1

1. Metropolitan Bank And Trust Company Vs. Ba Finance Corporation

G.R. No. 179952 December 4, 2009 ;

Bitanga – owner of the car

BA Finance Corporation – he obtained a loan and mortgaged his car
Malayan Insurance Corp – insurer of car against loss
MetroBank/ AsianBank (merged bank) – bank where Bitanga deposited and withdrew the entire proceeds check

Facts:
Lamberto Bitanga (Bitanga) obtained from respondent BA Finance Corporation (BA Finance) a P329,280 loan to secure
which, he mortgaged his car to respondent BA Finance. The mortgage contained the following stipulation:

The MORTGAGOR covenants and agrees that he/it will cause the property(ies) hereinabove
mortgaged to be insured against loss or damage by accident, theft and fire for a period of one year from
date hereof with an insurance company or companies acceptable to the MORTGAGEE in an amount not
less than the outstanding balance of mortgage obligations and that he/it will make all loss, if any, under
such policy or policies, payable to the MORTGAGEE or its assigns as its interest may appear . . .
. (emphasis and underscoring supplied)

Bitanga thus had the mortgaged car insured by respondent Malayan Insurance Co., Inc. (Malayan Insurance) which issued a
policy stipulating that, inter alia,

Loss, if any shall be payable to BA FINANCE CORP. as its interest may appear. It is hereby expressly
understood that this policy or any renewal thereof, shall not be cancelled without prior notification and
conformity by BA FINANCE CORPORATION. 5 (emphasis and underscoring supplied)

The car was stolen. On Bitanga's claim, Malayan Insurance issued a check payable to the order of "B.A. Finance Corporation
and Lamberto Bitanga" for P224,500, drawn against China Banking Corporation (China Bank). The check was crossed with
the notation "For Deposit Payees' Account Only."

Without the indorsement or authority of his co-payee BA Finance, Bitanga deposited the check to his account with the
Asianbank Corporation (Asianbank), now merged with herein petitioner Metropolitan Bank and Trust Company
(Metrobank). Bitanga subsequently withdrew the entire proceeds of the check.
In the meantime, Bitanga's loan became past due, but despite demands, he failed to settle it.

BA Finance eventually learned of the loss of the car and of Malayan Insurance's issuance of a crossed check payable to it
and Bitanga, and of Bitanga's depositing it in his account at Asianbank and withdrawing the entire proceeds thereof.

BA Finance thereupon demanded the payment of the value of the check from Asianbank but to no avail, prompting it to
file a complaint before the Regional Trial Court (RTC) for sum of money and damages against Asianbank and
Bitanga, alleging that, inter alia, it is entitled to the entire proceeds of the check.

Contention of the Respondent: In its Answer with Counterclaim, Asianbank/ METROBANK alleged that BA Finance
"instituted [the] complaint in bad faith to coerce [it] into paying the whole amount of the CHECK knowing fully well that its
rightful claim, if any, is against Malayan [Insurance]."

Asianbank thereafter filed a cross-claim against Bitanga, alleging that he fraudulently induced its personnel to release to
him the full amount of the check; and that on being later informed that the entire amount of the check did not belong to
Bitanga, it took steps to get in touch with him but he had changed residence without leaving any forwarding address.
And Asianbank filed a third-party complaint against Malayan Insurance, alleging that Malayan Insurance was grossly
negligent in issuing the check payable to both Bitanga and BA Finance and delivering it to Bitanga without the consent of
BA Finance.
 2
Bitanga was declared in default in Asianbank's cross-claim.

RTC RULING: finding that Malayan Insurance was not privy to the contract between BA Finance and Bitanga, and noting
the claim of Malayan Insurance that it is its policy to issue checks to both the insured and the financing company, held that
Malayan Insurance cannot be faulted for negligence for issuing the check payable to both BA Finance and Bitanga.

The trial court, holding that Asianbank was negligent in allowing Bitanga to deposit the check to his account and to
withdraw the proceeds thereof, without his co-payee BA Finance having either indorsed it or authorized him to indorse it in
its behalf, found Asianbank and Bitanga jointly and severally liable to BA Finance following Section 41 of the Negotiable
Instruments Law and Associated Bank v. Court of Appeals.
Thus the trial court disposed:
WHEREFORE, premises considered, judgment is hereby rendered ordering defendants Asian Bank Corporation and
Lamberto Bitanga:
1) To pay plaintiff jointly and severally the sum of P224,500.00 with interest thereon at the rate of 12% from
September 25, 1992 until fully paid;
2) To pay plaintiff the sum of P50,000.00 as exemplary damages; P20,000.00 as actual damages; P30,000.00 as
attorney's fee; and
3) To pay the costs of suit.
Asianbank's and Bitanga's [sic] counterclaims are dismissed.

The third party complaint of defendant/third party plaintiff against third-party defendant Malayan Insurance, Co., Inc. is
hereby dismissed. Asianbank is ordered to pay Malayan attorney's fee of P50,000.00 and a per appearance fee of P500.00.

On the cross-claim of defendant Asianbank, co-defendant Lamberto Bitanga is ordered to pay the former the
amounts the latter is ordered to pay the plaintiff the proceeds of the check with interest of 12% until fully paid and
damages and attorney’s fees.

Before the Court of Appeals, Asianbank, in its Appellant's Brief, submitted the following issues for consideration:
a. Whether BA Finance has a cause of action against Asianbank.
b. Assuming that BA Finance has a valid cause of action, may it claim from Asianbank more than one-half of the value of
the check considering that it is a mere co-payee or joint payee of the check?
c. Whether BA Finance is liable to Asianbank for actual and exemplary damages for wrongfully bringing the case to court.
d. Whether Malayan is liable to Asianbank for reimbursement of any sum of money which this Honorable Court may award
to BA Finance in this case.

CONTENTION OF ASIANBANK
And it proffered the following arguments:
A. BA Finance has no cause of action against Asianbank as it has no legal right and title to the check considering
that the check was not delivered to BA Finance. Hence, BA Finance is not a holder thereof under the Negotiable
Instruments Law.
B. Asianbank, as collecting bank, is not liable to BA Finance as there was no privity of contract between them.
C. Asianbank, as collecting bank, is not liable to BA Finance, considering that, as the intermediary between the
payee and the drawee Chinabank, it merely acted on the instructions of drawee Chinabank to pay the amount of
the check to Bitanga, hence, the consequent damage to BA Finance was due to the negligence of Chinabank.
D. Malayan's act of issuing and delivering the check solely to Bitanga in violation of the "loss payee" clause in the
Policy, is the proximate cause of the alleged damage to BA Finance.
E. Assuming Asianbank is liable, BA Finance can claim only his proportionate interest on the check as it is a joint
payee thereof.
F. Bitanga alone is liable for the amount to BA Finance on the ground of unjust enrichment or solutio indebiti.
G. BA Finance is liable to pay Asianbank actual and exemplary damages. 20 (underscoring supplied)
The appellate court, "summarizing" the errors attributed to the trial court by Asianbank to be "whether . . . BA
Finance has a cause of action against [it] even if the subject check had not been delivered to . . . BA Finance by the
 3
issuer itself," held in the affirmative and accordingly affirmed the trial court's decision but deleted the award of
P20,000 as actual damages

Hence, the present Petition for Review on Certiorari filed by Metrobank (hereafter petitioner) to which Asianbank was, as
earlier stated, merged, faulting the appellate court

Petitioner proffers the following arguments against the application of Associated Bank v. CA to the case:
. . . [T]he rule established in the Associated Bank case has provided a speedier remedy for the payee to recover from erring
collecting banks despite the absence of delivery of the negotiable instrument. However, the application of the rule
demands careful consideration of the factual settings and issues raised in the case . . . .
One of the relevant circumstances raised in Associated Bank is the existence of forgery or unauthorized indorsement. . . .
xxx xxx xxx
In the case at bar, Bitanga is authorized to indorse the check as the drawer names him as one of the payees. Moreover, his
signature is not a forgery nor has he or anyone forged the signature of the representative of BA Finance Corporation. No
unauthorized indorsement appears on the check.
xxx xxx xxx
Absent the indispensable fact of forgery or unauthorized indorsement, the desirable shortcut rule cannot be applied,
The petition fails.

ISSUE:
1. WHETHER OR NOT ASIANBANK(METROBANK) SHOULD BE LIABLE TO BA FINANCE FOR NEGLIGENTLY
ALLOWING BITANGA, HIS CO-PAYEE TO WITHDRAW THE ENTIRE PROCEEDS OF THE CHECK.
2. IF YES, SHOULD THE petitioner liable to BA Finance for the full value of the check?

RULING:
1. WHETHER OR NOT ASIANBANK(METROBANK) SHOULD BE LIABLE TO BA FINANCE FOR NEGLIGENTLY
ALLOWING BITANGA, HIS CO-PAYEE TO WITHDRAW THE ENTIRE PROCEEDS OF THE CHECK.

YES. Section 41 of the Negotiable Instruments Law provides:

Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all must
indorse unless the one indorsing has authority to indorse for the others

Bitanga alone endorsed the crossed check, and petitioner allowed the deposit and release of the proceeds thereof, despite
the absence of authority of Bitanga's co-payee BA Finance to endorse it on its behalf.
Denying any irregularity in accepting the check, petitioner maintains that it followed normal banking procedure.

Admittedly, petitioner dismissed the employee who allowed the deposit of the check in Bitanga's account.
Petitioner's argument that since there was neither forgery, nor unauthorized indorsement because Bitanga was a co-payee
in the subject check, the dictum in Associated Bank v. CA does not apply in the present case fails. The payment of an
instrument over a missing indorsement is the equivalent of payment on a forged indorsement or an unauthorized
indorsement in itself in the case of joint payees.

Clearly, petitioner, through its employee, was negligent when it allowed the deposit of the crossed check, despite the lone
endorsement of Bitanga, ostensibly ignoring the fact that the check did not, it bears repeating, carry the indorsement of
BA Finance.

As has been repeatedly emphasized, the banking business is imbued with public interest such that the highest degree of
diligence and highest standards of integrity and performance are expected of banks in order to maintain the trust and
confidence of the public in general in the banking sector. 30 Undoubtedly, BA Finance has a cause of action against
petitioner.
 4
2. IF YES, SHOULD THE petitioner liable to BA Finance for the full value of the check?

YES. Petitioner, at all events, argue that its liability to BA Finance should only be one-half of the amount covered by the
check as there is no indication in the check that Bitanga and BA Finance are solidary creditors to thus make them
presumptively joint creditors under Articles 1207 and 1208 of the Civil Code which respectively provide:

Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not
imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire
compliance with the prestations. There is a solidary liability only when the obligation expressly so states, or when the law or
the nature of the obligation requires solidarity.

Art. 1208. If from the law, or the nature or wording of the obligations to which the preceding article refers to the contrary
does not appear, the credit or debt shall be presumed to be divided into as many equal shares as there are creditors or
debtors, the debts or credits being considered distinct from one another, subject to the Rules of Court governing the
multiplicity of suits.

Petitioner's argument is flawed.

The provisions of the Negotiable Instruments Law and underlying jurisprudential teachings on the black-letter law
provide definitive justification for petitioner's full liability on the value of the check.

To be sure, a collecting bank, Asianbank in this case, where a check is deposited and which indorses the check upon
presentment with the drawee bank, is an indorser. This is because in indorsing a check to the drawee bank, a collecting
bank stamps the back of the check with the phrase "all prior endorsements and/or lack of endorsement guaranteed" and,
for all intents and purposes, treats the check as a negotiable instrument, hence, assumes the warranty of an
indorser. Without Asianbank's warranty, the drawee bank (China Bank in this case) would not have paid the value of the
subject check.

Petitioner, as the collecting bank or last indorser, generally suffers the loss because it has the duty to ascertain the
genuineness of all prior indorsements considering that the act of presenting the check for payment to the drawee is an
assertion that the party making the presentment has done its duty to ascertain the genuineness of prior indorsements.
Accordingly, one who credits the proceeds of a check to the account of the indorsing payee is liable in conversion to the
non-indorsing payee for the entire amount of the check.

Articles 1207 and 1208 of the Civil Code cannot be applied to the present case as these are completely irrelevant. The
drawer, Malayan Insurance in this case, issued the check to answer for an underlying contractual obligation (payment of
insurance proceeds). The obligation is merely reflected in the instrument and whether the payees would jointly share in the
proceeds or not is beside the point.
Moreover, granting petitioner's appeal for partial liability would run counter to the existing principles on the liabilities of
parties on negotiable instruments, particularly on Section 68 of the Negotiable Instruments Law which instructs that joint
payees who indorse are deemed to indorse jointly and severally. 36 Recall that when the maker dishonors the instrument,
the holder thereof can turn to those secondarily liable — the indorser — for recovery. And since the law explicitly mandates
a solidary liability on the part of the joint payees who indorse the instrument, the holder thereof (assuming the check was
further negotiated) can turn to either Bitanga or BA Finance for full recompense.

2. RCBC Savings Bank Vs. Odrada G.R. No. 219037, October 19, 2016 ;

Odrada – owner of the Montero

Lim – Buyer of the Montero
RCBC Savings – granted the car loan
Facts:
In April 2002, respondent Noel M. Odrada (Odrada) sold a second-hand Mitsubishi Montero (Montero) to
Teodoro L. Lim (Lim) for One Million Five Hundred Ten Thousand Pesos (P1,510,000). Of the total consideration, Six
 5
Hundred Ten Thousand Pesos (P610,000) was initially paid by Lim and the balance of Nine Hundred Thousand Pesos
(P900,000) was financed by petitioner RCBC Savings Bank (RCBC) through a car loan obtained by Lim. As a requisite
for the approval of the loan, RCBC required Lim to submit the original copies of the Certificate of Registration (CR) and
Official Receipt (OR) in his name. Unable to produce the Montero's OR and CR, Lim requested RCBC to execute a letter
addressed to Odrada informing the latter that his application for a car loan had been approved.
On 5 April 2002, RCBC issued a letter that the balance of the loan would be delivered to Odrada upon
submission of the OR and CR. Following the letter and initial down payment, Odrada executed a Deed of Absolute Sale
in favor of Lim and the latter took possession of the Montero.
When RCBC received the documents, RCBC issued two manager's checks payable to Odrada for Nine Hundred
Thousand Pesos (P900,000) and Thirteen Thousand Five Hundred Pesos (P13,500). After the issuance of the manager's
checks and their turnover to Odrada but prior to the checks' presentation, Lim notified Odrada in a letter dated 15 April
2002 that there was an issue regarding the roadworthiness of the Montero. In his letter, Lim stated in his letter that he
is to cancel or exchange the Montero that Odrada sent on the ground that it not meet the representations made.
Odrada was also asked to meet with Lim however, he did not go on the said meeting instead deposited the
manager’s check with international exchange bank and redeposited them but the checks were dishonored both times
apprarently upon Lim’s instruction to RCBC. Consequently, Odrada filed a collection suit against Lim and RCBC with
the RTC.

Contention of Lim: cancellation of the loan was at his instance, upon discovery of the misrepresentations by Odrada
about the Montero's roadworthiness. Lim claimed that the cancellation was not done ex parte but through a letter. He
further alleged that the letter was delivered to Odrada prior to the presentation of the manager's checks to RCBC.

Contention of RCBC: RCBC contended that the manager's checks were dishonored because Lim had cancelled the loan.
RCBC claimed that the cancellation of the loan was prior to the presentation of the manager's checks. Moreover, RCBC
alleged that despite notice of the defective condition of the Montero, which constituted a failure of consideration,
Odrada still proceeded with presenting the manager's checks

It was later disclosed during trial that RCBC also sent a formal notice of cancellation of the loan on 18 April
2002 to both Odrada and Lim. ACa
RTC RULING: In favor of Odrada.
The trial court held that Odrada was the proper party to ask for rescission. The lower court reasoned that the
right of rescission is implied in reciprocal obligations where one party fails to perform what is incumbent upon him
when the other is willing and ready to comply. The trial court ruled that it was not proper for Lim to exercise the right of
rescission since Odrada had already complied with the contract of sale by delivering the Montero while Lim remained
delinquent in payment. Since Lim was not ready, willing, and able to comply with the contract of sale, he was not the
proper party entitled to rescind the contract.
The trial court ruled that the defective condition of the Montero was not a supervening event that would justify
the dishonor of the manager's checks. The trial court reasoned that a manager's check is equivalent to cash and is really
the bank's own check. It may be treated as a promissory note with the bank as maker. Hence, the check becomes the
primary obligation of the bank which issued it and constitutes a written promise to pay on demand. Being the party
primarily liable, the trial court ruled that RCBC was liable to Odrada for the value of the manager's checks.
|||

COURT OF APPEALS RULING: Dismissed and Affirmed the trial court in favor of Odrada
The two manager's checks, which were complete and regular, reached the hands of Lim who deposited the same in his
bank account with Ibank. RCBC knew that the amount reflected on the manager's checks represented Lim's payment for
the remaining balance of the Montero's purchase price. The appellate court held that when RCBC issued the manager's
checks in favor of Odrada, RCBC admitted the existence of the payee and his then capacity to endorse, and undertook that
on due presentment the checks which were negotiable instruments would be accepted or paid, or both according to its
tenor. The appellate court held that the effective delivery of the checks to Odrada made RCBC liable for the checks.
 6
On RCBC's defense of want of consideration, the Court of Appeals affirmed the finding of the trial court that Odrada was
a holder in due course. The appellate court ruled that the defense of want of consideration is not available against a holder
in due course.

ISSUE:
whether or not the drawee bank of a manager's check has the option of refusing payment by interposing a personal
defense of the purchaser of the manager's check who delivered the check to a third party.

RULING:
YES.

Jurisprudence defines a manager's check as a check drawn by the bank's manager upon the bank itself and accepted in
advance by the bank by the act of its issuance. It is really the bank's own check and may be treated as a promissory note
with the bank as its maker. Consequently, upon its purchase, the check becomes the primary obligation of the bank and
constitutes its written promise to pay the holder upon demand. It is similar to a cashier's check both as to effect and use in
that the bank represents that the check is drawn against sufficient funds.

As a general rule, the drawee bank is not liable until it accepts. Prior to a bill's acceptance, no contractual relation exists
between the holder and the drawee. Acceptance, therefore, creates a privity of contract between the holder and the
drawee so much so that the latter, once it accepts, becomes the party primarily liable on the instrument. Accordingly,
acceptance is the act which triggers the operation of the liabilities of the drawee (acceptor) under Section 62 of
the Negotiable Instruments Law. Thus, once he accepts, the drawee admits the following:
(a) existence of the drawer;
(b) genuineness of the drawer's signature;
(c) capacity and authority of the drawer to draw the instrument; and
(d) existence of the payee and his then capacity to endorse.

As can be gleaned in a long line of cases decided by this Court, a manager's check is accepted by the bank upon its issuance.
As compared to an ordinary bill of exchange where acceptance occurs after the bill is presented to the drawee, the distinct
feature of a manager's check is that it is accepted in advance. Notably, the mere issuance of a manager's check creates a
privity of contract between the holder and the drawee bank, the latter primarily binding itself to pay according to the tenor
of its acceptance.

The drawee bank, as a result, has the unconditional obligation to pay a manager's check to a holder in due course
irrespective of any available personal defenses. However, while this Court has consistently held that a manager's check is
automatically accepted, a holder other than a holder in due course is still subject to defenses.

if the holder of a manager's check is not a holder in due course, can the drawee bank interpose a personal defense of
the purchaser?

YES. The foregoing rulings clearly establish that the drawee bank of a manager's check may interpose personal defenses of
the purchaser of the manager's check if the holder is not a holder in due course. In short, the purchaser of a manager's
check may validly countermand payment to a holder who is not a holder in due course. Accordingly, the drawee bank may
refuse to pay the manager's check by interposing a personal defense of the purchaser. Hence, the resolution of the present
case requires a determination of the status of Odrada as holder of the manager's checks.
In this case, the Court of Appeals gravely erred when it considered Odrada as a holder in due course. Section 52 of
the Negotiable Instruments Law defines a holder in due course as one who has taken the instrument under the following
conditions:
 7
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it has been previously
dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect
in the title of the person negotiating it. (Emphasis supplied)

To be a holder in due course, the law requires that a party must have acquired the instrument in good faith and for value.
Good faith means that the person taking the instrument has acted with due honesty with regard to the rights of the parties
liable on the instrument and that at the time he took the instrument, the holder has no knowledge of any defect or infirmity
of the instrument. To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the
same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such
facts that his action in taking the instrument would amount to bad faith.

Value, on the other hand, is defined as any consideration sufficient to support a simple contract.

In the present case, Odrada attempted to deposit the manager's checks on 16 April 2002, a day after Lim had informed him
that there was a serious problem with the Montero. Instead of addressing the issue, Odrada decided to deposit the
manager's checks. Odrada's actions do not amount to good faith. Clearly, Odrada failed to make an inquiry even when the
circumstances strongly indicated that there arose, at the very least, a partial failure of consideration due to the hidden
defects of the Montero. Odrada's action in depositing the manager's checks despite knowledge of the Montero's defects
amounted to bad faith. Moreover, when Odrada redeposited the manager's checks on 19 April 2002, he was already
formally notified by RCBC the previous day of the cancellation of Lim's auto loan transaction. Following UCPB, RCBC may
refuse payment by interposing a personal defense of Lim — that the title of Odrada had become defective when there
arose a partial failure or lack of consideration.

RCBC acted in good faith in following the instructions of Lim. The records show that Lim notified RCBC of the defective
condition of the Montero before Odrada presented the manager's checks. Lim informed RCBC of the hidden defects of the
Montero including a misaligned engine, smashed condenser, crippled bumper support, and defective transmission. RCBC
also received a formal notice of cancellation of the auto loan from Lim and this prompted RCBC to cancel the manager's
checks since the auto loan was the consideration for issuing the manager's checks. RCBC acted in good faith in stopping the
payment of the manager's checks.
Section 58 of the Negotiable Instruments Law provides: "In the hands of any holder other than a holder in due course,
a negotiable instrument is subject to the same defenses as if it were non-negotiable. . . . ." Since Odrada was not a
holder in due course, the instrument becomes subject to personal defenses under the Negotiable Instruments Law.
Hence, RCBC may legally act on a countermand by Lim, the purchaser of the manager's checks.

3. De Ocampo Vs. Gatchalian G.R. No. 15126;

Gatchalian – buyer of the car

Gonzales – represented that he was duly authorized by the owner of the cae, Ocamo Clinic to sell the car
De Ocampo – owner of the car

Facts:
Anita C. Gatchalian who was then interested in looking for a car for the use of her husband and the family, was shown and
offered a car by Manuel Gonzales who was accompanied by Emil Fajardo, the latter being personally known to defendant
Anita C. Gatchalian;

That Manuel Gonzales represented to defendant Anita C. Gatchalian that he was duly authorized by the owner of the car,
Ocampo Clinic, to look for a buyer of said car and to negotiate for and accomplish said sale

That Gatchalian, finding the price of the car quoted by Gonzales to her satisfaction, requested Gonzales to bring the car the
day following together with the certificate of registration of the car, so that her husband would be able to see same;
 8

(no intention to purchase the car = NO CR)

On this request of defendant Gatchalian, Gonzales advised her that the owner of the car will not be willing to give the
certificate of registration unless there is a showing that the party interested in the purchase of said car is ready and willing
to make such purchase and that for this purpose Manuel Gonzales requested defendant. Gatchalian to give him, (Manuel
Gonzales) a check which will be shown to the owner as evidence of buyer's good faith in the intention to purchase the said
car, the said check to be for safekeeping only of Manuel Gonzales and to be returned to defendant Anita C. Gatchalian the
following day when Manuel Gonzales brings the car and the certificate of registration.

That relying on these representations of Manuel Gonzales and with this assurance that said check will be only for
safekeeping and which will be returned to said defendant the following day when the car and its certificate of registration
will be brought by Manuel Gonzales to defendants, Gatchalian drew and issued a check that Manuel Gonzales executed and
issued a receipt for said check

Manuel Gonzales failed to appear the day following and on his failure to bring the car and its certificate of registration and
to return the check. on the following day as previously agreed upon, defendant Anita C. Gatchalian issued a 'Stop Payment
Order' on the check with the drawee bank. Said 'Stop Payment Order' was issued without previous notice on plaintiff, not
being known to defendant, Anita C. Gatchalian and who furthermore had no reason to know check was given to plaintiff;

Manuel Gonzales having received the check from defendant Anita C. Gatchalian under the representations and conditions
herein above specified, delivered the same to the Ocampo Clinic, in payment of the fees and expenses arising from the
hospitalization of his wife;

Contention of defendant-appellants: the check is not a negotiable instrument, under the facts and circumstances stated
in the stipulation of facts, and that plaintiff is not a holder in due course. In support of the first contention, it is argued that
defendant Gatchalian had no intention to transfer her property in the instrument as it was for safekeeping merely and,
therefore, there was no delivery required by law (Section 16, Negotiable Instruments Law); that assuming for the sake of
argument that delivery was not for safekeeping merely, the delivery was conditional and the condition was not fulfilled.

that plaintiff-appellee is not a holder in due course, the appellant argues that plaintiff-appellee cannot be a holder in due
course because there was no negotiation prior to plaintiff-appellee's acquiring the possession of the check; that a holder in
due course presupposes a prior party from whose hands negotiation proceeded, and in the case at bar, plaintiff-appellee is
the payee, the maker and the payee being original parties. It is also claimed that the plaintiff-appellee is not a holder in due
course because it acquired the check with notice of defect in the title of the holder, Manuel Gonzales, and because under
the circumstances stated in the stipulation of facts there were circumstances that brought suspicion about Gonzales'
possession and negotiation, which circumstances should have placed the plaintiff-appellee under the duty to inquire into
the title of the holder.

Contention of plaintiff-appellee: contention of the plaintiff is that there has been no negotiation of the instrument,
because the drawer did not deliver the instrument to Manuel Gonzales with the intention of negotiating the same, or for
the purpose of giving effect thereto, for as the stipulation of facts declares the check was to remain in the possession of
Manuel Gonzales, and was not to be negotiated, but was to serve merely as evidence of good faith of defendants in their
desire to purchase the car being sold to them. Admitting that such was the intention of the drawer of the check when she
delivered it to Manuel Gonzales, it was no fault of the plaintiff-appellee drawee if Manuel Gonzales delivered the check or
negotiated it. As the check was payable to the plaintiff-appellee, and was entrusted to Manuel Gonzales by Gatchalian, the
delivery to Manuel Gonzales was a delivery by the drawer to his own agent; in other words, Manuel Gonzales was the agent
of the drawer Anita Gatchalian insofar as the possession of the check is concerned. So, when the agent of drawer Manuel
Gonzales negotiated the check with the intention of getting its value from plaintiff- appellee, negotiation took place
through no fault of the plaintiff- appellee, unless it can be shown that the plaintiff-appellee should be considered as having
notice of the defect in the possession of the holder Manuel Gonzales.

ISSUE: whether the plaintiff-appellee may be considered as a holder in due course.

RULING:
NO. the Court agreed with the defendant –appellants agree with the defendants-appellants that the circumstances
indicated by them in their briefs,
 9
a. such as the fact that appellants had no obligation or liability to the Ocampo Clinic;
b. that the amount of the check did not correspond exactly with the obligation of Matilde Gonzales to Dr. V. R. de
Ocampo; and
c. that the check had two parallel lines in the upper left hand corner, which practice means that the check could
only be deposited but may not be converted into cash —

All these circumstances should have put the plaintiff-appellee to inquiry as to the why and wherefore of the possession of
the check by Manuel Gonzales, and why he used it to pay Matilde's account. It was payee's duty to ascertain from the
holder Manuel Gonzales what the nature of the latter's title to the check was or the nature of his possession. Having
failed in this respect, we must declare that plaintiff-appellee was guilty of gross neglect in not finding out the nature
of the title and possession of Manuel Gonzales, amounting to legal absence of good faith, and it may not be
considered as a holder of the check in good faith, to such effect is the consensus of authority. Thus, plaintiff-appellee
should not be allowed to recover the value of the check.

In the case at bar the rule that a possessor of the instrument is prima facie a holder in due course does not apply because
there was a defect in the title of the holder (Manuel Gonzales), because the instrument is not payable to him or to bearer.
On the other hand, the stipulation of facts indicated by the appellants in their brief, like the fact that the drawer had no
account with the payee; that the holder did not show or tell the payee why he had the check in his possession and why
he was using it for the payment of his own personal account — show that holder's title was defective or suspicious, to
say the least. As holder's title was defective or suspicious, it cannot be stated that the payee acquired the check without
knowledge of said defect in holder's title, and for this reason the presumption that it is a holder in due course or that it
acquired the instrument in good faith does not exist. And having presented no evidence that it acquired the check in good
faith, it (payee) cannot be considered as a holder in due course. In other words, under the circumstances of the case,
instead of the presumption that payee was a holder in good faith, the fact is that it acquired possession of the instrument
under circumstances that should have put it to inquiry as to the title of the holder who negotiated the check to it. The
burden was, therefore, placed upon it to show that notwithstanding the suspicious circumstances, it acquired the check in
actual good faith.

4. Equitable Banking Corporation, Inc. Vs. Special Steel Products, Inc. and Agusto Pardo (president)
G.R. No. 175350; June 13, 2012;

A crossed check with the notation "account payee only" can only be deposited in the named payee's account. It is gross
negligence for a bank to ignore this rule solely on the basis of a third party's oral representations of having a good title
thereto.

Facts:
Respondent Special Steel Products (SSPI)– Private domestic corp selling steel products and Pardo is the president and
majority stockholder
International Copra Export Corporation (Interco) – regular customer
Jose Isidro alias JOLLY UY– Interco EE
Equitable – depository bank of Interco and Uy

SSPI sold electrodes to Interco. Interco issued three checks payable to the order of SSPI. Each check was crossed with
notation “account payee only” and was drawn against Equitable.

The records do not identify the signatory for these three checks, or explain how Uy, Interco's purchasing officer, came into
possession of these checks.

The records only disclose that Uy presented each crossed check to Equitable on the day of its issuance and claimed that he
had good title thereto. He demanded the deposit of the checks in his personal accounts in Equitable, Account.
 10
Equitable acceded to Uy's demands on the assumption that Uy, as the son-in-law of Interco's majority stockholder, was
acting pursuant to Interco's orders. The bank also relied on Uy's status as a valued client. Thus, Equitable accepted the
checks for deposit in Uy's personal accounts and stamped "ALL PRIOR ENDORSEMENT AND/OR LACK OF
ENDORSEMENT GUARANTEED" on their dorsal portion. Uy promptly withdrew the proceeds of the checks.|||
SSPI reminded Interco of the unpaid welding electrodesIt reiterated its demand on January 14, 1992. SSPI
explained its immediate need for payment as it was experiencing some financial crisis of its own. Interco replied that it
had already issued three checks payable to SSPI and drawn against Equitable. SSPI denied receipt of these checks.
SSPI requested information from Equitable regarding the three checks. The bank refused to give any information
invoking the confidentiality of deposits.
The records do not disclose the circumstances surrounding Interco's and SSPI's eventual discovery of Uy's
scheme. Nevertheless, it was determined that Uy, not SSPI, received the proceeds of the three checks that were
payable to SSPI.
Thus, twenty-three months after the issuance of the three checks, Interco finally paid the value of the three
checks to SSPI, plus a portion of the accrued interests. Interco refused to pay the entire accrued interest on the ground
that it was not responsible for the delay. Thus, SSPI was unable to collect P437,040.35 (at the contracted rate of 36%
per annum) in interest income.
SSPI and its president, Pardo, filed a complaint for damages with application for a writ of preliminary
attachment against Uy and Equitable Bank. The complaint alleged that the three crossed checks, all payable to the
order of SSPI and with the notation "account payee only," could be deposited and encashed by SSPI only. However,
due to Uy's fraudulent representations, and Equitable's indispensable connivance or gross negligence, the restrictive
nature of the checks was ignored and the checks were deposited in Uy's account. Had the defendants not diverted the
three checks in July 1991, the plaintiffs could have used them in their business and earned money from them. Thus, the
plaintiffs prayed for an award of actual damages consisting of the unrealized interest income from the proceeds of the
checks for the two-year period that the defendants withheld the proceeds from them (from July 1991 up to June 1993).
Contention of Equitable: Equitable then argued for the dismissal of the complaint for lack of cause of action.
It maintained that interest income is due only when it is expressly stipulated in writing. Since Equitable and SSPI did
not enter into any contract, Equitable is not liable for damages, in the form of unobtained interest income, to
SSPI. Moreover, SSPI's acceptance of Interco's payment on the sales invoices is a waiver or extinction of SSPI's cause
of action based on the three checks.
Equitable further argued that it is not liable to SSPI because it accepted the three crossed checks in good
faith. Equitable averred that, due to Uy's close relations with the drawer of the checks, the bank had basis to assume
that the drawer authorized Uy to countermand the original order stated in the check (that it can only be deposited in
the named payee's account). Since only Uy is responsible for the fraudulent conversion of the checks, he should
reimburse Equitable for any amounts that it may be made liable to plaintiffs.
The bank counter-claimed that SSPI is liable to it in damages for the wrongful and malicious attachment of
Equitable's personal properties. The bank maintained that SSPI knew that the allegation of fraud against the bank is a
falsehood. Further, the bank is financially capable to meet the plaintiffs' claim should the latter receive a favorable
judgment. SSPI was aware that the preliminary attachment against the bank was unnecessary, and intended only to
humiliate or destroy the bank's reputation.
Meanwhile, Uy answered that the checks were negotiated to him; that he is a holder for value of the checks
and that he has a good title thereto. He did not, however, explain how he obtained the checks, from whom he
obtained his title, and the value for which he received them. During trial, Uy did not present any evidence but adopted
Equitable's evidence as his own.

RTC RULING:

The RTC clarified that SSPI's cause of action against Uy and Equitable is for quasi-delict. SSPI is not seeking to enforce
payment on the undelivered checks from the defendants, but to recover the damage that it sustained from the wrongful
non-delivery of the checks.
 11
The crossed checks belonged solely to the payee named therein, SSPI. Since SSPI did not authorize anyone to receive
payment in its behalf, Uy clearly had no title to the checks and Equitable had no right to accept the said checks from Uy.
Equitable was negligent in permitting Uy to deposit the checks in his account without verifying Uy's right to endorse the
crossed checks. The court reiterated that banks have the duty to scrutinize the checks deposited with it, for a
determination of their genuineness and regularity. The law holds banks to a high standard because banks hold themselves
out to the public as experts in the field. Thus, the trial court found Equitable's explanation regarding Uy's close relations
with the drawer unacceptable.

Uy's conversion of the checks and Equitable's negligence make them liable to compensate SSPI for the actual damage it
sustained. This damage consists of the income that SSPI failed to realize during the delay. The trial court then equated this
unrealized income with the interest income that SSPI failed to collect from Interco. Thus, it ordered Uy and Equitable to
pay, jointly and severally, the amount of P437,040.35 to SSPI as actual damages

CA RULING: AFFIRMED RTC RULING.

It affirmed the trial court's ruling that SSPI had a cause of action for quasi-delict against Equitable.The CA noted that the
three checks presented by Uy to Equitable were crossed checks, and strictly made payable to SSPI only. This means that
the checks could only be deposited in the account of the named payee. Thus, the CA found that Equitable had the
responsibility of ensuring that the crossed checks are deposited in SSPI's account only. Equitable violated this duty when
it allowed the deposit of the crossed checks in Uy's account.

ISSUE:
Whether SSPI has a cause of action against Equitable for quasi-delict

RULING:
YES. Equitable argues that SSPI cannot assert a right against the bank based on the undelivered checks. It cites
provisions from the Negotiable Instruments Law and the case of Development Bank of Rizal v. Sima Wei to argue that a
payee, who did not receive the check, cannot require the drawee bank to pay it the sum stated on the checks.
Equitable's argument is misplaced and beside the point. SSPI's cause of action is not based on the three checks.
SSPI does not ask Equitable or Uy to deliver to it the proceeds of the checks as the rightful payee. SSPI does not
assert a right based on the undelivered checks or for breach of contract. Instead, it asserts a cause of action based
on quasi-delict. A quasi-delict is an act or omission, there being fault or negligence, which causes damage to another.
Quasi-delicts exist even without a contractual relation between the parties. The courts below correctly ruled that SSPI
has a cause of action for quasi-delict against Equitable.
The checks that Interco issued in favor of SSPI were all crossed, made payable to SSPI's order, and contained the
notation "account payee only." This creates a reasonable expectation that the payee alone would receive the proceeds of
the checks and that diversion of the checks would be averted. This expectation arises from the accepted banking practice
that crossed checks are intended for deposit in the named payee's account only and no other. 56 At the very least, the
nature of crossed checks should place a bank on notice that it should exercise more caution or expend more than a
cursory inquiry, to ascertain whether the payee on the check has authorized the holder to deposit the same in a different
account. It is well to remember that "[t]he banking system has become an indispensable institution in the modern world
and plays a vital role in the economic life of every civilized society. Whether as mere passive entities for the safe-keeping
and saving of money or as active instruments of business and commerce, banks have attained an [sic] ubiquitous
presence among the people, who have come to regard them with respect and even gratitude and, above all, trust and
confidence. In this connection, it is important that banks should guard against injury attributable to negligence or bad
faith on its part. As repeatedly emphasized, since the banking business is impressed with public interest, the trust and
confidence of the public in it is of paramount importance. Consequently, the highest degree of diligence is expected, and
high standards of integrity and performance are required of it."
Equitable did not observe the required degree of diligence expected of a banking institution under the
existing factual circumstances.
The fact that a person, other than the named payee of the crossed check, was presenting it for deposit should
have put the bank on guard. It should have verified if the payee (SSPI) authorized the holder (Uy) to present the same
 12
in its behalf, or indorsed it to him. Considering however, that the named payee does not have an account with
Equitable (hence, the latter has no specimen signature of SSPI by which to judge the genuineness of its indorsement to
Uy), the bank knowingly assumed the risk of relying solely on Uy's word that he had a good title to the three checks.
Such misplaced reliance on empty words is tantamount to gross negligence, which is the "absence of or failure to
exercise even slight care or diligence, or the entire absence of care, evincing a thoughtless disregard of consequences
without exerting any effort to avoid them." The bank did not even make inquiries with the drawer, Interco (whom the
bank considered a "valued client"), to verify Uy's representation. The banking system is placed in peril when bankers
act out of blind faith and empty promises, without requiring proof of the assertions and without making the
appropriate inquiries. Had it only exercised due diligence, Equitable could have saved both Interco and the named
payee, SSPI, from the trouble that the bank's mislaid trust wrought for them.
Equitable's pretension that there is nothing under the circumstances that rendered Uy's title to the checks
questionable is outrageous. These are crossed checks, whose manner of discharge, in banking practice, is restrictive
and specific. Uy's name does not appear anywhere on the crossed checks. Equitable, not knowing the named payee on
the check, had no way of verifying for itself the alleged genuineness of the indorsement to Uy. The checks bear nothing
on their face that supports the belief that the drawer gave the checks to Uy. Uy's relationship to Interco's majority
stockholder will not justify disregarding what is clearly ordered on the checks.

5. Philippine National Bank Vs. Rodriguez G.R. No. 170325. September 26, 2008;

Facts:
Respondent spouses were clients of the petitioner PNB. They maintained savings and demand/checking accounts
(checking/current account in the name of spouses and checking/current account in the name of Erlando Rodriguez
(husband))

The spouses were engaged in the informal lending business. In line with their business, they had a discounting arrangement
with the Philnabank Employees Savings and Loan Association (PEMSLA), an association of PNB employees. Naturally,
PEMSLA was likewise a client of PNB Amelia Avenue Branch. The association maintained current and savings accounts
with petitioner bank.

PEMSLA regularly granted loans to its members. Spouses Rodriguez would rediscount the postdated checks issued to
members whenever the association was short of funds. As was customary, the spouses would replace the postdated checks
with their own checks issued in the name of the members.

It was PEMSLA's policy not to approve applications for loans of members with outstanding debts. To subvert this policy,
some PEMSLA officers devised a scheme to obtain additional loans despite their outstanding loan accounts. They took out
loans in the names of unknowing members, without the knowledge or consent of the latter. The PEMSLA checks issued for
these loans were then given to the spouses for rediscounting. The officers carried this out by forging the indorsement of
the named payees in the checks.

In return, the spouses issued their personal checks (Rodriguez checks) in the name of the members and delivered the
checks to an officer of PEMSLA. The PEMSLA checks, on the other hand, were deposited by the spouses to their account.

Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings account without any
indorsement from the named payees. This was an irregular procedure made possible through the facilitation of Edmundo
Palermo, Jr., treasurer of PEMSLA and bank teller in the PNB Branch. It appears that this became the usual practice for the
parties.

For the period November 1998 to February 1999, the spouses issued sixty nine (69) checks, in the total amount of
P2,345,804.00. These were payable to forty seven (47) individual payees who were all members of PEMSLA.

Petitioner PNB eventually found out about these fraudulent acts. To put a stop to this scheme, PNB closed the current
account of PEMSLA. As a result, the PEMSLA checks deposited by the spouses were returned or dishonored for the reason
"Account Closed". The corresponding Rodriguez checks, however, were deposited as usual to the PEMSLA savings account.
The amounts were duly debited from the Rodriguez account. Thus, because the PEMSLA checks given as payment were
returned, spouses Rodriguez incurred losses from the rediscounting transactions.
 13

Spouses Rodriguez filed a civil complaint for damages against PEMSLA, the Multi-Purpose Cooperative of Philnabankers
(MCP), and petitioner PNB. They sought to recover the value of their checks that were deposited to the PEMSLA savings
account amounting to P2,345,804.00. The spouses contended that because PNB credited the checks to the PEMSLA
account even without indorsements, PNB violated its contractual obligation to them as depositors. PNB paid the wrong
payees, hence, it should bear the loss.

PNB moved to dismiss the complaint on the ground of lack of cause of action. PNB argued that the claim for damages
should come from the payees of the checks, and not from spouses Rodriguez. Since there was no demand from the said
payees, the obligation should be considered as discharged.

Contention of PNB: PNB claimed it is not liable for the checks which it paid to the PEMSLA account without any
indorsement from the payees. The bank contended that spouses Rodriguez, the makers, actually did not intend for the
named payees to receive the proceeds of the checks. Consequently, the payees were considered as "fictitious payees" as
defined under the Negotiable Instruments Law (NIL). Being checks made to fictitious payees which are bearer instruments,
the checks were negotiable by mere delivery. PNB's Answer included its cross-claim against its co-defendants PEMSLA and
the MCP, praying that in the event that judgment is rendered against the bank, the cross-defendants should be ordered to
reimburse PNB the amount it shall pay.

RTC RULING: In Favor of SPS. RODRIGUEZ. PNB is liable to return the value of the checks.

PNB appealed the decision of RTC on the groun that the disputed checks should be considered as payable to bearer and not
to order.

CA RULING:
(note: CA reversed its first decision via amended decision)
Reversed and set aside the decision of RTC. (IN FAVOR OF PNB)
CA concluded that the checks were obviously meant by the spouses to be really paid to PEMSLA.

FIRST DECISION: CA found that the checks were bearer instruments, thus they do not require indorsement for
negotiation; and that spouses Rodriguez and PEMSLA conspired with each other to accomplish this money-making
scheme. The payees in the checks were "fictitious payees" because they were not the intended payees at all.|

“The court is convinced by the strong and credible evidence for the defendant-appellant with regard to the plaintiffs-
appellees' and PEMSLA's business arrangement — that the value of the rediscounted checks of the plaintiffs-appellees would
be deposited in PEMSLA's account for payment of the loans it has approved in exchange for PEMSLA's checks with the full
value of the said loans. This is the only obvious explanation as to why all the disputed sixty-nine (69) checks were in the
possession of PEMSLA's errand boy for presentment to the defendant-appellant that led to this present controversy. It also
appears that the teller who accepted the said checks was PEMSLA's officer, and that such was a regular practice by the
parties until the defendant-appellant discovered the scam. The logical conclusion, therefore, is that the checks were never
meant to be paid to order, but instead, to PEMSLA. We thus find no breach of contract on the part of the defendant-
appellant.”ACTEH|||

CA REVERSED its decision after Sps. Rodriguez filed an MR and argued, inter alia, that the checks on their faces were
unquestionably payable to order; and that PNB committed a breach of contract when it paid the value of the checks to
PEMSLA without indorsement from the payees. They also argued that their cause of action is not only against PEMSLA but
also against PNB to recover the value of the checks.

AMENDED DECISION: IN FAVOR OF SPS. RODRIGUEZ

The CA ruled that the checks were payable to order. According to the appellate court, PNB failed to present sufficient
proof to defeat the claim of the spouses Rodriguez that they really intended the checks to be received by the specified
payees. Thus, PNB is liable for the value of the checks which it paid to PEMSLA without indorsements from the named
payees. The award for damages was deemed appropriate in view of the failure of PNB to treat the Rodriguez account with
the highest degree of care considering the fiduciary nature of their relationship, which constrained respondents to seek
legal action.
 14

Hence, the present recourse under Rule 45.

PNB argues anew that when the spouses Rodriguez issued the disputed checks, they did not intend for the named payees
to receive the proceeds. Thus, they are bearer instruments that could be validly negotiated by mere delivery. Further,
testimonial and documentary evidence presented during trial amply proved that spouses Rodriguez and the officers of
PEMSLA conspired with each other to defraud the bank.

Issue:
Whether the subject checks are payable to order or to bearer and who bears the loss?|||

Ruling:
The subjects are considered payable to ORDER and the drawee (PNB) shall bear the loss.

A check that is payable to a specified payee is an order instrument. However, under Section 9 (c) of the NIL, a check
payable to a specified payee may nevertheless be considered as a bearer instrument if it is payable to the order of a
fictitious or non-existing person, and such fact is known to the person making it so payable. Thus, checks issued to "Prinsipe
Abante" or "Si Malakas at si Maganda", who are well-known characters in Philippine mythology, are bearer instruments
because the named payees are fictitious and non-existent.|||

We have yet to discuss a broader meaning of the term "fictitious" as used in the NIL. It is for this reason that We look
elsewhere for guidance. Court rulings in the United States are a logical starting point since our law on negotiable
instruments was directly lifted from the Uniform Negotiable Instruments Law of the United States.

A review of US jurisprudence yields that an actual, existing, and living payee may also be "fictitious" if the maker of the
check did not intend for the payee to in fact receive the proceeds of the check. This usually occurs when the maker
places a name of an existing payee on the check for convenience or to cover up an illegal activity. Thus, a check made
expressly payable to a non-fictitious and existing person is not necessarily an order instrument. If the payee is not the
intended recipient of the proceeds of the check, the payee is considered a "fictitious" payee and the check is a bearer
instrument.

In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer bears the loss. When faced with
a check payable to a fictitious payee, it is treated as a bearer instrument that can be negotiated by delivery. The underlying
theory is that one cannot expect a fictitious payee to negotiate the check by placing his indorsement thereon. And since
the maker knew this limitation, he must have intended for the instrument to be negotiated by mere delivery. Thus, in case
of controversy, the drawer of the check will bear the loss. This rule is justified for otherwise, it will be most convenient
for the maker who desires to escape payment of the check to always deny the validity of the indorsement. This despite the
fact that the fictitious payee was purposely named without any intention that the payee should receive the proceeds of the
check.

However, there is a commercial bad faith exception to the fictitious-payee rule. A showing of commercial bad faith on
the part of the drawee bank, or any transferee of the check for that matter, will work to strip it of this defense. The
exception will cause it to bear the loss. Commercial bad faith is present if the transferee of the check acts dishonestly, and
is a party to the fraudulent scheme.

APPLICATION:

In the case under review, the Rodriguez checks were payable to specified payees. It is unrefuted that the 69 checks were
payable to specific persons. Likewise, it is uncontroverted that the payees were actual, existing, and living persons who
were members of PEMSLA that had a rediscounting arrangement with spouses Rodriguez.

What remains to be determined is if the payees, though existing persons, were "fictitious" in its broader context.
 15
For the fictitious-payee rule to be available as a defense, PNB must show that the makers did not intend for the named
payees to be part of the transaction involving the checks. At most, the bank's thesis shows that the payees did not have
knowledge of the existence of the checks. This lack of knowledge on the part of the payees, however, was not
tantamount to a lack of intention on the part of respondents-spouses that the payees would not receive the checks'
proceeds. Considering that respondents-spouses were transacting with PEMSLA and not the individual payees, it is
understandable that they relied on the information given by the officers of PEMSLA that the payees would be receiving the
checks.

Verily, the subject checks are presumed order instruments. This is because, as found by both lower courts, PNB failed to
present sufficient evidence to defeat the claim of respondents-spouses that the named payees were the intended
recipients of the checks' proceeds. The bank failed to satisfy a requisite condition of a fictitious-payee situation — that the
maker of the check intended for the payee to have no interest in the transaction.

Because of a failure to show that the payees were "fictitious" in its broader sense, the fictitious-payee rule
does not apply. Thus, the checks are to be deemed payable to order. Consequently, the drawee bank bears the loss.

PNB was remiss in its duty as the drawee bank. It does not dispute the fact that its teller or tellers accepted the 69 checks
for deposit to the PEMSLA account even without any indorsement from the named payees. It bears stressing that order
instruments can only be negotiated with a valid indorsement.

A bank that regularly processes checks that are neither payable to the customer nor duly indorsed by the payee is
apparently grossly negligent in its operations. This Court has recognized the unique public interest possessed by the
banking industry and the need for the people to have full trust and confidence in their banks. For this reason, banks are
minded to treat their customer's accounts with utmost care, confidence, and honesty.

In a checking transaction, the drawee bank has the duty to verify the genuineness of the signature of the drawer and to pay
the check strictly in accordance with the drawer's instructions, i.e., to the named payee in the check. It should charge to the
drawer's accounts only the payables authorized by the latter. Otherwise, the drawee will be violating the instructions of the
drawer and it shall be liable for the amount charged to the drawer's account.

In the case at bar, respondents-spouses were the bank's depositors. The checks were drawn against respondents-spouses'
accounts. PNB, as the drawee bank, had the responsibility to ascertain the regularity of the indorsements, and the
genuineness of the signatures on the checks before accepting them for deposit. Lastly, PNB was obligated to pay the
checks in strict accordance with the instructions of the drawers. Petitioner miserably failed to discharge this burden.

The checks were presented to PNB for deposit by a representative of PEMSLA absent any type of indorsement, forged or
otherwise. The facts clearly show that the bank did not pay the checks in strict accordance with the instructions of the
drawers, respondents-spouses. Instead, it paid the values of the checks not to the named payees or their order, but to
PEMSLA, a third party to the transaction between the drawers and the payees.

6. Bdo Unibank, Inc. Vs. Lao and International Exchange Bank (Now UnionBank) G.R. No. 227005, June 19, 2017;

LAO /Selwyn Lao Construction - drawer

EVERLINK/ Represented by WU - payee
Equitable Bank/BDO - Drawee
Internal Exchange Bank/UnionBank – Collecting/Depositary Bank of Wu and a company named New Wave Plastic Corp

Facts:
On March 9, 1999, respondent Engineer Selwyn S. Lao (Lao) filed before the RTC a complaint for collection of sum of
money against Equitable Banking Corporation, now petitioner Banco de Oro Unibank (BDO), Everlink Pacific Ventures, Inc.
(Everlink), and Wu Hsieh a.k.a. George Wu (Wu).

In his complaint, Lao alleged that he was doing business under the name and style of "Selwyn Lao Construction"; that he
was a majority stockholder of Wing An Construction and Development Corporation (Wing An); that he entered into a
 16
transaction with Everlink, through its authorized representative Wu, under which, Everlink would supply him with "HCG
sanitary wares"; and that for the down payment, he issued two (2) Equitable crossed checks payable to Everlink:

Lao further averred that when the checks were encashed, he contacted Everlink for the immediate delivery of the sanitary
wares, but the latter failed to perform its obligation. Later, Lao learned that the checks were deposited in two different
bank accounts at respondent International Exchange Bank, now respondent Union Bank of the Philippines (Union Bank).
He was later informed that the two bank accounts belonged to Wu and a company named New Wave Plastic (New Wave),
represented by a certain Willy Antiporda (Antiporda).

Consequently, Lao was prompted to file a complaint against Everlink and Wu for their failure to comply with their
obligation and against BDO for allowing the encashment of the two (2) checks. He later withdrew his complaint against
Everlink as the corporation had ceased existing.

Contention of BDO: BDO asserted

1. that it had no obligation to ascertain the owner of the account/s to which the checks were deposited because the
instruction to deposit the said checks to the payee's account only was directed to the payee and the collecting bank, which
in this case was Union Bank;

2. that as the drawee bank, its obligations consist in examining the genuineness of the signatures appearing on the checks,
and paying the same if there were sufficient funds in the account under which the checks were drawn; and that the subject
checks were properly negotiated and paid in accordance with the instruction of Lao in crossing them as they were
deposited to the account of the payee Everlink with Union Bank, which then presented them for payment with BDO.

On August 24, 2001, Lao filed an Amended Complaint, wherein he impleaded Union Bank as additional defendant for
allowing the deposit of the crossed checks in two bank accounts other than the payee's, in violation of its obligation to
deposit the same only to the payee's account.

Contention of Uniobank: Union Bank argued that 1st Check was deposited in the account of Everlink; that 2nd was validly
negotiated by Everlink to New Wave; that the 2nd check was presented for payment to BDO, and the proceeds thereof were
credited to New Wave's account; that it was under no obligation to deposit the checks only in the account of Everlink
because there was nothing on the checks which would indicate such restriction; and that a crossed check continues to be
negotiable, the only limitation being that it should be presented for payment by a bank.

Tinimbang testified and revealed that sometime in July 1998, BDO received a letter from Wing An stating that the amounts
of the checks were not credited to Everlink's account. This prompted BDO to write a letter to Union Bank demanding the
latter to refund the amounts of the checks. In a letter-reply, Union Bank claimed that the checks were deposited in the
account of Everlink.

Atty. Buenaventura claimed that BDO gave credence to Union Bank's representation that the checks were indeed credited
to the account of Everlink. He stated that BDO's only obligations under the circumstances were to ascertain the
genuineness of the checks, to determine if the account was sufficiently funded and to credit the proceeds to the collecting
bank. On cross-examination, Atty. Buenaventura clarified that Union Bank endorsed the crossed checks as could be seen
on the dorsal portion of the subject checks. According to him, such endorsement meant that the lack of prior endorsement
was guaranteed by Union Bank.

RTC Ruling: RTC absolved BDO from any liability, but ordered Union Bank to pay Lao the amount, representing the value
of Check and moral damages and attorney's fees.

The RTC observed that there was nothing irregular with the transaction of 1st Check because the same was deposited in
Everlink's account with Union Bank. It, however, found that 2nd Check was irregularly deposited and encashed because it
was not issued for the account of Everlink, the payee, but for the account of New Wave.

The trial court noted further that 2nd Check was not even endorsed by Everlink to New Wave. Thus, it opined that Union
Bank was negligent in allowing the deposit and encashment of the said 2nd check without proper endorsement. The
RTC wrote that considering that the subject check was a crossed check, Union Bank failed to take reasonable steps in order
 17
to determine the validity of the representations made by Antiporda. In the end, it adjudged that BDO could not be held
liable because of Union Bank's warranty when it stamped on the check that "all prior endorsement and/or lack of
endorsement guaranteed." The dispositive portion of the decision reads:

Aggrieved, Union Bank elevated an appeal to the CA. 7

CA Ruling: affirmed, with modification, the ruling of the RTC. It ordered BDO to pay Lao the amount with legal interest
from the time of filing of the complaint until its full satisfaction. The appellate court further directed Union Bank to
reimburse BDO the aforementioned amount. It concurred with the RTC that Union Bank was liable because of its
negligence and its guarantee on the validity of all prior endorsements or lack of it.

With regard to BDO's liability, the CA explained that it violated its duty to charge to the drawer's account only those
authorized by the latter when it paid the value of 2nd Check. Thus, it held that BDO was liable for the amount charged to the
drawer's account. The fallo reads:

Aggrieved, BDO argued that the CA's order for it to pay Lao was erroneous as the RTC had already adjudged with finality
that it was not liable. It posited that the appellate court could not resolve issues not raised on appeal by both parties
thereto. BDO pointed out that it was not a party in the appeal before the CA. It further stressed that neither Lao nor Union
Bank assailed the RTC decision with respect to the dismissal of the complaint against it during the appeal before the CA,
and even on motion for reconsideration before the RTC. Thus, for failure to appeal therefrom, the RTC decision had already
attained finality as to BDO.

BDO further averred that Union Bank, as the collecting bank and last endorser, must suffer the loss because it had the
duty to ascertain the genuineness of all prior endorsement. It asserted that as the drawee bank, it could not be held
liable because it merely relied on Union Bank's express guarantee. It added that the proximate cause of the loss
suffered by Lao was the negligence of Union Bank when it allowed the deposit of the crossed check intended for
Everlink to New Wave's account.

ISSUE:
Whether or not the drawee bank ( bdo) may be held liable to the drawer for unauthorized payment of checks to a Person
other than the payee

RULING:
YES.

Sequence of Recovery in cases of

unauthorized payment of checks

The Court agrees with the appellate court that in cases of unauthorized payment of checks to a person other than the
payee named therein, the drawee bank may be held liable to the drawer. The drawee bank, in turn, may seek
reimbursement from the collecting bank for the amount of the check. This rule on the sequence of recovery in case of
unauthorized check transactions had already been deeply embedded in jurisprudence.

The liability of the drawee bank is based on its contract with the drawer and its duty to charge to the latter's accounts only
those payables authorized by him. A drawee bank is under strict liability to pay the check only to the payee or to the
payee's order. When the drawee bank pays a person other than the payee named in the check, it does not comply with the
terms of the check and violates its duty to charge the drawer's account only for properly payable items.

On the other hand, the liability of the collecting bank is anchored on its guarantees as the last endorser of the check.
Under Section 66 of the Negotiable Instruments Law, an endorser warrants "that the instrument is genuine and in all
respects what it purports to be; that he has good title to it; that all prior parties had capacity to contract; and that the
instrument is at the time of his endorsement valid and subsisting."

It has been repeatedly held that in check transactions, the collecting bank generally suffers the loss because it has the
duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to
 18
the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the
endorsements. If any of the warranties made by the collecting bank turns out to be false, then the drawee bank may
recover from it up to the amount of the check.

In the present case, BDO paid the value of 2ND Check to Union Bank, which, in turn, credited the amount to New Wave's
account. The payment by BDO was in violation of Lao's instruction because the same was not issued in favor of Everlink,
the payee named in the check. It must be pointed out that the subject check was not even endorsed by Everlink to New
Wave. Clearly, BDO violated its duty to charge to Lao's account only those payables authorized by him.

Nevertheless, even with such clear violation by BDO of its duty, the loss would have ultimately pertained to Union
Bank. By stamping at the back of the subject check the phrase "all prior endorsements and/or lack of it guaranteed,"
Union Bank had, for all intents and purposes treated the check as a negotiable instrument and, accordingly, assumed
the warranty of an endorser. Without such warranty, BDO would not have paid the proceeds of the check. Thus,
Union Bank cannot now deny liability after the aforesaid warranty turned out to be false.

Union Bank was clearly negligent when it allowed the check to be presented by, and deposited in the account of New
Wave, despite knowledge that it was not the payee named therein. Further, it could not have escaped its attention that the
subject checks were crossed checks.

A crossed check is one where two parallel lines are drawn across its face or across the corner thereof. A check may be
crossed generally or specially. A check is crossed especially when the name of a particular banker or company is written
between the parallel lines drawn. It is crossed generally when only the words "and company" are written at all between the
parallel lines.

Jurisprudence dictates that the effects of crossing a check are:

(1) That the check may not be encashed but only deposited in the bank;
(2) That the check may be negotiated only once — to one who has an account with a bank; and
(3) That the act of crossing the check serves as a warning to the holder that the check has been issued for a definite
purpose so that he must inquire if he has received the check pursuant to that purpose. The effects of crossing a
check, thus, relate to the mode of payment, meaning that the drawer had intended the check for deposit only by
the rightful person, i.e., the payee named therein.

It is undisputed that Check No. 0127-242250 had been crossed generally as nothing was written between the parallel lines
appearing on the face of the instrument. This indicated that Lao, the drawer, had intended the same for deposit only to the
account of Everlink, the payee named therein. Despite this clear intention, however, Union Bank negligently allowed the
deposit of the proceeds of the said check in the account of New Wave.

Generally, BDO must be ordered to pay Lao the value of the subject check; whereas, Union Bank would be ordered to
reimburse BDO the amount of the check. The aforesaid sequence of recovery, however, is not applicable in the
present case due to the presence of certain factual peculiarities.
From the foregoing, the Court is of the considered view that the pronouncements made in Associated Bank as regards the
simplification of the recovery proceedings are applicable in the present case. The factual milieu of this case are
substantially similar with that of Associated Bank, i.e., a crossed check was presented and deposited, without authority, in
the account of a person other than the payee named therein; the collecting bank endorsed the crossed check and warrant
the validity of all prior endorsements and/or lack of it; the warranty turned out to be false; and, a party to the check
transaction, which would otherwise be held liable to the party aggrieved, was not made a party in the proceedings in court.

To summarize, Lao, the drawer of the subject check, has a right of action against BDO for its failure to comply with its
duty as the drawee bank. BDO, in turn, would have a right of action against Union Bank because of the falsity of its
warranties as the collecting bank. Considering, however, that BDO was not made a party in the appeal, it could no
longer be held liable to Lao. Thus, following Associated Bank, the proceedings for recovery must be simplified and
Lao should be allowed to recover directly from Union Bank.

7. Gempesaw Vs. CA and PHIL BANK OF COMMUNICATIONS, February 9, 1993;

 19
Natividad O. Gempesaw owns and operates four grocery stores both in Caloocan City. Among these groceries are D.G.
Shopper's Mart and D.G. Whole Sale Mart. Gempesaw maintains a checking account with the Caloocan City Branch of
PBCom.

To facilitate payment of debts to her suppliers, Gempesaw draws checks against her checking account with PBCom as
drawee. Her customary practice of issuing checks in payment of her suppliers was as follows:

The checks were prepared and filled up as to all material particulars by her trusted bookkeeper, Alicia Galang, an employee
for more than 8 years. After the bookkeeper prepared the checks, the completed checks were submitted to Gempesaw for
her signature, together with the corresponding invoice receipts which indicate the correct obligations due and payable to
her suppliers. Gempesaw signed each and every check without bothering to verify the accuracy of the checks against the
corresponding invoices because she reposed full and implicit trust and confidence on her bookkeeper.

The issuance and delivery of the checks to the payees named therein were left to the bookkeeper. Gempesaw admitted
that she did not make any verification as to whether the checks were actually delivered to their respective payees.
Although PBCom notified her of all checks presented to and paid by the bank, Gempesaw did not verify the correctness of
the returned checks, much less check if the payees actually received the checks in payment for the supplies she received.

In the course of her business operations covering a period of 2 years, Gempesaw issued, following her usual practice, a total
of 82 checks in favor of several suppliers. These checks were all presented by the indorsees as holders thereof to, and
honored by PBCom. PBCom correspondingly debited the amounts thereof against Gempesaw's checking accoun. Most of
the checks were for amounts in excess of her actual obligations to the various payees as shown in their corresponding
invoices. Practically, all the checks issued and honored by PBCom were crossed checks. Aside from the daily notice given to
Gempesaw by PBCom, the latter also furnished her with a monthly statement of her bank transactions, attaching thereto
all the cancelled checks she had issued and which were debited against her current account.

It was only after the lapse of more than 2 years that Gempesaw found out about the fraudulent manipulations of her
bookkeeper. All the 82 checks with forged signatures of the payees were brought to Ernest L. Boon, Chief Accountant of
PBCom at the Buendia branch, who, without authority therefor, accepted them all for deposit at the Buendia branch to the
credit and/or in the accounts of Alfredo Y. Romero and Benito Lam.

Ernest L. Boon was a very close friend of Alfredo Y. Romero. 63 out of the 82 checks were deposited in Savings Account of
Alfredo Y. Romero at PBCom's Buendia branch, and 4 checks in his Savings Account 32-81-9 at its Ongpin branch. The rest
of the checks were deposited in Account, under the name of Benito Lam at the Elcano
branch of the respondent drawee Bank.

About 30 of the payees whose names were specifically written on the checks did not receive nor even see the subject
checks and that the indorsements appearing at the back of the checks were not theirs. The team of auditors from the main
office of PBCom which conducted periodical inspection of the branches' operations failed to discover, check or stop the
unauthorized acts of Ernest L. Boon. All the deposit slips of the 82 checks in question were initialed and/or approved for
deposit by Ernest L. Boon, contrary to the rules of PBCom, where only a Branch Manager, and no other official of PBCom,
may accept a second indorsement on a check for deposit. The Branch Managers of the Ongpin and Elcano branches
accepted the deposits made in the Buendia branch and credited the accounts of Alfredo Y. Romero and Benito Lam in their
respective branches.

On 7 November 1984, Gempesaw made a written demand on PBCom to credit her account with the money value of the 82
checks totalling P1,208,606.89 for having been wrongfully charged against her account. PBCom refused to grant
Gempesaw's demand.

On 23 January 1985, Gempesaw filed a Complaint against the Philippine Bank of Communications (PBCom) for recovery of
the money value of 82 checks charged against Gempesaw's account with PBCom on the ground that the payees'
indorsements were forgeries.

Regional Trial Court RULING:

dismissing the complaint as well as PBCom's counterclaim.
 20
CA RULING:
affirmed the decision of the RTC on two grounds, namely
(1) that Gempesaw's gross negligence in issuing the checks was the proximate cause of the loss and
(2) assuming that the bank was also negligent, the loss must nevertheless be borne by the party whose negligence
was the proximate cause of the loss.

On 5 March 1990, Gempesaw filed the petition for review under Rule 45 of the Rules of Court.

Issue
Whether the drawer’s account may be charged for checks where the indorsements were forged.

RULING:
YES.

The applicable law is the Negotiable Instruments Law 4 (heretofore referred to as the NIL). Section 23 of the NIL provides:
"When a signature is forged or made without the authority of the person whose signature it purports to be, it
is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce
payment thereof against any party thereto, can be acquired through or under such signature, unless the
party against whom it is sought to enforce such right is precluded from setting up the forgery or
want of authority."

Forgery is a real or absolute defense by the party whose signature is forged. A party whose signature to an
instrument was forged was never a party and never gave his consent to the contract which gave rise to the
instrument. Since his signature does not appear in the instrument, he cannot be held liable thereon by anyone, not
even by a holder in due course. Thus, if a person's signature is forged as a maker of a promissory note, he cannot be
made to pay because he never made the promise to pay. Or where a person's signature as a drawer of a check is
forged, the drawee bank cannot charge the amount thereof against the drawer's account because he never gave the
bank the order to pay. And said section does not refer only to the forged signature of the maker of a promissory note
and of the drawer of a check. It covers also a forged indorsement, i.e., the forged signature of the payee or
indorsee of a note or check. Since under said provision a forged signature is "wholly inoperative", no one can gain
title to the instrument through such forged indorsement. Such an indorsement prevents any subsequent party from
acquiring any right as against any party whose name appears prior to the forgery. Although rights may exist between
and among parties subsequent to the forged indorsement, not one of them can acquire rights against parties prior to
the forgery. Such forged indorsement cuts off the rights of all subsequent parties as against parties prior to the
forgery. However, the law makes an exception to these rules where a party is precluded from setting up forgery as a
defense.

Problems arising from forged indorsements of checks may generally be broken into two types of cases:
(1) where forgery was accomplished by a person not associated with the drawer — for example a mail
robbery; and
(2) where the indorsement was forged by an agent of the drawer.

This difference in situations would determine the effect of the drawer's negligence with respect to forged
indorsements. While there is no duty resting on the depositor to look for forged indorsements on his cancelled
checks in contrast to a duty imposed upon him to look for forgeries of his own name, a depositor is under a duty to
set up an accounting system and a business procedure as are reasonably calculated to prevent or render difficult the
forgery of indorsements, particularly by the depositor's own employees. And if the drawer (depositor) learns that a
check drawn by him has been paid under a forged indorsement, the drawer is under duty promptly to report such
fact to the drawee bank. For his negligence or failure either to discover or to report promptly the fact of such forgery
to the drawee, the drawer loses his right against the drawee who has debited his account under the forged
indorsement. In other words, he is precluded from using forgery as a basis for his claim for recrediting of his account.
 21
In the case at bar, petitioner admitted that the checks were filled up and completed by her trusted employee, Alicia
Galang, and were later given to her for her signature. Her signing the checks made the negotiable instrument
complete. Prior to signing the checks, there was no valid contract yet.

As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot charge the drawer's
account for the amount of said check. An exception to this rule is where the drawer is guilty of such negligence which
causes the bank to honor such a check or checks. If a check is stolen from the payee, it is quite obvious that the
drawer cannot possibly discover the forged indorsement by mere examination of his cancelled check. This accounts
for the rule that although a depositor owes a duty to his drawee bank to examine his cancelled checks for
forgery of his own signature, he has no similar duty as to forged indorsements. A different situation arises where the
indorsement was forged by an employee or agent of the drawer, or done with the active participation of the latter.
Most of the cases involving forgery by an agent or employee deal with the payee's indorsement. The drawer and the
payee oftentimes have business relations of long standing. The continued occurrence of business transactions of the
same nature provides the opportunity for the agent/employee to commit the fraud after having developed
familiarity with the signatures of the parties. However, sooner or later, some leak will show on the drawer's books. It
will then be just a question of time until the fraud is discovered. This is specially true when the agent perpetrates a
series of forgeries as in the case at bar.

The negligence of a depositor which will prevent recovery of an unauthorized payment is based on failure of the
depositor to act as a prudent businessman would under the circumstances. In the case at bar, the petitioner relied
implicitly upon the honesty and loyalty of her bookkeeper, and did not even verify the accuracy of the
amounts of the checks she signed against the invoices attached thereto. Furthermore, although she regularly
received her bank statements, she apparently did not carefully examine the same nor the check stubs and the
returned checks, and did not compare them with the sales invoices. Otherwise, she could have easily discovered the
discrepancies between the checks and the documents serving as bases for the checks. With such discovery, the
subsequent forgeries would not have been accomplished. It was not until two years after the bookkeeper
commenced her fraudulent scheme that petitioner discovered that eighty-two (82) checks were wrongfully charged
to her account, at which time she notified the respondent drawee Bank.

It is highly improbable that in a period of two years, not one of petitioner's suppliers complained of non-payment.
Assuming that even one single complaint had been made, petitioner would have been duty-bound, as far as the
respondent drawee Bank was concerned, to make an adequate investigation on the matter. Had this been done, the
discrepancies would have been discovered, sooner or later. Petitioner's failure to make such adequate inquiry
constituted negligence which resulted in the bank's honoring ofthe subsequent checks with forged indorsements.
On the other hand, since the record mentions nothing about such a complaint, the possibility exists that the checks
in question covered inexistent sales. But even in such a case, considering the length of a period of two (2) years, it is
hard to believe that petitioner did not know or realize that she was paying much more than she should for the
supplies she was actually getting. A depositor may not sit idly by, after knowledge has come to her that her funds
seem to be disappearing or that there may be a leak in her business, and refrain from taking the steps that a careful
and prudent businessman would take in such circumstances and if taken, would result in stopping the
continuance of the fraudulent scheme. If she fails to take such steps, the facts may establish her negligence, and in
that event, she would be estopped from recovering from the bank.

8. Associated Bank Vs. CA, January 31, 1996;

The Province of Tarlac maintains a current account with the Philippine National Bank (PNB) Tarlac Branch where the
provincial funds are deposited. Checks issued by the Province are signed by the Provincial Treasurer and 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. The allotment checks 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 the Office 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.
 22

On 19 February 1981, the Provincial Treasurer requested the manager of the PNB to return all of its cleared checks which
were issued from 1977 to 1980 in order to verify the regularity of their encashment. After the checks were examined, the
Provincial Treasurer learned that 30 checks amounting to P203,300.00 were encashed 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 his retirement on 28 February 1978, collected the 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.
Pangilinan sought to encash the first check with Associated Bank. However, the manager of Associated Bank refused 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 the same procedure for the second check, in the
amount of P5,000.00 and dated 20 April 1978, as well as for 28 other checks of various amounts and on various dates. The
last check negotiated by Pangilinan was for P8,000.00 and dated 10 February 1981. All the checks bore the stamp of
Associated Bank which reads "All prior endorsements guaranteed Associated Bank." Jesus David, the manager of
Associated Bank, alleged that Pangilinan made it appear that the checks were paid to him for certain projects with the
hospital. 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 and Pangilinan's wife are first cousins, the manager denied having
given Pangilinan preferential treatment on this account. On 26 February 1981, the Provincial Treasurer wrote the manager
of the PNB seeking the restoration of the various amounts debited from the current account of the Province. In turn, the
PNB manager demanded reimbursement from the Associated Bank on 15 May 1981. As both banks resisted payment, the
Province brought suit against PNB which, in turn, impleaded Associated Bank as thirdparty defendant. The latter then filed
a fourth-party complaint against Adena Canlas and Fausto Pangilinan. After trial on the merits, the lower court rendered its
decision on 21 March 1988, on the basic complaint, in favor of the Province and against PNB, ordering the latter to pay to
the former, the sum of P203,300.00 with legal interest thereon from 20 March 1981 until fully paid; on the third-party
complaint, in favor of PNB and against Associated Bank ordering the latter to reimburse to the former the amount of
P203,300.00 with legal dismissed for lack of cause of action as against Adena Canlas and lack of jurisdiction over the person
of Fausto Pangilinan as against the latter. The court also dismissed the counterclaims on the complaint, thirdparty
complaint and fourth-party complaint, for lack of merit. PNB and Associated Bank appealed to the Court of Appeals. The
appellate court affirmed the trial court's decision in toto on 30 September 1992. Hence the consolidated petitions which
seek a reversal of the appellate court's decision.

Issue:
Whether PNB was at fault and should solely bear the loss because it cleared and paid the forged
checks.

Ruling:
The present case concerns checks payable to the order of Concepcion Emergency Hospital or its Chief. They were properly
issued and bear the genuine signatures of the drawer, the Province of Tarlac. The infirmity in the questioned checks lies in
the payee's (Concepcion Emergency Hospital) indorsements which are forgeries. At the time of their indorsement, the
checks were order instruments. Checks having forged indorsements should be differentiated from forged checks or checks
bearing the forged signature of the drawer. Where the instrument is payable to order at the time of the forgery, such as the
checks in the case, the signature of its rightful holder (here, the payee hospital) is essential to transfer title to the same
instrument.

When the holder's indorsement is forged, all parties prior to the forgery may raise the real defense of forgery against all
parties subsequent thereto. An indorser of an order instrument warrants "that the instrument is genuine and in all respects
what it purports to be; that he has a good title to it; that all prior parties had capacity to contract; and that the instrument is
at the time of his indorsement valid and subsisting." He cannot interpose the defense that signatures prior to him are
forged. 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 banks' client is forged, the collecting
bank is bound by his warranties as an indorser and 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, is under strict liability to pay the check to the order of the
payee. The drawee bank is not similarly situated as the collecting bank because the former makes no warranty as to the
genuineness of any indorsement. The drawee bank's duty is but to verify the genuineness of the drawer's signature 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
 23
on his deposit. The bank is also 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 the collecting bank. However, a
drawee bank has the duty to promptly inform the presentor of the forgery upon discovery. 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. Herein, PNB, the drawee bank, cannot debit the current
account of the Province of Tarlac because it paid checks which bore forged indorsements.

However, if the Province of Tarlac as 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 Tarlac 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 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. The Court
finds that the Province of Tarlac was equally negligent and should, 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 retired from government service, was no longer connected with the hospital. With the exception of the first
check (dated 17 January 1978), all the checks were issued and released after Pangilinan's retirement on 28 February 1978.
After nearly three years, the Treasurer's 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 Elizabeth Juco, the new cashier.
The fact that there were now two persons collecting the checks for the hospital is an unmistakable sign of an irregularity
which should have alerted employees in the Treasurer's office of the fraud being committed. There is also evidence
indicating that the provincial employees were aware of Pangilinan's retirement and consequent dissociation from the
hospital. Hence, due to the negligence of the Province 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 and in not properly ascertaining why the retired hospital cashier was collecting checks for the payee hospital in
addition to the hospital's real cashier, the Province contributed to the loss amounting to P203,300.00 and shall be liable to
the PNB for 50% thereof. In effect, the Province of Tarlac can only recover 50% of P203,300.00 from PNB. The collecting
bank, Associated Bank, shall be liable to PNB for 50% of P203,300.00. It is liable on its warranties as indorser of the checks
which were deposited by Fausto Pangilinan, having guaranteed the genuineness of all prior indorsements, including that of
the chief of the payee hospital, Dr. Adena Canlas. Associated Bank was also remiss in its duty to ascertain the genuineness
ofthe payee's indorsement.

9. Ilusorio Vs. CA 393 Scra 89

FACTS:
Ilusorio was a businessman who was in charge of 20 or so corporations. He was a depositor in good standing of Manila
Banking Corporation. As he was in charge of a big number of corporations, he was usually out of the country for business.
He then entrusted his credit cards, checkbook, blank checks, passbooks, etc to his secretary, Katherine Eugenio. Eugenio
was also in charge of verifying and reconciling the statements of Ilusorio’s checking account.

Eugenio was able to encash and deposit to her personal account checks drawn against Ilusorio’s account with an aggregate
amount of 119K. Ilusorio didn’t bother to check his statement of account until a business partner informed him that he saw
Eugenio using his credit cards. Ilusorio then fired her and instituted criminal case of Estafa thru falsification against
Eugenio. Manila Banking Corp. also instituted a complaint of estafa against Eugenio based on the affidavit of Dante Razon,
an employee. Razon stated that he personally examined and scrutinized the encashed checks in accordance with their
verification procedures.

Manila Bank sought the expertise of NBI in determining the genuineness of the checks but Ilusorio failed to submit
specimen signatures and thus, NBI could not conduct the examination.

Issue: W/N Manila Bank is liable for damages for failing to detect a forged check
 24
RULING:

No. To be entitled to damages, Ilusorio has the burden of poving that the bank was negligent in failing to detect the
discrepancy in the signatures on the checks. Ilusorio had to establish the fact of forgery which he failed to do by failing to
submit his specimen signatures for NBI to conclusively establish forgery.

Furthermore, the Bank was not negligent in verifying the checks as they verified the drawer’s signatures against their
specimen signatures and in doubt, referred to more experienced verifier for further verification.

On the contrary, it was Ilusorio who was found to be negligent. He accorded his secretary with an unusual degree of trust
and unrestricted access to his finances. Furthermore, despite the fact that the bank was regularly sending statements of
account, he failed to check them until he found out that his secretary was using his credit cards.

Sec. 23 of the Negotiable Instruments law provides that a forged check is inoperative, meaning there was no right to
enforce payment against any party. But it also provides an exception: “unless the party against whom it is sought enforce
such right is precluded from setting up the forgery or want of authority”. This case falls under the exception since Ilusorio is
precluded from setting up forgery due to his own negligence considering that he allowed his secretary access to his credit
cards, checkbook, and allowed his secretary to verify his statements of account.