G.R. No. 93397 March 3, 1997 TRADERS ROYAL BANK, petitioner, vs.

COURT OF APPEALS, FILRITERS GUARANTY ASSURANCE CORPORATION and CENTRAL BANK of the PHILIPPINES, respondents.

consideration of the sum of PESOS: FIVE HUNDRED THOUSAND (P500,000.00), PhilFinance sold, transferred and delivered to petitioner CBCI 4-year, 8th series, Serial No. D891 with a face value of P500,000.00 . . ., which CBCI was among those previously acquired by PhilFinance from Filriters as averred in paragraph 3 of the Petition; 6. Pursuant to the aforesaid Repurchase Agreement (Annex "B"), Philfinance agreed to repurchase CBCI Serial No. D891 (Annex "C"), at the stipulated price of PESOS: FIVE HUNDRED NINETEEN THOUSAND THREE HUNDRED SIXTY-ONE & 11/100 (P519,361.11) on April 27, 1981; 7. PhilFinance failed to repurchase the CBCI on the agreed date of maturity, April 27, 1981, when the checks it issued in favor of petitioner were dishonored for insufficient funds; 8. Owing to the default of PhilFinance, it executed a Detached Assignment in favor of the Petitioner to enable the latter to have its title completed and registered in the books of the respondent. And by means of said Detachment, Philfinance transferred and assigned all, its rights and title in the said CBCI (Annex "C") to petitioner and, furthermore, it did thereby "irrevocably authorize the said issuer (respondent herein) to transfer the said bond/certificate on the books of its fiscal agent." . . . 9. Petitioner presented the CBCI (Annex "C"), together with the two (2) aforementioned Detached Assignments (Annexes "B" and "D"), to the Securities Servicing Department of the respondent, and requested the latter to effect the transfer of the CBCI on its books and to issue a new certificate in the name of petitioner as absolute owner thereof; 10. Respondent failed and refused to register the transfer as requested, and continues to do so notwithstanding petitioner's valid and just title over the same and despite repeated demands in writing, the latest of which is hereto attached as Annex "E" and made an integral part hereof; 11. The express provisions governing the transfer of the CBCI were substantially complied with the petitioner's request for registration, to wit:

TORRES, JR., J.: Assailed in this Petition for Review on Certiorari is the Decision of the respondent Court of Appeals dated January 29, 1990, 1 affirming the nullity of the transfer of Central Bank Certificate of Indebtedness (CBCI) No. D891, 2 with a face value of P500,000.00, from the Philippine Underwriters Finance Corporation (Philfinance) to the petitioner Trader's Royal Bank (TRB), under a Repurchase Agreement 3 dated February 4, 1981, and a Detached Assignment 4 dated April 27, 1981. Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila, Branch 32, the action was originally filed as a Petition for Mandamus 5 under Rule 65 of the Rules of Court, to compel the Central Bank of the Philippines to register the transfer of the subject CBCI to petitioner Traders Royal Bank (TRB). In the said petition, TRB stated that: 3. On November 27, 1979, Filriters Guaranty Assurance Corporation (Filriters) executed a "Detached Assignment" . . ., whereby Filriters, as registered owner, sold, transferred, assigned and delivered unto Philippine Underwriters Finance Corporation (Philfinance) all its rights and title to Central Bank Certificates of Indebtedness of PESOS: FIVE HUNDRED THOUSAND (P500,000) and having an aggregate value of PESOS: THREE MILLION FIVE HUNDRED THOUSAND (P3,500,000.00); 4. The aforesaid Detached Assignment (Annex "A") contains an express authorization executed by the transferor intended to complete the assignment through the registration of the transfer in the name of PhilFinance, which authorization is specifically phrased as follows: '(Filriters) hereby irrevocably authorized the said issuer (Central Bank) to transfer the said bond/certificates on the books of its fiscal agent; 5. On February 4, 1981, petitioner entered into a Repurchase Agreement with PhilFinance . . ., whereby, for and in

"No transfer thereof shall be valid unless made at said office (where the Certificate has been registered) by the registered owner hereof, in person or by his attorney duly authorized in writing, and similarly noted hereon, and upon payment of a nominal transfer fee which may be required, a new Certificate shall be issued to the transferee of the registered holder thereof." and, without a doubt, the Detached Assignments presented to respondent were sufficient authorizations in writing executed by the registered owner, Filriters, and its transferee, PhilFinance, as required by the above-quoted provision; 12. Upon such compliance with the aforesaid requirements, the ministerial duties of registering a transfer of ownership over the CBCI and issuing a new certificate to the transferee devolves upon the respondent; Upon these assertions, TRB prayed for the registration by the Central Bank of the subject CBCI in its name. On December 4, 1984, the Regional Trial Court the case took cognizance of the defendant Central Bank of the Philippines' Motion for Admission of Amended Answer with Counter Claim for Interpleader 6 thereby calling to fore the respondent Filriters Guaranty Assurance Corporation (Filriters), the registered owner of the subject CBCI as respondent. For its part, Filriters interjected as Special Defenses the following: 11. Respondent is the registered owner of CBCI No. 891; 12. The CBCI constitutes part of the reserve investment against liabilities required of respondent as an insurance company under the Insurance Code; 13. Without any consideration or benefit whatsoever to Filriters, in violation of law and the trust fund doctrine and to the prejudice of policyholders and to all who have present or future claim against policies issued by Filriters, Alfredo Banaria, then Senior Vice-

President-Treasury of Filriters, without any board resolution, knowledge or consent of the board of directors of Filriters, and without any clearance or authorization from the Insurance Commissioner, executed a detached assignment purportedly assigning CBCI No. 891 to Philfinance; xxx xxx xxx 14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar Jacobe, Vice-President-Treasury of Filriters (both of whom were holding the same positions in Philfinance), without any consideration or benefit redounding to Filriters and to the grave prejudice of Filriters, its policy holders and all who have present or future claims against its policies, executed similar detached assignment forms transferring the CBCI to plaintiff; xxx xxx xxx 15. The detached assignment is patently void and inoperative because the assignment is without the knowledge and consent of directors of Filriters, and not duly authorized in writing by the Board, as requiring by Article V, Section 3 of CB Circular No. 769; 16. The assignment of the CBCI to Philfinance is a personal act of Alfredo Banaria and not the corporate act of Filriters and such null and void; a) The assignment was executed without consideration and for that reason, the assignment is void from the beginning (Article 1409, Civil Code); b) The assignment was executed without any knowledge and consent of the board of directors of Filriters; c) The CBCI constitutes reserve investment of Filriters against liabilities, which is a requirement under the Insurance Code for its existence as an insurance company and the pursuit of its business operations. The assignment of the CBCI is illegal act in the sense of malum in se or malum prohibitum, for anyone to make, either as corporate or personal act; d) The transfer of dimunition of reserve investments of Filriters is expressly

prohibited by law, is immoral and against public policy; e) The assignment of the CBCI has resulted in the capital impairment and in the solvency deficiency of Filriters (and has in fact helped in placing Filriters under conservatorship), an inevitable result known to the officer who executed assignment. 17. Plaintiff had acted in bad faith and with knowledge of the illegality and invalidity of the assignment. a) The CBCI No. 891 is not a negotiable instrument and as a certificate of indebtedness is not payable to bearer but is a registered in the name of Filriters; b) The provision on transfer of the CBCIs provides that the Central Bank shall treat the registered owner as the absolute owner and that the value of the registered certificates shall be payable only to the registered owner; a sufficient notice to plaintiff that the assignments do not give them the registered owner's right as absolute owner of the CBCI's; c) CB Circular 769, Series of 1980 (Rules and Regulations Governing CBCIs) provides that the registered certificates are payable only to the registered owner (Article II, Section 1). 18. Plaintiff knew full well that the assignment by Philfinance of CBCI No. 891 by Filriters is not a regular transaction made in the usual of ordinary course of business; a) The CBCI constitutes part of the reserve investments of Filriters against liabilities requires by the Insurance Code and its assignment or transfer is expressly prohibited by law. There was no attempt to get any clearance or authorization from the Insurance Commissioner; b) The assignment by Filriters of the CBCI is clearly not a transaction in the usual or regular course of its business; c) The CBCI involved substantial amount and its assignment clearly constitutes disposition of "all or substantially all" of the assets of Filriters, which requires the affirmative action of the stockholders (Section 40, Corporation [sic] Code. 7

In its Decision 8 dated April 29, 1988, the Regional Trial Court of Manila, Branch XXXIII found the assignment of CBCI No. D891 in favor of Philfinance, and the subsequent assignment of the same CBCI by Philfinance in favor of Traders Royal Bank null and void and of no force and effect. The dispositive portion of the decision reads: ACCORDINGLY, judgment is hereby rendered in favor of the respondent Filriters Guaranty Assurance Corporation and against the plaintiff Traders Royal Bank: (a) Declaring the assignment of CBCI No. 891 in favor of PhilFinance, and the subsequent assignment of CBCI by PhilFinance in favor of the plaintiff Traders Royal Bank as null and void and of no force and effect; (b) Ordering the respondent Central Bank of the Philippines to disregard the said assignment and to pay the value of the proceeds of the CBCI No. D891 to the Filriters Guaranty Assurance Corporation; (c) Ordering the plaintiff Traders Royal Bank to pay respondent Filriters Guaranty Assurance Corp. The sum of P10,000 as attorney's fees; and (d) to pay the costs. SO ORDERED. 9 The petitioner assailed the decision of the trial court in the Court of Appeals 10, but their appeals likewise failed. The findings of the fact of the said court are hereby reproduced: The records reveal that defendant Filriters is the registered owner of CBCI No. D891. Under a deed of assignment dated November 27, 1971, Filriters transferred CBCI No. D891 to Philippine Underwriters Finance Corporation (Philfinance). Subsequently, Philfinance transferred CBCI No. D891, which was still registered in the name of Filriters, to appellant Traders Royal Bank (TRB). The transfer was made under a repurchase agreement dated February 4, 1981, granting Philfinance the right to repurchase the instrument on or before April 27, 1981. When Philfinance failed to buy back the note on maturity date, it executed a deed of assignment, dated April 27, 1981, conveying to appellant TRB all its right and the title to CBCI No. D891.

Armed with the deed of assignment, TRB then sought the transfer and registration of CBCI No. D891 in its name before the Security and Servicing Department of the Central Bank (CB). Central Bank, however, refused to effect the transfer and registration in view of an adverse claim filed by defendant Filriters. Left with no other recourse, TRB filed a special civil action for mandamus against the Central Bank in the Regional Trial Court of Manila. The suit, however, was subsequently treated by the lower court as a case of interpleader when CB prayed in its amended answer that Filriters be impleaded as a respondent and the court adjudge which of them is entitled to the ownership of CBCI No. D891. Failing to get a favorable judgment. TRB now comes to this Court on appeal. 11 In the appellate court, petitioner argued that the subject CBCI was a negotiable instrument, and having acquired the said certificate from Philfinance as a holder in due course, its possession of the same is thus free fro any defect of title of prior parties and from any defense available to prior parties among themselves, and it may thus, enforce payment of the instrument for the full amount thereof against all parties liable thereon. 12 In ignoring said argument, the appellate court that the CBCI is not a negotiable instrument, since the instrument clearly stated that it was payable to Filriters, the registered owner, whose name was inscribed thereon, and that the certificate lacked the words of negotiability which serve as an expression of consent that the instrument may be transferred by negotiation. Obviously, the assignment of the certificate from Filriters to Philfinance was fictitious, having made without consideration, and did not conform to Central Bank Circular No. 769, series of 1980, better known as the "Rules and Regulations Governing Central Bank Certificates of Indebtedness", which provided that any "assignment of registered certificates shall not be valid unless made . . . by the registered owner thereof in person or by his representative duly authorized in writing." Petitioner's claimed interest has no basis, since it was derived from Philfinance whose interest was inexistent, having acquired the certificate through simulation. What happened was Philfinance merely borrowed CBCI No. D891 from Filriters, a sister corporation, to guarantee its financing operations. Said the Court: In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for and on behalf of Filriters, did not have the necessary written authorization from the Board of Directors of Filriters to act for the latter. For lack of such authority, the

assignment did not therefore bind Filriters and violated as the same time Central Bank Circular No. 769 which has the force and effect of a law, resulting in the nullity of the transfer (People v. Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue, 165 SCRA 778). In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign or transfer to Traders Royal Bank and which the latter can register with the Central Bank. WHEREFORE, the judgment appealed from is AFFIRMED, with costs against plaintiffappellant. SO ORDERED.
13

As worded, the instrument provides a promise "to pay Filriters Guaranty Assurance Corporation, the registered owner hereof." Very clearly, the instrument is payable only to Filriters, the registered owner, whose name is inscribed thereon. It lacks the words of negotiability which should have served as an expression of consent that the instrument may be transferred by negotiation. 15 A reading of the subject CBCI indicates that the same is payable to FILRITERS GUARANTY ASSURANCE CORPORATION, and to no one else, thus, discounting the petitioner's submission that the same is a negotiable instrument, and that it is a holder in due course of the certificate. The language of negotiability which characterize a negotiable paper as a credit instrument is its freedom to circulate as a substitute for money. Hence, freedom of negotiability is the touchtone relating to the protection of holders in due course, and the freedom of negotiability is the foundation for the protection which the law throws around a holder in due course (11 Am. Jur. 2d, 32). This freedom in negotiability is totally absent in a certificate indebtedness as it merely to pay a sum of money to a specified person or entity for a period of time. As held in Caltex (Philippines), Inc. v. Court of Appeals,
16

Petitioner's present position rests solely on the argument that Philfinance owns 90% of Filriters equity and the two corporations have identical corporate officers, thus demanding the application of the doctrine or piercing the veil of corporate fiction, as to give validity to the transfer of the CBCI from registered owner to petitioner TRB. 14 This renders the payment by TRB to Philfinance of CBCI, as actual payment to Filriters. Thus, there is no merit to the lower court's ruling that the transfer of the CBCI from Filriters to Philfinance was null and void for lack of consideration. Admittedly, the subject CBCI is not a negotiable instrument in the absence of words of negotiability within the meaning of the negotiable instruments law (Act 2031). The pertinent portions of the subject CBCI read: xxx xxx xxx The Central Bank of the Philippines (the Bank) for value received, hereby promises to pay bearer, of if this Certificate of indebtedness be registered, to FILRITERS GUARANTY ASSURANCE CORPORATION, the registered owner hereof, the principal sum of FIVE HUNDRED THOUSAND PESOS. xxx xxx xxx Properly understood, a certificate of indebtedness pertains to certificates for the creation and maintenance of a permanent improvement revolving fund, is similar to a "bond," (82 Minn. 202). Being equivalent to a bond, it is properly understood as acknowledgment of an obligation to pay a fixed sum of money. It is usually used for the purpose of long term loans. The appellate court ruled that the subject CBCI is not a negotiable instrument, stating that:

The accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the face of the instrument itself. In the construction of a bill or note, the intention of the parties is to control, if it can be legally ascertained. While the writing may be read in the light of surrounding circumstance in order to more perfectly understand the intent and meaning of the parties, yet as they have constituted the writing to be the only outward and visible expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of the court in such case is to ascertain, not what the parties may have secretly intended as contradistinguished from what their words express, but what is the meaning of the words they have used. What the parties meant must be determined by what they said. Thus, the transfer of the instrument from Philfinance to TRB was merely an assignment, and is not governed by the negotiable instruments law. The pertinent question then is, was the transfer of the CBCI from Filriters to Philfinance and subsequently from Philfinance to TRB, in accord with existing law, so as to entitle TRB to have the CBCI registered in its name with the Central Bank?

The following are the appellate court's pronouncements on the matter: Clearly shown in the record is the fact that Philfinance's title over CBCI No. D891 is defective since it acquired the instrument from Filriters fictitiously. Although the deed of assignment stated that the transfer was for "value received", there was really no consideration involved. What happened was Philfinance merely borrowed CBCI No. D891 from Filriters, a sister corporation. Thus, for lack of any consideration, the assignment made is a complete nullity. What is more, We find that the transfer made by Filriters to Philfinance did not conform to Central Bank Circular No. 769, series of 1980, otherwise known as the "Rules and Regulations Governing Central Bank Certificates of Indebtedness", under which the note was issued. Published in the Official Gazette on November 19, 1980, Section 3 thereof provides that any assignment of registered certificates shall not be valid unless made . . . by the registered owner thereof in person or by his representative duly authorized in writing. In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for and on behalf of Filriters, did not have the necessary written authorization from the Board of Directors of Filriters to act for the latter. For lack of such authority, the assignment did not therefore bind Filriters and violated at the same time Central Bank Circular No. 769 which has the force and effect of a law, resulting in the nullity of the transfer (People vs. Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue, 165 SCRA 778). In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign or transfer to Traders Royal Bank and which the latter can register with the Central Bank Petitioner now argues that the transfer of the subject CBCI to TRB must upheld, as the respondent Filriters and Philfinance, though separate corporate entities on paper, have used their corporate fiction to defraud TRB into purchasing the subject CBCI, which purchase now is refused registration by the Central Bank. Says the petitioner; Since Philfinance own about 90% of Filriters and the two companies have the same corporate officers, if the principle of piercing

the veil of corporate entity were to be applied in this case, then TRB's payment to Philfinance for the CBCI purchased by it could just as well be considered a payment to Filriters, the registered owner of the CBCI as to bar the latter from claiming, as it has, that it never received any payment for that CBCI sold and that said CBCI was sold without its authority. xxx xxx xxx We respectfully submit that, considering that the Court of Appeals has held that the CBCI was merely borrowed by Philfinance from Filriters, a sister corporation, to guarantee its (Philfinance's) financing operations, if it were to be consistent therewith, on the issued raised by TRB that there was a piercing a veil of corporate entity, the Court of Appeals should have ruled that such veil of corporate entity was, in fact, pierced, and the payment by TRB to Philfinance should be construed as payment to Filriters. 17 We disagree with Petitioner. Petitioner cannot put up the excuse of piercing the veil of corporate entity, as this merely an equitable remedy, and may be awarded only in cases when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime or where a corporation is a mere alter ego or business conduit of a person. 18 Peiercing the veil of corporate entity requires the court to see through the protective shroud which exempts its stockholders from liabilities that ordinarily, they could be subject to, or distinguished one corporation from a seemingly separate one, were it not for the existing corporate fiction. But to do this, the court must be sure that the corporate fiction was misused, to such an extent that injustice, fraud, or crime was committed upon another, disregarding, thus, his, her, or its rights. It is the protection of the interests of innocent third persons dealing with the corporate entity which the law aims to protect by this doctrine. The corporate separateness between Filriters and Philfinance remains, despite the petitioners insistence on the contrary. For one, other than the allegation that Filriters is 90% owned by Philfinance, and the identity of one shall be maintained as to the other, there is nothing else which could lead the court under circumstance to disregard their corporate personalities. Though it is true that when valid reasons exist, the legal fiction that a corporation is an entity with a juridical personality separate from its stockholders and from other corporations may be disregarded, 19 in the absence of such grounds, the general rule must upheld. The fact that Filfinance owns majority shares in Filriters is not by itself a ground to disregard the independent

corporate status of Filriters. In Liddel & Co., Inc. vs. Collector of Internal Revenue, 20 the mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself a sufficient reason for disregarding the fiction of separate corporate personalities. In the case at bar, there is sufficient showing that the petitioner was not defrauded at all when it acquired the subject certificate of indebtedness from Philfinance. On its face the subject certificates states that it is registered in the name of Filriters. This should have put the petitioner on notice, and prompted it to inquire from Filriters as to Philfinance's title over the same or its authority to assign the certificate. As it is, there is no showing to the effect that petitioner had any dealings whatsoever with Filriters, nor did it make inquiries as to the ownership of the certificate. The terms of the CBCI No. D891 contain a provision on its TRANSFER. Thus: TRANSFER. This Certificate shall pass by delivery unless it is registered in the owner's name at any office of the Bank or any agency duly authorized by the Bank, and such registration is noted hereon. After such registration no transfer thereof shall be valid unless made at said office (where the Certificates has been registered) by the registered owner hereof, in person, or by his attorney, duly authorized in writing and similarly noted hereon and upon payment of a nominal transfer fee which may be required, a new Certificate shall be issued to the transferee of the registered owner thereof. The bank or any agency duly authorized by the Bank may deem and treat the bearer of this Certificate, or if this Certificate is registered as herein authorized, the person in whose name the same is registered as the absolute owner of this Certificate, for the purpose of receiving payment hereof, or on account hereof, and for all other purpose whether or not this Certificate shall be overdue. This is notice to petitioner to secure from Filriters a written authorization for the transfer or to require Philfinance to submit such an authorization from Filriters. Petitioner knew that Philfinance is not registered owner of the CBCI No. D891. The fact that a non-owner was disposing of the registered CBCI owned by another entity was a good reason for petitioner to verify of inquire as to the title Philfinance to dispose to the CBCI. Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1990 21, known as the Rules and Regulations Governing

Central Bank Certificates of Indebtedness, Section 3, Article V of which provides that: Sec. 3. Assignment of Registered Certificates. Assignment of registered certificates shall not be valid unless made at the office where the same have been issued and registered or at the Securities Servicing Department, Central Bank of the Philippines, and by the registered owner thereof, in person or by his representative, duly authorized in writing. For this purpose, the transferee may be designated as the representative of the registered owner. Petitioner, being a commercial bank, cannot feign ignorance of Central Bank Circular 769, and its requirements. An entity which deals with corporate agents within circumstances showing that the agents are acting in excess of corporate authority, may not hold the corporation liable. 22 This is only fair, as everyone must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. 23 The transfer made by Filriters to Philfinance did not conform to the said. Central Bank Circular, which for all intents, is considered part of the law. As found by the courts a quo, Alfredo O. Banaria, who had signed the deed of assignment from Filriters to Philfinance, purportedly for and in favor of Filriters, did not have the necessary written authorization from the Board of Directors of Filriters to act for the latter. As it is, the sale from Filriters to Philfinance was fictitious, and therefore void and inexistent, as there was no consideration for the same. This is fatal to the petitioner's cause, for then, Philfinance had no title over the subject certificate to convey the Traders Royal Bank. Nemo potest nisi quod de jure potest no man can do anything except what he can do lawfully. Concededly, the subject CBCI was acquired by Filriters to form part of its legal and capital reserves, which are required by law 24 to be maintained at a mandated level. This was pointed out by Elias Garcia, Manager-in-Charge of respondent Filriters, in his testimony given before the court on May 30, 1986. Q Do you know this Central Bank Certificate of Indebtedness, in short, CBCI No. D891 in the face value of P5000,000.00 subject of this case? A Yes, sir. Q Why do you know this?

A Well, this was CBCI of the company sought to be examined by the Insurance Commission sometime in early 1981 and this CBCI No. 891 was among the CBCI's that were found to be missing. Q Let me take you back further before 1981. Did you have the knowledge of this CBCI No. 891 before 1981? A Yes, sir. This CBCI is an investment of Filriters required by the Insurance Commission as legal reserve of the company. Q Legal reserve for the purpose of what? A Well, you see, the Insurance companies are required to put up legal reserves under Section 213 of the Insurance Code equivalent to 40 percent of the premiums receipt and further, the Insurance Commission requires this reserve to be invested preferably in government securities or government binds. This is how this CBCI came to be purchased by the company. It cannot, therefore, be taken out of the said funds, without violating the requirements of the law. Thus, the anauthorized use or distribution of the same by a corporate officer of Filriters cannot bind the said corporation, not without the approval of its Board of Directors, and the maintenance of the required reserve fund. Consequently, the title of Filriters over the subject certificate of indebtedness must be upheld over the claimed interest of Traders Royal Bank. ACCORDINGLY, the petition is DISMISSED and the decision appealed from dated January 29, 1990 is hereby AFFIRMED. SO ORDERED.

G.R. No. 170325

September 26, 2008

It was PEMSLAs policy not to approve applications for loans of members with outstanding debts. To subvert this policy, some PEMSLA officers devised a scheme to obtain additional loans despite their outstanding loan accounts. They took out loans in the names of unknowing members, without the knowledge or consent of the latter. The PEMSLA checks issued for these loans were then given to the spouses for rediscounting. The officers carried this out by forging the indorsement of the named payees in the checks. In return, the spouses issued their personal checks (Rodriguez checks) in the name of the members and delivered the checks to an officer of PEMSLA. The PEMSLA checks, on the other hand, were deposited by the spouses to their account. Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings account without any indorsement from the named payees. This was an irregular procedure made possible through the facilitation of Edmundo Palermo, Jr., treasurer of PEMSLA and bank teller in the PNB Branch. It appears that this became the usual practice for the parties. For the period November 1998 to February 1999, the spouses issued sixty nine (69) checks, in the total amount of P2,345,804.00. These were payable to forty seven (47) individual payees who were all members of PEMSLA.4 Petitioner PNB eventually found out about these fraudulent acts. To put a stop to this scheme, PNB closed the current account of PEMSLA. As a result, the PEMSLA checks deposited by the spouses were returned or dishonored for the reason "Account Closed." The corresponding Rodriguez checks, however, were deposited as usual to the PEMSLA savings account. The amounts were duly debited from the Rodriguez account. Thus, because the PEMSLA checks given as payment were returned, spouses Rodriguez incurred losses from the rediscounting transactions. RTC Disposition Alarmed over the unexpected turn of events, the spouses Rodriguez filed a civil complaint for damages against PEMSLA, the Multi-Purpose Cooperative of Philnabankers (MCP), and petitioner PNB. They sought to recover the value of their checks that were deposited to the PEMSLA savings account amounting to P2,345,804.00. The spouses contended that because PNB credited the checks to the PEMSLA account even without indorsements, PNB violated its contractual obligation to them as depositors. PNB paid the wrong payees, hence, it should bear the loss. PNB moved to dismiss the complaint on the ground of lack of cause of action. PNB argued that the claim for damages should come from the payees of the checks, and not from spouses Rodriguez. Since there was no demand from the said payees, the obligation should be considered as discharged. In an Order dated January 12, 2000, the RTC denied PNBs motion to dismiss.

PHILIPPINE NATIONAL BANK, Petitioner, vs. ERLANDO T. RODRIGUEZ and NORMA RODRIGUEZ, Respondents. DECISION REYES, R.T., J.: WHEN the payee of the check is not intended to be the true recipient of its proceeds, is it payable to order or bearer? What is the fictitious-payee rule and who is liable under it? Is there any exception? These questions seek answers in this petition for review on certiorari of the Amended Decision 1 of the Court of Appeals (CA) which affirmed with modification that of the Regional Trial Court (RTC).2 The Facts The facts as borne by the records are as follows: Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner Philippine National Bank (PNB), Amelia Avenue Branch, Cebu City. They maintained savings and demand/checking accounts, namely, PNBig Demand Deposits (Checking/Current Account No. 810624-6 under the account name Erlando and/or Norma Rodriguez), and PNBig Demand Deposit (Checking/Current Account No. 810480-4 under the account name Erlando T. Rodriguez). The spouses were engaged in the informal lending business. In line with their business, they had a discounting 3 arrangement with the Philnabank Employees Savings and Loan Association (PEMSLA), an association of PNB employees. Naturally, PEMSLA was likewise a client of PNB Amelia Avenue Branch. The association maintained current and savings accounts with petitioner bank. PEMSLA regularly granted loans to its members. Spouses Rodriguez would rediscount the postdated checks issued to members whenever the association was short of funds. As was customary, the spouses would replace the postdated checks with their own checks issued in the name of the members.

In its Answer,5 PNB claimed it is not liable for the checks which it paid to the PEMSLA account without any indorsement from the payees. The bank contended that spouses Rodriguez, the makers, actually did not intend for the named payees to receive the proceeds of the checks. Consequently, the payees were considered as "fictitious payees" as defined under the Negotiable Instruments Law (NIL). Being checks made to fictitious payees which are bearer instruments, the checks were negotiable by mere delivery. PNBs Answer included its cross-claim against its co-defendants PEMSLA and the MCP, praying that in the event that judgment is rendered against the bank, the cross-defendants should be ordered to reimburse PNB the amount it shall pay. After trial, the RTC rendered judgment in favor of spouses Rodriguez (plaintiffs). It ruled that PNB (defendant) is liable to return the value of the checks. All counterclaims and cross-claims were dismissed. The dispositive portion of the RTC decision reads: WHEREFORE, in view of the foregoing, the Court hereby renders judgment, as follows: 1. Defendant is hereby ordered to pay the plaintiffs the total amount of P2,345,804.00 or reinstate or restore the amount of P775,337.00 in the PNBig Demand Deposit Checking/Current Account No. 810480-4 of Erlando T. Rodriguez, and the amount of P1,570,467.00 in the PNBig Demand Deposit, Checking/Current Account No. 810624-6 of Erlando T. Rodriguez and/or Norma Rodriguez, plus legal rate of interest thereon to be computed from the filing of this complaint until fully paid; 2. The defendant PNB is hereby ordered to pay the plaintiffs the following reasonable amount of damages suffered by them taking into consideration the standing of the plaintiffs being sugarcane planters, realtors, residential subdivision owners, and other businesses: (a) Consequential damages, unearned income in the amount of P4,000,000.00, as a result of their having incurred great dificulty (sic) especially in the residential subdivision business, which was not pushed through and the contractor even threatened to file a case against the plaintiffs; (b) Moral damages of P1,000,000.00; (c) Exemplary damages of P500,000.00; in the amount

in

the

amount

(d) Attorneys fees in the amount of P150,000.00 considering that this case does not involve very complicated issues; and for the

(e) Costs of suit. 3. Other claims dismissed.6 CA Disposition PNB appealed the decision of the trial court to the CA on the principal ground that the disputed checks should be considered as payable to bearer and not to order. In a Decision7 dated July 22, 2004, the CA reversed and set aside the RTC disposition. The CA concluded that the checks were obviously meant by the spouses to be really paid to PEMSLA. The court a quo declared: We are not swayed by the contention of the plaintiffs-appellees (Spouses Rodriguez) that their cause of action arose from the alleged breach of contract by the defendant-appellant (PNB) when it paid the value of the checks to PEMSLA despite the checks being payable to order. Rather, we are more convinced by the strong and credible evidence for the defendant-appellant with regard to the plaintiffs-appellees and PEMSLAs business arrangement that the value of the rediscounted checks of the plaintiffs-appellees would be deposited in PEMSLAs account for payment of the loans it has approved in exchange for PEMSLAs checks with the full value of the said loans. This is the only obvious explanation as to why all the disputed sixty-nine (69) checks were in the possession of PEMSLAs errand boy for presentment to the defendant-appellant that led to this present controversy. It also appears that the teller who accepted the said checks was PEMSLAs officer, and that such was a regular practice by the parties until the defendant-appellant discovered the scam. The logical conclusion, therefore, is that the checks were never meant to be paid to order, but instead, to PEMSLA. We thus find no breach of contract on the part of the defendantappellant. According to plaintiff-appellee Erlando Rodriguez testimony, PEMSLA allegedly issued post-dated checks to its qualified members who had applied for loans. However, because of PEMSLAs insufficiency of funds, PEMSLA approached the plaintiffs-appellees for the latter to issue rediscounted checks in favor of said applicant members. Based on the investigation of the defendant-appellant, meanwhile, this arrangement allowed the plaintiffs-appellees to make a profit by issuing rediscounted checks, while the officers of PEMSLA and other members would be able to claim their loans, despite the fact that they were disqualified for one reason or another. They were able to achieve this conspiracy by using other members who had loaned lesser amounts of money or had not applied at all. x x x. 8(Emphasis added) The CA found that the checks were bearer instruments, thus they do not require indorsement for negotiation; and that spouses Rodriguez and PEMSLA conspired with each other to accomplish this money-making scheme. The payees in the checks were "fictitious payees" because they were not the intended payees at all. and counterclaims are hereby

The spouses Rodriguez moved for reconsideration. They argued, inter alia, that the checks on their faces were unquestionably payable to order; and that PNB committed a breach of contract when it paid the value of the checks to PEMSLA without indorsement from the payees. They also argued that their cause of action is not only against PEMSLA but also against PNB to recover the value of the checks. On October 11, 2005, the CA reversed itself via an Amended Decision, the last paragraph and fallo of which read: In sum, we rule that the defendant-appellant PNB is liable to the plaintiffs-appellees Sps. Rodriguez for the following: 1. Actual damages in the amount of P2,345,804 with interest at 6% per annum from 14 May 1999 until fully paid; 2. Moral damages in the amount of P200,000; 3. Attorneys fees in the amount of P100,000; and 4. Costs of suit. WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by Us AFFIRMING WITH MODIFICATION the assailed decision rendered in Civil Case No. 99-10892, as set forth in the immediately next preceding paragraph hereof, and SETTING ASIDE Our original decision promulgated in this case on 22 July 2004. SO ORDERED.9 The CA ruled that the checks were payable to order. According to the appellate court, PNB failed to present sufficient proof to defeat the claim of the spouses Rodriguez that they really intended the checks to be received by the specified payees. Thus, PNB is liable for the value of the checks which it paid to PEMSLA without indorsements from the named payees. The award for damages was deemed appropriate in view of the failure of PNB to treat the Rodriguez account with the highest degree of care considering the fiduciary nature of their relationship, which constrained respondents to seek legal action. Hence, the present recourse under Rule 45. Issues The issues may be compressed to whether the subject checks are payable to order or to bearer and who bears the loss? PNB argues anew that when the spouses Rodriguez issued the disputed checks, they did not intend for the named payees to receive the proceeds. Thus, they are bearer instruments that

could be validly negotiated by mere delivery. Further, testimonial and documentary evidence presented during trial amply proved that spouses Rodriguez and the officers of PEMSLA conspired with each other to defraud the bank. Our Ruling Prefatorily, amendment of decisions is more acceptable than an erroneous judgment attaining finality to the prejudice of innocent parties. A court discovering an erroneous judgment before it becomes final may, motu proprio or upon motion of the parties, correct its judgment with the singular objective of achieving justice for the litigants.10 However, a word of caution to lower courts, the CA in Cebu in this particular case, is in order. The Court does not sanction careless disposition of cases by courts of justice. The highest degree of diligence must go into the study of every controversy submitted for decision by litigants. Every issue and factual detail must be closely scrutinized and analyzed, and all the applicable laws judiciously studied, before the promulgation of every judgment by the court. Only in this manner will errors in judgments be avoided. Now to the core of the petition. As a rule, when the payee is fictitious or not intended to be the true recipient of the proceeds, the check is considered as a bearer instrument. A check is "a bill of exchange drawn on a bank payable on demand."11 It is either an order or a bearer instrument. Sections 8 and 9 of the NIL states: SEC. 8. When payable to order. The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of (a) A payee who is not maker, drawer, or drawee; or (b) The drawer or maker; or (c) The drawee; or (d) Two or more payees jointly; or (e) One or some of several payees; or (f) The holder of an office for the time being. Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty. SEC. 9. When payable to bearer. The instrument is payable to bearer

(a) When it is expressed to be so payable; or (b) When it is payable to a person named therein or bearer; or (c) When it is payable to the order of a fictitious or nonexisting person, and such fact is known to the person making it so payable; or (d) When the name of the payee does not purport to be the name of any person; or (e) Where the only or last indorsement indorsement in blank.12 (Underscoring supplied) is an

In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer bears the loss. When faced with a check payable to a fictitious payee, it is treated as a bearer instrument that can be negotiated by delivery. The underlying theory is that one cannot expect a fictitious payee to negotiate the check by placing his indorsement thereon. And since the maker knew this limitation, he must have intended for the instrument to be negotiated by mere delivery. Thus, in case of controversy, the drawer of the check will bear the loss. This rule is justified for otherwise, it will be most convenient for the maker who desires to escape payment of the check to always deny the validity of the indorsement. This despite the fact that the fictitious payee was purposely named without any intention that the payee should receive the proceeds of the check.15 The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty Insurance Bank.16 In the said case, the corporation Mueller & Martin was defrauded by George L. Martin, one of its authorized signatories. Martin drew seven checks payable to the German Savings Fund Company Building Association (GSFCBA) amounting to $2,972.50 against the account of the corporation without authority from the latter. Martin was also an officer of the GSFCBA but did not have signing authority. At the back of the checks, Martin placed the rubber stamp of the GSFCBA and signed his own name as indorsement. He then successfully drew the funds from Liberty Insurance Bank for his own personal profit. When the corporation filed an action against the bank to recover the amount of the checks, the claim was denied. The US Supreme Court held in Mueller that when the person making the check so payable did not intend for the specified payee to have any part in the transactions, the payee is considered as a fictitious payee. The check is then considered as a bearer instrument to be validly negotiated by mere delivery. Thus, the US Supreme Court held that Liberty Insurance Bank, as drawee, was authorized to make payment to the bearer of the check, regardless of whether prior indorsements were genuine or not.17 The more recent Getty Petroleum Corp. v. American Express Travel Related Services Company, Inc.18upheld the fictitiouspayee rule. The rule protects the depositary bank and assigns the loss to the drawer of the check who was in a better position to prevent the loss in the first place. Due care is not even required from the drawee or depositary bank in accepting and paying the checks. The effect is that a showing of negligence on the part of the depositary bank will not defeat the protection that is derived from this rule. However, there is a commercial bad faith exception to the fictitious-payee rule. A showing of commercial bad faith on the part of the drawee bank, or any transferee of the check for that matter, will work to strip it of this defense. The exception will cause it to bear the loss. Commercial bad faith is present if the transferee of the check acts dishonestly, and is a party to the fraudulent scheme. Said the US Supreme Court in Getty: Consequently, a transferees lapse of wary vigilance, disregard of suspicious circumstances which might have well induced a prudent banker to investigate and other permutations of

negligence are not relevant considerations under Section 3-405 x x x. Rather, there is a "commercial bad faith" exception to UCC 3405, applicable when the transferee "acts dishonestly where it has actual knowledge of facts and circumstances that amount to bad faith, thus itself becoming a participant in a fraudulent scheme. x x x Such a test finds support in the text of the Code, which omits a standard of care requirement from UCC 3-405 but imposes on all parties an obligation to act with "honesty in fact." x x x19 (Emphasis added) Getty also laid the principle that the fictitious-payee rule extends protection even to non-bank transferees of the checks. In the case under review, the Rodriguez checks were payable to specified payees. It is unrefuted that the 69 checks were payable to specific persons. Likewise, it is uncontroverted that the payees were actual, existing, and living persons who were members of PEMSLA that had a rediscounting arrangement with spouses Rodriguez. What remains to be determined is if the payees, though existing persons, were "fictitious" in its broader context. For the fictitious-payee rule to be available as a defense, PNB must show that the makers did not intend for the named payees to be part of the transaction involving the checks. At most, the banks thesis shows that the payees did not have knowledge of the existence of the checks. This lack of knowledge on the part of the payees, however, was not tantamount to a lack of intention on the part of respondents-spouses that the payees would not receive the checks proceeds. Considering that respondentsspouses were transacting with PEMSLA and not the individual payees, it is understandable that they relied on the information given by the officers of PEMSLA that the payees would be receiving the checks. Verily, the subject checks are presumed order instruments. This is because, as found by both lower courts, PNB failed to present sufficient evidence to defeat the claim of respondents-spouses that the named payees were the intended recipients of the checks proceeds. The bank failed to satisfy a requisite condition of a fictitious-payee situation that the maker of the check intended for the payee to have no interest in the transaction. Because of a failure to show that the payees were "fictitious" in its broader sense, the fictitious-payee rule does not apply. Thus, the checks are to be deemed payable to order. Consequently, the drawee bank bears the loss.20 PNB was remiss in its duty as the drawee bank. It does not dispute the fact that its teller or tellers accepted the 69 checks for deposit to the PEMSLA account even without any indorsement from the named payees. It bears stressing that order instruments can only be negotiated with a valid indorsement. A bank that regularly processes checks that are neither payable to the customer nor duly indorsed by the payee is apparently grossly negligent in its operations. 21 This Court has recognized

The distinction between bearer and order instruments lies in their manner of negotiation. Under Section 30 of the NIL, an order instrument requires an indorsement from the payee or holder before it may be validly negotiated. A bearer instrument, on the other hand, does not require an indorsement to be validly negotiated. It is negotiable by mere delivery. The provision reads: SEC. 30. What constitutes negotiation. An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder completed by delivery. A check that is payable to a specified payee is an order instrument. However, under Section 9(c) of the NIL, a check payable to a specified payee may nevertheless be considered as a bearer instrument if it is payable to the order of a fictitious or non-existing person, and such fact is known to the person making it so payable. Thus, checks issued to "Prinsipe Abante" or "Si Malakas at si Maganda," who are well-known characters in Philippine mythology, are bearer instruments because the named payees are fictitious and non-existent. We have yet to discuss a broader meaning of the term "fictitious" as used in the NIL. It is for this reason that We look elsewhere for guidance. Court rulings in the United States are a logical starting point since our law on negotiable instruments was directly lifted from the Uniform Negotiable Instruments Law of the United States.13 A review of US jurisprudence yields that an actual, existing, and living payee may also be "fictitious" if the maker of the check did not intend for the payee to in fact receive the proceeds of the check. This usually occurs when the maker places a name of an existing payee on the check for convenience or to cover up an illegal activity.14 Thus, a check made expressly payable to a nonfictitious and existing person is not necessarily an order instrument. If the payee is not the intended recipient of the proceeds of the check, the payee is considered a "fictitious" payee and the check is a bearer instrument.

the unique public interest possessed by the banking industry and the need for the people to have full trust and confidence in their banks.22 For this reason, banks are minded to treat their customers accounts with utmost care, confidence, and honesty.23 In a checking transaction, the drawee bank has the duty to verify the genuineness of the signature of the drawer and to pay the check strictly in accordance with the drawers instructions, i.e., to the named payee in the check. It should charge to the drawers accounts only the payables authorized by the latter. Otherwise, the drawee will be violating the instructions of the drawer and it shall be liable for the amount charged to the drawers account.24 In the case at bar, respondents-spouses were the banks depositors. The checks were drawn against respondents-spouses accounts. PNB, as the drawee bank, had the responsibility to ascertain the regularity of the indorsements, and the genuineness of the signatures on the checks before accepting them for deposit. Lastly, PNB was obligated to pay the checks in strict accordance with the instructions of the drawers. Petitioner miserably failed to discharge this burden. The checks were presented to PNB for deposit by a representative of PEMSLA absent any type of indorsement, forged or otherwise. The facts clearly show that the bank did not pay the checks in strict accordance with the instructions of the drawers, respondents-spouses. Instead, it paid the values of the checks not to the named payees or their order, but to PEMSLA, a third party to the transaction between the drawers and the payees.alfITC Moreover, PNB was negligent in the selection and supervision of its employees. The trustworthiness of bank employees is indispensable to maintain the stability of the banking industry. Thus, banks are enjoined to be extra vigilant in the management and supervision of their employees. In Bank of the Philippine Islands v. Court of Appeals,25 this Court cautioned thus: Banks handle daily transactions involving millions of pesos. By the very nature of their work the degree of responsibility, care and trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees. For obvious reasons, the banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees.26 PNBs tellers and officers, in violation of banking rules of procedure, permitted the invalid deposits of checks to the PEMSLA account. Indeed, when it is the gross negligence of the bank employees that caused the loss, the bank should be held liable.27 PNBs argument that there is no loss to compensate since no demand for payment has been made by the payees must also fail. Damage was caused to respondents-spouses when the PEMSLA checks they deposited were returned for the reason "Account Closed." These PEMSLA checks were the corresponding payments to the Rodriguez checks. Since they could not encash

the PEMSLA checks, respondents-spouses were unable to collect payments for the amounts they had advanced. A bank that has been remiss in its duty must suffer the consequences of its negligence. Being issued to named payees, PNB was duty-bound by law and by banking rules and procedure to require that the checks be properly indorsed before accepting them for deposit and payment. In fine, PNB should be held liable for the amounts of the checks. One Last Note We note that the RTC failed to thresh out the merits of PNBs cross-claim against its co-defendants PEMSLA and MPC. The records are bereft of any pleading filed by these two defendants in answer to the complaint of respondents-spouses and crossclaim of PNB. The Rules expressly provide that failure to file an answer is a ground for a declaration that defendant is in default.28 Yet, the RTC failed to sanction the failure of both PEMSLA and MPC to file responsive pleadings. Verily, the RTC dismissal of PNBs cross-claim has no basis. Thus, this judgment shall be without prejudice to whatever action the bank might take against its co-defendants in the trial court. To PNBs credit, it became involved in the controversial transaction not of its own volition but due to the actions of some of its employees. Considering that moral damages must be understood to be in concept of grants, not punitive or corrective in nature, We resolve to reduce the award of moral damages toP50,000.00.29 WHEREFORE, the appealed Amended Decision is AFFIRMED with the MODIFICATION that the award for moral damages is reduced to P50,000.00, and that this is without prejudice to whatever civil, criminal, or administrative action PNB might take against PEMSLA, MPC, and the employees involved. SO ORDERED. G.R. No. 93073 December 21, 1992 REPUBLIC PLANTERS BANK, petitioner, vs. COURT OF APPEALS and FERMIN CANLAS, respondents.

CAMPOS, JR., J.: This is an appeal by way of a Petition for Review on Certiorari from the decision * of the Court of Appeals in CA G.R. CV No. 07302, entitled "Republic Planters Bank.PlaintiffAppellee vs. Pinch Manufacturing Corporation, et al., Defendants, and Fermin Canlas, Defendant-Appellant", which affirmed the decision ** in Civil Case No. 82-5448 except that it completely absolved Fermin Canlas from liability under the promissory notes and reduced the award for damages and attorney's fees. The RTC decision, rendered on June 20, 1985, is quoted hereunder: WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff Republic Planters Bank, ordering defendant Pinch Manufacturing Corporation (formerly Worldwide Garment Manufacturing, Inc.) and defendants Shozo Yamaguchi and Fermin Canlas to pay, jointly and severally, the plaintiff bank the following sums with interest thereon at 16% per annum from the dates indicated, to wit: Under the promissory note (Exhibit "A"), the sum of P300,000.00 with interest from January 29, 1981 until fully paid; under promissory note (Exhibit "B"), the sum of P40,000.00 with interest from November 27, 1980; under the promissory note (Exhibit "C"), the sum of P166,466.00 which interest from January 29, 1981; under the promissory note (Exhibit "E"), the sum of P86,130.31 with interest from January 29, 1981; under the promissory note (Exhibit "G"), the sum of P12,703.70 with interest from November 27, 1980; under the promissory note (Exhibit "H"), the sum of P281,875.91 with interest from January 29, 1981; and under the promissory note (Exhibit "I"), the sum of P200,000.00 with interest from January 29, 1981.

Under the promissory note (Exhibit "D") defendants Pinch Manufacturing Corporation (formerly named Worldwide Garment Manufacturing, Inc.), and Shozo Yamaguchi are ordered to pay jointly and severally, the plaintiff bank the sum of P367,000.00 with interest of 16% per annum from January 29, 1980 until fully paid Under the promissory note (Exhibit "F") defendant corporation Pinch (formerly Worldwide) is ordered to pay the plaintiff bank the sum of P140,000.00 with interest at 16% per annum from November 27, 1980 until fully paid. Defendant Pinch (formely Worldwide) is hereby ordered to pay the plaintiff the sum of P231,120.81 with interest at 12% per annum from July 1, 1981, until fully paid and the sum of P331,870.97 with interest from March 28, 1981, until fully paid. All the defendants are also ordered to pay, jointly and severally, the plaintiff the sum of P100,000.00 as and for reasonable attorney's fee and the further sum equivalent to 3% per annum of the respective principal sums from the dates above stated as penalty charge until fully paid, plus one percent (1%) of the principal sums as service charge. With costs against the defendants. SO ORDERED.
1

issued nine promissory notes, marked as Exhibits A to I inclusive, each of which were uniformly worded in the following manner: ___________, after date, for value received, I/we, jointly and severaIly promise to pay to the ORDER of the REPUBLIC PLANTERS BANK, at its office in Manila, Philippines, the sum of ___________ PESOS(....) Philippine Currency... On the right bottom margin of the promissory notes appeared the signatures of Shozo Yamaguchi and Fermin Canlas above their printed names with the phrase "and (in) his personal capacity" typewritten below. At the bottom of the promissory notes appeared: "Please credit proceeds of this note to: ________ Savings Account ______XX Current Account No. 1372-00257-6 of WORLDWIDE GARMENT MFG. CORP. These entries were separated from the text of the notes with a bold line which ran horizontally across the pages. In the promissory notes marked as Exhibits C, D and F, the name Worldwide Garment Manufacturing, Inc. was apparently rubber stamped above the signatures of defendant and private respondent. On December 20, 1982, Worldwide Garment Manufacturing, Inc. noted to change its corporate name to Pinch Manufacturing Corporation. On February 5, 1982, petitioner bank filed a complaint for the recovery of sums of money covered among others, by the nine promissory notes with interest thereon, plus attorney's fees and penalty charges. The complainant was originally brought against Worldwide Garment Manufacturing, Inc. inter alia, but it was later amended to drop Worldwide Manufacturing, Inc. as defendant and substitute Pinch Manufacturing Corporation it its place. Defendants Pinch Manufacturing Corporation and Shozo Yamaguchi did not file an Amended Answer and failed to appear at the scheduled pre-trial conference despite due notice. Only private respondent Fermin Canlas filed an Amended Answer wherein he, denied having issued the promissory notes in question since according to him, he was not an officer of Pinch Manufacturing Corporation, but instead of Worldwide Garment Manufacturing, Inc., and that when he issued said promissory notes in behalf of Worldwide Garment Manufacturing, Inc., the same were in blank, the typewritten entries not appearing therein prior to the time he affixed his signature. In the mind of this Court, the only issue material to the resolution of this appeal is whether private respondent Fermin Canlas is solidarily liable with the other defendants, namely Pinch

Manufacturing Corporation and Shozo Yamaguchi, on the nine promissory notes. We hold that private respondent Fermin Canlas is solidarily liable on each of the promissory notes bearing his signature for the following reasons: The promissory motes are negotiable instruments and must be governed by the Negotiable Instruments Law. 2 Under the Negotiable lnstruments Law, persons who write their names on the face of promissory notes are makers and are liable as such. 3 By signing the notes, the maker promises to pay to the order of the payee or any holder 4according to the tenor thereof. 5 Based on the above provisions of law, there is no denying that private respondent Fermin Canlas is one of the comakers of the promissory notes. As such, he cannot escape liability arising therefrom. Where an instrument containing the words "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon. 6 An instrument which begins" with "I" ,We" , or "Either of us" promise to, pay, when signed by two or more persons, makes them solidarily liable. 7 The fact that the singular pronoun is used indicates that the promise is individual as to each other; meaning that each of the co-signers is deemed to have made an independent singular promise to pay the notes in full. In the case at bar, the solidary liability of private respondent Fermin Canlas is made clearer and certain, without reason for ambiguity, by the presence of the phrase "joint and several" as describing the unconditional promise to pay to the order of Republic Planters Bank. A joint and several note is one in which the makers bind themselves both jointly and individually to the payee so that all may be sued together for its enforcement, or the creditor may select one or more as the object of the suit. 8 A joint and several obligation in common law corresponds to a civil law solidary obligation; that is, one of several debtors bound in such wise that each is liable for the entire amount, and not merely for his proportionate share. 9 By making a joint and several promise to pay to the order of Republic Planters Bank, private respondent Fermin Canlas assumed the solidary liability of a debtor and the payee may choose to enforce the notes against him alone or jointly with Yamaguchi and Pinch Manufacturing Corporation as solidary debtors. As to whether the interpolation of the phrase "and (in) his personal capacity" below the signatures of the makers in the notes will affect the liability of the makers, We do not find it necessary to resolve and decide, because it is immaterial and will not affect to the liability of private respondent Fermin Canlas as a joint and several debtor of the notes. With or without the presence of said phrase, private respondent Fermin Canlas is primarily liable as a co-maker of each of the notes and his liability is that of a solidary debtor. Finally, the respondent Court made a grave error in holding that an amendment in a corporation's Articles of Incorporation

From the above decision only defendant Fermin Canlas appealed to the then Intermediate Court (now the Court Appeals). His contention was that inasmuch as he signed the promissory notes in his capacity as officer of the defunct Worldwide Garment Manufacturing, Inc, he should not be held personally liable for such authorized corporate acts that he performed. It is now the contention of the petitioner Republic Planters Bank that having unconditionally signed the nine (9) promissory notes with Shozo Yamaguchi, jointly and severally, defendant Fermin Canlas is solidarity liable with Shozo Yamaguchi on each of the nine notes. We find merit in this appeal. From the records, these facts are established: Defendant Shozo Yamaguchi and private respondent Fermin Canlas were President/Chief Operating Officer and Treasurer respectively, of Worldwide Garment Manufacturing, Inc.. By virtue of Board Resolution No.1 dated August 1, 1979, defendant Shozo Yamaguchi and private respondent Fermin Canlas were authorized to apply for credit facilities with the petitioner Republic Planters Bank in the forms of export advances and letters of credit/trust receipts accommodations. Petitioner bank

effecting a change of corporate name, in this case from Worldwide Garment manufacturing Inc to Pinch Manufacturing Corporation extinguished the personality of the original corporation. The corporation, upon such change in its name, is in no sense a new corporation, nor the successor of the original corporation. It is the same corporation with a different name, and its character is in no respect changed. 10 A change in the corporate name does not make a new corporation, and whether effected by special act or under a general law, has no affect on the identity of the corporation, or on its property, rights, or liabilities. 11 The corporation continues, as before, responsible in its new name for all debts or other liabilities which it had previously contracted or incurred. 12 As a general rule, officers or directors under the old corporate name bear no personal liability for acts done or contracts entered into by officers of the corporation, if duly authorized. Inasmuch as such officers acted in their capacity as agent of the old corporation and the change of name meant only the continuation of the old juridical entity, the corporation bearing the same name is still bound by the acts of its agents if authorized by the Board. Under the Negotiable Instruments Law, the liability of a person signing as an agent is specifically provided for as follows: Sec. 20. Liability of a person signing as agent and so forth. Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal , or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal liability. Where the agent signs his name but nowhere in the instrument has he disclosed the fact that he is acting in a representative capacity or the name of the third party for whom he might have acted as agent, the agent is personally liable to take holder of the instrument and cannot be permitted to prove that he was merely acting as agent of another and parol or extrinsic evidence is not admissible to avoid the agent's personal liability. 13 On the private respondent's contention that the promissory notes were delivered to him in blank for his signature, we rule otherwise. A careful examination of the notes in question shows that they are the stereotype printed form of promissory notes generally used by commercial banking institutions to be signed by their clients in obtaining loans. Such printed notes are incomplete because there are blank spaces to be filled up on material particulars such as payee's name, amount of the loan, rate of interest, date of issue and the maturity date. The terms and conditions of the loan are printed on the note for the

borrower-debtor 's perusal. An incomplete instrument which has been delivered to the borrower for his signature is governed by Section 14 of the Negotiable Instruments Law which provides, in so far as relevant to this case, thus: Sec. 14. Blanks: when may be filled. Where the instrument is wanting in any material particular, the person in possesion thereof has a prima facie authority to complete it by filling up the blanks therein. ... In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time... Proof that the notes were signed in blank was only the selfserving testimony of private respondent Fermin Canlas, as determined by the trial court, so that the trial court ''doubts the defendant (Canlas) signed in blank the promissory notes". We chose to believe the bank's testimony that the notes were filled up before they were given to private respondent Fermin Canlas and defendant Shozo Yamaguchi for their signatures as joint and several promissors. For signing the notes above their typewritten names, they bound themselves as unconditional makers. We take judicial notice of the customary procedure of commercial banks of requiring their clientele to sign promissory notes prepared by the banks in printed form with blank spaces already filled up as per agreed terms of the loan, leaving the borrowers-debtors to do nothing but read the terms and conditions therein printed and to sign as makers or co-makers. When the notes were given to private respondent Fermin Canlas for his signature, the notes were complete in the sense that the spaces for the material particular had been filled up by the bank as per agreement. The notes were not incomplete instruments; neither were they given to private respondent Fermin Canlas in blank as he claims. Thus, Section 14 of the NegotiabIe Instruments Law is not applicable. The ruling in case of Reformina vs. Tomol relied upon by the appellate court in reducing the interest rate on the promissory notes from 16% to 12% per annum does not squarely apply to the instant petition. In the abovecited case, the rate of 12% was applied to forebearances of money, goods or credit and court judgemets thereon, only in the absence of any stipulation between the parties. In the case at bar however , it was found by the trial court that the rate of interest is 9% per annum, which interest rate the plaintiff may at any time without notice, raise within the limits allowed law. And so, as of February 16, 1984 , the plaintiff had fixed the interest at 16% per annum. This Court has held that the rates under the Usury Law, as amended by Presidential Decree No. 116, are applicable only to interests by way of compensation for the use or forebearance of money. Article 2209 of the Civil Code, on the other hand, governs interests by way of damages. 15 This fine distinction was not taken into consideration by the appellate court, which instead

made a general statement that the interest rate be at 12% per annum. Inasmuch as this Court had declared that increases in interest rates are not subject to any ceiling prescribed by the Usury Law, the appellate court erred in limiting the interest rates at 12% per annum. Central Bank Circular No. 905, Series of 1982 removed the Usury Law ceiling on interest rates. 16 In the 1ight of the foregoing analysis and under the plain language of the statute and jurisprudence on the matter, the decision of the respondent: Court of Appeals absolving private respondent Fermin Canlas is REVERSED and SET ASIDE. Judgement is hereby rendered declaring private respondent Fermin Canlas jointly and severally liable on all the nine promissory notes with the following sums and at 16% interest per annum from the dates indicated, to wit: Under the promissory note marked as exhibit A, the sum of P300,000.00 with interest from January 29, 1981 until fully paid; under promissory note marked as Exhibit B, the sum of P40,000.00 with interest from November 27, 1980: under the promissory note denominated as Exhibit C, the amount of P166,466.00 with interest from January 29, 1981; under the promissory note denominated as Exhibit D, the amount of P367,000.00 with interest from January 29, 1981 until fully paid; under the promissory note marked as Exhibit E, the amount of P86,130.31 with interest from January 29, 1981; under the promissory note marked as Exhibit F, the sum of P140,000.00 with interest from November 27, 1980 until fully paid; under the promissory note marked as Exhibit G, the amount of P12,703.70 with interest from November 27, 1980; the promissory note marked as Exhibit H, the sum of P281,875.91 with interest from January 29, 1981; and the promissory note marked as Exhibit I, the sum of P200,000.00 with interest on January 29, 1981. The liabilities of defendants Pinch Manufacturing Corporation (formerly Worldwide Garment Manufacturing, Inc.) and Shozo Yamaguchi, for not having appealed from the decision of the trial court, shall be adjudged in accordance with the judgment rendered by the Court a quo. With respect to attorney's fees, and penalty and service charges, the private respondent Fermin Canlas is hereby held jointly and solidarity liable with defendants for the amounts found, by the Court a quo. With costs against private respondent. SO ORDERED.

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. 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.

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 the banks statement, which was made to it by the Shanghai Bank. This is not a case where the plaintiff's own signature was forged to one of it checks. In such a case, the plaintiff would have known of the forgery, and it would have been its 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

G.R. No. L-18657

August 23, 1922

JOHNS, J.: 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: 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 means of forgery of the signature of the payee? Is it the drawee or the last indorser, who ignored the forgery at the time of making the payment, or the forger? 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

THE GREAT EASTERN LIFE INSURANCE CO., plaintiffappellant, vs. HONGKONG & SHANGHAI BANKING CORPORATION and PHILIPPINE NATIONAL BANK, defendants-appellees. Camus and Delgado for appellant. Fisher and DeWitt and A. M. Opisso for Hongkong and Shanghai Bank. Roman J. Lacson for Philippine National Bank. STATEMENT The plaintiff is an insurance corporation, and the defendants are banking corporations, and each is duly licensed to do its respective business in the Philippines Islands. May 3, 1920, the plaintiff drew its check for P2,000 on the Hongkong and Shanghai Banking Corporation with whom it had

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 judgment will be entered in favor of the Hongkong Shanghai Banking Corporation against the Philippine National Bank for the same amount, together with the amount of its costs in this action. So ordered.

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 same date, September 28, 1927, the manger's check was deposited with the Bank of the Philippine Islands by the following endorsement: For deposit only with Bank of the Philippine Islands, to credit of account of San Carlos Milling Co., Ltd. G.R. No. L-37467 December 11, 1933 By For Agent (Sgd.) NEWLAND BALDWIN

SAN CARLOS MILLING CO., LTD., plaintiff-appellant, vs. BANK OF THE PHILIPPINE ISLANDS and CHINA BANKING CORPORATION, defendants-appellees. Gibbs and McDonough and Roman Ozaeta for appellant. Araneta, De Joya, Zaragosa and Araneta for appellee Bank of the Philippine Islands. Marcelo Nubla and Guevara, Francisco and Recto for appellee China Banking Corporation.

The endorsement to which the name of Newland Baldwin was affixed was spurious. 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. 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 bills of various denominations, named in the letter, be packed for shipment and delivery the next day. The next day, Dolores witnessed the counting and packing of the money, and shortly afterwards returned with the check for the sum of P200,000, purporting to be signed by Newland Baldwin as agent. Plaintiff had frequently withdrawn currency for shipment to its mill from the Bank of the Philippine Islands but never in so large an amount, and according to the record, never under the sole supervision of Dolores as the representative of plaintiff. 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.

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 main office in these Islands in the City of Manila. The business in the Philippine Islands was in the hands of Alfred D. Cooper, its agent under general power of attorney with authority of substitution. The principal employee in the Manila office was one Joseph L. Wilson, to whom had 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 Newland Baldwin and at the same time revoked the power of Wilson relative to the dealings with the Bank of the Philippine Islands, one of the banks in Manila 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

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. 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 necessary to discuss in detail. There is a mild assertion on the part of the defendant bank that the disputed signatures of Newland Baldwin were genuine and that he had been in the habit of signing checks in blank and turning the checks so signed over to Wilson. The proof as to the falsity of the questioned signatures of Baldwin places the matter beyond reasonable doubt, nor is it believed that Baldwin signed checks in blank and turned them over to Wilson. 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. Plaintiff in its letter of December 23, 1928, to the Bank of the Philippine Islands said in part: ". . . we now leave to demand that you pay over to us the entire amount of said manager's check of two hundred one thousand (P201,000) pesos, together with 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 refusal to pay, we shall claim interest at the legal rate of 6 per cent from and after the date of this demand inasmuch as we desire to withdraw and make use of the money." Such language might well be treated as a ratification of the deposit. 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 separate account but it transferred the credit to plaintiff's current account as a depositor of that bank. Furthermore, banks are not gratuitous bailees of the funds deposited with them by their customers. Banks are run for gain, and they solicit deposits in order that they can use the money for that very purpose. In 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. It must therefore be held that the proximate cause of loss was due to the negligence of the Bank of the Philippine Islands in honoring and cashing the two forged checks. The judgment absolving the Bank of the Philippine Islands must therefore be reversed, and a judgment entered in favor of plaintiff-appellant and against the Bank of the Philippine Islands, defendant-appellee, for the sum of P200,001, with legal interest thereon from December 23,1928, until payment, together with costs in both instances. So ordered.

G.R. No. L-43596

October 31, 1936

PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs. THE NATIONAL CITY BANK OF NEW YORK, and MOTOR SERVICE COMPANY, INC., defendants. MOTOR SERVICE COMPANY, INC., appellant. L. D. Lockwood for appellant. Camus and Delgado for appellee.

RECTO, J.: This case was submitted for decision to the court below on the following 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 A1, 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. 3. The checks Exhibits A and A-1 were then indorsed for deposit by the defendant Motor Service Company, Inc, at the National City Bank of New York and the former was accordingly credited with the amounts thereof, or P144.50 and P215.75. 4. On April 8 and 10, 1933, the said checks were cleared at the clearing house and the Philippine National Bank credited the National City Bank of New York for the amounts thereof, believing at the time that the signatures of the drawer were genuine, that the payee is an existing entity and the endorsement at the back thereof regular and genuine. 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 New York at the clearing house and for which the latter credited the Motor Service Co., but the defendants refused, and continue to refuse, to make such reimbursements. 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 Exhibit 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 error was committed in allowing said appeal. 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 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 well-regulated 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. But clearly the statute does not say that the contract of warranty of the negotiator, created by section 65, is discharged by these acts. The rule supported by the majority of the cases (14 A. L. R. 764), that payment 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 as to make the bank liable to the payee, is supported by all of the recent cases in which the question is considered. (Cases cited, Annotation at 69 A. L. R., 1076, 1077 [1930].) Merely stamping a check "Paid" upon its payment on a forged or unauthorized indorsement is not an acceptance thereof so as to render the drawee bank liable to the true payee. (Anderson vs. Tacoma National Bank [1928], 146 Wash., 520; 264 Pac., 8; Annotation at 69 A. L. R., 1077, [1930].)

In State Bank of Chicago vs. Mid-City Trust & Savings Bank (12 A. L. R., 989, 991, 992), the court said: The defendant in error contends that the payment of the check shows acceptance by the bank, urging that there can be no more definite act by the bank upon which a check has been drawn, showing acceptance than the payment of the check. Section 184 of the Negotiable Instruments Act (sec. 202) provides that the provisions of the act applicable to bills of exchange apply to a 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. Acceptance is a promise to pay in the future and continues the life of the bill. It was held in the First National Bank vs. Whitman (94 U. S., 343; 24 L. ed., 229), that payment of a check upon a forged indorsement did not operate as an acceptance in favor of the true owner. The contrary was held in Pickle vs. Muse (Fickle vs. People's Nat. Bank, 88 Tenn., 380; 7 L.R.A., 93; 17 Am. St. Rep., 900; 12 S. W., 919), and Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751) at a time when the Negotiable Instruments Act was not in force in those states. The opinion of the Supreme Court of the United States seems more logical, and the provision of the Negotiable Instruments Act now require 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 drawer, do not constitute an acceptance of the check or create a liability of the bank to the true holder or the payee. (Elyria Sav. & Bkg. Co. vs. Walker Bin Co., 92 Ohio St., 406; L. R. A., 1916D, 433; 111 N. E., 147; Ann. Cas. 1917D, 1055; Baltimore & O. R. Co. vs. First National Bank, 102 Va., 753; 47 S. E., 837; State Bank of Chicago vs. Mid-City Trust & Savings Bank 12 A. L. R., pp. 989, 991, 992.) Before drawee's acceptance of check there is no privity of contract between drawee and payee. Drawee's payment of check on unauthorized indorsement does not constitute "acceptance" of check. (Sinclair Refining Co.vs. Moultrie Banking Co., 165 S. E., 860 [1932].) The great weight of authority is to the effect that the payment of a check upon a forged or unauthorized indorsement and the stamping of it "paid" does not constitute an acceptance. (Dakota Radio Apparatus Co. vs.First Nat. Bank of Rapid City, 244 N. W., 351, 352 [1932].) Payment of the check, cashing it on presentment is not acceptance. (South Boston Trust Co. vs. Levin, 249 Mass., 45, 48, 49; 143 N. E., 816; Blocker, Shepard Co. vs. Granite Trust Company, 187 Me., 53, 54 [1933].) In Rauch vs. Bankers National Bank of Chicago (143 Ill. App., 625, 636, 637 [1908]), the language of the decision was as follows: . . . The plaintiffs say that this acceptance was made by the very unauthorized payments of which they complain. This suggestion does not seem forceful to us. It is the contention which was made before the Supreme Court of the United States in First National

Bank vs. Whitman (94 U. S., 343), and repudiated by that court. The language of the opinion in that case is so apt in the present case that we quote it: "It is further contended that such an acceptance of a check as creates a privity between the payee and the bank is established by the payment of the amount of this check in the manner described. This argument is based upon the erroneous assumption that the bank has paid this check. If this were true, it would have discharged all of its duty, and there would be an end to the claim against it. The bank supposed that it had paid the check, but this was an error. The money it paid was upon a pretended and not a real indorsement of the name of the payee. . . . We cannot recognize the argument that payment of the amount of the check or sight draft under such circumstances amounts to an acceptance creating a privity of contract with the real owner. "It is difficult to construe a payment as an acceptance under any circumstances. . . . A banker or 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 other hand, are more ready to promise to pay than to meet the promise when required. The difference between the transactions is essential and inherent." And in Wharf vs. Seattle National Bank (24 Pac. [2d]), 120, 123 [1933]): 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.) In a very recent case, Federal Land Bank vs. Collins (69 A. L. R., 1068, 1072-1074), this question was discussed at considerable length. The court said: In the light of the first of these statutes, counsel for appellant is forced to stand upon the narrow ledge that the payment of the check by the two banks will 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 Commercial National Bank and Trust Company, simply wrote its name as indorser and passed the check on to the drawee bank; does this constitute an acceptance? The precise question has not been presented to this court for decision. Without reference to authorities in other jurisdictions it would appear that the drawee bank had never written its name across the paper and therefore, under the strict terms of the statute, could not be bound as an acceptor; in the second place, it does

not appear to us to be illogical and unsound to say that the payment of a check by the drawee, and the stamping of it "paid", is equivalent to the same thing as the acceptance of a check; however, there is a variety of opinions in the various jurisdictions on this question. Counsel correctly states that the theory upon which the numerous courts hold that the payment of a check creates privity between the holder of the check and the drawee bank is tantamount to a pro tanto assignment of that part of the funds. It is most easily understood how the payment of the check, when not authorized to be done by the drawee bank, might under such circumstances create liability on the part of the drawee to the drawer. Counsel cites the case of Pickle vs. Muse (88 Tenn, 380; 12 S. W., 919; 7 L. R. A., 93; 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 thereon against the bank, and further held in a case similar to this, so far as this question is concerned, that the acceptance of a check so as to give a right of action to the payee is inferred from the retention of the check by the bank and its subsequent charge of the amount to the drawer, although it was presented by, and payment made, an unauthorized person. Judge Lurton cited the case of National Bank of the Republic vs. Millard (10 Wall., 152; 19 L. ed., 897), wherein the Supreme Court of the United States, not having such a case before it, threw out the suggestion that, if it was shown that a bank had charged the check on its books against the drawer and made settlement with the drawee that the holder could recover on account of money had and received, invoking the rule of justice and fairness, it might be said there was an implied promise to the holder to pay it on demand. (SeeNational 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 an acceptance and that it became a question of fact, and the bank became 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 Am. Rep., 751); Saylor vs. Bushong (100 Pa., 23; 45 Am. Rep., 353); and Dodge vs. Bank (20 Ohio St., 234; 5 Am. Rep., 648). This decision was in 1890, prior to the enactment of the Negotiable Instruments Law by the State of Tennessee. However, in this case Judge Snodgrass points out that the Millard case, supra, was dicta. The Dodge case, from the Ohio court, held exactly as the Tennessee court, but subsequently in the case of Elyria Bank vs. Walker Bin Co. (92 Ohio St., 406; 111 N. E., 147; L. R. A. 1916D, 433; Ann. Cas. 1917D, 1055), the court held to the contrary, called attention to the fact that the Dodge case was no longer the law, and proceeded to announce that, whatever might have been the law before the passage of the Negotiable Instrument Act in that state, it was no longer the law; that the rule announced in the Dodge case had been "discarded." The court, in the latter case, expressed its doubts that the courts of Tennessee and Pennsylvania would adhere to the rule announced in the Pickle case, quoted supra, in the face of the Negotiable Instrument Law. Subsequent to the Millard case, the Supreme

Court of the United States, in the case of First National Bank of Washington vs. Whitman (94 U. S., 343, 347; 24 L. ed., 229), where the bank, without any knowledge that the indorsement of the payee was unauthorized, paid the check, and it was contended that by the payment the privity of contract existing between the drawer and drawee was imparted to the payee, said: "It is further contended that such an acceptance of the check as creates a privity between the payee and the bank is established by the payment of the amount of this check in the manner described. This argument is based upon the erroneous assumption that the bank has paid this check. If this were true, it would have discharged all of its duty, and there would be an end of the claim against it. The bank supposed that it had paid the check; but this was an error. The money it paid was upon a pretended and not a real indorsement of the name of the payee. The real indorsement of the payee was as necessary to a valid payment as the real signature of the drawer; and in law the check remains unpaid. Its pretended payment did not diminish the funds of the drawer in the bank, or put money in the pocket of the person entitled to the payment. The state of the account was the same after the pretended payment as it was before. "We cannot recognize the argument that a payment of the amount of a check or sight draft under such circumstances amounts to an acceptance, creating a privity of contract with the real owner. It is difficult to construe a payment as an acceptance under any circumstances. The two things are essentially different. One is a promise to perform an act, the other an actual performance. A banker 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 other hand, are more ready to promise to pay than to meet the promise when required. The difference between the transactions is essential and inherent." 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 constitute a certification thereof, neither is it an acceptance thereof; and without 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 there an assignmentpro tanto of the funds where the check is not drawn on a particular fund, or does not show on its face that it is an assignment of a particular fund. The above rule as stated seems to have been the rule in the majority of the states even before the passage of the uniform Negotiable Instruments Act in the several states. The decision in the case of First National Bank vs. Bank of Cottage Grove (59 Or., 388), which appellant cites in its brief (pp. 12, 13 ) has been expressly overruled by the Supreme Court of Massachusetts in South Boston Trust Co. vs. Levin (143 N. E., 816, 817), in the following language: 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.) 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; Rouvantvs. 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

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.) 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 draft or check. (Security Commercial & Sav. Bank vs.Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945.) But we are aware of no case in which the principle that the drawee is bound to know the signature of the drawer of a bill or check which he undertakes to pay has been held to be decisive in favor of a payee of a forged bill or check to which he has himself given credit by his indorsement. (Secalso, Mckleroy vs. Bank, 14 La. Ann., 458; Canal Bank vs. Bank of Albany, 1 Hill, 287; Rouvant vs. Bank, supra, First Nat. Bank vs. Indiana National Bank; 30 N. E., 808-810.) In First Nat. Bank vs. United States National Bank ([1921], 100 Or., 264; 14 A. L. R., 479; 197 Pac., 547), the court declared: "A holder cannot profit by a mistake which his negligent disregard of duty has contributed to induce the drawee to commit. . . . The holder must refund, if by his negligence he has contributed to the consummation of the mistake on the part of the drawee by 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.) Also, a drawee could recover from another bank the portion of the proceeds of a forged check cashed by the latter and deposited by the forger in the second 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 purported drawer, where the purchasing bank was negligent in taking the check, and was not injured by the drawee's negligence in discovering and reporting the forgery as to the amount left on deposit, since it was not a purchaser for value. (First State Bank & T. Co. vs. First Nat. Bank [1924], 314 Ill., 269; 145 N. E., 382.) Similarly, it has been held that the drawee of a check could recover the amount paid on the check, after discovery of the forgery, from another bank, which put the check into circulation by cashing it for the one who had forged the signature of both drawer and payee without making any inquiry as to who he was although he was a stranger, after which the check reached, and was paid by, the drawee, after going through the hands of several intermediate indorsees. (71 A. L. R., p. 340.) In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the following statement was made: We are clearly of opinion, therefore that the warranty of genuineness, arising upon the act of the Brule National Bank in putting the check in circulation, was 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 payment. The Brule National Bank by its indorsement and delivery warranted its own identification of Kost and the genuineness of his signature. The indorsement of the check by the Brule National Bank was such as to assign the title to the

check to its assignee, the Whitbeck National Bank, and the amount 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 indorsee the agent of the indorser, nor did it prohibit farther negotiation of the instrument, nor did it appear to be in trust for, or to the use of, any other person, nor was it conditional. Certainly the Pukwana Bank was justified in relying upon the warrant of genuineness, which implied the full identification of Kost, and his signature by the defendant bank. This view of the statute is in accord with the decisions of many courts. (First National Bank vs. State Bank, 22 Neb., 769; 3 Am. St. Rep., 294; 36 N. W., 289; First National Bank vs. First National Bank, 151 Mass., 280; 21 Am. St. Rep., 450; 24 N. E., 44; People's Bank vs. Franklin Bank, 88 Tenn., 299; 6 L. R. A., 727; 17 Am. St. Rep., 884; 12 S. W., 716.)" The appellant leans heavily on the case of Fidelity & Co. vs. Planenscheck (71 A. L. R., 331), decided in 1929. We have carefully examined this decision and we do not feel justified in accepting its conclusions. It is but a restatement of the long abandoned rule of Neal vs. Price, and it predicated on the wrong premise that the payment includes acceptance, and that a bank drawee paying a check drawn on it becomes ipso facto an acceptor within the meaning of 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. [2nd] 497, 501) decided in 1931, the Court of Appeals of Kentucky held the following: The appellee, on presentation for payment of $600 check, failed to discover it 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 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 about him and did not cause or have him to be identified. Its act in so paying to him the check is a degree of negligence on its part equivalent to positive negligence. It indorsed the check, and, while such indorsement may not be 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 as a representation to it that it had exercised ordinary care and had complied 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 drawer's signature to it when paying the check and charging it to its customer's account and remitting its proceeds to appellant's correspondent. If in such a transaction between the drawee and the holder of a check both are without fault, no recovery may be had of the money so paid. (Deposit Bank of Georgetown vs. Fayette National Bank, supra, and cases cited.) Or the rule may be more accurately stated that, where the drawee pays the money, he cannot recover it back from a holder in good faith, for value and without fault.

If, on the other hand, the holder acts in bad faith, or is guilty of culpable negligence, a recovery may be had by the drawee of such holder. The negligence of the Bank of Louisa in failing to inquire of and about Banfield, and to cause or to have him identified before it parted with its money on the forged check, may be regarded as the primary and proximate cause of the loss. Its negligence in this respect reached in its effect the appellee, and induced incaution on its part. In comparison of the degrees of the negligence of the two, it is apparent that of the appellant excels in culpability. Both appellant and appellee inadvertently made a mistake, doubtless due to a hurry incident to 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 to the appellee, and it cannot on account thereof retain as against the appellee the money which it so received. It cannot shift the loss to the appellee, for such disregard of its duty inevitably contributed to induce the appellee to omit its duty critically to examine the signature of Armstrong, even if it did not know it instantly at the time it paid the check. (Farmers' Bank of Augusta vs. Farmer's Bank of Maysville, supra, and cases cited.) IV. The question now is to determine whether the appellant's negligence in purchasing the checks in question is such as to give the appellee the right to 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 signature of the drawer and detecting the forgery. We quote with approval the following conclusions of the court a quo: Check Exhibit A bears number 637023-D and is dated April 6, 1933, whereas check Exhibit A-1 bears number 637020-D and is dated April 7, 1933. Therefore, the latter check, which is prior in number to the former check, is however, issued on a later date. This circumstance must have aroused at least the curiosity of the Motor Service Co., Inc. The Motor Service Co., Inc., accepted the two checks from unknown persons. And not only this; check Exhibit A is indorsed by a subagent of the agent of the payee, International Auto Repair Shop. The Motor Service Co., Inc., made no inquiry whatsoever as to the extent of the authority of these unknown persons. Our Supreme Court said once that "any person taking checks made payable to a corporation, which can act only by agents, does so at his peril, and must abide by the consequences if the agent who indorses the same is without authority" (Insular Drug Co. vs. National Bank, 58, Phil., 684). xxx xxx xxx

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 parallel lines transversally drawn on the face of this check was a warning that 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. 76 and 79). Yet the Motor Service Co., Inc., accepted the check in payment for merchandise. . . . In Exhibit H attached to the stipulation of facts as an integral part thereof, the Motor Service Co., Inc., stated the following: "The Pangasinan Transportation Co. is a good customer of this firm and we received checks from them every month in payment of their account. The two checks in question seem to be exactly similar to the checks which we received from the Pangasinan Transportation Co. every month." If the failure of the Motor Service Co., Inc., to detect the forgery of the drawer's signature in the two checks, may be considered as an omission in good faith because of the similarity stated in the letter, then the same consideration applies to the Philippine National Bank, for the drawer is a customer of both the Motor Service Co., Inc., and the Philippine National Bank. (B. of E., pp. 25, 28, 35.) We are of opinion that the facts of the present case do not make it one between two equally innocent persons, the drawee bank and the holder, and that they are governed by the authorities already cited and also the following: The point in issue has sometimes been said to be that of negligence. The drawee who has paid upon the forged signature is held to bear the loss, because he has been negligent in failing to recognize that the handwriting is not that of his customer. But it follows obviously that if the payee, holder, or presenter of the forged paper has himself been in default, if he has himself been guilty of a negligence prior to that of the banker, or if by any act of his own he has at all contributed to induce the banker's negligence, then he may lose his right to cast the loss upon the banker. The courts have shown a steadily increasing disposition to extend the application of this rule over the new conditions of fact which from time to time arise, until it can now rarely happen that the holder, payee, or presenter can escape the imputation of having been in some degree contributory towards the mistake. Without any actual change in the abstract doctrines of the law, which are clear, just, and simple enough, the 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 to the original custom. . . . (2 Morse on Banks and Banking, 5th ed., secs. 464 and 466, pp. 82-85 and 86, 87.)

In First National Bank vs. Brule National Bank (12 A. L. R., 1079, 1088, 1089), the following statement appears in the concurring opinion: What, then, should be the rule? The drawee asks to recover for money had and received. If his claim did not rest upon a transaction relating to a negotiable instrument plaintiff could recover as for money paid under mistake, unless defendant could show some equitable reason, such as changed condition since, and relying upon, payment by plaintiff. In the Wyndmere Case, the North 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 theory of estoppel and puts a case of this kind on exactly the same basis as the ordinary case of payment under mistake. But the great weight of authority, and that based on the better reasoning, holds that the exigencies of business 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 negligent such holder has been? It surely is not. The correct rule recognizes the fact that, in case of payment without a prior acceptance or certification, the holder takes the paper upon the of the prior indorsers and the credit of the drawer, and not upon the credit of the drawee, in making payment, has a right to rely upon the assumption that the payee used due diligence, especially 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 that it was willing to warrant as relates thereto to all subsequent holders. (Uniform Act, secs. 65 and 66.) Such correct rule denies the drawee the right to 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 exchange uses all due care in the taking of bill or check and the drawee thereafter pays same, the transaction is absolutely closed modern business could not be done on any other basis. While the correct rule promotes the 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].)

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. 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. V. Section 23 of the Negotiable Instruments Act provides that "when a signature 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 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. 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. 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.) 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. In the light of the foregoing discussion, we conclude: 1. That where a check is accepted or certified by the bank on which it is drawn, the bank is estopped to deny the genuineness of the drawer's signature and his capacity to issue the instrument; 2. That if a drawee bank pays a forged check which was previously accepted or certified by the said bank it cannot recover from a holder who did not participate in the forgery and did not have actual notice thereof; 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; 4. That in the case of the payment of a forged check, even without former acceptance, the drawee can not recover from a holder in due course not chargeable with any act of negligence or disregard of duty; 5. That to entitle the holder of a forged check to retain the money obtained 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 appellee, the presumption that a drawee bank is bound to know more than any indorser the signature of its depositor does not hold; 10. That according to the undisputed facts of the case the appellant in purchasing the papers in question from unknown persons without making any inquiry as to the identity and authority of the said persons negotiating and indorsing them, acted negligently and contributed to the appellee's constructive negligence in failing to detect the forgery; 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 appellant. 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 ordered.

A partial stipulation of facts entered into by the parties and the decision of the Court of Appeals show that, on about January 15, 1962, one Augusto Lim deposited in his current account with the PCIB branch at Padre Faura, Manila, GSIS Check No. 645915- B, in the sum of P57,415.00, drawn against the PNB; that, following an established banking practice in the Philippines, the check was, on the same date, forwarded, for clearing, through the Central Bank, to the PNB, which did not return said check the next day, or at any other time, but retained it and paid its amount to the PCIB, as well as debited it against the account of the GSIS in the PNB; that, subsequently, or on January 31, 1962, upon demand from the GSIS, said sum of P57,415.00 was re-credited to the latter's account, for the reason that the signatures of its officers on the check were forged; and that, thereupon, or on February 2, 1962, the PNB demanded 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 Instance of Manila, whose decision was, in turn, affirmed by the Court of Appeals. It is not disputed that the signatures of the General Manager and the Auditor of the GSIS on the check, as drawer thereof, are forged; that the person named in the check as its payee was one Mariano D. Pulido, who purportedly indorsed it to one Manuel Go; that the check purports to have been indorsed by Manuel Go to Augusto Lim, who, in turn, deposited it with the PCIB, on January 15, 1962; that, thereupon, the PCIB stamped the following on the back of the check: "All prior indorsements and/or Lack of Endorsement Guaranteed, Philippine Commercial and Industrial Bank," Padre Faura Branch, Manila; that, 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. 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 the check are forged; (3) in not finding the PCIB liable to the PNB by virtue of 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 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 recover from the PCIB. The first assignment of error will be discussed later, together with the last,with which it is interrelated. As regards the second assignment of error, the PNB argues that, since the signatures of the drawer are forged, so must the signatures of the supposed indorsers be; but this conclusion does not necessarily follow from said premise. Besides, there is absolutely no evidence, and the PNB has not even tried to prove that the aforementioned indorsements are spurious. Again, the PNB refunded the amount of the check to the GSIS, on account of the forgery in the signatures, not of the indorsers or supposed indorsers, but of the officers of the GSISas drawer of the instrument. In other words, the question whether or not the indorsements have been falsified is immaterial to the PNB's

G.R. No. L-26001

October 29, 1968

PHILIPPINE NATIONAL BANK, petitioner, vs. THE COURT OF APPEALS and PHILIPPINE COMMERCIAL AND INDUSTRIAL BANK, respondents. Tomas Besa, Jose B. Galang and Juan C. Jimenez for petitioner. San Juan, Africa & Benedicto for respondents. CONCEPCION, C.J.: The Philippine National Bank hereinafter referred to as the PNB seeks 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 against the Philippine Commercial and Industrial Bank hereinafter referred to as the PCIB for the recovery of P57,415.00.

liability as a drawee, or to its right to recover from the PCIB, 1 for, as against the drawee, the indorsement of an intermediate bank does not guarantee the signature of the drawer,2 since the forgery of the indorsement is not the cause of the loss.3 With respect to the warranty on the back of the check, to which the third assignment of error refers, it should be noted that the PCIB thereby guaranteed "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 check, but its drawer.4Said warranty is irrelevant, therefore, to the PNB's alleged right to recover from the PCIB. It could have been availed of by a subsequent indorsee5 or a holder in due course6 subsequent to the PCIB, but, the PNB is neither. 7Indeed, upon payment by the PNB, as drawee, the check ceased to be a negotiable instrument, and became a mere voucher or proof of payment.8 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: CASTRO, J.: 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. This is a petition by the Jai-Alai Corporation of the Philippines (hereinafter referred to as the petitioner) for review of the decision of the Court of Appeals in C.A.-G.R. 34042-R dated June 25, 1968 in favor of the Bank of the Philippine Islands (hereinafter referred to as the respondent). From April 2, 1959 to May 18, 1959, ten checks with a total face value of P8,030.58 were deposited by the petitioner in its current account with the respondent bank. The particulars of these checks are as follows: 1. Drawn by the Delta Engineering Service upon the Pacific Banking Corporation and payable to the Inter-Island Gas Service Inc. or order: Date Deposited 4/2/59 4/20/59 4/24/59 5/4/59 5/6/59 Number B-352680 A-156907 A-156924 B-364764 B-364775 Check Amount P500.00 372.32 397.82 250.00 250.00 Exhibit Number 18 19 20 23 24

JAI-ALAI CORPORATION PHILIPPINES, Petitioner, v. BANK ISLAND, Respondent.

OF

OF THE

THE PHILIPPINE

2. Drawn by the Enrique Cortiz & Co. upon the Pacific Banking Corporation and payable to the Inter-Island Gas Service, Inc. or bearer: 4/13/59 4/27/59 B-335063 B-335072 P 2108.70 P2210.94 21 22

3. Drawn by the Luzon Tinsmith & Company upon the China

Banking Corporation and payable to the Inter-Island Gas Service, Inc. or bearer: 5/18/59 VN430188 P940.80 25

account of the petitioner, after netting out the value of the checks P8,030.58) with the forged indorsements, had a balance of only P128,257.65. The petitioner then filed a complaint against the respondent with the Court of First Instance of Manila, which was however dismissed by the trial court after due trial, and as well by the Court of Appeals, on appeal. Hence, the present recourse.

4. Drawn by the Roxas Manufacturing, Inc. upon the Philippine National Bank and payable to the Inter-Island Gas Service, Inc. order: 5/14/59 5/18/59 1860160 1860660 P P 500.00 500.00 26 27

contemplation, therefore, the payments made by the draweebanks to the respondent on account of the said checks were ineffective; and, such being the case, the relationship of creditor and debtor between the petitioner and the respondent had not been validly effected, the checks not having been properly and legitimately converted into cash. 4 In Great Eastern Life Ins. Co. vs. Hongkong & Shanghai Bank, 5 the Court ruled that it is the obligation of the collecting bank to reimburse the drawee-bank the value of the checks subsequently found to contain the forged indorsement of the payee. The reason is that the bank with which the check was deposited has no right to pay the sum stated therein to the forger "or anyone else upon a forged signature." "It was its duty to know," said the Court, "that [the payee's] endorsement was genuine before cashing the check." The petitioner must in turn shoulder the loss of the amounts which the respondent; as its collecting agent, had to reimburse to the drawee-banks. We do not consider material for the purposes of the case at bar that more than three months had elapsed since the proceeds of the checks in question were collected by the respondent. The record shows that the respondent had acted promptly after being informed that the indorsements on the checks were forged. Moreover, having received the checks merely for collection and deposit, the respondent cannot he expected to know or ascertain the genuineness of all prior indorsements on the said checks. Indeed, having itself indorsed them to the respondent in accordance with the rules and practices of commercial banks, of which the Court takes due cognizance, the petitioner is deemed to have given the warranty prescribed in Section 66 of the Negotiable Instruments Law that every single one of those checks "is genuine and in all respects what it purports to be.". The petitioner was, moreover, grossly recreant in accepting the checks in question from Ramirez. It could not have escaped the attention of the petitioner that the payee of all the checks was a corporation the Inter-Island Gas Service, Inc. Yet, the petitioner cashed these checks to a mere individual who was admittedly a habitue at its jai-alai games without making any inquiry as to his authority to exchange checks belonging to the payee-corporation. In Insular Drug Co. vs. National 6 the Court made the pronouncement that. ". . . The right of an agent to indorse commercial paper is a very responsible power and will not be lightly inferred. A salesman with authority to collect money belonging to his principal does not have the implied authority to indorse checks received in payment. Any person taking checks made payable to a corporation, which can act only by agents, does so at his peril, and must abide by the consequences if the agent who indorses the same is without authority." (underscoring supplied) It must be noted further that three of the checks in question are crossed checks, namely, exhs. 21, 25 and 27, which may only be deposited, but not encashed; yet, the petitioner negligently accepted them for cash. That two of the crossed checks, namely, exhs. 21 and 25, are bearer instruments would not, in our view, exculpate the petitioner from liability with respect to them. The fact that they are bearer checks and at the same time crossed checks should have aroused the petitioner's suspicion as to the title of Ramirez over them and his authority to cash them (apparently to purchase jai-alai tickets from the petitioner), it appearing on their face that a corporate entity the Inter Island

The issues posed by the petitioner in the instant petition may be briefly stated as follows: (a) Whether the respondent had the right to debit the petitioner's current account in the amount corresponding to the total value of the checks in question after more than three months had elapsed from the date their value was credited to the petitioner's account: (b) Whether the respondent is estopped from claiming that the amount of P8,030.58, representing the total value of the checks with the forged indorsements, had not been properly credited to the petitioner's account, since the same had already been paid by the drawee-banks and received in due course by the respondent; and(c) On the assumption that the respondent had improperly debited the petitioner's current account, whether the latter is entitled to damages. These three issues interlock and will be resolved jointly. In our opinion, the respondent acted within legal bounds when it debited the petitioner's account. When the petitioner deposited the checks with the respondent, the nature of the relationship created at that stage was one of agency, that is, the bank was to collect from the drawees of the checks the corresponding proceeds. It is true that the respondent had already collected the proceeds of the checks when it debited the petitioner's account, so that following the rule in Gullas vs. Philippine National Bank 2 it might be argued that the relationship between the parties had become that of creditor and debtor as to preclude the respondent from using the petitioner's funds to make payments not authorized by the latter. It is our view nonetheless that no creditor-debtor relationship was created between the parties. Section 23 of the Negotiable Instruments Law (Act 2031) states that 3 "When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority." Since under the foregoing provision, a forged signature in a negotiable instrument is wholly inoperative and no right to discharge it or enforce its payment can be acquired through or under the forged signature except against a party who cannot invoke the forgery, it stands to reason, upon the facts of record, that the respondent, as a collecting bank which indorsed the checks to the drawee-banks for clearing, should be liable to the latter for reimbursement, for, as found by the court a quo and by the appellate court, the indorsements on the checks had been forged prior to their delivery to the petitioner. In legal

All the foregoing checks, which were acquired by the petitioner from one Antonio J. Ramirez, a sales agent of the Inter-Island Gas and a regular bettor at jai-alai games, were, upon deposit, temporarily credited to the petitioner's account in accordance with the clause printed on the deposit slips issued by the respondent and which reads: "Any credit allowed the depositor on the books of the Bank for checks or drafts hereby received for deposit, is provisional only, until such time as the proceeds thereof, in current funds or solvent credits, shall have been actually received by the Bank and the latter reserves to itself the right to charge back the item to the account of its depositor, at any time before that event, regardless of whether or not the item itself can be returned." About the latter part of July 1959, after Ramirez had resigned from the Inter-Island Gas and after the checks had been submitted to inter-bank clearing, the Inter-Island Gas discovered that all the indorsements made on the checks purportedly by its cashiers, Santiago Amplayo and Vicenta Mucor (who were merely authorized to deposit checks issued payable to the said company) as well as the rubber stamp impression thereon reading "InterIsland Gas Service, Inc.," were forgeries. In due time, the InterIsland Gas advised the petitioner, the respondent, the drawers and the drawee-banks of the said checks about the forgeries, and filed a criminal complaint against Ramirez with the Office of the City Fiscal of Manila. 1 The respondent's cashier, Ramon Sarthou, upon receipt of the latter of Inter-Island Gas dated August 31, 1959, called up the petitioner's cashier, Manuel Garcia, and advised the latter that in view of the circumstances he would debit the value of the checks against the petitioner's account as soon as they were returned by the respective drawee-banks. Meanwhile, the drawers of the checks, having been notified of the forgeries, demanded reimbursement to their respective accounts from the drawee-banks, which in turn demanded from the respondent, as collecting bank, the return of the amounts they had paid on account thereof. When the drawee-banks returned the checks to the respondent, the latter paid their value which the former in turn paid to the Inter-Island Gas. The respondent, for its part, debited the petitioner's current account and forwarded to the latter the checks containing the forged indorsements, which the petitioner, however, refused to accept. On October 8, 1959 the petitioner drew against its current account with the respondent a check for P135,000 payable to the order of the Mariano Olondriz y Cia. in payment of certain shares of stock. The check was, however, dishonored by the respondent as its records showed that as of October 8, 1959 the current

Gas Service, Inc. was the payee thereof and Ramirez delivered the said checks to the petitioner ostensibly on the strength of the payee's cashiers' indorsements. At all events, under Section 67 of the Negotiable Instruments Law, "Where a person places his indorsement on an instrument negotiable by delivery he incurs all the liability of an indorser," and under Section 66 of the same statute a general indorser warrants that the instrument "is genuine and in all respects what it purports to be." Considering that the petitioner indorsed the said checks when it deposited them with the respondent, the petitioner as an indorser guaranteed the genuineness of all prior indorsements thereon. The respondent which relied upon the petitioner's warranty should not be held liable for the resulting loss. This conclusion applied similarly to exh. 22 which is an uncrossed bearer instrument, for under Section 65 of the Negotiable Instrument Law. "Every person negotiating an instrument by delivery . . . warrants (a) That the instrument is genuine and in all respects what it purports to be." Under that same section this warranty "extends in favor of no holder other than the immediate transferee," which, in the case at bar, would be the respondent. The provision in the deposit slip issued by the respondent which stipulates that it "reserves to itself the right to charge back the item to the account of its depositor," at any time before "current funds or solvent credits shall have been actually received by the Bank," would not materially affect the conclusion we have reached. That stipulation prescribes that there must be an actual receipt by the bank of current funds or solvent credits; but as we have earlier indicated the transfer by the drawee-banks of funds to the respondent on account of the checks in question was ineffectual because made under the mistaken and valid assumption that the indorsements of the payee thereon were genuine. Under article 2154 of the New Civil Code "If something is received when there is no right to demand it and it was unduly delivered through mistake, the obligation to return it arises." There was, therefore, in contemplation of law, no valid payment of money made by the drawee-banks to the respondent on account of the questioned checks. ACCORDINGLY, the judgment of the Court of Appeals is affirmed, at petitioner's cost.

predecessor-in-interest NWSA. Among the several accounts of NWSA with PNB is NWSA Account No. 6, otherwise known as Account No. 381-777 and which is presently allocated No. 010-500281. The authorized signature for said Account No. 6 were those of MWSS treasurer Jose Sanchez, its auditor Pedro Aguilar, and its acting General Manager Victor L. Recio. Their respective specimen signatures were submitted by the MWSS to and on file with the PNB. By special arrangement with the PNB, the MWSS used personalized checks in drawing from this account. These checks were printed for MWSS by its printer, F. Mesina Enterprises, located at 1775 Rizal Extension, Caloocan City. During the months of March, April and May 1969, twenty-three (23) checks were prepared, processed, issued and released by NWSA, all of which were paid and cleared by PNB and debited by PNB against NWSA Account No. 6, to wit: Check No. Date Payee Amount Date Paid By PNB 1. 59546 8-21-69 Deogracias P 3,187.79 4-269 Estrella 2. 59548 3-31-69 Natividad 2,848.86 4-23 69 GUTIERREZ, JR., J.: This petition for review asks us to set aside the October 29, 1982 decision of the respondent Court of Appeals, now Intermediate Appellate Court which reversed the decision of the Court of First Instance of Manila, Branch XL, and dismissed the plaintiff's complaint, the third party complaint, as well as the defendant's counterclaim. The background facts which led to the filing of the instant petition are summarized in the decision of the respondent Court of Appeals: Metropolitan Waterworks and Sewerage System (hereinafter referred to as MWSS) is a government owned and controlled corporation created under Republic Act No. 6234 as the successor-in- interest of the defunct NWSA. The Philippine National Bank (PNB for short), on the other hand, is the depository bank of MWSS and its

Engineering 7. 59558 4-2-69 Unreleased News 8. 59544 3-27-69 Progressive 18,391.20 4-18 69 Const. 9. 59564 4-2-69 Ind. Insp. 594.06 4-18 69 Int. Inc. 10. 59568 4-7-69 Roberto 800.00 4-22-69 Marsan 11. 59570 4-7-69 Paz Andres 200.00 4-22-69 12. 59574 4-8-69 Florentino 100,000.00 411-69 Santos 13. 59578 Unreleased Bulletin 4-8-69 Mla. Daily 95.00 The Evening 112.00

G.R. No. L-62943 July 14, 1986 METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner, vs. COURT OF APPEALS (Now INTERMEDIATE APPELLATE COURT) and THE PHILIPPINE NATIONAL BANK,respondents. Juan J. Diaz and Cesar T. Basa for respondent PNB. San Juan, Africa, Gonzales & San Agustin Law Offices for respondent PCIB.

Rosario 14. 59580 4-8-69 Phil. Herald 100.00 5-9-69 3. 59547 Unreleased Enterprises 4. 59549 3-31-69 Natividad 3,239.88 4-23-69 Rosario 5. 59552 4-1-69 Villarama 987.59 5-6-69 & Sons 6. 59554 4-1-69 Gascom 6,057.60 4-16 69 3-31-69 Pangilinan 195.00 15. 59582 4-8-69 Galauran 7,729.09 5-6-69 & Pilar 16. 59581 4-8-69 Manila 110.00 5-12 69 Chronicle 17. 59588 4-8-69 Treago 21,583.00 4-11 69 Tunnel 18. 59587 4-8-69 Delfin 120,000.00 4-11-69

Santiago 19. 59589 4-10-69 Deogracias 1,257.49 4-16 69 Estrella 20. 59594 4-14-69 Philam Ac- 33.03 4-29 69 cident Inc. 21. 59577 4-8-69 Esla 9,429.78 4-29 69 22. 59601 4-16-69 Justino 20,000.00 4-18-69 Torres 23. 59595 4-14-69 Neris Phil. 4,274.00 5-2069 Inc. -------------------P 320,636.26 During the same months of March, April and May 1969, twenty-three (23) checks bearing the same numbers as the aforementioned NWSA checks were likewise paid and cleared by PNB and debited against NWSA Account No. 6, to wit: Check Date Payee Amount Date Paid No. Issued By PNB 1. 59546 3-6-69 Raul Dizon P 84,401.00 316-69 2. 59548 3-11-69 Raul Dizon 104,790.00 4-169 3. 59547 3-14-69 Arturo Sison 56,903.00 411-69 4. 59549 3-20-69 Arturo Sison 48,903.00 415-69 5. 59552 3-24-69 Arturo Sison 63,845.00 416-69

6. 59544 3-26-69 Arturo Sison 98,450.00 417-69 7. 59558 3-28-69 Arturo Sison 114,840.00 421-69 8. 59544 3-16-69 Antonio 38,490.00 4-22-69 Mendoza 9. 59564 3-31-69 Arturo Sison 180,900.00 423-69 10.59568 4-2-69 Arturo Sison 134,940.00 45-69 11.59570 4-1-69 Arturo Sison 64,550.00 428-69 12.59574 4-2-69 Arturo Sison 148,610.00 429-69 13.59578 4-10-69 Antonio 93,950.00 4-29-69 Mendoza 14.59580 4-8-69 Arturo Sison 160,000.00 52-69 15.59582 4-10-69 Arturo Sison 155,400.00 55-69 16.59581 4-8-69 Antonio 176,580.00 5-6-69 Mendoza 17.59588 4-16-69 Arturo Sison 176,000.00 58-69 18.59587 4-16-69 Arturo Sison 300,000.00 512-69 19.59589 4-18-69 Arturo Sison 122,000.00 514-69 20.59594 4-18-69 Arturo Sison 280,000.00 515-69 21.59577 4-14-69 Antonio 260,000.00 5-1669 Mendoza

22.59601 4-18-69 Arturo Sison 400,000.00 519-69 23.59595 4-28-69 Arturo Sison 190,800.00 521-69 --------------P3,457,903.00 The foregoing checks were deposited by the payees Raul Dizon, Arturo Sison and Antonio Mendoza in their respective current accounts with the Philippine Commercial and Industrial Bank (PCIB) and Philippine Bank of Commerce (PBC) in the months of March, April and May 1969. Thru the Central Bank Clearing, these checks were presented for payment by PBC and PCIB to the defendant PNB, and paid, also in the months of March, April and May 1969. At the time of their presentation to PNB these checks bear the standard indorsement which reads 'all prior indorsement and/or lack of endorsement guaranteed.' Subsequent investigation however, conducted by the NBI showed that Raul Dizon, Arturo Sison and Antonio Mendoza were all fictitious persons. The respective balances in their current account with the PBC and/or PCIB stood as follows: Raul Dizon P3,455.00 as of April 30, 1969; Antonio Mendoza P18,182.00 as of May 23, 1969; and Arturo Sison Pl,398.92 as of June 30, 1969. On June 11, 1969, NWSA addressed a letter to PNB requesting the immediate restoration to its Account No. 6, of the total sum of P3,457,903.00 corresponding to the total amount of these twenty-three (23) checks claimed by NWSA to be forged and/or spurious checks. "In view of the refusal of PNB to credit back to Account No. 6 the said total sum of P3,457,903.00 MWSS filed the instant complaint on November 10, 1972 before the Court of First Instance of Manila and docketed thereat as Civil Case No. 88950. In its answer, PNB contended among others, that the checks in question were regular on its face in all respects, including the genuineness of the signatures of authorized NWSA signing officers and there was nothing on its face that could have aroused any suspicion as to its genuineness and due execution and; that NWSA was guilty of

negligence which was the proximate cause of the loss. PNB also filed a third party complaint against the negotiating banks PBC and PCIB on the ground that they failed to ascertain the Identity of the payees and their title to the checks which were deposited in the respective new accounts of the payees with them. xxx xxx xxx On February 6, 1976, the Court of First Instance of Manila rendered judgment in favor of the MWSS. The dispositive portion of the decision reads: WHEREFORE, on the COMPLAINT by a clear preponderance of evidence and in accordance with Section 23 of the Negotiable Instruments Law, the Court hereby renders judgment in favor of the plaintiff Metropolitan Waterworks and Sewerage System (MWSS) by ordering the defendant Philippine National Bank (PNB) to restore the total sum of THREE MILLION FOUR HUNDRED FIFTY SEVEN THOUSAND NINE HUNDRED THREE PESOS (P3,457,903.00) to plaintiff's Account No. 6, otherwise known as Account No. 010-500303, with legal interest thereon computed from the date of the filing of the complaint and until as restored in the said Account No. 6. On the THIRD PARTY COMPLAINT, the Court, for lack of evidence, hereby renders judgment in favor of the third party defendants Philippine Bank of Commerce (PBC) and Philippine Commercial and Industrial Bank (PCIB) by dismissing the Third Party Complaint. The counterclaims of the third party defendants are likewise dismissed for lack of evidence. No pronouncement as to costs. As earlier stated, the respondent court reversed the decision of the Court of First Instance of Manila and rendered judgment in favor of the respondent Philippine National Bank. A motion for reconsideration filed by the petitioner MWSS was denied by the respondent court in a resolution dated January 3, 1983. The petitioner now raises the following assignments of errors for the grant of this petition:

I. IN NOT HOLDING THAT AS THE SIGNATURES ON THE CHECKS WERE FORGED, THE DRAWEE BANK WAS LIABLE FOR THE LOSS UNDER SECTION 23 OF THE NEGOTIABLE INSTRUMENTS LAW. II. IN FAILING TO CONSIDER THE PROXIMATE NEGLIGENCE OF PNB IN ACCEPTING THE SPURIOUS CHECKS DESPITE THE OBVIOUS IRREGULARITY OF TWO SETS OF CHECKS BEARING IdENTICAL NUMBER BEING ENCASHED WITHIN DAYS OF EACH OTHER. III. IN NOT HOLDING THAT THE SIGNATURES OF THE DRAWEE MWSS BEING CLEARLY FORGED, AND THE CHECKS SPURIOUS, SAME ARE INOPERATIVE AS AGAINST THE ALLEGED DRAWEE. The appellate court applied Section 24 of the Negotiable Instruments Law which provides: Every negotiable instrument is deemed prima facie to have been issued for valuable consideration and every person whose signature appears thereon to have become a party thereto for value. The petitioner submits that the above provision does not apply to the facts of the instant case because the questioned checks were not those of the MWSS and neither were they drawn by its authorized signatories. The petitioner states that granting that Section 24 of the Negotiable Instruments Law is applicable, the same creates only a prima facie presumption which was overcome by the following documents, to wit: (1) the NBI Report of November 2, 1970; (2) the NBI Report of November 21, 1974; (3) the NBI Chemistry Report No. C-74891; (4) the Memorandum of Mr. Juan Dino, 3rd Assistant Auditor of the respondent drawee bank addressed to the Chief Auditor of the petitioner; (5) the admission of the respondent bank's counsel in open court that the National Bureau of Investigation found the signature on the twenty-three (23) checks in question to be forgeries; and (6) the admission of the respondent bank's witness, Mr. Faustino Mesina, Jr. that the checks in question were not printed by his printing press. The petitioner contends that since the signatures of the checks were forgeries, the respondent drawee bank must bear the loss under the rulings of this Court. A bank is bound to know the signatures of its customers; and if it pays a forged check it must be considered as making the payment out of its obligation funds, and cannot ordinarily charge the amount so paid to the account of the depositor whose name was forged. xxx xxx xxx

The signatures to the checks being forged, under Section 23 of the Negotiable Instruments Law they are not a charge against plaintiff nor are the checks of any value to the defendant. It must therefore be held that the proximate cause of loss was due to the negligence of the Bank of the Philippine Islands in honoring and cashing the two forged checks. (San Carlos Milling Co. v. Bank of the P. I., 59 Phil. 59) It is admitted that the Philippine National Bank cashed the check upon a forged signature, and placed the money to the credit of Maasim, who was the forger. That the Philippine National Bank then endorsed the chock and forwarded it to the Shanghai Bank by whom it was paid. The Philippine National Bank had no license or authority to pay the money to Maasim or anyone else upon a forged signature. It was its legal duty to know that Malicor's endorsement was genuine before cashing the check. Its remedy is against Maasim to whom it paid the money. (Great Eastern Life Ins. Co. v. Hongkong & Shanghai Bank, 43 Phil. 678). We have carefully reviewed the documents cited by the petitioner. There is no express and categorical finding in these documents that the twenty-three (23) questioned checks were indeed signed by persons other than the authorized MWSS signatories. On the contrary, the findings of the National Bureau of Investigation in its Report dated November 2, 1970 show that the MWSS fraud was an "inside job" and that the petitioner's delay in the reconciliation of bank statements and the laxity and loose records control in the printing of its personalized checks facilitated the fraud. Likewise, the questioned Documents Report No. 159-1074 dated November 21, 1974 of the National Bureau of Investigation does not declare or prove that the signatures appearing on the questioned checks are forgeries. The report merely mentions the alleged differences in the type face, checkwriting, and printing characteristics appearing in the standard or submitted models and the questioned typewritings. The NBI Chemistry Report No. C-74-891 merely describes the inks and pens used in writing the alleged forged signatures. It is clear that these three (3) NBI Reports relied upon by the petitioner are inadequate to sustain its allegations of forgery. These reports did not touch on the inherent qualities of the signatures which are indispensable in the determination of the existence of forgery. There must be conclusive findings that there is a variance in the inherent characteristics of the signatures and that they were written by two or more different persons. Forgery cannot be presumed (Siasat, et al. v. Intermediate Appellate Court, et al, 139 SCRA 238). It must be established by clear, positive, and convincing evidence. This was not done in the present case.

The cases of San Carlos Milling Co. Ltd. v. Bank of the Philippine Islands, et al. (59 Phil. 59) and Great Eastern Life Ins., Co. v. Hongkong and Shanghai Bank (43 Phil. 678) relied upon by the petitioner are inapplicable in this case because the forgeries in those cases were either clearly established or admitted while in the instant case, the allegations of forgery were not clearly established during trial. Considering the absence of sufficient security in the printing of the checks coupled with the very close similarities between the genuine signatures and the alleged forgeries, the twenty-three (23) checks in question could have been presented to the petitioner's signatories without their knowing that they were bogus checks. Indeed, the cashier of the petitioner whose signatures were allegedly forged was unable to ten the difference between the allegedly forged signature and his own genuine signature. On the other hand, the MWSS officials admitted that these checks could easily be passed on as genuine. The memorandum of Mr. A. T. Tolentino, no, Assistant Chief Accountant of the drawee Philippine National Bank to Mr. E. Villatuya, Executive Vice-President of the petitioner dated June 9, 1969 cites an instance where even the concerned NWSA officials could not ten the differences between the genuine checks and the alleged forged checks. At about 12:00 o'clock on June 6, 1969, VP Maramag requested me to see him in his office at the Cashier's Dept. where Messrs. Jose M. Sanchez, treasurer of NAWASA and Romeo Oliva of the same office were present. Upon my arrival I observed the NAWASA officials questioning the issue of the NAWASA checks appearing in their own list, xerox copy attached. For verification purposes, therefore, the checks were taken from our file. To everybody there present namely VIP Maramag, the two abovementioned NAWASA officials, AVP, Buhain, Asst. Cashier Castelo, Asst. Cashier Tejada and Messrs. A. Lopez and L. Lechuga, both C/A bookkeepers, no one was able to point out any difference on the signatures of the NAWASA officials appearing on the checks compared to their official signatures on file. In fact 3 checks, one of those under question, were presented to the NAWASA treasurer for verification but he could not point out which was his genuine signature. After intent comparison, he pointed on the questioned check as bearing his correct signature. xxx xxx xxx Moreover, the petitioner is barred from setting up the defense of forgery under Section 23 of the Negotiable Instruments Law which provides that:

SEC. 23. FORGED SIGNATURE; EFFECT OF.- When the signature is forged or made without authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto can be acquired through or under such signature unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. because it was guilty of negligence not only before the questioned checks were negotiated but even after the same had already been negotiated. (See Republic v. Equitable Banking Corporation, 10 SCRA 8) The records show that at the time the twenty-three (23) checks were prepared, negotiated, and encashed, the petitioner was using its own personalized checks, instead of the official PNB Commercial blank checks. In the exercise of this special privilege, however, the petitioner failed to provide the needed security measures. That there was gross negligence in the printing of its personalized checks is shown by the following uncontroverted facts, to wit: (1) The petitioner failed to give its printer, Mesina Enterprises, specific instructions relative to the safekeeping and disposition of excess forms, check vouchers, and safety papers; (2) The petitioner failed to retrieve from its printer all spoiled check forms; (3) The petitioner failed to provide any control regarding the paper used in the printing of said checks; (4) The petitioner failed to furnish the respondent drawee bank with samples of typewriting, cheek writing, and print used by its printer in the printing of its checks and of the inks and pens used in signing the same; and (5) The petitioner failed to send a representative to the printing office during the printing of said checks. This gross negligence of the petitioner is very evident from the sworn statement dated June 19, 1969 of Faustino Mesina, Jr., the owner of the printing press which printed the petitioner's personalized checks: xxx xxx xxx 7. Q: Do you have any business transaction with the National Waterworks and Sewerage Authority (NAWASA)?

A: Yes, sir. I have a contract with the NAWASA in printing NAWASA Forms such as NAWASA Check xxx xxx xxx 15. Q: Were you given any ingtruction by the NAWASA in connection with the printing of these check vouchers? A: There is none, sir. No instruction whatsoever was given to me. 16. Q: Were you not advised as to what kind of paper would be used in the check vouchers? A: Only as per sample, sir. xxx xxx xxx 20. Q: Where did you buy this Hammermill Safety check paper? A: From Tan Chiong, a paper dealer with store located at Juan Luna, Binondo, Manila. (In front of the Metropolitan Bank). xxx xxx xxx 24. Q: Were all these check vouchers printed by you submitted to NAWASA? A: Not all, sir. Because we have to make reservations or allowances for spoilage. 25. Q: Out of these vouchers printed by you, how many were spoiled and how many were the

excess printed vouchers?

check

of printing perforating.

and

A: Approximately four hundred (400) sheets, sir. I cannot determine the proportion of the excess and spoiled because the final act of perforating these check vouchers has not yet been done and spoilage can only be determined after this final act of printing. 26. Q: What did you do with these excess check vouchers? A: I keep it under lock and key in my firing cabinet. xxx xxx xxx 28. Q: Were you not instructed by the NAWASA authorities to bum these excess check vouchers? A: No, sir. I was not instructed. 29. Q: What do you intend to do with these excess printed check vouchers? A: I intend to use them for future orders from the xxx xxx xxx 32. Q: In the process of printing the check vouchers ordered by the NAWASA, how many sheets were actually spoiled? A: I cannot approximate, sir. But there are spoilage in the process

33. Q: What did you do with these spoilages? A: Spoiled printed materials are usually thrown out, in the garbage can. 34. Q: Was there any representative of the NAWASA to supervise the printing or watch the printing of these check vouchers? A: None, sir. xxx xxx xxx 39. Q: During the period of printing after the days work, what measures do you undertake to safeguard the mold and other paraphernalia used in the printing of these particular orders of NAWASA? A: Inasmuch as I have an employee who sleeps in the printing shop and at the same time do the guarding, we just leave the mold attached to the machine and the other finished or unfinished work check vouchers are left in the rack so that the work could be continued the following day. The National Bureau of Investigation Report dated November 2, 1970 is even more explicit. Thus xxx xxx xxx 60. We observed also that there is some laxity and loose control in the printing of NAWASA cheeks. We gathered from MESINA

ENTERPRISES, the printing firm that undertook the printing of the check vouchers of NAWASA that NAWASA had no representative at the printing press during the process of the printing and no particular security measure instructions adopted to safeguard the interest of the government in connection with printing of this accountable form. Another factor which facilitated the fraudulent encashment of the twenty-three (23) checks in question was the failure of the petitioner to reconcile the bank statements with its own records. It is accepted banking procedure for the depository bank to furnish its depositors bank statements and debt and credit memos through the mail. The records show that the petitioner requested the respondent drawee bank to discontinue the practice of mailing the bank statements, but instead to deliver the same to a certain Mr. Emiliano Zaporteza. For reasons known only to Mr. Zaporteza however, he was unreasonably delayed in taking prompt deliveries of the said bank statements and credit and debit memos. As a consequence, Mr. Zaporteza failed to reconcile the bank statements with the petitioner's records. If Mr. Zaporteza had not been remiss in his duty of taking the bank statements and reconciling them with the petitioner's records, the fraudulent encashments of the first checks should have been discovered, and further frauds prevented. This negligence was, therefore, the proximate cause of the failure to discover the fraud. Thus, When a person opens a checking account with a bank, he is given blank checks which he may fill out and use whenever he wishes. Each time he issues a check, he should also fill out the check stub to which the check is usually attached. This stub, if properly kept, will contain the number of the check, the date of its issue, the name of the payee and the amount thereof. The drawer would therefore have a complete record of the checks he issues. It is the custom of banks to send to its depositors a monthly statement of the status of their accounts, together with all the cancelled checks which have been cashed by their respective holders. If the depositor has filled out his check stubs properly, a comparison between them and the cancelled checks will reveal any forged check not taken from his checkbook. It is the duty of a depositor to carefully examine the bank's statement, his cancelled checks, his check stubs and other pertinent records within a reasonable time, and to report any errors without unreasonable delay. If his

negligence should cause the bank to honor a forged check or prevent it from recovering the amount it may have already paid on such check, he cannot later complain should the bank refuse to recredit his account with the amount of such check. (First Nat. Bank of Richmond v. Richmond Electric Co., 106 Va. 347, 56 SE 152, 7 LRA, NS 744 [1907]. See also Leather Manufacturers' Bank v. Morgan, 117 US 96, 6 S. Ct. 657 [1886]; Deer Island Fish and Oyster Co. v. First Nat. Bank of Biloxi, 166 Miss. 162, 146 So. 116 [1933]). Campos and Campos, Notes and Selected Cases on Negotiable Instruments Law, 1971, pp. 267-268). This failure of the petitioner to reconcile the bank statements with its cancelled checks was noted by the National Bureau of Investigation in its report dated November 2, 1970: 58. One factor which facilitate this fraud was the delay in the reconciliation of bank (PNB) statements with the NAWASA bank accounts. x x x. Had the NAWASA representative come to the PNB early for the statements and had the bank been advised promptly of the reported bogus check, the negotiation of practically all of the remaining checks on May, 1969, totalling P2,224,736.00 could have been prevented. The records likewise show that the petitioner failed to provide appropriate security measures over its own records thereby laying confidential records open to unauthorized persons. The petitioner's own Fact Finding Committee, in its report submitted to their General manager underscored this laxity of records control. It observed that the "office of Mr. Ongtengco (Cashier No. VI of the Treasury Department at the NAWASA) is quite open to any person known to him or his staff members and that the check writer is merely on top of his table." When confronted with this report at the Anti-Fraud Action Section of the National Bureau of Investigation. Mr. Ongtengco could only state that: A. Generally my order is not to allow anybody to enter my office. Only authorized persons are allowed to enter my office. There are some cases, however, where some persons enter my office because they are following up their checks. Maybe, these persons may have been authorized by Mr. Pantig. Most of the people entering my office are

changing checks as allowed by the Resolution of the Board of Directors of the NAWASA and the Treasurer. The check writer was never placed on my table. There is a place for the check write which is also under lock and key. Q. Is Mr. Pantig authorized to allow unauthorized persons to enter your office? A. No, sir. Q. Why are you tolerating Mr. Pantig admitting unauthorized persons in your office? A. I do not want to embarrass Mr. Pantig. Most of the people following up checks are employees of the NAWASA. Q. Was the authority given by the Board of Directors and the approval by the Treasurer for employees, and other persons to encash their checks carry with it their authority to enter your office? A. No, sir. xxx xxx xxx Q. From the answers that you have given to us we observed that actually there is laxity and poor control on your part with regards to the preparations of check payments inasmuch as you allow unauthorized persons to follow up their vouchers inside your office which may

leakout confidential informations or your books of account. After being apprised of all the shortcomings in your office, as head of the Cashiers' Office of the Treasury Department what remedial measures do you intend to undertake? A. Time and again the Treasurer has been calling our attention not to allow interested persons to hand carry their voucher checks and we are trying our best and if I can do it to follow the instructions to the letter, I will do it but unfortunately the persons who are allowed to enter my office are my co-employees and persons who have connections with our higher ups and I can not possibly antagonize them. Rest assured that even though that everybody will get hurt, I win do my best not to allow unauthorized persons to enter my office. xxx xxx xxx Q. Is it not possible inasmuch as your office is in charge of the posting of check payments in your books that leakage of payments to the banks came from your office? A. I am not aware of it but it only takes us a couple of minutes to process the checks. And there are cases wherein every information about the checks may be obtained from the Accounting Department, Auditing Department, or the Office of the General Manager.

Relying on the foregoing statement of Mr. Ongtengco, the National Bureau of Investigation concluded in its Report dated November 2, 1970 that the fraudulent encashment of the twentythree (23)cheeks in question was an "inside job". ThusWe have all the reasons to believe that this fraudulent act was an inside job or one pulled with inside connivance at NAWASA. As pointed earlier in this report, the serial numbers of these checks in question conform with the numbers in current use of NAWASA, aside from the fact that these fraudulent checks were found to be of the same kind and design as that of NAWASA's own checks. While knowledge as to such facts may be obtained through the possession of a NAWASA check of current issue, an outsider without information from the inside can not possibly pinpoint which of NAWASA's various accounts has sufficient balance to cover all these fraudulent checks. None of these checks, it should be noted, was dishonored for insufficiency of funds. . . Even if the twenty-three (23) checks in question are considered forgeries, considering the petitioner's gross negligence, it is barred from setting up the defense of forgery under Section 23 of the Negotiable Instruments Law. Nonetheless, the petitioner claims that it was the negligence of the respondent Philippine National Bank that was the proximate cause of the loss. The petitioner relies on our ruling in Philippine National Bank v. Court of Appeals(25 SCRA 693) that. Thus, by not returning the cheek to the PCIB, by thereby indicating that the PNB had found nothing wrong with the check and would honor the same, and by actually paying its amount to the PCIB, the PNB induced the latter, not only to believe that the check was genuine and good in every respect, but, also, to pay its amount to Augusto Lim. In other words, the PNB was the primary or proximate cause of the loss, and, hence, may not recover from the PCIB. The argument has no merit. The records show that the respondent drawee bank, had taken the necessary measures in the detection of forged checks and the prevention of their fraudulent encashment. In fact, long before the encashment of the twenty-three (23) checks in question, the respondent Bank had issued constant reminders to all Current Account Bookkeepers informing them of the activities of forgery syndicates. The Memorandum of the Assistant Vice-President and Chief Accountant of the Philippine National Bank dated February 17, 1966 reads in part: SUBJECT: ACTIVITIES SYNDICATE OF FORGERY

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

of Appeals dated October pronouncement as to costs. SO ORDERED.

29,

1982

is

AFFIRMED.

No

Upon complaint of private respondent on February 1, 1974 Ernesto Santos was apprehended by the police authorities and upon investigation he admitted that he stole the check of Gozon, forged his signature and encashed the same with the Bank. Hence Gozon filed the complaint for recovery of the amount of P5,000.00, plus interest, damages, attorney's fees and costs against the bank in the Court of First Instance of Rizal. After the issues were joined and the trial on the merits ensued, a decision was rendered on February 4, 1980, the dispositive part of which reads as follows: WHEREFORE, judgment is hereby rendered in favor of the plaintiff. The defendant is hereby condemned to return to plaintiff the amount of P5,000.00 which it had unlawfully withheld from the latter, with interest at the legal rate from September 22, 1972 until the amount is fully delivered. The defendant is further condemned to pay plaintiff the sum of P2,000.00 as attorney's fees and to pay the costs of this suit. Not satisfied therewith, the bank now filed this petition for review on certiorari in this Court raising the sole legal issue that THE ACT OF RESPONDENT FRANCISCO GOZON, II IN PUTTING HIS CHECK BOOK CONTAINING THE CHECK IN QUESTION INTO THE HANDS OF ERNESTO SANTOS WAS INDEED THE PROXIMATE CAUSE OF THE LOSS, THEREBY PRECLUDING HIM FROM SETTING UP THE DEFENSE OF FORGERY OR WANT 0F AUTHORITY UNDER SECTION 23 OF THE NEGOTIABLE INSTRUMENTS LAW, ACT NO. 3201 The petition is devoid of merit. This Court reproduces with approval the disquisition of the court a quo as follows: 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 change the amount so paid to the account of the depositor whose name was forged' (San Carlos Milling Co. vs. Bank of the P.I., 59 Phil. 59). This rule is absolutely necessary to the circulation of drafts and checks, and is based upon the presumed negligence of the drawee in failing to meet its obligation to know the signature of its correspondent. ... There is nothing inequitable in such a rule. If the paper comes to the drawee in the regular

G.R. No. L-53194 March 14, 1988 PHILIPPINE NATIONAL BANK petitioner, vs. HON. ROMULO S. QUIMPO, Presiding Judge, Court of First Instance of Rizal, Branch XIV, and FRANCISCO S. GOZON II, respondents.

GANCAYCO, J.: On July 3, 1973, Francisco S. Gozon II, who was a depositor of the Caloocan City Branch of the Philippine National Bank, went to the bank in his car accompanied by his friend Ernesto Santos whom he left in the car while he transacted business in the bank. When Santos saw that Gozon left his check book he took a check therefrom, filled it up for the amount of P5,000.00, forged the signature of Gozon, and thereafter he encashed the check in the bank on the same day. The account of Gozon was debited the said amount. Upon receipt of the statement of account from the bank, Gozon asked that the said amount of P5,000.00 should be returned to his account as his signature on the check was forged but the bank refused.

course of business, and he, having the opportunity ascertaining its character, pronounces it to be valid and pays it, it is not only a question of payment under mistake, but payment in neglect of duty which the commercial law places upon him, and the result of his negligence must rest upon him (12 ALR 1901, citing many cases found in I Agbayani, supra). Defendant, however, interposed the defense that it exercised diligence in accordance with the accepted norms of banking practice when it accepted and paid Exhibit "A". It presented evidence that the check had to pass scrutiny by a signature verifier as well as an officer of the bank. A comparison of the signature (Exhibit "A-l") on the forged check (Exhibit "A") with plaintiffs exemplar signatures (Exhibits "5-N" and "5-B") found in the PNB Form 35-A would immediately show the negligence of the employees of the defendant bank. Even a not too careful comparison would immediately arrest one's attention and direct it to the graceful lines of plaintiffs exemplar signatures found in Exhibits "5-A" and "5-B". The formation of the first letter "F" in the exemplars, which could be regarded as artistic, is completely different from the way the same letter is formed in Exhibit "A-l". That alone should have alerted a more careful and prudent signature verifier. The prime duty of a bank is to ascertain the genuineness of the signature of the drawer or the depositor on the check being encashed. 1 It is expected to use reasonable business prudence in accepting and cashing a check presented to it. In this case the findings of facts of the court a quo are conclusive. The trial court found that a comparison of the signature on the forged check and the sample signatures of private respondent show marked differences as the graceful lines in the sample signature which is completely different from those of the signature on the forged check. Indeed the NBI handwriting expert Estelita Santiago Agnes whom the trial court considered to be an "unbiased scientific expert" indicated the marked differences between the signature of private respondent on the sample signatures and the questioned signature. Notwithstanding the testimony of Col. Fernandez, witness for petitioner, advancing the opinion that the questioned signature appears to be genuine, the trial court by merely examining the pictorial report presented by said witness, found a marked difference in the second "c" in Francisco as written on the questioned signature as compared to the sample signatures, and the separation between the "s" and the "c" in the questioned signature while they are connected in the sample signatures. 2

Obviously, petitioner was negligent in encashing said forged check without carefully examining the signature which shows marked variation from the genuine signature of private respondent. In reference to the allegation of the petitioner that it is the negligence of private respondent that is the cause of the loss which he suffered, the trial court held: The act of plaintiff in leaving his checkbook in the car while he went out for a short while can not be considered negligence sufficient to excuse the defendant bank from its own negligence. It should be home in mind that when defendant left his car, Ernesto Santos, a long time classmate and friend remained in the same. Defendant could not have been expected to know that the said Ernesto Santos would remove a check from his checkbook. Defendant had trust in his classmate and friend. He had no reason to suspect that the latter would breach that trust . We agree. Private respondent trustee Ernesto Santos as a classmate and a friend. He brought him along in his car to the bank and he left his personal belongings in the car. Santos however removed and stole a check from his cheek book without the knowledge and consent of private respondent. No doubt private respondent cannot be considered negligent under the circumstances of the case. WHEREFORE, the petition is DISMISSED for lack of merit with costs against petitioner. SO ORDERED.

G.R. No. 92244 February 9, 1993 NATIVIDAD GEMPESAW, petitioner, vs. THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents. L.B. Camins for petitioner. Angara, Abello, Concepcion, Regals & Cruz for private respondent

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. II THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT FINDING AND RULING THAT IT IS THE GROSS AND INEXCUSABLE NEGLIGENCE AND FRAUDULENT ACTS OF THE OFFICIALS AND EMPLOYEES OF THE RESPONDENT BANK IN FORGING THE SIGNATURE OF THE PAYEES AND THE WRONG AND/OR ILLEGAL PAYMENTS MADE TO PERSONS, OTHER THAN TO THE INTENDED PAYEES SPECIFIED IN THE CHECKS, IS THE DIRECT AND PROXIMATE CAUSE OF THE DAMAGE TO PETITIONER WHOSE SAVING (SIC) ACCOUNT WAS DEBITED. III THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT ORDERING THE RESPONDENT BANK TO RESTORE OR RE-CREDIT THE CHECKING ACCOUNT OF 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 her business operations covering a period of two years, petitioner issued, following her usual practice stated above, a total of eighty-two (82) checks in favor of several suppliers. These checks were all presented by the indorsees as holders thereof to, and honored by, the respondent drawee Bank. Respondent drawee Bank correspondingly debited the amounts thereof against petitioner's checking account numbered 30-00038-1. Most of the aforementioned checks were for amounts in excess of her actual obligations to the various payees as shown in their corresponding invoices. To mention a few: . . . 1) in Check No. 621127, dated June 27, 1984 in the amount of P11,895.23 in favor of Kawsek Inc. (Exh. A-60), appellant's actual obligation to said payee was only P895.33 (Exh. A-83); (2) in Check No. 652282 issued on September 18, 1984 in favor of Senson Enterprises in the amount of P11,041.20 (Exh. A-67) appellant's actual obligation to said payee was only P1,041.20 (Exh. 7); (3) in Check No. 589092 dated April 7, 1984 for the amount of P11,672.47 in favor of Marchem (Exh. A-61) appellant's obligation was only P1,672.47 (Exh. B); (4) in Check No. 620450 dated May 10, 1984 in favor of Knotberry for P11,677.10 (Exh. A-31) her actual obligation was only P677.10 (Exhs. C and C-1); (5) in Check No. 651862 dated August 9, 1984 in favor of Malinta Exchange Mart for P11,107.16 (Exh. A-62), her obligation was only P1,107.16 (Exh. D-2); (6) in Check No. 651863 dated August 11, 1984 in favor of Grocer's International Food Corp. in the amount of P11,335.60 (Exh. A-66), her obligation was only P1,335.60 (Exh. E and E1); (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 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.

All the eighty-two (82) checks with forged signatures of the payees were brought to Ernest L. Boon, Chief Accountant of respondent drawee Bank at the Buendia branch, who, without authority therefor, accepted them all for deposit at the Buendia branch to the credit and/or in the accounts of Alfredo Y. Romero and Benito Lam. Ernest L. Boon was a very close friend of Alfredo Y. Romero. Sixty-three (63) out of the eighty-two (82) checks were deposited in Savings Account No. 00844-5 of Alfredo Y. Romero at the respondent drawee Bank's Buendia branch, and four (4) checks in his Savings Account No. 32-81-9 at its Ongpin branch. The rest of the checks were deposited in Account No. 0443-4, under the name of Benito Lam at the 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. This is not a suit by the party whose signature was forged on a check drawn against the drawee bank. The payees are not parties to the case. Rather, it is the drawer, whose signature is genuine, who instituted this action to recover from the drawee bank the money value of eighty-two (82) checks paid out by the drawee bank to holders of those checks where the indorsements of the payees were forged. How and by whom the forgeries were committed are not established on the record, but the respective payees admitted that they did not receive those checks and therefore never indorsed the same. The applicable law is the Negotiable Instruments Law 4 (heretofore referred to as the NIL). Section 23 of the NIL provides: When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be

acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. 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 recrediting of his account. In the case at bar, petitioner admitted that the checks were filled up and completed by her trusted employee, Alicia Galang, and

were 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 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 cannot be presented for payment but it can only be deposited and the drawee bank may only pay to another bank in the payee's or indorser's account. Petitioner likewise contends that banking rules prohibit the drawee bank from having checks with more than one indorsement. The banking rule banning acceptance of checks for deposit or cash payment with more than one indorsement unless cleared by some bank officials does not invalidate the instrument; neither does it invalidate the negotiation or transfer of the said check. In effect, this rule destroys the negotiability of bills/checks by limiting their negotiation by indorsement of only the payee. Under the NIL, the only kind of indorsement which stops the further negotiation of an instrument is a restrictive indorsement which prohibits the further negotiation thereof. Sec. 36. When indorsement restrictive. An indorsement is restrictive which either (a) Prohibits further instrument; or xxx xxx xxx In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written in express words at the back of the instrument, so that any subsequent party may be forewarned that ceases to be negotiable. However, the restrictive indorsee negotiation of the

acquires the right to receive payment and bring any action thereon as any indorser, but he can no longer transfer his rights as such indorsee where the form of the indorsement does not authorize him to do so. 12 Although the holder of a check cannot compel a drawee bank to honor it because there is no privity between them, as far as the drawer-depositor is concerned, such bank may not legally refuse to honor a negotiable bill of exchange or a check drawn against it with more than one indorsement if there is nothing irregular with the bill or check and the drawer has sufficient funds. The drawee cannot be compelled to accept or pay the check by the drawer or any holder because as a drawee, he incurs no liability on the check unless he accepts it. But the drawee will make itself liable to a suit for damages at the instance of the drawer for wrongful dishonor of the bill or check. Thus, it is clear that under the NIL, petitioner is precluded from raising the defense of forgery by reason of her gross negligence. But under Section 196 of the NIL, any case not provided for in the Act shall be governed by the provisions of existing legislation. Under the laws of quasi-delict, she cannot point to the negligence of the respondent drawee Bank in the selection and supervision of its employees as being the cause of the loss because negligence is the proximate cause thereof and under Article 2179 of the Civil Code, she may not be awarded damages. However, under Article 1170 of the same Code the respondent drawee Bank may be held liable for damages. The article provides Those who in the performance of their obligations are guilty of fraud, negligence or delay, and those who in any manner contravene the tenor thereof, are liable for damages. There is no question that there is a contractual relation between petitioner as depositor (obligee) and the respondent drawee bank as the obligor. In the performance of its obligation, the drawee bank is bound by its internal banking rules and regulations which form part of any contract it enters into with any of its depositors. When it violated its internal rules that second endorsements are not to be accepted without the approval of its branch managers and it did accept the same upon the mere approval of Boon, a chief accountant, it contravened the tenor of its obligation at the very least, if it were not actually guilty of fraud or negligence. Furthermore, the fact that the respondent drawee Bank did not discover the irregularity with respect to the acceptance of checks with second indorsement for deposit even without the approval of the branch manager despite periodic inspection conducted by a team of auditors from the main office constitutes negligence on the part of the bank in carrying out its obligations to its depositors. Article 1173 provides The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the

circumstance of the persons, of the time and of the place. . . . We hold that banking business is so impressed with public interest where the trust and confidence of the public in general is of paramount importance such that the appropriate standard of diligence must be a high degree of diligence, if not the utmost diligence. Surely, respondent drawee Bank cannot claim it exercised such a degree of diligence that is required of it. There is no way We can allow it now to escape liability for such negligence. Its liability as obligor is not merely vicarious but primary wherein the defense of exercise of due diligence in the selection and supervision of its employees is of no moment. Premises considered, respondent drawee Bank is adjudged liable to share the loss with the petitioner on a fifty-fifty ratio in accordance with Article 172 which provides: Responsibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by the courts according to the circumstances. With the foregoing provisions of the Civil Code being relied upon, it is being made clear that the decision to hold the drawee bank liable is based on law and substantial justice and not on mere equity. And although the case was brought before the court not on breach of contractual obligations, the courts are not precluded from applying to the circumstances of the case the laws pertinent thereto. Thus, the fact that petitioner's negligence was found to be the proximate cause of her loss does not preclude her from recovering damages. The reason why the decision dealt on a discussion on proximate cause is due to the error pointed out by petitioner as allegedly committed by the respondent court. And in breaches of contract under Article 1173, due diligence on the part of the defendant is not a defense. PREMISES CONSIDERED, the case is hereby ordered REMANDED to the trial court for the reception of evidence to determine the exact amount of loss suffered by the petitioner, considering that she partly benefited from the issuance of the questioned checks since the obligation for which she issued them were apparently extinguished, such that only the excess amount over and above the total of these actual obligations must be considered as loss of which one half must be paid by respondent drawee bank to herein petitioner. SO ORDERED.

Where thirty checks bearing forged endorsements are paid, who bears the loss, the drawer, the drawee bank or the collecting bank? This is the main issue in these consolidated petitions for review assailing the decision of the Court of Appeals in "Province of Tarlac v. Philippine National Bank v. Associated Bank v. Fausto Pangilinan, et. al." (CA-G.R. No. CV No. 17962). 1 The facts of the case are as follows: The Province of Tarlac maintains a current account with the Philippine National Bank (PNB) Tarlac Branch where the provincial funds are deposited. Checks issued by the Province are signed by the Provincial Treasurer and countersigned by the Provincial Auditor or the Secretary of the Sangguniang Bayan. A portion of the funds of the province is allocated to the Concepcion Emergency Hospital. 2 The allotment checks for said government hospital are drawn to the order of "Concepcion Emergency Hospital, Concepcion, Tarlac" or "The Chief, Concepcion Emergency Hospital, Concepcion, Tarlac." The checks are released by the Office of the Provincial Treasurer and received for the hospital by its administrative officer and cashier. In January 1981, the were post-audited discovered that the checks drawn by the books of account of the Provincial Treasurer by the Provincial Auditor. It was then hospital did not receive several allotment Province.

G.R. No. 107382/G.R. No. 107612

January 31, 1996

ASSOCIATED BANK, petitioner, vs. HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE NATIONAL BANK, respondents. xxxxxxxxxxxxxxxxxxxxx G.R. No. 107612 January 31, 1996

On February 19, 1981, the Provincial Treasurer requested the manager of the PNB to return all of its cleared checks which were issued from 1977 to 1980 in order to verify the regularity of their encashment. After the checks were examined, the Provincial Treasurer learned that 30 checks amounting to P203,300.00 were encashed by one Fausto Pangilinan, with the Associated Bank acting as collecting bank. It turned out that Fausto Pangilinan, who was the administrative officer and cashier of payee hospital until his retirement on February 28, 1978, collected the questioned checks from the office of the Provincial Treasurer. He claimed to be assisting or helping the hospital follow up the release of the checks and had official receipts. 3Pangilinan sought to encash the first check 4 with Associated Bank. However, the manager of Associated Bank refused and suggested that Pangilinan deposit the check in his personal savings account with the same bank. Pangilinan was able to withdraw the money when the check was cleared and paid by the drawee bank, PNB. After forging the signature of Dr. Adena Canlas who was chief of the payee hospital, Pangilinan followed the same procedure for the second check, in the amount of P5,000.00 and dated April 20, 1978, 5 as well as for twenty-eight other checks of various amounts and on various dates. The last check negotiated by Pangilinan was for f8,000.00 and dated February 10, 1981. 6 All the checks bore the stamp of Associated Bank which reads "All prior endorsements guaranteed ASSOCIATED BANK."

PHILIPPINE NATIONAL BANK, petitioner, vs. HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and ASSOCIATED BANK, respondents. DECISION ROMERO, J.:

Jesus David, the manager of Associated Bank testified that Pangilinan made it appear that the checks were paid to him for certain projects with the hospital. 7 He did not find as irregular the fact that the checks were not payable to Pangilinan but to the Concepcion Emergency Hospital. While he admitted that his wife and Pangilinan's wife are first cousins, the manager denied having given Pangilinan preferential treatment on this account. 8 On February 26, 1981, the Provincial Treasurer wrote the manager of the PNB seeking the restoration of the various amounts debited from the current account of the Province. 9 In turn, the PNB manager demanded reimbursement from the Associated Bank on May 15, 1981. 10 As both banks resisted payment, the Province of Tarlac brought suit against PNB which, in turn, impleaded Associated Bank as third-party defendant. The latter then filed a fourth-party complaint against Adena Canlas and Fausto Pangilinan. 11 After trial on the merits, the lower court rendered its decision on March 21, 1988, disposing as follows: WHEREFORE, in view of the foregoing, judgment is hereby rendered: 1. On the basic complaint, in favor of plaintiff Province of Tarlac and against defendant Philippine National Bank (PNB), ordering the latter to pay to the former, the sum of Two Hundred Three Thousand Three Hundred (P203,300.00) Pesos with legal interest thereon from March 20, 1981 until fully paid; 2. On the third-party complaint, in favor of defendant/third-party plaintiff Philippine National Bank (PNB) and against third-party defendant/fourth-party plaintiff Associated Bank ordering the latter to reimburse to the former the amount of Two Hundred Three Thousand Three Hundred (P203,300.00) Pesos with legal interests thereon from March 20, 1981 until fully paid;. 3. On the fourth-party complaint, the same is hereby ordered dismissed for lack of cause of action as against fourth-party defendant Adena Canlas and lack of jurisdiction over the person of fourth-party defendant Fausto Pangilinan as against the latter. 4. On the counterclaims on the complaint, third-party complaint and fourth-party complaint, the same are hereby ordered dismissed for lack of merit. SO ORDERED.
12

PNB and Associated Bank appealed to the Court of Appeals. 13 Respondent court affirmed the trial court's decision in toto on September 30, 1992. Hence these consolidated petitions which seek a reversal of respondent appellate court's decision. PNB assigned two errors. First, the bank contends that respondent court erred in exempting the Province of Tarlac from liability when, in fact, the latter was negligent because it delivered and released the questioned checks to Fausto Pangilinan who was then already retired as the hospital's cashier and administrative officer. PNB also maintains its innocence and alleges that as between two innocent persons, the one whose act was the cause of the loss, in this case the Province of Tarlac, bears the loss. Next, PNB asserts that it was error for the court to order it to pay the province and then seek reimbursement from Associated Bank. According to petitioner bank, respondent appellate Court should have directed Associated Bank to pay the adjudged liability directly to the Province of Tarlac to avoid circuity. 14 Associated Bank, on the other hand, argues that the order of liability should be totally reversed, with the drawee bank (PNB) solely and ultimately bearing the loss. Respondent court allegedly erred in applying Section 23 of the Philippine Clearing House Rules instead of Central Bank Circular No. 580, which, being an administrative regulation issued pursuant to law, has the force and effect of law. 15 The PCHC Rules are merely contractual stipulations among and between member-banks. As such, they cannot prevail over the aforesaid CB Circular. It likewise contends that PNB, the drawee bank, is estopped from asserting the defense of guarantee of prior indorsements against Associated Bank, the collecting bank. In stamping the guarantee (for all prior indorsements), it merely followed a mandatory requirement for clearing and had no choice but to place the stamp of guarantee; otherwise, there would be no clearing. The bank will be in a "no-win" situation and will always bear the loss as against the drawee bank. 16 Associated Bank also claims that since PNB already cleared and paid the value of the forged checks in question, it is now estopped from asserting the defense that Associated Bank guaranteed prior indorsements. The drawee bank allegedly has the primary duty to verify the genuineness of payee's indorsement before paying the check. 17 While both banks are innocent of the forgery, Associated Bank claims that PNB was at fault and should solely bear the loss because it cleared and paid the forged checks. xxx xxx xxx

The case at bench concerns checks payable to the order of Concepcion Emergency Hospital or its Chief. They were properly issued and bear the genuine signatures of the drawer, the Province of Tarlac. The infirmity in the questioned checks lies in the payee's (Concepcion Emergency Hospital) indorsements which are forgeries. At the time of their indorsement, the checks were order instruments. Checks having forged indorsements should be differentiated from forged checks or checks bearing the forged signature of the drawer. Section 23 of the Negotiable Instruments Law (NIL) provides: Sec. 23. FORGED SIGNATURE, EFFECT OF. When a signature is forged or made without authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. A forged signature, whether it be that of the drawer or the payee, is wholly inoperative and no one can gain title to the instrument through it. A person whose signature to an instrument was forged was never a party and never consented to the contract which allegedly gave rise to such instrument. 18 Section 23 does not avoid the instrument but only the forged signature. 19 Thus, a forged indorsement does not operate as the payee's indorsement. The exception to the general rule in Section 23 is where "a party against whom it is sought to enforce a right is precluded from setting up the forgery or want of authority." Parties who warrant or admit the genuineness of the signature in question and those who, by their acts, silence or negligence are estopped from setting up the defense of forgery, are precluded from using this defense. Indorsers, persons negotiating by delivery and acceptors are warrantors of the genuineness of the signatures on the instrument. 20 In bearer instruments, the signature of the payee or holder is unnecessary to pass title to the instrument. Hence, when the indorsement is a forgery, only the person whose signature is forged can raise the defense of forgery against a holder in due course. 21 The checks involved in this case are order instruments, hence, the following discussion is made with reference to the effects of a forged indorsement on an instrument payable to order. 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 holder's indorsement is

forged, all parties prior to the forgery may raise the real defense of forgery against all parties subsequent thereto. 22 An indorser of an order instrument warrants "that the instrument is genuine and in all respects what it purports to be; that he has a good title to it; that all prior parties had capacity to contract; and that the instrument is at the time of his indorsement valid and subsisting." 23 He cannot interpose the defense that signatures prior to him are forged. A collecting bank where a check is deposited and which indorses the check upon presentment with the drawee bank, is such an indorser. So even if the indorsement on the check deposited by the banks's client is forged, the collecting bank is bound by his warranties as an indorser and cannot set up the defense of forgery as against the drawee bank. The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay the check to the order of the payee. The drawer's instructions are reflected on the face and by the terms of the check. Payment under a forged indorsement is not to the drawer's 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 customer's (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. 24 The general rule then is that the drawee bank may not debit the drawer's account and is not entitled to indemnification from the drawer. 25 The risk of loss must perforce fall on the drawee bank. However, if the drawee bank can prove a failure by the customer/drawer to exercise ordinary care that substantially contributed to the making of the forged signature, the drawer is precluded from asserting the forgery. If at the same time the drawee bank was also negligent to the point of substantially contributing to the loss, then such loss from the forgery can be apportioned between the negligent drawer and the negligent bank. 26 In cases involving a forged check, where the drawer's signature is forged, the drawer can recover from the drawee bank. No drawee bank has a right to pay a forged check. If it does, it shall have to recredit the amount of the check to the account of the drawer. The liability chain ends with the drawee bank whose responsibility it is to know the drawer's signature since the latter is its customer. 27 In cases involving checks with forged indorsements, such as the present petition, the chain of liability does not end with the drawee bank. The drawee bank may not debit the account of the drawer but may generally pass liability back through the collection chain to the party who took from the forger and, of course, to the forger himself, if available. 28 In other words, the drawee bank canseek reimbursement or a return of the amount it paid from the presentor bank or person. 29 Theoretically, the latter can demand reimbursement from the person who indorsed

the check to it and so on. The loss falls on the party who took the check from the forger, or on the forger himself. In this case, the checks were indorsed by the collecting bank (Associated Bank) to the drawee bank (PNB). The former will necessarily be liable to the latter for the checks bearing forged indorsements. If the forgery is that of the payee's or holder's indorsement, the collecting bank is held liable, without prejudice to the latter proceeding against the forger. Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the drawee bank. The former must necessarily return the money paid by the latter because it was paid wrongfully. 30 More importantly, by reason of the statutory warranty of a general indorser in section 66 of the Negotiable Instruments Law, a collecting bank which indorses a check bearing a forged indorsement and presents it to the drawee bank guarantees all prior indorsements, including the forged indorsement. It warrants that the instrument is genuine, and that it is valid and subsisting at the time of his indorsement. Because the indorsement is a forgery, the collecting bank commits a breach of this warranty and will be accountable to the drawee bank. This liability scheme operates without regard to fault on the part of the collecting/presenting bank. Even if the latter bank was not negligent, it would still be liable to the drawee bank because of its indorsement. The Court has consistently ruled that "the collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements." 31 The drawee bank is not similarly situated as the collecting bank because the former makes no warranty as to the genuineness. of any indorsement. 32 The drawee bank's duty is but to verify the genuineness of the drawer's signature and not of the indorsement because the drawer is its client. Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the check. The bank knows him, his address and history because he is a client. It has taken a risk on his deposit. The bank is also in a better position to detect forgery, fraud or irregularity in the indorsement. Hence, the drawee bank can recover the amount paid on the check bearing a forged indorsement from the collecting bank. However, a drawee bank has the duty to promptly inform the presentor of the forgery upon discovery. If the drawee bank delays in informing the presentor of the forgery, thereby depriving said presentor of the right to recover from the forger, the former is deemed negligent and can no longer recover from the presentor.33

Applying these rules to the case at bench, PNB, the drawee bank, cannot debit the current account of the Province of Tarlac because it paid checks which bore forged indorsements. However, if the Province of Tarlac as drawer was negligent to the point of substantially contributing to the loss, then the drawee bank PNB can charge its account. If both drawee bank-PNB and drawer-Province of Tarlac were negligent, the loss should be properly apportioned between them. The loss incurred by drawee bank-PNB can be passed on to the collecting bank-Associated Bank which presented and indorsed the checks to it. Associated Bank can, in turn, hold the forger, Fausto Pangilinan, liable. If PNB negligently delayed in informing Associated Bank of the forgery, thus depriving the latter of the opportunity to recover from the forger, it forfeits its right to reimbursement and will be made to bear the loss. After careful examination of the records, the Court finds that the Province of Tarlac was equally negligent and should, therefore, share the burden of loss from the checks bearing a forged indorsement. The Province of Tarlac permitted Fausto Pangilinan to collect the checks when the latter, having already retired from government service, was no longer connected with the hospital. With the exception of the first check (dated January 17, 1978), all the checks were issued and released after Pangilinan's retirement on February 28, 1978. After nearly three years, the Treasurer's office was still releasing the checks to the retired cashier. In addition, some of the aid allotment checks were released to Pangilinan and the others to Elizabeth Juco, the new cashier. The fact that there were now two persons collecting the checks for the hospital is an unmistakable sign of an irregularity which should have alerted employees in the Treasurer's office of the fraud being committed. There is also evidence indicating that the provincial employees were aware of Pangilinan's retirement and consequent dissociation from the hospital. Jose Meru, the Provincial Treasurer, testified:. ATTY. MORGA: Q Now, is it true that for a given month there were two releases of checks, one went to Mr. Pangilinan and one went to Miss Juco? JOSE MERU: A Yes, sir. Q Will you please tell us how at the time (sic) when the authorized representative of Concepcion Emergency Hospital is and was supposed to be Miss Juco? A Well, as far as my investigation show (sic) the assistant cashier told me that Pangilinan represented

himself as also authorized to help in the release of these checks and we were apparently misled because they accepted the representation of Pangilinan that he was helping them in the release of the checks and besides according to them they were, Pangilinan, like the rest, was able to present an official receipt to acknowledge these receipts and according to them since this is a government check and believed that it will eventually go to the hospital following the standard procedure of negotiating government checks, they released the checks to Pangilinan aside from Miss Juco.34 The failure of the Province of Tarlac to exercise due care contributed to a significant degree to the loss tantamount to negligence. Hence, the Province of Tarlac should be liable for part of the total amount paid on the questioned checks. The drawee bank PNB also breached its duty to pay only according to the terms of the check. Hence, it cannot escape liability and should also bear part of the loss. As earlier stated, PNB can recover from the collecting bank. In the case of Associated Bank v. CA, 35 six crossed checks with forged indorsements were deposited in the forger's account with the collecting bank and were later paid by four different drawee banks. The Court found the collecting bank (Associated) to be negligent and held: 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. . . . The situation in the case at bench is analogous to the above case, for it was not the payee who deposited the checks with the collecting bank. Here, the checks were all payable to Concepcion Emergency Hospital but it was Fausto Pangilinan who deposited the checks in his personal savings account. Although Associated Bank claims that the guarantee stamped on the checks (All prior and/or lack of endorsements guaranteed) is merely a requirement forced upon it by clearing house rules, it cannot but remain liable. The stamp guaranteeing prior indorsements is not an empty rubric which a bank must fulfill for the sake of convenience. A bank is not required to accept all the checks negotiated to it. It is within the bank's discretion to receive a check for no banking institution would consciously or deliberately accept a check bearing a forged indorsement. When a check is deposited with the collecting bank, it takes a risk on its depositor. It is only logical that this bank be held accountable for checks deposited by its customers. A delay in informing the collecting bank (Associated Bank) of the forgery, which deprives it of the opportunity to go after the

forger, signifies negligence on the part of the drawee bank (PNB) and will preclude it from claiming reimbursement. It is here that Associated Bank's assignment of error concerning C.B. Circular No. 580 and Section 23 of the Philippine Clearing House Corporation Rules comes to fore. Under Section 4(c) of CB Circular No. 580, items bearing a forged endorsement shall be returned within twenty-Sour (24) hours after discovery of the forgery but in no event beyond the period fixed or provided by law for filing of a legal action by the returning bank. Section 23 of the PCHC Rules deleted the requirement that items bearing a forged endorsement should be returned within twenty-four hours. Associated Bank now argues that the aforementioned Central Bank Circular is applicable. Since PNB did not return the questioned checks within twenty-four hours, but several days later, Associated Bank alleges that PNB should be considered negligent and not entitled to reimbursement of the amount it paid on the checks. The Court deems it unnecessary to discuss Associated Bank's assertions that CB Circular No. 580 is an administrative regulation issued pursuant to law and as such, must prevail over the PCHC rule. The Central Bank circular was in force for all banks until June 1980 when the Philippine Clearing House Corporation (PCHC) was set up and commenced operations. Banks in Metro Manila were covered by the PCHC while banks located elsewhere still had to go through Central Bank Clearing. In any event, the twenty-fourhour return rule was adopted by the PCHC until it was changed in 1982. The contending banks herein, which are both branches in Tarlac province, are therefore not covered by PCHC Rules but by CB Circular No. 580. Clearly then, the CB circular was applicable when the forgery of the checks was discovered in 1981. The rule mandates that the checks be returned within twenty-four hours after discovery of the forgery but in no event beyond the period fixed by law for filing a legal action. The rationale of the rule is to give the collecting bank (which indorsed the check) adequate opportunity to proceed against the forger. If prompt notice is not given, the collecting bank maybe prejudiced and lose the opportunity to go after its depositor. The Court finds that even if PNB did not return the questioned checks to Associated Bank within twenty-four hours, as mandated by the rule, PNB did not commit negligent delay. Under the circumstances, PNB gave prompt notice to Associated Bank and the latter bank was not prejudiced in going after Fausto Pangilinan. After the Province of Tarlac informed PNB of the forgeries, PNB necessarily had to inspect the checks and conduct its own investigation. Thereafter, it requested the Provincial Treasurer's office on March 31, 1981 to return the checks for verification. The Province of Tarlac returned the checks only on April 22, 1981. Two days later, Associated Bank received the checks from PNB. 36 Associated Bank was also furnished a copy of the Province's letter of demand to PNB dated March 20, 1981, thus giving it notice of the forgeries. At this time, however, Pangilinan's account with Associated had only P24.63 in it. 37 Had Associated Bank decided to debit Pangilinan's account, it could not have recovered the amounts paid on the questioned checks. In addition, while

Associated Bank filed a fourth-party complaint against Fausto Pangilinan, it did not present evidence against Pangilinan and even presented him as its rebuttal witness. 38 Hence, Associated Bank was not prejudiced by PNB's failure to comply with the twenty-four-hour return rule. Next, Associated Bank contends that PNB is estopped from requiring reimbursement because the latter paid and cleared the checks. The Court finds this contention unmeritorious. Even if PNB cleared and paid the checks, it can still recover from Associated Bank. This is true even if the payee's Chief Officer who was supposed to have indorsed the checks is also a customer of the drawee bank. 39 PNB's duty was to verify the genuineness of the drawer's signature and not the genuineness of payee's indorsement. Associated Bank, as the collecting bank, is the entity with the duty to verify the genuineness of the payee's indorsement. PNB also avers that respondent court erred in adjudging circuitous liability by directing PNB to return to the Province of Tarlac the amount of the checks and then directing Associated Bank to reimburse PNB. The Court finds nothing wrong with the mode of the award. The drawer, Province of Tarlac, is a clientor customer of the PNB, not of Associated Bank. There is no privity of contract between the drawer and the collecting bank. The trial court made PNB and Associated Bank liable with legal interest from March 20, 1981, the date of extrajudicial demand made by the Province of Tarlac on PNB. The payments to be made in this case stem from the deposits of the Province of Tarlac in its current account with the PNB. Bank deposits are considered under the law as loans. 40 Central Bank Circular No. 416 prescribes a twelve percent (12%) interest per annum for loans, forebearance of money, goods or credits in the absence of express stipulation. Normally, current accounts are likewise interest-bearing, by express contract, thus excluding them from the coverage of CB Circular No. 416. In this case, however, the actual interest rate, if any, for the current account opened by the Province of Tarlac with PNB was not given in evidence. Hence, the Court deems it wise to affirm the trial court's use of the legal interest rate, or six percent (6%) per annum. The interest rate shall be computed from the date of default, or the date of judicial or extrajudicial demand. 41 The trial court did not err in granting legal interest from March 20, 1981, the date of extrajudicial demand. The Court finds as reasonable, the proportionate sharing of fifty percent - fifty percent (50%-50%). Due to the negligence of the Province of Tarlac in releasing the checks to an unauthorized person (Fausto Pangilinan), in allowing the retired hospital cashier to receive the checks for the payee hospital for a period close to three years and in not properly ascertaining why the retired hospital cashier was collecting checks for the payee hospital in addition to the hospital's real cashier, respondent Province contributed to the loss amounting to P203,300.00 and shall be liable to the PNB for fifty (50%) percent thereof. In effect, the Province of Tarlac can only recover fifty percent (50%) of P203,300.00 from PNB.

The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00. It is liable on its warranties as indorser of the checks which were deposited by Fausto Pangilinan, having guaranteed the genuineness of all prior indorsements, including that of the chief of the payee hospital, Dr. Adena Canlas. Associated Bank was also remiss in its duty to ascertain the genuineness of the payee's indorsement. IN VIEW OF THE FOREGOING, the petition for review filed by the Philippine National Bank (G.R. No. 107612) is hereby PARTIALLY GRANTED. The petition for review filed by the Associated Bank (G.R. No. 107382) is hereby DENIED. The decision of the trial court is MODIFIED. The Philippine National Bank shall pay fifty percent (50%) of P203,300.00 to the Province of Tarlac, with legal interest from March 20, 1981 until the payment thereof. Associated Bank shall pay fifty percent (50%) of P203,300.00 to the Philippine National Bank, likewise, with legal interest from March 20, 1981 until payment is made. SO ORDERED.

represented by ROMEO LIPANA, its President & General Manager, respondents.

HERMOSISIMA, JR., J.: Challenged in this petition for review is the Decision dated February 28, 1991 1 rendered by public respondent Court of Appeals which affirmed the Decision dated November 15, 1985 of the Regional Trial Court, National Capital Judicial Region, Branch CLX (160), Pasig City, in Civil Case No. 27288 entitled "Rommel's Marketing Corporation, etc. v. Philippine Bank of Commerce, now absorbed by Philippine Commercial and Industrial Bank." The case stemmed from a complaint filed by the private respondent Rommel's Marketing Corporation (RMC for brevity), represented by its President and General Manager Romeo Lipana, to recover from the former Philippine Bank of Commerce (PBC for brevity), now absorbed by the Philippine Commercial International Bank, the sum of P304,979.74 representing various deposits it had made in its current account with said bank but which were not credited to its account, and were instead deposited to the account of one Bienvenido Cotas, allegedly due to the gross and inexcusable negligence of the petitioner bank. RMC maintained two (2) separate current accounts, Current Account Nos. 53-01980-3 and 53-01748-7, with the Pasig Branch of PBC in connection with its business of selling appliances. In the ordinary and usual course of banking operations, current account deposits are accepted by the bank on the basis of deposit slips prepared and signed by the depositor, or the latter's agent or representative, who indicates therein the current account number to which the deposit is to be credited, the name of the depositor or current account holder, the date of the deposit, and the amount of the deposit either in cash or checks. The deposit slip has an upper portion or stub, which is detached and given to the depositor or his agent; the lower portion is retained by the bank. In some instances, however, the deposit slips are prepared in duplicate by the depositor. The original of the deposit slip is retained by the bank, while the duplicate copy is returned or given to the depositor. From May 5, 1975 to July 16, 1976, petitioner Romeo Lipana claims to have entrusted RMC funds in the form of cash totalling P304,979.74 to his secretary, Irene Yabut, for the purpose of depositing said funds in the current accounts of RMC with PBC. It turned out, however, that these deposits, on all occasions, were not credited to RMC's account but were instead deposited to Account No. 53-01734-7 of Yabut's husband, Bienvenido Cotas who likewise maintains an account with the same bank. During this period, petitioner bank had, however, been regularly furnishing private respondent with monthly statements showing its current accounts balances. Unfortunately, it had never been the practice of Romeo Lipana to check these monthly statements of account reposing complete trust and confidence on petitioner bank.

Irene Yabut's modus operandi is far from complicated. She would accomplish two (2) copies of the deposit slip, an original and a duplicate. The original showed the name of her husband as depositor and his current account number. On the duplicate copy was written the account number of her husband but the name of the account holder was left blank. PBC's teller, Azucena Mabayad, would, however, validate and stamp both the original and the duplicate of these deposit slips retaining only the original copy despite the lack of information on the duplicate slip. The second copy was kept by Irene Yabut allegedly for record purposes. After validation, Yabut would then fill up the name of RMC in the space left blank in the duplicate copy and change the account number written thereon, which is that of her husband's, and make it appear to be RMC's account number, i.e., C.A. No. 53-01980-3. With the daily remittance records also prepared by Ms. Yabut and submitted to private respondent RMC together with the validated duplicate slips with the latter's name and account number, she made her company believe that all the while the amounts she deposited were being credited to its account when, in truth and in fact, they were being deposited by her and credited by the petitioner bank in the account of Cotas. This went on in a span of more than one (1) year without private respondent's knowledge. Upon discovery of the loss of its funds, RMC demanded from petitioner bank the return of its money, but as its demand went unheeded, it filed a collection suit before the Regional Trial Court of Pasig, Branch 160. The trial court found petitioner bank negligent and ruled as follows: WHEREFORE, judgment is hereby rendered sentencing defendant Philippine Bank of Commerce, now absorbed by defendant Philippine Commercial & Industrial Bank, and defendant Azucena Mabayad to pay the plaintiff, jointly and severally, and without prejudice to any criminal action which may be instituted if found warranted: 1. The sum of P304,979.72, representing plaintiffs lost deposit, plus interest thereon at the legal rate from the filing of the complaint; 2. A sum equivalent to 14% thereof, as exemplary damages; 3. A sum equivalent to 25% of the total amount due, as and for attorney's fees; and 4. Costs. Defendants' counterclaim dismissed for lack of merit. 2 is hereby

G.R. No. 97626 March 14, 1997 PHILIPPINE BANK OF COMMERCE, now absorbed by PHILIPPINE COMMERCIAL INTERNATIONAL BANK, ROGELIO LACSON, DIGNA DE LEON, MARIA ANGELITA PASCUAL, et al., petitioners, vs. THE COURT OF APPEALS, ROMMEL'S MARKETING CORP.,

On appeal, the appellate court affirmed the foregoing decision with modifications, viz:

WHEREFORE, the decision appealed from herein is MODIFIED in the sense that the awards of exemplary damages and attorney's fees specified therein are eliminated and instead, appellants are ordered to pay plaintiff, in addition to the principal sum of P304,979.74 representing plaintiff's lost deposit plus legal interest thereon from the filing of the complaint, P25,000.00 attorney's fees and costs in the lower court as well as in this Court. 3 Hence, this petition anchored on the following grounds: 1) The proximate cause of the loss is the negligence of respondent Rommel Marketing Corporation and Romeo Lipana in entrusting cash to a dishonest employee. 2) The failure of respondent Rommel Marketing Corporation to cross-check the bank's statements of account with its own records during the entire period of more than one (1) year is the proximate cause of the commission of subsequent frauds and misappropriation committed by Ms. Irene Yabut. 3) The duplicate copies of the deposit slips presented by respondent Rommel Marketing Corporation are falsified and are not proof that the amounts appearing thereon were deposited to respondent Rommel Marketing Corporation's account with the bank, 4) The duplicate copies of the deposit slips were used by Ms. Irene Yabut to cover up her fraudulent acts against respondent Rommel Marketing Corporation, and not as records of deposits she made with the bank. 4 The petition has no merit. Simply put, the main issue posited before us is: What is the proximate cause of the loss, to the tune of P304,979.74, suffered by the private respondent RMC petitioner bank's negligence or that of private respondent's? Petitioners submit that the proximate cause of the loss is the negligence of respondent RMC and Romeo Lipana in entrusting cash to a dishonest employee in the person of Ms. Irene Yabut. 5 According to them, it was impossible for the bank to know that the money deposited by Ms. Irene Yabut belong to RMC; neither was the bank forewarned by RMC that Yabut will be depositing cash to its account. Thus, it was impossible for the bank to know the fraudulent design of Yabut considering that her husband, Bienvenido Cotas, also maintained an account with the bank. For the bank to inquire into the ownership of the cash

deposited by Ms. Irene Yabut would be irregular. Otherwise stated, it was RMC's negligence in entrusting cash to a dishonest employee which provided Ms. Irene Yabut the opportunity to defraud RMC. 6 Private respondent, on the other hand, maintains that the proximate cause of the loss was the negligent act of the bank, thru its teller Ms. Azucena Mabayad, in validating the deposit slips, both original and duplicate, presented by Ms. Yabut to Ms. Mabayad, notwithstanding the fact that one of the deposit slips was not completely accomplished. We sustain the private respondent. Our law on quasi-delicts states: Art. 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a quasidelict and is governed by the provisions of this Chapter. There are three elements of a quasi-delict: (a) damages suffered by the plaintiff; (b) fault or negligence of the defendant, or some other person for whose acts he must respond; and (c) the connection of cause and effect between the fault or negligence of the defendant and the damages incurred by the plaintiff. 7 In the case at bench, there is no dispute as to the damage suffered by the private respondent (plaintiff in the trial court) RMC in the amount of P304,979.74. It is in ascribing fault or negligence which caused the damage where the parties point to each other as the culprit. Negligence is the omission to do something which a reasonable man, guided by those considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of something which a prudent and reasonable man would do. The seventy-eight (78)-year-old, yet still relevant, case of Picart v. Smith, 8 provides the test by which to determine the existence of negligence in a particular case which may be stated as follows: Did the defendant in doing the alleged negligent act use that reasonable care and caution which an ordinarily prudent person would have used in the same situation? If not, then he is guilty of negligence. The law here in effect adopts the standard supposed to be supplied by the imaginary conduct of the discreet paterfamilias of the Roman law. The existence of negligence in a given case is not determined by reference to the personal judgment of the actor in the situation before him. The law considers what would be reckless, blameworthy, or negligent in the man of ordinary intelligence and prudence and determines liability by that. Applying the above test, it appears that the bank's teller, Ms. Azucena Mabayad, was negligent in validating, officially stamping

and signing all the deposit slips prepared and presented by Ms. Yabut, despite the glaring fact that the duplicate copy was not completely accomplished contrary to the self-imposed procedure of the bank with respect to the proper validation of deposit slips, original or duplicate, as testified to by Ms. Mabayad herself, thus: Q: Now, as teller of PCIB, Pasig Branch, will you please tell us Mrs. Mabayad your important duties and functions? A: I accept current and savings deposits from depositors and encashments. Q: Now in the handling of current account deposits of bank clients, could you tell us the procedure you follow? A: The client or depositor or the authorized representative prepares a deposit slip by filling up the deposit slip with the name, the account number, the date, the cash breakdown, if it is deposited for cash, and the check number, the amount and then he signs the deposit slip. Q: Now, how many deposit slips do you normally require in accomplishing current account deposit, Mrs. Mabayad? A: The bank requires only one copy of the deposit although some of our clients prepare the deposit slip in duplicate. Q: Now in accomplishing current account deposits from your clients, what do you issue to the depositor to evidence the deposit made?

A: We issue or we give to the clients the depositor's stub as a receipt of the deposit. Q: And who prepares the deposit slip? A: The depositor or the authorized representative sir? Q: Where does the depositor's stub comes (sic) from Mrs. Mabayad, is it with the deposit slip? A: The depositor's stub is connected with the deposit slip or the bank's copy. In a deposit slip, the upper portion is the depositor's stub and the lower portion is the bank's copy, and you can detach the bank's copy from the depositor's stub by tearing it sir. Q: Now what do you do upon presentment of the deposit slip by the depositor or the depositor's authorized representative? A: We see to it that the deposit slip 9 is properly accomplished and then we count the money and then we tally it with the deposit slip sir. Q: Now is the depositor's stub which you issued to your clients validated? A: Yes, sir. ours]
10

duplicate copy lacked one vital information that of the name of the account holder should have already put Ms. Mabayad on guard. Rather than readily validating the incomplete duplicate copy, she should have proceeded more cautiously by being more probing as to the true reason why the name of the account holder in the duplicate slip was left blank while that in the original was filled up. She should not have been so naive in accepting hook, line and sinker the too shallow excuse of Ms. Irene Yabut to the effect that since the duplicate copy was only for her personal record, she would simply fill up the blank space later on. 11 A "reasonable man of ordinary prudence" 12would not have given credence to such explanation and would have insisted that the space left blank be filled up as a condition for validation. Unfortunately, this was not how bank teller Mabayad proceeded thus resulting in huge losses to the private respondent. Negligence here lies not only on the part of Ms. Mabayad but also on the part of the bank itself in its lackadaisical selection and supervision of Ms. Mabayad. This was exemplified in the testimony of Mr. Romeo Bonifacio, then Manager of the Pasig Branch of the petitioner bank and now its Vice-President, to the effect that, while he ordered the investigation of the incident, he never came to know that blank deposit slips were validated in total disregard of the bank's validation procedures, viz: Q: Did he ever tell you that one of your cashiers affixed the stamp mark of the bank on the deposit slips and they validated the same with the machine, the fact that those deposit slips were unfilled up, is there any report similar to that? A: No, it was not the cashier but the teller. Q: The teller validated the blank deposit slip? A: No it reported. was not

Q: It is only now that you are aware of that? A: Yes, sir.

13

Prescinding from the above, public respondent Court of Appeals aptly observed: xxx xxx xxx It was in fact only when he testified in this case in February, 1983, or after the lapse of more than seven (7) years counted from the period when the funds in question were deposited in plaintiff's accounts (May, 1975 to July, 1976) that bank manager Bonifacio admittedly became aware of the practice of his teller Mabayad of validating blank deposit slips. Undoubtedly, this is gross, wanton, and inexcusable negligence in the appellant bank's supervision of its employees. 14 It was this negligence of Ms. Azucena Mabayad, coupled by the negligence of the petitioner bank in the selection and supervision of its bank teller, which was the proximate cause of the loss suffered by the private respondent, and not the latter's act of entrusting cash to a dishonest employee, as insisted by the petitioners. Proximate cause is determined on the facts of each case upon mixed considerations of logic, common sense, policy and precedent. 15 Vda. de Bataclan v. Medina, 16 reiterated in the case of Bank of the Phil. Islands v. Court of Appeals, 17 defines proximate cause as "that cause, which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred. . . ." In this case, absent the act of Ms. Mabayad in negligently validating the incomplete duplicate copy of the deposit slip, Ms. Irene Yabut would not have the facility with which to perpetrate her fraudulent scheme with impunity. Apropos, once again, is the pronouncement made by the respondent appellate court, to wit: . . . . Even if Yabut had the fraudulent intention to misappropriate the funds entrusted to her by plaintiff, she would not have been able to deposit those funds in her husband's current account, and then make plaintiff believe that it was in the latter's accounts wherein she had deposited them, had it not been for bank teller Mabayad's aforesaid gross and reckless negligence. The latter's negligence was thus the proximate, immediate and efficient cause that brought about the loss claimed by plaintiff in this case, and the failure of plaintiff to discover the same soon enough by failing to scrutinize the monthly statements of account being sent to it by appellant bank could not have

[Emphasis

Q: You did not know that any one in the bank tellers or cashiers validated the blank deposit slip? A: I am not aware of that.

Clearly, Ms. Mabayad failed to observe this very important procedure. The fact that the duplicate slip was not compulsorily required by the bank in accepting deposits should not relieve the petitioner bank of responsibility. The odd circumstance alone that such

prevented the fraud and misappropriation which Irene Yabut had already completed when she deposited plaintiff's money to the account of her husband instead of to the latter's accounts. 18 Furthermore, under the doctrine of "last clear chance" (also referred to, at times as "supervening negligence" or as "discovered peril"), petitioner bank was indeed the culpable party. This doctrine, in essence, states that where both parties are negligent, but the negligent act of one is appreciably later in time than that of the other, or when it is impossible to determine whose fault or negligence should be attributed to the incident, the one who had the last clear opportunity to avoid the impending harm and failed to do so is chargeable with the consequences thereof. 19Stated differently, the rule would also mean that an antecedent negligence of a person does not preclude the recovery of damages for the supervening negligence of, or bar a defense against liability sought by another, if the latter, who had the last fair chance, could have avoided the impending harm by the exercise of due diligence. 20Here, assuming that private respondent RMC was negligent in entrusting cash to a dishonest employee, thus providing the latter with the opportunity to defraud the company, as advanced by the petitioner, yet it cannot be denied that the petitioner bank, thru its teller, had the last clear opportunity to avert the injury incurred by its client, simply by faithfully observing their selfimposed validation procedure. At this juncture, it is worth to discuss the degree of diligence ought to be exercised by banks in dealing with their clients. The New Civil Code provides: Art. 1173. 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 circumstances of the persons, of the time and of the place. When negligence shows bad faith, the provisions of articles 1171 and 2201, paragraph 2, shall apply. If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required. (1104a) In the case of banks, however, the degree of diligence required is more than that of a good father of a family. Considering the fiduciary nature of their relationship with their depositors, banks are duty bound to treat the accounts of their clients with the highest degree of care. 21 As elucidated in Simex International (Manila), Inc. v. Court of Appeals, 22 in every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a few hundred pesos or of millions. The bank

must record every single transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can dispose as he sees fit, confident that the bank will deliver it as and to whomever he directs. A blunder on the part of the bank, such as the failure to duly credit him his deposits as soon as they are made, can cause the depositor not a little embarrassment if not financial loss and perhaps even civil and criminal litigation. The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. In the case before us, it is apparent that the petitioner bank was remiss in that duty and violated that relationship. Petitioners nevertheless aver that the failure of respondent RMC to cross-check the bank's statements of account with its own records during the entire period of more than one (1) year is the proximate cause of the commission of subsequent frauds and misappropriation committed by Ms. Irene Yabut. We do not agree. While it is true that had private respondent checked the monthly statements of account sent by the petitioner bank to RMC, the latter would have discovered the loss early on, such cannot be used by the petitioners to escape liability. This omission on the part of the private respondent does not change the fact that were it not for the wanton and reckless negligence of the petitioners' employee in validating the incomplete duplicate deposit slips presented by Ms. Irene Yabut, the loss would not have occurred. Considering, however, that the fraud was committed in a span of more than one (1) year covering various deposits, common human experience dictates that the same would not have been possible without any form of collusion between Ms. Yabut and bank teller Mabayad. Ms. Mabayad was negligent in the performance of her duties as bank teller nonetheless. Thus, the petitioners are entitled to claim reimbursement from her for whatever they shall be ordered to pay in this case. The foregoing notwithstanding, it cannot be denied that, indeed, private respondent was likewise negligent in not checking its monthly statements of account. Had it done so, the company would have been alerted to the series of frauds being committed against RMC by its secretary. The damage would definitely not have ballooned to such an amount if only RMC, particularly Romeo Lipana, had exercised even a little vigilance in their financial affairs. This omission by RMC amounts to contributory negligence which shall mitigate the damages that may be awarded to the private respondent 23 under Article 2179 of the New Civil Code, to wit: . . . When the plaintiff's own negligence was the immediate and proximate cause of his injury, he cannot recover damages. But if his negligence was only contributory, the

immediate and proximate cause of the injury being the defendant's lack of due care, the plaintiff may recover damages, but the courts shall mitigate the damages to be awarded. In view of this, we believe that the demands of substantial justice are satisfied by allocating the damage on a 60-40 ratio. Thus, 40% of the damage awarded by the respondent appellate court, except the award of P25,000.00 attorney's fees, shall be borne by private respondent RMC; only the balance of 60% needs to be paid by the petitioners. The award of attorney's fees shall be borne exclusively by the petitioners. WHEREFORE, the decision of the respondent Court of Appeals is modified by reducing the amount of actual damages private respondent is entitled to by 40%. Petitioners may recover from Ms. Azucena Mabayad the amount they would pay the private respondent. Private respondent shall have recourse against Ms. Irene Yabut. In all other respects, the appellate court's decision is AFFIRMED. Proportionate costs. SO ORDERED.

G.R. No. 126696 January 21, 1999 SECURITY BANK & TRUST COMPANY, petitioner, vs. TRIUMPH LUMBER AND CONSTRUCTION CORPORATION, respondent.

signatures, the aforesaid three (3) checks were encashed by unauthorized persons to the damage and prejudice of the plaintiff corporation. (Exhs, D, D-l, D-2) Plaintiff then requested the defendant to credit back and restore to its account the value of the checks which were wrongfully encashed in the amount of P300,000.00 but despite due demand the defendant failed to pay its liability. (Exhs. F, F-l, F-2) Finally, plaintiff claims that per findings of the PC Crime Laboratory, the signatures of Co Yok Teng and Yu Chun Kit, the authorized [signatories] of plaintiff were forged. (Exhs.E, E-1, to E-4, G, G-1, G-2, H, I, I-1, I-2) Upon the other hand, the defendant bank claims that on June 19, 1985 the plaintiff corporation opened savings account no. 3220-0529-79 and current account no. 32100053-60 with defendant bank's branch in Sucat, Paraaque, Metro Manila. In order to make the said current and savings account operational, the plaintiff herein provided the defendant with the requisite specimen signature cards which in effect authorized defendant bank to honor withdrawals on the basis of any two of three signatures affixed thereon, specifically those of Mr. Dee Kong, Mr. Co Yok Teng and Mr. Chun Yun Kit, the president, treasurer and general manager, respectively, of plaintiff corporation. (Exhs. 3, 4) Subsequently, plaintiff executed an automatic transfer agreement authorizing defendant bank to transfer cleared funds from plaintiff's savings account to its current account at any time whenever funds in the current account are insufficient to meet withdrawals therefrom or are below the stipulated minimum balance. (Exhs. 5, 6, 6A) Defendant also claims that the savings account pass book and the check booklets were kept by the plaintiff in its filing cabinet but on March 23, 1987 the plaintiff herein discovered that the door of his office was forced open including that of the filing cabinet where the check booklets and other bank documents were being kept by the plaintiff. (pp. 32-33, TSN of August 15, 1988) Defendant further claims that the incident was not reported to the police authorities by the plaintiff nor was there any advise given to defendant bank and that on the same day of the discovery by plaintiff of the burglary, said plaintiff nevertheless made three separate deposits in a total amount of P374,554.10. (Exhs. 1, 1-A, 1-B, 2-A, 2-B) Defendant also claims that immediately after the said deposit of P374,554.10 has been made by the plaintiff, three checks namely: check no. 466779 dated March 23, 1987 in the amount of P130,000.00; check no. 466779 dated March 23, 1987 of

P150,000.00 and check no. 466780 dated March 24, 1987 in the amount of P20,000.00 which [were] all payable to cash were successively presented to defendant bank for encashment which was given due course by the latter after said checks have passed through the standard bank procedure for verification the check signatures and the regularity of the material particular of said checks. (pp. 6, 19, 20, 39, TSN of February 1, 1989, p. 21, TSN of August 15, 1988) 4 On the basis of such factual environment, the trial court found no preponderance of evidence to support private respondent's complaint. The private respondent failed to show that the signatures on the subject checks were forged. It did not even present in court the originals of the checks. Neither did it bother to explain its failure to do so. Thus, it could be presumed that the original checks were willfully suppressed and would be adverse to private respondent's case if produced. Moreover, the signatures on the checks were not compared with the specimen signatures appearing on the specimen signatures cards provided by the private respondent upon opening its current account with petitioner. Thus, the opinion of the expert witness is not worthy of credit. Besides, the private respondent failed to present Mr. Co Yok Teng, one of the signatories of the checks in question, to deny the genuineness of the signatures. The trial court was convinced that the petitioner bank had exercised due care and diligence in determining the authenticity of the checks in question before they were encashed. It was rather the private respondent that had been negligent in the care and custody of the corporate checks. After the incident in question occurred, the private respondent should have reported the matter to the police authorities or to the bank in order that the latter could "undertake stringent measure to counteract any attempt to forge the corporate checks." But private respondent did not. Hence, private respondent should be the one to bear the loss. In view of such findings, the trial court is missed the complaint for lack of merit. On appeal, the Court of Appeals reversed the decision of the trial court and ordered the petitioner to reimburse the private respondent the sum of P300,000, plus interest at the rate of 21/2 % per month from 24 March 1987 until full payment thereof, as well as attorney's fees equivalent to 25% of the principal obligation. The Court of appeals held that it was not necessary for the private respondent to prove that the signatures on the three checks in question were forged of the following admissions set forth in petitioner's answer: 14. Plaintiff was guilty of negligence substantially contributing to the unauthorized signatures or for forgery of the

DAVIDE, JR., C.J.: In this petition for review on certiorari under Rule 45 of the Rules of Court the petitioner asks this Court to reverse the decision 1 of 28 December 1995 and the resolution 2 of 17 September 1996 of the Court of Appeals in CA-G.R. CV No, 33513. The former set aside the decision 3 of 14 November 1990 of the Regional Trial Court (RTC) of Makati in Civil Case No. 16882 and ordered the petitioner to reimburse the private respondent the value of the alleged forged checks drawn against private respondent's account, plus interest and attorney's fees. The latter denied petitioner's motion for reconsideration. Petitioner and private respondent were the defendant and plaintiff respectively, in Civil Case No. 16882. The factual antecedents of this case were summarized by the trial court in its decision in Civil Case No. 16882; thus: Based on plaintiffs evidence, it appears that plaintiff is a depositor in good standing of defendant bank's branch at Sucat, Paraaque, under current checking account no. 210-0053-60. Plaintiff claims that on March 23 and 24, 1987, three (3) checks all payable to cash and all drawn against plaintiffs aforementioned current account were presented for encashment at defendant's Sucat Paraaque branch, to wit: Security Bank check nos. 466779 and 466777, both dated March 23, 1987 in the amount of P150,000.00 and P130,000.00, respectively; and Security Bank Check no. 466780 dated March 24, 1987 in the amount of P20,000.00. (Exhs. A, A-1 to A-3, B, B-1 to B-3, C, C-1 to C-3) Plaintiff also claims that due to defendant bank's gross negligence and inexcusable negligence in exercising ordinary diligence in verifying from plaintiff the encashment of plaintiff's checks whose amount exceed P10,000.00 and in determining the forgery of drawer's

signatures on the checks mentioned in the complaint. xxx xxx xxx 15. The alleged forged signatures on the checks were sufficiently adroit as to escape detection even under the officer's scrutiny. xxx xxx xxx 20.3 Anna P. Naval and Roberto N. Gabutao verbally admitted that the checks were forged. xxx xxx xxx 21. Anna Naval and Roberto Gabutao are now facing charges for estafa thru Falsification of Commercial Documents under Criminal Case No. 30004 pending with the Regional Trial Court, National Capital Judicial Region, sitting at Makati, Metro Manila. According to the Court of Appeals, the expert witness, contrary to the trial court's finding, was able to examine the signatures on the original checks and compared them with the standard signatures of the signatories. The photographic enlargements of the questioned checks, which she identified in court, were in fact taken from the original checks. With the bank's admission in its answer, as well as the unrebutted testimony of the expert witness and of Chun Yun Kit, there could be no doubt that the signatures on the questioned checks were forged. The Court of Appeals likewise held that the petitioner must be the one to bear the consequences of its failure to detect the fogery. Besides, petitioner was "less than prudent" in the treatment of private respondent's account. It did not observe its arrangement with the private respondent that it would inform the latter whenever a check of more than P10,000 would be presented for encashment. Neither did it ask the payee to present an identification card or to bring someone who could attest to identity of the payee. After its motion for reconsideration was denied 5 by the Court of Appeals, petitioner filed this petition contending that the Court of Appeals erred in holding that I . . . THE SIGNATURES ON THE CHECKS IN QUESTION WERE FORGED. II

. . . WHETHER THE SIGNATURES WERE FORGED IS NO LONGER AN ISSUE IN THE CASE CONSIDERING THE AFFIRMATIVE DEFENSES SET FORT IN PETITIONER'S ANSWER. III . . . THE PETITIONER ITSELF WAS NEGLIGENT AND THAT RESPONDENT EXERCISED DUE CARE IN THE CUSTODY OF ITS CHECKS AND OTHER RELATED DOCUMENTS. IV . . . RESPONDENT IS ENTITLED TO REIMBURSEMENT OF P300,000.00 PLUS INTEREST THEREOF AS WELL AS ATTORNEY'S FEES. In the first assigned error, the petitioner alleges that the best evidence of the forgery were the original checks bearing the alleged forged signatures of private respondent's officers. In spite of the timely objection made by the petitioner, the private respondent introduced in evidence mere photocopies of the questioned checks. The failure to produce the originals of the checks was a fatal omission inasmuch as there would be no evidentiary basis for the court to declare that the instruments were forgeries. Likewise such failure amounted to a willful suppression of evidence, which created a presumption that its production would be unfavorable to respondent's case. 6 It could also be presumed that "the checks in question [were] genuine checks regularly issued by the respondent in the course of its business, bearing the genuine signatures of the officers whom it authorized to sign in its behalf." Also, an unfavorable inference could be drawn from the unexplained failure of private respondent to call as its witness Mr. Co Yok Teng, whose signature was among those allegedly forged. Petitioner further contends that the opinion of private respondent's expert witness, Crispina V. Tabo, Senior Document Examiner of the PC Crime Laboratory, has no weight and deserves no consideration. Tabo did not use as basis of her analytical study the standard signatures of Chun Yun Kit and Co Yok Teng on the specimen signature cards provided by the private respondent upon opening Current Account No. 32100523-60 with the petitioner. It was to be against these standard signatures appearing on the specimen cards that petitioner was to honor checks drawn against private respondent's account. What Tabo utilized for comparisons were signatures that were not even authenticated by Chun Yun Kit and Co Yok Teng. Neither was it proved that the supposed standard signatures had been written "closely proximate" to the date of the questioned checks. Moreover, the "requested signatures" on the long bond paper written post litem motam could not be accepted as standards of comparison "because of the ease with which they [could] be disguised to intentionally differentiate them from those being challenged." 8

As to the second assigned error, petitioner maintains that its Answer contained a specific denial of private respondent's allegation of forgery. It could set in its answer affirmative and negative defenses alternatively even if they were inconsistent with each other. 9 With respect to its third assigned error, petitioner asserts that it exercised due care and diligence in the payment of private respondent's checks by first verifying in accordance with standard bank practices and procedures the genuineness of the signatures and endorsements. Upon the other hand, the private respondent, in the management of its business affairs, fell short of the diligence and the ordinary prudence required under the circumstances. It should have advised petitioner of the alleged burglary that petitioner could have applied stricter rules in the processing of checks drawn against private respondent's account, but it did not bother to do so. Neither did it reconcile its account balances with the petitioner in order to forestall the happening of the forgery. In the last assigned error, the petitioner alleges that in view of the reasons it stated in the first and third assigned errors the petitioner cannot be obliged to pay the amount of P300,000 plus interest. On the contrary, petitioner is entitled to an award of attorney's fees because private respondent's complaint was "insincere, baseless, and intended to harass, annoy and defame [it]." 10 Upon the other hand, the respondent claims that petitioner should have filed "a petition for review by certiorari and not merely a petition for review." The determination of negligence by the Court of Appeals is a question of fact that cannot be disturbed on appeal. Even assuming that the instant case is an exeption to the rule limiting the appellate jurisdiction of the Supreme Court to reviewing errors of law nonetheless, the issue of forgery was adequately proved by preponderance of evidence. This appeal is meritorious. Well settled is the rule that in the exercise of our power of review the findings of facts of the Court of Appeals are conclusive and binding on this Court. However, there are recognized exceptions, among which is when the factual findings of the trial court and the appellate court are conflicting. 11 The disagreement between the trial court and the Court of Appeals in the factual conclusion, especially with regard to the alleged forgery of the signatures on the questioned checks and the negligence of the parties, has constrained us to examine the evidence submitted by the parties. On the issue of forgery, we are unable to agree with the finding of the Court of Appeals that the petitioner admitted in its Answer 12 to the complaint the forgery of the signatures. Far from admitting the forgery, petitioner categorically denied that the signatures on the questioned checks were forgeries. However, by way of an alternative affirmative defense, petitioner contended that it had exercised reasonable degree of diligence in detecting whether there was forgery Even assuming that the signatures on the checks were forged, still petitioner could not be held liable for the value of the checks because all the checks were complete

and regular on their face. The alleged forged signatures were "sufficiently adroit as to escape detection even under the officer's scrutiny." The Court of Appeals also erred in holding that forgery was duly established. First, Section 3, Rule 130 of the Rules of Court was not complied with by private respondent. The Section explicitly provides that when the subject of inquiry is the contents of a document, no evidence shall be admissible other than the original document itself. This is what is known as the "best evidence" rule. The exceptions are as follows: 1. When the original has been lost or destroyed, or cannot be produced in court, without bad faith on the part of the offeror; 2. When the original is in the custody or under the control of the party against whom the evidence is offered, and the latter fails to produce it after reasonable notice; 3. When the original consists of numerous accounts or other documents which cannot be examined in court without great loss of time, and the fact sought to be established from them is only the general result of the whole; and 4. When the original is a public record in the custody of a public officer or is recorded in a public office. In this case, the originals of the alleged forged check has to be produced since it was shown that any of these exceptions was present. What the private respondent offered were mere photocopies of the checks in question marked as Exhibits "A," "B," and "C," 13 It never explained the reason why it could not produce the originals of the checks. Its expert witness Crispina Tabo admitted though that the original checks were taken back by the investigating policeman, Glen Ticson; thus: ATTY. NARAG: Q Do you have a copy, Madam Witness of the checks which were submitted to you under question? A It was only a xerox copy, because the original was withdrawn by the investigating policeman, which is in (sic) the name of Glenn Ticzon, sir.

Q Do you want to impress the court that the originals of these checks were submitted to you? A Yes, sir. Q Do you have a copy of the originals of the checks under (sic) standards? A Xerox copies only, because it was also withdrawn by the investigating policeman, who is Mr. Glenn Ticzon. 14 Yet, the said policeman was not presented to produce the original checks. It is true that the photocopies of the questioned checks were all identified by private respondent's witness Yu Chun Kit during his direct testimony 15 without objection on the part of petitioner's counsel. The latter even cross-examined Yu Chun Kit, 16 and, at the formal offer of said exhibits, he objected to their admission solely on the grounds that they were "irrelevant, immaterial and self-serving." 17 The photocopies of the checks may therefore be admitted for failure of petitioner to tender an appropriate objection 18 to their admission. Nevertheless, their probative value is nil. 19 Then, too, .the proper procedure in the investigation of a disputed handwriting was not observed. The initial step in such investigation is the introduction of the genuine handwriting of the party sought to be charged with the disputed writing, which is to serve as a standard of comparison. 20 The standard or the exemplar must therefore be proved to be genuine. 21 For the purpose of proving the genuineness of a handwriting Section 22, Rule 132 of the Rules of Court provides: Sec. 22. How the genuineness of handwriting is proved. The handwriting of a person may be proved by any witness who believes it to be the handwriting of such person because he has seen the person write, or has seen writing purporting to be his upon which the witness has acted or been charged, and has thus acquired knowledge of the handwriting of such person. Evidence respecting the handwriting may also be given by a comparison, made by the witness or the court, with writings admitted or treated as genuine by the party against whom the evidence is offered, or proved to be genuine to the satisfaction of the judge.

In BA Finance v. Court of Appeals, 22 we had the occasion to rule that the genuineness of a standard writing may be established by any of the following: (1) by the admission of the person sought to be charged with the disputed writing made at or for the purposes of the trial, or by his testimony; (2) by witnesses who saw the standards written or to whom or in whose hearing the person sought to be charged acknowledged the writing thereof; (3) by evidence showing that the reputed writer of the standard has acquiesced in or recognized the same, or that it has been adopted and acted upon by him in his business transactions or other concerns. We find in the records only photocopies, not the originals, of the "long bond papers" containing the alleged specimen signatures. 23 Nobody was presented to prove that the specimen signatures were in fact signatures affixed by Yu Chun Kit and Co Yok Teng. Although the former took the witness stand, he was never called to identify or authenticate his signatures on the said photocopy. Clearly then, Section 22 of Rule 132 of the Rules of Court and the guidelines set forth in BA Finance v. Court of Appeals 24 were not complied with. Moreover, the so-called specimen signatures on the bond paper were not directly turned over to Tabo by those who purportedly wrote them. They, together with the questioned checks, were first submitted to the Administration Branch of the PC Crime Laboratory, then endorsed to the Questioned Document Branch. The chief of the latter branch thereafter referred them to Tabo. Tabo never saw the parties write the specimen signatures. She just presumed the specimen signatures to be genuine signatures of the parties concerned. These facts were disclosed by Tabo during her cross-examination; thus: Q These question [sic] signatures and the specimen or signatures or standard were just given to you by the police of Paraaque? A It was submitted to the Administrative Branch and the Administrative Branch endorsed that to the Question the Document Branch and the Chief of the Document Branch assigned that case to me, sir That is why I received it and examined it. COURT: Q How do you know that, that is the genuine signatures?

A'ITY. REVILLA Yes, how do you know that, that is the genuine signatures when you were not able to see him personally write his signature? A Because I examined the genuine signatures of Co Yok Teng which was submitted to the office by the investigator and it said to be genuine, and I compared the signature whether genuine or not. And upon comparing, all the specimen signatures were written by one, and also comparing all the question [sic] signatures, this one (pointing to the chart) are written by one so, they were written, the question [sic] and specimen were written by two different persons. Q You did not ask the person to personally give his signature in order that there will be basis of comparison between standard signature and the question [sic] signature? A Your Honor, if the specimen signature is not sufficient enough to arrive at a conclusion, we will tell the investigator to let the person involved to come to our office to write and sign his signature, if it is not sufficient to arrive at a conclusion we let him sign. Q So, you do not normally demand his income tax for example, the residence certificate or other documents which contained this undisputed signature?

A. We did not ask anymore additional specimen because the submitted document is sufficient enough to arrive at the conclusion. ATTY. REVILLA: Q So, you just relied on what were given to you by the investigator as they informed you that these were genuine and standard signature? A Yes, sir. Q And who was that person who gave you this document? A It was the Administrative Branch who [sic] endorsed this document to the Documentation Branch. I do not know the person who brought that. Q You do not know the person who brought this document to the Administrative branch? A Yes, sir I do not know. Q When you started making comparison and analysis of` this question [sic] signatures and standard signatures, you did not anymore require the person, Mr. CO Yok Teng to appear personally to you? A I did not, sir. ATIY. REVILLA Q Mrs. Tabo, like the question [sic] signature of Mr. Co Yok Teng, you also did not personally see or observe how Mr.
25

Co Yok Teng write this standard signature? A. Yes, sir Q And this [sic] standard signatures were just submitted to you? A Yes, it was submitted to the office, sir. Q And when you made the examination and analysis of these documents the standard and the question [sic] signature you did not require any other signature from these two personalities except those which were delivered to you? A. Yes, sir. COURT Q When this standard signature were submitted to you, you were just told that this is the genuine signature of the person involved, you were just told? A Yes, your Honor. As stated in the request it is the genuine signature. Q So that was your basis in claiming that this is the genuine signature of the persons involved? A I examined first the specimen, all the specimen whether it was written by.... Q What are those specimen submitted to you.

A The same checks, your Honor, and the written standard. Q Did you confront Co Yok Teng? ATTY. REVILLA A She Honor. COURT Q Did you confront Yu Chun Kit whether those were actually his genuine signature? A No, your Honor. Q So you just relied on the claim of the person who submitted to you that these are the genuine signatures? A Yes, your Honor. Q And on the basis that you compare the characteristic handwriting between the alleged genuine and question [sic] signature? A Yes, your Honor. 26 (Underscoring ours for emphasis). Our review of the testimony of private respondent's expert witness, Crispina V. Tabo, fails to convince us that she was a credible document examiner, despite petitioner's admission that she was. She was candid enough to admit to the court that although she had testified more or less three hundred times as an expert, her findings were sustained by the courts in more or less ten cases only. Thus: Court: Q How many times have you testified in Court? said no, your

A More or less three hundred (300) times, your Honor. Q How many were sustained by the Court? A More or less ten (10), sir. Q Out of 300? A. Yes, your Honor.
27

encashment. Dimaano did not controvert Chun Kit's testimony on this point. Such an arrangement was not observed by appellee with respect to the payment of the checks in question.(Emphasis supplied). We do not agree. During the hearing on 1 February 1989, Felicidad Dimaano denied having such agreement with the private respondent. Rather, the agreement was that "all encashments over the counter of P10,000.00 and above should be accompanied by one of the signatories" of private respondent. But this agreement was made only on 31 March 1987, or a few days after the encashment of the checks in question, 32 At any rate, since the questioned checks, which were payable to "cash," appeared regular on their face and the bank found nothing unusual in the transaction, as the respondent usually issued checks in big amounts 33 made payable to cash or to a particular person or to a company, 34 the petitioner cannot be faulted in paying the value of the disputed checks. Contrary to the finding of the Court of Appeals, the private respondent is the one which stands to be blamed for its predicament. Chun Yun Kit testified that in the morning of 23 March 1987, he and some employees found the doors of their office and the filing cabinets containing the company's check booklet to have been forcibly opened. They also found the documents in disarray. Under these circumstances, a prudent and reasonable man would simply have to go over the check booklet to find out whether a check was missing. But, apparently, private respondent's officers and employees did not bother to do so. If they did examine the booklet they could have readily discovered whether a check was taken. The following testimony of Chun Yun Kit is apropos: Q You said also during the last hearing that on the morning of March 23, 1987 you found out in the morning that the doors of the office were forced opened? A Yes, sir. Q And you also testified during the last hearing that the locked [sic] of the filing cabinet were also forced opened? A Yes, sir. Q And you found out on that same time and date on March 23, 1987 that the documents in the

Besides, under the circumstances obtaining in this case, Tabo could by no yardstick be considered to have adequate knowledge of the genuine signatures of the parties whose signatures on the questioned checks were claimed to be forged. That knowledge could be obtained either by (a) seeing the person write some other documents or signatures (ex visu scriptionis); (b) seeing documents otherwise known to him to have been written by the person in question (ex scriptis olim visis); or (c) examining, in or out of court, for the express purpose of obtaining such knowledge, the documents said to have been written by the person in question (ex comparatione scriptorum). 28 Tabo could not be a witness under the first and the second. She tried to be under the third. But under the third, it is essential that (a) certain specimens of handwriting were seen and considered by her and (b) they were genuinely written by the person in question. 29 Now, as stated above, Tabo had no adequate basis for concluding that the alleged specimen signatures in the long bond paper were indeed the signatures of the parties whose signatures in the checks were claimed to have been forged. Moreover, we do not think that the alleged specimens before her were sufficient in number. 30 Given the fact that Mrs. Tabo's testimony cannot inspire a conclusion that she was an expert, it was error to rely on her representation. It is settled that the relative weight of the opinions of experts by and large depends on the value of assistance and guidance they furnish the court in the determination of the issue involved. 31 On the issue of negligence, the Court of Appeals held: [T]here is overwhelming evidence to show that appellee (petitioner herein) was less than prudent in the treatment of appellant's (private respondents') account. According to Chun Yun Kit, they had an agreement with Appellee's Assistant branch manager, Felicidad, Dimaano, that appellant should be informed whenever a check for than P10,000.00 is presented for

filing cabinet were not in their proper position ? A Yes, sir. Q What did you do when you found out this [sic] circumstances on March 23, 1987? A We did not do anything because nothing was lost. Q Did it not occur to you Mr. witness, that considering that burglary was committed in your office, the doors of your office were forced opened, the locks of the filing cabinet were forced opened, the documents placed in the filing cabinet were not in their proper position, it did not occur to you to check the checks of the company as being placed in the filing cabinet? A When we examined the check booklet, we did not discover anything lost. Q You did not at all bother Mr. witness or your treasurer to check something might have lost in the check [sic], considering that the burglery [sic] and the filing cabinet were forced opened? A No, sir. Q Did you anything lost? A No, Sir.
35

adopt necessary measures to prevent unauthorized encashments of private respondent's checks. Hence, as correctly held by the trial court, it is the private respondent, not the petitioner, which must bear the loss. WHEREFORE, the instant petition is GRANTED the challenged decision of the Court of Appeals in CA-G.R. CV No. 33513 is hereby REVERSED, and the decision of the Regional Trial Court of Makati in Civil Case No. 6882 is hereby REINSTATED.1wphi1.nt SO ORDERED.

notice

Neither did any of private respondents officers or employees report the incident to the police authorities, 36 nor did anyone advise the petitioner of such incident so that the latter could

for the damages and costs of suit specified in the dispositive portion of the appealed decision. Costs against appellant TRB. SO ORDERED.2 As found by the Court of Appeals, the antecedent facts of the case are as follows: On April 15, 1985, the Bureau of Internal Revenue (BIR) assessed plaintiffs Radio Philippines Network (RPN), Intercontinental Broadcasting Corporation (IBC), and Banahaw Broadcasting Corporation (BBC) of their tax obligations for the taxable years 1978 to 1983. On March 25, 1987, Mrs. Lourdes C. Vera, plaintiffs comptroller, sent a letter to the BIR requesting settlement of plaintiffs tax obligations. The BIR granted the request and accordingly, on June 26, 1986, plaintiffs purchased from defendant Traders Royal Bank (TRB) three (3) managers checks to be used as payment for their tax liabilities, to wit:

Thereafter, plaintiffs sent letters to both defendants, demanding that the amounts covered by the checks be reimbursed or credited to their account. The defendants refused, hence, the instant suit.3 On February 17, 1985, the trial court rendered its decision, thus: WHEREFORE, in view of the foregoing considerations, judgment is hereby rendered in favor of the plaintiffs and against the defendants by : a) Condemning the defendant Traders Royal Bank to pay actual damages in the sum of Nine Million Seven Hundred Ninety Thousand and Seven Hundred Sixteen Pesos and Eighty-Seven Centavos (P9,790,716.87) broken down as follows: 1) To plaintiff RPN-9 - P4,155,835.00 2) To Plaintiff IBC-13 - P3,949,406.12 3) To Plaintiff BBC-2 - P1,685,475.72 plus interest at the legal rate from the filing of this case in court. b) Condemning the defendant Security Bank and Trust Company, being collecting bank, to reimburse the defendant Traders Royal Bank, all the amounts which the latter would pay to the aforenamed plaintiffs; c) Condemning both defendants to pay to each of the plaintiffs the sum of Three Hundred Thousand (P300,000.00) Pesos as exemplary damages and attorneys fees equivalent to twenty-five percent of the total amount recovered; and d) Costs of suit. SO ORDERED.4 Defendants Traders Royal Bank and Security Bank and Trust Company, Inc. both appealed the trial courts decision to the Court of Appeals. However, as quoted in the beginning hereof, the appellate court absolved defendant SBTC from any liability and held TRB solely liable to respondent networks for damages and costs of suit. In the instant petition for review on certiorari of the Court of Appeals decision, petitioner TRB assigns the following errors: (a) the Honorable Court of Appeals manifestly overlooked facts which would justify the conclusion that negligence on the part of RPN, IBC and BBC bars them from recovering anything from TRB, (b) the Honorable Court of Appeals plainly erred and

Check Number 30652 30650 30796 G.R. No. 138510 October 10, 2002

Amount P4,155.83 5.00 3,949,406. 12 1,685,475. 75

TRADERS ROYAL BANK, petitioner, vs. RADIO PHILIPPINES NETWORK, INC., INTERCONTINENTAL BROADCASTING CORPORATION and BANAHAW BROADCASTING CORPORATION, through the BOARD OF ADMINISTRATORS, and SECURITY BANK AND TRUST COMPANY, respondents. DECISION CORONA, J.: Petitioner seeks the review and prays for the reversal of the Decision1 of April 30, 1999 of Court of Appeals in CA-G.R. CV No. 54656, the dispositive portion of which reads: WHEREFORE, the appealed decision is AFFIRMED with modification in the sense that appellant SBTC is hereby absolved from any liability. Appellant TRB is solely liable to the appellees

Defendant TRB, through Aida Nuez, TRB Branch Manager at Broadcast City Branch, turned over the checks to Mrs. Vera who was supposed to deliver the same to the BIR in payment of plaintiffs taxes. Sometime in September, 1988, the BIR again assessed plaintiffs for their tax liabilities for the years 1979-82. It was then they discovered that the three (3) managers checks (Nos. 30652, 30650 and 30796) intended as payment for their taxes were never delivered nor paid to the BIR by Mrs. Vera. Instead, the checks were presented for payment by unknown persons to defendant Security Bank and Trust Company (SBTC), Taytay Branch as shown by the banks routing symbol transit number (BRSTN 01140027) or clearing code stamped on the reverse sides of the checks. Meanwhile, for failure of the plaintiffs to settle their obligations, the BIR issued warrants of levy, distraint and garnishment against them. Thus, they were constrained to enter into a compromise and paid BIR P18,962,225.25 in settlement of their unpaid deficiency taxes.

misapprehended the facts in relieving SBTC of its liability to TRB as collecting bank and indorser by overturning the trial courts factual finding that SBTC did endorse the three (3) managers checks subject of the instant case, and (c) the Honorable Court of Appeals plainly misapplied the law in affirming the award of exemplary damages in favor of RPN, IBC and BBC. In reply, respondents RPN, IBC, and BBC assert that TRBs petition raises questions of fact in violation of Rule 45 of the 1997 Revised Rules on Civil Procedure which restricts petitions for review on certiorari of the decisions of the Court of Appeals on pure questions of law. RPN, IBC and BBC maintain that the issue of whether or not respondent networks had been negligent were already passed upon both by the trial and appellate courts, and that the factual findings of both courts are binding and conclusive upon this Court. Likewise, respondent SBTC denies liability on the ground that it had no participation in the negotiation of the checks, emphasizing that the BRSTN imprints at the back of the checks cannot be considered as proof that respondent SBTC accepted the disputed checks and presented them to Philippine Clearing House Corporation for clearing. Setting aside the factual ramifications of the instant case, the threshold issue now is whether or not TRB should be held solely liable when it paid the amount of the checks in question to a person other than the payee indicated on the face of the check, the Bureau of Internal Revenue. "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."5 Consequently, if a bank pays a forged check, it must be considered as paying out of its funds and cannot charge the amount so paid to the account of the depositor. In the instant case, the 3 checks were payable to the BIR. It was established, however, that said checks were never delivered or paid to the payee BIR but were in fact presented for payment by some unknown persons who, in order to receive payment therefor, forged the name of the payee. Despite this fraud, petitioner TRB paid the 3 checks in the total amount of P9,790,716.87. Petitioner ought to have known that, where a check is drawn payable to the order of one person and is presented for payment by another and purports upon its face to have been duly indorsed by the payee of the check, it is the primary duty of petitioner to know that the check was duly indorsed by the original payee and, where it pays the amount of the check to a third person who has forged the signature of the payee, the loss falls upon petitioner who cashed the check. Its only remedy is against the person to whom it paid the money.6 It should be noted further that one of the subject checks was crossed. The crossing of one of the subject checks should have

put petitioner on guard; it was duty-bound to ascertain the indorsers title to the check or the nature of his possession. Petitioner should have known the effects of a crossed check: (a) the check may not be encashed but only deposited in the bank; (b) the check may be negotiated only once to one who has an account with a bank and (c) 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, otherwise, he is not a holder in due course.7 By encashing in favor of unknown persons checks which were on their face payable to the BIR, a government agency which can only act only through its agents, petitioner did so at its peril and must suffer the consequences of the unauthorized or wrongful endorsement.8 In this light, petitioner TRB cannot exculpate itself from liability by claiming that respondent networks were themselves negligent. A bank is engaged in a business impressed with public interest and it is its duty to protect its many clients and depositors who transact business with it. It is under the obligation to treat the accounts of the depositors and clients with meticulous care, whether such accounts consist only of a few hundreds or millions of pesos.9 Petitioner argues that respondent SBTC, as the collecting bank and indorser, should be held responsible instead for the amount of the checks. The Court of Appeals addressed exactly the same issue and made the following findings and conclusions: As to the alleged liability of appellant SBTC, a close examination of the records constrains us to deviate from the lower courts finding that SBTC, as a collecting bank, should similarly bear the loss. "A collecting bank where a check is deposited and which indorses the check upon presentment with the drawee bank, is such an indorser. So even if the indorsement on the check deposited by the banks client is forged, the collecting bank is bound by his warranties as an indorser and cannot set up the defense of forgery as against the drawee bank." To hold appellant SBTC liable, it is necessary to determine whether it is a party to the disputed transactions. Section 3 of the Negotiable Instruments Law reads: "SECTION 63. When person deemed indorser. - A person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor, is deemed to be an indorser unless he clearly indicates by appropriate words his intention to be bound in some other capacity."

Upon the other hand, the Philippine Clearing House Corporation (PCHC) rules provide: "Sec. 17.- BANK GUARANTEE. All checks cleared through the PCHC shall bear the guarantee affixed thereto by the Presenting Bank/Branch which shall read as follows: "Cleared thru the Philippine Clearing House Corporation. All prior endorsements and/or lack of endorsement guaranteed. NAME OF BANK/BRANCH BRSTN (Date of clearing)." Here, not one of the disputed checks bears the requisite endorsement of appellant SBTC. What appears to be a guarantee stamped at the back of the checks is that of the Philippine National Bank, Buendia Branch, thereby indicating that it was the latter Bank which received the same. It was likewise established during the trial that whenever appellant SBTC receives a check for deposit, its practice is to stamp on its face the words, "non-negotiable". Lana Echevarrias testimony is relevant: "ATTY. ROMANO: Could you tell us briefly the procedure you follow in receiving checks? "A: First of all, I verify the check itself, the place, the date, the amount in words and everything. And then, if all these things are in order and verified in the data sheet I stamp my non-negotiable stamp at the face of the check." Unfortunately, the words "non-negotiable" do not appear on the face of either of the three (3) disputed checks. Moreover, the aggregate amount of the checks is not reflected in the clearing documents of appellant SBTC. Section 19 of the Rules of the PCHC states: "Section 19 Regular Item Procedure: Each clearing participant, through its authorized representatives, shall deliver to the PCHC fully qualified MICR checks grouped in 200 or less items to a batch and supported by an add-list, a batch control slip, and a delivery statement. It bears stressing that through the add-list, the PCHC can countercheck and determine which checks have been presented on a particular day by a particular bank for processing and clearing. In this case, however, the add-list submitted by appellant SBTC together with the checks it presented for clearing on August 3, 1987 does not show that Check No. 306502 in the sum of P3,949,406.12 was among those that passed for clearing with the PCHC on that date. The same is true with Check No. 30652 with a face amount of P4,155,835.00 presented for clearing on August 11, 1987 and Check No. 30796 with a face amount of P1,685,475.75.

The foregoing circumstances taken altogether create a serious doubt on whether the disputed checks passed through the hands of appellant SBTC."10 We subscribe to the foregoing findings and conclusions of the Court of Appeals. A collecting bank which indorses a check bearing a forged indorsement and presents it to the drawee bank guarantees all prior indorsements, including the forged indorsement itself, and ultimately should be held liable therefor. However, it is doubtful if the subject checks were ever presented to and accepted by SBTC so as to hold it liable as a collecting bank, as held by the Court of Appeals. Since TRB did not pay the rightful holder or other person or entity entitled to receive payment, it has no right to reimbursement. Petitioner TRB was remiss in its duty and obligation, and must therefore suffer the consequences of its own negligence and disregard of established banking rules and procedures. We agree with petitioner, however, that it should not be made to pay exemplary damages to RPN, IBC and BBC because its wrongful act was not done in bad faith, and it did not act in a wanton, fraudulent, reckless or malevolent manner.11 We find the award of attorneys fees, 25% of P10 million, to be manifestly exorbitant.12 Considering the nature and extent of the services rendered by respondent networks counsel, however, the Court deems it appropriate to award the amount of P100,000 as attorneys fees. WHEREFORE, the appealed decision is MODIFIED by deleting the award of exemplary damages. Further, respondent networks are granted the amount of P100,000 as attorneys fees. In all other respects, the Court of Appeals decision is hereby AFFIRMED. SO ORDERED.

This petition for review seeks to reverse the decision1 promulgated on January 28, 1999 by the Court of Appeals in CA-G.R. CV No. 47942, affirming the decision of the then Court of First Instance of Rizal, Branch XV (now the Regional Trial Court of Makati, Branch 138) dismissing Civil Case No. 43907, for damages. The facts as summarized by the Court of Appeals are as follows: Petitioner is a prominent businessman who, at the time material to this case, was the Managing Director of Multinational Investment Bancorporation and the Chairman and/or President of several other corporations. He was a depositor in good standing of respondent bank, the Manila Banking Corporation, under current Checking Account No. 06-09037-0. As he was then running about 20 corporations, and was going out of the country a number of times, petitioner entrusted to his secretary, Katherine2 E. Eugenio, his credit cards and his checkbook with blank checks. It was also Eugenio who verified and reconciled the statements of said checking account.3 Between the dates September 5, 1980 and January 23, 1981, Eugenio was able to encash and deposit to her personal account about seventeen (17) checks drawn against the account of the petitioner at the respondent bank, with an aggregate amount of P119,634.34. Petitioner did not bother to check his statement of account until a business partner apprised him that he saw Eugenio use his credit cards. Petitioner fired Eugenio immediately, and instituted a criminal action against her for estafa thru falsification before the Office of the Provincial Fiscal of Rizal. Private respondent, through an affidavit executed by its employee, Mr. Dante Razon, also lodged a complaint for estafa thru falsification of commercial documents against Eugenio on the basis of petitioners statement that his signatures in the checks were forged.4 Mr. Razons affidavit states: That I have examined and scrutinized the following checks in accordance with prescribed verification procedures with utmost care and diligence by comparing the signatures affixed thereat against the specimen signatures of Mr. Ramon K. Ilusorio which we have on file at our said office on such dates, xxx That the aforementioned checks were among those issued by Manilabank in favor of its client MR. RAMON K. ILUSORIO, That the same were personally encashed by KATHERINE E. ESTEBAN, an executive secretary of MR. RAMON K. ILUSORIO in said Investment Corporation; That I have met and known her as KATHERINE E. ESTEBAN the attending verifier when she personally encashed the abovementioned checks at our said office; That MR. RAMON K. ILUSORIO executed an affidavit expressly disowning his signature appearing on the checks further alleged

G.R. No. 139130

November 27, 2002

RAMON K. ILUSORIO, petitioner, vs. HON. COURT OF APPEALS, and THE MANILA BANKING CORPORATION, respondents. DECISION QUISUMBING, J.:

to have not authorized the issuance and encashment of the same.5 Petitioner then requested the respondent bank to credit back and restore to its account the value of the checks which were wrongfully encashed but respondent bank refused. Hence, petitioner filed the instant case.6 At the trial, petitioner testified on his own behalf, attesting to the truth of the circumstances as narrated above, and how he discovered the alleged forgeries. Several employees of Manila Bank were also called to the witness stand as hostile witnesses. They testified that it is the banks standard operating procedure that whenever a check is presented for encashment or clearing, the signature on the check is first verified against the specimen signature cards on file with the bank. Manila Bank also sought the expertise of the National Bureau of Investigation (NBI) in determining the genuineness of the signatures appearing on the checks. However, in a letter dated March 25, 1987, the NBI informed the trial court that they could not conduct the desired examination for the reason that the standard specimens submitted were not sufficient for purposes of rendering a definitive opinion. The NBI then suggested that petitioner be asked to submit seven (7) or more additional standard signatures executed before or about, and immediately after the dates of the questioned checks. Petitioner, however, failed to comply with this request. After evaluating the evidence on both sides, the court a quo rendered judgment on May 12, 1994 with the following dispositive portion: WHEREFORE, finding no sufficient basis for plaintiff's cause herein against defendant bank, in the light of the foregoing considerations and established facts, this case would have to be, as it is hereby DISMISSED. Defendants counterclaim is likewise DISMISSED for lack of sufficient basis. SO ORDERED.
7

A. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE RESPONDENT BANK IS ESTOPPED FROM RAISING THE DEFENSE THAT THERE WAS NO FORGERY OF THE SIGNATURES OF THE PETITIONER IN THE CHECK BECAUSE THE RESPONDENT FILED A CRIMINAL COMPLAINT FOR ESTAFA THRU FALSIFICATION OF COMMERCIAL DOCUMENTS AGAINST KATHERINE EUGENIO USING THE AFFIDAVIT OF PETITIONER STATING THAT HIS SIGNATURES WERE FORGED AS PART OF THE AFFIDAVIT-COMPLAINT.9 B. THE COURT OF APPEALS ERRED IN NOT APPLYING SEC. 23, NEGOTIABLE INSTRUMENTS LAW.10 C. THE COURT OF APPEALS ERRED IN NOT HOLDING THE BURDEN OF PROOF IS WITH THE RESPONDENT BANK TO PROVE THE DUE DILIGENCE TO PREVENT DAMAGE, TO THE PETITIONER, AND THAT IT WAS NOT NEGLIGENT IN THE SELECTION AND SUPERVISION OF ITS EMPLOYEES.11 D. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT BANK SHOULD BEAR THE LOSS, AND SHOULD BE MADE TO PAY PETITIONER, WITH RECOURSE AGAINST KATHERINE EUGENIO ESTEBAN.12 Essentially the issues in this case are: (1) whether or not petitioner has a cause of action against private respondent; and (2) whether or not private respondent, in filing an estafa case against petitioners secretary, is barred from raising the defense that the fact of forgery was not established. Petitioner contends that Manila Bank is liable for damages for its negligence in failing to detect the discrepant checks. He adds that as a general rule a bank which has obtained possession of a check upon an unauthorized or forged endorsement of the payees signature and which collects the amount of the check from the drawee is liable for the proceeds thereof to the payee. Petitioner invokes the doctrine of estoppel, saying that having itself instituted a forgery case against Eugenio, Manila Bank is now estopped from asserting that the fact of forgery was never proven. For its part, Manila Bank contends that respondent appellate court did not depart from the accepted and usual course of judicial proceedings, hence there is no reason for the reversal of its ruling. Manila Bank additionally points out that Section 23 13 of the Negotiable Instruments Law is inapplicable, considering that the fact of forgery was never proven. Lastly, the bank negates petitioners claim of estoppel.14 On the first issue, we find that petitioner has no cause of action against Manila Bank. To be entitled to damages, petitioner has the burden of proving negligence on the part of the bank for failure to detect the discrepancy in the signatures on the checks. It is incumbent upon petitioner to establish the fact of forgery, i.e., by submitting his specimen signatures and comparing them with those on the questioned checks. Curiously though, petitioner failed to submit additional specimen signatures as requested by the National Bureau of Investigation from which to draw a conclusive finding regarding forgery. The Court of Appeals found

that petitioner, by his own inaction, was precluded from setting up forgery. Said the appellate court: We cannot fault the court a quo for such declaration, considering that the plaintiffs evidence on the alleged forgery is not convincing enough. The burden to prove forgery was upon the plaintiff, which burden he failed to discharge. Aside from his own testimony, the appellant presented no other evidence to prove the fact of forgery. He did not even submit his own specimen signatures, taken on or about the date of the questioned checks, for examination and comparison with those of the subject checks. On the other hand, the appellee presented specimen signature cards of the appellant, taken at various years, namely, in 1976, 1979 and 1981 (Exhibits "1", "2", "3" and "7"), showing variances in the appellants unquestioned signatures. The evidence further shows that the appellee, as soon as it was informed by the appellant about his questioned signatures, sought to borrow the questioned checks from the appellant for purposes of analysis and examination (Exhibit "9"), but the same was denied by the appellant. It was also the former which sought the assistance of the NBI for an expert analysis of the signatures on the questioned checks, but the same was unsuccessful for lack of sufficient specimen signatures.15 Moreover, petitioners contention that Manila Bank was remiss in the exercise of its duty as drawee lacks factual basis. Consistently, the CA and the RTC found that Manila Bank employees exercised due diligence in cashing the checks. The banks employees in the present case did not have a hint as to Eugenios modus operandi because she was a regular customer of the bank, having been designated by petitioner himself to transact in his behalf. According to the appellate court, the employees of the bank exercised due diligence in the performance of their duties. Thus, it found that: The evidence on both sides indicates that TMBCs employees exercised due diligence before encashing the checks. Its verifiers first verified the drawers signatures thereon as against his specimen signature cards, and when in doubt, the verifier went further, such as by referring to a more experienced verifier for further verification. In some instances the verifier made a confirmation by calling the depositor by phone. It is only after taking such precautionary measures that the subject checks were given to the teller for payment. Of course it is possible that the verifiers of TMBC might have made a mistake in failing to detect any forgery -- if indeed there was. However, a mistake is not equivalent to negligence if they were honest mistakes. In the instant case, we believe and so hold that if there were mistakes, the same were not deliberate, since the bank took all the precautions.16 As borne by the records, it was petitioner, not the bank, who was negligent. Negligence is the omission to do something which a reasonable man, guided by those considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of something which a prudent and reasonable man would do. 17 In the present case, it appears that petitioner accorded his secretary unusual degree of trust and unrestricted access to his credit cards, passbooks, check books, bank statements, including

Aggrieved, petitioner elevated the case to the Court of Appeals by way of a petition for review but without success. The appellate court held that petitioners own negligence was the proximate cause of his loss. The appellate court disposed as follows: WHEREFORE, the judgment appealed from is AFFIRMED. Costs against the appellant. SO ORDERED.8 Before us, petitioner ascribes the following errors to the Court of Appeals:

custody and possession of cancelled checks and reconciliation of accounts. Said the Court of Appeals on this matter: Moreover, the appellant had introduced his secretary to the bank for purposes of reconciliation of his account, through a letter dated July 14, 1980 (Exhibit "8"). Thus, the said secretary became a familiar figure in the bank. What is worse, whenever the bank verifiers call the office of the appellant, it is the same secretary who answers and confirms the checks. The trouble is, the appellant had put so much trust and confidence in the said secretary, by entrusting not only his credit cards with her but also his checkbook with blank checks. He also entrusted to her the verification and reconciliation of his account. Further adding to his injury was the fact that while the bank was sending him the monthly Statements of Accounts, he was not personally checking the same. His testimony did not indicate that he was out of the country during the period covered by the checks. Thus, he had all the opportunities to verify his account as well as the cancelled checks issued thereunder -- month after month. But he did not, until his partner asked him whether he had entrusted his credit card to his secretary because the said partner had seen her use the same. It was only then that he was minded to verify the records of his account. 18 The abovecited findings are binding upon the reviewing court. We stress the rule that the factual findings of a trial court, especially when affirmed by the appellate court, are binding upon us 19 and entitled to utmost respect20 and even finality. We find no palpable error that would warrant a reversal of the appellate courts assessment of facts anchored upon the evidence on record. Petitioners failure to examine his bank statements appears as the proximate cause of his own damage. Proximate cause is that cause, which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred. 21 In the instant case, the bank was not shown to be remiss in its duty of sending monthly bank statements to petitioner so that any error or discrepancy in the entries therein could be brought to the banks attention at the earliest opportunity. But, petitioner failed to examine these bank statements not because he was prevented by some cause in not doing so, but because he did not pay sufficient attention to the matter. Had he done so, he could have been alerted to any anomaly committed against him. In other words, petitioner had sufficient opportunity to prevent or detect any misappropriation by his secretary had he only reviewed the status of his accounts based on the bank statements sent to him regularly. In view of Article 2179 of the New Civil Code,22 when the plaintiffs own negligence was the immediate and proximate cause of his injury, no recovery could be had for damages. Petitioner further contends that under Section 23 of the Negotiable Instruments Law a forged check is inoperative, and that Manila Bank had no authority to pay the forged checks. True, it is a rule that when a signature is forged or made without the authority of the person whose signature it purports to be, the check is wholly inoperative. No right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party, can be acquired through or under such

signature. However, the rule does provide for an exception, namely: "unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority." In the instant case, it is the exception that applies. In our view, petitioner is precluded from setting up the forgery, assuming there is forgery, due to his own negligence in entrusting to his secretary his credit cards and checkbook including the verification of his statements of account. Petitioners reliance on Associated Bank vs. Court of Appeals23 and Philippine Bank of Commerce vs. CA24 to buttress his contention that respondent Manila Bank as the collecting or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements is misplaced. In the cited cases, the fact of forgery was not in issue. In the present case, the fact of forgery was not established with certainty. In those cited cases, the collecting banks were held to be negligent for failing to observe precautionary measures to detect the forgery. In the case before us, both courts below uniformly found that Manila Banks personnel diligently performed their duties, having compared the signature in the checks from the specimen signatures on record and satisfied themselves that it was petitioners. On the second issue, the fact that Manila Bank had filed a case for estafa against Eugenio would not estop it from asserting the fact that forgery has not been clearly established. Petitioner cannot hold private respondent in estoppel for the latter is not the actual party to the criminal action. In a criminal action, the State is the plaintiff, for the commission of a felony is an offense against the State.25 Thus, under Section 2, Rule 110 of the Rules of Court the complaint or information filed in court is required to be brought in the name of the "People of the Philippines." 26 Further, as petitioner himself stated in his petition, respondent bank filed the estafa case against Eugenio on the basis of petitioners own affidavit,27 but without admitting that he had any personal knowledge of the alleged forgery. It is, therefore, easy to understand that the filing of the estafa case by respondent bank was a last ditch effort to salvage its ties with the petitioner as a valuable client, by bolstering the estafa case which he filed against his secretary. All told, we find no reversible error that can be ascribed to the Court of Appeals. WHEREFORE, the instant petition is DENIED for lack of merit. The assailed decision of the Court of Appeals dated January 28, 1999 in CA-G.R. CV No. 47942, is AFFIRMED. Costs against petitioner. SO ORDERED.

G.R. No. 129015

August 13, 2004

SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC., petitioner, vs. FAR EAST BANK AND TRUST COMPANY AND COURT OF APPEALS, respondents.

counterchecked the signature on the check as against that on the signature card. He too concluded that the check was indeed signed by Jong. Velez then forwarded the check and signature card to Shirley Syfu, another bank officer, for approval. Syfu then noticed that Jose Sempio III ("Sempio"), the assistant accountant of Samsung Construction, was also in the bank. Sempio was wellknown to Syfu and the other bank officers, he being the assistant accountant of Samsung Construction. Syfu showed the check to Sempio, who vouched for the genuineness of Jongs signature. Confirming the identity of Gonzaga, Sempio said that the check was for the purchase of equipment for Samsung Construction. Satisfied with the genuineness of the signature of Jong, Syfu authorized the banks encashment of the check to Gonzaga. The following day, the accountant of Samsung Construction, Kyu, examined the balance of the bank account and discovered that a check in the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00) had been encashed. Aware that he had not prepared such a check for Jongs signature, Kyu perused the checkbook and found that the last blank check was missing.7 He reported the matter to Jong, who then proceeded to the bank. Jong learned of the encashment of the check, and realized that his signature had been forged. The Bank Manager reputedly told Jong that he would be reimbursed for the amount of the check.8 Jong proceeded to the police station and consulted with his lawyers.9 Subsequently, a criminal case for qualified theft was filed against Sempio before the Laguna court.10 In a letter dated 6 May 1992, Samsung Construction, through counsel, demanded that FEBTC credit to it the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), with interest.11 In response, FEBTC said that it was still conducting an investigation on the matter. Unsatisfied, Samsung Construction filed aComplaint on 10 June 1992 for violation of Section 23 of the Negotiable Instruments Law, and prayed for the payment of the amount debited as a result of the questioned check plus interest, and attorneys fees.12 The case was docketed as Civil Case No. 92-61506 before the Regional Trial Court ("RTC") of Manila, Branch 9.13 During the trial, both sides presented their respective expert witnesses to testify on the claim that Jongs signature was forged. Samsung Corporation, which had referred the check for investigation to the NBI, presented Senior NBI Document Examiner Roda B. Flores. She testified that based on her examination, she concluded that Jongs signature had been forged on the check. On the other hand, FEBTC, which had sought the assistance of the Philippine National Police (PNP),14 presented Rosario C. Perez, a document examiner from the PNP Crime Laboratory. She testified that her findings showed that Jongs signature on the check was genuine.15 Confronted with conflicting expert testimony, the RTC chose to believe the findings of the NBI expert. In a Decisiondated 25 April 1994, the RTC held that Jongs signature on the check was forged and accordingly directed the bank to pay or credit back to Samsung Constructions account the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), together with interest tolled from the time the complaint was filed, and attorneys fees in the amount of Fifteen Thousand Pesos (P15,000.00).

DECISION

FEBTC timely appealed to the Court of Appeals. On 28 November 1996, the Special Fourteenth Division of the Court of Appeals rendered a Decision,16 reversing the RTC Decision and absolving FEBTC from any liability. The Court of Appeals held that the contradictory findings of the NBI and the PNP created doubt as to whether there was forgery.17 Moreover, the appellate court also held that assuming there was forgery, it occurred due to the negligence of Samsung Construction, imputing blame on the accountant Kyu for lack of care and prudence in keeping the checks, which if observed would have prevented Sempio from gaining access thereto.18 The Court of Appeals invoked the ruling in PNB v. National City Bank of New York 19 that, if a loss, which must be borne by one or two innocent persons, can be traced to the neglect or fault of either, such loss would be borne by the negligent party, even if innocent of intentional fraud.20 Samsung Construction now argues that the Court of Appeals had seriously misapprehended the facts when it overturned the RTCs finding of forgery. It also contends that the appellate court erred in finding that it had been negligent in safekeeping the check, and in applying the equity principle enunciated in PNB v. National City Bank of New York. Since the trial court and the Court of Appeals arrived at contrary findings on questions of fact, the Court is obliged to examine the record to draw out the correct conclusions. Upon examination of the record, and based on the applicable laws and jurisprudence, we reverse the Court of Appeals. Section 23 of the Negotiable Instruments Law states: When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. (Emphasis supplied) The general rule is to the effect that a forged signature is "wholly inoperative," and payment made "through or under such signature" is ineffectual or does not discharge the instrument. 21 If payment is made, the drawee cannot charge it to the drawers account. The traditional justification for the result is that the drawee is in a superior position to detect a forgery because he has the makers signature and is expected to know and compare it.22 The rule has a healthy cautionary effect on banks by encouraging care in the comparison of the signatures against those on the signature cards they have on file. Moreover, the very opportunity of the drawee to insure and to distribute the cost among its customers who use checks makes the drawee an ideal party to spread the risk to insurance.23 Brady, in his treatise The Law of Forged and Altered Checks, elucidates:

TINGA, J.: Called to fore in the present petition is a classic textbook question if a bank pays out on a forged check, is it liable to reimburse the drawer from whose account the funds were paid out? The Court of Appeals, in reversing a trial court decision adverse to the bank, invoked tenuous reasoning to acquit the bank of liability. We reverse, applying time-honored principles of law. The salient facts follow. Plaintiff Samsung Construction Company Philippines, Inc. ("Samsung Construction"), while based in Bian, Laguna, maintained a current account with defendant Far East Bank and Trust Company1 ("FEBTC") at the latters Bel-Air, Makati branch.2 The sole signatory to Samsung Constructions account was Jong Kyu Lee ("Jong"), its Project Manager, 3 while the checks remained in the custody of the companys accountant, Kyu Yong Lee ("Kyu").4 On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC Check No. 432100 to the banks branch in BelAir, Makati. The check, payable to cash and drawn against Samsung Constructions current account, was in the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00). The bank teller, Cleofe Justiani, first checked the balance of Samsung Constructions account. After ascertaining there were enough funds to cover the check, 5 she compared the signature appearing on the check with the specimen signature of Jong as contained in the specimen signature card with the bank. After comparing the two signatures, Justiani was satisfied as to the authenticity of the signature appearing on the check. She then asked Gonzaga to submit proof of his identity, and the latter presented three (3) identification cards.6 At the same time, Justiani forwarded the check to the branch Senior Assistant Cashier Gemma Velez, as it was bank policy that two bank branch officers approve checks exceeding One Hundred Thousand Pesos, for payment or encashment. Velez likewise

When a person deposits money in a general account in a bank, against which he has the privilege of drawing checks in the ordinary course of business, the relationship between the bank and the depositor is that of debtor and creditor. So far as the legal relationship between the two is concerned, the situation is the same as though the bank had borrowed money from the depositor, agreeing to repay it on demand, or had bought goods from the depositor, agreeing to pay for them on demand. The bank owes the depositor money in the same sense that any debtor owes money to his creditor. Added to this, in the case of bank and depositor, there is, of course, the banks obligation to pay checks drawn by the depositor in proper form and presented in due course. When the bank receives the deposit, it impliedly agrees to pay only upon the depositors order. When the bank pays a check, on which the depositors signature is a forgery, it has failed to comply with its contract in this respect. Therefore, the bank is held liable. The fact that the forgery is a clever one is immaterial. The forged signature may so closely resemble the genuine as to defy detection by the depositor himself. And yet, if a bank pays the check, it is paying out its own money and not the depositors. The forgery may be committed by a trusted employee or confidential agent. The bank still must bear the loss. Even in a case where the forged check was drawn by the depositors partner, the loss was placed upon the bank. The case referred to is Robinson v. Security Bank, Ark., 216 S. W. Rep. 717. In this case, the plaintiff brought suit against the defendant bank for money which had been deposited to the plaintiffs credit and which the bank had paid out on checks bearing forgeries of the plaintiffs signature. xxx It was held that the bank was liable. It was further held that the fact that the plaintiff waited eight or nine months after discovering the forgery, before notifying the bank, did not, as a matter of law, constitute a ratification of the payment, so as to preclude the plaintiff from holding the bank liable. xxx This rule of liability can be stated briefly in these words: "A bank is bound to know its depositors signature." The rule is variously expressed in the many decisions in which the question has been considered. But they all sum up to the proposition that a bank must know the signatures of those whose general deposits it carries.24 By no means is the principle rendered obsolete with the advent of modern commercial transactions. Contemporary texts still affirm this well-entrenched standard. Nickles, in his book Negotiable Instruments and Other Related Commercial Paper wrote, thus:

The deposit contract between a payor bank and its customer determines who can draw against the customers account by specifying whose signature is necessary on checks that are chargeable against the customers account. Therefore, a check drawn against the account of an individual customer that is signed by someone other than the customer, and without authority from her, is not properly payable and is not chargeable to the customers account, inasmuch as any "unauthorized signature on an instrument is ineffective" as the signature of the person whose name is signed.25 Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute defense by the party whose signature is forged.26 On the premise that Jongs signature was indeed forged, FEBTC is liable for the loss since it authorized the discharge of the forged check. Such liability attaches even if the bank exerts due diligence and care in preventing such faulty discharge. Forgeries often deceive the eye of the most cautious experts; and when a bank has been so deceived, it is a harsh rule which compels it to suffer although no one has suffered by its being deceived. 27 The forgery may be so near like the genuine as to defy detection by the depositor himself, and yet the bank is liable to the depositor if it pays the check.28 Thus, the first matter of inquiry is into whether the check was indeed forged. A document formally presented is presumed to be genuine until it is proved to be fraudulent. In a forgery trial, this presumption must be overcome but this can only be done by convincing testimony and effective illustrations.29 In ruling that forgery was not duly proven, the Court of Appeals held: [There] is ground to doubt the findings of the trial court sustaining the alleged forgery in view of the conflicting conclusions made by handwriting experts from the NBI and the PNP, both agencies of the government. xxx These contradictory findings create doubt on whether there was indeed a forgery. In the case of TenioObsequio v. Court of Appeals, 230 SCRA 550, the Supreme Court held that forgery cannot be presumed; it must be proved by clear, positive and convincing evidence. This reasoning is pure sophistry. Any litigator worth his or her salt would never allow an opponents expert witness to stand uncontradicted, thus the spectacle of competing expert witnesses is not unusual. The trier of fact will have to decide which version to believe, and explain why or why not such version is more credible than the other. Reliance therefore cannot be placed merely on the fact that there are colliding opinions of two experts, both clothed with the presumption of official duty, in order to draw a conclusion, especially one which is extremely crucial. Doing so is tantamount to a jurisprudential cop-out.

Much is expected from the Court of Appeals as it occupies the penultimate tier in the judicial hierarchy. This Court has long deferred to the appellate court as to its findings of fact in the understanding that it has the appropriate skill and competence to plough through the minutiae that scatters the factual field. In failing to thoroughly evaluate the evidence before it, and relying instead on presumptions haphazardly drawn, the Court of Appeals was sadly remiss. Of course, courts, like humans, are fallible, and not every error deserves a stern rebuke. Yet, the appellate courts error in this case warrants special attention, as it is absurd and even dangerous as a precedent. If this rationale were adopted as a governing standard by every court in the land, barely any actionable claim would prosper, defeated as it would be by the mere invocation of the existence of a contrary "expert" opinion. On the other hand, the RTC did adjudge the testimony of the NBI expert as more credible than that of the PNP, and explained its reason behind the conclusion: After subjecting the evidence of both parties to a crucible of analysis, the court arrived at the conclusion that the testimony of the NBI document examiner is more credible because the testimony of the PNP Crime Laboratory Services document examiner reveals that there are a lot of differences in the questioned signature as compared to the standard specimen signature. Furthermore, as testified to by Ms. Rhoda Flores, NBI expert, the manner of execution of the standard signatures used reveals that it is a free rapid continuous execution or stroke as shown by the tampering terminal stroke of the signatures whereas the questioned signature is a hesitating slow drawn execution stroke. Clearly, the person who executed the questioned signature was hesitant when the signature was made.30 During the testimony of PNP expert Rosario Perez, the RTC bluntly noted that "apparently, there [are] differences on that questioned signature and the standard signatures."31 This Court, in examining the signatures, makes a similar finding. The PNP expert excused the noted "differences" by asserting that they were mere "variations," which are normal deviations found in writing.32 Yet the RTC, which had the opportunity to examine the relevant documents and to personally observe the expert witness, clearly disbelieved the PNP expert. The Court similarly finds the testimony of the PNP expert as unconvincing. During the trial, she was confronted several times with apparent differences between strokes in the questioned signature and the genuine samples. Each time, she would just blandly assert that these differences were just "variations,"33 as if the mere conjuration of the word would sufficiently disquiet whatever doubts about the deviations. Such conclusion, standing alone, would be of little or no value unless supported by sufficiently cogent reasons which might amount almost to a demonstration.34 The most telling difference between the questioned and genuine signatures examined by the PNP is in the final upward stroke in the signature, or "the point to the short stroke of the terminal in the capital letter L," as referred to by the PNP examiner who had marked it in her comparison chart as "point no. 6." To the plain

eye, such upward final stroke consists of a vertical line which forms a ninety degree (90) angle with the previous stroke. Of the twenty one (21) other genuine samples examined by the PNP, at least nine (9) ended with an upward stroke. 35However, unlike the questioned signature, the upward strokes of eight (8) of these signatures are looped, while the upward stroke of the seventh36 forms a severe forty-five degree (45) with the previous stroke. The difference is glaring, and indeed, the PNP examiner was confronted with the inconsistency in point no. 6. Q: Now, in this questioned document point no. 6, the "s" stroke is directly upwards. A: Yes, sir. Q: Now, can you look at all these standard signature (sic) were (sic) point 6 is repeated or the last stroke "s" is pointing directly upwards? A: There is none in the standard signature, sir.37 Again, the PNP examiner downplayed the uniqueness of the final stroke in the questioned signature as a mere variation, 38 the same excuse she proffered for the other marked differences noted by the Court and the counsel for petitioner.39 There is no reason to doubt why the RTC gave credence to the testimony of the NBI examiner, and not the PNP experts. The NBI expert, Rhoda Flores, clearly qualifies as an expert witness. A document examiner for fifteen years, she had been promoted to the rank of Senior Document Examiner with the NBI, and had held that rank for twelve years prior to her testimony. She had placed among the top five examinees in the Competitive Seminar in Question Document Examination, conducted by the NBI Academy, which qualified her as a document examiner. 40She had trained with the Royal Hongkong Police Laboratory and is a member of the International Association for Identification.41 As of the time she testified, she had examined more than fifty to fiftyfive thousand questioned documents, on an average of fifteen to twenty documents a day.42 In comparison, PNP document examiner Perez admitted to having examined only around five hundred documents as of her testimony.43 In analyzing the signatures, NBI Examiner Flores utilized the scientific comparative examination method consisting of analysis, recognition, comparison and evaluation of the writing habits with the use of instruments such as a magnifying lense, a stereoscopic microscope, and varied lighting substances. She also prepared enlarged photographs of the signatures in order to facilitate the necessary comparisons.44 She compared the questioned signature as against ten (10) other sample signatures of Jong. Five of these signatures were executed on checks previously issued by Jong, while the other five contained in business letters Jong had signed.45 The NBI found that there were significant differences in the handwriting characteristics existing between the questioned and the sample signatures, as to manner of execution, link/connecting strokes, proportion characteristics, and other identifying details.46

The RTC was sufficiently convinced by the NBI examiners testimony, and explained her reasons in its Decisions. While the Court of Appeals disagreed and upheld the findings of the PNP, it failed to convincingly demonstrate why such findings were more credible than those of the NBI expert. As a throwaway, the assailed Decision noted that the PNP, not the NBI, had the opportunity to examine the specimen signature card signed by Jong, which was relied upon by the employees of FEBTC in authenticating Jongs signature. The distinction is irrelevant in establishing forgery. Forgery can be established comparing the contested signatures as against those of any sample signature duly established as that of the persons whose signature was forged. FEBTC lays undue emphasis on the fact that the PNP examiner did compare the questioned signature against the bank signature cards. The crucial fact in question is whether or not the check was forged, not whether the bank could have detected the forgery. The latter issue becomes relevant only if there is need to weigh the comparative negligence between the bank and the party whose signature was forged. At the same time, the Court of Appeals failed to assess the effect of Jongs testimony that the signature on the check was not his.47 The assertion may seem self-serving at first blush, yet it cannot be ignored that Jong was in the best position to know whether or not the signature on the check was his. While his claim should not be taken at face value, any averments he would have on the matter, if adjudged as truthful, deserve primacy in consideration. Jongs testimony is supported by the findings of the NBI examiner. They are also backed by factual circumstances that support the conclusion that the assailed check was indeed forged. Judicial notice can be taken that is highly unusual in practice for a business establishment to draw a check for close to a million pesos and make it payable to cash or bearer, and not to order. Jong immediately reported the forgery upon its discovery. He filed the appropriate criminal charges against Sempio, the putative forger.48 Now for determination is whether Samsung Construction was precluded from setting up the defense of forgery under Section 23 of the Negotiable Instruments Law. The Court of Appeals concluded that Samsung Construction was negligent, and invoked the doctrines that "where a loss must be borne by one of two innocent person, can be traced to the neglect or fault of either, it is reasonable that it would be borne by him, even if innocent of any intentional fraud, through whose means it has succeeded 49 or who put into the power of the third person to perpetuate the wrong."50 Applying these rules, the Court of Appeals determined that it was the negligence of Samsung Construction that allowed the encashment of the forged check. In the case at bar, the forgery appears to have been made possible through the acts of one Jose Sempio III, an assistant accountant employed by the plaintiff Samsung [Construction] Co. Philippines, Inc. who supposedly stole the blank check and who presumably is responsible for its encashment through a forged signature of Jong Kyu Lee. Sempio was assistant to the Korean accountant who was in possession of the blank

checks and who through negligence, enabled Sempio to have access to the same. Had the Korean accountant been more careful and prudent in keeping the blank checks Sempio would not have had the chance to steal a page thereof and to effect the forgery. Besides, Sempio was an employee who appears to have had dealings with the defendant Bank in behalf of the plaintiff corporation and on the date the check was encashed, he was there to certify that it was a genuine check issued to purchase equipment for the company.51 We recognize that Section 23 of the Negotiable Instruments Law bars a party from setting up the defense of forgery if it is guilty of negligence.52 Yet, we are unable to conclude that Samsung Construction was guilty of negligence in this case. The appellate court failed to explain precisely how the Korean accountant was negligent or how more care and prudence on his part would have prevented the forgery. We cannot sustain this "tar and feathering" resorted to without any basis. The bare fact that the forgery was committed by an employee of the party whose signature was forged cannot necessarily imply that such partys negligence was the cause for the forgery. Employers do not possess the preternatural gift of cognition as to the evil that may lurk within the hearts and minds of their employees. The Courts pronouncement in PCI Bank v. Court of Appeals53 applies in this case, to wit: [T]he mere fact that the forgery was committed by a drawer-payors confidential employee or agent, who by virtue of his position had unusual facilities for perpetrating the fraud and imposing the forged paper upon the bank, does not entitle the bank to shift the loss to the drawer-payor, in the absence of some circumstance raising estoppel against the drawer.54 Admittedly, the record does not clearly establish what measures Samsung Construction employed to safeguard its blank checks. Jong did testify that his accountant, Kyu, kept the checks inside a "safety box,"55 and no contrary version was presented by FEBTC. However, such testimony cannot prove that the checks were indeed kept in a safety box, as Jongs testimony on that point is hearsay, since Kyu, and not Jong, would have the personal knowledge as to how the checks were kept. Still, in the absence of evidence to the contrary, we can conclude that there was no negligence on Samsung Constructions part. The presumption remains that every person takes ordinary care of his concerns,56 and that the ordinary course of business has been followed.57 Negligence is not presumed, but must be proven by him who alleges it.58 While the complaint was lodged at the instance of Samsung Construction, the matter it had to prove was the claim it had alleged - whether the check was forged. It cannot be required as well to prove that it was not negligent, because the legal presumption remains that ordinary care was employed. Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact that Samsung Construction was negligent. While

the payee, as in this case, may not have the personal knowledge as to the standard procedures observed by the drawer, it well has the means of disputing the presumption of regularity. Proving a negative fact may be "a difficult office," 59 but necessarily so, as it seeks to overcome a presumption in law. FEBTC was unable to dispute the presumption of ordinary care exercised by Samsung Construction, hence we cannot agree with the Court of Appeals finding of negligence. The assailed Decision replicated the extensive efforts which FEBTC devoted to establish that there was no negligence on the part of the bank in its acceptance and payment of the forged check. However, the degree of diligence exercised by the bank would be irrelevant if the drawer is not precluded from setting up the defense of forgery under Section 23 by his own negligence. The rule of equity enunciated in PNB v. National City Bank of New York, 60 as relied upon by the Court of Appeals, deserves careful examination. The point in issue has sometimes been said to be that of negligence. The drawee who has paid upon the forged signature is held to bear the loss, because he has been negligent in failing to recognize that the handwriting is not that of his customer. But it follows obviously that if the payee, holder, or presenter of the forged paper has himself been in default, if he has himself been guilty of a negligence prior to that of the banker, or if by any act of his own he has at all contributed to induce the banker's negligence, then he may lose his right to cast the loss upon the banker.61 (Emphasis supplied) Quite palpably, the general rule remains that the drawee who has paid upon the forged signature bears the loss. The exception to this rule arises only when negligence can be traced on the part of the drawer whose signature was forged, and the need arises to weigh the comparative negligence between the drawer and the drawee to determine who should bear the burden of loss. The Court finds no basis to conclude that Samsung Construction was negligent in the safekeeping of its checks. For one, the settled rule is that the mere fact that the depositor leaves his check book lying around does not constitute such negligence as will free the bank from liability to him, where a clerk of the depositor or other persons, taking advantage of the opportunity, abstract some of the check blanks, forges the depositors signature and collect on the checks from the bank.62 And for another, in point of fact Samsung Construction was not negligent at all since it reported the forgery almost immediately upon discovery.63 It is also worth noting that the forged signatures in PNB National City Bank of New York were not of the drawer, but indorsers. The same circumstance attends PNB v. Court Appeals,64 which was also cited by the Court of Appeals. It accepted that a forged signature of the drawer differs treatment than a forged signature of the indorser. v. of of is in

hands, but has ordinarily no opportunity to verify an indorsement.65 Thus, a drawee bank is generally liable to its depositor in paying a check which bears either a forgery of the drawers signature or a forged indorsement. But the bank may, as a general rule, recover back the money which it has paid on a check bearing a forged indorsement, whereas it has not this right to the same extent with reference to a check bearing a forgery of the drawers signature.66 The general rule imputing liability on the drawee who paid out on the forgery holds in this case. Since FEBTC puts into issue the degree of care it exercised before paying out on the forged check, we might as well comment on the banks performance of its duty. It might be so that the bank complied with its own internal rules prior to paying out on the questionable check. Yet, there are several troubling circumstances that lead us to believe that the bank itself was remiss in its duty. The fact that the check was made out in the amount of nearly one million pesos is unusual enough to require a higher degree of caution on the part of the bank. Indeed, FEBTC confirms this through its own internal procedures. Checks below twenty-five thousand pesos require only the approval of the teller; those between twenty-five thousand to one hundred thousand pesos necessitate the approval of one bank officer; and should the amount exceed one hundred thousand pesos, the concurrence of two bank officers is required.67 In this case, not only did the amount in the check nearly total one million pesos, it was also payable to cash. That latter circumstance should have aroused the suspicion of the bank, as it is not ordinary business practice for a check for such large amount to be made payable to cash or to bearer, instead of to the order of a specified person.68 Moreover, the check was presented for payment by one Roberto Gonzaga, who was not designated as the payee of the check, and who did not carry with him any written proof that he was authorized by Samsung Construction to encash the check. Gonzaga, a stranger to FEBTC, was not even an employee of Samsung Construction. 69 These circumstances are already suspicious if taken independently, much more so if they are evaluated in concurrence. Given the shadiness attending Gonzagas presentment of the check, it was not sufficient for FEBTC to have merely complied with its internal procedures, but mandatory that all earnest efforts be undertaken to ensure the validity of the check, and of the authority of Gonzaga to collect payment therefor. According to FEBTC Senior Assistant Cashier Gemma Velez, the bank tried, but failed, to contact Jong over the phone to verify the check.70 She added that calling the issuer or drawer of the check to verify the same was not part of the standard procedure of the bank, but an "extra effort."71 Even assuming that such personal verification is tantamount to extraordinary diligence, it cannot be denied that FEBTC still paid out the check despite the absence of

any proof of verification from the drawer. Instead, the bank seems to have relied heavily on the say-so of Sempio, who was present at the bank at the time the check was presented. FEBTC alleges that Sempio was well-known to the bank officers, as he had regularly transacted with the bank in behalf of Samsung Construction. It was even claimed that everytime FEBTC would contact Jong about problems with his account, Jong would hand the phone over to Sempio.72 However, the only proof of such allegations is the testimony of Gemma Velez, who also testified that she did not know Sempio personally,73 and had met Sempio for the first time only on the day the check was encashed.74 In fact, Velez had to inquire with the other officers of the bank as to whether Sempio was actually known to the employees of the bank.75 Obviously, Velez had no personal knowledge as to the past relationship between FEBTC and Sempio, and any averments of her to that effect should be deemed hearsay evidence. Interestingly, FEBTC did not present as a witness any other employee of their Bel-Air branch, including those who supposedly had transacted with Sempio before. Even assuming that FEBTC had a standing habit of dealing with Sempio, acting in behalf of Samsung Construction, the irregular circumstances attending the presentment of the forged check should have put the bank on the highest degree of alert. The Court recently emphasized that the highest degree of care and diligence is required of banks. Banks are engaged in a business impressed with public interest, and it is their duty to protect in return their many clients and depositors who transact business with them. They have the obligation to treat their clients account meticulously and with the highest degree of care, considering the fiduciary nature of their relationship. The diligence required of banks, therefore, is more than that of a good father of a family.76 Given the circumstances, extraordinary diligence dictates that FEBTC should have ascertained from Jong personally that the signature in the questionable check was his. Still, even if the bank performed with utmost diligence, the drawer whose signature was forged may still recover from the bank as long as he or she is not precluded from setting up the defense of forgery. After all, Section 23 of the Negotiable Instruments Law plainly states that no right to enforce the payment of a check can arise out of a forged signature. Since the drawer, Samsung Construction, is not precluded by negligence from setting up the forgery, the general rule should apply. Consequently, if a bank pays a forged check, it must be considered as paying out of its funds and cannot charge the amount so paid to the account of the depositor.77 A bank is liable, irrespective of its good faith, in paying a forged check.78 WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 28 November 1996 is REVERSED, and the Decision of the Regional Trial Court of Manila, Branch 9, dated 25 April 1994 is REINSTATED. Costs against respondent.

The justification for the distinction between forgery of the signature of the drawer and forgery of an indorsement is that the drawee is in a position to verify the drawers signature by comparison with one in his

SO ORDERED.

[G.R. No. 138569. September 11, 2003]

THE

CONSOLIDATED BANK and TRUST CORPORATION, petitioner, vs. COURT OF APPEALS and L.C. DIAZ and COMPANY, CPAs, respondents.

DECISION CARPIO, J.:

passbook. When Macaraya asked Teller No. 6 if Calapre got the passbook, Teller No. 6 answered that someone shorter than Calapre got the passbook. Calapre was then standing beside Macaraya. Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for the deposit of a check for P90,000 drawn on Philippine Banking Corporation (PBC). This PBC check of L.C. Diaz was a check that it had long closed. [4] PBC subsequently dishonored the check because of insufficient funds and because the signature in the check differed from PBCs specimen signature. Failing to get back the passbook, Macaraya went back to her office and reported the matter to the Personnel Manager of L.C. Diaz, Emmanuel Alvarez. The following day, 15 August 1991, L.C. Diaz through its Chief Executive Officer, Luis C. Diaz (Diaz), called up Solidbank to stop any transaction using the same passbook until L.C. Diaz could open a new account.[5] On the same day, Diaz formally wrote Solidbank to make the same request. It was also on the same day that L.C. Diaz learned of the unauthorized withdrawal the day before, 14 August 1991, of P300,000 from its savings account. The withdrawal slip for the P300,000 bore the signatures of the authorized signatories of L.C. Diaz, namely Diaz and Rustico L. Murillo. The signatories, however, denied signing the withdrawal slip. A certain Noel Tamayo received the P300,000. In an Information[6] dated 5 September 1991, L.C. Diaz charged its messenger, Emerano Ilagan (Ilagan) and one Roscon Verdazola with Estafa through Falsification of Commercial Document. The Regional Trial Court of Manila dismissed the criminal case after the City Prosecutor filed a Motion to Dismiss on 4 August 1992. On 24 August 1992, L.C. Diaz through its counsel demanded from Solidbank the return of its money. Solidbank refused. On 25 August 1992, L.C. Diaz filed a Complaint[7] for Recovery of a Sum of Money against Solidbank with the Regional Trial Court of Manila, Branch 8. After trial, the trial court rendered on 28 December 1994 a decision absolving Solidbank and dismissing the complaint. L.C. Diaz then appealed[8] to the Court of Appeals. On 27 October 1998, the Court of Appeals issued its Decision reversing the decision of the trial court. On 11 May 1999, the Court of Appeals issued its Resolution denying the motion for reconsideration of Solidbank. The appellate court, however, modified its decision by deleting the award of exemplary damages and attorneys fees.

production of the said book and entry therein of the withdrawal shall have the same effect as if made to the depositor personally.[9] At the time of the withdrawal, a certain Noel Tamayo was not only in possession of the passbook, he also presented a withdrawal slip with the signatures of the authorized signatories of L.C. Diaz. The specimen signatures of these persons were in the signature cards. The teller stamped the withdrawal slip with the words Saving Teller No. 5. The teller then passed on the withdrawal slip to Genere Manuel (Manuel) for authentication. Manuel verified the signatures on the withdrawal slip. The withdrawal slip was then given to another officer who compared the signatures on the withdrawal slip with the specimen on the signature cards. The trial court concluded that Solidbank acted with care and observed the rules on savings account when it allowed the withdrawal ofP300,000 from the savings account of L.C. Diaz. The trial court pointed out that the burden of proof now shifted to L.C. Diaz to prove that the signatures on the withdrawal slip were forged. The trial court admonished L.C. Diaz for not offering in evidence the National Bureau of Investigation (NBI) report on the authenticity of the signatures on the withdrawal slip for P300,000. The trial court believed that L.C. Diaz did not offer this evidence because it is derogatory to its action. Another provision of the rules on savings account states that the depositor must keep the passbook under lock and key.[10] When another person presents the passbook for withdrawal prior to Solidbanks receipt of the notice of loss of the passbook, that person is considered as the owner of the passbook. The trial court ruled that the passbook presented during the questioned transaction was now out of the lock and key and presumptively ready for a business transaction.[11] Solidbank did not have any participation in the custody and care of the passbook. The trial court believed that Solidbanks act of allowing the withdrawal of P300,000 was not the direct and proximate cause of the loss. The trial court held that L.C. Diazs negligence caused the unauthorized withdrawal. Three facts establish L.C. Diazs negligence: (1) the possession of the passbook by a person other than the depositor L.C. Diaz; (2) the presentation of a signed withdrawal receipt by an unauthorized person; and (3) the possession by an unauthorized person of a PBC check long closed by L.C. Diaz, which check was deposited on the day of the fraudulent withdrawal. The trial court debunked L.C. Diazs contention that Solidbank did not follow the precautionary procedures observed by the two parties whenever L.C. Diaz withdrew significant amounts from its account. L.C. Diaz claimed that a letter must accompany withdrawals of more than P20,000. The letter must request Solidbank to allow the withdrawal and convert the amount to a managers check. The bearer must also have a letter authorizing him to withdraw the same amount. Another person driving a car must accompany the bearer so that he would not walk from Solidbank to the office in making the withdrawal. The trial court pointed out that L.C. Diaz disregarded these precautions in its past withdrawal. On 16 July 1991, L.C. Diaz withdrew P82,554 without any separate letter of authorization or any communication with Solidbank that the money be converted into a managers check.

The Case

Before us is a petition for review of the Decision [1] of the Court of Appeals dated 27 October 1998 and its Resolution dated 11 May 1999. The assailed decision reversed the Decision [2] of the Regional Trial Court of Manila, Branch 8, absolving petitioner Consolidated Bank and Trust Corporation, now known as Solidbank Corporation (Solidbank), of any liability. The questioned resolution of the appellate court denied the motion for reconsideration of Solidbank but modified the decision by deleting the award of exemplary damages, attorneys fees, expenses of litigation and cost of suit.

The Facts

Solidbank is a domestic banking corporation organized and existing under Philippine laws. Private respondent L.C. Diaz and Company, CPAs (L.C. Diaz), is a professional partnership engaged in the practice of accounting. Sometime in March 1976, L.C. Diaz opened a savings account with Solidbank, designated as Savings Account No. S/A 200-16872-6. On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya (Macaraya), filled up a savings (cash) deposit slip for P990 and a savings (checks) deposit slip for P50. Macaraya instructed the messenger of L.C. Diaz, Ismael Calapre (Calapre), to deposit the money with Solidbank. Macaraya also gave Calapre the Solidbank passbook. Calapre went to Solidbank and presented to Teller No. 6 the two deposit slips and the passbook. The teller acknowledged receipt of the deposit by returning to Calapre the duplicate copies of the two deposit slips. Teller No. 6 stamped the deposit slips with the words DUPLICATE and SAVING TELLER 6 SOLIDBANK HEAD OFFICE. Since the transaction took time and Calapre had to make another deposit for L.C. Diaz with Allied Bank, he left the passbook with Solidbank. Calapre then went to Allied Bank. When Calapre returned to Solidbank to retrieve the passbook, Teller No. 6 informed him that somebody got the passbook.[3] Calapre went back to L.C. Diaz and reported the incident to Macaraya. Macaraya immediately prepared a deposit slip in duplicate copies with a check of P200,000. Macaraya, together with Calapre, went to Solidbank and presented to Teller No. 6 the deposit slip and check. The teller stamped the words DUPLICATE and SAVING TELLER 6 SOLIDBANK HEAD OFFICE on the duplicate copy of the deposit slip. When Macaraya asked for the passbook, Teller No. 6 told Macaraya that someone got the passbook but she could not remember to whom she gave the

The Ruling of the Trial Court

In absolving Solidbank, the trial court applied the rules on savings account written on the passbook. The rules state that possession of this book shall raise the presumption of ownership and any payment or payments made by the bank upon the

The trial court further justified the dismissal of the complaint by holding that the case was a last ditch effort of L.C. Diaz to recover P300,000 after the dismissal of the criminal case against Ilagan. The dispositive portion of the decision of the trial court reads: IN VIEW OF THE FOREGOING, judgment is hereby rendered DISMISSING the complaint. The Court further renders judgment in favor of defendant bank pursuant to its counterclaim the amount of Thirty Thousand Pesos (P30,000.00) as attorneys fees. With costs against plaintiff. SO ORDERED.[12]

chance. Solidbank could have averted the injury suffered by L.C. Diaz had it called up L.C. Diaz to verify the withdrawal. The appellate court ruled that the degree of diligence required from Solidbank is more than that of a good father of a family. The business and functions of banks are affected with public interest. Banks are obligated to treat the accounts of their depositors with meticulous care, always having in mind the fiduciary nature of their relationship with their clients. The Court of Appeals found Solidbank remiss in its duty, violating its fiduciary relationship with L.C. Diaz. The dispositive portion of the decision of the Court of Appeals reads: WHEREFORE, premises considered, the decision appealed from is hereby REVERSED and a new one entered. 1. Ordering defendant-appellee Consolidated Bank and Trust Corporation to pay plaintiffappellant the sum of Three Hundred Thousand Pesos (P300,000.00), with interest thereon at the rate of 12% per annum from the date of filing of the complaint until paid, the sum of P20,000.00 as exemplary damages, and P20,000.00 as attorneys fees and expenses of litigation as well as the cost of suit; and Ordering the dismissal of defendant-appellees counterclaim in the amount of P30,000.00 as attorneys fees.

The Issues

Solidbank seeks the review of the decision and resolution of the Court of Appeals on these grounds: I. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER BANK SHOULD SUFFER THE LOSS BECAUSE ITS TELLER SHOULD HAVE FIRST CALLED PRIVATE RESPONDENT BY TELEPHONE BEFORE IT ALLOWED THE WITHDRAWAL OF P300,000.00 TO RESPONDENTS MESSENGER EMERANO ILAGAN, SINCE THERE IS NO AGREEMENT BETWEEN THE PARTIES IN THE OPERATION OF THE SAVINGS ACCOUNT, NOR IS THERE ANY BANKING LAW, WHICH MANDATES THAT A BANK TELLER SHOULD FIRST CALL UP THE DEPOSITOR BEFORE ALLOWING A WITHDRAWAL OF A BIG AMOUNT IN A SAVINGS ACCOUNT. THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF LAST CLEAR CHANCE AND IN HOLDING THAT PETITIONER BANKS TELLER HAD THE LAST OPPORTUNITY TO WITHHOLD THE WITHDRAWAL WHEN IT IS UNDISPUTED THAT THE TWO SIGNATURES OF RESPONDENT ON THE WITHDRAWAL SLIP ARE GENUINE AND PRIVATE RESPONDENTS PASSBOOK WAS DULY PRESENTED, AND CONTRARIWISE RESPONDENT WAS NEGLIGENT IN THE SELECTION AND SUPERVISION OF ITS MESSENGER EMERANO ILAGAN, AND IN THE SAFEKEEPING OF ITS CHECKS AND OTHER FINANCIAL DOCUMENTS. THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE INSTANT CASE IS A LAST DITCH EFFORT OF PRIVATE RESPONDENT TO RECOVER ITS P300,000.00 AFTER FAILING IN ITS EFFORTS TO RECOVER THE SAME FROM ITS EMPLOYEE EMERANO ILAGAN. THE COURT OF APPEALS ERRED IN NOT MITIGATING THE DAMAGES AWARDED AGAINST PETITIONER UNDER ARTICLE 2197 OF THE CIVIL CODE, NOTWITHSTANDING ITS FINDING THAT PETITIONER BANKS NEGLIGENCE WAS ONLY CONTRIBUTORY.[16]

The Ruling of the Court of Appeals

II.

The Court of Appeals ruled that Solidbanks negligence was the proximate cause of the unauthorized withdrawal of P300,000 from the savings account of L.C. Diaz. The appellate court reached this conclusion after applying the provision of the Civil Code on quasi-delict, to wit: Article 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no preexisting contractual relation between the parties, is called a quasi-delict and is governed by the provisions of this chapter. The appellate court held that the three elements of a quasi-delict are present in this case, namely: (a) damages suffered by the plaintiff; (b) fault or negligence of the defendant, or some other person for whose acts he must respond; and (c) the connection of cause and effect between the fault or negligence of the defendant and the damage incurred by the plaintiff. The Court of Appeals pointed out that the teller of Solidbank who received the withdrawal slip for P300,000 allowed the withdrawal without making the necessary inquiry. The appellate court stated that the teller, who was not presented by Solidbank during trial, should have called up the depositor because the money to be withdrawn was a significant amount. Had the teller called up L.C. Diaz, Solidbank would have known that the withdrawal was unauthorized. The teller did not even verify the identity of the impostor who made the withdrawal. Thus, the appellate court found Solidbank liable for its negligence in the selection and supervision of its employees. The appellate court ruled that while L.C. Diaz was also negligent in entrusting its deposits to its messenger and its messenger in leaving the passbook with the teller, Solidbank could not escape liability because of the doctrine of last clear

2.

SO ORDERED.[13] Acting on the motion for reconsideration of Solidbank, the appellate court affirmed its decision but modified the award of damages. The appellate court deleted the award of exemplary damages and attorneys fees. Invoking Article 2231 [14] of the Civil Code, the appellate court ruled that exemplary damages could be granted if the defendant acted with gross negligence. Since Solidbank was guilty of simple negligence only, the award of exemplary damages was not justified. Consequently, the award of attorneys fees was also disallowed pursuant to Article 2208 of the Civil Code. The expenses of litigation and cost of suit were also not imposed on Solidbank. The dispositive portion of the Resolution reads as follows: WHEREFORE, foregoing considered, our decision dated October 27, 1998 is affirmed with modification by deleting the award of exemplary damages and attorneys fees, expenses of litigation and cost of suit. SO ORDERED.[15] Hence, this petition.

III.

IV.

The Ruling of the Court

The petition is partly meritorious.

Solidbanks Fiduciary Duty under the Law

performance in complying with its obligations under the contract of simple loan, beyond those required of non-bank debtors under a similar contract of simple loan. The fiduciary nature of banking does not convert a simple loan into a trust agreement because banks do not accept deposits to enrich depositors but to earn money for themselves. The law allows banks to offer the lowest possible interest rate to depositors while charging the highest possible interest rate on their own borrowers. The interest spread or differential belongs to the bank and not to the depositors who are not cestui que trust of banks. If depositors are cestui que trust of banks, then the interest spread or income belongs to the depositors, a situation that Congress certainly did not intend in enacting Section 2 of RA 8791.

Calapre. The burden was on Solidbank to prove that there was no negligence on its part or its employees. Solidbank failed to discharge its burden. Solidbank did not present to the trial court Teller No. 6, the teller with whom Calapre left the passbook and who was supposed to return the passbook to him. The record does not indicate that Teller No. 6 verified the identity of the person who retrieved the passbook. Solidbank also failed to adduce in evidence its standard procedure in verifying the identity of the person retrieving the passbook, if there is such a procedure, and that Teller No. 6 implemented this procedure in the present case. Solidbank is bound by the negligence of its employees under the principle of respondeat superior or command responsibility. The defense of exercising the required diligence in the selection and supervision of employees is not a complete defense in culpa contractual, unlike in culpa aquiliana.[25] The bank must not only exercise high standards of integrity and performance, it must also insure that its employees do likewise because this is the only way to insure that the bank will comply with its fiduciary duty. Solidbank failed to present the teller who had the duty to return to Calapre the passbook, and thus failed to prove that this teller exercised the high standards of integrity and performance required of Solidbanks employees.

The rulings of the trial court and the Court of Appeals conflict on the application of the law. The trial court pinned the liability on L.C. Diaz based on the provisions of the rules on savings account, a recognition of the contractual relationship between Solidbank and L.C. Diaz, the latter being a depositor of the former. On the other hand, the Court of Appeals applied the law on quasi-delict to determine who between the two parties was ultimately negligent. The law on quasi-delict or culpa aquiliana is generally applicable when there is no pre-existing contractual relationship between the parties. We hold that Solidbank is liable for breach of contract due to negligence, or culpa contractual. The contract between the bank and its depositor is governed by the provisions of the Civil Code on simple loan. [17] Article 1980 of the Civil Code expressly provides that x x x savings x x x deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. There is a debtor-creditor relationship between the bank and its depositor. 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. The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of Republic Act No. 8791 (RA 8791),[18] which took effect on 13 June 2000, declares that the State recognizes the fiduciary nature of banking that requires high standards of integrity and performance. [19] This new provision in the general banking law, introduced in 2000, is a statutory affirmation of Supreme Court decisions, starting with the 1990 case of Simex International v. Court of Appeals, [20] holding that the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.[21] This fiduciary relationship means that the banks obligation to observe high standards of integrity and performance is deemed written into every deposit agreement between a bank and its depositor. The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family. Article 1172 of the Civil Code states that the degree of diligence required of an obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a good father of a family.[22] Section 2 of RA 8791 prescribes the statutory diligence required from banks that banks must observe high standards of integrity and performance in servicing their depositors. Although RA 8791 took effect almost nine years after the unauthorized withdrawal of the P300,000 from L.C. Diazs savings account, jurisprudence[23] at the time of the withdrawal already imposed on banks the same high standard of diligence required under RA No. 8791. However, the fiduciary nature of a bank-depositor relationship does not convert the contract between the bank and its depositors from a simple loan to a trust agreement, whether express or implied. Failure by the bank to pay the depositor is failure to pay a simple loan, and not a breach of trust. [24] The law simply imposes on the bank a higher standard of integrity and

Solidbanks Breach of its Contractual Obligation

Article 1172 of the Civil Code provides that responsibility arising from negligence in the performance of every kind of obligation is demandable. For breach of the savings deposit agreement due to negligence, or culpa contractual, the bank is liable to its depositor. Calapre left the passbook with Solidbank because the transaction took time and he had to go to Allied Bank for another transaction. The passbook was still in the hands of the employees of Solidbank for the processing of the deposit when Calapre left Solidbank. Solidbanks rules on savings account require that the deposit book should be carefully guarded by the depositor and kept under lock and key, if possible. When the passbook is in the possession of Solidbanks tellers during withdrawals, the law imposes on Solidbank and its tellers an even higher degree of diligence in safeguarding the passbook. Likewise, Solidbanks tellers must exercise a high degree of diligence in insuring that they return the passbook only to the depositor or his authorized representative. The tellers know, or should know, that the rules on savings account provide that any person in possession of the passbook is presumptively its owner. If the tellers give the passbook to the wrong person, they would be clothing that person presumptive ownership of the passbook, facilitating unauthorized withdrawals by that person. For failing to return the passbook to Calapre, the authorized representative of L.C. Diaz, Solidbank and Teller No. 6 presumptively failed to observe such high degree of diligence in safeguarding the passbook, and in insuring its return to the party authorized to receive the same. In culpa contractual, once the plaintiff proves a breach of contract, there is a presumption that the defendant was at fault or negligent. The burden is on the defendant to prove that he was not at fault or negligent. In contrast, in culpa aquiliana the plaintiff has the burden of proving that the defendant was negligent. In the present case, L.C. Diaz has established that Solidbank breached its contractual obligation to return the passbook only to the authorized representative of L.C. Diaz. There is thus a presumption that Solidbank was at fault and its teller was negligent in not returning the passbook to

Proximate Cause of the Unauthorized Withdrawal

Another point of disagreement between the trial and appellate courts is the proximate cause of the unauthorized withdrawal. The trial court believed that L.C. Diazs negligence in not securing its passbook under lock and key was the proximate cause that allowed the impostor to withdraw the P300,000. For the appellate court, the proximate cause was the tellers negligence in processing the withdrawal without first verifying with L.C. Diaz. We do not agree with either court. Proximate cause is that cause which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury and without which the result would not have occurred.[26] Proximate cause is determined by the facts of each case upon mixed considerations of logic, common sense, policy and precedent.[27] L.C. Diaz was not at fault that the passbook landed in the hands of the impostor. Solidbank was in possession of the passbook while it was processing the deposit. After completion of the transaction, Solidbank had the contractual obligation to return the passbook only to Calapre, the authorized representative of L.C. Diaz. Solidbank failed to fulfill its contractual obligation because it gave the passbook to another person. Solidbanks failure to return the passbook to Calapre made possible the withdrawal of the P300,000 by the impostor who took possession of the passbook. Under Solidbanks rules on savings account, mere possession of the passbook raises the presumption of ownership. It was the negligent act of Solidbanks Teller No. 6 that gave the impostor presumptive ownership of the

passbook. Had the passbook not fallen into the hands of the impostor, the loss of P300,000 would not have happened. Thus, the proximate cause of the unauthorized withdrawal was Solidbanks negligence in not returning the passbook to Calapre. We do not subscribe to the appellate courts theory that the proximate cause of the unauthorized withdrawal was the tellers failure to call up L.C. Diaz to verify the withdrawal. Solidbank did not have the duty to call up L.C. Diaz to confirm the withdrawal. There is no arrangement between Solidbank and L.C. Diaz to this effect. Even the agreement between Solidbank and L.C. Diaz pertaining to measures that the parties must observe whenever withdrawals of large amounts are made does not direct Solidbank to call up L.C. Diaz. There is no law mandating banks to call up their clients whenever their representatives withdraw significant amounts from their accounts. L.C. Diaz therefore had the burden to prove that it is the usual practice of Solidbank to call up its clients to verify a withdrawal of a large amount of money. L.C. Diaz failed to do so. Teller No. 5 who processed the withdrawal could not have been put on guard to verify the withdrawal. Prior to the withdrawal of P300,000, the impostor deposited with Teller No. 6 the P90,000 PBC check, which later bounced. The impostor apparently deposited a large amount of money to deflect suspicion from the withdrawal of a much bigger amount of money. The appellate court thus erred when it imposed on Solidbank the duty to call up L.C. Diaz to confirm the withdrawal when no law requires this from banks and when the teller had no reason to be suspicious of the transaction. Solidbank continues to foist the defense that Ilagan made the withdrawal. Solidbank claims that since Ilagan was also a messenger of L.C. Diaz, he was familiar with its teller so that there was no more need for the teller to verify the withdrawal. Solidbank relies on the following statements in the Booking and Information Sheet of Emerano Ilagan: xxx Ilagan also had with him (before the withdrawal) a forged check of PBC and indicated the amount of P90,000 which he deposited in favor of L.C. Diaz and Company. After successfully withdrawing this large sum of money, accused Ilagan gave alias Rey (Noel Tamayo) his share of the loot. Ilagan then hired a taxicab in the amount of P1,000 to transport him (Ilagan) to his home province at Bauan, Batangas. Ilagan extravagantly and lavishly spent his money but a big part of his loot was wasted in cockfight and horse racing. Ilagan was apprehended and meekly admitted his guilt.[28] (Emphasis supplied.) L.C. Diaz refutes Solidbanks contention by pointing out that the person who withdrew the P300,000 was a certain Noel Tamayo. Both the trial and appellate courts stated that this Noel Tamayo presented the passbook with the withdrawal slip. We uphold the finding of the trial and appellate courts that a certain Noel Tamayo withdrew the P300,000. The Court is not a trier of facts. We find no justifiable reason to reverse the factual finding of the trial court and the Court of Appeals. The tellers who processed the deposit of the P90,000 check and the withdrawal of the P300,000 were not presented during trial to substantiate Solidbanks claim that Ilagan deposited the check

and made the questioned withdrawal. Moreover, the entry quoted by Solidbank does not categorically state that Ilagan presented the withdrawal slip and the passbook.

SO ORDERED.

Doctrine of Last Clear Chance

The doctrine of last clear chance states that where both parties are negligent but the negligent act of one is appreciably later than that of the other, or where it is impossible to determine whose fault or negligence caused the loss, the one who had the last clear opportunity to avoid the loss but failed to do so, is chargeable with the loss.[29] Stated differently, the antecedent negligence of the plaintiff does not preclude him from recovering damages caused by the supervening negligence of the defendant, who had the last fair chance to prevent the impending harm by the exercise of due diligence.[30] We do not apply the doctrine of last clear chance to the present case. Solidbank is liable for breach of contract due to negligence in the performance of its contractual obligation to L.C. Diaz. This is a case of culpa contractual, where neither the contributory negligence of the plaintiff nor his last clear chance to avoid the loss, would exonerate the defendant from liability. [31] Such contributory negligence or last clear chance by the plaintiff merely serves to reduce the recovery of damages by the plaintiff but does not exculpate the defendant from his breach of contract.[32]

G.R. No. 150228

July 30, 2009

BANK OF AMERICA NT & SA, Petitioner, vs. PHILIPPINE RACING CLUB, Respondent. DECISION LEONARDO-DE CASTRO, J.: This is a petition for review on certiorari under Rule 45 of the Rules of Court from the Decision1 promulgated on July 16, 2001 by the former Second Division of the Court of Appeals (CA), in CAG.R. CV No. 45371 entitled "Philippine Racing Club, Inc. v. Bank of America NT & SA," affirming the Decision 2 dated March 17, 1994 of the Regional Trial Court (RTC) of Makati, Branch 135 in Civil Case No. 89-5650, in favor of the respondent. Likewise, the present petition assails the Resolution3 promulgated on September 28, 2001, denying the Motion for Reconsideration of the CA Decision. The facts of this case as narrated in the assailed CA Decision are as follows: Plaintiff-appellee PRCI is a domestic corporation which maintains several accounts with different banks in the Metro Manila area. Among the accounts maintained was Current Account No. 58891012 with defendant-appellant BA (Paseo de Roxas Branch). The authorized joint signatories with respect to said Current Account were plaintiff-appellees President (Antonia Reyes) and Vice President for Finance (Gregorio Reyes). On or about the 2nd week of December 1988, the President and Vice President of plaintiff-appellee corporation were scheduled to go out of the country in connection with the corporations business. In order not to disrupt operations in their absence, they pre-signed several checks relating to Current Account No. 58891012. The intention was to insure continuity of plaintiff-appellees operations by making available cash/money especially to settle obligations that might become due. These checks were entrusted to the accountant with instruction to make use of the same as the need arose. The internal arrangement was, in the event there was need to make use of the checks, the accountant would prepare the corresponding voucher and thereafter complete the entries on the pre-signed checks.

Mitigated Damages

Under Article 1172, liability (for culpa contractual) may be regulated by the courts, according to the circumstances. This means that if the defendant exercised the proper diligence in the selection and supervision of its employee, or if the plaintiff was guilty of contributory negligence, then the courts may reduce the award of damages. In this case, L.C. Diaz was guilty of contributory negligence in allowing a withdrawal slip signed by its authorized signatories to fall into the hands of an impostor. Thus, the liability of Solidbank should be reduced. In Philippine Bank of Commerce v. Court of Appeals, where the Court held the depositor guilty of contributory negligence, we allocated the damages between the depositor and the bank on a 40-60 ratio. Applying the same ruling to this case, we hold that L.C. Diaz must shoulder 40% of the actual damages awarded by the appellate court. Solidbank must pay the other 60% of the actual damages.
[33]

WHEREFORE, the decision of the Court of Appeals is AFFIRMED with MODIFICATION. Petitioner Solidbank Corporation shall pay private respondent L.C. Diaz and Company, CPAs only 60% of the actual damages awarded by the Court of Appeals. The remaining 40% of the actual damages shall be borne by private respondent L.C. Diaz and Company, CPAs. Proportionate costs.

It turned out that on December 16, 1988, a John Doe presented to defendant-appellant bank for encashment a couple of plaintiffappellee corporations checks (Nos. 401116 and 401117) with the indicated value of P110,000.00 each. It is admitted that these 2 checks were among those presigned by plaintiff-appellee corporations authorized signatories. The two (2) checks had similar entries with similar infirmities and irregularities. On the space where the name of the payee should be indicated (Pay To The Order Of) the following 2-line entries were instead typewritten: on the upper line was the word "CASH" while the lower line had the following typewritten words, viz: "ONE HUNDRED TEN THOUSAND PESOS ONLY." Despite the highly irregular entries on the face of the checks, defendantappellant bank, without as much as verifying and/or confirming the legitimacy of the checks considering the substantial amount involved and the obvious infirmity/defect of the checks on their faces, encashed said checks. A verification process, even by was of a telephone call to PRCI office, would have taken less than ten (10) minutes. But this was not done by BA. Investigation conducted by plaintiff-appellee corporation yielded the fact that there was no transaction involving PRCI that call for the payment of P220,000.00 to anyone. The checks appeared to have come into the hands of an employee of PRCI (one Clarita Mesina who was subsequently criminally charged for qualified theft) who eventually completed without authority the entries on the presigned checks. PRCIs demand for defendant-appellant to pay fell on deaf ears. Hence, the complaint.4 After due proceedings, the trial court rendered a Decision in favor of respondent, the dispositive portion of which reads: PREMISES CONSIDERED, judgment is hereby rendered in favor of plaintiff and against the defendant, and the latter is ordered to pay plaintiff: (1) The sum of Two Hundred Twenty Thousand (P220,000.00) Pesos, with legal interest to be computed from date of the filing of the herein complaint; (2) The sum of Twenty Thousand (P20,000.00) Pesos by way of attorneys fees; (3) The sum of Ten Thousand (P10,000.00) Pesos for litigation expenses, and (4) To pay the costs of suit. SO ORDERED.5 Petitioner appealed the aforesaid trial court Decision to the CA which, however, affirmed said decision in toto in its July 16, 2001 Decision. Petitioners Motion for Reconsideration of the CA Decision was subsequently denied on September 28, 2001. Petitioner now comes before this Court arguing that:

I. The Court of Appeals gravely erred in holding that the proximate cause of respondents loss was petitioners encashment of the checks. A. The Court of Appeals gravely erred in holding that petitioner was liable for the amount of the checks despite the fact that petitioner was merely fulfilling its obligation under law and contract. B. The Court of Appeals gravely erred in holding that petitioner had a duty to verify the encashment, despite the absence of any obligation to do so. C. The Court of Appeals gravely erred in not applying Section 14 of the Negotiable Instruments Law, despite its clear applicability to this case; II. The Court of Appeals gravely erred in not holding that the proximate cause of respondents loss was its own grossly negligent practice of pre-signing checks without payees and amounts and delivering these pre-signed checks to its employees (other than their signatories). III. The Court of Appeals gravely erred in affirming the trial courts award of attorneys fees despite the absence of any applicable ground under Article 2208 of the Civil Code. IV. The Court of Appeals gravely erred in not awarding attorneys fees, moral and exemplary damages, and costs of suit in favor of petitioner, who clearly deserves them.6 From the discussions of both parties in their pleadings, the key issue to be resolved in the present case is whether the proximate cause of the wrongful encashment of the checks in question was due to (a) petitioners failure to make a verification regarding the said checks with the respondent in view of the misplacement of entries on the face of the checks or (b) the practice of the respondent of pre-signing blank checks and leaving the same with its employees. Petitioner insists that it merely fulfilled its obligation under law and contract when it encashed the aforesaid checks. Invoking Sections 1267 and 1858 of the Negotiable Instruments Law (NIL), petitioner claims that its duty as a drawee bank to a drawer-client maintaining a checking account with it is to pay orders for checks bearing the drawer-clients genuine signatures. The genuine signatures of the clients duly authorized signatories affixed on the checks signify the order for payment. Thus, pursuant to the said obligation, the drawee bank has the duty to determine whether the signatures appearing on the check are the drawerclients or its duly authorized signatories. If the signatures are genuine, the bank has the unavoidable legal and contractual duty to pay. If the signatures are forged and falsified, the drawee bank has the corollary, but equally unavoidable legal and contractual, duty not to pay.9

Furthermore, petitioner maintains that there exists a duty on the drawee bank to inquire from the drawer before encashing a check only when the check bears a material alteration. A material alteration is defined in Section 125 of the NIL to be one which changes the date, the sum payable, the time or place of payment, the number or relations of the parties, the currency in which payment is to be made or one which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect. With respect to the checks at issue, petitioner points out that they do not contain any material alteration. 10 This is a fact which was affirmed by the trial court itself.11 There is no dispute that the signatures appearing on the subject checks were genuine signatures of the respondents authorized joint signatories; namely, Antonia Reyes and Gregorio Reyes who were respondents President and Vice-President for Finance, respectively. Both pre-signed the said checks since they were both scheduled to go abroad and it was apparently their practice to leave with the company accountant checks signed in black to answer for company obligations that might fall due during the signatories absence. It is likewise admitted that neither of the subject checks contains any material alteration or erasure. However, on the blank space of each check reserved for the payee, the following typewritten words appear: "ONE HUNDRED TEN THOUSAND PESOS ONLY." Above the same is the typewritten word, "CASH." On the blank reserved for the amount, the same amount of One Hundred Ten Thousand Pesos was indicated with the use of a check writer. The presence of these irregularities in each check should have alerted the petitioner to be cautious before proceeding to encash them which it did not do. It is well-settled that banks are engaged in a business impressed with public interest, and it is their duty to protect in return their many clients and depositors who transact business with them. They have the obligation to treat their clients account meticulously and with the highest degree of care, considering the fiduciary nature of their relationship. The diligence required of banks, therefore, is more than that of a good father of a family.12 Petitioner asserts that it was not duty-bound to verify with the respondent since the amount below the typewritten word "CASH," expressed in words, is the very same amount indicated in figures by means of a check writer on the amount portion of the check. The amount stated in words is, therefore, a mere reiteration of the amount stated in figures. Petitioner emphasizes that a reiteration of the amount in words is merely a repetition and that a repetition is not an alteration which if present and material would have enjoined it to commence verification with respondent.13 We do not agree with petitioners myopic view and carefully crafted defense. Although not in the strict sense "material alterations," the misplacement of the typewritten entries for the payee and the amount on the same blank and the repetition of the amount using a check writer were glaringly obvious irregularities on the face of the check. Clearly, someone made a mistake in filling up the checks and the repetition of the entries was possibly an attempt to rectify the mistake. Also, if the check

had been filled up by the person who customarily accomplishes the checks of respondent, it should have occurred to petitioners employees that it would be unlikely such mistakes would be made. All these circumstances should have alerted the bank to the possibility that the holder or the person who is attempting to encash the checks did not have proper title to the checks or did not have authority to fill up and encash the same. As noted by the CA, petitioner could have made a simple phone call to its client to clarify the irregularities and the loss to respondent due to the encashment of the stolen checks would have been prevented. In the case at bar, extraordinary diligence demands that petitioner should have ascertained from respondent the authenticity of the subject checks or the accuracy of the entries therein not only because of the presence of highly irregular entries on the face of the checks but also of the decidedly unusual circumstances surrounding their encashment. Respondents witness testified that for checks in amounts greater than Twenty Thousand Pesos (P20,000.00) it is the companys practice to ensure that the payee is indicated by name in the check.14 This was not rebutted by petitioner. Indeed, it is highly uncommon for a corporation to make out checks payable to "CASH" for substantial amounts such as in this case. If each irregular circumstance in this case were taken singly or isolated, the banks employees might have been justified in ignoring them. However, the confluence of the irregularities on the face of the checks and circumstances that depart from the usual banking practice of respondent should have put petitioners employees on guard that the checks were possibly not issued by the respondent in due course of its business. Petitioners subtle sophistry cannot exculpate it from behavior that fell extremely short of the highest degree of care and diligence required of it as a banking institution. Indeed, taking this with the testimony of petitioners operations manager that in case of an irregularity on the face of the check (such as when blanks were not properly filled out) the bank may or may not call the client depending on how busy the bank is on a particular day,15 we are even more convinced that petitioners safeguards to protect clients from check fraud are arbitrary and subjective. Every client should be treated equally by a banking institution regardless of the amount of his deposits and each client has the right to expect that every centavo he entrusts to a bank would be handled with the same degree of care as the accounts of other clients. Perforce, we find that petitioner plainly failed to adhere to the high standard of diligence expected of it as a banking institution. In defense of its cashier/tellers questionable action, petitioner insists that pursuant to Sections 1416 and 1617 of the NIL, it could validly presume, upon presentation of the checks, that the party who filled up the blanks had authority and that a valid and intentional delivery to the party presenting the checks had taken place. Thus, in petitioners view, the sole blame for this debacle should be shifted to respondent for having its signatories pre-sign and deliver the subject checks. 18 Petitioner argues that there was indeed delivery in this case because, following American jurisprudence, the gross negligence of respondents accountant in safekeeping the subject checks which resulted in their theft should be treated as a voluntary delivery by the maker who is estopped from claiming non-delivery of the instrument.19

Petitioners contention would have been correct if the subject checks were correctly and properly filled out by the thief and presented to the bank in good order. In that instance, there would be nothing to give notice to the bank of any infirmity in the title of the holder of the checks and it could validly presume that there was proper delivery to the holder. The bank could not be faulted if it encashed the checks under those circumstances. However, the undisputed facts plainly show that there were circumstances that should have alerted the bank to the likelihood that the checks were not properly delivered to the person who encashed the same. In all, we see no reason to depart from the finding in the assailed CA Decision that the subject checks are properly characterized as incomplete and undelivered instruments thus making Section 1520 of the NIL applicable in this case. However, we do agree with petitioner that respondents officers practice of pre-signing of blank checks should be deemed seriously negligent behavior and a highly risky means of purportedly ensuring the efficient operation of businesses. It should have occurred to respondents officers and managers that the pre-signed blank checks could fall into the wrong hands as they did in this case where the said checks were stolen from the company accountant to whom the checks were entrusted. Nevertheless, even if we assume that both parties were guilty of negligent acts that led to the loss, petitioner will still emerge as the party foremost liable in this case. In instances where both parties are at fault, this Court has consistently applied the doctrine of last clear chance in order to assign liability. In Westmont Bank v. Ong,21 we ruled: [I]t is petitioner [bank] which had the last clear chance to stop the fraudulent encashment of the subject checks had it exercised due diligence and followed the proper and regular banking procedures in clearing checks. As we had earlier ruled, the one who had a last clear opportunity to avoid the impending harm but failed to do so is chargeable with the consequences thereof.22 (emphasis ours) In the case at bar, petitioner cannot evade responsibility for the loss by attributing negligence on the part of respondent because, even if we concur that the latter was indeed negligent in presigning blank checks, the former had the last clear chance to avoid the loss. To reiterate, petitioners own operations manager admitted that they could have called up the client for verification or confirmation before honoring the dubious checks. Verily, petitioner had the final opportunity to avert the injury that befell the respondent. Failing to make the necessary verification due to the volume of banking transactions on that particular day is a flimsy and unacceptable excuse, considering that the "banking business is so impressed with public interest where the trust and confidence of the public in general is of paramount importance such that the appropriate standard of diligence must be a high degree of diligence, if not the utmost diligence." 23 Petitioners negligence has been undoubtedly established and, thus, pursuant to Art. 1170 of the NCC,24 it must suffer the consequence of said negligence.

In the interest of fairness, however, we believe it is proper to consider respondents own negligence to mitigate petitioners liability. Article 2179 of the Civil Code provides: Art. 2179. When the plaintiffs own negligence was the immediate and proximate cause of his injury, he cannot recover damages. But if his negligence was only contributory, the immediate and proximate cause of the injury being the defendants lack of due care, the plaintiff may recover damages, but the courts shall mitigate the damages to be awarded.1avvph!1 Explaining this provision in Lambert v. Heirs of Ray Castillon,25 the Court held: The underlying precept on contributory negligence is that a plaintiff who is partly responsible for his own injury should not be entitled to recover damages in full but must bear the consequences of his own negligence. The defendant must thus be held liable only for the damages actually caused by his negligence. xxx xxx xxx As we previously stated, respondents practice of signing checks in blank whenever its authorized bank signatories would travel abroad was a dangerous policy, especially considering the lack of evidence on record that respondent had appropriate safeguards or internal controls to prevent the pre-signed blank checks from falling into the hands of unscrupulous individuals and being used to commit a fraud against the company. We cannot believe that there was no other secure and reasonable way to guarantee the non-disruption of respondents business. As testified to by petitioners expert witness, other corporations would ordinarily have another set of authorized bank signatories who would be able to sign checks in the absence of the preferred signatories.26Indeed, if not for the fortunate happenstance that the thief failed to properly fill up the subject checks, respondent would expectedly take the blame for the entire loss since the defense of forgery of a drawers signature(s) would be unavailable to it. Considering that respondent knowingly took the risk that the pre-signed blank checks might fall into the hands of wrongdoers, it is but just that respondent shares in the responsibility for the loss. We also cannot ignore the fact that the person who stole the presigned checks subject of this case from respondents accountant turned out to be another employee, purportedly a clerk in respondents accounting department. As the employer of the "thief," respondent supposedly had control and supervision over its own employee. This gives the Court more reason to allocate part of the loss to respondent. Following established jurisprudential precedents,27 we believe the allocation of sixty percent (60%) of the actual damages involved in this case (represented by the amount of the checks with legal interest) to petitioner is proper under the premises. Respondent should, in light of its contributory negligence, bear forty percent (40%) of its own loss. Finally, we find that the awards of attorneys fees and litigation expenses in favor of respondent are not justified under the

circumstances and, thus, must be deleted. The power of the court to award attorneys fees and litigation expenses under Article 2208 of the NCC28 demands factual, legal, and equitable justification. An adverse decision does not ipso facto justify an award of attorneys fees to the winning party.29 Even when a claimant is compelled to litigate with third persons or to incur expenses to protect his rights, still attorneys fees may not be awarded where no sufficient showing of bad faith could be reflected in a partys persistence in a case other than an erroneous conviction of the righteousness of his cause.30 WHEREFORE, the Decision of the Court of Appeals dated July 16, 2001 and its Resolution dated September 28, 2001 are AFFIRMED with the following MODIFICATIONS: (a) petitioner Bank of America NT & SA shall pay to respondent Philippine Racing Club sixty percent (60%) of the sum of Two Hundred Twenty Thousand Pesos (P220,000.00) with legal interest as awarded by the trial court and (b) the awards of attorneys fees and litigation expenses in favor of respondent are deleted. Proportionate costs. SO ORDERED.

KAPUNAN, J.:p This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the decision dated April 29, 1992 of respondent Court of Appeals in CA-G.R. CV No. 24776 and its resolution dated September 16, 1992, denying petitioner Philippine National Bank's motion for reconsideration of said decision. The facts of the case are as follows. A check with serial number 7-3666-223-3, dated August 7, 1981 in the amount of P97,650.00 was issued by the Ministry of Education and Culture (now Department of Education, Culture and Sports [DECS]) payable to F. Abante Marketing. This check was drawn against Philippine National Bank (herein petitioner). On August 11, 1981, F. Abante Marketing, a client of Capitol City Development Bank (Capitol), deposited the questioned check in its savings account with said bank. In turn, Capitol deposited the same in its account with the Philippine Bank of Communications (PBCom) which, in turn, sent the check to petitioner for clearing. Petitioner cleared the check as good and, thereafter, PBCom credited Capitol's account for the amount stated in the check. However, on October 19, 1981, petitioner returned the check to PBCom and debited PBCom's account for the amount covered by the check, the reason being that there was a "material alteration" of the check number. PBCom, as collecting agent of Capitol, then proceeded to debit the latter's account for the same amount, and subsequently, sent the check back to petitioner. Petitioner, however, returned the check to PBCom. On the other hand, Capitol could not, in turn, debit F. Abante Marketing's account since the latter had already withdrawn the amount of the check as of October 15, 1981. Capitol sought clarification from PBCom and demanded the re-crediting of the amount. PBCom followed suit by requesting an explanation and re-crediting from petitioner. Since the demands of Capitol were not heeded, it filed a civil suit with the Regional Trial Court of Manila against PBCom which, in turn, filed a third-party complaint against petitioner for reimbursement/indemnity with respect to the claims of Capitol. Petitioner, on its part, filed a fourth-party complaint against F. Abante Marketing. On October 3, 1989; the Regional Trial Court rendered its decision the dispositive portion of which reads: WHEREFORE, judgment is hereby rendered as follows:

1.) On plaintiffs complaint, defendant Philippine Bank of Communications is ordered to re-credit or reimburse plaintiff Capitol City Development Bank the amount of P97,650.00, plus interest of 12 percent thereto from October 19, 1981 until the amount is fully paid; 2.) On Philippine Bank of Communications third-party complaint third-party defendant PNB is ordered to reimburse and indemnify Philippine Bank of Communications for whatever amount PBCom pays to plaintiff; 3.) On Philippine National Bank's fourth-party complaint, F. Abante Marketing is ordered to reimburse and indemnify PNB for whatever amount PNB pays to PBCom; 4.) On attorney's fees, Philippine Bank of Communications is ordered to pay Capitol City Development Bank attorney's fees in the amount of Ten Thousand (P10,000.00) Pesos; but PBCom is entitled to reimbursement/indemnity from PNB; and Philippine National Bank to be, in turn reimbursed or indemnified by F. Abante Marketing for the same amount; 5.) The Counterclaims of PBCom and PNB are hereby dismissed; 6.) No pronouncement as to costs. SO ORDERED. 1 An appeal was interposed before the respondent Court of Appeals which rendered its decision on April 29, 1992, the decretal portion of which reads: WHEREFORE, the judgment appealed from is modified by exempting PBCom from liability to plaintiff-appellee for attorney's fees and ordering PNB to honor the check for P97,650.00, with interest as declared by the trial court, and pay plaintiff-appellee attorney's fees of P10,000.00. After the check shall have been honored by PNB, PBCom shall re-credit plaintiff-appellee's account with it with the amount. No pronouncement as to costs. SO ORDERED. 2 A motion for reconsideration of the decision was denied by the respondent Court in its resolution dated September 16, 1992 for lack of merit. 3

G.R. No. 107508 April 25, 1996 PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS, CAPITOL CITY DEVELOPMENT BANK, PHILIPPINE BANK OF COMMUNICATIONS, and F. ABANTE MARKETING, respondents.

Hence, petitioner filed the instant petition which raises the following issues: I WHETHER OR NOT AN ALTERATION OF THE SERIAL NUMBER OF A CHECK IS A MATERIAL ALTERATION UNDER THE NEGOTIABLE INSTRUMENTS LAW. II WHETHER OR NOT A CERTIFICATION HEREIN ISSUED BY THE MINISTRY OF EDUCATION CAN BE GIVEN WEIGHT IN EVIDENCE. III WHETHER OR NOT A DRAWEE BANK WHO FAILED TO RETURN A. CHECK WITHIN THE TWENTY FOUR (24) HOUR CLEARING PERIOD MAY RECOVER THE VALUE OF THE CHECK FROM THE COLLECTING BANK. IV WHETHER OR NOT IN THE ABSENCE OF MALICE OR ILL WILL PETITIONER PNB MAY BE HELD LIABLE FOR ATTORNEY'S FEES. 4 We find no merit in the petition. We shall first deal with the effect of the alteration of the serial number on the negotiability of the check in question. Petitioner anchors its position on Section 125 of the Negotiable Instruments Law (ACT No. 2031) 5 which provides: Sec. 225. What constitutes a material alteration. Any alteration which changes: (a) The date; (b) The sum payable, either for principal or interest; (c) The time or place of payment; (d) The number or the relations of the parties;

(e) The medium or currency payment is to be made;

in

which

Reproduced hereunder are some examples of material and immaterial alterations: A. Material Alterations: (1) Substituting the words "or bearer" for "order." (2) Writing "protest waived" above blank indorsements. (3) A change in the date from which interest is to run. (4) A check was originally drawn as follows: "Iron County Bank, Crystal Falls, Mich. Aug. 5, 1901. Pay to G.L. or order $9 fifty cents CTR" The insertion of the figure 5 before the figure 9, the instrument being otherwise unchanged. (5) Adding the words "with interest" with or without a fixed rate. (6) An alteration in the maturity of a note, whether the time for payment is thereby curtailed or extended. (7) An instrument was payable "First Nat'l Bank" the plaintiff added the word "Marion." (8) Plaintiff, without consent of the defendant, struck out the name of the defendant as payee and inserted the name of the maker of the original note. (9) Striking out the name of the payee and substituting that of the person who actually discounted the note. (10) Substituting the address of the maker for the name of a co-maker. 10 B. Immaterial Alterations: (1) Changing "I promise to pay" to "We promise to pay", where there are two makers. (2) Adding the word "annual" after the interest clause.

(f) Or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration. Petitioner alleges that there is no hard and fast rule in the interpretation of the aforequoted provision of the Negotiable Instruments Law. It maintains that under Section 125(f), any change that alters the effect of the instrument is a material alteration. 6 We do not agree. An alteration is said to be material if it alters the effect of the instrument. 7 It means an unauthorized change in an instrument that purports to modify in any respect the obligation of a party or an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party. 8 In other words, a material alteration is one which changes the items which are required to be stated under Section 1 of the Negotiable Instruments Law. Section 1 of the Negotiable Instruments Law provides: Sec. 1. Form of negotiable instruments. An instrument to be negotiable must conform to the following requirements: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. In his book entitled "Pandect of Commercial Law and Jurisprudence," Justice Jose C. Vitug opines that "an innocent alteration (generally, changes on items other than those required to be stated under Sec. 1, N.I.L.) and spoliation (alterations done by a stranger) will not avoid the instrument, but the holder may enforce it only according to its original tenor." 9

(3) Adding the date of maturity as a marginal notation. (4) Filling in the date of actual delivery where the makers of a note gave it with the date in blank, "July ____." (5) An alteration of the marginal figures of a note where the sum stated in words in the body remained unchanged. (6) The insertion of the legal rate of interest where the note had a provision for "interest at _______ per cent." (7) A printed form of promissory note had on the margin the printed words, "Extended to ________." The holder on or after maturity wrote in the blank space the words "May 1, 1913," as a reference memorandum of a promise made by him to the principal maker at the time the words were written to extend the time of payment. (8) Where there was a blank for the place of payment, filling in the blank with the place desired. (9) Adding to an indorsee's name the abbreviation "Cash" when it had been agreed that the draft should be discounted by the trust company of which the indorsee was cashier. (10) The indorsement of a note by a stranger after its delivery to the payee at the time the note was negotiated to the plaintiff. (11) An extension of time given by the holder of a note to the principal maker, without the consent of a surety co-maker. 11 The case at bench is unique in the sense that what was altered is the serial number of the check in question, an item which, it can readily be observed, is not an essential requisite for negotiability under Section 1 of the Negotiable Instruments Law. The aforementioned alteration did not change the relations between the parties. The name of the drawer and the drawee were not altered. The intended payee was the same. The sum of money due to the payee remained the same. Despite these findings, however, petitioner insists, that: xxx xxx xxx It is an accepted concept, besides being a negotiable instrument itself, that a TCAA

check by its very nature is the medium of exchange of governments (sic) instrumentalities of agencies. And as (a) safety measure, every government office o(r) agency (is) assigned TCAA checks bearing different number series. A concrete example is that of the disbursements of the Ministry of Education and Culture. It is issued by the Bureau of Treasury sizeable bundles of checks in booklet form with serial numbers different from other government office or agency. Now, for fictitious payee to succeed in its malicious intentions to defraud the government, all it need do is to get hold of a TCAA Check and have the serial numbers of portion (sic) thereof changed or altered to make it appear that the same was issued by the MEG. Otherwise, stated, it is through the serial numbers that (a) TCAA Check is determined to have been issued by a particular office or agency of the government. 12 xxx xxx xxx Petitioner's arguments fail to convince. The check's serial number is not the sole indication of its origin.. As succinctly found by the Court of Appeals, the name of the government agency which issued the subject check was prominently printed therein. The check's issuer was therefore sufficiently identified, rendering the referral to the serial number redundant and inconsequential. Thus, we quote with favor the findings of the respondent court: xxx xxx xxx If the purpose of the serial number is merely to identify the issuing government office or agency, its alteration in this case had no material effect whatsoever on the integrity of the check. The identity of the issuing government office or agency was not changed thereby and the amount of the check was not charged against the account of another government office or agency which had no liability under the check. The owner and issuer of the check is boldly and clearly printed on its face, second line from the top: "MINISTRY OF EDUCATION AND CULTURE," and below the name of the payee are the rubber-stamped words: "Ministry of Educ. & Culture." These words are not alleged to have been falsely or fraudulently intercalated into the check. The ownership of the check is established without the necessity of recourse to the serial number. Neither there any proof that the amount of

the check was erroneously charged against the account of a government office or agency other than the Ministry of Education and Culture. Hence, the alteration in the number of the check did not affect or change the liability of the Ministry of Education and Culture under the check and, therefore, is immaterial. The genuineness of the amount and the signatures therein of then Deputy Minister of Education Hermenegildo C. Dumlao and of the resident Auditor, Penomio C. Alvarez are not challenged. Neither is the authenticity of the different codes appearing therein questioned . . . 13 (Emphasis ours.) Petitioner, thus cannot refuse to accept the check in question on the ground that the serial number was altered, the same being an immaterial or innocent one. We now go to the second issue. It is petitioner's submission that the certification issued by Minrado C. Batonghinog, Cashier III of the MEC clearly shows that the check was altered. Said certification reads:

July 22, 198 TO WHOM IT MAY CONCERN: This is to certify that according to the records of this Office, TCAA PNB Check Mo. SN73666223-3 dated August 7, 1981 drawn in favor of F. Abante Marketing in the amount of NINETY (S)EVEN THOUSAND SIX HUNDRED FIFTY PESOS ONLY (P97,650.00) was not issued by this Office nor released to the payee concerned. The series number of said check was not included among those requisition by this Office from the Bureau of Treasury.

Very truly y (SGD.) MINRADO C. BATONGHINOG

Cashier III 1 Petitioner claims that even if the author of the certification issued by the Ministry of Education and Culture (MEG) was not presented, still the best evidence of the material alteration would be the disputed check itself and the serial number thereon. Petitioner thus assails the refusal of respondent court to give weight to the certification because the author thereof was not presented to identify it and to be cross-examined thereon. 15 We agree with the respondent court.

The one who signed the certification was not presented before the trial court to prove that the said document was really the document he prepared and that the signature below the said document is his own signature. Neither did petitioner present an eyewitness to the execution of the questioned document who could possibly identify it. 16 Absent this proof, we cannot rule on the authenticity of the contents of the certification. Moreover, as we previously emphasized, there was no material alteration on the check, the change of its serial number not being substantial to its negotiability. Anent the third issue whether or not the drawee bank may still recover the value of the check from the collecting bank even if it failed to return the check within the twenty-four (24) hour clearing period because the check was tampered suffice it to state that since there is no material alteration in the check, petitioner has no right to dishonor it and return it to PBCom, the same being in all respects negotiable. However, the amount of P10,000.00 as attorney's fees is hereby deleted. In their respective decisions, the trial court and the Court of Appeals failed to explicitly state the rationale for the said award. The trial court merely ruled as follows: With respect to Capitol's claim for damages consisting of alleged loss of opportunity, this Court finds that Capitol failed to adequately substantiate its claim. What Capitol had presented was a self-serving, unsubstantiated and speculative computation of what it allegedly could have earned or realized were it not for the debit made by PBCom which was triggered by the return and debit made by PNB. However, this Court finds that it would be fair and reasonable to impose interest at 12% per annum on the principal amount of the check computed from October 19, 1981 (the date PBCom debited Capitol's account) until the amount is fully paid and reasonable attorney's fees. 17(Emphasis ours.) And contrary to the Court of Appeal's resolution, petitioner unambiguously questioned before it the award of attorney's fees, assigning the latter as one of the errors committed by the trial court. 18 The foregoing is in conformity with the guiding principles laid down in a long line of cases and reiterated recently inConsolidated Bank & Trust Corporation (Solidbank) v. Court of Appeals: 19 The award of attorney's fees lies within the discretion of the court and depends upon the circumstances of each case. However, the discretion of the court to award attorney's fees under Article 2208 of the Civil Code of the Philippines demands factual, legal and equitable justification, without which the

award is a conclusion without a premise and improperly left to speculation and conjecture. It becomes a violation of the proscription against the imposition of a penalty on the right to litigate (Universal Shipping Lines, Inc. v. Intermediate Appellate Court, 188 SCRA 170 [1990]). The reason for the award must be stated in the text of the court's decision. If it is stated only in the dispositive portion of the decision, the same shall be disallowed. As to the award of attorney's fees being an exception rather than the rule, it is necessary for the court to make findings of fact and law that would bring the case within the exception and justify the grant of the award (Refractories Corporation of the Philippines v. Intermediate Appellate Court, 176 SCRA 539 [176 SCRA 539]). WHEREFORE, premises considered, except for the deletion of the award of attorney's fees, the decision of the Court of Appeals is hereby AFFIRMED. SO ORDERED.

G.R. Nos. L-25836-37 January 31, 1981 THE PHILIPPINE BANK OF COMMERCE, plaintiff-appellee, vs. JOSE M. ARUEGO, defendant-appellant.

FERNANDEZ, J.: The defendant, Jose M. Aruego, appealed to the Court of Appeals from the order of the Court of First Instance of Manila, Branch XIII, in Civil Case No. 42066 denying his motion to set aside the order declaring him in default, 1and from the order of said court in the same case denying his motion to set aside the judgment rendered after he was declared in default. 2 These two appeals of the defendant were docketed as CA-G.R. NO. 27734-R and CAG.R. NO. 27940-R, respectively. Upon motion of the defendant on July 25, 1960, 3 he was allowed by the Court of Appeals to file one consolidated record on appeal of CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R. 4 In a resolution promulgated on March 1, 1966, the Court of Appeals, First Division, certified the consolidated appeal to the Supreme Court on the ground that only questions of law are involved. 5 On December 1, 1959, the Philippine Bank of Commerce instituted against Jose M. Aruego Civil Case No. 42066 for the recovery of the total sum of about P35,000.00 with daily interest thereon from November 17, 1959 until fully paid and commission equivalent to 3/8% for every thirty (30) days or fraction thereof plus attorney's fees equivalent to 10% of the total amount due and costs. 6 The complaint filed by the Philippine Bank of Commerce contains twenty-two (22) causes of action referring to twenty-two (22) transactions entered into by the said Bank and Aruego on different dates covering the period from August 28, 1950 to March 14, 1951. 7 The sum sought to be recovered represents the cost of the printing of "World Current Events," a periodical published by the defendant. To facilitate the payment of the printing the defendant obtained a credit accommodation from the plaintiff. Thus, for every printing of the "World Current Events," the printer, Encal Press and Photo Engraving, collected the cost of printing by drawing a draft against the plaintiff, said draft being sent later to the defendant for acceptance. As an added security for the payment of the amounts advanced to Encal Press and Photo-Engraving, the plaintiff bank also required defendant Aruego to execute a trust receipt in favor of said bank wherein said defendant undertook to hold in trust for plaintiff the periodicals and to sell the same with the promise to turn over to the plaintiff the proceeds of the sale of said publication to answer for the payment of all obligations arising from the draft. 8

Aruego received a copy of the complaint together with the summons on December 2, 1959. 9 On December 14, 1959 defendant filed an urgent motion for extension of time to plead, and set the hearing on December 16, 1959.10 At the hearing, the court denied defendant's motion for extension. Whereupon, the defendant filed a motion to dismiss the complaint on December 17, 1959 on the ground that the complaint states no cause of action because: a) When the various bills of exchange were presented to the defendant as drawee for acceptance, the amounts thereof had already been paid by the plaintiff to the drawer (Encal Press and Photo Engraving), without knowledge or consent of the defendant drawee. b) In the case of a bill of exchange, like those involved in the case at bar, the defendant drawee is an accommodating party only for the drawer (Encal Press and Photo-Engraving) and win be liable in the event that the accommodating party (drawer) fails to pay its obligation to the plaintiff. 11 The complaint was dismissed in an order dated December 22, 1959, copy of which was received by the defendant on December 24, 1959. 12 On January 13, 1960, the plaintiff filed a motion for reconsideration. 13 On March 7, 1960, acting upon the motion for reconsideration filed by the plaintiff, the trial court set aside its order dismissing the complaint and set the case for hearing on March 15, 1960 at 8:00 in the morning. 14 A copy of the order setting aside the order of dismissal was received by the defendant on March 11, 1960 at 5:00 o'clock in the afternoon according to the affidavit of the deputy sheriff of Manila, Mamerto de la Cruz. On the following day, March 12, 1960, the defendant filed a motion to postpone the trial of the case on the ground that there having been no answer as yet, the issues had not yet been joined. 15 On the same date, the defendant filed his answer to the complaint interposing the following defenses: That he signed the document upon which the plaintiff sues in his capacity as President of the Philippine Education Foundation; that his liability is only secondary; and that he believed that he was signing only as an accommodation party. 16 On March 15, 1960, the plaintiff filed an ex parte motion to declare the defendant in default on the ground that the defendant should have filed his answer on March 11, 1960. He contends that by filing his answer on March 12, 1960, defendant was one day late. 17 On March 19, 1960 the trial court declared the defendant in default. 18 The defendant learned of the order declaring him in default on March 21, 1960. On March 22, 1960 the defendant filed a motion to set aside the order of default alleging that although the order of the court dated March 7, 1960 was received on March 11, 1960 at 5:00 in the afternoon, it could not have been reasonably expected of the defendant to file his answer on the last day of the reglementary period, March 11, 1960, within office hours, especially because the order of the court dated March 7, 1960 was brought to the attention of counsel only in the early hours of March 12, 1960. The defendant also alleged that he has a good and substantial defense. Attached to the motion are the affidavits of deputy sheriff

Mamerto de la Cruz that he served the order of the court dated March 7, 1960 on March 11, 1960, at 5:00 o'clock in the afternoon and the affidavit of the defendant Aruego that he has a good and substantial defense. 19 The trial court denied the defendant's motion on March 25, 1960. 20 On May 6, 1960, the trial court rendered judgment sentencing the defendant to pay to the plaintiff the sum of P35,444.35 representing the total amount of his obligation to the said plaintiff under the twenty-two (22) causes of action alleged in the complaint as of November 15, 1957 and the sum of P10,000.00 as attorney's fees. 21 On May 9, 1960 the defendant filed a notice of appeal from the order dated March 25, 1961 denying his motion to set aside the order declaring him in default, an appeal bond in the amount of P60.00, and his record on appeal. The plaintiff filed his opposition to the approval of defendant's record on appeal on May 13, 1960. The following day, May 14, 1960, the lower court dismissed defendant's appeal from the order dated March 25, 1960 denying his motion to set aside the order of default. 22 On May 19, 1960, the defendant filed a motion for reconsideration of the trial court's order dismissing his appeal. 23 The plaintiff, on May 20, 1960, opposed the defendant's motion for reconsideration of the order dismissing appeal. 24 On May 21, 1960, the trial court reconsidered its previous order dismissing the appeal and approved the defendant's record on appeal. 25 On May 30, 1960, the defendant received a copy of a notice from the Clerk of Court dated May 26, 1960, informing the defendant that the record on appeal filed ed by the defendant was forwarded to the Clerk of Court of Appeals. 26 On June 1, 1960 Aruego filed a motion to set aside the judgment rendered after he was declared in default reiterating the same ground previously advanced by him in his motion for relief from the order of default. 27 Upon opposition of the plaintiff filed on June 3, 1960, 28 the trial court denied the defendant's motion to set aside the judgment by default in an order of June 11, 1960. 29 On June 20, 1960, the defendant filed his notice of appeal from the order of the court denying his motion to set aside the judgment by default, his appeal bond, and his record on appeal. The defendant's record on appeal was approved by the trial court on June 25, 1960. 30 Thus, the defendant had two appeals with the Court of Appeals: (1) Appeal from the order of the lower court denying his motion to set aside the order of default docketed as CA-G.R. NO. 27734-R; (2) Appeal from the order denying his motion to set aside the judgment by default docketed as CA-G.R. NO. 27940-R. In his brief, the defendant-appellant assigned the following errors: I THE LOWER COURT ERRED IN HOLDING THAT THE DEFENDANT WAS IN DEFAULT. II THE LOWER COURT ERRED IN ENTERTAINING THE MOTION TO DECLARE DEFENDANT IN

DEFAULT ALTHOUGH AT THE TIME THERE WAS ALREADY ON FILE AN ANSWER BY HIM WITHOUT FIRST DISPOSING OF SAID ANSWER IN AN APPROPRIATE ACTION. III THE LOWER COURT ERRED IN DENYING DEFENDANT'S PETITION FOR RELIEF OF ORDER OF DEFAULT AND FROM JUDGMENT BY DEFAULT AGAINST DEFENDANT. 31 It has been held that to entitle a party to relief from a judgment taken against him through his mistake, inadvertence, surprise or excusable neglect, he must show to the court that he has a meritorious defense. 32 In other words, in order to set aside the order of default, the defendant must not only show that his failure to answer was due to fraud, accident, mistake or excusable negligence but also that he has a meritorious defense. The record discloses that Aruego received a copy of the complaint together with the summons on December 2, 1960; that on December 17, 1960, the last day for filing his answer, Aruego filed a motion to dismiss; that on December 22, 1960 the lower court dismissed the complaint; that on January 23, 1960, the plaintiff filed a motion for reconsideration and on March 7, 1960, acting upon the motion for reconsideration, the trial court issued an order setting aside the order of dismissal; that a copy of the order was received by the defendant on March 11, 1960 at 5:00 o'clock in the afternoon as shown in the affidavit of the deputy sheriff; and that on the following day, March 12, 1960, the defendant filed his answer to the complaint. The failure then of the defendant to file his answer on the last day for pleading is excusable. The order setting aside the dismissal of the complaint was received at 5:00 o'clock in the afternoon. It was therefore impossible for him to have filed his answer on that same day because the courts then held office only up to 5:00 o'clock in the afternoon. Moreover, the defendant immediately filed his answer on the following day. However, while the defendant successfully proved that his failure to answer was due to excusable negligence, he has failed to show that he has a meritorious defense. The defendant does not have a good and substantial defense. Defendant Aruego's defenses consist of the following: a) The defendant signed the bills of exchange referred to in the plaintiff's complaint in a representative capacity, as the then President of the Philippine Education Foundation Company, publisher of "World Current Events and Decision Law Journal," printed by Encal Press and Photo-Engraving, drawer of the said bills of exchange in favor of the plaintiff bank; b) The defendant signed these bills of exchange not as principal obligor, but as accommodation or additional party obligor, to add

to the security of said plaintiff bank. The reason for this statement is that unlike real bills of exchange, where payment of the face value is advanced to the drawer only upon acceptance of the same by the drawee, in the case in question, payment for the supposed bills of exchange were made before acceptance; so that in effect, although these documents are labelled bills of exchange, legally they are not bills of exchange but mere instruments evidencing indebtedness of the drawee who received the face value thereof, with the defendant as only additional security of the same. 33 The first defense of the defendant is that he signed the supposed bills of exchange as an agent of the Philippine Education Foundation Company where he is president. Section 20 of the Negotiable Instruments Law provides that "Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent or as filing a representative character, without disclosing his principal, does not exempt him from personal liability." An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he was signing as a representative of the Philippine Education Foundation Company. 34 He merely signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE ARGUEGO For failure to disclose his principal, Aruego is personally liable for the drafts he accepted. The defendant also contends that he signed the drafts only as an accommodation party and as such, should be made liable only after a showing that the drawer is incapable of paying. This contention is also without merit. An accommodation party is one who has signed the instrument as maker, drawer, indorser, without receiving value therefor and for the purpose of lending his name to some other person. Such person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of the taking of the instrument knew him to be only an accommodation party. 35 In lending his name to the accommodated party, the accommodation party is in effect a surety for the latter. He lends his name to enable the accommodated party to obtain credit or to raise money. He receives no part of the consideration for the instrument but assumes liability to the other parties thereto because he wants to accommodate another. In the instant case, the defendant signed as a drawee/acceptor. Under the Negotiable Instrument Law, a drawee is primarily liable. Thus, if the defendant who is a lawyer, he should not have signed as an acceptor/drawee. In doing so, he became primarily and personally liable for the drafts. The defendant also contends that the drafts signed by him were not really bills of exchange but mere pieces of evidence of indebtedness because payments were made before acceptance. This is also without merit. Under the Negotiable Instruments Law, a bill of exchange is an unconditional order in writting addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money

to order or to bearer. 36 As long as a commercial paper conforms with the definition of a bill of exchange, that paper is considered a bill of exchange. The nature of acceptance is important only in the determination of the kind of liabilities of the parties involved, but not in the determination of whether a commercial paper is a bill of exchange or not. It is evident then that the defendant's appeal can not prosper. To grant the defendant's prayer will result in a new trial which will serve no purpose and will just waste the time of the courts as well as of the parties because the defense is nil or ineffective. 37 WHEREFORE, the order appealed from in Civil Case No. 42066 of the Court of First Instance of Manila denying the petition for relief from the judgment rendered in said case is hereby affirmed, without pronouncement as to costs. SO ORDERED.

Palawan, in the amount of P36,800.00 and, as said Company needed funds for said construction, Jose Toribio, appellants' relative, and attorney-in-fact of the Company, approached the appellants asking them to mortgage their property to secure the loan of P10,000.00 which the Company was negotiating with the PNB. After some persuasion appellants signed on December 23, 1955 the 'Amendment of Real Estate Mortgage', mortgaging their said property to the PNB to guaranty the loan of P10,000.00 extended to the Company. The terms and conditions of the original mortgage for Pl,000.00 were made integral part of the new mortgage for P10,000.00 and both documents were registered with the Register of Deeds of Manila. The promissory note covering the loan of P10,000.00 dated December 29, 1955, maturing on April 27, 1956, was signed by Jose Toribio, as attorney-in-fact of the Company, and by the appellants. Appellants also signed the portion of the promissory note indicating that they are requesting the PNB to issue the Check covering the loan to the Company. On the same date (December 23, 1955) that the 'Amendment of Real Estate' was executed, Jose Toribio, in the same capacity as attorney-in- fact of the Company, executed also the 'Deed of Assignment' assigning all payments to be made by the Bureau to the Company on account of the contract for the construction of the Puerto Princesa building in favor of the PNB. This assignment of credit to the contrary notwithstanding, the Bureau; with approval, of the PNB, conditioned, however that they should be for labor and materials, made three payments to the Company on account of the contract price totalling P11,234.40. The Bureau's last request for P5,000.00 on June 20, 1956, however, was denied by the PNB for the reason that since the loan was already overdue as of April 28, 1956, the remaining balance of the contract price should be applied to the loan. The Company abandoned the work, as a consequence of which on June 30, 1956, the Bureau rescinded the construction contract and assumed the work of completing the building. On November 14, 1958, appellants wrote the PNB contending that since the PNB authorized payments to the Company instead of on account of the loan guaranteed by the mortgage there was a change in the conditions of the contract without the knowledge of appellants, which entitled the

latter to a cancellation of their mortgage contract. Failing in their bid to have the real estate mortgage cancelled, appellants filed on June 27, 1959 this action against the PNB, the Company, the latter's attorney-in-fact Jose Toribio, and the District Engineer of Puerto Princesa, Palawan, seeking the cancellation of their real estate mortgage. The complaint was amended to exclude the Company as defendant, it having been shown that its life as a partnership had already expired and, in lieu thereof, Ramon Concepcion and Manuel M. Tamayo, partners of the defunct Company, were impleaded in their private capacity as defendants. After hearing, the trial court rendered judgment, denying the prayer in the complaint that the petitioners be absolved from their obligation under the mortgage contract and that the said mortgage be released or cancelled. The petitioners were ordered to pay jointly and severally with their co-makers Ramon C. Concepcion and Manuel M. Tamayo the sum of P11,900.19 with interest at the rate of 6% per annum from the date of the filing of the complaint on June 27, 1959 until fully paid and Pl,000.00 attorney's fees. The decision also provided that if the judgment was not satisfied within 90 days from its receipt, the mortgaged properties together with all the improvements thereon belonging to the petitioners would be sold at public auction and applied to the judgment debt. The Court of Appeals affirmed the trial court's decision in toto stating that, as accommodation makers, the petitioners' liability is that of solidary co-makers and that since "the amounts released to the construction company were used therein and, therefore, were spent for the successful accomplishment of the work constructed for, the authorization made by the Philippine National Bank of partial payments to the construction company which was also one of the solidary debtors cannot constitute a valid defense on the part of the other solidary debtors. Moreover, those who rendered services and furnished materials in the construction are preferred creditors and have a lien on the price of the contract." The appellate court further held that PNB had no obligation whatsoever to notify the petitioners of its authorizing the three payments in the total amount of Pll,234.00 in favor of the Company because aside from the fact that the petitioners were not parties to the deed of assignment, there was no stipulation in said deed making it obligatory on the part of the PNB to notify the petitioners everytime it authorizes payment to the Company. It ruled that the petitioners cannot ask to be released from the real estate mortgage. In this petition, the petitioners raise the following issues which they present in the form of errors: I. First Assignment of Error.

G.R. No. L-34539 July 14, 1986 EULALIO PRUDENCIO and ELISA T. PRUDENCIO, petitioners, vs. THE HONORABLE COURT OF APPEALS, THE PHILIPPINE NATIONAL BANK, RAMON C. CONCEPCION and MANUEL M. TAMAYO, partners of the defunct partnership Concepcion & Tamayo Construction Company, JOSE TORIBIO, Atty-inFact of Concepcion & Tamayo Construction Company, and THE DISTRICT ENGINEER, Puerto Princesa, Palawan, respondents. Fernando R. Mangubat, Jr. for respondent PNB.

GUTIERREZ, JR., J.: This is a petition for review seeking to annul and set aside the decision of the Court of Appeals, now the Intermediate Appellate Court, affirming the order of the trial court which dismissed the petitioners' complaint for cancellation of their real estate mortgage and held them jointly and severally liable with the principal debtors on a promissory note which they signed as accommodation makers. The factual background of this case is stated in the decision of the appellate court: Appellants are the registered owners of a parcel of land located in Sampaloc, Manila, and covered by T.C.T. 35161 of the Register of Deeds of Manila. On October 7, 1954, this property was mortgaged by the appellants to the Philippine National Bank, hereinafter called PNB, to guarantee a loan of P1,000.00 extended to one Domingo Prudencio. Sometime in 1955, the Concepcion & Tamayo Construction Company, hereinafter called Company, had a pending contract with the Bureau of Public Works, hereinafter called the Bureau, for the construction of the municipal building in Puerto Princess,

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT HEREIN PETITIONERS WERE SOLIDARY CO-DEBTORS INSTEAD OF SURETIES: II. Second Assignment of Error. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONERS WERE NOT RELEASED FROM THEIR OBLIGATION TO THE RESPONDENT PNB, WHEN THE PNB, WITHOUT THE KNOWLEDGE AND CONSENT OF PETITIONERS, CHANGED THE TENOR AND CONDITION OF THE ASSIGNMENT OF PAYMENTS MADE BY THE PRINCIPAL DEBTOR; CONCEPCION & TAMAYO CONSTRUCTION COMPANY; AND RELEASED TO SUCH PRINCIPAL DEBTOR PAYMENTS FROM THE BUREAU OF PUBLIC WORKS WHICH WERE MORE THAN ENOUGH TO WIPE OUT THE INDEBTEDNESS TO THE PNB. The petitioners contend that as accommodation makers, the nature of their liability is only that of mere sureties instead of solidary co-debtors such that "a material alteration in the principal contract, effected by the creditor without the knowledge and consent of the sureties, completely discharges the sureties from all liability on the contract of suretyship. " They state that when respondent PNB did not apply the initial and subsequent payments to the petitioners' debt as provided for in the deed of assignment, they were released from their obligation as sureties and, therefore, the real estate mortgage executed by them should have been cancelled. Section 29 of the Negotiable Instrument Law provides: Liability of accommodation party. An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party. In the case of Philippine Bank of Commerce v. Aruego (102 SCRA 530, 539), we held that "... in lending his name to the accommodated party, the accommodation party is in effect a surety. ... . " However, unlike in a contract of suretyship, the liability of the accommodation party remains not only primary but also unconditional to a holder for value such that even if the accommodated party receives an extension of the period for payment without the consent of the accommodation party, the latter is still liable for the whole obligation and such extension does not release him because as far as a holder for value is concerned, he is a solidary co- debtor.

Expounding on the nature of the liability of an accommodation petition party under the aforequoted section, we ruled in Ang Tiong v. Ting (22 SCRA 713, 716): 3. That the appellant, again assuming him to be an accommodation indorser, may obtain security from the maker to protect himself against the danger of insolvency of the latter, cannot in any manner affect his liability to the appellee, as the said remedy is a matter of concern exclusively between accommodation indorser and accommodated party. So that the appellant stands only as a surety in relation to the maker, granting this to be true for the sake of argument, is immaterial to the claim of the appellee, and does not a whit diminish nor defeat the rights of the latter who is a holder for value. The liability of the appellant remains primary and unconditional. To sanction the appellant's theory is to give unwarranted legal recognition to the patent absurdity of a situation where an indorser, when sued on an instrument by a holder in due course and for value, can escape liability on his indorsement by the convenient expedient of interposing the defense that he is a mere accommodation indorser. There is, therefore, no question that as accommodation makers, petitioners would be primarily and unconditionally liable on the promissory note to a holder for value, regardless of whether they stand as sureties or solidary co-debtors since such distinction would be entirely immaterial and inconsequential as far as a holder for value is concerned. Consequently, the petitioners cannot claim to have been released from their obligation simply because the time of payment of such obligation was temporarily deferred by PNB without their knowledge and consent. There has to be another basis for their claim of having been freed from their obligation. The question which should be resolved in this instant petition, therefore, is whether or not PNB can be considered a holder for value under Section 29 of the Negotiable Instruments Law such that the petitioners must be necessarily barred from setting up the defense of want of consideration or some other personal defenses which may be set up against a party who is not a holder in due course. A holder for value under Section 29 of the Negotiable Instruments Law is one who must meet all the requirements of a holder in due course under Section 52 of the same law except notice of want of consideration. (Agbayani, Commercial Laws of the Philippines, 1964, p. 208). If he does not qualify as a holder in due course then he holds the instrument subject to the same defenses as if it were non-negotiable (Section 58, Negotiable Instruments Law). In the case at bar, can PNB, the payee of the promissory note be considered a holder in due course?

Petitioners contend that the payee PNB is an immediate party and, therefore, is not a holder in due course and stands on no better footing than a mere assignee. In those cases where a payee was considered a holder in due course, such payee either acquired the note from another holder or has not directly dealt with the maker thereof. As was held in the case of Bank of Commerce and Savings v. Randell (186 NorthWestern Reporter 71): We conclude, therefore, that a payee who receives a negotiable promissory note, in good faith, for value, before maturity, and without any notice of any infirmity, from a holder, not the maker. to whom it was negotiated as a completed instrument, is a holder in due course within the purview of a Negotiable Instruments law, so as to preclude the defense of fraud and failure of consideration between the maker and the holder to whom the instrument, was delivered. Similarly, in the case of Stone v. Goldberg & Lewis (60 Southern Reporter 748) on rehearing and quoting Daniel on Negotiable Instruments, it was held: It is a general principle of the law merchant that, as between the immediate parties to a negotiable instrument-the parties between whom there is a privity-the consideration may be inquired into; and as to them the only superiority of a bill or note over other unsealed evidence of debt is that it prima facie imports a consideration. Although as a general rule, a payee may be considered a holder in due course we think that such a rule cannot apply with respect to the respondent PNB. Not only was PNB an immediate party or in privy to the promissory note, that is, it had dealt directly with the petitioners knowing fully well that the latter only signed as accommodation makers but more important, it was the Deed of Assignment executed by the Construction Company in favor of PNB which principally moved the petitioners to sign the promissory note also in favor of PNB. Petitioners were made to believe and on that belief entered into the agreement that no other conditions would alter the terms thereof and yet, PNB altered the same. The Deed of Assignment specifically provided that Jose F. Toribio, on behalf of the Company, "have assigned, transferred and conveyed and by these presents, do assign, transfer and convey unto the said Philippine National Bank, its successors and assigns all payments to be received from the Bureau of Public Works on account of contract for the construction of the Puerto Princesa Municipal Building in Palawan, involving the total amount of P 36,000.00" and that "This assignment shall be irrevocable and subject to the terms and conditions of the promissory note and or any other kind of documents which the Philippine National Bank have required or may require the assignor to execute to evidence the abovementioned obligation."

Under the terms of the above Deed, it is clear that there are no further conditions which could possibly alter the agreement without the consent of the petitioners such as the grant of greater priority to obligations other than the payment of the loan due to the PNB and part of which loan was guaranteed by the petitioners in the amount of P10,000.00. This, notwithstanding, PNB approved the Bureau's release of three payments directly to the Company instead of paying the same to the Bank. This approval was in violation of the Deed of Assignment and without any notice to the petitioners who stood to lose their property once the promissory note falls due without the same having been paid because the PNB, in effect, waived payments of the first three releases. From the foregoing circumstances, PNB can not be regarded as having acted in good faith which is also one of the requisites of a holder in due course under Section 52 of the Negotiable Instruments Law. The PNB knew that the promissory note which it took from the accommodation makers was signed by the latter because of full reliance on the Deed of Assignment, which, PNB had no intention to comply with strictly. Worse, the third payment to the Company in the amount of P4,293.60 was approved by PNB although the promissory note was almost a month overdue, an act which is clearly detrimental to the petitioners. We, therefore, hold that respondent PNB is not a holder in due course. Thus, the petitioners can validly set up their personal defense of release from the real estate mortgage against PNB. The latter, in authorizing the third payment to the Company after the promissory note became due, in effect, extended the term of the payment of the note without the consent of the accommodation makers who stand as sureties to the accommodated party and to all other parties who are not holders in due course or who do not derive their right from the same, including PNB. It may be argued that the Prudencios could have mortgaged their property even without the promissory note. The records show, however, that they would not have mortgaged the lot were it not for the sake of the Company whose attorney-in-fact was their relative. The spouses did not need the money for themselves. The attorney-in-fact tried twice to convince the Prudencios to mortgage their property in order to secure a loan in favor of the Company but the Prudencios refused. It was only when the deed of assignment was shown to the spouses that they consented to the mortgage and signed the promissory note in the Bank's favor. Article 2085 of the Civil Code enumerates the requisites of a valid mortgage contract. Petitioners do not dispute the validity of the mortgage. They only want to have it cancelled because the Bank violated the deed of assignment and extended the period of time of payment of the promissory note without the petitioners' consent and to the latter's detriment. The mortgage cannot be separated from the promissory note for it is the latter which is the basis of determining whether the mortgage should be foreclosed or cancelled. Without the

promissory note which determines the amount of indebtedness there would have been no basis for the mortgage. True, if the Bank had not been the assignee, then the petition petitioners would be obliged to pay the Bank as their creditor on the promissory note, irrespective of whether or not the deed of assignment had been violated. However, the assignee and the creditor in this case are one and the samethe Bank itself. When the Bank violated the deed of assignment, it prejudiced itself because its very violation was the reason why it was not paid on time in its capacity as creditor in the promissory note. It would be unfair to make the petitioners now answer for the debt or to foreclose on their property. Neither can PNB justify its acts on the ground that the Bureau of Public Works approved the deed of assignment with the condition that the wages of laborers and materials needed in the construction work must take precedence over the payment of the promissory note. In the first place, PNB did not need the approval of the Bureau. But even if it did, it should have informed the petitioners about the amendment of the deed of assignment. Secondly, the wages and materials have already been paid. That issue is academic. What is in dispute is who should bear the loss in this case. As between the petitioners and the Bank, the law and the equities of the case favor the petitioners, And thirdly, the wages and materials constitute a lien only on the constructed building but do not enjoy preference over the loan unless there is a liquidation proceeding such as in insolvency or settlement of estate. (See Philippine Savings Bank v. Lantin, 124 SCRA 476). There were remedies available at the time if the laborers and the creditors had not been paid. The fact is, they have been paid. Hence, when the PNB accepted the condition imposed by the Bureau without the knowledge or consent of the petitioners, it amended the deed of assignment which, as stated earlier, was the principal reason why the petitioners consented to become accommodation makers. WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals affirming the decision of the trial court is hereby REVERSED and SET ASIDE and a new one entered absolving the petitioners from liability on the promissory note and under the mortgage contract. The Philippine National Bank is ordered to release the real estate mortgage constituted on the property of the petitioners and to pay the amount of THREE THOUSAND PESOS (P3,000.00) as attorney's fees. SO ORDERED. G.R. No. 80599 September 15, 1989 ERNESTINA CRISOLOGO-JOSE, petitioner, vs. COURT OF APPEALS and RICARDO S. SANTOS, JR. in his own behalf and as Vice-President for Sales of Mover Enterprises, Inc., respondents. Melquiades P. de Leon for petitioner. Rogelio A. Ajes for private respondent.

REGALADO, J.: Petitioner seeks the annulment of the decision 1 of respondent Court of Appeals, promulgated on September 8, 1987, which reversed the decision of the trial Court 2 dismissing the complaint for consignation filed by therein plaintiff Ricardo S. Santos, Jr. The parties are substantially agreed on the following facts as found by both lower courts: In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-president of Mover Enterprises, Inc. in-charge of marketing and sales; and the president of the said corporation was Atty. Oscar Z. Benares. On April 30, 1980, Atty. Benares, in accommodation of his clients, the spouses Jaime and Clarita Ong, issued Check No. 093553 drawn against Traders Royal Bank, dated June 14, 1980, in the amount of P45,000.00 (Exh- 'I') payable to defendant Ernestina Crisologo-Jose. Since the check was under the account of Mover Enterprises, Inc., the same was to be signed by its president, Atty. Oscar Z. Benares, and the treasurer of the said corporation. However, since at that time, the treasurer of Mover Enterprises was not available, Atty. Benares prevailed upon the plaintiff, Ricardo S. Santos, Jr., to sign the aforesaid chEck as an alternate story. Plaintiff Ricardo S. Santos, Jr. did sign the check. It appears that the check (Exh. '1') was issued to defendant Ernestina Crisologo-Jose in consideration of the waiver or quitclaim by said defendant over a certain property which the Government Service Insurance System (GSIS) agreed to sell to the clients of Atty. Oscar Benares, the spouses Jaime and Clarita Ong, with the understanding that upon approval by the GSIS of the compromise

agreement with the spouses Ong, the check will be encashed accordingly. However, since the compromise agreement was not approved within the expected period of time, the aforesaid check for P45,000.00 (Exh. '1') was replaced by Atty. Benares with another Traders Royal Bank cheek bearing No. 379299 dated August 10, 1980, in the same amount of P45,000.00 (Exhs. 'A' and '2'), also payable to the defendant Jose. This replacement check was also signed by Atty. Oscar Z. Benares and by the plaintiff Ricardo S. Santos, Jr. When defendant deposited this replacement check (Exhs. 'A' and '2') with her account at Family Savings Bank, Mayon Branch, it was dishonored for insufficiency of funds. A subsequent redepositing of the said check was likewise dishonored by the bank for the same reason. Hence, defendant through counsel was constrained to file a criminal complaint for violation of Batas Pambansa Blg. 22 with the Quezon City Fiscal's Office against Atty. Oscar Z. Benares and plaintiff Ricardo S. Santos, Jr. The investigating Assistant City Fiscal, Alfonso Llamas, accordingly filed an amended information with the court charging both Oscar Benares and Ricardo S. Santos, Jr., for violation of Batas Pambansa Blg. 22 docketed as Criminal Case No. Q-14867 of then Court of First Instance of Rizal, Quezon City. Meanwhile, during the preliminary investigation of the criminal charge against Benares and the plaintiff herein, before Assistant City Fiscal Alfonso T. Llamas, plaintiff Ricardo S. Santos, Jr. tendered cashier's check No. CC 160152 for P45,000.00 dated April 10, 1981 to the defendant Ernestina Crisologo-Jose, the complainant in that criminal case. The defendant refused to receive the cashier's check in payment of the dishonored check in the amount of P45,000.00. Hence, plaintiff encashed the aforesaid cashier's check and subsequently deposited said amount of P45,000.00 with the Clerk of Court on August 14, 1981 (Exhs. 'D' and 'E'). Incidentally, the cashier's check adverted to above was purchased by Atty. Oscar Z. Benares and given to the plaintiff herein to be applied in payment of the dishonored check. 3 After trial, the court a quo, holding that it was "not persuaded to believe that consignation referred to in Article 1256 of the Civil Code is applicable to this case," rendered judgment dismissing plaintiff s complaint and defendant's counterclaim. 4 As earlier stated, respondent court reversed and set aside said judgment of dismissal and revived the complaint for consignation, directing the trial court to give due course thereto.

Hence, the instant petition, the assignment of errors wherein are prefatorily stated and discussed seriatim. 1. Petitioner contends that respondent Court of Appeals erred in holding that private respondent, one of the signatories of the check issued under the account of Mover Enterprises, Inc., is an accommodation party under the Negotiable Instruments Law and a debtor of petitioner to the extent of the amount of said check. Petitioner avers that the accommodation party in this case is Mover Enterprises, Inc. and not private respondent who merely signed the check in question in a representative capacity, that is, as vice-president of said corporation, hence he is not liable thereon under the Negotiable Instruments Law. The pertinent provision of said law referred to provides: Sec. 29. Liability of accommodation party an accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party. Consequently, to be considered an accommodation party, a person must (1) be a party to the instrument, signing as maker, drawer, acceptor, or indorser, (2) not receive value therefor, and (3) sign for the purpose of lending his name for the credit of some other person. Based on the foregoing requisites, it is not a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument. From the standpoint of contract law, he differs from the ordinary concept of a debtor therein in the sense that he has not received any valuable consideration for the instrument he signs. Nevertheless, he is liable to a holder for value as if the contract was not for accommodation 5in whatever capacity such accommodation party signed the instrument, whether primarily or secondarily. Thus, it has been held that in lending his name to the accommodated party, the accommodation party is in effect a surety for the latter. 6 Assuming arguendo that Mover Enterprises, Inc. is the accommodation party in this case, as petitioner suggests, the inevitable question is whether or not it may be held liable on the accommodation instrument, that is, the check issued in favor of herein petitioner. We hold in the negative.

The aforequoted provision of the Negotiable Instruments Law which holds an accommodation party liable on the instrument to a holder for value, although such holder at the time of taking the instrument knew him to be only an accommodation party, does not include nor apply to corporations which are accommodation parties. 7 This is because the issue or indorsement of negotiable paper by a corporation without consideration and for the accommodation of another is ultra vires. 8 Hence, one who has taken the instrument with knowledge of the accommodation nature thereof cannot recover against a corporation where it is only an accommodation party. If the form of the instrument, or the nature of the transaction, is such as to charge the indorsee with knowledge that the issue or indorsement of the instrument by the corporation is for the accommodation of another, he cannot recover against the corporation thereon. 9 By way of exception, an officer or agent of a corporation shall have the power to execute or indorse a negotiable paper in the name of the corporation for the accommodation of a third person only if specifically authorized to do so. 10 Corollarily, corporate officers, such as the president and vice-president, have no power to execute for mere accommodation a negotiable instrument of the corporation for their individual debts or transactions arising from or in relation to matters in which the corporation has no legitimate concern. Since such accommodation paper cannot thus be enforced against the corporation, especially since it is not involved in any aspect of the corporate business or operations, the inescapable conclusion in law and in logic is that the signatories thereof shall be personally liable therefor, as well as the consequences arising from their acts in connection therewith. The instant case falls squarely within the purview of the aforesaid decisional rules. If we indulge petitioner in her aforesaid postulation, then she is effectively barred from recovering from Mover Enterprises, Inc. the value of the check. Be that as it may, petitioner is not without recourse. The fact that for lack of capacity the corporation is not bound by an accommodation paper does not thereby absolve, but should render personally liable, the signatories of said instrument where the facts show that the accommodation involved was for their personal account, undertaking or purpose and the creditor was aware thereof. Petitioner, as hereinbefore explained, was evidently charged with the knowledge that the cheek was issued at the instance and for the personal account of Atty. Benares who merely prevailed upon respondent Santos to act as co-signatory in accordance with the arrangement of the corporation with its depository bank. That it was a personal undertaking of said corporate officers was apparent to petitioner by reason of her personal involvement in the financial arrangement and the fact that, while it was the corporation's check which was issued to her for the amount involved, she actually had no transaction directly with said corporation. There should be no legal obstacle, therefore, to petitioner's claims being directed personally against Atty. Oscar Z. Benares and respondent Ricardo S. Santos, Jr., president and vicepresident, respectively, of Mover Enterprises, Inc.

2. On her second assignment of error, petitioner argues that the Court of Appeals erred in holding that the consignation of the sum of P45,000.00, made by private respondent after his tender of payment was refused by petitioner, was proper under Article 1256 of the Civil Code. Petitioner's submission is that no creditor-debtor relationship exists between the parties, hence consignation is not proper. Concomitantly, this argument was premised on the assumption that private respondent Santos is not an accommodation party. As previously discussed, however, respondent Santos is an accommodation party and is, therefore, liable for the value of the check. The fact that he was only a co-signatory does not detract from his personal liability. A co-maker or co-drawer under the circumstances in this case is as much an accommodation party as the other co-signatory or, for that matter, as a lone signatory in an accommodation instrument. Under the doctrine in Philippine Bank of Commerce vs. Aruego, supra, he is in effect a co-surety for the accommodated party with whom he and his co-signatory, as the other co-surety, assume solidary liability ex lege for the debt involved. With the dishonor of the check, there was created a debtor-creditor relationship, as between Atty. Benares and respondent Santos, on the one hand, and petitioner, on the other. This circumstance enables respondent Santos to resort to an action of consignation where his tender of payment had been refused by petitioner. We interpose the caveat, however, that by holding that the remedy of consignation is proper under the given circumstances, we do not thereby rule that all the operative facts for consignation which would produce the effect of payment are present in this case. Those are factual issues that are not clear in the records before us and which are for the Regional Trial Court of Quezon City to ascertain in Civil Case No. Q-33160, for which reason it has advisedly been directed by respondent court to give due course to the complaint for consignation, and which would be subject to such issues or claims as may be raised by defendant and the counterclaim filed therein which is hereby ordered similarly revived. 3. That respondent court virtually prejudged Criminal Case No. Q-14687 of the Regional Trial Court of Quezon City filed against private respondent for violation of Batas Pambansa Blg. 22, by holding that no criminal liability had yet attached to private respondent when he deposited with the court the amount of P45,000.00 is the final plaint of petitioner. We sustain petitioner on this score. Indeed, respondent court went beyond the ratiocination called for in the appeal to it in CA-G.R. CV. No. 05464. In its own decision therein, it declared that "(t)he lone issue dwells in the question of whether an accommodation party can validly consign the amount

of the debt due with the court after his tender of payment was refused by the creditor." Yet, from the commercial and civil law aspects determinative of said issue, it digressed into the merits of the aforesaid Criminal Case No. Q-14867, thus: Section 2 of B.P. 22 establishes the prima facie evidence of knowledge of such insufficiency of funds or credit. Thus, the making, drawing and issuance of a check, payment of which is refused by the drawee because of insufficient funds in or credit with such bank is prima facie evidence of knowledge of insufficiency of funds or credit, when the check is presented within 90 days from the date of the check. It will be noted that the last part of Section 2 of B.P. 22 provides that the element of knowledge of insufficiency of funds or credit is not present and, therefore, the crime does not exist, when the drawer pays the holder the amount due or makes arrangements for payment in full by the drawee of such check within five (5) banking days after receiving notice that such check has not been paid by the drawee. Based on the foregoing consideration, this Court finds that the plaintiff-appellant acted within Ms legal rights when he consigned the amount of P45,000.00 on August 14, 1981, between August 7, 1981, the date when plaintiff-appellant receive (sic) the notice of non-payment, and August 14, 1981, the date when the debt due was deposited with the Clerk of Court (a Saturday and a Sunday which are not banking days) intervened. The fifth banking day fell on August 14, 1981. Hence, no criminal liability has yet attached to plaintiff-appellant when he deposited the amount of P45,000.00 with the Court a quo on August 14, 1981. 11 That said observations made in the civil case at bar and the intrusion into the merits of the criminal case pending in another court are improper do not have to be belabored. In the latter case, the criminal trial court has to grapple with such factual issues as, for instance, whether or not the period of five banking days had expired, in the process determining whether notice of dishonor should be reckoned from any prior notice if any has been given or from receipt by private respondents of the subpoena therein with supporting affidavits, if any, or from the first day of actual preliminary investigation; and whether there was a justification for not making the requisite arrangements for payment in full of such check by the drawee bank within the said period. These are matters alien to the present controversy on tender and consignation of payment, where no such period and its legal effects are involved.

These are aside from the considerations that the disputed period involved in the criminal case is only a presumptive rule, juris tantum at that, to determine whether or not there was knowledge of insufficiency of funds in or credit with the drawee bank; that payment of civil liability is not a mode for extinguishment of criminal liability; and that the requisite quantum of evidence in the two types of cases are not the same. To repeat, the foregoing matters are properly addressed to the trial court in Criminal Case No. Q-14867, the resolution of which should not be interfered with by respondent Court of Appeals at the present posture of said case, much less preempted by the inappropriate and unnecessary holdings in the aforequoted portion of the decision of said respondent court. Consequently, we modify the decision of respondent court in CA-G.R. CV No. 05464 by setting aside and declaring without force and effect its pronouncements and findings insofar as the merits of Criminal Case No. Q-14867 and the liability of the accused therein are concerned. WHEREFORE, subject to the aforesaid modifications, judgment of respondent Court of Appeals is AFFIRMED. SO ORDERED. the

24% per annum for which they executed and delivered to Town Savings and Loan Bank (or TSLB) a promissory note with a maturity period of three (3) years and an acceleration clause upon default in the payment of any amortization, plus a penalty of 36% and 10% attorney's fees, if the note were referred to an attorney for collection. For failure to keep current their monthly payments on the account, the obligors were deemed to have defaulted on May 24, 1984. Notices of past due account and demands for payment were sent but ignored. At the time of the institution of the action on March 12, 1986, the unpaid obligation amounted to P1,114,983.40. The Hipolitos denied being personally liable on the P700,000.00 promissory note which they executed. The loan was allegedly for the account of Pilarita H. Reyes, the sister of Miguel Hipolito. She was the real party-in-interest. The Hipolitos, not having received any part of the loan, were mere guarantors for Pilarita. They allegedly signed the promissory note because they were persuaded to do so by Joey Santos, President of TSLB. When they received the demand letters, they confronted him but they were told that the Bank had to observe the formality of sending notices and demand letters. The real purpose was only to pressure Pilarita to comply with her undertaking. Insisting that they were mere guarantors, the Hipolitos vehemently protested against being dragged into the litigation as principal parties. As a result of the unfounded suit, they allegedly incurred actual damages estimated at P200,000.00 and attorney's fees of P30,000.00. In a decision dated September 14, 1990, Judge Zotico A. Toleto of the RTC of Malolos, Branch 18, held the respondents (then defendants) spouses Miguel and Alicia Hipolito, liable as accommodation parties on the promissory note. The spouses appealed to the Court of Appeals. In a decision dated March 12, 1992, the Court of Appeals found that the Hipolitos did not accommodate Pilarita but the TSLB, whose lending authority was restricted by the size of its loan portfolio. The Hipolitos were relieved from any liability to TSLB. Hence, this petition for review by TSLB. The lone issue in this case is whether the Hipolitos are liable on the promissory note which they executed in favor of the petitioner. We hold for the petitioner. An accommodation party is one who has signed the instrument as marker, drawer, indorser, without receiving value therefor and for the purpose of lending his name to some other person. Such person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of the taking of the instrument knew him to be only an accommodation party. In lending his

name to the accommodated party, the accommodation party is in effect a surety for the latter. He lends his name to enable the accommodated party to obtain credit or to raise money. He receives no part of the consideration for the instrument but assumes liability to the other parties thereto because he wants to accommodate another. (The Phil. Bank of Commerce vs. Aruego, 102 SCRA 530, 539, 540.) In this case, there is no question that the private respondents signed the promissory note in order to enable Pilarita H. Reyes, who is Miguel Hipolito's sister, to borrow the total sum of P1.4 million from TSLB. As observed by both the trial court and the appellate court, the actual beneficiary of the loan was Pilarita H. Reyes and no other. The Hipolitos accommodated her by signing a promissory note for half of the loan that she applied for because TSLB may not lend any single borrower more than the authorized limit of its loan portfilio. Under Section 29 of the Negotiable Instruments Law, the Hipolitos are liable to the bank on the promissory note that they signed to accommodate Pilarita. Respondent appellate court erred in giving credence to Hipolito's allegation that it was the bank's president who induced him to sign the promissory note so that the bank would not violate the Central Bank's regulation limiting the amount that TSLB could lend out. Besides being self-serving, Hipolito's testimony was uncorroborated by any other evidence on record, therefore, it should have been received with extreme caution. The Court is convinced that the intention of respondents Hipolitos in signing the promissory note was not so much to enable the Bank to grant a loan to Pilarita but for the latter to be able to obtain the full amount of the loan that she needed at the time. It is not credible that a Bank would want so much to lend money to a borrower that it would go out of its way to convince another person (respondent Miguel Hipolito) to accommodate the borrower (Pilarita H. Reyes). In the ordinary course of things, the borrower, Pilarita, not the Bank, would have requested her brother Miguel to accommodate her so she could have the P1.4 million that she wanted to borrow from the Bank. The case of Maulini vs. Serrano (28 Phil. 640), relied upon by the appellate court in reversing the decision of the trial court, is not applicable to this case. In that case, the evidence showed that the indorser (the loan broker Serrano) in making the indorsement to the lender, Maulini, was acting as agent for the latter or, as a mere vehicle for the transference of the naked title from the borrower or maker of the note (Moreno). Furthermore, his indorsement was wholly without consideration. We ruled that Serrano was not an accommodation indorser; he was not liable on the note. . . . Where, however, an indorsement is made as a favor to the indorsee, who requests it, not the better to secure payment, but to relieve himself from a distasteful situation, and where the only consideration for such indorsement passes from the indorser to the

G.R. No. 106011 June 17, 1993 TOWN SAVINGS AND LOAN BANK, INC., petitioner, vs. THE COURT OF APPEALS, SPOUSES MIGUELITO HIPOLITO AND ALICIA N. HIPOLITO, respondents. Maximo H. Simbulan for petitioner. Ma. Soledad Deriquito-Mawis for private respondents.

GRIO-AQUINO, J.: This is a petition for review on certiorari to set aside the decision dated March 12, 1992, of the Court of Appeals in CA-G.R. CV No. 29475 entitled, "Town Savings and Loan Bank, Inc. vs. Spouses Miguel Hipolito and Alicia N. Hipolito" reversing the decision dated September 14, 1990 of the Regional Trial Court of Bulacan which declared that the Hipolitos were accommodation parties on the promissory note and holding them liable to pay Town Savings And Loan Bank the sum of P1,392, 600.00. On or about May 4, 1983, the Hipolitos applied for, and were granted, a loan in the amount of P700,000.00 with interest of

indorsee, the situation does not present one creating an accommodation indorsement, nor one where there is a consideration sufficient to sustain an action on the indorsement. (p. 644.) Unlike the Maulini case, there was no agreement here, written or verbal, that in signing the promissory note, Miguel and Alicia Hipolito were acting as agents for the money lender the Bank. The consideration of the note signed by the Hipolitos was received by them through Pilarita. They acted as agents of Pilarita, not of the bank. They signed the promissory note as favor to Pilarita, to help her raise the funds that she needed. It was Pilarita whom they accommodated, not the bank, contrary to the erroneous finding of the appellate court. WHEREFORE, the petition for review is GRANTED. The appealed decision of the Court of Appeals is hereby REVERSED and that of the trial court is REINSTATED. Costs against the private respondents. SO ORDERED. DAVIDE, JR., J.: The petitioner urges us to review and set aside the amended Decision 1 of 6 March 1992 of respondent Court of Appeals in CAG.R. CV No. 25739 which modified the Decision of 15 November 1990 of Branch 19 of the Regional Trial Court (RTC) of Manila in Civil Case No. 87-42967, entitled Bank of the Philippine Islands (successor-in-interest of Commercial Bank and Trust Company) versus Eastern Plywood Corporation and Benigno D. Lim. The Court of Appeals had affirmed the dismissal of the complaint but had granted the defendants' counterclaim for P331,261.44 which represents the outstanding balance of their account with the plaintiff. As culled from the records and the pleadings of the parties, the following facts were duly established: Private respondents Eastern Plywood Corporation (Eastern) and Benigno D. Lim (Lim), an officer and stockholder of Eastern, held at least one joint bank account ("and/or" account) with the Commercial Bank and Trust Co. (CBTC), the predecessor-ininterest of petitioner Bank of the Philippine Islands (BPI). Sometime in March 1975, a joint checking account ("and" account) with Lim in the amount of P120,000.00 was opened by Mariano Velasco with funds withdrawn from the account of Eastern and/or Lim. Various amounts were later deposited or withdrawn from the joint account of Velasco and Lim. The money therein was placed in the money market. Velasco died on 7 April 1977. At the time of his death, the outstanding balance of the account stood at P662,522.87. On 5 May 1977, by virtue of an Indemnity Undertaking executed by Lim for himself and as President and General Manager of Eastern, 2 one-half of this amount was provisionally released and transferred to one of the bank accounts of Eastern with CBTC. 3

Thereafter, on 18 August 1978, Eastern obtained a loan of P73,000.00 from CBTC as "Additional Working Capital," evidenced by the "Disclosure Statement on Loan/Credit Transaction" (Disclosure Statement) signed by CBTC through its branch manager, Ceferino Jimenez, and Eastern, through Lim, as its President and General Manager. 4 The loan was payable on demand with interest at 14% per annum. G.R. No. 104612 May 10, 1994 BANK OF THE PHILIPPINE ISLANDS (successor-in- interest of COMMERCIAL AND TRUST CO.), petitioner, vs. HON. COURT OF APPEALS, EASTERN PLYWOOD CORP. and BENIGNO D. LIM, respondents. Leonen, Ramirez & Associates for petitioner. Constante A. Ancheta for private respondents. In addition, Eastern and Lim, and CBTC signed another document entitled "Holdout Agreement," also dated 18 August 1978, 6 wherein it was stated that "as security for the Loan [Lim and Eastern] have offered [CBTC] and the latter accepts a holdout on said [Current Account No. 2310-011-42 in the joint names of Lim and Velasco] to the full extent of their alleged interests therein as these may appear as a result of final and definitive judicial action or a settlement between and among the contesting parties thereto." 7 Paragraph 02 of the Agreement provides as follows: Eastply [Eastern] and Mr. Lim hereby confer upon Comtrust [CBTC], when and if their alleged interests in the Account Balance shall have been established with finality, ample and sufficient power as shall be necessary to retain said Account Balance and enable Comtrust to apply the Account Balance for the purpose of liquidating the Loan in respect of principal and/or accrued interest. And paragraph 05 thereof reads: The acceptance of this holdout shall not impair the right of Comtrust to declare the loan payable on demand at any time, nor shall the existence hereof and the nonresolution of the dispute between the contending parties in respect of entitlement to the Account Balance, preclude Comtrust from instituting an action for recovery against Eastply and/or Mr. Lim in the event the Loan is declared due and payable and Eastply and/or Mr. Lim shall default in payment of all obligations and liabilities thereunder. In the meantime, a case for the settlement of Velasco's estate was filed with Branch 152 of the RTC of Pasig, entitled "In re For this loan, Eastern issued on the same day a negotiable promissory note for P73,000.00 payable on demand to the order of CBTC with interest at 14% per annum. 5 The note was signed by Lim both in his own capacity and as President and General Manager of Eastern. No reference to any security for the loan appears on the note. In the Disclosure Statement, the box with the printed word "UNSECURED" was marked with "X" meaning unsecured, while the line with the words "this loan is wholly/partly secured by" is followed by the typewritten words "Hold-Out on a 1:1 on C/A No. 2310-001-42," which refers to the joint account of Velasco and Lim with a balance of P331,261.44.

Intestate Estate of Mariano Velasco," and docketed as Sp. Proc. No. 8959. In the said case, the whole balance of P331,261.44 in the aforesaid joint account of Velasco and Lim was being claimed as part of Velasco's estate. On 9 September 1986, the intestate court granted the urgent motion of the heirs of Velasco to withdraw the deposit under the joint account of Lim and Velasco and authorized the heirs to divide among themselves the amount withdrawn. 8 Sometime in 1980, CBTC was merged with BPI. 9 On 2 December 1987, BPI filed with the RTC of Manila a complaint against Lim and Eastern demanding payment of the promissory note for P73,000.00. The complaint was docketed as Civil Case No. 8742967 and was raffled to Branch 19 of the said court, then presided over by Judge Wenceslao M. Polo. Defendants Lim and Eastern, in turn, filed a counterclaim against BPI for the return of the balance in the disputed account subject of the Holdout Agreement and the interests thereon after deducting the amount due on the promissory note. After due proceedings, the trial court rendered its decision on 15 November 1990 dismissing the complaint because BPI failed to make out its case. Furthermore, it ruled that "the promissory note in question is subject to the 'hold-out' agreement," 10 and that based on this agreement, "it was the duty of plaintiff Bank [BPI] to debit the account of the defendants under the promissory note to set off the loan even though the same has no fixed maturity." 11 As to the defendants' counterclaim, the trial court, recognizing the fact that the entire amount in question had been withdrawn by Velasco's heirs pursuant to the order of the intestate court in Sp. Proc. No. 8959, denied it because the "said claim cannot be awarded without disturbing the resolution" of the intestate court. 12 Both parties appealed from the said decision to the Court of Appeals. Their appeal was docketed as CA-G.R. CV No. 25739. On 23 January 1991, the Court of Appeals rendered a decision affirming the decision of the trial court. It, however, failed to rule on the defendants' (private respondents') partial appeal from the trial court's denial of their counterclaim. Upon their motion for reconsideration, the Court of Appeals promulgated on 6 March 1992 an Amended Decision 13 wherein it ruled that the settlement of Velasco's estate had nothing to do with the claim of the defendants for the return of the balance of their account with CBTC/BPI as they were not privy to that case, and that the defendants, as depositors of CBTC/BPI, are the latter's creditors; hence, CBTC/BPI should have protected the defendants' interest in Sp. Proc. No. 8959 when the said account was claimed by Velasco's estate. It then ordered BPI "to pay defendants the amount of P331,261.44 representing the outstanding balance in the bank account of defendants." 14 On 22 April 1992, BPI filed the instant petition alleging therein that the Holdout Agreement in question was subject to a suspensive condition stated therein, viz., that the "P331,261.44 shall become a security for respondent Lim's promissory note only if respondents' Lim and Eastern Plywood Corporation's interests to that amount are established as a result of a final and definitive judicial action or a settlement between and among the

contesting parties thereto." 15 Hence, BPI asserts, the Court of Appeals erred in affirming the trial court's decision dismissing the complaint on the ground that it was the duty of CBTC to debit the account of the defendants to set off the amount of P73,000.00 covered by the promissory note. Private respondents Eastern and Lim dispute the "suspensive condition" argument of the petitioner. They interpret the findings of both the trial and appellate courts that the money deposited in the joint account of Velasco and Lim came from Eastern and Lim's own account as a finding that the money deposited in the joint account of Lim and Velasco "rightfully belong[ed] to Eastern Plywood Corporation and/or Benigno Lim." And because the latter are the rightful owners of the money in question, the suspensive condition does not find any application in this case and the bank had the duty to set off this deposit with the loan. They add that the ruling of the lower court that they own the disputed amount is the final and definitive judicial action required by the Holdout Agreement; hence, the petitioner can only hold the amount of P73,000.00 representing the security required for the note and must return the rest. 16 The petitioner filed a Reply to the aforesaid Comment. The private respondents filed a Rejoinder thereto. We gave due course to the petition and required the parties to submit simultaneously their memoranda. The key issues in this case are whether BPI can demand payment of the loan of P73,000.00 despite the existence of the Holdout Agreement and whether BPI is still liable to the private respondents on the account subject of the Holdout Agreement after its withdrawal by the heirs of Velasco. The collection suit of BPI is based on the promissory note for P73,000.00. On its face, the note is an unconditional promise to pay the said amount, and as stated by the respondent Court of Appeals, "[t]here is no question that the promissory note is a negotiable instrument." 17 It further correctly ruled that BPI was not a holder in due course because the note was not indorsed to BPI by the payee, CBTC. Only a negotiation by indorsement could have operated as a valid transfer to make BPI a holder in due course. It acquired the note from CBTC by the contract of merger or sale between the two banks. BPI, therefore, took the note subject to the Holdout Agreement. We disagree, however, with the Court of Appeals in its interpretation of the Holdout Agreement. It is clear from paragraph 02 thereof that CBTC, or BPI as its successor-ininterest, had every right to demand that Eastern and Lim settle their liability under the promissory note. It cannot be compelled to retain and apply the deposit in Lim and Velasco's joint account to the payment of the note. What the agreement conferred on CBTC was a power, not a duty. Generally, a bank is under no duty or obligation to make the application. 18 To apply the deposit to the payment of a loan is a privilege, a right of set-off which the bank has the option to exercise. 19

Also, paragraph 05 of the Holdout Agreement itself states that notwithstanding the agreement, CBTC was not in any way precluded from demanding payment from Eastern and from instituting an action to recover payment of the loan. What it provides is an alternative, not an exclusive, method of enforcing its claim on the note. When it demanded payment of the debt directly from Eastern and Lim, BPI had opted not to exercise its right to apply part of the deposit subject of the Holdout Agreement to the payment of the promissory note for P73,000.00. Its suit for the enforcement of the note was then in order and it was error for the trial court to dismiss it on the theory that it was set off by an equivalent portion in C/A No. 2310-00142 which BPI should have debited. The Court of Appeals also erred in affirming such dismissal. The "suspensive condition" theory of the petitioner is, therefore, untenable. The Court of Appeals correctly decided on the counterclaim. The counterclaim of Eastern and Lim for the return of the P331,261.44 20 was equivalent to a demand that they be allowed to withdraw their deposit with the bank. Article 1980 of the Civil Code expressly provides that "[f]ixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan." In Serrano vs. Central Bank of the Philippines, 21 we held that bank deposits are in the nature of irregular deposits; they are really loans because they earn interest. The relationship then between a depositor and a bank is one of creditor and debtor. The deposit under the questioned account was an ordinary bank deposit; hence, it was payable on demand of the depositor. 22 The account was proved and established to belong to Eastern even if it was deposited in the names of Lim and Velasco. As the real creditor of the bank, Eastern has the right to withdraw it or to demand payment thereof. BPI cannot be relieved of its duty to pay Eastern simply because it already allowed the heirs of Velasco to withdraw the whole balance of the account. The petitioner should not have allowed such withdrawal because it had admitted in the Holdout Agreement the questioned ownership of the money deposited in the account. As early as 12 May 1979, CBTC was notified by the Corporate Secretary of Eastern that the deposit in the joint account of Velasco and Lim was being claimed by them and that one-half was being claimed by the heirs of Velasco. 23 Moreover, the order of the court in Sp. Proc. No. 8959 merely authorized the heirs of Velasco to withdraw the account. BPI was not specifically ordered to release the account to the said heirs; hence, it was under no judicial compulsion to do so. The authorization given to the heirs of Velasco cannot be construed as a final determination or adjudication that the account belonged to Velasco. We have ruled that when the ownership of a particular property is disputed, the determination by a probate court of whether that property is included in the estate of a deceased is merely provisional in character and cannot be the subject of execution. 24 Because the ownership of the deposit remained undetermined, BPI, as the debtor with respect thereto, had no right to pay to

persons other than those in whose favor the obligation was constituted or whose right or authority to receive payment is indisputable. The payment of the money deposited with BPI that will extinguish its obligation to the creditor-depositor is payment to the person of the creditor or to one authorized by him or by the law to receive it. 25 Payment made by the debtor to the wrong party does not extinguish the obligation as to the creditor who is without fault or negligence, even if the debtor acted in utmost good faith and by mistake as to the person of the creditor, or through error induced by fraud of a third person. 26 The payment then by BPI to the heirs of Velasco, even if done in good faith, did not extinguish its obligation to the true depositor, Eastern. In the light of the above findings, the dismissal of the petitioner's complaint is reversed and set aside. The award on the counterclaim is sustained subject to a modification of the interest. WHEREFORE, the instant petition is partly GRANTED. The challenged amended decision in CA-G.R. CV No. 25735 is hereby MODIFIED. As modified: (1) Private respondents are ordered to pay the petitioner the promissory note for P73,000.00 with interest at: (a) 14% per annum on the principal, computed from 18 August 1978 until payment; (b) 12% per annum on the interest which had accrued up to the date of the filing of the complaint, computed from that date until payment pursuant to Article 2212 of the Civil Code. (2) The award of P331,264.44 in favor of the private respondents shall bear interest at the rate of 12% per annum computed from the filing of the counterclaim. No pronouncement as to costs. SO ORDERED.

G.R. No. L-15126

November 30, 1961

VICENTE R. DE OCAMPO & CO., plaintiff-appellee, vs. ANITA GATCHALIAN, ET AL., defendants-appellants. Vicente Formoso, Jr. for plaintiff-appellee. Reyes and Pangalagan for defendants-appellants. LABRADOR, J.: Appeal from a judgment of the Court of First Instance of Manila, Hon. Conrado M. Velasquez, presiding, sentencing the defendants to pay the plaintiff the sum of P600, with legal interest from September 10, 1953 until paid, and to pay the costs. The action is for the recovery of the value of a check for P600 payable to the plaintiff and drawn by defendant Anita C. Gatchalian. The complaint sets forth the check and alleges that plaintiff received it in payment of the indebtedness of one Matilde Gonzales; that upon receipt of said check, plaintiff gave Matilde Gonzales P158.25, the difference between the face value of the check and Matilde Gonzales' indebtedness. The defendants admit the execution of the check but they allege in their answer, as affirmative defense, that it was issued subject to a condition, which was not fulfilled, and that plaintiff was guilty of gross negligence in not taking steps to protect itself. At the time of the trial, the parties submitted a stipulation of facts, which reads as follows: Plaintiff and defendants through their respective undersigned attorney's respectfully submit the following Agreed Stipulation of Facts;

First. That on or about 8 September 1953, in the evening, defendant Anita C. Gatchalian who was then interested in looking for a car for the use of her husband and the family, was shown and offered a car by Manuel Gonzales who was accompanied by Emil Fajardo, the latter being personally known to defendant Anita C. Gatchalian; Second. That Manuel Gonzales represented to defend Anita C. Gatchalian that he was duly authorized by the owner of the car, Ocampo Clinic, to look for a buyer of said car and to negotiate for and accomplish said sale, but which facts were not known to plaintiff; Third. That defendant Anita C. Gatchalian, finding the price of the car quoted by Manuel Gonzales to her satisfaction, requested Manuel Gonzales to bring the car the day following together with the certificate of registration of the car, so that her husband would be able to see same; that on this request of defendant Anita C. Gatchalian, Manuel Gonzales advised her that the owner of the car will not be willing to give the certificate of registration unless there is a showing that the party interested in the purchase of said car is ready and willing to make such purchase and that for this purpose Manuel Gonzales requested defendant Anita C. Gatchalian to give him (Manuel Gonzales) a check which will be shown to the owner as evidence of buyer's good faith in the intention to purchase the said car, the said check to be for safekeeping only of Manuel Gonzales and to be returned to defendant Anita C. Gatchalian the following day when Manuel Gonzales brings the car and the certificate of registration, but which facts were not known to plaintiff; Fourth. That relying on these representations of Manuel Gonzales and with his assurance that said check will be only for safekeeping and which will be returned to said defendant the following day when the car and its certificate of registration will be brought by Manuel Gonzales to defendants, but which facts were not known to plaintiff, defendant Anita C. Gatchalian drew and issued a check, Exh. "B"; that Manuel Gonzales executed and issued a receipt for said check, Exh. "1"; Fifth. That on the failure of Manuel Gonzales to appear the day following and on his failure to bring the car and its certificate of registration and to return the check, Exh. "B", on the following day as previously agreed upon, defendant Anita C. Gatchalian issued a "Stop Payment Order" on the check, Exh. "3", with the drawee bank. Said "Stop Payment Order" was issued without previous notice on plaintiff not being know to defendant, Anita C. Gatchalian and who furthermore had no reason to know check was given to plaintiff; Sixth. That defendants, both or either of them, did not know personally Manuel Gonzales or any member of his family at any time prior to September 1953, but

that defendant Hipolito Gatchalian acquainted with V. R. de Ocampo;

is

personally

receipt of their main memoranda. Defendant's Record on Appeal).

(pp.

21-25,

Seventh. That defendants, both or either of them, had no arrangements or agreement with the Ocampo Clinic at any time prior to, on or after 9 September 1953 for the hospitalization of the wife of Manuel Gonzales and neither or both of said defendants had assumed, expressly or impliedly, with the Ocampo Clinic, the obligation of Manuel Gonzales or his wife for the hospitalization of the latter; Eight. That defendants, both or either of them, had no obligation or liability, directly or indirectly with the Ocampo Clinic before, or on 9 September 1953; Ninth. That Manuel Gonzales having received the check Exh. "B" from defendant Anita C. Gatchalian under the representations and conditions herein above specified, delivered the same to the Ocampo Clinic, in payment of the fees and expenses arising from the hospitalization of his wife; Tenth. That plaintiff for and in consideration of fees and expenses of hospitalization and the release of the wife of Manuel Gonzales from its hospital, accepted said check, applying P441.75 (Exhibit "A") thereof to payment of said fees and expenses and delivering to Manuel Gonzales the amount of P158.25 (as per receipt, Exhibit "D") representing the balance on the amount of the said check, Exh. "B"; Eleventh. That the acts of acceptance of the check and application of its proceeds in the manner specified above were made without previous inquiry by plaintiff from defendants: Twelfth. That plaintiff filed or caused to be filed with the Office of the City Fiscal of Manila, a complaint for estafa against Manuel Gonzales based on and arising from the acts of said Manuel Gonzales in paying his obligations with plaintiff and receiving the cash balance of the check, Exh. "B" and that said complaint was subsequently dropped; Thirteenth. That the exhibits mentioned in this stipulation and the other exhibits submitted previously, be considered as parts of this stipulation, without necessity of formally offering them in evidence; WHEREFORE, it is most respectfully prayed that this agreed stipulation of facts be admitted and that the parties hereto be given fifteen days from today within which to submit simultaneously their memorandum to discuss the issues of law arising from the facts, reserving to either party the right to submit reply memorandum, if necessary, within ten days from

No other evidence was submitted and upon said stipulation the court rendered the judgment already alluded above. In their appeal defendants-appellants contend that the check is not a negotiable instrument, under the facts and circumstances stated in the stipulation of facts, and that plaintiff is not a holder in due course. In support of the first contention, it is argued that defendant Gatchalian had no intention to transfer her property in the instrument as it was for safekeeping merely and, therefore, there was no delivery required by law (Section 16, Negotiable Instruments Law); that assuming for the sake of argument that delivery was not for safekeeping merely, delivery was conditional and the condition was not fulfilled. In support of the contention that plaintiff-appellee is not a holder in due course, the appellant argues that plaintiff-appellee cannot be a holder in due course because there was no negotiation prior to plaintiff-appellee's acquiring the possession of the check; that a holder in due course presupposes a prior party from whose hands negotiation proceeded, and in the case at bar, plaintiffappellee is the payee, the maker and the payee being original parties. It is also claimed that the plaintiff-appellee is not a holder in due course because it acquired the check with notice of defect in the title of the holder, Manuel Gonzales, and because under the circumstances stated in the stipulation of facts there were circumstances that brought suspicion about Gonzales' possession and negotiation, which circumstances should have placed the plaintiff-appellee under the duty, to inquire into the title of the holder. The circumstances are as follows: The check is not a personal check of Manuel Gonzales. (Paragraph Ninth, Stipulation of Facts). Plaintiff could have inquired why a person would use the check of another to pay his own debt. Furthermore, plaintiff had the "means of knowledge" inasmuch as defendant Hipolito Gatchalian is personally acquainted with V. R. de Ocampo (Paragraph Sixth, Stipulation of Facts.). The maker Anita C. Gatchalian is a complete stranger to Manuel Gonzales and Dr. V. R. de Ocampo (Paragraph Sixth, Stipulation of Facts). The maker is not in any manner obligated to Ocampo Clinic nor to Manuel Gonzales. (Par. 7, Stipulation of Facts.) The check could not have been intended to pay the hospital fees which amounted only to P441.75. The check is in the amount of P600.00, which is in excess of the amount due plaintiff. (Par. 10, Stipulation of Facts). It was necessary for plaintiff to give Manuel Gonzales change in the sum P158.25 (Par. 10, Stipulation of Facts). Since Manuel Gonzales is the party obliged to

pay, plaintiff should have been more cautious and wary in accepting a piece of paper and disbursing cold cash. The check is payable to bearer. Hence, any person who holds it should have been subjected to inquiries. EVEN IN A BANK, CHECKS ARE NOT CASHED WITHOUT INQUIRY FROM THE BEARER. The same inquiries should have been made by plaintiff. (Defendants-appellants' brief, pp. 52-53) Answering the first contention of appellant, counsel for plaintiffappellee argues that in accordance with the best authority on the Negotiable Instruments Law, plaintiff-appellee may be considered as a holder in due course, citing Brannan's Negotiable Instruments Law, 6th edition, page 252. On this issue Brannan holds that a payee may be a holder in due course and says that to this effect is the greater weight of authority, thus: Whether the payee may be a holder in due course under the N. I. L., as he was at common law, is a question upon which the courts are in serious conflict. There can be no doubt that a proper interpretation of the act read as a whole leads to the conclusion that a payee may be a holder in due course under any circumstance in which he meets the requirements of Sec. 52. The argument of Professor Brannan in an earlier edition of this work has never been successfully answered and is here repeated. Section 191 defines "holder" as the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. Sec. 52 defendants defines a holder in due course as "a holder who has taken the instrument under the following conditions: 1. That it is complete and regular on its face. 2. That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact. 3. That he took it in good faith and for value. 4. That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it." Since "holder", as defined in sec. 191, includes a payee who is in possession the word holder in the first clause of sec. 52 and in the second subsection may be replaced by the definition in sec. 191 so as to read "a holder in due course is a payee or indorsee who is in possession," etc. (Brannan's on Negotiable Instruments Law, 6th ed., p. 543). The first argument of the defendants-appellants, therefore, depends upon whether or not the plaintiff-appellee is a holder in due course. If it is such a holder in due course, it is immaterial that it was the payee and an immediate party to the instrument.

The other contention of the plaintiff is that there has been no negotiation of the instrument, because the drawer did not deliver the instrument to Manuel Gonzales with the intention of negotiating the same, or for the purpose of giving effect thereto, for as the stipulation of facts declares the check was to remain in the possession Manuel Gonzales, and was not to be negotiated, but was to serve merely as evidence of good faith of defendants in their desire to purchase the car being sold to them. Admitting that such was the intention of the drawer of the check when she delivered it to Manuel Gonzales, it was no fault of the plaintiffappellee drawee if Manuel Gonzales delivered the check or negotiated it. As the check was payable to the plaintiff-appellee, and was entrusted to Manuel Gonzales by Gatchalian, the delivery to Manuel Gonzales was a delivery by the drawer to his own agent; in other words, Manuel Gonzales was the agent of the drawer Anita Gatchalian insofar as the possession of the check is concerned. So, when the agent of drawer Manuel Gonzales negotiated the check with the intention of getting its value from plaintiff-appellee, negotiation took place through no fault of the plaintiff-appellee, unless it can be shown that the plaintiffappellee should be considered as having notice of the defect in the possession of the holder Manuel Gonzales. Our resolution of this issue leads us to a consideration of the last question presented by the appellants, i.e., whether the plaintiff-appellee may be considered as a holder in due course. Section 52, Negotiable Instruments Law, defines holder in due course, thus: A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. The stipulation of facts expressly states that plaintiff-appellee was not aware of the circumstances under which the check was delivered to Manuel Gonzales, but we agree with the defendantsappellants that the circumstances indicated by them in their briefs, such as the fact that appellants had no obligation or liability to the Ocampo Clinic; that the amount of the check did not correspond exactly with the obligation of Matilde Gonzales to Dr. V. R. de Ocampo; and that the check had two parallel lines in the upper left hand corner, which practice means that the check could only be deposited but may not be converted into cash all these circumstances should have put the plaintiff-appellee to inquiry as to the why and wherefore of the possession of the check by Manuel Gonzales, and why he used it to pay Matilde's account. It was payee's duty to ascertain from the holder Manuel Gonzales what the nature of the latter's title to the check was or

the nature of his possession. Having failed in this respect, we must declare that plaintiff-appellee was guilty of gross neglect in not finding out the nature of the title and possession of Manuel Gonzales, amounting to legal absence of good faith, and it may not be considered as a holder of the check in good faith. To such effect is the consensus of authority. In order to show that the defendant had "knowledge of such facts that his action in taking the instrument amounted to bad faith," it is not necessary to prove that the defendant knew the exact fraud that was practiced upon the plaintiff by the defendant's assignor, it being sufficient to show that the defendant had notice that there was something wrong about his assignor's acquisition of title, although he did not have notice of the particular wrong that was committed. Paika v. Perry, 225 Mass. 563, 114 N.E. 830. It is sufficient that the buyer of a note had notice or knowledge that the note was in some way tainted with fraud. It is not necessary that he should know the particulars or even the nature of the fraud, since all that is required is knowledge of such facts that his action in taking the note amounted bad faith. Ozark Motor Co. v. Horton (Mo. App.), 196 S.W. 395. Accord. Davis v. First Nat. Bank, 26 Ariz. 621, 229 Pac. 391. Liberty bonds stolen from the plaintiff were brought by the thief, a boy fifteen years old, less than five feet tall, immature in appearance and bearing on his face the stamp a degenerate, to the defendants' clerk for sale. The boy stated that they belonged to his mother. The defendants paid the boy for the bonds without any further inquiry. Held, the plaintiff could recover the value of the bonds. The term 'bad faith' does not necessarily involve furtive motives, but means bad faith in a commercial sense. The manner in which the defendants conducted their Liberty Loan department provided an easy way for thieves to dispose of their plunder. It was a case of "no questions asked." Although gross negligence does not of itself constitute bad faith, it is evidence from which bad faith may be inferred. The circumstances thrust the duty upon the defendants to make further inquiries and they had no right to shut their eyes deliberately to obvious facts. Morris v. Muir, 111 Misc. Rep. 739, 181 N.Y. Supp. 913, affd. in memo., 191 App. Div. 947, 181 N.Y. Supp. 945." (pp. 640-642, Brannan's Negotiable Instruments Law, 6th ed.). The above considerations would seem sufficient to justify our ruling that plaintiff-appellee should not be allowed to recover the value of the check. Let us now examine the express provisions of the Negotiable Instruments Law pertinent to the matter to find if our ruling conforms thereto. Section 52 (c) provides that a holder in due course is one who takes the instrument "in good faith and for value;" Section 59, "that every holder is deemed prima facie to be a holder in due course;" and Section 52 (d), that in order that one may be a holder in due course it is necessary that "at the time the instrument was negotiated to him "he had no notice of any . . . defect in the title of the person negotiating it;" and

lastly Section 59, that every holder is deemed prima facieto be a holder in due course. In the case at bar the rule that a possessor of the instrument is prima faciea holder in due course does not apply because there was a defect in the title of the holder (Manuel Gonzales), because the instrument is not payable to him or to bearer. On the other hand, the stipulation of facts indicated by the appellants in their brief, like the fact that the drawer had no account with the payee; that the holder did not show or tell the payee why he had the check in his possession and why he was using it for the payment of his own personal account show that holder's title was defective or suspicious, to say the least. As holder's title was defective or suspicious, it cannot be stated that the payee acquired the check without knowledge of said defect in holder's title, and for this reason the presumption that it is a holder in due course or that it acquired the instrument in good faith does not exist. And having presented no evidence that it acquired the check in good faith, it (payee) cannot be considered as a holder in due course. In other words, under the circumstances of the case, instead of the presumption that payee was a holder in good faith, the fact is that it acquired possession of the instrument under circumstances that should have put it to inquiry as to the title of the holder who negotiated the check to it. The burden was, therefore, placed upon it to show that notwithstanding the suspicious circumstances, it acquired the check in actual good faith. The rule applicable to the case at bar is that described in the case of Howard National Bank v. Wilson, et al., 96 Vt. 438, 120 At. 889, 894, where the Supreme Court of Vermont made the following disquisition: Prior to the Negotiable Instruments Act, two distinct lines of cases had developed in this country. The first had its origin in Gill v. Cubitt, 3 B. & C. 466, 10 E. L. 215, where the rule was distinctly laid down by the court of King's Bench that the purchaser of negotiable paper must exercise reasonable prudence and caution, and that, if the circumstances were such as ought to have excited the suspicion of a prudent and careful man, and he made no inquiry, he did not stand in the legal position of a bona fide holder. The rule was adopted by the courts of this country generally and seem to have become a fixed rule in the law of negotiable paper. Later in Goodman v. Harvey, 4 A. & E. 870, 31 E. C. L. 381, the English court abandoned its former position and adopted the rule that nothing short of actual bad faith or fraud in the purchaser would deprive him of the character of a bona fide purchaser and let in defenses existing between prior parties, that no circumstances of suspicion merely, or want of proper caution in the purchaser, would have this effect, and that even gross negligence would have no effect, except as evidence tending to establish bad faith or fraud. Some of the American courts adhered to the earlier rule, while others followed the change inaugurated in Goodman v. Harvey. The question was before this court in Roth v. Colvin, 32 Vt. 125, and, on full consideration of the question, a rule was adopted in harmony with that announced in Gill v. Cubitt, which has been adhered to in subsequent cases, including

those cited above. Stated briefly, one line of cases including our own had adopted the test of the reasonably prudent man and the other that of actual good faith. It would seem that it was the intent of the Negotiable Instruments Act to harmonize this disagreement by adopting the latter test. That such is the view generally accepted by the courts appears from a recent review of the cases concerning what constitutes notice of defect. Brannan on Neg. Ins. Law, 187-201. To effectuate the general purpose of the act to make uniform the Negotiable Instruments Law of those states which should enact it, we are constrained to hold (contrary to the rule adopted in our former decisions) that negligence on the part of the plaintiff, or suspicious circumstances sufficient to put a prudent man on inquiry, will not of themselves prevent a recovery, but are to be considered merely as evidence bearing on the question of bad faith. See G. L. 3113, 3172, where such a course is required in construing other uniform acts. It comes to this then: When the case has taken such shape that the plaintiff is called upon to prove himself a holder in due course to be entitled to recover, he is required to establish the conditions entitling him to standing as such, including good faith in taking the instrument. It devolves upon him to disclose the facts and circumstances attending the transfer, from which good or bad faith in the transaction may be inferred. In the case at bar as the payee acquired the check under circumstances which should have put it to inquiry, why the holder had the check and used it to pay his own personal account, the duty devolved upon it, plaintiff-appellee, to prove that it actually acquired said check in good faith. The stipulation of facts contains no statement of such good faith, hence we are forced to the conclusion that plaintiff payee has not proved that it acquired the check in good faith and may not be deemed a holder in due course thereof. For the foregoing considerations, the decision appealed from should be, as it is hereby, reversed, and the defendants are absolved from the complaint. With costs against plaintiffappellee.

CHECK NO. 1. China Banking Corporation 2. International Corporate Bank 3. Metropolitan Bank & Trust Co. 589053 04045549 036512

DATE Dec. 22, 1980 Dec. 22, 1980 Dec. 22, 1980

The total value of the three (3) postdated checks amounted to P 299,450.00. Subsequently, New Sikatuna Wood Industries, Inc. entered into an agreement with herein petitioner State Investment House, Inc. whereby for and in consideration of the sum of Pl,047,402.91 under a deed of sale, the former assigned and discounted with petitioner eleven (11) postdated checks including the aforementioned three (3) postdated checks issued by herein private respondent-wife Anita Pea Chua to New Sikatuna Wood Industries, Inc. G.R. No. 72764 July 13, 1989 STATE INVESTMENT HOUSE, petitioner, vs. INTERMEDIATE APPELLATE COURT, ANITA PEA CHUA and HARRIS CHUA, respondents. Macalino, Salonga & Associates for petitioner. Edgardo F. Sundiam for respondents. When the three checks issued by private respondent Anita Pena Chua were allegedly deposited by petitioner, these checks were dishonored by reason of "insufficient funds", "stop payment" and "account closed", respectively. Petitioner claims that despite demands on private respondent Anita Pea to make good said checks, the latter failed to pay the same necessitating the former to file an action for collection against the latter and her husband Harris Chua before the Regional Trial Court of Manila, Branch XXXVII docketed as Civil Case No. 82-10547. Private respondents-defendants filed a third party complaint against New Sikatuna Wood Industries, Inc. for reimbursement and indemnification in the event that they be held liable to petitioner-plaintiff. For failure of third party defendant to answer the third party complaint despite due service of summons, the latter was declared in default. On April 30, 1984, the lower court 1 rendered judgment against herein private respondents spouses, the dispositive portion of which reads: WHEREFORE, judgment is hereby rendered in favor of the plaintiff or against the defendants ordering the defendants to pay jointly and severally to the plaintiff the following amounts: 1. P 229,450.00 with interest at the rate of 12% per annum from February 24,1981 until fully paid; 2. P 29,945.00 as and for attorney's fees; and

FERNAN, C.J.: Petitioner State Investment House seeks a review of the decision of respondent Intermediate Appellate Court (now Court of Appeals) in AC-G.R. CV No. 04523 reversing the decision of the Regional Trial Court of Manila, Branch XXXVII dated April 30, 1984 and dismissing the complaint for collection filed by petitioner against private respondents Spouses Anita Pena Chua and Harris Chua. It appears that shortly before September 5, 1980, New Sikatuna Wood Industries, Inc. requested for a loan from private respondent Harris Chua. The latter agreed to grant the same subject to the condition that the former should wait until December 1980 when he would have the money. In view of this agreement, private respondent-wife, Anita Pena Chua issued three (3) crossed checks payable to New Sikatuna Wood Industries, Inc. all postdated December 22, 1980 as follows:

3. the costs of suit. On the third party complaint, third party defendant New Sikatuna Wood Industries, Inc. is ordered to pay third party plaintiffs Anita Pena Chua and Harris Chua all amounts said defendants' third- party plaintiffs may pay to the plaintiff on account of this case. 2 On appeal filed by private respondents in AC-G.R. CV No. 04523, the Intermediate Appellate Court 3 (now Court of Appeals) reversed the lower court's judgment in the now assailed decision, the dispositive portion of which reads: WHEREFORE, finding this appeal meritorious, We Reverse and Set Aside the appealed judgment, dated April 30, 1984 and a new judgment is hereby rendered dismissing the complaint, with costs against plaintiffappellee. 4 Hence, this petition. The pivotal issue in this case is whether or not petitioner is a holder in due course as to entitle it to proceed against private respondents for the amount stated in the dishonored checks. Section 52(c) of the Negotiable Instruments Law defines a holder in due course as one who takes the instrument "in good faith and for value". On the other hand, Section 52(d) provides that in order that one may be a holder in due course, it is necessary that "at the time the instrument was negotiated to him he had no notice of any x x x defect in the title of the person negotiating it." However, under Section 59 every holder is deemed prima facie to be a holder in due course. Admittedly, the Negotiable Instruments Law regulating the issuance of negotiable checks as well as the lights and liabilities arising therefrom, does not mention "crossed checks". But this Court has taken cognizance of the practice that a check with two parallel lines in the upper left hand corner means that it could only be deposited and may not be converted into cash. Consequently, such circumstance should put the payee on inquiry and upon him devolves the duty to ascertain the holder's title to the check or the nature of his possession. Failing in this respect, the payee is declared guilty of gross negligence amounting to legal absence of good faith and as such the consensus of authority is to the effect that the holder of the check is not a holder in good faith. 5 Petitioner submits that at the time of the negotiation and endorsement of the checks in question by New Sikatuna Wood Industries, it had no knowledge of the transaction and/or arrangement made between the latter and private respondents. We agree with respondent appellate court.

Relying on the ruling in Ocampo v. Gatchalian (supra), the Intermediate Appellate Court (now Court of Appeals), correctly elucidated that the effects of crossing a check are: the check may not be encashed but only deposited in the bank; the check may be negotiated only once to one who has an account with a bank; and 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, otherwise he is not a holder in due course. Further, the appellate court said: It results therefore that when appellee rediscounted the check knowing that it was a crossed check he was knowingly violating the avowed intention of crossing the check. Furthermore, his failure to inquire from the holder, party defendant New Sikatuna Wood Industries, Inc., the purpose for which the three checks were cross despite the warning of the crossing, prevents him from being considered in good faith and thus he is not a holder in due course. Being not a holder in due course, plaintiff is subject to personal defenses, such as lack of consideration between appellants and New Sikatuna Wood Industries. Note that under the facts the checks were postdated and issued only as a loan to New Sikatuna Wood Industries, Inc. if and when deposits were made to back up the checks. Such deposits were not made, hence no loan was made, hence the three checks are without consideration (Sec. 28, Negotiable Instruments Law). Likewise New Sikatuna Wood Industries negotiated the three checks in breach of faith in violation of Article (sic) 55, Negotiable Instruments Law, which is a personal defense available to the drawer of the check. 6 In addition, such instruments are mentioned in Section 541 of the Negotiable Instruments Law as follows: Sec. 541. The maker or any legal holder of a check shall be entitled to indicate therein that it be paid to a certain banker or institution, which he shall do by writing across the face the name of said banker or institution, or only the words "and company." The payment made to a person other than the banker or institution shall not exempt the person on whom it is drawn, if the payment was not correctly made. Under usual practice, crossing a check is done by placing two parallel lines diagonally on the left top portion of the check. The crossing may be special wherein between the two parallel lines is

written the name of a bank or a business institution, in which case the drawee should pay only with the intervention of that bank or company, or crossing may be general wherein between two parallel diagonal lines are written the words "and Co." or none at all as in the case at bar, in which case the drawee should not encash the same but merely accept the same for deposit. The effect therefore of crossing a check relates to the mode of its presentment for payment. Under Section 72 of the Negotiable Instruments Law, presentment for payment to be sufficient must be made (a) by the holder, or by some person authorized to receive payment on his behalf ... As to who the holder or authorized person will be depends on the instructions stated on the face of the check. The three subject checks in the case at bar had been crossed generally and issued payable to New Sikatuna Wood Industries, Inc. which could only mean that the drawer had intended the same for deposit only by the rightful person, i.e., the payee named therein. Apparently, it was not the payee who presented the same for payment and therefore, there was no proper presentment, and the liability did not attach to the drawer. Thus, in the absence of due presentment, the drawer did not become liable. 7 Consequently, no right of recourse is available to petitioner against the drawer of the subject checks, private respondent wife, considering that petitioner is not the proper party authorized to make presentment of the checks in question. Yet it does not follow as a legal proposition that simply because petitioner was not a holder in due course as found by the appellate court for having taken the instruments in question with notice that the same is for deposit only to the account of payee named in the subject checks, petitioner could not recover on the checks. The Negotiable Instruments Law does not provide that a holder who is not a holder in due course may not in any case recover on the instrument for in the case at bar, petitioner may recover from the New Sikatuna Wood Industries, Inc. if the latter has no valid excuse for refusing payment. The only disadvantage of a holder who is not in due course is that the negotiable instrument is subject to defenses as if it were non-negotiable. 8 That the subject checks had been issued subject to the condition that private respondents on due date would make the back up deposit for said checks but which condition apparently was not made, thus resulting in the non-consummation of the loan intended to be granted by private respondents to New Sikatuna Wood Industries, Inc., constitutes a good defense against petitioner who is not a holder in due course. WHEREFORE, the decision appealed from is hereby AFFIRMED with costs against petitioner. SO ORDERED.

G.R. No. 89802 May 7, 1992 ASSOCIATED BANK and CONRADO CRUZ, petitioners, vs. HON. COURT OF APPEALS, and MERLE V. REYES, doing business under the name and style "Melissa's RTW," respondents. Soluta, Leonidas, Marifosque, Javier, Liboon & aguila Law Offices for petitioners. 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 private respondent is engaged in the business of ready-towear garments under the firm name "Melissa's RTW." She deals with, among other customers, Robinson's Department Store, Payless Department Store, Rempson Department Store, and the Corona Bazaar. These companies issued in payment of their respective accounts crossed checks payable to Melissa's RTW in the amounts and on the dates indicated below: PAYOR BANK AMOUNT DATE Payless Solid Bank P3,960.00 January 19, 1982 Robinson's FEBTC 4,140.00 December 18, 1981 Robinson's FEBTC 1,650.00 December 24, 1981 Robinson's FEBTC 1,980.00 January 12, 1982 Rempson TRB 1,575.00 January 9, 1982 Corona RCBC 2,500.00 December 22, 1981

When she went to these companies to collect on what she thought were still unpaid accounts, she was informed of the issuance of the above-listed crossed checks. Further inquiry revealed that the said checks had been deposited with the Associated Bank (hereinafter, "the Bank") and subsequently paid by it to one Rafael Sayson, one of its "trusted depositors," in the words of its branch manager and co-petitioner, Conrado Cruz, Sayson had not been authorized by the private respondent to deposit and encash the said checks. The private respondent sued the petitioners in the Regional Trial Court of Quezon City for recovery of the total value of the checks plus damages. After trial, judgment was rendered requiring them to pay the private respondent the total value of the subject checks in the amount of P15,805.00 plus 12% interest, P50,000.00 actual damages, P25,000.00 exemplary damages, P5,000.00 attorney's fees, and the costs of the suit. 1 The petitioners appealed to the respondent court, reiterating their argument that the private respondent had no cause of action against them and should have proceeded instead against the companies that issued the checks. In disposing of this contention, the Court of Appeals 2 said: The cause of action of the appellee in the case at bar arose from the illegal, anomalous and irregular acts of the appellants in violating common banking practices to the damage and prejudice of the appellees, in allowing to be deposited and encashed as well as paying to improper parties without the knowledge, consent, authority or endorsement of the appellee which totalled P15,805.00, the six (6) checks in dispute which were "crossed checks" or "for payee's account only," the appellee being the payee. The three (3) elements of a cause of action are present in the case at bar, namely: (1) a right in favor of the plaintiff by whatever means and under whatever law it arises or is created; (2) an obligation on the part of the named defendant to respect or not to violate such right; and (3) an act or omission on the part of such defendant violative of the right of the plaintiff or constituting a breach thereof. (Republic Planters Bank vs. Intermediate Appellate Court, 131 SCRA 631). And such cause of action has been proved by evidence of great weight. The contents of the said checks issued by the customers of the appellee had not been questioned. There is no dispute that the same are crossed checks or for payee's account only, which is Melissa's RTW. The appellee had clearly shown that she had never authorized anyone to deposit the said checks nor to encash the same; that the appellants had allowed all

said checks to be deposited, cleared and paid to one Rafael Sayson in violation of the instructions in the said crossed checks that the same were for payee's account only; and that the appellee maintained a savings account with the Prudential Bank, Cubao Branch, Quezon City which never cleared the said checks and the appellee had been damaged by such encashment of the same. We affirm. Under accepted banking practice, crossing a check is done by writing two parallel lines diagonally on the left top portion of the checks. The crossing is special where the name of 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 six checks in the case at bar had been crossed and issued "for payee's account only." This could only signify that the drawers had intended the same for deposit only by the person indicated, to wit, Melissa's RTW. The petitioners argue that the cause of action for violation of the common instruction found on the face of the checks exclusively belongs to the issuers thereof and not to the payee. Moreover, having acted in good faith as they merely facilitated the encashment of the checks, they cannot be made liable to the private respondent. The subject checks were accepted for deposit by the Bank for the account of Rafael Sayson although they were crossed checks and the payee was not Sayson but Melissa's RTW. The Bank stamped thereon its guarantee that "all prior endorsements and/or lack of endorsements (were) guaranteed." By such deliberate and positive act, the Bank had for all legal intents and purposes treated the said checks as negotiable instruments and, accordingly, assumed the warranty of the endorser.

The weight of authority is to the effect that "the possession of check on a forged or unauthorized indorsement is wrongful, and when the money is collected on the check, the bank can be held 'for moneys had and received." 6The 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. Equitable Banking Corp., 9 "the law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it, for the purpose of determining their genuineness and regularity. The collecting bank, being primarily engaged in banking, holds itself out to the public as the expert on this field, and the law thus holds it to a high standard of conduct." The petitioners insist that the private respondent has no cause of action against them because they have no privity of contract with her. They also argue that it was Eddie Reyes, the private respondent's own husband, who endorsed the checks. Assuming that Eddie Reyes did endorse the crossed checks, we hold that the Bank would still be liable to the private respondent because he was not authorized to make the endorsements. And even if the endorsements were forged, as alleged, the Bank would still be liable to the private respondent for not verifying the endorser's authority. There is no substantial difference between an actual forging of a name to a check as an endorsement by a person not authorized to make the signature and the affixing of a name to a check as an endorsement by a person not authorized to endorse it. 10 The Bank does not deny collecting the money on the endorsement. It was its responsibility to inquire as to the authority of Rafael Sayson to deposit crossed checks payable to Melissa's RTW upon a prior endorsement by Eddie Reyes. The

failure of the Bank to make this inquiry was a breach of duty that made it liable to the private respondent for the amount of the checks. There being no evidence that the crossed checks were actually received by the private respondent, she would have a right of action against the drawer companies, which in turn could go against their respective drawee banks, which in turn could sue the herein petitioner as collecting bank. In a similar situation, it was held that, to simplify proceedings, the payee of the illegally encashed checks should be allowed to recover directly from the bank responsible for such encashment regardless of whether or not the checks were actually delivered to the payee. 11We 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.

G.R. No. 93048

March 3, 1994

In as much as George King failed to deliver the bales of tobacco leaf as agreed despite petitioner's demand, BCCFI issued on March 30, 1979, a stop payment order on all checks payable to George King, including check TCBT 551826. Subsequently, stop payment was also ordered on checks TCBT Nos. 608967 & 608968 on September 14 & 28, 1979, respectively, due to George King's failure to deliver the tobacco leaves. Efforts of SIHI to collect from BCCFI having failed, it instituted the present case, naming only BCCFI as party defendant. The trial court pronounced SIHI as having a valid claim being a holder in due course. It further said that the non-inclusion of King Tim Pua George as party defendant is immaterial in this case, since he, as payee, is not an indispensable party. The main issue then is whether SIHI, a second indorser, a holder of crossed checks, is a holder in due course, to be able to collect from the drawer, BCCFI. The Negotiable Instruments Law states what constitutes a holder in due course, thus: Sec. 52 A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. Section 59 of the NIL further states that every holder is deemed prima facie a holder in due course. However, when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims, acquired the title as holder in due course. The facts in this present case are on all fours to the case of State Investment House, Inc. (the very respondent in this case) v. Intermediate Appellate Court 7 wherein we made a discourse on the effects of crossing of checks. As preliminary, a check is defined by law as a bill of exchange drawn on a bank payable on demand. 8 There are a variety of checks, the more popular of which are the memorandum check,

cashier's check, traveler's check and crossed check. Crossed check is one where two parallel lines are drawn across its face or across a corner thereof. It may be crossed generally or specially. A check is crossed specially when the name of a particular banker or a company is written between the parallel lines drawn. It is crossed generally when only the words "and company" are written or nothing is written at all between the parallel lines. It may be issued so that the presentment can be made only by a bank. Veritably the Negotiable Instruments Law (NIL) does not mention "crossed checks," although Article 541 9 of the Code of Commerce refers to such instruments. According to commentators, the negotiability of a check is not affected by its being crossed, whether specially or generally. It may legally be negotiated from one person to another as long as the one who encashes the check with the drawee bank is another bank, or if it is specially crossed, by the bank mentioned between the parallel lines. 10 This is specially true in England where the Negotiable Instrument Law originated. In the Philippine business setting, however, we used to be beset with bouncing checks, forging of checks, and so forth that banks have become quite guarded in encashing checks, particularly those which name a specific payee. Unless one is a valued client, a bank will not even accept second indorsements on checks. In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of a check should have the following effects: (a) the check may not be encashed but only deposited in the bank; (b) the check may be negotiated only once to one who has an account with a bank; (c) and the act of crossing the check serves as 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, otherwise, he is not a holder in due course. 11 The foregoing was adopted in the case of SIHI v. IAC, supra. In that case, New Sikatuna Wood Industries, Inc. also sold at a discount to SIHI three post dated crossed checks, issued by Anita Pea Chua naming as payee New Sikatuna Wood Industries, Inc. Ruling that SIHI was not a holder in due course, we then said: The three checks in the case at bar had been crossed generally and issued payable to New Sikatuna Wood Industries, Inc. which could only mean that the drawer had intended the same for deposit only by the rightful person, i.e. the payee named therein. Apparently, it was not the payee who presented the same for payment and therefore, there was no proper presentment, and the liability did not attach to the drawer. Thus, in the absence of due presentment, the drawer did not become liable. Consequently, no right of recourse is available to petitioner (SIHI) against the drawer of the subject checks, private respondent wife (Anita), considering that petitioner is not the proper party authorized

BATAAN CIGAR AND CIGARETTE FACTORY, INC., petitioner, vs. THE COURT OF APPEALS and STATE INVESTMENT HOUSE, INC., respondents. Teresita Gandiongco Oledan for petitioner. Acaban & Sabado for private respondent.

NOCON, J.: For our review is the decision of the Court of Appeals in the case entitled "State Investment House, Inc. v. Bataan Cigar & Cigarette Factory Inc.," 1 affirming the decision of the Regional Trial Court 2 in a complaint filed by the State Investment House, Inc. (hereinafter referred to as SIHI) for collection on three unpaid checks issued by Bataan Cigar & Cigarette Factory, Inc. (hereinafter referred to as BCCFI). The foregoing decisions unanimously ruled in favor of SIHI, the private respondent in this case. Emanating from the records are the following facts. Petitioner, Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a corporation involved in the manufacturing of cigarettes, engaged one of its suppliers, King Tim Pua George (herein after referred to as George King), to deliver 2,000 bales of tobacco leaf starting October 1978. In consideration thereof, BCCFI, on July 13, 1978 issued crossed checks post dated sometime in March 1979 in the total amount of P820,000.00. 3 Relying on the supplier's representation that he would complete delivery within three months from December 5, 1978, petitioner agreed to purchase additional 2,500 bales of tobacco leaves, despite the supplier's failure to deliver in accordance with their earlier agreement. Again petitioner issued post dated crossed checks in the total amount of P1,100,000.00, payable sometime in September 1979. 4 During these times, George King was simultaneously dealing with private respondent SIHI. On July 19, 1978, he sold at a discount check TCBT 551826 5 bearing an amount of P164,000.00, post dated March 31, 1979, drawn by petitioner, naming George King as payee to SIHI. On December 19 and 26, 1978, he again sold to respondent checks TCBT Nos. 608967 & 608968, 6 both in the amount of P100,000.00, post dated September 15 & 30, 1979 respectively, drawn by petitioner in favor of George King.

to make presentment of the checks in question. xxx xxx xxx That the subject checks had been issued subject to the condition that private respondents (Anita and her husband) on due date would make the back up deposit for said checks but which condition apparently was not made, thus resulting in the nonconsummation of the loan intended to be granted by private respondents to New Sikatuna Wood Industries, Inc., constitutes a good defense against petitioner who is not a holder in due course. 12 It is then settled that crossing of checks should put the holder on inquiry and upon him devolves the duty to ascertain the indorser's title to the check or the nature of his possession. Failing in this respect, the holder is declared guilty of gross negligence amounting to legal absence of good faith, contrary to Sec. 52(c) of the Negotiable Instruments Law, 13 and as such the consensus of authority is to the effect that the holder of the check is not a holder in due course. In the present case, BCCFI's defense in stopping payment is as good to SIHI as it is to George King. Because, really, the checks were issued with the intention that George King would supply BCCFI with the bales of tobacco leaf. There being failure of consideration, SIHI is not a holder in due course. Consequently, BCCFI cannot be obliged to pay the checks. The foregoing does not mean, however, that respondent could not recover from the checks. The only disadvantage of a holder who is not a holder in due course is that the instrument is subject to defenses as if it were non-negotiable. 14 Hence, respondent can collect from the immediate indorser, in this case, George King. WHEREFORE, finding that the court a quo erred in the application of law, the instant petition is hereby GRANTED. The decision of the Regional Trial Court as affirmed by the Court of Appeals is hereby REVERSED. Cost against private respondent. SO ORDERED.