[ch4-A] Law 108: Negotiable Instruments First Semester
Quevedo [Ch4-A]
CHAPTER IV: DEFENSES AND EQUITIES
[Cases cited in Campos]
“The original plan was to have these digests merely as case ticklers –
not as substitute for the originals. Please limit your digests to relevant
details only. We do not need a reproduction of the LONG excerpts in
Campos.”
I already lost count how many times sentiments of this sort have been
aired – face-to-face w/ the people concerned, discussions during block
meetings, message chains over the yahoogroups, etc. =(
Next time, unless there are several separate opinions (w/c should ALWAYS
be included), please limit length of submissions to one column in this
format.
P.S. To those who submitted on time and followed the format, thanks!
Editing usually takes hours. You spared me that. I appreciate it.
MURRAY V THOMPSON
136 Tenn. 118, 188 S.W. 378, LRA, 1817B 1172 (1916)
~ice~
FACTS
SUBJECT: Bil of Exchange-Check
MAKERS: Brick company
PAYEE: Murray
SUBSEQUENT INDORSEMENTS: Father of Murray sold to
Thompson.
-Murray received a note from a brick company in
satisfaction to his claim for damages worth $1,750
because of personal injuries. It was payable on June 1,
1915 because he was still a minor. On October 16,
1914, W.A. Murray, his father, with the consent of the
minor, sold the note to Thompson. He indorsed the
name of his son without apprising Thompson that he
himself was not the payee. The proceeds were
deposited to the account of Murray. It was invested in a
saloon business and was lost. There was no actual
fraud on the part of Murray in the transaction with
Thompson.
-Murray wanted to disaffirm and recover.
ISSUE
WON an infant’s indorsement is void or voidable
HELD: Voidable.
Ratio Sec. 22. Effect of indorsement by infant or
corporation.-The indorsement or assignment of the
instrument by a corporation or by an infant passes the
property therein, notwithstanding that from want of
capacity, the corporation or infant may incur no liability
thereon.
-The statement that the infant “passes property
therein” entails that the contract of indorsement is not
void and that his indorsee has the right to enforce
payment from all parties prior to the infant indorser.
The incapacity of the minor cannot be availed of by the
prior parties.
-It was not intended to provide that the indorsee should
become the owner of the instrument by title
AY 2008-09
indefeasible as against the infant, or to make the act of
indorsement an irrevocable one. The law would not
want to deprive the infant of the right to reinvest in
himself the title to the instrument against a holder who
had knowledge of the indorser’s infancy.
-The common-law rule is that the purchaser and
indorsee of such a note is not a bona-fide holder as
against an infant indorser, and that the latter may
disaffirm and recover the note from the possession of
the former, who takes with constructive notice of the
incapacity. This means that the infant could disaffirm
and recover
Disposition: Court of Civil Appeals reversed while the
chancellor is affirmed.
RODRIGUEZ V MARTINEZ
5 Phil 67 (1906)
~rean~
FACTS
SUBJECT: promissory note dated Oct. 17, 1902, for
4,000 Mexican pesos
Signed by Martinez, payable to one Montalvo.
-Montalvo, for value received, sold and transferred the
said PN to Rodriguez before maturity. Rodriguez
received the same w/o notice of any conditions existing
against the note. Rodriguez, before having the note,
went to Martinez and asked him in respect thereto, and
was informed by him that the note was good and that
he would pay the same at a discount; and that the note
was delivered by Martinez to said Montalvo in payment
of the gambling debt which Martinez owed Montalvo.
This note was presented to the court as evidence of
that debt without the stamp required by law, and no
stamp had ever been attached thereto. After the trial
Rodriguez offered to put the necessary stamp on the
note, and tendered such stamp.
ISSUE
WON defendant Martinez is liable to pay Rodriguez on
the instrument.
HELD: YES
-SC did not discuss whether the game at which this
debt was incurred is a prohibited game or not. In view
of the fact that the judgment of the court below
contains no finding as to the name or nature of the
game, SC applied A1277 of CC: the consideration of the
contract must be presumed to be lawful and valid until
the contrary is proved; and without considering as we
have said these questions which we do not think
necessary to discuss for the purposes of this decision,
yet there are other grounds upon which this case can
be decided.
Prof. Rogelio V.
-From the facts set out in the judgment of the court
below, plaintiff Rodriguez acquired the ownership of the
note in question by virtue of its indorsement, he having
paid the value thereof to its former holder. He did so
without being aware of the fact that the note had an
unlawful origin, since he was not given notice, as the
court found, of any conditions existing against the note.
Furthermore, he accepted it in good faith, believing the
note was valid and absolutely good, and that defendant
Martinez would not repudiate it for the reason that
Martinez, had assured him before the purchase of the
note that the same was good and that he would it at a
discount. Without such assurance from Martinez we can
hardly believe that Rodriguez would have bought the
note. It is thus inferred from the fact that he,
Rodriguez, inquired from the defendant about the
nature of the note before accepting its indorsement.
-These facts sufficiently show that Rodriguez bought
the note upon the statement of Martinez that the same
had no legal defect and that he was thereby induced to
buy the same by the personal act of Martinez. In view
of this, Martinez can not be relieved from the obligation
of paying Rodriguez the amount of the note alleged to
have been executed for an unlawful consideration. If
such unlawful consideration did in fact exist, Martinez
deliberately and maliciously concealed it from
Rodriguez. Therefore, to hold otherwise would be
equivalent to permitting Martinez to go against his own
acts to the prejudice of Rodriguez. Such a holding
would be contrary to the most rudimentary principles of
justice and law. Par. 1, Sec. 333 of Code of Civil
Procedure, applicable to this case, provides as follows:
"Whenever a party has, by his own declaration, act, or
omission intentionally and deliberately led another to
believe a particular thing true, and to act upon such
belief, he can not, in any litigation arising out of such
declaration, act, or omission, be permitted to falsity it."
Disposition Judgment of lower court is reversed.
Defendant Martinez is ordered to pay to the plaintiff
Rodriguez the sum of 4,000 pesos, Mexican currency,
or its equivalent in Phil. currency, with legal interest at
6 % p.a.
GLUCKMAN V DARLING (1914)
85 N.J.L. 457, 89 Atl. 1016 (1914)
~yella~
FACTS
SUBJECT: Promisory note
MAKER: Charles Flynn
PAYEE: Balene & Max
INDORSEE: H.L. Darling
HOLDER FOR VALUE: Isaac Gluckman
[ch4-B] Law 108: Negotiable Instruments First Semester
-Balene & Max were about to sell to Charles Flynn some
real estate and were to take in part payment therefore
notes made by Flynn and indorsed by defendant. When
Balene & Max requested the defendant to be present at
the transfer and questioned him about the notes, he
attended and examined them and said, “Everything is
all right.” The notes were then accepted on account of
the purchase price of the property, and the one in suit
subsequently passed by indorsement, for a valuable
consideration, to the plaintiff.
-Defendant at the trial denied his signature as indorser,
insisiting that it was a forgery. Court denied
defendant’s motion for nonsuit
ISSUE
WON defendant is stopped from alleging forgery
HELD: YES
-It is true that silence and acquiescence alone does not
estop a defendant in a suit upon an alleged forged
instrument from proving the forgery, where the plaintiff
had not been prejudiced or damaged thereby. But
where the holder of a note has been willfully misled as
to the genuineness of an indorsement thereon by one
who purports to be the indorser and sustains damage
or is prejudiced thereby, the alleged indorser will be
stopped from denying the validity of the signature.
Disposition Judgment affirmed.
STRADER V HALEY
216 Minn. 315, 12 N.W. (2d) 608 (1943)
~javi~
FACTS
-Haley and his wife lived with plaintiff Strader. Between
July 11, 1936 and June 14, 1941, 69 checks were
negotiated by Haley. Strader claimed that Haley forged
her name as drawer for 2 checks and as indorser in a
total of 57 checks. Checks varied amounts. Park
Recreation Parlor, Luz, Easlinger, Liberty State Bank
were those who cashed the checks.
-Plaintiff claimed she never made such indorsements or
signed as drawer.
-Plaintiff brought separate actions against Haley,
parties who were alleged to have cashed checks for
Haley and Liberty State Bank.
-Defense claimed that the checks were indorsed by
plaintiff herself, that she delivered them to Haley with
instructions to cash them, to purchase supplies, and
return the change to her.
-TC said that there was no finding that plaintiff
authorized Haley to sign her name on any check. TC
also said that plaintiff received from Haley all the
AY 2008-09
proceeds of the checks with knowledge that such
proceeds came from the checks. TC found that plaintiff
had ratified Haley’s actions and conduct in cashing the
checks. Plaintiff appealed
ISSUE
WON plaintiff is liable for Haley’s acts by ratification
HELD: YES
*Court first determined WON “precluded” in sec.23 of
the NIL includes ratification (in this case receiving
proceeds of the checks)
-“precluded” includes ratification. NIL is based largely
on the English Bills of Exchange Act. The English law
contains a proviso “that nothing in this section shall
affect the ratification of an unauthorized signature not
amounting to a forgery.” This proviso was not included
in the NIL but a footnote was added that a forged
signature may be ratified. The dropping of such proviso
did not indicate any intention of changing the meaning
adopted from the English law. Established rule was that
an unauthorized signature not amounting to forgery
could be so ratified.
-SC concluded that the framers of the NIL intended that
under the act, the same as under the prior law, a party
may be “precluded” by ratification.
*case had a discussion on WON “precluded” was
equivalent to “estoppel” as some authors conclude.
However the Court said that although “precluded”
denotes the consequence of an estoppel, it is not
equivalent and its meaning should not be so limited
because 1)it is not the intention of the framers; 2) it is
opposed to the prior law which NIL adopted.
*Court then determined WON a forgery may be ratified
-By a forgery is meant an unauthorized signature on an
instyument or a material alteration thereof in violation
of a criminal statute. Rule is that an unauthorized
signature on a note, check or other instrument under
circumstances not constituting the crime of forgery
may be ratified.
-in the instant case, there was no forgery committed as
an essential element, the intent to fraud, was not
proven.
*WON plaintiff ratified acts of Haley: YES
-where the principal accepts and retains the benefits of
an unauthorized act of an agent with full knowledge of
all the facts, he thereby ratifies the act.
-in the instant case, the evidence sustains the finding
that plaintiff received the proceeds of the checks in
cash and with full knowledge of all the facts. This was
proven by: proceeds of the check were definitely
identified and traced; corroboration of Haley’s wife; the
fact that Strader did not complain to her attorneys that
Prof. Rogelio V. Quevedo [Ch4-B]
she did not receive any checks, which was her usual
routine.
-Court concluded that plaintiff ratified all the
unauthorized signatures in these cases; that by reason
of such ratification she is precluded from setting up the
fact that her signatures were unauthorized in the
actions against Haley.
Disposition affirmed
SAN CARLOS MINING CO, LTD. V
BPI, CHINABANK CORP (1933)
[place citation here]
~brian b~
FACTS
-Plaintiff corporation is organized under Hawaiian law
and is authorized to engage business in the Phils.
(Manila)
-The business in the Phils. was handled by Alfred
Cooper, its agent (under GPA) w/ authority of
substitution. The principal employee in the Manila office
is Joseph Wilson who also has a GPA but w/out
substitution. Before Cooper left in 1926, he gave a GPA
to Newland Baldwin and at the same time revoked
Wilson’s GPA relative to dealing with BPI, a bank where
plaintiff has an account.
-After a year, Wilson, conspiring w/ Alfredo Dolores, a
messenger-clerk in Plaintiff’s Manila office, sent a
cablegram to the company in Hawaii requesting a
telegraphic transfer of $100K to China Banking Corp.
(CBC), where plaintiff also has an account.
-After receipt of the money, CBC sent an exchange
contract to plaintiff offering P201K (current rate). On
this contract was forged the name of Baldwin. It also
contained a request for a certified check from CBC
upon receipt of the money.
-A manager’s check on CBC for P201K payable to
plaintiff was receipted for by Dolores. W/c check was
deposited to BPI by the following indorsement:
“For deposit only with BPI, to credit account of
(plaintiff).
“By (Sgd.)
NEWLAND BALDWIN
For Agent”
This endorsement was spurious.
-BPI credited plaintiff’s account for P201K and passed
the cashier’s check through the clearing house, where
it was paid by CBC.
-The same day, BPI received a letter, purporting to be
signed by Baldwin, directing that P200K in bills of
various denominations be packed for shipment and
delivery the next day. The next day, Dolores witnessed
[ch4-C] Law 108: Negotiable Instruments First Semester
the counting and packing of the money then he gave a
check, purporting to be signed by Baldwin, for P200K.
He was also charged P1 for the service wherein he also
came up w/ another check for P1, again purporting to
be signed by Baldwin. (This practice of withdrawing
money for shipment was frequent for plaintiff but never
so large an amount and under the sole supervision of
Dolores.)
-Dolores then delivered the money, in plaintiff’s office,
to Wilson where he received his P10K share. Shortly
thereafter, the crime was discovered, and upon BPI
refusing to credit plaintiff with the amount of the 2
forged checks (P200K+P1), plaintiff sued BPI and CBC.
-TC absolved both defendants.
ISSUES
1. WON CBC is liable
2. WON BPI is liable
HELD
*SC, first and foremost, declared that the falsity of
Baldwin’s signatures is beyond reasonable doubt.
1. NO. A bank that cashes a check must know to whom
it pays. In connection with the cahier’s check, this duty
was therefore upon BPI, and CBC was not bound to
inspect and verify all endorsements of the check, even
if some of them were also depositors in that bank. It
had a right to rely upon BPI’s endorsement when it
gave the latter bank credit for its own cahier’s check
2. YES. It is an elementary principle both of banking
and the NIL that a bank is bound to know the
signatures of its customers; and if it pays a forged
check, it must be considered as making the payment
out of its own funds, and cannot ordinarily charge the
amount so paid to the account of the depositor whose
name was forged.
-The bank in the case at bar was neither a gratuitous
bailee (as contended by BPI) nor an intermeddler bank
(as contended by plaintiff). Their relation is that of
depositor and banker, creditor and debtor.
-The bank paid out its money because it relied upon the
genuineness of the purported signatures of Baldwin.
These, they never questioned at the time its employees
should have used care. In fact, even today the bank
represents that it has a belief that they are genuine
signatures.
-The signatures to the checks being forged, under Sec.
23, NIL, they are not a charge against plaintiff nor are
the checks of any value to the defendant. The
proximate cause of the loss is BPI’s negligence.
Disposition Judgment modified –affirmed as to CBC,
reversed as to BPI.
AY 2008-09
PHIL. NAT’L BANK V QUIMPO
G.R. No. L-53194; Gancayco; March 14, 1988
~mini~
FACTS
-Francisco S. Gozon II, a depositor of the Caloocan
Branch of PNB, went to the bank accompanied by his
friend Ernesto Santos whom he left in the car while he
transacted business in the bank.
-Santos took a check from Gozon’s checkbook, filled it
up for the amount of P5T, forged the signature of
Gozon, and encashed it in the bank on the same day.
Upon receipt of the statement of account from the
bank, Gozon asked that the amount of P5T be returned
to his account as his signature on the check was forged
but the bank refused.
-Santos was apprehended by the police and he
admitted that he stole the check of Gozon. Gozon filed
the complaint for recovery of the amount of P5T
against the bank in the CFI Rizal.
-CFI ruled in favor of Gozon. Bank then filed petition for
review on certiorari before SC.
ISSUES
1. WON PNB was negligent in encashing the forged
check without carefully examining the signature therein
2. WON Gozon is precluded from setting up the defense
of forgery or want of authority (since it is his own
negligent act of leaving the checkbook in Santos’ hands
that is the proximate cause of the loss)
HELD
1. YES
Ratio A bank is bound to know the signatures of its
customers; and if it pays a forged check, it must be
considered as making the payment out of its own
funds, and cannot ordinarily change the amount so
paid to the account of the depositor whose name was
forged. This rule is absolutely necessary to the
circulation of drafts and checks, and is based upon the
presumed negligence of the drawee in failing to meet
its obligation to know the signature of its
correspondent. If the paper comes to the drawee in the
regular course of business, and he, having the
opportunity ascertaining its character, pronounces it to
be valid and pays it, it is not only a question of
payment under mistake, but payment in neglect of
duty which the commercial law places upon him, and
the result of his negligence must rest upon him.
2. NO
-The act of Gozon in leaving his checkbook in the car
while he went out for a short while can not be
considered negligence sufficient to excuse the
defendant bank from its own negligence. Gozon could
Prof. Rogelio V. Quevedo [Ch4-C]
not have been expected to know that Santos would
remove a check from his checkbook. Defendant had
trust in his classmate and friend. He had no reason to
suspect that the latter would breach that trust.
Disposition Petition is DISMISSED for lack of merit.
The Lawphil Project -Arellano Law Foundation
PRICE V NEAL
3 Burr. 1354 (1762)
~ricky~
FACTS
-A bill for 40 pounds (L40) was purportedly drawn by
Benjamin Sutton (drawer) against John Price (drawee)
in favor of Rogers Ruding (payee). It appeared from the
bill that it was indorsed to Anthony Topham, then
Hammon and Laroche and finally, for a valuable
consideration, to Watson and Son whose
representative, Edward Neal, received it. Neal gave
notice to Price. On the day it was due, Price sent his
servant to Neal to pay the L40 and take up the bill.
-A second bill for L40 was again purportedly drawn by
Sutton (drawer) against Price (drawee) in favor of
Ruding (payee). It appeared from this bill that it was
indorsed by Ruding to Watson and Son. This second bill
was accepted by Price upon presentment by writing on
it: “Accepted John Price.” The bill being accepted, it was
indorsed by Neal for a valuable consideration and left
at Price’s bankers for payment. It was paid upon Price’s
order.
-Unfortunately for Price, both these bills were actually
fakes. They were done by a certain Lee who was later
hanged for the crime of forgery.
-Wanting to recover the amount he paid, Price sued
Neal. It was proven that Neal acted innocently and
bona fide, without any suspicion of the forgeries and
that he paid the whole value of those bills. But the jury
found a verdict for Price.
ISSUE
WON Price may recover from Neal the money he paid
on the two bills.
HELD: NO.
Ratio Price cannot recover the money paid from Neal
because the latter received it upon a bill of exchange
indorsed to him for a fair and valuable consideration,
which he had bona fide paid, without the least privity or
suspicion of any forgery.
Reasoning Here was no fraud: no wrong. It was
incumbent upon Price (drawee) to be satisfied “that the
bill drawn upon him was the drawer’s hand,” before ha
accepted or paid it. It was not Neal’s duty to do so.
Notice was given upon Price of a bill drawn upon him;
[ch4-D] Law 108: Negotiable Instruments First Semester
and he sends his servant to pay and take it up. The
other bill he actually accepts.
-It was a considerable time after payment before Price
found they were forged and the forger was already to
be hanged. He made no objection at the time he paid
them. Whatever neglect there was, it was on his side.
-Neal had no reason to doubt the second bill after Price,
without any scruple or hesitation, paid the first. Neal
also paid the whole value bona fide. It is a misfortune
which happened without Neal’s fault or neglect. Even if
there was no neglect on the part of Price, there is no
reason to throw off the loss from one innocent man to
another innocent man.
Disposition Postea1 delivered to defendant.
FIRST NAT’L BANK OF PORTLAND V
U.S. NAT’L BANK OF PORTLAND
100 Ore. 264, 196 Pac 547, 14 ALR 470 (1921)
~joey~
FACTS
SUBJECT: 18 forged checks
DRAWER: Willamette Iron & Steel Works
DRAWEE: First National Bank of Portland
PAYEES: Rose and Shea, separately
INDORSEES: various merchants  United States
National Bank of Portland
-Rose and Shea confederated to obtain 18 blank checks
bearing the lithographed signature of Ball, president of
Steel Works, and forge therein the signature of Insley,
secretary-treasurer.
-The checks were negotiated by the two to various
merchants, all of whom deposited the checks in their
accounts in the United States National Bank.
-Defendant bank collected from drawee/plaintiff bank.
-Forgery was discovered and drawee was immediately
notified.
-Plaintiff bank wants to recover from defendant bank on
the theory that (1) the latter was negligent in not
detecting the forgery (apparently, drawer also had a
checking account in defendant bank, so they should
have been aware of the required signatures), and (2)
even if not negligent, the indorsement of the checks
and presentment for payment, followed by actual
payment, oblige the defendant to refund.
1 City Bank of New York for the amounts, believing that
Black’s Law Dictionary: “In the common-law practice, a formal
statement, indorsed on the nisi prius record, which gives an
account of the proceedings at the trial of the action.” The term
“nisi prius” means the court in which “the cause was tried to a
jury, as distinguished from the appellate court.” [So it appears
that in common-law practice, the victor will be entitled to a
formal statement of the proceedings. Probably so he could use
it to prove his acquittal or for execution of his claim.]
AY 2008-09
ISSUE
WON defendant bank is liable to plaintiff bank
HELD: NO
-GEN RULE: Where a holder for value in due course
presents to the drawee a bill of exchange to which the
name of the drawer has been forged, and the drawee
pays the instrument, the holder and drawee alike
ignorant that the signature of the ostensibly drawer
was forged, and it is subsequently discovered that the
signature of the drawer was forged, the drawee cannot
recover payment made to the holder.
-EXCEPTIONS: This defense is not available to a holder
who (1) is guilty of bad faith, or (2) has been negligent.
-Was the defendant negligent? NO. There was nothing
upon the face of any of the checks to excite suspicion,
and it is not claimed that any of the 18 merchants knew
or had any reason to suspect the checks were forgeries.
-The fact that the defendant had in its files the genuine
signature of a drawer might, if there are other
circumstances tending to show negligence be
considered in determining whether the defendant was
negligent; but it cannot be said that the failure to
compare the signatures was, as a matter of law,
negligence on the part of the defendant.
Disposition Judgment affirmed.
PHIL. NAT’L BANK V NAT’L CITY BANK OF NY
and MOTOR SERVICE CO., INC.
63 PHIL 711; RECTO; 1936
~chriscaps~
FACTS
-Unknown person negotiated w/ Motor Svc the checks
in payment for tires purchased fr Motor Svc, purporting
to have been issued by Pangasinan Transport Co.
against PNB and in favor of Int’l Auto Repair Shop.
-Said checks were indorsed by unknown person at the
back, Motor Svc believing that the signatures of Klar
(Manager and Treasurer of Pangasinan Transport) were
genuine.
-Checks were indorsed for deposit by Motor Svc at the
National City Bank of New York and Motor Svc was
credited w/ the amounts.
-Checks were cleared and PNB credited the National
the signatures of the drawer were genuine, that the
payee is an existing entity and the indorsements are
regular.
-PNB found out that the purported signatures of Klar
were forged. It demanded from Motor Svc the
reimbursement of amounts for w/c it credited the
Prof. Rogelio V. Quevedo [Ch4-D]
National City Bank and for w/c the National City Bank
credited Motor Svc.
-Motor Servic refused to reimburse. Pangasinan
Transport refused to have proceeds deducted from
their deposit.
ISSUE
WON PNB has right to recover from National City Bank
HELD: YES
-Acceptance is unnecessary in so far as bills of
exchange payable on demand are concerned (e.g.,
checks).
-A check being payable immediately and on demand,
bank can fulfill its duty to depositor only by paying the
amount demanded. The holder has no right to demand
from bank anything but payment, and the bank cannot
do anything but pay.
-There is however, nothing w/c prohibits presentation of
checks for acceptance before they are paid. Where a
check is certified by the bank on w/c it is drawn,
certification is equivalent to an acceptance. The bank
accepts if it chooses.
-The purpose of certification is to import strength to the
paper by obtaining acknowledgment from the certifying
bank that the drawer has sufficient funds.
-In this case, there was payment but no acceptance nor
certification.
-To entitle the holder of forged check to retain the
money obtained, he must be able to show that the
whole responsibility of determining validity of the
signature was upon drawee.
-The drawee of a check who is deceived by forgery of
drawer’s signature may recover payment, unless his
mistake has placed an innocent holder of paper in a
worse position than he could have been in if the
discovery of the forgery had been made on
presentation.
-The appellant in purchasing the papers from unknown
person w/o making inquiry, acted negligently and
contributed to the appellee’s constructive negligence in
failing to detect the forgery.
REPUBLIC V EQUITABLE BANKING CORP
and REPUBLIC OF THE PHIL V. BPI
10 SCRA 8; Concepcion; Jan 30, 1964
~’del~
FACTS
[BPI case]
-Jacinto Carranza asked the Corporacion de los Padres
Dominicos to cash 24 treasury warrants from which
[ch4-E] Law 108: Negotiable Instruments First Semester
encashment his wife expected to earn a sort of
commission.
-The Corporacion accommodated Carranza’s request
since the latter was a trusted former employee but
subject to certain conditions:
a) that the warrants be deposited with BPI;
b) that the actual payment of the value of the
warrants would be made only after the same had been
duly accepted and cleared by the Treasurer and the
proceeds thereof duly credited to the BPI account of
the Corporacion.
-Said conditions were met and deposited with BPI who
accepted the warrants “subject to collection only” and
with each of them (warrants) bearing the indorsement
of the respective payee and that of the Corporacion.
-BPI presented the warrants for payment to the drawee
(the Government) through the Clearing Office and upon
clearing, was paid by the Treasurer.
-BPI then credited the proceeds to the Corporacion’s
account, which was then withdrawn by the Corporacion.
-The Treasurer returned 3 of the warrants to the
Central Bank on the ground that those were forged and
then demanded that the value of said warrants be
charged against BPI’s account with the Clearing Office
and credited back to the demand deposit of the
Treasury.
-Eventually, all warrants were returned by the Treasury
to the Central Bank for the same reason and with the
same demand.
-Central Bank then referred the matter to BPI for
appropriate action but the latter opposed the return of
the warrants or to have their value charged against its
account and requested, instead, to the CB to return
said warrants to the Treasurer.
[Equitable Case]
-4 warrants were deposited with Equitable by its
depositors Robert Wong, Lu Chiu Kau and Chung
Ching .
-Equitable cleared said warrants through the Clearing
Office and then collected the corresponding amounts
from the Treasurer, and thereafter, credited those to
the accounts of the depositors.
-The Treasurer notified Equitable that said warrants
were defective and demanded reimbursement of said
amounts, which the latter refused.
[Consolidation]
-By agreement of the parties, said cases were jointly
heard. (Kasi,BPI filed a complaint against the
Corporacion; Equitable filed a similar complaint for
whatever reimbursements it and BPI may be sentenced
to give the Gov’t.)
ISSUE
WON said banks are liable
AY 2008-09
HELD: No. The Treasury was the negligent one here
since there was a “24 –hour clearing rule,” wherein
items that should be returned for whatever reason
should be done so within 24 hours. This it failed to do in
these two cases.
(Note: there is no mention of the NIL here because the
28 warrants were not negotiable; Campos posed the
question that had the said warrants been negotiable,
would the Court’s ruling be different?)
-Negligence in clearing: The Auditor of the Treasury,
whose signature was forged, exceeded his authority to
approve since each of the warrants involved were for
over 5k pesos. The irregularity of the warrants was
apparent on the face thereof from the Treasury’s
viewpoint yet the banks were not informed of any of
the irregularity in them until after said warrants were
cleared and honored. Only then did the Treasury give
notice of the forgeries.
-As was stated, all 28 warrants were cleared and paid
by the Treasury, this, then, induced the banks to credit
the amounts to the respective depositors. TF, the loss
of amounts was imputable to the acts and omissions of
the Treasury so the banks should not and cannot be
penalized.
-Treasury should bear the loss, citing PNB v Nat’l City
Bank of NY, “Where a loss, which must be borne by one
of two parties alike, innocent of forgery, can be traced
to the neglect or fault of either, it is reasonable that it
would be borne by him, even if innocent of any
intentional fraud, through whose means it has
succeeded.”
-“Generally, where a drawee bank otherwise would
have a right of recovery against a collecting or
indorsing bank for its payment of a forged check, its
action will be barred if it is guilty of an unreasonable
delay in discovering the forgery and in giving notice
thereof.” (C.J.S. 769-770)
-First State Bank & Trust v. First Nat’l Bank: (restated
lang ‘to ha!) Where a defendant bank, on presentation
to it of a forged check drawn on another bank, paid part
of amount to presenter, drawee having had the check
cleared through the clearing house, with no notice of
forgery given, said bank cannot be held liable for
amount so paid.
Disposition Decision appealed from is Affirmed.
FIRST NAT’L BANK OF PORTLAND V NOBLE (1946)
179 Ore. 26, 168 P. (2d) 354 (1946)
~jaja~
FACTS
Prof. Rogelio V. Quevedo [Ch4-E]
SUBJECT: check drawn as a refund of the payment
made by John and Lilian Noble for the property
purchased and subsequently reconveyed to T.D. Lee
through the drawer
DRAWER: Kelleck, a broker
DRAWEE: First National Bank of Portland Oregon
PAYEE: Lilian S. Noble
SUBSEQUENT INDORSEMENTS: Mrs. Noble indorsed the
check in blank and deposited it in the United States
National Bank of Portland. The deposit, on the same
day, was entered as credits in the Noble’s savings
account and checking account.
-The US National Bank, on Sept21, placed its clearing
house indorsement, as of Sept22, on the check. The
check reached the drawee, the First National Bank of
Portland on Sept22. The account of the drawer, Kelleck,
then had but $200 to his credit. On discovery of this
fact a teller in the First National Bank placed a small
symbol on the check which indicated that the check
was to be rejected for want of sufficient funds. The
check was then returned through the clearing house to
the forwarding bank, the US National, at 11 am,
Sept23, with the advice that it was being dishonored for
insufficient funds in the drawer’s account. The credit to
the US National Bank was canceled by the First
National. The US National, by letter dated Sept23,
informed Mrs. Noble of the dishonor of the Kelleck
check and that it had been charged back to the Noble’s
account.
-Sept24, shortly before 3pm, US National Bank by
messenger presented the check over the counter of the
First National. The teller in the First National, to whom
the check was presented the second time, mistook the
rejection symbol which on Sept22, had been placed on
the check by another teller of the First National, for a
symbol authorizing payment. Acting on this mistaken
assumption he prepared a cashier’s check dated
Sept24, payable to order of the United States National
in the amount of the Kelleck check, had the same duly
signed by an assistant cashier of the drawee and
delivered the same to the messenger from the United
States National. The United States National credited the
First National’s cashier’s check to the account of the
Nobles. The First National’s cashier’s check was marked
paid through the clearing house at 8:45 a.m., Sept25,
to the United States National though the courts finds
that the cashier’s check was received by the First
National on Sept24 and marked paid on that date
though the clearing house transaction took place on the
next morning.
-Sept25, the First National Bank discovered its mistake
and before 12 o’clock the First National retendered the
Kelleck check as a dishonored item but the United
States National refused to receive it and to return the
[ch4-F] Law 108: Negotiable Instruments First Semester
proceeds of the cashier’s check. The First National Bank
brought an action of assumpsit for money had and
received against Lilian Noble and John Noble and the
United States National Bank to recover the amount of
the cashier’s check, i.e., $10, 573.50. The US National
Bank filed its bill of interpleader and tendered the
money into court. The plaintiff recovered judgment in
the trial court against the Nobles. The Nobles appealed.
-The court concluded that the asserted right of plaintiff
to restitution must be considered exactly as if the
Kelleck check and had been paid over the counter in
cash.
ISSUE
WON the trial court erred in discharging the US National
from liability
HELD: NO
-Rule 33 of the Restatement on Restitution must control
the decision of this case. It is as follows:
-The payee is entitled to retain the money which he has
received as a bona fide purchaser. The typical cases
are those where an employee of a bank pays the holder
of a check in the mistaken belief that the drawer has
sufficient funds on deposit to meet it or in forgetfulness
of the fact that the drawer has directed that payment
should not be made.
-The forgery cases are said to rest, in part at least,
upon the maxim that where the equities are equal the
legal title must prevail. That maxim appears applicable
where a drawee bank pays a check so skillfully forged
as to defy detection. The holder and the drawee are
equally without fault, and the holder has the money.
-The position of the defendants in the case at bar is in
this respect stronger than that of the one who has
received payment of a forged check. Here the equities
are not equal. The representative of the plaintiff was
clearly negligent. He acted in reliance on a symbol
which he had never before seen the meaning of which
he had no reason to know. A moment’s inquiry would
have informed him fully concerning the meaning of the
symbol and the state of Kelleck’s account. But no
inquiry was made.
-The defendants Noble are not chargeable with any
neglect or inequitable conduct. Neither they nor their
collecting agent knew or were entitled to know the
state of the Kelleck account, and the fact that the
Kellect check was NSF on Sept22 did not render it
unconscionable to present it again on Sept24, Freeport
Bank of Freeport.
Disposition The decree in favor of the First National
Bank is reversed. It is ordered that the defendants
Noble recover the sum $10,573.50 paid into the
registry of the court xxx The decree is affirmed as to
AY 2008-09
the United States National Bank. The defendants Noble
may have their costs and disbursements from the
plaintiff First National Bank.
LIBERTY TRUST CO V HAGGERTY (1921)
[place citation here]
~ina~
FACTS
-Haggerty, a manloloko, had a checking account with
Liberty Trust Co. He induced a bookkeeper of the bank
to manipulate the bank's books to make it appear that
he had credit in the bank so that the checks he drew on
the bank would be honored. They were successful for
about 5 months, when a bank official accidentally
discovered the falsification. Haggerty and bookkeeper
succeeded in obtaining overdrafts of about $53k of the
bank's funds.
-Haggerty was arrested. He was also declared bankrupt
and a trusty was appointed. His total realized assets
was $9500 and the claims filed with the trustee totaled
more than $150k.
-Mayhew was one of the claimants. He loaned Haggerty
some money with 20-40% interest. Haggerty paid him
with checks drawn on Liberty. The bank paid a total of
$19k to Mayhew during the time the books were being
magicked. Mayhew was not aware of the fact that
Haggerty's account was being falsified.
-Liberty wants to recover the money it paid to Mayhew.
ISSUES
WON Liberty can recover what it paid Mayhew
HELD: NO.
Mayhew was a bona fide holder for value. As such, he
did not have a right to exact payment from Liberty
because there was no contract between them. Liberty,
on the other hand, had the right to determine WON to
pay him. When the bank decided to pay, it was bound
to know the state of its account with Haggerty. Having
exercised its option to pay or not to pay by honoring
the checks, Liberty can't recover the money back from
the payee. This is under the general rule that payment
of a check by a bank upon which it is drawn, under the
mistaken belief that the maker of the check has
sufficient funds to his credit to pay the check, is a
finality, and the bank can't recover from the payee of
the check the amount so paid.
-The reasons for this rule are:
1. there's no privity between the payee and the bank;
2. the bank always has the means of knowing the state
of the depositor's account by an examination of its
books, and therefore the payment is not a mistake
Prof. Rogelio V. Quevedo [Ch4-F]
within the meaning of the general rule which permits
the recovery of money paid under a mistake of fact;
and
3. to permit the bank to repudiate the payment would
destroy the certainty that must pertain to commercial
transactions and give way to uncertainty, delay and
annoyance.
-It's a rule that a person receiving stolen money
innocently in due course of business, in payment of a
pre-existing debt, is a holder for value as against the
former owner.
GREAT EASTERN LIFE INS. V HSBC (1922)
43 Phil 678 (1922); Johns
~chrislao~
FACTS
-Great Eastern, an insurance company, drew a check
for 2k on HSBC payable to the order of Melicor.
-Maasim fraudulently obtained possession of said check
and forged Melicor's signature, as an endorser. He then
endorsed and presented it to PNB where the amount
was placed to his credit.
-After paying Maasim, PNB endorsed the check to
HSBC. HSBC paid PNB and then charged the check to
the account of Great Eastern.
-HSBC, as expected in the ordinary course of business,
sent Great Eastern a bank statement which showed
that the check was charged to its account. Great
Eastern did not object.
-4 months later, Great Eastern found out that Melicor
never got paid. Great Eastern then made a demand on
HSBC that Great Eastern should be given credit for the
forged check but HSBC refused.
-Great Eastern sued HSBC to recover the 2k (so it could
pay Melicor). HSBC, on the other hand, prays that
should judgment be rendered against it, it should have
like judgment against PNB.
ISSUES
WON Great Eastern can recover
HELD
YES. This is not a case where the plaintiff's own
signature was forged to one of its checks. In such a
case, the plaintiff would have known the forgery and
would therefore have the duty to promptly notify the
bank. Failure to do so would release the bank.
-Here, the forgery was that of Melicor, the payee.
Therefore, when Great Eastern, the drawer, received its
bank statement, it had the right to assume that Melicor
had personally endorsed the check because otherwise,
HSBC would not have paid it.
[ch4-G] Law 108: Negotiable Instruments First Semester
-HSBC had no legal right to pay it out to anyone except
Great Eastern or its order. Great Eastern ordered HSBC
to pay the 2k to Melicor but the money was paid to
Maasim. HSBC has no defense to this action.
-PNB cashed the check upon a forged signature. PNB
had no license or authority to pay the money to
Maasim. It was its legal duty to know that Melicor's
endorsement was genuine before cashing the check. Its
remedy is against Maasim.
-Great Eastern can recover from HSBC. HSBC can
recover from PNB. As for PNB, it should go after
Maasim.
JAI-ALAI CORP. OF THE PHIL. V BPI (1975)
66 SCRA 29; CASTRO; August 6, 1975
~apple~
FACTS
-10 checks with a total face value of P8,030.58 were
deposited by Jai-Alai Corporation in its current account
with BPI
-All the checks (all payable to Inter-Island Gas or order)
were acquired by the Jai-Alai Corporation from one
Antonio J. Ramirez, a sales agent of the Inter-Island Gas
and a regular bettor at jai-alai games
-Upon deposit to BPI, the checks were temporarily
credited to Jai-Alai Corporation's account with the
condition that “any credit allowed...is provisional only,
until such time as the proceeds thereof, in current
funds or solvent credits, shall have been actually
received by the Bank, and the latter reserves to itself
the right to charge back the item to the account of its
depositor, at any time before that event, regardless of
whether or not the item itself can be returned...”
-After Ramirez had resigned from the Inter-Island Gas
and after the checks had been submitted to inter-bank
clearing, Inter-Island Gas discovered that all the
indorsements made on the checks purportedly by its
cashiers, as well as the rubber stamp impression
thereon reading "Inter-Island Gas Service, Inc.," were
forgeries.
-Inter-Island Gas advised Jai-Alai Corp, BPI, the drawers
and the drawee-banks of the said checks about the
forgeries
-Drawers of the checks demanded reimbursement to
their respective accounts from the drawee-banks
-Drawee-banks demanded from BPI, as collecting bank,
the return of the amounts they had paid on account
thereof
-BPI, for its part, debited Jai-Alai Corp's current account
-On October 8, 1959, Jai-Alai Corp drew against its
current account with BPI a check for P135,000 payable
AY 2008-09
to the order of the Mariano Olondriz y Cia in payment of
certain shares of stock.
-The check was dishonored by BPI as its records
showed that the current account of the petitioner, after
netting out the value of the checks P8,030.58 with the
forged indorsements, had a balance of only
P128,257.65.
-Jai-Alai Corp filed a complaint with CFI, which was
dismissed; CA affirmed dismissal
ISSUE
WON BPI had the right to debit the petitioner's current
account in the amount corresponding to the total value
of the checks with the forged indorsements
HELD: YES. The respondent acted within legal bounds
when it debited the petitioner's account.
-When the petitioner deposited the checks with the
respondent, the nature of the relationship created at
that stage was one of agency--the bank was to collect
from the drawees of the checks the corresponding
proceeds. It is true that the respondent had already
collected the proceeds of the checks when it debited
the petitioner's account, so that following the rule in
Gullas vs. Philippine National Bank, it might be argued
that the relationship between the parties had become
that of creditor and debtor as to preclude the
respondent from using the petitioner's funds to make
payments not authorized by the latter.
-Section 23 of the Negotiable Instruments Law
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."
-BPI, as a collecting bank which indorsed the checks to
the drawee-banks for clearing, should be liable to the
latter for reimbursement, for, as found by the court a
quo and by the appellate court, the indorsements on
the checks had been forged
-In legal contemplation, therefore, the payments made
by the drawee-banks to the BPI, on account of the said
checks, were ineffective; and, such being the case, the
relationship of creditor and debtor between the
petitioner and the respondent had not been validly
effected, the checks not having been properly and
legitimately converted into cash.
-Having received the checks merely for collection and
deposit, BPI cannot he expected to know or ascertain
the genuineness of all prior indorsements on the said
Prof. Rogelio V. Quevedo [Ch4-G]
checks. Indeed, Jai-Alai, having indorsed the checks to
BPI in accordance with the rules and practices of
commercial banks, is deemed to have given the
warranty prescribed in Section 66 of the Negotiable
Instruments Law that every single one of those checks
"is genuine and in all respects what it purports to be."
-Also, Jai-Alai was grossly recreant in accepting the
checks in question from Ramirez. It could not have
escaped it's attention that the payee of all the checks
was a corporation — the Inter-Island Gas Service, Inc.
Yet, the petitioner cashed these checks to a mere
individual who was admittedly a habitue at its jai-alai
games without making any inquiry as to his authority to
exchange checks belonging to the payee-corporation.
-It must be noted further that three of the checks in
question are crossed checks, which may only be
deposited, but not encashed; yet, the petitioner
negligently accepted them for cash.
-Under Section 67 of the Negotiable Instruments Law,
"Where a person places his indorsement on an
instrument negotiable by delivery he incurs all the
liability of an indorser," and under Section 66 of the
same statute a general indorser warrants that the
instrument "is genuine and in all respects what it
purports to be." Considering that the petitioner
indorsed the said checks when it deposited them with
the respondent, the petitioner as an indorser
guaranteed the genuineness of all prior indorsements
thereon. The respondent which relied upon the
petitioner's warranty should not be held liable for the
resulting loss.
-Also, under article 2154 of the New Civil Code "If
something is received when there is no right to demand
it and it was unduly delivered through mistake, the
obligation to return it arises." There was, therefore, in
contemplation of law, no valid payment of money made
by the drawee-banks to the respondent on account of
the questioned checks.
Disposition Petition denied. CA judgment affirmed.
CANAL BANK V BANK OF ALBANY
Supreme Court of New York; 1 Hill 287 (1841)
~rach~
FACTS
-This is a case to recover money paid on a draft. The
ground on which the plaintiffs sought to recover back
the money was that the endorsement purporting to be
that of Bentley was a forgery, which fact was proved by
Bentley and others on the trial.
-The draft was drawn on the plaintiffs (Canal Bank) by
the Montgomery County Bank, payable to the order
of E. Bentley. It purported to have been endorsed
successively by Bentley, then by one Budd, afterward
[ch4-H] Law 108: Negotiable Instruments First Semester AY 2008-09
by the Bank of New-York, and lastly by the defendants ~cha~
(Bank of Albany), to whom the plaintiffs paid it.
-Two months after payment, plaintiffs asked the FACTS
defendants to have the money refunded, notifying SUBJECT: A forged check
them at the same time of the forgery. DRAWER: Bureau of Treasury (treasury)
-Upon plaintiff’s objections, the circuit judge overruled DRAWEE: Republic Bank (RB)
the defendant’s offer to prove the ff: PAYEE: Martin Lorenzo, who was already dead 11 years
(1) That the defendants received the draft from the before the check was executed
Bank of New York to collect, as agents for the latter, INDORSEE: Ramon Lorenzo, Delia Dominguez, then
and that as such they received the money and paid it lastly Mauricia Ebrada
over to their principals, before notice of the forgery; -Treasury issued check in favor of Martin Lorenzo. The
(2) That a uniform custom of the banks of this state is check was subsequently indorsed to Ebrada for
to receive and collect drafts in the manner this was encashment, and so after, she delivered the proceeds
done, without disclosing their agency. to Dominguez, and Dominguez delivered the latter to a
certain Justinia Tinio. When Treasury found out that the
ISSUE check was forged, they demanded RB to refund the
WON the defendants were bound to return the money check proceeds. RB demanded refund from Ebrada. TC
received ruled for RB.
HELD: YES ISSUE
Ratio Though the defendants were innocent of any WON Ebrada, the last indorser, was liable to pay the
intended wrong, they had obtained money of the check on its face although she did not benefit from it
plaintiffs on an instrument to which they had no title,
and were therefore bound to refund; though notice of HELD: YES. Ebrada liable to RB, RB liable to Treasury
the forgery was not given till more than two months Ratio. Where a check is drawn payable to the order of
after they had received the money, they already one person and is presented to a bank by another and
received it and transmitted it to their principal. purports upon its face to have been duly indorsed by
-Where a bank collects a draft without disclosing to the the payee of the check, it is the duty of the bank to
drawee that it is merely collecting as agent, and it is know that the check was duly indorsed by the original
afterwards discovered that the indorsement was a payee, and where the Bank pays the amount of the
forgery, it is liable as principal in an action, by the check to a third person, who has forged the signature
drawee. of the payee, the loss falls upon the bank who cashed
-Where a draft had been fraudulently indorsed with the the check, and its only remedy is against the person to
name of an agent, who is also payee, and put in whom it paid the money.
circulation, bona fide, by the principal of the pretended Re: effect of forged instrument: Where the signature on
agent, without disclosing an agency, the indorsee of a negotiable instrument if forged, the negotiation of the
the principal, discovering the forgery two months after check is without force or effect (from Section 23 of the
might recover the money advanced to the principal. Negotiable Instruments Law (Act 2031)). It is only the
-If one accepts a draft in the hands of a bona fide negotiation based on the forged or unauthorized
holder, he will not be allowed afterward to dispute the signature which is inoperative (Beam vs. Farrel).
genuineness of the drawer's signature, though he may Re: drawee’s recovery when he paid based on a forged
that of the endorsers; and payment operates, in this instrument: the drawee of a check can recover from the
respect, the same as an acceptance. holder the money paid to him on a forged instrument. It
-To a note or bill payable to order, none but the payee is not supposed to be its duty to ascertain whether the
can assert any title without the indorsement of such signatures of the payee or indorsers are genuine or not.
payee; not even a bona fide holder. This is because the indorser is supposed to warrant to
Disposition New trial denied. the drawee that the signatures of the payee and
previous indorsers are genuine, warranty not extending
only to holders in due course. One who purchases a
check or draft is bound to satisfy himself that the paper
is genuine and that by indorsing it or presenting it for
payment or putting it into circulation before
REPUBLIC BANK V EBRADA presentation he impliedly asserts that he has
L-40796; 65 SCRA 680; July 31, 1975 performed his duty and the drawee who has paid the
Prof. Rogelio V. Quevedo [Ch4-H]
forged check, without actual negligence on his part,
may recover the money paid from such negligent
purchasers. In such cases the recovery is permitted
because although the drawee was in a way negligent in
failing to detect the forgery, yet if the encasher of the
check had performed his duty, the forgery would in all
probability, have been detected and the fraud
defeated.
Ratio for allowing recovery: Every one with even the
least experience in business knows that no business
man would accept a check in exchange for money or
goods unless he is satisfied that the check is genuine.
He accepts it only because he has proof that it is
genuine, or because he has sufficient confidence in the
honesty and financial responsibility of the person who
vouches for it. If he is deceived he has suffered a loss
of his cash or goods through his own mistake. His own
credulity or recklessness, or misplaced confidence was
the sole cause of the loss. Why should he be permitted
to shift the loss due to his own fault in assuming the
risk, upon the drawee, simply because of the accidental
circumstance that the drawee afterwards failed to
detect the forgery when the check was presented?
Reasoning.Since Ebrada was the last indorser of the
check, she was supposed to have warranted that she
has good title to said check. She was duty-bound to
ascertain whether the check in question was genuine
before presenting it to plaintiff Bank for payment. Her
failure to do so makes her liable for the loss and the
plaintiff Bank may recover from her the money she
received for the check. As reasoned out above, had she
performed the duty of ascertaining the genuineness of
the check, in all probability the forgery would have
been detected and the fraud defeated.
-As regards RB, the plaintiff Bank should suffer the loss
when it paid the amount of the check in question to
defendant-appellant, but it has the remedy to recover
from the latter the amount it paid to her.
-as regards the argument that Ebrada did not benefit
from the check, although the defendant-appellant to
whom the plaintiff Bank paid the check was not proven
to be the author of the supposed forgery, yet as last
indorser of the check, she has warranted that she has
good title to it even if in fact she did not have it
because the payee of the check was already dead 11
years before the check was issued. The fact that
immediately after receiving the cash proceeds of the
check in question in the amount of P1,246.08 from the
plaintiff Bank, defendant-appellant immediately turned
over said amount to Adelaida Dominguez (Third-Party
defendant and the Fourth-Party plaintiff) who in turn
handed the amount to Justina Tinio on the same date
would not exempt her from liability because by doing
so, she acted as an accommodation party in the check
[ch4-I] Law 108: Negotiable Instruments
for which she is also liable under Section 29 of the
Negotiable Instruments Law.
Disposition Judgment affirmed.
BANCO DE ORO V EQUITABLE BANK CORP
157 SCRA 188; Gancayco; January 20, 1988
~jojo~
FACTS
-Sometime in 1983, EBC thru its Visa Card
Department, drew 6 crossed Manager's checks
amounting to P45,982.23 and payable to certain
member establishments of Visa Card. Subsequently,
the Checks were deposited with the BDO to the credit
of its depositor, a certain Aida Trencio.
-Following normal procedures, and after stamping at
the back of the checks the usual endorsements: 'All
prior and/or lack of endorsement guaranteed', BDO
sent the checks for clearing through the PCHC.
Accordingly, EBC paid the checks; its clearing account
was debited for the value of the checks and
defendant's clearing account was credited for the same
amount.
-Thereafter, EBC discovered that the endorsements
appearing at the back of the checks and purporting to
be that of the payees were forged and/or unauthorized
or otherwise belong to persons other than the payees.
-EBC presented the checks directly to BDO for the
purpose of claiming reimbursement from the latter.
However, BDO refused to accept such direct
presentation and to reimburse the EBC for the value of
the Checks.
ISSUE
WON BDO was negligent and thus responsible for any
undue payment
HELD: YES
-In presenting the Checks for clearing and for payment,
BDO made an express guarantee on the validity of 'all
prior endorsements'. Thus, stamped at the bank of the
checks are the defendant's clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS
GUARANTEED. Without such warranty, EDC would not
have paid on the checks.
-No amount of legal jargon can reverse the clear
meaning of BDO's warranty. As the warranty has
proven to be false and inaccurate, the BDO is liable for
any damage arising out of the falsity of its
representation.
-The principle of estoppel effectively prevents BDO
from denying liability for any damages sustained by
EBC which, relying upon an action or declaration of the
First Semester AY 2008-09
BDO, paid on the checks. The same principle of
estoppel effectively prevents the BDO from denying the
existence of the checks.
-Whether the checks have been issued for valuable
considerations or not is of no serious moment to this
case. These checks have been made the subject of
contracts of endorsement wherein BDO made
expressed warranties to induce payment by the drawer
of the Checks; and the defendant cannot now refuse
liability for breach of warranty as a consequence of
such forged endorsements. BDO has falsely warranted
in favor of EBC the validity of all endorsements and the
genuineness of the checks in all respects what they
purport to be.
-The damage that will result if judgment is not
rendered for EBC is irreparable. The collecting bank has
privity with the depositor who is the principal culprit in
this case. BDO knows the depositor; her address and
her history, Depositor is BDO's client. It has taken a risk
on its depositor when it allowed her to collect on the
crossed-checks.
-Having accepted the crossed checks from persons
other than the payees, BDO is guilty of negligence; the
risk of wrongful payment has to be assumed by BDO.
BPI V CA, CHINA BANKING CORP
L-102383; 216 SCRA 51; November 26, 1992
~kiyo~
FACTS
SUBJECT: 2 checks for the pretermination of a money
market placement
DRAWER/DRAWEE: BPI
PAYEE: Eligia Fernando, impersonated by Susan Lopez
INDORSMENT: China Banking Corp., collecting bank of
the BPI checks
-Lopez impersonated Fernando, preterminated the
latter’s money market placement evidenced by a
promissory note (P2,462,243.19) from and through BPI,
who issued her 2 checks. She later opened an account
at CBC and endorsed the checks there; CBC stamped
them with guaranty of prior endorsements and/or lack
of endorsement; BPI cleared them. Lopez withdrew
nearly the whole amount. The real Fernando came on
the maturity date of the placement for rollover and
claimed forgery of endorsements.
ISSUE
WON in the event that the payee’s signature is forged,
BPI may claim reimbursement from CBC
HELD: NO
Prof. Rogelio V. Quevedo [Ch4-I]
-Under Sec. 23, the general rule is that forged
signatures are wholly inoperative and payments
through such are ineffectual; the exception is where
the party relying on the forgery is precluded from
setting up the forgery or want of authority. The court
recognizes negligence of the party invoking forgery as
an exception; hence general rule does not apply here.
BPI claims the clearing guaranty makes CBC wholly
liable for forged checks. Records show both BPI (not
calling Fernando to confirm pretermination; not
verifying Fernando’s signatures; not asking for the
promissory note upon pickup of checks) and CBC
(opening account for Lopez with only Fernando’s tax
account number as ID, not questioning Lopez’ huge
deposit and withdrawals) were negligent in the
selection/supervision of their employees and thus both
liable.
Disposition BPI is liable 60%, CBC is liable 40%
GEMPESAW V CA, PBCOM
218 SCRA 682; Campos, Jr.; Feb 9, 1993
~athe~
FACTS
-Petitioner Natividad O. Gempesaw (petitioner) owns
and operates four grocery stores in Caloocan City.
Petitioner maintains a checking account with the
Caloocan City Branch of the respondent drawee Bank
(PBC). To facilitate payment of debts to her suppliers,
petitioner draws checks against her checking account
with PBC 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.
-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.
-It appears that 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
[ch4-J] Law 108: Negotiable Instruments
the respondent drawee Bank, a certain Ernest L. Boon,
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. 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.
-The total amount of 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 , Caloocan branch.
-It was only after the lapse of more than two (2) years
that petitioner found out about the fraudulent
manipulations of her bookkeeper (payees did not
receive nor see the subject checks). Because of this,
the petitioner demanded from the drawee Bank to
credit her account with the money value of the 82
checks for having been wrongfully charged against her
account. The Bank refused.
PROCEDURE
RTC Caloocan – Complaint for recovery of the money
value of the 82 checks: dismissed
CA – Appeal: affirmed the decision of the RTC on two
grounds, namely (1) that the plaintiff’s (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.
SC- Petition under Rule 45
ISSUES
(issues relevant to the topic)
1. WON the CA erred in ruling that the negligence of the
drawer is the proximate cause of the resulting injury
to the drawee bank
2. WON the drawer is precluded from setting up the
forgery or want of authority as a defense WON the
respondent drawee Bank should not have honored
the checks because they were crossed checks.
(other issues)
3. WON banking rules prohibit the drawee bank from
having checks with more than one indorsement.
4. WON the drawee Bank may be held liable for
damages under any law aside from NIL
HELD
First Semester AY 2008-09
1. NO. The petitioner’s negligence was the proximate
cause of her loss.
Reasoning
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 pertinent 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.
2. YES. As a general rule, forgery is a defense.
However, the plaintiff falls under the exception.
-The applicable law is Section 23 of the NIL which
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."
-General Rule: 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.
-This section covers both the forged signature of the
maker of a promissory note/drawer of a check and
forged indorsement, i.e., the forged signature of the
payee or indorsee of a note or check.
-Example: If a person's signature is forged as a maker
Prof. Rogelio V. Quevedo [Ch4-J]
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.
-Exception: Where the drawer is guilty of such
negligence which causes the bank to honor such a
check or checks.
-Example: 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.
Reasoning In the case at bar, the agent was the one
who perpetrated the series of forgeries. Had the
petitioner been more prudent under the circumstances,
she could have discovered the fraud earlier.
3. NO.
Ratio 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.
4. NO.
Ratio 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
[ch4-K] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [Ch4-K]
payee. Under the NIL, the only kind of indorsement moment.
which stops the further negotiation of an instrument is Disposition: REMANDED to the trial court for the
a restrictive indorsement which prohibits the further reception of evidence to determine the exact amount
negotiation thereof (Sec. 36, NIL). In this kind of of loss suffered by the petitioner (which one half must
restrictive indorsement, the prohibition to transfer or be paid by respondent drawee bank to herein
negotiate must be written in express words at the back petitioner-50/50 ratio based on Article 1172).
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 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.

5. YES. Article 1170 of the New Civil Code

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."
Reasoning 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 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.
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. 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
[ch4-L] Law 108: Negotiable Instruments First Semester
TOLMAN V AMERICAN NAT’L BANK
48 Atl 480, 52 LRA 877 (1901)
~giulia~
FACTS
Tolman sues to recover money paid out by the
defendant on his account, upon his check, under a
forged indorsement. Potter, representing himself as
Haskell, went to the plaintiff to get a loan of money,
giving the residence and occupation of Haskell as his
own. The plaintiff made an inquiry on Haskell and
founding that the residence and occupation correct
thereby agreed to nake the loan. Potter, under the
name of Haskell, gave the note to the plaintiff, and the
plaintiff gave him a check on the defendant payable to
the order of Haskell, delivering it to Potter, supposing
him to be Haskell. Potter indorsed Haskell's name on
the back of the check, and gave it to AB Homes, who
collected it from the bank. When the note given to the
plaintiff became due, fraud was discovered. He
thereupon notified the ank, and demanded the return
of the amount paid on the check to the credit of his
account.
ISSUE
WON the bank is liable for the payment which it made
on the check,
Held
Ratio
Yes. When a bank receives money to be checked out by
a depositor, it is to be paid only as the depositor shall
order. The bank assumes this duty in receiving the
deposit. If the bank pays money out on a forged
signature, the depositor being free from balme or
negligence, it must bear the loss.
Reasoning
In this case the money was intended to Haaskell,
because his was the only name suggested. He had
been looked up and found to be responsible. It is a
perversion of words to say that it was intended for
Potter simply because he had fraudulently
impersonated Haskell, and led the plaintiff to believe
the he was Haskell. The plaintiff did not intend Potter to
have the money. When Potter fraudulently indorsed
Haskell's name on the check, it was a typical case of
forgery.
When a signature is forged or made out 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 therefor, or to enforce
payment thereof, against a party thereto, can be
acquired through or under such signature, unless a
AY 2008-09
party against whom it is sought to enforce such right is
precluded from setting up forgery or want of authority
SNYDER V CORN EXCHANGE NAT’L BANK
70 Atl. 876 (1908)
~ajang~
FACTS
-Action was filed by Snyder, individually and trading as
Harrison, Snyder & Son against Corn Exchange National
Bank. Snyder wants to recover the amount of the
checks which were wrongfully paid by the bank.
-George Snyder is a broker, trading and doing business
under the name of Harrison, Snyder & Son. He is a
depositor at the Corn Exchange National Bank. He had
in his employ a clerk named Edwin Greenfield, an
attorney, who was authorized to draw checks in his
name against his deposit in the said bank. Greenfield
drew 4 checks payable to the order of Charles Niemann
with a total amount of $ 18, 387.50. These checks
were paid by the bank and charged to the account of
Snyder.
-The checks were said to have been indorsed by
Neimann, but these indorsements were forgeries and
were never authorized by him or Snyder. They were
said to have been indorsed in blank to R.M. Miner &
Co., a copartnership purporting to caryy on a stock and
grain brokerage business but is actually conducting a
gambling establishment popularly known as a “bucket
shop.”
-The 4 checks were deposited by R.M. Miner to Real
Estate Title Insurance & Trust Company of Philadelphia.
The trust company then indorsed 3 of the 4 checks to
guarantee previous indorsements to certain banks in
Philadelphia for collection. The 4th check was also
indorsed by the trust company but without
guaranteeing the previous indorsements.
-Corn Exchagne Bank, relying upon the guaranty by the
trust company, paid each of the checks to the trust
company through its collecting agents.
-Based on the averments that, the indorsements
purporting to be those of Charles Niemann were
forgeries; that the trust company collected the
proceeds of the checks without actual knowledge of the
character of the business of R.M. Miner; that Corn
Exchange Nat’l Bank had constructive notice of the
business of the firm; and that the said checks were not
given in due course of the business.
-Snyder wants to recover from the bank the amounts
drawn from its account.
ISSUE
WON Snyder may recover
Prof. Rogelio V. Quevedo [Ch4-L]
HELD: NO.
-The bank said that Neimann was not a real, bona fide
payee, but was in legal contemplation, a fictitious
person—and such fact was known to Greenfield when
he drew the checks, in his capacity as Snyder’s
attorney/agent. Neimann may have been an existing
person, but nevertheless, he was a fictitious name
within the meaning of the act of assembly as Greenfield
only intended to use this name and never intended for
him to receive the checks or have any right to them.
-A check is payable to bearer when it is payable to the
order of a fictitious or nonexisting person, and such fact
was known to the person making it so payable.
-The intent of the drawer in inserting the name of the
payee is the sole test of whether the payee is a
fictitious person.
-In such case, there could be no recovery.
-When the checks were delivered to R.M. Miner, they
were shown as payable to bearer and nothing therefore
need be said in the contention of Snyder as to the
liability of the trust company to the bank upon the
guaranty of the indorsements on the checks.
-The checks drawn by Greenfield are made as if drawn
by Snyder himself. And when Snyder lodged with
Greenfield with this power, it is as if he said to the bank
that any check drawn by Greendield should be paid by
it as if it was made and issued by him. The court said
that if this is not enough to protect the bank from
liability for mispayments from his account, it is not easy
to conceive what else would be.
CLEARFIELD TRUST CO V UNITED STATES
318 US 363, 63 S.S. Ct. 573 (1943)
~glaisa~
FACTS
-A check was drawn on the Treasurer of the US through
the Federal Reserve Bank of Philadelphia to the order of
Clair Barner in the amount of $24.20.
-It was dated aat Harrisburg, Pennsylvania and was
drawn for the services rendered by Barner to the Works
Progress Administration.
-The check was placed at the mail addressed to Barner
but he did not receive the check.
-Some unknown person obtained it and presented it to
JC Penney Co. store representing that he was the payee
and endorsed the check in the name of Barner and
transferred it to JC Penney Co. in exchange for cash and
merchandise.
-JC Penney Co. endorsed the check to Clearfiled Trust
Co. which accepted it as an agent and endorsed it as
[ch4-M] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [Ch4-M]
follows: “Pay to the order of Federal Reserve Bank,
Prior endorsements guaranteed”
-Clearfield collected check from the US and paid the full
amount to JC Penney.
-Neither Clearfield nor JC Penney had any knowledge or
suspicion of forgery
-US filed a case against Clearfield based on the express
guaranty of prior endorsements made by Clearfield.
-District Court held that the rights of the parties were to
be determined by the law of Pennsylvania and since the
US unreasonably delayed in giving notice to the forgery
to Clearfield, it was barred from recovery. Circuit CA
reversed.

ISSUE
WON US is barred from recovery

HELD: NO
-He who presents a check for payment warrants that he
has title to it and the right to receive payment. If he has
acquired the check through forged endorsement, the
warranty is breached at the time the check is cashed.
The drawee’s right to recover accrues when the
payment is made. There is no other barrier to the
maintenance of cause of action. The theory of the
drawee’s responsibility where the drawer’s signature is
forged is inapplicable here. The drawee, whether it be
the US or another, is not chargeable with the
knowledge of the signature of the payee.
-Prompt notice of discovery of forgery was not a
condition precedent to suit. If it shown that the drawee
on learning of the forgery did not give prompt notice of
it and that damages resulted, recovery by the drawee
is barred.
-But we do not think that he who accepts a forged
signature of a payee deserves a preferential treatment.
It is his neglect or error in accepting the forger’s
signature which occasions the loss. He should be
allowed to shift that loss to the drawee only upon clear
showing that the drawee’s delay in notifying him of the
forgery caused him damage. No such damage has been
shown by Clearfield.
[ch4-N] Law 108: Negotiable Instruments First Semester AY 2008-09
DETROIT PISTON RING CO. V on the part of the Company consisted in the failure of
WAYNE COUNTY & HOME SAVINGS BANK its officers to make a thorough check of the payroll.
252 Mich. 163, 233 N.W. 185 (1930) Each time the checks were issued, the officers signing
~tito_romy~ them would compare the checks with the payroll, but at
no time was a complete investigation made, i.e., a
FACTS comparison of the checks with the time cards, nor was
-Helen Culbert was a trusted payroll clerk of Detroit an audit of the payroll ever made. It is perfectly clear
Piston. She prepared the biweekly payroll and the that a complete investigation would have disclosed the
checks corresponding therewith. She would then have fraud at once.
these signed by the officer of the Company who would -A depositor may not sit idly by after knowledge has
sign the same without question. Unbeknown to the come to him that his funds seem to be disappearing or
Company, Culbert was also preparing checks to the that there may be a leak in his business, and refrain
order of non-existing persons or former employees taking steps that a careful and prudent businessman
which she subsequently indorsed in the names of the would take in such circumstances, & w/c if taken would
payees and negotiate them to other banks or stores. result in stopping the issuances of fraudulent checks.
The drawee bank would then pay the same and debit Disposition Judgment reversed.
Detroit for the corresponding amount. MONTINOLA V PHIL. NAT’L BANK
-The cancelled checks were then returned to the 88 PHIL 178; Montemayor; February 26, 1951
company on the first of each month. the bookkeeper ~owen~
would then compare the balance on the bank
statement with Detroit’s own book. She would then sign FACTS
a receipt containing the stipulation “if no error is -Ramos is disbursing officer of USAFFE. As such, he
reported in ten days the account will be considered went to the Province of Lanao to procure a cash
correct. advance in the amount of P800K for the use of USAFFE.
-Because of the increased cost due to the activities of Encarnacion, Provincial Treasurer of Lanao did not have
Culbert, the Company employed auditors to ascertain that amount in cash. So, he gave Ramos P300K in
the reason for said increased costs. However, the emergency notes and a check for P500K. Ramos went
auditors (it should have employed Ricky if they really to the office of Laya, the Provincial Treasurer of
wanted to get to the bottom of the problem) failed to Misamis Oriental and ex officio agent of PNB branch in
discover the cause. Misamis Oriental, to encash the check for P500K which
-As it turned out, the fraud could have been easily he had received from Encarnacion. Ramos worked
discovered if someone just compared the payroll sheet under him as assistant agent in the bank branch and
with the time cards punched by employees in the time Ramos got the job as disbursing officer from the
clock. recommendation of Laya. Note that the currency being
-The company finally discovered the defalcation used in Misamis Oriental and Lanao which had not yet
amounting to $28,066.66. The Company sued Wayne been occupied by the Japanese invading forces, was
County & Home Savings alleging negligence in paying the emergency currency. Laya did not have enough
the questioned checks and claiming reimbursement of cash to cover the check so he gave Ramos P400K in
the above amount plus interests thereon. emergency notes and a check for P100,000 drawn on
-The lower court found for Detroit. Hence the PNB. According to Laya, he had previously deposited
appeal. P500,000 emergency notes in PNB Cebu and he
expected to have the check issued by him cashed in
ISSUE Cebu against said deposit. Ramos had no opportunity
WON Detroit was negligent in the issuance of the to cash the check because in the evening of the same
checks and thus estopped from asserting claims day the check was issued to him, the Japanese forces
against the Bank entered the capital of Misamis Oriental, and the USAFFE
forces surrendered. Ramos was made a prisoner of war
HELD: YES until 1943. In 1945, Ramos allegedly indorsed this
Ratio The estoppel of the depositor, on the ground of check (P100K) to Montinola.
negligence, to recover for an unauthorized payment, is -However, Montinola alleges that in 1944, Ramos,
based on the failure of the depositor to act as a prudent needing money to buy foodstuffs and medicine, offered
businessman in issuing his checks. to sell him the check. Montinola, with his agents and
Reasoning At the beginning of the period during which Ramos, went to see President Carmona of PNB Manila
the fraudulent checks were issued, the only negligence to check the genuineness of said check; after
Prof. Rogelio V. Quevedo [Ch4-N]
examining it President Carmona told him that it was
negotiable but that he should not let the Japanese
catch him with it because possession of the same
would indicate that he was still waiting for the return of
the Americans to the Philippines. He and Ramos finally
agreed to the sale of the check for P850,000 Japanese
military notes, payable in installments; that of this
amount, P450,000 was paid to Ramos in Japanese
military notes in five installments, and the balance of
P400,000 was paid in kind, (4 bottles of sulphatiasole,
each bottle containing 1,000 tablets, and each tablet
valued at P100). Upon payment of the full price, Ramos
duly indorsed the check which now appears on the back
of the document:
-"The words, 'pay to the order of ' -in rubber stamp and
in violet color are placed about one inch from the top.
This is followed by the words 'Enrique P. Montinola' in
typewriting which is approximately 5/8 of an inch below
the stamped words 'pay to the order of'. Below 'Enrique
P. Montinola', in typewriting are the words and figures
also in typewriting, '517 Isabel Street' and about 1/8 of
an inch therefrom, the edges of the check appear to
have been burned, but there are words stamped
apparently in rubber stamp which, according to
Montinola, are a facsimile of the signature of Ramos.
There is a signature which apparently reads 'M. V.
Ramos' also in green ink but made in handwriting."
-M. V. Ramos is handprinted in green ink, under the
signature. According to Montinola, he asked Ramos to
handprint it because Ramos' signature was not clear.
Ramos in his turn told the court that the agreement
between himself and Montinola regarding the transfer
of the check was that he was selling only P30,000 of
the check and for this reason, at the back of the
document he wrote in longhand the following:
"Pay to the order of Enrique P. Montinola P30,000
only. The balance to be deposited in the Philippine
National Bank to the credit of M. V. Ramos."
-Ramos further said that in exchange for this
assignment of P30,000 Montinola would pay him
P90,000 in Japanese military notes but that Montinola
gave him only two checks of P20,000 and P25,000,
leaving a balance unpaid of P45,000. In this he was
corroborated by Atty. Ramos Jr
-The indorsement or writing described by M. V. Ramos
which had been written by him at the back of the check
does not now appear at the back of said check. What
appears thereon is the indorsement testified to by
Montinola and described by the trial court as
reproduced above. Before going into a discussion of the
merits of the version given by Ramos and Montinola as
to the indorsement or writing at the back of the check,
it is well to give a further description of it as we shall do
later.
[ch4-O] Law 108: Negotiable Instruments First Semester
-Montinola filed a complaint in the CFI Manila against
PNB and the Provincial Treasurer of Misamis Oriental to
collect the sum of P100K the amount of a check issued
on 1942 by the Provincial Treasurer of Misamis Oriental
to Ramos and supposedly indorsed to Montinola.
I. When Montinola filed his complaint in 1947 he stated
therein that the check had been lost, and so in lieu
thereof he filed a supposed photostatic copy. However,
at the trial, he presented the check itself and had its
face marked and the back thereof. But the check is
badly mutilated, blotted, torn and partly burned, and its
condition can best be appreciated by seeing it. In
explanation of the mutilation of the check Montinola
told the court that several months after indorsing and
delivering the check to him, Ramos demanded the
return of the check to him, threatening Montinola with
bodily harm, even death by himself or his guerrilla
forces if he did not return said check, and that in order
to justify the non-delivery of the document and to
discourage Ramos from getting it back, he (Montinola)
had to resort to the mutilation of the document.
II. Laya stated that he issued the check only his
capacity as Provincial Treasurer, and that the words in
parenthesis "Agent, Phil. National Bank" now appearing
under his signature did not appear on the check when
he issued the same. The words 'Agent, Phil. National
Bank' which now appear on the check were not
typewritten below his signature when he signed the
said check and delivered the same to Ramos.
According to Laya, when he issued checks in his
capacity as agent of PNB Misamis Oriental the said
check must be countersigned by the cashier of the said
agency -not by the provincial auditor. Montinola on the
other hand said that when he received the check it
already bore the words 'Agent, Phil. National Bank'
below the signature of Laya and the printed words
'Provincial Treasurer'.
-TC: dismissed the complaint. Montinola appealed
directly to this Court because the amount exceeds
P50,000
ISSUES
1. WON the photostatic copy of the check is acceptable
given its mutilated condition
2. WON the words, 'Agent, Phil, National Bank' were
added after Laya had issued the check TF issued in the
capacity as agent of PNB
3. WON Ramos added or placed those words "in his
capacity as Provincial Treasurer of Misamis Oriental"
(obviously, not as agent of the Bank) below the
signature of Laya before transferring the check to
Montinola
4. WON there was valid negotiation (P30,000 only
indorsed)
AY 2008-09
HELD
1. NO
-a comparison between the photostatic copy and the
original check reveals discrepancies between the two.
The condition of the check as it was produced is such
that it was partially burned, partially blotted, badly
mutilated, discolored and pasted with cellophane. What
is worse is that Montinola's excuse as to how it was
lost, that it was mixed up with household effects is not
plausible, considering the fact that it involves his life
savings, and that before the alleged loss, he took
extreme pains and precautions to save the check from
the possible ravages of the war, had it photographed,
registered said check with the General Auditing Office
and he knew that Ramos, since liberation, was not after
the possession of that check.
2. NO
-If he issued the check as agent of the PNB, then the
bank is not only drawee but also a drawer of the check,
and Montinola evidently is trying to hold PNB liable in
that capacity of drawer, because as drawee alone,
inasmuch as the bank has not yet accepted or certified
the check, it may yet avoid payment.
-What renders more probable the testimony of Laya
and Ramos the money for which the check was issued
was expressly for the use of USAFFE of which Ramos
was then disbursing officer. And upon delivery of
P400K in emergency notes and the P100K check to
Ramos, Laya credited his depository accounts as
provincial treasurer with the corresponding credit entry.
In the normal course of events the check could not
have been issued by the bank, and this is borne by the
fact that the signature of Laya was countersigned by
the provincial auditor, not the bank cashier.
-said check was issued by the provincial treasurer of
Lanao to Ramos who requisitioned the said funds in his
capacity as disbursing officer of the USAFFE. The check
is not, in business parlance, 'certified check' or
'cashier's check.'
3. NO
-Naturally, Ramos must have known the procedure
followed as to the issuance of checks, namely, that
when a check is issued by the Provincial Treasurer, it is
countersigned by the Provincial Auditor as was done on
the check. And that if the Provincial Treasurer issues a
check as agent of the PNB, the check is countersigned
not by the Provincial Auditor who has nothing to do with
the bank, but by the bank cashier, which was not done
in this case. It is not likely, therefore, that Ramos had
made the insertion of the words "Agent, Phil. National
Bank" after he received the check, because he should
Prof. Rogelio V. Quevedo [Ch4-O]
have realized that following the practice already
described, the check having been issued by Laya as
Provincial Treasurer, and not as agent of the bank, and
since the check bears the countersignature not of the
Bank cashier but of the Provincial Auditor, the addition
of the words "Agent, Phil. National Bank" could not
change the status and responsibility of the bank. It is
therefore more logical to believe and to find that the
addition of those words was made after the check had
been transferred by Ramos to Montinola.
4. NO
-The check was not legally negotiated within the
meaning of the Negotiable Instruments Law. Section 32
of the same law provides that "the indorsement must
be an indorsement of the entire instrument. An
indorsement which purports to transfer to the indorsee
a part only of the amount payable, . . . (as in this case)
does not operate as a negotiation of the instrument."
Montinola may therefore not be regarded as an
indorsee. At most he may be regarded as a mere
assignee of the P30,000 sold to him by Ramos, in which
case, as such assignee, he is subject to all defenses
available to the drawer Provincial Treasurer of Misamis
Oriental and against Ramos.
IN SUMMARY
-Montinola’s complaint cannot prosper because
1) Check long overdue by about 2 1/2 years. It may
therefore be considered even then, a stale check.
2) The insertion of the words "Agent, Phil. National
Bank" which converts the bank from a mere drawee to
a drawer and therefore changes its liability, constitutes
a material alteration of the instrument without the
consent of the parties liable thereon, and so discharges
the instrument. (Section 124 of the Negotiable
Instruments Law).
3) The check was not legally negotiated within the
meaning of the Negotiable Instruments Law. Section 32
of the same law provides that "the indorsement must
be an indorsement of the entire instrument. An
indorsement which purports to transfer to the indorsee
a part only of the amount payable does not operate as
a negotiation of the instrument." Montinola may
therefore not be regarded as an indorsee. At most he
may be regarded as a mere assignee of the P30,000
sold to him by Ramos, in which case, as such assignee,
he is subject to all defenses available to the drawer
Provincial Treasurer of Misamis Oriental and against
Ramos.
4) He should have known that a check for such a large
amount of P100K could not have been issued to Ramos
in his private capacity but rather in his capacity as
disbursing officer of the USAFFE, and that at the time
that Ramos sold a part of the check to him, Ramos was
[ch4-P] Law 108: Negotiable Instruments First Semester
no longer connected with the USAFFE but already a
civilian who needed the money only for himself and his
family.
5) Ramos had he retained the check may not now
collect its value because it had been issued to him as
disbursing officer. As observed by the trial court, the
check was issued to M. V. Ramos not as a person but M.
V. Ramos as the disbursing officer of the USAFFE.
Therefore, he had no right to indorse it personally to
plaintiff. It was negotiated in breach of trust, hence he
transferred nothing to the plaintiff.
6) It is absolutely necessary for the court to examine
the original in order to see the actual alterations
supposedly made thereon, and that should this Court
grant the prayer contained in the bank's brief that the
check be later referred to the city fiscal for appropriate
action, said check may no longer be available if the
appellant is allowed to withdraw said document.
Disposition Decision affirmed
BANK OF COMMERCE OF SULPHUR V WEBSTER
70 Okla. 73, 172 942 (1918)
~maia~
FACTS
SUBJECT: a note of guaranty (this is the negotiable
instrument in question) was executed by Webster and
Molacek as guarantors, guaranteeing to the Bank of
Commerce of Sulphur the payment of two notes issued
by Crafton ($1,450 and $204)
MAKERS: of the 2 notes  Crafton; Note of Guarantee
(guaranteeing the notes) Webster and Molacek
PAYEE: Security State Bank
INDORSEE: Bank of Commerce of Sulphur (current
holder)
-The note of guarantee was executed when the notes
(to be guaranteed) were transferred from Security
State Bank to Bank of Commerce. When Bank of
Commerce sued for the fulfillment against the
guarantors, the guarantors interposed the defense that
they were relieved of liability since the note issued by
Crafton had been materially altered. The alteration
consists of having the wife of maker Crafton (Lizzie
Crafton) sign the note at the instance of the Bank of
Commerce after execution and delivery of the
guaranty. (note: it seems that in effect, Lizzie became a
co-maker to the note)
-Trial court held that the signing of Lizzie at the
instance of the Bank of Commerce, without knowledge
and consent of the guarantors, was an alteration that
defeated the guaranty
ISSUE
AY 2008-09
WON the signing of the notes by Lizzie Crafton after the
execution and delivery of the contract of guaranty
without the consent and knowledge of the guarantors
released and discharged the guarantors from the
contract of guaranty
HELD: YES
-the adding of an additional party to a negotiable
instrument subsequent to its execution and delivery
discharges the original parties when such change is
made without their knowledge or consent
-the reason why the addition of a name to a note as a
joint maker, after its issuance, materially alters it, is
because it changes the number of parties and their
relative rights, the rate of contribution, and the
character and description of the instrument
-“a guarantor is exonerated, except as far as he may be
indemnified by the principal, if by any act of the
creditor, without the consent of the guarantor, the
original obligation of the principal is altered in any
respect, or the remedies or rights of the creditor
against the principal in respect thereto, in any way
impaired or suspended. “
-the addition of the name of Lizzie to the note, payment
of which the guarantors guaranteed, changed the
identity of the said note and its effect and operation,
and such alteration being made without the consent
and knowledge of the guarantors, the guarantors are
discharged from their liability on the guaranty,
Disposition Judgment affirmed.
FOUTCH V ALEXANDRIA BANK & TRUST CO
177 Tenn 348; (1941)
~da~
FACTS
W.L. Foutch purchased a cow from B.W. Foutch for $18
for which he gave a check to B.W. Foutch, payable to
his order. This check was wholly written by the payee
(because it was W.L.'s practice to have the checks filled
filled out by the parties to whim the check was made).
In the check in issue: there was a space between the
dollar sign and the amount in numbers and the amount
in words was written midway of the line provided for it
and in the lower left corner “for cow” and when
presented it already bore $418, four hundred eighteen
dollars and “for cow and note”. All the figures and
writings in the check were in the same writing except
for the signature when it was presented to the
bank.The bank paid to B.W. Foutch the sum $418 called
for by the check, and charged it to the account of the
drawer.
Prof. Rogelio V. Quevedo [Ch4-P]
Issue: WON the the bank is liable for the overdraft (or
should W.L. Foutch bear the loss)
Held: The bank is not liable because it was the plaintiff
's negligence which approximately caused the loss and
the bank is not guilty of any negligence that
contributed to the loss.
There is a distinction between bank checks and
negotiable instruments of the note and bill class. One
who purchases a note, or like negotiable instrument, is
under no manner of compulsion and acts purely at his
option or election, under which circumstances it is not
inappropriate to apply, by analogy the caveat emptor
rule; whereas, the Bank is under a direct and peculiarly
delicate obligation,which requires prompt discharge,
usually with little opportunity for investigation to pay
the check of its depositor ,upon presentation, or subject
itself to the risk f damages. Furthermore the depositor
on the other hand,owes to his bank the duty to exercise
care in drawing checks in order to avoid possible loss.
The drawer of this check in this case authorized the
payee to fill out the check,not only in pencil,which
made the added words and figures raising the check
particularly easy to insert and well high impossible to
detect,there being no such variation as frequently
appears when different ink is used, but the payee
having been authorized to fill out the check in his
handwriting,with the words and figures placed as
herein before shown, no possibility of detection of the
check having been thus raised was left open to the
Bank.
SAVINGS BANK OF RICHMOND V
NAT’L BANK OF GOLDSBORO
39 A.L.R. 1374 (1925)
~bry_sj~
FACTS
-A.C. Norwood (DRAWER), President of the National
Bank of Goldsboro issued a certain draft dated March
29, 1918 for the sum of $6, drawn against the FIRST
NATIONAL BANK OF NEW YORK (the DRAWEE) payable
to the order of N.L. Massie.
-The said draft was thereafter unlawfully and without
the knowledge or consent of A.C. Norwood or the
Goldsboro Bank, fraudulently forged and altered in
material respects. The date was changed from March
29, 1918 to June 21, 1918, and the amount thereof
from $6 to $8,470.
-Massie sold the altered draft to the SAVINGS BANK OF
RICHMOND, with whom he had been transacting with
for two years. Trusting Massie’s moral and financial
strength, the SAVINGS BANK OF RICHMOND purchased
the draft for $8,470 giving him in exchange a cashier’s
[ch4-Q] Law 108: Negotiable Instruments First Semester
check for the same amount. When the Savings Bank
attempted to collect it, only then did it find out that the
draft was forged.
-In this suit, the Savings Bank insists that the National
Bank of Goldsboro (THE DRAWER) should be liable on
the theory that it was negligent or amiss in its duty to
ensure that the draft is safe from every reasonable
chance of alteration. Ordinary paper was used and that
there was no protectograph or other safety device to
prevent alteration. Daniel, a commentator on the
negotiable instruments law is cited as authority for the
liability of the drawer of a bill or the maker of a note
who by careless execution of the instrument left room
for any alteration, insertion or erasure, which would
prejudice the bona fide holder’s rights.
-The Goldsboro Bank counters that with a completed
draft, losses arising from its subsequent alteration and
forgery do not fall upon it but rather upon those who
have chosen to accept the same as changed. Assuming
that the argument of Savings Bank to be valid, it will
not be liable because it is not the proximate cause of
the loss.
ISSUES
1. WON Savings Bank can recover from point of view of
tort or negligence.
2. WON Bank can recover from the draft as a contract
btwn the parties.
3. WON Savings Bank can recover from the negotiable
instrument.
HELD
1. NO. The issuing of the note could in no sense be
considered as proximate cause of the loss. Where a
negotiable note was delivered in completed form, the
possibility that it might be altered by the willful fraud or
forgery of another was too remote to afford basis of an
action either in tort or in contract.
2. NO. The note in its forged and altered state is not a
contract of the maker of the instrument. Thus, a suit
based on contract can neither prosper.
3. YES, but only as to the original face value of the
draft. Section 3106 of the Negotiable Instruments Law
of North Carolina provides:
“Where a negotiable instrument is materially altered
without the assent of all parties liable thereon, it is
avoided except as against the party who has himself
made, authorized or assented to the alteration and
subsequent indorsers. But when the instrument has
been materially altered and is in the hands of a holder
in due course, not a party to the alteration, he may
enforce payment thereof according to the original
tenor.”
AY 2008-09
BSJ Comment: In other words, HIDC enjoys status as
such only to the extent of the original amount as
written by drawer or maker in a proper case. The Court
seems to consider it as a fair rule that nobody should
be liable for more than what s/he originally bargained
for. Impliedly, it seems to say that the HIDC albeit
protected by the law still has some duty to conduct
reasonable inquiry especially when transactions involve
huge sums of money. Certainly 8,000 dollars is a huge
amount in the 1920s. The Court’s ruling here could be
justified under the common law rule: as between two
innocent persons, the one whose acts occasioned the
loss shall suffer the consequences. Here, Savings
Bank’s own negligence is the proximate cause of the
loss.]
CRITTEN V CHEMICAL NAT’L BANK (1902)
NY Court of Appeals; 171 NY 219; 63 N.E. 969, 57 LRA
529
~mel~
FACTS
-Plaintiff kept a large and active account with the
defendant. The Plaintiffs employed a clerk named
Davis. It was the duty of Davis to fill up the checks
which it might be necessary for the plaintiffs to give in
the course of business, top make corresponding entries
in the stubs of the check book, and present the checks
so prepared to Mr. Critten, one of the plaintiffs, for
signaturem together with the bills in payment of which
they were drawn. After signing a check Critten would
place it and the bill in an envelope addressed to the
proper party, seal the envelope and put it in the mailing
drawer.
-in 24 separate instances, Davis abstracted one of the
envelopes from the mailing drawer, opened it,
obliterated by acids the name of the payee and the
account specified in the checks, then made the check
payable to cash and raised its amount, in the majority
of cases, by the sum of $100. he would draw the money
on the checks so altered from the defendant bank, pay
the bill for which the check was drawn in cash, and
appropriate the excess. On one occasion David did not
collect the altered check from the defendant, but
deposited it to his own credit in another bank. When a
check was presented to Critten for signature the
number of dollars for which it was drawn would be cut
in the check by a punching instrument. When Davis
altered a check he would punch a new figure in front of
those already appearing in the check. This work has
been entrusted to another person in Davis’ absence,
hence the forgeries were discovered and Davis was
arrested and punished. Hence this action to recover the
Prof. Rogelio V. Quevedo [Ch4-Q]
amount of these forged checks, over and above the
sums for which they were originally drawn
ISSUES
1. WON plaintiff is guilty of negligence
2. WON by negligence in its discharge or by the failure
to discover and notify the bank, the depositor (plaintiff)
is estopped from asserting that they are forgeries
3. WON defendant bank can claim relief from plaintiff’s
negligence
HELD
1. YES In this case, Davis falsified the additions or total
sat the foor of the pages in the check book. But with a
few exceptions he did not alter the amounts expressed
in the stubs. In no case did he change in the stubs the
name of the payee of the check. It is clear therefore
that at all times a comparison of the returned checks
with the stubs in the checkbooks would have exposed
the alterations made in the checks. Of course the
knowledge of the forgeries that davis possessed from
the fact that he himself was the forger, was in no
respect to be attributed to the plaintiffs. the Court sees
no reason why they were not chargeable with such
information as a comparison of the checks with the
check book would have imparted to an innocent party
previously unaware of the forgeries. As regards the
failure to discover the forgeries after the return of the
checks and the balancing of the account in the
passbook. As held in Weisser’s adm’rs vs Denison, “the
rule is settled that the depositor owes his bank the duty
of a reasonable verification of the returned checks.” . If
the depositor has by his negligence in failing to detect
forgeries in his checks and give notice thereof caused
loss to his bank, either by enabling the forger to repeat
his fraud or by depriving the bank of an opportunity to
obtain restitution, he should be responsible for the
damage caused by his default but beyond this his
liability should not extend. Moreover, the court sees no
reason why the bank should be entitled to anything
more than indemnity for the loss the depositor’s
negligence has caused it *The Court also made a
finding that the ordinary rule of principal and agent or
master and servant that the principal or master is liable
for the fault of his servant or agent in the master’s
business apply in this case.
2. NO .While the Court hold that this duty rests upon
the depositor, it does not accept the doctrine asserted
in some of the cases that, by negligence in its
discharge or by the failure to discover and notify the
bank, the depositor either adopts the checks as
genuine and ratifies their payment or estops himself
from asserting that they are forgeries. In the present
case, a check altered by Davis from the sum of $22 to
[ch4-R] Law 108: Negotiable Instruments First Semester
$622 was paid by the defendant to the Colonial Bank in
which Davis had deposited it. Against the bank the
defendant has ample recourse. If it were to be held that
the plaintiffs are estopped from denying the
genuineness of that check as against the defendant,
the latter could have no claim against the Colonial
Bank, nor is it clear that the plaintiffs would have any
direct right of action against that Bank. The Colonial
bank took the check solely on the responsibility of
Davis. To it the plaintiffs owed no duty. A rule which
might operate to relieve the bank from the liability it
assumed when it collected an altered check, merely
because the plaintiffs failed in their duty, not ti it, but to
a third party should not be upheld. Nor would it operate
justly in a case in which the bank had paid a single
forgery unless by the depositor’s default and delay the
bank had lost its opportunity to secure restitution.
3. NO. It was held that the defendant was also guilty of
negligence in paying the check. The sixth in sequence
of these forgeries was a check with the name of the
payee erased and “cash” written in the place thereof.
The teller of the defendant who paid the check and was
a witness on its behalf testified that the check showed
on its face that the word “cash” had been written in the
place for the payee’s name over an erasure; that it was
in such mutilated condition when it was presented to
him that, before paying it he required Davis to indorse
upon the check a receipt for its amount. Had Davis
been required to obtain the indorsement or guaranty of
the plaintiffs as to its correctness, the forgeries of Davis
would have been exposed, and their repetition would
not have occurred.The action brought by plaintiffs was
brought on contract, not on tort for the allegation of
negligence on the part of the defendant is used only to
defeat its claim for relief on account of the plaintiff’s
negligence.
Disposition The judgment should be reversed, and a
new trial granted.
DISSENTING OPINION Since plaintiffs entrusted the
work to a competent agent and, as established by
evidence, took other precautions, there was evidence
to support the finding in their favor. The rule which
imputes to a principal knowledge acquired by his agent
rest upon the presumption that the latter has disclosed
all the material facts to the former. This presumption
does not extend to a fact which, if disclosed would
subject the agent to a prosecution for crime or defeat a
scheme in which he was engaged to defraud his
employer.
MARINE NAT’L BANK V NAT’L CITY BANK (1874)
Court of Appeals of NY, 59 NY 67 (1874)
~eva~
AY 2008-09
FACTS
SUBJECT: A check for $25 (but was altered later)
DRAWER: Lunt Brothers
DRAWEE: Marine National Bank
PAYEE: To the order of Henry Smith
-Lunt Brothers who were merchants in NY gave a
stranger the $25-check in exchange for the same
amount.
-The next day, a person called upon Derippe & Co (gold
brokers in NY) stating that he wished to buy some gold
for Lunt Brothers, and asked $3334 gold in currency. A
memo, giving the amount as $4079.96 was delivered to
him.
-The person then altered the $25-check by erasing the
date, payee, and amount, and inserting Dec.2,1969,
payee Derippe & Co, amount $4079.96, sent the check
to Marine for certification, and upon presentation it was
duly certified, and thereupon, Derippe without notice,
and being ignorant of the alteration and relying upon
the certification, gave to the person the sum of $3334
American gold, receiving in payment the certified
check.
-Derippe indorsed the check and deposited it in
National City Bank. Marine Bank paid the check to Nat’l
City Bank, but requested repayment of the amount
immediately when it discovered the alterations. Nat’l
City Bank refused to repay the same. Before the
discovery of the alteration, both banks believed the
check to be genuine.
-Judgment was rendered for Marine Bank on the ground
that it did not guarantee the genuineness of the filling
out of the check by certifying, and so it was not
estopped from showing the alteration, and was entitled
to the repayment.
ISSUE
WON Marine National Bank is entitled to the
repayment.
HELD: YES
-That an acceptor of a bill of exchange by acceptance
only admits the genuineness of the signature of the
drawer, and does not admit the genuineness of the
indorsements...or any other part of the bill, is
elementary and sustained by an unbroken current of
authority. The reason is that when the bill is presented
for acceptance the acceptor looks to the handwriting of
the drawer with which he is presumed to be
acquainted...But the acceptor cannot be presumed to
have any such knowledge of the other facts upon which
the rights of the holder may depend.
-The doctrine is applied to cases of bills altered in the
body, by the raising of the amount for which they were
Prof. Rogelio V. Quevedo [Ch4-R]
drawn, and also to those in which the name of the
payee has been feloniously changed.
-The drawee is presumed to be acquainted with the
drawer’s signature, but to require the drawee to know
the handwriting of the residue of the bill is
unreasonable. It would, in most cases, be requiring an
impossibility. Such a rule would be not only arbitrary
and rigorous, but unjust.
Disposition Judgment affirmed.
WELLS FARGO BANK & UNION TRUST CO V
BANK OF ITALY
SC of California; 214 Cal. 156, 4 P. 2d 781 (1944)
~jat~
FACTS
SUBJECT: A check drawn on Wells Fargo Bank by
McCormick Co. made payable to order of Albert Meyer
Co. was altered. The name of the payee thereon was
erased and the name of one “Harry Behling” was
substituted.
DRAWER: McCormick Steamship Company
DRAWEE: Wells Fargo Bank
PAYEE: Albert Meyer and Company
-Behling, an employee of steamship co., purchased
clothes from a store owned by a certain Popkin, and
offered the check in question as payment. (It is not
known how Behling got hold of the check). The 2 then
went to drawee bank to have the check cashed. After
presentment, the drawee bank certified the check but
suggested that Popkin, being a depositor of defendant
bank, should cash it there instead. So defendant bank,
after the check was presented to it, paid the amount
thereof and transmitted it to drawee bank, which in
turn paid the amount of the check to defendant bank.
-Drawer did not discover the alteration until the original
payee made an inquiry several months after the check
had been paid. Drawer notified drawee. Drawee then
notified defendants (Bank of Italy and Popkin)
demanding repayment of the amount of the check.
Drawee filed action to recover the sum. Talo. Sa District
Court of Appeals, talo rin.
*Note: The alteration was made with such skill that it
could not be detected. The person responsible for the
alteration is unknown.
ISSUE
WON the drawee bank may recover the money it paid
HELD: NO
-Under Sec. 62, the acceptor, by accepting the
instrument, engages to pay “according to the tenor of
his acceptance.”
[ch4-S] Law 108: Negotiable Instruments First Semester
-It makes for the usefulness and currency of negotiable
paper to construe the words “according to the tenor of
his acceptance” as referring to the instrument as it was
at the time it came into the hands of the acceptor for
acceptance, for he accepts no other instrument other
than the one presented to him-the altered form-and it
alone he engages to pay.
-The presentation of a check to a drawee for payment
is not a negotiation. It involves no warranties as the
drawee is not a holder in due course. A drawee who has
paid the instrument is not a transferee of title as the
last holder’s indorsement does not transfer the check
but converts it into a voucher.
-Banking institutions can readily protect themselves
against liability on altered instruments either by
qualifying their acceptance or certification or by relying
on forgery insurance and special paper, which will
make alterations obvious.
Disposition Judgment affirmed
HSBC V PEOPLE’S BANK AND TRUST CO
G.R. No. L-28226; Fernando; Sept 30, 1970
~kooky~
FACTS:
-On Mar 8, 1965, PLDT drew a check on HSBC in favor
of the same bank in the sum of P14,608.05. PLDT sent
this check to HSBC by mail.
-Florentino Changco somehow got hold of the check,
and was able to erase the name of HSBC as payee and
instead typed his name. Four days before, Changco had
opened a current account with PBTC, where he
deposited the altered check.
-The check was presented by PBTC for clearing, with
the following indorsement: "For clearance, clearing
office. All prior endorsements and/or lack of
endorsements guaranteed. Peoples Bank and Trust
Company."
-The check was duly cleared by HSBC, and PBTC
credited Changco with the amount of the check.
Changco began to withdraw from the account then
subsequently closed it.
-On Apr 12, 1965 it was returned to PLDT, and the
alteration in the name of the payee was discovered. On
that same date, PBTC was notified of the alteration, and
HSBC requested PBTC to refund to it the sum of
P14,608.05. PBTC refused.
-HSBC relies on the indorsement (above), arguing that
since such an indorsement carries with it a concomitant
guarantee of genuineness, PBTC is liable to HSBC for
alteration.
-PBTC relies on the "24 hour" regulation of the Central
Bank that requires after a clearing, that all cleared
AY 2008-09
items must be returned not later than 3:00 PM of the
following business day. Since HSBC advised PBTC 27
days after clearing, PBTC claims that it is now too late
to do so.
-CFI dismissed the complaint based on the fact that
HSBC allowed 27 days to elapse after clearing before
notifying PBTC as to such alteration, the applicable
Central Bank regulation providing for a 24-hour period.
ISSUE:
WON the Central Bank regulation should be applied,
and would thus preclude or allow recovery by HSBC
from PBTC
HELD:
YES, it should apply
-The “24-hour” clearing house rule issued by the
Central Bank was applied in Republic v. Equitable
Banking Corporation. The rule is embodied in sec 4(c)
of Circular No. 9 of the Central Bank and reads thus:
"Items which should be returned for any reason
whatsoever shall be returned directly to the bank,
institution or entity from which the item was received.
… All items cleared at 11:00 o'clock a.m. shall be
returned not later than 2:00 o'clock p.m. on the same
day and all items cleared at 3:00 o'clock p.m. shall be
returned not later than 8:30 a.m. of the following
business day, except for items cleared on Saturday
which may be returned not later than 8:30 of the
following day." The circular is clear and comprehensive;
the facts of the present case fall within it.
-Moreover, as mentioned in a case cited by HSBC, "It is
a settled rule that a person who presents for payment
checks such as are here involved guarantees the
genuineness of the check, and the drawee bank need
concern itself with nothing but the genuineness of the
signature, and the state of the account with it of the
drawee." If at all, then, whatever remedy HSBC has
would lie not against PBTC but as against the party
responsible for changing the name of the payee. Its
failure to call the attention of PBTC as to such alteration
until after the lapse of 27 days would, in the light of the
above Central Bank circular, negate whatever right it
might have had against defendant Bank.
Disposition Decision affirmed
NOTE: As per Campos, this case illustrates the fact that
the SC comes to the same conclusion, but on an etirely
different basis, as the minority view regarding the
effect of drawee’s payment or acceptance of altered
check.
REPUBLIC BANK V CA, First Nat’l City Bank
G.R. No. 42725; April 22, 1991
Prof. Rogelio V. Quevedo [Ch4-S]
~aida rose~
FACTS
SUBJECT: Demand for refund by FNCB from Republic
Bank due to clearing by the former of an altered check
DRAWER: San Miguel Corporation (SMC)
DRAWEE: First National City Bank (FNCB)
PAYEE: J. Roberto Delgado
-SMC drew a divided check worth P240 in favor of
Delgado, one of its stockholders.
-After the check had been delivered, the check was
altered by increasing the amount on its face from P240
to P9,240. This was done fraudulently and without the
authority of SMC as drawer. The check was indorsed
and deposited on March 14, 1996 by Delgado in his
account with Republic Bank.
-Republic accepted the check without ascertaining its
genuineness and regularity. It endorsed the check to
FNCB with a stamp on the back of the check, stating:
“all prior and/or lack of indorsement guaranteed.”
-March 15, 1966: FNCB, believing that the check was
genuine and relying on the guaranty and endorsement
of the petitioner bank, paid the amount on the face of
the check.
-April 19, 1966 -SMC notified FNCB of the material
alternation in the check about a month after FNCB had
paid Republic Bank. FNCB recredited P9,240 to SMC’s
account.
-May 19, 1966 – FNCB wrote Republic about the
alteration. But at that time, Delgado had already
withdrawn the said amount from his Republic Bank
account.
-FCNB demanded that Republic Bank refund the
amount of P9,240 on the basis of the latter’s
endorsement and guaranty. Republic refused, saying
that 1) there was delay in giving notice of the
alteration, 2) it was SMC’s fault in drawing the heck in
such a way as to allow the alteration and 3) that FNCB,
as drawee, was absolved of any liability to SMC thus
FNCB had no right to recourse against Republic Bank.
-The trial court ordered Republic Bank to pay P9,240 to
PNCB with interest. The CA affirmed the TC ruling.
ISSUE
WON Republic Bank, as clearing bank, is protected from
liability by the 24-hour clearing house rule (in CB
Circular 9)
HELD: YES
-When an endorsement is forged, the collecting bank or
last endorsor bears the loss. However the unqualified
endorsement of the collecting bank on the check
should be read together with the 24-hour regulation on
clearing house operation.
[ch4-T] Law 108: Negotiable Instruments First Semester
-When the drawee bank fails to return a forged or
altered heck to the collecting bank within the 24-hour
clearing period, the collecting bank is absolved from
liability.
Jurisprudential rulings on the matter:
-HSBC vs. People’s Bank: A check was drawn by PLDT
on HSBC payable to the same bank. It was mailed to
the payee but landed in the hands of Changco who
erased the payee’s name and replaced it with his own
name. He then deposited the check in People’s Bank
with the indorsement: “For clearance, clearing office.”
This was cleared by the drawee bank HSBC. Changco
withdrew the money and when the alteration was
discovered, HSBC sought to recover the amount from
People’s Bank. HSBC advised People’s Bank of the
alteration 27 days after clearing. The Court ruled that
the said indorsement must be read with the 24-hour
regulation.
-Metrobank vs. FNCB (Aha! Gaya nga ng sabi ni Sharon
Cuneta, “Di na natuto…”): A check for P50 was drawn
by Cunanan and Co. on its account at FNCB and
payable to Manila Polo Club was changed to P50,000. It
was deposited by Sales in his account in Metrobank.
The check was cleared by FNCB which paid P50,000 to
Metrobank. The alteration was discovered 9 days later
so FNCB sought to recover from Metrobank. The Court
upheld the validity of the 24-hour clearing house
regulation. The check was not returned to Metrobank
in accordance with the given period but was cleared by
FNCB. Failure of FNCB to call attention to the alteration
of the check negates whatever right it may have had
against Metrobank.
-Every bank that issues checks for the use of its
customers should know WON the drawer’s signature is
genuine. It should be able to detect alterations,
erasures and other intercalations on the check. It
should possess appropriate detecting devices.
-Unless the alteration is attributable to the fault or
negligence of the drawer, the remedy of the drawee
bank that negligently clears a forged/altered check for
payment is against the party responsible for the
forgery/alteration.
Disposition Petition for review granted.
C.L.T. CORPORATION V PANAC
(District CA, California; 1944)
149 P. (2d) 901 (1944); WARD, J.
~lora~
FACTS
-Plaintiff (CLT-holder) brought this action to recover
from the defendants (Panacs-maker) the amount of 2
promissory notes, negotiable in form, executed in favor
AY 2008-09
of Home Improvement Company (payee) in payment of
certain repairs and renovations to be performed by the
payee upon two dwelling houses owned by the
defendants.
-The notes were indorsed by the payee to the plaintiff
which claims to be holder in due course.
-Defendants denied that the plaintiff was such a holder
and as a separate defense, pleaded fraud on the part of
the payee in the procurement of the notes by its agent
-William Hart. The defendants were alleged to be
illiterate.
-Hart was introduced to the defendants by a friend of
theirs, Krajer, for whom Home Improvement Company
had done repair work similar to that proposed to be
done by defendants.
-Hart prepared a document which purported to embody
the understanding arrived at on the work to be
performed and the cost. He asked defendants to sign it.
Both demurred, Mrs. Panac stating that she did not
read it and wished to see an attorney. Hart assured her
that it was not necessary, that the contract has to be
signed at once to get the work started. In doing so, he
read the items of work entered in his note book, stating
that they were in agreement and urged again the
defendants to sign. They still objected but their
scruples were overcome by Hart’s assurance that all
the work shall be done to their satisfaction and that it
was necessary to start at once. Martin thereupon
affixed his signature to the contract.
-Hart then presented to them another paper, divided
into 3 parts by perforated lines, one part being an
application for credit, the second a form of promissory
note and the third a declaration that the work for which
the credit was required had been satisfactorily
completed. The defendants placed their signatures at
the point indicated by Hart upon his assurance that it
was part of the contract for the work to be done and
without having Hart read it to them. The second note
was executed under the same circumstances.
-There were present during the proceedings 2 other
persons beside Krajer but neither the defendants
requested any of them to read aloud the document or
to explain the contents thereof.
-The defendants testified that they understood from
Hart that the work was to be paid for in monthly
installments, but had not contemplated giving notes.
-The work was never completed notwithstanding
vigorous efforts made by the plaintiff and the
defendants to induce Home Improvement Company to
do so, with the consequence that when the first
installment became due on the notes the defendants
refused to pay.
-The trial court found that CLT is a holder in due course
however, it also held that fraud was perpetuated
Prof. Rogelio V. Quevedo [Ch4-T]
against the defendants hence, plaintiff takes nothing by
its action.
-Plaintiffs appealed from the judgment.
ISSUES
1. WON plaintiff is a holder in due course.
2. WON defendants are free from negligence.
3. WON the defendants can plead the defense of fraud
against the plaintiff.
HELD
1. YES. Defendants do not contend that the plaintiff is
not a holder in due course. No evidence was introduced
that C.L.T. had actual knowledge of a defect in the
instruments or any fact that would justify a finding that
the plaintiff’s acceptance of the instruments amounted
to bad faith on their part.
2. YES. The trial court determined that, notwithstanding
the possession of some knowledge of the English
language on the part of the defendants, their neglect to
call upon others present to read to them the
documents, and their failure to insist on their request
for time to seek independent legal advice, they are free
from negligence. A reading of the record alone might
well disapprove this finding, but, bearing in mind that
the trial court had an opportunity to view the witnesses,
note their demeanor, the Court refrained from stating
as a matter of law that there is insufficient evidence to
uphold it.
3. NO. Brannan’s Negotiable Instrument: At common
law a real defense was held in most jurisdictions to
exist in those cases in which a person, without
negligence, has signed an instrument, which was, in
fact a negotiable instrument, but was deceived as to
the character of the instrument and without knowledge
of it. In such cases, there is no contract because there
was no consenting mind, but the signer may be
estopped by negligence to deny knowledge of the
character of the instrument which he has signed. If he
was not negligent he is not liable.
-In Wisconsin, Minnesota and Illinois, the NIL or other
legislation expressly makes fraud in the factum a real
defense. The Uniform Act does not cover the question
in so many words. It is possible however, that such
conduct is fraud within Sec. 55 and hence causes
merely a defective title, or that it is one of the defenses
under Sec. 57. It might also be assimilated to want of
delivery, which was made an equitable defense by Sec.
16. Either possibility would change the common law
and protect the holder in due course.
-In further support of this position it should be noted
that the other real defenses are covered by the act and
broad interpretation of Sec. 55, especially the last
clause “under such circumstances as amount to fraud”
[ch4-U] Law 108: Negotiable Instruments First Semester
certainly includes all kinds of fraud in factum. Since this
is so it is hard to believe that the framers overlooked
this particular defense. The equities are all in favor of
such interpretation, since the defrauded party really
caused the situation and should be the one to suffer.
-Under the old common law view fraud in Sec. 55 would
be limited to fraud in the inducement and defenses in
Sec, 57 restricted to defenses which were equitable at
common law, while fraud in the factum would continue
to be a real defense analogous to forgery under Sec.
23. Such is the result of a number of cases which have
arisen since the NIL, most of which do not cite the act,
but there is a strong line of well reasoned cases contra.
-Freedom from negligence on the part of the makers
has never been regarded in California in following the
common law rule, or made by statute a defense, real or
personal, against a claim of a holder of a negotiable
instrument in due course. If the legislature had
intended such defense it would undoubtedly have so
provided in no uncertain terms, as the courts of this
state have not, at any time, recognized such a defense.
-It follows that the defendants were not in position to
set up as a defense in this case any equities existing
between them and the Home Improvement Company
even if, as found by the court, they were free from
negligence in executing notes.
Disposition Judgment Reversed.
PETERS (Dissenting)
-The type of fraud here involved has been referred to
as fraud in esse contractus, fraud in the factum, fraud
in the inception or fraud in execution, to distinguish it
from fraud in the inducement which is a mere personal
defense. At common law the cases were practically
unanimous that fraud in the execution was a real
defense.
-The overwhelming weight of authority is to the effect
that the adoption of the NIL in now way changed the
common law rule, and that both before and after the
adoption of that uniform statute, fraud in the execution
was and remained, a real defense.
-The applicable rules under the NIL is stated as:
“Although there are some decisions to the contrary, the
weight of authority holds that if a person intending to
sign an instrument of an entirely different character
places his signature to a negotiable instrument not
being due to laches or negligence on the part of the
signor, the latter is not liable on the instrument,
although it has passed into the hands of a bona fide
holder for value.”
-Mr. Brannan quoted in the majority opinion approves
the minority rule.
-The many courts and legal writers have not approved
the rule that fraud in execution, where the maker is not
AY 2008-09
negligent, is a real defense, by blindly following the
common law rule. Cogent and compelling reasons exist
for this approval.
-It must be remembered that NIL is not an entirely new
statute, nor did it purport to repeal the entire law of
contracts. It purported to codify the law of merchant
and where there was a conflict to adopt what was
considered to be the better rule. Where the NIL has no
excess provision, or where its meaning is ambiguous,
cases decided under the law merchant and
fundamental rules of contract should be looked to in
arriving at a proper interpretation.
-So far as the present problem is concerned, the NIL
has no express provision covering the subject. There
are provisions, however which tend to show that the
drafter of the act intended fraud in the execution to be
real defense.
-Sec. 57 of NIL, Sec. 3138 of the Civil Coe, provides that
the holder in dues course “free from any defect of title
of prior parties, and free from defenses available prior
parties among themselves.” When a party, without
negligence, signs a document by reason of fraud of
another and honestly and reasonably believes it to be
something else other than a negotiable instrument, the
document, when executed is not merely voidable – it is
void.” Fraud of this type is not a mere defense nor a
mere defect of title such as referred to in Sec. 57. It is a
factor which renders the instrument non-existent as a
binding obligation.
Disposition Judgment Affirmed
C.I.T. CORPORATION V PANAC
Supreme Court of California
25 Cal. (2d) 547, 154 P. (2d) 710, 160 ALR 1285 (1944)
~marge~
FACTS (as found by the District Court of Appeals)
SUBJECT: 2 promissory notes in payment of certain
repairs and renovations to be performed by payee upon
two dwelling houses owned by makers
MAKERS: Sps. Panac, illiterate, unable to read or write
the English language
PAYEE: Home Improvement Company
INDORSEE: C.I.T. Corp, a holder for value in due course
-Makers were defrauded by payee in the procurement
of the notes. William Hart, agent of the payee, gained
their trust and confidence and secured their signatures
to the notes by false representations w/c induced them
to believe that they were signing a contract to repair
the houses and nothing else. They were ignorant of the
fact that they were signing notes, and were not
negligent in signing the same.
ISSUE
Prof. Rogelio V. Quevedo [Ch4-U]
WON the defense put up by the makers is a real
defense, good even against indorsee as a holder in due
course
HELD: YES
-A negotiable instrument which is void (as when there
is in fact no contract or there is fraud in the execution)
is not enforceable by a holder in due course in the
absence of negligence on the part of the maker.
-A person who cannot read is not always negligent in
not calling on a third person to read the instrument to
him. The question as to his negligence is one for the
jury (that is, the courts) to decide.
Circumstances showing that makers were not
negligent:
-Sps. Panac were illiterate
-Hart employed high pressure method
-Only contract for repair was read, not the notes
-Hart insisted an immediate execution
-Hart brushed aside Mrs. Panac’s suggestion that legal
advice be obtained
-Witnesses to the signing were all friends of Hart. Even
Krajer, whom makers personally knew couldn’t have
objected to such fraud since he was promised
commission. In fact, it was his apparent acquiescence
in the transaction that served to silent any
apprehensions of the makers.
COHN V CITY OF TAUNTON
303 Mass. 182, 21 N.E. (2d) 281 (1939)
~anton~
FACTS
-Action by Cohn et al., innocent purchasers for value
without notice, to prosecute to recover the face amount
of overdue coupons on certain bonds of the defendant
city payable to bearer which have been stolen from the
vault of the city treasurer.
-After the bearer bonds had been “delivered to the City
Treasurer as agent” in order to have them registered,
the Treasurer had completed the issue of fully
registered bonds of like amount, but had not
destroyed or cancelled the bearer bonds nor
placed any notation upon them and had kept
them in his vault.
-Cohn and company held them, but the City Treasurer
refused to pay on the ground that the amount covered
by the bonds had been paid already.
ISSUE
WON Cohn et al. were holders in due course, and thus
entitled to the amount
[ch4-V] Law 108: Negotiable Instruments First Semester
HELD: YES
Ratio An instrument that has once been issued,
returned, discharged, and stolen would seem to stand
no differently in the hands of a holder in due course
than an instrument that has been prepared, signed and
stolen before being issued.
Reasoning The validity of municipal obligations is not
affected, in the hands of innocent holders for value, by
facts which concern merely the manner of their passing
from their maker into currency, and which do not
concern the mode of, or the authority for their creation.
-It would be unfortunate in many respects if bonds of
municipalities passing by delivery in the market should
be treated differently in this regard from the negotiable
paper of other corporations and individuals.
-It is true that the incurring of liability by municipalities
is often strictly regulated by statue, and we need not
now go far as to say that such statutes could never
affect the position of an innocent holder.
-The case cited by the defendant was decided before
the negotiable instruments law and at a time when the
authorities were divided as to the necessity of an
authorized delivery of a negotiable instrument.
Disposition Judgment for the plaintiffs in the sum of
$100 and interest from the date of the writ.
SMITH V DOTTERWEICH
200 NY 299, 93 NE 985, 33 LRA (NS) 892; 1911
~jonas~
FACTS
-Dotterweich (MAKER-defendant) executed and
delivered to Smith (PAYEE-plaintiff) a promissory note
for $3,740 payable in 6 months. When the note became
due, it was renewed by 4 notes payable 6 months from
that date. The renewal notes were not paid at maturity,
& Smith brought action for payment.
-Smith introduced evidence to show that the original
note was given in payment of premiums on 2 life
insurance policies to the defendant by the John
Hancock Life Insurance Company through Smith, as its
general agent. Dotterweich denied that the notes were
given for value received and that Smith was the lawful
holder & owner thereof, alleging an oral agreement
under which neither the notes nor the insurance
policies were to become valid & enforceable obligations
unless Smith secured for Dotterweich a certain loan of
money.
-The trial court granted Smith’s motion to direct a
verdict, to which Dotterweich excepted and moved to
submit to the jury the question whether there was a
condition that the original note & the insurance policies
should be returned in case Smith did not procure a loan
AY 2008-09
of $70,000 for Dotterweich within a year. The motion
was denied, and Dotterweich took an exception.
ISSUE
WON the defendant’s testimony creates a question of
fact for a jury
HELD: YES
Ratio If the agreement created a condition precedent
(suspensive condition), without the performance of
which the notes never became valid obligations, then
there is a question of fact. If the agreement created a
condition subsequent (resolutory condition), the issue is
one of law for the decision of the trial judge. (basically –
i think – the issue is whether the oral agreement meant
that the notes were never valid, in which case there
was never any delivery, or that the notes later became
invalid because of the failure of the condition, in which
case there was delivery)
Reasoning The oral agreement between the parties
testified to by Dotterweich was that the note would be
held in Smith’s safe until the loan was procured,
otherwise the note would be returned & the insurance
policy would be null & void. The loan was never made,
therefore there is a failure of the condition which
determines the existence of any contract between the
parties. In the case of Jamestown Business College
Ass’n v Allen, upon which Smith relies to support his
contentions, the promissory note was rendered
effective by an unconditional delivery. The agreement
of the payee to release the maker and cancel the note
upon the happening of a future contingency was a
condition subsequent which brought the case within the
general rule that a contract reduced to writing, and
complete in its terms, cannot be contradicted by oral
testimony. The oral testimony therein was in direct
contradiction of the written contract, as to the
existence or validity of which there was no controversy,
while in the case at bar the oral testimony tends to
show that the writing purporting to be a contract is no
contract at all.
On the effect of oral testimony on contracts
which are wholly or partly reduced to writing –
When the oral testimony goes to the question whether
there is a written contract or not, it is always
competent; but when the effect of the oral testimony is
to establish the existence of the written contract which
it is designed to contradict or change, then the spoken
word must yield to the written compact.
On the rule in Benton v Martin, 52 NY 570 –
Instruments not under seal may be delivered upon
conditions the observance of which is essential to their
validity. The annexing of such conditions to the
delivery is not an oral contradiction of the written
Prof. Rogelio V. Quevedo [Ch4-V]
obligation as between the parties to it or others having
notice.
Disposition Judgment excepted from is reversed and a
new trial ordered.
PAVILIS V FARMERS UNION LIVESTOCK
COMMISSION
68 S.D. 96, 298, N.W. 732.
~monch~
FACTS
-Plaintiff Pavilis filed the action to recover upon an
instrument alleged to be a check transferred to plaintiff
for value by one C. Hoard who was named as payee
therein. Defendant Farmers Union Livestock
Commission argues that: (a) plaintiff was not HIDC, and
(b) the instrument signed in blank by defendant and
having been stolen from his possession prior to delivery
had no legal inception or existence as a check. Lower
court ruled in favor of plaintiff. Defendant appealed.
-It was practice of defendant’s office manager, who was
authorized to sign checks, to sign a block of
instruments, printed to be used as check at the
beginning of the business day and deliver the same to
the bookkeeper whose regularly duty was to complete
the instruments as checks and deliver the same to
customers during the business day. It was also the
practice of such office manager to procure the return of
such signed instruments not delivered at the close of
business day for the purpose of safekeeping and for the
purpose of checking or auditing the same.
-Around February 1939, one C. Hoard was employed by
defendant as a bookkeeper and clerk. Hoard was
expressly authorized by defendant in the presence of
such other bookkeeper to complete and deliver checks
only during business hours and only for amounts due
them as shown by such account of sales. Hoard was not
entrusted with a key to the defendant’s office although
he did have access to a key kept in a desk in the office
in order to unlock the padlock on the inside of the gate
across the counter between defendant’s office and the
hall. On or about Feb 24, 1939, after the close of the
defendant’s office, Hoard gained access thereto by
unlocking the gate across the counter and climbed over
the counter into defendant’s office and then opened
the safe in defendant’s office by using the combination
which he knew, and w/o defendant’s knowledge, took
certain instruments printed for use as checks, blank as
to amount, date and payee, which had been signed by
defendant’s office manager authorized to sign checks,
and, in one of which instruments Hoard w/o defendant’s
knowledge or express consent, inserted the date,
amount and payee. Then Hoard placed his name upon
[ch4-W] Law 108: Negotiable Instruments First Semester
the back of the instrument and delivered the same to
plaintiff for value of $102.85.
ISSUE
WON the lost check was completed and therefore
giving plaintiff Pavilis title to the instrument
HELD: NO
-The check in controversy was an incomplete
instrument when stolen and cannot be enforced in the
absence of conduct on the part of the drawer creating
estoppel.
-It is urged that defendant is chargeable with
negligence and is estopped to deny liability. The cases
cited are those in which the party sought to be charged
upon a negotiable instrument has entrusted an
instrument signed in blank to an agent or some other
person who has wrongfully completed and negotiated
the instrument; an agency or trust was created by
means of which the fraud was committed and the fact
that there was no authority for completing the
instrument was otherwise wrongfully dealt with was no
defense.
-In Linick v AJ Nutting Co: blank check signed by
plaintiff was stolen by Rycoff and Silbermann, who filled
the amount and a fictitious name as payee and
presented it to drawee bank. They endorsed the name
of the payee and transferred the check to defendant for
value who collected the amount of the check from the
bank. Court held that the check was an incomplete
instrument and that negligent custody of the check was
not borne out by the facts.
-Court concludes: If as a result of negligence such
instrument comes into the hands of a holder in due
course, the latter may recover, yet we cannot say
under the facts and circumstances of the instant case
that defendant was negligent. The loss did not result
from completion and negotiation of the check by one
entrusted with its possession, and we are not
concerned with a breach of duty as between a
depositor and drawee. It does not appear that
defendant company had reason to mistrust its
employee and to anticipate the wrongful taking by him
of a check signed in blank, the subsequent completion
and negotiation.
-The drawer owes the duty to use due care in the
execution of checks, but it does not follow as a legal
conclusion that signers of checks in blank assume the
risk of liability in all cases where such instruments are
wrongfully taken, completed and negotiated. To hold
that a person is negligent in having in his possession a
check signed in blank would require something more
than the exercise of ordinary care
Disposition Judgment of lower court is reversed.
AY 2008-09
WEINER V PENNSYLVANIA CO. FOR INSURANCE
ON LIVES AND GRANTING ANNUITIES
160 Pa. Super. 320, 51 A. 2d 385 (1947)
~ice~
FACTS
SUBJECT: Bil of Exchange-Check
MAKERS: Weiner
PAYEE: Blank
Weiner signed her name to a blank check. The check
was stolen. The thief placed the amount $250, the
date, and a fictitious name as the payee. The bank paid
the check to the fictitious payee who properly indorsed
it.
Weiner sued the bank to recover the amount taken
saying that the bank was negligent as it failed to
identify the person paid.
ISSUE
WON the bank is liable
HELD
No. The depositor is.
-Weiner signed the check in blank thus putting it in the
power of an unauthorized person to fill it in and present
it for payment. The depositor’s act made the loss
possible and caused it, and enabled the thief to commit
the fraud. Weiner’s act was a bar and an estoppel. To
hold otherwise would require the bank to communicate
with the drawer as each check was presented, in order
to find out if the delivery was intended. This is too
much to be expected; and to place the burden of loss
or its chance to the depository if it does not interview
the maker, is neither fair nor compatible with public
interest. Such would affect the very nature of checks
which is convenience.
Disposition: Affirmed.
LINICK V A.J. NUTTING & CO.
New York SC; 125 N.Y.S. 93, 140 App. Div. 265 (1910)
~rean~
FACTS
Plaintiff Linick signed his name to a blank check.
Thereafter Rycoff and Silberman stole the check, filled
in the name of FA Mann as payee and $147.87 as the
amount thereof, and presented it to the State Bank,
where plaintiff kept his account, and procured it to be
certified. Thereafter they indorsed said check with the
name of FA Mann and passed it to defendant A.J Nutting
and Co. for value, who collected the amount from said
bank. Plaintiff, having taken up said check from the
Prof. Rogelio V. Quevedo [Ch4-W]
bank, now sues defendant as for money had and
received for the amount of the check.
ISSUE
WON defendant obtained any title to the check which
as against the plaintiff, was a valid obligation for
$147.87.
HELD: NO
-In the case of a commercial paper, when by voluntary
act a party instructs another with such paper with a
blank thereon designed to be filled up with a stipulated
amount, such party is liable to a bona fide holder, of
the instrument. As to the basis of (plaintiff’s) liability,
some say that it rests upon an implied authority
conferred by the maker upon the person to whom it
was delivered to fill in the blanks, and others upon
estoppel by reason of negligence.
-Not upon implied authority: for such doctrine grows
out of principal-agent relationship, and there’s no such
relation between a thief and his victims. The rule that
the bona fide holder of an incomplete instrument,
negotiable but for some lack capable of being supplied,
has implied authority to supply the omission, and to
hold the maker thereon, only applies when the latter
has by his own act, or the act of another, authorized,
confided in or invested with apparent authority by him,
put the instrument in circulation as a negotiable paper.
-Not upon negligence: since the paper was stolen and
the persons guilty of the crime have been convicted.
Plaintiff then cannot be charged with negligence giving
rise to an estoppel, unless a man is guilty of negligence
in writing his name upon a piece of paper which by
some possibility may afterwards be stolen from him,
which paper comes into the hands of a third person
who is an entire stranger to the transaction, with words
written over the signature which are sufficient in form
to make it a check or note. Actionable negligence
involves, first, the existence of a duty; second, the
omission to exercise ordinary and reasonable care in
connection therewith; and third, injury resulting in
consequence thereof.
-Sec. 34 (NIL 15) states: Where an incomplete
instrument has not been delivered, it will not, if
completed and negotiated, without authority, be a valid
contract in the hands of any holder, as against any
person whose signature was placed thereon before
delivery.
-The next section in the same act to the effect that
“where the instrument is in the hands of a holder in due
course, a valid delivery thereof by all parties prior to
him so as to make them liable to him is conclusively
presumed” must be read with Sec 34 (NIL 15), and this
[ch4-X] Law 108: Negotiable Instruments First Semester
provision does not apply in the case of an incomplete
instrument completed and negotiated w/o authority.
-Court concludes: The delivery of a PN by a maker is
necessary to a valid inception of a contract. The
possession of such a note by the payee or indorsee is
prima facie evidence of delivery. But if it appears that
the note has never been actually delivered, and that
without any confidence, or negligence, or fault of the
maker, but by force and fraud, it was put in circulation,
there can be no recovery upon it, even when in the
hands of an innocent holder. So, defendant did not
obtain any title to the check, and cannot recover upon
it.
Disposition Judgment appealed from must be
reversed, and a new trial ordered.
SIMPSON V NAT’L BANK OF ROSEBURG
94 Ore. 147, 185 Pac. 913 (1919)
~yella~
FACTS
SUBJECT: Promisory note
MAKER: Mrs. M. Josephson
PAYEE: (intended to be the banki)
INDORSEE: National Bank of Roseburg
POSSESSOR: Grace Simpson
-When the note was executed the name of the payee
was left blank, and was still in that condition when the
plaintiff received it.
-The plaintiff tells about writing the name of the in
blank and avers that the plaintiff is entitled to the
indorsement of the defendant herein upon said note
and was at all times so entitled to the same
ISSUE
WON plaintiff has a right against the defendant and the
maker of the note
HELD: (case was remanded, court merely
discussed rules of the law of merchant if
instrument is incomplete)
-When the maker of the note left a blank for the name
of a payee and delivered the instrument in that
condition to another person for value then that person
to whom the note was delivered or any subsequent
holder could insert his own name, or that of a
transferee, as payee.
-The plaintiff could not have sued and recovered upon
an incomplete instrument.
-Grace Simpson could, in the absence of knowledge of
special instructions given by the maker, have filled the
blank by writing her own name as payee. However, in
AY 2008-09
this case, evidence show that the maker’s intention
was that the name of the bank was to be filled in the
blank as payee.
-A person upon whom authority is conferred to
complete the instrument, is not referred to as the
holder but as the one in possession. He is only given
prima facie authority to fill a blank, and that the person
filling the blank must do so strictly in accordance with
the authority given.
Disposition Cause is remanded to allow plaintiff
opportunity to amend her complaint and thus enter a
court of equity.
DOUGHERTY V SALT
227 N.Y. 200, 125 N.E. 94 (1919)
~javi~
FACTS:
-Action by Charles Doughtery, an infant, instituted by
Susan Teves, his guardian against Emma Salt an
executrix of the last will and testament of Helena
Doughtery (aunt of Charles)
-plaintiff received from his aunt a promissory note for
$3,000 payable at her death or before. Use was made
of a pronted form which contains the words “value
received”
-Salt explained how the note came to be: boy’s aunt
visited one day and commented how she loved the boy
so much to which Salt commented that her love was all
talk. Aunt replied by saying that she would take care of
the boy right at that instant. She asked the guardian to
make a note for her which she signed. In the note were
the words “You have always done for me, and I have
signed this note for you. Now, do not lose it. Some day
it will be valuable.” (‘You have always done for me…
and I have signed this note for you’….Sabi ko na nga ba
Pinoy si Susan Teves eh)
ISSUE: WON there was any consideration for the
promised payment
HELD: no
-TC geld that there was no consideration. Appelate
Division however reversed.
-SC reverses appellate court’s decision
-SC geld that the note was the VOLUNTARY AND
UNINFORCEABLE promise of an executory gift. (no
explanation why)
-the eight year old child was not a debtor, nor dealt
with as one. The aunt was conferring a bounty. The
promise was neither offered nor accepted with any
other purpose
-the plaintiff, through his own witness, the guardian
who explained how the note came to be, has explained
Prof. Rogelio V. Quevedo [Ch4-X]
the genesis of the promise. There is no showing that
consideration was given
WILLIAM BARCO & SON V FORBES (1927)
[place citation here]
~brian b~
FACTS
-Plaintiffs brought suit upon a note for $227.25 against
defendant who issued it for the purchase of fertilizer
from plaintiff.
-The note, dated Jan 10, 1923, was given in renewal of
a former note dated July 1, 1922.
-Defendant contended that the fertilizer was bought for
use in producing a sweet potato crop in 1922, and that
the fertilizer was worthless and had no effect whatever
upon the crop.
-This fact notwithstanding, TC ruled in favor of
plaintiffs.
ISSUE
WON defendant is liable
HELD: YES.
Ratio One who gives a note in renewal of another note,
with knowledge at the time of partial failure of the
consideration for the original note, or of false
representations by the payee, waives such defense and
cannot set it up to defeat or to reduce the discovery on
the renewal note. (Bank v Howard)
Reasoning The time for harvest was in July or August
1922 and the potatoes were dug at that time. It is
obvious, therefore, that the defendant knew then that
the fertilizer was worthless and that there was a total
failure of consideration. Nevertheless, he executed the
renewal note.
Disposition Judgment affirmed.