Haystack: Republic Bank vs. Ebrada (GR L-40796, 31 July 1975)

Republic Bank vs. Ebrada
[G.R. No. L-40796. July 31, 1975.]
First Division, Martin (J): 4 concurring

Facts: On 27 February 1963 Mauricia T. Ebrada, encashed Back Pay Check 508060 dated 15 January 1963 for P1,246.08 at the main office of the Republic Bank at Escolta, Manila. The check was issued by the Bureau of Treasury. The Bank was later advised by the said bureau that the alleged indorsement on the reverse side of the check by the payee, "Martin Lorenzo" was a forgery since the latter had allegedly died as of 14 July 1952. The Bank was then requested by the Bureau of Treasury to refund the amount of P1,246.08. To recover what it had refunded to the Bureau of Treasury, the Bank made verbal and formal demands upon Ebrada to account for the sum of P1,246.08, but Ebrada refused to do so. So the Bank sued Ebrada before the City Court of Manila. On 11 July 1966, Ebrada filed her answer denying the material allegations of the complaint and as affirmative defenses alleged that she was a holder in due course of the check in question, or at the very least, has acquired her rights from a holder in due course and therefore entitled to the proceeds thereof. She also alleged that the Bank has no cause of action against her; that it is in estoppel, or so negligent as not to be entitled to recover anything from her. On the same day, Ebrada filed a Third-Party complaint against Adelaida Dominguez who, in turn, filed on 14 September 1966 a Fourth-Party complaint against Justina Tinio. On 21 March 1967, the City Court of Manila rendered judgment for the plaintiff Bank against Ebrada; for Third-Party plaintiff against Third-Party defendant, Adelaida Dominguez, and for Fourth-Party plaintiff against Fourth-Party defendant, Justina Tinio.

From the judgment of the City Court, Ebrada took an appeal to the CFI Manila (Branch XXIII in Civil Case 69288) where the parties submitted a partial stipulation of facts; stipulating that they admit their respective capacities to sue and be sued; that on 15 January 1963 the Treasury of the Philippines issued its Check BP-508060, payable to the order of one Martin Lorenzo, in the sum of P1,246.08, and drawn on the Republic Bank; that the back side of aforementioned check bears the signatures of Martin Lorenzo, Ramon R. Lorenzo, Delia Dominguez, and Mauricia T. Ebrada, in such order; that the check was delivered to Ebrada by the Third-Party defendant and Fourth-Party plaintiff Adelaida Rodriguez, for the purpose of encashment; that the signature of Ebrada was affixed on said check on 27 February 1963 when she encashed it with the Bank; that immediately after Ebrada received the cash proceeds of said check in the sum of P1,246.08 from the plaintiff Bank, she immediately turned over the said amount to the third-party defendant and fourth-party plaintiff Rodriguez, who in turn handed the said amount to the fourth-party defendant Justina Tinio on the same date, as evidenced by the receipt signed by her. Based on the stipulation of facts and the documentary evidence presented, the trial court rendered a decision on 6 June 1969, ordering Ebrada to pay the bank the amount of P1246.08 with interest as the legal rate from the filing of the complaint on 16 June 1966, until fully paid, plus the costs in both instances against Ebrada. The right of Ebrada to file whatever claim she may have against Adelaida Dominguez in connection with the case was reserved. The right of the estate of Dominguez to file the fourth-party complaint against Justina Tinio was also reserved. Hence, the appeal on a question of law.

The Supreme Court affirmed the judgment appealed from in toto with costs against Ebrada.

1. Indorser warrants that he/she has good title to the check; Section 5 of NIL
The check in question was delivered to Ebrada by Adelaida Dominguez for the purpose of encashment and that her signature was affixed on said check when she cashed it with the Bank. Ebrada was the last indorser of the said check. As such indorser, she was supposed to have warranted that she has good title to said check; for under Section 5 of the Negotiable Instruments Law, it is provided that "Every person negotiating an instrument by delivery or by qualified indorsement, warrants: (a) That the instrument is genuine and in all respects what it purports to be. (b) That she has good title to it."

2. Indorser warrants all subsequent holders in due course
Under Section 65 of the Negotiable Instruments Law, "Every indorser who indorses without qualification warrants to all subsequent holders in due course: (a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding sections; (b) That the instrument is at the time of his indorsement valid and subsisting."

3. Where the signature on an instrument is forged, the negotiation of the check is without force or effect
The signature of the original payee of the check, Martin Lorenzo was a forgery because he was already dead almost 11 years before the check in question was issued by the Bureau of Treasury. Under Section 23 of the Negotiable Instruments Law (Act 2031): "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 instruments, or to give a discharge 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." It is clear from the provision that where the signature on a negotiable instrument if forged, the negotiation of the check is without force or effect.

4. Beam vs. Farrel; Where check has several indorsement, only negotiation based on forged or unauthorized signature which is inoperative
In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where a check has several indorsements on it, it was held that it is only the negotiation based on the forged or unauthorized signature which is inoperative. Applying the principle to the present case, it can be safely concluded that it is only the negotiation predicated on the forged indorsement that should be declared inoperative. This means that the negotiation of the check in question from Martin Lorenzo, the original payee, to Ramon R. Lorenzo, the second indorser, should be declared of no effect, but the negotiation of the check from Ramon R. Lorenzo to Adelaida Dominguez, the third indorser, and from Dominguez to the Ebrada who did not know of the forgery, should be considered valid and enforceable, barring any claim of forgery.

5. State vs. Broadway Mut. Bank; Drawee of check can recover from the holder the money paid to him on a forged instrument
In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it was held that the drawee of a check can recover from the holder the money paid to him on a forged instrument. It is not supposed to be its duty to ascertain whether the signatures of the payee or indorsers are genuine or not. This is because the indorser is supposed to warrant to the drawee that the signatures of the payee and previous indorsers are genuine, warranty not extending only to holders in due course. One who purchases a check or draft is bound to satisfy himself that the paper is genuine and that by indorsing it or presenting it for payment or putting it into circulation before presentation he impliedly asserts that he has performed his duty and the drawee who has paid the forged check, without actual negligence on his part, may recover the money paid from such negligent purchasers. In such cases the recovery is permitted because although the drawee was in a way negligent in failing to detect the forgery, yet if the encasher of the check had performed his duty, the forgery would in all probability, have been detected and the fraud defeated.

6. Rationale why drawee bank allowed to recover from encasher
The reason for allowing the drawee bank to recover from the encasher is that "every one with even the least experience in business knows that no business man would accept a check in exchange for money or goods unless he is satisfied that the check is genuine. He accepts it only because he has proof that it is genuine, or because he has sufficient confidence in the honesty and financial responsibility of the person who vouches for it. If he is deceived he has suffered a loss of his cash or goods through his own mistake. His own credulity or recklessness, or misplaced confidence was the sole cause of the loss. Why should he be permitted to shift the loss due to his own fault in assuming the risk, upon the drawee, simply because of the accidental circumstance that the drawee afterwards failed to detect the forgery when the check was presented?"

7. Ebrada duty-bound to ascertain check to be genuine; in negligence, liable to the bank
Ebrada, upon receiving the check in question from Dominguez, was duty-bound to ascertain whether the check in question was genuine before presenting it to the Bank for payment. Her failure to do so makes her liable for the loss and the Bank may recover from her the money she received for the check. Had she performed the duty of ascertaining the genuineness of the check, in all probability the forgery would have been detected and the fraud defeated.

8. Great Eastern Life Insurance Co. vs. Hongkong and Shanghai Banking Corp.; Facts
In Great Eastern Life Insurance Co. vs. Hongkong and Shanghai Banking Corp., the Great Eastern Life Insurance Co. drew its check for P2000 on the Hongkong and Shanghai Banking Corp. payable to the order of Lazaro Melicor. A certain E. M. Maasin fraudulently obtained the check and forged the signature of Melicor, as an indorser, and then personally indorsed and presented the check to the PNB where the amount of the check was placed to his (Maasin's) credit. On the next day, the PNB indorsed the check to the Hongkong and Shanghai Banking Corp. which paid it and charged the amount of the check to the insurance company. The Court held that the Hongkong and Shanghai Banking Corp. was liable to the insurance company for the amount of the check and that the PNB was in turn liable to the Hongkong and Shanghai Banking Corp.

9. Great Eastern Life Insurance Co. vs. Hongkong and Shanghai Banking Corp.; Duty of bank to know that the check was duly indorsed by original payee
In the Great Eastern Life Insurance case, it was held that “where a check is drawn payable to the order of one person and is presented to a bank by another and purports upon its face to have been duly indorsed by the payee of the check, it is the duty of the bank to know that the check was duly indorsed by the original payee, and where the Bank pays the amount of the check to a third person, who has forged the signature of the payee, the loss falls upon the bank who cashed the check, and its only remedy is against the person to whom it paid the money."

10. Bank should suffer loss but has remedy to recover from last indorser
The Bank should suffer the loss when it paid the amount of the check in question to Ebrada, but it has the remedy to recover from the latter the amount it paid to her. Although the Ebrada to whom the Bank paid the check was not proven to be the author of the supposed forgery, yet as last indorser of the check, she has warranted that she has good title to it even if in fact she did not have it because the payee of the check was already dead 11 years before the check was issued. The fact that immediately after receiving the cash proceeds of the check in question in the amount of P1,246.08 from the Bank, Ebrada immediately turned over said amount to Adelaida Dominguez (Third-Party defendant and the Fourth-Party plaintiff) who in turn handed the amount to Justina Tinio on the same date would not exempt her from liability because by doing so, she acted as an accommodation party in the check for which she is also liable under Section 29 of the Negotiable Instruments Law (Act 2031).

11. Accommodation party defined; Section 29 of the Negotiable Instruments Law
Section 29 of the Negotiable Instrument Law provides that “an accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party."

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