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WEEK 2
Case:

 PNB vs. Rodriguez G.R. No. 170325, September 26, 2008

Republic of the Philippines

Supreme Court
Manila

THIRD DIVISION

PHILIPPINE NATIONAL BANK, G.R. No. 170325

Petitioner,
Present:
YNARES-SANTIAGO, J.,
Chairperson,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

ERLANDO T. RODRIGUEZ Promulgated:

and NORMA RODRIGUEZ,
Respondents. September 26, 2008
x--------------------------------------------------x

DECISION

REYES, R.T., J.:

WHEN the payee of the check is not intended to be the true recipient of its proceeds, is it payable to order
or bearer? What is the fictitious-payee rule and who is liable under it?Is there any exception?

These questions seek answers in this petition for review on certiorari of the Amended
Decision[1] of the Court of Appeals (CA) which affirmed with modification that of the Regional Trial Court
(RTC).[2]

The Facts

The facts as borne by the records are as follows:

Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner Philippine

National Bank (PNB), Amelia Avenue Branch, Cebu City. They maintained savings and demand/checking
accounts, namely, PNBig Demand Deposits (Checking/Current Account No. 810624-6 under the account
name Erlando and/or Norma Rodriguez), and PNBig Demand Deposit (Checking/Current Account No.
810480-4 under the account name Erlando T. Rodriguez).

The spouses were engaged in the informal lending business. In line with their business, they had
a discounting[3] arrangement with the Philnabank Employees Savings and Loan Association (PEMSLA),
an association of PNB employees. Naturally, PEMSLA was likewise a client of PNB Amelia Avenue
Branch. The association maintained current and savings accounts with petitioner bank.

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PEMSLA regularly granted loans to its members. Spouses Rodriguez would rediscount the
postdated checks issued to members whenever the association was short of funds. As was customary,
the spouses would replace the postdated checks with their own checks issued in the name of the
members.

It was PEMSLAs policy not to approve applications for loans of members with outstanding
debts. To subvert this policy, some PEMSLA officers devised a scheme to obtain additional loans despite
their outstanding loan accounts. They took out loans in the names of unknowing members, without the
knowledge or consent of the latter. The PEMSLA checks issued for these loans were then given to the
spouses for rediscounting. The officers carried this out by forging the indorsement of the named payees
in the checks.

In return, the spouses issued their personal checks (Rodriguez checks) in the name of the
members and delivered the checks to an officer of PEMSLA. The PEMSLA checks, on the other hand,
were deposited by the spouses to their account.

Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings
account without any indorsement from the named payees. This was an irregular procedure made
possible through the facilitation of Edmundo Palermo, Jr., treasurer of PEMSLA and bank teller in
the PNB Branch. It appears that this became the usual practice for the parties.

For the period November 1998 to February 1999, the spouses issued sixty nine (69) checks, in
the total amount of P2,345,804.00. These were payable to forty seven (47) individual payees who were all
members of PEMSLA.[4]

Petitioner PNB eventually found out about these fraudulent acts. To put a stop to this
scheme, PNB closed the current account of PEMSLA. As a result, the PEMSLA checks deposited by the
spouses were returned or dishonored for the reason Account Closed. The corresponding Rodriguez
checks, however, were deposited as usual to the PEMSLA savings account. The amounts were duly
debited from the Rodriguez account. Thus, because the PEMSLA checks given as payment were
returned, spouses Rodriguez incurred losses from the rediscounting transactions.

RTC Disposition

Alarmed over the unexpected turn of events, the spouses Rodriguez filed a civil complaint for
damages against PEMSLA, the Multi-Purpose Cooperative of Philnabankers (MCP), and petitioner
PNB. They sought to recover the value of their checks that were deposited to the PEMSLA savings
account amounting to P2,345,804.00. The spouses contended that because PNB credited the checks
to the PEMSLA account even without indorsements, PNB violated its contractual obligation to them as
depositors. PNBpaid the wrong payees, hence, it should bear the loss.

PNB moved to dismiss the complaint on the ground of lack of cause of action. PNB argued that the claim
for damages should come from the payees of the checks, and not from spouses Rodriguez. Since there
was no demand from the said payees, the obligation should be considered as discharged.

In an Order dated January 12, 2000, the RTC denied PNBs motion to dismiss.

In its Answer,[5] PNB claimed it is not liable for the checks which it paid to the PEMSLA account
without any indorsement from the payees. The bank contended that spouses Rodriguez, the
makers, actually did not intend for the named payees to receive the proceeds of the
checks. Consequently, the payees were considered as fictitious payees as defined under the
Negotiable Instruments Law (NIL). Being checks made to fictitious payees which are bearer instruments,
the checks were negotiable by mere delivery. PNBs Answer included its cross-claim against its co-
defendants PEMSLA and the MCP, praying that in the event that judgment is rendered against the
bank, the cross-defendants should be ordered to reimburse PNB the amount it shall pay.

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After trial, the RTC rendered judgment in favor of spouses Rodriguez (plaintiffs). It ruled
that PNB (defendant) is liable to return the value of the checks. All counterclaims and cross-claims were
dismissed. The dispositive portion of the RTC decision reads:

WHEREFORE, in view of the foregoing, the Court hereby renders judgment, as

follows:

1. Defendant is hereby ordered to pay the plaintiffs the total amount of P2,345,804.00 or
reinstate or restore the amount of P775,337.00 in the PNBig Demand Deposit
Checking/Current Account No. 810480-4 of Erlando T. Rodriguez, and the
amount of P1,570,467.00 in the PNBig Demand Deposit, Checking/Current
Account No. 810624-6 of Erlando T. Rodriguez and/or Norma Rodriguez, plus
legal rate of interest thereon to be computed from the filing of this complaint until
fully paid;

2. The defendant PNB is hereby ordered to pay the plaintiffs the following reasonable
amount of damages suffered by them taking into consideration the standing of
the plaintiffs being sugarcane planters, realtors, residential subdivision owners,
and other businesses:

(a) Consequential damages, unearned income in the amount

of P4,000,000.00, as a result of their having incurred great dificulty
(sic) especially in the residential subdivision business, which was
not pushed through and the contractor even threatened to file a
case against the plaintiffs;

(b) Moral damages in the amount of P1,000,000.00;

(c) Exemplary damages in the amount of P500,000.00;

(d) Attorneys fees in the amount of P150,000.00 considering that this

case does not involve very complicated issues; and for the

(e) Costs of suit.

3. Other claims and counterclaims are hereby dismissed.[6]

CA Disposition

PNB appealed the decision of the trial court to the CA on the principal ground that the disputed
checks should be considered as payable to bearer and not to order.

In a Decision[7] dated July 22, 2004, the CA reversed and set aside the RTC disposition. The CA
concluded that the checks were obviously meant by the spouses to be really paid to PEMSLA. The
court a quo declared:

We are not swayed by the contention of the plaintiffs-appellees (Spouses

Rodriguez) that their cause of action arose from the alleged breach of contract by the
defendant-appellant (PNB) when it paid the value of the checks to PEMSLA despite the
checks being payable to order. Rather, we are more convinced by the strong and credible
evidence for the defendant-appellant with regard to the plaintiffs-appellees and PEMSLAs
business arrangement that the value of the rediscounted checks of the plaintiffs-
appellees would be deposited in PEMSLAs account for payment of the loans it has
approved in exchange for PEMSLAs checks with the full value of the said loans. This is

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the only obvious explanation as to why all the disputed sixty-nine (69) checks were in the
possession of PEMSLAs errand boy for presentment to the defendant-appellant that led
to this present controversy. It also appears that the teller who accepted the said checks
was PEMSLAs officer, and that such was a regular practice by the parties until the
defendant-appellant discovered the scam. The logical conclusion, therefore, is that the
checks were never meant to be paid to order, but instead, to PEMSLA. We thus find no
breach of contract on the part of the defendant-appellant.

According to plaintiff-appellee Erlando Rodriguez testimony, PEMSLA allegedly

issued post-dated checks to its qualified members who had applied for loans. However,
because of PEMSLAs insufficiency of funds, PEMSLA approached the plaintiffs-
appellees for the latter to issue rediscounted checks in favor of said applicant
members. Based on the investigation of the defendant-appellant, meanwhile, this
arrangement allowed the plaintiffs-appellees to make a profit by issuing rediscounted
checks, while the officers of PEMSLA and other members would be able to claim their
loans, despite the fact that they were disqualified for one reason or another. They were
able to achieve this conspiracy by using other members who had loaned lesser amounts
of money or had not applied at all. x x x.[8] (Emphasis added)

The CA found that the checks were bearer instruments, thus they do not require indorsement for
negotiation; and that spouses Rodriguez and PEMSLA conspired with each other to accomplish this
money-making scheme. The payees in the checks were fictitious payees because they were not the
intended payees at all.

The spouses Rodriguez moved for reconsideration. They argued, inter alia, that the checks on
their faces were unquestionably payable to order; and that PNB committed a breach of contract when it
paid the value of the checks to PEMSLA without indorsement from the payees. They also argued that
their cause of action is not only against PEMSLA but also against PNB to recover the value of the checks.

On October 11, 2005, the CA reversed itself via an Amended Decision, the last paragraph
and fallo of which read:

In sum, we rule that the defendant-appellant PNB is liable to the plaintiffs-

appellees Sps. Rodriguez for the following:

1. Actual damages in the amount of P2,345,804 with interest at 6%

per annum from 14 May 1999 until fully paid;

2. Moral damages in the amount of P200,000;

3. Attorneys fees in the amount of P100,000; and

4. Costs of suit.

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered

by Us AFFIRMING WITH MODIFICATION the assailed decision rendered in Civil Case
No. 99-10892, as set forth in the immediately next preceding paragraph hereof, and
SETTING ASIDE Our original decision promulgated in this case on 22 July 2004.

SO ORDERED.[9]

The CA ruled that the checks were payable to order. According to the appellate court, PNB failed
to present sufficient proof to defeat the claim of the spouses Rodriguez that they really intended the
checks to be received by the specified payees. Thus, PNB is liable for the value of the checks which it
paid to PEMSLA without indorsements from the named payees. The award for damages was deemed

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appropriate in view of the failure of PNB to treat the Rodriguez account with the highest degree of
care considering the fiduciary nature of their relationship, which constrained respondents to seek
legal action.

Hence, the present recourse under Rule 45.

Issues

The issues may be compressed to whether the subject checks are payable to order or to bearer
and who bears the loss?

PNB argues anew that when the spouses Rodriguez issued the disputed checks, they did not
intend for the named payees to receive the proceeds. Thus, they are bearer instruments that could be
validly negotiated by mere delivery. Further, testimonial and documentary evidence presented during
trial amply proved that spouses Rodriguez and the officers of PEMSLA conspired with each other to
defraud the bank.

Our Ruling

Prefatorily, amendment of decisions is more acceptable than an erroneous judgment attaining

finality to the prejudice of innocent parties. A court discovering an erroneous judgment before it becomes
final may, motu proprio or upon motion of the parties, correct its judgment with the singular objective of
achieving justice for the litigants.[10]

However, a word of caution to lower courts, the CA in Cebu in this particular case, is in order. The
Court does not sanction careless disposition of cases by courts of justice.The highest degree of diligence
must go into the study of every controversy submitted for decision by litigants. Every issue and factual
detail must be closely scrutinized and analyzed, and all the applicable laws judiciously studied, before the
promulgation of every judgment by the court. Only in this manner will errors in judgments be avoided.

Now to the core of the petition.

As a rule, when the payee is fictitious or not intended to be the true recipient of the
proceeds, the check is considered as a bearer instrument. A check is a bill of exchange drawn on a
bank payable on demand.[11] It is either an order or a bearer instrument. Sections 8 and 9 of the NIL
states:

SEC. 8. When payable to order. The instrument is payable to order where it is

drawn payable to the order of a specified person or to him or his order. It may be drawn
payable to the order of

(a) A payee who is not maker, drawer, or drawee; or

(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.

Where the instrument is payable to order, the payee must be named or otherwise
indicated therein with reasonable certainty.

SEC. 9. When payable to bearer. The instrument is payable to bearer

(a) When it is expressed to be so payable; or

(b) When it is payable to a person named therein or bearer; or

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(c) When it is payable to the order of a fictitious or non-existing person, and

such fact is known to the person making it so payable; or
(d) When the name of the payee does not purport to be the name of any
person; or
(e) Where the only or last indorsement is an indorsement in
blank.[12] (Underscoring supplied)

The distinction between bearer and order instruments lies in their manner of negotiation. Under
Section 30 of the NIL, an order instrument requires an indorsement from the payee or holder before it
may be validly negotiated. A bearer instrument, on the other hand, does not require an indorsement to be
validly negotiated. It is negotiable by mere delivery. The provision reads:

SEC. 30. What constitutes negotiation. An instrument is negotiated when it is

transferred from one person to another in such manner as to constitute the transferee the
holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is
negotiated by the indorsement of the holder completed by delivery.

A check that is payable to a specified payee is an order instrument. However, under Section 9(c)
of the NIL, a check payable to a specified payee may nevertheless be considered as a bearer instrument
if it is payable to the order of a fictitious or non-existing person, and such fact is known to the person
making it so payable. Thus, checks issued to Prinsipe Abante or Si Malakas at si Maganda, who are well-
known characters in Philippine mythology, are bearer instruments because the named payees are
fictitious and non-existent.

We have yet to discuss a broader meaning of the term fictitious as used in the NIL. It is for this
reason that We look elsewhere for guidance. Court rulings in the United States are a logical starting point
since our law on negotiable instruments was directly lifted from the Uniform Negotiable Instruments Law
of the United States.[13]

A review of US jurisprudence yields that an actual, existing, and living payee may also be
fictitious if the maker of the check did not intend for the payee to in fact receive the proceeds of the
check. This usually occurs when the maker places a name of an existing payee on the check for
convenience or to cover up an illegal activity.[14] Thus, a check made expressly payable to a non-fictitious
and existing person is not necessarily an order instrument. If the payee is not the intended recipient of
the proceeds of the check, the payee is considered a fictitious payee and the check is a bearer
instrument.

In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer bears
the loss. When faced with a check payable to a fictitious payee, it is treated as a bearer instrument that
can be negotiated by delivery. The underlying theory is that one cannot expect a fictitious payee to
negotiate the check by placing his indorsement thereon. And since the maker knew this limitation, he
must have intended for the instrument to be negotiated by mere delivery. Thus, in case of controversy,
the drawer of the check will bear the loss. This rule is justified for otherwise, it will be most convenient for
the maker who desires to escape payment of the check to always deny the validity of the
indorsement. This despite the fact that the fictitious payee was purposely named without any intention
that the payee should receive the proceeds of the check.[15]

The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty Insurance Bank.[16] In the
said case, the corporation Mueller & Martin was defrauded by George L. Martin, one of its authorized
signatories. Martin drew seven checks payable to the German Savings Fund Company Building
Association (GSFCBA) amounting to $2,972.50 against the account of the corporation without authority
from the latter. Martin was also an officer of the GSFCBA but did not have signing authority. At the back
of the checks, Martin placed the rubber stamp of the GSFCBA and signed his own name as
indorsement. He then successfully drew the funds from Liberty Insurance Bank for his own personal
profit. When the corporation filed an action against the bank to recover the amount of the checks, the
claim was denied.

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The US Supreme Court held in Mueller that when the person making the check so payable did
not intend for the specified payee to have any part in the transactions, the payee is considered as a
fictitious payee. The check is then considered as a bearer instrument to be validly negotiated by mere
delivery. Thus, the US Supreme Court held that Liberty Insurance Bank, as drawee, was authorized to
make payment to the bearer of the check, regardless of whether prior indorsements were genuine or
not.[17]

The more recent Getty Petroleum Corp. v. American Express Travel Related Services Company,
Inc.[18] upheld the fictitious-payee rule. The rule protects the depositary bank and assigns the loss to the
drawer of the check who was in a better position to prevent the loss in the first place. Due care is not
even required from the drawee or depositary bank in accepting and paying the checks. The effect is that a
showing of negligence on the part of the depositary bank will not defeat the protection that is derived from
this rule.

However, there is a commercial bad faith exception to the fictitious-payee rule. A showing
of commercial bad faith on the part of the drawee bank, or any transfereeof the check for that
matter, will work to strip it of this defense. The exception will cause it to bear the loss. Commercial bad
faith is present if the transferee of the check acts dishonestly, and is a party to the fraudulent
scheme. Said the US Supreme Court in Getty:

Consequently, a transferees lapse of wary vigilance, disregard of suspicious

circumstances which might have well induced a prudent banker to investigate and other
permutations of negligence are not relevant considerations under Section 3-405 x x
x. Rather, there is a commercial bad faith exception to UCC 3-405, applicable when the
transferee acts dishonestly where it has actual knowledge of facts and circumstances
that amount to bad faith, thus itself becoming a participant in a fraudulent scheme. x x
x Such a test finds support in the text of the Code, which omits a standard of care
requirement from UCC 3-405 but imposes on all parties an obligation to act with honesty
in fact. x x x[19] (Emphasis added)

Getty also laid the principle that the fictitious-payee rule extends protection even to non-bank transferees
of the checks.

In the case under review, the Rodriguez checks were payable to specified payees. It is unrefuted
that the 69 checks were payable to specific persons. Likewise, it is uncontroverted that the payees were
actual, existing, and living persons who were members of PEMSLA that had a rediscounting arrangement
with spouses Rodriguez.

What remains to be determined is if the payees, though existing persons, were fictitious in its
broader context.

For the fictitious-payee rule to be available as a defense, PNB must show that the makers did not
intend for the named payees to be part of the transaction involving the checks. At most, the banks thesis
shows that the payees did not have knowledge of the existence of the checks. This lack of knowledge
on the part of the payees, however, was not tantamount to a lack of intention on the part of
respondents-spouses that the payees would not receive the checks proceeds. Considering that
respondents-spouses were transacting with PEMSLA and not the individual payees, it is understandable
that they relied on the information given by the officers of PEMSLA that the payees would be receiving
the checks.

Verily, the subject checks are presumed order instruments. This is because, as found by both
lower courts, PNB failed to present sufficient evidence to defeat the claim of respondents-spouses that
the named payees were the intended recipients of the checks proceeds. The bank failed to satisfy a

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requisite condition of a fictitious-payee situation that the maker of the check intended for the payee to
have no interest in the transaction.

Because of a failure to show that the payees were fictitious in its broader sense, the fictitious-
payee rule does not apply. Thus, the checks are to be deemed payable to order. Consequently, the
drawee bank bears the loss.[20]

PNB was remiss in its duty as the drawee bank. It does not dispute the fact that its teller or
tellers accepted the 69 checks for deposit to the PEMSLA account even without any indorsement from
the named payees. It bears stressing that order instruments can only be negotiated with a valid
indorsement.

A bank that regularly processes checks that are neither payable to the customer nor duly
indorsed by the payee is apparently grossly negligent in its operations. [21] This Court has recognized the
unique public interest possessed by the banking industry and the need for the people to have full trust
and confidence in their banks.[22] For this reason, banks are minded to treat their customers accounts with
utmost care, confidence, and honesty.[23]

In a checking transaction, the drawee bank has the duty to verify the genuineness of the
signature of the drawer and to pay the check strictly in
accordance with the drawers instructions, i.e., to the named payee in the check. It should charge to the
drawers accounts only the payables authorized by the latter. Otherwise, the drawee will be violating the
instructions of the drawer and it shall be liable for the amount charged to the drawers account.[24]

In the case at bar, respondents-spouses were the banks depositors. The checks were drawn
against respondents-spouses accounts. PNB, as the drawee bank, had the responsibility to ascertain the
regularity of the indorsements, and the genuineness of the signatures on the checks before accepting
them for deposit. Lastly, PNB was obligated to pay the checks in strict accordance with the instructions of
the drawers. Petitioner miserably failed to discharge this burden.

The checks were presented to PNB for deposit by a representative of PEMSLA absent any type
of indorsement, forged or otherwise. The facts clearly show that the bank did not pay the checks in strict
accordance with the instructions of the drawers, respondents-spouses. Instead, it paid the values of the
checks not to the named payees or their order, but to PEMSLA, a third party to the transaction between
the drawers and the payees.

Moreover, PNB was negligent in the selection and supervision of its employees. The
trustworthiness of bank employees is indispensable to maintain the stability of the banking industry. Thus,
banks are enjoined to be extra vigilant in the management and supervision of their employees. In Bank of
the Philippine Islands v. Court of Appeals,[25]this Court cautioned thus:

Banks handle daily transactions involving millions of pesos. By the very nature of
their work the degree of responsibility, care and trustworthiness expected of their
employees and officials is far greater
than those of ordinary clerks and employees. For obvious reasons, the banks are
expected to exercise the highest degree of diligence in the selection and supervision of
their employees.[26]

PNBs tellers and officers, in violation of banking rules of procedure, permitted the invalid deposits
of checks to the PEMSLA account. Indeed, when it is the gross negligence of the bank employees that
caused the loss, the bank should be held liable.[27]

PNBs argument that there is no loss to compensate since no demand for payment has been
made by the payees must also fail. Damage was caused to respondents-spouses when the PEMSLA
checks they deposited were returned for the reason Account Closed. These PEMSLA checks were the

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corresponding payments to the Rodriguez checks. Since they could not encash the PEMSLA checks,
respondents-spouses were unable to collect payments for the amounts they had advanced.

A bank that has been remiss in its duty must suffer the consequences of its negligence. Being
issued to named payees, PNB was duty-bound by law and by banking rules and procedure to require that
the checks be properly indorsed before accepting them for deposit and payment. In fine, PNB should be
held liable for the amounts of the checks.

One Last Note

We note that the RTC failed to thresh out the merits of PNBs cross-claim against its co-
defendants PEMSLA and MPC. The records are bereft of any pleading filed by these two defendants in
answer to the complaint of respondents-spouses and cross-claim of PNB. The Rules expressly provide
that failure to file an answer is a ground for a declaration that defendant
is in default.[28] Yet, the RTC failed to sanction the failure of both PEMSLA and MPC to file responsive
pleadings. Verily, the RTC dismissal of PNBs cross-claim has no basis. Thus, this judgment shall be
without prejudice to whatever action the bank might take against its co-defendants in the trial court.

To PNBs credit, it became involved in the controversial transaction not of its own volition but due to the
actions of some of its employees. Considering that moral damages must be understood to be in concept
of grants, not punitive or corrective in nature, We resolve to reduce the award of moral damages
to P50,000.00.[29]

WHEREFORE, the appealed Amended Decision is AFFIRMED with the MODIFICATION that
the award for moral damages is reduced to P50,000.00, and that this is without prejudice to whatever
civil, criminal, or administrative action PNB might take against PEMSLA, MPC, and the employees
involved.

SO ORDERED.

 San Miguel Corp. vs. Puzon, Jr. September 22, 2010

FIRST DIVISION

SAN MIGUEL CORPORATION, G.R. No. 167567

Petitioner,

Present:

CORONA, C. J., Chairperson,

- versus - CARPIO MORALES,⃰
VELASCO, JR.,
DEL CASTILLO, and
PEREZ, JJ.

BARTOLOME PUZON, JR., Promulgated:

Respondent. September 22, 2010
x-------------------------------------------------------------------x

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DECISION

DEL CASTILLO, J.:

This petition for review assails the December 21, 2004 Decision[1]and March 28, 2005 Resolution[2]of the Court of
Appeals (CA) in CA-G.R. SP No. 83905, which dismissed the petition before it and denied reconsideration,
respectively.

Factual Antecedents

Respondent Bartolome V. Puzon, Jr., (Puzon) owner of Bartenmyk Enterprises, was a dealer of beer products of
petitioner San Miguel Corporation (SMC) for Paraaque City. Puzon purchased SMC products on credit. To ensure
payment and as a business practice, SMC required him to issue postdated checks equivalent to the value of the
products purchased on credit before the same were released to him. Said checks were returned to Puzon when the
transactions covered by these checks were paid or settled in full.

On December 31, 2000, Puzon purchased products on credit amounting to P11,820,327 for which he issued, and
gave to SMC, Bank of the Philippine Islands (BPI) Check Nos. 27904 (forP309,500.00) and 27903
(for P11,510,827.00) to cover the said transaction.

On January 23, 2001, Puzon, together with his accountant, visited the SMC Sales Office in Paraaque City to
reconcile his account with SMC. During that visit Puzon allegedly requested to see BPI Check No. 17657. However,
when he got hold of BPI Check No. 27903 which was attached to a bond paper together with BPI Check No. 17657
he allegedly immediately left the office with his accountant, bringing the checks with them.

SMC sent a letter to Puzon on March 6, 2001 demanding the return of the said checks. Puzon ignored the demand
hence SMC filed a complaint against him for theft with the City Prosecutors Office of Paraaque City.

Rulings of the Prosecutor and the Secretary of Department of Justice (DOJ)

The investigating prosecutor, Elizabeth Yu Guray found that the relationship between [SMC] and [Puzon]
appears to be one of credit or creditor-debtor relationship. The problem lies in the reconciliation of accounts and the
non-payment of beer empties which cannot give rise to a criminal prosecution for theft.[3] Thus, in her July 31, 2001
Resolution,[4] she recommended the dismissal of

the case for lack of evidence. SMC appealed.

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On June 4, 2003, the DOJ issued its resolution[5]affirming the prosecutors Resolution dismissing the
case. Its motion for reconsideration having been denied in the April 23, 2004 DOJ Resolution,[6]SMC filed a petition
for certiorari with the CA.

Ruling of the Court of Appeals

The CA found that the postdated checks were issued by Puzon merely as a security for the payment of his
purchases and that these were not intended to be encashed. It thus concluded that SMC did not acquire ownership
of the checks as it was duty bound to return the same checks to Puzon after the transactions covering them were
settled. The CA agreed with the prosecutor that there was no theft, considering that a person cannot be charged
with theft for taking personal property that belongs to himself. It disposed of the appeal as follows:

WHEREFORE, finding no grave abuse of discretion committed by public respondent, the instant
petition is hereby DISMISSED. The assailed Resolutions of public respondent, dated 04 June
2003 and 23 April 2004, are AFFIRMED. No costs at this instance.

SO ORDERED.[7]

The motion for reconsideration of SMC was denied. Hence, the present petition.

Issues

Petitioner now raises the following issues:

I
WHETHER X X X PUZON HAD STOLEN FROM SMC ON JANUARY 23, 2001, AMONG
OTHERS BPI CHECK NO. 27903 DATED MARCH 30, 2001 IN THE AMOUNT OF PESOS:
ELEVEN MILLION FIVE HUNDRED TEN THOUSAND EIGHT HUNDRED TWENTY SEVEN
(Php11,510,827.00)

II
WHETHER X X X THE POSTDATED CHECKS ISSUED BY PUZON, PARTICULARLY BPI
CHECK NO. 27903 DATED MARCH 30, 2001 IN THE AMOUNT OF PESOS: ELEVEN
MILLION FIVE HUNDRED TEN THOUSAND EIGHT HUNDRED TWENTY SEVEN
(Php11,510,827.00), WERE ISSUED IN PAYMENT OF HIS BEER PURCHASES OR WERE
USED MERELY AS SECURITY TO ENSURE PAYMENT OF PUZONS OBLIGATION.

III
WHETHER X X X THE PRACTICE OF SMC IN RETURNING THE POSTDATED CHECKS
ISSUED IN PAYMENT OF BEER PRODUCTS PURCHASED ON CREDIT SHOULD THE
TRANSACTIONS COVERED BY THESE CHECKS [BE] SETTLED ON [THE] MATURITY
DATES THEREOF COULD BE LIKENED TO A CONTRACT OF PLEDGE.

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 Page 12 of 96

IV
WHETHER X X X SMC HAD ESTABLISHED PROBABLE CAUSE TO JUSTIFY THE
INDICTMENT OF PUZON FOR THE CRIME OF THEFT PURSUANT TO ART. 308 OF THE
REVISED PENAL CODE.[8]

Petitioner's Arguments

SMC contends that Puzon was positively identified by its employees to have taken the subject postdated checks. It
also contends that ownership of the checks was transferred to it because these were issued, not merely as security
but were, in payment of Puzons purchases. SMC points out that it has established more than sufficient probable
cause to justify the indictment of Puzon for the crime of Theft.

Respondents Arguments

On the other hand, Puzon contends that SMC raises questions of fact that are beyond the province of an appeal
on certiorari. He also insists that there is no probable cause to charge him with theft because the subject checks
were issued only as security and he therefore retained ownership of the same.

Our Ruling

The petition has no merit.

Preliminary Matters

At the outset we find that as pointed out by Puzon, SMC raises questions of fact. The resolution of the first issue
raised by SMC of whether respondent stole the subject check, which calls for the Court to determine whether
respondent is guilty of a felony, first requires that the facts be duly established in the proper forum and in accord with
the proper procedure. This issue cannot be resolved based on mere allegations of facts and affidavits. The same is
true with the second issue raised by petitioner, to wit: whether the checks issued by Puzon were payments for his
purchases or were intended merely as security to ensure payment. These issues cannot be properly resolved in the
present petition for review on certiorari which is rooted merely on the resolution of the prosecutor finding no probable
cause for the filing of an information for theft.

The third issue raised by petitioner, on the other hand, would entail venturing into constitutional matters for a
complete resolution. This route is unnecessary in the present case considering that the main matter for resolution

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 Page 13 of 96

here only concerns grave abuse of discretion and the existence of probable cause for theft, which at this point is
more properly resolved through another more clear cut route.

Probable Cause for Theft

Probable cause is defined as such facts and circumstances that will engender a well-founded belief that a crime has
been committed and that the respondent is probably guilty thereof and should be held for trial.[9] On the fine points of
the determination of probable cause, Reyes v. Pearlbank Securities, Inc.[10] comprehensively elaborated that:

The determination of [the existence or absence of probable cause] lies within the discretion of the
prosecuting officers after conducting a preliminary investigation upon complaint of an offended
party. Thus, the decision whether to dismiss a complaint or not is dependent upon the sound
discretion of the prosecuting fiscal. He may dismiss the complaint forthwith, if he finds the charge
insufficient in form or substance or without any ground. Or he may proceed with the investigation if
the complaint in his view is sufficient and in proper form. To emphasize, the determination of
probable cause for the filing of information in court is an executive function, one that properly
pertains at the first instance to the public prosecutor and, ultimately, to the Secretary of Justice,
who may direct the filing of the corresponding information or move for the dismissal of the
case. Ultimately, whether or not a complaint will be dismissed is dependent on the sound
discretion of the Secretary of Justice. And unless made with grave abuse of discretion, findings of
the Secretary of Justice are not subject to review.

For this reason, the Court considers it sound judicial policy to refrain from interfering in the conduct
of preliminary investigations and to leave the Department of Justice ample latitude of discretion in
the determination of what constitutes sufficient evidence to establish probable cause for the
prosecution of supposed offenders. Consistent with this policy, courts do not reverse the Secretary
of Justice's findings and conclusions on the matter of probable cause except in clear cases of
grave abuse of discretion.

In the present case, we are also not sufficiently convinced to deviate from the general rule of non-
interference. Indeed the CA did not err in dismissing the petition for certiorari before it, absent grave abuse of
discretion on the part of the DOJ Secretary in not finding probable cause against Puzon for theft.

The Revised Penal Code provides:

Art. 308. Who are liable for theft. - Theft is committed by any person who, with intent to gain but
without violence against, or intimidation of persons nor force upon things, shall take personal
property of another without the latters consent.

xxxx

[T]he essential elements of the crime of theft are the following: (1) that there be a taking of personal property; (2) that
said property belongs to another; (3) that the taking be done with intent to gain; (4) that the taking be done without

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 Page 14 of 96

the consent of the owner; and (5) that the taking be accomplished without the use of violence or intimidation against
persons or force upon things.[11]

Considering that the second element is that the thing taken belongs to another, it is relevant to determine whether
ownership of the subject check was transferred to petitioner. On this point the Negotiable Instruments Law provides:

Sec. 12. Antedated and postdated The instrument is not invalid for the reason only that it is
antedated or postdated, provided this is not done for an illegal or fraudulent purpose. The person
to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery.
(Underscoring supplied.)

Note however that delivery as the term is used in the aforementioned provision means that the party delivering did
so for the purpose of giving effect thereto.[12] Otherwise, it cannot be said that there has been delivery of the
negotiable instrument. Once there is delivery, the person to whom the instrument is delivered gets the title to the
instrument completely and irrevocably.

If the subject check was given by Puzon to SMC in payment of the obligation, the purpose of giving effect to the
instrument is evident thus title to or ownership of the check was transferred upon delivery. However, if the check
was not given as payment, there being no intent to give effect to the instrument, then ownership of the check was
not transferred to SMC.

The evidence of SMC failed to establish that the check was given in payment of the obligation of Puzon. There was
no provisional receipt or official receipt issued for the amount of the check.What was issued was a receipt for
the document, a POSTDATED CHECK SLIP.[13]

Furthermore, the petitioner's demand letter sent to respondent states As per company policies on receivables, all
issuances are to be covered by post-dated checks. However, you have deviated from this policy by forcibly taking
away the check you have issued to us to cover the December issuance.[14] Notably, the term payment was not used
instead the terms covered and cover were used.

Although the petitioner's witness, Gregorio L. Joven III, states in paragraph 6 of his affidavit that the check was given
in payment of the obligation of Puzon, the same is contradicted by his statements in paragraph 4, where he states
that As a standard company operating procedure, all beer purchases by dealers on credit shall be covered by
postdated checks equivalent to the value of the beer products purchased; in paragraph 9 where he states that the
transaction covered by the said check had not yet been paid for, and in paragraph 8 which clearly shows that partial
payment is expected to be made by the return of beer empties, and not by the deposit or encashment of the
check. Clearly the term cover was not meant to be used interchangeably with payment.

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 Page 15 of 96

When taken in conjunction with the counter-affidavit of Puzon where he states that As the [liquid beer] contents are
paid for, SMC return[s] to me the corresponding PDCs or request[s] me to replace them with whatever was the
unpaid balance.[15] it becomes clear that both parties did not intend for the check to pay for the beer products. The
evidence proves that the check was accepted, not as payment, but in accordance with the long-standing policy of
SMC to require its dealers to issue postdated checks to cover its receivables. The check was only meant
to coverthe transaction and in the meantime Puzon was to pay for the transaction by some other means other than
the check. This being so, title to the check did not transfer to SMC; it remained with Puzon. The second element of
the felony of theft was therefore not established. Petitioner was not able to show that Puzon took a check
that belonged to another. Hence, the prosecutor and the DOJ were correct in finding no probable cause for theft.

Consequently, the CA did not err in finding no grave abuse of discretion committed by the DOJ in sustaining the
dismissal of the case for theft for lack of probable cause.

WHEREFORE, the petition is DENIED. The December 21, 2004 Decision and March 28, 2005 Resolution of the
Court of Appeals in CA-G.R. SP. No. 83905 are AFFIRMED.

SO ORDERED.

WEEK 4

Real and Personal Defenses:

 State Investment House, Inc. vs. CA, January 11, 1993

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 101163 January 11, 1993

STATE INVESTMENT HOUSE, INC., petitioner,

vs.
COURT OF APPEALS and NORA B. MOULIC, respondents.

Escober, Alon & Associates for petitioner.

Page 15 of 96
 Page 16 of 96

Martin D. Pantaleon for private respondents.

BELLOSILLO, J.:

The liability to a holder in due course of the drawer of checks issued to another merely as security, and
the right of a real estate mortgagee after extrajudicial foreclosure to recover the balance of the obligation,
are the issues in this Petition for Review of the Decision of respondent Court of Appeals.

Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for pieces of jewelry to be
sold on commission, two (2) post-dated Equitable Banking Corporation checks in the amount of Fifty
Thousand Pesos (P50,000.00) each, one dated 30 August 1979 and the other, 30 September 1979.
Thereafter, the payee negotiated the checks to petitioner State Investment House. Inc. (STATE).

MOULIC failed to sell the pieces of jewelry, so she returned them to the payee before maturity of the
checks. The checks, however, could no longer be retrieved as they had already been negotiated.
Consequently, before their maturity dates, MOULIC withdrew her funds from the drawee bank.

Upon presentment for payment, the checks were dishonored for insufficiency of funds. On 20 December
1979, STATE allegedly notified MOULIC of the dishonor of the checks and requested that it be paid in
cash instead, although MOULIC avers that no such notice was given her.

On 6 October 1983, STATE sued to recover the value of the checks plus attorney's fees and expenses of
litigation.

In her Answer, MOULIC contends that she incurred no obligation on the checks because the jewelry was
never sold and the checks were negotiated without her knowledge and consent. She also instituted a
Third-Party Complaint against Corazon Victoriano, who later assumed full responsibility for the checks.

On 26 May 1988, the trial court dismissed the Complaint as well as the Third-Party Complaint, and
ordered STATE to pay MOULIC P3,000.00 for attorney's fees.

STATE elevated the order of dismissal to the Court of Appeals, but the appellate court affirmed the trial
court on the ground that the Notice of Dishonor to MOULIC was made beyond the period prescribed by
the Negotiable Instruments Law and that even if STATE did serve such notice on MOULIC within the
reglementary period it would be of no consequence as the checks should never have been presented for
payment. The sale of the jewelry was never effected; the checks, therefore, ceased to serve their purpose
as security for the jewelry.

We are not persuaded.

The negotiability of the checks is not in dispute. Indubitably, they were negotiable. After all, at the pre-
trial, the parties agreed to limit the issue to whether or not STATE was a holder of the checks in due
course.1

In this regard, Sec. 52 of the Negotiable Instruments Law provides —

Sec. 52. What constitutes a holder in due course. — A holder in due course is a holder
who has taken the instrument under the following conditions: (a) That it is complete and
regular upon its face; (b) That he became the holder of it before it was overdue, and
without notice that it was previously dishonored, if such was the fact; (c) That he took it in

Page 16 of 96
 Page 17 of 96

good faith and for value; (d) That at the time it was negotiated to him he had no notice of
any infirmity in the instrument or defect in the title of the person negotiating it.

Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable instrument is a
holder in due course.2 Consequently, the burden of proving that STATE is not a holder in due course lies
in the person who disputes the presumption. In this regard, MOULIC failed.

The evidence clearly shows that: (a) on their faces the post-dated checks were complete and regular: (b)
petitioner bought these checks from the payee, Corazon Victoriano, before their due dates; 3 (c) petitioner
took these checks in good faith and for value, albeit at a discounted price; and, (d) petitioner was never
informed nor made aware that these checks were merely issued to payee as security and not for value.

Consequently, STATE is indeed a holder in due course. As such, it holds the instruments free from any
defect of title of prior parties, and from defenses available to prior parties among themselves; STATE
may, therefore, enforce full payment of the checks.4

MOULIC cannot set up against STATE the defense that there was failure or absence of consideration.
MOULIC can only invoke this defense against STATE if it was privy to the purpose for which they were
issued and therefore is not a holder in due course.

That the post-dated checks were merely issued as security is not a ground for the discharge of the
instrument as against a holder in due course. For the only grounds are those outlined in Sec. 119 of the
Negotiable Instruments Law:

Sec. 119. Instrument; how discharged. — A negotiable instrument is discharged: (a) By

payment in due course by or on behalf of the principal debtor; (b) By payment in due
course by the party accommodated, where the instrument is made or accepted for his
accommodation; (c) By the intentional cancellation thereof by the holder; (d) By any other
act which will discharge a simple contract for the payment of money; (e) When the
principal debtor becomes the holder of the instrument at or after maturity in his own right.

Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the discharge of the
instrument. But, the intentional cancellation contemplated under paragraph (c) is that cancellation
effected by destroying the instrument either by tearing it up,5 burning it,6 or writing the word "cancelled" on
the instrument. The act of destroying the instrument must also be made by the holder of the instrument
intentionally. Since MOULIC failed to get back possession of the post-dated checks, the intentional
cancellation of the said checks is altogether impossible.

On the other hand, the acts which will discharge a simple contract for the payment of money under
paragraph (d) are determined by other existing legislations since Sec. 119 does not specify what these
acts are, e.g., Art. 1231 of the Civil Code7 which enumerates the modes of extinguishing obligations.
Again, none of the modes outlined therein is applicable in the instant case as Sec. 119 contemplates of a
situation where the holder of the instrument is the creditor while its drawer is the debtor. In the present
action, the payee, Corazon Victoriano, was no longer MOULIC's creditor at the time the jewelry was
returned.

Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the mere expediency
of withdrawing her funds from the drawee bank. She is thus liable as she has no legal basis to excuse
herself from liability on her checks to a holder in due course.

Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment. The need for
such notice is not absolute; there are exceptions under Sec. 114 of the Negotiable Instruments Law:

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 Page 18 of 96

Sec. 114. When notice need not be given to drawer. — Notice of dishonor is not required
to be given to the drawer in the following cases: (a) Where the drawer and the drawee
are the same person; (b) When the drawee is a fictitious person or a person not having
capacity to contract; (c) When the drawer is the person to whom the instrument is
presented for payment: (d) Where the drawer has no right to expect or require that the
drawee or acceptor will honor the instrument; (e) Where the drawer had countermanded
payment.

Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the checks when she
returned the jewelry. She simply withdrew her funds from her drawee bank and transferred them to
another to protect herself. After withdrawing her funds, she could not have expected her checks to be
honored. In other words, she was responsible for the dishonor of her checks, hence, there was no need
to serve her Notice of Dishonor, which is simply bringing to the knowledge of the drawer or indorser of the
instrument, either verbally or by writing, the fact that a specified instrument, upon proper proceedings
taken, has not been accepted or has not been paid, and that the party notified is expected to pay it. 8

In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating, not hindering or
hampering transactions in commercial paper. Thus, the said statute should not be tampered with
haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a single case. 9

The drawing and negotiation of a check have certain effects aside from the transfer of title or the incurring
of liability in regard to the instrument by the transferor. The holder who takes the negotiated paper makes
a contract with the parties on the face of the instrument. There is an implied representation that funds or
credit are available for the payment of the instrument in the bank upon which it is drawn.10 Consequently,
the withdrawal of the money from the drawee bank to avoid liability on the checks cannot prejudice the
rights of holders in due course. In the instant case, such withdrawal renders the drawer, Nora B. Moulic,
liable to STATE, a holder in due course of the checks.

Under the facts of this case, STATE could not expect payment as MOULIC left no funds with the drawee
bank to meet her obligation on the checks,11 so that Notice of Dishonor would be futile.

The Court of Appeals also held that allowing recovery on the checks would constitute unjust enrichment
on the part of STATE Investment House, Inc. This is error.

The record shows that Mr. Romelito Caoili, an Account Assistant, testified that the obligation of Corazon
Victoriano and her husband at the time their property mortgaged to STATE was extrajudicially foreclosed
amounted to P1.9 million; the bid price at public auction was only P1 million. 12 Thus, the value of the
property foreclosed was not even enough to pay the debt in full.

Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of
mortgage, the mortgagee is entitled to claim the deficiency from the debtor.13 The step thus taken by the
mortgagee-bank in resorting to an extra-judicial foreclosure was merely to find a proceeding for the sale
of the property and its action cannot be taken to mean a waiver of its right to demand payment for the
whole debt.14 For, while Act 3135, as amended, does not discuss the mortgagee's right to recover such
deficiency, it does not contain any provision either, expressly or impliedly, prohibiting recovery. In this
jurisdiction, when the legislature intends to foreclose the right of a creditor to sue for any deficiency
resulting from foreclosure of a security given to guarantee an obligation, it so expressly provides. For
instance, with respect to pledges, Art. 2115 of the Civil Code15 does not allow the creditor to recover the
deficiency from the sale of the thing pledged. Likewise, in the case of a chattel mortgage, or a thing sold
on installment basis, in the event of foreclosure, the vendor "shall have no further action against the
purchaser to recover any unpaid balance of the price. Any agreement to the contrary will be void". 16

It is clear then that in the absence of a similar provision in Act No. 3135, as amended, it cannot be
concluded that the creditor loses his right recognized by the Rules of Court to take action for the recovery

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 Page 19 of 96

of any unpaid balance on the principal obligation simply because he has chosen to extrajudicially
foreclose the real estate mortgage pursuant to a Special Power of Attorney given him by the mortgagor in
the contract of mortgage.17

The filing of the Complaint and the Third-Party Complaint to enforce the checks against MOULIC and the
VICTORIANO spouses, respectively, is just another means of recovering the unpaid balance of the debt
of the VICTORIANOs.

In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the holder in due course,
STATE, without prejudice to any action for recompense she may pursue against the VICTORIANOs as
Third-Party Defendants who had already been declared as in default.

WHEREFORE, the petition is GRANTED. The decision appealed from is REVERSED and a new one
entered declaring private respondent NORA B. MOULIC liable to petitioner STATE INVESTMENT
HOUSE, INC., for the value of EBC Checks Nos. 30089658 and 30089660 in the total amount of
P100,000.00, P3,000.00 as attorney's fees, and the costs of suit, without prejudice to any action for
recompense she may pursue against the VICTORIANOs as Third-Party Defendants.

Costs against private respondent.

SO ORDERED.

 PNB vs. Conception Mining Co., July 31, 1962

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-16968 July 31, 1962

PHILIPPINE NATIONAL BANK, plaintiff-appellee,

vs.
CONCEPCION MINING COMPANY, INC., ET AL., defendants-appellants.

Ramon B. de los Reyes for plaintiff-appellee.

Demetrio Miraflor for defendants-appellants.

LABRADOR, J.:

Appeal from a judgment or decision of the Court of First Instance of Manila, Hon. Gustavo Victoriano,
presiding, sentencing defendants Concepcion Mining Company and Jose Sarte to pay jointly and
severally to the plaintiff the amount of P7,197.26 with interest up to September 29, 1959, plus a daily
interest of P1.3698 thereafter up to the time the amount is fully paid, plus 10% of the amount as attorney's
fees, and costs of this suit.

The present action was instituted by the plaintiff to recover from the defendants the face of a promissory
note the pertinent part of which reads as follows:

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 Page 20 of 96

Manila, March 12, 1954

NINETY DAYS after date, for value received, I promise to pay to the order of the Philippine National Bank
....

In case it is necessary to collect this note by or through an attorney-at-law, the makers and indorsers shall
pay ten percent (10%) of the amount due on the note as attorney's fees, which in no case shall be less
than P100.00 exclusive of all costs and fees allowed by law as stipulated in the contract of real estate
mortgage. Demand and Dishonor Waived. Holder may accept partial payment reserving his right of
recourse again each and all indorsers.

(Purpose — mining industry)

CONCEPCION MINING COMPANY, INC.,
By:
(Sgd.) VICENTE LEGARDA
President
(Sgd.) VICENTE LEGARDA
(Sgd.) JOSE S SARTE

"Please issue check to —

Mr. Jose S. Sarte"

Upon the filing of the complaint the defendants presented their answer in which they allege that the co-
maker the promissory note Don Vicente L. Legarda died on February 24, 1946 and his estate is in the
process of judicial determination in Special Proceedings No. 29060 of the Court of First Instance of
Manila. On the basis of this allegation it is prayed, as a special defense, that the estate of said deceased
Vicente L. Legarda be included as party-defendant. The court in its decision ruled that the inclusion of
said defendant is unnecessary and immaterial, in accordance with the provisions of Article 1216 of the
Deny Civil Code and section 17 (g) of the Negotiable Instruments Law.

A motion to reconsider this decision was denied and thereupon defendants presented a petition for relief,
asking that the effects of the judgment be suspended for the reason that the deceased Vicente L.
Legarda should have been included as a party-defendant and his liability should be determined in
pursuance of the provisions of the promissory note. This motion for relief was also denied, hence
defendant appealed to this Court.

Section 17 (g) of the Negotiable Instruments Law provides as follows:

SEC. 17. Construction where instrument is ambiguous. — Where the language of the instrument
is ambiguous or there are omissions therein, the following rules of construction apply:

xxx xxx xxx

(g) Where an instrument containing the word "I promise to pay" is signed by two or more persons,
they are deemed to be jointly and severally liable thereon.

And Article 1216 of the Civil Code of the Philippines also provides as follows:

ART. 1216. The creditor may proceed against any one of the solidary debtors or some of them
simultaneously. The demand made against one of them shall not be an obstacle to those which
may subsequently be directed against the others so long as the debt has not been fully collected.

Page 20 of 96
 Page 21 of 96

In view of the above quoted provisions, and as the promissory note was executed jointly and severally by
the same parties, namely, Concepcion Mining Company, Inc. and Vicente L. Legarda and Jose S. Sarte,
the payee of the promissory note had the right to hold any one or any two of the signers of the promissory
note responsible for the payment of the amount of the note. This judgment of the lower court should be
affirmed.

Our attention has been attracted to the discrepancies in the printed record on appeal. We note, first, that
the names of the defendants, who are evidently the Concepcion Mining Co., Inc. and Jose S. Sarte, do
not appear in the printed record on appeal. The title of the complaint set forth in the record on appeal
does not contain the name of Jose Sarte, when it should, as two defendants are named in the complaint
and the only defense of the defendants is the non-inclusion of the deceased Vicente L. Legarda as a
defendant in the action. We also note that the copy of the promissory note which is set forth in the record
on appeal does not contain the name of the third maker Jose S. Sarte. Fortunately, the brief of appellee
on page 4 sets forth said name of Jose S. Sarte as one of the co-maker of the promissory note. Evidently,
there is an attempt to mislead the court into believing that Jose S. Sarte is no one of the co-makers. The
attorney for the defendants Atty. Jose S. Sarte himself and he should be held primarily responsible for the
correctness of the record on appeal. We, therefore, order the said Atty. Jose S. Sarte to explain why in
his record on appeal his own name as one of the defendants does not appear and neither does his name
appear as one of the co-signers of the promissory note in question. So ordered.

WEEK 5
Cases:

 PNB vs. Quimpo, 158 SCRA 582

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-53194 March 14, 1988

PHILIPPINE NATIONAL BANK petitioner,

vs.
HON. ROMULO S. QUIMPO, Presiding Judge, Court of First Instance of Rizal, Branch XIV, and
FRANCISCO S. GOZON II, respondents.

GANCAYCO, J.:

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

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 Page 22 of 96

Upon complaint of private respondent on February 1, 1974 Ernesto Santos was apprehended by the
police authorities and upon investigation he admitted that he stole the check of Gozon, forged his
signature and encashed the same with the Bank.

Hence Gozon filed the complaint for recovery of the amount of P5,000.00, plus interest, damages,
attorney's fees and costs against the bank in the Court of First Instance of Rizal. After the issues were
joined and the trial on the merits ensued, a decision was rendered on February 4, 1980, the dispositive
part of which reads as follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff. The defendant is

hereby condemned to return to plaintiff the amount of P5,000.00 which it had unlawfully
withheld from the latter, with interest at the legal rate from September 22, 1972 until the
amount is fully delivered. The defendant is further condemned to pay plaintiff the sum of
P2,000.00 as attorney's fees and to pay the costs of this suit.

Not satisfied therewith, the bank now filed this petition for review on certiorari in this Court raising the sole
legal issue that —

THE ACT OF RESPONDENT FRANCISCO GOZON, II IN PUTTING HIS CHECK BOOK

CONTAINING THE CHECK IN QUESTION INTO THE HANDS OF ERNESTO SANTOS
WAS INDEED THE PROXIMATE CAUSE OF THE LOSS, THEREBY PRECLUDING
HIM FROM SETTING UP THE DEFENSE OF FORGERY OR WANT 0F AUTHORITY
UNDER SECTION 23 OF THE NEGOTIABLE INSTRUMENTS LAW, ACT NO. 3201

The petition is devoid of merit.

This Court reproduces with approval the disquisition of the court a quo as follows:

A bank is bound to know the signatures of its customers; and if it pays a forged check, it
must be considered as making the payment out of its own funds, and cannot ordinarily
change the amount so paid to the account of the depositor whose name was forged' (San
Carlos Milling Co. vs. Bank of the P.I., 59 Phil. 59).

This rule is absolutely necessary to the circulation of drafts and checks, and is based
upon the presumed negligence of the drawee in failing to meet its obligation to know the
signature of its correspondent. ... There is nothing inequitable in such a rule. If the paper
comes to the drawee in the regular course of business, and he, having the opportunity
ascertaining its character, pronounces it to be valid and pays it, it is not only a question of
payment under mistake, but payment in neglect of duty which the commercial law places
upon him, and the result of his negligence must rest upon him (12 ALR 1901, citing many
cases found in I Agbayani, supra).

Defendant, however, interposed the defense that it exercised diligence in accordance

with the accepted norms of banking practice when it accepted and paid Exhibit "A". It
presented evidence that the check had to pass scrutiny by a signature verifier as well as
an officer of the bank.

A comparison of the signature (Exhibit "A-l") on the forged check (Exhibit "A") with
plaintiffs exemplar signatures (Exhibits "5-N" and "5-B") found in the PNB Form 35-A
would immediately show the negligence of the employees of the defendant bank. Even a
not too careful comparison would immediately arrest one's attention and direct it to the
graceful lines of plaintiffs exemplar signatures found in Exhibits "5-A" and "5-B". The
formation of the first letter "F" in the exemplars, which could be regarded as artistic, is

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completely different from the way the same letter is formed in Exhibit "A-l". That alone
should have alerted a more careful and prudent signature verifier.

The prime duty of a bank is to ascertain the genuineness of the signature of the drawer or the depositor
on the check being encashed. 1 It is expected to use reasonable business prudence in accepting and
cashing a check presented to it.

In this case the findings of facts of the court a quo are conclusive. The trial court found that a comparison
of the signature on the forged check and the sample signatures of private respondent show marked
differences as the graceful lines in the sample signature which is completely different from those of the
signature on the forged check. Indeed the NBI handwriting expert Estelita Santiago Agnes whom the trial
court considered to be an "unbiased scientific expert" indicated the marked differences between the
signature of private respondent on the sample signatures and the questioned signature. Notwithstanding
the testimony of Col. Fernandez, witness for petitioner, advancing the opinion that the questioned
signature appears to be genuine, the trial court by merely examining the pictorial report presented by said
witness, found a marked difference in the second "c" in Francisco as written on the questioned signature
as compared to the sample signatures, and the separation between the "s" and the "c" in the questioned
signature while they are connected in the sample signatures.2

Obviously, petitioner was negligent in encashing said forged check without carefully examining the
signature which shows marked variation from the genuine signature of private respondent.

In reference to the allegation of the petitioner that it is the negligence of private respondent that is the
cause of the loss which he suffered, the trial court held:

The act of plaintiff in leaving his checkbook in the car while he went out for a short while
can not be considered negligence sufficient to excuse the defendant bank from its own
negligence. It should be home in mind that when defendant left his car, Ernesto Santos, a
long time classmate and friend remained in the same. Defendant could not have been
expected to know that the said Ernesto Santos would remove a check from his
checkbook. Defendant had trust in his classmate and friend. He had no reason to suspect
that the latter would breach that trust .

We agree.

Private respondent trustee Ernesto Santos as a classmate and a friend. He brought him along in his car
to the bank and he left his personal belongings in the car. Santos however removed and stole a check
from his cheek book without the knowledge and consent of private respondent. No doubt private
respondent cannot be considered negligent under the circumstances of the case.

WHEREFORE, the petition is DISMISSED for lack of merit with costs against petitioner.

SO ORDERED.

 BPI vs. Casa Montessori Internationale 430 SCRA 261

FIRST DIVISION

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[G.R. No. 149454. May 28, 2004]

BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. CASA MONTESSORI INTERNATIONALE and
LEONARDO T. YABUT, respondents.

[G.R. No. 149507. May 28, 2004]

CASA MONTESSORI INTERNATIONALE, petitioner, vs. BANK OF THE PHILIPPINE

ISLANDS, respondent.

DECISION
PANGANIBAN, J.:

By the nature of its functions, a bank is required to take meticulous care of the deposits of its clients,
who have the right to expect high standards of integrity and performance from it.Among its obligations in
furtherance thereof is knowing the signatures of its clients. Depositors are not estopped from questioning
wrongful withdrawals, even if they have failed to question those errors in the statements sent by the bank
to them for verification.

The Case

Before us are two Petitions for Review[1] under Rule 45 of the Rules of Court, assailing the March 23,
2001 Decision[2] and the August 17, 2001 Resolution[3] of the Court of Appeals (CA) in CA-GR CV No.
63561. The decretal portion of the assailed Decision reads as follows:

WHEREFORE, upon the premises, the decision appealed from is AFFIRMED with the modification that
defendant bank [Bank of the Philippine Islands (BPI)] is held liable only for one-half of the value of the
forged checks in the amount of P547,115.00 after deductions subject to REIMBURSEMENT from third
party defendant Yabut who is likewise ORDERED to pay the other half to plaintiff corporation [Casa
Montessori Internationale (CASA)].[4]

The assailed Resolution denied all the parties Motions for Reconsideration.

The Facts

The facts of the case are narrated by the CA as follows:

On November 8, 1982, plaintiff CASA Montessori International[5] opened Current Account No. 0291-0081-
01 with defendant BPI[,] with CASAs President Ms. Ma. Carina C. Lebron as one of its authorized
signatories.

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In 1991, after conducting an investigation, plaintiff discovered that nine (9) of its checks had been
encashed by a certain Sonny D. Santos since 1990 in the total amount of P782,000.00, on the following
dates and amounts:

Check No. Date Amount

1. 839700 April 24, 1990 P 43,400.00

2. 839459 Nov. 2, 1990 110,500.00

3. 839609 Oct. 17, 1990 47,723.00

4. 839549 April 7, 1990 90,700.00

5. 839569 Sept. 23, 1990 52,277.00

6. 729149 Mar. 22, 1990 148,000.00

7. 729129 Mar. 16, 1990 51,015.00

8. 839684 Dec. 1, 1990 140,000.00

9. 729034 Mar. 2, 1990 98,985.00

Total -- P 782,600.00[6]

It turned out that Sonny D. Santos with account at BPIs Greenbelt Branch [was] a fictitious name used by
third party defendant Leonardo T. Yabut who worked as external auditor of CASA.Third party defendant
voluntarily admitted that he forged the signature of Ms. Lebron and encashed the checks.
The PNP Crime Laboratory conducted an examination of the nine (9) checks and concluded that the
handwritings thereon compared to the standard signature of Ms. Lebron were not written by the latter.
On March 4, 1991, plaintiff filed the herein Complaint for Collection with Damages against defendant
bank praying that the latter be ordered to reinstate the amount of P782,500.00[7] in the current and
savings accounts of the plaintiff with interest at 6% per annum.
On February 16, 1999, the RTC rendered the appealed decision in favor of the plaintiff.[8]

Ruling of the Court of Appeals

Modifying the Decision of the Regional Trial Court (RTC), the CA apportioned the loss between BPI
and CASA. The appellate court took into account CASAs contributory negligence that resulted in the
undetected forgery. It then ordered Leonardo T. Yabut to reimburse BPI half the total amount claimed;
and CASA, the other half. It also disallowed attorneys fees and moral and exemplary damages.
Hence, these Petitions.[9]

Issues

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In GR No. 149454, Petitioner BPI submits the following issues for our consideration:

I. The Honorable Court of Appeals erred in deciding this case NOT in accord with the applicable
decisions of this Honorable Court to the effect that forgery cannot be presumed; that it must be proved
by clear, positive and convincing evidence; and that the burden of proof lies on the party alleging the
forgery.

II. The Honorable Court of Appeals erred in deciding this case not in accord with applicable laws, in
particular the Negotiable Instruments Law (NIL) which precludes CASA, on account of its own negligence,
from asserting its forgery claim against BPI, specially taking into account the absence of any negligence
on the part of BPI.[10]

In GR No. 149507, Petitioner CASA submits the following issues:

1. The Honorable Court of Appeals erred when it ruled that there is no showing that [BPI], although
negligent, acted in bad faith x x x thus denying the prayer for the award of attorneys fees, moral damages
and exemplary damages to [CASA]. The Honorable Court also erred when it did not order [BPI] to pay
interest on the amounts due to [CASA].

2. The Honorable Court of Appeals erred when it declared that [CASA] was likewise negligent in the case
at bar, thus warranting its conclusion that the loss in the amount of P547,115.00 be apportioned between
[CASA] and [BPI] x x x.[11]

These issues can be narrowed down to three. First, was there forgery under the Negotiable
Instruments Law (NIL)? Second, were any of the parties negligent and therefore precluded from setting
up forgery as a defense? Third, should moral and exemplary damages, attorneys fees, and interest be
awarded?

The Courts Ruling

The Petition in GR No. 149454 has no merit, while that in GR No. 149507 is partly meritorious.

First Issue:
Forged Signature Wholly Inoperative

Section 23 of the NIL provides:

Section 23. Forged signature; effect of. -- 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 x x x 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.[12]

Under this provision, a forged signature is a real[13] or absolute defense,[14] and a person whose
signature on a negotiable instrument is forged is deemed to have never become a party thereto and to
have never consented to the contract that allegedly gave rise to it. [15]
The counterfeiting of any writing, consisting in the signing of anothers name with intent to defraud, is
forgery.[16]

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In the present case, we hold that there was forgery of the drawers signature on the check.
First, both the CA[17] and the RTC[18] found that Respondent Yabut himself had voluntarily admitted,
through an Affidavit, that he had forged the drawers signature and encashed the checks. [19] He never
refuted these findings.[20] That he had been coerced into admission was not corroborated by any evidence
on record.[21]
Second, the appellate and the trial courts also ruled that the PNP Crime Laboratory, after its
examination of the said checks,[22] had concluded that the handwritings thereon -- compared to the
standard signature of the drawer -- were not hers.[23] This conclusion was the same as that in the
Report[24] that the PNP Crime Laboratory had earlier issued to BPI -- the drawee bank -- upon the latters
request.
Indeed, we respect and affirm the RTCs factual findings, especially when affirmed by the CA, since
these are supported by substantial evidence on record. [25]

Voluntary Admission Not

Violative of Constitutional Rights

The voluntary admission of Yabut did not violate his constitutional rights (1) on custodial
investigation, and (2) against self-incrimination.
In the first place, he was not under custodial investigation. [26] His Affidavit was executed in private
and before private individuals.[27] The mantle of protection under Section 12 of Article III of the 1987
Constitution[28] covers only the period from the time a person is taken into custody for investigation of his
possible participation in the commission of a crime or from the time he is singled out as a suspect in the
commission of a crime although not yet in custody.[29]
Therefore, to fall within the ambit of Section 12, quoted above, there must be an arrest or a
deprivation of freedom, with questions propounded on him by the police authorities for the purpose of
eliciting admissions, confessions, or any information.[30] The said constitutional provision does not apply to
spontaneous statements made in a voluntary manner [31] whereby an individual orally admits to authorship
of a crime.[32] What the Constitution proscribes is the compulsory or coercive disclosure of incriminating
facts.[33]
Moreover, the right against self-incrimination[34] under Section 17 of Article III[35] of the Constitution,
which is ordinarily available only in criminal prosecutions, extends to all other government proceedings --
including civil actions, legislative investigations,[36] and administrative proceedings that possess a criminal
or penal aspect[37] -- but not to private investigations done by private individuals. Even in such
government proceedings, this right may be waived,[38] provided the waiver is certain; unequivocal; and
intelligently, understandingly and willingly made.[39]
If in these government proceedings waiver is allowed, all the more is it so in private investigations. It
is of no moment that no criminal case has yet been filed against Yabut. The filing thereof is entirely up to
the appropriate authorities or to the private individuals upon whom damage has been caused. As we shall
also explain later, it is not mandatory for CASA -- the plaintiff below -- to implead Yabut in the civil case
before the lower court.
Under these two constitutional provisions, [t]he Bill of Rights [40] does not concern itself with the
relation between a private individual and another individual. It governs the relationship between the
individual and the State.[41] Moreover, the Bill of Rights is a charter of liberties for the individual and a
limitation upon the power of the [S]tate.[42] These rights[43] are guaranteed to preclude the slightest
coercion by the State that may lead the accused to admit something false, not prevent him from freely
and voluntarily telling the truth.[44]
Yabut is not an accused here. Besides, his mere invocation of the aforesaid rights does not
automatically entitle him to the constitutional protection.[45] When he freely and voluntarily executed[46] his

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Affidavit, the State was not even involved. Such Affidavit may therefore be admitted without violating his
constitutional rights while under custodial investigation and against self-incrimination.

Clear, Positive and Convincing

Examination and Evidence

The examination by the PNP, though inconclusive, was nevertheless clear, positive and convincing.
Forgery cannot be presumed.[47] It must be established by clear, positive and convincing
evidence.[48] Under the best evidence rule as applied to documentary evidence like the checks in
question, no secondary or substitutionary evidence may inceptively be introduced, as the original writing
itself must be produced in court.[49] But when, without bad faith on the part of the offeror, the original
checks have already been destroyed or cannot be produced in court, secondary evidence may be
produced.[50] Without bad faith on its part, CASA proved the loss or destruction of the original checks
through the Affidavit of the one person who knew of that fact[51] -- Yabut. He clearly admitted to discarding
the paid checks to cover up his misdeed.[52] In such a situation, secondary evidence like microfilm copies
may be introduced in court.
The drawers signatures on the microfilm copies were compared with the standard signature. PNP
Document Examiner II Josefina de la Cruz testified on cross-examination that two different persons had
written them.[53] Although no conclusive report could be issued in the absence of the original
checks,[54] she affirmed that her findings were 90 percent conclusive. [55]According to her, even if the
microfilm copies were the only basis of comparison, the differences were evident. [56] Besides, the RTC
explained that although the Report was inconclusive, no conclusive report could have been given by the
PNP, anyway, in the absence of the original checks.[57] This explanation is valid; otherwise, no such report
can ever be relied upon in court.
Even with respect to documentary evidence, the best evidence rule applies only when the contents
of a document -- such as the drawers signature on a check -- is the subject of inquiry.[58] As to whether
the document has been actually executed, this rule does not apply; and testimonial as well as any other
secondary evidence is admissible.[59] Carina Lebron herself, the drawers authorized signatory, testified
many times that she had never signed those checks. Her testimonial evidence is admissible; the checks
have not been actually executed. The genuineness of her handwriting is proved, not only through the
courts comparison of the questioned handwritings and admittedly genuine specimens thereof, [60] but
above all by her.
The failure of CASA to produce the original checks neither gives rise to the presumption of
suppression of evidence[61] nor creates an unfavorable inference against it.[62] Such failure merely
authorizes the introduction of secondary evidence[63] in the form of microfilm copies. Of no consequence
is the fact that CASA did not present the signature card containing the signatures with which those on the
checks were compared.[64] Specimens of standard signatures are not limited to such a card. Considering
that it was not produced in evidence, other documents that bear the drawers authentic signature may be
resorted to.[65] Besides, that card was in the possession of BPI -- the adverse party.
We have held that without the original document containing the allegedly forged signature, one
cannot make a definitive comparison that would establish forgery; [66] and that a comparison based on a
mere reproduction of the document under controversy cannot produce reliable results. [67] We have also
said, however, that a judge cannot merely rely on a handwriting experts testimony, [68] but should also
exercise independent judgment in evaluating the authenticity of a signature under scrutiny. [69] In the
present case, both the RTC and the CA conducted independent examinations of the evidence presented
and arrived at reasonable and similar conclusions. Not only did they admit secondary evidence; they also
appositely considered testimonial and other documentary evidence in the form of the Affidavit.
The best evidence rule admits of exceptions and, as we have discussed earlier, the first of these has
been met.[70] The result of examining a questioned handwriting, even with the aid of experts and scientific

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instruments, may be inconclusive;[71] but it is a non sequitur to say that such result is not clear, positive
and convincing. The preponderance of evidence required in this case has been satisfied.[72]

Second Issue:
Negligence Attributable to BPI Alone

Having established the forgery of the drawers signature, BPI -- the drawee -- erred in making payments
by virtue thereof. The forged signatures are wholly inoperative, and CASA -- the drawer whose authorized
signatures do not appear on the negotiable instruments -- cannot be held liable thereon. Neither is the
latter precluded from setting up forgery as a real defense.

Clear Negligence
in Allowing Payment
Under a Forged Signature

We have repeatedly emphasized that, since the banking business is impressed with public interest,
of paramount importance thereto is the trust and confidence of the public in general.Consequently, the
highest degree of diligence[73] is expected,[74] and high standards of integrity and performance are even
required, of it.[75] By the nature of its functions, a bank is under obligation to treat the accounts of its
depositors with meticulous care,[76] always having in mind the fiduciary nature of their relationship.[77]
BPI contends that it has a signature verification procedure, in which checks are honored only when
the signatures therein are verified to be the same with or similar to the specimen signatures on the
signature cards. Nonetheless, it still failed to detect the eight instances of forgery. Its negligence
consisted in the omission of that degree of diligence required [78] of a bank.It cannot now feign ignorance,
for very early on we have already ruled that a bank is bound to know the signatures of its customers; and
if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot
ordinarily charge the amount so paid to the account of the depositor whose name was forged. [79] In fact,
BPI was the same bank involved when we issued this ruling seventy years ago.

Neither Waiver nor Estoppel

Results from Failure to
Report Error in Bank Statement

The monthly statements issued by BPI to its clients contain a notice worded as follows: If no error is
reported in ten (10) days, account will be correct.[80] Such notice cannot be considered a waiver, even if
CASA failed to report the error. Neither is it estopped from questioning the mistake after the lapse of the
ten-day period.
This notice is a simple confirmation[81] or circularization -- in accounting parlance -- that requests
client-depositors to affirm the accuracy of items recorded by the banks. [82] Its purpose is to obtain from the
depositors a direct corroboration of the correctness of their account balances with their respective
banks.[83] Internal or external auditors of a bank use it as a basic audit procedure[84] -- the results of which
its client-depositors are neither interested in nor privy to -- to test the details of transactions and balances
in the banks records.[85] Evidential matter obtained from independent sources outside a bank only serves
to provide greater assurance of reliability[86] than that obtained solely within it for purposes of an audit of
its own financial statements, not those of its client-depositors.
Furthermore, there is always the audit risk that errors would not be detected [87] for various
reasons. One, materiality is a consideration in audit planning;[88] and two, the information obtained from

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such a substantive test is merely presumptive and cannot be the basis of a valid waiver. [89] BPI has no
right to impose a condition unilaterally and thereafter consider failure to meet such condition a
waiver. Neither may CASA renounce a right[90] it has never possessed.[91]
Every right has subjects -- active and passive. While the active subject is entitled to demand its
enforcement, the passive one is duty-bound to suffer such enforcement.[92]
On the one hand, BPI could not have been an active subject, because it could not have demanded
from CASA a response to its notice. Besides, the notice was a measly request worded as follows: Please
examine x x x and report x x x.[93] CASA, on the other hand, could not have been a passive subject,
either, because it had no obligation to respond. It could -- as it did -- choose not to respond.
Estoppel precludes individuals from denying or asserting, by their own deed or representation,
anything contrary to that established as the truth, in legal contemplation. [94] Our rules on evidence even
make a juris et de jure presumption[95] that whenever one has, by ones own act or omission, intentionally
and deliberately led another to believe a particular thing to be true and to act upon that belief, one cannot
-- in any litigation arising from such act or omission -- be permitted to falsify that supposed truth.[96]
In the instant case, CASA never made any deed or representation that misled BPI. The formers
omission, if any, may only be deemed an innocent mistake oblivious to the procedures and
consequences of periodic audits. Since its conduct was due to such ignorance founded upon an innocent
mistake, estoppel will not arise.[97] A person who has no knowledge of or consent to a transaction may not
be estopped by it.[98] Estoppel cannot be sustained by mere argument or doubtful inference x x
x.[99] CASA is not barred from questioning BPIs error even after the lapse of the period given in the notice.

Loss Borne by
Proximate Source
of Negligence

For allowing payment[100] on the checks to a wrongful and fictitious payee, BPI -- the drawee bank --
becomes liable to its depositor-drawer. Since the encashing bank is one of its branches,[101] BPI can
easily go after it and hold it liable for reimbursement. [102] It may not debit the drawers account[103] and is
not entitled to indemnification from the drawer.[104] In both law and equity, when one of two 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.[105]
Proximate cause is determined by the facts of the case.[106] It is that cause which, in natural and
continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which
the result would not have occurred.[107]
Pursuant to its prime duty to ascertain well the genuineness of the signatures of its client-depositors
on checks being encashed, BPI is expected to use reasonable business prudence. [108] In the performance
of that obligation, it is bound by its internal banking rules and regulations that form part of the contract it
enters into with its depositors.[109]
Unfortunately, it failed in that regard. First, Yabut was able to open a bank account in one of its
branches without privity;[110] that is, without the proper verification of his corresponding identification
papers. Second, BPI was unable to discover early on not only this irregularity, but also the marked
differences in the signatures on the checks and those on the signature card.Third, despite the
examination procedures it conducted, the Central Verification Unit [111] of the bank even passed off these
evidently different signatures as genuine. Without exercising the required prudence on its part, BPI
accepted and encashed the eight checks presented to it. As a result, it proximately contributed to the
fraud and should be held primarily liable[112] for the negligence of its officers or agents when acting within
the course and scope of their employment.[113] It must bear the loss.

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CASA Not Negligent

in Its Financial Affairs

In this jurisdiction, the negligence of the party invoking forgery is recognized as an exception [114] to
the general rule that a forged signature is wholly inoperative. [115] Contrary to BPIs claim, however, we do
not find CASA negligent in handling its financial affairs. CASA, we stress, is not precluded from setting up
forgery as a real defense.

Role of Independent Auditor

The major purpose of an independent audit is to investigate and determine objectively if the financial
statements submitted for audit by a corporation have been prepared in accordance with the appropriate
financial reporting practices[116] of private entities. The relationship that arises therefrom is both legal and
moral.[117] It begins with the execution of the engagement letter[118] that embodies the terms and
conditions of the audit and ends with the fulfilled expectation of the auditors ethical [119] and competent
performance in all aspects of the audit.[120]
The financial statements are representations of the client; but it is the auditor who has the
responsibility for the accuracy in the recording of data that underlies their preparation, their form of
presentation, and the opinion[121] expressed therein.[122] The auditor does not assume the role of
employee or of management in the clients conduct of operations [123] and is never under the control or
supervision[124] of the client.
Yabut was an independent auditor[125] hired by CASA. He handled its monthly bank reconciliations
and had access to all relevant documents and checkbooks. [126] In him was reposed the clients[127] trust
and confidence[128] that he would perform precisely those functions and apply the appropriate procedures
in accordance with generally accepted auditing standards. [129]Yet he did not meet these
expectations. Nothing could be more horrible to a client than to discover later on that the person tasked to
detect fraud was the same one who perpetrated it.

Cash Balances
Open to Manipulation

It is a non sequitur to say that the person who receives the monthly bank statements, together with
the cancelled checks and other debit/credit memoranda, shall examine the contents and give notice of
any discrepancies within a reasonable time. Awareness is not equipollent with discernment.
Besides, in the internal accounting control system prudently installed by CASA, [130] it was Yabut who
should examine those documents in order to prepare the bank reconciliations.[131]He owned his working
papers,[132] and his output consisted of his opinion as well as the clients financial statements and
accompanying notes thereto. CASA had every right to rely solely upon his output -- based on the terms of
the audit engagement -- and could thus be unwittingly duped into believing that everything was in
order. Besides, [g]ood faith is always presumed and it is the burden of the party claiming otherwise to
adduce clear and convincing evidence to the contrary.[133]
Moreover, there was a time gap between the period covered by the bank statement and the date of
its actual receipt. Lebron personally received the December 1990 bank statement only in January
1991[134] -- when she was also informed of the forgery for the first time, after which she immediately
requested a stop payment order. She cannot be faulted for the late detection of the forged December
check. After all, the bank account with BPI was not personal but corporate, and she could not be
expected to monitor closely all its finances. A preschool teacher charged with molding the minds of the
youth cannot be burdened with the intricacies or complexities of corporate existence.

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There is also a cutoff period such that checks issued during a given month, but not presented for
payment within that period, will not be reflected therein.[135] An experienced auditor with intent to defraud
can easily conceal any devious scheme from a client unwary of the accounting processes involved by
manipulating the cash balances on record -- especially when bank transactions are numerous, large and
frequent. CASA could only be blamed, if at all, for its unintelligent choice in the selection and appointment
of an auditor -- a fault that is not tantamount to negligence.
Negligence is not presumed, but proven by whoever alleges it.[136] Its mere existence is not sufficient
without proof that it, and no other cause,[137] has given rise to damages.[138] In addition, this fault is
common to, if not prevalent among, small and medium-sized business entities, thus leading the
Professional Regulation Commission (PRC), through the Board of Accountancy (BOA), to require today
not only accreditation for the practice of public accountancy, [139] but also the registration of firms in the
practice thereof. In fact, among the attachments now required upon registration are the code of good
governance[140] and a sworn statement on adequate and effective training.[141]
The missing checks were certainly reported by the bookkeeper [142] to the accountant[143] -- her
immediate supervisor -- and by the latter to the auditor. However, both the accountant and the auditor, for
reasons known only to them, assured the bookkeeper that there were no irregularities.
The bookkeeper[144] who had exclusive custody of the checkbooks [145] did not have to go directly to
CASAs president or to BPI. Although she rightfully reported the matter, neither an investigation was
conducted nor a resolution of it was arrived at, precisely because the person at the top of the helm was
the culprit. The vouchers, invoices and check stubs in support of all check disbursements could be
concealed or fabricated -- even in collusion -- and management would still have no way to verify its cash
accountabilities.
Clearly then, Yabut was able to perpetrate the wrongful act through no fault of CASA. If auditors may
be held liable for breach of contract and negligence,[146] with all the more reason may they be charged
with the perpetration of fraud upon an unsuspecting client. CASA had the discretion to pursue BPI alone
under the NIL, by reason of expediency or munificence or both. Money paid under a mistake may
rightfully be recovered,[147] and under such terms as the injured party may choose.

Third Issue:
Award of Monetary Claims

Moral Damages Denied

We deny CASAs claim for moral damages.

In the absence of a wrongful act or omission,[148] or of fraud or bad faith,[149] moral damages cannot
be awarded.[150] The adverse result of an action does not per se make the action wrongful, or the party
liable for it. One may err, but error alone is not a ground for granting such damages.[151] While no proof of
pecuniary loss is necessary therefor -- with the amount to be awarded left to the courts discretion[152] --
the claimant must nonetheless satisfactorily prove the existence of its factual basis [153] and causal
relation[154] to the claimants act or omission.[155]
Regrettably, in this case CASA was unable to identify the particular instance -- enumerated in the
Civil Code -- upon which its claim for moral damages is predicated. [156] Neither bad faith nor negligence
so gross that it amounts to malice[157] can be imputed to BPI. Bad faith, under the law, does not simply
connote bad judgment or negligence;[158] it imports a dishonest purpose or some moral obliquity and
conscious doing of a wrong, a breach of a known duty through some motive or interest or ill will that
partakes of the nature of fraud.[159]
As a general rule, a corporation -- being an artificial person without feelings, emotions and senses,
and having existence only in legal contemplation -- is not entitled to moral damages,[160] because it cannot

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experience physical suffering and mental anguish.[161] However, for breach of the fiduciary duty required
of a bank, a corporate client may claim such damages when its good reputation is besmirched by such
breach, and social humiliation results therefrom.[162] CASA was unable to prove that BPI had debased the
good reputation of,[163] and consequently caused incalculable embarrassment to, the former. CASAs mere
allegation or supposition thereof, without any sufficient evidence on record,[164] is not enough.

Exemplary Damages Also Denied

We also deny CASAs claim for exemplary damages.

Imposed by way of correction[165] for the public good,[166] exemplary damages cannot be recovered
as a matter of right.[167] As we have said earlier, there is no bad faith on the part of BPI for paying the
checks of CASA upon forged signatures. Therefore, the former cannot be said to have acted in a wanton,
fraudulent, reckless, oppressive or malevolent manner.[168] The latter, having no right to moral damages,
cannot demand exemplary damages.[169]

Attorneys Fees Granted

Although it is a sound policy not to set a premium on the right to litigate,[170] we find that CASA is
entitled to reasonable attorneys fees based on factual, legal, and equitable justification. [171]
When the act or omission of the defendant has compelled the plaintiff to incur expenses to protect
the latters interest,[172] or where the court deems it just and equitable,[173] attorneys fees may be
recovered. In the present case, BPI persistently denied the claim of CASA under the NIL to recredit the
latters account for the value of the forged checks. This denial constrained CASA to incur expenses and
exert effort for more than ten years in order to protect its corporate interest in its bank account. Besides,
we have already cautioned BPI on a similar act of negligence it had committed seventy years ago, but it
has remained unrelenting. Therefore, the Court deems it just and equitable to grant ten percent
(10%)[174] of the total value adjudged to CASA as attorneys fees.

Interest Allowed

For the failure of BPI to pay CASA upon demand and for compelling the latter to resort to the courts
to obtain payment, legal interest may be adjudicated at the discretion of the Court, the same to run from
the filing[175] of the Complaint.[176] Since a court judgment is not a loan or a forbearance of recovery, the
legal interest shall be at six percent (6%) per annum.[177] If the obligation consists in the payment of a sum
of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the
contrary, shall be the payment of x x x legal interest, which is six percent per annum.[178] The actual base
for its computation shall be on the amount finally adjudged,[179] compounded[180] annually to make up for
the cost of money[181] already lost to CASA.
Moreover, the failure of the CA to award interest does not prevent us from granting it upon damages
awarded for breach of contract.[182] Because BPI evidently breached its contract of deposit with CASA, we
award interest in addition to the total amount adjudged. Under Section 196 of the NIL, any case not
provided for shall be governed by the provisions of existing legislation or, in default thereof, by the rules of
the law merchant.[183] Damages are not provided for in the NIL. Thus, we resort to the Code of Commerce
and the Civil Code. Under Article 2 of the Code of Commerce, acts of commerce shall be governed by its
provisions and, in their absence, by the usages of commerce generally observed in each place; and in the
absence of both rules, by those of the civil law.[184] This law being silent, we look at Article 18 of the Civil
Code, which states: In matters which are governed by the Code of Commerce and special laws, their

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deficiency shall be supplied by its provisions. A perusal of these three statutes unmistakably shows that
the award of interest under our civil law is justified.
WHEREFORE, the Petition in GR No. 149454 is hereby DENIED, and that in GR No.
149507 PARTLY GRANTED. The assailed Decision of the Court of Appeals is AFFIRMED with
modification: BPI is held liable for P547,115, the total value of the forged checks less the amount already
recovered by CASA from Leonardo T. Yabut, plus interest at the legal rate of six percent (6%) per
annum -- compounded annually, from the filing of the complaint until paid in full; and attorneys fees of ten
percent (10%) thereof, subject to reimbursement from Respondent Yabut for the entire amount, excepting
attorneys fees. Let a copy of this Decision be furnished the Board of Accountancy of the Professional
Regulation Commission for such action as it may deem appropriate against Respondent Yabut. No costs.
SO ORDERED.

 Samsung Construction Company Philippines vs. FEBTC, 436 SCRA 402

SECOND DIVISION

[G.R. No. 129015. August 13, 2004]

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

DECISION
TINGA, J.:

Called to fore in the present petition is a classic textbook question if a bank pays out on a forged
check, is it liable to reimburse the drawer from whose account the funds were paid out? The Court of
Appeals, in reversing a trial court decision adverse to the bank, invoked tenuous reasoning to acquit the
bank of liability. We reverse, applying time-honored principles of law.
The salient facts follow.
Plaintiff Samsung Construction Company Philippines, Inc. (Samsung Construction), while based in
Bian, Laguna, maintained a current account with defendant Far East Bank and Trust Company[1] (FEBTC)
at the latters Bel-Air, Makati branch.[2] The sole signatory to Samsung Constructions account was Jong
Kyu Lee (Jong), its Project Manager,[3] while the checks remained in the custody of the companys
accountant, Kyu Yong Lee (Kyu).[4]
On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC Check No. 432100 to
the banks branch in Bel-Air, Makati. The check, payable to cash and drawn against Samsung
Constructions current account, was in the amount of Nine Hundred Ninety Nine Thousand Five Hundred
Pesos (P999,500.00). The bank teller, Cleofe Justiani, first checked the balance of Samsung
Constructions account. After ascertaining there were enough funds to cover the check, [5] she compared
the signature appearing on the check with the specimen signature of Jong as contained in the specimen
signature card with the bank. After comparing the two signatures, Justiani was satisfied as to the
authenticity of the signature appearing on the check. She then asked Gonzaga to submit proof of his
identity, and the latter presented three (3) identification cards.[6]

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At the same time, Justiani forwarded the check to the branch Senior Assistant Cashier Gemma
Velez, as it was bank policy that two bank branch officers approve checks exceeding One Hundred
Thousand Pesos, for payment or encashment. Velez likewise counterchecked the signature on the check
as against that on the signature card. He too concluded that the check was indeed signed by Jong. Velez
then forwarded the check and signature card to Shirley Syfu, another bank officer, for approval. Syfu then
noticed that Jose Sempio III (Sempio), the assistant accountant of Samsung Construction, was also in the
bank. Sempio was well-known to Syfu and the other bank officers, he being the assistant accountant of
Samsung Construction. Syfu showed the check to Sempio, who vouched for the genuineness of Jongs
signature. Confirming the identity of Gonzaga, Sempio said that the check was for the purchase of
equipment for Samsung Construction. Satisfied with the genuineness of the signature of Jong, Syfu
authorized the banks encashment of the check to Gonzaga.
The following day, the accountant of Samsung Construction, Kyu, examined the balance of the bank
account and discovered that a check in the amount of Nine Hundred Ninety Nine Thousand Five Hundred
Pesos (P999,500.00) had been encashed. Aware that he had not prepared such a check for Jongs
signature, Kyu perused the checkbook and found that the last blank check was missing. [7] He reported the
matter to Jong, who then proceeded to the bank. Jong learned of the encashment of the check, and
realized that his signature had been forged.The Bank Manager reputedly told Jong that he would be
reimbursed for the amount of the check.[8] Jong proceeded to the police station and consulted with his
lawyers.[9] Subsequently, a criminal case for qualified theft was filed against Sempio before the Laguna
court.[10]
In a letter dated 6 May 1992, Samsung Construction, through counsel, demanded that FEBTC credit
to it the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), with
interest.[11] In response, FEBTC said that it was still conducting an investigation on the matter.
Unsatisfied, Samsung Construction filed a Complaint on 10 June 1992 for violation of Section 23 of the
Negotiable Instruments Law, and prayed for the payment of the amount debited as a result of the
questioned check plus interest, and attorneys fees.[12] The case was docketed as Civil Case No. 92-
61506 before the Regional Trial Court (RTC) of Manila, Branch 9.[13]
During the trial, both sides presented their respective expert witnesses to testify on the claim that
Jongs signature was forged. Samsung Corporation, which had referred the check for investigation to the
NBI, presented Senior NBI Document Examiner Roda B. Flores. She testified that based on her
examination, she concluded that Jongs signature had been forged on the check. On the other hand,
FEBTC, which had sought the assistance of the Philippine National Police (PNP), [14] presented Rosario C.
Perez, a document examiner from the PNP Crime Laboratory. She testified that her findings showed that
Jongs signature on the check was genuine.[15]
Confronted with conflicting expert testimony, the RTC chose to believe the findings of the NBI
expert. In a Decision dated 25 April 1994, the RTC held that Jongs signature on the check was forged
and accordingly directed the bank to pay or credit back to Samsung Constructions account the amount of
Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), together with interest tolled
from the time the complaint was filed, and attorneys fees in the amount of Fifteen Thousand Pesos
(P15,000.00).
FEBTC timely appealed to the Court of Appeals. On 28 November 1996, the Special Fourteenth
Division of the Court of Appeals rendered a Decision,[16] reversing the RTC Decisionand absolving
FEBTC from any liability. The Court of Appeals held that the contradictory findings of the NBI and the
PNP created doubt as to whether there was forgery. [17] Moreover, the appellate court also held that
assuming there was forgery, it occurred due to the negligence of Samsung Construction, imputing blame
on the accountant Kyu for lack of care and prudence in keeping the checks, which if observed would have
prevented Sempio from gaining access thereto.[18] The Court of Appeals invoked the ruling in PNB v.
National City Bank of New York[19]that, if a loss, which must be borne by one or two innocent persons, can
be traced to the neglect or fault of either, such loss would be borne by the negligent party, even if
innocent of intentional fraud.[20]
Samsung Construction now argues that the Court of Appeals had seriously misapprehended the
facts when it overturned the RTCs finding of forgery. It also contends that the appellate court erred in

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finding that it had been negligent in safekeeping the check, and in applying the equity principle
enunciated in PNB v. National City Bank of New York.
Since the trial court and the Court of Appeals arrived at contrary findings on questions of fact, the
Court is obliged to examine the record to draw out the correct conclusions. Upon examination of the
record, and based on the applicable laws and jurisprudence, we reverse the Court of Appeals.
Section 23 of the Negotiable Instruments Law states:

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

The general rule is to the effect that a forged signature is wholly inoperative, and payment made
through or under such signature is ineffectual or does not discharge the instrument. [21] If payment is
made, the drawee cannot charge it to the drawers account. The traditional justification for the result is that
the drawee is in a superior position to detect a forgery because he has the makers signature and is
expected to know and compare it.[22] The rule has a healthy cautionary effect on banks by encouraging
care in the comparison of the signatures against those on the signature cards they have on file.
Moreover, the very opportunity of the drawee to insure and to distribute the cost among its customers
who use checks makes the drawee an ideal party to spread the risk to insurance. [23]
Brady, in his treatise The Law of Forged and Altered Checks, elucidates:

When a person deposits money in a general account in a bank, against which he has the privilege of
drawing checks in the ordinary course of business, the relationship between the bank and the depositor is
that of debtor and creditor. So far as the legal relationship between the two is concerned, the situation is
the same as though the bank had borrowed money from the depositor, agreeing to repay it on demand, or
had bought goods from the depositor, agreeing to pay for them on demand. The bank owes the depositor
money in the same sense that any debtor owes money to his creditor. Added to this, in the case of bank
and depositor, there is, of course, the banks obligation to pay checks drawn by the depositor in proper
form and presented in due course. When the bank receives the deposit, it impliedly agrees to pay only
upon the depositors order. When the bank pays a check, on which the depositors signature is a forgery, it
has failed to comply with its contract in this respect. Therefore, the bank is held liable.

The fact that the forgery is a clever one is immaterial. The forged signature may so closely resemble the
genuine as to defy detection by the depositor himself. And yet, if a bank pays the check, it is paying out
its own money and not the depositors.

The forgery may be committed by a trusted employee or confidential agent. The bank still must bear the
loss. Even in a case where the forged check was drawn by the depositors partner, the loss was placed
upon the bank. The case referred to is Robinson v. Security Bank, Ark., 216 S. W. Rep. 717. In this case,
the plaintiff brought suit against the defendant bank for money which had been deposited to the plaintiffs
credit and which the bank had paid out on checks bearing forgeries of the plaintiffs signature.

xxx

It was held that the bank was liable. It was further held that the fact that the plaintiff waited eight or nine
months after discovering the forgery, before notifying the bank, did not, as a matter of law, constitute a
ratification of the payment, so as to preclude the plaintiff from holding the bank liable. xxx

This rule of liability can be stated briefly in these words: A bank is bound to know its depositors
signature. The rule is variously expressed in the many decisions in which the question has been

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considered. But they all sum up to the proposition that a bank must know the signatures of those whose
general deposits it carries.[24]

By no means is the principle rendered obsolete with the advent of modern commercial transactions.
Contemporary texts still affirm this well-entrenched standard. Nickles, in his book Negotiable Instruments
and Other Related Commercial Paper wrote, thus:

The deposit contract between a payor bank and its customer determines who can draw against the
customers account by specifying whose signature is necessary on checks that are chargeable against the
customers account. Therefore, a check drawn against the account of an individual customer that is signed
by someone other than the customer, and without authority from her, is not properly payable and is not
chargeable to the customers account, inasmuch as any unauthorized signature on an instrument is
ineffective as the signature of the person whose name is signed.[25]

Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute defense by the
party whose signature is forged.[26] On the premise that Jongs signature was indeed forged, FEBTC is
liable for the loss since it authorized the discharge of the forged check. Such liability attaches even if the
bank exerts due diligence and care in preventing such faulty discharge. Forgeries often deceive the eye
of the most cautious experts; and when a bank has been so deceived, it is a harsh rule which compels it
to suffer although no one has suffered by its being deceived.[27] The forgery may be so near like the
genuine as to defy detection by the depositor himself, and yet the bank is liable to the depositor if it pays
the check.[28]
Thus, the first matter of inquiry is into whether the check was indeed forged. A document formally
presented is presumed to be genuine until it is proved to be fraudulent. In a forgery trial, this presumption
must be overcome but this can only be done by convincing testimony and effective illustrations. [29]
In ruling that forgery was not duly proven, the Court of Appeals held:

[There] is ground to doubt the findings of the trial court sustaining the alleged forgery in view of the
conflicting conclusions made by handwriting experts from the NBI and the PNP, both agencies of the
government.

xxx

These contradictory findings create doubt on whether there was indeed a forgery. In the case of Tenio-
Obsequio v. Court of Appeals, 230 SCRA 550, the Supreme Court held that forgery cannot be presumed;
it must be proved by clear, positive and convincing evidence.

This reasoning is pure sophistry. Any litigator worth his or her salt would never allow an opponents
expert witness to stand uncontradicted, thus the spectacle of competing expert witnesses is not
unusual. The trier of fact will have to decide which version to believe, and explain why or why not such
version is more credible than the other. Reliance therefore cannot be placed merely on the fact that there
are colliding opinions of two experts, both clothed with the presumption of official duty, in order to draw a
conclusion, especially one which is extremely crucial. Doing so is tantamount to a jurisprudential cop-out.
Much is expected from the Court of Appeals as it occupies the penultimate tier in the judicial
hierarchy. This Court has long deferred to the appellate court as to its findings of fact in the understanding
that it has the appropriate skill and competence to plough through the minutiae that scatters the factual
field. In failing to thoroughly evaluate the evidence before it, and relying instead on presumptions
haphazardly drawn, the Court of Appeals was sadly remiss. Of course, courts, like humans, are fallible,
and not every error deserves a stern rebuke. Yet, the appellate courts error in this case warrants special
attention, as it is absurd and even dangerous as a precedent. If this rationale were adopted as a
governing standard by every court in the land, barely any actionable claim would prosper, defeated as it
would be by the mere invocation of the existence of a contrary expert opinion.

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On the other hand, the RTC did adjudge the testimony of the NBI expert as more credible than that
of the PNP, and explained its reason behind the conclusion:

After subjecting the evidence of both parties to a crucible of analysis, the court arrived at the conclusion
that the testimony of the NBI document examiner ismore credible because the testimony
of the PNP Crime Laboratory Services document examiner reveals that there are a lot of differences in
the questioned signature as compared to the standard specimen signature. Furthermore, as testified to by
Ms. Rhoda Flores, NBI expert, the manner of execution of the standard signatures used reveals that it is
a free rapid continuous execution or stroke as shown by the tampering terminal stroke of the signatures
whereas the questioned signature is a hesitating slow drawn execution stroke. Clearly, the person who
executed the questioned signature was hesitant when the signature was made.[30]

During the testimony of PNP expert Rosario Perez, the RTC bluntly noted that apparently, there [are]
differences on that questioned signature and the standard signatures.[31] This Court, in examining the
signatures, makes a similar finding. The PNP expert excused the noted differences by asserting that they
were mere variations, which are normal deviations found in writing. [32] Yet the RTC, which had the
opportunity to examine the relevant documents and to personally observe the expert witness, clearly
disbelieved the PNP expert. The Court similarly finds the testimony of the PNP expert as
unconvincing. During the trial, she was confronted several times with apparent differences between
strokes in the questioned signature and the genuine samples. Each time, she would just blandly assert
that these differences were just variations,[33] as if the mere conjuration of the word would sufficiently
disquiet whatever doubts about the deviations. Such conclusion, standing alone, would be of little or no
value unless supported by sufficiently cogent reasons which might amount almost to a demonstration. [34]
The most telling difference between the questioned and genuine signatures examined by the PNP is
in the final upward stroke in the signature, or the point to the short stroke of the terminal in the capital
letter L, as referred to by the PNP examiner who had marked it in her comparison chart as point no. 6. To
the plain eye, such upward final stroke consists of a vertical line which forms a ninety degree (90) angle
with the previous stroke. Of the twenty one (21) other genuine samples examined by the PNP, at least
nine (9) ended with an upward stroke.[35]However, unlike the questioned signature, the upward strokes of
eight (8) of these signatures are looped, while the upward stroke of the seventh [36] forms a severe forty-
five degree (45) with the previous stroke. The difference is glaring, and indeed, the PNP examiner was
confronted with the inconsistency in point no. 6.
Q: Now, in this questioned document point no. 6, the s stroke is directly upwards.
A: Yes, sir.
Q: Now, can you look at all these standard signature (sic) were (sic) point 6 is repeated or the
last stroke s is pointing directly upwards?
A: There is none in the standard signature, sir.[37]
Again, the PNP examiner downplayed the uniqueness of the final stroke in the questioned signature
as a mere variation,[38] the same excuse she proffered for the other marked differences noted by the
Court and the counsel for petitioner.[39]
There is no reason to doubt why the RTC gave credence to the testimony of the NBI examiner, and
not the PNP experts. The NBI expert, Rhoda Flores, clearly qualifies as an expert witness. A document
examiner for fifteen years, she had been promoted to the rank of Senior Document Examiner with the
NBI, and had held that rank for twelve years prior to her testimony. She had placed among the top five
examinees in the Competitive Seminar in Question Document Examination, conducted by
the NBI Academy, which qualified her as a document examiner.[40] She had trained with the Royal
Hongkong Police Laboratory and is a member of the International Association for Identification. [41] As of
the time she testified, she had examined more than fifty to fifty-five thousand questioned documents, on
an average of fifteen to twenty documents a day.[42] In comparison, PNP document examiner Perez
admitted to having examined only around five hundred documents as of her testimony. [43]

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In analyzing the signatures, NBI Examiner Flores utilized the scientific comparative examination
method consisting of analysis, recognition, comparison and evaluation of the writing habits with the use of
instruments such as a magnifying lense, a stereoscopic microscope, and varied lighting substances. She
also prepared enlarged photographs of the signatures in order to facilitate the necessary
comparisons.[44] She compared the questioned signature as against ten (10) other sample signatures of
Jong. Five of these signatures were executed on checks previously issued by Jong, while the other five
contained in business letters Jong had signed.[45] The NBI found that there were significant differences in
the handwriting characteristics existing between the questioned and the sample signatures, as to manner
of execution, link/connecting strokes, proportion characteristics, and other identifying details.[46]
The RTC was sufficiently convinced by the NBI examiners testimony, and explained her reasons in
its Decisions. While the Court of Appeals disagreed and upheld the findings of the PNP, it failed to
convincingly demonstrate why such findings were more credible than those of the NBI expert. As a
throwaway, the assailed Decision noted that the PNP, not the NBI, had the opportunity to examine the
specimen signature card signed by Jong, which was relied upon by the employees of FEBTC in
authenticating Jongs signature. The distinction is irrelevant in establishing forgery. Forgery can be
established comparing the contested signatures as against those of any sample signature duly
established as that of the persons whose signature was forged.
FEBTC lays undue emphasis on the fact that the PNP examiner did compare the questioned
signature against the bank signature cards. The crucial fact in question is whether or not the check
was forged, not whether the bank could have detected the forgery. The latter issue becomes
relevant only if there is need to weigh the comparative negligence between the bank and the party
whose signature was forged.
At the same time, the Court of Appeals failed to assess the effect of Jongs testimony that the
signature on the check was not his.[47] The assertion may seem self-serving at first blush, yet it cannot be
ignored that Jong was in the best position to know whether or not the signature on the check was
his. While his claim should not be taken at face value, any averments he would have on the matter, if
adjudged as truthful, deserve primacy in consideration. Jongs testimony is supported by the findings of
the NBI examiner. They are also backed by factual circumstances that support the conclusion that the
assailed check was indeed forged. Judicial notice can be taken that is highly unusual in practice for a
business establishment to draw a check for close to a million pesos and make it payable to cash or
bearer, and not to order. Jong immediately reported the forgery upon its discovery. He filed the
appropriate criminal charges against Sempio, the putative forger.[48]
Now for determination is whether Samsung Construction was precluded from setting up the defense
of forgery under Section 23 of the Negotiable Instruments Law. The Court of Appeals concluded that
Samsung Construction was negligent, and invoked the doctrines that where a loss must be borne by one
of two innocent person, can be traced to the neglect or fault of either, it is reasonable that it would be
borne by him, even if innocent of any intentional fraud, through whose means it has succeeded [49] or who
put into the power of the third person to perpetuate the wrong.[50] Applying these rules, the Court of
Appeals determined that it was the negligence of Samsung Construction that allowed the encashment of
the forged check.

In the case at bar, the forgery appears to have been made possible through the acts of one Jose Sempio
III, an assistant accountant employed by the plaintiff Samsung [Construction] Co. Philippines, Inc. who
supposedly stole the blank check and who presumably is responsible for its encashment through a forged
signature of Jong Kyu Lee. Sempio was assistant to the Korean accountant who was in possession of the
blank checks and who through negligence, enabled Sempio to have access to the same. Had the Korean
accountant been more careful and prudent in keeping the blank checks Sempio would not have had the
chance to steal a page thereof and to effect the forgery. Besides, Sempio was an employee who appears
to have had dealings with the defendant Bank in behalf of the plaintiff corporation and on the date the
check was encashed, he was there to certify that it was a genuine check issued to purchase equipment
for the company.[51]

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We recognize that Section 23 of the Negotiable Instruments Law bars a party from setting up the
defense of forgery if it is guilty of negligence.[52] Yet, we are unable to conclude that Samsung
Construction was guilty of negligence in this case. The appellate court failed to explain precisely how the
Korean accountant was negligent or how more care and prudence on his part would have prevented the
forgery. We cannot sustain this tar and feathering resorted to without any basis.
The bare fact that the forgery was committed by an employee of the party whose signature was
forged cannot necessarily imply that such partys negligence was the cause for the forgery. Employers do
not possess the preternatural gift of cognition as to the evil that may lurk within the hearts and minds of
their employees. The Courts pronouncement in PCI Bank v. Court of Appeals[53] applies in this case, to
wit:

[T]he mere fact that the forgery was committed by a drawer-payors confidential employee or agent, who
by virtue of his position had unusual facilities for perpetrating the fraud and imposing the forged paper
upon the bank, does not entitle the bank to shift the loss to the drawer-payor, in the absence of some
circumstance raising estoppel against the drawer.[54]

Admittedly, the record does not clearly establish what measures Samsung Construction employed to
safeguard its blank checks. Jong did testify that his accountant, Kyu, kept the checks inside a safety
box,[55] and no contrary version was presented by FEBTC. However, such testimony cannot prove that the
checks were indeed kept in a safety box, as Jongs testimony on that point is hearsay, since Kyu, and not
Jong, would have the personal knowledge as to how the checks were kept.
Still, in the absence of evidence to the contrary, we can conclude that there was no negligence on
Samsung Constructions part. The presumption remains that every person takes ordinary care of his
concerns,[56] and that the ordinary course of business has been followed.[57] Negligence is not presumed,
but must be proven by him who alleges it.[58] While the complaint was lodged at the instance of Samsung
Construction, the matter it had to prove was the claim it had alleged - whether the check was forged. It
cannot be required as well to prove that it was not negligent, because the legal presumption remains that
ordinary care was employed.
Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact that Samsung
Construction was negligent. While the payee, as in this case, may not have the personal knowledge as to
the standard procedures observed by the drawer, it well has the means of disputing the presumption of
regularity. Proving a negative fact may be a difficult office, [59] but necessarily so, as it seeks to overcome
a presumption in law. FEBTC was unable to dispute the presumption of ordinary care exercised by
Samsung Construction, hence we cannot agree with the Court of Appeals finding of negligence.
The assailed Decision replicated the extensive efforts which FEBTC devoted to establish that there
was no negligence on the part of the bank in its acceptance and payment of the forged check. However,
the degree of diligence exercised by the bank would be irrelevant if the drawer is not precluded from
setting up the defense of forgery under Section 23 by his own negligence. The rule of equity enunciated
in PNB v. National City Bank of New York, [60] as relied upon by the Court of Appeals, deserves careful
examination.

The point in issue has sometimes been said to be that of negligence. The drawee who has paid upon
the forged signature is held to bear the loss, because he has been negligent in failing to recognize
that the handwriting is not that of his customer. But it follows obviously that if the payee, holder, or
presenter of the forged paper has himself been in default, if he has himself been guilty of a negligence
prior to that of the banker, or if by any act of his own he has at all contributed to induce the banker's
negligence, then he may lose his right to cast the loss upon the banker. [61] (Emphasis supplied)

Quite palpably, the general rule remains that the drawee who has paid upon the forged signature
bears the loss. The exception to this rule arises only when negligence can be traced on the part of the
drawer whose signature was forged, and the need arises to weigh the comparative negligence between
the drawer and the drawee to determine who should bear the burden of loss. The Court finds no basis to

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conclude that Samsung Construction was negligent in the safekeeping of its checks. For one, the settled
rule is that the mere fact that the depositor leaves his check book lying around does not constitute such
negligence as will free the bank from liability to him, where a clerk of the depositor or other persons,
taking advantage of the opportunity, abstract some of the check blanks, forges the depositors signature
and collect on the checks from the bank.[62] And for another, in point of fact Samsung Construction was
not negligent at all since it reported the forgery almost immediately upon discovery. [63]
It is also worth noting that the forged signatures in PNB v. National City Bank of New York were not
of the drawer, but of indorsers. The same circumstance attends PNB v. Court of Appeals,[64] which was
also cited by the Court of Appeals. It is accepted that a forged signature of the drawer differs in treatment
than a forged signature of the indorser.

The justification for the distinction between forgery of the signature of the drawer and forgery of an
indorsement is that the drawee is in a position to verify the drawers signature by comparison with one in
his hands, but has ordinarily no opportunity to verify an indorsement. [65]

Thus, a drawee bank is generally liable to its depositor in paying a check which bears either a forgery of
the drawers signature or a forged indorsement. But the bank may, as a general rule, recover back the
money which it has paid on a check bearing a forged indorsement, whereas it has not this right to the
same extent with reference to a check bearing a forgery of the drawers signature. [66]

The general rule imputing liability on the drawee who paid out on the forgery holds in this case.
Since FEBTC puts into issue the degree of care it exercised before paying out on the forged check,
we might as well comment on the banks performance of its duty. It might be so that the bank complied
with its own internal rules prior to paying out on the questionable check. Yet, there are several troubling
circumstances that lead us to believe that the bank itself was remiss in its duty.
The fact that the check was made out in the amount of nearly one million pesos is unusual enough to
require a higher degree of caution on the part of the bank. Indeed, FEBTC confirms this through its own
internal procedures. Checks below twenty-five thousand pesos require only the approval of the teller;
those between twenty-five thousand to one hundred thousand pesos necessitate the approval of one
bank officer; and should the amount exceed one hundred thousand pesos, the concurrence of two bank
officers is required.[67]
In this case, not only did the amount in the check nearly total one million pesos, it was also payable
to cash. That latter circumstance should have aroused the suspicion of the bank, as it is not ordinary
business practice for a check for such large amount to be made payable to cash or to bearer, instead of
to the order of a specified person.[68] Moreover, the check was presented for payment by one Roberto
Gonzaga, who was not designated as the payee of the check, and who did not carry with him any written
proof that he was authorized by Samsung Construction to encash the check. Gonzaga, a stranger to
FEBTC, was not even an employee of Samsung Construction. [69] These circumstances are already
suspicious if taken independently, much more so if they are evaluated in concurrence. Given the
shadiness attending Gonzagas presentment of the check, it was not sufficient for FEBTC to have merely
complied with its internal procedures, but mandatory that all earnest efforts be undertaken to ensure the
validity of the check, and of the authority of Gonzaga to collect payment therefor.
According to FEBTC Senior Assistant Cashier Gemma Velez, the bank tried, but failed, to contact
Jong over the phone to verify the check.[70] She added that calling the issuer or drawer of the check to
verify the same was not part of the standard procedure of the bank, but an extra effort. [71] Even assuming
that such personal verification is tantamount to extraordinary diligence, it cannot be denied that FEBTC
still paid out the check despite the absence of any proof of verification from the drawer. Instead, the bank
seems to have relied heavily on the say-so of Sempio, who was present at the bank at the time the check
was presented.
FEBTC alleges that Sempio was well-known to the bank officers, as he had regularly transacted with
the bank in behalf of Samsung Construction. It was even claimed that everytime FEBTC would contact

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Jong about problems with his account, Jong would hand the phone over to Sempio. [72] However, the only
proof of such allegations is the testimony of Gemma Velez, who also testified that she did not know
Sempio personally,[73] and had met Sempio for the first time only on the day the check was
encashed.[74] In fact, Velez had to inquire with the other officers of the bank as to whether Sempio was
actually known to the employees of the bank.[75] Obviously, Velez had no personal knowledge as to the
past relationship between FEBTC and Sempio, and any averments of her to that effect should be deemed
hearsay evidence. Interestingly, FEBTC did not present as a witness any other employee of their Bel-Air
branch, including those who supposedly had transacted with Sempio before.
Even assuming that FEBTC had a standing habit of dealing with Sempio, acting in behalf of
Samsung Construction, the irregular circumstances attending the presentment of the forged check should
have put the bank on the highest degree of alert. The Court recently emphasized that the highest degree
of care and diligence is required of banks.

Banks are engaged in a business impressed with public interest, and it is their duty to protect in return
their many clients and depositors who transact business with them. They have the obligation to treat their
clients account meticulously and with the highest degree of care, considering the fiduciary nature of their
relationship. The diligence required of banks, therefore, is more than that of a good father of a family. [76]

Given the circumstances, extraordinary diligence dictates that FEBTC should have ascertained from
Jong personally that the signature in the questionable check was his.
Still, even if the bank performed with utmost diligence, the drawer whose signature was forged may
still recover from the bank as long as he or she is not precluded from setting up the defense of
forgery. After all, Section 23 of the Negotiable Instruments Law plainly states that no right to enforce the
payment of a check can arise out of a forged signature. Since the drawer, Samsung Construction, is not
precluded by negligence from setting up the forgery, the general rule should apply. Consequently, if a
bank pays a forged check, it must be considered as paying out of its funds and cannot charge the amount
so paid to the account of the depositor.[77] A bank is liable, irrespective of its good faith, in paying a forged
check.[78]
WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 28 November
1996 is REVERSED, and the Decision of the Regional Trial Court of Manila, Branch 9, dated 25 April
1994 is REINSTATED. Costs against respondent.
SO ORDERED.

 PNB vs. CA, 256 SCRA 693

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.

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 Page 43 of 96

Tomas Besa, Jose B. Galang and Juan C. Jimenez for petitioner.

San Juan, Africa & Benedicto for respondents.

CONCEPCION, C.J.:

The Philippine National Bank — hereinafter referred to as the PNB — seeks the review by certiorari of a
decision of the Court of Appeals, which affirmed that of the Court of First Instance of Manila, dismissing
plaintiff's complaint against the Philippine Commercial and Industrial Bank — hereinafter referred to as
the PCIB — for the recovery of P57,415.00.

A partial stipulation of facts entered into by the parties and the decision of the Court of Appeals show that,
on about January 15, 1962, one Augusto Lim deposited in his current account with the PCIB branch at
Padre Faura, Manila, GSIS Check No. 645915- B, in the sum of P57,415.00, drawn against the PNB;
that, following an established banking practice in the Philippines, the check was, on the same date,
forwarded, for clearing, through the Central Bank, to the PNB, which did not return said check the next
day, or at any other time, but retained it and paid its amount to the PCIB, as well as debited it against the
account of the GSIS in the PNB; that, subsequently, or on January 31, 1962, upon demand from the
GSIS, said sum of P57,415.00 was re-credited to the latter's account, for the reason that the signatures of
its officers on the check were forged; and that, thereupon, or on February 2, 1962, the PNB demanded
from the PCIB the refund of said sum, which the PCIB refused to do. Hence, the present action against
the PCIB, which was dismissed by the Court of First Instance of Manila, whose decision was, in turn,
affirmed by the Court of Appeals.

It is not disputed that the signatures of the General Manager and the Auditor of the GSIS on the check, as
drawer thereof, are forged; that the person named in the check as its payee was one Mariano D. Pulido,
who purportedly indorsed it to one Manuel Go; that the check purports to have been indorsed by Manuel
Go to Augusto Lim, who, in turn, deposited it with the PCIB, on January 15, 1962; that, thereupon, the
PCIB stamped the following on the back of the check: "All prior indorsements and/or Lack of
Endorsement Guaranteed, Philippine Commercial and Industrial Bank," Padre Faura Branch, Manila; that,
on the same date, the PCIB sent the check to the PNB, for clearance, through the Central Bank; and that,
over two (2) months before, or on November 13, 1961, the GSIS had notified the PNB, which
acknowledged receipt of the notice, that said check had been lost, and, accordingly, requested that its
payment be stopped.

In its brief, the PNB maintains that the lower court erred: (1) in not finding the PCIB guilty of negligence;
(2) in not finding that the indorsements at the back of the check are forged; (3) in not finding the PCIB
liable to the PNB by virtue of the former's warranty on the back of the check; (4) in not holding that
"clearing" is not "acceptance", in contemplation of the Negotiable Instruments law; (5) in not finding that,
since the check had not been accepted by the PNB, the latter is entitled to reimbursement therefor; and
(6) in denying the PNB's right to recover from the PCIB.

The first assignment of error will be discussed later, together with the last,with which it is interrelated.

As regards the second assignment of error, the PNB argues that, since the signatures of the drawer are
forged, so must the signatures of the supposed indorsers be; but this conclusion does not necessarily
follow from said premise. Besides, there is absolutely no evidence, and the PNB has not even tried to
prove that the aforementioned indorsements are spurious. Again, the PNB refunded the amount of the
check to the GSIS, on account of the forgery in the signatures, not of the indorsers or supposed
indorsers, but of the officers of the GSIS as 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 notthe cause of
the loss.3

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 Page 44 of 96

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.4 Said warranty is irrelevant, therefore, to the PNB's alleged right to recover from the
PCIB. It could have been availed of by a subsequent indorsee5 or a holder in due course6 subsequent to
the PCIB, but, the PNB is neither.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 Law9 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:

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 Page 45 of 96

(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.

 BPI Family Bank vs. Buenaventura, 471 SCRA 431

SECOND DIVISION

BPI FAMILY BANK, G.R. No. 148196

Petitioner,

- versus -

EDGARDO BUENAVENTURA, MYRNA LIZARDO

and YOLANDA TICA,
Respondents.

x--------------------------x

EDGARDO BUENAVENTURA, MYRNA LIZARDO G.R. No. 148259

and YOLANDA TICA,
Petitioners, Present:

PUNO, Chairman,
AUSTRIA-MARTINEZ,
- versus - CALLEJO, SR.,
TINGA, and
CHICO-NAZARIO, JJ.

Promulgated:
BPI FAMILY BANK,
Respondent. September 30, 2005

x-----------------------------------------------------------x

DECISION

AUSTRIA-MARTINEZ, J.:

Before us are two consolidated petitions for review on certiorari under Rule 45 of the Rules of
Court assailing the Decision[1] of the Court of Appeals (CA) dated November 27, 2000 in CA-G.R. CV No.
53962, which affirmed with modification the Decision dated August 11, 1995 of the Regional Trial Court,

Page 45 of 96
 Page 46 of 96

Branch 25, Manila (Manila RTC); and the CA Resolution dated May 3, 2001, which denied the parties
separate motions for reconsideration.

The factual background of the case is as follows:

On May 23, 1990, Edgardo Buenaventura, Myrna Lizardo and Yolanda Tica (Buenaventura, et
al.), all officers of the International Baptist Church and International Baptist Academy in Malabon, Metro
Manila, filed a complaint for Reinstatement of Current Account/Release of Money plus Damages against
BPI Family Bank (BPI-FB) before the Manila RTC, docketed as Civil Case No. 90-53154.[2]

They alleged that: on August 30, 1989, they accepted from Amado Franco BPI-FB Check No.
129004 dated August 29, 1989 in the amount of P500,000.00, jointly issued by Eladio Teves and Joseph
Teves;[3] they opened Current Account No. 807-065314-0 with the BPI-FB Branch at Bonifacio Market,
Edsa, Caloocan City and deposited the check as initial deposit; the check was subsequently cleared and
the amount was credited to their Current
Account; on September 3, 1989, they drew a check in the amount of P10,171.50 and pursuant to normal
banking procedure the check was honored and debited from their Current Account, leaving a balance
of P490,328.50; on September 4, 1989, they drew another check in the amount of P46,189.60; instead of
debiting the said amount against their Current
Account, it was debited, without their knowledge and consent, against their Savings Account No. 08-
95332-5 with the same branch; on September 9, 1989, they drew a check for P91,270.00 which, upon
presentment for payment, was dishonored for the reason account closed, in spite of the balance in the
Current Account of P490,328.50; they thereafter learned from BPI-FB that their Current Account had
been frozen upon instruction of Severino P. Coronacion, Vice-President of BPI-FB on the ground that the
source of fund was illegal or unauthorized; they demanded the reinstatement of the account, but BPI-FB
refused.

On June 20, 1990, BPI-FB filed a motion to dismiss on the ground of litis pendentia, alleging that
there is a pending case for recovery of sum of money arising from the BPI-FB Check No. 129004 dated
August 29, 1989 before the Regional Trial Court (RTC), Branch 146, Makati [4] and Buenaventura is one of
the defendants therein.[5]Buenaventura, et al. opposed the motion to dismiss on the ground that there is
no identity of parties, rights asserted and reliefs prayed between the two cases. [6]

On October 10, 1990, the Manila RTC denied the motion to dismiss, ruling that there can be
no res judicata between the two cases since the parties are different and the causes of action are not the
same.[7]

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On December 10, 1990, BPI-FB filed its answer alleging that: the check received by
Buenaventura, et al. from Amado Franco was drawn by Eladio Teves and Joseph Teves against the
Current Account of the Tevesteco Arrastre Stevedoring Co., Inc. (Tevesteco); the funds in the said
Tevesteco account allegedly consisted mainly of funds in the amount of P80,000,000.00 transferred to it
from another account belonging to the First Metro Investment Corporation (FMIC); such transfer of funds
was effected on the basis of an Authority to Debit bearing the signatures of certain officers of FMIC; upon
its investigation, BPI-FB found that the signatures in the Authority to Debit were forged; before this,
however, Tevesteco had already issued several checks against its Current Account, one of which is the
BPI-FB Check No. 129004 received by Buenaventura, et al. from Amado Franco, after a series of
indorsements; it has the right to consider the Current Account of Buenaventura, et al., which is funded
from BPI-FB Check No. 129004, as closed and to refuse any further withdrawal from the same; assuming
that the forgery claim of FMIC is untrue and incorrect, it is the right of the BPI-FB, as a matter of
protecting its interests, to freeze their account or to hold it in suspense and not to allow any withdrawals
therefrom in the meantime that the issue of forgery remains unsettled; FMIC has instituted another civil
action, presently pending appeal, against BPI-FB and several other defendants for the recovery of
the P80,000,000.00 transferred from the formers account to Tevestecos account. [8]

Following trial on the merits, on August 11, 1995, the Manila RTC rendered its decision, finding
that: BPI-FB had no right to unilaterally freeze the deposits of Buenaventura, et al. since the latter had no
participation in any fraud that may have attended the prior fund transfers from FMIC to Tevesteco; as
holders in good faith and for value of the BPI-FB Check No. 129004, their rights to the sum embodied in
the said check should have been respected; BPI-FBs unilateral action of freezing the Current Account
amounted to an unlawful confiscation of their property without due process. The dispositive portion of the
RTC decision reads as follows:

WHEREFORE, in view of the foregoing judgment is rendered in favor of the

plaintiff and against the defendant bank and the latter is ordered as follows:

1. To pay the plaintiff the sum of P490,328.50 representing the balance of the
plaintiffs deposit under Account No. 807-065-313-0 which was unlawfully frozen by the
bank and finally debited against said account with legal rate of interest from date of
closure;

2. To pay the sum of P200,000.00 as moral damages;

3. To pay the amount of P200,000.00 as exemplary damages to serve as an

example and lesson to serve as a deterrent for similar action which the bank may take
against its depositors in the future;

4. To pay the sum of P50,000.00 as attorneys fees.

SO ORDERED.[9]

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Dissatisfied, BPI-FB appealed to the CA. It alleged that: the case should have been dismissed for
lack of cause of action because it is the International Baptist Academy which is the owner of the funds
deposited with BPI-FB and therefore the real party-in-interest, although the account is in the name of
Buenaventura, et al.; the RTC should not have ordered the payment of the balance of the Current
Account of Buenaventura, et al. because the latter were interested only in the reinstatement of their
Current Account; the provisions of the Negotiable Instruments Law should not have been applied by the
RTC to support its position that Buenaventura, et al. are the owners of the funds in their Current Account;
BPI-FB is entitled to freeze the account of Buenaventura, et al. and to disallow any withdrawals therefrom
as a measure to protect its interest; BPI-FB, not Buenaventura, et al., is entitled to damages.
On November 27, 2000, the CA affirmed the decision of the Manila RTC, holding that BPI-FB did
not act in accordance with law.[10] It ruled that the relationship between the bank and the depositor is that
of debtor and creditor and, as such, BPI-FB could not lawfully refuse to make payments on the checks
drawn and issued by Buenaventura, et al., provided only that there are funds available in the latters
deposit. It further declared that BPI-FB is not justified in freezing the amounts deposited by
Buenaventura, et al. for suspicion of being illegal or unauthorized as a result of the claimed fraud
perpetuated against FMIC because: (a) it has not been sufficiently shown that the funds in the account of
Buenaventura, et al. were derived exclusively from the alleged P80,000,000.00 unlawfully transferred
from the funds of FMIC or that the deposit under the name of Tevesteco consisted exclusively of the
said P80,000,000.00 debited from FMICs account; and (b) there is no clear proof of any involvement of
Buenaventura, et al., the International Baptist Church or International Baptist Academy in the alleged
irregularities attending the fund transfer from FMIC to Tevesteco.

The CA also found unmeritorious BPI-FBs claim that Buenaventura, et al. have no cause of
action since the International Baptist Academy is the real party-in-interest. It held that since it is
undisputed that it is the Current Account of Buenaventura, et al. which was frozen and closed by BPI-FB,
then the former are the parties-in-interest in the reopening of the said account. It found no error in the
Manila RTCs order that BPI-FB pay the amount of P490,328.50 plus interest directly to Buenaventura, et
al. since the reinstatement of the Current Account would mean the same thing as the payment of the
balance; Buenaventura, et al. would necessarily have the right to withdraw their deposit if and when they
see it fit. Furthermore, the CA held that the RTCs disposition falls under the general prayer of
Buenaventura, et al. for such other reliefs as may be just and equitable under the attendant
circumstances.

With regard to award of damages, the CA sustained the award of moral damages and attorneys
fees, holding that BPI-FBs actuations were established to have caused Buenaventura, et al. to incur the
distrust of their Baptist brethren, besides suffering mental anguish, serious anxiety, wounded feelings,
and moral shock but found no basis for the award of exemplary damages of P200,000.00 for lack of
showing that BPI-FB was not animated by any wanton, fraudulent, reckless, oppressive or malevolent
intent.

Page 48 of 96
 Page 49 of 96

Both parties filed separate motions for reconsideration. Buenaventura, et al. sought
reconsideration of the deletion of the award of exemplary damages. [11] On the other hand, BPI-FB
reiterated its argument that the International Baptist Academy is the real party-in-interest. It also assailed
the findings and conclusions of the CA.[12]

On May 3, 2001, the CA denied both motions for reconsideration.[13]

Hence, the present two consolidated petitions for review on certiorari.

In G.R No. 148196, BPI-FB ascribes six errors upon the CA, to wit:

I. The Honorable Court of Appeals committed a reversible error in holding that

the respondents are the real parties-in-interest in this case contrary to the admissions of
respondents themselves that it is the International Baptist Academy who is the owner of
the funds in question and hence it is and out to be the real party in interest in this case.

II. The Honorable Court of Appeals committed a grave abuse of discretion in not
dismissing respondents complaint for lack of cause of action.
III. The Honorable Court of Appeals committed a reversible error in NOT holding,
based on a misapprehension of facts that BPI-FB is entitled to freeze respondents
account and to disallow any withdrawal therefrom as a measure to protect its interest.

IV. The Honorable Court of Appeals committed a reversible error in holding,

based on a misapprehension of facts, that it has not been sufficiently shown that the
funds in deposit with BPI-FB under the name of the respondents were derived exclusively
from the alleged 80 million pesos unlawfully transferred from the funds of FMIC or that
the deposit under the name of Tevesteco consisted exclusively of the said 80 million
pesos debited from FMICs account.

V. The Honorable Court of Appeals committed a grave abuse of discretion in

NOT upholding the position of BPI-FB on the freezing of respondents current account
when it held that there was no clear proof of any involvement by the respondents with the
alleged irregularities attending the fund transfer from FMIC to Tevesteco.

VI. The Honorable Court of Appeals committed a grave abuse of discretion, in

holding, in effect, that there is nothing wrong with the Lower Courts order directing BPI-
FB to pay to respondents directly the balance of their account plus interest although their
prayer in their complaint was only to reinstate their current account.[14]

Anent the first and second grounds, BPI-FB maintains that the complaint should have been
dismissed for lack of cause of action because Buenaventura et al. admit that the International Baptist
Academy is the owner of the funds in question and therefore the real party-in-interest to prosecute the
action.

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 Page 50 of 96

On the third ground, BPI-FB asserts that it has the right to consider the account of
Buenaventura, et al. as frozen and to refuse any withdrawals
from the same because of the forgery claim of FMIC. Assuming the forgery claim of FMIC is true and
correct, the amount transferred from FMICs account to Tevestecos account is the money of BPI-FB under
the principle that a bank is deemed to have disbursed its own funds. It submits that as an original owner
who is restored in possession of stolen property, it has a better right over such property than a mere
transferee no matter how innocent the latter may be.

Concerning the fourth ground, BPI-FB submits that ample proof was presented by it that the
deposit under the name of Tevesteco consisted exclusively of the P80,000,000.00 debited from FMICs
account and the funds in deposit with BPI-FB under the name of Buenaventura, et al. were derived
exclusively from the P80,000,000.00 unlawfully transferred from the funds of FMIC.

With regard to the fifth ground, BPI-FB concedes that there is no clear proof of any involvement
by Buenaventura, et al. in the alleged irregularities attending the fund transfer from FMIC to Tevesteco. It
insists, however, that the freezing of the account was triggered by the forgery claim of FMIC and the
unauthorized fund transfer to Tevesteco based on the principle that a bank is deemed to have disbursed
its own funds, and not its depositors, where the authority for such disbursement is a forgery and null and
void. It had the right to set up its ownership of the money as against that of Buenaventura, et al. and to
refuse to return the same to them.

As to the sixth ground, BPI-FB points out that Buenaventura, et al. originally prayed in the
alternative for the reinstatement of their Current Account or for payment of the balance remaining in said
account but they subsequently chose to delete that portion praying for the payment of the balance of their
account. It submits that Buenaventura, et al.deliberately did this to sidestep the other pending case filed
against the suspected perpetrators of the fraud, including Amado Franco and Buenaventura, before RTC,
Branch 146, Makati.

In G.R. No. 148259, Buenaventura, et al. anchor their petition on a sole ground, to wit:

The Honorable Court of Appeals has decided the case in a way not in accord
with law and applicable jurisprudence in the deletion of the award of exemplary damages
granted by the court a quo.[15]

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 Page 51 of 96

They submit that BPI-FB acted in a wanton, reckless, oppressive and malevolent manner in
freezing, and subsequently closing, their account without prior notification. They insist that BPI-FB failed
in its obligation, as an entity engaged in business affected with public interest, to treat the accounts of its
depositors with meticulous care, having in mind the fiduciary nature of their relationship. Moreover, as if to
compound its reckless conduct, BPI-FB declared itself the owner of the money which the depositors have
placed in its care, freezing and later closing the depositors account, all before due notice and without first
giving the latter the opportunity to properly present their side or at least sufficient time to direct their
course of action, like refraining from issuing any check, to eventually save themselves from any
embarrassment and/or possible criminal prosecution for estafa or violation of Batas Pambansa Blg. 22.

We rule in favor of Buenaventura, et al.

It is elementary that it is only in the name of a real party-in-interest that a civil suit may be
prosecuted. Under Section 2, Rule 3 of the Rules of Civil Procedure, a realparty-in-interest is the party
who stands to be benefited or injured by the judgment in the suit, or the party entitled to the avails of the
suit. "Interest" within the meaning of the rule means material interest, an interest in issue and to be
affected by the decree, as distinguished from mere interest in the question involved, or a mere incidental
interest.[16]One having no right or interest to protect cannot invoke the jurisdiction of the court as a party
plaintiff in an action.[17] To qualify a person to be a real party-in-interest in whose name an action must be
prosecuted, he must appear to be the present real owner of the right sought to be enforced. [18] Since a
contract may be violated only by the parties thereto as against each other, in an action upon that contract,
the real parties-in-interest, either as plaintiff or as defendant, must be parties to the said contract.[19]

In the present case, Buenaventura, et al. are the real parties-in-interest. They are the parties who
contracted with BPI-FB with regard to the Current Account. While the funds were used for purposes of the
International Baptist Church and the International Baptist Academy, it must be noted that the Current
Account is in the name of Buenaventura, et al. They are the signatories of the check which was
dishonored by BPI-FB upon presentment and the ones who will be held accountable for the nonpayment
or dishonor of any check they issued. Thus, they are the real parties-in-interest to enforce the terms of the
contract of deposit with BPI-FB.

Furthermore, BPI-FB has no unilateral right to freeze the current account of Buenaventura, et
al. based on the suspicion that the funds in the latters account are illegal or unauthorized having been
sourced from the
unlawful transfer of funds from the account of FMIC to Tevesteco and disallow any withdrawal therefrom
to allegedly protect its interest.

Page 51 of 96
 Page 52 of 96

Needless to stress, the contract between a bank and its depositor is governed by the provisions
of the Civil Code on simple loan.[20] Thus, there is a debtor-creditor relationship between a bank and its
depositor. The bank is the debtor and the depositor is the creditor. The depositor lends the bank money
and the bank agrees to pay the depositor on demand. The savings or current deposit agreement between
the bank and the depositor is the contract that determines the rights and obligations of the parties.

Every bank that issues checks for the use of its customers should know whether or not the
drawer's signature thereon is genuine, whether there are sufficient funds in the drawers account to cover
checks issued, and it should be able to detect alterations, erasures, superimpositions or intercalations
thereon, for these instruments are prepared, printed and issued by itself, it has control of the drawer's
account, and it is supposed to be familiar with the drawer's signature. It should possess appropriate
detecting devices for uncovering forgeries and/or alterations on these instruments. Unless a forgery or
alteration is attributable to the fault or negligence of the drawer himself, the remedy of the drawee bank
that negligently clears a forged and/or altered check for payment is against the party responsible for the
forgery or alteration, otherwise, it bears the loss.[21]

There is nothing inequitable in such a rule for if in the regular course of business the check
comes to the drawee bank which, having the opportunity to ascertain its character, pronounces it to be
valid and pays it, as in this case, it is not only a question of payment under mistake, but payment in
neglect of duty which the commercial law places upon it, and the result of its negligence must rest upon
it.[22]

Having been negligent in detecting the forgery prior to clearing the check, BPI-FB should bear the
loss and cant shift the blame to Buenaventura, et al. having failed to show any participation on their part
in the forgery. BPI-FB fails to point any circumstance which should have put Buenaventura, et al. on
inquiry as to the why and wherefore of the possession of the check by Amado Franco. Buenaventura, et
al. were not privies to any transaction involving FMIC, Tevesteco or Franco. They thus had no obligation
to ascertain from Franco what the nature of the latters title to the checks was, if any, or the nature of his
possession. They cannot be guilty of gross neglect amounting to legal absence of good faith, absent any
showing that there was something amiss about Francos acquisition or possession of the check, which
was payable to bearer.[23]

Thus, the fact that the funds in deposit with BPI-FB under the name of Buenaventura, et al. were
allegedly derived exclusively from the alleged P80,000,000.00 unlawfully transferred from the funds of
FMIC or that the deposit under the name of Tevesteco consisted allegedly exclusively of the
said P80,000,000.00 debited from FMICs account is immaterial. These circumstances cannot be used
against a party not privy to the forgery.

There is no merit to the claim that the CA erred in affirming the RTCs order directing BPI-FB to
pay the balance of their account plus interest although the prayer was only to reinstate their Current

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Account. The complaint does contain a general prayer for such other relief as may be just and equitable
in the premises. And this general prayer is broad enough to justify extension of a remedy different from or
together with the specific remedy sought.[24] Indeed, a court may grant relief to a party, even if the party
awarded did not pray for it in his pleadings.[25]

As to the prayer of Buenaventura, et al. for exemplary damages, the Court finds that the CA erred
in deleting the award of exemplary damages. The law allows the grant of exemplary damages to set an
example for the public good.[26] The business of a bank is affected with public interest; thus, it makes a
sworn profession of diligence and meticulousness in giving irreproachable service. [27] For this reason, the
bank should guard against injury attributable to negligence or bad faith on its part.[28] The award of
exemplary damages is proper as a warning to BPI-FB and all concerned not to recklessly disregard their
obligation to exercise the highest and strictest diligence in serving their depositors. However, the award
should be in a reduced amount of P50,000.00 since exemplary damages are imposed not to enrich one
party or impoverish another but to serve as a deterrent against or as a negative incentive to curb socially
deleterious actions.[29]

In summation, the Court reminds BPI-FB that the banking sector must at all times maintain a high
level of meticulousness, always having in mind the fiduciary nature of its relationship with its
depositors.[30] This fiduciary relationship means that the banks obligation to observe high standards of
integrity and performance is deemed written into every deposit agreement between a bank and its
depositor. Failure to comply with this standard shall render a bank liable to its depositors for damages.

WHEREFORE, the petition in G.R. No. 148196 is DENIED and the petition in G.R. No. 148259
is GRANTED. The assailed Decision dated November 27, 2000 and Resolution dated May 3, 2001 of the
Court of Appeals in CA-G.R. CV No. 53962, which affirmed with modification the Decision rendered by
the Regional Trial Court, Branch 25, Manila, dated August 11, 1995 in Civil Case No. 90-53154, are
hereby AFFIRMED with the MODIFICATION that BPI Family Bank is directed to pay Buenaventura, et
al.the amount of P50,000.00 as exemplary damages. Costs against BPI Family Bank.

SO ORDERED.

 MWSS vs. CA 143 SCRA 20

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

Page 53 of 96
 Page 54 of 96

G.R. No. L-62943 July 14, 1986

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner,

vs.
COURT OF APPEALS (Now INTERMEDIATE APPELLATE COURT) and THE PHILIPPINE NATIONAL
BANK, respondents.

Juan J. Diaz and Cesar T. Basa for respondent PNB.

San Juan, Africa, Gonzales & San Agustin Law Offices for respondent PCIB.

GUTIERREZ, JR., J.:

This petition for review asks us to set aside the October 29, 1982 decision of the respondent Court of
Appeals, now Intermediate Appellate Court which reversed the decision of the Court of First Instance of
Manila, Branch XL, and dismissed the plaintiff's complaint, the third party complaint, as well as the
defendant's counterclaim.

The background facts which led to the filing of the instant petition are summarized in the decision of the
respondent Court of Appeals:

Metropolitan Waterworks and Sewerage System (hereinafter referred to as MWSS) is a

government owned and controlled corporation created under Republic Act No. 6234 as
the successor-in- interest of the defunct NWSA. The Philippine National Bank (PNB for
short), on the other hand, is the depository bank of MWSS and its predecessor-in-interest
NWSA. Among the several accounts of NWSA with PNB is NWSA Account No. 6,
otherwise known as Account No. 381-777 and which is presently allocated No. 010-
500281. The authorized signature for said Account No. 6 were those of MWSS treasurer
Jose Sanchez, its auditor Pedro Aguilar, and its acting General Manager Victor L. Recio.
Their respective specimen signatures were submitted by the MWSS to and on file with
the PNB. By special arrangement with the PNB, the MWSS used personalized checks in
drawing from this account. These checks were printed for MWSS by its printer, F. Mesina
Enterprises, located at 1775 Rizal Extension, Caloocan City.

During the months of March, April and May 1969, twenty-three (23) checks were
prepared, processed, issued and released by NWSA, all of which were paid and cleared
by PNB and debited by PNB against NWSA Account No. 6, to wit:

Check No. Date Payee Amount Date Paid

By PNB

1. 59546 8-21-69 Deogracias P 3,187.79 4-2-69

Estrella

2. 59548 3-31-69 Natividad 2,848.86 4-23 69

Rosario

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 Page 55 of 96

3. 59547 3-31-69 Pangilinan 195.00 Unreleased

Enterprises

4. 59549 3-31-69 Natividad 3,239.88 4-23-69

Rosario

5. 59552 4-1-69 Villarama 987.59 5-6-69

& Sons

6. 59554 4-1-69 Gascom 6,057.60 4-16 69

Engineering

7. 59558 4-2-69 The Evening 112.00 Unreleased

News

8. 59544 3-27-69 Progressive 18,391.20 4-18 69

Const.

9. 59564 4-2-69 Ind. Insp. 594.06 4-18 69

Int. Inc.

10. 59568 4-7-69 Roberto 800.00 4-22-69

Marsan

11. 59570 4-7-69 Paz Andres 200.00 4-22-69

12. 59574 4-8-69 Florentino 100,000.00 4-11-69

Santos

13. 59578 4-8-69 Mla. Daily 95.00 Unreleased

Bulletin

14. 59580 4-8-69 Phil. Herald 100.00 5-9-69

15. 59582 4-8-69 Galauran 7,729.09 5-6-69

& Pilar

16. 59581 4-8-69 Manila 110.00 5-12 69

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 Page 56 of 96

Chronicle

17. 59588 4-8-69 Treago 21,583.00 4-11 69

Tunnel

18. 59587 4-8-69 Delfin 120,000.00 4-11-69

Santiago

19. 59589 4-10-69 Deogracias 1,257.49 4-16 69

Estrella

20. 59594 4-14-69 Philam Ac- 33.03 4-29 69

cident Inc.

21. 59577 4-8-69 Esla 9,429.78 4-29 69

22. 59601 4-16-69 Justino 20,000.00 4-18-69

Torres

23. 59595 4-14-69 Neris Phil. 4,274.00 5-20-69

Inc. --------------------

P 320,636.26

During the same months of March, April and May 1969, twenty-three (23) checks bearing
the same numbers as the aforementioned NWSA checks were likewise paid and cleared
by PNB and debited against NWSA Account No. 6, to wit:

Check Date Payee Amount Date Paid

No. Issued By PNB

1. 59546 3-6-69 Raul Dizon P 84,401.00 3-16-69

2. 59548 3-11-69 Raul Dizon 104,790.00 4-1-69

3. 59547 3-14-69 Arturo Sison 56,903.00 4-11-69

4. 59549 3-20-69 Arturo Sison 48,903.00 4-15-69

5. 59552 3-24-69 Arturo Sison 63,845.00 4-16-69

6. 59544 3-26-69 Arturo Sison 98,450.00 4-17-69

7. 59558 3-28-69 Arturo Sison 114,840.00 4-21-69

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 Page 57 of 96

8. 59544 3-16-69 Antonio 38,490.00 4-22-69 Mendoza

9. 59564 3-31-69 Arturo Sison 180,900.00 4-23-69

10.59568 4-2-69 Arturo Sison 134,940.00 4- 5-69

11.59570 4-1-69 Arturo Sison 64,550.00 4-28-69

12.59574 4-2-69 Arturo Sison 148,610.00 4-29-69

13.59578 4-10-69 Antonio 93,950.00 4-29-69

Mendoza

14.59580 4-8-69 Arturo Sison 160,000.00 5-2-69

15.59582 4-10-69 Arturo Sison 155,400.00 5-5-69

16.59581 4-8-69 Antonio 176,580.00 5-6-69

Mendoza

17.59588 4-16-69 Arturo Sison 176,000.00 5-8-69

18.59587 4-16-69 Arturo Sison 300,000.00 5-12-69

19.59589 4-18-69 Arturo Sison 122,000.00 5-14-69

20.59594 4-18-69 Arturo Sison 280,000.00 5-15-69

21.59577 4-14-69 Antonio 260,000.00 5-16-69

Mendoza

22.59601 4-18-69 Arturo Sison 400,000.00 5-19-69

23.59595 4-28-69 Arturo Sison 190,800.00 5-21-69

---------------

P3,457,903.00

The foregoing checks were deposited by the payees Raul Dizon, Arturo Sison and
Antonio Mendoza in their respective current accounts with the Philippine Commercial and
Industrial Bank (PCIB) and Philippine Bank of Commerce (PBC) in the months of March,
April and May 1969. Thru the Central Bank Clearing, these checks were presented for
payment by PBC and PCIB to the defendant PNB, and paid, also in the months of March,
April and May 1969. At the time of their presentation to PNB these checks bear the
standard indorsement which reads 'all prior indorsement and/or lack of endorsement
guaranteed.'

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Subsequent investigation however, conducted by the NBI showed that Raul Dizon, Arturo
Sison and Antonio Mendoza were all fictitious persons. The respective balances in their
current account with the PBC and/or PCIB stood as follows: Raul Dizon P3,455.00 as of
April 30, 1969; Antonio Mendoza P18,182.00 as of May 23, 1969; and Arturo Sison
Pl,398.92 as of June 30, 1969.

On June 11, 1969, NWSA addressed a letter to PNB requesting the immediate
restoration to its Account No. 6, of the total sum of P3,457,903.00 corresponding to the
total amount of these twenty-three (23) checks claimed by NWSA to be forged and/or
spurious checks. "In view of the refusal of PNB to credit back to Account No. 6 the said
total sum of P3,457,903.00 MWSS filed the instant complaint on November 10, 1972
before the Court of First Instance of Manila and docketed thereat as Civil Case No.
88950.

In its answer, PNB contended among others, that the checks in question were regular on
its face in all respects, including the genuineness of the signatures of authorized NWSA
signing officers and there was nothing on its face that could have aroused any suspicion
as to its genuineness and due execution and; that NWSA was guilty of negligence which
was the proximate cause of the loss.

PNB also filed a third party complaint against the negotiating banks PBC and PCIB on
the ground that they failed to ascertain the Identity of the payees and their title to the
checks which were deposited in the respective new accounts of the payees with them.

xxx xxx xxx

On February 6, 1976, the Court of First Instance of Manila rendered judgment in favor of the MWSS. The
dispositive portion of the decision reads:

WHEREFORE, on the COMPLAINT by a clear preponderance of evidence and in

accordance with Section 23 of the Negotiable Instruments Law, the Court hereby renders
judgment in favor of the plaintiff Metropolitan Waterworks and Sewerage System
(MWSS) by ordering the defendant Philippine National Bank (PNB) to restore the total
sum of THREE MILLION FOUR HUNDRED FIFTY SEVEN THOUSAND NINE
HUNDRED THREE PESOS (P3,457,903.00) to plaintiff's Account No. 6, otherwise
known as Account No. 010-50030-3, with legal interest thereon computed from the date
of the filing of the complaint and until as restored in the said Account No. 6.

On the THIRD PARTY COMPLAINT, the Court, for lack of evidence, hereby renders
judgment in favor of the third party defendants Philippine Bank of Commerce (PBC) and
Philippine Commercial and Industrial Bank (PCIB) by dismissing the Third Party
Complaint.

The counterclaims of the third party defendants are likewise dismissed for lack of
evidence.

No pronouncement as to costs.

As earlier stated, the respondent court reversed the decision of the Court of First Instance of Manila and
rendered judgment in favor of the respondent Philippine National Bank.

A motion for reconsideration filed by the petitioner MWSS was denied by the respondent court in a
resolution dated January 3, 1983.

Page 58 of 96
 Page 59 of 96

The petitioner now raises the following assignments of errors for the grant of this petition:

I. IN NOT HOLDING THAT AS THE SIGNATURES ON THE CHECKS WERE FORGED,

THE DRAWEE BANK WAS LIABLE FOR THE LOSS UNDER SECTION 23 OF THE
NEGOTIABLE INSTRUMENTS LAW.

II. IN FAILING TO CONSIDER THE PROXIMATE NEGLIGENCE OF PNB IN

ACCEPTING THE SPURIOUS CHECKS DESPITE THE OBVIOUS IRREGULARITY OF
TWO SETS OF CHECKS BEARING IdENTICAL NUMBER BEING ENCASHED WITHIN
DAYS OF EACH OTHER.

III. IN NOT HOLDING THAT THE SIGNATURES OF THE DRAWEE MWSS BEING
CLEARLY FORGED, AND THE CHECKS SPURIOUS, SAME ARE INOPERATIVE AS
AGAINST THE ALLEGED DRAWEE.

The appellate court applied Section 24 of the Negotiable Instruments Law which provides:

Every negotiable instrument is deemed prima facie to have been issued for valuable
consideration and every person whose signature appears thereon to have become a
party thereto for value.

The petitioner submits that the above provision does not apply to the facts of the instant case because
the questioned checks were not those of the MWSS and neither were they drawn by its authorized
signatories. The petitioner states that granting that Section 24 of the Negotiable Instruments Law is
applicable, the same creates only a prima facie presumption which was overcome by the following
documents, to wit: (1) the NBI Report of November 2, 1970; (2) the NBI Report of November 21, 1974; (3)
the NBI Chemistry Report No. C-74891; (4) the Memorandum of Mr. Juan Dino, 3rd Assistant Auditor of
the respondent drawee bank addressed to the Chief Auditor of the petitioner; (5) the admission of the
respondent bank's counsel in open court that the National Bureau of Investigation found the signature on
the twenty-three (23) checks in question to be forgeries; and (6) the admission of the respondent bank's
witness, Mr. Faustino Mesina, Jr. that the checks in question were not printed by his printing press. The
petitioner contends that since the signatures of the checks were forgeries, the respondent drawee bank
must bear the loss under the rulings of this Court.

A bank is bound to know the signatures of its customers; and if it pays a forged check it
must be considered as making the payment out of its obligation funds, and cannot
ordinarily charge the amount so paid to the account of the depositor whose name was
forged.

xxx xxx xxx

The signatures to the checks being forged, under Section 23 of the Negotiable
Instruments Law they are not a charge against plaintiff nor are the checks of any value to
the defendant.

It must therefore be held that the proximate cause of loss was due to the negligence of
the Bank of the Philippine Islands in honoring and cashing the two forged checks. (San
Carlos Milling Co. v. Bank of the P. I., 59 Phil. 59)

It is admitted that the Philippine National Bank cashed the check upon a forged signature,
and placed the money to the credit of Maasim, who was the forger. That the Philippine
National Bank then endorsed the chock and forwarded it to the Shanghai Bank by whom
it was paid. The Philippine National Bank had no license or authority to pay the money to

Page 59 of 96
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Maasim or anyone else upon a forged signature. It was its legal duty to know that
Malicor's endorsement was genuine before cashing the check. Its remedy is against
Maasim to whom it paid the money. (Great Eastern Life Ins. Co. v. Hongkong & Shanghai
Bank, 43 Phil. 678).

We have carefully reviewed the documents cited by the petitioner. There is no express and categorical
finding in these documents that the twenty-three (23) questioned checks were indeed signed by persons
other than the authorized MWSS signatories. On the contrary, the findings of the National Bureau of
Investigation in its Report dated November 2, 1970 show that the MWSS fraud was an "inside job" and
that the petitioner's delay in the reconciliation of bank statements and the laxity and loose records control
in the printing of its personalized checks facilitated the fraud. Likewise, the questioned Documents Report
No. 159-1074 dated November 21, 1974 of the National Bureau of Investigation does not declare or prove
that the signatures appearing on the questioned checks are forgeries. The report merely mentions the
alleged differences in the type face, checkwriting, and printing characteristics appearing in the standard or
submitted models and the questioned typewritings. The NBI Chemistry Report No. C-74-891 merely
describes the inks and pens used in writing the alleged forged signatures.

It is clear that these three (3) NBI Reports relied upon by the petitioner are inadequate to sustain its
allegations of forgery. These reports did not touch on the inherent qualities of the signatures which are
indispensable in the determination of the existence of forgery. There must be conclusive findings that
there is a variance in the inherent characteristics of the signatures and that they were written by two or
more different persons.

Forgery cannot be presumed (Siasat, et al. v. Intermediate Appellate Court, et al, 139 SCRA 238). It must
be established by clear, positive, and convincing evidence. This was not done in the present case.

The cases of San Carlos Milling Co. Ltd. v. Bank of the Philippine Islands, et al. (59 Phil. 59) and Great
Eastern Life Ins., Co. v. Hongkong and Shanghai Bank (43 Phil. 678) relied upon by the petitioner are
inapplicable in this case because the forgeries in those cases were either clearly established or admitted
while in the instant case, the allegations of forgery were not clearly established during trial.

Considering the absence of sufficient security in the printing of the checks coupled with the very close
similarities between the genuine signatures and the alleged forgeries, the twenty-three (23) checks in
question could have been presented to the petitioner's signatories without their knowing that they were
bogus checks. Indeed, the cashier of the petitioner whose signatures were allegedly forged was unable to
ten the difference between the allegedly forged signature and his own genuine signature. On the other
hand, the MWSS officials admitted that these checks could easily be passed on as genuine.

The memorandum of Mr. A. T. Tolentino, no, Assistant Chief Accountant of the drawee Philippine
National Bank to Mr. E. Villatuya, Executive Vice-President of the petitioner dated June 9, 1969 cites an
instance where even the concerned NWSA officials could not ten the differences between the genuine
checks and the alleged forged checks.

At about 12:00 o'clock on June 6, 1969, VP Maramag requested me to see him in his
office at the Cashier's Dept. where Messrs. Jose M. Sanchez, treasurer of NAWASA and
Romeo Oliva of the same office were present. Upon my arrival I observed the NAWASA
officials questioning the issue of the NAWASA checks appearing in their own list, xerox
copy attached.

For verification purposes, therefore, the checks were taken from our file. To everybody
there present namely VIP Maramag, the two abovementioned NAWASA officials, AVP,
Buhain, Asst. Cashier Castelo, Asst. Cashier Tejada and Messrs. A. Lopez and L.
Lechuga, both C/A bookkeepers, no one was able to point out any difference on the
signatures of the NAWASA officials appearing on the checks compared to their official

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signatures on file. In fact 3 checks, one of those under question, were presented to the
NAWASA treasurer for verification but he could not point out which was his genuine
signature. After intent comparison, he pointed on the questioned check as bearing his
correct signature.

xxx xxx xxx

Moreover, the petitioner is barred from setting up the defense of forgery under Section 23 of the
Negotiable Instruments Law which provides that:

SEC. 23. FORGED SIGNATURE; EFFECT OF.- When the signature is forged or made
without authority of the person whose signature it purports to be, it is wholly inoperative,
and no right to retain the instrument, or to give a discharge therefor, or to enforce
payment thereof against any party thereto can be acquired through or under such
signature unless the party against whom it is sought to enforce such right is precluded
from setting up the forgery or want of authority.

because it was guilty of negligence not only before the questioned checks were negotiated but even after
the same had already been negotiated. (See Republic v. Equitable Banking Corporation, 10 SCRA 8) The
records show that at the time the twenty-three (23) checks were prepared, negotiated, and encashed, the
petitioner was using its own personalized checks, instead of the official PNB Commercial blank checks. In
the exercise of this special privilege, however, the petitioner failed to provide the needed security
measures. That there was gross negligence in the printing of its personalized checks is shown by the
following uncontroverted facts, to wit:

(1) The petitioner failed to give its printer, Mesina Enterprises, specific instructions relative to the
safekeeping and disposition of excess forms, check vouchers, and safety papers;

(2) The petitioner failed to retrieve from its printer all spoiled check forms;

(3) The petitioner failed to provide any control regarding the paper used in the printing of said checks;

(4) The petitioner failed to furnish the respondent drawee bank with samples of typewriting, cheek writing,
and print used by its printer in the printing of its checks and of the inks and pens used in signing the
same; and

(5) The petitioner failed to send a representative to the printing office during the printing of said checks.

This gross negligence of the petitioner is very evident from the sworn statement dated June 19, 1969 of
Faustino Mesina, Jr., the owner of the printing press which printed the petitioner's personalized checks:

xxx xxx xxx

7. Q: Do you have any business transaction with the National

Waterworks and Sewerage Authority (NAWASA)?

A: Yes, sir. I have a contract with the NAWASA in printing NAWASA

Forms such as NAWASA Check

xxx xxx xxx

15. Q: Were you given any ingtruction by the NAWASA in connection

with the printing of these check vouchers?

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A: There is none, sir. No instruction whatsoever was given to me.

16. Q: Were you not advised as to what kind of paper would be used in
the check vouchers?

A: Only as per sample, sir.

xxx xxx xxx

20. Q: Where did you buy this Hammermill Safety check paper?

A: From Tan Chiong, a paper dealer with store located at Juan Luna,
Binondo, Manila. (In front of the Metropolitan Bank).

xxx xxx xxx

24. Q: Were all these check vouchers printed by you submitted to

NAWASA?

A: Not all, sir. Because we have to make reservations or allowances for

spoilage.

25. Q: Out of these vouchers printed by you, how many were spoiled and
how many were the excess printed check vouchers?

A: Approximately four hundred (400) sheets, sir. I cannot determine the

proportion of the excess and spoiled because the final act of perforating
these check vouchers has not yet been done and spoilage can only be
determined after this final act of printing.

26. Q: What did you do with these excess check vouchers?

A: I keep it under lock and key in my firing cabinet.

xxx xxx xxx

28. Q: Were you not instructed by the NAWASA authorities to bum these
excess check vouchers?

A: No, sir. I was not instructed.

29. Q: What do you intend to do with these excess printed check

vouchers?

A: I intend to use them for future orders from the

xxx xxx xxx

32. Q: In the process of printing the check vouchers ordered by the

NAWASA, how many sheets were actually spoiled?

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A: I cannot approximate, sir. But there are spoilage in the process of

printing and perforating.

33. Q: What did you do with these spoilages?

A: Spoiled printed materials are usually thrown out, in the garbage can.

34. Q: Was there any representative of the NAWASA to supervise the

printing or watch the printing of these check vouchers?

A: None, sir.

xxx xxx xxx

39. Q: During the period of printing after the days work, what measures
do you undertake to safeguard the mold and other paraphernalia used in
the printing of these particular orders of NAWASA?

A: Inasmuch as I have an employee who sleeps in the printing shop and

at the same time do the guarding, we just leave the mold attached to the
machine and the other finished or unfinished work check vouchers are
left in the rack so that the work could be continued the following day.

The National Bureau of Investigation Report dated November 2, 1970 is even more explicit. Thus—

xxx xxx xxx

60. We observed also that there is some laxity and loose control in the
printing of NAWASA cheeks. We gathered from MESINA
ENTERPRISES, the printing firm that undertook the printing of the check
vouchers of NAWASA that NAWASA had no representative at the
printing press during the process of the printing and no particular security
measure instructions adopted to safeguard the interest of the
government in connection with printing of this accountable form.

Another factor which facilitated the fraudulent encashment of the twenty-three (23) checks in question
was the failure of the petitioner to reconcile the bank statements with its own records.

It is accepted banking procedure for the depository bank to furnish its depositors bank statements and
debt and credit memos through the mail. The records show that the petitioner requested the respondent
drawee bank to discontinue the practice of mailing the bank statements, but instead to deliver the same to
a certain Mr. Emiliano Zaporteza. For reasons known only to Mr. Zaporteza however, he was
unreasonably delayed in taking prompt deliveries of the said bank statements and credit and debit
memos. As a consequence, Mr. Zaporteza failed to reconcile the bank statements with the petitioner's
records. If Mr. Zaporteza had not been remiss in his duty of taking the bank statements and reconciling
them with the petitioner's records, the fraudulent encashments of the first checks should have been
discovered, and further frauds prevented. This negligence was, therefore, the proximate cause of the
failure to discover the fraud. Thus,

When a person opens a checking account with a bank, he is given blank checks which he
may fill out and use whenever he wishes. Each time he issues a check, he should also fill
out the check stub to which the check is usually attached. This stub, if properly kept, will
contain the number of the check, the date of its issue, the name of the payee and the

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amount thereof. The drawer would therefore have a complete record of the checks he
issues. It is the custom of banks to send to its depositors a monthly statement of the
status of their accounts, together with all the cancelled checks which have been cashed
by their respective holders. If the depositor has filled out his check stubs properly, a
comparison between them and the cancelled checks will reveal any forged check not
taken from his checkbook. It is the duty of a depositor to carefully examine the bank's
statement, his cancelled checks, his check stubs and other pertinent records within a
reasonable time, and to report any errors without unreasonable delay. If his negligence
should cause the bank to honor a forged check or prevent it from recovering the amount
it may have already paid on such check, he cannot later complain should the bank refuse
to recredit his account with the amount of such check. (First Nat. Bank of Richmond v.
Richmond Electric Co., 106 Va. 347, 56 SE 152, 7 LRA, NS 744 [1907]. See also Leather
Manufacturers' Bank v. Morgan, 117 US 96, 6 S. Ct. 657 [1886]; Deer Island Fish and
Oyster Co. v. First Nat. Bank of Biloxi, 166 Miss. 162, 146 So. 116 [1933]). Campos and
Campos, Notes and Selected Cases on Negotiable Instruments Law, 1971, pp. 267-268).

This failure of the petitioner to reconcile the bank statements with its cancelled checks was noted by the
National Bureau of Investigation in its report dated November 2, 1970:

58. One factor which facilitate this fraud was the delay in the reconciliation of bank (PNB)
statements with the NAWASA bank accounts. x x x. Had the NAWASA representative
come to the PNB early for the statements and had the bank been advised promptly of the
reported bogus check, the negotiation of practically all of the remaining checks on May,
1969, totalling P2,224,736.00 could have been prevented.

The records likewise show that the petitioner failed to provide appropriate security measures over its own
records thereby laying confidential records open to unauthorized persons. The petitioner's own Fact
Finding Committee, in its report submitted to their General manager underscored this laxity of records
control. It observed that the "office of Mr. Ongtengco (Cashier No. VI of the Treasury Department at the
NAWASA) is quite open to any person known to him or his staff members and that the check writer is
merely on top of his table."

When confronted with this report at the Anti-Fraud Action Section of the National Bureau of Investigation.
Mr. Ongtengco could only state that:

A. Generally my order is not to allow anybody to enter my office. Only

authorized persons are allowed to enter my office. There are some
cases, however, where some persons enter my office because they are
following up their checks. Maybe, these persons may have been
authorized by Mr. Pantig. Most of the people entering my office are
changing checks as allowed by the Resolution of the Board of Directors
of the NAWASA and the Treasurer. The check writer was never placed
on my table. There is a place for the check write which is also under lock
and key.

Q. Is Mr. Pantig authorized to allow unauthorized persons to enter your

office?

A. No, sir.

Q. Why are you tolerating Mr. Pantig admitting unauthorized persons in

your office?

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A. I do not want to embarrass Mr. Pantig. Most of the people following up

checks are employees of the NAWASA.

Q. Was the authority given by the Board of Directors and the approval by
the Treasurer for employees, and other persons to encash their checks
carry with it their authority to enter your office?

A. No, sir.

xxx xxx xxx

Q. From the answers that you have given to us we observed that actually
there is laxity and poor control on your part with regards to the
preparations of check payments inasmuch as you allow unauthorized
persons to follow up their vouchers inside your office which may leakout
confidential informations or your books of account. After being apprised
of all the shortcomings in your office, as head of the Cashiers' Office of
the Treasury Department what remedial measures do you intend to
undertake?

A. Time and again the Treasurer has been calling our attention not to
allow interested persons to hand carry their voucher checks and we are
trying our best and if I can do it to follow the instructions to the letter, I
will do it but unfortunately the persons who are allowed to enter my office
are my co-employees and persons who have connections with our higher
ups and I can not possibly antagonize them. Rest assured that even
though that everybody will get hurt, I win do my best not to allow
unauthorized persons to enter my office.

xxx xxx xxx

Q. Is it not possible inasmuch as your office is in charge of the posting of

check payments in your books that leakage of payments to the banks
came from your office?

A. I am not aware of it but it only takes us a couple of minutes to process

the checks. And there are cases wherein every information about the
checks may be obtained from the Accounting Department, Auditing
Department, or the Office of the General Manager.

Relying on the foregoing statement of Mr. Ongtengco, the National Bureau of Investigation concluded in
its Report dated November 2, 1970 that the fraudulent encashment of the twenty-three (23)cheeks in
question was an "inside job". Thus-

We have all the reasons to believe that this fraudulent act was an inside job or one pulled
with inside connivance at NAWASA. As pointed earlier in this report, the serial numbers
of these checks in question conform with the numbers in current use of NAWASA, aside
from the fact that these fraudulent checks were found to be of the same kind and design
as that of NAWASA's own checks. While knowledge as to such facts may be obtained
through the possession of a NAWASA check of current issue, an outsider without
information from the inside can not possibly pinpoint which of NAWASA's various
accounts has sufficient balance to cover all these fraudulent checks. None of these
checks, it should be noted, was dishonored for insufficiency of funds. . .

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Even if the twenty-three (23) checks in question are considered forgeries, considering the petitioner's
gross negligence, it is barred from setting up the defense of forgery under Section 23 of the Negotiable
Instruments Law.

Nonetheless, the petitioner claims that it was the negligence of the respondent Philippine National Bank
that was the proximate cause of the loss. The petitioner relies on our ruling in Philippine National Bank v.
Court of Appeals (25 SCRA 693) that.

Thus, by not returning the cheek to the PCIB, by thereby indicating that the PNB had
found nothing wrong with the check and would honor the same, and by actually paying its
amount to the PCIB, the PNB induced the latter, not only to believe that the check was
genuine and good in every respect, but, also, to pay its amount to Augusto Lim. In other
words, the PNB was the primary or proximate cause of the loss, and, hence, may not
recover from the PCIB.

The argument has no merit. The records show that the respondent drawee bank, had taken the
necessary measures in the detection of forged checks and the prevention of their fraudulent encashment.
In fact, long before the encashment of the twenty-three (23) checks in question, the respondent Bank had
issued constant reminders to all Current Account Bookkeepers informing them of the activities of forgery
syndicates. The Memorandum of the Assistant Vice-President and Chief Accountant of the Philippine
National Bank dated February 17, 1966 reads in part:

SUBJECT: ACTIVITIES OF FORGERY SYNDICATE

From reliable information we have gathered that personalized checks of current account
depositors are now the target of the forgery syndicate. To protect the interest of the bank,
you are hereby enjoined to be more careful in examining said checks especially those
coming from the clearing, mails and window transactions. As a reminder please be
guided with the following:

1. Signatures of drawers should be properly scrutinized and compared with those we

have on file.

2. The serial numbers of the checks should be compared with the serial numbers
registered with the Cashier's Dept.

3. The texture of the paper used and the printing of the checks should be compared with
the sample we have on file with the Cashier's Dept.

4. Checks bearing several indorsements should be given a special attention.

5. Alteration in amount both in figures and words should be carefully examined even if
signed by the drawer.

6. Checks issued in substantial amounts particularly by depositors who do not usually

issue checks in big amounts should be brought to the attention of the drawer by
telephone or any fastest means of communication for purposes of confirmation.

and your attention is also invited to keep abreast of previous circulars and memo
instructions issued to bookkeepers.

We cannot fault the respondent drawee Bank for not having detected the fraudulent encashment of the
checks because the printing of the petitioner's personalized checks was not done under the supervision

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and control of the Bank. There is no evidence on record indicating that because of this private printing the
petitioner furnished the respondent Bank with samples of checks, pens, and inks or took other
precautionary measures with the PNB to safeguard its interests.

Under the circumstances, therefore, the petitioner was in a better position to detect and prevent the
fraudulent encashment of its checks.

WHEREFORE, the petition for review on certiorari is hereby DISMISSED for lack of merit. The decision of
the respondent Court of Appeals dated October 29, 1982 is AFFIRMED. No pronouncement as to costs.

SO ORDERED.

 Gempesaw vs. CA Feb. 9, 2003

DECISION

CAMPOS, JR., J.:

From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447), Petitioner, Natividad
Gempesaw, appealed to this Court in a Petition for Review, on the issue of the right of the drawer to
recover from the drawee bank who pays a check with a forged indorsement of the payee, debiting the
same against the drawer’s account.

The records show that on January 23, 1985, petitioner filed a Complaint against the private respondent
Philippine Bank of Communications (respondent drawee Bank) for recovery of the money value of eighty-
two (82) checks charged against the petitioner’s account with 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
:chanrob1es virtual 1aw library

"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.chanrobles virtual lawlibrary

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

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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 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."cralaw virtua1aw library

From the records, the relevant facts are as follows:chanrob1es virtual 1aw library

Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery stores located at Rizal
Avenue Extension and at Second Avenue, both in 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 actually 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 the correctness of the returned checks, much less check if the payees actually received the
checks in payment for the supplies she received. In the course of her business operations covering a
period of two years, petitioner issued, following her usual practice stated above, a total of eighty-two (82)
checks in favor of several suppliers. These checks were all presented by the indorsees as holders thereof
to, and honored by, the respondent drawee Bank. Respondent drawee Bank correspondingly debited the
amounts thereof against petitioner’s checking account numbered 30-00038-1. Most of the aforementioned
checks were for amounts in excess of her actual obligations to the various payees as shown in their
corresponding invoices. To mention a few:jgc:chanrobles.com.ph

". . . 1) in Check No. 621127, dated June 27, 1984 in the amount of P11,895.23 in favor of Kawsek Inc.
(Exh. A-60), appellant’s actual obligation to said payee was only P895.33 (Exh. A-83); (2) in Check No.
652282 issued on September 18, 1984 in favor of Senson Enterprises in the amount of P11,041.20 (Exh.
A-67) appellant’s actual obligation to said payee was only P1,041.20 (Exh. 7); (3) in Check No. 589092
dated April 7, 1984 for the amount of P11,672.47 in favor of Marchem (Exh. A-61) appellant’s obligation
was only P1,672.47 (Exh. B); (4) in Check No. 620450 dated May 10, 1984 in favor of Knotberry for
P11,677.10 (Exh. A-31) her actual obligation was only P677.10 (Exhs. C and C-1); (5) in Check No.
651862 dated August 9, 1984 in favor of Malinta Exchange Mart for P11,107.16 (Exh. A-62), her
obligation was only P1,107.16 (Exh. D-2); (6) in Check No. 651863 dated August 11, 1984 in favor of
Grocer’s International Food Corp. in the amount of P11,335.60 (Exh. A-66), her obligation was only
P1,335.60 (Exh. E and 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 24, 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

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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 bank 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 than two (2) years that petitioner found out about the fraudulent manipulations of her
bookkeeper.chanrobles virtual lawlibrary

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 Elcano 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 periodical
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 Elcano 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:jgc:chanrobles.com.ph

"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." chanrobles.com:cralaw:red

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

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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 the 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 later 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 Elcano branches of the same bank. The
total amount of P1,208,606.89, represented by eighty-two (82) checks, were credited and paid out by
respondent drawee Bank to Alfredo Y. Romero and Benito Lam, and debited against petitioner’s checking
account No. 13-00038-1, Caloocan branch.chanrobles law library : red

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

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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
oftentimes have 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 the 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 sales 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 time
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 much 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 such 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 on her issued checks, or at least made random scrutiny
of her 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.chanrobles virtual lawlibrary

The doctrine in the case of Great Eastern Life Insurance Co. v. Hongkong & Shanghai Bank 11 is not

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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.

x x x"

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 it 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.chanrobles law library : red

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 her 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."cralaw virtua1aw library

There is no question that there is a contractual relation between petitioner as depositor (obligee) and the

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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 correspondents with the circumstance of the persons, of the time and of the
place. . . ."cralaw virtua1aw library

We hold that banking business is so impressed with public interest where the trust and confidence of the
public in general is of paramount importance such that the appropriate standard of diligence must be a
high degree of diligence, if not the utmost diligence. Surely, respondent drawee Bank cannot claim it
exercised such a degree of diligence that is required of it. There is no way We can allow it now to escape
liability for such negligence. Its liability as obligor is not merely vicarious but primary wherein the defense
of exercise of due diligence in the selection and supervision of its employees is of no moment.

Premises considered, respondent drawee Bank is adjudged liable to share the loss with the petitioner on
a fifty-fifty ratio in accordance with Article 1172 which provides:jgc:chanrobles.com.ph

"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."cralaw virtua1aw library

With the foregoing provisions of the Civil Code being relied upon, it is being made clear that the decision
to hold the drawee bank liable is based on law and substantial justice and not on mere equity. And
although the case was brought before the court not on breach of contractual obligations, the courts are
not precluded from applying to the circumstances of the case the laws pertinent thereto. Thus, the fact
that petitioner’s negligence was found to be the proximate cause of her loss does not preclude her from
recovering damages. The reason why the decision dealt on a discussion on proximate cause is due to the
error pointed out by petitioner as allegedly committed by the respondent court. And in breaches of
contract under Article 1173, due diligence on the part of the defendant is not a defense.

PREMISES CONSIDERED, the case is hereby ordered REMANDED to the trial court for the reception of
evidence to determine the exact amount of loss suffered by the petitioner, considering that she partly
benefited from the issuance of the questioned checks since the obligation for which she issued them were
apparently extinguished, such that only the excess amount over and above the total of these actual
obligations must be considered as loss of which one half must be paid by respondent drawee bank to
herein petitioner.

SO ORDERED.

 Associated Bank vs. CA January 31, 1996

Republic of the Philippines

SUPREME COURT
Manila

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SECOND DIVISION

G.R. No. 107382/G.R. No. 107612 January 31, 1996

ASSOCIATED BANK, petitioner,

vs.
HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE NATIONAL
BANK, respondents.

xxxxxxxxxxxxxxxxxxxxx

G.R. No. 107612 January 31, 1996

PHILIPPINE NATIONAL BANK, petitioner,

vs.
HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and ASSOCIATED
BANK, respondents.

DECISION

ROMERO, J.:

Where thirty checks bearing forged endorsements are paid, who bears the loss, the drawer, the drawee
bank or the collecting bank?

This is the main issue in these consolidated petitions for review assailing the decision of the Court of
Appeals in "Province of Tarlac v. Philippine National Bank v. Associated Bank v. Fausto Pangilinan, et.
al." (CA-G.R. No. CV No. 17962). 1

The facts of the case are as follows:

The Province of Tarlac maintains a current account with the Philippine National Bank (PNB) Tarlac
Branch where the provincial funds are deposited. Checks issued by the Province are signed by the
Provincial Treasurer and countersigned by the Provincial Auditor or the Secretary of the Sangguniang
Bayan.

A portion of the funds of the province is allocated to the Concepcion Emergency Hospital. 2 The allotment
checks for said government hospital are drawn to the order of "Concepcion Emergency Hospital,
Concepcion, Tarlac" or "The Chief, Concepcion Emergency Hospital, Concepcion, Tarlac." The checks
are released by the Office of the Provincial Treasurer and received for the hospital by its administrative
officer and cashier.

In January 1981, the books of account of the Provincial Treasurer were post-audited by the Provincial
Auditor. It was then discovered that the hospital did not receive several allotment checks drawn by the
Province.

On February 19, 1981, the Provincial Treasurer requested the manager of the PNB to return all of its
cleared checks which were issued from 1977 to 1980 in order to verify the regularity of their encashment.
After the checks were examined, the Provincial Treasurer learned that 30 checks amounting to
P203,300.00 were encashed by one Fausto Pangilinan, with the Associated Bank acting as collecting
bank.

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It turned out that Fausto Pangilinan, who was the administrative officer and cashier of payee hospital until
his retirement on February 28, 1978, collected the questioned checks from the office of the Provincial
Treasurer. He claimed to be assisting or helping the hospital follow up the release of the checks and had
official receipts. 3Pangilinan sought to encash the first check 4 with Associated Bank. However, the
manager of Associated Bank refused and suggested that Pangilinan deposit the check in his personal
savings account with the same bank. Pangilinan was able to withdraw the money when the check was
cleared and paid by the drawee bank, PNB.

After forging the signature of Dr. Adena Canlas who was chief of the payee hospital, Pangilinan followed
the same procedure for the second check, in the amount of P5,000.00 and dated April 20, 1978, 5 as well
as for twenty-eight other checks of various amounts and on various dates. The last check negotiated by
Pangilinan was for f8,000.00 and dated February 10, 1981. 6 All the checks bore the stamp of Associated
Bank which reads "All prior endorsements guaranteed ASSOCIATED BANK."

Jesus David, the manager of Associated Bank testified that Pangilinan made it appear that the checks
were paid to him for certain projects with the hospital. 7 He did not find as irregular the fact that the checks
were not payable to Pangilinan but to the Concepcion Emergency Hospital. While he admitted that his
wife and Pangilinan's wife are first cousins, the manager denied having given Pangilinan preferential
treatment on this account. 8

On February 26, 1981, the Provincial Treasurer wrote the manager of the PNB seeking the restoration of
the various amounts debited from the current account of the Province. 9

In turn, the PNB manager demanded reimbursement from the Associated Bank on May 15, 1981. 10

As both banks resisted payment, the Province of Tarlac brought suit against PNB which, in turn,
impleaded Associated Bank as third-party defendant. The latter then filed a fourth-party complaint against
Adena Canlas and Fausto Pangilinan. 11

After trial on the merits, the lower court rendered its decision on March 21, 1988, disposing as follows:

WHEREFORE, in view of the foregoing, judgment is hereby rendered:

1. On the basic complaint, in favor of plaintiff Province of Tarlac and against defendant Philippine
National Bank (PNB), ordering the latter to pay to the former, the sum of Two Hundred Three
Thousand Three Hundred (P203,300.00) Pesos with legal interest thereon from March 20, 1981
until fully paid;

2. On the third-party complaint, in favor of defendant/third-party plaintiff Philippine National Bank

(PNB) and against third-party defendant/fourth-party plaintiff Associated Bank ordering the latter
to reimburse to the former the amount of Two Hundred Three Thousand Three Hundred
(P203,300.00) Pesos with legal interests thereon from March 20, 1981 until fully paid;.

3. On the fourth-party complaint, the same is hereby ordered dismissed for lack of cause of action
as against fourth-party defendant Adena Canlas and lack of jurisdiction over the person of fourth-
party defendant Fausto Pangilinan as against the latter.

4. On the counterclaims on the complaint, third-party complaint and fourth-party complaint, the
same are hereby ordered dismissed for lack of merit.

SO ORDERED. 12

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PNB and Associated Bank appealed to the Court of Appeals. 13 Respondent court affirmed the trial court's
decision in toto on September 30, 1992.

Hence these consolidated petitions which seek a reversal of respondent appellate court's decision.

PNB assigned two errors. First, the bank contends that respondent court erred in exempting the Province
of Tarlac from liability when, in fact, the latter was negligent because it delivered and released the
questioned checks to Fausto Pangilinan who was then already retired as the hospital's cashier and
administrative officer. PNB also maintains its innocence and alleges that as between two innocent
persons, the one whose act was the cause of the loss, in this case the Province of Tarlac, bears the loss.

Next, PNB asserts that it was error for the court to order it to pay the province and then seek
reimbursement from Associated Bank. According to petitioner bank, respondent appellate Court should
have directed Associated Bank to pay the adjudged liability directly to the Province of Tarlac to avoid
circuity. 14

Associated Bank, on the other hand, argues that the order of liability should be totally reversed, with the
drawee bank (PNB) solely and ultimately bearing the loss.

Respondent court allegedly erred in applying Section 23 of the Philippine Clearing House Rules instead
of Central Bank Circular No. 580, which, being an administrative regulation issued pursuant to law, has
the force and effect of law. 15 The PCHC Rules are merely contractual stipulations among and between
member-banks. As such, they cannot prevail over the aforesaid CB Circular.

It likewise contends that PNB, the drawee bank, is estopped from asserting the defense of guarantee of
prior indorsements against Associated Bank, the collecting bank. In stamping the guarantee (for all prior
indorsements), it merely followed a mandatory requirement for clearing and had no choice but to place
the stamp of guarantee; otherwise, there would be no clearing. The bank will be in a "no-win" situation
and will always bear the loss as against the drawee bank. 16

Associated Bank also claims that since PNB already cleared and paid the value of the forged checks in
question, it is now estopped from asserting the defense that Associated Bank guaranteed prior
indorsements. The drawee bank allegedly has the primary duty to verify the genuineness of payee's
indorsement before paying the check. 17

While both banks are innocent of the forgery, Associated Bank claims that PNB was at fault and should
solely bear the loss because it cleared and paid the forged checks.

xxx xxx xxx

The case at bench concerns checks payable to the order of Concepcion Emergency Hospital or its Chief.
They were properly issued and bear the genuine signatures of the drawer, the Province of Tarlac. The
infirmity in the questioned checks lies in the payee's (Concepcion Emergency Hospital) indorsements
which are forgeries. At the time of their indorsement, the checks were order instruments.

Checks having forged indorsements should be differentiated from forged checks or checks bearing the
forged signature of the drawer.

Section 23 of the Negotiable Instruments Law (NIL) provides:

Sec. 23. FORGED SIGNATURE, EFFECT OF. — When a signature is forged or made without
authority of the person whose signature it purports to be, it is wholly inoperative, and no right to
retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any

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party thereto, can be acquired through or under such signature unless the party against whom it
is sought to enforce such right is precluded from setting up the forgery or want of authority.

A forged signature, whether it be that of the drawer or the payee, is wholly inoperative and no one can
gain title to the instrument through it. A person whose signature to an instrument was forged was never a
party and never consented to the contract which allegedly gave rise to such instrument. 18 Section 23
does not avoid the instrument but only the forged signature. 19 Thus, a forged indorsement does not
operate as the payee's indorsement.

The exception to the general rule in Section 23 is where "a party against whom it is sought to enforce a
right is precluded from setting up the forgery or want of authority." Parties who warrant or admit the
genuineness of the signature in question and those who, by their acts, silence or negligence are estopped
from setting up the defense of forgery, are precluded from using this defense. Indorsers, persons
negotiating by delivery and acceptors are warrantors of the genuineness of the signatures on the
instrument. 20

In bearer instruments, the signature of the payee or holder is unnecessary to pass title to the instrument.
Hence, when the indorsement is a forgery, only the person whose signature is forged can raise the
defense of forgery against a holder in due course. 21

The checks involved in this case are order instruments, hence, the following discussion is made with
reference to the effects of a forged indorsement on an instrument payable to order.

Where the instrument is payable to order at the time of the forgery, such as the checks in this case, the
signature of its rightful holder (here, the payee hospital) is essential to transfer title to the same
instrument. When the holder's indorsement is forged, all parties prior to the forgery may raise the real
defense of forgery against all parties subsequent thereto. 22

An indorser of an order instrument warrants "that the instrument is genuine and in all respects what it
purports to be; that he has a good title to it; that all prior parties had capacity to contract; and that the
instrument is at the time of his indorsement valid and subsisting." 23 He cannot interpose the defense that
signatures prior to him are forged.

A collecting bank where a check is deposited and which indorses the check upon presentment with the
drawee bank, is such an indorser. So even if the indorsement on the check deposited by the banks's
client is forged, the collecting bank is bound by his warranties as an indorser and cannot set up the
defense of forgery as against the drawee bank.

The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay the check
to the order of the payee. The drawer's instructions are reflected on the face and by the terms of the
check. Payment under a forged indorsement is not to the drawer's order. When the drawee bank pays a
person other than the payee, it does not comply with the terms of the check and violates its duty to
charge its customer's (the drawer) account only for properly payable items. Since the drawee bank did not
pay a holder or other person entitled to receive payment, it has no right to reimbursement from the
drawer. 24 The general rule then is that the drawee bank may not debit the drawer's account and is not
entitled to indemnification from the drawer. 25 The risk of loss must perforce fall on the drawee bank.

However, if the drawee bank can prove a failure by the customer/drawer to exercise ordinary care that
substantially contributed to the making of the forged signature, the drawer is precluded from asserting the
forgery.

If at the same time the drawee bank was also negligent to the point of substantially contributing to the
loss, then such loss from the forgery can be apportioned between the negligent drawer and the negligent
bank. 26

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In cases involving a forged check, where the drawer's signature is forged, the drawer can recover from
the drawee bank. No drawee bank has a right to pay a forged check. If it does, it shall have to recredit the
amount of the check to the account of the drawer. The liability chain ends with the drawee bank whose
responsibility it is to know the drawer's signature since the latter is its customer. 27

In cases involving checks with forged indorsements, such as the present petition, the chain of liability
does not end with the drawee bank. The drawee bank may not debit the account of the drawer but may
generally pass liability back through the collection chain to the party who took from the forger and, of
course, to the forger himself, if available. 28 In other words, the drawee bank canseek reimbursement or a
return of the amount it paid from the presentor bank or person. 29 Theoretically, the latter can demand
reimbursement from the person who indorsed the check to it and so on. The loss falls on the party who
took the check from the forger, or on the forger himself.

In this case, the checks were indorsed by the collecting bank (Associated Bank) to the drawee bank
(PNB). The former will necessarily be liable to the latter for the checks bearing forged indorsements. If the
forgery is that of the payee's or holder's indorsement, the collecting bank is held liable, without prejudice
to the latter proceeding against the forger.

Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the drawee bank.
The former must necessarily return the money paid by the latter because it was paid wrongfully. 30

More importantly, by reason of the statutory warranty of a general indorser in section 66 of the Negotiable
Instruments Law, a collecting bank which indorses a check bearing a forged indorsement and presents it
to the drawee bank guarantees all prior indorsements, including the forged indorsement. It warrants that
the instrument is genuine, and that it is valid and subsisting at the time of his indorsement. Because the
indorsement is a forgery, the collecting bank commits a breach of this warranty and will be accountable to
the drawee bank. This liability scheme operates without regard to fault on the part of the
collecting/presenting bank. Even if the latter bank was not negligent, it would still be liable to the drawee
bank because of its indorsement.

The Court has consistently ruled that "the collecting bank or last endorser generally suffers the loss
because it has the duty to ascertain the genuineness of all prior endorsements considering that the act of
presenting the check for payment to the drawee is an assertion that the party making the presentment
has done its duty to ascertain the genuineness of the endorsements." 31

The drawee bank is not similarly situated as the collecting bank because the former makes no warranty
as to the genuineness. of any indorsement. 32 The drawee bank's duty is but to verify the genuineness of
the drawer's signature and not of the indorsement because the drawer is its client.

Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the check.
The bank knows him, his address and history because he is a client. It has taken a risk on his deposit.
The bank is also in a better position to detect forgery, fraud or irregularity in the indorsement.

Hence, the drawee bank can recover the amount paid on the check bearing a forged indorsement from
the collecting bank. However, a drawee bank has the duty to promptly inform the presentor of the forgery
upon discovery. If the drawee bank delays in informing the presentor of the forgery, thereby depriving
said presentor of the right to recover from the forger, the former is deemed negligent and can no longer
recover from the presentor. 33

Applying these rules to the case at bench, PNB, the drawee bank, cannot debit the current account of the
Province of Tarlac because it paid checks which bore forged indorsements. However, if the Province of
Tarlac as drawer was negligent to the point of substantially contributing to the loss, then the drawee bank
PNB can charge its account. If both drawee bank-PNB and drawer-Province of Tarlac were negligent, the
loss should be properly apportioned between them.

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The loss incurred by drawee bank-PNB can be passed on to the collecting bank-Associated Bank which
presented and indorsed the checks to it. Associated Bank can, in turn, hold the forger, Fausto Pangilinan,
liable.

If PNB negligently delayed in informing Associated Bank of the forgery, thus depriving the latter of the
opportunity to recover from the forger, it forfeits its right to reimbursement and will be made to bear the
loss.

After careful examination of the records, the Court finds that the Province of Tarlac was equally negligent
and should, therefore, share the burden of loss from the checks bearing a forged indorsement.

The Province of Tarlac permitted Fausto Pangilinan to collect the checks when the latter, having already
retired from government service, was no longer connected with the hospital. With the exception of the first
check (dated January 17, 1978), all the checks were issued and released after Pangilinan's retirement on
February 28, 1978. After nearly three years, the Treasurer's office was still releasing the checks to the
retired cashier. In addition, some of the aid allotment checks were released to Pangilinan and the others
to Elizabeth Juco, the new cashier. The fact that there were now two persons collecting the checks for the
hospital is an unmistakable sign of an irregularity which should have alerted employees in the Treasurer's
office of the fraud being committed. There is also evidence indicating that the provincial employees were
aware of Pangilinan's retirement and consequent dissociation from the hospital. Jose Meru, the Provincial
Treasurer, testified:.

ATTY. MORGA:

Q Now, is it true that for a given month there were two releases of checks, one went to Mr.
Pangilinan and one went to Miss Juco?

JOSE MERU:

A Yes, sir.

Q Will you please tell us how at the time (sic) when the authorized representative of Concepcion
Emergency Hospital is and was supposed to be Miss Juco?

A Well, as far as my investigation show (sic) the assistant cashier told me that Pangilinan
represented himself as also authorized to help in the release of these checks and we were
apparently misled because they accepted the representation of Pangilinan that he was helping
them in the release of the checks and besides according to them they were, Pangilinan, like the
rest, was able to present an official receipt to acknowledge these receipts and according to them
since this is a government check and believed that it will eventually go to the hospital following
the standard procedure of negotiating government checks, they released the checks to
Pangilinan aside from Miss Juco.34

The failure of the Province of Tarlac to exercise due care contributed to a significant degree to the loss
tantamount to negligence. Hence, the Province of Tarlac should be liable for part of the total amount paid
on the questioned checks.

The drawee bank PNB also breached its duty to pay only according to the terms of the check. Hence, it
cannot escape liability and should also bear part of the loss.

As earlier stated, PNB can recover from the collecting bank.

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In the case of Associated Bank v. CA, 35 six crossed checks with forged indorsements were deposited in
the forger's account with the collecting bank and were later paid by four different drawee banks. The
Court found the collecting bank (Associated) to be negligent and held:

The Bank should have first verified his right to endorse the crossed checks, of which he was not
the payee, and to deposit the proceeds of the checks to his own account. The Bank was by
reason of the nature of the checks put upon notice that they were issued for deposit only to the
private respondent's account. . . .

The situation in the case at bench is analogous to the above case, for it was not the payee who deposited
the checks with the collecting bank. Here, the checks were all payable to Concepcion Emergency
Hospital but it was Fausto Pangilinan who deposited the checks in his personal savings account.

Although Associated Bank claims that the guarantee stamped on the checks (All prior and/or lack of
endorsements guaranteed) is merely a requirement forced upon it by clearing house rules, it cannot but
remain liable. The stamp guaranteeing prior indorsements is not an empty rubric which a bank must fulfill
for the sake of convenience. A bank is not required to accept all the checks negotiated to it. It is within the
bank's discretion to receive a check for no banking institution would consciously or deliberately accept a
check bearing a forged indorsement. When a check is deposited with the collecting bank, it takes a risk
on its depositor. It is only logical that this bank be held accountable for checks deposited by its
customers.

A delay in informing the collecting bank (Associated Bank) of the forgery, which deprives it of the
opportunity to go after the forger, signifies negligence on the part of the drawee bank (PNB) and will
preclude it from claiming reimbursement.

It is here that Associated Bank's assignment of error concerning C.B. Circular No. 580 and Section 23 of
the Philippine Clearing House Corporation Rules comes to fore. Under Section 4(c) of CB Circular No.
580, items bearing a forged endorsement shall be returned within twenty-Sour (24) hours after discovery
of the forgery but in no event beyond the period fixed or provided by law for filing of a legal action by the
returning bank. Section 23 of the PCHC Rules deleted the requirement that items bearing a forged
endorsement should be returned within twenty-four hours. Associated Bank now argues that the
aforementioned Central Bank Circular is applicable. Since PNB did not return the questioned checks
within twenty-four hours, but several days later, Associated Bank alleges that PNB should be considered
negligent and not entitled to reimbursement of the amount it paid on the checks.

The Court deems it unnecessary to discuss Associated Bank's assertions that CB Circular No. 580 is an
administrative regulation issued pursuant to law and as such, must prevail over the PCHC rule. The
Central Bank circular was in force for all banks until June 1980 when the Philippine Clearing House
Corporation (PCHC) was set up and commenced operations. Banks in Metro Manila were covered by the
PCHC while banks located elsewhere still had to go through Central Bank Clearing. In any event, the
twenty-four-hour return rule was adopted by the PCHC until it was changed in 1982. The contending
banks herein, which are both branches in Tarlac province, are therefore not covered by PCHC Rules but
by CB Circular No. 580. Clearly then, the CB circular was applicable when the forgery of the checks was
discovered in 1981.

The rule mandates that the checks be returned within twenty-four hours after discovery of the forgery but
in no event beyond the period fixed by law for filing a legal action. The rationale of the rule is to give the
collecting bank (which indorsed the check) adequate opportunity to proceed against the forger. If prompt
notice is not given, the collecting bank maybe prejudiced and lose the opportunity to go after its depositor.

The Court finds that even if PNB did not return the questioned checks to Associated Bank within twenty-
four hours, as mandated by the rule, PNB did not commit negligent delay. Under the circumstances, PNB
gave prompt notice to Associated Bank and the latter bank was not prejudiced in going after Fausto

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Pangilinan. After the Province of Tarlac informed PNB of the forgeries, PNB necessarily had to inspect
the checks and conduct its own investigation. Thereafter, it requested the Provincial Treasurer's office on
March 31, 1981 to return the checks for verification. The Province of Tarlac returned the checks only on
April 22, 1981. Two days later, Associated Bank received the checks from PNB. 36

Associated Bank was also furnished a copy of the Province's letter of demand to PNB dated March 20,
1981, thus giving it notice of the forgeries. At this time, however, Pangilinan's account with Associated
had only P24.63 in it. 37Had Associated Bank decided to debit Pangilinan's account, it could not have
recovered the amounts paid on the questioned checks. In addition, while Associated Bank filed a fourth-
party complaint against Fausto Pangilinan, it did not present evidence against Pangilinan and even
presented him as its rebuttal witness. 38 Hence, Associated Bank was not prejudiced by PNB's failure to
comply with the twenty-four-hour return rule.

Next, Associated Bank contends that PNB is estopped from requiring reimbursement because the latter
paid and cleared the checks. The Court finds this contention unmeritorious. Even if PNB cleared and paid
the checks, it can still recover from Associated Bank. This is true even if the payee's Chief Officer who
was supposed to have indorsed the checks is also a customer of the drawee bank. 39 PNB's duty was to
verify the genuineness of the drawer's signature and not the genuineness of payee's indorsement.
Associated Bank, as the collecting bank, is the entity with the duty to verify the genuineness of the
payee's indorsement.

PNB also avers that respondent court erred in adjudging circuitous liability by directing PNB to return to
the Province of Tarlac the amount of the checks and then directing Associated Bank to reimburse PNB.
The Court finds nothing wrong with the mode of the award. The drawer, Province of Tarlac, is a clientor
customer of the PNB, not of Associated Bank. There is no privity of contract between the drawer and the
collecting bank.

The trial court made PNB and Associated Bank liable with legal interest from March 20, 1981, the date of
extrajudicial demand made by the Province of Tarlac on PNB. The payments to be made in this case
stem from the deposits of the Province of Tarlac in its current account with the PNB. Bank deposits are
considered under the law as loans. 40 Central Bank Circular No. 416 prescribes a twelve percent (12%)
interest per annum for loans, forebearance of money, goods or credits in the absence of express
stipulation. Normally, current accounts are likewise interest-bearing, by express contract, thus excluding
them from the coverage of CB Circular No. 416. In this case, however, the actual interest rate, if any, for
the current account opened by the Province of Tarlac with PNB was not given in evidence. Hence, the
Court deems it wise to affirm the trial court's use of the legal interest rate, or six percent (6%) per annum.
The interest rate shall be computed from the date of default, or the date of judicial or extrajudicial
demand. 41 The trial court did not err in granting legal interest from March 20, 1981, the date of
extrajudicial demand.

The Court finds as reasonable, the proportionate sharing of fifty percent - fifty percent (50%-50%). Due to
the negligence of the Province of Tarlac in releasing the checks to an unauthorized person (Fausto
Pangilinan), in allowing the retired hospital cashier to receive the checks for the payee hospital for a
period close to three years and in not properly ascertaining why the retired hospital cashier was collecting
checks for the payee hospital in addition to the hospital's real cashier, respondent Province contributed to
the loss amounting to P203,300.00 and shall be liable to the PNB for fifty (50%) percent thereof. In effect,
the Province of Tarlac can only recover fifty percent (50%) of P203,300.00 from PNB.

The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00. It is
liable on its warranties as indorser of the checks which were deposited by Fausto Pangilinan, having
guaranteed the genuineness of all prior indorsements, including that of the chief of the payee hospital, Dr.
Adena Canlas. Associated Bank was also remiss in its duty to ascertain the genuineness of the payee's
indorsement.

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IN VIEW OF THE FOREGOING, the petition for review filed by the Philippine National Bank (G.R. No.
107612) is hereby PARTIALLY GRANTED. The petition for review filed by the Associated Bank (G.R. No.
107382) is hereby DENIED. The decision of the trial court is MODIFIED. The Philippine National Bank
shall pay fifty percent (50%) of P203,300.00 to the Province of Tarlac, with legal interest from March 20,
1981 until the payment thereof. Associated Bank shall pay fifty percent (50%) of P203,300.00 to the
Philippine National Bank, likewise, with legal interest from March 20, 1981 until payment is made.

SO ORDERED.

 Republic vs. Ebrada, July 31, 1975

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-40796 July 31, 1975

REPUBLIC BANK, plaintiff-appellee,

vs.
MAURICIA T. EBRADA, defendant-appellant.

Sabino de Leon, Jr. for plaintiff-appellee.

Julio Baldonado for defendant-appellant.

MARTIN, J.:

Appeal on a question of law of the decision of the Court of First Instance of Manila, Branch XXIII in Civil
Case No. 69288, entitled "Republic Bank vs. Mauricia T. Ebrada."

On or about February 27, 1963 defendant Mauricia T. Ebrada, encashed Back Pay Check No. 508060
dated January 15, 1963 for P1,246.08 at the main office of the plaintiff Republic Bank at Escolta, Manila.
The check was issued by the Bureau of Treasury.1 Plaintiff Bank was later advised by the said bureau
that the alleged indorsement on the reverse side of the aforesaid check by the payee, "Martin Lorenzo"
was a forgery2 since the latter had allegedly died as of July 14, 1952.3 Plaintiff Bank was then requested
by the Bureau of Treasury to refund the amount of P1,246.08.4 To recover what it had refunded to the
Bureau of Treasury, plaintiff Bank made verbal and formal demands upon defendant Ebrada to account
for the sum of P1,246.08, but said defendant refused to do so. So plaintiff Bank sued defendant Ebrada
before the City Court of Manila.

On July 11, 1966, defendant Ebrada filed her answer denying the material allegations of the complaint
and as affirmative defenses alleged that she was a holder in due course of the check in question, or at
the very least, has acquired her rights from a holder in due course and therefore entitled to the proceeds

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thereof. She also alleged that the plaintiff Bank has no cause of action against her; that it is in estoppel, or
so negligent as not to be entitled to recover anything from her.5

About the same day, July 11, 1966 defendant Ebrada filed a Third-Party complaint against Adelaida
Dominguez who, in turn, filed on September 14, 1966 a Fourth-Party complaint against Justina Tinio.

On March 21, 1967, the City Court of Manila rendered judgment for the plaintiff Bank against defendant
Ebrada; for Third-Party plaintiff against Third-Party defendant, Adelaida Dominguez, and for Fourth-Party
plaintiff against Fourth-Party defendant, Justina Tinio.

From the judgment of the City Court, defendant Ebrada took an appeal to the Court of First Instance of
Manila where the parties submitted a partial stipulation of facts as follows:

COME NOW the undersigned counsel for the plaintiff, defendant, Third-Party defendant
and Fourth-Party plaintiff and unto this Honorable Court most respectfully submit the
following:

PARTIAL STIPULATION OF FACTS

1. That they admit their respective capacities to sue and be sued;

2. That on January 15, 1963 the Treasury of the Philippines issued its Check No. BP-
508060, payable to the order of one MARTIN LORENZO, in the sum of P1,246.08, and
drawn on the Republic Bank, plaintiff herein, which check will be marked as Exhibit "A"
for the plaintiff;

3. That the back side of aforementioned check bears the following signatures, in this
order:

1) MARTIN LORENZO;

2) RAMON R. LORENZO;

3) DELIA DOMINGUEZ; and

4) MAURICIA T. EBRADA;

4. That the aforementioned check was delivered to the defendant MAURICIA T. EBRADA by the Third-
Party defendant and Fourth-Party plaintiff ADELAIDA DOMINGUEZ, for the purpose of encashment;

5. That the signature of defendant MAURICIA T. EBRADA was affixed on said check on
February 27, 1963 when she encashed it with the plaintiff Bank;

6. That immediately after defendant MAURICIA T. EBRADA received the cash proceeds
of said check in the sum of P1,246.08 from the plaintiff Bank, she immediately turned
over the said amount to the third-party defendant and fourth-party plaintiff ADELAIDA
DOMINGUEZ, who in turn handed the said amount to the fourth-party defendant
JUSTINA TINIO on the same date, as evidenced by the receipt signed by her which will
be marked as Exhibit "1-Dominguez"; and

7. That the parties hereto reserve the right to present evidence on any other fact not
covered by the foregoing stipulations,

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Manila, Philippines, June 6, 1969.

Based on the foregoing stipulation of facts and the documentary evidence presented, the trial court
rendered a decision, the dispositive portion of which reads as follows:

WHEREFORE, the Court renders judgment ordering the defendant Mauricia T. Ebrada to
pay the plaintiff the amount of ONE THOUSAND TWO FORTY-SIX 08/100 (P1,246.08),
with interest at the legal rate from the filing of the complaint on June 16, 1966, until fully
paid, plus the costs in both instances against Mauricia T. Ebrada.

The right of Mauricia T. Ebrada to file whatever claim she may have against Adelaida
Dominguez in connection with this case is hereby reserved. The right of the estate of
Dominguez to file the fourth-party complaint against Justina Tinio is also reserved.

SO ORDERED.

In her appeal, defendant-appellant presses that the lower court erred:

IN ORDERING THE APPELLANT TO PAY THE APPELLEE THE FACE VALUE OF THE
SUBJECT CHECK AFTER FINDING THAT THE DRAWER ISSUED THE SUBJECT
CHECK TO A PERSON ALREADY DECEASED FOR 11-½ YEARS AND THAT THE
APPELLANT DID NOT BENEFIT FROM ENCASHING SAID CHECK.

From the stipulation of facts it is admitted that the check in question was delivered to defendant-appellant
by Adelaida Dominguez for the purpose of encashment and that her signature was affixed on said check
when she cashed it with the plaintiff Bank. Likewise it is admitted that defendant-appellant was the last
indorser of the said check. As such indorser, she was supposed to have warranted that she has good title
to said check; for under Section 65 of the Negotiable Instruments Law: 6

Every person negotiating an instrument by delivery or by qualified indorsement, warrants:

(a) That the instrument is genuine and in all respects what it purports to be.

(b) That she has good title to it.

xxx xxx xxx

and under Section 65 of the same Act:

Every indorser who indorses without qualification warrants to all subsequent holders in
due course:

(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next
preceding sections;

(b) That the instrument is at the time of his indorsement valid and subsisting.

It turned out, however, that the signature of the original payee of the check, Martin Lorenzo was a forgery
because he was already dead 7 almost 11 years before the check in question was issued by the Bureau
of Treasury. Under action 23 of the Negotiable Instruments Law (Act 2031):

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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 instruments, or to give a
discharge 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 is clear from the provision that where the signature on a negotiable instrument if forged, the negotiation
of the check is without force or effect. But does this mean that the existence of one forged signature
therein will render void all the other negotiations of the check with respect to the other parties whose
signature are genuine?

In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where a check has several indorsements on
it, it was held that it is only the negotiation based on the forged or unauthorized signature which is
inoperative. Applying this principle to the case before Us, it can be safely concluded that it is only the
negotiation predicated on the forged indorsement that should be declared inoperative. This means that
the negotiation of the check in question from Martin Lorenzo, the original payee, to Ramon R. Lorenzo,
the second indorser, should be declared of no affect, but the negotiation of the aforesaid check from
Ramon R. Lorenzo to Adelaida Dominguez, the third indorser, and from Adelaida Dominguez to the
defendant-appellant who did not know of the forgery, should be considered valid and enforceable, barring
any claim of forgery.

What happens then, if, after the drawee bank has paid the amount of the check to the holder thereof, it
was discovered that the signature of the payee was forged? Can the drawee bank recover from the one
who encashed the check?

In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it was held that the drawee of a check
can recover from the holder the money paid to him on a forged instrument. It is not supposed to be its
duty to ascertain whether the signatures of the payee or indorsers are genuine or not. This is because the
indorser is supposed to warrant to the drawee that the signatures of the payee and previous indorsers are
genuine, warranty not extending only to holders in due course. 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 and the
drawee who has paid the forged check, without actual negligence on his part, may recover the money
paid from such negligent purchasers. In such cases the recovery is permitted because although the
drawee was in a way negligent in failing to detect the forgery, yet if the encasher of the check had
performed his duty, the forgery would in all probability, have been detected and the fraud defeated. The
reason for allowing the drawee bank to recover from the encasher is:

Every one with even the least experience in business knows that no business man would
accept a check in exchange for money or goods unless he is satisfied that the check is
genuine. He accepts it only because he has proof that it is genuine, or because he has
sufficient confidence in the honesty and financial responsibility of the person who
vouches for it. If he is deceived he has suffered a loss of his cash or goods through his
own mistake. His own credulity or recklessness, or misplaced confidence was the sole
cause of the loss. Why should he be permitted to shift the loss due to his own fault in
assuming the risk, upon the drawee, simply because of the accidental circumstance that
the drawee afterwards failed to detect the forgery when the check was presented? 8

Similarly, in the case before Us, the defendant-appellant, upon receiving the check in question from
Adelaida Dominguez, was duty-bound to ascertain whether the check in question was genuine before
presenting it to plaintiff Bank for payment. Her failure to do so makes her liable for the loss and the
plaintiff Bank may recover from her the money she received for the check. As reasoned out above, had
she performed the duty of ascertaining the genuineness of the check, in all probability the forgery would
have been detected and the fraud defeated.

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In our jurisdiction We have a case of similar import. 9 The Great Eastern Life Insurance Company drew its
check for P2000.00 on the Hongkong and Shanghai Banking Corporation payable to the order of Lazaro
Melicor. A certain E. M. Maasin fraudulently obtained the check and forged the signature of Melicor, as an
indorser, and then personally indorsed and presented the check to the Philippine National Bank where
the amount of the check was placed to his (Maasin's) credit. On the next day, the Philippine National
Bank indorsed the cheek to the Hongkong and Shanghai Banking Corporation which paid it and charged
the amount of the check to the insurance company. The Court held that the Hongkong and Shanghai
Banking Corporation was liable to the insurance company for the amount of the check and that the
Philippine National Bank was in turn liable to the Hongkong and Shanghai Banking Corporation. Said the
Court:

Where a check is drawn payable to the order of one person and is presented to a bank
by another and purports upon its face to have been duly indorsed by the payee of the
check, it is the duty of the bank to know that the check was duly indorsed by the original
payee, and where the bank pays the amount of the check to a third person, who has
forged the signature of the payee, the loss falls upon the bank who cashed the check,
and its only remedy is against the person to whom it paid the money.

With the foregoing doctrine We are to concede that the plaintiff Bank should suffer the loss when it paid
the amount of the check in question to defendant-appellant, but it has the remedy to recover from the
latter the amount it paid to her. Although the defendant-appellant to whom the plaintiff Bank paid the
check was not proven to be the author of the supposed forgery, yet as last indorser of the check, she has
warranted that she has good title to it 10 even if in fact she did not have it because the payee of the check
was already dead 11 years before the check was issued. The fact that immediately after receiving title
cash proceeds of the check in question in the amount of P1,246.08 from the plaintiff Bank, defendant-
appellant immediately turned over said amount to Adelaida Dominguez (Third-Party defendant and the
Fourth-Party plaintiff) who in turn handed the amount to Justina Tinio on the same date would not exempt
her from liability because by doing so, she acted as an accommodation party in the check for which she is
also liable under Section 29 of the Negotiable Instruments Law (Act 2031), thus: .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 VIEW OF THE FOREGOING, the judgment appealed from is hereby affirmed in toto with costs against
defendant-appellant.

SO ORDERED.

 Metropolitan Bank and Trust Com. vs. BA Finance Corp. Dec. 4, 2009

FIRST DIVISION

METROPOLITAN BANK AND TRUST G.R. No. 179952

COMPANY (formerly ASIANBANK
CORPORATION), Present:
Petitioner,
PUNO, C.J., Chairperson,
CARPIO MORALES,
LEONARDO-DE CASTRO,

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 Page 87 of 96

BERSAMIN, and
- versus - VILLARAMA, JR., JJ.

BA FINANCE CORPORATION and

MALAYAN INSURANCE CO., INC.,
Respondents. Promulgated:
December 4, 2009

x-------------------------------------------------x

DECISION

CARPIO MORALES, J.:

Lamberto Bitanga (Bitanga) obtained from respondent BA Finance Corporation (BA Finance)
a P329,280[1] loan to secure which, he mortgaged his car to respondent BA Finance. [2] The mortgage
contained the following stipulation:

The MORTGAGOR covenants and agrees that he/it will cause the
property(ies) hereinabove mortgaged to be insured against loss or damage by
accident, theft and fire for a period of one year from date hereof with an insurance
company or companies acceptable to the MORTGAGEE in an amount not less than
the outstanding balance of mortgage obligations and that he/it will make all loss, if
any, under such policy or policies, payable to the MORTGAGEE or its assigns as its
interest may appear x x x.[3] (emphasis and underscoring supplied)

Bitanga thus had the mortgaged car insured by respondent Malayan Insurance Co., Inc. (Malayan
Insurance)[4] which issued a policy stipulating that, inter alia,

Loss, if any shall be payable to BA FINANCE CORP. as its interest may

appear. It is hereby expressly understood that this policy or any renewal thereof, shall
not be cancelled without prior notification and conformity by BA FINANCE
CORPORATION.[5] (emphasis and underscoring supplied)

The car was stolen. On Bitangas claim, Malayan Insurance issued a check payable to the order of
B.A. Finance Corporation and Lamberto Bitanga for P224,500, drawn against China Banking Corporation
(China Bank). The check was crossed with the notation For Deposit Payees Account Only.[6]

Without the indorsement or authority of his co-payee BA Finance, Bitanga deposited the check to
his account with the Asianbank Corporation (Asianbank), now merged with herein petitioner Metropolitan
Bank and Trust Company (Metrobank). Bitanga subsequently withdrew the entire proceeds of the check.

In the meantime, Bitangas loan became past due, but despite demands, he failed to settle it.

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BA Finance eventually learned of the loss of the car and of Malayan Insurances issuance of a
crossed check payable to it and Bitanga, and of Bitangas depositing it in his account at Asianbank and
withdrawing the entire proceeds thereof.

BA Finance thereupon demanded the payment of the value of the check from Asianbank [7] but to
no avail, prompting it to file a complaint before the Regional Trial Court (RTC) of Makati for sum of money
and damages against Asianbank and Bitanga,[8] alleging that, inter alia, it is entitled to the entire proceeds
of the check.
In its Answer with Counterclaim,[9] Asianbank alleged that BA Finance instituted [the] complaint in
bad faith to coerce [it] into paying the whole amount of the CHECK knowing fully well that its rightful claim,
if any, is against Malayan [Insurance].[10]

Asianbank thereafter filed a cross-claim against Bitanga,[11] alleging that he fraudulently induced
its personnel to release to him the full amount of the check; and that on being later informed that the entire
amount of the check did not belong to Bitanga, it took steps to get in touch with him but he had changed
residence without leaving any forwarding address.[12]

And Asianbank filed a third-party complaint against Malayan Insurance,[13] alleging that Malayan
Insurance was grossly negligent in issuing the check payable to both Bitanga and BA Finance and
delivering it to Bitanga without the consent of BA Finance.[14]

Bitanga was declared in default in Asianbanks cross-claim.[15]

Branch 137 of the Makati RTC, finding that Malayan Insurance was not privy to the contract
between BA Finance and Bitanga, and noting the claim of Malayan Insurance that it is its policy to issue
checks to both the insured and the financing company, held that Malayan Insurance cannot be faulted for
negligence for issuing the check payable to both BA Finance and Bitanga.

The trial court, holding that Asianbank was negligent in allowing Bitanga to deposit the check to
his account and to withdraw the proceeds thereof, without his co-payee BA Finance having either indorsed
it or authorized him to indorse it in its behalf,[16] found Asianbank and Bitanga jointly and severally liable to
BA Finance following Section 41 of the Negotiable Instruments Law and Associated Bank v. Court of
Appeals.[17]

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Thus the trial court disposed:

WHEREFORE, premises considered, judgment is hereby rendered ordering
defendants Asian Bank Corporation and Lamberto Bitanga:

1) To pay plaintiff jointly and severally the sum of

P224,500.00 with interest thereon at the rate of 12%
from September 25, 1992 until fully paid;
2) To pay plaintiff the sum of P50,000.00 as exemplary
damages; P20,000.00 as actual damages; P30,000.00 as
attorneys fee; and
3) To pay the costs of suit.

Asianbanks and Bitangas [sic] counterclaims are dismissed.

The third party complaint of defendant/third party plaintiff against third-party
defendant Malayan Insurance, Co., Inc. is hereby dismissed. Asianbank is ordered to
pay Malayan attorneys fee of P50,000.00 and a per appearance fee of P500.00.

On the cross-claim of defendant Asianbank, co-defendant Lamberto

Bitanga is ordered to pay the former the amounts the latter is ordered to pay the
plaintiff in Nos. 1, 2 and 3 above-mentioned.

SO ORDERED.[18] (emphasis and underscoring supplied)

Before the Court of Appeals, Asianbank, in its Appellants Brief, submitted the following issues for
consideration:

3.01.1.1 Whether BA Finance has a cause of action against Asianbank.

3.01.1.2 Assuming that BA Finance has a valid cause of action, may it

claim from Asianbank more than one-half of the value of the check considering that it
is a mere co-payee or joint payee of the check?

3.01.1.3 Whether BA Finance is liable to Asianbank for actual and

exemplary damages for wrongfully bringing the case to court.

3.01.1.4 Whether Malayan is liable to Asianbank for reimbursement of

any sum of money which this Honorable Court may award to BA Finance in this
case.[19] (underscoring supplied)

And it proffered the following arguments:

A. BA Finance has no cause of action against Asianbank as it has no legal right and title to the
check considering that the check was not delivered to BA Finance. Hence, BA Finance is
not a holder thereof under the Negotiable Instruments Law.

B. Asianbank, as collecting bank, is not liable to BA Finance as there was no privity of contract
between them.

C. Asianbank, as collecting bank, is not liable to BA Finance, considering that, as the

intermediary between the payee and the drawee Chinabank, it merely acted on the

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instructions of drawee Chinabank to pay the amount of the check to Bitanga, hence, the
consequent damage to BA Finance was due to the negligence of Chinabank.

D. Malayans act of issuing and delivering the check solely to Bitanga in violation of the loss payee
clause in the Policy, is the proximate cause of the alleged damage to BA Finance.

E. Assuming Asianbank is liable, BA Finance can claim only his proportionate interest on the
check as it is a joint payee thereof.

F. Bitanga alone is liable for the amount to BA Finance on the ground of unjust enrichment
or solutio indebiti.

G. BA Finance is liable to pay Asianbank actual and exemplary damages.[20] (underscoring

supplied)

The appellate court, summarizing the errors attributed to the trial court by Asianbank to be
whetherBA Finance has a cause of action against [it] even if the subject check had not been delivered
toBA Finance by the issuer itself, held in the affirmative and accordingly affirmed the trial courts decision
but deleted the award of P20,000 as actual damages.[21]

Hence, the present Petition for Review on Certiorari[22] filed by Metrobank (hereafter petitioner) to
which Asianbank was, as earlier stated, merged, faulting the appellate court

I. x x x in applying the case of Associated Bank v. Court of

Appeals, in the absence of factual similarity and of the legal
relationships necessary for the application of the desirable shortcut
rule. x x x
II. x x x in not finding that x x x the general rule that the payee
has no cause of action against the collecting bank absent delivery
to him must be applied.
III. x x x in finding that all the elements of a cause of action by
BA Finance Corporation against Asianbank Corporation are
present.
IV. x x x in finding that Article 1208 of the Civil Code is not
applicable.
V. x x x in awarding of exemplary damages even in the
absence of moral, temperate, liquidated or compensatory damages
and a finding of fact that Asianbank acted in a wanton, fraudulent,
reckless, oppressive or malevolent manner.
xxxx
VII. x x x in dismissing Asianbanks counterclaim and Third Party
complaint [against Malayan Insurance].[23] (italics in the original;
underscoring supplied)

Petitioner proffers the following arguments against the application of Associated Bank v. CA to the
case:

x x x [T]he rule established in the Associated Bank case has provided a

speedier remedy for the payee to recover from erring collecting banks despite the
absence of delivery of the negotiable instrument. However, the application of the rule

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 Page 91 of 96

demands careful consideration of the factual settings and issues raised in the case x x
x.

One of the relevant circumstances raised in Associated Bank is the existence

of forgery or unauthorized indorsement. x x x

xxxx

In the case at bar, Bitanga is authorized to indorse the check as the drawer
names him as one of the payees. Moreover, his signature is not a forgery nor has he
or anyone forged the signature of the representative of BA Finance Corporation. No
unauthorized indorsement appears on the check.

xxxx

Absent the indispensable fact of forgery or unauthorized indorsement, the

desirable shortcut rule cannot be applied,[24] (underscoring supplied)

The petition fails.

Section 41 of the Negotiable Instruments Law provides:

Where an instrument is payable to the order of two or more payees or
indorsees who are not partners, all must indorse unless the one indorsing has
authority to indorse for the others.(emphasis and underscoring supplied)

Bitanga alone endorsed the crossed check, and petitioner allowed the deposit and release of the
proceeds thereof, despite the absence of authority of Bitangas co-payee BA Finance to endorse it on its
behalf.[25]
Denying any irregularity in accepting the check, petitioner maintains that it followed normal
banking procedure. The testimony of Imelda Cruz, Asianbanks then accounting head, shows otherwise,
however, viz:

Q Now, could you be familiar with a particular policy of the bank with respect
to checks with joined (sic) payees?
A Yes, sir.

Q And what would be the particular policy of the bank regarding this
transaction?
A The bank policy and procedure regarding the joint checks. Once it is
deposited to a single account, we are not accepting joint checks
for single account, depositing to a single account (sic).

Q What happened to the bank employee who allowed this particular

transaction to occur?
A Once the branch personnel, the bank personnel (sic) accepted it, he is
liable.

Q What do you mean by the branch personnel being held liable?

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A Because since (sic) the bank policy, we are not supposed to accept
joint checks to a [single] account, so we mean that personnel
would be held liable in the sense that (sic) once it is withdrawn
or encashed, it will not be allowed.

Q In your experience, have you encountered any bank employee who was
subjected to disciplinary action by not following bank policies?
A The one that happened in that case, since I really dont know who that
personnel is, he is no longer connected with the bank.

Q What about in general, do you know of any disciplinary action, Madam

witness?
A Since theres a negligence on the part of the bank personnel, it will be
a ground for his separation [from] the bank. [26] (emphasis, italics
and underscoring supplied)

Admittedly, petitioner dismissed the employee who allowed the deposit of the check in Bitangas account.

Petitioners argument that since there was neither forgery, nor unauthorized indorsement because
Bitanga was a co-payee in the subject check, the dictum in Associated Bank v. CA does not apply in the
present case fails. The payment of an instrument over a missing indorsement is the equivalent of payment
on a forged indorsement[27] or an unauthorized indorsement in itself in the case of joint payees.[28]

Clearly, petitioner, through its employee, was negligent when it allowed the deposit of the crossed
check, despite the lone endorsement of Bitanga, ostensibly ignoring the fact that the check did not, it bears
repeating, carry the indorsement of BA Finance.[29]

As has been repeatedly emphasized, the banking business is imbued with public interest such
that the highest degree of diligence and highest standards of integrity and performance are expected of
banks in order to maintain the trust and confidence of the public in general in the banking
sector.[30] Undoubtedly, BA Finance has a cause of action against petitioner.

Is petitioner liable to BA Finance for the full value of the check?

Petitioner, at all events, argue that its liability to BA Finance should only be one-half of the amount
covered by the check as there is no indication in the check that Bitanga and BA Finance are solidary
creditors to thus make them presumptively joint creditors under Articles 1207 and 1208 of the Civil Code
which respectively provide:

Art. 1207. The concurrence of two or more creditors or of two or more debtors
in one and the same obligation does not imply that each one of the former has a right
to demand, or that each one of the latter is bound to render, entire compliance with

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the prestations. There is a solidary liability only when the obligation expressly so
states, or when the law or the nature of the obligation requires solidarity.

Art. 1208. If from the law, or the nature or wording of the obligations to which
the preceding article refers to the contrary does not appear, the credit or debt shall be
presumed to be divided into as many equal shares as there are creditors or debtors,
the debts or credits being considered distinct from one another, subject to the Rules of
Court governing the multiplicity of suits.

Petitioners argument is flawed.

The provisions of the Negotiable Instruments Law and underlying jurisprudential teachings on the
black-letter law provide definitive justification for petitioners full liability on the value of the check.

To be sure, a collecting bank, Asianbank in this case, where a check is deposited and which
indorses the check upon presentment with the drawee bank, is an indorser. [31]This is because in indorsing
a check to the drawee bank, a collecting bank stamps the back of the check with the phrase all prior
endorsements and/or lack of endorsement guaranteed[32] and, for all intents and purposes, treats the
check as a negotiable instrument, hence, assumes the warranty of an indorser.[33] Without Asianbanks
warranty, the drawee bank (China Bank in this case) would not have paid the value of the subject check.

Petitioner, as the collecting bank or last indorser, generally suffers the loss because it has the
duty to ascertain the genuineness of all prior indorsements considering that the act of presenting the
check for payment to the drawee is an assertion that the party making the presentment has done its duty
to ascertain the genuineness of prior indorsements.[34]

Accordingly, one who credits the proceeds of a check to the account of the indorsing payee is
liable in conversion to the non-indorsing payee for the entire amount of the check.[35]

It bears noting that in petitioners cross-claim against Bitanga, the trial court ordered Bitanga to
return to petitioner the entire value of the check ─ P224,500.00 ─ with interest as well as damages and
cost of suit. Petitioner never questioned this aspect of the trial courts disposition, yet it now prays for the
modification of its liability to BA Finance to only one-half of said amount. To pander to petitioners
supplication would certainly amount to unjust enrichment at BA Finances expense. Petitioners
remedywhich is the reimbursement for the full amount of the check from the perpetrator of the irregularity
lies with Bitanga.

Articles 1207 and 1208 of the Civil Code cannot be applied to the present case as these are
completely irrelevant. The drawer, Malayan Insurance in this case, issued the check to answer for an

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underlying contractual obligation (payment of insurance proceeds). The obligation is merely reflected in
the instrument and whether the payees would jointly share in the proceeds or not is beside the point.

Moreover, granting petitioners appeal for partial liability would run counter to the existing
principles on the liabilities of parties on negotiable instruments, particularly on Section 68 of
the Negotiable Instruments Law which instructs that joint payees who indorse are deemed to indorse
jointly and severally.[36] Recall that when the maker dishonors the instrument, the holder thereof can turn
to those secondarily liable the indorser for recovery.[37] And since the law explicitly mandates a solidary
liability on the part of the joint payees who indorse the instrument, the holder thereof (assuming the check
was further negotiated) can turn to either Bitanga or BA Finance for full recompense.

Respecting petitioners challenge to the award by the appellate court of exemplary damages to BA
Finance, the same fails. Contrary to petitioners claim that no moral, temperate, liquidated or
compensatory damages were awarded by the trial court, [38] the RTC did in fact award compensatory or
actual damages of P224,500, the value of the check, plus interest thereon.

Petitioner argues, however, that assuming arguendo that compensatory damages had been
awarded, the same contravened Article 2232 of the Civil Code which provides that in contracts or quasi-
contracts, the court may award exemplary damages only if the defendant acted in a wanton, fraudulent,
reckless, oppressive, or malevolent manner.Since, so petitioner concludes, there was no finding that it
acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner, [39] it is not liable for exemplary
damages.

The argument fails. To reiterate, petitioners liability is based not on contract or quasi-contract but
on quasi-delict since there is no pre-existing contractual relation between the parties.[40] Article 2231 of
the Civil Code, which provides that in quasi-delict, exemplary damages may be granted if the defendant
acted with gross negligence, thus applies.For gross negligence implies a want or absence of or failure to
exercise even slight care or diligence, or the entire absence of care,[41] evincing a thoughtless disregard of
consequences without exerting any effort to avoid them.[42]

x x x The law allows the grant of exemplary damages to set an example for
the public good. The business of a bank is affected with public interest; thus it makes
a sworn profession of diligence and meticulousness in giving irreproachable
service. For this reason, the bank should guard against in injury attributable to
negligence or bad faith on its part. The award of exemplary damages is proper as a
warning to [the petitioner] and all concerned not to recklessly disregard their obligation
to exercise the highest and strictest diligence in serving their depositors.[43] (Italics and
underscoring supplied)

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As for the dismissal by the appellate court of petitioners third-party complaint against Malayan
Insurance, the same is well-taken. Petitioner based its third-party complaint on Malayan Insurances
alleged gross negligence in issuing the check payable to both BA Finance and Bitanga, despite the
stipulation in the mortgage and in the insurance policy that liability for loss shall be payable to BA
Finance.[44] Malayan Insurance countered, however, that it

x x x paid the amount of P224,500 to BA Finance Corporation and Lamberto

Bitanga in compliance with the decision in the case of Lamberto Bitanga versus
Malayan Insurance Co., Inc., Civil Case No. 88-2802, RTC-Makati Br. 132, and
affirmed on appeal by the Supreme Court [3rd Division], G.R. no. 101964, April 8, 1992
x x x.[45] (underscoring supplied)

It is noted that Malayan Insurance, which stated that it was a matter of company policy to issue
checks in the name of the insured and the financing company, presented a witness to rebut its supposed
negligence. [46] Perforce, it thus wrote a crossed check with joint payees so as to serve warning that the
check was issued for a definite purpose.[47]Petitioner never ever disputed these assertions.

The Court takes exception, however, to the appellate courts affirmance of the trial courts grant of
legal interest of 12% per annum on the value of the check. For the obligation in this case did not arise out
of a loan or forbearance of money, goods or credit. While Article 1980 of the Civil Code provides that:

Fixed savings, and current deposits of money in banks and similar institutions
shall be governed by the provisions concerning simple loan,

said provision does not find application in this case since the nature of the relationship between BA
Finance and petitioner is one of agency whereby petitioner, as collecting bank, is to collect for BA
Finance the corresponding proceeds from the check.[48] Not being a loan or forbearance of money, the
interest should be 6% per annum computed from the date of extrajudicial demand on September 25,
1992 until finality of judgment; and 12% per annum from finality of judgment until payment, conformably
with Eastern Shipping Lines, Inc. v. Court of Appeals.[49]

WHEREFORE, the Decision of the Court of Appeals dated May 18, 2007 is AFFIRMED with
MODIFICATION in that the rate of interest on the judgment obligation of P224,500 should be 6% per
annum, computed from the time of extrajudicial demand on September 25, 1992 until its full payment
before finality of judgment; thereafter, if the amount adjudged remains unpaid, the interest rate shall
be 12% per annum computed from the time the judgment becomes final and executory until fully satisfied.
Costs against petitioner.

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SO ORDERED.

WEEK 6

 Vicky Ty vs. People, September 27, 2004

Accommodation:

 Ang vs. Associated Bank, G.R. No. 146511, September 5, 2007

 Lim vs. Saban, G.R. No. 163720, December 16, 2004

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