PHILIPPINE NATIONAL BANK, plaintiff-appellee, Bank of New York and the former was

vs. accordingly credited with the amounts thereof,

THE NATIONAL CITY BANK OF NEW YORK, and or P144.50 and P215.75.
MOTOR SERVICE COMPANY, INC., defendants.
MOTOR SERVICE COMPANY, INC., appellant. 4. On April 8 and 10, 1933, the said checks
were cleared at the clearing house and the
L. D. Lockwood for appellant. Philippine National Bank credited the National
Camus and Delgado for appellee. City Bank of New York for the amounts
thereof, believing at the time that the
signatures of the drawer were genuine, that
the payee is an existing entity and the
endorsement at the back thereof regular and
genuine.
RECTO, J.:
5. The Philippine National Bank then found out
This case was submitted for decision to the court
that the purported signatures of J. L. Klar, as
below on the following stipulation of facts:
Manager and Treasurer of the Pangasinan
Transportation Company, Inc., in said Exhibits
1. That plaintiff is a banking corporation A and A-1 were forged when so informed by
organized and existing under and by virtue of a the said Company, and it accordingly
special act of the Philippine Legislature, with demanded from the defendants the
office as principal place of business at the reimbursement of the amounts for which it
Masonic Temple Bldg., Escolta, Manila, P. I.; credited the National City Bank of New York at
that the defendant National City Bank of New the clearing house and for which the latter
York is a foreign banking corporation with a credited the Motor Service Co., but the
branch office duly authorized and licensed to defendants refused, and continue to refuse, to
carry and engage in banking business in the make such reimbursements.
Philippine Islands, with branch office and place
of business in the National City Bank Bldg.,
6. The Pangasinan Transportation Co., Inc.,
City of Manila, P. I., and that the defendant
objected to have the proceeds of said check
Motor Service Company, Inc., is a corporation
deducted from their deposit.
organized and existing under and by virtue of
the general corporation law of the Philippine
Islands, with office and principal place of 7. Exhibits B, C, D, E, F, and G, which were
business at 408 Rizal Avenue, City of Manila, introduced at the trial in the municipal court of
P. I., engaged in the purchase and sale of Manila and forming part of the record of the
automobile spare parts and accessories. present case, are admitted by the parties as
genuine and are made part of this stipulation
as well as Exhibit H hereto attached and made
2. That on April 7 and 9, 1933, an unknown
a part hereof.
person or persons negotiated with defendant
Motor Service Company, Inc., the checks
marked as Exhibits A and A-1, respectively, Upon plaintiff's motion, the case was dismissed before
which are made parts of the stipulation, in trial as to the defendant National City Bank of New
payment for automobile tires purchased from York. a decision was thereafter rendered giving
said defendant's stores, purporting to have plaintiff judgment for the total amount of P360.25, with
been issued by the "Pangasinan interest and costs. From this decision the instant
Transportation Co., Inc. by J. L. Klar, Manager appeal was taken.
and Treasurer", against the Philippine National
Bank and in favor of the International Auto Before us is the preliminary question of whether the
Repair Shop, for P144.50 and P215.75; and original appeal taken by the plaintiff from the decision
said checks were indorsed by said unknown of the municipal court of Manila where this case
persons in the manner indicated at the back originated, became perfected because of plaintiff's
thereof, the Motor Service Co., Inc., believing failure to attach to the record within 15 days from
at the time that the signature of J. L. Klar, receipt of notice of said decision, the certificate of
Manager and Treasurer of the Pangasinan appeal bond required by section 76 of the Code of
Transportation Co., Inc., on both checks were Civil Procedure. It is not disputed that both the appeal
genuine. docket fee and the appeal cash bond were paid and
deposited within the prescribed time. The issue is
3. The checks Exhibits A and A-1 were then whether the mere failure to file the official receipt
indorsed for deposit by the defendant Motor showing that such deposit was made within the said
Service Company, Inc, at the National City period is a sufficient ground to dismiss plaintiff's
appeal. This question was settled by our decision in
the case of Blanco vs. Bernabe and lawyers be no such thing as "acceptance" in the ordinary
Cooperative Publishing Co. (page 124, ante), and no sense of the term. A check being payable immediately
further consideration. No error was committed in and on demand, the bank can fulfill its duty to the
allowing said appeal. depositor only by paying the amount demanded. The
holder has no right to demand from the bank anything
We now pass on to consider and determine the main but payment of the check, and the bank has no right,
question presented by this appeal, namely, whether as against the drawer, to do anything but pay it. (5 R.
the appellee has the right to recover from the C. L., p. 516, par. 38.) A check is not an instrument
appellant, under the circumstances of this case, the which in the ordinary course of business calls for
value of the checks on which the signatures of the acceptance. The holder can never claim acceptance
drawer were forged. The appellant maintains that the as his legal right. He can present for payment, and
question should be answered in the negative and in only for payment. (1 Morse on Banks and Banking, 6th
support of its contention appellant advanced various ed., pp. 898, 899.)
reasons presently to be examined carefully.
There is, however, nothing in the law or in, business
I. It is contended, first of all, that the payment of the practice against the presentation of checks for
checks in question made by the drawee bank acceptance, before they are paid, in which case we
constitutes an "acceptance", and, consequently, the have a "certification" equivalent to "acceptance"
case should be governed by the provisions of section according to section 187, which provides that "where a
62 of the Negotiable Instruments Law, which says: check is certified by the bank on which it is drawn, the
certification is equivalent to an acceptance", and it is
SEC. 62. Liability of acceptor. The acceptor then that the warranty under section 62 exists. This
by accepting the instrument engages that he certification or acceptance consists in the signification
will pay it according to the tenor of his by the drawee of his assent to the order of the drawer,
acceptance; and admits: which must not express that the drawee will perform
his promise by any other means than the payment of
money. (Sec. 132.) When the holder of a check
(a) The existence of the drawer, the
procures it to be accepted or certified, the drawer and
genuineness of his signature, and his
all indorsers are discharged from liability thereon (sec.
capacity and authority to draw the
188), and then the check operates as an assignment
instrument; and
of a part of the funds to the credit of the drawer with
the bank. (Sec. 189.) There is nothing in the nature of
(b) The existence of the payee and his the check which intrinsically precludes its acceptance,
then capacity to indorse. in like manner and with like effect as a bill of exchange
or draft may be accepted. The bank may accept if it
This contention is without merit. A check is a bill of chooses; and it is frequently induced by convenience,
exchange payable on demand and only the rules by the exigencies of business, or by the desire to
governing bills of exchange payable on demand are oblige customers, voluntarily to incur the obligation.
applicable to it, according to section 185 of the The act by which the bank places itself under
Negotiable Instruments Law. In view of the fact that obligation to pay to the holder the sum called for by a
acceptance is a step unnecessary, in so far as bills of check must be the expressed promise or undertaking
exchange payable on demand are concerned (sec. of the bank signifying its intent to assume the
143), it follows that the provisions relative to obligation, or some act from which the law will
"acceptance" are without application to checks. imperatively imply such valid promise or undertaking.
Acceptance implies, in effect, subsequent negotiation The most ordinary form which such an act assumes is
of the instrument, which is not true in case of the the acceptance by the bank of the check, or, as it is
payment of a check because from the moment a check perhaps more often called, the certifying of the check.
is paid it is withdrawn from circulation. The warranty (1 Morse on Banks and Banking, pp. 898, 899; 5 R. C.
established by section 62, is in favor of holders of the L., p. 520.)
instrument after its acceptance. When the drawee
bank cashes or pays a check, the cycle of negotiation No doubt a bank may by an unequivocal promise in
is terminated, and it is illogical thereafter to speak of writing make itself liable in any event to pay the check
subsequent holders who can invoke the warranty upon demand, but this is not an "acceptance" of the
provided in section 62 against the drawee. Moreover, check in the true sense of that term. Although a check
according to section 191, "acceptance" means "an does not call for acceptance, and the holder can
acceptance completed by delivery or notification" and present it only for payment, the certification of checks
this concept is entirely incompatible with payment, is a means in constant and extensive use in the
because when payment is made the check is retained business of banking, and its effects and consequences
by the bank, and there is no such thing as delivery or are regulated by the law merchant. Checks drawn
notification to the party receiving the payment. Checks upon banks or bankers, thus marked and certified,
are not to be accepted, but presented at once for enter largely into the commercial and financial
payment. (1 Bouvier's Law Dictionary, 476.) There can
transactions of the country; they pass from hand to (1 Morse, Banks and Banking, 915; 1 Bouvier's Law
hand, in the payment of debts, the purchase of Dictionary, 476.) The bank virtually says, that check is
property, and in the transfer of balances from one good; we have the money of the drawer here ready to
house and one bank to another. In the great pay it. We will pay it now if you will receive it. The
commercial centers, they make up no inconsiderable holder says, No, I will not take the money; you may
portion of the circulation, and thus perform a useful, certify the check and retain the money for me until this
valuable, and an almost indispensable office. The check is presented. The law will not permit a check,
purpose of procuring a check to be certified is to when due, to be thus presented, and the money to be
impart strength and credit to the paper by obtaining an left with the bank for the accommodation of the holder
acknowledgment from the certifying bank that the without discharging the drawer. The money being due
drawer has funds therein sufficient to cover the check and the check presented, it is his own fault if the
and securing the engagement of the bank that the holder declines to receive the pay, and for his own
check will be paid upon presentation. A certified check convenience has the money appropriated to that check
has a distinctive character as a species of commercial subject to its future presentment at any time within the
paper, and performs important functions in banking statute of limitations. (1 Morse on Banks and Banking,
and commercial business. When a check is certified, it p. 920.)
ceases to possess the character, or to perform the
functions, of a check, and represents so much money The theory of the appellant and of the decisions on
on deposit, payable to the holder on demand. The which it relies to support its view is vitiated by the fact
check becomes a basis of credit an easy mode of that they take the word "acceptance" in its ordinary
passing money from hand to hand, and answers the meaning and not in the technical sense in which it is
purposes of money. (5 R. C. L., pp. 516, 517.) lwphi [Link]

used in the Negotiable Instruments Law. Appellant

says that when payment is made, such payment
All the authorities, both English and American, hold amounts to an acceptance, because he who pays
that a check may be accepted, though acceptance is accepts. This is true in common parlance but
not usual. By the law merchant, the certificate of the "acceptance" in legal contemplation. The word
bank that a check is good is equivalent to acceptance. "acceptance" has a peculiar meaning in the Negotiable
It implies that the check is drawn upon sufficient funds Instruments Law, and, as has been above stated, in
in the hands of the drawee, that they have been set the instant case there was payment but no
apart for its satisfaction, and that they shall be so acceptatance, or what is equivalent to acceptance,
applied whenever the check is presented for payment. certification.
It is an undertaking that the check is good then, and
shall continue good, and this agreement is as binding With few exceptions, the weight of authority is to the
on the bank as its notes of circulation, a certificate of effect that "payment" neither includes nor implies
deposit payable to the order of the depositor, or any "acceptance".
other obligation it can assume. The object of certifying
a check, as regards both parties is to enable the In National Bank vs. First National Bank ([19101, 141
holder to use it as money. The transferee takes it with Mo. App., 719; 125 S. W., 513), the court asks, if a
the same readiness and sense of security that he mere promise to pay a check is binding on a bank,
would take the notes of the bank. It is available also to why should not the absolute payment of the check
him for all the purposes of money. Thus it continues to have the same effect? In response, it is submitted that
perform its important functions until in the course of the two things, that is acceptance and payment,
business it goes back to the bank for redemption, and are entirely different. If the drawee accepts the paper
is extinguished by payment. It cannot be doubted that after seeing it, and then permits it to go into circulation
the certifying bank intended these consequences, and as genuine, on all the principles of estoppel, he ought
it is liable accordingly. To hold otherwise would render to be prevented from setting up forgery to defeat
these important securities only a snare and a delusion. liability to one who has taken the paper on the faith of
A bank incurs no greater risk in certifying a check than the acceptance, or certification. On the other hand,
in giving a certificate of deposit. In well-regulated mere payment of the paper at the termination of its
banks the practice is at once to charge the check to course does not act as an estoppel. The attempt to
the account of the drawer, to credit it in a certified state a general rule covering both acceptance and
check account, and, when the check is paid, to debit payment is responsible for a large part of the
that account with the amount. Nothing can be simpler conflicting arguments which have been advanced by
or safer than this process. (Merchants' Bank vs. States the courts with respect to the rule. (Annotation at 12 A.
Bank, 10 Wall., 604, at p. 647; 19 Law. ed., 1008, L. R., 1090 1921].)
1019.)
In First National Bank vs. Brule National Bank ([1917],
Ordinarily the acceptance or certification of a check is 12 A. L. R., 1079, 1085), the court said:
performed and evidenced by some word or mark,
usually the words "good", "certified" or "accepted"
We are of the opinion that "payment is not
written upon the check by the banker or bank officer.
acceptance". Acceptance, as defined by
 section 131, cannot be confounded with liability of the bank to the true holder or the payee.
payment. . . . (Elyria Sav. & Bkg. Co. vs. Walker Bin Co., 92 Ohio
St., 406; L. R. A., 1916D, 433; 111 N. E., 147; Ann.
Acceptance, certification, or payment of a Cas. 1917D, 1055; Baltimore & O. R. Co. vs. First
check, by the express language of the statute, National Bank, 102 Va., 753; 47 S. E., 837; State Bank
discharges the liability only of the persons of Chicago vs. Mid-City Trust & Savings Bank 12 A. L.
named in the statute, to wit, the drawer and all R., pp. 989, 991, 992.)
indorsers, and the contract of indorsement by
the negotiator if the check is discharged by Before drawee's acceptance of check there is no
acceptance, certification, or payment. But privity of contract between drawee and payee.
clearly the statute does not say that the Drawee's payment of check on unauthorized
contract of warranty of the negotiator, created indorsement does not constitute "acceptance" of
by section 65, is discharged by these acts. check. (Sinclair Refining Co. vs. Moultrie Banking Co.,
165 S. E., 860 [1932].)
The rule supported by the majority of the cases (14 A.
L. R. 764), that payment of a check on a forged or The great weight of authority is to the effect that the
unauthorized indorsement of the payee's name, and payment of a check upon a forged or unauthorized
charging the same to the drawer's account, do not indorsement and the stamping of it "paid" does not
amount to an acceptance so as to make the bank constitute an acceptance. (Dakota Radio Apparatus
liable to the payee, is supported by all of the recent Co. vs. First Nat. Bank of Rapid City, 244 N. W., 351,
cases in which the question is considered. (Cases 352 [1932].)
cited, Annotation at 69 A. L. R., 1076, 1077 [1930].)
Payment of the check, cashing it on presentment is not
Merely stamping a check "Paid" upon its payment on a acceptance. (South Boston Trust Co. vs. Levin, 249
forged or unauthorized indorsement is not an Mass., 45, 48, 49; 143 N. E., 816; Blocker, Shepard
acceptance thereof so as to render the drawee bank Co. vs. Granite Trust Company, 187 Me., 53, 54
liable to the true payee. (Anderson vs. Tacoma [1933].)
National Bank [1928], 146 Wash., 520; 264 Pac., 8;
Annotation at 69 A. L. R., 1077, [1930].) In Rauch vs. Bankers National Bank of Chicago (143
Ill. App., 625, 636, 637 [1908]), the language of the
In State Bank of Chicago vs. Mid-City Trust & Savings decision was as follows:
Bank (12 A. L. R., 989, 991, 992), the court said:
. . . The plaintiffs say that this acceptance was
The defendant in error contends that the payment of made by the very unauthorized payments of
the check shows acceptance by the bank, urging that which they complain. This suggestion does not
there can be no more definite act by the bank upon seem forceful to us. It is the contention which
which a check has been drawn, showing acceptance was made before the Supreme Court of the
than the payment of the check. Section 184 of the United States in First National
Negotiable Instruments Act (sec. 202) provides that Bank vs. Whitman (94 U. S., 343), and
the provisions of the act applicable to bills of exchange repudiated by that court. The language of the
apply to a check, and section 131 (sec. 149), that the opinion in that case is so apt in the present
acceptance of a bill must be in writing signed by the case that we quote it:
drawee. Payment is the final act which extinguishes a
bill. Acceptance is a promise to pay in the future and "It is further contended that such an
continues the life of the bill. It was held in the First acceptance of a check as creates a privity
National Bank vs. Whitman (94 U. S., 343; 24 L. ed., between the payee and the bank is established
229), that payment of a check upon a forged by the payment of the amount of this check in
indorsement did not operate as an acceptance in favor the manner described. This argument is based
of the true owner. The contrary was held in upon the erroneous assumption that the bank
Pickle vs. Muse (Fickle vs. People's Nat. Bank, 88 has paid this check. If this were true, it would
Tenn., 380; 7 L.R.A., 93; 17 Am. St. Rep., 900; 12 S. have discharged all of its duty, and there would
W., 919), and Seventh National Bank vs. Cook (73 be an end to the claim against it. The bank
Pa., 483; 13 Am. Rep., 751) at a time when the supposed that it had paid the check, but this
Negotiable Instruments Act was not in force in those was an error. The money it paid was upon a
states. The opinion of the Supreme Court of the United pretended and not a real indorsement of the
States seems more logical, and the provision of the name of the payee. . . . We cannot recognize
Negotiable Instruments Act now require an acceptance the argument that payment of the amount of
to be in writing. Under this statute the payment of a the check or sight draft under such
check on a forged indorsement, stamping it "paid," and circumstances amounts to an acceptance
charging it to the account of the drawer, do not creating a privity of contract with the real
constitute an acceptance of the check or create a owner.
 "It is difficult to construe a payment as an Lurton held that the acceptance of a check was
acceptance under any circumstances. . . . A necessary in order to give the holder thereof a right of
banker or individual may be ready to make action thereon against the bank, and further held in a
actual payment of a check or draft when case similar to this, so far as this question is
presented, while unwilling to make a promise concerned, that the acceptance of a check so as to
to pay at a future time. Many, on the other give a right of action to the payee is inferred from the
hand, are more ready to promise to pay than to retention of the check by the bank and its subsequent
meet the promise when required. The charge of the amount to the drawer, although it was
difference between the transactions is presented by, and payment made, an unauthorized
essential and inherent." person. Judge Lurton cited the case of National Bank
of the Republic vs. Millard (10 Wall., 152; 19 L. ed.,
And in Wharf vs. Seattle National Bank (24 Pac. [2d]), 897), wherein the Supreme Court of the United States,
120, 123 [1933]): not having such a case before it, threw out the
suggestion that, if it was shown that a bank had
It is the rule that payment of a check on charged the check on its books against the drawer and
unauthorized or forged indorsement does not made settlement with the drawee that the holder could
operate as an acceptance of the check so as recover on account of money had and received,
to authorize an action by the real owner to invoking the rule of justice and fairness, it might be
recover its amount from the drawee bank. said there was an implied promise to the holder to pay
(Michie on Banks and Banking, vol. 5, sec. it on demand. (SeeNational Bank of the
278, p. 521.) A full list of the authorities Republic vs. Millard, 10 Wall. [77 U. S.], 152; 19 L. ed.,
supporting the rule will be found in a footnote 899.) The Tennessee court then argued that it would
to the foregoing citation. (See also, Federal be inequitable and unconscionable for the owner and
Land Bank vs. Collins, 156 Miss., 893; 127 payee of the check to be limited to an action against
So., 570; 69 A. L. R., 1068.) an insolvent drawer and might thereby lose the debt.
They recognized the legal principle that there is no
privity between the drawer bank and the holder, or
In a very recent case, Federal Land Bank vs. Collins
payee, of the check, and proceeded to hold that no
(69 A. L. R., 1068, 1072-1074), this question was
particular kind of writing was necessary to constitute
discussed at considerable length. The court said:
an acceptance and that it became a question of fact,
and the bank became liable when it stamped it "paid"
In the light of the first of these statutes, counsel for and charged it to the account of the drawer, and cites,
appellant is forced to stand upon the narrow ledge that in support of its opinion, Seventh National
the payment of the check by the two banks will Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751);
constitute an acceptance. The drawee bank simply Saylor vs. Bushong (100 Pa., 23; 45 Am. Rep., 353);
marked it "paid" and did not write anything else except and Dodge vs. Bank (20 Ohio St., 234; 5 Am. Rep.,
the date. The bank first paying the check, the 648).
Commercial National Bank and Trust Company, simply
wrote its name as indorser and passed the check on to
This decision was in 1890, prior to the
the drawee bank; does this constitute an acceptance?
enactment of the Negotiable Instruments Law
The precise question has not been presented to this
by the State of Tennessee. However, in this
court for decision. Without reference to authorities in
case Judge Snodgrass points out that the
other jurisdictions it would appear that the drawee
Millard case, supra, was dicta. The Dodge
bank had never written its name across the paper and
case, from the Ohio court, held exactly as the
therefore, under the strict terms of the statute, could
Tennessee court, but subsequently in the case
not be bound as an acceptor; in the second place, it
of Elyria Bank vs. Walker Bin Co. (92 Ohio St.,
does not appear to us to be illogical and unsound to
406; 111 N. E., 147; L. R. A. 1916D, 433; Ann.
say that the payment of a check by the drawee, and
Cas. 1917D, 1055), the court held to the
the stamping of it "paid", is equivalent to the same
contrary, called attention to the fact that the
thing as the acceptance of a check; however, there is
Dodge case was no longer the law, and
a variety of opinions in the various jurisdictions on this
proceeded to announce that, whatever might
question. Counsel correctly states that the theory upon
have been the law before the passage of the
which the numerous courts hold that the payment of a
Negotiable Instrument Act in that state, it was
check creates privity between the holder of the check
no longer the law; that the rule announced in
and the drawee bank is tantamount to apro
the Dodge case had been "discarded." The
tanto assignment of that part of the funds. It is most
court, in the latter case, expressed its doubts
easily understood how the payment of the check,
that the courts of Tennessee and Pennsylvania
when not authorized to be done by the drawee bank,
would adhere to the rule announced in the
might under such circumstances create liability on the
Pickle case, quoted supra, in the face of the
part of the drawee to the drawer. Counsel cites the
Negotiable Instrument Law. Subsequent to the
case of Pickle vs. Muse (88 Tenn, 380; 12 S. W., 919;
Millard case, the Supreme Court of the United
7 L. R. A., 93; 17 Am. St. Rep., 900), wherein Judge
States, in the case of First National Bank of Negotiable Instruments Act in the particular
Washington vs. Whitman (94 U. S., 343, 347; state, and these decisions are divided into two
24 L. ed., 229), where the bank, without any classes: the one holding that the check
knowledge that the indorsement of the payee delivered by the drawer to the holder and
was unauthorized, paid the check, and it was presented to the bank or drawee constitutes an
contended that by the payment the privity of assignment pro tanto; the other holding that
contract existing between the drawer and the payment of the check and the charging of
drawee was imparted to the payee, said: same to the drawee although paid to an
unauthorized person creates privity of contract
"It is further contended that such an between the holder and the drawee bank.
acceptance of the check as creates a privity
between the payee and the bank is established We have already seen that our own court has
by the payment of the amount of this check in repudiated the assignment pro tanto theory,
the manner described. This argument is based and since the adoption of the Negotiable
upon the erroneous assumption that the bank Instrument Act by this state we are compelled
has paid this check. If this were true, it would to say that payment of a check is not
have discharged all of its duty, and there would equivalent to accepting a check in writing and
be an end of the claim against it. The bank signing the name of the acceptor thereon.
supposed that it had paid the check; but this Payment of the check and the charging of
was an error. The money it paid was upon a same to the drawer does not constitute an
pretended and not a real indorsement of the acceptance. Payment of the check is the end
name of the payee. The real indorsement of of the voyage; acceptance of the check is to
the payee was as necessary to a valid fuel the vessel and strengthen it for continued
payment as the real signature of the drawer; operation on the commercial sea. What we
and in law the check remains unpaid. Its have said applies to the holder and not to the
pretended payment did not diminish the funds drawer of the check. On this question we
of the drawer in the bank, or put money in the conclude that the general rule is that an action
pocket of the person entitled to the payment. cannot be maintained by a payee of the check
The state of the account was the same after against the bank on which is draw unless the
the pretended payment as it was before. check has been certified or accepted by the
bank in compliance with the statute, even
"We cannot recognize the argument that a though at the time the check is that an action
payment of the amount of a check or sight cannot be maintained by a payee of the drawer
draft under such circumstances amounts to an of the check out of which the check is legally
acceptance, creating a privity of contract with payable; and that the payment of the check by
the real owner. It is difficult to construe a the bank on which it is drawn, even though
payment as an acceptance under any paid on the unauthorized indorsement of the
circumstances. The two things are essentially name of the holder (without notice of the defect
different. One is a promise to perform an act, by the bank), does not constitute a certification
the other an actual performance. A banker or thereof, neither is it an acceptance thereof;
an individual may be ready to make actual and without acceptance or certification, as
payment of a check or draft when presented, provided by statute, there is no privity of
while unwilling to make a promise to pay at a contract between the drawee bank and the
future time. Many, on the other hand, are more payee, or holder of the check. Neither is there
ready to promise to pay than to meet the an assignment pro tanto of the funds where
promise when required. The difference the check is not drawn on a particular fund, or
between the transactions is essential and does not show on its face that it is an
inherent." assignment of a particular fund. The above
rule as stated seems to have been the rule in
Counsel for the appellant cite other cases the majority of the states even before the
holding that the stamping of the check "paid" passage of the uniform Negotiable Instruments
and the charging of the amount thereof to the Act in the several states.
drawer constituted an acceptance, but we are
of opinion that none of these cases cited hold The decision in the case of First National
that it is in compliance with the Negotiable Bank vs. Bank of Cottage Grove (59 Or., 388), which
Instruments Act; paying the check and appellant cites in its brief (pp. 12, 13 ) has been
stamping same is not the equivalent of expressly overruled by the Supreme Court of
accepting the check in writing signed by the Massachusetts in South Boston Trust Co. vs. Levin
drawee. The cases holding that payment as (143 N. E., 816, 817), in the following language:
indicated above constituted acceptance were
rendered prior to the adoption of the
 In First National Bank vs. Bank of Cottage Georgia (10 Wheat., 333), that in B. B. Ford &
Grove (59 Or., 388; 117 Pac., 293, 296, at Co. vs. People's Bank of Orangeburg (74 S. C., 180),
page 396), it was said: "The payment of a bill it was held that "an unrestricted indorsement of a draft
or check by the drawee amounts to more than and presentation to the drawee is a representation that
an acceptance. The rule, holding that such a the signature of the drawer is genuine", and in Lisbon
payment has all the efficacy of an acceptance, First National Bank vs. Wyndmere Bank (15 N. D.,
is founded upon the principle that the greater 299), it was also held that "the drawee of a forged
includes the less." We are unable to agree with check who has paid the same without detecting the
this statement as there is no similarity between forgery, may upon discovery of the forgery, recover the
acceptance and payment; payment discharges money paid from the party who received the money,
the instrument, and no one else is expected to even though the latter was a good faith holder,
advance anything on the faith of it; provided the latter has not been misled or prejudiced
acceptance, contemplates further circulation, by the drawee's failure to detect the forgery."
induced by the fact of acceptance. The rule
that the acceptor made certain admissions Daniel, in his treatise on Negotiable Instruments, has
which will inure to the benefit of subsequent the following to say:
holders, has no applicability to payment of the
instrument where subsequent holders can In all the cases which hold the drawee absolutely
never exist. estoppel by acceptance or payment from denying
genuineness of the drawer's name, the loss is thrown
II. The old doctrine that a bank was bound to know its upon him on the ground of negligence on his part in
correspondent's signature and that a drawee could not accepting or paying, until he has ascertained the bill to
recover money paid upon a forgery of the drawer's be genuine. But the holder has preceded him in
name, because it was said, the drawee was negligent negligence, by himself not ascertaining the true
not to know the forgery and it must bear the character of the paper before he received it, or
consequence of its negligence, is fast fading into the presented it for acceptance or payment. And although,
misty past, where it belongs. It was founded in as a general rule, the drawee is more likely to know
misconception of the fundamental principles of law and the drawer's handwriting than a stranger is, if he is in
common sense. (2 Morse, Banks and Banking, p. fact deceived as to its genuineness, we do not
1031.) perceive that he should suffer more deeply by mistake
than a stranger, who, without knowing the handwriting,
Some of the cases carried the rule to its furthest limit has taken the paper without previously ascertaining its
and held that under no circumstances (except, of genuineness. And the mistake of the drawee should
course, where the purchaser of the bill has participated always be allowed to be corrected, unless the holder,
in the fraud upon the drawee) would the drawee be acting upon faith and confidence induced by his
allowed to recover bank money paid under a mistake honoring the draft, would be placed in a worse position
of fact upon a bill of exchange to which the name of by according such privilege to him. This view has been
the drawer had been forged. This doctrine has been applied in a well considered case, and is intimidated in
freely criticized by the eminent authorities, as a rule another; and is forcibly presented by Mr. Chitty, who
too favorable to the holder, not the most fair, nor best says it is going a great way to charge the acceptor with
calculated to effectuate justice between the drawee knowledge of his correspondent's handwriting, "unless
and the drawer. (5 R.C.L., p. 556.) some bona fide holder has purchased the paper on the
faith of such an act." Negligence in making payment
The old rule which was originally announced by Lord under a mistake of fact is not now deemed a bar to
Mansfield in the leading case of Price vs. Neal (3 recovery of it, and we do not see why any exception
Burr., 1354), elicited the following comment from should be made to the principle, which would apply as
Justice Holmes, then Chief Justice of the Supreme well as to release an obligation not consummated by
Court of Massachusetts, in the case of Dedham payment. ( Vol. 2, 6th edition, pp. 1537-1539.)
National Bank vs. Everett National Bank (177 Mass.,
392). "Probably the rule was adopted from an III. But now the rule is perfectly well settled that in
impression of convenience rather than for any more determining the relative rights of a drawee who, under
academic reason; or perhaps we may say that Lord a mistake of fact, has paid, and a holder who has
Mansfield took the case out of the doctrine as to received such payment, upon a check to which the
payments under a mistake of fact by the assumption name of the drawer has been forged, it is only fair to
that a holder who simply presents negotiable paper for consider the question of diligence or negligence of the
payment makes no representation as to the signature, parties in respect thereto. (Woods and
and that the drawee pays at his peril." Malone vs. Colony Bank [1902], 56 L. R. A., 929, 932.)
The responsibility of the drawee who pays a forged
Such was the reaction that followed Lord Mansfield's check, for the genuineness of the drawer's signature,
rule which Justice Story of the United States Supreme is absolute only in favor of one who has not, by his
adopted in the case of Bank of United States vs. own fault or negligence, contributed to the success of
the fraud or to mislead the drawee. (National Bank of means it has succeeded. (Gloucester Bank vs. Salem
America [Link], 106 Mass., 441; 8 Am. Rep., 349; Bank, 17 Mass., 33; First Nat. Bank of
Woods and Malone vs. Colony Bank, supra; De Danvers vs. First National Bank of Salem, supra; B. B.
Feriet vs. Bank of America, 23 La. Ann., 310; B. B. Ford & Co. vs. People's Bank of Orangeburg, supra.)
Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., Again if the indorser is guilty of negligence in receiving
180; 10 L. R. A. [N. S.], 63.) If it appears that the one and paying the check or draft, or has reason to believe
to whom payment was made was not an innocent that the instrument is not genuine, but fails to inform
sufferer, but was guilty of negligence in not doing the drawee of his suspicions the indorser according to
something, which plain duty demanded, and which, if it the reasoning of some courts will be held liable to the
had been done, would have avoided entailing loss on drawee upon his implied warranty that the instrument
any one, he is not entitled to retain the moneys paid is genuine. (B. B. Ford & Co. vs. People's Bank of
through a mistake on the part of the drawee bank. Orangeburg, supra; Newberry Sav. Bank vs. Bank of
(First Nat. Bank of Danvers vs. First Nat. Bank of Columbia, 93 S. C., 294; 38 L. R. A. [N. S], 1200.)
Salem, 151 Mass., 280; 24 N. E., 44; 21 A. S. R., 450; Most of the courts now agree that one who purchases
First Nat. Bank of Orleans vs. State Bank of Alma, 22 a check or draft is bound to satisfy himself that the
Neb., 769; 36 N. W., 289; 3 A. S. R., 294; American paper is genuine; and that by indorsing it or presenting
Exp. Co. vs. State Nat. Bank, 27 Okla., 824; 113 Pac., it for payment or putting it into circulation before
711; 33 L. R. A. [N. S.], 188; B. B. Ford & presentation he impliedly asserts that he has
Co. vs. People's Bank of Orangeburg, 74 S. C., 180; performed his duty, the drawee, who has, without
54 S. E., 204; 114 A. S. R., 986; 7 Ann. Cas., 744; 10 actual negligence on his part, paid the forged demand,
L. R. A. [N. S.], 63; People's Bank vs. Franklin Bank, may recover the money paid from such negligent
88 Tenn. 299; 12 S. W., 716; 17 A. S. R.) 884; 6 L. R. purchaser. (Lisbon First National Bank vs. Wyndmere
A., 724; Canadian Bank of Commerce vs. Bingham, 30 Bank, supra.) Of course, the drawee must, in order to
Wash., 484; 71 Pac., 43; 60 L. R. A., 955.) In other recover back the holder, show that he himself was free
words, to entitle the holder of a forged check to retain from fault. (See also 5 R. C. L., pp. 556-558.)
the money obtained he must be able to show that the
whole responsibility of determining the validity of the So, if a collecting bank is alone culpable, and, on
signature was upon the drawee, and that the account of its negligence only, the loss has occurred,
negligence of such drawee was not lessened by any the drawee may recover the amount it paid on the
failure of any precaution which, from his implied forged draft or check. (Security Commercial & Sav.
assertion in presenting the check as a sufficient Bank vs. Southern Trust & C. Bank [1925], 74 Cal.
voucher, the drawee had the right to believe he had App., 734; 241 Pac., 945.)
taken. (Ellis vs. Ohio Life Insurance & Trust Co., 4
Ohio St., 628; Rouvant vs. Bank, 63 Tex., 610; But we are aware of no case in which the principle that
Bank vs. Ricker, 71 Ill., 429; First National Bank of the drawee is bound to know the signature of the
Danvers vs. First Nat. Bank of Salem, 24 N. E., 44, 45; drawer of a bill or check which he undertakes to pay
B. B. Ford & Co. [Link]'s Bank of has been held to be decisive in favor of a payee of a
Orangeburg, supra.) The recovery is permitted in such forged bill or check to which he has himself given
case, because, although the drawee was credit by his indorsement. (Secalso,
constructively negligent in failing to detect the forgery, Mckleroy vs. Bank, 14 La. Ann., 458; Canal
yet if the purchaser had performed his duty, the Bank vs. Bank of Albany, 1 Hill, 287;
forgery would in all probability have been detected and Rouvant vs. Bank, supra, First Nat. Bank vs. Indiana
the fraud defeated. (First National Bank of National Bank; 30 N. E., 808-810.)
Lisbon vs. Bank of Wyndmere, 15 N. D., 209; 10 L. R.
A. [N. S.], 49.) In the absence of actual fault on the
In First Nat. Bank vs. United States National Bank
part of the drawee, his constructive fault in not
([1921], 100 Or., 264; 14 A. L. R., 479; 197 Pac., 547),
knowing the signature of the drawer and detecting the
the court declared: "A holder cannot profit by a
forgery will not preclude his recovery from one who
mistake which his negligent disregard of duty has
took the check under circumstances of suspicion
contributed to induce the drawee to commit. . . . The
without proper precaution, or whose conduct has been
holder must refund, if by his negligence he has
such as to mislead the drawee or induce him to pay
contributed to the consummation of the mistake on the
the check without the usual scrutiny or other
part of the drawee by misleading him. . . . If the only
precautions against mistake or fraud. (National Bank
fault attributable to the drawee is the constructive fault
of America vs. Bangs, supra; First National
which the law raises from the bald fact that he has
Bank vs. Indiana National Bank, 30 N. E., 808-810;
failed to detect the forgery, and if he is not chargeable
Woods and Malone vs. Colony Bank, supra; First
with actual fault in addition to such constructive fault,
National Bank of Danvers vs. First Nat. Bank of Salem,
then he is not precluded from recovery from a holder
151 Mass., 280.) Where a loss, which must be borne
whose conduct has been such as to mislead the
by one of two parties alike innocent of forgery, can be
drawee or induce him to pay the check or bill of
traced to the neglect or fault of either, it is
exchange without the usual security against fraud. The
unreasonable that it would be borne by him, even if
holder must refund to a drawee who is not guilty of
innocent of any intentional fraud, through whose
actual fault if the holder was negligent in not making not discharged by payment of the check by the drawee
due inquiry concerning the validity of the check before (First National Bank), nor was the Brule National Bank
he took it, and if the drawee can be said to have been deceived or misled to its prejudice by such payment.
excused from making inquiry before taking the check The Brule National Bank by its indorsement and
because of having had a right to, presume that the delivery warranted its own identification of Kost and
holder had made such inquiry." the genuineness of his signature. The indorsement of
the check by the Brule National Bank was such as to
The rule that one who first negotiates forged paper assign the title to the check to its assignee, the
without taking some precaution to learn whether or not Whitbeck National Bank, and the amount was credited
it is genuine should not be allowed to retain the to the indorser. The check bore no indication that it
proceeds of the draft or check from the drawee, whose was deposited for collection, and was not in any
sole fault was that he did not discover the forgery manner restricted so as to constitute the indorsee the
before he paid the draft or check, has been followed agent of the indorser, nor did it prohibit farther
by the later cases. (Security Commercial & Savings negotiation of the instrument, nor did it appear to be in
Bank vs. Southern Trust & C. Bank [1925], 74 Cal. trust for, or to the use of, any other person, nor was it
App., 734; 241 Pac., 945; Hutcheson Hardware conditional. Certainly the Pukwana Bank was justified
Co. vs. Planters State Bank [1921], 26 Ga. App., 321; in relying upon the warrant of genuineness, which
105 S. E., 854; [Annotation at 71 A. L. R., 337].) implied the full identification of Kost, and his signature
by the defendant bank. This view of the statute is in
Where a bank, without inquiry or identification of the accord with the decisions of many courts. (First
person presenting a forged check, purchases it, National Bank vs. State Bank, 22 Neb., 769; 3 Am. St.
indorses it, generally, and presents it to the drawee Rep., 294; 36 N. W., 289; First National Bank vs. First
bank, which pays it, the latter may recover if its only National Bank, 151 Mass., 280; 21 Am. St. Rep., 450;
negligence was its mistake in having failed to detect 24 N. E., 44; People's Bank vs. Franklin Bank, 88
the forgery, since its mistake, did not mislead the Tenn., 299; 6 L. R. A., 727; 17 Am. St. Rep., 884; 12
purchaser or bring about a change in position. S. W., 716.)"
(Security Commercial & Savings Bank vs. Southern
Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., The appellant leans heavily on the case of Fidelity &
945.) Co. vs. Planenscheck (71 A. L. R., 331), decided in
1929. We have carefully examined this decision and
Also, a drawee could recover from another bank the we do not feel justified in accepting its conclusions. It
portion of the proceeds of a forged check cashed by is but a restatement of the long abandoned rule of
the latter and deposited by the forger in the second Neal vs. Price, and it predicated on the wrong premise
bank and never withdrawn, upon the discovery of the that the payment includes acceptance, and that a bank
forgery three months later, after the drawee had paid drawee paying a check drawn on it becomes ipso
the check and returned the voucher to the purported facto an acceptor within the meaning of section 62 of
drawer, where the purchasing bank was negligent in the Negotiable Instruments Act. Moreover in a more
taking the check, and was not injured by the drawee's recent decision, that of Louisa National
negligence in discovering and reporting the forgery as Bank vs. Kentucky National Bank (39 S. W. [2nd] 497,
to the amount left on deposit, since it was not a 501) decided in 1931, the Court of Appeals of
purchaser for value. (First State Bank & T. Co. vs. First Kentucky held the following:
Nat. Bank [1924], 314 Ill., 269; 145 N. E., 382.)
The appellee, on presentation for payment of
Similarly, it has been held that the drawee of a check $600 check, failed to discover it was a forgery.
could recover the amount paid on the check, after It was bound to know the signature of its
discovery of the forgery, from another bank, which put customer, Armstrong, and it was derelict in
the check into circulation by cashing it for the one who failing to give his signature to the check
had forged the signature of both drawer and payee sufficient attention and examination to enable it
without making any inquiry as to who he was although to discover instantly the forgery. The appellant,
he was a stranger, after which the check reached, and when the check was presented to it by
was paid by, the drawee, after going through the Banfield, failed to make an inquiry of or about
hands of several intermediate indorsees. (71 A. L. R., him and did not cause or have him to be
p. 340.) identified. Its act in so paying to him the check
is a degree of negligence on its part equivalent
to positive negligence. It indorsed the check,
In First National Bank vs. Brule National Bank ([1917],
and, while such indorsement may not be
12 A. L. R., 1079, 1085), the following statement was
regarded within the meaning of the Negotiable
made:
Instrument Law as amounting to a warranty to
appellant of that which it indorsed, it at least
We are clearly of opinion, therefore that the warranty substantially served as a representation to it
of genuineness, arising upon the act of the Brule that it had exercised ordinary care and had
National Bank in putting the check in circulation, was
 complied with the rules and customs of Check Exhibit A bears number 637023-D and
prudent banking. Its indorsement was is dated April 6, 1933, whereas check Exhibit
calculated, if it did not in fact do so, to lull the A-1 bears number 637020-D and is dated April
drawee bank into indifference as to the 7, 1933. Therefore, the latter check, which is
drawer's signature to it when paying the check prior in number to the former check, is
and charging it to its customer's account and however, issued on a later date. This
remitting its proceeds to appellant's circumstance must have aroused at least the
correspondent. curiosity of the Motor Service Co., Inc.

If in such a transaction between the drawee The Motor Service Co., Inc., accepted the two
and the holder of a check both are without checks from unknown persons. And not only
fault, no recovery may be had of the money so this; check Exhibit A is indorsed by a subagent
paid. (Deposit Bank of Georgetown vs. Fayette of the agent of the payee, International Auto
National Bank, supra, and cases cited.) Or the Repair Shop. The Motor Service Co., Inc.,
rule may be more accurately stated that, where made no inquiry whatsoever as to the extent of
the drawee pays the money, he cannot recover the authority of these unknown persons. Our
it back from a holder in good faith, for value Supreme Court said once that "any person
and without fault. taking checks made payable to a corporation,
which can act only by agents, does so at his
If, on the other hand, the holder acts in bad peril, and must abide by the consequences if
faith, or is guilty of culpable negligence, a the agent who indorses the same is without
recovery may be had by the drawee of such authority" (Insular Drug Co. vs. National Bank,
holder. The negligence of the Bank of Louisa 58, Phil., 684).
in failing to inquire of and about Banfield, and
to cause or to have him identified before it xxx xxx xxx
parted with its money on the forged check,
may be regarded as the primary and proximate Check Exhibit A-1, aside from having been
cause of the loss. Its negligence in this respect indorsed by a supposed agent of the
reached in its effect the appellee, and induced international Auto Repair Shop is crossed
incaution on its part. In comparison of the generally. The existence of two parallel lines
degrees of the negligence of the two, it is transversally drawn on the face of this check
apparent that of the appellant excels in was a warning that the check could only be
culpability. Both appellant and appellee collected through a banking institution (Jacobs,
inadvertently made a mistake, doubtless due Law of Bills of Exchange, etc., pp., 179, 180;
to a hurry incident to business. The first and Bills of Exchange Act of England, secs. 76 and
most grievous one was made by the appellant 79). Yet the Motor Service Co., Inc., accepted
, amounting to its disregard of the duty, it owed the check in payment for merchandise.
itself as well as the duty it owed to the
appellee, and it cannot on account thereof . . . In Exhibit H attached to the stipulation of
retain as against the appellee the money which facts as an integral part thereof, the Motor
it so received. It cannot shift the loss to the Service Co., Inc., stated the following:
appellee, for such disregard of its duty
inevitably contributed to induce the appellee to
"The Pangasinan Transportation Co. is a good
omit its duty critically to examine the signature
customer of this firm and we received checks
of Armstrong, even if it did not know it instantly
from them every month in payment of their
at the time it paid the check. (Farmers' Bank of
account. The two checks in question seem to
Augusta vs. Farmer's Bank of Maysville, supra,
be exactly similar to the checks which we
and cases cited.)
received from the Pangasinan Transportation
Co. every month."
IV. The question now is to determine whether the
appellant's negligence in purchasing the checks in
If the failure of the Motor Service Co., Inc., to
question is such as to give the appellee the right to
detect the forgery of the drawer's signature in
recover upon said checks, and on the other hand,
the two checks, may be considered as an
whether the drawee bank was not itself negligent,
omission in good faith because of the similarity
except for its constructive fault in not knowing the
stated in the letter, then the same
signature of the drawer and detecting the forgery.
consideration applies to the Philippine National
Bank, for the drawer is a customer of both the
We quote with approval the following conclusions of Motor Service Co., Inc., and the Philippine
the court a quo: National Bank. (B. of E., pp. 25, 28, 35.)
We are of opinion that the facts of the present case do rule recognizes the fact that, in case of
not make it one between two equally innocent payment without a prior acceptance or
persons, the drawee bank and the holder, and that certification, the holder takes the paper upon
they are governed by the authorities already cited and the of the prior indorsers and the credit of the
also the following: drawer, and not upon the credit of the drawee,
in making payment, has a right to rely upon the
The point in issue has sometimes been said to assumption that the payee used due diligence,
be that of negligence. The drawee who has especially where such payee negotiated the
paid upon the forged signature is held to bear bill or check to a holder, thus representing that
the loss, because he has been negligent in it had so fully satisfied itself as to the identity
failing to recognize that the handwriting is not and signature of the maker that it was willing to
that of his customer. But it follows obviously warrant as relates thereto to all subsequent
that if the payee, holder, or presenter of the holders. (Uniform Act, secs. 65 and 66.) Such
forged paper has himself been in default, if he correct rule denies the drawee the right to
has himself been guilty of a negligence prior to recover when the holder was without fault or
that of the banker, or if by any act of his own when there has been some change of position
he has at all contributed to induce the banker's calling for equitable relief. When a holder of a
negligence, then he may lose his right to cast bill of exchange uses all due care in the taking
the loss upon the banker. The courts have of bill or check and the drawee thereafter pays
shown a steadily increasing disposition to same, the transaction is absolutely closed
extend the application of this rule over the new modern business could not be done on any
conditions of fact which from time to time arise, other basis. While the correct rule promotes
until it can now rarely happen that the holder, the fluidity of two recognized mediums of
payee, or presenter can escape the imputation exchange, those mediums by which the great
of having been in some degree contributory bulk of business is carried on, checks and
towards the mistake. Without any actual drafts, upon the other hand it encourages and
change in the abstract doctrines of the law, demands prudent business methods upon the
which are clear, just, and simple enough, the part of those receiving such mediums of
gradual but sure tendency and effect of the exchange. (Pennington County Bank vs. First
decisions have been to put as heavy a burden State Bank, 110 Minn., 263; 26 L. R. A. [N. S.],
of responsibility upon the payee as upon the 849; 136 Am. St. Rep., 496; 125 N. W., 119;
drawee, contrary to the original custom. . . . (2 First National Bank vs. State Bank, 22 Neb.,
Morse on Banks and Banking, 5th ed., secs. 769; 3 Am. St. Rep., 294; 36 N. W., 289; Bank
464 and 466, pp. 82-85 and 86, 87.) of Williamson, vs. McDowell County Bank, 66
W. Va., 545; 36 L. R. A. [N. S.], 605; 66 S. E.,
In First National Bank vs. Brule National Bank (12 A. L. 761; Germania Bank vs. Boutell, 60 Minn.,
R., 1079, 1088, 1089), the following statement 189; 27 L. R. A., 635; 51 Am. St. Rep., 519; 62
appears in the concurring opinion: N. W., 327; American Express Co. vs. State
National Bank, 27 Okla., 824; 33 L. R. A. [N.
S.], 188; 113 Pac., 711; Farmers' National
What, then, should be the rule? The drawee
Bank vs. Farmers' & Traders Bank, L. R. A.,
asks to recover for money had and received. If
1915A, 77, and note (159 Ky., 141; 166 S. W.,
his claim did not rest upon a transaction
986].)
relating to a negotiable instrument plaintiff
could recover as for money paid under
mistake, unless defendant could show some That the defendant bank did not use
equitable reason, such as changed condition reasonable business prudence is clear. It took
since, and relying upon, payment by plaintiff. In this check from a strangerwithout other
the Wyndmere Case, the North Dakota court identification than that given by another
holds that this rule giving right to recover stranger; its cashier witnessed the mark of
money paid under mistake should extend to such stranger thus vouching for the identity
negotiable paper, and it rejects in its entirety and signature of the maker; and it indorsed the
the theory of estoppel and puts a case of this check as "Paid," thus further throwing plaintiff
kind on exactly the same basis as the ordinary off guard. Defendant could not but have
case of payment under mistake. But the great known, when negotiating such check and
weight of authority, and that based on the putting it into the channel through which it
better reasoning, holds that the exigencies of would finally be presented to plaintiff for
business demand a different rule in relation to payment, that plaintiff, if it paid such check, as
negotiable paper. What is that rule? Is it an defendant was asking it to do, would have to
absolute estoppel against the drawee in favor rely solely upon the apparent faith and credit
of a holder, no matter how negligent such that defendant had placed in the drawer. From
holder has been? It surely is not. The correct the very circumstances of this case plaintiff
 had to act on the facts as presented to it by suffered by its being deceived. (17 A. L. R. 891; 5 R.
defendant, upon such facts only. C. L., 559.)

But appellant argues that it so changed its In the instant case should the drawee bank be allowed
position, after payment by plaintiff, that in recovery, the appellant's position would not become
"equity and good conscience" plaintiff should worse than if the drawee had refused the payment of
not recover it says it did not pay over any these checks upon their presentation. The appellant
money to the forger until after plaintiff had paid has lost nothing by anything which the drawee has
the check. There would be merit in such done. It had in its hands some forged worthless
contention if defendant had indorsed the check papers. It did not purchase or acquire these papers
for "collection," thus advising plaintiff that it because of any representation made to it by the
was relying on plaintiff and not on the drawer. drawee. It purchased them from unknown persons and
It stands in court where it would have been if it under suspicious circumstances. It had no valid title to
had done as it represented. them, because the persons from whom it received
them did not have such title. The appellant could not
In Woods and Malone vs. Colony Bank (56 L. R. A., have compelled the drawee to pay them, and the
929, 932), the court said: drawee could have refused payment had it been able
to detect the forgery. By making a refund, the
. . . If the holder has been negligent in paying appellant would only returning what it had received
the forged paper, or has by his conduct, without any title or right. And when appellant pays
however innocent, misled or deceived the back the money it had received it will be entitled to
drawee to his damage, it would be unjust for have restored to it the forged papers it parted with.
him to be allowed to shield himself from the There is no good reason why the accidental payment
results of his own carelessness by asserting made by the appellant should inure to the benefit of
that the drawee was bound in law to know his the appellant. If there were injury to the appellant said
drawer's signature. injury was caused not by the failure of the appellee to
detect the forgery but by the very negligence of the
appellant in purchasing commercial papers from
V. Section 23 of the Negotiable Instruments Act
unknown persons without making inquiry as to their
provides that "when a signature is forged or made
genuineness.
without the authority of the person whose signature it
purports to be, is wholly inoperative, and no right to
retain the instrument, or to give a discharge therefor, In the light of the foregoing discussion, we conclude:
or to enforce payment thereof against any party
thereto, can be acquired through or under such 1. That where a check is accepted or certified
signature, unless the party against whom it is sought by the bank on which it is drawn, the bank is
to enforce such right is precluded from setting up the estopped to deny the genuineness of the
forgery or want of authority. drawer's signature and his capacity to issue
the instrument;
It not appearing that the appellee bank did not warrant
to the appellant the genuineness of the checks in 2. That if a drawee bank pays a forged check
question, by its acceptance thereof, nor did it perform which was previously accepted or certified by
any act which would have induced the appellant to the said bank it cannot recover from a holder
believe in the genuineness of said instruments before who did not participate in the forgery and did
appellant purchased them for value, it can not be said not have actual notice thereof;
that the appellee is precluded from setting up the
forgery and, therefore, the appellant is not entitled to 3. That the payment of a check does not
retain the amount of the forged check paid to it by the include or imply its acceptance in the sense
appellee. that this word is used in section 62 of the
Negotiable Instruments Law;
VI. It has been held by many courts that a drawee of a
check, who is deceived by a forgery of the drawer's 4. That in the case of the payment of a forged
signature may recover the payment back, unless his check, even without former acceptance, the
mistake has placed an innocent holder of the paper in drawee can not recover from a holder in due
a worse position than he would have been in if the course not chargeable with any act of
discovery of the forgery had been made on negligence or disregard of duty;
presentation. (5 R. C. L., p. 559; 2 Daniel on
Negotiable Instruments, 1538.) Forgeries often 5. That to entitle the holder of a forged check
deceived the eye of the most cautious experts; and to retain the money obtained thereon, there
when a bank has been deceived, it is a harsh rule must be a showing that the duty to ascertain
which compels it to suffer although no one has the genuineness of the signature rested
entirely upon the drawee, and that the Wherefore, the assignments of error are overruled,
constructive negligence of such drawee in and the judgment appealed from must be, as it is
failing to detect the forgery was not affected by hereby, affirmed, with costs against the appellant. So
any disregard of duty on the part of the holder, ordered.
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.
PHILIPPINE NATIONAL BANK, petitioner, and, accordingly, requested that its payment be
vs. stopped.
THE COURT OF APPEALS and PHILIPPINE
COMMERCIAL AND INDUSTRIAL In its brief, the PNB maintains that the lower court
BANK, respondents. erred: (1) in not finding the PCIB guilty of negligence;
(2) in not finding that the indorsements at the back of
Tomas Besa, Jose B. Galang and Juan C. Jimenez for the check are forged; (3) in not finding the PCIB liable
petitioner. to the PNB by virtue of the former's warranty on the
San Juan, Africa & Benedicto for respondents. back of the check; (4) in not holding that "clearing" is
not "acceptance", in contemplation of the Negotiable
CONCEPCION, C.J.: Instruments law; (5) in not finding that, since the check
had not been accepted by the PNB, the latter is
The Philippine National Bank hereinafter referred to entitled to reimbursement therefor; and (6) in denying
as the PNB seeks the review by certiorari of a the PNB's right to recover from the PCIB.
decision of the Court of Appeals, which affirmed that of
the Court of First Instance of Manila, dismissing The first assignment of error will be discussed later,
plaintiff's complaint against the Philippine Commercial together with the last,with which it is interrelated.
and Industrial Bank hereinafter referred to as the
PCIB for the recovery of P57,415.00. As regards the second assignment of error, the PNB
argues that, since the signatures of the drawer are
A partial stipulation of facts entered into by the parties forged, so must the signatures of the supposed
and the decision of the Court of Appeals show that, on indorsers be; but this conclusion does not necessarily
about January 15, 1962, one Augusto Lim deposited in follow from said premise. Besides, there is absolutely
his current account with the PCIB branch at Padre no evidence, and the PNB has not even tried to prove
Faura, Manila, GSIS Check No. 645915- B, in the sum that the aforementioned indorsements are spurious.
of P57,415.00, drawn against the PNB; that, following Again, the PNB refunded the amount of the check to
an established banking practice in the Philippines, the the GSIS, on account of the forgery in the
check was, on the same date, forwarded, for clearing, signatures, not of the indorsers or supposed indorsers,
through the Central Bank, to the PNB, which did not but of the officers of the GSIS as drawer of the
return said check the next day, or at any other time, instrument. In other words, the question whether or not
but retained it and paid its amount to the PCIB, as well the indorsements have been falsified is immaterial to
as debited it against the account of the GSIS in the the PNB's liability as a drawee, or to its right to recover
PNB; that, subsequently, or on January 31, 1962, from the PCIB,1 for, as against the drawee, the
upon demand from the GSIS, said sum of P57,415.00 indorsement of an intermediate bank does not
was re-credited to the latter's account, for the reason guarantee the signature of the drawer,2 since the
that the signatures of its officers on the check were forgery of the indorsement is notthe cause of the loss.3
forged; and that, thereupon, or on February 2, 1962,
the PNB demanded from the PCIB the refund of said With respect to the warranty on the back of the check,
sum, which the PCIB refused to do. Hence, the to which the third assignment of error refers, it should
present action against the PCIB, which was dismissed be noted that the PCIB thereby guaranteed "all
by the Court of First Instance of Manila, whose prior indorsements," not the authenticity of the
decision was, in turn, affirmed by the Court of Appeals. signatures of the officers of the GSIS who signed on
its behalf, because the GSIS is not an indorser of the
It is not disputed that the signatures of the General check, but its drawer.4 Said warranty is irrelevant,
Manager and the Auditor of the GSIS on the check, as therefore, to the PNB's alleged right to recover from
drawer thereof, are forged; that the person named in the PCIB. It could have been availed of by a
the check as its payee was one Mariano D. Pulido, subsequent indorsee5 or a holder in due
who purportedly indorsed it to one Manuel Go; that the course subsequent to the PCIB, but, the PNB is
6

check purports to have been indorsed by Manuel Go neither.7 Indeed, upon payment by the PNB, as
to Augusto Lim, who, in turn, deposited it with the drawee, the check ceased to be a negotiable
PCIB, on January 15, 1962; that, thereupon, the PCIB instrument, and became a mere voucher or proof of
stamped the following on the back of the check: "All payment.8
prior indorsements and/or Lack of Endorsement
Guaranteed, Philippine Commercial and Industrial Referring to the fourth and fifth assignments of error,
Bank," Padre Faura Branch, Manila; that, on the same we must bear in mind that, in general, "acceptance", in
date, the PCIB sent the check to the PNB, for the sense in which this term is used in the Negotiable
clearance, through the Central Bank; and that, over Instruments Law9 is not required for checks, for the
two (2) months before, or on November 13, 1961, the same are payable on demand.10 Indeed, "acceptance"
GSIS had notified the PNB, which acknowledged and "payment" are, within the purview of said Law,
receipt of the notice, that said check had been lost, 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 equally at fault, the court will leave the parties where it
Law,12 "the acceptance of a bill is the signification by finds them.15
the drawee of his assent to the order of the drawer,"
which, in the case of checks, is the payment, on Lastly, Section 62 of Act No. 2031 provides:
demand, of a given sum of money. Upon the other
hand, actual payment of the amount of a check The acceptor by accepting the instrument
implies not only an assent to said order of the drawer engages that he will pay it according to the
and a recognition of the drawer's obligation to pay the tenor of his acceptance; and admits:
aforementioned sum, but, also, a compliance with
such obligation.
(a) The existence of the drawer, the
genuineness of his signature, and his capacity
Let us now consider the first and the last assignments and authority to draw the instrument; and
of error. The PNB maintains that the lower court erred
in not finding that the PCIB had been guilty of
(b) The existence of the payee and his then
negligence in not discovering that the check was
capacity to indorse.
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 The prevailing view is that the same rule applies in the
particularity that the PNB had been guilty of a greater case of a drawee who pays a bill without having
degree of negligence, because it had a previous and previously accepted it.16
formal notice from the GSIS that the check had been
lost, with the request that payment thereof be stopped. WHEREFORE, the decision appealed from is hereby
Just as important, if not more important and decisive, affirmed, with costs against the Philippine National
is the fact that the PNB's negligence was the main or Bank. It is so ordered.
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
THE GREAT EASTERN LIFE INSURANCE rendering a judgment in its favor, as prayed for in its
CO., plaintiff-appellant, complaint.
vs.
HONGKONG & SHANGHAI BANKING
CORPORATION and PHILIPPINE NATIONAL
BANK, defendants-appellees.
JOHNS, J.:
Camus and Delgado for appellant.
Fisher and DeWitt and A. M. Opisso for Hongkong and
There is no dispute about any of the findings of fact
Shanghai Bank.
made by the trial court, and the plaintiff relies upon
Roman J. Lacson for Philippine National Bank.
them for a reversal. Among other things, the trial court
says:
STATEMENT
Who is responsible for the refund to the drawer
The plaintiff is an insurance corporation, and the of the amount of the check drawn and payable
defendants are banking corporations, and each is duly to order, when its value was collected by a
licensed to do its respective business in the third person by means of forgery of the
Philippines Islands. signature of the payee? Is it the drawee or the
last indorser, who ignored the forgery at the
May 3, 1920, the plaintiff drew its check for P2,000 on time of making the payment, or the forger?
the Hongkong and Shanghai Banking Corporation with
whom it had an account, payable to the order of To lower court found that Melicor's name was forged
Lazaro Melicor. E. M. Maasim fraudulently obtained to the check. "So that the person to whose order the
possession of the check, forged Melicor's signature, as check was issued did not receive the money, which
an endorser, and then personally endorsed and was collected by E. M. Maasim," and then says:
presented it to the Philippine National Bank where the
amount of the check was placed to his credit. After
Now then, the National Bank should not be
having paid the check, and on the next day, the
held responsible for the payment of made to
Philippine national Bank endorsed the check to the
Maasim in good faith of the amount of the
Hongkong and Shanghai Banking Corporation which
check, because the indorsement of Maasim is
paid it and charged the amount of the check to the
unquestionable and his signature perfectly
account of the plaintiff. In the ordinary course of
genuine, and the bank was not obliged to
business, the Hongkong Shanghai Banking
identify the signature of the former indorser.
Corporation rendered a bank statement to the plaintiff
Neither could the Hongkong and Shanghai
showing that the amount of the check was charged to
Banking Corporation be held responsible in
its account, and no objection was then made to the
making payment in good faith to the National
statement. About four months after the check was
Bank, because the latter is a holder in due
charged to the account of the plaintiff, it developed that
course of the check in question. In other
Lazaro Melicor, to whom the check was made
words, the two defendant banks can not be
payable, had never received it, and that his signature,
held civilly responsible for the consequences
as an endorser, was forged by Maasim, who
of the falsification or forgery of the signature of
presented and deposited it to his private account in the
Lazaro Melicor, the National Bank having had
Philippine National Bank. With this knowledge , the
no notice of said forgery in making payment to
plaintiff promptly made a demand upon the Hongkong
Maasim, nor the Hongkong bank in making
and Shanghai Banking Corporation that it should be
payment to National Bank. Neither bank
given credit for the amount of the forged check, which
incurred in any responsibility arising from that
the bank refused to do, and the plaintiff commenced
crime, nor was either of the said banks by
this action to recover the P2,000 which was paid on
subsequent acts, guilty of negligence or fault.
the forged check. On the petition of the Shanghai
Bank, the Philippine National Bank was made
defendant. The Shanghai Bank denies any liability, but This was fundamental error.
prays that, if a judgment should be rendered against it,
in turn, it should have like judgment against the Plaintiff's check was drawn on Shanghai Bank payable
Philippine National Bank which denies all liability to to the order of Melicor. In other words, the plaintiff
either party. authorized and directed the Shanghai Bank to pay
Melicor, or his order, P2,000. It did not authorize or
Upon the issues being joined, a trial was had and direct the bank to pay the check to any other person
judgment was rendered against the plaintiff and in than Melicor, or his order, and the testimony is
favor of the defendants, from which the plaintiff undisputed that Melicor never did part with his title or
appeals, claiming that the court erred in dismissing the endorse the check, and never received any of its
case, notwithstanding its finding of fact, and in not proceeds. Neither is the plaintiff estopped or bound by
the banks statement, which was made to it by the costs of this action, and a corresponding judgment will
Shanghai Bank. This is not a case where the plaintiff's be entered in favor of the Hongkong Shanghai
own signature was forged to one of it checks. In such Banking Corporation against the Philippine National
a case, the plaintiff would have known of the forgery, Bank for the same amount, together with the amount
and it would have been its duty to have promptly of its costs in this action. So ordered.
notified the bank of any forged signature, and any
failure on its part would have released bank from any
liability. That is not this case. Here, the forgery was
that of Melicor, who was the payee of the check, and
the legal presumption is that the bank would not honor
the check without the genuine endorsement of Melicor.
In other words, when the plaintiff received it banks
statement, it had a right to assume that Melicor had
personally endorsed the check, and that, otherwise,
the bank would not have paid it.

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

Instruments Law, says:

When a signature is forged or made without

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

That section is square in point.

The money was on deposit in the Shanghai Bank, and

it had no legal right to pay it out to anyone except the
plaintiff or its order. Here, the plaintiff ordered the
Shanghai Bank to pay the P2,000 to Melicor, and the
money was actually paid to Maasim and was never
paid to Melicor, and he never paid to Melicor, and he
never personally endorsed the check, or authorized
any one to endorse it for him, and the alleged
endorsement was a forgery. Hence, upon the
undisputed facts, it must follow that the Shanghai Bank
has no defense to this action.

It is admitted that the Philippine National Bank cashed

the check upon a forged signature, and placed the
money to the credit of Maasim, who was a forger. That
the Philippine National Bank then endorsed the check
and forwarded it to the Shanghai Bank by whom it was
paid. The Philippine National Bank had no license or
authority to pay the money to Maasim or anyone else
upon a forge signature. It was its legal duty to know
that Melicor's endorsment was genuine before cashing
the check. Its remedy is against Maasim to whom it
paid the money.

The judgment of the lower court is reversed, and one

will be entered here in favor of the plaintiff and against
the Hongkong and Shanghai Banking Corporation for
the P2,000, with interest thereon from November 8,
1920 at the rate of 6 per cent per annum, and the
NATIVIDAD GEMPESAW, petitioner, THE RESPONDENT COURT OF
vs. APPEALS ALSO ERRED IN NOT
THE HONORABLE COURT OF APPEALS and FINDING AND RULING THAT IT IS
PHILIPPINE BANK OF THE GROSS AND INEXCUSABLE
COMMUNICATIONS, respondents. NEGLIGENCE AND FRAUDULENT
ACTS OF THE OFFICIALS AND
L.B. Camins for petitioner. EMPLOYEES OF THE RESPONDENT
BANK IN FORGING THE SIGNATURE
Angara, Abello, Concepcion, Regals & Cruz for private OF THE PAYEES AND THE WRONG
respondent 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
CAMPOS, JR., J.: SAVING (SIC) ACCOUNT WAS
DEBITED.
From the adverse decision * of the Court of Appeals
(CA-G.R. CV No. 16447), petitioner, Natividad III
Gempesaw, appealed to this Court in a Petition for
Review, on the issue of the right of the drawer to THE RESPONDENT COURT OF
recover from the drawee bank who pays a check with APPEALS ALSO ERRED IN NOT
a forged indorsement of the payee, debiting the same ORDERING THE RESPONDENT
against the drawer's account. BANK TO RESTORE OR RE-CREDIT
THE CHECKING ACCOUNT OF THE
The records show that on January 23, 1985, petitioner PETITIONER IN THE CALOOCAN
filed a Complaint against the private respondent CITY BRANCH BY THE VALUE OF
Philippine Bank of Communications (respondent THE EIGHTY-TWO (82) CHECKS
drawee Bank) for recovery of the money value of WHICH IS IN THE AMOUNT OF
eighty-two (82) checks charged against the petitioner's P1,208,606.89 WITH LEGAL
account with the respondent drawee Bank on the INTEREST.
ground that the payees' indorsements were forgeries.
The Regional Trial Court, Branch CXXVIII of Caloocan From the records, the relevant facts are as follows:
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 Petitioner Natividad O. Gempesaw (petitioner) owns
appeal, the Court of Appeals in a decision rendered on and operates four grocery stores located at Rizal
February 22, 1990, affirmed the decision of the RTC Avenue Extension and at Second Avenue, Caloocan
on two grounds, namely (1) that the plaintiff's City. Among these groceries are D.G. Shopper's Mart
(petitioner herein) gross negligence in issuing the and D.G. Whole Sale Mart. Petitioner maintains a
checks was the proximate cause of the loss and (2) checking account numbered 13-00038-1 with the
assuming that the bank was also negligent, the loss Caloocan City Branch of the respondent drawee Bank.
must nevertheless be borne by the party whose To facilitate payment of debts to her suppliers,
negligence was the proximate cause of the loss. On petitioner draws checks against her checking account
March 5, 1990, the petitioner filed this petition under with the respondent bank as drawee. Her customary
Rule 45 of the Rules of Court setting forth the following practice of issuing checks in payment of her suppliers
as the alleged errors of the respondent Court:1 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
I eight (8) years. After the bookkeeper prepared the
checks, the completed checks were submitted to the
THE RESPONDENT COURT OF petitioner for her signature, together with the
APPEALS ERRED IN RULING THAT corresponding invoice receipts which indicate the
THE NEGLIGENCE OF THE correct obligations due and payable to her suppliers.
DRAWER IS THE PROXIMATE Petitioner signed each and every check without
CAUSE OF THE RESULTING INJURY bothering to verify the accuracy of the checks against
TO THE DRAWEE BANK, AND THE the corresponding invoices because she reposed full
DRAWER IS PRECLUDED FROM and implicit trust and confidence on her bookkeeper.
SETTING UP THE FORGERY OR The issuance and delivery of the checks to the payees
WANT OF AUTHORITY. named therein were left to the bookkeeper. Petitioner
admitted that she did not make any verification as to
II whether or not the checks were delivered to their
respective payees. Although the respondent drawee A-34), her obligation was only P504.00
Bank notified her of all checks presented to and paid (Exhs. I-1 and I-2).2
by the bank, petitioner did not verify he correctness of
the returned checks, much less check if the payees Practically, all the checks issued and honored by the
actually received the checks in payment for the respondent drawee bank were crossed checks.3 Aside
supplies she received. In the course of her business from the daily notice given to the petitioner by the
operations covering a period of two years, petitioner respondent drawee Bank, the latter also furnished her
issued, following her usual practice stated above, a with a monthly statement of her transactions, attaching
total of eighty-two (82) checks in favor of several thereto all the cancelled checks she had issued and
suppliers. These checks were all presented by the which were debited against her current account. It was
indorsees as holders thereof to, and honored by, the only after the lapse of more two (2) years that
respondent drawee Bank. Respondent drawee Bank petitioner found out about the fraudulent manipulations
correspondingly debited the amounts thereof against of her bookkeeper.
petitioner's checking account numbered 30-00038-1.
Most of the aforementioned checks were for amounts All the eighty-two (82) checks with forged signatures of
in excess of her actual obligations to the various the payees were brought to Ernest L. Boon, Chief
payees as shown in their corresponding invoices. To Accountant of respondent drawee Bank at the Buendia
mention a few: branch, who, without authority therefor, accepted them
all for deposit at the Buendia branch to the credit
. . . 1) in Check No. 621127, dated and/or in the accounts of Alfredo Y. Romero and
June 27, 1984 in the amount of Benito Lam. Ernest L. Boon was a very close friend of
P11,895.23 in favor of Kawsek Inc. Alfredo Y. Romero. Sixty-three (63) out of the eighty-
(Exh. A-60), appellant's actual two (82) checks were deposited in Savings Account
obligation to said payee was only No. 00844-5 of Alfredo Y. Romero at the respondent
P895.33 (Exh. A-83); (2) in Check No. drawee Bank's Buendia branch, and four (4) checks in
652282 issued on September 18, 1984 his Savings Account No. 32-81-9 at its Ongpin branch.
in favor of Senson Enterprises in the The rest of the checks were deposited in Account No.
amount of P11,041.20 (Exh. A-67) 0443-4, under the name of Benito Lam at the Elcao
appellant's actual obligation to said branch of the respondent drawee Bank.
payee was only P1,041.20 (Exh. 7); (3)
in Check No. 589092 dated April 7, About thirty (30) of the payees whose names were
1984 for the amount of P11,672.47 in specifically written on the checks testified that they did
favor of Marchem (Exh. A-61) not receive nor even see the subject checks and that
appellant's obligation was only the indorsements appearing at the back of the checks
P1,672.47 (Exh. B); (4) in Check No. were not theirs.
620450 dated May 10, 1984 in favor of
Knotberry for P11,677.10 (Exh. A-31)
The team of auditors from the main office of the
her actual obligation was only P677.10
respondent drawee Bank which conducted periodic
(Exhs. C and C-1); (5) in Check No.
inspection of the branches' operations failed to
651862 dated August 9, 1984 in favor
discover, check or stop the unauthorized acts of
of Malinta Exchange Mart for
Ernest L. Boon. Under the rules of the respondent
P11,107.16 (Exh. A-62), her obligation
drawee Bank, only a Branch Manager and no other
was only P1,107.16 (Exh. D-2); (6) in
official of the respondent drawee bank, may accept a
Check No. 651863 dated August 11,
second indorsement on a check for deposit. In the
1984 in favor of Grocer's International
case at bar, all the deposit slips of the eighty-two (82)
Food Corp. in the amount of
checks in question were initialed and/or approved for
P11,335.60 (Exh. A-66), her obligation
deposit by Ernest L. Boon. The Branch Managers of
was only P1,335.60 (Exh. E and E-1);
the Ongpin and Elcao branches accepted the
(7) in Check No. 589019 dated March
deposits made in the Buendia branch and credited the
17, 1984 in favor of Sophy Products in
accounts of Alfredo Y. Romero and Benito Lam in their
the amount of P11,648.00 (Exh. A-78),
respective branches.
her obligation was only P648.00 (Exh.
G); (8) in Check No. 589028 dated
March 10, 1984 for the amount of On November 7, 1984, petitioner made a written
P11,520.00 in favor of the Yakult demand on respondent drawee Bank to credit her
Philippines (Exh. A-73), the latter's account with the money value of the eighty-two (82)
invoice was only P520.00 (Exh. H-2); checks totalling P1,208.606.89 for having been
(9) in Check No. 62033 dated May 23, wrongfully charged against her account. Respondent
1984 in the amount of P11,504.00 in drawee Bank refused to grant petitioner's demand. On
favor of Monde Denmark Biscuit (Exh. January 23, 1985, petitioner filed the complaint with
the Regional Trial Court.
This is not a suit by the party whose signature was rights of all subsequent parties as against
forged on a check drawn against the drawee bank. parties prior to the forgery. However, the law
The payees are not parties to the case. Rather, it is makes an exception to these rules where a
the drawer, whose signature is genuine, who instituted party is precluded from setting up forgery as a
this action to recover from the drawee bank the money defense.
value of eighty-two (82) checks paid out by the drawee
bank to holders of those checks where the As a matter of practical significance, problems arising
indorsements of the payees were forged. How and by from forged indorsements of checks may generally be
whom the forgeries were committed are not broken into two types of cases: (1) where forgery was
established on the record, but the respective payees accomplished by a person not associated with the
admitted that they did not receive those checks and drawer for example a mail robbery; and (2) where
therefore never indorsed the same. The applicable law the indorsement was forged by an agent of the drawer.
is the Negotiable Instruments Law4 (heretofore referred This difference in situations would determine the effect
to as the NIL). Section 23 of the NIL provides: of the drawer's negligence with respect to forged
indorsements. While there is no duty resting on the
When a signature is forged or made depositor to look for forged indorsements on his
without the authority of the person cancelled checks in contrast to a duty imposed upon
whose signature it purports to be, it is him to look for forgeries of his own name, a depositor
wholly inoperative, and no right to is under a duty to set up an accounting system and a
retain the instrument, or to give a business procedure as are reasonably calculated to
discharge therefor, or to enforce prevent or render difficult the forgery of indorsements,
payment thereof against any party particularly by the depositor's own employees. And if
thereto, can be acquired through or the drawer (depositor) learns that a check drawn by
under such signature, unless the party him has been paid under a forged indorsement, the
against whom it is sought to enforce drawer is under duty promptly to report such fact to the
such right is precluded from setting up drawee bank.5For his negligence or failure either to
the forgery or want of authority. discover or to report promptly the fact of such forgery
to the drawee, the drawer loses his right against the
Under the aforecited provision, forgery is a real drawee who has debited his account under a forged
or absolute defense by the party whose indorsement.6 In other words, he is precluded from
signature is forged. A party whose signature to using forgery as a basis for his claim for re-crediting of
an instrument was forged was never a party his account.
and never gave his consent to the contract
which gave rise to the instrument. Since his In the case at bar, petitioner admitted that the checks
signature does not appear in the instrument, were filled up and completed by her trusted employee,
he cannot be held liable thereon by anyone, Alicia Galang, and were given to her for her signature.
not even by a holder in due course. Thus, if a Her signing the checks made the negotiable
person's signature is forged as a maker of a instrument complete. Prior to signing the checks, there
promissory note, he cannot be made to pay was no valid contract yet.
because he never made the promise to pay.
Or where a person's signature as a drawer of a Every contract on a negotiable instrument is
check is forged, the drawee bank cannot incomplete and revocable until delivery of the
charge the amount thereof against the instrument to the payee for the purpose of giving effect
drawer's account because he never gave the thereto.7 The first delivery of the instrument, complete
bank the order to pay. And said section does in form, to the payee who takes it as a holder, is called
not refer only to the forged signature of the issuance of the instrument.8 Without the initial delivery
maker of a promissory note and of the drawer of the instrument from the drawer of the check to the
of a check. It covers also a forged payee, there can be no valid and binding contract and
indorsement, i.e., the forged signature of the no liability on the instrument.
payee or indorsee of a note or check. Since
under said provision a forged signature is Petitioner completed the checks by signing them as
"wholly inoperative", no one can gain title to drawer and thereafter authorized her employee Alicia
the instrument through such forged Galang to deliver the eighty-two (82) checks to their
indorsement. Such an indorsement prevents respective payees. Instead of issuing the checks to the
any subsequent party from acquiring any right payees as named in the checks, Alicia Galang
as against any party whose name appears delivered them to the Chief Accountant of the Buendia
prior to the forgery. Although rights may exist branch of the respondent drawee Bank, a certain
between and among parties subsequent to the Ernest L. Boon. It was established that the signatures
forged indorsement, not one of them can of the payees as first indorsers were forged. The
acquire rights against parties prior to the record fails to show the identity of the party who made
forgery. Such forged indorsement cuts off the the forged signatures. The checks were then indorsed
for the second time with the names of Alfredo Y. been accomplished. It was not until two years after the
Romero and Benito Lam, and were deposited in the bookkeeper commenced her fraudulent scheme that
latter's accounts as earlier noted. The second petitioner discovered that eighty-two (82) checks were
indorsements were all genuine signatures of the wrongfully charged to her account, at which she
alleged holders. All the eighty-two (82) checks bearing notified the respondent drawee bank.
the forged indorsements of the payees and the
genuine second indorsements of Alfredo Y. Romero It is highly improbable that in a period of two years, not
and Benito Lam were accepted for deposit at the one of Petitioner's suppliers complained of non-
Buendia branch of respondent drawee Bank to the payment. Assuming that even one single complaint
credit of their respective savings accounts in the had been made, petitioner would have been duty-
Buendia, Ongpin and Elcao branches of the same bound, as far as the respondent drawee Bank was
bank. The total amount of P1,208,606.89, represented concerned, to make an adequate investigation on the
by eighty-two (82) checks, were credited and paid out matter. Had this been done, the discrepancies would
by respondent drawee Bank to Alfredo Y. Romero and have been discovered, sooner or later. Petitioner's
Benito Lam, and debited against petitioner's checking failure to make such adequate inquiry constituted
account No. 13-00038-1, Caloocan branch. negligence which resulted in the bank's honoring of
the subsequent checks with forged indorsements. On
As a rule, a drawee bank who has paid a check on the other hand, since the record mentions nothing
which an indorsement has been forged cannot charge about such a complaint, the possibility exists that the
the drawer's account for the amount of said check. An checks in question covered inexistent sales. But even
exception to this rule is where the drawer is guilty of in such a case, considering the length of a period of
such negligence which causes the bank to honor such two (2) years, it is hard to believe that petitioner did not
a check or checks. If a check is stolen from the payee, know or realize that she was paying more than she
it is quite obvious that the drawer cannot possibly should for the supplies she was actually getting. A
discover the forged indorsement by mere examination depositor may not sit idly by, after knowledge has
of his cancelled check. This accounts for the rule that come to her that her funds seem to be disappearing or
although a depositor owes a duty to his drawee bank that there may be a leak in her business, and refrain
to examine his cancelled checks for forgery of his own from taking the steps that a careful and prudent
signature, he has no similar duty as to forged businessman would take in such circumstances and if
indorsements. A different situation arises where the taken, would result in stopping the continuance of the
indorsement was forged by an employee or agent of fraudulent scheme. If she fails to take steps, the facts
the drawer, or done with the active participation of the may establish her negligence, and in that event, she
latter. Most of the cases involving forgery by an agent would be estopped from recovering from the bank.9
or employee deal with the payee's indorsement. The
drawer and the payee often time shave business One thing is clear from the records that the
relations of long standing. The continued occurrence petitioner failed to examine her records with
of business transactions of the same nature provides reasonable diligence whether before she signed the
the opportunity for the agent/employee to commit the checks or after receiving her bank statements. Had the
fraud after having developed familiarity with the petitioner examined her records more carefully,
signatures of the parties. However, sooner or later, particularly the invoice receipts, cancelled checks,
some leak will show on the drawer's books. It will then check book stubs, and had she compared the sums
be just a question of time until the fraud is discovered. written as amounts payable in the eighty-two (82)
This is specially true when the agent perpetrates a checks with the pertinent sales invoices, she would
series of forgeries as in the case at bar. have easily discovered that in some checks, the
amounts did not tally with those appearing in the sales
The negligence of a depositor which will prevent invoices. Had she noticed these discrepancies, she
recovery of an unauthorized payment is based on should not have signed those checks, and should have
failure of the depositor to act as a prudent conducted an inquiry as to the reason for the irregular
businessman would under the circumstances. In the entries. Likewise had petitioner been more vigilant in
case at bar, the petitioner relied implicitly upon the going over her current account by taking careful note
honesty and loyalty of her bookkeeper, and did not of the daily reports made by respondent drawee Bank
even verify the accuracy of amounts of the checks she in her issued checks, or at least made random scrutiny
signed against the invoices attached thereto. of cancelled checks returned by respondent drawee
Furthermore, although she regularly received her bank Bank at the close of each month, she could have
statements, she apparently did not carefully examine easily discovered the fraud being perpetrated by Alicia
the same nor the check stubs and the returned Galang, and could have reported the matter to the
checks, and did not compare them with the same respondent drawee Bank. The respondent drawee
invoices. Otherwise, she could have easily discovered Bank then could have taken immediate steps to
the discrepancies between the checks and the prevent further commission of such fraud. Thus,
documents serving as bases for the checks. With such petitioner's negligence was the proximate cause of her
discovery, the subsequent forgeries would not have loss. And since it was her negligence which caused
the respondent drawee Bank to honor the forged xxx xxx xxx
checks or prevented it from recovering the amount it
had already paid on the checks, petitioner cannot now In this kind of restrictive indorsement, the prohibition to
complain should the bank refuse to recredit her transfer or negotiate must be written in express words
account with the amount of such checks. 10 Under at the back of the instrument, so that any subsequent
Section 23 of the NIL, she is now precluded from using party may be forewarned that ceases to be negotiable.
the forgery to prevent the bank's debiting of her However, the restrictive indorsee acquires the right to
account. receive payment and bring any action thereon as any
indorser, but he can no longer transfer his rights as
The doctrine in the case of Great Eastern Life such indorsee where the form of the indorsement does
Insurance Co. vs. Hongkong & Shanghai Bank 11 is not not authorize him to do so. 12
applicable to the case at bar because in said case, the
check was fraudulently taken and the signature of the Although the holder of a check cannot compel a
payee was forged not by an agent or employee of the drawee bank to honor it because there is no privity
drawer. The drawer was not found to be negligent in between them, as far as the drawer-depositor is
the handling of its business affairs and the theft of the concerned, such bank may not legally refuse to honor
check by a total stranger was not attributable to a negotiable bill of exchange or a check drawn against
negligence of the drawer; neither was the forging of it with more than one indorsement if there is nothing
the payee's indorsement due to the drawer's irregular with the bill or check and the drawer has
negligence. Since the drawer was not negligent, the sufficient funds. The drawee cannot be compelled to
drawee was duty-bound to restore to the drawer's accept or pay the check by the drawer or any holder
account the amount theretofore paid under the check because as a drawee, he incurs no liability on the
with a forged payee's indorsement because the check unless he accepts it. But the drawee will make
drawee did not pay as ordered by the drawer. itself liable to a suit for damages at the instance of the
drawer for wrongful dishonor of the bill or check.
Petitioner argues that respondent drawee Bank should
not have honored the checks because they were Thus, it is clear that under the NIL, petitioner is
crossed checks. Issuing a crossed check imposes no precluded from raising the defense of forgery by
legal obligation on the drawee not to honor such a reason of her gross negligence. But under Section 196
check. It is more of a warning to the holder that the of the NIL, any case not provided for in the Act shall be
check cannot be presented to the drawee bank for governed by the provisions of existing legislation.
payment in cash. Instead, the check can only be Under the laws of quasi-delict, she cannot point to the
deposited with the payee's bank which in turn must negligence of the respondent drawee Bank in the
present it for payment against the drawee bank in the selection and supervision of its employees as being
course of normal banking transactions between banks. the cause of the loss because negligence is the
The crossed check cannot be presented for payment proximate cause thereof and under Article 2179 of the
but it can only be deposited and the drawee bank may Civil Code, she may not be awarded damages.
only pay to another bank in the payee's or indorser's However, under Article 1170 of the same Code the
account. respondent drawee Bank may be held liable for
damages. The article provides
Petitioner likewise contends that banking rules prohibit
the drawee bank from having checks with more than Those who in the performance of their
one indorsement. The banking rule banning obligations are guilty of fraud,
acceptance of checks for deposit or cash payment with negligence or delay, and those who in
more than one indorsement unless cleared by some any manner contravene the tenor
bank officials does not invalidate the instrument; thereof, are liable for damages.
neither does it invalidate the negotiation or transfer of
the said check. In effect, this rule destroys the There is no question that there is a contractual relation
negotiability of bills/checks by limiting their negotiation between petitioner as depositor (obligee) and the
by indorsement of only the payee. Under the NIL, the respondent drawee bank as the obligor. In the
only kind of indorsement which stops the further performance of its obligation, the drawee bank is
negotiation of an instrument is a restrictive bound by its internal banking rules and regulations
indorsement which prohibits the further negotiation which form part of any contract it enters into with any
thereof. of its depositors. When it violated its internal rules that
second endorsements are not to be accepted without
Sec. 36. When indorsement restrictive. the approval of its branch managers and it did accept
An indorsement is restrictive which the same upon the mere approval of Boon, a chief
either accountant, it contravened the tenor of its obligation at
the very least, if it were not actually guilty of fraud or
(a) Prohibits further negotiation of the negligence.
instrument; or
Furthermore, the fact that the respondent drawee suffered by the petitioner, considering that she partly
Bank did not discover the irregularity with respect to benefited from the issuance of the questioned checks
the acceptance of checks with second indorsement for since the obligation for which she issued them were
deposit even without the approval of the branch apparently extinguished, such that only the excess
manager despite periodic inspection conducted by a amount over and above the total of these actual
team of auditors from the main office constitutes obligations must be considered as loss of which one
negligence on the part of the bank in carrying out its half must be paid by respondent drawee bank to
obligations to its depositors. Article 1173 provides herein petitioner.

The fault or negligence of the obligor SO ORDERED.

consists in the omission of that
diligence which is required by the
nature of the obligation and
corresponds with the circumstance of
the persons, of the time and of the
place. . . .

We hold that banking business is so impressed with

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

Premises considered, respondent drawee Bank is

adjudged liable to share the loss with the petitioner on
a fifty-fifty ratio in accordance with Article 172 which
provides:

Responsibility arising from negligence

in the performance of every kind of
obligation is also demandable, but
such liability may be regulated by the
courts according to the circumstances.

With the foregoing provisions of the Civil Code being

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

PREMISES CONSIDERED, the case is hereby

ordered REMANDED to the trial court for the reception
of evidence to determine the exact amount of loss
ASSOCIATED BANK and CONRADO private respondent to deposit and encash the said
CRUZ, petitioners, checks.
vs.
HON. COURT OF APPEALS, and MERLE V. REYES, The private respondent sued the petitioners in the
doing business under the name and style Regional Trial Court of Quezon City for recovery of the
"Melissa's RTW," respondents. total value of the checks plus damages. After trial,
judgment was rendered requiring them to pay the
Soluta, Leonidas, Marifosque, Javier, Liboon & aguila private respondent the total value of the subject
Law Offices for petitioners. checks in the amount of P15,805.00 plus 12% interest,
P50,000.00 actual damages, P25,000.00 exemplary
Roberto B. Lugue for private respondent. damages, P5,000.00 attorney's fees, and the costs of
the suit. 1

The petitioners appealed to the respondent court,

reiterating their argument that the private respondent
CRUZ, J.: had no cause of action against them and should have
proceeded instead against the companies that issued
the checks. In disposing of this contention, the Court of
The sole issue raised in this case is whether or not the Appeals 2 said:
private respondent has a cause of action against the
petitioners for their encashment and payment to
another person of certain crossed checks issued in her The cause of action of the appellee in
favor. the case at bar arose from the illegal,
anomalous and irregular acts of the
appellants in violating common
The private respondent is engaged in the business of banking practices to the damage and
ready-to-wear garments under the firm name prejudice of the appellees, in allowing
"Melissa's RTW." She deals with, among other to be deposited and encashed as well
customers, Robinson's Department Store, Payless as paying to improper parties without
Department Store, Rempson Department Store, and the knowledge, consent, authority or
the Corona Bazaar. endorsement of the appellee which
totalled P15,805.00, the six (6) checks
These companies issued in payment of their in dispute which were "crossed checks"
respective accounts crossed checks payable to or "for payee's account only," the
Melissa's RTW in the amounts and on the dates appellee being the payee.
indicated below:
The three (3) elements of a cause of
PAYOR BANK AMOUNT DATE action are present in the case at bar,
namely: (1) a right in favor of the
Payless Solid Bank P3,960.00 January plaintiff by whatever means and under
19, 1982 whatever law it arises or is created; (2)
Robinson's FEBTC 4,140.00 an obligation on the part of the named
December 18, 1981 defendant to respect or not to violate
Robinson's FEBTC 1,650.00 such right; and (3) an act or omission
December 24, 1981 on the part of such defendant violative
Robinson's FEBTC 1,980.00 January of the right of the plaintiff or
12, 1982 constituting a breach thereof. (Republic
Rempson TRB 1,575.00 January 9, Planters Bank vs. Intermediate
1982 Appellate Court, 131 SCRA 631).
Corona RCBC 2,500.00 December 22,
1981 And such cause of action has been
proved by evidence of great weight.
When she went to these companies to collect on what The contents of the said checks issued
she thought were still unpaid accounts, she was by the customers of the appellee had
informed of the issuance of the above-listed crossed not been questioned. There is no
checks. Further inquiry revealed that the said checks dispute that the same are crossed
had been deposited with the Associated Bank checks or for payee's account only,
(hereinafter, "the Bank") and subsequently paid by it to which is Melissa's RTW. The appellee
one Rafael Sayson, one of its "trusted depositors," in had clearly shown that she had never
the words of its branch manager and co-petitioner, authorized anyone to deposit the said
Conrado Cruz, Sayson had not been authorized by the checks nor to encash the same; that
the appellants had allowed all said
 checks to be deposited, cleared and The subject checks were accepted for deposit by the
paid to one Rafael Sayson in violation Bank for the account of Rafael Sayson although they
of the instructions in the said crossed were crossed checks and the payee was not Sayson
checks that the same were for payee's but Melissa's RTW. The Bank stamped thereon its
account only; and that the appellee guarantee that "all prior endorsements and/or lack of
maintained a savings account with the endorsements (were) guaranteed." By such deliberate
Prudential Bank, Cubao Branch, and positive act, the Bank had for all legal intents and
Quezon City which never cleared the purposes treated the said checks as negotiable
said checks and the appellee had been instruments and, accordingly, assumed the warranty of
damaged by such encashment of the the endorser.
same.
The weight of authority is to the effect that "the
We affirm. possession of check on a forged or unauthorized
indorsement is wrongful, and when the money is
Under accepted banking practice, crossing a check is collected on the check, the bank can be held 'for
done by writing two parallel lines diagonally on the left moneys had and received." 6 The proceeds are held
top portion of the checks. The crossing is special for the rightful owner of the payment and may be
where the name of a bank or a business institution is recovered by him. The position of the bank taking the
written between the two parallel lines, which means check on the forged or unauthorized indorsement is
that the drawee should pay only with the intervention the same as if it had taken the check and collected
of that company. 3 The crossing is general where the without indorsement at all. The act of the bank
words written between the two parallel lines are "and amounts to conversion of the check. 7
Co." or "for payee's account only," as in the case at
bar. This means that the drawee bank should not It is not disputed that the proceeds of the subject
encash the check but merely accept it for deposit. 4 checks belonged to the private respondent. As she
had not at any time authorized Rafael Sayson to
In State Investment House vs. IAC, 5 this Court endorse or encash them, there was conversion of the
declared that "the effects of crossing a check are: (1) funds by the Bank.
that the check may not be encashed but only
deposited in the bank; (2) that the check may be When the Bank paid the checks so endorsed
negotiated only once to one who has an account notwithstanding that title had not passed to the
with a bank; and (3) that the act of crossing the check endorser, it did so at its peril and became liable to the
serves as a warning to the holder that the check has payee for the value of the checks. This liability
been issued for a definite purpose so that he must attached whether or not the Bank was aware of the
inquire if he has received the check pursuant to that unauthorized endorsement. 8
purpose."
The petitioners were negligent when they permitted the encashment of the
checks by Sayson. The Bank should have first verified his right to endorse
The effects therefore of crossing a check relate to the the crossed checks, of which he was not the payee, and to deposit the
mode of its presentment for payment. Under Sec. 72 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
of the Negotiable Instruments Law, presentment for to the private respondent's account. Its failure to inquire into Sayson's
payment, to be sufficient, must be made by the holder authority was a breach of a duty it owed to the private respondent.
or by some person authorized to receive payment on
his behalf. Who the holder or authorized person is As the Court stressed in Banco de Oro Savings and
depends on the instruction stated on the face of the Mortgage Bank vs. Equitable Banking Corp., 9 "the law
check. imposes a duty of diligence on the collecting bank to
scrutinize checks deposited with it, for the purpose of
The six checks in the case at bar had been crossed determining their genuineness and regularity. The
and issued "for payee's account only." This could only collecting bank, being primarily engaged in banking,
signify that the drawers had intended the same for holds itself out to the public as the expert on this field,
deposit only by the person indicated, to wit, Melissa's and the law thus holds it to a high standard of
RTW. conduct."

The petitioners argue that the cause of action for The petitioners insist that the private respondent has
violation of the common instruction found on the face no cause of action against them because they have no
of the checks exclusively belongs to the issuers privity of contract with her. They also argue that it was
thereof and not to the payee. Moreover, having acted Eddie Reyes, the private respondent's own husband,
in good faith as they merely facilitated the encashment who endorsed the checks.
of the checks, they cannot be made liable to the
private respondent. Assuming that Eddie Reyes did endorse the crossed
checks, we hold that the Bank would still be liable to
the private respondent because he was not authorized
to make the endorsements. And even if the
endorsements were forged, as alleged, the Bank
would still be liable to the private respondent for not
verifying the endorser's authority. There is no
substantial difference between an actual forging of a
name to a check as an endorsement by a person not
authorized to make the signature and the affixing of a
name to a check as an endorsement by a person not
authorized to endorse it. 10

The Bank does not deny collecting the money on the

endorsement. It was its responsibility to inquire as to
the authority of Rafael Sayson to deposit crossed
checks payable to Melissa's RTW upon a prior
endorsement by Eddie Reyes. The failure of the Bank
to make this inquiry was a breach of duty that made it
liable to the private respondent for the amount of the
checks.

There being no evidence that the crossed checks were

actually received by the private respondent, she would
have a right of action against the drawer companies,
which in turn could go against their respective drawee
banks, which in turn could sue the herein petitioner as
collecting bank. In a similar situation, it was held that,
to simplify proceedings, the payee of the illegally
encashed checks should be allowed to recover directly
from the bank responsible for such encashment
regardless of whether or not the checks were actually
delivered to the payee. 11We approve such direct
action in the case at bar.

It is worth repeating that before presenting the checks

for clearing and for payment, the Bank had stamped
on the back thereof the words: "All prior endorsements
and/or lack of endorsements guaranteed," and thus
made the assurance that it had ascertained the
genuineness of all prior endorsements.

We find that the respondent court committed no

reversible error in holding that the private respondent
had a valid cause of action against the petitioners and
that the latter are indeed liable to her for their
unauthorized encashment of the subject checks. We
also agree with the reduction of the award of the
exemplary damages for lack of sufficient evidence to
support them.

WHEREFORE, the petition is DENIED, with costs

against the petitioner. It is so ordered.