NEGO CASE DIGESTS

NEGOTIABILITY

1) Philippine Education Co. v Soriano

Postal Money Orders Not Negotiable Instruments

In April 1958, a certain Enrique Montinola was purchasing ten money orders from the
Manila Post Office. Each money order was worth P200.00. Montinola offered to pay the
money orders via a private check but the cashier told him he cannot pay via a private check.
But still somehow, Montinola was able to leave the post office with the money orders
without him paying for them.
Days later, the missing money orders were discovered. Meanwhile, the Philippine Education
Co., Inc. (PECI) presented one of the missing postal money orders before the Bank of
America. The money order was initially credited and so P200.00 was deposited in PECIs
account with the bank. But then later the post office, through Mauricio Soriano (Chief of the
Money Order Division of the Post Office), advised the bank that the money order was
irregularly issued hence the P200.00 was debited back from PECIs account.
PECI is now invoking that the money order was duly negotiated to them and thus they are
entitled to the amount it represents.
ISSUE: Whether or not postal money orders are negotiable instruments.
HELD: No. Postal money orders are not negotiable instruments. The rationale behind this
rule is the fact that in establishing and operating a postal money order system, the
government is not engaging in commercial transactions but merely exercises a
governmental power for the public benefit. In fact, postal money orders are subject to a lot
of restrictions limiting their negotiability. Particularly in this case, as far back as 1948, there
was already an agreement between Bank of America and the Manila Post Office, that in case
the post office would have an adverse claim against any Bank of America depositor involving
postal money orders issued by the post office, all amounts cleared in relation thereto shall
be refunded back to the post offices account with the bank this in itself is already a
limitation in the negotiability and nature of the postal money orders issued by the post
office because of the special conditions attached.

2) CALTEX PHIL. V CA
FACTS:
Security Bank and Trust Company (Security Bank), a commercial banking
institution, through its Sucat Branch issued 280 certificates of time deposit (CTDs) in
favor of Angel dela Cruz who deposited with Security Bank the total amount of
P1,120,000

Angel delivered the CTDs to Caltex for his purchase of fuel products

March 18, 1982: Angel informed Mr. Tiangco, the Sucat Branch Manager that he lost
all CTDs, submitted the required Affidavit of Loss and received the replacement
 March 25, 1982: Angel dela Cruz negotiated and obtained a loan from Security Bank
in the amount of P875,000 and executed a notarized Deed of Assignment of Time
Deposit

November, 1982: Mr. Aranas, Credit Manager of Caltex went to the Sucat branch to
verify the CTDs declared lost by Angel

November 26, 1982: Security Bank received a letter from Caltex formally informing
it of its possession of the CTDs in question and of its decision to pre-terminate the same.

December 8, 1982: Caltex was requested by Security Bank to furnish:

a copy of the document evidencing the guarantee agreement with Mr. Angel
dela Cruz

the details of Mr. Angel's obligation against which Caltex proposed to apply
the time deposits

Security Bank rejected Caltex demand for payment bec. it failed to furnish a copy of
its agreement w/ Angel

April 1983, the loan of Angel dela Cruz with Security Bank matured

August 5, 1983: CTD were set-off w/ the matured loan

Caltex filed a complaint praying the bank to pay 1,120,000 plus 16% interest

CA affirmed RTC to dismiss complaint

ISSUE:

1. W/N the CTDs are negotiable

2. W/N Caltex as holder in due course can rightfully recover on the CTDs

HELD: Petition is Denied and appealed decision is affirmed.

1. YES.
Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates
the requisites for an instrument to become negotiable, viz:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and -check
(e) Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
The documents provide that the amounts deposited shall be repayable to the
depositor

depositor = bearer

If it was really the intention of respondent bank to pay the amount to

Angel de la Cruz only, it could have with facility so expressed that fact in clear and
categorical terms in the documents, instead of having the word "BEARER" stamped on
the space provided for the name of the depositor in each CTD

negotiability or non-negotiability of an instrument is determined from the writing,

that is, from the face of the instrument itself

2. NO.
although the CTDs are bearer instruments, a valid negotiation thereof for the true
purpose and agreement between it and De la Cruz, as ultimately ascertained, requires
both delivery and indorsement

CTDs were in reality delivered to it as a security for De la Cruz' purchases of

its fuel products

There was no negotiation in the sense of a transfer of the legal title to the
CTDs in favor of petitioner in which situation, for obvious reasons, mere delivery of the
bearer CTDs would have sufficed.

Where the holder has a lien on the instrument arising from contract, he is deemed a
holder for value to the extent of his lien.

As such holder of collateral security, he would be a pledgee but the

requirements therefor and the effects thereof, not being provided for by the Negotiable
Instruments Law, shall be governed by the Civil Code provisions on pledge of
incorporeal rights:

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged.
The instrument proving the right pledged shall be delivered to the creditor, and if
negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description of the thing
pledged and the date of the pledge do not appear in a public instrument.
Art. 1625. An assignment of credit, right or action shall produce no effect as against third
persons, unless it appears in a public instrument, or the instrument is recorded in the
Registry of Property in case the assignment involves real property.

3. METROBANK V CA

FACTS:
Gomez opened an account with Golden Savings bank and deposited 38 treasury
warrants. All these warrants were indorsed by the cashier of Golden Savings, and
deposited it to the savings account in a Metrobank branch. They were sent later on
for clearing by the branch office to the principal office of Metrobank, which
forwarded them to the Bureau of Treasury for special clearing. On persistent
inquiries on whether the warrants have been cleared, the branch manager allowed
withdrawal of the warrants, only to find out later on that the treasury warrants have
been
dishonored.

HELD:
The treasury warrants were not negotiable instruments. Clearly, it is indicated that it
was non-negotiable and of equal significance is the indication that they are payable
from a particular fund, Fund 501. This indication as the source of payment to be
made on the treasury warrant
makes the promise to pay conditional and the warrants themselves non-negotiable.

Metrobank then cannot contend that by indorsing the warrants in general, GS assumed that
they were genuine and in all respects what they purport it to be, in accordance to Section 66
of the NIL. The simple reason is that the law isnt applicable to the non-negotiable
treasury warrants. The
indorsement was made for the purpose of merely depositing them with Metrobank
for clearing. It was in fact Metrobank which stamped on the back of the warrants: All
prior indorsements and/or lack of endorsements guaranteed

4) FACTS:
Petitioner Sesbreno made a money market placement in the amount of P300,000 with the
Philippine Underwriters Finance Corporation (PhilFinance), with a term of 32
days. PhilFinance issued to Sesbreno the Certificate of Confirmation of Sale of a Delta Motor
Corporation Promissory Note, the Certificate of Securities Delivery Receipt indicating the
sale of the note with notation that said security was in the custody of Pilipinas Bank, and
postdated checks drawn against the Insular Bank of Asia and America for P304,533.33
payable on March 13, 1981. The checks were dishonored for having been drawn against
insufficient funds. Pilipinas Bank never released the note, nor any instrument related
thereto, to Sesbreno; but Sesbreno learned that the security which was issued on April 10,
1980, maturing on 6 April 1981, has a face value of P2,300,833.33 with PhilFinance as
payee and Delta Motors as maker; and was stamped non-negotiable on its face. As
Sesbreno was unable to collect his investment and interest thereon, he filed an action for
damages against Delta Motors and Pilipinas Bank. Delta Motors contents that said
promissory note was not intended to be negotiated or otherwise transferred by Philfinance
as manifested by the word "non-negotiable" stamped across the face of the Note.

ISSUE:
Whether the non-negotiability of a promissory note prevents its assignment.

RULING:
A negotiable instrument, instead of being negotiated, may also be assigned or transferred.
The legal consequences of negotiation and assignment of the instrument are different. A
non-negotiable instrument may not be negotiated but may be assigned or transferred,
absent an express prohibition against assignment or transfer written in the face of the
instrument. The subject promissory note, while marked "non-negotiable," was not at the
same time stamped "non-transferable" or "non-assignable." It contained no stipulation
which prohibited Philfinance from assigning or transferring such note, in whole or in part.

**A non-negotiable instrument may not be negotiated but may be assigned or transferred,
absent an express prohibition against assignment or transfer written on the face of the
instrument.

5) FIRESTONE TIRE AND RUBBER CO. V CA

Facts:
Forjas-Arca Enterprise Company is maintaining a special savings account with Luzon
Development Bank, the latter authorized and allowed withdrawals of funds though the
medium of special withdrawal slips. These are supplied by Fojas-Arca. Fojas-Arca purchased
on credit with FirestoneTire & Rubber Company, in payment Fojas-Arca delivered a 6 special
withdrawal slips. In turn, these were deposited by the Firsestone to its bank account in
Citibank. With this, relying on such confidence and belief Firestone extended to Fojas-Arca
other purchase on credit of its products but several withdrawal slips were dishonored and
not paid. As a consequence, Citibank debited the plaintiffs account representing the
aggregate amount of the two dishonored special withdrawal slips. Fojas-Arca averred that
the pecuniary losses it suffered are a caused by and directly attributes to defendants gross
negligence as a result Fojas-Arca filed a complaint.

Issue:
Whether or not the acceptance and payment of the special withdrawal slips without
the presentation of the depositors passbook thereby giving the impression that it is a
negotiable instrument like a check.

Held:
No. Withdrawal slips in question were non negotiable instrument. Hence, the rules
governing the giving immediate notice of dishonor of negotiable instrument do not apply.
The essence of negotiability which characterizes a negotiable paper as a credit instrument
lies in its freedom to circulate freely as a substitute for money. The withdrawal slips in
question lacked this character.

II. PAYABLE TO BEARER

6. ANG TEK LIAN V CA

Facts:
Ang Tek Lian knowing that he had no funds therefor, drew a check upon China
Banking Corporation payable to the order of cash. He delivered it toLee Hua Hong in
exchange for money. The check was presented by Lee Hua hong to the drawee bank for
payment, but it w3as dishonored for insufficiency of funds. With this, Ang Tek Lian was
convicted of estafa.
Issue:
Whether or not the check issued by Ang Tek Lian that is payable to the order to cash
and not have been indorsed by Ang Tek Lian, making him not guilty for the crime of estafa.

Held:
No.Under Sec. 9 of NIL a check drawn payable to the order of cash is a check payable
to bearer and the bank may pay it to the person presenting it for payment without the
drawers indorsement. However, if the bank is not sure of the bearers identity or financial
solvency, it has the right to demand identification or assurance against possible
complication, such as forgery of drawers signature, loss of the check by the rightful owner,
raising of the amount payable, etc. But where the bank is satisfied of the identity or
economic standing of the bearer who tenders the check for collection, it will pay the
instrument without further question; and it would incur no liability to the drawer in thus
acting

III. COMPLETE BUT UNDELIVERED

7. Development Bank of the Phils. V SIma Wei

FACTS:
Respondent Sima Wei executed and delivered to petitioner Bank a promissory
note engaging to pay the petitioner Bank or order the amount of P1,820,000.00. Sima Wei
subsequently issued two crossed checks payable to petitioner Bank drawn against China
Banking Corporation in full settlement of the drawer's account evidenced by the promissory
note. These two checks however were not delivered to the petitioner-payee or to any of its
authorized representatives but instead came into the possession of respondent Lee Kian
Huat, who deposited the checks without the petitioner-payee's indorsement to the account
of respondent Plastic Corporation with Producers Bank. Inspite of the fact that the checks
were crossed and payable to petitioner Bank and bore no indorsement of the latter, the
Branch Manager of Producers Bank authorized the acceptance of the checks for deposit and
credited them to the account of said Plastic Corporation.

ISSUE:
Whether petitioner Bank has a cause of action against Sima Wei for the undelivered checks.

RULING:
No. A negotiable instrument must be delivered to the payee in order to evidence its
existence as a binding contract. Section 16 of the NIL provides that every contract on a
negotiable instrument is incomplete and revocable until delivery of the instrument for the
purpose of giving effect thereto. Thus, the payee of a negotiable instrument acquires no
interest with respect thereto until its delivery to him. Without the initial delivery of the
instrument from the drawer to the payee, there can be no liability on the
instrument. Petitioner however has a right of action against Sima Wei for the balance due
on the promissory note.

IV. LIABILITY OF PERSONS SIGNING AS AGENT

8. PHILIPPINE BANK OF COMMERCE V ARUEGO
Jose Aruego obtained a credit accommodation from the Philippine Bank of Commerce to
facilitate the payment of printing of World Current Events, the periodical he is publishing.
Thus, for every printing of the periodical, the printer, Encal Press and Photo Engraving,
collected the cost of printing by drawing a draft against the plaintiff, said draft being sent
later to the defendant for acceptance. As an added security for the payment of the amounts
advanced to Encal Press and Photo-Engraving, the plaintiff bank also required defendant
Aruego to execute a trust receipt in favor of said bank wherein said defendant undertook to
hold in trust for plaintiff the periodicals and to sell the same with the promise to turn over
to the plaintiff the proceeds of the sale of said publication to answer for the payment of all
obligations arising from the draft. The Philippine Bank of Commerce instituted an action
against Aruego to recover the cost of printing of the latters periodical. Aruego however
argues that he signed the supposed bills of exchange only as an agent of the Philippine
Education Foundation Company where he is president.

Issue:
Whether Aruego can be held liable by the petitioner although he signed the supposed bills
of exchange only as an agent of Philippine Education Foundation Company.

Held:
Yes. Aruego did not disclose in any of the drafts that he accepted that he was signing as
representative of the Philippine Education Foundation Company. Aruego contends that he
signed the supposed bills of exchange as an agent of the Philippine Education Foundation
Company where he is president. Section 20 of the Negotiable Instruments Law provides that
"Where the instrument contains or a person adds to his signature words indicating that he
signs for or on behalf of a principal or in a representative capacity, he is not liable on the
instrument if he was duly authorized; but the mere addition of words describing him as an
agent or as filing a representative character, without disclosing his principal, does not
exempt him from personal liability." An inspection of the drafts accepted by the defendant
shows that nowhere has he disclosed that he was signing as a representative of the
Philippine Education Foundation Company. He merely signed as follows: "JOSE ARUEGO
(Acceptor) (SGD) JOSE ARGUEGO For failure to disclose his principal, Aruego is personally
liable for the drafts he accepted.

9. FRANCISCO V CA
FACTS:
A. Francisco Realty & Development Corporation (AFRDC), of which petitioner Francisco is
the president, entered into a Land Development and Construction Contract with private
respondent Herby Commercial & Construction Corporation (HCCC), represented by its
President and General Manager private respondent Ong. Under the contract, HCCC was to
be paid on the basis of the completed houses and developed lands delivered to and accepted
by AFRDC and the GSIS. Sometime in 1979, Ong discovered that Diaz and Francisco, the
Vice-President of GSIS, had executed and signed seven checks of various dates and amounts
payable to HCCC for completed and delivered work under the contract. Ong, however, claims
that these checks were never delivered to HCCC. It turned out that Francisco forged the
indorsement of Ong on the checks and indorsed the checks for a second time by signing her
name at the back of the checks, petitioner then deposited said checks in her savings
account. A case was brought by private respondents against petitioner to recover the value
of said checks. Petitioner however claims that she was authorized to sign Ong's name on the
checks by virtue of the Certification executed by Ong in her favor giving her the authority to
collect all the receivables of HCCC from the GSIS, including the questioned checks.

ISSUE:
Whether petitioner cannot be held liable on the questioned checks by virtue of the
Certification executed by Ong giving her the authority to collect such checks from the GSIS.

RULING:
Petitioner is liable. The Negotiable Instruments Law provides that where any person is
under obligation to indorse in a representative capacity, he may indorse in such terms as to
negative personal liability. An agent, when so signing, should indicate that he is merely
signing in behalf of the principal and must disclose the name of his principal; otherwise he
shall be held personally liable. Even assuming that Francisco was authorized by HCCC to
sign Ong's name, still, Francisco did not indorse the instrument in accordance with law.
Instead of signing Ong's name, Francisco should have signed her own name and expressly
indicated that she was signing as an agent of HCCC. Thus, the Certification cannot be used by
Francisco to validate her act of forgery.

V. FORGERY

10) JAI-ALAI V BPI

FACTS:
Petitioner deposited 10 checks in its current account with BPI. The checks which were
acquired by petitioner from Ramirez, a sales agent of the Inter-Island Gas were all payable
to Inter-Island Gas Service, Inc. or order. After the checks had been submitted to Inter-bank
clearing, Inter-Island Gas discovered that all the indorsements made on the checks
purportedly by its cashiers were forgeries. BPI thus debited the value of the checks against
petitioner's current account and forwarded to the latter the checks containing the forged
indorsements which petitioner refused to accept.

ISSUE:
Whether BPI had the right to debit from petitioner's current account the value of the checks
with the forged indorsements.

RULING:
BPI acted within legal bounds when it debited the petitioner's account. Having indorsed the
checks to respondent bank, petitioner is deemed to have given the warranty prescribed in
Section 66 of the NIL that every single one of those checks "is genuine and in all respects
what it purports to be." Respondent which relied upon the petitioner's warranty should not
be held liable for the resulting loss.
**The depositor of a check as indorser warrants that it is genuine and in all respects what it
purports to be. Having indorsed the checks to respondent bank, petitioner is deemed to have
given the warranty prescribed in Section 66 of the NIL that every single one of those checks " is
genuine and in all respects what it purports to be."

11) REPUBLIC BANK V EBRADA

On January 15, 1963, the Bureau of Treasury issued a back pay check to Martin Lorenzo in
the amount of P1,246.08. The drawee named therein was Republic Bank. The check was
subsequently indorsed to Ramon Lorenzo, then to Delia Dominguez and then to Mauricia
Ebrada. Ebrada encashed the check with the Republic Bank. Republic Bank paid the amount
of the check to Ebrada. Ebrada, upon receiving the cash, gave it to Dominguez; Dominguez in
turn gave the cash to Ramon Lorenzo.
Later, the Bureau of Treasury notified that the check was a forgery because the payee named
therein (Martin Lorenzo) was actually dead 11 years ago before the check was issued.
Republic Bank refunded the amount to the Bureau of Treasury. The bank then demanded
Ebrada to refund them.
ISSUE: Whether or not Republic Bank may recover from Ebrada.
HELD: Yes. Ebrada, being the last indorser, warranted the genuineness of the signatures of
the payee and the previous indorsers. The drawee bank is not duty bound to ascertain
whether or not the signatures of the payee and the indorsers are genuine. 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 (in this case Republic
Bank) who has paid the forged check, without actual negligence on his part, may recover the
money paid from such negligent purchasers.
But Ebrada did not profit from this because she, upon receiving the encashment, gave the same
to Dominguez?
She is still liable because she is considered as an accommodation party pursuant to
Section 29 of the Negotiable Instruments Law. 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.

12) MWSS V CA
The City of Dagupan (CITY) filed a complaint against the former National Waterworks and
Sewerage Authority (NAWASA), now the Metropolitan Waterworks and Sewerage System
(MWSS), for recovery of the ownership and possession of the Dagupan Waterworks System.
NAWASA interposed as one of its special defenses R.A. 1383 which vested upon it the
ownership, possession and control of all waterworks systems throughout the Philippines
and as one of its counterclaims the reimbursement of the expenses it had incurred for
necessary and useful improvements amounting to P255,000.00. Judgment was rendered by
the trial court in favor of the CITY on the basis of a stipulation of facts. The trial court found
NAWASA to be a possessor in bad faith and hence not entitled to the reimbursement claimed
by it.
ISSUE:
Whether or not MWSS has the right to remove all the useful improvements introduced by
NAWASA to the Dagupan Waterworks System, notwithstanding the fact that NAWASA was
found to be a possessor in bad faith?

HELD: No.

Article 449 of the Civil Code of the Philippines provides that "he who builds, plants or sows
in bad faith on the land of another, loses what is built, planted or sown without right to
indemnity." As a builder in bad faith, NAWASA lost whatever useful improvements it had
made without right to indemnity. Moreover, under Article 546 of said code, only a possessor
in good faith shall be refunded for useful expenses with the right of retention until
reimbursed; and under Article 547 thereof, only a possessor in good faith may remove
useful improvements if this can be done without damage to the principal thing and if the
person who recovers the possession does not exercise the option of reimbursing the useful
expenses. The right given a possessor in bad faith is to remove improvements applies only to
improvements for pure luxury or mere pleasure, provided the thing suffers no injury
thereby and the lawful possessor does not prefer to retain them by paying the value they
have at the time he enters into possession (Article 549).
13) BANCO DE ORO V EQUITABLE BANKING CORP
FACTS

Equitable Bank drew six crossed managers check payable to certain member
establishments of Visa Card. Subsequently, the checks were deposited with Banco De Oro
(BDO) to the credit of its depositor. Following normal procedures and after stamping at the
back of the checks the usual endorsements,BDOsent the checks for clearing through the
Philippine Clearing House Corporation (PCHC). Accordingly, Equitable Banking paid the
checks; its clearing account was debited for the value of the checks and BDOs clearing
account was credited for the same amount. Thereafter, Equitable Banking discovered that
the endorsements appearing at the back of the checks and purporting to be that of the
payees were forged and/or unauthorized or otherwise belong to persons other than the
payees.Equitable Banking presented the checks directly to BDO for the purpose of claiming
reimbursement from the latter. However, BDO refused to accept such direct presentation
and to reimburse Equitable Banking for the value of the checks.

ISSUES

(a) Whether or not BDO is estopped from claiming that checks under consideration are non-
negotiable instruments.

(b) Whether or not BDO can escape liability by reasons of forgery.

(c) Whether or not only negotiable checks are within the jurisdiction of PCHC.
RULING

(a) YES. BDO having stamped its guarantee of all prior endorsements and/or lack of
endorsements is now estopped from claiming that the checks under consideration are not
negotiable instruments. The checks were accepted for deposit by the petitioner stamping
thereon its guarantee, in order that it can clear the said checks with the respondent bank. By
such deliberate and positive attitude of the petitioner it has for all legal intents and
purposes treated the said cheeks as negotiable instruments and accordingly assumed the
warranty of the endorser when it stamped its guarantee of prior endorsements at the back
of the checks. It led the said respondent to believe that it was acting as endorser of the
checks and on the strength of this guarantee said respondent cleared the checks in question
and credited the account of the petitioner. Petitioner is now barred from taking an opposite
posture by claiming that the disputed checks are not negotiable instrument.

(b) NO. A commercial bank cannot escape the liability of an endorser of a check and which
may turn out to be a forged endorsement. Whenever any bank treats the signature at the
back of the checks as endorsements and thus logically guarantees the same as such there
can be no doubt said bank has considered the checks as negotiable.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.

(c) NO. PCHCs jurisdiction is not limited to negotiable checks only. The term check as used
in the said Articles of Incorporation of PCHC can only connote checks in general use in
commercial and business activities. Thus, no distinction. Ubi lex non distinguit, nec nos
distinguere debemus. Checks are used between banks and bankers and their customers, and
are designed to facilitate banking operations. It is of the essence to be payable on demand,
because the contract between the banker and the customer is that the money is needed on
demand.

14) GEMPESAW V CA
Natividad Gempesaw is a businesswoman who entrusted to her bookkeeper, Alicia Galang,
the preparation of checks about to be issued in the course of her business transactions.
From 1984 to 1986, 82 checks amounting to P1,208,606.89, were prepared and were
supposed to be delivered to Gempesaws clients as payees named thereon. However,
through Galang, these checks were never delivered to the supposed payees. Instead, the
checks were fraudulently indorsed to Alfredo Romero and Benito Lam.
ISSUE: Whether or not the bank should refund the money lost by reason of the forged
indorsements.
HELD: No. Gempesaw cannot set up the defense of forgery by reason of her negligence. As a
rule, a drawee bank (in this case the Philippine Bank of Communications) who has paid a
check on which an indorsement has been forged cannot charge the drawers (Gempesaws)
account for the amount of said check. An exception to this rule is where the drawer is guilty
of such negligence which causes the bank to honor such a check or checks. If a check is
stolen from the payee, it is quite obvious that the drawer cannot possibly discover the
forged indorsement by mere examination of his cancelled check. A different situation arises
where the indorsement was forged by an employee or agent of the drawer, or done with the
active participation of the latter.
The negligence of a depositor which will prevent recovery of an unauthorized payment is
based on failure of the depositor to act as a prudent businessman would under the
circumstances. In the case at bar, Gempesaw relied implicitly upon the honesty and loyalty
of Galang, and did not even verify the accuracy of amounts of the checks she signed against
the invoices attached thereto. Furthermore, although she regularly received her bank
statements, she apparently did not carefully examine the same nor the check stubs and the
returned checks, and did not compare them with the same invoices. Otherwise, she could
have easily discovered the discrepancies between the checks and the documents serving as
bases for the checks. With such discovery, the subsequent forgeries would not have been
accomplished. It was not until two years after Galang commenced her fraudulent scheme
that Gempesaw discovered that eighty-two (82) checks were wrongfully charged to her
account, at which she notified the Philippine Bank of Communications.

15) ASSOCIATED BANK V CA

The Province of Tarlac was disbursing funds to Concepcion Emergency Hospital via checks
drawn against its account with the Philippine National Bank (PNB). These checks were
drawn payable to the order of Concepcion Emergency Hospital. Fausto Pangilinan was the
cashier of Concepcion Emergency Hospital in Tarlac until his retirement in 1978. He used to
handle checks issued by the provincial government of Tarlac to the said hospital. However,
after his retirement, the provincial government still delivered checks to him until its
discovery of this irregularity in 1981. By forging the signature of the chief payee of the
hospital (Dr. Adena Canlas), Pangilinan was able to deposit 30 checks amounting to P203k
to his account with the Associated Bank.
When the province of Tarlac discovered this irregularity, it demanded PNB to reimburse the
said amount. PNB in turn demanded Associated Bank to reimburse said amount. PNB
averred that Associated Bank is liable to reimburse because of its indorsement borne on the
face of the checks:
All prior endorsements guaranteed ASSOCIATED BANK.
ISSUE: What are the liabilities of each party?
HELD: The checks involved in this case are order instruments.
Liability of Associated Bank
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 holders indorsement is forged, all parties prior to
the forgery may raise the real defense of forgery against all parties subsequent thereto.
A collecting bank (in this case Associated Bank) where a check is deposited and which
indorses the check upon presentment with the drawee bank (PNB), is such an indorser. So
even if the indorsement on the check deposited by the bankss client is forged, Associated
Bank is bound by its warranties as an indorser and cannot set up the defense of forgery as
against the PNB.
EXCEPTION: If it can be shown that the drawee bank (PNB) unreasonably delayed in
notifying the collecting bank (Associated Bank) of the fact of the forgery so much so that the
latter can no longer collect reimbursement from the depositor-forger.
Liability of PNB
The bank on which a check is drawn, known as the drawee bank (PNB), is under strict
liability to pay the check to the order of the payee (Provincial Government of Tarlac).
Payment under a forged indorsement is not to the drawers 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 customers (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 drawers account and is not entitled to indemnification from
the drawer. The risk of loss must perforce fall on the drawee bank.
EXCEPTION: If the drawee bank (PNB) can prove a failure by the customer/drawer (Tarlac
Province) to exercise ordinary care that substantially contributed to the making of the
forged signature, the drawer is precluded from asserting the forgery.
In sum, by reason of Associated Banks indorsement and warranties of prior indorsements
as a party after the forgery, it is liable to refund the amount to PNB. The Province of Tarlac
can ask reimbursement from PNB because the Province is a party prior to the forgery.
Hence, the instrument is inoperative. HOWEVER, it has been proven that the Provincial
Government of Tarlac has been negligent in issuing the checks especially when it continued
to deliver the checks to Pangilinan even when he already retired. Due to this contributory
negligence, PNB is only ordered to pay 50% of the amount or half of P203 K.
BUT THEN AGAIN, since PNB can pass its loss to Associated Bank (by reason of Associated
Banks warranties), PNB can ask the 50% reimbursement from Associated Bank. Associated
Bank can ask reimbursement from Pangilinan but unfortunately in this case, the court did
not acquire jurisdiction over him.

16) METROBANK V FIRST NATIONAL CITY BANK

FACTS:

August 25, 1964: Check dated July 8, 1964 for P50,000.00, payable to CASH, drawn
by Joaquin Cunanan & Company on First National City Bank (FNCB) was deposited with
Metropolitan Bank and Trust Company (Metro Bank) by Salvador Sales.

Earlier that day, Sales had opened a current account with Metro Bank
depositing P500.00 in cash

Metro Bank immediately sent the cash check to the Clearing House of the
Central Bank with the following words stamped at the back of the check:

Metropolitan Bank and Trust Company Cleared (illegible) office All

prior endorsements and/or Lack of endorsements Guaranteed.

The check was cleared the same day. Private respondent paid petitioner
through clearing the amount of P50,000.00, and Sales was credited with the said
amount in his deposit with Metro Bank.

August 26, 1964: Sales made his 1st withdrawal of P480.00 from his current account
 August 28, 1964: he withdrew P32,100.00

August 31, 1964: he withdrew the balance of P17,920 and closed his account with
Metro Bank

September 3, 1964: FNCB returned cancelled Check to drawer Joaquin Cunanan &
Company, together with the monthly statement of the company's account with FNCB.

notified FNCB that the check had been altered

actual amount of P50.00 was raised to P50,000.00

name of the payee, Manila Polo Club, was superimposed the word
CASH.

September 10, 1964: FNCB wrote Metro Bank asking for reimbursement

June 29, 1965: FNCB filed for recovery

CA affirmed Trial Court: Metro Bank to reimburse FNCB

ISSUE: W/N Metrobank should reimsburse FNCB for the altered amount as indorser

HELD: NO. FNCB liable.

Under the procedure prescribed, the drawee bank receiving the check for clearing
from the Central Bank Clearing House must return the check to the collecting bank
within the 24-hour period if the check is defective for any reason. - FNCB failed to do so

indorsement must be read together with the 24-hour regulation on clearing

House Operations of the Central Bank

Metro Bank can not be held liable for the payment of the altered check.

Moreover, FNCB did not deny the allegation of Metro Bank that before it allowed the
withdrawal of the balance of P17,920.00 by Salvador Sales, Metro Bank withheld
payment and first verified, through its Assistant Cashier Federico Uy, the regularity and
genuineness of the check deposit from Marcelo Mirasol, Department Officer of FNCB,
because its (Metro Bank) attention was called by the fast movement of the account

17) REPUBLIC BANK V CA

Facts:
San Miguel Corporation drew a dividend check worth P240 on its account in First
National City Bank in favor of J. Roberto Delgado, a stock holder. The amount on its face was
fraudulently and without authority of the drawer, altered by increasing it from P240 to P9,
240. The check was indorsed and deposited by Delgado to his account with Republic bank.
Republic endorsed the check to FNCB and presented I for payment through the Central Bank
Clearing House. FNCB paid P9, 240 to the Republic through the Central Bank Clearing
House. SMC notified FNCB of trhe material alteration in the check in question. FNCB
informed Republic with regard to the alteration nand forgery of the endorsement of
Delgado. By the, Delgado had already withdrawn his account from the republic. FNCB
demanded that Republic refund the P9, 240. Trial court rendered judgment in favor of FNCB
and it was affirmed by the Court of Appeals.

Issue:
Whether Republic, as the collecting bank, is protected, by 24-hour clearing house rule,
found in CB circular No. 9, as amended, from liability to refund the amount paid by FNCB, as
drawee of the SMC dividend check.

Held:
No. The 24-hour clearing house rule is valid rule applicable to commercial banks. It is
true that when an indorsement is forged, the collecting bank or last endorser, as general
rule, bears the loss. But the unqualified endorsement of the collecting bank on the check
should be read together with the 24-hour regulation on the clearing house operation. Thus,
when the drawee bank fails to return a forged or altered check to the collecting bank is
absolved from liability. Unless an alteration is attributable to the fault or negligence of the
drawer himself, such as when he leaves spaces on the check which would allow the
fraudulent insertion of additional numerals in the amount appearing thereon, the remedy of
the drawee bank that negligently clears a forged and/or honor altered check for payment is
against the party responsible for the forgery or alteration, otherwise, it bears the loss. It
may not charge the amount so paid to the account of the drawer, if the latter was free from
blame, nor recover it from the collecting bank is the latter made payment after proper
clearance from the drawee.

18) PHILIPPINE COMMERCIAL INTERNATIONAL BANK V CA

There are three cases consolidated here: G.R. No. 121413 (PCIB vs CA and Ford and
Citibank), G.R. No. 121479 (Ford vs CA and Citibank and PCIB), and G.R. No. 128604 (Ford vs
Citibank and PCIB and CA).
G.R. No. 121413/G.R. No. 121479
In October 1977, Ford Philippines drew a Citibank check in the amount of P4,746,114.41 in
favor of the Commissioner of the Internal Revenue (CIR). The check represents Fords tax
payment for the third quarter of 1977. On the face of the check was written Payees account
only which means that the check cannot be encashed and can only be deposited with the
CIRs savings account (which is with Metrobank). The said check was however presented to
PCIB and PCIB accepted the same. PCIB then indorsed the check for clearing to Citibank.
Citibank cleared the check and paid PCIB P4,746,114.41. CIR later informed Ford that it
never received the tax payment.
An investigation ensued and it was discovered that Fords accountant Godofredo Rivera,
when the check was deposited with PCIB, recalled the check since there was allegedly an
error in the computation of the tax to be paid. PCIB, as instructed by Rivera, replaced the
check with two of its managers checks.
It was further discovered that Rivera was actually a member of a syndicate and the
managers checks were subsequently deposited with the Pacific Banking Corporation by
other members of the syndicate. Thereafter, Rivera and the other members became fugitives
of justice.
G.R. No. 128604
In July 1978 and in April 1979, Ford drew two checks in the amounts of P5,851,706.37 and
P6,311,591.73 respectively. Both checks are again for tax payments. Both checks are for
Payees account only or for the CIRs bank savings account only with Metrobank. Again,
these checks never reached the CIR.
In an investigation, it was found that these checks were embezzled by the same syndicate to
which Rivera was a member. It was established that an employee of PCIB, also a member of
the syndicate, created a PCIB account under a fictitious name upon which the two checks,
through high end manipulation, were deposited. PCIB unwittingly endorsed the checks to
Citibank which the latter cleared. Upon clearing, the amount was withdrawn from the
fictitious account by syndicate members.
ISSUE: What are the liabilities of each party?
HELD: G.R. No. 121413/G.R. No. 121479
PCIB is liable for the amount of the check (P4,746,114.41). PCIB, as a collecting bank has
been negligent in verifying the authority of Rivera to negotiate the check. It failed to
ascertain whether or not Rivera can validly recall the check and have them be replaced with
PCIBs managers checks as in fact, Ford has no knowledge and did not authorize such. A
bank (in this case PCIB) which cashes a check drawn upon another bank (in this case
Citibank), without requiring proof as to the identity of persons presenting it, or making
inquiries with regard to them, cannot hold the proceeds against the drawee when the
proceeds of the checks were afterwards diverted to the hands of a third party. Hence, PCIB is
liable for the amount of the embezzled check.
G.R. No. 128604
PCIB and Citibank are liable for the amount of the checks on a 50-50 basis.
As a general rule, a bank is liable for the negligent or tortuous act of its employees within
the course and apparent scope of their employment or authority. Hence, PCIB is liable for
the fraudulent act of its employee who set up the savings account under a fictitious name.
Citibank is likewise liable because it was negligent in the performance of its obligations with
respect to its agreement with Ford. The checks which were drawn against Fords account
with Citibank clearly states that they are payable to the CIR only yet Citibank delivered said
payments to PCIB. Citibank however argues that the checks were indorsed by PCIB to
Citibank and that the latter has nothing to do but to pay it. The Supreme Court cited Section
62 of the Negotiable Instruments Law which mandates the Citibank, as an acceptor of the
checks, to engage in paying the checks according to the tenor of the acceptance which is to
deliver the payment to the payees account only.
But the Supreme Court ruled that in the consolidated cases, that PCIB and Citibank are not
the only negligent parties. Ford is also negligent for failing to examine its passbook in a
timely manner which could have avoided further loss. But this negligence is not the
proximate cause of the loss but is merely contributory. Nevertheless, this mitigates the
liability of PCIB and Citibank hence the rate of interest, with which PCIB and Citibank is to
pay Ford, is lowered from 12% to 6% per annum.