Negotiable Instruments Case Digest: Republic v. Ebrada (1975)

G.R. No. L-40796 July 31, 1975
Lessons Applicable: Forgery (Negotiable Instruments Law)

FACTS: * February 27, 1963: Mauricia T. Ebrada, encashed Back Pay Check dated January 15, 1963 for P1,246.08 at Republic Bank

* check was issued by the Bureau of Treasury

* Bureau advised Republic Bank that the indorsement on the reverse side of the check by the payee, "Martin Lorenzo" was a forgery because he died as of July 14, 1952 and requested a refund

* July 11, 1966: Ebrada filed a Third-Party complaint against Adelaida Dominguez who, in turn, filed on September 14, 1966 a Fourth-Party complaint against Justina Tinio.

* March 21, 1967: City Court of Manila favored Republic against Ebrada, for Third-Party plaintiff against Adelaida Dominguez, and for Fourth-Party plaintiff against Justina Tinio

* CA: reversed Mauricia T. Ebrada claim against Adelaida Dominguez and Domiguez against Justina Tinio

W/N: Ebrada should be held liable.

HELD: YES. Affirmed in toto. * under Section 65 of the Negotiable Instruments Law:

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. xxx xxx xxx
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. * Under action 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. * Martin Lorenzo (forged as original payee) > Ramon R. Lorenzo (2nd indorser) = NO EFFECT

* Ramon R. Lorenzo(2nd indorser)> Adelaida Dominguez (third indorser)>Adelaida Dominguez to Ebrada who did not know of the forgery = valid and enforceable barring any claim of forgery

* drawee of a check can recover from the holder the money paid to him on a forged instrument

* not its duty to ascertain whether the signatures of the payee or indorsers are genuine or not

* indorser is supposed to warrant to the drawee that the signatures of the payee and previous indorsers (NOT only holders in due course) are genuine

* RATIONALE: . indorsers 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

* Ebrada , upon receiving the check in question from Adelaida Dominguez, was duty-bound to ascertain whether the check in question was genuine before presenting it to plaintiff Bank for payment

* Based on the doctrine from Great Eastern Life Ins. Co. v. Hongkong Shanghai Bank (1922) , 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 Ebrada the amount it paid

* Ebrada immediately turning over 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):

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.

Negotiable Instruments Case Digest: Ang Tiong v. Ting (1968)
G.R. No. L-26767 February 22, 1968

Lessons Applicable: General Indorser (Negotiable Instrurments)

Laws Applicable: Section 63 of the Negotiable Instruments Law

FACTS: * August 15, 1960: Lorenzo Ting issued Philippine Bank of Communications check K-81618, w/ sum of P4,000, payable to "cash or bearer" * With Felipe Ang's signature (indorsement in blank) at the back thereof, the instrument was received by the Ang Tiong who presented it to the drawee bank for payment but it was dishonored * Ting made a written demand to both Ting and Ang to no avail * March 6, 1962: Municipal Court of Manila favored Tiong against Ting and Ang * CA: ordered Ang to pay with interest * Ang contends that he is an accomodating indorser
ISSUE: W/N Ang is an accomodating indorser and not a general indorser a

HELD: NO. Affirmed * Section 63 of the Negotiable Instruments Law: a person placing his signature upon an instrument otherwise than as maker, drawer or acceptor = a general indorser, — unless he clearly indicates plaintiff appropriate words his intention to be bound in some other capacity * warrants: * (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 have capacity to contract; and * (d) that the instrument is at the time of his indorsement valid and subsisting * Even on the assumption that the appellant is a mere accommodation party, as he professes to be, he is by the clear mandate of section 29 of the Negotiable Instruments Law, "liable on the instrument to a holder for value, notwithstanding that such holder at the time of taking the instrument knew him to be only an accommodation party." * It is not a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument. * Nor is it correct to say that the holder for value is not a holder in due course merely because at the time he acquired the instrument, he knew that the indorser was only an accommodation party. * assuming him to be an accommodation indorser, may obtain security from the maker to protect himself against the danger of insolvency of the latter, cannot in any manner affect his liability to the Tiong, as the said remedy is a matter of concern exclusively between accommodation indorser and accommodated party. * The liability of the appellant remains primary and unconditional.

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-16477 November 22, 1921
R. N. CLARK, plaintiff-appellant, vs. GEORGE C. SELLNER, defendant-appellee.
Wolfson, Wolfson & Schwarzkopf for appellant.
Williams & Ferrier for appellee.

ROMUALDEZ, J.:
The defendant, in conjunction with two other persons, signed the following note in favor of the plaintiff:
P12,000.00 MANILA, July 1, 1914.
Six months after date, for value received, we jointly and severally promise to pay to the order of R. N. Clark at his office in the city of Manila, the sum of twelve thousand pesos, Philippine currency, with interest thereon in like currency from date until paid at the rate of ten per cent per annum, payable quarterly.
If suit is necessary to collect this note, we hereby agree to pay as attorney's fees ten per centum of the amount found due.
(Sgd.) W. H. CLARKE,
[INTERNAL REVENUE JOHN MAYE. STAMP.] By W. H. CLARKE, his attorney.
GEO. C. SELLNER."
The note matured, but its amount was not paid.
Counsel for the defendant allege that the latter did not receive in that transaction either the whole or any part of the amount of the debt; that the instrument was not presented to the defendant for payment; and that the defendant, being an accommodation party, is not liable unless the note is negotiated, which was not done, as shown by the evidence.
With regard to the first point, the liability of the defendant, as one of the signers of the note, is not dependent on whether he has, or has not, received any part of the amount of the debt. The defendant is really and expressly one of the joint and several debtors on the note, and as such he is liable under the provisions of section 60 of Act No. 2031, entitled The Negotiable Instruments Law, which provisions should be applied in this case in view of the character of the instrument.
As to presentment for payment, such action is not necessary in order to charge the person primarily liable, as is the defendant. (Sec. 70, Act No. 2031.)
And as to whether or not the defendant is an accommodation party, it should be taken into account that by putting his signature to the note, he lent his name, not to the creditor, but to those who signed with him placing himself with respect to the creditor in the same position and with the same liability as the said signers. It should be noted that the phrase "without receiving value therefor," as used in section 29 of the aforesaid Act, means "without receiving value by virtue of the instrument" and not, as it apparently is supposed to mean, "without receiving payment for lending his name." If, as in the instant case, a sum of money was received by virtue of the note, it is immaterial, so far as the creditor is concerned, whether one of the singers has, or has not, received anything in payment of the use of his name. In reality the legal situation of the defendant in this case may properly be regarded as that of a joint surety rather than that of an accommodation party. The defendant, as a joint surety, may, upon the maturity of the note, pay the debt, demand the collateral security and dispose of it to his benefit; but there is no proof whatever that this was done. As to the plaintiff, he is the "holder for value," under the phrase of said section 29, for he had paid the money to the signers at the time the note was executed and delivered to him. Who is the "holder" is defined in section 191 of the said law thus:
"Holder" means the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof.
And as such holder, he has the right to demand payment of the debt from the signer of the note, even though he knows that said person is merely an accommodation party (section 29 above cited), assuming the defendant to be such, which, as has been stated, is not the case.
The trial judge took into account the fact that at the time of the maturity of the note, the collateral security given to guarantee the payment was worth more than what was due on the note, but it depreciated to such an extent that, at the time of the institution of this action, it was entirely valueless. And taking this circumstance, together with the fact that this case was not commenced until after the lapse of four years from the date on which the payment fell due, and with the further fact that the defendant had not received any part of the amount mentioned in the note, he was of the opinion, and so decided, that the defendant could not be held liable. The theory of the judge a quo was that the plaintiff's failure to enforce the guaranty for the payment of the debt, and his delay in instituting this action constitute laches, which had the effect of extinguishing his right of action.
We see no sufficient ground for applying such a theory to the case before us. As stated, the defendant's position being, as it is, that of a joint surety, he may, at any time after the maturity of the note, make payment, thus subrogating himself in the place of the creditor with the right to enforce the guaranty against the other signers of the note for the reimbursement of what he is entitled to recover from them. The mere delay of the creditor in enforcing the guaranty has not by any means impaired his action against the defendant. It should not be lost sight of that the defendant's signature on the note is an assurance to the creditor that the collateral guaranty will remain good, and that otherwise, he, the defendant, will be personally responsible for the payment.
True, that if the creditor had done any act whereby the guaranty was impaired in its value, or discharged, such an act would have wholly or partially released the surety; but it must be born in mind that it is a recognized doctrine in the matter of suretyship that with respect to the surety, the creditor is under no obligation to display any diligence in the enforcement of his rights as a creditor. His mere inaction, indulgence, passiveness, or delay in proceeding against the principal debtor, or the fact that he did not enforce the guaranty or apply on the payment of such funds as were available, constitute no defense at all for the surety, unless the contract expressly requires diligence and promptness on the part of the creditor, which is not the case in the present action. There is in some decisions a tendency toward holding that the creditor's laches may discharge the surety, meaning by laches a negligent forbearance. This theory, however, is not generally accepted and the courts almost universally consider it essentially inconsistent with the relation of the parties to the note. (21 R. C. L., 1032-1034.)
We find that in the judgment appealed from there were committed the errors assigned, and that the defendant is under obligation to pay the plaintiff the amount of the debt, as prayed for in the complaint.lawphil.net
The judgment appealed from must, therefore, be, as is hereby, reversed. Let an order be issued to the effect that the plaintiff have and recover from the defendant the sum of twelve thousand pesos (P12,000), as principal debt, plus one thousand two hundred pesos (P1,200), the sum agreed upon as attorney's fees, and 10 per cent interest on the principal debt from July 1, 1914, until it is fully paid, deducting therefrom the sum of three hundred pesos (P300) already paid on account, as stated in the complaint.
This decision is rendered without special pronouncement as to costs. So ordered.
Araullo, C.J., Street, Malcolm, Avanceña and Villamor, JJ., concur.
Johnson, J., took no part.
Vicente De Ocampo vs Anita Gatchalian
<HTML><META HTTP-EQUIV="content-type" CONTENT="text/html;charset=utf-8"><P style="text-align: center;">Republic of the Philippines<BR><STRONG>SUPREME COURT</STRONG><BR> Manila</P><P style="text-align: center;">EN BANC</P><P><STRONG>G.R. No. L-15126 </STRONG>November 30, 1961</P><P><STRONG>VICENTE R. DE OCAMPO &amp; CO.,</STRONG> <EM>plaintiff-appellee</EM>,</P><P>vs.</P><P><STRONG>ANITA GATCHALIAN, ET AL.,</STRONG> <EM>defendants-appellants</EM>.</P><P><EM>Vicente Formoso, Jr. for plaintiff-appellee.<BR> Reyes and Pangalañgan for defendants-appellants.</EM></P><P> </P><P style="text-align: center;"><STRONG>D E C I S I O N</STRONG></P><P><EM>LABRADOR, J.:</EM></P><P>Appeal from a judgment of the Court of First Instance of Manila, Hon. Conrado M. Velasquez, presiding, sentencing the defendants to pay the plaintiff the sum of P600, with legal interest from September 10, 1953 until paid, and to pay the costs.</P><P>The action is for the recovery of the value of <SPAN class="IL_AD" id="IL_AD1">a check</SPAN> for P600 payable to the plaintiff and drawn by defendant Anita C. Gatchalian. The complaint sets forth the check and alleges that plaintiff received it in payment of the indebtedness of one Matilde Gonzales; that upon receipt of said check, plaintiff gave Matilde Gonzales P158.25, the difference between the face value of the check and Matilde Gonzales’ indebtedness. The defendants admit the execution of the check but they allege in their <SPAN class="IL_AD" id="IL_AD2">answer</SPAN>, as affirmative defense, that it was issued subject to a condition, which was not fulfilled, and that plaintiff was guilty of gross negligence in not taking steps to protect itself.</P><P>At the time of the trial, the parties submitted a stipulation of facts, which reads as follows:</P><P style="padding-left: 30px;">Plaintiff and defendants through their respective undersigned attorney’s respectfully submit the following Agreed Stipulation of Facts;</P><P style="padding-left: 30px;"><EM>First</EM>. — That on or about 8 September 1953, in the evening, defendant Anita C. Gatchalian who was then interested in looking for a car for the use of her husband and the family, was shown and offered a car by Manuel Gonzales who was accompanied by Emil Fajardo, the latter being personally known to defendant Anita C. Gatchalian;</P><P style="padding-left: 30px;"><EM>Second</EM>. — That Manuel Gonzales represented to defend Anita C. Gatchalian that he was duly authorized by the owner of the car, Ocampo Clinic, to look for a buyer of said car and to negotiate for and accomplish said sale, but which facts were not known to plaintiff;</P><P style="padding-left: 30px;"><EM>Third</EM>. — That defendant Anita C. Gatchalian, finding the price of the car quoted by Manuel Gonzales to her satisfaction, requested Manuel Gonzales to bring the car the day following together with the certificate of registration of the car, so that her husband would be able to see same; that on this request of defendant Anita C. Gatchalian, Manuel Gonzales advised her that the owner of the car will not be willing to give the certificate of registration unless there is a showing that the party interested in the purchase of said car is ready and willing to make such purchase and that for this purpose Manuel Gonzales requested defendant Anita C. Gatchalian to give him (Manuel Gonzales) a check which will be shown to the owner as evidence of buyer’s good faith in the intention to purchase the said car, the said check to be for safekeeping only of Manuel Gonzales and to be returned to defendant Anita C. Gatchalian the following day when Manuel Gonzales brings the car and the certificate of registration, but which facts were not known to plaintiff;</P><P style="padding-left: 30px;"><EM>Fourth</EM>. — That relying on these representations of Manuel Gonzales and with his assurance that said check will be only for safekeeping and which will be returned to said defendant the following day when the car and its certificate of registration will be brought by Manuel Gonzales to defendants, but which facts were not known to plaintiff, defendant Anita C. Gatchalian drew and issued a check, Exh. “B”; that Manuel Gonzales executed and issued a receipt for said check, Exh. “1”;</P><P style="padding-left: 30px;"><EM>Fifth</EM>. — That on the failure of Manuel Gonzales to appear the day following and on his failure to bring the car and its certificate of registration and to return the check, Exh. “B”, on the following day as previously agreed upon, defendant Anita C. Gatchalian issued a “Stop Payment Order” on the check, Exh. “3”, with the drawee bank. Said “Stop Payment Order” was issued without previous notice on plaintiff not being know to defendant, Anita C. Gatchalian and who furthermore had no reason to know check was given to plaintiff;</P><P style="padding-left: 30px;"><EM>Sixth</EM>. — That defendants, both or either of them, did not know personally Manuel Gonzales or any member of his family at any time prior to September 1953, but that defendant Hipolito Gatchalian is personally acquainted with V. R. de Ocampo;</P><P style="padding-left: 30px;"><EM>Seventh</EM>. — That defendants, both or either of them, had no arrangements or agreement with the Ocampo Clinic at any time prior to, on or after 9 September 1953 for the hospitalization of the wife of Manuel Gonzales and neither or both of said defendants had assumed, expressly or impliedly, with the Ocampo Clinic, the obligation of Manuel Gonzales or his wife for the hospitalization of the latter;</P><P style="padding-left: 30px;"><EM>Eight</EM>. — That defendants, both or either of them, had no obligation or liability, directly or indirectly with the Ocampo Clinic before, or on 9 September 1953;</P><P style="padding-left: 30px;"><EM>Ninth</EM>. — That Manuel Gonzales having received the check Exh. “B” from defendant Anita C. Gatchalian under the representations and conditions herein above specified, delivered the same to the Ocampo Clinic, in payment of the fees and expenses arising from the hospitalization of his wife;</P><P style="padding-left: 30px;"><EM>Tenth</EM>. — That plaintiff for and in consideration of fees and expenses of hospitalization and the release of the wife of Manuel Gonzales from its hospital, accepted said check, applying P441.75 (Exhibit “A”) thereof to payment of said fees and expenses and delivering to Manuel Gonzales the amount of P158.25 (as per receipt, Exhibit “D”) representing the balance on the amount of the said check, Exh. “B”;</P><P style="padding-left: 30px;"><EM>Eleventh</EM>. — That the acts of acceptance of the check and application of its proceeds in the manner specified above were made without previous inquiry by plaintiff from defendants:</P><P style="padding-left: 30px;"><EM>Twelfth</EM>. — That plaintiff filed or caused to be filed with the Office of the City Fiscal of Manila, a complaint for estafa <SPAN class="IL_AD" id="IL_AD3">against</SPAN> Manuel Gonzales based on and arising from the acts of said Manuel Gonzales in paying his obligations with plaintiff and receiving the cash balance of the check, Exh. “B” and that said complaint was subsequently dropped;</P><P style="padding-left: 30px;"><EM>Thirteenth</EM>. — That the exhibits mentioned in this stipulation and the other exhibits submitted previously, be considered as parts of this stipulation, without necessity of formally offering them in evidence;</P><P style="padding-left: 30px;">WHEREFORE, it is most respectfully prayed that this agreed stipulation of facts be admitted and that the parties hereto be given fifteen days from today within which to submit simultaneously their memorandum to discuss the issues of law arising from the facts, reserving to either party the right to submit reply memorandum, if necessary, within ten days from receipt of their main memoranda. (pp. 21-25, Defendant’s Record on Appeal).</P><P>No other evidence was submitted and upon said stipulation the court rendered the judgment already alluded above.</P><P>In their appeal defendants-appellants contend that the check is not a negotiable instrument, under the facts and circumstances stated in the stipulation of facts, and that plaintiff is not a holder in due course. In support of the first contention, it is argued that defendant Gatchalian had no intention to transfer her property in the instrument as it was for safekeeping merely and, therefore, there was no delivery required by law (Section 16, Negotiable Instruments Law); that assuming for the sake of argument that delivery was not for safekeeping merely, delivery was conditional and the condition was not fulfilled.</P><P>In support of the contention that plaintiff-appellee is not a holder in due course, the appellant argues that plaintiff-appellee cannot be a holder in due course because there was no negotiation prior to plaintiff-appellee’s acquiring the possession of the check; that a holder in due course presupposes a prior party from whose hands negotiation proceeded, and in the case at bar, plaintiff-appellee is the payee, the maker and the payee being original parties. It is also claimed that the plaintiff-appellee is not a holder in due course because it acquired the check with notice of defect in the title of the holder, Manuel Gonzales, and because under the circumstances stated in the stipulation of facts there were circumstances that brought suspicion about Gonzales’ possession and negotiation, which circumstances should have placed the plaintiff-appellee under the duty, to inquire into the title of the holder. The circumstances are as follows:</P><P style="padding-left: 30px;">The check is not a personal check of Manuel Gonzales. (Paragraph Ninth, Stipulation of Facts). Plaintiff could have inquired why a person would use the check of another to pay his own debt. Furthermore, plaintiff had the “means of knowledge” inasmuch as defendant Hipolito Gatchalian is personally acquainted with V. R. de Ocampo (Paragraph Sixth, Stipulation of Facts).</P><P style="padding-left: 30px;">The maker Anita C. Gatchalian is a complete stranger to Manuel Gonzales and Dr. V. R. de Ocampo (Paragraph Sixth, Stipulation of Facts).</P><P style="padding-left: 30px;">The maker is not in any manner obligated to Ocampo Clinic nor to Manuel Gonzales. (Par. 7, Stipulation of Facts.)</P><P style="padding-left: 30px;">The check could not have been intended to pay the hospital fees which amounted only to P441.75. The check is in the amount of P600.00, which is in excess of the amount due plaintiff. (Par. 10, Stipulation of Facts).</P><P style="padding-left: 30px;">It was necessary for plaintiff to give Manuel Gonzales change in the sum P158.25 (Par. 10, Stipulation of Facts). Since Manuel Gonzales is the party obliged to pay, plaintiff should have been more cautious and wary in accepting a piece of paper and disbursing cold cash.</P><P style="padding-left: 30px;">The check is payable to bearer. Hence, any person who holds it should have been subjected to inquiries. EVEN IN A BANK, CHECKS ARE NOT CASHED WITHOUT INQUIRY FROM THE BEARER. The same inquiries should have been made by plaintiff. (Defendants-appellants’ brief, pp. 52-53)</P><P>Answering the first contention of appellant, counsel for plaintiff-appellee argues that in accordance with the best authority on the Negotiable Instruments Law, plaintiff-appellee may be considered as a holder in due course, citing Brannan’s Negotiable Instruments Law, 6th edition, page 252. On this issue Brannan holds that a payee may be a holder in due course and says that to this effect is the greater weight of authority, thus:</P><P style="padding-left: 30px;">Whether the payee may be a holder in due course under the N. I. L., as he was at common law, is a question upon which the courts are in serious conflict. There can be no doubt that a proper interpretation of the act read as a whole leads to the conclusion that a payee may be a holder in due course under any circumstance in which he meets the requirements of Sec. 52.</P><P style="padding-left: 30px;">The argument of Professor Brannan in an earlier edition of this work has never been successfully answered and is here repeated.</P><P style="padding-left: 30px;">Section 191 defines “holder” as the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. Sec. 52 defendants defines a holder in due course as “a holder who has taken the instrument under the following conditions: 1. That it is complete and regular on its face. 2. That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact. 3. That he took it in good faith and for value. 4. That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.”</P><P style="padding-left: 30px;">Since “holder”, as defined in sec. 191, includes a payee who is in possession the word holder in the first clause of sec. 52 and in the second subsection may be replaced by the definition in sec. 191 so as to read “a holder in due course is a payee or indorsee who is in possession,” etc. (Brannan’s on Negotiable Instruments Law, 6th ed., p. 543).</P><P>The first argument of the defendants-appellants, therefore, depends upon whether or not the plaintiff-appellee is a holder in due course. If it is such a holder in due course, it is immaterial that it was the payee and an immediate party to the instrument.</P><P>The other contention of the plaintiff is that there has been no negotiation of the instrument, because the drawer did not deliver the instrument to Manuel Gonzales with the intention of negotiating the same, or for the purpose of giving effect thereto, for as the stipulation of facts declares the check was to remain in the possession Manuel Gonzales, and was not to be negotiated, but was to serve merely as evidence of good faith of defendants in their desire to purchase the car being sold to them. Admitting that such was the intention of the drawer of the check when she delivered it to Manuel Gonzales, it was no fault of the plaintiff-appellee drawee if Manuel Gonzales delivered the check or negotiated it. As the check was payable to the plaintiff-appellee, and was entrusted to Manuel Gonzales by Gatchalian, the delivery to Manuel Gonzales was a delivery by the drawer to his own agent; in other words, Manuel Gonzales was the agent of the drawer Anita Gatchalian insofar as the possession of the check is concerned. So, when the agent of drawer Manuel Gonzales negotiated the check with the intention of getting its value from plaintiff-appellee, negotiation took place through no fault of the plaintiff-appellee, unless it can be shown that the plaintiff-appellee should be considered as having notice of the defect in the possession of the holder Manuel Gonzales. Our resolution of this issue leads us to a consideration of the last question presented by the appellants, i.e., whether the plaintiff-appellee may be considered as a holder in due course.</P><P>Section 52, Negotiable Instruments Law, defines holder in due course, thus:</P><P style="padding-left: 30px;">A holder in due course is a holder who has taken the instrument under the following conditions:</P><P style="padding-left: 60px;">(a) That it is complete and regular upon its face;</P><P style="padding-left: 60px;">(b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact;</P><P style="padding-left: 60px;">(c) That he took it in good faith and for value;</P><P style="padding-left: 60px;">(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.</P><P>The stipulation of facts expressly states that plaintiff-appellee was not aware of the circumstances under which the check was delivered to Manuel Gonzales, but we agree with the defendants-appellants that the circumstances indicated by them in their briefs, such as the fact that appellants had no obligation or liability to the Ocampo Clinic; that the amount of the check did not correspond exactly with the obligation of Matilde Gonzales to Dr. V. R. de Ocampo; and that the check had two parallel lines in the upper left hand corner, which practice means that the check could only be deposited but may not be converted into cash — all these circumstances should have put the plaintiff-appellee to inquiry as to the why and wherefore of the possession of the check by Manuel Gonzales, and why he used it to pay Matilde’s account. It was payee’s duty to ascertain from the holder Manuel Gonzales what the nature of the latter’s title to the check was or the nature of his possession. Having failed in this respect, we must declare that plaintiff-appellee was guilty of gross neglect in not finding out the nature of the title and possession of Manuel Gonzales, amounting to legal absence of good faith, and it may not be considered as a holder of the check in good faith. To such effect is the consensus of authority.</P><P style="padding-left: 30px;">In order to show that the defendant had “knowledge of such facts that his action in taking the instrument amounted to bad faith,” it is not necessary to prove that the defendant knew the exact fraud that was practiced upon the plaintiff by the defendant’s assignor, it being sufficient to show that the defendant had notice that there was something wrong about his assignor’s acquisition of title, although he did not have notice of the particular wrong that was committed. <EM>Paika v. Perry</EM>, 225 Mass. 563, 114 N.E. 830.</P><P style="padding-left: 30px;">It is sufficient that the buyer of a note had notice or knowledge that the note was in some way tainted with fraud. It is not necessary that he should know the particulars or even the nature of the fraud, since all that is required is knowledge of such facts that his action in taking the note amounted bad faith. <EM>Ozark Motor Co. v. Horton</EM> (Mo. App.), 196 S.W. 395. <EM>Accord. Davis v. First Nat. Bank</EM>, 26 Ariz. 621, 229 Pac. 391.</P><P style="padding-left: 30px;">Liberty bonds stolen from the plaintiff were brought by the thief, a boy fifteen years old, less than five feet tall, immature in appearance and bearing on his face the stamp a degenerate, to the defendants’ clerk for sale. The boy stated that they belonged to his mother. The defendants paid the boy for the bonds without any further inquiry. Held, the plaintiff could recover the value of the bonds. The term ‘bad faith’ does not necessarily involve furtive motives, but means bad faith in a commercial sense. The manner in which the defendants conducted their Liberty Loan department provided an easy way for thieves to dispose of their plunder. It was a case of “no questions asked.” Although gross negligence does not of itself constitute bad faith, it is evidence from which bad faith may be inferred. The circumstances thrust the duty upon the defendants to make further inquiries and they had no right to shut their eyes deliberately to obvious facts. <EM>Morris v. Muir</EM>, 111 Misc. Rep. 739, 181 N.Y. Supp. 913, affd. in memo., 191 App. Div. 947, 181 N.Y. Supp. 945.” (pp. 640-642, Brannan’s Negotiable Instruments Law, 6th ed.).</P><P>The above considerations would seem sufficient to justify our ruling that plaintiff-appellee should not be allowed to recover the value of the check. Let us now examine the express provisions of the Negotiable Instruments Law pertinent to the matter to find if our ruling conforms thereto. Section 52 (c) provides that a holder in due course is one who takes the instrument “in good faith and for value;” Section 59, “that every holder is deemed prima facie to be a holder in due course;” and Section 52 (d), that in order that one may be a holder in due course it is necessary that “at the time the instrument was negotiated to him “he had no notice of any . . . defect in the title of the person negotiating it;” and lastly Section 59, that every holder is deemed<EM> </EM><EM>prima facie</EM>to be a holder in due course.</P><P>In the case at bar the rule that a possessor of the instrument is<EM> </EM><EM>prima facie </EM>a holder in due course does not apply because there was a defect in the title of the holder (Manuel Gonzales), because the instrument is not payable to him or to bearer. On the other hand, the stipulation of facts indicated by the appellants in their brief, like the fact that the drawer had no account with the payee; that the holder did not show or tell the payee why he had the check in his possession and why he was using it for the payment of his own personal account — show that holder’s title was defective or suspicious, to say the least. As holder’s title was defective or suspicious, it cannot be stated that the payee acquired the check without knowledge of said defect in holder’s title, and for this reason the presumption that it is a holder in due course or that it acquired the instrument in good faith does not exist. And having presented no evidence that it acquired the check in good faith, it (payee) cannot be considered as a holder in due course. In other words, under the circumstances of the case, instead of the presumption that payee was a holder in good faith, the fact is that it acquired possession of the instrument under circumstances that should have put it to inquiry as to the title of the holder who negotiated the check to it. The burden was, therefore, placed upon it to show that notwithstanding the suspicious circumstances, it acquired the check in actual good faith.</P><P>The rule applicable to the case at bar is that described in the case of Howard National Bank v. Wilson, et al., 96 Vt. 438, 120 At. 889, 894, where the Supreme Court of Vermont made the following disquisition:</P><P style="padding-left: 30px;">Prior to the Negotiable Instruments Act, two distinct lines of cases had developed in this country. The first had its origin in <EM>Gill v. Cubitt</EM>, 3 B. &amp; C. 466, 10 E. L. 215, where the rule was distinctly laid down by the court of King’s Bench that the purchaser of negotiable paper must exercise reasonable prudence and caution, and that, if the circumstances were such as ought to have excited the suspicion of a prudent and careful man, and he made no inquiry, he did not stand in the legal position of a bona fide holder. The rule was adopted by the courts of this country generally and seem to have become a fixed rule in the law of negotiable paper. Later in Goodman v. Harvey, 4 A. &amp; E. 870, 31 E. C. L. 381, the English court abandoned its former position and adopted the rule that nothing short of actual bad faith or fraud in the purchaser would deprive him of the character of a bona fide purchaser and let in defenses existing between prior parties, that no circumstances of suspicion merely, or want of proper caution in the purchaser, would have this effect, and that even gross negligence would have no effect, except as evidence tending to establish bad faith or fraud. Some of the American courts adhered to the earlier rule, while others followed the change inaugurated in Goodman v. Harvey. The question was before this court in <EM>Roth v. Colvin</EM>, 32 Vt. 125, and, on full consideration of the question, a rule was adopted in harmony with that announced in <EM>Gill v. Cubitt</EM>, which has been adhered to in subsequent cases, including those cited above. Stated briefly, one line of cases including our own had adopted the test of the reasonably prudent man and the other that of actual good faith. It would seem that it was the intent of the Negotiable Instruments Act to harmonize this disagreement by adopting the latter test. That such is the view generally accepted by the courts appears from a recent review of the cases concerning what constitutes notice of defect. Brannan on Neg. Ins. Law, 187-201. To effectuate the general purpose of the act to make uniform the Negotiable Instruments Law of those states which should enact it, we are constrained to hold (contrary to the rule adopted in our former decisions) that negligence on the part of the plaintiff, or suspicious circumstances sufficient to put a prudent man on inquiry, will not of themselves prevent a recovery, but are to be considered merely as evidence bearing on the question of bad faith. See G. L. 3113, 3172, where such a course is required in construing other uniform acts.</P><P style="padding-left: 30px;">It comes to this then: When the case has taken such shape that the plaintiff is called upon to prove himself a holder in due course to be entitled to recover, he is required to establish the conditions entitling him to standing as such, including good faith in taking the instrument. It devolves upon him to disclose the facts and circumstances attending the transfer, from which good or bad faith in the transaction may be inferred.</P><P>In the case at bar as the payee acquired the check under circumstances which should have put it to inquiry, why the holder had the check and used it to pay his own personal account, the duty devolved upon it, plaintiff-appellee, to prove that it actually acquired said check in good faith. The stipulation of facts contains no statement of such good faith, hence we are forced to the conclusion that plaintiff payee has not proved that it acquired the check in good faith and may not be deemed a holder in due course thereof.</P><P><STRONG>FOR THE FOREGOING CONSIDERATIONS</STRONG>, the decision appealed from should be, as it is hereby, <STRONG>REVERSED</STRONG>, and the defendants are absolved from the complaint. With costs against plaintiff-appellee.</P><P><EM>Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and De Leon, JJ.,</EM> <EM>concur</EM>.<BR><EM>Bengzon</EM>, <EM>C.J.,</EM><EM> </EM><EM>concurs in the result</EM></P>_
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-37467 December 11, 1933
SAN CARLOS MILLING CO., LTD., plaintiff-appellant, vs. BANK OF THE PHILIPPINE ISLANDS and CHINA BANKING CORPORATION, defendants-appellees.
Gibbs and McDonough and Roman Ozaeta for appellant.
Araneta, De Joya, Zaragosa and Araneta for appellee Bank of the Philippine Islands.
Marcelo Nubla and Guevara, Francisco and Recto for appellee China Banking Corporation.

HULL, J.:
Plaintiff corporation, organized under the laws of the Territory of Hawaii, is authorized to engaged in business in the Philippine Islands, and maintains its main office in these Islands in the City of Manila.
The business in the Philippine Islands was in the hands of Alfred D. Cooper, its agent under general power of attorney with authority of substitution. The principal employee in the Manila office was one Joseph L. Wilson, to whom had been given a general power of attorney but without power of substitution. In 1926 Cooper, desiring to go on vacation, gave a general power of attorney to Newland Baldwin and at the same time revoked the power of Wilson relative to the dealings with the Bank of the Philippine Islands, one of the banks in Manila in which plaintiff maintained a deposit.
About a year thereafter Wilson, conspiring together with one Alfredo Dolores, a messenger-clerk in plaintiff's Manila office, sent a cable gram in code to the company in Honolulu requesting a telegraphic transfer to the China Banking Corporation of Manila of $100,00. The money was transferred by cable, and upon its receipt the China Banking Corporation, likewise a bank in which plaintiff maintained a deposit, sent an exchange contract to plaintiff corporation offering the sum of P201,000, which was then the current rate of exchange. On this contract was forged the name of Newland Baldwin and typed on the body of the contract was a note:lawphil.net
Please send us certified check in our favor when transfer is received.
A manager's check on the China Banking Corporation for P201,000 payable to San Carlos Milling Company or order was receipted for by Dolores. On the same date, September 28, 1927, the manger's check was deposited with the Bank of the Philippine Islands by the following endorsement:
For deposit only with Bank of the Philippine Islands, to credit of account of San Carlos Milling Co., Ltd.
By (Sgd.) NEWLAND BALDWIN
For Agent
The endorsement to which the name of Newland Baldwin was affixed was spurious.
The Bank of the Philippine Islands thereupon credited the current account of plaintiff in the sum of P201,000 and passed the cashier's check in the ordinary course of business through the clearing house, where it was paid by the China Banking Corporation.
On the same day the cashier of the Bank of the Philippine Islands received a letter, purporting to be signed by Newland Baldwin, directing that P200,000 in bills of various denominations, named in the letter, be packed for shipment and delivery the next day. The next day, Dolores witnessed the counting and packing of the money, and shortly afterwards returned with the check for the sum of P200,000, purporting to be signed by Newland Baldwin as agent.
Plaintiff had frequently withdrawn currency for shipment to its mill from the Bank of the Philippine Islands but never in so large an amount, and according to the record, never under the sole supervision of Dolores as the representative of plaintiff.
Before delivering the money, the bank asked Dolores for P1 to cover the cost of packing the money, and he left the bank and shortly afterwards returned with another check for P1, purporting to be signed by Newland Baldwin. Whereupon the money was turned over to Dolores, who took it to plaintiff's office, where he turned the money over to Wilson and received as his share, P10,000.
Shortly thereafter the crime was discovered, and upon the defendant bank refusing to credit plaintiff with the amount withdrawn by the two forged checks of P200,000 and P1, suit was brought against the Bank of the Philippine Islands, and finally on the suggestion of the defendant bank, an amended complaint was filed by plaintiff against both the Bank of the Philippine Islands and the China Banking Corporation.
At the trial the China Banking Corporation contended that they had drawn a check to the credit of the plaintiff company, that the check had been endorsed for deposit, and that as the prior endorsement had in law been guaranteed by the Bank of the Philippine Islands, when they presented the cashier's check to it for payment, the China Banking Corporation was absolved even if the endorsement of Newland Baldwin on the check was a forgery.
The Bank of the Philippine Islands presented many special defenses, but in the main their contentions were that they had been guilty of no negligence, that they had dealt with the accredited representatives of the company in the due course of business, and that the loss was due to the dishonesty of plaintiff's employees and the negligence of plaintiff's general agent.
In plaintiff's Manila office, besides the general agent, Wilson, and Dolores, most of the time there was employed a woman stenographer and cashier. The agent did not keep in his personal possession either the code-book or the blank checks of either the Bank of the Philippine Islands or the China Banking Corporation. Baldwin was authorized to draw checks on either of the depositaries. Wilson could draw checks in the name of the plaintiff on the China Banking Corporation.
After trial in which much testimony was taken, the trial court held that the deposit of P201,000 in the Bank of the Philippine Islands being the result of a forged endorsement, the relation of depositor and banker did not exist, but the bank was only a gratuitous bailee; that the Bank of the Philippine Islands acted in good faith in the ordinary course of its business, was not guilty of negligence, and therefore under article 1902 of the Civil Code which should control the case, plaintiff could not recover; and that as the cause of loss was the criminal actions of Wilson and Dolores, employees of plaintiff, and as Newland Baldwin, the agent, had not exercised adequate supervision over plaintiff's Manila office, therefore plaintiff was guilty of negligence, which ground would likewise defeat recovery.
From the decision of the trial court absolving the defendants, plaintiff brings this appeal and makes nine assignments of error which we do not deem it necessary to discuss in detail.
There is a mild assertion on the part of the defendant bank that the disputed signatures of Newland Baldwin were genuine and that he had been in the habit of signing checks in blank and turning the checks so signed over to Wilson.
The proof as to the falsity of the questioned signatures of Baldwin places the matter beyond reasonable doubt, nor is it believed that Baldwin signed checks in blank and turned them over to Wilson.
As to the China Banking Corporation, it will be seen that it drew its check payable to the order of plaintiff and delivered it to plaintiff's agent who was authorized to receive it. A bank that cashes a check must know to whom it pays. In connection with the cashier's check, this duty was therefore upon the Bank of the Philippine Islands, and the China Banking Corporation was not bound to inspect and verify all endorsements of the check, even if some of them were also those of depositors in that bank. It had a right to rely upon the endorsement of the Bank of the Philippine Islands when it gave the latter bank credit for its own cashier's check. Even if we would treat the China Banking Corporation's cashier's check the same as the check of a depositor and attempt to apply the doctrines of the Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Banking Corporation and National Bank (43 Phil., 678), and hold the China Banking Corporation indebted to plaintiff, we would at the same time have to hold that the Bank of the Philippine Islands was indebted to the China Banking Corporation in the same amount. As, however, the money was in fact paid to plaintiff corporation, we must hold that the China Banking Corporation is indebted neither to plaintiff nor to the Bank of the Philippine Islands, and the judgment of the lower court far as it absolves the China Banking Corporation from responsibility is affirmed.
Returning to the relation between plaintiff and the Bank of the Philippine Islands, we will now consider the effect of the deposit of P201,000. It must be noted that this was not a presenting of the check for cash payment but for deposit only. It is a matter of general knowledge that most endorsements for deposit only, are informal. Most are by means of a rubber stamp. The bank would have been justified in accepting the check for deposit even with only a typed endorsement. It accepted the check and duly credited plaintiff's account with the amount on the face of the check. Plaintiff was not harmed by the transaction as the only result was the removal of that sum of money from a bank from which Wilson could have drawn it out in his own name to a bank where Wilson would not have authority to draw checks and where funds could only be drawn out by the check of Baldwin.
Plaintiff in its letter of December 23, 1928, to the Bank of the Philippine Islands said in part:
". . . we now leave to demand that you pay over to us the entire amount of said manager's check of two hundred one thousand (P201,000) pesos, together with interest thereon at the agreed rate of 3 ½ per cent per annum on daily balances of our credit in account current with your bank to this date. In the event of your refusal to pay, we shall claim interest at the legal rate of 6 per cent from and after the date of this demand inasmuch as we desire to withdraw and make use of the money." Such language might well be treated as a ratification of the deposit.
The contention of the bank that it was a gratuitous bailee is without merit. In the first place, it is absolutely contrary to what the bank did. It did not take it up as a separate account but it transferred the credit to plaintiff's current account as a depositor of that bank. Furthermore, banks are not gratuitous bailees of the funds deposited with them by their customers. Banks are run for gain, and they solicit deposits in order that they can use the money for that very purpose. In this case the action was neither gratuitous nor was it a bailment.
On the other hand, we cannot agree with the theory of plaintiff that the Bank of the Philippine Islands was an intermeddling bank. In the many cases cited by plaintiff where the bank that cashed the forged endorsement was held as an intermeddler, in none was the claimant a regular depositor of the bank, nor in any of the cases cited, was the endorsement for deposit only. It is therefore clear that the relation of plaintiff with the Bank of the Philippine Islands in regard to this item of P201,000 was that of depositor and banker, creditor and debtor.
We now come to consider the legal effect of payment by the bank to Dolores of the sum of P201,000, on two checks on which the name of Baldwin was forged as drawer. As above stated, the fact that these signatures were forged is beyond question. It is an elementary principle both of banking and of the Negotiable Instruments Law that —
A bank is bound to know the signatures of its customers; and if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily charge the amount so paid to the account of the depositor whose name was forged. (7 C.J., 683.)
There is no act of the plaintiff that led the Bank of the Philippine Islands astray. If it was in fact lulled into a false sense of security, it was by the effrontery of Dolores, the messenger to whom it entrusted this large sum of money.
The bank paid out its money because it relied upon the genuineness of the purported signatures of Baldwin. These, they never questioned at the time its employees should have used care. In fact, even today the bank represents that it has a relief that they are genuine signatures.
The signatures to the check being forged, under section 23 of the Negotiable Instruments Law they are not a charge against plaintiff nor are the checks of any value to the defendant.
It must therefore be held that the proximate cause of loss was due to the negligence of the Bank of the Philippine Islands in honoring and cashing the two forged checks.
The judgment absolving the Bank of the Philippine Islands must therefore be reversed, and a judgment entered in favor of plaintiff-appellant and against the Bank of the Philippine Islands, defendant-appellee, for the sum of P200,001, with legal interest thereon from December 23,1928, until payment, together with costs in both instances. So ordered.
Malcolm, Villa-Real, Vickers, and Imperial, JJ., concur
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 113236 March 5, 2001
FIRESTONE TIRE & RUBBER COMPANY OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS and LUZON DEVELOPMENT BANK, respondents.
QUISUMBING, J.:
This petition assails the decision 1 dated December 29, 1993 of the Court of Appeals in CA-G.R. CV No. 29546, which affirmed the judgment 2 of the Regional Trial Court of Pasay City, Branch 113 in Civil Case No. PQ-7854-P, dismissing Firestone's complaint for damages.
The facts of this case, adopted by the CA and based on findings by the trial court, are as follows:
. . . [D]efendant is a banking corporation. It operates under a certificate of authority issued by the Central Bank of the Philippines, and among its activities, accepts savings and time deposits. Said defendant had as one of its client-depositors the Fojas-Arca Enterprises Company ("Fojas-Arca" for brevity). Fojas-Arca maintaining a special savings account with the defendant, the latter authorized and allowed withdrawals of funds therefrom through the medium of special withdrawal slips. These are supplied by the defendant to Fojas-Arca.
In January 1978, plaintiff and Fojas-Arca entered into a "Franchised Dealership Agreement" (Exh. B) whereby Fojas-Arca has the privilege to purchase on credit and sell plaintiff's products.
On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid Agreement, Fojas-Arca purchased on credit Firestone products from plaintiff with a total amount of P4,896,000.00. In payment of these purchases, Fojas-Arca delivered to plaintiff six (6) special withdrawal slips drawn upon the defendant. In turn, these were deposited by the plaintiff with its current account with the Citibank. All of them were honored and paid by the defendant. This singular circumstance made plaintiff believe [sic] and relied [sic] on the fact that the succeeding special withdrawal slips drawn upon the defendant would be equally sufficiently funded. Relying on such confidence and belief and as a direct consequence thereof, plaintiff extended to Fojas-Arca other purchases on credit of its products.
On the following dates Fojas-Arca purchased Firestone products on credit (Exh. M, I, J, K) and delivered to plaintiff the corresponding special withdrawal slips in payment thereof drawn upon the defendant, to wit: DATE | WITHDRAWAL SLIP NO. | AMOUNT | June 15, 1978 | 42127 | P1,198,092.80 | July 15, 1978 | 42128 | 940,190.00 | Aug. 15, 1978 | 42129 | 880,000.00 | Sep. 15, 1978 | 42130 | 981,500.00 |
These were likewise deposited by plaintiff in its current account with Citibank and in turn the Citibank forwarded it [sic] to the defendant for payment and collection, as it had done in respect of the previous special withdrawal slips. Out of these four (4) withdrawal slips only withdrawal slip No. 42130 in the amount of P981,500.00 was honored and paid by the defendant in October 1978. Because of the absence for a long period coupled with the fact that defendant honored and paid withdrawal slips No. 42128 dated July 15, 1978, in the amount of P981,500.00 plaintiff's belief was all the more strengthened that the other withdrawal slips were likewise sufficiently funded, and that it had received full value and payment of Fojas-Arca's credit purchased then outstanding at the time. On this basis, plaintiff was induced to continue extending to Fojas-Arca further purchase on credit of its products as per agreement (Exh. "B").
However, on December 14, 1978, plaintiff was informed by Citibank that special withdrawal slips No. 42127 dated June 15, 1978 for P1,198,092.80 and No. 42129 dated August 15, 1978 for P880,000.00 were dishonored and not paid for the reason 'NO ARRANGEMENT.' As a consequence, the Citibank debited plaintiff's account for the total sum of P2,078,092.80 representing the aggregate amount of the above-two special withdrawal slips. Under such situation, plaintiff averred that the pecuniary losses it suffered is caused by and directly attributable to defendant's gross negligence.
On September 25, 1979, counsel of plaintiff served a written demand upon the defendant for the satisfaction of the damages suffered by it. And due to defendant's refusal to pay plaintiff's claim, plaintiff has been constrained to file this complaint, thereby compelling plaintiff to incur litigation expenses and attorney's fees which amount are recoverable from the defendant.
Controverting the foregoing asseverations of plaintiff, defendant asserted, inter alia that the transactions mentioned by plaintiff are that of plaintiff and Fojas-Arca only, [in] which defendant is not involved; Vehemently, it was denied by defendant that the special withdrawal slips were honored and treated as if it were checks, the truth being that when the special withdrawal slips were received by defendant, it only verified whether or not the signatures therein were authentic, and whether or not the deposit level in the passbook concurred with the savings ledger, and whether or not the deposit is sufficient to cover the withdrawal; if plaintiff treated the special withdrawal slips paid by Fojas-Arca as checks then plaintiff has to blame itself for being grossly negligent in treating the withdrawal slips as check when it is clearly stated therein that the withdrawal slips are non-negotiable; that defendant is not a privy to any of the transactions between Fojas-Arca and plaintiff for which reason defendant is not duty bound to notify nor give notice of anything to plaintiff. If at first defendant had given notice to plaintiff it is merely an extension of usual bank courtesy to a prospective client; that defendant is only dealing with its depositor Fojas-Arca and not the plaintiff. In summation, defendant categorically stated that plaintiff has no cause of action against it (pp. 1-3, Dec.; pp. 368-370, id).3
Petitioner's complaint4 for a sum of money and damages with the Regional Trial Court of Pasay City, Branch 113, docketed as Civil Case No. 29546, was dismissed together with the counterclaim of defendant.
Petitioner appealed the decision to the Court of Appeals. It averred that respondent Luzon Development Bank was liable for damages under Article 21765 in relation to Articles 196 and 207 of the Civil Code. As noted by the CA, petitioner alleged the following tortious acts on the part of private respondent: 1) the acceptance and payment of the special withdrawal slips without the presentation of the depositor's passbook thereby giving the impression that the withdrawal slips are instruments payable upon presentment; 2) giving the special withdrawal slips the general appearance of checks; and 3) the failure of respondent bank to seasonably warn petitioner that it would not honor two of the four special withdrawal slips.
On December 29, 1993, the Court of Appeals promulgated its assailed decision. It denied the appeal and affirmed the judgment of the trial court. According to the appellate court, respondent bank notified the depositor to present the passbook whenever it received a collection note from another bank, belying petitioner's claim that respondent bank was negligent in not requiring a passbook under the subject transaction. The appellate court also found that the special withdrawal slips in question were not purposely given the appearance of checks, contrary to petitioner's assertions, and thus should not have been mistaken for checks. Lastly, the appellate court ruled that the respondent bank was under no obligation to inform petitioner of the dishonor of the special withdrawal slips, for to do so would have been a violation of the law on the secrecy of bank deposits.
Hence, the instant petition, alleging the following assignment of error:
25. The CA grievously erred in holding that the [Luzon Development] Bank was free from any fault or negligence regarding the dishonor, or in failing to give fair and timely advice of the dishonor, of the two intermediate LDB Slips and in failing to award damages to Firestone pursuant to Article 2176 of the New Civil Code.8
The issue for our consideration is whether or not respondent bank should be held liable for damages suffered by petitioner, due to its allegedly belated notice of non-payment of the subject withdrawal slips.
The initial transaction in this case was between petitioner and Fojas-Arca, whereby the latter purchased tires from the former with special withdrawal slips drawn upon Fojas-Arca's special savings account with respondent bank. Petitioner in turn deposited these withdrawal slips with Citibank. The latter credited the same to petitioner's current account, then presented the slips for payment to respondent bank. It was at this point that the bone of contention arose.
On December 14, 1978, Citibank informed petitioner that special withdrawal slips Nos. 42127 and 42129 dated June 15, 1978 and August 15, 1978, respectively, were refused payment by respondent bank due to insufficiency of Fojas-Arca's funds on deposit. That information came about six months from the time Fojas-Arca purchased tires from petitioner using the subject withdrawal slips. Citibank then debited the amount of these withdrawal slips from petitioner's account, causing the alleged pecuniary damage subject of petitioner's cause of action.
At the outset, we note that petitioner admits that the withdrawal slips in question were non-negotiable.9 Hence, the rules governing the giving of immediate notice of dishonor of negotiable instruments do not apply in this case.10 Petitioner itself concedes this point.11 Thus, respondent bank was under no obligation to give immediate notice that it would not make payment on the subject withdrawal slips. Citibank should have known that withdrawal slips were not negotiable instruments. It could not expect these slips to be treated as checks by other entities. Payment or notice of dishonor from respondent bank could not be expected immediately, in contrast to the situation involving checks.
In the case at bar, it appears that Citibank, with the knowledge that respondent Luzon Development Bank, had honored and paid the previous withdrawal slips, automatically credited petitioner's current account with the amount of the subject withdrawal slips, then merely waited for the same to be honored and paid by respondent bank. It presumed that the withdrawal slips were "good."
It bears stressing that Citibank could not have missed the non-negotiable nature of the withdrawal slips. 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.12 The withdrawal slips in question lacked this character.
A bank is under obligation to treat the accounts of its depositors with meticulous care, whether such account consists only of a few hundred pesos or of millions of pesos.13 The fact that the other withdrawal slips were honored and paid by respondent bank was no license for Citibank to presume that subsequent slips would be honored and paid immediately. By doing so, it failed in its fiduciary duty to treat the accounts of its clients with the highest degree of care.14
In the ordinary and usual course of banking operations, current account deposits are accepted by the bank on the basis of deposit slips prepared and signed by the depositor, or the latter's agent or representative, who indicates therein the current account number to which the deposit is to be credited, the name of the depositor or current account holder, the date of the deposit, and the amount of the deposit either in cash or in check.15
The withdrawal slips deposited with petitioner's current account with Citibank were not checks, as petitioner admits. Citibank was not bound to accept the withdrawal slips as a valid mode of deposit. But having erroneously accepted them as such, Citibank — and petitioner as account-holder — must bear the risks attendant to the acceptance of these instruments. Petitioner and Citibank could not now shift the risk and hold private respondent liable for their admitted mistake.
WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in CA-G.R. CV No. 29546 is AFFIRMED. Costs against petitioner.
SO ORDERED.
Bellosillo, Mendoza, Buena and De Leon, Jr., JJ ., concur.

Footnotes
1 Rollo, pp. 27-34.
2 Id. at 44-48.
3 Id. at 27-30.
4 Id. at 35-43.
5 ARTICLE 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a quasi-delict and is governed by the provisions of this Chapter.
6 ARTICLE 19. The local civil registrar shall require the payment of the fees prescribed by law or regulations before the issuance of the marriage license. No other sum shall be collected in the nature of a fee or tax of any kind for the issuance of said license. It shall, however, be issued free of charge to indigent parties, that is, those who have no visible means of income or whose income is insufficient for their subsistence, a fact established by their affidavit or by their oath before the local civil registrar.
7 ARTICLE 20. The license shall be valid in any part of the Philippines for a period of one hundred twenty days from the date of issue, and shall be deemed automatically cancelled at the expiration of said period if the contracting parties have not made use of it. The expiry date shall be stamped in bold characters on the face of every license issued.
8 Rollo, p. 13.
9 Id. at 19; Petition, paragraph 34, subparagraph B.
10 NEGOTIABLE INSTRUMENTS LAW — ACT NO. 2031
SECTION 89. To whom notice of dishonor must be given. — Except as otherwise provided, when a negotiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given is discharge.
SECTION 103. Where parties reside in same place. — Where the person giving and the person to receive notice reside in the same place, notice must be given within the following times:
(a) If given at the place of business of the person to receive notice, it must be given before the close of business hours the day following;
(b) If given at his residence, it must be given before the usual hours of rest on the day following;
(c) If sent by mail, it must be deposited in the post-office in time to reach him in usual course on the day following.
SECTION 104. Where parties reside in different places. — Where the person giving and the person to receive notice reside in different places, the notice must be given within the following times:
(a) If sent by mail, it must be deposited in the post-office in time to go by mail the day following the day of dishonor, or if there be no mail at a convenient hour on that day, by the next mail thereafter;
(b) If given otherwise than through the post-office, then within the time that notice would have been received in due course of mail if it had been deposited in the post-office within the time specified in the last subdivision.
11 Supra, note 9.
12 Traders Royal Bank vs. Court of Appeals, 269 SCRA 15, 26 (1997).
13 Philippine National Bank vs. Court of Appeals, 315 SCRA 309, 314-315 (1999).
14 Philippine Bank of Commerce vs. Court of Appeals, 269 SCRA 695, 708-709 (1997).
15 Id. at 699.

FIRST DIVISION
JAI-ALAI CORPORATION OF THE PHILIPPINES, Petitioner, v. BANK OF THE PHILIPPINE ISLAND, Respondent.
CASTRO, J.:
This is a petition by the Jai-Alai Corporation of the Philippines (hereinafter referred to as the petitioner) for review of the decision of the Court of Appeals in C.A.-G.R. 34042-R dated June 25, 1968 in favor of the Bank of the Philippine Islands (hereinafter referred to as the respondent).

From April 2, 1959 to May 18, 1959, ten checks with a total face value of P8,030.58 were deposited by the petitioner in its current account with the respondent bank. The particulars of these checks are as follows:

1. Drawn by the Delta Engineering Service upon the Pacific Banking Corporation and payable to the Inter-Island Gas Service Inc. or order:

Date Check Exhibit

Deposited Number Amount Number

4/2/59 B-352680 P500.00 18

4/20/59 A-156907 372.32 19

4/24/59 A-156924 397.82 20

5/4/59 B-364764 250.00 23

5/6/59 B-364775 250.00 24

2. Drawn by the Enrique Cortiz & Co. upon the Pacific Banking Corporation and payable to the Inter-Island Gas Service, Inc. or bearer:

4/13/59 B-335063 P 2108.70 21

4/27/59 B-335072 P2210.94 22

3. Drawn by the Luzon Tinsmith & Company upon the China Banking Corporation and payable to the Inter-Island Gas Service, Inc. or bearer:

5/18/59 VN430188 P940.80 25

4. Drawn by the Roxas Manufacturing, Inc. upon the Philippine National Bank and payable to the Inter-Island Gas Service, Inc. order:

5/14/59 1860160 P 500.00 26

5/18/59 1860660 P 500.00 27

All the foregoing checks, which were acquired by the petitioner from one Antonio J. Ramirez, a sales agent of the Inter-Island Gas and a regular bettor at jai-alai games, were, upon deposit, temporarily credited to the petitioner's account in accordance with the clause printed on the deposit slips issued by the respondent and which reads:

"Any credit allowed the depositor on the books of the Bank for checks or drafts hereby received for deposit, is provisional only, until such time as the proceeds thereof, in current funds or solvent credits, shall have been actually received by the Bank and the latter reserves to itself the right to charge back the item to the account of its depositor, at any time before that event, regardless of whether or not the item itself can be returned."

About the latter part of July 1959, after Ramirez had resigned from the Inter-Island Gas and after the checks had been submitted to inter-bank clearing, the Inter-Island Gas discovered that all the indorsements made on the checks purportedly by its cashiers, Santiago Amplayo and Vicenta Mucor (who were merely authorized to deposit checks issued payable to the said company) as well as the rubber stamp impression thereon reading "Inter-Island Gas Service, Inc.," were forgeries. In due time, the Inter-Island Gas advised the petitioner, the respondent, the drawers and the drawee-banks of the said checks about the forgeries, and filed a criminal complaint against Ramirez with the Office of the City Fiscal of Manila. 1

The respondent's cashier, Ramon Sarthou, upon receipt of the latter of Inter-Island Gas dated August 31, 1959, called up the petitioner's cashier, Manuel Garcia, and advised the latter that in view of the circumstances he would debit the value of the checks against the petitioner's account as soon as they were returned by the respective drawee-banks.

Meanwhile, the drawers of the checks, having been notified of the forgeries, demanded reimbursement to their respective accounts from the drawee-banks, which in turn demanded from the respondent, as collecting bank, the return of the amounts they had paid on account thereof. When the drawee-banks returned the checks to the respondent, the latter paid their value which the former in turn paid to the Inter-Island Gas. The respondent, for its part, debited the petitioner's current account and forwarded to the latter the checks containing the forged indorsements, which the petitioner, however, refused to accept.

On October 8, 1959 the petitioner drew against its current account with the respondent a check for P135,000 payable to the order of the Mariano Olondriz y Cia. in payment of certain shares of stock. The check was, however, dishonored by the respondent as its records showed that as of October 8, 1959 the current account of the petitioner, after netting out the value of the checks P8,030.58) with the forged indorsements, had a balance of only P128,257.65.

The petitioner then filed a complaint against the respondent with the Court of First Instance of Manila, which was however dismissed by the trial court after due trial, and as well by the Court of Appeals, on appeal.

Hence, the present recourse.

The issues posed by the petitioner in the instant petition may be briefly stated as follows:

(a) Whether the respondent had the right to debit the petitioner's current account in the amount corresponding to the total value of the checks in question after more than three months had elapsed from the date their value was credited to the petitioner's account:(b) Whether the respondent is estopped from claiming that the amount of P8,030.58, representing the total value of the checks with the forged indorsements, had not been properly credited to the petitioner's account, since the same had already been paid by the drawee-banks and received in due course by the respondent; and(c) On the assumption that the respondent had improperly debited the petitioner's current account, whether the latter is entitled to damages.

These three issues interlock and will be resolved jointly.

In our opinion, the respondent acted within legal bounds when it debited the petitioner's account. When the petitioner deposited the checks with the respondent, the nature of the relationship created at that stage was one of agency, that is, the bank was to collect from the drawees of the checks the corresponding proceeds. It is true that the respondent had already collected the proceeds of the checks when it debited the petitioner's account, so that following the rule in Gullas vs. Philippine National Bank 2 it might be argued that the relationship between the parties had become that of creditor and debtor as to preclude the respondent from using the petitioner's funds to make payments not authorized by the latter. It is our view nonetheless that no creditor-debtor relationship was created between the parties.

Section 23 of the Negotiable Instruments Law (Act 2031) states that 3 —

"When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority."

Since under the foregoing provision, a forged signature in a negotiable instrument is wholly inoperative and no right to discharge it or enforce its payment can be acquired through or under the forged signature except against a party who cannot invoke the forgery, it stands to reason, upon the facts of record, that the respondent, as a collecting bank which indorsed the checks to the drawee-banks for clearing, should be liable to the latter for reimbursement, for, as found by the court a quo and by the appellate court, the indorsements on the checks had been forged prior to their delivery to the petitioner. In legal contemplation, therefore, the payments made by the drawee-banks to the respondent on account of the said checks were ineffective; and, such being the case, the relationship of creditor and debtor between the petitioner and the respondent had not been validly effected, the checks not having been properly and legitimately converted into cash. 4

In Great Eastern Life Ins. Co. vs. Hongkong & Shanghai Bank, 5 the Court ruled that it is the obligation of the collecting bank to reimburse the drawee-bank the value of the checks subsequently found to contain the forged indorsement of the payee. The reason is that the bank with which the check was deposited has no right to pay the sum stated therein to the forger "or anyone else upon a forged signature." "It was its duty to know," said the Court, "that [the payee's] endorsement was genuine before cashing the check." The petitioner must in turn shoulder the loss of the amounts which the respondent; as its collecting agent, had to reimburse to the drawee-banks.

We do not consider material for the purposes of the case at bar that more than three months had elapsed since the proceeds of the checks in question were collected by the respondent. The record shows that the respondent had acted promptly after being informed that the indorsements on the checks were forged. Moreover, having received the checks merely for collection and deposit, the respondent cannot he expected to know or ascertain the genuineness of all prior indorsements on the said checks. Indeed, having itself indorsed them to the respondent in accordance with the rules and practices of commercial banks, of which the Court takes due cognizance, the petitioner is deemed to have given the warranty prescribed in Section 66 of the Negotiable Instruments Law that every single one of those checks "is genuine and in all respects what it purports to be.".

The petitioner was, moreover, grossly recreant in accepting the checks in question from Ramirez. It could not have escaped the attention of the petitioner that the payee of all the checks was a corporation — the Inter-Island Gas Service, Inc. Yet, the petitioner cashed these checks to a mere individual who was admittedly a habitue at its jai-alai games without making any inquiry as to his authority to exchange checks belonging to the payee-corporation. In Insular Drug Co. vs. National 6 the Court made the pronouncement that.

". . . The right of an agent to indorse commercial paper is a very responsible power and will not be lightly inferred. A salesman with authority to collect money belonging to his principal does not have the implied authority to indorse checks received in payment. Any person taking checks made payable to a corporation, which can act only by agents, does so at his peril, and must abide by the consequences if the agent who indorses the same is without authority." (underscoring supplied)

It must be noted further that three of the checks in question are crossed checks, namely, exhs. 21, 25 and 27, which may only be deposited, but not encashed; yet, the petitioner negligently accepted them for cash. That two of the crossed checks, namely, exhs. 21 and 25, are bearer instruments would not, in our view, exculpate the petitioner from liability with respect to them. The fact that they are bearer checks and at the same time crossed checks should have aroused the petitioner's suspicion as to the title of Ramirez over them and his authority to cash them (apparently to purchase jai-alai tickets from the petitioner), it appearing on their face that a corporate entity — the Inter Island Gas Service, Inc. — was the payee thereof and Ramirez delivered the said checks to the petitioner ostensibly on the strength of the payee's cashiers' indorsements.

At all events, under Section 67 of the Negotiable Instruments Law, "Where a person places his indorsement on an instrument negotiable by delivery he incurs all the liability of an indorser," and under Section 66 of the same statute a general indorser warrants that the instrument "is genuine and in all respects what it purports to be." Considering that the petitioner indorsed the said checks when it deposited them with the respondent, the petitioner as an indorser guaranteed the genuineness of all prior indorsements thereon. The respondent which relied upon the petitioner's warranty should not be held liable for the resulting loss. This conclusion applied similarly to exh. 22 which is an uncrossed bearer instrument, for under Section 65 of the Negotiable Instrument Law. "Every person negotiating an instrument by delivery . . . warrants (a) That the instrument is genuine and in all respects what it purports to be." Under that same section this warranty "extends in favor of no holder other than the immediate transferee," which, in the case at bar, would be the respondent.

The provision in the deposit slip issued by the respondent which stipulates that it "reserves to itself the right to charge back the item to the account of its depositor," at any time before "current funds or solvent credits shall have been actually received by the Bank," would not materially affect the conclusion we have reached. That stipulation prescribes that there must be an actual receipt by the bank of current funds or solvent credits; but as we have earlier indicated the transfer by the drawee-banks of funds to the respondent on account of the checks in question was ineffectual because made under the mistaken and valid assumption that the indorsements of the payee thereon were genuine. Under article 2154 of the New Civil Code "If something is received when there is no right to demand it and it was unduly delivered through mistake, the obligation to return it arises." There was, therefore, in contemplation of law, no valid payment of money made by the drawee-banks to the respondent on account of the questioned checks.

ACCORDINGLY, the judgment of the Court of Appeals is affirmed, at petitioner's cost.

Makasiar, Esguerra, Muñoz Palma and Martin, JJ., concur.

Teehankee, J., is on leave.

Endnotes:
1. The City Fiscal dropped the charges on the ground that the Inter-Island Gas which was later reimbursed by the drawee-banks, was no longer qualified to be regarded as an offended party which could properly file a complaint against Ramirez because it had not suffered any damage at all.

2. 62 Phil. 519 (1935).

3. A bank check is a negotiable instrument and is governed by the Negotiable Instruments Law (Ang Tiong vs. Ting, 22 SCRA 713).

4. The collecting hank may certainly set up as defense the so-called "24-hour clearing house rule" of the Central Bank. This rule is not, however, invoked here. See Hongkong & Shanghai Banking Corp. vs. People's Bank & Trust Co., 35 SCRA 141.

5. 43 Phil. 678 (1922).

6. 58 Phil. 685 (1933).