FACTS:

Natividad Gempesaw, the petitioner, owns and operates four grocery stores in Caloocan City. She maintains a checking account with the respondent drawee Bank. Gempesaw's bookkeeper, Alicia Galang, prepares the checks and submits them to Gempesaw for her signature. Gempesaw signs each check without verifying their accuracy against the corresponding invoices. She also does not verify if the checks were actually delivered to the payees. The respondent drawee Bank notifies Gempesaw of all checks presented and paid, but she does not verify the correctness of the returned checks or if the payees received them. Gempesaw issued a total of 82 checks in favor of several suppliers, and the respondent drawee Bank honored and debited the amounts of these checks against her checking account. However, most of the checks were for amounts in excess of Gempesaw's actual obligations to the payees.

The petitioner later discovered that her bookkeeper had fraudulently manipulated her checks by altering the amounts and forging the signatures of payees. This deception was discovered more than two years after it had occurred. It was found that a total of 82 checks with forged signatures were accepted for deposit by the Chief Accountant of the respondent drawee Bank, without authorization, to the accounts of Alfredo Y. Romero and Benito Lam. Some of the payees testified that they did not receive or see the checks, and the indorsements on the back of the checks were not theirs. The auditors of the respondent drawee Bank failed to detect or stop the unauthorized acts of the Chief Accountant. Gempesaw demanded that the drawee bank credit her account with the value of the checks, but the bank refused. As a result, Gempesaw filed a complaint seeking to recover the funds from the drawee bank.

The main issue in the case is whether Gempesaw's negligence in detecting and reporting the forged indorsement precludes her right to claim reimbursement from the bank. Gempesaw argues that the drawee bank should be held liable for debiting her account under the forged endorsement, while the bank claims that her negligence in setting up an accounting system and business procedure to prevent or detect forged indorsements bars her claim for reimbursement.

ISSUES:

1. Whether the drawer is precluded from setting up forgery as a defense due to her negligence.

2. Whether the drawer's failure to discover or promptly report the forgery to the drawee bank precludes her from claiming recrediting of her account.

3. Whether the petitioner's negligence in failing to conduct an adequate investigation on the unauthorized checks constitutes a bar to her claim for recovery from the bank.

4. Whether the petitioner's failure to diligently examine her records and detect the discrepancies in the amounts payable on the checks constitutes negligence.

5. Whether the crossed checks issued by the petitioner impose a legal obligation on the drawee bank not to honor them.

6. Whether the banking rule prohibiting checks with more than one indorsement invalidates the instrument and its negotiation.

7. Whether the petitioner is precluded from raising the defense of forgery due to gross negligence.

8. Whether the respondent drawee bank can be held liable for damages for the wrongful dishonor of the check.

9. Whether the respondent drawee bank is guilty of fraud, negligence, or contravened the tenor of its obligation.

10. Whether the respondent drawee bank can escape liability by claiming exercise of due diligence in the selection and supervision of its employees.

RULING:

1. The drawer is precluded from setting up forgery as a defense due to her negligence. While there is no duty for the depositor to look for forged endorsements on her cancelled checks, she is under a duty to have an accounting system and business procedure that would make it difficult to forge endorsements, particularly by her employees.

2. The drawer's failure to promptly report the forgery to the drawee bank precludes her from claiming recrediting of her account. By failing to discover or report promptly the fact of forgery, the drawer loses her right against the drawee bank, which has debited her account under the forged endorsements.

3. Yes, the petitioner's negligence in failing to conduct an adequate investigation on the unauthorized checks bars her claim for recovery from the bank.

4. Yes, the petitioner's failure to diligently examine her records and detect the discrepancies in the amounts payable on the checks constitutes negligence.

5. No, the crossed checks issued by the petitioner do not impose a legal obligation on the drawee bank not to honor them.

6. No, the banking rule prohibiting checks with more than one indorsement does not invalidate the instrument and its negotiation.

7. The petitioner is precluded from raising the defense of forgery due to gross negligence.

8. The respondent drawee bank can be held liable for damages for the wrongful dishonor of the check.

9. The respondent drawee bank is guilty of negligence and contravened the tenor of its obligation.

10. The respondent drawee bank cannot escape liability by claiming exercise of due diligence in the selection and supervision of its employees.

PRINCIPLES:

• A drawee bank cannot charge the drawer's account for a check on which an indorsement has been forged, unless the drawer is guilty of negligence that causes the bank to honor the check.

• A drawer has a duty to implement an accounting system and business procedure that would prevent or make it difficult to forge indorsements by the drawer's own employees.

• The duty to examine cancelled checks for forgery of signature does not extend to forged indorsements, unless the indorsement was forged by an employee or agent of the drawer.

• The negligence of a depositor that prevents recovery of an unauthorized payment is based on the failure to act as a prudent businessman would under the circumstances.

• A depositor has a duty to examine her records with reasonable diligence and take prompt action if irregularities or discrepancies are found, otherwise her negligence may result in bars to recovery from the bank.

• A crossed check serves as a warning to the holder that it cannot be presented to the drawee bank for payment in cash, but can only be deposited for payment against the drawee bank in the course of normal banking transactions between banks.

• The banking rule prohibiting checks with more than one indorsement does not invalidate the instrument or its negotiation, but restricts the further negotiation of the check unless cleared by some bank officials. Only a restrictive indorsement, with express words prohibiting further negotiation, stops the further negotiation of an instrument.

• The holder of a check cannot compel a drawee bank to honor it, but the drawee bank may not legally refuse to honor a negotiable bill of exchange or a check if there is nothing irregular with it and the drawer has sufficient funds.

• The drawee bank may be held liable for damages for wrongful dishonor of a bill or check.

• The fault or negligence of the obligor consists of the omission of that diligence required by the nature of the obligation.

• Banking business is impressed with public interest, and a high degree of diligence is required of banks to maintain the trust and confidence of the public.

• The defense of exercise of due diligence in the selection and supervision of employees is not a defense for breaches of contract.