Development Bank of the Phils. vs. Sima WeiThe payee of a negotiable instrument acquires no interest with respect thereto until its delivery to him. Delivery of an instrument means transfer of possession, actual or constructive, from one person to another. Without the initial delivery of the instrument from the drawer to the payee, there can be no liability on the instrument. Moreover, such delivery must be intended to give effect to the instrument.

FORGERY CASES

Jai-Alai Corp. of the Phil. vs. Bank of the Phil. IslandsG.R. No. L-29432    August 6, 1975    66 SCRA 29-forgery

FACTS:Petitioner deposited 10 checks in its current account with BPI.  The checks which were acquired by petitioner from Ramirez, a sales agent of the Inter-Island Gas were all payable to Inter-Island Gas Service, Inc. or order.  After the checks had been submitted to Inter-bank clearing, Inter-Island Gas discovered that all the indorsements made on the checks purportedly by its cashiers were forgeries.  BPI thus debited the value of the checks against petitioner's current account and forwarded to the latter the checks containing the forged indorsements which petitioner refused to accept.        ISSUE:Whether BPI had the right to debit from petitioner's current account the value of the checks with the forged indorsements.

RULING:BPI acted within legal bounds when it debited the petitioner's account. Having indorsed the checks to respondent bank, petitioner is deemed to have given the warranty prescribed in Section 66 of the NIL that every single one of those checks "is genuine and in all respects what it purports to be." Respondent which relied

upon the petitioner's warranty should not be held liable for the resulting loss.

**The depositor of a check as indorser warrants that it is genuine and in all respects what it purports to be.  Having indorsed the checks to respondent bank, petitioner is deemed to have given the warranty prescribed in Section 66 of the NIL that every single one of those checks " is genuine and in all respects what it purports to be."

Jail-Alai vs. Bank of the Philippine IslandsHolders of checks may obtain payment from the drawee bank by presenting it for payment directly with the bank or by depositing it in his account in another bank known as the collecting bank or depositary bank. When the holder deposits his check with the collecting bank, the nature of the relationship created at that stage is one of agency, that is the bank is to collect from the drawee of the check the corresponding proceeds.

Republic Banks VS Ebrada

65 SCRA 680 – Mercantile Law – Negotiable Instruments Law – Consideration – Forgery – Liability of Accommodation Party 

On January 15, 1963, the Bureau of Treasury issued a back pay check to Martin Lorenzo in the amount of P1,246.08. The drawee named therein was Republic Bank. The check was subsequently indorsed to Ramon Lorenzo, then to Delia Dominguez and then to Mauricia Ebrada. Ebrada encashed the check with the Republic Bank. Republic Bank paid the amount of the check to Ebrada. Ebrada, upon receiving the cash, gave it to Dominguez; Dominguez in turn gave the cash to Ramon Lorenzo.Later, the Bureau of Treasury notified that the check was a forgery because the payee named therein (Martin Lorenzo) was actually dead 11 years ago before the check was issued. Republic Bank refunded the amount to the Bureau of

Treasury. The bank then demanded Ebrada to refund them.

ISSUE: Whether or not Republic Bank may recover from Ebrada.

HELD: Yes. Ebrada, being the last indorser, warranted the genuineness of thesignatures of the payee and the previous indorsers. The drawee bank is not duty bound to ascertain whether or not the signatures of the payee and the indorsers are genuine. One who purchases a check or draft is bound to satisfy himself that the paper is genuine and that by indorsing it or presenting it for payment or putting it into circulation before presentation he impliedly asserts that he has performed his duty and the drawee (in this case Republic Bank) who has paid the forged check, without actual negligence on his part, may recover the money paid from such negligent purchasers.But Ebrada did not profit from this because she, upon receiving the encashment, gave the same to Dominguez?She is still liable because she is considered as an accommodation party – pursuant to Section 29 of the Negotiable Instruments Law. An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party. Facts: Mauricia T. Ebrada (defendant) encashed a check at theRepublic Bank. The check was issued by the Bureau of Treasury and was indorsed several times before falling into the hands of thedefendant. Defendant managed to cash the check (worth around 1200 pesos). It was however discovered that the original payee, Martin Lorenzo, was already dead for more than a decade. Therefore the initial endorsement must have been a forgery.

Issues:(1) Whether or not Ebrada is liable to return the amount that shecashed.

(2) Whether or not a drawee of a check (bank) can recover from the holder (Ebrada) the money paid from a forged instrument.

Held: Sec. 23 of the Negotiable Instruments Law dictates that where the signature on the negotiable instrument is forged then the negotiation of the check is without force or effect. In this specific case the court held that since the check was endorsed multiple times already it was not the responsibility of the bank to ascertain if thesignatures of the previous endorsements were genuine or not. It was the responsibility of the holder of the check to satisfy himself that the paper is genuine. The acts of presenting the check for payment or putting it into circulation asserts that the holder has performed his duty to ascertain the validity of the instrument. “Everyone with even the least experience in business knows that no business man would accept a check in exchange for money or goods unless he is satisfied that the check is genuine. If he is deceived he has suffered a loss of his cash or goods through his own mistake.” Ebrada, upon receiving the check in question, was duty bound to ascertain if it was genuine or not before presenting it to plaintiff Bank. The Bank may recover from Ebrada the amount she received for the check.

Republic Bank vs. Ebreda              Where the signature on a negotiable instrument is forged, the negotiation of the check is without force or effect. However, where a check has several indorsersment on it, it is only the negotiation based on the forged or unauthorized signature is inoperative. It will not render void all the other negotiations of the check with respect to other parties whose signatures are genuine.

MWSS VS CA

143 SCRA 20 – Mercantile Law – Negotiable Instruments Law – Liabilities of Parties – Forgery – Negligence of DrawerMetropolitan Waterworks and Sewerage System (MWSS) had an account with PNB. When it was still called NAWASA, MWSS made a special arrangement with PNB so that it may have personalized checks to be printed by Mesina Enterprises. These personalized checks were the ones being used by MWSS in its business transactions.From March to May 1969, MWSS issued 23 checks to various payees in the aggregate amount of P320,636.26. During the same months, another set of 23 checks containing the same check numbers earlier issued were forged. The aggregate amount of the forged checks amounted to P3,457,903.00. This amount was distributed to the bank accounts of three persons: Arturo Sison, Antonio Mendoza, and Raul Dizon.MWSS then demanded PNB to restore the amount of P3,457,903.00. PNB refused. The trial court ruled in favor of MWSS but the Court of Appeals reversed the trial court’s decision.

ISSUE: Whether or not PNB should restore the said amount.

HELD: No. MWSS is precluded from setting up the defense of forgery. It has been proven that MWSS has been negligent in supervising the printing of its personalized checks. It failed to provide security measures and coordinate the same with PNB. Further, the signatures in the forged checks appear to be genuine as reported by the National Bureau of Investigation so much so that the MWSS itself cannot tell the difference between the forged signature and the genuine one. The records likewise show that MWSS failed to provide appropriate security measures over its own records thereby laying confidential records open to unauthorized persons. Even if the twenty-three (23) checks in question are considered forgeries, considering the MWSS’s gross negligence, it is barred from setting up the defense of forgery under Section 23 of the Negotiable Instruments Law.

The Supreme Court further emphasized that forgery cannot be presumed. It must be established by clear, positive, and convincing evidence. This was not done in the present case.

FACTS:MWSS  had  an  account  from  PNB.    Its  treasurer,  auditor,  and  General Manager are the ones authorized to sign checks.  During a period of time, 23  checks  were  drawn  and  debited  against  the  account  of  petitioner.  Bearing the same check numbers, the amounts stated therein were again debited from the account of petitioner.  The amounts drawn were deposited in the accounts of the payees in PCIB.  It was found out though that the names stated in the drawn checks were all fictitious.  Petitioner demanded the return of the amounts debited but the bank refused to do so.  Thus, it filed a complaint.  

HELD:There  was  no  categorical  finding  that  the  23  checks  were  signed  by persons  other  than  those  authorized  to  sign.    On  the  contrary,  the  NBI reports shows that the fraud was an “inside job” and that the delay in the reconciliation  of  the  bank  statements  and  the  laxity  and  loss  of  records control  in the printing of the personalized checks facilitated the fraud.  It further doesn’t provide that the signatures were forgeries.  Forgery cannot be presumed.  It should be proven by clear, convincing and positive evidence.  This wasn’t done in the present case. The petitioner cannot invoke Section 23 because it was guilty of negligence not only before the questioned checks but even after the same had already been negotiated.

MWSS vs. Court of AppealsIt is basic that whoever alleges forgery must prove such fact. Forgery cannot be presumed, it must be duly established.

Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corp.

FACTSEquitable Bank drew six crossed manager’s check payable to certain member establishments of Visa Card. Subsequently, the checks were deposited with Banco De Oro (BDO) to the credit of its depositor. Following normal procedures and after stamping at the back of the checks the usual endorsements,BDOsent the checks for clearing through the Philippine Clearing House Corporation (PCHC). Accordingly, Equitable Banking paid the checks; its clearing account was debited for the value of the checks and BDO’s clearing account was credited for the same amount. Thereafter, Equitable Banking discovered that the endorsements appearing at the back of the checks and purporting to be that of the payees were forged and/or unauthorized or otherwise belong to persons other than the payees.Equitable Banking presented the checks directly to BDO for the purpose of claiming reimbursement from the latter. However, BDO refused to accept such direct presentation and to reimburse Equitable Banking for the value of the checks.

ISSUES(a) Whether or not BDO is estopped from claiming that checks under consideration are non-negotiable instruments.(b) Whether or not BDO can escape liability by reasons of forgery.(c) Whether or not only negotiable checks are within the jurisdiction of PCHC. RULING(a) YES. BDO having stamped its guarantee of “all prior endorsements and/or lack of endorsements” is now estopped from claiming that the checks under consideration are not negotiable instruments. The checks were accepted for deposit by the petitioner stamping thereon its guarantee, in order that it can clear the said checks with the respondent bank. By such deliberate and positive attitude of the petitioner it has for all legal intents and purposes treated the said cheeks as negotiable instruments and

accordingly assumed the warranty of the endorser when it stamped its guarantee of prior endorsements at the back of the checks. It led the said respondent to believe that it was acting as endorser of the checks and on the strength of this guarantee said respondent cleared the checks in question and credited the account of the petitioner. Petitioner is now barred from taking an opposite posture by claiming that the disputed checks are not negotiable instrument.(b) NO. A commercial bank cannot escape the liability of an endorser of a check and which may turn out to be a forged endorsement. Whenever any bank treats the signature at the back of the checks as endorsements and thus logically guarantees the same as such there can be no doubt said bank has considered the checks asnegotiable.The collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements.(c)  NO. PCHC’s jurisdiction is not limited to negotiable checks only. The term check as used in the said Articles of Incorporation of PCHC can only connote checks in general use in commercial and business activities. Thus, no distinction. Ubi lex non distinguit, nec nos distinguere debemus. Checks are used between banks and bankers and their customers, and are designed to facilitate banking operations. It is of the essence to be payable on demand, because the contract between the banker and the customer is that the money is needed on demand.

Banco de Oro vs. Equitable Banking Corporation           If the instrument involved is a check, the drawee cannot charge the account of the drawer if the payee’s or indorser’s signature is forged. The drawee, in turn has the right of recourse against the collecting bank.

The drawer generally owes no duty of diligence to the collecting bak, the law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it for the purpose of determining their genuineness and regularity. The collecting bank being primarily engaged in banking holds itself out to the public as the expert and the law holds it to high standard of conduct.It  is  the  collecting  bank  that  generally  suffers  the  loss with regard to forged indorsements because  it  had  the  duty  to  ascertain  the  genuineness  of  all  prior indorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the indorsements.

Gempesaw vs. Court of Appeals218 SCRA 682 – Mercantile Law – Negotiable Instruments Law – Liabilities of Parties – Forgery – Forged Indorsements 

Natividad Gempesaw is a businesswoman who entrusted to her bookkeeper, Alicia Galang, the preparation of checks about to be issued in the course of her business transactions. From 1984 to 1986, 82 checks amounting to P1,208,606.89, were prepared and were supposed to be delivered to Gempesaw’s clients as payees named thereon. However, through Galang, these checks were never delivered to the supposed payees. Instead, the checks were fraudulently indorsed to Alfredo Romero and Benito Lam.

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

HELD: No. Gempesaw cannot set up the defense of forgery by reason of her negligence. As a rule, a drawee bank (in this case the Philippine Bank of Communications) who has paid a check on which an indorsement has been forged cannot charge the drawer’s (Gempesaw’s) account for the amount of said check. An exception to this rule is where the drawer is guilty of such negligence which causes

the bank to honor such a check or checks. If a check is stolen from the payee, it is quite obvious that the drawer cannot possibly discover the forged indorsement by mere examination of his cancelled check.  A different situation arises where the indorsement was forged by an employee or agent of the drawer, or done with the active participation of the latter.The negligence of a depositor which will prevent recovery of an unauthorized payment is based on failure of the depositor to act as a prudent businessman would under the circumstances. In the case at bar, Gempesaw relied implicitly upon the honesty and loyalty of Galang, and did not even verify the accuracy of amounts of the checks she signed against the invoices attached thereto. Furthermore, although she regularly received her bank statements, she apparently did not carefully examine the same nor the check stubs and the returned checks, and did not compare them with the same invoices. Otherwise, she could have easily discovered the discrepancies between the checks and the documents serving as bases for the checks. With such discovery, the subsequent forgeries would not have been accomplished. It was not until two years after Galang commenced her fraudulent scheme that Gempesaw discovered that eighty-two (82) checks were wrongfully charged to her account, at which she notified the Philippine Bank of Communications.

Gempesaw vs. Court of AppealsA forged signature is wholly inoperative, no one can gain title to the instrument through such forged insdorsement. Such indorsement prevents any subsequent partyfrom acquiring any right as against parties prior to the forgery. Although rights may exist between and among parties subsequent to the forged instrument, not one of the can acquire rights agasint parties prior to the forgery. Such forged instrument cuts-off the rights of all subsequent parties as against parties prior to the forgery. However, the law makes an exception to these rules where party is precluded from setting up forgery as a defense.

Associated Bank VS CAFacts: Faustino Pangilinan, cashier of the Concepcion Emergency Hospital, forged the signature of Dr. Adena Canlas who was the Chief of the said hospital and endorsed 30 checks amounting to P203,300 to himself. The money was drawn from the account of the Province of Tarlac with PNB. Pangilinan deposited the checks to his personal savings account with Associated Bank which was cleared and paid for by PNB. The checks have a stamp of Associated Bankwhich reads “All prior endorsements guaranteed by Associated Bank”.

The Province of Tarlac, through the Provincial Treasurer, wrote PNB to restore the various amounts debited from the current account of the Province. PNB on its part demanded reimbursement fromAssociated Bank. Both banks resisted payment which led to the Province of Tarlac suing PNB. PNB in turn impleaded Associated Bank in the suit as a third-party defendant while Associated Bankimpleaded Canlas and Pangilinan as fourth-party defendants.

The trial court ruled that 1) PNB should pay the Province of Tarlac the P203,300 with legal interests, 2) Associated Bank should be pay the same amount to PNB and 3) dismissed the complaints against Canlas and Pangilinan. On appeal, the CA affirmed the ruling of the trial court 

Issue: Who should bear the loss arising from the forgery, the Province of Tarlac, PNB, Associated Bank or Pangilinan?

Held: The SC held that the Province and Associated Bank should bear losses in the proportion of 50-50.

The Province can only recover 50% of the P203,300 from PNB because of the negligence they exhibited in releasing the checks to the then already retired Pangilinan who is an unauthorized person to handle the said checks.

On the other hand, Associated Bank is

liable to PNB only to 50% of the same amount because of its liability as indorser of the checks that were deposited by Pangilinan, and guaranteed the genuineness of the said checks. They failed to exercise due diligence in checking the veracity of indorsements.

Associated Bank vs. Court of AppealsCASE DIGEST: G. R. No. 123793, June 29, 1998

Commercial Law, Corporation, Merger, Negotiable Instruments, Promissory Note

FACTS:

Associated Banking Corporation and Citizens Bank and Trust Company (CBTC) merged to form just one banking corporation known as Associated Citizens Bank (later renamed Associated Bank), the surviving bank. After the merger agreement had been signed, but before a certificate of merger was issued, respondent Lorenzo Sarmiento, Jr. executed in favor of Associated Bank a promissory note, promising to pay the bank P2.5 million on or before due date at 14% interest per annum, among other accessory dues. For failure to pay the amount due, Sarmiento was sued by Associated Bank.

Respondent argued that the plaintiff is not the proper party in interest because the promissory note was executed in favor of CBTC. Also, while respondent executed the promissory note in favor of CBTC, said note was a contract pour autrui, one in favor of a third person who may demand its fulfillment. Also, respondent claimed that he received no consideration for the promissory note and, in support thereof, cites petitioner's failure to submit any proof of his loan application and of his actual receipt of the amount loaned.

ISSUE:

1.) Whether or not Associated Bank, the surviving corporation, may enforce the promissory note made by private respondent in favor of CBTC, the absorbed company, after the merger

agreement had been signed, but before a certificate of merger was issued?

2.) Whether or not the promissory note was a contract pour autrui and was issued without consideration?

HELD:

The petition is impressed with merit.

Associated Bank assumed all the rights of CBTC. Although absorbed corporations are dissolved, there is no winding up of their affairs or liquidation of their assets, because the surviving corporation automatically acquires all their rights, privileges and powers, as well as their liabilities. The merger, however, does not become effective upon the mere agreement of the constituent corporations. The Securities and Exchange Commission (SEC) and majority of the respective stockholders of the constituent corporations must have approved the merger. (Section 79, Corporation Code) It will be effective only upon the issuance by the SEC of a certificate of merger. Records do not show when the SEC approved the merger.

But assuming that the effectivity date of the merger was the date of its execution, we still cannot agree that petitioner no longer has any interest in the promissory note. The agreement itself clearly provides that all contracts — irrespective of the date of execution — entered into in the name of CBTC shall be understood as pertaining to the surviving bank, herein petitioner. Such must have been deliberately included in the agreement in order to avoid giving the merger agreement a farcical interpretation aimed at evading fulfillment of a due obligation. Thus, although the subject promissory note names CBTC as the payee, the reference to CBTC in the note shall be construed, under the very provisions of the merger agreement, as a reference to petitioner bank.

On the issue that the promissory note was a contract pour autrui and was issued without consideration, the Supreme Court

held it was not. In a contract pour autrui, an incidental benefit or interest, which another person gains, is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. The "fairest test" in determining whether the third person's interest in a contract is a stipulation pour autrui or merely an incidental interest is to examine the intention of the parties as disclosed by their contract. It did not indicate that a benefit or interest was created in favor of a third person. The instrument itself says nothing on the purpose of the loan, only the terms of payment and the penalties in case of failure to pay.

Private respondent also claims that he received no consideration for the promissory note, citing petitioner's failure to submit any proof of his loan application and of his actual receipt of the amount loaned. These arguments deserve no merit. Res ipsa loquitur. The instrument, bearing the signature of private respondent, speaks for itself. Respondent Sarmiento has not questioned the genuineness and due execution thereof. That he partially paid his obligation is itself an express acknowledgment of his obligation.

WHEREFORE, the petition is GRANTED.Associated Bank vs. Court of AppealsWhen a check is deposited with the collecting bank, it takes a risk on its depositor. It is only logical that this bank be held accountable for checks deposited by its customers. It is important to mention that Payee whose signature was forged may directly proceed against the collecting bank. However, the drawer cannot opt to recover from the collecting bank. There is no privity of contract between the drawer and the collecting bank.

FACTS:August 25, 1964: Check dated July 8, 1964 for P50,000.00, payable to CASH, drawn by Joaquin Cunanan & Company on First National City Bank (FNCB) was deposited with Metropolitan Bank and

Trust Company (Metro Bank) by Salvador Sales. 

Earlier that day, Sales had opened a current account with Metro Bank depositing P500.00 in cash

Metro Bank immediately sent the cash check to the Clearing House of the Central Bank with the following words stamped at the back of the check:

Metropolitan Bank and Trust Company Cleared (illegible) office All prior endorsements and/or Lack of endorsements Guaranteed. 

The check was cleared the same day. Private respondent paid petitioner through clearing the amount of P50,000.00, and Sales was credited with the said amount in his deposit with Metro Bank.

August 26, 1964: Sales made his 1st withdrawal of P480.00 from his current account

August 28, 1964: he withdrew P32,100.00

August 31, 1964: he withdrew the balance of P17,920 and closed his account with Metro Bank

September 3, 1964: FNCB returned cancelled Check to drawer Joaquin Cunanan & Company, together with the monthly statement of the company's account with FNCB. 

notified FNCB that the check had been altered

actual amount of P50.00 was raised to P50,000.00name of the payee, Manila Polo Club, was superimposed the word CASH.

September 10, 1964: FNCB wrote Metro Bank asking for reimbursement 

June 29, 1965: FNCB filed for recovery  CA affirmed Trial Court: Metro Bank to reimburse FNCB 

ISSUE: W/N Metrobank should reimsburse FNCB for the altered amount as indorser

HELD: NO. FNCB liable.

Under the procedure prescribed, the drawee bank receiving the check for clearing from theCentral Bank Clearing House must return the check to the collecting bank within the 24-hour period if the check is defective for any reason. - FNCB failed to do so

indorsement must be read together with the 24-hour regulation on clearing House Operations of the Central Bank

Metro Bank can not be held liable for the payment of the altered check.

Moreover, FNCB did not deny the allegation of Metro Bank that before it allowed the withdrawal of the balance of P17,920.00 by Salvador Sales, Metro Bank withheld paymentand first verified, through its Assistant Cashier Federico Uy, the regularity and genuineness of the check deposit from Marcelo Mirasol, Department Officer of FNCB, because its (Metro Bank) attention was called by the fast movement of the account

Metrobank vs. First National City BankWhen the indorsement itself is very clear when it begins with the words “For clearance, clearing office” such indorsement must be read together with the 24-hour rule regulation of the House operations of the Central Bank. Once that 24-hour period is over, the liability on such indorsement has ceased. Failure of drawee bank to call the attention of collecting bank to the alteration of the check in question until after the lapse of 24 hours negates whatever right it might have against the collecting bank. Its remedy lies not against collecting bank but against the party responsible for the changing of the name of the payee and the amount on the face of the check.

Republic Bank vs. CAGR No 42725, 196 SCRA 100

-forgery

FACTS:San Miguel Corporation (SMC) drew a check amounting to P240.00 on its account in First National City Bank (FNCB) in favor of Delgado, a stockholder.  Delgado fraudulently altered the amount of the check to P9,240 after which he endorsed and deposited it with Republic Bank.  Republic Bank endorsed the check to First National City Bank (FNCB), the drawee bank, by stamping on the back of the check “all prior and / or lack of indorsement guaranteed".  Based on such endorsement, FNCB paid the amount to Republic Bank. Later on, San Miguel informed FNCB of the material alteration of the amount. FNCB recredited the amount  to San Miguel’s account, and demanded refund from Republic Bank.  Republic Bank refused, claiming there was delay in giving it notice of the alteration.

ISSUE:Whether petitioner Republic Bank as the collecting bank should bear the loss resulting from the altered check.

RULING:The drawee bank, FNCB, should bear the loss for the payment of the altered check for its failure to detect and warn Republic Bank of the fraudulent character of the check within the 24-hour clearing house rule.  Republic Bank, as the collecting bank, is protected by the 24-hour clearing house rule found in Central Bank Circular No. 9.  When an indorsement is forged, the collecting bank or last indorser, as a general rule, bears the loss. But the unqualified indorsement of the collecting bank on the check should be read together with the 24-hour regulation on clearing house operation. Hence, when a drawee bank fails to return a forged or altered check to the collecting bank within the 24-hour  clearing period, the collecting bank is absolved from liability.

Republic Bank vs. Court of AppealsThe 24-hour clearing house rule is valid rule applicable to commercial banks. As general rule, the collecting bank or last

endorser bears the loss when the indorsement was forged. But the unqualified endorsement of the collecting bank on the check should be read together with the 24-hour regulation on the clearing house operation. Thus, when the drawee bank fails to return a forged or altered check to the collecting bank is absolved from liability. Unless an alteration is attributable to the fault or negligence of the drawer himself, the remedy of the drawee bank that negligently clears a forged and/or honor altered check for payment is against the party responsible for the forgery or alteration, otherwise, it bears the loss.

Philippine Commercial International Bank vs. Court of Appeals350 SCRA 446 – Mercantile Law – Negotiable Instruments Law – Rights of the Holder – What Constitutes a Holder in Due Course – Negligence of the Collecting Bank and the Drawee Bank

There are three cases consolidated here: G.R. No. 121413 (PCIB vs CA and Ford and Citibank), G.R. No. 121479 (Ford vs CA and Citibank and PCIB), and G.R. No. 128604 (Ford vs Citibank and PCIB and CA).G.R. No. 121413/G.R. No. 121479In October 1977, Ford Philippines drew a Citibank check in the amount of P4,746,114.41 in favor of the Commissioner of the Internal Revenue (CIR). The check represents Ford’s tax payment for the third quarter of 1977. On the face of the check was written “Payee’s account only” which means that the check cannot be encashed and can only be deposited with the CIR’s savings account (which is with Metrobank). The said check was however presented to PCIB and PCIB accepted the same. PCIB then indorsed the check for clearing to Citibank. Citibank cleared the check and paid PCIB P4,746,114.41. CIR later informed Ford that it never received the tax payment.An investigation ensued and it was discovered that Ford’s accountant Godofredo Rivera, when the check was deposited with PCIB, recalled the check since there was allegedly an error in the

computation of the tax to be paid. PCIB, as instructed by Rivera, replaced the check with two of its manager’s checks.It was further discovered that Rivera was actually a member of a syndicate and the manager’s checks were subsequently deposited with the Pacific Banking Corporation by other members of the syndicate. Thereafter, Rivera and the other members became fugitives of justice.G.R. No. 128604In July 1978 and in April 1979, Ford drew two checks in the amounts of P5,851,706.37 and P6,311,591.73 respectively. Both checks are again for tax payments. Both checks are for “Payee’s account only” or for the CIR’s bank savings account only with Metrobank. Again, these checks never reached the CIR.In an investigation, it was found that these checks were embezzled by the same syndicate to which Rivera was a member. It was established that an employee of PCIB, also a member of the syndicate, created a PCIB account under a fictitious name upon which the two checks, through high end manipulation, were deposited. PCIB unwittingly endorsed the checks to Citibank which the latter cleared. Upon clearing, the amount was withdrawn from the fictitious account by syndicate members.

ISSUE: What are the liabilities of each party?

HELD: G.R. No. 121413/G.R. No. 121479PCIB is liable for the amount of the check (P4,746,114.41). PCIB, as a collecting bank has been negligent in verifying the authority of Rivera to negotiate the check. It failed to ascertain whether or not Rivera can validly recall the check and have them be replaced with PCIB’s manager’s checks as in fact, Ford has no knowledge and did not authorize such. A bank (in this case PCIB) which cashes a check drawn upon another bank (in this case Citibank), without requiring proof as to the identity of persons presenting it, or making inquiries with regard to them, cannot hold the proceeds against the drawee when the proceeds of the checks were

afterwards diverted to the hands of a third party. Hence, PCIB is liable for the amount of the embezzled check.G.R. No. 128604PCIB and Citibank are liable for the amount of the checks on a 50-50 basis.As a general rule, a bank is liable for the negligent or tortuous act of its employees within the course and apparent scope of their employment or authority. Hence, PCIB is liable for the fraudulent act of its employee who set up the savings account under a fictitious name.Citibank is likewise liable because it was negligent in the performance of its obligations with respect to its agreement with Ford. The checks which were drawn against Ford’s account with Citibank clearly states that they are payable to the CIR only yet Citibank delivered said payments to PCIB. Citibank however argues that the checks were indorsed by PCIB to Citibank and that the latter has nothing to do but to pay it. The Supreme Court cited Section 62 of the Negotiable Instruments Law which mandates the Citibank, as an acceptor of the checks, to engage in paying the checks according to the tenor of the acceptance which is to deliver the payment to the “payee’s account only”.But the Supreme Court ruled that in the consolidated cases, that PCIB and Citibank are not the only negligent parties. Ford is also negligent for failing to examine its passbook in a timely manner which could have avoided further loss. But this negligence is not the proximate cause of the loss but is merely contributory. Nevertheless, this mitigates the liability of PCIB and Citibank hence the rate of interest, with which PCIB and Citibank is to pay Ford, is lowered from 12% to 6% per annum.

Philippine Commercial International Bank vs. Court of AppealsA bank (in this case PCIB) which cashes a check drawn upon another bank (in this case Citibank), without requiring proof as to the identity of persons presenting it, or making inquiries with regard to them, cannot hold the proceeds against the drawee when the proceeds of the checks

were afterwards diverted to the hands of a third party.

Ramon Illusorio vs. Court of Appeals

FACTS:Ilusorio was a businessman who was in charge of 20 or so corporations. He was a depositor in good standing of Manila Banking Corporation. As he was in charge of a big number of corporations, he was usually out of the country for business. He then entrusted his credit cards, checkbook, blank checks, passbooks, etc to his secretary, Katherine Eugenio. Eugenio was also in charge of verifying and reconciling the statements of Ilusorio’s checking account. Eugenio was able to encash and deposit to her personal account checks drawn against Ilusorio’s account with an aggregate amount of 119K. Ilusorio didn’t bother to check his statement of account until a business partner informed him that he saw Eugenio using his credit cards. Ilusorio then fired her and instituted criminal case of Estafa thru falsification against Eugenio. Manila Banking Corp. also instituted a complaint of estafa against Eugenio based on the affidavit of Dante Razon, an employee. Razon stated that he personally examined and scrutinized the encashed checks in accordance with their verification procedures. Manila Bank sought the expertise of NBI in determining the genuineness of the checks but Ilusorio failed to submit specimen signatures and thus, NBI could not conduct the examination. Issue: W/N Manila Bank is liable for damages for failing to detect a forged check Held: No. To be entitled to damages, Ilusorio has the burden of poving that the bank was negligent in failing to detect the discrepancy in the signatures on the checks. Ilusorio had to establish the fact of forgery which he failed to do by failing

to submit his specimen signatures for NBI to conclusively establish forgery. Furthermore, the Bank was not negligent in verifying the checks as they verified the drawer’s signatures against their specimen signatures and in doubt, referred to more experienced verifier for further verification. On the contrary, it was Ilusorio who was found to be negligent. He accorded his secretary with an unusual degree of trust and unrestricted access to his finances. Furthermore, despite the fact that the bank was regularly sending statements of account, he failed to check them until he found out that his secretary was using his credit cards. Sec. 23 of the Negotiable Instruments law provides that a forged check is inoperative, meaning there was no right to enforce payment against any party. But it also provides an exception: “unless the party against whom it is sought enforce such right is precluded from setting up the forgery or want of authority”. This case falls under the exception since Ilusorio is precluded from setting up forgery due to his own negligence considering that he allowed his secretary access to his credit cards, checkbook, and allowed his secretary to verify his statements of account.

Ramon Illusorio vs. Court of AppealsThe collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior indorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the indorsements. As between the drawer and the drawee bank, the drawee bank should bear the loss. The drawee bank shall have recourse against the collecting bank because such collecting bank guarantees that all prior endorsements are genuine. The collecting bank then can go against the forger. In cases involving a forged check, where the drawer’s is forged, drawer can recover

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

Samsung Construction Co. Phils, Inc vs. FEBTC and CAFacts: Samsung Construction held an account with Far East Bank. One day a check worth 900,000, payable to cash, was presented by one Roberto Gonzaga in the Makati Branch of Far East Bank. The check was certified to be true by Jose Sempio, the assistant accountant of Samsung, who was also present during the time the check was cashed. Later however it was discovered that no such check was ever approved by the Samsung’s head accountant, the president of the company also never signed any such check.

Issue: Whether or not Far East Bank is liable to reimburse Samsung for cashing out the forged check, which was drawn from the account of Samsung

Held: Far East Bank is liable for reimbursement. Sec. 23 of the Negotiable Instrument Law states that a forged signature makes the instrument “wholly inoperative”. If payment is made the drawee (Far East) cannot charge it to the drawer’s account (Samsung). The fact that the forgery is clever is immaterial. The forged signature may so closely resemble the genuine as to defy detection by the depositor himself. And yet, if the bank pays the check, it is paying out with its own money and not of the depositor’s. This rule of liability can be stated briefly in these words: “A bank is bound to know its depositor’s signature.” The accusation of negligence on the part of Samsung was not clearly proven. Absence of proof to the contrary, the presumption is that the ordinary course of business was followed.

Samsung Construction Co. Phils, Inc vs. FEBTC and CA

Under Sec. 62 of NIL, among the warranties to be assumed by the acceptor is it admits the existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument. It is incumbent upon the drawee bank to ascertain the genuineness of the signature of its depositor. The respondent bank in this case did not exercise the degree of diligence required to enable it to detect the forgery. Aside from the warranties as an indorser, the collecting bank is made liable because it is privy to the depositor who negotiated the check because it knows him, his address and history for being a client thereof. Thus, it is in a better position to detect forgery or irregularity in the indorsement aka “Doctrine of Comparative Negligence”