nego instru cases_ft_berne guerrero

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Republic of the PhilippinesSUPREME COURT Manila

EN BANC

G.R. No. L-1405 July 31, 1948

BENJAMIN ABUBAKAR, petitioner,vs.THE AUDITOR GENERAL, respondent.

Viray and Viola Viray for petitioner. First Assistant Solicitor General Roberto A. Gianzon and Solicitor Manuel Tomacruz for respondent.

BENGZON, J. :

We are asked to overrule the decision of the Auditor General refusing to authorize the payment of Treasurywarrant No. A-2867376 for P1,000 which was issued in favor of Placido S. Urbanes on December 10, 1941, butis now in the hands of herein petitioner Benjamin Abubakar.

For his refusal the respondent gave two reasons: first, because the money available for the redemption oftreasury warrants issued before January 2, 1942, is appropriated by Republic Act No. 80 (Item F-IV-8) and thiswarrant does not come within the purview of said appropriation; and second, because on of the requirements ofhis office had not been complied with, namely, that it must be shown that the holders of warrants covering

payment or replenishment of cash advances for official expenditures (as this warrant is) received them in payment of definite government obligations.

Finding the first reason to be sufficiently valid we shall not discuss, nor pass upon the second.

There is no doubt as to the authenticity and date of the treasury warrant. There is no question that it wasregularly indorsed by the payee and is now in the custody of the herein petitioner who is a private individual.On the other hand, it is admitted that the warrant was originally made payable to Placido S. Urbanes in hiscapacity as disbursing officer of the Food Administration for "additional cash advance for Food ProductionCampaign in La Union" (Annex A). It is thus apparent that this is a treasury warrant issued in favor of a publicofficer or employee and held in possession by a private individual. Such being the case, the Auditor General canhardly be blamed for not authorizing its redemption out of an appropriation specifically for "treasury warrantsissued ... in favor of and held in possession by private individuals." (Republic Act No. 80, Item F-IV-8.) Thiswarrant was not issued in favor of a private individual . It was issued in favor of a government employee .

The distinction is not without a difference. Outstanding treasury warrants issued prior to January 2, 1942,

amount to more than four million pesos. The appropriation herein mentioned is only for P1,750,000. ObviouslyCongress wished to provide for redemption of one class of warrants those issued to private individuals asdistinguished from those issued in favor of government officials. Basis for the discrimination is not lacking.Probably the Government is not so sure that those warrants to officials have all been properly used by the latterduring the Japanese occupation or maybe it wants to conduct further inquiries as to the equities of the presentholders thereof.

The petitioner argues that he is a holder in good faith and for value of a negotiable instrument an dis entitled tothe rights and privileges of a holder in due course, free from defenses. But this treasury warrant is not within thescope of the negotiable instruments law. For one thing, the document bearing on its face the words "payablefrom the appropriation for food administration," is actually an order for payment out of "a particular fund," and

is not unconditional, and does not fulfill one of the essential requirements of a negotiable instrument. (Section 3last sentenced and section 1[ b] of the Negotiable Instruments Law.) In the United States, government warrantsfor the payment of money are not negotiable instruments nor commercial proper 1

Anyway the question here is not whether the Government should eventually pay this warrant, or is ultimatelyresponsible for it, but whether the Auditor General erred in refusing to permit payment out of the particularappropriation in Item F-IV-8 of Republic Act No. 80. We think that he did not. Petition dismissed, with costs.

Paras, Actg. C.J., Feria, Pablo, Perfecto, Briones, and Padilla, JJ., concur.


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Footnotes

1 Logan County Bank vs. Farmers' National Bank, 155 Pac., 561; Velvet Ridge School District No. 91vs. Bank of Searcy, 137 S.W., 907; Marshall vs. State, 102 So., 650.

Ang Tiong vs. Ting, GR L-26767, 22 February 1968

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-26767 February 22, 1968

ANG TIONG, plaintiff-appellee,vs.LORENZO TING, doing business under the name and style of PRUNES PRESERVED MFG., andFELIPE ANG, defendants.FELIPE ANG, defendant-appellant.

Chipeco & Alcaraz, Jr. for plaintiff-appellee. Ang, Atienza & Tabora for defendant-appellant.

CASTRO,J.:

On August 15, 1960 Lorenzo Ting issued Philippine Bank of Communications check K-81618, for thesum of P4,000, payable to "cash or bearer". With Felipe Ang's signature (indorsement in blank) at the backthereof, the instrument was received by the plaintiff Ang Tiong who thereafter presented it to the drawee bankfor payment. The bank dishonored it. The plaintiff then made written demands on both Lorenzo Ting and FelipeAng that they make good the amount represented by the check. These demands went unheeded; so he filed inthe municipal court of Manila an action for collection of the sum of P4,000, plus P500 attorney's fees. OnMarch 6, 1962 the municipal court adjudged for the plaintiff against the two defendants.

Only Felipe Ang appealed to the Court of First Instance of Manila (civil case 50018), which rendered

judgment on July 31, 1962, amended by an order dated August 9, 1962, directing him to pay to the plaintiff "thesum of P4,000, with interest at the legal rate from the date of the filing of the complaint, a further sum of P400as attorney's fees, and costs."

Felipe Ang then elevated the case to the Court of Appeals, which certified it to this Court because theissues raised are purely of law.

The appellant imputes to the court a quo three errors, namely, (1) that it refused to apply article 2071 ofthe new Civil Code to the case at bar; (2) that it adjudged him a general indorser under the NegotiableInstruments Law (Act 2031); and (3) that it held that he "cannot obtain his release from the contract ofsuretyship or obtain security to protect himself against any proceedings on the part of the creditor and against

the danger of insolvency of the principal debtor," because he is "jointly and severally liable on the instrument."This, appeal is absolutely without merit.

1. The genuineness and due execution of the instrument are not controverted. That the appellee is a holderthereof for value is admitted.

Having arisen from a bank check which is indisputably a negotiable instrument, the present case is,therefore, in so far as the indorsee is concerned vis-a-vis the indorser, governed solely plaintiff the NegotiableInstruments Law (see secs. 1 and 185). Article 2071 of the new Civil Code, invoked by the appellant, the


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pertinent portion of which states, "The guarantor, even before been paid, may proceed against the principaldebtor; (1) when he is sued for the payment; . . . the action of the guarantor is to obtain release from theguaranty, to demand a security that shall protect him from any proceedings by the creditor . . .," is herecompletely irrelevant and can have no application whatsoever.

We are in agreement with the trial judge that nothing in the check in question indicates that the appellantis not a general indorser within the purview of section 63 of the Negotiable Instruments Law which makes "a

person placing his signature upon an instrument otherwise than as maker, drawer or acceptor" a generalindorser, "unless he clearly indicates plaintiff appropriate words his intention to be bound in some othercapacity," which he did not do. And section 66 ordains that "every indorser who indorses without qualification,warrants to all subsequent holders in due course" (a) that the instrument is genuine and in all respects what it

purports to be; (b) that he has a good title to it; (c) that all prior parties have capacity to contract; and (d) that theinstrument is at the time of his indorsement valid and subsisting. In addition, "he engages that on due

presentment, it shall be accepted or paid, or both, as the case may be, and that if it be dishonored, he will paythe amount thereof to the holder." 1

2. Even on the assumption that the appellant is a mere accommodation party, as he professes to be, he isnevertheless, by the clear mandate of section 29 of the Negotiable Instruments Law, yet "liable on theinstrument to a holder for value, notwithstanding that such holder at the time of taking the instrument knew him

to be only an accommodation party." To paraphrase, the accommodation party is liable to a holder for value asif the contract was not for accommodation. It is not a valid defense that the accommodation party did notreceive any valuable consideration when he executed the instrument. Nor is it correct to say that the holder forvalue is not a holder in due course merely because at the time he acquired the instrument, he knew that theindorser was only an accommodation party. 2

3. That the appellant, again assuming him to be an accommodation indorser, may obtain security from themaker to protect himself against the danger of insolvency of the latter, cannot in any manner affect his liabilityto the appellee, as the said remedy is a matter of concern exclusively between accommodation indorser andaccommodated party. So that the fact that the appellant stands only as a surety in relation to the maker, grantingthis to be true for the sake of argument, is immaterial to the claim of the appellee, and does not a whit diminish

nor defeat the rights of the latter who is a holder for value. The liability of the appellant remains primary andunconditional. To sanction the appellant's theory is to give unwarranted legal recognition to the patent absurdityof a situation where an indorser, when sued on an instrument by a holder in due course and for value, canescape liability on his indorsement by the convenient expedient of interposing the defense that he is a mereaccomodation indorser.

ACCORDINGLY, the judgment a quo is affirmed in toto , at appellant's cost.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Angeles and Fernando, JJ., concur.1wph1.t

Footnotes 1See also Beutel's Brannan Negotiable Instruments Law , 7th ed., pp. 927, 956; Alvendia, The Negotiable

Instruments Law , pp. 119-120; Stuart del Rosario, Treatise on Negotiable Instruments , 1961 ed., p. 189.

2Beutel's, id . pp. 568-569; Stuart del Rosario, id., pp. 165, 242-243; Alvendia, id ., pp. 55, 57-58; National Bank vs. Maza, et al ., 48 Phil. 210.

22 SCRA 713 Commercial Law Negotiable Instruments Law Accommodation Party General Indorser

In August 1960, Lorenzo Ting issued a check in the amount of P4,000.00 payable to cash or bearer. At the back

of the check, Felipe Ang affixed his signature. The check later on ended up in the hands of Ang Tiong. WhenTiong presented the check with the bank, it was dishonored. Tiong then sued Lorenzo and Felipe. Tiong wonthe collection suit. Felipe appealed on the ground that he should be allowed to recover from Lorenzo becauseFelipe is a guarantor and not an indorser. Felipe also avers, in the alternative, that he is a mere accommodation

party and that fact is known by Tiong. As such, Tiong should make Lorenzo the person directly and primarilyliable, not Felipe.

ISSUE: Whether or not Felipes arguments are correct.


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HELD: No. The check is a negotiable instrument. What governs the transaction is the Negotiable InstrumentsLaw (NIL) and not the Civil Code provisions on guaranty. Felipe is not a guarantor. Under Section 63 of the

NIL a person signing in blank a negotiable instrument, such as the check in this case, is considered as a generalindorser. All Felipe did is to affix his signature at the back of the check such already qualifies as a blankindorsement.

A person placing his signature upon an instrument otherwise than as maker, drawer or acceptor is a generalindorser, unless he clearly indicates plaintiff appropriate words his intention to be bound in some othercapacity, which he did not do. And section 66 ordains that every indorser who indorses without qualification,warrants to all subsequent holders in due course (a) that the instrument is genuine and in all respects what it

purports to be; (b) that he has a good title to it; (c) that all prior parties have capacity to contract; and (d) that theinstrument is at the time of his indorsement valid and subsisting. In addition, he engages that on due

presentment, it shall be accepted or paid, or both, as the case may be, and that if it be dishonored, he will paythe amount thereof to the holder.

Anent Felipes alternative allegation that he is exempt as an accommodation party, the same is not tenable.Section 29 of the NIL is clear when it states that an accommodation party is liable on the instru ment to aholder for value, notwithstanding that such holder at the time of taking the instrument knew him to be only anaccommodation party.

Further, whether or not Felipe should be allowed to recover from the maker, Lorenzo, does not affect Tiongsright to recover from any of them (Lorenzo the maker, or Felipe the indorser).

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-15645 January 31, 1964

PAZ P. ARRIETA and VITALIADO ARRIETA, plaintiffs-appellees,vs.NATIONAL RICE AND CORN CORPORATION, defendant-appellant,MANILA UNDERWRITERS INSURANCE CO., INC., defendant-appellee.

Teehankee and Carreon for plaintiffs-appellees.The Government Corporate Counsel for defendant-appellant.

Isidro A. Vera for defendant-appellee.

REGALA, J.:

This is an appeal of the defendant-appellant NARIC from the decision of the trial court dated February 20,1958, awarding to the plaintiffs-appellees the amount of $286,000.00 as damages for breach of contract anddismissing the counterclaim and third party complaint of the defendant-appellant NARIC.

In accordance with Section 13 of Republic Act No. 3452, "the National Rice and Corn Administration (NARIC)is hereby abolished and all its assets, liabilities, functions, powers which are not inconsistent with the provisionsof this Act, and all personnel are transferred "to the Rice and Corn Administration (RCA).

All references, therefore, to the NARIC in this decision must accordingly be adjusted and read as RCA pursuantto the aforementioned law.

On May 19, 1952, plaintiff-appellee participated in the public bidding called by the NARIC for the supply of20,000 metric tons of Burmese rice. As her bid of $203.00 per metric ton was the lowest, she was awarded thecontract for the same. Accordingly, on July 1, 1952, plaintiff-appellee Paz P. Arrieta and the appellantcorporation entered into a Contract of Sale of Rice, under the terms of which the former obligated herself todeliver to the latter 20,000 metric tons of Burmess Rice at $203.00 per metric ton, CIF Manila. In turn, thedefendant corporation committed itself to pay for the imported rice "by means of an irrevocable, confirmed andassignable letter of credit in U.S. currency in favor of the plaintiff-appellee and/or supplier in Burma,


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immediately." Despite the commitment to pay immediately "by means of an irrevocable, confirmed andassignable Letter of Credit," however, it was only on July 30, 1952, or a full month from the execution of thecontract, that the defendant corporation, thru its general manager, took the first to open a letter of credit byforwarding to the Philippine National Bank its Application for Commercial Letter Credit. The application wasaccompanied by a transmittal letter, the relevant paragraphs of which read:

In view of the fact that we do not have sufficient deposit with your institution with which to cover theamount required to be deposited as a condition for the opening of letters of credit, we will appreciate it ifthis application could be considered special case.

We understand that our supplier, Mrs. Paz P. Arrieta, has a deadline to meet which is August 4, 1952,and in order to comply therewith, it is imperative that the L/C be opened prior to that date. We wouldtherefore request your full cooperation on this matter.

On the same day, July 30, 1952, Mrs. Paz P. Arrieta thru counsel, advised the appellant corporation of theextreme necessity for the immediate opening of the letter credit since she had by then made a tender to hersupplier in Rangoon, Burma, "equivalent to 5% of the F.O.B. price of 20,000 tons at $180.70 and in compliancewith the regulations in Rangoon this 5% will be confiscated if the required letter of credit is not received bythem before August 4, 1952."

On August 4, 1952, the Philippine National Bank informed the appellant corporation that its application, "for aletter of credit for $3,614,000.00 in favor of Thiri Setkya has been approved by the Board of Directors with thecondition that marginal cash deposit be paid and that drafts are to be paid upon presentment." (Exh. J-pl.; Exh.10-def., p. 19, Folder of Exhibits). Furthermore, the Bank represented that it "will hold your application inabeyance pending compliance with the above stated requirement."

As it turned out, however, the appellant corporation not in any financial position to meet the condition. Asmatter of fact, in a letter dated August 2, 1952, the NARIC bluntly confessed to the appellee its dilemma: "Inthis connection, please be advised that our application for opening of the letter of credit has been presented tothe bank since July 30th but the latter requires that we first deposit 50% of the value of the letter amounting to

aproximately $3,614,000.00 which we are not in a position to meet ." (Emphasis supplied. Exh. 9-Def.; Exh. 1-Pe., p. 18, Folder of Exhibits)

Consequently, the credit instrument applied for was opened only on September 8, 1952 "in favor of ThiriSetkya, Rangoon, Burma, and/or assignee for $3,614,000.00," (which is more than two months from theexecution of the contract) the party named by the appellee as beneficiary of the letter of credit. 1wph1.t

As a result of the delay, the allocation of appellee's supplier in Rangoon was cancelled and the 5% deposit,amounting to 524,000 kyats or approximately P200,000.00 was forfeited. In this connection, it must be made ofrecord that although the Burmese authorities had set August 4, 1952, as the deadline for the remittance of therequired letter of credit, the cancellation of the allocation and the confiscation of the 5% deposit were not

effected until August 20, 1952, or, a full half month after the expiration of the deadline. And yet, even with the15-day grace, appellant corporation was unable to make good its commitment to open the disputed letter ofcredit.

The appellee endeavored, but failed, to restore the cancelled Burmese rice allocation. When the futility ofreinstating the same became apparent, she offered to substitute Thailand rice instead to the defendant NARIC,communicating at the same time that the offer was "a solution which should be beneficial to the NARIC and tous at the same time." (Exh. X-Pe., Exh. 25 Def., p. 38, Folder of Exhibits). This offer for substitution,however, was rejected by the appellant in a resolution dated November 15, 1952.

On the foregoing, the appellee sent a letter to the appellant, demanding compensation for the damages caused

her in the sum of $286,000.00, U.S. currency, representing unrealized profit. The demand having been rejectedshe instituted this case now on appeal.

At the instance of the NARIC, a counterclaim was filed and the Manila Underwriters Insurance Company was brought to the suit as a third party defendant to hold it liable on the performance bond it executed in favor of the plaintiff-appellee.

We find for the appellee.


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It is clear upon the records that the sole and principal reason for the cancellation of the allocation contracted bythe appellee herein in Rangoon, Burma, was the failure of the letter of credit to be opened with thecontemplated period. This failure must, therefore, be taken as the immediate cause for the consequent damagewhich resulted. As it is then, the disposition of this case depends on a determination of who was responsible forsuch failure. Stated differently, the issue is whether appellant's failure to open immediately the letter of credit indispute amounted to a breach of the contract of July 1, 1952 for which it may be held liable in damages.

Appellant corporation disclaims responsibility for the delay in the opening of the letter of credit. On thecontrary, it insists that the fault lies with the appellee. Appellant contends that the disputed negotiableinstrument was not promptly secured because the appellee , failed to seasonably furnish data necessary andrequired for opening the same, namely, "(1) the amount of the letter of credit, (2) the person, company orcorporation in whose favor it is to be opened, and (3) the place and bank where it may be negotiated." Appellantwould have this Court believe, therefore, that had these informations been forthwith furnished it, there wouldhave been no delay in securing the instrument.

Appellant's explanation has neither force nor merit. In the first place, the explanation reaches into an area of the proceedings into which We are not at liberty to encroach. The explanation refers to a question of fact. Nothingin the record suggests any arbitrary or abusive conduct on the part of the trial judge in the formulation of theruling. His conclusion on the matter is sufficiently borne out by the evidence presented. We are denied,

therefore, the prerogative to disturb that finding, consonant to the time-honored tradition of this Tribunal to holdtrial judges better situated to make conclusions on questions of fact. For the record, We quote hereunder thelower court's ruling on the point:

The defense that the delay, if any in opening the letter of credit was due to the failure of plaintiff toname the supplier, the amount and the bank is not tenable. Plaintiff stated in Court that these facts wereknown to defendant even before the contract was executed because these facts were necessarily revealedto the defendant before she could qualify as a bidder. She stated too that she had given the necessarydata immediately after the execution of Exh. "A" (the contract of July 1, 1952) to Mr. GABRIELBELMONTE, General Manager of the NARIC, both orally and in writing and that she also pressed forthe opening of the letter of credit on these occasions. These statements have not been controverted and

defendant NARIC, notwithstanding its previous intention to do so, failed to present Mr. Belmonte totestify or refute this. ...

Secondly, from the correspondence and communications which form part of the record of this case, it is clearthat what singularly delayed the opening of the stipulated letter of credit and which, in turn, caused thecancellation of the allocation in Burma, was the inability of the appellant corporation to meet the conditionimportation by the Bank for granting the same. We do not think the appellant corporation can refute the fact thathad it been able to put up the 50% marginal cash deposit demanded by the bank, then the letter of credit wouldhave been approved, opened and released as early as August 4, 1952. The letter of the Philippine National Bankto the NARIC was plain and explicit that as of the said date, appellant's "application for a letter of credit ... hasbeen approved by the Board of Directors with the condition that 50% marginal cash deposit be paid and that

drafts are to be paid upon presentment." (Emphasis supplied)

The liability of the appellant, however, stems not alone from this failure or inability to satisfy the requirementsof the bank. Its culpability arises from its willful and deliberate assumption of contractual obligations even as itwas well aware of its financial incapacity to undertake the prestation. We base this judgment upon the letterwhich accompanied the application filed by the appellant with the bank, a part of which letter was quoted earlierin this decision. In the said accompanying correspondence, appellant admitted and owned that it did "not havesufficient deposit with your institution (the PNB) with which to cover the amount required to be deposited as acondition for the opening of letters of credit. ... .

A number of logical inferences may be drawn from the aforementioned admission. First, that the appellant knew

the bank requirements for opening letters of credit; second, that appellant also knew it could not meet thoserequirement. When, therefore, despite this awareness that was financially incompetent to open a letter of creditimmediately, appellant agreed in paragraph 8 of the contract to pay immediately "by means of an irrevocable,confirm and assignable letter of credit," it must be similarly held to have bound itself to answer for all and everyconsequences that would result from the representation. aptly observed by the trial court:

... Having called for bids for the importation of rice involving millions, $4,260,000.00 to be exact, itshould have a certained its ability and capacity to comply with the inevitably requirements in cash to payfor such importation. Having announced the bid, it must be deemed to have impliedly assured suppliersof its capacity and facility to finance the importation within the required period, especially since it had


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imposed the supplier the 90-day period within which the shipment of the rice must be brought into thePhilippines. Having entered in the contract, it should have taken steps immediately to arrange for theletter of credit for the large amount involved and inquired into the possibility of its issuance.

In relation to the aforequoted observation of the trial court, We would like to make reference also to Article 11of the Civil Code which provides:

Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and thosewho in any manner contravene the tenor thereof, are liable in damages.

Under this provision, not only debtors guilty of fraud, negligence or default in the performance of obligations adecreed liable; in general, every debtor who fails in performance of his obligations is bound to indemnify forthe losses and damages caused thereby (De la Cruz Seminary of Manila, 18 Phil. 330; Municipality of Moncadav. Cajuigan, 21 Phil. 184; De la Cavada v. Diaz, 37 Phil. 982; Maluenda & Co. v. Enriquez, 46 Phil. 916;Pasumil v. Chong, 49 Phil. 1003; Pando v. Gimenez, 54 Phil. 459; Acme Films v. Theaters Supply, 63 Phil.657). The phrase "any manner contravene the tenor" of the obligation includes any illicit act which impairs thestrict and faithful fulfillment of the obligation or every kind or defective performance. (IV Tolentino, CivilCode of the Philippines, citing authorities, p. 103.)

The NARIC would also have this Court hold that the subsequent offer to substitute Thailand rice for theoriginally contracted Burmese rice amounted to a waiver by the appellee of whatever rights she might havederived from the breach of the contract. We disagree. Waivers are not presumed, but must be clearly andconvincingly shown, either by express stipulation or acts admitting no other reasonable explanation. (Ramirezv. Court of Appeals, 52 O.G. 779.) In the case at bar, no such intent to waive has been established.

We have carefully examined and studied the oral and documentary evidence presented in this case and uponwhich the lower court based its award. Under the contract, the NARIC bound itself to buy 20,000 metric tons ofBurmese rice at "$203.00 U.S. Dollars per metric ton, all net shipped weight, and all in U.S. currency, C.I.F.Manila ..." On the other hand, documentary and other evidence establish with equal certainty that the plaintiff-appellee was able to secure the contracted commodity at the cost price of $180.70 per metric ton from her

supplier in Burma. Considering freights, insurance and charges incident to its shipment here and the forfeitureof the 5% deposit, the award granted by the lower court is fair and equitable. For a clearer view of the equity ofthe damages awarded, We reproduce below the testimony of the appellee, adequately supported by the evidenceand record:

Q. Will you please tell the court, how much is the damage you suffered?

A. Because the selling price of my rice is $203.00 per metric ton, and the cost price of my rice is$180.00 We had to pay also $6.25 for shipping and about $164 for insurance. So adding the cost of therice, the freight, the insurance, the total would be about $187.99 that would be $15.01 gross profit permetric ton, multiply by 20,000 equals $300,200, that is my supposed profit if I went through the

contract.

The above testimony of the plaintiff was a general approximation of the actual figures involved in thetransaction. A precise and more exact demonstration of the equity of the award herein is provided by ExhibitHH of the plaintiff and Exhibit 34 of the defendant, hereunder quoted so far as germane.

It is equally of record now that as shown in her request dated July 29, 1959, and other communicationssubsequent thereto for the opening by your corporation of the required letter of credit, Mrs. Arrieta wassupposed to pay her supplier in Burma at the rate of One Hundred Eighty Dollars and Seventy Cents($180.70) in U.S. Currency, per ton plus Eight Dollars ($8.00) in the same currency per ton for shippingand other handling expenses, so that she is already assured of a net profit of Fourteen Dollars and Thirty

Cents ($14.30), U.S., Currency, per ton or a total of Two Hundred and Eighty Six Thousand Dollars($286,000.00), U.S. Currency, in the aforesaid transaction. ...

Lastly, herein appellant filed a counterclaim asserting that it has suffered, likewise by way of unrealized profitdamages in the total sum of $406,000.00 from the failure of the projected contract to materialize. Thiscounterclaim was supported by a cost study made and submitted by the appellant itself and wherein it wasillustrated how indeed had the importation pushed thru, NARIC would have realized in profit the amountasserted in the counterclaim. And yet, the said amount of P406,000.00 was realizable by appellant despite anumber of expenses which the appellee under the contract, did not have to incur. Thus, under the cost studysubmitted by the appellant, banking and unloading charges were to be shouldered by it, including an Import


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License Fee of 2% and superintendence fee of $0.25 per metric ton. If the NARIC stood to profit over P400000.00 from the disputed transaction inspite of the extra expenditures from which the herein appellee wasexempt, we are convicted of the fairness of the judgment presently under appeal.

In the premises, however, a minor modification must be effected in the dispositive portion of the decisionappeal from insofar as it expresses the amount of damages in U.S. currency and not in Philippine Peso.Republic Act 529 specifically requires the discharge of obligations only "in any coin or currency which at thetime of payment is legal tender for public and private debts." In view of that law, therefore, the award should beconverted into and expressed in Philippine Peso.

This brings us to a consideration of what rate of exchange should apply in the conversion here decreed. Shouldit be at the time of the breach, at the time the obligation was incurred or at the rate of exchange prevailing on the

promulgation of this decision.

In the case of Engel v. Velasco & Co ., 47 Phil. 115, We ruled that in an action for recovery of damages for breach of contract, even if the obligation assumed by the defendant was to pay the plaintiff a sum of moneyexpressed in American currency, the indemnity to be allowed should be expressed in Philippine currency at therate of exchange at the time of the judgment rather than at the rate of exchange prevailing on the date ofdefendant's breach. This ruling, however, can neither be applied nor extended to the case at bar for the same was

laid down when there was no law against stipulating foreign currencies in Philippine contracts. But now wehave Republic Act No. 529 which expressly declares such stipulations as contrary to public policy, void and ofno effect. And, as We already pronounced in the case of Eastboard Navigation, Ltd. v. Juan Ysmael & Co., Inc .,G.R. No. L-9090, September 10, 1957, if there is any agreement to pay an obligation in a currency other thanPhilippine legal tender, the same is null and void as contrary to public policy (Republic Act 529), and the mostthat could be demanded is to pay said obligation in Philippine currency "to be measured in the prevailing rate ofexchange at the time the obligation was incurred (Sec. 1, idem )."

UPON ALL THE FOREGOING, the decision appealed from is hereby affirmed, with the sole modification thatthe award should be converted into the Philippine peso at the rate of exchange prevailing at the time theobligation was incurred or on July 1, 1952 when the contract was executed. The appellee insurance company, in

the light of this judgment, is relieved of any liability under this suit. No pronouncement as to costs.

Bengzon, C.J., Padilla, Concepcion, Paredes, Dizon and Makalintal, JJ., concur. Barrera, J., took no part. Reyes, J.B.L., J., reserves his vote.

Republic of the Philippines

SUPREME COURT Manila

FIRST DIVISION

G.R. No. 89802 May 7, 1992

ASSOCIATED BANK and CONRADO CRUZ, petitioners,vs.HON. COURT OF APPEALS, and MERLE V. REYES, doing business under the name and style "Melissa's RTW," respondents.

Soluta, Leonidas, Marifosque, Javier, Liboon & aguila Law Offices for petitioners.

Roberto B. Lugue for private respondent.

CRUZ, J. :

The sole issue raised in this case is whether or not the private respondent has a cause of action against the petitioners for their encashment and payment toanother person of certain crossed checks issued in her favor.

The private respondent is engaged in the business of ready-to-wear garments under the firm name "Melissa's RTW." She deals with, among other customers,Robinson's Department Store, Payless Department Store, Rempson Department Store, and the Corona Bazaar.


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These companies issued in payment of their respective accounts crossed checks payable to Melissa's RTW in the amounts and on the dates indicated below:

PAYOR BANK AMOUNT DATE

Payless Solid Bank P3,960.00 January 19, 1982Robinson's FEBTC 4,140.00 December 18, 1981Robinson's FEBTC 1,650.00 December 24, 1981Robinson's FEBTC 1,980.00 January 12, 1982Rempson TRB 1,575.00 January 9, 1982Corona RCBC 2,500.00 December 22, 1981

When she went to these companies to collect on what she thought were still unpaid accounts, she was informed of the issuance of the above-listed crossedchecks. Further inquiry revealed that the said checks had been deposited with the Associated Bank (hereinafter, "the Bank") and subsequently paid by it to oneRafael Sayson, one of its "trusted depositors," in the words of its branch manager and co-petitioner, Conrado Cruz, Sayson had not been authorized by the privaterespondent to deposit and encash the said checks.

The private respondent sued the petitioners in the Regional Trial Court of Quezon City for recovery of the total value of the checks plus damages. After trial, judgment was rendered requiring them to pay the private respondent the total value of the subject checks in the amount of P15,805.00 plus 12% interest,P50,000.00 actual damages, P25,000.00 exemplary damages, P5,000.00 attorney's fees, and the costs of the suit.

1

The petitioners appealed to the respondent court, reiterating their argument that the private respondent had no cause ofaction against them and should have proceeded instead against the companies that issued the checks. In disposing ofthis contention, the Court of Appeals 2 said:

The cause of action of the appellee in the case at bar arose from the illegal, anomalous and irregular acts

of the appellants in violating common banking practices to the damage and prejudice of the appellees, inallowing to be deposited and encashed as well as paying to improper parties without the knowledge,consent, authority or endorsement of the appellee which totalled P15,805.00, the six (6) checks in disputewhich were "crossed checks" or "for payee's account only," the appellee being the payee.

The three (3) elements of a cause of action are present in the case at bar, namely: (1) a right in favor ofthe plaintiff by whatever means and under whatever law it arises or is created; (2) an obligation on thepart of the named defendant to respect or not to violate such right; and (3) an act or omission on the partof such defendant violative of the right of the plaintiff or constituting a breach thereof. (Republic PlantersBank vs. Intermediate Appellate Court, 131 SCRA 631).

And such cause of action has been proved by evidence of great weight. The contents of the said checksissued by the customers of the appellee had not been questioned. There is no dispute that the same arecrossed checks or for payee's account only, which is Melissa's RTW. The appellee had clearly shown thatshe had never authorized anyone to deposit the said checks nor to encash the same; that the appellantshad allowed all said checks to be deposited, cleared and paid to one Rafael Sayson in violation of theinstructions in the said crossed checks that the same were for payee's account only; and that the appelleemaintained a savings account with the Prudential Bank, Cubao Branch, Quezon City which never clearedthe said checks and the appellee had been damaged by such encashment of the same.

We affirm.

Under accepted banking practice, crossing a check is done by writing two parallel lines diagonally on the left top portion ofthe checks. The crossing is special where the name of a bank or a business institution is written between the two parallellines, which means that the drawee should pay only with the intervention of that company. 3 The crossing is general wherethe words written between the two parallel lines are "and Co." or "for payee's account only," as in the case at bar. Thismeans that the drawee bank should not encash the check but merely accept it for deposit. 4

In State Investment House vs . IAC , 5 this Court declared that "the effects of crossing a check are: (1) that the check maynot be encashed but only deposited in the bank; (2) that the check may be negotiated only once to one who has anaccount with a bank; and (3) that the act of crossing the check serves as a warning to the holder that the check has beenissued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose."

The effects therefore of crossing a check relate to the mode of its presentment for payment. Under Sec. 72 of theNegotiable Instruments Law, presentment for payment, to be sufficient, must be made by the holder or by some personauthorized to receive payment on his behalf. Who the holder or authorized person is depends on the instruction stated onthe face of the check.

The six checks in the case at bar had been crossed and issued "for payee's account only." This could only signify that thedrawers had intended the same for deposit only by the person indicated, to wit, Melissa's RTW.

The petitioners argue that the cause of action for violation of the common instruction found on the face of the checksexclusively belongs to the issuers thereof and not to the payee. Moreover, having acted in good faith as they merelyfacilitated the encashment of the checks, they cannot be made liable to the private respondent.

The subject checks were accepted for deposit by the Bank for the account of Rafael Sayson although they were crossedchecks and the payee was not Sayson but Melissa's RTW. The Bank stamped thereon its guarantee that "all priorendorsements and/or lack of endorsements (were) guaranteed." By such deliberate and positive act, the Bank had for alllegal intents and purposes treated the said checks as negotiable instruments and, accordingly, assumed the warranty ofthe endorser.


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The weight of authority is to the effect that "the possession of check on a forged or unauthorized indorsement is wrongful,and when the money is collected on the check, the bank can be held 'for moneys had and received." 6 The proceeds areheld for the rightful owner of the payment and may be recovered by him. The position of the bank taking the check on theforged or unauthorized indorsement is the same as if it had taken the check and collected without indorsement at all. Theact of the bank amounts to conversion of the check. 7

It is not disputed that the proceeds of the subject checks belonged to the private respondent. As she had not at any timeauthorized Rafael Sayson to endorse or encash them, there was conversion of the funds by the Bank.

When the Bank paid the checks so endorsed notwithstanding that title had not passed to the endorser, it did so at its periland became liable to the payee for the value of the checks. This liability attached whether or not the Bank was aware ofthe unauthorized endorsement. 8

The petitioners were negligent when they permitted the encashment of the checks by Sayson. The Bank should have first verified his right to endorse the crossedchecks, of which he was not the payee, and to deposit the proceeds of the checks to his own account. The Bank was by reason of the nature of the checks putupon notice that they were issued for deposit only to the private respondent's account. Its failure to inquire into Sayson's authority was a breach of a duty it owed tothe private respondent.

As the Court stressed in Banco de Oro Savings and Mortgage Bank vs . Equitable Banking Corp .,9 "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. Thecollecting bank, being primarily engaged in banking, holds itself out to the public as the expert on this field, and the lawthus holds it to a high standard of conduct."

The petitioners insist that the private respondent has no cause of action against them because they have no privity ofcontract with her. They also argue that it was Eddie Reyes, the private respondent's own husband, who endorsed thechecks.

Assuming that Eddie Reyes did endorse the crossed checks, we hold that the Bank would still be liable to the privaterespondent because he was not authorized to make the endorsements. And even if the endorsements were forged, asalleged, the Bank would still be liable to the private respondent for not verifying the endorser's authority. There is nosubstantial difference between an actual forging of a name to a check as an endorsement by a person not authorized tomake the signature and the affixing of a name to a check as an endorsement by a person not authorized to endorse it. 10

The Bank does not deny collecting the money on the endorsement. It was its responsibility to inquire as to the authority ofRafael Sayson to deposit crossed checks payable to Melissa's RTW upon a prior endorsement by Eddie Reyes. Thefailure of the Bank to make this inquiry was a breach of duty that made it liable to the private respondent for the amount ofthe checks.

There being no evidence that the crossed checks were actually received by the private respondent, she would have aright of action against the drawer companies, which in turn could go against their respective drawee banks, which in turncould sue the herein petitioner as collecting bank. In a similar situation, it was held that, to simplify proceedings, the payeeof the illegally encashed checks should be allowed to recover directly from the bank responsible for such encashmentregardless of whether or not the checks were actually delivered to the payee. 11 We approve such direct action in the caseat bar.

It is worth repeating that before presenting the checks for clearing and for payment, the Bank had stamped on the backthereof the words: "All prior endorsements and/or lack of endorsements guaranteed," and thus made the assurance that ithad ascertained the genuineness of all prior endorsements.

We find that the respondent court committed no reversible error in holding that the private respondent had a valid cause ofaction against the petitioners and that the latter are indeed liable to her for their unauthorized encashment of the subjectchecks. We also agree with the reduction of the award of the exemplary damages for lack of sufficient evidence to supportthem.

WHEREFORE, the petition is DENIED, with costs against the petitioner. It is so ordered.

Narvasa, C.J., Grio-Aquino, Medialdea and Bellosillo, JJ., concur.

Footnotes

1 Orig. rec., pp. 149-158.

2 Paras, G.C., J ., ponente with Aldecoa and Ordoez-Benitez, JJ ., concurring.

3 State Investment House vs. Intermediate Appellate Court, 175 SCRA 310.

4 Vicente R. de Ocampo & Co. vs. Gatchalian, 3 SCRA 596.

5 175 SCRA 310.


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that all prior parties had capacity to contract; and that the instrument is at the time of his indorsement valid andsubsisting. H e cannot interpose the defense that signatures prior to him are forged.

6. ID.; ID.; ID.; ID.; COLLECTING BANK WHERE CHECK IS DEPOSITED AND INDORSESCHECK, AN INDORSER. - A collecting bank where a check is deposited and which indorses the check upon

presentment with the drawee bank, is such an indorser. So even if the indorsement on the check deposited bythe bankss client is forged, the collecting bank is bound by his warranties as an indorser and cannot set up thedefense of forgery as against the drawee bank.

7. ID.; ID.; ID.; PAYMENT UNDER A FORGED INDORSEMENT IS NOT TO THE DRAWERSORDER; REASON. - The bank on which a check is drawn, known as the drawee bank, is under strict liabilityto pay the check to the order of the payee. The drawers instruction s are reflected on the face and by the termsof the check. Payment under a forged indorsement is not to the drawers order. When the drawee bank pays a

person other than the payee, it does not comply with the terms of the check and violates its duty to charge itscustomers (the drawer) account only for properly payable items. Since the drawee bank did not pay a holder orother person entitled to receive payment, it has no right to reimbursement from the drawer. The general rulethen is that the drawee bank may not debit the drawers account and is not entitled to indemnification from thedrawer. The risk of loss must perforce fall on the drawee bank.

8. ID.; ID.; ID.; ID.; EXCEPTIONS. - If the drawee bank can prove a failure by the customer/drawer toexercise ordinary care that substantially contributed to the making of the forged signature, the drawer is

precluded from asserting the forgery. If at the same time the drawee bank was also negligent to the point ofsubstantially contributing to the loss, then such loss from the forgery can be apportioned between the negligentdrawer and the negligent bank.

9. ID.; ID.; ID.; WHERE THE DRAWERS SIGNATURE IS FORGED, THE DRAWER CANRECOVER FROM THE DRAWEE BANK. - In cases involving a forged check, where the drawers signature is forged, the drawer can recover from the drawee bank. No drawee bank has a right to pay a forgedcheck. If it does, it shall have to recredit the amount of the check to the account of the drawer. The liabilitychain ends with the drawee bank w hose responsibility it is to know the drawers signature since the latter is its

customer.

10. ID.; ID.; ID.; IN CASES OF FORGED INDORSEMENTS, THE LOSS FALLS ON THE PARTYWHO TOOK THE CHECK FROM THE FORGER OR THE FORGER HIMSELF. In cases involvingchecks with forged indorsements, such as the present petition, the chain of liability does not end with thedrawee bank. The drawee bank may not debit the account of the drawer but may generally pass liability backthrough the collection chain to the party who took from the forger and, of course, to the forger himself, ifavailable. In other words, the drawee bank can seek reimbursement or a return of the amount it paid from the

presentor bank or person. Theoretically, the latter can demand reimbursement from the person who indorsed thecheck to it and so on. The loss falls on the party who took the check from the forger, or on the forger himself.Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the drawee bank. The

former must necessarily return the money paid by the latter because it was paid wrongfully.

11. ID.; ID.; ID.; ID.; CASE AT BAR. - In this case, the checks were indorsed by the collecting bank(Associated Bank) to the drawee bank (PNB). The former will necessarily be liable to the latter for the checks

bearing forged indorsements. If the forgery is that of the payees or holders indorsement, the collecting bank isheld liable, without prejudice to the latter proceeding against the forger.

12. ID.; ID.; ID.; GENERAL INDORSER; COLLECTING BANK OR LAST ENDORSER SUFFERSLOSS ON FORGED IN-DORSEMENT; REASON. - More importantly, by reason of the statutory warrantyof a general indorser in Section 66 of the Negotiable Instruments Law, a collecting bank which indorses a check

bearing a forged indorsement and presents it to .the drawee bank guarantees all prior indorsements, including

the forged indorsement. It warrants that the instrument is genuine, and that it is valid and subsisting at the timeof his indorsement. Because the indorsement is a forgery, the collecting bank commits a breach of this warrantyand will be accountable to the drawee bank. This liability scheme operates without regard to fault on the part ofthe collecting/presenting bank. Even if the latter bank was not negligent, it would still be liable to the drawee

bank because of its indorsement. The Court has consistently ruled that the collecting bank or last endorsergenerally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsementsconsidering that the act of presenting the check for payment to the drawee is an assertion that the party makingthe presentment has done its duty to ascertain the genuineness of the endorsements. Moreover, the collecting

bank is made liable because it is privy to the depositor who negotiated the check. The bank knows him, his


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address and history because he is a client. It has taken a risk on his deposit. The bank is also in a better positionto detect forgery, fraud or irregularity in the indorsement.

13. ID.; ID.; ID.; DRAWEE BANK NOT LIABLE FOR LOSS ON FORGED INDORSEMENT;REASON. - The drawee bank is not similarly situated as the collecting bank because the former makes nowarranty as to the genuineness of any indorsement. The drawee bank s duty is but to verify the genuineness ofthe drawers signature and not of the indorsement because the drawer is its client.

14. ID.; ID.; ID.; ID.; DUTY OF DRAWEE BANK TO PROMPTLY INFORM PRESENTOR OFTHE FORGERY UPON DISCOVERY; EFFECT OF FAILURE TO PROMPTLY INFORM. Thedrawee bank can recover the amount paid on the check bearing a forged indorsement from the collecting bank.However, a drawee bank has the duty to promptly inform the presentor of the forgery upon discovery. If thedrawee bank delays in informing the presentor of the forgery, thereby depriving said presentor of the right torecover from the forger, the former is deemed negligent and can no longer recover from the presentor.

15. ID.; ID.; ID.; ID.; ID.; ID.; EFFECT OF CON-TRIBUTORY NEGLIGENCE IN CASE AT BAR.- Applying these rules to the case at bench, PNB, the drawee bank, cannot debit the current account of theProvince of Tarlac because it paid checks which bore forged indorsements. However, if the Province of Tarlacas drawer was negligent to the point of substantially contributing to the loss, then the drawee bank PNB can

charge its account. If both drawee bank-PNB and drawer-Province of TarJac were negligent, the loss should be properly apportioned between them. The loss incurred by drawee bank-PNB can be passed on to the collecting bank-Associated Bank which presented and indorsed the checks to it. Associated Bank can, in turn, hold theforger, Fausto Pangilinan, liable. If PNB negligently delayed in informing Associated Bank of the forgery, thusdepriving 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 the Province of Tarlacwas equally negligent and should, therefore, share the burden of loss from the checks bearing a forgedindorsement. The Province of Tarlac permitted Fausto Pangilinan to collect the checks when the latter, havingalready retired from government service, was no longer connected with the hospital. With the exception of thefirst check (dated January 17, 1978), all the checks were issued and released after Pangilinans retirement onFebruary 28, 1978. After nearly three years, the Treasurers office was still releasing the checks to the retired

cashier. In addition, some of the aid allotment checks were released to Pangilinan and the others to ElizabethJuco, the new cashier. The fact that there were now two persons collecting the checks for the hospital is anunmistakable sign of an irregularity which should have alerted employees in the Treasurers office of the fraud

being committed. There is also evidence indicating that the provincial employees were aware of Pangilin ansretirement and consequent dissociation from the hospital. The failure of the Province of Tarlac to exercise duecare contributed to a significant degree to the loss tantamount to negligence. Hence, the Province of Tarlacshould be liable for part of the total amount paid on the questioned checks. The drawee bank PNB also breachedits duty to pay only according to the terms of the check. Hence, it cannot escape liability and should also bear

part of the loss. The Court finds as reasonable, the proportionate sharing of fifty percent - fifty percent (50%-50%). Due to the negligence of the Province of Tarlac in releasing the checks to an unauthorized person (FaustoPangilinan), in allowing the retired hospital cashier to receive the checks for the payee hospital for a period

close to three years and in not properly ascertaining why the retired hospital cashier was collecting checks forthe payee hospital in addition to the hospitals real cashier, respondent Province contributed to the lossamounting to P203,300.00 and shall be liable to the PNB for fifty (50%) percent thereof. In effect, the Provinceof Tarlac can only recover fifty percent (50%) of P203,300.00 from PNB. The collecting bank, AssociatedBank, shall be liable to PNB for fifty (50%) percent of P203,300.00. It is liable on its warranties as indorser ofthe checks which were deposited by Fausto Pangilinan, having guaranteed the genuineness of all priorindorsements, including that of the chief of the payee hospital, Dr. Adena Canlas. Associated Bank was alsoremiss in its duty to ascertain the genuineness of the payees indorsement.

16. ID.; ID.; ID.; FORGERY; DELAY IN INFORMING COLLECTING BANK OF FORGERY BYTHE DRAWEE BANK SIGNIFIES NEGLIGENCE. - A delay in informing the collecting bank (Associated

Bank) of the forgery, which deprives it of the opportunity to go after the forger, signifies negligence on the partof the drawee bank (PNB) and will preclude it from claiming reimbursement.

17. ID.; ID.; ID.; RETURN OF FORGED INDORSEMENT; 24-HOUR PERIOD BUT NOTBEYOND PERIOD FOR FILING LEGAL ACTION FOR BANKS OUTSIDE METRO MANILA;CASE AT BAR. - Under Section 4(c) of CB Circular No. 580, items bearing a forged endorsement shall bereturned within twenty-four (24) hours after discovery of the forgery but in no event beyond the period fixed or

provided by law for filing of a legal action by the returning bank. Section 23 of the PCHC Rules deleted therequirement that items bearing a forged endorsement should be returned within twenty-four hours. AssociatedBank now argues that the aforementioned Central Bank Circular is applicable. Since PNB did not return the


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questioned checks within twenty-four hours, but several days later, Associated Bank alleges that PNB should beconsidered negligent and not entitled to reimbursement of the amount it paid on the checks. The Central Bankcircular was in force for all banks until June 1980 when the Philippine Clearing House Corporation (PCHC)was set up and commenced operations. Banks in Metro Manila were covered by the PCHC while banks locatedelsewhere still had to go through Central Bank Clearing. In any event, the twenty-four-hour return rule wasadopted by the PCHC until it was changed in 1982. The contending banks herein, which are both branches inTarlac province, are therefore not covered by PCHC Rules but by CB Circular No. 580. Clearly then, the CBcircular was applicable when the forgery of the checks was discovered in 1981.

18. ID.; ID.; ID.; ID.; RATIONALE. - The rule mandates that the checks be returned within twenty-fourhours after discovery of the forgery but in no event beyond the period fixed by law for filing a legal action. Therationale of the rule is to give the collecting bank (which indorsed the check) adequate opportunity to proceedagainst the forger. If prompt notice is not given, the collecting bank maybe prejudiced and lose the opportunityto go after its depositor.

19. ID.; ID.; ID.; ID.; FAILURE TO RETURN FORGED INDORSEMENT WITHIN 24 HOURSFROM DISCOVERY DOES NOT PREJUDICE COLLECTING BANK WHICH PRESENTEDFORGER AS ITS REBUTTAL WITNESS. The Court finds that even if PNB did not return the questionedchecks to Associated Bank within twenty-four hours, as mandated by the rule, PNB did not commit negligent

delay. Under the circumstances, PNB gave prompt notice to Associated Bank and the latter bank was not prejudiced in going after Fausto Pangilinan. After the Province of Tarlac informed PNB of the forgeries, PNBnecessarily had to inspect the checks and conduct its own investigation. Thereafter, it requested the ProvincialTreasurers office on March 31, 1981 to return the checks for verification. The Province of Tarlac returned thechecks only on April 22, 1981. Two days later, Associated Bank received the checks from PNB. AssociatedBank was also f urnished a copy of the Provinces letter of demand to PNB dated March 20, 1981, thus giving itnotice of the forgeries. At this time, however, Pangilinans account with Associated had only P24.63 in it. HadAssociated Bank decided to debit Pangilinans acc ount, it could not have recovered the amounts paid on thequestioned checks. In addition, while Associated Bank filed a fourth-party complaint against Fausto Pangilinan,it did not present evidence against Pangilinan and even presented him as its rebuttal witness. Hence, AssociatedBank was not prejudiced by PNBs failure to comply with the twenty -four-hour return rule.

20. REMEDIAL LAW; ACTIONS; ESTOPPEL; WILL NOT APPLY TO DRAWEE BANK WHOFAID AND CLEARED CHECKS WITH FORGED INDORSEMENT. - Associated Bank contends thatPNB is estopped from requiring reimbursement because the latter paid and cleared the checks. The Court findsthis contention unmeritorious. Even if PNB cleared and paid the checks, it can still recover from AssociatedBank. This is true even i f the payees Chief Officer who was supposed to have indorsed the checks is also acustomer of the drawee bank. PNBs duty was to verify the genuineness of the drawers signature and not thegenuineness of payees indorsement. Associated Bank, as the colle cting bank, is the entity with the duty toverify the genuineness of the payees indorsement.

21. CIVIL LAW; OBLIGATIONS AND CON-TRACTS; THERE IS NO PRIVITY OF CONTRACT

BETWEEN THE DRAWER AND COLLECTING BANK; DRAWER CAN RECOVER FROMDRAWEE BANK AND DRAWEE BANK CAN SEEK REIMBURSEMENT FROM COLLECTINGBANK. - PNB also avers that respondent court erred in adjudging circuitous liability by directing PNB to returnto the Province of Tarlac the amount of the checks and then directing Associated Bank to reimburse PNB. TheCourt finds nothing wrong with the mode of the award. The drawer, Province of Tarlac, is a client or customerof the PNB, not of Associated Bank. There is no privity of contract between the drawer and the collecting bank.

22. COMMERCIAL LAW; BANKS; BANK DEPOSITS ARE LOANS; RECOVERY OF AMOUNTDEPOSITED IN CURRENT ACCOUNT GIVEN 6% INTEREST PER ANNUM. - The trial court madePNB and Associated Bank liable with legal interest from March 20, 1981, the date of extrajudicial demandmade by the Province of Tarlac on PNB. The payments to be made in this case stem from the deposits of the

Province of Tarlac in its current account with the PNB. Bank deposits are considered under the law as loans.Central Bank Circular No. 416 prescribes a twelve percent (12%) interest per annum for loans, forebearance ofmoney, goods or credits in the absence of express stipulation. Normally, current accounts 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 account opened by the Province of Tarlac with PNB wasnot given in evidence. Hence, the Court deems it wise to affirm the trial courts use of the legal interest rate, orsix percent (6%) per annum. The interest rate shall be computed from the date of default, or the date of judicialor extrajudicial demand. The trial court did not err in granting legal interest from March 20, 1981, the date ofextrajudicial demand.


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APPEARANCES OF COUNSEL

Jose A. Soluta, Jr. & Associates for Associated Bank.

Santiago, Jr., Vidad, Corpus & Associates for PNB.

The Solicitor General for public respondent.

D E C I S I O N

ROMERO, J.:

Where thirty checks bearing forged endorsements are paid, who bears the loss, the drawer, the drawee bank orthe collecting bank?

This is the main issue in these consolidated petitions for review assailing the decision of the Court of Appeals inProvince 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 Philippine National Bank (PNB) Tarlac Branchwhere the provincial funds are deposited. Checks issued by the Province are signed by the Provincial Treasurerand countersigned by the Provincial Auditor or the Secretary of the Sangguniang Bayan.

A portion of the funds of the province is allocated to the Concepcion Emergency Hospital. 2 The allotmentchecks for said government hospital are drawn to the order of Concepcion. Emergency Hospital, Concepcion,Tarlac or The Chief, Concepcion Emergency Hospital, Concepcion, Tarlac. The checks are released by theOffice of the Provincial Treasurer and received for the hospital by its administrative officer and cashier.

In January 1981, the books of account of the Provincial Treasurer were post-audited by the Provincial Auditor.It was then discovered that the hospital did not receive several allotment checks drawn by the Province.

On February 19, 1981, the Provincial Treasurer requested the manager of the PNB to return all of its clearedchecks which were issued from 1977 to 1980 in order to verify the regularity of their encashment. After thechecks were examined, the Provincial Treasurer learned that 30 checks amounting to P203,300.00 wereencashed by one Fausto Pangilinan, with the Associated Bank acting as collecting bank.

It turned out that Fausto Pangilinan, who was the administrative officer and cashier of payee hospital until hisretirement 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 up the release of the checks and had official receipts. 3

Pangilinan sought to encash the first check 4 with Associated Bank. However, the manager of Associated Bankrefused and suggested that Pangilinan deposit the check in his personal savings account with the same bank.Pangilinan was able to withdraw the money when the check was cleared and paid by the drawee bank, PNB.

After forging the signature of Dr. Adena Canlas who was chief of the payee hospital, Pangilinan followed thesame procedure for the second check, in the amount of P5,000.00 and dated April 20, 1978, 5 as well as fortwenty-eight other checks, of various amounts and on various dates. The last check negotiated by Pangilinanwas for P8,000.00 and dated February 10, 1981. 6 All the checks bore the stamp of Associated Bank which readsAll prior endorsements guaranteed ASSOCIATED BANK.

Jesus David, the manager of Associated Bank testified that Pangilinan made it appear that the checks were paid

to him for certain projects with the hospital. 7 He did not find as irregular the fact that the checks were not payable to Pangilinan but to the Concepcion Emergency Hospital. While he admitted that his wife andPangilinans wife are first cousins, the manager denied having given Pangilinan preferential treatment on thisaccount. 8

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

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


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As both banks resisted payment, the Province of Tarlac brought suit against PNB which, in turn, impleadedAssociated Bank as third-party defendant. The latter then filed a fourth-party complaint against Adena Canlasand Fausto Pangilinan. 11

After trial on the merits, the lower court rendered its decision on March 21, 1988, disposing as follows:

WHEREFORE, in view of the foregoing, judgment is hereby rendered:

1. On the basic complaint, in favor of plaintiff Province of Tarlac and against defendant Philippine NationalBank (PNB), ordering the latter to pay to the former, the sum of Two Hundred Three Thousand Three Hundred(P203,300.00) Pesos with legal interest 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) andagainst third-party defendant/fourth-party plaintiff Associated Bank ordering the latter to reimburse to theformer the amount of Two Hundred Three Thousand Three Hundred (P203,300.00) Pesos with legal intereststhereon from March 20, 1981 until fully paid;.

3. On the fourth-party complaint, the same is hereby ordered dismissed for lack of cause of action as againstfourth-party defendant Adena Canlas and lack of jurisdiction over the person of fourth-party defendant FaustoPangilinan as against the latter.

4. On the counterclaims on the complaint, third-party complaint and fourth-party complaint, the same arehereby ordered dismissed for lack of merit.

SO ORDERED. 12

PNB and Associated Bank appealed to the Court of AppealS. 13 Respondent court affir med the trial courtsdecision in toto on September 30, 1992.

Hence these consolidated petitions which seek a reversal of respondent appellate courts decision.

PNB assigned two errors. First, the bank contends that respondent court erred in exempting the Province ofTarlac from liability when, in fact, the latter was negligent because it delivered and released the questionedchecks to Fausto Pangilinan who was then already retired as the hospitals cashier and administrative officer.PNB also maintains its innocence and alleges that as between two innocent persons, the one whose act was thecause of the loss, in this case the Province of Tarlac, bears the loss.

Next, PNB asserts that it was error for the court to order it to pay the province and then seek reimbursementfrom Associated Bank. According to petitioner bank, respondent appellate Court should have directedAssociated Bank to pay the adjudged liability directly to the Province of Tarlac to avoid circuity. 14

Associated Bank, on the other hand, argues that the order of liability should be totally reversed, with the drawee bank (PNB) solely and ultimately bearing the loss.

Respondent court allegedly erred in applying Section 23 of the Philippine Clearing House Rules instead ofCentral Bank Circular No. 580, which, being an administrative regulation issued pursuant to law, has the forceand 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 from asserting the defense of guarantee of priorindorsements against Associated Bank, the collecting bank. In stamping the guarantee (for all priorindorsements), it merely followed a mandatory requirement for clearing 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 willalways bear the loss as against the drawee bank. 16

Associated Bank also claims that since PNB already cleared and paid the value of the forged checks in question,it is now estopped from asserting the defense that Associated Bank guaranteed prior indorsements. The drawee

bank allegedly has the primary duty to verify the genuineness of payees indorsement before paying thecheck. 17

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


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xxx xxx xxx

The case at bench concerns checks payable to the order of Concepcion Emergency Hospital or its Chief. Theywere properly issued and bear the genuine signatures of the drawer, the Province of Tarlac. The infirmity in thequestioned checks lies in the payees (Concepcion Emergency Hospital) indorsements which are forgeries. Atthe time of their indorsement, the checks were order instruments.

Checks having forged indorsements should be differentiated from forged checks or checks bearing the forgedsignature of the drawer.

Section 23 of the Negotiable Instruments Law (NIL) provides:

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

A forged signature, whether it be that of the drawer or the payee, is wholly inoperative and no one can gain titleto the instrument through it. A person whose signature to an instrument was forged was never a party and neverconsented to the contract which allegedly gave rise to such instrument. 18 Section 23 does not avoid theinstrument but only the forged signature. 19 Thus, a forged indorsement does not operate as th e payeesindorsement.

The exception to the general rule in Section 23 is where a party against whom it is sought to enforce a right is precluded from setting up the forgery or want of authority. Parties who warrant or admit the genuineness of thesignature in question and those who, by their acts, silence or negligence are estopped from setting up thedefense of forgery, are precluded from using this defense. Indorsers, persons negotiating by delivery andacceptors are warrantors of the genuineness of the signatures on the instIument. 20

In bearer instruments, the signature of the payee or holder is unnecessary to pass title to the instrument. Hence,when the indorsement is a forgery, only the person whose signature is forged can raise the defense of forgeryagainst a holder in due course. 21

The checks involved in this case are order instruments, hence, the following discussion is made with referenceto the effects of a forged indorsement 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 signatureof its rightful holder (here, the payee hospital) is essential to transfer title to the same instrument. When theholders indorsement is fo rged, all parties prior to the forgery may raise the real defense of forgery against all

parties subsequent thereto. 22

An indorser of an order instrument warrants that the instrument is genuine and in all respects what it purportsto be; that he has a good title to it; that all prior parties had capacity to contract; and that the instrument is at thetime of his indorsement valid and subsisting. 23 He cannot interpose the defense that signatures prior to him areforged.

A collecting bank where a check is deposited and which indorses the check upon presentment with the drawee bank, is such an indorser. So even if the indorsement on the check deposited by the bankss client is forged, thecollecting bank is bound by his warranties as an indorser and cannot set up the defense of forgery as against thedrawee bank.

The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay the check to theorder of the payee. The drawers instructions are reflected on the face and by the terms of the check. Paymentunder a forged indorsement is not to the drawers order. When the drawee bank pays a person other than the

payee, it does not comply with the terms of the check and violates its duty to charge its customers (the drawer)account only for properly payable items. Since the drawee bank did not pay a holder or other person entitled toreceive payment, it has no right to reimbursement from the drawer. 24 The general rule then is that the drawee

bank may not debit the drawers account and is not entitled to indemnification from the drawer. 25 The risk ofloss must perforce fall on the drawee bank.


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However, if the drawee bank can prove a failure by the customer/drawer to exercise ordinary care thatsubstantially contributed to the making of the forged signature, the drawer is precluded from asserting theforgery.

If at the same time the drawee bank was also negligent to the point of substantially contributing to the loss, thensuch loss from the forgery can be apportioned between the negligent drawer and the negligent bank. 26

In cases involving a forged check, where the drawers signature is forged, the drawer can recover from thedrawee bank. No drawee bank has a right to pay a forged check. If it does, it shall have to recredit the amount ofthe check to the account of the drawer. The liability chain ends with the drawee bank whose responsibility it isto know the drawers signature since the latter is its customer. 27

In cases involving checks with forged indorsements, such as the present petition, the chain of liability does notend with the drawee bank. The drawee bank may not debit the account of the drawer but may generally passliability back through the collection chain to the party who took from the forger and, of course, to the forgerhimself, if available. 28 In other words, the drawee bank can seek reimbursement or a return of the amount it

paid from the presentor bank or person. 29 Theoretically, the latter can demand reimbursement from the personwho indorsed the check to it and so on. The loss falls on the party who took the check from the forger, or on theforger himself.

In this case, the checks were indorsed by the collecting bank (Associated Bank) to the drawee bank (PNB). Theformer will necessarily be liable to the latter for the checks bearing forged indorsements. If the forgery is that ofthe payees or holders indorsement, the collecting bank is held liable, without prejudice to the latter proceedingagainst the forger.

Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the drawee bank. Theformer must necessarily return the money paid by the latter because it was paid wrongfully. 30

More importantly, by reason of the statutory warranty of a general indorser in Section 66 of the NegotiableInstruments Law, a collecting bank which indorses a check bearing a forged indorsement and presents it to the

drawee bank guarantees all prior indorsements, including the forged indorsement. It warrants that the instrumentis genuine, and that it is valid and subsisting at the time of his indorsement. Because the indorsement is aforgery, the collecting bank commits a breach of this warranty and will be accountable to the drawee bank. Thisliability scheme operates without regard to fault on the part of the collecting/presenting bank. Even if the latter

bank was not negligent, it would still be liable to the drawee bank because of its indorsement.

The Court has consistently ruled that the collecting bank or last endorser generally suffers the loss because ithas the duty to ascertain the genuineness of all prior endorsements considering that the act of presenting thecheck for payment to the drawee is an assertion that the party making the presentment has done its duty toascertain the genuineness of the endor sements. 31

The drawee bank is not similarly situated as the collecting bank because the former makes no warranty as to thegenuineness of any indorsement. 32 The drawee banks duty is but to verify the genuineness of the drawerssignature and not of the indorsement because the drawer is its client.

Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the check. The bank knows him, his address and history because he is a client. It has taken a risk on his deposit. The bank isalso in a better position to detect forgery, fraud or irregularity in the indorsement.

Hence, the drawee bank can recover the amount paid on the check bearing a forged indorsement from thecollecting bank. However, a drawee bank has the duty to promptly inform the presentor of the forgery upondiscovery. If the drawee bank delays in informing the presentor of the forgery, thereby depriving said presentor

of the right to recover from the forger, the former is deemed negligent and can no longer recover from the presentor. 33

Applying these rules to the case at bench, PNB, the drawee bank, cannot debit the current account of theProvince of Tarlac because it paid checks which bore forged indorsements. However, if the Province of Tarlacas drawer was negligent to the point of substantially contributing to the loss, then the drawee bank PNB cancharge its account. If both drawee bank-PNB and drawer-Province of Tarlac were negligent, the loss should be

properly apportioned between them.


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The loss incurred by drawee bank-PNB can be passed on to the collecting bank-Associated Bank which presented and indorsed the checks 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 theopportunity 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 the Province of Tarlac was equally negligent andshould, therefore, share the burden of loss from the checks bearing a forged indorsement.

The Province of Tarlac permitted Fausto Pangilinan to collect the checks when the latter, having already retiredfrom government service, was no longer connected with the hospital. With the exception of the first check(dated January 17, 1978), all the checks were issued and released after Pangilinans retirement on February 28,1978. After nearly three years, the Treasurers office was still releasin g the checks to the retired cashier. Inaddition, some of the aid allotment checks were released to Pangilinan and the others to Elizabeth Juco, the newcashier. The fact that there were now two persons collecting the checks for the hospital is an unmistakable signof an irregularity which should have alerted employees in the Treasurers office of the fraud being committed.There is also evidence indicating that the provincial employees were aware of Pangilinans retirement andconsequent 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 of checks, one went to Mr. Pangilinan andone went to Miss Juco?

JOSE MERU:

A : Yes, sir.

Q : Will you please tell us how at the time (sic) when the authorized representative of ConcepcionEmergency Hospital is and was supposed to be Miss Juco?

A : Well, as far as my investigation show (sic) the assistant cashier told me that Pangilinan representedhimself as also authorized to help in the release of these checks and we were apparently misled because theyaccepted the representation of Pangilinan that he was helping them in the release of the checks and besidesaccording to them they were, Pangilinan, like the rest, was able to present an official receipt to acknowledgethese receipts and according to them since this is a government check and believed that it will eventually go tothe hospital following the standard procedure of negotiating government checks, they released the checks toPangilinan aside from Miss Juco. 34

The failure of the Province of Tarlac to exercise due care contributed to a significant degree to the losstantamount to negligence. Hence, the Province of Tarlac should be liable for part of the total amount paid on the

questioned checks.

The drawee bank PNB also breached its duty to pay only according to the terms of the check. Hence, it cannotescape liability and should also 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 forged indorsements were deposited in theforgers account with the collecting bank and were later paid by four different drawee banks. The Court foundthe collecting bank (Associated) to be negligent and held:

The Bank should have first verified his right to endorse the crossed checks, of which he was not the payee, andto deposit the proceeds of the checks to his own account. The Bank was by reason of the nature of the checks

put u pon notice that they were issued for deposit only to the private respondents account. xxx

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

Although Associated Bank claims that the guarantee stamped on the checks (All prior and/or lack ofendorsements guaranteed) is merely a requirement forced upon it by clearing house rules, it cannot but remain


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liable. The stamp guaranteeing prior indorsements is not an empty rubric which a bank must fulfill for the sakeof convenience. A bank is not required to accept all the c hecks negotiated to it. It is within the bahks discretionto receive a check for no banking institution would consciously or deliberately accept a check bearing a forgedindorsement. When a check is deposited with the collecting bank, it takes a risk on its depositor. It is onlylogical that this bank be held accountable for checks deposited by its customers.

A delay in informing the collecting bank (Associated Bank) of the forgery, which deprives it of the opportunityto go after the forger, signifies negligence on the part of the drawee bank (PNB) and will preclude it fromclaiming reimbursement.

It is here that Associated Banks assignment of error concerning C.B. Circular No. 580 and Section 23 of thePhilippine Clearing House Corporation Rules comes to fore. Under Section 4(c) of CB Circular No. 580, items

bearing a forged endorsement shall be returned within twenty-four (24) hours after discovery of the forgery butin no event beyond the period fixed or provided by law for filing of a legal action by the returning bank. Section23 of the PCHC Rules deleted the requirement that items bearing a forged endorsement should be returnedwithin twenty-four hours. Associated Bank now argues that the aforementioned Central Bank Circular isapplicable. Since PNB did not return the questioned checks within twenty-four hours, but several days later,Associated Bank alleges that PNB should be considered negligent and not entitled to reimbursement of theamount it paid on the checks.

The Court deems it unnecessary to d iscuss Associated Banks assertions that CB Circular No. 580 is anadministrative regulation issued pursuant to law and as such, must prevail over the PCHC rule. The CentralBank circular was in force for all banks until June 1980 when the Philippine Clearing House Corporation(PCHC) was set up and commenced operations. Banks in Metro Manila were covered by the PCHC while bankslocated elsewhere still had to go through Central Bank Clearing. In any event, the twenty-four-hour return rulewas adopted by the PCHC until it was changed in 1982. The contending banks herein, which are both branchesin Tarlac province, are therefore not covered by PCHC Rules but by CB Circular No. 580. Clearly then, the CBcircular was applicable when the forgery of the checks was discovered in 1981.

The rule mandates that the checks be returned within twenty-four hours after discovery of the forgery but in no

event beyond the period fixed by law for filing a legal action. The rationale of the rule is to give the collecting bank (which indorsed the check) adequate opportunity to proceed against the forger. If prompt notice is notgiven, the collecting bank maybe prejudiced and lose the opportunity to go after its depositor.

The Court finds that even if PNB did not return the questioned checks to Associated Bank within twenty-fourhours, as mandated by the rule, PNB did not commit negligent delay. Under the circumstances, PNB gave

prompt notice to Associated Bank and the latter bank was not prejudiced in going after Fausto Pangilinan. Afterthe Province of Tarlac informed PNB of the forgeries, PNB necessarily had to inspect the checks and conductits own investigation. Thereafter, it requested the Provincial Treasurers office on March 31, 1981 to return thechecks for verification. The Province of Tarlac returned the checks only on April 22, 1981. Two days later,Associated Bank received the checks from PNB. 36

Associated Bank was also furnished a copy of the Provinces letter of demand to PNB dated March 20, 1981,thus giving it notice of the forgeries. At this time, however, Pangilinans account with As

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