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Gempesaw vs.Court of Appeals
G.R. No. 92244
February 9, 1993
Natividad O. Gempesaw owns and operates four grocery stores in Caloocan City. She maintains a checking account with the Caloocan City Branch of the Philippine Bank of Communications (drawee Bank). To facilitate payment of debts to her suppliers, she draws checks against her checking account with the bank as drawee.
As part of her customary practice of issuing checks in payment of her suppliers, the checks were usually prepared and filled up as to all material particulars by her trusted bookkeeper, Alicia Galang, an employee for more than 8 years.
After the bookkeeper prepared the checks, the completed checks were submitted to Gempesaw for her signature, together with the corresponding invoice receipts which indicate the correct obligations due and payable to her suppliers.
Gempesaw signed each and every check without bothering to verify the accuracy of the checks against the corresponding invoices because she reposed full and implicit trust and confidence on her bookkeeper.
On 23 January 1985, Gempesaw filed a Complaint against the drawee Bank for recovery of the money value of 82 checks charged against her account with the drawee Bank on the ground that the payees' indorsements were forgeries.
About 30 of the payees whose names were specifically written on the checks testified that they did not receive nor even see the subject checks and that the indorsements appearing at the back of the checks were not theirs. It was learned that all the 82 checks with forged signatures of the payees were brought to Ernest L. Boon, Chief Accountant of drawee Bank at the Buendia branch, who, without authority therefor, accepted them all for deposit at the Buendia branch to the credit and/or in the accounts of Alfredo Y. Romero and Benito Lam.
The Court of Appeals in a decision rendered affirmed the decision of the RTC on two grounds, namely (1) that Gempesaw’s gross negligence in issuing the checks was the proximate cause of the loss and (2) assuming that the bank was also negligent, the loss must nevertheless be borne by the party whose negligence was the proximate cause of the loss.
On 5 March 1990, Gempesaw filed the petition for review under Rule 45 of the Rules of Court.
The Supreme Court order the case remanded to the trial court for the reception of evidence to determine the exact amount of loss suffered by Gempesaw, considering that she partly benefited from the issuance of the questioned checks since the obligation for which she issued them were apparently extinguished, such that only the excess amount over and above the total of these actual obligations must be considered as loss of which one half must be paid by drawee bank to Gempesaw.
1. Generally the main issue is whether forgery of negotiable instrument is a real or absolute defense;
2. Whether Gempesaw’s gross negligence in issuing the checks was the proximate cause of the loss; and
3. Whether the drawee bank was also negligent, the loss must nevertheless be borne by the party whose negligence was the proximate cause of the loss.
1. Rules of the drawee Bank (PBCom) as to acceptance of second indorsement on a check for deposit.
Under the rules of the drawee Bank, only a Branch Manager, and no other official of the drawee Bank, may accept a second indorsement on a check for deposit. In the present case, all the deposit slips of the 82 checks in question were initialed and/or approved for deposit by Ernest L. Boon, Chief Accountant of the Buendia Branch of the drawee Bank. The Branch Managers of the Ongpin and Elcano branches accepted the deposits made in the Buendia branch and credited the accounts of Alfredo Y. Romero and Benito Lam in their respective branches.
2. Present case not a suit by party whose signature was forged on a check drawn against the drawee bank, but by the drawer whose signature is genuine.
The present case is not a suit by the party whose signature was forged on a check drawn against the drawee bank. The payees are not parties to the case. Rather, it is the drawer, whose signature is genuine, who instituted the action to recover from the drawee bank the money value of 82 checks paid out by the drawee bank to holders of those checks where the indorsements of the payees were forged. How and by whom the forgeries were committed are not established on the record, but the respective payees admitted that they did not receive those checks and therefore never indorsed the same.
3. Section 23 of the Negotiable instruments Law.
The applicable law is the Negotiable Instruments Law (NIL). Section 23 of the NIL provides that "when a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority."
4. Forgery a real or absolute defense by the party whose signature is forged; Party includes maker or drawer, indorsee or payee.
Under Section 23 of the NIL, forgery is a real or absolute defense by the party whose signature is forged. A party whose signature to an instrument was forged was never a party and never gave his consent to the contract which gave rise to the instrument. Since his signature does not appear in the instrument, he cannot be held liable thereon by anyone, not even by a holder in due course. Thus, if a person's signature is forged as a maker of a promissory note, he cannot be made to pay because he never made the promise to pay. Or where a person's signature as a drawer of a check is forged, the drawee bank cannot charge the amount thereof against the drawer's account because he never gave the bank the order to pay. And said section does not refer only to the forged signature of the maker of a promissory note and of the drawer of a check. It covers also a forged indorsement, i.e., the forged signature of the payee or indorsee of a note or check.
5. Effects of forgery.
Since under said provision a forged signature is "wholly inoperative", no one can gain title to the instrument through such forged indorsement. Such an indorsement prevents any subsequent party from acquiring any right as against any party whose name appears prior to the forgery. Although rights may exist between and among parties subsequent to the forged indorsement, not one of them can acquire rights against parties prior to the forgery. Such forged indorsement cuts off the rights of all subsequent parties as against parties prior to the forgery. However, the law makes an exception to these rules where a party is precluded from setting up forgery as a defense.
6. Two types of cases of problems arising from forged indorsements of checks.
Problems arising from forged indorsements of checks may generally be broken into two types of cases: (1) where forgery was accomplished by a person not associated with the drawer [for example a mail robbery]; and (2) where the indorsement was forged by an agent of the drawer. This difference in situations would determine the effect of the drawer's negligence with respect to forged indorsements.
7. Duty of drawer; Effect of negligence.
While there is no duty resting on the depositor to look for forged indorsements on his cancelled checks in contrast to a duty imposed upon him to look for forgeries of his own name, a depositor is under a duty to set up an accounting system and a business procedure as are reasonably calculated to prevent or render difficult the forgery of indorsements, particularly by the depositor's own employees. And if the drawer (depositor) learns that a check drawn by him has been paid under a forged indorsement, the drawer is under duty promptly to report such fact to the drawee bank. For his negligence or failure either to discover or to report promptly the fact of such forgery to the drawee, the drawer loses his right against the drawee who has debited his account under the forged indorsement. In other words, he is precluded from using forgery as a basis for his claim for recrediting of his account.
8. Effect of signing of negotiable instrument.
Gempesaw admitted that the checks were filled up and completed by her trusted employee, Alicia Galang, and were later given to her for her signature. Her signing the checks made the negotiable instrument complete. Prior to signing the checks, there was no valid contract yet.
9. Negotiable instrument is incomplete and revocable until delivery of the instrument to the payee; Issuance of the instrument.
Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument to the payee for the purpose of giving effect thereto. The first delivery of the instrument, complete in form, to the payee who takes it as a holder, is called issuance of the instrument. Without the initial delivery of the instrument from the drawer of the check to the payee, there can be no valid and binding contract and no liability on the instrument.
10. Drawee bank cannot charge drawer’s bank where indorsement has been forged.
Exception, when drawer is guilty of negligence which causes bank to honor such checks
As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot charge the drawer's account for the amount of said check. An exception to this rule is where the drawer is guilty of such negligence which causes the bank to honor such a check or checks.
11. Drawer has duty to examine cancelled checks for forgery of his own signature, not as to forged indorsements.
If a check is stolen from the payee, it is quite obvious that the drawer cannot possibly discover the forged indorsement by mere examination of his cancelled check. This accounts for the rule that although a depositor owes a duty to his drawee bank to examine his cancelled checks for forgery of his own signature, he has no similar duty as to forged indorsements.
12. When indorsement forged by an employee or agent of drawer; Fraud discoverable.
A different situation arises where the indorsement was forged by an employee or agent of the drawer, or done with the active participation of the latter. Most of the cases involving forgery by an agent or employee deal with the payee's indorsement. The drawer and the payee oftentimes have business relations of long standing. The continued occurrence of business transactions of the same nature provides the opportunity for the agent/employee to commit the fraud after having developed familiarity with the signatures of the parties. However, sooner or later, some leak will show on the drawer's books. It will then be just a question of time until the fraud is discovered. This is specially true when the agent perpetrates a series of forgeries as in the present case.
13. Negligence of depositor that will prevent recovery of an unauthorized payment.
The negligence of a depositor which will prevent recovery of an unauthorized payment is based on failure of the depositor to act as a prudent businessman would under the circumstances. In the present case, Gempesaw relied implicitly upon the honesty and loyalty of her bookkeeper, and did not even verify the accuracy of the amounts of the checks she signed against the invoices attached thereto. Furthermore, although she regularly received her bank statements, she apparently did not carefully examine the same nor the check stubs and the returned checks, and did not compare them with the sales invoices. Otherwise, she could have easily discovered the discrepancies between the checks and the documents serving as bases for the checks. With such discovery, the subsequent forgeries would not have been accomplished. It was not until two years after the bookkeeper commenced her fraudulent scheme that Gempesaw discovered that 82 checks were wrongfully charged to her account, at which time she notified the drawee Bank.
14. Even if there is possibility that checks covered inexistent sales, Gempesaw did not exercise prudence.
Since there is no mention about any of Gempesaw’s suppliers complaining of non-payment, the possibility exists that the checks in question covered inexistent sales. But even in such a case, considering the length of a period of 2 years, it is hard to believe that Gempesaw did not know or realize that she was paying much more than she should for the supplies she was actually getting. A depositor may not sit idly by, after knowledge has come to her that her funds seem to be disappearing or that there may be a leak in her business, and refrain from taking the steps that a careful and prudent businessman would take in such circumstances and if taken, would result in stopping the continuance of the fraudulent scheme. If she fails to take such steps, the facts may establish her negligence, and in that event, she would be estopped from recovering from the bank.
15. Gempesaw precluded from using forgery as a defense; Gempesaw’s negligence was proximate cause of her loss.
Had Gempesaw examined her records more carefully, she would have noticed discrepancies. Had Gempesaw been more vigilant in going over her current account by taking careful note of the daily reports made by the drawee Bank on her issued checks, or at least made random scrutiny of her cancelled checks returned by drawee Bank at the close of each month, she could have easily discovered the fraud being perpetrated by Alicia Galang, and could have reported the matter to the drawee Bank. The drawee Bank then could have taken immediate steps to prevent further commission of such fraud. Thus, Gempesaw's negligence was the proximate cause of her loss. And since it was her negligence which caused the drawee Bank to honor the forged checks or prevented it from recovering the amount it had already paid on the checks, Gempesaw cannot now complain should the bank refuse to recredit her account with the amount of such checks. Under Section 23 of the NIL, she is now precluded from using the forgery to prevent the bank's debiting of her account.
16. Great Eastern Life Insurance case not applicable; Payee’s signature not forged by agent or employee of drawer.
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Bank is not applicable to the case at bar because in said case, the check was fraudulently taken and the signature of the payee was forged not by an agent or employee of the drawer. The drawer was not found to be negligent in the handling of its business affairs and the theft of the check by a total stranger was not attributable to negligence of the drawer; neither was the forging of the payee's indorsement due to the drawer's negligence. Since the drawer was not negligent, the drawee was duty-bound to restore to the drawer's account the amount theretofore paid under the check with a forged payee's indorsement because the drawee did not pay as ordered by the drawer.
17. Crossed check imposes no legal obligation on the drawee not to honor such check.
Cross check merely a warning that check cannot be presented for payment in cash
Issuing a crossed check imposes no legal obligation on the drawee not to honor such a check. It is more of a warning to the holder that the check cannot be presented to the drawee bank for payment in cash. Instead, the check can only be deposited with the payee's bank which in turn must present it for payment against the drawee bank in the course of normal banking transactions between banks. The crossed check cannot be presented for payment but it can only be deposited and the drawee bank may only pay to another bank in the payee's or indorser's account.
18. Banking rule banning acceptance of checks with more than one indorsement, unless cleared by bank officials, does not invalidate instrument, nor negotiation or transfer thereof.
The banking rule banning acceptance of checks for deposit or cash payment with more than one indorsement unless cleared by some bank officials does not invalidate the instrument; neither does it invalidate the negotiation or transfer of the said check. In effect, this rule destroys the negotiability of bills/checks by limiting their negotiation by indorsement of only the payee. Under the NIL, the only kind of indorsement which stops the further negotiation of an instrument is a restrictive indorsement which prohibits the further negotiation thereof.
19. Restrictive indorsement.
Section 36 of the Negotiable Instruments Law (When indorsement restrictive) provides that “an indorsement is restrictive which either (a) Prohibits further negotiation of the instrument; or. xxx xxx xxx" In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written in express words at the back of the instrument, so that any subsequent party may be forewarned that it ceases to be negotiable. However, the restrictive indorsee acquires the right to receive payment and bring any action thereon as any indorser, but he can no longer transfer his rights as such indorsee where the form of the indorsement does not authorize him to do so.
20. Liability of drawee on wrongful dishonor of bill or check.
Although the holder of a check cannot compel a drawee bank to honor it because there is no privity between them, as far as the drawer-depositor is concerned, such bank may not legally refuse to honor a negotiable bill of exchange or a check drawn against it with more than one indorsement if there is nothing irregular with the bill or check and the drawer has sufficient funds. The drawee cannot be compelled to accept or pay the check by the drawer or any holder because as a drawee, he incurs no liability on the check unless he accepts it. But the drawee will make itself liable to a suit for damages at the instance of the drawer for wrongful dishonor of the bill or check.
21. Drawer cannot allege negligence of drawee bank on the selection and supervision of its employees, Drawee may be liable for damages under Article 1170 of the Civil Code, and not Article 2179.
Under Section 196 of the NIL, any case not provided for in the Act shall be governed by the provisions of existing legislation. Under the laws of quasi-delict, she cannot point to the negligence of the drawee Bank in the selection and supervision of its employees as being the cause of the loss because her negligence is the proximate cause thereof and under Article 2179 of the Civil Code, she may not be awarded damages. However, under Article 1170 of the same Code the drawee Bank may be held liable for damages. The article provides "Those who in the performance of their obligations are guilty of fraud, negligence or delay, and those who in any manner contravene the tenor thereof, are liable for damages."
22. Violation of internal banking rules and regulations contravenes tenor of bank’s obligation.
There is a contractual relation between Gempesaw as depositor (obligee) and the drawee bank as the obligor. In the performance of its obligation, the drawee bank is bound by its internal banking rules and regulations which form part of any contract it enters into with any of its depositors. When it violated its internal rules that second endorsements are not to be accepted without the approval of its branch managers and it did accept the same upon the mere approval of Boon, a chief accountant, it contravened the tenor of its obligation at the very least, if it were not actually guilty of fraud or negligence.
23. Non-discovery of irregularity as to acceptance of checks with second indorsement without approval of branch manager constitutes negligence on the part of the bank; Article 1173 of the Civil Code.
The fact that the drawee Bank did not discover the irregularity with respect to the acceptance of checks with second indorsement for deposit even without the approval of the branch manager despite periodic inspection conducted by a team of auditors from the main office constitutes negligence on the part of the bank in carrying out its obligations to its depositors. Article 1173 provides "The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and correspondents with the circumstance of the persons, of the time and of the place. . . ."
24. Banking business impressed with public interest; Utmost diligence required.
The banking business is so impressed with public interest where the trust and confidence of the public in general is of paramount importance such that the appropriate standard of diligence must be a high degree of diligence, if not the utmost diligence. Surely, drawee Bank cannot claim it exercised such a degree of diligence that is required of it. There is no way that it be allowed to escape liability for such negligence. Its liability as obligor is not merely vicarious but primary wherein the defense of exercise of due diligence in the selection and supervision of its employees is of no moment.
25. Bank liable to 50:50 ratio share for loss, in accordance with Article 1172 of the Civil Code.
The drawee Bank is adjudged liable to share the loss with the petitioner on a fifty-fifty ratio in accordance with Article 1172 which provides "Responsibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances."
26. Liability of the bank thus is based on law and not mere equity.
With the foregoing provisions of the Civil Code being relied upon, it is being made clear that the decision to hold the drawee bank liable is based on law and substantial justice and not on mere equity.
27. Courts not precluded to apply circumstances of the case the laws pertinent thereto.
Gempesaw’s negligence does not preclude her from recovering damages
And although the case was brought before the court not on breach of contractual obligations, the courts are not precluded from applying to the circumstances of the case the laws pertinent thereto. Thus, the fact that petitioner's negligence was found to be the proximate cause of her loss does not preclude her from recovering damages. The reason why the decision dealt on a discussion on proximate cause is due to the error pointed out by petitioner as allegedly committed by the appellate court. And in breaches of contract under Article 1173, due diligence on the part of the bank is not a defense.