51) Gempesaw v. CA (Same as #6)

3/12/2015 SUPREME COURT REPORTS ANNOTATED VOLUME 218

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682 SUPREME COURT REPORTS ANNOTATEDGempesaw vs. Court of Appeals

G.R. No. 92244. February 9, 1993.*

NATIVIDAD GEMPESAW, petitioner, vs. THEHONORABLE COURT OF APPEALS and PHILIPPINEBANK OF COMMUNICATIONS, respondents.

Negotiable Instruments Law; Checks; Forged Indorsements;Effect of drawer's negligence.—As a matter of practicalsignificance, problems arising from forged indorsements of checksmay generally be broken into two types of cases: (1) where forgerywas accomplished by a person not associated with the drawer—forexample a mail robbery; and (2) where the indorsement wasforged by an agent of the drawer. This difference in situationswould determine the effect of the drawer's negligence with respectto forged indorsements. While there is no duty resting on thedepositor to look for forged indorsements on his cancelled checksin contrast to a duty imposed upon him to look for forgeries of hisown name, a depositor is under a duty to set up an accountingsystem and a business procedure as are reasonably calculated toprevent or render difficult the forgery of indorsements,particularly by the depositor's own employees. And if the drawer(depositor) learns that a check drawn by him has been paid undera forged indorsement, the drawer is under duty promptly to reportsuch fact to the drawee bank. For his negligence or failure eitherto discover or to report promptly the fact of such forgery to thedrawee, the drawer loses his right against the drawee who hasdebited his account under the forged indorsement. In other words,he is precluded from using forgery as a basis for his claim forrecrediting of his account.

Same; Same; Same; Same.—As a rule, a drawee bank whohas paid a check on which an indorsement has been forged cannotcharge the drawer's account for the amount of said check. Anexception to this rule is where the drawer is guilty of suchnegligence which causes the bank to honor such a check or checks.



If a check is stolen from the payee, it is quite obvious that thedrawer cannot possibly discover the forged indorsement by mereexamination of his cancelled check. This accounts for the rule thatalthough a depositor owes a duty to his drawee bank to examinehis cancelled checks for forgery of his own signature, he has nosimilar duty as to forged indorsements. A different situationarises where the indorsement was forged by an

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* SECOND DIVISION.

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VOL. 218, FEBRUARY 9, 1993 683

Gempesaw vs. Court of Appeals

employee or a ent of the drawer, or done with the activeparticipation of the latter. Most of the cases involving forgery byan agent or employee deal with the payee's indorsement. Thedrawer and the payee oftentimes have business relations of longstanding. The continued occurrence of business transactions ofthe same nature provides the opportunity for the agent/employeeto commit the fraud after having developed familiarity with thesignatures of the parties. However, sooner or later, some leak willshow on the drawer's books. It will then be just a question of timeuntil the fraud is discovered. This is specially true when the agentperpetrates a series of forgeries as in the case at bar. Thenegligence of a depositor which will prevent recovery of anunauthorized payment is based on failure of the depositor to actas a prudent businessman would under the circumstances.

Same; Same; No legal obligation on drawee not to honorcrossed checks.—Petitioner argues that respondent drawee Bankshould not have honored the checks because they were crossedchecks. Issuing a crossed check imposes no legal obligation on thedrawee not to honor such a check. It is more of a warning to theholder that the check cannot be presented to the drawee bank forpayment in cash. Instead, the check can only be deposited withthe payee's bank which in turn must present it for paymentagainst the drawee bank in the course of normal bankingtransactions between banks. The crossed check cannot be



presented for payment but it can only be deposited and thedrawee bank may only pay to another bank in the payee's orindorser's account.

Banks and Banking; Contractual relation between depositoras obligee and drawee bank as obligor; Violation of rule on nonacceptance of second indorsements without approval of branchmanager.—There is no question that there is a contractualrelation between petitioner as depositor (obligee) and therespondents drawee bank as the obligor. In the performance of itsobligation, the drawee bank is bound by its internal banking rulesand regulations which form part of any contract it enters intowith any of its depositors. When it violated its internal rules thatsecond endorsements are not to be accepted without the approvalof its branch managers and it did accept the same upon the mereapproval of Boon, a chief accountant, it contravened the tenor ofits obligation at the very least, if it were not actually guilty offraud or negligence. Furthermore, the fact that the respondentdrawee Bank did not discover the irregularity with respect to theacceptance of checks with second indorsement for deposit evenwithout the approval of the branch manager despite

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684 SUPREME COURT REPORTS ANNOTATED

Gempesaw vs. Court of Appeals

periodic inspection conducted by a team of auditors from the mainoffice constitutes negligence on the part of the bank in carryingout its obligations to its depositors. Article 1173 provides—"Thefault or negligence of the obligor consists in the omission of thatdiligence which is required by the nature of the obligation andcorrespondents with the circumstance of the persons, of the timeand of the place. x x x." We hold that banking business is soimpressed with public interest where the trust and confidence ofthe public in general is of paramount importance such that theappropriate standard of diligence must be a high degree ofdiligence, if not the utmost diligence. Surely, respondent draweeBank cannot claim it exercised such a degree of diligence that isrequired of it. There is no way We can allow it now to escapeliability for such negligence. Its liability as obligor is not merelyvicarious but primary wherein the defense of exercise of duediligence in the selection and supervision of its employees is of no



moment.

PETITION for review of the decision of the Court ofAppeals.

The facts are stated in the opinion of the Court.L.B. Camins for petitioner.Angara, Abello, Concepcion, Regala & Cruz for private

respondent.

CAMPOS, JR., J.:

From the adverse decision** of the Court of Appeals (CA

G.R. CV No. 16447), petitioner, Natividad Gempesaw,appealed to this Court in a Petition for Review, on the issueof the right of the drawer to recover from the drawee bankwho pays a check with a forged indorsement of the payee,debiting the same against the drawer's account.

The records show that on January 23, 1985, petitionerfiled a Complaint against the private respondent PhilippineBank of Communications (respondent drawee Bank) forrecovery of the money value of eightytwo (82) checkscharged against the petitioner's account with respondentdrawee Bank on the ground

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** Penned by Associate' Justice Celso L. Magsino, Associate JusticesNathanael P. De Pano, Jr. and Cezar D. Francisco, concurring.

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VOL. 218, FEBRUARY 9, 1993 685Gempesaw vs. Court of Appeals

that the payees' indorsements were forgeries. The RegionalTrial Court, Branch CXXVIII of Caloocan City, which triedthe case, rendered a decision on November 17, 1987dismissing the complaint as well as the respondent draweeBank's counterclaim. On appeal, the Court of Appeals in adecision rendered on February 22,1990, affirmed thedecision of the RTC on two grounds, namely (1) that theplaintiffs (petitioner herein) gross negligence in issuing thechecks was the proximate cause of the loss and (2)assuming that the bank was also negligent, the loss mustnevertheless be borne by the party whose negligence was



the proximate cause of the loss. On March 5, 1990, thepetitioner filed this petition under Rule 45 of the Rules ofCourt setting forth the following as the alleged errors of therespondent Court.

1:

"I

THE RESPONDENT COURT OF APPEALS ERRED IN RULINGTHAT THE NEGLIGENCE OF THE DRAWER IS THEPROXIMATE CAUSE OF THE RESULTING INJURY TO THEDRAWEE BANK, AND THE DRAWER IS PRECLUDED FROMSETTING UP THE FORGERY OR WANT OF AUTHORITY.

II

THE RESPONDENT COURT OF APPEALS ALSO ERRED INNOT FINDING AND RULING THAT IT IS THE GROSS ANDINEXCUSABLE NEGLIGENCE AND FRAUDULENT ACTS OFTHE OFFICIALS AND EMPLOYEES OF THE RESPONDENTBANK IN FORGING THE SIGNATURE OF THE PAYEES ANDTHE WRONG AND/ OR ILLEGAL PAYMENTS MADE TOPERSONS, OTHER THAN TO THE INTENDED PAYEESSPECIFIED IN THE CHECKS, IS THE DIRECT ANDPROXIMATE CAUSE OF THE DAMAGE TO PETITIONERWHOSE SAVING (SIC) ACCOUNT WAS DEBITED.

III

THE RESPONDENT COURT OF APPEALS ALSO ERRED INNOT ORDERING THE RESPONDENT BANK TO RESTORE ORRECREDIT THE CHECKING ACCOUNT OF PETITIONER INTHE

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1 Rollo, p. 11.

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CALOOCAN CITY BRANCH BY THE VALUE OF THE EIGHTYTWO (82) CHECKS WHICH IS IN THE AMOUNT OFP1,208,606.89 WITH LEGAL INTEREST."

From the records, the relevant facts are as follows:



Petitioner Natividad O. Gempesaw (petitioner) owns andoperates four grocery stores located at Rizal AvenueExtension and at Second Avenue, both in Caloocan City.Among these groceries are D.G. Shopper's Mart and D.G.Whole Sale Mart. Petitioner maintains a checking accountnumbered 13000381 with the Caloocan City Branch of therespondent drawee Bank. To facilitate payment of debts toher suppliers, petitioner draws checks against her checkingaccount with the respondent bank as drawee. Hercustomary practice of issuing checks in payment of hersuppliers was as follows: The checks were prepared andfilled up as to all material particulars by her trustedbookkeeper, Alicia Galang, an employee for more thaneight (8) years. After the bookkeeper prepared the checks,the completed checks were submitted to the petitioner forher signature, together with the corresponding invoicereceipts which indicate the correct obligations due andpayable to her suppliers. Petitioner signed each and everycheck without bothering to verify the accuracy of the checksagainst the corresponding invoices because she reposed fulland implicit trust and confidence on her bookkeeper. Theissuance and delivery of the checks to the payees namedtherein were left to the bookkeeper. Petitioner admittedthat she did not make any verification as to whether or notthe checks were actually delivered to their respectivepayees. Although the respondent drawee Bank notified herof all checks presented to and paid by the bank, petitionerdid not verify the correctness of the returned checks, muchless check if the payees actually received the checks inpayment for the supplies she received. In the course of herbusiness operations covering a period of two years,petitioner issued, following her usual practice stated above,a total of eightytwo (82) checks in favor of severalsuppliers. These checks were all presented by the indorseesas holders thereof to, and honored by, the respondentdrawee Bank. Respondent drawee Bank correspondinglydebited the amounts thereof against petitioner's checkingaccount num

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bered 30000381. Most of .the aforementioned checks were



for amounts in excess of her actual obligations to thevarious payees as shown in their corresponding invoices. Tomention a few:

"x x x (1) in Check No. 621127, dated June 27, 1984 in the amountof P11,895.23 in favor of Kawsek Inc. (Exh. A60), appellant'sactual obligation to said payee was only P895.33 (Exh. A83); (2)in Check No. 652282 issued on September 18, 1984 in favor ofSenson Enterprises in the amount of P1 1,041.20 (Exh. A67)appellant's actual obligation to said payee was only P1,041.20(Exh. 7); (3) in Check No. 589092 dated April 7, 1984 for theamount of P11,672.47 in favor of Marchem, (Exh. A61)appellant's obligation was only P 1,672.47 (Exh. B); (4) in CheckNo. 620450 dated May 10, 1984 in favor of Knotberry forP11,677.10 (Exh. A31) her actual obligation was only P677.10(Exhs. C and C1); (5) in Check No. 651862 dated August 9, 1984in favor of Malinta Exchange Mart for P11,107,16 (Exh. A62), herobligation was only P1,107.16 (Exh. D2); (6) in Check No. 651863dated August 11,1984 in favor of Grocer's International FoodCorp. in the amount of P1 1,335.60 (Exh. A66), her obligationwas only P1,335.60 (Exh. E and E1); (7) in Check No. 589019dated March 17, 1984 in favor of Sophy Products in the amount ofP11,648.00 (Exh. A78), her obligation was only P648.00 (Exh. G);(8) in Check No. 589028 dated March 10, 1984 for the amount ofP11,520.00 in favor of the Yakult Philippines (Exh. A73), thelatter's invoice was only P520.00 (Exh. H2); (9) in Check No.62033 dated May 24, 1984 in the amount of P11,504.00 in favor ofMonde Denmark Biscuit (Exh. A34), her obligation was onlyP504.00 (Exhs. 11 and I2)."

2

Practically, all the checks issued and honored by therespondent drawee Bank were crossed checks.

3 Aside from

the daily

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2 Rollo, pp. 2021; CA Decision, pp. 23. See Notes 26 thereof.3 A crossed check is defined as a check crossed with two (2) lines,

between which are either the name of a bank or the words "and company,"in full or abbreviated. In the former case, the banker on whom it is drawnmust not pay the money for the check to any other than the bankernamed; in the latter case, he must not pay it to any other than a banker.Black's Law Dictionary 301 (4th Ed.), citing 2 Steph. Comm. 118, note C; 7Exch. 389; [1903] A.C. 240; Farmers' Bank v. Johnson, King & Co., 134Ga. 486, 68 S.E. 85, 30 L.R.A., N.S. 697.



688


notice given to the petitioner by the respondent draweeBank, the latter also furnished her with a monthlystatement of her bank transactions, attaching thereto allthe cancelled checks she had issued and which weredebited against her current account. It was only after thelapse of more than two (2) years that petitioner found outabout the fraudulent manipulations of her bookkeeper.

All the eightytwo (82) checks with forged signatures ofthe payees were brought to Ernest L. Boon, ChiefAccountant of respondent drawee Bank at the Buendiabranch, who, without authority therefor, accepted them allfor deposit at the Buendia branch to the credit and/or inthe accounts of Alfredo Y. Romero and Benito Lam. ErnestL. Boon was a very close friend of Alfredo Y. Romero, Sixtythree (63) out of the eightytwo (82) checks were depositedin Savings Account No. 008445 of Alfredo Y. Romero at therespondent drawee Bank's Buendia branch, and four (4)checks in his Savings Account No. 32819 at its Ongpinbranch. The rest of the checks were deposited in AccountNo. 04434, under the name of Benito Lam at the Elcanobranch of the respondent drawee Bank.

About thirty (30) of the payees whose names werespecifically written on the checks testified that they did notreceive nor even see the subject checks and that theindorsements appearing at the back of the checks were nottheirs.

The team of auditors from the main office of therespondent drawee Bank which conducted periodicalinspection of the branches' operations failed to discover,check or stop the unauthorized acts of Ernest L. Boon.Under the rules of the respondent drawee Bank, only aBranch Manager, and no other official of the respondentdrawee Bank, may accept a second indorsement on a checkfor deposit. In the case at bar, all the deposit slips of theeightytwo (82) checks in question were initialed and/orapproved for deposit by Ernest L. Boon. The BranchManagers of the Ongpin and Elcano branches accepted thedeposits made in the Buendia branch and credited theaccounts of Alfredo Y. Romero and Benito Lam in their



respective branches.On November 7, 1984, petitioner made a written

demand on respondent drawee Bank to credit her accountwith the money value of the eightytwo (82) checkstotalling P 1,208,606.89 for

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having been wrongfully charged against her account.Respondent drawee Bank refused to grant petitioner'sdemand. On January 23, 1985, petitioner filed thecomplaint with the Regional Trial Court.

This is not a suit by the party whose signature wasforged on a check drawn against the drawee bank. Thepayees are not parties to the case. Rather, it is the drawer,whose signature is genuine, who instituted this action torecover from the drawee bank the money value of eightytwo (82) checks paid out by the drawee bank to holders ofthose checks where the indorsements of the payees wereforged. How and by whom the forgeries were committed arenot established on the record, but the respective payeesadmitted that they did not receive those checks andtherefore never indorsed the same. The applicable law isthe Negotiable Instruments Law

4 (heretofore referred to as

the NIL). Section 23 of the NIL provides:

"When a signature is forged or made without the authority of theperson whose signature it purports to be, it is wholly inoperative,and no right to retain the instrument, or to give a dischargetherefor, or to enforce payment thereof against any party thereto,can be acquired through or under such signature, unless the partyagainst whom it is sought to enforce such right is precluded fromsetting up the forgery or want of authority."

Under the aforecited provision, forgery is a real or absolutedefense by the party whose signature is forged. A partywhose signature to an instrument was forged was never aparty and never gave his consent to the contract whichgave rise to the instrument. Since his signature does notappear in the instrument, he cannot be held liable thereonby anyone, not even by a holder in due course. Thus, if aperson's signature is forged as a maker of a promissory



note, he cannot be made to pay because he never made thepromise to pay. Or where a person's signature as a drawerof a check is forged, the drawee bank cannot charge theamount thereof against the drawer's account because henever gave the bank the order to pay. And said section doesnot refer only to the forged signature of the maker of a

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4 Act No. 2031, enacted on February 3, 1911.

690


promissory note and of the drawer of a check. It covers alsoa forged indorsement, i.e., the forged signature of the payeeor indorsee of a note or check. Since under said provision aforged signature is "wholly inoperative", no one can gaintitle to the instrument through such forged indorsement.Such an indorsement prevents any subsequent party fromacquiring any right as against any party whose nameappears prior to the forgery. Although rights may existbetween and among parties subsequent to the forgedindorsement, not one of them can acquire rights againstparties prior to the forgery. Such forged indorsement cutsoff the rights of all subsequent parties as against partiesprior to the forgery. However, the law makes an exceptionto these rules where a party is precluded from setting upforgery as a defense.

As a matter of practical significance, problems arisingfrom forged indorsements of checks may generally bebroken into two types of cases: (1) where forgery wasaccomplished by a person not associated with the drawer—for example a mail robbery; and (2) where the indorsementwas forged by an agent of the drawer. This difference insituations would determine the effect of the drawer'snegligence with respect to forged indorsements. Whilethere is no duty resting on the depositor to look for forgedindorsements on his cancelled checks in contrast to a dutyimposed upon him to look for forgeries of his own name, adepositor is under a duty to set up an accounting systemand a business procedure as are reasonably calculated toprevent or render difficult the forgery of indorsements,



particularly by the depositor's own employees. And if thedrawer (depositor) learns that a check drawn by him hasbeen paid under a forged indorsement, the drawer is underduty promptly to report such fact to the drawer bank.

5 For

his negligence or failure either to discover or to reportpromptly the fact of such forgery to the drawee, the drawerloses his right against the drawee who has debited hisaccount under the forged indorsement.

6 In other words, he

is precluded from

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5 Britton, Bills and Notes, Sec. 143, pp. 663664.6 City of New York vs. Bronx County Trust Co., 261 N.Y. 64,184 N.E.

495 (1933); Detroit Piston Ring Co. vs. Wayne County & Home

691


using forgery as a basis for his claim for recrediting of hisaccount.

In the case at bar, petitioner admitted that the checkswere filled up and completed by her trusted employee,Alicia Galang, and were later given to her for hersignature. Her signing the checks made the negotiableinstrument complete. Prior to signing the checks, there wasno valid contract yet.

Every contract on a negotiable instrument is incompleteand revocable until delivery of the instrument to the payeefor the purpose of giving effect thereto.

7 The first delivery of

the instrument, complete in form, to the payee who takes itas a holder, is called issuance of the instrument.

8 Without

the initial delivery of the instrument from the drawer ofthe check to the payee, there can be no valid and bindingcontract and no liability on the instrument.

Petitioner completed the checks by signing them asdrawer and thereafter authorized her employee AliciaGalang to deliver the eightytwo (82) checks to theirrespective payees. Instead of issuing the checks to thepayees as named in the checks, Alicia Galang deliveredthem to the Chief Accountant of the Buendia branch of therespondent drawee Bank, a certain Ernest L. Boon. It wasestablished that the signatures of the payees as first



indorsers were forged. The record fails to show the identityof the party who made the forged signatures. The checkswere then indorsed for the second time with the names ofAlfredo Y. Romero and Benito Lam, and were deposited inthe latter's accounts as earlier noted. The secondindorsements were all genuine signatures of the allegedholders. All the eightytwo (82) checks bearing the forgedindorsements of the payees and the genuine secondindorsements of Alfredo Y. Romero and Benito Lam wereaccepted for deposit at the Buendia branch of respondentdrawee Bank to the credit of their respective savingsaccounts in the Buendia, Ongpin and Elcano branches ofthe same bank. The total amount of Savings Bank, 252Mich. 163, 233 N.W. 185 (1930); C.E. Erickson Co. vs. lowaNat. Bank, 211 lowa 495, 230 N.W. 342 (1930).

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7 NIL, Sec, 16.8 Ibid., Sec. 191, par. 10.

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P1,208,606.89, represented by eightytwo (82) checks, werecredited and paid out by respondent drawee Bank toAlfredo Y. Romero and Benito Lam, and debited againstpetitioner's checking account No. 13000381, Caloocanbranch.

As a rule, a drawee bank who has paid a check on whichan indorsement has been forged cannot charge the drawer'saccount for the amount of said check. An exception to thisrule is where the drawer is guilty of such negligence whichcauses the bank to honor such a check or checks. If a checkis stolen from the payee, it is quite obvious that the drawercannot possibly discover the forged indorsement by mereexamination of his cancelled check. This accounts for therule that although a depositor owes a duty to his draweebank to examine his cancelled checks for forgery of his ownsignature, he has no similar duty as to forgedindorsements. A different situation arises where theindorsement was forged by an employee or agent of thedrawer, or done with the active participation of the latter.



Most of the cases involving forgery by an agent or employeedeal with the payee's indorsement. The drawer and thepayee oftentimes have business relations of long standing.The continued occurrence of business transactions of thesame nature provides the opportunity for theagent/employee to commit the fraud after having developedfamiliarity with the signatures of the parties. However,sooner or later, some leak will show on the drawer's books.It will then be just a question of time until the fraud isdiscovered. This is specially true when the agentperpetrates a series of forgeries as in the case at bar.

The negligence of a depositor which will preventrecovery of an unauthorized payment is based on failure ofthe depositor to act as a prudent businessman would underthe circumstances. In the case at bar, the petitioner reliedimplicitly upon the honesty and loyalty of her bookkeeper,and did not even verify the accuracy of the amounts of thechecks she signed against the invoices attached thereto.Furthermore, although she regularly received her bankstatements, she apparently did not carefully examine thesame nor the check stubs and the returned checks, and didnot compare them with the sales invoices. Otherwise, shecould have easily discovered the discrepancies between thechecks and the documents serving as bases for the checks.With such discovery, the subsequent forgeries

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would not have been accomplished. It was not until twoyears after the bookkeeper commenced her fraudulentscheme that petitioner discovered that eightytwo (82)checks were wrongfully charged to her account, at whichtime she notified the respondent drawee bank.

It is highly improbable that in a period of two years, notone of petitioner's suppliers complained of nonpayment.Assuming that even one single complaint had been made,petitioner would have been dutybound, as far as therespondent drawee Bank was concerned, to make anadequate investigation on the matter. Had this been done,the discrepancies would have been discovered, sooner orlater. Petitioner's failure to make such adequate inquiryconstituted negligence which resulted in the bank's



honoring of the subsequent checks with forgedindorsements. On the other hand, since the recordmentions nothing about such a complaint, the possibilityexists that the checks in question covered inexistent sales.But even in such a case, considering the length of a periodof two (2) years, it is hard to believe that petitioner did notknow or realize that she was paying much more than sheshould for the supplies she was actually getting. Adepositor may not sit idly by, after knowledge has come toher that her funds seem to be disappearing or that theremay be a leak in her business, and refrain from taking thesteps that a careful and prudent businessman would takein such circumstances and if taken, would result instopping the continuance of the fraudulent scheme. If shefails to take such steps, the facts may establish hernegligence and in that event, she would be estopped fromrecovering from the bank.

9

One thing is clear from the records—that the petitionerfailed to examine her records with reasonable diligencewhether before she signed the checks or after receiving herbank statements. Had the petitioner examined her recordsmore carefully, particularly the invoice receipts, cancelledchecks, check book stubs, and had she compared the sumswritten as amounts payable in the eightytwo (82) checkswith the perti

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9 Detroit Piston Ring Co. vs. Wayne County & Home Savings Bank,supra, note 3.

694


nent sales invoices, she would have easily discovered thatin some checks, the amounts did not tally with thoseappearing in the sales invoices. Had she noticed thesediscrepancies, she should not have signed those checks, andshould have conducted an inquiry as to the reason for theirregular entries. Likewise, had petitioner been morevigilant in going over her current account by taking carefulnote of the daily reports made by respondent drawee Bankon her issued checks, or at least made random scrutiny of



her cancelled checks returned by respondent drawee Bankat the close of each month, she could have easily discoveredthe fraud being perpetrated by Alicia Galang, and couldhave reported the matter to the respondent drawee Bank.The respondent drawee Bank then could have takenimmediate steps to prevent further commission of suchfraud. Thus, petitioner's negligence was the proximatecause of her loss. And since it was her negligence whichcaused the respondent drawee Bank to honor the forgedchecks or prevented it from recovering the amount it hadalready paid on the checks, petitioner cannot now complainshould the bank refuse to recredit her account with theamount of such checks.

10 Under Section 23 of the NIL, she

is now precluded from using the forgery to prevent thebank's debiting on her account.

The doctrine in the case of Great Eastern Life InsuranceCo. us. Hongkong & Shanghai Bank

11 is not applicable to

the case at bar because in said case, the check wasfraudulently taken and the signature of the payee wasforged not by an agent or employee of the drawer. Thedrawer was not found to be negligent in the handling of itsbusiness affairs and the theft of the check by a totalstranger was not attributable to negligence of the drawer;neither was the forging of the payee's indorsement due tothe drawer's negligence. Since the drawer was notnegligent, the drawee was dutybound to restore to thedrawer's account the amount theretofore paid under thecheck with

____________

10 Defiance Lumber Co. vs. Bank of California, N.A., 180 Wash. 533, 41P. 2d 135 (1935); National Surety Co. vs. President and Directors ofManhattan Co., et al, 252 N.Y. 247, 169 N.E. 372 (1929); Erickson Co. vs.lowa National Bank, supra, note 3

11 43 Phil. 678 (1922).

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a forged payee's indorsement because the drawee did notpay as ordered by the drawer.

Petitioner argues that respondent drawee Bank should



not have honored the checks because they were crossedchecks. Issuing a crossed check imposes no legal obligationon the drawee not to honor such a check. It is more of awarning to the holder that the check cannot be presented tothe drawee bank for payment in cash. Instead, the checkcan only be deposited with the payee's bank which in turnmust present it for payment against the drawee bank inthe course of normal banking transactions between banks.The crossed check cannot be presented for payment but itcan only be deposited and the drawee bank may only pay toanother bank in the payee's or indorser's account.

Petitioner likewise contends that banking rules prohibitthe drawee bank from having checks with more than oneindorsement. The banking rule banning acceptance ofchecks for deposit or cash payment with more than oneindorsement unless cleared by some bank officials does notinvalidate the instrument; neither does it invalidate thenegotiation or transfer of the said check. In effect this ruledestroys the negotiability of bills/checks by limiting theirnegotiation by indorsement of only the payee. Under theNIL, the only kind of indorsement which stops the furthernegotiation of an instrument is a restrictive indorsementwhich prohibits the further negotiation thereof.

"Sec. 36. When indorsement restrictive.—An indorsement isrestrictive which either

(a) Prohibits further negotiation of the instrument; or X X x."

In this kind of restrictive indorsement, the prohibition totransfer or negotiate must be written in express words atthe back of the instrument, so that any subsequent partymay be forewarned that it ceases to be negotiable.However, the restrictive indorsee acquires the right toreceive payment and bring any action thereon as anyindorser, but he can no longer transfer his rights as suchindorsee where the form of the

696


indorsement does not authorize him to do so.12

Although the holder of a check cannot compel a draweebank to honor it because there is no privity between them,



as far as the drawerdepositor is concerned, such bank maynot legally refuse to honor a negotiable bill of exchange or acheck drawn against it with more than one indorsement ifthere is nothing irregular with the bill or check and thedrawer has sufficient funds. The drawee cannot becompelled to accept or pay the check by the drawer or anyholder because as a drawee, he incurs no liability on thecheck unless he accepts it. But the drawee will make itselfliable to a suit for damages at the instance of the drawerfor wrongful dishonor of the bill or check.

Thus, it is clear that under the NIL, petitioner isprecluded from raising the defense of forgery by reason ofher gross negligence. But under Section 196 of the NIL, anycase not provided for in the Act shall be governed by theprovisions of existing legislation. Under the laws of quasidelict, she cannot point to the negligence of the respondentdrawee Bank in the selection and supervision of itsemployees as being the cause of the loss because hernegligence is the proximate cause thereof and under Article2179 of the Civil Code, she may not be awarded damages.However, under Article 1170 of the same Code therespondent drawee Bank may be held liable for damages.The article provides—

"Those who in the performance of their obligations are guilty offraud, negligence or delay, and those who in any mannercontravene the tenor thereof, are liable for damages."

There is no question that there is a contractual relationbetween petitioner as depositor (obligee) and therespondent drawee bank as the obligor. In the performanceof its obligation, the drawee bank is bound by its internalbanking rules and regulations which form part of anycontract it enters into with any of its depositors. When itviolated its internal rules that second endorsements arenot to be accepted without the

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12 NIL, Sec. 37.

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approval of its branch managers and it did accept the sameupon the mere approval of Boon, a chief accountant, itcontravened the tenor of its obligation at the very least, if itwere not actually guilty of fraud or negligence.

Furthermore, the fact that the respondent drawee Bankdid not discover the irregularity with respect to theacceptance of checks with second indorsement for depositeven without the approval of the branch manager despiteperiodic inspection conducted by a team of auditors fromthe main office constitutes negligence on the part of thebank in carrying out its obligations to its depositors. Article1173 provides—

"The fault or negligence of the obligor consists in the omission ofthat diligence which is required by the nature of the obligationand corresponds with the circumstance of the persons, of the timeand of the place. x x x."

We hold that banking business is so impressed with publicinterest where the trust and confidence of the public ingeneral is of paramount importance such that theappropriate standard of diligence must be a high degree ofdiligence, if not the utmost diligence. Surely, respondentdrawee Bank cannot claim it exercised such a degree ofdiligence that is required of it. There is no way We canallow it now to escape liability for such negligence. Itsliability as obligor is not merely vicarious but primarywherein the defense of exercise of due diligence in theselection and supervision of its employees is of no moment.

Premises considered, respondent drawee Bank isadjudged liable to share the loss with the petitioner on afiftyfifty ratio in accordance with Article 1172 whichprovides:

"Responsibility arising from negligence in the performance ofevery kind of obligation is also demandable, but such liability maybe regulated by the courts, according to the circumstances."

With the foregoing provisions of the Civil Code being reliedupon, it is being made clear that the decision to hold thedrawee bank liable is based on law and substantial justiceand not on mere equity. And although the case was broughtbefore the court not on breach of contractual obligations,the courts are not precluded from applying to thecircumstances of the case



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the laws pertinent thereto. Thus, the fact that petitioner'snegligence was found to be the proximate cause of her lossdoes not preclude her from recovering damages. The reasonwhy the decision dealt on a discussion on proximate causeis due to the error pointed out by petitioner as allegedlycommitted by the respondent court. And in breaches ofcontract under Article 1173, due diligence on the part ofthe defendant is not a defense.

PREMISES CONSIDERED, the case is hereby orderedREMANDED to the trial court for the reception of evidenceto determine the exact amount of loss suffered by thepetitioner, considering that she partly benefited from theissuance of the questioned checks since the obligation forwhich she issued them were apparently extinguished, suchthat only the excess amount over and above the total ofthese actual obligations must be considered as loss of whichone half must be paid by respondent drawee bank to hereinpetitioner.

SO ORDERED.

Narvasa (C.J., Chairman), Feliciano, Regalado andNocon, JJ., concur.

Case remanded to trial court for reception of evidence.

Note.—Respondent bank is not guilty of negligence forit had no way of ascertaining the authenticity of theendorsements in the checks, and because it caused thechecks to pass through the clearing house, before allowingwithdrawal of the proceeds thereof (Manila LighterTransportation, Inc. vs. Court of Appeals, 182 SCRA 251).

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51) Gempesaw v. CA (Same as #6)