Primary Holding

Payment of a check does not constitute acceptance under Section 62 of the Negotiable Instruments Law. A drawee bank can recover payments made on forged checks from negligent holders who failed to exercise due diligence in accepting the checks.

Background

In April 1933, Motor Service Company (MSC) accepted two checks as payment for automobile tires from unknown individuals. These checks were purportedly issued by the Pangasinan Transportation Co. and signed by J.L. Klar as Manager and Treasurer, payable to International Auto Repair Shop. MSC deposited these checks with the National City Bank of New York, which then cleared them through the Philippine National Bank (PNB). After honoring the checks, PNB discovered that J.L. Klar's signatures were forged when informed by Pangasinan Transportation Co. PNB immediately demanded reimbursement from both MSC and National City Bank, but both refused. PNB filed suit, and the case was eventually dismissed against National City Bank before trial, proceeding solely against MSC for recovery of the funds paid on the forged checks.

Facts

• 1. On April 7 and 9, 1933, unknown persons negotiated checks with Motor Service Company
• 2. Checks purportedly issued by Pangasinan Transportation Co. by J.L. Klar
• 3. Checks were for P144.50 and P215.75 payable to International Auto Repair Shop
• 4. MSC accepted checks as payment for automobile tires
• 5. Checks were deposited at National City Bank and cleared through PNB
• 6. PNB later discovered signatures were forged
• 7. PNB demanded reimbursement but defendants refused

Arguments of the Petitioners

• 1. Entitled to recover payments made on forged checks
• 2. MSC was negligent in accepting checks from unknown persons
• 3. MSC failed to verify authenticity of checks and signatures

Arguments of the Respondents

• 1. Payment of checks constituted acceptance under Section 62 of NIL
• 2. PNB bound to know customer's signature
• 3. MSC was innocent holder in due course
• 4. Pangasinan Transportation Co. was regular customer

Issues

• 1. Whether payment of check constitutes acceptance under NIL
• 2. Whether drawee bank can recover from holder who accepted forged checks
• 3. Extent of bank's duty to verify drawer's signature
• 4. Effect of holder's negligence on right of drawee to recover

Ruling

• 1. Court affirmed lower court's decision in favor of PNB
• 2. Payment does not constitute acceptance under NIL
• 3. Bank can recover if holder was negligent
• 4. MSC failed to exercise due diligence in accepting checks
• 5. MSC's negligence contributed to the successful forgery
• 6. MSC had duty to verify authenticity before accepting checks
• 7. No change in position that would prejudice MSC by requiring refund

Doctrines

• 1. Doctrine of Constructive Fault - Bank's failure to detect forgery is constructive fault
• 2. Doctrine of Comparative Negligence - Holder's prior negligence bars recovery retention of payment
• 3. Doctrine of Equitable Estoppel - Bank not estopped if holder was negligent

Precedents Cited

• 1. Price vs. Neal (3 Burr., 1354) - Original rule on bank's duty to know drawer's signature
• 2. First National Bank vs. Whitman (94 U.S. 343) - Payment doesn't constitute acceptance
• 3. Bank of United States vs. Georgia (10 Wheat., 333) - On bank's duty regarding signatures

Statutory and Constitutional Provisions

• 1. Negotiable Instruments Law - Section 62 - Liability of acceptor
• 2. Negotiable Instruments Law - Section 23 - Effect of forged signature
• 3. Negotiable Instruments Law - Section 185 - Application to checks
• 4. Negotiable Instruments Law - Section 191 - Definition of acceptance