Chunky Monkeys CM Digest

Case Name: ASSOCIATED BANK VS. CA (2)

Docket: G.R. No. 107612
Date: January 31, 1996
Ponente: ROMERO, J.

FACTS:
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

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Chunky Monkeys CM Digest

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 P203K.

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.

SUMMARY:

1. GENERAL RULE: Drawee bank liable to drawer

EXCEPTIONS:
o If drawer alone is negligent, he is precluded from setting up forgery and bears the
loss.
o When there is negligence on the part of both drawee and drawer, loss shall be
apportioned to both

2. GENERAL RULE: Collecting bank or forger liable to drawee bank

EXCEPTIONS:
o When there is negligence on the part of the drawee bank in informing collecting bank
of the forgery. In such case, drawee bank waives its right to reimbursement and will
bear the loss.
3. COLLECTING BANK CAN PROCEED AGAINST THE FORGER.

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