FACTS:

The  province  of  Tarlac  maintains  an  account  with  PNB-Tarlac.    Part  of  its funds  is  appropriated  for  the  benefit  of  Concepcion  Emergency  Hospital.  During a post-audit done by the province, it was found out that 30 of its checks weren’t received by the hospital.  Upon further investigation, it was found out that the checks were encashed by Pangilinan who was a former cashier   and   administrative   officer   of   the   hospital   through   forged indorsements.      This   prompted   the   provincial   treasurer   to   ask   for
reimbursement  from  PNB  and  thereafter,  PNB  from  Associated  Bank.    As the two banks didn't want to reimburse, an action was filed against them.   
 

HELD:

There   is   a   distinction   on   forged   indorsements   with   regard   bearer instruments and instruments payable to order.  
 
With instruments payable to bearer, the signature of the payee or holder is unnecessary to pass title to the instrument.  Hence, when the indorsement is  a  forgery,  only  the  person  whose  signature  is  forged  can  raise  the defense of forgery against holder in due course.
 
In  instruments  payable  to  order,  the  signature  of  the  rightful  holder  is essential  to  transfer  title  to  the  same  instrument.    When  the  holder’s signature  is  forged,  all  parties  prior  to  the  forgery  may  raise  the  real defense of forgery against all parties subsequent thereto.  In connection to this,  an  indorser  warrants  that  the  instrument  is  genuine.    A  collecting bank  is  such  an  indorser.    So  even  if  the  indorsement  is  forged,  the collecting bank is bound by his warranties as an indorser and cannot set up
the defense of forgery as against the drawee bank.  
 
Furthermore, in cases involving checks with forged indorsements, such as the  case  at  bar,  the  chain  of  liability  doesn't  end  with  the  drawee  bank.  The  drawee  bank  may  not  debit  the  account  of  the  drawer  but  may generally pass liability back through the collection  chain to the party who took  from  the  forger  and  of  course,  the  forger  himself,  if  available.    In other words, the drawee bank can seek reimbursement or a return of the amount  it  paid  from  the  collecting  bank  or  person.    The  collecting  bank generally  suffers  the  loss  because  it  has  te  duty  to  ascertain  the genuineness   of   all   prior   endorsements   considering   that   the   act   of presenting  the  check  for  payment  to  the  drawee  is  an  assertion  that  the party  making  the  presentment  has  done  its  duty  to  ascertain  the
genuineness of the indorsements.
 
With  regard  the  issue  of  delay,  a  delay  in  informing  the  bank  of  the forgery, which deprives it of the opportunity to go after the forger, signifies negligence  on  the  part  of  the  drawee  bank  and  will  preclude  it  from claiming reimbursement.  In this case, PNB wasn't guilty of any negligent delay.    Its  delay  hasn't  prejudiced  Associated  Bank  in  any  way  because even  if  there  wasn't  delay,  the  fact  that  there  was  nothing  left  of  the account of Pangilinan, there couldn't be anymore reimbursement.