Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

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 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 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. Cruz, Bellosillo and Quiason, JJ., concur.

TOWN SAVINGS AND LOAN BANK V. CA- Accommodation Party 223 SCRA 459 FACTS: Spouses Hipolito applied for and was granted a loan by the bank, which was secured by a promissory note. For failure to pay their monthly payments, they were declared in default. The spouses denied having any liability. They stated that the real party-in-interest is the sister of the husband, Pilarita Reyes. part of the loan, were mere guarantors of Reyes. As such, they protested against being dragged into the litigation. The spouses, not having received

The trial court held that they were liable as accommodation parties to the promissory note. This was reversed by the Court of Appeals. HELD: An accommodation party is one who has signed the instrument as maker, drawer, indorser, without receiving value therefore 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 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. In the case at bar, it is indisputable that the spouses signed the promissory note to enable Reyes to secure a loan from the bank. She was the actual beneficiary of the loan and the spouses accommodated her by signing the note.

ANG TIONG V. TING 22 SCRA 713

FACTS: Ting issued a PBCom check payable to cash or bearer. This was indorsed by Ang at the back and it was received by plaintiff. Upon encashment of the check, the same was dishonored. Plaintiff moved that the two make good the value of the check but despite demands, he was unheeded, prompting him to file a complaint. The trial court decided in his favor.

HELD: Even on the assumption that the appellant was an accommodation indorser, as he professes to be, he is nevertheless by the clear mandate of section 29, liable on the instrument to a holder for value, notwithstanding that such holder at the time of taking the instrument knew him to be an accommodation party. And assuming that he was an accommodation party, he may obtain security from the maker to protect himself against the danger of insolvency of the latter but this doesn't affect his liability to the appellee, as the said remedy is a matter of recourse between him and the maker.

Nego-d: Ang Tiong vs. Ting (GR L-26767, 22February 1968) Posted by Berne Guerrero under(a) oas,digests No Comments Ang Tiong vs. Ting GR L-26767, 22 February 1968 Facts: Lorenzo Ting issued a check for P4,000 payable to cash or bearer. With Felipe Angs signature (indorsement in blank) at the back thereof, theinstrument was received by Ang Tiong who thereafter presented it to thebank for payment. The drawee bank dishonored it. Ang Tiong made writtendemands on both Ting and Ang to make good the amount represented bythe check. These demands unheeded. Ang Tiong filed suit for collection. Thetrial court adjudged for Ang Tiong. Only Ang appealed, maintaining that he isonly an accommodation party. Issue: Whether Felipe Ang is an accommodation party. Held: Felipe Ang is a general indorser (Section 63, Negotiable InstrumentsLaw), in the absence of any indication by appropriate words his intention tobe bound in some other capacity. Even on the assumption that Ang is amere accommodation party, he is liable on the instrument to a holder forvalue notwithstanding that such holder at the time of taking the instrumentknew him to be only an accommodation party (Section 29, NegotiableInstruments Law). Assuming further that Ang is an accommodation indorser,the fact that Ang may obtain security from the maker to protect himself against the danger of insolvency of the latter cannot in any manner affecthis liability to Ang Tiong, as the said remedy is a matter of concernexclusively between an accommodation indorser and an accommodatedparty. The liability of Felipe Ang remains primary and unconditional. En Banc, Castro (J)

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-26767 February 22, 1968

ANG TIONG, plaintiff-appellee, vs. LORENZO TING, doing business under the name and style of PRUNES PRESERVED MFG., and FELIPE ANG, defendants. FELIPE ANG, defendant-appellant. Chipeco & Alcaraz, Jr. for plaintiff-appellee. Ang, Atienza & Tabora for defendant-appellant. CASTRO, J.: On August 15, 1960 Lorenzo Ting issued Philippine Bank of Communications check K-81618, for the sum of P4,000, payable to "cash or bearer". With Felipe Ang's signature (indorsement in blank) at the back thereof, the instrument was received by the plaintiff Ang Tiong who thereafter presented it to the drawee bank for payment. The bank dishonored it. The plaintiff then made written demands on both Lorenzo Ting and Felipe Ang that they make good the amount represented by the check. These demands went unheeded; so he filed in the municipal court of Manila an action for collection of the sum of P4,000, plus P500 attorney's fees. On March 6, 1962 the municipal court adjudged for the plaintiff against the two defendants. Only Felipe Ang appealed to the Court of First Instance of Manila (civil case 50018), which rendered judgment on July 31, 1962, amended by an order dated August 9, 1962, directing him to pay to the plaintiff "the sum of P4,000, with interest at the legal rate from the date of the filing of the complaint, a further sum of P400 as attorney's fees, and costs." Felipe Ang then elevated the case to the Court of Appeals, which certified it to this Court because the issues raised are purely of law. The appellant imputes to the court a quo three errors, namely, (1) that it refused to apply article 2071 of the new Civil Code to the case at bar; (2) that it adjudged him a general indorser under the Negotiable Instruments Law (Act 2031); and (3) that it held that he "cannot obtain his release from the contract of suretyship or obtain security to protect himself against any proceedings on the part of the creditor and against the danger of insolvency of the principal debtor," because he is "jointly and severally liable on the instrument." This, appeal is absolutely without merit. 1. The genuineness and due execution of the instrument are not controverted. That the appellee is a holder thereof for value is admitted. Having arisen from a bank check which is indisputably a negotiable instrument, the present case is, therefore, in so far as the indorsee is concerned vis-a-vis the indorser, governed solely plaintiff the Negotiable Instruments Law (see secs. 1 and 185). Article 2071 of the new Civil Code, invoked by the appellant, the pertinent portion of which states, "The guarantor, even before been paid, may proceed against the principal debtor; (1) when he is sued for the payment; . . . the action of the guarantor is to obtain release from the guaranty, to demand a security that shall protect him from any proceedings by the creditor . . .," is here completely irrelevant and can have no application whatsoever. We are in agreement with the trial judge that nothing in the check in question indicates that the appellant is not a general indorser within the purview of section 63 of the Negotiable Instruments Law which makes "a person placing his signature upon an instrument otherwise than as maker, drawer or acceptor" a general indorser, "unless he clearly indicates plaintiff appropriate words his intention to be bound in some other capacity," which he did not do. And section 66 ordains that "every indorser who indorses without qualification, warrants to all subsequent holders in due course" (a) that the instrument is genuine and in all respects what it purports to be; (b) that he has a good title to it; (c) that all prior parties have capacity to contract; and (d) that the instrument is at the time of his indorsement valid and subsisting. In addition, "he engages that on due presentment, it shall be accepted or paid, or both, as the case may be, and that if it be dishonored, he will pay the amount thereof to the holder." 1 2. Even on the assumption that the appellant is a mere accommodation party, as he professes to be, he is nevertheless, by the clear mandate of section 29 of the Negotiable Instruments Law, yet "liable on the instrument to a holder for value, notwithstanding that such holder at the time of taking the instrument knew him to be only an accommodation party." To paraphrase, the accommodation party is liable to a holder for value as if the contract was not for accommodation. It is not a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument. Nor is it correct to say that the holder for value is not a holder in due course merely because at the time he acquired the instrument, he knew that the indorser was only an accommodation party. 2 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 fact 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 accomodation indorser. ACCORDINGLY, the judgment a quo is affirmed in toto, at appellant's cost.

G.R. No. L-26767

February 22, 1968

Lessons Applicable: (Negotiable Insturment) FACTS:

August 15, 1960: Lorenzo Ting issued Philippine Bank of Communications check K-81618, w/ sum of P4,000, payable to "cash or bearer" o With Felipe Ang's signature (indorsement in blank) at the back thereof, the instrument was received by the Ang Tiong who presented it to the drawee bank for payment but it was dishonored o Ting made a written demand to both Ting and Ang to no avail March 6, 1962: Municipal Court of Manila favored Tiong against Ting and Ang CA: ordered Ang to pay with interest Ang contends that he is an accomodating indorser

ISSUE: W/N Ang is an accomodating indorser and not a general indorser a HELD: NO. Affirmed

Section 63 of the Negotiable Instruments Law: a person placing his signature upon an instrument otherwise than as maker, drawer or acceptor = a general indorser, unless he clearly indicates plaintiff appropriate words his intention to be bound in some other capacity o warrants: (a) that the instrument is genuine and in all respects what it purports to be; (b) that he has a good title to it; (c) that all prior parties have capacity to contract; and (d) that the instrument is at the time of his indorsement valid and subsisting Even on the assumption that the appellant is a mere accommodation party, as he professes to be, he is by the clear mandate of section 29 of the Negotiable Instruments Law, "liable on the instrument to a holder for value, notwithstanding that such holder at the time of taking the instrument knew him to be only an accommodation party." o It is not a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument. o Nor is it correct to say that the holder for value is not a holder in due course merely because at the time he acquired the instrument, he knew that the indorser was only an accommodation party. 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 Tiong, as the said remedy is a matter of concern exclusively between accommodation indorser and accommodated party. o The liability of the appellant remains primary and unconditional.

BANCO ATLANTICO V. AUDITOR GENERAL 81 SCRA 335

FACTS: Boncan was the Finance Officer of the Philippine Embassy in Madrid who on many occasions negotiated with Banco Atlantico checks, allegedly endorsed to her by the embassy. On these occasions, the bank allowed the payment of the checks, notwithstanding the fact that the drawee bank has not yet cleared the checks for collection. This was premised on the finding that Boncan had special relations with the employees of the bank. And that upon presentment to the drawee bank, the checks were dishonored due to non-acceptance allegedly on the ground that the drawer has ordered the stoppage of payment. This prompted Banco Atlantico to collect from the Philippine Embassy for the funds released to Boncan but the latter refused. This eventually led to filing of money claim of the bank with the Auditor General.

HELD: On whether or not Banco Atlantico was a holder in due course, it is not. Following the decision of the Auditor General in denying the claim of the bank, the checks were demand notes. It should have been put on guard when Boncan negotiated the checks with them and subsequently deposited the same to her account. Even though it were demand notes, she instructed the bank that the same be not presented for collection till a later date. The fact that the amount was quite big and it was the payee herself who made the request that the same be not presented for collection until a fixed date in the future was proof of a glaring infirmity or defect in the instrument. It loudly proclaims Take me at your own risk. It was obvious by then that the bank had knowledge of the infirmity or defect of the checks. Furthermore, what it did when it allowed payment before clearing is beyond the normal and ordinary banking practice especially when the bank involved is a foreign bank and the amounts involved were large. Boncan wasn't even a client of the bank but was someone who had special relations with its officers. In view of the foregoing, the embassy as the drawer of the 3 checks in question cannot be held liable. It is apparent that the said 3 checks were (fraudulently altered) by Boncan as to their accounts and therefore wholly inoperative (note: should be avoided).

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. L-33549 January 31, 1978 BANCO ATLANTICO, petitioner, vs. AUDITOR GENERAL, respondent. Juan G. Collas, Jr., and Luis Ma. Guerrero for petitioner. Solicitor General Estelito P. Mendoza Assistant Solicitor General Rosalio A. de Leon and Solicitor Eulogio Raquel-Santos for respondent.

FERNANDEZ, J: This is an appeal from the decision of the Auditor General contained in a letter dated April 22, 1971 addressed to the counsel of the petitioner, Banco Atlantico, stating that, ... for want of legal basis, this Office cannot snow in audit the payment of the said claim of Banco Atlantico against the Philippine Embassy in Madrid, Spain." 1 The record discloses that the petitioner is a commercial Bank doing business in Madrid, Spain; that on October 31, i968, Virginia Boncan, then the Finance Officer of the Philippine Embassy in Madrid, Spain, negotiated with Banco Atlantico a Philippine Embassy check signed by Luis M. Gonzales, its ambassador and by said Virginia Boncan as Finance Officer, dated October 31, 1968 in the sum of US$10,109.10 payable to Azucena Pace and drawn against the Philippine National Bank branch in New York, U.S.A.; that the check was endorsed by Azucena Pace and Virginia Boncan; that the petitioner, without clearing the check with the drawn bank in New York, U.S.A., paid the full amount of US$10,109.10 to Virginia Boncan; that on November 2, 1968, Virginia Boncan negotiated by endorsement with the petitioner another embassy check signed by Luis M. Gonzales as ambassador and by her as finance officer in the sum of US$35,000.75 dated November 2, 1968 payable to Virginia Boncan and drawn against the Philippine National Bank branch in New York, U.S.A.; that the petitioner paid the full amount of the check to Virginia Boncan without clearing said check with the drawn bank, that on November 5, 1968, Virginia Boncan negotiated by endorsement with petitioner another embassy check signed by Ambassador Luis M. Gonzales and by Finance Officer Virginia Boncan in the sum of US$90,000.00 dated November 5, 1968 payable to Virginia Boncan and drawn against the Philippine National Bank in New York, U.S.A.; that the petitioner paid the full amount of the aforementioned check of US$90,000.00 to Virginia Boncan without clearing said check with the drawn bank; that upon presentment for acceptance and payment of the aforementioned checks by Banco Atlantico through its collecting bank in New York, U.S.A. to the drawn bank, the Philippine National Bank branch in U.S.A., said drawee bank dishonored the checks by non-acceptance allegedly on the ground that the drawer had ordered payments to be stopped; that upon receipt of the notice of the dishonor, the collecting bank of the petitioner in New York, U.S.A. sent individual notices of protest with respect to the checks in question to the Philippine Embassy in Madrid, Spain and to Virginia Boncan as endorser payee that Virginia Boncan and the Philippine Embassy in Madrid, Spain refused to pay the petitioner the amounts of the aforementioned checks.
2

The petitioner, Banco Atlantico, filed the corresponding money claim with the Auditor General. In denying the claim of the petitioner for the amounts of the three checks in question, the respondent Auditor General concurred in the following views expressed by Ambassador Luis M. Gonzales in his second endorsement dated November 13, 1970: 1) Counsel for Claimant alleges that the "Embassy of the Republic of the Philippines maintained a checking account with Claimant who honored and cashed checks drawn by the Embassy against its depository bank, the Philippine National Bank branch in New York, U.S.A." This claim is erroneous. The Embassy never maintained any checking account with Banco Atlantico at any time in the past. Only the individual staff members of the Embassy, including Miss Virginia Boncan, in their personal and private capacities, maintained accounts with said bank. 2) Counsel for claimant alleges that the three checks for the amount of US$10,109.10, US$35,075.00 and US$90,000.00 were honored and full amount of the aforementioned checks paid to Miss Boncan in the ordinary course of its banking transactions. While the aforementioned checks of the Embassy may have appeared valid, payment to Miss Boncan in her capacity as endorser and payee of the checks without clearing them first with the drawee bank is definitely not in accordance with normal or ordinary banking practice, especially so in this case where the drawee bank was a foreign bank, and the amounts involved were quite large. The normal procedure would have been for the Banco Atlantico to clear the three cheeks concerned with the drawee bank before paying Miss Boncan. From our investigation we have gathered enough proof that Miss Boncan had very special relations with the employees and chiefs of the claimant bank's foreign department. This personal relationship that existed between Miss Boncan and said employees and officers was one thing and ordinary banking transactions were something else. Because of this special relationship, the bank took a risk and sacrificed normal banking procedures by cashing the aforementioned checks without prior clearance from the drawee bank.

3) Counsel for claimant says that Banco Atlantico has every right to recover from the Embassy as drawer of the checks because it is a holder in due course. Basis for the claim is Section 61 of the Negotiable Instruments Law, to wit: SEC. 61. Liability of drawer The drawer by drawing the instrument admits the existence of the payee and his then capacity to endorse and engages that on the due presentment the instrument will be accepted or paid, or both, according to its tenor and that if it be dishonored, and the n proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder. It is erroneous for claimant bank's Counsel to single out this particular provision because the interpretation thereof would be out of context. All the other related provisions of said law must be interpreted together, and it would then be doubtful if Banco Atlantico could qualify as a holder in due course. 4) As regards the checks for US$10,109.10 and US$35,075.00 Miss. Boncan had altered them by fraudulently increasing the amounts for which said cheeks were issued, and claimant bank failed to protect itself by cashing them without first clearing them with the drawer bank. When claimant bank gave Miss Boncan special treatment as a privileged client in disregard of the elementary principles of prudence that should attend banking transactions, they should stand to suffer the loss that was due to their own negligence. Further proof of the special relationship between claimant bank and Miss Boncan was the leniency of the bank towards her when it accepted for deposit to Miss Boncan's dollar account an Embassy check for US$75.00 payable to Mr. Antonio P. Villamor without his indorsement. Such leniency on the part of the bank could even lead to the suspicion that there was collusion between the bank and Miss Boncan A photocopy of this check is enclose for ease of reference. In the particular case of the check for US$90,000.00 we can demonstrate that claimant bank likewise has no ewe at all. Section 61 of the Negotiable instruments Law can only be availed of by holders in due course and Banco Atlantico cannot be considered as one under the definition of Section 52 of the N.I.L., to wit: SEC. 52. What constitutes a holder in due course A holder in due course is a holder who has taken the instrument under the following conditions: a. That it is complete and regular on its face; b. That he became the holder of it before it was overdue, and without notice that it has 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 infirmity in the instrument or defect in the title of the person negotiating it. All four conditions enumerated under this section must concur before a holder can be considered as a holder in due course. The absence or failure to comply with any of the conditions set forth under this section will make one's title to the instrument defective. The check for US$90,000.00 was a demand note. When Miss Boncan the payee of this check, negotiated the same by depositing it in her account, at the game time informing the bank in writing (copy of her letter is enclosed for ease of reference) that it be not presented for collection until a later date, Banco Atlantico through its agent teller or cashier should have been put on guard that there was something wrong with the check. The fact that the amount involved was quite big and it was the payee herself who made the request that the same not be presented for collection until a fixed date in the future was proof of a glaring infirmity or defect in the instrument. It loudly proclaims, "Take me at your risk." The interest of the payee was the immediate punishment of the check of which she was the beneficiary and not the deferment of the presentment for collection of the same to the drawee bank. This being the case, Banco Atlantico was not a holder in due course as defined by Section 52 of the N.I.L., because it was obvious that it had knowledge of the infirmity or defect of the cheek. The fact that the check was honored by claimant bank was proof not only of their gross negligence but a further manifestation of the special treatment they were according Miss Boncan. 3 According to the petitioner, the issues at bar are the follow: 1. Was there a forgery committed on the three (3) checks as contemplated by See. 23 of the Negotiable Instruments Law (NIL) as to bar petitioner from enforcing collection from the drawer-Philippine Embassy in Madrid, Spain? And, if there was such a forgery, is the drawer precluded from setting up forgery or want of authority of Miss Boncan? and, 2. Do the payments of the aforecited checks without clearing them first with the drawee bank constitute an actual notice of a defective title in the endorser thereof and/or an assumption of risk by the petitioner as to defeat collection thereon? 4 The record shows that the chock dated October 31, 1968 and payable to Azucena Pace was intended to be issued for the sum of US$109.10 for the payment of said payee's salary as consular clerk in the Philippine Embassy in Madrid for the second half of October, 1968 as shown in the Embassy's General Payroll. 5 It also appears that the check dated November 2, 1968 was to be issued for the amount of US$75.00 in reimbursement of Virginia Boncan's living quarters allowance for November 1968 as shown in Cash Voucher No. MA-132/69. 6 There is also a showing that on November 8, 1968,

Virginia Boncan cashed with the petitioner a check for US$90,000.00 dated November 5, 1968 drawn on the Philippine National Bank branch at New York City, and although said check was payable on demand, Virginia Boncan asked that the same be not presented for collection until a later date. 7 The petitioner paid the amounts of the three (3) checks in question to Virginia Boncan without previously clearing the said checks with the drawee bank, Philippine National Bank, New York. This is contrary to normal or ordinary banking practice specially so where the drawee bank is a foreign bank and the amounts involved were large. The drawer of the aforementioned checks was not even a client of the petitioner. There is a showing that Virginia Boncan enjoyed special treatment from the employees and chiefs of the petitioner's foreign department. It was probably because of this special relation. ship that the petitioner, in of the elementary principle that should attend banking transactions, cashed the three (3) checks in question without prior clearances from the drawee bank. In view of the foregoing, the Philippine Embassy in Madrid, as drawer of the three (3) checks in question, cannot be held liable. It is apparent that the said three (3) checks were fraudulently altered by Virginia Boncan as to their amounts and, therefore, wholly inoperative. 8 No right of payment thereof against any party thereto could have been acquired by the petitioner. WHEREFORE, the decision of the Auditor General denying the claim of the petitioner for payment of the three (3) checks, Annex "C", Annex "D", and Annex "E" of the petition, is hereby affirmed, without pronouncement as to costs. SO ORDERED. Republic of the Philippines SUPREME COURT Manila EN BANC 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 is personally acquainted with V. R. de Ocampo; 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 receipt of their main memoranda. (pp. 21-25, Defendant's Record on Appeal). 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, plaintiff-appellee 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 plaintiff-appellee argues that in accordance with the best authority on the Negotiable Instruments Law, plaintiffappellee 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 plaintiff-appellee 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 plaintiff-appellee 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 defendants-appellants 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

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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 plaintiff-appellee. Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and De Leon, JJ., concur. Bengzon, C.J., concurs in the result.

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PNB V. NATIONAL CITY BANK OF NY 63 PHIL 711

FACTS: Unknown persons negotiated with Motor Services Company checks, which were part of the stipulation in payment of automobile tires purchased from the latters store. It purported to have been issued by Pangasinan Transportation Company. The said checks were indorsed at the back by said unknown persons, the Motor company believing at that time that the signatures contained therein were genuine. The checks were later deposited with the companys account in National City Bank of NY. The said checks were consequently cleared and PNB credited National City Bank with the amounts. Thereafter, PNB discovered that the signatures were forged and it demanded the reimbursement of the amounts for which it credited the other bank.

HELD: A check is a bill of exchange payable on demand and only the rules governing bills of exchanges payable on demand are applicable to it. in view of the fact that acceptance is a step necessary insofar as negotiable instruments are concerned, it follows that the provisions relative to acceptance are without application to checks. Acceptance implies subsequent negotiation of the instrument, which is not true in the case of checks because from the moment it is paid, it is withdrawn from circulation. When the drawee banks 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 warrant against the drawee. Further, in determining the relative rights of a drawee who under a mistake of fact, has paid, 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 and negligence of the parties in respect thereto. The responsibility of the drawee who pays a forged check, for the genuineness of the drawers 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. According to the undisputed facts, National City Bank in purchasing the papers in question from unknown persons without making any inquiry as to the identity and authority of said persons negotiating and indorsing them, acted negligently and contributed to the constructive loss of PNB in failing to detect the forgery. Under the circumstances of the case, if the appellee bank is allowed to recover, there will be no change in position as to the injury or prejudice of the appellant.

Republic of the Philippines SUPREME COURT Manila EN BANC 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 A-1, respectively, which are made parts of the stipulation, in payment for automobile tires purchased from said defendant's stores, purporting to have been

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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

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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;

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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. (See National Bank of the Republic vs. Millard, 10 Wall. [77 U. S.], 152; 19 L. ed., 899.) The Tennessee court then argued that it would be inequitable and unconscionable for the owner and payee of the check to be limited to an action against an insolvent drawer and might thereby lose the debt. They recognized the legal principle that there is no privity between the drawer bank and the holder, or payee, of the check, and proceeded to hold that no particular kind of writing was necessary to constitute 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.

15

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 assignment pro 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:

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In all the cases which hold the drawee absolutely estoppel by acceptance or payment from denying genuineness of the drawer's name, the loss is thrown upon him on the ground of negligence on his part in accepting or paying, until he has ascertained the bill to be genuine. But the holder has preceded him in negligence, by himself not ascertaining the true character of the paper before he received it, or presented it for acceptance or payment. And although, as a general rule, the drawee is more likely to know the drawer's handwriting than a stranger is, if he is in fact deceived as to its genuineness, we do not perceive that he should suffer more deeply by mistake than a stranger, who, without knowing the handwriting, has taken the paper without previously ascertaining its genuineness. And the mistake of the drawee should always be allowed to be corrected, unless the holder, acting upon faith and confidence induced by his honoring the draft, would be placed in a worse position by according such privilege to him. This view has been applied in a well considered case, and is intimidated in another; and is forcibly presented by Mr. Chitty, who says it is going a great way to charge the acceptor with knowledge of his correspondent's handwriting, "unless some bona fide holder has purchased the paper on the faith of such an act." Negligence in making payment under a mistake of fact is not now deemed a bar to recovery of it, and we do not see why any exception should be made to the principle, which would apply as well as to release an obligation not consummated by payment. ( Vol. 2, 6th edition, pp. 1537-1539.) III. But now the rule is perfectly well settled that in determining the relative rights of a drawee who, under a mistake of fact, has paid, and a holder who has received such payment, upon a check to which the name of the drawer has been forged, it is only fair to consider the question of diligence or negligence of the parties in respect thereto. (Woods and Malone vs. Colony Bank [1902], 56 L. R. A., 929, 932.) The responsibility of the drawee who pays a forged check, for the genuineness of the drawer's signature, is absolute only in favor of one who has not, by his own fault or negligence, contributed to the success of the fraud or to mislead the drawee. (National Bank of America vs. Bangs, 106 Mass., 441; 8 Am. Rep., 349; Woods and Malone vs. Colony Bank, supra; De Feriet vs. Bank of America, 23 La. Ann., 310; B. B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 10 L. R. A. [N. S.], 63.) If it appears that the one to whom payment was made was not an innocent sufferer, but was guilty of negligence in not doing something, which plain duty demanded, and which, if it had been done, would have avoided entailing loss on any one, he is not entitled to retain the moneys paid through a mistake on the part of the drawee bank. (First Nat. Bank of Danvers vs. First Nat. Bank of Salem, 151 Mass., 280; 24 N. E., 44; 21 A. S. R., 450; First Nat. Bank of Orleans vs. State Bank of Alma, 22 Neb., 769; 36 N. W., 289; 3 A. S. R., 294; American Exp. Co. vs. State Nat. Bank, 27 Okla., 824; 113 Pac., 711; 33 L. R. A. [N. S.], 188; B. B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 54 S. E., 204; 114 A. S. R., 986; 7 Ann. Cas., 744; 10 L. R. A. [N. S.], 63; People's Bank vs. Franklin Bank, 88 Tenn. 299; 12 S. W., 716; 17 A. S. R.) 884; 6 L. R. A., 724; Canadian Bank of Commerce vs. Bingham, 30 Wash., 484; 71 Pac., 43; 60 L. R. A., 955.) In other words, to entitle the holder of a forged check to retain the money obtained he must be able to show that the whole responsibility of determining the validity of the signature was upon the drawee, and that the negligence of such drawee was not lessened by any failure of any precaution which, from his implied assertion in presenting the check as a sufficient voucher, the drawee had the right to believe he had taken. (Ellis vs. Ohio Life Insurance & Trust Co., 4 Ohio St., 628; Rouvant vs. Bank, 63 Tex., 610; Bank vs. Ricker, 71 Ill., 429; First National Bank of Danvers vs. First Nat. Bank of Salem, 24 N. E., 44, 45; B. B. Ford & Co. vs. People's Bank of Orangeburg, supra.) The recovery is permitted in such case, because, although the drawee was constructively negligent in failing to detect the forgery, yet if the purchaser had performed his duty, the forgery would in all probability have been detected and the fraud defeated. (First National Bank of Lisbon vs. Bank of Wyndmere, 15 N. D., 209; 10 L. R. A. [N. S.], 49.) In the absence of actual fault on the part of the drawee, his constructive fault in not knowing the signature of the drawer and detecting the forgery will not preclude his recovery from one who took the check under 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.)

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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:

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"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.

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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. Avancea, C. J., Villa-Real, Abad Santos, Imperial, Diaz, and Laurel, JJ., concur.

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GR L-53194, 14 March 1988 FACTS Francisco Gozon was a depositor of the Philippine National Bank (PNB Caloocan City branch). Ernesto Santos, Gozons friend, took a check from the latters checkbook which was left in the car, filled it up for the amount of P5,000, forged Gozons signature, and encashed it. Gozon learned about the transaction upon receipt of the banks statement of account, and requested the bank to recredit the amount to his account. The bank refused. Hence, the present action. ISSUE Who shall bear the loss resulting from the forged check. HELD 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. It is expected to use reasonable business prudence in accepting and cashing a check being encashed or presented to it. Payment in neglect of duty places upon him the result of such negligence. Still, Gozons act in leaving his checkbook in the car, where his trusted friend remained in, cannot be considered negligence sufficient to excuse the bank from its own negligence. The bank bears the loss.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION 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. 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).

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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 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 "5B") 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.

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