Understanding Liability for Forged Endorsements on Checks

ASSOCIATED BANK, PETITIONER, VS. HON. COURT OF APPEALS, PROVINCE OF TARLAC AND PHILIPPINE NATIONAL BANK, RESPONDENTS. G.R. No. 107382, January 31, 1996

Imagine you’re a business owner who issues a check to pay a supplier. Unbeknownst to you, an employee of the supplier forges the endorsement and cashes the check. Who is responsible for the loss? This question, seemingly simple, leads to a complex web of legal liabilities among the drawer, the drawee bank, and the collecting bank. The Supreme Court case of Associated Bank vs. Court of Appeals sheds light on this very issue, providing clarity on how losses from forged endorsements are allocated.

This case delves into the responsibilities of various parties involved in check transactions when a forged endorsement occurs. It clarifies the duties of the drawer (the check issuer), the drawee bank (the bank the check is drawn on), and the collecting bank (the bank that initially accepts the check for deposit).

Legal Context: Negotiable Instruments Law and Forged Endorsements

The legal framework governing checks and endorsements is primarily found in the Negotiable Instruments Law (NIL). Section 23 of the NIL is particularly relevant, stating:

“When a signature is forged or made without the authority of the person whose signature it purports to be, it 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.”

This section essentially means that a forged signature is invalid, and no one can claim rights based on it. However, there are exceptions, particularly when a party’s negligence contributes to the forgery.

For example, if a company uses a rubber stamp signature and leaves it accessible to unauthorized personnel, they might be precluded from claiming forgery if that stamp is used to fraudulently endorse a check. This is because their negligence facilitated the forgery.

In order instruments, like the checks in this case, the rightful holder’s signature is essential for transferring title. A forged endorsement prevents this transfer, allowing prior parties to raise the defense of forgery. Furthermore, an endorser warrants the genuineness of the instrument. A collecting bank that endorses a check to the drawee bank guarantees prior endorsements, and is held accountable if an indorsement turns out to be forged.

Case Breakdown: Province of Tarlac vs. PNB and Associated Bank

The Province of Tarlac maintained an account with the Philippine National Bank (PNB). Fausto Pangilinan, a retired cashier of Concepcion Emergency Hospital, managed to obtain 30 checks issued by the Province payable to the hospital. He forged the hospital chief’s signature, deposited the checks into his personal account at Associated Bank, and then withdrew the funds. Here’s how the case unfolded:

• Discovery of Forgery: The Provincial Treasurer discovered the missing checks during a routine audit.
• Demand for Reimbursement: The Province demanded PNB restore the debited amount, and PNB, in turn, sought reimbursement from Associated Bank.
• Lawsuit: The Province sued PNB, which then impleaded Associated Bank.

The Supreme Court highlighted the dual negligence in this case:

“The Province of Tarlac permitted Fausto Pangilinan to collect the checks when the latter, having already retired from government service, was no longer connected with the hospital… The failure of the Province of Tarlac to exercise due care contributed to a significant degree to the loss tantamount to negligence.”

The Court also noted the responsibility of Associated Bank as the collecting bank, stating:

“Associated Bank shall be liable to PNB for fifty (50%) percent of P203,300.00. It is liable on its warranties as indorser of the checks which were deposited by Fausto Pangilinan, having guaranteed the genuineness of all prior indorsements…”

Ultimately, the Supreme Court apportioned the loss, finding both the Province of Tarlac and Associated Bank negligent.

Practical Implications: Lessons for Businesses and Banks

This case provides valuable lessons for both businesses and banks. Businesses must implement robust internal controls to prevent unauthorized access to and collection of checks. Banks, especially collecting banks, must exercise due diligence in verifying endorsements and scrutinizing transactions, especially those involving payees who are not the depositors.

Key Lessons:

• Implement strong internal controls: Regularly audit financial processes and segregate duties to minimize fraud risks.
• Verify endorsements: Banks must meticulously verify endorsements, especially for checks deposited by someone other than the payee.
• Promptly report discrepancies: Report any suspected forgeries or irregularities to the bank immediately.

For example, a company might implement a policy requiring dual signatures for checks above a certain amount. This reduces the risk of a single employee fraudulently endorsing and cashing a check.

Frequently Asked Questions (FAQs)

Q: What is a forged endorsement?

A: A forged endorsement is a signature on the back of a check or other negotiable instrument that is not made by the actual payee or authorized representative.

Q: Who is liable when a check has a forged endorsement?

A: Generally, the collecting bank that guarantees prior endorsements is primarily liable. However, liability can be apportioned if other parties, like the drawer, were also negligent.

Q: What is the role of the drawee bank in forged endorsement cases?

A: The drawee bank has a duty to verify the drawer’s signature but not necessarily the endorsements. However, they must promptly notify the collecting bank upon discovering a forgery.

Q: How can businesses prevent losses from forged endorsements?

A: Businesses should implement strong internal controls, including regular audits, segregation of duties, and verification of payee information.

Q: What should I do if I suspect a forged endorsement on a check I issued?

A: Immediately notify your bank and file a formal complaint. Provide all relevant information and documentation to support your claim.

Q: Is there a time limit to report a forged endorsement?

A: Yes, banks typically have time limits for reporting forged endorsements, so it’s crucial to act quickly upon discovery.

ASG Law specializes in banking law, commercial litigation, and fraud prevention. Contact us or email hello@asglawpartners.com to schedule a consultation.