620 SUPREME COURT REPORTS ANNOTATED

Associated Bank vs. Court of Appeals

*
G.R. No. 107382. January 31, 1996.

ASSOCIATED BANK, petitioner, vs. HON. COURT OF

APPEALS, PROVINCE OF TARLAC and PHILIPPINE
NATIONAL BANK, respondents.
*
G.R. No. 107612. January 31, 1996.

PHILIPPINE NATIONAL BANK, petitioner, vs. HONORABLE

COURT OF APPEALS, PROVINCE OF TARLAC, and
ASSOCIATED BANK, respondents.

Commercial Law; Negotiable Instruments Law; Forgery; 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.—A
forged signature, whether it be that of the drawer or the payee, is wholly
inoperative and no one can gain title to the instrument through it. A person
whose signature to an instrument was forged was never a party and never
consented to the contract which allegedly gave rise to such instrument.
Section 23 does not avoid the instrument but only the forged signature.
Thus, a forged indorsement does not operate as the payee’s indorsement.

Same; Same; Same; 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.—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.

Same; Same; Same; 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.—In bearer instruments, the signa-

____________________________

* SECOND DIVISION.
 621

VOL. 252, JANUARY 31, 1996 621

Associated Bank vs. Court of Appeals

ture 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.

Same; Same; Same; 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.—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.

Same; Same; Same; Indorser cannot interpose the defense that

signatures prior to him are forged.—An indorser of an order instrument
warrants “that the instrument is genuine and in all respects what it purports
to be; that he has a good title to it; that all prior parties had capacity to
contract; and that the instrument is at the time of his indorsement valid and
subsisting.” He cannot interpose the defense that signatures prior to him are
forged.

Same; Same; Same; A collecting bank where a check is deposited and

which indorses the check upon presentment with the drawee bank is such an
indorser.—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 bank’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.

Same; Same; Same; Payment under a forged indorsement is not to the

drawer’s order.—The bank on which a check is drawn, known as the drawee
bank, is under strict liability to pay the check to the order of the payee. The
drawer’s instructions are reflected on the face and by the terms of the check.
Payment under a forged indorsement is not to the drawer’s order. When the
drawee bank pays a person other than the payee, it does not comply with the
terms of the check and violates its duty to charge its customer’s (the drawer)
account only for properly payable items. Since the drawee bank did not pay
a holder or other person entitled to receive payment, it has no right to
reimbursement from the drawer. The general rule then is that the drawee
bank may not debit the drawer’s account and is not

622
622 SUPREME COURT REPORTS ANNOTATED

Associated Bank vs. Court of Appeals

entitled to indemnification from the drawer. The risk of loss must perforce
fall on the drawee bank.

Same; Same; Same; Drawer is precluded from asserting forgery where

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.—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.

Same; Same; Same; Drawee bank can seek reimbursement or a return

of the amount it paid from the presentor bank or person.—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. In other words, the drawee bank
can seek reimbursement or a return of the amount it paid from the presentor
bank or person. Theoretically, the latter can demand reimbursement from
the person who indorsed the check to it and so on. The loss falls on the party
who took the check from the forger, or on the forger himself.

Same; Same; Same; 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.—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.

Same; Same; Same; Drawee banks not similarly situated as the

collecting bank.—The drawee bank is not similarly situated as the collecting
bank because the former makes no warranty as to the genuineness of any
indorsement. The drawee bank’s duty is but to

623

VOL. 252, JANUARY 31, 1996 623

Associated Bank vs. Court of Appeals

verify the genuineness of the drawer’s signature and not of the indorsement
because the drawer is its client.

Same; Same; Same; Drawee bank has the duty to promptly inform the
presentor of the forgery upon discovery.—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.

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

PETITIONS for review of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.

     Jose A. Soluta, Jr. and Associates for Associated Bank.
          Santiago, Jr., Vidad, Corpus & Associates for Philippine
National Bank.

ROMERO, J.:

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.

624

624 SUPREME COURT REPORTS ANNOTATED

Associated Bank vs. Court of Appeals

1
17962).
The facts of the case are as follows:
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
2
Concepcion Emergency Hospital. The allotment checks for said
government hospital are drawn to the order of “Concepcion
Emergency Hospital, Concepcion, Tarlac” or “The Chief,
Concepcion Emergency Hospital, Concepcion, Tarlac.” The checks
are released by the Office of the Provincial Treasurer and received
for the hospital by its administrative officer and cashier.
In January 1981, the books of account of the Provincial Treasurer
were post-audited by the Provincial Auditor. It was

____________________________

1 Penned by Justice Asaali S. Isnani, with Associate Justices Arturo S. Buena and
Ricardo P. Galvez, concurring, dated September 30, 1992. Rollo, p. 22.
2 Provincial aid was given irregularly. Hospital staff would often call the
provincial treasurer’s office to inquire whether there was an allotment check for the
hospital. The hospital’s administrative officer and cashier would then go to the
provincial treasurer’s office to pick up the check.
Checks received by the hospital are deposited in the account of the National
Treasury with the PNB. All income of the hospital in excess of the amount which the
National Government has directed it to raise, is excess income. The latter is given
back to the hospital after a supplemental budget is prepared. When the latter is
approved, an advice of allotment is made. Then the hospital requests a cash
disbursement ceiling. When approved, this is brought to the Ministry of Health. The
regional office of said Ministry then prepares a check for the hospital. The check will
be deposited in the hospital’s current account at the PNB. (Culled from the testimony
of Dr. Adena Canlas, TSN, October 17, 1983, pp. 8-11; December 6, 1983, pp. 43-
44.)

625

VOL. 252, JANUARY 31, 1996 625

Associated Bank vs. Court of Appeals

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 3 follow up the release of the checks and had official4
receipts. Pangilinan sought to encash the first check with
Associated Bank. However, the manager of Associated Bank refused
and suggested that Pangilinan deposit the check in his personal
savings account with the same bank. Pangilinan was able to
withdraw the money when the check was cleared and paid by the
drawee bank, PNB.
 After forging the signature of Dr. Adena Canlas who was chief of
the payee hospital, Pangilinan followed the same procedure for the
5
second check, in the amount of P5,000.00 and dated April 20, 1978,
as well as for twenty-eight other checks of various amounts and on
various dates. The last check negotiated by Pangilinan was for
6
P8,000.00 and dated February 10, 1981. All the checks bore the
stamp of Associated Bank which reads “All prior endorsements
guaranteed ASSOCIATED BANK.”
Jesus David, the manager of Associated Bank testified that
Pangilinan made it appear that 7the checks were paid to him for
certain projects with the hospital. He did not find as

____________________________

3 TSN, March 13, 1984, pp. 51-60.

4 Check No. 530863 K, dated January 17, 1978 for P10,000.00.
5 Check No. 526788 K.
6 Check No. 391351 L.
7 TSN, July 10, 1985, pp. 14-15.

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626 SUPREME COURT REPORTS ANNOTATED

Associated Bank vs. Court of Appeals

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
8
having given Pangilinan preferential treatment on this account.
On February 26, 1981, the Provincial Treasurer wrote the
manager of the PNB seeking the restoration of the9 various amounts
debited from the current account of the Province. In turn, the PNB
manager demanded reimbursement from the Associated Bank on
10
May 15, 1981.
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 a11fourth-party complaint
against Adena Canlas and Fausto Pangilinan.
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

____________________________

8 TSN, July 10, 1985, pp. 20-21, 34-35; September 24, 1985.
9 Exhibit FF for Province of Tarlac. On March 20, 1981, the Province of Tarlac reiterated its
request in another letter to PNB. Associated Bank was allegedly furnished with a copy of this
letter. (Records, pp. 246-247) PNB requested the Province to return the checks in a letter dated
March 31, 1981. The checks were returned to PNB on April 22, 1981. (Exhibit GG) On April
24, 1981, PNB gave the checks to Associated Bank. (Exhibit 5) Associated Bank returned the
checks to PNB on April 28, 1981, along with a letter stating its refusal to return the money paid
by PNB. (Exhibit 6)
10 Exhibit “MM” for Province of Tarlac.
11 Civil Case No. 6227, “Province of Tarlac v. Philippine National Bank; Philippine
National Bank v. Associated Bank; Associated Bank v. Fausto Pangilinan and Adena G.
Canlas,” Regional Trial Court Branch 64, Tarlac, Tarlac.

627

VOL. 252, JANUARY 31, 1996 627

Associated Bank vs. Court of Appeals

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;
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.
4. On the counterclaims on the complaint, third-party complaint and
fourth-party complaint, the same are hereby ordered dismissed for
lack of merit.
12
SO ORDERED.”
13
PNB and Associated Bank appealed to the Court of Appeals.
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.
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
____________________________

12 Penned by Judge Arturo U. Barias, Jr., Rollo, pp. 391-392.

13 CA-G.R. CV No. 17962.

628

628 SUPREME COURT REPORTS ANNOTATED

Associated Bank vs. Court of Appeals

14
avoid circuity.
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.
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
15
to law, has the force and effect of law. 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” 16situation and will always bear the loss as against the drawee
bank.
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 17the genuineness of payee’s indorsement before paying the
check.
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.
***
The case at bench concerns checks payable to the order of
Concepcion Emergency Hospital or its Chief. They were prop-

____________________________

14 Petition, pp. 6-7; Rollo, pp. 13-14, G.R. No. 107612.

15 Citing Antique Sawmills, Inc. v. Zayco, 17 SCRA 316, et al., Petition, p. 9,
Rollo, p. 10.
16 Associated Bank’s Petition, p. 13.
17 Id., at 12.

629

VOL. 252, JANUARY 31, 1996 629

 Associated Bank vs. Court of Appeals

erly 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.
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
18
allegedly gave rise to such instrument. Section 1923 does not avoid
the instrument but only the forged signature. 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 es-

____________________________

18 J. CAMPOS & M. LOPEZ-CAMPOS, NEGOTIABLE INSTRUMENTS LAW,

227-230 (4th ed., 1990).
19 I A. AGBAYANI, COMMENTARIES AND JURISPRUDENCE ON THE
COMMERCIAL LAWS OF THE PHILIPPINES 198 (1989 ed.).

630

630 SUPREME COURT REPORTS ANNOTATED

Associated Bank vs. Court of Appeals

topped 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
20
instrument.
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 21 forged
can raise the defense of forgery against a holder in due course.
 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
22
against all parties subsequent thereto.
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
23
is at the time of his indorsement valid and
subsisting.” He cannot interpose the defense that signatures prior to
him are forged.
A collecting bank where a check is deposited and which indorses
the check upon presentment with the drawee bank, is such an
indorser. So even if the indorsement on the check deposited by the
bank’s client is forged, the collecting bank is

____________________________

20 Id., at 199.
21 J. VITUG, PANDECT OF COMMERCIAL LAW AND JURISPRUDENCE 51-
53 (Rev. ed., 1990).
22 Id.
23 Section 66, Negotiable Instruments Law.

631

VOL. 252, JANUARY 31, 1996 631

Associated Bank vs. Court of Appeals

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
24
from the drawer. The general rule then is that the drawee bank may
not debit the drawer’s
25
account and is not entitled to indemnification
from the drawer. 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 26be apportioned between the negligent drawer and the
negligent bank.
In cases involving a forged check, where the drawer’s signature
is forged, the drawer can recover from the drawee

____________________________

24 S. NICKLES, NEGOTIABLE INSTRUMENTS AND OTHER RELATED

COMMERCIAL PAPER 416 (2nd ed., 1993).
25 Great Eastern Life Insurance Co. v. Hongkong and Shanghai Banking Corp., 43
Phil. 678; Banco de Oro Savings and Mortgage Bank v. Equitable Banking
Corporation, G.R. No. L-74917, January 20, 1988, 157 SCRA 188; CAMPOS &
LOPEZ-CAMPOS, op. cit. note 18 at 283, citing La Fayette v. Merchants Bank, 73
Ark 561; Wills v. Barney, 22 Cal 240; Wellington National Bank v. Robbins, 71 Kan
748.
26 R. JORDAN & W. WARREN, NEGOTIABLE INSTRUMENTS AND
LETTERS OF CREDIT 216 (1992).

632

632 SUPREME COURT REPORTS ANNOTATED

Associated Bank vs. Court of Appeals

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
27
its customer.
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,
28
if available. In other words, the drawee bank can seek
reimbursement or a return of the amount it paid from the presentor
29
bank or person. Theoretically, the latter can demand reimbursement
from the person who indorsed the check to it and so on. The loss
falls on the party who took the check from the forger, or on the
forger himself.
In 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 30return the money paid by the latter because it was paid
wrongfully.
____________________________

27 Id.
28 Id., at 216-235; VITUG, op. cit. note 21 at 53.
29 Banco de Oro v. Equitable Banking Corp., supra; Great Eastern Life Insurance
Co. v. HSBC, supra.
30 Article 2154 of the Civil Code provides: “If something is received when there is
no right to demand it, and it was unduly delivered through mistake, the obligation to
return it arises.” Banco de Oro v. Equitable Banking Corp., supra.

633

VOL. 252, JANUARY 31, 1996 633

Associated Bank vs. Court of Appeals

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 presentment31had done its duty to
ascertain the genuineness of the endorsements.”
The drawee bank is not similarly situated as the collecting bank
because the former
32
makes no warranty as to the genuineness of any
indorsement. The drawee bank’s duty is but to verify the
genuineness of the drawer’s signature and not of the indorsement
because the drawer is its client.
Moreover, the collecting bank is made liable because it is privy
to the depositor who negotiated the check. The bank knows him, his
address and history because he is a client. It has taken a risk on his
deposit. The bank is also in a better position to detect forgery, fraud
or irregularity in the indorsement.

____________________________

31 Bank of the Phil. Islands v. CA, G.R. No. 102383, November 26, 1992, 216
SCRA 51, 63 citing Banco de Oro v. Equitable Banking Corp., supra; Great Eastern
Life Insurance Co. v. HSBC, supra.
32 CAMPOS & LOPEZ-CAMPOS, op. cit. note 18 at 283 citing Inter-state Trust
Co. v. U.S. National Bank, 185 Pac. 260; Hongkong and Shanghai Banking Corp. v.
People’s Bank and Trust Co., supra.
 634

634 SUPREME COURT REPORTS ANNOTATED

Associated Bank vs. Court of Appeals

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 33
is deemed negligent and can
no longer recover from the presentor.
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

____________________________

33 JORDAN & WARREN, op. cit. note 26 at 217; CAMPOS & LOPEZ-
CAMPOS, op. cit. note 18 at 283.

635

VOL. 252, JANUARY 31, 1996 635

Associated Bank vs. Court of Appeals

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:

“ATTY. MORGA:
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:
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

____________________________

34 TSN, June 19, 1984, pp. 10-11.

636

636 SUPREME COURT REPORTS ANNOTATED

Associated Bank vs. Court of Appeals

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.
As earlier stated, PNB can recover from35 the collecting bank.
In the case of Associated Bank v. CA, 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:

“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. x x x”

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 logi-

____________________________

35 G.R. No. 89802, May 7, 1992, 208 SCRA 465.

637

VOL. 252, JANUARY 31, 1996 637

Associated Bank vs. Court of Appeals

cal that this bank be held accountable for checks deposited by its
customers.
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.
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-four (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 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.

638

638 SUPREME COURT REPORTS ANNOTATED

Associated Bank vs. Court of Appeals

The rule mandates that the checks be returned within twenty-four

hours after discovery of the forgery but in no event beyond the
period fixed by law for filing a legal action. The rationale of the rule
is to give the collecting bank (which indorsed the check) adequate
opportunity to proceed against the forger. If prompt notice is not
given, the collecting bank may be prejudiced and lose the
opportunity to go after its depositor.
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.
36
Two
days later, Associated Bank received the checks from PNB.
Associated Bank was also furnished a copy of the Province’s
letter of demand to PNB dated March 20, 1981, thus giving it notice
of the forgeries. At this time, however, Pangilinan’s account with
37
Associated had only P24.63 in it. 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
38
rebuttal witness. Hence, Associated Bank was not prejudiced by
PNB’s failure to comply with the twenty-four-hour return rule.
Next, Associated Bank contends that PNB is estopped from
requiring reimbursement because the latter paid and cleared
____________________________

36 See footnote 9.
37 Exhibit “3-G” for Associated Bank.
38 TSN, January 8, 1987.

639

VOL. 252, JANUARY 31, 1996 639

Associated Bank vs. Court of Appeals

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
39
drawee bank. PNB’s duty was to verify the genuineness of the
drawer’s signature and not the genuineness of payee’s indorsement.
Associated Bank, as the collecting bank, is the entity with the duty
to verify the genuineness of the payee’s indorsement.
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 client or 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
40
the PNB. Bank deposits are considered under the law
as loans. 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 com-

____________________________

39 San Carlos Milling Co. Ltd. v. BPI, 59 Phil. 59.

40 Article 1980 of the Civil Code reads: Fixed, savings, and current deposits of
money in banks and similar institutions shall be governed by the provisions
concerning simple loan.

640

640 SUPREME COURT REPORTS ANNOTATED

 Associated Bank vs. Court of Appeals

puted from
41
the date of default, or the date of judicial or extrajudicial
demand. 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

____________________________

41 Eastern Shipping Lines, Inc. v. CA, G.R. No. 97412, July 12, 1994, 234 SCRA
78.

641

VOL. 252, JANUARY 31, 1996 641

Paredes, Jr. vs. Sandiganbayan, Second Division

Bank, likewise, with legal interest from March 20, 1981 until
payment is made.
SO ORDERED.

     Regalado (Chairman), Puno and Mendoza, JJ., concur.

Petition of PNB partially granted while that of Associated Bank

denied. Judgment of trial court modified.
 Note.—Forgery cannot be presumed it must be proved by clear,
positive and convincing evidence. (Tenio-Obsequio vs. Court of
Appeals, 230 SCRA 550 [1994])

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