Haystack: Associated Bank vs. Court of Appeals (GR 107382, 31 January 1996)

Associated Bank vs. CA
[G.R. No. 107382. January 31, 1996.]
Also PNB vs. CA [G.R. No. 107612. January 31, 1996.]
Second Division, Romero (J): 3 concurring

Facts: The Province of Tarlac maintains a current account with the Philippine National Bank (PNB) Tarlac Branch where the provincial funds are deposited. Checks issued by the Province are signed by the Provincial Treasurer and countersigned by the Provincial Auditor or the Secretary of the Sangguniang Bayan. A portion of the funds of the province is allocated to the Concepcion Emergency Hospital. The allotment checks for said government hospital are drawn to the order of "Concepcion Emergency Hospital, Concepcion, Tarlac" or "The Chief, Concepcion Emergency Hospital, Concepcion, Tarlac." The checks are released by the Office of the Provincial Treasurer and received for the hospital by its administrative officer and cashier. In January 1981, the books of account of the Provincial Treasurer were post-audited by the Provincial Auditor. It was then discovered that the hospital did not receive several allotment checks drawn by the Province. On 19 February 1981, the Provincial Treasurer requested the manager of the PNB to return all of its cleared checks which were issued from 1977 to 1980 in order to verify the regularity of their encashment. After the checks were examined, the Provincial Treasurer learned that 30 checks amounting to P203,300.00 were encashed by one Fausto Pangilinan, with the Associated Bank acting as collecting bank. It turned out that Fausto Pangilinan, who was the administrative officer and cashier of payee hospital until his retirement on 28 February 1978, collected the checks from the office of the Provincial Treasurer. He claimed to be assisting or helping the hospital follow up the release of the checks and had official receipts. Pangilinan sought to encash the first check with Associated Bank. However, the manager of Associated Bank refused and suggested that Pangilinan deposit the check in his personal savings account with the same bank. Pangilinan was able to withdraw the money when the check was cleared and paid by the drawee bank, PNB. After forging the signature of Dr. Adena Canlas who was chief of the payee hospital, Pangilinan followed the same procedure for the second check, in the amount of P5,000.00 and dated 20 April 1978, as well as for 28 other checks of various amounts and on various dates. The last check negotiated by Pangilinan was for P8,000.00 and dated 10 February 1981. All the checks bore the stamp of Associated Bank which reads "All prior endorsements guaranteed Associated Bank." Jesus David, the manager of Associated Bank, alleged that Pangilinan made it appear that the checks were paid to him for certain projects with the hospital. He did not find as irregular the fact that the checks were not payable to Pangilinan but to the Concepcion Emergency Hospital. While he admitted that his wife and Pangilinan's wife are first cousins, the manager denied having given Pangilinan preferential treatment on this account. On 26 February 1981, the Provincial Treasurer wrote the manager of the PNB seeking the restoration of the various amounts debited from the current account of the Province. In turn, the PNB manager demanded reimbursement from the Associated Bank on 15 May 1981.

As both banks resisted payment, the Province brought suit against PNB which, in turn, impleaded Associated Bank as third-party defendant. The latter then filed a fourth-party complaint against Adena Canlas and Fausto Pangilinan. After trial on the merits, the lower court rendered its decision on 21 March 1988, on the basic complaint, in favor of the Province and against PNB, ordering the latter to pay to the former, the sum of P203,300.00 with legal interest thereon from 20 March 1981 until fully paid; on the third-party complaint, in favor of PNB and against Associated Bank ordering the latter to reimburse to the former the amount of P203,300.00 with legal interests thereon from 20 March 20, 1981 until fully paid; on the fourth-party complaint, the same was ordered dismissed for lack of cause of action as against Adena Canlas and lack of jurisdiction over the person of Fausto Pangilinan as against the latter. The court also dismissed the counterclaims on the complaint, third-party complaint and fourth-party complaint, for lack of merit. PNB and Associated Bank appealed to the Court of Appeals. The appellate court affirmed the trial court's decision in toto on 30 September 1992. Hence the consolidated petitions which seek a reversal of the appellate court's decision.

The Supreme Court partially granted the petition for review filed by the PNB (GR 107612) while the petition for review filed by the Associated Bank (GR 107382) was denied. The Court further modified the decision of the trial court to the effect that the PNB shall pay 50% of P203,300.00 to the Province of Tarlac, with legal interest from 20 March 1981 until the payment thereof, and that Associated Bank shall pay 50% of P203,300.00 to the PNB, likewise, with legal interest from 20 March 1981 until payment is made.

1. Check having forged indorsement should be differentiated forged checks or checks bearing the forged signature of the drawer
The present case concerns checks payable to the order of Concepcion Emergency Hospital or its Chief. They were properly issued and bear the genuine signatures of the drawer, the Province of Tarlac. The infirmity in the questioned checks lies in the payee's (Concepcion Emergency Hospital) indorsements which are forgeries. At the time of their indorsement, the checks were order instruments. Checks having forged indorsements should be differentiated from forged checks or checks bearing the forged signature of the drawer.

2. Section 23 NIL, Effect of Forged Signature; Section 23 does not avoid the instrument but only the forged signature
Section 23 of the Negotiable Instruments Law (NIL) provides “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. “ Thus, 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. Section 23 does not avoid the instrument but only the forged signature. Thus, a forged indorsement does not operate as the payee's indorsement.

3. Exception to general rule in Section 23
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, persons negotiating by delivery and acceptors are warrantors of the genuineness of the signatures on the instrument.

4. Bearer instruments, signature unnecessary to pass title to instrument: When indorsement is a forgery, only person whose signature is forged can raise the defense of forgery against a holder in due course
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

5. Order instruments, signature of rightful holder essential to transfer title: When indorsement is a forgery, all parties prior to forgery may raise real defense of forgery against all subsequent parties
The checks involved in the present case are order instruments. Where the instrument is payable to order at the time of the forgery, such as the checks in the present 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.

6. Indorser warrants that instrument is genuine, that he has good title to it; and all prior parties had capacity to contract
An indorser of an order instrument warrants "that the instrument is genuine and in all respects what it purports to be; that he has a good title to it; that all prior parties had capacity to contract; and that the instrument is at the time of his indorsement valid and subsisting." He cannot interpose the defense that signatures prior to him are forged. A collecting bank where a check is deposited and which indorses the check upon presentment with the drawee bank, is such an indorser. So even if the indorsement on the check deposited by the banks' client is forged, the collecting bank is bound by his warranties as an indorser and cannot set up the defense of forgery as against the drawee bank.

7. Drawee bank under strict liability to pay check to the order of the payee; Drawee bank risk loss if negligent
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. The general rule then is that the drawee bank may not debit the drawer's account and is not entitled to indemnification from the drawer. The risk of loss must perforce fall on the drawee bank.

8. When drawer substantially contributed to the making of forged signature
If the drawee bank can prove a failure by the customer/drawer to exercise ordinary care that substantially contributed to the making of the forged signature, the drawer is precluded from asserting the forgery.

9. When drawer and drawee bank are equally negligent
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.

10. When drawer’s signature is forged, drawer can recover from drawee bank; Drawee bank has duty to know drawer’s signature
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 re-credit the amount of the check to the account of the drawer. The liability chain ends with the drawee bank whose responsibility it is to know the drawer's signature since the latter is its customer.

11. When indorser’s signature is forged, drawee bank may pass liability back through the collection chain
In cases involving checks with forged indorsements, 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. In other words, the drawee bank can seek reimbursement or a return of the amount it paid from the presentor bank or person. Theoretically, the latter can demand reimbursement from the person who indorsed 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. In the present 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.

12. Collecting bank has no right to be paid by drawee bank
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.

13. Section 66 NIL; Collecting bank warrants instrument is genuine, valid and subsisting at time of indorsement; Collecting bank liable even without its fault
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 its indorsement.

14. Collecting bank or last endorser suffer loss as it has duty to ascertain genuineness of prior endorsements
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."

15. Drawee bank not similarly situated as collecting bank, does not warrant genuineness of indorsements
The drawee bank is not similarly situated as the collecting bank because the former makes no warranty as to the genuineness of any indorsement. The drawee bank's duty is but to verify the genuineness of the drawer's signature and not of the indorsement because the drawer is its client. Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the check. The bank knows him, his address and history because he is a client. It has taken a risk on his deposit. The bank is also in a better position to detect forgery, fraud or irregularity in the indorsement.

16. Drawee bank can recover unless negligent in promptly informing the presentor of the forgery upon discovery
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.

17. Application of the rules in the present case
Applying the rules to the present case, 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 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 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.

18. Province of Tarlac equally negligent as PNB
The Province of Tarlac permitted Fausto Pangilinan to collect the checks when the latter, having already retired from government service, was no longer connected with the hospital. With the exception of the first check (dated 17 January 1978), all the checks were issued and released after Pangilinan's retirement on 28 February 1978. After nearly 3 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. The failure of the Province to exercise due care contributed to a significant degree to the loss tantamount to negligence. Therefore, the Province was equally negligent and should, therefore, share the burden of loss from the checks bearing a forged indorsement. Likewise, 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. Even so, PNB can recover from the collecting bank.

19. Case analogous to Associated Bank vs. CA
The situation in the present case is analogous to Associated Bank v. CA, for it was not the payee who deposited the checks with the collecting bank. In said case, six 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 as 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. Here, the checks were all payable to Concepcion Emergency Hospital but it was Fausto Pangilinan who deposited the checks in his personal savings account.

20. Stamp guaranteeing prior indorsement not an empty rubric; Bank held accountable for checks deposited by its customers
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.

21. Section 4(c) of CB Circular 580, not Section 23 of the PCHC Rules, applies
Under Section 4 (c) of CB Circular No. 580, items bearing a forged endorsement shall be returned within 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 24 hours. 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 24-hour return rule was adopted by the PCHC until it was changed in 1982. In the present case, the contending banks which are both branches in Tarlac province are therefore not covered by PCHC Rules but by CB Circular 580. Clearly then, the CB circular was applicable when the forgery of the checks was discovered in 1981.

22. Rationale of the 24-hour rule
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 may be prejudiced and lose the opportunity to go after its depositor.

23. PNB did not commit negligent delay; Associated Bank not prejudiced by PNB’s failure to comply with the 25-hour return rule
Even if PNB did not return the questioned checks to Associated Bank within 24 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 31 March 1981 to return the checks for verification. The Province returned the checks only on 22 April 1981. Two days later, Associated Bank received the checks from PNB. Associated Bank was also furnished a copy of the Province's letter of demand to PNB dated 20 March 1981, thus giving it notice of the forgeries. At this time, however, Pangilinan's account with Associated had only P24.63 in it. 37 Had 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. Hence, Associated Bank was not prejudiced by PNB's failure to comply with the 24-hour return rule.

24. PNB not estopped from requiring reimbursement just because it paid and cleared the checks
PNB 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. PNB'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.

25. Mode of award justified; No privity of contract between drawer and collecting bank
There is nothing wrong with the mode of the award, directing PNB to return to the Province of Tarlac the amount of the checks and then directing Associated Bank to reimburse PNB.. The drawer-Province is a client or customer of the PNB, not of Associated Bank. There is no privity of contract between the drawer and the collecting bank.

26. PNB and Associated Bank liable with interest from date of extrajudicial demand as bank deposits are considered as loans; 6% interest per annum as there is no evidence as to actual interest rate
The trial court made PNB and Associated Bank liable with legal interest from 20 March 1981, the date of extrajudicial demand made by the Province of Tarlac on PNB. The payments to be made in the present case stem from the deposits of the Province in its current account with the PNB. Bank deposits are considered under the law as loans. Central Bank Circular 416 prescribes a 12% interest per annum for loans, forbearance of money, goods or credits in the absence of express stipulation. Normally, current accounts are likewise interest-bearing, by express contract, excluding them from the coverage of CB Circular 416. However, the actual interest rate, if any, for the current account opened by the Province with PNB was not given in evidence. Hence, the Court affirmed the trial court's use of the legal interest rate, or 6% per annum, computed from the date of default, or the date of judicial or extrajudicial demand.

27. Liabilities of the parties
Due to the negligence of the Province of Tarlac in releasing the checks to an unauthorized person and in not properly ascertaining why the retired hospital cashier was collecting checks for the payee hospital in addition to the hospital's real cashier, the Province contributed to the loss and shall be liable to the PNB for 50% thereof. In effect, the Province can only recover 50% of P203,300.00 from PNB. The collecting bank, Associated Bank, shall be liable to PNB for 50% percent of P203,300.00. It is liable on its warranties as indorser of the checks which were deposited by 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.

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