Insular Drug Co., Inc. vs. Philippine National Bank

A salesman or agent authorized to collect payments for his principal does not, by virtue of that authority alone, possess implied authority to indorse checks made payable to the principal; and a bank that accepts such checks and credits them to the agent's personal account without authority from the principal is liable to the principal for the amounts represented thereby.

Insular Drug Co., Inc. is a Philippine corporation with offices in Manila. U.E. Foerster was formerly employed as a salesman of the drug company for the islands of Panay and Negros, and also acted as a collector for the company. He was instructed to deposit checks received in payment to the credit of the drug company at the Iloilo branch of the Chartered Bank of India, Australia and China. The Philippine National Bank operated a branch in Iloilo where Foerster, without authorization, instead deposited the checks into his personal account.

Insular Drug Co., Inc. is a Philippine corporation with offices in the City of Manila. U.E. Foerster was formerly a salesman of the drug company for the islands of Panay and Negros and also acted as a collector for the company. He was instructed to take the checks which came to his hands for the drug company to the Iloilo branch of the Chartered Bank of India, Australia and China and deposit the amounts to the credit of the drug company.

Instead of following these instructions, Foerster deposited checks — including those of Juan Llorente, Dolores Salcedo, Estanislao Salcedo, and a fourth party — with the Iloilo branch of the Philippine National Bank. The checks were placed in Foerster's personal account. Some of the checks were drawn against the Bank of the Philippine Islands. After the indorsement on the checks was written "Received payment prior indorsement guaranteed by Philippine National Bank, Iloilo Branch, Angel Padilla, Manager." The indorsements took various forms: some read "Insular Drug Company, Inc., By: (Sgd.) U. Foerster, Agent. (Sgd.) U. Foerster"; others read "Insular Drug Co., Inc., By: (Sgd.) Carmen E. de Foerster, Agent (Sgd.) Carmen E. de Foerster"; still others bore variations such as "Insular Drug Co., Inc., By: (Sgd.) Carmen E. de Foerster, Carmen E. de Froster," or simply "(Sgd.) Carmen E. de Foerster, (Sgd.) Carmen E. de Foerster," or "Insular Drug Co., Inc., Carmen E. de Foerster, By: (Sgd.) V. Bacaldo." Carmen E. de Foerster was Foerster's stenographer. As a consequence of these indorsements, the amounts stated in the checks were subsequently withdrawn by U.E. Foerster and Carmen E. de Foerster.

Eventually the Manila office of the drug company investigated Foerster's transactions. Upon the discovery of anomalies, Foerster committed suicide. There is no evidence showing that the bank knew Foerster was misappropriating the funds of his principal. The Insular Drug Company claims that it never received the face value of 132 checks in question, covering a total of ₱18,285.92. The Philippine National Bank chose to submit the case without presenting evidence in its behalf.

• No Fraud Suffered by Drug Company: The bank argued that the drug company was never defrauded at all, pointing to the absence of clear evidence on the extent of the loss suffered.
• Implied Authority to Indorse: The bank maintained that Foerster had implied authority to indorse all checks made out in the name of the Insular Drug Co., Inc., given his role as salesman and collector.
• Good Faith: The bank contended that it acted in good faith, which should relieve it from responsibility.
• Trust Fund and Check Differentiation: The bank argued that no trust fund was involved, that there was no proof of the right of Foerster's wife and clerk to indorse the checks, and that the checks drawn on the Bank of the Philippine Islands could not be differentiated from those drawn on the Philippine National Bank because of the indorsement by the latter.

• Defense of No Fraud: Whether the bank's contention that the drug company was never defrauded constitutes a valid defense.
• Implied Authority to Indorse: Whether a salesman authorized to collect payments for his principal has implied authority to indorse checks made payable to the principal.
• Bank Liability: Whether the bank is liable to the drug company for crediting checks payable to the corporation to the personal account of its agent without authority from the corporation.

• Defense of No Fraud: No. The defense that the drug company was never defrauded was not relied upon by the bank in the trial court and therefore could not be raised on appeal.
• Implied Authority to Indorse: No. A salesman with authority to collect money belonging to his principal does not have implied authority to indorse checks received in payment; the right of an agent to indorse commercial paper is a very responsible power and will not be lightly inferred.
• Bank Liability: Yes. The bank made itself responsible to the drug company for the amounts represented by the checks when it credited those checks to the personal account of Foerster and permitted withdrawals without authority from the drug company, as the checks themselves disclosed that the money belonged to the corporation and not to Foerster or his wife or clerk.

• Defense of No Fraud: The bank argued that the drug company was never defrauded, but this defense was not raised in the trial court. The drug company's case rested on the proposition that checks drawn in its favor were improperly and illegally cashed by the bank for Foerster and placed in his personal account, making it possible for Foerster to defraud the company. The bank did not attempt to go behind this proposition. Since the defense of no fraud was not pleaded or proven below, it was unavailable on appeal.

• Implied Authority to Indorse: The right of an agent to indorse commercial paper is a very responsible power and will not be lightly inferred. A salesman authorized to collect money belonging to his principal does not, by that fact alone, possess implied authority to indorse checks received in payment. The Court emphasized that any person taking checks made payable to a corporation, which can act only through agents, does so at his peril and must abide by the consequences if the indorsing agent lacks authority. The bank not only permitted Foerster to indorse checks and place them in his personal account, but went further and permitted Foerster's wife and clerk to indorse the checks — a course of conduct that compounded the unauthorized nature of the transactions.

• Bank Liability: The checks themselves disclosed that the money belonged to Insular Drug Co., Inc., and not to Foerster, his wife, or his clerk. By crediting the checks to Foerster's personal account and permitting withdrawals without authority from the drug company, the bank assumed responsibility for the amounts represented. The bank's good faith was insufficient to relieve it of liability, as the face of the instruments gave notice of the true ownership. The bank could have relieved itself by pleading and proving that the money withdrawn eventually passed to the drug company, thus negating any loss, but it failed to do so. The bank was made to stand the loss occasioned by the negligence of its agents.

• Implied Authority of Agents to Indorse Commercial Paper — The right of an agent to indorse commercial paper is a very responsible power and will not be lightly inferred. A salesman or collector authorized to receive payments for his principal does not, by virtue of that authority alone, possess implied authority to indorse checks made payable to the principal. Any person taking checks made payable to a corporation, which can act only through agents, does so at his peril and must abide by the consequences if the indorsing agent is without authority. The Court applied this rule to hold PNB liable for accepting indorsements by Foerster, his wife, and his clerk, none of whom had authority from the drug company.

• Bank's Duty to Ascertain Authority of Indorsers — A bank accepting checks payable to a corporation and crediting them to the personal account of an agent without authority from the corporate payee is liable to the principal for the amounts represented. The bank's good faith does not relieve it of responsibility where the checks themselves disclose that the money belongs to the corporation and not to the agent. The bank could relieve itself only by proving that the withdrawn funds ultimately reached the principal, thus negating any loss.

• "The right of an agent to indorse commercial paper is a very responsible power and will not be lightly inferred. A salesman with authority to collect money belonging to his principal does not have the implied authority to indorse checks received in payment." — This passage articulates the ratio decidendi: the canonical formulation of the rule limiting an agent's implied authority to indorse commercial paper, frequently cited in subsequent Philippine commercial law jurisprudence.

• "Any person taking checks made payable to a corporation, which can act only by agent does so at his peril, and must same by the consequences if the agent who indorses the same is without authority." — This states the risk-allocation rule placing the burden on the bank or holder of corporate checks to verify the indorser's authority, a principle central to the Court's holding.

• "When the bank credited those checks to the personal account of Foerster and permitted Foerster and his wife to make withdrawals without there being made authority from the drug company to do so, the bank made itself responsible to the drug company for the amounts represented by the checks." — This passage applies the rule to the facts, establishing the bank's direct liability to the principal for unauthorized crediting and withdrawals.

• Fulton Iron Works Co. vs. China Banking Corporation, 55 Phil. 208 (1930) — Mentioned by both parties but distinguished by the Court as resting on a different state of facts, thus not directly controlling.
• Arcade Realty Co. vs. Bank of Commerce, 180 Cal. 318 (1919) — Cited as foreign authority supporting the rule that a person taking checks payable to a corporation does so at his peril if the indorsing agent lacks authority.
• Standard Steam Specialty Co. vs. Corn Exchange Bank, 220 N.Y. 278 (1917) — Cited as foreign authority for the same proposition regarding the peril of accepting corporate checks indorsed by an unauthorized agent.
• People vs. Bank of North America, 75 N.Y. 547 (1879) — Cited as foreign authority supporting the rule on agent indorsement authority.
• Graham vs. United States Savings Institution, 46 Mo. 186 (1870) — Cited as foreign authority on the same point.

Villa-Real, Hull, Imperial, and Butte, JJ., concurred.