G.R. No. L-14226. February 29, 1960.
MANILA SURETY AND FIDELITY CO., INC., plaintiff-appellee, vs. JOSE M. LUNA, defendant-appellant.

FACTS

Defendant Jose M. Luna was the registered owner of a parcel of land in Manila covered by Transfer Certificate of Title No. 44225. In mid-1946, he entrusted his owner’s duplicate certificate of title and other ownership documents to Jose Calderon for the specific purpose of finding someone willing to extend a loan of P5,000 to P6,000 on the security of the property. These documents came into the hands of an impostor who, representing himself as Jose M. Luna, approached the Manila Surety and Fidelity Co., Inc. to secure a credit accommodation. On September 4, 1946, the surety company agreed, co-signed a promissory note with the impostor in favor of the Philippine National Bank for P3,500, and received from the impostor an indemnity agreement and the title documents as security. The impostor obtained a cashier’s check for P3,430.60 from the bank, forged the endorsement, and withdrew the proceeds. When the promissory note matured, the surety company paid the bank and then demanded reimbursement from Luna. Upon learning of the transaction, Luna denied involvement. The surety company sued Luna for recovery of the amount paid, plus interest and attorney’s fees. The trial court ruled in favor of the surety company, applying the principle that as between two innocent parties, the one who made the fraud possible must bear the loss.

ISSUE

Whether defendant Jose M. Luna should be held liable for the loss resulting from the forgery and impersonation committed by the impostor who used Luna’s title documents, which Luna had entrusted to another for a specific purpose.

RULING

No. The Supreme Court reversed the trial court’s decision and dismissed the complaint against Luna. The Court distinguished this case from Blondeau vs. Nano, which involved a forged mortgage on Torrens-registered land where the mortgagee relied on the title. Here, the surety company did not obtain a mortgage on Luna’s land; it merely obtained a personal indemnity agreement from the impostor. The transaction essentially hinged on the identification of the impostor as Luna, not on the intrinsic value or encumbrance of the Torrens title itself. The surety company failed to take necessary precautions to ascertain the identity of the person with whom it was dealing, despite being a business entity assisted by a notary public whose duty includes verifying identity. The Court emphasized that it was the surety company’s duty to ascertain the impostor’s identity and authority, and its failure to do so meant it undertook the transaction at its own peril. Therefore, Luna, who entrusted the documents for a specific limited purpose, could not be held liable for the forgery. Costs were imposed on the appellee.