Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-43596

October 31, 1936

PHILIPPINE NATIONAL BANK, plaintiff-appellee,

vs.
THE NATIONAL CITY BANK OF NEW YORK, and MOTOR SERVICE COMPANY, INC., defendants.
MOTOR SERVICE COMPANY, INC., appellant.
L. D. Lockwood for appellant.
Camus and Delgado for appellee.

RECTO, J.:
This case was submitted for decision to the court below on the following stipulation of facts:
1. That plaintiff is a banking corporation organized and existing under and by virtue of a special act of the
Philippine Legislature, with office as principal place of business at the Masonic Temple Bldg., Escolta, Manila, P.
I.; that the defendant National City Bank of New York is a foreign banking corporation with a branch office
duly authorized and licensed to carry and engage in banking business in the Philippine Islands, with branch
office and place of business in the National City Bank Bldg., City of Manila, P. I., and that the defendant Motor
Service Company, Inc., is a corporation organized and existing under and by virtue of the general corporation
law of the Philippine Islands, with office and principal place of business at 408 Rizal Avenue, City of Manila, P.
I., engaged in the purchase and sale of automobile spare parts and accessories.
2. That on April 7 and 9, 1933, an unknown person or persons negotiated with defendant Motor Service
Company, Inc., the checks marked as Exhibits A and A-1, respectively, which are made parts of the
stipulation, in payment for automobile tires purchased from said defendant's stores, purporting to have been
issued by the "Pangasinan Transportation Co., Inc. by J. L. Klar, Manager and Treasurer", against the Philippine
National Bank and in favor of the International Auto Repair Shop, for P144.50 and P215.75; and said checks
were indorsed by said unknown persons in the manner indicated at the back thereof, the Motor Service Co.,
Inc., believing at the time that the signature of J. L. Klar, Manager and Treasurer of the Pangasinan
Transportation Co., Inc., on both checks were genuine.
3. The checks Exhibits A and A-1 were then indorsed for deposit by the defendant Motor Service Company,
Inc, at the National City Bank of New York and the former was accordingly credited with the amounts thereof,
or P144.50 and P215.75.
4. On April 8 and 10, 1933, the said checks were cleared at the clearing house and the Philippine National
Bank credited the National City Bank of New York for the amounts thereof, believing at the time that the
signatures of the drawer were genuine, that the payee is an existing entity and the endorsement at the back
thereof regular and genuine.
5. The Philippine National Bank then found out that the purported signatures of J. L. Klar, as Manager and
Treasurer of the Pangasinan Transportation Company, Inc., in said Exhibits A and A-1 were forged when so
informed by the said Company, and it accordingly demanded from the defendants the reimbursement of the
amounts for which it credited the National City Bank of New York at the clearing house and for which the latter
credited the Motor Service Co., but the defendants refused, and continue to refuse, to make such
reimbursements.

6. The Pangasinan Transportation Co., Inc., objected to have the proceeds of said check deducted from their
deposit.
7. Exhibits B, C, D, E, F, and G, which were introduced at the trial in the municipal court of Manila and forming
part of the record of the present case, are admitted by the parties as genuine and are made part of this
stipulation as well as Exhibit H hereto attached and made a part hereof.
Upon plaintiff's motion, the case was dismissed before trial as to the defendant National City Bank of New York. a
decision was thereafter rendered giving plaintiff judgment for the total amount of P360.25, with interest and costs.
From this decision the instant appeal was taken.
Before us is the preliminary question of whether the original appeal taken by the plaintiff from the decision of the
municipal court of Manila where this case originated, became perfected because of plaintiff's failure to attach to the
record within 15 days from receipt of notice of said decision, the certificate of appeal bond required by section 76 of
the Code of Civil Procedure. It is not disputed that both the appeal docket fee and the appeal cash bond were paid and
deposited within the prescribed time. The issue is whether the mere failure to file the official receipt showing that such
deposit was made within the said period is a sufficient ground to dismiss plaintiff's appeal. This question was settled
by our decision in the case of Blanco vs. Bernabe and lawyers Cooperative Publishing Co. (page 124, ante), and no
further consideration. No error was committed in allowing said appeal.
We now pass on to consider and determine the main question presented by this appeal, namely, whether the appellee
has the right to recover from the appellant, under the circumstances of this case, the value of the checks on which the
signatures of the drawer were forged. The appellant maintains that the question should be answered in the negative
and in support of its contention appellant advanced various reasons presently to be examined carefully.
I. It is contended, first of all, that the payment of the checks in question made by the drawee bank constitutes an
"acceptance", and, consequently, the case should be governed by the provisions of section 62 of the Negotiable
Instruments Law, which says:
SEC. 62. Liability of acceptor. The acceptor by accepting the instrument engages that he will pay it
according to the tenor of his acceptance; and admits:
(a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to
draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
This contention is without merit. 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. In view
of the fact that acceptance is a step unnecessary, in so far as bills of exchange payable on demand are concerned
(sec. 143), it follows that the provisions relative to "acceptance" are without application to checks. Acceptance
implies, in effect, subsequent negotiation of the instrument, which is not true in case of the payment of a check
because from the moment a check is paid it is withdrawn from circulation. The warranty established by section 62, is
in favor of holders of the instrument after its acceptance. When the drawee bank cashes or pays a check, the cycle of
negotiation is terminated, and it is illogical thereafter to speak of subsequent holders who can invoke the warranty
provided in section 62 against the drawee. Moreover, according to section 191, "acceptance" means "an acceptance
completed by delivery or notification" and this concept is entirely incompatible with payment, because when payment
is made the check is retained by the bank, and there is no such thing as delivery or notification to the party receiving
the payment. Checks are not to be accepted, but presented at once for payment. (1 Bouvier's Law Dictionary, 476.)
There can be no such thing as "acceptance" in the ordinary sense of the term. A check being payable immediately and
on demand, the bank can fulfill its duty to the depositor only by paying the amount demanded. The holder has no
right to demand from the bank anything but payment of the check, and the bank has no right, as against the drawer,
to do anything but pay it. (5 R. C. L., p. 516, par. 38.) A check is not an instrument which in the ordinary course of
business calls for acceptance. The holder can never claim acceptance as his legal right. He can present for payment,
and only for payment. (1 Morse on Banks and Banking, 6th ed., pp. 898, 899.)
There is, however, nothing in the law or in, business practice against the presentation of checks for acceptance, before
they are paid, in which case we have a "certification" equivalent to "acceptance" according to 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. This certification or acceptance consists in the
signification by the drawee of his assent to the order of the drawer, which must not express that the drawee will
perform his promise by any other means than the payment of money. (Sec. 132.) When the holder of a check
procures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon (sec. 188),
and then the check operates as an assignment of a part of the funds to the credit of the drawer with the bank. (Sec.
189.) There is nothing in the nature of the check which intrinsically precludes its acceptance, in like manner and with
like effect as a bill of exchange or draft may be accepted. The bank may accept if it chooses; and it is frequently
induced by convenience, by the exigencies of business, or by the desire to oblige customers, voluntarily to incur the
obligation. The act by which the bank places itself under obligation to pay to the holder the sum called for by a check
must be the expressed promise or undertaking of the bank signifying its intent to assume the obligation, or some act
from which the law will imperatively imply such valid promise or undertaking. The most ordinary form which such an
act assumes is the acceptance by the bank of the check, or, as it is perhaps more often called, the certifying of the
check. (1 Morse on Banks and Banking, pp. 898, 899; 5 R. C. L., p. 520.)
No doubt a bank may by an unequivocal promise in writing make itself liable in any event to pay the check upon
demand, but this is not an "acceptance" of the check in the true sense of that term. Although a check does not call for
acceptance, and the holder can present it only for payment, the certification of checks is a means in constant and
extensive use in the business of banking, and its effects and consequences are regulated by the law merchant. Checks
drawn upon banks or bankers, thus marked and certified, enter largely into the commercial and financial transactions
of the country; they pass from hand to hand, in the payment of debts, the purchase of property, and in the transfer of
balances from one house and one bank to another. In the great commercial centers, they make up no inconsiderable
portion of the circulation, and thus perform a useful, valuable, and an almost indispensable office. The purpose of
procuring a check to be certified is to impart strength and credit to the paper by obtaining an acknowledgment from
the certifying bank that the drawer has funds therein sufficient to cover the check and securing the engagement of the
bank that the check will be paid upon presentation. A certified check has a distinctive character as a species of
commercial paper, and performs important functions in banking and commercial business. When a check is certified, it
ceases to possess the character, or to perform the functions, of a check, and represents so much money on deposit,
payable to the holder on demand. The check becomes a basis of credit an easy mode of passing money from hand
to hand, and answers the purposes of money. (5 R. C. L., pp. 516, 517.)lwphi1.nt
All the authorities, both English and American, hold that a check may be accepted, though acceptance is not usual. By
the law merchant, the certificate of the bank that a check is good is equivalent to acceptance. It implies that the check
is drawn upon sufficient funds in the hands of the drawee, that they have been set apart for its satisfaction, and that
they shall be so applied whenever the check is presented for payment. It is an undertaking that the check is good
then, and shall continue good, and this agreement is as binding on the bank as its notes of circulation, a certificate of
deposit payable to the order of the depositor, or any other obligation it can assume. The object of certifying a check,
as regards both parties is to enable the holder to use it as money. The transferee takes it with the same readiness and
sense of security that he would take the notes of the bank. It is available also to him for all the purposes of money.
Thus it continues to perform its important functions until in the course of business it goes back to the bank for
redemption, and is extinguished by payment. It cannot be doubted that the certifying bank intended these
consequences, and it is liable accordingly. To hold otherwise would render these important securities only a snare and
a delusion. A bank incurs no greater risk in certifying a check than in giving a certificate of deposit. In well-regulated
banks the practice is at once to charge the check to the account of the drawer, to credit it in a certified check account,
and, when the check is paid, to debit that account with the amount. Nothing can be simpler or safer than this process.
(Merchants' Bank vs. States Bank, 10 Wall., 604, at p. 647; 19 Law. ed., 1008, 1019.)
Ordinarily the acceptance or certification of a check is performed and evidenced by some word or mark, usually the
words "good", "certified" or "accepted" written upon the check by the banker or bank officer. (1 Morse, Banks and
Banking, 915; 1 Bouvier's Law Dictionary, 476.) The bank virtually says, that check is good; we have the money of
the drawer here ready to pay it. We will pay it now if you will receive it. The holder says, No, I will not take the
money; you may certify the check and retain the money for me until this check is presented. The law will not permit a
check, when due, to be thus presented, and the money to be left with the bank for the accommodation of the holder
without discharging the drawer. The money being due and the check presented, it is his own fault if the holder
declines to receive the pay, and for his own convenience has the money appropriated to that check subject to its
future presentment at any time within the statute of limitations. (1 Morse on Banks and Banking, p. 920.)
The theory of the appellant and of the decisions on which it relies to support its view is vitiated by the fact that they
take the word "acceptance" in its ordinary meaning and not in the technical sense in which it is used in the Negotiable
Instruments Law. Appellant says that when payment is made, such payment amounts to an acceptance, because he
who pays accepts. This is true in common parlance but "acceptance" in legal contemplation. The word "acceptance"

has a peculiar meaning in the Negotiable Instruments Law, and, as has been above stated, in the instant case there
was payment but no acceptatance, or what is equivalent to acceptance, certification.
With few exceptions, the weight of authority is to the effect that "payment" neither includes nor implies "acceptance".
In National Bank vs. First National Bank ([19101, 141 Mo. App., 719; 125 S. W., 513), the court asks, if a mere
promise to pay a check is binding on a bank, why should not the absolute payment of the check have the same effect?
In response, it is submitted that the two things, that is acceptance and payment, are entirely different. If the
drawee accepts the paper after seeing it, and then permits it to go into circulation as genuine, on all the principles of
estoppel, he ought to be prevented from setting up forgery to defeat liability to one who has taken the paper on the
faith of the acceptance, or certification. On the other hand, mere payment of the paper at the termination of its course
does not act as an estoppel. The attempt to state a general rule covering both acceptance and payment is responsible
for a large part of the conflicting arguments which have been advanced by the courts with respect to the rule.
(Annotation at 12 A. L. R., 1090 1921].)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the court said:
We are of the opinion that "payment is not acceptance". Acceptance, as defined by section 131, cannot be
confounded with payment. . . .
Acceptance, certification, or payment of a check, by the express language of the statute, discharges the
liability only of the persons named in the statute, to wit, the drawer and all indorsers, and the contract of
indorsement by the negotiator if the check is discharged by acceptance, certification, or payment. But clearly
the statute does not say that the contract of warranty of the negotiator, created by section 65, is discharged
by these acts.
The rule supported by the majority of the cases (14 A. L. R. 764), that payment of a check on a forged or
unauthorized indorsement of the payee's name, and charging the same to the drawer's account, do not amount to an
acceptance so as to make the bank liable to the payee, is supported by all of the recent cases in which the question is
considered. (Cases cited, Annotation at 69 A. L. R., 1076, 1077 [1930].)
Merely stamping a check "Paid" upon its payment on a forged or unauthorized indorsement is not an acceptance
thereof so as to render the drawee bank liable to the true payee. (Anderson vs. Tacoma National Bank [1928], 146
Wash., 520; 264 Pac., 8; Annotation at 69 A. L. R., 1077, [1930].)
In State Bank of Chicago vs. Mid-City Trust & Savings Bank (12 A. L. R., 989, 991, 992), the court said:
The defendant in error contends that the payment of the check shows acceptance by the bank, urging that there can
be no more definite act by the bank upon which a check has been drawn, showing acceptance than the payment of
the check. Section 184 of the Negotiable Instruments Act (sec. 202) provides that the provisions of the act applicable
to bills of exchange apply to a check, and section 131 (sec. 149), that the acceptance of a bill must be in writing
signed by the drawee. Payment is the final act which extinguishes a bill. Acceptance is a promise to pay in the future
and continues the life of the bill. It was held in the First National Bank vs. Whitman (94 U. S., 343; 24 L. ed., 229),
that payment of a check upon a forged indorsement did not operate as an acceptance in favor of the true owner. The
contrary was held in Pickle vs. Muse (Fickle vs. People's Nat. Bank, 88 Tenn., 380; 7 L.R.A., 93; 17 Am. St. Rep., 900;
12 S. W., 919), and Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751) at a time when the Negotiable
Instruments Act was not in force in those states. The opinion of the Supreme Court of the United States seems more
logical, and the provision of the Negotiable Instruments Act now require an acceptance to be in writing. Under this
statute the payment of a check on a forged indorsement, stamping it "paid," and charging it to the account of the
drawer, do not constitute an acceptance of the check or create a liability of the bank to the true holder or the payee.
(Elyria Sav. & Bkg. Co. vs. Walker Bin Co., 92 Ohio St., 406; L. R. A., 1916D, 433; 111 N. E., 147; Ann. Cas. 1917D,
1055; Baltimore & O. R. Co. vs. First National Bank, 102 Va., 753; 47 S. E., 837; State Bank of Chicago vs. Mid-City
Trust & Savings Bank 12 A. L. R., pp. 989, 991, 992.)
Before drawee's acceptance of check there is no privity of contract between drawee and payee. Drawee's payment of
check on unauthorized indorsement does not constitute "acceptance" of check. (Sinclair Refining Co.vs. Moultrie
Banking Co., 165 S. E., 860 [1932].)

The great weight of authority is to the effect that the payment of a check upon a forged or unauthorized indorsement
and the stamping of it "paid" does not constitute an acceptance. (Dakota Radio Apparatus Co. vs.First Nat. Bank of
Rapid City, 244 N. W., 351, 352 [1932].)
Payment of the check, cashing it on presentment is not acceptance. (South Boston Trust Co. vs. Levin, 249 Mass., 45,
48, 49; 143 N. E., 816; Blocker, Shepard Co. vs. Granite Trust Company, 187 Me., 53, 54 [1933].)
In Rauch vs. Bankers National Bank of Chicago (143 Ill. App., 625, 636, 637 [1908]), the language of the decision was
as follows:
. . . The plaintiffs say that this acceptance was made by the very unauthorized payments of which they
complain. This suggestion does not seem forceful to us. It is the contention which was made before the
Supreme Court of the United States in First National Bank vs. Whitman (94 U. S., 343), and repudiated by
that court. The language of the opinion in that case is so apt in the present case that we quote it:
"It is further contended that such an acceptance of a check as creates a privity between the payee and the
bank is established by the payment of the amount of this check in the manner described. This argument is
based upon the erroneous assumption that the bank has paid this check. If this were true, it would have
discharged all of its duty, and there would be an end to the claim against it. The bank supposed that it had
paid the check, but this was an error. The money it paid was upon a pretended and not a real indorsement of
the name of the payee. . . . We cannot recognize the argument that payment of the amount of the check or
sight draft under such circumstances amounts to an acceptance creating a privity of contract with the real
owner.
"It is difficult to construe a payment as an acceptance under any circumstances. . . . A banker or individual
may be ready to make actual payment of a check or draft when presented, while unwilling to make a promise
to pay at a future time. Many, on the other hand, are more ready to promise to pay than to meet the promise
when required. The difference between the transactions is essential and inherent."
And in Wharf vs. Seattle National Bank (24 Pac. [2d]), 120, 123 [1933]):
It is the rule that payment of a check on unauthorized or forged indorsement does not operate as an
acceptance of the check so as to authorize an action by the real owner to recover its amount from the drawee
bank. (Michie on Banks and Banking, vol. 5, sec. 278, p. 521.) A full list of the authorities supporting the rule
will be found in a footnote to the foregoing citation. (See also, Federal Land Bank vs. Collins, 156 Miss., 893;
127 So., 570; 69 A. L. R., 1068.)
In a very recent case, Federal Land Bank vs. Collins (69 A. L. R., 1068, 1072-1074), this question was discussed at
considerable length. The court said:
In the light of the first of these statutes, counsel for appellant is forced to stand upon the narrow ledge that the
payment of the check by the two banks will constitute an acceptance. The drawee bank simply marked it "paid" and
did not write anything else except the date. The bank first paying the check, the Commercial National Bank and Trust
Company, simply wrote its name as indorser and passed the check on to the drawee bank; does this constitute an
acceptance? The precise question has not been presented to this court for decision. Without reference to authorities in
other jurisdictions it would appear that the drawee bank had never written its name across the paper and therefore,
under the strict terms of the statute, could not be bound as an acceptor; in the second place, it does not appear to us
to be illogical and unsound to say that the payment of a check by the drawee, and the stamping of it "paid", is
equivalent to the same thing as the acceptance of a check; however, there is a variety of opinions in the various
jurisdictions on this question. Counsel correctly states that the theory upon which the numerous courts hold that the
payment of a check creates privity between the holder of the check and the drawee bank is tantamount to a pro
tanto assignment of that part of the funds. It is most easily understood how the payment of the check, when not
authorized to be done by the drawee bank, might under such circumstances create liability on the part of the drawee
to the drawer. Counsel cites the case of Pickle vs. Muse (88 Tenn, 380; 12 S. W., 919; 7 L. R. A., 93; 17 Am. St. Rep.,
900), wherein Judge Lurton held that the acceptance of a check was necessary in order to give the holder thereof a
right of action thereon against the bank, and further held in a case similar to this, so far as this question is concerned,
that the acceptance of a check so as to give a right of action to the payee is inferred from the retention of the check
by the bank and its subsequent charge of the amount to the drawer, although it was presented by, and payment
made, an unauthorized person. Judge Lurton cited the case of National Bank of the Republic vs. Millard (10 Wall., 152;

19 L. ed., 897), wherein the Supreme Court of the United States, not having such a case before it, threw out the
suggestion that, if it was shown that a bank had charged the check on its books against the drawer and made
settlement with the drawee that the holder could recover on account of money had and received, invoking the rule of
justice and fairness, it might be said there was an implied promise to the holder to pay it on demand. (SeeNational
Bank of the Republic vs. Millard, 10 Wall. [77 U. S.], 152; 19 L. ed., 899.) The Tennessee court then argued that it
would be inequitable and unconscionable for the owner and payee of the check to be limited to an action against an
insolvent drawer and might thereby lose the debt. They recognized the legal principle that there is no privity between
the drawer bank and the holder, or payee, of the check, and proceeded to hold that no particular kind of writing was
necessary to constitute an acceptance and that it became a question of fact, and the bank became liable when it
stamped it "paid" and charged it to the account of the drawer, and cites, in support of its opinion, Seventh National
Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751); Saylor vs. Bushong (100 Pa., 23; 45 Am. Rep., 353); and
Dodge vs. Bank (20 Ohio St., 234; 5 Am. Rep., 648).
This decision was in 1890, prior to the enactment of the Negotiable Instruments Law by the State of
Tennessee. However, in this case Judge Snodgrass points out that the Millard case, supra, was dicta. The
Dodge case, from the Ohio court, held exactly as the Tennessee court, but subsequently in the case of Elyria
Bank vs. Walker Bin Co. (92 Ohio St., 406; 111 N. E., 147; L. R. A. 1916D, 433; Ann. Cas. 1917D, 1055), the
court held to the contrary, called attention to the fact that the Dodge case was no longer the law, and
proceeded to announce that, whatever might have been the law before the passage of the Negotiable
Instrument Act in that state, it was no longer the law; that the rule announced in the Dodge case had been
"discarded." The court, in the latter case, expressed its doubts that the courts of Tennessee and Pennsylvania
would adhere to the rule announced in the Pickle case, quoted supra, in the face of the Negotiable Instrument
Law. Subsequent to the Millard case, the Supreme Court of the United States, in the case of First National
Bank of Washington vs. Whitman (94 U. S., 343, 347; 24 L. ed., 229), where the bank, without any knowledge
that the indorsement of the payee was unauthorized, paid the check, and it was contended that by the
payment the privity of contract existing between the drawer and drawee was imparted to the payee, said:
"It is further contended that such an acceptance of the check as creates a privity between the payee and the
bank is established by the payment of the amount of this check in the manner described. This argument is
based upon the erroneous assumption that the bank has paid this check. If this were true, it would have
discharged all of its duty, and there would be an end of the claim against it. The bank supposed that it had
paid the check; but this was an error. The money it paid was upon a pretended and not a real indorsement of
the name of the payee. The real indorsement of the payee was as necessary to a valid payment as the real
signature of the drawer; and in law the check remains unpaid. Its pretended payment did not diminish the
funds of the drawer in the bank, or put money in the pocket of the person entitled to the payment. The state
of the account was the same after the pretended payment as it was before.
"We cannot recognize the argument that a payment of the amount of a check or sight draft under such
circumstances amounts to an acceptance, creating a privity of contract with the real owner. It is difficult to
construe a payment as an acceptance under any circumstances. The two things are essentially different. One
is a promise to perform an act, the other an actual performance. A banker or an individual may be ready to
make actual payment of a check or draft when presented, while unwilling to make a promise to pay at a future
time. Many, on the other hand, are more ready to promise to pay than to meet the promise when required.
The difference between the transactions is essential and inherent."
Counsel for the appellant cite other cases holding that the stamping of the check "paid" and the charging of
the amount thereof to the drawer constituted an acceptance, but we are of opinion that none of these cases
cited hold that it is in compliance with the Negotiable Instruments Act; paying the check and stamping same is
not the equivalent of accepting the check in writing signed by the drawee. The cases holding that payment as
indicated above constituted acceptance were rendered prior to the adoption of the Negotiable Instruments Act
in the particular state, and these decisions are divided into two classes: the one holding that the check
delivered by the drawer to the holder and presented to the bank or drawee constitutes an assignment pro
tanto; the other holding that the payment of the check and the charging of same to the drawee although paid
to an unauthorized person creates privity of contract between the holder and the drawee bank.
We have already seen that our own court has repudiated the assignment pro tanto theory, and since the
adoption of the Negotiable Instrument Act by this state we are compelled to say that payment of a check is
not equivalent to accepting a check in writing and signing the name of the acceptor thereon. Payment of the
check and the charging of same to the drawer does not constitute an acceptance. Payment of the check is the
end of the voyage; acceptance of the check is to fuel the vessel and strengthen it for continued operation on

the commercial sea. What we have said applies to the holder and not to the drawer of the check. On this
question we conclude that the general rule is that an action cannot be maintained by a payee of the check
against the bank on which is draw unless the check has been certified or accepted by the bank in compliance
with the statute, even though at the time the check is that an action cannot be maintained by a payee of the
drawer of the check out of which the check is legally payable; and that the payment of the check by the bank
on which it is drawn, even though paid on the unauthorized indorsement of the name of the holder (without
notice of the defect by the bank), does not constitute a certification thereof, neither is it an acceptance
thereof; and without acceptance or certification, as provided by statute, there is no privity of contract between
the drawee bank and the payee, or holder of the check. Neither is there an assignmentpro tanto of the funds
where the check is not drawn on a particular fund, or does not show on its face that it is an assignment of a
particular fund. The above rule as stated seems to have been the rule in the majority of the states even before
the passage of the uniform Negotiable Instruments Act in the several states.
The decision in the case of First National Bank vs. Bank of Cottage Grove (59 Or., 388), which appellant cites in its
brief (pp. 12, 13 ) has been expressly overruled by the Supreme Court of Massachusetts in South Boston Trust
Co. vs. Levin (143 N. E., 816, 817), in the following language:
In First National Bank vs. Bank of Cottage Grove (59 Or., 388; 117 Pac., 293, 296, at page 396), it was said:
"The payment of a bill or check by the drawee amounts to more than an acceptance. The rule, holding that
such a payment has all the efficacy of an acceptance, is founded upon the principle that the greater includes
the less." We are unable to agree with this statement as there is no similarity between acceptance and
payment; payment discharges the instrument, and no one else is expected to advance anything on the faith of
it; acceptance, contemplates further circulation, induced by the fact of acceptance. The rule that the acceptor
made certain admissions which will inure to the benefit of subsequent holders, has no applicability to payment
of the instrument where subsequent holders can never exist.
II. The old doctrine that a bank was bound to know its correspondent's signature and that a drawee could not recover
money paid upon a forgery of the drawer's name, because it was said, the drawee was negligent not to know the
forgery and it must bear the consequence of its negligence, is fast fading into the misty past, where it belongs. It was
founded in misconception of the fundamental principles of law and common sense. (2 Morse, Banks and Banking, p.
1031.)
Some of the cases carried the rule to its furthest limit and held that under no circumstances (except, of course, where
the purchaser of the bill has participated in the fraud upon the drawee) would the drawee be allowed to recover bank
money paid under a mistake of fact upon a bill of exchange to which the name of the drawer had been forged. This
doctrine has been freely criticized by the eminent authorities, as a rule too favorable to the holder, not the most fair,
nor best calculated to effectuate justice between the drawee and the drawer. (5 R.C.L., p. 556.)
The old rule which was originally announced by Lord Mansfield in the leading case of Price vs. Neal (3 Burr., 1354),
elicited the following comment from Justice Holmes, then Chief Justice of the Supreme Court of Massachusetts, in the
case of Dedham National Bank vs. Everett National Bank (177 Mass., 392). "Probably the rule was adopted from an
impression of convenience rather than for any more academic reason; or perhaps we may say that Lord Mansfield
took the case out of the doctrine as to payments under a mistake of fact by the assumption that a holder who simply
presents negotiable paper for payment makes no representation as to the signature, and that the drawee pays at his
peril."
Such was the reaction that followed Lord Mansfield's rule which Justice Story of the United States Supreme adopted in
the case of Bank of United States vs. Georgia (10 Wheat., 333), that in B. B. Ford & Co. vs. People's Bank of
Orangeburg (74 S. C., 180), it was held that "an unrestricted indorsement of a draft and presentation to the drawee is
a representation that the signature of the drawer is genuine", and in Lisbon First National Bank vs.Wyndmere Bank
(15 N. D., 299), it was also held that "the drawee of a forged check who has paid the same without detecting the
forgery, may upon discovery of the forgery, recover the money paid from the party who received the money, even
though the latter was a good faith holder, provided the latter has not been misled or prejudiced by the drawee's failure
to detect the forgery."
Daniel, in his treatise on Negotiable Instruments, has the following to say:
In all the cases which hold the drawee absolutely estoppel by acceptance or payment from denying genuineness of the
drawer's name, the loss is thrown upon him on the ground of negligence on his part in accepting or paying, until he
has ascertained the bill to be genuine. But the holder has preceded him in negligence, by himself not ascertaining the

true character of the paper before he received it, or presented it for acceptance or payment. And although, as a
general rule, the drawee is more likely to know the drawer's handwriting than a stranger is, if he is in fact deceived as
to its genuineness, we do not perceive that he should suffer more deeply by mistake than a stranger, who, without
knowing the handwriting, has taken the paper without previously ascertaining its genuineness. And the mistake of the
drawee should always be allowed to be corrected, unless the holder, acting upon faith and confidence induced by his
honoring the draft, would be placed in a worse position by according such privilege to him. This view has been applied
in a well considered case, and is intimidated in another; and is forcibly presented by Mr. Chitty, who says it is going a
great way to charge the acceptor with knowledge of his correspondent's handwriting, "unless some bona fide holder
has purchased the paper on the faith of such an act." Negligence in making payment under a mistake of fact is not
now deemed a bar to recovery of it, and we do not see why any exception should be made to the principle, which
would apply as well as to release an obligation not consummated by payment. ( Vol. 2, 6th edition, pp. 1537-1539.)
III. But now the rule is perfectly well settled that in determining the relative rights of a drawee who, under a mistake
of fact, has paid, and a holder who has received such payment, upon a check to which the name of the drawer has
been forged, it is only fair to consider the question of diligence or negligence of the parties in respect thereto. (Woods
and Malone vs. Colony Bank [1902], 56 L. R. A., 929, 932.) The responsibility of the drawee who pays a forged check,
for the genuineness of the drawer's signature, is absolute only in favor of one who has not, by his own fault or
negligence, contributed to the success of the fraud or to mislead the drawee. (National Bank of America vs. Bangs,
106 Mass., 441; 8 Am. Rep., 349; Woods and Malone vs. Colony Bank, supra; De Feriet vs.Bank of America, 23 La.
Ann., 310; B. B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 10 L. R. A. [N. S.], 63.) If it appears that
the one to whom payment was made was not an innocent sufferer, but was guilty of negligence in not doing
something, which plain duty demanded, and which, if it had been done, would have avoided entailing loss on any one,
he is not entitled to retain the moneys paid through a mistake on the part of the drawee bank. (First Nat. Bank of
Danvers vs. First Nat. Bank of Salem, 151 Mass., 280; 24 N. E., 44; 21 A. S. R., 450; First Nat. Bank of
Orleans vs. State Bank of Alma, 22 Neb., 769; 36 N. W., 289; 3 A. S. R., 294; American Exp. Co. vs. State Nat. Bank,
27 Okla., 824; 113 Pac., 711; 33 L. R. A. [N. S.], 188; B. B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C.,
180; 54 S. E., 204; 114 A. S. R., 986; 7 Ann. Cas., 744; 10 L. R. A. [N. S.], 63; People's Bank vs. Franklin Bank, 88
Tenn. 299; 12 S. W., 716; 17 A. S. R.) 884; 6 L. R. A., 724; Canadian Bank of Commerce vs. Bingham, 30 Wash.,
484; 71 Pac., 43; 60 L. R. A., 955.) In other words, to entitle the holder of a forged check to retain the money
obtained he must be able to show that the whole responsibility of determining the validity of the signature was upon
the drawee, and that the negligence of such drawee was not lessened by any 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.
(Ellis vs. Ohio Life Insurance & Trust Co., 4 Ohio St., 628; Rouvantvs. Bank, 63 Tex., 610; Bank vs. Ricker, 71 Ill., 429;
First National Bank of Danvers vs. First Nat. Bank of Salem, 24 N. E., 44, 45; B. B. Ford & Co. vs. People's Bank of
Orangeburg, supra.) The recovery is permitted in such case, because, although the drawee was constructively
negligent in failing to detect the forgery, yet if the purchaser had performed his duty, the forgery would in all
probability have been detected and the fraud defeated. (First National Bank of Lisbon vs. Bank of Wyndmere, 15 N. D.,
209; 10 L. R. A. [N. S.], 49.) 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 not preclude his recovery from one who took the
check under circumstances of suspicion 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.
(National Bank of America vs. Bangs, supra; First National Bank vs. Indiana National Bank, 30 N. E., 808-810; Woods
and Malone vs. Colony Bank, supra; First National Bank of Danvers vs. First Nat. Bank of Salem, 151 Mass., 280.)
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 unreasonable that it would be borne by him, even if innocent of any intentional fraud, through
whose means it has succeeded. (Gloucester Bank vs. Salem Bank, 17 Mass., 33; First Nat. Bank of Danvers vs. First
National Bank of Salem,supra; B. B. Ford & Co. vs. People's Bank of Orangeburg, supra.) Again if the indorser is guilty
of negligence in receiving and paying the check or draft, or has reason to believe that the instrument is not genuine,
but fails to inform the drawee of his suspicions the indorser according to the reasoning of some courts will be held
liable to the drawee upon his implied warranty that the instrument is genuine. (B. B. Ford & Co. vs. People's Bank of
Orangeburg, supra; Newberry Sav. Bank vs. Bank of Columbia, 93 S. C., 294; 38 L. R. A. [N. S], 1200.) Most of the
courts now agree that 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 presentation he impliedly asserts
that he has performed his duty, the drawee, who has, without actual negligence on his part, paid the forged demand,
may recover the money paid from such negligent purchaser. (Lisbon First National Bank vs.Wyndmere Bank, supra.)
Of course, the drawee must, in order to recover back the holder, show that he himself was free from fault. (See also 5
R. C. L., pp. 556-558.)
So, if a collecting bank is alone culpable, and, on account of its negligence only, the loss has occurred, the drawee
may recover the amount it paid on the forged draft or check. (Security Commercial & Sav. Bank vs.Southern Trust &
C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)

But we are aware of no case in which the principle that the drawee is bound to know the signature of the drawer of a
bill or check which he undertakes to pay has been held to be decisive in favor of a payee of a forged bill or check to
which he has himself given credit by his indorsement. (Secalso, Mckleroy vs. Bank, 14 La. Ann., 458; Canal
Bank vs. Bank of Albany, 1 Hill, 287; Rouvant vs. Bank, supra, First Nat. Bank vs. Indiana National Bank; 30 N. E.,
808-810.)
In First Nat. Bank vs. United States National Bank ([1921], 100 Or., 264; 14 A. L. R., 479; 197 Pac., 547), the court
declared: "A holder cannot profit by a mistake which his negligent disregard of duty has contributed to induce the
drawee to commit. . . . The holder must refund, if by his negligence he has contributed to the consummation of the
mistake on the part of the drawee by misleading him. . . . If the only fault attributable to the drawee is the
constructive fault which the law raises from the bald fact that he has failed to detect the forgery, and if he is not
chargeable with actual fault in addition to such constructive fault, then he is not precluded from recovery from a
holder whose conduct has been such as to mislead the drawee or induce him to pay the check or bill of exchange
without the usual security against fraud. The holder must refund to a drawee who is not guilty of actual fault if the
holder was negligent in not making due inquiry concerning the validity of the check before he took it, and if the
drawee can be said to have been excused from making inquiry before taking the check because of having had a right
to, presume that the holder had made such inquiry."
The rule that one who first negotiates forged paper without taking some precaution to learn whether or not it is
genuine should not be allowed to retain the proceeds of the draft or check from the drawee, whose sole fault was that
he did not discover the forgery before he paid the draft or check, has been followed by the later cases. (Security
Commercial & Savings Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945; Hutcheson
Hardware Co. vs. Planters State Bank [1921], 26 Ga. App., 321; 105 S. E., 854; [Annotation at 71 A. L. R., 337].)
Where a bank, without inquiry or identification of the person presenting a forged check, purchases it, indorses it,
generally, and presents it to the drawee bank, which pays it, the latter may recover if its only negligence was its
mistake in having failed to detect the forgery, since its mistake, did not mislead the purchaser or bring about a change
in position. (Security Commercial & Savings Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac.,
945.)
Also, a drawee could recover from another bank the portion of the proceeds of a forged check cashed by the latter and
deposited by the forger in the second bank and never withdrawn, upon the discovery of the forgery three months
later, after the drawee had paid the check and returned the voucher to the purported drawer, where the purchasing
bank was negligent in taking the check, and was not injured by the drawee's negligence in discovering and reporting
the forgery as to the amount left on deposit, since it was not a purchaser for value. (First State Bank & T. Co. vs. First
Nat. Bank [1924], 314 Ill., 269; 145 N. E., 382.)
Similarly, it has been held that the drawee of a check could recover the amount paid on the check, after discovery of
the forgery, from another bank, which put the check into circulation by cashing it for the one who had forged the
signature of both drawer and payee without making any inquiry as to who he was although he was a stranger, after
which the check reached, and was paid by, the drawee, after going through the hands of several intermediate
indorsees. (71 A. L. R., p. 340.)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the following statement was made:
We are clearly of opinion, therefore that the warranty of genuineness, arising upon the act of the Brule National Bank
in putting the check in circulation, was not discharged by payment of the check by the drawee (First National Bank),
nor was the Brule National Bank deceived or misled to its prejudice by such payment. The Brule National Bank by its
indorsement and delivery warranted its own identification of Kost and the genuineness of his signature. The
indorsement of the check by the Brule National Bank was such as to assign the title to the check to its assignee, the
Whitbeck National Bank, and the amount was credited to the indorser. The check bore no indication that it was
deposited for collection, and was not in any manner restricted so as to constitute the indorsee the agent of the
indorser, nor did it prohibit farther negotiation of the instrument, nor did it appear to be in trust for, or to the use of,
any other person, nor was it conditional. Certainly the Pukwana Bank was justified in relying upon the warrant of
genuineness, which implied the full identification of Kost, and his signature by the defendant bank. This view of the
statute is in accord with the decisions of many courts. (First National Bank vs. State Bank, 22 Neb., 769; 3 Am. St.
Rep., 294; 36 N. W., 289; First National Bank vs. First National Bank, 151 Mass., 280; 21 Am. St. Rep., 450; 24 N. E.,
44; People's Bank vs. Franklin Bank, 88 Tenn., 299; 6 L. R. A., 727; 17 Am. St. Rep., 884; 12 S. W., 716.)"

The appellant leans heavily on the case of Fidelity & Co. vs. Planenscheck (71 A. L. R., 331), decided in 1929. We have
carefully examined this decision and we do not feel justified in accepting its conclusions. It is but a restatement of the
long abandoned rule of Neal vs. Price, and it predicated on the wrong premise that the payment includes acceptance,
and that a bank drawee paying a check drawn on it becomes ipso facto an acceptor within the meaning of section 62
of the Negotiable Instruments Act. Moreover in a more recent decision, that of Louisa National Bank vs. Kentucky
National Bank (39 S. W. [2nd] 497, 501) decided in 1931, the Court of Appeals of Kentucky held the following:
The appellee, on presentation for payment of $600 check, failed to discover it was a forgery. It was bound to
know the signature of its customer, Armstrong, and it was derelict in failing to give his signature to the check
sufficient attention and examination to enable it to discover instantly the forgery. The appellant, when the
check was presented to it by Banfield, failed to make an inquiry of or about him and did not cause or have him
to be identified. Its act in so paying to him the check is a degree of negligence on its part equivalent to
positive negligence. It indorsed the check, and, while such indorsement may not be regarded within the
meaning of the Negotiable Instrument Law as amounting to a warranty to appellant of that which it indorsed,
it at least substantially served as a representation to it that it had exercised ordinary care and had complied
with the rules and customs of prudent banking. Its indorsement was calculated, if it did not in fact do so, to
lull the drawee bank into indifference as to the drawer's signature to it when paying the check and charging it
to its customer's account and remitting its proceeds to appellant's correspondent.
If in such a transaction between the drawee and the holder of a check both are without fault, no recovery may
be had of the money so paid. (Deposit Bank of Georgetown vs. Fayette National Bank, supra, and cases cited.)
Or the rule may be more accurately stated that, where the drawee pays the money, he cannot recover it back
from a holder in good faith, for value and without fault.
If, on the other hand, the holder acts in bad faith, or is guilty of culpable negligence, a recovery may be had
by the drawee of such holder. The negligence of the Bank of Louisa in failing to inquire of and about Banfield,
and to cause or to have him identified before it parted with its money on the forged check, may be regarded
as the primary and proximate cause of the loss. Its negligence in this respect reached in its effect the
appellee, and induced incaution on its part. In comparison of the degrees of the negligence of the two, it is
apparent that of the appellant excels in culpability. Both appellant and appellee inadvertently made a mistake,
doubtless due to a hurry incident to business. The first and most grievous one was made by the appellant ,
amounting to its disregard of the duty, it owed itself as well as the duty it owed to the appellee, and it cannot
on account thereof retain as against the appellee the money which it so received. It cannot shift the loss to
the appellee, for such disregard of its duty inevitably contributed to induce the appellee to omit its duty
critically to examine the signature of Armstrong, even if it did not know it instantly at the time it paid the
check. (Farmers' Bank of Augusta vs. Farmer's Bank of Maysville, supra, and cases cited.)
IV. The question now is to determine whether the appellant's negligence in purchasing the checks in question is such
as to give the appellee the right to recover upon said checks, and on the other hand, whether the drawee bank was
not itself negligent, except for its constructive fault in not knowing the signature of the drawer and detecting the
forgery.
We quote with approval the following conclusions of the court a quo:
Check Exhibit A bears number 637023-D and is dated April 6, 1933, whereas check Exhibit A-1 bears number
637020-D and is dated April 7, 1933. Therefore, the latter check, which is prior in number to the former
check, is however, issued on a later date. This circumstance must have aroused at least the curiosity of the
Motor Service Co., Inc.
The Motor Service Co., Inc., accepted the two checks from unknown persons. And not only this; check Exhibit
A is indorsed by a subagent of the agent of the payee, International Auto Repair Shop. The Motor Service Co.,
Inc., made no inquiry whatsoever as to the extent of the authority of these unknown persons. Our Supreme
Court said once that "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" (Insular Drug Co. vs. National Bank, 58, Phil., 684).
xxx

xxx

xxx

Check Exhibit A-1, aside from having been indorsed by a supposed agent of the international Auto Repair Shop
is crossed generally. The existence of two parallel lines transversally drawn on the face of this check was a
warning that the check could only be collected through a banking institution (Jacobs, Law of Bills of Exchange,
etc., pp., 179, 180; Bills of Exchange Act of England, secs. 76 and 79). Yet the Motor Service Co., Inc.,
accepted the check in payment for merchandise.
. . . In Exhibit H attached to the stipulation of facts as an integral part thereof, the Motor Service Co., Inc.,
stated the following:
"The Pangasinan Transportation Co. is a good customer of this firm and we received checks from them every
month in payment of their account. The two checks in question seem to be exactly similar to the checks which
we received from the Pangasinan Transportation Co. every month."
If the failure of the Motor Service Co., Inc., to detect the forgery of the drawer's signature in the two checks,
may be considered as an omission in good faith because of the similarity stated in the letter, then the same
consideration applies to the Philippine National Bank, for the drawer is a customer of both the Motor Service
Co., Inc., and the Philippine National Bank. (B. of E., pp. 25, 28, 35.)
We are of opinion that the facts of the present case do not make it one between two equally innocent persons, the
drawee bank and the holder, and that they are governed by the authorities already cited and also the following:
The point in issue has sometimes been said to be that of negligence. The drawee who has paid upon the
forged signature is held to bear the loss, because he has been negligent in failing to recognize that the
handwriting is not that of his customer. But it follows obviously that if the payee, holder, or presenter of the
forged paper has himself been in default, if he has himself been guilty of a negligence prior to that of the
banker, or if by any act of his own he has at all contributed to induce the banker's negligence, then he may
lose his right to cast the loss upon the banker. The courts have shown a steadily increasing disposition to
extend the application of this rule over the new conditions of fact which from time to time arise, until it can
now rarely happen that the holder, payee, or presenter can escape the imputation of having been in some
degree contributory towards the mistake. Without any actual change in the abstract doctrines of the law,
which are clear, just, and simple enough, the gradual but sure tendency and effect of the decisions have been
to put as heavy a burden of responsibility upon the payee as upon the drawee, contrary to the original
custom. . . . (2 Morse on Banks and Banking, 5th ed., secs. 464 and 466, pp. 82-85 and 86, 87.)
In First National Bank vs. Brule National Bank (12 A. L. R., 1079, 1088, 1089), the following statement appears in the
concurring opinion:
What, then, should be the rule? The drawee asks to recover for money had and received. If his claim did not
rest upon a transaction relating to a negotiable instrument plaintiff could recover as for money paid under
mistake, unless defendant could show some equitable reason, such as changed condition since, and relying
upon, payment by plaintiff. In the Wyndmere Case, the North Dakota court holds that this rule giving right to
recover money paid under mistake should extend to negotiable paper, and it rejects in its entirety the theory
of estoppel and puts a case of this kind on exactly the same basis as the ordinary case of payment under
mistake. But the great weight of authority, and that based on the better reasoning, holds that the exigencies
of business demand a different rule in relation to negotiable paper. What is that rule? Is it an absolute
estoppel against the drawee in favor of a holder, no matter how negligent such holder has been? It surely is
not. The correct rule recognizes the fact that, in case of payment without a prior acceptance or certification,
the holder takes the paper upon the of the prior indorsers and the credit of the drawer, and not upon the
credit of the drawee, in making payment, has a right to rely upon the assumption that the payee used due
diligence, especially where such payee negotiated the bill or check to a holder, thus representing that it had so
fully satisfied itself as to the identity and signature of the maker that it was willing to warrant as relates
thereto to all subsequent holders. (Uniform Act, secs. 65 and 66.) Such correct rule denies the drawee the
right to recover when the holder was without fault or when there has been some change of position calling for
equitable relief. When a holder of a bill of exchange uses all due care in the taking of bill or check and the
drawee thereafter pays same, the transaction is absolutely closed modern business could not be done on
any other basis. While the correct rule promotes the fluidity of two recognized mediums of exchange, those
mediums by which the great bulk of business is carried on, checks and drafts, upon the other hand it
encourages and demands prudent business methods upon the part of those receiving such mediums of
exchange. (Pennington County Bank vs. First State Bank, 110 Minn., 263; 26 L. R. A. [N. S.], 849; 136 Am.
St. Rep., 496; 125 N. W., 119; First National Bank vs. State Bank, 22 Neb., 769; 3 Am. St. Rep., 294; 36 N.

W., 289; Bank of Williamson, vs. McDowell County Bank, 66 W. Va., 545; 36 L. R. A. [N. S.], 605; 66 S. E.,
761; Germania Bank vs. Boutell, 60 Minn., 189; 27 L. R. A., 635; 51 Am. St. Rep., 519; 62 N. W., 327;
American Express Co. vs. State National Bank, 27 Okla., 824; 33 L. R. A. [N. S.], 188; 113 Pac., 711;
Farmers' National Bank vs. Farmers' & Traders Bank, L. R. A., 1915A, 77, and note (159 Ky., 141; 166 S. W.,
986].)
That the defendant bank did not use reasonable business prudence is clear. It took this check from a
stranger without other identification than that given by another stranger; its cashier witnessed the mark of
such stranger thus vouching for the identity and signature of the maker; and it indorsed the check as "Paid,"
thus further throwing plaintiff off guard. Defendant could not but have known, when negotiating such check
and putting it into the channel through which it would finally be presented to plaintiff for payment, that
plaintiff, if it paid such check, as defendant was asking it to do, would have to rely solely upon the apparent
faith and credit that defendant had placed in the drawer. From the very circumstances of this case plaintiff had
to act on the facts as presented to it by defendant, upon such facts only.
But appellant argues that it so changed its position, after payment by plaintiff, that in "equity and good
conscience" plaintiff should not recover it says it did not pay over any money to the forger until after
plaintiff had paid the check. There would be merit in such contention if defendant had indorsed the check for
"collection," thus advising plaintiff that it was relying on plaintiff and not on the drawer. It stands in court
where it would have been if it had done as it represented.
In Woods and Malone vs. Colony Bank (56 L. R. A., 929, 932), the court said:
. . . If the holder has been negligent in paying the forged paper, or has by his conduct, however innocent,
misled or deceived the drawee to his damage, it would be unjust for him to be allowed to shield himself from
the results of his own carelessness by asserting that the drawee was bound in law to know his drawer's
signature.
V. 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, 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.
It not appearing that the appellee bank did not warrant to the appellant the genuineness of the checks in question, by
its acceptance thereof, nor did it perform any act which would have induced the appellant to believe in the
genuineness of said instruments before appellant purchased them for value, it can not be said that the appellee is
precluded from setting up the forgery and, therefore, the appellant is not entitled to retain the amount of the forged
check paid to it by the appellee.
VI. It has been held by many courts that 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 discovery of the forgery had been made on presentation. (5 R. C. L., p. 559; 2 Daniel on
Negotiable Instruments, 1538.) Forgeries often deceived the eye of the most cautious experts; and when a bank has
been deceived, it is a harsh rule which compels it to suffer although no one has suffered by its being deceived. (17 A.
L. R. 891; 5 R. C. L., 559.)
In the instant case should the drawee bank be allowed recovery, the appellant's position would not become worse
than if the drawee had refused the payment of these checks upon their presentation. The appellant 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. It purchased them from unknown
persons and under suspicious circumstances. It had no valid title to them, because the persons from whom it received
them did not have such title. The appellant could not have compelled the drawee to pay them, and the drawee could
have refused payment had it been able to detect the forgery. By making a refund, the appellant would only returning
what it had received without any title or right. And when appellant pays back the money it had received it will be
entitled to have restored to it the forged papers it parted with. There is no good reason why the accidental payment
made by the appellant should inure to the benefit of the appellant. If there were injury to the appellant said injury was
caused not by the failure of the appellee to detect the forgery but by the very negligence of the appellant in
purchasing commercial papers from unknown persons without making inquiry as to their genuineness.

In the light of the foregoing discussion, we conclude:

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.
Wherefore, the assignments of error are overruled, and the judgment appealed from must be, as it is hereby,
affirmed, with costs against the appellant. So ordered.
Avancea, C. J., Villa-Real, Abad Santos, Imperial, Diaz, and Laurel, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-7593

March 27, 1913

THE UNITED STATES, plaintiff-appellee,

vs.
JOSE M. IGPUARA, defendant-appellant.
W. A. Kincaid, Thos. L. Hartigan, and Jose Robles Lahesa for appellant.
Office of the Solicitor-General Harvey for appellee.
ARELLANO, C.J.:
The defendant therein is charged with the crime of estafa, for having swindled Juana Montilla and Eugenio Veraguth
out of P2,498 Philippine currency, which he had take on deposit from the former to be at the latter's disposal. The
document setting forth the obligation reads:
We hold at the disposal of Eugenio Veraguth the sum of two thousand four hundred and ninety-eight pesos (P2,498),
the balance from Juana Montilla's sugar. Iloilo, June 26, 1911, Jose Igpuara, for Ramirez and Co.
The Court of First Instance of Iloilo sentenced the defendant to two years of presidio correccional, to pay Juana
Montilla P2,498 Philippine currency, and in case of insolvency to subsidiary imprisonment at P2.50 per day, not to
exceed one-third of the principal penalty, and the costs.
The defendant appealed, alleging as errors: (1) Holding that the document executed by him was a certificate of
deposit; (2) holding the existence of a deposit, without precedent transfer or delivery of the P2,498; and (3)
classifying the facts in the case as the crime of estafa.
A deposit is constituted from the time a person receives a thing belonging to another with the obligation of
keeping and returning it. (Art. 1758, Civil Code.)
That the defendant received P2,498 is a fact proven. The defendant drew up a document declaring that they remained
in his possession, which he could not have said had he not received them. They remained in his possession, surely in
no other sense than to take care of them, for they remained has no other purpose. They remained in the defendant's
possession at the disposal of Veraguth; but on August 23 of the same year Veraguth demanded for him through a
notarial instrument restitution of them, and to date he has not restored them.
The appellant says: "Juana Montilla's agent voluntarily accepted the sum of P2,498 in an instrument payable on
demand, and as no attempt was made to cash it until August 23, 1911, he could indorse and negotiate it like any
other commercial instrument. There is no doubt that if Veraguth accepted the receipt for P2,498 it was because at
that time he agreed with the defendant to consider the operation of sale on commission closed, leaving the collection
of said sum until later, which sum remained as a loan payable upon presentation of the receipt." (Brief, 3 and 4.)
Then, after averring the true facts: (1) that a sales commission was precedent; (2) that this commission was settled
with a balance of P2,498 in favor of the principal, Juana Montilla; and (3) that this balance remained in the possession
of the defendant, who drew up an instrument payable on demand, he has drawn two conclusions, both erroneous:
One, that the instrument drawn up in the form of a deposit certificate could be indorsed or negotiated like any other
commercial instrument; and the other, that the sum of P2,498 remained in defendant's possession as a loan.
It is erroneous to assert that the certificate of deposit in question is negotiable like any other commercial instrument:
First, because every commercial instrument is not negotiable; and second, because only instruments payable to order
are negotiable. Hence, this instrument not being to order but to bearer, it is not negotiable.

It is also erroneous to assert that sum of money set forth in said certificate is, according to it, in the defendant's
possession as a loan. In a loan the lender transmits to the borrower the use of the thing lent, while in a deposit the
use of the thing is not transmitted, but merely possession for its custody or safe-keeping.
In order that the depositary may use or dispose oft he things deposited, the depositor's consent is required, and then:
The rights and obligations of the depositary and of the depositor shall cease, and the rules and provisions
applicable to commercial loans, commission, or contract which took the place of the deposit shall be observed.
(Art. 309, Code of Commerce.)
The defendant has shown no authorization whatsoever or the consent of the depositary for using or disposing of the
P2,498, which the certificate acknowledges, or any contract entered into with the depositor to convert the deposit into
a loan, commission, or other contract.
That demand was not made for restitution of the sum deposited, which could have been claimed on the same or the
next day after the certificate was signed, does not operate against the depositor, or signify anything except the
intention not to press it. Failure to claim at once or delay for sometime in demanding restitution of the things
deposited, which was immediately due, does not imply such permission to use the thing deposited as would convert
the deposit into a loan.
Article 408 of the Code of Commerce of 1829, previous to the one now in force, provided:
The depositary of an amount of money cannot use the amount, and if he makes use of it, he shall be
responsible for all damages that may accrue and shall respond to the depositor for the legal interest on the
amount.
Whereupon the commentators say:
In this case the deposit becomes in fact a loan, as a just punishment imposed upon him who abuses the
sacred nature of a deposit and as a means of preventing the desire of gain from leading him into speculations
that may be disastrous to the depositor, who is much better secured while the deposit exists when he only has
a personal action for recovery.
According to article 548, No. 5, of the Penal Code, those who to the prejudice of another appropriate or
abstract for their own use money, goods, or other personal property which they may have received as a
deposit, on commission, or for administration, or for any other purpose which produces the obligation of
delivering it or returning it, and deny having received it, shall suffer the penalty of the preceding article,"
which punishes such act as the crime of estafa. The corresponding article of the Penal Code of the Philippines
in 535, No. 5.
In a decision of an appeal, September 28, 1895, the principle was laid down that: "Since he commits the crime
ofestafa under article 548 of the Penal Code of Spain who to another's detriment appropriates to himself or abstracts
money or goods received on commission for delivery, the court rightly applied this article to the appellant, who, to the
manifest detriment of the owner or owners of the securities, since he has not restored them, willfully and wrongfully
disposed of them by appropriating them to himself or at least diverting them from the purpose to which he was
charged to devote them."
It is unquestionable that in no sense did the P2,498 which he willfully and wrongfully disposed of to the detriments of
his principal, Juana Montilla, and of the depositor, Eugenio Veraguth, belong to the defendant.
Likewise erroneous is the construction apparently at tempted to be given to two decisions of this Supreme Court (U.
S. vs. Dominguez, 2 Phil. Rep., 580, and U. S. vs. Morales and Morco, 15 Phil. Rep., 236) as implying that what
constitutes estafa is not the disposal of money deposited, but denial of having received same. In the first of said cases
there was no evidence that the defendant had appropriated the grain deposited in his possession.
On the contrary, it is entirely probable that, after the departure of the defendant from Libmanan on
September 20, 1898, two days after the uprising of the civil guard in Nueva Caceres, the rice was seized by
the revolutionalists and appropriated to their own uses.

In this connection it was held that failure to return the thing deposited was not sufficient, but that it was necessary to
prove that the depositary had appropriated it to himself or diverted the deposit to his own or another's benefit. He
was accused or refusing to restore, and it was held that the code does not penalize refusal to restore but denial of
having received. So much for the crime of omission; now with reference to the crime of commission, it was not held in
that decision that appropriation or diversion of the thing deposited would not constitute the crime ofestafa.
In the second of said decisions, the accused "kept none of the proceeds of the sales. Those, such as they were, he
turned over to the owner;" and there being no proof of the appropriation, the agent could not be found guilty of the
crime of estafa.
Being in accord and the merits of the case, the judgment appealed from is affirmed, with costs.
Torres, Johnson and Trent, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-11776

August 30, 1958

RAMON GONZALES, plaintiff-appellee,

vs.
GO TIONG and LUZON SURETY CO., INC., defendants-appellants.
Rustico V. Nazareno for appellee.
David, Abel and Ysip for appellant Go Tiong.
Tolentino, Garcia and D. R. Cruz for appellant Luzon Surety Co., Inc.
MONTEMAYOR, J.:
Defendants Go Tiong and Luzon Surety Co. are appealing from the decision of the Court of First Instance of Manila,
Judge Magno S. Gatmaitan presiding, the dispositive part of which reads as follows:
In view whereof, judgment is rendered condemning defendant Go Tiong and Luzon Surety Co., jointly and
severally, to pay plaintiff the sum of P4,920 with legal interest from the date of the filing of the complaint until
fully paid; judgment is also rendered against Go Tiong to pay the sum of P3,680 unto plaintiff, also with legal
interest from the date of the filing of the complaint until fully paid. Go Tiong is also condemned to pay the
sum of P1,000 as attorney's fees, plus costs.
The appeal was first taken to the Court of Appeals, the latter indorsing the case to us later under the provisions of
Section 17 (6) of Republic Act No. 296, on the ground that the issues raised were purely questions of law.
Go Tiong owned a rice mill and warehouse, located at Mabini, Urdaneta, Pangasinan. On February 4, 1953, he
obtained a license to engage in the business of a bonded warehouseman (Exhibit N). To secure the performance of his
obligations as such bonded warehouseman, the Luzon Surety Co. executed Guaranty Bond No. 294 in the sum of
P18,334 (Exhibit O), conditioned particularly on the fulfillment by Go Tiong of his duty or obligation to deliver to the
depositors in his storage warehouse, the palay received by him for storage, at any time demand is made, or to pay
the market value thereof, in case he was unable to return the same. The bond was executed on January 26, 1953. Go
Tiong insured the warehouse and the palay deposited therein with the Alliance Surety and Insurance Company.
But prior to the issuance of the license to Go Tiong to operate as bonded warehouseman, he had on several occasions
received palay for deposit from plaintiff Gonzales, totaling 368 sacks, for which he issued receipts, Exhibits A, B, C,
and D. After he was licensed as bonded warehouseman, Go Tiong again received various deliveries of palay from

plaintiff, totaling 492 sacks, for which he issued the corresponding receipts, all the grand total of 860 sacks, valued at
P8,600 at the rate of P10 per sack.
On or about March 15, 1953, plaintiff demanded from Go Tiong the value of his deposits in the amount of P8,600, but
he was told to return after two days, which he did, but Go Tiong again told him to come back. A few days later, the
warehouse burned to the ground. Before the fire, Go Tiong had been accepting deliveries of palay from other
depositors and at the time of the fire, there were 5,847 sacks of palay in the warehouse, in excess of the 5,000 sacks
authorized under his license. The receipts issued by Go Tiong to the plaintiff were ordinary receipts, not the
"warehouse receipts" defined by the Warehouse Receipts Act (Act No. 2137).
After the burning of the warehouse, the depositors of palay, including plaintiff, filed their claims with the Bureau of
Commerce, and it would appear that with the proceeds of the insurance policy, the Bureau of Commerce paid off some
of the claim. Plaintiff's counsel later withdrew his claim with the Bureau of Commerce, according to Go Tiong, because
his claim was denied by the Bureau, but according to the decision of the trial court, because nothing came from
plaintiff's efforts to have his claim paid. Thereafter, Gonzales filed the present action against Go Tiong and the Luzon
Surety for the sum of P8,600, the value of his palay, with legal interest, damages in the sum of P5,000 and P1,500 as
attorney's fees. Gonzales later renewed his claim with the Bureau of Commerce (Exhibit S).
While the case was pending in court, Gonzales and Go Tiong entered into a contract of amicable settlement to the
effect that upon the settlement of all accounts due to him by Go Tiong, he, Gonzales, would have all actions pending
against Go Tiong dismissed. Inasmuch as Go Tiong failed to settle the accounts, Gonzales prosecuted his court action..
For purposes of reference, we reproduce the assignment of errors of Go Tiong, as well as the assignment of errors of
the Luzon Surety, all reading thus:
I. The trial court erred in finding that plaintiff-appellee's claim is covered by the Bonded Warehouse Law, Act
3893, as amended, and not by the Civil Code.
II. The trial court erred in not exempting defendant-appellant Go Tiong for the loss of the palay deposited,
pursuant to the provisions of the New Civil Code.".
xxx

xxx

xxx

I. The trial court erred in not declaring that the amicable settlement by and between plaintiff-appellee and
defendant Go Tiong constituted a material alteration of the surety bond of appellant Luzon Surety which
extinguished and discharged its liability.
II. The trial court erred in bolding that the receipts for the palay received by Go Tiong, though not in the form
of "quedans" or warehouse receipts are chargeable against the surety bond filed under the provisions of the
General Bonded Warehouse Act (Act No. 3893 as amended by Republic Act No. 247) as a result of a loss.
III. The trial court erred in not holding that the plaintiff had renounced and abandoned his rights under the
Bonded Warehouse Act by the withdrawal of his claim from the Bureau of Commerce and the execution of the
"amicable settlement".
IV. The trial court erred in not holding that the palay delivered to Go Tiong constitutes gratuitous deposit
which was extinguished upon the loss and destruction of the subject matter.
V. The trial court erred in not declaring that the transaction between defendant Go Tiong and plaintiff was
more of a sale rather than a deposit.
VI. The trial court erred in declaring that the Luzon Surety Co., Inc., had not complied with its undertaking
despite the liquidation of all the claims by the Bureau of Commerce.
VII. The lower court erred in adjudging the herein surety liable under the terms of the Bond.
We shall discuss the assigned errors at the same time, considering the close relation between them, although we do
not propose to discuss and rule upon all of them. Both appellants urge that plaintiff's claim is governed by the Civil

Code and not by the Bonded Warehouse Act (Act No. 3893, as amended by Republic Act No. 247), for the reason that,
as already stated, what Go Tiong issued to plaintiff were ordinary receipts, not the warehouse receipts contemplated
by the Warehouse Receipts Law, and because the deposits of palay of plaintiff were gratuitous.
Act No. 3893 as amended is a special law regulating the business of receiving commodities for storage and defining
the rights and obligations of a bonded warehouseman and those transacting business with him. Consequently, any
deposit made with him as a bonded warehouseman must necessarily be governed by the provisions of Act No. 3893.
The kind or nature of the receipts issued by him for the deposits is not very material much less decisive. Though it is
desirable that receipts issued by a bonded warehouseman should conform to the provisions of the Warehouse Receipts
Law, said provisions in our opinion are not mandatory and indispensable in the sense that if they fell short of the
requirements of the Warehouse Receipts Act, then the commodities delivered for storage become ordinary deposits
and will not be governed by the provisions of the Bonded Warehouse Act. Under Section 1 of the Warehouse Receipts
Act, one would gather the impression that the issuance of a warehouse receipt in the form provided by it is merely
permissive and directory and not obligatory:
SECTION 1. Persons who may issue receipts. Warehouse receipts may be issued by any warehouseman.,
and the Bonded Warebouse Act as amended permits the warehouseman to issue any receipt, thus:
. . . . "receipt" as any receipt issued by a warehouseman for commodity delivered to him.
As the trial court well observed, as far as Go Tiong was concerned, the fact that the receipts issued by him were not
"quedans" is no valid ground for defense because he was the principal obligor. Furthermore, as found by the trial
court, Go Tiong had repeatedly promised plaintiff to issue to him "quedans" and had assured him that he should not
worry; and that Go Tiong was in the habit of issuing ordinary receipts (not "quedans") to his depositors.
As to the contention that the deposits made by the plaintiff were free because he paid no fees therefor, it would
appear that Go Tiong induced plaintiff to deposit his palay in the warehouse free of charge in order to promote his
business and to attract other depositors, it being understood that because of this accommodation, plaintiff would
convince other palay owners to deposit with Go Tiong.
Appellants contend that the burning of the warehouse was a fortuitous event and not due to any fault of Go Tiong and
that consequently, he should not be held liable, appellants supporting the contention with the ruling in the case of La
Sociedad Dalisay vs. De los Reyes, 55 Phil. 452, reading as follows:
Inasmuch as the fire, according to the judgment appealed from, was neither intentional nor due to the
negligence of the appellant company or its officials; and it appearing from the evidence that the then manager
attempted to save the palay, the appellant company should not be held responsible for damages resulting
from said fire. . . . .
The trial court correctly disposed of this same contention, thus:
The defense that the palay was destroyed by fire neither does the Court consider to be good for while the
contract was in the nature of a deposit and the loss of the thing would exempt the obligor in a contract of
deposit to return the goods, this exemption from the responsibility for the damages must be conditioned in his
proof that the loss was by force majeure, and without his fault. The Court does not see from the evidence that
the proof is clear on the legal exemption. On the contrary, the fact that he exceeded the limit of the
authorized deposit must have increased the risk and would militate against his defense of non-liability. For this
reason, the Court does not follow La Sociedad vs. De Los Santos, 55 Phil. 42 quoted by Go Tiong. (p. 3,
Decision).
Considering the fact, as already stated, that prior to the burning of the warehouse, plaintiff demanded the payment of
the value of his palay from Go Tiong on two occasions but was put off without any valid reason, under the
circumstances, the better rule which we accept is the following:
. . . . This rule proceeds upon the theory that the facts surrounding the care of the property by a bailee are
peculiarly within his knowledge and power to prove, and that the enforcement of any other rule would impose
great difficulties upon the bailors. ... It is illogical and unreasonable to hold that the presumption of negligence
in case of this kind is rebutted by the bailee by simply proving that the property bailed was destroyed by an

ordinary fire which broke out on the bailee's own premises, without regard to the care exercised by the latter
to prevent the fire, or to save the property after the commencement of the fire. All the authorities seem to
agree that the rule that there shall be a presumption of negligence in bailment cases like the present one,
where there is default in delivery or accounting, for the goods is just a necessary one. . . . (9 A.L.R. 566; see
also Hanes vs. Shapiro, 84 S.E. 33; J. Russel Mfg. Co. vs. New Haven, S.B. Co., 50 N.Y. 211; Beck vs. WilkinsRicks Co., 102 S.E. 313, Fleishman vs. Southern R. Co., 56 S.E. 974).
Besides, as observed by the trial court, the defendant violated the terms of his license by accepting for deposit palay
in excess of the limit authorized by his license, which fact must have increased the risk.
The Luzon Surety claims that the amicable settlement by and between Gonzales and Go Tiong constituted a material
alteration of its bond, thereby extinguishing and discharging its liability. It is evident, however, that while there was an
attempt to settle the case amicably, the settlement was never consummated because Go Tiong failed to settle the
accounts of Gonzales to the latter's satisfaction. Consequently, said non-consummated compromise settlement does
not discharge the surety:
A compromise or settlement between the creditor or obligee and the principal, by which the latter is
discharged from liability, discharges the surety, . . . . But an unconsummated . . . agreement to compromise,
falling short of an effective settlement, will not discharge the surety. (50 C. J. 185)
In relation to the failure of Go Tiong to issue the warehouse receipts contemplated by the Warehouse Receipts Act,
which failure, according to appellants, precluded plaintiff from suing on the bond, reference may be made to Section 2
of Act No. 3893, defining receipt as any receipt issued by a warehouseman for commodity delivered to him, showing
that the law does not require as indispensable that a warehouse receipt be issued. Furthermore, Section 7 of said law
provides that as long as the depositor is injured by a breach of any obligation of the warehouseman, which obligation
is secured by a bond, said depositor may sue on said bond. In other words, the surety cannot avoid liability from the
mere failure of the warehouseman to issue the prescribed receipt. In the case of Andreson vs. Krueger, 212 N.W. 198,
199, it was held:
The surety company concedes that the bond which it gave contains the statutory conditions. The statute . . .
requires that the bond shall be conditioned upon the faithful performance of the public local grain
warehouseman of all the provisions of law relating to the storage of grain by such warehouseman.
The surety company thereby made itself responsible for the performance by the warehouseman of all the
duties and obligations imposed upon him by the statute; and, if he failed to perform any such duty to the loss
or detriment of those who delivered grain for storage, the surety company became liable therefor. Where the
warehouseman receives grain for storage and refuses to return or pay it, the fact that he failed to issue the
receipt, when the statute required him to issue on receiving it, is not available to the surety as a defense
against an action on the bond. The obligation of the surety covers the duty of the warehouseman to issue the
prescribed receipt, as well as the other duties imposed upon him by the statute.
We deem it unnecessary to discuss and rule upon the other questions raised in the appeal.
In view of the foregoing, the appealed decision is hereby affirmed, with costs.
Paras, C. J., Padilla, Reyes, A., Bautista Angelo, Concepcion, Endencia, Reyes, J.B.L., and Felix, JJ., concur.
Bengzon, J., concurs in the result.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-17825

June 26, 1922

In the matter of the Involuntary insolvency of U. DE POLI.

FELISA ROMAN, claimant-appellee,
vs.
ASIA BANKING CORPORATION, claimant-appellant.
Wolfson, Wolfson and Schwarzkopf and Gibbs, McDonough & Johnson for appellant.
Antonio V. Herrero for appellee.
OSTRAND, J.:
This is an appeal from an order entered by the Court of First Instance of Manila in civil No. 19240, the insolvency of
Umberto de Poli, and declaring the lien claimed by the appellee Felisa Roman upon a lot of leaf tobacco, consisting of
576 bales, and found in the possession of said insolvent, superior to that claimed by the appellant, the Asia Banking
Corporation.
The order appealed from is based upon the following stipulation of facts:
It is hereby stipulated and agreed by and between Felisa Roman and Asia Banking Corporation, and on their
behalf by their undersigned attorneys, that their respective rights, in relation to the 576 bultos of tobacco
mentioned in the order of this court dated April 25, 1921, be, and hereby are, submitted to the court for
decision upon the following:
I. Felisa Roman claims the 576 bultos of tobacco under and by virtue of the instrument, a copy of which is
hereto attached and made a part hereof and marked Exhibit A.
II. That on November 25, 1920, said Felisa Roman notified the said Asia Banking Corporation of her
contention, a copy of which notification is hereto attached and made a part hereof and marked Exhibit B.
III. That on November 29, 1920, said Asia Banking Corporation replied as per copy hereto attached and
marked Exhibit C.
IV. That at the time the above entitled insolvency proceedings were filed the 576 bultos of tobacco were in
possession of U. de Poli and now are in possession of the assignee.
V. That on November 18, 1920, U. de Poli, for value received, issued a quedan, covering aforesaid
576bultos of tobacco, to the Asia Banking Corporation as per copy of quedan attached and marked Exhibit D.
VI. That aforesaid 576 bultos of tobacco are part and parcel of the 2,777 bultos purchased by U. de Poli from
Felisa Roman.
VII. The parties further stipulate and agree that any further evidence that either of the parties desire to
submit shall be taken into consideration together with this stipulation.
Manila, P. I., April 28, 1921.
(Sgd.) ANTONIO V. HERRERO
Attorney for Felisa Roman
(Sgd.) WOLFSON, WOLFSON & SCHWARZKOPF
Attorney for Asia Banking Corp.
Exhibit A referred to in the foregoing stipulation reads:
1. Que la primera parte es duea de unos dos mil quinientos a tres mil quintales de tacabo de distintas
clases, producidos en los municipios de San Isidro, Kabiaw y Gapan adquiridos por compra con dinero
perteneciente a sus bienes parafernales, de los cuales es ella administradora.

2. Que ha convenido la venta de dichos dos mil quinientos a tres mil quintales de tabaco mencionada con la
Segunda Parte, cuya compraventa se regira por las condiciones siguientes:
(a) La Primera Parte remitira a la Segunda debidamente enfardado el tabaco de que ella es propietaria
enbultos no menores de cincuenta kilos, siendo de cuenta de dicha Primera Parte todos los gastos que origine
dicha mercancja hasta la estacion de ferrocarril de Tutuban, en cuyo lugar se hara cargo la Segunda y desde
cuyo instante seran de cuenta de esta los riesgos de la mercancia.
(b) El precio en que la Primera Parte vende a la Segunda el tabaco mencionada es el de veintiseis pesos (P26),
moneda filipina, por quintal, pagaderos en la forma que despues se establece.
(c) La Segunda Parte sera la consignataria del tabaco en esta Ciudad de Manila quien se hara cargo de el
cuando reciba la factura de embarque y la guia de Rentas Internas, trasladandolo a su bodega quedando en la
misma en calidad de deposito hasta la fecha en que dicha Segunda Parte pague el precio del mismo, siendo de
cuenta de dicha Segunda Parte el pago de almacenaje y seguro.
(d) LLegada la ultima expedicion del tabaco, se procedera a pesar el mismo con intervencion de la Primera
Parte o de un agente de ella, y conocido el numero total de quintales remitidos, se hara liquidacion del precio
a cuenta del cual se pagaran quince mil pesos (P15,000), y el resto se dividira en cuatro pagares vencederos
cada uno de ellos treinta dias despues del anterior pago; esto es, el primer pagare vencera a los treinta dias
de la fecha en que se hayan pagado los quince mil pesos, el segundo a igual tiempo del anterior pago, y asi
sucesivamente; conviniendose que el capital debido como precio del tabaco devengara un interes del diez por
ciento anual.
Los plazos concedidos al comprador para el pago del precio quedan sujetos a la condicion resolutoria de que si
antes del vencimiento de cualquier plazo, el comprador vendiese parte del tabaco en proporcion al importe de
cualquiera de los pagares que restasen por vencer, o caso de que vendiese, pues se conviene para este caso
que desde el momento en que la Segunda Parte venda el tabaco, el deposito del mismo, como garantia del
pago del precio, queda cancelado y simultaneamente es exigible el importe de la parte por pagar.
Leido este documento por los otorgantes y encontrandolo conforme con lo por ellos convenido, lo firman la
Primera Parte en el lugar de su residencia, San Isidro de Nueva Ecija, y la Segunda en esta Ciudad de Manila,
en las fechas que respectivamente al pie de este documento aparecen.
(Fdos.) FELISA ROMAN VDA. DE MORENO
U. DE POLI
Firmado en presencia de:
(Fdos.) ANTONIO V. HERRERO
T. BARRETTO
("Acknowledged before Notary")
Exhibit D is a warehouse receipt issued by the warehouse of U. de Poli for 576 bales of tobacco. The first paragraph of
the receipt reads as follows:
Quedan depositados en estos almacenes por orden del Sr. U. de Poli la cantidad de quinientos setenta y seis
fardos de tabaco en rama segun marcas detalladas al margen, y con arreglo a las condiciones siguientes:
In the left margin of the face of the receipts, U. de Poli certifies that he is the sole owner of the merchandise therein
described. The receipt is endorced in blank "Umberto de Poli;" it is not marked "non-negotiable" or "not negotiable."
Exhibit B and C referred to in the stipulation are not material to the issues and do not appear in the printed record.
Though Exhibit A in its paragraph (c) states that the tobacco should remain in the warehouse of U. de Poli as a deposit
until the price was paid, it appears clearly from the language of the exhibit as a whole that it evidences a contract of
sale and the recitals in order of the Court of First Instance, dated January 18, 1921, which form part of the printed

record, show that De Poli received from Felisa Roman, under this contract, 2,777 bales of tobacco of the total value of
P78,815.69, of which he paid P15,000 in cash and executed four notes of P15,953.92 each for the balance. The sale
having been thus consummated, the only lien upon the tobacco which Felisa Roman can claim is a vendor's lien.
The order appealed from is based upon the theory that the tobacco was transferred to the Asia Banking Corporation as
security for a loan and that as the transfer neither fulfilled the requirements of the Civil Code for a pledge nor
constituted a chattel mortgage under Act No. 1508, the vendor's lien of Felisa Roman should be accorded preference
over it.
It is quite evident that the court below failed to take into consideration the provisions of section 49 of Act No. 2137
which reads:
Where a negotiable receipts has been issued for goods, no seller's lien or right of stoppage in transitu shall
defeat the rights of any purchaser for value in good faith to whom such receipt has been negotiated, whether
such negotiation be prior or subsequent to the notification to the warehouseman who issued such receipt of
the seller's claim to a lien or right of stoppage in transitu. Nor shall the warehouseman be obliged to deliver or
justified in delivering the goods to an unpaid seller unless the receipt is first surrendered for cancellation.
The term "purchaser" as used in the section quoted, includes mortgagee and pledgee. (See section 58 (a) of the same
Act.)
In view of the foregoing provisions, there can be no doubt whatever that if the warehouse receipt in question is
negotiable, the vendor's lien of Felisa Roman cannot prevail against the rights of the Asia Banking Corporation as the
indorse of the receipt. The only question of importance to be determined in this case is, therefore, whether the receipt
before us is negotiable.
The matter is not entirely free from doubt. The receipt is not perfect: It recites that the merchandise is deposited in
the warehouse "por orden" instead of "a la orden" or "sujeto a la orden" of the depositor and it contain no other direct
statement showing whether the goods received are to be delivered to the bearer, to a specified person, or to a
specified person or his order.
We think, however, that it must be considered a negotiable receipt. A warehouse receipt, like any other document,
must be interpreted according to its evident intent (Civil Code, arts. 1281 et seq.) and it is quite obvious that the
deposit evidenced by the receipt in this case was intended to be made subject to the order of the depositor and
therefore negotiable. That the words "por orden" are used instead of "a la orden" is very evidently merely a clerical or
grammatical error. If any intelligent meaning is to be attacked to the phrase "Quedan depositados en estos almacenes
por orden del Sr. U. de Poli" it must be held to mean "Quedan depositados en estos almacenes a la orden del Sr. U. de
Poli." The phrase must be construed to mean that U. de Poli was the person authorized to endorse and deliver the
receipts; any other interpretation would mean that no one had such power and the clause, as well as the entire
receipts, would be rendered nugatory.
Moreover, the endorsement in blank of the receipt in controversy together with its delivery by U. de Poli to the
appellant bank took place on the very of the issuance of the warehouse receipt, thereby immediately demonstrating
the intention of U. de Poli and of the appellant bank, by the employment of the phrase "por orden del Sr. U. de Poli" to
make the receipt negotiable and subject to the very transfer which he then and there made by such endorsement in
blank and delivery of the receipt to the blank.
As hereinbefore stated, the receipt was not marked "non-negotiable." Under modern statutes the negotiability of
warehouse receipts has been enlarged, the statutes having the effect of making such receipts negotiable unless
marked "non-negotiable." (27 R. C. L., 967 and cases cited.)
Section 7 of the Uniform Warehouse Receipts Act, says:
A non-negotiable receipt shall have plainly placed upon its face by the warehouseman issuing it 'nonnegotiable,' or 'not negotiable.' In case of the warehouseman's failure so to do, a holder of the receipt who
purchased it for value supposing it to be negotiable may, at his option, treat such receipt as imposing upon
the warehouseman the same liabilities he would have incurred had the receipt been negotiable.

This section shall not apply, however, to letters, memoranda, or written acknowledgments of an informal
character.
This section appears to give any warehouse receipt not marked "non-negotiable" or "not negotiable" practically the
same effect as a receipt which, by its terms, is negotiable provided the holder of such unmarked receipt acquired it for
value supposing it to be negotiable, circumstances which admittedly exist in the present case.
We therefore hold that the warehouse receipts in controversy was negotiable and that the rights of the endorsee
thereof, the appellant, are superior to the vendor's lien of the appellee and should be given preference over the latter.
The order appealed from is therefore reversed without costs. So ordered.
Araullo, C.J., Malcolm, Avancea, Villamor, Johns and Romualdez, JJ., concur.