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(5) M, maker, P, payee. X indorses the note to A by forging P's signature. A indorses the note to B, B to C, C to D, the present holder.

D can enforce the note against A, B, and C who are indorsers subsequent to the forgery. As indorsers, they warrant that the instrument is genuine and in all respects what it purports to be. (see Sees. 65 and 66.)

(6) P makes a bill of exchange payable to his own order by forging R's signature thereto as a drawer. The bill is addressed to W as drawee. On presentation for acceptance, W accepts the bill, (see Sec. 143.) P then indorses the bill to A, A to B, B to C, C to D, the present holder.

In this case, W cannot refuse to pay D on the ground that the signature of R was a forgery because by accepting the bill, he admits the genuineness of the drawer's signature, (see Sec. 62.)

Of course, W is not liable to P, the forger, and he can recover from him the money paid to D. Neither is W liable to D if the latter had knowledge of the forgery or was guilty of negligence at the time he acquired the bill in not making inquiries which if made might have revealed the fact of forgery.

ILLUSTRATIVE CASES:

1. Drawee bank paid a check with name of drawer forged, although amount of check exceeds authorized limit.

Facts: R is authorized to draw on W (a bank) for any amount not exceeding P5,000.00. P makes a bill of exchange payable to his own order for P6,000.00 by forging R's signature. P indorsed the bill to A, a holder in due course, who presented it for payment.

After the bill had been cleared thru W's clearing office, W paid the bill.

Issue: Can W recover the amount paid to A?

Held: No, because W was guilty of gross negligence considering that the irregularity was apparent on the face of the bill. W is, therefore, precluded from setting up the question of forgery.

(Republic of the Phils, v. Equitable Banking Corporation, 10 SCRA 8 [1964].)

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2. Drawer's negligence facilitated the encashment of forged checks and prevented the discovery of the fraud.

Facts: During the months of March, April, and May 1969, 23 checks payable to various payees were prepared, processed, issued and released by R (MWSS), all of which were paid and cleared by W (PNB) and debited by W against R's account. During the same period of time, 23 checks bearing the same numbers as the aforementioned checks were likewise paid and cleared by W and debited against R's account.

Investigation conducted by the NBI shows that the second 23 checks were deposited by three (3) fictitious payees and the fraudulent encashment was an "inside job."

Issue: Is R barred from setting up the defense of forgery under Section 23?

Held: Yes. R was guilty of negligence not only before the questioned checks were negotiated but even after the same were already negotiated as shown by the following:

It used its own personalized checks, instead of the official PNB commercial blank checks without providing the needed security measures in the exercise of its special privilege in the printing of the same (e.g., relative to the safekeeping and disposition of excess forms and spoiled check forms, paper used in printing said checks, supervision of the printing) and furnishing W with the print used by the printer, inks and pens in signing the checks, and other information regarding the same; and

It failed to reconcile the bank statements with its own records which failure facilitated the fraudulent encashment.

This negligence was the proximate cause of the failure to discover the fraud. (Metropolitan Waterworks and Sewerage System v. Court of Appeals, 143 SCRA 20 [1986].)

3. Drawee bank allowed 27 days to elapse after clearing before notifying collecting bank as to forgery of payee's name.

Facts: R drew a check on W (a bank) and in favor of P as payee.

The check fell into the hands of A who erased the name of P and put his name instead. A deposited the altered check in his name with B (a bank) which presented the check to W for

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clearing. The check was duly cleared by W and A, the forger, was credited the amount of the check.

The alteration was discovered 27 days later and B was notified on the same day.

Issue: Is B liable to refund the amount of the check?

Held: No. The court, relying on the doctrine announced in Republic of the Philippines v. Equitable Banking Corporation (supra.), held as decisive the fact that W allowed 27 days to elapse after clearing before notifying B as to such alteration. The applicable Central Bank regulation (Circular No. 9, Feb. 17, 1949, as amended by Circulars No. 138, Jan. 30, 1962 and No. 169, March 30,1964.) provides for a 24-hour period only within which the drawee-bank must return a check to the collecting bank if the check is defective for any reason. (Hongkong & Shanghai Banking Corporation v. People's Bank & Trust Company, 35 SCRA 140 [1970]; see Phil National Bank v. Court of Appeals, 25 SCRA 693 [1968].)

Note: The validity of the 24-hour clearing hours regulation has been upheld in Republic vs. Equitable Banking Corporation, supra.

The remedy of the drawee bank is against the party responsible for the alteration. It is true that when an indorsement is forged, the collecting bank or last indorser, as a general rule, bears the loss (Banco de Oro Savings & Mortgage Bank v. Equitable Banking Corporation, 157 SCRA 158 [1985].), but the unqualified indorsement of the collecting bank on the check should be read together with the 24-hour regulation on clearing house operations.

Once that 24-hour period is over, the liability of the collecting bank in such an indorsement has ceased. (Metropolitan Bank & Trust Co.

v. the First National City Bank, 118 SCRA 537 [1982]; Republic Bank v. Court of Appeals, 196 SCRA 100 [1991].)

The clearing regulation in force when the dispute in Bank of the Phil. Islands v. Court of Appeals (infra.) occurred in November 12,1981 (forging of payees' indorsement) under Gearing House Rules and Regulations Philippine Clearing House Corporation (PCHC) as revised on September 19,1980 provides:

"Items which have been the subject of material alteration or items bearing a forged endorsement when such endorsement is necessary for negotiation shall be returned within twenty-four (24) hours after discovery of the altera

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tion or the forgery, but in no event beyond the period pre- scribed by law for the filing of a legal action by the return- ing bank/branch, institution or entity against the bank/

branch, institution or entity sending the same." (Sec. 23 thereof.)

In the case of Banco De Oro Savings and Mortgage Bank vs.

Equitable Banking Corporation (157 SCRA 188 [1988], infra.), the clearing regulation (this is the present clearing regulation) at the time the parties' dispute occurred was as follows:

"Sec. 21. x x x x x x x x x

Items which have been the subject of material

alteration or items bearing forged endorsement when such endorsement is necessary for negotiation shall be returned by direct presentation or demand to the Presenting Bank and not through the regular clearing house facilities within the period prescribed by law for the filing of a legal action by the returning bank/branch, institution or entity sending the same."

The above-cited clearing regulations are substantially the same in that it allows a return of a check "bearing forged endorsement when such endorsement is necessary for negotiation" even beyond the next regular clearing although not beyond the prescriptive period "for the filing of a legal action by the returning bank." (Bank of the Phil. Islands vs. Court of Appeals, 216 SCRA 51 [1992], infra.)

4. Depositor entrusted to his secretary who was able to encash and deposit to her personal account several checks against account of the depositor, his credit cards and check books with blank checks.

Facts: Petitioner RI was a depositor of good standing of respondent bank, MBC. As he was then running about 20 corporations, and was going out of the country a number of times, he entrusted to his security KE, his credit cards and his checkbooks with blank checks. It was also KE who verified and reconciled the statements of said checking account.

KE was able to encash and deposit to her personal account 17 checks drawn against the account of petitioner RI at the respondent bank. RI did not bother to check his statement of account until a business partner apprised him he saw KE use RI's credit cards.

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RI requested MBC to credit back and restore to his account the value of the checks which were wrongfully encashed but MBC refused.

Issue: Is MBC liable for damages for its negligence in failing to detect the discrepant checks?

Held: (1) Petitioner has no cause of action. — "To be entitled to damages, petitioner has the burden of proving negligence on the part of the bank for failure to detect the discrepancy in the signatures on the checks. It is incumbent upon petitioner to establish the fact of forgery, i.e., by submitting his specimen signatures and comparing them with those on the questioned checks. Curiously though, petitioner failed to submit additional specimen signatures as requested by the National Bureau of Investigation from which to draw a conclusive finding regarding forgery.

The Court of Appeals found that petitioner, by his own inaction, was precluded from setting up forgery."

(2) MBC employees exercised due diligence. — "Petitioner's contention that Manila Bank [MBC] was remiss in the exercise of its duty as drawee lacks factual basis. Consistently, the CA and the RTC found that Manila Bank employees exercised due diligence in cashing the checks. The bank's employees in the present case did not have a hint as to Eugenio's [KE's] modus operandi because she was a regular customer of the bank, having been designated by petitioner himself to transact in his behalf.

According to the appellate court, the employees of the bank exercised due diligence in the performance of their duties."

(3) Petitioner negligent. — "As borne by the records, it was petitioner, not the bank, who was negligent. Negligence is the omission to do something which a reasonable man, guided by those considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of something which a prudent and reasonable man would do. In the present case, it appears that petitioner accorded his secretary unusual degree of trust and unrestricted access to his credit cards, passbooks, check books, bank statements, including custody and possession of cancelled checks and reconciliation of accounts."

(4) Petitioner failed to examine his bank statements. — "Pe-titioner's failure to examine his bank statements appears as the proximate cause of his own damage. Proximate cause is that

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cause, which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred. In the instant case, the bank was not shown to be remiss in its duty of sending monthly bank statements to petitioner so that any error or discrepancy in the entries therein could be brought to the bank's attention at the earliest opportunity. But, petitioner failed to examine these bank statements not because he was prevented by some cause in not doing so, but because he did not pay sufficient attention to the matter. Had he done so, he could have been alerted to any anomaly committed against him.

In other words, petitioner had sufficient opportunity to prevent or detect any misappropriation by his secretary had he only reviewed the status of his accounts based on the bank statements sent to him regularly. In view of Article 2179 of the New Civil Code, when the plaintiff's own negligence was the immediate and proximate cause of his injury, no recovery could be had for damages."

(5) Petitioner precluded from setting up forgery. — "The rule [in Section 23] does provide for an exception, namely: 'unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority.' In the instant case, it is the exception that applies. In our view, petitioner is precluded from setting up the forgery, assuming there is forgery, due to his own negligence in entrusting to his secretary his credit cards and checkbook including the verification of his statements of account."

(6) Fact of forgery not proved. — "Petitioner's reliance on Associated Bank vs. Court of Appeals (252 SCRA 620,633 [1996].) and Philippine Bank of Commerce vs. Court of Appeals (269 SCRA 695,703-710 [1997].) to buttress his contention that respondent Manila Bank as the collecting or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements is misplaced. In the cited cases, the fact of forgery was not in issue. In the present case, the fact of forgery was not established with certainty. In those cited cases, the collecting banks were held to be negligent for failing to observe precautionary measures to detect the forgery.

In the case before us, both courts below uniformly found that Manila Bank's personnel diligently performed their duties, having compared the signature in the checks from the

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specimen signatures on record and satisfied themselves that it was petitioner's/' (Ilusorio vs. Court of Appeals, 393 SCRA 89 [2002].)

5. Bank paid P950,000 upon a forged check payable to cash.

Facts. Plaintiff Samsung Construction Company Philippines, Inc.

("Samsung Construction"), while based in Binan, Laguna, maintained a current account with defendant Far East Bank and Trust Company ("FEBTC") at the latter's Bel-Air, Makati branch. The sole signatory to Samsung Construction's account was Jong Kyu Lee ("Jong"), its Project Manager, while the checks remained in the custody of the company's accountant, Kyu Yong Lee ("Kyu").

On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC Check to the bank's branch in Bel- Air, Makati. The check, payable to cash and drawn against Samsung Construction's current account, was in the amount of P999,500.00. The bank teller, CJ first checked the balance of Samsung Construction's account. After ascertaining there were enough funds to cover the check, she compared the signature appearing on the check with the specimen signature of Jong as contained in the specimen signature card with the bank. After comparing the two signatures, CJ was satisfied as to the authenticity of the signature appearing on the check. She then asked Gonzaga to submit proof of his identity, and the latter presented three (3) identification cards.

At the same time, CJ forwarded the check to the branch Senior Assistant Cashier GV, as it was bank policy that two bank branch officers approve checks exceeding P100, 000. 00 for payment or encashment. GV likewise counterchecked the signature on the check as against that on the signature card. He too concluded that the check was indeed signed by Jong. GV then forwarded the check and signature card to SS, another bank officer, for approval. SS then noticed that Jose Sempio IE ("Sempio"), the assistant accountant of Samsung Construction, was also in the bank. Sempio was well-known to SS and the other bank officers, he being the assistant accountant of Samsung Construction. SS showed the check to Sempio, who vouched for the genuineness of Jong's signature.

Confirming the identity of Gonzaga, Sempio said that the check was for the

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purchase of equipment for Samsung Construction. Satisfied with the genuineness of the signature of Jong, SS authorized the bank's encashment of the check to Gonzaga.

The following day, the accountant of Samsung Construction, Kyu, examined the balance of the bank account and discovered that a check in the amount of P999,500.00 had been encashed.

Aware that he had not prepared such a check for Jong's signature, Kyu perused the checkbook and found that the last blank check was missing. He reported the matter to Jong, who then proceeded to the bank. Jong learned of the encashment of the check, and realized that his signature had been forged. The Bank Manager reputedly told Jong that he would be reimbursed for the amount of the check. Jong proceeded to the police station and consulted with his lawyers. Subsequently, a criminal case for qualified theft was filed against Sempio before the Laguna Regional Trial court.

During the trial, both sides presented their respective expert witnesses to testify on the claim that Jong's signature was forged.

Samsung Corporation, which had referred the check for investigation to the NBI, presented Senior NBI Document Examiner Roda B. Flores. She testified that based on her examination, she concluded that Jong's signature had been forged on the check. On the other hand, FEBTC, which had sought the assistance of the Philippine National Police (PNP), presented Rosario C. Perez, a document examiner from the PNP Crime Laboratory. She testified that her findings showed that Jong's signature on the check was genuine.

Confronted with conflicting handwriting expert testimony of the NBI and the PNP, the RTC chose to believe the findings of the NBI expert that Jong's signature had been forged on the check and accordingly directed the bank to pay or credit back to Samsung Construction's account the amount of P999,500.00, together with interest tolled from the time the complaint was filed, and attorney's fees in the amount of P15,000.00.

The Court of Appeals reversed the RTC Decision and absolved FEBTC from any liability.

Issue: Who shall bear the loss? The drawee bank or the drawer?

(1) Generally, a forged signature is wholly inoperative — The general rule is to the effect that a forged signature is "wholly inoperative," and payment made "through or under such

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signature" is ineffectual or does not discharge the instrument. If payment is made, the drawee cannot charge it to the drawer's account. The traditional justification for the result is that the drawee is in a superior position to detect a forgery because he has the maker's signature and is expected to know and compare it. The rule has a healthy cautionary effect on banks by encouraging care in the comparison of the signatures against those on the signature cards they have on file. Moreover, the very opportunity of the drawee to insure and to distribute the cost among its customers who use checks makes the drawee an ideal party to spread the risk to insurance.

Brady, in his treatise The Law of Forged and Altered Checks, elucidates:

'When a person deposits money in a general account in a bank, against which he has the privilege of drawing checks in the ordinary course of business, the relationship between the bank and the depositor is that of debtor and creditor. So far as the legal relationship between the two is concerned, the situation is the same as though the bank had borrowed money from the depositor, agreeing to repay it on demand, or had bought goods from the depositor, agreeing to pay for them on demand. The bank owes the depositor money in the same sense that any debtor owes money to his creditor. Added to this, in the case of bank and depositor, there is, of course, the bank's obligation to pay checks drawn by the depositor in

'When a person deposits money in a general account in a bank, against which he has the privilege of drawing checks in the ordinary course of business, the relationship between the bank and the depositor is that of debtor and creditor. So far as the legal relationship between the two is concerned, the situation is the same as though the bank had borrowed money from the depositor, agreeing to repay it on demand, or had bought goods from the depositor, agreeing to pay for them on demand. The bank owes the depositor money in the same sense that any debtor owes money to his creditor. Added to this, in the case of bank and depositor, there is, of course, the bank's obligation to pay checks drawn by the depositor in