Negotiable Instruments Case Digest: PNB v. National City Bank New York (1936)

G.R. No. L-43596  October 31, 1936

Lessons Applicable: Forgery (Negotiable Instruments)

FACTS:

• April 7 & 9, 1933: unknown person or persons purchased tires and paid Motor Service Company, Inc.(MSCI) checks purporting to have been issued by the "Pangasinan Transportation Co., Inc. (Pantranco) by J. L. Klar, Manager and Treasurer" against PNB and in favor of International Auto Repair Shop. 
• MSCI indorsed for deposit at the National City Bank of New York and MSCI was accordingly credited with the amounts thereof, or P144.50 and P215.75
• April 8 & 10, 1933: Checks were cleared and PNB credited the National City Bank 
• PNB found out that the signatures of J. L. Klar, Manager and Treasurer were forged and demanded from MSCI and National City Bank New York
• PNB filed the case in the municipal court of Manila against National City Bank and MSCI.
• Pantranco objected to have the proceeds of said check deducted from their deposit.
• RTC: Favored PNB
• MSCI appealed

ISSUES: 

1. W/N acceptance = payment
2. W/N law or business practice prevents the presentation of checks for acceptance before they are paid.
3. W/N MSCI was negligent and therefore PNB should recover
4. W/N the drawee bank should be allowed recovery, as MSCI's position would not become worse than if the drawee had refused the payment of these checks upon their presentation.

HELD: Affirmed

1. NO.

• A check is a bill of exchange payable on demand and only the rules governing bills of exchange payable on demand are applicable to it, according to section 185 of the Negotiable Instruments Law
• Acceptance is a step unnecessary for bills of exchange payable on demand (sec. 143)
• Acceptance implies, subsequent negotiation of the instrument
• From the moment a check is paid it is withdrawn from circulation. 
• That the payment of a check does not include or imply its acceptance in the sense that this word is used in section 62 of the Negotiable Instruments Law
• Payment (in checks) - final act which extinguishes a bill. 
• Acceptance (in certified checks) - a promise to pay in the future and continues the life of the bill.

     2. NO

•  section 187, which provides that "where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance", and it is then that the warranty under section 62 exists
• That if a drawee bank pays a forged check which was previously accepted or certified by the said bank it cannot recover from a holder who did not participate in the forgery and did not have actual notice thereof

     3. YES.

• Circumstances:
• check number 637023-D was dated April 6, 1933, whereas check number 637020-D and is dated April 7, 1933. (later check had prior number)
• accepted the 2 checks from unknown persons
• check 637023-D was indorsed by a subagent of the agent of the payee, International Auto Repair Shop and cross generally
• Section 23 of the Negotiable Instruments Act provides that "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.
• PNB did not warrant to MCSI the genuineness of the checks in question, by its acceptance thereof, nor did it perform any act which would have induced MSCI to believe in the genuineness
• PNB is NOT precluded from setting up the forgery

     4. NO.

• A drawee of a check, who is deceived by a forgery of the drawer's signature may recover the payment back, unless his mistake has placed an innocent holder of the paper in a worse position than he would have been in if the discover of the forgery had been made on presentation.
• MSCI has lost nothing by anything which the drawee has done. It had in its hands some forged worthless papers. It did not purchase or acquire these papers because of any representation made to it by the drawee

Court concluded:

1. That where a check is accepted or certified by the bank on which it is drawn, the bank is estopped to deny the genuineness of the drawer's signature and his capacity to issue the instrument;

2. That if a drawee bank pays a forged check which was previously accepted or certified by the said bank it cannot recover from a holder who did not participate in the forgery and did not have actual notice thereof;

3. That the payment of a check does not include or imply its acceptance in the sense that this word is used in section 62 of the Negotiable Instruments Law;

4. That in the case of the payment of a forged check, even without former acceptance, the drawee can not recover from a holder in due course not chargeable with any act of negligence or disregard of duty;

5. That to entitle the holder of a forged check to retain the money obtained thereon, there must be a showing that the duty to ascertain the genuineness of the signature rested entirely upon the drawee, and that the constructive negligence of such drawee in failing to detect the forgery was not affected by any disregard of duty on the part of the holder, or by failure of any precaution which, from his implied assertion in presenting the check as a sufficient voucher, the drawee had the right to believe he had taken;

6. That in the absence of actual fault on the part of the drawee, his constructive fault in not knowing the signature of the drawer and detecting the forgery will nor preclude his recovery from one who took the check under circumstances of suspicion and without proper precaution, or whose conduct has been such as to mislead the drawee or induce him to pay the check without the usual scrutiny or other precautions against mistake or fraud;

7. That on 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 presentation he impliedly asserts that he performed his duty;

8. That while the foregoing rule, chosen from a welter of decisions on the issue as the correct one, will not hinder the circulation of two recognized mediums of exchange by which the great bulk of business is carried on, namely, drafts and checks, on the other hand, it will encourage and demand prudent business methods on the part of those receiving such mediums of exchange;

9. That it being a matter of record in the present case, that the appellee bank in no more chargeable with the knowledge of the drawer's signature than the appellant is, as the drawer was as much the customer of the appellant as of the appellee, the presumption that a drawee bank is bound to know more than any indorser the signature of its depositor does not hold;

10. That according to the undisputed facts of the case the appellant in purchasing the papers in question from unknown persons without making any inquiry as to the identity and authority of the said persons negotiating and indorsing them, acted negligently and contributed to the appellee's constructive negligence in failing to detect the forgery;

11. That under the circumstances of the case, if the appellee bank is allowed to recover, there will be no change of position as to the injury or prejudice of the appellant.