ASSOCIATED BANK (Now WESTMONT BANK) vs.

TAN
G.R. No. 156940 December 14, 2004
FACTS:
Respondent Tan is a businessman and a regular depositor-creditor of the petitioner,
Associated Bank. Sometime in September 1990, he deposited a postdated check with the
petitioner in the amount of P101,000 issued to him by a certain Willy Cheng from Tarlac. The
check was duly entered in his bank record. Allegedly, upon advice and instruction of petitioner
that theP101,000 check was already cleared and backed up by sufficient funds, respondent, on
the same date, withdrew the sum of P240,000 from his account leaving a balance of P57,793.45.
A day after, TAN deposited the amount of P50,000 making his existing balance in the amount of
P107,793.45, because he has issued several checks to his business partners. However, his
suppliers and business partners went back to him alleging that the checks he issued bounced
for insufficiency of funds. Thereafter, respondent informed petitioner to take positive steps
regarding the matter for he has adequate and sufficient funds to pay the amount of the subject
checks. Nonetheless, petitioner did not bother nor offer any apology regarding the incident.
Respondent Tan filed a Complaint for Damages on December 19, 1990, with the RTC against
petitioner. The trial court rendered a decision in favor of respondent and ordered petitioner to
pay damages and attorney’s fees. Appellate court affirmed the lower court’s decision. CA ruled
that the bank should not have authorized the withdrawal of the value of the deposited check prior
to its clearing. Petitioner filed a Petition for Review before the Supreme Court.
ISSUE:
W/N petitioner has the right to debit the amount of the dishonored check from the account of
respondent on the ground that the check was withdrawn by respondent prior to its clearing
HELD:
The Petition has no merit.
The real issue here is not so much the right of petitioner to debit respondent’s account but,
rather, the manner in which it exercised such right. Banks are granted by law the right to debit
the value of a dishonored check from a depositor’s account but they must do so with the highest
degree of care, so as not to prejudice the depositor unduly. The degree of diligence required of
banks is more than that of a good father of a family where the fiduciary nature of their relationship
with their depositors is concerned. In this case, petitioner did not treat respondent’s account
with the highest degree of care. Respondent withdrew his money upon the advice of petitioner
that his money was already cleared. It is petitioner’s premature authorization of the withdrawal
that caused the respondent’s account balance to fall to insufficient levels, and the subsequent
dishonor of his own checks for lack of funds.
Negotiable Instruments Case Digest: Gonzales V. RCBC (2006)
G.R. No. 156294 November 29, 2006
Lessons Applicable: Right of the holder (Negotiable Instruments Law)
FACTS:
 Gonzales, New Accounts Clerk in the Retail Banking Department at RCBC Head Office
 Dr. Don Zapanta of the Ade Medical Group drew a foreign check of $7,500 against the
drawee bank Wilshire Center Bank, LA, California payable to Eva Alviar (Alviar),
Gonzales mother.
 Alviar then endorsed this check.
 Since RCBC gives special accommodations to its employees to receive the check’s value
w/o awaiting the clearing period, Gonzales presented the foreign check to Olivia Gomez,
the RCBC’s Head of Retail Banking
 Olivia Gomez requested Gonzales to endorse it which she did. Olivia Gomez then
acquiesced to the early encashment of the check and signed the check but indicated
thereon her authority of "up to P17,500.00 only".
 Carlos Ramos signed it with an "ok" annotation.
 Presented the check to Rolando Zornosa, Supervisor of the Remittance section of the
Foreign Department of the RCBC Head Office, who after scrutinizing the entries and
signatures authorized its encashment.
 Gonzales received its peso equivalent P155,270.85
 RCBC tried to collect through its correspondent bank, the First Interstate Bank of
California but it was dishonored the check because:
 "END. IRREG" or irregular indorsemen
 "account closed"
 Unable to collect, RCBC demanded from Gonzales
 November 27, 1987: Through letter Gonzales agreed that the payment be made thru
salary deduction.
 October 1987: deductions started
 March 7, 1988: RCBC sent a demand letter to Alviar for the payment but she did not
respond
 June 16, 1988: a letter was sent to Gonzales reminding her of her liability as an indorser
 July 1988: Gonzales resigned from RCBC paying only P12,822.20 covering 10 months
 RCBC filed a complaint for a sum of money against Eva Alviar, Melva Theresa Alviar-
Gonzales and the latter’s husband Gino Gonzales
 CA Affirmed RTC: liable Eva Alviar as principal debtor and Melva Theresa Alviar-
Gonzales as guarantor
ISSUE: W/N Eva Alviar and Melva Theresa Alvia-Gonzales is liable as general endorsers
HELD: NO. CA REVERSED. RCBC reimburse Gonzales
Sec. 66. Liability of general indorser. - Every indorser who indorses without qualification,
warrants to all subsequent holders in due course
The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section;
(a) That the instrument is genuine and in all respects what it purports to be
(b) That he has a good title to it
(c) That all prior parties had capacity to contract
2. That the instrument is, at the time of his indorsement, valid and subsisting
In addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the
case may be, according to its tenor, and that if it be dishonored and the necessary
proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to
any subsequent indorser who may be compelled to pay it
Under Section 66, the warranties for which Alviar and Gonzales are liable as general endorsers
in favor of subsequent endorsers extend only to the state of the instrument at the time of their
endorsements,
This provision cannot be used by the party which introduced a defect on the instrument (RCBC)
w/c qualifiedly endorsed it
Had it not been for the qualified endorsement "up to P17,500.00 only" of Olivia Gomez, who is
the employee of RCBC, there would have been no reason for the dishonor of the check
The holder or subsequent endorser who tries to claim under the instrument which had been
dishonored for "irregular endorsement" must not be the irregular endorser himself who gave
cause for the dishonor.
Otherwise, a clear injustice results when any subsequent party to the instrument may simply
make the instrument defective and later claim from prior endorsers who have no knowledge or
participation in causing or introducing said defect to the instrument, which thereby caused its
dishonor.
ASSOCIATED BANK V. CA 252 SCRA 620
FACTS:
The province of Tarlac maintains an account with PNB-Tarlac. Part of its funds is
appropriated for the benefit of Concepcion Emergency Hospital. During a post-audit done
by the province, it was found out that 30 of its checks weren’t received by the hospital. Upon
further investigation, it was found out that the checks were encashed by Pangilinan who was a
former cashier and administrative officer of the hospital through forged indorsements.
This prompted the provincial treasurer to ask for reimbursement from PNB and
thereafter, PNB from Associated Bank. As the two banks didn't want to reimburse, an action
was filed against them.
HELD:
There is a distinction on forged indorsements with regard bearer instruments and
instruments payable to order.
With instruments payable to bearer, 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 holder in due course.
In instruments payable to order, the signature of the rightful holder is essential to transfer
title to the same instrument. When the holder’s signature is forged, all parties prior to
the forgery may raise the real defense of forgery against all parties subsequent thereto. In
connection to this, an indorser warrants that the instrument is genuine. A collecting bank
is such an indorser. So even if the indorsement 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.
Furthermore, in cases involving checks with forged indorsements, such as the case at bar,
the chain of liability doesn't 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, the forger himself, if available. In
other words, the drawee bank can seek reimbursement or a return of the amount it paid from
the collecting bank or person. The collecting bank generally suffers the loss because it
has te 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 indorsements.
With regard the issue of delay, a delay in informing the bank of the forgery, which
deprives it of the opportunity to go after the forger, signifies negligence on the part of the
drawee bank and will preclude it from claiming reimbursement. In this case, PNB wasn't
guilty of any negligent delay. Its delay hasn't prejudiced Associated Bank in any way
because even if there wasn't delay, the fact that there was nothing left of the account of
Pangilinan, there couldn't be anymore reimbursement.

ASSOCIATED BANK V. CA 252 SCRA 620

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 holder’s 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 banks’s 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 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.

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 Bank’s 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
Bank’s 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.