Associated Bank vs Court of Appeals (1996)

252 SCRA 620 Mercantile Law Negotiable Instruments Law Liabilities of Parties
Forgery Collecting Bank vs Drawee Bank
The Province of Tarlac was disbursing funds to Concepcion Emergency Hospital via checks
drawn against its account with the Philippine National Bank (PNB). These checks were
drawn payable to the order of Concepcion Emergency Hospital. Fausto Pangilinan was the
cashier of Concepcion Emergency Hospital in Tarlac until his retirement in 1978. He used to
handle checks issued by the provincial government of Tarlac to the said hospital. However,
after his retirement, the provincial government still delivered checks to him until its discovery
of this irregularity in 1981. By forging the signature of the chief payee of the hospital (Dr.
Adena Canlas), Pangilinan was able to deposit 30 checks amounting to P203k to his
account with the Associated Bank.
When the province of Tarlac discovered this irregularity, it demanded PNB to reimburse the
said amount. PNB in turn demanded Associated Bank to reimburse said amount. PNB
averred that Associated Bank is liable to reimburse because of its indorsement borne on the
face of the checks:

ISSUE: What are the liabilities of each party?

HELD: The checks involved in this case are order instruments.
Liability of Associated Bank
Where the instrument is payable to order at the time of the forgery, such as the checks in
this case, the signature of its rightful holder (here, the payee hospital) is essential to transfer
title to the same instrument. When the holders indorsement is forged, all parties prior to the
forgery may raise the real defense of forgery against all parties subsequent thereto.
A collecting bank (in this case Associated Bank) where a check is deposited and which
indorses the check upon presentment with the drawee bank (PNB), is such an indorser. So
even if the indorsement on the check deposited by the bankss client is forged, Associated
Bank is bound by its warranties as an indorser and cannot set up the defense of forgery as
against the PNB.
EXCEPTION: If it can be shown that the drawee bank (PNB) unreasonably delayed in
notifying the collecting bank (Associated Bank) of the fact of the forgery so much so that the
latter can no longer collect reimbursement from the depositor-forger.

Liability of PNB
The bank on which a check is drawn, known as the drawee bank (PNB), is under strict
liability to pay the check to the order of the payee (Provincial Government of Tarlac).
Payment under a forged indorsement is not to the drawers order. When the drawee bank
pays a person other than the payee, it does not comply with the terms of the check and
violates its duty to charge its customers (the drawer) account only for properly payable
items. Since the drawee bank did not pay a holder or other person entitled to receive
payment, it has no right to reimbursement from the drawer. The general rule then is that the
drawee bank may not debit the drawers account and is not entitled to indemnification from
the drawer. The risk of loss must perforce fall on the drawee bank.
EXCEPTION: If the drawee bank (PNB) can prove a failure by the customer/drawer (Tarlac
Province) to exercise ordinary care that substantially contributed to the making of the forged
signature, the drawer is precluded from asserting the forgery.
In sum, by reason of Associated Banks indorsement and warranties of prior indorsements
as a party after the forgery, it is liable to refund the amount to PNB. The Province of Tarlac
can ask reimbursement from PNB because the Province is a party prior to the forgery.
Hence, the instrument is inoperative. HOWEVER, it has been proven that the Provincial
Government of Tarlac has been negligent in issuing the checks especially when it continued
to deliver the checks to Pangilinan even when he already retired. Due to this contributory
negligence, PNB is only ordered to pay 50% of the amount or half of P203 K.
BUT THEN AGAIN, since PNB can pass its loss to Associated Bank (by reason of
Associated Banks warranties), PNB can ask the 50% reimbursement from Associated
Bank. Associated Bank can ask reimbursement from Pangilinan but unfortunately in this
case, the court did not acquire jurisdiction over him.

BPI vs. Casa Montessori Internationale, G. R. No. 149454 & 149507, May 28, 2004
Post under case digests, Civil Law at Tuesday, January 31, 2012 Posted
by Schizophrenic Mind
Facts: CASA Montessori International opened an account with BPI, with
CASAs President as one of its authorized signatories. It discovered that 9 of its checks
had been encashed by a certain Sonny D. Santos whose name turned out to be
fictitious, and was used by a certain Yabut, CASAs external auditor. He voluntarily
admitted that he forged the signature and encashed the checks.

RTC granted the Complaint for Collection with Damages against BPI ordering to
reinstate the amount in the account, with interest. CA took account of CASAs
contributory negligence and apportioned the loss between CASA and BPI, and ordred
Yabut to reimburse both.
BPI contends that the monthly statements it issues to its clientscontain a notice worded
as follows: If no error is reported in 10 days, account will be correct and as such, it
should be considered a waiver.
Issue:Whether or not waiver or estoppel results from failure to report the error in
the bank statement
Held: Such notice cannot be considered a waiver, even if CASA failed to report the
error. Neither is it estopped from questioning the mistake after the lapse of the ten-day
period.
This notice is a simple confirmation or "circularization" -- in accounting parlance -- that
requests client-depositors to affirm the accuracy of items recorded by the banks. Its
purpose is to obtain from the depositors a direct corroboration of the correctness of
theiraccount balances with their respective banks.
Every right has subjects -- active and passive. While the active subject is entitled to
demand its enforcement, the passive one is duty-bound to suffer such enforcement. On
the one hand, BPI could not have been an active subject, because it could not have
demanded from CASA a response to its notice. CASA, on the other hand, could not
have been a passive subject, either, because it had no obligation to respond. It could -as it did -- choose not to respond.
Estoppel precludes individuals from denying or asserting, by their own deed
or representation, anything contrary to that established as the truth, in legal
contemplation. Our rules on evidence even make a juris et de jure presumption that
whenever one has, by ones own act or omission, intentionally and deliberately led
another to believe a particular thing to be true and to act upon that belief, one cannot --

in any litigation arising from such act or omission -- be permitted to falsify that supposed
truth.
In the instant case, CASA never made any deed or representationthat misled BPI. The
formers omission, if any, may only be deemed an innocent mistake oblivious to the
procedures and consequences of periodic audits. Since its conduct was due to such
ignorance founded upon an innocent mistake, estoppel will not arise. A person who has
no knowledge of or consent to a transaction may not be estopped by it. "Estoppel
cannot be sustained by mere argument or doubtful inference x x x." CASA is not barred
from questioning BPIs error even after the lapse of the period given in the notice.

Negotiable Instruments Law: Liability Of Collecting Banks

October 30, 2014 by The Lawyer's Post
Cesar and Lolita maintains a savings account and a special savings account with
Express Savings Bank. The spouses are engaged in the buy and sell of brand new and
second hand motor vehicles. One day, a certain Gerry ordered a second-hand
Mitsubishi Pajero and a brand new Honda CRV, and paid the spouses with nine
Philippine Veterans Affairs Office checks payable to different payees and drawn against
the Philippine Veterans Bank, each with a face value of P200,000, for a total of
P1,800,000.00. The spouses deposited the checks in their saving account with the
bank, who in turn deposited it with their depositary bank, the Equitable-PCI Bank. The
latter then presented the checks to the drawee bank, which honoured the checks. Upon
being informed that the checks were honored, the spouses released the two cars to the
buyer.
In July, 2000, two months after the checks were honoured, the drawee bank, Philippine
Veterans Bank, informed Equitable-PCI that the checks the spouses presented for
payment were materially altered, the amount for each check being only P4,000.00
instead of P200,000.00. This set off a series of events which lead to the case. When
Equitable-PCIs protest with the Philippine Clearing House Inc. was denied, it
proceeded to debit Express Savings account the amount of P1,800,000, the amount of
the check. On the other hand, when the spouses issued a check for P500,000.00

Express Saving Bank dishonoured the check, with notation Deposit Under Hold. Upon
demand by the spouses to honor the check, the bank closed the special saving account,
transferred the balance to the savings account of the spouses, then debited the amount
of P1,800,000.00 representing the amount of the nine dishonoured checks, from the
spouses savings account.
The spouses then filed a Complaint for Sum of Money with Damages against Express
Savings Bank. The Regional Trial Court found in favour of the spouses and ruled
against the bank. On motion for reconsideration, however, the RTC pairing judge
reversed the decision and ruled that the applicable provision is Art. 1980 of the Civil
Code which provides that fixed, savings and current deposits of money with the banks
are governed by the provisions of simple loan; thus the bank had all the right to set-off
against the spouses savings account the amount of the nine checks dishonoured.
On appeal to the Court of Appeals, the latter affirmed the trial courts decision on the
motion for reconsideration but deleted the award of moral damages and attorneys fees.
What is the applicable provision on the facts of the case?
The Supreme Court reversed the Court of Appeals decision, applying the provisions of
the Negotiable Instruments Law instead of the Civil Code:
1). Liability of the drawer, Philippine Veterans Bank
The second view is that the acceptor/drawee despite the tenor of his acceptance is
liable only to the extent of the bill prior to alteration. This view appears to be in
consonance with Section 124 of the Negotiable Instruments Law which states that a
material alteration avoids an instrument except as against an assenting party and
subsequent indorsers, but a holder in due course may enforce payment according to its
original tenor. Thus, when the drawee bank pays a materially altered check, it violates
the terms of the check, as well as its duty to charge its clients account only for bona
fide disbursements he had made. If the drawee did not pay according to the original
tenor of the instrument, as directed by the drawer, then it has no right to claim
reimbursement from the drawer, much less, the right to deduct the erroneous payment it
made from the drawers account which it was expected to treat with utmost fidelity. The
drawee, however, still has recourse to recover its loss. It may pass the liability back to

the collecting bank which is what the drawee bank exactly did in this case. It debited the
account of Equitable-PCI Bank for the altered amount of the checks.
xxx
2) Liability of the collecting bank, Express Savings Bank and/or Equitable PCI Bank:
A depositary/collecting bank where a check is deposited, and which endorses the
check upon presentment with the drawee bank, is an endorser. Under Section 66 of the
Negotiable Instruments Law, an endorser warrants that the instrument is genuine and
in all respects what it purports to be; that he has good title to it; that all prior parties had
capacity to contract; and that the instrument is at the time of his endorsement valid and
subsisting. It has been repeatedly held that in check transactions, the
depositary/collecting bank or last endorser generally suffers the loss because it has the
duty to ascertain the genuineness of all prior endorsements considering that the act of
presenting the check for payment to the drawee is an assertion that the party making
the presentment has done its duty to ascertain the genuineness of the endorsements. If
any of the warranties made by the depositary/collecting bank turns out to be false, then
the drawee bank may recover from it up to the amount of the check.
The law imposes a duty of diligence on the collecting bank to scrutinize checks
deposited with it for the purpose of determining their genuineness and regularity. The
collecting bank being primarily engaged in banking holds itself out to the public as the
expert and the law holds it to a high standard of conduct.
As collecting banks, the Bank and Equitable-PCI Bank are both liable for the amount of
the materially altered checks. Since Equitable-PCI Bank is not a party to this case and
the Bank allowed its account with Equitable-PCI Bank to be debited, it has the option to
seek recourse against the latter in another forum.
xxx
3.) Liability of the spouses:
The 2008 case of Far East Bank & Trust Company v. Gold Palace Jewellery Co. is in
point. A foreigner purchased several pieces of jewelry from Gold Palace Jewellery

using a United Overseas Bank (Malaysia) issued draft addressed to the Land Bank of
the Philippines (LBP). Gold Palace Jewellery deposited the draft in the companys
account with Far East Bank. Far East Bank presented the draft for clearing to
LBP. The latter cleared the same and Gold Palace Jewellerys account was credited
with the amount stated in the draft. Consequently, Gold Palace Jewellery released the
pieces of jewelries to the foreigner. Three weeks later, LBP informed Far East Bank
that the amount in the foreign draft had been materially altered from P300,000.00 to
P380,000.00. LBP returned the check to Far East Bank. Far East Bank refunded LBP
the P380,000.00 paid by LBP. Far East Bank initially debited P168,053.36 from Gold
Palace Jewellerys account and demanded the payment of the difference between the
amount in the altered draft and the amount debited from Gold Palace Jewellery.
However, for the reasons already discussed above, our pronouncement in the Far East
Bank and Trust Company case that the drawee is liable on its payment of the check
according to the tenor of the check at the time of payment, which was the raised
amount is inapplicable to the factual milieu obtaining herein.
We only adopt said decision in so far as it adjudged liability on the part of the collecting
bank, thus:
Thus, considering that, in this case, Gold Palace is protected by Section 62 of the NIL,
its collecting agent, Far East, should not have debited the money paid by the drawee
bank from respondent companys account. When Gold Palace deposited the check with
Far East, the latter, under the terms of the deposit and the provisions of the NIL,
became an agent of the former for the collection of the amount in the draft. The
subsequent payment by the drawee bank and the collection of the amount by the
collecting bank closed the transaction insofar as the drawee and the holder of the check
or his agent are concerned, converted the check into a mere voucher, and, as already
discussed, foreclosed the recovery by the drawee of the amount paid. This closure of
the transaction is a matter of course; otherwise, uncertainty in commercial transactions,
delay and annoyance will arise if a bank at some future time will call on the payee for
the return of the money paid to him on the check.

As the transaction in this case had been closed and the principal-agent relationship
between the payee and the collecting bank had already ceased, the latter in returning
the amount to the drawee bank was already acting on its own and should now be
responsible for its own actions. x x x Likewise, Far East cannot invoke the warranty of
the payee/depositor who indorsed the instrument for collection to shift the burden it
brought upon itself. This is precisely because the said indorsement is only for purposes
of collection which, under Section 36 of the NIL, is a restrictive indorsement. It did not in
any way transfer the title of the instrument to the collecting bank. Far East did not own
the draft, it merely presented it for payment. Considering that the warranties of a
general indorser as provided in Section 66 of the NIL are based upon a transfer of title
and are available only to holders in due course, these warranties did not attach to the
indorsement for deposit and collection made by Gold Palace to Far East. Without any
legal right to do so, the collecting bank, therefore, could not debit respondents account
for the amount it refunded to the drawee bank.
The foregoing considered, we affirm the ruling of the appellate court to the extent that
Far East could not debit the account of Gold Palace, and for doing so, it must return
what it had erroneously taken.
Applying the foregoing ratiocination, the Bank cannot debit the savings account of
petitioners. A depositary/collecting bank may resist or defend against a claim for breach
of warranty if the drawer, the payee, or either the drawee bank or depositary bank was
negligent and such negligence substantially contributed to the loss from alteration. In
the instant case, no negligence can be attributed to petitioners. We lend credence to
their claim that at the time of the sales transaction, the Banks branch manager was
present and even offered the Banks services for the processing and eventual crediting
of the checks. True to the branch managers words, the checks were cleared three
days later when deposited by petitioners and the entire amount of the checks was
credited to their savings account.
xxx
No compensation or set-off:

The Bank cannot set-off the amount it paid to Equitable-PCI Bank with petitioners
savings account. Under Art. 1278 of the New Civil Code, compensation shall take place
when two persons, in their own right, are creditors and debtors of each other. And the
requisites for legal compensation are:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time
a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they
be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5)That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
It is well-settled that the relationship of the depositors and the Bank or similar institution
is that of creditor-debtor. Article 1980 of the New Civil Code provides that fixed, savings
and current deposits of money in banks and similar institutions shall be governed by the
provisions concerning simple loans. The bank is the debtor and the depositor is the
creditor. The depositor lends the bank money and the bank agrees to pay the depositor
on demand. The savings deposit agreement between the bank and the depositor is the
contract that determines the rights and obligations of the parties.
But as previously discussed, petitioners are not liable for the deposit of the altered
checks. The Bank, as the depositary and collecting bank ultimately bears the
loss. Thus, there being no indebtedness to the Bank on the part of petitioners, legal
compensation cannot take place.
FIRST DIVISION, G.R. No. 176697, September 10, 2014, CESAR V. AREZA AND
LOLITA B. AREZA, PETITIONERS, VS. EXPRESS SAVINGS BANK, INC. AND
MICHAEL POTENCIANO, RESPONDENTS.