Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 116320 November 29, 1999
ADALIA FRANCISCO, petitioner,
vs.
COURT OF APPEALS, HERBY COMMERCIAL &
CONSTRUCTION CORPORATION AND JAIME C.
ONG,respondents.
GONZAGA-REYES, J.:
Assailed in this petition for review on certiorari is the decision 1
of the Court of Appeals affirming the decision 2rendered by
Branch 168 of the Regional Trial Court of Pasig in Civil Case
No. 35231 in favor of private respondents.
The controversy before this Court finds its origins in a Land
Development and Construction Contract which was entered into
on June 23, 1977 by A. Francisco Realty & Development
Corporation (AFRDC), of which petitioner Adalia Francisco
(Francisco) is the president, and private respondent Herby
Commercial & Construction Corporation (HCCC), represented
by its President and General Manager private respondent Jaime
C. Ong (Ong), pursuant to a housing project of AFRDC at San
Jose del Monte, Bulacan, financed by the Government Service
Insurance System (GSIS). Under the contract, HCCC agreed to
undertake the construction of 35 housing units and the
development of 35 hectares of land. The payment of HCCC for

its services was on a turn-key basis, that is, HCCC was to be

paid on the basis of the completed houses and developed lands
delivered to and accepted by AFRDC and the GSIS. To facilitate
payment, AFRDC executed a Deed of Assignment in favor of
HCCC to enable the latter to collect payments directly from the
GSIS. Furthermore, the GSIS and AFRDC put up an Executive
Committee Account with the Insular Bank of Asia & America
(IBAA) in the amount of P4,000,000.00 from which checks
would be issued and co-signed by petitioner Francisco and the
GSIS Vice-President Armando Diaz (Diaz).
On February 10, 1978, HCCC filed a complaint 3 with the
Regional Trial Court of Quezon City against Francisco, AFRDC
and the GSIS for the collection of the unpaid balance under the
Land Development and Construction Contract in the amount of
P515,493.89 for completed and delivered housing units and land
development. However, the parties eventually arrived at an
amicable settlement of their differences, which was embodied in
a Memorandum Agreement executed by HCCC and AFRDC on
July 21, 1978. Under the agreement, the parties stipulated that
HCCC had turned over 83 housing units which have been
accepted and paid for by the GSIS. The GSIS acknowledged that
it still owed HCCC P520,177.50 representing incomplete
construction of housing units, incomplete land development and
5% retention, which amount will be discharged when the defects
and deficiencies are finally completed by HCCC. It was also
provided that HCCC was indebted to AFRDC in the amount of
P180,234.91 which the former agreed would be paid out of the
proceeds from the 40 housing units still to be turned over by
HCCC or from any amount due to HCCC from the GSIS.
Consequently, the trial court dismissed the case upon the filing
by the parties of a joint motion to dismiss.

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

GSIS, Ong discovered that Diaz and Francisco had executed and
signed seven checks 4, of various dates and amounts, drawn
against the IBAA and payable to HCCC for completed and
delivered work under the contract. Ong, however, claims that
these checks were never delivered to HCCC. Upon inquiry with
Diaz, Ong learned that the GSIS gave Francisco custody of the
checks since she promised that she would deliver the same to
HCCC. Instead, Francisco forged the signature of Ong, without
his knowledge or consent, at the dorsal portion of the said
checks to make it appear that HCCC had indorsed the checks;
Francisco then indorsed the checks for a second time by signing
her name at the back of the checks and deposited the checks in
her IBAA savings account. IBAA credited Francisco's account
with the amount of the checks and the latter withdrew the
amount so credited.
On June 7, 1979, Ong filed complaints with the office of the city
fiscal of Quezon City, charging Francisco with estafa thru
falsification of commercial documents. Francisco denied having
forged Ong's signature on the checks, claiming that Ong himself
indorsed the seven checks in behalf of HCCC and delivered the
same to Francisco in payment of the loans extended by
Francisco to HCCC. According to Francisco, she agreed to grant
HCCC the loans in the total amount of P585,000.00 and covered
by eighteen promissory notes in order to obviate the risk of the
non-completion of the project. As a means of repayment, Ong
allegedly issued a Certification authorizing Francisco to collect
HCCC's receivables from the GSIS. Assistant City Fiscal Ramon
M. Gerona gave credence to Francisco's claims and accordingly,
dismissed the complaints, which dismissal was affirmed by the
Minister of Justice in a resolution issued on June 5, 1981.

The present case was brought by private respondents on

November 19, 1979 against Francisco and IBAA for the
recovery of P370,475.00, representing the total value of the
seven checks, and for damages, attorney's fees, expenses of
litigation and costs. After trial on the merits, the trial court
rendered its decision in favor of private respondents, the
dispositive portion of which provides
WHEREFORE, premises considered, judgment is hereby
rendered in favor of the plaintiffs and against the defendants
INSULAR BANK OF ASIA & AMERICA and ATTY. ADALIA
FRANCISCO, to jointly and severally pay the plaintiffs the
amount of P370.475.00 plus interest thereon at the rate of 12%
per annum from the date of the filing of the complaint until the
full amount is paid; moral damages to plaintiff Jaime Ong in the
sum of P50,000.00; exemplary damages of P50,000.00;
litigation expenses of P5,000.00; and attorney's fees of
P50,000.00.
With respect to the cross-claim of the defendant IBAA against its
co-defendant Atty. Adalia Francisco, the latter is ordered to
reimburse the former for the sums that the Bank shall pay to the
plaintiff on the forged checks including the interests paid
thereon.
Further, the defendants are ordered to pay the costs.
Based upon the findings of handwriting experts from the
National Bureau of Investigation (NBI), the trial court held that
Francisco had indeed forged the signature of Ong to make it
appear that he had indorsed the checks. Also, the court ruled that
there were no loans extended, reasoning that it was unbelievable
that HCCC was experiencing financial difficulties so as to

compel it to obtain the loans from AFRDC in view of the fact

that the GSIS had issued checks in favor of HCCC at about the
same time that the alleged advances were made. The trial court
stated that it was plausible that Francisco concealed the fact of
issuance of the checks from private respondents in order to make
it appear as if she were accommodating private respondents,
when in truth she was lending HCCC its own money.
With regards to the Memorandum Agreement entered into
between AFRDC and HCCC in Civil Case No. Q-24628, the
trial court held that the same did not make any mention of the
forged checks since private respondents were as of yet unaware
of their existence, that fact having been effectively concealed by
Francisco, until private respondents acquired knowledge of
Francisco's misdeeds in 1979.
IBAA was held liable to private respondents for having honored
the checks despite such obvious irregularities as the lack of
initials to validate the alterations made on the check, the absence
of the signature of a co-signatory in the corporate checks of
HCCC and the deposit of the checks on a second indorsement in
the savings account of Francisco. However, the trial court
allowed IBAA recourse against Francisco, who was ordered to
reimburse the IBAA for any sums it shall have to pay to private
respondents. 5
Both Francisco and IBAA appealed the trial court's decision, but
the Court of Appeals dismissed IBAA's appeal for its failure to
file its brief within the 45-day extension granted by the appellate
court. IBAA's motion for reconsideration and petition for review
on certiorari filed with this Court were also similarly denied. On
November 21, 1989, IBAA and HCCC entered into a
Compromise Agreement which was approved by the trial court,

wherein HCCC acknowledged receipt of the amount of

P370,475.00 in full satisfaction of its claims against IBAA,
without prejudice to the right of the latter to pursue its claims
against Francisco.
On June 29, 1992, the Court of Appeals affirmed the trial court's
ruling, hence this petition for review on certiorarifiled by
petitioner, assigning the following errors to the appealed
decision
1. The respondent Court of Appeals erred in concluding that
private respondents did not owe Petitioner the sum covered by
the Promissory Notes Exh. 2-2-A-2-P (FRANCISCO). Such
conclusion was based mainly on conjectures, surmises and
speculation contrary to the unrebutted pleadings and evidence
presented by petitioner.
2. The respondent Court of Appeals erred in holding that
Petitioner falsified the signature of private respondent ONG on
the checks in question without any authority therefor which is
patently contradictory to the unrebutted pleading and evidence
that petitioner was expressly authorized by respondent HERBY
thru ONG to collect all receivables of HERBY from GSIS to pay
the loans extended to them. (Exhibit 3).
3. That respondent Court of Appeals erred in holding that the
seven checks in question were not taken up in the liquidation
and reconciliation of all outstanding account between AFRDC
and HERBY as acknowledged by the parties in Memorandum
Agreement (Exh. 5) is a pure conjecture, surmise and
speculation contrary to the unrebutted evidence presented by
petitioners. It is an inference made which is manifestly mistaken.

4. The respondent Court of Appeals erred in affirming the

decision of the lower court and dismissing the appeal. 6
The pivotal issue in this case is whether or not Francisco forged
the signature of Ong on the seven checks. In this connection, we
uphold the lower courts' finding that the subject matter of the
present case, specifically the seven checks, drawn by GSIS and
AFRDC, dated between October to November 1977, in the total
amount of P370,475.00 and payable to HCCC, was not included
in the Memorandum Agreement executed by HCCC and AFRDC
in Civil Case No. Q-24628. As observed by the trial court, aside
from there being absolutely no mention of the checks in the said
agreement, the amounts represented by said checks could not
have been included in the Memorandum Agreement executed in
1978 because private respondents only discovered Francisco's
acts of forgery in 1979. The lower courts found that Francisco
was able to easily conceal from private respondents even the fact
of the issuance of the checks since she was a co-signatory
thereof. 7 We also note that Francisco had custody of the checks,
as proven by the check vouchers bearing her uncontested
signature, 8 by which she, in effect, acknowledged having
received the checks intended for HCCC. This contradicts
Francisco's claims that the checks were issued to Ong who
delivered them to Francisco already indorsed. 9
As regards the forgery, we concur with the lower courts', finding
that Francisco forged the signature of Ong on the checks to make
it appear as if Ong had indorsed said checks and that, after
indorsing the checks for a second time by signing her name at
the back of the checks, Francisco deposited said checks in her
savings account with IBAA. The forgery was satisfactorily
established in the trial court upon the strength of the findings of
the NBI handwriting expert. 10 Other than petitioner's self-

serving denials, there is nothing in the records to rebut the NBI's

findings. Well-entrenched is the rule that findings of trial courts
which are factual in nature, especially when affirmed by the
Court of Appeals, deserve to be respected and affirmed by the
Supreme Court, provided it is supported by substantial evidence
on record, 11 as it is in the case at bench.
Petitioner claims that she was, in any event, authorized to sign
Ong's name on the checks by virtue of the Certification executed
by Ong in her favor giving her the authority to collect all the
receivables of HCCC from the GSIS, including the questioned
checks. 12 Petitioner's alternative defense must similarly fail. The
Negotiable Instruments Law provides that where any person is
under obligation to indorse in a representative capacity, he may
indorse in such terms as to negative personal liability. 13 An
agent, when so signing, should indicate that he is merely signing
in behalf of the principal and must disclose the name of his
principal; otherwise he shall be held personally liable. 14 Even
assuming that Francisco was authorized by HCCC to sign Ong's
name, still, Francisco did not indorse the instrument in
accordance with law. Instead of signing Ong's name, Francisco
should have signed her own name and expressly indicated that
she was signing as an agent of HCCC. Thus, the Certification
cannot be used by Francisco to validate her act of forgery.
Every person who, contrary to law, wilfully or negligently
causes damage to another, shall indemnify the latter for the
same. 15 Due to her forgery of Ong's signature which enabled her
to deposit the checks in her own account, Francisco deprived
HCCC of the money due it from the GSIS pursuant to the Land
Development and Construction Contract. Thus, we affirm
respondent court's award of compensatory damages in the
amount of P370,475.00, but with a modification as to the interest

rate which shall be six percent (6%) per annum, to be computed

from the date of the filing of the complaint since the amount of
damages was alleged in the complaint; 16 however, the rate of
interest shall be twelve percent (12%) per annumfrom the time
the judgment in this case becomes final and executory until its
satisfaction and the basis for the computation of this twelve
percent (12%) rate of interest shall be the amount of
P370,475.00. This is in accordance with the doctrine enunciated
in Eastern Shipping Lines, Inc. vs. Court of Appeals, et al., 17
which was reiterated in Philippine National Bank vs. Court of
Appeals, 18 Philippine Airlines, Inc. vs. Court of Appeals 19 and
in Keng Hua Paper Products Co., Inc. vs.Court of Appeals, 20
which provides that
1. When an obligation is breached, and it consists in the payment
of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 of
the Civil Code.
2. When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate
of six percent (6%) per annum. No interest, however, shall be
adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim
is made judicially or extrajudicially (Art. 1169, Civil Code) but

when such certainty cannot be so reasonably established at the

time the demand is made, the interest shall begin to run only
from the date the judgment of the court is made (at which time
the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount finally
adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall be
twelve percent (12%) per annum from such finality until its
satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.
We also sustain the award of exemplary damages in the amount
of P50,000.00. Under Article 2229 of the Civil Code, exemplary
damages are imposed by way of example or correction for the
public good, in addition to the moral, temperate, liquidated or
compensatory damages. Considering petitioner's fraudulent act,
we hold that an award of P50,000.00 would be adequate, fair and
reasonable. The grant of exemplary damages justifies the award
of attorney's fees in the amount of P50,000.00, and the award of
P5,000.00 for litigation
expenses. 21
The appellate court's award of P50,000.00 in moral damages is
warranted. Under Article 2217 of the Civil Code, moral damages
may be granted upon proof of physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded
feelings, moral shock, social humiliation and similar injury. 22
Ong testitified that he suffered sleepless nights, embarrassment,
humiliation and anxiety upon discovering that the checks due his

company were forged by petitioner and that petitioner had filed

baseless criminal complaints against him before the fiscal's
office of Quezon City which disrupted HCCC's business
operations. 23
WHEREFORE, we AFFIRM the respondent court's decision
promulgated on June 29, 1992, upholding the February 16, 1988
decision of the trial court in favor of private respondents, with
the modification that the interest upon the actual damages
awarded shall be at six percent (6%) per annum, which interest
rate shall be computed from the time of the filing of the
complaint on November 19, 1979. However, the interest rate
shall be twelve percent (12%) per annum from the time the
judgment in this case becomes final and executory and until such
amount is fully paid. The basis for computation of the six
percent and twelve percent rates of interest shall be the amount
of P370,475.00. No pronouncement as to costs.
SO ORDERED.
Melo, Vitug, Panganiban and Purisima, JJ., concur.

A. Francisco Realty & Development Corporation (AFRDC), of

which petitioner Francisco is the president, entered into a Land
Development and Construction Contract with private respondent
Herby Commercial & Construction Corporation (HCCC),
represented by its President and General Manager private
respondent Ong. Under the contract, HCCC was to be paid on
the basis of the completed houses and developed lands delivered
to and accepted by AFRDC and the GSIS. Sometime in 1979,
Ong discovered that Diaz and Francisco, the Vice-President of
GSIS, had executed and signed seven checks of various dates
and amounts payable to HCCC for completed and delivered
work under the contract. Ong, however, claims that these checks
were never delivered to HCCC. It turned out that Francisco
forged the indorsement of Ong on the checks and indorsed the
checks for a second time by signing her name at the back of the
checks, petitioner then deposited said checks in her savings
account. A case was brought by private respondents against
petitioner to recover the value of said checks. Petitioner
however claims that she was authorized to sign Ong's name on
the checks by virtue of the Certification executed by Ong in her
favor giving her the authority to collect all the receivables of
HCCC from the GSIS, including the questioned checks.
ISSUE:

ADALIA FRANCISCO vs. COURT OF APPEALS, ET AL.

G.R. No. 116320 November 29, 1999
--agents
FACTS:

Whether petitioner cannot be held liable on the questioned

checks by virtue of the Certification executed by Ong giving her
the authority to collect such checks from the GSIS.
RULING:
Petitioner is liable. The Negotiable Instruments Law provides
that where any person is under obligation to indorse in a

representative capacity, he may indorse in such terms as to

negative personal liability. An agent, when so signing, should
indicate that he is merely signing in behalf of the principal and
must disclose the name of his principal; otherwise he shall be
held personally liable. Even assuming that Francisco was
authorized by HCCC to sign Ong's name, still, Francisco did not
indorse the instrument in accordance with law. Instead of signing
Ong's name, Francisco should have signed her own name and
expressly indicated that she was signing as an agent of HCCC.
Thus, the Certification cannot be used by Francisco to validate
her act of forgery.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-37467

December 11, 1933

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

vs.
BANK OF THE PHILIPPINE ISLANDS and CHINA
BANKING CORPORATION, defendants-appellees.
Gibbs and McDonough and Roman Ozaeta for appellant.
Araneta, De Joya, Zaragosa and Araneta for appellee Bank of
the Philippine Islands.
Marcelo Nubla and Guevara, Francisco and Recto for appellee
China Banking Corporation.
HULL, J.:
Plaintiff corporation, organized under the laws of the Territory of
Hawaii, is authorized to engaged in business in the Philippine
Islands, and maintains its main office in these Islands in the City
of Manila.
The business in the Philippine Islands was in the hands of Alfred
D. Cooper, its agent under general power of attorney with
authority of substitution. The principal employee in the Manila
office was one Joseph L. Wilson, to whom had been given a

general power of attorney but without power of substitution. In

1926 Cooper, desiring to go on vacation, gave a general power
of attorney to Newland Baldwin and at the same time revoked
the power of Wilson relative to the dealings with the Bank of the
Philippine Islands, one of the banks in Manila in which plaintiff
maintained a deposit.
About a year thereafter Wilson, conspiring together with one
Alfredo Dolores, a messenger-clerk in plaintiff's Manila office,
sent a cable gram in code to the company in Honolulu requesting
a telegraphic transfer to the China Banking Corporation of
Manila of $100,00. The money was transferred by cable, and
upon its receipt the China Banking Corporation, likewise a bank
in which plaintiff maintained a deposit, sent an exchange
contract to plaintiff corporation offering the sum of P201,000,
which was then the current rate of exchange. On this contract
was forged the name of Newland Baldwin and typed on the body
of the contract was a note:lawphil.net
Please send us certified check in our favor when transfer is
received.
A manager's check on the China Banking Corporation for
P201,000 payable to San Carlos Milling Company or order was
receipted for by Dolores. On the same date, September 28, 1927,
the manger's check was deposited with the Bank of the
Philippine Islands by the following endorsement:

The endorsement to which the name of Newland Baldwin was

affixed was spurious.
The Bank of the Philippine Islands thereupon credited the
current account of plaintiff in the sum of P201,000 and passed
the cashier's check in the ordinary course of business through the
clearing house, where it was paid by the China Banking
Corporation.
On the same day the cashier of the Bank of the Philippine
Islands received a letter, purporting to be signed by Newland
Baldwin, directing that P200,000 in bills of various
denominations, named in the letter, be packed for shipment and
delivery the next day. The next day, Dolores witnessed the
counting and packing of the money, and shortly afterwards
returned with the check for the sum of P200,000, purporting to
be signed by Newland Baldwin as agent.
Plaintiff had frequently withdrawn currency for shipment to its
mill from the Bank of the Philippine Islands but never in so large
an amount, and according to the record, never under the sole
supervision of Dolores as the representative of plaintiff.

For deposit only with Bank of the Philippine Islands, to credit of

account of San Carlos Milling Co., Ltd.

Before delivering the money, the bank asked Dolores for P1 to

cover the cost of packing the money, and he left the bank and
shortly afterwards returned with another check for P1,
purporting to be signed by Newland Baldwin. Whereupon the
money was turned over to Dolores, who took it to plaintiff's
office, where he turned the money over to Wilson and received
as his share, P10,000.

By (Sgd.) NEWLAND BALDWIN

For Agent

Shortly thereafter the crime was discovered, and upon the

defendant bank refusing to credit plaintiff with the amount

withdrawn by the two forged checks of P200,000 and P1, suit

was brought against the Bank of the Philippine Islands, and
finally on the suggestion of the defendant bank, an amended
complaint was filed by plaintiff against both the Bank of the
Philippine Islands and the China Banking Corporation.
At the trial the China Banking Corporation contended that they
had drawn a check to the credit of the plaintiff company, that the
check had been endorsed for deposit, and that as the prior
endorsement had in law been guaranteed by the Bank of the
Philippine Islands, when they presented the cashier's check to it
for payment, the China Banking Corporation was absolved even
if the endorsement of Newland Baldwin on the check was a
forgery.
The Bank of the Philippine Islands presented many special
defenses, but in the main their contentions were that they had
been guilty of no negligence, that they had dealt with the
accredited representatives of the company in the due course of
business, and that the loss was due to the dishonesty of plaintiff's
employees and the negligence of plaintiff's general agent.
In plaintiff's Manila office, besides the general agent, Wilson,
and Dolores, most of the time there was employed a woman
stenographer and cashier. The agent did not keep in his personal
possession either the code-book or the blank checks of either the
Bank of the Philippine Islands or the China Banking
Corporation. Baldwin was authorized to draw checks on either
of the depositaries. Wilson could draw checks in the name of the
plaintiff on the China Banking Corporation.
After trial in which much testimony was taken, the trial court
held that the deposit of P201,000 in the Bank of the Philippine

Islands being the result of a forged endorsement, the relation of

depositor and banker did not exist, but the bank was only a
gratuitous bailee; that the Bank of the Philippine Islands acted in
good faith in the ordinary course of its business, was not guilty
of negligence, and therefore under article 1902 of the Civil Code
which should control the case, plaintiff could not recover; and
that as the cause of loss was the criminal actions of Wilson and
Dolores, employees of plaintiff, and as Newland Baldwin, the
agent, had not exercised adequate supervision over plaintiff's
Manila office, therefore plaintiff was guilty of negligence, which
ground would likewise defeat recovery.
From the decision of the trial court absolving the defendants,
plaintiff brings this appeal and makes nine assignments of error
which we do not deem it necessary to discuss in detail.
There is a mild assertion on the part of the defendant bank that
the disputed signatures of Newland Baldwin were genuine and
that he had been in the habit of signing checks in blank and
turning the checks so signed over to Wilson.
The proof as to the falsity of the questioned signatures of
Baldwin places the matter beyond reasonable doubt, nor is it
believed that Baldwin signed checks in blank and turned them
over to Wilson.
As to the China Banking Corporation, it will be seen that it drew
its check payable to the order of plaintiff and delivered it to
plaintiff's agent who was authorized to receive it. A bank that
cashes a check must know to whom it pays. In connection with
the cashier's check, this duty was therefore upon the Bank of the
Philippine Islands, and the China Banking Corporation was not
bound to inspect and verify all endorsements of the check, even

if some of them were also those of depositors in that bank. It had

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

Plaintiff in its letter of December 23, 1928, to the Bank of the

Philippine Islands said in part:
". . . we now leave to demand that you pay over to us the entire
amount of said manager's check of two hundred one thousand
(P201,000) pesos, together with interest thereon at the agreed
rate of 3 per cent per annum on daily balances of our credit in
account current with your bank to this date. In the event of your
refusal to pay, we shall claim interest at the legal rate of 6 per
cent from and after the date of this demand inasmuch as we
desire to withdraw and make use of the money." Such language
might well be treated as a ratification of the deposit.
The contention of the bank that it was a gratuitous bailee is
without merit. In the first place, it is absolutely contrary to what
the bank did. It did not take it up as a separate account but it
transferred the credit to plaintiff's current account as a depositor
of that bank. Furthermore, banks are not gratuitous bailees of the
funds deposited with them by their customers. Banks are run for
gain, and they solicit deposits in order that they can use the
money for that very purpose. In this case the action was neither
gratuitous nor was it a bailment.
On the other hand, we cannot agree with the theory of plaintiff
that the Bank of the Philippine Islands was an intermeddling
bank. In the many cases cited by plaintiff where the bank that
cashed the forged endorsement was held as an intermeddler, in
none was the claimant a regular depositor of the bank, nor in any
of the cases cited, was the endorsement for deposit only. It is
therefore clear that the relation of plaintiff with the Bank of the
Philippine Islands in regard to this item of P201,000 was that of
depositor and banker, creditor and debtor.

We now come to consider the legal effect of payment by the

bank to Dolores of the sum of P201,000, on two checks on
which the name of Baldwin was forged as drawer. As above
stated, the fact that these signatures were forged is beyond
question. It is an elementary principle both of banking and of the
Negotiable Instruments Law that

therefore be reversed, and a judgment entered in favor of

plaintiff-appellant and against the Bank of the Philippine Islands,
defendant-appellee, for the sum of P200,001, with legal interest
thereon from December 23,1928, until payment, together with
costs in both instances. So ordered.
Malcolm, Villa-Real, Vickers, and Imperial, JJ., concur.

A bank is bound to know the signatures of its customers; and if it

pays a forged check, it must be considered as making the
payment out of its own funds, and cannot ordinarily charge the
amount so paid to the account of the depositor whose name was
forged. (7 C.J., 683.)
There is no act of the plaintiff that led the Bank of the Philippine
Islands astray. If it was in fact lulled into a false sense of
security, it was by the effrontery of Dolores, the messenger to
whom it entrusted this large sum of money.
The bank paid out its money because it relied upon the
genuineness of the purported signatures of Baldwin. These, they
never questioned at the time its employees should have used
care. In fact, even today the bank represents that it has a relief
that they are genuine signatures.
The signatures to the check being forged, under section 23 of the
Negotiable Instruments Law they are not a charge against
plaintiff nor are the checks of any value to the defendant.
It must therefore be held that the proximate cause of loss was
due to the negligence of the Bank of the Philippine Islands in
honoring and cashing the two forged checks.
The judgment absolving the Bank of the Philippine Islands must

G.R. No. L-37467 December 11, 1933

SAN CARLOS MILLING CO., LTD., plaintiff-appellant,vs.
BANK OF THE PHILIPPINE ISLANDS and CHINA
BANKING CORPORATION,defendants-appellees
Facts:
San Carlos Milling Co. Ltd , is the corporation whose main
office was in Hawaii. This office was managed by certain Alfred
Cooper with the general power of authority with power of
substitution. On the other hand, Joseph L . Wilson, the principal
employee in Manila who was given also a general power of
authority but subsequently revoked by the former. Sometime in
1926, Cooper had a vacation,appointed Newland Baldwin a

general power of authority. Meanwhile, the respondents China

Banking Corporation (for brevity China) and Bank of the
Philippines Islands (for brevity BPI), impleaded by the plaintiff
for sum of money amounted to Php 201,000 for the payment of
spurious forged check with the forged signature of the Newland
Baldwin issued by China Banking Corporation to a certain
Alfredo Dolores who were conspiring and confederating
together with Wilson for the crimes of forgery of the checked .
On the trial, it was found out that the managers check was
forged and Baldwin never signed the instrument. The China
Bank Corporation interposed the defense it drew its check
payable to the order of plaintiff and delivered it to plaintiff's
agent who was authorized to receive it. A bank that cashes a
check must know to whom it pays. In connection with the
cashier's check, this duty was therefore upon the Bank of the
Philippine Islands, and the China Banking Corporation was not
bound to inspect and verify all endorsements of the check, even
if some of them were also those of depositors in that bank. It had
a right to rely upon the endorsement of the Bank of the
Philippine Islands when it gave the latter bank credit for its own
cashier's check.
Issued :
Whether or not the BPI is liable for the sum of money
amounting to Php 201,000as results of its negligence in
encashed the forged check without the due diligence?

Held:
Petition is granted. The fact that these signatures were forged is

beyond question. It is an elementary principle both of banking

and of the Negotiable Instruments Law that
Xxx A bank is bound to know the signatures of its customers;
and if it pays a forged check, it must be considered as making
the payment out of its own funds,and cannot ordinarily charge
the amount so paid to the account of the depositor whose name
was forged. (7 C.J., 683.) xxx
There is no act of the plaintiff that led the Bank of the Philippine
Islands astray. If it was in fact lulled into a false sense of
security, it was by the effrontery of Dolores, the messenger to
whom it entrusted this large sum of money. The bank paid out its
money because it relied upon the genuineness of the purported
signatures of Baldwin. These, they never questioned at the time
its employees should have used care. In fact, even today the
bank represents that it has a relief that they are genuine
signatures. The signatures to the check being forged,under
section 23 of the Negotiable Instruments Law they are not a
charge against plaintiff nor are the checks of any value to the
defendant. It must therefore be held that the proximate cause of
loss was due to the negligence of the Bank of the Philippine
Islands in honoring and cashing the two forged checks.

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
issued by the "Pangasinan Transportation Co., Inc. by J. L. Klar,
Manager and Treasurer", against the Philippine National Bank
and in favor of the International Auto Repair Shop, for P144.50
and P215.75; and said checks were indorsed by said unknown
persons in the manner indicated at the back thereof, the Motor
Service Co., Inc., believing at the time that the signature of J. L.
Klar, Manager and Treasurer of the Pangasinan Transportation
Co., Inc., on both checks were genuine.
3. The checks Exhibits A and A-1 were then indorsed for deposit
by the defendant Motor Service Company, Inc, at the National
City Bank of New York and the former was accordingly credited
with the amounts thereof, or P144.50 and P215.75.
4. On April 8 and 10, 1933, the said checks were cleared at the
clearing house and the Philippine National Bank credited the
National City Bank of New York for the amounts thereof,
believing at the time that the signatures of the drawer were
genuine, that the payee is an existing entity and the endorsement

at the back thereof regular and genuine.

5. The Philippine National Bank then found out that the
purported signatures of J. L. Klar, as Manager and Treasurer of
the Pangasinan Transportation Company, Inc., in said Exhibits A
and A-1 were forged when so informed by the said Company,
and it accordingly demanded from the defendants the
reimbursement of the amounts for which it credited the National
City Bank of New York at the clearing house and for which the
latter credited the Motor Service Co., but the defendants refused,
and continue to refuse, to make such reimbursements.
6. The Pangasinan Transportation Co., Inc., objected to have the
proceeds of said check deducted from their deposit.
7. Exhibits B, C, D, E, F, and G, which were introduced at the
trial in the municipal court of Manila and forming part of the
record of the present case, are admitted by the parties as genuine
and are made part of this stipulation as well as Exhibit H hereto
attached and made a part hereof.
Upon plaintiff's motion, the case was dismissed before trial as to
the defendant National City Bank of New York. a decision was
thereafter rendered giving plaintiff judgment for the total amount
of P360.25, with interest and costs. From this decision the
instant appeal was taken.
Before us is the preliminary question of whether the original
appeal taken by the plaintiff from the decision of the municipal
court of Manila where this case originated, became perfected
because of plaintiff's failure to attach to the record within 15
days from receipt of notice of said decision, the certificate of
appeal bond required by section 76 of the Code of Civil

Procedure. It is not disputed that both the appeal docket fee and
the appeal cash bond were paid and deposited within the
prescribed time. The issue is whether the mere failure to file the
official receipt showing that such deposit was made within the
said period is a sufficient ground to dismiss plaintiff's appeal.
This question was settled by our decision in the case of Blanco
vs. Bernabe and lawyers Cooperative Publishing Co. (page 124,
ante), and no further consideration. No error was committed in
allowing said appeal.
We now pass on to consider and determine the main question
presented by this appeal, namely, whether the appellee has the
right to recover from the appellant, under the circumstances of
this case, the value of the checks on which the signatures of the
drawer were forged. The appellant maintains that the question
should be answered in the negative and in support of its
contention appellant advanced various reasons presently to be
examined carefully.
I. It is contended, first of all, that the payment of the checks in
question made by the drawee bank constitutes an "acceptance",
and, consequently, the case should be governed by the provisions
of section 62 of the Negotiable Instruments Law, which says:
SEC. 62. Liability of acceptor. The acceptor by accepting the
instrument engages that he will pay it according to the tenor of
his acceptance; and admits:
(a) The existence of the drawer, the genuineness of his signature,
and his capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.

This contention is without merit. A check is a bill of exchange

payable on demand and only the rules governing bills of
exchange payable on demand are applicable to it, according to
section 185 of the Negotiable Instruments Law. In view of the
fact that acceptance is a step unnecessary, in so far as bills of
exchange payable on demand are concerned (sec. 143), it
follows that the provisions relative to "acceptance" are without
application to checks. Acceptance implies, in effect, subsequent
negotiation of the instrument, which is not true in case of the
payment of a check because from the moment a check is paid it
is withdrawn from circulation. The warranty established by
section 62, is in favor of holders of the instrument after its
acceptance. When the drawee bank cashes or pays a check, the
cycle of negotiation is terminated, and it is illogical thereafter to
speak of subsequent holders who can invoke the warranty
provided in section 62 against the drawee. Moreover, according
to section 191, "acceptance" means "an acceptance completed by
delivery or notification" and this concept is entirely incompatible
with payment, because when payment is made the check is
retained by the bank, and there is no such thing as delivery or
notification to the party receiving the payment. Checks are not to
be accepted, but presented at once for payment. (1 Bouvier's
Law Dictionary, 476.) There can be no such thing as
"acceptance" in the ordinary sense of the term. A check being
payable immediately and on demand, the bank can fulfill its duty
to the depositor only by paying the amount demanded. The
holder has no right to demand from the bank anything but
payment of the check, and the bank has no right, as against the
drawer, to do anything but pay it. (5 R. C. L., p. 516, par. 38.) A
check is not an instrument which in the ordinary course of
business calls for acceptance. The holder can never claim
acceptance as his legal right. He can present for payment, and
only for payment. (1 Morse on Banks and Banking, 6th ed., pp.

898, 899.)
There is, however, nothing in the law or in, business practice
against the presentation of checks for acceptance, before they are
paid, in which case we have a "certification" equivalent to
"acceptance" according to section 187, which provides that
"where a check is certified by the bank on which it is drawn, the
certification is equivalent to an acceptance", and it is then that
the warranty under section 62 exists. This certification or
acceptance consists in the signification by the drawee of his
assent to the order of the drawer, which must not express that the
drawee will perform his promise by any other means than the
payment of money. (Sec. 132.) When the holder of a check
procures it to be accepted or certified, the drawer and all
indorsers are discharged from liability thereon (sec. 188), and
then the check operates as an assignment of a part of the funds to
the credit of the drawer with the bank. (Sec. 189.) There is
nothing in the nature of the check which intrinsically precludes
its acceptance, in like manner and with like effect as a bill of
exchange or draft may be accepted. The bank may accept if it
chooses; and it is frequently induced by convenience, by the
exigencies of business, or by the desire to oblige customers,
voluntarily to incur the obligation. The act by which the bank
places itself under obligation to pay to the holder the sum called
for by a check must be the expressed promise or undertaking of
the bank signifying its intent to assume the obligation, or some
act from which the law will imperatively imply such valid
promise or undertaking. The most ordinary form which such an
act assumes is the acceptance by the bank of the check, or, as it
is perhaps more often called, the certifying of the check. (1
Morse on Banks and Banking, pp. 898, 899; 5 R. C. L., p. 520.)
No doubt a bank may by an unequivocal promise in writing

make itself liable in any event to pay the check upon demand,
but this is not an "acceptance" of the check in the true sense of
that term. Although a check does not call for acceptance, and the
holder can present it only for payment, the certification of
checks is a means in constant and extensive use in the business
of banking, and its effects and consequences are regulated by the
law merchant. Checks drawn upon banks or bankers, thus
marked and certified, enter largely into the commercial and
financial transactions of the country; they pass from hand to
hand, in the payment of debts, the purchase of property, and in
the transfer of balances from one house and one bank to another.
In the great commercial centers, they make up no inconsiderable
portion of the circulation, and thus perform a useful, valuable,
and an almost indispensable office. The purpose of procuring a
check to be certified is to impart strength and credit to the paper
by obtaining an acknowledgment from the certifying bank that
the drawer has funds therein sufficient to cover the check and
securing the engagement of the bank that the check will be paid
upon presentation. A certified check has a distinctive character
as a species of commercial paper, and performs important
functions in banking and commercial business. When a check is
certified, it ceases to possess the character, or to perform the
functions, of a check, and represents so much money on deposit,
payable to the holder on demand. The check becomes a basis of
credit an easy mode of passing money from hand to hand,
and answers the purposes of money. (5 R. C. L., pp. 516,
517.)lwphi1.nt
All the authorities, both English and American, hold that a check
may be accepted, though acceptance is not usual. By the law
merchant, the certificate of the bank that a check is good is
equivalent to acceptance. It implies that the check is drawn upon
sufficient funds in the hands of the drawee, that they have been

set apart for its satisfaction, and that they shall be so applied
whenever the check is presented for payment. It is an
undertaking that the check is good then, and shall continue good,
and this agreement is as binding on the bank as its notes of
circulation, a certificate of deposit payable to the order of the
depositor, or any other obligation it can assume. The object of
certifying a check, as regards both parties is to enable the holder
to use it as money. The transferee takes it with the same
readiness and sense of security that he would take the notes of
the bank. It is available also to him for all the purposes of
money. Thus it continues to perform its important functions until
in the course of business it goes back to the bank for redemption,
and is extinguished by payment. It cannot be doubted that the
certifying bank intended these consequences, and it is liable
accordingly. To hold otherwise would render these important
securities only a snare and a delusion. A bank incurs no greater
risk in certifying a check than in giving a certificate of deposit.
In well-regulated banks the practice is at once to charge the
check to the account of the drawer, to credit it in a certified
check account, and, when the check is paid, to debit that account
with the amount. Nothing can be simpler or safer than this
process. (Merchants' Bank vs. States Bank, 10 Wall., 604, at p.
647; 19 Law. ed., 1008, 1019.)
Ordinarily the acceptance or certification of a check is
performed and evidenced by some word or mark, usually the
words "good", "certified" or "accepted" written upon the check
by the banker or bank officer. (1 Morse, Banks and Banking,
915; 1 Bouvier's Law Dictionary, 476.) The bank virtually says,
that check is good; we have the money of the drawer here ready
to pay it. We will pay it now if you will receive it. The holder
says, No, I will not take the money; you may certify the check
and retain the money for me until this check is presented. The

law will not permit a check, when due, to be thus presented, and
the money to be left with the bank for the accommodation of the
holder without discharging the drawer. The money being due and
the check presented, it is his own fault if the holder declines to
receive the pay, and for his own convenience has the money
appropriated to that check subject to its future presentment at
any time within the statute of limitations. (1 Morse on Banks and
Banking, p. 920.)
The theory of the appellant and of the decisions on which it
relies to support its view is vitiated by the fact that they take the
word "acceptance" in its ordinary meaning and not in the
technical sense in which it is used in the Negotiable Instruments
Law. Appellant says that when payment is made, such payment
amounts to an acceptance, because he who pays accepts. This is
true in common parlance but "acceptance" in legal
contemplation. The word "acceptance" has a peculiar meaning in
the Negotiable Instruments Law, and, as has been above stated,
in the instant case there was payment but no acceptatance, or
what is equivalent to acceptance, certification.
With few exceptions, the weight of authority is to the effect that
"payment" neither includes nor implies "acceptance".
In National Bank vs. First National Bank ([19101, 141 Mo.
App., 719; 125 S. W., 513), the court asks, if a mere promise to
pay a check is binding on a bank, why should not the absolute
payment of the check have the same effect? In response, it is
submitted that the two things, that is acceptance and payment,
are entirely different. If the drawee accepts the paper after
seeing it, and then permits it to go into circulation as genuine, on
all the principles of estoppel, he ought to be prevented from
setting up forgery to defeat liability to one who has taken the

paper on the faith of the acceptance, or certification. On the

other hand, mere payment of the paper at the termination of its
course does not act as an estoppel. The attempt to state a general
rule covering both acceptance and payment is responsible for a
large part of the conflicting arguments which have been
advanced by the courts with respect to the rule. (Annotation at
12 A. L. R., 1090 1921].)
In First National Bank vs. Brule National Bank ([1917], 12 A. L.
R., 1079, 1085), the court said:
We are of the opinion that "payment is not acceptance".
Acceptance, as defined by section 131, cannot be confounded
with payment. . . .
Acceptance, certification, or payment of a check, by the express
language of the statute, discharges the liability only of the
persons named in the statute, to wit, the drawer and all indorsers,
and the contract of indorsement by the negotiator if the check is
discharged by acceptance, certification, or payment. But clearly
the statute does not say that the contract of warranty of the
negotiator, created by section 65, is discharged by these acts.
The rule supported by the majority of the cases (14 A. L. R.
764), that payment of a check on a forged or unauthorized
indorsement of the payee's name, and charging the same to the
drawer's account, do not amount to an acceptance so as to make
the bank liable to the payee, is supported by all of the recent
cases in which the question is considered. (Cases cited,
Annotation at 69 A. L. R., 1076, 1077 [1930].)
Merely stamping a check "Paid" upon its payment on a forged or
unauthorized indorsement is not an acceptance thereof so as to

render the drawee bank liable to the true payee. (Anderson vs.
Tacoma National Bank [1928], 146 Wash., 520; 264 Pac., 8;
Annotation at 69 A. L. R., 1077, [1930].)

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.)

In State Bank of Chicago vs. Mid-City Trust & Savings Bank

(12 A. L. R., 989, 991, 992), the court said:

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 defendant in error contends that the payment of the check

shows acceptance by the bank, urging that there can be no more
definite act by the bank upon which a check has been drawn,
showing acceptance than the payment of the check. Section 184
of the Negotiable Instruments Act (sec. 202) provides that the
provisions of the act applicable to bills of exchange apply to a
check, and section 131 (sec. 149), that the acceptance of a bill
must be in writing signed by the drawee. Payment is the final act
which extinguishes a bill. Acceptance is a promise to pay in the
future and continues the life of the bill. It was held in the First
National Bank vs. Whitman (94 U. S., 343; 24 L. ed., 229), that
payment of a check upon a forged indorsement did not operate
as an acceptance in favor of the true owner. The contrary was
held in Pickle vs. Muse (Fickle vs. People's Nat. Bank, 88 Tenn.,
380; 7 L.R.A., 93; 17 Am. St. Rep., 900; 12 S. W., 919), and
Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751)
at a time when the Negotiable Instruments Act was not in force
in those states. The opinion of the Supreme Court of the United
States seems more logical, and the provision of the Negotiable
Instruments Act now require an acceptance to be in writing.
Under this statute the payment of a check on a forged
indorsement, stamping it "paid," and charging it to the account
of the drawer, do not constitute an acceptance of the check or
create a liability of the bank to the true holder or the payee.
(Elyria Sav. & Bkg. Co. vs. Walker Bin Co., 92 Ohio St., 406; L.
R. A., 1916D, 433; 111 N. E., 147; Ann. Cas. 1917D, 1055;

The great weight of authority is to the effect that the payment of

a check upon a forged or unauthorized indorsement and the
stamping of it "paid" does not constitute an acceptance. (Dakota
Radio Apparatus Co. vs.First Nat. Bank of Rapid City, 244 N.
W., 351, 352 [1932].)
Payment of the check, cashing it on presentment is not
acceptance. (South Boston Trust Co. vs. Levin, 249 Mass., 45,
48, 49; 143 N. E., 816; Blocker, Shepard Co. vs. Granite Trust
Company, 187 Me., 53, 54 [1933].)
In Rauch vs. Bankers National Bank of Chicago (143 Ill. App.,
625, 636, 637 [1908]), the language of the decision was as
follows:
. . . The plaintiffs say that this acceptance was made by the very
unauthorized payments of which they complain. This suggestion
does not seem forceful to us. It is the contention which was
made before the Supreme Court of the United States in First
National Bank vs. Whitman (94 U. S., 343), and repudiated by
that court. The language of the opinion in that case is so apt in
the present case that we quote it:

"It is further contended that such an acceptance of a check as

creates a privity between the payee and the bank is established
by the payment of the amount of this check in the manner
described. This argument is based upon the erroneous
assumption that the bank has paid this check. If this were true, it
would have discharged all of its duty, and there would be an end
to the claim against it. The bank supposed that it had paid the
check, but this was an error. The money it paid was upon a
pretended and not a real indorsement of the name of the
payee. . . . We cannot recognize the argument that payment of
the amount of the check or sight draft under such circumstances
amounts to an acceptance creating a privity of contract with the
real owner.
"It is difficult to construe a payment as an acceptance under any
circumstances. . . . A banker or individual may be ready to make
actual payment of a check or draft when presented, while
unwilling to make a promise to pay at a future time. Many, on
the other hand, are more ready to promise to pay than to meet
the promise when required. The difference between the
transactions is essential and inherent."
And in Wharf vs. Seattle National Bank (24 Pac. [2d]), 120, 123
[1933]):
It is the rule that payment of a check on unauthorized or forged
indorsement does not operate as an acceptance of the check so as
to authorize an action by the real owner to recover its amount
from the drawee bank. (Michie on Banks and Banking, vol. 5,
sec. 278, p. 521.) A full list of the authorities supporting the rule
will be found in a footnote to the foregoing citation. (See also,
Federal Land Bank vs. Collins, 156 Miss., 893; 127 So., 570; 69
A. L. R., 1068.)

In a very recent case, Federal Land Bank vs. Collins (69 A. L.

R., 1068, 1072-1074), this question was discussed at
considerable length. The court said:
In the light of the first of these statutes, counsel for appellant is
forced to stand upon the narrow ledge that the payment of the
check by the two banks will constitute an acceptance. The
drawee bank simply marked it "paid" and did not write anything
else except the date. The bank first paying the check, the
Commercial National Bank and Trust Company, simply wrote its
name as indorser and passed the check on to the drawee bank;
does this constitute an acceptance? The precise question has not
been presented to this court for decision. Without reference to
authorities in other jurisdictions it would appear that the drawee
bank had never written its name across the paper and therefore,
under the strict terms of the statute, could not be bound as an
acceptor; in the second place, it does not appear to us to be
illogical and unsound to say that the payment of a check by the
drawee, and the stamping of it "paid", is equivalent to the same
thing as the acceptance of a check; however, there is a variety of
opinions in the various jurisdictions on this question. Counsel
correctly states that the theory upon which the numerous courts
hold that the payment of a check creates privity between the
holder of the check and the drawee bank is tantamount to a pro
tanto assignment of that part of the funds. It is most easily
understood how the payment of the check, when not authorized
to be done by the drawee bank, might under such circumstances
create liability on the part of the drawee to the drawer. Counsel
cites the case of Pickle vs.Muse (88 Tenn, 380; 12 S. W., 919; 7
L. R. A., 93; 17 Am. St. Rep., 900), wherein Judge Lurton held
that the acceptance of a check was necessary in order to give the
holder thereof a right of action thereon against the bank, and
further held in a case similar to this, so far as this question is

concerned, that the acceptance of a check so as to give a right of

action to the payee is inferred from the retention of the check by
the bank and its subsequent charge of the amount to the drawer,
although it was presented by, and payment made, an
unauthorized person. Judge Lurton cited the case of National
Bank of the Republic vs. Millard (10 Wall., 152; 19 L. ed., 897),
wherein the Supreme Court of the United States, not having such
a case before it, threw out the suggestion that, if it was shown
that a bank had charged the check on its books against the
drawer and made settlement with the drawee that the holder
could recover on account of money had and received, invoking
the rule of justice and fairness, it might be said there was an
implied promise to the holder to pay it on demand. (SeeNational
Bank of the Republic vs. Millard, 10 Wall. [77 U. S.], 152; 19 L.
ed., 899.) The Tennessee court then argued that it would be
inequitable and unconscionable for the owner and payee of the
check to be limited to an action against an insolvent drawer and
might thereby lose the debt. They recognized the legal principle
that there is no privity between the drawer bank and the holder,
or payee, of the check, and proceeded to hold that no particular
kind of writing was necessary to constitute an acceptance and
that it became a question of fact, and the bank became liable
when it stamped it "paid" and charged it to the account of the
drawer, and cites, in support of its opinion, Seventh National
Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751); Saylor vs.
Bushong (100 Pa., 23; 45 Am. Rep., 353); and Dodge vs. Bank
(20 Ohio St., 234; 5 Am. Rep., 648).
This decision was in 1890, prior to the enactment of the
Negotiable Instruments Law by the State of Tennessee.
However, in this case Judge Snodgrass points out that the
Millard case, supra, was dicta. The Dodge case, from the Ohio
court, held exactly as the Tennessee court, but subsequently in

the case of Elyria Bank vs. Walker Bin Co. (92 Ohio St., 406;
111 N. E., 147; L. R. A. 1916D, 433; Ann. Cas. 1917D, 1055),
the court held to the contrary, called attention to the fact that the
Dodge case was no longer the law, and proceeded to announce
that, whatever might have been the law before the passage of the
Negotiable Instrument Act in that state, it was no longer the law;
that the rule announced in the Dodge case had been "discarded."
The court, in the latter case, expressed its doubts that the courts
of Tennessee and Pennsylvania would adhere to the rule
announced in the Pickle case, quoted supra, in the face of the
Negotiable Instrument Law. Subsequent to the Millard case, the
Supreme Court of the United States, in the case of First National
Bank of Washington vs. Whitman (94 U. S., 343, 347; 24 L. ed.,
229), where the bank, without any knowledge that the
indorsement of the payee was unauthorized, paid the check, and
it was contended that by the payment the privity of contract
existing between the drawer and drawee was imparted to the
payee, said:
"It is further contended that such an acceptance of the check as
creates a privity between the payee and the bank is established
by the payment of the amount of this check in the manner
described. This argument is based upon the erroneous
assumption that the bank has paid this check. If this were true, it
would have discharged all of its duty, and there would be an end
of the claim against it. The bank supposed that it had paid the
check; but this was an error. The money it paid was upon a
pretended and not a real indorsement of the name of the payee.
The real indorsement of the payee was as necessary to a valid
payment as the real signature of the drawer; and in law the check
remains unpaid. Its pretended payment did not diminish the
funds of the drawer in the bank, or put money in the pocket of
the person entitled to the payment. The state of the account was

the same after the pretended payment as it was before.

"We cannot recognize the argument that a payment of the
amount of a check or sight draft under such circumstances
amounts to an acceptance, creating a privity of contract with the
real owner. It is difficult to construe a payment as an acceptance
under any circumstances. The two things are essentially
different. One is a promise to perform an act, the other an actual
performance. A banker or an individual may be ready to make
actual payment of a check or draft when presented, while
unwilling to make a promise to pay at a future time. Many, on
the other hand, are more ready to promise to pay than to meet
the promise when required. The difference between the
transactions is essential and inherent."
Counsel for the appellant cite other cases holding that the
stamping of the check "paid" and the charging of the amount
thereof to the drawer constituted an acceptance, but we are of
opinion that none of these cases cited hold that it is in
compliance with the Negotiable Instruments Act; paying the
check and stamping same is not the equivalent of accepting the
check in writing signed by the drawee. The cases holding that
payment as indicated above constituted acceptance were
rendered prior to the adoption of the Negotiable Instruments Act
in the particular state, and these decisions are divided into two
classes: the one holding that the check delivered by the drawer
to the holder and presented to the bank or drawee constitutes an
assignment pro tanto; the other holding that the payment of the
check and the charging of same to the drawee although paid to
an unauthorized person creates privity of contract between the
holder and the drawee bank.
We have already seen that our own court has repudiated the

assignment pro tanto theory, and since the adoption of the

Negotiable Instrument Act by this state we are compelled to say
that payment of a check is not equivalent to accepting a check in
writing and signing the name of the acceptor thereon. Payment
of the check and the charging of same to the drawer does not
constitute an acceptance. Payment of the check is the end of the
voyage; acceptance of the check is to fuel the vessel and
strengthen it for continued operation on the commercial sea.
What we have said applies to the holder and not to the drawer of
the check. On this question we conclude that the general rule is
that an action cannot be maintained by a payee of the check
against the bank on which is draw unless the check has been
certified or accepted by the bank in compliance with the statute,
even though at the time the check is that an action cannot be
maintained by a payee of the drawer of the check out of which
the check is legally payable; and that the payment of the check
by the bank on which it is drawn, even though paid on the
unauthorized indorsement of the name of the holder (without
notice of the defect by the bank), does not constitute a
certification thereof, neither is it an acceptance thereof; and
without acceptance or certification, as provided by statute, there
is no privity of contract between the drawee bank and the payee,
or holder of the check. Neither is there an 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:

In all the cases which hold the drawee absolutely estoppel by

acceptance or payment from denying genuineness of the
drawer's name, the loss is thrown upon him on the ground of
negligence on his part in accepting or paying, until he has
ascertained the bill to be genuine. But the holder has preceded
him in negligence, by himself not ascertaining the true character
of the paper before he received it, or presented it for acceptance
or payment. And although, as a general rule, the drawee is more
likely to know the drawer's handwriting than a stranger is, if he
is in fact deceived as to its genuineness, we do not perceive that
he should suffer more deeply by mistake than a stranger, who,
without knowing the handwriting, has taken the paper without
previously ascertaining its genuineness. And the mistake of the
drawee should always be allowed to be corrected, unless the
holder, acting upon faith and confidence induced by his honoring
the draft, would be placed in a worse position by according such
privilege to him. This view has been applied in a well considered
case, and is intimidated in another; and is forcibly presented by
Mr. Chitty, who says it is going a great way to charge the
acceptor with knowledge of his correspondent's handwriting,
"unless some bona fide holder has purchased the paper on the
faith of such an act." Negligence in making payment under a
mistake of fact is not now deemed a bar to recovery of it, and we
do not see why any exception should be made to the principle,
which would apply as well as to release an obligation not
consummated by payment. ( Vol. 2, 6th edition, pp. 1537-1539.)
III. But now the rule is perfectly well settled that in determining
the relative rights of a drawee who, under a mistake of fact, has
paid, and a holder who has received such payment, upon a check
to which the name of the drawer has been forged, it is only fair
to consider the question of diligence or negligence of the parties
in respect thereto. (Woods and Malone vs. Colony Bank [1902],

56 L. R. A., 929, 932.) The responsibility of the drawee who

pays a forged check, for the genuineness of the drawer's
signature, is absolute only in favor of one who has not, by his
own fault or negligence, contributed to the success of the fraud
or to mislead the drawee. (National Bank of America vs. Bangs,
106 Mass., 441; 8 Am. Rep., 349; Woods and Malone vs. Colony
Bank, supra; De Feriet vs.Bank of America, 23 La. Ann., 310; B.
B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180;
10 L. R. A. [N. S.], 63.) If it appears that the one to whom
payment was made was not an innocent sufferer, but was guilty
of negligence in not doing something, which plain duty
demanded, and which, if it had been done, would have avoided
entailing loss on any one, he is not entitled to retain the moneys
paid through a mistake on the part of the drawee bank. (First
Nat. Bank of Danvers vs. First Nat. Bank of Salem, 151 Mass.,
280; 24 N. E., 44; 21 A. S. R., 450; First Nat. Bank of Orleans
vs. State Bank of Alma, 22 Neb., 769; 36 N. W., 289; 3 A. S. R.,
294; American Exp. Co. vs. State Nat. Bank, 27 Okla., 824; 113
Pac., 711; 33 L. R. A. [N. S.], 188; B. B. Ford & Co. vs. People's
Bank of Orangeburg, 74 S. C., 180; 54 S. E., 204; 114 A. S. R.,
986; 7 Ann. Cas., 744; 10 L. R. A. [N. S.], 63; People's Bank vs.
Franklin Bank, 88 Tenn. 299; 12 S. W., 716; 17 A. S. R.) 884; 6
L. R. A., 724; Canadian Bank of Commerce vs. Bingham, 30
Wash., 484; 71 Pac., 43; 60 L. R. A., 955.) In other words, to
entitle the holder of a forged check to retain the money obtained
he must be able to show that the whole responsibility of
determining the validity of the signature was upon the drawee,
and that the negligence of such drawee was not lessened by any
failure of any precaution which, from his implied assertion in
presenting the check as a sufficient voucher, the drawee had the
right to believe he had taken. (Ellis vs. Ohio Life Insurance &
Trust Co., 4 Ohio St., 628; Rouvantvs. Bank, 63 Tex., 610; Bank
vs. Ricker, 71 Ill., 429; First National Bank of Danvers vs. First

Nat. Bank of Salem, 24 N. E., 44, 45; B. B. Ford & Co. vs.
People's Bank of Orangeburg, supra.) The recovery is permitted
in such case, because, although the drawee was constructively
negligent in failing to detect the forgery, yet if the purchaser had
performed his duty, the forgery would in all probability have
been detected and the fraud defeated. (First National Bank of
Lisbon vs. Bank of Wyndmere, 15 N. D., 209; 10 L. R. A. [N.
S.], 49.) In the absence of actual fault on the part of the drawee,
his constructive fault in not knowing the signature of the drawer
and detecting the forgery will not preclude his recovery from
one who took the check under circumstances of suspicion
without proper precaution, or whose conduct has been such as to
mislead the drawee or induce him to pay the check without the
usual scrutiny or other precautions against mistake or fraud.
(National Bank of America vs.Bangs, supra; First National Bank
vs. Indiana National Bank, 30 N. E., 808-810; Woods and
Malone vs. Colony Bank, supra; First National Bank of Danvers
vs. First Nat. Bank of Salem, 151 Mass., 280.) Where a loss,
which must be borne by one of two parties alike innocent of
forgery, can be traced to the neglect or fault of either, it is
unreasonable that it would be borne by him, even if innocent of
any intentional fraud, through whose means it has succeeded.
(Gloucester Bank vs. Salem Bank, 17 Mass., 33; First Nat. Bank
of Danvers vs. First National Bank of Salem, supra; B. B. Ford
& Co. vs. People's Bank of Orangeburg, supra.) Again if the
indorser is guilty of negligence in receiving and paying the
check or draft, or has reason to believe that the instrument is not
genuine, but fails to inform the drawee of his suspicions the
indorser according to the reasoning of some courts will be held
liable to the drawee upon his implied warranty that the
instrument is genuine. (B. B. Ford & Co. vs. People's Bank of
Orangeburg, supra; Newberry Sav. Bank vs. Bank of Columbia,
93 S. C., 294; 38 L. R. A. [N. S], 1200.) Most of the courts now

agree that one who purchases a check or draft is bound to satisfy

himself that the paper is genuine; and that by indorsing it or
presenting it for payment or putting it into circulation before
presentation he impliedly asserts that he has performed his duty,
the drawee, who has, without actual negligence on his part, paid
the forged demand, may recover the money paid from such
negligent purchaser. (Lisbon First National Bank vs.Wyndmere
Bank, supra.) Of course, the drawee must, in order to recover
back the holder, show that he himself was free from fault. (See
also 5 R. C. L., pp. 556-558.)
So, if a collecting bank is alone culpable, and, on account of its
negligence only, the loss has occurred, the drawee may recover
the amount it paid on the forged draft or check. (Security
Commercial & Sav. Bank vs.Southern Trust & C. Bank [1925],
74 Cal. App., 734; 241 Pac., 945.)
But we are aware of no case in which the principle that the
drawee is bound to know the signature of the drawer of a bill or
check which he undertakes to pay has been held to be decisive in
favor of a payee of a forged bill or check to which he has
himself given credit by his indorsement. (Secalso, Mckleroy vs.
Bank, 14 La. Ann., 458; Canal Bank vs. Bank of Albany, 1 Hill,
287; Rouvant vs. Bank, supra, First Nat. Bank vs. Indiana
National Bank; 30 N. E., 808-810.)
In First Nat. Bank vs. United States National Bank ([1921], 100
Or., 264; 14 A. L. R., 479; 197 Pac., 547), the court declared: "A
holder cannot profit by a mistake which his negligent disregard
of duty has contributed to induce the drawee to commit. . . . The
holder must refund, if by his negligence he has contributed to the
consummation of the mistake on the part of the drawee by
misleading him. . . . If the only fault attributable to the drawee is

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

the proceeds of a forged check cashed by the latter and deposited

by the forger in the second bank and never withdrawn, upon the
discovery of the forgery three months later, after the drawee had
paid the check and returned the voucher to the purported drawer,
where the purchasing bank was negligent in taking the check,
and was not injured by the drawee's negligence in discovering
and reporting the forgery as to the amount left on deposit, since
it was not a purchaser for value. (First State Bank & T. Co. vs.
First Nat. Bank [1924], 314 Ill., 269; 145 N. E., 382.)
Similarly, it has been held that the drawee of a check could
recover the amount paid on the check, after discovery of the
forgery, from another bank, which put the check into circulation
by cashing it for the one who had forged the signature of both
drawer and payee without making any inquiry as to who he was
although he was a stranger, after which the check reached, and
was paid by, the drawee, after going through the hands of several
intermediate indorsees. (71 A. L. R., p. 340.)
In First National Bank vs. Brule National Bank ([1917], 12 A. L.
R., 1079, 1085), the following statement was made:
We are clearly of opinion, therefore that the warranty of
genuineness, arising upon the act of the Brule National Bank in
putting the check in circulation, was not discharged by payment
of the check by the drawee (First National Bank), nor was the
Brule National Bank deceived or misled to its prejudice by such
payment. The Brule National Bank by its indorsement and
delivery warranted its own identification of Kost and the
genuineness of his signature. The indorsement of the check by
the Brule National Bank was such as to assign the title to the
check to its assignee, the Whitbeck National Bank, and the
amount was credited to the indorser. The check bore no

indication that it was deposited for collection, and was not in any
manner restricted so as to constitute the indorsee the agent of the
indorser, nor did it prohibit farther negotiation of the instrument,
nor did it appear to be in trust for, or to the use of, any other
person, nor was it conditional. Certainly the Pukwana Bank was
justified in relying upon the warrant of genuineness, which
implied the full identification of Kost, and his signature by the
defendant bank. This view of the statute is in accord with the
decisions of many courts. (First National Bank vs.State Bank, 22
Neb., 769; 3 Am. St. Rep., 294; 36 N. W., 289; First National
Bank vs. First National Bank, 151 Mass., 280; 21 Am. St. Rep.,
450; 24 N. E., 44; People's Bank vs. Franklin Bank, 88 Tenn.,
299; 6 L. R. A., 727; 17 Am. St. Rep., 884; 12 S. W., 716.)"

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.

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:

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.

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

If, on the other hand, the holder acts in bad faith, or is guilty of
culpable negligence, a recovery may be had by the drawee of
such holder. The negligence of the Bank of Louisa in failing to
inquire of and about Banfield, and to cause or to have him
identified before it parted with its money on the forged check,
may be regarded as the primary and proximate cause of the loss.
Its negligence in this respect reached in its effect the appellee,
and induced incaution on its part. In comparison of the degrees
of the negligence of the two, it is apparent that of the appellant
excels in culpability. Both appellant and appellee inadvertently
made a mistake, doubtless due to a hurry incident to business.

The first and most grievous one was made by the appellant ,
amounting to its disregard of the duty, it owed itself as well as
the duty it owed to the appellee, and it cannot on account thereof
retain as against the appellee the money which it so received. It
cannot shift the loss to the appellee, for such disregard of its
duty inevitably contributed to induce the appellee to omit its
duty critically to examine the signature of Armstrong, even if it
did not know it instantly at the time it paid the check. (Farmers'
Bank of Augusta vs. Farmer's Bank of Maysville, supra, and
cases cited.)
IV. The question now is to determine whether the appellant's
negligence in purchasing the checks in question is such as to
give the appellee the right to recover upon said checks, and on
the other hand, whether the drawee bank was not itself negligent,
except for its constructive fault in not knowing the signature of
the drawer and detecting the forgery.
We quote with approval the following conclusions of the court a
quo:
Check Exhibit A bears number 637023-D and is dated April 6,
1933, whereas check Exhibit A-1 bears number 637020-D and is
dated April 7, 1933. Therefore, the latter check, which is prior in
number to the former check, is however, issued on a later date.
This circumstance must have aroused at least the curiosity of the
Motor Service Co., Inc.
The Motor Service Co., Inc., accepted the two checks from
unknown persons. And not only this; check Exhibit A is indorsed
by a subagent of the agent of the payee, International Auto
Repair Shop. The Motor Service Co., Inc., made no inquiry
whatsoever as to the extent of the authority of these unknown

persons. Our Supreme Court said once that "any person taking
checks made payable to a corporation, which can act only by
agents, does so at his peril, and must abide by the consequences
if the agent who indorses the same is without authority" (Insular
Drug Co. vs. National Bank, 58, Phil., 684).
xxx

xxx

xxx

Check Exhibit A-1, aside from having been indorsed by a

supposed agent of the international Auto Repair Shop is crossed
generally. The existence of two parallel lines transversally drawn
on the face of this check was a warning that the check could
only be collected through a banking institution (Jacobs, Law of
Bills of Exchange, etc., pp., 179, 180; Bills of Exchange Act of
England, secs. 76 and 79). Yet the Motor Service Co., Inc.,
accepted the check in payment for merchandise.
. . . In Exhibit H attached to the stipulation of facts as an integral
part thereof, the Motor Service Co., Inc., stated the following:
"The Pangasinan Transportation Co. is a good customer of this
firm and we received checks from them every month in payment
of their account. The two checks in question seem to be exactly
similar to the checks which we received from the Pangasinan
Transportation Co. every month."
If the failure of the Motor Service Co., Inc., to detect the forgery
of the drawer's signature in the two checks, may be considered
as an omission in good faith because of the similarity stated in
the letter, then the same consideration applies to the Philippine
National Bank, for the drawer is a customer of both the Motor
Service Co., Inc., and the Philippine National Bank. (B. of E.,
pp. 25, 28, 35.)

We are of opinion that the facts of the present case do not make
it one between two equally innocent persons, the drawee bank
and the holder, and that they are governed by the authorities
already cited and also the following:
The point in issue has sometimes been said to be that of
negligence. The drawee who has paid upon the forged signature
is held to bear the loss, because he has been negligent in failing
to recognize that the handwriting is not that of his customer. But
it follows obviously that if the payee, holder, or presenter of the
forged paper has himself been in default, if he has himself been
guilty of a negligence prior to that of the banker, or if by any act
of his own he has at all contributed to induce the banker's
negligence, then he may lose his right to cast the loss upon the
banker. The courts have shown a steadily increasing disposition
to extend the application of this rule over the new conditions of
fact which from time to time arise, until it can now rarely
happen that the holder, payee, or presenter can escape the
imputation of having been in some degree contributory towards
the mistake. Without any actual change in the abstract doctrines
of the law, which are clear, just, and simple enough, the gradual
but sure tendency and effect of the decisions have been to put as
heavy a burden of responsibility upon the payee as upon the
drawee, contrary to the original custom. . . . (2 Morse on Banks
and Banking, 5th ed., secs. 464 and 466, pp. 82-85 and 86, 87.)
In First National Bank vs. Brule National Bank (12 A. L. R.,
1079, 1088, 1089), the following statement appears in the
concurring opinion:
What, then, should be the rule? The drawee asks to recover for
money had and received. If his claim did not rest upon a
transaction relating to a negotiable instrument plaintiff could

recover as for money paid under mistake, unless defendant could

show some equitable reason, such as changed condition since,
and relying upon, payment by plaintiff. In the Wyndmere Case,
the North Dakota court holds that this rule giving right to
recover money paid under mistake should extend to negotiable
paper, and it rejects in its entirety the theory of estoppel and puts
a case of this kind on exactly the same basis as the ordinary case
of payment under mistake. But the great weight of authority, and
that based on the better reasoning, holds that the exigencies of
business demand a different rule in relation to negotiable paper.
What is that rule? Is it an absolute estoppel against the drawee in
favor of a holder, no matter how negligent such holder has been?
It surely is not. The correct rule recognizes the fact that, in case
of payment without a prior acceptance or certification, the holder
takes the paper upon the of the prior indorsers and the credit of
the drawer, and not upon the credit of the drawee, in making
payment, has a right to rely upon the assumption that the payee
used due diligence, especially where such payee negotiated the
bill or check to a holder, thus representing that it had so fully
satisfied itself as to the identity and signature of the maker that it
was willing to warrant as relates thereto to all subsequent
holders. (Uniform Act, secs. 65 and 66.) Such correct rule denies
the drawee the right to recover when the holder was without
fault or when there has been some change of position calling for
equitable relief. When a holder of a bill of exchange uses all due
care in the taking of bill or check and the drawee thereafter pays
same, the transaction is absolutely closed modern business
could not be done on any other basis. While the correct rule
promotes the fluidity of two recognized mediums of exchange,
those mediums by which the great bulk of business is carried on,
checks and drafts, upon the other hand it encourages and
demands prudent business methods upon the part of those
receiving such mediums of exchange. (Pennington County Bank

vs. First State Bank, 110 Minn., 263; 26 L. R. A. [N. S.], 849;
136 Am. St. Rep., 496; 125 N. W., 119; First National Bank vs.
State Bank, 22 Neb., 769; 3 Am. St. Rep., 294; 36 N. W., 289;
Bank of Williamson, vs. McDowell County Bank, 66 W. Va.,
545; 36 L. R. A. [N. S.], 605; 66 S. E., 761; Germania Bank vs.
Boutell, 60 Minn., 189; 27 L. R. A., 635; 51 Am. St. Rep., 519;
62 N. W., 327; American Express Co. vs. State National Bank,
27 Okla., 824; 33 L. R. A. [N. S.], 188; 113 Pac., 711; Farmers'
National Bank vs. Farmers' & Traders Bank, L. R. A., 1915A,
77, and note (159 Ky., 141; 166 S. W., 986].)
That the defendant bank did not use reasonable business
prudence is clear. It took this check from a stranger without
other identification than that given by another stranger; its
cashier witnessed the mark of such stranger thus vouching for
the identity and signature of the maker; and it indorsed the check
as "Paid," thus further throwing plaintiff off guard. Defendant
could not but have known, when negotiating such check and
putting it into the channel through which it would finally be
presented to plaintiff for payment, that plaintiff, if it paid such
check, as defendant was asking it to do, would have to rely
solely upon the apparent faith and credit that defendant had
placed in the drawer. From the very circumstances of this case
plaintiff had to act on the facts as presented to it by defendant,
upon such facts only.
But appellant argues that it so changed its position, after
payment by plaintiff, that in "equity and good conscience"
plaintiff should not recover it says it did not pay over any
money to the forger until after plaintiff had paid the check. There
would be merit in such contention if defendant had indorsed the
check for "collection," thus advising plaintiff that it was relying
on plaintiff and not on the drawer. It stands in court where it

would have been if it had done as it represented.

In Woods and Malone vs. Colony Bank (56 L. R. A., 929, 932),
the court said:
. . . If the holder has been negligent in paying the forged paper,
or has by his conduct, however innocent, misled or deceived the
drawee to his damage, it would be unjust for him to be allowed
to shield himself from the results of his own carelessness by
asserting that the drawee was bound in law to know his drawer's
signature.
V. Section 23 of the Negotiable Instruments Act provides that
"when a signature is forged or made without the authority of the
person whose signature it purports to be, is wholly inoperative,
and no right to retain the instrument, or to give a discharge
therefor, or to enforce payment thereof against any party thereto,
can be acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded from
setting up the forgery or want of authority.
It not appearing that the appellee bank did not warrant to the
appellant the genuineness of the checks in question, by its
acceptance thereof, nor did it perform any act which would have
induced the appellant to believe in the genuineness of said
instruments before appellant purchased them for value, it can not
be said that the appellee is precluded from setting up the forgery
and, therefore, the appellant is not entitled to retain the amount
of the forged check paid to it by the appellee.
VI. It has been held by many courts that a drawee of a check,
who is deceived by a forgery of the drawer's signature may
recover the payment back, unless his mistake has placed an

innocent holder of the paper in a worse position than he would

have been in if the discovery of the forgery had been made on
presentation. (5 R. C. L., p. 559; 2 Daniel on Negotiable
Instruments, 1538.) Forgeries often deceived the eye of the most
cautious experts; and when a bank has been deceived, it is a
harsh rule which compels it to suffer although no one has
suffered by its being deceived. (17 A. L. R. 891; 5 R. C. L., 559.)
In the instant case should the drawee bank be allowed recovery,
the appellant's position would not become worse than if the
drawee had refused the payment of these checks upon their
presentation. The appellant has lost nothing by anything which
the drawee has done. It had in its hands some forged worthless
papers. It did not purchase or acquire these papers because of
any representation made to it by the drawee. It purchased them
from unknown persons and under suspicious circumstances. It
had no valid title to them, because the persons from whom it
received them did not have such title. The appellant could not
have compelled the drawee to pay them, and the drawee could
have refused payment had it been able to detect the forgery. By
making a refund, the appellant would only returning what it had
received without any title or right. And when appellant pays
back the money it had received it will be entitled to have
restored to it the forged papers it parted with. There is no good
reason why the accidental payment made by the appellant should
inure to the benefit of the appellant. If there were injury to the
appellant said injury was caused not by the failure of the
appellee to detect the forgery but by the very negligence of the
appellant in purchasing commercial papers from unknown
persons without making inquiry as to their genuineness.
In the light of the foregoing discussion, we conclude:

1. That where a check is accepted or certified by the bank on

which it is drawn, the bank is estopped to deny the genuineness
of the drawer's signature and his capacity to issue the instrument;
2. That if a drawee bank pays a forged check which was
previously accepted or certified by the said bank it cannot
recover from a holder who did not participate in the forgery and
did not have actual notice thereof;
3. That the payment of a check does not include or imply its
acceptance in the sense that this word is used in section 62 of the
Negotiable Instruments Law;
4. That in the case of the payment of a forged check, even
without former acceptance, the drawee can not recover from a
holder in due course not chargeable with any act of negligence
or disregard of duty;
5. That to entitle the holder of a forged check to retain the money
obtained thereon, there must be a showing that the duty to
ascertain the genuineness of the signature rested entirely upon
the drawee, and that the constructive negligence of such drawee
in failing to detect the forgery was not affected by any disregard
of duty on the part of the holder, or by failure of any precaution
which, from his implied assertion in presenting the check as a
sufficient voucher, the drawee had the right to believe he had
taken;
6. That in the absence of actual fault on the part of the drawee,
his constructive fault in not knowing the signature of the drawer
and detecting the forgery will nor preclude his recovery from
one who took the check under circumstances of suspicion and
without proper precaution, or whose conduct has been such as to

mislead the drawee or induce him to pay the check without the
usual scrutiny or other precautions against mistake or fraud;
7. That on who purchases a check or draft is bound to satisfy
himself that the paper is genuine, and that by indorsing it or
presenting it for payment or putting it into circulation before
presentation he impliedly asserts that he performed his duty;
8. That while the foregoing rule, chosen from a welter of
decisions on the issue as the correct one, will not hinder the
circulation of two recognized mediums of exchange by which
the great bulk of business is carried on, namely, drafts and
checks, on the other hand, it will encourage and demand prudent
business methods on the part of those receiving such mediums of
exchange;
9. That it being a matter of record in the present case, that the
appellee bank in no more chargeable with the knowledge of the
drawer's signature than the appellant is, as the drawer was as
much the customer of the appellant as of the appellee, the
presumption that a drawee bank is bound to know more than any
indorser the signature of its depositor does not hold;
10. That according to the undisputed facts of the case the
appellant in purchasing the papers in question from unknown
persons without making any inquiry as to the identity and
authority of the said persons negotiating and indorsing them,
acted negligently and contributed to the appellee's constructive
negligence in failing to detect the forgery;
11. That under the circumstances of the case, if the appellee
bank is allowed to recover, there will be no change of position as
to the injury or prejudice of the appellant.

Wherefore, the assignments of error are overruled, and the

judgment appealed from must be, as it is hereby, affirmed, with
costs against the appellant. So ordered.
Avancea, C. J., Villa-Real, Abad Santos, Imperial, Diaz, and
Laurel, JJ., concur.

PNB V. National City Bank New York (1936)

G.R. No. L-43596 October 31, 1936
Lessons Applicable: Forgery (Negotiable Instruments)
FACTS:
April 7 & 9, 1933: unknown person or persons purchased tires
and paid Motor Service Company, Inc.(MSCI) checks purporting
to have been issued by the "Pangasinan Transportation Co., Inc.
(Pantranco) by J. L. Klar, Manager and Treasurer" against PNB
and in favor of International Auto Repair Shop.
MSCI indorsed for deposit at the National City Bank of New
York and MSCI was accordingly credited with the amounts
thereof, or P144.50 and P215.75
April 8 & 10, 1933: Checks were cleared and PNB credited the
National City Bank

PNB found out that the signatures of J. L. Klar, Manager and

Treasurer were forged and demanded from MSCI and National
City Bank New York

NO.

PNB filed the case in the municipal court of Manila against

National City Bank and MSCI.

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

Pantranco objected to have the proceeds of said check deducted

from their deposit.

Acceptance is a step unnecessary for bills of exchange payable

on demand (sec. 143)

RTC: Favored PNB

Acceptance implies, subsequent negotiation of the instrument

MSCI appealed
ISSUES:

From the moment a check is paid it is withdrawn from

circulation.

W/N acceptance = payment

W/N law or business practice prevents the presentation of
checks for acceptance before they are paid.

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

W/N MSCI was negligent and therefore PNB should recover

Payment (in checks) - final act which extinguishes a bill.

W/N the drawee bank should be allowed recovery, as MSCI's

position would not become worse than if the drawee had refused
the payment of these checks upon their presentation.

Acceptance (in certified checks) - a promise to pay in the future

and continues the life of the bill.

HELD: Affirmed

NO, 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 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

NO. 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 discover of the
forgery had been made on presentation.

YES. Circumstances: check number 637023-D was dated April

6, 1933, whereas check number 637020-D and is dated April 7,
1933. (later check had prior number) accepted the 2 checks from
unknown persons

MSCI 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

check 637023-D was indorsed by a subagent of the agent of the

payee, International Auto Repair Shop and cross generally
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, it is wholly inoperative,
and no right to retain the instrument, or to give a discharge
therefor, or to enforce payment thereof against any party thereto,
can be acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded from
setting up the forgery or want of authority.

Court concluded:

PNB did not warrant to MCSI the genuineness of the checks in

question, by its acceptance thereof, nor did it perform any act
which would have induced MSCI to believe in the genuineness

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;

PNB is NOT precluded from setting up the forgery

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

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;

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.

Commercial and Industrial Bank hereinafter referred to as the

PCIB for the recovery of P57,415.00.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-26001

October 29, 1968

PHILIPPINE NATIONAL BANK, petitioner,

vs.
THE COURT OF APPEALS and PHILIPPINE
COMMERCIAL AND INDUSTRIAL BANK, respondents.
Tomas Besa, Jose B. Galang and Juan C. Jimenez for petitioner.
San Juan, Africa & Benedicto for respondents.
CONCEPCION, C.J.:
The Philippine National Bank hereinafter referred to as the
PNB seeks the review by certiorari of a decision of the Court
of Appeals, which affirmed that of the Court of First Instance of
Manila, dismissing plaintiff's complaint against the Philippine

A partial stipulation of facts entered into by the parties and the

decision of the Court of Appeals show that, on about January 15,
1962, one Augusto Lim deposited in his current account with the
PCIB branch at Padre Faura, Manila, GSIS Check No. 645915B, in the sum of P57,415.00, drawn against the PNB; that,
following an established banking practice in the Philippines, the
check was, on the same date, forwarded, for clearing, through
the Central Bank, to the PNB, which did not return said check
the next day, or at any other time, but retained it and paid its
amount to the PCIB, as well as debited it against the account of
the GSIS in the PNB; that, subsequently, or on January 31, 1962,
upon demand from the GSIS, said sum of P57,415.00 was recredited to the latter's account, for the reason that the signatures
of its officers on the check were forged; and that, thereupon, or
on February 2, 1962, the PNB demanded from the PCIB the
refund of said sum, which the PCIB refused to do. Hence, the
present action against the PCIB, which was dismissed by the
Court of First Instance of Manila, whose decision was, in turn,
affirmed by the Court of Appeals.
It is not disputed that the signatures of the General Manager and
the Auditor of the GSIS on the check, as drawer thereof, are
forged; that the person named in the check as its payee was one
Mariano D. Pulido, who purportedly indorsed it to one Manuel
Go; that the check purports to have been indorsed by Manuel Go
to Augusto Lim, who, in turn, deposited it with the PCIB, on
January 15, 1962; that, thereupon, the PCIB stamped the
following on the back of the check: "All prior indorsements
and/or Lack of Endorsement Guaranteed, Philippine
Commercial and Industrial Bank," Padre Faura Branch, Manila;

that, on the same date, the PCIB sent the check to the PNB, for
clearance, through the Central Bank; and that, over two (2)
months before, or on November 13, 1961, the GSIS had notified
the PNB, which acknowledged receipt of the notice, that said
check had been lost, and, accordingly, requested that its payment
be stopped.
In its brief, the PNB maintains that the lower court erred: (1) in
not finding the PCIB guilty of negligence; (2) in not finding that
the indorsements at the back of the check are forged; (3) in not
finding the PCIB liable to the PNB by virtue of the former's
warranty on the back of the check; (4) in not holding that
"clearing" is not "acceptance", in contemplation of the
Negotiable Instruments law; (5) in not finding that, since the
check had not been accepted by the PNB, the latter is entitled to
reimbursement therefor; and (6) in denying the PNB's right to
recover from the PCIB.
The first assignment of error will be discussed later, together
with the last,with which it is interrelated.
As regards the second assignment of error, the PNB argues that,
since the signatures of the drawer are forged, so must the
signatures of the supposed indorsers be; but this conclusion does
not necessarily follow from said premise. Besides, there is
absolutely no evidence, and the PNB has not even tried to prove
that the aforementioned indorsements are spurious. Again, the
PNB refunded the amount of the check to the GSIS, on account
of the forgery in the signatures, not of the indorsers or supposed
indorsers, but of the officers of the GSISas drawer of the
instrument. In other words, the question whether or not the
indorsements have been falsified is immaterial to the PNB's
liability as a drawee, or to its right to recover from the PCIB, 1

for, as against the drawee, the indorsement of an intermediate

bank does not guarantee the signature of the drawer,2 since the
forgery of the indorsement is not the cause of the loss.3
With respect to the warranty on the back of the check, to which
the third assignment of error refers, it should be noted that the
PCIB thereby guaranteed "all prior indorsements," not the
authenticity of the signatures of the officers of the GSIS who
signed on its behalf, because the GSIS is not an indorser of the
check, but its drawer.4Said warranty is irrelevant, therefore, to
the PNB's alleged right to recover from the PCIB. It could have
been availed of by a subsequent indorsee 5 or a holder in due
course6 subsequent to the PCIB, but, the PNB is neither.7 Indeed,
upon payment by the PNB, as drawee, the check ceased to be a
negotiable instrument, and became a mere voucher or proof of
payment.8
Referring to the fourth and fifth assignments of error, we must
bear in mind that, in general, "acceptance", in the sense in which
this term is used in the Negotiable Instruments Law 9 is not
required for checks, for the same are payable on demand.10
Indeed, "acceptance" and "payment" are, within the purview of
said Law, essentially different things, for the former is "a
promise to perform an act," whereas the latter is the "actual
performance" thereof.11 In the words of the Law,12 "the
acceptance of a bill is the signification by the drawee of his
assent to the order of the drawer," which, in the case of checks,
is the payment, on demand, of a given sum of money. Upon the
other hand, actual payment of the amount of a check implies not
only an assent to said order of the drawer and a recognition of
the drawer's obligation to pay the aforementioned sum, but, also,
a compliance with such obligation.

Let us now consider the first and the last assignments of error.
The PNB maintains that the lower court erred in not finding that
the PCIB had been guilty of negligence in not discovering that
the check was forged. Assuming that there had been such
negligence on the part of the PCIB, it is undeniable, however,
that the PNB has, also, been negligent, with the particularity that
the PNB had been guilty of a greater degree of negligence,
because it had a previous and formal notice from the GSIS that
the check had been lost, with the request that payment thereof be
stopped. Just as important, if not more important and decisive, is
the fact that the PNB's negligence was the main or proximate
cause for the corresponding loss.
In this connection, it will be recalled that the PCIB did not cash
the check upon its presentation by Augusto Lim; that the latter
had merely deposited it in his current account with the PCIB;
that, on the same day, the PCIB sent it, through the Central
Bank, to the PNB, for clearing; that the PNB did not return the
check to the PCIB the next day or at any other time; that said
failure to return the check to the PCIB implied, under the current
banking practice, that the PNB considered the check good and
would honor it; that, in fact, the PNB honored the check and
paid its amount to the PCIB; and that only then did the PCIB
allow Augusto Lim to draw said amount from his
aforementioned current account.
Thus, by not returning the check to the PCIB, by thereby
indicating that the PNB had found nothing wrong with the check
and would honor the same, and by actually paying its amount to
the PCIB, the PNB induced the latter, not only to believe that the
check was genuine and good in every respect, but, also, to pay
its amount to Augusto Lim. In other words, the PNB was the
primary or proximate cause of the loss, and, hence, may not

recover from the PCIB.13

It is a well-settled maxim of law and equity that when one of
two (2) innocent persons must suffer by the wrongful act of a
third person, the loss must be borne by the one whose negligence
was the proximate cause of the loss or who put it into the power
of the third person to perpetrate the wrong.14
Then, again, it has, likewise, been held that, where the collecting
(PCIB) and the drawee (PNB) banks are equally at fault, the
court will leave the parties where it finds them.15
Lastly, Section 62 of Act No. 2031 provides:
The acceptor by accepting the instrument engages that he will
pay it according to the tenor of his acceptance; and admits:
(a) The existence of the drawer, the genuineness of his signature,
and his capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
The prevailing view is that the same rule applies in the case of a
drawee who pays a bill without having previously accepted it.16
WHEREFORE, the decision appealed from is hereby affirmed,
with costs against the Philippine National Bank. It is so ordered.
Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles,
Fernando and Capistrano, JJ., concur.
Zaldivar, J., took no part.

Philippine National Bank vs Court of Appeals (October

1968)
25 SCRA 693 Mercantile Law Negotiable Instruments Law
Liabilities of Parties Forgery Forged Check Warranties
In November 1961, GSIS advised PNB that a check bearing
check number 645915- B has been lost.
On January 15, 1962, Augusto Lim, holding GSIS Check No.
645915- B which was in the amount of P57,415.00, went to
PCIB to have the check deposited in his PCIB account.
Apparently, the check was indorsed to him by Manuel Go, which
was previously indorsed by Mariano Pulido to Go. Pulido was
the named payee in the check.
PCIB did not encash the check in favor of Augusto Lim but
rather it deposited the amount to Lims PCIB account. Lim
cannot withdraw the amount yet as it needs clearing. PCIB
stamped the check with All prior indorsements and/or Lack of
Endorsement Guaranteed, Philippine Commercial and Industrial
Bank. PCIB then sent the check to PNB for clearing. PNB did
not act on the check but it paid PCIB the amount of the check.
PCIB considered this as a manifestation that the check was good
hence it cleared Lim to withdraw the amount.
On January 31, 1962, GSIS demanded PNB to restore the

amount and PNB complied. PNB then demanded PCIB to refund

the amount of the check. PCIB refused. The lower court ruled in
favor of PCIB. This was affirmed by the Court of Appeals. PNB
argued that the indorsements are forged hence it has no liability.
ISSUE: Whether or not PCIB should refund the amount to PNB.
HELD: No. The question whether or not the indorsements have
been falsified is immaterial to PNBs liability as a drawee or to
its right to recover from the PCIB for, as against the drawee, the
indorsement of an intermediate bank does not guarantee the
signature of the drawer, since the forgery of the indorsement is
not the cause of the loss.
With respect to the warranty on the back of the check, it should
be noted that the PCIB thereby guaranteed all prior
indorsements, not the authenticity of the signatures of the
officers of the GSIS who signed on its behalf, because the GSIS
is not an indorser of the check, but its drawer. Further, PNB has
been negligent. It has been notified months before about the lost
check.

PHILIPPINE NATIONAL BANK, defendants-appellees.

Camus and Delgado for appellant.
Fisher and DeWitt and A. M. Opisso for Hongkong and
Shanghai Bank.
Roman J. Lacson for Philippine National Bank.
STATEMENT
The plaintiff is an insurance corporation, and the defendants are
banking corporations, and each is duly licensed to do its
respective business in the Philippines Islands.
May 3, 1920, the plaintiff drew its check for P2,000 on the
Hongkong and Shanghai Banking Corporation with whom it had
an account, payable to the order of Lazaro Melicor. E. M.
Maasim fraudulently obtained possession of the check, forged
Melicor's signature, as an endorser, and then personally endorsed

and presented it to the Philippine National Bank where the

amount of the check was placed to his credit. After having paid
the check, and on the next day, the Philippine national Bank
endorsed the check to the Hongkong and Shanghai Banking
Corporation which paid it and charged the amount of the check
to the account of the plaintiff. In the ordinary course of business,
the Hongkong Shanghai Banking Corporation rendered a bank
statement to the plaintiff showing that the amount of the check
was charged to its account, and no objection was then made to
the statement. About four months after the check was charged to
the account of the plaintiff, it developed that Lazaro Melicor, to
whom the check was made payable, had never received it, and
that his signature, as an endorser, was forged by Maasim, who
presented and deposited it to his private account in the
Philippine National Bank. With this knowledge , the plaintiff
promptly made a demand upon the Hongkong and Shanghai
Banking Corporation that it should be given credit for the
amount of the forged check, which the bank refused to do, and
the plaintiff commenced this action to recover the P2,000 which
was paid on the forged check. On the petition of the Shanghai
Bank, the Philippine National Bank was made defendant. The
Shanghai Bank denies any liability, but prays that, if a judgment
should be rendered against it, in turn, it should have like
judgment against the Philippine National Bank which denies all
liability to either party.
Upon the issues being joined, a trial was had and judgment was
rendered against the plaintiff and in favor of the defendants,
from which the plaintiff appeals, claiming that the court erred in
dismissing the case, notwithstanding its finding of fact, and in
not rendering a judgment in its favor, as prayed for in its
complaint.

JOHNS, J.:

This was fundamental error.

There is no dispute about any of the findings of fact made by the

trial court, and the plaintiff relies upon them for a reversal.
Among other things, the trial court says:

Plaintiff's check was drawn on Shanghai Bank payable to the

order of Melicor. In other words, the plaintiff authorized and
directed the Shanghai Bank to pay Melicor, or his order, P2,000.
It did not authorize or direct the bank to pay the check to any
other person than Melicor, or his order, and the testimony is
undisputed that Melicor never did part with his title or endorse
the check, and never received any of its proceeds. Neither is the
plaintiff estopped or bound by the banks statement, which was
made to it by the Shanghai Bank. This is not a case where the
plaintiff's own signature was forged to one of it checks. In such a
case, the plaintiff would have known of the forgery, and it would
have been its duty to have promptly notified the bank of any
forged signature, and any failure on its part would have released
bank from any liability. That is not this case. Here, the forgery
was that of Melicor, who was the payee of the check, and the
legal presumption is that the bank would not honor the check
without the genuine endorsement of Melicor. In other words,
when the plaintiff received it banks statement, it had a right to
assume that Melicor had personally endorsed the check, and
that, otherwise, the bank would not have paid it.

Who is responsible for the refund to the drawer of the amount of

the check drawn and payable to order, when its value was
collected by a third person by means of forgery of the signature
of the payee? Is it the drawee or the last indorser, who ignored
the forgery at the time of making the payment, or the forger?
To lower court found that Melicor's name was forged to the
check. "So that the person to whose order the check was issued
did not receive the money, which was collected by E. M.
Maasim," and then says:
Now then, the National Bank should not be held responsible for
the payment of made to Maasim in good faith of the amount of
the check, because the indorsement of Maasim is unquestionable
and his signature perfectly genuine, and the bank was not
obliged to identify the signature of the former indorser. Neither
could the Hongkong and Shanghai Banking Corporation be held
responsible in making payment in good faith to the National
Bank, because the latter is a holder in due course of the check in
question. In other words, the two defendant banks can not be
held civilly responsible for the consequences of the falsification
or forgery of the signature of Lazaro Melicor, the National Bank
having had no notice of said forgery in making payment to
Maasim, nor the Hongkong bank in making payment to National
Bank. Neither bank incurred in any responsibility arising from
that crime, nor was either of the said banks by subsequent acts,
guilty of negligence or fault.

Section 23 of Act No. 2031, known as the Negotiable

Instruments Law, says:
When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative,
and no right to retain the instrument, or to give a discharge
therefor, or to enforce payment thereof against any party thereto,
can be acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded from
setting up the forgery or want of authority.

That section is square in point.

Ostrand and Romualdez, JJ., concur.

The money was on deposit in the Shanghai Bank, and it had no

legal right to pay it out to anyone except the plaintiff or its order.
Here, the plaintiff ordered the Shanghai Bank to pay the P2,000
to Melicor, and the money was actually paid to Maasim and was
never paid to Melicor, and he never paid to Melicor, and he
never personally endorsed the check, or authorized any one to
endorse it for him, and the alleged endorsement was a forgery.
Hence, upon the undisputed facts, it must follow that the
Shanghai Bank has no defense to this action.
It is admitted that the Philippine National Bank cashed the check
upon a forged signature, and placed the money to the credit of
Maasim, who was a forger. That the Philippine National Bank
then endorsed the check and forwarded it to the Shanghai Bank
by whom it was paid. The Philippine National Bank had no
license or authority to pay the money to Maasim or anyone else
upon a forge signature. It was its legal duty to know that
Melicor's endorsment was genuine before cashing the check. Its
remedy is against Maasim to whom it paid the money.
The judgment of the lower court is reversed, and one will be
entered here in favor of the plaintiff and against the Hongkong
and Shanghai Banking Corporation for the P2,000, with interest
thereon from November 8, 1920 at the rate of 6 per cent per
annum, and the costs of this action, and a corresponding
judgment will be entered in favor of the Hongkong Shanghai
Banking Corporation against the Philippine National Bank for
the same amount, together with the amount of its costs in this
action. So ordered.
Araullo, C.J., Johnson, Street, Malcolm, Avancea, Villamor,

Great Eastern Life Ins. Co. V. Hongkong Shanghai Bank

(1922)
G.R. No. L-18657

August 23, 1922

Lessons Applicable: Forgery (Negotiable Instruments Law)

FACTS:
May 3, 1920: Great Eastern Life Ins. Co. (Eastern) drew its
check for P2,000 on the Hongkong and Shanghai Banking
Corporation (HSBC) payable to the order of Lazaro Melicor.

E. M. Maasim fraudulently obtained possession of the check,

forged Melicor's signature, as an endorser, and then personally
endorsed and presented it to the Philippine National Bank (PNB)
and it was placed to his credit.

YES. lower court is reversed. Eastern against HSBC who can

claim against PNB forgery was that of Melicor (payees and NOT
the maker)

Next day: PNB endorsed the check to the HSBC who paid it

Eastern received it banks statement, it had a right to assume that

Melicor had personally endorsed the check, and that, otherwise,
the bank would not have paid it

HSBC sent a bank statement to the Eastern showing the amount

of the check was charged to its account, and no objection was
made

Section 23 of Negotiable Instruments Law:

4 months after the check was charged, it developed that Lazaro

Melicor, to whom the check was made payable, had never
received it, and that his signature, as an endorser, was forged by
Maasim,
Eastern promptly made a demand upon the HSBC to credit the
amount of the forged check

When a signature is forged or made without the authority of the

person whose signature it purports to be, it is wholly inoperative,
and no right to retain the instrument, or to give a discharge
therefor, or to enforce payment thereof against any party thereto,
can be acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded from
setting up the forgery or want of authority.

Eastern filed against HSBC and PNB

The Philippine National Bank had no license or authority to pay

the money to Maasim or anyone else upon a forge signature.

RTC: dismissed the case

Its remedy is against Maasim to whom it paid the money.

ISSUES:
W/N Eastern has the right to recover the amount of the forged
check
HELD:

with a forged indorsement of the payee, debiting the same

against the drawer's account.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 92244 February 9, 1993
NATIVIDAD GEMPESAW, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and
PHILIPPINE BANK OF COMMUNICATIONS, respondents.
L.B. Camins for petitioner.
Angara, Abello, Concepcion, Regals & Cruz for private
respondent
CAMPOS, JR., J.:
From the adverse decision * of the Court of Appeals (CA-G.R.
CV No. 16447), petitioner, Natividad Gempesaw, appealed to
this Court in a Petition for Review, on the issue of the right of
the drawer to recover from the drawee bank who pays a check

The records show that on January 23, 1985, petitioner filed a

Complaint against the private respondent Philippine Bank of
Communications (respondent drawee Bank) for recovery of the
money value of eighty-two (82) checks charged against the
petitioner's account with the respondent drawee Bank on the
ground that the payees' indorsements were forgeries. The
Regional Trial Court, Branch CXXVIII of Caloocan City, which
tried the case, rendered a decision on November 17, 1987
dismissing the complaint as well as the respondent drawee
Bank's counterclaim. On appeal, the Court of Appeals in a
decision rendered on February 22, 1990, affirmed the decision of
the RTC on two grounds, namely (1) that the plaintiff's
(petitioner herein) gross negligence in issuing the checks was the
proximate cause of the loss and (2) assuming that the bank was
also negligent, the loss must nevertheless be borne by the party
whose negligence was the proximate cause of the loss. On
March 5, 1990, the petitioner filed this petition under Rule 45 of
the Rules of Court setting forth the following as the alleged
errors of the respondent Court: 1

I
THE RESPONDENT COURT OF APPEALS ERRED IN
RULING THAT THE NEGLIGENCE OF THE DRAWER IS
THE PROXIMATE CAUSE OF THE RESULTING INJURY
TO THE DRAWEE BANK, AND THE DRAWER IS
PRECLUDED FROM SETTING UP THE FORGERY OR
WANT OF AUTHORITY.

II
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN
NOT FINDING AND RULING THAT IT IS THE GROSS AND
INEXCUSABLE NEGLIGENCE AND FRAUDULENT ACTS
OF THE OFFICIALS AND EMPLOYEES OF THE
RESPONDENT BANK IN FORGING THE SIGNATURE OF
THE PAYEES AND THE WRONG AND/OR ILLEGAL
PAYMENTS MADE TO PERSONS, OTHER THAN TO THE
INTENDED PAYEES SPECIFIED IN THE CHECKS, IS THE
DIRECT AND PROXIMATE CAUSE OF THE DAMAGE TO
PETITIONER WHOSE SAVING (SIC) ACCOUNT WAS
DEBITED.
III
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN
NOT ORDERING THE RESPONDENT BANK TO RESTORE
OR RE-CREDIT THE CHECKING ACCOUNT OF THE
PETITIONER IN THE CALOOCAN CITY BRANCH BY THE
VALUE OF THE EIGHTY-TWO (82) CHECKS WHICH IS IN
THE AMOUNT OF P1,208,606.89 WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and
operates four grocery stores located at Rizal Avenue Extension
and at Second Avenue, Caloocan City. Among these groceries
are D.G. Shopper's Mart and D.G. Whole Sale Mart. Petitioner
maintains a checking account numbered 13-00038-1 with the
Caloocan City Branch of the respondent drawee Bank. To
facilitate payment of debts to her suppliers, petitioner draws
checks against her checking account with the respondent bank as

drawee. Her customary practice of issuing checks in payment of

her suppliers was as follows: the checks were prepared and filled
up as to all material particulars by her trusted bookkeeper, Alicia
Galang, an employee for more than eight (8) years. After the
bookkeeper prepared the checks, the completed checks were
submitted to the petitioner for her signature, together with the
corresponding invoice receipts which indicate the correct
obligations due and payable to her suppliers. Petitioner signed
each and every check without bothering to verify the accuracy of
the checks against the corresponding invoices because she
reposed full and implicit trust and confidence on her bookkeeper.
The issuance and delivery of the checks to the payees named
therein were left to the bookkeeper. Petitioner admitted that she
did not make any verification as to whether or not the checks
were delivered to their respective payees. Although the
respondent drawee Bank notified her of all checks presented to
and paid by the bank, petitioner did not verify he correctness of
the returned checks, much less check if the payees actually
received the checks in payment for the supplies she received. In
the course of her business operations covering a period of two
years, petitioner issued, following her usual practice stated
above, a total of eighty-two (82) checks in favor of several
suppliers. These checks were all presented by the indorsees as
holders thereof to, and honored by, the respondent drawee Bank.
Respondent drawee Bank correspondingly debited the amounts
thereof against petitioner's checking account numbered 3000038-1. Most of the aforementioned checks were for amounts
in excess of her actual obligations to the various payees as
shown in their corresponding invoices. To mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the amount
of P11,895.23 in favor of Kawsek Inc. (Exh. A-60), appellant's
actual obligation to said payee was only P895.33 (Exh. A-83);

(2) in Check No. 652282 issued on September 18, 1984 in favor

of Senson Enterprises in the amount of P11,041.20 (Exh. A-67)
appellant's actual obligation to said payee was only P1,041.20
(Exh. 7); (3) in Check No. 589092 dated April 7, 1984 for the
amount of P11,672.47 in favor of Marchem (Exh. A-61)
appellant's obligation was only P1,672.47 (Exh. B); (4) in Check
No. 620450 dated May 10, 1984 in favor of Knotberry for
P11,677.10 (Exh. A-31) her actual obligation was only P677.10
(Exhs. C and C-1); (5) in Check No. 651862 dated August 9,
1984 in favor of Malinta Exchange Mart for P11,107.16 (Exh.
A-62), her obligation was only P1,107.16 (Exh. D-2); (6) in
Check No. 651863 dated August 11, 1984 in favor of Grocer's
International Food Corp. in the amount of P11,335.60 (Exh. A66), her obligation was only P1,335.60 (Exh. E and E-1); (7) in
Check No. 589019 dated March 17, 1984 in favor of Sophy
Products in the amount of P11,648.00 (Exh. A-78), her
obligation was only P648.00 (Exh. G); (8) in Check No. 589028
dated March 10, 1984 for the amount of P11,520.00 in favor of
the Yakult Philippines (Exh. A-73), the latter's invoice was only
P520.00 (Exh. H-2); (9) in Check No. 62033 dated May 23,
1984 in the amount of P11,504.00 in favor of Monde Denmark
Biscuit (Exh. A-34), her obligation was only P504.00 (Exhs. I-1
and I-2). 2
Practically, all the checks issued and honored by the respondent
drawee bank were crossed checks. 3 Aside from the daily notice
given to the petitioner by the respondent drawee Bank, the latter
also furnished her with a monthly statement of her transactions,
attaching thereto all the cancelled checks she had issued and
which were debited against her current account. It was only after
the lapse of more two (2) years that petitioner found out about
the fraudulent manipulations of her bookkeeper.

All the eighty-two (82) checks with forged signatures of the

payees were brought to Ernest L. Boon, Chief Accountant of
respondent drawee Bank at the Buendia branch, who, without
authority therefor, accepted them all for deposit at the Buendia
branch to the credit and/or in the accounts of Alfredo Y. Romero
and Benito Lam. Ernest L. Boon was a very close friend of
Alfredo Y. Romero. Sixty-three (63) out of the eighty-two (82)
checks were deposited in Savings Account No. 00844-5 of
Alfredo Y. Romero at the respondent drawee Bank's Buendia
branch, and four (4) checks in his Savings Account No. 32-81-9
at its Ongpin branch. The rest of the checks were deposited in
Account No. 0443-4, under the name of Benito Lam at the
Elcao branch of the respondent drawee Bank.
About thirty (30) of the payees whose names were specifically
written on the checks testified that they did not receive nor even
see the subject checks and that the indorsements appearing at the
back of the checks were not theirs.
The team of auditors from the main office of the respondent
drawee Bank which conducted periodic inspection of the
branches' operations failed to discover, check or stop the
unauthorized acts of Ernest L. Boon. Under the rules of the
respondent drawee Bank, only a Branch Manager and no other
official of the respondent drawee bank, may accept a second
indorsement on a check for deposit. In the case at bar, all the
deposit slips of the eighty-two (82) checks in question were
initialed and/or approved for deposit by Ernest L. Boon. The
Branch Managers of the Ongpin and Elcao branches accepted
the deposits made in the Buendia branch and credited the
accounts of Alfredo Y. Romero and Benito Lam in their
respective branches.

On November 7, 1984, petitioner made a written demand on

respondent drawee Bank to credit her account with the money
value of the eighty-two (82) checks totalling P1,208.606.89 for
having been wrongfully charged against her account.
Respondent drawee Bank refused to grant petitioner's demand.
On January 23, 1985, petitioner filed the complaint with the
Regional Trial Court.
This is not a suit by the party whose signature was forged on a
check drawn against the drawee bank. The payees are not parties
to the case. Rather, it is the drawer, whose signature is genuine,
who instituted this action to recover from the drawee bank the
money value of eighty-two (82) checks paid out by the drawee
bank to holders of those checks where the indorsements of the
payees were forged. How and by whom the forgeries were
committed are not established on the record, but the respective
payees admitted that they did not receive those checks and
therefore never indorsed the same. The applicable law is the
Negotiable Instruments Law 4(heretofore referred to as the NIL).
Section 23 of the NIL provides:
When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative,
and no right to retain the instrument, or to give a discharge
therefor, or to enforce payment thereof against any party thereto,
can be acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded from
setting up the forgery or want of authority.
Under the aforecited provision, forgery is a real or absolute
defense by the party whose signature is forged. A party whose
signature to an instrument was forged was never a party and
never gave his consent to the contract which gave rise to the

instrument. Since his signature does not appear in the

instrument, he cannot be held liable thereon by anyone, not even
by a holder in due course. Thus, if a person's signature is forged
as a maker of a promissory note, he cannot be made to pay
because he never made the promise to pay. Or where a person's
signature as a drawer of a check is forged, the drawee bank
cannot charge the amount thereof against the drawer's account
because he never gave the bank the order to pay. And said
section does not refer only to the forged signature of the maker
of a promissory note and of the drawer of a check. It covers also
a forged indorsement, i.e., the forged signature of the payee or
indorsee of a note or check. Since under said provision a forged
signature is "wholly inoperative", no one can gain title to the
instrument through such forged indorsement. Such an
indorsement prevents any subsequent party from acquiring any
right as against any party whose name appears prior to the
forgery. Although rights may exist between and among parties
subsequent to the forged indorsement, not one of them can
acquire rights against parties prior to the forgery. Such forged
indorsement cuts off the rights of all subsequent parties as
against parties prior to the forgery. However, the law makes an
exception to these rules where a party is precluded from setting
up forgery as a defense.
As a matter of practical significance, problems arising from
forged indorsements of checks may generally be broken into two
types of cases: (1) where forgery was accomplished by a person
not associated with the drawer for example a mail robbery;
and (2) where the indorsement was forged by an agent of the
drawer. This difference in situations would determine the effect
of the drawer's negligence with respect to forged indorsements.
While there is no duty resting on the depositor to look for forged
indorsements on his cancelled checks in contrast to a duty

imposed upon him to look for forgeries of his own name, a

depositor is under a duty to set up an accounting system and a
business procedure as are reasonably calculated to prevent or
render difficult the forgery of indorsements, particularly by the
depositor's own employees. And if the drawer (depositor) learns
that a check drawn by him has been paid under a forged
indorsement, the drawer is under duty promptly to report such
fact to the drawee bank. 5 For his negligence or failure either to
discover or to report promptly the fact of such forgery to the
drawee, the drawer loses his right against the drawee who has
debited his account under a forged indorsement. 6 In other words,
he is precluded from using forgery as a basis for his claim for recrediting of his account.
In the case at bar, petitioner admitted that the checks were filled
up and completed by her trusted employee, Alicia Galang, and
were given to her for her signature. Her signing the checks made
the negotiable instrument complete. Prior to signing the checks,
there was no valid contract yet.
Every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument to the payee for the
purpose of giving effect thereto. 7 The first delivery of the
instrument, complete in form, to the payee who takes it as a
holder, is called issuance of the instrument. 8 Without the initial
delivery of the instrument from the drawer of the check to the
payee, there can be no valid and binding contract and no liability
on the instrument.
Petitioner completed the checks by signing them as drawer and
thereafter authorized her employee Alicia Galang to deliver the
eighty-two (82) checks to their respective payees. Instead of
issuing the checks to the payees as named in the checks, Alicia

Galang delivered them to the Chief Accountant of the Buendia

branch of the respondent drawee Bank, a certain Ernest L. Boon.
It was established that the signatures of the payees as first
indorsers were forged. The record fails to show the identity of
the party who made the forged signatures. The checks were then
indorsed for the second time with the names of Alfredo Y.
Romero and Benito Lam, and were deposited in the latter's
accounts as earlier noted. The second indorsements were all
genuine signatures of the alleged holders. All the eighty-two (82)
checks bearing the forged indorsements of the payees and the
genuine second indorsements of Alfredo Y. Romero and Benito
Lam were accepted for deposit at the Buendia branch of
respondent drawee Bank to the credit of their respective savings
accounts in the Buendia, Ongpin and Elcao branches of the
same bank. The total amount of P1,208,606.89, represented by
eighty-two (82) checks, were credited and paid out by
respondent drawee Bank to Alfredo Y. Romero and Benito Lam,
and debited against petitioner's checking account No. 13-000381, Caloocan branch.
As a rule, a drawee bank who has paid a check on which an
indorsement has been forged cannot charge the drawer's account
for the amount of said check. An exception to this rule is where
the drawer is guilty of such negligence which causes the bank to
honor such a check or checks. If a check is stolen from the
payee, it is quite obvious that the drawer cannot possibly
discover the forged indorsement by mere examination of his
cancelled check. This accounts for the rule that although a
depositor owes a duty to his drawee bank to examine his
cancelled checks for forgery of his own signature, he has no
similar duty as to forged indorsements. A different situation
arises where the indorsement was forged by an employee or
agent of the drawer, or done with the active participation of the

latter. Most of the cases involving forgery by an agent or

employee deal with the payee's indorsement. The drawer and the
payee often time shave business relations of long standing. The
continued occurrence of business transactions of the same nature
provides the opportunity for the agent/employee to commit the
fraud after having developed familiarity with the signatures of
the parties. However, sooner or later, some leak will show on the
drawer's books. It will then be just a question of time until the
fraud is discovered. This is specially true when the agent
perpetrates a series of forgeries as in the case at bar.
The negligence of a depositor which will prevent recovery of an
unauthorized payment is based on failure of the depositor to act
as a prudent businessman would under the circumstances. In the
case at bar, the petitioner relied implicitly upon the honesty and
loyalty of her bookkeeper, and did not even verify the accuracy
of amounts of the checks she signed against the invoices
attached thereto. Furthermore, although she regularly received
her bank statements, she apparently did not carefully examine
the same nor the check stubs and the returned checks, and did
not compare them with the same invoices. Otherwise, she could
have easily discovered the discrepancies between the checks and
the documents serving as bases for the checks. With such
discovery, the subsequent forgeries would not have been
accomplished. It was not until two years after the bookkeeper
commenced her fraudulent scheme that petitioner discovered
that eighty-two (82) checks were wrongfully charged to her
account, at which she notified the respondent drawee bank.
It is highly improbable that in a period of two years, not one of
Petitioner's suppliers complained of non-payment. Assuming
that even one single complaint had been made, petitioner would
have been duty-bound, as far as the respondent drawee Bank

was concerned, to make an adequate investigation on the matter.

Had this been done, the discrepancies would have been
discovered, sooner or later. Petitioner's failure to make such
adequate inquiry constituted negligence which resulted in the
bank's honoring of the subsequent checks with forged
indorsements. On the other hand, since the record mentions
nothing about such a complaint, the possibility exists that the
checks in question covered inexistent sales. But even in such a
case, considering the length of a period of two (2) years, it is
hard to believe that petitioner did not know or realize that she
was paying more than she should for the supplies she was
actually getting. A depositor may not sit idly by, after knowledge
has come to her that her funds seem to be disappearing or that
there may be a leak in her business, and refrain from taking the
steps that a careful and prudent businessman would take in such
circumstances and if taken, would result in stopping the
continuance of the fraudulent scheme. If she fails to take steps,
the facts may establish her negligence, and in that event, she
would be estopped from recovering from the bank. 9
One thing is clear from the records that the petitioner failed to
examine her records with reasonable diligence whether before
she signed the checks or after receiving her bank statements.
Had the petitioner examined her records more carefully,
particularly the invoice receipts, cancelled checks, check book
stubs, and had she compared the sums written as amounts
payable in the eighty-two (82) checks with the pertinent sales
invoices, she would have easily discovered that in some checks,
the amounts did not tally with those appearing in the sales
invoices. Had she noticed these discrepancies, she should not
have signed those checks, and should have conducted an inquiry
as to the reason for the irregular entries. Likewise had petitioner
been more vigilant in going over her current account by taking

careful note of the daily reports made by respondent drawee

Bank in her issued checks, or at least made random scrutiny of
cancelled checks returned by respondent drawee Bank at the
close of each month, she could have easily discovered the fraud
being perpetrated by Alicia Galang, and could have reported the
matter to the respondent drawee Bank. The respondent drawee
Bank then could have taken immediate steps to prevent further
commission of such fraud. Thus, petitioner's negligence was the
proximate cause of her loss. And since it was her negligence
which caused the respondent drawee Bank to honor the forged
checks or prevented it from recovering the amount it had already
paid on the checks, petitioner cannot now complain should the
bank refuse to recredit her account with the amount of such
checks. 10 Under Section 23 of the NIL, she is now precluded
from using the forgery to prevent the bank's debiting of her
account.
The doctrine in the case of Great Eastern Life Insurance Co. vs.
Hongkong & Shanghai Bank 11 is not applicable to the case at
bar because in said case, the check was fraudulently taken and
the signature of the payee was forged not by an agent or
employee of the drawer. The drawer was not found to be
negligent in the handling of its business affairs and the theft of
the check by a total stranger was not attributable to negligence
of the drawer; neither was the forging of the payee's indorsement
due to the drawer's negligence. Since the drawer was not
negligent, the drawee was duty-bound to restore to the drawer's
account the amount theretofore paid under the check with a
forged payee's indorsement because the drawee did not pay as
ordered by the drawer.
Petitioner argues that respondent drawee Bank should not have
honored the checks because they were crossed checks. Issuing a

crossed check imposes no legal obligation on the drawee not to

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

acquires the right to receive payment and bring any action

thereon as any indorser, but he can no longer transfer his rights
as such indorsee where the form of the indorsement does not
authorize him to do so. 12
Although the holder of a check cannot compel a drawee bank to
honor it because there is no privity between them, as far as the
drawer-depositor is concerned, such bank may not legally refuse
to honor a negotiable bill of exchange or a check drawn against
it with more than one indorsement if there is nothing irregular
with the bill or check and the drawer has sufficient funds. The
drawee cannot be compelled to accept or pay the check by the
drawer or any holder because as a drawee, he incurs no liability
on the check unless he accepts it. But the drawee will make itself
liable to a suit for damages at the instance of the drawer for
wrongful dishonor of the bill or check.
Thus, it is clear that under the NIL, petitioner is precluded from
raising the defense of forgery by reason of her gross negligence.
But under Section 196 of the NIL, any case not provided for in
the Act shall be governed by the provisions of existing
legislation. Under the laws of quasi-delict, she cannot point to
the negligence of the respondent drawee Bank in the selection
and supervision of its employees as being the cause of the loss
because negligence is the proximate cause thereof and under
Article 2179 of the Civil Code, she may not be awarded
damages. However, under Article 1170 of the same Code the
respondent drawee Bank may be held liable for damages. The
article provides
Those who in the performance of their obligations are guilty of
fraud, negligence or delay, and those who in any manner
contravene the tenor thereof, are liable for damages.

There is no question that there is a contractual relation between

petitioner as depositor (obligee) and the respondent drawee bank
as the obligor. In the performance of its obligation, the drawee
bank is bound by its internal banking rules and regulations
which form part of any contract it enters into with any of its
depositors. When it violated its internal rules that second
endorsements are not to be accepted without the approval of its
branch managers and it did accept the same upon the mere
approval of Boon, a chief accountant, it contravened the tenor of
its obligation at the very least, if it were not actually guilty of
fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not
discover the irregularity with respect to the acceptance of checks
with second indorsement for deposit even without the approval
of the branch manager despite periodic inspection conducted by
a team of auditors from the main office constitutes negligence on
the part of the bank in carrying out its obligations to its
depositors. Article 1173 provides
The fault or negligence of the obligor consists in the omission of
that diligence which is required by the nature of the obligation
and corresponds with the circumstance of the persons, of the
time and of the place. . . .
We hold that banking business is so impressed with public
interest where the trust and confidence of the public in general is
of paramount importance such that the appropriate standard of
diligence must be a high degree of diligence, if not the utmost
diligence. Surely, respondent drawee Bank cannot claim it
exercised such a degree of diligence that is required of it. There
is no way We can allow it now to escape liability for such
negligence. Its liability as obligor is not merely vicarious but

primary wherein the defense of exercise of due diligence in the

selection and supervision of its employees is of no moment.

respondent drawee bank to herein petitioner.

SO ORDERED.

Premises considered, respondent drawee Bank is adjudged liable

to share the loss with the petitioner on a fifty-fifty ratio in
accordance with Article 172 which provides:
Responsibility arising from negligence in the performance of
every kind of obligation is also demandable, but such liability
may be regulated by the courts according to the circumstances.
With the foregoing provisions of the Civil Code being relied
upon, it is being made clear that the decision to hold the drawee
bank liable is based on law and substantial justice and not on
mere equity. And although the case was brought before the court
not on breach of contractual obligations, the courts are not
precluded from applying to the circumstances of the case the
laws pertinent thereto. Thus, the fact that petitioner's negligence
was found to be the proximate cause of her loss does not
preclude her from recovering damages. The reason why the
decision dealt on a discussion on proximate cause is due to the
error pointed out by petitioner as allegedly committed by the
respondent court. And in breaches of contract under Article
1173, due diligence on the part of the defendant is not a defense.
PREMISES CONSIDERED, the case is hereby ordered
REMANDED to the trial court for the reception of evidence to
determine the exact amount of loss suffered by the petitioner,
considering that she partly benefited from the issuance of the
questioned checks since the obligation for which she issued
them were apparently extinguished, such that only the excess
amount over and above the total of these actual obligations must
be considered as loss of which one half must be paid by

Narvasa, C.J., Feliciano, Regalado and Nocon, JJ., concur.

ISSUE: Whether or not the bank should refund the money lost
by reason of the forged indorsements.

Natividad Gempesaw vs Court of Appeals

218 SCRA 682 Mercantile Law Negotiable Instruments Law
Liabilities of Parties Forgery Forged Indorsements
Natividad Gempesaw is a businesswoman who entrusted to her
bookkeeper, Alicia Galang, the preparation of checks about to be
issued in the course of her business transactions. From 1984 to
1986, 82 checks amounting to P1,208,606.89, were prepared and
were supposed to be delivered to Gempesaws clients as payees
named thereon. However, through Galang, these checks were
never delivered to the supposed payees. Instead, the checks were
fraudulently indorsed to Alfredo Romero and Benito Lam.

HELD: No. Gempesaw cannot set up the defense of forgery by

reason of her negligence. As a rule, a drawee bank (in this case
the Philippine Bank of Communications) who has paid a check
on which an indorsement has been forged cannot charge the
drawers (Gempesaws) account for the amount of said check.
An exception to this rule is where the drawer is guilty of such
negligence which causes the bank to honor such a check or
checks. If a check is stolen from the payee, it is quite obvious
that the drawer cannot possibly discover the forged indorsement
by mere examination of his cancelled check. A different
situation arises where the indorsement was forged by an
employee or agent of the drawer, or done with the active
participation of the latter.
The negligence of a depositor which will prevent recovery of an
unauthorized payment is based on failure of the depositor to act
as a prudent businessman would under the circumstances. In the
case at bar, Gempesaw relied implicitly upon the honesty and
loyalty of Galang, and did not even verify the accuracy of
amounts of the checks she signed against the invoices attached
thereto. Furthermore, although she regularly received her bank
statements, she apparently did not carefully examine the same
nor the check stubs and the returned checks, and did not
compare them with the same invoices. Otherwise, she could
have easily discovered the discrepancies between the checks and

the documents serving as bases for the checks. With such

discovery, the subsequent forgeries would not have been
accomplished. It was not until two years after Galang
commenced her fraudulent scheme that Gempesaw discovered
that eighty-two (82) checks were wrongfully charged to her
account, at which she notified the Philippine Bank of
Communications.

G.R. No. 89802 May 7, 1992

ASSOCIATED BANK and CONRADO CRUZ, petitioners,
vs.
HON. COURT OF APPEALS, and MERLE V. REYES,
doing business under the name and style "Melissa's RTW,"
respondents.
Soluta, Leonidas, Marifosque, Javier, Liboon & aguila Law
Offices for petitioners.
Roberto B. Lugue for private respondent.
CRUZ, J.:
The sole issue raised in this case is whether or not the private
respondent has a cause of action against the petitioners for their
encashment and payment to another person of certain crossed
checks issued in her favor.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

The private respondent is engaged in the business of ready-towear garments under the firm name "Melissa's RTW." She deals
with, among other customers, Robinson's Department Store,
Payless Department Store, Rempson Department Store, and the
Corona Bazaar.
These companies issued in payment of their respective accounts
crossed checks payable to Melissa's RTW in the amounts and on
the dates indicated below:

PAYOR BANK AMOUNT DATE

Payless Solid Bank P3,960.00 January 19, 1982
Robinson's FEBTC 4,140.00 December 18, 1981
Robinson's FEBTC 1,650.00 December 24, 1981
Robinson's FEBTC 1,980.00 January 12, 1982
Rempson TRB 1,575.00 January 9, 1982
Corona RCBC 2,500.00 December 22, 1981
When she went to these companies to collect on what she
thought were still unpaid accounts, she was informed of the
issuance of the above-listed crossed checks. Further inquiry
revealed that the said checks had been deposited with the
Associated Bank (hereinafter, "the Bank") and subsequently paid
by it to one Rafael Sayson, one of its "trusted depositors," in the
words of its branch manager and co-petitioner, Conrado Cruz,
Sayson had not been authorized by the private respondent to
deposit and encash the said checks.
The private respondent sued the petitioners in the Regional Trial
Court of Quezon City for recovery of the total value of the
checks plus damages. After trial, judgment was rendered
requiring them to pay the private respondent the total value of
the subject checks in the amount of P15,805.00 plus 12%
interest, P50,000.00 actual damages, P25,000.00 exemplary
damages, P5,000.00 attorney's fees, and the costs of the suit. 1
The petitioners appealed to the respondent court, reiterating their
argument that the private respondent had no cause of action
against them and should have proceeded instead against the
companies that issued the checks. In disposing of this
contention, the Court of Appeals 2 said:

The cause of action of the appellee in the case at bar arose from
the illegal, anomalous and irregular acts of the appellants in
violating common banking practices to the damage and
prejudice of the appellees, in allowing to be deposited and
encashed as well as paying to improper parties without the
knowledge, consent, authority or endorsement of the appellee
which totalled P15,805.00, the six (6) checks in dispute which
were "crossed checks" or "for payee's account only," the appellee
being the payee.
The three (3) elements of a cause of action are present in the
case at bar, namely: (1) a right in favor of the plaintiff by
whatever means and under whatever law it arises or is created;
(2) an obligation on the part of the named defendant to respect or
not to violate such right; and (3) an act or omission on the part of
such defendant violative of the right of the plaintiff or
constituting a breach thereof. (Republic Planters Bank vs.
Intermediate Appellate Court, 131 SCRA 631).
And such cause of action has been proved by evidence of great
weight. The contents of the said checks issued by the customers
of the appellee had not been questioned. There is no dispute that
the same are crossed checks or for payee's account only, which is
Melissa's RTW. The appellee had clearly shown that she had
never authorized anyone to deposit the said checks nor to encash
the same; that the appellants had allowed all said checks to be
deposited, cleared and paid to one Rafael Sayson in violation of
the instructions in the said crossed checks that the same were for
payee's account only; and that the appellee maintained a savings
account with the Prudential Bank, Cubao Branch, Quezon City
which never cleared the said checks and the appellee had been
damaged by such encashment of the same.

We affirm.

indicated, to wit, Melissa's RTW.

Under accepted banking practice, crossing a check is done by

writing two parallel lines diagonally on the left top portion of the
checks. The crossing is special where the name of a bank or a
business institution is written between the two parallel lines,
which means that the drawee should pay only with the
intervention of that company. 3 The crossing is general where the
words written between the two parallel lines are "and Co." or
"for payee's account only," as in the case at bar. This means that
the drawee bank should not encash the check but merely accept
it for deposit. 4

The petitioners argue that the cause of action for violation of the
common instruction found on the face of the checks exclusively
belongs to the issuers thereof and not to the payee. Moreover,
having acted in good faith as they merely facilitated the
encashment of the checks, they cannot be made liable to the
private respondent.

In State Investment House vs. IAC, 5 this Court declared that "the
effects of crossing a check are: (1) that the check may not be
encashed but only deposited in the bank; (2) that the check may
be negotiated only once to one who has an account with a
bank; and (3) that the act of crossing the check serves as a
warning to the holder that the check has been issued for a
definite purpose so that he must inquire if he has received the
check pursuant to that purpose."
The effects therefore of crossing a check relate to the mode of its
presentment for payment. Under Sec. 72 of the Negotiable
Instruments Law, presentment for payment, to be sufficient,
must be made by the holder or by some person authorized to
receive payment on his behalf. Who the holder or authorized
person is depends on the instruction stated on the face of the
check.
The six checks in the case at bar had been crossed and issued
"for payee's account only." This could only signify that the
drawers had intended the same for deposit only by the person

The subject checks were accepted for deposit by the Bank for
the account of Rafael Sayson although they were crossed checks
and the payee was not Sayson but Melissa's RTW. The Bank
stamped thereon its guarantee that "all prior endorsements and/or
lack of endorsements (were) guaranteed." By such deliberate and
positive act, the Bank had for all legal intents and purposes
treated the said checks as negotiable instruments and,
accordingly, assumed the warranty of the endorser.
The weight of authority is to the effect that "the possession of
check on a forged or unauthorized indorsement is wrongful, and
when the money is collected on the check, the bank can be held
'for moneys had and received." 6The proceeds are held for the
rightful owner of the payment and may be recovered by him.
The position of the bank taking the check on the forged or
unauthorized indorsement is the same as if it had taken the check
and collected without indorsement at all. The act of the bank
amounts to conversion of the check. 7
It is not disputed that the proceeds of the subject checks
belonged to the private respondent. As she had not at any time
authorized Rafael Sayson to endorse or encash them, there was
conversion of the funds by the Bank.

When the Bank paid the checks so endorsed notwithstanding

that title had not passed to the endorser, it did so at its peril and
became liable to the payee for the value of the checks. This
liability attached whether or not the Bank was aware of the
unauthorized endorsement. 8
The petitioners were negligent when they permitted the
encashment of the checks by Sayson. The Bank should have first
verified his right to endorse the crossed checks, of which he was
not the payee, and to deposit the proceeds of the checks to his
own account. The Bank was by reason of the nature of the
checks put upon notice that they were issued for deposit only to
the private respondent's account. Its failure to inquire into
Sayson's authority was a breach of a duty it owed to the private
respondent.
As the Court stressed in Banco de Oro Savings and Mortgage
Bank vs. Equitable Banking Corp., 9 "the law imposes a duty of
diligence on the collecting bank to scrutinize checks deposited
with it, for the purpose of determining their genuineness and
regularity. The collecting bank, being primarily engaged in
banking, holds itself out to the public as the expert on this field,
and the law thus holds it to a high standard of conduct."
The petitioners insist that the private respondent has no cause of
action against them because they have no privity of contract with
her. They also argue that it was Eddie Reyes, the private
respondent's own husband, who endorsed the checks.
Assuming that Eddie Reyes did endorse the crossed checks, we
hold that the Bank would still be liable to the private respondent
because he was not authorized to make the endorsements. And
even if the endorsements were forged, as alleged, the Bank

would still be liable to the private respondent for not verifying

the endorser's authority. There is no substantial difference
between an actual forging of a name to a check as an
endorsement by a person not authorized to make the signature
and the affixing of a name to a check as an endorsement by a
person not authorized to endorse it. 10
The Bank does not deny collecting the money on the
endorsement. It was its responsibility to inquire as to the
authority of Rafael Sayson to deposit crossed checks payable to
Melissa's RTW upon a prior endorsement by Eddie Reyes. The
failure of the Bank to make this inquiry was a breach of duty
that made it liable to the private respondent for the amount of the
checks.
There being no evidence that the crossed checks were actually
received by the private respondent, she would have a right of
action against the drawer companies, which in turn could go
against their respective drawee banks, which in turn could sue
the herein petitioner as collecting bank. In a similar situation, it
was held that, to simplify proceedings, the payee of the illegally
encashed checks should be allowed to recover directly from the
bank responsible for such encashment regardless of whether or
not the checks were actually delivered to the payee. 11 We
approve such direct action in the case at bar.
It is worth repeating that before presenting the checks for
clearing and for payment, the Bank had stamped on the back
thereof the words: "All prior endorsements and/or lack of
endorsements guaranteed," and thus made the assurance that it
had ascertained the genuineness of all prior endorsements.
We find that the respondent court committed no reversible error

in holding that the private respondent had a valid cause of action

against the petitioners and that the latter are indeed liable to her
for their unauthorized encashment of the subject checks. We also
agree with the reduction of the award of the exemplary damages
for lack of sufficient evidence to support them.
WHEREFORE, the petition is DENIED, with costs against the
petitioner. It is so ordered.
Narvasa, C.J., Grio-Aquino, Medialdea and Bellosillo, JJ.,
concur.

account with Associated Bank.

Reyes demanded refund from Associated Bank as she averred
that those checks are crossed checks and should have only be
deposited with Reyes account which is with Prudential Bank.
Associated Bank argued that the checks were indorsed to Sayson
by Reyess husband, Eddie Reyes.
ISSUE: Whether or not Associated Bank should refund the 6
checks.
HELD: Yes. The six checks in the case at bar had been crossed
and issued for payees account only. This could only signify
that the drawers (Reyes clients) had intended the same for
deposit only by the person indicated, to wit, Merle Reyes.
The court also elucidated the effects of crossing a check namely:

Associated Bank vs Court of Appeals (1992)

208 SCRA 465 Mercantile Law Negotiable Instruments Law
Crossed Checks Effects of Crossing Checks
Merle Reyes is a businesswoman who was issued 6 checks by
her customers as payments for her services. The 6 checks are
crossed checks which on their faces are written: Payees
account only. The checks never reached the hands of Reyes.
Instead, a certain Rafael Sayson got hold of the checks and had
them deposited, and subsequently encashed, from his deposit

1. that the check may not be encashed but only deposited in the
bank;
2. that the check may be negotiated only once to one who has
an account with a bank; and
3. that the act of crossing the check serves as a warning to the
holder that the check has been issued for a definite purpose so
that he must inquire if he has received the check pursuant to that
purpose.

On the other hand, even if indeed Eddie Reyes indorsed the

checks, Associated Bank is still liable because in the first place,
the husband is not authorized to make indrosements. And even if
the endorsements were forged, as alleged, Associated Bank
would still be liable to Reyes for not verifying the endorsers
authority. There is no substantial difference between an actual
forging of a name to a check as an endorsement by a person not
authorized to make the signature and the affixing of a name to a
check as an endorsement by a person not authorized to endorse
it.

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-56169 June 26, 1992
TRAVEL-ON, INC., petitioner,
vs.
COURT OF APPEALS and ARTURO S. MIRANDA,
respondents.
RESOLUTION
FELICIANO, J.:
Petitioner Travel-On. Inc. ("Travel-On") is a travel agency
selling airline tickets on commission basis for and in behalf of
different airline companies. Private respondent Arturo S.
Miranda had a revolving credit line with petitioner. He procured
tickets from petitioner on behalf of airline passengers and
derived commissions therefrom.

Republic of the Philippines

On 14 June 1972, Travel-On filed suit before the Court of First

Instance ("CFI") of Manila to collect on six (6) checks issued by
private respondent with a total face amount of P115,000.00. The
complaint, with a prayer for the issuance of a writ of preliminary
attachment and attorney's fees, averred that from 5 August 1969
to 16 January 1970, petitioner sold and delivered various airline
tickets to respondent at a total price of P278,201.57; that to settle
said account, private respondent paid various amounts in cash
and in kind, and thereafter issued six (6) postdated checks
amounting to P115,000.00 which were all dishonored by the

drawee banks. Travel-On further alleged that in March 1972,

private respondent made another payment of P10,000.00
reducing his indebtedness to P105,000.00. The writ of
attachment was granted by the court a quo.

advance Hongkong money to the passenger. The passenger then

paid Travel-On upon his return to Manila and which payment
would be credited by Travel-On to respondent's running account
with it.

In his answer, private respondent admitted having had

transactions with Travel-On during the period stipulated in the
complaint. Private respondent, however, claimed that he had
already fully paid and even overpaid his obligations and that
refunds were in fact due to him. He argued that he had issued the
postdated checks for purposes of accommodation, as he had in
the past accorded similar favors to petitioner. During the
proceedings, private respondent contested several tickets alleged
to have been erroneously debited to his account. He claimed
reimbursement of his alleged over payments, plus litigation
expenses, and exemplary and moral damages by reason of the
allegedly improper attachment of his properties.

In its decision dated 31 January 1975, the court a quo ordered

Travel-On to pay private respondent the amount of P8,894.91
representing net overpayments by private respondent, moral
damages of P10,000.00 for the wrongful issuance of the writ of
attachment and for the filing of this case, P5,000.00 for
attorney's fees and the costs of the suit.

In support of his theory that the checks were issued for

accommodation, private respondent testified that he bad issued
the checks in the name of Travel-On in order that its General
Manager, Elita Montilla, could show to Travel-On's Board of
Directors that the accounts receivable of the company were still
good. He further stated that Elita Montilla tried to encash the
same, but that these were dishonored and were subsequently
returned to him after the accommodation purpose had been
attained.
Travel-On's witness, Elita Montilla, on the other hand explained
that the "accommodation" extended to Travel-On by private
respondent related to situations where one or more of its
passengers needed money in Hongkong, and upon request of
Travel-On respondent would contact his friends in Hongkong to

The trial court ruled that private respondent's indebtedness to

petitioner was not satisfactorily established and that the
postdated checks were issued not for the purpose of encashment
to pay his indebtedness but to accommodate the General
Manager of Travel-On to enable her to show to the Board of
Directors that Travel-On was financially stable.
Petitioner filed a motion for reconsideration that was, however,
denied by the trial court, which in fact then increased the award
of moral damages to P50,000.00.
On appeal, the Court of Appeals affirmed the decision of the trial
court, but reduced the award of moral damages to P20,000.00,
with interest at the legal rate from the date of the filing of the
Answer on 28 August 1972.
Petitioner moved for reconsideration of the Court of Appeal's'
decision, without success.
In the instant Petition for Review, it is urged that the postdated
checks are per se evidence of liability on the part of private

respondent. Petitioner further argues that even assuming that the

checks were for accommodation, private respondent is still liable
thereunder considering that petitioner is a holder for value.
Both the trial and appellate courts had rejected the checks as
evidence of indebtedness on the ground that the various
statements of account prepared by petitioner did not show that
Private respondent had an outstanding balance of P115,000.00
which is the total amount of the checks he issued. It was pointed
out that while the various exhibits of petitioner showed various
accountabilities of private respondent, they did not satisfactorily
establish the amount of the outstanding indebtedness of private
respondent. The appellate court made much of the fact that the
figures representing private respondent's unpaid accounts found
in the "Schedule of Outstanding Account" dated 31 January 1970
did not tally with the figures found in the statement which
showed private respondent's transactions with petitioner for the
years 1969 and 1970; that there was no satisfactory explanation
as to why the total outstanding amount of P278,432.74 was still
used as basis in the accounting of 7 April 1972 considering that
according to the table of transactions for the year 1969 and 1970,
the total unpaid account of private respondent amounted to
P239,794.57.
We have, however, examined the record and it shows that the 7
April 1972 Statement of Account had simply not been updated;
that if we use as basis the figure as of 31 January 1970 which is
P278,432.74 and from it deduct P38,638.17 which represents
some of the payments subsequently made by private respondent,
the figure P239,794.57 will be obtained.
Also, the fact alone that the various statements of account had
variances in figures, simply did not mean that private respondent

had no more financial obligations to petitioner. It must be

stressed that private respondent's account with petitioner was a
running or open one, which explains the varying figures in each
of the statements rendered as of a given date.
The appellate court erred in considering only the statements of
account in determining whether private respondent was indebted
to petitioner under the checks. By doing so, it failed to give due
importance to the most telling piece of evidence of private
respondent's indebtedness the checks themselves which he
had issued.
Contrary to the view held by the Court of Appeals, this Court
finds that the checks are the all important evidence of petitioner's
case; that these checks clearly established private respondent's
indebtedness to petitioner; that private respondent was liable
thereunder.
It is important to stress that a check which is regular on its face
is deemed prima facie to have been issued for a valuable
consideration and every person whose signature appears thereon
is deemed to have become a party thereto for value. 1 Thus, the
mere introduction of the instrument sued on in evidence prima
facie entitles the plaintiff to recovery. Further, the rule is quite
settled that a negotiable instrument is presumed to have been
given or indorsed for a sufficient consideration unless otherwise
contradicted and overcome by other competent evidence. 2
In the case at bar, the Court of Appeals, contrary to these
established rules, placed the burden of proving the existence of
valuable consideration upon petitioner. This cannot be
countenanced; it was up to private respondent to show that he
had indeed issued the checks without sufficient consideration.

The Court considers that Private respondent was unable to rebut

satisfactorily this legal presumption. It must also be noted that
those checks were issued immediately after a letter demanding
payment had been sent to private respondent by petitioner
Travel-On.
The fact that all the checks issued by private respondent to
petitioner were presented for payment by the latter would lead to
no other conclusion than that these checks were intended for
encashment. There is nothing in the checks themselves (or in any
other document for that matter) that states otherwise.

held by a payee or indorsee as a holder in due course, who gave

full value therefor to the accommodated party. The latter, in
other words, receives or realizes full value which the
accommodated party then must repay to the accommodating
party, unless of course the accommodating party intended to
make a donation to the accommodated party. But the
accommodating party is bound on the check to the holder in due
course who is necessarily a third party and is not the
accommodated party. Having issued or indorsed the check, the
accommodating party has warranted to the holder in due course
that he will pay the same according to its tenor. 3

We are unable to accept the Court of Appeals' conclusion that the

checks here involved were issued for "accommodation" and that
accordingly private respondent maker of those checks was not
liable thereon to petitioner payee of those checks.

In the case at bar, Travel-On was payee of all six (6) checks, it
presented these checks for payment at the drawee bank but the
checks bounced. Travel-On obviously was not an accommodated
party; it realized no value on the checks which bounced.

In the first place, while the Negotiable Instruments Law does

refer to accommodation transactions, no such transaction was
here shown. Section 29 of the Negotiable Instruments Law
provides as follows:

Travel-On was entitled to the benefit of the statutory

presumption that it was a holder in due course, 4 that the checks
were supported by valuable consideration. 5 Private respondent
maker of the checks did not successfully rebut these
presumptions. The only evidence aliunde that private respondent
offered was his own self-serving uncorroborated testimony. He
claimed that he had issued the checks to Travel-On as payee to
"accommodate" its General Manager who allegedly wished to
show those checks to the Board of Directors of Travel-On to
"prove" that Travel-On's account receivables were somehow
"still good." It will be seen that this claim was in fact a claim
that the checks were merely simulated, that private respondent
did not intend to bind himself thereon. Only evidence of the
clearest and most convincing kind will suffice for that purpose; 6
no such evidence was submitted by private respondent. The
latter's explanation was denied by Travel-On's General Manager;

Sec. 29. Liability of accommodation party. An

accommodation party is one who has signed the instrument as
maker, drawer, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to some other
person. Such a person is liable on the instrument to a holder for
value, notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation party.
In accommodation transactions recognized by the Negotiable
Instruments Law, an accommodating party lends his credit to the
accommodated party, by issuing or indorsing a check which is

that explanation, in any case, appears merely contrived and quite

hollow to us. Upon the other hand, the "accommodation" or
assistance extended to Travel-On's passengers abroad as testified
by petitioner's General Manager involved, not the
accommodation transactions recognized by the NIL, but rather
the circumvention of then existing foreign exchange regulations
by passengers booked by Travel-On, which incidentally involved
receipt of full consideration by private respondent.

of 23 January 1981 of the Court of Appeals, as well as the

Decision dated 31 January 1975 of the trial court, and to enter a
new decision requiring private respondent Arturo S. Miranda to
pay to petitioner Travel-On the amount of P105,000.00 with
legal interest thereon from 14 June 1972, plus ten percent (10%)
of the total amount due as attorney's fees. Costs against Private
respondent.
Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ., concur.

Thus, we believe and so hold that private respondent must be

held liable on the six (6) checks here involved. Those checks in
themselves constituted evidence of indebtedness of private
respondent, evidence not successfully overturned or rebutted by
private respondent.
Since the checks constitute the best evidence of private
respondent's liability to petitioner Travel-On, the amount of such
liability is the face amount of the checks, reduced only by the
P10,000.00 which Travel-On admitted in its complaint to have
been paid by private respondent sometime in March 1992.
The award of moral damages to Private respondent must be set
aside, for the reason that Petitioner's application for the writ of
attachment rested on sufficient basis and no bad faith was shown
on the part of Travel-On. If anyone was in bad faith, it was
private respondent who issued bad checks and then pretended to
have "accommodated" petitioner's General Manager by assisting
her in a supposed scheme to deceive petitioner's Board of
Directors and to misrepresent Travel-On's financial condition.
ACCORDINGLY, the Court Resolved to GRANT due course to
the Petition for Review on Certiorari and to REVERSE and SET
ASIDE the Decision dated 22 October 1980 and the Resolution

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. L-56169 June 26, 1992

TRAVEL-ON, INC., petitioner,
vs.
COURT OF APPEALS and ARTURO S. MIRANDA,
respondents.
RESOLUTION
FELICIANO, J.:
Petitioner Travel-On. Inc. ("Travel-On") is a travel agency
selling airline tickets on commission basis for and in behalf of
different airline companies. Private respondent Arturo S.

Miranda had a revolving credit line with petitioner. He procured

tickets from petitioner on behalf of airline passengers and
derived commissions therefrom.
On 14 June 1972, Travel-On filed suit before the Court of First
Instance ("CFI") of Manila to collect on six (6) checks issued by
private respondent with a total face amount of P115,000.00. The
complaint, with a prayer for the issuance of a writ of preliminary
attachment and attorney's fees, averred that from 5 August 1969
to 16 January 1970, petitioner sold and delivered various airline
tickets to respondent at a total price of P278,201.57; that to settle
said account, private respondent paid various amounts in cash
and in kind, and thereafter issued six (6) postdated checks
amounting to P115,000.00 which were all dishonored by the
drawee banks. Travel-On further alleged that in March 1972,
private respondent made another payment of P10,000.00
reducing his indebtedness to P105,000.00. The writ of
attachment was granted by the court a quo.
In his answer, private respondent admitted having had
transactions with Travel-On during the period stipulated in the
complaint. Private respondent, however, claimed that he had
already fully paid and even overpaid his obligations and that
refunds were in fact due to him. He argued that he had issued the
postdated checks for purposes of accommodation, as he had in
the past accorded similar favors to petitioner. During the
proceedings, private respondent contested several tickets alleged
to have been erroneously debited to his account. He claimed
reimbursement of his alleged over payments, plus litigation
expenses, and exemplary and moral damages by reason of the
allegedly improper attachment of his properties.
In support of his theory that the checks were issued for

accommodation, private respondent testified that he bad issued

the checks in the name of Travel-On in order that its General
Manager, Elita Montilla, could show to Travel-On's Board of
Directors that the accounts receivable of the company were still
good. He further stated that Elita Montilla tried to encash the
same, but that these were dishonored and were subsequently
returned to him after the accommodation purpose had been
attained.
Travel-On's witness, Elita Montilla, on the other hand explained
that the "accommodation" extended to Travel-On by private
respondent related to situations where one or more of its
passengers needed money in Hongkong, and upon request of
Travel-On respondent would contact his friends in Hongkong to
advance Hongkong money to the passenger. The passenger then
paid Travel-On upon his return to Manila and which payment
would be credited by Travel-On to respondent's running account
with it.
In its decision dated 31 January 1975, the court a quo ordered
Travel-On to pay private respondent the amount of P8,894.91
representing net overpayments by private respondent, moral
damages of P10,000.00 for the wrongful issuance of the writ of
attachment and for the filing of this case, P5,000.00 for
attorney's fees and the costs of the suit.
The trial court ruled that private respondent's indebtedness to
petitioner was not satisfactorily established and that the
postdated checks were issued not for the purpose of encashment
to pay his indebtedness but to accommodate the General
Manager of Travel-On to enable her to show to the Board of
Directors that Travel-On was financially stable.

Petitioner filed a motion for reconsideration that was, however,

denied by the trial court, which in fact then increased the award
of moral damages to P50,000.00.
On appeal, the Court of Appeals affirmed the decision of the trial
court, but reduced the award of moral damages to P20,000.00,
with interest at the legal rate from the date of the filing of the
Answer on 28 August 1972.
Petitioner moved for reconsideration of the Court of Appeal's'
decision, without success.
In the instant Petition for Review, it is urged that the postdated
checks are per se evidence of liability on the part of private
respondent. Petitioner further argues that even assuming that the
checks were for accommodation, private respondent is still liable
thereunder considering that petitioner is a holder for value.
Both the trial and appellate courts had rejected the checks as
evidence of indebtedness on the ground that the various
statements of account prepared by petitioner did not show that
Private respondent had an outstanding balance of P115,000.00
which is the total amount of the checks he issued. It was pointed
out that while the various exhibits of petitioner showed various
accountabilities of private respondent, they did not satisfactorily
establish the amount of the outstanding indebtedness of private
respondent. The appellate court made much of the fact that the
figures representing private respondent's unpaid accounts found
in the "Schedule of Outstanding Account" dated 31 January 1970
did not tally with the figures found in the statement which
showed private respondent's transactions with petitioner for the
years 1969 and 1970; that there was no satisfactory explanation
as to why the total outstanding amount of P278,432.74 was still

used as basis in the accounting of 7 April 1972 considering that

according to the table of transactions for the year 1969 and 1970,
the total unpaid account of private respondent amounted to
P239,794.57.
We have, however, examined the record and it shows that the 7
April 1972 Statement of Account had simply not been updated;
that if we use as basis the figure as of 31 January 1970 which is
P278,432.74 and from it deduct P38,638.17 which represents
some of the payments subsequently made by private respondent,
the figure P239,794.57 will be obtained.
Also, the fact alone that the various statements of account had
variances in figures, simply did not mean that private respondent
had no more financial obligations to petitioner. It must be
stressed that private respondent's account with petitioner was a
running or open one, which explains the varying figures in each
of the statements rendered as of a given date.
The appellate court erred in considering only the statements of
account in determining whether private respondent was indebted
to petitioner under the checks. By doing so, it failed to give due
importance to the most telling piece of evidence of private
respondent's indebtedness the checks themselves which he
had issued.
Contrary to the view held by the Court of Appeals, this Court
finds that the checks are the all important evidence of petitioner's
case; that these checks clearly established private respondent's
indebtedness to petitioner; that private respondent was liable
thereunder.
It is important to stress that a check which is regular on its face

is deemed prima facie to have been issued for a valuable

consideration and every person whose signature appears thereon
is deemed to have become a party thereto for value. 1 Thus, the
mere introduction of the instrument sued on in evidence prima
facie entitles the plaintiff to recovery. Further, the rule is quite
settled that a negotiable instrument is presumed to have been
given or indorsed for a sufficient consideration unless otherwise
contradicted and overcome by other competent evidence. 2
In the case at bar, the Court of Appeals, contrary to these
established rules, placed the burden of proving the existence of
valuable consideration upon petitioner. This cannot be
countenanced; it was up to private respondent to show that he
had indeed issued the checks without sufficient consideration.
The Court considers that Private respondent was unable to rebut
satisfactorily this legal presumption. It must also be noted that
those checks were issued immediately after a letter demanding
payment had been sent to private respondent by petitioner
Travel-On.

here shown. Section 29 of the Negotiable Instruments Law

provides as follows:
Sec. 29. Liability of accommodation party. An
accommodation party is one who has signed the instrument as
maker, drawer, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to some other
person. Such a person is liable on the instrument to a holder for
value, notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation party.

The fact that all the checks issued by private respondent to

petitioner were presented for payment by the latter would lead to
no other conclusion than that these checks were intended for
encashment. There is nothing in the checks themselves (or in any
other document for that matter) that states otherwise.

In accommodation transactions recognized by the Negotiable

Instruments Law, an accommodating party lends his credit to the
accommodated party, by issuing or indorsing a check which is
held by a payee or indorsee as a holder in due course, who gave
full value therefor to the accommodated party. The latter, in
other words, receives or realizes full value which the
accommodated party then must repay to the accommodating
party, unless of course the accommodating party intended to
make a donation to the accommodated party. But the
accommodating party is bound on the check to the holder in due
course who is necessarily a third party and is not the
accommodated party. Having issued or indorsed the check, the
accommodating party has warranted to the holder in due course
that he will pay the same according to its tenor. 3

We are unable to accept the Court of Appeals' conclusion that the

checks here involved were issued for "accommodation" and that
accordingly private respondent maker of those checks was not
liable thereon to petitioner payee of those checks.

In the case at bar, Travel-On was payee of all six (6) checks, it
presented these checks for payment at the drawee bank but the
checks bounced. Travel-On obviously was not an accommodated
party; it realized no value on the checks which bounced.

In the first place, while the Negotiable Instruments Law does

refer to accommodation transactions, no such transaction was

Travel-On was entitled to the benefit of the statutory

presumption that it was a holder in due course, 4 that the checks

were supported by valuable consideration. 5 Private respondent

maker of the checks did not successfully rebut these
presumptions. The only evidence aliunde that private respondent
offered was his own self-serving uncorroborated testimony. He
claimed that he had issued the checks to Travel-On as payee to
"accommodate" its General Manager who allegedly wished to
show those checks to the Board of Directors of Travel-On to
"prove" that Travel-On's account receivables were somehow
"still good." It will be seen that this claim was in fact a claim
that the checks were merely simulated, that private respondent
did not intend to bind himself thereon. Only evidence of the
clearest and most convincing kind will suffice for that purpose; 6
no such evidence was submitted by private respondent. The
latter's explanation was denied by Travel-On's General Manager;
that explanation, in any case, appears merely contrived and quite
hollow to us. Upon the other hand, the "accommodation" or
assistance extended to Travel-On's passengers abroad as testified
by petitioner's General Manager involved, not the
accommodation transactions recognized by the NIL, but rather
the circumvention of then existing foreign exchange regulations
by passengers booked by Travel-On, which incidentally involved
receipt of full consideration by private respondent.
Thus, we believe and so hold that private respondent must be
held liable on the six (6) checks here involved. Those checks in
themselves constituted evidence of indebtedness of private
respondent, evidence not successfully overturned or rebutted by
private respondent.
Since the checks constitute the best evidence of private
respondent's liability to petitioner Travel-On, the amount of such
liability is the face amount of the checks, reduced only by the
P10,000.00 which Travel-On admitted in its complaint to have

been paid by private respondent sometime in March 1992.

The award of moral damages to Private respondent must be set
aside, for the reason that Petitioner's application for the writ of
attachment rested on sufficient basis and no bad faith was shown
on the part of Travel-On. If anyone was in bad faith, it was
private respondent who issued bad checks and then pretended to
have "accommodated" petitioner's General Manager by assisting
her in a supposed scheme to deceive petitioner's Board of
Directors and to misrepresent Travel-On's financial condition.
ACCORDINGLY, the Court Resolved to GRANT due course to
the Petition for Review on Certiorari and to REVERSE and SET
ASIDE the Decision dated 22 October 1980 and the Resolution
of 23 January 1981 of the Court of Appeals, as well as the
Decision dated 31 January 1975 of the trial court, and to enter a
new decision requiring private respondent Arturo S. Miranda to
pay to petitioner Travel-On the amount of P105,000.00 with
legal interest thereon from 14 June 1972, plus ten percent (10%)
of the total amount due as attorney's fees. Costs against Private
respondent.
Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ., concur.

Travel-On, Inc. vs Court of Appeals

G.R. No. L-56169 June 26, 1992
-accommodation party
FACTS:
Petitioner Travel-On Inc. is a travel agency from which Arturo
Miranda procured tickets on behalf of airline passengers and
derived commissions therefrom. Miranda was sued by petitioner
to collect on the six postdated checks he issued which were all

dishonored by the drawee banks. Miranda, however, claimed

that he had already fully paid and even overpaid his obligations
and that refunds were in fact due to him. He argued that he had
issued the postdated checks not for the purpose of encashment to
pay his indebtedness but for purposes of accommodation, as he
had in the past accorded similar favors to petitioner. Petitioner
however urges that the postdated checks are per se evidence of
liability on the part of private respondent and further argues that
even assuming that the checks were for accommodation, private
respondent is still liable thereunder considering that petitioner is
a holder for value.
ISSUE:
Whether Miranda is liable on the postdated checks he issued
even assuming that said checks were issued for accommodation
only.

not an accommodated party; it realized no value on the checks

which bounced. Miranda must be held liable on the checks
involved as petitioner is entitled to the benefit of the statutory
presumption that it was a holder in due course and that the
checks were supported by valuable consideration.

**In accommodation transactions recognized by the Negotiable

Instruments Law, an accommodating party lends his credit to the
accommodated party, by issuing or indorsing a check which is
held by a payee or indorsee as a holder in due course, who gave
full value therefor to the accommodated party. In the case at
bar, Travel-On was the payee of all six (6) checks, it presented
these checks for payment at the drawee bank but the checks
bounced. Travel-On obviously was not an accommodated party;
it realized no value on the checks which bounced.

RULING:
There was no accommodation transaction in the case at bar. In
accommodation transactions recognized by the Negotiable
Instruments Law, an accommodating party lends his credit to the
accommodated party, by issuing or indorsing a check which is
held by a payee or indorsee as a holder in due course, who gave
full value therefor to the accommodated party. The latter, in
other words, receives or realizes full value which the
accommodated party then must repay to the accommodating
party. But the accommodating party is bound on the check to the
holder in due course who is necessarily a third party and is not
the accommodated party. In the case at bar, Travel-On was payee
of all six (6) checks, it presented these checks for payment at the
drawee bank but the checks bounced. Travel-On obviously was

Travel-On V. CA (1992)
G.R. No. L-56169 June 26, 1992

Lessons Applicable: Consideration and Accomodation Party

(Negotiable Instruments)
FACTS:
Arturo S. Miranda had a revolving credit line with Travel-On.
Inc. (Travel-On), a travel agency selling airline tickets on
commission basis for and in behalf of different airline companies
procured tickets from Travel-On on behalf of airline passengers
and derived commissions therefrom.
June 14 1972: Travel-On filed bef. the CFI to collect 6 checks
issued by Miranda totaling P115,000.00
August 5 1969 - January 16 1970: Travel-On sold and delivered
airline tickets to Miranda w/ total price of P278,201.57 paid in
cash and 6 checks = P115,000 - all dishonored by the drawee
banks
March 1972: paid P10,000.00 reducing his debts to P105,000
Miranda: checks were issued for to "accommodate" Travel-On's
General Manager to show the BOD of Travel-On that their
receivables were still good Travel-On's witness, Elita Montilla:
related to situations where its passengers needed money in
Hongkong, and upon request of Travel-On, Miranda would
contact his friends in Hongkong to advance Hongkong money to
the passenger

1
CA affirmed CFI: ordered Travel-On to pay Miranda P8,894.91
representing net overpayments by private respondent, moral
damages of P10,000.00 (later increased to P50,000 by CFI and
reduced by CA to P20,000) for the wrongful issuance of the writ
of attachment and for the filing of this case, P5,000.00 for
attorney's fees and the costs of the suit - decision was because
Travel-On did not show that Miranda had an outstanding balance
of P115,000.00
ISSUE: W/N Miranda is liable for the 6 dishonored checks
because there was no accomodation
HELD: YES. GRANT due course to the Petition for Review on
Certiorari and to REVERSE and SET ASIDE the Decision of
the CA and trial court failed to give due importance the checks
themselves as evidence of the debt check which is regular on its
face is deemed prima facie to have been issued for a valuable
consideration and every person whose signature appears thereon
is deemed to have become a party thereto for value.
negotiable instrument is presumed to have been given or
indorsed for a sufficient consideration unless otherwise
contradicted and overcome by other competent evidence
Those checks in themselves constituted evidence of
indebtedness of Miranda, evidence not successfully overturned
or rebutted by private respondent.

While the Negotiable Instruments Law does refer to

accommodation transactions, no such transaction was here
shown
Sec. 29. Liability of accommodation party. An
accommodation party is one who has signed the instrument as
maker, drawer, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to some other
person. Such a person is liable on the instrument to a holder for
value, notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation party.
Having issued or indorsed the check, the accommodating party
has warranted to the holder in due course that he will pay the
same according to its tenor.
Travel-On obviously was not an accommodated party; it realized
no value on the checks which bounced.

This is an appeal from a judgment of the Court of First Instance

of the city of Manila in favor of the plaintiff for the sum of
P3,000, with interest thereon at the rate of
1 per cent month from September 5, 1912, together with the
costs.
The action was brought by the plaintiff upon the contract of
indorsement alleged to have been made in his favor by the
defendant upon the following promissory note:
3,000. Due 5th of September, 1912.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

We jointly and severally agree to pay to the order of Don

Antonio G. Serrano on or before the 5th day of September, 1912,
the sum of three thousand pesos (P3,000) for value received for
commercial operations. Notice and protest renounced. If the sum
herein mentioned is not completely paid on the 5th day of
September, 1912, this instrument will draw interest at the rate of
1 per cent per month from the date when due until the date of
its complete payment. The makers hereof agree to pay the
additional sum of P500 as attorney's fees in case of failure to pay
the note.

G.R. No. L-8844 December 16, 1914

Manila, June 5, 1912.

FERNANDO MAULINI, ET AL., plaintiffs-appellees,

vs.
ANTONIO G. SERRANO, defendant-appellant.

(Sgd.) For Padern, Moreno & Co., by F. Moreno, member of the

firm. For Jose Padern, by F. Moreno. Angel Gimenez.

R. M. Calvo for appellant.

Jose Arnaiz for appellees.
MORELAND, J.:

The note was indorsed on the back as follows:

Pay note to the order of Don Fernando Maulini, value received.
Manila, June 5, 1912. (Sgd.) A.G. Serrano.

The first question for resolution on this appeal is whether or not,

under the Negotiable Instruments Law, an indorser of a
negotiable promissory note may, in an action brought by his
indorsee, show, by parol evidence, that the indorsement was
wholly without consideration and that, in making it, the indorser
acted as agent for the indorsee, as a mere vehicle of transfer of
the naked title from the maker to the indorsee, for which he
received no consideration whatever.
The learned trial court, although it received parol evidence on
the subject provisionally, held, on the final decision of the case,
that such evidence was not admissible to alter, very, modify or
contradict the terms of the contract of indorsement, and,
therefore, refused to consider the evidence thus provisionally
received, which tended to show that, by verbal agreement
between the indorser and the indorsee, the indorser, in making
the indorsement, was acting as agent for the indorsee, as a mere
vehicle for the transference of naked title, and that his
indorsement was wholly without consideration. The court also
held that it was immaterial whether there was a consideration for
the transfer or not, as the indorser, under the evidence offered,
was an accommodation indorser.
We are of the opinion that the trial court erred in both
findings.1awphil.net
In the first place, the consideration of a negotiable promissory
note, or of any of the contracts connected therewith, like that of
any other written instrument, is, between the immediate parties
to the contract, open to attack, under proper circumstances, for
the purpose of showing an absolute lack or failure of
consideration.

It seems, according to the parol evidence provisionally admitted

on the trial, that the defendant was a broker doing business in the
city of Manila and that part of his business consisted in looking
up and ascertaining persons who had money to loan as well as
those who desired to borrow money and, acting as a mediary,
negotiate a loan between the two. He had done much business
with the plaintiff and the borrower, as well as with many other
people in the city of Manila, prior to the matter which is the
basis of this action, and was well known to the parties interested.
According to his custom in transactions of this kind, and the
arrangement made in this particular case, the broker obtained
compensation for his services of the borrower, the lender paying
nothing therefor. Sometimes this was a certain per cent of the
sum loaned; at other times it was a part of the interest which the
borrower was to pay, the latter paying 1 per cent and the
broker per cent. According to the method usually followed in
these transactions, and the procedure in this particular case, the
broker delivered the money personally to the borrower, took note
in his own name and immediately transferred it by indorsement
to the lender. In the case at bar this was done at the special
request of the indorsee and simply as a favor to him, the latter
stating to the broker that he did not wish his name to appear on
the books of the borrowing company as a lender of money and
that he desired that the broker take the note in his own name,
immediately transferring to him title thereto by indorsement.
This was done, the note being at once transferred to the lender.
According to the evidence referred to, there never was a moment
when Serrano was the real owner of the note. It was always the
note of the indorsee, Maulini, he having furnished the money
which was the consideration for the note directly to the maker
and being the only person who had the slightest interest therein,
Serrano, the broker, acting solely as an agent, a vehicle by which

the naked title to the note passed fro the borrower to the lender.
The only payment that the broker received was for his services
in negotiating the loan. He was paid absolutely nothing for
becoming responsible as an indorser on the paper, nor did the
indorsee lose, pay or forego anything, or alter his position
thereby.
Nor was the defendant an accommodation indorser. The learned
trial court quoted that provision of the Negotiable Instruments
Law which defines an accommodation party as "one who has
signed the instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of lending
his name to some other person. Such a person is liable on the
instrument to a holder for value, notwithstanding such holder at
the time of taking the instrument knew the same to be only an
accommodation party." (Act No. 2031, sec. 29.)
We are of the opinion that the trial court misunderstood this
definition. The accommodation to which reference is made in
the section quoted is not one to the person who takes the note
that is, the payee or indorsee, but one to the maker or indorser of
the note. It is true that in the case at bar it was an
accommodation to the plaintiff, in a popular sense, to have the
defendant indorse the note; but it was not the accommodation
described in the law, but, rather, a mere favor to him and one
which in no way bound Serrano. In cases of accommodation
indorsement the indorser makes the indorsement for the
accommodation of the maker. Such an indorsement is generally
for the purpose of better securing the payment of the note that
is, he lend his name to the maker, not to the holder. Putting it in
another way: An accommodation note is one to which the
accommodation party has put his name, without consideration,
for the purpose of accommodating some other party who is to

use it and is expected to pay it. The credit given to the

accommodation part is sufficient consideration to bind the
accommodation maker. 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.
The prohibition in section 285 of the Code of Civil Procedure
does not apply to a case like the one before us. The purpose of
that prohibition is to prevent alternation, change, modification or
contradiction of the terms of a written instrument, admittedly
existing, by the use of parol evidence, except in the cases
specifically named in the section. The case at bar is not one
where the evidence offered varies, alters, modifies or contradicts
the terms of the contract of indorsement admittedly existing. The
evidence was not offered for that purpose. The purpose was to
show that no contract of indorsement ever existed; that the
minds of the parties never met on the terms of such contract; that
they never mutually agreed to enter into such a contract; and that
there never existed a consideration upon which such an
agreement could be founded. The evidence was not offered to
vary, alter, modify, or contradict the terms of an agreement
which it is admitted existed between the parties, but to deny that
there ever existed any agreement whatever; to wipe out all
apparent relations between the parties, and not to vary, alter or
contradict the terms of a relation admittedly existing; in other
words, the purpose of the parol evidence was to demonstrate, not
that the indorser did not intend to make the particular
indorsement which he did make; not that he did not intend to

make the indorsement in the terms made; but, rather, to deny the
reality of any indorsement; that a relation of any kind whatever
was created or existed between him and the indorsee by reason
of the writing on the back of the instrument; that no
consideration ever passed to sustain an indorsement of any kind
whatsoever.
The contention has some of the appearances of a case in which
an indorser seeks prove forgery. Where an indorser claims that
his name was forged, it is clear that parol evidence is admissible
to prove that fact, and, if he proves it, it is a complete defense,
the fact being that the indorser never made any such contract,
that no such relation ever existed between him and the indorsee,
and that there was no consideration whatever to sustain such a
contract. In the case before us we have a condition somewhat
similar. While the indorser does not claim that his name was
forged, he does claim that it was obtained from him in a manner
which, between the parties themselves, renders, the contract as
completely inoperative as if it had been forged.
Parol
evidence
named.1awphil.net

was

admissible

for

the

purpose

There is no contradiction of the evidence offered by the defense

and received provisionally by the court. Accepting it as true the
judgment must be reversed.
The judgment appealed from is reversed and the complaint
dismissed on the merits; no special finding as to costs.
Arellano, C.J., Johnson and Trent, JJ., concur.
Separate Opinions

TORRES, J., concurring:

Act No. 2031, known as the Negotiable Instruments Law, which
governs the present case, establishes various kinds of
indorsements by means of which the liability of the indorser is in
some manner limited, distinguishing it from that of the regular
or general indorser, and among those kinds is that of the
qualified indorsement which, pursuant to section 38 of the same
Act, constitutes the indorser a mere assignor of the title to the
instrument, and may be made by adding to the indorser's
signature the words "without recourse" or any words of similar
import.
If the defendant, Antonio G. Serrano, intervened, as he alleged
and tried to prove that he did at the trial, only as a broker or
agent between the lender and plaintiff, Maulini, and the makers
of the promissory note, Padern, Moreno & Co. and Angel
Gimenez, in order to afford an opportunity to the former to
invest the amount of the note in such manner that it might bring
him interest, the defendant could have qualified the indorsement
in question by adding to his signature the words "without
recourse" or any others such as would have made known in what
capacity he intervened in that transaction. As the defendant did
not do so ad as he signed the indorsement in favor of the plaintiff
Maulini for value received from the latter, his liability, according
to section 66 of the Act aforecited, is that of a regular or general
indorser, who, this same section provides, engages that if the
instrument be dishonored, and the necessary 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. And the evidence which the defendant presented, tending
to show what were the conditions to which the defendant
presented, tending to show what were the conditions to which he

obligated himself and in what capacity he intervened in making

that indorsement and that this latter was absolutely without
consideration, should not have been admitted so that he might
elude the aforesaid obligation, or, if admitted, should not be
taken into account, because as a regular indorser he warranted,
pursuant to the said section 66, that the instrument was genuine
and in all respects what it purported to be, that he had a good
title to it, and that it was at the time of his indorsement valid and
subsisting. He cannot, therefore, by means of any evidence, and
much less of such as consists of his own testimony, and as such
interested party, alter, modify, contradict or annul, as he virtually
claimed and claims to be entitled to do, what in writing and with
a full and perfect knowledge of the meaning and import of the
words contained in the indorsement, he set forth therein over his
signature.
Section 63 of the Act above cited says that a person placing his
signature upon an instrument otherwise than as maker, drawer,
or acceptor is deemed to be an indorser, unless he clearly
indicates by appropriate words his contention to be bound
indicates by appropriate words his intention to be bound in some
other capacity. This provision of the law clearly indicates that in
every negotiable instrument it is absolutely necessary to specify
the capacity in which the person intervenes who is mentioned
therein or takes part in its negotiation, because only by so doing
can it be determined what liabilities arise from that intervention
and from whom, how and when they must be exacted. And if, in
the vent of a failure to express the capacity in which the person
who signed the negotiable instrument intended to be bound, he
should be deemed to be an indorser, when the very words of the
instrument expressly and conclusively show that such he is, as
occurs in the present case, and when the indorsement contains
no restriction, modification, condition or qualification whatever,

there cannot be attributed to him, without violating the

provisions of the said Act, any other intention than that of being
bound in the capacity in which he appears in the instrument
itself, nor can evidence be admitted or, if already admitted, taken
into consideration, for the purpose of proving such other
intention, for the simple reason that if the law has already fixed
ad determined the capacity in which it must be considered that
the person who signed the negotiable instrument intervened and
the intention of his being bound in a definite capacity, for no
other purpose, undoubtedly, than that there shall be no evidence
given in the matter, when the capacity appears in the instrument
itself and the intention is determined by the very same capacity,
as occurs in this case, the admission of evidence in reference
thereto is entirely unnecessary, useless, and contrary to the
purposes of the law, which is clear and precise in its provisions
and admits of no subterfuges or evasions for escaping
obligations contracted upon the basis of credit, with evident and
sure detriment to those who intervened or took part in the
negotiation of the instrument.
However, it is held in the majority opinion, for the purpose of
sustaining the premises that the proofs presented by the
defendant could have been admitted without violating the
provisions of section 285 of the Code of Civil Procedure, that
the evidence was not offered to vary, alter, modify, or contradict
the terms of an agreement which it is admitted existed between
the parties, but to deny that there ever existed any agreement
whatever; to wipe out all apparent relations between the parties,
and not to vary, alter or contradict the terms of a relation
admittedly existing; in other words, the purpose of the parol
evidence was to demonstrate, not that the indorser did not intend
to make the particular indorsement in the terms made, but rather
to deny the reality of any indorsement; to deny that a relation of

any kind whatsoever was created or existed between him and the
indorsee by reason of the writing on the back of the instrument;
to deny that any consideration ever passed to sustain an
indorsement of any kind whatsoever. It is stated in the same
decision that the contention has some of the appearances of a
case in which an indorser seeks to prove forgery.
First of all, we do not see that there exists any appearance or
similarity whatever between the case at bar and one where
forgery is sought to be proved. The defendant did not, either
civilly or criminally, impugn the indorsement as being false. He
admitted its existence, as stated in the majority opinion itself,
and did not disown his signature written in the indorsement. His
denial to the effect that the indorsement was wholly without
consideration, aside from the fact that it is i contradiction to the
statements that he over his signature made in the instrument,
does not allow the supposition that the instrument was forged.
The meaning which the majority opinion apparently wishes to
convey, in calling attention to the difference between what, as it
says, was the purpose of the evidence presented by the defendant
and what was sought to be proved thereby, is that the defendant
does not endeavor to contradict or alter the terms of the
agreement, which is contained in the instrument and is admitted
to exist between the parties; but to deny the existence of such an
agreement between them, that is, the existence of any
indorsement at all, and that any consideration ever passed to
sustain the said indorsement, or, in other words, that the
defendant acknowledged the indorsement as regards the form in
which it appears to have been drawn up, but not with respect to
its essence, that is, to the truth of the particular facts set forth in
the indorsement. It cannot be denied that the practical result
evidence is other than to contradict, modify, alter or even to

annul the terms of the agreement contained in the indorsement:

so that, in reality, the distinction does not exist that is mentioned
as a ground of the decision of the majority of the court in
support of the opinion that the evidence in question might have
been admitted, without violating the provisions of the
aforementioned section 285 of the Code of Civil Procedure. This
section is based upon the same principle which is taken into
account in the Negotiable Instruments Law to write into it such
positive and definite provisions which purport, without
possibility of discussion or doubt, the uselessness of taking
evidence when the capacity of the person who intervened in a
negotiable instrument or his intention of being bound in a
particular way appears in the instrument itself or has been fixed
by statute, if it is not shown that he did so in some other capacity
than that of maker, drawer or acceptor.
But aside from what the Code of Civil Procedure prescribes with
respect to this matter, as the present case is governed by the
Negotiable Instruments Law, we must abide by its provisions.
Section 24 of this Act, No. 2031, says that every negotiable
instrument is deemed prima facie to have been issued for a
valuable consideration; and every person whose signature
appears thereon, to have become a party thereto for value. If the
Act establishes this presumption for the case where there might
be doubt with respect to the existence of a valuable
consideration, in order to avoid the taking of evidence in the
matter, when the consideration appears from the instrument itself
by the expression of the value, the introduction of evidence is
entirely unnecessary and improper.
According to section 25 of the same Act, value is any
consideration sufficient to support a simple contract, and so

broad is the scope the law gives to the meaning of "value" in this
kind of instruments that it considers as such a prior of
preexistent debt, whether the instrument be payable on demand
or at some future date.
Section 26 provides that where value has at any time been given
for the instrument, the holder is deemed a holder for value, both
in respect to the maker and to the defendant indorser, it is
immaterial whether he did so directly to the person who appears
in the promissory note as the maker or whether he delivered the
sum to the defendant in order that this latter might in turn deliver
it to the maker.
The defendant being the holder of the instrument, he is also
unquestionably the holder in due course. In the first place, in
order to avoid doubts with respect to this matter which might
require the introduction of evidence, the Act before mentioned
has provided, in section 59, that every holder is deemed prima
facie to be a holder in due course, and such is the weight it gives
to this presumption and to the consequences derived therefrom,
that it imposes upon the holder the burden to prove that he or
some person under whom he claims acquired the title in due
course, only when it is shown that the title of any person who
has negotiated the instrument was defective. This rule, however,
pursuant to the said section, does not apply in favor of a party
who became bound on the instrument prior to the acquisition of
such defective title, in which case the defendant Serrano is not
included, because, in the first place, he was not bound on the
instrument prior to the acquisition of the title by the plaintiff, but
it was the maker of the promissory note who was bound on the
instrument executed in favor of the defendant or indorser prior to
the acquisition of the title by the plaintiff; and, in the second
place, it does not appear, nor was it proved, as will be seen

hereinafter, that the title in question was defective.

According to section 52 of the same Act, the plaintiff is the
holder in due course of the instrument in question, that is, of the
promissory note containing the obligation compliance with
which is demanded of him by the defendant, because he took the
instrument under the condition: (a) That it was 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; (c) that he took it in good faith and for value; and
(d) that at the time it was negotiated to him he had no notice of
any deficiency in the instrument or defect in the title of the
person negotiating it.
Pursuant to section 56 of the said Act, to constitute notice of a
deficiency in the instrument or defect in the title of the person
negotiating the same, the person to whom it is transferred must
have had actual knowledge of the deficiency or defect, or
knowledge of such facts that his action in taking the instrument
amounted to bad faith.
In the present case it cannot be said, for it is not proven, that the
plaintiff, upon accepting the instrument from the defendant, had
actual knowledge of any deficiency or defect in the same, for the
simple reason that it contains no deficiency or defect. Its terms
are very clear and positive. There is nothing ambiguous,
concealed, or which might give rise to any doubt whatever with
respect to its terms or to the agreement made by the parties.
Furthermore, as stated in the majority opinion, the defendant did
not intend to make the particular indorsement which he did make
in the terms, form and manner in which it was made, nor did he
intend to change or alter the terms of the agreement which is
admitted to have existed between the parties. All of which

indicates that, neither as regards the plaintiff nor as regards the

defendant, was there any deficiency or defect in the title or in the
instrument, and that the plaintiff, upon taking or receiving the
instrument from the defendant, had no knowledge of any fact
from which bad faith on his part might be implied. Besides, no
evidence was produced of the existence of any such bad faith,
nor of the knowledge of any deficiency or defect.
Moreover, section 55 of Act No. 2031 provides that the title of a
person who negotiates an instrument is defective within the
meaning of this Act when he obtained the instrument, or any
signature thereto, by fraud, duress, or force and fear, or other
unlawful means, or for an illegal consideration, or when he
negotiates it in breach of faith, or under such circumstances as
amount to a fraud. As no evidence was taken on these points, the
only ones that may be proven as regards negotiable instruments,
the defendant must be deemed to be the holder of the instrument
in due course, pursuant to the provisions of the aforecited
section 59, and he cannot be required to prove that he or his
predecessor in interest acquired the title as such holder in due
course.
Now then, according to section 28 of the same Act, as against
the holder of the instrument in due course absence or failure of
consideration is not a matter of defense; and, pursuant to section
57, a holder in due course holds the instrument free from any
defect of title of prior parties, and free from defenses available to
prior parties among themselves, and may enforce payment of the
instrument for the full amount thereof against all parties liable
thereon. And the next section, No. 58 prescribes that in the hands
of any holder other than a holder in due course, a negotiable
instrument is subject to the same defenses as if it were
nonnegotiable.

So it could not be clearer than that, pursuant to the provisions of

the Negotiable Instrument Law, which governs the case at bar, as
the plaintiff is the holder in due course of the instrument in
question, no proof whatever from the defendant could be
admitted, nor if admitted should be taken into account, bearing
on the lack of consideration in the indorsement, as alleged by
him, and for the purpose of denying the existence of any
indorsement and that any relation whatever was created or
existed between him and the indorsee; likewise, that no defense
of any kind could have been admitted from the defendant in
respect to the said instrument, and, finally, that the defendant is
obligated to pay the sum mentioned in the said indorsement, it
being immaterial whether or not he be deemed to be an
accommodation party in the instrument, in order that compliance
with the said obligation may be required of him in his capacity
of indorser.
Basing our conclusions on the foregoing grounds, and regretting
to dissent from the opinion of the majority of our colleagues, we
believe that the judgment appealed from should be affirmed,
with the costs against the appellant.
Araullo, J., dissents.

maker or indorser of the note. It may be true that in the case at

bar it was an accommodation to the plaintiff, in a popular sense,
to have the defendant indorse the note; but it was not the
accommodation described in the law, but, rather, a mere favor to
him and one which in no way bound Serrano.

Maulini v. Serrano [G.R. No. L-8844. December 16, 1914]

FACTS
The note was indorsed on the back as follows:
Pay note to the order of Don Fernando Maulini, value
received. Manila, June 5, 1912. (Sgd.) A.G. Serrano.
ISSUE
Whether or not appellant is an accommodation indorser with
regard to plaintiff-appellee Maulini.
RULING
NO. Appellant is not an accommodation indorser in this case.
The accommodation to which reference is made in the Section
29 of Negotiable Instruments Law is not one to the person who
takes the note that is, the payee or indorsee, but one to the

vs.
FRANCISCO SEVILLA, respondent.
Belen Law Offices for petitioner.
Poblador, Cruz & Nazareno for respondent.
SANCHEZ, J.:
On March 28, 1949, Victor Sevilla, Oscar Varona and Simeon
Sadaya executed, jointly and severally, in favor of the Bank of
the Philippine Islands, or its order, a promissory note for
P15,000.00 with interest at 8% per annum, payable on demand.
The entire, amount of P15,000.00, proceeds of the promissory
note, was received from the bank by Oscar Varona alone. Victor
Sevilla and Simeon Sadaya signed the promissory note as comakers only as a favor to Oscar Varona. Payments were made on
account. As of June 15, 1950, the outstanding balance stood
P4,850.00. No payment thereafter made.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-17845

April 27, 1967

INTESTATE ESTATE OF VICTOR SEVILLA. SIMEON

SADAYA, petitioner,

On October 6, 1952, the bank collected from Sadaya the

foregoing balance which, together with interest, totalled
P5,416.12. Varona failed to reimburse Sadaya despite repeated
demands.
Victor Sevilla died. Intestate estate proceedings were started in
the Court of First Instance of Rizal, Special Proceeding No.
1518. Francisco Sevilla was named administrator.
In Special Proceeding No. 1518, Sadaya filed a creditor's claim
for the above sum of P5,746.12, plus attorneys fees in the sum of
P1,500.00. The administrator resisted the claim upon the
averment that the deceased Victor Sevilla "did not receive any
amount as consideration for the promissory note," but signed it

only "as surety for Oscar Varona".

of the last two, Simeon Sadaya, paid that balance.

On June 5, 1957, the trial court issued an order admitting the

claim of Simeon Sadaya in the amount of P5,746.12, and
directing the administrator to pay the same from any available
funds belonging to the estate of the deceased Victor Sevilla.

2. It is beyond debate that Simeon Sadaya could have sought

reimbursement of the total amount paid from Oscar Varona. This
is but right and just. Varona received full value of the promissory
note.3 Sadaya received nothing therefrom. He paid the bank
because he was a joint and several obligor. The least that can be
said is that, as between Varona and Sadaya, there is an implied
contract of indemnity. And Varona is bound by the obligation to
reimburse Sadaya.4

The motion to reconsider having been overruled, the

administrator appealed.1 The Court of Appeals, in a decision
promulgated on July, 15, 1960, voted to set aside the order
appealed from and to disapprove and disallow "appellee's claim
of P5,746.12 against the intestate estate."
The case is now before this Court on certiorari to review the
judgment of the Court of Appeals.
Sadaya's brief here seeks reversal of the appellate court's
decision and prays that his claim "in the amount of 50% of
P5,746.12, or P2,873.06, against the intestate estate of the
deceased Victor Sevilla," be approved.
1. That Victor Sevilla and Simeon Sadaya were joint and several
accommodation makers of the 15,000.00-peso promissory note
in favor of the Bank of the Philippine Islands, need not be
essayed. As such accommodation the makers, the individual
obligation of each of them to the bank is no different from, and
no greater and no less than, that contract by Oscar Varona. For,
while these two did not receive value on the promissory note,
they executed the same with, and for the purpose of lending their
names to, Oscar Varona. Their liability to the bank upon the
explicit terms of the promissory note is joint and several. 2 Better
yet, the bank could have pursued its right to collect the unpaid
balance against either Sevilla or Sadaya. And the fact is that one

3. The common creditor, the Bank of the Philippine Islands, now

out of the way, we first look into the relations inter se amongst
the three consigners of the promissory note. Their relations visa-vis the Bank, we repeat, is that of joint and several obligors.
But can the same thing be said about the relations of the three
consigners, in respect to each other?
Surely enough, as amongst the three, the obligation of Varona
and Sevilla to Sadaya who paid can not be joint and several. For,
indeed, had payment been made by Oscar Varona, instead of
Simeon Sadaya, Varona could not have had reason to seek
reimbursement from either Sevilla or Sadaya, or both. After all,
the proceeds of the loan went to Varona and the other two
received nothing therefrom.
4. On principle, a solidary accommodation maker who made
payment has the right to contribution, from his coaccommodation maker, in the absence of agreement to the
contrary between them, and subject to conditions imposed by
law. This right springs from an implied promise between the
accommodation makers to share equallythe burdens that may
ensue from their having consented to stamp their signatures on

the promissory note.5 For having lent their signatures to the

principal debtor, they clearly placed themselves in so far as
payment made by one may create liability on the other in the
category of mere joint grantors of the former.6 This is as it
should be. Not one of them benefited by the promissory note.
They stand on the same footing. In misfortune, their burdens
should be equally spread.
Manresa, commenting on Article 1844 of the Civil Code of
Spain,7 which is substantially reproduced in Article 20738 of our
Civil Code, on this point stated:
Otros, como Pothier, entienden que, si bien el principio es
evidente enestricto concepto juridico, se han extremado sus
consecuencias hasta el punto de que estas son contrarias, no
solo a la logica, sino tambien a la equidad, que debe ser el alma
del Derecho, como ha dicho Laurent.
Esa accion sostienen no nace de la fianza, pues, en efecto,
el hecho de afianzar una misma deuda no crea ningun vinculo
juridico, ni ninguna razon de obligar entre los fiadores, sino que
trae, por el contrario, su origen de una acto posterior, cual es el
pago de toda la deuda realizado por uno de ellos, y la equdad,
no permite que los denias fiadores, que igualmente estaban
estaban obligos a dicho pago, se aprovenchen de ese acto en
perjuico del que lo realozo.
Lo cierto es que esa accion concedida al fiador nace, si, del
hecho del pago, pero es consecuencia del beneficio o del
derecho de division, como tenemos ya dicho. En efecto, por
virtud de esta todos los cofiadores vienen obligados a contribuir
al pago de parte que a cada uno corresponde. De ese obligacion,
contraida por todos ellos, se libran los que no han pagado por

consecuencia del acto realizado por el que pago, y si bien este no

hizo mas que cumplir el deber que el contracto de fianza le
imponia de responder de todo el debito cuando no limito su
obligacion a parte alguna del mismo, dicho acto redunda en
beneficio de los otros cofiadores los cuales se aprovechan de el
para quedar desligados de todo compromiso con el acreedor.9
5. And now, to the requisites before one accommodation maker
can seek reimbursement from a co-accommodation maker.
By Article 18 of the Civil Code in matters not covered by the
special laws, "their deficiency shall be supplied by the
provisions of this Code". Nothing extant in the Negotiable
Instruments Law would define the right of one accommodation
maker to seek reimbursement from another. Perforce, we must
go to the Civil Code.1wph1.t
Because Sevilla and Sadaya, in themselves, are but coguarantors of Varona, their case comes within the ambit of
Article 2073 of the Civil Code which reads:
ART. 2073. When there are two or more guarantors of the same
debtor and for the same debt, the one among them who has paid
may demand of each of the others the share which is
proportionally owing from him.
If any of the guarantors should be insolvent, his share shall be
borne by the others, including the payer, in the same proportion.
The provisions of this article shall not be applicable, unless the
payment has been made in virtue of a judicial demand or unless
the principal debtor is insolvent.10

As Mr. Justice Street puts it: "[T]hat article deals with the
situation which arises when one surety has paid the debt to the
creditor and is seeking contribution from his cosureties."11

satisfacer sus ductares respectivas, repitiendo despues por ellas

contra el deudor con la imposicion de las molestias y gastos
consiguientes.

Not that the requirements in paragraph 3, Article 2073, just

quoted, are devoid of cogent reason. Says Manresa:12

No es aventurado asegurar que si el fiador que paga pudiera

libremente utilizar uno u otro de dichos derechos, el de
indemnizacion por el deudor y el del reintegro por los
cofiadores, indudablemente optaria siempre y en todo caso por
el segundo, puesto que mucha mas garantias de solvencia y
mucha mas seguridad del cobro ha de encontrar en los fiadores
que en el deudor; y en la practica quedaria reducido el primero a
la indemnizacion por el deudor a los confiadores que hubieran
hecho el reintegro, obligando a estos, sin excepcion alguna, a
soportar siempre los gastos y las molestias que anteriormente
homos indicado. Y para evitar estos perjuicios, la ley no ha
podido menos de reducir el ejercicio de ese derecho a los casos
en que absolutamente sea indispensable.13

c) Requisitos para el ejercicio del derecho de reintegro o de

reembolso derivado de la corresponsabilidad de los cofiadores.
La tercera de las prescripciones que comprende el articulo se
refiere a los requisitos que deben concurrir para que pueda tener
lugar lo dispuesto en el mismo. Ese derecho que concede al
fiador para reintegrarse directamente de los fiadores de lo que
pago por ellos en vez de dirigir su reclamacion contra el deudor,
es un beneficio otorgado por la ley solo ell dos casos
determinados, cuya justificacion resulta evidenciada desde
luego; y esa limitacion este debidamente aconsejada por una
razon de prudencia que no puede desconocerse, cual es la de
evitar que por la mera voluntad de uno de los cofiadores pueda
hacerse surgir la accion de reintegro contra los demas en
prejuicio de los mismos.
El perjuicio que con tal motivo puede inferirse a los cofiadores
es bien notorio, pues teniendo en primer termino el fiador que
paga por el deudor el derecho de indemnizacion contra este,
sancionado por el art. 1,838, es de todo punto indudable que
ejercitando esta accion pueden quedar libres de toda
responsabilidad los demas cofiadores si, a consecuencia de ella,
indemniza el fiado a aquel en los terminos establecidos en el
expresado articulo. Por el contrario de prescindir de dicho
derecho el fiador, reclamando de los confiadores en primer lugar
el oportuno reintegro, estos en tendrian mas remedio que

6. All of the foregoing postulate the following rules: (1) A joint

and several accommodation maker of a negotiable promissory
note may demand from the principal debtor reimbursement for
the amount that he paid to the payee; and (2) a joint and several
accommodation maker who pays on the said promissory note
may directly demand reimbursement from his coaccommodation maker without first directing his action against
the principal debtor provided that (a) he made the payment by
virtue of a judicial demand, or (b) a principal debtor is insolvent.
The Court of Appeals found that Sadaya's payment to the bank
"was made voluntarily and without any judicial demand," and
that "there is an absolute absence of evidence showing that
Varona is insolvent". This combination of fact and lack of fact
epitomizes the fatal distance between payment by Sadaya and

Sadaya's right to demand of Sevilla "the share which is

proportionately owing from him."
For the reasons given, the judgment of the Court of Appeals
under review is hereby affirmed. No costs. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal,
Bengzon, J.P., Zaldivar and Castro, JJ., concur.

Victor Sevilla and Simeon Sadaya signed the promissory note as

co-makers only as a favor to Oscar Varona.
June 15, 1950: outstanding balance is P4,850.00. No payment
thereafter made.
Oct 16 1952: bank collected from Sadaya total of P5,416.12(w/
int)
Varona failed to reimburse Sadaya despite repeated demands.
Victor Sevilla died Francisco Sevilla was named administrator.
Sadaya filed a creditor's claim for the above sum of P5,746.12,
plus attorneys fees in the sum of P1,500.00

Sadaya V. Sevilla (1967)

G.R. No. L-17845

April 27, 1967

Lessons Applicable: Consideration and Accommodation Party

(Negotiable Instruments)
FACTS:
March 28, 1949: Victor Sevilla, Oscar Varona and Simeon
Sadaya executed, jointly and severally, in favor of the BPI, or its
order, a promissory note for P15,000.00 with interest at 8% per
annum, payable on demand.
The P15,000.00 proceeds was received by Oscar Varona alone.

The administrator resisted the claim upon the averment that the
deceased Victor Sevilla "did not receive any amount as
consideration for the promissory note," but signed it only "as
surety for Oscar Varona
June 5, 1957: Trial court order the administrator to pay
CA reversed.
ISSUE: W/N Sadaya can claim against the estate of Sevilla as
co-accomodation party when Verona as principal debtor is not

yet insolvent
HELD: NO. Affirmed
Varona is bound by the obligation to reimburse Sadaya solidary
accommodation maker who made payment has the right to
contribution, from his co-accommodation maker, in the absence
of agreement to the contrary between them, and subject to
conditions imposed by law requisites before one accommodation
maker can seek reimbursement from a co-accommodationmaker.
1 ART. 2073. When there are two or more guarantors of
the same debtor and for the same debt, the one among them
who has paid may demand of each of the others the share
which is proportionally owing from him.
2 If any of the guarantors should be insolvent, his share
shall be borne by the others, including the payer, in the same
proportion.
2
3 (1) A joint and several accommodation maker of a
negotiable promissory note may demand from the principal
debtor reimbursement for the amount that he paid to the
payee;
4 (2) a joint and several accommodation maker who pays
on the said promissory note may directly demand

reimbursement from his co-accommodation maker without

first directing his action against the principal debtor provided
that
1 (a) he made the payment by virtue of a judicial demand,
or -no judicial demand just voluntarily
2 (b) a principal debtor is insolvent. - Varona is not
insolvent

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 121413

January 29, 2001

PHILIPPINE COMMERCIAL INTERNATIONAL BANK

(formerly INSULAR BANK OF ASIA AND
AMERICA),petitioner,
vs.
COURT OF APPEALS and FORD PHILIPPINES, INC. and
CITIBANK, N.A., respondents.

G.R. No. 121479

January 29, 2001

FORD PHILIPPINES, INC., petitioner-plaintiff,

vs.
COURT OF APPEALS and CITIBANK, N.A. and

PHILIPPINE COMMERCIAL INTERNATIONAL

BANK,respondents.

G.R. No. 128604

January 29, 2001

FORD PHILIPPINES, INC., petitioner,

vs.
CITIBANK, N.A., PHILIPPINE COMMERCIAL
INTERNATIONAL BANK and COURT OF APPEALS,
respondents.
QUISUMBING, J.:
These consolidated petitions involve several fraudulently
negotiated checks.
The original actions a quo were instituted by Ford Philippines to
recover from the drawee bank, CITIBANK, N.A. (Citibank) and
collecting bank, Philippine Commercial International Bank
(PCIBank) [formerly Insular Bank of Asia and America], the
value of several checks payable to the Commissioner of Internal
Revenue, which were embezzled allegedly by an organized
syndicate.1wphi1.nt
G.R. Nos. 121413 and 121479 are twin petitions for review of
the March 27, 1995 Decision1 of the Court of Appeals in CAG.R. CV No. 25017, entitled "Ford Philippines, Inc. vs.
Citibank, N.A. and Insular Bank of Asia and America (now
Philipppine Commercial International Bank), and the August 8,
1995 Resolution,2 ordering the collecting bank, Philippine
Commercial International Bank, to pay the amount of Citibank

Check No. SN-04867.

In G.R. No. 128604, petitioner Ford Philippines assails the
October 15, 1996 Decision3 of the Court of Appeals and its
March 5, 1997 Resolution4 in CA-G.R. No. 28430 entitled "Ford
Philippines, Inc. vs. Citibank, N.A. and Philippine Commercial
International Bank," affirming in toto the judgment of the trial
court holding the defendant drawee bank, Citibank, N.A., solely
liable to pay the amount of P12,163,298.10 as damages for the
misapplied proceeds of the plaintiff's Citibanl Check Numbers
SN-10597 and 16508.
I. G.R. Nos. 121413 and 121479
The stipulated facts submitted by the parties as accepted by the
Court of Appeals are as follows:
"On October 19, 1977, the plaintiff Ford drew and issued its
Citibank Check No. SN-04867 in the amount of P4,746,114.41,
in favor of the Commissioner of Internal Revenue as payment of
plaintiff;s percentage or manufacturer's sales taxes for the third
quarter of 1977.
The aforesaid check was deposited with the degendant IBAA
(now PCIBank) and was subsequently cleared at the Central
Bank. Upon presentment with the defendant Citibank, the
proceeds of the check was paid to IBAA as collecting or
depository bank.
The proceeds of the same Citibank check of the plaintiff was
never paid to or received by the payee thereof, the
Commissioner of Internal Revenue.

As a consequence, upon demand of the Bureau and/or

Commissioner of Internal Revenue, the plaintiff was compelled
to make a second payment to the Bureau of Internal Revenue of
its percentage/manufacturers' sales taxes for the third quarter of
1977 and that said second payment of plaintiff in the amount of
P4,746,114.41 was duly received by the Bureau of Internal
Revenue.
It is further admitted by defendant Citibank that during the time
of the transactions in question, plaintiff had been maintaining a
checking account with defendant Citibank; that Citibank Check
No. SN-04867 which was drawn and issued by the plaintiff in
favor of the Commissioner of Internal Revenue was a crossed
check in that, on its face were two parallel lines and written in
between said lines was the phrase "Payee's Account Only"; and
that defendant Citibank paid the full face value of the check in
the amount of P4,746,114.41 to the defendant IBAA.
It has been duly established that for the payment of plaintiff's
percentage tax for the last quarter of 1977, the Bureau of Internal
Revenue issued Revenue Tax Receipt No. 18747002, dated
October 20, 1977, designating therein in Muntinlupa, Metro
Manila, as the authorized agent bank of Metrobanl, Alabang
branch to receive the tax payment of the plaintiff.
On December 19, 1977, plaintiff's Citibank Check No. SN04867, together with the Revenue Tax Receipt No. 18747002,
was deposited with defendant IBAA, through its Ermita Branch.
The latter accepted the check and sent it to the Central Clearing
House for clearing on the samd day, with the indorsement at the
back "all prior indorsements and/or lack of indorsements
guaranteed." Thereafter, defendant IBAA presented the check for
payment to defendant Citibank on same date, December 19,

1977, and the latter paid the face value of the check in the
amount of P4,746,114.41. Consequently, the amount of
P4,746,114.41 was debited in plaintiff's account with the
defendant Citibank and the check was returned to the plaintiff.
Upon verification, plaintiff discovered that its Citibank Check
No. SN-04867 in the amount of P4,746,114.41 was not paid to
the Commissioner of Internal Revenue. Hence, in separate letters
dated October 26, 1979, addressed to the defendants, the
plaintiff notified the latter that in case it will be re-assessed by
the BIR for the payment of the taxes covered by the said checks,
then plaintiff shall hold the defendants liable for reimbursement
of the face value of the same. Both defendants denied liability
and refused to pay.
In a letter dated February 28, 1980 by the Acting Commissioner
of Internal Revenue addressed to the plaintiff - supposed to be
Exhibit "D", the latter was officially informed, among others,
that its check in the amount of P4, 746,114.41 was not paid to
the government or its authorized agent and instead encashed by
unauthorized persons, hence, plaintiff has to pay the said amount
within fifteen days from receipt of the letter. Upon advice of the
plaintiff's lawyers, plaintiff on March 11, 1982, paid to the
Bureau of Internal Revenue, the amount of P4,746,114.41,
representing payment of plaintiff's percentage tax for the third
quarter of 1977.
As a consequence of defendant's refusal to reimburse plaintiff of
the payment it had made for the second time to the BIR of its
percentage taxes, plaintiff filed on January 20, 1983 its original
complaint before this Court.
On December 24, 1985, defendant IBAA was merged with the

Philippine Commercial International Bank (PCI Bank) with the

latter as the surviving entity.

Godofredo Rivera because he could not be served with summons

as the NBI declared him as a "fugitive from justice".

Defendant Citibank maintains that; the payment it made of

plaintiff's Citibank Check No. SN-04867 in the amount of
P4,746,114.41 "was in due course"; it merely relied on the
clearing stamp of the depository/collecting bank, the defendant
IBAA that "all prior indorsements and/or lack of indorsements
guaranteed"; and the proximate cause of plaintiff's injury is the
gross negligence of defendant IBAA in indorsing the plaintiff's
Citibank check in question.

On June 15, 1989, the trial court rendered its decision, as

follows:

It is admitted that on December 19, 1977 when the proceeds of

plaintiff's Citibank Check No. SN-048867 was paid to defendant
IBAA as collecting bank, plaintiff was maintaining a checking
account with defendant Citibank."5
Although it was not among the stipulated facts, an investigation
by the National Bureau of Investigation (NBI) revealed that
Citibank Check No. SN-04867 was recalled by Godofredo
Rivera, the General Ledger Accountant of Ford. He purportedly
needed to hold back the check because there was an error in the
computation of the tax due to the Bureau of Internal Revenue
(BIR). With Rivera's instruction, PCIBank replaced the check
with two of its own Manager's Checks (MCs). Alleged members
of a syndicate later deposited the two MCs with the Pacific
Banking Corporation.
Ford, with leave of court, filed a third-party complaint before the
trial court impleading Pacific Banking Corporation (PBC) and
Godofredo Rivera, as third party defendants. But the court
dismissed the complaint against PBC for lack of cause of action.
The course likewise dismissed the third-party complaint against

"Premises considered, judgment is hereby rendered as follows:

"1. Ordering the defendants Citibank and IBAA (now PCI
Bank), jointly and severally, to pay the plaintiff the amount of
P4,746,114.41 representing the face value of plaintiff's Citibank
Check No. SN-04867, with interest thereon at the legal rate
starting January 20, 1983, the date when the original complaint
was filed until the amount is fully paid, plus costs;
"2. On defendant Citibank's cross-claim: ordering the crossdefendant IBAA (now PCI Bank) to reimburse defendant
Citibank for whatever amount the latter has paid or may pay to
the plaintiff in accordance with next preceding paragraph;
"3. The counterclaims asserted by the defendants against the
plaintiff, as well as that asserted by the cross-defendant against
the cross-claimant are dismissed, for lack of merits; and
"4. With costs against the defendants.
SO ORDERED."6
Not satisfied with the said decision, both defendants, Citibank
and PCIBank, elevated their respective petitions for review on
certiorari to the Courts of Appeals. On March 27, 1995, the
appellate court issued its judgment as follows:

"WHEREFORE, in view of the foregoing, the court AFFIRMS

the appealed decision with modifications.

such casue of action had already prescribed.

PCIBank sets forth the following issues for consideration:

The court hereby renderes judgment:

1. Dismissing the complaint in Civil Case No. 49287 insofar as
defendant Citibank N.A. is concerned;
2. Ordering the defendant IBAA now PCI Bank to pay the
plaintiff the amount of P4,746,114.41 representing the face value
of plaintiff's Citibank Check No. SN-04867, with interest
thereon at the legal rate starting January 20, 1983, the date when
the original complaint was filed until the amount is fully paid;
3. Dismissing the counterclaims asserted by the defendants
against the plaintiff as well as that asserted by the crossdefendant against the cross-claimant, for lack of merits.

I. Did the respondent court err when, after finding that the
petitioner acted on the check drawn by respondent Ford on the
said respondent's instructions, it nevertheless found the
petitioner liable to the said respondent for the full amount of the
said check.
II. Did the respondent court err when it did not find prescription
in favor of the petitioner.8
In a counter move, Ford filed its petition docketed as G.R. No.
121479, questioning the same decision and resolution of the
Court of Appeals, and praying for the reinstatement in toto of the
decision of the trial court which found both PCIBank and
Citibank jointly and severally liable for the loss.

Costs against the defendant IBAA (now PCI Bank).

IT IS SO ORDERED."

PCI Bank moved to reconsider the above-quoted decision of the

Court of Appeals, while Ford filed a "Motion for Partial
Reconsideration." Both motions were denied for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions
for review by certiorari under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision
and resolution of the Twelfth Division of the Court of Appeals
contending that it merely acted on the instruction of Ford and

In G.R. No. 121479, appellant Ford presents the following

propositions for consideration:
I. Respondent Citibank is liable to petitioner Ford considering
that:
1. As drawee bank, respondent Citibank owes to petitioner Ford,
as the drawer of the subject check and a depositor of respondent
Citibank, an absolute and contractual duty to pay the proceeds of
the subject check only to the payee thereof, the Commissioner of
Internal Revenue.
2. Respondent Citibank failed to observe its duty as banker with

respect to the subject check, which was crossed and payable to

"Payee's Account Only."

appertaining to the second quarter of 1978 and the first quarter

of 1979.

3. Respondent Citibank raises an issue for the first time on

appeal; thus the same should not be considered by the Honorable
Court.

The facts as narrated by the Court of Appeals are as follows:

4. As correctly held by the trial court, there is no evidence of

gross negligence on the part of petitioner Ford.9

Ford drew Citibank Check No. SN-10597 on July 19, 1978 in

the amount of P5,851,706.37 representing the percentage tax due
for the second quarter of 1978 payable to the Commissioner of
Internal Revenue. A BIR Revenue Tax Receipt No. 28645385
was issued for the said purpose.

II. PCI Bank is liable to petitioner Ford considering that:

1. There were no instructions from petitioner Ford to deliver the
proceeds of the subject check to a person other than the payee
named therein, the Commissioner of the Bureau of Internal
Revenue; thus, PCIBank's only obligation is to deliver the
proceeds to the Commissioner of the Bureau of Internal
Revenue.10
2. PCIBank which affixed its indorsement on the subject check
("All prior indorsement and/or lack of indorsement guaranteed"),
is liable as collecting bank.11
3. PCIBank is barred from raising issues of fact in the instant
proceedings.12
4. Petitioner Ford's cause of action had not prescribed.

13

II. G.R. No. 128604

The same sysndicate apparently embezzled the proceeds of
checks intended, this time, to settle Ford's percentage taxes

On April 20, 1979, Ford drew another Citibank Check No. SN16508 in the amount of P6,311,591.73, representing the payment
of percentage tax for the first quarter of 1979 and payable to the
Commissioner of Internal Revenue. Again a BIR Revenue Tax
Receipt No. A-1697160 was issued for the said purpose.
Both checks were "crossed checks" and contain two diagonal
lines on its upper corner between, which were written the words
"payable to the payee's account only."
The checks never reached the payee, CIR. Thus, in a letter dated
February 28, 1980, the BIR, Region 4-B, demanded for the said
tax payments the corresponding periods above-mentioned.
As far as the BIR is concernced, the said two BIR Revenue Tax
Receipts were considered "fake and spurious". This anomaly
was confirmed by the NBI upon the initiative of the BIR. The
findings forced Ford to pay the BIR a new, while an action was
filed against Citibank and PCIBank for the recovery of the
amount of Citibank Check Numbers SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tried the

case, made its findings on the modus operandi of the syndicate,

as follows:
"A certain Mr. Godofredo Rivera was employed by the plaintiff
FORD as its General Ledger Accountant. As such, he prepared
the plaintiff's check marked Ex. 'A' [Citibank Check No. Sn10597] for payment to the BIR. Instead, however, fo delivering
the same of the payee, he passed on the check to a coconspirator named Remberto Castro who was a pro-manager of
the San Andres Branch of PCIB.* In connivance with one
Winston Dulay, Castro himself subsequently opened a Checking
Account in the name of a fictitious person denominated as
'Reynaldo reyes' in the Meralco Branch of PCIBank where
Dulay works as Assistant Manager.
After an initial deposit of P100.00 to validate the account, Castro
deposited a worthless Bank of America Check in exactly the
same amount as the first FORD check (Exh. "A",
P5,851,706.37) while this worthless check was coursed through
PCIB's main office enroute to the Central Bank for clearing,
replaced this worthless check with FORD's Exhibit 'A' and
accordingly tampered the accompanying documents to cover the
replacement. As a result, Exhibit 'A' was cleared by defendant
CITIBANK, and the fictitious deposit account of 'Reynaldo
Reyes' was credited at the PCIB Meralco Branch with the total
amount of the FORD check Exhibit 'A'. The same method was
again utilized by the syndicate in profiting from Exh. 'B'
[Citibank Check No. SN-16508] which was subsequently
pilfered by Alexis Marindo, Rivera's Assistant at FORD.
From this 'Reynaldo Reyes' account, Castro drew various checks
distributing the sahres of the other participating conspirators
namely (1) CRISANTO BERNABE, the mastermind who

formulated the method for the embezzlement; (2) RODOLFO R.

DE LEON a customs broker who negotiated the initial contact
between Bernabe, FORD's Godofredo Rivera and PCIB's
Remberto Castro; (3) JUAN VASTILLO who assisted de Leon
in the initial arrangements; (4) GODOFREDO RIVERA,
FORD's accountant who passed on the first check (Exhibit "A")
to Castro; (5) REMERTO CASTRO, PCIB's pro-manager at San
Andres who performed the switching of checks in the clearing
process and opened the fictitious Reynaldo Reyes account at the
PCIB Meralco Branch; (6) WINSTON DULAY, PCIB's
Assistant Manager at its Meralco Branch, who assisted Castro in
switching the checks in the clearing process and facilitated the
opening of the fictitious Reynaldo Reyes' bank account; (7)
ALEXIS MARINDO, Rivera's Assistant at FORD, who gave the
second check (Exh. "B") to Castro; (8) ELEUTERIO JIMENEZ,
BIR Collection Agent who provided the fake and spurious
revenue tax receipts to make it appear that the BIR had received
FORD's tax payments.
Several other persons and entities were utilized by the syndicate
as conduits in the disbursements of the proceeds of the two
checks, but like the aforementioned participants in the
conspiracy, have not been impleaded in the present case. The
manner by which the said funds were distributed among them
are traceable from the record of checks drawn against the
original "Reynaldo Reyes" account and indubitably identify the
parties who illegally benefited therefrom and readily indicate in
what amounts they did so."14
On December 9, 1988, Regional Trial Court of Makati, Branch
57, held drawee-bank, Citibank, liable for the value of the two
checks while adsolving PCIBank from any liability, disposing as
follows:

"WHEREFORE, judgment is hereby rendered sentencing

defendant CITIBANK to reimburse plaintiff FORD the total
amount of P12,163,298.10 prayed for in its complaint, with 6%
interest thereon from date of first written demand until full
payment, plus P300,000.00 attorney's fees and expenses
litigation, and to pay the defendant, PCIB (on its counterclaim to
crossclaim) the sum of P300,000.00 as attorney's fees and costs
of litigation, and pay the costs.
SO ORDERED."15
Both Ford and Citibank appealed to the Court of Appeals which
affirmed, in toto, the decision of the trial court. Hence, this
petition.
Petitioner Ford prays that judgment be rendered setting aside the
portion of the Court of Appeals decision and its resolution dated
March 5, 1997, with respect to the dismissal of the complaint
against PCIBank and holding Citibank solely responsible for the
proceeds of Citibank Check Numbers SN-10597 and 16508 for
P5,851,706.73 and P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing the
complaint against defendant PCIBank considering that:
I. Defendant PCIBank was clearly negligent when it failed to
exercise the diligence required to be exercised by it as a banking
insitution.
II. Defendant PCIBank clearly failed to observe the diligence
required in the selection and supervision of its officers and
employees.

III. Defendant PCIBank was, due to its negligence, clearly liable

for the loss or damage resulting to the plaintiff Ford as a
consequence of the substitution of the check consistent with
Section 5 of Central Bank Circular No. 580 series of 1977.
IV. Assuming arguedo that defedant PCIBank did not accept,
endorse or negotiate in due course the subject checks, it is liable,
under Article 2154 of the Civil Code, to return the money which
it admits having received, and which was credited to it its
Central bank account.16
The main issue presented for our consideration by these petitions
could be simplified as follows: Has petitioner Ford the right to
recover from the collecting bank (PCIBank) and the drawee
bank (Citibank) the value of the checks intended as payment to
the Commissioner of Internal Revenue? Or has Ford's cause of
action already prescribed?
Note that in these cases, the checks were drawn against the
drawee bank, but the title of the person negotiating the same was
allegedly defective because the instrument was obtained by
fraud and unlawful means, and the proceeds of the checks were
not remitted to the payee. It was established that instead of
paying the checks to the CIR, for the settlement of the approprite
quarterly percentage taxes of Ford, the checks were diverted and
encashed for the eventual distribution among the mmbers of the
syndicate. As to the unlawful negotiation of the check the
applicable law is Section 55 of the Negotiable Instruments Law
(NIL), which provides:
"When title defective -- The title of a person who negotiates an
instrument is defective within the meaning of this Act when he
obtained the instrument, or any signature thereto, by fraud,

duress, or fore and fear, or other unlawful means, or for an

illegal consideration, or when he negotiates it in breach of faith
or under such circumstances as amount to a fraud."
Pursuant to this provision, it is vital to show that the negotiation
is made by the perpetator in breach of faith amounting to fraud.
The person negotiating the checks must have gone beyond the
authority given by his principal. If the principal could prove that
there was no negligence in the performance of his duties, he may
set up the personal defense to escape liability and recover from
other parties who. Though their own negligence, alowed the
commission of the crime.
In this case, we note that the direct perpetrators of the offense,
namely the embezzlers belonging to a syndicate, are now
fugitives from justice. They have, even if temporarily, escaped
liability for the embezzlement of millions of pesos. We are thus
left only with the task of determining who of the present parties
before us must bear the burden of loss of these millions. It all
boils down to thequestion of liability based on the degree of
negligence among the parties concerned.
Foremost, we must resolve whether the injured party, Ford, is
guilty of the "imputed contributory negligence" that would
defeat its claim for reimbursement, bearing ing mind that its
employees, Godofredo Rivera and Alexis Marindo, were among
the members of the syndicate.
Citibank points out that Ford allowed its very own employee,
Godofredo Rivera, to negotiate the checks to his co-conspirators,
instead of delivering them to the designated authorized
collecting bank (Metrobank-Alabang) of the payee, CIR.
Citibank bewails the fact that Ford was remiss in the supervision

and control of its own employees, inasmuch as it only

discovered the syndicate's activities through the information
given by the payee of the checks after an unreasonable period of
time.
PCIBank also blames Ford of negligence when it allegedly
authorized Godofredo Rivera to divert the proceeds of Citibank
Check No. SN-04867, instead of using it to pay the BIR. As to
the subsequent run-around of unds of Citibank Check Nos. SN10597 and 16508, PCIBank claims that the proximate cause of
the damge to Ford lies in its own officers and employees who
carried out the fradulent schemes and the transactions. These
circumstances were not checked by other officers of the
company including its comptroller or internal auditor. PCIBank
contends that the inaction of Ford despite the enormity of the
amount involved was a sheer negligence and stated that, as
between two innocent persons, one of whom must suffer the
consequences of a breach of trust, the one who made it possible,
by his act of negligence, must bear the loss.
For its part, Ford denies any negligence in the performance of its
duties. It avers that there was no evidence presented before the
trial court showing lack of diligence on the part of Ford. And,
citing the case of Gempesaw vs. Court of Appeals,17 Ford argues
that even if there was a finding therein that the drawer was
negligent, the drawee bank was still ordered to pay damages.
Furthermore, Ford contends the Godofredo rivera was not
authorized to make any representation in its behalf, specifically,
to divert the proceeds of the checks. It adds that Citibank raised
the issue of imputed negligence against Ford for the first time on
appeal. Thus, it should not be considered by this Court.

On this point, jurisprudence regarding the imputed negligence of

employer in a master-servant relationship is instructive. Since a
master may be held for his servant's wrongful act, the law
imputes to the master the act of the servant, and if that act is
negligent or wrongful and proximately results in injury to a third
person, the negligence or wrongful conduct is the negligence or
wrongful conduct of the master, for which he is liable. 18 The
general rule is that if the master is injured by the negligence of a
third person and by the concuring contributory negligence of his
own servant or agent, the latter's negligence is imputed to his
superior and will defeat the superior's action against the third
person, asuming, of course that the contributory negligence was
the proximate cause of the injury of which complaint is made.19
Accordingly, we need to determine whether or not the action of
Godofredo Rivera, Ford's General Ledger Accountant, and/or
Alexis Marindo, his assistant, was the proximate cause of the
loss or damage. AS defined, proximate cause is that which, in
the natural and continuous sequence, unbroken by any efficient,
intervening cause produces the injury and without the result
would not have occurred.20
It appears that although the employees of Ford initiated the
transactions attributable to an organized syndicate, in our view,
their actions were not the proximate cause of encashing the
checks payable to the CIR. The degree of Ford's negligence, if
any, could not be characterized as the proximate cause of the
injury to the parties.
The Board of Directors of Ford, we note, did not confirm the
request of Godofredo Rivera to recall Citibank Check No. SN04867. Rivera's instruction to replace the said check with
PCIBank's Manager's Check was not in theordinary course of

business which could have prompted PCIBank to validate the

same.
As to the preparation of Citibank Checks Nos. SN-10597 and
16508, it was established that these checks were made payable
to the CIR. Both were crossed checks. These checks were
apparently turned around by Ford's emploees, who were acting
on their own personal capacity.
Given these circumstances, the mere fact that the forgery was
committed by a drawer-payor's confidential employee or agent,
who by virtue of his position had unusual facilities for
perpertrating the fraud and imposing the forged paper upon the
bank, does notentitle the bank toshift the loss to the drawerpayor, in the absence of some circumstance raising estoppel
against the drawer.21 This rule likewise applies to the checks
fraudulently negotiated or diverted by the confidential
employees who hold them in their possession.
With respect to the negligence of PCIBank in the payment of the
three checks involved, separately, the trial courts found
variations between the negotiation of Citibank Check No. SN04867 and the misapplication of total proceeds of Checks SN10597 and 16508. Therefore, we have to scrutinize, separately,
PCIBank's share of negligence when the syndicate achieved its
ultimate agenda of stealing the proceeds of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank
through its Ermita Branch. It was coursed through the ordinary
banking transaction, sent to Central Clearing with the
indorsement at the back "all prior indorsements and/or lack of

indorsements guaranteed," and was presented to Citibank for

payment. Thereafter PCIBank, instead of remitting the proceeds
to the CIR, prepared two of its Manager's checks and enabled the
syndicate to encash the same.
On record, PCIBank failed to verify the authority of Mr. Rivera
to negotiate the checks. The neglect of PCIBank employees to
verify whether his letter requesting for the replacement of the
Citibank Check No. SN-04867 was duly authorized, showed
lack of care and prudence required in the circumstances.
Furthermore, it was admitted that PCIBank is authorized to
collect the payment of taxpayers in behalf of the BIR. As an
agent of BIR, PCIBank is duty bound to consult its principal
regarding the unwarranted instructions given by the payor or its
agent. As aptly stated by the trial court, to wit:
"xxx. Since the questioned crossed check was deposited with
IBAA [now PCIBank], which claimed to be a
depository/collecting bank of BIR, it has the responsibility to
make sure that the check in question is deposited in Payee's
account only.
xxx

xxx

xxx

As agent of the BIR (the payee of the check), defendant IBAA

should receive instructions only from its principal BIR and not
from any other person especially so when that person is not
known to the defendant. It is very imprudent on the part of the
defendant IBAA to just rely on the alleged telephone call of the
one Godofredo Rivera and in his signature considering that the
plaintiff is not a client of the defendant IBAA."

It is a well-settled rule that the relationship between the payee or

holder of commercial paper and the bank to which it is sent for
collection is, in the absence of an argreement to the contrary, that
of principal and agent.22 A bank which receives such paper for
collection is the agent of the payee or holder.23
Even considering arguendo, that the diversion of the amount of a
check payable to the collecting bank in behalf of the designated
payee may be allowed, still such diversion must be properly
authorized by the payor. Otherwise stated, the diversion can be
justified only by proof of authority from the drawer, or that the
drawer has clothed his agent with apparent authority to receive
the proceeds of such check.
Citibank further argues that PCI Bank's clearing stamp appearing
at the back of the questioned checks stating that ALL PRIOR
INDORSEMENTS AND/OR LACK OF INDORSEMENTS
GURANTEED should render PCIBank liable because it made it
pass through the clearing house and therefore Citibank had no
other option but to pay it. Thus, Citibank had no other option but
to pay it. Thus, Citibank assets that the proximate cause of
Ford's injury is the gross negligence of PCIBank. Since the
questione dcrossed check was deposited with PCIBank, which
claimed to be a depository/collecting bank of the BIR, it had the
responsibility to make sure that the check in questions is
deposited in Payee's account only.
Indeed, the crossing of the check with the phrase "Payee's
Account Only," is a warning that the check should be deposited
only in the account of the CIR. Thus, it is the duty of the
collecting bank PCIBank to ascertain that the check be deposited
in payee's account only. Therefore, it is the collecting bank
(PCIBank) which is bound to scruninize the check and to know

its depositors before it could make the clearing indorsement "all

prior indorsements and/or lack of indorsement guaranteed".
In Banco de Oro Savings and Mortgage Bank vs. Equitable
Banking Corporation,24 we ruled:
"Anent petitioner's liability on said instruments, this court is in
full accord with the ruling of the PCHC's Board of Directors
that:
'In presenting the checks for clearing and for payment, the
defendant made an express guarantee on the validity of "all prior
endorsements." Thus, stamped at the back of the checks are the
defedant's clear warranty: ALL PRIOR ENDORSEMENTS
AND/OR LACK OF ENDORSEMENTS GUARANTEED.
Without such warranty, plaintiff would not have paid on the
checks.'
No amount of legal jargon can reverse the clear meaning of
defendant's warranty. As the warranty has proven to be false and
inaccurate, the defendant is liable for any damage arising out of
the falsity of its representation."25
Lastly, banking business requires that the one who first cashes
and negotiates the check must take some percautions to learn
whether or not it is genuine. And if the one cashing the check
through indifference or othe circumstance assists the forger in
committing the fraud, he should not be permitted to retain the
proceeds of the check from the drawee whose sole fault was that
it did not discover the forgery or the defect in the title of the
person negotiating the instrument before paying the check. For
this reason, a bank which cashes a check drawn upon another
bank, without requiring proof as to the identity of persons

presenting it, or making inquiries with regard to them, cannot

hold the proceeds against the drawee when the proceeds of the
checks were afterwards diverted to the hands of a third party. In
such cases the drawee bank has a right to believe that the
cashing bank (or the collecting bank) had, by the usual proper
investigation, satisfied itself of the authenticity of the
negotiation of the checks. Thus, one who encashed a check
which had been forged or diverted and in turn received payment
thereon from the drawee, is guilty of negligence which
proximately contributed to the success of the fraud practiced on
the drawee bank. The latter may recover from the holder the
money paid on the check.26
Having established that the collecting bank's negligence is the
proximate cause of the loss, we conclude that PCIBank is liable
in the amount corresponding to the proceeds of Citibank Check
No. SN-04867.
G.R. No. 128604
The trial court and the Court of Appeals found that PCIBank had
no official act in the ordinary course of business that would
attribute to it the case of the embezzlement of Citibank Check
Numbers SN-10597 and 16508, because PCIBank did not
actually receive nor hold the two Ford checks at all. The trial
court held, thus:
"Neither is there any proof that defendant PCIBank contributed
any official or conscious participation in the process of the
embezzlement. This Court is convinced that the switching
operation (involving the checks while in transit for "clearing")
were the clandestine or hidden actuations performed by the
members of the syndicate in their own personl, covert and

private capacity and done without the knowledge of the

defendant PCIBank"27
In this case, there was no evidence presented confirming the
conscious particiapation of PCIBank in the embezzlement. As a
general rule, however, a banking corporation is liable for the
wrongful or tortuous acts and declarations of its officers or
agents within the course and scope of their employment. 28 A
bank will be held liable for the negligence of its officers or
agents when acting within the course and scope of their
employment. It may be liable for the tortuous acts of its officers
even as regards that species of tort of which malice is an
essential element. In this case, we find a situation where the
PCIBank appears also to be the victim of the scheme hatched by
a syndicate in which its own management employees had
particiapted.
The pro-manager of San Andres Branch of PCIBank, Remberto
Castro, received Citibank Check Numbers SN-10597 and 16508.
He passed the checks to a co-conspirator, an Assistant Manager
of PCIBank's Meralco Branch, who helped Castro open a
Checking account of a fictitious person named "Reynaldo
Reyes." Castro deposited a worthless Bank of America Check in
exactly the same amount of Ford checks. The syndicate
tampered with the checks and succeeded in replacing the
worthless checks and the eventual encashment of Citibank
Check Nos. SN 10597 and 16508. The PCIBank Ptro-manager,
Castro, and his co-conspirator Assistant Manager apparently
performed their activities using facilities in their official capacity
or authority but for their personal and private gain or benefit.
A bank holding out its officers and agents as worthy of
confidence will not be permitted to profit by the frauds these

officers or agents were enabled to perpetrate in the apparent

course of their employment; nor will t be permitted to shirk its
responsibility for such frauds, even though no benefit may
accrue to the bank therefrom. For the general rule is that a bank
is liable for the fraudulent acts or representations of an officer or
agent acting within the course and apparent scope of his
employment or authority.29 And if an officer or employee of a
bank, in his official capacity, receives money to satisfy an
evidence of indebetedness lodged with his bank for collection,
the bank is liable for his misappropriation of such sum.30
Moreover, as correctly pointed out by Ford, Section 5 31 of
Central Bank Circular No. 580, Series of 1977 provides that any
theft affecting items in transit for clearing, shall be for the
account of sending bank, which in this case is PCIBank.
But in this case, responsibility for negligence does not lie on
PCIBank's shoulders alone.
The evidence on record shows that Citibank as drawee bank was
likewise negligent in the performance of its duties. Citibank
failed to establish that its payment of Ford's checjs were made in
due course and legally in order. In its defense, Citibank claims
the genuineness and due execution of said checks, considering
that Citibank (1) has no knowledge of any informity in the
issuance of the checks in question (2) coupled by the fact that
said checks were sufficiently funded and (3) the endorsement of
the Payee or lack thereof was guaranteed by PCI Bank (formerly
IBAA), thus, it has the obligation to honor and pay the same.
For its part, Ford contends that Citibank as the drawee bank
owes to Ford an absolute and contractual duty to pay the
proceeds of the subject check only to the payee thereof, the CIR.

Citing Section 6232 of the Negotiable Instruments Law, Ford

argues that by accepting the instrument, the acceptro which is
Citibank engages that it will pay according to the tenor of its
acceptance, and that it will pay only to the payee, (the CIR),
considering the fact that here the check was crossed with
annotation "Payees Account Only."
As ruled by the Court of Appeals, Citibank must likewise answer
for the damages incurred by Ford on Citibank Checks Numbers
SN 10597 and 16508, because of the contractual relationship
existing between the two. Citibank, as the drawee bank breached
its contractual obligation with Ford and such degree of
culpability contributed to the damage caused to the latter. On
this score, we agree with the respondent court's ruling.
Citibank should have scrutinized Citibank Check Numbers SN
10597 and 16508 before paying the amount of the proceeds
thereof to the collecting bank of the BIR. One thing is clear from
the record: the clearing stamps at the back of Citibank Check
Nos. SN 10597 and 16508 do not bear any initials. Citibank
failed to notice and verify the absence of the clearing stamps.
Had this been duly examined, the switching of the worthless
checks to Citibank Check Nos. 10597 and 16508 would have
been discovered in time. For this reason, Citibank had indeed
failed to perform what was incumbent upon it, which is to ensure
that the amount of the checks should be paid only to its
designated payee. The fact that the drawee bank did not discover
the irregularity seasonably, in our view, consitutes negligence in
carrying out the bank's duty to its depositors. The point is that as
a business affected with public interest and because of the nature
of its functions, the bank is under obligation to treat the accounts
of its depositors with meticulous care, always having in mind the
fiduciary nature of their relationship.33

Thus, invoking the doctrine of comparative negligence, we are

of the view that both PCIBank and Citibank failed in their
respective obligations and both were negligent in the selection
and supervision of their employees resulting in the encashment
of Citibank Check Nos. SN 10597 AND 16508. Thus, we are
constrained to hold them equally liable for the loss of the
proceeds of said checks issued by Ford in favor of the CIR.
Time and again, we have stressed that banking business is so
impressed with public interest where the trust and confidence of
the public in general is of paramount umportance such that the
appropriate standard of diligence must be very high, if not the
highest, degree of diligence.34 A bank's liability as obligor is not
merely vicarious but primary, wherein the defense of exercise of
due diligence in the selection and supervision of its employees is
of no moment.35
Banks handle daily transactions involving millions of pesos. 36
By the very nature of their work the degree of responsibility,
care and trustworthiness expected of their employees and
officials is far greater than those of ordinary clerks and
employees.37 Banks are expected to exercise the highest degree
of diligence in the selection and supervision of their
employees.38
On the issue of prescription, PCIBank claims that the action of
Ford had prescribed because of its inability to seek judicial relief
seasonably, considering that the alleged negligent act took place
prior to December 19, 1977 but the relief was sought only in
1983, or seven years thereafter.
The statute of limitations begins to run when the bank gives the
depositor notice of the payment, which is ordinarily when the

check is returned to the alleged drawer as a voucher with a

statement of his account,39 and an action upon a check is
ordinarily governed by the statutory period applicable to
instruments in writing.40
Our laws on the matter provide that the action upon a written
contract must be brought within ten year from the time the right
of action accrues.41 hence, the reckoning time for the prescriptive
period begins when the instrument was issued and the
corresponding check was returned by the bank to its depositor
(normally a month thereafter). Applying the same rule, the cause
of action for the recovery of the proceeds of Citibank Check No.
SN 04867 would normally be a month after December 19, 1977,
when Citibank paid the face value of the check in the amount of
P4,746,114.41. Since the original complaint for the cause of
action was filed on January 20, 1984, barely six years had
lapsed. Thus, we conclude that Ford's cause of action to recover
the amount of Citibank Check No. SN 04867 was seasonably
filed within the period provided by law.
Finally, we also find thet Ford is not completely blameless in its
failure to detect the fraud. Failure on the part of the depositor to
examine its passbook, statements of account, and cancelled
checks and to give notice within a reasonable time (or as
required by statute) of any discrepancy which it may in the
exercise of due care and diligence find therein, serves to mitigate
the banks' liability by reducing the award of interest from twelve
percent (12%) to six percent (6%) per annum. As provided in
Article 1172 of the Civil Code of the Philippines, respondibility
arising from negligence in the performance of every kind of
obligation is also demandable, but such liability may be
regulated by the courts, according to the circumstances. In quasidelicts, the contributory negligence of the plaintiff shall reduce

the damages that he may recover.42

WHEREFORE, the assailed Decision and Resolution of the
Court of Appeals in CA-G.R. CV No. 25017 areAFFIRMED.
PCIBank, know formerly as Insular Bank of Asia and America,
id declared solely responsible for the loss of the proceeds of
Citibank Check No SN 04867 in the amount P4,746,114.41,
which shall be paid together with six percent (6%) interest
thereon to Ford Philippines Inc. from the date when the original
complaint was filed until said amount is fully paid.
However, the Decision and Resolution of the Court of Appeals
in CA-G.R. No. 28430 are MODIFIED as follows: PCIBank
and Citibank are adjudged liable for and must share the loss,
(concerning the proceeds of Citibank Check Numbers SN 10597
and 16508 totalling P12,163,298.10) on a fifty-fifty ratio, and
each bank is ORDEREDto pay Ford Philippines Inc.
P6,081,649.05, with six percent (6%) interest thereon, from the
date the complaint was filed until full payment of said
amount.1wphi1.nt
Costs against Philippine Commercial International Bank and
Citibank N.A.
SO ORDERED.
Bellosillo, Mendoza, Buena, De Leon, Jr., JJ, concur.

Has Ford the right to recover the value of the checks intended as
payment to CIR?
HELD:

PCIB V. CA
350 SCRA 446
FACTS:
Ford Philippines filed actions to recover from the drawee bank
Citibank and collecting bank PCIB the value of several
checks payable to the Commissioner of Internal Revenue
which were embezzled allegedly by an organized syndicate.
What prompted this action was the drawing of a check by
Ford, which it deposited to PCIB as payment and was
debited from their Citibank account. It later on found out that
the payment wasnt received
by
the
Commissioner.
Meanwhile, according to the NBI report, one of the checks
issued by petitioner was withdrawn from PCIB for alleged
mistake in the amount to be paid. This was replaced with
managers check by PCIB, which were allegedly stolen by
the syndicate and deposited in their own account.
The trial court decided in favor of Ford.
ISSUE:

The checks were drawn against the drawee bank but the title of
the person negotiating the same was allegedly defective because
the instrument was obtained by fraud and unlawful means,
and the proceeds of the checks were not remitted to the
payee. It was established that instead paying the
Commissioner, the checks were diverted and encashed for
the eventual distribution among members of the syndicate.
Pursuant to this, it is vital to show that the negotiation is
made by the perpetrator in breach of faith amounting to fraud.
The person negotiating the checks must have gone beyond the
authority given by his principal. If the principal could prove that
there was no negligence in the performance of his duties, he
may set up the personal defense to escape liability and
recover from other parties who, through their own negligence,
allowed the commission of the crime.
It should be resolved if Ford is guilty of the imputed
contributory negligence that would defeat its claim for
reimbursement, bearing in mind that its employees were among
the members of the syndicate. It appears although the
employees of Ford initiated the transactions attributable to
the organized syndicate, their actions were not the
proximate cause of encashing the checks payable to CIR.
The degree of Fords negligence couldnt be characterized
as the proximate cause of the injury to parties. The mere
fact that the forgery was committed by a drawer-payors

confidential employee or agent, who by virtue of his position

had unusual facilities for perpetrating the fraud and imposing the
forged paper upon the bank, doesnt entitle the bank to shift the
loss to the drawer-payor, in the absence of some circumstance
raising estoppel against the drawer.
Note: not only PCIB but also Citibank is responsible for
negligence. Citibank was negligent in the performance of its
duties as a drawee bank. It failed to establish its payments of
Fords checks were made in due course and legally in order.

Internal Revenue for the payment of manufacturers taxes. The

check was deposited with defendant IBAA (now PCIB),
subsequently cleared the the Central Bank, and paid by Citibank
to IBAA. The proceeds never reached BIR, so plaintiff was
compelled to make a second payment. Defendant refused to
reimburse plaintiff, and so the latter filed a complaint. An
investigation revealed that the check was recalled by Godofredo
Rivera, the general ledger accountant of Ford, and was replaced
by a managers check. Alleged members of a syndicate
deposited the two managers checks with Pacific Banking
Corporation. Ford filed a third party complaint against Rivera
and PBC. The case against PBC was dismissed. The case against
Rivera was likewise dismissed because summons could not be
served. The trial court held Citibank and PCIB jointly and
severally liable to Ford, but the Court of Appeals only held PCIB
liable.
II. G. R. No. 128604

PCIB v. CA
Facts:
This case is composed of three consolidated petitions involving
several checks, payable to the Bureau of Internal Revenue, but
was embezzled allegedly by an organized syndicate.
I. G. R. Nos. 121413 and 121479
On October 19, 1977, plaintiff Ford issued a Citibank check
amounting to P4,746,114.41 in favor of the Commissioner of

Ford drew two checks in favor of the Commissioner of Internal

Revenue, amounting to P5,851,706.37 and P6,311,591.73. Both
are crossed checks payable to payees account only. The checks
never reached BIR, so plaintiff was compelled to make second
payments. Plaintiff instituted an action for recovery against
PCIB and Citibank.
On investigation of NBI, the modus operandi was discovered.
Gorofredo Rivera made the checks but instead of delivering
them to BIR, passed it to Castro, who was the manager of PCIB
San Andres. Castro opened a checking account in the name of a
fictitious person Reynaldo Reyes. Castro deposited a
worthless Bank of America check with the same amount as that
issued by Ford. While being routed to the Central Bank for

clearing, the worthless check was replaced by the genuine one

from Ford.
The trial court absolved PCIB and held Citibank liable, which
decision was affirmed in toto by the Court of Appeals.
Issues:

employee or agent, who by virtue of his position had unusual

facilities for perpertrating the fraud and imposing the forged
paper upon the bank, does notentitle the bank toshift the loss to
the drawer-payor, in the absence of some circumstance raising
estoppel against the drawer. This rule likewise applies to the
checks fraudulently negotiated or diverted by the confidential
employees who hold them in their possession.

(1) Whether there is contributory negligence on the part of Ford

(2) Has petitioner Ford the right to recover from the collecting
bank (PCIBank) and the drawee bank (Citibank) the value of the
checks intended as payment to the Commissioner of Internal
Revenue?
Held:
(1) The general rule is that if the master is injured by the
negligence of a third person and by the concuring contributory
negligence of his own servant or agent, the latter's negligence is
imputed to his superior and will defeat the superior's action
against the third person, asuming, of course that the contributory
negligence was the proximate cause of the injury of which
complaint is made. As defined, proximate cause is that which, in
the natural and continuous sequence, unbroken by any efficient,
intervening cause produces the injury and without the result
would not have occurred. It appears that although the employees
of Ford initiated the transactions attributable to an organized
syndicate, in our view, their actions were not the proximate
cause of encashing the checks payable to the CIR. The degree of
Ford's negligence, if any, could not be characterized as the
proximate cause of the injury to the parties. The mere fact that
the forgery was committed by a drawer-payor's confidential

(2) We have to scrutinize, separately, PCIBank's share of

negligence when the syndicate achieved its ultimate agenda of
stealing the proceeds of these checks.
a. G. R. Nos. 121413 and 121479
On record, PCIBank failed to verify the authority of Mr. Rivera
to negotiate the checks. The neglect of PCIBank employees to
verify whether his letter requesting for the replacement of the
Citibank Check No. SN-04867 was duly authorized, showed
lack of care and prudence required in the circumstances.
Furthermore, it was admitted that PCIBank is authorized to
collect the payment of taxpayers in behalf of the BIR. As an
agent of BIR, PCIBank is duty bound to consult its principal
regarding the unwarranted instructions given by the payor or its
agent. It is a well-settled rule that the relationship between the
payee or holder of commercial paper and the bank to which it is
sent for collection is, in the absence of an argreement to the
contrary, that of principal and agent. A bank which receives such
paper for collection is the agent of the payee or holder.
Indeed, the crossing of the check with the phrase "Payee's
Account Only," is a warning that the check should be deposited

only in the account of the CIR. Thus, it is the duty of the

collecting bank PCIBank to ascertain that the check be deposited
in payee's account only. Therefore, it is the collecting bank
(PCIBank) which is bound to scrutinize the check and to know
its depositors before it could make the clearing indorsement "all
prior indorsements and/or lack of indorsement guaranteed".
Lastly, banking business requires that the one who first cashes
and negotiates the check must take some precautions to learn
whether or not it is genuine. And if the one cashing the check
through indifference or other circumstance assists the forger in
committing the fraud, he should not be permitted to retain the
proceeds of the check from the drawee whose sole fault was that
it did not discover the forgery or the defect in the title of the
person negotiating the instrument before paying the check. For
this reason, a bank which cashes a check drawn upon another
bank, without requiring proof as to the identity of persons
presenting it, or making inquiries with regard to them, cannot
hold the proceeds against the drawee when the proceeds of the
checks were afterwards diverted to the hands of a third party. In
such cases the drawee bank has a right to believe that the
cashing bank (or the collecting bank) had, by the usual proper
investigation, satisfied itself of the authenticity of the
negotiation of the checks. Thus, one who encashed a check
which had been forged or diverted and in turn received payment
thereon from the drawee, is guilty of negligence which
proximately contributed to the success of the fraud practiced on
the drawee bank. The latter may recover from the holder the
money paid on the check.

conscious participation of PCIBank in the embezzlement. As a

general rule, however, a banking corporation is liable for the
wrongful or tortuous acts and declarations of its officers or
agents within the course and scope of their employment. A bank
will be held liable for the negligence of its officers or agents
when acting within the course and scope of their employment. It
may be liable for the tortuous acts of its officers even as regards
that species of tort of which malice is an essential element. In
this case, we find a situation where the PCIBank appears also to
be the victim of the scheme hatched by a syndicate in which its
own management employees had participated. But in this case,
responsibility for negligence does not lie on PCIBank's
shoulders alone.
Citibank failed to notice and verify the absence of the clearing
stamps. For this reason, Citibank had indeed failed to perform
what was incumbent upon it, which is to ensure that the amount
of the checks should be paid only to its designated payee. The
point is that as a business affected with public interest and
because of the nature of its functions, the bank is under
obligation to treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of their
relationship. Thus, invoking the doctrine of comparative
negligence, we are of the view that both PCIBank and Citibank
failed in their respective obligations and both were negligent in
the selection and supervision of their employees resulting in the
encashment of Citibank Check Nos. SN 10597 AND 16508.
Thus, we are constrained to hold them equally liable for the loss
of the proceeds of said checks issued by Ford in favor of the
CIR.

b. G. R. No. 128604
In this case, there was no evidence presented confirming the

Republic of the Philippines

SUPREME COURT

Manila

As found by the Court of Appeals, the antecedent facts of the

case are as follows:

THIRD DIVISION
G.R. No. 138510

October 10, 2002

TRADERS ROYAL BANK, petitioner,

vs.
RADIO PHILIPPINES NETWORK, INC.,
INTERCONTINENTAL BROADCASTING
CORPORATION and
BANAHAW BROADCASTING CORPORATION,
through the BOARD OF ADMINISTRATORS,
and SECURITY BANK AND TRUST COMPANY,
respondents.
DECISION

On April 15, 1985, the Bureau of Internal Revenue (BIR)

assessed plaintiffs Radio Philippines Network (RPN),
Intercontinental Broadcasting Corporation (IBC), and Banahaw
Broadcasting Corporation (BBC) of their tax obligations for the
taxable years 1978 to 1983.
On March 25, 1987, Mrs. Lourdes C. Vera, plaintiffs
comptroller, sent a letter to the BIR requesting settlement of
plaintiffs tax obligations.
The BIR granted the request and accordingly, on June 26, 1986,
plaintiffs purchased from defendant Traders Royal Bank (TRB)
three (3) managers checks to be used as payment for their tax
liabilities, to wit:

CORONA, J.:
Petitioner seeks the review and prays for the reversal of the
Decision1 of April 30, 1999 of Court of Appeals in CA-G.R. CV
No. 54656, the dispositive portion of which reads:
WHEREFORE, the appealed decision is AFFIRMED with
modification in the sense that appellant SBTC is hereby
absolved from any liability. Appellant TRB is solely liable to the
appellees for the damages and costs of suit specified in the
dispositive portion of the appealed decision. Costs against
appellant TRB.
SO ORDERED.2

Check Number

Amount

30652

P4,155.835.00

30650

3,949,406.12

30796

1,685,475.75

WHEREFORE, in view of the foregoing considerations,

judgment is hereby rendered in favor of the plaintiffs and against
the defendants by :
Defendant TRB, through Aida Nuez, TRB Branch Manager at
Broadcast City Branch, turned over the checks to Mrs. Vera who
was supposed to deliver the same to the BIR in payment of
plaintiffs taxes.
Sometime in September, 1988, the BIR again assessed plaintiffs
for their tax liabilities for the years 1979-82. It was then they
discovered that the three (3) managers checks (Nos. 30652,
30650 and 30796) intended as payment for their taxes were
never delivered nor paid to the BIR by Mrs. Vera. Instead, the
checks were presented for payment by unknown persons to
defendant Security Bank and Trust Company (SBTC), Taytay
Branch as shown by the banks routing symbol transit number
(BRSTN 01140027) or clearing code stamped on the reverse
sides of the checks.
Meanwhile, for failure of the plaintiffs to settle their obligations,
the BIR issued warrants of levy, distraint and garnishment
against them. Thus, they were constrained to enter into a
compromise and paid BIR P18,962,225.25 in settlement of their
unpaid deficiency taxes.
Thereafter, plaintiffs sent letters to both defendants, demanding
that the amounts covered by the checks be reimbursed or
credited to their account. The defendants refused, hence, the
instant suit.3
On February 17, 1985, the trial court rendered its decision, thus:

a) Condemning the defendant Traders Royal Bank to pay actual

damages in the sum of Nine Million Seven Hundred Ninety
Thousand and Seven Hundred Sixteen Pesos and Eighty-Seven
Centavos (P9,790,716.87) broken down as follows:
1) To plaintiff RPN-9 - P4,155,835.00
2) To Plaintiff IBC-13 - P3,949,406.12
3) To Plaintiff BBC-2 - P1,685,475.72
plus interest at the legal rate from the filing of this case in court.
b) Condemning the defendant Security Bank and Trust
Company, being collecting bank, to reimburse the defendant
Traders Royal Bank, all the amounts which the latter would pay
to the aforenamed plaintiffs;
c) Condemning both defendants to pay to each of the plaintiffs
the sum of Three Hundred Thousand (P300,000.00) Pesos as
exemplary damages and attorneys fees equivalent to twenty-five
percent of the total amount recovered; and
d) Costs of suit.
SO ORDERED.4
Defendants Traders Royal Bank and Security Bank and Trust

Company, Inc. both appealed the trial courts decision to the

Court of Appeals. However, as quoted in the beginning hereof,
the appellate court absolved defendant SBTC from any liability
and held TRB solely liable to respondent networks for damages
and costs of suit.
In the instant petition for review on certiorari of the Court of
Appeals decision, petitioner TRB assigns the following errors:
(a) the Honorable Court of Appeals manifestly overlooked facts
which would justify the conclusion that negligence on the part of
RPN, IBC and BBC bars them from recovering anything from
TRB, (b) the Honorable Court of Appeals plainly erred and
misapprehended the facts in relieving SBTC of its liability to
TRB as collecting bank and indorser by overturning the trial
courts factual finding that SBTC did endorse the three (3)
managers checks subject of the instant case, and (c) the
Honorable Court of Appeals plainly misapplied the law in
affirming the award of exemplary damages in favor of RPN, IBC
and BBC.
In reply, respondents RPN, IBC, and BBC assert that TRBs
petition raises questions of fact in violation of Rule 45 of the
1997 Revised Rules on Civil Procedure which restricts petitions
for review on certiorari of the decisions of the Court of Appeals
on pure questions of law. RPN, IBC and BBC maintain that the
issue of whether or not respondent networks had been negligent
were already passed upon both by the trial and appellate courts,
and that the factual findings of both courts are binding and
conclusive upon this Court.
Likewise, respondent SBTC denies liability on the ground that it
had no participation in the negotiation of the checks,
emphasizing that the BRSTN imprints at the back of the checks

cannot be considered as proof that respondent SBTC accepted

the disputed checks and presented them to Philippine Clearing
House Corporation for clearing.
Setting aside the factual ramifications of the instant case, the
threshold issue now is whether or not TRB should be held solely
liable when it paid the amount of the checks in question to a
person other than the payee indicated on the face of the check,
the Bureau of Internal Revenue.
"When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative,
and no right to retain the instrument, or to give a discharge
therefor, or to enforce payment thereof against any party thereto,
can be acquired through or under such signature." 5
Consequently, if a bank pays a forged check, it must be
considered as paying out of its funds and cannot charge the
amount so paid to the account of the depositor.
In the instant case, the 3 checks were payable to the BIR. It was
established, however, that said checks were never delivered or
paid to the payee BIR but were in fact presented for payment by
some unknown persons who, in order to receive payment
therefor, forged the name of the payee. Despite this fraud,
petitioner TRB paid the 3 checks in the total amount of
P9,790,716.87.
Petitioner ought to have known that, where a check is drawn
payable to the order of one person and is presented for payment
by another and purports upon its face to have been duly indorsed
by the payee of the check, it is the primary duty of petitioner to
know that the check was duly indorsed by the original payee
and, where it pays the amount of the check to a third person who

has forged the signature of the payee, the loss falls upon
petitioner who cashed the check. Its only remedy is against the
person to whom it paid the money.6
It should be noted further that one of the subject checks was
crossed. The crossing of one of the subject checks should have
put petitioner on guard; it was duty-bound to ascertain the
indorsers title to the check or the nature of his possession.
Petitioner should have known the effects of a crossed check: (a)
the check may not be encashed but only deposited in the bank;
(b) the check may be negotiated only once to one who has an
account with a bank and (c) the act of crossing the check serves
as a warning to the holder that the check has been issued for a
definite purpose so that he must inquire if he has received the
check pursuant to that purpose, otherwise, he is not a holder in
due course.7
By encashing in favor of unknown persons checks which were
on their face payable to the BIR, a government agency which
can only act only through its agents, petitioner did so at its peril
and must suffer the consequences of the unauthorized or
wrongful endorsement.8 In this light, petitioner TRB cannot
exculpate itself from liability by claiming that respondent
networks were themselves negligent.
A bank is engaged in a business impressed with public interest
and it is its duty to protect its many clients and depositors who
transact business with it. It is under the obligation to treat the
accounts of the depositors and clients with meticulous care,
whether such accounts consist only of a few hundreds or
millions of pesos.9
Petitioner argues that respondent SBTC, as the collecting bank

and indorser, should be held responsible instead for the amount

of the checks.
The Court of Appeals addressed exactly the same issue and
made the following findings and conclusions:
As to the alleged liability of appellant SBTC, a close
examination of the records constrains us to deviate from the
lower courts finding that SBTC, as a collecting bank, should
similarly bear the loss.
"A collecting bank where a check is deposited and which
indorses the check upon presentment with the drawee bank, is
such an indorser. So even if the indorsement on the check
deposited by the banks client is forged, the collecting bank is
bound by his warranties as an indorser and cannot set up the
defense of forgery as against the drawee bank."
To hold appellant SBTC liable, it is necessary to determine
whether it is a party to the disputed transactions.
Section 3 of the Negotiable Instruments Law reads:
"SECTION 63. When person deemed indorser. - A person
placing his signature upon an instrument otherwise than as
maker, drawer, or acceptor, is deemed to be an indorser unless he
clearly indicates by appropriate words his intention to be bound
in some other capacity."
Upon the other hand, the Philippine Clearing House Corporation
(PCHC) rules provide:

"Sec. 17.- BANK GUARANTEE. All checks cleared through the

PCHC shall bear the guarantee affixed thereto by the Presenting
Bank/Branch which shall read as follows:
"Cleared thru the Philippine Clearing House Corporation. All
prior endorsements and/or lack of endorsement guaranteed.
NAME OF BANK/BRANCH BRSTN (Date of clearing)."
Here, not one of the disputed checks bears the requisite
endorsement of appellant SBTC. What appears to be a guarantee
stamped at the back of the checks is that of the Philippine
National Bank, Buendia Branch, thereby indicating that it was
the latter Bank which received the same.
It was likewise established during the trial that whenever
appellant SBTC receives a check for deposit, its practice is to
stamp on its face the words, "non-negotiable". Lana Echevarrias
testimony is relevant:

"Section 19 Regular Item Procedure:

Each clearing participant, through its authorized representatives,
shall deliver to the PCHC fully qualified MICR checks grouped
in 200 or less items to a batch and supported by an add-list, a
batch control slip, and a delivery statement.
It bears stressing that through the add-list, the PCHC can
countercheck and determine which checks have been presented
on a particular day by a particular bank for processing and
clearing. In this case, however, the add-list submitted by
appellant SBTC together with the checks it presented for
clearing on August 3, 1987 does not show that Check No.
306502 in the sum of P3,949,406.12 was among those that
passed for clearing with the PCHC on that date. The same is true
with Check No. 30652 with a face amount of P4,155,835.00
presented for clearing on August 11, 1987 and Check No. 30796
with a face amount of P1,685,475.75.

"ATTY. ROMANO: Could you tell us briefly the procedure you

follow in receiving checks?

The foregoing circumstances taken altogether create a serious

doubt on whether the disputed checks passed through the hands
of appellant SBTC."10

"A: First of all, I verify the check itself, the place, the date, the
amount in words and everything. And then, if all these things are
in order and verified in the data sheet I stamp my non-negotiable
stamp at the face of the check."

We subscribe to the foregoing findings and conclusions of the

Court of Appeals.

Unfortunately, the words "non-negotiable" do not appear on the

face of either of the three (3) disputed checks.
Moreover, the aggregate amount of the checks is not reflected in
the clearing documents of appellant SBTC. Section 19 of the
Rules of the PCHC states:

A collecting bank which indorses a check bearing a forged

indorsement and presents it to the drawee bank guarantees all
prior indorsements, including the forged indorsement itself, and
ultimately should be held liable therefor. However, it is doubtful
if the subject checks were ever presented to and accepted by
SBTC so as to hold it liable as a collecting bank, as held by the
Court of Appeals.

Since TRB did not pay the rightful holder or other person or
entity entitled to receive payment, it has no right to
reimbursement. Petitioner TRB was remiss in its duty and
obligation, and must therefore suffer the consequences of its
own negligence and disregard of established banking rules and
procedures.
We agree with petitioner, however, that it should not be made to
pay exemplary damages to RPN, IBC and BBC because its
wrongful act was not done in bad faith, and it did not act in a
wanton, fraudulent, reckless or malevolent manner.11
We find the award of attorneys fees, 25% of P10 million, to be
manifestly exorbitant.12 Considering the nature and extent of the
services rendered by respondent networks counsel, however, the
Court deems it appropriate to award the amount of P100,000 as
attorneys fees.
WHEREFORE, the appealed decision is MODIFIED by deleting
the award of exemplary damages. Further, respondent networks
are granted the amount of P100,000 as attorneys fees. In all
other respects, the Court of Appeals decision is hereby
AFFIRMED.
SO ORDERED.
Puno, (Chairman), Panganiban, and Morales, JJ., concur.
Sandoval-Gutierrez, J., no part.
Traders Royal Bank v. Radio Philippines Network [G.R. No.
138510. October 10, 2002]

FACTS
Managers checks were procured by respondents payable to Bureau
of Internal Revenue. These checks were crossed and deposited to a
collecting bank by persons other than the payee.
ISSUE
Whether or not a collecting bank is precluded from setting up the
forgery against the drawee bank.
RULING
YES. A collecting bank where a check is deposited and which indorses
the check upon presentment with the drawee bank, is such an
indorser. So even if the indorsement on the check deposited by the
banks client is forged, the collecting bank is bound by his warranties
as an indorser and cannot set up the defense of forgery as against the
drawee bank.