Associated Bank vs. Court of Appeals

(G.R. No. 107382. January 31, 1996)


A portion of the funds of the Province of Tarlac is allocated to the Concepcion Emergency Hospital. The checks were payable to the order of the hospital. The allotment checks were released by the Provincial Treasurer and received by the hospital’s admin officer or cashier.

During the audit, it was discovered that  the hospital did not receive 30 allotment checks drawn from the province’s current account with PNB.

They learned that the checks were encashed by Faustino, a retired admin officer and cashier of payee hospital.  He was able to withdraw the money by forging the signature of Dr. Canlas, the chief of the payee hospital. All the checks bore the stamp of Associated Bank which reads “All prior endorsements guaranteed ASSOCIATED BANK.”

The Provincial Treasurer wrote the manager of the PNB seeking the restoration of the various amounts debited. In turn, PNB demanded reimbursement from Associated Bank.

Both banks resisted payment so the Province of Tarlac filed a suit against PNB, which, in turn, impleaded Associated Bank as third-party defendant. Associated Bank then filed a fourth-party complaint against Dr. Canlas and Pangilinan.

The lower court ruled in favor of the Province of Tarlac. On the third-party complaint, it ruled in favor of PNB and ordered Associated Bank to reimburse the former. On the fourth-party complaint, the case was dismissed for lack of cause of action against Dr. Calas and lack of jurisdiction over the person of Pangilinan.

PNB and Associated Bank appealed to the CA. The CA affirmed the trial court’s decision in toto.

PNB contends that Province of Tarlac shall be liable because it delivered and released the questioned checks to Fausto Pangilinan who was then already retired as the hospital’s cashier and administrative officer.

On the other hand, Associated Bank argues that the order of liability should be totally reversed, with the drawee bank (PNB) solely and ultimately bearing the loss. The drawee bank allegedly has the primary duty to verify the genuineness of payee’s indorsement before paying the check.


Where thirty checks bearing forged endorsements are paid, who bears the loss, the drawer, the drawee bank or the collecting bank?


The collecting Bank. The Court discusses the difference between forgery in case of a bearer instrument or order instrument.

The checks involved in this case are order instruments. To rightful signature of holder is essential to transfer title. When the holder’s indorsement is forged, all parties prior to the forgery may raise the real defense of forgery against all parties subsequent thereto.

A collecting bank where a check is deposited and which indorses the check upon presentment with the drawee bank, is such an indorser. So even if the indorsement on the check deposited by the bank’s client is forged, the collecting bank is bound by his warranties as an indorser and cannot set up the defense of forgery as against the drawee bank.

In this case, the checks were indorsed by the collecting bank (Associated Bank) to the drawee bank (PNB). The former will necessarily be liable to the latter for the checks bearing forged indorsements. If the forgery is that of the payee’s or holder’s indorsement, the collecting bank is held liable, without prejudice to the latter proceeding against the forger.

Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the drawee bank. The former must necessarily return the money paid by the latter because it was paid wrongfully.