[G.R. NO. 148789.

January 16, 2003]

BPI Family Savings Bank, Inc. and Hedzelito Noel Bayaborda,
petitioners, vs. Romeo Manikan, respondent.
DECISION
VITUG, J.:
Petitioners seek a review of the decision of the Court of
Appeals in C.A. G.R. SP. No. 48011 which has affirmed the
judgment of the Regional Trial Court, Branch 26, of Iloilo City,
dismissing the complaint of petitioners for mandamus and
ordering them to pay respondent the sum of P30,000.00 by
way of attorney's fees.
It would appear that respondent, being the City Treasurer of
Iloilo City, assessed petitioner bank business taxes for the
years 1992 and 1993. On 26 January 1994, the bank issued
two manager's checks payable to the City Treasurer of Iloilo
City, the first, Manager's Check No. 010649 for P462,270.60,
was to cover the business tax for the year 1992, and the
second, Manager's Check No. 010650 in the amount of
P482,988.45, was to settle the business tax for the year
1993. Hedzelito Bayaborda, then manager of the banks
Iloilo Branch, instructed an employee, Edmund Sabio, to
deliver the two manager's checks to the Secretary to the City
Mayor, a certain Toto Espinosa, who, in turn, handed them
over to his secretary, Leila Salcedo, for transmittal to the City
Treasurer. The value of the checks were eventually credited
to the account of the City Treasurer of Iloilo City. The checks,
however, were not applied to satisfy the tax liabilities of
petitioner but of other taxpayers.
The misapplication of the proceeds of the checks came to the
knowledge of respondent City Treasurer who, thereupon,
created a committee to look into the matter. The
investigation revealed that it was upon the representation of
Leila Salcedo that the manager's checks were used to pay
tax liabilities of other taxpayers and not those of petitioner

bank. Meanwhile, the bank, through counsel, made a

demand on respondent to issue official receipts to show that
it had paid its business taxes for the years 1992 and 1993
covered by the diverted manager's checks. When he refused
to issue the receipts requested, respondent was sued by
petitioners for mandamus and damages.
The Regional Trial Court dismissed the complaint for
mandamus and ruled that petitioners had no clear legal right
to demand the issuance of official receipts nor could
respondent, given the circumstances, be compelled to issue
another set of receipts in the name of the bank. The trial
court further ordered petitioners to pay respondent the sum
of P30,000.00 by way of attorney's fees.
The Court of Appeals, on appeal by petitioners, sustained the
trial court in toto.
In their petition for review before this Court, petitioners urge
a reversal of the decision of the appellate court contending
that a) AN ACTION FOR MANDAMUS NECESSARILY INCLUDES
INDEMNIFICATION FOR DAMAGES AND IS ASSESSED ON A
PUBLIC OFFICIAL'S PRIVATE CAPACITY. HENCE, SUING A
PUBLIC OFFICIAL IN HIS PRIVATE CAPACITY DOES NOT AS A
MATTER OF RIGHT ENTITLE HIM TO AN AWARD OF
ATTORNEY'S FEES BY WAY OF COUNTERCLAIM.
b) THE RECEIPT BY THE CITY TREASURER'S OFFICE OF ILOILO
OF THE FACE VALUE OF THE TWO MANAGER'S CHECKS
INTENDED FOR PAYMENT OF ITS BUSINESS TAXES FOR THE
YEAR 1992 AND 1993 ENTITLES IT TO THE ISSUANCE OF AN
OFFICIAL RECEIPT ENFORCEABLE BY A WRIT OF MANDAMUS.
In order that a writ of mandamus may aptly issue, it is
essential that, on the one hand, the person petitioning for it
has a clear legal right to the claim that is sought and that, on
the other hand, the respondent has an imperative duty to

perform that which is demanded of him.1[1] Mandamus will

not issue to enforce a right, or to compel compliance with a
duty, which is questionable or over which a substantial doubt
exists. The principal function of the writ of mandamus is to
command and to expedite, not to inquire and to adjudicate;
thus, it is neither the office nor the aim of the writ to secure a
legal right but to implement that which is already
established. Unless the right to the relief sought is
unclouded, mandamus will not issue.2[2]
The checks delivered by petitioner bank to Toto Espinosa
were managers checks. A managers check, like a cashiers
check, is an order of the bank to pay, drawn upon itself,
committing in effect its total resources, integrity and honor
behind its issuance. By its peculiar character and general
use in commerce, a managers check or a cashiers check is
regarded substantially to be as good as the money it
represents.3[3]

awarding attorneys fees and expenses of litigation, the use

of that judgment, however, must be done with great care
approximating as closely as possible the instances
exemplified by the law. Attorneys fees in the concept of
damages are not recoverable against a party just because of
an unfavorable judgment. Repeatedly, it has been said that
no premium should be placed on the right to litigate. 5[5]
WHEREFORE, the instant petition is partly granted. The
appealed decision is affirmed save for the award of
attorneys fees in favor of private respondent which is
ordered deleted. No costs.
SO ORDERED.

By allowing the delivery of the subject checks to a person

who is not directly charged with the collection of its tax
liabilities, the bank must be deemed to have assumed the
risk of a possible misuse thereof even as it appears to have
fallen short of the diligence ordinarily expected of it. The
bank, of course, is not precluded from pursuing a right of
action against those who could have been responsible for the
wrongdoing or who might have been unjustly benefited
thereby.
The award of attorneys fees in favor of respondent City
Treasurer, however, should be deleted. Such an award, in the
concept of damages under Article 2208 of the Civil Code,
demands factual and legal justifications. 4[4] While the law
allows some degree of discretion on the part of the courts in
1
2

On July 6, 1986, the Development Bank of Rizal (petitioner

Bank for brevity) filed a complaint for a sum of money
against respondents Sima Wei and/or Lee Kian Huat, Mary
Cheng Uy, Samson Tung, Asian Industrial Plastic Corporation
(Plastic Corporation for short) and the Producers Bank of the
Philippines, on two causes of action:
(1) To enforce payment of the balance of
P1,032,450.02 on a promissory note executed
by respondent Sima Wei on June 9, 1983; and

G.R. No. 85419 March 9, 1993

DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner,
vs.
SIMA WEI and/or LEE KIAN HUAT, MARY CHENG UY,
SAMSON TUNG, ASIAN INDUSTRIAL PLASTIC
CORPORATION and PRODUCERS BANK OF THE
PHILIPPINES, defendants-respondents.
Yngson & Associates for petitioner.
Henry A. Reyes & Associates for Samso Tung & Asian
Industrial Plastic Corporation.
Eduardo G. Castelo for Sima Wei.
Monsod, Tamargo & Associates for Producers Bank.
Rafael S. Santayana for Mary Cheng Uy.

CAMPOS, JR., J.:

(2) To enforce payment of two checks executed

by Sima Wei, payable to petitioner, and drawn
against the China Banking Corporation, to pay
the balance due on the promissory note.
Except for Lee Kian Huat, defendants filed their separate
Motions to Dismiss alleging a common ground that the
complaint states no cause of action. The trial court granted
the defendants' Motions to Dismiss. The Court of Appeals
affirmed this decision, * to which the petitioner Bank,
represented by its Legal Liquidator, filed this Petition for
Review by Certiorari, assigning the following as the alleged
errors of the Court of Appeals: 1
(1) THE COURT OF APPEALS ERRED IN HOLDING
THAT THE PLAINTIFF-PETITIONER HAS NO CAUSE
OF ACTION AGAINST DEFENDANTSRESPONDENTS HEREIN.
(2) THE COURT OF APPEALS ERRED IN HOLDING
THAT SECTION 13, RULE 3 OF THE REVISED
RULES OF COURT ON ALTERNATIVE
DEFENDANTS IS NOT APPLICABLE TO HEREIN
DEFENDANTS-RESPONDENTS.
The antecedent facts of this case are as follows:

In consideration for a loan extended by petitioner Bank to

respondent Sima Wei, the latter executed and delivered to
the former a promissory note, engaging to pay the petitioner
Bank or order the amount of P1,820,000.00 on or before June
24, 1983 with interest at 32% per annum. Sima Wei made
partial payments on the note, leaving a balance of
P1,032,450.02. On November 18, 1983, Sima Wei issued two
crossed checks payable to petitioner Bank drawn against
China Banking Corporation, bearing respectively the serial
numbers 384934, for the amount of P550,000.00 and
384935, for the amount of P500,000.00. The said checks
were allegedly issued in full settlement of the drawer's
account evidenced by the promissory note. These two checks
were not delivered to the petitioner-payee or to any of its
authorized representatives. For reasons not shown, these
checks came into the possession of respondent Lee Kian
Huat, who deposited the checks without the petitionerpayee's indorsement (forged or otherwise) to the account of
respondent Plastic Corporation, at the Balintawak branch,
Caloocan City, of the Producers Bank. Cheng Uy, Branch
Manager of the Balintawak branch of Producers Bank, relying
on the assurance of respondent Samson Tung, President of
Plastic Corporation, that the transaction was legal and
regular, instructed the cashier of Producers Bank to accept
the checks for deposit and to credit them to the account of
said Plastic Corporation, inspite of the fact that the checks
were crossed and payable to petitioner Bank and bore no
indorsement of the latter. Hence, petitioner filed the
complaint as aforestated.
The main issue before Us is whether petitioner Bank has a
cause of action against any or all of the defendants, in the
alternative or otherwise.
A cause of action is defined as an act or omission of one
party in violation of the legal right or rights of another. The

essential elements are: (1) legal right of the plaintiff; (2)

correlative obligation of the defendant; and (3) an act or
omission of the defendant in violation of said legal right. 2
The normal parties to a check are the drawer, the payee and
the drawee bank. Courts have long recognized the business
custom of using printed checks where blanks are provided for
the date of issuance, the name of the payee, the amount
payable and the drawer's signature. All the drawer has to do
when he wishes to issue a check is to properly fill up the
blanks and sign it. However, the mere fact that he has done
these does not give rise to any liability on his part, until and
unless the check is delivered to the payee or his
representative. A negotiable instrument, of which a check is,
is not only a written evidence of a contract right but is also a
species of property. Just as a deed to a piece of land must be
delivered in order to convey title to the grantee, so must a
negotiable instrument be delivered to the payee in order to
evidence its existence as a binding contract. Section 16 of
the Negotiable Instruments Law, which governs checks,
provides in part:
Every contract on a negotiable instrument is
incomplete and revocable until delivery of the
instrument for the purpose of giving effect
thereto. . . .
Thus, the payee of a negotiable instrument acquires no
interest with respect thereto until its delivery to him. 3
Delivery of an instrument means transfer of possession,
actual or constructive, from one person to another. 4 Without
the initial delivery of the instrument from the drawer to the
payee, there can be no liability on the instrument. Moreover,
such delivery must be intended to give effect to the
instrument.

The allegations of the petitioner in the original complaint

show that the two (2) China Bank checks, numbered 384934
and 384935, were not delivered to the payee, the petitioner
herein. Without the delivery of said checks to petitionerpayee, the former did not acquire any right or interest therein
and cannot therefore assert any cause of action, founded on
said checks, whether against the drawer Sima Wei or against
the Producers Bank or any of the other respondents.
In the original complaint, petitioner Bank, as plaintiff, sued
respondent Sima Wei on the promissory note, and the
alternative defendants, including Sima Wei, on the two
checks. On appeal from the orders of dismissal of the
Regional Trial Court, petitioner Bank alleged that its cause of
action was not based on collecting the sum of money
evidenced by the negotiable instruments stated but on
quasi-delict a claim for damages on the ground of
fraudulent acts and evident bad faith of the alternative
respondents. This was clearly an attempt by the petitioner
Bank to change not only the theory of its case but the basis
of his cause of action. It is well-settled that a party cannot
change his theory on appeal, as this would in effect deprive
the other party of his day in court. 5
Notwithstanding the above, it does not necessarily follow
that the drawer Sima Wei is freed from liability to petitioner
Bank under the loan evidenced by the promissory note
agreed to by her. Her allegation that she has paid the
balance of her loan with the two checks payable to petitioner
Bank has no merit for, as We have earlier explained, these
checks were never delivered to petitioner Bank. And even
granting, without admitting, that there was delivery to
petitioner Bank, the delivery of checks in payment of an
obligation does not constitute payment unless they are
cashed or their value is impaired through the fault of the

creditor. 6 None of these exceptions were alleged by

respondent Sima Wei.
Therefore, unless respondent Sima Wei proves that she has
been relieved from liability on the promissory note by some
other cause, petitioner Bank has a right of action against her
for the balance due thereon.
However, insofar as the other respondents are concerned,
petitioner Bank has no privity with them. Since petitioner
Bank never received the checks on which it based its action
against said respondents, it never owned them (the checks)
nor did it acquire any interest therein. Thus, anything which
the respondents may have done with respect to said checks
could not have prejudiced petitioner Bank. It had no right or
interest in the checks which could have been violated by said
respondents. Petitioner Bank has therefore no cause of action
against said respondents, in the alternative or otherwise. If at
all, it is Sima Wei, the drawer, who would have a cause of
action against her
co-respondents, if the allegations in the complaint are found
to be true.
With respect to the second assignment of error raised by
petitioner Bank regarding the applicability of Section 13, Rule
3 of the Rules of Court, We find it unnecessary to discuss the
same in view of Our finding that the petitioner Bank did not
acquire any right or interest in the checks due to lack of
delivery. It therefore has no cause of action against the
respondents, in the alternative or otherwise.
In the light of the foregoing, the judgment of the Court of
Appeals dismissing the petitioner's complaint is AFFIRMED
insofar as the second cause of action is concerned. On the
first cause of action, the case is REMANDED to the trial court
for a trial on the merits, consistent with this decision, in order
to determine whether respondent Sima Wei is liable to the

Development Bank of Rizal for any amount under the

promissory note allegedly signed by her.
SO ORDERED.

G.R. No. L-43596

October 31, 1936

PHILIPPINE NATIONAL BANK, plaintiff-appellee,

vs.
THE NATIONAL CITY BANK OF NEW YORK, and MOTOR
SERVICE COMPANY, INC., defendants.
MOTOR SERVICE COMPANY, INC., appellant.
L. D. Lockwood for appellant.
Camus and Delgado for appellee.

RECTO, J.:

This case was submitted for decision to the court below on

the following stipulation of facts:
1. That plaintiff is a banking corporation organized and
existing under and by virtue of a special act of the
Philippine Legislature, with office as principal place of
business at the Masonic Temple Bldg., Escolta, Manila,
P. I.; that the defendant National City Bank of New York
is a foreign banking corporation with a branch office
duly authorized and licensed to carry and engage in
banking business in the Philippine Islands, with branch
office and place of business in the National City Bank
Bldg., City of Manila, P. I., and that the defendant
Motor Service Company, Inc., is a corporation
organized and existing under and by virtue of the
general corporation law of the Philippine Islands, with
office and principal place of business at 408 Rizal
Avenue, City of Manila, P. I., engaged in the purchase
and sale of automobile spare parts and accessories.
2. That on April 7 and 9, 1933, an unknown person or
persons negotiated with defendant Motor Service
Company, Inc., the checks marked as Exhibits A and A1, respectively, which are made parts of the
stipulation, in payment for automobile tires purchased
from said defendant's stores, purporting to have been
issued by the "Pangasinan Transportation Co., Inc. by J.
L. Klar, Manager and Treasurer", against the Philippine
National Bank and in favor of the International Auto
Repair Shop, for P144.50 and P215.75; and said checks
were indorsed by said unknown persons in the manner
indicated at the back thereof, the Motor Service Co.,
Inc., believing at the time that the signature of J. L.
Klar, Manager and Treasurer of the Pangasinan
Transportation Co., Inc., on both checks were genuine.

3. The checks Exhibits A and A-1 were then indorsed

for deposit by the defendant Motor Service Company,
Inc, at the National City Bank of New York and the
former was accordingly credited with the amounts
thereof, or P144.50 and P215.75.
4. On April 8 and 10, 1933, the said checks were
cleared at the clearing house and the Philippine
National Bank credited the National City Bank of New
York for the amounts thereof, believing at the time that
the signatures of the drawer were genuine, that the
payee is an existing entity and the endorsement at the
back thereof regular and genuine.
5. The Philippine National Bank then found out that the
purported signatures of J. L. Klar, as Manager and
Treasurer of the Pangasinan Transportation Company,
Inc., in said Exhibits A and A-1 were forged when so
informed by the said Company, and it accordingly
demanded from the defendants the reimbursement of
the amounts for which it credited the National City
Bank of New York at the clearing house and for which
the latter credited the Motor Service Co., but the
defendants refused, and continue to refuse, to make
such reimbursements.
6. The Pangasinan Transportation Co., Inc., objected to
have the proceeds of said check deducted from their
deposit.
7. Exhibits B, C, D, E, F, and G, which were introduced
at the trial in the municipal court of Manila and
forming part of the record of the present case, are
admitted by the parties as genuine and are made part
of this stipulation as well as Exhibit H hereto attached
and made a part hereof.

Upon plaintiff's motion, the case was dismissed before trial as

to the defendant National City Bank of New York. a decision
was thereafter rendered giving plaintiff judgment for the total
amount of P360.25, with interest and costs. From this
decision the instant appeal was taken.
Before us is the preliminary question of whether the original
appeal taken by the plaintiff from the decision of the
municipal court of Manila where this case originated, became
perfected because of plaintiff's failure to attach to the record
within 15 days from receipt of notice of said decision, the
certificate of appeal bond required by section 76 of the Code
of Civil Procedure. It is not disputed that both the appeal
docket fee and the appeal cash bond were paid and
deposited within the prescribed time. The issue is whether
the mere failure to file the official receipt showing that such
deposit was made within the said period is a sufficient
ground to dismiss plaintiff's appeal. This question was settled
by our decision in the case of Blanco vs. Bernabe and lawyers
Cooperative Publishing Co. (page 124, ante), and no further
consideration. No error was committed in allowing said
appeal.
We now pass on to consider and determine the main question
presented by this appeal, namely, whether the appellee has
the right to recover from the appellant, under the
circumstances of this case, the value of the checks on which
the signatures of the drawer were forged. The appellant
maintains that the question should be answered in the
negative and in support of its contention appellant advanced
various reasons presently to be examined carefully.
I. It is contended, first of all, that the payment of the checks
in question made by the drawee bank constitutes an
"acceptance", and, consequently, the case should be
governed by the provisions of section 62 of the Negotiable
Instruments Law, which says:

SEC. 62. Liability of acceptor. The acceptor by

accepting the instrument engages that he will pay it
according to the tenor of his acceptance; and admits:
(a) The existence of the drawer, the
genuineness of his signature, and his capacity
and authority to draw the instrument; and
(b) The existence of the payee and his then
capacity to indorse.
This contention is without merit. A check is a bill of exchange
payable on demand and only the rules governing bills of
exchange payable on demand are applicable to it, according
to section 185 of the Negotiable Instruments Law. In view of
the fact that acceptance is a step unnecessary, in so far as
bills of exchange payable on demand are concerned (sec.
143), it follows that the provisions relative to "acceptance"
are without application to checks. Acceptance implies, in
effect, subsequent negotiation of the instrument, which is not
true in case of the payment of a check because from the
moment a check is paid it is withdrawn from circulation. The
warranty established by section 62, is in favor of holders of
the instrument after its acceptance. When the drawee bank
cashes or pays a check, the cycle of negotiation is
terminated, and it is illogical thereafter to speak of
subsequent holders who can invoke the warranty provided in
section 62 against the drawee. Moreover, according to
section 191, "acceptance" means "an acceptance completed
by delivery or notification" and this concept is entirely
incompatible with payment, because when payment is made
the check is retained by the bank, and there is no such thing
as delivery or notification to the party receiving the payment.
Checks are not to be accepted, but presented at once for
payment. (1 Bouvier's Law Dictionary, 476.) There can be no
such thing as "acceptance" in the ordinary sense of the term.
A check being payable immediately and on demand, the

bank can fulfill its duty to the depositor only by paying the
amount demanded. The holder has no right to demand from
the bank anything but payment of the check, and the bank
has no right, as against the drawer, to do anything but pay it.
(5 R. C. L., p. 516, par. 38.) A check is not an instrument
which in the ordinary course of business calls for acceptance.
The holder can never claim acceptance as his legal right. He
can present for payment, and only for payment. (1 Morse on
Banks and Banking, 6th ed., pp. 898, 899.)
There is, however, nothing in the law or in, business practice
against the presentation of checks for acceptance, before
they are paid, in which case we have a "certification"
equivalent to "acceptance" according to section 187, which
provides that "where a check is certified by the bank on
which it is drawn, the certification is equivalent to an
acceptance", and it is then that the warranty under section
62 exists. This certification or acceptance consists in the
signification by the drawee of his assent to the order of the
drawer, which must not express that the drawee will perform
his promise by any other means than the payment of money.
(Sec. 132.) When the holder of a check procures it to be
accepted or certified, the drawer and all indorsers are
discharged from liability thereon (sec. 188), and then the
check operates as an assignment of a part of the funds to the
credit of the drawer with the bank. (Sec. 189.) There is
nothing in the nature of the check which intrinsically
precludes its acceptance, in like manner and with like effect
as a bill of exchange or draft may be accepted. The bank
may accept if it chooses; and it is frequently induced by
convenience, by the exigencies of business, or by the desire
to oblige customers, voluntarily to incur the obligation. The
act by which the bank places itself under obligation to pay to
the holder the sum called for by a check must be the
expressed promise or undertaking of the bank signifying its
intent to assume the obligation, or some act from which the

law will imperatively imply such valid promise or

undertaking. The most ordinary form which such an act
assumes is the acceptance by the bank of the check, or, as it
is perhaps more often called, the certifying of the check. (1
Morse on Banks and Banking, pp. 898, 899; 5 R. C. L., p.
520.)
No doubt a bank may by an unequivocal promise in writing
make itself liable in any event to pay the check upon
demand, but this is not an "acceptance" of the check in the
true sense of that term. Although a check does not call for
acceptance, and the holder can present it only for payment,
the certification of checks is a means in constant and
extensive use in the business of banking, and its effects and
consequences are regulated by the law merchant. Checks
drawn upon banks or bankers, thus marked and certified,
enter largely into the commercial and financial transactions
of the country; they pass from hand to hand, in the payment
of debts, the purchase of property, and in the transfer of
balances from one house and one bank to another. In the
great commercial centers, they make up no inconsiderable
portion of the circulation, and thus perform a useful,
valuable, and an almost indispensable office. The purpose of
procuring a check to be certified is to impart strength and
credit to the paper by obtaining an acknowledgment from the
certifying bank that the drawer has funds therein sufficient to
cover the check and securing the engagement of the bank
that the check will be paid upon presentation. A certified
check has a distinctive character as a species of commercial
paper, and performs important functions in banking and
commercial business. When a check is certified, it ceases to
possess the character, or to perform the functions, of a
check, and represents so much money on deposit, payable to
the holder on demand. The check becomes a basis of credit
an easy mode of passing money from hand to hand, and

answers the purposes of money. (5 R. C. L., pp. 516,

517.)lwphi1.nt
All the authorities, both English and American, hold that a
check may be accepted, though acceptance is not usual. By
the law merchant, the certificate of the bank that a check is
good is equivalent to acceptance. It implies that the check is
drawn upon sufficient funds in the hands of the drawee, that
they have been set apart for its satisfaction, and that they
shall be so applied whenever the check is presented for
payment. It is an undertaking that the check is good then,
and shall continue good, and this agreement is as binding on
the bank as its notes of circulation, a certificate of deposit
payable to the order of the depositor, or any other obligation
it can assume. The object of certifying a check, as regards
both parties is to enable the holder to use it as money. The
transferee takes it with the same readiness and sense of
security that he would take the notes of the bank. It is
available also to him for all the purposes of money. Thus it
continues to perform its important functions until in the
course of business it goes back to the bank for redemption,
and is extinguished by payment. It cannot be doubted that
the certifying bank intended these consequences, and it is
liable accordingly. To hold otherwise would render these
important securities only a snare and a delusion. A bank
incurs no greater risk in certifying a check than in giving a
certificate of deposit. In well-regulated banks the practice is
at once to charge the check to the account of the drawer, to
credit it in a certified check account, and, when the check is
paid, to debit that account with the amount. Nothing can be
simpler or safer than this process. (Merchants' Bank vs.
States Bank, 10 Wall., 604, at p. 647; 19 Law. ed., 1008,
1019.)
Ordinarily the acceptance or certification of a check is
performed and evidenced by some word or mark, usually the

words "good", "certified" or "accepted" written upon the

check by the banker or bank officer. (1 Morse, Banks and
Banking, 915; 1 Bouvier's Law Dictionary, 476.) The bank
virtually says, that check is good; we have the money of the
drawer here ready to pay it. We will pay it now if you will
receive it. The holder says, No, I will not take the money; you
may certify the check and retain the money for me until this
check is presented. The law will not permit a check, when
due, to be thus presented, and the money to be left with the
bank for the accommodation of the holder without
discharging the drawer. The money being due and the check
presented, it is his own fault if the holder declines to receive
the pay, and for his own convenience has the money
appropriated to that check subject to its future presentment
at any time within the statute of limitations. (1 Morse on
Banks and Banking, p. 920.)
The theory of the appellant and of the decisions on which it
relies to support its view is vitiated by the fact that they take
the word "acceptance" in its ordinary meaning and not in the
technical sense in which it is used in the Negotiable
Instruments Law. Appellant says that when payment is made,
such payment amounts to an acceptance, because he who
pays accepts. This is true in common parlance but
"acceptance" in legal contemplation. The word "acceptance"
has a peculiar meaning in the Negotiable Instruments Law,
and, as has been above stated, in the instant case there was
payment but no acceptatance, or what is equivalent to
acceptance, certification.
With few exceptions, the weight of authority is to the effect
that "payment" neither includes nor implies "acceptance".
In National Bank vs. First National Bank ([19101, 141 Mo.
App., 719; 125 S. W., 513), the court asks, if a mere promise
to pay a check is binding on a bank, why should not the
absolute payment of the check have the same effect? In

response, it is submitted that the two things, that is

acceptance and payment, are entirely different. If the
drawee accepts the paper after seeing it, and then permits it
to go into circulation as genuine, on all the principles of
estoppel, he ought to be prevented from setting up forgery to
defeat liability to one who has taken the paper on the faith of
the acceptance, or certification. On the other hand, mere
payment of the paper at the termination of its course does
not act as an estoppel. The attempt to state a general rule
covering both acceptance and payment is responsible for a
large part of the conflicting arguments which have been
advanced by the courts with respect to the rule. (Annotation
at 12 A. L. R., 1090 1921].)
In First National Bank vs. Brule National Bank ([1917], 12 A.
L. R., 1079, 1085), the court said:
We are of the opinion that "payment is not
acceptance". Acceptance, as defined by section 131,
cannot be confounded with payment. . . .
Acceptance, certification, or payment of a check, by
the express language of the statute, discharges the
liability only of the persons named in the statute, to
wit, the drawer and all indorsers, and the contract of
indorsement by the negotiator if the check is
discharged by acceptance, certification, or payment.
But clearly the statute does not say that the contract
of warranty of the negotiator, created by section 65, is
discharged by these acts.
The rule supported by the majority of the cases (14 A. L. R.
764), that payment of a check on a forged or unauthorized
indorsement of the payee's name, and charging the same to
the drawer's account, do not amount to an acceptance so as
to make the bank liable to the payee, is supported by all of

the recent cases in which the question is considered. (Cases

cited, Annotation at 69 A. L. R., 1076, 1077 [1930].)
Merely stamping a check "Paid" upon its payment on a forged
or unauthorized indorsement is not an acceptance thereof so
as to render the drawee bank liable to the true payee.
(Anderson vs. Tacoma National Bank [1928], 146 Wash., 520;
264 Pac., 8; Annotation at 69 A. L. R., 1077, [1930].)
In State Bank of Chicago vs. Mid-City Trust & Savings Bank
(12 A. L. R., 989, 991, 992), the court said:
The defendant in error contends that the payment of the
check shows acceptance by the bank, urging that there can
be no more definite act by the bank upon which a check has
been drawn, showing acceptance than the payment of the
check. Section 184 of the Negotiable Instruments Act (sec.
202) provides that the provisions of the act applicable to bills
of exchange apply to a check, and section 131 (sec. 149),
that the acceptance of a bill must be in writing signed by the
drawee. Payment is the final act which extinguishes a bill.
Acceptance is a promise to pay in the future and continues
the life of the bill. It was held in the First National Bank vs.
Whitman (94 U. S., 343; 24 L. ed., 229), that payment of a
check upon a forged indorsement did not operate as an
acceptance in favor of the true owner. The contrary was held
in Pickle vs. Muse (Fickle vs. People's Nat. Bank, 88 Tenn.,
380; 7 L.R.A., 93; 17 Am. St. Rep., 900; 12 S. W., 919), and
Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep.,
751) at a time when the Negotiable Instruments Act was not
in force in those states. The opinion of the Supreme Court of
the United States seems more logical, and the provision of
the Negotiable Instruments Act now require an acceptance to
be in writing. Under this statute the payment of a check on a
forged indorsement, stamping it "paid," and charging it to the
account of the drawer, do not constitute an acceptance of
the check or create a liability of the bank to the true holder

or the payee. (Elyria Sav. & Bkg. Co. vs. Walker Bin Co., 92
Ohio St., 406; L. R. A., 1916D, 433; 111 N. E., 147; Ann. Cas.
1917D, 1055; Baltimore & O. R. Co. vs. First National Bank,
102 Va., 753; 47 S. E., 837; State Bank of Chicago vs. MidCity Trust & Savings Bank 12 A. L. R., pp. 989, 991, 992.)
Before drawee's acceptance of check there is no privity of
contract between drawee and payee. Drawee's payment of
check on unauthorized indorsement does not constitute
"acceptance" of check. (Sinclair Refining Co. vs. Moultrie
Banking Co., 165 S. E., 860 [1932].)
The great weight of authority is to the effect that the
payment of a check upon a forged or unauthorized
indorsement and the stamping of it "paid" does not
constitute an acceptance. (Dakota Radio Apparatus Co. vs.
First Nat. Bank of Rapid City, 244 N. W., 351, 352 [1932].)
Payment of the check, cashing it on presentment is not
acceptance. (South Boston Trust Co. vs. Levin, 249 Mass., 45,
48, 49; 143 N. E., 816; Blocker, Shepard Co. vs. Granite Trust
Company, 187 Me., 53, 54 [1933].)
In Rauch vs. Bankers National Bank of Chicago (143 Ill. App.,
625, 636, 637 [1908]), the language of the decision was as
follows:
. . . The plaintiffs say that this acceptance was made
by the very unauthorized payments of which they
complain. This suggestion does not seem forceful to
us. It is the contention which was made before the
Supreme Court of the United States in First National
Bank vs. Whitman (94 U. S., 343), and repudiated by
that court. The language of the opinion in that case is
so apt in the present case that we quote it:

"It is further contended that such an acceptance of a

check as creates a privity between the payee and the
bank is established by the payment of the amount of
this check in the manner described. This argument is
based upon the erroneous assumption that the bank
has paid this check. If this were true, it would have
discharged all of its duty, and there would be an end to
the claim against it. The bank supposed that it had
paid the check, but this was an error. The money it
paid was upon a pretended and not a real indorsement
of the name of the payee. . . . We cannot recognize the
argument that payment of the amount of the check or
sight draft under such circumstances amounts to an
acceptance creating a privity of contract with the real
owner.
"It is difficult to construe a payment as an acceptance
under any circumstances. . . . A banker or individual
may be ready to make actual payment of a check or
draft when presented, while unwilling to make a
promise to pay at a future time. Many, on the other
hand, are more ready to promise to pay than to meet
the promise when required. The difference between
the transactions is essential and inherent."
And in Wharf vs. Seattle National Bank (24 Pac. [2d]), 120,
123 [1933]):
It is the rule that payment of a check on unauthorized
or forged indorsement does not operate as an
acceptance of the check so as to authorize an action
by the real owner to recover its amount from the
drawee bank. (Michie on Banks and Banking, vol. 5,
sec. 278, p. 521.) A full list of the authorities
supporting the rule will be found in a footnote to the
foregoing citation. (See also, Federal Land Bank vs.
Collins, 156 Miss., 893; 127 So., 570; 69 A. L. R., 1068.)

In a very recent case, Federal Land Bank vs. Collins (69 A. L.

R., 1068, 1072-1074), this question was discussed at
considerable length. The court said:
In the light of the first of these statutes, counsel for appellant
is forced to stand upon the narrow ledge that the payment of
the check by the two banks will constitute an acceptance.
The drawee bank simply marked it "paid" and did not write
anything else except the date. The bank first paying the
check, the Commercial National Bank and Trust Company,
simply wrote its name as indorser and passed the check on
to the drawee bank; does this constitute an acceptance? The
precise question has not been presented to this court for
decision. Without reference to authorities in other
jurisdictions it would appear that the drawee bank had never
written its name across the paper and therefore, under the
strict terms of the statute, could not be bound as an
acceptor; in the second place, it does not appear to us to be
illogical and unsound to say that the payment of a check by
the drawee, and the stamping of it "paid", is equivalent to
the same thing as the acceptance of a check; however, there
is a variety of opinions in the various jurisdictions on this
question. Counsel correctly states that the theory upon which
the numerous courts hold that the payment of a check
creates privity between the holder of the check and the
drawee bank is tantamount to a pro tanto assignment of that
part of the funds. It is most easily understood how the
payment of the check, when not authorized to be done by
the drawee bank, might under such circumstances create
liability on the part of the drawee to the drawer. Counsel
cites the case of Pickle vs. Muse (88 Tenn, 380; 12 S. W., 919;
7 L. R. A., 93; 17 Am. St. Rep., 900), wherein Judge Lurton
held that the acceptance of a check was necessary in order
to give the holder thereof a right of action thereon against
the bank, and further held in a case similar to this, so far as
this question is concerned, that the acceptance of a check so

as to give a right of action to the payee is inferred from the

retention of the check by the bank and its subsequent charge
of the amount to the drawer, although it was presented by,
and payment made, an unauthorized person. Judge Lurton
cited the case of National Bank of the Republic vs. Millard (10
Wall., 152; 19 L. ed., 897), wherein the Supreme Court of the
United States, not having such a case before it, threw out the
suggestion that, if it was shown that a bank had charged the
check on its books against the drawer and made settlement
with the drawee that the holder could recover on account of
money had and received, invoking the rule of justice and
fairness, it might be said there was an implied promise to the
holder to pay it on demand. (See National Bank of the
Republic vs. Millard, 10 Wall. [77 U. S.], 152; 19 L. ed., 899.)
The Tennessee court then argued that it would be inequitable
and unconscionable for the owner and payee of the check to
be limited to an action against an insolvent drawer and might
thereby lose the debt. They recognized the legal principle
that there is no privity between the drawer bank and the
holder, or payee, of the check, and proceeded to hold that no
particular kind of writing was necessary to constitute an
acceptance and that it became a question of fact, and the
bank became liable when it stamped it "paid" and charged it
to the account of the drawer, and cites, in support of its
opinion, Seventh National Bank vs. Cook (73 Pa., 483; 13 Am.
Rep., 751); Saylor vs. Bushong (100 Pa., 23; 45 Am. Rep.,
353); and Dodge vs. Bank (20 Ohio St., 234; 5 Am. Rep.,
648).
This decision was in 1890, prior to the enactment of
the Negotiable Instruments Law by the State of
Tennessee. However, in this case Judge Snodgrass
points out that the Millard case, supra, was dicta. The
Dodge case, from the Ohio court, held exactly as the
Tennessee court, but subsequently in the case of Elyria
Bank vs. Walker Bin Co. (92 Ohio St., 406; 111 N. E.,

147; L. R. A. 1916D, 433; Ann. Cas. 1917D, 1055), the

court held to the contrary, called attention to the fact
that the Dodge case was no longer the law, and
proceeded to announce that, whatever might have
been the law before the passage of the Negotiable
Instrument Act in that state, it was no longer the law;
that the rule announced in the Dodge case had been
"discarded." The court, in the latter case, expressed its
doubts that the courts of Tennessee and Pennsylvania
would adhere to the rule announced in the Pickle case,
quoted supra, in the face of the Negotiable Instrument
Law. Subsequent to the Millard case, the Supreme
Court of the United States, in the case of First National
Bank of Washington vs. Whitman (94 U. S., 343, 347;
24 L. ed., 229), where the bank, without any
knowledge that the indorsement of the payee was
unauthorized, paid the check, and it was contended
that by the payment the privity of contract existing
between the drawer and drawee was imparted to the
payee, said:
"It is further contended that such an acceptance of the
check as creates a privity between the payee and the
bank is established by the payment of the amount of
this check in the manner described. This argument is
based upon the erroneous assumption that the bank
has paid this check. If this were true, it would have
discharged all of its duty, and there would be an end of
the claim against it. The bank supposed that it had
paid the check; but this was an error. The money it
paid was upon a pretended and not a real indorsement
of the name of the payee. The real indorsement of the
payee was as necessary to a valid payment as the real
signature of the drawer; and in law the check remains
unpaid. Its pretended payment did not diminish the
funds of the drawer in the bank, or put money in the

pocket of the person entitled to the payment. The

state of the account was the same after the pretended
payment as it was before.
"We cannot recognize the argument that a payment of
the amount of a check or sight draft under such
circumstances amounts to an acceptance, creating a
privity of contract with the real owner. It is difficult to
construe a payment as an acceptance under any
circumstances. The two things are essentially different.
One is a promise to perform an act, the other an actual
performance. A banker or an individual may be ready
to make actual payment of a check or draft when
presented, while unwilling to make a promise to pay at
a future time. Many, on the other hand, are more
ready to promise to pay than to meet the promise
when required. The difference between the
transactions is essential and inherent."
Counsel for the appellant cite other cases holding that
the stamping of the check "paid" and the charging of
the amount thereof to the drawer constituted an
acceptance, but we are of opinion that none of these
cases cited hold that it is in compliance with the
Negotiable Instruments Act; paying the check and
stamping same is not the equivalent of accepting the
check in writing signed by the drawee. The cases
holding that payment as indicated above constituted
acceptance were rendered prior to the adoption of the
Negotiable Instruments Act in the particular state, and
these decisions are divided into two classes: the one
holding that the check delivered by the drawer to the
holder and presented to the bank or drawee
constitutes an assignment pro tanto; the other holding
that the payment of the check and the charging of
same to the drawee although paid to an unauthorized

person creates privity of contract between the holder

and the drawee bank.
We have already seen that our own court has
repudiated the assignment pro tanto theory, and since
the adoption of the Negotiable Instrument Act by this
state we are compelled to say that payment of a check
is not equivalent to accepting a check in writing and
signing the name of the acceptor thereon. Payment of
the check and the charging of same to the drawer
does not constitute an acceptance. Payment of the
check is the end of the voyage; acceptance of the
check is to fuel the vessel and strengthen it for
continued operation on the commercial sea. What we
have said applies to the holder and not to the drawer
of the check. On this question we conclude that the
general rule is that an action cannot be maintained by
a payee of the check against the bank on which is
draw unless the check has been certified or accepted
by the bank in compliance with the statute, even
though at the time the check is that an action cannot
be maintained by a payee of the drawer of the check
out of which the check is legally payable; and that the
payment of the check by the bank on which it is
drawn, even though paid on the unauthorized
indorsement of the name of the holder (without notice
of the defect by the bank), does not constitute a
certification thereof, neither is it an acceptance
thereof; and without acceptance or certification, as
provided by statute, there is no privity of contract
between the drawee bank and the payee, or holder of
the check. Neither is there an assignment pro tanto of
the funds where the check is not drawn on a particular
fund, or does not show on its face that it is an
assignment of a particular fund. The above rule as
stated seems to have been the rule in the majority of

the states even before the passage of the uniform

Negotiable Instruments Act in the several states.
The decision in the case of First National Bank vs. Bank of
Cottage Grove (59 Or., 388), which appellant cites in its brief
(pp. 12, 13 ) has been expressly overruled by the Supreme
Court of Massachusetts in South Boston Trust Co. vs. Levin
(143 N. E., 816, 817), in the following language:
In First National Bank vs. Bank of Cottage Grove (59
Or., 388; 117 Pac., 293, 296, at page 396), it was said:
"The payment of a bill or check by the drawee
amounts to more than an acceptance. The rule,
holding that such a payment has all the efficacy of an
acceptance, is founded upon the principle that the
greater includes the less." We are unable to agree with
this statement as there is no similarity between
acceptance and payment; payment discharges the
instrument, and no one else is expected to advance
anything on the faith of it; acceptance, contemplates
further circulation, induced by the fact of acceptance.
The rule that the acceptor made certain admissions
which will inure to the benefit of subsequent holders,
has no applicability to payment of the instrument
where subsequent holders can never exist.
II. The old doctrine that a bank was bound to know its
correspondent's signature and that a drawee could not
recover money paid upon a forgery of the drawer's name,
because it was said, the drawee was negligent not to know
the forgery and it must bear the consequence of its
negligence, is fast fading into the misty past, where it
belongs. It was founded in misconception of the fundamental
principles of law and common sense. (2 Morse, Banks and
Banking, p. 1031.)

Some of the cases carried the rule to its furthest limit and
held that under no circumstances (except, of course, where
the purchaser of the bill has participated in the fraud upon
the drawee) would the drawee be allowed to recover bank
money paid under a mistake of fact upon a bill of exchange
to which the name of the drawer had been forged. This
doctrine has been freely criticized by the eminent authorities,
as a rule too favorable to the holder, not the most fair, nor
best calculated to effectuate justice between the drawee and
the drawer. (5 R.C.L., p. 556.)
The old rule which was originally announced by Lord
Mansfield in the leading case of Price vs. Neal (3 Burr., 1354),
elicited the following comment from Justice Holmes, then
Chief Justice of the Supreme Court of Massachusetts, in the
case of Dedham National Bank vs. Everett National Bank (177
Mass., 392). "Probably the rule was adopted from an
impression of convenience rather than for any more
academic reason; or perhaps we may say that Lord Mansfield
took the case out of the doctrine as to payments under a
mistake of fact by the assumption that a holder who simply
presents negotiable paper for payment makes no
representation as to the signature, and that the drawee pays
at his peril."
Such was the reaction that followed Lord Mansfield's rule
which Justice Story of the United States Supreme adopted in
the case of Bank of United States vs. Georgia (10 Wheat.,
333), that in B. B. Ford & Co. vs. People's Bank of Orangeburg
(74 S. C., 180), it was held that "an unrestricted indorsement
of a draft and presentation to the drawee is a representation
that the signature of the drawer is genuine", and in Lisbon
First National Bank vs. Wyndmere Bank (15 N. D., 299), it was
also held that "the drawee of a forged check who has paid
the same without detecting the forgery, may upon discovery
of the forgery, recover the money paid from the party who

received the money, even though the latter was a good faith
holder, provided the latter has not been misled or prejudiced
by the drawee's failure to detect the forgery."
Daniel, in his treatise on Negotiable Instruments, has the
following to say:
In all the cases which hold the drawee absolutely estoppel by
acceptance or payment from denying genuineness of the
drawer's name, the loss is thrown upon him on the ground of
negligence on his part in accepting or paying, until he has
ascertained the bill to be genuine. But the holder has
preceded him in negligence, by himself not ascertaining the
true character of the paper before he received it, or
presented it for acceptance or payment. And although, as a
general rule, the drawee is more likely to know the drawer's
handwriting than a stranger is, if he is in fact deceived as to
its genuineness, we do not perceive that he should suffer
more deeply by mistake than a stranger, who, without
knowing the handwriting, has taken the paper without
previously ascertaining its genuineness. And the mistake of
the drawee should always be allowed to be corrected, unless
the holder, acting upon faith and confidence induced by his
honoring the draft, would be placed in a worse position by
according such privilege to him. This view has been applied
in a well considered case, and is intimidated in another; and
is forcibly presented by Mr. Chitty, who says it is going a
great way to charge the acceptor with knowledge of his
correspondent's handwriting, "unless some bona fide holder
has purchased the paper on the faith of such an act."
Negligence in making payment under a mistake of fact is not
now deemed a bar to recovery of it, and we do not see why
any exception should be made to the principle, which would
apply as well as to release an obligation not consummated by
payment. ( Vol. 2, 6th edition, pp. 1537-1539.)

III. But now the rule is perfectly well settled that in

determining the relative rights of a drawee who, under a
mistake of fact, has paid, and a holder who has received such
payment, upon a check to which the name of the drawer has
been forged, it is only fair to consider the question of
diligence or negligence of the parties in respect thereto.
(Woods and Malone vs. Colony Bank [1902], 56 L. R. A., 929,
932.) The responsibility of the drawee who pays a forged
check, for the genuineness of the drawer's signature, is
absolute only in favor of one who has not, by his own fault or
negligence, contributed to the success of the fraud or to
mislead the drawee. (National Bank of America vs. Bangs,
106 Mass., 441; 8 Am. Rep., 349; Woods and Malone vs.
Colony Bank, supra; De Feriet vs. Bank of America, 23 La.
Ann., 310; B. B. Ford & Co. vs. People's Bank of Orangeburg,
74 S. C., 180; 10 L. R. A. [N. S.], 63.) If it appears that the one
to whom payment was made was not an innocent sufferer,
but was guilty of negligence in not doing something, which
plain duty demanded, and which, if it had been done, would
have avoided entailing loss on any one, he is not entitled to
retain the moneys paid through a mistake on the part of the
drawee bank. (First Nat. Bank of Danvers vs. First Nat. Bank
of Salem, 151 Mass., 280; 24 N. E., 44; 21 A. S. R., 450; First
Nat. Bank of Orleans vs. State Bank of Alma, 22 Neb., 769; 36
N. W., 289; 3 A. S. R., 294; American Exp. Co. vs. State Nat.
Bank, 27 Okla., 824; 113 Pac., 711; 33 L. R. A. [N. S.], 188; B.
B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180;
54 S. E., 204; 114 A. S. R., 986; 7 Ann. Cas., 744; 10 L. R. A.
[N. S.], 63; People's Bank vs. Franklin Bank, 88 Tenn. 299; 12
S. W., 716; 17 A. S. R.) 884; 6 L. R. A., 724; Canadian Bank of
Commerce vs. Bingham, 30 Wash., 484; 71 Pac., 43; 60 L. R.
A., 955.) In other words, to entitle the holder of a forged
check to retain the money obtained he must be able to show
that the whole responsibility of determining the validity of
the signature was upon the drawee, and that the negligence
of such drawee was not lessened by any failure of any

precaution which, from his implied assertion in presenting the

check as a sufficient voucher, the drawee had the right to
believe he had taken. (Ellis vs. Ohio Life Insurance & Trust
Co., 4 Ohio St., 628; Rouvant vs. Bank, 63 Tex., 610; Bank vs.
Ricker, 71 Ill., 429; First National Bank of Danvers vs. First
Nat. Bank of Salem, 24 N. E., 44, 45; B. B. Ford & Co. vs.
People's Bank of Orangeburg, supra.) The recovery is
permitted in such case, because, although the drawee was
constructively negligent in failing to detect the forgery, yet if
the purchaser had performed his duty, the forgery would in
all probability have been detected and the fraud defeated.
(First National Bank of Lisbon vs. Bank of Wyndmere, 15 N.
D., 209; 10 L. R. A. [N. S.], 49.) In the absence of actual fault
on the part of the drawee, his constructive fault in not
knowing the signature of the drawer and detecting the
forgery will not preclude his recovery from one who took the
check under circumstances of suspicion without proper
precaution, or whose conduct has been such as to mislead
the drawee or induce him to pay the check without the usual
scrutiny or other precautions against mistake or fraud.
(National Bank of America vs. Bangs, supra; First National
Bank vs. Indiana National Bank, 30 N. E., 808-810; Woods
and Malone vs. Colony Bank, supra; First National Bank of
Danvers vs. First Nat. Bank of Salem, 151 Mass., 280.) Where
a loss, which must be borne by one of two parties alike
innocent of forgery, can be traced to the neglect or fault of
either, it is unreasonable that it would be borne by him, even
if innocent of any intentional fraud, through whose means it
has succeeded. (Gloucester Bank vs. Salem Bank, 17 Mass.,
33; First Nat. Bank of Danvers vs. First National Bank of
Salem, supra; B. B. Ford & Co. vs. People's Bank of
Orangeburg, supra.) Again if the indorser is guilty of
negligence in receiving and paying the check or draft, or has
reason to believe that the instrument is not genuine, but fails
to inform the drawee of his suspicions the indorser according
to the reasoning of some courts will be held liable to the

drawee upon his implied warranty that the instrument is

genuine. (B. B. Ford & Co. vs. People's Bank of Orangeburg,
supra; Newberry Sav. Bank vs. Bank of Columbia, 93 S. C.,
294; 38 L. R. A. [N. S], 1200.) Most of the courts now agree
that one who purchases a check or draft is bound to satisfy
himself that the paper is genuine; and that by indorsing it or
presenting it for payment or putting it into circulation before
presentation he impliedly asserts that he has performed his
duty, the drawee, who has, without actual negligence on his
part, paid the forged demand, may recover the money paid
from such negligent purchaser. (Lisbon First National Bank
vs. Wyndmere Bank, supra.) Of course, the drawee must, in
order to recover back the holder, show that he himself was
free from fault. (See also 5 R. C. L., pp. 556-558.)

the only fault attributable to the drawee is the constructive

fault which the law raises from the bald fact that he has
failed to detect the forgery, and if he is not chargeable with
actual fault in addition to such constructive fault, then he is
not precluded from recovery from a holder whose conduct
has been such as to mislead the drawee or induce him to pay
the check or bill of exchange without the usual security
against fraud. The holder must refund to a drawee who is not
guilty of actual fault if the holder was negligent in not making
due inquiry concerning the validity of the check before he
took it, and if the drawee can be said to have been excused
from making inquiry before taking the check because of
having had a right to, presume that the holder had made
such inquiry."

So, if a collecting bank is alone culpable, and, on account of

its negligence only, the loss has occurred, the drawee may
recover the amount it paid on the forged draft or check.
(Security Commercial & Sav. Bank vs. Southern Trust & C.
Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)

The rule that one who first negotiates forged paper without
taking some precaution to learn whether or not it is genuine
should not be allowed to retain the proceeds of the draft or
check from the drawee, whose sole fault was that he did not
discover the forgery before he paid the draft or check, has
been followed by the later cases. (Security Commercial &
Savings Bank vs. Southern Trust & C. Bank [1925], 74 Cal.
App., 734; 241 Pac., 945; Hutcheson Hardware Co. vs.
Planters State Bank [1921], 26 Ga. App., 321; 105 S. E., 854;
[Annotation at 71 A. L. R., 337].)

But we are aware of no case in which the principle that the

drawee is bound to know the signature of the drawer of a bill
or check which he undertakes to pay has been held to be
decisive in favor of a payee of a forged bill or check to which
he has himself given credit by his indorsement. (Secalso,
Mckleroy vs. Bank, 14 La. Ann., 458; Canal Bank vs. Bank of
Albany, 1 Hill, 287; Rouvant vs. Bank, supra, First Nat. Bank
vs. Indiana National Bank; 30 N. E., 808-810.)
In First Nat. Bank vs. United States National Bank ([1921],
100 Or., 264; 14 A. L. R., 479; 197 Pac., 547), the court
declared: "A holder cannot profit by a mistake which his
negligent disregard of duty has contributed to induce the
drawee to commit. . . . The holder must refund, if by his
negligence he has contributed to the consummation of the
mistake on the part of the drawee by misleading him. . . . If

Where a bank, without inquiry or identification of the person

presenting a forged check, purchases it, indorses it,
generally, and presents it to the drawee bank, which pays it,
the latter may recover if its only negligence was its mistake
in having failed to detect the forgery, since its mistake, did
not mislead the purchaser or bring about a change in
position. (Security Commercial & Savings Bank vs. Southern
Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)
Also, a drawee could recover from another bank the portion
of the proceeds of a forged check cashed by the latter and

deposited by the forger in the second bank and never

withdrawn, upon the discovery of the forgery three months
later, after the drawee had paid the check and returned the
voucher to the purported drawer, where the purchasing bank
was negligent in taking the check, and was not injured by the
drawee's negligence in discovering and reporting the forgery
as to the amount left on deposit, since it was not a purchaser
for value. (First State Bank & T. Co. vs. First Nat. Bank [1924],
314 Ill., 269; 145 N. E., 382.)
Similarly, it has been held that the drawee of a check could
recover the amount paid on the check, after discovery of the
forgery, from another bank, which put the check into
circulation by cashing it for the one who had forged the
signature of both drawer and payee without making any
inquiry as to who he was although he was a stranger, after
which the check reached, and was paid by, the drawee, after
going through the hands of several intermediate indorsees.
(71 A. L. R., p. 340.)
In First National Bank vs. Brule National Bank ([1917], 12 A.
L. R., 1079, 1085), the following statement was made:
We are clearly of opinion, therefore that the warranty of
genuineness, arising upon the act of the Brule National Bank
in putting the check in circulation, was not discharged by
payment of the check by the drawee (First National Bank),
nor was the Brule National Bank deceived or misled to its
prejudice by such payment. The Brule National Bank by its
indorsement and delivery warranted its own identification of
Kost and the genuineness of his signature. The indorsement
of the check by the Brule National Bank was such as to
assign the title to the check to its assignee, the Whitbeck
National Bank, and the amount was credited to the indorser.
The check bore no indication that it was deposited for
collection, and was not in any manner restricted so as to
constitute the indorsee the agent of the indorser, nor did it

prohibit farther negotiation of the instrument, nor did it

appear to be in trust for, or to the use of, any other person,
nor was it conditional. Certainly the Pukwana Bank was
justified in relying upon the warrant of genuineness, which
implied the full identification of Kost, and his signature by the
defendant bank. This view of the statute is in accord with the
decisions of many courts. (First National Bank vs. State Bank,
22 Neb., 769; 3 Am. St. Rep., 294; 36 N. W., 289; First
National Bank vs. First National Bank, 151 Mass., 280; 21 Am.
St. Rep., 450; 24 N. E., 44; People's Bank vs. Franklin Bank,
88 Tenn., 299; 6 L. R. A., 727; 17 Am. St. Rep., 884; 12 S. W.,
716.)"
The appellant leans heavily on the case of Fidelity & Co. vs.
Planenscheck (71 A. L. R., 331), decided in 1929. We have
carefully examined this decision and we do not feel justified
in accepting its conclusions. It is but a restatement of the
long abandoned rule of Neal vs. Price, and it predicated on
the wrong premise that the payment includes acceptance,
and that a bank drawee paying a check drawn on it becomes
ipso facto an acceptor within the meaning of section 62 of
the Negotiable Instruments Act. Moreover in a more recent
decision, that of Louisa National Bank vs. Kentucky National
Bank (39 S. W. [2nd] 497, 501) decided in 1931, the Court of
Appeals of Kentucky held the following:
The appellee, on presentation for payment of $600
check, failed to discover it was a forgery. It was bound
to know the signature of its customer, Armstrong, and
it was derelict in failing to give his signature to the
check sufficient attention and examination to enable it
to discover instantly the forgery. The appellant, when
the check was presented to it by Banfield, failed to
make an inquiry of or about him and did not cause or
have him to be identified. Its act in so paying to him
the check is a degree of negligence on its part

equivalent to positive negligence. It indorsed the

check, and, while such indorsement may not be
regarded within the meaning of the Negotiable
Instrument Law as amounting to a warranty to
appellant of that which it indorsed, it at least
substantially served as a representation to it that it
had exercised ordinary care and had complied with the
rules and customs of prudent banking. Its indorsement
was calculated, if it did not in fact do so, to lull the
drawee bank into indifference as to the drawer's
signature to it when paying the check and charging it
to its customer's account and remitting its proceeds to
appellant's correspondent.
If in such a transaction between the drawee and the
holder of a check both are without fault, no recovery
may be had of the money so paid. (Deposit Bank of
Georgetown vs. Fayette National Bank, supra, and
cases cited.) Or the rule may be more accurately
stated that, where the drawee pays the money, he
cannot recover it back from a holder in good faith, for
value and without fault.
If, on the other hand, the holder acts in bad faith, or is
guilty of culpable negligence, a recovery may be had
by the drawee of such holder. The negligence of the
Bank of Louisa in failing to inquire of and about
Banfield, and to cause or to have him identified before
it parted with its money on the forged check, may be
regarded as the primary and proximate cause of the
loss. Its negligence in this respect reached in its effect
the appellee, and induced incaution on its part. In
comparison of the degrees of the negligence of the
two, it is apparent that of the appellant excels in
culpability. Both appellant and appellee inadvertently
made a mistake, doubtless due to a hurry incident to

business. The first and most grievous one was made

by the appellant , amounting to its disregard of the
duty, it owed itself as well as the duty it owed to the
appellee, and it cannot on account thereof retain as
against the appellee the money which it so received. It
cannot shift the loss to the appellee, for such disregard
of its duty inevitably contributed to induce the
appellee to omit its duty critically to examine the
signature of Armstrong, even if it did not know it
instantly at the time it paid the check. (Farmers' Bank
of Augusta vs. Farmer's Bank of Maysville, supra, and
cases cited.)
IV. The question now is to determine whether the appellant's
negligence in purchasing the checks in question is such as to
give the appellee the right to recover upon said checks, and
on the other hand, whether the drawee bank was not itself
negligent, except for its constructive fault in not knowing the
signature of the drawer and detecting the forgery.
We quote with approval the following conclusions of the court
a quo:
Check Exhibit A bears number 637023-D and is dated
April 6, 1933, whereas check Exhibit A-1 bears number
637020-D and is dated April 7, 1933. Therefore, the
latter check, which is prior in number to the former
check, is however, issued on a later date. This
circumstance must have aroused at least the curiosity
of the Motor Service Co., Inc.
The Motor Service Co., Inc., accepted the two checks
from unknown persons. And not only this; check
Exhibit A is indorsed by a subagent of the agent of the
payee, International Auto Repair Shop. The Motor
Service Co., Inc., made no inquiry whatsoever as to the
extent of the authority of these unknown persons. Our

Supreme Court said once that "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" (Insular Drug Co. vs. National
Bank, 58, Phil., 684).
xxx

xxx

Motor Service Co., Inc., and the Philippine National

Bank. (B. of E., pp. 25, 28, 35.)
We are of opinion that the facts of the present case do not
make it one between two equally innocent persons, the
drawee bank and the holder, and that they are governed by
the authorities already cited and also the following:

xxx

Check Exhibit A-1, aside from having been indorsed by

a supposed agent of the international Auto Repair
Shop is crossed generally. The existence of two parallel
lines transversally drawn on the face of this check was
a warning that the check could only be collected
through a banking institution (Jacobs, Law of Bills of
Exchange, etc., pp., 179, 180; Bills of Exchange Act of
England, secs. 76 and 79). Yet the Motor Service Co.,
Inc., accepted the check in payment for merchandise.
. . . In Exhibit H attached to the stipulation of facts as
an integral part thereof, the Motor Service Co., Inc.,
stated the following:
"The Pangasinan Transportation Co. is a good customer
of this firm and we received checks from them every
month in payment of their account. The two checks in
question seem to be exactly similar to the checks
which we received from the Pangasinan Transportation
Co. every month."
If the failure of the Motor Service Co., Inc., to detect
the forgery of the drawer's signature in the two
checks, may be considered as an omission in good
faith because of the similarity stated in the letter, then
the same consideration applies to the Philippine
National Bank, for the drawer is a customer of both the

The point in issue has sometimes been said to be that

of negligence. The drawee who has paid upon the
forged signature is held to bear the loss, because he
has been negligent in failing to recognize that the
handwriting is not that of his customer. But it follows
obviously that if the payee, holder, or presenter of the
forged paper has himself been in default, if he has
himself been guilty of a negligence prior to that of the
banker, or if by any act of his own he has at all
contributed to induce the banker's negligence, then he
may lose his right to cast the loss upon the banker.
The courts have shown a steadily increasing
disposition to extend the application of this rule over
the new conditions of fact which from time to time
arise, until it can now rarely happen that the holder,
payee, or presenter can escape the imputation of
having been in some degree contributory towards the
mistake. Without any actual change in the abstract
doctrines of the law, which are clear, just, and simple
enough, the gradual but sure tendency and effect of
the decisions have been to put as heavy a burden of
responsibility upon the payee as upon the drawee,
contrary to the original custom. . . . (2 Morse on Banks
and Banking, 5th ed., secs. 464 and 466, pp. 82-85
and 86, 87.)
In First National Bank vs. Brule National Bank (12 A. L. R.,
1079, 1088, 1089), the following statement appears in the
concurring opinion:

What, then, should be the rule? The drawee asks to

recover for money had and received. If his claim did
not rest upon a transaction relating to a negotiable
instrument plaintiff could recover as for money paid
under mistake, unless defendant could show some
equitable reason, such as changed condition since,
and relying upon, payment by plaintiff. In the
Wyndmere Case, the North Dakota court holds that
this rule giving right to recover money paid under
mistake should extend to negotiable paper, and it
rejects in its entirety the theory of estoppel and puts a
case of this kind on exactly the same basis as the
ordinary case of payment under mistake. But the great
weight of authority, and that based on the better
reasoning, holds that the exigencies of business
demand a different rule in relation to negotiable paper.
What is that rule? Is it an absolute estoppel against the
drawee in favor of a holder, no matter how negligent
such holder has been? It surely is not. The correct rule
recognizes the fact that, in case of payment without a
prior acceptance or certification, the holder takes the
paper upon the of the prior indorsers and the credit of
the drawer, and not upon the credit of the drawee, in
making payment, has a right to rely upon the
assumption that the payee used due diligence,
especially where such payee negotiated the bill or
check to a holder, thus representing that it had so fully
satisfied itself as to the identity and signature of the
maker that it was willing to warrant as relates thereto
to all subsequent holders. (Uniform Act, secs. 65 and
66.) Such correct rule denies the drawee the right to
recover when the holder was without fault or when
there has been some change of position calling for
equitable relief. When a holder of a bill of exchange
uses all due care in the taking of bill or check and the
drawee thereafter pays same, the transaction is

absolutely closed modern business could not be

done on any other basis. While the correct rule
promotes the fluidity of two recognized mediums of
exchange, those mediums by which the great bulk of
business is carried on, checks and drafts, upon the
other hand it encourages and demands prudent
business methods upon the part of those receiving
such mediums of exchange. (Pennington County Bank
vs. First State Bank, 110 Minn., 263; 26 L. R. A. [N. S.],
849; 136 Am. St. Rep., 496; 125 N. W., 119; First
National Bank vs. State Bank, 22 Neb., 769; 3 Am. St.
Rep., 294; 36 N. W., 289; Bank of Williamson, vs.
McDowell County Bank, 66 W. Va., 545; 36 L. R. A. [N.
S.], 605; 66 S. E., 761; Germania Bank vs. Boutell, 60
Minn., 189; 27 L. R. A., 635; 51 Am. St. Rep., 519; 62 N.
W., 327; American Express Co. vs. State National Bank,
27 Okla., 824; 33 L. R. A. [N. S.], 188; 113 Pac., 711;
Farmers' National Bank vs. Farmers' & Traders Bank, L.
R. A., 1915A, 77, and note (159 Ky., 141; 166 S. W.,
986].)
That the defendant bank did not use reasonable
business prudence is clear. It took this check from a
stranger without other identification than that given by
another stranger; its cashier witnessed the mark of
such stranger thus vouching for the identity and
signature of the maker; and it indorsed the check as
"Paid," thus further throwing plaintiff off guard.
Defendant could not but have known, when
negotiating such check and putting it into the channel
through which it would finally be presented to plaintiff
for payment, that plaintiff, if it paid such check, as
defendant was asking it to do, would have to rely
solely upon the apparent faith and credit that
defendant had placed in the drawer. From the very
circumstances of this case plaintiff had to act on the

facts as presented to it by defendant, upon such facts

only.
But appellant argues that it so changed its position,
after payment by plaintiff, that in "equity and good
conscience" plaintiff should not recover it says it did
not pay over any money to the forger until after
plaintiff had paid the check. There would be merit in
such contention if defendant had indorsed the check
for "collection," thus advising plaintiff that it was
relying on plaintiff and not on the drawer. It stands in
court where it would have been if it had done as it
represented.
In Woods and Malone vs. Colony Bank (56 L. R. A., 929, 932),
the court said:
. . . If the holder has been negligent in paying the
forged paper, or has by his conduct, however innocent,
misled or deceived the drawee to his damage, it would
be unjust for him to be allowed to shield himself from
the results of his own carelessness by asserting that
the drawee was bound in law to know his drawer's
signature.
V. Section 23 of the Negotiable Instruments Act provides that
"when a signature is forged or made without the authority of
the person whose signature it purports to be, 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.
It not appearing that the appellee bank did not warrant to the
appellant the genuineness of the checks in question, by its

acceptance thereof, nor did it perform any act which would

have induced the appellant to believe in the genuineness of
said instruments before appellant purchased them for value,
it can not be said that the appellee is precluded from setting
up the forgery and, therefore, the appellant is not entitled to
retain the amount of the forged check paid to it by the
appellee.
VI. It has been held by many courts that a drawee of a check,
who is deceived by a forgery of the drawer's signature may
recover the payment back, unless his mistake has placed an
innocent holder of the paper in a worse position than he
would have been in if the discovery of the forgery had been
made on presentation. (5 R. C. L., p. 559; 2 Daniel on
Negotiable Instruments, 1538.) Forgeries often deceived the
eye of the most cautious experts; and when a bank has been
deceived, it is a harsh rule which compels it to suffer
although no one has suffered by its being deceived. (17 A. L.
R. 891; 5 R. C. L., 559.)
In the instant case should the drawee bank be allowed
recovery, the appellant's position would not become worse
than if the drawee had refused the payment of these checks
upon their presentation. The appellant has lost nothing by
anything which the drawee has done. It had in its hands
some forged worthless papers. It did not purchase or acquire
these papers because of any representation made to it by
the drawee. It purchased them from unknown persons and
under suspicious circumstances. It had no valid title to them,
because the persons from whom it received them did not
have such title. The appellant could not have compelled the
drawee to pay them, and the drawee could have refused
payment had it been able to detect the forgery. By making a
refund, the appellant would only returning what it had
received without any title or right. And when appellant pays
back the money it had received it will be entitled to have

restored to it the forged papers it parted with. There is no

good reason why the accidental payment made by the
appellant should inure to the benefit of the appellant. If there
were injury to the appellant said injury was caused not by the
failure of the appellee to detect the forgery but by the very
negligence of the appellant in purchasing commercial papers
from unknown persons without making inquiry as to their
genuineness.
In the light of the foregoing discussion, we conclude:
1. That where a check is accepted or certified by the
bank on which it is drawn, the bank is estopped to
deny the genuineness of the drawer's signature and
his capacity to issue the instrument;
2. That if a drawee bank pays a forged check which
was previously accepted or certified by the said bank it
cannot recover from a holder who did not participate in
the forgery and did not have actual notice thereof;
3. That the payment of a check does not include or
imply its acceptance in the sense that this word is
used in section 62 of the Negotiable Instruments Law;
4. That in the case of the payment of a forged check,
even without former acceptance, the drawee can not
recover from a holder in due course not chargeable
with any act of negligence or disregard of duty;
5. That to entitle the holder of a forged check to retain
the money obtained thereon, there must be a showing
that the duty to ascertain the genuineness of the
signature rested entirely upon the drawee, and that
the constructive negligence of such drawee in failing
to detect the forgery was not affected by any disregard
of duty on the part of the holder, or by failure of any

precaution which, from his implied assertion in

presenting the check as a sufficient voucher, the
drawee had the right to believe he had taken;
6. That in the absence of actual fault on the part of the
drawee, his constructive fault in not knowing the
signature of the drawer and detecting the forgery will
nor preclude his recovery from one who took the check
under circumstances of suspicion and without proper
precaution, or whose conduct has been such as to
mislead the drawee or induce him to pay the check
without the usual scrutiny or other precautions against
mistake or fraud;
7. That on who purchases a check or draft is bound to
satisfy himself that the paper is genuine, and that by
indorsing it or presenting it for payment or putting it
into circulation before presentation he impliedly
asserts that he performed his duty;
8. That while the foregoing rule, chosen from a welter
of decisions on the issue as the correct one, will not
hinder the circulation of two recognized mediums of
exchange by which the great bulk of business is
carried on, namely, drafts and checks, on the other
hand, it will encourage and demand prudent business
methods on the part of those receiving such mediums
of exchange;
9. That it being a matter of record in the present case,
that the appellee bank in no more chargeable with the
knowledge of the drawer's signature than the
appellant is, as the drawer was as much the customer
of the appellant as of the appellee, the presumption
that a drawee bank is bound to know more than any
indorser the signature of its depositor does not hold;

10. That according to the undisputed facts of the case

the appellant in purchasing the papers in question
from unknown persons without making any inquiry as
to the identity and authority of the said persons
negotiating and indorsing them, acted negligently and
contributed to the appellee's constructive negligence
in failing to detect the forgery;

PHILIPPINE NATIONAL BANK, petitioner,

vs.
HONORABLE COURT OF APPEALS, PROVINCE OF
TARLAC, and ASSOCIATED BANK, respondents.
DECISION
ROMERO, J.:

11. That under the circumstances of the case, if the

appellee bank is allowed to recover, there will be no
change of position as to the injury or prejudice of the
appellant.
Wherefore, the assignments of error are overruled, and the
judgment appealed from must be, as it is hereby, affirmed,
with costs against the appellant. So ordered.

Where thirty checks bearing forged endorsements are paid,

who bears the loss, the drawer, the drawee bank or the
collecting bank?
This is the main issue in these consolidated petitions for
review assailing the decision of the Court of Appeals in
"Province of Tarlac v. Philippine National Bank v. Associated
Bank v. Fausto Pangilinan, et. al." (CA-G.R. No. CV No. 17962).
1

The facts of the case are as follows:

G.R. No. 107382/G.R. No. 107612

1996

January 31,

ASSOCIATED BANK, petitioner,

vs.
HON. COURT OF APPEALS, PROVINCE OF TARLAC and
PHILIPPINE NATIONAL BANK, respondents.
xxxxxxxxxxxxxxxxxxxxx
G.R. No. 107612

January 31, 1996

The Province of Tarlac maintains a current account with the

Philippine National Bank (PNB) Tarlac Branch where the
provincial funds are deposited. Checks issued by the Province
are signed by the Provincial Treasurer and countersigned by
the Provincial Auditor or the Secretary of the Sangguniang
Bayan.
A portion of the funds of the province is allocated to the
Concepcion Emergency Hospital. 2 The allotment checks for
said government hospital are drawn to the order of
"Concepcion Emergency Hospital, Concepcion, Tarlac" or "The
Chief, Concepcion Emergency Hospital, Concepcion, Tarlac."
The checks are released by the Office of the Provincial
Treasurer and received for the hospital by its administrative
officer and cashier.

In January 1981, the books of account of the Provincial

Treasurer were post-audited by the Provincial Auditor. It was
then discovered that the hospital did not receive several
allotment checks drawn by the Province.
On February 19, 1981, the Provincial Treasurer requested the
manager of the PNB to return all of its cleared checks which
were issued from 1977 to 1980 in order to verify the
regularity of their encashment. After the checks were
examined, the Provincial Treasurer learned that 30 checks
amounting to P203,300.00 were encashed by one Fausto
Pangilinan, with the Associated Bank acting as collecting
bank.
It turned out that Fausto Pangilinan, who was the
administrative officer and cashier of payee hospital until his
retirement on February 28, 1978, collected the questioned
checks from the office of the Provincial Treasurer. He claimed
to be assisting or helping the hospital follow up the release of
the checks and had official receipts. 3 Pangilinan sought to
encash the first check 4 with Associated Bank. However, the
manager of Associated Bank refused and suggested that
Pangilinan deposit the check in his personal savings account
with the same bank. Pangilinan was able to withdraw the
money when the check was cleared and paid by the drawee
bank, PNB.
After forging the signature of Dr. Adena Canlas who was chief
of the payee hospital, Pangilinan followed the same
procedure for the second check, in the amount of P5,000.00
and dated April 20, 1978, 5 as well as for twenty-eight other
checks of various amounts and on various dates. The last
check negotiated by Pangilinan was for f8,000.00 and dated
February 10, 1981. 6 All the checks bore the stamp of
Associated Bank which reads "All prior endorsements
guaranteed ASSOCIATED BANK."

Jesus David, the manager of Associated Bank testified that

Pangilinan made it appear that the checks were paid to him
for certain projects with the hospital. 7 He did not find as
irregular the fact that the checks were not payable to
Pangilinan but to the Concepcion Emergency Hospital. While
he admitted that his wife and Pangilinan's wife are first
cousins, the manager denied having given Pangilinan
preferential treatment on this account. 8
On February 26, 1981, the Provincial Treasurer wrote the
manager of the PNB seeking the restoration of the various
amounts debited from the current account of the Province.

In turn, the PNB manager demanded reimbursement from the

Associated Bank on May 15, 1981. 10
As both banks resisted payment, the Province of Tarlac
brought suit against PNB which, in turn, impleaded
Associated Bank as third-party defendant. The latter then
filed a fourth-party complaint against Adena Canlas and
Fausto Pangilinan. 11
After trial on the merits, the lower court rendered its decision
on March 21, 1988, disposing as follows:
WHEREFORE, in view of the foregoing, judgment is
hereby rendered:
1. On the basic complaint, in favor of plaintiff Province
of Tarlac and against defendant Philippine National
Bank (PNB), ordering the latter to pay to the former,
the sum of Two Hundred Three Thousand Three
Hundred (P203,300.00) Pesos with legal interest
thereon from March 20, 1981 until fully paid;
2. On the third-party complaint, in favor of
defendant/third-party plaintiff Philippine National Bank

(PNB) and against third-party defendant/fourth-party

plaintiff Associated Bank ordering the latter to
reimburse to the former the amount of Two Hundred
Three Thousand Three Hundred (P203,300.00) Pesos
with legal interests thereon from March 20, 1981 until
fully paid;.

Next, PNB asserts that it was error for the court to order it to
pay the province and then seek reimbursement from
Associated Bank. According to petitioner bank, respondent
appellate Court should have directed Associated Bank to pay
the adjudged liability directly to the Province of Tarlac to
avoid circuity. 14

3. On the fourth-party complaint, the same is hereby

ordered dismissed for lack of cause of action as
against fourth-party defendant Adena Canlas and lack
of jurisdiction over the person of fourth-party
defendant Fausto Pangilinan as against the latter.

Associated Bank, on the other hand, argues that the order of

liability should be totally reversed, with the drawee bank
(PNB) solely and ultimately bearing the loss.

4. On the counterclaims on the complaint, third-party

complaint and fourth-party complaint, the same are
hereby ordered dismissed for lack of merit.
SO ORDERED.

12

PNB and Associated Bank appealed to the Court of Appeals. 13

Respondent court affirmed the trial court's decision in toto on
September 30, 1992.
Hence these consolidated petitions which seek a reversal of
respondent appellate court's decision.
PNB assigned two errors. First, the bank contends that
respondent court erred in exempting the Province of Tarlac
from liability when, in fact, the latter was negligent because
it delivered and released the questioned checks to Fausto
Pangilinan who was then already retired as the hospital's
cashier and administrative officer. PNB also maintains its
innocence and alleges that as between two innocent persons,
the one whose act was the cause of the loss, in this case the
Province of Tarlac, bears the loss.

Respondent court allegedly erred in applying Section 23 of

the Philippine Clearing House Rules instead of Central Bank
Circular No. 580, which, being an administrative regulation
issued pursuant to law, has the force and effect of law. 15 The
PCHC Rules are merely contractual stipulations among and
between member-banks. As such, they cannot prevail over
the aforesaid CB Circular.
It likewise contends that PNB, the drawee bank, is estopped
from asserting the defense of guarantee of prior
indorsements against Associated Bank, the collecting bank.
In stamping the guarantee (for all prior indorsements), it
merely followed a mandatory requirement for clearing and
had no choice but to place the stamp of guarantee;
otherwise, there would be no clearing. The bank will be in a
"no-win" situation and will always bear the loss as against
the drawee bank. 16
Associated Bank also claims that since PNB already cleared
and paid the value of the forged checks in question, it is now
estopped from asserting the defense that Associated Bank
guaranteed prior indorsements. The drawee bank allegedly
has the primary duty to verify the genuineness of payee's
indorsement before paying the check. 17

While both banks are innocent of the forgery, Associated

Bank claims that PNB was at fault and should solely bear the
loss because it cleared and paid the forged checks.
xxx

xxx

xxx

The case at bench concerns checks payable to the order of

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

only the forged signature. 19 Thus, a forged indorsement does

not operate as the payee's indorsement.
The exception to the general rule in Section 23 is where "a
party against whom it is sought to enforce a right is
precluded from setting up the forgery or want of authority."
Parties who warrant or admit the genuineness of the
signature in question and those who, by their acts, silence or
negligence are estopped from setting up the defense of
forgery, are precluded from using this defense. Indorsers,
persons negotiating by delivery and acceptors are warrantors
of the genuineness of the signatures on the instrument. 20
In bearer instruments, the signature of the payee or holder is
unnecessary to pass title to the instrument. Hence, when the
indorsement is a forgery, only the person whose signature is
forged can raise the defense of forgery against a holder in
due course. 21

Section 23 of the Negotiable Instruments Law (NIL) provides:

Sec. 23. FORGED SIGNATURE, EFFECT OF. When a
signature is forged or made without authority of the
person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instrument, or to
give a discharge therefor, or to enforce payment
thereof against any party thereto, can be acquired
through or under such signature unless the party
against whom it is sought to enforce such right is
precluded from setting up the forgery or want of
authority.
A forged signature, whether it be that of the drawer or the
payee, is wholly inoperative and no one can gain title to the
instrument through it. A person whose signature to an
instrument was forged was never a party and never
consented to the contract which allegedly gave rise to such
instrument. 18 Section 23 does not avoid the instrument but

The checks involved in this case are order instruments,

hence, the following discussion is made with reference to the
effects of a forged indorsement on an instrument payable to
order.
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. 22
An indorser of an order instrument warrants "that the
instrument is genuine and in all respects what it purports to
be; that he has a good title to it; that all prior parties had
capacity to contract; and that the instrument is at the time of

his indorsement valid and subsisting." 23 He cannot interpose

the defense that signatures prior to him are forged.
A collecting bank where a check is deposited and which
indorses the check upon presentment with the drawee bank,
is such an indorser. So even if the indorsement on the check
deposited by the banks's client is forged, the collecting bank
is bound by his warranties as an indorser and cannot set up
the defense of forgery as against the drawee bank.
The bank on which a check is drawn, known as the drawee
bank, is under strict liability to pay the check to the order of
the payee. The drawer's instructions are reflected on the face
and by the terms of the check. Payment under a forged
indorsement is not to the drawer's order. When the drawee
bank pays a person other than the payee, it does not comply
with the terms of the check and violates its duty to charge its
customer's (the drawer) account only for properly payable
items. Since the drawee bank did not pay a holder or other
person entitled to receive payment, it has no right to
reimbursement from the drawer. 24 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. 25 The
risk of loss must perforce fall on the drawee bank.
However, if the drawee bank can prove a failure by the
customer/drawer to exercise ordinary care that substantially
contributed to the making of the forged signature, the drawer
is precluded from asserting the forgery.
If at the same time the drawee bank was also negligent to
the point of substantially contributing to the loss, then such
loss from the forgery can be apportioned between the
negligent drawer and the negligent bank. 26
In cases involving a forged check, where the drawer's
signature is forged, the drawer can recover from the drawee

bank. No drawee bank has a right to pay a forged check. If it

does, it shall have to recredit the amount of the check to the
account of the drawer. The liability chain ends with the
drawee bank whose responsibility it is to know the drawer's
signature since the latter is its customer. 27
In cases involving checks with forged indorsements, such as
the present petition, the chain of liability does not end with
the drawee bank. The drawee bank may not debit the
account of the drawer but may generally pass liability back
through the collection chain to the party who took from the
forger and, of course, to the forger himself, if available. 28 In
other words, the drawee bank canseek reimbursement or a
return of the amount it paid from the presentor bank or
person. 29 Theoretically, the latter can demand
reimbursement from the person who indorsed the check to it
and so on. The loss falls on the party who took the check
from the forger, or on the forger himself.
In this case, the checks were indorsed by the collecting bank
(Associated Bank) to the drawee bank (PNB). The former will
necessarily be liable to the latter for the checks bearing
forged indorsements. If the forgery is that of the payee's or
holder's indorsement, the collecting bank is held liable,
without prejudice to the latter proceeding against the forger.
Since a forged indorsement is inoperative, the collecting
bank had no right to be paid by the drawee bank. The former
must necessarily return the money paid by the latter because
it was paid wrongfully. 30
More importantly, by reason of the statutory warranty of a
general indorser in section 66 of the Negotiable Instruments
Law, a collecting bank which indorses a check bearing a
forged indorsement and presents it to the drawee bank
guarantees all prior indorsements, including the forged
indorsement. It warrants that the instrument is genuine, and

that it is valid and subsisting at the time of his indorsement.

Because the indorsement is a forgery, the collecting bank
commits a breach of this warranty and will be accountable to
the drawee bank. This liability scheme operates without
regard to fault on the part of the collecting/presenting bank.
Even if the latter bank was not negligent, it would still be
liable to the drawee bank because of its indorsement.
The Court has consistently ruled that "the collecting bank or
last endorser generally suffers the loss because it has the
duty to ascertain the genuineness of all prior endorsements
considering that the act of presenting the check for payment
to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness
of the endorsements." 31
The drawee bank is not similarly situated as the collecting
bank because the former makes no warranty as to the
genuineness. of any indorsement. 32 The drawee bank's duty
is but to verify the genuineness of the drawer's signature and
not of the indorsement because the drawer is its client.
Moreover, the collecting bank is made liable because it is
privy to the depositor who negotiated the check. The bank
knows him, his address and history because he is a client. It
has taken a risk on his deposit. The bank is also in a better
position to detect forgery, fraud or irregularity in the
indorsement.
Hence, the drawee bank can recover the amount paid on the
check bearing a forged indorsement from the collecting bank.
However, a drawee bank has the duty to promptly inform the
presentor of the forgery upon discovery. If the drawee bank
delays in informing the presentor of the forgery, thereby
depriving said presentor of the right to recover from the
forger, the former is deemed negligent and can no longer
recover from the presentor. 33

Applying these rules to the case at bench, PNB, the drawee

bank, cannot debit the current account of the Province of
Tarlac because it paid checks which bore forged
indorsements. However, if the Province of Tarlac as drawer
was negligent to the point of substantially contributing to the
loss, then the drawee bank PNB can charge its account. If
both drawee bank-PNB and drawer-Province of Tarlac were
negligent, the loss should be properly apportioned between
them.
The loss incurred by drawee bank-PNB can be passed on to
the collecting bank-Associated Bank which presented and
indorsed the checks to it. Associated Bank can, in turn, hold
the forger, Fausto Pangilinan, liable.
If PNB negligently delayed in informing Associated Bank of
the forgery, thus depriving the latter of the opportunity to
recover from the forger, it forfeits its right to reimbursement
and will be made to bear the loss.
After careful examination of the records, the Court finds that
the Province of Tarlac was equally negligent and should,
therefore, share the burden of loss from the checks bearing a
forged indorsement.
The Province of Tarlac permitted Fausto Pangilinan to collect
the checks when the latter, having already retired from
government service, was no longer connected with the
hospital. With the exception of the first check (dated January
17, 1978), all the checks were issued and released after
Pangilinan's retirement on February 28, 1978. After nearly
three years, the Treasurer's office was still releasing the
checks to the retired cashier. In addition, some of the aid
allotment checks were released to Pangilinan and the others
to Elizabeth Juco, the new cashier. The fact that there were
now two persons collecting the checks for the hospital is an
unmistakable sign of an irregularity which should have

alerted employees in the Treasurer's office of the fraud being

committed. There is also evidence indicating that the
provincial employees were aware of Pangilinan's retirement
and consequent dissociation from the hospital. Jose Meru, the
Provincial Treasurer, testified:.

negligence. Hence, the Province of Tarlac should be liable for

part of the total amount paid on the questioned checks.
The drawee bank PNB also breached its duty to pay only
according to the terms of the check. Hence, it cannot escape
liability and should also bear part of the loss.

ATTY. MORGA:
As earlier stated, PNB can recover from the collecting bank.
Q Now, is it true that for a given month there were two
releases of checks, one went to Mr. Pangilinan and one
went to Miss Juco?
JOSE MERU:

In the case of Associated Bank v. CA, 35 six crossed checks

with forged indorsements were deposited in the forger's
account with the collecting bank and were later paid by four
different drawee banks. The Court found the collecting bank
(Associated) to be negligent and held:

A Yes, sir.
Q Will you please tell us how at the time (sic) when the
authorized representative of Concepcion Emergency
Hospital is and was supposed to be Miss Juco?
A Well, as far as my investigation show (sic) the
assistant cashier told me that Pangilinan represented
himself as also authorized to help in the release of
these checks and we were apparently misled because
they accepted the representation of Pangilinan that he
was helping them in the release of the checks and
besides according to them they were, Pangilinan, like
the rest, was able to present an official receipt to
acknowledge these receipts and according to them
since this is a government check and believed that it
will eventually go to the hospital following the
standard procedure of negotiating government checks,
they released the checks to Pangilinan aside from Miss
Juco.34
The failure of the Province of Tarlac to exercise due care
contributed to a significant degree to the loss tantamount to

The Bank should have first verified his right to endorse

the crossed checks, of which he was not the payee,
and to deposit the proceeds of the checks to his own
account. The Bank was by reason of the nature of the
checks put upon notice that they were issued for
deposit only to the private respondent's account. . . .
The situation in the case at bench is analogous to the above
case, for it was not the payee who deposited the checks with
the collecting bank. Here, the checks were all payable to
Concepcion Emergency Hospital but it was Fausto Pangilinan
who deposited the checks in his personal savings account.
Although Associated Bank claims that the guarantee
stamped on the checks (All prior and/or lack of endorsements
guaranteed) is merely a requirement forced upon it by
clearing house rules, it cannot but remain liable. The stamp
guaranteeing prior indorsements is not an empty rubric
which a bank must fulfill for the sake of convenience. A bank
is not required to accept all the checks negotiated to it. It is
within the bank's discretion to receive a check for no banking
institution would consciously or deliberately accept a check

bearing a forged indorsement. When a check is deposited

with the collecting bank, it takes a risk on its depositor. It is
only logical that this bank be held accountable for checks
deposited by its customers.

contending banks herein, which are both branches in Tarlac

province, are therefore not covered by PCHC Rules but by CB
Circular No. 580. Clearly then, the CB circular was applicable
when the forgery of the checks was discovered in 1981.

A delay in informing the collecting bank (Associated Bank) of

the forgery, which deprives it of the opportunity to go after
the forger, signifies negligence on the part of the drawee
bank (PNB) and will preclude it from claiming reimbursement.

The rule mandates that the checks be returned within

twenty-four hours after discovery of the forgery but in no
event beyond the period fixed by law for filing a legal action.
The rationale of the rule is to give the collecting bank (which
indorsed the check) adequate opportunity to proceed against
the forger. If prompt notice is not given, the collecting bank
maybe prejudiced and lose the opportunity to go after its
depositor.

It is here that Associated Bank's assignment of error

concerning C.B. Circular No. 580 and Section 23 of the
Philippine Clearing House Corporation Rules comes to fore.
Under Section 4(c) of CB Circular No. 580, items bearing a
forged endorsement shall be returned within twenty-Sour
(24) hours after discovery of the forgery but in no event
beyond the period fixed or provided by law for filing of a legal
action by the returning bank. Section 23 of the PCHC Rules
deleted the requirement that items bearing a forged
endorsement should be returned within twenty-four hours.
Associated Bank now argues that the aforementioned Central
Bank Circular is applicable. Since PNB did not return the
questioned checks within twenty-four hours, but several days
later, Associated Bank alleges that PNB should be considered
negligent and not entitled to reimbursement of the amount it
paid on the checks.
The Court deems it unnecessary to discuss Associated Bank's
assertions that CB Circular No. 580 is an administrative
regulation issued pursuant to law and as such, must prevail
over the PCHC rule. The Central Bank circular was in force for
all banks until June 1980 when the Philippine Clearing House
Corporation (PCHC) was set up and commenced operations.
Banks in Metro Manila were covered by the PCHC while banks
located elsewhere still had to go through Central Bank
Clearing. In any event, the twenty-four-hour return rule was
adopted by the PCHC until it was changed in 1982. The

The Court finds that even if PNB did not return the
questioned checks to Associated Bank within twenty-four
hours, as mandated by the rule, PNB did not commit
negligent delay. Under the circumstances, PNB gave prompt
notice to Associated Bank and the latter bank was not
prejudiced in going after Fausto Pangilinan. After the Province
of Tarlac informed PNB of the forgeries, PNB necessarily had
to inspect the checks and conduct its own investigation.
Thereafter, it requested the Provincial Treasurer's office on
March 31, 1981 to return the checks for verification. The
Province of Tarlac returned the checks only on April 22, 1981.
Two days later, Associated Bank received the checks from
PNB. 36
Associated Bank was also furnished a copy of the Province's
letter of demand to PNB dated March 20, 1981, thus giving it
notice of the forgeries. At this time, however, Pangilinan's
account with Associated had only P24.63 in it. 37 Had
Associated Bank decided to debit Pangilinan's account, it
could not have recovered the amounts paid on the
questioned checks. In addition, while Associated Bank filed a
fourth-party complaint against Fausto Pangilinan, it did not
present evidence against Pangilinan and even presented him

as its rebuttal witness. 38 Hence, Associated Bank was not

prejudiced by PNB's failure to comply with the twenty-fourhour return rule.
Next, Associated Bank contends that PNB is estopped from
requiring reimbursement because the latter paid and cleared
the checks. The Court finds this contention unmeritorious.
Even if PNB cleared and paid the checks, it can still recover
from Associated Bank. This is true even if the payee's Chief
Officer who was supposed to have indorsed the checks is also
a customer of the drawee bank. 39 PNB's duty was to verify
the genuineness of the drawer's signature and not the
genuineness of payee's indorsement. Associated Bank, as the
collecting bank, is the entity with the duty to verify the
genuineness of the payee's indorsement.
PNB also avers that respondent court erred in adjudging
circuitous liability by directing PNB to return to the Province
of Tarlac the amount of the checks and then directing
Associated Bank to reimburse PNB. The Court finds nothing
wrong with the mode of the award. The drawer, Province of
Tarlac, is a clientor customer of the PNB, not of Associated
Bank. There is no privity of contract between the drawer and
the collecting bank.
The trial court made PNB and Associated Bank liable with
legal interest from March 20, 1981, the date of extrajudicial
demand made by the Province of Tarlac on PNB. The
payments to be made in this case stem from the deposits of
the Province of Tarlac in its current account with the PNB.
Bank deposits are considered under the law as loans. 40
Central Bank Circular No. 416 prescribes a twelve percent
(12%) interest per annum for loans, forebearance of money,
goods or credits in the absence of express stipulation.
Normally, current accounts are likewise interest-bearing, by
express contract, thus excluding them from the coverage of
CB Circular No. 416. In this case, however, the actual interest

rate, if any, for the current account opened by the Province of

Tarlac with PNB was not given in evidence. Hence, the Court
deems it wise to affirm the trial court's use of the legal
interest rate, or six percent (6%) per annum. The interest
rate shall be computed from the date of default, or the date
of judicial or extrajudicial demand. 41 The trial court did not
err in granting legal interest from March 20, 1981, the date of
extrajudicial demand.
The Court finds as reasonable, the proportionate sharing of
fifty percent - fifty percent (50%-50%). Due to the negligence
of the Province of Tarlac in releasing the checks to an
unauthorized person (Fausto Pangilinan), in allowing the
retired hospital cashier to receive the checks for the payee
hospital for a period close to three years and in not properly
ascertaining why the retired hospital cashier was collecting
checks for the payee hospital in addition to the hospital's real
cashier, respondent Province contributed to the loss
amounting to P203,300.00 and shall be liable to the PNB for
fifty (50%) percent thereof. In effect, the Province of Tarlac
can only recover fifty percent (50%) of P203,300.00 from
PNB.
The collecting bank, Associated Bank, shall be liable to PNB
for fifty (50%) percent of P203,300.00. It is liable on its
warranties as indorser of the checks which were deposited by
Fausto Pangilinan, having guaranteed the genuineness of all
prior indorsements, including that of the chief of the payee
hospital, Dr. Adena Canlas. Associated Bank was also remiss
in its duty to ascertain the genuineness of the payee's
indorsement.
IN VIEW OF THE FOREGOING, the petition for review filed by
the Philippine National Bank (G.R. No. 107612) is hereby
PARTIALLY GRANTED. The petition for review filed by the
Associated Bank (G.R. No. 107382) is hereby DENIED. The
decision of the trial court is MODIFIED. The Philippine

National Bank shall pay fifty percent (50%) of P203,300.00 to

the Province of Tarlac, with legal interest from March 20,
1981 until the payment thereof. Associated Bank shall pay
fifty percent (50%) of P203,300.00 to the Philippine National
Bank, likewise, with legal interest from March 20, 1981 until
payment is made.
SO ORDERED.

G.R. No. 75954 October 22, 1992

PEOPLE OF THE PHILIPPINES, petitioner,
vs.
HON. DAVID G. NITAFAN, Presiding Judge, Regional
Trial Court, Branch 52, Manila, and K.T. LIM alias
MARIANO LIM, respondents.

BELLOSILLO, J.:
Failing in his argument that B.P. 22, otherwise known as the
"Bouncing Check Law", is unconstitutional, 1 private
respondent now argues that the check he issued, a
memorandum check, is in the nature of a promissory note,
hence, outside the purview of the statute. Here, his argument
must also fail.

The facts are simple. Private respondent K.T. Lim was

charged before respondent court with violation of B.P. 22 in
an Information alleging
That on . . . January 10, 1985, in the City of
Manila . . . the said accused did then and there
wilfully, unlawfully and feloniously make or draw
and issue to Fatima Cortez Sasaki . . . Philippine
Trust Company Check No. 117383 dated
February 9, 1985 . . . in the amount of
P143,000.00, . . . well knowing that at the time
of issue he . . . did not have sufficient funds in or
credit with the drawee bank . . . which check . . .
was subsequently dishonored by the drawee
bank for insufficiency of funds, and despite
receipt of notice of such dishonor, said accused
failed to pay said Fatima Cortez Sasaki the
amount of said check or to make arrangement
for full payment of the same within five (5)
banking days after receiving said notice. 2
On 18 July 1986, private respondent moved to quash the
Information of the ground that the facts charged did not
constitute a felony as B.P. 22 was unconstitutional and that
the check he issued was a memorandum check which was in
the nature of a promissory note, perforce, civil in nature. On
1 September 1986, respondent judge, ruling that B.P. 22 on
which the Information was based was unconstitutional,
issued the questioned Order quashing the Information.
Hence, this petition for review on certiorari filed by the
Solicitor General in behalf of the government.
Since the constitutionality of the "Bouncing Check Law" has
already been sustained by this Court in Lozano v. Martinez 3
and the seven (7) other cases decided jointly with it, 4 the
remaining issue, as aptly stated by private respondent in his
Memorandum, is whether a memorandum check issued

postdated in partial payment of a pre-existing obligation is

within the coverage of B.P. 22.
Citing U.S. v. Isham, 5 private respondent contends that
although a memorandum check may not differ in form and
appearance from an ordinary check, such a check is given by
the drawer to the payee more in the nature of memorandum
of indebtedness and, should be sued upon in a civil action.
We are not persuaded.
A memorandum check is in the form of an ordinary check,
with the word "memorandum", "memo" or "mem" written
across its face, signifying that the maker or drawer engages
to pay the bona fide holder absolutely, without any condition
concerning its presentment. 6 Such a check is an evidence of
debt against the drawer, and although may not be intended
to be presented, 7 has the same effect as an ordinary check,
8 and if passed to the third person, will be valid in his hands
like any other check. 9
From the above definition, it is clear that a memorandum
check, which is in the form of an ordinary check, is still drawn
on a bank and should therefore be distinguished from a
promissory note, which is but a mere promise to pay. If
private respondent seeks to equate memorandum check with
promissory note, as he does to skirt the provisions of B.P. 22,
he could very well have issued a promissory note, and this
would be have exempted him form the coverage of the law.
In the business community a promissory note, certainly, has
less impact and persuadability than a check.
Verily, a memorandum check comes within the meaning of
Sec. 185 of the Negotiable Instruments Law which defines a
check as "a bill of exchange drawn on a bank payable on
demand." A check is also defined as " [a] written order or
request to a bank or persons carrying on the business of

banking, by a party having money in their hands, desiring

them to pay, on presentment, to a person therein named or
bearer, or to such person or order, a named sum of money,"
citing 2 Dan. Neg. Inst. 528; Blair v. Wilson, 28 Gratt. (Va.)
170; Deener v. Brown, 1 MacArth. (D.C.) 350; In re Brown, 2
Sto. 502, Fed. Cas. No. 1,985. See Chapman v. White, 6 N.Y.
412, 57 Am. Dec 464. 10 Another definition of check is that is
"[a] draft drawn upon a bank and payable on demand, signed
by the maker or drawer, containing an unconditional promise
to pay a sum certain in money to the order of the payee,"
citing State v. Perrigoue, 81 Wash, 2d 640, 503 p. 2d 1063,
1066. 11
A memorandum check must therefore fall within the ambit of
B.P. 22 which does not distinguish but merely provides that
"[a]ny person who makes or draws and issues any check
knowing at the time of issue that he does not have sufficient
funds in or credit with the drawee bank . . . which check is
subsequently dishonored . . . shall be punished by
imprisonment . . ." (Emphasis supplied ). 12 Ubi lex no
distinguit nec nos distinguere debemus.
But even if We retrace the enactment of the "Bouncing Check
Law" to determine the parameters of the concept of "check",
We can easily glean that the members of the then Batasang
Pambansa intended it to be comprehensive as to include all
checks drawn against banks. This was particularly the
ratiocination of Mar. Estelito P. Mendoza, co-sponsor of
Cabinet Bill No. 9 which later became B.P. 22, when in
response to the interpellation of Mr. Januario T. Seo, Mr.
Mendoza explained that the draft or order must be addressed
to a bank or depository, 13 and accepted the proposed
amendment of Messrs. Antonio P. Roman and Arturo M.
Tolentino that the words "draft or order", and certain terms
which technically meant promissory notes, wherever they
were found in the text of the bill, should be deleted since the

bill was mainly directed against the pernicious practice of

issuing checks with insufficient or no funds, and not to drafts
which were not drawn against banks. 14
A memorandum check, upon presentment, is generally
accepted by the bank. Hence it does not matter whether the
check issued is in the nature of a memorandum as evidence
of indebtedness or whether it was issued is partial fulfillment
of a pre-existing obligation, for what the law punishes is the
issuance itself of a bouncing check 15 and not the purpose for
which it was issuance. The mere act of issuing a worthless
check, whether as a deposit, as a guarantee, or even as an
evidence of a pre-existing debt, is malum prohibitum. 16
We are not unaware that a memorandum check may carry
with it the understanding that it is not be presented at the
bank but will be redeemed by the maker himself when the
loan fall due. This understanding may be manifested by
writing across the check "Memorandum", "Memo" or "Mem."
However, with the promulgation of B.P. 22, such
understanding or private arrangement may no longer prevail
to exempt it from penal sanction imposed by the law. To
require that the agreement surrounding the issuance of
check be first looked into and thereafter exempt such
issuance from the punitive provision of B.P. 22 on the basis of
such agreement or understanding would frustrate the very
purpose for which the law was enacted to stem the
proliferation of unfunded checks. After having effectively
reduced the incidence of worthless checks changing hands,
the country will once again experience the limitless
circulation of bouncing checks in the guise of memorandum
checks if such checks will be considered exempt from the
operation of B.P. 22. It is common practice in commercial
transactions to require debtors to issue checks on which
creditors must rely as guarantee of payment. To determine
the reasons for which checks are issued, or the terms and

conditions for their issuance, will greatly erode the faith the
public responses in the stability and commercial value of
checks as currency substitutes, and bring about havoc in
trade and in banking communities. 17
WHEREFORE, the petition is GRANTED and the Order of
respondent Judge of 1 September 1986 is SET ASIDE.
Consequently, respondent Judge, or whoever presides over
the Regional Trial Court of Manila, Branch 52, is hereby
directed forthwith to proceed with the hearing of the case
until terminated.
SO ORDERED.

[G.R. No. 105188. January 23, 1998]

MYRON C. PAPA, Administrator of the Testate Estate of Angela
M. Butte, petitioner, vs. A. U. VALENCIA and CO. INC., FELIX
PEARROYO, SPS. ARSENIO B. REYES & AMANDA SANTOS,
and DELFIN JAO, respondents.
DECISION
KAPUNAN, J.:
In this petition for review on certiorari under Rule 45 of the
Rules of Court, petitioner Myron C. Papa seeks to reverse and
set aside 1) the Decision dated 27 January 1992 of the
Court of Appeals which affirmed with modification the
decision of the trial court; and, 2) the Resolution dated 22

April 1992 of the same court, which denied petitioners

motion for reconsideration of the above decision.
The antecedent facts of this case are as follows:
Sometime in June 1982, herein private respondents A.U.
Valencia and Co., Inc. (hereinafter referred to as respondent
Valencia, for brevity) and Felix Pearroyo (hereinafter called
respondent Pearroyo), filed with the Regional Trial Court of
Pasig, Branch 151, a complaint for specific performance
against herein petitioner Myron C. Papa, in his capacity as
administrator of the Testate Estate of one Angela M. Butte.
The complaint alleged that on 15 June 1973, petitioner Myron
C. Papa, acting as attorney-in-fact of Angela M. Butte, sold to
respondent Pearroyo, through respondent Valencia, a parcel
of land, consisting of 286.60 square meters, located at corner
Retiro and Cadiz Streets, La Loma, Quezon City, and covered
by Transfer Certificate of Title No. 28993 of the Register of
Deeds of Quezon City; that prior to the alleged sale, the said
property, together with several other parcels of land likewise
owned by Angela M. Butte, had been mortgaged by her to
the Associated Banking Corporation (now Associated Citizens
Bank); that after the alleged sale, but before the title to the
subject property had been released, Angela M. Butte passed
away; that despite representations made by herein
respondents to the bank to release the title to the property
sold to respondent Pearroyo, the bank refused to release it
unless and until all the mortgaged properties of the late
Angela M. Butte were also redeemed; that in order to protect
his rights and interests over the property, respondent
Pearroyo caused the annotation on the title of an adverse
claim as evidenced by Entry No. P.E. - 6118/T-28993,
inscribed on 18 January 1977.
The complaint further alleged that it was only upon the
release of the title to the property, sometime in April 1977,
that respondents Valencia and Pearroyo discovered that
the mortgage rights of the bank had been assigned to one
Tomas L. Parpana (now deceased), as special administrator of
the Estate of Ramon Papa, Jr., on 12 April 1977; that since

then, herein petitioner had been collecting monthly rentals in

the amount of P800.00 from the tenants of the property,
knowing that said property had already been sold to private
respondents on 15 June 1973; that despite repeated
demands from said respondents, petitioner refused and failed
to deliver the title to the property. Thereupon, respondents
Valencia and Pearroyo filed a complaint for specific
performance, praying that petitioner be ordered to deliver to
respondent Pearroyo the title to the subject property (TCT
28993); to turn over to the latter the sum of P72,000.00 as
accrued rentals as of April 1982, and the monthly rental of
P800.00 until the property is delivered to respondent
Pearroyo; to pay respondents the sum of P20,000.00 as
attorneys fees; and to pay the costs of the suit.
In his Answer, petitioner admitted that the lot had been
mortgaged to the Associated Banking Corporation (now
Associated Citizens Bank). He contended, however, that the
complaint did not state a cause of action; that the real
property in interest was the Testate Estate of Angela M.
Butte, which should have been joined as a party defendant;
that the case amounted to a claim against the Estate of
Angela M. Butte and should have been filed in Special
Proceedings No. A-17910 before the Probate Court in Quezon
City; and that, if as alleged in the complaint, the property
had been assigned to Tomas L. Parpana, as special
administrator of the Estate of Ramon Papa, Jr., said estate
should be impleaded. Petitioner, likewise, claimed that he
could not recall in detail the transaction which allegedly
occurred in 1973; that he did not have TCT No. 28993 in his
possession; that he could not be held personally liable as he
signed the deed merely as attorney-in-fact of said Angela M.
Butte. Finally, petitioner asseverated that as a result of the
filing of the case, he was compelled to hire the services of
counsel for a fee of P20,000.00, for which respondents should
be held liable.
Upon his motion, herein private respondent Delfin Jao was
allowed to intervene in the case. Making common cause with
respondents Valencia and Pearroyo, respondent Jao alleged
that the subject lot which had been sold to respondent
Pearroyo through respondent Valencia was in turn sold to

him on 20 August 1973 for the sum of P71,500.00, upon his

paying earnest money in the amount of P5,000.00. He,
therefore, prayed that judgment be rendered in favor of
respondents Valencia and Pearroyo; and, that after the
delivery of the title to said respondents, the latter in turn be
ordered to execute in his favor the appropriate deed of
conveyance covering the property in question and to turn
over to him the rentals which aforesaid respondents sought
to collect from petitioner Myron C. Papa.
Respondent Jao, likewise, averred that as a result of
petitioners refusal to deliver the title to the property to
respondents Valencia and Pearroyo, who in turn failed to
deliver the said title to him, he suffered mental anguish and
serious anxiety for which he sought payment of moral
damages; and, additionally, the payment of attorneys fees
and costs.
For his part, petitioner, as administrator of the Testate Estate
of Angela M. Butte, filed a third-party complaint against
herein private respondents, spouses Arsenio B. Reyes and
Amanda Santos (respondent Reyes spouses, for short). He
averred, among others, that the late Angela M. Butte was the
owner of the subject property; that due to non-payment of
real estate tax said property was sold at public auction by
the City Treasurer of Quezon City to the respondent Reyes
spouses on 21 January 1980 for the sum of P14,000.00; that
the one-year period of redemption had expired; that
respondents Valencia and Pearroyo had sued petitioner
Papa as administrator of the estate of Angela M. Butte, for
the delivery of the title to the property; that the same
aforenamed respondents had acknowledged that the price
paid by them was insufficient, and that they were willing to
add a reasonable amount or a minimum of P55,000.00 to the
price upon delivery of the property, considering that the
same was estimated to be worth P143,000.00; that petitioner
was willing to reimburse respondent Reyes spouses whatever
amount they might have paid for taxes and other charges,
since the subject property was still registered in the name of
the late Angela M. Butte; that it was inequitable to allow
respondent Reyes spouses to acquire property estimated to
be worth P143,000.00, for a measly sum of P14,000.00.

Petitioner prayed that judgment be rendered cancelling the

tax sale to respondent Reyes spouses; restoring the subject
property to him upon payment by him to said respondent
Reyes spouses of the amount of P14,000.00, plus legal
interest; and, ordering respondents Valencia and Pearroyo
to pay him at least P55,000.00 plus everything they might
have to pay the Reyes spouses in recovering the property.
Respondent Reyes spouses in their Answer raised the
defense of prescription of petitioners right to redeem the
property.
At the trial, only respondent Pearroyo testified. All the other
parties only submitted documentary proof.
On 29 June 1987, the trial court rendered a decision, the
dispositive portion of which reads:
WHEREUPON, judgment is hereby rendered as follows:
1) Allowing defendant to redeem from third-party defendants
and ordering the latter to allow the former to redeem the
property in question, by paying the sum of P14,000.00 plus
legal interest of 12% thereon from January 21, 1980;
2) Ordering defendant to execute a Deed of Absolute Sale in
favor of plaintiff Felix Pearroyo covering the property in
question and to deliver peaceful possession and enjoyment
of the said property to the said plaintiff, free from any liens
and encumbrances;
Should this not be possible, for any reason not attributable to
defendant, said defendant is ordered to pay to plaintiff Felix
Pearroyo the sum of P45,000.00 plus legal interest of 12%
from June 15, 1973;
3) Ordering plaintiff Felix Pearroyo to execute and deliver to
intervenor a deed of absolute sale over the same property,
upon the latters payment to the former of the balance of the
purchase price of P71,500.00;

Should this not be possible, plaintiff Felix Pearroyo is

ordered to pay intervenor the sum of P5,000.00 plus legal
interest of 12% from August 23, 1973; and
4) Ordering defendant to pay plaintiffs the amount of
P5,000.00 for and as attorneys fees and litigation expenses.
SO ORDERED.i[1]
Petitioner appealed the aforesaid decision of the trial court to
the Court of Appeals, alleging among others that the sale
was never consummated as he did not encash the check
(in the amount of P40,000.00) given by respondents Valencia
and Pearroyo in payment of the full purchase price of the
subject lot. He maintained that what said respondents had
actually paid was only the amount of P5,000.00 (in cash) as
earnest money.
Respondent Reyes spouses, likewise, appealed the above
decision. However, their appeal was dismissed because of
failure to file their appellants brief.
On 27 January 1992, the Court of Appeals rendered a
decision, affirming with modification the trial courts decision,
thus:
WHEREFORE, the second paragraph of the dispositive portion
of the appealed decision is MODIFIED, by ordering the
defendant-appellant to deliver to plaintiff-appellees the
owners duplicate of TCT No. 28993 of Angela M. Butte and
the peaceful possession and enjoyment of the lot in question
or, if the owners duplicate certificate cannot be produced, to
authorize the Register of Deeds to cancel it and issue a
certificate of title in the name of Felix Pearroyo. In all other
respects, the decision appealed from is AFFIRMED. Costs
against defendant-appellant Myron C. Papa.
SO ORDERED.ii[2]
In affirming the trial courts decision, respondent court held
that contrary to petitioners claim that he did not encash the

aforesaid check, and therefore, the sale was not

consummated, there was no evidence at all that petitioner
did not, in fact, encash said check. On the other hand,
respondent Pearroyo testified in court that petitioner Papa
had received the amount of P45,000.00 and issued receipts
therefor. According to respondent court, the presumption is
that the check was encashed, especially since the payment
by check was not denied by defendant-appellant (herein
petitioner) who, in his Answer, merely alleged that he can
no longer recall the transaction which is supposed to have
happened 10 years ago.iii[3]
On petitioners claim that he cannot be held personally liable
as he had acted merely as attorney-in-fact of the owner,
Angela M. Butte, respondent court held that such contention
is without merit. This action was not brought against him in
his personal capacity, but in his capacity as the
administrator of the Testate Estate of Angela M. Butte. iv[4]
On petitioners contention that the estate of Angela M. Butte
should have been joined in the action as the real party in
interest, respondent court held that pursuant to Rule 3,
Section 3 of the Rules of Court, the estate of Angela M. Butte
does not have to be joined in the action. Likewise, the estate
of Ramon Papa, Jr., is not an indispensable party under Rule
3, Section 7 of the same Rules. For the fact is that Ramon
Papa, Jr., or his estate, was not a party to the Deed of
Absolute Sale, and it is basic law that contracts bind only
those who are parties thereto.v[5]
Respondent court observed that the conditions under which
the mortgage rights of the bank were assigned are not clear.
In any case, any obligation which the estate of Angela M.
Butte might have to the estate of Ramon Papa, Jr. is strictly
between them. Respondents Valencia and Pearroyo are not
bound by any such obligation.
Petitioner filed a motion for reconsideration of the above
decision, which motion was denied by respondent Court of
Appeals.

Hence, this petition wherein petitioner raises the following

issues:

Pearroyo, as evidenced by a letter addressed to him in

which said respondents wrote, in part:

I. THE CONCLUSION OR FINDING OF THE COURT OF

APPEALS THAT THE SALE IN QUESTION WAS CONSUMMATED
IS GROUNDED ON SPECULATION OR CONJECTURE, AND IS
CONTRARY TO THE APPLICABLE LEGAL PRINCIPLE.

x x x. Please be informed that I had been authorized by Dr.

Ramon Papa, Jr., heir of Mrs. Angela M. Butte to pay you the
aforementioned amount of P75,000.00 for the release and
cancellation of subject propertys mortgage. The money is
with me and if it is alright with you, I would like to tender the
payment as soon as possible. x x x.viii[8]

II. THE COURT OF APPEALS, IN MODIFYING THE DECISION

OF THE TRIAL COURT, ERRED BECAUSE IT, IN EFFECT,
CANCELLED OR NULLIFIED AN ASSIGNMENT OF THE SUBJECT
PROPERTY IN FAVOR OF THE ESTATE OF RAMON PAPA, JR.
WHICH IS NOT A PARTY IN THIS CASE.
III. THE COURT OF APPEALS ERRED IN NOT HOLDING
THAT THE ESTATE OF ANGELA M. BUTTE AND THE ESTATE OF
RAMON PAPA, JR. ARE INDISPENSABLE PARTIES IN THIS CASE. vi
[6]
Petitioner argues that respondent Court of Appeals erred in
concluding that the alleged sale of the subject property had
been consummated. He contends that such a conclusion is
based on the erroneous presumption that the check (in the
amount of P40,000.00) had been cashed, citing Art. 1249 of
the Civil Code, which provides, in part, that payment by
checks shall produce the effect of payment only when they
have been cashed or when through the fault of the creditor
they have been impaired.vii[7] Petitioner insists that he never
cashed said check; and, such being the case, its delivery
never produced the effect of payment. Petitioner, while
admitting that he had issued receipts for the payments,
asserts that said receipts, particularly the receipt of PCIB
Check No. 761025 in the amount of P40,000.00, do not prove
payment. He avers that there must be a showing that said
check had been encashed. If, according to petitioner, the
check had been encashed, respondent Pearroyo should
have presented PCIB Check No. 761025 duly stamped
received by the payee, or at least its microfilm copy.
Petitioner finally avers that, in fact, the consideration for
the sale was still in the hands of respondents Valencia and

We find no merit in petitioners arguments.

It is an undisputed fact that respondents Valencia and
Pearroyo had given petitioner Myron C. Papa the amounts
of Five Thousand Pesos (P5,000.00) in cash on 24 May 1973,
and Forty Thousand Pesos (P40,000.00) in check on 15 June
1973, in payment of the purchase price of the subject lot.
Petitioner himself admits having received said amounts, ix[9]
and having issued receipts therefor.x[10] Petitioners
assertion that he never encashed the aforesaid check is not
subtantiated and is at odds with his statement in his answer
that he can no longer recall the transaction which is
supposed to have happened 10 years ago. After more than
ten (10) years from the payment in part by cash and in part
by check, the presumption is that the check had been
encashed. As already stated, he even waived the
presentation of oral evidence.
Granting that petitioner had never encashed the check, his
failure to do so for more than ten (10) years undoubtedly
resulted in the impairment of the check through his
unreasonable and unexplained delay.
While it is true that the delivery of a check produces the
effect of payment only when it is cashed, pursuant to Art.
1249 of the Civil Code, the rule is otherwise if the debtor is
prejudiced by the creditors unreasonable delay in
presentment. The acceptance of a check implies an
undertaking of due diligence in presenting it for payment,
and if he from whom it is received sustains loss by want of
such diligence, it will be held to operate as actual payment of

the debt or obligation for which it was given. xi[11] It has,

likewise, been held that if no presentment is made at all, the
drawer cannot be held liable irrespective of loss or
injuryxii[12] unless presentment is otherwise excused. This is
in harmony with Article 1249 of the Civil Code under which
payment by way of check or other negotiable instrument is
conditioned on its being cashed, except when through the
fault of the creditor, the instrument is impaired. The payee of
a check would be a creditor under this provision and if its
non-payment is caused by his negligence, payment will be
deemed effected and the obligation for which the check was
given as conditional payment will be discharged. xiii[13]
Considering that respondents Valencia and Pearroyo had
fulfilled their part of the contract of sale by delivering the
payment of the purchase price, said respondents, therefore,
had the right to compel petitioner to deliver to them the
owners duplicate of TCT No. 28993 of Angela M. Butte and
the peaceful possession and enjoyment of the lot in question.
With regard to the alleged assignment of mortgage rights,
respondent Court of Appeals has found that the conditions
under which said mortgage rights of the bank were assigned
are not clear. Indeed, a perusal of the original records of the
case would show that there is nothing there that could shed
light on the transactions leading to the said assignment of
rights; nor is there any evidence on record of the conditions
under which said mortgage rights were assigned. What is
certain is that despite the said assignment of mortgage
rights, the title to the subject property has remained in the
name of the late Angela M. Butte.xiv[14] This much is
admitted by petitioner himself in his answer to respondents
complaint as well as in the third-party complaint that
petitioner filed against respondent-spouses Arsenio B. Reyes
and Amanda Santos.xv[15] Assuming arquendo that the
mortgage rights of the Associated Citizens Bank had been
assigned to the estate of Ramon Papa, Jr., and granting that
the assigned mortgage rights validly exist and constitute a

lien on the property, the estate may file the appropriate

action to enforce such lien. The cause of action for specific
performance which respondents Valencia and Pearroyo have
against petitioner is different from the cause of action which
the estate of Ramon Papa, Jr. may have to enforce whatever
rights or liens it has on the property by reason of its being
an alleged assignee of the banks rights of mortgage.
Finally, the estate of Angela M. Butte is not an indispensable
party. Under Section 3 of Rule 3 of the Rules of Court, an
executor or administrator may sue or be sued without joining
the party for whose benefit the action is presented or
defended, thus:
Sec. 3. Representative parties. - A trustee of an express trust,
a guardian, executor or administrator, or a party authorized
by statute, may sue or be sued without joining the party for
whose benefit the action is presented or defended; but the
court may, at any stage of the proceedings, order such
beneficiary to be made a party. An agent acting in his own
name and for the benefit of an undisclosed principal may sue
or be sued without joining the principal except when the
contract involves things belonging to the principal. xvi[16]
Neither is the estate of Ramon Papa, Jr. an indispensable
party without whom, no final determination of the action can
be had. Whatever prior and subsisting mortgage rights the
estate of Ramon Papa, Jr. has over the property may still be
enforced regardless of the change in ownership thereof.
WHEREFORE, the petition for review is hereby DENIED and
the Decision of the Court of Appeals, dated 27 January 1992
is AFFIRMED.
SO ORDERED.

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