Negotiable Instruments Case Digest: San Carlos Milling Co. Ltd V.

BPI (1993)
FACTS:

San Carlos Milling Co. Ltd. (San Carlos) was in the hands of Alfred D. Cooper, its agent under general
power of attorney with authority of substitution

The principal employee in the Manila office was Joseph L. Wilson, to whom had been given a general power
of attorney but without power of substitution.

1926: Cooper, desiring to go on vacation, gave a general power of attorney to Newland Baldwin and at the
same time revoked the power of Wilson relative to the dealings with BPI

Wilson, conspiring together with Alfredo Dolores, a messenger-clerk in San Carlos' Manila office,
sent a cable gram in code to the company in Honolulu requesting a telegraphic transfer to the China Banking
Corporation (China Bank) of Manila of $100,00.

The money was transferred by cable, and upon its receipt China Bank sent an exchange contract
to San Carlos offering the sum of P201K, which was then the current rate of exchange.

September 28, 1927: A manager's check on the China Banking Corporation for P201K payable to San
Carlos Milling Company or order was receipted for by Dolores

deposited with the BPI having a fake endorsement (Baldwin forged as drawer)

For deposit only with Bank of the Philippine Islands, to credit of account of San Carlos Milling Co., Ltd.
By (Sgd.) NEWLAND BALDWIN
For Agent

San Carlos had frequently withdrawn currency for shipment to its mill but never in so large an amount, and
never under the sole supervision of Dolores

Before delivering the money, the bank asked Dolores for P1 to cover the cost of packing the money, and he
left the bank and shortly afterwards returned with another check for P1, purporting to be signed by Newland
Baldwin

the crime was discovered and San Carlos filed against the BPI and China Bank (after ammendment
complaint)

China Bank: as the prior endorsement had in law been guaranteed by the BPI, they are absolved
even if the endorsement of Newland Baldwin on the check was a forgery

BPI: guilty of no negligence, loss was due to the dishonesty of San Carlos employees and the
negligence of San Carlos general agent

RTC: BPI in GF and San Carlos could not recover

ISSUE: W/N BPI was bound to inspect the checks and shall therefore be liable in case of forgery

HELD: YES. judgment absolving the Bank of the Philippine Islands must therefore be reversed

duty was upon the BPI, and the China Banking Corporation was not bound to inspect and verify all
endorsements of the check, even if some of them were also those of depositors in that bank

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.

under section 23 of the Negotiable Instruments Law they are not a charge against San Carlos nor are the
checks of any value to the BPI.

proximate cause of loss was due to the negligence of the Bank of the Philippine Islands in honoring
and cashing the two forged checks

Negotiable Instruments Case Digest: PNB

V. National City Bank New York (1936)
G.R. No. L-43596 October 31, 1936
Lessons Applicable: Forgery (Negotiable Instruments)

FACTS:

April 7 & 9, 1933: unknown person or persons purchased tires and paid Motor Service Company, Inc.
(MSCI) checks purporting to have been issued by the "Pangasinan Transportation Co., Inc. (Pantranco) by

J. L. Klar, Manager and Treasurer" against PNB and in favor of International Auto Repair Shop.
MSCI indorsed for deposit at the National City Bank of New York and MSCI was accordingly

credited with the amounts thereof, or P144.50 and P215.75

April 8 & 10, 1933: Checks were cleared and PNB credited the National City Bank

PNB found out that the signatures of J. L. Klar, Manager and Treasurer were forged and demanded

from MSCI and National City Bank New York

PNB filed the case in the municipal court of Manila against National City Bank and

MSCI.
Pantranco objected to have the proceeds of said check deducted from their deposit.

RTC: Favored PNB

MSCI appealed

ISSUES:
1.

W/N acceptance = payment

2.

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

3.

W/N MSCI was negligent and therefore PNB should recover

4.

W/N the drawee bank should be allowed recovery, as MSCI's position would not
become worse than if the drawee had refused the payment of these checks upon
their presentation.

HELD: Affirmed
1.

NO.
A check is a bill of exchange payable on demand and only the rules governing bills of exchange

payable on demand are applicable to it, according to section 185 of the Negotiable Instruments Law
Acceptance is a step unnecessary for bills of exchange payable on demand (sec. 143)

Acceptance implies, subsequent negotiation of the instrument

From the moment a check is paid it is withdrawn from circulation.

That the payment of a check does not include or imply its acceptance in the sense that this word is

used in section 62 of the Negotiable Instruments Law

Payment (in checks) - final act which extinguishes a bill.
Acceptance (in certified checks) - a promise to pay in the future and continues the life of the

bill.
2. NO

section 187, which provides that "where a check is certified by the bank on
which it is drawn, the certification is equivalent to an acceptance", and it is then that

the warranty under section 62 exists

That if a drawee bank pays a forged check which was previously accepted or certified by the said bank
it cannot recover from a holder who did not participate in the forgery and did not have actual notice
thereof

3. YES.
Circumstances:
check number 637023-D was dated April 6, 1933, whereas check number

637020-D and is dated April 7, 1933. (later check had prior number)
accepted the 2 checks from unknown persons
check 637023-D was indorsed by a subagent of the agent of the payee,

International Auto Repair Shop and cross generally

Section 23 of the Negotiable Instruments Act provides that "when a
signature is forged or made without the authority of the person whose signature it
purports to be, it is wholly inoperative, and no right to retain the instrument, or to
give a discharge therefor, or to enforce payment thereof against any party thereto,
can be acquired through or under such signature, unless the party against whom it is
sought to enforce such right is precluded from setting up the forgery or want of
authority.
PNB did not warrant to MCSI the genuineness of the checks in

question, by its acceptance thereof, nor did it perform any act which would have

induced MSCI to believe in the genuineness

PNB is NOT precluded from setting up the forgery

4. NO.
A drawee of a check, who is deceived by a forgery of the drawer's signature may
recover the payment back, unless his mistake has placed an innocent holder of the
paper in a worse position than he would have been in if the discover of the forgery

had been made on presentation.

MSCI has lost nothing by anything which the drawee has done. It had in its hands
some forged worthless papers. It did not purchase or acquire these papers because
of any representation made to it by the drawee

Court concluded:

1. That where a check is accepted or certified by the bank on which it is drawn, the
bank is estopped to deny the genuineness of the drawer's signature and his capacity to
issue the instrument;
2. That if a drawee bank pays a forged check which was previously accepted or certified
by the said bank it cannot recover from a holder who did not participate in the forgery
and did not have actual notice thereof;
3. That the payment of a check does not include or imply its acceptance in the sense
that this word is used in section 62 of the Negotiable Instruments Law;
4. That in the case of the payment of a forged check, even without former acceptance,
the drawee can not recover from a holder in due course not chargeable with any act of
negligence or disregard of duty;
5. That to entitle the holder of a forged check to retain the money obtained thereon,
there must be a showing that the duty to ascertain the genuineness of the signature
rested entirely upon the drawee, and that the constructive negligence of such drawee in
failing to detect the forgery was not affected by any disregard of duty on the part of the
holder, or by failure of any precaution which, from his implied assertion in presenting
the check as a sufficient voucher, the drawee had the right to believe he had taken;
6. That in the absence of actual fault on the part of the drawee, his constructive fault in
not knowing the signature of the drawer and detecting the forgery will nor preclude his
recovery from one who took the check under circumstances of suspicion and without
proper precaution, or whose conduct has been such as to mislead the drawee or induce
him to pay the check without the usual scrutiny or other precautions against mistake or
fraud;
7. That on who purchases a check or draft is bound to satisfy himself that the paper is
genuine, and that by indorsing it or presenting it for payment or putting it into
circulation before presentation he impliedly asserts that he performed his duty;
8. That while the foregoing rule, chosen from a welter of decisions on the issue as the
correct one, will not hinder the circulation of two recognized mediums of exchange by
which the great bulk of business is carried on, namely, drafts and checks, on the other
hand, it will encourage and demand prudent business methods on the part of those
receiving such mediums of exchange;
9. That it being a matter of record in the present case, that the appellee bank in no
more chargeable with the knowledge of the drawer's signature than the appellant is, as
the drawer was as much the customer of the appellant as of the appellee, the
presumption that a drawee bank is bound to know more than any indorser the signature
of its depositor does not hold;
10. That according to the undisputed facts of the case the appellant in purchasing the
papers in question from unknown persons without making any inquiry as to the identity

and authority of the said persons negotiating and indorsing them, acted negligently and
contributed to the appellee's constructive negligence in failing to detect the forgery;
11. That under the circumstances of the case, if the appellee bank is allowed to recover,
there will be no change of position as to the injury or prejudice of the appellant.

Negotiable Instruments Case Digest: PNB V. CA (1968)

G.R. No. L-26001
Lessons Applicable:

October 29, 1968

Forgery (Negotiable Instruments Law)

Liabilities of the parties (Negotiable Instruments Law)

FACTS:

January 15, 1962: Augusto Lim deposited in his current account with the PCIB
branch at Padre Faura, Manila a GSIS Check of P57,415.00 drawn against the PNB

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

Same date: following an established banking practice in the Philippines, the check
was forwarded for clearing through the Central Bank to the PNB

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

PNB received a formal notice from the GSIS that the check had been lost,
with the request that payment thereof be stopped

January 31, 1962: Upon demand from the GSIS, the P57,415.00 was re-credited to
them bec. the signatures of its officers on the check were forged

signatures of the General Manager and the Auditor of the GSIS on the check,
as drawer, are forged

payee Mariano D. Pulido indorsed it to Manuel Go and then indorsed by

Manuel Go to Augusto Lim

February 2, 1962: PNB demanded from the PCIB the refund

PNB filed against the PCIB

CA affirmed CFI: dismissed

ISSUE: W/N PCIB as indorser is liable despite the fact that the check is forged when PNB is
also negligent
HELD: NO. Affirmed

PCIB stamped on the back of the check: "All prior indorsements and/or Lack of
Endorsement Guaranteed, Philippine Commercial and Industrial Bank," Padre Faura
Branch, Manila

indorsements falsified is immaterial to the PNB's liability as a drawee, or to its

right to recover from the PCIB, for, as against the drawee, the indorsement of an
intermediate bank does not guarantee the signature of the drawer, since the forgery of
the indorsement is not the cause of the loss.

Guaranteed not the authenticity of the signatures of the officers of the GSIS who
signed because the GSIS is not an indorser of the check, but its drawer

warranty is irrelevant to the PNB's alleged right to recover from the PCIB

in general, "acceptance" is not required for checks since they are payable on
demand

acceptance
promise to perform an act
the acceptance of a bill is the signification by the drawee of his assent
to the order of the drawer
payment

actual performance

compliance with obligation

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
PNB's negligence was the main or proximate cause for the corresponding loss

PNB did not return the check

when 1 of 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

where the collecting (PCIB) and the drawee (PNB) banks are equally at fault, the
court will leave the parties where it finds them

applies in the case of a drawee who pays a bill without having previously
accepted it

Section 62 of Act No. 2031 provides

The acceptor by accepting the instrument engages that he will pay it according to the tenor
of hisacceptance; and admits:
(a) The existence of the drawer, the genuineness of his signature, and his capacity and
authority to
draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.

Negotiable Instruments Case Digest: Great Eastern Life Ins. Co. V. Hongkong Shanghai Bank (1922)
G.R. No. L-18657

August 23, 1922

Lessons Applicable: Forgery (Negotiable Instruments Law)

FACTS:

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

E. M. Maasim fraudulently obtained possession of the check, forged Melicor's

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

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

HSBC sent a bank statement to the Eastern showing the amount of the check was
charged to its account, and no objection was made

4 months after the check was charged, it developed that Lazaro Melicor, to whom the
check was made payable, had never received it, and that his signature, as an endorser,
was forged by Maasim,

Eastern promptly made a demand upon the HSBC to credit the amount of the forged
check

Eastern filed against HSBC and PNB

RTC: dismissed the case

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

HELD: YES. lower court is reversed. Eastern against HSBC who can claim against PNB

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

Eastern received it banks statement, it had a right to assume that Melicor had
personally endorsed the check, and that, otherwise, the bank would not have paid it

Section 23 of Negotiable Instruments Law:

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.

The Philippine National Bank had no license or authority to pay the money to Maasim
or anyone else upon a forge signature.

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

Negotiable Instruments Case Digest:

Gempesaw V. CA (1993)
G.R. No. 92244 February 9, 1993
Lessons Applicable: Promissory Notes and Checks (Negotiable Instruments Law)

FACTS:

Gempesaw owns and operates four grocery stores

to pay their debts of her supplies, she draws checks against her account

she signed each and every crossed 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.

although the Bank notified her of all checks presented to and paid by the
bank, petitioner did not verify he correctness of the returned checks, much less
check if the payees actually received the checks in payment for the supplies she
received
It was only after the lapse of more 2 years that petitioner found out about

the fraudulent manipulations of her bookkeeper

November 7, 1984: Gempesaw made a written demand on respondent drawee
Bank to credit her account with the money value of the 82 checks totalling

P1,208.606.89 for having been wrongfully charged against her account

January 23, 1985: Gempesaw filed against Philippine Bank of

Communications (drawee Bank) for recovery of the money value of 82

checks charged against the Gempesaw's account on the ground that the
payees' indorsements were forgeries
RTC: dismissed the complaint
CA: affirmed
Gempesaw gross negligence = promixate cause of the loss

ISSUE: W/N Gempesaw has a right to recover the amount attributable to the forgeries

HELD: NO. 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.

Petitioner completed the checks by signing them as drawer and thereafter

authorized her employee Alicia Galang to deliver to payees

GR: 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
EX: where the drawer is guilty of such negligence which causes the bank to

honor such a check or checks.

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 chanrobles virtual law library
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx

In this kind of restrictive indorsement, the prohibition to transfer or negotiate

must be written in express words at the back of the instrument, so that any

subsequent party may be forewarned that ceases to be negotiable.

However, the restrictive indorsee acquires the right to receive payment
and bring any action thereon as any indorser, but he can no longer transfer his
rights as such indorsee where the form of the indorsement does not authorize him

to do so.
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
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

Negotiable Instruments Case Digest: Associated Bank V. CA (1996)

G.R. No. 107382/G.R. No. 107612
January 31, 1996
Lessons Applicable: Forgery (Negotiable Instruments Law)

FACTS:

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

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.

January 1981:Upon post-audit by the Provincial Auditor, it was discovered that the hospital did
not receive several allotment checks

February 19, 1981: After the checks were examined, they learned that 30 checks of
P203,300 were encashed by Fausto Pangilinan, with the Associated Bank acting as collecting
bank.
Fausto Pangilinan

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
sought to encash the 1st check with Associated Bank

Jesus David, 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.
PNB did not return the questioned checks within twenty-four hours, but several

days later

After forging the signature of Dr. Adena Canlas who was chief of the payee hospital,
Pangilinan followed the same procedure for the other checks.

All the checks bore the stamp of Associated Bank which reads "All prior endorsements
guaranteed ASSOCIATED BANK.

CA affrimed RTC: Associated to reimburse PNB and ordering PNB to pay Province of Tarlac

ISSUE: W/N PNB and Associated Bank should be held liable

HELD: YES. PARTIALLY GRANTED. The collecting bank, Associated Bank, shall be liable to PNB for 50%
of P203,300

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

GR

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.

EX: 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

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

In order instruments, 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.

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

A collecting bank where a check is deposited and which indorses the check
upon presentment with the drawee bank = 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. 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.

GR: drawee bank may not debit the drawer's account and is not entitled to indemnification
from the drawer - risk of loss must perforce fall on the drawee bank
EX:

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

In cases involving a forged check, where the drawer's signature is forged, the drawer can
recover from the drawee bank.

In cases involving checks with forged indorsements, the drawee bank canseek reimbursement
or a return of the amount it paid from the presentor bank or person

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

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.

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.

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

In this case, the checks were indorsed by the collecting bank (Associated Bank) to the
drawee bank (PNB)

The stamp guaranteeing prior indorsements is not an empty rubric which a

bank must fulfill for the sake of convenience

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.