682 SUPREME COURT REPORTS ANNOTATED

Gempesaw vs. Court of Appeals

*
G.R. No. 92244. February 9, 1993.

NATIVIDAD GEMPESAW, petitioner, vs. THE HONORABLE

COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.

Negotiable Instruments Law; Checks; Forged Indorsements; Effect of

drawer's negligence.—As a matter of practical significance, 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. 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.
Same; Same; Same; Same.—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. 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. A different situation arises where the indorsement was forged
by an

___________

* SECOND DIVISION.
 683

VOL. 218, FEBRUARY 9, 1993 683

Gempesaw vs. Court of Appeals

employee or a ent 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 case at bar. 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.
Same; Same; No legal obligation on drawee not to honor crossed
checks.—Petitioner argues that respondent drawee Bank should not have
honored the checks because they were crossed checks. 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.
Banks and Banking; Contractual relation between depositor as obligee
and drawee bank as obligor; Violation of rule on non-acceptance of second
indorsements without approval of branch manager.—There is no question
that there is a contractual relation between petitioner as depositor (obligee)
and the respondents 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. Furthermore, the fact that the
respondent 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

684
684 SUPREME COURT REPORTS ANNOTATED

Gempesaw vs. Court of Appeals

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. x x x." We hold that 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, respondent drawee Bank cannot claim it exercised such a
degree of diligence that is required of it. There is no way We can allow it
now 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.

PETITION for review of the decision of the Court of Appeals.

The facts are stated in the opinion of the Court.
L.B. Camins for petitioner.
Angara, Abello, Concepcion, Regala & Cruz for private
respondent.

CAMPOS, JR., J.:

**
From the adverse decision of the Court of Appeals (CA-G.R. CV
No. 16447), petitioner, Natividad Gempesaw, appealed to this Court
in a Petition for Review, on the issue of the right of the drawer to
recover from the drawee bank who pays a check with a forged
indorsement of the payee, debiting the same against the drawer's
account.
The records show that on January 23, 1985, petitioner filed a
Complaint against the private respondent Philippine Bank of
Communications (respondent drawee Bank) for recovery of the
money value of eighty-two (82) checks charged against the
petitioner's account with respondent drawee Bank on the ground

____________

** Penned by Associate' Justice Celso L. Magsino, Associate Justices Nathanael P.

De Pano, Jr. and Cezar D. Francisco, concurring.

685

VOL. 218, FEBRUARY 9, 1993 685

Gempesaw vs. Court of Appeals

that the payees' indorsements were forgeries. The Regional Trial

Court, Branch CXXVIII of Caloocan City, which tried the case,
rendered a decision on November 17, 1987 dismissing the complaint
as well as the respondent drawee Bank's counterclaim. On appeal,
the Court of Appeals in a decision rendered on February 22,1990,
affirmed the decision of the RTC on two grounds, namely (1) that
the plaintiffs (petitioner herein) 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
March 5, 1990, the petitioner filed this petition under Rule 45 of the
Rules of Court setting forth the following as the alleged errors of the
1
respondent Court. :

"I

THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT

THE NEGLIGENCE OF THE DRAWER IS THE PROXIMATE CAUSE
OF THE RESULTING INJURY TO THE DRAWEE BANK, AND THE
DRAWER IS PRECLUDED FROM SETTING UP THE FORGERY OR
WANT OF AUTHORITY.

II

THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT

FINDING AND RULING THAT IT IS THE GROSS AND
INEXCUSABLE NEGLIGENCE AND FRAUDULENT ACTS OF THE
OFFICIALS AND EMPLOYEES OF THE RESPONDENT BANK IN
FORGING THE SIGNATURE OF THE PAYEES AND THE WRONG
AND/ OR ILLEGAL PAYMENTS MADE TO PERSONS, OTHER THAN
TO THE INTENDED PAYEES SPECIFIED IN THE CHECKS, IS THE
DIRECT AND PROXIMATE CAUSE OF THE DAMAGE TO
PETITIONER WHOSE SAVING (SIC) ACCOUNT WAS DEBITED.

III

THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT

ORDERING THE RESPONDENT BANK TO RESTORE OR RECREDIT
THE CHECKING ACCOUNT OF PETITIONER IN THE

___________

1 Rollo, p. 11.

686

686 SUPREME COURT REPORTS ANNOTATED

Gempesaw vs. Court of Appeals

CALOOCAN CITY BRANCH BY THE VALUE OF THE EIGHTY TWO

(82) CHECKS WHICH IS IN THE AMOUNT OF P1,208,606.89 WITH
LEGAL INTEREST."

From the records, the relevant facts are as follows:

Petitioner Natividad O. Gempesaw (petitioner) owns and
operates four grocery stores located at Rizal Avenue Extension and
at Second Avenue, both in Caloocan City. Among these groceries
are D.G. Shopper's Mart and D.G. Whole Sale Mart. Petitioner
maintains a checking account numbered 13-00038-1 with the
Caloocan City Branch of the respondent drawee Bank. To facilitate
payment of debts to her suppliers, petitioner draws checks against
her checking account with the respondent bank as drawee. Her
customary practice of issuing checks in payment of her suppliers
was as follows: The checks were prepared and filled up as to all
material particulars by her trusted bookkeeper, Alicia Galang, an
employee for more than eight (8) years. After the bookkeeper
prepared the checks, the completed checks were submitted to the
petitioner for her signature, together with the corresponding invoice
receipts which indicate the correct obligations due and payable to
her suppliers. Petitioner 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. The issuance and delivery of the
checks to the payees named therein were left to the bookkeeper.
Petitioner admitted that she did not make any verification as to
whether or not the checks were actually delivered to their respective
payees. Although the respondent drawee Bank notified her of all
checks presented to and paid by the bank, petitioner did not verify
the correctness of the returned checks, much less check if the payees
actually received the checks in payment for the supplies she
received. In the course of her business operations covering a period
of two years, petitioner issued, following her usual practice stated
above, a total of eighty-two (82) checks in favor of several suppliers.
These checks were all presented by the indorsees as holders thereof
to, and honored by, the respondent drawee Bank. Respondent
drawee Bank correspondingly debited the amounts thereof against
petitioner's checking account num-

687

VOL. 218, FEBRUARY 9, 1993 687

Gempesaw vs. Court of Appeals

bered 30-00038-1. Most of .the aforementioned checks were for

amounts in excess of her actual obligations to the various payees as
shown in their corresponding invoices. To mention a few:

"x x x (1) in Check No. 621127, dated June 27, 1984 in the amount of
P11,895.23 in favor of Kawsek Inc. (Exh. A-60), appellant's actual
obligation to said payee was only P895.33 (Exh. A-83); (2) in Check No.
652282 issued on September 18, 1984 in favor of Senson Enterprises in the
amount of P1 1,041.20 (Exh. A-67) appellant's actual obligation to said
payee was only P1,041.20 (Exh. 7); (3) in Check No. 589092 dated April 7,
1984 for the amount of P11,672.47 in favor of Marchem, (Exh. A-61)
appellant's obligation was only P 1,672.47 (Exh. B); (4) in Check No.
620450 dated May 10, 1984 in favor of Knotberry for P11,677.10 (Exh. A-
31) her actual obligation was only P677.10 (Exhs. C and C-1); (5) in Check
No. 651862 dated August 9, 1984 in favor of Malinta Exchange Mart for
P11,107,16 (Exh. A-62), her obligation was only P1,107.16 (Exh. D-2); (6)
in Check No. 651863 dated August 11,1984 in favor of Grocer's
International Food Corp. in the amount of P1 1,335.60 (Exh. A-66), her
obligation was only P1,335.60 (Exh. E and E-1); (7) in Check No. 589019
dated March 17, 1984 in favor of Sophy Products in the amount of
P11,648.00 (Exh. A-78), her obligation was only P648.00 (Exh. G); (8) in
Check No. 589028 dated March 10, 1984 for the amount of P11,520.00 in
favor of the Yakult Philippines (Exh. A-73), the latter's invoice was only
P520.00 (Exh. H-2); (9) in Check No. 62033 dated May 24, 1984 in the
amount of P11,504.00 in favor of Monde Denmark Biscuit (Exh. A-34), her
2
obligation was only P504.00 (Exhs. 1-1 and I-2)."

Practically, all the checks issued and honored by the respondent

3
drawee Bank were crossed checks. Aside from the daily

_____________

2 Rollo, pp. 20-21; CA Decision, pp. 2-3. See Notes 2-6 thereof.
3 A crossed check is defined as a check crossed with two (2) lines, between which
are either the name of a bank or the words "and company," in full or abbreviated. In
the former case, the banker on whom it is drawn must not pay the money for the
check to any other than the banker named; in the latter case, he must not pay it to any
other than a banker. Black's Law Dictionary 301 (4th Ed.), citing 2 Steph. Comm.
118, note C; 7 Exch. 389; [1903] A.C. 240; Farmers' Bank v. Johnson, King & Co.,
134 Ga. 486, 68 S.E. 85, 30 L.R.A., N.S. 697.

688

688 SUPREME COURT REPORTS ANNOTATED

Gempesaw vs. Court of Appeals

notice given to the petitioner by the respondent drawee Bank, the

latter also furnished her with a monthly statement of her bank
transactions, attaching thereto all the cancelled checks she had
issued and which were debited against her current account. It was
only after the lapse of more than two (2) years that petitioner found
out about the fraudulent manipulations of her bookkeeper.
All the eighty-two (82) checks with forged signatures of the
payees were brought to Ernest L. Boon, Chief Accountant of
respondent 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. Ernest L. Boon was a very close friend of Alfredo Y.
Romero, Sixty-three (63) out of the eighty-two (82) checks were
deposited in Savings Account No. 00844-5 of Alfredo Y. Romero at
the respondent drawee Bank's Buendia branch, and four (4) checks
in his Savings Account No. 32-81-9 at its Ongpin branch. The rest of
the checks were deposited in Account No. 0443-4, under the name
of Benito Lam at the Elcano branch of the respondent drawee Bank.
About thirty (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.
 The team of auditors from the main office of the respondent
drawee Bank which conducted periodical inspection of the branches'
operations failed to discover, check or stop the unauthorized acts of
Ernest L. Boon. Under the rules of the respondent drawee Bank,
only a Branch Manager, and no other official of the respondent
drawee Bank, may accept a second indorsement on a check for
deposit. In the case at bar, all the deposit slips of the eighty-two (82)
checks in question were initialed and/or approved for deposit by
Ernest L. Boon. 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.
On November 7, 1984, petitioner made a written demand on
respondent drawee Bank to credit her account with the money value
of the eighty-two (82) checks totalling P 1,208,606.89 for

689

VOL. 218, FEBRUARY 9, 1993 689

Gempesaw vs. Court of Appeals

having been wrongfully charged against her account. Respondent

drawee Bank refused to grant petitioner's demand. On January 23,
1985, petitioner filed the complaint with the Regional Trial Court.
This 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 this action to recover from the drawee bank the money
value of eighty-two (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 the4
same. The applicable law is the Negotiable Instruments Law
(heretofore referred to as the NIL). Section 23 of the NIL provides:

"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."

Under the aforecited provision, 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

___________

4 Act No. 2031, enacted on February 3, 1911.

690

690 SUPREME COURT REPORTS ANNOTATED

Gempesaw vs. Court of Appeals

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. 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.
As a matter of practical significance, 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. 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
5
such fact to the drawer 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
6
account under the forged indorsement. In other words, he is
precluded from

____________

5 Britton, Bills and Notes, Sec. 143, pp. 663-664.

6 City of New York vs. Bronx County Trust Co., 261 N.Y. 64,184 N.E. 495 (1933);
Detroit Piston Ring Co. vs. Wayne County & Home
 691

VOL. 218, FEBRUARY 9, 1993 691

Gempesaw vs. Court of Appeals

using forgery as a basis for his claim for recrediting of his account.
In the case at bar, petitioner 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.
Every contract on a negotiable instrument is incomplete and
revocable until delivery of the7 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
8
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.
Petitioner completed the checks by signing them as drawer and
thereafter authorized her employee Alicia Galang to deliver the
eighty-two (82) checks to their respective payees. Instead of issuing
the checks to the payees as named in the checks, Alicia Galang
delivered them to the Chief Accountant of the Buendia branch of the
respondent drawee Bank, a certain Ernest L. Boon. It was
established that the signatures of the payees as first indorsers were
forged. The record fails to show the identity of the party who made
the forged signatures. The checks were then indorsed for the second
time with the names of Alfredo Y. Romero and Benito Lam, and
were deposited in the latter's accounts as earlier noted. The second
indorsements were all genuine signatures of the alleged holders. All
the eighty-two (82) checks bearing the forged indorsements of the
payees and the genuine second indorsements of Alfredo Y. Romero
and Benito Lam were accepted for deposit at the Buendia branch of
respondent drawee Bank to the credit of their respective savings
accounts in the Buendia, Ongpin and Elcano branches of the same
bank. The total amount of Savings Bank, 252 Mich. 163, 233 N.W.
185 (1930); C.E. Erickson Co. vs. lowa Nat. Bank, 211 lowa 495,
230 N.W. 342 (1930).

___________

7 NIL, Sec, 16.

8 Ibid., Sec. 191, par. 10.

692

692 SUPREME COURT REPORTS ANNOTATED

Gempesaw vs. Court of Appeals

P1,208,606.89, represented by eighty-two (82) checks, were credited

and paid out by respondent drawee Bank to Alfredo Y. Romero and
Benito Lam, and debited against petitioner's checking account No.
13-00038-1, Caloocan branch.
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. 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. 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 case at bar.
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 case at
bar, the petitioner 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

693

VOL. 218, FEBRUARY 9, 1993 693

Gempesaw vs. Court of Appeals

would not have been accomplished. It was not until two years after
the bookkeeper commenced her fraudulent scheme that petitioner
discovered that eighty-two (82) checks were wrongfully charged to
her account, at which time she notified the respondent drawee bank.
It is highly improbable that in a period of two years, not one of
petitioner's suppliers complained of non-payment. Assuming that
even one single complaint had been made, petitioner would have
been duty-bound, as far as the respondent drawee Bank was
concerned, to make an adequate investigation on the matter. Had this
been done, the discrepancies would have been discovered, sooner or
later. Petitioner's failure to make such adequate inquiry constituted
negligence which resulted in the bank's honoring of the subsequent
checks with forged indorsements. On the other hand, since the
record mentions nothing about such a complaint, the possibility
exists that the checks in question covered inexistent sales. But even
in such a case, considering the length of a period of two (2) years, it
is hard to believe that petitioner 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
9
from the bank.
One thing is clear from the records—that the petitioner failed to
examine her records with reasonable diligence whether before she
signed the checks or after receiving her bank statements. Had the
petitioner examined her records more carefully, particularly the
invoice receipts, cancelled checks, check book stubs, and had she
compared the sums written as amounts payable in the eighty-two
(82) checks with the perti-

____________

9 Detroit Piston Ring Co. vs. Wayne County & Home Savings Bank, supra, note 3.

694

694 SUPREME COURT REPORTS ANNOTATED

Gempesaw vs. Court of Appeals

nent sales invoices, she would have easily discovered that in some
checks, the amounts did not tally with those appearing in the sales
invoices. Had she noticed these discrepancies, she should not have
signed those checks, and should have conducted an inquiry as to the
reason for the irregular entries. Likewise, had petitioner been more
vigilant in going over her current account by taking careful note of
the daily reports made by respondent drawee Bank on her issued
checks, or at least made random scrutiny of her cancelled checks
returned by respondent 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 respondent drawee
Bank. The respondent drawee Bank then could have taken
immediate steps to prevent further commission of such fraud. Thus,
petitioner's negligence was the proximate cause of her loss. And
since it was her negligence which caused the respondent drawee
Bank to honor the forged checks or prevented it from recovering the
amount it had already paid on the checks, petitioner cannot now
complain should the bank refuse to recredit her account with the
10
amount of such checks. Under Section 23 of the NIL, she is now
precluded from using the forgery to prevent the bank's debiting on
her account.
The doctrine in the case of Great Eastern Life Insurance Co. us.
11
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

____________

10 Defiance Lumber Co. vs. Bank of California, N.A., 180 Wash. 533, 41 P. 2d 135
(1935); National Surety Co. vs. President and Directors of Manhattan Co., et al, 252
N.Y. 247, 169 N.E. 372 (1929); Erickson Co. vs. lowa National Bank, supra, note 3
11 43 Phil. 678 (1922).

695

VOL. 218, FEBRUARY 9, 1993 695

Gempesaw vs. Court of Appeals

a forged payee's indorsement because the drawee did not pay as

ordered by the drawer.
Petitioner argues that respondent drawee Bank should not have
honored the checks because they were crossed checks. 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.
Petitioner likewise contends that banking rules prohibit the
drawee bank from having checks with more than one indorsement.
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.
"Sec. 36. When indorsement restrictive.—An indorsement is restrictive
which either
(a) Prohibits further negotiation of the instrument; or X X x."

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

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Gempesaw vs. Court of Appeals

12
indorsement does not authorize him to do so.
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.
Thus, it is clear that under the NIL, petitioner is precluded from
raising the defense of forgery by reason of her gross negligence. But
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
respondent 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 respondent 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."

There is no question that there is a contractual relation between

petitioner as depositor (obligee) and the respondent 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
____________

12 NIL, Sec. 37.

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Gempesaw vs. Court of Appeals

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.
Furthermore, the fact that the respondent 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 corresponds
with the circumstance of the persons, of the time and of the place. x x x."

We hold that 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, respondent drawee Bank cannot claim it exercised
such a degree of diligence that is required of it. There is no way We
can allow it now 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.
Premises considered, respondent 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."

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. 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

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 Gempesaw vs. Court of Appeals

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 respondent court. And in
breaches of contract under Article 1173, due diligence on the part of
the defendant is not a defense.
PREMISES CONSIDERED, the case is hereby ordered
REMANDED to the trial court for the reception of evidence to
determine the exact amount of loss suffered by the petitioner,
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 respondent drawee bank to
herein petitioner.
SO ORDERED.

Narvasa (C.J., Chairman), Feliciano, Regalado and Nocon,

JJ., concur.

Case remanded to trial court for reception of evidence.

Note.—Respondent bank is not guilty of negligence for it had no

way of ascertaining the authenticity of the endorsements in the
checks, and because it caused the checks to pass through the clearing
house, before allowing withdrawal of the proceeds thereof (Manila
Lighter Transportation, Inc. vs. Court of Appeals, 182 SCRA 251).

—o0o—

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