JAI-ALAI CORPORATION OF THE PHILIPPINES, Petitioner, v.

BANK OF THE PHILIPPINE

G.R. No. L-29432

CASTRO, J.:

This is a petition by the Jai-Alai Corporation of the Philippines (hereinafter referred to as

From April 2, 1959 to May 18, 1959, ten checks with a total face value of P8,030.58 were
deposited by the petitioner in its current account with the respondent bank. The
particulars of these checks are as follows:

1. Drawn by the Delta Engineering Service upon the Pacific Banking Corporation and
payable to the Inter-Island Gas Service Inc. or order:

Date Check Exhibit

Deposited Number Amount Number

4/2/59 B-352680 P500.00 18

4/20/59 A-156907 372.32 19

4/24/59 A-156924 397.82 20

5/4/59 B-364764 250.00 23

5/6/59 B-364775 250.00 24

2. Drawn by the Enrique Cortiz & Co. upon the Pacific Banking Corporation and payable to
the Inter-Island Gas Service, Inc. or bearer:

4/13/59 B-335063 P 2108.70 21

4/27/59 B-335072 P2210.94 22

3. Drawn by the Luzon Tinsmith & Company upon the China Banking Corporation and
payable to the Inter-Island Gas Service, Inc. or bearer:

5/18/59 VN430188 P940.80 25

5/14/59 1860160 P 500.00 26

5/18/59 1860660 P 500.00 27

All the foregoing checks, which were acquired by the petitioner from one Antonio J.
Ramirez, a sales agent of the Inter-Island Gas and a regular bettor at jai-alai games, were,
upon deposit, temporarily credited to the petitioner's account in accordance with the
clause printed on the deposit slips issued by the respondent and which reads:

"Any credit allowed the depositor on the books of the Bank for checks or drafts hereby
received for deposit, 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."

About the latter part of July 1959, after Ramirez had resigned from the Inter-Island Gas and
after the checks had been submitted to inter-bank clearing, the Inter-Island Gas discovered
that all the indorsements made on the checks purportedly by its cashiers, Santiago
Amplayo and Vicenta Mucor (who were merely authorized to deposit checks issued
payable to the said company) as well as the rubber stamp impression thereon reading
"Inter-Island Gas Service, Inc.," were forgeries. In due time, the Inter-Island Gas advised the
petitioner, the respondent, the drawers and the drawee-banks of the said checks about the
forgeries, and filed a criminal complaint against Ramirez with the Office of the City Fiscal of
Manila. 1

The respondent's cashier, Ramon Sarthou, upon receipt of the latter of Inter-Island Gas
dated August 31, 1959, called up the petitioner's cashier, Manuel Garcia, and advised the
latter that in view of the circumstances he would debit the value of the checks against the
petitioner's account as soon as they were returned by the respective drawee-banks.

Meanwhile, the drawers of the checks, having been notified of the forgeries, demanded
reimbursement to their respective accounts from the drawee-banks, which in turn
demanded from the respondent, as collecting bank, the return of the amounts they had paid
on account thereof. When the drawee-banks returned the checks to the respondent, the
latter paid their value which the former in turn paid to the Inter-Island Gas. The
respondent, for its part, debited the petitioner's current account and forwarded to the
latter the checks containing the forged indorsements, which the petitioner, however,
refused to accept.

On October 8, 1959 the petitioner drew against its current account with the respondent a
check for P135,000 payable to the order of the Mariano Olondriz y Cia. in payment of
certain shares of stock. The check was, however, dishonored by the respondent as its
records showed that as of October 8, 1959 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.

The petitioner then filed a complaint against the respondent with the Court of First
Instance of Manila, which was however dismissed by the trial court after due trial, and as
well by the Court of Appeals, on appeal.

Hence, the present recourse.

The issues posed by the petitioner in the instant petition may be briefly stated as follows:

(a) Whether the respondent had the right to debit the petitioner's current account in the
amount corresponding to the total value of the checks in question after more than three
months had elapsed from the date their value was credited to the petitioner's account:(b)
Whether the respondent is estopped from claiming that the amount of P8,030.58,
representing the total value of the checks with the forged indorsements, had not been
properly credited to the petitioner's account, since the same had already been paid by the
drawee-banks and received in due course by the respondent; and(c) On the assumption
that the respondent had improperly debited the petitioner's current account, whether the
latter is entitled to damages.

These three issues interlock and will be resolved jointly.

In our opinion, 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, that is, 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 2 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. It is our view nonetheless that no creditor-debtor relationship was created between
the parties.

Section 23 of the Negotiable Instruments Law (Act 2031) states that 3 —

"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."

Since under the foregoing provision, a forged signature in a negotiable instrument is wholly
inoperative and no right to discharge it or enforce its payment can be acquired through or
under the forged signature except against a party who cannot invoke the forgery, it stands
to reason, upon the facts of record, that the respondent, 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 prior to their delivery to the petitioner. In
legal contemplation, therefore, the payments made by the drawee-banks to the respondent
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. 4

In Great Eastern Life Ins. Co. vs. Hongkong & Shanghai Bank, 5 the Court ruled that it is the
obligation of the collecting bank to reimburse the drawee-bank the value of the checks
subsequently found to contain the forged indorsement of the payee. The reason is that the
bank with which the check was deposited has no right to pay the sum stated therein to the
forger "or anyone else upon a forged signature." "It was its duty to know," said the Court,
"that [the payee's] endorsement was genuine before cashing the check." The petitioner
must in turn shoulder the loss of the amounts which the respondent; as its collecting agent,
had to reimburse to the drawee-banks.

We do not consider material for the purposes of the case at bar that more than three
months had elapsed since the proceeds of the checks in question were collected by the
respondent. The record shows that the respondent had acted promptly after being
informed that the indorsements on the checks were forged. Moreover, having received the
checks merely for collection and deposit, the respondent cannot he expected to know or
ascertain the genuineness of all prior indorsements on the said checks. Indeed, having itself
indorsed them to the respondent in accordance with the rules and practices of commercial
banks, of which the Court takes due cognizance, the petitioner 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.".

The petitioner was, moreover, grossly recreant in accepting the checks in question from
Ramirez. It could not have escaped the attention of the petitioner 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. In Insular Drug Co. vs. National 6 the Court made the pronouncement that.

". . . The right of an agent to indorse commercial paper is a very responsible power and will
not be lightly inferred. A salesman with authority to collect money belonging to his
principal does not have the implied authority to indorse checks received in payment. Any
person taking checks made payable to a corporation, which can act only by agents, does so
at his peril, and must abide by the consequences if the agent who indorses the same is
without authority." (underscoring supplied)

It must be noted further that three of the checks in question are crossed checks, namely,
exhs. 21, 25 and 27, which may only be deposited, but not encashed; yet, the petitioner
negligently accepted them for cash. That two of the crossed checks, namely, exhs. 21 and
25, are bearer instruments would not, in our view, exculpate the petitioner from liability
with respect to them. The fact that they are bearer checks and at the same time crossed
checks should have aroused the petitioner's suspicion as to the title of Ramirez over them
and his authority to cash them (apparently to purchase jai-alai tickets from the petitioner),
it appearing on their face that a corporate entity — the Inter Island Gas Service, Inc. — was
the payee thereof and Ramirez delivered the said checks to the petitioner ostensibly on the
strength of the payee's cashiers' indorsements.

At all events, 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. This conclusion applied similarly to exh. 22 which is an uncrossed bearer
instrument, for under Section 65 of the Negotiable Instrument Law. "Every person
negotiating an instrument by delivery . . . warrants (a) That the instrument is genuine and
in all respects what it purports to be." Under that same section this warranty "extends in
favor of no holder other than the immediate transferee," which, in the case at bar, would be
the respondent.

The provision in the deposit slip issued by the respondent which stipulates that it "reserves
to itself the right to charge back the item to the account of its depositor," at any time before
"current funds or solvent credits shall have been actually received by the Bank," would not
materially affect the conclusion we have reached. That stipulation prescribes that there
must be an actual receipt by the bank of current funds or solvent credits; but as we have
earlier indicated the transfer by the drawee-banks of funds to the respondent on account of
the checks in question was ineffectual because made under the mistaken and valid
assumption that the indorsements of the payee thereon were genuine. 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.

ACCORDINGLY, the judgment of the Court of Appeals is affirmed, at petitioner's cost.

Makasiar, Esguerra, Muñoz Palma and Martin, JJ., concur.

Teehankee, J., is on leave