The Supreme Court held that a bank bears the loss when it pays a check with a forged endorsement, especially if the check is crossed. Traders Royal Bank (TRB) was liable for paying manager’s checks to unauthorized persons who forged the Bureau of Internal Revenue (BIR)’s endorsement, the rightful payee. This ruling reinforces a bank’s duty to ensure payments are made to the correct payee, safeguarding depositors and upholding the integrity of negotiable instruments.

When Banks Fail to Verify: Who Pays the Price for Forged Tax Payments?

In 1986, Radio Philippines Network (RPN), Intercontinental Broadcasting Corporation (IBC), and Banahaw Broadcasting Corporation (BBC) sought to settle their tax obligations with the Bureau of Internal Revenue (BIR). To do so, they purchased three manager’s checks from Traders Royal Bank (TRB), intending for these checks to be delivered to the BIR. However, these checks, instead of reaching the BIR, were fraudulently presented and paid to unknown individuals who forged the BIR’s endorsement. Consequently, the BIR assessed RPN, IBC, and BBC again for the same tax liabilities, forcing them to enter into a compromise and make a payment of P18,962,225.25 to settle their tax deficiencies.

The central issue before the Supreme Court was whether Traders Royal Bank (TRB) should be held solely liable for paying the amounts of the checks to someone other than the named payee, the Bureau of Internal Revenue (BIR). This issue hinges on the fundamental principles governing negotiable instruments, particularly the responsibility of banks in ensuring that checks are paid to the rightful parties. The decision rested on the principle that a forged endorsement is wholly inoperative, and a bank that pays on such an endorsement does so at its own peril. The court needed to determine the extent of TRB’s liability in light of the forged endorsements and the established banking practices intended to prevent such fraudulent activities.

The legal framework governing this case is primarily the **Negotiable Instruments Law (NIL)**. Section 23 of the NIL is particularly relevant, stating that:

“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.”

Building on this principle, the Supreme Court reiterated that if a bank pays a forged check, it is considered to be paying out of its own funds and cannot debit the depositor’s account. This protection is crucial to maintaining trust in the banking system and ensuring that depositors are not penalized for the fraudulent actions of others.

The Court emphasized TRB’s duty to verify the endorsement before paying the checks. As stated in the decision, it is the primary duty of the bank to ensure that the check was duly endorsed by the original payee when a check is drawn payable to the order of one person but presented for payment by another. The Supreme Court cited *Great Eastern Life Insurance vs. Hongkong & Shanghai Banking Corporation*, 43 Phil. 678 (1922), underscoring that the loss falls upon the bank that cashed the check when it pays the amount of the check to a third person who has forged the signature of the payee. The bank’s recourse is against the person to whom it paid the money.

Furthermore, the fact that one of the checks was crossed added another layer of responsibility for TRB. Crossing a check serves as a warning, placing the bank on high alert. The effects of a crossed check, as the Court noted citing *Bataan Cigar and Cigarette Factory, Inc. vs. CA*, 230 SCRA 643 (1994), are that (a) the check may not be encashed but only deposited in the bank; (b) the check may be negotiated only once to one who has an account with a bank; and (c) the act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose, requiring inquiry if the check was received pursuant to that purpose; otherwise, the holder is not a holder in due course.

The Supreme Court considered the argument that Security Bank and Trust Company (SBTC), as the collecting bank, should also be held liable. However, the Court of Appeals found, and the Supreme Court affirmed, that there was insufficient evidence to prove that SBTC had indeed participated in the negotiation of the checks. The checks did not bear the requisite endorsement of SBTC. In fact, the guarantee stamp was that of the Philippine National Bank. Furthermore, the clearing documents of SBTC did not reflect the aggregate amount of the checks.

The practical implications of this decision are significant for both banks and depositors. Banks must implement stringent verification processes to ensure the authenticity of endorsements, especially for checks payable to specific payees. This includes training staff to recognize potential forgeries and utilizing technology to verify signatures and endorsements. Depositors, on the other hand, are assured that banks have a high duty of care to protect their funds and that the bank bears the risk of loss in cases of forged endorsements. This assurance reinforces trust in the banking system.

The Court also addressed the award of damages. While the lower courts had awarded exemplary damages, the Supreme Court deleted this award, finding that TRB’s wrongful act was not done in bad faith or with wanton, fraudulent, reckless, or malevolent intent. However, the Court did find it appropriate to award attorney’s fees, though reducing the amount to P100,000 from the manifestly exorbitant 25% of P10 million originally awarded.

FAQs

What was the key issue in this case?	The key issue was whether Traders Royal Bank (TRB) should be held liable for paying checks with forged endorsements to unauthorized individuals, rather than to the named payee, the Bureau of Internal Revenue (BIR).
What is the significance of a forged endorsement?	Under the Negotiable Instruments Law, a forged endorsement is entirely inoperative, meaning no rights can be acquired through it. A bank that pays a check with a forged endorsement bears the loss.
What is the duty of a bank when presented with a check?	The bank has a primary duty to ensure that the check is duly endorsed by the original payee. If the check is presented by someone other than the payee, the bank must verify the endorsement’s authenticity.
What is the effect of crossing a check?	Crossing a check serves as a warning that the check has been issued for a specific purpose. The bank must inquire whether the holder received the check pursuant to that purpose before encashing it.
Why was Security Bank and Trust Company (SBTC) absolved of liability?	The court found insufficient evidence to prove that SBTC had participated in the negotiation of the checks. The checks lacked SBTC’s endorsement, and clearing documents did not reflect the transactions.
What kind of verification is expected from the banks?	Banks should implement stringent verification processes, which includes training staff to recognize potential forgeries and utilizing technology to verify signatures and endorsements.
Why were exemplary damages removed?	The Supreme Court removed the exemplary damages because TRB’s actions, while wrongful, were not done in bad faith or with fraudulent intent.
What was the outcome regarding attorney’s fees?	The Supreme Court deemed the original attorney’s fees (25% of P10 million) to be manifestly exorbitant and reduced the amount to P100,000, considering the nature and extent of the services rendered.

This case underscores the critical role banks play in safeguarding financial transactions and highlights the importance of robust verification procedures to prevent fraud. Banks must remain vigilant in upholding their duty of care to depositors and ensuring the integrity of negotiable instruments.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: TRADERS ROYAL BANK vs. RADIO PHILIPPINES NETWORK, G.R. No. 138510, October 10, 2002