252 SCRA 620 Mercantile Law Negotiable Instruments Law Liabilities of Parties

Forgery Collecting Bank vs Drawee Bank

The Province of Tarlac was disbursing funds to Concepcion Emergency Hospital via checks
drawn against its account with the Philippine National Bank (PNB). These checks were
drawn payable to the order of Concepcion Emergency Hospital. Fausto Pangilinan was the
cashier of Concepcion Emergency Hospital in Tarlac until his retirement in 1978. He used to
handle checks issued by the provincial government of Tarlac to the said hospital. However,
after his retirement, the provincial government still delivered checks to him until its discovery
of this irregularity in 1981. By forging the signature of the chief payee of the hospital (Dr.
Adena Canlas), Pangilinan was able to deposit 30 checks amounting to P203k to his
account with the Associated Bank.
When the province of Tarlac discovered this irregularity, it demanded PNB to reimburse the
said amount. PNB in turn demanded Associated Bank to reimburse said amount. PNB
averred that Associated Bank is liable to reimburse because of its indorsement borne on the
face of the checks:
All prior endorsements guaranteed ASSOCIATED BANK.
ISSUE: What are the liabilities of each party?
HELD: The checks involved in this case are order instruments.
Liability of Associated Bank
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 holders indorsement is forged, all parties prior to the
forgery may raise the real defense of forgery against all parties subsequent thereto.
A collecting bank (in this case Associated Bank) where a check is deposited and which
indorses the check upon presentment with the drawee bank (PNB), is such an indorser. So
even if the indorsement on the check deposited by the bankss client is forged, Associated
Bank is bound by its warranties as an indorser and cannot set up the defense of forgery as
against the PNB.

EXCEPTION: If it can be shown that the drawee bank (PNB) unreasonably delayed in
notifying the collecting bank (Associated Bank) of the fact of the forgery so much so that the
latter can no longer collect reimbursement from the depositor-forger.
Liability of PNB
The bank on which a check is drawn, known as the drawee bank (PNB), is under strict
liability to pay the check to the order of the payee (Provincial Government of Tarlac).
Payment under a forged indorsement is not to the drawers 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 customers (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 drawers account and is not entitled to indemnification from
the drawer. The risk of loss must perforce fall on the drawee bank.
EXCEPTION: If the drawee bank (PNB) can prove a failure by the customer/drawer (Tarlac
Province) to exercise ordinary care that substantially contributed to the making of the forged
signature, the drawer is precluded from asserting the forgery.
In sum, by reason of Associated Banks indorsement and warranties of prior indorsements
as a party after the forgery, it is liable to refund the amount to PNB. The Province of Tarlac
can ask reimbursement from PNB because the Province is a party prior to the forgery.
Hence, the instrument is inoperative. HOWEVER, it has been proven that the Provincial
Government of Tarlac has been negligent in issuing the checks especially when it continued
to deliver the checks to Pangilinan even when he already retired. Due to this contributory
negligence, PNB is only ordered to pay 50% of the amount or half of P203 K.
BUT THEN AGAIN, since PNB can pass its loss to Associated Bank (by reason of
Associated Banks warranties), PNB can ask the 50% reimbursement from Associated
Bank. Associated Bank can ask reimbursement from Pangilinan but unfortunately in this
case, the court did not acquire jurisdiction over him.
Facts:
Private respondent K.T. Lim was charged with violation of B.P. 22. He moved to quash
the Information of the ground that the facts charged did not constitute a felony as B.P.
22 was unconstitutional and that the check he issued was a memorandum check which
was in the nature of a promissory note, perforce, civil in nature. Judge Nitafan, ruling

that B.P. 22 on which the Information was based was unconstitutional, issued the
questioned Order quashing the Information. Hence, the appeal.
Issue:
Wether a memorandum check is within the coverage of B.P. 22
Held:
A memorandum check is in the form of an ordinary check, with the word
"memorandum", "memo" or "mem" written across its face, signifying that the maker or
drawer engages to pay the bona fide holder absolutely, without any condition
concerning its presentment. Such a check is an evidence of debt against the drawer,
and although may not be intended to be presented, has the same effect as an ordinary
check, and if passed to the third person, will be valid in his hands like any other check.
A memorandum check comes within the meaning of Sec. 185 of the Negotiable
Instruments Law which defines a check as "a bill of exchange drawn on a bank payable
on demand. A memorandum check, upon presentment, is generally accepted by the
bank. Hence it does not matter whether the check issued is in the nature of a
memorandum as evidence of indebtedness or whether it was issued is partial fulfillment
of a pre-existing obligation, for what the law punishes is the issuance itselfof a bouncing
check and not the purpose for which it was issuance. The mere act of issuing a
worthless check, whether as a deposit, as a guarantee, or even as an evidence of a preexisting

debt,

is

malum

prohibitum.

A memorandum check may carry with it the understanding that it is not be presented at
the bank but will be redeemed by the maker himself when the loan fall due. However,
with the promulgation of B.P. 22, such understanding or private arrangement may no
longer prevail to exempt it from penal sanction imposed by the law. To require that the
agreement surrounding the issuance of check be first looked into and thereafter exempt
such issuance from the punitive provision of B.P. 22 on the basis of such agreement or
understanding would frustrate the very purpose for which the law was enacted to
stem the proliferation of unfunded checks. After having effectively reduced the
incidence of worthless checks changing hands, the country will once again experience
the limitless circulation of bouncing checks in the guise of memorandum checks if such
checks will be considered exempt from the operation of B.P. 22. It is common practice in
commercial transactions to require debtors to issue checks on which creditors must rely

as guarantee of payment. To determine the reasons for which checks are issued, or the
terms and conditions for their issuance, will greatly erode the faith the public responses
in the stability and commercial value of checks as currency substitutes, and bring about
havoc in trade and in banking communities. (People vs. Judge Nitafan, G.R. No.
75954, October 22, 1992)

Luis Wong is a collector of Limtong Press, Inc., a company which prints calendars. Wong
was assigned to collect check payments from LPI clients. One time, six of LPIs clients were
not able to give the check payments to Wong. Wong then made arrangements with LPI so
that for the meantime, Wong can use his personal checks to guarantee the calendar orders
of the LPIs clients. LPI however has a policy of not accepting personal checks of its agents.
LPI instead proposed that the personal checks should be used to cover Wongs debt with
LPI which arose from unremitted checks by Wong in the past. Wong agreed. So he issued 6
checks dated December 30, 1985.
Before the maturity of the checks, Wong persuaded LPI not to deposit the checks because
he said hell be replacing them within 30 days. LPI complied however Wong reneged on the
payment. On June 5, 1986 or 157 days from date of issue, LPI presented the check to
RCBC but the checks were dishonored (account closed). On June 20, 1986, LPI sent Wong
a notice of dishonor. Wong failed to make good the amount of the checks within five
banking days from his receipt of the notice. LPI then sued Wong for violations of Batas
Pambansa Blg. 22.
Among others, Wong argued that hes not guilty of the crime of charged because one of the
elements of the crime is missing, that is, prima facie presumption of knowledge of lack of
funds against the drawer. According to Wong, this element is lost by reason of the belated
deposit of the checks by LPI which was 157 days after the checks were issued; that he is
not expected to keep his bank account active beyond the 90-day period 90 days being the
period required for the prima facie presumption of knowledge of lack of fund to arise.
ISSUE: Whether or not Wong is guilty of the crime charged.
HELD: Yes. Wong is guilty of violating BP 22. The elements of violation of BP 22 pertinent
to this case are:
1. The making, drawing and issuance of any check to apply for account or for value;

2. The knowledge of the maker, drawer, or issuer that at the time of issue he does not have
sufficient funds in or credit with the drawee bank for the payment of such check in full upon
its presentment; and
3. The subsequent dishonor of the check by the drawee bank for insufficiency of funds or
credit or dishonor for the same reason had not the drawer, without any valid cause, ordered
the bank to stop payment.
Under the second element, the presumption of knowledge of the insufficiency arises if the
check is presented within 90 days from the date of issue of the check. This presumption is
lost, as in the case at bar, by failure of LPI to present it within 90 days. But this does not
mean that the second element was not attendant with respect to Wong. The presumption is
lost but lack of knowledge can still be proven, LPI did not deposit the checks because of the
reassurance of Wong that he would issue new checks. Upon his failure to do so, LPI was
constrained to deposit the said checks. After the checks were dishonored, Wong was duly
notified of such fact but failed to make arrangements for full payment within five (5) banking
days thereof. There is, on record, sufficient evidence that Wong had knowledge of the
insufficiency of his funds in or credit with the drawee bank at the time of issuance of the
checks.
The Supreme Court also noted that under Section 186 of the Negotiable Instruments Law,
a check must be presented for payment within a reasonable time after its issue or the
drawer will be discharged from liability thereon to the extent of the loss caused by the
delay. By current banking practice, a check becomes stale after more than six (6)
months, or 180 days. LPI deposited the checks 157 days after the date of the check. Hence
said checks cannot be considered stale.