Philippine National Bank vs. The National City Bank of New YorkG.R. No. L-43596October 31, 1936

Facts:1) On April 7 and 9 1933, unknown persons negotiated with Motor Service Company two

checks in payment of automobile tires. It was issued by Pangasinan Transportation Co against PNB in favor of the International Auto Repair Shop. The checks were indorsed by unknown persons.

2) Motor Service Company indorsed the checks for deposit at the National City Bank of New York.

3) On April 8 and 10, 1933, the checks were cleared by PNB. 4) PNB later found out that the signature of the drawer was forged.

Issues:1) Did PNB accept the check?2) Is the bank obliged to know the signature of its depositors?3) Who bears the lost in case of forgery?4) Who was negligent?5) Is PNB precluded from setting up forgery as a defense?6) Can PNB recover payment?

Held:1) No. Payment of the check made a bank is not equivalent to acceptance so as to make

the bank liable under article 62 of the NIL. Checks according to Section 185 is a bill of exchange payable on demand, acceptance is unnecessary.

Acceptance vs. Paymenta) Acceptance implies successive negotiation while payment prevents farther

negotiation.b) Acceptance is a promise to pay in the future and continues the life of the bill;

Payment is the final act and extinguishes the bill

BUT: There is nothing the law that against presentation of checks for acceptance. It is possible that the check is presented to the bank for “certification”. This is equal to acceptance. But it is not “acceptance” in the true sense. It is only made to acknowledge that the check is good.American Jurisprudence:

i) National Bank vs. First National Bankii) State Bank of Chicago vs. Mid City Trust and Savings Bankiii) Rauch vs. Bankers National Bank of Chicago –payment of unauthorized or

forged indorsement does not operate as acceptance of the check.iv) Federal Land Bank vs. Collins-payment is not acceptance because the

drawee bank never writes its name across the paper.v) First National Bank vs Bank of Cottage Grove-there is no similarity

between acceptance and payment.

vi) Seventh National Bank vs. Cook – There is no privity between payee and the bank because it is not the bank that pays. If the money paid is based upon an forged or wrong indorsement, the account is untouched.

Payment is not acceptance and payment does not imply acceptance. 2) No. It is an old doctrine that is no longer applicable. This doctrine is said to be too

favorable to the holder. Some Justices criticize that this priniciple is based on an erroneous assumption that the holder only resents the check for payment. It must be remembered that when a holder presents a check, he also has warranties about the signature of the check.

One author even said that the drawee bank must not suffer for not knowing the signature of the drawer when the holder on the other hand, without knowing the signature of the drawer took the oinstrument.

3) The party guilty of negligence bears the lost.

HOLDER: In order to entitle a HOLDER to payment of a forged check, the holder must a) prove that the responsibility of determining the genuineness of the signature is upon the drawee b) he was diligent in handling the check.

BANK: Actual negligence is different from constructive negligence. In the absence of actual fault by the drawee, the constructive fault of not knowing the signature of the drawer and not detecting forgery WILL NOT PRECLUDE the drawee from revering the amount. If both bank and holder were not guilty of any fault, the NEGLIGENT PARTY bears the loss.

American Jurisprudence:i) First National Bank vs US Nat Bank- A holder cannot profit by a mistake which his

negligent disregard of duty has contributed to induce the drawee. A holder must make due inquiry as to the validity of the check before presenting it.

ii) First Nat Bank vs. Brule Nat Bank – The warranty of an indorser on the genuineness of a signature is not released by the payment of the check.

4) Motor Service Co was negligent. The bank was only guilty of constructive fault. Motor Service Co on the other hand had several fault: i) In the two checks that were indorsed, the check that was later presented (April

9) to Motor Services bears a check number that is earlier than the one presented in the April 7 transaction. Motor Services failed to check it.

ii) Motor Service took the check from an unknown person. International Auto Repair Shop is a company and in such situation, it must inquire as to the authority of the one indorsing.

iii) One of the checks was crossed.

5) No, PNB is not precluded from putting up the defense of forgery. It did not warrant the genuineness of the signature when it paid the check and it did not induce the appellant to believe the genuineness of the signature.

6) Yes, PNB can recover.