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G.R. No. 107382/G.R. No. 107612 January 31, 1996

ASSOCIATED BANK,petitioner,

vs.

HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE

NATIONAL BANK,respondents.

x x x x x x x x x x x x x x x x x x x x x

G.R. No. 107612 January 31, 1996

PHILIPPINE NATIONAL BANK, petitioner,

vs.

HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and

ASSOCIATED BANK, respondents.

D E C I S I O N

ROMERO, J.:

Where thirty checks bearing forged endorsements are paid, who bears the loss, the

drawer, the drawee bank or the collecting bank?

This is the main issue in these consolidated petitions for review assailing the decision

of the Court of Appeals in "Province of Tarlac v. Philippine National Bank v.

Associated Bank v. Fausto Pangilinan, et. al." (CA-G.R. No. CV No. 17962).1

The facts of the case are as follows:

The Province of Tarlac maintains a current account with the 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.2The 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.

On February 19, 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 February 28, 1978, collected the questioned

checks from the office of the Provincial Treasurer. He claimed to be assisting or

helping the hospital follow up the release of the checks and had official receipts.3

Pangilinan sought to encash the first check4with 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 April 20, 1978,5as well as for twenty-eight other checks of

various amounts and on various dates. The last check negotiated by Pangilinan was

for f8,000.00 and dated February 10, 1981.6All the checks bore the stamp of

Associated Bank which reads "All prior endorsements guaranteed ASSOCIATED

BANK."

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

that the checks were paid to him for certain projects with the hospital.

7

He did notfind 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.8

On February 26, 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.9

In turn, the PNB manager demanded reimbursement from the Associated Bank on

May 15, 1981.

10

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

which, in turn, impleaded Associated Bank as third-party defendant. The latter then

filed a fourth-party complaint against Adena Canlas and Fausto Pangilinan.11

After trial on the merits, the lower court rendered its decision on March 21, 1988,

disposing as follows:

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

1. On the basic complaint, in favor of plaintiff Province of Tarlac and against

defendant Philippine National Bank (PNB), ordering the latter to pay to the former,

the sum of Two Hundred Three Thousand Three Hundred (P203,300.00) Pesos with

legal interest thereon from March 20, 1981 until fully paid;

2. On the third-party complaint, in favor of defendant/third-party plaintiff Philippine

National Bank (PNB) and against third-party defendant/fourth-party plaintiff

Associated Bank ordering the latter to reimburse to the former the amount of Two

Hundred Three Thousand Three Hundred (P203,300.00) Pesos with legal interests

thereon from March 20, 1981 until fully paid;.

3. On the fourth-party complaint, the same is hereby ordered dismissed for lack of

cause of action as against fourth-party defendant Adena Canlas and lack of

jurisdiction over the person of fourth -party defendant Fausto Pangilinan as against

the latter.

4. On the counterclaims on the complaint, third-party complaint and fourth-party

complaint, the same are hereby ordered dismissed for lack of merit.

SO ORDERED.12

PNB and Associated Bank appealed to the Court of Appeals.

13

Respondent courtaffirmed the trial court's decision in toto on September 30, 1992.

Hence these consolidated petitions which seek a reversal of respondent appellate

court's decision.

PNB assigned two errors. First, the bank contends that respondent court erred in

exempting the Province of Tarlac from liability when, in fact, the latter was negligent

because it delivered and released the questioned checks to Fausto Pangilinan who

was then already retired as the hospital's cashier and administrative officer. PNB also

maintains its innocence and alleges that as between two innocent persons, the one

whose act was the cause of the loss, in this case the Province of Tarlac, bears theloss.

Next, PNB asserts that it was error for the court to order it to pay the province and

then seek reimbursement from Associated Bank. According to petitioner bank,

respondent appellate Court should have directed Associated Bank to pay the

adjudged liability directly to the Province of Tarlac to avoid circuity.14

Associated Bank, on the other hand, argues that the order of liability should be

totally reversed, with the drawee bank (PNB) solely and ultimately bearing the loss.

Respondent court allegedly erred in applying Section 23 of the Philippine ClearingHouse Rules instead of Central Bank Circular No. 580, which, being an

administrative regulation issued pursuant to law, has the force and effect of law.15

The PCHC Rules are merely contractual stipulations among and between member-

banks. As such, they cannot prevail over the aforesaid CB Circular.

It likewise contends that PNB, the drawee bank, is estopped from asserting the

defense of guarantee of prior indorsements against Associated Bank, the collecting

bank. In stamping the guarantee (for all prior indorsements), it merely followed a

mandatory requirement for clearing and had no choice but to place the stamp of

guarantee; otherwise, there would be no clearing. The bank will be in a "no-win"

situation and will always bear the loss as against the drawee bank.16

Associated Bank also claims that since PNB already cleared and paid the value of the

forged checks in question, it is now estopped from asserting the defense that

Associated Bank guaranteed prior indorsements. The drawee bank allegedly has the

primary duty to verify the genuineness of payee's indorsement before paying the

check.17

While both banks are innocent of the forgery, Associated Bank claims that PNB was

at fault and should solely bear the loss because it cleared and paid the forged checks.

xxx xxx xxx

The case at bench 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.

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

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Sec. 23. FORGED SIGNATURE, EFFECT OF. When a signature is forged or

made without authority of the person whose signature it purports to be, it is wholly

inoperative, and no right to retain the instrument, or to 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.

A forged signature, whether it be that of the drawer or the payee, is wholly

inoperative and no one can gain title to the instrument through it. A person whose

signature to an instrument was forged was never a party and never consented to the

contract which allegedly gave rise to such instrument.18Section 23 does not avoid

the instrument but only the forged signature.19Thus, a forged indorsement does not

operate as the payee's indorsement.

The exception to the general rule in Section 23 is where "a party against whom it is

sought to enforce a right is precluded from setting up the forgery or want of

authority." Parties who warrant or admit the genuineness of the signature in question

and those who, by their acts, silence or negligence are estopped from setting up the

defense of forgery, are precluded from using this defense. Indorsers, personsnegotiating by delivery and acceptors are warrantors of the genuineness of the

signatures on the instrument.20

In bearer instruments, the signature of the payee or holder is unnecessary to pass title

to the instrument. Hence, when the indorsement is a forgery, only the person whose

signature is forged can raise the defense of forgery against a holder in due course.21

The checks involved in this case are order instruments, hence, the following

discussion is made with reference to the effects of a forged indorsement on an

instrument payable to order.

Where the instrument is payable to order at the time of the forgery, such as the

checks in this case, the 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.22

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."23He 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's 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 drawer's instructions are

reflected on the face and by the terms of the check. Payment under a forged

indorsement is not to the drawer's order. When the drawee bank pays a person other

than the payee, it does not comply with the terms of the check and violates its duty to

charge its customer's (the drawer) account only for properly payable items. Since the

drawee bank did not pay a holder or other person entitled to receive payment, it has

no right to reimbursement from the drawer.24The general rule then is that the

drawee bank may not debit the drawer's account and is not entitled to

indemnification from the drawer.25The risk of loss must perforce fall on the drawee

bank.

However, if the drawee bank can prove a failure by the customer/drawer to exerciseordinary care that substantially contributed to the making of the forged signature, the

drawer is precluded from asserting the forgery.

If at the same time the drawee bank was also negligent to the point of substantially

contributing to the loss, then such loss from the forgery can be apportioned between

the negligent drawer and the negligent bank.26

In cases involving a forged check, where the drawer's signature is forged, the drawer

can recover from the drawee bank. No drawee bank has a right to pay a forged

check. If it does, it shall have to recredit the amount of the check to the account of

the drawer. The liability chain ends with the drawee bank whose responsibility it isto know the drawer's signature since the latter is its customer.27

In cases involving checks with forged indorsements, such as the present petition, the

chain of liability does not end with the drawee bank. The drawee bank may not debit

the account of the drawer but may generally pass liability back through the collection

chain to the party who took from the forger and, of course, to the forger himself, if

available.28In other words, the drawee bank canseek reimbursement or a return of

the amount it paid from the presentor bank or person.29Theoretically, the latter can

demand reimbursement from the person who indorsed the check to it and so on. The

loss falls on the party who took the check from the forger, or on the forger himself.

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In this case, the checks were indorsed by the collecting bank (Associated Bank) to

the drawee bank (PNB). The former will necessarily be liable to the latter for the

checks bearing forged indorsements. If the forgery is that of the payee's or holder's

indorsement, the collecting bank is held liable, without prejudice to the latter

proceeding against the forger.

Since a forged indorsement is inoperative, the collecting bank had no right to be paid

by the drawee bank. The former must necessarily return the money paid by the latter

because it was paid wrongfully.30

More importantly, by reason of the statutory warranty of a general indorser in section

66 of the Negotiable Instruments Law, a collecting bank which indorses a check

bearing a forged indorsement and presents it to the drawee bank guarantees all prior

indorsements, including the forged indorsement. It warrants that the instrument is

genuine, and that it is valid and subsisting at the time of his indorsement. Because

the indorsement is a forgery, the collecting bank commits a breach of this warranty

and will be accountable to the drawee bank. This liability scheme operates without

regard to fault on the part of the collecting/presenting bank. Even if the latter bank

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

The Court has consistently ruled that "the collecting bank or last endorser generally

suffers the loss because it has the duty to ascertain the genuineness of all prior

endorsements considering that the act of presenting the check for payment to the

drawee is an assertion that the party making the presentment has done its duty to

ascertain the genuineness of the endorsements."31

The drawee bank is not similarly situated as the collecting bank because the former

makes no warranty as to the genuineness. of any indorsement.32The drawee bank's

duty is but to verify the genuineness of the drawer's signature and not of theindorsement because the drawer is its client.

Moreover, the collecting bank is made liable because it is privy to the depositor who

negotiated the check. The bank knows him, his address and history because he is a

client. It has taken a risk on his deposit. The bank 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.33

Applying these rules to the case at bench, 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.

After careful examination of the records, the Court finds that the Province of Tarlac

was equally negligent and should, therefore, share the burden of loss from the checksbearing 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 January 17, 1978), all the

checks were issued and released after Pangilinan's retirement on February 28, 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. Jose Meru, the Provincial Treasurer, testified:.

ATTY. MORGA:

Q Now, is it true that for a given month there were two releases of checks, one went

to Mr. Pangilinan and one went to Miss Juco?

JOSE MERU:

A Yes, sir.

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Q Will you please tell us how at the time (sic) when the authorized representative of

Concepcion Emergency Hospital is and was supposed to be Miss Juco?

A Well, as far as my investigation show (sic) the assistant cashier told me that

Pangilinan represented himself as also authorized to help in the release of these

checks and we were apparently misled because they accepted the representation of

Pangilinan that he was helping them in the release of the checks and besides

according to them they were, Pangilinan, like the rest, was able to present an official

receipt to acknowledge these receipts and according to them since this is a

government check and believed that it will eventually go to the hospital following

the standard procedure of negotiating government checks, they released the checks to

Pangilinan aside from Miss Juco.34

The failure of the Province of Tarlac to exercise due care contributed to a significant

degree to the loss tantamount to negligence. Hence, the Province of Tarlac should be

liable for part of the total amount paid on the questioned checks.

The drawee bank PNB also breached its duty to pay only according to the terms of

the check. Hence, it cannot escape liability and should also bear part of the loss.

As earlier stated, PNB can recover from the collecting bank.

In the case ofAssociated Bank v.CA,35six crossed checks with forged indorsements

were deposited in the forger's account with the collecting bank and were later paid by

four different drawee banks. The Court found the collecting bank (Associated) to be

negligent and held:

The Bank should have first verified his right to endorse the crossed checks, of which

he was not the payee, and to deposit the proceeds of the checks to his own account.

The Bank was by reason of the nature of the checks put upon notice that they were

issued for deposit only to the private respondent's account. . . .

The situation in the case at bench is analogous to the above case, for it was not the

payee who deposited the checks with the collecting bank. Here, the checks were al l

payable to Concepcion Emergency Hospital but it was Fausto Pangilinan who

deposited the checks in his personal savings account.

Although Associated Bank claims that the guarantee stamped on the checks (All

prior and/or lack of endorsements guaranteed) is merely a requirement forced upon it

by clearing house rules, it cannot but remain liable. The stamp guaranteeing prior

indorsements is not an empty rubric which a bank must fulfill for the sake of

convenience. A bank is not required to accept all the checks negotiated to it. It is

within the bank's discretion to receive a check for no banking institution would

consciously or deliberately accept a check bearing a forged indorsement. When a

check is deposited with the collecting bank, it takes a risk on its depositor. It is only

logical that this bank be held accountable for checks deposited by its customers.

A delay in informing the collecting bank (Associated Bank) of the forgery, which

deprives it of the opportunity to go after the forger, signifies negligence on the part

of the drawee bank (PNB) and will preclude it from claiming reimbursement.

It is here that Associated Bank's assignment of error concerning C.B. Circular No.

580 and Section 23 of the Philippine Clearing House Corporation Rules comes to

fore. Under Section 4(c) of CB Circular No. 580, items bearing a forged

endorsement shall be returned within twenty-Sour (24) hours after discovery of the

forgery but in no event beyond the period fixed or provided by law for filing of a

legal action by the returning bank. Section 23 of the PCHC Rules deleted the

requirement that items bearing a forged endorsement should be returned within

twenty-four hours. Associated Bank now argues that the aforementioned Central

Bank Circular is applicable. Since PNB did not return the questioned checks within

twenty-four hours, but several days later, Associated Bank alleges that PNB shouldbe considered negligent and not entitled to reimbursement of the amount it paid on

the checks.

The Court deems it unnecessary to discuss Associated Bank's assertions that CB

Circular No. 580 is an administrative regulation issued pursuant to law and as such,

must prevail over the PCHC rule. The Central Bank circular was in force for all

banks until June 1980 when the Philippine Clearing House Corporation (PCHC) was

set up and commenced operations. Banks in Metro Manila were covered by the

PCHC while banks located elsewhere still had to go through Central Bank Clearing.

In any event, the twenty-four-hour return rule was adopted by the PCHC until it was

changed in 1982. The contending banks herein, which are both branches in Tarlacprovince, are therefore not covered by PCHC Rules but by CB Circular No. 580.

Clearly then, the CB circular was applicable when the forgery of the checks was

discovered in 1981.

The rule mandates that the checks be returned within twenty-four hours after

discovery of the forgery but in no event beyond the period fixed by law for filing a

legal action. The rationale of the rule is to give the collecting bank (which indorsed

the check) adequate opportunity to proceed against the forger. If prompt notice is not

given, the collecting bank maybe prejudiced and lose the opportunity to go after its

depositor.

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The Court finds that even if PNB did not return the questioned checks to Associated

Bank within twenty-four hours, as mandated by the rule, PNB did not commit

negligent delay. Under the circumstances, PNB gave prompt notice to Associated

Bank and the latter bank was not prejudiced in going after Fausto Pangilinan. After

the Province of Tarlac informed PNB of the forgeries, PNB necessarily had to

inspect the checks and conduct its own investigation. Thereafter, it requested the

Provincial Treasurer's office on March 31, 1981 to return the checks for verification.

The Province of Tarlac returned the checks only on April 22, 1981. Two days later,Associated Bank received the checks from PNB.36

Associated Bank was also furnished a copy of the Province's letter of demand to

PNB dated March 20, 1981, thus giving it notice of the forgeries. At this time,

however, Pangilinan's account with Associated had only P24.63 in it.37Had

Associated Bank decided to debit Pangilinan's account, it could not have recovered

the amounts paid on the questioned checks. In addition, while Associated Bank filed

a fourth-party complaint against Fausto Pangilinan, it did not present evidence

against Pangilinan and even presented him as its rebuttal witness.38Hence,

Associated Bank was not prejudiced by PNB's failure to comply with the twenty-

four-hour return rule.

Next, Associated Bank contends that PNB is estopped from requiring reimbursement

because the latter paid and cleared the checks. The Court finds this contention

unmeritorious. Even if PNB cleared and paid the checks, it can still recover from

Associated Bank. This is true even if the payee's Chief Officer who was supposed to

have indorsed the checks is also a customer of the drawee bank.39PNB's duty was to

verify the genuineness of the drawer's signature and not the genuineness of payee's

indorsement. Associated Bank, as the collecting bank, is the entity with the duty to

verify the genuineness of the payee's indorsement.

PNB also avers that respondent court erred in adjudging circuitous liability bydirecting PNB to return to the Province of Tarlac the amount of the checks and then

directing Associated Bank to reimburse PNB. The Court finds nothing wrong with

the mode of the award. The drawer, Province of Tarlac, is a clientor customer of the

PNB, not of Associated Bank. There is no privity of contract between the drawer and

the collecting bank.

The trial court made PNB and Associated Bank liable with legal interest from March

20, 1981, the date of extrajudicial demand made by the Province of Tarlac on PNB.

The payments to be made in this case stem from the deposits of the Province of

Tarlac in its current account with the PNB. Bank deposits are considered under the

law as loans.40Central Bank Circular No. 416 prescribes a twelve percent (12%)

interest per annum for loans, forebearance of money, goods or credits in the absence

of express stipulation. Normally, current accounts are likewise interest-bearing, by

express contract, thus excluding them from the coverage of CB Circular No. 416. In

this case, however, the actual interest rate, if any, for the current account opened by

the Province of Tarlac with PNB was not given in evidence. Hence, the Court deems

it wise to affirm the trial court's use of the legal interest rate, or six percent (6%) per

annum. The interest rate shall be computed from the date of default, or the date of

judicial or extrajudicial demand.

41

The trial court did not err in granting legalinterest from March 20, 1981, the date of extrajudicial demand.

The Court finds as reasonable, the proportionate sharing of fifty percent - fifty

percent (50%-50%). 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,

respondent Province contributed to the loss amounting to P203,300.00 and shall be

liable to the PNB for fifty (50%) percent thereof. In effect, the Province of Tarlac

can only recover fifty percent (50%) of P203,300.00 from PNB.

The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent

of P203,300.00. It is liable on its warranties as 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 of the

payee's indorsement.

IN VIEW OF THE FOREGOING, the petition for review filed by the Philippine

National Bank (G.R. No. 107612) is hereby PARTIALLY GRANTED. The petition

for review filed by the Associated Bank (G.R. No. 107382) is hereby DENIED. Thedecision of the trial court is MODIFIED. The Philippine National Bank shall pay

fifty percent (50%) of P203,300.00 to the Province of Tarlac, with legal interest from

March 20, 1981 until the payment thereof. Associated Bank shall pay fifty percent

(50%) of P203,300.00 to the Philippine National Bank, likewise, with legal interest

from March 20, 1981 until payment is made.

SO ORDERED.

[G.R. No. 132560. January 30, 2002]

WESTMONT BANK (formerly ASSOCIATED BANKING CORP.),petitioner, vs.EUGENE ONG, respondent.

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D E C I S I O N

QUISUMBING,J.:

This is a petition for review of the decisioni[1] dated January 13, 1998, of the Court

of Appeals in CA-G.R. CV No. 28304 ordering the petitioner to pay respondent

P1,754,787.50 plus twelve percent (12%) interest per annum computed from October

7, 1977, the date of the first extrajudicial demand, plus damages.

The facts of this case are undisputed.

Respondent Eugene Ong maintained a current account with petitioner, formerly the

Associated Banking Corporation, but now known as Westmont Bank. Sometime in

May 1976, he sold certain shares of stocks through Island Securities Corporation. To

pay Ong, Island Securities purchased two (2) Pacific Banking Corporation managers

checks,ii[2] both dated May 4, 1976, issued in the name of Eugene Ong as payee.

Before Ong could get hold of the checks, his friend Paciano Tanlimco got hold of

them, forged Ongs signature and deposited these with petitioner, where Tanlimco

was also a depositor. Even though Ongs specimen signature was on file, petitioner

accepted and credited both checks to the account of Tanlimco, without verifying thesignature indorsements appearing at the back thereof. Tanlimco then immediately

withdrew the money and absconded.

Instead of going straight to the bank to stop or question the payment, Ong first

sought the help of Tanlimcos family to recover the amount. Later, he reported the

incident to the Central Bank, which like the first effort, unfortunately proved futile.

It was only on October 7, 1977, about five (5) months from discovery of the fraud,

did Ong cry foul and demanded in his complaint that petitioner pay the value of the

two checks from the bank on whose gross negligence he imputed his loss. In his

suit, he insisted that he did not deliver, negotiate, endorse or transfer to any personor entity the subject checks issued to him and asserted that the signatures on the

back were spurious.iii[3]

The bank did not present evidence to the contrary, but simply contended that since

plaintiff Ong claimed to have never received the originals of the two (2) checks in

question from Island Securities, much less to have authorized Tanlimco to receive

the same, he never acquired ownership of these checks. Thus, he had no legal

personality to sue as he is not a real party in interest. The bank then filed a demurrer

to evidence which was denied.

On February 8, 1989, after trial on the merits, the Regional Trial Court of Manila,

Branch 38, rendered a decision, thus:

IN VIEW OF THE FOREGOING, the court hereby renders judgment for the

plaintiff and against the defendant, and orders the defendant to pay the plaintiff:

1. The sum of P1,754,787.50 representing the total face value of the two

checks in question, exhibits A and B, respectively, with interest thereon at the

legal rate of twelve percent (12%) per annum computed from October 7, 1977 (thedate of the first extrajudicial demand) up to and until the same shall have been paid

in full;

2. Moral damages in the amount of P250,000.00;

3. Exemplary or corrective damages in the sum of P100,000.00 by way of

example or correction for the public good;

4. Attorneys fees of P50,000.00 and costs of suit.

Defendants counterclaims are dismissed for lack of merit.

SO ORDERED.iv[4]

Petitioner elevated the case to the Court of Appeals without success. In its decision,

the appellate court held:

WHEREFORE, in view of the foregoing, the appealed decision is AFFIRMED in

toto.v[5]

Petitioner now comes before this Court on a petition for review, alleging that the

Court of Appeals erred:

I

... IN AFFIRMING THE TRIAL COURTS CONCLUSION THAT RESPONDENT

HAS A CAUSE OF ACTION AGAINST THE PETITIONER.

II

... IN AFFIRMING THE TRIAL COURTS DECISION FINDING PETITIONER

LIABLE TO RESPONDENT AND DECLARING THAT THE LATTER MAY

RECOVER DIRECTLY FROM THE FORMER; AND

III

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... IN NOT ADJUDGING RESPONDENT GUILTY OF LACHES AND IN NOT

ABSOLVING PETITIONER FROM LIABILITY.

Essentially the issues in this case are: (1) whether or not respondent Ong has a cause

of action against petitioner Westmont Bank; and (2) whether or not Ong is barred to

recover the money from Westmont Bank due to laches.

Respondent admitted that he was never in actual or physical possession of the two

(2) checks of the Island Securities nor did he authorize Tanlimco or any of thelatters representative to demand, accept and receive the same. For this reason,

petitioner argues, respondent cannot sue petitioner because under Section 51 of the

Negotiable Instruments Lawvi[6] it is only when a person becomes a holder of a

negotiable instrument can he sue in his own name. Conversely, prior to his

becoming a holder, he had no right or cause of action under such negotiable

instrument. Petitioner further argues that since Section 191vii[7] of the Negotiable

Instruments Law defines a holder as the payee or indorsee of a bill or note, who is

in possession of it, or the bearer thereof, in order to be a holder, it is a requirement

that he be in possession of the instrument or the bearer thereof. Simply stated, since

Ong never had possession of the checks nor did he authorize anybody, he did not

become a holder thereof hence he cannot sue in his own name.viii[8]

Petitioner also cites Article 1249ix[9] of the Civil Code explaining that a check, even

if it is a managers check, is not legal tender. Hence, the creditor cannot be

compelled to accept payment thru this means.x[10] It is petitioners position that for

all intents and purposes, Island Securities has not yet tendered payment to respondent

Ong, thus, any action by Ong should be directed towards collecting the amount from

Island Securities. Petitioner claims that Ongs cause of action against it has not

ripened as of yet. It may be that petitioner would be liable to the drawee bank - - but

that is a matter between petitioner and drawee-bank, Pacific Banking

Corporation.xi[11]

For its part, respondent Ong leans on the ruling of the trial court and the Court of

Appeals which held that the suit of Ong against the petitioner bank is a desirable

shortcut to reach the party who ought in any event to be ultimately liable.xii[12] It

likewise cites the ruling of the courts a quowhich held that according to the general

rule, a bank who has obtained possession of a check upon an unauthorized or forged

indorsement of the payees signature and who collects the amount of the check from

the drawee is liable for the proceeds thereof to the payee. The theory of said rule is

that the collecting banks possession of such check is wrongful.xiii[13]

Respondent also citesAssociated Bank vs. Court of Appealsxiv[14]which held thatthe collecting bank or last endorser generally suffers the loss because it has the duty

to ascertain the genuineness of all prior endorsements. The collecting bank is also

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. Hence, it is in a better

position to detect forgery, fraud or irregularity in the indorsement.xv[15]

Anent Article 1249 of the Civil Code, Ong points out that bank checks are

specifically governed by the Negotiable Instruments Law which is a special law and

only in the absence of specific provisions or deficiency in the special law may the

Civil Code be invoked.xvi[16]

Considering the contentions of the parties and the evidence on record, we find no

reversible error in the assailed decisions of the appellate and trial courts, hence there

is no justifiable reason to grant the petition.

Petitioners claim that respondent has no cause of action against the bank is clearly

misplaced. As defined, a cause of action is the act or omission by which a party

violates a right of another.xvii[17] The essential elements of a cause of action are: (a)

a legal right or rights of the plaintiff, (b) a correlative obligation of the defendant,

and (c) an act or omission of the defendant in violation of said legal right.xviii[18]

The complaint filed before the trial court expressly alleged respondents rightas

payee of the managers checks to receive the amount involved, petitioners

correlative dutyas collecting bank to ensure that the amount gets to the rightful

payee or his order, and a breach of that duty because of a blatant act of negligence

on the part of petitioner which violated respondents rights.xix[19]

Under Section 23 of the Negotiable Instruments Law:

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 anyparty thereto, can be acquired through or under such signature, unless the par ty

against whom it is sought to enforce such right is precluded from setting up the

forgery or want of authority.

Since the signature of the payee, in the case at bar, was forged to make it appear that

he had made an indorsement in favor of the forger, such signature should be deemed

as inoperative and ineffectual. Petitioner, as the collecting bank, grossly erred in

making payment by virtue of said forged signature. The payee, herein respondent,

should therefore be allowed to recover from the collecting bank.

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The collecting bank is liable to the payee and must bear the loss because it is its legal

duty to ascertain that the payees endorsement was genuine before cashing the

check.xx[20] As a general rule, a bank or corporation who has obtained possession

of a check upon an unauthorized or forged indorsement of the payees signature and

who collects the amount of the check from the drawee, is liable for the proceeds

thereof to the payee or other owner, notwithstanding that the amount has been paid to

the person from whom the check was obtained.xxi[21]

The theory of the rule is that the possession of the check on the forged or

unauthorized indorsement is wrongful, and when the money had been collected on

the check, the bank or other person or corporation can be held as for moneys had and

received, and the proceeds are held for the rightful owners who may recover them.

The position of the bank taking the check on the forged or unauthorized indorsement

is the same as if it had taken the check and collected the money without indorsement

at all and the act of the bank amounts to conversion of the check.xxii[22]

Petitioners claim that since there was no delivery yet and respondent has never

acquired possession of the checks, respondents remedy is with the drawer and not

with petitioner bank. Petitioner relies on the view to the effect that where there is no

delivery to the payee and no title vests in him, he ought not to be allowed to recover

on the ground that he lost nothing because he never became the owner of the check

and still retained his claim of debt against the drawer.xxiii[23] However, another

view in certain cases holds that even if the absence of delivery is considered, such

consideration is not material. The rationale for this view is that in said cases the

plaintiff uses one action to reach, by a desirable short cut, the person who ought in

any event to be ultimately liable as among the innocent persons involved in the

transaction. In other words, the payee ought to be allowed to recover directly from

the collecting bank, regardless of whether the check was delivered to the payee or

not.xxiv[24]

Considering the circumstances in this case, in our view, petitioner could not escape

liability for its negligent acts. Admittedly, respondent Eugene Ong at the time the

fraudulent transaction took place was a depositor of petitioner bank. Banks are

engaged in a business impressed with public interest, and it is their duty to protect in

return their many clients and depositors who transact business with them.xxv[25]

They have the obligation to treat their clients account meticulously and with the

highest degree of care, considering the fiduciary nature of their relationship. The

diligence required of banks, therefore, is more than that of a good father of a

family.xxvi[26] In the present case, petitioner was held to be grossly negligent in

performing its duties. As found by the trial court:

xxx (A)t the time the questioned checks were accepted for deposit to Paciano

Tanlimcos account by defendant bank, defendant bank, admittedly had in its files

specimen signatures of plaintiff who maintained a current account with them

(Exhibits L-1 and M-1; testimony of Emmanuel Torio). Given the substantial

face value of the two checks, totalling P1,754,787.50, and the fact that they were

being deposited by a person not the payee, the very least defendant bank should have

done, as any reasonable prudent man would have done, was to verify the genuineness

of the indorsements thereon. The Court cannot help but note that had defendant

conducted even the most cursory comparison with plaintiffs specimen signatures in

its files (Exhibit L-1 and M-1) it would have at once seen that the alleged

indorsements were falsified and were not those of the plaintiff-payee. However,

defendant apparently failed to make such a verification or, what is worse did so but,

chose to disregard the obvious dissimilarity of the signatures. The first omission

makes it guilty of gross negligence; the second of bad faith. In either case, defendant

is liable to plaintiff for the proceeds of the checks in question.xxvii[27]

These findings are binding and conclusive on the appellate and the reviewing courts.

On the second issue, petitioner avers that respondent Ong is barred by laches for

failing to assert his right for recovery from the bank as soon as he discovered the

scam. The lapse of five months before he went to seek relief from the bank,

according to petitioner, constitutes laches.

In turn, respondent contends that petitioner presented no evidence to support its

claim of laches. On the contrary, the established facts of the case as found by the

trial court and affirmed by the Court of Appeals are that respondent left no stone

unturned to obtain relief from his predicament.

On the matter of delay in reporting the loss, respondent calls attention to the fact that

the checks were issued on May 4, 1976, and on the very next day, May 5, 1976,

these were already credited to the account of Paciano Tanlimco and presented for

payment to Pacific Banking Corporation. So even if the theft of the checks were

discovered and reported earlier, respondent argues, it would not have altered the

situation as the encashment of the checks was consummated within twenty four

hours and facilitated by the gross negligence of the petitioner bank.xxviii[28]

Laches may be defined as the failure or neglect for an unreasonable and unexplained

length of time, to do that which, by exercising due diligence, could or should have

been done earlier. It is negligence or omission to assert a right within a reasonable

time, warranting a presumption that the party entitled thereto has either abandoned or

declined to assert it.xxix[29] It concerns itself with whether or not by reason of longinaction or inexcusable neglect, a person claiming a right should be barred from

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asserting the same, because to allow him to do so would be unjust to the person

against whom such right is sought to be enforced.xxx[30]

In the case at bar, it cannot be said that respondent sat on his rights. He immediately

acted after knowing of the forgery by proceeding to seek help from the Tanlimco

family and later the Central Bank, to remedy the situation and recover his money

from the forger, Paciano Tanlimco. Only after he had exhausted possibilities of

settling the matter amicably with the family of Tanlimco and through the CB, about

five months after the unlawful transaction took place, did he resort to making the

demand upon the petitioner and eventually before the court for recovery of the

money value of the two checks. These acts cannot be construed as undue delay in or

abandonment of the assertion of his rights.

Moreover, the claim of petitioner that respondent should be barred by laches is

clearly a vain attempt to deflect responsibility for its negligent act. As explained by

the appellate court, it is petitioner which had the last clear chance to stop the

fraudulent encashment of the subject checks had it exercised due diligence and

followed the proper and regular banking procedures in clearing checks.xxxi[31] As

we had earlier ruled, the one who had the last clear opportunity to avoid the

impending harm but failed to do so is chargeable with the consequences

thereof.xxxii[32]

WHEREFORE,the instant petition is DENIED for lack of merit. The assailed

decision of the Court of Appeals, sustaining the judgment of the Regional Trial

Court of Manila, is AFFIRMED.

Costs against petitioner.

SO ORDERED.

G.R. No. 138510 October 10, 2002

TRADERS ROYAL BANK,petitioner,

vs.

RADIO PHILIPPINES NETWORK, INC.,

INTERCONTINENTAL BROADCASTING CORPORATION and

BANAHAW BROADCASTING CORPORATION,

through the BOARD OF ADMINISTRATORS,

and SECURITY BANK AND TRUST COMPANY,respondents.

D E C I S I O N

CORONA, J.:

Petitioner seeks the review and prays for the reversal of the Decision1of April 30,

1999 of Court of Appeals in CA-G.R. CV No. 54656, the dispositive portion of

which reads:

WHEREFORE, the appealed decision is AFFIRMED with modification in the sense

that appellant SBTC is hereby absolved from any liability. Appellant TRB is solely

liable to the appellees for the damages and costs of suit specified in the dispositive

portion of the appealed decision. Costs against appellant TRB.

SO ORDERED.2

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

On April 15, 1985, the Bureau of Internal Revenue (BIR) assessed plaintiffs Radio

Philippines Network (RPN), Intercontinental Broadcasting Corporation (IBC), and

Banahaw Broadcasting Corporation (BBC) of their tax obligations for the taxable

years 1978 to 1983.

On March 25, 1987, Mrs. Lourdes C. Vera, plaintiffs comptroller, sent a letter to the

BIR requesting settlement of plaintiffs tax obligations.

The BIR granted the request and accordingly, on June 26, 1986, plaintiffs purchased

from defendant Traders Royal Bank (TRB) three (3) managers checks to be used as

payment for their tax liabilities, to wit:

Check Number Amount

30652 P4,155.835.00

30650 3,949,406.12

30796 1,685,475.75

Defendant TRB, through Aida Nuez, TRB Branch Manager at Broadcast City

Branch, turned over the checks to Mrs. Vera who was supposed to deliver the same

to the BIR in payment of plaintiffs taxes.

Sometime in September, 1988, the BIR again assessed plaintiffs for their tax

liabilities for the years 1979-82. It was then they discovered that the three (3)

managers checks (Nos. 30652, 30650 and 30796) intended as payment for their taxeswere never delivered nor paid to the BIR by Mrs. Vera. Instead, the checks were

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presented for payment by unknown persons to defendant Security Bank and Trust

Company (SBTC), Taytay Branch as shown by the banks routing symbol transit

number (BRSTN 01140027) or clearing code stamped on the reverse sides of the

checks.

Meanwhile, for failure of the plaintiffs to settle their obligations, the BIR issued

warrants of levy, distraint and garnishment against them. Thus, they were

constrained to enter into a compromise and paid BIR P18,962,225.25 in settlement of

their unpaid deficiency taxes.

Thereafter, plaintiffs sent letters to both defendants, demanding that the amounts

covered by the checks be reimbursed or credited to their account. The defendants

refused, hence, the instant suit.3

On February 17, 1985, the trial court rendered its decision, thus:

WHEREFORE, in view of the foregoing considerations, judgment is hereby

rendered in favor of the plaintiffs and against the defendants by :

a) Condemning the defendant Traders Royal Bank to pay actual damages in the sumof Nine Million Seven Hundred Ninety Thousand and Seven Hundred Sixteen Pesos

and Eighty-Seven Centavos (P9,790,716.87) broken down as follows:

1) To plaintiff RPN-9 - P4,155,835.00

2) To Plaintiff IBC-13 - P3,949,406.12

3) To Plaintiff BBC-2 - P1,685,475.72

plus interest at the legal rate from the filing of this case in court.

b) Condemning the defendant Security Bank and Trust Company, being collectingbank, to reimburse the defendant Traders Royal Bank, all the amounts which the

latter would pay to the aforenamed plaintiffs;

c) Condemning both defendants to pay to each of the plaintiffs the sum of Three

Hundred Thousand (P300,000.00) Pesos as exemplary damages and attorneys fees

equivalent to twenty-five percent of the total amount recovered; and

d) Costs of suit.

SO ORDERED.4

Defendants Traders Royal Bank and Security Bank and Trust Company, Inc. both

appealed the trial courts decision to the Court of Appeals. However, as quoted in the

beginning hereof, the appellate court absolved defendant SBTC from any liability

and held TRB solely liable to respondent networks for damages and costs of suit.

In the instant petition for review on certiorari of the Court of Appeals decision,

petitioner TRB assigns the following errors: (a) the Honorable Court of Appeals

manifestly overlooked facts which would justify the conclusion that negligence on

the part of RPN, IBC and BBC bars them from recovering anything from TRB, (b)

the Honorable Court of Appeals plainly erred and misapprehended the facts in

relieving SBTC of its liability to TRB as collecting bank and indorser by overturning

the trial courts factual finding that SBTC did endorse the three (3) managers checks

subject of the instant case, and (c) the Honorable Court of Appeals plainly

misapplied the law in affirming the award of exemplary damages in favor of RPN,

IBC and BBC.

In reply, respondents RPN, IBC, and BBC assert that TRBs petition raises questions

of fact in violation of Rule 45 of the 1997 Revised Rules on Civil Procedure which

restricts petitions for review on certiorari of the decisions of the Court of Appeals on

pure questions of law. RPN, IBC and BBC maintain that the issue of whether or not

respondent networks had been negligent were already passed upon both by the trial

and appellate courts, and that the factual findings of both courts are binding and

conclusive upon this Court.

Likewise, respondent SBTC denies liability on the ground that it had no participation

in the negotiation of the checks, emphasizing that the BRSTN imprints at the back of

the checks cannot be considered as proof that respondent SBTC accepted the

disputed checks and presented them to Philippine Clearing House Corporation for

clearing.

Setting aside the factual ramifications of the instant case, the threshold issue now is

whether or not TRB should be held solely liable when it paid the amount of the

checks in question to a person other than the payee indicated on the face of the

check, the Bureau of Internal Revenue.

"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." 5Consequently, if a

bank pays a forged check, it must be considered as paying out of its funds and cannot

charge the amount so paid to the account of the depositor.

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In the instant case, the 3 checks were payable to the BIR. It was established,

however, that said checks were never delivered or paid to the payee BIR but were in

fact presented for payment by some unknown persons who, in order to receive

payment therefor, forged the name of the payee. Despite this fraud, petitioner TRB

paid the 3 checks in the total amount of P9,790,716.87.

Petitioner ought to have known that, where a check is drawn payable to the order of

one person and is presented for payment by another and purports upon its face to

have been duly indorsed by the payee of the check, it is the primary duty of

petitioner to know that the check was duly indorsed by the original payee and, where

it pays the amount of the check to a third person who has forged the signature of the

payee, the loss falls upon petitioner who cashed the check. Its only remedy is against

the person to whom it paid the money.6

It should be noted further that one of the subject checks was crossed. The crossing of

one of the subject checks should have put petitioner on guard; it was duty-bound to

ascertain the indorsers title to the check or the nature of his possession. Petitioner

should have known the effects of a crossed check: (a) the check may not be encashed

but only deposited in the bank; (b) the check may be negotiated only once to one

who has an account with a bank and (c) the act of crossing the check serves as a

warning to the holder that the check has been issued for a definite purpose so that he

must inquire if he has received the check pursuant to that purpose, otherwise, he is

not a holder in due course.7

By encashing in favor of unknown persons checks which were on their face payable

to the BIR, a government agency which can only act only through its agents,

petitioner did so at its peril and must su ffer the consequences of the unauthorized or

wrongful endorsement.8In this light, petitioner TRB cannot exculpate itself from

liability by claiming that respondent networks were themselves negligent.

A bank is engaged in a business impressed with public interest and it is its duty to

protect its many clients and depositors who transact business with it. It is under the

obligation to treat the accounts of the depositors and clients with meticulous care,

whether such accounts consist only of a few hundreds or millions of pesos.9

Petitioner argues that respondent SBTC, as the collecting bank and indorser, should

be held responsible instead for the amount of the checks.

The Court of Appeals addressed exactly the same issue and made the following

findings and conclusions:

As to the alleged liability of appellant SBTC, a close examination of the records

constrains us to deviate from the lower courts finding that SBTC, as a collecting

bank, should similarly bear the loss.

"A collecting bank where a check is deposited and which indorses the check upon

presentment with the drawee bank, is such an indorser. 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."

To hold appellant SBTC liable, it is necessary to determine whether it is a party to

the disputed transactions.

Section 3 of the Negotiable Instruments Law reads:

"SECTION 63. When person deemed indorser. - A person placing his signature upon

an instrument otherwise than as maker, drawer, or acceptor, is deemed to be an

indorser unless he clearly indicates by appropriate words his intention to be bound in

some other capacity."

Upon the other hand, the Philippine Clearing House Corporation (PCHC) rules

provide:

"Sec. 17.- BANK GUARANTEE. All checks cleared through the PCHC shall bear

the guarantee affixed thereto by the Presenting Bank/Branch which shall read as

follows:

"Cleared thru the Philippine Clearing House Corporation. All prior endorsements

and/or lack of endorsement guaranteed. NAME OF BANK/BRANCH BRSTN (Date

of clearing)."

Here, not one of the disputed checks bears the requisite endorsement of appellant

SBTC. What appears to be a guarantee stamped at the back of the checks is that of

the Philippine National Bank, Buendia Branch, thereby indicating that it was the

latter Bank which received the same.

It was likewise established during the trial that whenever appellant SBTC receives a

check for deposit, its practice is to stamp on its face the words, "non-negotiable".

Lana Echevarrias testimony is relevant:

"ATTY. ROMANO: Could you tell us briefly the procedure you follow in receiving

checks?

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"A: First of all, I verify the check itself, the place, the date, the amount in words and

everything. And then, if all these things are in order and verified in the data sheet I

stamp my non-negotiable stamp at the face of the check."

Unfortunately, the words "non-negotiable" do not appear on the face of either of the

three (3) disputed checks.

Moreover, the aggregate amount of the checks is not reflected in the clearing

documents of appellant SBTC. Section 19 of the Rules of the PCHC states:

"Section 19Regular Item Procedure:

Each clearing participant, through its authorized representatives, shall deliver to the

PCHC fully qualified MICR checks grouped in 200 or less items to a batch and

supported by an add-list, a batch control slip, and a delivery statement.

It bears stressing that through the add-list, the PCHC can countercheck and

determine which checks have been presented on a particular day by a particular bank

for processing and clearing. In this case, however, the add-list submitted by appellant

SBTC together with the checks it presented for clearing on August 3, 1987 does notshow that Check No. 306502 in the sum of P3,949,406.12 was among those that

passed for clearing with the PCHC on that date. The same is true with Check No.

30652 with a face amount of P4,155,835.00 presented for clearing on August 11,

1987 and Check No. 30796 with a face amount of P1,685,475.75.

The foregoing circumstances taken altogether create a serious doubt on whether the

disputed checks passed through the hands of appellant SBTC." 10

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

A collecting bank which indorses a check bearing a forged indorsement and presents

it to the drawee bank guarantees all prior indorsements, including the forged

indorsement itself, and ultimately should be held liable therefor. However, it is

doubtful if the subject checks were ever presented to and accepted by SBTC so as to

hold it liable as a collecting bank, as held by the Court of Appeals.

Since TRB did not pay the rightful holder or other person or entity entitled to receive

payment, it has no right to reimbursement. Petitioner TRB was remiss in its duty and

obligation, and must therefore suffer the consequences of its own negligence and

disregard of established banking rules and procedures.

We agree with petitioner, however, that it should not be made to pay exemplary

damages to RPN, IBC and BBC because its wrongful act was not done in bad faith,

and it did not act in a wanton, fraudulent, reckless or malevolent manner.11

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

exorbitant.12Considering the nature and extent of the services rendered by

respondent networks counsel, however, the Court deems it appropriate to award the

amount of P100,000 as attorneys fees.

WHEREFORE, the appealed decision is MODIFIED by deleting the award of

exemplary damages. Further, respondent networks are granted the amount of

P100,000 as attorneys fees. In all other respects, the Court of Appeals decision is

hereby AFFIRMED.

SO ORDERED.

G.R. No. 133179 March 27, 2008

ALLIED BANKING CORPORATION,Petitioner,

vs.LIM SIO WAN, METROPOLITAN BANK AND TRUST CO., and

PRODUCERS BANK,Respondents.

D E C I S I O N

VELASCO, JR., J.:

To ingratiate themselves to their valued depositors, some banks at times bend over

backwards that they unwittingly expose themselves to great risks.

The Case

This Petition for Review on Certiorari under Rule 45 seeks to reverse the Court of

Appeals (CAs) Decision promulgated on March 18, 19981in CA-G.R. CV No.

46290 entitled Lim Sio Wan v. Allied Banking Corporation, et al. The CA Decision

modified the Decision dated November 15, 19932of the Regional Trial Court (RTC),

Branch 63 in Makati City rendered in Civil Case No. 6757.

The Facts

The facts as found by the RTC and affirmed by the CA are as follows:

On November 14, 1983, respondent Lim Sio Wan deposited with petitioner AlliedBanking Corporation (Allied) at its Quintin Paredes Branch in Manila a money

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market placement of PhP 1,152,597.35 for a term of 31 days to mature on December

15, 1983,3as evidenced by Provisional Receipt No. 1356 dated November 14, 1983 .4

On December 5, 1983, a person claiming to be Lim Sio Wan called up Cristina So,

an officer of Allied, and instructed the latter to pre-terminate Lim Sio Wans money

market placement, to issue a managers check representing the proceeds of the

placement, and to give the check to one Deborah Dee Santos who would pick up the

check.5Lim Sio Wan described the appearance of Santos so that So could easily

identify her.6

Later, Santos arrived at the bank and signed the application form for a managers

check to be issued.7The bank issued Managers Check No. 035669 for PhP

1,158,648.49, representing the proceeds of Lim Sio Wans money market placement

in the name of Lim Sio Wan, as payee.8The check was cross-checked "For Payees

Account Only" and given to Santos.9

Thereafter, the managers check was deposited in the account of Filipinas Cement

Corporation (FCC) at respondent Metropolitan Bank and Trust Co. (Metrobank),10

with the forged signature of Lim Sio Wan as indorser.11

Earlier, on September 21, 1983, FCC had deposited a money market placement for

PhP 2 million with respondent Producers Bank. Santos was the money market trader

assigned to handle FCCs account.12Such deposit is evidenced by Official Receipt

No. 31756813and a Letter dated September 21, 1983 of Santos addressed to Angie

Lazo of FCC, acknowledging receipt of the placement.14The placement matured on

October 25, 1983 and was rolled-over until December 5, 1983 as evidenced by a

Letter dated October 25, 1983.15When the placement matured, FCC demanded the

payment of the proceeds of the placement.16On December 5, 1983, the same date

that So received the phone call instructing her to pre-terminate Lim Sio Wans

placement, the managers check in the name of Lim Sio Wan was deposited in the

account of FCC, purportedly representing the proceeds of FCCs money market

placement with Producers Bank.17In other words, the Allied check was deposited

with Metrobank in the account of FCC as P roducers Banks payment of its obligation

to FCC.

To clear the check and in compliance with the requirements of the Philippine

Clearing House Corporation (PCHC) Rules and Regulations, Metrobank stamped a

guaranty on the check, which reads: "All prior endorsements and/or lack of

endorsement guaranteed."18

The check was sent to Allied through the PCHC. Upon the presentment of the check,

Allied funded the check even without checking the authenticity of Lim Sio Wans

purported indorsement. Thus, the amount on the face of the check was credited to the

account of FCC.19

On December 9, 1983, Lim Sio Wan deposited with Allied a second money market

placement to mature on January 9, 1984.20

On December 14, 1983, upon the maturity date of the first money market placement,

Lim Sio Wan went to Allied to withdraw it.21She was then informed that the

placement had been pre-terminated upon her instructions. She denied giving anyinstructions and receiving the proceeds thereof. She desisted from further complaints

when she was assured by the banks manager that her money would be recovered.22

When Lim Sio Wans second placement matured on January 9, 1984, So called Lim

Sio Wan to ask for the latters instructions on the second placement. Lim Sio Wan

instructed So to roll-over the placement for another 30 days.23On January 24, 1984,

Lim Sio Wan, realizing that the promise that her money would be recovered would

not materialize, sent a demand letter to Allied asking for the payment of the first

placement.24Allied refused to pay Lim Sio Wan, claiming that the latter had

authorized the pre-termination of the placement and its subsequent release to

Santos.25

Consequently, Lim Sio Wan filed with the RTC a Complaint dated February 13,

198426docketed as Civil Case No. 6757 against Allied to recover the proceeds of her

first money market placement. Sometime in February 1984, she withdrew her second

placement from Allied.

Allied filed a third party complaint27against Metrobank and Santos. In turn,

Metrobank filed a fourth party complaint28against FCC. FCC for its part filed a fifth

party complaint29against Producers Bank. Summonses were duly served upon all the

parties except for Santos, who was no longer connected with Producers Bank.30

On May 15, 1984, or more than six (6) months after funding the check, Allied

informed Metrobank that the signature on the check was forged.31Thus, Metrobank

withheld the amount represented by the check from FCC. Later on, Metrobank

agreed to release the amount to FCC after the latter executed an Undertaking,

promising to indemnify Metrobank in case it was made to reimburse the amount.32

Lim Sio Wan thereafter filed an amended complaint to include Metrobank as a party-

defendant, along with Allied.33The RTC admitted the amended complaint despite

the opposition of Metrobank.34Consequently, Allieds third party complaint against

Metrobank was converted into a cross-claim and the latters fourth party complaint

against FCC was converted into a third party complaint.35

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