FACTS:

CASA Montessori International (CASA) opened a current account with Bank of the Philippine Islands (BPI) in 1982. Ma. Carina C. Lebron, CASA's President, was one of the authorized signatories. In 1991, CASA discovered that nine of its checks had been encashed by a person named Sonny D. Santos since 1990, with a total amount of P782,000. It was later found out that Sonny D. Santos was a fictitious name used by Leonardo T. Yabut, an external auditor of CASA. Yabut admitted to forging Lebron's signature and encashing the checks. CASA filed a complaint for collection with damages against BPI, seeking to recover the amount of P782,500. The Regional Trial Court (RTC) rendered judgment in favor of CASA. The Court of Appeals (CA) modified the RTC's decision and apportioned the loss between BPI and CASA, taking into account CASA's contributory negligence in failing to detect the forgery. BPI and CASA filed separate petitions for review before the Supreme Court.

ISSUES:

1. Whether the forgery of the drawer's signature on the check rendered it wholly inoperative.

2. Whether Yabut's voluntary admission of forging the signature violated his constitutional rights.

3. Whether the microfilm copies of the paid checks are admissible as secondary evidence;

4. Whether Casa de Oro Manufacturing Corporation (CASA) can be held liable for the forged checks;

5. Whether Bank of the Philippine Islands (BPI) was negligent in allowing payment under a forged signature;

6. Whether failure to report an error in the bank statement results in waiver or estoppel.

7. Whether the notice sent by BPI to CASA requesting examination and reporting of bank statements constitutes a valid waiver of CASA's right to claim forgeries on the checks.

8. Whether CASA can be estopped from questioning BPI's error in encashing the forged checks.

9. Who should bear the loss resulting from the encashment of the forged checks.

10. Whether Yabut, the independent auditor, can be held liable for the fraudulent acts committed against CASA.

11. Whether CASA can recover the amount it paid to BPI under the principle of mistake.

12. Whether CASA is entitled to moral damages.

13. Whether Casa could claim moral damages from BPI.

14. Whether Casa could claim exemplary damages from BPI.

15. Whether Casa is entitled to attorney's fees.

16. Whether Casa is entitled to interest.

RULING:

1. Yes, the forgery of the drawer's signature on the check rendered it wholly inoperative. Under Section 23 of the Negotiable Instruments Law, a forged signature is a real defense and the person whose signature is forged is deemed to have never become a party to the negotiable instrument. The court found that the drawer's signature was forged based on the admissions made by Yabut and the findings of the PNP Crime Laboratory.

2. No, Yabut's voluntary admission of forging the signature did not violate his constitutional rights. His admission was made in a voluntary manner and was not part of a custodial investigation. The constitutional protection against self-incrimination only applies when a person is under custody for investigation of his possible participation in a crime. Furthermore, the right against self-incrimination applies to government proceedings, not private investigations. Yabut's admission can be admitted as evidence without violating his constitutional rights.

3. The microfilm copies of the paid checks are admissible as secondary evidence. The failure of CASA to produce the original checks authorizes the introduction of secondary evidence. The genuineness of the checks can be proved through testimonial and other documentary evidence, such as the comparison of signatures and the testimony of the drawer's authorized signatory.

4. CASA cannot be held liable for the forged checks. The forged signatures are wholly inoperative and CASA is not precluded from setting up forgery as a real defense.

5. BPI was negligent in allowing payment under a forged signature. BPI has a duty to treat the accounts of its depositors with meticulous care and to know the signatures of its customers. The negligence of BPI in failing to detect the forgery constitutes a clear negligence.

6. Failure to report an error in the bank statement does not result in waiver or estoppel. The notice in the monthly statements serves as a confirmation that requests depositors to affirm the accuracy of recorded items. Failure to report an error within the prescribed period does not waive the right to question the mistake.

7. The notice sent by BPI to CASA requesting examination and reporting of bank statements does not constitute a valid waiver of CASA's right to claim forgeries on the checks. CASA had no obligation to respond to the notice, and BPI cannot unilaterally impose conditions for the validity of a waiver.

8. CASA cannot be estopped from questioning BPI's error in encashing the forged checks. CASA did not make any deed or representation that misled BPI, and its conduct was due to an innocent mistake.

9. BPI, as the drawee bank, becomes liable to its depositor-drawer for allowing payment on the forged checks. BPI can hold its encashing branch liable for reimbursement and cannot debit the drawer's account or seek indemnification from the drawer.

10. Yes, Yabut, the independent auditor, can be held liable for the fraudulent acts committed against CASA. The auditor has the responsibility for the accuracy in the recording of data that underlies the preparation of financial statements and the opinion expressed therein. Yabut, as an independent auditor hired by CASA, failed to meet these expectations and instead perpetrated fraud.

11. Yes, CASA can recover the amount it paid to BPI under the principle of mistake. Money paid under a mistake may rightfully be recovered, and CASA has the discretion to pursue BPI alone for the recovery.

12. No, CASA is not entitled to moral damages. In the absence of a wrongful act or omission, fraud, or bad faith, moral damages cannot be awarded. CASA failed to satisfactorily prove the existence of the factual basis and causal relation to its claim for moral damages.

13. Casa cannot claim moral damages from BPI.

14. Casa cannot claim exemplary damages from BPI.

15. Casa is entitled to attorney's fees.

16. Casa is entitled to interest.

PRINCIPLES:

• A forged signature on a negotiable instrument is wholly inoperative.

• The right against self-incrimination only applies to government proceedings and can be waived in certain circumstances.

• Clear, positive, and convincing evidence is required to prove forgery.

• Secondary evidence, such as microfilm copies, may be admissible when the original documents cannot be produced.

• The best evidence rule applies only when the contents of a document are the subject of inquiry, not when the document's execution is in question.

• In cases of forgery, the drawee bank is liable for making payments under a forged signature.

• Banks have a duty to exercise the highest degree of diligence in handling the accounts of its depositors.

• Failure to report an error in a bank statement does not waive the right to question the mistake.

• Banks may request depositors to affirm the accuracy of items recorded in their accounts, but the results of such affirmations are for audit purposes and do not constitute a valid waiver.

• Estoppel precludes individuals from denying or asserting anything contrary to the truth established by their own deed or representation.

• Loss must be borne by the one whose negligence was the proximate cause or who put it into the power of a third person to commit the wrong.

• A forged signature is generally wholly inoperative, but negligence on the part of the party invoking forgery can be an exception.

• The role of an independent auditor is to objectively investigate and determine if financial statements have been prepared in accordance with financial reporting practices.

• The auditor has the responsibility for the accuracy in the recording of data that underlies the preparation of financial statements.

• Money paid under a mistake may rightfully be recovered.

• In the absence of a wrongful act or omission, fraud, or bad faith, moral damages cannot be awarded.

• Moral damages cannot be claimed against a corporation unless its reputation is besmirched and social humiliation results from a breach of its fiduciary duty.

• Exemplary damages cannot be recovered as a matter of right and can only be imposed if there is bad faith, wantonness, fraud, recklessness, oppression or malice.

• Attorney's fees can be recovered if the defendant's act or omission compelled the plaintiff to incur expenses to protect its interest.

• Legal interest may be awarded if the defendant fails to pay upon demand and compels the plaintiff to resort to the courts to obtain payment.