Nego Chapter IV Notes

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NEGOTIABLE INSTRUMENTS LAW

Chapter 4: Defenses & Equities

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KINDS OF DEFENSES1. Real defenses (Absolute defenses) Those which attach to

the instrument itself and generally disclose an absence of one of the essential elements of a contract or where theadmitted contract is void for all purposes for reasons of

public policyo Available against all holders, even HDC

2. Personal Defenses (Equitable Defenses) Those wherein atrue contract appears, but for some reason, such as fraud,the defendant is excused from the obligation to perform

o Can be raised only against non-HDC

KINDS OF CLAIMS OF OWNERSHIP (EQUITIES)1. Legal title May recover even from HDC2. Equitable title May not recover from HDC, only from non-

HDC

REAL DEFENSE AND PERSONAL DEFENSE DISTINGUISHED

REAL DEFENSES PERSONAL DEFENSESNATURE

Those that attach to the NIitself and are available againstall holders, whether or not HDC,but only by parties entitled toraise them

Those which are available onlyagainst a person not HDC or asubsequent holder who standsin privity with him

STATUS OF CONTRACTVoid Voidable

AVAILABILITY AGAINST HDCAvailable against HDC Not available against HDC

DEFENSES

Key: PAID-WIFI-MUD-FEM1. PRESCRIPTION2. Material ALTERATION (Sec

124)3. ILLEGALITY If declared

void for any purpose4. DURESS amounting to

forgery5. WANT of authority of agent6. NON-DELIVERY of

Incomplete Instrument (Sec15)

Key: CUBIC: RAIN-WIFI-MICU1. Non-delivery of COMPLETEinstrument (Sec 16)

2. ULTRA VIRES acts of corporations where thecorporation has the powerto issue negotiable paperbut the issuance was notauthorized for the particularpurpose for which it wasissued

3. Negotiation in BREACH of

7. FORGERY (Sec 23)8. INSANITY Where the

insane person has aguardian

9. MINORITY available only

to the minor10. ULTRA VIRES act of corporation

11. DISCHARGE in Insolvency12. Fraud in FACTUM or Esse

Contractus Fraud inexecution

13. Execution of NI betweenpublic ENEMIES

14. MARRIAGE in the case of awife

NOTE: An Instrument subject toreal defense cannot be enforcedagainst the person to whom thedefense is available but it canbe enforced against thosewhom such defense is notavailable such as under Sec 23

faith (Sec 55)4. INSERTION of wrong date in

an instrument (Sec 13)5. CONDITIONAL delivery of

complete instrument

6. Filling up blank beyondREASONABLE time (Sec 14)7. ABSENCE or failure of

consideration whetherpartial or total (Sec 28)

8. ILLEGAL consideration (Sec55)

9. Filling up blank NOT withinauthority (Sec 14)

10. WANT of authority agentwhere he has apparentauthority

11. Fraud in INDUCEMENT12. Acquisition by FORCE,

duress or fear (Sec 55)13. INTOXICATION14. MISTAKE15. INSANITY Where there is

no notice of insanity in thepart of the one contractingwith the insane person

16. Negotiation underCIRCUMSTANCES thatamount to fraud (Sec 55)

17. Acquisition of theinstrument by UNLAWFULmeans (Sec 55)

A. INCAPACITY Under Sec 22 NIL , If a minor indorses aNI, although he cannot be held liable on his contract of indorsement, the title to the instrument passes to his indorsee Real defense EFFECT: Subsequent holder, if HDC, can recover from the

maker free from the defenses of minority and otherpersonal defenses


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EXAMPLE: A makes a note payable to B (minor). B indorsesthe note to C, who in turn, indorses it to D. Upon maturity, Dsues A (maker).

o A cannot raise the defense of minority of B because:(1) Sec 22 provides that indorsement of NI by a minor

passes the property therein; and (2) under Sec 60, themaker warrants the capacity of the payee to indorseo If A is insolvent, D cannot sue B because as to B,

minority is a real defenseo Is C liable to D? Yes, under Sec 66, a general indorser

warrants the capacity of all prior parties

NOTE: Minority is a real defense available only to the minor and is

not a personal defense which by availed of by the partiesother than such minor

Same rules apply in case the indorser is a corporation withno capacity to indorse under its charter; insane or

demented persons, and deaf-mutes who do know how towrite

MURRAY V. THOMPSON136 Tenn. 118, 188 S.W. 378, LRA, 1817B 1172 (1916)Subject: CHECKMaker: Brick CoPayee: MurraySubsequent indorsements: Murrays father sold NI to Thompson

FACTS: Murray received a note from a brick company insatisfaction to his claim for damages worth $1,750 because of personal injuries. It was payable on June 1, 1915 because he wasstill a minor. On October 16, 1914, W.A. Murray, his father, withthe consent of the minor, sold the note to Thompson. He indorsedthe name of his son without apprising Thompson that he himself was not the payee. The proceeds were deposited to the account of Murray. It was invested in a saloon business and was lost. Therewas no actual fraud on the part of Murray in the transaction withThompson.

ISSUE: What is the status of the indorsement of a NI by a minor?

HELD: Voidable. Under Sec 22, The statement that the infantpasses property therein entails that the contract of indorsement is not void and that his indorsee has the rightto enforce payment from all parties prior to the infantindorser. The incapacity of the minor cannot be availed of

by the prior parties.

It was not intended to provide that the indorsee should becomethe owner of the instrument by title indefeasible as against theinfant, or to make the act of indorsement an irrevocable one. Thelaw would not want to deprive the infant of the right to reinvest inhimself the title to the instrument against a holder who hadknowledge of the indorsers infancy.

The common-law rule is that the purchaser and indorsee of such anote is not a bona-fide holder as against an infant indorser, andthat the latter may disaffirm and recover the note from thepossession of the former, who takes with constructive notice of the

incapacity. This means that the infant could disaffirm and recover

B. ILLEGALITY As general rule, illegality is a personaldefense not available against HDC. Under Sec 55 , illegal consideration is mere personal

defense , available only against non-HDC Although a NI may have been issued or negotiated for an

illegal consideration, only the parties involved in theillegality and subsequent parties who are not HDC can beadversely affected

HDC can still recover HOWEVER, NI, if declared void for any/all purposes, the

defense of illegality becomes a real defense

RODRIGUEZ V. MARTINEZ5 PHIL 67 (1906)Subject: PN dated October 17, 1902 for P4,000Maker: MartinezPayee: MontalvoIndorsee: Rodriguez

FACTS: Montalvo, for value received, sold and transferred the saidPN to Rodriguez before maturity. Rodriguez received the sameWITHOUT notice of any conditions existing against the note.


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Rodriguez, before having the note, went to Martinez and askedhim in respect thereto, and was informed by him that the note wasgood and that he would pay the same at a discount; and that thenote was delivered by Martinez to Montalvo in payment of thegambling debt which Martinez owed Montalvo. This note was

presented to the court as evidence of that debt without the stamprequired by law, and no stamp had ever been attached thereto.After the trial Rodriguez offered to put the necessary stamp on thenote, and tendered such stamp.

ISSUE: WON Martinez is liable to pay Rodriguez on the PN

HELD: Yes. SC did not discuss whether the game at which thisdebt was incurred is a prohibited game or not. In view of the factthat the judgment of the court below contains no finding as to thename or nature of the game, SC applied Art 1277 NCC: theconsideration of the contract must be presumed to be lawful andvalid until the contrary is proved; and without considering as we

have said these questions which we do not think necessary todiscuss for the purposes of this decision, yet there are othergrounds upon which this case can be decided.

From the facts set out in the judgment of the court below,Rodriguez acquired the ownership of the note in question by virtueof its indorsement, he having paid the value thereof to itsformer holder. He did so without being aware of the factthat the note had an unlawful origin, since he was not givennotice of any conditions existing against the note .Furthermore, he accepted it in good faith, believing the note wasvalid and absolutely good, and that defendant Martinez would notrepudiate it for the reason that Martinez, had assured him beforethe purchase of the note that the same was good and that hewould it at a discount. Without such assurance from Martinez wecan hardly believe that Rodriguez would have bought the note. Itis thus inferred from the fact that he, Rodriguez, inquired from thedefendant about the nature of the note before accepting itsindorsement.

These facts sufficiently show that Rodriguez bought the note uponthe statement of Martinez that the same had no legal defect andthat he was thereby induced to buy the same by the personal actof Martinez. In view of this, Martinez cannot be relieved from the

obligation of paying Rodriguez the amount of the note alleged tohave been executed for an unlawful consideration. If such unlawfulconsideration did in fact exist, Martinez deliberately andmaliciously concealed it from Rodriguez. Therefore, to holdotherwise would be equivalent to permitting Martinez to go against

his own acts to the prejudice of Rodriguez. Such a holding wouldbe contrary to the most rudimentary principles of justice and law.Par. 1, Sec 333 of Code of Civil Procedure, applicable to this case,provides as follows: "Whenever a party has, by his owndeclaration, act, or omission intentionally and deliberately ledanother to believe a particular thing true, and to act upon suchbelief, he cannot, in any litigation arising out of such declaration,act, or omission, be permitted to falsity it."

C. FORGERY Under Sec 23, forgery is a real defense. Aperson whose signature to an instrument was forged wasnever a party and never consented to the contract which gaverise to such instrument; as such, he cannot be held liablethereon by anyone, not even HDC TWO situations contemplated under Sec 23:

a. Want of authority of agent Where the signature onthe instrument is affixed by one who purports to be anagent but who does not have the authority to bind thealleged principal

b. Where the signature is affixed by one who does notclaim to act as an agent and who has no authority tobind the apparent signer

EFFECTS:a. Signature (not the instrument itself) is inoperative and

no one can gain title to the instrument through itb. NO right to retain the instrument, or to give discharge

therefore, or to enforce payment thereof EXCEPTION: Where the party against whom it is sought to

enforce a right is precluded from setting up the forgery orwant of authority1. Person who WARRANT or admit the genuineness of the

signature in questiona. Indorsers Indorsers can be held liable because of

their breach of warranty that the instrument isgenuine and in all respect what it purports to be(Sec 66)

b. Persons negotiating by mere delivery; and


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c. Acceptors2. Those who by their acts, silence, or negligence are

ESTOPPED from setting up the defense of forgery These include acts or omission that amount toratification, express or impliedo

But a person precluded from raising the defense of forgery may still recover damages under NCC ontorts

o If the instrument is payable to bearer, the forgeryof the indorsement is immaterial since it isnegotiable by mere delivery

In case of forgery of an indorsement of an instrumentpayable to order, it is not only the person whose signaturewas forged who would not be liable but also the partiesprior to such person. Payment under a forged instrumentis not the drawers order.

Where an instrument is originally payable to bearer, theeffects of a forged indorsement is different. The holder of

such instrument who did not know of the forgery can stillenforce it against the drawer or maker because he cancancel the forged indorsement as not being necessary tohis title (Sec 48). REASON: Payable to bearer instrumentsare negotiated by mere delivery

Should there be an indorsement subsequent to the forgedone, the holder, should he be unable to recover from themaker, may have a right against the subsequent indorseron the latters warranty that the instrument is genuine andvalid at the time of his indorsement

NOTE: The burden of proving the genuineness of asignature is on the person basing his claim thereon.

GLUCKMAN V. DARLING85 N.J.L. 457, 89 Atl. 1016 (1914)Subject: Promissory noteMaker: Charles FlynnPayee: Balene & MaxIndorsee: H.L. DarlingHolder for Value: Isaac Gluckman

FACTS: Balene & Max were about to sell to Charles Flynn somereal estate and were to take in part payment therefore notes made

by Flynn and indorsed by defendant. When Balene & Maxrequested the defendant to be present at the transfer andquestioned him about the notes, he attended and examined themand said, Everything is all right. The notes were then acceptedon account of the purchase price of the property, and the one in

suit subsequently passed by indorsement, for a valuableconsideration, to the plaintiff. Defendant at the trial denied hissignature as indorser, insisting that it was a forgery.

ISSUE: WON Gluckman is estopped from alleging forgery

HELD: Yes. It is true that silence and acquiescence alone does notestop a defendant in a suit upon an alleged forged instrument fromproving the forgery, where the plaintiff had not been prejudiced ordamaged thereby. But where the holder of a note has beenwillfully misled as to the genuineness of an indorsement thereonby one who purports to be the indorser and sustains damage or isprejudiced thereby, the alleged indorser will be stopped from

denying the validity of the signature.

STRADER V. HALEY216 Minn. 315, 12 N.W. (2d) 608 (1943)Subject: ChecksDrawer: StraderForger: Haley

FACTS: Haley and his wife lived with plaintiff Strader. Between July 11, 1936 and June 14, 1941, 69 checks were negotiated byHaley. Strader claimed that Haley forged her name as drawer for 2checks and as indorser in a total of 57 checks. Checks variedamounts. Park Recreation Parlor, Luz, Easlinger, Liberty StateBank were those who cashed the checks. Plaintiff claimed shenever made such indorsements or signed as drawer.

Plaintiff brought separate actions against Haley, parties who werealleged to have cashed checks for Haley and Liberty State Bank.Defense claimed that the checks were indorsed by plaintiff herself,that she delivered them to Haley with instructions to cash them, topurchase supplies, and return the change to her.

TC said that there was no finding that plaintiff authorized Haley tosign her name on any check. TC also said that plaintiff received


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from Haley all the proceeds of the checks with knowledge thatsuch proceeds came from the checks. TC found that plaintiff hadratified Haleys actions and conduct in cashing the checks.

ISSUE : WON Plaint iff is liable for Haleys acts by ratification

HELD: Yes. The Court held that the word precluded in Sec 23NIL includes ratification (in this case, receiving proceeds of thechecks). NIL is based largely on the English Bills of Exchange Act. TheEnglish law contains a proviso that nothing in this section shall affect theratification of an unauthorized signature not amounting to a forgery. Thisproviso was not included in the NIL but a footnote was added that a forgedsignature may be ratified. The dropping of such proviso did not indicateany intention of changing the meaning adopted from the English law.Established rule was that an unauthorized signature not amounting toforgery could be so ratified.

SC concluded that the framers of the NIL intended that under the act, thesame as under the prior law, a party may be precluded by ratification.

*case had a discussion on WON precluded was equivalent to estoppel as some authors conclude. However the Court said that although precluded denotes the consequence of an estoppel, it is not equivalentand its meaning should not be so limited because 1) it is not the intentionof the framers; 2) it is opposed to the prior law which NIL adopted.

By a forgery is meant an unauthorized signature on an instrument or amaterial alteration thereof in violation of a criminal statute. Rule is that anunauthorized signature on a note, check or other instrument undercircumstances not constituting the crime of forgery may be ratified.

CAB: There was no forgery committed as an essential element, the intentto fraud, was not proven.

Where the principal accepts and retains the benefits of an unauthorized actof an agent with full knowledge of all the facts, he thereby ratifies the act.In the instant case, the evidence sustains the finding that plaintiff receivedthe proceeds of the checks in cash and with full knowledge of all the facts.This was proven by: proceeds of the check were definitely identified andtraced; corroboration of Haleys wife; the fact that Strader did not complainto her attorneys that she did not receive any checks, which was her usualroutine.

The Court concluded that plaintiff ratified all the unauthorized signatures inthese cases; that by reason of such ratification she is precluded fromsetting up the fact that her signatures were unauthorized in the actionsagainst Haley.

SAN CARLOS MILLING CO V. BPI & CHINA BANKINGCORP59 PHIL59 (1933)Subject: CheckDrawer: San Carlos Milling Co

Drawee: BPICollecting Bank: China Bank

FACTS: San Carlos Milling is organized under Hawaiian law and isauthorized to engage business in the Philippines. The business inthe Philippines was handled by Alfred Cooper, its agent (underGPA) with authority of substitution. The principal employee in theManila office is Joseph Wilson who also has a GPA but withoutsubstitution. Before Cooper left in 1926, he gave a GPA to NewlandBaldwin and at the same time revoked Wilsons GPA relative todealing with BPI, a bank where plaintiff has an account.

After a year, Wilson, conspiring with Alfredo Dolores, a messenger-clerk in Plaintiffs Manila office, sent a cablegram to the companyin Hawaii requesting a telegraphic transfer of $100K to ChinaBanking Corp. (CBC), where plaintiff also has an account.

After receipt of the money, CBC sent an exchange contract toplaintiff offering P201K (current rate). On this contract was forgedthe name of Baldwin. It also contained a request for a certifiedcheck from CBC upon receipt of the money.

A managers check on CBC for P201K payable to plaintiff wasreceipted for by Dolores. W/c check was deposited to BPI by thefollowing indorsement: For deposit only with BPI, to credit

account of (plaintiff). By (Sgd.) NEWLAND BALDWIN For Agent

This endorsement was spurious.

BPI credit ed plaintiffs account for P201K and passed the cashierscheck through the clearing house, where it was paid by CBC. Thesame day, BPI received a letter, purporting to be signed byBaldwin, directing that P200K in bills of various denominations bepacked for shipment and delivery the next day. The next day,Dolores witnessed the counting and packing of the money then hegave a check, purporting to be signed by Baldwin, for P200K. He


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was also charged P1 for the service wherein he also came up w/another check for P1, again purporting to be signed by Baldwin.(This practice of withdrawing money for shipment was frequent forplaintiff but never so large an amount and under the solesupervision of Dolores.)

Dolores then delivered the money, in plaintiffs office, to Wilsonwhere he received his P10K share. Shortly thereafter, the crimewas discovered, and upon BPI refusing to credit plaintiff with theamount of the 2 forged checks (P200K+P1), plaintiff sued BPI andCBC

ISSUES:1. WON China Bank is liable2. WON BPI is liable

HELD:FIRST ISSUE: No. A bank that cashes a check must know to whom

it pays. In connection with the cahiers check, this duty wastherefore upon BPI, and CBC was not bound to inspect and verifyall endorsements of the check, even if some of them were alsodepositors in that bank. It had a right to rely upon BPIsendorsement when it gave the latter bank credit for its owncahiers check

SECOND ISSUE: Yes. It is an elementary principle both of bankingand the NIL that a drawee bank is bound to know the signatures of its customers; and if it pays a forged check, it must be consideredas making the payment out of its own funds, and cannot ordinarilycharge the amount so paid to the account of the depositor whosename was forged.

The bank paid out its money because it relied upon thegenuineness of the purported signatures of Baldwin. These, theynever questioned at the time its employees should have used care.In fact, even today the bank represents that it has a belief thatthey are genuine signatures.

The signatures to the checks being forged, under Sec 23, NIL, theyare not a charge against plaintiff nor are the checks of any valueto the defendant. The proximate cause of the loss is BPIsnegligence.

PNB V. QUIMPOG.R. No. L-53194 (1988)FACTS: Francisco S. Gozon II, a depositor of the Caloocan Branchof PNB, went to the bank accompanied by his friend ErnestoSantos whom he left in the car while he transacted business in the

bank. Santos took a check from Gozons checkbook, filled it up forthe amount of P5T, forged the signature of Gozon, and encashed itin the bank on the same day. Upon receipt of the statement of account from the bank, Gozon asked that the amount of P5T bereturned to his account as his signature on the check was forgedbut the bank refused.

Santos was apprehended by the police and he admitted that hestole the check of Gozon. Gozon filed the complaint for recovery of the amount of P5T against the bank in the CFI Rizal.

ISSUES:1. WON PNB was negligent in encashing the forged check without

carefully examining the signature therein2. WON Gozon is precluded from setting up the defense of forgery or

want of authority (since it is his own negligent act of leaving thecheckbook in Santos hands that is the proximate cause of the loss)

HELD:FIRST ISSUE: Yes. The drawee bank is bound to know thesignatures of its customers; and if it pays a forged check, it mustbe considered as making the payment out of its own funds, andcannot ordinarily change the amount so paid to the account of thedepositor whose name was forged. This rule is absolutelynecessary to the circulation of drafts and checks, and is basedupon the presumed negligence of the drawee in failing to meet its

obligation to know the signature of its correspondent. If the papercomes to the drawee in the regular course of business, and he,having the opportunity ascertaining its character, pronounces it tobe valid and pays it, it is not only a question of payment undermistake, but payment in neglect of duty which the commercial lawplaces upon him, and the result of his negligence must rest uponhim.

SECOND ISSUE: No. The act of Gozon in leaving his checkbook inthe car while he went out for a short while can not be considerednegligence sufficient to excuse the defendant bank from its own


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negligence. Gozon could not have been expected to know thatSantos would remove a check from his checkbook. Defendant hadtrust in his classmate and friend. He had no reason to suspect thatthe latter would breach that trust.

ACCEPTANCE AND PAYMENT UNDER MISTAKE1. Price v. Neal Doctrine When the drawers signature isforged on a bill or check and the drawee did not detect theforgery thereon, the drawee cannot charge the amountthereof to the drawers account

o RATIO: The drawee is bound the know the signature of the drawer by reason of its business relations with thedrawer.

o Forgery as a defense is not available to the acceptorunder Sec 62 NIL

o Sec 62 covers bills paid without prior acceptance andbills accepted since one who pays a bill necessarilyaccepts it. (No distinction between acceptance andpayment)

PRICE V. NEAL3 Burr. 1354 (1762)Subject: Bill for 40Drawer: Benjamin SuttonDrawee: John PricePayee: Rogers RudingHolder: Watson & SonFACTS: A bill for 40 was purportedly drawn by Sutton (drawer)against Price (drawee) in favor of Ruding (payee). It appearedfrom the bill that it was indorsed to Anthony Topham, then

Hammon and Laroche and finally, for a valuable consideration, toWatson and Son whose representative, Edward Neal, received it.Neal gave notice to Price. On the day it was due, Price sent hisservant to Neal to pay the 40 and take up the bill.

A second bill for 40 was again purportedly drawn by Sutton(drawer) against Price (drawee) in favor of Ruding (payee). Itappeared from this bill that it was indorsed by Ruding to Watsonand Son. This second bill was accepted by Price upon presentmentby writing on it: Accepted John Price. The bill being accepted, itwas indorsed by Neal for a valuable consideration and left atPrices bankers for payment. It was paid upon Prices order.

Unfortunately for Price, both these bills were actually fakes. Theywere done by a certain Lee who was later hanged for the crime of forgery. Wanting to recover the amount he paid, Price sued Neal.It was proven that Neal acted innocently and bona fide, withoutany suspicion of the forgeries and that he paid the whole value of

those bills. But the jury found a verdict for Price.ISSUE: WON Price may recover from Neal the money he paid onthe two bills

HELD: No. Price cannot recover the money paid from Neal becausethe latter received it upon a bill of exchange indorsed to him for afair and valuable consideration, which he had bona fide paid,without the least privity or suspicion of any forgery. It wasincumbent upon Price (drawee) to be satisfied that the bill drawnupon him was the drawers hand, before ha accepted or paid it. Itwas not Neals duty to do so. Notice was given upon Price of a billdrawn upon him; and he sends his servant to pay and take it up.

The other bill he actually accepts.CAB: It was a considerable time after payment before Price foundthey were forged and the forger was already to be hanged. Hemade no objection at the time he paid them. Whatever neglectthere was, it was on his side. Neal had no reason to doubt thesecond bill after Price, without any scruple or hesitation, paid thefirst. Neal also paid the whole value bona fide. It is a misfortunewhich happened without Neals fault or neglect.

NOTE: Under Price v. Neal, a drawee who paid on an accepted billas well as a non-accepted bill, each of which bore a forgedsignature of the drawer, cannot recover the money paid out oneither bill.

FIRST NATL BANK OF PORTLAND V. US NATL BANKOF PORTLAND100 Ore. 264, 196 Pac 547, 14 ALR 470 (1921)Subject: 18 forged checksDrawer: Willamette Iron & Steel WorksDrawee: First National Bank of PortlandPayee: Rose and SheaIndorsees: various merchants to US National Bank of PortlandFACTS: Rose and Shea conspired to obtain 18 blank checksbearing the lithographed signature of Ball, president of Steel


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Works, and forged therein the signature of Insley, secretary-treasurer. The checks were negotiated by the two to variousmerchants, all of whom deposited the checks in their accounts inthe United States National Bank. Defendant bank collected fromdrawee/plaintiff bank. Forgery was discovered and drawee was

immediately notified.Plaintiff bank wants to recover from defendant bank on the theorythat (1) the latter was negligent in not detecting the forgery(apparently, drawer also had a checking account in defendantbank, so they should have been aware of the required signatures),and (2) even if not negligent, the indorsement of the checks andpresentment for payment, followed by actual payment, oblige thedefendant to refund.

ISSUE: WON defendant bank is liable to plaintiff bank

HELD: No.

GENERAL RULE: Where a holder for value in due course presentsto the drawee a bill of exchange to which the name of the drawerhas been forged, and the drawee pays the instrument, the holderand drawee alike ignorant that the signature of the ostensiblydrawer was forged, and it is subsequently discovered that thesignature of the drawer was forged, the drawee cannot recoverpayment made to the holder.EXCEPTIONS: This defense is not available to a holder who (1) isguilty of bad faith, or (2) has been negligent.

CAB: There was nothing upon the face of any of the checks toexcite suspicion, and it is not claimed that any of the 18 merchantsknew or had any reason to suspect the checks were forgeries. Thefact that the defendant had in its files the genuine signature of adrawer might be, if there are other circumstances tending to shownegligence, considered in determining whether the defendant wasnegligent; but it cannot be said that the failure to compare thesignatures was, as a matter of law, negligence on the part of thedefendant.

PNB V. NATL CITY BANK OF NEW YORK & MOTOR SERVICE CO63 PHIL 711 (1936)Subject: Checks

Drawer: Pangasinan Transport CoDrawee: PNBPayee: International Auto Repair ShopHolder/Recipient: Motor Service Co

FACTS: An unknown person negotiated with Motor Service Co thechecks in payment for tires purchased from Motor Svc, purportingto have been issued by Pangasinan Transport Co. against PNB andin favor of Intl Auto Repair Shop. Said checks were indorsed byunknown person at the back, Motor Svc believing that thesignatures of Klar (Manager and Treasurer of PangasinanTransport) were genuine. Checks were indorsed for deposit byMotor Svc at the National City Bank of New York and Motor Svcwas credited w/ the amounts.

Checks were cleared and PNB credited the National City Bank of New York for the amounts, believing that the signatures of thedrawer were genuine, that the payee is an existing entity and the

indorsements are regular. PNB found out that the purportedsignatures of Klar were forged. It demanded from Motor Svc thereimbursement of amounts for w/c it credited the National CityBank and for w/c the National City Bank credited Motor Svc.Motor Servic refused to reimburse. Pangasinan Transport refusedto have proceeds deducted from their deposit.

ISSUE: WON PNB has a right to recover from National City Bankof New York

HELD: Yes.

Acceptance is unnecessary in so far as bills of exchange payable ondemand are concerned (e.g., checks). A check being payable immediatelyand on demand, bank can fulfill its duty to depositor only by paying theamount demanded. The holder has no right to demand from bankanything but payment, and the bank cannot do anything but pay.

There is however, nothing w/c prohibits presentation of checks foracceptance before they are paid. Where a check is certified by the bank onw/c it is drawn, certification is equivalent to an acceptance. The bankaccepts if it chooses. The purpose of certification is to import strength tothe paper by obtaining acknowledgment from the certifying bank that thedrawer has sufficient funds. In this case, there was payment but noacceptance nor certification.


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To entitle the holder of forged check to retain the money obtained,he must be able to show that the whole responsibility of determining validity of the signature was upon drawee. The draweeof a check who is deceived by forgery of drawers signature mayrecover payment, unless his mistake has placed an innocent holderof paper in a worse position than he could have been in if the

discovery of the forgery had been made on presentation .

CAB: Motor Services, in purchasing the papers from unknown personwithout making inquiry, acted negligently and contributed to the PNBsconstructive negligence in failing to detect the forgery.

NOTE: In such cases, the doctrine of contributory negligence is applied.Art 2179 NCC provides: When the plaintiffs own negligence was theimmediate and proximate cause of his injury, he cannot recoverdamages. But if his negligence was only contributory, the immediateand proximate cause of the injury being the defendants lack of duecare, the plaintiff may recover damages but the courts shall mitigatethe damages to be awarded.

PNB V. COURT OF APPEALS25 SCRA 693 (1968)Subject: CheckDrawer: GSISDrawee: PNBPayee: Mariano PulidoCollecting Bank: PCIBHolder/Recipient: Augusto Lim

FACTS: A check was purportedly drawn by GSIS against PNB infavor of Mariano Pulido. It appears the payee, Mariano Pulido,indorsed the check to Manuel Go, who in turn indorsed it to

Augusto Lim. When the check was deposited at PCIB, PCIBstamped the check All prior indorsements and/or lack of indorsements guaranteed. 2 months prior to its deposit(November 13, 1961), GSIS notified PNB that said check had beenlost and requested to stop payment.

On January 15, 1962, Augusto Lim deposited in his PCIB account aGSIS check for P57,415 drawn against PNB. The check cleared thefollowing day, however PNB did not return the said check; instead,it retained it and paid its amount to PCIB and debited the amountagainst GSISs account.

Subsequently, on January 31, 1962, upon demand from GSIS, PNBre-credited the amount since the signatures on the check wereforged. Thereupon, PNB sought to refund the said amount fromPCIB but the latter refused.

ISSUES:1. WON PCIB is liable to PNB by virtue of the formers guarantyon the back of the check

2. WON PNB may recover from PCIB

HELD:FIRST ISSUE: No. PCIB guaranteed that all prior indorsements, not the authenticity of the signatures of the officers of GSISbecause GSIS is not an indorser of the check, but is drawer. Itcould have been availed of by a subsequent indorsee, or HDC,subsequent to PCIB, but PNB is neither. Upon payment by PNB, asdrawee, the check ceased to be a negotiable instrument andbecame a mere voucher or proof of payment.

SECOND ISSUE: No. Assuming PCIB had been negligent, it is stillundeniable that PNB had been guilty of a greater degree of negligence, since it had a previous and formal notice from GSISthat the check had been lost and a stop payment order had beenmade. PNB, then, is the proximate cause and must therefore bearthe corresponding loss.

CAB: The fact that PNB retained the check and did not return it toPCIB after it had cleared, implies that PNB considered the checkgood and would honor it. As a matter of fact, PNB honored thecheck and paid its amount to PCIB. It was only then that PCIBallowed Lim to draw said amount from his account.

ACCEPTANCE AND PAYMENTAcceptance and payment within the purview of NIL are essentiallytwo different things. Acceptance is a promise to perform an act,whereas payment is the actual performance thereof. Theacceptance of a bill is the signification by the drawee of his assentto the order of the drawer, which in case of checks, is the paymenton demand, of a given sum of money. On the other hand, paymentimplies not only an assent to said order and recognition of thedrawees ob ligation to pay, but also a compliance with suchobligation.


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REPUBLIC V. EQUITABLE BANKING CORP AND BPI10 SCRA 8 (1964)

FACTS : Jacinto Carranza asked the Corporacion de los PadresDominicos to cash 24 treasury warrants from which encashment

his wife expected to earn a sort of commission. The Corporacionaccommodated Carranzas request since the latter was a trustedformer employee but subject to certain conditions:

a) that the warrants be deposited with BPI;b) that the actual payment of the value of the warrants would

be made only after the same had been duly accepted andcleared by the Treasurer and the proceeds thereof dulycredited to the BPI account of the Corporacion.

Said conditions were met and deposited with BPI who accepted thewarrants subject to collection only and with each of them(warrants) bearing the indorsement of the respective payee andthat of the Corporacion.

BPI presented the warrants for payment to the drawee (theGovernment) through the Clearing Office and upon clearing, waspaid by the Treasurer. BPI then credited the proceeds to theCorporacions account, which was then withdrawn by theCorporacion.

The Treasurer returned 3 of the warrants to the Central Bank onthe ground that those were forged and then demanded that thevalue of said warrants be charged against BPIs account with theClearing Office and credited back to the demand deposit of theTreasury. Eventually, all warrants were returned by the Treasuryto the Central Bank for the same reason and with the samedemand.

Central Bank then referred the matter to BPI for appropriate actionbut the latter opposed the return of the warrants or to have theirvalue charged against its account and requested, instead, to theCB to return said warrants to the Treasurer.[Equitable Case]: 4 warrants were deposited with Equitable by itsdepositors Robert Wong, Lu Chiu Kau and Chung Ching. Equitablecleared said warrants through the Clearing Office and thencollected the corresponding amounts from the Treasurer, andthereafter, credited those to the accounts of the depositors.

The Treasurer notified Equitable that said warrants were defectiveand demanded reimbursement of said amounts, which the latterrefused.

ISSUE : WON said banks are liable

HELD: No. The Treasury was negligent in this case since there wasa 24 hour clearing rule, wherein items that should be returnedfor whatever reason should be done so within 24 hours. This itfailed to do in these two cases.

(Note: there is no mention of the NIL here because the 28warrants were not negotiable; Campos posed the question that had the said warrants been negotiable, would the Courts ruling bedifferent?)

Negligence in clearing: The Auditor of the Treasury, whosesignature was forged, exceeded his authority to approve since

each of the warrants involved were for over 5k pesos. Theirregularity of the warrants was apparent on the face thereof fromthe Treasurys viewpoint yet the banks were not informed of any of the irregularity in them until after said warrants were cleared andhonored. Only then did the Treasury give notice of the forgeries.As was stated, all 28 warrants were cleared and paid by theTreasury, this, then, induced the banks to credit the amounts tothe respective depositors. TF, the loss of amounts was imputableto the acts and omissions of the Treasury so the banks should notand cannot be penalized.

Treasury should bear the loss, citing PNB v Natl City Bank of NY, Where a loss, which must be borne by one of two parties alike,innocent of forgery, can be traced to the neglect or fault of either,it is reasonable that it would be borne by him, even if innocent of any intentional fraud, through whose means it has succeeded.

Generally, where a drawee bank otherwise would have a right of recovery against a collecting or indorsing bank for its payment of aforged check, its action will be barred if it is guilty of anunreasonable delay in discovering the forgery and in giving noticethereof.


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2. Extension of Price v. Neal Doctrine a. Overdraft Overdraft occurs when a check is issued for

an amount more than what the drawer has in depositwith the drawee bank. In this case, the drawee, whopays the holder of the bill despite the knowledge of the

drawers insufficient funds, cannot recover from theholder what he paid under mistake. HOWEVER, such holder must have been a bona

fide purchaser of the bill, otherwise the draweemay recover from him

On the other hand, the drawee may claim againstthe drawer

FIRST NATL BANK OF PORTLAND V. NOBLE (1946) 179 Ore. 26, 168 P. (2d) 354 (1946)Subject: check drawn as a refund of the payment made by John and LilianNoble for the property purchased and subsequently reconveyed to T.D. Leethrough the drawer

Drawer: Kelleck, a brokerDrawee: First National Bank of PortlandPayee: Lilian NobleSubsequent indorsements: Noble indorsed the check in blank anddeposited it in the United States National Bank of Portland. The deposit, onthe same day, was entered as credits in the Nobles savings account andchecking account.

FACTS: The US National Bank, on September21, placed its clearing houseindorsement, as of September22, on the check. The check reached thedrawee, the First National Bank of Portland on September22. The accountof the drawer, Kelleck, then had but $200 to his credit. On discovery of thisfact a teller in the First National Bank placed a small symbol on the checkwhich indicated that the check was to be rejected for want of sufficientfunds. The check was then returned through the clearing house to theforwarding bank, the US National, at 11 am, September23, with the advicethat it was being dishonored for insufficient funds in the drawers account.The credit to the US National Bank was canceled by the First National. TheUS National, by letter dated September23, informed Mrs. Noble of thedishonor of the Kelleck check and that it had been charged back to theNobles account.

September 24, shortly before 3pm, US National Bank by messengerpresented the check over the counter of the First National. The teller in theFirst National, to whom the check was presented the second time, mistookthe rejection symbol which on September 22, had been placed on the

check by another teller of the First National, for a symbol authorizingpayment. Acting on this mist aken assumption he prepared a cashierscheck dated September24, payable to order of the United States Nationalin the amount of the Kelleck check, had the same duly signed by anassistant cashier of the drawee and delivered the same to the messengerfrom the United States National. The United States National credited the

First Nationals cashiers check to the account of the Nobles. The FirstNationals cashiers check was marked paid through the clearing house at8:45 a.m., September25, to the United States National though the courtsfinds that the cashiers check was received by the First National onSeptember24 and marked paid on that date though the clearing housetransaction took place on the next morning.

September25, the First National Bank discovered its mistake and before 12oclock the First National retendered the Kelleck check as a dishonored itembut the United States National refused to receive it and to return theproceeds of the cashiers check. The First National Bank brought an actionof assumpsit for money had and received against Lilian Noble and JohnNoble and the United States National Bank to recover the amount of thecashiers check, i.e., $10, 573.50. The US National Bank filed its bill of interpleader and tendered the money into court. The plaintiff recovered

judgment in the trial court against the Nobles.The court concluded that the asserted right of plaintiff to restitution mustbe considered exactly as if the Kelleck check and had been paid over thecounter in cash.

ISSUE: WON the trial court erred in discharging the US National fromliability

HELD: No. -Rule 33 of the Restatement on Restitution must control thedecision of this case. It is as follows: The payee is entitled to retain themoney which he has received as a bona fide purchaser. The typical casesare those where an employee of a bank pays the holder of a check in themistaken belief that the drawer has sufficient funds on deposit to meet it or

in forgetfulness of the fact that the drawer has directed that paymentshould not be made.

The forgery cases are said to rest, in part at least, upon the maxim thatwhere the equities are equal the legal title must prevail. That maximappears applicable where a drawee bank pays a check so skillfully forgedas to defy detection. The holder and the drawee are equally without fault,and the holder has the money.

The position of the defendants in the case at bar is in this respect strongerthan that of the one who has received payment of a forged check. Here theequities are not equal. The representative of the plaintiff was clearlynegligent. He acted in reliance on a symbol which he had never before


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seen the meaning of which he had no reason to know. A moments inquirywould have informed him fully concerning the meaning of the symbol andthe state of Kellecks account. But no inquiry was made.

The defendants Noble are not chargeable with any neglect or inequitableconduct. Neither they nor their collecting agent knew or were entitled to

know the state of the Kelleck account, and the fact that the Kelleck checkwas NSF on Sept22 did not render it unconscionable to present it again onSeptember 24, Freeport Bank of Freeport.

LIBERTY TRUST CO V. HAGGERTY92 N.J. Eq. 609, 113 Atl. 596 (1921)

FACTS: Haggerty, a swindler, had a checking account with LibertyTrust Co. He induced a bookkeeper of the bank to manipulate thebank's books to make it appear that he had credit in the bank sothat the checks he drew on the bank would be honored. They weresuccessful for about 5 months, when a bank official accidentallydiscovered the falsification. Haggerty and bookkeeper succeeded inobtaining overdrafts of about $53k of the bank's funds.Haggerty was arrested. He was also declared bankrupt and atrusty was appointed. His total realized assets was $9500 and theclaims filed with the trustee totaled more than $150k.

Mayhew was one of the claimants. He loaned Haggerty somemoney with 20-40% interest. Haggerty paid him with checksdrawn on Liberty. The bank paid a total of $19k to Mayhew duringthe time the books were being magicked. Mayhew was not awareof the fact that Haggerty's account was being falsified. Libertywants to recover the money it paid to Mayhew.

ISSUE: WON Liberty can recover what it paid Mayhew

HELD: No. Mayhew was a bona fide holder for value. As such, hedid not have a right to exact payment from Liberty because therewas no contract between them. Liberty, on the other hand, hadthe right to determine whether to pay him. When the bankdecided to pay, it was bound to know the state of its account withHaggerty. Having exercised its option to pay or not to pay byhonoring the checks, Liberty can't recover the money back fromthe payee. This is under the general rule that payment of a checkby a bank upon which it is drawn, under the mistaken belief thatthe maker of the check has sufficient funds to his credit to pay the

check, is a finality, and the bank can't recover from the payee of the check the amount so paid.

The reasons for this rule are:1. There is no privity between the payee and the bank;

2. The bank always has the means of knowing the state of thedepositor's account by an examination of its books, andtherefore the payment is not a mistake within the meaningof the general rule which permits the recovery of money paidunder a mistake of fact; and

3. To permit the bank to repudiate the payment would destroythe certainty that must pertain to commercial transactionsand give way to uncertainty, delay and annoyance.

It is a rule that a person receiving stolen money innocently in duecourse of business, in payment of a pre-existing debt, is a holderfor value as against the former owner.

b. Stop Payment Order A stop payment order is oneissued by the drawer of a check countermanding his firstorder to the drawee bank to pay the check i.e., thedrawer is ordering the drawee bank not to pay the checkissued by him.

The drawee bank is bound to follow the stop orderprovided it is received prior to its certification orpayment of the check

RATIO: Payment was voluntary on the part of thedrawee bank which, because of the stop order, wasunder no legal obligation to pay and its negligenceis paying precludes it from reclaiming the amountfrom a bona fide holder

EXCEPTION: Drawee bank may claim from drawerif such payment discharged a legitimate debt of the drawer

If stop order comes after the bank has certified oraccepted the check, the bank is under legal duty topay the holder and will not be liable to the drawerfor doing so

Certification and acceptance are akin toassignment of credit i.e., funds are segregated tobe given to the payee


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3. Effect of Negligence of Depositor The drawee bank isnot liable if the proximate cause of the wrongful payment isthe negligence of the drawer

o If the negligence of the depositor should delay thediscovery of the forgeries and this negligence is should

deprive the bank to recover from the forger, thedepositor will have to bear the burden of the loss andcannot demand a re-credit from the bank

o RATIO: It is the duty of the depositor to carefullyexamine the banks statement, his cancelled checksand check stubs within a reasonable time, and toreport any errors without unreasonable delay

4. Effect of Payment under Forged Indorsements Adrawee can recover the amount paid by him on a forgedindorsement since he makes no warranty as to thegenuineness of any indorsement

o When the drawee learns about the forgery, the drawee

has the duty to notify the holder whom he has paid assoon as possible. If he fails to act promptly, he maylose his right to recover against the holder if hisnegligent delay operates to the latters prejudice

o If the draw fails to recover from an insolvent holder,he cannot recover from the drawer

o Payable to bearer instruments: The drawee bank maydebit the drawer s account in spite of the forgedindorsement because such indorsement may bedisregarded as being unnecessary to the holders title EXCEPT: If drawees negligence prejudices the holder

o Where both drawee and collecting banks are guilty of negligence, the degree of negligence of each will beweighed in considering the amount of loss each shouldbear (contributory negligence)

GREAT EASTERN LIFE INS CO V. HSBC43 PHIL 678 (1922)Subject: Check for P2000Drawer: Great Eastern Life InsDrawee: HSBCPayee: MelicorCollecting Bank: PNB

FACTS: Great Eastern, an insurance company, drew a check for2k on HSBC payable to the order of Melicor. Maasim fraudulentlyobtained possession of said check and forged Melicor's signature,as an endorser. He then endorsed and presented it to PNB wherethe amount was placed to his credit.

After paying Maasim, PNB endorsed the check to HSBC. HSBC paidPNB and then charged the check to the account of Great Eastern.HSBC, as expected in the ordinary course of business, sent GreatEastern a bank statement which showed that the check wascharged to its account. Great Eastern did not object.

4 months later, Great Eastern found out that Melicor never gotpaid. Great Eastern then made a demand on HSBC that GreatEastern should be given credit for the forged check but HSBCrefused. Great Eastern sued HSBC to recover the 2k (so it couldpay Melicor). HSBC, on the other hand, prays that should

judgment be rendered against it, it should have like judgment

against PNB.

ISSUE: WON Great Eastern can recover

HELD: Yes. This is not a case where the plaintiff's own signaturewas forged to one of its checks. In such a case, the plaintiff wouldhave known the forgery and would therefore have the duty topromptly notify the bank. Failure to do so would release the bank.

Here, the forgery was that of payees signature, Melicor.Therefore, when Great Eastern, the drawer, received its bankstatement, it had the right to assume that Melicor had personallyendorsed the check because otherwise, HSBC would not have paidit.

HSBC had no legal right to pay it out to anyone except GreatEastern or its order. Great Eastern ordered HSBC to pay the 2k toMelicor but the money was paid to Maasim. HSBC has no defenseto this action.

PNB cashed the check upon a forged signature. PNB had no licenseor authority to pay the money to Maasim. It was its legal duty toknow that Melicor's endorsement was genuine before cashing thecheck. Its remedy is against Maasim. Great Eastern can recover


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from HSBC. HSBC can recover from PNB. As for PNB, it should goafter Maasim.

JAI-ALAI CORP V. BPI66 SCRA 29 (1975)

Subject: 10 Checks amounting to P8,030.58Drawer: Delta Engineering ServiceDrawee: Pacific Banking CorpPayee: Inter-Island Gas Service or orderCollecting Bank: BPIHolder/Recipient: Jai-Alai Corp

FACTS: 10 checks with a total face value of P8,030.58 weredeposited by Jai-Alai Corporation in its current account with BPI.All the checks (all payable to Inter-Island Gas or order) wereacquired by the Jai-Alai Corporation from one Antonio J. Ramirez,a sales agent of the Inter-Island Gas and a regular bettor at jai-alai games

Upon deposit to BPI, the checks were temporarily credited to Jai-Alai Corporation's account with the condition that any cred itallowed...is provisional only, until such time as the proceedsthereof, in current funds or solvent credits, shall have beenactually received by the Bank, and the latter reserves to itself theright to charge back the item to the account of its depositor, atany time before that event, regardless of whether or not the itemitself can be returned...

After Ramirez had resigned from the Inter-Island Gas and after thechecks had been submitted to inter-bank clearing, Inter-Island Gasdiscovered that all the indorsements made on the checkspurportedly by its cashiers, as well as the rubber stamp impressionthereon reading "Inter-Island Gas Service, Inc.," were forgeries.

Inter-Island Gas advised Jai-Alai Corp, BPI, the drawers and thedrawee-banks of the said checks about the forgeries. Drawers of the checks demanded reimbursement to their respective accountsfrom the drawee-banks. Drawee-banks demanded from BPI, ascollecting bank, the return of the amounts they had paid onaccount thereof. BPI, for its part, debited Jai-Alai Corp's currentaccount

On October 8, 1959, Jai-Alai Corp drew against i ts current accountwith BPI a check for P135,000 payable to the order of the MarianoOlondriz y Cia in payment of certain shares of stock. The checkwas dishonored by BPI as its records showed that the currentaccount of the petitioner, after netting out the value of the checksP8,030.58 with the forged indorsements, had a balance of onlyP128,257.65.

ISSUE: WON BPI had the right to debit the petitioner's currentaccount in the amount corresponding to the total value of thechecks with the forged indorsements

HELD: Yes. When the petitioner deposited the checks with therespondent, the nature of the relationship created at that stagewas one of agency--the bank was to collect from the drawees of the checks the corresponding proceeds. It is true that therespondent had already collected the proceeds of the checks whenit debited the petitioner's account, so that following the rule in

Gullas vs. Philippine National Bank, it might be argued that therelationship between the parties had become that of creditor anddebtor as to preclude the respondent from using the petitioner'sfunds to make payments not authorized by the latter.

BPI, as a collecting bank which indorsed the checks to the drawee-banks for clearing, should be liable to the latter forreimbursement, for, as found by the court a quo and by theappellate court, the indorsements on the checks had been forged

In legal contemplation, therefore, the payments made by thedrawee-banks to the BPI, on account of the said checks, wereineffective; and, such being the case, the relationship of creditorand debtor between the petitioner and the respondent had notbeen validly effected, the checks not having been properly andlegitimately converted into cash.

Having received the checks merely for collection and deposit, BPIcannot he expected to know or ascertain the genuineness of allprior indorsements on the said checks. Indeed, Jai-Alai, havingindorsed the checks to BPI in accordance with the rules andpractices of commercial banks, is deemed to have given thewarranty prescribed in Section 66 of the Negotiable Instruments


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Law that every single one of those checks "is genuine and in allrespects what it purports to be."

Also, Jai-Alai was grossly negligent in accepting the checks inquestion from Ramirez. It could not have escaped its attention thatthe payee of all the checks was a corporation he Inter-Island GasService, Inc. Yet, the petitioner cashed these checks to a mereindividual who was admittedly a habitual gambler at jai-alai gameswithout making any inquiry as to his authority to exchange checksbelonging to the payee-corporation. It must be noted further thatthree of the checks in question are crossed checks, which mayonly be deposited, but not cashed; yet, the petitioner negligentlyaccepted them for cash.

Under Sec 67 NIL, "Where a person places his indorsement on aninstrument negotiable by delivery he incurs all the liability of anindorser," and under Section 66 of the same statute a generalindorser warrants that the instrument "is genuine and in all

respects what it purports to be." Considering that the petitionerindorsed the said checks when it deposited them with therespondent, the petitioner as an indorser guaranteed thegenuineness of all prior indorsements thereon. The respondentwhich relied upon the petitioner's warranty should not be heldliable for the resulting loss.

CANAL BANK V. BANK OF ALBANY1 Hill 287 (1841)

FACTS: This is a case to recover money paid on a draft. Theground on which the plaintiffs sought to recover back the moneywas that the endorsement purporting to be that of Bentley was aforgery, which fact was proved by Bentley and others on the trial.

The draft was drawn on the plaintiffs ( Canal Bank ) by theMontgomery County Bank , payable to the order of E. Bentley .It purported to have been endorsed successively by Bentley, thenby one Budd, afterward by the Bank of New-York, and lastly by thedefendants ( Bank of Albany ), to whom the plaintiffs paid i t.

Two months after payment, plaintiffs asked the defendants to havethe money refunded, notifying them at the same time of the

forgery. Upon plaintiffs objections, the circuit judge overruled thedefendants offer t o prove the ff:

(1) That the defendants received the draft from the Bank of NewYork to collect, as agents for the latter, and that as suchthey received the money and paid it over to their principals, before notice of the forgery ;

(2) That a uniform custom of the banks of this state is to receiveand collect drafts in the manner this was done, withoutdisclosing their agency.

ISSUE: WON the defendants were bound to return the moneyreceived

HELD: Yes. Though the defendants were innocent of any intendedwrong, they had obtained money of the plaintiffs on an instrumentto which they had no title, and were therefore bound to refund;though notice of the forgery was not given till more than twomonths after they had received the money, they already received

it and transmitted it to their principal.

Where a bank collects a draft without disclosing to the drawee thatit is merely collecting as agent, and it is afterwards discovered thatthe indorsement was a forgery, it is liable as principal in an action,by the drawee.

Where a draft had been fraudulently indorsed with the name of anagent, who is also payee, and put in circulation, bona fide, by theprincipal of the pretended agent, without disclosing an agency, theindorsee of the principal, discovering the forgery two months aftermight recover the money advanced to the principal.

If one accepts a draft in the hands of a bona fide holder, he willnot be allowed afterward to dispute the genuineness of thedrawer's signature, though he may that of the endorsers; andpayment operates, in this respect, the same as an acceptance. Toa note or bill payable to order, none but the payee can assert anytitle without the indorsement of such payee; not even a bona fideholder.

REPUBLIC BANK V. EBRADA65 SCRA 860 (1975)Subject: Forged Check


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Drawer: Bureau of TreasuryDrawee: Republic BankPayee: Martin Lorenzo, who was already dead 11 years prior to theexecution of the checkIndorsee: Ramon Lorenzo, Delia DominguezHolder/Recipient: Mauricia Ebrada

FACTS: Treasury issued check in favor of Martin Lorenzo. Thecheck was subsequently indorsed to Ebrada for encashment, andso after, she delivered the proceeds to Dominguez, and Dominguezdelivered the latter to a certain Justinia Tinio. When Treasuryfound out that the check was forged, they demanded RB to refundthe check proceeds. RB demanded refund from Ebrada. TC ruledfor RB.

ISSUE: WON Ebrada, the last indorser, was liable to pay the checkon its face although she did not benefit from it

HELD: Ebrada liable to RB, RB li able to Treasury.

Where a check is drawn payable to the order of one person and ispresented to a bank by another and purports upon its face to havebeen duly indorsed by the payee of the check, it is the duty of thebank to know that the check was duly indorsed by the originalpayee, and where the Bank pays the amount of the check to athird person, who has forged the signature of the payee, the lossfalls upon the bank who cashed the check, and its only remedy isagainst the person to whom it paid the money.

EFFECT OF FORGED INSTRUMENT: Where the signature on anegotiable instrument if forged, the negotiation of the check iswithout force or effect (from Sec 23 of NIL). It is only thenegotiation based on the forged or unauthorized signature which isinoperative (Beam vs. Farrel).DRAWEES RECOVERY WHEN HE PAID BASED ON A FORGEDINSTRUMENT: The drawee of a check can recover from the holderthe money paid to him on a forged instrument. It is not supposedto be its duty to ascertain whether the signatures of the payee orindorsers are genuine or not. This is because the indorser issupposed to warrant to the drawee that the signatures of thepayee and previous indorsers are genuine, warranty not extendingonly to holders in due course. One who purchases a check or draft

is bound to satisfy himself that the paper is genuine and that byindorsing it or presenting it for payment or putting it intocirculation before presentation he impliedly asserts that he hasperformed his duty and the drawee who has paid the forged check,without actual negligence on his part, may recover the money paidfrom such negligent purchasers. In such cases the recovery ispermitted because although the drawee was in a way negligent infailing to detect the forgery, yet if the encasher of the check hadperformed his duty, the forgery would in all probability, have beendetected and the fraud defeated.

CAB: Since Ebrada was the last indorser of the check, she wassupposed to have warranted that she has good title to said check.She was duty-bound to ascertain whether the check in questionwas genuine before presenting it to plaintiff Bank for payment. Herfailure to do so makes her liable for the loss and the plaintiff Bankmay recover from her the money she received for the check. Asreasoned out above, had she performed the duty of ascertaining

the genuineness of the check, in all probability the forgery wouldhave been detected and the fraud defeated.

As regards RB, the plaintiff Bank should suffer the loss when itpaid the amount of the check in question to defendant-appellant,but it has the remedy to recover from the latter the amount it paidto her.

As regards the argument that Ebrada did not benefit from thecheck, although the defendant-appellant to whom the plaintiff Bank paid the check was not proven to be the author of thesupposed forgery, yet as last indorser of the check, she haswarranted that she has good title to it even if in fact she did nothave it because the payee of the check was already dead 11 yearsbefore the check was issued. The fact that immediately afterreceiving the cash proceeds of the check in question in the amountof P1,246.08 from the plaintiff Bank, defendant-appellantimmediately turned over said amount to Adelaida Dominguez whoin turn handed the amount to Justina Tinio on the same datewould not exempt her from liability because by doing so, she actedas an accommodation party in the check for which she is also liableunder Sec 29 NIL.


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BDO V. EQUITABLE BANKING CORP157 SCRA 188 (1988)Subject: 6 ChecksDrawer: Equitable Banking Corp, Visa Card DeptDrawee: Equitable Bank

Payee: Various Visa cardholdersCollecting Bank: BDOHolder/Recipient: Aida Trencio

FACTS: Sometime in 1983, EBC thru its Visa Card Department,drew 6 crossed Manager's checks amounting to P45,982.23 andpayable to certain member establishments of Visa Card.Subsequently, the checks were deposited with the BDO to thecredit of its depositor, a certain Aida Trencio.

Following normal procedures, and after stamping at the back of the checks the usual endorsements: 'All prior and/or lack of endorsement guaranteed', BDO sent the checks for clearing

through the PCHC. Accordingly, EBC paid the checks; its clearingaccount was debited for the value of the checks and defendant'sclearing account was credited for the same amount. Thereafter,EBC discovered that the endorsements appearing at the back of the checks and purporting to be that of the payees were forgedand/or unauthorized or otherwise belong to persons other than thepayees.

EBC presented the checks directly to BDO for the purpose of claiming reimbursement from the latter. However, BDO refused toaccept such direct presentation and to reimburse the EBC for thevalue of the Checks.

ISSUE: WON BDO was negligent and thus responsible for anyundue payment

HELD: Yes. In presenting the Checks for clearing and for payment,BDO made an express guarantee on the validity of 'all priorendorsements'. Thus, stamped at the bank of the checks are thedefendant's clear warranty: ALL PRIOR ENDORSEMENTS AND/ORLACK OF ENDORSEMENTS GUARANTEED. Without such warranty,EDC would not have paid on the checks. As the warranty hasproven to be false and inaccurate, the BDO is liable for anydamage arising out of the falsity of its representation.

The principle of estoppel effectively prevents BDO from denyingliability for any damages sustained by EBC which, relying upon anaction or declaration of the BDO, paid on the checks. The sameprinciple of estoppel effectively prevents the BDO from denyingthe existence of the checks.

Whether the checks have been issued for valuable considerationsor not is of no serious moment to this case. These checks havebeen made the subject of contracts of endorsement wherein BDOmade expressed warranties to induce payment by the drawer of the Checks; and the defendant cannot now refuse liability forbreach of warranty as a consequence of such forgedendorsements. BDO has falsely warranted in favor of EBC thevalidity of all endorsements and the genuineness of the checks inall respects what they purport to be.

CAB: The collecting bank has privity with the depositor who is the

principal culprit in this case. BDO knows the depositor; heraddress and her history, Depositor is BDO's client. It has taken arisk on its depositor when it allowed her to collect on the crossed-checks. Having accepted the crossed checks from persons otherthan the payees, BDO is guilty of negligence; the risk of wrongfulpayment has to be assumed by BDO.

BPI V. CA AND CHINA BANKING CORP216 SCRA 51 (1992)Subject: 2 Checks for the pre-termination of a money marketplacementDrawer/Drawee: BPIPayee: Eligia Fernando impersonated by Susan LopezCollecting Bank: China Banking Corp

FACTS: Lopez impersonated Fernando, preterminated the lattersmoney market placement evidenced by a promissory note(P2,462,243.19) from and through BPI, who issued her 2 checks.She later opened an account at CBC and endorsed the checksthere; CBC stamped them with guaranty of prior endorsementsand/or lack of endorsement; BPI cleared them. Lopez withdrewnearly the whole amount. The real Fernando came on the maturitydate of the placement for rollover and claimed forgery of endorsements.


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ISSUE: WON in the event that the payees signature is forged, BPImay claim reimbursement from CBC

HELD: No. Under Sec 23, the general rule is that forged signaturesare wholly inoperative and payments through such are ineffectual;the exception is where the party relying on the forgery isprecluded from setting up the forgery or want of authority. Thecourt recognizes negligence of the party invoking forgery as anexception; hence general rule does not apply here. BPI claims theclearing guaranty makes CBC wholly liable for forged checks.Records show both BPI (not calling Fernando to confirm pre-termination; not verifying Fernandos signatures; not asking forthe promissory note upon pickup of checks) and CBC (openingaccount for Lopez with only Fer nandos tax account number as ID,not questioning Lopez huge deposit and withdrawals) werenegligent in the selection/supervision of their employees and thusboth liable.

GEMPESAW V. COURT OF APPEALS AND PBCOM218 SCRA 682 (1993)Subject: 82 ChecksDrawer: Natividad GempesawDrawee: PBCOMPayee: Various suppliers/merchants

FACTS: Petitioner Natividad Gempesaw owns and operates 4grocery stores in Caloocan City. Petitioner maintains a checkingaccount with the Caloocan City Branch of the respondent draweeBank (PBCOM). To facilitate payment of debts to her suppliers,petitioner draws checks against her checking account with PBC asdrawee. Her customary practice of issuing checks in payment of her suppliers was as follows: The checks were prepared and filledup as to all material particulars by her trusted bookkeeper, AliciaGalang, an employee for more than 8 years. After the bookkeeperprepared the checks, the completed checks were submitted to thepetitioner for her signature, together with the correspondinginvoice receipts which indicate the correct obligations due andpayable to her suppliers. Petitioner signed each and every checkwithout bothering to verify the accuracy of the checks against thecorresponding invoices because she reposed full and implicit trustand confidence on her bookkeeper. The issuance and delivery of

the checks to the payees named therein were left to thebookkeeper.

In the course of her business operations covering a period of twoyears, petitioner issued, following her usual practice stated above,a total of 82 checks in favor of several suppliers. It appears thatinstead of issuing the checks to the payees as named in thechecks, Alicia Galang delivered them to the Chief Accountant of the Buendia branch of the respondent drawee Bank, a certainErnest L. Boon, who, without authority therefor, accepted them allfor deposit at the Buendia branch to the credit and/or in theaccounts of Alfredo Y. Romero and Benito Lam. Ernest L. Boon wasa very close friend of Alfredo Y. Romero. It was established thatthe signatures of the payees as first indorsers were forged. Therecord fails to show the identity of the party who made the forgedsignatures. The checks were then indorsed for the second timewith the names of Alfredo Y. Romero and Benito Lam, and weredeposited in the latter's accounts as earlier noted. The second

indorsements were all genuine signatures of the alleged holders.

It was only after the lapse of more than 2 years that petitionerfound out about the fraudulent manipulations of her bookkeeper(payees did not receive nor see the subject checks). Because of this, the petitioner demanded from the drawee Bank to credit heraccount with the money value of the 82 checks for having beenwrongfully charged against her account. The Bank refused.

ISSUES1. WON the CA erred in ruling that the negligence of the drawer

is the proximate cause of the resulting injury to the draweebank

2. WON the drawer is precluded from setting up the forgery orwant of authority as a defense WON the respondent draweeBank should not have honored the checks because they werecrossed checks.

3. WON banking rules prohibit the drawee bank from havingchecks with more than one indorsement.

4. WON the drawee Bank may be held liable for damages underany law aside from NIL

HELD:FIRST ISSUE: No. The petitioners negligence was the proximate


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cause of her loss. Gempesaw failed to examine her records withreasonable diligence whether before she signed the checks or afterreceiving her bank statements. Had the petitioner examined herrecords more carefully, particularly the invoice receipts, cancelledchecks, check book stubs, and had she compared the sums writtenas amounts payable in the 82 checks with the pertinent salesinvoices, she would have easily discovered that in some checks,the amounts did not tally with those appearing in the salesinvoices. Had she noticed these discrepancies, she should not havesigned those checks, and should have conducted an inquiry as tothe reason for the irregular entries. Likewise, had petitioner beenmore vigilant in going over her current account by taking carefulnote of the daily reports made by respondent drawee Bank on herissued checks, or at least made random scrutiny of her cancelledchecks returned by respondent drawee Bank at the close of eachmonth, she could have easily discovered the fraud beingperpetrated by Alicia Galang, and could have reported the matterto the respondent drawee Bank. The respondent drawee Bank then

could have taken immediate steps to prevent further commissionof such fraud.

SECOND ISSUE: Yes. As a general rule, forgery is a defense.However, the plaintiff falls under the exception.GENERAL RULE: Sec 23 provides that forgery is a real or absolutedefense by the party whose signature is forged. A party whosesignature to an instrument was forged was never a party andnever gave his consent to the contract which gave rise to theinstrument. Since his signature does not appear in the instrument,he cannot be held liable thereon by anyone, not even by a holderin due course. This section covers both the forged signature of the maker of a promissory note/drawer of a check and forged

indorsement, i.e., the forged signature of the payee or indorsee of a note or check.

EXCEPTION: Where the drawer is guilty of such negligence whichcauses the bank to honor such a check or checks. Where theindorsement was forged by an employee or agent of the drawer,or done with the active participation of the latter. Most of thecases involving forgery by an agent or employee deal with thepayee's indorsement. The drawer and the payee oftentimes havebusiness 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 havingdeveloped familiarity with the signatures of the parties.

CAB: the agent was the one who perpetrated the series of forgeries. Had the petitioner been more prudent under thecircumstances, she could have discovered the fraud earlier.

THIRD ISSUE: The banking rule banning acceptance of checks fordeposit or cash payment with more than one indorsement unlesscleared by some bank officials does not invalidate the instrument;neither does it invalidate the negotiation or transfer of the saidcheck. In effect, this rule destroys the negotiability of bills/checksby limiting their negotiation by indorsement of only the payee.Under the NIL, the only kind of indorsement which stops thefurther negotiation of an instrument is a restrictive indorsementwhich prohibits the further negotiation thereof (Sec 36, NIL). Inthis kind of restrictive indorsement, the prohibition to transfer ornegotiate must be written in express words at the back of the

instrument, so that any subsequent party may be forewarned thatit ceases to be negotiable. However, the restrictive indorseeacquires the right to receive payment and bring any action thereonas any indorser, but he can no longer transfer his rights as suchindorsee where the form of the indorsement does not authorizehim to do so.

Although the holder of a check cannot compel a drawee bank tohonor it because there is no privity between them, as far as thedrawer-depositor is concerned, such bank may not legally refuseto honor a negotiable bill of exchange or a check drawn against itwith more than one indorsement if there is nothing irregular withthe bill or check and the drawer has sufficient funds. The drawee

cannot be compelled to accept or pay the check by the drawer orany holder because as a drawee, he incurs no li ability on the checkunless he accepts it. But the drawee will make itself liable to a suitfor damages at the instance of the drawer for wrongful dishonor of the bill or check.

FOURTH ISSUE: Yes, under Art 1170 NCC. There is no questionthat there is a contractual relation between petitioner as depositor(obligee) and the respondent drawee bank as the obligor. In theperformance of its obligation, the drawee bank is bound by itsinternal banking rules and regulations which form part of any


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contract it enters into with any of its depositors. When it violatedits internal rules that second endorsements are not to be acceptedwithout the approval of its branch managers and it did accept thesame upon the mere approval of Boon, a chief accountant, itcontravened the tenor of its obligation at the very least, if it werenot actually guilty of fraud or negligence.

MWSS V. COURT OF APPEALS AND PNB143 SCRA 29 (1936)Subject: 23 ChecksDrawer: MWSSDrawee: PNBPayees: Various individualsCollecting Banks: PCIB and PBC

FACTS: By special arrangement with PNB, MWSS usedpersonalized checks in drawing from its account. MWSS issuedpersonalized checks against its account with PNB in favor of

different payees. During the same month, a second batch of 23checks were issued bearing the same numbers as those in the firstbatch. Both batches were paid and cleared by PNB and debitedagainst the account of MWSS.

At the time of their presentation to PNB, these checks bear thestandard indorsement, All prior indorsement and/or lack of indorsement guaranteed.

Upon investigation by NBI, it appeared that the payees for the 2 nd batch of checks were all fictitious persons. As such, MWSSdemanded PNB to re-credit the amounts paid on the 23 checks butPNB refused.

ISSUE: WON the drawee bank is liable to MWSS

HELD: No. First of all, there is no express and categorical findingthat the 23 questioned checks were indeed signed by personsother than the authorized MWSS signatories. Forgery cannot bepresumed. It must be established by clear, positive and convincingevidence. This was not done in the present case.

Furthermore, the petitioner was using its own personalized checks,instead of the official PNB commercial blank checks. Considering

the absence of sufficient security in the printing of the checkscoupled with the very closed similarities between the genuinesignatures and the alleged forgeries, the 23 checks in questioncould have been presented to the petitioners signatories withouttheir knowing that they were bogus checks. Petitioner failed toprovide the needed security measures. Another factor whichfacilitated the fraudulent encashment of the 23 disputed checkswas the failure of the petitioner to reconcile the bank statementswith its own records.

Thus, even if the 23 checks in question are considered forgeries,considering the petitioners gross negligence, it is barred fromsetting up the defense of forgery under Sec 23 NIL.

Drawee-bank PNB cannot be faulted for not having detected thefraudulent encashment of the checks because the printing of thepe titioners personalized checks were not done under thesupervision and control of the bank. There is no evidence on

record indicating that because of this private printing, thepetitioner furnished the respondent bank with samples of checks,pens, and inks or took other precautionary measures with PNB tosafeguard its interests. Under the circumstances, the petitionerwas in a better position to detect and prevent the fraudulentencashment of its checks.

RAMON ILUSURIO V. COURT OF APPEALS393 SCRA 89 (2002 )Subject: 17 ChecksDrawer: Ramon IlusorioDrawee: Manila Banking Corp

FACTS: Ilusorio was a prominent business and head of variouscorporations. At the time he had an account with Manila Bank. Ashe was running about 20 corporations, he entrusted his secretary,Katherine Eugenio, to handle his credit cards and his checkbookwith blank checks. It was also Eugenio who verified and reconciledthe statements of said checking account.

Between September 1980 and January 1981, Eugenio was able toencash and deposit to her personal account 17 checks drawnagainst Ilusorios account with Manila Bank. Petitioner did notbother to check his statement of account until a business partner


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informed him that he saw Eugenio used his credit card. A criminalaction was subsequently filed against Eugenio.

Ilusorio requested Manila Bank to restore to his account the valueof the checks which were wrongfully encashed but Manila Bankrefused.

ISSUE: WON Manila Bank is li able to Ilusorio

HELD: No. It was Ilusorios failure to examine his bank statementswhich was the proximate cause of his own damage. To be entitledto damages, petitioner has the burden of proving negligence onthe part of the bank for failure to detect the discrepancy in thesignatures on the checks. It is incumbent upon petitioner toestablish the fact of forgery, i.e., by submitting his specimensignatures and comparing them with those on the questionedchecks. Curiously though, petitioner failed to submit additionalspecimen signatures as requested by NBI from which to draw a

conclusive finding regarding forgery. Moreover, it was shown thatthe Manila Banks employees exercised due diligence beforeencashing the checks.

CAB: The bank was not shown to be remiss in its duty of sendingmonthly bank statements to petitioner so that any error ordiscrepancy in the entries therein could be brought to the banksattention at the earliest opportunity. But, petitioner failed toexamine these bank statements not because he was prevented bysome cause in not doing so, but because he did not pay sufficientattention to the matter. Had he done so, he could have beenalerted to any anomaly committed against him. In other words,petitioner had sufficient opportunity to prevent or detect any

misappropriation by his secretary had he only reviewed the statusof his accounts based on the bank statements sent to himregularly.

It is a rule that when a signature is forged or made without theauthority of the person whose signature it purports to be, thecheck is wholly inoperative. No right to retain the instrument, or togive a discharge therefor, or to enforce payment thereof againstany party, can be acquired through or under such signature.However, the rule does provide for an exception, namely: "unlessthe party against whom it is sought to enforce such right is

precluded from setting up the forgery or want of authority." In theinstant case, it is the exception that applies. In our view, petitioneris precluded from setting up the forgery, assuming there isforgery, due to his own negligence in entrusting to his secretaryhis credit cards and checkbook including the verification of hisstatements of account.

TOLMAN V. AMERICAL NATL BANK 48 Atl. 480, 52 L.R.A 877 (1901)

FACTS: Tolman sues to recover money paid out by the defendanton his account, upon his check, under a forged indorsement.Potter, representing himself as Haskell, went to the plaintiff to geta loan of money, giving the residence and occupation of Haskell ashis own. The plaintiff made an inquiry on Haskell and founding thatthe residence and occupation correct thereby agreed to nake theloan. Potter, under the name of Haskell, gave the note to theplaintiff, and the plaintiff gave him a check on the defendant

payable to the order of Haskell, delivering it to Potter, supposinghim to be Haskell. Potter indorsed Haskell's name on the back of the check, and gave it to AB Homes, who collected it from thebank. When the note given to the plaintiff became due, fraud wasdiscovered. He thereupon notified the ank, and demanded thereturn of the amount paid on the check to the credit of hisaccount.

ISSUE: WON the bank is liable for the payment which it made onthe check:

HELD: Yes. When a bank receives money to be checked out by adepositor, it is to be paid only as the depositor shall order. Thebank assumes this duty in receiving the deposit. If the bank paysmoney out on a forged signature, the depositor being free frombalme or negligence, it must bear the loss.

CAB: The money was intended to Haaskell, because his was theonly name suggested. He had been looked up and found to beresponsible. It is a perversion of words to say that it was intendedfor Potter simply because he had fraudulently impersonatedHaskell, and led the plaintiff to believe the he was Haskell. Theplaintiff did not intend Potter to have the money. When Potter


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fraudulently indorsed Haskell's name on the check, it was a typicalcase of forgery.

When a signature is forged or made out without the authority of the person whose signature it purports to be, it is whollyinoperative, and no right to retain the instrument, or to givedischarge therefor, or to enforce payment thereof, against a partythereto, can be acquired through or under such signature, unless aparty against whom it is sought to enforce such right is precludedfrom setting up forgery or want of authority.

SNYDER V. CORN EXCHANGE NATIONAL BANK221 Pa. 599, 70 Atl. 876 (1908)Subject: 4 ChecksDrawer: George SnyderDrawee: Corn Exchange BankPayee: Charles Niemann or orderHolder/Recipient: RM Miner

Collecting Bank: Real Estate Title Insurance & Trust Comp

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