G.R. No. 18657 ; August 23, 1922
THE GREAT EASTERN LIFE INSURANCE CO., plaintiff-appellant, vs. HONGKONG & SHANGHAI BANKING CORPORATION and PHILIPPINE NATIONAL BANK, defendants-appellees.

FACTS

Plaintiff Great Eastern Life Insurance Co. drew a check for P2,000 on its account with defendant Hongkong & Shanghai Banking Corporation (HSBC), payable to the order of Lazaro Melicor. E. M. Maasim fraudulently obtained the check, forged Melicor’s endorsement, added his own genuine endorsement, and deposited it with defendant Philippine National Bank (PNB). PNB credited Maasim, paid the check, and then endorsed it to HSBC, which paid PNB and charged plaintiff’s account. HSBC sent a bank statement to plaintiff reflecting the charge. About four months later, plaintiff discovered the forgery (Melicor never received or endorsed the check) and demanded HSBC re-credit its account. HSBC refused. Plaintiff sued both banks. The trial court absolved both banks, finding they acted in good faith without negligence.

ISSUE

Who bears the loss arising from the payment of a check based on a forged endorsement of the payee’s signature?

RULING

The drawee bank (HSBC) bears the ultimate loss and must re-credit the drawer’s account. The collecting bank (PNB) is liable to the drawee bank.
The drawer (plaintiff) authorized HSBC to pay only to Melicor or his order. The forged endorsement of Melicor was “wholly inoperative” under Section 23 of the Negotiable Instruments Law ( Act No. 2031 ). Therefore, HSBC had no right to charge plaintiff’s account as it did not pay according to the drawer’s order. HSBC’s payment to PNB, which presented the check with a forged endorsement, was not a valid payment. Plaintiff was not estopped by its failure to promptly object to the bank statement, as the forgery was of the payee’s signature, not the drawer’s; the drawer had the right to assume the bank verified endorsements before payment.
PNB, as the collecting bank that first cashed the check, warranted the genuineness of all prior endorsements when it presented the check to HSBC. Its remedy is against the forger, Maasim, to whom it paid the money.
The Supreme Court reversed the trial court and entered judgment: (1) for plaintiff against HSBC for P2,000 with interest and costs; and (2) for HSBC against PNB for the same amount plus costs.