Bank of the Philippine Islands vs. Court of Appeals, Hon.

Judge of the Regional Trial Court of Makati, Branch 59, China Banking Corporation, and Philippine Clearing House Corporation (BPI vs. China Banking Corp.), GR No. 102383, Nov. 26, 1992 NATURE OF ACTION: Appeal to SC by certiorari, R45, ROC FACTS: October 9, 1981: Reginaldo Eustaquio from BPIs Money Market Department received a phone call from a woman who called herself Eligia Fernando. Eligia has a money market placement as evidenced by a promissory note with a maturity date of November 11, 1981, and a maturity value of P2,462,243.19. Eligia wanted to preterminate the placement, but trading time was over by then, and she was advised to call again the following week. Later that day, Reginaldo conveyed the matter to Penelope Bulan, who handled Eligias account in the past. Reginaldo was left to attend to the pretermination. October 12, 1981: Eligia followed up on the pretermination of the placement. Reginaldo was so sure that it was indeed Eligia Fernando, the treasurer of Philamlife, he was talking to. No one at BPI bothered to call up Eligia at her Philamlife office to verify the pretermination request. Eligia asked that two checks be issued for the placements proceeds, and that these check s were to be delivered to her Philamlife office. Reginaldo promptly prepared the purchase order slip for the pretermination requested. The checks were signed that very morning and were given to the dispatcher for delivery. However, Eligia called she changed her mind. Instead of having the checks delivered to her office, she woud either pick them up herself or have her niece, Rosemarie, pick them up for her. Reginaldo told Eligia that if her niece would be the one receiving the checks, she would need a written authorization. Rosemarie did show up to take the checks. Too late did BPI realize that theyve been had. Rosemarie and Eligia were one and the same, and the signatures on the written authorization and the letter of pretermination itself were all forged. October 13, 1981: A woman purporting to be Eligia applied at China Bankings head office for the opening of a new account. The day after, Eligia deposited the two checks. Her endorsement therein was found to conform with the specimen signature with China Banking. China Bankings guaranty of prior endorsements was stamped on the checks, which were then sent to clearing. BPI promptly cleared them on the same day. October 15, 1981: Withdrawals on the China Banking account began. A total of P2.422,600 was withdrawn. November 11, 1981 was the money market placements supposed maturity date. That day, the real Eligia Fernando went to BPI for the roll-over of her placement and was faced with the shock of her life when informed that she had already preterminanted the placement. The real Eligia executed an affidavit stating the following: (1) that while she was the payee of the two checks, she neither got to receive nor indorse them; and (2) that the signatures on the back of the checks were forgeries. Eligia surrendered the original of her promissory note to BPI evidence a roll-over of the placement. BPI then issued a new promissory note, and returned the checks in question to China Banking because the payee's endorsement was forged. China Banking then had the checks brought back to BPI because its beyond clearing time.

The issue was brought before the Philippine Clearing House Corporation's Arbitration Board which ruled in BPIs favor. Upon a Motion for Reconsideration filed by China Banking, however, the PCHC reversed its Order, ruling in favor of China Banking instead. BPI filed a petition for review with the Makati RTC. The petition was dismissed. Aggrieved, BPI filed a petition for review on certiorari under R45, ROC, with the SC. The petition was referred to the CA for proper determination, which promptly affirmed the trial court's decision.

Hence, this petition. ISSUES: 1. In the event that the payee's signature is forged, may the drawer/drawee bank claim reimbursement from the collecting bank which earlier paid the proceeds of the checks after the same checks were cleared by the drawer/drawee bank through the PCHC? 2. When a bank, like China Banking in this case, presents checks for clearing and payment, what is the extent of the bank's warranty of the validity of all prior endorsements stamped at the back of the checks? ARGUMENTS: BPI asserts the following: 1. China Banking's clear warranty that "all prior endorsements and/or lack of endorsements, guaranteed" stamped at the back of the checks was an unrestrictive clearing guaranty that all prior endorsements in the checks are genuine; therefore, the presenting or collecting bank had an unquestioned liability when it turned out that the payee's signatures on the checks were forged. (With this being the case, BPI reckons that considerations of relative negligence on their part have become irrelevant.) 2. The NIL, spec. Sec. 23, is not applicable in the light of the absolute liability of the representing or collecting bank as regards forged endorsements in consonance with the clearing guarantee requirement imposed upon the presenting or collecting banks "as it is worded today." 3. The doctrine of last clear chance, as used in the case of Picart vs. Smith, should have been applied considering the circumstances of the case. RULING: BPI's theory that the present clearing guarantee requirement imposed on the representing or collecting bank under the PCHC rules and regulations is independent of the Negotiable Instruments Law is not in order. (1) As to forgery in endorsements, generally, the collecting bank or last endorser 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. However, in prior decisions of the Supreme Court on the matter, the general rule was applied because as between the drawee bank and the collecting bank, the latter was negligent and thus responsible for undue payment. The case at bar is different. (2) The NIL applies to negotiable instruments as defined under Sec. 1 thereof. The present case involves checks as defined by and under the coverage of the Negotiable Instruments Law. Affirming BPIs theory would violate the rule that rules and regulations implement ing the law should conform to the law.

(3) Sec. 23 of the NIL states: When 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 discharge therefore, or to enforce payment thereof, against any party thereto, can be acquired through or under such forged signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. GR: XPN: A forged signature is wholly inoperative and payment made through or under such signature is ineffectual and will not discharge the instrument. When the party relying in the forgery is precluded from setting up the forgery or want of authority, Sec. 23 cannot be raised as a defense against liability. Negligence of the party invoking forgery is recognized as an exception to the general rule.

In this case, the payee's names in the subject checks were forged. Following the general rule, the checks are "wholly inoperative" and of no effect. However, the underlying circumstances of the case show that the general rule on forgery is not applicable. The issue as to who between the parties should bear the loss in the payment of the forged checks necessities the determination of the rights and liabilities of the parties involved in the controversy in relation to the forged checks. The records show that BPI as drawee bank and China Banking as representing or collecting bank were both negligent resulting in the encashment of the forged checks. "Banks handle daily transactions involving millions of pesos. By the very nature of their work the degree of responsibility, care and trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees. For obvious reasons, the banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees." (4) China Banking had no prior notice of the fraud as to the pretermination of Eligia's money market placement. Moreover, Eligia herself is not a depositor of China Banking. Hence, a comparison of the signature of the real Eligia with that of the impostor, which China Banking did, could not have resulted in the discovery of the fraud. The records fail to show that China Banking had any knowledge, actual or implied, of the fraud perpetrated by the fake Eligia and the employees of BPI. Even then, the Supreme Court cannot ignore the fact that China Banking closed its eyes to the suspicious circumstances of huge over-the-counter withdrawals made immediately after Eligias account was opened. The opening of the account itself was accompanied by inexplicable acts clearly showing negligence, and while the last clear chance doctrine is not deemed controlling in this case, China Banking still had ample opportunity to avoid the harm which befell both banks. China Banking let the opportunity slip by when the ordinary prudence expected of bank employees would have sufficed to seize it. Both banks were negligent in the selection and supervision of their employees resulting in the encashment of the forged checks by an impostor. It was the gross negligence of the employees of both banks which resulted in the fraud and the subsequent loss. While it is true that BPI's negligence may have been the proximate cause of the loss, China Bankings negligence contributed equally to the success of the impostor in encashing the proceeds of the forged checks. Under these circumstances, Article 2179 of the Civil Code finds application to the effect that while China Banking may recover its losses, such losses are subject to mitigation by the courts. BPI shall be responsible for sixty percent (60%) while China Banking shall share forty percent (40%) of the loss of P2,413,215.16 and the arbitration costs of P7,000.