nego material alteration cases

7/27/2019 Nego Material Alteration Cases

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THIRD DIVISION[G.R. No. 138510. October 10, 2002]

TRADERS ROYAL BANK,petitioner, vs. RADIO PHILIPPINESNETWORK,INC., INTERCONTINENTAL BROADCASTINGCORPORATIONand BANAHAWBROADCASTINGCORPORATION, through theBOARD OFADMINISTRATORS,and SECURITY BANK ANDTRUSTCOMPANY,respondents.

D E C I S I O N

CORONA,J.:Petitioner seeks the review and prays for the reversal of the

Decision[1] of April 30, 1999 of Court of Appeals in CA-G.R. CV No.54656, the dispositive portion of which reads:WHEREFORE, the appealed decision is AFFIRMED with modification inthe sense that appellant SBTC is hereby absolved from anyliability. Appellant TRB is solely liable to the appellees for the damagesand costs of suit specified in the dispositive portion of the appealeddecision. Costs against appellant TRB.SO ORDERED.[2]

As found by the Court of Appeals, the antecedent facts of the caseare as follows:

On April 15, 1985, the Bureau of Internal Revenue (BIR) assessedplaintiffs Radio Philippines Network (RPN), IntercontinentalBroadcasting Corporation (IBC), and Banahaw BroadcastingCorporation (BBC) of their tax obligations for the taxable years 1978 to1983.On March 25, 1987, Mrs. Lourdes C. Vera, plaintiffs comptroller, sent aletter to the BIR requesting settlement of plaintiffs tax obligations.The BIR granted the request and accordingly, on June 26, 1986,plaintiffs purchased from defendant Traders Royal Bank (TRB) three (3)managers checks to be used as payment for their tax liabilities, to wit:Check Number Amount30652 P4,155.835.00

30650 3,949,406.1230796 1,685,475.75Defendant TRB, through Aida Nuez, TRB Branch Manager atBroadcast City Branch, turned over the checks to Mrs. Vera who wassupposed to deliver the same to the BIR in payment of plaintiffs taxes.Sometime in September, 1988, the BIR again assessed plaintiffs fortheir tax liabilities for the years 1979-82. It was then they discoveredthat the three (3) managers checks (Nos. 30652, 30650 and 30796)intended as payment for their taxes were never delivered nor paid tothe BIR by Mrs. Vera. Instead, the checks were presented for paymentby unknown persons to defendant Security Bank and Trust Company

(SBTC), Taytay Branch as shown by the banks routing symbol transitnumber (BRSTN 01140027) or clearing code stamped on the reversesides of the checks.Meanwhile, for failure of the plaintiffs to settle their obligations, the BIRissued warrants of levy, distraint and garnishment against them. Thus,they were constrained to enter into a compromise and paid BIRP18,962,225.25 in settlement of their unpaid deficiency taxes.Thereafter, plaintiffs sent letters to both defendants, demanding thatthe amounts covered by the checks be reimbursed or credited to their

account. The defendants refused, hence, the instant suit.[3]

On February 17, 1985, the trial court rendered its decision, thus:WHEREFORE, in view of the foregoing considerations, judgment ishereby rendered in favor of the plaintiffs and against the defendantsby :

a) Condemning the defendant Traders Royal Bank to payactual damages in the sum of Nine Million Seven HundredNinety Thousand and Seven Hundred Sixteen Pesos andEighty-Seven Centavos (P9,790,716.87) broken down asfollows:

1) To plaintiff RPN-9 - P4,155,835.002) To Plaintiff IBC-13 - P3,949,406.12

3) To Plaintiff BBC-2 - P1,685,475.72plus interest at the legal rate from the filing of this case in court.

b) Condemning the defendant Security Bank and TrustCompany, being collecting bank, to reimburse thedefendant Traders Royal Bank, all the amounts which thelatter would pay to the aforenamed plaintiffs;

c) Condemning both defendants to pay to each of theplaintiffs the sum of Three Hundred Thousand(P300,000.00) Pesos as exemplary damages andattorneys fees equivalent to twenty-five percent of thetotal amount recovered; and

d) Costs of suit.

SO ORDERED.[4]Defendants Traders Royal Bank and Security Bank and Trust

Company, Inc. both appealed the trial courts decision to the Court ofAppeals. However, as quoted in the beginning hereof, the appellatecourt absolved defendant SBTC from any liability and held TRB solelyliable to respondent networks for damages and costs of suit.

In the instant petition for review on certiorari of the Court ofAppeals decision, petitioner TRB assigns the following errors: (a) theHonorable Court of Appeals manifestly overlooked facts which wouldjustify the conclusion that negligence on the part of RPN, IBC and BBCbars them from recovering anything from TRB, (b) the Honorable Court
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of Appeals plainly erred and misapprehended the facts in relievingSBTC of its liability to TRB as collecting bank and indorser byoverturning the trial courts factual finding that SBTC did endorse thethree (3) managers checks subject of the instant case, and (c) theHonorable Court of Appeals plainly misapplied the law in affirming theaward of exemplary damages in favor of RPN, IBC and BBC.

In reply, respondents RPN, IBC, and BBC assert that TRBs petitionraises questions of fact in violation of Rule 45 of the 1997 RevisedRules on Civil Procedure which restricts petitions for review on

certiorari of the decisions of the Court of Appeals on pure questions oflaw. RPN, IBC and BBC maintain that the issue of whether or notrespondent networks had been negligent were already passed uponboth by the trial and appellate courts, and that the factual findings ofboth courts are binding and conclusive upon this Court.

Likewise, respondent SBTC denies liability on the ground that ithad no participation in the negotiation of the checks, emphasizing thatthe BRSTN imprints at the back of the checks cannot be considered asproof that respondent SBTC accepted the disputed checks andpresented them to Philippine Clearing House Corporation for clearing.

Setting aside the factual ramifications of the instant case, thethreshold issue now is whether or not TRB should be held solely liable

when it paid the amount of the checks in question to a person otherthan the payee indicated on the face of the check, the Bureau ofInternal Revenue.

When a signature is forged or made without the authority of theperson whose signature it purports to be, it is wholly inoperative, andno right to retain the instrument, or to give a discharge therefor, or toenforce payment thereof against any party thereto, can be acquiredthrough or under such signature.[5] Consequently, if a bank pays aforged check, it must be considered as paying out of its funds andcannot charge the amount so paid to the account of the depositor.

In the instant case, the 3 checks were payable to the BIR. It wasestablished, however, that said checks were never delivered or paid to

the payee BIR but were in fact presented for payment by someunknown persons who, in order to receive payment therefor, forgedthe name of the payee. Despite this fraud, petitioner TRB paid the 3checks in the total amount of P9,790,716.87.

Petitioner ought to have known that, where a check is drawnpayable to the order of one person and is presented for payment byanother and purports upon its face to have been duly indorsed by thepayee of the check, it is the primary duty of petitioner to know that thecheck was duly indorsed by the original payee and, where it pays theamount of the check to a third person who has forged the signature of

the payee, the loss falls upon petitioner who cashed the check. Its onlyremedy is against the person to whom it paid the money.[6]

It should be noted further that one of the subject checks wascrossed. The crossing of one of the subject checks should have putpetitioner on guard; it was duty-bound to ascertain the indorsers titleto the check or the nature of his possession. Petitioner should haveknown the effects of a crossed check: (a) the check may not beencashed but only deposited in the bank; (b) the check may benegotiated only once to one who has an account with a bank and (c)

the act of crossing the check serves as a warning to the holder that thecheck has been issued for a definite purpose so that he must inquire ifhe has received the check pursuant to that purpose, otherwise, he isnot a holder in due course.[7]

By encashing in favor of unknown persons checks which were ontheir face payable to the BIR, a government agency which can only actonly through its agents, petitioner did so at its peril and must suffer theconsequences of the unauthorized or wrongful endorsement. [8] In thislight, petitioner TRB cannot exculpate itself from liability by claimingthat respondent networks were themselves negligent.

A bank is engaged in a business impressed with public interest andit is its duty to protect its many clients and depositors who transact

business with it. It is under the obligation to treat the accounts of thedepositors and clients with meticulous care, whether such accountsconsist only of a few hundreds or millions of pesos.[9]

Petitioner argues that respondent SBTC, as the collecting bank andindorser, should be held responsible instead for the amount of thechecks.

The Court of Appeals addressed exactly the same issue and madethe following findings and conclusions:As to the alleged liability of appellant SBTC, a close examination of therecords constrains us to deviate from the lower courts finding thatSBTC, as a collecting bank, should similarly bear the loss.A collecting bank where a check is deposited and which indorses the

check upon presentment with the drawee bank, is such an indorser. Soeven if the indorsement on the check deposited by the banks client isforged, the collecting bank is bound by his warranties as an indorserand cannot set up the defense of forgery as against the drawee bank.To hold appellant SBTC liable, it is necessary to determine whether it isa party to the disputed transactions.Section 3 of the Negotiable Instruments Law reads:SECTION 63. When person deemed indorser. - A person placing hissignature upon an instrument otherwise than as maker, drawer, oracceptor, is deemed to be an indorser unless he clearly indicates byappropriate words his intention to be bound in some other capacity.
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Upon the other hand, the Philippine Clearing House Corporation (PCHC)rules provide:Sec. 17.- BANK GUARANTEE. All checks cleared through the PCHCshall bear the guarantee affixed thereto by the Presenting Bank/Branchwhich shall read as follows:Cleared thru the Philippine Clearing House Corporation. All priorendorsements and/or lack of endorsement guaranteed. NAME OFBANK/BRANCH BRSTN (Date of clearing).Here, not one of the disputed checks bears the requisite endorsement

of appellant SBTC. What appears to be a guarantee stamped at theback of the checks is that of the Philippine National Bank, BuendiaBranch, thereby indicating that it was the latter Bank which receivedthe same.It was likewise established during the trial that whenever appellantSBTC receives a check for deposit, its practice is to stamp on its facethe words, non-negotiable. Lana Echevarrias testimony is relevant:ATTY. ROMANO: Could you tell us briefly the procedure you follow inreceiving checks?A: First of all, I verify the check itself, the place, the date, the amountin words and everything. And then, if all these things are in order andverified in the data sheet I stamp my non-negotiable stamp at the face

of the check.Unfortunately, the words non-negotiable do not appear on the face ofeither of the three (3) disputed checks.Moreover, the aggregate amount of the checks is not reflected in theclearing documents of appellant SBTC. Section 19 of the Rules of thePCHC states:Section 19 Regular Item Procedure:Each clearing participant, through its authorized representatives, shalldeliver to the PCHC fully qualified MICR checks grouped in 200 or lessitems to a batch and supported by an add-list, a batch control slip, anda delivery statement.It bears stressing that through the add-list, the PCHC can countercheck

and determine which checks have been presented on a particular dayby a particular bank for processing and clearing. In this case, however,the add-list submitted by appellant SBTC together with the checks itpresented for clearing on August 3, 1987 does not show that Check No.306502 in the sum of P3,949,406.12 was among those that passed forclearing with the PCHC on that date. The same is true with Check No.30652 with a face amount of P4,155,835.00 presented for clearing onAugust 11, 1987 and Check No. 30796 with a face amount ofP1,685,475.75.

The foregoing circumstances taken altogether create a serious doubton whether the disputed checks passed through the hands of appellantSBTC.[10]

We subscribe to the foregoing findings and conclusions of theCourt of Appeals.

A collecting bank which indorses a check bearing a forgedindorsement and presents it to the drawee bank guarantees all priorindorsements, including the forged indorsement itself, and ultimatelyshould be held liable therefor. However, it is doubtful if the subject

checks were ever presented to and accepted by SBTC so as to hold itliable as a collecting bank, as held by the Court of Appeals.

Since TRB did not pay the rightful holder or other person or entityentitled to receive payment, it has no right toreimbursement. Petitioner TRB was remiss in its duty and obligation,and must therefore suffer the consequences of its own negligence anddisregard of established banking rules and procedures.

We agree with petitioner, however, that it should not be made topay exemplary damages to RPN, IBC and BBC because its wrongful actwas not done in bad faith, and it did not act in a wanton, fraudulent,reckless or malevolent manner.[11]

We find the award of attorneys fees, 25% of P10 million, to be

manifestly exorbitant.[12] Considering the nature and extent of theservices rendered by respondent networks counsel, however, theCourt deems it appropriate to award the amount of P100,000 asattorneys fees.

WHEREFORE, the appealed decision is MODIFIED by deleting theaward of exemplary damages. Further, respondent networks aregranted the amount of P100,000 as attorneys fees. In all otherrespects, the Court of Appeals decision is hereby AFFIRMED.

SO ORDERED.Puno, (Chairman), Panganiban, and Morales, JJ., concur.Sandoval-Gutierrez, J., no part.

[1]Penned by Associate Justice Angelina Sandoval-Gutierrez andconcurred in by Associate Justices Romeo A. Brawner andMartin S. Villarama, Jr. (Ninth Division).

[2]Rollo, p. 74.[3]Rollo, pp. 63-65.[4]Rollo, p. 54.[5]Section 23, Negotiable Instruments Law.[6]Great Eastern Life Insurance vs. Hongkong & Shanghai Banking

Corporation, 43 Phil. 678 (1922).
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[7]Bataan Cigar and Cigarette Factory, Inc. vs. CA, 230 SCRA 643(1994).

[8]Insular Drug Co. vs. National, 58 Phil. 685 (1933).[9]PNB vs. CA, 315 SCRA 309 (1999).[10]Rollo, pp. 69-73.[11]Cervantes vs. CA, 304 SCRA 25 (1999).[12]Barons Marketing Corporation vs. CA, 286 SCRA 96 (1998).

Republic of the PhilippinesSUPREME COURT

ManilaSECOND DIVISION

G.R. No. 107382/G.R. No. 107612 January 31, 1996ASSOCIATED BANK, petitioner,vs.HON. COURT OF APPEALS, PROVINCE OF TARLAC andPHILIPPINE NATIONAL BANK, respondents.x x x x x x x x x x x x x x x x x x x x xG.R. No. 107612 January 31, 1996PHILIPPINE NATIONAL BANK, petitioner,vs.

HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, andASSOCIATED BANK, respondents.D E C I S I O NROMERO,J.:Where thirty checks bearing forged endorsements are paid, who bearsthe loss, the drawer, the drawee bank or the collecting bank?This is the main issue in these consolidated petitions for reviewassailing the decision of the Court of Appeals in "Province of Tarlac v.Philippine National Bank v. Associated Bank v. Fausto Pangilinan, et.

al." (CA-G.R. No. CV No. 17962).1

The facts of the case are as follows:The Province of Tarlac maintains a current account with the PhilippineNational Bank (PNB) Tarlac Branch where the provincial funds aredeposited. Checks issued by the Province are signed by the ProvincialTreasurer and countersigned by the Provincial Auditor or the Secretaryof the Sangguniang Bayan.A portion of the funds of the province is allocated to the ConcepcionEmergency Hospital. 2 The allotment checks for said governmenthospital are drawn to the order of "Concepcion Emergency Hospital,Concepcion, Tarlac" or "The Chief, Concepcion Emergency Hospital,Concepcion, Tarlac." The checks are released by the Office of the

Provincial Treasurer and received for the hospital by its administrativeofficer and cashier.In January 1981, the books of account of the Provincial Treasurer werepost-audited by the Provincial Auditor. It was then discovered that thehospital did not receive several allotment checks drawn by theProvince.On February 19, 1981, the Provincial Treasurer requested the managerof the PNB to return all of its cleared checks which were issued from1977 to 1980 in order to verify the regularity of their encashment.After the checks were examined, the Provincial Treasurer learned that30 checks amounting to P203,300.00 were encashed by one FaustoPangilinan, with the Associated Bank acting as collecting bank.

It turned out that Fausto Pangilinan, who was the administrative officerand cashier of payee hospital until his retirement on February 28,1978, collected the questioned checks from the office of the ProvincialTreasurer. He claimed to be assisting or helping the hospital follow upthe release of the checks and had official receipts. 3Pangilinan soughtto encash the first check 4 with Associated Bank. However, themanager of Associated Bank refused and suggested that Pangilinandeposit the check in his personal savings account with the same bank.Pangilinan was able to withdraw the money when the check wascleared and paid by the drawee bank, PNB.
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After forging the signature of Dr. Adena Canlas who was chief of thepayee hospital, Pangilinan followed the same procedure for the secondcheck, in the amount of P5,000.00 and dated April 20, 1978, 5 as wellas for twenty-eight other checks of various amounts and on variousdates. The last check negotiated by Pangilinan was for f8,000.00 anddated February 10, 1981. 6 All the checks bore the stamp of AssociatedBank which reads "All prior endorsements guaranteed ASSOCIATEDBANK."Jesus David, the manager of Associated Bank testified that Pangilinan

made it appear that the checks were paid to him for certain projectswith the hospital. 7 He did not find as irregular the fact that the checkswere not payable to Pangilinan but to the Concepcion EmergencyHospital. While he admitted that his wife and Pangilinan's wife are firstcousins, the manager denied having given Pangilinan preferentialtreatment on this account. 8

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

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

As both banks resisted payment, the Province of Tarlac brought suit

against PNB which, in turn, impleaded Associated Bank as third-partydefendant. The latter then filed a fourth-party complaint against AdenaCanlas and Fausto Pangilinan. 11

After trial on the merits, the lower court rendered its decision on March21, 1988, disposing as follows:

WHEREFORE, in view of the foregoing, judgment is herebyrendered:1. On the basic complaint, in favor of plaintiff Province of Tarlacand against defendant Philippine National Bank (PNB), orderingthe latter to pay to the former, the sum of Two Hundred ThreeThousand Three Hundred (P203,300.00) Pesos with legalinterest thereon from March 20, 1981 until fully paid;

2. On the third-party complaint, in favor of defendant/third-party plaintiff Philippine National Bank (PNB) and against third-party defendant/fourth-party plaintiff Associated Bank orderingthe latter to reimburse to the former the amount of TwoHundred Three Thousand Three Hundred (P203,300.00) Pesoswith legal interests thereon from March 20, 1981 until fullypaid;.3. On the fourth-party complaint, the same is hereby ordereddismissed for lack of cause of action as against fourth-partydefendant Adena Canlas and lack of jurisdiction over the person

of fourth-party defendant Fausto Pangilinan as against thelatter.4. On the counterclaims on the complaint, third-party complaintand fourth-party complaint, the same are hereby ordereddismissed for lack of merit.SO ORDERED.12

PNB and Associated Bank appealed to the Court ofAppeals. 13 Respondent court affirmed the trial court's decision in totoon September 30, 1992.

Hence these consolidated petitions which seek a reversal ofrespondent appellate court's decision.PNB assigned two errors. First, the bank contends that respondentcourt erred in exempting the Province of Tarlac from liability when, infact, the latter was negligent because it delivered and released thequestioned checks to Fausto Pangilinan who was then already retiredas the hospital's cashier and administrative officer. PNB also maintainsits innocence and alleges that as between two innocent persons, theone whose act was the cause of the loss, in this case the Province ofTarlac, bears the loss.Next, PNB asserts that it was error for the court to order it to pay theprovince and then seek reimbursement from Associated Bank.

According to petitioner bank, respondent appellate Court should havedirected Associated Bank to pay the adjudged liability directly to theProvince of Tarlac to avoid circuity. 14

Associated Bank, on the other hand, argues that the order of liabilityshould be totally reversed, with the drawee bank (PNB) solely andultimately bearing the loss.Respondent court allegedly erred in applying Section 23 of thePhilippine Clearing House Rules instead of Central Bank Circular No.580, which, being an administrative regulation issued pursuant to law,has the force and effect of law. 15 The PCHC Rules are merelycontractual stipulations among and between member-banks. As such,they cannot prevail over the aforesaid CB Circular.

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

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

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

xxx xxx xxxThe case at bench concerns checks payable to the order of ConcepcionEmergency Hospital or its Chief. They were properly issued and bearthe genuine signatures of the drawer, the Province of Tarlac. The

infirmity in the questioned checks lies in the payee's (ConcepcionEmergency Hospital) indorsements which are forgeries. At the time oftheir indorsement, the checks were order instruments.Checks having forged indorsements should be differentiated fromforged checks or checks bearing the forged signature of the drawer.Section 23 of the Negotiable Instruments Law (NIL) provides:

Sec. 23. FORGED SIGNATURE, EFFECT OF. When a signatureis forged or made without authority of the person whosesignature it purports to be, it is wholly inoperative, and no rightto retain the instrument, or to give a discharge therefor, or toenforce payment thereof against any party thereto, can beacquired through or under such signature unless the party

against whom it is sought to enforce such right is precludedfrom setting up the forgery or want of authority.

A forged signature, whether it be that of the drawer or the payee, iswholly inoperative and no one can gain title to the instrument throughit. A person whose signature to an instrument was forged was never aparty and never consented to the contract which allegedly gave rise tosuch instrument. 18Section 23 does not avoid the instrument but onlythe forged signature. 19 Thus, a forged indorsement does not operateas the payee's indorsement.The exception to the general rule in Section 23 is where "a partyagainst whom it is sought to enforce a right is precluded from settingup the forgery or want of authority." Parties who warrant or admit the

genuineness of the signature in question and those who, by their acts,silence or negligence are estopped from setting up the defense offorgery, are precluded from using this defense. Indorsers, personsnegotiating by delivery and acceptors are warrantors of thegenuineness of the signatures on the instrument. 20

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

The checks involved in this case are order instruments, hence, thefollowing discussion is made with reference to the effects of a forgedindorsement on an instrument payable to order.Where the instrument is payable to order at the time of the forgery,such as the checks in this case, the signature of its rightful holder(here, the payee hospital) is essential to transfer title to the sameinstrument. When the holder's indorsement is forged, all parties priorto the forgery may raise the real defense of forgery against all partiessubsequent thereto. 22

An indorser of an order instrument warrants "that the instrument isgenuine and in all respects what it purports to be; that he has a goodtitle to it; that all prior parties had capacity to contract; and that theinstrument is at the time of his indorsement valid and subsisting." 23 Hecannot interpose the defense that signatures prior to him are forged.A collecting bank where a check is deposited and which indorses thecheck upon presentment with the drawee bank, is such an indorser. Soeven if the indorsement on the check deposited by the banks's client isforged, the collecting bank is bound by his warranties as an indorserand cannot set up the defense of forgery as against the drawee bank.The bank on which a check is drawn, known as the drawee bank, isunder strict liability to pay the check to the order of the payee. The

drawer's instructions are reflected on the face and by the terms of thecheck. Payment under a forged indorsement is not to the drawer'sorder. When the drawee bank pays a person other than the payee, itdoes not comply with the terms of the check and violates its duty tocharge its customer's (the drawer) account only for properly payableitems. Since the drawee bank did not pay a holder or other personentitled to receive payment, it has no right to reimbursement from thedrawer. 24 The general rule then is that the drawee bank may not debitthe drawer's account and is not entitled to indemnification from thedrawer. 25 The risk of loss must perforce fall on the drawee bank.However, if the drawee bank can prove a failure by thecustomer/drawer to exercise ordinary care that substantially

contributed to the making of the forged signature, the drawer isprecluded from asserting the forgery.If at the same time the drawee bank was also negligent to the point ofsubstantially contributing to the loss, then such loss from the forgerycan be apportioned between the negligent drawer and the negligentbank. 26

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

In cases involving checks with forged indorsements, such as thepresent petition, the chain of liability does not end with the draweebank. The drawee bank may not debit the account of the drawer butmay generally pass liability back through the collection chain to theparty who took from the forger and, of course, to the forger himself, ifavailable. 28 In other words, the drawee bank canseek reimbursementor a return of the amount it paid from the presentor bank or

person.29

Theoretically, the latter can demand reimbursement fromthe person who indorsed the check to it and so on. The loss falls on theparty who took the check from the forger, or on the forger himself.In this case, the checks were indorsed by the collecting bank(Associated Bank) to the drawee bank (PNB). The former willnecessarily be liable to the latter for the checks bearing forgedindorsements. If the forgery is that of the payee's or holder'sindorsement, the collecting bank is held liable, without prejudice to thelatter proceeding against the forger.Since a forged indorsement is inoperative, the collecting bank had noright to be paid by the drawee bank. The former must necessarilyreturn the money paid by the latter because it was paid wrongfully. 30

More importantly, by reason of the statutory warranty of a generalindorser in section 66 of the Negotiable Instruments Law, a collectingbank which indorses a check bearing a forged indorsement andpresents it to the drawee bank guarantees all prior indorsements,including the forged indorsement. It warrants that the instrument isgenuine, and that it is valid and subsisting at the time of hisindorsement. Because the indorsement is a forgery, the collecting bankcommits a breach of this warranty and will be accountable to thedrawee bank. This liability scheme operates without regard to fault onthe part of the collecting/presenting bank. Even if the latter bank wasnot negligent, it would still be liable to the drawee bank because of itsindorsement.

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

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

Moreover, the collecting bank is made liable because it is privy to thedepositor who negotiated the check. The bank knows him, his addressand history because he is a client. It has taken a risk on his deposit.The bank is also in a better position to detect forgery, fraud orirregularity in the indorsement.Hence, the drawee bank can recover the amount paid on the checkbearing a forged indorsement from the collecting bank. However, adrawee bank has the duty to promptly inform the presentor of theforgery upon discovery. If the drawee bank delays in informing the

presentor of the forgery, thereby depriving said presentor of the rightto recover from the forger, the former is deemed negligent and can nolonger recover from the presentor.33

Applying these rules to the case at bench, PNB, the drawee bank,cannot debit the current account of the Province of Tarlac because itpaid checks which bore forged indorsements. However, if the Provinceof Tarlac as drawer was negligent to the point of substantiallycontributing to the loss, then the drawee bank PNB can charge itsaccount. If both drawee bank-PNB and drawer-Province of Tarlac werenegligent, the loss should be properly apportioned between them.The loss incurred by drawee bank-PNB can be passed on to thecollecting bank-Associated Bank which presented and indorsed the

checks to it. Associated Bank can, in turn, hold the forger, FaustoPangilinan, liable.If PNB negligently delayed in informing Associated Bank of the forgery,thus depriving the latter of the opportunity to recover from the forger,it forfeits its right to reimbursement and will be made to bear the loss.After careful examination of the records, the Court finds that theProvince of Tarlac was equally negligent and should, therefore, sharethe burden of loss from the checks bearing a forged indorsement.The Province of Tarlac permitted Fausto Pangilinan to collect thechecks when the latter, having already retired from governmentservice, was no longer connected with the hospital. With the exceptionof the first check (dated January 17, 1978), all the checks were issued

and released after Pangilinan's retirement on February 28, 1978. Afternearly three years, the Treasurer's office was still releasing the checksto the retired cashier. In addition, some of the aid allotment checkswere released to Pangilinan and the others to Elizabeth Juco, the newcashier. The fact that there were now two persons collecting thechecks for the hospital is an unmistakable sign of an irregularity whichshould have alerted employees in the Treasurer's office of the fraudbeing committed. There is also evidence indicating that the provincialemployees were aware of Pangilinan's retirement and consequentdissociation from the hospital. Jose Meru, the Provincial Treasurer,testified:.
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ATTY. MORGA:Q Now, is it true that for a given month there were two releasesof checks, one went to Mr. Pangilinan and one went to MissJuco?JOSE MERU:A Yes, sir.Q Will you please tell us how at the time (sic) when theauthorized representative of Concepcion Emergency Hospital isand was supposed to be Miss Juco?

A Well, as far as my investigation show (sic) the assistantcashier told me that Pangilinan represented himself as alsoauthorized to help in the release of these checks and we wereapparently misled because they accepted the representation ofPangilinan that he was helping them in the release of thechecks and besides according to them they were, Pangilinan,like the rest, was able to present an official receipt toacknowledge these receipts and according to them since this isa government check and believed that it will eventually go tothe hospital following the standard procedure of negotiatinggovernment checks, they released the checks to Pangilinanaside from Miss Juco.34

The failure of the Province of Tarlac to exercise due care contributed toa significant degree to the loss tantamount to negligence. Hence, theProvince of Tarlac should be liable for part of the total amount paid onthe questioned checks.The drawee bank PNB also breached its duty to pay only according tothe terms of the check. Hence, it cannot escape liability and shouldalso bear part of the loss.As earlier stated, PNB can recover from the collecting bank.In the case ofAssociated Bank v. CA, 35 six crossed checks with forgedindorsements were deposited in the forger's account with thecollecting bank and were later paid by four different drawee banks. TheCourt found the collecting bank (Associated) to be negligent and held:

The Bank should have first verified his right to endorse thecrossed checks, of which he was not the payee, and to depositthe proceeds of the checks to his own account. The Bank wasby reason of the nature of the checks put upon notice that theywere issued for deposit only to the private respondent'saccount. . . .

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

Although Associated Bank claims that the guarantee stamped on thechecks (All prior and/or lack of endorsements guaranteed) is merely arequirement forced upon it by clearing house rules, it cannot butremain liable. The stamp guaranteeing prior indorsements is not anempty rubric which a bank must fulfill for the sake of convenience. Abank is not required to accept all the checks negotiated to it. It iswithin the bank's discretion to receive a check for no bankinginstitution would consciously or deliberately accept a check bearing aforged indorsement. When a check is deposited with the collecting

bank, it takes a risk on its depositor. It is only logical that this bank beheld accountable for checks deposited by its customers.A delay in informing the collecting bank (Associated Bank) of theforgery, which deprives it of the opportunity to go after the forger,signifies negligence on the part of the drawee bank (PNB) and willpreclude it from claiming reimbursement.It is here that Associated Bank's assignment of error concerning C.B.Circular No. 580 and Section 23 of the Philippine Clearing HouseCorporation Rules comes to fore. Under Section 4(c) of CB Circular No.580, items bearing a forged endorsement shall be returned withintwenty-Sour (24) hours after discovery of the forgery but in no eventbeyond the period fixed or provided by law for filing of a legal action by

the returning bank. Section 23 of the PCHC Rules deleted therequirement that items bearing a forged endorsement should bereturned within twenty-four hours. Associated Bank now argues thatthe aforementioned Central Bank Circular is applicable. Since PNB didnot return the questioned checks within twenty-four hours, but severaldays later, Associated Bank alleges that PNB should be considerednegligent and not entitled to reimbursement of the amount it paid onthe checks.The Court deems it unnecessary to discuss Associated Bank'sassertions that CB Circular No. 580 is an administrative regulationissued pursuant to law and as such, must prevail over the PCHC rule.The Central Bank circular was in force for all banks until June 1980

when the Philippine Clearing House Corporation (PCHC) was set up andcommenced operations. Banks in Metro Manila were covered by thePCHC while banks located elsewhere still had to go through CentralBank Clearing. In any event, the twenty-four-hour return rule wasadopted by the PCHC until it was changed in 1982. The contendingbanks herein, which are both branches in Tarlac province, aretherefore not covered by PCHC Rules but by CB Circular No. 580.Clearly then, the CB circular was applicable when the forgery of thechecks was discovered in 1981.The rule mandates that the checks be returned within twenty-fourhours after discovery of the forgery but in no event beyond the period
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fixed by law for filing a legal action. The rationale of the rule is to givethe collecting bank (which indorsed the check) adequate opportunity toproceed against the forger. If prompt notice is not given, the collectingbank maybe prejudiced and lose the opportunity to go after itsdepositor.The Court finds that even if PNB did not return the questioned checksto Associated Bank within twenty-four hours, as mandated by the rule,PNB did not commit negligent delay. Under the circumstances, PNBgave prompt notice to Associated Bank and the latter bank was not

prejudiced in going after Fausto Pangilinan. After the Province of Tarlacinformed PNB of the forgeries, PNB necessarily had to inspect thechecks and conduct its own investigation. Thereafter, it requested theProvincial Treasurer's office on March 31, 1981 to return the checks forverification. The Province of Tarlac returned the checks only on April22, 1981. Two days later, Associated Bank received the checks fromPNB. 36

Associated Bank was also furnished a copy of the Province's letter ofdemand to PNB dated March 20, 1981, thus giving it notice of theforgeries. At this time, however, Pangilinan's account with Associatedhad only P24.63 in it.37 Had Associated Bank decided to debitPangilinan's account, it could not have recovered the amounts paid on

the questioned checks. In addition, while Associated Bank filed afourth-party complaint against Fausto Pangilinan, it did not presentevidence against Pangilinan and even presented him as its rebuttalwitness. 38 Hence, Associated Bank was not prejudiced by PNB's failureto comply with the twenty-four-hour return rule.Next, Associated Bank contends that PNB is estopped from requiringreimbursement because the latter paid and cleared the checks. TheCourt finds this contention unmeritorious. Even if PNB cleared and paidthe checks, it can still recover from Associated Bank. This is true evenif the payee's Chief Officer who was supposed to have indorsed thechecks is also a customer of the drawee bank. 39 PNB's duty was toverify the genuineness of the drawer's signature and not the

genuineness of payee's indorsement. Associated Bank, as thecollecting bank, is the entity with the duty to verify the genuineness ofthe payee's indorsement.PNB also avers that respondent court erred in adjudging circuitousliability by directing PNB to return to the Province of Tarlac the amountof the checks and then directing Associated Bank to reimburse PNB.The Court finds nothing wrong with the mode of the award. Thedrawer, Province of Tarlac, is a clientor customer of the PNB, not ofAssociated Bank. There is no privity of contract between the drawerand the collecting bank.

The trial court made PNB and Associated Bank liable with legal interestfrom March 20, 1981, the date of extrajudicial demand made by theProvince of Tarlac on PNB. The payments to be made in this case stemfrom the deposits of the Province of Tarlac in its current account withthe PNB. Bank deposits are considered under the law asloans. 40 Central Bank Circular No. 416 prescribes a twelve percent(12%) interest per annum for loans, forebearance of money, goods orcredits in the absence of express stipulation. Normally, currentaccounts are likewise interest-bearing, by express contract, thus

excluding them from the coverage of CB Circular No. 416. In this case,however, the actual interest rate, if any, for the current accountopened by the Province of Tarlac with PNB was not given in evidence.Hence, the Court deems it wise to affirm the trial court's use of thelegal interest rate, or six percent (6%) per annum. The interest rateshall be computed from the date of default, or the date of judicial orextrajudicial demand. 41 The trial court did not err in granting legalinterest from March 20, 1981, the date of extrajudicial demand.The Court finds as reasonable, the proportionate sharing of fiftypercent - fifty percent (50%-50%). Due to the negligence of theProvince of Tarlac in releasing the checks to an unauthorized person(Fausto Pangilinan), in allowing the retired hospital cashier to receive

the checks for the payee hospital for a period close to three years andin not properly ascertaining why the retired hospital cashier wascollecting checks for the payee hospital in addition to the hospital'sreal cashier, respondent Province contributed to the loss amounting toP203,300.00 and shall be liable to the PNB for fifty (50%) percentthereof. In effect, the Province of Tarlac can only recover fifty percent(50%) of P203,300.00 from PNB.The collecting bank, Associated Bank, shall be liable to PNB for fifty(50%) percent of P203,300.00. It is liable on its warranties as indorserof the checks which were deposited by Fausto Pangilinan, havingguaranteed the genuineness of all prior indorsements, including that ofthe chief of the payee hospital, Dr. Adena Canlas. Associated Bank was

also remiss in its duty to ascertain the genuineness of the payee'sindorsement.IN VIEW OF THE FOREGOING, the petition for review filed by thePhilippine National Bank (G.R. No. 107612) is hereby PARTIALLYGRANTED. The petition for review filed by the Associated Bank (G.R.No. 107382) is hereby DENIED. The decision of the trial court isMODIFIED. The Philippine National Bank shall pay fifty percent (50%) ofP203,300.00 to the Province of Tarlac, with legal interest from March20, 1981 until the payment thereof. Associated Bank shall pay fiftypercent (50%) of P203,300.00 to the Philippine National Bank, likewise,with legal interest from March 20, 1981 until payment is made.
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SO ORDERED.Regalado, Puno and Mendoza, JJ., concur.

SUPREME COURTManilaEN BANCDECISION

PNB vs CADecember 31, 1995G.R. No., ,vs., .

,J.:

Where thirty checks bearing forged endorsements are paid, who bearsthe loss, the drawer, the drawee bank or the collecting bank?This is the main issue in these consolidated petitions for reviewassailing the decision of the Court of Appeals in Province of Tarlac v.Philippine National Bank v. Associated Bank v. Fausto Pangilinan, et.al. (CA-G.R. No. CV No. 17962). 1The facts of the case are as follows:The Province of Tarlac maintains a current account with the PhilippineNational Bank (PNB) Tarlac Branch where the provincial funds aredeposited. Checks issued by the Province are signed by the ProvincialTreasurer and countersigned by the Provincial Auditor or the Secretaryof the Sangguniang Bayan.

A portion of the funds of the province is allocated to the ConcepcionEmergency Hospital. 2 The allotment checks for said governmenthospital are drawn to the order of Concepcion Emergency Hospital,Concepcion, Tarlac or The Chief, Concepcion Emergency Hospital,Concepcion, Tarlac. The checks are released by the Office of theProvincial Treasurer and received for the hospital by its administrativeofficer and cashier.In January 1981, the books of account of the Provincial Treasurer werepost-audited by the Provincial Auditor. It was then discovered that thehospital did not receive several allotment checks drawn by theProvince.

On February 19, 1981, the Provincial Treasurer requested the managerof the PNB to return all of its cleared checks which were issued from1977 to 1980 in order to verify the regularity of their encashment.After the checks were examined, the Provincial Treasurer learned that30 checks amounting to P203,300.00 were encashed by one FaustoPangilinan, with the Associated Bank acting as collecting bank.It turned out that Fausto Pangilinan, who was the administrative officerand cashier of payee hospital until his retirement on February 28,1978, collected the questioned checks from the office of the Provincial

Treasurer. He claimed to be assisting or helping the hospital follow upthe release of the checks and had official receipts. 3 Pangilinan soughtto encash the first check 4 with Associated Bank. However, themanager of Associated Bank refused and suggested that Pangilinandeposit the check in his personal savings account with the same bank.Pangilinan was able to withdraw the money when the check wascleared and paid by the drawee bank, PNB.After forging the signature of Dr. Adena Canlas who was chief of thepayee hospital, Pangilinan followed the same procedure for the secondcheck, in the amount of P5,000.00 and dated April 20, 1978, 5 as wellas for twenty-eight other checks of various amounts and on variousdates. The last check negotiated by Pangilinan was for f8,000.00 and

dated February 10, 1981. 6 All the checks bore the stamp ofAssociated Bank which reads All prior endorsements guaranteedASSOCIATED BANK.Jesus David, the manager of Associated Bank testified that Pangilinanmade it appear that the checks were paid to him for certain projectswith the hospital. 7 He did not find as irregular the fact that the checkswere not payable to Pangilinan but to the Concepcion EmergencyHospital. While he admitted that his wife and Pangilinans wife are firstcousins, the manager denied having given Pangilinan preferentialtreatment on this account. 8On February 26, 1981, the Provincial Treasurer wrote the manager ofthe PNB seeking the restoration of the various amounts debited from

the current account of the Province. 9In turn, the PNB manager demanded reimbursement from theAssociated Bank on May 15, 1981. 10As both banks resisted payment, the Province of Tarlac brought suitagainst PNB which, in turn, impleaded Associated Bank as third-partydefendant. The latter then filed a fourth-party complaint against AdenaCanlas and Fausto Pangilinan. 11After trial on the merits, the lower court rendered its decision on March21, 1988, disposing as follows:WHEREFORE, in view of the foregoing, judgment is hereby rendered:


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1. On the basic complaint, in favor of plaintiff Province of Tarlac andagainst defendant Philippine National Bank (PNB), ordering the latter topay to the former, the sum of Two Hundred Three Thousand ThreeHundred (P203,300.00) Pesos with legal interest thereon from March20, 1981 until fully paid;2. On the third-party complaint, in favor of defendant/third-partyplaintiff Philippine National Bank (PNB) and against third-partydefendant/fourth-party plaintiff Associated Bank ordering the latter toreimburse to the former the amount of Two Hundred Three Thousand

Three Hundred (P203,300.00) Pesos with legal interests thereon fromMarch 20, 1981 until fully paid;.3. On the fourth-party complaint, the same is hereby ordereddismissed for lack of cause of action as against fourth-party defendantAdena Canlas and lack of jurisdiction over the person of fourth-partydefendant Fausto Pangilinan as against the latter.4. On the counterclaims on the complaint, third-party complaint andfourth-party complaint, the same are hereby ordered dismissed for lackof merit.SO ORDERED. 12PNB and Associated Bank appealed to the Court of Appeals. 13Respondent court affirmed the trial courts decision in toto on

September 30, 1992.Hence these consolidated petitions which seek a reversal ofrespondent appellate courts decision.PNB assigned two errors. First, the bank contends that respondentcourt erred in exempting the Province of Tarlac from liability when, infact, the latter was negligent because it delivered and released thequestioned checks to Fausto Pangilinan who was then already retiredas the hospitals cashier and administrative officer. PNB also maintainsits innocence and alleges that as between two innocent persons, theone whose act was the cause of the loss, in this case the Province ofTarlac, bears the loss.Next, PNB asserts that it was error for the court to order it to pay the

province and then seek reimbursement from Associated Bank.According to petitioner bank, respondent appellate Court should havedirected Associated Bank to pay the adjudged liability directly to theProvince of Tarlac to avoid circuity. 14Associated Bank, on the other hand, argues that the order of liabilityshould be totally reversed, with the drawee bank (PNB) solely andultimately bearing the loss.Respondent court allegedly erred in applying Section 23 of thePhilippine Clearing House Rules instead of Central Bank Circular No.580, which, being an administrative regulation issued pursuant to law,has the force and effect of law. 15 The PCHC Rules are merely

contractual stipulations among and between member-banks. As such,they cannot prevail over the aforesaid CB Circular.It likewise contends that PNB, the drawee bank, is estopped fromasserting the defense of guarantee of prior indorsements againstAssociated Bank, the collecting bank. In stamping the guarantee (forall prior indorsements), it merely followed a mandatory requirement forclearing and had no choice but to place the stamp of guarantee;otherwise, there would be no clearing. The bank will be in a no-winsituation and will always bear the loss as against the drawee bank. 16

Associated Bank also claims that since PNB already cleared and paidthe value of the forged checks in question, it is now estopped fromasserting the defense that Associated Bank guaranteed priorindorsements. The drawee bank allegedly has the primary duty toverify the genuineness of payees indorsement before paying thecheck. 17While both banks are innocent of the forgery, Associated Bank claimsthat PNB was at fault and should solely bear the loss because it clearedand paid the forged checks.xxx &nbsp &nbsp &nbsp xxx &nbsp &nbsp &nbsp xxxThe case at bench concerns checks payable to the order of ConcepcionEmergency Hospital or its Chief. They were properly issued and bear

the genuine signatures of the drawer, the Province of Tarlac. Theinfirmity in the questioned checks lies in the payees (ConcepcionEmergency Hospital) indorsements which are forgeries. At the time oftheir indorsement, the checks were order instruments.Checks having forged indorsements should be differentiated fromforged checks or checks bearing the forged signature of the drawer.Section 23 of the Negotiable Instruments Law (NIL) provides:Sec. 23. FORGED SIGNATURE, EFFECT OF. ? When a signature is forgedor made without authority of the person whose signature it purports tobe, it is wholly inoperative, and no right to retain the instrument, or togive a discharge therefor, or to enforce payment thereof against anyparty thereto, can be acquired through or under such signature unless

the party against whom it is sought to enforce such right is precludedfrom setting up the forgery or want of authority.A forged signature, whether it be that of the drawer or the payee, iswholly inoperative and no one can gain title to the instrument throughit. A person whose signature to an instrument was forged was never aparty and never consented to the contract which allegedly gave rise tosuch instrument. 18 Section 23 does not avoid the instrument but onlythe forged signature. 19 Thus, a forged indorsement does not operateas the payees indorsement.The exception to the general rule in Section 23 is where a partyagainst whom it is sought to enforce a right is precluded from setting


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The Court has consistently ruled that the collecting bank or lastendorser generally suffers the loss because it has the duty to ascertainthe genuineness of all prior endorsements considering that the act ofpresenting the check for payment to the drawee is an assertion thatthe party making the presentment has done its duty to ascertain thegenuineness of the endorsements. 31The drawee bank is not similarly situated as the collecting bankbecause the former makes no warranty as to the genuineness. of anyindorsement. 32 The drawee banks duty is but to verify the

genuineness of the drawers signature and not of the indorsementbecause the drawer is its client.Moreover, the collecting bank is made liable because it is privy to thedepositor who negotiated the check. The bank knows him, his addressand history because he is a client. It has taken a risk on his deposit.The bank is also in a better position to detect forgery, fraud orirregularity in the indorsement.Hence, the drawee bank can recover the amount paid on the checkbearing a forged indorsement from the collecting bank. However, adrawee bank has the duty to promptly inform the presentor of theforgery upon discovery. If the drawee bank delays in informing thepresentor of the forgery, thereby depriving said presentor of the right

to recover from the forger, the former is deemed negligent and can nolonger recover from the presentor. 33Applying these rules to the case at bench, PNB, the drawee bank,cannot debit the current account of the Province of Tarlac because itpaid checks which bore forged indorsements. However, if the Provinceof Tarlac as drawer was negligent to the point of substantiallycontributing to the loss, then the drawee bank PNB can charge itsaccount. If both drawee bank-PNB and drawer-Province of Tarlac werenegligent, the loss should be properly apportioned between them.The loss incurred by drawee bank-PNB can be passed on to thecollecting bank-Associated Bank which presented and indorsed thechecks to it. Associated Bank can, in turn, hold the forger, Fausto

Pangilinan, liable.If PNB negligently delayed in informing Associated Bank of the forgery,thus depriving the latter of the opportunity to recover from the forger,it forfeits its right to reimbursement and will be made to bear the loss.After careful examination of the records, the Court finds that theProvince of Tarlac was equally negligent and should, therefore, sharethe burden of loss from the checks bearing a forged indorsement.The Province of Tarlac permitted Fausto Pangilinan to collect thechecks when the latter, having already retired from governmentservice, was no longer connected with the hospital. With the exceptionof the first check (dated January 17, 1978), all the checks were issued

and released after Pangilinans retirement on February 28, 1978. Afternearly three years, the Treasurers office was still releasing the checksto the retired cashier. In addition, some of the aid allotment checkswere released to Pangilinan and the others to Elizabeth Juco, the newcashier. The fact that there were now two persons collecting thechecks for the hospital is an unmistakable sign of an irregularity whichshould have alerted employees in the Treasurers office of the fraudbeing committed. There is also evidence indicating that the provincialemployees were aware of Pangilinans retirement and consequent

dissociation from the hospital. Jose Meru, the Provincial Treasurer,testified:.ATTY. MORGA:Q Now, is it true that for a given month there were two releases ofchecks, one went to Mr. Pangilinan and one went to Miss Juco?JOSE MERU:A Yes, sir.Q Will you please tell us how at the time (sic) when the authorizedrepresentative of Concepcion Emergency Hospital is and was supposedto be Miss Juco?A Well, as far as my investigation show (sic) the assistant cashier toldme that Pangilinan represented himself as also authorized to help in

the release of these checks and we were apparently misled becausethey accepted the representation of Pangilinan that he was helpingthem in the release of the checks and besides according to them theywere, Pangilinan, like the rest, was able to present an official receipt toacknowledge these receipts and according to them since this is agovernment check and believed that it will eventually go to thehospital following the standard procedure of negotiating governmentchecks, they released the checks to Pangilinan aside from Miss Juco.34The failure of the Province of Tarlac to exercise due care contributed toa significant degree to the loss tantamount to negligence. Hence, theProvince of Tarlac should be liable for part of the total amount paid onthe questioned checks.

The drawee bank PNB also breached its duty to pay only according tothe terms of the check. Hence, it cannot escape liability and shouldalso bear part of the loss.As earlier stated, PNB can recover from the collecting bank.In the case of Associated Bank v. CA, 35 six crossed checks with forgedindorsements were deposited in the forgers account with thecollecting bank and were later paid by four different drawee banks. TheCourt found the collecting bank (Associated) to be negligent and held:The Bank should have first verified his right to endorse the crossedchecks, of which he was not the payee, and to deposit the proceeds ofthe checks to his own account. The Bank was by reason of the nature


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of the checks put upon notice that they were issued for deposit only tothe private respondents account. . . .The situation in the case at bench is analogous to the above case, for itwas not the payee who deposited the checks with the collecting bank.Here, the checks were all payable to Concepcion Emergency Hospitalbut it was Fausto Pangilinan who deposited the checks in his personalsavings account.Although Associated Bank claims that the guarantee stamped on thechecks (All prior and/or lack of endorsements guaranteed) is merely a

requirement forced upon it by clearing house rules, it cannot butremain liable. The stamp guaranteeing prior indorsements is not anempty rubric which a bank must fulfill for the sake of convenience. Abank is not required to accept all the checks negotiated to it. It iswithin the banks discretion to receive a check for no bankinginstitution would consciously or deliberately accept a check bearing aforged indorsement. When a check is deposited with the collectingbank, it takes a risk on its depositor. It is only logical that this bank beheld accountable for checks deposited by its customers.A delay in informing the collecting bank (Associated Bank) of theforgery, which deprives it of the opportunity to go after the forger,signifies negligence on the part of the drawee bank (PNB) and will

preclude it from claiming reimbursement.It is here that Associated Banks assignment of error concerning C.B.Circular No. 580 and Section 23 of the Philippine Clearing HouseCorporation Rules comes to fore. Under Section 4(c) of CB Circular No.580, items bearing a forged endorsement shall be returned withintwenty-Sour (24) hours after discovery of the forgery but in no eventbeyond the period fixed or provided by law for filing of a legal action bythe returning bank. Section 23 of the PCHC Rules deleted therequirement that items bearing a forged endorsement should bereturned within twenty-four hours. Associated Bank now argues thatthe aforementioned Central Bank Circular is applicable. Since PNB didnot return the questioned checks within twenty-four hours, but several

days later, Associated Bank alleges that PNB should be considerednegligent and not entitled to reimbursement of the amount it paid onthe checks.The Court deems it unnecessary to discuss Associated Banksassertions that CB Circular No. 580 is an administrative regulationissued pursuant to law and as such, must prevail over the PCHC rule.The Central Bank circular was in force for all banks until June 1980when the Philippine Clearing House Corporation (PCHC) was set up andcommenced operations. Banks in Metro Manila were covered by thePCHC while banks located elsewhere still had to go through CentralBank Clearing. In any event, the twenty-four-hour return rule was

adopted by the PCHC until it was changed in 1982. The contendingbanks herein, which are both branches in Tarlac province, aretherefore not covered by PCHC Rules but by CB Circular No. 580.Clearly then, the CB circular was applicable when the forgery of thechecks was discovered in 1981.The rule mandates that the checks be returned within twenty-fourhours after discovery of the forgery but in no event beyond the periodfixed by law for filing a legal action. The rationale of the rule is to givethe collecting bank (which indorsed the check) adequate opportunity to

proceed against the forger. If prompt notice is not given, the collectingbank maybe prejudiced and lose the opportunity to go after itsdepositor.The Court finds that even if PNB did not return the questioned checksto Associated Bank within twenty-four hours, as mandated by the rule,PNB did not commit negligent delay. Under the circumstances, PNBgave prompt notice to Associated Bank and the latter bank was notprejudiced in going after Fausto Pangilinan. After the Province of Tarlacinformed PNB of the forgeries, PNB necessarily had to inspect thechecks and conduct its own investigation. Thereafter, it requested theProvincial Treasurers office on March 31, 1981 to return the checks forverification. The Province of Tarlac returned the checks only on April

22, 1981. Two days later, Associated Bank received the checks fromPNB. 36Associated Bank was also furnished a copy of the Provinces letter ofdemand to PNB dated March 20, 1981, thus giving it notice of theforgeries. At this time, however, Pangilinans account with Associatedhad only P24.63 in it. 37 Had Associated Bank decided to debitPangilinans account, it could not have recovered the amounts paid onthe questioned checks. In addition, while Associated Bank filed afourth-party complaint against Fausto Pangilinan, it did not presentevidence against Pangilinan and even presented him as its rebuttalwitness. 38 Hence, Associated Bank was not prejudiced by PNBsfailure to comply with the twenty-four-hour return rule.

Next, Associated Bank contends that PNB is estopped from requiringreimbursement because the latter paid and cleared the checks. TheCourt finds this contention unmeritorious. Even if PNB cleared and paidthe checks, it can still recover from Associated Bank. This is true evenif the payees Chief Officer who was supposed to have indorsed thechecks is also a customer of the drawee bank. 39 PNBs duty was toverify the genuineness of the drawers signature and not thegenuineness of payees indorsement. Associated Bank, as thecollecting bank, is the entity with the duty to verify the genuineness ofthe payees indorsement.


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PNB also avers that respondent court erred in adjudging circuitousliability by directing PNB to return to the Province of Tarlac the amountof the checks and then directing Associated Bank to reimburse PNB.The Court finds nothing wrong with the mode of the award. Thedrawer, Province of Tarlac, is a clientor customer of the PNB, not ofAssociated Bank. There is no privity of contract between the drawerand the collecting bank.The trial court made PNB and Associated Bank liable with legal interestfrom March 20, 1981, the date of extrajudicial demand made by the

Province of Tarlac on PNB. The payments to be made in this case stemfrom the deposits of the Province of Tarlac in its current account withthe PNB. Bank deposits are considered under the law as loans. 40Central Bank Circular No. 416 prescribes a twelve percent (12%)interest per annum for loans, forebearance of money, goods or creditsin the absence of express stipulation. Normally, current accounts arelikewise interest-bearing, by express contract, thus excluding themfrom the coverage of CB Circular No. 416. In this case, however, theactual interest rate, if any, for the current account opened by theProvince of Tarlac with PNB was not given in evidence. Hence, theCourt deems it wise to affirm the trial courts use of the legal interestrate, or six percent (6%) per annum. The interest rate shall be

computed from the date of default, or the date of judicial orextrajudicial demand. 41 The trial court did not err in granting legalinterest from March 20, 1981, the date of extrajudicial demand.The Court finds as reasonable, the proportionate sharing of fiftypercent fifty percent (50%-50%). Due to the negligence of theProvince of Tarlac in releasing the checks to an unauthorized person(Fausto Pangilinan), in allowing the retired hospital cashier to receivethe checks for the payee hospital for a period close to three years andin not properly ascertaining why the retired hospital cashier wascollecting checks for the payee hospital in addition to the hospitalsreal cashier, respondent Province contributed to the loss amounting toP203,300.00 and shall be liable to the PNB for fifty (50%) percent

thereof. In effect, the Province of Tarlac can only recover fifty percent(50%) of P203,300.00 from PNB.The collecting bank, Associated Bank, shall be liable to PNB for fifty(50%) percent of P203,300.00. It is liable on its warranties as indorserof the checks which were deposited by Fausto Pangilinan, havingguaranteed the genuineness of all prior indorsements, including that ofthe chief of the payee hospital, Dr. Adena Canlas. Associated Bank wasalso remiss in its duty to ascertain the genuineness of the payeesindorsement.IN VIEW OF THE FOREGOING, the petition for review filed by thePhilippine National Bank (G.R. No. 107612) is hereby PARTIALLY

GRANTED. The petition for review filed by the Associated Bank (G.R.No. 107382) is hereby DENIED. The decision of the trial court isMODIFIED. The Philippine National Bank shall pay fifty percent (50%) ofP203,300.00 to the Province of Tarlac, with legal interest from March20, 1981 until the payment thereof. Associated Bank shall pay fiftypercent (50%) of P203,300.00 to the Philippine National Bank, likewise,with legal interest from March 20, 1981 until payment is made.SO ORDERED.Regalado, Puno and Mendoza, JJ., concur.


ManilaEN BANC

G.R. No. L-37467 December 11, 1933SAN CARLOS MILLING CO., LTD., plaintiff-appellant,vs.BANK OF THE PHILIPPINE ISLANDS and CHINA BANKINGCORPORATION, defendants-appellees.


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Gibbs and McDonough and Roman Ozaeta for appellant.Araneta, De Joya, Zaragosa and Araneta for appellee Bank of thePhilippine Islands.Marcelo Nubla and Guevara, Francisco and Recto for appellee ChinaBanking Corporation.HULL,J.:Plaintiff corporation, organized under the laws of the Territory ofHawaii, is authorized to engaged in business in the Philippine Islands,

and maintains its main office in these Islands in the City of Manila.The business in the Philippine Islands was in the hands of Alfred D.Cooper, its agent under general power of attorney with authority ofsubstitution. The principal employee in the Manila office was oneJoseph L. Wilson, to whom had been given a general power of attorneybut without power of substitution. In 1926 Cooper, desiring to go onvacation, gave a general power of attorney to Newland Baldwin and atthe same time revoked the power of Wilson relative to the dealingswith the Bank of the Philippine Islands, one of the banks in Manila inwhich plaintiff maintained a deposit.About a year thereafter Wilson, conspiring together with one AlfredoDolores, a messenger-clerk in plaintiff's Manila office, sent a cable

gram in code to the company in Honolulu requesting a telegraphictransfer to the China Banking Corporation of Manila of $100,00. Themoney was transferred by cable, and upon its receipt the ChinaBanking Corporation, likewise a bank in which plaintiff maintained adeposit, sent an exchange contract to plaintiff corporation offering thesum of P201,000, which was then the current rate of exchange. On thiscontract was forged the name of Newland Baldwin and typed on thebody of the contract was a note: lawphil.net

Please send us certified check in our favor when transfer isreceived.

A manager's check on the China Banking Corporation for P201,000payable to San Carlos Milling Company or order was receipted for by

Dolores. On the same date, September 28, 1927, the manger's checkwas deposited with the Bank of the Philippine Islands by the followingendorsement:

For deposit only with Bank of the Philippine Islands, to credit ofaccount of San Carlos Milling Co., Ltd.

By (Sgd.) NEWLAND BALDWINFor Agent

The endorsement to which the name of Newland Baldwin was affixedwas spurious.The Bank of the Philippine Islands thereupon credited the currentaccount of plaintiff in the sum of P201,000 and passed the cashier's

check in the ordinary course of business through the clearing house,where it was paid by the China Banking Corporation.On the same day the cashier of the Bank of the Philippine Islandsreceived a letter, purporting to be signed by Newland Baldwin,directing that P200,000 in bills of various denominations, named in theletter, be packed for shipment and delivery the next day. The next day,Dolores witnessed the counting and packing of the money, and shortlyafterwards returned with the check for the sum of P200,000,purporting to be signed by Newland Baldwin as agent.

Plaintiff had frequently withdrawn currency for shipment to its millfrom the Bank of the Philippine Islands but never in so large anamount, and according to the record, never under the sole supervisionof Dolores as the representative of plaintiff.Before delivering the money, the bank asked Dolores for P1 to coverthe cost of packing the money, and he left the bank and shortlyafterwards returned with another check for P1, purporting to be signedby Newland Baldwin. Whereupon the money was turned over toDolores, who took it to plaintiff's office, where he turned the moneyover to Wilson and received as his share, P10,000.Shortly thereafter the crime was discovered, and upon the defendantbank refusing to credit plaintiff with the amount withdrawn by the two

forged checks of P200,000 and P1, suit was brought against the Bankof the Philippine Islands, and finally on the suggestion of the defendantbank, an amended complaint was filed by plaintiff against both theBank of the Philippine Islands and the China Banking Corporation.At the trial the China Banking Corporation contended that they haddrawn a check to the credit of the plaintiff company, that the checkhad been endorsed for deposit, and that as the prior endorsement hadin law been guaranteed by the Bank of the Philippine Islands, whenthey presented the cashier's check to it for payment, the ChinaBanking Corporation was absolved even if the endorsement of NewlandBaldwin on the check was a forgery.The Bank of the Philippine Islands presented many special defenses,

but in the main their contentions were that they had been guilty of nonegligence, that they had dealt with the accredited representatives ofthe company in the due course of business, and that the loss was dueto the dishonesty of plaintiff's employees and the negligence ofplaintiff's general agent.In plaintiff's Manila office, besides the general agent, Wilson, andDolores, most of the time there was employed a woman stenographerand cashier. The agent did not keep in his personal possession eitherthe code-book or the blank checks of either the Bank of the PhilippineIslands or the China Banking Corporation. Baldwin was authorized to


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Baldwin was forged as drawer. As above stated, the fact that thesesignatures were forged is beyond question. It is an elementaryprinciple both of banking and of the Negotiable Instruments Law that

A bank is bound to know the signatures of its customers; and ifit pays a forged check, it must be considered as making thepayment out of its own funds, and cannot ordinarily charge theamount so paid to the account of the depositor whose namewas forged. (7 C.J., 683.)

There is no act of the plaintiff that led the Bank of the Philippine

Islands astray. If it was in fact lulled into a false sense of security, itwas by the effrontery of Dolores, the messenger to whom it entrustedthis large sum of money.The bank paid out its money because it relied upon the genuineness ofthe purported signatures of Baldwin. These, they never questioned atthe time its employees should have used care. In fact, even today thebank represents that it has a relief that they are genuine signatures.The signatures to the check being forged, under section 23 of theNegotiable Instruments Law they are not a charge against plaintiff norare the checks of any value to the defendant.It must therefore be held that the proximate cause of loss was due tothe negligence of the Bank of the Philippine Islands in honoring and

cashing the two forged checks.The judgment absolving the Bank of the Philippine Islands musttherefore be reversed, and a judgment entered in favor of plaintiff-appellant and against the Bank of the Philippine Islands, defendant-appellee, for the sum of P200,001, with legal interest thereon fromDecember 23,1928, until payment, together with costs in bothinstances. So ordered.Malcolm, Villa-Real, Vickers, and Imperial, JJ., concur.


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ManilaTHIRD DIVISION

G.R. No. 129910 September 5, 2006THE INTERNATIONAL CORPORATE BANK, INC., petitioner,

vs.COURT OF APPEALS and PHILIPPINE NATIONALBANK, respondents.

D E C I S I O NCARPIO,J.:

The CaseBefore the Court is a petition for review1assailing the 9 August 1994Amended Decision2 and the 16 July 1997 Resolution3of the Court ofAppeals in CA-G.R. CV No. 25209.

The Antecedent FactsThe case originated from an action for collection of sum of money filedon 16 March 1982 by the International Corporate Bank,

Inc.4

("petitioner") against the Philippine National Bank ("respondent").The case was raffled to the then Court of First Instance (CFI) of Manila,Branch 6. The complaint was amended on 19 March 1982. The casewas eventually re-raffled to the Regional Trial Court of Manila, Branch52 ("trial court").The Ministry of Education and Culture issued 15 checks5 drawn againstrespondent which petitioner accepted for deposit on various dates. Thechecks are as follows:

Check Number Date Payee Amount

7-3694621-4 7-20-81 Trade Factors, Inc.

7-3694609-6 7-27-81 Romero D. Palmares



7-3666225-5 8-10-81 Antonio Lisan

7-3688945-6 8-10-81 Antonio Lisan

7-4535674-1 8-21-81 Golden City Trading

7-4535675-2 8-21-81 Red Arrow Trading

7-4535699-5 8-24-81 Antonio Lisan

7-4535700-6 8-24-81 Antonio Lisan7-4697902-2 9-18-81 Ace Enterprises, Inc.

7-4697925-6 9-18-81 Golden City Trading

7-4697011-6 10-02-81 Wintrade Marketing

7-4697909-4 10-02-81 ABC Trading, Inc.

7-4697922-3 10-05-81 Golden EnterprisesThe checks were deposited on the following dates for the followingaccounts:

Check Number Date Deposited Account

7-3694621-4 7-23-81 CA 0060

7-3694609-6 7-28-81 CA 0060

7-3666224-4 8-

nego material alteration cases

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