SAN CARLOS MILLING CO., LTD vs. BANK OF THE PHILIPPINE ISLANDS AND CHINA BANKING

CORPORATIONG.R. No. L-37467

December 11, 1933

FACTS:

San Carlos milling,organized under the laws of the Territory of Hawaii was authorized to engage in business in the Philippines. The business in the Philippines was in the hands of Alfred Cooper, its agent under general power of attorney with authority of substitution. The principal employee in the Manila Office was Joseph Wilson who had a general power of attorney but without power of substitution. Cooper went on a vacation and gave a general power of attorney to Newland Baldwin and revoked the power of Wilson relative to the dealings with BPI.

After a year, Wilson conspired with Dolores, a messenger-clerk and sent a cable gram in code to the company in Honolulu requesting a telegraphic transfer to the China Banking Corporation of Manila for $100,000. The money was transferred by cable to Chinabank and upon receipt, sent to San Carlos Milling an exchange contract for P201,000 (exchange rate then). Such contract was forged in the name of Newland Baldwin. It further asked Chinabank to send a certified check in San Carlos Milling’s favor, payable for deposit only with BPI. The endorsement to which the name of Newland Baldwin was affixed was spurious. BPI credited the current account of plaintiff in the sum of P201,000 and after it was cleared, it was paid by China Banking Corporation

The next day, BPI received a letter purported to be signed by Newland Baldwin, directing that the money be paid in certain denominations. The couting and packing of the money was witnessed by Dolores who in turn returned with a check purporting to be signed by Newland Baldwin as agent. . Dolores also returned with a forged check for P1 covering the cost of packing the money. Shortly thereafter, the crime was discovered but BPI refused to credit San Carlos Milling with the amount withdrawn by the two forged checks and brought the case to the Trial Court. Upon the petition of BPI, Chinabank was also impleaded as defendant.

The trial court held that the deposit of P201,000 in the BPI being the result of a forged endorsement, the relation of the depositor and banker did not exist, but the bank was only a gratuitous bailee; that BPI acted in good faith in the ordinary course of business and was not guilty of negligence and that San Carlos Milling could not recover since the loss was due to the criminal actions of its

employees. San Carlos appealed its case to the Supreme Court.

ISSUE: WON BPI is guilty of negligence and is liable to pay San Carlos Milling for the amount it had cashed out

HELD: Judgment absolving BPI was reversed.

BPI is guilty of negligence because it should have taken care in ensuring that the signatures were not forged; China Bank is not liable since the responsibility of verifying all endorsements on the check is with the bank that cashes the check, in this case, BPI.

A bank that cashes a check must know to whom it pays. In connection with the cashier’s check, this duty was therefore upon the BPI and the CBC was not bound to inspect and verify all endorsements of the check, even if some of them were also those of the depoistors in that bank. It had a right to rely upon the endorsement of BPI when it gave the latter bank credit for its own cashier’s check. Since the money was in fact paid by CBC to BPI, CBC is not indebted to San Carlos Milling or BPI.

“A bank is bound to know the signatures of its customers; and if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily charge the amount so paid to the account of the depositor whose name was forged”. (7 C.J. 683)

o No act of San Carlos Milling led BPI to go astray. The bank paid out its money because it relied upon the genuiness of the purported signatures of Baldwin. Its employees should have used care. Therefore, the proximate cause of loss was due to the negligence of tBPI in honoring and cashing two forged checks (P201,000 and P1).