G.R. No. 37467 - San Carlos Milling Co., Ltd. vs. Bank of the Philippine Islands

Plaintiff-Appellant: San Carlos Milling Co., Ltd., a corporation organized under the laws of the Territory of Hawaii with its principal office in Manila and engaged in business in the Philippine Islands.
Defendant-Appellees:

Bank of the Philippine Islands – where the plaintiff maintained a deposit account and processed the deposit transaction with a forged endorsement.
China Banking Corporation – where the plaintiff also maintained a deposit account and which issued an exchange contract and a manager’s check.

Alfred D. Cooper – acted as the agent of the corporation under a general power of attorney with authority of substitution.
Joseph L. Wilson – principal employee and agent in the Manila office, holding a general power of attorney without power of substitution.
Newland Baldwin – appointed by Cooper in 1926 as agent (by means of a general power of attorney) upon Cooper’s vacation, thereby revoking Wilson’s authority in dealings with the Bank of the Philippine Islands.

In approximately 1927, Wilson, in collusion with Alfredo Dolores (a messenger-clerk in the plaintiff’s Manila office), orchestrated a fraudulent transaction:

They transmitted a coded cablegram from the Manila office to the company headquarters in Honolulu, requesting a telegraphic transfer in the amount of $100,000 to the China Banking Corporation.
Subsequent to the transfer, the China Banking Corporation sent an exchange contract offering P201,000 according to the prevailing rate of exchange.

On the exchange contract, the name of Newland Baldwin was forged. A typed note on the contract stated, “Please send us certified check in our favor when transfer is received.”
A manager’s check payable to “San Carlos Milling Company or order” was receipted by Alfredo Dolores on the China Banking Corporation.
The check was deposited at the Bank of the Philippine Islands with an endorsement purporting to be by Newland Baldwin “For Agent,” which the bank accepted despite its spurious nature.

The Bank of the Philippine Islands credited the plaintiff’s account with P201,000 after the deposit and processed the cashier’s check via the clearing house.
On the same day, the bank received a letter – ostensibly signed by Newland Baldwin – instructing that P200,000 in various denominations be packed for shipment.
The following day, Alfredo Dolores witnessed the counting and packing of the money and returned with another check for P1, also bearing a forged signature of Newland Baldwin, to cover the packing cost.
The money was delivered to Dolores, who later transferred it to Wilson; Wilson then obtained P10,000 as his share before the fraudulent scheme was discovered.

Upon discovery of the crime, the defendant bank (Bank of the Philippine Islands) refused to credit the plaintiff’s account with the amounts withdrawn via forged checks of P200,000 and P1.
Plaintiff initiated suit against the Bank of the Philippine Islands; later, upon suggestion by the bank, an amended complaint was filed against both defendant banks.
At trial, defenses raised included:

The China Banking Corporation argued that its check had been properly endorsed and that the bank’s endorsement guarantee absolved it.
The Bank of the Philippine Islands contended that it acted in good faith in the ordinary course of business, dealing with the accredited representatives of the plaintiff, and that the wrongful act was due to the negligence and criminal actions of the plaintiff’s employees and agents.

The plaintiff’s Manila office typically employed a general agent (Wilson), a messenger-clerk (Dolores), a stenographer, and a cashier.
Wilson did not maintain possession of the code-book or the blank checks provided by the banks.
Baldwin, although authorized to draw checks on the depositaries, did not exercise adequate supervision over the operations in the Manila office.

Whether the signatures on the checks and endorsements – ascribed to Newland Baldwin – were genuine or forged.
The effect of a forged endorsement on the legal relation between the depositor and the bank.

Whether the deposit of P201,000 with the forged endorsement nullified the usual depositor-banker relationship, thereby rendering the bank merely a gratuitous bailee.
Whether the bank’s actions in accepting a check for deposit only, even with a non-standard (typed) endorsement, constituted a valid transactional relationship.

To what extent the negligence of the Bank of the Philippine Islands in honoring forged checks contributed as the proximate cause of the plaintiff’s loss.
Whether the fraudulent acts by plaintiff’s employees and the delegation of authority and supervision to agents contributed to the wrongful payment.

Whether the China Banking Corporation, as a depository institution that relied on the valid endorsement provided by the Bank of the Philippine Islands, could be held liable.
The applicability of doctrines from similar cases (e.g., Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Banking Corporation, and National Bank case) to the present facts.

Whether section 23 of the Negotiable Instruments Law exonerates the bank when it pays out on forged checks in reliance upon purported signatures.
The duty of a bank to verify the genuineness of endorsements versus the depositor’s responsibility for safeguarding authority and codes.