why banks rarely accept checks with two or more endorsements?

I found this article really helpful for my Negotiale Instruments Law subject:

THE EFFECT OF FORGERY IN CHECKS
By: Atty. Christopher E. Cruz
Do you ever wonder why banks rarely accept checks bearing two or more endorsements
for deposit to your account? No law requires banks to reject checks bearing two or more
endorsements. In fact, the law encourages the free transfer and negotiation of checks to other
parties in accordance with the principle of “accumulation of secondary contracts” of negotiable
instruments. As checks and other negotiable instruments are endorsed from one person to
another, the endorsers become debtors of the holder of the check. Thus, the more debtors there
are, the greater are the chances that the holder of the check can collect payment. If the law
allows numerous endorsements on checks, why then does your bank rarely honor checks
bearing two or more endorsements? The reason is because banks may also be endorsers.
Let us consider a hypothetical case: Jojo draws a check payable to the order of Manny
as payee with ABC bank as drawee. Without Manny’s knowledge, Ronald steals the check and
forges Manny’s signature, making it appear that Manny endorsed it to him. Ronald then
endorses the check and deposits the same in his own savings account with XYZ bank. XYZ
bank then presents the check for payment with ABC bank. ABC bank pays the amount to XYZ
bank which, in turn, credits it to the account of Ronald. Thereupon, forger Ronald withdraws the
amount and goes into hiding. In this case, who bears the loss, the drawer (Manny), the drawee
bank (ABC bank) or the collecting bank (XYZ bank)?
Under Section 23 of the Negotiable Instruments Law, a forged signature in a check,
whether it be that of the drawer or the payee, is wholly inoperative and no one can gain title to
the instrument through it. A person whose signature was forged was never a party and never
consented to the contract. Thus, a forged endorsement does not operate as the payee’s
endorsement. However, this rule does not apply to a party who is precluded from setting up
forgery or want of authority. Who are these parties? They are those who warrant or admit the
genuineness of the forged signature and those who by their acts, silence or negligence, are
barred from setting up forgery. An endorser is an example of a party who is precluded from
setting up forgery as he warrants, among other things, that “the instrument is genuine and in all
respects what it purports to be” (Sec. 65 (a), Negotiable Instruments Law).
Let us now apply the aforesaid rules to the present case. As between the drawer Jojo
and the drawee ABC bank, the latter is liable for the loss. Under the circumstances, ABC bankഊis under strict liability to pay the check only to the order of Jojo as reflected on the face of the
check. Payment under the forged endorsement of Manny is not to Jojo’s order. By paying a
party other than to the order of Jojo, ABC bank failed to comply with the terms of the check. It
violated its duty to charge Jojo’s account only according to his order. Thus, as a general rule,
ABC bank may not debit Jojo’s account and must re-credit the amount of the check to his
account. However, if ABC bank can prove that Jojo substantially contributed to the making of
the forged signature, the latter is precluded from setting up forgery.
However, all is not lost for ABC bank since it was not Jojo’s signature that was forged
but Manny’s. In cases involving forged endorsements, the drawee ABC bank may not debit the
account of the drawer but may generally pass liability back through the collection chain to the
party who took it from the forger and, of course, to the forger himself, if available (Associated
Bank vs. Court of Appeals, 252 SCRA 620). Thus, ABC bank may seek reimbursement from
XYZ bank. Since Manny’s signature was forged, XYZ bank had no right to be paid by ABC
Bank. Furthermore, under Sec. 66 of the Negotiable Instruments Law, a collecting bank like
XYZ Bank that endorses a check bearing a forged signature and presents it to the drawee ABC
bank is liable as an endorser. Thus, XYZ warrants the genuineness of all prior signatures and is
precluded from setting up forgery or want of authority. Thus, as between the drawer, the drawee
and the collecting bank, the collecting bank is ultimately liable for the loss.
Since the drawee ABC Bank is liable to the drawer Jojo, and the collecting bank XYZ
Bank, in turn, is liable to the drawee ABC Bank, can Jojo be allowed to directly collect from XYZ
Bank to simplify matters? Negative. There is no legal relationship between Jojo and XYZ Bank.
Jojo is not a client of XYZ Bank. While the procedure may be simpler, this legal shortcut is not
permissible.
You now know why your bank rarely accepts checks bearing two or more endorsements
– as collecting banks, they do not want to be liable as endorsers.
Atty. Christopher E. Cruz is a Full-Time Assistant Professor of the Commercial Law Department,
De La Salle University.
These article are contributed by the CBE Faculty in the column of Business Focus of Manila
Bulletin published August 2, 2004.