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G.R. No. 116320

November 29, 1999

ADALIA FRANCISCO, petitioner,

vs.
COURT OF APPEALS, HERBY COMMERCIAL
CORPORATION AND JAIME C. ONG, respondents.

&

units, incomplete land development and 5% retention, which amount will be

discharged when the defects and deficiencies are finally completed by HCCC.
It was also provided that HCCC was indebted to AFRDC in the amount of
P180,234.91 which the former agreed would be paid out of the proceeds from
CONSTRUCTION the 40 housing units still to be turned over by HCCC or from any amount due to
HCCC from the GSIS. Consequently, the trial court dismissed the case upon
the filing by the parties of a joint motion to dismiss.

GONZAGA-REYES, J.:
Assailed in this petition for review on certiorari is the decision 1 of the Court of
Appeals affirming the decision 2 rendered by Branch 168 of the Regional Trial
Court of Pasig in Civil Case No. 35231 in favor of private respondents.
The controversy before this Court finds its origins in a Land Development and
Construction Contract which was entered into on June 23, 1977 by A.
Francisco Realty & Development Corporation (AFRDC), of which petitioner
Adalia Francisco (Francisco) is the president, and private respondent Herby
Commercial & Construction Corporation (HCCC), represented by its President
and General Manager private respondent Jaime C. Ong (Ong), pursuant to a
housing project of AFRDC at San Jose del Monte, Bulacan, financed by the
Government Service Insurance System (GSIS). Under the contract, HCCC
agreed to undertake the construction of 35 housing units and the development
of 35 hectares of land. The payment of HCCC for its services was on a turn-key
basis, that is, HCCC was to be paid on the basis of the completed houses and
developed lands delivered to and accepted by AFRDC and the GSIS. To
facilitate payment, AFRDC executed a Deed of Assignment in favor of HCCC to
enable the latter to collect payments directly from the GSIS. Furthermore, the
GSIS and AFRDC put up an Executive Committee Account with the Insular
Bank of Asia & America (IBAA) in the amount of P4,000,000.00 from which
checks would be issued and co-signed by petitioner Francisco and the GSIS
Vice-President Armando Diaz (Diaz).

Sometime in 1979, after an examination of the records of the GSIS, Ong

discovered that Diaz and Francisco had executed and signed seven checks 4,
of various dates and amounts, drawn against the IBAA and payable to HCCC
for completed and delivered work under the contract. Ong, however, claims that
these checks were never delivered to HCCC. Upon inquiry with Diaz, Ong
learned that the GSIS gave Francisco custody of the checks since she
promised that she would deliver the same to HCCC. Instead, Francisco forged
the signature of Ong, without his knowledge or consent, at the dorsal portion of
the said checks to make it appear that HCCC had indorsed the checks;
Francisco then indorsed the checks for a second time by signing her name at
the back of the checks and deposited the checks in her IBAA savings account.
IBAA credited Francisco's account with the amount of the checks and the latter
withdrew the amount so credited.

On June 7, 1979, Ong filed complaints with the office of the city fiscal of
Quezon City, charging Francisco with estafa thru falsification of commercial
documents. Francisco denied having forged Ong's signature on the checks,
claiming that Ong himself indorsed the seven checks in behalf of HCCC and
delivered the same to Francisco in payment of the loans extended by Francisco
to HCCC. According to Francisco, she agreed to grant HCCC the loans in the
total amount of P585,000.00 and covered by eighteen promissory notes in
order to obviate the risk of the non-completion of the project. As a means of
repayment, Ong allegedly issued a Certification authorizing Francisco to collect
HCCC's receivables from the GSIS. Assistant City Fiscal Ramon M. Gerona
gave credence to Francisco's claims and accordingly, dismissed the
complaints, which dismissal was affirmed by the Minister of Justice in a
On February 10, 1978, HCCC filed a complaint 3 with the Regional Trial Court resolution issued on June 5, 1981.
of Quezon City against Francisco, AFRDC and the GSIS for the collection of
the unpaid balance under the Land Development and Construction Contract in The present case was brought by private respondents on November 19, 1979
the amount of P515,493.89 for completed and delivered housing units and land against Francisco and IBAA for the recovery of P370,475.00, representing the
development. However, the parties eventually arrived at an amicable settlement total value of the seven checks, and for damages, attorney's fees, expenses of
of their differences, which was embodied in a Memorandum Agreement litigation and costs. After trial on the merits, the trial court rendered its decision
executed by HCCC and AFRDC on July 21, 1978. Under the agreement, the in favor of private respondents, the dispositive portion of which provides
parties stipulated that HCCC had turned over 83 housing units which have
been accepted and paid for by the GSIS. The GSIS acknowledged that it still WHEREFORE, premises considered, judgment is hereby rendered in favor of
owed HCCC P520,177.50 representing incomplete construction of housing the plaintiffs and against the defendants INSULAR BANK OF ASIA & AMERICA

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and ATTY. ADALIA FRANCISCO, to jointly and severally pay the plaintiffs the
amount of P370.475.00 plus interest thereon at the rate of 12% per annum
from the date of the filing of the complaint until the full amount is paid; moral
damages to plaintiff Jaime Ong in the sum of P50,000.00; exemplary damages
of P50,000.00; litigation expenses of P5,000.00; and attorney's fees of
P50,000.00.

petition for review on certiorari filed with this Court were also similarly denied.
On November 21, 1989, IBAA and HCCC entered into a Compromise
Agreement which was approved by the trial court, wherein HCCC
acknowledged receipt of the amount of P370,475.00 in full satisfaction of its
claims against IBAA, without prejudice to the right of the latter to pursue its
claims against Francisco.

With respect to the cross-claim of the defendant IBAA against its co-defendant On June 29, 1992, the Court of Appeals affirmed the trial court's ruling, hence
Atty. Adalia Francisco, the latter is ordered to reimburse the former for the sums this petition for review on certiorari filed by petitioner, assigning the following
that the Bank shall pay to the plaintiff on the forged checks including the errors to the appealed decision
interests paid thereon.
1.
The respondent Court of Appeals erred in concluding that private
Further, the defendants are ordered to pay the costs.
respondents did not owe Petitioner the sum covered by the Promissory Notes
Exh. 2-2-A-2-P (FRANCISCO). Such conclusion was based mainly on
Based upon the findings of handwriting experts from the National Bureau of conjectures, surmises and speculation contrary to the unrebutted pleadings and
Investigation (NBI), the trial court held that Francisco had indeed forged the evidence presented by petitioner.
signature of Ong to make it appear that he had indorsed the checks. Also, the
court ruled that there were no loans extended, reasoning that it was 2.
The respondent Court of Appeals erred in holding that Petitioner
unbelievable that HCCC was experiencing financial difficulties so as to compel falsified the signature of private respondent ONG on the checks in question
it to obtain the loans from AFRDC in view of the fact that the GSIS had issued without any authority therefor which is patently contradictory to the unrebutted
checks in favor of HCCC at about the same time that the alleged advances pleading and evidence that petitioner was expressly authorized by respondent
were made. The trial court stated that it was plausible that Francisco concealed HERBY thru ONG to collect all receivables of HERBY from GSIS to pay the
the fact of issuance of the checks from private respondents in order to make it loans extended to them. (Exhibit 3).
appear as if she were accommodating private respondents, when in truth she
was lending HCCC its own money.
3.
That respondent Court of Appeals erred in holding that the seven
checks in question were not taken up in the liquidation and reconciliation of all
With regards to the Memorandum Agreement entered into between AFRDC outstanding account between AFRDC and HERBY as acknowledged by the
and HCCC in Civil Case No. Q-24628, the trial court held that the same did not parties in Memorandum Agreement (Exh. 5) is a pure conjecture, surmise and
make any mention of the forged checks since private respondents were as of speculation contrary to the unrebutted evidence presented by petitioners. It is
yet unaware of their existence, that fact having been effectively concealed by an inference made which is manifestly mistaken.
Francisco, until private respondents acquired knowledge of Francisco's
misdeeds in 1979.
4.
The respondent Court of Appeals erred in affirming the decision of the
lower court and dismissing the appeal. 6
IBAA was held liable to private respondents for having honored the checks
despite such obvious irregularities as the lack of initials to validate the The pivotal issue in this case is whether or not Francisco forged the signature
alterations made on the check, the absence of the signature of a co-signatory of Ong on the seven checks. In this connection, we uphold the lower courts'
in the corporate checks of HCCC and the deposit of the checks on a second finding that the subject matter of the present case, specifically the seven
indorsement in the savings account of Francisco. However, the trial court checks, drawn by GSIS and AFRDC, dated between October to November
allowed IBAA recourse against Francisco, who was ordered to reimburse the 1977, in the total amount of P370,475.00 and payable to HCCC, was not
IBAA for any sums it shall have to pay to private respondents. 5
included in the Memorandum Agreement executed by HCCC and AFRDC in
Civil Case No. Q-24628. As observed by the trial court, aside from there being
Both Francisco and IBAA appealed the trial court's decision, but the Court of absolutely no mention of the checks in the said agreement, the amounts
Appeals dismissed IBAA's appeal for its failure to file its brief within the 45-day represented by said checks could not have been included in the Memorandum
extension granted by the appellate court. IBAA's motion for reconsideration and Agreement executed in 1978 because private respondents only discovered

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Francisco's acts of forgery in 1979. The lower courts found that Francisco was
able to easily conceal from private respondents even the fact of the issuance of
the checks since she was a co-signatory thereof. 7 We also note that Francisco
had custody of the checks, as proven by the check vouchers bearing her
uncontested signature, 8 by which she, in effect, acknowledged having
received the checks intended for HCCC. This contradicts Francisco's claims
that the checks were issued to Ong who delivered them to Francisco already
indorsed. 9
As regards the forgery, we concur with the lower courts', finding that Francisco
forged the signature of Ong on the checks to make it appear as if Ong had
indorsed said checks and that, after indorsing the checks for a second time by
signing her name at the back of the checks, Francisco deposited said checks in
her savings account with IBAA. The forgery was satisfactorily established in the
trial court upon the strength of the findings of the NBI handwriting expert. 10
Other than petitioner's self-serving denials, there is nothing in the records to
rebut the NBI's findings. Well-entrenched is the rule that findings of trial courts
which are factual in nature, especially when affirmed by the Court of Appeals,
deserve to be respected and affirmed by the Supreme Court, provided it is
supported by substantial evidence on record, 11 as it is in the case at bench.

amount of damages was alleged in the complaint; 16 however, the rate of

interest shall be twelve percent (12%) per annum from the time the judgment in
this case becomes final and executory until its satisfaction and the basis for the
computation of this twelve percent (12%) rate of interest shall be the amount of
P370,475.00. This is in accordance with the doctrine enunciated in Eastern
Shipping Lines, Inc. vs. Court of Appeals, et al., 17 which was reiterated in
Philippine National Bank vs. Court of Appeals, 18 Philippine Airlines, Inc. vs.
Court of Appeals 19 and in Keng Hua Paper Products Co., Inc. vs. Court of
Appeals, 20 which provides that
1.
When an obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of money, the interest due should be
that which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
2.
When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at
the discretion of the court at the rate of six percent (6%) per annum. No
interest, however, shall be adjudged on unliquidated claims or damages except
when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the
interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall begin
to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.

Petitioner claims that she was, in any event, authorized to sign Ong's name on
the checks by virtue of the Certification executed by Ong in her favor giving her
the authority to collect all the receivables of HCCC from the GSIS, including the
questioned checks. 12 Petitioner's alternative defense must similarly fail. The
Negotiable Instruments Law provides that where any person is under obligation
to indorse in a representative capacity, he may indorse in such terms as to
negative personal liability. 13 An agent, when so signing, should indicate that
he is merely signing in behalf of the principal and must disclose the name of his
principal; otherwise he shall be held personally liable. 14 Even assuming that
Francisco was authorized by HCCC to sign Ong's name, still, Francisco did not
indorse the instrument in accordance with law. Instead of signing Ong's name,
Francisco should have signed her own name and expressly indicated that she 3.
When the judgment of the court awarding a sum of money becomes
was signing as an agent of HCCC. Thus, the Certification cannot be used by final and executory, the rate of legal interest, whether the case falls under
Francisco to validate her act of forgery.
paragraph 1 or paragraph 2, above, shall be twelve percent (12%) per annum
from such finality until its satisfaction, this interim period being deemed to be by
Every person who, contrary to law, wilfully or negligently causes damage to then an equivalent to a forbearance of credit.
another, shall indemnify the latter for the same. 15 Due to her forgery of Ong's
signature which enabled her to deposit the checks in her own account, We also sustain the award of exemplary damages in the amount of P50,000.00.
Francisco deprived HCCC of the money due it from the GSIS pursuant to the Under Article 2229 of the Civil Code, exemplary damages are imposed by way
Land Development and Construction Contract. Thus, we affirm respondent of example or correction for the public good, in addition to the moral,
court's award of compensatory damages in the amount of P370,475.00, but temperate, liquidated or compensatory damages. Considering petitioner's
with a modification as to the interest rate which shall be six percent (6%) per fraudulent act, we hold that an award of P50,000.00 would be adequate, fair
annum, to be computed from the date of the filing of the complaint since the and reasonable. The grant of exemplary damages justifies the award of

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attorney's fees in the amount of P50,000.00, and the award of P5,000.00 for
litigation
expenses. 21
The appellate court's award of P50,000.00 in moral damages is warranted.
Under Article 2217 of the Civil Code, moral damages may be granted upon
proof of physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation and similar injury.
22 Ong testitified that he suffered sleepless nights, embarrassment, humiliation
and anxiety upon discovering that the checks due his company were forged by
petitioner and that petitioner had filed baseless criminal complaints against him
before the fiscal's office of Quezon City which disrupted HCCC's business
operations. 23
WHEREFORE, we AFFIRM the respondent court's decision promulgated on
June 29, 1992, upholding the February 16, 1988 decision of the trial court in
favor of private respondents, with the modification that the interest upon the
actual damages awarded shall be at six percent (6%) per annum, which
interest rate shall be computed from the time of the filing of the complaint on
November 19, 1979. However, the interest rate shall be twelve percent (12%)
per annum from the time the judgment in this case becomes final and
executory and until such amount is fully paid. The basis for computation of the
six percent and twelve percent rates of interest shall be the amount of
P370,475.00. No pronouncement as to costs.
SO ORDERED.

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G.R. No. L-37467

December 11, 1933

same date, September 28, 1927, the manger's check was deposited with the
Bank of the Philippine Islands by the following endorsement:

SAN CARLOS MILLING CO., LTD., plaintiff-appellant,

vs.
For deposit only with Bank of the Philippine Islands, to credit of account of San
BANK OF THE PHILIPPINE ISLANDS and CHINA BANKING CORPORATION, Carlos Milling Co., Ltd.
defendants-appellees.
By (Sgd.) NEWLAND BALDWIN
Gibbs and McDonough and Roman Ozaeta for appellant.
For Agent
Araneta, De Joya, Zaragosa and Araneta for appellee Bank of the Philippine
Islands.
The endorsement to which the name of Newland Baldwin was affixed was
Marcelo Nubla and Guevara, Francisco and Recto for appellee China Banking spurious.
Corporation.
The Bank of the Philippine Islands thereupon credited the current account of
plaintiff in the sum of P201,000 and passed the cashier's check in the ordinary
course of business through the clearing house, where it was paid by the China
Banking Corporation.
HULL, J.:
Plaintiff corporation, organized under the laws of the Territory of Hawaii, is
authorized to engaged in business in the Philippine Islands, and maintains its On the same day the cashier of the Bank of the Philippine Islands received a
letter, purporting to be signed by Newland Baldwin, directing that P200,000 in
main office in these Islands in the City of Manila.
bills of various denominations, named in the letter, be packed for shipment and
The business in the Philippine Islands was in the hands of Alfred D. Cooper, its delivery the next day. The next day, Dolores witnessed the counting and
agent under general power of attorney with authority of substitution. The packing of the money, and shortly afterwards returned with the check for the
principal employee in the Manila office was one Joseph L. Wilson, to whom had sum of P200,000, purporting to be signed by Newland Baldwin as agent.
been given a general power of attorney but without power of substitution. In
1926 Cooper, desiring to go on vacation, gave a general power of attorney to Plaintiff had frequently withdrawn currency for shipment to its mill from the Bank
Newland Baldwin and at the same time revoked the power of Wilson relative to of the Philippine Islands but never in so large an amount, and according to the
the dealings with the Bank of the Philippine Islands, one of the banks in Manila record, never under the sole supervision of Dolores as the representative of
plaintiff.
in which plaintiff maintained a deposit.
About a year thereafter Wilson, conspiring together with one Alfredo Dolores, a
messenger-clerk in plaintiff's Manila office, sent a cable gram in code to the
company in Honolulu requesting a telegraphic transfer to the China Banking
Corporation of Manila of $100,00. The money was transferred by cable, and
upon its receipt the China Banking Corporation, likewise a bank in which
plaintiff maintained a deposit, sent an exchange contract to plaintiff corporation
offering the sum of P201,000, which was then the current rate of exchange. On
this contract was forged the name of Newland Baldwin and typed on the body
of the contract was a note:lawphil.net
Please send us certified check in our favor when transfer is received.
A manager's check on the China Banking Corporation for P201,000 payable to
San Carlos Milling Company or order was receipted for by Dolores. On the

Before delivering the money, the bank asked Dolores for P1 to cover the cost of
packing the money, and he left the bank and shortly afterwards returned with
another check for P1, purporting to be signed by Newland Baldwin. Whereupon
the money was turned over to Dolores, who took it to plaintiff's office, where he
turned the money over to Wilson and received as his share, P10,000.
Shortly thereafter the crime was discovered, and upon the defendant bank
refusing to credit plaintiff with the amount withdrawn by the two forged checks
of P200,000 and P1, suit was brought against the Bank of the Philippine
Islands, and finally on the suggestion of the defendant bank, an amended
complaint was filed by plaintiff against both the Bank of the Philippine Islands
and the China Banking Corporation.

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At the trial the China Banking Corporation contended that they had drawn a
check to the credit of the plaintiff company, that the check had been endorsed
for deposit, and that as the prior endorsement had in law been guaranteed by
the Bank of the Philippine Islands, when they presented the cashier's check to
it for payment, the China Banking Corporation was absolved even if the
endorsement of Newland Baldwin on the check was a forgery.
The Bank of the Philippine Islands presented many special defenses, but in the
main their contentions were that they had been guilty of no negligence, that
they had dealt with the accredited representatives of the company in the due
course of business, and that the loss was due to the dishonesty of plaintiff's
employees and the negligence of plaintiff's general agent.
In plaintiff's Manila office, besides the general agent, Wilson, and Dolores, most
of the time there was employed a woman stenographer and cashier. The agent
did not keep in his personal possession either the code-book or the blank
checks of either the Bank of the Philippine Islands or the China Banking
Corporation. Baldwin was authorized to draw checks on either of the
depositaries. Wilson could draw checks in the name of the plaintiff on the China
Banking Corporation.
After trial in which much testimony was taken, the trial court held that the
deposit of P201,000 in the Bank of the Philippine Islands being the result of a
forged endorsement, the relation of depositor and banker did not exist, but the
bank was only a gratuitous bailee; that the Bank of the Philippine Islands acted
in good faith in the ordinary course of its business, was not guilty of negligence,
and therefore under article 1902 of the Civil Code which should control the
case, plaintiff could not recover; and that as the cause of loss was the criminal
actions of Wilson and Dolores, employees of plaintiff, and as Newland Baldwin,
the agent, had not exercised adequate supervision over plaintiff's Manila office,
therefore plaintiff was guilty of negligence, which ground would likewise defeat
recovery.

As to the China Banking Corporation, it will be seen that it drew its check
payable to the order of plaintiff and delivered it to plaintiff's agent who was
authorized to receive it. A bank that cashes a check must know to whom it
pays. In connection with the cashier's check, this duty was therefore upon the
Bank of the Philippine Islands, and the China Banking Corporation was not
bound to inspect and verify all endorsements of the check, even if some of
them were also those of depositors in that bank. It had a right to rely upon the
endorsement of the Bank of the Philippine Islands when it gave the latter bank
credit for its own cashier's check. Even if we would treat the China Banking
Corporation's cashier's check the same as the check of a depositor and attempt
to apply the doctrines of the Great Eastern Life Insurance Co. vs. Hongkong &
Shanghai Banking Corporation and National Bank (43 Phil., 678), and hold the
China Banking Corporation indebted to plaintiff, we would at the same time
have to hold that the Bank of the Philippine Islands was indebted to the China
Banking Corporation in the same amount. As, however, the money was in fact
paid to plaintiff corporation, we must hold that the China Banking Corporation is
indebted neither to plaintiff nor to the Bank of the Philippine Islands, and the
judgment of the lower court far as it absolves the China Banking Corporation
from responsibility is affirmed.
Returning to the relation between plaintiff and the Bank of the Philippine
Islands, we will now consider the effect of the deposit of P201,000. It must be
noted that this was not a presenting of the check for cash payment but for
deposit only. It is a matter of general knowledge that most endorsements for
deposit only, are informal. Most are by means of a rubber stamp. The bank
would have been justified in accepting the check for deposit even with only a
typed endorsement. It accepted the check and duly credited plaintiff's account
with the amount on the face of the check. Plaintiff was not harmed by the
transaction as the only result was the removal of that sum of money from a
bank from which Wilson could have drawn it out in his own name to a bank
where Wilson would not have authority to draw checks and where funds could
only be drawn out by the check of Baldwin.

From the decision of the trial court absolving the defendants, plaintiff brings this
appeal and makes nine assignments of error which we do not deem it Plaintiff in its letter of December 23, 1928, to the Bank of the Philippine Islands
necessary to discuss in detail.
said in part:
There is a mild assertion on the part of the defendant bank that the disputed ". . . we now leave to demand that you pay over to us the entire amount of said
signatures of Newland Baldwin were genuine and that he had been in the habit manager's check of two hundred one thousand (P201,000) pesos, together with
of signing checks in blank and turning the checks so signed over to Wilson.
interest thereon at the agreed rate of 3 per cent per annum on daily balances
of our credit in account current with your bank to this date. In the event of your
The proof as to the falsity of the questioned signatures of Baldwin places the refusal to pay, we shall claim interest at the legal rate of 6 per cent from and
matter beyond reasonable doubt, nor is it believed that Baldwin signed checks after the date of this demand inasmuch as we desire to withdraw and make use
in blank and turned them over to Wilson.

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of the money." Such language might well be treated as a ratification of the It must therefore be held that the proximate cause of loss was due to the
deposit.
negligence of the Bank of the Philippine Islands in honoring and cashing the
two forged checks.
The contention of the bank that it was a gratuitous bailee is without merit. In the
first place, it is absolutely contrary to what the bank did. It did not take it up as a The judgment absolving the Bank of the Philippine Islands must therefore be
separate account but it transferred the credit to plaintiff's current account as a reversed, and a judgment entered in favor of plaintiff-appellant and against the
depositor of that bank. Furthermore, banks are not gratuitous bailees of the Bank of the Philippine Islands, defendant-appellee, for the sum of P200,001,
funds deposited with them by their customers. Banks are run for gain, and they with legal interest thereon from December 23,1928, until payment, together
solicit deposits in order that they can use the money for that very purpose. In with costs in both instances. So ordered.
this case the action was neither gratuitous nor was it a bailment.
On the other hand, we cannot agree with the theory of plaintiff that the Bank of
the Philippine Islands was an intermeddling bank. In the many cases cited by
plaintiff where the bank that cashed the forged endorsement was held as an
intermeddler, in none was the claimant a regular depositor of the bank, nor in
any of the cases cited, was the endorsement for deposit only. It is therefore
clear that the relation of plaintiff with the Bank of the Philippine Islands in regard
to this item of P201,000 was that of depositor and banker, creditor and debtor.
We now come to consider the legal effect of payment by the bank to Dolores of
the sum of P201,000, on two checks on which the name of Baldwin was forged
as drawer. As above stated, the fact that these signatures were forged is
beyond question. It is an elementary principle both of banking and of the
Negotiable Instruments Law that
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. (7 C.J., 683.)
There is no act of the plaintiff that led the Bank of the Philippine Islands astray.
If it was in fact lulled into a false sense of security, it was by the effrontery of
Dolores, the messenger to whom it entrusted this large sum of money.
The bank paid out its money because it relied upon the genuineness of the
purported signatures of Baldwin. These, they never questioned at the time its
employees should have used care. In fact, even today the bank represents that
it has a relief that they are genuine signatures.
The signatures to the check 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.

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G.R. No. L-43596

October 31, 1936

and the former was accordingly credited with the amounts thereof, or P144.50
and P215.75.

PHILIPPINE NATIONAL BANK, plaintiff-appellee,

vs.
4. On April 8 and 10, 1933, the said checks were cleared at the clearing house
THE NATIONAL CITY BANK OF NEW YORK, and MOTOR SERVICE and the Philippine National Bank credited the National City Bank of New York
COMPANY, INC., defendants.
for the amounts thereof, believing at the time that the signatures of the drawer
MOTOR SERVICE COMPANY, INC., appellant.
were genuine, that the payee is an existing entity and the endorsement at the
back thereof regular and genuine.
L. D. Lockwood for appellant.
Camus and Delgado for appellee.
5. The Philippine National Bank then found out that the purported signatures of
J. L. Klar, as Manager and Treasurer of the Pangasinan Transportation
Company, Inc., in said Exhibits A and A-1 were forged when so informed by the
said Company, and it accordingly demanded from the defendants the
reimbursement of the amounts for which it credited the National City Bank of
RECTO, J.:
New York at the clearing house and for which the latter credited the Motor
This case was submitted for decision to the court below on the following Service Co., but the defendants refused, and continue to refuse, to make such
reimbursements.
stipulation of facts:
1. That plaintiff is a banking corporation organized and existing under and by
virtue of a special act of the Philippine Legislature, with office as principal place
of business at the Masonic Temple Bldg., Escolta, Manila, P. I.; that the
defendant National City Bank of New York is a foreign banking corporation with
a branch office duly authorized and licensed to carry and engage in banking
business in the Philippine Islands, with branch office and place of business in
the National City Bank Bldg., City of Manila, P. I., and that the defendant Motor
Service Company, Inc., is a corporation organized and existing under and by
virtue of the general corporation law of the Philippine Islands, with office and
principal place of business at 408 Rizal Avenue, City of Manila, P. I., engaged in
the purchase and sale of automobile spare parts and accessories.
2. That on April 7 and 9, 1933, an unknown person or persons negotiated with
defendant Motor Service Company, Inc., the checks marked as Exhibits A and
A-1, respectively, which are made parts of the stipulation, in payment for
automobile tires purchased from said defendant's stores, purporting to have
been issued by the "Pangasinan Transportation Co., Inc. by J. L. Klar, Manager
and Treasurer", against the Philippine National Bank and in favor of the
International Auto Repair Shop, for P144.50 and P215.75; and said checks
were indorsed by said unknown persons in the manner indicated at the back
thereof, the Motor Service Co., Inc., believing at the time that the signature of J.
L. Klar, Manager and Treasurer of the Pangasinan Transportation Co., Inc., on
both checks were genuine.

6. The Pangasinan Transportation Co., Inc., objected to have the proceeds of

said check deducted from their deposit.
7. Exhibits B, C, D, E, F, and G, which were introduced at the trial in the
municipal court of Manila and forming part of the record of the present case,
are admitted by the parties as genuine and are made part of this stipulation as
well as ESxhibit H hereto attached and made a part hereof.
Upon plaintiff's motion, the case was dismissed before trial as to the defendant
National City Bank of New York. a decision was thereafter rendered giving
plaintiff judgment for the total amount of P360.25, with interest and costs. From
this decision the instant appeal was taken.

Before us is the preliminary question of whether the original appeal taken by

the plaintiff from the decision of the municipal court of Manila where this case
originated, became perfected because of plaintiff's failure to attach to the
record within 15 days from receipt of notice of said decision, the certificate of
appeal bond required by section 76 of the Code of Civil Procedure. It is not
disputed that both the appeal docket fee and the appeal cash bond were paid
and deposited within the prescribed time. The issue is whether the mere failure
to file the official receipt showing that such deposit was made within the said
period is a sufficient ground to dismiss plaintiff's appeal. This question was
settled by our decision in the case of Blanco vs. Bernabe and lawyers
Cooperative Publishing Co. (page 124, ante), and no further consideration. No
3. The checks Exhibits A and A-1 were then indorsed for deposit by the error was committed in allowing said appeal.
defendant Motor Service Company, Inc, at the National City Bank of New York

NEGO; FORGERY|9
We now pass on to consider and determine the main question presented by
this appeal, namely, whether the appellee has the right to recover from the
appellant, under the circumstances of this case, the value of the checks on
which the signatures of the drawer were forged. The appellant maintains that
the question should be answered in the negative and in support of its
contention appellant advanced various reasons presently to be examined
carefully.
I. It is contended, first of all, that the payment of the checks in question made
by the drawee bank constitutes an "acceptance", and, consequently, the case
should be governed by the provisions of section 62 of the Negotiable
Instruments Law, which says:
SEC. 62. Liability of acceptor. The acceptor by accepting the instrument
engages that he will pay it according to the tenor of his acceptance; and
admits:
(a) The existence of the drawer, the genuineness of his signature, and his
capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
This contention is without merit. A check is a bill of exchange payable on
demand and only the rules governing bills of exchange payable on demand are
applicable to it, according to section 185 of the Negotiable Instruments Law. In
view of the fact that acceptance is a step unnecessary, in so far as bills of
exchange payable on demand are concerned (sec. 143), it follows that the
provisions relative to "acceptance" are without application to checks.
Acceptance implies, in effect, subsequent negotiation of the instrument, which
is not true in case of the payment of a check because from the moment a check
is paid it is withdrawn from circulation. The warranty established by section 62,
is in favor of holders of the instrument after its acceptance. When the drawee
bank cashes or pays a check, the cycle of negotiation is terminated, and it is
illogical thereafter to speak of subsequent holders who can invoke the warranty
provided in section 62 against the drawee. Moreover, according to section 191,
"acceptance" means "an acceptance completed by delivery or notification" and
this concept is entirely incompatible with payment, because when payment is
made the check is retained by the bank, and there is no such thing as delivery
or notification to the party receiving the payment. Checks are not to be
accepted, but presented at once for payment. (1 Bouvier's Law Dictionary,
476.) There can be no such thing as "acceptance" in the ordinary sense of the
term. A check being payable immediately and on demand, the bank can fulfill
its duty to the depositor only by paying the amount demanded. The holder has

no right to demand from the bank anything but payment of the check, and the
bank has no right, as against the drawer, to do anything but pay it. (5 R. C. L.,
p. 516, par. 38.) A check is not an instrument which in the ordinary course of
business calls for acceptance. The holder can never claim acceptance as his
legal right. He can present for payment, and only for payment. (1 Morse on
Banks and Banking, 6th ed., pp. 898, 899.)
There is, however, nothing in the law or in, business practice against the
presentation of checks for acceptance, before they are paid, in which case we
have a "certification" equivalent to "acceptance" according to section 187,
which provides that "where a check is certified by the bank on which it is drawn,
the certification is equivalent to an acceptance", and it is then that the warranty
under section 62 exists. This certification or acceptance consists in the
signification by the drawee of his assent to the order of the drawer, which must
not express that the drawee will perform his promise by any other means than
the payment of money. (Sec. 132.) When the holder of a check procures it to be
accepted or certified, the drawer and all indorsers are discharged from liability
thereon (sec. 188), and then the check operates as an assignment of a part of
the funds to the credit of the drawer with the bank. (Sec. 189.) There is nothing
in the nature of the check which intrinsically precludes its acceptance, in like
manner and with like effect as a bill of exchange or draft may be accepted. The
bank may accept if it chooses; and it is frequently induced by convenience, by
the exigencies of business, or by the desire to oblige customers, voluntarily to
incur the obligation. The act by which the bank places itself under obligation to
pay to the holder the sum called for by a check must be the expressed promise
or undertaking of the bank signifying its intent to assume the obligation, or
some act from which the law will imperatively imply such valid promise or
undertaking. The most ordinary form which such an act assumes is the
acceptance by the bank of the check, or, as it is perhaps more often called, the
certifying of the check. (1 Morse on Banks and Banking, pp. 898, 899; 5 R. C.
L., p. 520.)
No doubt a bank may by an unequivocal promise in writing make itself liable in
any event to pay the check upon demand, but this is not an "acceptance" of the
check in the true sense of that term. Although a check does not call for
acceptance, and the holder can present it only for payment, the certification of
checks is a means in constant and extensive use in the business of banking,
and its effects and consequences are regulated by the law merchant. Checks
drawn upon banks or bankers, thus marked and certified, enter largely into the
commercial and financial transactions of the country; they pass from hand to
hand, in the payment of debts, the purchase of property, and in the transfer of
balances from one house and one bank to another. In the great commercial
centers, they make up no inconsiderable portion of the circulation, and thus
perform a useful, valuable, and an almost indispensable office. The purpose of

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procuring a check to be certified is to impart strength and credit to the paper by
obtaining an acknowledgment from the certifying bank that the drawer has
funds therein sufficient to cover the check and securing the engagement of the
bank that the check will be paid upon presentation. A certified check has a
distinctive character as a species of commercial paper, and performs important
functions in banking and commercial business. When a check is certified, it
ceases to possess the character, or to perform the functions, of a check, and
represents so much money on deposit, payable to the holder on demand. The
check becomes a basis of credit an easy mode of passing money from hand
to hand, and answers the purposes of money. (5 R. C. L., pp. 516,
517.)lwphi1.nt
All the authorities, both English and American, hold that a check may be
accepted, though acceptance is not usual. By the law merchant, the certificate
of the bank that a check is good is equivalent to acceptance. It implies that the
check is drawn upon sufficient funds in the hands of the drawee, that they have
been set apart for its satisfaction, and that they shall be so applied whenever
the check is presented for payment. It is an undertaking that the check is good
then, and shall continue good, and this agreement is as binding on the bank as
its notes of circulation, a certificate of deposit payable to the order of the
depositor, or any other obligation it can assume. The object of certifying a
check, as regards both parties is to enable the holder to use it as money. The
transferee takes it with the same readiness and sense of security that he would
take the notes of the bank. It is available also to him for all the purposes of
money. Thus it continues to perform its important functions until in the course of
business it goes back to the bank for redemption, and is extinguished by
payment. It cannot be doubted that the certifying bank intended these
consequences, and it is liable accordingly. To hold otherwise would render
these important securities only a snare and a delusion. A bank incurs no
greater risk in certifying a check than in giving a certificate of deposit. In wellregulated banks the practice is at once to charge the check to the account of
the drawer, to credit it in a certified check account, and, when the check is paid,
to debit that account with the amount. Nothing can be simpler or safer than this
process. (Merchants' Bank vs. States Bank, 10 Wall., 604, at p. 647; 19 Law.
ed., 1008, 1019.)
Ordinarily the acceptance or certification of a check is performed and
evidenced by some word or mark, usually the words "good", "certified" or
"accepted" written upon the check by the banker or bank officer. (1 Morse,
Banks and Banking, 915; 1 Bouvier's Law Dictionary, 476.) The bank virtually
says, that check is good; we have the money of the drawer here ready to pay it.
We will pay it now if you will receive it. The holder says, No, I will not take the
money; you may certify the check and retain the money for me until this check
is presented. The law will not permit a check, when due, to be thus presented,

and the money to be left with the bank for the accommodation of the holder
without discharging the drawer. The money being due and the check presented,
it is his own fault if the holder declines to receive the pay, and for his own
convenience has the money appropriated to that check subject to its future
presentment at any time within the statute of limitations. (1 Morse on Banks
and Banking, p. 920.)
The theory of the appellant and of the decisions on which it relies to support its
view is vitiated by the fact that they take the word "acceptance" in its ordinary
meaning and not in the technical sense in which it is used in the Negotiable
Instruments Law. Appellant says that when payment is made, such payment
amounts to an acceptance, because he who pays accepts. This is true in
common parlance but "acceptance" in legal contemplation. The word
"acceptance" has a peculiar meaning in the Negotiable Instruments Law, and,
as has been above stated, in the instant case there was payment but no
acceptatance, or what is equivalent to acceptance, certification.
With few exceptions, the weight of authority is to the effect that "payment"
neither includes nor implies "acceptance".
In National Bank vs. First National Bank ([19101, 141 Mo. App., 719; 125 S. W.,
513), the court asks, if a mere promise to pay a check is binding on a bank,
why should not the absolute payment of the check have the same effect? In
response, it is submitted that the two things, that is acceptance and
payment, are entirely different. If the drawee accepts the paper after seeing
it, and then permits it to go into circulation as genuine, on all the principles of
estoppel, he ought to be prevented from setting up forgery to defeat liability to
one who has taken the paper on the faith of the acceptance, or certification. On
the other hand, mere payment of the paper at the termination of its course does
not act as an estoppel. The attempt to state a general rule covering both
acceptance and payment is responsible for a large part of the conflicting
arguments which have been advanced by the courts with respect to the rule.
(Annotation at 12 A. L. R., 1090 1921].)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085),
the court said:
We are of the opinion that "payment is not acceptance". Acceptance, as defined
by section 131, cannot be confounded with payment. . . .
Acceptance, certification, or payment of a check, by the express language of
the statute, discharges the liability only of the persons named in the statute, to
wit, the drawer and all indorsers, and the contract of indorsement by the
negotiator if the check is discharged by acceptance, certification, or payment.

NEGO; FORGERY|11
But clearly the statute does not say that the contract of warranty of the Before drawee's acceptance of check there is no privity of contract between
negotiator, created by section 65, is discharged by these acts.
drawee and payee. Drawee's payment of check on unauthorized indorsement
does not constitute "acceptance" of check. (Sinclair Refining Co. vs. Moultrie
The rule supported by the majority of the cases (14 A. L. R. 764), that payment Banking Co., 165 S. E., 860 [1932].)
of a check on a forged or unauthorized indorsement of the payee's name, and
charging the same to the drawer's account, do not amount to an acceptance so The great weight of authority is to the effect that the payment of a check upon a
as to make the bank liable to the payee, is supported by all of the recent cases forged or unauthorized indorsement and the stamping of it "paid" does not
in which the question is considered. (Cases cited, Annotation at 69 A. L. R., constitute an acceptance. (Dakota Radio Apparatus Co. vs. First Nat. Bank of
1076, 1077 [1930].)
Rapid City, 244 N. W., 351, 352 [1932].)
Merely stamping a check "Paid" upon its payment on a forged or unauthorized Payment of the check, cashing it on presentment is not acceptance. (South
indorsement is not an acceptance thereof so as to render the drawee bank Boston Trust Co. vs. Levin, 249 Mass., 45, 48, 49; 143 N. E., 816; Blocker,
liable to the true payee. (Anderson vs. Tacoma National Bank [1928], 146 Shepard Co. vs. Granite Trust Company, 187 Me., 53, 54 [1933].)
Wash., 520; 264 Pac., 8; Annotation at 69 A. L. R., 1077, [1930].)
In Rauch vs. Bankers National Bank of Chicago (143 Ill. App., 625, 636, 637
In State Bank of Chicago vs. Mid-City Trust & Savings Bank (12 A. L. R., 989, [1908]), the language of the decision was as follows:
991, 992), the court said:
. . . The plaintiffs say that this acceptance was made by the very unauthorized
The defendant in error contends that the payment of the check shows payments of which they complain. This suggestion does not seem forceful to
acceptance by the bank, urging that there can be no more definite act by the us. It is the contention which was made before the Supreme Court of the United
bank upon which a check has been drawn, showing acceptance than the States in First National Bank vs. Whitman (94 U. S., 343), and repudiated by
payment of the check. Section 184 of the Negotiable Instruments Act (sec. 202) that court. The language of the opinion in that case is so apt in the present case
provides that the provisions of the act applicable to bills of exchange apply to a that we quote it:
check, and section 131 (sec. 149), that the acceptance of a bill must be in
writing signed by the drawee. Payment is the final act which extinguishes a bill. "It is further contended that such an acceptance of a check as creates a privity
Acceptance is a promise to pay in the future and continues the life of the bill. It between the payee and the bank is established by the payment of the amount
was held in the First National Bank vs. Whitman (94 U. S., 343; 24 L. ed., 229), of this check in the manner described. This argument is based upon the
that payment of a check upon a forged indorsement did not operate as an erroneous assumption that the bank has paid this check. If this were true, it
acceptance in favor of the true owner. The contrary was held in Pickle vs. Muse would have discharged all of its duty, and there would be an end to the claim
(Fickle vs. People's Nat. Bank, 88 Tenn., 380; 7 L.R.A., 93; 17 Am. St. Rep., against it. The bank supposed that it had paid the check, but this was an error.
900; 12 S. W., 919), and Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. The money it paid was upon a pretended and not a real indorsement of the
Rep., 751) at a time when the Negotiable Instruments Act was not in force in name of the payee. . . . We cannot recognize the argument that payment of the
those states. The opinion of the Supreme Court of the United States seems amount of the check or sight draft under such circumstances amounts to an
more logical, and the provision of the Negotiable Instruments Act now require acceptance creating a privity of contract with the real owner.
an acceptance to be in writing. Under this statute the payment of a check on a
forged indorsement, stamping it "paid," and charging it to the account of the "It is difficult to construe a payment as an acceptance under any
drawer, do not constitute an acceptance of the check or create a liability of the circumstances. . . . A banker or individual may be ready to make actual
bank to the true holder or the payee. (Elyria Sav. & Bkg. Co. vs. Walker Bin payment of a check or draft when presented, while unwilling to make a promise
Co., 92 Ohio St., 406; L. R. A., 1916D, 433; 111 N. E., 147; Ann. Cas. 1917D, to pay at a future time. Many, on the other hand, are more ready to promise to
1055; Baltimore & O. R. Co. vs. First National Bank, 102 Va., 753; 47 S. E., pay than to meet the promise when required. The difference between the
837; State Bank of Chicago vs. Mid-City Trust & Savings Bank 12 A. L. R., pp. transactions is essential and inherent."
989, 991, 992.)
And in Wharf vs. Seattle National Bank (24 Pac. [2d]), 120, 123 [1933]):

NEGO; FORGERY|12
It is the rule that payment of a check on unauthorized or forged indorsement
does not operate as an acceptance of the check so as to authorize an action by
the real owner to recover its amount from the drawee bank. (Michie on Banks
and Banking, vol. 5, sec. 278, p. 521.) A full list of the authorities supporting the
rule will be found in a footnote to the foregoing citation. (See also, Federal Land
Bank vs. Collins, 156 Miss., 893; 127 So., 570; 69 A. L. R., 1068.)

the holder to pay it on demand. (See National Bank of the Republic vs. Millard,
10 Wall. [77 U. S.], 152; 19 L. ed., 899.) The Tennessee court then argued that
it would be inequitable and unconscionable for the owner and payee of the
check to be limited to an action against an insolvent drawer and might thereby
lose the debt. They recognized the legal principle that there is no privity
between the drawer bank and the holder, or payee, of the check, and
proceeded to hold that no particular kind of writing was necessary to constitute
In a very recent case, Federal Land Bank vs. Collins (69 A. L. R., 1068, 1072- an acceptance and that it became a question of fact, and the bank became
1074), this question was discussed at considerable length. The court said:
liable when it stamped it "paid" and charged it to the account of the drawer, and
cites, in support of its opinion, Seventh National Bank vs. Cook (73 Pa., 483; 13
In the light of the first of these statutes, counsel for appellant is forced to stand Am. Rep., 751); Saylor vs. Bushong (100 Pa., 23; 45 Am. Rep., 353); and
upon the narrow ledge that the payment of the check by the two banks will Dodge vs. Bank (20 Ohio St., 234; 5 Am. Rep., 648).
constitute an acceptance. The drawee bank simply marked it "paid" and did not
write anything else except the date. The bank first paying the check, the This decision was in 1890, prior to the enactment of the Negotiable Instruments
Commercial National Bank and Trust Company, simply wrote its name as Law by the State of Tennessee. However, in this case Judge Snodgrass points
indorser and passed the check on to the drawee bank; does this constitute an out that the Millard case, supra, was dicta. The Dodge case, from the Ohio
acceptance? The precise question has not been presented to this court for court, held exactly as the Tennessee court, but subsequently in the case of
decision. Without reference to authorities in other jurisdictions it would appear Elyria Bank vs. Walker Bin Co. (92 Ohio St., 406; 111 N. E., 147; L. R. A.
that the drawee bank had never written its name across the paper and 1916D, 433; Ann. Cas. 1917D, 1055), the court held to the contrary, called
therefore, under the strict terms of the statute, could not be bound as an attention to the fact that the Dodge case was no longer the law, and proceeded
acceptor; in the second place, it does not appear to us to be illogical and to announce that, whatever might have been the law before the passage of the
unsound to say that the payment of a check by the drawee, and the stamping Negotiable Instrument Act in that state, it was no longer the law; that the rule
of it "paid", is equivalent to the same thing as the acceptance of a check; announced in the Dodge case had been "discarded." The court, in the latter
however, there is a variety of opinions in the various jurisdictions on this case, expressed its doubts that the courts of Tennessee and Pennsylvania
question. Counsel correctly states that the theory upon which the numerous would adhere to the rule announced in the Pickle case, quoted supra, in the
courts hold that the payment of a check creates privity between the holder of face of the Negotiable Instrument Law. Subsequent to the Millard case, the
the check and the drawee bank is tantamount to a pro tanto assignment of that Supreme Court of the United States, in the case of First National Bank of
part of the funds. It is most easily understood how the payment of the check, Washington vs. Whitman (94 U. S., 343, 347; 24 L. ed., 229), where the bank,
when not authorized to be done by the drawee bank, might under such without any knowledge that the indorsement of the payee was unauthorized,
circumstances create liability on the part of the drawee to the drawer. Counsel paid the check, and it was contended that by the payment the privity of contract
cites the case of Pickle vs. Muse (88 Tenn, 380; 12 S. W., 919; 7 L. R. A., 93; existing between the drawer and drawee was imparted to the payee, said:
17 Am. St. Rep., 900), wherein Judge Lurton held that the acceptance of a
check was necessary in order to give the holder thereof a right of action "It is further contended that such an acceptance of the check as creates a
thereon against the bank, and further held in a case similar to this, so far as this privity between the payee and the bank is established by the payment of the
question is concerned, that the acceptance of a check so as to give a right of amount of this check in the manner described. This argument is based upon
action to the payee is inferred from the retention of the check by the bank and the erroneous assumption that the bank has paid this check. If this were true, it
its subsequent charge of the amount to the drawer, although it was presented would have discharged all of its duty, and there would be an end of the claim
by, and payment made, an unauthorized person. Judge Lurton cited the case of against it. The bank supposed that it had paid the check; but this was an error.
National Bank of the Republic vs. Millard (10 Wall., 152; 19 L. ed., 897), The money it paid was upon a pretended and not a real indorsement of the
wherein the Supreme Court of the United States, not having such a case before name of the payee. The real indorsement of the payee was as necessary to a
it, threw out the suggestion that, if it was shown that a bank had charged the valid payment as the real signature of the drawer; and in law the check remains
check on its books against the drawer and made settlement with the drawee unpaid. Its pretended payment did not diminish the funds of the drawer in the
that the holder could recover on account of money had and received, invoking bank, or put money in the pocket of the person entitled to the payment. The
the rule of justice and fairness, it might be said there was an implied promise to

NEGO; FORGERY|13
state of the account was the same after the pretended payment as it was constitute a certification thereof, neither is it an acceptance thereof; and without
before.
acceptance or certification, as provided by statute, there is no privity of contract
between the drawee bank and the payee, or holder of the check. Neither is
"We cannot recognize the argument that a payment of the amount of a check or there an assignment pro tanto of the funds where the check is not drawn on a
sight draft under such circumstances amounts to an acceptance, creating a particular fund, or does not show on its face that it is an assignment of a
privity of contract with the real owner. It is difficult to construe a payment as an particular fund. The above rule as stated seems to have been the rule in the
acceptance under any circumstances. The two things are essentially different. majority of the states even before the passage of the uniform Negotiable
One is a promise to perform an act, the other an actual performance. A banker Instruments Act in the several states.
or an individual may be ready to make actual payment of a check or draft when
presented, while unwilling to make a promise to pay at a future time. Many, on The decision in the case of First National Bank vs. Bank of Cottage Grove (59
the other hand, are more ready to promise to pay than to meet the promise Or., 388), which appellant cites in its brief (pp. 12, 13 ) has been expressly
when required. The difference between the transactions is essential and overruled by the Supreme Court of Massachusetts in South Boston Trust Co.
inherent."
vs. Levin (143 N. E., 816, 817), in the following language:
Counsel for the appellant cite other cases holding that the stamping of the
check "paid" and the charging of the amount thereof to the drawer constituted
an acceptance, but we are of opinion that none of these cases cited hold that it
is in compliance with the Negotiable Instruments Act; paying the check and
stamping same is not the equivalent of accepting the check in writing signed by
the drawee. The cases holding that payment as indicated above constituted
acceptance were rendered prior to the adoption of the Negotiable Instruments
Act in the particular state, and these decisions are divided into two classes: the
one holding that the check delivered by the drawer to the holder and presented
to the bank or drawee constitutes an assignment pro tanto; the other holding
that the payment of the check and the charging of same to the drawee although
paid to an unauthorized person creates privity of contract between the holder
and the drawee bank.
We have already seen that our own court has repudiated the assignment pro
tanto theory, and since the adoption of the Negotiable Instrument Act by this
state we are compelled to say that payment of a check is not equivalent to
accepting a check in writing and signing the name of the acceptor thereon.
Payment of the check and the charging of same to the drawer does not
constitute an acceptance. Payment of the check is the end of the voyage;
acceptance of the check is to fuel the vessel and strengthen it for continued
operation on the commercial sea. What we have said applies to the holder and
not to the drawer of the check. On this question we conclude that the general
rule is that an action cannot be maintained by a payee of the check against the
bank on which is draw unless the check has been certified or accepted by the
bank in compliance with the statute, even though at the time the check is that
an action cannot be maintained by a payee of the drawer of the check out of
which the check is legally payable; and that the payment of the check by the
bank on which it is drawn, even though paid on the unauthorized indorsement
of the name of the holder (without notice of the defect by the bank), does not

In First National Bank vs. Bank of Cottage Grove (59 Or., 388; 117 Pac., 293,
296, at page 396), it was said: "The payment of a bill or check by the drawee
amounts to more than an acceptance. The rule, holding that such a payment
has all the efficacy of an acceptance, is founded upon the principle that the
greater includes the less." We are unable to agree with this statement as there
is no similarity between acceptance and payment; payment discharges the
instrument, and no one else is expected to advance anything on the faith of it;
acceptance, contemplates further circulation, induced by the fact of
acceptance. The rule that the acceptor made certain admissions which will
inure to the benefit of subsequent holders, has no applicability to payment of
the instrument where subsequent holders can never exist.
II. The old doctrine that a bank was bound to know its correspondent's
signature and that a drawee could not recover money paid upon a forgery of
the drawer's name, because it was said, the drawee was negligent not to know
the forgery and it must bear the consequence of its negligence, is fast fading
into the misty past, where it belongs. It was founded in misconception of the
fundamental principles of law and common sense. (2 Morse, Banks and
Banking, p. 1031.)
Some of the cases carried the rule to its furthest limit and held that under no
circumstances (except, of course, where the purchaser of the bill has
participated in the fraud upon the drawee) would the drawee be allowed to
recover bank money paid under a mistake of fact upon a bill of exchange to
which the name of the drawer had been forged. This doctrine has been freely
criticized by the eminent authorities, as a rule too favorable to the holder, not
the most fair, nor best calculated to effectuate justice between the drawee and
the drawer. (5 R.C.L., p. 556.)

NEGO; FORGERY|14
The old rule which was originally announced by Lord Mansfield in the leading
case of Price vs. Neal (3 Burr., 1354), elicited the following comment from
Justice Holmes, then Chief Justice of the Supreme Court of Massachusetts, in
the case of Dedham National Bank vs. Everett National Bank (177 Mass., 392).
"Probably the rule was adopted from an impression of convenience rather than
for any more academic reason; or perhaps we may say that Lord Mansfield
took the case out of the doctrine as to payments under a mistake of fact by the
assumption that a holder who simply presents negotiable paper for payment
makes no representation as to the signature, and that the drawee pays at his
peril."
Such was the reaction that followed Lord Mansfield's rule which Justice Story of
the United States Supreme adopted in the case of Bank of United States vs.
Georgia (10 Wheat., 333), that in B. B. Ford & Co. vs. People's Bank of
Orangeburg (74 S. C., 180), it was held that "an unrestricted indorsement of a
draft and presentation to the drawee is a representation that the signature of
the drawer is genuine", and in Lisbon First National Bank vs. Wyndmere Bank
(15 N. D., 299), it was also held that "the drawee of a forged check who has
paid the same without detecting the forgery, may upon discovery of the forgery,
recover the money paid from the party who received the money, even though
the latter was a good faith holder, provided the latter has not been misled or
prejudiced by the drawee's failure to detect the forgery."
Daniel, in his treatise on Negotiable Instruments, has the following to say:
In all the cases which hold the drawee absolutely estoppel by acceptance or
payment from denying genuineness of the drawer's name, the loss is thrown
upon him on the ground of negligence on his part in accepting or paying, until
he has ascertained the bill to be genuine. But the holder has preceded him in
negligence, by himself not ascertaining the true character of the paper before
he received it, or presented it for acceptance or payment. And although, as a
general rule, the drawee is more likely to know the drawer's handwriting than a
stranger is, if he is in fact deceived as to its genuineness, we do not perceive
that he should suffer more deeply by mistake than a stranger, who, without
knowing the handwriting, has taken the paper without previously ascertaining
its genuineness. And the mistake of the drawee should always be allowed to be
corrected, unless the holder, acting upon faith and confidence induced by his
honoring the draft, would be placed in a worse position by according such
privilege to him. This view has been applied in a well considered case, and is
intimidated in another; and is forcibly presented by Mr. Chitty, who says it is
going a great way to charge the acceptor with knowledge of his
correspondent's handwriting, "unless some bona fide holder has purchased the
paper on the faith of such an act." Negligence in making payment under a
mistake of fact is not now deemed a bar to recovery of it, and we do not see

why any exception should be made to the principle, which would apply as well
as to release an obligation not consummated by payment. ( Vol. 2, 6th edition,
pp. 1537-1539.)
III. But now the rule is perfectly well settled that in determining the relative
rights of a drawee who, under a mistake of fact, has paid, and a holder who has
received such payment, upon a check to which the name of the drawer has
been forged, it is only fair to consider the question of diligence or negligence of
the parties in respect thereto. (Woods and Malone vs. Colony Bank [1902], 56
L. R. A., 929, 932.) The responsibility of the drawee who pays a forged check,
for the genuineness of the drawer's signature, is absolute only in favor of one
who has not, by his own fault or negligence, contributed to the success of the
fraud or to mislead the drawee. (National Bank of America vs. Bangs, 106
Mass., 441; 8 Am. Rep., 349; Woods and Malone vs. Colony Bank, supra; De
Feriet vs. Bank of America, 23 La. Ann., 310; B. B. Ford & Co. vs. People's
Bank of Orangeburg, 74 S. C., 180; 10 L. R. A. [N. S.], 63.) If it appears that the
one to whom payment was made was not an innocent sufferer, but was guilty of
negligence in not doing something, which plain duty demanded, and which, if it
had been done, would have avoided entailing loss on any one, he is not entitled
to retain the moneys paid through a mistake on the part of the drawee bank.
(First Nat. Bank of Danvers vs. First Nat. Bank of Salem, 151 Mass., 280; 24 N.
E., 44; 21 A. S. R., 450; First Nat. Bank of Orleans vs. State Bank of Alma, 22
Neb., 769; 36 N. W., 289; 3 A. S. R., 294; American Exp. Co. vs. State Nat.
Bank, 27 Okla., 824; 113 Pac., 711; 33 L. R. A. [N. S.], 188; B. B. Ford & Co.
vs. People's Bank of Orangeburg, 74 S. C., 180; 54 S. E., 204; 114 A. S. R.,
986; 7 Ann. Cas., 744; 10 L. R. A. [N. S.], 63; People's Bank vs. Franklin Bank,
88 Tenn. 299; 12 S. W., 716; 17 A. S. R.) 884; 6 L. R. A., 724; Canadian Bank
of Commerce vs. Bingham, 30 Wash., 484; 71 Pac., 43; 60 L. R. A., 955.) In
other words, to entitle the holder of a forged check to retain the money obtained
he must be able to show that the whole responsibility of determining the validity
of the signature was upon the drawee, and that the negligence of such drawee
was not lessened by any failure of any precaution which, from his implied
assertion in presenting the check as a sufficient voucher, the drawee had the
right to believe he had taken. (Ellis vs. Ohio Life Insurance & Trust Co., 4 Ohio
St., 628; Rouvant vs. Bank, 63 Tex., 610; Bank vs. Ricker, 71 Ill., 429; First
National Bank of Danvers vs. First Nat. Bank of Salem, 24 N. E., 44, 45; B. B.
Ford & Co. vs. People's Bank of Orangeburg, supra.) The recovery is permitted
in such case, because, although the drawee was constructively negligent in
failing to detect the forgery, yet if the purchaser had performed his duty, the
forgery would in all probability have been detected and the fraud defeated.
(First National Bank of Lisbon vs. Bank of Wyndmere, 15 N. D., 209; 10 L. R. A.
[N. S.], 49.) In the absence of actual fault on the part of the drawee, his
constructive fault in not knowing the signature of the drawer and detecting the
forgery will not preclude his recovery from one who took the check under

NEGO; FORGERY|15
circumstances of suspicion without proper precaution, or whose conduct has
been such as to mislead the drawee or induce him to pay the check without the
usual scrutiny or other precautions against mistake or fraud. (National Bank of
America vs. Bangs, supra; First National Bank vs. Indiana National Bank, 30 N.
E., 808-810; Woods and Malone vs. Colony Bank, supra; First National Bank of
Danvers vs. First Nat. Bank of Salem, 151 Mass., 280.) Where a loss, which
must be borne by one of two parties alike innocent of forgery, can be traced to
the neglect or fault of either, it is unreasonable that it would be borne by him,
even if innocent of any intentional fraud, through whose means it has
succeeded. (Gloucester Bank vs. Salem Bank, 17 Mass., 33; First Nat. Bank of
Danvers vs. First National Bank of Salem, supra; B. B. Ford & Co. vs. People's
Bank of Orangeburg, supra.) Again if the indorser is guilty of negligence in
receiving and paying the check or draft, or has reason to believe that the
instrument is not genuine, but fails to inform the drawee of his suspicions the
indorser according to the reasoning of some courts will be held liable to the
drawee upon his implied warranty that the instrument is genuine. (B. B. Ford &
Co. vs. People's Bank of Orangeburg, supra; Newberry Sav. Bank vs. Bank of
Columbia, 93 S. C., 294; 38 L. R. A. [N. S], 1200.) Most of the courts now agree
that one who purchases a check or draft is bound to satisfy himself that the
paper is genuine; and that by indorsing it or presenting it for payment or putting
it into circulation before presentation he impliedly asserts that he has performed
his duty, the drawee, who has, without actual negligence on his part, paid the
forged demand, may recover the money paid from such negligent purchaser.
(Lisbon First National Bank vs. Wyndmere Bank, supra.) Of course, the drawee
must, in order to recover back the holder, show that he himself was free from
fault. (See also 5 R. C. L., pp. 556-558.)

misleading him. . . . If the only fault attributable to the drawee is the

constructive fault which the law raises from the bald fact that he has failed to
detect the forgery, and if he is not chargeable with actual fault in addition to
such constructive fault, then he is not precluded from recovery from a holder
whose conduct has been such as to mislead the drawee or induce him to pay
the check or bill of exchange without the usual security against fraud. The
holder must refund to a drawee who is not guilty of actual fault if the holder was
negligent in not making due inquiry concerning the validity of the check before
he took it, and if the drawee can be said to have been excused from making
inquiry before taking the check because of having had a right to, presume that
the holder had made such inquiry."
The rule that one who first negotiates forged paper without taking some
precaution to learn whether or not it is genuine should not be allowed to retain
the proceeds of the draft or check from the drawee, whose sole fault was that
he did not discover the forgery before he paid the draft or check, has been
followed by the later cases. (Security Commercial & Savings Bank vs. Southern
Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945; Hutcheson Hardware
Co. vs. Planters State Bank [1921], 26 Ga. App., 321; 105 S. E., 854;
[Annotation at 71 A. L. R., 337].)
Where a bank, without inquiry or identification of the person presenting a forged
check, purchases it, indorses it, generally, and presents it to the drawee bank,
which pays it, the latter may recover if its only negligence was its mistake in
having failed to detect the forgery, since its mistake, did not mislead the
purchaser or bring about a change in position. (Security Commercial & Savings
Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)

So, if a collecting bank is alone culpable, and, on account of its negligence only,
the loss has occurred, the drawee may recover the amount it paid on the forged Also, a drawee could recover from another bank the portion of the proceeds of
draft or check. (Security Commercial & Sav. Bank vs. Southern Trust & C. Bank a forged check cashed by the latter and deposited by the forger in the second
[1925], 74 Cal. App., 734; 241 Pac., 945.)
bank and never withdrawn, upon the discovery of the forgery three months
later, after the drawee had paid the check and returned the voucher to the
But we are aware of no case in which the principle that the drawee is bound to purported drawer, where the purchasing bank was negligent in taking the
know the signature of the drawer of a bill or check which he undertakes to pay check, and was not injured by the drawee's negligence in discovering and
has been held to be decisive in favor of a payee of a forged bill or check to reporting the forgery as to the amount left on deposit, since it was not a
which he has himself given credit by his indorsement. (Secalso, Mckleroy vs. purchaser for value. (First State Bank & T. Co. vs. First Nat. Bank [1924], 314
Bank, 14 La. Ann., 458; Canal Bank vs. Bank of Albany, 1 Hill, 287; Rouvant vs. Ill., 269; 145 N. E., 382.)
Bank, supra, First Nat. Bank vs. Indiana National Bank; 30 N. E., 808-810.)
Similarly, it has been held that the drawee of a check could recover the amount
In First Nat. Bank vs. United States National Bank ([1921], 100 Or., 264; 14 A. paid on the check, after discovery of the forgery, from another bank, which put
L. R., 479; 197 Pac., 547), the court declared: "A holder cannot profit by a the check into circulation by cashing it for the one who had forged the signature
mistake which his negligent disregard of duty has contributed to induce the of both drawer and payee without making any inquiry as to who he was
drawee to commit. . . . The holder must refund, if by his negligence he has although he was a stranger, after which the check reached, and was paid by,
contributed to the consummation of the mistake on the part of the drawee by

NEGO; FORGERY|16
the drawee, after going through the hands of several intermediate indorsees. negligence. It indorsed the check, and, while such indorsement may not be
(71 A. L. R., p. 340.)
regarded within the meaning of the Negotiable Instrument Law as amounting to
a warranty to appellant of that which it indorsed, it at least substantially served
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), as a representation to it that it had exercised ordinary care and had complied
the following statement was made:
with the rules and customs of prudent banking. Its indorsement was calculated,
if it did not in fact do so, to lull the drawee bank into indifference as to the
We are clearly of opinion, therefore that the warranty of genuineness, arising drawer's signature to it when paying the check and charging it to its customer's
upon the act of the Brule National Bank in putting the check in circulation, was account and remitting its proceeds to appellant's correspondent.
not discharged by payment of the check by the drawee (First National Bank),
nor was the Brule National Bank deceived or misled to its prejudice by such If in such a transaction between the drawee and the holder of a check both are
payment. The Brule National Bank by its indorsement and delivery warranted without fault, no recovery may be had of the money so paid. (Deposit Bank of
its own identification of Kost and the genuineness of his signature. The Georgetown vs. Fayette National Bank, supra, and cases cited.) Or the rule
indorsement of the check by the Brule National Bank was such as to assign the may be more accurately stated that, where the drawee pays the money, he
title to the check to its assignee, the Whitbeck National Bank, and the amount cannot recover it back from a holder in good faith, for value and without fault.
was credited to the indorser. The check bore no indication that it was deposited
for collection, and was not in any manner restricted so as to constitute the If, on the other hand, the holder acts in bad faith, or is guilty of culpable
indorsee the agent of the indorser, nor did it prohibit farther negotiation of the negligence, a recovery may be had by the drawee of such holder. The
instrument, nor did it appear to be in trust for, or to the use of, any other person, negligence of the Bank of Louisa in failing to inquire of and about Banfield, and
nor was it conditional. Certainly the Pukwana Bank was justified in relying upon to cause or to have him identified before it parted with its money on the forged
the warrant of genuineness, which implied the full identification of Kost, and his check, may be regarded as the primary and proximate cause of the loss. Its
signature by the defendant bank. This view of the statute is in accord with the negligence in this respect reached in its effect the appellee, and induced
decisions of many courts. (First National Bank vs. State Bank, 22 Neb., 769; 3 incaution on its part. In comparison of the degrees of the negligence of the two,
Am. St. Rep., 294; 36 N. W., 289; First National Bank vs. First National Bank, it is apparent that of the appellant excels in culpability. Both appellant and
151 Mass., 280; 21 Am. St. Rep., 450; 24 N. E., 44; People's Bank vs. Franklin appellee inadvertently made a mistake, doubtless due to a hurry incident to
Bank, 88 Tenn., 299; 6 L. R. A., 727; 17 Am. St. Rep., 884; 12 S. W., 716.)"
business. The first and most grievous one was made by the appellant ,
amounting to its disregard of the duty, it owed itself as well as the duty it owed
The appellant leans heavily on the case of Fidelity & Co. vs. Planenscheck (71 to the appellee, and it cannot on account thereof retain as against the appellee
A. L. R., 331), decided in 1929. We have carefully examined this decision and the money which it so received. It cannot shift the loss to the appellee, for such
we do not feel justified in accepting its conclusions. It is but a restatement of disregard of its duty inevitably contributed to induce the appellee to omit its duty
the long abandoned rule of Neal vs. Price, and it predicated on the wrong critically to examine the signature of Armstrong, even if it did not know it
premise that the payment includes acceptance, and that a bank drawee paying instantly at the time it paid the check. (Farmers' Bank of Augusta vs. Farmer's
a check drawn on it becomes ipso facto an acceptor within the meaning of Bank of Maysville, supra, and cases cited.)
section 62 of the Negotiable Instruments Act. Moreover in a more recent
decision, that of Louisa National Bank vs. Kentucky National Bank (39 S. W. IV. The question now is to determine whether the appellant's negligence in
[2nd] 497, 501) decided in 1931, the Court of Appeals of Kentucky held the purchasing the checks in question is such as to give the appellee the right to
following:
recover upon said checks, and on the other hand, whether the drawee bank
was not itself negligent, except for its constructive fault in not knowing the
The appellee, on presentation for payment of $600 check, failed to discover it signature of the drawer and detecting the forgery.
was a forgery. It was bound to know the signature of its customer, Armstrong,
and it was derelict in failing to give his signature to the check sufficient attention We quote with approval the following conclusions of the court a quo:
and examination to enable it to discover instantly the forgery. The appellant,
when the check was presented to it by Banfield, failed to make an inquiry of or Check Exhibit A bears number 637023-D and is dated April 6, 1933, whereas
about him and did not cause or have him to be identified. Its act in so paying to check Exhibit A-1 bears number 637020-D and is dated April 7, 1933.
him the check is a degree of negligence on its part equivalent to positive Therefore, the latter check, which is prior in number to the former check, is

NEGO; FORGERY|17
however, issued on a later date. This circumstance must have aroused at least not that of his customer. But it follows obviously that if the payee, holder, or
the curiosity of the Motor Service Co., Inc.
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
The Motor Service Co., Inc., accepted the two checks from unknown persons. he has at all contributed to induce the banker's negligence, then he may lose
And not only this; check Exhibit A is indorsed by a subagent of the agent of the his right to cast the loss upon the banker. The courts have shown a steadily
payee, International Auto Repair Shop. The Motor Service Co., Inc., made no increasing disposition to extend the application of this rule over the new
inquiry whatsoever as to the extent of the authority of these unknown persons. conditions of fact which from time to time arise, until it can now rarely happen
Our Supreme Court said once that "any person taking checks made payable to that the holder, payee, or presenter can escape the imputation of having been
a corporation, which can act only by agents, does so at his peril, and must in some degree contributory towards the mistake. Without any actual change in
abide by the consequences if the agent who indorses the same is without the abstract doctrines of the law, which are clear, just, and simple enough, the
authority" (Insular Drug Co. vs. National Bank, 58, Phil., 684).
gradual but sure tendency and effect of the decisions have been to put as
heavy a burden of responsibility upon the payee as upon the drawee, contrary
xxx
xxx
xxx
to the original custom. . . . (2 Morse on Banks and Banking, 5th ed., secs. 464
and 466, pp. 82-85 and 86, 87.)
Check Exhibit A-1, aside from having been indorsed by a supposed agent of
the international Auto Repair Shop is crossed generally. The existence of two In First National Bank vs. Brule National Bank (12 A. L. R., 1079, 1088, 1089),
parallel lines transversally drawn on the face of this check was a warning that the following statement appears in the concurring opinion:
the check could only be collected through a banking institution (Jacobs, Law of
Bills of Exchange, etc., pp., 179, 180; Bills of Exchange Act of England, secs. What, then, should be the rule? The drawee asks to recover for money had and
76 and 79). Yet the Motor Service Co., Inc., accepted the check in payment for received. If his claim did not rest upon a transaction relating to a negotiable
merchandise.
instrument plaintiff could recover as for money paid under mistake, unless
defendant could show some equitable reason, such as changed condition
. . . In Exhibit H attached to the stipulation of facts as an integral part thereof, since, and relying upon, payment by plaintiff. In the Wyndmere Case, the North
the Motor Service Co., Inc., stated the following:
Dakota court holds that this rule giving right to recover money paid under
mistake should extend to negotiable paper, and it rejects in its entirety the
"The Pangasinan Transportation Co. is a good customer of this firm and we theory of estoppel and puts a case of this kind on exactly the same basis as the
received checks from them every month in payment of their account. The two ordinary case of payment under mistake. But the great weight of authority, and
checks in question seem to be exactly similar to the checks which we received that based on the better reasoning, holds that the exigencies of business
from the Pangasinan Transportation Co. every month."
demand a different rule in relation to negotiable paper. What is that rule? Is it an
absolute estoppel against the drawee in favor of a holder, no matter how
If the failure of the Motor Service Co., Inc., to detect the forgery of the drawer's negligent such holder has been? It surely is not. The correct rule recognizes the
signature in the two checks, may be considered as an omission in good faith fact that, in case of payment without a prior acceptance or certification, the
because of the similarity stated in the letter, then the same consideration holder takes the paper upon the of the prior indorsers and the credit of the
applies to the Philippine National Bank, for the drawer is a customer of both the drawer, and not upon the credit of the drawee, in making payment, has a right
Motor Service Co., Inc., and the Philippine National Bank. (B. of E., pp. 25, 28, to rely upon the assumption that the payee used due diligence, especially
35.)
where such payee negotiated the bill or check to a holder, thus representing
that it had so fully satisfied itself as to the identity and signature of the maker
We are of opinion that the facts of the present case do not make it one between that it was willing to warrant as relates thereto to all subsequent holders.
two equally innocent persons, the drawee bank and the holder, and that they (Uniform Act, secs. 65 and 66.) Such correct rule denies the drawee the right to
are governed by the authorities already cited and also the following:
recover when the holder was without fault or when there has been some
change of position calling for equitable relief. When a holder of a bill of
The point in issue has sometimes been said to be that of negligence. The exchange uses all due care in the taking of bill or check and the drawee
drawee who has paid upon the forged signature is held to bear the loss, thereafter pays same, the transaction is absolutely closed modern business
because he has been negligent in failing to recognize that the handwriting is could not be done on any other basis. While the correct rule promotes the

NEGO; FORGERY|18
fluidity of two recognized mediums of exchange, those mediums by which the
great bulk of business is carried on, checks and drafts, upon the other hand it
encourages and demands prudent business methods upon the part of those
receiving such mediums of exchange. (Pennington County Bank vs. First State
Bank, 110 Minn., 263; 26 L. R. A. [N. S.], 849; 136 Am. St. Rep., 496; 125 N.
W., 119; First National Bank vs. State Bank, 22 Neb., 769; 3 Am. St. Rep., 294;
36 N. W., 289; Bank of Williamson, vs. McDowell County Bank, 66 W. Va., 545;
36 L. R. A. [N. S.], 605; 66 S. E., 761; Germania Bank vs. Boutell, 60 Minn.,
189; 27 L. R. A., 635; 51 Am. St. Rep., 519; 62 N. W., 327; American Express
Co. vs. State National Bank, 27 Okla., 824; 33 L. R. A. [N. S.], 188; 113 Pac.,
711; Farmers' National Bank vs. Farmers' & Traders Bank, L. R. A., 1915A, 77,
and note (159 Ky., 141; 166 S. W., 986].)

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.

That the defendant bank did not use reasonable business prudence is clear. It
took this check from a stranger without other identification than that given by
another stranger; its cashier witnessed the mark of such stranger thus vouching
for the identity and signature of the maker; and it indorsed the check as "Paid,"
thus further throwing plaintiff off guard. Defendant could not but have known,
when negotiating such check and putting it into the channel through which it
would finally be presented to plaintiff for payment, that plaintiff, if it paid such
check, as defendant was asking it to do, would have to rely solely upon the
apparent faith and credit that defendant had placed in the drawer. From the
very circumstances of this case plaintiff had to act on the facts as presented to
it by defendant, upon such facts only.

VI. It has been held by many courts that a drawee of a check, who is deceived
by a forgery of the drawer's signature may recover the payment back, unless
his mistake has placed an innocent holder of the paper in a worse position than
he would have been in if the discovery of the forgery had been made on
presentation. (5 R. C. L., p. 559; 2 Daniel on Negotiable Instruments, 1538.)
Forgeries often deceived the eye of the most cautious experts; and when a
bank has been deceived, it is a harsh rule which compels it to suffer although
no one has suffered by its being deceived. (17 A. L. R. 891; 5 R. C. L., 559.)

But appellant argues that it so changed its position, after payment by plaintiff,
that in "equity and good conscience" plaintiff should not recover it says it did
not pay over any money to the forger until after plaintiff had paid the check.
There would be merit in such contention if defendant had indorsed the check
for "collection," thus advising plaintiff that it was relying on plaintiff and not on
the drawer. It stands in court where it would have been if it had done as it
represented.
In Woods and Malone vs. Colony Bank (56 L. R. A., 929, 932), the court said:
. . . If the holder has been negligent in paying the forged paper, or has by his
conduct, however innocent, misled or deceived the drawee to his damage, it
would be unjust for him to be allowed to shield himself from the results of his
own carelessness by asserting that the drawee was bound in law to know his
drawer's signature.

It not appearing that the appellee bank did not warrant to the appellant the
genuineness of the checks in question, by its acceptance thereof, nor did it
perform any act which would have induced the appellant to believe in the
genuineness of said instruments before appellant purchased them for value, it
can not be said that the appellee is precluded from setting up the forgery and,
therefore, the appellant is not entitled to retain the amount of the forged check
paid to it by the appellee.

In the instant case should the drawee bank be allowed recovery, the appellant's
position would not become worse than if the drawee had refused the payment
of these checks upon their presentation. The appellant has lost nothing by
anything which the drawee has done. It had in its hands some forged worthless
papers. It did not purchase or acquire these papers because of any
representation made to it by the drawee. It purchased them from unknown
persons and under suspicious circumstances. It had no valid title to them,
because the persons from whom it received them did not have such title. The
appellant could not have compelled the drawee to pay them, and the drawee
could have refused payment had it been able to detect the forgery. By making a
refund, the appellant would only returning what it had received without any title
or right. And when appellant pays back the money it had received it will be
entitled to have restored to it the forged papers it parted with. There is no good
reason why the accidental payment made by the appellant should inure to the
benefit of the appellant. If there were injury to the appellant said injury was
caused not by the failure of the appellee to detect the forgery but by the very
negligence of the appellant in purchasing commercial papers from unknown
persons without making inquiry as to their genuineness.

V. Section 23 of the Negotiable Instruments Act provides that "when a signature In the light of the foregoing discussion, we conclude:
is forged or made without the authority of the person whose signature it
purports to be, is wholly inoperative, and no right to retain the instrument, or to

NEGO; FORGERY|19
1. That where a check is accepted or certified by the bank on which it is drawn, appellee, the presumption that a drawee bank is bound to know more than any
the bank is estopped to deny the genuineness of the drawer's signature and his indorser the signature of its depositor does not hold;
capacity to issue the instrument;
10. That according to the undisputed facts of the case the appellant in
2. That if a drawee bank pays a forged check which was previously accepted or purchasing the papers in question from unknown persons without making any
certified by the said bank it cannot recover from a holder who did not participate inquiry as to the identity and authority of the said persons negotiating and
in the forgery and did not have actual notice thereof;
indorsing them, acted negligently and contributed to the appellee's constructive
negligence in failing to detect the forgery;
3. That 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 Law;
11. That under the circumstances of the case, if the appellee bank is allowed to
recover, there will be no change of position as to the injury or prejudice of the
4. That in the case of the payment of a forged check, even without former appellant.
acceptance, the drawee can not recover from a holder in due course not
chargeable with any act of negligence or disregard of duty;
Wherefore, the assignments of error are overruled, and the judgment appealed
from must be, as it is hereby, affirmed, with costs against the appellant. So
5. That to entitle the holder of a forged check to retain the money obtained ordered.
thereon, there must be a showing that the duty to ascertain the genuineness of
the signature rested entirely upon the drawee, and that the constructive
negligence of such drawee in failing to detect the forgery was not affected by
any disregard of duty on the part of the holder, or by failure of any precaution
which, from his implied assertion in presenting the check as a sufficient
voucher, the drawee had the right to believe he had taken;
6. That in the absence of actual fault on the part of the drawee, his constructive
fault in not knowing the signature of the drawer and detecting the forgery will
nor preclude his recovery from one who took the check under circumstances of
suspicion and without proper precaution, or whose conduct has been such as
to mislead the drawee or induce him to pay the check without the usual scrutiny
or other precautions against mistake or fraud;
7. That on 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 performed his
duty;
8. That while the foregoing rule, chosen from a welter of decisions on the issue
as the correct one, will not hinder the circulation of two recognized mediums of
exchange by which the great bulk of business is carried on, namely, drafts and
checks, on the other hand, it will encourage and demand prudent business
methods on the part of those receiving such mediums of exchange;
9. That it being a matter of record in the present case, that the appellee bank in
no more chargeable with the knowledge of the drawer's signature than the
appellant is, as the drawer was as much the customer of the appellant as of the

NEGO; FORGERY|20
October 29, 1968
G.R. No. L-26001
PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE COURT OF APPEALS and PHILIPPINE
INDUSTRIAL BANK, respondents.

on the same date, the PCIB sent the check to the PNB, for clearance, through
the Central Bank; and that, over two (2) months before, or on November 13,
1961, the GSIS had notified the PNB, which acknowledged receipt of the
notice, that said check had been lost, and, accordingly, requested that its
payment be stopped.
COMMERCIAL

AND

In its brief, the PNB maintains that the lower court erred: (1) in not finding the
PCIB guilty of negligence; (2) in not finding that the indorsements at the back of
Tomas Besa, Jose B. Galang and Juan C. Jimenez for petitioner.
the check are forged; (3) in not finding the PCIB liable to the PNB by virtue of
San Juan, Africa & Benedicto for respondents.
the former's warranty on the back of the check; (4) in not holding that "clearing"
is not "acceptance", in contemplation of the Negotiable Instruments law; (5) in
CONCEPCION, C.J.:
not finding that, since the check had not been accepted by the PNB, the latter
is entitled to reimbursement therefor; and (6) in denying the PNB's right to
The Philippine National Bank hereinafter referred to as the PNB seeks recover from the PCIB.
the review by certiorari of a decision of the Court of Appeals, which affirmed
that of the Court of First Instance of Manila, dismissing plaintiff's complaint The first assignment of error will be discussed later, together with the last,with
against the Philippine Commercial and Industrial Bank hereinafter referred to which it is interrelated.
as the PCIB for the recovery of P57,415.00.
As regards the second assignment of error, the PNB argues that, since the
A partial stipulation of facts entered into by the parties and the decision of the signatures of the drawer are forged, so must the signatures of the supposed
Court of Appeals show that, on about January 15, 1962, one Augusto Lim indorsers be; but this conclusion does not necessarily follow from said premise.
deposited in his current account with the PCIB branch at Padre Faura, Manila, Besides, there is absolutely no evidence, and the PNB has not even tried to
GSIS Check No. 645915- B, in the sum of P57,415.00, drawn against the PNB; prove that the aforementioned indorsements are spurious. Again, the PNB
that, following an established banking practice in the Philippines, the check refunded the amount of the check to the GSIS, on account of the forgery in the
was, on the same date, forwarded, for clearing, through the Central Bank, to signatures, not of the indorsers or supposed indorsers, but of the officers of the
the PNB, which did not return said check the next day, or at any other time, but GSIS as drawer of the instrument. In other words, the question whether or not
retained it and paid its amount to the PCIB, as well as debited it against the the indorsements have been falsified is immaterial to the PNB's liability as a
account of the GSIS in the PNB; that, subsequently, or on January 31, 1962, drawee, or to its right to recover from the PCIB,[[1]] for, as against the drawee,
upon demand from the GSIS, said sum of P57,415.00 was re-credited to the the indorsement of an intermediate bank does not guarantee the signature of
latter's account, for the reason that the signatures of its officers on the check the drawer,[[2]] since the forgery of the indorsement is not the cause of the
were forged; and that, thereupon, or on February 2, 1962, the PNB demanded loss.[[3]]
from the PCIB the refund of said sum, which the PCIB refused to do. Hence,
the present action against the PCIB, which was dismissed by the Court of First With respect to the warranty on the back of the check, to which the third
Instance of Manila, whose decision was, in turn, affirmed by the Court of assignment of error refers, it should be noted that the PCIB thereby guaranteed
Appeals.
"all prior indorsements," not the authenticity of the signatures of the officers of
the GSIS who signed on its behalf, because the GSIS is not an indorser of the
It is not disputed that the signatures of the General Manager and the Auditor of check, but its drawer.[[4]] Said warranty is irrelevant, therefore, to the PNB's
the GSIS on the check, as drawer thereof, are forged; that the person named in alleged right to recover from the PCIB. It could have been availed of by a
the check as its payee was one Mariano D. Pulido, who purportedly indorsed it subsequent indorsee[[5]] or a holder in due course[[6]] subsequent to the PCIB,
to one Manuel Go; that the check purports to have been indorsed by Manuel but, the PNB is neither.[[7]] Indeed, upon payment by the PNB, as drawee, the
Go to Augusto Lim, who, in turn, deposited it with the PCIB, on January 15, check ceased to be a negotiable instrument, and became a mere voucher or
1962; that, thereupon, the PCIB stamped the following on the back of the proof of payment.[[8]]
check: "All prior indorsements and/or Lack of Endorsement Guaranteed,
Philippine Commercial and Industrial Bank," Padre Faura Branch, Manila; that,

NEGO; FORGERY|21
Referring to the fourth and fifth assignments of error, we must bear in mind that,
in general, "acceptance", in the sense in which this term is used in the
Negotiable Instruments Law[[9]] is not required for checks, for the same are
payable on demand.[[10]] Indeed, "acceptance" and "payment" are, within the
purview of said Law, essentially different things, for the former is "a promise to
perform an act," whereas the latter is the "actual performance" thereof.[[11]] In
the words of the Law,[[12]] "the acceptance of a bill is the signification by the
drawee of his assent to the order of the drawer," which, in the case of checks,
is the payment, on demand, of a given sum of money. Upon the other hand,
actual payment of the amount of a check implies not only an assent to said
order of the drawer and a recognition of the drawer's obligation to pay the
aforementioned sum, but, also, a compliance with such obligation.
Let us now consider the first and the last assignments of error. The PNB
maintains that the lower court erred in not finding that the PCIB had been guilty
of negligence in not discovering that the check was forged. Assuming that there
had been such negligence on the part of the PCIB, it is undeniable, however,
that the PNB has, also, been negligent, with the particularity that the PNB had
been guilty of a greater degree of negligence, because it had a previous and
formal notice from the GSIS that the check had been lost, with the request that
payment thereof be stopped. Just as important, if not more important and
decisive, is the fact that the PNB's negligence was the main or proximate cause
for the corresponding loss.
In this connection, it will be recalled that the PCIB did not cash the check upon
its presentation by Augusto Lim; that the latter had merely deposited it in his
current account with the PCIB; that, on the same day, the PCIB sent it, through
the Central Bank, to the PNB, for clearing; that the PNB did not return the
check to the PCIB the next day or at any other time; that said failure to return
the check to the PCIB implied, under the current banking practice, that the PNB
considered the check good and would honor it; that, in fact, the PNB honored
the check and paid its amount to the PCIB; and that only then did the PCIB
allow Augusto Lim to draw said amount from his aforementioned current
account.
Thus, by not returning the check to the PCIB, by thereby indicating that the
PNB had found nothing wrong with the check and would honor the same, and
by actually paying its amount to the PCIB, the PNB induced the latter, not only
to believe that the check was genuine and good in every respect, but, also, to
pay its amount to Augusto Lim. In other words, the PNB was the primary or
proximate cause of the loss, and, hence, may not recover from the PCIB.[[13]]
It is a well-settled maxim of law and equity that when one of two (2) innocent
persons must suffer by the wrongful act of a third person, the loss must be

borne by the one whose negligence was the proximate cause of the loss or
who put it into the power of the third person to perpetrate the wrong.[[14]]
Then, again, it has, likewise, been held that, where the collecting (PCIB) and
the drawee (PNB) banks are equally at fault, the court will leave the parties
where it finds them.[[15]]
Lastly, Section 62 of Act No. 2031 provides:
The acceptor by accepting the instrument engages that he will pay it according
to the tenor of his acceptance; and admits:
(a) The existence of the drawer, the genuineness of his signature, and his
capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
The prevailing view is that the same rule applies in the case of a drawee who
pays a bill without having previously accepted it.[[16]]
WHEREFORE, the decision appealed from is hereby affirmed, with costs
against the Philippine National Bank. It is so ordered.

NEGO; FORGERY|22
August 23, 1922

Upon the issues being joined, a trial was had and judgment was rendered
against the plaintiff and in favor of the defendants, from which the plaintiff
appeals, claiming that the court erred in dismissing the case, notwithstanding
its finding of fact, and in not rendering a judgment in its favor, as prayed for in
its complaint.

G.R. No. 18657

THE GREAT EASTERN LIFE INSURANCE CO., plaintiff-appellant,
vs.
HONGKONG & SHANGHAI BANKING CORPORATION and PHILIPPINE
NATIONAL BANK, defendants-appellees.
JOHNS, J.:
Camus and Delgado for appellant.
Fisher and DeWitt and A. M. Opisso for Hongkong and Shanghai Bank.
Roman J. Lacson for Philippine National Bank.

There is no dispute about any of the findings of fact made by the trial court, and
the plaintiff relies upon them for a reversal. Among other things, the trial court
says:

STATEMENT

Who is responsible for the refund to the drawer of the amount of the check
drawn and payable to order, when its value was collected by a third person by
The plaintiff is an insurance corporation, and the defendants are banking means of forgery of the signature of the payee? Is it the drawee or the last
corporations, and each is duly licensed to do its respective business in the indorser, who ignored the forgery at the time of making the payment, or the
Philippines Islands.
forger?
May 3, 1920, the plaintiff drew its check for P2,000 on the Hongkong and
Shanghai Banking Corporation with whom it had an account, payable to the
order of Lazaro Melicor. E. M. Maasim fraudulently obtained possession of the
check, forged Melicor's signature, as an endorser, and then personally
endorsed and presented it to the Philippine National Bank where the amount of
the check was placed to his credit. After having paid the check, and on the next
day, the Philippine national Bank endorsed the check to the Hongkong and
Shanghai Banking Corporation which paid it and charged the amount of the
check to the account of the plaintiff. In the ordinary course of business, the
Hongkong Shanghai Banking Corporation rendered a bank statement to the
plaintiff showing that the amount of the check was charged to its account, and
no objection was then made to the statement. About four months after the
check was charged to the account of the plaintiff, it developed that Lazaro
Melicor, to whom the check was made payable, had never received it, and that
his signature, as an endorser, was forged by Maasim, who presented and
deposited it to his private account in the Philippine National Bank. With this
knowledge , the plaintiff promptly made a demand upon the Hongkong and
Shanghai Banking Corporation that it should be given credit for the amount of
the forged check, which the bank refused to do, and the plaintiff commenced
this action to recover the P2,000 which was paid on the forged check. On the
petition of the Shanghai Bank, the Philippine National Bank was made
defendant. The Shanghai Bank denies any liability, but prays that, if a judgment
should be rendered against it, in turn, it should have like judgment against the
Philippine National Bank which denies all liability to either party.

To lower court found that Melicor's name was forged to the check. "So that the
person to whose order the check was issued did not receive the money, which
was collected by E. M. Maasim," and then says:
Now then, the National Bank should not be held responsible for the payment of
made to Maasim in good faith of the amount of the check, because the
indorsement of Maasim is unquestionable and his signature perfectly genuine,
and the bank was not obliged to identify the signature of the former indorser.
Neither could the Hongkong and Shanghai Banking Corporation be held
responsible in making payment in good faith to the National Bank, because the
latter is a holder in due course of the check in question. In other words, the two
defendant banks can not be held civilly responsible for the consequences of the
falsification or forgery of the signature of Lazaro Melicor, the National Bank
having had no notice of said forgery in making payment to Maasim, nor the
Hongkong bank in making payment to National Bank. Neither bank incurred in
any responsibility arising from that crime, nor was either of the said banks by
subsequent acts, guilty of negligence or fault.
This was fundamental error.
Plaintiff's check was drawn on Shanghai Bank payable to the order of Melicor.
In other words, the plaintiff authorized and directed the Shanghai Bank to pay
Melicor, or his order, P2,000. It did not authorize or direct the bank to pay the
check to any other person than Melicor, or his order, and the testimony is
undisputed that Melicor never did part with his title or endorse the check, and
never received any of its proceeds. Neither is the plaintiff estopped or bound by

NEGO; FORGERY|23
the banks statement, which was made to it by the Shanghai Bank. This is not a judgment will be entered in favor of the Hongkong Shanghai Banking
case where the plaintiff's own signature was forged to one of it checks. In such Corporation against the Philippine National Bank for the same amount, together
a case, the plaintiff would have known of the forgery, and it would have been its with the amount of its costs in this action. So ordered.
duty to have promptly notified the bank of any forged signature, and any failure
on its part would have released bank from any liability. That is not this case.
Here, the forgery was that of Melicor, who was the payee of the check, and the
legal presumption is that the bank would not honor the check without the
genuine endorsement of Melicor. In other words, when the plaintiff received it
banks statement, it had a right to assume that Melicor had personally endorsed
the check, and that, otherwise, the bank would not have paid it.
Section 23 of Act No. 2031, known as the Negotiable Instruments Law, says:
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.
That section is square in point.
The money was on deposit in the Shanghai Bank, and it had no legal right to
pay it out to anyone except the plaintiff or its order. Here, the plaintiff ordered
the Shanghai Bank to pay the P2,000 to Melicor, and the money was actually
paid to Maasim and was never paid to Melicor, and he never paid to Melicor,
and he never personally endorsed the check, or authorized any one to endorse
it for him, and the alleged endorsement was a forgery. Hence, upon the
undisputed facts, it must follow that the Shanghai Bank has no defense to this
action.
It is admitted that the Philippine National Bank cashed the check upon a forged
signature, and placed the money to the credit of Maasim, who was a forger.
That the Philippine National Bank then endorsed the check and forwarded it to
the Shanghai Bank by whom it was paid. The Philippine National Bank had no
license or authority to pay the money to Maasim or anyone else upon a forge
signature. It was its legal duty to know that Melicor's endorsment was genuine
before cashing the check. Its remedy is against Maasim to whom it paid the
money.
The judgment of the lower court is reversed, and one will be entered here in
favor of the plaintiff and against the Hongkong and Shanghai Banking
Corporation for the P2,000, with interest thereon from November 8, 1920 at the
rate of 6 per cent per annum, and the costs of this action, and a corresponding

NEGO; FORGERY|24
G.R. No. 92244 February 9, 1993
II
NATIVIDAD GEMPESAW, petitioner,
vs.
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT FINDING
THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK OF AND RULING THAT IT IS THE GROSS AND INEXCUSABLE NEGLIGENCE
COMMUNICATIONS, respondents.
AND FRAUDULENT ACTS OF THE OFFICIALS AND EMPLOYEES OF THE
RESPONDENT BANK IN FORGING THE SIGNATURE OF THE PAYEES AND
L.B. Camins for petitioner.
THE WRONG AND/OR ILLEGAL PAYMENTS MADE TO PERSONS, OTHER
THAN TO THE INTENDED PAYEES SPECIFIED IN THE CHECKS, IS THE
Angara, Abello, Concepcion, Regals & Cruz for private respondent
DIRECT AND PROXIMATE CAUSE OF THE DAMAGE TO PETITIONER
WHOSE SAVING (SIC) ACCOUNT WAS DEBITED.
III
CAMPOS, JR., J.:
From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447),
petitioner, Natividad Gempesaw, appealed to this Court in a Petition for Review,
on the issue of the right of the drawer to recover from the drawee bank who
pays a check with a forged indorsement of the payee, debiting the same
against the drawer's account.
The records show that on January 23, 1985, petitioner filed a Complaint against
the private respondent Philippine Bank of Communications (respondent drawee
Bank) for recovery of the money value of eighty-two (82) checks charged
against the petitioner's account with the respondent drawee Bank on the
ground that the payees' indorsements were forgeries. The Regional Trial Court,
Branch CXXVIII of Caloocan City, which tried the case, rendered a decision on
November 17, 1987 dismissing the complaint as well as the respondent drawee
Bank's counterclaim. On appeal, the Court of Appeals in a decision rendered on
February 22, 1990, affirmed the decision of the RTC on two grounds, namely
(1) that the plaintiff's (petitioner herein) gross negligence in issuing the checks
was the proximate cause of the loss and (2) assuming that the bank was also
negligent, the loss must nevertheless be borne by the party whose negligence
was the proximate cause of the loss. On March 5, 1990, the petitioner filed this
petition under Rule 45 of the Rules of Court setting forth the following as the
alleged errors of the respondent Court: 1
I
THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE
NEGLIGENCE OF THE DRAWER IS THE PROXIMATE CAUSE OF THE
RESULTING INJURY TO THE DRAWEE BANK, AND THE DRAWER IS
PRECLUDED FROM SETTING UP THE FORGERY OR WANT OF
AUTHORITY.

THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT

ORDERING THE RESPONDENT BANK TO RESTORE OR RE-CREDIT THE
CHECKING ACCOUNT OF THE PETITIONER IN THE CALOOCAN CITY
BRANCH BY THE VALUE OF THE EIGHTY-TWO (82) CHECKS WHICH IS IN
THE AMOUNT OF P1,208,606.89 WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery
stores located at Rizal Avenue Extension and at Second Avenue, Caloocan
City. Among these groceries are D.G. Shopper's Mart and D.G. Whole Sale
Mart. Petitioner maintains a checking account numbered 13-00038-1 with the
Caloocan City Branch of the respondent drawee Bank. To facilitate payment of
debts to her suppliers, petitioner draws checks against her checking account
with the respondent bank as drawee. Her customary practice of issuing checks
in payment of her suppliers was as follows: the checks were prepared and filled
up as to all material particulars by her trusted bookkeeper, Alicia Galang, an
employee for more than eight (8) years. After the bookkeeper prepared the
checks, the completed checks were submitted to the petitioner for her
signature, together with the corresponding invoice receipts which indicate the
correct obligations due and payable to her suppliers. Petitioner signed each
and every check without bothering to verify the accuracy of the checks against
the corresponding invoices because she reposed full and implicit trust and
confidence on her bookkeeper. The issuance and delivery of the checks to the
payees named therein were left to the bookkeeper. Petitioner admitted that she
did not make any verification as to whether or not the checks were delivered to
their respective payees. Although the respondent drawee Bank notified her of
all checks presented to and paid by the bank, petitioner did not verify he
correctness of the returned checks, much less check if the payees actually
received the checks in payment for the supplies she received. In the course of

NEGO; FORGERY|25
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. A67) appellant's actual obligation to said payee was only P1,041.20 (Exh. 7); (3)
in Check No. 589092 dated April 7, 1984 for the amount of P11,672.47 in favor
of Marchem (Exh. A-61) appellant's obligation was only P1,672.47 (Exh. B); (4)
in Check No. 620450 dated May 10, 1984 in favor of Knotberry for P11,677.10
(Exh. A-31) her actual obligation was only P677.10 (Exhs. C and C-1); (5) in
Check No. 651862 dated August 9, 1984 in favor of Malinta Exchange Mart for
P11,107.16 (Exh. A-62), her obligation was only P1,107.16 (Exh. D-2); (6) in
Check No. 651863 dated August 11, 1984 in favor of Grocer's International
Food Corp. in the amount of P11,335.60 (Exh. A-66), her obligation was only
P1,335.60 (Exh. E and E-1); (7) in Check No. 589019 dated March 17, 1984 in
favor of Sophy Products in the amount of P11,648.00 (Exh. A-78), her
obligation was only P648.00 (Exh. G); (8) in Check No. 589028 dated March
10, 1984 for the amount of P11,520.00 in favor of the Yakult Philippines (Exh.
A-73), the latter's invoice was only P520.00 (Exh. H-2); (9) in Check No. 62033
dated May 23, 1984 in the amount of P11,504.00 in favor of Monde Denmark
Biscuit (Exh. A-34), her obligation was only P504.00 (Exhs. I-1 and I-2). 2

Account No. 00844-5 of Alfredo Y. Romero at the respondent drawee Bank's

Buendia branch, and four (4) checks in his Savings Account No. 32-81-9 at its
Ongpin branch. The rest of the checks were deposited in Account No. 0443-4,
under the name of Benito Lam at the Elcao branch of the respondent drawee
Bank.
About thirty (30) of the payees whose names were specifically written on the
checks testified that they did not receive nor even see the subject checks and
that the indorsements appearing at the back of the checks were not theirs.
The team of auditors from the main office of the respondent drawee Bank which
conducted periodic inspection of the branches' operations failed to discover,
check or stop the unauthorized acts of Ernest L. Boon. Under the rules of the
respondent drawee Bank, only a Branch Manager and no other official of the
respondent drawee bank, may accept a second indorsement on a check for
deposit. In the case at bar, all the deposit slips of the eighty-two (82) checks in
question were initialed and/or approved for deposit by Ernest L. Boon. The
Branch Managers of the Ongpin and Elcao branches accepted the deposits
made in the Buendia branch and credited the accounts of Alfredo Y. Romero
and Benito Lam in their respective branches.
On November 7, 1984, petitioner made a written demand on respondent
drawee Bank to credit her account with the money value of the eighty-two (82)
checks totalling P1,208.606.89 for having been wrongfully charged against her
account. Respondent drawee Bank refused to grant petitioner's demand. On
January 23, 1985, petitioner filed the complaint with the Regional Trial Court.

Practically, all the checks issued and honored by the respondent drawee bank
were crossed checks. 3 Aside from the daily notice given to the petitioner by
the respondent drawee Bank, the latter also furnished her with a monthly
statement of her transactions, attaching thereto all the cancelled checks she
had issued and which were debited against her current account. It was only
after the lapse of more two (2) years that petitioner found out about the
fraudulent manipulations of her bookkeeper.

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:

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

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.

NEGO; FORGERY|26
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 a forged indorsement. 6
In other words, he is precluded from using forgery as a basis for his claim for
re-crediting of his account.

In the case at bar, petitioner admitted that the checks were filled up and
completed by her trusted employee, Alicia Galang, and were given to her for
her signature. Her signing the checks made the negotiable instrument
complete. Prior to signing the checks, there was no valid contract yet.
Every contract on a negotiable instrument is incomplete and revocable until
delivery of the instrument to the payee for the purpose of giving effect thereto. 7
The first delivery of the instrument, complete in form, to the payee who takes it
as a holder, is called issuance of the instrument. 8 Without the initial delivery of
the instrument from the drawer of the check to the payee, there can be no valid
and binding contract and no liability on the instrument.
Petitioner completed the checks by signing them as drawer and thereafter
authorized her employee Alicia Galang to deliver the eighty-two (82) checks to
their respective payees. Instead of issuing the checks to the payees as named
in the checks, Alicia Galang delivered them to the Chief Accountant of the
Buendia branch of the respondent drawee Bank, a certain Ernest L. Boon. It
was established that the signatures of the payees as first indorsers were
forged. The record fails to show the identity of the party who made the forged
signatures. The checks were then indorsed for the second time with the names
of Alfredo Y. Romero and Benito Lam, and were deposited in the latter's
accounts as earlier noted. The second indorsements were all genuine
signatures of the alleged holders. All the eighty-two (82) checks bearing the
forged indorsements of the payees and the genuine second indorsements of
Alfredo Y. Romero and Benito Lam were accepted for deposit at the Buendia
branch of respondent drawee Bank to the credit of their respective savings
accounts in the Buendia, Ongpin and Elcao branches of the same bank. The
total amount of P1,208,606.89, represented by eighty-two (82) checks, were
credited and paid out by respondent drawee Bank to Alfredo Y. Romero and
Benito Lam, and debited against petitioner's checking account No. 13-00038-1,
Caloocan branch.
As a rule, a drawee bank who has paid a check on which an indorsement has
been forged cannot charge the drawer's account for the amount of said check.
An exception to this rule is where the drawer is guilty of such negligence which
causes the bank to honor such a check or checks. If a check is stolen from the
payee, it is quite obvious that the drawer cannot possibly discover the forged
indorsement by mere examination of his cancelled check. This accounts for the
rule that although a depositor owes a duty to his drawee bank to examine his
cancelled checks for forgery of his own signature, he has no similar duty as to
forged indorsements. A different situation arises where the indorsement was
forged by an employee or agent of the drawer, or done with the active
participation of the latter. Most of the cases involving forgery by an agent or
employee deal with the payee's indorsement. The drawer and the payee often

NEGO; FORGERY|27
time shave business relations of long standing. The continued occurrence of
business transactions of the same nature provides the opportunity for the
agent/employee to commit the fraud after having developed familiarity with the
signatures of the parties. However, sooner or later, some leak will show on the
drawer's books. It will then be just a question of time until the fraud is
discovered. This is specially true when the agent perpetrates a series of
forgeries as in the case at bar.
The negligence of a depositor which will prevent recovery of an unauthorized
payment is based on failure of the depositor to act as a prudent businessman
would under the circumstances. In the case at bar, the petitioner relied implicitly
upon the honesty and loyalty of her bookkeeper, and did not even verify the
accuracy of amounts of the checks she signed against the invoices attached
thereto. Furthermore, although she regularly received her bank statements, she
apparently did not carefully examine the same nor the check stubs and the
returned checks, and did not compare them with the same invoices. Otherwise,
she could have easily discovered the discrepancies between the checks and
the documents serving as bases for the checks. With such discovery, the
subsequent forgeries would not have been accomplished. It was not until two
years after the bookkeeper commenced her fraudulent scheme that petitioner
discovered that eighty-two (82) checks were wrongfully charged to her account,
at which she notified the respondent drawee bank.
It is highly improbable that in a period of two years, not one of Petitioner's
suppliers complained of non-payment. Assuming that even one single
complaint had been made, petitioner would have been duty-bound, as far as
the respondent drawee Bank was concerned, to make an adequate
investigation on the matter. Had this been done, the discrepancies would have
been discovered, sooner or later. Petitioner's failure to make such adequate
inquiry constituted negligence which resulted in the bank's honoring of the
subsequent checks with forged indorsements. On the other hand, since the
record mentions nothing about such a complaint, the possibility exists that the
checks in question covered inexistent sales. But even in such a case,
considering the length of a period of two (2) years, it is hard to believe that
petitioner did not know or realize that she was paying more than she should for
the supplies she was actually getting. A depositor may not sit idly by, after
knowledge has come to her that her funds seem to be disappearing or that
there may be a leak in her business, and refrain from taking the steps that a
careful and prudent businessman would take in such circumstances and if
taken, would result in stopping the continuance of the fraudulent scheme. If she
fails to take steps, the facts may establish her negligence, and in that event,
she would be estopped from recovering from the bank. 9

One thing is clear from the records that the petitioner failed to examine her
records with reasonable diligence whether before she signed the checks or
after receiving her bank statements. Had the petitioner examined her records
more carefully, particularly the invoice receipts, cancelled checks, check book
stubs, and had she compared the sums written as amounts payable in the
eighty-two (82) checks with the pertinent sales invoices, she would have easily
discovered that in some checks, the amounts did not tally with those appearing
in the sales invoices. Had she noticed these discrepancies, she should not
have signed those checks, and should have conducted an inquiry as to the
reason for the irregular entries. Likewise had petitioner been more vigilant in
going over her current account by taking careful note of the daily reports made
by respondent drawee Bank in her issued checks, or at least made random
scrutiny of cancelled checks returned by respondent drawee Bank at the close
of each month, she could have easily discovered the fraud being perpetrated
by Alicia Galang, and could have reported the matter to the respondent drawee
Bank. The respondent drawee Bank then could have taken immediate steps to
prevent further commission of such fraud. Thus, petitioner's negligence was the
proximate cause of her loss. And since it was her negligence which caused the
respondent drawee Bank to honor the forged checks or prevented it from
recovering the amount it had already paid on the checks, petitioner cannot now
complain should the bank refuse to recredit her account with the amount of
such checks. 10 Under Section 23 of the NIL, she is now precluded from using
the forgery to prevent the bank's debiting of her account.
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong &
Shanghai Bank 11 is not applicable to the case at bar because in said case, the
check was fraudulently taken and the signature of the payee was forged not by
an agent or employee of the drawer. The drawer was not found to be negligent
in the handling of its business affairs and the theft of the check by a total
stranger was not attributable to negligence of the drawer; neither was the
forging of the payee's indorsement due to the drawer's negligence. Since the
drawer was not negligent, the drawee was duty-bound to restore to the
drawer's account the amount theretofore paid under the check with a forged
payee's indorsement because the drawee did not pay as ordered by the
drawer.
Petitioner argues that respondent drawee Bank should not have honored the
checks because they were crossed checks. Issuing a crossed check imposes
no legal obligation on the drawee not to honor such a check. It is more of a
warning to the holder that the check cannot be presented to the drawee bank
for payment in cash. Instead, the check can only be deposited with the payee's
bank which in turn must present it for payment against the drawee bank in the
course of normal banking transactions between banks. The crossed check

NEGO; FORGERY|28
cannot be presented for payment but it can only be deposited and the drawee negligence is the proximate cause thereof and under Article 2179 of the Civil
bank may only pay to another bank in the payee's or indorser's account.
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
Petitioner likewise contends that banking rules prohibit the drawee bank from article provides
having checks with more than one indorsement. The banking rule banning
acceptance of checks for deposit or cash payment with more than one Those who in the performance of their obligations are guilty of fraud,
indorsement unless cleared by some bank officials does not invalidate the negligence or delay, and those who in any manner contravene the tenor
instrument; neither does it invalidate the negotiation or transfer of the said thereof, are liable for damages.
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 There is no question that there is a contractual relation between petitioner as
of indorsement which stops the further negotiation of an instrument is a depositor (obligee) and the respondent drawee bank as the obligor. In the
restrictive indorsement which prohibits the further negotiation thereof.
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
Sec. 36.
When indorsement restrictive. An indorsement is restrictive its depositors. When it violated its internal rules that second endorsements are
which either
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
(a) Prohibits further negotiation of the instrument; or
contravened the tenor of its obligation at the very least, if it were not actually
guilty of fraud or negligence.
xxx
xxx
xxx
Furthermore, the fact that the respondent drawee Bank did not discover the
In this kind of restrictive indorsement, the prohibition to transfer or negotiate irregularity with respect to the acceptance of checks with second indorsement
must be written in express words at the back of the instrument, so that any for deposit even without the approval of the branch manager despite periodic
subsequent party may be forewarned that ceases to be negotiable. However, inspection conducted by a team of auditors from the main office constitutes
the restrictive indorsee acquires the right to receive payment and bring any negligence on the part of the bank in carrying out its obligations to its
action thereon as any indorser, but he can no longer transfer his rights as such depositors. Article 1173 provides
indorsee where the form of the indorsement does not authorize him to do so.
12
The fault or negligence of the obligor consists in the omission of that diligence
which is required by the nature of the obligation and corresponds with the
Although the holder of a check cannot compel a drawee bank to honor it circumstance of the persons, of the time and of the place. . . .
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 We hold that banking business is so impressed with public interest where the
exchange or a check drawn against it with more than one indorsement if there trust and confidence of the public in general is of paramount importance such
is nothing irregular with the bill or check and the drawer has sufficient funds. that the appropriate standard of diligence must be a high degree of diligence, if
The drawee cannot be compelled to accept or pay the check by the drawer or not the utmost diligence. Surely, respondent drawee Bank cannot claim it
any holder because as a drawee, he incurs no liability on the check unless he exercised such a degree of diligence that is required of it. There is no way We
accepts it. But the drawee will make itself liable to a suit for damages at the can allow it now to escape liability for such negligence. Its liability as obligor is
instance of the drawer for wrongful dishonor of the bill or check.
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.
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 Premises considered, respondent drawee Bank is adjudged liable to share the
the NIL, any case not provided for in the Act shall be governed by the loss with the petitioner on a fifty-fifty ratio in accordance with Article 172 which
provisions of existing legislation. Under the laws of quasi-delict, she cannot provides:
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

NEGO; FORGERY|29
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.

NEGO; FORGERY|30
G.R. No. 89802 May 7, 1992

manager and co-petitioner, Conrado Cruz, Sayson had not been authorized by
the private respondent to deposit and encash the said checks.

ASSOCIATED BANK and CONRADO CRUZ, petitioners,

vs.
The private respondent sued the petitioners in the Regional Trial Court of
HON. COURT OF APPEALS, and MERLE V. REYES, doing business under the Quezon City for recovery of the total value of the checks plus damages. After
name and style "Melissa's RTW," respondents.
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%
Soluta, Leonidas, Marifosque, Javier, Liboon & aguila Law Offices for interest, P50,000.00 actual damages, P25,000.00 exemplary damages,
petitioners.
P5,000.00 attorney's fees, and the costs of the suit. 1
Roberto B. Lugue for private respondent.

CRUZ, J.:
The sole issue raised in this case is whether or not the private respondent has
a cause of action against the petitioners for their encashment and payment to
another person of certain crossed checks issued in her favor.

The 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 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
The three (3) elements of a cause of action are present in the case at bar,
Department Store, and the Corona Bazaar.
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
These companies issued in payment of their respective accounts crossed defendant to respect or not to violate such right; and (3) an act or omission on
checks payable to Melissa's RTW in the amounts and on the dates indicated 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
below:
SCRA 631).
PAYOR BANK AMOUNT
DATE
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
Payless Solid Bank
P3,960.00
January 19, 1982
been questioned. There is no dispute that the same are crossed checks or for
Robinson's
FEBTC 4,140.00
December 18, 1981
payee's account only, which is Melissa's RTW. The appellee had clearly shown
Robinson's
FEBTC 1,650.00
December 24, 1981
that she had never authorized anyone to deposit the said checks nor to encash
Robinson's
FEBTC 1,980.00
January 12, 1982
the same; that the appellants had allowed all said checks to be deposited,
Rempson
TRB
1,575.00
January 9, 1982
cleared and paid to one Rafael Sayson in violation of the instructions in the said
Corona RCBC 2,500.00
December 22, 1981
crossed checks that the same were for payee's account only; and that the
When she went to these companies to collect on what she thought were still appellee maintained a savings account with the Prudential Bank, Cubao
unpaid accounts, she was informed of the issuance of the above-listed crossed Branch, Quezon City which never cleared the said checks and the appellee had
checks. Further inquiry revealed that the said checks had been deposited with been damaged by such encashment of the same.
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 We affirm.

NEGO; FORGERY|31
Under accepted banking practice, crossing a check is done by writing two
parallel lines diagonally on the left top portion of the checks. The crossing is
special where the name of a bank or a business institution is written between
the two parallel lines, which means that the drawee should pay only with the
intervention of that company. 3 The crossing is general where the words written
between the two parallel lines are "and Co." or "for payee's account only," as in
the case at bar. This means that the drawee bank should not encash the check
but merely accept it for deposit. 4
In State Investment House vs. IAC, 5 this Court declared that "the effects of
crossing a check are: (1) that the check may not be encashed but only
deposited in the bank; (2) that the check may be negotiated only once to
one who has an account with a bank; and (3) that the act of crossing the check
serves as a warning to the holder that the check has been issued for a definite
purpose so that he must inquire if he has received the check pursuant to that
purpose."
The effects therefore of crossing a check relate to the mode of its presentment
for payment. Under Sec. 72 of the Negotiable Instruments Law, presentment for
payment, to be sufficient, must be made by the holder or by some person
authorized to receive payment on his behalf. Who the holder or authorized
person is depends on the instruction stated on the face of the check.

the check, the bank 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 of the 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.

As the Court stressed in Banco de Oro Savings and Mortgage Bank vs.
The six checks in the case at bar had been crossed and issued "for payee's Equitable Banking Corp., 9 "the law imposes a duty of diligence on the
account only." This could only signify that the drawers had intended the same collecting bank to scrutinize checks deposited with it, for the purpose of
for deposit only by the person indicated, to wit, Melissa's RTW.
determining their genuineness and regularity. The collecting bank, being
primarily engaged in banking, holds itself out to the public as the expert on this
The petitioners argue that the cause of action for violation of the common field, and the law thus holds it to a high standard of conduct."
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 The petitioners insist that the private respondent has no cause of action against
merely facilitated the encashment of the checks, they cannot be made liable to them because they have no privity of contract with her. They also argue that it
the private respondent.
was Eddie Reyes, the private respondent's own husband, who endorsed the
checks.
The subject checks were accepted for deposit by the Bank for the account of
Rafael Sayson although they were crossed checks and the payee was not Assuming that Eddie Reyes did endorse the crossed checks, we hold that the
Sayson but Melissa's RTW. The Bank stamped thereon its guarantee that "all Bank would still be liable to the private respondent because he was not
prior endorsements and/or lack of endorsements (were) guaranteed." By such authorized to make the endorsements. And even if the endorsements were
deliberate and positive act, the Bank had for all legal intents and purposes forged, as alleged, the Bank would still be liable to the private respondent for
treated the said checks as negotiable instruments and, accordingly, assumed not verifying the endorser's authority. There is no substantial difference
the warranty of the endorser.
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
The weight of authority is to the effect that "the possession of check on a forged check as an endorsement by a person not authorized to endorse it. 10
or unauthorized indorsement is wrongful, and when the money is collected on

NEGO; FORGERY|32
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.

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 of endorsements 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.