BANKING LAWS 1. Check No.
1. Check No. 215391 dated May 29, 1981, in Life Trading, on June 15, 1981, and by the G. and U.
FIRST DIVISION
[G.R. No. 88013. March 19, 1990.]
SIMEX INTERNATIONAL (MANILA),
INCORPORATED, petitioner, vs. THE
HONORABLE COURT OF APPEALS and
TRADERS ROYAL BANK, respondents.
We are concerned in this case with the
question of damages, specifically moral and exemplary
damages. The negligence of the private respondent has
already been established. All we have to ascertain is
whether the petitioner is entitled to the said damages
and, if so, in what amounts.
The parties agree on the basic facts. The petitioner is a
private corporation engaged in the exportation of food
products. It buys these products from various local
suppliers and then sells them abroad, particularly in the
United States, Canada and the Middle East. Most of its
exports are purchased by the petitioner on credit. LLphil
The petitioner was a depositor of the respondent bank
and maintained a checking account in its branch at
Romulo Avenue, Cubao, Quezon City. On May 25,
1981, the petitioner deposited to its account in the said
bank the amount of P100,000.00, thus increasing its
balance as of that date to P190,380.74. 1 Subsequently,
the petitioner issued several checks against its deposit
but was surprised to learn later that they had been
dishonored for insufficient funds.
The dishonored checks are the following:
favor of California Manufacturing
Company, Inc. for P16,480.00:
2. Check No. 215426 dated May 28, 1981, in
favor of the Bureau of Internal Revenue
in the amount of P3,386.73:
3. Check No. 215451 dated June 4, 1981, in
favor of Mr. Greg Pedreo in the
amount of P7,080.00:
4. Check No. 215441 dated June 5, 1981, in
favor of Malabon Longlife Trading
Corporation in the
amount of P42,906.00:
5. Check No. 215474 dated June 10, 1981, in
favor of Malabon Longlife Trading
Corporation in the
amount of P12,953.00:
6. Check No. 215477 dated June 9, 1981, in
favor of Sea-Land Services, Inc. in the
amount of P27,024.45:
7. Check No. 215412 dated June 10, 1981, in
favor of Baguio Country Club
Corporation in the
amount of P4,385.02: and
8. Check No. 215480 dated June 9, 1981, in
favor of Enriqueta Bayla in the
amount of P6,275.00. 2
As a consequence, the California Manufacturing
Corporation sent on June 9, 1981, a letter of demand to
the petitioner, threatening prosecution if the dishonored
check issued to it was not made good. It also withheld
delivery of the order made by the petitioner. Similar
letters were sent to the petitioner by the Malabon Long
1
Enterprises, on June 10, 1981. Malabon also canceled
the petitioner's credit line and demanded that future
payments be made by it in cash or certified check.
Meantime, action on the pending orders of the petitioner
with the other suppliers whose checks were dishonored
was also deferred. cdrep
The petitioner complained to the respondent bank on
June 10, 1981. 3 Investigation disclosed that the
sum of P100,000.00 deposited by the petitioner on May
25, 1981, had not been credited to it. The error was
rectified on June 17, 1981, and the dishonored checks
were paid after they were re-deposited. 4
In its letter dated June 20, 1981, the petitioner demanded
reparation from the respondent bank for its "gross and
wanton negligence." This demand was not met. The
petitioner then filed a complaint in the
then Court of First Instance of Rizal claiming from the
private respondent moral damages in the
sum of P1,000,000.00 and exemplary damages in the
sum of P500,000.00, plus 25% attorney's fees, and costs.
After trial, Judge Johnico G. Serquia rendered
judgment holding that moral and exemplary damages
were not called for under the circumstances. However,
observing that the plaintiffs right had been violated, he
ordered the defendant to pay nominal damages in the
amount of P20,000.00 plus P5,000.00 attorney's fees and
costs. 5This decision was affirmed in toto by the
respondent court. 6
The respondent court found with the trial court that the
private respondent was guilty of negligence but agreed
that the petitioner was nevertheless not entitled to moral
damages. It said:
The essential ingredient of moral damages is
proof of bad faith (De Aparicio vs. Parogurga, 150
SCRA 280). Indeed, there was the omission by the
defendant-appellee bank to credit appellant's
deposit of P100,000.00 on May 25, 1981. But the bank
rectified its records. It credited the said amount in
favor of plaintiff-appellant in less than a month. The
dishonored checks were eventually paid. These
circumstances negate any imputation or
insinuation of malicious, fraudulent, wanton and gross
bad faith and negligence on the part of the defendant-
appellant.
It is this ruling that is faulted in the petition now before
us.
This Court has carefully examined the facts of this case
and finds that it cannot share some of the
conclusions of the lower courts. It seems to us that the
negligence ofthe private respondent had been brushed
off rather lightly as if it were a minor infraction
requiring no more than a slap on the wrist. We feel it is
not enough to say that the private respondent rectified its
records and credited the deposit in less than a month as
if this were sufficient repentance. The error should not
have been committed in the first place. The respondent
bank has not even explained why it was committed at
all. It is true that the dishonored checks were, as
the Court ofAppeals put it, "eventually" paid. However,
this took almost a month when, properly, the checks
should have been paid immediately upon
presentment. llcd
As the Court sees it, the initial carelessness of the
respondent bank, aggravated by the lack of promptitude
in repairing its error, justifies the grant of moral
damages. This rather lackadaisical attitude toward the
complaining depositor constituted the gross negligence,
if not wanton bad faith, that the respondent court said
had not been established by the petitioner.
We also note that while stressing the rectification made
by the respondent bank, the decision practically ignored
the prejudice suffered by the petitioner. This was simply
glossed over if not, indeed, disbelieved. The fact is that
the petitioner's credit line was canceled and its orders
were not acted upon pending receipt of actual payment
by the suppliers. Its business declined. Its reputation was
tarnished. Its standing was reduced in the business
community. All this was due to the fault of the
respondent bank which was undeniably remiss in its
duty to the petitioner.
Article 2205 of the Civil Code provides that actual or
compensatory damages may be received "(2) for injury
to the plaintiff's business standing or commercial
credit." There is no question that the petitioner did
sustain actual injury as a result of the dishonored checks
and that the existence of the loss having been
established "absolute certainty as to its amount is not
required." 7 Such injury should bolster all the more the
demand of the petitioner for moral damages and justifies
the examination by this Court of the validity and
reasonableness of the said claim.
We agree that moral damages are not awarded to
penalize the defendant but to compensate the plaintiff
for the injuries he may have suffered. 8 In the case at
bar, the petitioner is seeking such damages for the
prejudice sustained by it as a result of the private
respondent's fault. The respondent court said that the
claimed losses are purely speculative and are not
supported by substantial evidence, but if failed to
consider that the amount of such losses need not be
established with exactitude, precisely because of their
nature. Moral damages are not susceptible of pecuniary
2
estimation. Article 2216 of the Civil Code specifically
provides that "no proof ofpecuniary loss is necessary in
order that moral, nominal, temperate, liquidated or
exemplary damages may be adjudicated." That is why
the determination of the amount to be awarded (except
liquidated damages) is left to the sound
discretion of the court, according to "the
circumstances of each case." LexLib
From every viewpoint except that of the petitioner's, its
claim of moral damages in the amount of P1,000,000.00
is nothing short of preposterous. Its business certainly is
not that big, or its name that prestigious, to sustain such
an extravagant pretense. Moreover, a corporation is not
as a rule entitled to moral damages because, not being a
natural person, it cannot experience physical suffering or
such sentiments as wounded feelings, serious anxiety,
mental anguish and moral shock. The only exception to
this rule is where the corporation has a good reputation
that is debased, resulting in its social humiliation. 9
We shall recognize that the petitioner did suffer injury
because of the private respondent's negligence the
caused the dishonor of the checks issued by it. The
immediate consequence was that its prestige was
impaired because of the bouncing checks and confidence
in it as a reliable debtor was diminished. The private
respondent makes much of the one instance when the
petitioner was sued in a collection case, but that did not
prove that it did not have a good reputation that could
not be marred, more so since that case was ultimately
settled. 10 It does not appear that, as the private
respondent would portray it, the petitioner is an
unsavory and disreputable entity that has no good name
to protect.
Considering all this, we feel that the award of nominal
damages in the sum of P20,000.00 was not the proper
relief to which the petitioner was entitled. Under Article
2221 of the Civil Code, "nominal damages are
adjudicated in order that a right of the plaintiff, which
has been violated or invaded by the defendant, may be
vindicated or recognized, and not for the
purpose of indemnifying the plaintiff for any loss
suffered by him." As we have found that the petitioner
has indeed incurred loss through the fault of the private
respondent, the proper remedy is the award to
it of moral damages, which we impose, in our
discretion, in the same amount of P20,000.00. LexLib
Now for the exemplary damages.
The pertinent provisions of the Civil Code are the
following:
Art. 2229. Exemplary or corrective damages
are imposed, by way of example or correction
for the public good, in addition to the moral,
temperate, liquidated or compensatory
damages.
Art. 2232. In contracts and quasi-contracts,
the court may award exemplary damages if the
defendant acted in a wanton, fraudulent,
reckless, oppressive, or malevolent manner.
The banking system is an indispensable institution in the
modern world and plays a vital role in the economic
life of every civilized nation. Whether as mere passive
entities for the safekeeping and saving of money or as
active instruments of business and commerce, banks
have become an ubiquitous presence among the people,
who have come to regard them with respect and even
gratitude and, most of all, confidence. Thus, even the
humble wage-earner has not hesitated to entrust his life's
savings to the bank of his choice, knowing that they will
be safe in its custody and will even earn some interest
for him. The ordinary person, with equal faith, usually and why it was not corrected immediately after its
maintains a modest checking account for security and discovery. Such ineptness comes under the
convenience in the settling of his monthly bills and the concept of the wanton manner contemplated in the Civil
payment of ordinary expenses. As for business entities Code that calls for the imposition of exemplary
like the petitioner, the bank is a trusted and active damages.
associate that can help in the running of their affairs, not
After deliberating on this particular matter, the Court, in
only in the form of loans when needed but more often in
the exercise of its discretion, hereby imposes upon the
the conduct of their day-to-day transactions like the
respondent bank exemplary damages in the
issuance or encashment of checks. prcd
amount ofP50,000.00, "by way of example or correction
In every case, the depositor expects the bank to treat his for the public good," in the words of the law. It is
account with the utmost fidelity, whether such account expected that this ruling will serve as a warning and
consists only of a few hundred pesos or of millions. The deterrent against the repetition of the ineptness and
bank must record every single transaction accurately, indifference that has been displayed here, lest the
down to the last centavo, and as promptly as possible. confidence of the public in the banking system be
This has to be done if the account is to reflect at any further impaired. LLpr
given time the amount of money the depositor can
ACCORDINGLY, the appealed judgment is hereby
dispose of as he sees fit, confident that the bank will
MODIFIED and the private respondent is ordered to pay
deliver it as and to whomever he directs. A blunder on
the petitioner, in lieu of nominal damages, moral
the part of the bank, such as the dishonor of a check
damages in the amount of P20,000.00, and exemplary
without good reason, can cause the depositor not a little
damages in the amount of P50,000.00 plus the original
embarrassment if not also financial loss and perhaps
award of attorney's fees in the amount of P5,000.00, and
even civil and criminal litigation.
costs.
The point is that as a business affected with public
interest and because of the nature of its functions, the
bank is under obligation to treat the accounts of its SO ORDERED.
depositors with meticulous care, always having in mind
the fiduciary nature of their relationship. In the case at
bar, it is obvious that the respondent bank was remiss in
that duty and violated that relationship. What is
especially deplorable is that, having been informed of its
FIRST DIVISION
error in not crediting the deposit in question to the
petitioner, the respondent bank did not immediately
correct it but did so only one week later or twenty-three [G.R. No. 138569. September 11, 2003.]
days after the deposit was made. It bears repeating that
the record does not contain any satisfactory THE CONSOLIDATED BANK and TRUST
explanation of why the error was made in the first place CORPORATION, petitioner, vs. COURT OF
3
 APPEALS and L.C. DIAZ and COMPANY,
CPA's, respondents.
The Case
Before us is a petition for review of the Decision 1 of
the Court of Appeals dated 27 October 1998 and its
Resolution dated 11 May 1999. The assailed decision
reversed the Decision 2 of the Regional Trial Court of
Manila, Branch 8, absolving petitioner Consolidated.
Bank and Trust Corporation, now known as Solidbank
Corporation ("Solidbank"), of any liability. The
questioned resolution of the appellate court denied the
motion for reconsideration of Solidbank but modified
the decision by deleting the award of exemplary
damages, attorney's fees, expenses of litigation and cost
of suit. caAICE
The Facts
Solidbank is a domestic banking corporation organized
and existing under Philippine laws. Private respondent
L.C. Diaz and Company, CPA's ("L.C. Diaz"), is a
professional partnership engaged in the practice of
accounting.
Sometime in March 1976, L.C. Diaz opened a savings
account with Solidbank, designated as Savings Account
No. S/A 200-16872-6.
On 14 August 1991, L.C. Diaz through its cashier,
Mercedes Macaraya ("Macaraya"), filled up a savings
(cash) deposit slip for P990 and a savings (checks)
deposit slip for P50. Macaraya instructed the messenger
of L.C. Diaz, Ismael Calapre ("Calapre"), to deposit the
money with Solidbank. Macaraya also gave Calapre the
Solidbank passbook.
Calapre went to Solidbank and presented to Teller No. 6
the two deposit slips and the passbook. The teller
acknowledged receipt of the deposit by returning to
Calapre the duplicate copies of the two deposit slips.
Teller No. 6 stamped the deposit slips with the words
"DUPLICATE" and "SAVING TELLER 6
SOLIDBANK HEAD OFFICE." Since the transaction
took time and Calapre had to make another deposit for
L.C. Diaz with Allied Bank, he left the passbook with
Solidbank. Calapre then went to Allied Bank. When
Calapre returned to Solidbank to retrieve the passbook,
Teller No. 6 informed him that "somebody got the
passbook. 3 Calapre went back to L.C. Diaz and
reported the incident to Macaraya.
Macaraya immediately prepared a deposit slip in
duplicate copies with a check of P200,000. Macaraya,
together with Calapre, went to Solidbank and presented
to Teller No. 6 the deposit slip and check. The teller
stamped the words "DUPLICATE" and "SAVING
TELLER 6 SOLIDBANK HEAD OFFICE" on the
duplicate copy of the deposit slip. When Macaraya
asked for the passbook, Teller No. 6 told Macaraya that
someone got the passbook but she could not remember
to whom she gave the passbook. When Macaraya asked
Teller No. 6 if Calapre got the passbook, Teller No. 6
answered that someone shorter than Calapre got the
passbook. Calapre was then standing beside Macaraya.
Teller No. 6 handed to Macaraya a deposit slip dated 14
August 1991 for the deposit of a check for P90,000
drawn on Philippine Banking Corporation ("PBC"). This
PBC check of L.C. Diaz was a check that it had "long
closed." 4 PBC subsequently dishonored the check
because of insufficient funds and because the signature
in the check differed from PBC's specimen signature.
Failing to get back the passbook, Macaraya went back to
her office and reported the matter to the Personnel
Manager of L.C. Diaz, Emmanuel Alvarez.
4
The following day, 15 August 1991, L.C. Diaz through
its Chief Executive Officer, Luis C. Diaz ("Diaz"),
called up Solidbank to stop any transaction using the
same passbook until L.C. Diaz could open a new
account. 5 On the same day, Diaz formally wrote
Solidbank to make the same request. It was also on the
same day that L.C. Diaz learned of the unauthorized
withdrawal the day before, 14 August 1991, of P300,000
from its savings account. The withdrawal slip for the
P300,000 bore the signatures of the authorized
signatories of L.C. Diaz, namely Diaz and Rustico L.
Murillo. The signatories, however, denied signing the
withdrawal slip. A certain Noel Tamayo received the
P300,000. IaSCTE
In an Information 6 dated 5 September 1991, L.C. Diaz
charged its messenger, Emerano Ilagan ("Ilagan") and
one Roscon Verdazola with Estafa through Falsification
of Commercial Document. The Regional Trial Court of
Manila dismissed the criminal case after the City
Prosecutor filed a Motion to Dismiss on 4 August 1992.
On 24 August 1992, L.C. Diaz through its counsel
demanded from Solidbank the return of its money.
Solidbank refused.
On 25 August 1992, L.C. Diaz filed a Complaint 7 for
Recovery of a Sum of Money against Solidbank with the
Regional Trial Court of Manila, Branch 8. After trial, the
trial court rendered on 28 December 1994 a decision
absolving Solidbank and dismissing the complaint.
L.C. Diaz then appealed 8 to the Court of Appeals. On
27 October 1998, the Court of Appeals issued its
Decision reversing the decision of the trial court.
On 11 May 1999, the Court of Appeals issued its
Resolution denying the motion for reconsideration of
Solidbank. The appellate court, however, modified its
decision by deleting the award of exemplary damages
and attorney's fees.
The Ruling of the Trial Court
In absolving Solidbank, the trial court applied the rules
on savings account written on the passbook. The rules
state that "possession of this book shall raise the
presumption of ownership and any payment or payments
made by the bank upon the production of the said book
and entry therein of the withdrawal shall have the same
effect as if made to the depositor personally." 9
At the time of the withdrawal, a certain Noel Tamayo
was not only in possession of the passbook, he also
presented a withdrawal slip with the signatures of the
authorized signatories of L.C. Diaz. The specimen
signatures of these persons were in the signature cards.
The teller stamped the withdrawal slip with the words
"Saving Teller No. 5." The teller then passed on the
withdrawal slip to Genere Manuel ("Manuel") for
authentication. Manuel verified the signatures on the
withdrawal slip. The withdrawal slip was then given to
another officer who compared the signatures on the
withdrawal slip with the specimen on the signature
cards. The trial court concluded that Solidbank acted
with care and observed the rules on savings account
when it allowed the withdrawal of P300,000 from the
savings account of L.C. Diaz.
The trial court pointed out that the burden of proof now
shifted to L.C. Diaz to prove that the signatures on the
withdrawal slip were forged. The trial court admonished
L.C. Diaz for not offering in evidence the National
Bureau of Investigation ("NBI") report on the
authenticity of the signatures on the withdrawal slip for
P300,000. The trial court believed that L.C. Diaz did not
offer this evidence because it is derogatory to its action.
Another provision of the rules on savings account states
that the depositor must keep the passbook "under lock
and key." 10 When another person presents the passbook
for withdrawal prior to Solidbank's receipt of the notice
of loss of the passbook, that person is considered as the
owner of the passbook. The trial court ruled that the
passbook presented during the questioned transaction
was "now out of the lock and key and presumptively
ready for a business transaction." 11
Solidbank did not have any participation in the custody
and care of the passbook. The trial court believed that
Solidbank's act of allowing the withdrawal of P300,000
was not the direct and proximate cause of the loss. The
trial court held that L.C. Diaz's negligence caused the
unauthorized withdrawal. Three facts establish L.C.
Diaz's negligence: (1) the possession of the passbook by
a person other than the depositor L.C. Diaz; (2) the
presentation of a signed withdrawal receipt by an
unauthorized person; and (3) the possession by an
unauthorized person of a PBC check "long closed" by
L.C. Diaz, which check was deposited on the day of the
fraudulent withdrawal.
The trial court debunked L.C. Diaz's contention that
Solidbank did not follow the precautionary procedures
observed by the two parties whenever L.C. Diaz
withdrew significant amounts from its account. L.C.
Diaz claimed that a letter must accompany withdrawals
of more than P20,000. The letter must request Solidbank
to allow the withdrawal and convert the amount to a
manager's check. The bearer must also have a letter
authorizing him to withdraw the same amount. Another
person driving a car must accompany the bearer so that
he would not walk from Solidbank to the office in
making the withdrawal. The trial court pointed out that
L.C. Diaz disregarded these precautions in its past
withdrawal. On 16 July 1991, L.C. Diaz withdrew
5
P82,554 without any separate letter of authorization or
any communication with Solidbank that the money be
converted into a manager's check.
The trial court further justified the dismissal of the
complaint by holding that the case was a last ditch effort
of L.C. Diaz to recover P300,000 after the dismissal of
the criminal case against Ilagan.
The dispositive portion of the decision of the trial court
reads:
IN VIEW OF THE FOREGOING, judgment is
hereby rendered DISMISSING the complaint.
The Court further renders judgment in favor of
defendant bank pursuant to its counterclaim the
amount of Thirty Thousand Pesos (P30,000.00)
as attorney's fees.
With costs against plaintiff.
SO ORDERED. 12
The Ruling of the Court of Appeals
The Court of Appeals ruled that Solidbank's negligence
was the proximate cause of the unauthorized withdrawal
of P300,000 from the savings account of L.C. Diaz. The
appellate court reached this conclusion after applying
the provision of the Civil Code on quasi-delict, to wit:
Article 2176. Whoever by act or omission
causes damage to another, there being fault or
negligence, is obliged to pay for the damage
done. Such fault or negligence, if there is no
pre-existing contractual relation between the
parties, is called a quasi-delict and is governed
by the provisions of this chapter.
 The appellate court held that the three elements of The dispositive portion of the decision of the Court of disallowed pursuant to Article 2208 of the Civil Code.
a quasi-delict are present in this case, namely: (a) Appeals reads: The expenses of litigation and cost of suit were also
damages suffered by the plaintiff; (b) fault or not imposed on Solidbank.
WHEREFORE, premises considered, the
negligence of the defendant, or some other person for The dispositive portion of the Resolution reads as
decision appealed from is hereby REVERSED
whose acts he must respond; and (c) the connection of follows:
and a new one entered.
cause and effect between the fault or negligence of the
defendant and the damage incurred by the plaintiff. 1. Ordering defendant-appellee WHEREFORE, foregoing considered, our
Consolidated Bank and Trust decision dated October 27, 1998 is affirmed
The Court of Appeals pointed out that the teller of
Corporation. to pay plaintiff- with modification by deleting the award of
Solidbank who received the withdrawal slip for
appellant the sum of Three exemplary damages and attorney's fees,
P300,000 allowed the withdrawal without making the
Hundred Thousand Pesos expenses of litigation and cost of suit.
necessary inquiry. The appellate court stated that the
teller, who was not presented by Solidbank during trial, (P300,000.00), with interest SO ORDERED. 15
should have called up the depositor because the money thereon at the rate of 12% per
to be withdrawn was a significant amount. Had the teller annum from the date of filing of Hence, this petition.
called up L.C. Diaz, Solidbank would have known that the complaint until paid, the
The Issues
the withdrawal was unauthorized. The teller did not sum of P20,000.00 as
exemplary damages, and Solidbank seeks the review of the decision and
even verify the identity of the impostor who made the
P20,000.00 as attorney's fees resolution of the Court of Appeals on these grounds:
withdrawal. Thus, the appellate court found Solidbank
liable for its negligence in the selection and supervision and expenses of litigation as I. THE COURT OF APPEALS ERRED IN
of its employees. well as the cost of suit; and HOLDING THAT PETITIONER
2. Ordering the dismissal of defendant- BANK SHOULD SUFFER THE LOSS
The appellate court ruled that while L.C. Diaz was also
appellee's counterclaim in the BECAUSE ITS TELLER SHOULD
negligent in entrusting its deposits to its messenger and
amount of P30,000.00 as HAVE FIRST CALLED PRIVATE
its messenger in leaving the passbook with the teller,
attorney's fees. RESPONDENT BY TELEPHONE
Solidbank could not escape liability because of the
BEFORE IT ALLOWED THE
doctrine of "last clear chance." Solidbank could have SO ORDERED. 13 WITHDRAWAL OF P300,000.00 TO
averted the injury suffered by L.C. Diaz had it called up
Acting on the motion for reconsideration of Solidbank, RESPONDENT'S MESSENGER
L.C. Diaz to verify the withdrawal.
the appellate court affirmed its decision but modified EMERANO ILAGAN, SINCE THERE
The appellate court ruled that the degree of diligence the award of damages. The appellate court deleted the IS NO AGREEMENT BETWEEN
required from Solidbank is more than that of a good award of exemplary damages and attorney's fees. THE PARTIES IN THE OPERATION
father of a family. The business and functions of banks Invoking Article 2231 14 of the Civil Code, the OF THE SAVINGS ACCOUNT, NOR
are affected with public interest. Banks are obligated to appellate court ruled that exemplary damages could be IS THERE ANY BANKING LAW,
treat the accounts of their depositors with meticulous granted if the defendant acted with gross negligence. WHICH MANDATES THAT A BANK
care, always having in mind the fiduciary nature of their Since Solidbank was guilty of simple negligence only, TELLER SHOULD FIRST CALL UP
relationship with their clients. The Court of Appeals the award of exemplary damages was not justified. THE DEPOSITOR BEFORE
found Solidbank remiss in its duty, violating its Consequently, the award of attorney's fees was also ALLOWING A WITHDRAWAL OF A
fiduciary relationship with L.C. Diaz.
6
 BIG AMOUNT IN A SAVINGS
ACCOUNT.
II. THE COURT OF APPEALS ERRED IN
APPLYING THE DOCTRINE OF
LAST CLEAR CHANCE AND IN
HOLDING THAT PETITIONER
BANK'S TELLER HAD THE LAST
OPPORTUNITY TO WITHHOLD
THE WITHDRAWAL WHEN IT IS
UNDISPUTED THAT THE TWO
SIGNATURES OF RESPONDENT
ON THE WITHDRAWAL SLIP ARE
GENUINE AND PRIVATE
RESPONDENT'S PASSBOOK WAS
DULY PRESENTED, AND
CONTRARIWISE RESPONDENT
WAS NEGLIGENT IN THE
SELECTION AND SUPERVISION OF
ITS MESSENGER EMERANO
ILAGAN, AND IN THE
SAFEKEEPING OF ITS CHECKS
AND OTHER FINANCIAL
DOCUMENTS.
III. THE COURT OF APPEALS ERRED IN
NOT FINDING THAT THE INSTANT
CASE IS A LAST DITCH EFFORT
OF PRIVATE RESPONDENT TO
RECOVER ITS P300,000.00 AFTER
FAILING IN ITS EFFORTS TO
RECOVER THE SAME FROM ITS
EMPLOYEE EMERANO ILAGAN.
IV. THE COURT OF APPEALS ERRED IN
NOT MITIGATING THE DAMAGES
AWARDED AGAINST PETITIONER
UNDER ARTICLE 2197 OF THE
CIVIL CODE, NOTWITHSTANDING
ITS FINDING THAT PETITIONER
BANK'S NEGLIGENCE WAS ONLY
CONTRIBUTORY. 16
The Ruling of the Court
The petition is partly meritorious.
Solidbank's Fiduciary Duty under the Law
The rulings of the trial court and the Court of Appeals
conflict on the application of the law. The trial court
pinned the liability on L.C. Diaz based on the provisions
of the rules on savings account, a recognition of the
contractual relationship between Solidbank and L.C.
Diaz, the latter being a depositor of the former. On the
other hand, the Court of Appeals applied the law
on quasi-delict to determine who between the two
parties was ultimately negligent. The law on quasi-
delict or culpa aquiliana is generally applicable when
there is no pre-existing contractual relationship between
the parties.
We hold that Solidbank is liable for breach of contract
due to negligence, or culpa contractual.
The contract between the bank and its depositor is
governed by the provisions of the Civil Code on simple
loan. 17 Article 1980 of the Civil Code expressly
provides that ". . . savings . . . deposits of money in
banks and similar institutions shall be governed by the
provisions concerning simple loan." There is a debtor-
creditor relationship between the bank and its depositor.
The bank is the debtor and the depositor is the creditor.
The depositor lends the bank money and the bank agrees
to pay the depositor on demand. The savings deposit
agreement between the bank and the depositor is the
contract that determines the rights and obligations of the
parties.
7
The law imposes on banks high standards in view of the
fiduciary nature of banking. Section 2 of Republic Act No. 8791
("RA 8791"), 18 which took effect on 13 June 2000,
declares that the State recognizes the "fiduciary nature
of banking that requires high standards of integrity and
performance." 19 This new provision in the general banking
law, introduced in 2000, is a statutory affirmation of
Supreme Court decisions, starting with the 1990 case
of Simex International v. Court of Appeals, 20 holding that "the bank
is under obligation to treat the accounts of its depositors
with meticulous care, always having in mind the
fiduciary nature of their relationship. 21
This fiduciary relationship means that the bank's
obligation to observe "high standards of integrity and
performance" is deemed written into every deposit
agreement between a bank and its depositor. The
fiduciary nature of banking requires banks to assume a
degree of diligence higher than that of a good father of a
family. Article 1172 of the Civil Code states that the
degree of diligence required of an obligor is that
prescribed by law or contract, and absent such
stipulation then the diligence of a good father of a
family. 22 Section 2 of RA 8791 prescribes the statutory
diligence required from banks that banks must
observe "high standards of integrity and performance" in
servicing their depositors. Although RA 8791 took effect
almost nine years after the unauthorized withdrawal of
the P300,000 from L.C. Diaz's savings account,
jurisprudence 23 at the time of the withdrawal already
imposed on banks the same high standard of diligence
required under RA No. 8791.
However, the fiduciary nature of a bank-depositor
relationship does not convert the contract between the
bank and its depositors from a simple loan to a trust
agreement, whether express or implied. Failure by the
bank to pay the depositor is failure to pay a simple loan,
and not a breach of trust. 24 The law simply imposes on
the bank a higher standard of integrity and performance
in complying with its obligations under the contract of
simple loan, beyond those required of non-bank debtors
under a similar contract of simple loan.
The fiduciary nature of banking does not convert a
simple loan into a trust agreement because banks do not
accept deposits to enrich depositors but to earn money
for themselves. The law allows banks to offer the lowest
possible interest rate to depositors while charging the
highest possible interest rate on their own borrowers.
The interest spread or differential belongs to the bank
and not to the depositors who are not cestui que trust of
banks. If depositors are cestui que trust of banks, then
the interest spread or income belongs to the depositors, a
situation that Congress certainly did not intend in
enacting Section 2 of RA 8791.
Solidbank's Breach of its Contractual Obligation
Article 1172 of the Civil Code provides that
"responsibility arising from negligence in the
performance of every kind of obligation is demandable."
For breach of the savings deposit agreement due to
negligence, or culpa contractual, the bank is liable to its
depositor.
Calapre left the passbook with Solidbank because the
"transaction took time" and he had to go to Allied Bank
for another transaction. The passbook was still in the
hands of the employees of Solidbank for the processing
of the deposit when Calapre left Solidbank. Solidbank's
rules on savings account require that the "deposit book
should be carefully guarded by the depositor and kept
under lock and key, if possible." When the passbook is
in the possession of Solidbank's tellers during
withdrawals, the law imposes on Solidbank and its
tellers an even higher degree of diligence in
safeguarding the passbook.
Likewise, Solidbank's tellers must exercise a high
degree of diligence in insuring that they return the
passbook only to the depositor or his authorized
representative. The tellers know, or should know, that
the rules on savings account provide that any person in
possession of the passbook is presumptively its owner. If
the tellers give the passbook to the wrong person, they
would be clothing that person presumptive ownership of
the passbook, facilitating unauthorized withdrawals by
that person. For failing to return the passbook to
Calapre, the authorized representative of L.C. Diaz,
Solidbank and Teller No. 6 presumptively failed to
observe such high degree of diligence in safeguarding
the passbook, and in insuring its return to the party
authorized to receive the same.
In culpa contractual, once the plaintiff proves a breach
of contract, there is a presumption that the defendant
was at fault or negligent. The burden is on the defendant
to prove that he was not at fault or negligent. In contrast,
in culpa aquiliana the plaintiff has the burden of
proving that the defendant was negligent. In the present
case, L.C. Diaz has established that Solidbank breached
its contractual obligation to return the passbook only to
the authorized representative of L.C. Diaz. There is thus
a presumption that Solidbank was at fault and its teller
was negligent in not returning the passbook to Calapre.
The burden was on Solidbank to prove that there was no
negligence on its part or its employees.
Solidbank failed to discharge its burden. Solidbank did
not present to the trial court Teller No. 6, the teller with
whom Calapre left the passbook and who was supposed
to return the passbook to him. The record does not
8
indicate that Teller No. 6 verified the identity of the
person who retrieved the passbook. Solidbank also
failed to adduce in evidence its standard procedure in
verifying the identity of the person retrieving the
passbook, if there is such a procedure, and that Teller
No. 6 implemented this procedure in the present case.
Solidbank is bound by the negligence of its employees
under the principle of respondeat superior or command
responsibility. The defense of exercising the required
diligence in the selection and supervision of employees
is not a complete defense in culpa contractual, unlike
in culpa aquiliana. 25
The bank must not only exercise "high standards of
integrity and performance," it must also insure that its
employees do likewise because this is the only way to
insure that the bank will comply with its fiduciary duty.
Solidbank failed to present the teller who had the duty to
return to Calapre the passbook, and thus failed to prove
that this teller exercised the "high standards of integrity
and performance" required of Solidbank's
employees. ETHCDS
Proximate Cause of the Unauthorized Withdrawal
Another point of disagreement between the trial and
appellate courts is the proximate cause of the
unauthorized withdrawal. The trial court believed that
L.C. Diaz's negligence in not securing its passbook
under lock and key was the proximate cause that
allowed the impostor to withdraw the P300,000. For the
appellate court, the proximate cause was the teller's
negligence in processing the withdrawal without first
verifying with L.C. Diaz. We do not agree with either
court.
Proximate cause is that cause which, in natural and
continuous sequence, unbroken by any efficient
intervening cause, produces the injury and without
which the result would not have occurred. 26 Proximate
cause is determined by the facts of each case upon
mixed considerations of logic, common sense, policy
and precedent. 27
L.C. Diaz was not at fault that the passbook landed in
the hands of the impostor. Solidbank was in possession
of the passbook while it was processing the deposit.
After completion of the transaction, Solidbank had the
contractual obligation to return the passbook only to
Calapre, the authorized representative of L.C. Diaz.
Solidbank failed to fulfill its contractual obligation
because it gave the passbook to another person.
Solidbank's failure to return the passbook to Calapre
made possible the withdrawal of the P300,000 by the
impostor who took possession of the passbook. Under
Solidbank's rules on savings account, mere possession
of the passbook raises the presumption of ownership. It
was the negligent act of Solidbank's Teller No. 6 that
gave the impostor presumptive ownership of the
passbook. Had the passbook not fallen into the hands of
the impostor, the loss of P300,000 would not have
happened. Thus, the proximate cause of the
unauthorized withdrawal was Solidbank's negligence in
not returning the passbook to Calapre.
We do not subscribe to the appellate court's theory that
the proximate cause of the unauthorized withdrawal was
the teller's failure to call up L.C. Diaz to verify the
withdrawal. Solidbank did not have the duty to call up
L.C. Diaz to confirm the withdrawal. There is no
arrangement between Solidbank and L.C. Diaz to this
effect. Even the agreement between Solidbank and L.C.
Diaz pertaining to measures that the parties must
observe whenever withdrawals of large amounts are
made does not direct Solidbank to call up L.C. Diaz.
There is no law mandating banks to call up their clients
whenever their representatives withdraw significant
amounts from their accounts. L.C. Diaz therefore had
the burden to prove that it is the usual practice of
Solidbank to call up its clients to verify a withdrawal of
a large amount of money. L.C. Diaz failed to do so.
Teller No. 5 who processed the withdrawal could not
have been put on guard to verify the withdrawal. Prior to
the withdrawal of P300,000, the impostor deposited with
Teller No. 6 the P90,000 PBC check, which later
bounced. The impostor apparently deposited a large
amount of money to deflect suspicion from the
withdrawal of a much bigger amount of money. The
appellate court thus erred when it imposed on Solidbank
the duty to call up L.C. Diaz to confirm the withdrawal
when no law requires this from banks and when the
teller had no reason to be suspicious of the transaction.
Solidbank continues to foist the defense that Ilagan
made the withdrawal. Solidbank claims that since Ilagan
was also a messenger of L.C. Diaz, he was familiar with
its teller so that there was no more need for the teller to
verify the withdrawal. Solidbank relies on the following
statements in the Booking and Information Sheet of
Emerano Ilagan:
. . . Ilagan also had with him (before the
withdrawal) a forged check of PBC and
indicated the amount of P90,000 which he
deposited in favor of L.C. Diaz and Company.
After successfully withdrawing this large sum
of money, accused Ilagan gave alias Rey (Noel
Tamayo) his share of the loot. Ilagan then hired
a taxicab in the amount of P1,000 to transport
him (Ilagan) to his home province at Bauan,
Batangas. Ilagan extravagantly and lavishly
spent his money but a big part of his loot was
9
wasted in cockfight and horse racing. Ilagan
was apprehended and meekly admitted his
guilt. 28 (Emphasis supplied.)
L.C. Diaz refutes Solidbank's contention by pointing out
that the person who withdrew the P300,000 was a
certain Noel Tamayo. Both the trial and appellate courts
stated that this Noel Tamayo presented the passbook
with the withdrawal slip.
We uphold the finding of the trial and appellate courts
that a certain Noel Tamayo withdrew the P300,000. The
Court is not a trier of facts. We find no justifiable reason
to reverse the factual finding of the trial court and the
Court of Appeals. The tellers who processed the deposit
of the P90,000 check and the withdrawal of the
P300,000 were not presented during trial to substantiate
Solidbank's claim that Ilagan deposited the check and
made the questioned withdrawal. Moreover, the entry
quoted by Solidbank does not categorically state that
Ilagan presented the withdrawal slip and the passbook.
Doctrine of Last Clear Chance
The doctrine of last clear chance states that where both
parties are negligent but the negligent act of one is
appreciably later than that of the other, or where it is
impossible to determine whose fault or negligence
caused the loss, the one who had the last clear
opportunity to avoid the loss but failed to do so, is
chargeable with the loss. 29 Stated differently, the
antecedent negligence of the plaintiff does not preclude
him from recovering damages caused by the
supervening negligence of the defendant, who had the
last fair chance to prevent the impending harm by the
exercise of due diligence. 30
We do not apply the doctrine of last clear chance to the
present case. Solidbank is liable for breach of contract
due to negligence in the performance of its contractual
obligation to L.C. Diaz. This is a case of culpa
contractual, where neither the contributory negligence of
the plaintiff nor his last clear chance to avoid the loss,
would exonerate the defendant from liability. 31 Such
contributory negligence or last clear chance by the
plaintiff merely serves to reduce the recovery of
damages by the plaintiff but does not exculpate the
defendant from his breach of contract. 32
Mitigated Damages
Under Article 1172, "liability (for culpa contractual)
may be regulated by the courts, according to the
circumstances." This means that if the defendant
exercised the proper diligence in the selection and
supervision of its employee, or if the plaintiff was guilty
of contributory negligence, then the courts may reduce
the award of damages. In this case, L.C. Diaz was guilty
of contributory negligence in allowing a withdrawal slip
signed by its authorized signatories to fall into the hands
of an impostor. Thus, the liability of Solidbank should
be reduced.
In Philippine Bank of Commerce v. Court of
Appeals, 33 where the Court held the depositor guilty of
contributory negligence, we allocated the damages
between the depositor and the bank on a 40-60 ratio.
Applying the same ruling to this case, we hold that L.C.
Diaz must shoulder 40% of the actual damages awarded
by the appellate court. Solidbank must pay he other 60%
of the actual damages.
WHEREFORE, the decision of the Court of Appeals is
AFFIRMED with MODIFICATION. Petitioner
Solidbank Corporation shall pay private respondent L.C.
Diaz and Company, CPA's only 60% of the actual
damages awarded by the Court of Appeals. The
remaining 40% of the actual damages shall be borne by
private respondent L.C. Diaz and Company, CPA's.
Proportionate costs.
SO ORDERED.
FIRST DIVISION
[G.R. No. 154469. December 6, 2006.]
METROPOLITAN BANK AND TRUST
COMPANY, petitioner, vs. RENATO D.
CABILZO, respondent.
Before this Court is a Petition for Review on Certiorari,
filed by petitioner Metropolitan Bank and Trust
Company (Metrobank) seeking to reverse and set aside
the Decision 1 of the Court of Appeals dated 8 March
2002 and its Resolution dated 26 July 2002 affirming
the Decision of the Regional Trial Court (RTC) of
Manila, Branch 13 dated 4 September 1998. The
dispositive portion of the Court of Appeals Decision
reads:
WHEREFORE, the assailed decision dated
September 4, 1998 is AFFIRMED with
modifications (sic) that the awards for
exemplary damages and attorney's fees are
hereby deleted.
Petitioner Metrobank is a banking institution duly
organized and existing as such under Philippine laws. 2
Respondent Renato D. Cabilzo (Cabilzo) was one of
Metrobank's clients who maintained a current account
with Metrobank Pasong Tamo Branch. 3
10
On 12 November 1994, Cabilzo issued a Metrobank
Check No. 985988, payable to "CASH" and postdated
on 24 November 1994 in the amount of One Thousand
Pesos (P1,000.00). The check was drawn against
Cabilzo's Account with Metrobank Pasong Tamo Branch
under Current Account No. 618044873-3 and was paid
by Cabilzo to a certain Mr. Marquez, as his sales
commission. 4
Subsequently, the check was presented to Westmont
Bank for payment. Westmont Bank, in turn, indorsed the
check to Metrobank for appropriate clearing. After the
entries thereon were examined, including the availability
of funds and the authenticity of the signature of the
drawer, Metrobank cleared the check for encashment in
accordance with the Philippine Clearing House
Corporation (PCHC) Rules.
On 16 November 1994, Cabilzo's representative was at
Metrobank Pasong Tamo Branch to make some
transaction when he was asked by a bank personnel if
Cabilzo had issued a check in the amount
of P91,000.00 to which the former replied in the
negative. On the afternoon of the same date, Cabilzo
himself called Metrobank to reiterate that he did not
issue a check in the amount of P91,000.00 and requested
that the questioned check be returned to him for
verification, to which Metrobank complied. 5
Upon receipt of the check, Cabilzo discovered that
Metrobank Check No. 985988 which he issued on 12
November 1994 in the amount of P1,000.00 was altered
toP91,000.00 and the date 24 November 1994 was
changed to 14 November 1994. 6
Hence, Cabilzo demanded that Metrobank re-credit the
amount of P91,000.00 to his account. Metrobank,
however, refused reasoning that it has to refer the matter
first to its Legal Division for appropriate action.
Repeated verbal demands followed but Metrobank still
failed to re-credit the amount of P91,000.00 to Cabilzo's
account. 7
On 30 June 1995, Cabilzo, thru counsel, finally sent a
letter-demand 8 to Metrobank for the payment of
P90,000.00, after deducting the original value of the
check in the amount of P1,000.00. Such written demand
notwithstanding, Metrobank still failed or refused to
comply with its obligation. IcaHCS
Consequently, Cabilzo instituted a civil action for
damages against Metrobank before the RTC of Manila,
Branch 13. In his Complaint docketed as Civil Case No.
95-75651, Renato D. Cabilzo v. Metropolitan Bank and
Trust Company, Cabilzo prayed that in addition to his
claim for reimbursement, actual and moral damages plus
costs of the suit be awarded in his favor. 9
For its part, Metrobank countered that upon the receipt
of the said check through the PCHC on 14 November
1994, it examined the genuineness and the authenticity
of the drawer's signature appearing thereon and the
technical entries on the check including the amount in
figures and in words to determine if there were
alterations, erasures, superimpositions or intercalations
thereon, but none was noted. After verifying the
authenticity and propriety of the aforesaid entries,
including the indorsement of the collecting bank located
at the dorsal side of the check which stated that, "all
prior indorsements and lack of indorsement guaranteed,"
Metrobank cleared the check. 10
Anent thereto, Metrobank claimed that as a collecting
bank and the last indorser, Westmont Bank should be
held liable for the value of the check. Westmont Bank
indorsed the check as the an unqualified indorser, by
virtue of which it assumed the liability of a general
indorser, and thus, among others, warranted that the
instrument is genuine and in all respect what it purports
to be.
In addition, Metrobank, in turn, claimed that Cabilzo
was partly responsible in leaving spaces on the check,
which, made the fraudulent insertion of the amount and
figures thereon, possible. On account of his negligence
in the preparation and issuance of the check, which
according to Metrobank, was the proximate cause of the
loss, Cabilzo cannot thereafter claim indemnity by
virtue of the doctrine of equitable estoppel.
Thus, Metrobank demanded from Cabilzo, for payment
in the amount of P100,000.00 which represents the cost
of litigation and attorney's fees, for allegedly bringing a
frivolous and baseless suit. 11
On 19 April 1996, Metrobank filed a Third-Party
Complaint 12 against Westmont Bank on account of its
unqualified indorsement stamped at the dorsal side of
the check which the former relied upon in clearing what
turned out to be a materially altered check.
Subsequently, a Motion to Dismiss 13 the Third-Party
Complaint was then filed by Westmont bank because
another case involving the same cause of action was
pending before a different court. The said case arose
from an action for reimbursement filed by Metrobank
before the Arbitration Committee of the PCHC against
Westmont Bank, and now the subject of a Petition for
Review before the RTC of Manila, Branch 19.
In an Order 14 dated 4 February 1997, the trial court
granted the Motion to Dismiss the Third-Party
Complaint on the ground of litis pendentia.
On 4 September 1998, the RTC rendered a
Decision 15 in favor of Cabilzo and thereby ordered
Metrobank to pay the sum of P90,000.00, the amount of
the check. In stressing the fiduciary nature of the
11
relationship between the bank and its clients and the
negligence of the drawee bank in failing to detect an
apparent alteration on the check, the trial court ordered
for the payment of exemplary damages, attorney's fees
and cost of litigation. The dispositive portion of the
Decision reads:
WHEREFORE, judgment is rendered ordering
defendant Metropolitan Bank and Trust
Company to pay plaintiff Renato Cabilzo the
sum of P90,000 with legal interest of 6 percent
per annum from November 16, 1994 until
payment is made plus P20,000 attorney's fees,
exemplary damages of P50,000, and costs of
the suit. 16
Aggrieved, Metrobank appealed the adverse decision to
the Court of Appeals reiterating its previous argument
that as the last indorser, Westmont Bank shall bear the
loss occasioned by the fraudulent alteration of the check.
Elaborating, Metrobank maintained that by reason of its
unqualified indorsement, Westmont Bank warranted that
the check in question is genuine, valid and subsisting
and that upon presentment the check shall be accepted
according to its tenor. EDACSa
Even more, Metrobank argued that in clearing the check,
it was not remiss in the performance of its duty as the
drawee bank, but rather, it exercised the highest degree
of diligence in accordance with the generally accepted
banking practice. It further insisted that the entries in the
check were regular and authentic and alteration could
not be determined even upon close examination.
In a Decision 17 dated 8 March 2002, the Court of
Appeals affirmed with modification the Decision of the
court a quo, similarly finding Metrobank liable for the
amount of the check, without prejudice, however, to the
outcome of the case between Metrobank and Westmont
Bank which was pending before another tribunal. The
decretal portion of the Decision reads:
WHEREFORE, the assailed decision dated
September 4, 1998 is AFFIRMED with the
modifications (sic) that the awards for
exemplary damages and attorney's fees are
hereby deleted. 18
Similarly ill-fated was Metrobank's Motion for
Reconsideration which was also denied by the appellate
court in its Resolution 19 issued on 26 July 2002, for
lack of merit.
Metrobank now poses before this Court this sole issue:
THE HONORABLE COURT OF APPEALS
GRAVELY ERRED IN HOLDING
Also pertinent is the following provision in the
METROBANK, AS DRAWEE BANK,
Negotiable Instrument Law which states:
LIABLE FOR THE ALTERATIONS ON THE
SUBJECT CHECK BEARING THE
AUTHENTIC SIGNATURE OF THE
DRAWER THEREOF.
We resolve to deny the petition.
An alteration is said to be material if it changes the
effect of the instrument. It means that an unauthorized
change in an instrument that purports to modify in any
respect the obligation of a party or an unauthorized
addition of words or numbers or other change to an
incomplete instrument relating to the obligation of a
party. 20In other words, a material alteration is one
which changes the items which are required to be stated
under Section 1 of the Negotiable Instruments Law.
Section 1 of the Negotiable Instruments Law provides:
Section 1. Form of negotiable instruments.
An instrument to be negotiable must conform
to the following requirements:
(a) It must be in writing and signed by
the maker or drawer;
(b) Must contain an unconditional
promise or order to pay a sum
certain in money;
(c) Must be payable on demand or at a
fixed determinable future time;
(d) Must be payable to order or to
bearer; and
(e) Where the instrument is addressed
to a drawee, he must be named
or otherwise indicated therein
with reasonable certainty.
Section 125. What constitutes material
alteration. Any alteration which changes:
(a) The date;
(b) The sum payable, either for
principal or interest;
(c) The time or place of payment;
(d) The number or the relation of the
parties; aIHCSA
(e) The medium or currency in which
payment is to be made;
Or which adds a place of payment where no
place of payment is specified, or any other
alteration by his express or implied acts. There is no
change or addition which alters the effect of
12
the instrument in any respect is a material
alteration.
In the case at bar, the check was altered so that the
amount was increased
from P1,000.00 to P91,000.00 and the date was changed
from 24 November 1994 to 14 November 1994.
Apparently, since the entries altered were among those
enumerated under Section 1 and 125, namely, the sum of
money payable and the date of the check, the instant
controversy therefore squarely falls within the purview
of material alteration.
Now, having laid the premise that the present petition is
a case of material alteration, it is now necessary for us to
determine the effect of a materially altered instrument,
as well as the rights and obligations of the parties
thereunder. The following provision of the Negotiable
Instrument Law will shed us some light in threshing out
this issue:
Section 124. Alteration of instrument; effect of.
Where a negotiable instrument is materially
altered without the assent of all parties liable
thereon, it is avoided, except as against a party
who has himself made, authorized,
and assented to the
alteration and subsequent indorsers.
But when the instrument has been materially
altered and is in the hands of a holder in due
course not a party to the alteration, he may
enforce the payment thereof according to its
original tenor. (Emphasis ours.)
Indubitably, Cabilzo was not the one who made nor
authorized the alteration. Neither did he assent to the
showing that he failed to exercise such reasonable
degree of diligence required of a prudent man which
could have otherwise prevented the loss. As correctly
ruled by the appellate court, Cabilzo was never remiss in
the preparation and issuance of the check, and there
were no indicia of evidence that would prove otherwise.
Indeed, Cabilzo placed asterisks before and after the
amount in words and figures in order to forewarn the
subsequent holders that nothing follows before and after
the amount indicated other than the one specified
between the asterisks.
The degree of diligence required of a reasonable man in
the exercise of his tasks and the performance of his
duties has been faithfully complied with by Cabilzo. In
fact, he was wary enough that he filled with asterisks the
spaces between and after the amounts, not only those
stated in words, but also those in numerical figures, in
order to prevent any fraudulent insertion, but
unfortunately, the check was still successfully altered,
indorsed by the collecting bank, and cleared by the
drawee bank, and encashed by the perpetrator of the
fraud, to the damage and prejudice of Cabilzo.
Verily, Metrobank cannot lightly impute that Cabilzo
was negligent and is therefore prevented from asserting
his rights under the doctrine of equitable estoppel when
the facts on record are bare of evidence to support such
conclusion. The doctrine of equitable estoppel states that
when one of the two innocent persons, each guiltless of
any intentional or moral wrong, must suffer a loss, it
must be borne by the one whose erroneous conduct,
either by omission or commission, was the cause of
injury.21 Metrobank's reliance on this dictum, is
misplaced. For one, Metrobank's representation that it is
an innocent party is flimsy and evidently, misleading. At
the same time, Metrobank cannot asseverate that
Cabilzo was negligent and this negligence was the
proximate cause 22 of the loss in the absence of even a
scintilla proof to buttress such claim. Negligence is not
presumed but must be proven by the one who alleges
it. 23
Undoubtedly, Cabilzo was an innocent party in this
instant controversy. He was just an ordinary
businessman who, in order to facilitate his business
transactions, entrusted his money with a bank, not
knowing that the latter would yield a substantial amount
of his deposit to fraud, for which Cabilzo can never be
faulted. CTHaSD
We never fail to stress the remarkable significance of a
banking institution to commercial transactions, in
particular, and to the country's economy in general. The
banking system is an indispensable institution in the
modern world and plays a vital role in the economic life
of every civilized nation. Whether as mere passive
entities for the safekeeping and saving of money or as
active instruments of business and commerce, banks
have become an ubiquitous presence among the people,
who have come to regard them with respect and even
gratitude and, most of all, confidence. 24
Thus, even the humble wage-earner does not hesitate to
entrust his life's savings to the bank of his choice,
knowing that they will be safe in its custody and will
even earn some interest for him. The ordinary person,
with equal faith, usually maintains a modest checking
account for security and convenience in the settling of
his monthly bills and the payment of ordinary expenses.
As for a businessman like the respondent, the bank is a
trusted and active associate that can help in the running
of his affairs, not only in the form of loans when needed
but more often in the conduct of their day-to-day
transactions like the issuance or encashment of
checks. 25
13
In every case, the depositor expects the bank to treat his
account with the utmost fidelity, whether such account
consists only of a few hundred pesos or of millions. The
bank must record every single transaction accurately,
down to the last centavo, and as promptly as possible.
This has to be done if the account is to reflect at any
given time the amount of money the depositor can
dispose of as he sees fit, confident that the bank will
deliver it as and to whomever he directs. 26
The point is that as a business affected with public
interest and because of the nature of its functions, the
bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind
the fiduciary nature of their relationship. The
appropriate degree of diligence required of a bank must
be a high degree of diligence, if not the utmost
diligence. 27
In the present case, it is obvious that Metrobank was
remiss in that duty and violated that relationship. As
observed by the Court of Appeals, there are material
alterations on the check that are visible to the naked eye.
Thus:
. . . The number "1" in the date is clearly
imposed on a white figure in the shape of the
number "2". The appellant's employees who
examined the said check should have likewise
been put on guard as to why at the end of the
amount in words, i.e., after the word "ONLY",
there are 4 asterisks, while at the beginning of
the line or before said phrase, there is none,
even as 4 asterisks have been placed before and
after the word "CASH" in the space for payee.
In addition, the 4 asterisks before the words
"ONE THOUSAND PESOS ONLY" have
noticeably been erased with typing correction
 paper, leaving white marks, over which the
word "NINETY" was superimposed. The same
can be said of the numeral "9" in the amount
"91,000", which is superimposed over a
whitish mark, obviously an erasure, in lieu of
the asterisk which was deleted to insert the said
figure. The appellant's employees should have
again noticed why only 2 asterisks were placed
before the amount in figures, while 3 asterisks
were placed after such amount. The word
"NINETY" is also typed differently and with a
lighter ink, when compared with the words
"ONE THOUSAND PESOS ONLY." The
letters of the word "NINETY" are likewise a
little bigger when compared with the letters of
the words "ONE THOUSAND PESOS
ONLY". 28
Surprisingly, however, Metrobank failed to detect the
above alterations which could not escape the attention of
even an ordinary person. This negligence was
exacerbated by the fact that, as found by the trial court,
the check in question was examined by the cash
custodian whose functions do not include the
examinations of checks indorsed for payment against
drawer's accounts. 29 Obviously, the employee allowed
by Metrobank to examine the check was not verse and
competent to handle such duty. These factual findings of
the trial court is conclusive upon this court especially
when such findings was affirmed the appellate court. 30
Apropos thereto, we need to reiterate that by the very
nature of their work the degree of responsibility, care
and trustworthiness expected of their employees and
officials is far better than those of ordinary clerks and
employees. Banks are expected to exercise the highest
degree of diligence in the selection and supervision of
their employees. 31
In addition, the bank on which the check is drawn,
known as the drawee bank, is under strict liability to pay
to the order of the payee in accordance with the drawer's
instructions as reflected on the face and by the terms of
the check. Payment made under materially altered
instrument is not payment done in accordance with the
instruction of the drawer.
When the drawee bank pays a materially altered check,
it violates the terms of the check, as well as its duty to
charge its client's account only for bona
fidedisbursements he had made. Since the drawee bank,
in the instant case, did not pay according to the original
tenor of the instrument, as directed by the drawer, then it
has no right to claim reimbursement from the drawer,
much less, the right to deduct the erroneous payment it
made from the drawer's account which it was expected
to treat with utmost fidelity.
Metrobank vigorously asserts that the entries in the
check were carefully examined: The date of the
instrument, the amount in words and figures, as well as
the drawer's signature, which after verification, were
found to be proper and authentic and was thus cleared.
We are not persuaded. Metrobank's negligence consisted
in the omission of that degree of diligence required of a
bank owing to the fiduciary nature of its relationship
with its client. Article 1173 of the Civil Code provides:
The fault or negligence of the obligor consists
in the omission of that diligence which is
required by the nature of the obligation and
corresponds with the circumstances of the
persons, of the time and of the place. . . . .
Beyond question, Metrobank failed to comply with the
degree required by the nature of its business as provided
14
by law and jurisprudence. If indeed it was not remiss in
its obligation, then it would be inconceivable for it not to
detect an evident alteration considering its vast
knowledge and technical expertise in the intricacies of
the banking business. This Court is not completely
unaware of banks' practices of employing devices and
techniques in order to detect forgeries, insertions,
intercalations, superimpositions and alterations in
checks and other negotiable instruments so as to
safeguard their authenticity and negotiability. Metrobank
cannot now feign ignorance nor claim diligence; neither
can it point its finger at the collecting bank, in order to
evade liability. IcaEDC
Metrobank argues that Westmont Bank, as the collecting
bank and the last indorser, shall bear the loss. Without
ruling on the matter between the drawee bank and the
collecting bank, which is already under the jurisdiction
of another tribunal, we find that Metrobank cannot rely
on such indorsement, in clearing the questioned check.
The corollary liability of such indorsement, if any, is
separate and independent from the liability of
Metrobank to Cabilzo.
The reliance made by Metrobank on Westmont Bank's
indorsement is clearly inconsistent, if not totally
offensive to the dictum that being impressed with public
interest, banks should exercise the highest degree of
diligence, if not utmost diligence in dealing with the
accounts of its own clients. It owes the highest degree
fidelity to its clients and should not therefore lightly rely
on the judgment of other banks on occasions where its
clients money were involve, no matter how small or
substantial the amount at stake.
Metrobank's contention that it relied on the strength of
collecting bank's indorsement may be merely a lame
excuse to evade liability, or may be indeed an actual
banking practice. In either case, such act constitutes a
deplorable banking practice and could not be allowed by
this Court bearing in mind that the confidence of public
in general is of paramount importance in banking
business.
What is even more deplorable is that, having been
informed of the alteration, Metrobank did not
immediately re-credit the amount that was erroneously
debited from Cabilzo's account but permitted a full
blown litigation to push through, to the prejudice of its
client. Anyway, Metrobank is not left with no recourse
for it can still run after the one who made the alteration
or with the collecting bank, which it had already done. It
bears repeating that the records are bare of evidence to
prove that Cabilzo was negligent. We find no justifiable
reason therefore why Metrobank did not immediately
reimburse his account. Such ineptness comes within the
concept of wanton manner contemplated under the Civil
Code which warrants the imposition of exemplary
damages, "by way of example or correction for the
public good," in the words of the law. It is expected that
this ruling will serve as a stern warning in order to deter
the repetition of similar acts of negligence, lest the
confidence of the public in the banking system be
further eroded. 32
WHEREFORE, premises considered, the instant Petition
is DENIED. The Decision dated 8 March 2002 and the
Resolution dated 26 July 2002 of the Court of Appeals
are AFFIRMED with modification that exemplary
damages in the amount of P50,000.00 be awarded. Costs
against the petitioner.
SO ORDERED.
FIRST DIVISION
[G.R. No. 127469. January 15, 2004.]
PHILIPPINE BANKING
CORPORATION, petitioner, vs. COURT OF
APPEALS and LEONILO
MARCOS, respondents.
The Case
Before us is a petition for review of the Decision 1 of
the Court of Appeals in CA-G.R. CV No. 34382 dated
10 December 1996 modifying the Decision 2 of the
Regional Trial Court, Fourth Judicial Region, Assisting
Court, Bian, Laguna in Civil Case No. B-3148 entitled
"Leonilo Marcos v. Philippine Banking Corporation."
The Antecedent Facts
On 30 August 1989, Leonilo Marcos ("Marcos") filed
with the trial court a Complaint for Sum of Money with
Damages 3 against petitioner Philippine Banking
Corporation ("BANK"). 4
Marcos alleged that sometime in 1982, the BANK
through Florencio B. Pagsaligan ("Pagsaligan"), one of
the officials of the BANK and a close friend of Marcos,
persuaded him to deposit money with the BANK.
Marcos yielded to Pagsaligan's persuasion and claimed
he made a time deposit with the BANK on two
occasions. The first was on 11 March 1982 for
P664,897.67. The BANK issued Receipt No. 635734 for
this time deposit. On 12 March 1982, Marcos claimed
he again made a time deposit with the BANK for
P764,897.67. The BANK did not issue an official
receipt for this time deposit but it acknowledged a
deposit of this amount through a letter-certification
15
Pagsaligan issued. The time deposits earned interest at
17% per annum and had a maturity period of 90 days.
Marcos alleged that Pagsaligan kept the various time
deposit certificates on the assurance that the BANK
would take care of the certificates, interests and
renewals. Marcos claimed that from the time of the
deposit, he had not received the principal amount or its
interest.
Sometime in March 1983, Marcos wanted to withdraw
from the BANK his time deposits and the accumulated
interests to buy materials for his construction business.
However, the BANK through Pagsaligan convinced
Marcos to keep his time deposits intact and instead to
open several domestic letters of credit. The BANK
required Marcos to give a marginal deposit of 30% of
the total amount of the letters of credit. The time
deposits of Marcos would secure 70% of the letters of
credit. Since Marcos trusted the BANK and Pagsaligan,
he signed blank printed forms of the application for the
domestic letters of credit, trust receipt agreements and
promissory notes. SDITAC
Marcos executed three Trust Receipt Agreements
totalling P851,250, broken down as follows: (1) Trust
Receipt No. CD 83.7 dated 8 March 1983 for P300,000;
(2) Trust Receipt No. CD 83.9 dated 15 March 1983 for
P300,000; and (3) Trust Receipt No. CD 83.10 dated 15
March 1983 for P251,250. Marcos deposited the
required 30% marginal deposit for the trust receipt
agreements. Marcos claimed that his obligation to the
BANK was therefore only P595,875 representing 70%
of the letters of credit.
Marcos believed that he and the BANK became
creditors and debtors of each other. Marcos expected the
BANK to offset automatically a portion of his time
deposits and the accumulated interest with the amount
covered by the three trust receipts totalling P851,250
less the 30% marginal deposit, that he had paid. Marcos
argued that if only the BANK applied his time deposits
and the accumulated interest to his remaining obligation,
which is 70% of the total amount of the letters of credit,
he would have paid completely his debt. Marcos further
pointed out that since he did not apply for a renewal of
the trust receipt agreements, the BANK had no right to
renew the same.
Marcos accused the BANK of unjustly demanding
payment for the total amount of the trust receipt
agreements without deducting the 30% marginal deposit
that he had already made. He decried the BANK's
unlawful charging of accumulated interest because he
claimed there was no agreement as to the payment of
interest. The interest arose from numerous alleged
extensions and penalties. Marcos reiterated that there
was no agreement to this effect because his time
deposits served as the collateral for his remaining
obligation.
Marcos also denied that he obtained another loan from
the BANK for P500,000 with interest at 25% per
annum supposedly covered by Promissory Note No. 20-
97983 dated 24 October 1983. Marcos bewailed the
BANK's belated claim that his time deposits were
applied to this void promissory note on 12 March 1985.
In sum, Marcos claimed that:
(1) his time deposit with the BANK "in the total sum of
P1,428,795.34 5 has earned accumulated interest since
March 1982 up to the present in the total amount of
P1,727,305.45 at the rate of 17% per annum so his total
money with defendant (the BANK) is P3,156,100.79
less the amount of P595,875 representing the 70%
balance of the marginal deposit and/or balance of the
trust agreements;" and
(2) his indebtedness was only P851,250 less the 30%
paid as marginal deposit or a balance of P595,875,
which the BANK should have automatically deducted
from his time deposits and accumulated interest, leaving
the BANK's indebtedness to him at P2,560,025.79.
Marcos prayed the trial court to declare Promissory
Note No. 20-97983 void and to order the BANK to pay
the amount of his time deposits with interest. He also
sought the award of moral and exemplary damages as
well as attorney's fees for P200,000 plus 25% of the
amount due.
On 18 September 1989, summons and a copy of the
complaint were served on the BANK. 6
On 9 October 1989, the BANK filed its Answer with
Counterclaim. The BANK denied the allegations in the
complaint. The BANK believed that the suit was
Marcos' desperate attempt to avoid liability under
several trust receipt agreements that were the subject of
a criminal complaint.
The BANK alleged that as of 12 March 1982, the total
amount of the various time deposits of Marcos was only
P764,897.67 and not P1,428,795.35 7 as alleged in the
complaint. The P764,897.67 included the P664,897.67
that Marcos deposited on 11 March 1982.
The BANK pointed out that Marcos delivered to the
BANK the time deposit certificates by virtue of the
Deed of Assignment dated 2 June 1989. Marcos
executed the Deed of Assignment to secure his various
loan obligations. The BANK claimed that these loans
are covered by Promissory Note No. 20-756-82 dated 2
June 1982 for P420,000 and Promissory Note No. 20-
979-83 dated 24 October 1983 for P500,000. The
BANK stressed that these obligations are separate and
distinct from the trust receipt agreements.
16
When Marcos defaulted in the payment of Promissory
Note No. 20-979-83, the BANK debited his time
deposits and applied the same to the obligation that is
now considered fully paid. 8 The BANK insisted that
the Deed of Assignment authorized it to apply the time
deposits in payment of Promissory Note No. 20-979-83.
In March 1982, the wife of Marcos, Consolacion
Marcos, sought the advice of Pagsaligan. Consolacion
informed Pagsaligan that she and her husband needed to
finance the purchase of construction materials for their
business, L.A. Marcos Construction Company.
Pagsaligan suggested the opening of the letters of credit
and the execution of trust receipts, whereby the BANK
would agree to purchase the goods needed by the client
through the letters of credit. The BANK would then
entrust the goods to the client, as entrustee, who would
undertake to deliver the proceeds of the sale or the
goods themselves to the entrustor within a specified
time.
The BANK claimed that Marcos freely entered into the
trust receipt agreements. When Marcos failed to account
for the goods delivered or for the proceeds of the sale,
the BANK filed a complaint for violation of Presidential
Decree No. 115 or the Trust Receipts Law. Instead of initiating
negotiations for the settlement of the account, Marcos
filed this suit. CcTHaD
The BANK denied falsifying Promissory Note No. 20-
979-83. The BANK claimed that the promissory note is
supported by documentary evidence such as Marcos'
application for this loan and the microfilm of the
cashier's check issued for the loan. The BANK insisted
that Marcos could not deny the agreement for the
payment of interest and penalties under the trust receipt
agreements. The BANK prayed for the dismissal of the
complaint, payment of damages, attorney's fees and cost
of suit.
On 15 December 1989, the trial court on motion of
Marcos' counsel issued an order declaring the BANK in
default for filing its answer five days after the 15-day
period to file the answer had lapsed. 9 The trial court
also held that the answer is a mere scrap of paper
because a copy was not furnished to Marcos. In the
same order, the trial court allowed Marcos to present his
evidence ex parte on 18 December 1989. On that date,
Marcos testified and presented documentary evidence.
The case was then submitted for decision.
On 19 December 1989, Marcos received a copy of the
BANK's Answer with Compulsory Counterclaim.
On 29 December 1989, the BANK filed an opposition to
Marcos' motion to declare the BANK in default. On 9
January 1990, the BANK filed a motion to lift the order
of default claiming that it had only then learned of the
order of default. The BANK explained that its delayed
filing of the Answer with Counterclaim and failure to
serve a copy of the answer on Marcos was due to
excusable negligence. The BANK asked the trial court
to set aside the order of default because it had a valid
and meritorious defense.
On 7 February 1990, the trial court issued an order
setting aside the default order and admitting the BANK's
Answer with Compulsory Counterclaim. The trial court
ordered the BANK to present its evidence on 12 March
1990.
On 5 March 1990, the BANK filed a motion praying to
cross-examine Marcos who had testified during the ex
parte hearing of 18 December 1989. On 12 March 1990,
the trial court denied the BANK's motion and directed
the BANK to present its evidence. Trial then ensued.
The BANK presented two witnesses, Rodolfo Sales, the
Branch Manager of the BANK's Cubao Branch since
1987, and Pagsaligan, the Branch Manager of the same
branch from 1982 to 1986.
On 24 April 1990, the counsel of Marcos cross-
examined Pagsaligan. Due to lack of material time, the
trial court reset the continuation of the cross-
examination and presentation of other evidence. The
succeeding hearings were postponed, specifically on 24,
27 and 28 of August 1990, because of the BANK's
failure to produce its witness, Pagsaligan. The BANK on
these scheduled hearings also failed to present other
evidence.
On 7 September 1990, the BANK moved to postpone
the hearing on the ground that Pagsaligan could not
attend the hearing because of illness. The trial court
denied the motion to postpone and on motion of Marcos'
counsel ruled that the BANK had waived its right to
present further evidence. The trial court considered the
case submitted for decision. The BANK moved for
reconsideration, which the trial court denied.
On 8 October 1990, the trial court rendered its decision
in favor of Marcos. Aggrieved, the BANK appealed to
the Court of Appeals.
On 10 December 1996, the Court of Appeals modified
the decision of the trial court by reducing the amount of
actual damages and deleting the attorney's fees awarded
to Marcos.
The Ruling of the Trial Court
The trial court ruled that the total amount of time
deposits of Marcos was P1,429,795.34 and not only
P764,897.67 as claimed by the BANK. The trial court
17
found that Marcos made a time deposit on two
occasions. The first time deposit was made on 11 March
1982 for P664,897.67 as shown by Receipt No. 635743.
On 12 March 1982, Marcos again made a time deposit
for P764,897.67 as acknowledged by Pagsaligan in a
letter of certification. The two time deposits thus
amounted to P1,429,795.34.
The trial court pointed out that no receipt was issued for
the 12 March 1982 time deposit because the letter of
certification was sufficient. The trial court made a
finding that the certification letter did not include the
time deposit made on 11 March 1982. The 12 March
1982 deposit was in cash while the 11 March 1982
deposit was in checks which still had to clear. The
checks were not included in the certification letter since
the BANK could not credit the amounts of the checks
prior to clearing. The trial court declared that even the
Deed of Assignment acknowledged that Marcos made
several time deposits as the Deed stated that the
assignment was charged against "various" time deposits.
The trial court recognized the existence of the Deed of
Assignment and the two loans that Marcos supposedly
obtained from the BANK on 28 May 1982 for P340,000
and on 2 June 1982 for P420,000. The two loans
amounted to P760,000. On 2 June 1982, the same day
that he secured the second loan, Marcos executed a
Deed of Assignment assigning to the BANK P760,000
of his time deposits. The trial court concluded that
obviously the two loans were immediately paid by virtue
of the Deed of Assignment.
The trial court found it strange that Marcos borrowed
money from the BANK at a higher rate of interest
instead of just withdrawing his time deposits. The trial
court saw no rhyme or reason why Marcos had to secure
the loans from the BANK. The trial court was convinced
that Marcos did not know that what he had signed were
loan applications and a Deed of Assignment in payment
for his loans. Nonetheless, the trial court recognized "the
said loan of P760,000 and its corresponding payment by
virtue of the Deed of Assignment for the equal sum." 10
If the BANK's claim is true that the time deposits of
Marcos amounted only to P764,897.67 and he had
already assigned P760,000 of this amount, the trial court
pointed out that what would be left as of 3 June 1982
would only be P4,867.67. 11 Yet, after the time deposits
had matured, the BANK allowed Marcos to open letters
of credit three times. The three letters of credit were all
secured by the time deposits of Marcos after he had paid
the 30% marginal deposit. The trial court opined that if
Marcos' time deposit was only P764,897.67, then the
letters of credit totalling P595,875 (less 30% marginal
deposit) was guaranteed by only P4,867.67, 12 the
remaining time deposits after Marcos had executed the
Deed of Assignment for P760,000.
According to the trial court, a security' of only
P4,867.67 13 for a loan worth P595,875 (less 30%
marginal deposit) is not only preposterous, it is also
comical. Worse, aside from allowing Marcos to have
unsecured trust receipts, the BANK still claimed to have
granted Marcos another loan for P500,000 on 25
October 1983 covered by Promissory Note No. 20-979-
83. The BANK is a commercial bank engaged in the
business of lending money. Allowing a loan of more
than a million pesos without collateral is in the words of
the trial court, "an impossibility and a gross violation of
Central Bank Rules and Regulations, which no Bank
Manager has such authority to grant." 14 Thus, the trial
court held that the BANK could not have granted
Marcos the loan covered by Promissory Note No. 20-
979-83 because it was unsecured by any collateral.
The trial court required the BANK to produce the
original copies of the loan application and Promissory
Note No. 20-979-83 so that it could determine who
applied for this loan. However, the BANK presented to
the trial court only the "machine copies of the duplicate"
of these documents.
Based on the "machine copies of the duplicate" of the
two documents, the trial court noticed the following
discrepancies: (1) Marcos' signature on the two
documents are merely initials unlike in the other
documents submitted by the BANK; (2) it is highly
unnatural for the BANK to only have duplicate copies of
the two documents in its custody; (3) the address of
Marcos in the documents is different from the place of
residence as stated by Marcos in the other documents
annexed by the BANK in its Answer; (4) Pagsaligan
made it appear that a check for the loan proceeds of
P470,588 less bank charges was issued to Marcos but
the check's payee was one ATTY. LEONILO MARCOS
and, as the trial court noted, Marcos is not a lawyer; and
(5) Pagsaligan was not sure what branch of the BANK
issued the check for the loan proceeds. The trial court
was convinced that Marcos did not execute the
questionable documents covering the P500,000 loan and
Pagsaligan used these documents as a means to justify
his inability to explain and account for the time deposits
of Marcos. HSDaTC
The trial court noted the BANK's "defective"
documentation of its transaction with Marcos. First, the
BANK was not in possession of the original copies of
the documents like the loan applications. Second, the
BANK did not have a ledger of the accounts of Marcos
or of his various transactions with the BANK. Last, the
BANK did not issue a certificate of time deposit to
Marcos. Again, the trial court attributed the BANK's
18
lapses to Pagsaligan's scheme to defraud Marcos of his
time deposits.
The trial court also took note of Pagsaligan's demeanor
on the witness stand. Pagsaligan evaded the questions by
giving unresponsive or inconsistent answers compelling
the trial court to admonish him. When the trial court
ordered Pagsaligan to produce the documents, he
"conveniently became sick" 15 and thus failed to attend
the hearings without presenting proof of his physical
condition.
The trial court disregarded the BANK's assertion that the
time deposits were converted into a savings account at
14% or 10% per annum upon maturity. The BANK
never informed Marcos that his time deposits had
already matured and these were converted into a savings
account. As to the interest due on the trust receipts, the
trial court ruled that there is no basis for such a charge
because the documents do not stipulate any interest.
In computing the amount due to Marcos, the trial court
took into account the marginal deposit that Marcos had
already paid which is equivalent to 30% of the total
amount of the three trust receipts. The three trust
receipts totalling P851,250 would then have a balance of
P595,875. The balance became due in March 1987 and
on the same date, Marcos' time deposits of P669,932.30
had already earned interest from 1983 to 1987 totalling
P569,323.21 at 17% per annum. Thus, the trial court
ruled that the time deposits in 1987 totalled P1,239,115.
From this amount, the trial court deducted P595,875, the
amount of the trust receipts, leaving a balance on the
time deposits of P643,240 as of March 1987. However,
since the BANK failed to return the time deposits of
Marcos, which again matured in March 1990, the time
deposits with interest, less the amount of trust receipts
paid in 1987, amounted to P971,292.49 as of March
1990.
In the alternative, the trial court ruled that even if
Marcos had only one time deposit of P764,897.67 as
claimed by the BANK, the time deposit would have still
earned interest at the rate of 17% per annum. The time
deposit of P650,163 would have increased to
P1,415,060 in 1987 after earning interest. Deducting the
amount of the three trust receipts, Marcos' time deposits
still totalled P1,236,969.30 plus interest.
The dispositive portion of the decision of the trial court
reads:
WHEREFORE, under the foregoing
circumstances, judgment is hereby rendered in
favor of Plaintiff, directing Defendant Bank as
follows:
1) to return to Plaintiff his time deposit
in the sum of P971,292.49 with
interest thereon at the legal rate,
until fully restituted;
2) to pay attorney's fees of
P200,000.00; [and]
3) [to pay the] cost of these
proceedings.
IT IS SO ORDERED. 16
The Ruling of the Court of Appeals
The Court of Appeals addressed the procedural and
substantive issues that the BANK raised.
The appellate court ruled that the trial court committed a
reversible error when it denied the BANK's motion to
cross-examine Marcos. The appellate court ruled that the
right to cross-examine is a fundamental right that the
BANK did not waive because the BANK vigorously
asserted this right. The BANK's failure to serve a notice
of the motion to Marcos is not a valid ground to deny
the motion to cross-examine. The appellate court held
that the motion to cross-examine is one of those non-
litigated motions that do not require the movant to
provide a notice of hearing to the other party.
The Court of Appeals pointed out that when the trial
court lifted the order of default, it had the duty to afford
the BANK its right to cross-examine Marcos. This duty
assumed greater importance because the only evidence
supporting the complaint is Marcos' ex parte testimony.
The trial court should have tested the veracity of
Marcos' testimony through the distilling process of
cross-examination. The Court of Appeals, however,
believed that the case should not be remanded to the
trial court because Marcos' testimony on the time
deposits is supported by evidence on record from which
the appellate court could make an intelligent judgment.
On the second procedural issue, the Court of Appeals
held that the trial court did not err when it declared that
the BANK had waived its right to present its evidence
and had submitted the case for decision. The appellate
court agreed with the grounds relied upon by the trial
court in its Order dated 7 September 1990.
The Court of Appeals, however, differed with the
finding of the trial court as to the total amount of the
time deposits. The appellate court ruled that the total
amount of the time deposits of Marcos is only
P764,897.67 and not P1,429,795.34 as found by the trial
court. The certification letter issued by Pagsaligan
showed that Marcos made a time deposit on 12 March
1982 for P764,897.67. The certification letter shows that
the amount mentioned in the letter was the aggregate or
19
total amount of the time deposits of Marcos as of that
date. Therefore, the P764,897.67 already included the
P664,897.67 time deposit made by Marcos on 11 March
1982.
The Court of Appeals further explained:
Besides, the Official Receipt (Exh. "B", p. 32,
Records) dated March 11, 1982 covering the
sum of P664,987.67 time deposit did not
provide for a maturity date implying clearly
that the amount covered by said receipt forms
part of the total sum shown in the letter-
certification which contained a maturity date.
Moreover, it taxes one's credulity to believe
that appellee would make a time deposit on
March 12, 1982 in the sum
of P764,897.67 which except for the additional
sum of P100,000.00 is practically identical (see
emphasized figures) to the sum
of P664,897.67 deposited the day before
March 11, 1982.
Additionally, We agree with the contention of
the appellant that the lower court wrongly
appreciated the testimony of Mr. Pagsaligan.
Our finding is strengthened when we consider
the alleged application for loan by the appellee
with the appellant in the sum of P500,000.00
dated October 24, 1983. (Exh. "J", p. 40,
Records), wherein it was stated that the loan is
for additional working capital versus
the various time deposit amounting to
P760,000.00. 17 (Emphasis supplied)
The Court of Appeals sustained the factual findings of
the trial court in ruling that Promissory Note No. 20-
979-83 is void. There is no evidence of a bank ledger or
computation of interest of the loan. The appellate court
blamed the BANK for failing to comply with the orders
of the trial court to produce the documents on the loan.
The BANK also made inconsistent statements. In its
Answer to the Complaint, the BANK alleged that the
loan was fully paid when it debited the time deposits of
Marcos with the loan. However, in its discussion of the
assigned errors, the BANK claimed that Marcos had yet
to pay the loan.
The appellate court deleted the award of attorney's fees.
It noted that the trial court failed to justify the award of
attorney's fees in the text of its decision. The dispositive
portion of the decision of the Court of Appeals reads:
WHEREFORE, premises considered, the
appealed decision is SET ASIDE. A new
judgment is hereby rendered ordering the
appellant bank to return to the appellee his
time deposit in the sum of P764,897.67 with
17% interest within 90 days from March 11,
1982 in accordance with the letter-certification
and with legal interest thereafter until fully
paid. Costs against the appellant.
SO ORDERED. 18 (Emphasis supplied)
The Issues
The BANK anchors this petition on the following
issues:
1) WHETHER OR NOT THE PETITIONER
[sic] ABLE TO PROVE THE PRIVATE
RESPONDENT'S OUTSTANDING
OBLIGATIONS SECURED BY THE
ASSIGNMENT OF TIME DEPOSITS?
1.1) COROLLARILY, WHETHER OR
NOT THE PROVISIONS OF
SECTION 8 RULE 10 OF [sic] THEN
REVISED RULES OF COURT BE
APPLIED [sic] SO AS TO CREATE A
JUDICIAL ADMISSION ON THE
GENUINENESS AND DUE
EXECUTION OF THE
ACTIONABLE DOCUMENTS
APPENDED TO THE PETITIONER'S
ANSWER?
2) WHETHER OR NOT PETITIONER [sic]
DEPRIVED OF DUE PROCESS WHEN THE
LOWER COURT HAS [sic] DECLARED
PETITIONER TO HAVE WAIVED
PRESENTATION OF FURTHER EVIDENCE
AND CONSIDERED THE CASE
SUBMITTED FOR RESOLUTION? 19
The Ruling of the Court
The petition is without merit.
Procedural Issues
There was no violation of the BANK's right to
procedural due process when the trial court denied the
BANK's motion to cross-examine Marcos. Prior to the
denial of the motion, the trial court had properly
declared the BANK in default. Since the BANK was in
default, Marcos was able to present his evidence ex
parte including his own testimony. When the trial court
lifted the order of default, the BANK was restored to its
standing and rights in the action. However, as a rule, the
proceedings already taken should not be
disturbed. 20 Nevertheless, it is within the trial court's
discretion to reopen the evidence submitted by the
plaintiff and allow the defendant to challenge the same,
by cross-examining the plaintiff's witnesses or
introducing countervailing evidence. 21 The 1964 Rules
of Court, the rules then in effect at the time of the
hearing of this case, recognized the trial court's exercise
20
of this discretion. The 1997 Rules of Court retained this
discretion. 22 Section 3, Rule 18 of the 1964 Rules of
Court reads: DTESIA
Sec. 3. Relief from order of default. A party
declared in default may any time after
discovery thereof and before judgment file a
motion under oath to set aside the order of
default upon proper showing that his failure to
answer was due to fraud, accident, mistake or
excusable neglect and that he has a meritorious
defense. In such case the order of default may
be set aside on such terms and conditions as
the judge may impose in the interest of justice.
(Emphasis supplied)
The records show that the BANK did not ask the trial
court to restore its right to cross-examine Marcos when
it sought the lifting of the default order on 9 January
1990. Thus, the order dated 7 February 1990 setting
aside the order of default did not confer on the BANK
the right to cross-examine Marcos. It was only on 2
March 1990 that the BANK filed the motion to cross-
examine Marcos. During the 12 March 1990 hearing, the
trial court denied the BANK's oral manifestation to grant
its motion to cross-examine Marcos because there was
no proof of service on Marcos. The BANK's counsel
pleaded for reconsideration but the trial court denied the
plea and ordered the BANK to present its evidence.
Instead of presenting its evidence, the BANK moved for
the resetting of the hearing and when the trial court
denied the same, the BANK informed the trial court that
it was elevating the denial to the "upper court." 23
To repeat, the trial court had previously declared the
BANK in default. The trial court therefore had the right
to decide whether or not to disturb the testimony of
Marcos that had already been terminated even before the
trial court lifted the order of default.
We do not agree with the appellate court's ruling that a
motion to cross-examine is a non-litigated motion and
that the trial court gravely abused its discretion when it
denied the motion to cross-examine. A motion to cross-
examine is adversarial. The adverse party in this case
had the right to resist the motion to cross-examine
because the movant had previously forfeited its right to
cross-examine the witness. The purpose of a notice of a
motion is to avoid surprises on the opposite party and to
give him time to study and meet the arguments. 24 In a
motion to cross-examine, the adverse party has the right
not only to prepare a meaningful opposition to the
motion but also to be informed that his witness is being
recalled for cross-examination. The proof of service was
therefore indispensable and the trial court was correct in
denying the oral manifestation to grant the motion for
cross-examination.
We find no justifiable reason to relax the application of
the rule on notice of motions 25 to this case. The BANK
could have easily re-filed the motion to cross-examine
with the requisite notice to Marcos. It did not do so. The
BANK did not make good its threat to elevate the denial
to a higher court. The BANK waited until the trial court
rendered a judgment on the merits before questioning
the interlocutory order of denial.
While the right to cross-examine is a vital element of
procedural due process, the right does not necessarily
require an actual cross-examination, but merely an
opportunity to exercise this right if desired by the party
entitled to it. 26 Clearly, the BANK's failure to cross-
examine is imputable to the BANK when it lost this
right 27 as it was in default and failed thereafter to
exhaust the remedies to secure the exercise of this right
at the earliest opportunity.
The two other procedural lapses that the BANK
attributes to the appellate and trial courts deserve scant
consideration.
The BANK raises for the very first time the issue of
judicial admission on the part of Marcos. The BANK
even has the audacity to fault the Court of Appeals for
not ruling on this issue when it never raised this matter
before the appellate court or before the trial court.
Obviously, this issue is only an afterthought. An issue
raised for the first time on appeal and not raised timely
in the proceedings in the lower court is barred by
estoppel. 28
The BANK cannot claim that Marcos had admitted the
due execution of the documents attached to its answer
because the BANK filed its answer late and even failed
to serve it on Marcos. The BANK's answer, including
the actionable documents it pleaded and attached to its
answer, was a mere scrap of paper. There was nothing
that Marcos could specifically deny under oath. Marcos
had already completed the presentation of his evidence
when the trial court lifted the order of default and
admitted the BANK's answer. The provision of the
Rules of Court governing admission of actionable
documents was not enacted to reward a party in default.
We will not allow a party to gain an advantage from its
disregard of the rules.
As to the issue of its right to present additional evidence,
we agree with the Court of Appeals that the trial court
correctly ruled that the BANK had waived this right.
The BANK cannot now claim that it was deprived of its
right to conduct a re-direct examination of Pagsaligan.
21
The BANK postponed the hearings three
times 29 because of its inability to secure Pagsaligan's
presence during the hearings. The BANK could have
presented another witness or its other evidence but it
obstinately insisted on the resetting of the hearing
because of Pagsaligan's absence allegedly due to illness.
The BANK's propensity for postponements had long
delayed the case. Its motion for postponement based on
Pagsaligan's illness was not even supported by
documentary evidence such as a medical certificate.
Documentary evidence of the illness is necessary before
the trial court could rule that there is a sufficient basis to
grant the postponement. 30
The BANK's Fiduciary Duty to its Depositor
The BANK is liable to Marcos for offsetting his time
deposits with a fictitious promissory note. The existence
of Promissory Note No. 20-979-83 could have been
easily proven had the BANK presented the original
copies of the promissory note and its supporting
evidence. In lieu of the original copies, the BANK
presented the "machine copies of the duplicate" of the
documents. These substitute documents have no
evidentiary value. The BANK's failure to explain the
absence of the original documents and to maintain a
record of the offsetting of this loan with the time
deposits bring to fore the BANK's dismal failure to
fulfill its fiduciary duty to Marcos.
Section 2 of Republic Act No. 8791 (General Banking Law of 2000)
expressly imposes this fiduciary duty on banks when it
declares that the State recognizes the "fiduciary nature
of banking that requires high standards of integrity and
performance." This statutory declaration merely echoes
the earlier pronouncement of the Supreme Court
in Simex International (Manila) Inc. v. Court of
Appeals 31 requiring banks to "treat the accounts of its
depositors with meticulous care, always having in mind
the fiduciary nature of their relationship." 32 The Court
reiterated this fiduciary duty of banks in subsequent
cases. 33
Although RA No. 8791 took effect only in the year
2000, 34 at the time that the BANK transacted with
Marcos, jurisprudence had already imposed on banks
the same high standard of diligence required under RA No.
8791. 35 This fiduciary relationship means that the bank's
obligation to observe "high standards of integrity and
performance" is deemed written into every deposit
agreement between a bank and its depositor.
The fiduciary nature of banking requires banks to
assume a degree of diligence higher than that of a good
father of a family. Thus, the BANK's fiduciary duty
imposes upon it a higher level of accountability than that
expected of Marcos, a businessman, who negligently
signed blank forms and entrusted his certificates of time
deposits to Pagsaligan without retaining copies of the
certificates.
The business of banking is imbued with public interest.
The stability of banks largely depends on the confidence
of the people in the honesty and efficiency of banks.
InSimex International (Manila) Inc. v. Court of
Appeals 36 we pointed out the depositor's reasonable
expectations from a bank and the bank's corresponding
duty to its depositor, as follows:
In every case, the depositor expects the bank to
treat his account with the utmost fidelity,
whether such account consists only of a few
hundred pesos or of millions. The bank must
record every single transaction accurately,
down to the last centavo, and as promptly as
possible. This has to be done if the account is
to reflect at any given time the amount of
money the depositor can dispose of as he sees
fit, confident that the bank will deliver it as and
to whomever he directs.
As the BANK's depositor, Marcos had the right to
expect that the BANK was accurately recording his
transactions with it. Upon the maturity of his time
deposits, Marcos also had the right to withdraw the
amount due him after the BANK had correctly debited
his outstanding obligations from his time deposits.
By the very nature of its business, the BANK should
have had in its possession the original copies of the
disputed promissory note and the records and ledgers
evidencing the offsetting of the loan with the time
deposits of Marcos. The BANK inexplicably failed to
produce the original copies of these documents. Clearly,
the BANK failed to treat the account of Marcos with
meticulous care.
The BANK claims that it is a reputable banking
institution and that it has no reason to forge Promissory
Note No. 20-979-83. The trial court and appellate court
did not rule that it was the bank that forged the
promissory note. It was Pagsaligan, the BANK's branch
manager and a close friend of Marcos, whom the trial
court categorically blamed for the fictitious loan
agreements. The trial court held that Pagsaligan made up
the loan agreement to cover up his inability to account
for the time deposits of Marcos.
Whether it was the BANK's negligence and inefficiency
or Pagsaligan's misdeed that deprived Marcos of the
amount due him will not excuse the BANK from its
obligation to return to Marcos the correct amount of his
time deposits with interest. The duty to observe "high
standards of integrity and performance" imposes on the
BANK that obligation. The BANK cannot also unjustly
enrich itself by keeping Marcos' money.
22
Assuming Pagsaligan was behind the spurious
promissory note, the BANK would still be accountable
to Marcos. We have held that a bank is liable for the
wrongful acts of its officers done in the interest of the
bank or in their dealings as bank representatives but not
for acts outside the scope of their authority. 37 Thus, we
held:
A bank holding out its officers and agents as
worthy of confidence will not be permitted to
profit by the frauds they may thus be enabled
to perpetrate in the apparent scope of their
employment; nor will it be permitted to shirk
its responsibility for such frauds; even though
no benefit may accrue to the bank therefrom
(10 Am Jur 2d, p. 114). Accordingly, a banking
corporation is liable to innocent third persons
where the representation is made in the course
of its business by an agent acting within the
general scope of his authority even though, in
the particular case, the agent is secretly abusing
his authority and attempting to perpetrate a
fraud upon his principal or some other person,
for his own ultimate benefit. 38
The Existence of Promissory Note No. 20-979-83
was not Proven
The BANK failed to produce the best evidence the
original copies of the loan application and promissory
note. The Best Evidence Rule provides that the court
shall not receive any evidence that is merely
substitutionary in its nature, such as photocopies, as long
as the original evidence can be had. 39 Absent a clear
showing that the original writing has been lost,
destroyed or cannot be produced in court, the photocopy
must be disregarded, being unworthy of any probative
value and being an inadmissible piece of evidence. 40
What the BANK presented were merely the "machine
copies of the duplicate" of the loan application and
promissory note. No explanation was ever offered by the
BANK for its inability to produce the original copies of
the documentary evidence. The BANK also did not
comply with the orders of the trial court to submit the
originals.
The purpose of the rule requiring the production of the
best evidence is the prevention of fraud. 41 If a party is
in possession of evidence and withholds it, and seeks to
substitute inferior evidence in its place, the presumption
naturally arises that the better evidence is withheld for
fraudulent purposes, which its production would expose
and defeat. 42
The absence of the original of the documentary evidence
casts suspicion on the existence of Promissory Note No.
20-979-83 considering the BANK's fiduciary duty to
keep efficiently a record of its transactions with its
depositors. Moreover, the circumstances enumerated by
the trial court bolster the conclusion that Promissory
Note No. 20-979-83 is bogus. The BANK has only itself
to blame for the dearth of competent proof to establish
the existence of Promissory Note No. 20-979-
83. EHaDIC
Total Amount Due to Marcos
The Bank and Marcos do not now dispute the ruling of
the Court of Appeals that the total amount of time
deposits that Marcos placed with the BANK is only
P764,897.67 and not P1,429,795.34 as found by the trial
court. The BANK has always argued that Marcos' time
deposits only totalled P764,897.67. 43 What the BANK
insists on in this petition is the trial court's violation of
its right to procedural due process and the absence of
any obligation to pay or return anything to Marcos.
Marcos, on the other hand, merely prays for the
affirmation of either the trial court or appellate court
decision. 44 We uphold the finding of the Court of
Appeals as to the amount of the time deposits as such
finding is in accord with the evidence on record.
Marcos claimed that the certificates of time deposit were
with Pagsaligan for safekeeping. Marcos was only able
to present the receipt dated 11 March 1982 and the
letter-certification dated 12 March 1982 to prove the
total amount of his time deposits with the BANK. The
letter-certification issued by Pagsaligan reads:
March 12, 1982
Dear Mr. Marcos:
This is to certify that we are taking care in your
behalf various Time Deposit Certificates with
an aggregate value of PESOS: SEVEN
HUNDRED SIXTY FOUR THOUSAND
EIGHT HUNDRED NINETY SEVEN AND
67/100 (P764,897.67) ONLY, issued today for
90 days at 17% p.a. with the interest payable at
maturity on June 10, 1982.
Thank you.
Sgd.
FLORENCI
O B.
PAGSALIG
AN
Branch
Manager 4
5 covered by the trust receipts and thus no interest is due
The foregoing certification is clear. The total amount of
time deposits of Marcos as of 12 March 1982 is
23
P764,897.67, inclusive of the sum of P664,987.67 that
Marcos placed on time deposit on 11 March 1982. This
is plainly seen from the use of the word "aggregate."
We are not swayed by Marcos' testimony that the
certification is actually for the first time deposit that he
placed on 11 March 1982. The letter-certification speaks
of "various Time Deposits Certificates with an
'aggregate value' of P764,897.67." If the amount stated
in the letter-certification is for a single time deposit only,
and did not include the 11 March 1982 time deposit,
then Marcos should have demanded a new letter of
certification from Pagsaligan. Marcos is a businessman.
While he already made an error in judgment in
entrusting to Pagsaligan the certificates of time deposits,
Marcos should have known the importance of making
the letter-certification reflect the true nature of the
transaction. Marcos is bound by the letter-certification
since he was the one who prodded Pagsaligan to issue it.
We modify the amount that the Court of Appeals ordered
the BANK to return to Marcos. The appellate court did
not offset Marcos' outstanding debt with the BANK
covered by the three trust receipt agreements even
though Marcos admits his obligation under the three
trust receipt agreements. The total amount of the trust
receipts is P851,250 less the 30% marginal deposit of
P255,375 that Marcos had already paid the BANK. This
reduced Marcos' total debt with the BANK to P595,875
under the trust receipts.
The trial and appellate courts found that the parties did
not agree on the imposition of interest on the loan
on this loan. However, the records show that the three
trust receipt agreements contained stipulations for the
payment of interest but the parties failed to fill up the
blank spaces on the rate of interest. Put differently, the
BANK and Marcos expressly agreed in writing on the
payment of interest 46 without, however, specifying the
rate of interest. We, therefore, impose the legal interest
of 12% per annum, the legal interest for the forbearance
of money, 47 on each of the three trust receipts.
Based on Marcos' testimony 48 and the BANK'S letter
of demand, 49 the trust receipt agreements became due
in March 1987. The records do not show exactly when
in March 1987 the obligation became due. In accordance
with Article 2212 of the Civil Code, in such a case the
court shall fix the period of the duration of the
obligation. 50The BANK'S letter of demand is dated 6
March 1989. We hold that the trust receipts became due
on 6 March 1987.
Marcos' payment of the marginal deposit of P255,375
for the trust receipts resulted in the proportionate
reduction of the three trust receipts. The reduced value
of the trust receipts and their respective interest as of 6
March 1987 are as follows:
1. Trust Receipt No. CD 83.7 issued on 8
March 1983 originally for P300,000
was reduced to P210,618.75 with
interest of P101,027.76. 51
2. Trust Receipt No. CD 83.9 issued on 15
March 1983 originally for P300,000
was reduced to P210,618.75 with
interest of P100,543.04. 52
3. Trust Receipt No. CD 83.10 issued on 15
March 1983 originally for P251,250
was reduced to P174,637.5 with
interest of P83,366.68. 53
When the trust receipts became due on 6 March 1987,
Marcos owed the BANK P880,812.48. This amount
included P595,875, the principal value of the three trust
receipts after payment of the marginal deposit, and
P284,937.48, the interest then due on the three trust
receipts.
Upon maturity of the three trust receipts, the BANK
should have automatically deducted, by way of
offsetting, Marcos' outstanding debt to the BANK from
his time deposits and its accumulated interest. Marcos'
time deposits of P764,897.67 had already earned
interest 54 of P616,318.92 as of 6 March 1987. 55 Thus,
Marcos' total funds with the BANK amounted to
P1,381,216.59 as of the maturity of the trust receipts.
After deducting P880,812.48, the amount Marcos owed
the BANK, from Marcos' funds with the BANK of
P1,381,216.59, Marcos' remaining time deposits as of 6
March 1987 is only P500,404.11. The accumulated
interest on this P500,404.11 as of 30 August 1989, the
date of filing of Marcos' complaint with the trial court,
is P211,622.96. 56 From 30 August 1989, the interest
due on the accumulated interest of P211,622.96 should
earn legal interest at 12% per annum pursuant to Article
2212 57 of the Civil Code.
The BANK's dismal failure to account for Marcos'
money justifies the award of moral 58 and exemplary
damages. 59 Certainly, the BANK, as employer, is liable
for the negligence or the misdeed of its branch manager
which caused Marcos mental anguish and serious
anxiety. 60 Moral damages of P100,000 is reasonable
and is in accord with our rulings in similar cases
involving banks' negligence with regard to the accounts
of their depositors. 61
We also award P20,000 to Marcos as exemplary
damages. The law allows the grant of exemplary
damages by way of example for the public good. 62 The
public relies on the banks' fiduciary duty to observe the
highest degree of diligence. The banking sector is
24
expected to maintain at all times this high level of
meticulousness. 63
WHEREFORE, the decision of the Court of Appeals is
AFFIRMED with MODIFICATION. Petitioner
Philippine Banking Corporation is ordered to return to
private respondent Leonilo Marcos P500,404.11, the
remaining principal amount of his time deposits, with
interest at 17% per annum from 30 August 1989 until
full payment. Petitioner Philippine Banking Corporation
is also ordered to pay to private respondent Leonilo
Marcos P211,622.96, the accumulated interest as of 30
August 1989, plus 12% legal interest per annum from 30
August 1989 until full payment. Petitioner Philippine
Banking Corporation is further ordered to pay P100,000
by way of moral damages and P20,000 as exemplary
damages to private respondent Leonilo
Marcos. cTDaEH
Costs against petitioner.
SO ORDERED.
SECOND DIVISION
[G.R. No. L-30511. February 14, 1980.]
MANUEL M.
SERRANO, petitioner, vs. CENTRAL
BANK OF THE PHILIPPINES;
OVERSEAS BANK OF MANILA;
EMERITO M. RAMOS, SUSANA B.
RAMOS, EMERITO B. RAMOS, JR.,
JOSEFA RAMOS DELA RAMA,
HORACIO DELA RAMA, ANTONIO B.
 RAMOS, FILOMENA RAMOS
LEDESMA, RODOLFO LEDESMA,
VICTORIA RAMOS TANJUATCO, and
TEOFILO TANJUATCO, respondents.
Petition for mandamus and prohibition, with preliminary
injunction, that seeks the establishment of joint and
solidary liability to the amount of Three Hundred Fifty
Thousand Pesos, with interest, against respondent
Central Bank of the Philippines and Overseas Bank of
Manila and its stockholders, on the alleged failure of the
Overseas Bank of Manila to return the time deposits
made by petitioner and assigned to him, on the ground
that respondent Central Bank failed in its duty to
exercise strict supervision over respondent Overseas
Bank of Manila to protect depositors and the general
public. 1 Petitioner also prays that both respondent
banks be ordered to execute the proper and necessary
documents to constitute all properties listed in Annex
"7" of the Answer of respondent Central Bank of the
Philippines in G.R. No.L-29352, entitled "Emerito M.
Ramos, et al. vs. Central Bank of the Philippines," into a
trust fund in favor of petitioner and all other depositors
of respondent Overseas Bank of Manila. It is also
prayed that the respondents be prohibited permanently
from honoring, implementing, or doing any act
predicated upon the validity or efficacy of the deeds of
mortgage, assignment, and/or conveyance or transfer of
whatever nature of the properties listed in Annex "7" of
the Answer of respondent Central Bank in G.R. No.
29352. 2 cdtai
A sought for ex-parte preliminary injunction against
both respondent banks was not given by this Court.
Undisputed pertinent facts are:
On October 13, 1966 and December 12, 1966, petitioner
made a time deposit, for one year with 6% interest, of
One Hundred Fifty Thousand Pesos (P150,000.00) with
the respondent Overseas Bank of Manila. 3 Concepcion
Maneja also made a time deposit, for one year with 6-
1/2% interest, on March 6, 1967, of Two Hundred
Thousand Pesos (P200,000.00) with the same
respondent Overseas Bank of Manila. 4
On August 31, 1968, Concepcion Maneja, married to
Felixberto M. Serrano, assigned and conveyed to
petitioner Manuel M. Serrano, her time deposit of
P200,000.00 with respondent Overseas Bank of
Manila. 5
Notwithstanding series of demands for encashment of
the aforementioned time deposits from the respondent
Overseas Bank of Manila, dating from December 6,
1967 up to March 4, 1968, not a single one of the time
deposit certificates was honored by respondent Overseas
Bank of Manila. 6
Respondent Central Bank admits that it is charged with
the duty of administering the banking system of the
Republic and it exercises supervision over all doing
business in the Philippines, but denies the petitioner's
allegation that the Central Bark has the duty to exercise
a most rigid and stringent supervision of banks,
implying that respondent Central Bank has to watch
every move or activity of all banks, including
respondent Overseas Bank of Manila. Respondent
Central Bank claims that as of March 12, 1965, the
Overseas Bank of Manila, while operating, was only on
a limited degree of banking operations since the
Monetary Board decided in its Resolution No. 322,
dated March 12, 1965, to prohibit the Overseas Bank of
Manila from making new loans and investments in view
of its chronic reserve deficiencies against its deposit
25
liabilities. This limited operation of respondent Overseas
Bank of Manila continued up to 1968. 7
Respondent Central Bank also denied that it is guarantor
of the permanent solvency of any banking institution as
claimed by petitioner. It claims that neither the law nor
sound banking supervision requires respondent Central
Bank to advertise or represent to the public any remedial
measures it may impose upon chronic delinquent banks
as such action may inevitably result to panic or bank
"runs". In the years 1966-1967, there were no findings to
declare the respondent Overseas Bank of Manila as
insolvent. 8
Respondent Central Bank likewise denied that a
constructive trust was created in favor of petitioner and
his predecessor in interest Concepcion Maneja when
their time deposits were made in 1966 and 1967 with the
respondent Overseas Bank of Manila as during that time
the latter was not an insolvent bank and its operation as
a banking institution was being salvaged by the
respondent Central Bank. 9
Respondent Central Bank avers no knowledge of
petitioner's claim that the properties given by respondent
Overseas Bank of Manila as additional collaterals to
respondent Central Bank of the Philippines for the
former's overdrafts and emergency loans were acquire
through the use of depositors' money, including that of
the petitioner and Concepcion Maneja. 10
In G.R. No. L-29352, entitled "Emerito M. Ramos, et al.
vs. Central Bank of the Philippines," a case was filed by
the petitioner Ramos, wherein respondent Overseas
Bank of Manila sought to prevent respondent Central
Bank from closing, declaring the former insolvent, and
liquidating its assets. Petitioner Manuel Serrano in this
case, filed on September 6, 1968, a motion to intervene
in G.R. No. L-29352, on the ground that Serrano had a
real and legal interest as depositor of the Overseas Bank
of Manila in the matter in litigation in that case.
Respondent Central Bank in G.R. No. L-29352 opposed
petitioner Manuel Serrano's motion to intervene in that
case, on the ground that his claim as depositor of the
Overseas Bank of Manila should properly be ventilated
in the Court of First Instance, and if this Court were to
allow Serrano to intervene as depositor in G.R. No. L-
29352, thousands of other depositors would follow and
thus cause an avalanche of cases in this Court. In the
resolution dated October 4, 1968, this Court denied
Serrano's, motion to intervene. The contents of said
motion to intervene are substantially the same as those
of the present petition.11
This Court rendered decision in G.R. No. L-29352 on
October 4, 1971, which became final and executory on
March 3, 1972, favorable to the respondent Overseas
Bank of Manila, with the dispositive portion to
wit: Cdpr
WHEREFORE, the writs prayed for in the
petition are hereby granted and respondent
Central Bank's resolution Nos. 1263, 1290 and
1333 (that prohibit the Overseas Bank of
Manila to participate in clearing, direct the
suspension of its operation, and ordering the
liquidation of said bank) are hereby annulled
and set aside; and said respondent Central
Bank of the Philippines is directed to comply
with its obligations under the Voting Trust
Agreement, and to desist from taking action in
violation therefor. Costs against respondent
Central Bank of the Philippines." 12
Because of the above decision, petitioner in this case
filed a motion for judgment in this case, praying for a
decision on the merits, adjudging respondent Central
Bank jointly and severally liable with respondent
Overseas Bank of Manila to the petitioner for the
P350,000 time deposit made with the latter bank, with
all interests due therein; and declaring all assets
assigned or mortgaged by the respondents Overseas
Bank of Manila and the Ramos groups in favor of the
Central Bank as trust funds for the benefit of petitioner
and other depositors. 13
By the very nature of the claims and causes of action
against respondents, they in reality are recovery of time
deposits plus interest from respondent Overseas Bank of
Manila, and recovery of damages against respondent
Central Bank for its alleged failure to strictly supervise
the acts of the other respondent Bank and protect the
interests of its depositors by virtue of the constructive
trust created when respondent Central Bank required the
other respondent to increase its collaterals for its
overdrafts and emergency loans, said collaterals
allegedly acquired through the use of depositors money.
These claims should be ventilated in the Court of First
Instance of proper jurisdiction as We already pointed out
when this Court denied petitioner's motion to intervene
in G.R. No. L-29352. Claims of these nature are not
proper in actions for mandamus and prohibition as there
is no shown clear abuse of discretion by the Central
Bank in its exercise of supervision over the other
respondent Overseas Bank of Manila, and if there was,
petitioner here is not the proper party to raise that
question, but rather the Overseas Bank of Manila, as it
did in G.R. No. L-29352. Neither is there anything to
prohibit in this case, since the questioned acts of the
respondent Central Bank (the acts of dissolving and
liquidating the Overseas Bank of Manila), which
petitioner here intends to use as his basis for claims of
damages against respondent Central Bank, had been
accomplished a long time ago.
26
Furthermore, both parties overlooked one fundamental
principle in the nature of bank deposits when the
petitioner claimed that there should be created a
constructive trust in his favor when the respondent
Overseas Bank of Manila increased its collaterals in
favor of respondent Central Bank for the former's
overdrafts and emergency loans, since these collaterals
were acquired by the use of depositors' money. LexLib
Bank deposits are in the nature of irregular deposits.
They are really loans because they earn interest. All
kinds of bank deposits, whether fixed, savings, or
current are to be treated as loans and are to be covered
by the law on loans. 14 Current and savings deposits are
loans to a bank because it can use the same. The
petitioner here in making time deposits that earn
interests with respondent Overseas Bank of Manila was
in reality a creditor of the respondent Bank and not a
depositor. The respondent Bank was in turn a debtor of
petitioner. Failure of the respondent Bank to honor the
time deposit is failure to pay its obligation as a debtor
and not a breach of trust arising from a depositary's
failure to return the subject matter of the deposit.
WHEREFORE, the petition is dismissed for lack of
merit, with costs against petitioner.
SO ORDERED.
FIRST DIVISION
[G.R. No. 97626. March 14, 1997.]
 PHILIPPINE BANK OF COMMERCE,
now absorbed
by PHILIPPINE COMMERCIAL
INTERNATIONAL BANK, ROGELIO
LACSON, DIGNA DE LEON, MARIA
ANGELITA PASCUAL, et
al., petitioners, vs.
THE COURT OF APPEALS, ROMMEL'S
MARKETING CORP., represented by
ROMEO LIPANA, its President & General
Manager, respondents.
Challenged in this petition for review is the Decision
dated February 28, 1991 1 rendered by public
respondent Court of Appeals which affirmed the
Decision dated November 15, 1985 of the Regional
Trial Court, National Capital Judicial Region, Branch
CLX (160), Pasig City, in Civil Case No. 27288
entitled Rommel's Marketing Corporation,
etc. v. Philippine Bank of Commerce, now absorbed
by Philippine Commercial and Industrial Bank.
The case stemmed from a complaint filed by the private
respondent Rommel's Marketing Corporation (RMC for
brevity), represented by its President and General
Manager Romeo Lipana, to recover from the
former Philippine Bank of Commerce (PBC for brevity),
now absorbed by the Philippine Commercial
International Bank, the sum of P304,979.74 representing
various deposits it had made in its current account with
said bank but which were not credited to its account, and
were instead deposited to the account of one Bienvenido
Cotas, allegedly due to the gross and inexcusable
negligence of the petitioner bank.
RMC maintained two (2) separate current accounts,
Current Account Nos. 53-01980-3 and 53-01748-7, with
the Pasig Branch of PBC in connection with its
business ofselling appliances.
In the ordinary and usual course of banking operations,
current account deposits are accepted by the bank on the
basis of deposit slips prepared and signed by the
depositor, or the latter's agent or representative, who
indicates therein the current account number to which
the deposit is to be credited, the name of the depositor or
current account holder, the date of the deposit, and the
amount of the deposit either in cash or checks. The
deposit slip has an upper portion or stub, which is
detached and given to the depositor or his agent; the
lower portion is retained by the bank. In some instances,
however, the deposit slips are prepared in duplicate by
the depositor. The original of the deposit slip is retained
by the bank, while the, duplicate copy is returned or
given to the depositor.
From May 5, 1975 to July 16, 1976, petitioner Romeo
Lipana claims to have entrusted RMC funds in the
form of cash totalling P304,979.74 to his secretary, Irene
Yabut, for the purpose of depositing said funds in the
current accounts of RMC with PBC. It turned out,
however, that these deposits, on all occasions, were not
credited to RMC's account but were instead deposited to
Account No. 53-01734-7 of Yabut's husband,
Bienvenido Cotas who likewise maintains an account
with the same bank. During this period,
petitioner bank had, however, been regularly furnishing
private respondent with monthly statements showing its
current accounts balances. Unfortunately, it had never
been the practice of Romeo Lipana to check these
monthly statements of account reposing complete trust
and confidence on petitionerbank.
27
Irene Yabut's modus operandi is far from complicated.
She would accomplish two (2) copies of the deposit slip,
an original and a duplicate. The original showed the
name of her husband as depositor and his current
account number. On the duplicate copy was written the
account number of her husband but the name of the
account holder was left blank. PBC's teller, Azucena
Mabayad, would, however, validate and stamp both the
original and the duplicate of these deposit slips retaining
only the original copy despite the lack of information on
the duplicate slip. The second copy was kept by Irene
Yabut allegedly for record purposes. After validation,
Yabut would then fill up the name of RMC in the space
left blank in the duplicate copy and change the account
number written thereon, which is that of her husband's,
and make it appear to be RMC's account number, i.e.,
C.A. No. 53-01980-3. With the daily remittance records
also prepared by Ms. Yabut and submitted to private
respondent RMC together with the validated duplicate
slips with the latter's name and account number, she
made her company believe that all the while the amounts
she deposited were being credited to its account when,
in truth and in fact, they were being deposited by her
and credited by the petitioner bank in the
account ofCotas. This went on in a span of more than
one (1) year without private respondent's knowledge.
Upon discovery of the loss of its funds, RMC demanded
from petitioner bank the return of its money, but as its
demand went unheeded, it filed a collection suit before
the Regional Trial Court of Pasig, Branch 160. The
trial court found petitioner bank negligent and ruled as
follows:
"WHEREFORE, judgment is hereby rendered
sentencing
defendant Philippine Bank of Commerce, now
absorbed by defendant Philippine Commercial
 & Industrial Bank, and defendant Azucena
Mabayad to pay the plaintiff, jointly and
severally, and without prejudice to any
criminal action which may be instituted if
found warranted:
1. The sum of P304,979.72, representing
plaintiff's lost deposit, plus interest thereon at
the legal rate from the filing of the complaint;
2. A sum equivalent to 14% thereof, as
exemplary damages;
3. A sum equivalent to 25% of the total amount
due, as and for attorney's fees; and
4. Costs.
Defendants' counterclaim is hereby dismissed
for lack of merit." 2
On appeal, the appellate court affirmed the foregoing
decision with modifications, viz:
"WHEREFORE, the decision appealed from
herein is MODIFIED in the sense that the
awards of exemplary damages and attorney's
fees specified therein are eliminated and
instead, appellants are ordered to pay plaintiff,
in addition to the principal sum of P304,979.74
representing plaintiff's lost deposit plus legal
interest thereon from the filing of the
complaint, P25,000.00 attorney's fees and costs
in the lower court as well as in this Court." 3
Hence, this petition anchored on the following grounds:
1) The proximate cause of the loss is the
negligence of respondent Rommel
Marketing Corporation and Romeo
Lipana in entrusting cash to a dishonest person of Ms. Irene Yabut. 5 According to them, it was
employee. impossible for the bank to know that the money
deposited by Ms. Irene Yabut belong to RMC; neither
2) The failure of respondent Rommel
was thebank forewarned by RMC that Yabut will be
Marketing Corporation to cross-check
depositing cash to its account. Thus, it was impossible
the bank's statements of account with
for the bank to know the fraudulent design of Yabut
its own records during the entire
considering that her husband, Bienvenido Cotas, also
period of more than one (1) year is the
maintained an account with the bank For the bank to
proximate cause of the
inquire into the ownership of the cash deposited by Ms.
commission of subsequent frauds and
Irene Yabut would be irregular. Otherwise stated, it was
misappropriation committed by Ms.
RMC's negligence in entrusting cash to a dishonest
Irene Yabut.
employee which provided Ms. Irene Yabut the
opportunity to defraud RMC. 6
3) The duplicate copies of the deposit slips
presented by respondent Rommel
Private respondent, on the other hand, maintains that the
Marketing Corporation are falsified and
proximate cause of the loss was the
are not proof that the amounts
negligent act of the bank, thru its teller Ms. Azucena
appearing thereon were deposited to
Mabayad, in validating the deposit slips, both original
respondent Rommel Marketing
and duplicate, presented by Ms. Yabut to Ms. Mabayad,
Corporation's account with the bank.
notwithstanding the fact that one of the deposit slips was
4) The duplicate copies of the deposit slips not completely accomplished.
were used by Ms. Irene Yabut to cover
We sustain the private respondent.
up her fraudulent acts against
respondent Rommel Marketing Our law on quasi-delicts states:
Corporation, and not as
"Art. 2176. Whoever by act or omission causes
records of deposits she made with
damage to another, there being fault or
the bank. 4
negligence, is obliged to pay for the damage
The petition has no merit. done. Such fault or negligence if there is no
pre-existing contractual relation between the
Simply put, the main issue posited before us is: What is
the proximate cause of the loss, to the parties, is called a quasi-delict and is governed
by the provisions of this Chapter."
tune of P304,979.74, suffered by the private respondent
RMC petitioner bank's negligence or that of private There are three elements of a quasi-delict: (a) damages
respondent's? suffered by the plaintiff; (b) fault or negligence of the
Petitioners submit that the proximate cause of the loss is defendant, or some other person for whose acts he must
the negligence of respondent RMC and Romeo Lipana respond; and (c) the connection of cause and effect
in entrusting cash to a dishonest employee in the
28
between the fault or negligence of the defendant and the
damages incurred by the plaintiff. 7
In the case at bench, there is no dispute as to the damage
suffered by the private respondent (plaintiff in the
trial court) RMC in the amount of P304,979.74. It is in
ascribing fault or negligence which caused the damage
where the parties point to each other as the culprit.
Negligence is the omission to do something which a
reasonable man, guided by those considerations which
ordinarily regulate the conduct of human affairs, would
do, or the doing of something which a prudent and
reasonable man would do. The seventy-eight (78)-year-
old, yet still relevant, case of Picart v. Smith, 8 provides
the test by which to determine the
existence of negligence in a particular case which may
be stated as follows: Did the defendant in doing the
alleged negligent act use that reasonable care and
caution which an ordinarily prudent person would have
used in the same situation? If not, then he is
guilty of negligence. The law here in effect adopts the
standard supposed to be supplied by the imaginary
conduct of the discreet paterfamilias of the Roman law.
The existence of negligence in a given case is not
determined by reference to the personal judgment of the
actor in the situation before him. The law considers what
would be reckless, blameworthy, or negligent in the
man of ordinary intelligence and prudence and
determines liability by that.
Applying the above test, it appears that the bank's teller,
Ms. Azucena Mabayad, was negligent in validating,
officially stamping and signing all the deposit slips
prepared and presented by Ms. Yabut, despite the glaring
fact that the duplicate copy was not completely
accomplished contrary to the self-imposed
procedure of the bank with respect to the proper
validation of deposit slips, original or duplicate, as A: We issue or we give to the clients the
testified to by Ms. Mabayad herself, thus: depositor's stub as a receipt of the
deposit.
"Q: Now, as teller of PCIB, Pasig Branch, will
you please tell us Mrs. Mabayad your Q: And who prepares the deposit slip?
important duties and functions?
A: The depositor or the authorized
A: I accept current and savings deposits from representative sir.
depositors and encashments.
Q: Where does the depositor's stub comes (sic)
Q: Now in the handling of current account from Mrs. Mabayad, is it with the
deposits of bank clients, could you tell deposit slip?
us the procedure you follow?
A: The depositor's stub is connected with the
A: The client or depositor or the authorized deposit slip or the bank's copy. In a
representative prepares a deposit slip deposit slip, the upper portion is the
by filling up the deposit slip with the depositor's stub and the lower portion is
name, the account number, the date, thebank's copy, and you can detach
the cash breakdown, if it is deposited the bank's copy from the depositor's
for cash, and the check number, the stub by tearing it sir.
amount and then he signs the deposit
Q: Now what do you do upon
slip.
presentment of the deposit slip by the
depositor or the depositor's authorized
representative?
Q: Now, how many deposit slips do you
normally require in accomplishing A: We see to it that the deposit slip 9 is
current account deposit, Mrs. properly accomplished and then we
Mabayad? count the money and then we tally it
with the deposit slip sir.
A: The bank requires only one copy of the
deposit although some of our clients Q: Now is the depositor's stub which you
prepare the deposit slip in duplicate. issued to your clients validated?
Q: Now in accomplishing current account A: Yes, sir. " 10 [Emphasis ours.]
deposits from your clients, what do you
Clearly, Ms. Mabayad failed to observe this very
issue to the depositor to evidence the
important procedure. The fact that the duplicate slip was
deposit made?
not compulsorily required by the bank in accepting
deposits should not relieve the
petitioner bank of responsibility. The odd circumstance
29
alone that such duplicate copy lacked one vital
information that of the name of the account holder
should have already put Ms. Mabayad on guard. Rather
than readily validating the incomplete duplicate copy,
she should have proceeded more cautiously by being
more probing as to the true reason why the name of the
account holder in the duplicate slip was left blank while
that in the original was filled up. She should not have
been so naive in accepting hook, line and sinker the too
shallow excuse of Ms. Irene Yabut to the effect that
since the duplicate copy was only for her personal
record, she would simply fill up the blank space later
on. 11 A "reasonable man of ordinary
prudence" 12 would not have given credence to such
explanation and would have insisted that the space left
blank be filled up as a condition for validation.
Unfortunately, this was not how bank teller Mabayad
proceeded thus resulting in huge losses to the private
respondent.
Negligence here lies not only on the part of Ms.
Mabayad but also on the part of the bank itself in its
lackadaisical selection and supervision of Ms. Mabayad.
This was exemplified in the testimony of Mr. Romeo
Bonifacio, then Manager of the Pasig Branch of the
petitioner bank and now its Vice-President, to the effect
that, while he ordered the investigation of the incident,
he never came to know that blank deposit slips were
validated in total disregard of the bank's validation
procedures, viz:
"Q: Did he ever tell you that one of your
cashiers affixed the stamp
mark of the bank on the deposit slips
and they validated the same with the
machine, the fact that those deposit
slips were unfilled up, is there any
report similar to that?
A: No, it was not the cashier but the teller.
Bataclan v. Medina, 16reiterated in the
Q: The teller validated the blank deposit slip?
A: No it was not reported.
Q: You did not know that any one in
the bank tellers or cashiers validated
the blank deposit slip?
A: I am not aware of that.
Q: It is only now that you are aware of that?
A: Yes, sir." 13
Prescinding from the above, public
respondent Court of Appeals aptly observed:
"xxx xxx xxx
It was in fact only when he testified in this case
in February, 1983, or after the lapse of more
than seven (7) years counted from the period
when the funds in question were deposited in
plaintiffs accounts (May, 1975 to July, 1976)
that bank manager Bonifacio admittedly
became aware of the practice of his teller
Mabayad of validating blank deposit slips.
Undoubtedly, this is gross, wanton, and
inexcusable negligence in the appellant bank's
supervision of its employees." 14
It was this negligence of Ms. Azucena Mabayad,
coupled by the negligence of the petitioner bank in the
selection and supervision of its bank teller, which was
the proximate cause of the loss suffered by the private
respondent, and not the latter's act of entrusting cash to a
dishonest employee, as insisted by the petitioners.
Proximate cause is determined on the facts of each case
upon mixed considerations of logic, common sense,
30
policy and precedent. 15 Vda. de
case of Bank of the
Phil. Islands v. Court of Appeals, 17 defines proximate
cause as "that cause, which, in natural and continuous
sequence, unbroken by any efficient intervening cause,
produces the injury, and without which the result would
not have occurred. . . ." In this case, absent
the act of Ms. Mabayad in negligently validating the
incomplete duplicate copy of the deposit slip, Ms. Irene
Yabut would not have the facility with which to
perpetrate her fraudulent scheme with impunity.
Apropos, once again, is the pronouncement made by the
respondent appellate court, to wit:
". . . Even if Yabut had the fraudulent intention
to misappropriate the funds entrusted to her by
plaintiff, she would not have been able to
deposit those funds in her husband's current
account, and then make plaintiff believe that it
was in the latter's accounts wherein she had
deposited them, had it not been for bank teller
Mabayad's aforesaid gross and reckless
negligence. The latter's negligence was thus the
proximate, immediate and efficient cause that
brought about the loss claimed by plaintiff in
this case, and the failure of plaintiff to discover
the same soon enough by failing to scrutinize
the monthly statements of account being sent
to it by appellant bank could not have
prevented the fraud and misappropriation
which Irene Yabut had already completed when
she deposited plaintiff's money to the
account of her husband instead of to the
latter's. accounts." 18
Furthermore, under the doctrine of "last clear chance"
(also referred to, at times as "supervening negligence" or
as "discovered peril"), petitioner bank was indeed the
culpable party. This doctrine, in essence, states that
where both parties are negligent, but the
negligent act of one is appreciably later in time than
that of the other, or when it is impossible to determine
whose fault or negligence should be attributed to the
incident, the one who had the last clear opportunity to
avoid the impending harm and failed to do so is
chargeable with the consequences thereof. 19 Stated
differently, the rule would also mean that an antecedent
negligence of a person does not preclude the
recovery of damages for the supervening negligence of,
or bar a defense against liability sought by another, if the
latter, who had the last fair chance, could have avoided
the impending harm by the exercise of due
diligence. 20 Here, assuming that private respondent
RMC was negligent in entrusting cash to a dishonest
employee, thus providing the latter with the opportunity
to defraud the company, as advanced by the petitioner,
yet it cannot be denied that the petitionerbank, thru its
teller, had the last clear opportunity to avert the injury
incurred by its client, simply by faithfully observing
their self-imposed validation procedure.
At this juncture, it is worth to discuss the
degree of diligence ought to be exercised by banks in
dealing with their clients.
The New Civil Code provides:
"ART. 1173. The fault or negligence of the
obligor consists in the omission of that
diligence which is required by the nature of the
obligation and corresponds with the
circumstances of the persons, of the time
and of the place. When negligence shows bad
faith, the provisions of articles 1171 and 2201,
paragraph 2, shall apply.
If the law or contract does not state the entire period of more than one (1) year is the proximate
diligence which is to be observed in the cause of the commission of subsequent frauds and
performance, that which is expected of a good misappropriation committed by Ms. Irene Yabut.
father of a family shall be required. (1104a)"
We do not agree.
In the case of banks, however, the degree of diligence
required is more than that of a good father of a family.
Considering the fiduciary nature of their relationship While it is true that had private respondent checked the
with their depositors, banks are duty bound to treat the monthly statements of account sent by the
accounts of their clients with the highest petitioner bank to RMC, the latter would have
degree of care. 21 discovered the loss early on, such cannot be used by the
petitioners to escape liability. This omission on the
As elucidated in Simex International (Manila),
part of the private respondent does not change the fact
Inc. v. Court of Appeals, 22 in every case, the depositor
that were it not for the wanton and reckless
expects the bank to treat his account with the utmost
negligence of the petitioners' employee in validating the
fidelity, whether such account consists only of a few
incomplete duplicate deposit slips presented by Ms.
hundred pesos or of millions. The bank must record
Irene Yabut, the loss would not have occurred.
every single transaction accurately, down to the last
Considering, however, that the fraud was committed in a
centavo, and as promptly as possible. This has to be
span of more than one (1) year covering various
done if the account is to reflect at any given time the
deposits, common human experience dictates that the
amount of money the depositor can dispose as he sees
same would not have been possible without any
fit, confident that thebank will deliver it as and to
form of collusion between Ms. Yabut and bank teller
whomever he directs. A blunder on the part of the bank,
Mabayad. Ms. Mabayad was negligent in the
such as the failure to duly credit him his deposits as
performance ofher duties as bank teller nonetheless.
soon as they are made, can cause the depositor not a
Thus, the petitioners are entitled to claim reimbursement
little embarrassment if not financial loss and perhaps
from her for whatever they shall be ordered to pay in
even civil and criminal litigation.
this case.
The point is that as a business affected with public
The foregoing notwithstanding, it cannot be denied that,
interest and because of the nature of its functions,
indeed, private respondent was likewise negligent in not
the bank is under obligation to treat the accounts of its
checking its monthly statements of account. Had it done
depositors with meticulous care, always having in mind
so, the company would have been alerted to the
the fiduciary nature of their relationship. In the case
series of frauds being committed against RMC by its
before us, it is apparent that the petitioner bank was
secretary. The damage would definitely not have
remiss in that duty and violated that relationship. LexLib
ballooned to such an amount if only RMC, particularly
Petitioners nevertheless aver that the Romeo Lipana, had exercised even a little vigilance in
failure of respondent RMC to cross-check the bank's their financial affairs. This omission by RMC amounts
statements of account with its own records during the to contributory negligence which shall mitigate the
31
damages that may be awarded to the private
respondent 23 under Article 2179 of the New Civil
Code, to wit:
". . . When the plaintiff's own negligence was
the immediate and proximate cause of his
injury, he cannot recover damages. But if his
negligence was only contributory, the
immediate and proximate cause of the injury
being the defendant's lack of due care, the
plaintiff may recover damages, but the courts
shall mitigate the damages to be awarded."
In view of this, we believe that the
demands of substantial justice are satisfied by allocating
the damage on a 60-40 ratio. Thus, 40% of the damage
awarded by the respondent appellate court, except the
award of P25,000.00 attorney's fees, shall be borne by
private respondent RMC; only the balance of 60% needs
to be paid by the petitioners. The award of attorney's
fees shall be borne exclusively by the petitioners.
WHEREFORE, the decision of the
respondent Court of Appeals is modified by reducing
the amount of actual damages private respondent is
entitled to by 40%. Petitioners may recover from Ms.
Azucena Mabayad the amount they would pay the
private respondent. Private respondent shall have
recourse against Ms. Irene Yabut. In all other respects,
the appellate court's decision is AFFIRMED.
Proportionate costs.
SO ORDERED.
SECOND DIVISION
[G.R. No. 132560. January 30, 2002.]
WESTMONT BANK (formerly
ASSOCIATED BANKING
CORP.), petitioner, vs.
EUGENE ONG, respondent.
This is a petition for review of the decision 1 dated
January 13, 1998, of the Court of Appeals in CA-G.R.
CV No. 28304 ordering the petitioner to pay respondent
P1,754,787.50 plus twelve percent (12%) interest per
annum computed from October 7, 1977, the date of the
first extrajudicial demand, plus damages.
The facts of this case are undisputed.
Respondent Eugene Ong maintained a current account
with petitioner, formerly the Associated Banking
Corporation, but now known as Westmont Bank.
Sometime in May 1976, he sold certain shares of stocks
through Island Securities Corporation. To pay Ong,
Island Securities purchased two (2) Pacific Banking
Corporation manager's checks, 2 both dated May 4,
1976, issued in the name of Eugene Ong as payee.
Before Ong could get hold of the checks, his friend
Faciano Tanlimco got hold of them, forged Ong's
signature and deposited these with petitioner, where
Tanlimco was also a depositor. Even though Ong's
specimen signature was on file, petitioner accepted and
credited both checks to the account of Tanlimco, without
verifying the 'signature indorsements' appearing at the
back thereof. Tanlimco then immediately withdrew the
money and absconded.
Instead of going straight to the bank to stop or question
the payment, Ong first sought the help of Tanlimco's
family to recover the amount. Later, he reported the
32
incident to the Central Bank, which like the first effort,
unfortunately proved futile.
It was only on October 7, 1977, about five (5) months
from discovery of the fraud, did Ong cry foul and
demanded in his complaint that petitioner pay the value
of the two checks from the bank on whose gross
negligence he imputed his loss. In his suit, he insisted
that he did not "deliver, negotiate, endorse or transfer to
any person or entity" the subject checks issued to him
and asserted that the signatures on the back were
spurious. 3
The bank did not present evidence to the contrary, but
simply contended that since plaintiff Ong claimed to
have never received the originals of the two (2) checks
in question from Island Securities, much less to have
authorized Tanlimco to receive the same, he never
acquired ownership of these checks. Thus, he had no
legal personality to sue as he is not a real party-in-
interest. The bank then filed a demurrer to evidence
which was denied.
On February 8, 1989, after trial on the merits, the
Regional Trial Court of Manila, Branch 38, rendered a
decision, thus:
IN VIEW OF THE FOREGOING, the court
hereby renders judgment for the plaintiff and
against the defendant, and orders the defendant
to pay the plaintiff:
1. The sum of P1,754,787.50 representing the
total face value of the two checks in
question, Exhibits "A" and "B",
respectively, with interest thereon at the
legal rate of twelve percent (12%) per
annum computed from October 7, 1977
 (the date of the first extrajudicial
demand) up to and until the same shall
have been paid in full;
2. Moral damages in the amount of
P250,000.00;
3. Exemplary or corrective damages in the sum
of P100,000.00 by way of example or
correction for the public good;
4. Attorney's fees of P50,000.00 and costs of
suit.
Defendant's counterclaims are dismissed for
lack of merit.
SO ORDERED. 4
Petitioner elevated the case to the Court of Appeals
without success. In its decision, the appellate court held:
WHEREFORE, in view of the foregoing, the
appealed decision is AFFIRMED in toto. 5
Petitioner now comes before this Court on a petition for
review, alleging that the Court of Appeals erred:
I negotiable instrument. Petitioner further argues that
. . . IN AFFIRMING THE TRIAL
COURT'S CONCLUSION THAT
RESPONDENT HAS A CAUSE OF
ACTION AGAINST THE
PETITIONER.
II
. . . IN AFFIRMING THE TRIAL
COURT'S DECISION FINDING
PETITIONER LIABLE TO
RESPONDENT AND DECLARING
THAT THE LATTER MAY
RECOVER DIRECTLY FROM THE
FORMER; AND
III
. . . IN NOT ADJUDGING
RESPONDENT GUILTY OF LACHES
AND IN NOT ABSOLVING
PETITIONER FROM LIABILITY.
Essentially the issues in this case are: (1) whether or not
respondent Ong has a cause of action against
petitioner Westmont Bank; and (2) whether or
not Ong is barred to recover the money
from Westmont Bank due to laches.
Respondent admitted that he was never in actual or
physical possession of the two (2) checks of the Island
Securities nor did he authorize Tanlimco or any of the
latter's representative to demand, accept and receive the
same. For this reason, petitioner argues, respondent
cannot sue petitioner because under Section 51 of the
Negotiable Instruments Law 6 it is only when a person
becomes a holder of a negotiable instrument can he sue
in his own name. Conversely, prior to his becoming a
holder, he had no right or cause of action under such
since Section 191 7 of the Negotiable Instruments Law
defines a "holder" as the 'payee or indorsee of a bill or
note, who is in possession of it, or the bearer thereof,' in
order to be a holder, it is a requirement that he be in
possession of the instrument or the bearer thereof.
Simply stated, since Ong never had possession of the
checks nor did he authorize anybody, he did not become
a holder thereof hence he cannot sue in his own name. 8
Petitioner also cites Article 1249 9 of the Civil Code
explaining that a check, even if it is a manager's check,
is not legal tender. Hence, the creditor cannot be
33
compelled to accept payment thru this means. 10 It is
petitioner's position that for all intents and purposes,
Island Securities has not yet tendered payment to
respondent Ong, thus, any action by Ong should be
directed towards collecting the amount from Island
Securities. Petitioner claims that Ong's cause of action
against it has not ripened as of yet. It may be that
petitioner would be liable to the drawee bank but that
is a matter between petitioner and drawee-bank, Pacific
Banking Corporation. 11
For its part, respondent Ong leans on the ruling of the
trial court and the Court of Appeals which held that the
suit of Ong against the petitioner bank is a desirable
shortcut to reach the party who ought in any event to be
ultimately liable. 12 It likewise cites the ruling of the
courts a quo which held that according to the general
rule, a bank who has obtained possession of a check
upon an unauthorized or forged indorsement of the
payee's signature and who collects the amount of the
check from the drawee is liable for the proceeds thereof
to the payee. The theory of said rule is that the
collecting bank's possession of such check is
wrongful. 13
Respondent also cites Associated Bank vs. Court of
Appeals 14 which held that the collecting bank or last
endorser generally suffers the loss because it has the
duty to ascertain the genuineness of all prior
endorsements. The collecting bank is also made liable
because it is privy to the depositor who negotiated the
check. The bankknows him, his address and history
because he is a client. Hence, it is in a better position to
detect forgery, fraud or irregularity in the
indorsement. 15
Anent Article 1249 of the Civil Code, Ong points out
that bank checks are specifically governed by the
Negotiable Instruments Law which is a special law and
only in the absence of specific provisions or deficiency
in the special law may the Civil Code be invoked. 16
Considering the contentions of the parties and the
evidence on record, we find no reversible error in the
assailed decisions of the appellate and trial courts, hence
there is no justifiable reason to grant the petition.
Petitioner's claim that respondent has no cause of action
against the bank is clearly misplaced. As defined, a
cause of action is the act or omission by which a party
violates a right of another. 17 The essential elements of
a cause of action are: (a) a legal right or rights of the
plaintiff, (b) a correlative obligation of the defendant,
and (c) an act or omission of the defendant in violation
of said legal right. 18
The complaint filed before the trial court expressly
alleged respondent's right as payee of the manager's
checks to receive the amount involved, petitioner's
correlativeduty as collecting bank to ensure that the
amount gets to the rightful payee or his order, and
a breach of that duty because of a blatant act of
negligence on the part of petitioner which violated
respondent's rights. 19
Under Section 23 of the Negotiable Instruments Law:
When a signature is forged or made without
the authority of the person whose signature it
purports to be, it is wholly inoperative, and no
right to retain the instrument, or to give a
discharge therefor, or to enforce payment
thereof against any party thereto, can be
acquired through or under such signature,
unless the party against whom it is sought to
enforce such right is precluded from setting up
the forgery or want of authority.
Since the signature of the payee, in the case at bar, was
forged to make it appear that he had made an
endorsement in favor of the forger, such signature
should be deemed as inoperative and ineffectual.
Petitioner, as the collecting bank, grossly erred in
making payment by virtue of said forged signature. The
payee, herein respondent, should therefore be allowed to
recover from the collecting bank.
The collecting bank is liable to the payee and must bear
the loss because it is its legal duty to ascertain that the
payee's endorsement was genuine before cashing the
check. 20 As a general rule, a bank or corporation who
has obtained possession of a check upon an
unauthorized or forged indorsement of the payee's
signature and who collects the amount of the check from
the drawee, is liable for the proceeds thereof to the
payee or other owner, notwithstanding that the amount
has been paid to the person from whom the check was
obtained. 21
The theory of the rule is that the possession of the check
on the forged or unauthorized indorsement is wrongful,
and when the money had been collected on the check,
the bank or other person or corporation can be held as
for moneys had and received, and the proceeds are held
for the rightful owners who may recover them. The
position of the bank taking the check on the forged or
unauthorized indorsement is the same as if it had taken
the check and collected the money without indorsement
at all and the act of the bank amounts to conversion of
the check. 22
Petitioner's claim that since there was no delivery yet
and respondent has never acquired possession of the
checks, respondent's remedy is with the drawer and not
with petitioner bank. Petitioner relies on the view to the
effect that where there is no delivery to the payee and no
34
title vests in him, he ought not to be allowed to recover
on the ground that he lost nothing because he never
became the owner of the check and still retained his
claim of debt against the drawer. 23 However, another
view in certain cases holds that even if the absence of
delivery is considered, such consideration is not
material. The rationale for this view is that in said cases
the plaintiff uses one action to reach, by a desirable short
cut, the person who ought in any event to be ultimately
liable as among the innocent persons involved in the
transaction. In other words, the payee ought to be
allowed to recover directly from the collecting bank,
regardless of whether the check was delivered to the
payee or not. 24
Considering the circumstances in this case, in our view,
petitioner could not escape liability for its negligent acts.
Admittedly, respondent Eugene Ong at the time the
fraudulent transaction took place was a depositor of
petitioner bank. Banks are engaged in a business
impressed with public interest, and it is their duty to
protect in return their many clients and depositors who
transact business with them. 25 They have the obligation
to treat their client's account meticulously and with the
highest degree of care, considering the fiduciary nature
of their relationship. The diligence required of banks,
therefore, is more than that of a good father of a
family. 26 In the present case, petitioner was held to be
grossly negligent in performing its duties. As found by
the trial court:
. . . (A)t the time the questioned checks were
accepted for deposit to Paciano Tanlimco's
account by defendant bank, defendant bank,
admittedly had in its files specimen signatures
of plaintiff who maintained a current account
 with them (Exhibits "L-1" and "M-1";
testimony of Emmanuel Torio). Given the
substantial face value of the two checks,
totalling P1,754,787.50, and the fact that they
were being deposited by a person not the
payee, the very least defendant bank should
have done, as any reasonable prudent man
would have done, was to verify the
genuineness of the indorsements thereon. The
Court cannot help but note that had defendant
conducted even the most cursory comparison
with plaintiff's specimen signatures in its files
(Exhibit "L-1" and "M-1") it would have at
once seen that the alleged indorsements were
falsified and were not those of the plaintiff-
payee. However, defendant apparently failed to
make such a verification or, what is worse did
so but, chose to disregard the obvious
dissimilarity of the signatures. The first
omission makes it guilty of gross negligence;
the second of bad faith. In either case,
defendant is liable to plaintiff for the proceeds
of the checks in question. 27
These findings are binding and conclusive on the
appellate and the reviewing courts.
On the second issue, petitioner avers that
respondent Ong is barred by laches for failing to assert
his right for recovery from the bank as soon as he
discovered the scam. The lapse of five months before he
went to seek relief, from the bank, according to
petitioner, constitutes laches.
In turn, respondent contends that petitioner presented no
evidence to support its claim of laches. On the contrary,
the established facts of the case as found by the trial
court and affirmed by the Court of Appeals are that
respondent left no stone unturned to obtain relief from
his predicament.
On the matter of delay in reporting the loss, respondent
calls attention to the fact that the checks were issued on
May 4, 1976, and on the very next day, May 5, 1976,
these were already credited to the account of Paciano
Tanlimco and presented for payment to Pacific Banking
Corporation. So even if the theft of the checks were
discovered and reported earlier, respondent argues, it
would not have altered the situation as the encashment
of the checks was consummated within twenty-four
hours and facilitated by the gross negligence of the
petitioner bank. 28
Laches may be defined as the failure or neglect for an
unreasonable and unexplained length of time, to do that
which, by exercising due diligence, could or should
have been done earlier. It is negligence or omission to
assert a right within a reasonable time, warranting a
presumption that the party entitled thereto has either
abandoned or declined to assert it. 29 It concerns itself
with whether or not by reason of long inaction or
inexcusable neglect, a person claiming a right should be
barred from asserting the same, because to allow him to
do so would be unjust to the person against whom such
right is sought to be enforced. 30
In the case at bar, it cannot be said that respondent sat
on his rights. He immediately acted after knowing of the
forgery by proceeding to seek help from the Tanlimco
family and later the Central Bank, to remedy the
situation and recover his money from the forger, Paciano
Tanlimco. Only after he had exhausted possibilities of
settling the matter amicably with the family of Tanlimco
and through the CB, about five months after the
unlawful transaction took place, did he resort to making
the demand upon the petitioner and eventually before
the court for recovery of the money value of the two
checks. These acts cannot be construed as undue delay
in or abandonment of the assertion of his rights.
Moreover, the claim of petitioner that respondent should
be barred by laches is clearly a vain attempt to deflect
responsibility for its negligent act. As explained by the
appellate court, it is petitioner which had the last clear
chance to stop the fraudulent encashment of the subject
checks had it exercised due diligence and followed the
proper and regular banking procedures in clearing
checks. 31 As we had earlier ruled, the one who had the
last clear opportunity to avoid the impending harm but
failed to do so is chargeable with the consequences
thereof. 32
WHEREFORE, the instant petition is DENIED for lack
of merit. The assailed decision of the Court of Appeals,
sustaining the judgment of the Regional Trial Court of
Manila, is AFFIRMED. CSIcHA
Costs against petitioner.
SO ORDERED.
FIRST DIVISION
[G.R. No. 167346. April 2, 2007.]
SOLIDBANK CORPORATION/METROP
OLITAN BANK AND TRUST
COMPANY, * petitioner, vs. SPOUSES PET
ER and SUSAN TAN, respondents.

35
Assailed in this petition for review by certiorari under
Rule 45 of the Rules of Court are the decision 1 and
resolution 2 of the Court of Appeals (CA) dated
November 26, 2004 and March 1, 2005, respectively, in
CA-G.R. CV No. 58618, 3 affirming the decision of the
Regional Trial Court (RTC) of Manila, Branch 31. 4
On December 2, 1991, respondents' representative,
Remigia Frias, deposited with petitioner ten checks
worth P455,962. Grace Neri, petitioner's teller no. 8 in
its Juan Luna, Manila Branch, received two deposit slips
for the checks, an original and a duplicate. Neri verified
the checks and their amounts in the deposit slips then
returned the duplicate copy to Frias and kept the original
copy for petitioner.
In accordance with the usual practice between petitioner
and respondents, the latter's passbook was left with
petitioner for the recording of the deposits on the bank's
ledger. Later, respondents retrieved the passbook and
discovered that one of the checks, Metropolitan Bank
and Trust Company (Metrobank) check no. 403954,
payable to cash in the sum of P250,000 was not posted
therein. cDCaHA
Immediately, respondents notified petitioner of the
problem. Petitioner showed respondent Peter Tan a
duplicate copy of a deposit slip indicating the list of
checks deposited by Frias. But it did not include the
missing check. The deposit slip bore the stamp mark
"teller no. 7" instead of "teller no. 8" who previously
received the checks.
Still later, respondent Peter Tan learned from Metrobank
(where he maintained an account) that Metrobank check
no. 403954 had cleared after it was inexplicably
deposited by a certain Dolores Lagsac in Premier Bank
in San Pedro, Laguna. Respondents demanded that
petitioner pay the amount of the check but it refused,
hence, they filed a case for collection of a sum of money
in the RTC of Manila, Branch 31.
In its answer, petitioner averred that the deposit slips
Frias used when she deposited the checks were spurious.
Petitioner accused respondents of engaging in a scheme
to illegally exact money from it. It added that, contrary
to the claim of respondents, it was "teller no. 7" who
received the deposit slips and, although respondents
insisted that Frias deposited ten checks, only nine
checks were actually received by said teller. By way of
counterclaim, it sought payment of P1,000,000 as actual
and moral damages and P500,000 as exemplary
damages. aCcADT
After trial, the RTC found petitioner liable to
respondents:
Upon examination of the oral, as well as of the
documentary evidence which the parties
presented at the trial in support of their
respective contentions, and after taking into
consideration all the circumstances of the case,
this Court believes that the loss of Metrobank
Check No. 403954 in the sum of P250,000.00
was due to the fault of [petitioner] . . . [It]
retained the original copy of the [deposit slip
marked by "Teller No. 7"]. There is a
presumption in law that evidence willfully
suppressed would be adverse if produced.
Art. 1173 of the Civil Code states that "the
fault or negligence of the obligor consists in
the omission of that diligence which is
required by the nature of the obligation and
corresponds with the circumstances of the
person of the time and of the place"; and that
"if the law or contract does not state the
diligence which is to be observed in the
36
performance, the same as expected of a good
father of a family shall be required."
. . . For failure to comply with its obligation,
[petitioner] is presumed to have been at fault or
to have acted negligently unless they prove that
they observe extraordinary diligence as
prescribed in Arts. 1733 and 1735 of the Civil
Code (Art. 1756). . . HAcaCS
xxx xxx xxx
WHEREFORE, premises considered, judgment
is hereby rendered in favor of [respondents],
ordering [petitioner] to pay the sum of
P250,000, with legal interest from the time the
complaint [for collection of a sum of money]
was filed until satisfied; P25,000.00 moral
damages; P25,000.00 exemplary damages plus
20% of the amount due [respondents] as and
for attorney's fees. With costs.
SO ORDERED. 5
Petitioner appealed to the CA which affirmed in toto the
RTC's assailed decision:
Serious doubt [was] engendered by the fact
that [petitioner] did not present the original of
the deposit slip marked with "Teller No. 7" and
on which the entry as to Metrobank Check No.
403954 did not appear. Even the most cursory
look at the handwriting thereon reveal[ed] a
very marked difference with that in the other
deposit slips filled up [by Frias] on December
2, 1991. Said circumstances spawn[ed] the
belief thus, the said deposit slip was prepared
by [petitioner] itself to cover up for the lost
check. 6 DTCAES
Petitioner filed a motion for reconsideration but the CA
dismissed it. Hence, this appeal.
Before us, petitioner faults the CA for upholding the
RTC decision. Petitioner argues that: (1) the findings of
the RTC and the CA were not supported by the evidence
and records of the case; (2) the award of damages in
favor of respondents was unwarranted and (3) the
application by the RTC, as affirmed by the CA, of the
provisions of the Civil Code on common carriers to the
instant case was erroneous. 7
The petition must fail.
On the first issue, petitioner contends that the lower
courts erred in finding it negligent for the loss of the
subject check. According to petitioner, the fact that the
check was deposited in Premier Bank affirmed its claim
that it did not receive the check.
At the outset, the Court stresses that it accords respect to
the factual findings of the trial court and, unless it
overlooked substantial matters that would alter the
outcome of the case, this Court will not disturb such
findings. 8 We meticulously reviewed the records of the
case and found no reason to deviate from the rule.
Moreover, since the CA affirmed these findings on
appeal, they are final and conclusive on us. 9 We
therefore sustain the RTC's and CA's findings that
petitioner was indeed negligent and responsible for
respondents' lost check.
On the issue of damages, petitioner argues that the moral
and exemplary damages awarded by the lower courts
had no legal basis. For the award of moral damages to
stand, petitioner avers that respondents should have
proven the existence of bad faith by clear and
convincing evidence. According to petitioner, simple
negligence cannot be a basis for its award. It insists that
the award of exemplary damages is justified only when have performed under the circumstances. In other words,
the act complained of was done in a wanton, fraudulent like a common carrier whose business is also imbued
and oppressive manner. 10 ECTSDa with public interest, petitioner should have exercised
extraordinary diligence to negate its liability to
We disagree.
respondents.
While petitioner may argue that simple negligence does
Assuming arguendo that the trial court indeed used the
not warrant the award of moral damages, it nonetheless
provisions on common carriers to pin down liability on
cannot insist that that was all it was guilty of. It refused
petitioner, still we see no reason to strike down the RTC
to produce the original copy of the deposit slip which
and CA rulings on this ground alone. cSTHaE
could have proven its claim that it did not receive
respondents' missing check. Thus, in suppressing the In one case, 16 the Court did not hesitate to apply the
best evidence that could have bolstered its claim and doctrine of last clear chance (commonly used in
confirmed its innocence, the presumption now arises transportation laws involving common carriers) to a
that it withheld the same for fraudulent purposes. 11 banking transaction where it adjudged the bank
responsible for the encashment of a forged check. There,
Moreover, in presenting a false deposit slip in its attempt
we enunciated that the degree of diligence required of
to feign innocence, petitioner's bad faith was apparent
banks is more than that of a good father of a family in
and unmistakable. Bad faith imports a dishonest purpose
keeping with their responsibility to exercise the
or some moral obliquity or conscious doing of a wrong
necessary care and prudence in handling their clients'
that partakes of the nature of fraud. 12
money.
As to the award of exemplary damages, the law allows it
We find no compelling reason to disallow the
by way of example for the public good. The business of
application of the provisions on common carriers to this
banking is impressed with public interest and great
case if only to emphasize the fact that banking
reliance is made on the bank's sworn profession of
institutions (like petitioner) have the duty to exercise the
diligence and meticulousness in giving irreproachable
highest degree of diligence when transacting with the
service. 13 For petitioner's failure to carry out its
public. By the nature of their business, they are required
responsibility and to account for respondents' lost check,
to observe the highest standards of integrity and
we hold that the lower courts did not err in awarding
performance, and utmost assiduousness as well. 17
exemplary damages to the latter. DEHaAS
WHEREFORE, the assailed decision and resolution of
On the last issue, we hold that the trial court did not
the Court of Appeals dated November 26, 2004 and
commit any error. A cursory reading of its decision
March 1, 2005, respectively, in CA-G.R. CV No. 58618
reveals that it anchored its conclusion that petitioner was
are hereby AFFIRMED. Accordingly, the petition is
negligent on Article 1173 of the Civil Code. 14
DENIED. CcAESI
In citing the different provisions of the Civil Code on
common carriers, 15 the trial court merely made
reference to the kind of diligence that petitioner should Costs against petitioner.
37
SO ORDERED.
SECOND DIVISION
[G.R. No. 129015. August 13, 2004.]
SAMSUNG CONSTRUCTION COMPANY
PHILIPPINES, INC., petitioner, vs. FAR
EAST BANK AND TRUST COMPANY AND
COURT OF APPEALS,respondents.
Called to fore in the present petition is a classic textbook
question if a bank pays out on a forged check, is it
liable to reimburse the drawer from whose account the
funds were paid out? The Court of Appeals, in reversing
a trial court decision adverse to the bank, invoked
tenuous reasoning to acquit the bank of liability. We
reverse, applying time-honored principles of law.
The salient facts follow.
Plaintiff Samsung Construction Company Philippines,
Inc. (Samsung Construction), while based in Bian,
Laguna, maintained a current account with defendant
Far East Bank and Trust Company 1 (FEBTC) at the
latters Bel-Air, Makati branch. 2 The sole signatory
to Samsung Constructions account was Jong Kyu Lee
(Jong), its Project Manager, 3 while the checks
remained in the custody of the companys accountant,
Kyu Yong Lee (Kyu). 4
On 19 March 1992, a certain Roberto Gonzaga
presented for payment FEBTC Check No. 432100 to the
banks branch in Bel-Air, Makati. The check, payable to
cash and drawn against Samsung Constructions current
account, was in the amount of Nine Hundred Ninety
Nine Thousand Five Hundred Pesos (P999,500.00). The
bank teller, Cleofe Justiani, first checked the balance
of Samsung Constructions account. After ascertaining
there were enough funds to cover the check, 5 she
compared the signature appearing on the check with the
specimen signature of Jong as contained in the specimen
signature card with the bank. After comparing the two
signatures, Justiani was satisfied as to the authenticity of
the signature appearing on the check. She then asked
Gonzaga to submit proof of his identity, and the latter
presented three (3) identification cards. 6
At the same time, Justiani forwarded the check to the
branch Senior Assistant Cashier Gemma Velez, as it was
bank policy that two bank branch officers approve
checks exceeding One Hundred Thousand Pesos, for
payment or encashment. Velez likewise counterchecked
the signature on the check as against that on the
signature card. He too concluded that the check was
indeed signed by Jong. Velez then forwarded the check
and signature card to Shirley Syfu, another bank officer,
for approval. Syfu then noticed that Jose Sempio III
(Sempio), the assistant accountant
of Samsung Construction, was also in the bank. Sempio
was well-known to Syfu and the other bank officers, he
being the assistant accountant of Samsung Construction.
Syfu showed the check to Sempio, who vouched for the
genuineness of Jongs signature. Confirming the identity
of Gonzaga, Sempio said that the check was for the
purchase of equipment for Samsung Construction.
Satisfied with the genuineness of the signature of Jong,
Syfu authorized the banks encashment of the check to
Gonzaga.
The following day, the accountant
of Samsung Construction, Kyu, examined the balance of
38
the bank account and discovered that a check in the
amount of Nine Hundred Ninety Nine Thousand Five
Hundred Pesos (P999,500.00) had been encashed. Aware
that he had not prepared such a check for Jongs
signature, Kyu perused the checkbook and found that the
last blank check was missing. 7 He reported the matter
to Jong, who then proceeded to the bank. Jong learned
of the encashment of the check, and realized that his
signature had been forged. The Bank Manager reputedly
told Jong that he would be reimbursed for the amount of
the check. 8 Jong proceeded to the police station and
consulted with his lawyers. 9 Subsequently, a criminal
case for qualified theft was filed against Sempio before
the Laguna court. 10
In a letter dated 6 May 1992, Samsung Construction,
through counsel, demanded that FEBTC credit to it the
amount of Nine Hundred Ninety Nine Thousand Five
Hundred Pesos (P999,500.00), with interest. 11 In
response, FEBTC said that it was still conducting an
investigation on the matter.
Unsatisfied, Samsung Constructionfiled a Complaint on
10 June 1992 for violation of Section 23 of the Negotiable
Instruments Law, and prayed for the payment of the amount
debited as a result of the questioned check plus interest,
and attorneys fees. 12 The case was docketed as Civil
Case No. 92-61506 before the Regional Trial Court
(RTC) of Manila, Branch 9. 13
During the trial, both sides presented their respective
expert witnesses to testify on the claim that Jongs
signature was forged. Samsung Corporation, which had
referred the check for investigation to the NBI,
presented Senior NBI Document Examiner Roda B.
Flores. She testified that based on her examination, she
concluded that Jongs signature had been forged on the
check. On the other hand, FEBTC, which had sought the
assistance of the Philippine National Police
(PNP), 14 presented Rosario C. Perez, a document
examiner from the PNP Crime Laboratory. She testified
that her findings showed that Jongs signature on the
check was genuine. 15
Confronted with conflicting expert testimony, the RTC
chose to believe the findings of the NBI expert. In a
Decision dated 25 April 1994, the RTC held that Jongs
signature on the check was forged and accordingly
directed the bank to pay or credit back
to Samsung Constructions account the amount of Nine
Hundred Ninety Nine Thousand Five Hundred Pesos
(P999,500.00), together with interest tolled from the
time the complaint was filed, and attorneys fees in the
amount of Fifteen Thousand Pesos (P15,000.00).
FEBTC timely appealed to the Court of Appeals. On 28
November 1996, the Special Fourteenth Division of the
Court of Appeals rendered a Decision, 16 reversing the
RTCDecision and absolving FEBTC from any liability.
The Court of Appeals held that the contradictory
findings of the NBI and the PNP created doubt as to
whether there was forgery. 17 Moreover, the appellate
court also held that assuming there was forgery, it
occurred due to the negligence
of Samsung Construction, imputing blame on the
accountant Kyu for lack of care and prudence in keeping
the checks, which if observed would have prevented
Sempio from gaining access thereto. 18 The Court of
Appeals invoked the ruling in PNB v. National City
Bank of New York 19 that, if a loss, which must be borne
by one or two innocent persons, can be traced to the
neglect or fault of either, such loss would be borne by
the negligent party, even if innocent of intentional
fraud. 20
Samsung Construction now argues that the Court of
Appeals had seriously misapprehended the facts when it
overturned the RTCs finding of forgery. It also contends insure and to distribute the cost among its customers
that the appellate court erred in finding that it had been who use checks makes the drawee an ideal party to
negligent in safekeeping the check, and in applying the spread the risk to insurance. 23
equity principle enunciated in PNB v. National City
Brady, in his treatise The Law of Forged and Altered
Bank of New York. TAcDHS
Checks, elucidates:
Since the trial court and the Court of Appeals arrived at
When a person deposits money in a general
contrary findings on questions of fact, the Court is
account in a bank, against which he has the
obliged to examine the record to draw out the correct
privilege of drawing checks in the ordinary
conclusions. Upon examination of the record, and based
course of business, the relationship between
on the applicable laws and jurisprudence, we reverse the
the bank and the depositor is that of debtor and
Court of Appeals.
creditor. So far as the legal relationship
Section 23 of the Negotiable Instruments Law states: between the two is concerned, the situation is
the same as though the bank had borrowed
When a signature is forged or made without
money from the depositor, agreeing to repay it
the authority of the person whose signature it
on demand, or had bought goods from the
purports to be, it is wholly inoperative, and no
depositor, agreeing to pay for them on demand.
right to retain the instrument, or to give a
The bank owes the depositor money in the
discharge therefor, or to enforce payment
same sense that any debtor owes money to his
thereof against any party thereto, can be
creditor. Added to this, in the case of bank and
acquired through or under such signature,
depositor, there is, of course, the banks
unless the party against whom it is sought to
obligation to pay checks drawn by the
enforce such right is precluded from setting up
depositor in proper form and presented in due
the forgery or want of authority. (Emphasis
course. When the bank receives the deposit, it
supplied)
impliedly agrees to pay only upon the
The general rule is to the effect that a forged signature is depositors order. When the bank pays a check,
wholly inoperative, and payment made through or on which the depositors signature is a forgery,
under such signature is ineffectual or does not it has failed to comply with its contract in this
discharge the instrument. 21 If payment is made, the respect. Therefore, the bank is held liable.
drawee cannot charge it to the drawers account. The
The fact that the forgery is a clever one is
traditional justification for the result is that the drawee is
immaterial. The forged signature may so
in a superior position to detect a forgery because he has
closely resemble the genuine as to defy
the makers signature and is expected to know and
detection by the depositor himself. And yet, if a
compare it. 22 The rule has a healthy cautionary effect
bank pays the check, it is paying out its own
on banks by encouraging care in the comparison of the
money and not the depositors.
signatures against those on the signature cards they have
on file. Moreover, the very opportunity of the drawee to
39
 The forgery may be committed by a trusted
employee or confidential agent. The bank still
must bear the loss. Even in a case where the
forged check was drawn by the depositors
partner, the loss was placed upon the bank. The
case referred to is Robinson v. Security Bank,
Ark., 216 S. W. Rep. 717. In this case, the
plaintiff brought suit against the defendant
bank for money which had been deposited to
the plaintiffs credit and which the bank had
paid out on checks bearing forgeries of the
plaintiffs signature.
xxx xxx xxx
It was held that the bank was liable. It was
further held that the fact that the plaintiff
waited eight or nine months after discovering
the forgery, before notifying the bank, did not,
as a matter of law, constitute a ratification of
the payment, so as to preclude the plaintiff
from holding the bank liable . . .
This rule of liability can be stated briefly in
these words: A bank is bound to know its
depositors signature. The rule is variously
expressed in the many decisions in which the
question has been considered. But they all sum
up to the proposition that a bank must know
the signatures of those whose general deposits
it carries. 24
By no means is the principle rendered obsolete with the
advent of modern commercial transactions.
Contemporary texts still affirm this well-entrenched
standard. Nickles, in his book Negotiable Instruments
and Other Related Commercial Paper wrote, thus:
The deposit contract between a payor bank and
its customer determines who can draw against
the customers account by specifying whose
signature is necessary on checks that are
chargeable against the customers account.
Therefore, a check drawn against the account
of an individual customer that is signed by
someone other than the customer, and without
authority from her, is not properly payable and
is not chargeable to the customers account,
inasmuch as any unauthorized signature on an
instrument is ineffective as the signature of
the person whose name is signed. 25
Under Section 23 of the Negotiable Instruments Law, forgery is a
real or absolute defense by the party whose signature is
forged. 26 On the premise that Jongs signature was
indeed forged, FEBTC is liable for the loss since it
authorized the discharge of the forged check. Such
liability attaches even if the bank exerts due diligence
and care in preventing such faulty discharge. Forgeries
often deceive the eye of the most cautious experts; and
when a bank has been so deceived, it is a harsh rule
which compels it to suffer although no one has suffered
by its being deceived. 27 The forgery may be so near
like the genuine as to defy detection by the depositor
himself, and yet the bank is liable to the depositor if it
pays the check. 28
Thus, the first matter of inquiry is into whether the
check was indeed forged. A document formally
presented is presumed to be genuine until it is proved to
be fraudulent. In a forgery trial, this presumption must
be overcome but this can only be done by convincing
testimony and effective illustrations. 29
In ruling that forgery was not duly proven, the Court of
Appeals held:
40
[There] is ground to doubt the findings of the
trial court sustaining the alleged forgery in
view of the conflicting conclusions made by
handwriting experts from the NBI and the PNP,
both agencies of the government.
xxx xxx xxx
These contradictory findings create doubt on
whether there was indeed a forgery. In the case
of Tenio-Obsequio v. Court of Appeals, 230
SCRA 550, the Supreme Court held that
forgery cannot be presumed; it must be proved
by clear, positive and convincing evidence.
This reasoning is pure sophistry. Any litigator worth his
or her salt would never allow an opponents expert
witness to stand uncontradicted, thus the spectacle of
competing expert witnesses is not unusual. The trier of
fact will have to decide which version to believe, and
explain why or why not such version is more credible
than the other. Reliance therefore cannot be placed
merely on the fact that there are colliding opinions of
two experts, both clothed with the presumption of
official duty, in order to draw a conclusion, especially
one which is extremely crucial. Doing so is tantamount
to a jurisprudential cop-out.
Much is expected from the Court of Appeals as it
occupies the penultimate tier in the judicial hierarchy.
This Court has long deferred to the appellate court as to
its findings of fact in the understanding that it has the
appropriate skill and competence to plough through
the minutiae that scatters the factual field. In failing to
thoroughly evaluate the evidence before it, and relying
instead on presumptions haphazardly drawn, the Court
of Appeals was sadly remiss. Of course, courts, like
humans, are fallible, and not every error deserves a stern
rebuke. Yet, the appellate courts error in this case
warrants special attention, as it is absurd and even
dangerous as a precedent. If this rationale were adopted
as a governing standard by every court in the land,
barely any actionable claim would prosper, defeated as it
would be by the mere invocation of the existence of a
contrary expert opinion.
On the other hand, the RTC did adjudge the testimony of
the NBI expert as more credible than that of the PNP,
and explained its reason behind the conclusion:
After subjecting the evidence of both parties to
a crucible of analysis, the court arrived at the
conclusion that the testimony of the NBI
document examiner is more credible because
the testimony of the PNP Crime Laboratory
Services document examiner reveals that there
are a lot of differences in the questioned
signature as compared to the standard
specimen signature. Furthermore, as testified
to by Ms. Rhoda Flores, NBI expert, the
manner of execution of the standard signatures
used reveals that it is a free rapid continuous
execution or stroke as shown by the tampering
terminal stroke of the signatures whereas the
questioned signature is a hesitating slow drawn
execution stroke. Clearly, the person who
executed the questioned signature was hesitant
when the signature was made. 30
During the testimony of PNP expert Rosario Perez, the
RTC bluntly noted that apparently, there [are]
differences on that questioned signature and the standard
signatures. 31 This Court, in examining the signatures,
makes a similar finding. The PNP expert excused the
noted differences by asserting that they were mere
variations, which are normal deviations found in
writing. 32 Yet the RTC, which had the opportunity to
examine the relevant documents and to personally
observe the expert witness, clearly disbelieved the PNP
expert. The Court similarly finds the testimony of the
PNP expert as unconvincing. During the trial, she was
confronted several times with apparent differences
between strokes in the questioned signature and the
genuine samples. Each time, she would just blandly
assert that these differences were just variations, 33 as
if the mere conjuration of the word would sufficiently
disquiet whatever doubts about the deviations. Such
conclusion, standing alone, would be of little or no value
unless supported by sufficiently cogent reasons which
might amount almost to a demonstration. 34
The most telling difference between the questioned and
genuine signatures examined by the PNP is in the final
upward stroke in the signature, or the point to the short
stroke of the terminal in the capital letter L, as
referred to by the PNP examiner who had marked it in
her comparison chart as point no. 6. To the plain eye,
such upward final stroke consists of a vertical line which
forms a ninety degree (90) angle with the previous
stroke. Of the twenty one (21) other genuine samples
examined by the PNP, at least nine (9) ended with an
upward stroke. 35 However, unlike the questioned
signature, the upward strokes of eight (8) of these
signatures are looped, while the upward stroke of the
seventh 36 forms a severe forty-five degree (45) with
the previous stroke. The difference is glaring, and
indeed, the PNP examiner was confronted with the
inconsistency in point no. 6.
Q: Now, in this questioned document point no.
6, the s stroke is directly upwards.
A: Yes, sir.
Q: Now, can you look at all these standard
signature (sic) were (sic) point 6 is
41
repeated or the last stroke s is
pointing directly upwards?
A: There is none in the standard signature,
sir. 37
Again, the PNP examiner downplayed the uniqueness of
the final stroke in the questioned signature as a mere
variation, 38 the same excuse she proffered for the other
marked differences noted by the Court and the counsel
for petitioner. 39
There is no reason to doubt why the RTC gave credence
to the testimony of the NBI examiner, and not the PNP
experts. The NBI expert, Rhoda Flores, clearly qualifies
as an expert witness. A document examiner for fifteen
years, she had been promoted to the rank of Senior
Document Examiner with the NBI, and had held that
rank for twelve years prior to her testimony. She had
placed among the top five examinees in the Competitive
Seminar in Question Document Examination, conducted
by the NBI Academy, which qualified her as a document
examiner. 40 She had trained with the Royal Hongkong
Police Laboratory and is a member of the International
Association for Identification. 41 As of the time she
testified, she had examined more than fifty to fifty-five
thousand questioned documents, on an average of fifteen
to twenty documents a day. 42 In comparison, PNP
document examiner Perez admitted to having examined
only around five hundred documents as of her
testimony. 43
In analyzing the signatures, NBI Examiner Flores
utilized the scientific comparative examination method
consisting of analysis, recognition, comparison and
evaluation of the writing habits with the use of
instruments such as a magnifying lense, a stereoscopic
microscope, and varied lighting substances. She also
prepared enlarged photographs of the signatures in order
to facilitate the necessary comparisons. 44 She
compared the questioned signature as against ten (10)
other sample signatures of Jong. Five of these signatures
were executed on checks previously issued by Jong,
while the other five contained in business letters Jong
had signed. 45 The NBI found that there were
significant differences in the handwriting characteristics
existing between the questioned and the sample
signatures, as to manner of execution, link/connecting
strokes, proportion characteristics, and other identifying
details. 46
The RTC was sufficiently convinced by the NBI
examiners testimony, and explained her reasons in
its Decisions. While the Court of Appeals disagreed and
upheld the findings of the PNP, it failed to convincingly
demonstrate why such findings were more credible than
those of the NBI expert. As a throwaway, the
assailed Decisionnoted that the PNP, not the NBI, had
the opportunity to examine the specimen signature card
signed by Jong, which was relied upon by the
employees of FEBTC in authenticating Jongs signature.
The distinction is irrelevant in establishing forgery.
Forgery can be established comparing the contested
signatures as against those of any sample signature duly
established as that of the persons whose signature was
forged.
FEBTC lays undue emphasis on the fact that the PNP
examiner did compare the questioned signature against
the bank signature cards. The crucial fact in question is
whether or not the check was forged, not whether the
bank could have detected the forgery. The latter issue
becomes relevant only if there is need to weigh the
comparative negligence between the bank and the party
whose signature was forged.
At the same time, the Court of Appeals failed to assess
the effect of Jongs testimony that the signature on the
check was not his. 47 The assertion may seem self-
serving at first blush, yet it cannot be ignored that Jong
was in the best position to know whether or not the
signature on the check was his. While his claim should
not be taken at face value, any averments he would have
on the matter, if adjudged as truthful, deserve primacy in
consideration. Jongs testimony is supported by the
findings of the NBI examiner. They are also backed by
factual circumstances that support the conclusion that
the assailed check was indeed forged. Judicial notice can
be taken that is highly unusual in practice for a business
establishment to draw a check for close to a million
pesos and make it payable to cash or bearer, and not to
order. Jong immediately reported the forgery upon its
discovery. He filed the appropriate criminal charges
against Sempio, the putative forger. 48
Now for determination is
whether Samsung Construction was precluded from
setting up the defense of forgery under Section 23 of
the Negotiable Instruments Law. The Court of Appeals concluded
that Samsung Construction was negligent, and invoked
the doctrines that where a loss must be borne by one of
two innocent person, can be traced to the neglect or fault
of either, it is reasonable that it would be borne by him,
even if innocent of any intentional fraud, through whose
means it has succeeded 49 or who put into the power of
the third person to perpetuate the wrong. 50 Applying
these rules, the Court of Appeals determined that it was
the negligence of Samsung Construction that allowed
the encashment of the forged check.
In the case at bar, the forgery appears to have
been made possible through the acts of one
Jose Sempio III, an assistant accountant
employed by the
42
plaintiff Samsung[Construction] Co.
Philippines, Inc. who supposedly stole the
blank check and who presumably is
responsible for its encashment through a forged
signature of Jong Kyu Lee. Sempio was
assistant to the Korean accountant who was in
possession of the blank checks and who
through negligence, enabled Sempio to have
access to the same. Had the Korean accountant
been more careful and prudent in keeping the
blank checks Sempio would not have had the
chance to steal a page thereof and to effect the
forgery. Besides, Sempio was an employee
who appears to have had dealings with the
defendant Bank in behalf of the plaintiff
corporation and on the date the check was
encashed, he was there to certify that it was a
genuine check issued to purchase equipment
for the company. 51
We recognize that Section 23 of the Negotiable Instruments
Law bars a party from setting up the defense of forgery if
it is guilty of negligence. 52 Yet, we are unable to
conclude that Samsung Construction was guilty of
negligence in this case. The appellate court failed to
explain precisely how the Korean accountant was
negligent or how more care and prudence on his part
would have prevented the forgery. We cannot sustain
this tar and feathering resorted to without any basis.
The bare fact that the forgery was committed by an
employee of the party whose signature was forged
cannot necessarily imply that such partys negligence
was the cause for the forgery. Employers do not possess
the preternatural gift of cognition as to the evil that may
lurk within the hearts and minds of their employees. The
Courts pronouncement in PCI Bank v. Court of
Appeals 53 applies in this case, to wit:
 [T]he mere fact that the forgery was committed
by a drawer-payors confidential employee or
agent, who by virtue of his position had
unusual facilities for perpetrating the fraud and
imposing the forged paper upon the bank, does
not entitle the bank to shift the loss to the
drawer-payor, in the absence of some
circumstance raising estoppel against the
drawer. 54
Admittedly, the record does not clearly establish what
measures Samsung Construction employed to safeguard
its blank checks. Jong did testify that his accountant,
Kyu, kept the checks inside a safety box, 55 and no
contrary version was presented by FEBTC. However,
such testimony cannot prove that the checks were
indeed kept in a safety box, as Jongs testimony on that
point is hearsay, since Kyu, and not Jong, would have
the personal knowledge as to how the checks were kept.
Still, in the absence of evidence to the contrary, we can
conclude that there was no negligence
on Samsung Constructions part. The presumption
remains that every person takes ordinary care of his
concerns, 56 and that the ordinary course of business
has been followed. 57 Negligence is not presumed, but
must be proven by him who alleges it. 58 While the
complaint was lodged at the instance
of Samsung Construction, the matter it had to prove was
the claim it had alleged whether the check was
forged. It cannot be required as well to prove that it was
not negligent, because the legal presumption remains
that ordinary care was employed.
Thus, it was incumbent upon FEBTC, in defense, to
prove the negative fact that Samsung Construction was
negligent. While the payee, as in this case, may not have
the personal knowledge as to the standard procedures
observed by the drawer, it well has the means of
disputing the presumption of regularity. Proving a
negative fact may be a difficult office, 59 but
necessarily so, as it seeks to overcome a presumption in
law. FEBTC was unable to dispute the presumption of
ordinary care exercised by Samsung Construction, hence
we cannot agree with the Court of Appeals finding of
negligence.
The assailed Decision replicated the extensive efforts
which FEBTC devoted to establish that there was no
negligence on the part of the bank in its acceptance and
payment of the forged check. However, the degree of
diligence exercised by the bank would be irrelevant if
the drawer is not precluded from setting up the defense
of forgery under Section 23 by his own negligence. The
rule of equity enunciated in PNB v. National City Bank
of New York, 60 as relied upon by the Court of Appeals,
deserves careful examination. SEAHcT
The point in issue has sometimes been said to
be that of negligence. The drawee who has
paid upon the forged signature is held to bear
the loss, because he has been negligent in
failing to recognize that the handwriting is not
that of his customer. But it follows obviously
that if the payee, holder, or presenter of the
forged paper has himself been in default, if he
has himself been guilty of a negligence prior to
that of the banker, or if by any act of his own
he has at all contributed to induce the banker's
negligence, then he may lose his right to cast
the loss upon the banker. 61 (Emphasis
supplied)
Quite palpably, the general rule remains that the drawee
who has paid upon the forged signature bears the loss.
The exception to this rule arises only when negligence
43
can be traced on the part of the drawer whose signature
was forged, and the need arises to weigh the
comparative negligence between the drawer and the
drawee to determine who should bear the burden of loss.
The Court finds no basis to conclude
that Samsung Construction was negligent in the
safekeeping of its checks. For one, the settled rule is that
the mere fact that the depositor leaves his check book
lying around does not constitute such negligence as will
free the bank from liability to him, where a clerk of the
depositor or other persons, taking advantage of the
opportunity, abstract some of the check blanks, forges
the depositors signature and collect on the checks from
the bank. 62 And for another, in point of
fact Samsung Construction was not negligent at all since
it reported the forgery almost immediately upon
discovery. 63
It is also worth noting that the forged signatures in
PNB v. National City Bank of New York were not of the
drawer, but of indorsers. The same circumstance
attends PNBv. Court of Appeals, 64 which was also cited
by the Court of Appeals. It is accepted that a forged
signature of the drawer differs in treatment than a forged
signature of the indorser.
The justification for the distinction between
forgery of the signature of the drawer and
forgery of an indorsement is that the drawee is
in a position to verify the drawers signature by
comparison with one in his hands, but has
ordinarily no opportunity to verify an
indorsement. 65
Thus, a drawee bank is generally liable to its
depositor in paying a check which bears either
a forgery of the drawers signature or a forged
indorsement. But the bank may, as a general
 rule, recover back the money which it has paid
on a check bearing a forged indorsement,
whereas it has not this right to the same extent
with reference to a check bearing a forgery of
the drawers signature. 66
The general rule imputing liability on the drawee who
paid out on the forgery holds in this case.
Since FEBTC puts into issue the degree of care it
exercised before paying out on the forged check, we
might as well comment on the banks performance of its
duty. It might be so that the bank complied with its own
internal rules prior to paying out on the questionable
check. Yet, there are several troubling circumstances
that lead us to believe that the bank itself was remiss in
its duty.
The fact that the check was made out in the amount of
nearly one million pesos is unusual enough to require a
higher degree of caution on the part of the bank.
Indeed, FEBTC confirms this through its own internal
procedures. Checks below twenty-five thousand pesos
require only the approval of the teller; those between
twenty-five thousand to one hundred thousand pesos
necessitate the approval of one bank officer; and should
the amount exceed one hundred thousand pesos, the
concurrence of two bank officers is required. 67
In this case, not only did the amount in the check nearly
total one million pesos, it was also payable to cash. That
latter circumstance should have aroused the suspicion of
the bank, as it is not ordinary business practice for a
check for such large amount to be made payable to cash
or to bearer, instead of to the order of a specified
person. 68 Moreover, the check was presented for
payment by one Roberto Gonzaga, who was not
designated as the payee of the check, and who did not
carry with him any written proof that he was authorized
by Samsung Construction to encash the check. Gonzaga,
a stranger to FEBTC, was not even an employee
of SamsungConstruction. 69 These circumstances are
already suspicious if taken independently, much more so
if they are evaluated in concurrence. Given the
shadiness attending Gonzagas presentment of the
check, it was not sufficient for FEBTC to have merely
complied with its internal procedures, but mandatory
that all earnest efforts be undertaken to ensure the
validity of the check, and of the authority of Gonzaga to
collect payment therefor.
According to FEBTC Senior Assistant Cashier Gemma
Velez, the bank tried, but failed, to contact Jong over the
phone to verify the check. 70 She added that calling the
issuer or drawer of the check to verify the same was not
part of the standard procedure of the bank, but an extra
effort. 71 Even assuming that such personal
verification is tantamount to extraordinary diligence, it
cannot be denied that FEBTC still paid out the check
despite the absence of any proof of verification from the
drawer. Instead, the bank seems to have relied heavily
on the say-so of Sempio, who was present at the bank at
the time the check was presented.
FEBTC alleges that Sempio was well-known to the bank
officers, as he had regularly transacted with the bank in
behalf of Samsung Construction. It was even claimed
that everytime FEBTC would contact Jong about
problems with his account, Jong would hand the phone
over to Sempio. 72 However, the only proof of such
allegations is the testimony of Gemma Velez, who also
testified that she did not know Sempio
personally, 73 and had met Sempio for the first time
only on the day the check was encashed. 74 In fact,
Velez had to inquire with the other officers of the bank
44
as to whether Sempio was actually known to the
employees of the bank. 75 Obviously, Velez had no
personal knowledge as to the past relationship
between FEBTC and Sempio, and any averments of her
to that effect should be deemed hearsay evidence.
Interestingly, FEBTC did not present as a witness any
other employee of their Bel-Air branch, including those
who supposedly had transacted with Sempio before.
Even assuming that FEBTC had a standing habit of
dealing with Sempio, acting in behalf
of Samsung Construction, the irregular circumstances
attending the presentment of the forged check should
have put the bank on the highest degree of alert. The
Court recently emphasized that the highest degree of
care and diligence is required of banks.
Banks are engaged in a business impressed
with public interest, and it is their duty to
protect in return their many clients and
depositors who transact business with them.
They have the obligation to treat their clients
account meticulously and with the highest
degree of care, considering the fiduciary nature
of their relationship. The diligence required of
banks, therefore, is more than that of a good
father of a family. 76
Given the circumstances, extraordinary diligence
dictates that FEBTC should have ascertained from Jong
personally that the signature in the questionable check
was his.
Still, even if the bank performed with utmost diligence,
the drawer whose signature was forged may still recover
from the bank as long as he or she is not precluded from
setting up the defense of forgery. After all, Section 23 of
the Negotiable Instruments Law plainly states that no right to
enforce the payment of a check can arise out of a forged
signature. Since the drawer, Samsung Construction, is
not precluded by negligence from setting up the forgery,
the general rule should apply. Consequently, if a bank
pays a forged check, it must be considered as paying out
of its funds and cannot charge the amount so paid to the
account of the depositor. 77 A bank is liable, irrespective
of its good faith, in paying a forged check. 78
WHEREFORE, the Petition is GRANTED. The
Decision of the Court of Appeals dated 28 November
1996 is REVERSED, and the Decision of the Regional
Trial Court of Manila, Branch 9, dated 25 April 1994 is
REINSTATED. Costs against respondent.
SO ORDERED.
FIRST DIVISION
[G.R. No. 146918. May 2, 2006.]
CITIBANK, N.A., petitioner, vs. SPOUSES
LUIS AND
CARMELITA CABAMONGAN AND THEIR
SONS LUIS CABAMONGAN, JR. AND
LITO CABAMONGAN,respondents.
Before the Court is a petition for review on certiorari of
the Decision 1 dated January 26, 2001 and the
Resolution 2 dated July 30, 2001 of the Court of
Appeals (CA) in CA-G.R. CV No. 59033.
The factual background of the case is as follows:
On August 16, 1993, spouses Luis and
Carmelita Cabamongan opened a joint "and/or" foreign
currency time deposit in trust for their sons Luis, Jr. and
Lito at theCitibank, N.A., Makati branch, with
Reference No. 60-22214372, in the amount of
$55,216.69 for a term of 182 days or until February 14,
1994, at 2.5625 per cent interest per annum. 3 Prior to
maturity, or on November 10, 1993, a person claiming
to be Carmelita went to the Makati branch and pre-
terminated the said foreign currency time deposit by
presenting a passport, a Bank of America Versatele
Card, an ATM card and a Mabuhay Credit Card. 4 She
filled up the necessary forms for pre-termination of
deposits with the assistance of Account Officer Yeye
San Pedro. While the transaction was being processed,
she was casually interviewed by San Pedro about her
personal circumstances and investment plans. 5 Since
the said person failed to surrender the original
Certificate of Deposit, she had to execute a notarized
release and waiver document in favor of Citibank,
pursuant to Citibank's internal procedure, before the
money was released to her. 6 The release and waiver
document7 was not notarized on that same day but the
money was nonetheless given to the person
withdrawing. 8 The transaction lasted for about 40
minutes. 9
After said person left, San Pedro realized that she left
behind an identification card. 10 Thus, San Pedro called
up Carmelita's listed address at No. 48 Ranger Street,
Moonwalk Village, Las Pias, Metro Manila on the
same day to have the card picked up. 11 Marites, the
wife of Lito, received San Pedro's call and was stunned
by the news that Carmelita preterminated her foreign
currency time deposit because Carmelita was in the
United States at that
time. 12 The Cabamongan spouses work and reside in
California. Marites made an overseas call to Carmelita
45
to inform her about what
happened. 13 The Cabamongan spouses were shocked at
the news. It seems that sometime between June 10 and
16, 1993, an unidentified person broke in at the couple's
residence at No. 3268 Baldwin Park Boulevard, Baldwin
Park, California. Initially, they reported that only
Carmelita's jewelry box was missing, but later on, they
discovered that other items, such as their passports, bank
deposit certificates, including the subject foreign
currency deposit, and identification cards were also
missing. 14 It was only then that
the Cabamongan spouses realized that their passports
and bank deposit certificates were lost. 15
Through various overseas calls,
the Cabamongan spouses informed Citibank, thru San
Pedro, that Carmelita was in the United States and did
not preterminate their deposit and that the person who
did so was an impostor who could have also been
involved in the break-in of their California residence.
San Pedro told the spouses to submit the necessary
documents to support their claim but Citibank concluded
nonetheless that Carmelita indeed preterminated her
deposit. In a letter dated September 16, 1994,
the Cabamongan spouses, through counsel, made a
formal demand upon Citibank for payment of their
preterminated deposit in the amount of $55,216.69 with
legal interests. 16 In a letter dated November 28,
1994, Citibank, through counsel, refused
the Cabamongan spouses' demand for payment,
asserting that the subject deposit was released to
Carmelita upon proper identification and verification. 17
On January 27, 1995, the Cabamongan spouses filed a
complaint against Citibank before the Regional Trial
Court of Makati for Specific Performance with
Damages, docketed as Civil Case No 95-163 and raffled
to Branch 150 (RTC). 18
In its Answer dated April 20, 1995, Citibank insists that
it was not negligent of its duties since the subject
deposit was released to Carmelita only upon proper
identification and verification. 19
At the pre-trial conference the parties failed to arrive at
an amicable settlement. 20 Thus, trial on the merits
ensued. HDTSCc
For the plaintiffs, the Cabamongan spouses themselves
and Florenda G. Negre, Documents Examiner II of the
Philippine National Police (PNP) Crime Laboratory in
Camp Crame, Quezon City, testified.
The Cabamongan spouses, in essence, testified that
Carmelita could not have preterminated the deposit
account since she was in California at the time of the
incident. 21 Negre testified that an examination of the
questioned signature and the samples of the standard
signatures of Carmelita submitted in the RTC showed a
significant divergence. She concluded that they were not
written by one and the same person. 22
For the respondent, Citibank presented San Pedro and
Cris Cabalatungan, Vice-President and In-Charge of
Security and Management Division. Both San Pedro and
Cabalatungan testified that proper bank procedure was
followed and the deposit was released to Carmelita only
upon proper identification and verification. 23
On July 1, 1997, the RTC rendered a decision in favor of
the Cabamongan spouses and against Citibank, the
dispositive portion of which reads, thus:
WHEREFORE, premises considered,
defendant Citibank, N.A., is hereby ordered to
pay the plaintiffs the following:
1) the principal amount of their Foreign
Currency Deposit (Reference No.
6022214372) amounting to $55,216.69 or its
Phil. Currency equivalent plus interests from
August 16, 1993 until fully paid;
2) Moral damages of P50,000.00;
3) Attorney's fees of P50,000.00; and
4) Cost of suit.
SO ORDERED. 24
The RTC reasoned that:
. . . Citibank, N.A., committed negligence
resulting to the undue suffering of the
plaintiffs. The forgery of the signatures of
plaintiff Carmelita Cabamongan on the
questioned documents has been categorically
established by the handwriting expert. . . .
Defendant bank was clearly remiss in its duty
and obligations to treat plaintiff's account with
the highest degree of care, considering the
nature of their relationship. Banks are under
the obligation to treat the accounts of their
depositors with meticulous care. This is the
reason for their established procedure of
requiring several specimen signatures and
recent picture from potential depositors. For
every transaction, the depositor's signature is
passed upon by personnel to check and
countercheck possible irregularities and
therefore must bear the blame when they fail to
detect the forgery or discrepancy. 25
Despite the favorable decision,
the Cabamongan spouses filed on October 1, 1997 a
motion to partially reconsider the decision by praying
for an increase of the amount of the damages
awarded. 26 Citibank opposed the motion. 27 On
November 19, 1997, the RTC granted the motion for
46
partial reconsideration and amended the dispositive
portion of the decision as follows:
From the foregoing, and considering all the
evidence laid down by the parties, the
dispositive portion of the court's decision dated
July 1, 1997 is hereby amended and/or
modified to read as follows:
WHEREFORE,
defendant Citibank, N.A., is hereby
ordered to pay the plaintiffs the
following:
1) the principal amount of their foreign
currency deposit (Reference No.
6022214372) amounting to $55,216.69
or its Philippine currency equivalent (at
the time of its actual payment or
execution) plus legal interest from Aug.
16, 1993 until fully paid.
2) moral damages in the amount of
P200,000.00; cAISTC
3) exemplary damages in the amount of
P100,000.00;
4) attorney's fees of P100,000.00;
5) litigation expenses of P200,000.00;
6) cost of suit.
SO ORDERED. 28
Dissatisfied, Citibank filed an appeal with the CA,
docketed as CA-G.R. CV No. 59033. 29 On January 26,
2001, the CA rendered a decision sustaining the finding
of the RTC that Citibank was negligent, ratiocinating in
this wise:
In the instant case, it is beyond dispute that the
subject foreign currency deposit was pre-
terminated on 10 November 1993. But
Carmelita Cabamongan, who works as a
nursing aid (sic) at the Sierra View Care Center
in Baldwin Park, California, had shown
through her Certificate of Employment and her
Daily Time Record from the [sic] January to
December 1993 that she was in the United
States at the time of the incident.
Defendant Citibank, N.A., however, insists that
Carmelita was the one who pre-terminated the
deposit despite claims to the contrary. Its basis
for saying so is the fact that the person who
made the transaction on the incident mentioned
presented a valid passport and three (3) other
identification cards. The attending account
officer examined these documents and even
interviewed said person. She was satisfied that
the person presenting the documents was
indeed Carmelita Cabamongan. However, such
conclusion is belied by these following
circumstances.
First, the said person did not present the
certificate of deposit issued to
Carmelita Cabamongan. This would not have
been an insurmountable obstacle as the bank,
in the absence of such certificate, allows the
termination of the deposit for as long as the
depositor executes a notarized release and
waiver document in favor of the bank.
However, this simple procedure was not
followed by the bank, as it terminated the
deposit and actually delivered the money to the
impostor without having the said document
notarized on the flimsy excuse that another
department of the bank was in charge of
notarization. The said procedure was obviously
for the protection of the bank but it deliberately
ignored such precaution. At the very least, the
conduct of the bank amounts to negligence.
Second, in the internal memorandum of
Account Officer Yeye San Pedro regarding the
incident, she reported that upon comparing the
authentic signatures of
Carmelita Cabamongan on file with the bank
with the signatures made by the person
claiming to be Cabamongan on the documents
required for the termination of the deposit, she
noticed that one letter in the latter [sic]
signatures was different from that in the
standard signatures. She requested said person
to sign again and scrutinized the identification
cards presented. Presumably, San Pedro was
satisfied with the second set of signatures
made as she eventually authorized the
termination of the deposit. However, upon
examination of the signatures made during the
incident by the Philippine National Police
(PNP) Crime Laboratory, the said signatures
turned out to be forgeries. As the qualifications
of Document Examiner Florenda Negre were
established and she satisfactorily testified on
her findings during the trial, we have no reason
to doubt the validity of her findings. Again, the
bank's negligence is patent. San Pedro was
able to detect discrepancies in the signatures
but she did not exercise additional precautions
to ascertain the identity of the person she was
dealing with. In fact, the entire transaction took
only 40 minutes to complete despite the
47
anomalous situation. Undoubtedly, the bank
could have done a better job. CDScaT
Third, as the bank had on file pictures of its
depositors, it is inconceivable how bank
employees could have been duped by an
impostor. San Pedro admitted in her testimony
that the woman she dealt with did not resemble
the pictures appearing on the identification
cards presented but San Pedro still went on
with the sensitive transaction. She did not mind
such disturbing anomaly because she was
convinced of the validity of the passport. She
also considered as decisive the fact that the
impostor had a mole on her face in the same
way that the person in the pictures on the
identification cards had a mole. These
explanations do not account for the disparity
between the pictures and the actual appearance
of the impostor. That said person was allowed
to withdraw the money anyway is beyond
belief.
The above circumstances point to the bank's
clear negligence. Bank transactions pass
through a successive [sic] of bank personnel,
whose duty is to check and countercheck
transactions for possible errors. While a bank is
not expected to be infallible, it must bear the
blame for failing to discover mistakes of its
employees despite established bank procedure
involving a battery of personnel designed to
minimize if not eliminate errors. In the instant
case, Yeye San Pedro, the employee who
primarily dealt with the impostor, did not
follow bank procedure when she did not have
the waiver document notarized. She also
openly courted disaster by ignoring
 discrepancies between the actual appearance of
the impostor and the pictures she presented, as
well as the disparities between the signatures
made during the transaction and those on file
with the bank. But even if San Pedro was
negligent, why must the other employees in the
hierarchy of the bank's work flow allow such
thing to pass unnoticed and unrectified? 30
The CA, however, disagreed with the damages awarded
by the RTC. It held that, insofar as the date from which
legal interest of 12% is to run, it should be counted from
September 16, 1994 when extrajudicial demand was
made. As to moral damages, the CA reduced it to
P100,000.00 and deleted the awards of exemplary
damages and litigation expenses. Thus, the dispositive
portion of the CA decision reads:
WHEREFORE, the decision of the trial court
dated 01 July 1997, and its order dated 19
November 1997, are hereby AFFIRMED with
the MODIFICATION that the legal interest for
actual damages awarded in the amount of
$55,216.69 shall run from 16 September 1994;
exemplary damages amounting to P100,000.00
and litigation expenses amounting to
P200,000.00 are deleted; and moral damages is
reduced to P100,000.00.
Costs against defendant.
SO ORDERED. 31
The Cabamongan spouses filed a motion for partial
reconsideration on the matter of the award of damages
in the decision. 32 On July 30, 2001, the CA granted in
part said motion and modified its decision as follows:
1. The actual damages in amount of
$55,216.69, representing the amount of
appellees' foreign currency time deposit shall
earn an interest of 2.5625% for the period 16
August 1993 to 14 February 1994, as stipulated
in the contract;
2. From 16 September 1994 until full payment,
the amount of $55,216.69 shall earn interest at
the legal rate of 12% per annum, and;
3. The award of moral damages is reduced to
P50,000.00. 33
Dissatisfied, both parties filed separate petitions for
review on certiorari with this Court.
The Cabamongan spouses' petition, docketed as G.R.
No. 149234, was denied by the Court per its Resolution
dated October 17, 2001. 34 On the other
hand, Citibank's petition was given due course by the
Court per Resolution dated December 10, 2001 and the
parties were required to submit their respective
memoranda. 35
Citibank poses the following errors for resolution:
1. THE HONORABLE COURT OF APPEALS
GRAVELY ERRED AND GRAVELY
ABUSED ITS DISCRETION IN
UPHOLDING THE LOWER
COURT'S DECISION WHICH IS
NOT BASED ON CLEAR
EVIDENCE BUT ON GRAVE
MISAPPREHENSION OF FACTS.
2. THE HONORABLE COURT OF APPEALS
GRAVELY ERRED IN UPHOLDING
THE DECISION OF THE TRIAL
COURT AWARDING MORAL
DAMAGES WHEN IN FACT THERE
IS NO BASIS IN LAW AND FACT
FOR SAID AWARD. IESAac
48
3. THE HONORABLE COURT OF APPEALS
GRAVELY ERRED IN RULING
THAT THE PRINCIPAL AMOUNT
OF US$55,216.69 SHOULD EARN
INTEREST AT THE RATE OF 12%
PER ANNUM FROM 16
SEPTEMBER 1994 UNTIL FULL
PAYMENT. 36
Anent the first ground, Citibank contends that the CA
erred in affirming the RTC's finding that it was negligent
since the said courts failed to appreciate the extra
diligence of a good father of a family exercised
by Citibank thru San Pedro.
As to the second ground, Citibank argues that
the Cabamongan spouses are not entitled to moral
damages since moral damages can be awarded only in
cases of breach of contract where the bank has acted
willfully, fraudulently or in bad faith. It submits that it
has not been shown in this case that Citibank acted
willfully, fraudulently or in bad faith and mere
negligence, even if the Cabamongan spouses suffered
mental anguish or serious anxiety on account thereof, is
not a ground for awarding moral damages.
On the third ground, Citibank avers that the interest rate
should not be 12% but the stipulated rate of 2.5625%
per annum. It adds that there is no basis to pay the
interest rate of 12% per annum from September 16,
1994 until full payment because as of said date there
was no legal ground yet for the Cabamongan spouses to
demand payment of the principal and it is only after a
final judgment is issued declaring that Citibank is
obliged to return the principal amount of US$55,216.69
when the right to demand payment starts and legal
interest starts to run.
On the other hand, the Cabamongan spouses contend
that Citibank's negligence has been established by
evidence. As to the interest rate, they submit that the
stipulated interest of 2.5635% should apply for the 182-
day contract period from August 16, 1993 to February
14, 1993; thereafter, 12% should apply. They further
contend that the RTC's award of exemplary damages of
P100,000.00 should be maintained. They submit that the
CA erred in treating the award of litigation expenses as
lawyer's fees since they have shown that they incurred
actual expenses in litigating their claim against Citibank.
They also contend that the CA erred in reducing the
award of moral damages in view of the degree of mental
anguish and emotional fears, anxieties and nervousness
suffered by them. 37
Subsequently, Citibank, thru a new counsel, submitted a
Supplemental Memorandum, 38 wherein it posits that,
assuming that it was negligent,
the Cabamonganspouses were guilty of contributory
negligence since they failed to notify Citibank that they
had migrated to the United States and were residents
thereat and after having been victims of a burglary, they
should have immediately assessed their loss and
informed Citibank of the disappearance of the bank
certificate, their passports and other identification cards,
then the fraud would not have been perpetuated and the
losses avoided. It further argues that since
the Cabamongan spouses are guilty of contributory
negligence, the doctrine of last clear chance is
inapplicable.
Citibank's assertion that the Cabamongan spouses are
guilty of contributory negligence and non-application of
the doctrine of last clear chance cannot pass muster
since these contentions were raised for the first time
only in their Supplemental Memorandum. Indeed, the
records show that said contention were neither pleaded
in the petition for review and the memorandum nor
in Citibank's Answer to the complaint or in its
appellant's brief filed with the CA. To consider the
alleged facts and arguments raised belatedly in a
supplemental pleading to herein petition for review at
this very late stage in the proceedings would amount to
trampling on the basic principles of fair play, justice and
due process. 39
The Court has repeatedly emphasized that, since the
banking business is impressed with public interest, of
paramount importance thereto is the trust and
confidence of the public in general. Consequently, the
highest degree of diligence 40 is expected, 41 and high
standards of integrity and performance are even
required, of it. 42 By the nature of its functions, a bank
is "under obligation to treat the accounts of its
depositors with meticulous care, 43 always having in
mind the fiduciary nature of their relationship." 44
In this case, it has been sufficiently shown that the
signatures of Carmelita in the forms for pretermination
of deposits are forgeries. Citibank, with its signature
verification procedure, failed to detect the forgery. Its
negligence consisted in the omission of that degree of
diligence required of banks. The Court has held that 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." 45 Such
principle equally applies here.
Citibank cannot label its negligence as mere mistake or
human error. Banks handle daily transactions involving
millions of pesos. 46 By the very nature of their works
the degree of responsibility, care and trustworthiness
49
expected of their employees and officials is far greater
than those of ordinary clerks and employees. 47 Banks
are expected to exercise the highest degree of diligence
in the selection and supervision of their employees. 48
The Court agrees with the observation of the CA
that Citibank, thru Account Officer San Pedro, openly
courted disaster when despite noticing discrepancies in
the signature and photograph of the person claiming to
be Carmelita and the failure to surrender the original
certificate of time deposit, the pretermination of the
account was allowed. Even the waiver document was
not notarized, a procedure meant to protect the bank. For
not observing the degree of diligence required of
banking institutions, whose business is impressed with
public interest, Citibank is liable for damages. SHECcT
As to the interest rate, Citibank avers that the claim of
the Cabamongan spouses does not constitute a loan or
forbearance of money and therefore, the interest rate of
6%, not 12%, applies.
The Court does not agree.
The time deposit subject matter of herein petition is a
simple loan. The provisions of the New Civil Code on
simple loan govern the contract between a bank and its
depositor. Specifically, Article 1980 thereof
categorically provides that ". . . savings . . . deposits of
money in banks and similar institutions shall be
governed by the provisions concerning simple loan."
Thus, the relationship between a bank and its depositor
is that of a debtor-creditor, the depositor being the
creditor as it lends the bank money, and the bank is the
debtor which agrees to pay the depositor on demand.
The applicable interest rate on the actual damages of
$55,216.69, should be in accordance with the guidelines
set forth in Eastern Shipping Lines, Inc.v. Court of Appeals 49 to wit:
I. When an obligation, regardless of its source, the demand can be established with rate of 12% shall apply. As for the intervening period
i.e., law, contracts, quasi-contracts, delicts or reasonable certainty. Accordingly, between February 15, 1994 to September 15, 1994, the
quasi-delicts is breached, the contravenor can where the demand is established with rate of interest then prevailing granted by Citibank shall
be held liable for damages. The provisions reasonable certainty, the interest shall apply since the time deposit provided for roll over upon
under Title XVIII on "Damages" of the Civil begin to run from the time the claim is maturity of the principal and interest. 51
Code govern in determining the measure of made judicially or extrajudicially (Art.
As to moral damages, in culpa contractual or breach of
recoverable damages. 1169, Civil Code) but when such
contract, as in the case before the Court, moral damages
certainty cannot be so reasonably
II. With regard particularly to an award of are recoverable only if the defendant has acted
established at the time the demand is
interest, in the concept of actual and fraudulently or in bad faith, 52 or is found guilty of
made, the interest shall begin to run
compensatory damages, the rate of interest, as gross negligence amounting to bad faith, or in wanton
only from the date the judgment of the
well as the accrual thereof, is imposed, as disregard of his contractual obligations. 53 The act
court is made (at which time the
follows: of Citibank's employee in allowing the pretermination
quantification of damages may be
of Cabamongan spouses' account despite the noted
1. When the obligation is breached, deemed to have been reasonably
discrepancies in Carmelita's signature and photograph,
and it consists in the payment of a ascertained). The actual base for the
the absence of the original certificate of time deposit and
sum of money, i.e., a loan or computation of legal interest shall, in
the lack of notarized waiver dormant, constitutes gross
forbearance of money, the interest any case, be on the amount finally
negligence amounting to bad faith under Article 2220 of
due should be that which may have adjudged. ScEaAD
the Civil Code.
been stipulated in writing.
3. When the judgment of the court
Furthermore, the interest due shall There is no hard-and-fast rule in the determination of
awarding a sum of money becomes
itself earn legal interest from the what would be a fair amount of moral damages since
final and executory, the rate of legal
time it is judicially demanded. In the each case must be governed by its own peculiar facts.
interest whether the case falls under
absence of stipulation, the rate of The yardstick should be that it is not palpably and
paragraph 1 or paragraph 2, above,
interest shall be 12% per annum to scandalously excessive. 54 The amount of P50,000.00
shall be 12% per annum from such
be computed from default, i.e., from awarded by the CA is reasonable and just. Moreover,
finality until its satisfaction, this
judicial or extrajudicial demand said award is deemed final and executory insofar as
interim period being deemed to be by
under and subject to the provisions respondents are concerned considering that their petition
then an equivalent to a forbearance of
of Article 1169 of the Civil Code. for review had been denied by the Court in its final and
credit. 50
executory Resolution dated October 17, 2001 in G.R.
2. When an obligation, not constituting
Thus, in a loan or forbearance of money, the interest due No. 149234.
a loan or forbearance of money, is
should be that stipulated in writing, and in the absence
breached, an interest on the amount of Finally, Citibank contends that the award of attorney's
thereof, the rate shall be 12% per annum counted from
damages awarded may be imposed at fees should be deleted since such award appears only in
the time of demand. Accordingly, the stipulated interest
the discretion of the court at the rate of the dispositive portion of the decision of the RTC and
rate of 2.562% per annum shall apply for the 182-day
6% per annum. No interest, however, the latter failed to elaborate, explain and justify the
contract period from August 16, 1993 to February 14,
shall be adjudged on unliquidated same.
1994. For the period from the date of extra-judicial
claims or damages except when or until
demand, September 16, 1994, until full payment, the
50
Article 2208 of the New Civil Code enumerates the interest at the rate then petitioner Philippine Savings Bank (PSBank) and its
instances where such may be awarded and, in all cases, prevailing granted Bustos Branch Head, Erlinda O. Santos, to reimburse
it must be reasonable, just and equitable if the same by Citibank; DSIaAE respondent Chowking Food Corporation(Chowking)
were to be granted. Attorney's fees as part of damages the amount corresponding to five (5) illegally
c. From September 16, 1994 until full
are not meant to enrich the winning party at the expense encashed checks. aIEDAC
payment, the principal amount
of the losing litigant. They are not awarded every time a
of $55,216.69 and the interest The Facts
party prevails in a suit because of the policy that no
earned as of September 15, Between March 15, 1989 and August 10, 1989,
premium should be placed on the right to
1994, shall earn interest at the Joe Kuan Food Corporation issued in favor
litigate. 55 The award of attorney's fees is the exception
legal rate of 12% per annum; of Chowking five (5) PSBank checks with the
rather than the general rule. As such, it is necessary for
the court to make findings of facts and law that would 2. The award of attorney's fees is DELETED. following numbers, dates and denominations:
bring the case within the exception and justify the grant Check No. Amount Date
of such award. The matter of attorney's fees cannot be No pronouncement as to costs.
mentioned only in the dispositive portion of the SO ORDERED. 017069 P44,120.00 15 March 1989
decision. 56 They must be clearly explained and 053528 P135,052.87 09 May 1989
justified by the trial court in the body of its decision. 074602 P160,138.12 08 August 1989
Consequently, the award of attorney's fees should be 074631 P159,634.13 08 August 1989
deleted. 017096 P60,036.74 10 August 1989 2
WHEREFORE, the instant petition is PARTIALLY THIRD DIVISION The total amount of the subject checks reached
GRANTED. The assailed Decision and Resolution are P556,981.86.
AFFIRMED with MODIFICATIONS, as follows: [G.R. No. 177526. July 4, 2008.] On the respective due dates of each
1. The interest shall be computed as follows: check, Chowking's acting accounting manager, Rino T.
PHILIPPINE SAVINGS BANK, petitioner, v Manzano, endorsed and encashed said checks with the
a. The actual damages in principal
s. CHOWKING FOOD CORPORATION, res Bustos branch of respondent PSBank. 3
amount of $55,216.69,
pondent.
representing the amount of All the five checks were honored by defendant
foreign currency time deposit Santos, even with only the endorsement of Manzano
shall earn interest at the IT is the peculiar quality of a fool to perceive approving them. The signatures of the other authorized
stipulated rate of 2.5625% for the fault of others and to forget his own. Ang isang officers of respondent corporation were absent in the
the period August 16, 1993 to kakatuwang katangian ng isang hangal ay punahin five (5) checks, contrary to usual banking
February 14, 1994; ang kamalian ng iba at kalimutan naman ang sa practice. 4 Unexpectedly, Manzano absconded with
kanya. and misappropriated the check proceeds. 5
b. From February 15, 1994 to
September 15, 1994, the This is a petition for review on certiorari of When Chowking found out Manzano's scheme,
principal amount of $55,216.69 the Decision 1 of the Court of Appeals (CA) it demanded reimbursement from PSBank. 6 When
and the interest earned as of reinstating the Decision of the Regional Trial Court PSBank refused to pay, Chowking filed a
February 14, 1994 shall earn (RTC), Manila, Branch 5. The RTC ordered complaint 7 for a sum of money with damages before
51
the RTC. Likewise impleaded were PSBank's
president, Antonio S. Abacan, and Bustos branch head,
Santos. 8
Both PSBank and Santos filed cross claims and
third party complaints against Manzano. 9 Despite all
diligent efforts, summonses were not served upon
third party defendant Manzano. Santos did not take
any further action and her third party complaint was
archived. 10 CIAHaT
Meanwhile, petitioner caused the service of its
summons on the cross-claim and third party
complaints through publication. On its subsequent
motion, Manzano was declared in default for failure to
file a responsive pleading. 11
Respondent filed a motion for summary
judgment. Petitioner opposed the motion. On February
1, 1995, the trial court denied the motion via an order
of even date. 12
In its Answer, petitioner did not controvert the
foregoing facts, but denied liability to respondent for
the encashed checks. 13 Petitioner bank maintained it
exercised due diligence in the supervision of all its
employees. It even dismissed defendant Santos after
she was found guilty of negligence in the performance
of her duties. 14
Defendant Santos, on the other hand, denied
that she had been negligent in her job. She averred that
she merely followed the bank's practice of honoring
respondent's checks even if accompanied only by
Manzano's endorsement. 15
Defendant Abacan likewise denied any liability
to respondent. He alleged that, as president and officer
of petitioner bank, he played no role in the
transactions complained of. 16 Thus, respondent has With respect to the cross claim of
no cause of action against him. defendant PSBank against Erlinda Santos and
its third-party complaint against Rino T.
Petitioner, Santos and Abacan were unanimous
Manzano, both Santos and Manzano are hereby
in asserting that respondent is estopped from claiming
ordered to jointly and severally, reimburse
reimbursement and damages since it was negligent in
defendant PSBank whatever amount the latter
allowing Manzano to take hold, endorse, and encash
shall be constrained to pay plaintiff in
its checks. Petitioner pointed out that the proximate
connection with this case.aHADTC
cause of respondent's loss was its own negligence. 17
SO ORDERED. 18
RTC Disposition
Aggrieved, petitioner filed a motion for
On August 24, 1998, the RTC rendered
reconsideration. Through an Order dated January 11,
judgment in favor of respondent, the dispositive
1999, the RTC reversed its earlier ruling and held that
portion of which reads:
it was respondent's own negligence that was the
WHEREFORE, premises considered, proximate cause of the loss. The fallo of the amended
judgment is hereby rendered in favor of RTC decision now reads:
plaintiff and as against
In light of the foregoing grounds and
defendant Philippine Savings Bank and Erlinda
observations, the Decision of August 24, 1998,
O. Santos ordering the said defendants to pay
by this Court is accordingly modified as
plaintiff, jointly and severally: HTacDS
follows:
1. The amount of P556,981.86 plus
1. Ordering the dismissal of the
interest at the rate of 12% per
complaint by the
annum from August 15, 1989
plaintiff Chowking Food Corpor
until said amount shall have
ation against the
been paid;
defendants, Philippine Savings
2. 20% of the total amount due plaintiff Bank (PSBank) and Erlinda
as attorney's fees; Santos for lack of basis in fact
and law;
3. The sum of P100,000.00 as
exemplary damages; 2. Ordering the third party defendant,
Regino or Rino T. Manzano to
4. The sum of P1,000,000.00 for
pay the
plaintiff's unrealized profits.
plaintiff Chowking Food Corpor
The complaint with respect to ation, the following:
defendant Antonio Abacan, Jr. as well as his
a. To reimburse the plaintiff the
counterclaim and cross claim are hereby
amount of P556,981.86
DISMISSED.
52
 plus interest at the rate
of 12% per annum from
August 15, 1989, until
said amount has been
fully satisfied;
Santos should bear the loss. Said the appellate court:
b. To pay an attorney's fee
equivalent to 20% of the
total amount due the
plaintiff;
c. To pay an amount of
P100,000.00 the plaintiff
for actual and
compensatory damages,
plus the costs of this
suit.
SO ORDERED. 19
Dissatisfied with the modified ruling of the
RTC, respondent appealed to the CA.
CA Disposition
In its appeal,
respondent Chowking contended, inter alia, that the
RTC erred in ruling that the proximate cause of the
loss was its own negligence; and that its claim was
barred by estoppel. IacHAE
On January 31, 2007, the CA granted the
appeal, disposing as follows:
WHEREFORE, the instant appeal is
GRANTED. The order appealed from is
hereby SET ASIDE and the 24 August 1998
decision is consequently REINSTATED with
modification that the awards of attorney's fees,
exemplary damages, and alleged
P1,000,000.00 unrealized profits of the
appellant are DELETED.
IT IS SO ORDERED. 20
The CA held that both petitioner PSBank and
It is admitted that PSB cashed, over the
counter, the checks of the appellant indorsed
by Manzano alone. Since there is no more
dispute on the negligent act of Santos in
honoring the appellant's checks, over the
counter, despite the proper indorsements, the
categorical finding of negligence against her,
remaining unrebutted, is deemed established.
This in effect warrants a finding that Santos is
liable for damages to the appellant. The lower
court therefore erred in dismissing the
complaint against her. 21
Further, the CA held that:
Contrary to PSB's contention that it
should not be held liable because it neither
consented to nor had knowledge of
Santos' (sic) violations, such liability of Santos
is solidary with PSB pursuant to Article 2176
in relation to Article 2180 of the Civil Code
which states:
"Art. 2176. Whoever by act or
omission causes damage to another,
there being fault or negligence, is
obliged to pay for the damage done. . . .
Art. 2180. The obligation imposed by
Art. 2176 is demandable not only for
one's own acts or omissions but also for
those of persons for whom one is
responsible.
53
xxx xxx xxx
Employers shall be liable for the
damage caused by their employees and
household helpers acting within the
scope of their assigned tasks even
though the former are not engaged in
any business or activity. IaSAHC
xxx xxx xxx
The responsibility treated of in this
article shall cease when the persons
herein mentioned prove that they
observed all the diligence of a good
father of a family to prevent damage."
. . . However, with banks like PSB, the
degree of diligence required is more than that
of a good father of a family considering that
the business of banking is imbued with public
interest due to the nature of its functions.
Highest degree of diligence is needed which
PSB, in this case, failed to observe.
. . . Its argument that it should no be
held responsible for the negligent acts of
Santos because those were independent
acts . . . perpetrated without its knowledge and
consent is without basis in fact and in law.
Assuming that PSB did not err in hiring Santos
for her position, its lack of supervision over her
made it solidarily liable for the unauthorized
encashment of the checks involved. In the
supervision of employees, the employer must
formulate standard operating procedures,
monitor their implementation and impose
disciplinary measures for the breach thereof.
The appellee, in this case, presented no
evidence that it formulated rules/guidelines for
 the proper performance of functions of its
employees and that it strictly implemented and
monitored compliance therewith. . . . 22
The CA also disagreed with petitioner's
contention that respondent's own negligence was the
proximate cause of its loss. The CA opined that even
assuming that respondent was also negligent in
allowing Manzano to encash its checks, petitioner had
the last clear chance to avert injury and loss to
respondent. This could have been done if petitioner,
through Santos, faithfully and carefully observed its
encashment rules and procedures.
The CA ratiocinated:
. . . Had Santos not been remiss in
The doctrine of equitable estoppel or
verifying the indorsements of the checks
estoppel in pais finds no application in the present
involved, she would not have cashed the same
case. The equitable doctrine of estoppel was explained
because Manzano, whose only signature
by this Court in Caltex (Philippines), Inc.v. Court of Appeals: 24
appears therein, is apparently not an authorized
signatory of the appellant . . . had every means
to determine the validity of those indorsements
but for one reason or another she was
neglectful of her duty . . . as admitted by PSB,
such over the counter encashments are not
even sanctioned by its policies but Santos
simply ignored the same. It appears clear that
Santos let the opportunity slip by when an
exercise of ordinary prudence expected
of bank employees would have sufficed to
prevent the loss. 23 AaEcDS
Issues
Petitioner has resorted to the present recourse
and assigns to the CA the following errors:
I in Maneclangv. Baun: 26
THE HONORABLE COURT OF
APPEALS ERRED IN NOT RULING THAT
RESPONDENT WAS ESTOPPED FROM
ASSERTING ITS CLAIM AGAINST
PETITIONER.
II
THE HONORABLE COURT OF
APPEALS ERRED WHEN IT DID NOT
RULE THAT RESPONDENT'S
NEGLIGENCE WAS THE PROXIMATE
CAUSE OF ITS OWN LOSS. (Underscoring
supplied) aTICAc
Our Ruling
Under the doctrine of estoppel, an
admission or representation is rendered
conclusive upon the person making it, and
cannot be denied or disproved as against the
person relying thereon. A party may not go
back on his own acts and representations to the
prejudice of the other party who relied upon
them. In the law of evidence, whenever a party
has, by his own declaration, act, or omission,
intentionally and deliberately led another to
believe a particular thing true, to act upon such
belief, he cannot, in any litigation arising out
of such declaration, act, or omission, be
permitted to falsify it. 25
The principle received further elaboration
54
In estoppel by pais, as related to the
party sought to be estopped, it is necessary that
there be a concurrence of the following
requisites: (a) conduct amounting to false
representation or concealment of material facts
or at least calculated to convey the impression
that the facts are otherwise than, and
inconsistent with, those which the party
subsequently attempts to assert; (b) intent, or at
least expectation that this conduct shall be
acted upon, or at least influenced by the other
party; and (c) knowledge, actual or
constructive of the actual facts. 27
Estoppel may vary somewhat in definition, but
all authorities agree that a party invoking the doctrine
must have been misled to one's prejudice. That is the
final and, in reality, most important of the elements of
equitable estoppel. 28 It is this element that is lacking
here.
We agree with the CA that Chowking did not
make any false representation or concealment of
material facts in relation to the encashments of the
previous checks. As adverted to earlier, respondent
may have allowed Manzano to previously encash its
checks, but it has always been accompanied with the
endorsements of the other authorized signatories.
Respondent did not allow petitioner to have its checks
encashed without the signature of all of its authorized
signatories.
The CA pointed out:
We find at the back of those checks,
whereon indorsement usually appears, the
signature of Manzano together with other
signature/signatures though mostly are
illegible. It appears then that, assuming the
 appellant impliedly tolerated the act of
Manzano in indorsing the checks, it did not
allow Manzano "alone" to indorse its checks as
what actually happened in this case because his
previous indorsements were coupled with
other indorsements of the appellant's
signatories. There is, therefore, no sufficient
evidence to sustain PSB's submission. On this
score alone, the defense of estoppel must
fail. 29 (Underscoring and emphasis
supplied) DSETcC
Neither can estoppel be appreciated in relation
to petitioner itself. In Kalalov. Luz, 30 the Court
enumerated the elements of estoppel in this wise:
. . . As related to the party claiming the
estoppel, the essential elements are (1) lack of
knowledge and of the means of knowledge of
the truth as the facts in question; (2) reliance,
in good faith, upon the conduct and statements
of the party to be estopped; (3) action or
inaction based thereon of such character as to
change the position or status of the party
claiming the estoppel, to his injury, detriment
or prejudice. 31
Here, the first two elements are wanting.
Petitioner has knowledge of the truth and the means to
it as to the proper endorsements necessary in
encashing respondent's checks. Respondent has an
account with petitioner bank and, as such, is privy to
the proper signatories to endorse respondent's checks.
Neither can petitioner claim good faith.
It is elementary that estoppel cannot be
sustained in doubtful inference. Absent the conclusive
proof that its essential elements are present, estoppel
must fail. Because estoppel, when misapplied,
becomes a most effective weapon to accomplish an
injustice, inasmuch as it shuts a man's mouth from
speaking the truth. 32
Petitioner failed to prove that it has
observed the due diligence required of banks under
the law. Contrary to petitioner's view, its negligence is
the proximate cause of respondent's loss.
It cannot be over emphasized that the banking
business is impressed with public interest. Of
paramount importance is the trust and confidence of
the public in general in the banking industry.
Consequently, the diligence required of banks is more
Q: Did he ever tell you that one of your
than that of a Roman pater familias or a good father of
a family. 33 The highest degree of diligence is
expected. 34 CcADHI
In its declaration of policy, the General Banking Law of
200035 requires of banks the highest standards of
integrity and performance. Needless to say, a bank is
"under obligation to treat the accounts of its depositors
with meticulous care." 36 The fiduciary nature of the
relationship between the bank and the depositors must
always be of paramount concern. 37
Petitioner, through Santos, was clearly
negligent when it honored respondent's checks with
the lone endorsement of Manzano. In the similar case
of PhilippineBankof Commercev. Court of Appeals, 38 an
employee of Rommel's Marketing Corporation (RMC)
was able to illegally deposit in a different account the
checks of thecorporation. This Court found that it was
the bank teller's failure to exercise extraordinary
diligence to validate the deposit slips that caused the
crime to be perpetrated.
The Court held thus:
55
Negligence here lies not only on the
part of Ms. Mabayad but also on the part of
the bank itself in its lackadaisical selection and
supervision of Ms. Mabayad. This was
exemplified in the testimony of Mr. Romeo
Bonifacio, then Manager of the Pasig Branch
of the petitioner bank and now its Vice-
President, to the effect that, while he ordered
the investigation of the incident, he never came
to know that blank deposit slips were validated
in total disregard of the bank's validation
procedures, viz.:
cashiers affixed the stamp mark of
the bank on the deposit slips and they
validated the same with the machine,
the fact that those deposit slips were
unfilled up, is there any report similar
to that?
A: No, it was not the cashier but the teller.
Q: The teller validated the blank deposit slip?
A: No it was not reported.
Q: You did not know that any one in
the bank tellers or cashiers validated
the blank deposit slip?
A: I am not aware of that.
Q: It is only now that you are aware of that?
A: Yes, Sir. TcDaSI
xxx xxx xxx
It was this negligence . . . coupled by
the negligence of the petitioner bank in the
selection and supervision of its bank teller,
 which was the proximate cause of the loss
suffered by private respondent, and not the
latter's act of entrusting cash to a dishonest
employee, as insisted by the petitioners. 39
Proximate cause is determined by the facts of
the case. It is that cause which, in natural and
continuous sequence, unbroken by any efficient
intervening cause, produces the injury, and without
which the result would not have occurred. 40
Measured by the foregoing yardstick, the
proximate cause of the loss is not respondent's alleged
negligence in allowing Manzano to take hold and
encash respondent's checks. The proximate cause is
petitioner's own negligence in the supervision of its
employees when it overlooked the irregular practice of
encashing checks even without the requisite
endorsements.
In Bankof thePhilippineIslandsv. Casa Montessori
Internationale,
41 this Court similarly held:
For allowing payment on the checks to
a wrongful and fictitious payee, BPI the
drawee bank becomes liable to its
depositor-drawer. Since the encashingbank is
one of its branches, BPI can easily go after it
and hold it liable for reimbursement. . . . In
both law and equity, when one of two innocent
persons "must suffer by the wrongful act of a
third person, the loss must be borne by the one
whose negligence was the proximate cause of
the loss or who put it into the power of the
third person to perpetrate the wrong." 42
Further, the Court ruled:
Pursuant to its prime duty to ascertain
well the genuineness of the signatures of its
client-depositors on checks being encashed,
BPI is "expected to use reasonable business
prudence." In the performance of that
obligation, it is bound by its internal banking
rules and regulations that form part of the
contract it enters into with its
depositors. DEHaTC
Unfortunately, it failed in that regard. . .
. Without exercising the required prudence on
its part, BPI accepted and encashed the eight
checks presented to it. As a result, it
proximately contributed to the fraud and
should be held primarily liable for the
"negligence of its officers or agents when
acting within the course and scope of their
employment." It must bear the loss. 43
WHEREFORE, the petition is DENIED for
lack of merit.
SO ORDERED.
FIRST DIVISION
[G.R. No. 150228. July 30, 2009.]
BANK OF AMERICA NT & SA, petitioner,
vs. PHILIPPINE RACING CLUB, responden
t.
This is a petition for review on certiorari under
Rule 45 of the Rules of Court from the
Decision 1 promulgated on July 16, 2001 by the
56
former Second Division ofthe Court of Appeals (CA),
in CA-G.R. CV No.
45371 entitled "Philippine Racing Club,
Inc. v. Bank of America NT & SA", affirming the
Decision 2 dated March 17, 1994 ofthe Regional Trial
Court (RTC) of Makati, Branch 135 in Civil Case No.
89-5650, in favor of the respondent. Likewise, the
present petition assails the Resolution 3promulgated
on September 28, 2001, denying the Motion for
Reconsideration of the CA Decision.
The facts of this case as narrated in the assailed
CA Decision are as follows:
Plaintiff-appellee PRCI is a domestic
corporation which maintains several accounts
with different banks in the Metro Manila area.
Among the accounts maintained was Current
Account No. 58891-012 with defendant-
appellant BA (Paseo de Roxas Branch). The
authorized joint signatories with respect to said
Current Account were plaintiff-appellee's
President (Antonia Reyes) and Vice President
for Finance (Gregorio Reyes).
On or about the 2nd week of December 1988,
the President and Vice President of plaintiff-
appellee corporation were scheduled to go
out of the country in connection with the
corporation's business. In order not to disrupt
operations in their absence, they pre-signed
several checks relating to Current Account No.
58891-012. The intention was to insure
continuity of plaintiff-appellee's operations by
making available cash/money especially to
settle obligations that might become due.
These checks were entrusted to the accountant
with instruction to make use of the same as the
need arose. The internal arrangement was, in
the event there was need to make use of the
checks, the accountant would prepare the
corresponding voucher and thereafter complete
the entries on the pre-signed checks.
It turned out that on December 16, 1988, a
John Doe presented to defendant-
appellant bank for encashment a
couple of plaintiff-appellee corporation's
checks (Nos. 401116 and 401117) with the
indicated value of P110,000.00 each. It is
admitted that these 2 checks were among those
presigned by plaintiff-appellee corporation's
authorized signatories.
The two (2) checks had similar entries with
similar infirmities and irregularities. On the
space where the name of the payee should be
indicated (Pay To The Order Of) the following
2-line entries were instead typewritten: on the
upper line was the word "CASH" while the
lower line had the following typewritten
words, viz.: "ONE HUNDRED TEN
THOUSAND PESOS ONLY". Despite the
highly irregular entries on the face of the
checks, defendant-appellant bank, without as
much as verifying and/or confirming the
legitimacy of the checks considering the
substantial amount involved and the obvious
infirmity/defect of the checks on their faces,
encashed said checks. A verification process,
even by was of a telephone call to PRCI office,
would have taken less than ten (10) minutes.
But this was not done by BA. Investigation
conducted by plaintiff-appellee corporation
yielded the fact that there was no transaction
involving PRCI that call for the
payment of P220,000.00 to anyone. The checks
appeared to have come into the hands of an Petitioner now comes before this Court arguing
employee of PRCI (one Clarita Mesina who that:
was subsequently criminally charged for I. The Court of Appeals gravely erred in
qualified theft) who eventually completed holding that the proximate
without authority the entries on the pre-signed
cause of respondent's loss was
checks. PRCI's demand for defendant-
petitioner's encashment of the checks.
appellant to pay fell on deaf ears. Hence, the
complaint. 4 A. The Court of Appeals gravely erred
in holding that petitioner was
After due proceedings, the trial court rendered liable for the amount of the
a Decision in favor of respondent, the dispositive checks despite the fact that
portion of which reads: petitioner was merely fulfilling
PREMISES CONSIDERED, judgment is its obligation under law and
hereby rendered in favor of plaintiff and contract.
against the defendant, and the latter is ordered
B. The Court of Appeals gravely erred
to pay plaintiff:
in holding that petitioner had a
(1) The sum of Two Hundred Twenty duty to verify the encashment,
Thousand (P220,000.00) Pesos, with legal despite the absence of any
interest to be computed from date of the obligation to do so. IaEHSD
filing of the herein complaint;
C. The Court of Appeals gravely erred
(2) The sum of Twenty Thousand (P20,000.00) in not applying Section
Pesos by way of attorney's fees; 14 of the Negotiable
Instruments Law, despite its
(3) The sum of Ten Thousand (P10,000.00)
clear applicability to this case;
Pesos for litigation expenses, and
II. The Court of Appeals gravely erred in not
(4) To pay the costs of suit.
holding that the proximate
SO ORDERED. 5 IaDcTC cause of respondent's loss was its own
grossly negligent practice of pre-
Petitioner appealed the aforesaid trial court signing checks without payees and
Decision to the CA which, however, affirmed said amounts and delivering these pre-
decision in toto in its July 16, 2001 Decision. signed checks to its employees (other
Petitioner's Motion for Reconsideration of the CA than their signatories).
Decision was subsequently denied on September 28,
2001. III. The Court of Appeals gravely erred in
affirming the trial court's
award of attorney's fees despite the
57
 absence of any applicable ground under
Article 2208 of the Civil
Code. TCHcAE
IV. The Court of Appeals gravely erred in not
awarding attorney's fees, moral and
exemplary damages, and costs of suit in
favor of petitioner, who clearly
deserves them. 6
From the discussions of both parties in their
pleadings, the key issue to be resolved in the present
case is whether the proximate cause of the wrongful
encashment of the checks in question was due to (a)
petitioner's failure to make a verification regarding the
said checks with the respondent in view of the
misplacement of entries on the face of the checks or
(b) the practice of the respondent of pre-signing blank
checks and leaving the same with its employees.
Petitioner insists that it merely fulfilled its
obligation under law and contract when it encashed
the aforesaid checks. Invoking Sections 126 7 and
185 8 of the Negotiable Instruments Law (NIL),
petitioner claims that its duty as a drawee bank to a
drawer-client maintaining a checking account with it is
to pay orders for checks bearing the drawer-client's
genuine signatures. The genuine signatures of the
client's duly authorized signatories affixed on the
checks signify the order for payment. Thus, pursuant
to the said obligation, the drawee bank has the duty to
determine whether the signatures appearing on the
check are the drawer-client's or its duly authorized
signatories. If the signatures are genuine, the bank has
the unavoidable legal and contractual duty to pay. If
the signatures are forged and falsified, the
drawee bank has the corollary, but equally
unavoidable legal and contractual, duty not to
pay. 9 HAICET
Furthermore, petitioner maintains that there
exists a duty on the drawee bank to inquire from the
drawer before encashing a check only when the check
bears a material alteration. A material alteration is
defined in Section 125 of the NIL to be one which
changes the date, the sum payable, the time or
place of payment, the number or relations of the
parties, the currency in which payment is to be made
or one which adds a place of payment where no
place of payment is specified, or any other change or
addition which alters the effect of the instrument in
any respect. With respect to the checks at issue,
petitioner points out that they do not contain any
material alteration. 10 This is a fact which was
affirmed by the trial court itself. 11
There is no dispute that the signatures
appearing on the subject checks were genuine
signatures of the respondent's authorized joint
signatories; namely, Antonia Reyes and Gregorio
Reyes who were respondent's President and Vice-
President for Finance, respectively. Both pre-signed
the said checks since they were both scheduled to go
abroad and it was apparently their practice to leave
with the company accountant checks signed in black
to answer for company obligations that might fall due
during the signatories' absence. It is likewise admitted
that neither of the subject checks contains any material
alteration or erasure. HCacTI
However, on the blank space of each check
reserved for the payee, the following typewritten
words appear: "ONE HUNDRED TEN THOUSAND
PESOS ONLY". Above the same is the typewritten
word, "CASH". On the blank reserved for the amount,
the same amount of One Hundred Ten Thousand Pesos
was indicated with the use of a check writer. The
presence of these irregularities in each check should
58
have alerted the petitioner to be cautious before
proceeding to encash them which it did not do.
It is well-settled that banks are engaged in a
business impressed with public interest, and it is their
duty to protect in return their many clients and
depositors who transact business with them. They have
the obligation to treat their client's account
meticulously and with the highest degree of care,
considering the fiduciary nature of their relationship.
The diligence required of banks, therefore, is more
than that of a good father of a family. 12 DcaCSE
Petitioner asserts that it was not duty-bound to
verify with the respondent since the amount below the
typewritten word "CASH", expressed in words, is the
very same amount indicated in figures by means of a
check writer on the amount portion of the check. The
amount stated in words is, therefore, a mere
reiterationof the amount stated in figures. Petitioner
emphasizes that a reiteration of the amount in words is
merely a repetition and that a repetition is not an
alteration which if present and material would have
enjoined it to commence verification with
respondent. 13
We do not agree with petitioner's myopic view
and carefully crafted defense. Although not in the
strict sense "material alterations", the
misplacement of the typewritten entries for the payee
and the amount on the same blank and the
repetition of the amount using a check writer were
glaringly obvious irregularities on the face of the
check. Clearly, someone made a mistake in filling up
the checks and the repetition of the entries was
possibly an attempt to rectify the mistake. Also, if the
check had been filled up by the person who
customarily accomplishes the checks of respondent, it
should have occurred to petitioner's employees that it
would be unlikely such mistakes would be made. All
these circumstances should have alerted the bank to
the possibility that the holder or the person who is
attempting to encash the checks did not have proper
title to the checks or did not have authority to fill up
and encash the same. As noted by the CA, petitioner
could have made a simple phone call to its client to
clarify the irregularities and the loss to respondent due
to the encashment of the stolen checks would have
been prevented.
In the case at bar, extraordinary diligence
demands that petitioner should have ascertained from
respondent the authenticity of the subject checks or the
accuracy of the entries therein not only because of the
presence of highly irregular entries on the face of the
checks but also of the decidedly unusual
circumstances surrounding their encashment.
Respondent's witness testified that for checks in
amounts greater than Twenty Thousand Pesos
(P20,000.00) it is the company's practice to ensure that
the payee is indicated by name in the check. 14 This
was not rebutted by petitioner. Indeed, it is highly
uncommon for a corporation to make out checks
payable to "CASH" for substantial amounts such as in
this case. If each irregular circumstance in this case
were taken singly or isolated, the bank's employees
might have been justified in ignoring them. However,
the confluence of the irregularities on the face of the
checks and circumstances that depart from the usual
banking practice of respondent should have put
petitioner's employees on guard that the checks were
possibly not issued by the respondent in due
courseof its business. Petitioner's subtle sophistry
cannot exculpate it from behavior that fell extremely
short of the highest degree of care and diligence
required of it as a banking institution. DcHaET
Indeed, taking this with the
testimony of petitioner's operations manager that in
case of an irregularity on the face of the check (such
as when blanks were not properly filled out)
the bank may or may not call the client depending on
how busy the bank is on a particular day, 15 we are
even more convinced that petitioner's safeguards to
protect clients from check fraud are arbitrary and
subjective. Every client should be treated equally by a
banking institution regardless of the amountof his
deposits and each client has the right to expect that
every centavo he entrusts to a bank would be handled
with the same degree of care as the accounts ofother
clients. Perforce, we find that petitioner plainly failed
to adhere to the high standard of diligence
expected of it as a banking institution.
In defense of its cashier/teller's questionable
action, petitioner insists that pursuant to Sections
14 16 and 16 17 of the NIL, it could validly presume,
upon presentation of the checks, that the party who
filled up the blanks had authority and that a valid and
intentional delivery to the party presenting the checks
had taken place. Thus, in petitioner's view, the sole
blame for this debacle should be shifted to respondent
for having its signatories pre-sign and deliver the
subject checks. 18Petitioner argues that there was
indeed delivery in this case because, following
American jurisprudence, the gross
negligence of respondent's accountant in safekeeping
the subject checks which resulted in their theft should
be treated as a voluntary delivery by the maker who is
estopped from claiming non-delivery of the
instrument. 19 EDcIAC
Petitioner's contention would have been correct
if the subject checks were correctly and properly filled
out by the thief and presented to the bank in good
59
order. In that instance, there would be nothing to give
notice to the bank of any infirmity in the title of the
holder of the checks and it could validly presume that
there was proper delivery to the holder.
The bank could not be faulted if it encashed the checks
under those circumstances. However, the undisputed
facts plainly show that there were circumstances that
should have alerted the bank to the likelihood that the
checks were not properly delivered to the person who
encashed the same. In all, we see no reason to depart
from the finding in the assailed CA Decision that the
subject checks are properly characterized as
incomplete and undelivered instruments thus making
Section 15 20 of the NIL applicable in this case.
However, we do agree with petitioner that
respondent's officers' practice of pre-signing of blank
checks should be deemed seriously negligent behavior
and a highly risky means of purportedly ensuring the
efficient operation of businesses. It should have
occurred to respondent's officers and managers that the
pre-signed blank checks could fall into the wrong
hands as they did in this case where the said checks
were stolen from the company accountant to whom the
checks were entrusted.
Nevertheless, even if we assume that both
parties were guilty of negligent acts that led to the
loss, petitioner will still emerge as the party foremost
liable in this case. In instances where both parties are
at fault, this Court has consistently applied the
doctrine of last clear chance in order to assign
liability. cAHIST
In WestmontBankv. Ong, 21 we ruled:
. . . [I]t is petitioner [bank] which had the last
clear chance to stop the fraudulent
encashment of the subject checks had it
 exercised due diligence and followed the
proper and regular banking procedures in
clearing checks. As we had earlier ruled, the
one who had a last clear opportunity to
avoid the impending harm but failed to do
so is chargeable with the consequences
thereof. 22 (emphasis ours)
In the case at bar, petitioner cannot evade
responsibility for the loss by attributing negligence on
the part of respondent because, even if we concur that
the latter was indeed negligent in pre-signing blank
checks, the former had the last clear chance to avoid
the loss. To reiterate, petitioner's own operations
manager admitted that they could have called up the
client for verification or confirmation before honoring
the dubious checks. Verily, petitioner had the final
opportunity to avert the injury that befell the
respondent. Failing to make the necessary verification
due to the volume of banking transactions on that
particular day is a flimsy and unacceptable excuse,
considering that the "banking business is so impressed
with public interest where the trust and
confidence of the public in general is ofparamount
importance such that the appropriate
standard of diligence must be a high
degree of diligence, if not the utmost
diligence." 23 Petitioner's negligence has been
undoubtedly established and, thus, pursuant to Art.
1170 of the NCC, 24 it must suffer the
consequence of said negligence. cDCHaS
In the interest of fairness, however, we believe
it is proper to consider respondent's own negligence to
mitigate petitioner's liability. Article 2179 of the Civil
Code provides:
Art. 2179. When the plaintiffs own negligence
was the immediate and proximate cause of his
injury, he cannot recover damages. But if his
negligence was only contributory, the
immediate and proximate cause of the injury
being the defendant's lack of due care, the
plaintiff may recover damages, but the courts
shall mitigate the damages to be awarded.
Explaining this provision in Lambertv. HeirsofRay
Castillon, 25 the Court held:
The underlying precept on contributory
negligence is that a plaintiff who is partly
responsible for his own injury should not be
entitled to recover damages in full but must
bear the consequences of his own negligence.
The defendant must thus be held liable only for
the damages actually caused by his negligence.
. . . AHDcCT
As we previously stated, respondent's
practice of signing checks in blank whenever its
authorized bank signatories would travel abroad was a
dangerous policy, especially considering the
lack of evidence on record that respondent had
appropriate safeguards or internal controls to prevent
the pre-signed blank checks from falling into the
hands of unscrupulous individuals and being used to
commit a fraud against the company. We cannot
believe that there was no other secure and reasonable
way to guarantee the non-disruption of respondent's
business. As testified to by petitioner's expert witness,
other corporations would ordinarily have another
set of authorized bank signatories who would be able
to sign checks in the absence of the preferred
signatories. 26 Indeed, if not for the fortunate
happenstance that the thief failed to properly fill up
the subject checks, respondent would expectedly take
the blame for the entire loss since the
defense of forgeryof a drawer's signature(s) would be
60
unavailable to it. Considering that respondent
knowingly took the risk that the pre-signed blank
checks might fall into the handsof wrongdoers, it is
but just that respondent shares in the responsibility for
the loss.
We also cannot ignore the fact that the person
who stole the pre-signed checks subject of this case
from respondent's accountant turned out to be another
employee, purportedly a clerk in respondent's
accounting department. As the employer of the "thief",
respondent supposedly had control and supervision
over its own employee. This gives the Court more
reason to allocate part of the loss to respondent.
Following established jurisprudential
precedents, 27 we believe the allocation of sixty
percent (60%) of the actual damages involved in this
case (represented by the amount of the checks with
legal interest) to petitioner is proper under the
premises. Respondent should, in light of its
contributory negligence, bear forty percent
(40%) of its own loss. cCTIaS
Finally, we find that the awards of attorney's
fees and litigation expenses in favor of respondent are
not justified under the circumstances and, thus, must
be deleted. The power of the court to award attorney's
fees and litigation expenses under Article 2208 of the
NCC 28 demands factual, legal, and equitable
justification.
An adverse decision does not ipso facto justify
an award of attorney's fees to the winning
party. 29 Even when a claimant is compelled to litigate
with third persons or to incur expenses to protect his
rights, still attorney's fees may not be awarded where
no sufficient showing of bad faith could be reflected in
 a party's persistence in a case other than an erroneous
conviction of the righteousness of his cause. 30
WHEREFORE, the Decision of the
Court of Appeals dated July 16, 2001 and its
Resolution dated September 28, 2001 are AFFIRMED
with the following MODIFICATIONS: (a)
petitioner Bank of America NT & SA shall pay to
respondent Philippine Racing Club sixty percent
(60%) of the sum of Two Hundred Twenty Thousand
Pesos (P220,000.00) with legal interest as awarded by
the trial court and (b) the awards of attorney's fees and
litigation expenses in favor of respondent are
deleted. SAaTHc
Proportionate costs.
SO ORDERED.
THIRD DIVISION
[G.R. No. 112160. February 28, 2000.]
OSMUNDO S. CANLAS and
ANGELINA CANLAS, petitioners, vs. COU
RT OF APPEALS, ASIAN SAVINGS BANK,
MAXIMO C. CONTRERAS and VICENTE
MAOSCA, respondents.
At bar is a Petition for Review on Certiorari under Rule
45 of the Rules of Court, seeking to review and set aside
the Decision 1 of the Court of Appeals in CA-G.R. CV
No. 25242, which reversed the Decision 2 of Branch
59 of the Regional Trial Court of Makati City in Civil
Case No. M-028; the dispositive portion of which reads:
"WHEREFORE, the decision appealed from is
hereby REVERSED and SET ASIDE and a
new one is hereby entered DISMISSING the
complaint of the spouses Osmundo and
Angelina Canlas. On the
counterclaim of defendant Asian Savings
Bank, the plaintiffs Canlas spouses are hereby
ordered to pay the defendant Asian Savings
Bank the amount of P50,000.00 as moral and
exemplary damages plus P15,000.00 as and for
attorney's fees. prLL
With costs against appellees.
SO ORDERED." 3
The facts that matter:
Sometime in August, 1982, the petitioner, Osmundo
S. Canlas, and private respondent, Vicente Maosca,
decided to venture in business and to raise the capital
needed therefor. The former then executed a Special
Power of Attorney authorizing the latter to mortgage
two parcels of land situated in San Dionisio, (BF
Homes) Paraaque, Metro Manila, each lot with semi-
concrete residential house existing thereon, and
respectively covered by Transfer Certificate of Title No.
54366 in his (Osmundo's) name and Transfer
Certificate of Title No. S-78498 in the name of his wife
Angelina Canlas. cdtai
Subsequently, Osmundo Canlas agreed to sell the said
parcels of land to Vicente Maosca, for and in
consideration of P850,000.00, P500,000.00 of which
payable within one week, and the
balance of P350,000.00 to serve as his (Osmundo's)
investment in the business. Thus,
61
Osmundo Canlas delivered to Vicente Maosca the
transfer certificates of title of the parcels of land
involved. Vicente Maosca, as his part of the
transaction, issued two postdated checks in
favor of Osmundo Canlas in the amounts of P40,000.00
and P460,000.00, respectively, but it turned out that the
check covering the bigger amount was not sufficiently
funded. 4
On September 3, 1982, Vicente Maosca was able to
mortgage the same parcels of land for P100,000.00 to a
certain Attorney Manuel Magno, with the
help of impostors who misrepresented themselves as the
spouses, Osmundo Canlas and Angelina Canlas. 5
On September 29, 1982, private respondent Vicente
Maosca was granted a loan by the respondent Asian
Savings Bank (ASB) in the amount of P500,000.00,
with the use of subject parcels of land as security, and
with the involvement of the same impostors who again
introduced themselves as the Canlas spouses. 6 When
the loan it extended was not paid, respondent bank
extrajudicially foreclosed the mortgage. LLjur
On January 15, 1983, Osmundo Canlas wrote a letter
informing the respondent bank that the
execution of subject mortgage over the two
parcels of land in question was without their
(Canlas spouses) authority, and request that steps be
taken to annul and/or revoke the questioned mortgage.
On January 18, 1983, petitioner Osmundo Canlas also
wrote the office of Sheriff Maximo C. Contreras, asking
that the auction sale scheduled on February 3, 1983 be
canceled or held in abeyance. But respondents Maximo
C. Contreras and Asian Savings Bank refused to heed
petitioner Canlas' stance and proceeded with the
scheduled auction sale. 7
Consequently, on February 3, 1983 the herein petitioners
instituted the present case for annulment of deed of real
estate mortgage with prayer for the issuance of a
writ of preliminary injunction; and on May 23, 1983, the
trial court issued an Order restraining the respondent
sheriff from issuing the corresponding
Certificate ofSheriff's Sale. 8
For failure to file his answer, despite several motions for
extension of time for the filing thereof, Vicente Maosca
was declared in default. 9
On June 1, 1989, the lower court a quo came out with a
decision annulling subject deed of mortgage and
disposing, thus:
"Premises considered, judgment is hereby
rendered as follows:
1. Declaring the deed of real estate mortgage
(Exhibit 'L') involving the properties of the
plaintiffs as null and void;
2. Declaring the public auction sale conducted
by the defendant Sheriff, involving the same
properties as illegal and without binding effect;
3. Ordering the defendants, jointly and
severally, to pay the plaintiff's the
sum of P20,000.00 representing attorney's fees;
4. On defendant ASB's crossclaim: ordering
the cross-defendant Vicente Maosca to pay
the defendant ASB the sum of P350,000 00,
representing the amount which he received as
proceeds of the loan secured by the void
mortgage, plus interest at the legal rate,
starting February 3, 1983, the date when the
original complaint was filed, until the amount
is fully paid; cdasia
5. With costs against the defendants.
SO ORDERED." 10
From such Decision below, Asian Savings Bank
appealed to the Court of Appeals, which handed down
the assailed judgment of reversal, dated September 30,
1983, in CA-G.R. CV No. 25242. Dissatisfied therewith,
the petitioners found their way to this Court via the
present Petition; theorizing that: LLjur
"I
RESPONDENT COURT OF APPEALS ERRE
D IN HOLDING THAT THE
MORTGAGE OF THE PROPERTIES
SUBJECT OF THIS CASE WAS VALID.
II
RESPONDENT COURT OF APPEALS ERRE
D IN HOLDING THAT PETITIONERS ARE
NOT ENTITLED TO RELIEF BECAUSE
THEY WERE NEGLIGENT AND
THEREFORE MUST BEAR THE LOSS.
III
RESPONDENT COURT OF APPEALS ERRE
D IN HOLDING THAT RESPONDENT ASB
EXERCISED DUE DILIGENCE IN
GRANTING THE LOAN
APPLICATION OF RESPONDENT.
which bank deposits the bank should guard against loss
IV
RESPONDENT COURT OF APPEALS ERRE
D IN HOLDING THAT RESPONDENT ASB
DID NOT ACT WITH BAD FAITH IN
PROCEEDING WITH THE FORECLOSURE
SALE OF THE PROPERTIES. LLjur
62
V
RESPONDENT COURT OF APPEALS ERRE
D IN AWARDING RESPONDENT ASB
MORAL DAMAGES." 11
The Petition is impressed with merit.
Article 1173 of the Civil Code provides:
"ARTICLE 1173. The fault or
negligence of the obligor consist in the
omission of that diligence which is required by
the nature of the obligation and corresponds
with the circumstances of the persons, of the
time and of the place. When negligence shows
bad faith, the provisions of Articles 1171 and
2201, paragraph 2, shall apply. cdasia
If the law or contract does not state the
diligence which is to be observed in the
performance, that which is expected of a good
father of a family shall be required. (1104)"
The degree of diligence required of banks is more than
that of a good father of a family; 12 in keeping with
their responsibility to exercise the necessary care and
prudence in dealing even on a registered or titled
property. The business of a bank is affected with public
interest, holding in trust the money of the depositors,
due to negligence or bad faith, by reason of which the
bank would be denied the protective mantle of the land
registration law, accorded only to purchasers or
mortgagees for value and in good faith. 13
In the case under consideration, from the evidence on
hand it can be gleaned unerringly that respondent bank
did not observe the requisite diligence in ascertaining or
verifying the real identity of the couple who introduced
themselves as the spouses Osmundo Canlas and
Angelina Canlas. It is worthy to note that not even a
single identification card was exhibited by the said
impostors to show their true identity; and yet, the bank
acted on their representations simply on the basis of the
residence certificates bearing signatures which tended to
match the signatures affixed on a previous
deed of mortgage to a certain Atty. Magno, covering the
same parcels of land in question. Felizado Mangubat,
Assistant Vice President of Asian Savings Bank, thus
testified inter alia: LexLib
"xxx xxx xxx
Q: According to you, the basis for your having
recommended for the
approval of MANASCO's (sic) loan
particularly that one involving the
property of plaintiff in this case, the
spouses OSMUNDO CANLAS and
ANGELINA CANLAS, the basis for
such approval was that according to
you all the signatures and other things
taken into account matches with
that of the document previously
executed by the spouses CANLAS?
A: That is the only basis for accepting the
signature on the mortgage, the basis for
the recommendation of the
approval of the loan are the financial
statement ofMAOSCA?
A: Yes, among others the signature and TAX
Account Number, Residence Certificate
appearing on the previous loan
executed by the spouses CANLAS, I
am referring to EXHIBIT 5, mortgage
to ATTY MAGNO, those were made
the basis.
A: That is just the basis of accepting the
signature, because at that time the loan
have been approved already on the
basis of the financial statement of the
client the Bank Statement. Wneh (sic) it
was approved we have to base it on the
Financial Statement of the client, the
signatures were accepted only for the
purpose ofsigning the mortgage not for
the approval, we don't (sic) approve
loans on the signature cdtai
ATTY. CLAROS:
Would you agree that as part of ascertaining
the identity of the parties particularly
the mortgage, you don't consider also
the signature, the Residence Certificate,
the particular address of the parties
involved cdll
A: I think the question defers (sic) from what
you asked a while ago.
Q: Among others?
A: We have to accept the signature on the
basis of the other signatures given to us
it being a public instrument.
ATTY CARLOS:
You mean to say the criteria of ascertaining
the identity of the mortgagor does not
depend so much on the signature on the
residence certificate they have
presented. cdtai
63
A: We have to accept that.
xxx xxx xxx
A: We accepted the signature on the
basis of the mortgage in favor of ATTY.
MAGNO duly notarized which I have
been reiterrting (sic) entitled to full
faith considering that it is a public
instrument.
ATTY CARLOS:
What other requirement did you take into
account in ascertaining the
identification of the parties particularly
the mortgage in this case?
A: Residence Certificate.
Q: Is that all, is that the only requirement?
A: We requested for others but they could not
produce, and because they presented to
us the Residence Certificate which
matches on the signature on the
Residence Certificate in favor of Atty.
Magno." 14
Evidently, the efforts exerted by the bank to verify the
identity of the couple posing as Osmundo Canlas and
Angelina Canlas fell short of the responsibility of the
bank to observe more than the diligence of a good
father of a family. The negligence of respondent bank
was magnified by the fact that the previous
deed of mortgage (which was used as the basis for
checking the genuineness of the signatures of the
supposed Canlas spouses) did not bear the tax account
number of the spouses, 15 as well as the Community
Tax Certificate of Angelina Canlas 16 But such fact
notwithstanding, the bank did not require the impostors
to submit additional proof of their true identity. prcd
Under the doctrine of last clear chance, which is
applicable here, the respondent bank must suffer the
resulting loss. In essence, the doctrine of last clear
chance is to the effect that where both parties are
negligent but the negligent act of one is appreciably later
in point of time than that of the other, or where it is
impossible to determine whose fault or negligence
brought about the occurrence of the incident, the one
who had the last clear opportunity to avoid the
impending harm but failed to do so, is chargeable with
the consequences arising therefrom. Stated differently,
the rule is that the antecedent negligence of a person
does not preclude recovery ofdamages caused by the
supervening negligence of the latter, who had the last
fair chance to prevent the impending harm by the
exercise of due diligence. 17
Assuming that Osmundo Canlas was negligent in giving
Vicente Maosca the opportunity to perpetrate the fraud,
by entrusting to latter the owner's copy of the transfer
certificates of title of subject parcels of land, it cannot be
denied that the bank had the last clear chance to prevent
the fraud, by the simple expedient of faithfully
complying with the requirements for banks to ascertain
the identity of the persons transacting with them. cdphil
For not observing the degree of diligence
required of banking institutions, whose business is
impressed with public interest, respondent Asian
Savings Bank has to bear the loss sued upon.
In ruling for respondent bank,
the Court of Appeals concluded that the petitioner
Osmundo Canlas was a party to the fraudulent
scheme of Maosca and therefore, estopped from
impugning the validity of subject deed of mortgage; application of defendant Asian Savings Bank,
ratiocinating thus: which culminated in his receiving a
portion of the process thereof." 18
"xxx xxx xxx
A meticulous and painstaking scrutiny of the Records on
Thus, armed with the titles and the special
hand, reveals, however, that the findings arrived at by
power of attorney, Maosca went to the
the Court of Appeals are barren of any sustainable basis.
defendant bank and applied for a loan. And
For instance, the execution of the deeds of mortgages
when Maosca came over to the bank to
constituted by Maosca on subject
submit additional documents pertinent to his
pieces of property of petitioners were made possible not
loan application, Osmundo Canlas was with
by the Special Powerof Attorney executed by
him, together with a certain Rogelio Viray. At
Osmundo Canlas in favor of Maosca but through the
that time, Osmundo Canlaswas introduced to
use of impostors who misrepresented themselves as the
the bank personnel as 'Leonardo Rey'. LexLib
spouses Angelina Canlas and Osmundo Canlas. It cannot
When he was introduced as 'Leonardo Rey' for be said therefore, that the petitioners authorized Vicente
the first time Osmundo should have corrected Maosca to constitute the mortgage on their
Maosca right away. But he did not. Instead, parcels of land. LLjur
he even allowed Maosca to avail of his
What is more, Osmundo Canlas was introduced as
(Osmundo's) membership privileges at the
"Leonardo Rey" by Vicente Maosca, only on the
Metropolitan Club when Maosca invited two
occasion of the luncheon meeting at the Metropolitan
officers of the defendant bank to a luncheon
Club. 19Thereat, the failure of Osmundo Canlas to
meeting which Osmundo also attended. And
rectify Maosca's misrepresentations could not be taken
during that meeting, Osmundo did not say who
as a fraudulent act. As well explained by the former, he
he really is, but even let Maosca introduced
just did not want to embarrass Maosca, so that he
him again as 'Leonardo Rey', which all the
waited for the end of the meeting to correct Maosca. 20
more indicates that he connived with Maosca
in deceiving the defendant bank. Then, too, Osmundo Canlas recounted that during the
said luncheon meeting, they did not talk about the
Finally, after the loan was finally approved,
security or collateral for the loan of Maosca with
Osmundo accompanied Maosca to the bank
ASB. 21 So also, Mrs. Josefina Rojo, who was the
when the loan was released. At that time, a
Account Officer of Asian Savings Bank when Maosca
manager's check for P200,000.00 was issued in
applied for subject loan, corroborated the
the name of Oscar Motorworks, which
testimony of Osmundo Canlas, she testified: cdrep
Osmundo admits he owns and operates. cdasia
Collectively, the foregoing circumstances
cannot but conjure to a single conclusion that "xxx xxx xxx
Osmundo actively participated in the loan
64
 Q: Now could you please describe out the
lunch conference at the Metro Club in
Makati?
A: Mr Mangubat, Mr Maosca and I did not
discuss with respect to the loan
application and discuss primarily his
business.
xxx xxx xxx
Q: So, what is the main topic of your
discussion during the meeting?
A: The main topic was then, about his business
although, Mr. Leonardo Rey, who
actually turned out as Mr. Canlas,
supplier of Mr. Maosca.
Q: I see. . . other than the business of Mr.
Maosca, were there any other topic
discussed ?
A: YES.
Q: And what was the topic?
A: General Economy then.
xxx xxx xxx" 22
Verily, Osmundo Canlas was left unaware of the illicit
plan of Maosca, explaining thus why he (Osmundo)
did not bother to correct what Maosca
misrepresented and to assert ownership over the two
parcels of land in question. cdll
Not only that, while it is true that Osmundo Canlas was
with Vicente Maosca when the latter submitted the
documents needed for his loan application, and when the
check of P200,000.00 was released, the former did not
know that the collateral used by Maosca for the said
loan were their (Canlas spouses') properties. Osmundo
happened to be with Maosca at the time because he Trial Court of Makati City in Civil Case No. M-028 is
wanted to make sure that Maosca would make good his hereby REINSTATED. No pronouncement as to
promise to pay the balance of the purchase price of the costs. LLjur
said lots out of the proceeds of the loan. 23
SO ORDERED.
The receipt by Osmundo Canlas of the P200,000.00
check from ASB could not stop him from assailing the
validity of the mortgage because the said amount was in
payment of the parcels of land he sold to Maosca. 24
What is decisively clear on record is that Maosca SECOND DIVISION
managed to keep Osmundo Canlas uninformed of his
(Maosca's) intention to use the [G.R. No. 92244. February 9, 1993.]
parcels of land of the Canlasspouses as security for the
loan obtained from Asian Savings Bank. Since Vicente NATIVIDAD GEMPESAW, petitioner, vs. T
Maosca showed Osmundo Canlas several HE
certificates of title of lots which, according to Maosca HONORABLE COURT OF APPEALS and
were the collaterals, Osmundo Canlas was confident that PHILIPPINE
their (Canlases') parcels of land were not involved in the BANK OF COMMUNICATIONS, responde
loan transactions with the Asian Savings nts.
Bank. 25 Under the attendant facts and circumstances,
Osmundo Canlas was undoubtedly negligent, which
negligence made them (petitioners) undeserving of an From the adverse
awardof attorney's fees. LLjur decision * of the Court of Appeals (CA-G.R. CV No.
16447), petitioner, Natividad Gempesaw, appealed to
Settled is the rule that a contract of mortgage must be
this Court in a Petition for Review, on the issueof the
constituted only by the absolute owner on the property
right of the drawer to recover from the drawee bank who
mortgaged; 26 a mortgage, constituted by an impostor is
pays a check with a forged indorsement of the payee,
void. 27 Considering that it was established indubitably
debiting the same against the drawer's account.
that the contract of mortgage sued upon was entered into
and signed by impostors who misrepresented themselves The records show that on January 23, 1985, petitioner
as the spouses Osmundo Canlas and Angelina Canlas, filed a Complaint against the private respondent
the Court is of the ineluctable conclusion and finding Philippine Bank of Communications (respondent drawee
that subject contract of mortgage is a complete nullity. Bank) for recovery of the money value of eighty-two
(82) checks charged against the petitioner's account with
WHEREFORE, the Petition is GRANTED and the
respondent drawee Bank on the ground that the payees'
Decision of the Court of Appeals, dated September 30,
indorsements were forgeries. The Regional Trial Court,
1993, in CA-G.R. CV No. 25242 SET ASIDE. The
Branch CXXVIII of Caloocan City, which tried the case,
Decision of Branch 59 of the Regional
65
rendered a decision on November 17, 1987 dismissing
the complaint as well as the respondent drawee Bank's
counterclaim. On appeal, the Court of Appeals in a
decision rendered on February 22, 1990, affirmed the
decision ofthe RTC on two grounds, namely (1) that the
plaintiff's (petitioner herein) gross negligence in issuing
the checks was the proximate cause of the loss and (2)
assuming that the bank was also negligent, the loss must
nevertheless be borne by the party whose negligence
was the proximate cause of the loss. On March 5, 1990,
the petitioner filed this petition under Rule 45 of the
Rules of Court setting forth the following as the alleged
errors of the respondent Court. 1 :
"I
THE
RESPONDENT COURT OF APPEALS ERRE
D IN RULING THAT THE
NEGLIGENCE OF THE DRAWER IS THE
PROXIMATE CAUSE OF THE RESULTING
INJURY TO THE DRAWEE BANK, AND
THE DRAWER IS PRECLUDED FROM
SETTING UP THE FORGERY OR
WANT OF AUTHORITY. Cdpr
II
THE
RESPONDENT COURT OF APPEALS ALS
O ERRED IN NOT FINDING AND RULING
THAT IT IS THE GROSS AND
INEXCUSABLE NEGLIGENCE AND
FRAUDULENT ACTS OFTHE OFFICIALS
AND EMPLOYEES OF THE RESPONDENT
BANK IN FORGING THE
SIGNATURE OF THE PAYEES AND THE
WRONG AND/OR ILLEGAL PAYMENTS
MADE TO PERSONS, OTHER THAN TO
THE INTENDED PAYEES SPECIFIED IN
THE CHECKS, IS THE DIRECT AND
PROXIMATE CAUSE OF THE DAMAGE
TO PETITIONER WHOSE SAVING (SIC)
ACCOUNT WAS DEBITED.
III
THE
RESPONDENT COURT OF APPEALS ALS
O ERRED IN NOT ORDERING THE
RESPONDENT BANK TO RESTORE OR
RE-CREDIT THE CHECKING
ACCOUNT OF PETITIONER IN THE
CALOOCAN CITY BRANCH BY THE
VALUE OF THE EIGHTY TWO (82)
CHECKS WHICH IS IN THE
AMOUNT OF P1,208,606.89 WITH LEGAL
INTEREST."
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns
and operates four grocery stores located at Rizal Avenue
Extension and at Second Avenue, both in Caloocan City.
Among these groceries are D.G. Shopper's Mart and
D.G. Whole Sale Mart. Petitioner maintains a checking
account numbered 13-00038-1 with the Caloocan City
Branchof the respondent drawee Bank. To facilitate
payment of debts to her suppliers, petitioner draws
checks against her checking account with the respondent
bank as drawee. Her customary practice of issuing
checks in payment of her suppliers was as follows: The
checks were prepared and filled up as to all material
particulars by her trusted bookkeeper, Alicia Galang, an
employee for more than eight (8) years. After the
bookkeeper prepared the checks, the completed checks
were submitted to the petitioner for her signature,
together with the corresponding invoice receipts which
66
indicate the correct obligations due and payable to her
suppliers. Petitioner signed each and every check
without bothering to verify the accuracy of the checks
against the corresponding invoices because she reposed
full and implicit trust and confidence on her bookkeeper.
The issuance and delivery of the checks to the payees
named therein were left to the bookkeeper. Petitioner
admitted that she did not make any verification as to
whether or not the checks were actually delivered to
their respective payees. Although the respondent drawee
Bank notified her of all checks presented to and paid by
the bank, petitioner did not verify the correctness of the
returned checks, much less check if the payees actually
received the checks in payment for the supplies she
received. In the course of her business operations
covering a period of two years, petitioner issued,
following her usual practice stated above, a
total of eighty-two (82) checks in favor of several
suppliers. These checks were all presented by the
indorsees as holders thereof to, and honored by, the
respondent drawee Bank. Respondent drawee Bank
correspondingly debited the amounts thereof against
petitioner's checking account numbered 30-00038-1.
Most ofthe aforementioned checks were for amounts in
excess of her actual obligations to the various payees as
shown in their corresponding invoices. To mention a
few:
". . . 1) in Check No. 621127, dated June 27,
1984 in the amount of P11,895.23 in
favor of Kawsek Inc. (Exh. A-60), appellant's
actual obligation to said payee was only
P895.33 (Exh. A-83); (2) in Check No. 652282
issued on September 18, 1984 in
favor of Senson Enterprises in the
amount of P11,041.20 (Exh. A-67) appellant's
 actual obligation to said payee was only
P1,041.20 (Exh. 7); (3) in Check No. 589092
dated April 7, 1984 for the
amount of P11,672.47 in favor of Marchem
(Exh. A-61) appellant's obligation was only
P1,672.47 (Exh. B); (4) in Check No. 620450
dated May 10, 1984 in favor of Knotberry for
P11,677.10 (Exh. A-31) her actual obligation
was only P677.10 (Exhs. C and C-1); (5) in
Check No. 651862 dated August 9, 1984 in
favor of Malinta Exchange Mart for
P11,107.16 (Exh. A-62), her obligation was
only P1,107.16 (Exh. D-2); (6) in Check No.
651863 dated August 11, 1984 in
favor of Grocer's International Food Corp. in
the amount of P11,335.60 (Exh. A-66), her
obligation was only P1,335.60 (Exh. E and E-
1); (7) in Check No. 589019 dated March 17,
1984 in favor of Sophy Products in the
amount of P11,648.00 (Exh. A-78), her
obligation was only P648.00 (Exh. G); (8) in
Check No. 589028 dated March 10, 1984 for
the amount of P11,520.00 in favor of the
Yakult Philippines (Exh. A-73), the latter's
invoice was only P520.00 (Exh. H-2); (9) in
Check No. 62033 dated May 24, 1984 in the
amount of P11,504.00 in favor of Monde
Denmark Biscuit (Exh. A-34), her obligation
was only P504.00 (Exhs. I-1 and I-2)." 2
Practically, all the checks issued and honored by the
respondent drawee Bank were crossed checks. 3 Aside
from the daily notice given to the petitioner by the
respondent drawee Bank, the latter also furnished her
with a monthly statement of her bank transactions,
attaching thereto all the cancelled checks she had issued
and which were debited against her current account. It
was only after the lapse of more than two (2) years that
petitioner found out about the fraudulent
manipulations ofher bookkeeper. cdphil
All the eighty-two (82) checks with forged
signatures of the payees were brought to Ernest L. Boon,
Chief Accountant of respondent drawee Bank at the
Buendia branch, who, without authority therefor,
accepted them all for deposit at the Buendia branch to
the credit and/or in the accounts of Alfredo Y. Romero
and Benito Lam. Ernest L. Boon was a very close
friend of Alfredo Y. Romero. Sixty-three (63) out of the
eighty-two (82) checks were deposited in Savings
Account No. 00844-5 of Alfredo Y. Romero at the
respondent drawee Bank's Buendia branch, and four (4)
checks in his Savings Account No. 32-81-9 at its Ongpin
branch. The rest of the checks were deposited in
Account No. 0443-4, under the name of Benito Lam at
the Elcano branch of the respondent drawee Bank.
About thirty (30) of the payees whose names were
specifically written on the checks testified that they did
not receive nor even see the subject checks and that the
indorsements appearing at the back of the checks were
not theirs.
The team of auditors from the main office of the
respondent drawee Bank which conducted periodical
inspection of the branches' operations failed to discover,
check or stop the unauthorized acts of Ernest L. Boon.
Under the rules of the respondent drawee Bank, only a
Branch Manager, and no other official of the respondent
drawee Bank, may accept a second indorsement on a
check for deposit. In the case at bar, all the deposit
slips of the eighty-two (82) checks in question were
initialed and/or approved for deposit by Ernest L. Boon.
The Branch Managers of the Ongpin and Elcano
branches accepted the deposits made in the Buendia
67
branch and credited the accounts of Alfredo Y. Romero
and Benito Lam in their respective branches.
On November 7, 1984, petitioner made a written
demand on respondent drawee Bank to credit her
account with the money value of the eighty-two (82)
checks totalling P1,208,606.89 for having been
wrongfully charged against her account. Respondent
drawee Bank refused to grant petitioner's demand. On
January 23, 1985, petitioner filed the complaint with the
Regional Trial Court.
This is not a suit by the party whose signature was
forged on a check drawn against the drawee bank. The
payees are not parties to the case. Rather, it is the
drawer, whose signature is genuine, who instituted this
action to recover from the drawee bank the money
value of eighty-two (82) checks paid out by the drawee
bank to holders of those checks where the
indorsements of the payees were forged. How and by
whom the forgeries were committed are not established
on the record, but the respective payees admitted that
they did not receive those checks and therefore never
indorsed the same. The applicable law is the Negotiable
Instruments Law 4(heretofore referred to as the NIL). Section
23 of the NIL provides:
"When a signature is forged or made without
the authority of the person whose signature it
purports to be, it is wholly inoperative, and no
right to retain the instrument, or to give a
discharge therefor, or to enforce payment
thereof against any party thereto, can be
acquired through or under such signature,
unless the party against whom it is sought to
enforce such right is precluded from setting up
the forgery or want of authority." LibLex
 Under the aforecited provision, forgery is a real or
absolute defense by the party whose signature is
forged. A party whose signature to an instrument was
forged was never a party and never gave his consent to
the contract which gave rise to the instrument. Since
his signature does not appear in the instrument, he
cannot be held liable thereon by anyone, not even by a
holder in due course. Thus, if a person's signature is
forged as a maker of a promissory note, he cannot be
made to pay because he never made the promise to
pay. Or where a person's signature as a drawer of a
check is forged, the drawee bank cannot charge the
amount thereof against the drawer's account because
he never gave the bank the order to pay. And said
section does not refer only to the forged
signature of the maker of a promissory note and of the
drawer of a check. It covers also a forged indorsement,
i.e., the forged signature of the payee or indorsee of a
note or check. Since under said provision a forged
signature is "wholly inoperative", no one can gain title
to the instrument through such forged indorsement.
Such an indorsement prevents any subsequent party
from acquiring any right as against any party whose
name appears prior to the forgery. Although rights may
exist between and among parties subsequent to the
forged indorsement, not one of them can acquire rights
against parties prior to the forgery. Such forged
indorsement cuts off the rights of all subsequent
parties as against parties prior to the forgery. However,
the law makes an exception to these rules where a
party is precluded from setting up forgery as a
defense.
As a matter of practical significance, problems arising
from forged indorsements of checks may generally be
broken into two types of cases: (1) where forgery was
accomplished by a person not associated with the
drawer for example a mail robbery; and (2) where the
indorsement was forged by an agent of the drawer. This
difference in situations would determine the effect of the
drawer's negligence with respect to forged indorsements.
While there is no duty resting on the depositor to look
for forged indorsements on his cancelled checks in
contrast to a duty imposed upon him to look for
forgeries of his own name, a depositor is under a duty to
set up an accounting system and a business procedure as
are reasonably calculated to prevent or render difficult
the forgery of indorsements, particularly by the
depositor's own employees. And if the drawer
(depositor) learns that a check drawn by him has been
paid under a forged indorsement, the drawer is under
duty promptly to report such fact to the drawee
bank. 5 For his negligence or failure either to discover
or to report promptly the fact of such forgery to the
drawee, the drawer loses his right against the drawee
who has debited his account under the forged
indorsement. 6 In other words, he is precluded from
using forgery as a basis for his claim for
recrediting of his account.
In the case at bar, petitioner admitted that the checks
were filled up and completed by her trusted employee,
Alicia Galang, and were later given to her for her
signature. Her signing the checks made the negotiable
instrument complete. Prior to signing the checks, there
was no valid contract yet.
Every contract on a negotiable instrument is incomplete
and revocable until delivery of the instrument to the
payee for the purpose of giving effect thereto. 7 The first
delivery of the instrument, complete in form, to the
payee who takes it as a holder, is called issuance of the
instrument. 8 Without the initial delivery of the
instrument from the drawer of the check to the payee,
there can be no valid and binding contract and no
liability on the instrument.
68
Petitioner completed the checks by signing them as
drawer and thereafter authorized her employee Alicia
Galang to deliver the eighty-two (82) checks to their
respective payees. Instead of issuing the checks to the
payees as named in the checks, Alicia Galang delivered
them to the Chief Accountant of the Buendia
branch ofthe respondent drawee Bank, a certain Ernest
L. Boon. It was established that the signatures of the
payees as first indorsers were forged. The record fails to
show the identity of the party who made the forged
signatures. The checks were then indorsed for the
second time with the names of Alfredo Y. Romero and
Benito Lam, and were deposited in the latter's accounts
as earlier noted. The second indorsements were all
genuine signatures of the alleged holders. All the eighty-
two (82) checks bearing the forged indorsements of the
payees and the genuine second indorsements of Alfredo
Y. Romero and Benito Lam were accepted for deposit at
the Buendia branch of respondent drawee Bank to the
credit of their respective savings accounts in the
Buendia, Ongpin and Elcano branches of the same bank.
The total amount ofP1,208,606.89, represented by
eighty-two (82) checks, were credited and paid out by
respondent drawee Bank to Alfredo Y. Romero and
Benito Lam, and debited against petitioner's checking
account No. 13-00038-1, Caloocan branch. LLpr
As a rule, a drawee bank who has paid a check on which
an indorsement has been forged cannot charge the
drawer's account for the amount of said check. An
exception to this rule is where the drawer is
guilty of such negligence which causes the bank to
honor such a check or checks. If a check is stolen from
the payee, it is quite obvious that the drawer cannot
possibly discover the forged indorsement by mere
examination of his cancelled check. This accounts for
the rule that although a depositor owes a duty to his
drawee bank to examine his cancelled checks for
forgery of his own signature, he has no similar duty as to
forged indorsements. A different situation arises where
the indorsement was forged by an employee or
agent of the drawer, or done with the active
participation of the latter. Most of the cases involving
forgery by an agent or employee deal with the payee's
indorsement. The drawer and the payee oftentimes have
business relations of long standing. The continued
occurrence of business transactions of the same nature
provides the opportunity for the agent/employee to
commit the fraud after having developed familiarity
with the signatures of the parties. However, sooner or
later, some leak will show on the drawer's books. It will
then be just a question of time until the fraud is
discovered. This is specially true when the agent
perpetrates a series of forgeries as in the case at bar.
The negligence of a depositor which will prevent
recovery of an unauthorized payment is based on
failure of the depositor to act as a prudent businessman
would under the circumstances. In the case at bar, the
petitioner relied implicitly upon the honesty and
loyalty of her bookkeeper, and did not even verify the
accuracy of the amounts of the checks she signed
against the invoices attached thereto. Furthermore,
although she regularly received her bank statements, she
apparently did not carefully examine the same nor the
check stubs and the returned checks, and did not
compare them with the sales invoices. Otherwise, she
could have easily discovered the discrepancies between
the checks and the documents serving as bases for the
checks. With such discovery, the subsequent forgeries
would not have been accomplished. It was not until two
years after the bookkeeper commenced her fraudulent
scheme that petitioner discovered that eighty-two (82)
checks were wrongfully charged to her account, at eighty-two (82) checks with the pertinent sales invoices,
which time she notified the respondent drawee Bank. she would have easily discovered that in some checks,
the amounts did not tally with those appearing in the
It is highly improbable that in a period of two years, not
sales invoices. Had she noticed these discrepancies, she
one of petitioner's suppliers complained of non-
should not have signed those checks, and should have
payment. Assuming that even one single complaint had
conducted an inquiry as to the reason for the irregular
been made, petitioner would have been duty-bound, as
entries. Likewise, had petitioner been more vigilant in
far as the respondent drawee Bank was concerned, to
going over her current account by taking careful
make an adequate investigation on the matter. Had this
noteof the daily reports made by respondent drawee
been done, the discrepancies would have been
Bank on her issued checks, or at least made random
discovered, sooner or later. Petitioner's failure to make
scrutiny of her cancelled checks returned by respondent
such adequate inquiry constituted negligence which
drawee Bank at the close of each month, she could have
resulted in the bank's honoring of the subsequent checks
easily discovered the fraud being perpetrated by Alicia
with forged indorsements. On the other hand, since the
Galang, and could have reported the matter to the
record mentions nothing about such a complaint, the
respondent drawee Bank. The respondent drawee Bank
possibility exists that the checks in question covered
then could have taken immediate steps to prevent further
inexistent sales. But even in such a case, considering the
commission of such fraud. Thus, petitioner's negligence
length of a period of two (2) years, it is hard to believe
was the proximate cause of her loss. And since it was
that petitioner did not know or realize that she was
her negligence which caused the respondent drawee
paying much more than she should for the supplies she
Bank to honor the forged checks or prevented it from
was actually getting. A depositor may not sit idly by,
recovering the amount it had already paid on the checks,
after knowledge has come to her that her funds seem to
petitioner cannot now complain should the bank refuse
be disappearing or that there may be a leak in her
to recredit her account with the amount of such
business, and refrain from taking the steps that a careful
checks. 10 Under Section 23 of the NIL, she is now
and prudent businessman would take in such
precluded from using the forgery to prevent the bank's
circumstances and if taken, would result in stopping the
debiting of her account. cdphil
continuance of the fraudulent scheme. If she fails to take
such steps, the facts may establish her negligence, and in The doctrine in the case of Great Eastern Life Insurance
that event, she would be estopped from recovering from Co. vs. Hongkong & Shanghai Bank 11 is not applicable
the bank. 9 to the case at bar because in said case, the check was
fraudulently taken and the signature of the payee was
One thing is clear from the records that the petitioner
forged not by an agent or employee of the drawer. The
failed to examine her records with reasonable diligence
drawer was not found to be negligent in the
whether before she signed the checks or after receiving
handling ofits business affairs and the theft of the check
her bank statements. Had the petitioner examined her
by a total stranger was not attributable to
records more carefully, particularly the invoice receipts,
negligence of the drawer; neither was the forging of the
cancelled checks, check book stubs, and had she
payee's indorsement due to the drawer's negligence.
compared the sums written as amounts payable in the
Since the drawer was not negligent, the drawee was
69
duty-bound to restore to the drawer's account the
amount theretofore paid under the check with a forged
payee's indorsement because the drawee did not pay as
ordered by the drawer.
Petitioner argues that respondent drawee Bank should
not have honored the checks because they were crossed
checks. Issuing a crossed check imposes no legal
obligation on the drawee not to honor such a check. It is
more of a warning to the holder that the check cannot be
presented to the drawee bank for payment in cash.
Instead, the check can only be deposited with the
payee's bank which in turn must present it for payment
against the drawee bank in the course of normal banking
transactions between banks. The crossed check cannot
be presented for payment but it can only be deposited
and the drawee bank may only pay to another bank in
the payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit
the drawee bank from having checks with more than one
indorsement. The banking rule banning
acceptance ofchecks for deposit or cash payment with
more than one indorsement unless cleared by some bank
officials does not invalidate the instrument; neither does
it invalidate the negotiation or transfer of the said check.
In effect, this rule destroys the
negotiability of bills/checks by limiting their negotiation
by indorsement of only the payee. Under the NIL, the
only kind of indorsement which stops the further
negotiation of an instrument is a restrictive indorsement
which prohibits the further negotiation thereof.
"Sec. 36. When indorsement restrictive. An
indorsement is restrictive which either.
(a) Prohibits further
negotiation of the instrument; or.
xxx xxx xxx"
In this kind of restrictive indorsement, the prohibition
to transfer or negotiate must be written in express
words at the back of the instrument, so that any
subsequent party may be forewarned that it ceases to
be negotiable. However, the restrictive indorsee
acquires the right to receive payment and bring any
action thereon as any indorser, but he can no longer
transfer his rights as such indorsee where the
form of the indorsement does not authorize him to do
so. 12
Although the holder of a check cannot compel a drawee
bank to honor it because there is no privity between
them, as far as the drawer-depositor is concerned, such
bank may not legally refuse to honor a negotiable
bill of exchange or a check drawn against it with more
than one indorsement if there is nothing irregular with
the bill or check and the drawer has sufficient funds.
The drawee cannot be compelled to accept or pay the
check by the drawer or any holder because as a drawee,
he incurs no liability on the check unless he accepts it.
But the drawee will make itself liable to a suit for
damages at the instance of the drawer for wrongful
dishonor of the bill or check. LLpr
Thus, it is clear that under the NIL, petitioner is
precluded from raising the defense of forgery by
reason of her gross negligence. But under Section
196 of the NIL, any case not provided for in the Act
shall be governed by the provisions of existing
legislation. Under the laws of quasi-delict, she cannot
point to the negligence of the respondent drawee Bank
in the selection and supervision of its employees as
being the cause of the loss because her negligence is the
proximate cause thereof and under Article 2179 of the
Civil Code, she may not be awarded damages. However,
under Article 1170 of the same Code the respondent
70
drawee Bank may be held liable for damages. The
article provides
"Those who in the performance of their
obligations are guilty of fraud, negligence or
delay, and those who in any manner contravene
the tenor thereof, are liable for damages."
There is no question that there is a contractual relation
between petitioner as depositor (obligee) and the
respondent drawee bank as the obligor. In the
performance ofits obligation, the drawee bank is bound
by its internal banking rules and regulations which form
part of any contract it enters into with any of its
depositors. When it violated its internal rules that second
endorsements are not to be accepted without the
approval of its branch managers and it did accept the
same upon the mere approval of Boon, a chief
accountant, it contravened the tenor of its obligation at
the very least, if it were not actually guilty of fraud or
negligence.
Furthermore, the fact that the respondent drawee Bank
did not discover the irregularity with respect to the
acceptance of checks with second indorsement for
deposit even without the approval of the branch manager
despite periodic inspection conducted by a
team of auditors from the main office constitutes
negligence on the partof the bank in carrying out its
obligations to its depositors. Article 1173 provides
"The fault or negligence of the obligor consists
in the omission of that diligence which is
required by the nature of the obligation and
correspondents with the circumstance of the
persons, of the time and of the place. . . ."
We hold that banking business is so impressed with
public interest where the trust and confidence of the
public in general is of paramount importance such that
the appropriate standard of diligence must be a high
degree of diligence, if not the utmost diligence. Surely,
respondent drawee Bank cannot claim it exercised such
a degree of diligence that is required of it. There is no
way We can allow it now to escape liability for such
negligence. Its liability as obligor is not merely
vicarious but primary wherein the
defense of exercise of due diligence in the selection and
supervision of its employees is of no moment.
Premises considered, respondent drawee Bank is
adjudged liable to share the loss with the petitioner on a
fifty-fifty ratio in accordance with Article 1172 which
provides:
"Responsibility arising from negligence in the
performance of every kind of obligation is also
demandable, but such liability may be
regulated by the courts, according to the
circumstances."
With the foregoing provisions of the Civil Code being
relied upon, it is being made clear that the decision to
hold the drawee bank liable is based on law and
substantial justice and not on mere equity. And although
the case was brought before the court not on
breach of contractual obligations, the courts are not
precluded from applying to the circumstances of the
case the laws pertinent thereto. Thus, the fact that
petitioner's negligence was found to be the proximate
cause of her loss does not preclude her from recovering
damages. The reason why the decision dealt on a
discussion on proximate cause is due to the error pointed
out by petitioner as allegedly committed by the
respondent court. And in breaches of contract under
Article 1173, due diligence on the part of the defendant
is not a defense.
PREMISES CONSIDERED, the case is hereby ordered
REMANDED to the trial court for the
reception of evidence to determine the exact
amount of loss suffered by the petitioner, considering
that she partly benefited from the issuance of the
questioned checks since the obligation for which she
issued them were apparently extinguished, such that
only the excess amount over and above the total of these
actual obligations must be considered as loss of which
one half must be paid by respondent drawee bank to
herein petitioner.
SO ORDERED.
SECOND DIVISION
[G.R. No. 157845. September 20, 2005.]
PHILIPPINE NATIONAL
BANK, petitioner, vs. NORMAN Y.
PIKE, respondent.
This petition for review on certiorari under Rule 45 of
the 1997 Rules of Civil Procedure, as amended, seeks to
reverse the Decision 1 dated 19 December 2002, and the
Resolution 2 dated 02 April 2003, both of the Court of
Appeals, in CA-G.R. CV No. 59389, which affirmed
with modification the Decision 3 rendered by the
Regional Trial Court (RTC), Branch 07 of Manila, dated
71
10 January 1997, in Civil Case No. 94-68821 in favor of
herein respondent Norman Pike (Pike).
The case stemmed from a complaint 4 filed by herein
respondent Pike for damages 5 against Philippine
National Bank (PNB) on 04 January 1994.
Complainant Pike often traveled to and from Japan as a
gay entertainer in said country. Sometime in 1991, he
opened U.S. Dollar Savings Account No. 0265-704591-
0 with herein petitioner PNB Buendia branch for which
he was issued a corresponding passbook. The complaint
alleged in substance that before complainant Pike left
for Japan on 18 March 1993, he kept the aforementioned
passbook inside a cabinet under lock and key, in his
home; that on 19 April 1993, a few hours after he
arrived from Japan, he discovered that some of his
valuables were missing including the passbook; that he
immediately reported the incident to the police which
led to the arrest and prosecution of a certain Mr. Joy
Manuel Davasol; that complainant Pike also discovered
that Davasol made two (2) unauthorized withdrawals
from his U.S. Dollar Savings Account No. 0265-
704591-0, both times at the PNB Buendia branch on the
following dates:
DATEAMOUNT
31 March 1993$3,500.00
05 April 19934,000.00
TOTAL$7,500.00
that on several occasions, complainant Pike went to
defendant PNB's Buendia branch and verbally
protested the unauthorized withdrawals and likewise
demanded the return of the total withdrawn amount of
U.S. $7,500.00, on the ground that he never authorized
anybody to withdraw from his account as the
 signatures appearing on the subject withdrawal slips
were clearly forgeries; that defendant PNB refused to
credit said amount back to complainant's U.S. Dollar
Savings Account without justifiable reason, and
instead, defendant bank wrote him that it exercised
due diligence in the handling of said account; and that
on 06 May 1993, complainant Pike wrote defendant
PNB simply to request that the hold-account be lifted
so that he may withdraw the remaining balance left in
his U.S.$ Savings Account and nothing else. aCTHDA
On the other hand, defendant PNB alleged, in its Motion
to Dismiss 6 of 18 April 1994, a counterstatement of
facts. Its factual allegations read:
. . . On March 15, 1993 at PNB Buendia
Branch, Mr. Norman Y. Pike, together with a
certain Joy Davasol went to see PNB AVP Mr.
Lorenzo T. Val (sic), Jr. purposely to withdraw
the amount of $2,000.00. Mr. Pike also
informed AVP Val that he is leaving for abroad
(Japan) and made verbal instruction to honor
all withdrawals to be transmitted by his Talent
Manager and Choreographer, Joy Davasol who
shall present pre-signed withdrawal slips
bearing his (Pike's) signature. . .
On April 19, 1993, a certain Josephine
Balmaceda, who claimed to be plaintiff's sister
executed an affidavit . . . stating therein that
they discovered today (April 19, 1993) the lost
(sic) of her brother's passbook issued by PNB
on account of robbery, committed in the
residence/office of her brother, promptly
reporting the matter to the police authorities
and her brother cannot report the matter to the
Bank because he was currently in Japan and
therefore requesting the Bank to issue a hold-
order on her brother's passbook.
But a copy of an alarm (Police) Report dated Buendia Branch
April 19, 1993 . . . stated that plaintiff (who
Paseo de Roxas cor. Gil Puyat Street
was the one who reported the matter) after one
month in Japan, he (complainant) arrived Makati, Metro Manila
yesterday. . .
Sir:
On April 26, 1993, Atty. Nathaniel Ifurung
In connection with the request of my
who claims to be plaintiff's counsel sent a
sister, Mrs. Josephine P. Balmaceda for
demand letter to VP Violeta T. Suquila (then
the hold-order on my dollar savings
VP and Manager of PNB Buendia Branch)
passbook No. 265-704591-0, I am now
demanding the bank to credit back the amount
requesting your good office to lift the
of US$7,500.00 which were withdrawn on
same so I can withdraw the remaining
March 31, 1993 and April 5, 1993, because his
balance of my passbook which was
client's signatures were forged and the
reported lost sometime in March of this
withdrawal made thereon were
year.
unauthorized. . .
I also promise not to hold responsible
On May 5, 1993, Mr. Norman Y. Pike executed
the bank and its officers for the
an affidavit of loss (sic) Dollar Account
withdrawal made on my dollar savings
Passbook . . . and requested the PNB to replace
passbook on March 19 and April 5,
the same and allow him to make withdrawals
1993 respectively as a result of the lost
thereon. He stated that his passbook was stolen
(sic) of my passbook.
together with other valuables which he
discovered only in the early morning of April Sgd
19, 1993. . . .
NO
On May 6, 1993, plaintiff Norman Y. Pike
RM
wrote a letter . . . addressed to the Manager of
AN
PNB, Buendia Branch the full contents of said
Y.
letter hereto quoted as follows:
PIK
Ma E
y 6,
Dep
199
osit
3
or
The Manager
Phil
Philippine National Bank ippi
ne
72
 Pas On July 2, 1993, Plaintiff's counsel sent a letter xxx xxx xxx
spor to PNB Vice Pres. Suquila denying that his
The court compared the signatures in the
t client made any such promise not to hold
questioned withdrawal slips with the known
responsible the bank and its officers for the
No. signatures of the depositor and is convinced
withdrawal made . . . .
H91 that the signatures in the unauthorized
802 A letter dated July 29, 1993 . . . was sent to withdrawal slips do not correspond to the true
2 Plaintiff's counsel by VP Suquila stating that signatures of the depositor.
plaintiff's withdrawal of the remaining balance
Issu From the evidence that it received, the court is
of his account with the Bank effectively estops
ed convinced that the bank was negligent in the
him from claiming on the alleged unauthorized
at performance of its duties such that
withdrawals.
Ma unauthorized withdrawals were made in the
nila The trial court, in its decision dated 10 January 1997, deposit of plaintiff Norman Y. Pike. 7
on made the following findings of fact:
The dispositive portion of the trial court's decision reads:
Sep . . . [T]hat the bank is responsible for such
WHEREFORE and considering the foregoing,
t. 6, unauthorized withdrawals. The court is not
judgment is hereby rendered in favor of the
199 impressed with the defense put up by the bank.
plaintiff and against the defendant and ordering
0 Its contention that the withdrawals were
the defendant to pay the following:
authorized by the plaintiff because there was
Plac
an arrangement between the bank represented 1.US$7,500.00 plus interest thereon at
e of
by its Asst. Vice President Lorenzo Bal, Jr. and the rate of 12% per annum until
Issu
the depositor Norman Y. Pike to the effect that the full amount is paid;
anc
pre-signed withdrawal slips, that is, withdrawal
e 2.P25,000.00 for and as attorney's fees;
slip signed by the depositor in the presence of
On the same day May 6, 1993 Plaintiff Mr. Bal whereby it would be made to appear 3.P50,000.00 as moral damages and
Norman Y. Pike was allowed by defendant that it was the depositor himself who presented P50,000.00 as exemplary
bank to withdraw the remaining balance from the same to the bank despite the fact that it was damages; and
his passbook . . . . another person who presented the same should
be honored by the bank cannot be sanctioned 4.Plus the costs of suit. 8
A letter dated May 18, 1993 was sent to
by the court. Firstly, the court is not satisfied Defendant PNB's motion for reconsideration was
Plaintiff's counsel . . . by PNB . . . stating that
that there was indeed such an arrangement. . . subsequently denied by the court a quo. 9
the Bank regrets that it cannot accede to such
It is Mr. Bal's contention that such an
request inasmuch as the Bank exercised due On appeal, the Court of Appeals issued the assailed
arrangement although not ordinarily entered
diligence of a good father to his family in the decision dated 19 December 2002, affirming the
into is still a legal procedure of the bank and is
handling of transactions covering the deposit findings of the RTC that indeed defendant-appellant
resorted to accommodate the depositors'
account of Mr. Pike . . . . TIEHSA PNB was negligent in exercising the diligence required
specially honored and valued depositor at that.
of a business imbued with public interest such as that of
73
the banking industry, however, it modified the rate of
interest and award for damages, to wit:
WHEREFORE, premises considered, the
Decision dated January 10, 1997 issued by the
Regional Trial Court of Manila, Branch 7, in
Civil Case No. 94-68821, is hereby
AFFIRMED with MODIFICATION, as
follows:
1.Ordering appellant, the Philippine
National Bank, Buendia
Branch, to refund appellee the
amount of $7,500.00 plus
interest of 6% per annum to be
computed from the date of the
filing of the complaint which
interest rate shall become
12% per annum from the time
the judgment in this case
becomes final and executory
until its satisfaction; TaEIAS
2.The award for moral damages is
reduced to P20,000.00; and
3.The award for exemplary damages is
likewise reduced to P20,000.00.
Costs against appellant. 10
The appellate court held that:
Appellant claims that appellee personally
talked to its officers to allow Joy Manuel
Davasol to make withdrawals. Appellee even
left pre-signed withdrawal slips before he went
to Japan. However, appellant could have told
appellee to authorize the withdrawal by a
representative by indicating the same at the
space provided at the back portion of the
withdrawal slip. This operational flaw was
observed by the trial court, when it ruled:
The court cannot also understand why
the bank did not require the correct,
proper and the usual procedure of
requiring a depositor who is
withdrawing the money through a
representative to fill up the back
portion of the withdrawal slips, which
form was issued by the bank itself.
A perusal of the records discloses that appellee
had previously authorized withdrawals by a
representative. However, these withdrawals
were properly accompanied by a "withdrawal
by a representative" form aside from a
handwritten request by appellee to allow such
withdrawals by his representative, or a
typewritten letter-request for withdrawal by a
representative. Certainly, appellant lacked the
due care and caution required of managers and
employees of a firm engaged in so sensitive
and demanding business as banking. . . .
In its desire to be exonerated from liability,
appellant advances the argument that, granting
negligence on its part, appellee condoned this
negligence as shown in his letter dated May 6,
1993, wherein appellee purportedly undertook,
not to hold the bank and its officers responsible
for the unauthorized withdrawals from his
account.
We do not agree. It should be emphasized that
while the appellee admitted signing the letter
74
dated May 6, 1993, he, however, denied having
undertook (sic) to exonerate the appellant from
liability for the unauthorized withdrawals.
Appellee questioned the second paragraph of
the said letter as being superimposed so that his
signature overlapped the text of the second
paragraph of said letter. A waiver of right, in
order to be valid, should be in a language that
clearly manifests his desire to do so. . . . In the
instant case, appellee's filing of the instant
action is inconsistent with appellant's
contention that he had waived his right to
question appellant's negligent act of allowing
the unauthorized withdrawals from his
account. 11
Defendant-appellant PNB filed a motion for
reconsideration. In a Resolution dated 02 April 2003, the
Court of Appeals denied said motion.
Hence, this petition.
Petitioner PNB now seeks the review of the aforequoted
decision and resolution of the Court of Appeals
predicated on the following issues:
I.
WHETHER OR NOT THE PRINCIPLE OF
ESTOPPEL WAS NOT PROPERLY APPLIED
IN THIS CASE;
II.
WHETHER OR NOT RESPONDENT HAVE
SUBSTANTIALLY PROVEN THAT THE
SIGNATURES APPEARING ON THE TWO
(2) QUESTIONED PRE-SIGNED
WITHDRAWAL SLIP FORMS ARE ALL
FORGERIES IN ACCORDANCE WITH
 SECTION 22, RULE 132 OF THE REVISED
RULES OF COURT; and
III.
WHETHER OR NOT MORAL AND
EXEMPLARY DAMAGES CAN BE
AWARDED AGAINST A PARTY IN GOOD
FAITH. TaCDIc
Petitioner PNB contends that due to the verbal
instructions 12 of respondent Pike, a valued depositor, it
allowed the withdrawal by another person. Plus, the fact
that said respondent withdrew the remaining balance in
his US Savings Account and executed a waiver releasing
petitioner PNB from any liability due to the loss of the
funds should rightly negate a finding of negligence on
its part. Accordingly, petitioner PNB claims that the
appellate court, as well as the trial court erred in holding
that the withdrawals in question were unauthorized as
the signatures appearing on the subject withdrawal slips
were forgeries. Petitioner PNB, therefore, argues that it
should not be held liable for the amount withdrawn from
the account of respondent Pike in the sum of $7,500.00,
as well as for moral and exemplary damages.
A priori, it is quite evident that the petition is anchored
on a plea to review or re-examine the factual
conclusions reached by the trial court and affirmed by
the Court of Appeals, and for this Court to hold
otherwise. Whether:
1)respondent Pike's signatures appearing on
the pertinent withdrawal slips used by Joy
Manuel Davasol 13 to withdraw the amount of
$7,500.00, were forgeries, as found by the trial
court and affirmed by the Court of Appeals, or
were authentic as claimed by petitioner bank;
and
2)respondent Pike in fact executed a waiver
absolving petitioner bank from any legal
responsibility due to the unauthorized
withdrawals, as maintained by petitioner bank,
or the paragraph containing said waiver was
intercalated by some other person, thus,
amounting no waiver at all, as held by the
courts a quo.
are questions of fact and not of law. Inexorably, these
issues call for an inquiry into the facts and evidence on
record. This, as we have so often held, we cannot do.
Elementary is the rule that this Court is not the
appropriate venue to consider anew the factual issues as
it is not a trier of facts, and, it generally does not weigh
anew the evidence already passed upon by the Court of
Appeals. 14 When this Court is tasked to go over once
more the evidence presented by both parties, and
analyze, assess and weigh them to ascertain if the trial
court and the appellate court were correct in according
superior credit to this or that piece of evidence of one
party or the other, the Court cannot and will not do the
same. 15 Such task is foreclosed by the rule enunciated
under Section 1 of Rule 45 16 of the Rules of Court:
SECTION 1.Filing of petition with Supreme
Court. . . . The petition shall raise only
questions of law 17 which must be distinctly
set forth.
We have oft "ruled that factual findings of the Court of
Appeals are conclusive on the parties and not
reviewable by this Court and they carry even more
weight when the Court of Appeals affirms the factual
findings of the trial court," 18 and in the absence of any
showing that the findings complained of are totally
devoid of support in the evidence on record, or that they
are so glaringly erroneous as to constitute serious abuse
75
of discretion, such findings must stand. The courts a
quo are in a much better position to evaluate properly
the evidence.
Finding no other alternative but to affirm their finding
that petitioner PNB negligently allowed the
unauthorized withdrawals subject of the case at bar, the
instant petition for review must necessarily fail.
At this juncture, it bears emphasizing that negligence of
banking institutions should never be countenanced. The
negligence here lies in the lackadaisical attitude
exhibited by employees of petitioner PNB in their
treatment of respondent Pike's US Dollar Savings
Account that resulted in the unauthorized withdrawal of
$7,500.00. Nevertheless, though its employees may be
the ones negligent, a bank's liability as an obligor is not
merely vicarious but primary, as banks are expected to
exercise the highest degree of diligence in the selection
and supervision of their employees, 19 and having such
obligation, this Court cannot ignore the circumstances
surrounding the case at bar how the employees of
petitioner PNB turned their heads, nay, closed their eyes
to the suspicious circumstances enfolding the two
withdrawals subject of the case at bar. It may even be
said that they went out of their ways to disregard
standard operating procedures formulated to ensure the
security of each and every account that they are
handling. Petitioner PNB does not deny that the
withdrawal slips used were in breach of standard
operating procedures of banks in the ordinary and usual
course of banking operations as testified to by one of its
witnesses, Mr. Lorenzo T. Bal, Assistant Vice President
of Petitioner PNB's Buendia branch, on cross-
examination 20 he stated thus:
Q:Mr. Witness, when the original of Exhibit
"B" 21 was presented to you for
 approval, how many signatures of
depositor appears thereon? IcHTAa
A:Two (2) signatures appears (sic) on the face
of the withdrawal slip.
Q:When it (sic) was (sic) presented to you
immediately?
A:Yes, sir.
Q:Are you sure of that?
A:Yes, sir. Because it was pre signed
withdrawal slip.
Q:What does the signature appear, the word
recipient means?
A:Received.
Q:So, what you are saying is that, the
depositor here signed this even before
receiving the amount?
A:Because before the withdrawal was made,
Mr. Pike, the depositor came to the
bank when he withdrew the $2,000.00
and instructed me or requested us even
the supervisor to honor all withdrawal
slip.
Q:And this is a regular procedure?
A:Yes, sir.
Q:Are you sure of that?
A:Yes, sir.
Q:Do you have written manual on this
particular procedure, Mr. Witness?
A:Of course, that includes in the Rules and
regulations of the bank.
Q:Are you are (sic) are very sure of that?
A:And banking is a fast transaction between
the depositor and the bank.
Q:And then, is the use of the back portion of
the withdrawal slip . . . with a heading
of authorization?
A:Normally, a depositor and the bank agrees
on certain terms that if you allow
withdrawal from his account, his or her
account, its enough that the signature
of the depositor appears on both
spaces in the front side of the
withdrawal slip. Even if you do not
have the back portion of the
withdrawal slip.
Q:You are very sure of that?
A:Yes, sir.
Q:And that has been done with the other
withdrawal slip of Norman Pike as
stated or as shown in the Statement of
Account?
A:Yes, sir.
Q:That withdrawal made by representative?
A:Yes, sir.
From the foregoing, petitioner PNB's witness was
utterly remiss in protecting the bank's client, as well as
the bank itself, when he allowed an account holder to
make it appear as if he was the one actually withdrawing
from an account and actually receiving the withdrawn
76
amount. Ordinarily, banks allow withdrawal by someone
who is not the account holder so long as the account
holder authorizes his representative to withdraw and
receive from his account by signing on the space
provided particularly for such transactions, usually
found at the back of withdrawal slips. As fittingly found
by the courts a quo, if indeed, respondent Pike signed
the withdrawal slips in the presence of Mr. Lorenzo Bal,
petitioner PNB's AVP at its Buendia branch, why did he
not call respondent Pike's attention and refer him to the
space provided for authorizing representatives to
withdraw from and receive the proceeds of such
withdrawal? Or, at the very least, sign or initial the same
so that he could identify the pre-signed withdrawal slips
made by Mr. Pike? DECcAS
Q:You are also saying that on March 15, 1993,
you likewise met Joy Manuel Dabasol?
A:Yes, sir.
Q:And you (sic) also saying on March 15,
1993, you also met Norman Pike, the
depositor,
A:Yes, sir.
Q:And when did you first met (sic) Norman
Pike?
A:March 15 when he withdrew $2,000.00.
Q:That was the first time?
A:First time, yes.
Q:And Mr. Norman Pike was already
transacting with you long before that
day, is this correct? For how long was
he transacting with you?
A:That was my first time. Answer. You are familiar with his physical
appearance?
Q:That was the first time. What I mean is, that
he was transacting with the PNB, A:Not so much. Because there are so much
Buendia Branch long before you met depositor (sic) in the
him? bank. 23 [Emphasis ours.]
A:Maybe. By his own testimony, the witness negated the very
reason for the bank's bizarre "accommodation" of the
xxx xxx xxx
alleged verbal request of respondent Pike that he was
Q:And the withdrawal made on April 5, 1993 a "valued client." From the aforequoted, it appears that
which you approved, you did not look the witness, Lorenzo Bal, was not even reasonably
at Exhibit "C", the Savings Signature familiar with respondent Pike, yet, he was ready, willing
Card Individual?
and able to accommodate the verbal request of said
depositor. Worse still, the witness still approved the
A:We do not look at that, that is kept in the
withdrawal transaction without asking for any proof of
vault.
identification for the reason that: 1) Davasol was in
Q:Yes or no? possession of a pre-signed withdrawal slip; and 2) the
witness "recognized" the signature of respondent Pike
A:No, sir.
even after admitting that he did not bother to counter
xxx xxx xxx check the signature on the slip with the specimen
signature card of respondent Pike and that he met
Q:And Mr. witness, Exhibit "C-1" 22 which is
respondent Pike just once so that he cannot seem to
being kept at your vault, also contains a
recall what the latter looks like. The ensuing quoted
picture?
testimony of the same witness will justify a finding of
A:Yes, sir. negligence amounting to bad faith, to wit:
Q:And the picture of the depositor? Q:And you also met Joy Manuel Dabasol on
March 15? ACcHIa
A:Yes, sir.
A:Yes, sir.
Q:And are you familiar with the identity of the
depositor Norman Pike? Q:And can you describe Joy Manuel Dabasol?
A:What particular identity? A:I cannot recall his face but then he is a
Talent manager, because there are so
Q:His appearance?
many depositors in the bank.
A:He is gay looking fellow.
xxx xxx xxx
COURT:
77
Q:Mr. witness, you are saying that Mr. Pike,
the depositor gave you verbal authority
to honor withdrawal by Joy Manuel
Dabasol?
A:Yes, sir.
Q:Why did you not require then that Mr. Pike
instead sign the authorization portion
and that the name of Joy Manuel
Dabasol appear thereon with his
signature?
xxx xxx xxx
A:I required Mr. Norman Pike to sign the
withdrawal slip on the face of the
withdrawal slip.
Q:But not the authorization portion of the said
withdrawal slip?
xxx xxx xxx
A:No, because that is sufficient already.
Q:And is this your normal procedure, Mr.
witness? This particular procedure that
you conducted?
A:I don't think so.
Q:Mr. witness, when on April 5, 1993, when
Joy Dabasol came to the office and
according to you, you do not remember
him, is that correct?
A:I cannot recall his face.
xxx xxx xxx
Q:And he just showed you a withdrawal slip, is
this correct?
A:Yes, on April 5.
Q:Did you require him to produce any
Identification Card, yes or no?
A:No.
Q:And how did you know then that it was Joy
Dabasol who was making the
withdrawal on April 5?
A:Because the presigned withdrawal slip was
presented to me.
Q:Is that all your basis?
A:Yes, sir. Because his signature appears.
xxx xxx xxx
Q:Mr. witness, this alleged authority given to
you by Norman Pike to honor
withdrawal by Joy Manuel Dabasol,
was that in writing?
A:It was verbally requested.
Q:And that is SPO (sic) of PNB, Buendia
Branch to accept verbal
authorities? aDcETC
A:Yes.
Q:Is that Standard Operating Procedure?
A:It is not SPO, but when you knew the client,
Your Honor, you have to honor also the
trust and confidence. Let us say if
you. . .
Q:According to you, you met Norman Pike
only on March 15, 1993 and
immediately you allowed him to
withdraw through pre-signed
withdrawal slip?
A:Yes, Your Honor. Because a depositor
requested you to honor his signature,
you have to do that or else will . . . and
besides the request is for purpose of
expediency, Your Honor. Because most
often than that, he is out of the country,
in Japan. And his Talent Manager is the
one managing the recruiting agency.
The money will be used in the
operating expenses.
xxx xxx xxx
Q:You did not even bother to look at the
Savings Signature Card Individual, yes
or no?
A:No, sir. 24 [Emphases supplied.]
Having admitted that pre-signed withdrawal slips do not
constitute the normal procedure with respect to
withdrawals by representatives should have already put
petitioner PNB's employees on guard. Rather than
readily validating and permitting said withdrawals, they
should have proceeded more cautiously. Clearly,
petitioner bank's employee, Lorenzo T. Bal, an Assistant
Vice President at that, was exceedingly careless in his
treatment of respondent Pike's savings account.
From the foregoing, the evidence clearly showed that
the petitioner bank did not exercise the degree of
diligence that it ought to have exercised in dealing with
their clients.
With banks, the degree of diligence required, contrary to
the position of petitioner PNB, is more than that of a
good father of a family considering that the business of
78
banking is imbued with public interest due to the nature
of their functions. The stability of banks largely depends
on the confidence of the people in the honesty and
efficiency of banks. Thus, the law imposes on banks a
high degree of obligation to treat the accounts of its
depositors with meticulous care, always having in mind
the fiduciary nature of banking. Section 2 of Republic Act No.
8791, 25 which took effect on 13 June 2000, makes a
categorical declaration that the State recognizes the
"fiduciary nature of banking that requires high standards
of integrity and performance." 26
Though passed long after the unauthorized withdrawals
in this case, the aforequoted provision is a statutory
affirmation of Supreme Court decisions already in
esse at the time of such withdrawals. We elucidated in
the 1990 case of Simex International, Inc. v. Court of
Appeals, 27 that "the bank is under obligation to treat
the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their
relationship." 28
Likewise, in the case of The Consolidated Bank and Trust
Corporation v. Court of Appeals, 29 we clarified that said fiduciary
relationship means that the bank's obligation to observe
"highest standards of integrity and performance" is
deemed written into every deposit agreement between a
bank and its depositor. The fiduciary nature of banking
requires banks to assume a degree of diligence higher
than that of a good father of a family. Article 1172 of the
New Civil Code states that the degree of diligence
required of an obligor 30 is that prescribed by law or
contract, and absent such stipulation then the diligence
of a family. In every case, the depositor expects the bank
to treat his account with the utmost fidelity, whether
such accounts consist only of a few hundred pesos or of
millions of pesos. 31
Anent the issue of the propriety of the award of damages
in this case, petitioner PNB asseverates that there was
no evidence to prove that respondent Pike "suffered
anguish, embarrassment and mental sufferings" 32 due
to its acts in allowing the alleged unauthorized
withdrawals. And, having relied on the instructions of a
valued depositor, petitioner PNB likewise avers that its
actions were made in good faith, for this reason, there is
no factual basis for said award. CASaEc
Petitioner PNB's assertions fail to impress us.
The award of moral and exemplary damages is left to
the sound discretion of the court, and if such discretion
is well exercised, as in this case, it will not be disturbed
on appeal. 33 In the case of Philippine Telegraph &
Telephone Corporation v. Court of Appeals, 34 we had
the occasion to reiterate the conditions to be met in
order that moral damages may be recovered. In said case
we stated:
An award of moral damages would require,
firstly, evidence of besmirched reputation, or
physical, mental or psychological suffering
sustained by the claimant; secondly, a culpable
act or omission factually established; thirdly,
proof that the wrongful act or omission of the
defendant is the proximate cause of the
damages sustained by the claimant; and
fourthly, that the case is predicated on any of
the instances expressed or envisioned
by Articles 2219 35 and 2220 36 of the Civil
Code.
Specifically, in culpa contractual or breach of contract,
as here, moral damages are recoverable only if the
defendant has acted fraudulently or in bad faith, 37 or is
found guilty of gross negligence amounting to bad
faith, 38 or in wanton disregard of his contractual
obligations. 39 Verily, the breach must be wanton, P10,000.00 representing expenses of litigation. Costs
reckless, malicious, or in bad faith, oppressive or against petitioner PNB. cIaCTS
abusive. 40
SO ORDERED.
There is no reason to disturb the trial court's finding of
petitioner bank's employees' negligence in their
treatment of respondent Pike's account. In the case on
hand, the Court of Appeals sustained, and rightly so, that
SECOND DIVISION
an award of moral damages is warranted. For, as found
by said appellate court, citing the case of Prudential Bank v.
Court of Appeals, 41 "the bank's negligence is a result of lack [G.R. No. 176434. June 25, 2008.]
of due care and caution required of managers and
employees of a firm engaged in so sensitive and BANK OF THE PHILIPPINE
demanding business, as banking, hence, the award of ISLANDS, petitioner, vs. LIFETIME
P20,000.00 as moral damages, is proper. MARKETING
CORPORATION, respondent.
The award of exemplary damages is also proper as a
The Bank of the Philippine Islands (BPI) seeks
warning to petitioner PNB and all concerned not to
the reversal of the Decision 1 of the Court of Appeals
recklessly disregard their obligation to exercise the
highest and strictest diligence in serving their dated 31 July 2006 in CA-G.R. CV No. 62769 which
depositors. ordered it to pay Lifetime Marketing Corporation
(LMC) actual damages in the amount of
Finally, the aforestated grant of exemplary damages P2,075,695.50 on account of its gross negligence in
entitles respondent Pike the award of attorney's fees in handling LMC's account.
the amount of P20,000.00 and the award of P10,000.00
The following facts, quoted from the decision
for litigation expenses. 42
of the Court of Appeals, are undisputed:
WHEREFORE, the instant petition is DENIED. The
assailed Decision dated 19 December 2002, and the On October 22, 1981, Lifetime
Resolution dated 02 April 2003, both of the Court of Marketing Corporation (LMC, for brevity),
Appeals, in CA-G.R. CV No. 59389, which affirmed opened a current account with the Bank of the
with modification the Decision rendered by the Regional Philippine Islands (BPI, for brevity),
Trial Court (RTC), Branch 07 of Manila, dated 10 Greenhills-Edsa branch, denominated as
Account No. 3101-0680-63. In this account,
January 1997, in Civil Case No. 94-68821, are hereby
the "sales agents" of LMC would have to
AFFIRMED with the MODIFICATION that petitioner
deposit their collections or payments to the
PNB is directed to pay respondent Pike additional 1)
latter. As a result, LMC and BPI, made a
P20,000.00 representing attorney's fees; and 2)
special arrangement that the former's agents
79
will accomplish three (3) copies of the deposit
slips, the third copy to be retained and held by
the teller until LMC's authorized
representatives, Mrs. Virginia Mongon and
Mrs. Violeta Ancajas, shall retrieve them on
the following banking day.
Sometime in 1986, LMC availed of the
BPI's inter-branch banking network services in
Metro Manila, whereby the former's agents
could make [a] deposit to any BPI branch in
Metro Manila under the same account. Under
this system, BPI's bank tellers were no longer
obliged to retain the extra copy of the deposit
slips instead, they will rely on the machine-
validated deposit slip, to be submitted by
LMC's agents. For its part, BPI would send to
LMC a monthly bank statement relating to the
subject account. This practice was observed
and complied with by the parties. AHCcET
As a business practice, the registered
sales agents or the Lifetime Educational
Consultants of LMC, can get the books from
the latter on consignment basis, then they
would go directly to their clients to sell. These
agents or Lifetime Educational Consultants
would then pay to LMC, seven (7) days after
they pick up all the books to be sold. Since
LMC have several agents around the
Philippines, it required to remit their payments
through BPI, where LMC maintained its
current account. It has been LMC's practice to
require its agents to present a validated deposit
slip and, on that basis, LMC would issue to the
latter an acknowledgement receipt.
Alice Laurel, is one of LMC's
"Educational Consultants" or agents. On
various dates covering the period from
May, [sic] 1991 up to August, 1992, Alice
Laurel deposited checks to LMC's subject
account at different branches of BPI,
specifically: at the Harrison/Buendia branch-8
checks; at Arrangue branch-4 checks; at
Araneta branch-1 check; at Binondo branch-3
checks; at Ermita branch-5 checks; at Cubao
Shopping branch-1 check; at Escolta branch-4
checks; at the Malate branch-2 checks; at Taft
Avenue branch-2 checks; at Paseo de Roxas
branch-1 check; at J. Ruiz, San Juan branch, at
West Avenue and Commonwealth Quezon City
branch-2 checks; and at Vito Cruz branch-2
checks.
Each check thus deposited were
retrieved by Alice Laurel after the deposit slips
were machine-validated, except the following
thirteen (13) checks, which bore no machine
validation, to wit: CBC Check No. 484004,
RCBC Check No. 419818, CBC Check No.
484042, FEBTC Check No. 171857, RCBC
Check No. 419847, CBC Check No. 484053,
MBTC Check No. 080726, CBC Check No.
484062, PBC Check No. 158076, CBC Check
No. 484027, CBC Check No. 484017, CBC
Check No. 484023 and CBC Check No.
218190.
A verification with BPI by LMC
showed that Alice Laurel made check deposits
with the named BPI branches and, after the
check deposit slips were machine-validated,
requested the teller to reverse the transactions.
Based on general banking practices, however,
the cancellation of deposit or payment
transactions upon request by any depositor or
80
payor, requires that all copies of the deposit
slips must be retrieved or surrendered to the
bank. This practice, in effect, cancels the
deposit or payment transaction, thus, it leaves
no evidence for any subsequent claim or
misrepresentation made by any innocent third
person. Notwithstanding this, the verbal
requests of Alice Laurel and her husband to
reverse the deposits even after the deposit slips
were already received and consummated were
accommodated by BPI tellers. IAETDc
Alice Laurel presented the machine-
validated deposit slips to LMC which, on the
strength thereof, considered her account paid.
LMC even granted her certain privileges or
prizes based on the deposits she made.
The total aggregate amount covered by
Alice Laurel's deposit slips was Two Million
Seven Hundred Sixty Seven Thousand, Five
Hundred Ninety Four Pesos (P2,767,594.00)
and, for which, LMC paid Laurel the total sum
of Five Hundred Sixty Thousand Seven
Hundred Twenty Six Pesos (P560,726.00) by
way of "sales discount and promo prizes."
The above fraudulent transactions of
Alice Laurel and her husband was made
possible through BPI teller's failure to retrieve
the duplicate original copies of the deposit
slips from the former, every time they ask for
cancellation or reversal of the deposit or
payment transaction.
Upon discovery of this fraud in early
August 1992, LMC made queries from the BPI
branches involved. In reply to said queries, BPI
branch managers formally admitted that they
cancelled, without the permission of or due
notice to LMC, the deposit transactions made
by Alice and her husband, and based only upon
the latter's verbal request or representation.
Thereafter, LMC immediately instituted
a criminal action for Estafa against Alice
Laurel and her husband Thomas Limoanco,
before the Regional Trial Court of Makati,
Branch 65, docketed as Criminal Case No. 93-
7970 to 71, entitled People of the Philippines
v. Thomas Limoanco and Alice Laurel. This
case for estafa, however, was archived because
summons could not be served upon the spouses
as they have absconded. Thus, the BPI's
apparent reluctance to admit liability and settle
LMC's claim for damages, and a hopeless case
of recovery from Alice Laurel and her
husband, has left LMC, with no option but to
recover damages from BPI.
On July 24, 1995, LMC, through its
representative, Miss Consolacion C. Rogacion,
the President of the company, filed a
Complaint for Damages against BPI, docketed
as Civil Case No. 95-1106, and was raffled to
Regional Trial Court of Makati City, Branch
141.
After trial on the merits, the court a
quo rendered a Decision in favor of LMC. The
dispositive portion of which reads, as
follows: IEHaSc
WHEREFORE, decision is hereby
rendered ordering defendant bank to
pay plaintiff actual damages equitably
reduced to one (1) million pesos plus
attorney's fees of P100,000.00.
No pronouncement as to costs.
SO ORDERED. 2
Only BPI filed an appeal. The Court of
Appeals affirmed the decision of the trial court but
increased the award of actual damages to
P2,075,695.50 and deleted the award of P100,000.00
as attorney's fees. 3 Citing public interest, the
appellate court denied reconsideration in a
Resolution 4 dated 30 January 2007.
In this Petition for Review 5 dated 19 March
2007, BPI insists that LMC should have presented
evidence to prove not only the amount of the checks
that were deposited and subsequently reversed, but
also the actual delivery of the books and the payment
of "sales and promo prizes" to Alice Laurel. Failing
this, there was allegedly no basis for the award of
actual damages. Moreover, the actual damages should
not have been increased because the decision of the
trial court became conclusive as regards LMC when it
did not appeal the said decision.
BPI further avers that LMC's negligence in
considering the machine-validated check deposit slips
as evidence of Alice Laurel's payment was the
proximate cause of its own loss. Allegedly, by
allowing its agents to make deposits with other BPI
branches, LMC violated its own special arrangement
with BPI's Greenhills-EDSA branch for the latter to
hold on to an extra copy of the deposit slip for pick up
by LMC's authorized representatives. BPI points out
that the deposits were in check and not in cash. As
such, LMC should have borne in mind that the
machine validation in the deposit slips is still subject
to the sufficiency of the funds in the drawers' account.
Furthermore, LMC allegedly ignored the express
notice indicated in its monthly bank statements and
81
consequently failed to check the accuracy of the
transactions reflected therein.
In its Manifestation of Compliance by
Respondent on the Order Dated 20 June 2007
Received on 29 July 2007 to Submit
Comment, 6 dated 9 August 2007, LMC insists that it
is indeed entitled to the actual damages awarded to it
by the appellate court.
BPI filed a Reply 7 dated 15 January 2008, in
reiteration of its submissions. DACIHc
We have repeatedly emphasized that the
banking industry is impressed with public interest. Of
paramount importance thereto is the trust and
confidence of the public in general. Accordingly, the
highest degree of diligence is expected, and high
standards of integrity and performance are required of
it. By the nature of its functions, a bank is under
obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary
nature of its relationship with them. 8 The fiduciary
nature of banking, previously imposed by case law, is
now enshrined in Republic Act No. 8791 or the General Banking Law
of 2000. Section 2 thereof specifically says that the state
recognizes the fiduciary nature of banking that
requires high standards of integrity and performance. 9
Whether BPI observed the highest degree of
care in handling LMC's account is the subject of the
inquiry in this case.
LMC sought recovery from BPI on a cause of
action based on tort. Article 2176 of the Civil Code
provides, "Whoever by act or omission causes damage
to another, there being fault or negligence, is obliged
to pay for the damage done. Such fault or negligence if
there is no pre-existing contractual relation between
the parties, is called a quasi-delict and is governed by
the provisions of this Chapter." There are three
elements of quasi-delict: (a) fault or negligence of the
defendant, or some other person for whose acts he
must respond; (b) damages suffered by the plaintiff;
and (c) the connection of cause and effect between the
fault or negligence of the defendant and the damages
incurred by the plaintiff. 10
In this case, both the trial court and the Court
of Appeals found that the reversal of the transactions
in question was unilaterally undertaken by BPI's
tellers without following normal banking procedure
which requires them to ensure that all copies of the
deposit slips are surrendered by the depositor. The
machine-validated deposit slips do not show that the
transactions have been cancelled, leading LMC to rely
on these slips and to consider Alice Laurel's account as
already paid.
Negligence is the omission to do something
which a reasonable man, guided by those
considerations which ordinarily regulate the conduct
of human affairs, would do, or the doing of something
which a prudent and reasonable man would not
do. 11 Negligence in this case lies in the tellers'
disregard of the validation procedures in place and
BPI's utter failure to supervise its employees. Notably,
BPI's managers admitted in several correspondences
with LMC that the deposit transactions were cancelled
without LMC's knowledge and consent and based only
upon the request of Alice Laurel and her
husband. 12 DIEAHc
It is well to reiterate that the degree of
diligence required of banks is more than that of a
reasonable man or a good father of a family. In view
of the fiduciary nature of their relationship with their
depositors, banks are duty-bound to treat the accounts
of their clients with the highest degree of care. 13
BPI cannot escape liability because of LMC's
failure to scrutinize the monthly statements sent to it
by the bank. This omission does not change the fact
that were it not for the wanton and reckless negligence
of BPI's tellers in failing to require the surrender of the
machine-validated deposit slips before reversing the
deposit transactions, the loss would not have occurred.
BPI's negligence is undoubtedly the proximate cause
of the loss. Proximate cause is that cause which, in a
natural and continuous sequence, unbroken by any
efficient intervening cause, produces the injury, and
without which the result would not have occurred. 14
It is also true, however, that LMC should have
been more vigilant in managing and overseeing its
own financial affairs. The damages awarded to it were
correctly reduced on account of its own contributory
negligence in accordance with Article 1172 of the
Civil Code. 15
Parenthetically, we find no merit in BPI's
allegation that LMC should have presented evidence
of delivery of the books and payment of sales and
promo prizes to Alice Laurel. The evidence presented
by LMC in the form of BPI's own admission that the
deposit transactions were reversed at the instance of
Alice Laurel and her husband, coupled with the
machine-validated deposit slips 16 which were
supposed to have been deposited to LMC's account
but were cancelled without its knowledge and consent,
sufficiently form the bases for the actual damages
claimed because they are the very same documents
relied upon by LMC in considering Alice Laurel's
account paid and in granting her monetary privileges
and prizes.
Be that as it may, we find the appellate court's
decision increasing the award of actual damages in
favor of LMC improper since the latter did not appeal
82
from the decision of the trial court. It is well-settled
that a party who does not appeal from the decision
may not obtain any affirmative relief from the
appellate court other than what he has obtained from
the lower court whose decision is brought up on
appeal. The exceptions to this rule, such as where
there are (1) errors affecting the lower court's
jurisdiction over the subject matter, (2) plain errors not
specified, and (3) clerical errors, do not apply in this
case. 17 CADHcI
WHEREFORE, the Decision of the Court of
Appeals in CA-G.R. CV No. 62769 dated 31 July
2006 and its Resolution dated January 30, 2007 are
AFFIRMED with the MODIFICATION that the Bank
of the Philippine Islands is ordered to pay actual
damages to Lifetime Marketing Corporation in the
amount of One Million Pesos (P1,000,000.00). No
pronouncement as to costs.
SO ORDERED.
|||
FIRST DIVISION
[G.R. No. 149454. May 28, 2004.]
BANK OF THE PHILIPPINE
ISLANDS, petitioner, vs. CASA
MONTESSORI INTERNATIONALE and
LEONARDO T. YABUT, respondents.
[G.R. No. 149507. May 28, 2004.]
 CASA MONTESSORI
INTERNATIONALE, petitioner, vs. BANK
OF THE PHILIPPINE
ISLANDS, respondent.
By the nature of its functions, a bank is required to take
meticulous care of the deposits of its clients, who have
the right to expect high standards of integrity and
performance from it. Among its obligations in
furtherance thereof is knowing the signatures of its
clients. Depositors are not estopped from questioning
wrongful withdrawals, even if they have failed to
question those errors in the statements sent by the bank
to them for verification.
The Case
Before us are two Petitions for Review 1 under Rule 45
of the Rules of Court, assailing the March 23, 2001
Decision 2 and the August 17, 2001 Resolution 3 of the
Court of Appeals (CA) in CA-GR CV No. 63561. The
decretal portion of the assailed Decision reads as
follows:
"WHEREFORE, upon the premises, the
decision appealed from is AFFIRMED with the
modification that defendant bank [Bank of the
Philippine Islands (BPI)] is held liable only for
one-half of the value of the forged checks in
the amount of P547,115.00 after deductions
subject to REIMBURSEMENT from third
party defendant Yabut who is likewise
ORDERED to pay the other half to plaintiff
corporation [Casa Montessori Internationale
(CASA)]." 4
The assailed Resolution denied all the parties' Motions
for Reconsideration.
The Facts
The facts of the case are narrated by the CA as follows:
"On November 8, 1982, plaintiff CASA
Montessori International 5 opened Current
Account No. 0291-0081-01 with defendant
BPI[,] with CASA's President Ms. Ma. Carina
C. Lebron as one of its authorized signatories.
"In 1991, after conducting an investigation,
plaintiff discovered that nine (9) of its checks
had been encashed by a certain Sonny D.
Santos since 1990 in the total amount of
P782,000.00, on the following dates and
amounts:
'Check No. Date Amount
1. 839700 April 24, 1990 P43,400.00
2. 839459 Nov. 2, 1990 110,500.00
3. 839609 Oct. 17, 1990 47,723.00
4. 839549 April 7, 1990 90,700.00
5. 839569 Sept. 23, 1990 52,277.00
6. 729149 Mar. 22, 1990 148,000.00
7. 729129 Mar. 16, 1990 51,015.00
8. 839684 Dec. 1, 1990 140,000.00
9. 729034 Mar. 2, 1990 98,985.00
Hence, these Petitions. 9
Total P782,600.00 6
"It turned out that 'Sonny D. Santos' with
account at BPI's Greenbelt Branch [was] a
fictitious name used by third party defendant
Leonardo T. Yabut who worked as external
83
auditor of CASA. Third party defendant
voluntarily admitted that he forged the
signature of Ms. Lebron and encashed the
checks.
"The PNP Crime Laboratory conducted an
examination of the nine (9) checks and
concluded that the handwritings thereon
compared to the standard signature of Ms.
Lebron were not written by the latter.
"On March 4, 1991, plaintiff filed the herein
Complaint for Collection with Damages
against defendant bank praying that the latter
be ordered to reinstate the amount of
P782,500.00 7 in the current and savings
accounts of the plaintiff with interest at 6% per
annum.
"On February 16, 1999, the RTC rendered the
appealed decision in favor of the plaintiff." 8
Ruling of the Court of Appeals
Modifying the Decision of the Regional Trial Court
(RTC), the CA apportioned the loss between BPI and
CASA. The appellate court took into account CASA's
contributory negligence that resulted in the undetected
forgery. It then ordered Leonardo T. Yabut to reimburse
BPI half the total amount claimed; and CASA, the other
half. It also disallowed attorney's fees and moral and
exemplary damages.
Issues
In GR No. 149454, Petitioner BPI submits the following
issues for our consideration:
"I. The Honorable Court of Appeals erred in
deciding this case NOT in accord with the
 applicable decisions of this Honorable
Court to the effect that forgery cannot be
presumed; that it must be proved by clear,
positive and convincing evidence; and that the
burden of proof lies on the party alleging the
forgery.
"II. The Honorable Court of Appeals erred in
deciding this case not in accord with
applicable laws, in particular the Negotiable
Instruments Law (NIL) which precludes CASA, on
account of its own negligence, from asserting
its forgery claim against BPI, specially taking
into account the absence of any negligence on
the part of BPI." 10
In GR No. 149507, Petitioner CASA submits the
following issues:
"1. The Honorable Court of Appeals erred
when it ruled that 'there is no showing that
[BPI], although negligent, acted in bad
faith . . .' thus denying the prayer for the award
of attorney's fees, moral damages and
exemplary damages to [CASA]. The
Honorable Court also erred when it did not
order [BPI] to pay interest on the amounts due
to [CASA].
"2. The Honorable Court of Appeals erred
when it declared that [CASA] was likewise
negligent in the case at bar, thus warranting its
conclusion that the loss in the amount of
P547,115.00 be 'apportioned between [CASA]
and [BPI] . . .'" 11
These issues can be narrowed down to three. First, was
there forgery under the Negotiable Instruments
Law (NIL)? Second, were any of the parties negligent and
therefore precluded from setting up forgery as a
defense? Third, should moral and exemplary damages,
attorney's fees, and interest be awarded?
The Court's Ruling
The Petition in GR No. 149454 has no merit, while that
in GR No. 149507 is partly meritorious.
First Issue:
Forged Signature Wholly Inoperative
Section 23 of the NIL provides:
"Section 23. Forged signature; effect of .
When a signature is forged or made without
the authority of the person whose signature it
purports to be, it is wholly inoperative, and no
right . . . to enforce payment thereof against
any party thereto, can be acquired through or
under such signature, unless the party against
whom it is sought to enforce such right is
precluded from setting up the forgery or want
of authority." 12
Under this provision, a forged signature is a real 13 or
absolute defense, 14 and a person whose signature on a
negotiable instrument is forged is deemed to have never
become a party thereto and to have never consented to
the contract that allegedly gave rise to it. 15
The counterfeiting of any writing, consisting in the
signing of another's name with intent to defraud, is
forgery. 16
In the present case, we hold that there was forgery of the
drawer's signature on the check.
First, both the CA 17 and the RTC 18 found that
Respondent Yabut himself had voluntarily admitted,
through an Affidavit, that he had forged the drawer's
84
signature and encashed the checks. 19 He never refuted
these findings. 20 That he had been coerced into
admission was not corroborated by any evidence on
record. 21
Second, the appellate and the trial courts also ruled that
the PNP Crime Laboratory, after its examination of the
said checks, 22 had concluded that the handwritings
thereon compared to the standard signature of the
drawer were not hers. 23 This conclusion was the
same as that in the Report 24 that the PNP Crime
Laboratory had earlier issued to BPI the drawee bank
upon the latter's request.
Indeed, we respect and affirm the RTC's factual
findings, especially when affirmed by the CA, since
these are supported by substantial evidence on
record. 25
Voluntary Admission Not
Violative of Constitutional Rights
The voluntary admission of Yabut did not violate his
constitutional rights (1) on custodial investigation, and
(2) against self-incrimination.
In the first place, he was not under custodial
investigation. 26 His Affidavit was executed in private
and before private individuals. 27 The mantle of
protection underSection 12 of Article III of the 1987
Constitution 28 covers only the period "from the time a
person is taken into custody for investigation of his
possible participation in the commission of a crime or
from the time he is singled out as a suspect in the
commission of a crime although not yet in custody." 29
Therefore, to fall within the ambit of Section 12, quoted
above, there must be an arrest or a deprivation of
freedom, with "questions propounded on him by the
police authorities for the purpose of eliciting admissions,
confessions, or any information." 30 The said
constitutional provision does "not apply to spontaneous
statements made in a voluntary manner" 31 whereby an
individual orally admits to authorship of a
crime. 32 "What the Constitution proscribes is the
compulsory or coercive disclosure of incriminating
facts." 33
Moreover, the right against self-
incrimination 34 under Section 17 of Article III 35 of the
Constitution, which is ordinarily available only in criminal
prosecutions, extends to all other government
proceedings including civil actions, legislative
investigations, 36 and administrative proceedings that
possess a criminal or penal aspect 37 but not to
private investigations done by private individuals. Even
in such government proceedings, this right may be
waived, 38 provided the waiver is certain; unequivocal;
and intelligently, understandingly and willingly
made. 39
If in these government proceedings waiver is allowed,
all the more is it so in private investigations. It is of no
moment that no criminal case has yet been filed against
Yabut. The filing thereof is entirely up to the appropriate
authorities or to the private individuals upon whom
damage has been caused. As we shall also explain later,
it is not mandatory for CASA the plaintiff below
to implead Yabut in the civil case before the lower court.
Under these two constitutional provisions, "[t]he Bill of
Rights 40 does not concern itself with the relation
between a private individual and another individual. It
governs the relationship between the individual and the
State." 41 Moreover, the Bill of Rights "is a charter of
liberties for the individual and a limitation upon the
power of the [S]tate." 42 These rights 43 are guaranteed
to preclude the slightest coercion by the State that may
lead the accused "to admit something false, not prevent
him from freely and voluntarily telling the truth." 44
Yabut is not an accused here. Besides, his mere
invocation of the aforesaid rights "does not
automatically entitle him to the constitutional
protection." 45 When he freely and voluntarily
executed 46 his Affidavit, the State was not even
involved. Such Affidavit may therefore be admitted
without violating his constitutional rights while under
custodial investigation and against self-incrimination.
Clear, Positive and Convincing
Examination and Evidence
The examination by the PNP, though inconclusive, was
nevertheless clear, positive and convincing.
Forgery "cannot be presumed." 47 It must be established
by clear, positive and convincing evidence. 48 Under the
best evidence rule as applied to documentary evidence
like the checks in question, no secondary or
substitutionary evidence may inceptively be introduced,
as the original writing itself must be produced in
court. 49 But when, without bad faith on the part of the
offeror, the original checks have already been destroyed
or cannot be produced in court, secondary evidence may
be produced. 50Without bad faith on its part, CASA
proved the loss or destruction of the original checks
through the Affidavit of the one person who knew of
that fact 51 Yabut. He clearly admitted to discarding
the paid checks to cover up his misdeed. 52 In such a
situation, secondary evidence like microfilm copies may
be introduced in court.
The drawer's signatures on the microfilm copies were
compared with the standard signature. PNP Document
Examiner II Josefina de la Cruz testified on cross-
85
examination that two different persons had written
them. 53 Although no conclusive report could be issued
in the absence of the original checks, 54 she affirmed
that her findings were 90 percent
conclusive. 55 According to her, even if the microfilm
copies were the only basis of comparison, the
differences were evident. 56 Besides, the RTC explained
that although the Report was inconclusive, no
conclusive report could have been given by the PNP,
anyway, in the absence of the original checks. 57 This
explanation is valid; otherwise, no such report can ever
be relied upon in court.
Even with respect to documentary evidence, the best
evidence rule applies only when the contents of a
document such as the drawer's signature on a check
is the subject of inquiry. 58 As to whether the
document has been actually executed, this rule does not
apply; and testimonial as well as any other secondary
evidence is admissible. 59 Carina Lebron herself, the
drawer's authorized signatory, testified many times that
she had never signed those checks. Her testimonial
evidence is admissible; the checks have not been
actually executed. The genuineness of her handwriting is
proved, not only through the court's comparison of the
questioned handwritings and admittedly genuine
specimens thereof, 60 but above all by her.
The failure of CASA to produce the original checks
neither gives rise to the presumption of suppression of
evidence 61 nor creates an unfavorable inference against
it. 62Such failure merely authorizes the introduction of
secondary evidence 63 in the form of microfilm copies.
Of no consequence is the fact that CASA did not present
the signature card containing the signatures with which
those on the checks were compared. 64 Specimens of
standard signatures are not limited to such a card.
Considering that it was not produced in evidence, other
documents that bear the drawer's authentic signature
may be resorted to. 65 Besides, that card was in the
possession of BPI the adverse party.
We have held that without the original document
containing the allegedly forged signature, one cannot
make a definitive comparison that would establish
forgery; 66and that a comparison based on a mere
reproduction of the document under controversy cannot
produce reliable results. 67 We have also said, however,
that a judge cannot merely rely on a handwriting expert's
testimony, 68 but should also exercise independent
judgment in evaluating the authenticity of a signature
under scrutiny. 69In the present case, both the RTC and
the CA conducted independent examinations of the
evidence presented and arrived at reasonable and similar
conclusions. Not only did they admit secondary
evidence; they also appositely considered testimonial
and other documentary evidence in the form of the
Affidavit.
The best evidence rule admits of exceptions and, as we
have discussed earlier, the first of these has been
met. 70 The result of examining a questioned
handwriting, even with the aid of experts and scientific
instruments, may be inconclusive; 71 but it is a non
sequitur to say that such result is not clear, positive and
convincing. The preponderance of evidence required in
this case has been satisfied. 72
Second Issue:
Negligence Attributable to BPI Alone
Having established the forgery of the drawer's signature,
BPI the drawee erred in making payments by
virtue thereof. The forged signatures are wholly
inoperative, and CASA the drawer whose authorized
signatures do not appear on the negotiable instruments
cannot be held liable thereon. Neither is the latter
precluded from setting up forgery as a real defense.
even if CASA failed to report the error. Neither is it
Clear Negligence
in Allowing Payment
Under a Forged Signature
We have repeatedly emphasized that, since the banking
business is impressed with public interest, of paramount
importance thereto is the trust and confidence of the
public in general. Consequently, the highest degree of
diligence 73 is expected, 74 and high standards of
integrity and performance are even required, of it. 75 By
the nature of its functions, a bank is "under obligation to
treat the accounts of its depositors with meticulous
care, 76 always having in mind the fiduciary nature of
their relationship." 77
BPI contends that it has a signature verification
procedure, in which checks are honored only when the
signatures therein are verified to be the same with or
similar to the specimen signatures on the signature
cards. Nonetheless, it still failed to detect the eight
instances of forgery. Its negligence consisted in the
omission of that degree of diligence required 78 of a
bank. It cannot now feign ignorance, for very early on
we have already ruled that 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." 79 In fact, BPI was the same bank involved
when we issued this ruling seventy years ago.
Neither Waiver nor Estoppel
Results from Failure to
Report Error in Bank Statement
The monthly statements issued by BPI to its clients
contain a notice worded as follows: "If no error is
86
reported in ten (10) days, account will be
correct." 80 Such notice cannot be considered a waiver,
estopped from questioning the mistake after the lapse of
the ten-day period.
This notice is a simple confirmation 81 or
"circularization" in accounting parlance that
requests client-depositors to affirm the accuracy of items
recorded by the banks. 82 Its purpose is to obtain from
the depositors a direct corroboration of the correctness
of their account balances with their respective
banks. 83 Internal or external auditors of a bank use it as
a basic audit procedure 84 the results of which its
client-depositors are neither interested in nor privy to
to test the details of transactions and balances in the
bank's records. 85 Evidential matter obtained from
independent sources outside a bank only serves to
provide greater assurance of reliability 86 than that
obtained solely within it for purposes of an audit of its
own financial statements, not those of its client-
depositors.
Furthermore, there is always the audit risk that errors
would not be detected 87 for various reasons. One,
materiality is a consideration in audit
planning; 88 and two, the information obtained from
such a substantive test is merely presumptive and cannot
be the basis of a valid waiver. 89 BPI has no right to
impose a condition unilaterally and thereafter consider
failure to meet such condition a waiver. Neither may
CASA renounce a right 90 it has never possessed. 91
Every right has subjects active and passive. While the
active subject is entitled to demand its enforcement, the
passive one is duty-bound to suffer such enforcement.92
On the one hand, BPI could not have been an active
subject, because it could not have demanded from
CASA a response to its notice. Besides, the notice was a
measly request worded as follows: "Please examine . . .
and report . . ." 93 CASA, on the other hand, could not
have been a passive subject, either, because it had no
obligation to respond. It could as it did choose not
to respond.
Estoppel precludes individuals from denying or
asserting, by their own deed or representation, anything
contrary to that established as the truth, in legal
contemplation. 94 Our rules on evidence even make
a juris et de jure presumption 95 that whenever one has,
by one's own act or omission, intentionally and
deliberately led another to believe a particular thing to
be true and to act upon that belief, one cannot in any
litigation arising from such act or omission be
permitted to falsify that supposed truth. 96
In the instant case, CASA never made any deed or
representation that misled BPI. The former's omission, if
any, may only be deemed an innocent mistake oblivious
to the procedures and consequences of periodic audits.
Since its conduct was due to such ignorance founded
upon an innocent mistake, estoppel will not arise. 97 A
person who has no knowledge of or consent to a
transaction may not be estopped by it. 98 "Estoppel
cannot be sustained by mere argument or doubtful
inference . . .."99 CASA is not barred from questioning
BPI's error even after the lapse of the period given in the
notice.
Loss Borne by
Proximate Source
of Negligence
For allowing payment 100 on the checks to a wrongful
and fictitious payee, BPI the drawee bank
becomes liable to its depositor-drawer. Since the
encashing bank is one of its branches, 101 BPI can
easily go after it and hold it liable for
reimbursement. 102 It "may not debit the drawer's
account 103 and is not entitled to indemnification from
the drawer." 104 In both law and equity, when one of
two innocent persons "must suffer by the wrongful act
of a third person, the loss must be borne by the one
whose negligence was the proximate cause of the loss or
who put it into the power of the third person to
perpetrate the wrong." 105
Proximate cause is determined by the facts of the
case. 106 "It is that cause which, in natural and
continuous sequence, unbroken by any efficient
intervening cause, produces the injury, and without
which the result would not have occurred." 107
Pursuant to its prime duty to ascertain well the
genuineness of the signatures of its client-depositors on
checks being encashed, BPI is "expected to use
reasonable business prudence." 108 In the performance
of that obligation, it is bound by its internal banking
rules and regulations that form part of the contract it
enters into with its depositors. 109
Unfortunately, it failed in that regard. First, Yabut was
able to open a bank account in one of its branches
without privity; 110 that is, without the proper
verification of his corresponding identification
papers. Second, BPI was unable to discover early on not
only this irregularity, but also the marked differences in
the signatures on the checks and those on the signature
card. Third, despite the examination procedures it
conducted, the Central Verification Unit 111 of the bank
even passed off these evidently different signatures as
genuine. Without exercising the required prudence on its
part, BPI accepted and encashed the eight checks
presented to it. As a result, it proximately contributed to
87
the fraud and should be held primarily liable 112 for the
"negligence of its officers or agents when acting within
the course and scope of their employment." 113 It must
bear the loss.
CASA Not Negligent
in Its Financial Affairs
In this jurisdiction, the negligence of the party invoking
forgery is recognized as an exception 114 to the general
rule that a forged signature is wholly
inoperative. 115Contrary to BPI's claim, however, we do
not find CASA negligent in handling its financial affairs.
CASA, we stress, is not precluded from setting up
forgery as a real defense.
Role of Independent Auditor
The major purpose of an independent audit is to
investigate and determine objectively if the financial
statements submitted for audit by a corporation have
been prepared in accordance with the appropriate
financial reporting practices 116 of private entities. The
relationship that arises therefrom is both legal and
moral. 117 It begins with the execution of the
engagement letter 118 that embodies the terms and
conditions of the audit and ends with the fulfilled
expectation of the auditor's ethical 119 and competent
performance in all aspects of the audit. 120
The financial statements are representations of the
client; but it is the auditor who has the responsibility for
the accuracy in the recording of data that underlies their
preparation, their form of presentation, and the
opinion 121 expressed therein. 122 The auditor does not
assume the role of employee or of management in the
client's conduct of operations 123 and is never under the
control or supervision 124 of the client. ATDHSC
Yabut was an independent auditor 125 hired by CASA.
He handled its monthly bank reconciliations and had
access to all relevant documents and checkbooks. 126 In
him was reposed the client's 127 trust and
confidence 128 that he would perform precisely those
functions and apply the appropriate procedures in
accordance with generally accepted auditing
standards. 129 Yet he did not meet these expectations.
Nothing could be more horrible to a client than to
discover later on that the person tasked to detect fraud
was the same one who perpetrated it.
Cash Balances
Open to Manipulation
It is a non sequiturto say that the person who receives
the monthly bank statements, together with the
cancelled checks and other debit/credit memoranda,
shall examine the contents and give notice of any
discrepancies within a reasonable time. Awareness is not
equipollent with discernment.
Besides, in the internal accounting control system
prudently installed by CASA, 130 it was Yabut who
should examine those documents in order to prepare the
bank reconciliations. 131 He owned his working
papers, 132 and his output consisted of his opinion as
well as the client's financial statements and
accompanying notes thereto. CASA had every right to
rely solely upon his output based on the terms of the
audit engagement and could thus be unwittingly
duped into believing that everything was in order.
Besides, "[g]ood faith is always presumed and it is the
burden of the party claiming otherwise to adduce clear
and convincing evidence to the contrary." 133
Moreover, there was a time gap between the period
covered by the bank statement and the date of its actual
receipt. Lebron personally received the December 1990
bank statement only in January 1991 134 when she
was also informed of the forgery for the first time, after
which she immediately requested a "stop payment
order." She cannot be faulted for the late detection of the
forged December check. After all, the bank account with
BPI was not personal but corporate, and she could not
be expected to monitor closely all its finances. A
preschool teacher charged with molding the minds of the
youth cannot be burdened with the intricacies or
complexities of corporate existence.
There is also a cutoff period such that checks issued
during a given month, but not presented for payment
within that period, will not be reflected therein. 135 An
experienced auditor with intent to defraud can easily
conceal any devious scheme from a client unwary of the
accounting processes involved by manipulating the cash
balances on record especially when bank transactions
are numerous, large and frequent. CASA could only be
blamed, if at all, for its unintelligent choice in the
selection and appointment of an auditor a fault that is
not tantamount to negligence.
Negligence is not presumed, but proven by whoever
alleges it. 136 Its mere existence "is not sufficient
without proof that it, and no other cause," 137 has given
rise to damages. 138 In addition, this fault is common
to, if not prevalent among, small and medium-sized
business entities, thus leading the Professional
Regulation Commission (PRC), through the Board of
Accountancy (BOA), to require today not only
accreditation for the practice of public
accountancy, 139 but also the registration of firms in the
practice thereof. In fact, among the attachments now
required upon registration are the code of good
governance 140 and a sworn statement on adequate and
effective training. 141
88
The missing checks were certainly reported by the
bookkeeper 142 to the accountant 143 her immediate
supervisor and by the latter to the auditor. However,
both the accountant and the auditor, for reasons known
only to them, assured the bookkeeper that there were no
irregularities.
The bookkeeper 144 who had exclusive custody of the
checkbooks 145 did not have to go directly to CASA's
president or to BPI. Although she rightfully reported the
matter, neither an investigation was conducted nor a
resolution of it was arrived at, precisely because the
person at the top of the helm was the culprit. The
vouchers, invoices and check stubs in support of all
check disbursements could be concealed or fabricated
even in collusion and management would still have
no way to verify its cash accountabilities.
Clearly then, Yabut was able to perpetrate the wrongful
act through no fault of CASA. If auditors may be held
liable for breach of contract and negligence, 146 with all
the more reason may they be charged with the
perpetration of fraud upon an unsuspecting client. CASA
had the discretion to pursue BPI alone under the NIL, by
reason of expediency or munificence or both. Money
paid under a mistake may rightfully be
recovered, 147 and under such terms as the injured party
may choose.
Third Issue:
Award of Monetary Claims
Moral Damages Denied
We deny CASA's claim for moral damages.
In the absence of a wrongful act or omission, 148 or of
fraud or bad faith, 149 moral damages cannot be
awarded. 150 The adverse result of an action does
not per semake the action wrongful, or the party liable
for it. One may err, but error alone is not a ground for
granting such damages. 151 While no proof of
pecuniary loss is necessary therefor with the amount
to be awarded left to the court's discretion 152 the
claimant must nonetheless satisfactorily prove the
existence of its factual basis 153 and causal
relation 154 to the claimant's act or omission. 155
Regrettably, in this case CASA was unable to identify
the particular instance enumerated in the Civil Code
upon which its claim for moral damages is
predicated. 156Neither bad faith nor negligence so gross
that it amounts to malice 157 can be imputed to BPI.
Bad faith, under the law, "does not simply connote bad
judgment or negligence; 158 it imports a dishonest
purpose or some moral obliquity and conscious doing of
a wrong, a breach of a known duty through some motive
or interest or ill will that partakes of the nature of
fraud." 159
As a general rule, a corporation being an artificial
person without feelings, emotions and senses, and
having existence only in legal contemplation is not
entitled to moral damages, 160 because it cannot
experience physical suffering and mental
anguish. 161 However, for breach of the fiduciary duty
required of a bank, a corporate client may claim such
damages when its good reputation is besmirched by
such breach, and social humiliation results
therefrom. 162 CASA was unable to prove that BPI had
debased the good reputation of, 163 and consequently
caused incalculable embarrassment to, the former.
CASA's mere allegation or supposition thereof, without
any sufficient evidence on record, 164 is not enough.
Exemplary Damages Also Denied
We also deny CASA's claim for exemplary damages.
Imposed by way of correction 165 for the public
good, 166 exemplary damages cannot be recovered as a
matter of right. 167 As we have said earlier, there is no
bad faith on the part of BPI for paying the checks of
CASA upon forged signatures. Therefore, the former
cannot be said to have acted in a wanton, fraudulent,
reckless, oppressive or malevolent manner. 168 The
latter, having no right to moral damages, cannot demand
exemplary damages. 169
Attorney's Fees Granted
Although it is a sound policy not to set a premium on
the right to litigate, 170 we find that CASA is entitled to
reasonable attorney's fees based on "factual, legal, and
equitable justification." 171
When the act or omission of the defendant has
compelled the plaintiff to incur expenses to protect the
latter's interest, 172 or where the court deems it just and
equitable, 173 attorney's fees may be recovered. In the
present case, BPI persistently denied the claim of CASA
under the NIL to recredit the latter's account for the
value of the forged checks. This denial constrained
CASA to incur expenses and exert effort for more than
ten years in order to protect its corporate interest in its
bank account. Besides, we have already cautioned BPI
on a similar act of negligence it had committed seventy
years ago, but it has remained unrelenting. Therefore,
the Court deems it just and equitable to grant ten percent
(10%) 174 of the total value adjudged to CASA as
attorney's fees.
Interest Allowed
For the failure of BPI to pay CASA upon demand and
for compelling the latter to resort to the courts to obtain
payment, legal interest may be adjudicated at the
discretion of the Court, the same to run from the
filing 175 of the Complaint. 176 Since a court judgment
89
is not a loan or a forbearance of recovery, the legal
interest shall be at six percent (6%) per annum. 177 "If
the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall
be the payment of . . . legal interest, which is six
percent per annum." 178 The actual base for its
computation shall be "on the amount finally
adjudged," 179 compounded 180 annually to make up
for the cost of money 181 already lost to CASA.
Moreover, the failure of the CA to award interest does
not prevent us from granting it upon damages awarded
for breach of contract. 182 Because BPI evidently
breached its contract of deposit with CASA, we award
interest in addition to the total amount adjudged.
Under Section 196 of the NIL, any case not provided for
shall be "governed by the provisions of existing
legislation or, in default thereof, by the rules of the law
merchant." 183 Damages are not provided for in the
NIL. Thus, we resort to the Code of Commerce and the
Civil Code. Under Article 2 of the Code of Commerce,
acts of commerce shall be governed by its provisions
and, "in their absence, by the usages of commerce
generally observed in each place; and in the absence of
both rules, by those of the civil law." 184 This law being
silent, we look at Article 18 of the Civil Code, which
states: "In matters which are governed by the Code of
Commerce and special laws, their deficiency shall be
supplied" by its provisions. A perusal of these three
statutes unmistakably shows that the award of interest
under our civil law is justified.
WHEREFORE, the Petition in GR No. 149454 is hereby
DENIED, and that in GR No. 149507 PARTLY
GRANTED. The assailed Decision of the Court of
Appeals is AFFIRMED with modification: BPI is held
liable for P547,115, the total value of the forged checks
less the amount already recovered by CASA from
Leonardo T. Yabut, plus interest at the legal rate of six
percent (6%) per annum compounded annually, from
the filing of the complaint until paid in full; and
attorney's fees of ten percent (10%) thereof, subject to
reimbursement from Respondent Yabut for the entire
amount, excepting attorney's fees. Let a copy of this
Decision be furnished the Board of Accountancy of the
Professional Regulation Commission for such action as
it may deem appropriate against Respondent Yabut. No
costs.
SO ORDERED.
SECOND DIVISION
[G.R. No. 141835. February 4, 2009.]
CENTRAL BANK OF THE
PHILIPPINES, petitioner, vs. CITYTRUST
BANKING CORPORATION, respondent.
Pursuant to Republic Act No. 625, the old Central
Bank Law, respondent Citytrust Banking Corporation
(Citytrust), formerly Feati Bank, maintained a demand
deposit account with petitioner Central Bank of the
Philippines, now Bangko Sentral ng
Pilipinas. IDaEHS
As required, Citytrust furnished petitioner with
the names and corresponding signatures of five of its
officers authorized to sign checks and serve as drawers
and indorsers for its account. And it provided
petitioner with the list and corresponding signatures of
its roving tellers authorized to withdraw, sign receipts
and perform other transactions on its behalf. Petitioner
later issued security identification cards to the roving
tellers one of whom was "Rounceval Flores" (Flores).
On July 15, 1977, Flores presented for
payment to petitioner's Senior Teller Iluminada dela
Cruz (Iluminada) two Citytrust checks of even date,
payable to Citytrust, one in the amount of P850,000
and the other in the amount of P900,000, both of
which were signed and indorsed by Citytrust's
authorized signatory-drawers.
After the checks were certified by petitioner's
Accounting Department, Iluminada verified them,
prepared the cash transfer slip on which she affixed
her signature, stamped the checks with the notation
"Received Payment" and asked Flores to, as he did,
sign on the space above such notation. Instead of
signing his name, however, Flores signed as "Rosauro
C. Cayabyab" a fact Iluminada failed to notice.
Iluminada thereupon sent the cash transfer slip
and checks to petitioner's Cash Department where an
officer verified and compared the drawers' signatures
on the checks against their specimen signatures
provided by Citytrust, and finding the same in order,
approved the cash transfer slip and paid the
corresponding amounts to Flores. Petitioner then
debited the amount of the checks totaling P1,750,000
from Citytrust's demand deposit account.
More than a year and nine months later,
Citytrust, by letter dated April 23, 1979, alleging that
the checks were already cancelled because they were
stolen, demanded petitioner to restore the amounts
covered thereby to its demand deposit account.
Petitioner did not heed the demand, however.
90
Citytrust later filed a complaint for estafa, with
reservation on the filing of a separate civil action,
against Flores. Flores was convicted.
Citytrust thereafter filed before the Regional
Trial Court (RTC) of Manila a complaint for recovery
of sum of money with damages against petitioner
which it alleged erred in encashing the checks and in
charging the proceeds thereof to its account, despite
the lack of authority of "Rosauro C. Cayabyab". jurcda
By Decision 1 of November 13, 1991, Branch
32 of the RTC of Manila found both Citytrust and
petitioner negligent and accordingly held them equally
liable for the loss. Both parties appealed to the Court
of Appeals which, by Decision 2 dated July 16, 1999,
affirmed the trial court's decision, it holding that both
parties contributed equally to the fraudulent
encashment of the checks, hence, they should equally
share the loss in consonance with Article 2179 3 vis a
vis Article 1172 4 of the Civil Code.
In arriving at its Decision, the appellate court
noted that while "Citytrust failed to take adequate
precautionary measures to prevent the fraudulent
encashment of its checks", petitioner was not entirely
blame-free in light of its failure to verify the signature
of Citytrust's agent authorized to receive payment.
Brushing aside petitioner's contention that it
cannot be sued, the appellate court held that
petitioner's Charter specifically clothes it with the
power to sue and be sued.
Also brushing aside petitioner's assertion that
Citytrust's reservation of the filing of a separate civil
action against Flores precluded Citytrust from filing
the civil action against it, the appellate court held that
the "action for the recovery of sum of money is
separate and distinct and is grounded on a separate
cause of action from that of the criminal case for
estafa."
Hence, the present appeal, petitioner
maintaining that Flores having been an authorized
roving teller, Citytrust is bound by his acts. Also
maintaining that it was not negligent in releasing the
proceeds of the checks to Flores, the failure of its
teller to properly verify his signature notwithstanding,
petitioner contends that verification could be
dispensed with, Flores having been known to be an
authorized roving teller of Citytrust who had had
numerous transactions with it (petitioner) on its
(Citytrust's) behalf for five years prior to the
questioned transaction.
Attributing negligence solely to Citytrust,
petitioner harps on Citytrust's allowing Flores to steal
the checks and failing to timely cancel them; allowing
Flores to wear the issued identification card issued by
it (petitioner); failing to report Flores' absence from
work on the day of the incident; and failing to explain
the circumstances surrounding the supposed theft and
cancellation of the checks.
Drawing attention to Citytrust's considerable
delay in demanding the restoration of the proceeds of
the checks, petitioners argue that,
assuming arguendo that its teller was negligent,
Citytrust's negligence, which preceded that committed
by the teller, was the proximate cause of the loss or
fraud.
The petition is bereft of merit.
Petitioner's teller Iluminada did not verify
Flores' signature on the flimsy excuse that Flores had
had previous transactions with it for a number of
years. That circumstance did not excuse the teller from
focusing attention to or at least glancing at Flores as
he was signing, and to satisfy herself that the signature
he had just affixed matched that of his specimen
signature. Had she done that, she would have readily
been put on notice that Flores was affixing, not his but
a fictitious signature.
Given that petitioner is the government body
mandated to supervise and regulate banking and other
financial institutions, this Court's ruling in Consolidated
Bank and Trust Corporation v. Court of Appeals 5 illumines: CaSAcH
The contract between the bank and its
depositor is governed by the provisions of the
Civil Code on simple loan. Article 1980 of the
Civil Code expressly provides that ". . . savings
. . . deposits of money in banks and similar
institutions shall be governed by the provisions
concerning simple loan." There is a debtor-
creditor relationship between the bank and its
depositor. The bank is the debtor and the
depositor is the creditor. The depositor lends
the bank money and the bank agrees to pay the
depositor on demand. The savings deposit
agreement between the bank and the depositor
is the contract that determines the rights and
obligations of the parties.
The law imposes on banks high standards in
view of the fiduciary nature of banking.
Section 2 of Republic Act No. 8791 ("RA 8791"), which
took effect on 13 June 2000, declares that the
State recognizes the "fiduciary nature of
banking that requires high standards of
integrity and performance." This new provision
in the general banking law, introduced in 2000, is a
statutory affirmation of Supreme Court
decisions, starting with the 1990 case of Simex
International v. Court of Appeals, holding that
"the bank is under obligation to treat the
91
accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of
their relationship."
This fiduciary relationship means that the
bank's obligation to observe "high
standards of integrity and performance" is
deemed written into every deposit
agreement between a bank and its depositor.
The fiduciary nature of banking requires
banks to assume a degree of diligence higher
than that of a good father of a family. Article
1172 of the Civil Code states that the degree of
diligence required of an obligor is that
prescribed by law or contract, and absent such
stipulation then the diligence of a good father
of a family. Section 2 of RA 8791 prescribes the
statutory diligence required from banks that
banks must observe "high standards of
integrity and performance" in servicing their
depositors. Although RA 8791 took effect
almost nine years after the unauthorized
withdrawal of the P300,000 from L.C. Diaz's
savings account, jurisprudence at the time
of the withdrawal already imposed on banks
the same high standard of diligence required
under RA No. 8791. (Emphasis supplied)
Citytrust's failure to timely examine its
account, cancel the checks and notify petitioner of
their alleged loss/theft should mitigate petitioner's
liability, in accordance with Article 2179 of the Civil
Code which provides that if the plaintiff's negligence
was only contributory, the immediate and proximate
cause of the injury being the defendant's lack of due
care, the plaintiff may recover damages, but the courts
shall mitigate the damages to be awarded. For had
Citytrust timely discovered the loss/theft and/or
 subsequent encashment, their proceeds or part thereof
could have been recovered. cSICHD
In line with the ruling in Consolidated
Bank, the Court deems it proper to allocate the loss
between petitioner and Citytrust on a 60-40 ratio.
WHEREFORE, the assailed Court of Appeals
Decision of July 16, 1999 is hereby AFFIRMED with
MODIFICATION, in that petitioner and Citytrust
should bear the loss on a 60-40 ratio.
SO ORDERED.
SECOND DIVISION
[G.R. No. L-38427. March 12, 1975.]
CENTRAL BANK OF THE PHILIPPINES
as Liquidator of the FIDELITY
SAVINGS BANK, petitioner, vs. HONORAB
LE JUDGE JESUS P. MORFE, as Presiding
Judge of Branch XIII, Court of First
Instance of Manila, Spouses AUGUSTO and
ADELAIDA PADILLA and Spouses
MARCELA and JOB ELIZES,respondents.
This case involves the question of whether a final
judgment for the payment of a time deposit in a
savings bank, which judgment was obtained
after the bank was declared insolvent, is a preferred
claim against the bank. The question arises
under the following facts:
On February 18, 1969 the Monetary Board
found the Fidelity Savings Bank to be
insolvent. The Board
directed the Superintendent of Banks to take
charge of its assets, forbade it to do business, and
instructed the Central Bank Legal Counsel to take
appropriate legal actions (Resolution No. 350).
On December 9, 1969 the Board resolved to
seek the court's assistance and supervision
in the liquidation of the bank. The resolution was
implemented only on January 25, 1972
when the Central Bank of the Philippines filed the corres
ponding petition for assistance and supervision
in the Court of First Instance of Manila (Civil Case No.
86005 assigned to Branch XIII).
Prior to the institution of the liquidation proceeding but
after the declaration of insolvency, or, specifically,
sometime in March, 1971, the spouses Job Elizes and
Marcela P. Elizes filed a complaint in the Court of First
Instance of Manila against the Fidelity
Savings Bank for the recovery of the sum of P50,584
as the balance of their time deposits (Civil Case No.
82520 assigned to Branch I).
In the judgment rendered in that case on December 13,
1972 the Fidelity Savings Bank was ordered to
pay the Elizes spouses the sum of P50,584 plus
accumulated interest.
In another case, assigned to Branch
XXX of the Court of First
Instance of Manila, the spouses Augusto A. Padilla and
Adelaida Padilla secured on April 14, 1972 a judgment
against the Fidelity
Savings Bank for the sums of P80,000
as the balance of their time deposits, plus interests,
P70,000 as moral and exemplary damages and P9,600 as
92
attorney's fees (Civil Case No. 84200 where the action
was filed on September 6, 1971).
In its orders of August 20, 1973 and February 25,
1974, the lower court (Branch XIII having
cognizance of the liquidation proceeding), upon
motions of the Elizes and Padilla spouses and
over the opposition of the Central Bank,
directed the latter, as liquidator, to pay their time
deposits as preferred credits, evidenced by final
judgments, within the meaning of article 2244(14)
(b) of the Civil Code, if there are enough funds
in the liquidator's custody in excess of the credits more
preferred under section 30 of the Central Bank Law in
relation to articles 2244 and 2251 of the Civil Code.
From the said order, the Central Bank appealed to this
Court by certiorari. It contends that the final judgments
secured by the Elizes and Padilla spouses do not enjoy
any preference because (a) they were rendered
after the Fidelity Savings Bank was declared insolvent
and (b)
under the charter of the Central Bank and the General
Banking Law, no final judgment can be validly obtained
against an insolvent bank.
Republic Act No. 265 provides:
"SEC. 29. Proceedings upon insolvency.
Whenever, upon examination
by the Superintendent or his examiners or
agents into the condition of any banking
institution, it shall be disclosed
that the condition of the same is
one of insolvency, or that its continuance in
business would involve probable loss to its
depositors or creditors, it shall
be the duty of the Superintendent forthwith, in
writing, to inform the Monetary
Board of the facts, and the Board, upon
finding the statements of theSuperintendent to
be true, shall forthwith forbid the institution to
do business in the Philippines and shall take
charge of its assets and proceeds according to
law.
"The Monetary Board shall thereupon
determine within thirty days
whether the institution may be reorganized or
otherwise placed in such a condition so that it
may be permitted to resume business with
safety to its creditors and shall
prescribe the conditions under which such
resumption of business shall take place. In
such case theexpenses and fees
in the administration of the institution shall be
determined by the Board and shall be paid
to the Central Bank out of the assets of such
banking institution.
The General Banking Act, Republic Act No. 337, provides:
"At any time within ten days
after the Monetary Board has taken
charge of the assets of any banking institution,
such institution may apply to the Court of First
Instance for an order requiring the Monetary
Board to show cause why it should not be
enjoined from continuing such charge of its
assets, and the court may direct the Board to
refrain from further proceedings and to
surrender charge of its assets.
"If the Monetary Board shall determine
that the banking institution cannot resume
The Civil Code provides:
business with safety to its creditors, it shall,
by the Solicitor General, file a petition
inthe Court of First Instance
reciting the proceedings which have been taken
and praying the assistance and
supervision of the court
in the liquidation of the affairs of thesame. The
Superintendent shall thereafter, upon
order of the Monetary Board and
under the supervision of the court and with all
convenient speed,
convert the assetsof the banking institution to
money.
"SEC. 30. Distribution of assets. In
case of liquidation of a banking institution,
after payment of the costs of the proceedings,
including reasonable expenses and
fees of the Central Bank to be allowed
by the court, the Central Bank shall
pay the debts of such institution,
under the order of the court, in accordance
with their legal priority."
"SEC. 85. Any director or officer of any
banking institution who receives or permits or
causes to be received in said bank any deposit,
or who pays out or permits or causes to be paid
out any funds of said bank, or who transfers or
permits or causes to be transferred any
securities or property of said bank, after
said bank becomes insolvent, shall be punished
by fine of not less than one thousand nor more
than ten thousand pesos and by imprisonment
for not less than two nor more than ten years."
"ART. 2237. Insolvency shall be governed by
special laws insofar as they are not inconsistent
with this Code. (n)
93
"ART. 2244. With reference to other property,
real and personal, of the debtor, the following
claims or credits shall be preferred in the order
named:
xxx xxx xxx
(14) Credits which, without special privilege,
appear in (a) a public instrument; or (b) in a
final judgment, if they have
been the subject of litigation. These credits
shall have preference among themselves
in the order of priority of the dates of the instru
ments and of the judgments, respectively.
( 1924a)
"ART. 2251. Those credits which do not enjoy
any preference with respect to specific
property, and those which enjoy preference, as
to the amount not paid, shall be satisfied
according to the following rules:
(1) In the order established in article 2244;(2)
Common credits referred to in article 2246
shall be paid pro rata regardless of dates.
(1929a)".
The trial court or, to be exact, the liquidation court noted
that there is no provision
in the charter of the Central Bank and in the General
Banking Law (Republic Acts Nos. 265 and 337,
respectively) which suspends or abates civil actions
against an insolvent bank pending in courts other
than the liquidation court. It reasoned out that, because
such actions are not suspended, judgments against
insolvent banks could be considered as preferred credits
under article 2244(14)(b) of the Civil Code. It further
noted that, in contrast with the Central Bank Act, section
18 of the Insolvency Law provides that
upon the issuance by the court of an order declaring a
person insolvent, "all civil proceedings against the said
insolvent shall be stayed".
The liquidation court directed the Central Bank to
honor the writs of execution issued by Branches I and
XXX for the enforcement of the judgments obtained
by theElizes and Padilla spouses. It suggested that, after
satisfaction of the judgments, the Central Bank, as
liquidator, should include said judgments
in the list of preferred credits contained
in the "Project of Distribution" "with the notation
'already paid'".
On the other hand, the Central Bank argues that
after the Monetary Board has declared that a bank is
insolvent and has ordered it to cease
operations, the Board becomes the trustee of its assets
"for the equal benefit of all the creditors,
including the depositors". The Central Bank cites the rul
ing that "the assets of an insolvent banking institution
are held in trust for the equal benefit of all creditors, and
after its insolvency, one cannot obtain an advantage or a
preference over another by an attachment, execution or
otherwise" (Rohr vs. Stanton Trust & Savings Bank, 76
Mont. 248, 245 Pac. 947).
The stand of the Central Bank is that all depositors and
creditors of the insolvent bank should file their actions
with the liquidation court. In support of that view it
citesthe provision that the Insolvency Law does not
apply to banks (last sentence, sec. 52 of Act No. 1956).
It also invokes the provision penalizing a director or
officer of a hank who disburses, or allows
disbursement, of the funds of the bank after it becomes
insolvent (Sec. 85, General Banking Act, Republic Act No. 337). It
cites the ruling that "a creditor of an insolvent
state bank in the hands of a liquidator who recovered a
judgment against it is not entitled to a preference for
(by) the mere fact that he is a judgment creditor"
(Thomas H. Briggs & Sons, Inc. vs. Allen, 207 N.
Carolina 10, 175 S. E. 838, Braver,
Liquidation of Financial Institutions, p. 922).
It should be noted that fixed, savings, and current
deposits of money in banks and similar institutions are
not true deposits. They are considered simple loans and,
as such, are not preferred credits (Art. 1980, Civil Code;
In re Liquidation of Mercantile Bank of China: Tan
Tiong Tick vs. American Apothecaries Co., 65 Phil. 414;
Pacific Coast Biscuit Co. vs. Chinese Grocers
Association, 65 Phil. 375; Fletcher American
National Bank vs. Ang Cheng Lian, 65 Phil. 385; Pacific
Commercial Co. vs. American Apothecaries Co., 65
Phil. 429; Gopoco Grocery vs. Pacific Coast Biscuit
Co., 65 Phil. 443).
The aforequoted section 29 of the Central Bank's charter
explicitly provides that when a bank is found to be
insolvent, the Monetary Board shall forbid it to do
business and shall take charge of its assets. The Board in
its Resolution No. 350 dated February 18, 1969
banned the Fidelity Savings Bank from doing business.
It took charge ofthe bank's assets. Evidently, one
purpose in prohibiting the insolvent bank from doing
business is to prevent some depositors from having an
undue or fraudulent preference over other creditors and
depositors.
That purpose would be nullified if, as in this case,
after the bank is declared insolvent, suits by some
depositors could be maintained and judgments would be
rendered for the payment of their deposits and then such
judgments would be considered preferred credits under
article 2244(14)(b) of the Civil Code.
94
We are of the opinion that such judgments cannot be
considered preferred and that article 2244(14)(b) does
not apply to judgments for the payment of the deposits
in an insolvent savings bank which were obtained
after the declaration of insolvency.
A contrary rule or practice would be
productive of injustice, mischief and confusion. To
recognize such judgments as entitled to priority would
mean that depositors in insolvent banks, after learning
that the bank is insolvent as shown by the fact that it can
no longer pay withdrawals or that it has closed its doors
or has been enjoined by the Monetary Board from doing
business, would rush to the courts to secure judgments
for the payment of their deposits.
In such an eventuality, the courts would be swamped
with suits of that character. Some of the judgments
would be default judgments. Depositors armed with
such judgments would pester the liquidation court with
claims for preference on the basis of article 2244(14)(b).
Less alert depositors would be prejudiced. That
inequitable situation could not have been contemplated
by the framers of section 29.
The Rohr case (supra) supplies some illumination
on the disposition of the instant case. It appears in that
case that the Stanton Trust & Savings Bank of Great
Falls closed its doors to business on July 9, 1923. On
November 7, 1924 the bank (then already under
liquidation) issued to William Rohr a certificate stating
that he was entitled to claim from the bank $1,191.72
and that he was entitled to dividends thereon. Later,
Rohr sued the bank for the payment of his
claim. The bank demurred tothe complaint. The trial
court sustained the demurrer. Rohr appealed. In
affirming the order sustaining the demurrer, the Supreme
Court of Montana said:
 "The general principle of equity
that the assets of an insolvent are to be
distributed ratably among general creditors
applies with full force
to the distribution of theassets of a bank. A
general depositor of a bank is merely a general
creditor, and, as such, is not entitled to any
preference or priority over other general
creditors.
"The assets of a bank in process of liquidation
are held in trust for the equal benefit of all
creditors. and one cannot be permitted to
obtain an advantage or preference over another
by an attachment, execution or otherwise. A
disputed claim of a creditor may be
adjudicated, but those whose claims are
recognized and admitted may not successfully
maintain action thereon. So to permit would
defeat the very
purpose of the liquidation of a bank whether
being voluntarily accomplished or
throughthe intervention of a receiver.
xxx xxx xxx
"The available assets of such a bank are held in
trust, and so conserved that each depositor or
other creditor shall receive payment or
dividend according to theamount of his debt,
and that none of equal class shall receive any
advantage or preference over another."
And with respect to a national bank under voluntary
liquidation, the court noted in the Rohr case
that the assets of such a bank "become a trust fund, to be
administered for the benefit of all creditors pro
rata, and, while the bank retains its corporate existence,
and may be sued, the effect of a judgment obtained
against it by a creditor is only to fix the amount of debt. list of the preferred credits to be paid in full
He can acquire no lien which will give him any in the order of priorities established in Articles 2241,
preference or advantage over other general creditors." 2242, 2243, 2246 and 2247" of the Civil Code (note that
(245 Pac. 249) ** article 2244 was not mentioned). There is no cogent
reason why the Elizes and Padilla spouses should not
Considering that the deposits in question, in their
adhere to the procedure outlined in the said rules and
inception, were not preferred credits, it does not seem
regulations.
logical and just that they should be raised
to the category ofpreferred credits simply WHEREFORE, the lower court's orders of August 20,
because the depositors, taking advantage of the long 1973 and February 25, 1974 are reversed and set aside.
interval between the declaration of insolvency No costs.
and the filing of the petition for judicial assistance and
SO ORDERED.
supervision, were able to secure judgments
for the payment of their time deposits.
The judicial declaration that the said deposits were
payable to the depositors, as indisputably they were due,
could not have given the Elizes and Padilla spouses a
priority over the other depositors whose deposits were FIRST DIVISION
likewise indisputably due and owing
from the insolvent bank but who did not want to incur
[G.R. No. 104612. May 10, 1994.]
litigation expenses in securing a judgment
for the payment of the deposits.
BANK OF THE PHILIPPINE ISLANDS
The circumstance that the Fidelity Savings Bank, having (successor-in-interest of COMMERCIAL
stopped operations since February 19, 1969, was BANK AND TRUST
forbidden to do business (and that ban would CO.), petitioner, vs. HON. COURT OF
include thepayment of time deposits) implies that suits APPEALS, EASTERN PLYWOOD CORP.
for the payment of such deposits were prohibited. What and BENIGNO D. LIM, respondents.
was directly prohibited should not be encompassed
indirectly. (See Maurello vs. Broadway Bank & Trust
Co. of Paterson, 176 Atl. 391, 114 N.J.L. 167). The petitioner urges us to review and set aside the
amended Decision 1 of 6 March 1992 of respondent
It is noteworthy that in the trial court's order of October
Court of Appeals in CA-G.R. CV No. 25739 which
3, 1972, which contains the Bank Liquidation Rules and
modified the Decision of 15 November 1990 of Branch
Regulations, it indicated in Step III the procedure for
19 of the Regional Trial Court (RTC) of Manila in Civil
processing the claims against the insolvent bank. In Step
Case No. 87-42967, entitled Bank of the Philippine
IV, the court directed the Central Bank, as liquidator, to
Islands (successor-in-interest of Commercial Bank and
submit a Project of Distribution which should include "a
95
Trust Company) versus Eastern Plywood Corporation
and Benigno D. Lim. The Court of Appeals had affirmed
the dismissal of the complaint but had granted the
defendants' counterclaim for P331,261.44 which
represents the outstanding balance of their account with
the plaintiff.
As culled from the records and the pleadings of the
parties, the following facts were duly established:
Private respondents Eastern Plywood Corporation
(Eastern) and Benigno D. Lim (Lim), an officer and
stockholder of Eastern, held at least one joint bank
account ("and/or" account) with the Commercial Bank
and Trust Co. (CBTC), the predecessor-in-interest of
petitioner Bank of the Philippine Islands (BPI).
Sometime in March 1975, a joint checking account
("and" account) with Lim in the amount of P120,000.00
was opened by Mariano Velasco with funds withdrawn
from the account of Eastern and/or Lim. Various
amounts were later deposited or withdrawn from the
joint account of Velasco and Lim. The money therein
was placed in the money market. LLjur
Velasco died on 7 April 1977. At the time of his death,
the outstanding balance of the account stood at
P662,522.87. On 5 May 1977, by virtue of an Indemnity
Undertaking executed by Lim for himself and as
President and General Manager of Eastern, 2 one-half of
this amount was provisionally released and transferred
to one of the bank accounts of Eastern with CBTC. 3
Thereafter, on 18 August 1978, Eastern obtained a loan
of P73,000.00 from CBTC as "Additional Working
Capital," evidenced by the "Disclosure Statement on
Loan/Credit Transaction" (Disclosure Statement) signed
by CBTC through its branch manager, Ceferino
Jimenez, and Eastern, through Lim, as its President and
General Manager. 4 The loan was payable on demand
with interest at 14% per annum.
For this loan, Eastern issued on the same day a
negotiable promissory note for P73,000.00 payable on
demand to the order of CBTC with interest at 14% per
annum. 5The note was signed by Lim both in his own
capacity and as President and General Manager of
Eastern. No reference to any security for the loan
appears on the note. In the Disclosure Statement, the
box with the printed word "UNSECURED" was marked
with "X". meaning unsecured, while the line with the
words "this loan is wholly/partly secured by" is
followed by the typewritten words "Hold-Out on 1:1 on
C/A No. 2310-001-42," which refers to the joint account
of Velasco and Lim with a balance of P331,261.44.
In addition, Eastern and Lim, and CBTC signed another
document entitled "Holdout Agreement," also dated 18
August 1978, 6 wherein it was stated that "as security
for the Loan [Lim and Eastern] have offered [CBTC]
and the latter accepts a holdout on said [Current Account
No. 2310-011-42 in the joint names of Lim and Velasco]
to the full extent of their alleged interests therein as
these may appear as a result of final and definitive
judicial action or a settlement between and among the
contesting parties thereto." 7 Paragraph 02 of the
Agreement provides as follows: LLjur
"Eastply [Eastern] and Mr. Lim hereby confer
upon Comtrust [CBTC], when and if their
alleged interests in the Account Balance shall
have been established with finality, ample and
sufficient power as shall be necessary to retain
said Account Balance and enable Comtrust to
apply the Account Balance for the purpose of
liquidating the Loan in respect of principal
and/or accrued interest."
96
And paragraph 05 thereof reads:
"The acceptance of this holdout shall not
impair the right of Comtrust to declare the loan
payable on demand at any time, nor shall the
existence hereof and the non-resolution of the
dispute between the contending parties in
respect of entitlement to the Account Balance,
preclude Comtrust from instituting an action
for recovery against Eastply and/or Mr. Lim in
the event the Loan is declared due and payable
and Eastply and/or Mr. Lim shall default in
payment of all obligations and liabilities
thereunder."
In the meantime, a case for the settlement of Velasco's
estate was filed with Branch 152 of the RTC of Pasig,
entitled "In re Intestate Estate of Mariano Velasco," and
docketed as Sp. Proc. No. 8959. In the said case, the
whole balance of P331,261.44 in the aforesaid joint
account of Velasco and Lim was being claimed as part
of Velasco's estate. On 9 September 1986, the intestate
court granted the urgent motion of the heirs of Velasco
to withdraw the deposit under the joint account of Lim
and Velasco and authorized the heirs to divide among
themselves the amount withdrawn. 8
Sometime in 1980, CBTC was merged with BPI. 9 On 2
December 1987, BPI filed with the RTC of Manila a
complaint against Lim and Eastern demanding payment
of the promissory note for P73,000.00. The complaint
was docketed as Civil Case No. 87-42967 and was
raffled to Branch 19 of the said court, then presided over
by Judge Wenceslao M. Polo. Defendants Lim and
Eastern, in turn, filed a counterclaim against BPI for the
return of the balance in the disputed account subject of
the Holdout Agreement and the interests thereon after
deducting the amount due on the promissory note.
After due proceedings, the trial court rendered its
decision on 15 November 1990 dismissing the
complaint because BPI failed to make out its case.
Furthermore, it ruled that "the promissory note in
question is subject to the 'hold-out' agreement," 10 and
that based on this agreement, "it was the duty of plaintiff
Bank [BPI] to debit the account of the defendants under
the promissory note to set off the loan even though the
same has no fixed maturity." 11 As to the defendants'
counterclaim, the trial court, recognizing the fact that
the entire amount in question had been withdrawn by
Velasco's heirs pursuant to the order of the intestate
court in Sp. Proc. No. 8959, denied it because the "said
claim cannot be awarded without disturbing the
resolution" of the intestate court. 12
Both parties appealed from the said decision to the
Court of Appeals. Their appeal was docketed as CA-
G.R. CV No. 25739. prLL
On 23 January 1991, the Court of Appeals rendered a
decision affirming the decision of the trial court. It,
however, failed to rule on the defendants' (private
respondents') partial appeal from the trial court's denial
of their counterclaim. Upon their motion for
reconsideration, the Court of Appeals promulgated on 6
March 1992 an Amended Decision 13 wherein it ruled
that the settlement of Velasco's estate had nothing to do
with the claim of the defendants for the return of the
balance of their account with CBTC/BPI as they were
not privy to that case, and that the defendants, as
depositors of CBTC/BPI, are the latter's creditors;
hence, CBTC/BPI should have protected the defendants'
interest in Sp. Proc. No. 8959 when the said account was
claimed by Velasco's estate. It then ordered BPI "to pay
defendants the amount of P331,261.44 representing the
outstanding balance in the bank account of
defendants." 14
On 22 April 1992, BPI failed the instant petition
alleging therein that the Holdout Agreement in question
was subject to a suspensive condition stated therein, viz.,
that the "P331,261.44 shall become a security for
respondent Lim's promissory note only if respondents'
Lim and Eastern Plywood Corporation's interests to that
amount are established as a result of a final and
definitive judicial action or a settlement between and
among the contesting parties thereto." 15 Hence, BPI
asserts, the Court of Appeals erred in affirming the trial
court's decision dismissing the complaint on the ground
that it was the duty of CBTC to debit the account of the
defendants to set off the amount of P73,000.00 covered
by the promissory note.
Private respondents Eastern and Lim dispute the
"suspensive condition" argument of the petitioner. They
interpret the findings of both the trial and appellate
courts that the money deposited in the joint account of
Velasco and Lim came from Eastern and Lim's own
account as a finding that the money deposited in the
joint account of Lim and Velasco "rightfully belong[ed]
to Eastern Plywood Corporation and/or Benigno Lim."
And because the latter are the rightful owners of the
money in question, the suspensive condition does not
find any application in this case and the bank had the
duty to set off this deposit with the loan. They add that
the ruling of the lower court that they own the disputed
amount is the final and definitive judicial action
required by the Holdout Agreement; hence, the
petitioner can only hold the amount of P73,000.00
representing the security required for the note and must
return the rest. 16
97
The petitioner filed a Reply to the aforesaid Comment.
The private respondents filed a Rejoinder thereto.
We gave due course to the petition and required the
parties to submit simultaneously their memoranda. prLL
The key issues in this case are whether BPI can demand
payment of the loan of P73,000.00 despite the existence
of the Holdout Agreement and whether BPI is still liable
to the private respondents on the account subject of the
Holdout Agreement after its withdrawal by the heirs of
Velasco.
The collection suit of BPI is based on the promissory
note for P73,000.00. On its face, the note is an
unconditional promise to pay the said amount, and as
stated by the respondent Court of Appeals, "[t]here is no
question that the promissory note is a negotiable
instrument." 17 It further correctly ruled that BPI was
not a holder in due course because the note was not
indorsed to BPI by the payee, CBTC. Only a negotiation
by indorsement could have operated as a valid transfer
to make BPI a holder in due course. It acquired the note
from CBTC by the contract of merger or sale between
the two banks. BPI, therefore, took the note subject to
the Holdout Agreement.
We disagree, however, with the Court of Appeals in its
interpretation of the Holdout Agreement. It is clear from
paragraph 02 thereof that CBTC, or BPI as its successor-
in-interest, had every right to demand that Eastern and
Lim settle their liability under the promissory note. It
cannot be compelled to retain and apply the deposit in
Lim and Velasco's joint account to the payment of the
note. What the agreement conferred on CBTC was
a power, not a duty. Generally, a bank is under no duty
or obligation to make the application. 18 To apply the
deposit to the payment of a loan is a privilege, a right of
set-off which the bank has the option to exercise. 19
Also, paragraph 05 of the Holdout Agreement itself
states that notwithstanding the agreement, CBTC was
not in any way precluded from demanding payment
from Eastern and from instituting an action to recover
payment of the loan. What it provides is an alternative,
not an exclusive, method of enforcing its claim on the
note. When it demanded payment of the debt directly
from Eastern and Lim, BPI had opted not to exercise its
right to apply part of the deposit subject of the Holdout
Agreement to the payment of the promissory note for
P73,000.00. Its suit for the enforcement of the note was
then in order and it was error for the trial court to
dismiss it on the theory that it was set off by an
equivalent portion in C/A No. 2310-001-42 which BPI
should have debited. The Court of Appeals also erred in
affirming such dismissal.
The "suspensive condition" theory of the petitioner is,
therefore, untenable. LLphil
The Court of Appeals correctly decided on the
counterclaim. The counterclaim of Eastern and Lim for
the return of the P331,261.44 20 was equivalent to a
demand that they be allowed to withdraw their deposit
with the bank. Article 1980 of the Civil Code expressly
provides that "[f]ixed, savings, and current deposits of
money in banks and similar institutions shall be
governed by the provisions concerning simple loan."
In Serrano vs. Central Bank of the Philippines, 21 we
held that bank deposits are in the nature of irregular
deposits; they are really loans because they earn interest.
The relationship then between a depositor and a bank is
one of creditor and debtor. The deposit under the
questioned account was an ordinary bank deposit;
hence, it was payable on demand of the depositor. 22
The account was proved and established to belong to
Eastern even if it was deposited in the names of Lim and
Velasco. As the real creditor of the bank, Eastern has the
right to withdraw it or to demand payment thereof. BPI
cannot be relieved of its duty to pay Eastern simply
because it already allowed the heirs of Velasco to
withdraw the whole balance of the account. The
petitioner should not have allowed such withdrawal
because it had admitted in the Holdout Agreement the
questioned ownership of the money deposited in the
account. As early as 12 May 1979, CBTC was notified
by the Corporate Secretary of Eastern that the deposit in
the joint account of Velasco and Lim was being claimed
by them and that one-half was being claimed by the
heirs of Velasco. 23
Moreover, the order of the court in Sp. Proc. No. 8959
merely authorized the heirs of Velasco to withdraw the
account. BPI was not specifically ordered to release the
account to the said heirs; hence, it was under no judicial
compulsion to do so. The authorization given to the
heirs of Velasco cannot be construed as a final
determination or adjudication that the account belonged
to Velasco. We have ruled that when the ownership of a
particular property is disputed, the determination by a
probate court of whether that property is included in the
estate of a deceased is merely provisional in character
and cannot be the subject of execution. 24
Because the ownership of the deposit remained
undetermined, BPI, as the debtor with respect thereto,
had no right to pay to persons other than those in whose
favor the obligation was constituted or whose right or
authority to receive payment is indisputable. The
payment of the money deposited with BPI that will
extinguish its obligation to the creditor-depositor is
payment to the person of the creditor or to one
authorized by him or by the law to receive
98
it. 25 Payment made by the debtor to the wrong party
does not extinguish the obligation as to the creditor who
is without fault or negligence, even if the debtor acted in
utmost good faith and by mistake as to the person of the
creditor, or through error induced by fraud of a third
person. 26 The payment then by BPI to the heirs of
Velasco, even if done in good faith, did not extinguish
its obligation to the true depositor, Eastern.
In the light of the above findings, the dismissal of the
petitioner's complaint is reversed and set aside. The
award on the counterclaim is sustained subject to a
modification of the interest.
WHEREFORE, the instant petition is partly
GRANTED. The challenged amended decision in CA-
G.R. CV No. 25735 is hereby MODIFIED. As
modified: cdrep
(1) Private respondents are ordered to pay the
petitioner the promissory note for P73,000.00
with interest at:
(a) 14% per annum on the
principal, computed from 18 August 1978
until payment;
(b) 12% per annum on the interest
which had accrued up to the date of the
filing of the complaint, computed from
that date until payment pursuant to
Article 2212 of the Civil Code.
(2) The award of P331,264.44 in favor of the
private respondents shall bear interest at the
rate of 12% per annum computed from the
filing of the counterclaim.
No pronouncement as to costs.
SO ORDERED.

THIRD DIVISION
[G.R. NO. 123498. November 23, 2007.]
BPI FAMILY BANK, petitioner, vs. AMADO
FRANCO and COURT OF
APPEALS, respondents.
Banks are exhorted to treat the accounts of their
depositors with meticulous care and utmost fidelity. We
reiterate this exhortation in the case at bench.
Before us is a Petition for Review on Certiorari seeking
the reversal of the Court of Appeals (CA) Decision 1 in
CA-G.R. CV No. 43424 which affirmed with
modification the judgment 2 of the Regional Trial Court,
Branch 55, Manila (Manila RTC), in Civil Case No. 90-
53295.
This case has its genesis in an ostensible fraud
perpetrated on the petitioner BPI Family Bank (BPI-FB)
allegedly by respondent Amado Franco (Franco) in
conspiracy with other individuals, 3 some of whom
opened and maintained separate accounts with BPI-FB,
San Francisco del Monte (SFDM) branch, in a series of
transactions.
On August 15, 1989, Tevesteco Arrastre-Stevedoring
Co., Inc. (Tevesteco) opened a savings and current
account with BPI-FB. Soon thereafter, or on August 25,
1989, First Metro Investment Corporation (FMIC) also
opened a time deposit account with the same branch of
BPI-FB with a deposit of P100,000,000.00, to mature
one year thence.
Subsequently, on August 31, 1989, Franco opened three
accounts, namely, a current, 4 savings, 5 and time
deposit, 6 with BPI-FB. The current and savings
accounts were respectively funded with an initial deposit
of P500,000.00 each, while the time deposit account had
P1,000,000.00 with a maturity date of August 31, 1990.
The total amount of P2,000,000.00 used to open these
accounts is traceable to a check issued by Tevesteco
allegedly in consideration of Franco's introduction of
Eladio Teves, 7who was looking for a conduit bank to
facilitate Tevesteco's business transactions, to Jaime
Sebastian, who was then BPI-FB SFDM's Branch
Manager. In turn, the funding for the P2,000,000.00
check was part of the P80,000,000.00 debited by BPI-
FB from FMIC's time deposit account and credited to
Tevesteco's current account pursuant to an Authority to
Debit purportedly signed by FMIC's officers.
It appears, however, that the signatures of FMIC's
officers on the Authority to Debit were forged. 8 On
September 4, 1989, Antonio Ong, 9 upon being shown
the Authority to Debit, personally declared his signature
therein to be a forgery. Unfortunately, Tevesteco had
already effected several withdrawals from its current
account (to which had been credited the P80,000,000.00
covered by the forged Authority to Debit) amounting to
P37,455,410.54, including the P2,000,000.00 paid to
Franco.
On September 8, 1989, impelled by the need to protect
its interests in light of FMIC's forgery claim, BPI-FB,
thru its Senior Vice-President, Severino Coronacion,
instructed Jesus Arangorin 10 to debit Franco's savings
and current accounts for the amounts remaining
therein. 11 However, Franco's time deposit account
99
could not be debited due to the capacity limitations of
BPI-FB's computer. 12
In the meantime, two checks 13 drawn by Franco
against his BPI-FB current account were dishonored
upon presentment for payment, and stamped with a
notation "account under garnishment." Apparently,
Franco's current account was garnished by virtue of an
Order of Attachment issued by the Regional Trial Court
of Makati (Makati RTC) in Civil Case No. 89-4996
(Makati Case), which had been filed by BPI-FB against
Franco et al., 14 to recover the P37,455,410.54
representing Tevesteco's total withdrawals from its
account.
Notably, the dishonored checks were issued by Franco
and presented for payment at BPI-FB prior to Franco's
receipt of notice that his accounts were under
garnishment. 15 In fact, at the time the Notice of
Garnishment dated September 27, 1989 was served on
BPI-FB, Franco had yet to be impleaded in the Makati
case where the writ of attachment was issued.
It was only on May 15, 1990, through the service of a
copy of the Second Amended Complaint in Civil Case
No. 89-4996, that Franco was impleaded in the Makati
case. 16Immediately, upon receipt of such copy, Franco
filed a Motion to Discharge Attachment which the
Makati RTC granted on May 16, 1990. The Order
Lifting the Order of Attachment was served on BPI-FB
on even date, with Franco demanding the release to him
of the funds in his savings and current accounts. Jesus
Arangorin, BPI-FB's new manager, could not forthwith
comply with the demand as the funds, as previously
stated, had already been debited because of FMIC's
forgery claim. As such, BPI-FB's computer at the SFDM
Branch indicated that the current account record was
"not on file."
With respect to Franco's savings account, it appears that
Franco agreed to an arrangement, as a favor to
Sebastian, whereby P400,000.00 from his savings
account was temporarily transferred to Domingo
Quiaoit's savings account, subject to its immediate
return upon issuance of a certificate of deposit which
Quiaoit needed in connection with his visa application at
the Taiwan Embassy. As part of the arrangement,
Sebastian retained custody of Quiaoit's savings account
passbook to ensure that no withdrawal would be effected
therefrom, and to preserve Franco's deposits.
On May 17, 1990, Franco pre-terminated his time
deposit account. BPI-FB deducted the amount of
P63,189.00 from the remaining balance of the time
deposit account representing advance interest paid to
him.
These transactions spawned a number of cases, some of
which we had already resolved.
FMIC filed a complaint against BPI-FB for the recovery
of the amount of P80,000,000.00 debited from its
account. 17 The case eventually reached this Court, and
in BPI Family Savings Bank, Inc. v. First Metro Investment Corporation, 18 we
upheld the finding of the courts below that BPI-FB
failed to exercise the degree of diligence required by the
nature of its obligation to treat the accounts of its
depositors with meticulous care. Thus, BPI-FB was
found liable to FMIC for the debited amount in its time
deposit. It was ordered to pay P65,332,321.99 plus
interest at 17% per annum from August 29, 1989 until
fully restored. In turn, the 17% shall itself earn interest
at 12% from October 4, 1989 until fully paid.
In a related case, Edgardo Buenaventura, Myrna Lizardo
and Yolanda Tica (Buenaventura, et al.), 19 recipients of
a P500,000.00 check proceeding from the
P80,000,000.00 mistakenly credited to Tevesteco,
likewise filed suit. Buenaventura et al., as in the case of
Franco, were also prevented from effecting
withdrawals 20from their current account with BPI-FB,
Bonifacio Market, Edsa, Caloocan City Branch.
Likewise, when the case was elevated to this Court
docketed as BPI Family Bank v. Buenaventura, 21 we
ruled that BPI-FB had no right to freeze
Buenaventura, et al.'s accounts and adjudged BPI-FB
liable therefor, in addition to damages.
Meanwhile, BPI-FB filed separate civil and criminal
cases against those believed to be the perpetrators of the
multi-million peso scam. 22 In the criminal case,
Franco, along with the other accused, except for Manuel
Bienvenida who was still at large, were acquitted of the
crime of Estafa as defined and penalized under Article
351, par. 2 (a) of the Revised Penal Code. 23 However,
the civil case 24 remains under litigation and the
respective rights and liabilities of the parties have yet to
be adjudicated.
Consequently, in light of BPI-FB's refusal to heed
Franco's demands to unfreeze his accounts and release
his deposits therein, the latter filed on June 4, 1990 with
the Manila RTC the subject suit. In his complaint,
Franco prayed for the following reliefs: (1) the interest
on the remaining balance 25 of his current account
which was eventually released to him on October 31,
1991; (2) the balance 26 on his savings account, plus
interest thereon; (3) the advance interest 27 paid to him
which had been deducted when he pre-terminated his
time deposit account; and (4) the payment of actual,
moral and exemplary damages, as well as attorney's
fees.
BPI-FB traversed this complaint, insisting that it was
correct in freezing the accounts of Franco and refusing
to release his deposits, claiming that it had a better right
100
to the amounts which consisted of part of the money
allegedly fraudulently withdrawn from it by Tevesteco
and ending up in Franco's accounts. BPI-FB asseverated
that the claimed consideration of P2,000,000.00 for the
introduction facilitated by Franco between George
Daantos and Eladio Teves, on the one hand, and Jaime
Sebastian, on the other, spoke volumes of Franco's
participation in the fraudulent transaction.
On August 4, 1993, the Manila RTC rendered judgment,
the dispositive portion of which reads as follows:
WHEREFORE, in view of all the foregoing,
judgment is hereby rendered in favor of
[Franco] and against [BPI-FB], ordering the
latter to pay to the former the following sums:
1. P76,500.00 representing the legal rate of
interest on the amount of P450,000.00 from
May 18, 1990 to October 31, 1991;
2. P498,973.23 representing the balance on
[Franco's] savings account as of May 18, 1990,
together with the interest thereon in accordance
with the bank's guidelines on the payment
therefor;
3. P30,000.00 by way of attorney's fees; and
4. P10,000.00 as nominal damages.
The counterclaim of the defendant is
DISMISSED for lack of factual and legal
anchor.
Costs against [BPI-FB].
SO ORDERED. 28
Unsatisfied with the decision, both parties filed their
respective appeals before the CA. Franco confined his
appeal to the Manila RTC's denial of his claim for moral
and exemplary damages, and the diminutive award of
attorney's fees. In affirming with modification the lower
court's decision, the appellate court decreed, to wit:
WHEREFORE, foregoing considered, the
appealed decision is hereby AFFIRMED with
modification ordering [BPI-FB] to pay
[Franco] P63,189.00 representing the interest
deducted from the time deposit of plaintiff-
appellant. P200,000.00 as moral damages and
P100,000.00 as exemplary damages, deleting
the award of nominal damages (in view of the
award of moral and exemplary damages) and
increasing the award of attorney's fees from
P30,000.00 to P75,000.00.
Cost against [BPI-FB].
SO ORDERED. 29
In this recourse, BPI-FB ascribes error to the CA when it
ruled that: (1) Franco had a better right to the deposits in
the subject accounts which are part of the proceeds of a
forged Authority to Debit; (2) Franco is entitled to
interest on his current account; (3) Franco can recover
the P400,000.00 deposit in Quiaoit's savings account;
(4) the dishonor of Franco's checks was not legally in
order; (5) BPI-FB is liable for interest on Franco's time
deposit, and for moral and exemplary damages; and (6)
BPI-FB's counter-claim has no factual and legal anchor.
The petition is partly meritorious.
We are in full accord with the common ruling of the
lower courts that BPI-FB cannot unilaterally freeze
Franco's accounts and preclude him from withdrawing
his deposits. However, contrary to the appellate court's
ruling, we hold that Franco is not entitled to unearned
interest on the time deposit as well as to moral and
exemplary damages.
First. On the issue of who has a better right to the
deposits in Franco's accounts, BPI-FB urges us that the
legal consequence of FMIC's forgery claim is that the
money transferred by BPI-FB to Tevesteco is its own,
and considering that it was able to recover possession of
the same when the money was redeposited by Franco, it
had the right to set up its ownership thereon and freeze
Franco's accounts.
BPI-FB contends that its position is not unlike that of an
owner of personal property who regains possession after
it is stolen, and to illustrate this point, BPI-FB gives the
following example: where X's television set is stolen by
Y who thereafter sells it to Z, and where Z unwittingly
entrusts possession of the TV set to X, the latter would
have the right to keep possession of the property and
preclude Z from recovering possession thereof. To
bolster its position, BPI-FB cites Article 559 of the Civil
Code, which provides:
Article 559. The possession of movable
property acquired in good faith is equivalent to
a title. Nevertheless, one who has lost any
movable or has been unlawfully deprived
thereof, may recover it from the person in
possession of the same.
If the possessor of a movable lost or of which
the owner has been unlawfully deprived, has
acquired it in good faith at a public sale, the
owner cannot obtain its return without
reimbursing the price paid therefor.
BPI-FB's argument is unsound. To begin with, the
movable property mentioned in Article 559 of the Civil
Code pertains to a specific or determinate thing. 30 A
101
determinate or specific thing is one that is individualized
and can be identified or distinguished from others of the
same kind. 31
In this case, the deposit in Franco's accounts consists of
money which, albeit characterized as a movable, is
generic and fungible. 32 The quality of being fungible
depends upon the possibility of the property, because of
its nature or the will of the parties, being substituted by
others of the same kind, not having a distinct
individuality. 33
Significantly, while Article 559 permits an owner who
has lost or has been unlawfully deprived of a movable to
recover the exact same thing from the current possessor,
BPI-FB simply claims ownership of the equivalent
amount of money, i.e., the value thereof, which it had
mistakenly debited from FMIC's account and credited to
Tevesteco's, and subsequently traced to Franco's
account. In fact, this is what BPI-FB did in filing the
Makati Case against Franco, et al. It staked its claim on
the money itself which passed from one account to
another, commencing with the forged Authority to Debit.
It bears emphasizing that money bears no earmarks of
peculiar ownership, 34 and this characteristic is all the
more manifest in the instant case which involves money
in a banking transaction gone awry. Its primary function
is to pass from hand to hand as a medium of exchange,
without other evidence of its title. 35 Money, which had
passed through various transactions in the general course
of banking business, even if of traceable origin, is no
exception.
Thus, inasmuch as what is involved is not a specific or
determinate personal property, BPI-FB's illustrative
example, ostensibly based on Article 559, is inapplicable
to the instant case.
There is no doubt that BPI-FB owns the deposited
monies in the accounts of Franco, but not as a legal
consequence of its unauthorized transfer of FMIC's
deposits to Tevesteco's account. BPI-FB conveniently
forgets that the deposit of money in banks is governed
by the Civil Code provisions on simple loan or
mutuum. 36 As there is a debtor-creditor relationship
between a bank and its depositor, BPI-FB ultimately
acquired ownership of Franco's deposits, but such
ownership is coupled with a corresponding obligation to
pay him an equal amount on demand. 37 Although BPI-
FB owns the deposits in Franco's accounts, it cannot
prevent him from demanding payment of BPI-FB's
obligation by drawing checks against his current
account, or asking for the release of the funds in his
savings account. Thus, when Franco issued checks
drawn against his current account, he had every right as
creditor to expect that those checks would be honored
by BPI-FB as debtor.
More importantly, BPI-FB does not have a unilateral
right to freeze the accounts of Franco based on its mere
suspicion that the funds therein were proceeds of the
multi-million peso scam Franco was allegedly involved
in. To grant BPI-FB, or any bank for that matter, the
right to take whatever action it pleases on deposits
which it supposes are derived from shady transactions,
would open the floodgates of public distrust in the
banking industry.
Our pronouncement in Simex International (Manila), Inc. v. Court of
Appeals 38 continues to resonate, thus:
The banking system is an indispensable
institution in the modern world and plays a
vital role in the economic life of every
civilized nation. Whether as mere passive
entities for the safekeeping and saving of
money or as active instruments of business and
commerce, banks have become an ubiquitous
presence among the people, who have come to
regard them with respect and even gratitude
and, most of all, confidence. Thus, even the
humble wage-earner has not hesitated to
entrust his life's savings to the bank of his
choice, knowing that they will be safe in its
custody and will even earn some interest for
him. The ordinary person, with equal faith,
usually maintains a modest checking account
for security and convenience in the settling of
his monthly bills and the payment of ordinary
expenses. . . . .
In every case, the depositor expects the bank to
treat his account with the utmost fidelity,
whether such account consists only of a few
hundred pesos or of millions. The bank must
record every single transaction accurately,
down to the last centavo, and as promptly as
possible. This has to be done if the account is
to reflect at any given time the amount of
money the depositor can dispose of as he sees
fit, confident that the bank will deliver it as and
to whomever directs. A blunder on the part of
the bank, such as the dishonor of the check
without good reason, can cause the depositor
not a little embarrassment if not also financial
loss and perhaps even civil and criminal
litigation.
The point is that as a business affected with
public interest and because of the nature of its
functions, the bank is under obligation to treat
the accounts of its depositors with meticulous
care, always having in mind the fiduciary
nature of their relationship. . . . .
102
Ineluctably, BPI-FB, as the trustee in the fiduciary
relationship, is duty bound to know the signatures of its
customers. Having failed to detect the forgery in the
Authority to Debit and in the process inadvertently
facilitate the FMIC-Tevesteco transfer, BPI-FB cannot
now shift liability thereon to Franco and the other
payees of checks issued by Tevesteco, or prevent
withdrawals from their respective accounts without the
appropriate court writ or a favorable final judgment.
Further, it boggles the mind why BPI-FB, even without
delving into the authenticity of the signature in the
Authority to Debit, effected the transfer of
P80,000,000.00 from FMIC's to Tevesteco's account,
when FMIC's account was a time deposit and it had
already paid advance interest to FMIC. Considering that
there is as yet no indubitable evidence establishing
Franco's participation in the forgery, he remains an
innocent party. As between him and BPI-FB, the latter,
which made possible the present predicament, must bear
the resulting loss or inconvenience.
Second. With respect to its liability for interest on
Franco's current account, BPI-FB argues that its non-
compliance with the Makati RTC's Order Lifting the
Order of Attachment and the legal consequences thereof,
is a matter that ought to be taken up in that court.
The argument is tenuous. We agree with the succinct
holding of the appellate court in this respect. The Manila
RTC's order to pay interests on Franco's current account
arose from BPI-FB's unjustified refusal to comply with
its obligation to pay Franco pursuant to their contract of
mutuum. In other words, from the time BPI-FB refused
Franco's demand for the release of the deposits in his
current account, specifically, from May 17, 1990,
interest at the rate of 12% began to accrue thereon. 39
Undeniably, the Makati RTC is vested with the authority
to determine the legal consequences of BPI-FB's non-
compliance with the Order Lifting the Order of
Attachment. However, such authority does not preclude
the Manila RTC from ruling on BPI-FB's liability to
Franco for payment of interest based on its continued
and unjustified refusal to perform a contractual
obligation upon demand. After all, this was the core
issue raised by Franco in his complaint before the
Manila RTC.
Third. As to the award to Franco of the deposits in
Quiaoit's account, we find no reason to depart from the
factual findings of both the Manila RTC and the CA.
Noteworthy is the fact that Quiaoit himself testified that
the deposits in his account are actually owned by Franco
who simply accommodated Jaime Sebastian's request to
temporarily transfer P400,000.00 from Franco's savings
account to Quiaoit's account. 40 His testimony cannot be
characterized as hearsay as the records reveal that he
had personal knowledge of the arrangement made
between Franco, Sebastian and himself. 41
BPI-FB makes capital of Franco's belated allegation
relative to this particular arrangement. It insists that the
transaction with Quiaoit was not specifically alleged in
Franco's complaint before the Manila RTC. However, it
appears that BPI-FB had impliedly consented to the trial
of this issue given its extensive cross-examination of
Quiaoit.
Section 5, Rule 10 of the Rules of Court provides:
Section 5. Amendment to conform to or
authorize presentation of evidence. When
issues not raised by the pleadings are tried
with the express or implied consent of the
parties, they shall be treated in all respects
as if they had been raised in the pleadings.
Such amendment of the pleadings as may be
necessary to cause them to conform to the
evidence and to raise these issues may be
made upon motion of any party at any time,
even after judgment; but failure to amend
does not affect the result of the trial of these
issues. If evidence is objected to at the trial on
the ground that it is now within the issues
made by the pleadings, the court may allow the
pleadings to be amended and shall do so with
liberality if the presentation of the merits of the
action and the ends of substantial justice will
be subserved thereby. The court may grant a
continuance to enable the amendment to be
made. (Emphasis supplied)
In all, BPI-FB's argument that this case is not the right
forum for Franco to recover the P400,000.00 begs the
issue. To reiterate, Quiaoit, testifying during the trial,
unequivocally disclaimed ownership of the funds in his
account, and pointed to Franco as the actual owner
thereof. Clearly, Franco's action for the recovery of his
deposits appropriately covers the deposits in Quiaoit's
account.
Fourth. Notwithstanding all the foregoing, BPI-FB
continues to insist that the dishonor of Franco's checks
respectively dated September 11 and 18, 1989 was
legally in order in view of the Makati RTC's
supplemental writ of attachment issued on September
14, 1989. It posits that as the party that applied for the
writ of attachment before the Makati RTC, it need not be
served with the Notice of Garnishment before it could
place Franco's accounts under garnishment.
103
The argument is specious. In this argument, we perceive
BPI-FB's clever but transparent ploy to circumvent
Section 4, 42 Rule 13 of the Rules of Court. It should be
noted that the strict requirement on service of court
papers upon the parties affected is designed to comply
with the elementary requisites of due process. Franco
was entitled, as a matter of right, to notice, if the
requirements of due process are to be observed. Yet, he
received a copy of the Notice of Garnishment only on
September 27, 1989, several days after the two checks
he issued were dishonored by BPI-FB on September 20
and 21, 1989. Verily, it was premature for BPI-FB to
freeze Franco's accounts without even awaiting service
of the Makati RTC's Notice of Garnishment on Franco.
Additionally, it should be remembered that the
enforcement of a writ of attachment cannot be made
without including in the main suit the owner of the
property attached by virtue thereof. Section 5, Rule 13
of the Rules of Court specifically provides that "no levy
or attachment pursuant to the writ issued . . . shall be
enforced unless it is preceded, or contemporaneously
accompanied, by service of summons, together with a
copy of the complaint, the application for attachment, on
the defendant within the Philippines."
Franco was impleaded as party-defendant only on May
15, 1990. The Makati RTC had yet to acquire
jurisdiction over the person of Franco when BPI-FB
garnished his accounts. 43 Effectively, therefore, the
Makati RTC had no authority yet to bind the deposits of
Franco through the writ of attachment, and
consequently, there was no legal basis for BPI-FB to
dishonor the checks issued by Franco.
Fifth. Anent the CA's finding that BPI-FB was in bad
faith and as such liable for the advance interest it
deducted from Franco's time deposit account, and for
moral as well as exemplary damages, we find it proper
to reinstate the ruling of the trial court, and allow only
the recovery of nominal damages in the amount of
P10,000.00. However, we retain the CA's award of
P75,000.00 as attorney's fees.
In granting Franco's prayer for interest on his time
deposit account and for moral and exemplary damages,
the CA attributed bad faith to BPI-FB because it (1)
completely disregarded its obligation to Franco; (2)
misleadingly claimed that Franco's deposits were under
garnishment; (3) misrepresented that Franco's current
account was not on file; and (4) refused to return the
P400,000.00 despite the fact that the ostensible owner,
Quiaoit, wanted the amount returned to Franco.
In this regard, we are guided by Article 2201 of the Civil
Code which provides:
Article 2201. In contracts and quasi-contracts,
the damages for which the obligor who acted
in good faith is liable shall be those that are the
natural and probable consequences of the
breach of the obligation, and which the parties
have foreseen or could have reasonable
foreseen at the time the obligation was
constituted.
In case of fraud, bad faith, malice or wanton
attitude, the obligor shall be responsible for
all damages which may be reasonably
attributed to the non-performance of the
obligation. (Emphasis supplied.)
We find, as the trial court did, that BPI-FB acted out of
the impetus of self-protection and not out of
malevolence or ill will. BPI-FB was not in the corrupt
state of mind contemplated in Article 2201 and should
not be held liable for all damages now being imputed to
it for its breach of obligation. For the same reason, it is
not liable for the unearned interest on the time deposit.
Bad faith does not simply connote bad judgment or
negligence; it imports a dishonest purpose or some
moral obliquity and conscious doing of wrong; it
partakes of the nature of fraud. 44 We have held that it is
a breach of a known duty through some motive of
interest or ill will. 45 In the instant case, we cannot
attribute to BPI-FB fraud or even a motive of self-
enrichment. As the trial court found, there was no denial
whatsoever by BPI-FB of the existence of the accounts.
The computer-generated document which indicated that
the current account was "not on file" resulted from the
prior debit by BPI-FB of the deposits. The remedy of
freezing the account, or the garnishment, or even the
outright refusal to honor any transaction thereon was
resorted to solely for the purpose of holding on to the
funds as a security for its intended court action, 46 and
with no other goal but to ensure the integrity of the
accounts.
We have had occasion to hold that in the absence of
fraud or bad faith, 47 moral damages cannot be
awarded; and that the adverse result of an action does
not per se make the action wrongful, or the party liable
for it. One may err, but error alone is not a ground for
granting such damages. 48
An award of moral damages contemplates the existence
of the following requisites: (1) there must be an injury
clearly sustained by the claimant, whether physical,
mental or psychological; (2) there must be a culpable act
or omission factually established; (3) the wrongful act or
omission of the defendant is the proximate cause of the
injury sustained by the claimant; and (4) the award for
damages is predicated on any of the cases stated in
Article 2219 of the Civil Code. 49
104
Franco could not point to, or identify any particular
circumstance in Article 2219 of the Civil Code, 50 upon
which to base his claim for moral damages.
Thus, not having acted in bad faith, BPI-FB cannot be
held liable for moral damages under Article 2220 of the
Civil Code for breach of contract. 51
We also deny the claim for exemplary damages. Franco
should show that he is entitled to moral, temperate, or
compensatory damages before the court may even
consider the question of whether exemplary damages
should be awarded to him. 52 As there is no basis for the
award of moral damages, neither can exemplary
damages be granted.
While it is a sound policy not to set a premium on the
right to litigate, 53 we, however, find that Franco is
entitled to reasonable attorney's fees for having been
compelled to go to court in order to assert his right.
Thus, we affirm the CA's grant of P75,000.00 as
attorney's fees.
Attorney's fees may be awarded when a party is
compelled to litigate or incur expenses to protect his
interest, 54 or when the court deems it just and
equitable. 55 In the case at bench, BPI-FB refused to
unfreeze the deposits of Franco despite the Makati
RTC's Order Lifting the Order of Attachment and
Quiaoit's unwavering assertion that the P400,000.00 was
part of Franco's savings account. This refusal
constrained Franco to incur expenses and litigate for
almost two (2) decades in order to protect his interests
and recover his deposits. Therefore, this Court deems it
just and equitable to grant Franco P75,000.00 as
attorney's fees. The award is reasonable in view of the
complexity of the issues and the time it has taken for this
case to be resolved. 56
Sixth. As for the dismissal of BPI-FB's counter-claim,
we uphold the Manila RTC's ruling, as affirmed by the
CA, that BPI-FB is not entitled to recover
P3,800,000.00 as actual damages. BPI-FB's alleged loss
of profit as a result of Franco's suit is, as already pointed
out, of its own making. Accordingly, the denial of its
counter-claim is in order.
WHEREFORE, the petition is PARTIALLY
GRANTED. The Court of Appeals Decision dated
November 29, 1995 is AFFIRMED with the
MODIFICATION that the award of unearned interest on
the time deposit and of moral and exemplary damages is
DELETED.
No pronouncement as to costs.
SO ORDERED.
FIRST DIVISION
[G.R. No. 157833. October 15, 2007.]
BANK OF THE PHILIPPINE
ISLANDS, petitioner, vs. GREGORIO C.
ROXAS, respondent.
For our resolution is the instant Petition for Review
on Certiorari assailing the Decision 1 of the Court of
Appeals (Fourth Division) dated February 13, 2003 in
CA-G.R. CV No. 67980.
The facts of the case, as found by the trial court and
affirmed by the Court of Appeals, are:
Gregorio C. Roxas, respondent, is a trader. Sometime in
March 1993, he delivered stocks of vegetable oil to
spouses Rodrigo and Marissa Cawili. As payment
therefor, spouses Cawili issued a personal check in the
amount of P348,805.50. However, when respondent
tried to encash the check, it was dishonored by the
drawee bank. Spouses Cawili then assured him that they
would replace the bounced check with a cashier's check
from the Bank of the Philippine Islands (BPI),
petitioner.
On March 31, 1993, respondent and Rodrigo Cawili
went to petitioner's branch at Shaw Boulevard,
Mandaluyong City where Elma Capistrano, the branch
manager, personally attended to them. Upon Elma's
instructions, Lita Sagun, the bank teller, prepared BPI
Cashier's Check No. 14428 in the amount of
P348,805.50, drawn against the account of Marissa
Cawili, payable to respondent. Rodrigo then handed the
check to respondent in the presence of Elma.
The following day, April 1, 1993, respondent returned to
petitioner's branch at Shaw Boulevard to encash the
cashier's check but it was dishonored. Elma informed
him that Marissa's account was closed on that date.
Despite respondent's insistence, the bank officers
refused to encash the check and tried to retrieve it from
respondent. He then called his lawyer who advised him
to deposit the check in his (respondent's) account at
Citytrust, Ortigas Avenue. However, the check was
dishonored on the ground "Account Closed."
On September 23, 1993, respondent filed with the
Regional Trial Court, Branch 263, Pasig City a
complaint for sum of money against petitioner, docketed
105
as Civil Case No. 63663. Respondent prayed that
petitioner be ordered to pay the amount of the check,
damages and cost of the suit.
In its answer, petitioner specifically denied the
allegations in the complaint, claiming that it issued the
check by mistake in good faith; that its dishonor was due
to lack of consideration; and that respondent's remedy
was to sue Rodrigo Cawili who purchased the check. As
a counterclaim, petitioner prayed that respondent be
ordered to pay attorney's fees and expenses of
litigation. EHTISC
Petitioner filed a third-party complaint against spouses
Cawili. They were later declared in default for their
failure to file their answer.
After trial, the RTC rendered a Decision, the dispositive
portion of which reads:
WHEREFORE, in view of the foregoing
premises, this Court hereby renders judgment
in favor of herein plaintiff and orders the
defendant, Bank of the Philippine Islands, to
pay Gerardo C. Roxas:
1) The sum of P348,805.50, the face
value of the cashier's check,
with legal interest thereon
computed from April 1, 1993
until the amount is fully paid;
2) The sum of P50,000.00 for moral
damages;
3) The sum of P50,000.00 as exemplary
damages to serve as an example
for the public good;
4) The sum of P25,000.00 for and as
attorney's fees; and the
 5) Costs of suit.
As to the third-party complaint, third-party
defendants Spouses Rodrigo and Marissa
Cawili are hereby ordered to indemnify
defendant Bank of the Philippine Islands such
amount(s) adjudged and actually paid by it to
herein plaintiff Gregorio C. Roxas, including
the costs of suit.
SO ORDERED.
On appeal, the Court of Appeals, in its Decision,
affirmed the trial court's judgment.
Hence, this petition.
Petitioner ascribes to the Court of Appeals the following
errors: (1) in finding that respondent is a holder in due
course; and (2) in holding that it (petitioner) is liable to
respondent for the amount of the cashier's check.
Section 52 of the Negotiable Instruments Law provides:
SEC. 52. What constitutes a holder in due
course. A holder in due course is a holder
who has taken the instrument under the
following conditions:
(a) That it is complete and regular upon
its face;
(b) That he became the holder of it
before it was overdue and
without notice that it had been
previously dishonored, if such
was the fact;
(c) That he took it in good faith and for
value;
(d) That at the time it was negotiated to not err in concluding that respondent is a holder in due
him, he had no notice of any course of the cashier's check.
infirmity in the instrument or
Furthermore, it bears emphasis that the disputed check is
defect in the title of person
a cashier's check. In International Corporate Bank v.
negotiating it.
Spouses Gueco, 3 this Court held that a cashier's check
As a general rule, under the above provision, every is really the bank's own check and may be treated as a
holder is presumed prima facie to be a holder in due promissory note with the bank as the maker. The check
course. One who claims otherwise has the onus becomes the primary obligation of the bank which
probandi to prove that one or more of the conditions issues it and constitutes a written promise to pay
required to constitute a holder in due course are lacking. upon demand. In New Pacific Timber & Supply Co.
In this case, petitioner contends that the element of Inc. v. Seeris, 4 this Court took judicial notice of the
"value" is not present, therefore, respondent could not be "well-known and accepted practice in the business
a holder in due course. sector that a cashier's check is deemed as cash." This is
because the mere issuance of a cashier's check is
Petitioner's contention lacks merit. Section 25 of the
considered acceptance thereof. AcTDaH
same law states:
In view of the above pronouncements, petitioner bank
SEC. 25. Value, what constitutes. Value is
became liable to respondent from the moment it issued
any consideration sufficient to support a simple
the cashier's check. Having been accepted by
contract. An antecedent or pre-existing debt
respondent, subject to no condition whatsoever,
constitutes value; and is deemed as such
petitioner should have paid the same upon presentment
whether the instrument is payable on demand
by the former.
or at a future time.
WHEREFORE, the petition is DENIED. The assailed
In Walker Rubber Corp. v. Nederlandsch Indische &
Decision of the Court of Appeals (Fourth Division) in
Handelsbank, N.V. and South Sea Surety & Insurance
CA-G.R. CV No. 67980 is AFFIRMED. Costs against
Co., Inc., 2 this Court ruled that value "in general terms
petitioner.
may be some right, interest, profit or benefit to the party
who makes the contract or some forbearance, detriment, SO ORDERED.
loan, responsibility, etc. on the other side." Here, there is
no dispute that respondent received Rodrigo Cawili's
cashier's check as payment for the former's vegetable
oil. The fact that it was Rodrigo who purchased the
cashier's check from petitioner will not affect
respondent's status as a holder for value since the check THIRD DIVISION
was delivered to him as payment for the vegetable oil he
sold to spouses Cawili. Verily, the Court of Appeals did
[G.R. No. 156940. December 14, 2004.]
106
 ASSOCIATED BANK (Now WESTMONT
BANK), petitioner, vs. VICENTE HENRY
TAN, respondent.
While banks are granted by law the right to debit the
value of a dishonored check from a depositor's account,
they must do so with the highest degree of care, so as
not to prejudice the depositor unduly.
The Case
Before us is a Petition for Review 1 under Rule 45 of
the Rules of Court, assailing the January 27, 2003
Decision 2 of the Court of Appeals (CA) in CA-GR CV
No. 56292. The CA disposed as follows:
"WHEREFORE, premises considered, the
Decision dated December 3, 1996, of the
Regional Trial Court of Cabanatuan City, Third
Judicial Region, Branch 26, in Civil Case No.
892-AF is hereby AFFIRMED. Costs against
the [petitioner]." 3
The Facts
The CA narrated the antecedents as follows:
"Vicente Henry Tan (hereafter TAN) is a
businessman and a regular depositor-creditor
of the Associated Bank (hereinafter referred to
as the BANK). Sometime in September 1990,
he deposited a postdated UCPB check with the
said BANK in the amount of P101,000.00
issued to him by a certain Willy Cheng from
Tarlac. The check was duly entered in his bank
record thereby making his balance in the
amount of P297,000.00, as of October 1, 1990,
from his original deposit of P196,000.00.
Allegedly, upon advice and instruction of the
BANK that the P101,000.00 check was already
cleared and backed up by sufficient funds,
TAN, on the same date, withdrew the sum of
P240,000.00, leaving a balance of P57,793.45.
A day after, TAN deposited the amount of
P50,000.00 making his existing balance in the
amount of P107,793.45, because he has issued
several checks to his business partners, to wit:
CHECK NUMBERS DATE AMOUNT
a. 138814 Sept. 29, 1990 P9,000.00
b. 138804 Oct. 8, 1990 9,350.00
c. 138787 Sept. 30, 1990 6,360.00
d. 138847 Sept. 29, 1990 21,850.00
e. 167054 Sept. 29, 1990 4,093.40
f. 138792 Sept. 29, 1990 3,546.00
g. 138774 Oct. 2, 1990 6,600.00
h. 167072 Oct. 10, 1990 9,908.00
i. 168802 Oct. 10, 1990 3,650.00
"However, his suppliers and business partners
went back to him alleging that the checks he
issued bounced for insufficiency of funds.
Thereafter, TAN, thru his lawyer, informed the
BANK to take positive steps regarding the
matter for he has adequate and sufficient funds
to pay the amount of the subject checks.
Nonetheless, the BANK did not bother nor
offer any apology regarding the incident.
Consequently, TAN, as plaintiff, filed a
Complaint for Damages on December 19,
1990, with the Regional Trial Court of
Cabanatuan City, Third Judicial Region,
107
docketed as Civil Case No. 892-AF, against the
BANK, as defendant. SDITAC
"In his [C]omplaint, [respondent] maintained
that he ha[d] sufficient funds to pay the subject
checks and alleged that his suppliers decreased
in number for lack of trust. As he has been in
the business community for quite a time and
has established a good record of reputation and
probity, plaintiff claimed that he suffered
embarrassment, humiliation, besmirched
reputation, mental anxieties and sleepless
nights because of the said unfortunate incident.
[Respondent] further averred that he
continuously lost profits in the amount of
P250,000.00. [Respondent] therefore prayed
for exemplary damages and that [petitioner] be
ordered to pay him the sum of P1,000,000.00
by way of moral damages, P250,000.00 as lost
profits, P50,000.00 as attorney's fees plus 25%
of the amount claimed including P1,000.00 per
court appearance. 2004cdasia
"Meanwhile, [petitioner] filed a Motion to
Dismiss on February 7, 1991, but the same was
denied for lack of merit in an Order dated
March 7, 1991. Thereafter, [petitioner] BANK
on March 20, 1991 filed its Answer denying,
among others, the allegations of [respondent]
and alleged that no banking institution would
give an assurance to any of its client/depositor
that the check deposited by him had already
been cleared and backed up by sufficient funds
but it could only presume that the same has
been honored by the drawee bank in view of
the lapse of time that ordinarily takes for a
check to be cleared. For its part, [petitioner]
alleged that on October 2, 1990, it gave notice
to the [respondent] as to the return of his
UCPB check deposit in the amount of
P101,000.00, hence, on even date, [respondent]
deposited the amount of P50,000.00 to cover
the returned check.
"By way of affirmative defense, [petitioner]
averred that [respondent] had no cause of
action against it and argued that it has all the
right to debit the account of the [respondent]
by reason of the dishonor of the check
deposited by the [respondent] which was
withdrawn by him prior to its clearing.
[Petitioner] further averred that it has no
liability with respect to the clearing of
deposited checks as the clearing is being
undertaken by the Central Bank and in
accepting [the] check deposit, it merely
obligates itself as depositor's collecting agent
subject to actual payment by the drawee bank.
[Petitioner] therefore prayed that [respondent]
be ordered to pay it the amount of
P1,000,000.00 by way of loss of goodwill,
P7,000.00 as acceptance fee plus P500.00 per
appearance and by way of attorney's fees.
"Considering that Westmont Bank has taken
over the management of the affairs/properties
of the BANK, [respondent] on October 10,
1996, filed an Amended Complaint reiterating
substantially his allegations in the original
complaint, except that the name of the previous
defendant ASSOCIATED BANK is now
WESTMONT BANK.
"Trial ensured and thereafter, the court
rendered its Decision dated December 3, 1996
in favor of the [respondent] and against the
[petitioner], ordering the latter to pay the before unilaterally debiting the amount of P101,000.
[respondent] the sum of P100,000.00 by way Without such notice, it is estopped from blaming him for
of moral damages, P75,000.00 as exemplary failing to fund his account.
damages, P25,000.00 as attorney's fees, plus
The CA opined that, had the P101,000 not been debited,
the costs of this suit. In making said ruling, it
respondent would have had sufficient funds for the
was shown that [respondent] was not officially
postdated checks he had issued. Thus, the supposed
informed about the debiting of the P101,000.00
accommodation accorded by petitioner to him is the
[from] his existing balance and that the BANK
proximate cause of his business woes and shame, for
merely allowed the [respondent] to use the
which it is liable for damages.
fund prior to clearing merely for
accommodation because the BANK considered Because of the bank's negligence, the CA awarded
him as one of its valued clients. The trial court respondent moral damages of P100,000. It also granted
ruled that the bank manager was negligent in him exemplary damages of P75,000 and attorney's fees
handling the particular checking account of the of P25,000.
[respondent] stating that such lapses caused all
Hence this Petition. 5
the inconveniences to the [respondent]. The
trial court also took into consideration that Issue
[respondent's] mother was originally
In its Memorandum, petitioner raises the sole issue of
maintaining with the . . . BANK [a] current
"whether or not the petitioner, which is acting as a
account as well as [a] time deposit, but [o]n
collecting bank, has the right to debit the account of its
one occasion, although his mother made a
client for a check deposit which was dishonored by the
deposit, the same was not credited in her favor
drawee bank." 6
but in the name of another." 4
The Court's Ruling
Petitioner appealed to the CA on the issues of whether it
was within its rights, as collecting bank, to debit the The Petition has no merit. ESaITA
account of its client for a dishonored check; and whether
Sole Issue:
it had informed respondent about the dishonor prior to
Debit of Depositor's Account
debiting his account.
Ruling of the Court of Appeals Petitioner-bank contends that its rights and obligations
under the present set of facts were misappreciated by the
Affirming the trial court, the CA ruled that the bank CA. It insists that its right to debit the amount of the
should not have authorized the withdrawal of the value
dishonored check from the account of respondent is
of the deposited check prior to its clearing. Having done clear and unmistakable. Even assuming that it did not
so, contrary to its obligation to treat respondent's give him notice that the check had been dishonored,
account with meticulous care, the bank violated its own such right remains immediately enforceable.
policy. It thereby took upon itself the obligation to
officially inform respondent of the status of his account
108
In particular, petitioner argues that the check deposit slip
accomplished by respondent on September 17, 1990,
expressly stipulated that the bank was obligating itself
merely as the depositor's collecting agent and until
such time as actual payment would be made to it it
was reserving the right to charge against the depositor's
account any amount previously credited. Respondent
was allowed to withdraw the amount of the check prior
to clearing, merely as an act of accommodation, it
added.
At the outset, we stress that the trial court's factual
findings that were affirmed by the CA are not subject to
review by this Court. 7 As petitioner itself takes no issue
with those findings, we need only to determine the legal
consequence, based on the established facts.
Right of Setoff
A bank generally has a right of setoff over the deposits
therein for the payment of any withdrawals on the part
of a depositor. 8 The right of a collecting bank to debit a
client's account for the value of a dishonored check that
has previously been credited has fairly been established
by jurisprudence. To begin with, Article 1980 of the
Civil Code provides that "[f]ixed, savings, and current
deposits of money in banks and similar institutions shall
be governed by the provisions concerning simple loan."
Hence, the relationship between banks and depositors
has been held to be that of creditor and debtor. 9 Thus,
legal compensation under Article 1278 10 of the Civil
Code may take place "when all the requisites mentioned
in Article 1279 are present," 11 as follows:
"(1) That each one of the obligors be bound
principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money,
or if the things due are consumable, they be of
the same kind, and also of the same quality if
the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any
retention or controversy, commenced by third
persons and communicated in due time to the
debtor." 12
Nonetheless, the real issue here is not so much the right
of petitioner to debit respondent's account but, rather,
the manner in which it exercised such right. The Court
has held that even while the right of setoff is conceded,
separate is the question of whether that remedy has
properly been exercised. 13
The liability of petitioner in this case ultimately revolves
around the issue of whether it properly exercised its
right of setoff. The determination thereof hinges, in turn,
on the bank's role and obligations, first, as respondent's
depositary bank; and second, as collecting agent for the
check in question.
Obligation as
Depositary Bank
In BPI v. Casa Montessori, 14 the Court has emphasized
that the banking business is impressed with public
interest. "Consequently, the highest degree of diligence
is expected, and high standards of integrity and
performance are even required of it. By the nature of its
functions, a bank is under obligation to treat the
accounts of its depositors with meticulous care." 15
Also affirming this long standing doctrine, Philippine
Bank of Commerce v. Court of Appeals 16 has held that
109
"the degree of diligence required of banks is more than
that of a good father of a family where the fiduciary
nature of their relationship with their depositors is
concerned." 17 Indeed, the banking business is vested
with the trust and confidence of the public; hence the
"appropriate standard of diligence must be very high, if
not the highest, degree of diligence." 18 The standard
applies, regardless of whether the account consists of
only a few hundred pesos or of millions. 19
The fiduciary nature of banking, previously imposed by
case law, 20 is now enshrined in Republic Act No. 8791 or the
General Banking Law of 2000. Section 2 of the law specifically
says that the State recognizes the "fiduciary nature of
banking that requires high standards of integrity and
performance."
Did petitioner treat respondent's account with the
highest degree of care? From all indications, it did not.
It is undisputed nay, even admitted that
purportedly as an act of accommodation to a valued
client, petitioner allowed the withdrawal of the face
value of the deposited check prior to its clearing. That
act certainly disregarded the clearance requirement of
the banking system. Such a practice is unusual, because
a check is not legal tender or money; 21 and its value
can properly be transferred to a depositor's account only
after the check has been cleared by the drawee bank. 22
Under ordinary banking practice, after receiving a check
deposit, a bank either immediately credit the amount to
a depositor's account; or infuse value to that account
only after the drawee bank shall have paid such
amount. 23 Before the check shall have been cleared for
deposit, the collecting bank can only "assume" at its
own risk as herein petitioner did that the check
would be cleared and paid out.
Reasonable business practice and prudence, moreover,
dictated that petitioner should not have authorized the
withdrawal by respondent of P240,000 on October 1,
1990, as this amount was over and above his
outstanding cleared balance of P196,793.45. 24 Hence,
the lower courts correctly appreciated the evidence in
his favor.
Obligation as
Collecting Agent
Indeed, the bank deposit slip expressed this reservation:
"In receiving items on deposit, this Bank
obligates itself only as the Depositor's
Collecting agent, assuming no responsibility
beyond carefulness in selecting
correspondents, and until such time as actual
payments shall have come to its possession,
this Bank reserves the right to charge back to
the Depositor's account any amounts
previously credited whether or not the
deposited item is returned. . . ." 25
However, this reservation is not enough to insulate the
bank from any liability. In the past, we have expressed
doubt about the binding force of such conditions
unilaterally imposed by a bank without the consent of
the depositor. 26 It is indeed arguable that "in signing
the deposit slip, the depositor does so only to identify
himself and not to agree to the conditions set forth at the
back of the deposit slip." 27
Further, by the express terms of the stipulation,
petitioner took upon itself certain obligations as
respondent's agent, consonant with the well-settled rule
that the relationship between the payee or holder of a
commercial paper and the collecting bank is that of
principal and agent. 28 Under Article 1909 29 of the
Civil Code, such bank could be held liable not only for
fraud, but also for negligence.
As a general rule, a bank is liable for the wrongful or
tortuous acts and declarations of its officers or agents
within the course and scope of their
employment. 30 Due to the very nature of their business,
banks are expected to exercise the highest degree of
diligence in the selection and supervision of their
employees. 31 Jurisprudence has established that the
lack of diligence of a servant is imputed to the
negligence of the employer, when the negligent or
wrongful act of the former proximately results in an
injury to a third person; 32 in this case, the depositor.
The manager of the bank's Cabanatuan branch,
Consorcia Santiago, categorically admitted that she and
the employees under her control had breached bank
policies. They admittedly breached those policies when,
without clearance from the drawee bank in Baguio, they
allowed respondent to withdraw on October 1, 1990, the
amount of the check deposited. Santiago testified that
respondent "was not officially informed about the
debiting of the P101,000 from his existing balance of
P170,000 on October 2, 1990 . . . " 33
Being the branch manager, Santiago clearly acted within
the scope of her authority in authorizing the withdrawal
and the subsequent debiting without notice.
Accordingly, what remains to be determined is whether
her actions proximately caused respondent's injury.
Proximate cause is that which in a natural and
continuous sequence, unbroken by any efficient
intervening cause produces the injury, and without
which the result would not have occurred. 34
Let us go back to the facts as they unfolded. It is
undeniable that the bank's premature authorization of the
withdrawal by respondent on October 1, 1990, triggered
110
in rapid succession and in a natural sequence the
debiting of his account, the fall of his account balance to
insufficient levels, and the subsequent dishonor of his
own checks for lack of funds. The CA correctly noted
thus:
". . . [T]he depositor . . . withdrew his money
upon the advice by [petitioner] that his money
was already cleared. Without such advice,
[respondent] would not have withdrawn the
sum of P240,000.00. Therefore, it cannot be
denied that it was [petitioner's] fault which
allowed [respondent] to withdraw a huge sum
which he believed was already his. TaCEHA
"To emphasize, it is beyond cavil that
[respondent] had sufficient funds for the check.
Had the P101,000.00 not [been] debited, the
subject checks would not have been
dishonored. Hence, we can say that
[respondent's] injury arose from the dishonor
of his well-funded checks. . . ." 35
Aggravating matters, petitioner failed to show that it had
immediately and duly informed respondent of the
debiting of his account. Nonetheless, it argues that the
giving of notice was discernible from his act of
depositing P50,000 on October 2, 1990, to augment his
account and allow the debiting. This argument deserves
short shrift.
First, notice was proper and ought to be expected. By
the bank manager's account, respondent was considered
a "valued client" whose checks had always been
sufficiently funded from 1987 to 1990, 36 until the
October imbroglio. Thus, he deserved nothing less than
an official notice of the precarious condition of his
account.
Second, under the provisions of the Negotiable
Instruments Law regarding the liability of a general
indorser 37 and the procedure for a notice of
dishonor, 38 it was incumbent on the bank to give
proper notice to respondent. In Gullas v. National
Bank, 39 the Court emphasized:
". . . [A] general indorser of a negotiable
instrument engages that if the instrument
the check in this case is dishonored and the
necessary proceedings for its dishonor are duly
taken, he will pay the amount thereof to the
holder (Sec. 66) It has been held by a long line
of authorities that notice of dishonor is
necessary to charge an indorser and that the
right of action against him does not accrue
until the notice is given.
". . . The fact we believe is undeniable that
prior to the mailing of notice of dishonor, and
without waiting for any action by Gullas, the
bank made use of the money standing in his
account to make good for the treasury
warrant. At this point recall that Gullas was
merely an indorser and had issued checks in
good faith. As to a depositor who has funds
sufficient to meet payment of a check drawn by
him in favor of a third party, it has been held
that he has a right of action against the bank
for its refusal to pay such a check in the
absence of notice to him that the bank has
applied the funds so deposited in
extinguishment of past due claims held against
him. (Callahan vs. Bank of Anderson [1904], 2
Ann. Cas., 203.) However this may be, as to an
indorser the situation is different, and notice
should actually have been given him in order
that he might protect his interests." 40
Third, regarding the deposit of P50,000 made by
respondent on October 2, 1990, we fully subscribe to the
CA's observations that it was not unusual for a well-
reputed businessman like him, who "ordinarily takes
note of the amount of money he takes and releases," to
immediately deposit money in his current account to
answer for the postdated checks he had issued. 41
Damages
Inasmuch as petitioner does not contest the basis for the
award of damages and attorney's fees, we will no longer
address these matters.
WHEREFORE, the Petition is DENIED and the assailed
Decision AFFIRMED. Costs against petitioner.
SO ORDERED.
FIRST DIVISION
[G.R. No. 74917. January 20, 1988.]
BANCO DE ORO SAVINGS AND
MORTGAGE
BANK, petitioner, vs. EQUITABLE
BANKING CORPORATION, PHILIPPINE
CLEARING HOUSE CORPORATION,
AND REGIONAL TRIAL COURT OF
QUEZON CITY, BRANCH XCII
(92) respondents.
111
This is a petition for review on certiorari of a decision of
the Regional Trial Court of Quezon City promulgated on
March 24, 1986 in Civil Case No. Q-46517 entitled
Banco de Oro Savings and Mortgage Bank versus
Equitable Banking Corporation and the Philippine
Clearing House Corporation after a review of the
Decision of the Board of Directors of the Philippine
Clearing House Corporation (PCHC) in the case of
Equitable Banking Corporation (EBC) vs. Banco de Oro
Savings and Mortgage (BCO), ARBICOM Case No. 84-
033.
The undisputed facts are as follows:
"It appears that sometime in March, April, May
and August 1983, plaintiff through its Visa
Card Department, drew six crossed Manager's
check (Exhibits 'A' to 'F', and herein referred to
as Checks) having an aggregate amount of
Forty Five Thousand Nine Hundred and Eighty
Two & 23/100 (P45,982.23) Pesos and payable
to certain member establishments of Visa Card.
Subsequently, the Checks were deposited with
the defendant to the credit of its depositor, a
certain Aida Trencio.
Following normal procedures, and after
stamping at the back of the Checks the usual
endorsements: 'All prior and/or lack of
endorsement guaranteed' the defendant sent the
checks for clearing through the Philippine
Clearing House Corporation (PCHC).
Accordingly, plaintiff paid the Checks; its
clearing account was debited for the value of
the Checks and defendant's clearing account
was credited for the same amount.
Thereafter, plaintiff discovered that the
endorsements appearing at the back of the
 Checks and purporting to be that of the payees
were forged and/or unauthorized or otherwise
belong to persons other than the payees.
Pursuant to the PCHC Clearing Rules and
Regulations, plaintiff presented the Checks
directly to the defendant for the purpose of
claiming reimbursement from the latter.
However, defendant refused to accept such
direct presentation and to reimburse the
plaintiff for the value of the Checks; hence,
this case.
In its Complaint, plaintiff prays for judgment
to require the defendant to pay the plaintiff the
sum of P45,982.23 with interest at the rate of
12% per annum from the date of the complaint
plus attorney's fees in the amount of
P10,000.00 as well as the cost of the suit.
In accordance with Section 38 of the Clearing
House Rules and Regulations, the dispute was
presented for Arbitration; and Atty. Ceasar
Querubin was designated as the Arbitrator.
After an exhaustive investigation and hearing
the Arbiter rendered a decision in favor of the
plaintiff and against the defendant ordering the
PCHC to debit the clearing account of the
defendant, and to credit the clearing account of
the plaintiff of the amount of P45,982.23 with
interest at the rate of 12% per annum from date
of the complaint and Attorney's fee in the
amount of P5,000.00. No pronouncement as to
cost was made." 1
In a motion for reconsideration filed by the petitioner,
the Board of Directors of the PCHC affirmed the
decision of the said Arbiter in this wise:
"'In view of all the foregoing the decision of
the Arbiter is confirmed"; and the Philippine
Clearing House Corporation is hereby ordered
to debit the clearing account of the defendant
and credit the clearing account of plaintiff the
amount of Forty Five Thousand Nine Hundred
Eighty Two & 23/100 (P45,982.23) Pesos with
interest at the rate of 12% per annum from date
of the complaint, and the Attorney's fee in the
amount of Five Thousand (P5,000.00) Pesos.'"
Thus, a petition for review was filed with the Regional
Trial Court of Quezon City, Branch XCII, wherein in
due course a decision was rendered affirming in toto the
decision of the PCHC.
Hence this petition.
The petition is focused on the following issues:
1. Did the PCHC have any jurisdiction to give
due course to and adjudicate Arbicom
Case No. 84-033?
2. Were the subject checks non-negotiable and
if not, does it fall under the ambit of the
power of the PCHC?
3. Is the Negotiable Instrument Law, Act No.
2031 applicable in deciding controversies
of this nature by the PCHC?
4. What law should govern in resolving
controversies of this nature?
5. Was the petitioner bank negligent and thus
responsible for any undue payment?
Petitioner maintains that the PCHC is not clothed with
jurisdiction because the Clearing House Rules and
Regulations of PCHC cover and apply only to checks
112
that are genuinely negotiable. Emphasis is laid on the
primary purpose of the PCHC in the Articles of
Incorporation, which states:
"To provide, maintain and render an effective,
convenient, efficient, economical and relevant
exchange and facilitate service limited to check
processing and sorting by way of assisting
member banks, entities in clearing checks and
other clearing items as defined in existing and
in future Central Bank of the Philippines
circulars, memoranda, circular letters, rules and
regulations and policies in pursuance to the
provisions of Section 107 of R.A. 265. . ."
and Section 107 of R.A. 265 which provides:
xxx xxx xxx
The deposit reserves maintained by the banks
in the Central Bank, in accordance with the
provisions of Section 1000 shall serve as a
basis for the clearing of checks, and the
settlement of interbank balances . . ."
Petitioner argues that by law and common
sense, the term check should be interpreted as one that
fits the articles of incorporation of the PCHC, the
Central Bank and the Clearing House Rules stating that
it is a negotiable instrument citing the definition of a
"check" as basically a "bill of exchange" under Section
185 of the NIL and that it should be payable to "order"
or to "bearer" under Section 126 of same law. Petitioner
alleges that with the cancellation of the printed word
"or bearer" from the face of the check, it becomes non-
negotiable so the PCHC has no jurisdiction over the
case.
 The Regional Trial Court took exception to this
stand and conclusion put forth by the herein petitioner
as it held:
"Petitioner's theory cannot be maintained. As
will be noted, the PCHC makes no distinction
as to the character or nature of the checks
subject of its jurisdiction. The pertinent
provisions quoted in petitioner's memorandum
simply refer to check(s). Where the law does
not distinguish, we shall not distinguish.
In the case of Reyes vs. Chuanico (CA-G.R.
No. 20813-R, Feb. 5, 1962) the Appellate
Court categorically stated that there are four
kinds of checks in this jurisdiction; the regular
check; the cashier's check; the traveller's
check; and the crossed check. The Court,
further elucidated, that while the Negotiable
Instruments Law does not contain any provision on
crossed checks, it is common practice in
commercial and banking operations to issue
checks of this character, obviously in
accordance with Article 541 of the Code of
Commerce. Attention is likewise called to
Section 185 of the Negotiable Instruments Law:
'Sec. 185. Check defined. A
check is a bill of exchange drawn on a
bank payable on demand. Except as
herein otherwise provided, the
provisions of this act applicable to a
bill of exchange payable on demand
apply to a check.'
and the provisions of Section 61 (supra) that
the drawer may insert in the instrument an
express stipulation negating or limiting his
own liability to the holder. Consequently, it
appears that the use of the term 'check' in the
Articles of Incorporation of PCHC is to be
perceived as not limited to negotiable checks
only, but to checks as is generally known in
use in commercial or business transactions.
Anent Petitioner's liability on said instruments,
this court is in full accord with the ruling of the
PCHC Board of Directors that:
'In presenting the Checks for
clearing and for payment, the defendant
made an express guarantee on the
validity of 'all prior endorsements'.
Thus, stamped at the back of the checks
are the defendant's clear warranty; ALL
PRIOR ENDORSEMENTS AND/OR
LACK OF ENDORSEMENTS
GUARANTEED. Without such
warranty, plaintiff would not have paid
on the checks.
No amount of legal jargon can
reverse the clear meaning of
defendant's warranty. As the warranty
has proven to be false and inaccurate,
the defendant is liable for any damage
arising out of the falsity of its
representation.
The principle of estoppel,
effectively prevents the defendant from
denying liability for any damage
sustained by the plaintiff which, relying
upon an action or declaration of the
defendant, paid on the Checks. The
same principle of estoppel effectively
prevents the defendant from denying
113
the existence of the Checks.' (Pp. 10-11
Decision; pp. 43-44, Rollo)"
We agree.
As provided in the aforecited articles of incorporation of
PCHC its operation extend to "clearing checks and other
clearing items." No doubt transactions on non-
negotiable checks are within the ambit of its jurisdiction.
In a previous case this Court had occasion to rule:
"Ubilex non distinguit nec nos distinguere
debemos." 2 It was enunciated in Loc Cham v. Ocampo,
77 Phil. 636 (1946):
"The rule, founded on logic, is a corollary of
the principle that general words and phrases in
a statute should ordinarily be accorded their
natural and general significance. In other
words, there should be no distinction in the
application of a statute where none is
indicated."
There should be no distinction in the application of a
statute where none is indicated for courts are not
authorized to distinguish where the law makes no
distinction. They should instead administer the law not
as they think it ought to be but us they find it and
without regard to consequences. 3
The term, check as used in the said Articles of
Incorporation of PCHC can only connote checks in
general use in commercial, and business activities. It
cannot be conceived to be limited to negotiable checks
only. cdreo
Checks are used between banks and bankers and their
customers, and are designed to facilitate banking
operations. It is of the essence to be payable on demand,
because the contract between the banker and the
customer is that the money is needed on demand. 4
The participation of the two banks, petitioner and
private respondent, in the clearing operations of PCHC
is a manifestation of their submission to its
jurisdiction. Sec. 3 and 36.6 of the PCHC-CHRR
clearing rules and regulations provide:
"SEC. 3. AGREEMENT TO THESE RULES.
It is the general agreement and
understanding that any participant in the
Philippine Clearing House Corporation, MICR
clearing operations by the mere fact of their
participation, thereby manifests its agreement
to these Rules and Regulations and its
subsequent amendments."
Sec. 36.6. (ARBITRATION) The fact that a
bank participates in the clearing operations of
the PCHC shall be deemed its written and
subscribed consent to the binding effect of this
arbitration agreement as if it had done so in
accordance with section 4 of (the) Republic Act No.
876, otherwise known as the Arbitration Law."
Further Section 2 of the Arbitration Law mandates:
"Two or more persons or parties may submit to
the arbitration of one or more arbitrators any
controversy existing between them at the time
of the submission and which may be the
subject of an action, or the parties of any
contract may in such contract agree to settle by
arbitration a controversy thereafter arising
between them. Such submission or contract
shall be valid and irrevocable, save upon
grounds as exist at law for the revocation of
any contract.
"Such submission or contract may include
question arising out of valuations, appraisals or
other controversies which may be collateral,
incidental, precedent or subsequent to any
issue between the parties . . ."
Sec. 21 of the same rules, says:
"Items which have been the subject of material
alteration or items bearing forged
endorsement when such endorsement is
necessary for negotiation shall be returned by
direct presentation or demand to the
Presenting Bank and not through the regular
clearing house facilities within the period
prescribed by law for the filing of a legal
action by the returning bank/branch, institution
or entity sending the same." (Emphasis
supplied)
Viewing these provisions the conclusion is clear that the
PCHC Rules and Regulations should not be interpreted
to be applicable only to checks which are negotiable
instruments but also to non-negotiable instruments, and
that the PCHC has jurisdiction over this case even as the
checks subject of this litigation are admittedly non-
negotiable.
Moreover, petitioner is estopped from raising the
defense of non-negotiability of the checks in question. It
stamped its guarantee on the back of the checks and
subsequently presented these checks for clearing and it
was on the basis of these endorsements by the petitioner
that the proceeds were credited in its clearing account.
The petitioner by its own acts and representation can not
now deny liability because it assumed the liabilities of
an endorser by stamping its guarantee at the back of the
checks.
114
The petitioner having stamped its guarantee of "all prior
endorsements and/or lack of endorsements" (Exh. A-2 to
F-2) is now estopped from claiming that the checks
under consideration are not negotiable instruments. The
checks were accepted for deposit by the petitioner
stamping thereon its guarantee, in order that it can clear
the said checks with the respondent bank. By such
deliberate and positive attitude of the petitioner it has for
all legal intents and purposes treated the said checks as
negotiable instruments and accordingly assumed the
warranty of the endorser when it stamped its guarantee
of prior endorsements at the back of the checks. It led
the said respondent to believe that it was acting as
endorser of the checks and on the strength of this
guarantee said respondent cleared the checks in question
and credited the account of the petitioner. Petitioner is
now barred from taking an opposite posture by claiming
that the disputed checks are not negotiable instrument.
This Court enunciated in Philippine National Bank vs.
Court of Appeals, 5 a point relevant to the issue when it
stated "the doctrine of estoppel is based upon the
grounds of public policy, fair dealing, good faith and
justice and its purpose is to forbid one to speak against
his own act, representations or commitments to the
injury of one to whom they were directed and who
reasonably relied thereon."
A commercial bank cannot escape the liability of an
endorser of a check and which may turn out to be a
forged endorsement. Whenever any bank treats the
signature at the back of the checks as endorsements and
thus logically guarantees the same as such there can be
no doubt said bank has considered the checks as
negotiable. cdrep
Apropos the matter of forgery in endorsements, this
Court has succinctly emphasized that the collecting bank
or last endorser generally suffers the loss because it has
the 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 endorsements. This is
laid down in the case of PNB vs. National City
Bank. 6 In another case, this court held that if the
drawee-bank discovers that the signature of the payee
was forged after it has paid the amount of the check to
the holder thereof, it can recover the amount paid from
the collecting bank. 7
A truism stated by this Court is that "The doctrine of
estoppel precludes a party from repudiating an
obligation voluntarily assumed after having accepted
benefits therefrom. To countenance such repudiation
would be contrary to equity and put premium on fraud
or misrepresentation." 8
We made clear in Our decision in Philippine National
Bank vs. The National City Bank of NY & Motor Service
Co. that:
"Where a check is accepted or certified by the
bank on which it is drawn, the bank is estopped
to deny the genuineness of the drawer's
signature and his capacity to issue the
instrument.
If a drawee bank pays a forged check which
"was previously accepted or certified by the
said bank, it can not recover from a holder who
did not participate in the forgery and did not
have actual notice thereof.
The payment of a check does not include or
imply its acceptance in the sense that this word
is used in Section 62 of the Negotiable
Instruments Act." 9
The point that comes uppermost is whether the drawee
bank was negligent in failing to discover the alteration
or the forgery.
Very akin to the case at bar is one which involves a suit
filed by the drawer of checks against the collecting bank
and this came about in Farmers State Bank 10 where it
was held:
"A cause of action against the (collecting bank)
in favor of the appellee (the drawer) accrued as
a result of the bank breaching its implied
warranty of the genuineness of the
indorsements of the name of the payee by
bringing about the presentation of the checks
(to the drawee bank) and collecting the
amounts thereof, the right to enforce that cause
of action was not destroyed by the
circumstance that another cause of action for
the recovery of the amounts paid on the checks
would have accrued in favor of the appellee
against another or to others than the bank if
when the checks were paid they have been
indorsed by the payee." (United States vs.
National Exchange Bank, 214 US, 302, 29 S
CT-665, 53 L. Ed 1006,16 Am. Cas. 1184;
Onondaga County Savings Bank vs. United
States (E.C.A.) 64 F 703)".
Section 66 of the Negotiable Instruments ordains that:
"Every indorser who indorses without
qualification, warrants to all subsequent
holders in due course" (a) that the instrument is
115
genuine and in all respects what it purports to
be; (b) that he has good title to it; (c) that all
prior parties have capacity to contract; and (d)
that the instrument is at the time of his
indorsement valid and subsisting. 11
It has been enunciated in an American case particularly
in American Exchange National Bank vs. Yorkville
Bank 12 that: "the drawer owes no duty of diligence to
the collecting bank (one who had accepted an altered
check and had paid over the proceeds to the depositor)
except of seasonably discovering the alteration by a
comparison of its returned checks and check stubs or
other equivalent record, and to inform the drawee
thereof."
In this case it was further held that:
"The real and underlying reasons why
negligence of the drawer constitutes no defense
to the collecting bank are that there is no
privity between the drawer and the collecting
bank (Corn Exchange Bank vs. Nassau Bank,
204 N.Y.S. 80) and the drawer owes to that
bank no duty of vigilance (New York Produce
Exchange Bank vs. Twelfth Ward Bank, 204
N.Y.S. 54) and no act of the collecting bank is
induced by any act or representation or
admission of the drawer (Seaboard National
Bank vs. Bank of America (supra) and it
follows that negligence on the part of the
drawer cannot create any liability from it to the
collecting bank, and the drawer thus is neither
a necessary nor a proper party to an action by
the drawee bank against such bank. It is quite
true that depositors in banks are under the
obligation of examining their passbooks and
returned vouchers as a protection against the
 payment by the depository bank against forged
checks, and negligence in the performance of
that obligation may relieve that bank of
liability for the repayment of amounts paid out
on forged checks, which but for such
negligence it would he bound to repay. A
leading case on that subject is Morgan vs.
United States Mortgage and Trust Col. 208
N.Y. 218, 101 N.E. 871 Amn. Cas. 1914D,
462, L.R.A. 1915D, 74."
Thus We hold that while the drawer generally owes no
duty of diligence to the collecting bank, the law imposes
a duty of diligence on the collecting bank to scrutinize
checks deposited with it for the purpose of determining
their genuineness and regularity. The collecting bank
being primarily engaged in banking holds itself out to
the public as the expert and the law holds it to a high
standard of conduct. LLpr
And although the subject checks are non-negotiable the
responsibility of petitioner as indorser thereof remains.
To countenance a repudiation by the petitioner of its
obligation would be contrary to equity and would deal a
negative blow to the whole banking system of this
country.
The court reproduces with approval the following
disquisition of the PCHC in its decision
"II. Payments To Persons Other
Than The Payees Are Not Valid
And Give Rise To An Obligation
To Return Amounts Received.
Nothing is more clear than that neither the
defendant's depositor nor the defendant is
entitled to receive payment payable for the
Checks. As the checks are not payable to
defendant's depositor, payments to persons
other than payees named therein, their
successor-in-interest or any person authorized
to receive payment are not valid. Article 1240,
New Civil Code of the Philippines
unequivocably provides that:
'Art. 1240. Payment shall be
made to the person in whose favor the
obligation has been constituted, or his
successor-in-interest, or any person
authorized to receive it.'
Considering that neither the defendant's
depositor nor the defendant is entitled to
receive payments for the Checks, payments to
any of them give rise to an obligation to return
the amounts received. Section 2154 of the New
Civil Code mandates that:
'Article 2154. If something is
received when there is no right to
demand it, and it was unduly delivered
through mistake, the obligation to
return it arises.
It is contended that plaintiff should be held
responsible for issuing the Checks
notwithstanding that the underlying
transactions were fictitious. This contention
has no basis in our jurisprudence.
The nullity of the underlying transactions does
not diminish, but in fact strengthens, plaintiff's
right to recover from the defendant. Such
nullity clearly emphasizes the obligation of the
payees to return the proceeds of the Checks. If
a failure of consideration is sufficient to
warrant a finding that a payee is not entitled to
116
payment or must return payment already made,
with more reason the defendant, who is neither
the payee nor the person authorized by the
payee, should be compelled to surrender the
proceeds of the Checks received by it.
Defendant does not have any title to the
Checks; neither can it claim any derivative title
to them.
"III. Having Violated Its Warranty
On Validity Of All Endorsements,
Collecting Bank Cannot Deny
Liability To Those Who Relied
On Its Warranty.
In presenting the Checks for clearing and for
payment, the defendant made an express
guarantee on the validity of 'all prior
endorsements'. Thus, stamped at the bank of
the checks are the defendant's clear warranty:
ALL PRIOR ENDORSEMENTS AND/OR
LACK OF ENDORSEMENTS
GUARANTEED. Without such warranty,
plaintiff would not have paid on the checks.
No amount of legal jargon can reverse the clear
meaning of defendant's warranty. As the
warranty has proven to be false and inaccurate,
the defendant is liable for any damage arising
out of the falsity of its representation.
The principle of estoppel effectively prevents
the defendant from denying liability for any
damages sustained by the plaintiff which,
relying upon an action or declaration of the
defendant, paid on the Checks. The same
principle of estoppel effectively prevents the
defendant from denying the existence of the
Checks.
Whether the Checks have been issued for
valuable considerations or not is of no serious
moment to this case. These Checks have been
made the subject of contracts of endorsement
wherein the defendant made expressed
warranties to induce payment by the drawer of
the Checks; and the defendant cannot now
refuse liability for breach of warranty as a
consequence of such forged endorsements. The
defendant has falsely warranted in favor of
plaintiff the validity of all endorsements and
the genuineness of the checks in all respects
what they purport to be. cdreo
The damage that will result if judgment is not
rendered for the plaintiff is irreparable. The
collecting bank has privity with the depositor
who is the principal culprit in this case. The
defendant knows the depositor; her address and
her history, Depositor is defendant's client. It
has taken a risk on its depositor when it
allowed her to collect on the crossed-checks.
Having accepted the crossed checks from
persons other than the payees, the defendant is
guilty of negligence; the risk of wrongful
payment has to be assumed by the defendant.
On the matter of the award of the interest and
attorney's fees, the Board of Directors finds no
reason to reverse the decision of the Arbiter.
The defendant's failure to reimburse the
plaintiff has constrained the plaintiff to hire the
services of counsel in order to protect its
interest notwithstanding that plaintiff's claim is
plainly valid, just and demandable. In addition,
defendant's clear obligation is to reimburse
plaintiff upon direct presentation of the checks;
and it is undenied that up to this time the
defendant has failed to make such
reimbursement."
WHEREFORE, the petition is DISMISSED for lack of
merit without pronouncement as to costs. The decision
of the respondent court of 24 March 1986 and its order
of 3 June 1986 are hereby declared to be immediately
executory.
SO ORDERED.
FIRST DIVISION
[G.R. No. 136202. January 25, 2007.]
BANK OF THE PHILIPPINE
ISLANDS, petitioner, vs. COURT OF
APPEALS, ANNABELLE A. SALAZAR,
and JULIO R.
TEMPLONUEVO, respondents.
This is a petition for review under Rule 45 of the Rules
of Court seeking the reversal of the Decision 1 dated
April 3, 1998, and the Resolution 2 dated November 9,
1998, of the Court of Appeals in CA-G.R. CV No.
42241.
The facts 3 are as follows:
A.A. Salazar Construction and Engineering Services
filed an action for a sum of money with damages against
117
herein petitioner Bank of the Philippine Islands (BPI) on
December 5, 1991 before Branch 156 of the Regional
Trial Court (RTC) of Pasig City. The complaint was later
amended by substituting the name of Annabelle A.
Salazar as the real party in interest in place of A.A.
Salazar Construction and Engineering Services. Private
respondent Salazar prayed for the recovery of the
amount of Two Hundred Sixty-Seven Thousand, Seven
Hundred Seven Pesos and Seventy Centavos
(P267,707.70) debited by petitioner BPI from her
account. She likewise prayed for damages and attorney's
fees.
Petitioner BPI, in its answer, alleged that on August 31,
1991, Julio R. Templonuevo, third-party defendant and
herein also a private respondent, demanded from the
former payment of the amount of Two Hundred Sixty-
Seven Thousand, Six Hundred Ninety-Two Pesos and
Fifty Centavos (P267,692.50) representing the aggregate
value of three (3) checks, which were allegedly payable
to him, but which were deposited with the petitioner
bank to private respondent Salazar's account (Account
No. 0203-1187-67) without his knowledge and
corresponding endorsement. ITAaCc
Accepting that Templonuevo's claim was a valid one,
petitioner BPI froze Account No. 0201-0588-48 of A.A.
Salazar and Construction and Engineering Services,
instead of Account No. 0203-1187-67 where the checks
were deposited, since this account was already closed by
private respondent Salazar or had an insufficient
balance.
Private respondent Salazar was advised to settle the
matter with Templonuevo but they did not arrive at any
settlement. As it appeared that private respondent
Salazar was not entitled to the funds represented by the
checks which were deposited and accepted for deposit,
petitioner BPI decided to debit the amount of
P267,707.70 from her Account No. 0201-0588-48 and
the sum of P267,692.50 was paid to Templonuevo by
means of a cashier's check. The difference between the
value of the checks (P267,692.50) and the amount
actually debited from her account (P267,707.70)
represented bank charges in connection with the
issuance of a cashier's check to Templonuevo.
In the answer to the third-party complaint, private
respondent Templonuevo admitted the payment to him
of P267,692.50 and argued that said payment was to
correct the malicious deposit made by private
respondent Salazar to her private account, and that
petitioner bank's negligence and tolerance regarding the
matter was violative of the primary and ordinary rules of
banking. He likewise contended that the debiting or
taking of the reimbursed amount from the account of
private respondent Salazar by petitioner BPI was a
matter exclusively between said parties and may be
pursuant to banking rules and regulations, but did not in
any way affect him. The debiting from another account
of private respondent Salazar, considering that her other
account was effectively closed, was not his concern.
After trial, the RTC rendered a decision, the dispositive
portion of which reads thus:
WHEREFORE, premises considered,
judgment is hereby rendered in favor of the
plaintiff [private respondent Salazar] and
against the defendant [petitioner BPI] and
ordering the latter to pay as follows:
1. The amount of P267,707.70 with
12% interest thereon from
September 16, 1991 until the
said amount is fully paid;
2. The amount of P30,000.00 as and for
actual damages;
3. The amount of P50,000.00 as and for
moral damages;
4. The amount of P50,000.00 as and for
exemplary damages;
5. The amount of P30,000.00 as and for
attorney's fees; and
6. Costs of suit. ACIESH
The counterclaim is hereby ordered
DISMISSED for lack of factual basis.
The third-party complaint [filed by petitioner]
is hereby likewise ordered DISMISSED for
lack of merit.
Third-party defendant's [i.e., private
respondent Templonuevo's] counterclaim is
hereby likewise DISMISSED for lack of
factual basis.
SO ORDERED. 4
On appeal, the Court of Appeals (CA) affirmed the
decision of the RTC and held that respondent Salazar
was entitled to the proceeds of the three (3) checks
notwithstanding the lack of endorsement thereon by the
payee. The CA concluded that Salazar and Templonuevo
had previously agreed that the checks payable to JRT
Construction and Trading 5 actually belonged to Salazar
and would be deposited to her account, with petitioner
acquiescing to the arrangement. 6
Petitioner therefore filed this petition on these grounds:
I.
118
The Court of Appeals committed reversible
error in misinterpreting Section 49 of the
Negotiable Instruments Law and Section 3 (r
and s) of Rule 131 of the New Rules on
Evidence.
II.
The Court of Appeals committed reversible
error in NOT applying the provisions of
Articles 22, 1278 and 1290 of the Civil Code
in favor of BPI.
III.
The Court of Appeals committed a reversible
error in holding, based on a misapprehension
of facts, that the account from which BPI
debited the amount of P267,707.70 belonged to
a corporation with a separate and distinct
personality.
IV.
The Court of Appeals committed a reversible
error in holding, based entirely on speculations,
surmises or conjectures, that there was an
agreement between SALAZAR and
TEMPLONUEVO that checks payable to
TEMPLONUEVO may be deposited by
SALAZAR to her personal account and that
BPI was privy to this agreement. CcTIAH
V.
The Court of Appeals committed reversible
error in holding, based entirely on speculation,
surmises or conjectures, that SALAZAR
suffered great damage and prejudice and that
her business standing was eroded.
 VI.
The Court of Appeals erred in affirming
instead of reversing the decision of the lower
court against BPI and dismissing SALAZAR's
complaint.
VII.
The Honorable Court erred in affirming the
decision of the lower court dismissing the
third-party complaint of BPI. 7
The issues center on the propriety of the deductions
made by petitioner from private respondent Salazar's
account. Stated otherwise, does a collecting bank, over
the objections of its depositor, have the authority to
withdraw unilaterally from such depositor's account the
amount it had previously paid upon certain unendorsed
order instruments deposited by the depositor to another
account that she later closed?
Petitioner argues thus:
1. There is no presumption in law that a check
payable to order, when found in the
possession of a person who is neither a
payee nor the indorsee thereof, has
been lawfully transferred for value.
Hence, the CA should not have
presumed that Salazar was a transferee
for value within the contemplation of
Section 49 of the Negotiable
Instruments Law, 8 as the latter applies
only to a holder defined under Section
191of the same. 9
2. Salazar failed to adduce sufficient evidence
to prove that her possession of the three
checks was lawful despite her
allegations that these checks were
deposited pursuant to a prior internal
arrangement with Templonuevo and
that petitioner was privy to the
arrangement.
3. The CA should have applied the Civil Code
provisions on legal compensation
because in deducting the subject
amount from Salazar's account,
petitioner was merely rectifying the
undue payment it made upon the
checks and exercising its prerogative to
alter or modify an erroneous credit
entry in the regular course of its
business.
4. The debit of the amount from the account of
A.A. Salazar Construction and
Engineering Services was proper even
though the value of the checks had
been originally credited to the personal
account of Salazar because A.A.
Salazar Construction and Engineering
Services, an unincorporated single
proprietorship, had no separate and
distinct personality from Salazar.
5. Assuming the deduction from Salazar's
account was improper, the CA should
not have dismissed petitioner's third-
party complaint against Templonuevo
because the latter would have the legal
duty to return to petitioner the proceeds
of the checks which he previously
received from it.
6. There was no factual basis for the award of
damages to Salazar.
119
The petition is partly meritorious. EcICSA
First, the issue raised by petitioner requires an inquiry
into the factual findings made by the CA. The CA's
conclusion that the deductions from the bank account of
A.A. Salazar Construction and Engineering Services
were improper stemmed from its finding that there was
no ineffective payment to Salazar which would call for
the exercise of petitioner's right to set off against the
former's bank deposits. This finding, in turn, was drawn
from the pleadings of the parties, the evidence adduced
during trial and upon the admissions and stipulations of
fact made during the pre-trial, most significantly the
following:
(a) That Salazar previously had in her possession the
following checks:
(1) Solid Bank Check No. CB766556 dated
January 30, 1990 in the amount of
P57,712.50;
(2) Solid Bank Check No. CB898978 dated
July 31, 1990 in the amount of
P55,180.00; and,
(3) Equitable Banking Corporation Check No.
32380638 dated August 28, 1990 for
the amount of P154,800.00;
(b) That these checks which had an aggregate amount of
P267,692.50 were payable to the order of JRT
Construction and Trading, the name and style under
which Templonuevo does business;
(c) That despite the lack of endorsement of the
designated payee upon such checks, Salazar was able to
deposit the checks in her personal savings account with
petitioner and encash the same;
(d) That petitioner accepted and paid the checks on three
(3) separate occasions over a span of eight months in
1990; and
(e) That Templonuevo only protested the purportedly
unauthorized encashment of the checks after the lapse of
one year from the date of the last check. 10
Petitioner concedes that when it credited the value of the
checks to the account of private respondent Salazar, it
made a mistake because it failed to notice the lack of
endorsement thereon by the designated payee. The CA,
however, did not lend credence to this claim and
concluded that petitioner's actions were deliberate, in
view of its admission that the "mistake" was committed
three times on three separate occasions, indicating
acquiescence to the internal arrangement between
Salazar and Templonuevo. The CA explained thus:
It was quite apparent that the three checks
which appellee Salazar deposited were not
indorsed. Three times she deposited them to
her account and three times the amounts borne
by these checks were credited to the same. And
in those separate occasions, the bank did not
return the checks to her so that she could have
them indorsed. Neither did the bank question
her as to why she was depositing the checks to
her account considering that she was not the
payee thereof, thus allowing us to come to the
conclusion that defendant-appellant BPI was
fully aware that the proceeds of the three
checks belong to appellee. TSIaAc
For if the bank was not privy to the agreement
between Salazar and Templonuevo, it is most
unlikely that appellant BPI (or any bank for
that matter) would have accepted the checks
for deposit on three separate times nary any
question. Banks are most finicky over
accepting checks for deposit without the
corresponding indorsement by their payee. In
fact, they hesitate to accept indorsed checks for
deposit if the depositor is not one they know
very well. 11
The CA likewise sustained Salazar's position that she
received the checks from Templonuevo pursuant to an
internal arrangement between them, ratiocinating as
follows:
If there was indeed no arrangement between
Templonuevo and the plaintiff over the three
questioned checks, it baffles us why it was
only on August 31, 1991 or more than a year
after the third and last check was deposited that
he demanded for the refund of the total amount
of P267,692.50.
A prudent man knowing that payment is due
him would have demanded payment by his
debtor from the moment the same became due
and demandable. More so if the sum involved
runs in hundreds of thousand of pesos. By and
large, every person, at the very moment he
learns that he was deprived of a thing which
rightfully belongs to him, would have created a
big fuss. He would not have waited for a year
within which to do so. It is most inconceivable
that Templonuevo did not do this. 12
Generally, only questions of law may be raised in an
appeal by certiorari under Rule 45 of the Rules of
Court. 13 Factual findings of the CA are entitled to great
weight and respect, especially when the CA affirms the
factual findings of the trial court. 14 Such questions on
whether certain items of evidence should be accorded
probative value or weight, or rejected as feeble or
120
spurious, or whether or not the proofs on one side or the
other are clear and convincing and adequate to establish
a proposition in issue, are questions of fact. The same
holds true for questions on whether or not the body of
proofs presented by a party, weighed and analyzed in
relation to contrary evidence submitted by the adverse
party may be said to be strong, clear and convincing, or
whether or not inconsistencies in the body of proofs of a
party are of such gravity as to justify refusing to give
said proofs weight all these are issues of fact which
are not reviewable by the Court. 15
This rule, however, is not absolute and admits of certain
exceptions, namely: a) when the conclusion is a finding
grounded entirely on speculations, surmises, or
conjectures; b) when the inference made is manifestly
mistaken, absurd, or impossible; c) when there is a grave
abuse of discretion; d) when the judgment is based on a
misapprehension of facts; e) when the findings of fact
are conflicting; f) when the CA, in making its findings,
went beyond the issues of the case and the same are
contrary to the admissions of both appellant and
appellee; g) when the findings of the CA are contrary to
those of the trial court; h) when the findings of fact are
conclusions without citation of specific evidence on
which they are based; i) when the finding of fact of the
CA is premised on the supposed absence of evidence but
is contradicted by the evidence on record; and j) when
the CA manifestly overlooked certain relevant facts not
disputed by the parties and which, if properly
considered, would justify a different conclusion. 16
In the present case, the records do not support the
finding made by the CA and the trial court that a prior
arrangement existed between Salazar and Templonuevo
regarding the transfer of ownership of the checks. This
fact is crucial as Salazar's entitlement to the value of the
instruments is based on the assumption that she is a
transferee within the contemplation of Section 49 of the
Negotiable Instruments Law.
Section 49 of the Negotiable Instruments Law
contemplates a situation whereby the payee or indorsee
delivers a negotiable instrument for value without
indorsing it, thus:
Transfer without indorsement; effect of
Where the holder of an instrument payable
to his order transfers it for value without
indorsing it, the transfer vests in the transferee
such title as the transferor had therein, and the
transferee acquires in addition, the right to
have the indorsement of the transferor. But for
the purpose of determining whether the
transferee is a holder in due course, the
negotiation takes effect as of the time when the
indorsement is actually made. 17
It bears stressing that the above transaction is an
equitable assignment and the transferee acquires the
instrument subject to defenses and equities available
among prior parties. Thus, if the transferor had legal
title, the transferee acquires such title and, in addition,
the right to have the indorsement of the transferor and
also the right, as holder of the legal title, to maintain
legal action against the maker or acceptor or other party
liable to the transferor. The underlying premise of this
provision, however, is that a valid transfer of ownership
of the negotiable instrument in question has taken
place. ISTDAH
Transferees in this situation do not enjoy the
presumption of ownership in favor of holders since they
are neither payees nor indorsees of such instruments.
The weight of authority is that the mere possession of a
negotiable instrument does not in itself conclusively
establish either the right of the possessor to receive
payment, or of the right of one who has made payment
to be discharged from liability. Thus, something more
than mere possession by persons who are not payees or
indorsers of the instrument is necessary to authorize
payment to them in the absence of any other facts from
which the authority to receive payment may be
inferred. 18
The CA and the trial court surmised that the subject
checks belonged to private respondent Salazar based on
the pre-trial stipulation that Templonuevo incurred a
one-year delay in demanding reimbursement for the
proceeds of the same. To the Court's mind, however,
such period of delay is not of such unreasonable length
as to estop Templonuevo from asserting ownership over
the checks especially considering that it was readily
apparent on the face of the instruments 19 that these
were crossed checks.
In State Investment House v. IAC, 20 the Court
enumerated the effects of crossing a check, thus: (1) that
the check may not be encashed but only deposited in the
bank; (2) that the check may be negotiated only once
to one who has an account with a bank; and (3) that the
act of crossing the check serves as a warning to the
holder that the check has been issued for a definite
purpose so that such holder must inquire if the check has
been received pursuant to that purpose.
Thus, even if the delay in the demand for reimbursement
is taken in conjunction with Salazar's possession of the
checks, it cannot be said that the presumption of
ownership in Templonuevo's favor as the designated
payee therein was sufficiently overcome. This is
consistent with the principle that if instruments payable
to named payees or to their order have not been indorsed
in blank, only such payees or their indorsees can be
121
holders and entitled to receive payment in their own
right. 21
The presumption under Section 131 (s) of the Rules of
Court stating that a negotiable instrument was given for
a sufficient consideration will not inure to the benefit of
Salazar because the term "given" does not pertain
merely to a transfer of physical possession of the
instrument. The phrase "given or indorsed" in the
context of a negotiable instrument refers to the manner
in which such instrument may be negotiated. Negotiable
instruments are negotiated by "transfer to one person or
another in such a manner as to constitute the transferee
the holder thereof. If payable to bearer it is negotiated
by delivery. If payable to order it is negotiated by the
indorsement completed by delivery." 22 The present
case involves checks payable to order. Not being
a payee or indorsee of the checks, private respondent
Salazar could not be a holder thereof. aDHScI
It is an exception to the general rule for a payee of an
order instrument to transfer the instrument without
indorsement. Precisely because the situation is
abnormal, it is but fair to the maker and to prior holders
to require possessors to prove without the aid of an
initial presumption in their favor, that they came into
possession by virtue of a legitimate transaction with the
last holder. 23 Salazar failed to discharge this burden,
and the return of the check proceeds to Templonuevo
was therefore warranted under the circumstances despite
the fact that Templonuevo may not have clearly
demonstrated that he never authorized Salazar to deposit
the checks or to encash the same. Noteworthy also is the
fact that petitioner stamped on the back of the checks the
words: "All prior endorsements and/or lack of
endorsements guaranteed," thereby making the
assurance that it had ascertained the genuineness of all
prior endorsements. Having assumed the liability of a
general indorser, petitioner's liability to the designated
payee cannot be denied.
Consequently, petitioner, as the collecting bank, had the
right to debit Salazar's account for the value of the
checks it previously credited in her favor. It is of no
moment that the account debited by petitioner was
different from the original account to which the
proceeds of the check were credited because both
admittedly belonged to Salazar, the former being the
account of the sole proprietorship which had no separate
and distinct personality from her, and the latter being her
personal account.
The right of set-off was explained in Associated Bank v. Tan: 24
A bank generally has a right of set-off over the
deposits therein for the payment of any
withdrawals on the part of a depositor. The
right of a collecting bank to debit a client's
account for the value of a dishonored check
that has previously been credited has fairly
been established by jurisprudence. To begin
with, Article 1980 of the Civil Code provides
that "[f]ixed, savings, and current deposits of
money in banks and similar institutions shall
be governed by the provisions concerning
simple loan."
Hence, the relationship between banks and
depositors has been held to be that of creditor
and debtor. Thus, legal compensation under
Article 1278 of the Civil Code may take place
"when all the requisites mentioned in Article
1279 are present," as follows:
(1) That each one of the obligors be
bound principally, and that he
be at the same time a principal
creditor of the other;
(2) That both debts consist in a sum of
money, or if the things due are
consumable, they be of the
same kind, and also of the same
quality if the latter has been
stated;
(3) That the two debts be due;
(4) That they be liquidated and
demandable;
(5) That over neither of them there be
any retention or controversy,
commenced by third persons
and communicated in due time
to the debtor. DcaCSE
While, however, it is conceded that petitioner had the
right of set-off over the amount it paid to Templonuevo
against the deposit of Salazar, the issue of whether it
acted judiciously is an entirely different matter. 25 As
businesses affected with public interest, and because of
the nature of their functions, banks are under obligation
to treat the accounts of their depositors with meticulous
care, always having in mind the fiduciary nature of their
relationship. 26 In this regard, petitioner was clearly
remiss in its duty to private respondent Salazar as its
depositor.
To begin with, the irregularity appeared plainly on the
face of the checks. Despite the obvious lack of
indorsement thereon, petitioner permitted the
encashment of these checks three times on three
separate occasions. This negates petitioner's claim that it
merely made a mistake in crediting the value of the
checks to Salazar's account and instead bolsters the
122
conclusion of the CA that petitioner recognized Salazar's
claim of ownership of checks and acted deliberately in
paying the same, contrary to ordinary banking policy
and practice. It must be emphasized that the law imposes
a duty of diligence on the collecting bank to scrutinize
checks deposited with it, for the purpose of determining
their genuineness and regularity. The collecting bank,
being primarily engaged in banking, holds itself out to
the public as the expert on this field, and the law thus
holds it to a high standard of conduct. 27 The taking and
collection of a check without the proper indorsement
amount to a conversion of the check by the bank. 28
More importantly, however, solely upon the prompting
of Templonuevo, and with full knowledge of the
brewing dispute between Salazar and Templonuevo,
petitioner debited the account held in the name of the
sole proprietorship of Salazar without even serving due
notice upon her. This ran contrary to petitioner's
assurances to private respondent Salazar that the account
would remain untouched, pending the resolution of the
controversy between her and Templonuevo. 29 In this
connection, the CA cited the letter dated September 5,
1991 of Mr. Manuel Ablan, Senior Manager of petitioner
bank's Pasig/Ortigas branch, to private respondent
Salazar informing her that her account had been frozen,
thus:
From the tenor of the letter of Manuel Ablan, it
is safe to conclude that Account No. 0201-
0588-48 will remain frozen or untouched until
herein [Salazar] has settled matters with
Templonuevo. But, in an unexpected move, in
less than two weeks (eleven days to be precise)
from the time that letter was written,
[petitioner] bank issued a cashier's check in the
name of Julio R. Templonuevo of the J.R.T.
Construction and Trading for the sum of
 P267,692.50 (Exhibit "8") and debited said
amount from Ms. Arcilla's account No. 0201-
0588-48 which was supposed to be frozen or
controlled. Such a move by BPI is, to Our
minds, a clear case of negligence, if not a
fraudulent, wanton and reckless disregard of
the right of its depositor.
The records further bear out the fact that respondent
Salazar had issued several checks drawn against the
account of A.A. Salazar Construction and Engineering
Services prior to any notice of deduction being served.
The CA sustained private respondent Salazar's claim of
damages in this regard:
The act of the bank in freezing and later
debiting the amount of P267,692.50 from the
account of A.A. Salazar Construction and
Engineering Services caused plaintiff-appellee
great damage and prejudice particularly when
she had already issued checks drawn against
the said account. As can be expected, the said
checks bounced. To prove this, plaintiff-
appellee presented as exhibits photocopies of
checks dated September 8, 1991, October 28,
1991, and November 14, 1991 (Exhibits "D",
"E" and "F" respectively) 30
These checks, it must be emphasized, were subsequently
dishonored, thereby causing private respondent Salazar
undue embarrassment and inflicting damage to her
standing in the business community. Under the
circumstances, she was clearly not given the opportunity
to protect her interest when petitioner unilaterally
withdrew the above amount from her account without
informing her that it had already done so. aCIHcD
For the above reasons, the Court finds no reason to
disturb the award of damages granted by the CA against
petitioner. This whole incident would have been avoided [G.R. No. 121413. January 29, 2001.]
had petitioner adhered to the standard of diligence
expected of one engaged in the banking business. A PHILIPPINE COMMERCIAL
depositor has the right to recover reasonable moral INTERNATIONAL BANK (formerly
damages even if the bank's negligence may not have INSULAR BANK OF ASIA AND
been attended with malice and bad faith, if the former AMERICA), petitioner, vs. COURT OF
suffered mental anguish, serious anxiety, embarrassment APPEALS and FORD PHILIPPINES, INC.
and humiliation. 31 Moral damages are not meant to and CITIBANK, N.A., respondents.
enrich a complainant at the expense of defendant. It is
only intended to alleviate the moral suffering she has
[G.R. No. 121479. January 29, 2001.]
undergone. The award of exemplary damages is
justified, on the other hand, when the acts of the bank
are attended by malice, bad faith or gross negligence. FORD PHILIPPINES, INC., petitioner-
The award of reasonable attorney's fees is proper where plaintiff, vs. COURT OF APPEALS and
exemplary damages are awarded. It is proper where CITIBANK, N.A. and PHILIPPINE
depositors are compelled to litigate to protect their COMMERCIAL INTERNATIONAL
interest. 32 BANK,respondents.
WHEREFORE, the petition is partially GRANTED. The
assailed Decision dated April 3, 1998 and Resolution [G.R. No. 128604. January 29, 2001.]
dated April 3, 1998 rendered by the Court of Appeals in
CA-G.R. CV No. 42241 are MODIFIED insofar as it
FORD PHILIPPINES, INC., petitioner, vs.
ordered petitioner Bank of the Philippine Islands to
CITIBANK, N.A., PHILIPPINE
return the amount of Two Hundred Sixty-seven
COMMERCIAL INTERNATIONAL BANK
Thousand Seven Hundred and Seven and 70/100 Pesos
and THE COURT OF
(P267,707.70) to respondent Annabelle A. Salazar,
APPEALS, respondents.
which portion is REVERSED and SET ASIDE. In all
other respects, the same are AFFIRMED.
These consolidated petitions involve several
No costs.
fraudulently negotiated checks.
SO ORDERED.
The original actions a quo were instituted by Ford
Philippines to recover from the drawee bank
CITIBANK, N.A. (Citibank) and collecting bank,
Philippine Commercial International Bank (PCIBank)
[formerly Insular Bank of Asia and America], the value
of several checks payable to the Commissioner of
SECOND DIVISION
123
Internal Revenue, which were embezzled allegedly by
an organized syndicate.
G.R. Nos. 121413 and 121479 are twin petitions for
review of the March 27, 1995 Decision 1 of the Court of
Appeals in CA-G.R CV No. 25017, entitled "Ford
Philippines, Inc. vs. Citibank N.A. and Insular Bank of
Asia and America (now Philippine Commercial
International Bank), and the August 8, 1995
Resolution, 2 ordering the collecting bank Philippine
Commercial International Bank to pay the amount of
Citibank Check No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails
the October 15, 1996 Decision 3 of the Court of Appeals
and its March 5, 1997 Resolution 4 in CA-G.R. No.
28430 entitled "Ford Philippines, Inc. vs. Citibank N.A.
and Philippine Commercial International Bank,"
affirming in toto the judgment of the trial court holding
the defendant drawee bank Citibank N.A., solely liable
to pay the amount of P12,163,298.10 as damages for the
misapplied proceeds of the plaintiff's Citibank Check
Numbers SN-10597 and 16508.
I. GR Nos. 121413 and 121479
The stipulated facts submitted by the parties as accepted
by the Court of Appeals as follows:
"On October 19, 1977, the plaintiff Ford drew
and issued its Citibank Check No. SN-04867 in
the amount of P4,746,114.41, in favor of the
Commissioner of Internal Revenue as payment
of plaintiff's percentage or manufacturer's sales
taxes for the third quarter of 1977.
The aforesaid check was deposited with the
defendant IBAA (now PCIBank) and was
subsequently cleared at the Central Bank.
Upon presentment with the defendant Citibank,
the proceeds of the check was paid to IBAA as Branch to receive the tax payment of the
collecting or depository bank. plaintiff.
The proceeds of the same Citibank check of On December 19, 1977, plaintiff's Citibank
the plaintiff was never paid to or received by Check No. SN-04867, together with the
the payee thereof, the Commissioner of Revenue Tax Receipt No. 18747002, was
Internal Revenue. deposited with defendant IBAA, through its
Ermita Branch. The latter accepted the check
As a consequence, upon demand of the Bureau
and sent it to the Central Clearing House for
and/or Commissioner of Internal Revenue, the
clearing on the same day, with the indorsement
plaintiff was compelled to make a second
at the back "all prior indorsements and/or lack
payment to the Bureau of Internal Revenue of
of indorsements guaranteed." Thereafter,
its percentage/manufacturers' sales taxes for
defendant IBAA presented the check for
the third quarter of 1977 and that said second
payment to defendant Citibank on same date,
payment of plaintiff in the amount of
December 19, 1977, and the latter paid the face
P4,746,114.41 was duly received by the
value of the check in the amount of
Bureau of Internal Revenue.
P4,746,114.41. Consequently, the amount of
It is further admitted by defendant Citibank P4,746,114.41 was debited in plaintiff's
that during the time of the transactions in account with the defendant Citibank and the
question, plaintiff had been maintaining a check was returned to the plaintiff.
checking account with defendant Citibank; that
Upon verification, plaintiff discovered that its
Citibank Check No. SN-04867 which was
Citibank Check No. SN-04867 in the amount
drawn and issued by the plaintiff in favor of
of P4,746,114.41 was not paid to the
the Commissioner of Internal Revenue was a
Commissioner of Internal Revenue. Hence, in
crossed check in that, on its face were two
separate letters dated October 26, 1979,
parallel lines and written in between said lines
addressed to the defendants, the plaintiff
was the phrase "Payee's Account Only"; and
notified the latter that in case it will be re-
that defendant Citibank paid the full face value
assessed by the BIR for the payment of the
of the check in the amount of P4,746,114.41 to
taxes covered by the said checks, then plaintiff
the defendant IBAA.
shall hold the defendants liable for
It has been duly established that for the reimbursement of the face value of the same.
payment of plaintiff's percentage tax for the Both defendants denied liability and refused to
last quarter of 1977, the Bureau of Internal pay.
Revenue issued Revenue Tax Receipt No.
In a letter dated February 28, 1980 by the
18747002, dated October 20, 1977, designating
Acting Commissioner of Internal Revenue
therein in Muntinlupa, Metro Manila, as the
addressed to the plaintiff supposed to be
authorized agent bank of Metrobank, Alabang
124
Exhibit "D", the latter was officially informed,
among others, that its check in the amount of
P4,746,114.41 was not paid to the government
or its authorized agent and instead encashed by
unauthorized persons, hence, plaintiff has to
pay the said amount within fifteen days from
receipt of the letter. Upon advice of the
plaintiff's lawyers, plaintiff on March 11, 1982,
paid to the Bureau of Internal Revenue, the
amount of P4,746,114.41, representing
payment of plaintiff's percentage tax for the
third quarter of 1977.
As a consequence of defendant's refusal to
reimburse plaintiff of the payment it had made
for the second time to the BIR of its percentage
taxes, plaintiff filed on January 20, 1983 its
original complaint before this Court.
On December 24, 1985, defendant IBAA was
merged with the Philippine Commercial
International Bank (PCI Bank) with the latter
as the surviving entity.
Defendant Citibank maintains that; the
payment it made of plaintiff's Citibank Check
No. SN-04867 in the amount of P4,746,114.41
"was in due course"; it merely relied on the
clearing stamp of the depository/collecting
bank, the defendant IBAA that "all prior
indorsements and/or lack of indorsements
guaranteed"; and the proximate cause of
plaintiff's injury is the gross negligence of
defendant IBAA in indorsing the plaintiff's
Citibank check in question.
It is admitted that on December 19, 1977 when
the proceeds of plaintiff's Citibank Check No.
SN-04867 was paid to defendant IBAA as
collecting bank, plaintiff was maintaining a
checking account with defendant Citibank." 5
Although it was not among the stipulated facts, an
investigation by the National Bureau of Investigation
(NBI) revealed that Citibank Check No. SN-04867 was
recalled by Godofredo Rivera, the General Ledger
Accountant of Ford. He purportedly needed to hold back
the check because there was an error in the computation
of the tax due to the Bureau of Internal Revenue (BIR).
With Rivera's instruction, PCIBank replaced the check
with two of its own Manager's Checks (MCs). Alleged
members of a syndicate later deposited the two MCs
with the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint
before the trial court impleading Pacific Banking
Corporation (PBC) and Godofredo Rivera, as third party
defendants. But the court dismissed the complaint
against PBC for lack of cause of action. The court
likewise dismissed the third-party complaint against
Godofredo Rivera because he could not be served with
summons as the NBI declared him as a "fugitive from
justice".
On June 15, 1989, the trial court rendered its decision,
as follows:
"Premises considered, judgment is hereby
rendered as follows:
1. Ordering the defendants Citibank
and IBAA (now PCI Bank),
jointly and severally, to pay the
plaintiff the amount of
P4,746,114.41 representing the
125
face value of plaintiff's Citibank
Check No. SN-04867, with
interest thereon at the legal rate
starting January 20, 1983, the
date when the original
complaint was filed until the
amount is fully paid, plus costs;
2. On defendant Citibank's cross-claim:
ordering the cross-defendant
IBAA (now PCI BANK) to
reimburse defendant Citibank
for whatever amount the latter
has paid or may pay to the
plaintiff in accordance with the
next preceding paragraph;
3. The counterclaims asserted by the
defendants against the plaintiff,
as well as that asserted by the
cross-defendant against the
cross-claimant are dismissed,
for lack of merits; and
4. With costs against the defendants.
SO ORDERED." 6
Not satisfied with the said decision, both defendants,
Citibank and PCIBank, elevated their respective
petitions for review on certiorari to the Court of
Appeals. On March 27, 1995, the appellate court issued
its judgment as follows:
"WHEREFORE, in view of the foregoing, the
court AFFIRMS the appealed decision with
modifications.
The court hereby renders judgment:
 1. Dismissing the complaint in Civil
Case No. 49287 insofar as
defendant Citibank N.A. is
concerned;
2. Ordering the defendant IBAA now
PCI Bank to pay the plaintiff
the amount of P4,746,114.41
representing the face value of
plaintiff's Citibank Check No.
SN-04867, with interest thereon
at the legal rate starting January
20, 1983. the date when the
original complaint was filed
until the amount is fully paid;
3. Dismissing the counterclaims
asserted by the defendants
against the plaintiff as well as
that asserted by the cross-
defendant against the cross-
claimant, for lack of merits.
Costs against the defendant IBAA (now PCI
Bank).
IT IS SO ORDERED." 7
PCIBank moved to reconsider the above-quoted
decision of the Court of Appeals, while Ford filed a
"Motion for Partial Reconsideration." Both motions
were denied for lack of merit.
Separately, PCIBank and Ford filed before this Court,
petitions for review by certiorari under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the
decision and resolution of the Twelfth Division of the
Court of Appeals contending that it merely acted on the
instruction of Ford and such cause of action had already
prescribed.
PCIBank sets forth the following issues for
consideration:
I. Did the respondent court err when, after
finding that the petitioner acted on the
check drawn by respondent Ford on the
said respondent's instructions, it
nevertheless found the petitioner liable
to the said respondent for the full
amount of the said check.
II. Did the respondent court err when it did not
find prescription in favor of the
petitioner. 8
In a counter move, Ford filed its petition docketed as
G.R. No. 121479, questioning the same decision and
resolution of the Court of Appeals, and praying for the
reinstatement in toto of the decision of the trial court
which found both PCIBank and Citibank jointly and
severally liable for the loss.
In G.R. No. 121479, appellant Ford presents the
following propositions for consideration:
I. Respondent Citibank is liable to petitioner
Ford considering that:
1. As drawee bank, respondent
Citibank owes to petitioner
Ford, as the drawer of the
subject check and a depositor of
respondent Citibank, an
absolute and contractual duty to
pay the proceeds of the subject
check only to the payee thereof,
126
the Commissioner of Internal
Revenue.
2. Respondent Citibank failed to
observe its duty as banker with
respect to the subject check,
which was crossed and payable
to "Payee's Account Only."
3. Respondent Citibank raises an issue
for the first time on appeal; thus
the same should not be
considered by the Honorable
Court.
4. As correctly held by the trial court,
there is no evidence of gross
negligence on the part of
petitioner Ford. 9
II. PCIBank is liable to petitioner Ford
considering that:
1. There were no instructions from
petitioner Ford to deliver the
proceeds of the subject check to
a person other than the payee
named therein, the
Commissioner of the Bureau of
Internal Revenue; thus,
PCIBank's only obligation is to
deliver the proceeds to the
Commissioner of the Bureau of
Internal Revenue. 10
2. PCIBank which affixed its
indorsement on the subject
check ("All prior indorsement
and/or lack of indorsement
 guaranteed"), is liable as
collecting bank. 11
3. PCIBank is barred from raising
issues of fact in the instant
proceedings. 12
4. Petitioner Ford's cause of action had
not prescribed. 13
II. G.R. No. 128604
The same syndicate apparently embezzled the proceeds
of checks intended, this time, to settle Ford's percentage
taxes appertaining to the second quarter of 1978 and the
first quarter of 1979.
The facts as narrated by the Court of Appeals are as
follows:
Ford drew Citibank Check No. SN-10597 on July 19,
1978 in the amount of P5,851,706.37 representing the
percentage tax due for the second quarter of 1978
payable to the Commissioner of Internal Revenue. A
BIR Revenue Tax Receipt No. 28645385 was issued for
the said purpose.
On April 20, 1979, Ford drew another Citibank Check
No. SN-16508 in the amount of P6,311,591.73,
representing the payment of percentage tax for the first
quarter of 1979 and payable to the Commissioner of
Internal Revenue. Again a BIR Revenue Tax Receipt
No. A-1697160 was issued for the said
purpose. DcSEHT
Both checks were "crossed checks" and contain two
diagonal lines on its upper left corner between which
were written the words "payable to the payee's account
only."
The checks never reached the payee, CIR. Thus, in a the Central Bank for clearing, replaced this
letter dated February 28, 1980, the BIR, Region 4-B, worthless check with FORD's Exhibit 'A' and
demanded for the said tax payments the corresponding accordingly tampered the accompanying
periods above-mentioned. documents to cover the replacement. As a
result, Exhibit 'A' was cleared by defendant
As far as the BIR is concerned, the said two BIR
CITIBANK, and the fictitious deposit account
Revenue Tax Receipts were considered "fake and
of 'Reynaldo Reyes' was credited at the PCIB
spurious". This anomaly was confirmed by the NBI
Meralco Branch with the total amount of the
upon the initiative of the BIR. The findings forced Ford
FORD check Exhibit 'A'. The same method
to pay the BIR anew, while an action was filed against
was again utilized by the syndicate in profiting
Citibank and PCIBank for the recovery of the amount of
from Exh. 'B' [Citibank Check No. SN-16508]
Citibank Check Numbers SN-10597 and 16508.
which was subsequently pilfered by Alexis
The Regional Trial Court of Makati, Branch 57, which Marindo, Rivera's Assistant at FORD.
tied the case, made its findings on the modus
operandi of the syndicate, as follows:
From this 'Reynaldo Reyes' account, Castro
"A certain Mr. Godofredo Rivera was
drew various checks distributing the shares of
employed by the plaintiff FORD as its General
the other participating conspirators namely (1)
Ledger Accountant. As such, he prepared the
CRISANTO BERNABE, the mastermind who
plaintiff's check marked Ex. 'A' [Citibank
formulated the method for the embezzlement;
Check No. SN-10597] for payment to the BIR.
(2) RODOLFO R. DE LEON a customs broker
Instead, however, of delivering the same to the
who negotiated the initial contact between
payee, he passed on the check to a co-
Bernabe, FORD's Godofredo Rivera and
conspirator named Remberto Castro who was a
PCIB's Remberto Castro; (3) JUAN
pro-manager of the San Andres Branch of
CASTILLO who assisted de Leon in the initial
PCIB. * In connivance with one Winston
arrangements; (4) GODOFREDO RIVERA,
Dulay, Castro himself subsequently opened a
FORD's accountant who passed on the first
Checking Account in the name of a fictitious
check (Exhibit "A") to Castro; (5)
person denominated as 'Reynaldo Reyes' in the
REMBERTO CASTRO, PCIB's pro-manager
Meralco Branch of PCIBank where Dulay
at San Andres who performed the switching of
works as Assistant Manager.
checks in the clearing process and opened the
After an initial deposit of P100.00 to validate fictitious Reynaldo Reyes account at the PCIB
the account, Castro deposited a worthless Bank Meralco Branch; (6) WINSTON DULAY,
of America Check in exactly the same amount PCIB's Assistant Manager at its Meralco
as the first FORD check (Exh. "A", Branch, who assisted Castro in switching the
P5,851,706.37) while this worthless check was checks in the clearing process and facilitated
coursed through PCIB's main office enroute to the opening of the fictitious Reynaldo Reyes'
127
 bank account; (7) ALEXIS MARINDO,
Rivera's Assistant at FORD, who gave the
second check (Exh. "B") to Castro; (8)
ELEUTERIO JIMENEZ, BIR Collection
Agent who provided the fake and spurious
revenue tax receipts to make it appear that the
BIR had received FORD's tax payments.
Several other persons and entities were utilized
by the syndicate as conduits in the
disbursements of the proceeds of the two
checks, but like the aforementioned
participants in the conspiracy, have not been
impleaded in the present case. The manner by
which the said funds were distributed among
them are traceable from the record of checks
drawn against the original "Reynaldo Reyes"
account and indubitably identify the parties
who illegally benefited therefrom and readily
indicate in what amounts they did so." 14
On December 9, 1988, Regional Trial Court of Makati,
Branch 57, held drawee-bank, Citibank, liable for the
value of the two checks while absolving PCIBank from
any liability, disposing as follows:
"WHEREFORE, judgment is hereby rendered
sentencing defendant CITIBANK to reimburse
plaintiff FORD the total amount of
P12,163,298.10 prayed for in its complaint,
with 6% interest thereon from date of first
written demand until full payment, plus
P300,000.00 attorney's fees and expenses of
litigation, and to pay the defendant, PCIB (on
its counterclaim to crossclaim) the sum of
P300,000.00 as attorney's fees and costs of
litigation, and pay the costs.
SO ORDERED." 15
Both Ford and Citibank appealed to the Court of
Appeals which affirmed, in toto, the decision of the trial
court. Hence, this petition.
Petitioner Ford prays that judgment be rendered setting
aside the portion of the Court of Appeals decision and
its resolution dated March 5, 1997, with respect to the
dismissal of the complaint against PCIBank and holding
Citibank solely responsible for the proceeds of Citibank
Check Numbers SN-10597 and 16508 for P5,851,706.73
and P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing
the complaint against defendant PCIBank considering
that:
I. Defendant PCIBank was clearly negligent
when it failed to exercise the diligence
required to be exercised by it as a
banking institution.
II. Defendant PCIBank clearly failed to
observe the diligence required in the
selection and supervision of its officers
and employees.
III. Defendant PCIBank was, due to its
negligence, clearly liable for the loss or
damage resulting to the plaintiff Ford
as a consequence of the substitution of
the check consistent with Section 5 of
Central Bank Circular No. 580 series of
1977.
IV. Assuming arguendo that defendant
PCIBank did not accept, endorse or
negotiate in due course the subject
checks, it is liable, under Article 2154
of the Civil Code, to return the money
which it admits having received, and
128
which was credited to it in its Central
Bank account. 16
The main issue presented for our consideration by these
petitions could be simplified as follows: Has petitioner
Ford the right to recover from the collecting bank
(PCIBank) and the drawee bank (Citibank) the value of
the checks intended as payment to the Commissioner of
Internal Revenue? Or has Ford's cause of action already
prescribed?
Note that in these cases, the checks were drawn against
the drawee bank, but the title of the person negotiating
the same was allegedly defective because the instrument
was obtained by fraud and unlawful means, and the
proceeds of the checks were not remitted to the payee. It
was established that instead of paying the checks to the
CIR, for the settlement of the appropriate quarterly
percentage taxes of Ford, the checks were diverted and
encashed for the eventual distribution among the
members of the syndicate. As to the unlawful
negotiation of the check the applicable law is Section 55
of the Negotiable Instruments Law (NIL), which
provides:
"When title defective The title of a person
who negotiates an instrument is defective
within the meaning of this Act when he
obtained the instrument, or any signature
thereto, by fraud, duress, or force and fear, or
other unlawful means, or for an illegal
consideration, or when he negotiates it in
breach of faith or under such circumstances as
amount to a fraud."
Pursuant to this provision, it is vital to show that the
negotiation is made by the perpetrator in breach of faith
amounting to fraud. The person negotiating the checks
must have gone beyond the authority given by his
principal. If the principal could prove that there was no
negligence in the performance of his duties, he may set
up the personal defense to escape liability and recover
from other parties who, through their own negligence,
allowed the commission of the crime.
In this case, we note that the direct perpetrators of the
offense, namely the embezzlers belonging to a
syndicate, are now fugitives from justice. They have,
even if temporarily, escaped liability for the
embezzlement of millions of pesos. We are thus left only
with the task of determining who of the present parties
before us must bear the burden of loss of these millions.
It all boils down to the question of liability based on the
degree of negligence among the parties concerned.
Foremost, we must resolve whether the injured party,
Ford, is guilty of the "imputed contributory negligence"
that would defeat its claim for reimbursement, bearing
in mind that its employees, Godofredo Rivera and
Alexis Marindo, were among the members of the
syndicate.
Citibank points out that Ford allowed its very own
employee, Godofredo Rivera, to negotiate the checks to
his co-conspirators, instead of delivering them to the
designated authorized collecting bank (Metrobank-
Alabang) of the payee, CIR. Citibank bewails the fact
that Ford was remiss in the supervision and control of its
own employees, inasmuch as it only discovered the
syndicate's activities through the information given by
the payee of the checks after an unreasonable period of
time.
PCIBank also blames Ford of negligence when it
allegedly authorized Godofredo Rivera to divert the
proceeds of Citibank Check No. SN-04867, instead of
using it to pay the BIR. As to the subsequent run-around
of funds of Citibank Check Nos. SN-10597 and 16508,
PCIBank claims that the proximate cause of the damage
to Ford lies in its own officers and employees who
carried out the fraudulent schemes and the transactions.
These circumstances were not checked by other officers
of the company, including its comptroller or internal
auditor. PCIBank contends that the inaction of Ford
despite the enormity of the amount involved was a sheer
negligence and stated that, as between two innocent
persons, one of whom must suffer the consequences of a
breach of trust, the one who made it possible, by his act
of negligence, must bear the loss.
For its part, Ford denies any negligence in the
performance of its duties. It avers that there was no
evidence presented before the trial court showing lack of
diligence on the part of Ford. And, citing the case
of Gempesaw vs. Court of Appeals, 17 Ford argues that
even if there was a finding therein that the drawer was
negligent, the drawee bank was still ordered to pay
damages.
Furthermore, Ford contends that Godofredo Rivera was
not authorized to make any representation in its behalf,
specifically, to divert the proceeds of the checks. It adds
that Citibank raised the issue of imputed negligence
against Ford for the first time on appeal. Thus, it should
not be considered by this Court.
On this point, jurisprudence regarding the imputed
negligence of employer in a master-servant relationship
is instructive. Since a master may be held for his
servant's wrongful act, the law imputes to the master the
act of the servant, and if that act is negligent or wrongful
and proximately results in injury to a third person, the
negligence or wrongful conduct is the negligence or
wrongful conduct of the master, for which he is
liable. 18 The general rule is that if the master is injured
by the negligence of a third person and by the
129
concurring contributory negligence of his own servant or
agent, the latter's negligence is imputed to his superior
and will defeat the superior's action against the third
person, assuming, of course that the contributory
negligence was the proximate cause of the injury of
which complaint is made. 19
Accordingly, we need to determine whether or not the
action of Godofredo Rivera, Ford's General Ledger
Accountant, and/or Alexis Marindo, his assistant, was
the proximate cause of the loss or damage. As defined,
proximate cause is that which, in the natural and
continuous sequence, unbroken by any efficient,
intervening cause produces the injury, and without
which the result would not have occurred. 20
It appears that although the employees of Ford initiated
the transactions attributable to an organized syndicate, in
our view, their actions were not the proximate cause of
encashing the checks payable to the CIR. The degree of
Ford's negligence, if any, could not be characterized as
the proximate cause of the injury to the parties.
The Board of Directors of Ford, we note, did not
confirm the request of Godofredo Rivera to recall
Citibank Check No. SN-04867. Rivera's instruction to
replace the said check with PCIBank's Manager's Check
was not in the ordinary course of business which could
have prompted PCIBank to validate the same.
As to the preparation of Citibank Checks Nos. SN-
10597 and 16508, it was established that these checks
were made payable to the CIR. Both were crossed
checks. These checks were apparently turned around by
Ford's employees, who were acting on their own
personal capacity.
Given these circumstances, the mere fact that the
forgery was committed by a drawer-payor's confidential
employee or agent, who by virtue of his position had
unusual facilities for perpetrating the fraud and
imposing the forged paper upon the bank, does not
entitle the bank to shift the loss to the drawer-payor, in
the absence of some circumstance raising estoppel
against the drawer. 21 This rule likewise applies to the
checks fraudulently negotiated or diverted by the
confidential employees who hold them in their
possession.
With respect to the negligence of PCIBank in the
payment of the three checks involved, separately, the
trial courts found variations between the negotiation of
Citibank Check No. SN-04867 and the misapplication of
total proceeds of Checks SN-10597 and 16508.
Therefore, we have to scrutinize, separately, PCIBank's
share of negligence when the syndicate achieved its
ultimate agenda of stealing the proceeds of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at
PCIBank through its Ermita Branch. It was coursed
through the ordinary banking transaction, sent to Central
Clearing with the indorsement at the back "all prior
indorsements and/or lack of indorsements guaranteed,"
and was presented to Citibank for payment. Thereafter
PCIBank, instead of remitting the proceeds to the CIR,
prepared two of its Manager's checks and enabled the
syndicate to encash the same.
On record, PCIBank failed to verify the authority of Mr.
Rivera to negotiate the checks. The neglect of PCIBank
employees to verify whether his letter requesting for the
replacement of the Citibank Check No. SN-04867 was
duly authorized, showed lack of care and prudence
required in the circumstances.
Furthermore, it was admitted that PCIBank is authorized
to collect the payment of taxpayers in behalf of the BIR.
As an agent of BIR, PCIBank is duty bound to consult
its principal regarding the unwarranted instructions
given by the payor or its agent. As aptly stated by the
trial court, to wit:
". . . Since the questioned crossed check was
deposited with IBAA [now PCIBank], which
claimed to be a depository/collecting bank of
the BIR, it has the responsibility to make sure
that the check in question is deposited in
Payee's account only.
xxx xxx xxx
As agent of the BIR (the payee of the check),
defendant IBAA should receive instructions
only from its principal BIR and not from any
other person especially so when that person is
not known to the defendant. It is very
imprudent on the part of the defendant IBAA
to just rely on the alleged telephone call of one
(Godofredo Rivera and in his signature to the
authenticity of such signature considering that
the plaintiff is not a client of the defendant
IBAA."
It is a well-settled rule that the relationship between the
payee or holder of commercial paper and the bank to
which it is sent for collection is, in the absence of an
agreement to the contrary, that of principal and
agent. 22 A bank which receives such paper for
collection is the agent of the payee or holder. 23
Even considering arguendo, that the diversion of the
amount of a check payable to the collecting bank in
behalf of the designated payee may be allowed, still
such diversion must be properly authorized by the payor.
130
Otherwise stated, the diversion can be justified only by
proof of authority from the drawer, or that the drawer
has clothed his agent with apparent authority to receive
the proceeds of such check.
Citibank further argues that PCI Bank's clearing stamp
appearing at the back of the questioned checks stating
that ALL PRIOR INDORSEMENTS AND/OR LACK
OF INDORSEMENTS GUARANTEED should render
PCIBank liable because it made it pass through the
clearing house and therefore Citibank had no other
option but to pay it. Thus, Citibank asserts that the
proximate cause of Ford's injury is the gross negligence
of PCIBank. Since the questioned crossed check was
deposited with PCIBank, which claimed to be a
depository/collecting bank of the BIR, it had the
responsibility to make sure that the check in question is
deposited in Payee's account only.
Indeed, the crossing of the check with the phrase
"Payee's Account Only," is a warning that the check
should be deposited only in the account of the CIR.
Thus, it is the duty of the collecting bank PCIBank to
ascertain that the check be deposited in payee's account
only. Therefore, it is the collecting bank (PCIBank)
which is bound to scrutinize the check and to know its
depositors before it could make the clearing indorsement
"all prior indorsements and/or lack of indorsement
guaranteed".
In Banco de Oro Savings and Mortgage Bank vs.
Equitable Banking Corporation, 24 we ruled:
"Anent petitioner's liability on said instruments, this
court is in full accord with the ruling of the PCHC's
Board of Directors that:
'In presenting the checks for clearing and for
payment, the defendant made an express
 guarantee on the validity of "all prior
endorsements." Thus, stamped at the back of
the checks are the defendant's clear warranty:
ALL PRIOR ENDORSEMENTS AND/OR
LACK OF ENDORSEMENTS
GUARANTEED. Without such warranty,
plaintiff would not have paid on the checks.'
No amount of legal jargon can reverse the clear
meaning of defendant's warranty. As the
warranty has proven to be false and inaccurate,
the defendant is liable for any damage arising
out of the falsity of its representation." 25
Lastly, banking business requires that the one who first
cashes and negotiates the check must take some
precautions to learn whether or not it is genuine. And if
the one cashing the check through indifference or other
circumstance assists the forger in committing the fraud,
he should not be permitted to retain the proceeds of the
check from the drawee whose sole fault was that it did
not discover the forgery or the defect in the title of the
person negotiating the instrument before paying the
check. For this reason, a bank which cashes a check
drawn upon another bank, without requiring proof as to
the identity of persons presenting it, or making inquiries
with regard to them, cannot hold the proceeds against
the drawee when the proceeds of the checks were
afterwards diverted to the hands of a third party. In such
cases the drawee bank has a right to believe that the
cashing bank (or the collecting bank) had, by the usual
proper investigation, satisfied itself of the authenticity of
the negotiation of the checks. Thus, one who encashed a
check which had been forged or diverted and in turn
received payment thereon from the drawee, is guilty of
negligence which proximately contributed to the success
of the fraud practiced on the drawee bank. The latter
may recover from the holder the money paid on the
check. 26
Having established that the collecting bank's negligence
is the proximate cause of the loss, we conclude that
PCIBank is liable in the amount corresponding to the
proceeds of Citibank Check No. SN-04867.
G.R. No. 128604
The trial court and the Court of Appeals found that
PCIBank had no official act in the ordinary course of
business that would attribute to it the case of the
embezzlement of Citibank Check Numbers SN-10597
and 16508, because PCIBank did not actually receive
nor hold the two Ford checks at all. The trial court held,
thus:
"Neither is there any proof that defendant
PCIBank contributed any official or conscious
participation in the process of the
embezzlement. This Court is convinced that
the switching operation (involving the checks
while in transit for "clearing") were the
clandestine or hidden actuations performed by
the members of the syndicate in their own
personal, covert and private capacity and done
without the knowledge of the defendant
PCIBank. . . ." 27
In this case, there was no evidence presented confirming
the conscious participation of PCIBank in the
embezzlement. As a general rule, however, a banking
corporation is liable for the wrongful or tortuous acts
and declarations of its officers or agents within the
course and scope of their employment. 28 A bank will
be held liable for the negligence of its officers or agents
when acting within the course and scope of their
employment. It may be liable for the tortuous acts of its
officers even as regards that species of tort of which
131
malice is an essential element. In this case, we find a
situation where the PCIBank appears also to be the
victim of the scheme hatched by a syndicate in which its
own management employees had participated:
The pro-manager of San Andres Branch of PCIBank,
Remberto Castro, received Citibank Check Numbers SN
10597 and 16508. He passed the checks to a co-
conspirator, an Assistant Manager of PCIBank's Meralco
Branch, who helped Castro open a Checking account of
a fictitious person named "Reynaldo Reyes." Castro
deposited a worthless Bank of America Check in exactly
the same amount of Ford checks. The syndicate
tampered with the checks and succeeded in replacing the
worthless checks and the eventual encashment of
Citibank Check Nos. SN 10597 and 16508. The
PCIBank Pro-manager, Castro, and his co-conspirator
Assistant Manager apparently performed their activities
using facilities in their official capacity or authority but
for their personal and private gain or benefit.
A bank holding out its officers and agents as worthy of
confidence will not be permitted to profit by the frauds
these officers or agents were enabled to perpetrate in the
apparent course of their employment; nor will it be
permitted to shirk its responsibility for such frauds, even
though no benefit may accrue to the bank therefrom. For
the general rule is that a bank is liable for the fraudulent
acts or representations of an officer or agent acting
within the course and apparent scope of his employment
or authority. 29 And if an officer or employee of a bank,
in his official capacity, receives money to satisfy an
evidence of indebtedness lodged with his bank for
collection, the bank is liable for his misappropriation of
such sum. 30
Moreover, as correctly pointed out by Ford, Section
5 31 of Central Bank Circular No. 580, Series of 1977
provides that any theft affecting items in transit for
clearing, shall be for the account of sending bank, which
in this case is PCIBank.
But in this case, responsibility for negligence does not
lie on PCIBank's shoulders alone.
The evidence on record shows that Citibank as drawee
bank was likewise negligent in the performance of its
duties. Citibank failed to establish that its payment of
Ford's checks were made in due course and legally in
order. In its defense, Citibank claims the genuineness
and due execution of said checks, considering that
Citibank (1) has no knowledge of any infirmity in the
issuance of the checks in question (2) coupled by the
fact that said checks were sufficiently funded and (3) the
endorsement of the Payee or lack thereof was
guaranteed by PCIBank (formerly IBAA), thus, it has
the obligation to honor and pay the same.
For its part, Ford contends that Citibank as the drawee
bank owes to Ford an absolute and contractual duty to
pay the proceeds of the subject check only to the payee
thereof, the CIR. Citing Section 62 32 of the Negotiable
Instruments Law, Ford argues that by accepting the
instrument, the acceptor which is Citibank engages that
it will pay according to the tenor of its acceptance, and
that it will pay only to the payee, (the CIR), considering
the fact that here the check was crossed with annotation
"Payees Account Only."
As ruled by the Court of Appeals, Citibank must
likewise answer for the damages incurred by Ford on
Citibank Checks Numbers SN 10597 and 16508,
because of the contractual relationship existing between
the two. Citibank, as the drawee bank breached its
contractual obligation with Ford and such degree of
culpability contributed to the damage caused to the
latter. On this score, we agree with the respondent
court's ruling.
Citibank should have scrutinized Citibank Check
Numbers SN 10597 and 16508 before paying the
amount of the proceeds thereof to the collecting bank of
the BIR. One thing is clear from the record: the clearing
stamps at the back of Citibank Check Nos. SN 10597
and 16508 do not bear any initials. Citibank failed to
notice and verify the absence of the clearing stamps.
Had this been duly examined, the switching of the
worthless checks to Citibank Check Nos. 10597 and
16508 would have been discovered in time. For this
reason, Citibank had indeed failed to perform what was
incumbent upon it, which is to ensure that the amount of
the checks should be paid only to its designated payee.
The fact that the drawee bank did not discover the
irregularity seasonably, in our view, constitutes
negligence in carrying out the bank's duty to its
depositors. The point is that as a business affected with
public interest and because of the nature of its functions,
the bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind
the fiduciary nature of their relationship. 33
Thus, invoking the doctrine of comparative negligence,
we are of the view that both PCIBank and Citibank
failed in their respective obligations and both were
negligent in the selection and supervision of their
employees resulting in the encashment of Citibank
Check Nos. SN 10597 and 16508. Thus, we are
constrained to hold them equally liable for the loss of
the proceeds of said checks issued by Ford in favor of
the CIR.
Time and again, we have stressed that banking business
is so impressed with public interest where the trust and
132
confidence of the public in general is of paramount
importance such that the appropriate standard of
diligence must be very high, if not the highest, degree of
diligence. 34 A bank's liability as obligor is not merely
vicarious but primary, wherein the defense of exercise of
due diligence in the selection and supervision of its
employees is of no moment. 35
Banks handle daily transactions involving millions of
pesos. 36 By the very nature of their work the degree of
responsibility, care and trustworthiness expected of their
employees and officials is far greater than those of
ordinary clerks and employees. 37 Banks are expected to
exercise the highest degree of diligence in the selection
and supervision of their employees. 38
On the issue of prescription, PCIBank claims that the
action of Ford had prescribed because of its inability to
seek judicial relief seasonably, considering that the
alleged negligent act took place prior to December 19,
1977 but the relief was sought only in 1983, or seven
years thereafter.
The statute of limitations begins to run when the bank
gives the depositor notice of the payment, which is
ordinarily when the check is returned to the alleged
drawer as a voucher with a statement of his
account, 39 and an action upon a check is ordinarily
governed by the statutory period applicable to
instruments in writing. 40
Our laws on the matter provide that the action upon a
written contract must be brought within ten years from
the time the right of action accrues. 41 Hence, the
reckoning time for the prescriptive period begins when
the instrument was issued and the corresponding check
was returned by the bank to its depositor (normally a
month thereafter). Applying the same rule, the cause of
action for the recovery of the proceeds of Citibank
Check No. SN 04867 would normally be a month after
December 19, 1977, when Citibank paid the face value
of the check in the amount of P4,746,114.41. Since the
original complaint for the cause of action was filed on
January 20, 1983, barely six years had lapsed. Thus, we
conclude that Ford's cause of action to recover the
amount of Citibank Check No. SN 04867 was
seasonably filed within the period provided by law.
Finally, we also find that Ford is not completely
blameless in its failure to detect the fraud. Failure on the
part of the depositor to examine its passbook, statements
of account, and cancelled checks and to give notice
within a reasonable time (or as required by statute) of
any discrepancy which it may in the exercise of due care
and diligence find therein, serves to mitigate the banks'
liability by reducing the award of interest from twelve
percent (12%) to six percent (6%) per annum. As
provided in Article 1172 of the Civil Code of the
Philippines, responsibility arising from negligence in the
performance of every kind of obligation is also
demandable, but such liability may be regulated by the
courts, according to the circumstances. In quasi-delicts,
the contributory negligence of the plaintiff shall reduce
the damages that he may recover. 42
WHEREFORE, the assailed Decision and Resolution of
the Court of Appeals in CA-G.R. CV No. 25017 are
AFFIRMED. PCIBank, known formerly as Insular Bank
of Asia and America, is declared solely responsible for
the loss of the proceeds of Citibank Check No. SN
04867 in the amount P4,746,114.41, which shall be paid
together with six percent (6%) interest thereon to Ford
Philippines Inc. from the date when the original
complaint was filed until said amount is fully paid.
However, the Decision and Resolution of the Court of
Appeals in CA-G.R. No. 28430 are MODIFIED as
follows: PCIBank and Citibank are adjudged liable for
and must share the loss, (concerning the proceeds of
Citibank Check Numbers SN 10597 and 16508 totalling
P12,163,298.10) on a fifty-fifty ratio, and each bank is
ORDERED to pay Ford Philippines Inc. P6,081,649.05,
with six percent (6%) interest thereon, from the date the
complaint was filed until full payment of said amount.
Costs against Philippine Commercial International Bank
and Citibank, N.A.
SO ORDERED.
SECOND DIVISION
[G.R. No. 133179. March 27, 2008.]
ALLIED BANKING
CORPORATION, petitioner, vs. LIM SIO
WAN, METROPOLITAN BANK AND
TRUST CO., and PRODUCERS
BANK, respondents.
To ingratiate themselves to their valued
depositors, some banks at times bend over backwards
that they unwittingly expose themselves to great risks.
The Case
This Petition for Review on Certiorari under
Rule 45 seeks to reverse the Court of Appeals' (CA's)
Decision promulgated on March 18, 1998 1 in CA-
G.R. CV No. 46290 entitled Lim Sio Wan v. Allied
Banking Corporation, et al. The CA Decision
133
modified the Decision dated November 15, 1993 2 of
the Regional Trial Court (RTC), Branch 63 in Makati
City rendered in Civil Case No. 6757. cCaEDA
The Facts
The facts as found by the RTC and affirmed by
the CA are as follows:
On November 14, 1983, respondent Lim Sio
Wan deposited with petitioner Allied Banking
Corporation (Allied) at its Quintin Paredes Branch in
Manila a money market placement of
PhP1,152,597.35 for a term of 31 days to mature on
December 15, 1983, 3 as evidenced by Provisional
Receipt No. 1356 dated November 14, 1983. 4
On December 5, 1983, a person claiming to be
Lim Sio Wan called up Cristina So, an officer of
Allied, and instructed the latter to pre-terminate Lim
Sio Wan's money market placement, to issue a
manager's check representing the proceeds of the
placement, and to give the check to one Deborah Dee
Santos who would pick up the check. 5 Lim Sio Wan
described the appearance of Santos so that So could
easily identify her. 6
Later, Santos arrived at the bank and signed the
application form for a manager's check to be
issued. 7 The bank issued Manager's Check No.
035669 for PhP1,158,648.49, representing the
proceeds of Lim Sio Wan's money market placement
in the name of Lim Sio Wan, as payee. 8 The check
was cross-checked "For Payee's Account Only" and
given to Santos. 9
Thereafter, the manager's check was deposited
in the account of Filipinas Cement Corporation (FCC)
at respondent Metropolitan Bank and Trust Co.
(Metrobank), 10 with the forged signature of Lim Sio
Wan as indorser. 11
Earlier, on September 21, 1983, FCC had
deposited a money market placement for PhP2 million
with respondent Producers Bank. Santos was the
money market trader assigned to handle FCC's
account. 12 Such deposit is evidenced by Official
Receipt No. 317568 13 and a Letter dated September
21, 1983 of Santos addressed to Angie Lazo of FCC,
acknowledging receipt of the placement. 14 The
placement matured on October 25, 1983 and was
rolled-over until December 5, 1983 as evidenced by a
Letter dated October 25, 1983. 15 When the placement
matured, FCC demanded the payment of the proceeds
of the placement. 16 On December 5, 1983, the same
date that So received the phone call instructing her to
pre-terminate Lim Sio Wan's placement, the manager's
check in the name of Lim Sio Wan was deposited in
the account of FCC, purportedly representing the
proceeds of FCC's money market placement with
Producers Bank. 17 In other words, the Allied check
was deposited with Metrobank in the account of FCC
as Producers Bank's payment of its obligation to FCC.
To clear the check and in compliance with the
requirements of the Philippine Clearing House
Corporation (PCHC) Rules and Regulations,
Metrobank stamped a guaranty on the check, which
reads: "All prior endorsements and/or lack of
endorsement guaranteed." 18
The check was sent to Allied through the
PCHC. Upon the presentment of the check, Allied
funded the check even without checking the
authenticity of Lim Sio Wan's purported indorsement.
Thus, the amount on the face of the check was
credited to the account of FCC. 19
On December 9, 1983, Lim Sio Wan deposited
with Allied a second money market placement to
mature on January 9, 1984. 20
On December 14, 1983, upon the maturity date
of the first money market placement, Lim Sio Wan
went to Allied to withdraw it. 21 She was then
informed that the placement had been pre-terminated
upon her instructions. She denied giving any
instructions and receiving the proceeds thereof. She
desisted from further complaints when she was
assured by the bank's manager that her money would
be recovered. 22
When Lim Sio Wan's second placement
matured on January 9, 1984, So called Lim Sio Wan to
ask for the latter's instructions on the second
placement. Lim Sio Wan instructed So to roll-over the
placement for another 30 days. 23 On January 24,
1984, Lim Sio Wan, realizing that the promise that her
money would be recovered would not materialize, sent
a demand letter to Allied asking for the payment of the
first placement. 24 Allied refused to pay Lim Sio Wan,
claiming that the latter had authorized the pre-
termination of the placement and its subsequent
release to Santos. 25
Consequently, Lim Sio Wan filed with the RTC
a Complaint dated February 13, 1984 26 docketed as
Civil Case No. 6757 against Allied to recover the
proceeds of her first money market placement.
Sometime in February 1984, she withdrew her second
placement from Allied. DSHcTC
Allied filed a third party complaint 27 against
Metrobank and Santos. In turn, Metrobank filed a
fourth party complaint 28 against FCC. FCC for its
part filed a fifth party complaint 29 against Producers
Bank. Summonses were duly served upon all the
134
parties except for Santos, who was no longer
connected with Producers Bank.30
On May 15, 1984, or more than six (6) months
after funding the check, Allied informed Metrobank
that the signature on the check was forged. 31 Thus,
Metrobank withheld the amount represented by the
check from FCC. Later on, Metrobank agreed to
release the amount to FCC after the latter executed an
Undertaking, promising to indemnify Metrobank in
case it was made to reimburse the amount. 32
Lim Sio Wan thereafter filed an amended
complaint to include Metrobank as a party-defendant,
along with Allied. 33 The RTC admitted the amended
complaint despite the opposition of
Metrobank. 34 Consequently, Allied's third party
complaint against Metrobank was converted into a
cross-claim and the latter's fourth party complaint
against FCC was converted into a third party
complaint. 35
After trial, the RTC issued its Decision,
holding as follows:
WHEREFORE, judgment is hereby
rendered as follows:
1. Ordering defendant Allied Banking
Corporation to pay plaintiff the amount of
P1,158,648.49 plus 12% interest per annum
from March 16, 1984 until fully paid;
2. Ordering defendant Allied Bank to
pay plaintiff the amount of P100,000.00 by
way of moral damages;
3. Ordering defendant Allied Bank to
pay plaintiff the amount of P173,792.20 by
way of attorney's fees; and,
 4. Ordering defendant Allied Bank to
pay the costs of suit. aTcIAS
Defendant Allied Bank's cross-claim
against defendant Metrobank is DISMISSED.
Likewise defendant Metrobank's third-
party complaint as against Filipinas Cement
Corporation is DISMISSED.
Filipinas Cement Corporation's fourth-
party complaint against Producer's Bank is also
DISMISSED.
SO ORDERED. 36
The Decision of the Court of Appeals
Allied appealed to the CA, which in turn
issued the assailed Decision on March 18, 1998,
modifying the RTC Decision, as follows:
WHEREFORE, premises considered,
the decision appealed from is MODIFIED.
Judgment is rendered ordering and sentencing
defendant-appellant Allied Banking
Corporation to pay sixty (60%) percent and
defendant-appellee Metropolitan Bank and
Trust Company forty (40%) of the amount of
P1,158,648.49 plus 12% interest per annum
from March 16, 1984 until fully paid. The
moral damages, attorney's fees and costs of suit
adjudged shall likewise be paid by defendant-
appellant Allied Banking Corporation and
defendant-appellee Metropolitan Bank and
Trust Company in the same proportion of 60-
40. Except as thus modified, the decision
appealed from is AFFIRMED. HcSDIE
SO ORDERED. 37
Hence, Allied filed the instant petition.
The Issues
Allied raises the following issues for our
consideration:
The Honorable Court of Appeals erred
in holding that Lim Sio Wan did not authorize
[Allied] to pre-terminate the initial placement
and to deliver the check to Deborah Santos.
The Honorable Court of Appeals erred
in absolving Producers Bank of any liability
for the reimbursement of amount adjudged
demandable.
The Honorable Court of Appeals erred
in holding [Allied] liable to the extent of 60%
of amount adjudged demandable in clear
disregard to the ultimate liability of Metrobank
as guarantor of all endorsement on the check, it
being the collecting bank. 38
The petition is partly meritorious. SAEHaC
A Question of Fact
Allied questions the finding of both the trial
and appellate courts that Allied was not authorized to
release the proceeds of Lim Sio Wan's money market
placement to Santos. Allied clearly raises a question of
fact. When the CA affirms the findings of fact of the
RTC, the factual findings of both courts are binding on
this Court. 39
We also agree with the CA when it said that it
could not disturb the trial court's findings on the
credibility of witness So inasmuch as it was the trial
court that heard the witness and had the opportunity to
observe closely her deportment and manner of
testifying. Unless the trial court had plainly
overlooked facts of substance or value, which, if
considered, might affect the result of the case, 40 we
135
find it best to defer to the trial court on matters
pertaining to credibility of witnesses.
Additionally, this Court has held that the matter
of negligence is also a factual question. 41 Thus, the
finding of the RTC, affirmed by the CA, that the
respective parties were negligent in the exercise of
their obligations is also conclusive upon this
Court. ACETIa
The Liability of the Parties
As to the liability of the parties, we find that
Allied is liable to Lim Sio Wan. Fundamental and
familiar is the doctrine that the relationship between a
bank and a client is one of debtor-creditor.
Articles 1953 and 1980 of the Civil Code
provide:
Art. 1953. A person who receives a
loan of money or any other fungible thing
acquires the ownership thereof, and is bound to
pay to the creditor an equal amount of the same
kind and quality.
Art. 1980. Fixed, savings, and current
deposits of money in banks and similar
institutions shall be governed by the provisions
concerning simple loan. CEDScA
Thus, we have ruled in a line of cases that a
bank deposit is in the nature of a simple loan or
mutuum. 42 More succinctly, in Citibank, N.A. (Formerly First
National City Bank) v. Sabeniano, this Court ruled that a money
market placement is a simple loan or
mutuum. 43 Further, we defined a money market
in Cebu International Finance Corporation v. Court of Appeals , as
follows:
 [A] money market is a market dealing
in standardized short-term credit instruments
(involving large amounts) where lenders and
borrowers do not deal directly with each other
but through a middle man or dealer in open
market. In a money market transaction, the
investor is a lender who loans his money to a
borrower through a middleman or dealer.
In the case at bar, the money market
transaction between the petitioner and the
private respondent is in the nature of a loan. 44
Lim Sio Wan, as creditor of the bank for her
money market placement, is entitled to payment upon
her request, or upon maturity of the placement, or until
the bank is released from its obligation as debtor. Until
any such event, the obligation of Allied to Lim Sio
Wan remains unextinguished.
Art. 1231 of the Civil Code enumerates the
instances when obligations are considered
extinguished, thus:
Art. 1231. Obligations are
extinguished:
(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of
the debt;
(4) By the confusion or merger of the
rights of creditor and debtor;
(5) By compensation;
(6) By novation. HCISED
Other causes of extinguishment of
obligations, such as annulment, rescission,
fulfillment of a resolutory condition, and
prescription, are governed elsewhere in this
Code. (Emphasis supplied.)
From the factual findings of the trial and
appellate courts that Lim Sio Wan did not authorize
the release of her money market placement to Santos
and the bank had been negligent in so doing, there is
no question that the obligation of Allied to pay Lim
Sio Wan had not been extinguished. Art. 1240 of the
Code states that "payment shall be made to the person
in whose favor the obligation has been constituted, or
his successor in interest, or any person authorized to
receive it." As commented by Arturo Tolentino:
Payment made by the debtor to a wrong
party does not extinguish the obligation as to
the creditor, if there is no fault or negligence
which can be imputed to the latter. Even when
the debtor acted in utmost good faith and by
mistake as to the person of his creditor, or
through error induced by the fraud of a third
person, the payment to one who is not in fact
his creditor, or authorized to receive such
payment, is void, except as provided in Article
1241. Such payment does not prejudice the
creditor, and accrual of interest is not
suspended by it. 45 (Emphasis supplied.)
Since there was no effective payment of Lim
Sio Wan's money market placement, the bank still has
an obligation to pay her at six percent (6%) interest
from March 16, 1984 until the payment
thereof. 2005jur
We cannot, however, say outright that Allied is
solely liable to Lim Sio Wan.
Allied claims that Metrobank is the proximate
cause of the loss of Lim Sio Wan's money. It points
136
out that Metrobank guaranteed all prior indorsements
inscribed on the manager's check, and without
Metrobank's guarantee, the present controversy would
never have occurred. According to Allied:
Failure on the part of the collecting
bank to ensure that the proceeds of the check is
paid to the proper party is, aside from being an
efficient intervening cause, also the last
negligent act, . . . contributory to the injury
caused in the present case, which thereby leads
to the conclusion that it is the collecting bank,
Metrobank that is the proximate cause of the
alleged loss of the plaintiff in the instant
case. 46
We are not persuaded.
Proximate cause is "that cause, which, in
natural and continuous sequence, unbroken by any
efficient intervening cause, produces the injury and
without which the result would not have
occurred." 47 Thus, there is an efficient supervening
event if the event breaks the sequence leading from the
cause to the ultimate result. To determine the
proximate cause of a controversy, the question that
needs to be asked is: If the event did not happen,
would the injury have resulted? If the answer is NO,
then the event is the proximate cause.
In the instant case, Allied avers that even if it
had not issued the check payment, the money
represented by the check would still be lost because of
Metrobank's negligence in indorsing the check without
verifying the genuineness of the indorsement thereon.
Section 66 in relation to Sec. 65 of the
Negotiable Instruments Law provides:
 Section 66. Liability of general
indorser. Every indorser who indorses
without qualification, warrants to all
subsequent holders in due course;
a) The matters and things mentioned
in subdivisions (a), (b) and (c)
of the next preceding section;
and
b) That the instrument is at the time of
his indorsement valid and
subsisting;
And in addition, he engages that on due
presentment, it shall be accepted or paid, or
both, as the case may be according to its tenor,
and that if it be dishonored, and the necessary
proceedings on dishonor be duly taken, he will
pay the amount thereof to the holder, or to any
subsequent indorser who may be compelled to
pay it.
Section 65. Warranty where
negotiation by delivery, so forth. Every
person negotiating an instrument by delivery or
by a qualified indorsement, warrants:
a) That the instrument is genuine and
in all respects what it
purports to be;
b) That he has a good title of it;
c) That all prior parties had capacity to
contract;
d) That he has no knowledge of any
fact which would impair the
validity of the instrument or
render it valueless.
But when the negotiation is by delivery
only, the warranty extends in favor of no
holder other than the immediate transferee.
The provisions of subdivision (c) of
this section do not apply to persons negotiating
public or corporation securities, other than bills
and notes. (Emphasis supplied.)
The warranty "that the instrument is genuine
and in all respects what it purports to be" covers all the
defects in the instrument affecting the validity thereof,
including a forged indorsement. Thus, the last indorser
will be liable for the amount indicated in the
negotiable instrument even if a previous indorsement
was forged. We held in a line of cases that "a
collecting bank which indorses a check bearing a
forged indorsement and presents it to the drawee bank
guarantees all prior indorsements, including the forged
indorsement itself, and ultimately should be held liable
therefor." 48
However, this general rule is subject to
exceptions. One such exception is when the issuance
of the check itself was attended with negligence. Thus,
in the cases cited above where the collecting bank is
generally held liable, in two of the cases where the
checks were negligently issued, this Court held the
institution issuing the check just as liable as or more
liable than the collecting bank. aSHAIC
In isolated cases where the checks were
deposited in an account other than that of the payees
on the strength of forged indorsements, we held the
collecting bank solely liable for the whole amount of
the checks involved for having indorsed the same.
In Republic Bank v. Ebrada, 49 the check was
properly issued by the Bureau of Treasury. While
in Banco de Oro Savings and Mortgage Bank (Banco
137
de Oro) v. Equitable Banking Corporation, 50 Banco
de Oro admittedly issued the checks in the name of the
correct payees. And in Traders Royal Bank v. Radio
Philippines Network, Inc., 51 the checks were issued
at the request of Radio Philippines Network, Inc. from
Traders Royal Bank.
However, in Bank of the Philippine Islands v. Court of Appeals,
we said that the drawee bank is liable for 60% of the
amount on the face of the negotiable instrument and
the collecting bank is liable for 40%. We also noted
the relative negligence exhibited by two banks, to wit:
Both banks were negligent in the
selection and supervision of their employees
resulting in the encashment of the forged
checks by an impostor. Both banks were not
able to overcome the presumption of
negligence in the selection and supervision of
their employees. It was the gross negligence of
the employees of both banks which resulted in
the fraud and the subsequent loss. While it is
true that petitioner BPI's negligence may have
been the proximate cause of the loss,
respondent CBC's
negligence contributed equally to the success
of the impostor in encashing the proceeds of
the forged checks. Under these circumstances,
we apply Article 2179 of the Civil Code to the
effect that while respondent CBC may recover
its losses, such losses are subject to mitigation
by the courts. (See Phoenix Construction Inc.
v. Intermediate Appellate Courts, 148 SCRA
353 [1987]). HDaACI
Considering the comparative
negligence of the two (2) banks, we rule that
the demands of substantial justice are satisfied
by allocating the loss of P2,413,215.16 and the
 costs of the arbitration proceeding in the
amount of P7,250.00 and the cost of litigation
on a 60-40 ratio. 52
Similarly, we ruled in Associated Bank v. Court of
that the issuing institution and the collecting
Appeals
bank should equally share the liability for the loss of
amount represented by the checks concerned due to
the negligence of both parties:
The Court finds as reasonable, the
proportionate sharing of fifty percent-fifty
percent (50%-50%). Due to the negligence of
the Province of Tarlac in releasing the checks
to an unauthorized person (Fausto Pangilinan),
in allowing the retired hospital cashier to
receive the checks for the payee hospital for a
period close to three years and in not properly
ascertaining why the retired hospital cashier
was collecting checks for the payee hospital in
addition to the hospital's real cashier,
respondent Province contributed to the loss
amounting to P203,300.00 and shall be liable
to the PNB for fifty (50%) percent thereof. In
effect, the Province of Tarlac can only recover
fifty percent (50%) of P203,300.00 from PNB.
The collecting bank, Associated Bank,
shall be liable to PNB for fifty (50%) percent
of P203,300.00. It is liable on its warranties as
indorser of the checks which were deposited
by Fausto Pangilinan, having guaranteed the
genuineness of all prior indorsements,
including that of the chief of the payee
hospital, Dr. Adena Canlas. Associated Bank
was also remiss in its duty to ascertain the
genuineness of the payee's indorsement. 53
A reading of the facts of the two immediately
preceding cases would reveal that the reason why the
bank or institution which issued the check was held
partially liable for the amount of the check was
because of the negligence of these parties which
resulted in the issuance of the checks.
In the instant case, the trial court correctly
found Allied negligent in issuing the manager's check
and in transmitting it to Santos without even a written
authorization. 54 In fact, Allied did not even ask for
the certificate evidencing the money market placement
or call up Lim Sio Wan at her residence or office to
confirm her instructions. Both actions could have
prevented the whole fraudulent transaction from
unfolding. Allied's negligence must be considered as
the proximate cause of the resulting loss.
To reiterate, had Allied exercised the diligence
due from a financial institution, the check would not
have been issued and no loss of funds would have
resulted. In fact, there would have been no issuance of
indorsement had there been no check in the first place.
The liability of Allied, however, is concurrent
with that of Metrobank as the last indorser of the
check. When Metrobank indorsed the check in
compliance with the PCHC Rules and
Regulations 55 without verifying the authenticity of
Lim Sio Wan's indorsement and when it accepted the
check despite the fact that it was cross-checked
payable to payee's account only, 56 its negligent and
cavalier indorsement contributed to the easier release
of Lim Sio Wan's money and perpetuation of the
fraud. Given the relative participation of Allied and
Metrobank to the instant case, both banks cannot be
adjudged as equally liable. Hence, the 60:40 ratio of
the liabilities of Allied and Metrobank, as ruled by the
CA, must be upheld. DEIHAa
138
FCC, having no participation in the negotiation
of the check and in the forgery of Lim Sio Wan's
indorsement, can raise the real defense of forgery as
against both banks. 57
As to Producers Bank, Allied Bank's argument
that Producers Bank must be held liable as employer
of Santos under Art. 2180 of the Civil Code is
erroneous. Art. 2180 pertains to the vicarious liability
of an employer for quasi-delicts that an employee has
committed. Such provision of law does not apply to
civil liability arising from delict.
One also cannot apply the principle of
subsidiary liability in Art. 103 of the Revised Penal
Code in the instant case. Such liability on the part of
the employer for the civil aspect of the criminal act of
the employee is based on the conviction of the
employee for a crime. Here, there has been no
conviction for any crime.
As to the claim that there was unjust
enrichment on the part of Producers Bank, the same is
correct. Allied correctly claims in its petition that
Producers Bank should reimburse Allied for whatever
judgment that may be rendered against it pursuant to
Art. 22 of the Civil Code, which provides: "Every
person who through an act of performance by another,
or any other means, acquires or comes into possession
of something at the expense of the latter without just
cause or legal ground, shall return the same to him."
The above provision of law was clarified
in Reyes v. Lim, where we ruled that "[t]here is unjust
enrichment when a person unjustly retains a benefit to
the loss of another, or when a person retains money or
property of another against the fundamental principles
of justice, equity and good conscience." 58
 In Tamio v. Ticson, we further clarified the principle
of unjust enrichment, thus: "Under Article 22 of the
Civil Code, there is unjust enrichment when (1) a
person is unjustly benefited, and (2) such benefit is
derived at the expense of or with damages to
another." 59
In the instant case, Lim Sio Wan's money
market placement in Allied Bank was pre-terminated
and withdrawn without her consent. Moreover, the
proceeds of the placement were deposited in
Producers Bank's account in Metrobank without any
justification. In other words, there is no reason that the
proceeds of Lim Sio Wans' placement should be
deposited in FCC's account purportedly as payment
for FCC's money market placement and interest in
Producers Bank. With such payment, Producers Bank's
indebtedness to FCC was extinguished, thereby
benefitting the former. Clearly, Producers Bank was
unjustly enriched at the expense of Lim Sio Wan.
Based on the facts and circumstances of the case,
Producers Bank should reimburse Allied and
Metrobank for the amounts the two latter banks are
ordered to pay Lim Sio Wan. TCaAHI
It cannot be validly claimed that FCC, and not
Producers Bank, should be considered as having been
unjustly enriched. It must be remembered that FCC's
money market placement with Producers Bank was
already due and demandable; thus, Producers Bank's
payment thereof was justified. FCC was entitled to
such payment. As earlier stated, the fact that the
indorsement on the check was forged cannot be raised
against FCC which was not a part in any stage of the
negotiation of the check. FCC was not unjustly
enriched.
From the facts of the instant case, we see that
Santos could be the architect of the entire controversy.
Unfortunately, since summons had not been served on
Santos, the courts have not acquired jurisdiction over
her. 60 We, therefore, cannot ascribe to her liability in
the instant case.
Clearly, Producers Bank must be held liable to
Allied and Metrobank for the amount of the check
plus 12% interest per annum, moral damages,
attorney's fees, and costs of suit which Allied and
Metrobank are adjudged to pay Lim Sio Wan based on
a proportion of 60:40.
WHEREFORE, the petition is PARTLY
GRANTED. The March 18, 1998 CA Decision in CA-
G.R. CV No. 46290 and the November 15, 1993 RTC
Decision in Civil Case No. 6757 are AFFIRMED with
MODIFICATION.
Thus, the CA Decision is AFFIRMED,
the fallo of which is reproduced, as follows:
WHEREFORE, premises considered,
the decision appealed from is MODIFIED.
Judgment is rendered ordering and sentencing
defendant-appellant Allied Banking
Corporation to pay sixty (60%) percent and
defendant-appellee Metropolitan Bank and
Trust Company forty (40%) of the amount of
P1,158,648.49 plus 12% interest per annum
from March 16, 1984 until fully paid. The
moral damages, attorney's fees and costs of
suit adjudged shall likewise be paid by
defendant-appellant Allied Banking
Corporation and defendant-appellee
Metropolitan Bank and Trust Company in the
same proportion of 60-40. Except as thus
modified, the decision appealed from is
AFFIRMED. CaATDE
SO ORDERED.
139
Additionally and by way of MODIFICATION,
Producers Bank is hereby ordered to pay Allied and
Metrobank the aforementioned amounts. The liabilities
of the parties are concurrent and independent of each
other. TACEDI
SO ORDERED.
FIRST DIVISION
[G.R. No. 171169. August 24, 2009.]
GC DALTON INDUSTRIES,
INC., petitioner, vs. EQUITABLE PCI
BANK, respondent.
In 1999, respondent Equitable PCI Bank
extended a P30-million credit line to Camden
Industries, Inc. (CII) allowing the latter to avail of
several loans (covered by promissory notes) and to
purchase trust receipts. To facilitate collection, CII
executed a "hold-out" agreement in favor of
respondent authorizing it to deduct from its savings
account any amounts due. To guarantee payment,
petitioner GC Dalton Industries, Inc. executed a third-
party mortgage of its real properties in Quezon
City 1 and Malolos, Bulacan 2 as security for CII's
loans. 3
CII did not pay its obligations despite
respondent's demands. By 2003, its outstanding
consolidated promissory notes and unpaid trust
receipts had reached a staggering P68,149,132.40. 4
 Consequently, respondent filed a petition for
extrajudicial foreclosure of petitioner's Bulacan
properties in the Regional Trial Court (RTC) of
Bulacan on May 7, 2004. 5 On August 3, 2004, the
mortgaged properties were sold at a public auction
where respondent was declared the highest bidder.
Consequently, a certificate of sale 6 was issued in
respondent's favor on August 3, 2004.
On September 13, 2004, respondent filed the
certificate of sale and an affidavit of consolidation of
ownership 7 in the Register of Deeds of Bulacan
pursuant to Section 47 of the General Banking
Law. 8 Hence, petitioner's TCTs covering the Bulacan
properties were cancelled and new ones were issued in
the name of respondent. 9 cHEATI
In view of the foregoing, respondent filed
an ex parte motion for the issuance of a writ of
possession 10 in the RTC Bulacan, Branch 10 on
January 10, 2005. 11
Previously, however, on August 4, 2004, CII
had filed an action for specific performance and
damages 12 in the RTC of Pasig, Branch 71 (Pasig
RTC), asserting that it had allegedly paid its obligation
in full to respondent. 13 CII sought to compel
respondent to render an accounting in order to prove
that the bank fraudulently foreclosed on petitioner's
mortgaged properties.
Because respondent allegedly failed to appear
during the trial, the Pasig RTC rendered a decision on
March 30, 2005 14 based on the evidence presented by
CII. It found that, while CII's past due obligation
amounted only to P14,426,485.66 as of November 30,
2002, respondent had deducted a total of
P108,563,388.06 from CII's savings account. Thus, the
Pasig RTC ordered respondent: (1) to return to CII the
"overpayment" with legal interest of 12% per
annum amounting to P94,136,902.40; (2) to
compensate it for lost profits amounting to P2,000,000
per month starting August 2004 with legal interest of
12% per annum until full payment and (3) to return
the TCTs covering the mortgaged properties to
petitioner. It likewise awarded CII P2,000,000 and
P300,000, respectively, as moral and exemplary
damages and P500,000 as attorney's fees.
Respondent filed a notice of appeal. CII, on the
other hand, moved for the immediate entry and
execution of the abovementioned decision.
In an order dated December 7, 2005, 15 the
Pasig RTC dismissed respondent's notice of appeal
due to its failure to pay the appellate docket fees. It
likewise found respondent guilty of forum-shopping
for filing the petition for the issuance of a writ of
possession in the Bulacan RTC. Thus, the Pasig RTC
ordered the immediate entry of its March 30, 2005
decision. 16
Meanwhile, in view of the pending case in the
Pasig RTC, petitioner opposed respondent's ex
parte motion for the issuance of a writ of possession in
the Bulacan RTC. It claimed that respondent was
guilty of fraud and forum-shopping, and that it was not
informed of the foreclosure. Furthermore, respondent
fraudulently foreclosed on the properties since the
Pasig RTC had not yet determined whether CII indeed
failed to pay its obligations.
In an order dated December 10, 2005, the
Bulacan RTC granted the motion and a writ of
possession was issued in respondent's favor on
December 19, 2005.CcaASE
Petitioner immediately assailed the December
10, 2005 order of the Bulacan RTC via a petition
140
for certiorari in the Court of Appeals (CA). It claimed
that the order violated Section 14, Article VIII of the
Constitution 17 which requires that every decision
must clearly and distinctly state its factual and legal
bases. In a resolution dated January 13, 2006, 18 the
CA dismissed the petition for lack of merit on the
ground that an order involving the issuance of a writ of
possession is not a judgment on the merits, hence, not
covered by the requirement of Section 14, Article VIII
of the Constitution.
Petitioner elevated the matter to this Court,
assailing the January 13, 2006 resolution of the CA. It
insists that the December 10, 2005 order of the
Bulacan RTC was void as it was bereft of factual and
legal bases.
Petitioner likewise cites the conflict between
the December 10, 2005 order of the Bulacan RTC and
the December 7, 2005 order of the Pasig RTC.
Petitioner claims that, since the Pasig RTC already
ordered the entry of its March 30, 2005 decision (in
turn ordering respondent to return TCT No. 351231
and all such other owner's documents of title as may
have been placed in its possession by virtue of the
subject trust receipt and loan transactions), the same
was already final and executory. Thus, inasmuch as
CII had supposedly paid respondent in full, it was
erroneous for the Bulacan RTC to order the issuance
of a writ of possession to respondent.
Respondent, on the other hand, asserts that
petitioner is raising a question of fact as it essentially
assails the propriety of the issuance of the writ of
possession. It likewise points out that petitioner did
not truthfully disclose the status of the March 30, 2005
decision of the Pasig RTC because, in an order dated
April 4, 2006, the Pasig RTC partially reconsidered its
December 7, 2005 order and gave due course to
respondent's notice of appeal. (The propriety of the
said April 4, 2006 order is still pending review in the
CA.)
We deny the petition.
The issuance of a writ of possession to a
purchaser in an extrajudicial foreclosure is summary
and ministerial in nature as such proceeding is merely
an incident in the transfer of title. 19 The trial court
does not exercise discretion in the issuance
thereof. 20 For this reason, an order for the issuance of
a writ of possession is not the judgment on the merits
contemplated by Section 14, Article VIII of the
Constitution. Hence, the CA correctly upheld the
December 10, 2005 order of the Bulacan
RTC. caHCSD
Furthermore, the mortgagor loses all legal
interest over the foreclosed property after the
expiration of the redemption period. 21 Under Section
47 of the General Banking Law, 22 if the mortgagor is
a juridical person, it can exercise the right to redeem
the foreclosed property until, but not after, the
registration of the certificate of foreclosure sale within
three months after foreclosure, whichever is earlier.
Thereafter, such mortgagor loses its right of
redemption.
Respondent filed the certificate of sale and
affidavit of consolidation with the Register of Deeds
of Bulacan on September 13, 2004. This terminated
the redemption period granted by Section 47 of the
General Banking Law. Because consolidation of title
becomes a right upon the expiration of the redemption
period,23 respondent became the owner of the
foreclosed properties. 24 Therefore, when petitioner
opposed the ex parte motion for the issuance of the
writ of possession on January 10, 2005 in the Bulacan
RTC, it no longer had any legal interest in the Bulacan
properties.
Nevertheless, even if the ownership of the
Bulacan properties had already been consolidated in
the name of respondent, petitioner still had, and could
have availed of, the remedy provided in Section 8 of
Act 3135. 25 It could have filed a petition to annul the
August 3, 2004 auction sale and to cancel the
December 19, 2005 writ of possession, 26 within 30
days after respondent was given possession. 27 But it
did not. Thus, inasmuch as the 30-day period to avail
of the said remedy had already lapsed, petitioner could
no longer assail the validity of the August 3, 2004 sale.
Any question regarding the validity of the
mortgage or its foreclosure cannot be a legal
ground for the refusal to issue a writ of
possession. Regardless of whether or not there
is a pending suit for the annulment of the
mortgage or the foreclosure itself, the
purchaser is entitled to a writ of possession,
without prejudice, of course, to the eventual
outcome of the pending annulment case. 28
Needless to say, petitioner committed a
misstep by completely relying and pinning all its
hopes for relief on its complaint for specific
performance and damages in the Pasig
RTC, 29 instead of resorting to the remedy of
annulment (of the auction sale and writ of possession)
under Section 8 of Act 3135 in the Bulacan
RTC. caSDCA
WHEREFORE, the petition is
hereby DENIED.
Costs against petitioner.
SO ORDERED.
141
FIRST DIVISION
[G.R. No. 171545. December 19, 2007.]
EQUITABLE PCI BANK, * AIMEE YU
and BEJAN LIONEL APAS, petitioners, vs.
NG SHEUNG NGOR ** doing business
under the name and style "KEN
MARKETING," KEN APPLIANCE
DIVISION, INC. and BENJAMIN E.
GO, respondents.
This petition for review on certiorari 1 seeks to set aside
the decision 2 of the Court of Appeals (CA) in CA-G.R.
SP No. 83112 and its resolution 3 denying
reconsideration.
On October 7, 2001, respondents Ng Sheung
Ngor, 4 Ken Appliance Division, Inc. and Benjamin E.
Go filed an action for annulment and/or reformation of
documents and contracts 5 against petitioner Equitable
PCI Bank (Equitable) and its employees, Aimee Yu and
Bejan Lionel Apas, in the Regional Trial Court (RTC),
Branch 16 of Cebu City. 6 They claimed that Equitable
induced them to avail of its peso and dollar credit
facilities by offering low interest rates 7 so they
accepted Equitable's proposal and signed the bank's pre-
printed promissory notes on various dates beginning
1996. They, however, were unaware that the documents
contained identical escalation clauses granting Equitable
authority to increase interest rates without their [m]illion [p]esos as moral obligation is the
consent. 8 damages; conversion rate of
P26.50 per dollar
Equitable, in its answer, asserted that respondents C) Ordering [Equitable] to pay
availed of at the time of
knowingly accepted all the terms and conditions [respondents] the sum of P10
incurring of the
contained in the promissory notes. 9 In fact, they [m]illion [p]esos as exemplary
obligation in accordance
continuously availed of and benefited from Equitable's damages;
with Article 1250 of the
credit facilities for five years. 10
D) Ordering defendants Aimee Yu and Civil Code of the
After trial, the RTC upheld the validity of the Bejan [Lionel] Apas to pay Philippines;
promissory notes. It found that, in 2001 alone, Equitable [respondents], jointly and
H) Dismissing [Equitable's]
restructured respondents' loans amounting to severally, the sum of [t]wo
counterclaim except the
US$228,200 and P1,000,000. 11 The trial court, [m]illion [p]esos as moral and
payment of the aforestated
however, invalidated the escalation clause contained exemplary damages;
unpaid principal loan
therein because it violated the principle of mutuality of
E) Ordering [Equitable, Aimee Yu and obligations and interest.
contracts. 12 Nevertheless, it took judicial notice of the
Bejan Lionel Apas], jointly and
steep depreciation of the peso during the intervening SO ORDERED. 19
severally, to pay [respondents']
period 13 and declared the existence of extraordinary
attorney's fees in the sum of Equitable and respondents filed their respective notices
deflation. 14 Consequently, the RTC ordered the use of
P300,000; litigation expenses in of appeal. 20
the 1996 dollar exchange rate in computing respondents'
the sum of P50,000 and the cost
dollar-denominated loans. 15 Lastly, because the In the March 1, 2004 order of the RTC, both notices
of suit;
business reputation of respondents was (allegedly) were denied due course because Equitable and
severely damaged when Equitable froze their F) Directing plaintiffs Ng Sheung Ngor respondents "failed to submit proof that they paid their
accounts, 16 the trial court awarded moral and and Ken Marketing to pay respective appeal fees." 21
exemplary damages to them. 17 [Equitable] the unpaid principal
WHEREFORE, premises considered, the
obligation for the peso loan as
The dispositive portion of the February 5, 2004 RTC appeal interposed by defendants from the
well as the unpaid obligation for
decision 18 provided: Decision in the above-entitled case
the dollar denominated loan;
is DENIED due course. As of February 27,
WHEREFORE, premises considered,
G) Directing plaintiff Ng Sheung Ngor 2004, the Decision dated February 5, 2004,
judgment is hereby rendered:
and Ken Marketing to pay is considered final and executory in so far as
A) Ordering [Equitable] to reinstate [Equitable] interest as follows: [Equitable, Aimee Yu and Bejan Lionel
and return the amount of Apas] are concerned. 22 (emphasis supplied)
1) 12% per annum for the peso
[respondents'] deposit placed on
loans; Equitable moved for the reconsideration of the March 1,
hold status;
2004 order of the RTC 23 on the ground that it did in
2) 8% per annum for the dollar
B) Ordering [Equitable] to pay fact pay the appeal fees. Respondents, on the other hand,
loans. The basis for the
[respondents] the sum of P12 prayed for the issuance of a writ of execution. 24
payment of the dollar
142
On March 24, 2004, the RTC issued an omnibus order
denying Equitable's motion for reconsideration for lack
of merit 25 and ordered the issuance of a writ of
execution in favor of respondents. 26 According to the
RTC, because respondents did not move for the
reconsideration of the previous order (denying due
course to the parties' notices of appeal), 27 the February
5, 2004 decision became final and executory as to both
parties and a writ of execution against Equitable was in
order. 28
A writ of execution was thereafter issued 29 and three
real properties of Equitable were levied upon. 30
On March 26, 2004, Equitable filed a petition for relief
in the RTC from the March 1, 2004 order. 31 It,
however, withdrew that petition on March 30,
2004 32 and instead filed a petition for certiorari with
an application for an injunction in the CA to enjoin the
implementation and execution of the March 24, 2004
omnibus order. 33
On June 16, 2004, the CA granted Equitable's
application for injunction. A writ of preliminary
injunction was correspondingly issued. 34
Notwithstanding the writ of injunction, the properties of
Equitable previously levied upon were sold in a public
auction on July 1, 2004. Respondents were the highest
bidders and certificates of sale were issued to them. 35
On August 10, 2004, Equitable moved to annul the July
1, 2004 auction sale and to cite the sheriffs who
conducted the sale in contempt for proceeding with the
auction despite the injunction order of the CA. 36
On October 28, 2005, the CA dismissed the petition
for certiorari. 37 It found Equitable guilty of forum
shopping because the bank filed its petition for certiorari
in the CA several hours before withdrawing its petition
for relief in the RTC. 38 Moreover, Equitable failed to
disclose, both in the statement of material dates and
certificate of non-forum shopping (attached to its
petition for certiorari in the CA), that it had a pending
petition for relief in the RTC. 39
Equitable moved for reconsideration 40 but it was
denied. 41 Thus, this petition.
Equitable asserts that it was not guilty of forum
shopping because the petition for relief was withdrawn
on the same day the petition for certiorari was
filed. 42 It likewise avers that its petition
for certiorari was meritorious because the RTC
committed grave abuse of discretion in issuing the
March 24, 2004 omnibus order which was based on an
erroneous assumption. The March 1, 2004 order denying
its notice of appeal for non payment of appeal fees was
erroneous because it had in fact paid the required
fees. 43 Thus, the RTC, by issuing its March 24, 2004
omnibus order, effectively prevented Equitable from
appealing the patently wrong February 5, 2004
decision. 44
This petition is meritorious.
EQUITABLE WAS NOT GUILTY
OF FORUM SHOPPING
Forum shopping exists when two or more actions
involving the same transactions, essential facts and
circumstances are filed and those actions raise identical
issues, subject matter and causes of action. 45 The test is
whether, in two or more pending cases, there is identity
of parties, rights or causes of actions and reliefs. 46
Equitable's petition for relief in the RTC and its petition
for certiorari in the CA did not have identical causes of
action. The petition for relief from the denial of its
notice of appeal was based on the RTC's judgment or
143
final order preventing it from taking an appeal by "fraud,
accident, mistake or excusable negligence." 47 On the
other hand, its petition for certiorari in the CA, a special
civil action, sought to correct the grave abuse of
discretion amounting to lack of jurisdiction committed
by the RTC. 48
In a petition for relief, the judgment or final order is
rendered by a court with competent jurisdiction. In a
petition for certiorari, the order is rendered by a court
without or in excess of its jurisdiction.
Moreover, Equitable substantially complied with the
rule on non-forum shopping when it moved to withdraw
its petition for relief in the RTC on the same day (in fact
just four hours and forty minutes after) it filed the
petition for certiorari in the CA. Even if Equitable failed
to disclose that it had a pending petition for relief in the
RTC, it rectified what was doubtlessly a careless
oversight by withdrawing the petition for relief just a
few hours after it filed its petition for certiorari in the
CA a clear indication that it had no intention of
maintaining the two actions at the same time.
THE TRIAL COURT
COMMITTED GRAVE ABUSE
OF DISCRETION IN ISSUING
ITS MARCH 1, 2004 AND
MARCH 24, 2004 ORDERS
Section 1, Rule 65 of the Rules of Court provides:
Section 1. Petition for Certiorari.
When any tribunal, board or officer
exercising judicial or quasi-judicial function
has acted without or in excess of its or his
jurisdiction, or with grave abuse of
discretion amounting to lack or excess of
jurisdiction, and there is no appeal, nor any
plain, speedy or adequate remedy in the
 ordinary course of law, a person aggrieved
thereby may file a verified petition in the
proper court, alleging the facts with certainty
and praying that judgment be rendered
annulling or modifying the proceedings of such
tribunal, board or officer, and granting such
incidental reliefs as law and justice may
require.
The petition shall be accompanied by a
certified true copy of the judgment, order or
resolution subject thereof, copies of all
pleadings and documents relevant and
pertinent thereto, and a sworn certificate of
non-forum shopping as provided in the third
paragraph of Section 3, Rule 46.
There are two substantial requirements in a petition
for certiorari. These are:
1. that the tribunal, board or officer exercising
judicial or quasi-judicial functions
acted without or in excess of his or its
jurisdiction or with grave abuse of
discretion amounting to lack or excess
of jurisdiction; and
2. that there is no appeal or any plain, speedy
and adequate remedy in the ordinary
course of law.
For a petition for certiorari premised on grave abuse of
discretion to prosper, petitioner must show that the
public respondent patently and grossly abused his
discretion and that abuse amounted to an evasion of
positive duty or a virtual refusal to perform a duty
enjoined by law or to act at all in contemplation of law,
as where the power was exercised in an arbitrary and
despotic manner by reason of passion or hostility. 49
The March 1, 2004 order denied due course to the
notices of appeal of both Equitable and respondents.
However, it declared that the February 5, 2004 decision
wasfinal and executory only with respect to
Equitable. 50 As expected, the March 24, 2004
omnibus order denied Equitable's motion for
reconsideration and granted respondents' motion for the
issuance of a writ of execution. 51
The March 1, 2004 and March 24, 2004 orders of the
RTC were obviously intended to prevent Equitable, et
al. from appealing the February 5, 2004 decision. Not
only that. The execution of the decision was undertaken
with indecent haste, effectively obviating or defeating
Equitable's right to avail of possible legal remedies. No
matter how we look at it, the RTC committed grave
abuse of discretion in rendering those orders.
With regard to whether Equitable had a plain, speedy
and adequate remedy in the ordinary course of law, we
hold that there was none. The RTC denied due course to
its notice of appeal in the March 1, 2004 order. It
affirmed that denial in the March 24, 2004 omnibus
order. Hence, there was no way Equitable could have
possibly appealed the February 5, 2004 decision. 52
Although Equitable filed a petition for relief from the
March 24, 2004 order, that petition was not a plain,
speedy and adequate remedy in the ordinary course of
law. 53A petition for relief under Rule 38 is an equitable
remedy allowed only in exceptional circumstances or
where there is no other available or adequate remedy. 54
Thus, we grant Equitable's petition for certiorari and
consequently give due course to its appeal.
144
EQUITABLE RAISED PURE
QUESTIONS OF LAW IN ITS
PETITION FOR REVIEW
The jurisdiction of this Court in Rule 45 petitions is
limited to questions of law. 55 There is a question of law
"when the doubt or controversy concerns the correct
application of law or jurisprudence to a certain set of
facts; or when the issue does not call for the probative
value of the evidence presented, the truth or falsehood of
facts being admitted." 56
Equitable does not assail the factual findings of the trial
court. Its arguments essentially focus on the nullity of
the RTC's February 5, 2004 decision. Equitable points
out that that decision was patently erroneous, specially
the exorbitant award of damages, as it was
inconsistent with existing law and jurisprudence. 57
THE PROMISSORY NOTES
WERE VALID
The RTC upheld the validity of the promissory notes
despite respondents' assertion that those documents were
contracts of adhesion.
A contract of adhesion is a contract whereby almost all
of its provisions are drafted by one party. 58 The
participation of the other party is limited to affixing his
signature or his "adhesion" to the contract. 59 For this
reason, contracts of adhesion are strictly construed
against the party who drafted it. 60
It is erroneous, however, to conclude that contracts of
adhesion are invalid per se. They are, on the contrary, as
binding as ordinary contracts. A party is in reality free to
accept or reject it. A contract of adhesion becomes void
only when the dominant party takes advantage of the
weakness of the other party, completely depriving the
latter of the opportunity to bargain on equal footing. 61
That was not the case here. As the trial court noted, if
the terms and conditions offered by Equitable had been
truly prejudicial to respondents, they would have walked
out and negotiated with another bank at the first
available instance. But they did not. Instead, they
continuously availed of Equitable's credit facilities for
five long years.
While the RTC categorically found that respondents had
outstanding dollar- and peso-denominated loans with
Equitable, it, however, failed to ascertain the total
amount due (principal, interest and penalties, if any) as
of July 9, 2001. The trial court did not explain how it
arrived at the amounts of US$228,200 and
P1,000,000. 62 InMetro Manila Transit Corporation v.
D.M. Consunji, 63 we reiterated that this Court is not a
trier of facts and it shall pass upon them only for
compelling reasons which unfortunately are not present
in this case. 64 Hence, we ordered the partial remand of
the case for the sole purpose of determining the amount
of actual damages. 65
ESCALATION CLAUSE
VIOLATED THE PRINCIPLE OF
MUTUALITY OF CONTRACTS
Escalation clauses are not void per se. However, one
"which grants the creditor an unbridled right to adjust
the interest independently and upwardly, completely
depriving the debtor of the right to assent to an
important modification in the agreement" is void.
Clauses of that nature violate the principle of mutuality
of contracts.66 Article 1308 67 of the Civil Code holds
that a contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one
of them. 68
For this reason, we have consistently held that a valid
escalation clause provides:
1. that the rate of interest will only be
increased if the applicable maximum
rate of interest is increased by law or by
the Monetary Board; and
2. that the stipulated rate of interest will be
reduced if the applicable maximum rate
of interest is reduced by law or by the
Monetary Board (de-escalation
clause).69
The RTC found that Equitable's promissory notes
uniformly stated:
If subject promissory note is extended, the
interest for subsequent extensions shall be at
such rate as shall be determined by the
bank. 70
Equitable dictated the interest rates if the term (or period
for repayment) of the loan was extended. Respondents
had no choice but to accept them. This was a violation
of Article 1308 of the Civil Code. Furthermore, the
assailed escalation clause did not contain the necessary
provisions for validity, that is, it neither provided that
the rate of interest would be increased only if allowed
by law or the Monetary Board, nor allowed de-
escalation. For these reasons, the escalation clause was
void.
With regard to the proper rate of interest, in New
Sampaguita Builders v. Philippine National Bank 71 we
held that, because the escalation clause was annulled,
the principal amount of the loan was subject to the
original or stipulated rate of interest. Upon maturity, the
amount due was subject to legal interest at the rate of
12% per annum. 72
Consequently, respondents should pay Equitable the
interest rates of 12.66% p.a. for their dollar-denominated
145
loans and 20% p.a. for their peso-denominated loans
from January 10, 2001 to July 9, 2001. Thereafter,
Equitable was entitled to legal interest of 12% p.a. on all
amounts due.
THERE WAS NO
EXTRAORDINARY DEFLATION
Extraordinary inflation exists when there is an unusual
decrease in the purchasing power of currency (that is,
beyond the common fluctuation in the value of
currency) and such decrease could not be reasonably
foreseen or was manifestly beyond the contemplation of
the parties at the time of the obligation. Extraordinary
deflation, on the other hand, involves an inverse
situation. 73
Article 1250 of the Civil Code provides:
Article 1250. In case an extraordinary inflation
or deflation of the currency stipulated should
intervene, the value of the currency at the time
of the establishment of the obligation shall be
the basis of payment, unless there is an
agreement to the contrary.
For extraordinary inflation (or deflation) to affect an
obligation, the following requisites must be proven:
1. that there was an official declaration of
extraordinary inflation or deflation
from the Bangko Sentral ng Pilipinas
(BSP); 74
2. that the obligation was contractual in
nature; 75 and
3. that the parties expressly agreed to consider
the effects of the extraordinary inflation
or deflation. 76
Despite the devaluation of the peso, the BSP never
declared a situation of extraordinary inflation.
Moreover, although the obligation in this instance arose
out of a contract, the parties did not agree to recognize
the effects of extraordinary inflation (or
deflation). 77 The RTC never mentioned that there was
a such stipulation either in the promissory note or loan
agreement. Therefore, respondents should pay their
dollar-denominated loans at the exchange rate fixed by
the BSP on the date of maturity. 78
THE AWARD OF MORAL AND
EXEMPLARY DAMAGES LACKED
BASIS
Moral damages are in the category of an award designed
to compensate the claimant for actual injury suffered,
not to impose a penalty to the wrongdoer. 79 To be
entitled to moral damages, a claimant must prove:
1. That he or she suffered besmirched
reputation, or physical, mental or
psychological suffering sustained by
the claimant;
2. That the defendant committed a wrongful
act or omission;
3. That the wrongful act or omission was the
proximate cause of the damages the
claimant sustained;
4. The case is predicated on any of the
instances expressed or envisioned by
Article 2219 80 and 2220 81 . 82
In culpa contractual or breach of contract, moral
damages are recoverable only if the defendant acted
fraudulently or in bad faith or in wanton disregard of his
contractual obligations. 83 The breach must be wanton,
reckless, malicious or in bad faith, and oppressive or
abusive. 84
The RTC found that respondents did not pay Equitable
the interest due on February 9, 2001 (or any month
thereafter prior to the maturity of the loan) 85 or the
amount due (principal plus interest) due on July 9,
2001. 86 Consequently, Equitable applied respondents'
deposits to their loans upon maturity.
The relationship between a bank and its depositor is that
of creditor and debtor. 87 For this reason, a bank has the
right to set-off the deposits in its hands for the payment
of a depositor's indebtedness. 88
Respondents indeed defaulted on their obligation. For
this reason, Equitable had the option to exercise its legal
right to set-off or compensation. However, the RTC
mistakenly (or, as it now appears, deliberately)
concluded that Equitable acted "fraudulently or in bad
faith or in wanton disregard" of its contractual
obligations despite the absence of proof. The undeniable
fact was that, whatever damage respondents sustained
was purely the consequence of their failure to pay
their loans. There was therefore absolutely no basis for
the award of moral damages to them.
Neither was there reason to award exemplary damages.
Since respondents were not entitled to moral damages,
neither should they be awarded exemplary
damages.89 And if respondents were not entitled to
moral and exemplary damages, neither could they be
awarded attorney's fees and litigation expenses. 90
ACCORDINGLY, the petition is hereby GRANTED.
146
The October 28, 2005 decision and February 3, 2006
resolution of the Court of Appeals in CA-G.R. SP No.
83112 are hereby REVERSED and SET ASIDE.
The March 24, 2004 omnibus order of the Regional Trial
Court, Branch 16, Cebu City in Civil Case No. CEB-
26983 is hereby ANNULLED for being rendered with
grave abuse of discretion amounting to lack or excess of
jurisdiction. All proceedings undertaken pursuant thereto
are likewise declared null and void.
The March 1, 2004 order of the Regional Trial Court,
Branch 16 of Cebu City in Civil Case No. CEB-26983 is
hereby SET ASIDE. The appeal of petitioners Equitable
PCI Bank, Aimee Yu and Bejan Lionel Apas is therefore
given due course.
The February 5, 2004 decision of the Regional Trial
Court, Branch 16 of Cebu City in Civil Case No. CEB-
26983 is accordingly SET ASIDE. New judgment is
hereby entered:
1. ordering respondents Ng Sheung Ngor,
doing business under the name and
style of "Ken Marketing," Ken
Appliance Division, Inc. and Benjamin
E. Go to pay petitioner Equitable PCI
Bank the principal amount of their
dollar- and peso-denominated loans;
2. ordering respondents Ng Sheung Ngor,
doing business under the name and
style of "Ken Marketing," Ken
Appliance Division, Inc. and Benjamin
E. Go to pay petitioner Equitable PCI
Bank interest at:
a) 12.66% p.a. with respect to their
dollar-denominated loans from
 January 10, 2001 to July 9,
2001;
b) 20% p.a. with respect to their peso-
denominated loans from
January 10, 2001 to July 9,
2001; 91
c) pursuant to our ruling in Eastern Shipping
Lines v. Court of Appeals, 92 the total
amount due on July 9, 2001
shall earn legal interest at 12%
p.a. from the time petitioner
Equitable PCI Bank demanded
payment, whether judicially or
extra-judicially; and
d) after this Decision becomes final and
executory, the applicable rate
shall be 12% p.a. until full
satisfaction;
3. all other claims and counterclaims are
dismissed.
As a starting point, the Regional Trial Court, Branch 16
of Cebu City shall compute the exact amounts due on
the respective dollar-denominated and peso-
denominated loans, as of July 9, 2001, of respondents
Ng Sheung Ngor, doing business under the name and
style of "Ken Marketing," Ken Appliance Division and
Benjamin E. Go.
SO ORDERED.
FIRST DIVISION
[G.R. No. 148325. September 3, 2007.]
REYNALDO P. FLOIRENDO,
JR., petitioner, vs. METROPOLITAN
BANK AND TRUST
COMPANY, respondent.
For our resolution is the instant Petition for Review
on Certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, as amended, assailing the Decision 1 dated
February 22, 2001 and Order 2 dated May 2, 2001
rendered by the Regional Trial Court (RTC), Branch 39,
Cagayan de Oro City in Civil Case No. 98-476, entitled,
"REYNALDO P. FLOIRENDO,
JR., plaintiff, v. METROPOLITAN BANK AND TRUST
COMPANY, ET AL., defendants."
Reynaldo P. Floirendo, Jr., petitioner, is the president
and chairman of the Board of Directors of Reymill
Realty Corporation, a domestic corporation engaged in
real estate business. On March 20, 1996, he obtained a
loan of P1,000,000.00 from the Metropolitan Bank and
Trust Company, Cagayan de Oro City Branch,
respondent, to infuse additional working capital for his
company. As security for the loan, petitioner executed a
real estate mortgage in favor of respondent bank over
his four (4) parcels of land, all situated at Barangay
Carmen, Cagayan de Oro City.
The loan was renewed for another year secured by the
same real estate mortgage. Petitioner signed a
promissory note dated March 14, 1997 fixing the rate of
interest at "15.446% per annum for the first 30 days,
subject to upward/downward adjustment every 30 days
thereafter"; and a penalty charge of 18% per
147
annum "based on any unpaid principal to be computed
from date of default until payment of the obligation."
The promissory note likewise provides that:
The rate of interest and/or bank charges herein
stipulated, during the term of this Promissory
Note, its extension, renewals or other
modifications, may be increased, decreased, or
otherwise changed from time to time by the
Bank without advance notice to me/us in the
event of changes in the interest rate prescribed
by law or the Monetary Board of the Central
Bank of the Philippines, in the rediscount rate
of member banks with the Central Bank of the
Philippines, in the interest rates on savings and
time deposits, in the interest rates on the bank's
borrowings, in the reserve requirements, or in
the overall costs of funding or money;
I/We hereby expressly consent to any extension
and/or renewal hereof in whole or in part
and/or partial payment on account which may
be requested by and/or granted to anyone of us
for the payment of this note upon payment of
the corresponding renewal or extension fee.
On July 11, 1997, respondent bank started imposing
higher interest rates on petitioner's loan which varied
through the months, in fact, as high as 30.244% in
October 1997. As a result, petitioner could no longer pay
the high interest rates charged by respondent bank. Thus,
he negotiated for the renewal of his loan. Respondent
bank agreed provided petitioner would pay the arrears in
interest amounting to the total sum of P163,138.33.
Despite payment by petitioner, respondent bank, instead
of renewing the loan, filed with the Office of the Clerk
of Court and Provincial Sheriff, RTC, Cagayan de Oro
City a petition for foreclosure of mortgage which was
granted. On August 17, 1998, the auction sale was set.
Prior thereto or on August 11, 1998, petitioner filed with
the RTC, Branch 39, same city, a complaint for
reformation of real estate mortgage contract and
promissory note, docketed as Civil Case No. 98-476.
Referring to the real estate mortgage and the promissory
note as "contracts of adhesion," petitioner alleged that
the increased interest rates unilaterally imposed by
respondent bank are scandalous, immoral, illegal and
unconscionable. He also alleged that the terms and
conditions of the real estate mortgage and the
promissory note are such that they could be interpreted
by respondent bank in whatever manner it wants,
leaving petitioner at its mercy. Petitioner thus prayed for
reformation of these documents and the issuance of a
temporary restraining order (TRO) and a writ of
preliminary injunction to enjoin the foreclosure and sale
at public auction of his four (4) parcels of land.
On August 14, 1998, the RTC issued a TRO and on
September 3, 1998, a writ of preliminary injunction.
In its answer to the complaint, respondent bank asserted
that the interest stipulated by the parties in the
promissory note is not per annum but on a month to
month basis. The 15.446% interest appearing therein
was good only for the first 30 days of the loan, subject
to upward and downward adjustment every 30 days
thereafter. The terms of the real estate mortgage and
promissory note voluntarily entered into by petitioner
are clear and unequivocal. There is, therefore, no legal
and factual basis for an action for reformation of
instruments.
On February 22, 2001, the RTC rendered a Judgment (1)
dismissing the complaint for reformation of instruments,
(2) dissolving the writ of preliminary injunction and (3)
directing the sale at public auction of petitioner's
mortgaged properties. The RTC ruled:
In order that an action for reformation of an
instrument may prosper, the following
requisites must occur:
1.) There must have been a meeting of
the minds upon the contract;
2.) The instrument or document
evidencing the contract does not
express the true agreement
between the parties; and
3.) The failure of the instrument to
express the agreement must be
due to mistake, fraud,
inequitable conduct or accident.
(National Irrigation
Administration v. Gamit, G.R.
No. 85869, November 5, 1992)
xxx xxx xxx
A perusal further of the complaint and the
evidences submitted by the parties convinced
the court that there was certainly a meeting of
the minds between the parties. Plaintiff and
defendant bank entered into a contract of loan,
the terms and conditions of which, especially
on the rates of interest, are clearly and
unequivocally spelled out in the promissory
note. The court believes that there was
absolutely no mistake, fraud or anything that
could have prevented a meeting of the minds
between the parties.
The RTC upheld the validity of the escalation clause,
thus:
148
Escalation clauses are valid stipulations in
commercial contract to maintain fiscal stability
and to retain the value of money in loan term
contracts, (Llorin v. CA, G.R. No. 103592,
February 4, 1993).
xxx xxx xxx
. . . the Court has no other alternative to resolve
Issue No. 1 that defendant bank is allowed to
impose the interest rate questioned by plaintiff
considering that Exhibit "B" and "B-1," which
is Exhibit "1" and "1-A" of defendant bank is
very clear that the rate of interest is
15.446% per annum for the first 30 days
subject to upward/downward adjustment every
30 days thereafter.
On the issue of the validity of the foreclosure of the real
estate mortgage, the RTC ruled that:
It is a settled rule that in a real estate mortgage
when the obligation is not paid when due, the
mortgagee has the right to foreclose the
mortgage and to have the property seized and
sold in view of applying the proceeds to the
payment of the obligation (Estate Investment
House v. CA, 215 SCRA 734).
On May 2, 2001, petitioner filed a motion for
reconsideration but it was denied for lack of merit.
Hence, the instant petition.
The fundamental issue for our resolution is whether the
mortgage contract and the promissory note express the
true agreement between the parties herein.
Petitioner contends that the "escalation clause" in the
promissory note imposing 15.446% interest on the loan
"for the first 30 days subject to upward/downward
adjustment every 30 days thereafter" is illegal,
excessive and arbitrary. The determination to increase or
decrease such interest rate is primarily left to the
discretion of respondent bank.
We agree.
We hold that the increases of interest rate unilaterally
imposed by respondent bank without petitioner's assent
are violative of the principle of mutuality of contracts
ordained in Article 1308 of the Civil Code 3 which
provides:
Article 1308. The contract must bind both
contracting parties; its validity or compliance
cannot be left to the will of one of them.
The binding effect of any agreement between the parties
to a contract is premised on two settled principles: (1)
that obligations arising from contracts have the force of
law between the contracting parties; and (2) that there
must be mutuality between the parties based on their
essential equality to which is repugnant to have one
party bound by the contract leaving the other free
therefrom. 4 Any contract which appears to be heavily
weighed in favor of one of the parties so as to lead to an
unconscionable result is void. Any stipulation regarding
the validity or compliance of the contract which is left
solely to the will of one of the parties is likewise
invalid. 5
The provision in the promissory note authorizing
respondent bank to increase, decrease or otherwise
change from time to time the rate of interest and/or bank
charges "without advance notice" to petitioner, "in the
event of change in the interest rate prescribed by law or
the Monetary Board of the Central Bank of the
Philippines," does not give respondent bank
unrestrained freedom to charge any rate other than that
which was agreed upon. Here, the monthly
upward/downward adjustment of interest rate is left to
the will of respondent bank alone. It violates the essence
of mutuality of the contract.
In Philippine National Bank v. Court of Appeals , 6 and in later
cases, 7 we held:
In order that obligations arising from contracts
may have the force of law between the parties,
there must be mutuality between the parties
based on their essential equality. A contract
containing a condition which makes its
fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting
parties, is void (Garcia v. Rita Legarda, Inc.,
21 SCRA 555). Hence, even assuming that the
P1.8 million loan agreement between the PNB
and the private respondent gave the PNB a
license (although in fact there was none) to
increase the interest rate at will during the term
of the loan, that license would have been null
and void for being violative of the principle of
mutuality essential in contracts. It would have
invested the loan agreement with the character
of a contract of adhesion, where the parties do
not bargain on equal footing, the weaker
party's (the debtor) participation being reduced
to the alternative "to take it or leave it" (Qua v.
Law Union & Rock Insurance Co., 95 Phil.
85). Such a contract is a veritable trap for the
weaker party whom the courts of justice must
protect against abuse and imposition.
In New Sampaguita Builders Construction, Inc. (NSBCI) v. Philippine National
Bank, 8 we ruled that while it is true that escalation
clauses are valid in maintaining fiscal stability and
149
retaining the value of money on long term contracts,
however, giving respondent an unbridled right to adjust
the interest independently and upwardly would
completely take away from petitioner the right to assent
to an important modification in their agreement, hence,
would negate the element of mutuality in their contracts.
Such escalation clause would make the fulfillment of the
contracts dependent exclusively upon the uncontrolled
will of respondent bank and is therefore void. In the
present case, the promissory note gives respondent bank
authority to increase the interest rate at will during the
term of the loan. This stipulation violates the principle
of mutuality between the parties. It would be converting
the loan agreement into a contract of adhesion where the
parties do not bargain on equal footing, the weaker
party's (petitioner's) participation being reduced to the
alternative "to take it or leave it. 9 While the Usury Law
ceiling on interest rate was lifted by Central Bank
Circular No. 905, nothing therein could possibly be read
as granting respondent bank carte blanche authority to
raise interest rate to levels which would either enslave
its borrower (petitioner herein) or lead to hemorrhaging
of his assets. 10
In Philippine National Bank v. Court of Appeals , 11 we declared void
the escalation clause in the Credit Agreement between
petitioner bank and private respondents whereby the
"Bank reserves the right to increase the interest rate
within the limit allowed by law at any time depending
on whatever policy it may adopt in the future . . ." We
held:
It is basic that there can be no contract in the
true sense in the absence of the element of
agreement, or of mutual assent of the parties. If
this assent is wanting on the part of one who
contracts, his act has no more efficacy than if it
 had been done under duress or by a person of
unsound mind.
Similarly, contract changes must be made with
the consent of the contracting parties. The
minds of all the parties must meet as to the
proposed modification, especially when it
affects an important aspect of the agreement.
In the case of loan contracts, it cannot be
gainsaid that the rate of interest is always a
vital component, for it can make or break a
capital venture. Thus, any change must
be mutually agreed upon, otherwise, it is bereft
of any binding effect.
We cannot countenance petitioner bank's
posturing that that escalation clause at bench
gives it unbridled right
to unilaterally upwardly adjust the interest on
private respondents' loan. That
would completely take away from private
respondents the right to assent to an important
modification in their agreement, and would
negate the element of mutuality in contracts.
Under Article 1310 of the Civil Code, courts are granted
authority to reduce/increase interest rates equitably,
thus:
Article 1310. The determination shall not be
obligatory if it is evidently inequitable. In such
case, the courts shall decide what is equitable
under the circumstances.
In the other Philippine National Bank v. Court of Appeals 12 case, we
disauthorized petitioner bank from unilaterally raising
the interest rate on the loan of private respondent from
18% to 32%, 41% and 48%. In Almeda v. Court of
Appeals, 13 where the interest rate was increased from
21% to as high as 68% per annum, we declared arbitrary
"the galloping increases in interest rate imposed by
respondent bank on petitioners' loan, over the latter's
vehement protests." In Medel v. Court of Appeals, 14 the
stipulated interest of 5.5% per month or 66% per
annum on a loan amounting to P500,000.00 was
equitably reduced for being iniquitous, unconscionable
and exorbitant. In Solangon v. Salazar, 15 the stipulated
interest rate of 6% per month or 72% per annum was
found to be "definitely outrageous and inordinate" and
was reduced to 12% per annum which we deemed fair
and reasonable. In Imperial v. Jaucian, 16 we ruled that
the trial court was justified in reducing the stipulated
interest rate from 16% to 1.167% or 14% per annum and
the stipulated penalty charge from 5% to 1.167% per
month or 14% per annum.
In this case, respondent bank started to increase the
agreed interest rate of 15.446% per annum to 24.5% on
July 11, 1997 and every month thereafter; 27% on
August 11, 1997; 26% on September 10, 1997; 33% on
October 15, 1997; 26.5% on November 27, 1997; 27%
on December 1997; 29% on January 13, 1998; 30.244%
on February 7, 1998; 24.49% on March 9, 1998; 22.9%
on April 18, 1998; and 18% on May 21, 1998.
Obviously, the rate increases are excessive and arbitrary.
It bears reiterating that respondent bank unilaterally
increased the interest rate without petitioner's
knowledge and consent.
As mentioned earlier, petitioner negotiated for the
renewal of his loan. As required by respondent bank, he
paid the interests due. Respondent bank then could not
claim that there was no attempt on his part to comply
with his obligation. Yet, respondent bank hastily filed a
petition to foreclose the mortgage to gain the upperhand
in taking petitioner's four (4) parcels of land at bargain
prices. Obviously, respondent bank acted in bad faith.
150
In sum, we find that the requisites for reformation of the
mortgage contract and promissory note are present in
this case. There has been meeting of minds of the parties
upon these documents. However, these documents do
not express the parties' true agreement on interest rates.
And the failure of these documents to express their
agreement on interest rates was due to respondent bank's
inequitable conduct.
WHEREFORE, we GRANT the petition. The
Judgment dated February 22, 2001 of the RTC of
Cagayan de Oro City, Branch 39 in Civil Case No. 98-
476 is REVERSED. The real estate mortgage contract
and the promissory note agreed upon by the parties are
reformed in the sense that any increase in the interest
rate beyond 15.446% per annum should not be imposed
by respondent bank without the consent of petitioner.
The interest he paid in excess of 15.446% should be
applied to the payment of the principal obligation.
SO ORDERED.
SPECIAL SECOND DIVISION
[G.R. No. 139290. May 19, 2006.]
TRADE & INVESTMENT
DEVELOPMENT CORPORATION OF
THE PHILIPPINES (Formerly Philippine
Export & Foreign Loan Guarantee
Corporation,petitioner, vs. ROBLETT
INDUSTRIAL CONSTRUCTION
CORPORATION, ROBERTO G. ABIERA
and LETICIA ABIERA, and PARAMOUNT
 INSURANCE
CORPORATION, respondents.
Under consideration are the motion for
reconsideration 1 dated 23 December 2005 and
supplemental motion for reconsideration 2 dated 23
January 2006, both filed by respondent Paramount
Insurance Corporation (Paramount) with regard to
our Decision 3 dated 11 November 2005 which disposed
of the case as follows:
WHEREFORE, premises considered, the
petition is hereby GRANTED. The Decision of
the Court of Appeals is REVERSED and the
judgment of the Regional Trial Court is
REINSTATED with the following
modifications:
a) ordering respondents Roblett, the
Abieras, and Paramount, jointly
and severally, to pay petitioner
Philguarantee the amount of
P11,775,611.25, with the
following rates of interest and
penalty charge, to wit:
i. for respondent Paramount,
eighteen percent (18%)
interest per annum from
5 June 1990 until fully
paid;
ii. for respondents Roblett and
the Abieras, sixteen
percent (16%) interest
per annum from 5 June
1990 until fully paid;
and penalty charge of
sixteen percent (16%)
per annum compounded
monthly from 5 June
1990 until fully paid;
b) ordering respondents Roblett and the
Abieras, jointly and severally, to
pay petitioner Philguarantee the
amount of P18,029,219.78 plus
12% interest thereon from the
time of finality of judgment
until fully paid;
c) ordering respondents Roblett and the
Abieras, jointly and severally, to
pay petitioner Philguarantee ten
percent (10%) of
P11,775,611.25, as attorney's
fees, plus the costs of suit;
d) ordering respondent Paramount,
jointly and severally with
respondents Roblett and the
Abieras, to pay petitioner
Philguarantee P100,000.00 as
reasonable attorney's
fees; CSDTac
e) ordering respondents Roblett and
Benlot, jointly and severally, to
reimburse respondent
Paramount whatever amount it
would pay petitioner
Philguarantee including all
interests, attorney's fees and the
costs; and
f) ordering all the respondents, jointly
and severally, and the third-
151
party defendants, also jointly
and severally, to pay petitioner
Philguarantee legal interest of
12% per annum on the
judgment awards respectively
against them from the time of
finality of judgment until fully
paid.
SO ORDERED. 4
In support of its motion for reconsideration, Paramount
submits the following grounds: (1) Paramount issued a
bidder's bond and not a performance or guarantee bond
so that when respondent Roblett Industrial Construction
Corporation (Roblett) executed the sub-contract
agreement, Paramount was released from liability
thereunder; (2) petitioner is guilty of misrepresentation
and concealment in securing Paramount's continuing
commitment to answer for Roblett's repayment scheme;
(3) petitioner and Roblett entered into a rehabilitation
program which novated the principal obligation of the
parties resulting in the discharge of Paramount; (4) the
subject surety bond expired without any claim being
made against the same; and (5) Paramount is not liable
for attorney's fees.
The supplemental motion for reconsideration essentially
reiterates the allegations and arguments found in the
motion for reconsideration with the additional
contention that the interest charge on the principal debt
is unconscionable.
We have perused the instant motions and find no new
substantial arguments to warrant the reversal or
modification of our Decision. Respondent's motion
essentially concerns issues that have been passed upon
and fully considered by the Court in the decision sought
to be reconsidered. Thus, we find no cogent reason to
depart from the ruling subject of this recourse. The only
matter left to be resolved is the validity of the interest
charge against the principal amount involved in this
case.
Under the surety bond, 5 Paramount bound itself jointly
and severally with Roblett to pay petitioner to the extent
of P11,775,611.35 for whatever damages and liabilities
the latter may suffer by virtue of its counterguarantee.
Paramount further agreed to pay petitioner interest
thereon at the rate of 18% per annum from the date of
receipt of petitioner's first demand letter up to the date
of actual payment.
In our Decision, we found that none of the parties
questioned the validity of the stipulated interest rate.
Finding the same legal, we upheld its validity. With the
suspension of the Usury Law and the removal of interest
ceiling, the parties are free to stipulate the interest to be
imposed on monetary obligations. Absent any evidence
of fraud, undue influence, or any vice of consent
exercised by one party against the other, the interest rate
agreed upon is binding upon them. 6 Nevertheless, we
ruled that Paramount's liability therefor should
commence from the date of judicial demand, or on 5
June 1990, and not from the date petitioner made a
formal notice of demand to Paramount. This is but fair
as the delay in the performance of Paramount is
attributable to the failure of petitioner to inform the
former of the developments in the negotiations with
Roblett.
Paramount argues that it is made liable for
approximately P48 million, the bulk of which is the
interest charge and not the principal amount. It then
submits that the interest is clearly iniquitous,
unconscionable and exorbitant, thus contrary to
morals, 7 citing our ruling in Medel v. Court of Appeals. 8 In the
said case, we held as void the stipulation on interest at
the rate of 5.5% per month or 66% per annum, on a
P500,000.00 loan, the same being "excessive,
iniquitous, unconscionable and exorbitant, hence,
contrary to morals ("contra bonos mores"), if not against
the law." 9
It would seem that Paramount's opposition to the interest
awarded herein does not spring from the invalidity of
the stipulated interest rate but rather on the resulting
amount of interest charge alone, which if counted from
the date of judicial demand would come to roughly P32
million which is thrice the amount of the principal debt
of P11,775,611.35. ICTDEa
While the Court recognizes the right of the parties to
enter into contracts and who are expected to comply
with their terms and obligations, this rule is not absolute.
Stipulated interest rates are illegal if they are
unconscionable 10 and the Court is allowed to temper
interest rates when necessary. 11 In exercising this
vested power to determine what is iniquitous and
unconscionable, the Court must consider the
circumstances of each case. 12 What may be iniquitous
and unconscionable in one case, may be just in another.
In a number of cases, 13 this Court equitably reduced
the interest rate agreed upon by the parties for being
iniquitous, unconscionable, and/or exhorbitant.
Notably in the case of Development Bank of the Philippines v. Court of
Appeals 14 , while this Court held that respondents were
liable for the stipulated interest rate of 18% per annum,
we equitably reduced the same to 10% per annum after
finding that the interests and penalty charges alone
exceeded the amount of the principal debt. As such, the
interests were found to be excessive. We further held
that the additional penalty charge of 8% per annum
would sufficiently cover whatever else damages
152
petitioner may have incurred such as attorney's fees and
litigation expenses.
In the instant case, the resulting interest charge has
turned out to be excessive in the context of its base
computation period, and hence, unwarranted in fact and
in operation. We are not unmindful of the length of time
this case has been pending in court for which the amount
involved has ballooned to the outrageous amount of
more than P45 million which is four times the principal
debt.
While we have sustained the validity of much higher
interest rates of 21% per annum in Bautista v. Pilar
Development Corporation 15 and 24% per annum
in Garcia v. Court of Appeals 16 as the factual
circumstances therein warrant, it is well to note that
compared to the instant case, the said cases were
litigated for a shorter period of time 12 years and 3
years, respectively. Development Bank of the
Philippines 17 was finally decided after only 10 years of
litigation. Here, the complaint was filed in the lower
court on 5 June 1990 or sixteen (16) years ago.
Consequently, the already huge principal debt swelled to
a considerably disproportionate sum. Thus, we deem an
interest rate of 12% per annum is more reasonable under
the circumstances.
WHEREFORE, premises considered, respondent
Paramount's motion for reconsideration and
supplemental motion for reconsideration are GRANTED
IN PART and our assailed Decision dated 11 November
2005 is hereby MODIFIED. The interest rate of 18% per
annum as stipulated in the surety bond is equitably
reduced to 12% per annum. The Decision is AFFIRMED
WITH FINALITY in all other respects.
SO ORDERED.

THIRD DIVISION
[G.R. No. 148753. July 30, 2004.]
NEW SAMPAGUITA BUILDERS
CONSTRUCTION, INC. (NSBCI) and
Spouses EDUARDO R. DEE and
ARCELITA M. DEE, petitioners, vs.
PHILIPPINE NATIONAL
BANK, respondent.
Courts have the authority to strike down or to modify
provisions in promissory notes that grant the lenders
unrestrained power to increase interest rates, penalties
and other charges at the latter's sole discretion and
without giving prior notice to and securing the consent
of the borrowers. This unilateral authority is anathema
to the mutuality of contracts and enable lenders to take
undue advantage of borrowers. Although the Usury Law has
been effectively repealed, courts may still reduce
iniquitous or unconscionable rates charged for the use of
money. Furthermore, excessive interests, penalties and
other charges not revealed in disclosure statements
issued by banks, even if stipulated in the promissory
notes, cannot be given effect under the Truth in Lending Act.
The Case
Before us is a Petition for Review 1 under Rule 45 of
the Rules of Court, seeking to nullify the June 20, 2001
Decision 2 of the Court of Appeals 3 (CA) in CA-GR
CV No. 55231. The decretal portion of the assailed
Decision reads as follows:
"WHEREFORE, the decision of the Regional
Trial Court of Dagupan City, Branch 40 dated
December 28, 1995 is REVERSED and SET
ASIDE. The foreclosure proceedings of the
mortgaged properties of defendants-
appellees 4 and the February 26, 1992 auction
sale are declared legal and valid and said
defendants-appellees are ordered to pay
plaintiff-appellant PNB, 5 jointly and
severally[,] the amount of deficiency that will
be computed by the trial court based on the
original penalty of 6% per annum as explicitly
stated in the loan documents and to pay
attorney's fees in an amount equivalent to . . .
1% of the total amount due and the costs of
suit and expenses of litigation." 6
The Facts
The facts are narrated by the CA as follows:
"On February 11, 1989, Board Resolution No.
05, Series of 1989 was approved by
[Petitioner] NSBCI [1)] authorizing the
company to . . . apply for or secure a
commercial loan with the PNB in an aggregate
amount of P8.0M, under such terms agreed by
the Bank and the NSBCI, using or mortgaging
the real estate properties registered in the name
of its President and Chairman of the Board
[Petitioner] Eduardo R. Dee as collateral; [and]
2) authorizing [petitioner-spouses] to secure
the loan and to sign any [and all] documents
which may be required by [Respondent]
PNB[,] and that [petitioner-spouses] shall act
as sureties or co-obligors who shall be jointly
153
and severally liable with [Petitioner] NSBCI
for the payment of any [and all] obligations.
"On August 15, 1989, Resolution No. 77 was
approved by granting the request of
[Respondent] PNB thru its Board NSBCI for
an P8 Million loan broken down into a
revolving credit line of P7.7M and an
unadvised line of P0.3M for additional
operating and working capital 7 to mobilize its
various construction projects, namely:
'1) MWSS Watermain;
2) NEA-Liberty farm;
3) Olongapo City Pag-Asa Public
Market;
4) Renovation of COA-NCR Buildings
1, 2 and 9;
5) Dupels, Inc., Extensive prawn farm
development project;
6) Banawe Hotel Phase II;
7) Clark Air Base Barracks and
Buildings; and
8) Others: EDSA Lighting, Roxas Blvd.
Painting NEA Sapang Palay and
Angeles City.'
"The loan of [Petitioner] NSBCI was secured
by a first mortgage on the following: a) three
(3) parcels of residential land located at
Mangaldan, Pangasinan with total land area of
1,214 square meters[,] including improvements
thereon and registered under TCT Nos.
128449, 126071, and 126072 of the Registry of
Deeds of Pangasinan; b) six (6) parcels of
residential land situated at San Fabian,
Pangasinan with total area of 1,767 square
meters[,] including improvements thereon and
covered by TCT Nos. 144006, 144005,
120458, 120890, 144161[,] and 121127 of the
Registry of Deeds of Pangasinan; and c) a
residential lot and improvements thereon
located at Mangaldan, Pangasinan with an area
of 4,437 square meters and covered by
TCT No. 140378 of the Registry of Deeds of
Pangasinan.
"The loan was further secured by the joint and
several signatures of [Petitioners] Eduardo Dee
and Arcelita Marquez Dee, who signed as
accommodation-mortgagors since all the
collaterals were owned by them and registered
in their names.
"Moreover [Petitioner] NSBCI executed the
following documents, viz: a) promissory note
dated June 29, 1989 in the amount of
P5,000,000.00 with due date on October 27,
1989; [b)] promissory note dated September 1,
1989 in the amount of P2,700,000.00 with due
date on December 30, 1989; and c) promissory
note dated September 6, 1989 in the amount of
P300,000.00 with maturity date on January 4,
1990.
"In addition, [petitioner] corporation also
signed the Credit Agreement dated August 31,
1989 relating to the 'revolving credit line' of
P7.7 Million . . . and the Credit Agreement
dated September 5, 1989 to support the
'unadvised line' of P300,000.00.
"On August 31, 1989, [petitioner-spouses]
executed a 'Joint and Solidary Agreement'
(JSA) in favor of [Respondent] PNB
'unconditionally and irrevocably binding
themselves to be jointly and severally liable
with the borrower for the payment of all sums
due and payable to the Bank under the Credit
Document.'
"Later on, [Petitioner] NSBCI failed to comply
with its obligations under the promissory
notes.
"On June 18, 1991, [Petitioner] Eduardo R.
Dee on behalf of [Petitioner] NSBCI sent a
letter to the Branch Manager of the PNB
Dagupan Branch requesting for a 90-day
extension for the payment of interests and
restructuring of its loan for another term.
"Subsequently, NSBCI tendered payment to
[Respondent] PNB [of] three (3) checks
aggregating P1,000,000.00, namely 1)
check no. 316004 dated August 8, 1991 in the
amount of P200,000.00; 2) check no.
03499997 dated August 8, 1991 in the amount
of P650,000.00; and 3) check no. 03499998
dated August 15, 1991 in the amount of
P150,000.00. 8
"In a meeting held on August 12, 1991,
[Respondent] PNB's representative[,] Mr.
Rolly Cruzabra, was informed by [Petitioner]
Eduardo Dee of his intention to remit to
[Respondent] PNB post-dated checks covering
interests, penalties and part of the loan
principals of his due account.
"On August 22, 1991, [Respondent] bank's
Crispin Carcamo wrote [Petitioner] Eduardo
Dee[,] informing him that [Petitioner] NSBCI's
154
proposal [was] acceptable[,] provided the total
payment should be P4,128,968.29 that [would]
cover the amount of P1,019,231.33 as
principal, P3,056,058.03 as interests and
penalties[,] and P53,678.93 for insurance[,]
with the issuance of post-dated checks to be
dated not later than November 29, 1991.
"On September 6, 1991, [Petitioner] Eduardo
Dee wrote the PNB Branch Manager
reiterating his proposals for the settlement of
[Petitioner] NSBCI's past due loan account
amounting to P7,019,231.33.
"[Petitioner] Eduardo Dee later tendered four
(4) post-dated Interbank checks aggregating
P1,111,306.67 in favor of [Respondent]
PNB, viz:
'Check No. Date Amount
03500087 Sept. 29, 1991 P277,826.70
03500088 Oct. 29, 1991 P277,826.70
03500089 Nov. 29, 1991 P277,826.70
03500090 Dec. 20, 1991 P277,826.57'
"Upon presentment[,] however, . . . check nos.
03500087 and 03500088 dated September 29
and October 29, 1991 were dishonored by the
drawee bank and returned due [to] a 'stop
payment' order from [petitioners].
"On November 12, 1991, PNB's Mr. Carcamo
wrote [Petitioner] Eduardo Dee informing him
that unless the dishonored checks [were] made
good, said PNB branch 'shall recall its
recommendation to the Head Office for the
restructuring of the loan account and refer the
matter to its legal counsel for legal action.[']
[Petitioners] did not heed [respondent's]
warning and as a result[,] the PNB Dagupan
Branch sent demand letters to [Petitioner]
NSBCI at its office address at 1611 ERDC
Building, E. Rodriguez Sr. Avenue, Quezon
City[,] asking it to settle its past due loan
account.
"[Petitioners] nevertheless failed to pay their
loan obligations within the [timeframe] given
them and as a result, [Respondent] PNB filed
with the Provincial Sheriff of Pangasinan at
Lingayen a Petition for Sale under Act 3135, as
amended[,] and Presidential DecreeNo. 385 dated
January 30, 1992.
"The notice of extra-judicial sale of the
mortgaged properties relating to said PNB's
[P]etition for [S]ale was published in the
February 8, 15 and 22, 1992 issues of the
Weekly Guardian, allegedly a newspaper of
general circulation in the Province of
Pangasinan, including the cities of Dagupan
and San Carlos. In addition[,] copies of the
notice were posted in three (3) public places[,]
and copies thereof furnished [Petitioner]
NSBCI at 1611 [ERDC Building,] E.
Rodriguez Sr. Avenue, Quezon City, [and at]
555 Shaw Blvd., Mandaluyong[, Metro
Manila;] and [Petitioner] Sps. Eduardo and
Arcelita Dee at 213 Wilson St., San Juan,
Metro Manila.
"On February 26, 1992, the Provincial Deputy
Sheriff Cresencio F. Ferrer of Lingayen,
Pangasinan foreclosed the real estate mortgage
and sold at public auction the mortgaged
properties of [petitioner-spouses,] with
[Respondent] PNB being declared the highest
bidder for the amount of P10,334,000.00.
"On March 2, 1992, copies of the Sheriff's
Certificate of Sale were sent by registered mail
to [petitioner] corporation's address at 1611
[ERDC Building,] E. Rodriguez Sr. Avenue,
Quezon City and [petitioner-spouses'] address
at 213 Wilson St., San Juan, Metro Manila.
"On April 6, 1992, the PNB Dagupan Branch
Manager sent a letter to [petitioners] at their
address at 1611 [ERDC Building,] E.
Rodriguez Sr. Avenue, Quezon City[,]
informing them that the properties securing
their loan account [had] been sold at public
auction, that the Sheriff's Certificate of Sale
had been registered with the Registry of Deeds
of Pangasinan on March 13, 1992[,] and that a
period of one (1) year therefrom [was] granted
to them within which to redeem their
properties.
"[Petitioners] failed to redeem their properties
within the one-year redemption period[,] and
so [Respondent] PNB executed a [D]eed of
[A]bsolute [S]ale consolidating title to the
properties in its name. TCT Nos. 189935 to
189944 were later issued to [Petitioner] PNB
by the Registry of Deeds of Pangasinan.
"On August 4, 1992, [Respondent] PNB
informed [Petitioner] NSBCI that the proceeds
of the sale conducted on February 26, 1992
were not sufficient to cover its total claim
155
amounting to P12,506,476.43[,] and thus
demanded from the latter the deficiency of
P2,172,476.43 plus interest and other
charges[,] until the amount [was] fully paid.
"[Petitioners] refused to pay the above
deficiency claim which compelled
[Respondent] PNB to institute the instant
[C]omplaint for the collection of its deficiency
claim.
"Finding that the PNB debt relief package
automatically [granted] to [Petitioner] NSBCI
the benefits under the program, the court a
quo ruled in favor of [petitioners] in its
Decision dated December 28, 1995, the fallo of
which reads:
'In view of the foregoing, the Court
believes and so holds that the
[respondent] has no cause of action
against the [petitioners].
'WHEREFORE, the case is hereby
DISMISSED, without costs.'" 9
On appeal, respondent assailed the trial court's Decision
dismissing its deficiency claim on the mortgage debt. It
also challenged the ruling of the lower court that
Petitioner NSBCI's loan account was bloated, and that
the inadequacy of the bid price was sufficient to set
aside the auction sale.
Ruling of the Court of Appeals
Reversing the trial court, the CA held that Petitioner
NSBCI did not avail itself of respondent's debt relief
package (DRP) or take steps to comply with the
conditions for qualifying under the program. The
appellate court also ruled that entitlement to the program
was not a matter of right, because such entitlement was
still subject to the approval of higher bank authorities,
based on their assessment of the borrower's repayment
capability and satisfaction of other requirements.
As to the misapplication of loan payments, the CA held
that the subsidiary ledgers of NSBCI's loan accounts
with respondent reflected all the loan proceeds as well
as the partial payments that had been applied either to
the principal or to the interests, penalties and other
charges. Having been made in the ordinary and usual
course of the banking business of respondent, its entries
were presumed accurate, regular and fair under Section
5(q) of Rule 131 of the Rules of Court. Petitioners failed
to rebut this presumption.
The increases in the interest rates on NSBCI's loan were
also held to be authorized by law and the Monetary
Board and like the increases in penalty rates
voluntarily and freely agreed upon by the parties in the
Credit Agreements they executed. Thus, these increases
were binding upon petitioners.
However, after considering that two to three of
Petitioner NSBCI's projects covered by the loan were
affected by the economic slowdown in the areas near the
military bases in the cities of Angeles and Olongapo, the
appellate court annulled and deleted the adjustment in
penalty from 6 percent to 36 percent per annum. Not
only did respondent fail to demonstrate the existence of
market forces and economic conditions that would
justify such increases; it could also have treated
petitioners' request for restructuring as a request for
availment of the DRP. Consequently, the original
penalty rate of 6 percent per annum was used to
compute the deficiency claim.
The auction sale could not be set aside on the basis of
the inadequacy of the auction price, because in sales
made at public auction, the owner is given the right to
redeem the mortgaged properties; the lower the bid
price, the easier it is to effect redemption or to sell such
right. The bid price of P10,334,000.00 vis--vis
respondent's claim of P12,506,476.43 was found to be
neither shocking nor unconscionable.
The attorney's fees were also reduced by the appellate
court from 10 percent to 1 percent of the total
indebtedness. First, there was no extreme difficulty in
an extrajudicial foreclosure of a real estate mortgage, as
this proceeding was merely administrative in nature and
did not involve a court litigation contesting the
proceedings prior to the auction sale. Second, the
attorney's fees were exclusive of all stipulated costs and
fees. Third, such fees were in the nature of liquidated
damages that did not inure to respondent's salaried
counsel.
Respondent was also declared to have the unquestioned
right to foreclose the Real Estate Mortgage. It was
allowed to recover any deficiency in the mortgage
account not realized in the foreclosure sale, since
petitioner-spouses had agreed to be solidarily liable for
all sums due and payable to respondent.
Finally, the appellate court concluded that the
extrajudicial foreclosure proceedings and auction sale
were valid for the following reasons: (1) personal notice
to the mortgagors, although unnecessary, was actually
made; (2) the notice of extrajudicial sale was duly
published and posted; (3) the extrajudicial sale was
conducted through the deputy sheriff, under the
direction of the clerk of court who was concurrently the
ex-oficio provincial sheriff and acting as agent of
respondent; (4) the sale was conducted within the
province where the mortgaged properties were located;
156
and (5) such sale was not shown to have been attended
by fraud.
Hence this Petition. 10
Issues
Petitioners submit the following issues for our
consideration:
"I
Whether or not the Honorable Court of
Appeals correctly ruled that petitioners did not
avail of PNB's debt relief package and were
not entitled thereto as a matter of right.
"II
Whether or not petitioners have adduced
sufficient and convincing evidence to
overthrow the presumption of regularity and
correctness of the PNB entries in the subsidiary
ledgers of the loan accounts of petitioners.
"III
Whether or not the Honorable Court of
Appeals seriously erred in not holding that the
Respondent PNB bloated the loan account of
petitioner corporation by imposing interests,
penalties and attorney's fees without legal,
valid and equitable justification.
"IV
Whether or not the auction price at which the
mortgaged properties was sold was
disproportionate to their actual fair mortgage
value.
"V
Whether or not Respondent PNB is not entitled
to recover the deficiency in the mortgage
account not realized in the foreclosure sale,
considering that:
A. Petitioners are merely guarantors of
the mortgage debt of petitioner
corporation which has a
separate personality from the
[petitioner-spouses].
B. The joint and solidary agreement
executed by [petitioner-spouses]
are contracts of adhesion not
binding on them;
C. The NSBCI Board Resolution is not
valid and binding on [petitioner-
spouses] because they were
compelled to execute the said
Resolution[;] otherwise[,]
Respondent PNB would not
grant petitioner corporation the
loan;
D. The Respondent PNB had already in
its possession the properties of
the [petitioner-spouses] which
served as a collateral to the loan
obligation of petitioner
corporation[,] and to still allow
Respondent PNB to recover the
deficiency claim amounting to a
very substantial amount of P2.1
million would constitute unjust
enrichment on the part of
Respondent PNB.
"VI
Whether or not the extrajudicial foreclosure the interest of justice and in the exercise of our sound
proceedings and auction sale, including all discretion. 19
subsequent proceedings[,] are null and void for
Indeed, Petitioner NSBCI's loan accounts with
non-compliance with jurisdictional and other
respondent appear to be bloated with some iniquitous
mandatory requirements; whether or not the
imposition of interests, penalties, other charges and
petition for extrajudicial foreclosure of
attorney's fees. To demonstrate this point, the Court shall
mortgage was filed prematurely; and whether
take up one by one the promissory notes, the credit
or not the finding of fraud by the trial court is
agreements and the disclosure statements.
amply supported by the evidence on
record." 11 Increases in Interest Baseless
Promissory Notes. In each drawdown, the Promissory
The foregoing may be summed up into two main
Notes specified the interest rate to be charged: 19.5
issues: first, whether the loan accounts are bloated;
percent in the first, and 21.5 percent in the second and
and second, whether the extrajudicial foreclosure and
again in the third. However, a uniform clause therein
subsequent claim for deficiency are valid and proper.
permitted respondent to increase the rate "within the
The Court's Ruling limits allowed by law at any time depending on
The Petition is partly meritorious. whatever policy it may adopt in the
future . . .," 20 without even giving prior notice to
First Main Issue:
petitioners. The Court holds that petitioners' accessory
Bloated Loan Accounts duty to pay interest 21 did not give respondent
At the outset, it must be stressed that only questions of unrestrained freedom to charge any rate other than that
law 12 may be raised in a petition for review which was agreed upon. No interest shall be due, unless
on certiorari under Rule 45 of the Rules of Court. As a expressly stipulated in writing. 22 It would be the zenith
of farcicality to specify and agree upon rates that could
rule, questions of fact cannot be the subject of this mode
be subsequently upgraded at whim by only one party to
of appeal, 13 for "[t]he Supreme Court is not a trier of
the agreement.
facts." 14 As exceptions to this rule, however, factual
findings of the CA may be reviewed on
appeal 15 when, inter alia, the factual inferences are
The "unilateral determination and imposition" 23 of
manifestly mistaken; 16 the judgment is based on a
increased rates is "violative of the principle of mutuality
misapprehension of facts; 17 or the CA manifestly
of contracts ordained in Article 1308 24 of the Civil
overlooked certain relevant and undisputed facts that, if
Code." 25One-sided impositions do not have the force
properly considered, would justify a different legal
of law between the parties, because such impositions are
conclusion. 18 In the present case, these exceptions exist
not based on the parties' essential equality.
in various instances, thus prompting us to take
cognizance of factual issues and to decide upon them in Although escalation clauses 26 are valid in maintaining
fiscal stability and retaining the value of money on long-
157
term contracts, 27 giving respondent an unbridled right
to adjust the interest independently and upwardly would
completely take away from petitioners the "right to
assent to an important modification in their
agreement" 28and would also negate the element of
mutuality in their contracts. The clause cited earlier
made the fulfillment of the contracts "dependent
exclusively upon the uncontrolled will" 29 of respondent
and was therefore void. Besides, the pro
forma promissory notes have the character of a contract
d'adhsion, 30 "where the parties do not bargain on
equal footing, the weaker party's [the debtor's]
participation being reduced to the alternative 'to take it
or leave it.'" 31
"While the Usury Law 32 ceiling on interest rates was lifted
by [Central Bank] Circular No. 905, 33 nothing in the
said Circular grants lenders carte blanche authority to
raise interest rates to levels which will either enslave
their borrowers or lead to a hemorrhaging of their
assets." 34 In fact, we have declared nearly ten years
ago that neither this Circular nor PD 1684, which further
amended the Usury Law, "authorized either party to
unilaterally raise the interest rate without the other's
consent." 35
Moreover, a similar case eight years ago pointed out to
the same respondent (PNB) that borrowing signified a
capital transfusion from lending institutions to
businesses and industries and was done for the purpose
of stimulating their growth; yet respondent's continued
"unilateral and lopsided policy" 36 of increasing interest
rates "without the prior assent" 37 of the borrower not
only defeats this purpose, but also deviates from this
pronouncement. Although such increases are not
usurious, since the "Usury Law is now legally
inexistent" 38 the interest ranging from 26 percent to
35 percent in the statements of account 39 "must be
equitably reduced for being iniquitous, unconscionable
and exorbitant." 40 Rates found to be iniquitous or
unconscionable are void, as if it there were no express
contract thereon. 41 Above all, it is undoubtedly against
public policy to charge excessively for the use of
money. 42
It cannot be argued that assent to the increases can be
implied either from the June 18, 1991 request of
petitioners for loan restructuring or from their lack of
response to the statements of account sent by
respondent. Such request does not indicate any
agreement to an interest increase; there can
be no implied waiver of a right when there is no clear,
unequivocal and decisive act showing such
purpose. 43 Besides, the statements were not letters of
information sent to secure their conformity; and even if
we were to presume these as an offer, there
was no acceptance. No one receiving a proposal to
modify a loan contract, especially interest a vital
component is "obliged to answer the proposal." 44
Furthermore, respondent did not follow the stipulation
in the Promissory Notes providing for the automatic
conversion of the portion that remained unpaid after 730
days or two years from date of original release
into a medium-term loan, subject to the applicable
interest rate to be applied from the dates of original
release. 45
In the first, 46 second 47 and third 48 Promissory Notes,
the amount that remained unpaid as of October 27,
1989, December 1989 and January 4, 1990 their
respective due dates should have been automatically
converted by respondent into medium-term loans on
June 30, 1991, September 2, 1991, and September 7,
1991, respectively. And on this unpaid amount should
have been imposed the same interest rate charged by
158
respondent on other medium-term loans; and the rate
applied from June 29, 1989, September 1, 1989 and
September 6, 1989 their respective original release
until paid. But these steps were not taken. Aside from
sending demand letters, respondent did not at all
exercise its option to enforce collection as of these
Notes' due dates. Neither did it renew or extend the
account. cSCTID
In these three Promissory Notes, evidently, no complaint
for collection was filed with the courts. It was not until
January 30, 1992 that a Petition for Sale of the
mortgaged properties was filed with the provincial
sheriff, instead. 49 Moreover, respondent did not supply
the interest rate to be charged on medium-term loans
granted by automatic conversion. Because of this
deficiency, we shall use the legal rate of 12 percent per
annum on loans and forbearance of money, as provided
for by CB Circular 416. 50
Credit Agreements. Aside from the promissory notes,
another main document involved in the principal
obligation is the set of credit agreements executed and
their annexes.
The first Credit Agreement 51 dated June 19, 1989
although offered and admitted in evidence, and even
referred to in the first Promissory Note cannot be
given weight.
First, it was not signed by respondent through its branch
manager. 52 Apparently it was surreptitiously
acknowledged before respondent's counsel, who
unflinchingly declared that it had been signed by the
parties on every page, although respondent's signature
does not appear thereon. 53
Second, it was objected to by petitioners, 54 contrary to
the trial court's findings. 55 However, it was not the
Agreement, but the revolving credit line 56 of
P5,000,000, that expired one year from the Agreement's
date of implementation. 57
Third, there was no attached annex that contained the
General Conditions. 58 Even the Acknowledgment did
not allude to its existence. 59 Thus, no terms or
conditions could be added to the Agreement other than
those already stated therein.
Since the first Credit Agreement cannot be given weight,
the interest rate on the first availment pegged at 3
percent over and above respondent's prime rate 60 on
the date of such availment 61 has no bearing at all on
the loan. After the first Note's due date, the rate of 19
percent agreed upon should continue to be applied on
the availment, until its automatic conversion to a
medium-term loan.
The second Credit Agreement 62 dated August 31, 1989,
provided for interest respondent's prime rate, plus the
applicable spread 63 in effect as of the date of each
availment, 64 on a revolving credit line of
P7,700,000 65 but did not state any provision on its
increase or decrease. 66 Consequently, petitioners could
not be made to bear interest more than such prime rate
plus spread. The Court gives weight to this second
Credit Agreement for the following reasons.
First, this document submitted by respondent was
admitted by petitioners. 67 Again, contrary to their
assertion, it was not the Agreement but the credit line
that expired one year from the Agreement's date of
implementation. 68 Thus, the terms and conditions
continued to apply, even if drawdowns could no longer
be made.
Second, there was no 7-page annex 69 offered in
evidence that contained the General
Conditions, 70 notwithstanding the Acknowledgment of Second, there was again no 7-page annex 79 offered that
its existence by respondent's counsel. Thus, no terms or contained the General Conditions, 80 regardless of the
conditions could be appended to the Agreement other Acknowledgment by the same respondent's counsel
than those specified therein. affirming its existence. Thus, the terms and conditions in
this Agreement relating to interest cannot be expanded
Third, the 12-page General Conditions 71 offered and
beyond that which was already laid down by the parties.
admitted in evidence had no probative value. There
was no reference to it in the Acknowledgment of the Disclosure Statements. In the present case, the
Agreement; neither was respondent's signature on any of Disclosure Statements 81 furnished by respondent set
the pages thereof. Thus, the General Conditions' forth the same interest rates as those respectively
stipulations on interest adjustment, 72 whether on a indicated in the Promissory Notes. Although no method
fixed or a floating scheme, had no effect whatsoever on of computation was provided showing how such rates
the Agreement. Contrary to the trial court's were arrived at, we will nevertheless take up the
findings, 73 the General Condition were correctly Statements seriatim in order to determine the applicable
objected to by petitioners.74 The rate of 21.5 percent rates clearly.
agreed upon in the second Note thus continued to apply
to the second availment, until its automatic conversion
into a medium-term loan. As to the first Disclosure Statement on Loan/Credit
Transaction 82 dated June 13, 1989, we hold that the
The third Credit Agreement 75 dated September 5, 1989,
19.5 percent effective interest rate per annum 83 would
provided for the same rate of interest as that in the
indeed apply to the first availment or drawdown
second Agreement. This rate was to be applied to
evidenced by the first Promissory Note. Not only was
availments of an unadvised line of P300,000. Since
this Statement issued prior to the consummation of such
there was no mention in the third Agreement, either, of
availment or drawdown, but the rate shown therein can
any stipulation on increases or decreases 76 in interest,
also be considered equivalent to 3 percent over and
there would be no basis for imposing amounts higher
above respondent's prime rate in effect. Besides,
than the prime rate plus spread. Again, the 21.5 percent
respondent mentioned no other rate that it considered to
rate agreed upon would continue to apply to the third
be the prime rate chargeable to petitioners. Even if we
availment indicated in the third Note, until such amount
disregarded the related Credit Agreement, we assume
was automatically converted into a medium-term loan.
that this private transaction between the parties was fair
The Court also finds that, first, although this document and regular, 84 and that the ordinary course of business
was admitted by petitioners, 77 it was the credit line that was followed. 85
expired one year from the implementation of the
As to the second Disclosure Statement on Loan/Credit
Agreement. 78 The terms and conditions therein
Transaction 86 dated September 2, 1989, we hold that
continued to apply, even if availments could no longer
the 21.5 percent effective interest rate per
be drawn after expiry.
annum 87 would definitely apply to the second
availment or drawdown evidenced by the second
159
Promissory Note. Incidentally, this Statement was issued
only after the consummation of its related availment or
drawdown, yet such rate can be deemed equivalent to
the prime rate plus spread, as stipulated in the
corresponding Credit Agreement. Again, we presume
that this private transaction was fair and regular, and that
the ordinary course of business was followed. That the
related Promissory Note was pre-signed would also
bolster petitioners' claim although, under cross-
examination Efren Pozon Assistant Department
Manager I 88 of PNB, Dagupan Branch testified that
the Disclosure Statements were the basis for preparing
the Notes. 89
As to the third Disclosure Statement on Loan/Credit
Transaction 90 dated September 6, 1989, we hold that
the same 21.5 percent effective interest rate per
annum 91would apply to the third availment or
drawdown evidenced by the third Promissory Note. This
Statement was made available to petitioner-spouses,
only after the related Credit Agreement had been
executed, but simultaneously with the consummation of
the Statement's related availment or drawdown.
Nonetheless, the rate herein should still be regarded as
equivalent to the prime rate plus spread, under the
similar presumption that this private transaction was fair
and regular and that the ordinary course of business was
followed.
In sum, the three disclosure statements, as well as the
two credit agreements considered by this Court, did not
provide for any increase in the specified interest rates.
Thus, none would now be permitted. When cross-
examined, Julia Ang-Lopez, Finance Account Analyst II
of PNB, Dagupan Branch, even testified that the bases
for computing such rates were those sent by the head
office from time to time, and not those indicated in the
notes or disclosure statements. 92
In addition to the preceding discussion, it is then useless
to belabor the point that the increase in rates violates the
impairment 93 clause of the Constitution, 94 because the sole
purpose of this provision is to safeguard the integrity of
valid contractual agreements against unwarranted
interference by the State 95 in the form of laws. Private
individuals' intrusions on interest rates is governed by
statutory enactments like the Civil Code.
Penalty, or Increases
Thereof, Unjustified
No penalty charges or increases thereof appear either in
the Disclosure Statements 96 or in any of the clauses in
the second and the third Credit Agreements 97 earlier
discussed. While a standard penalty charge of 6 percent
per annum has been imposed on the amounts stated in
all three Promissory Notes still remaining unpaid or
unrenewed when they fell due, 98 there is no stipulation
therein that would justify any increase in that charges.
The effect, therefore, when the borrower is not clearly
informed of the Disclosure Statements prior to the
consummation of the availment or drawdown is that
the lender will have no right to collect upon such
charge 99or increases thereof, even if stipulated in the
Notes. The time is now ripe to give teeth to the often
ignored forty-one-year old "Truth in Lending Act" 100 and thus
transform it from a snivelling paper tiger to a growling
financial watchdog of hapless borrowers.
Besides, we have earlier said that the Notes are contracts
of adhesion; although not invalid per se, any apparent
ambiguity in the loan contracts taken as a whole
shall be strictly construed against respondent who
caused it. 101 Worse, in the statements of account, the
penalty rate has again been unilaterally increased by
respondent to 36 percent without petitioners' consent. As
a result of its move, such liquidated damages intended
160
as a penalty shall be equitably reduced by the Court to
zilch 102 for being iniquitous or unconscionable. 103
Although the first Disclosure Statement was furnished
Petitioner NSBCI prior to the execution of the
transaction, it is not a contract that can be modified by
the related Promissory Note, but a mere statement in
writing that reflects the true and effective cost of loans
from respondent. Novation can never be
presumed, 104 and theanimus novandi "must appear by
express agreement of the parties, or by their acts that are
too clear and unequivocal to be mistaken." 105 To allow
novation will surely flout the "policy of the State to
protect its citizens from a lack of awareness of the true
cost of credit." 106
With greater reason should such penalty charges be
indicated in the second and third Disclosure Statements,
yet none can be found therein. While the charges are
issued after the respective availment or drawdown, the
disclosure statements are given simultaneously
therewith. Obviously, novation still does not apply.
Other Charges Unwarranted
In like manner, the other charges imposed by respondent
are not warranted. No particular values or rates of
service charge are indicated in the Promissory Notes or
Credit Agreements, and no total value or even the
breakdown figures of such non-finance charge are
specified in the Disclosure Statements. Moreover, the
provision in the Mortgage that requires the payment of
insurance and other charges is neither made part of nor
reflected in such Notes, Agreements, or Statements. 107
Attorney's Fees Equitably Reduced
We affirm the equitable reduction in attorney's
fees. 108 These are not an integral part of the cost of
borrowing, but arise only when collecting upon the
Notes becomes necessary. The purpose of these fees is
not to give respondent a larger compensation for the
loan than the law already allows, but to protect it against
any future loss or damage by being compelled to retain
counsel in-house or not to institute judicial
proceedings for the collection of its credit. 109 Courts
have has the power 110 to determine their
reasonableness 111 based on quantum meruit 112 and to
reduce 113 the amount thereof if excessive. 114
In addition, the disqualification argument in the
Affidavit of Publication raised by petitioners no longer
holds water, inasmuch as Act 496 115 has repealed the
Spanish Notarial Law. 116 In the same vein, their
engagement of their counsel in another capacity
concurrent with the practice of law is not prohibited, so
long as the roles being assumed by such counsel is made
clear to the client. 117 The only reason for this
clarification requirement is that certain ethical
considerations operative in one profession may not be so
in the other. 118
Debt Relief Package
Not Availed Of
We also affirm the CA's disquisition on the debt relief
package (DRP).
Respondent's Circular is not an outright grant of
assistance or extension of payment, 119 but a mere offer
subject to specific terms and conditions.
Petitioner NSBCI failed to establish satisfactorily that it
had been seriously and directly affected by the economic
slowdown in the peripheral areas of the then US military
bases. Its allegations, devoid of any verification, cannot
lead to a supportable conclusion. In fact, for short-term
loans, there is still a need to conduct a thorough review
of the borrower's repayment possibilities. 120
Neither has Petitioner NSBCI shown enough margin of
equity, 121 based on the latest loan value of hard
collaterals, 122 to be eligible for the package. Additional
accommodations on an unsecured basis may be granted
only when regular payment amortizations have been
established, or when the merits of the credit application
would so justify. 123
The branch manager's recommendation to restructure or
extend a total outstanding loan not exceeding
P8,000,000 is not final, but subject to the approval of
respondent's Branches Department Credit Committee,
chaired by its executive vice-president. 124 Aside from
being further conditioned on other pertinent policies of
respondent, 125 such approval nevertheless needs to be
reported to its Board of Directors for
confirmation. 126 In fact, under the General Banking Law of
2000, 127 banks shall grant loans and other credit
accommodations only in amounts and for periods of
time essential to the effective completion of operations
to be financed, "consistent with safe and sound banking
practices." 128 The Monetary Board then and now
still prescribes, by regulation, the conditions and
limitations under which banks may grant extensions or
renewals of their loans and other credit
accommodations. 129
Entries in Subsidiary Ledgers
Regular and Correct
Contrary to petitioners' assertions, the subsidiary ledgers
of respondent properly reflected all entries pertaining to
Petitioner NSBCI's loan accounts. In accordance with
the Generally Accepted Accounting Principles (GAAP)
for the Banking Industry, 130 all interests accrued or
earned on such loans, except those that were
restructured and non-accruing, 131 have been
periodically taken into income. 132 Without a doubt, the
subsidiary ledgers in a manual accounting system are
161
mere private documents 133that support and are
controlled by the general ledger. 134 Such ledgers are
neither foolproof nor standard in format, but are
periodically subject to audit. Besides, we go by the
presumption that the recording of private transactions
has been fair and regular, and that the ordinary course of
business has been followed.
Second Main Issue:
Extrajudicial Foreclosure Valid, But
Deficiency Claims Excessive
Respondent aptly exercised its option to "foreclose the
mortgage," 135 after petitioners had failed to pay all the
Notes in full when they fell due. 136 The extrajudicial
sale and subsequent proceedings are therefore valid, but
the alleged deficiency claim cannot be recovered.
Auction Price Adequate
In the accessory contract 137 of real mortgage, 138 in
which immovable property or real rights thereto are used
as security 139 for the fulfillment of the principal loan
obligation, 140 the bid price may be lower than the
property's fair market value. 141 In fact, the loan value
itself is only 70 percent of the appraised value. 142 As
correctly emphasized by the appellate court, a low bid
price will make it easier 143 for the owner to effect
redemption 144 by subsequently reacquiring the
property or by selling the right to redeem and thus
recover alleged losses. Besides, the public auction sale
has been regularly and fairly conducted, 145 there has
been ample authority to effect the sale, 146 and the
Certificates of Title can be relied upon. No personal
notice 147 is even required, 148 because an extrajudicial
foreclosure is an action in rem, requiring only notice by
publication and posting, in order to bind parties bid price. On the basis of these rates and the comparison Interest at 19.5% p.a.
interested in the foreclosed property. 149 made, the deficiency claim receivable amounting to
1/6/90-3/30/90 ([5,000,000-356,821.30]
P2,172,476.43 in fact vanishes. Instead, there is an
As no redemption 150 was exercised within one year x 19.5% x [84/365]) 208,370.59 208,370.59
overpayment by more than P3 million, as shown in the
after the date of registration of the Certificate of Sale
following Schedules:
with the Registry of Deeds, 151 respondent being the
highest bidder has the right to a writ of possession, SCHEDULE 1: PN (1) drawdown amount on Amount due as of 3/30/90 4,851,549.29
the final process that will consummate the extrajudicial 6/29/89 P5,000,000.00
foreclosure. On the other hand, petitioner-spouses, who Less: Payment on 3/30/90 (pro-rated upon
Less: Interest deducted in advance interest) 163,182.85 163,182.85
are mortgagors herein, shall lose all their rights to the
(per 6/13/89 Disclosure Statement) 305,165.00
property. 152

No Deficiency Claim Receivable Balance 45,187.75 4,688,366.44
After the foreclosure and sale of the mortgaged property, Net proceeds 4,694,835.00
Add:
the Real Estate Mortgage is extinguished. Although the =========
mortgagors, being third persons, are not liable for any Interest at 19.5% p.a.
deficiency in the absence of a contrary Principal 5,000,000.00
3/31/90-5/31/90 ([5,000,000-356,821.30]
stipulation, 153 the action for recovery of such amount Add: x 19.5% x [62/365]) 153,797.34 153,797.34
being clearly sureties to the principal obligation
may still be directed against them. 154 However, Interest at 19.5% p.a.
respondent may impose only the stipulated interest rates
10/28/89-12/31/89 (5,000,000 x Amount due as of 5/31/90 198,985.09 4,842,163.79
of 19.5 percent and 21.5 percent on the respective
19.5% x [65/365]) 173,630.14
availments subject to the 12 percent legal rate Less: Payment on 5/31/90 (pro-rated upon
revision upon automatic conversion into medium-term 1/1/90-1/5/90 (5,000,000 x interest) 199,806.42 199,806.42
loans plus 1 percent attorney's fees, without 19.5% x [5/365]) 13,356.16 186,986.30 186,986.30
additional charges on penalty, insurance or any increases

thereof. Balance (821.33) 4,642,357.36
Amount due as of 1/5/90 5,186,986.30
Accordingly, the excessive interest rates in the =========
Statements of Account sent to petitioners are reduced to Less: Payment on 1/5/90 (pro-rated upon
19.5 percent and 21.5 percent, as stipulated in the interest) 543,807.61 543,807.61 Add:
Promissory Notes; upon loan conversion, these rates are Interest at 19.5% p.a.
further reduced to the legal rate of 12 percent. Payments
made by petitioners are pro-rated, the charges on penalty Balance (356,821.30) 4,643,178.70 6/1/90-6/29/90 ([5,000,000-(356,821.30+
and insurance eliminated, and the resulting total unpaid 821.33)] x 19.5% x [29/365]) 71,924.74 71,924.74
principal and interest of P6,582,077.70 as of the date of =========

public auction is then subjected to 1 percent attorney's Add:
fees. The total outstanding obligation is compared to the Amount due as of 6/29/90 4,714,282.11
162
Less: Payment on 6/29/90 (pro-rated upon Balance 73,651.92 3,948,921.37
interest) 839,012.66 839,012.66
Amount due as of 8/15/91 321,652.11 4,196,921.55 Add:

Less: Payment on 8/15/91 (pro-rated upon Interest at 12% p.a.
Balance (767,087.92) 3,875,269.44 interest) 86,593.37 86,593.37
12/21/91-12/31/91 ([5,000,000-
========= (356,821.30+821.33+767,087.92)]
x 12% x [11/365]) 14,281.03
Add: Balance 235,058.74 4,110,328.18
1/1/92-2/26/92 ([5,000,000-
Interest at 19.5% p.a. Add:
(356,821.30+821.33+767,087.92)]
6/30/90-12/31/90 ([5,000,000- Interest at 12% p.a. x 12% x [57/365]) 74,001.70 88,282.74 88,282.74
(356,821.30+821.33+767,087.92)]
8/16/91-11/29/91 ([5,000,000-
x 19.5% x [185/365]) 383,014.64
(356,821.30+821.33+767,087.92)]
Amount due on PN (1) as of
1/1/91-6/29/91 ([5,000,000- x 12% x [106/365]) 135,050.49 135,050.49
2/26/92 161,934.66 P4,037,204.10
(356,821.30+821.33+767,087.92)]

x 19.5% x [180/365]) 372,662.90 ========= =========
Amount due as of 11/29/91 370,109.22 4,245,378.67
Interest at 12% p.a. upon automatic conversion
Less: Payment on 11/29/91 (pro-rated upon
6/30/91-8/8/91 ([5,000,000- SCHEDULE 2: PN (2) drawdown amount on
interest) 161,096.81 161,096.81
(356,821.30+821.33+767,087.92)] 9/1/89 P2,700,000.00
x 12% x [40/365]) 50,962.45 806,639.99 806,639.99
Less: Interest deducted in advance
Balance 209,012.41 4,084,281.86 (per 9/1/89 Disclosure Statement) 180,559.88
Amount due as of 8/8/91 4,681,909.43 Add:
Less: Payment on 8/8/91 (pro-rated upon Interest at 12% p.a. Net proceeds 2,519,440.12
interest) 493,906.31 493,906.31
11/30/91-12/20/91 ([5,000,000- =========
(356,821.30+821.33+767,087.92)]
Principal 2,700,000.00
x 12% x [21/365]) 26,755.28 26,755.28
Balance 312,733.68 4,188,003.13
Add:

Add:
Interest at 21.5% p.a.
Amount due as of 12/20/91 235,767.70 4,111,037.14
Interest at 12% p.a.
12/31/89 (2,700,000 x 21.5% x [1/365]) 1,590.41
Less: Payment on 12/20/91 (pro-rated upon
8/9/91-8/15/91 ([5,000,000-
interest) 162,115.78 162,115.78 1/1/90-1/5/90 (2,700,000 x 21.5% x
(356,821.30+821.33+767,087.92)]
[5/365]) 7,952.05 9,542.47 9,542.47
x 12% x [7/365]) 8,918.43 8,918.43
163
 Balance (523.04) 2,681,267.31
Amount due as of 1/5/90 2,709,542.47 ========= Balance 202,810.86 2,395,593.95
Less: Payment on 1/5/90 (pro-rated upon Add: Add:
interest) 27,752.12 27,752.12
Interest at 21.5% p.a. Interest at 21.5% p.a.

6/1/90-6/29/90 ([2,700,000- 8/9/91-8/15/91 ([2,700,000-
Balance (18,209.65) 2,681,790.35 (18,209.65+523.04)] x (18,209.65+523.04+488,484.22)]
21.5% x [29/365]) 45,801.92 45,801.92 x 21.5% x [7/365]) 9,041.48 9,041.48
========

Add:
Amount due as of 6/29/90 2,727,069.24 Amount due as of 8/15/91 211,852.33 2,404,635.43
Interest at 21.5% p.a.
Less: Payment on 6/29/90 (pro-rated upon Less: Payment on 8/15/91 (pro-rated upon
1/6/90-3/30/90 ([2,700,000-18,209.65]
interest) 534,286.14 534,286.14 interest) 57,033.69 57,033.69
x 21.5% x [84/365]) 132,693.52 132,693.52


Balance (488,484.22) 2,192,783.10 Balance 154,818.64 2,347,601.74
Amount due as of 3/30/90 2,814,483.87
========= Add:
Less: Payment on 3/30/90 (pro-rated upon
interest) 103,917.28 103,917.28 Add: Interest at 21.5% p.a.
Interest at 21.5% p.a. 8/16/91-9/1/91 ([2,700,000-
(18,209.65+523.04+488,484.22)]
Balance 28,776.23 2,710,566.58 6/30/90-12/31/90 ([2,700,000-
x 21.5% x [17/365]) 21,957.87
(18,209.65+523.04+488,484.22)]
Add:
x 21.5% x [185/365]) 238,953.28 Interest at 12% p.a. upon automatic conversion
Interest at 21.5% p.a.
1/1/91-8/8/91 ([2,700,000- 9/2/91-11/29/91 ([2,700,000-
3/31/90-5/31/90 ([2,700,000-18,209.65] (18,209.65+523.04+488,484.22)] (18,209.65+523.04+488,484.22)]
x 21.5% x [62/365]) 97,940.45 97,940.45 x 21.5% x x 12% x [89/365]) 64,161.43 86,119.30 86,119.30
[220/365]) 284,160.66 523,113.94 523,113.94


Amount due as of 5/31/90 126,716.69 2,808,507.04 Amount due as of 11/29/91 240,937.94 2,433,721.04
Amount due as of 8/8/91 2,715,897.04
Less: Payment on 5/31/90 (pro-rated upon Less: Payment on 11/29/91 (pro-rated upon
interest) 127,239.72 127,239.72 Less: Payment on 8/8/91 (pro-rated upon interest) 104,872.65 104,872.65
interest) 320,303.08 320,303.08

164
Balance 136,065.30 2,328,848.39 SCHEDULE 3: PN (3) drawdown amount on
9/6/89 P300,000.00
Add: Balance 3,215.45 302,878.24
Less: Interest deducted in advance
Interest at 12% p.a. Add:
(per 9/6/89 Disclosure Statement) 20,062.21
11/30/91-12/20/91 ([2,700,000- Interest at 21.5% p.a.

(18,209.65+523.04+488,484.22)]
3/31/90-5/31/90 ([300,000-337.22]
x 12% x [21/365]) 15,139.21 15,139.21 Net proceeds 279,937.79
x 21.5% x [62/365]) 10,943.85 10,943.85
=========

Amount due as of 12/20/91 151,204.51 2,343,987.61 Principal 300,000.00
Amount due as of 5/31/90 14,159.30 313,822.08
Less: Payment on 12/20/91 (pro-rated upon Add:
Less: Payment on 5/31/90 (pro-rated upon
interest) 103,969.45 103,969.45
Interest at 21.5% p.a. interest) 14,217.74 14,217.74

1/5/90 (300,000 x 21.5% x [1/365]) 176.71 176.71
Balance 47,235.07 2,240,018.16
Balance (58.44) 299,604.34
Add:
Amount due as of 1/5/90 300,176.71 =========
Less: Payment on 1/5/90 (pro-rated upon Add:
Interest at 12% p.a. interest) 513.93 513.93
Interest at 21.5% p.a.
12/21/91-12/31/91 ([2,700,000-
6/1/90-6/29/90 ([300,000-(337.22+58.44)]
(18,209.65+523.04+488,484.22)]
Balance (337.22) 299,662.78 x 21.5% x [29/365]) 5,117.90 5,117.90
x 12% x [11/365]) 7,930.06
========
1/1/92-2/26/92 ([2,700,000-
(18,209.65+523.04+488,484.22)] Add: Amount due as of 6/29/90 304,722.24
x 12% x [57/365]) 41,092.15 49,022.22 49,022.22
Interest at 21.5% p.a. Less: Payment on 6/29/90 (pro-rated upon
interest) 59,701.04 59,701.04
1/6/90-3/30/90 ([300,000-337.22]
Amount due on PN (2) as of x 21.5% x [84/365]) 14,827.15 14,827.15
2/26/92 96,257.28 2,289,040.38
Balance (54,583.14) 245,021.20
========= =========
Amount due as of 3/30/90 314,489.93 =========
Less: Payment on 3/30/90 (pro-rated upon Add:
interest) 11,611.70 11,611.70
Interest at 21.5% p.a.
165
 6/30/90-12/31/90 ([300,000- Interest at 12% p.a. upon automatic conversion 1/1/92-2/26/92 ([300,000-
(337.22+58.44+54,583.14)] (337.22+58.44+54,583.14)]]
9/7/91-11/29/91 ([300,000-
x 21.5% x [185/365]) 26,700.60 x 12% x [57/365]) 4,591.63 5,477.73 5,477.73
(337.22+58.44+54,583.14)]]
1/1/91-8/8/91 ([300,000- x 12% x [84/365]) 6,766.61 9,941.82 9,941.82
(337.22+58.44+54,583.14)]]
Amount due on PN (3) as of
x 21.5% x [220/365]) 31,752.06 58,452.66 58,452.66
2/26/92 10,812.03 P255,833.22
Amount due as of 11/29/91 27,241.23 272,262.43

======== ========
Less: Payment on 11/29/91 (pro-rated upon
Amount due as of 8/8/91 303,473.86
interest) 11,857.24 11,857.24
Less: Payment on 8/8/91 (pro-rated upon
SCHEDULE 4: Application of Payments Upon Interest
interest) 35,790.61 35,790.61
Balance 15,383.98 260,405.18

Add: Date Interest
Balance 22,662.05 267,683.25
Interest at 12% p.a. Payable Pro-rated
Add:
11/30/91-12/20/91 ([300,000-
Interest at 21.5% p.a.
(337.22+58.44+54,583.14)]]
1/5/90 PN (1) P186,986.30 P543,807.61
8/9/91-8/15/91 ([300,000- x 12% x [21/365]) 1,691.65 1,691.65
(337.22+58.44+54,583.14)]] PN (2) 9,542.47 27,752.12

x 21.5% x [7/365]) 1,010.29 1,010.29
PN (3) 176.71 513.93
Amount due as of 12/20/91 17,075.64 262,096.84


Less: Payment on 12/20/91 (pro-rated upon
Amount due as of 8/15/91 23,672.34 268,693.54
interest) 11,741.35 11,741.35 196,705.48 572,073.65
Less: Payment on 8/15/91 (pro-rated upon
========= =========
interest) 6,372.93 6,372.93
Balance 5,334.29 250,355.49

Add: 3/30/90 PN (1) 208,370.59 163,182.85
Balance 17,299.41 262,320.61
Interest at 12% p.a. PN (2) 132,693.52 103,917.28
Add:
12/21/91-12/31/91 ([300,000- PN (3) 14,827.15 11,611.70
Interest at 21.5% p.a.
(337.22+58.44+54,583.14)]]
8/16/91-9/6/91 ([300,000- x 12% x [11/365]) 886.10
(337.22+58.44+54,583.14)]] 355,891.26 278,711.83
x 21.5% x [22/365]) 3,175.21
166
 ========= =========
5/31/90 PN (1) 198,985.09 199,806.42
PN (2) 126,716.69 127,239.72
PN (3) 14,159.30 14,217.74
339,861.08 341,263.89
========= =========
6/29/90 PN (1) 71,924.74 839,012.66
PN (2) 45,801.92 534,286.14
PN (3) 5,117.90 59,701.04
122,844.56 1,432,999.84
========= =========
8/8/91 PN (1) 806,639.99 493,906.31
PN (2) 523,113.94 320,303.08
PN (3) 58,452.66 35,790.61
In the preparation of the above-mentioned schedules,
1,388,206.59 850,000.00
========= =========
8/15/91 PN (1) 321,652.11 86,593.37
PN (2) 211,852.33 57,033.69 Second, payments of the principal were not made until
the interests had been covered. 156 For instance, the first
PN (3) 23,672.34 6,372.93
payment on January 15, 1990 had initially been applied
to all interests due on the notes, before deductions were
made from their respective principal amounts. The
557,176.79 150,000.00 resulting decrease in interest balances served as the
========= ========= bases for subsequent pro-ratings.
Third, payments were proportionately applied to all
interests that were due and of the same nature and
11/29/91 PN (1) 370,109.22 161,096.81 burden. 157 This legal principle was the rationale for the
PN (2) 240,937.94 104,872.65 pro-rated computations shown on Schedule 4.
PN (3) 27,241.23 11,857.24 Fourth, since there was no stipulation on
capitalization, no interests due and unpaid were added to
the principal; hence, such interests did not earn any
638,288.39 277,826.70 additional interest. 158 The simple not compounded
method of interest calculation 159 was used on all
========= ========= Notes until the date of public auction.
In fine, under solutio indebiti 160 or payment by
mistake, 161 there is no deficiency receivable in favor of
12/20/91 PN (1) 235,767.70 162,115.78
PNB, but rather an excess claim or surplus 162 payable
PN (2) 151,204.51 103,969.45 by respondent; this excess should immediately be
returned to petitioner-spouses or their assigns not to
PN (3) 17,075.64 11,741.35
mention the buildings and improvements 163 on and the
fruits of the property to the end that no one may be
unjustly enriched or benefited at the expense of
P404,047.85 P277,826.57 another. 164 Such surplus is in the amount of
========= ========= P3,686,101.52, computed as follows:
Total unpaid principal and interest on the
these basic legal principles were followed: promissory notes as of February 26, 1992:
First, the payments were applied to debts that were
already due. 155 Thus, when the first payment was
made and applied on January 5, 1990, all Promissory Drawdown on June 29, 1989
Notes were already due. (Schedule 1) P4,037,204.10
Drawdown on September 1, 1989
167
 (Schedule 2) 2,289,040.38
Drawdown on September 6, 1989
(Schedule 3) 255,833.22
6,582,077.70
Add: 1% attorney's fees 65,820.78
connection with the credit documents, 173 only the
Total outstanding obligation 6,647,898.48
Less: Bid price 10,334,000.00
charged.
Excess P3,686,101.52
==========
Joint and Solidary Agreement. Contrary to the
contention of the petitioner-spouses, their Joint and
Solidary Agreement (JSA) 165 was indubitably a surety,
not a guaranty.166 They consented to be jointly and
severally liable with Petitioner NSBCI the borrower
not only for the payment of all sums due and payable
in favor of respondent, but also for the faithful and
prompt performance of all the terms and conditions
thereof. 167 Additionally, the corporate secretary of
Petitioner NSBCI certified as early as February 23,
1989, that the spouses should act as such
surety. 168 But, their solidary liability should be
carefully studied, not sweepingly assumed to cover all
availments instantly.
First, the JSA was executed on August 31, 1989. As
correctly adverted to by petitioners, 169 it covered only
the Promissory Notes of P2,700,000 and P300,000 made
after that date. The terms of a contract of suretyship
undeniably determine the surety's liability 170 and
cannot extend beyond what is stipulated
therein. 171 Yet, the total amount petitioner-spouses
agreed to be held liable for was P7,700,000; by the time
the JSA was executed, the first Promissory Note was
AFFIRMED, with the MODIFICATION that PNB is
still unpaid and was thus brought within the JSA's
ambit. 172
Second, while the JSA included all costs, charges and
expenses that respondent might incur or sustain in
of this Decision. After this Decision becomes final and
interest was imposed under the pertinent Credit
Agreements. Moreover, the relevant Promissory Notes
had to be resorted to for proper valuation of the interests
Third, although the JSA, as a contract of adhesion,
should be taken contra proferentum against the party
who may have caused any ambiguity therein, no such
ambiguity was found. Petitioner-spouses, who agreed to
be accommodation mortgagors, 174 can no longer be
held individually liable for the entire onerous
obligation175 because, as it turned out, it was
respondent that still owed them.
To summarize, to give full force to the Truth in Lending Act,
only the interest rates of 19.5 percent and 21.5 percent
stipulated in the Promissory Notes may be imposed by
respondent on the respective availments. After 730 days,
the portions remaining unpaid are automatically
converted into medium-term loans at the legal rate of 12
percent. In all instances, the simple method of interest
computation is followed. Payments made by petitioners
are applied and pro-rated according to basic legal
principles. Charges on penalty and insurance are
eliminated, and 1 percent attorney's fees imposed upon
the total unpaid balance of the principal and interest as
of the date of public auction. The P2 million deficiency
claim therefore vanishes, and a refund of P3,686,101.52
arises.
WHEREFORE, this Petition is hereby PARTLY
GRANTED. The Decision of the Court of Appeals is
ORDERED to refund the sum of P3,686,101.52
representing the overcollection computed above, plus
interest thereon at the legal rate of six percent (6%) per
annum from the filing of the Complaint until the finality
executory, the applicable rate shall be twelve percent
(12%) per annum until its satisfaction. No costs.
SO ORDERED.
FIRST DIVISION
[G.R. No. 153571. September 18, 2003.]
BENGUET MANAGEMENT
CORPORATION, petitioner, vs. COURT OF
APPEALS, KEPPEL BANK PHILIPPINES,
INC., as Trustee for METROPOLITAN
BANK AND TRUST COMPANY, UNITED
COCONUT PLANTERS BANK, RIZAL
COMMERCIAL BANKING
CORPORATION, FAR EAST BANK AND
TRUST COMPANY and BANK OF THE
PHILIPPINE ISLANDS under the
Mortgage Trust Indenture, and THE

168
 REGISTER OF DEEDS OF
CALAMBA, respondents.
Assailed in this petition for certiorari under Rule 65 of
the Revised Rules of Court is the Resolution of the
Court of Appeals in CA-G.R. SP No. 69503 dated April
5, 2002, 1which denied petitioner's application for the
issuance of a temporary restraining order, as well as its
May 28, 2002 2 Resolution denying the motion for
reconsideration.
The antecedent facts reveal that on November 29, 1994,
petitioner Benguet Management Corporation (BMC)
and Keppel Bank Philippines, Inc. (KBPI), 3 acting as
trustee of the other respondent banks, entered into a
Loan Agreement and Mortgage Trust Indenture (MTI)
whereby BMC, in consideration of the syndicated loan
of P190,000,000.00, constituted in favor of KBPI a
mortgage on several lots located in Alaminos, Laguna
and Iba, Zambales.
On September 28, 2001, for failure of BMC to pay in
full the installments due on the Loan Agreement and
Mortgage Trust Indenture, KBPI filed an
application 4 for extra-judicial foreclosure of mortgage
before the Office of the Clerk of Court of the Regional
Trial Court of Iba, Zambales. On October 29, 2001, a
similar application 5 for extra judicial foreclosure of
mortgage was filed by KBPI with the Office of the Clerk
of Court of the Regional Trial Court of San Pablo City,
docketed as EJF No. Sp-2546 (01). Accompanying the
latter application was a certification 6 from the Clerk of
Court of the Regional Trial Court of Iba, Zambales,
stating that KBPI had paid the corresponding
foreclosure fees covering BMC's properties situated in
Zambales and Laguna. HDAECI
On October 31, 2001, BMC filed with the Office of the
Executive Judge of the Regional Trial Court of San
Pablo City a "Request Not To Give Due Course To The
Application for Extra-Judicial Foreclosure. . ." 7 in EJF
No. Sp-2546 (01). BMC claimed that the application
should be denied because it is insufficient in form and
substance and there is no need to proceed with the
foreclosure of its properties situated in Laguna because
it was willing to execute a dacion en pago in place of
the mortgaged properties. Subsequently, BMC filed a
"Compliance and Supplementary Grounds to
Disapprove Application for Extra judicial Foreclosure of
Real Estate Mortgage" 8 and a Memorandum. 9 BMC
contended that the application for foreclosure should be
denied because KBPI included unauthorized penalties in
the statement of accounts and it did not comply with its
obligation to give BMC a 60-day grace period. BMC
further claimed that the MTI securing the principal loan
of P190 Million cannot be foreclosed because it was not
registered with the Register of Deeds.
KBPI opposed the letter-request of BMC on the
ground, inter alia, of wrong remedy and forum
shopping. 10
Meanwhile, on November 7, 2001, BMC filed with the
Regional Trial Court of Iba, Zambales, Branch 70, a
complaint for damages, accounting and nullification of
foreclosure of its properties in Zambales, with prayer for
the issuance of a temporary restraining order, docketed
as Civil Case No. RTC-1852-I. 11 BMC averred that the
foreclosure of its properties should be annulled because
KBPI imposed unauthorized penalties, interest and
charges. Assuming that the amount claimed is due and
demandable, BMC maintained that the same cannot be
enforced because KBPI did not comply with the 60-day
grace period. BMC added that dacion en pago should be
preferred over the foreclosure of the collaterals because
169
the other respondent banks are agreeable to such
proposal.
On the same date, the Regional Trial Court of Iba,
Zambales issued a temporary restraining order enjoining
the sale at public auction of BMC's properties in
Zambales. 12
On February 6, 2002, KBPI's application for extra-
judicial foreclosure of mortgage was found to be
sufficient in form and substance, and was
granted. 13 BMC filed a motion for reconsideration,
which was denied on March 4, 2002. 14
Hence, BMC filed a petition for certiorari with the
Court of Appeals, 15 reiterating its arguments in EJF
No. Sp-2546 (01) and assailing the validity of the
foreclosure of its properties in Laguna. It prayed for the
issuance of a preliminary injunction and/or temporary
restraining order to enjoin the scheduled sale of its
properties in Laguna on March 19, 2002 at 10:00 pm.
Since no injunction or restraining order was issued by
the Court of Appeals, the auction sale proceeded as
scheduled with KBPI as the highest bidder.
To restrain the registration of the certificate of
sale, 16 BMC filed a Supplemental Petition 17 which
was favorably acted upon by the Court of Appeals on
March 22, 2002.18 On the same day, a temporary
restraining order enjoining the registration of the
certificate of sale was issued by the appellate court,
albeit, late as the certificate was already registered at
2:15 p.m. of March 22, 2002.
Subsequently, BMC filed with the appellate court an
Amended Supplemental Petition, 19 followed by an
Urgent Manifestation 20 praying for the issuance of a
writ of preliminary injunction and/or temporary
restraining order to enjoin the consolidation of titles
over the foreclosed properties in the name of respondent
banks. BMC contended that the foreclosure sale should
be annulled because (1) the bid price was grossly
inadequate; (2) the sale was conducted in violation
of Sections 2 and 3 of Act No. 3135 on the requirements of
place of sale and posting of notice; and (3) the other
creditor banks are amenable to the proposed dacion en
pago instead of the foreclosure.
In its Resolution dated April 5, 2002, the Court of
Appeals denied BMC's prayer to restrain the
consolidation of title in the name of KBPI, thus:
The petitioner's filing of an Amended
Supplemental Petition dated March 25, 2002,
and an Urgent Manifestation dated March 27,
2002 is hereby noted. aESIHT
However, we see no justifiable reason to grant
an injunctive relief at this point in time, since
the acts sought to be restrained or enjoined are
positive rights of a buyer in a foreclosure sale.
Unless the petitioner could prove the nullity of
such sale, there is no reason to stop the
Register of Deeds concerned from performing
its ministerial duty under the law.
WHEREFORE, the application for temporary
restraining order in the Amended Supplemental
Petition is hereby DENIED.
The respondents are directed to also file their
comment thereto within ten (10) days from
notice hereof. Should the parties prefer, the
case shall be set for hearing to enable the
parties to prove their respective positions as to
issues in the petition as well as subsequent
Supplemental Petition and Amended
Supplemental Petition.
In the meantime, the Chief of the Mailing
Section is directed to investigate and report to
us within fifteen (15) days from notice, how
and who made the unauthorized insertion of
the "Register of Deeds of Laguna" to the
Court's Notice of Resolution of March 22,
2002.
SO ORDERED. 21
BMC filed a motion for reconsideration claiming,
among others, that Section 47 of the General Banking
Act (Republic Act No. 8791), which reduced the period of
redemption for extra-judicially foreclosed properties of
juridical persons from one year to "until, but not
after, the registration of the certificate of foreclosure sale
. . . which in no case shall be more than three (3) months
after foreclosure, whichever is earlier," is unduly
discriminatory and therefore unconstitutional.
On May 28, 2002, the Court of Appeals denied BMC's
motion for reconsideration. 22 Hence, BMC filed the
instant petition, contending that
I V
THE COURT OF APPEALS ACTED WITH
GRAVE ABUSE OF DISCRETION IN
DENYING PETITIONER'S APPLICATION
FOR TRO TO RESTRAIN THE
CONSOLIDATION OF TITLES AFTER IT
HAD EARLIER RESTRAINED, ALBEIT
TOO LATE, THE REGISTRATION OF THE
SHERIFF'S CERTIFICATE OF SALE,
DEMONSTRATIVELY HAVING BEEN
CONVINCED OF THE MERIT OF THE
LEGAL GROUNDS RAISED BY THE
170
PETITIONER IN SUPPORT OF THE
APPLICATION FOR TEMPORARY
RESTRAINING ORDER.
II
THE NEW LAW (GENERAL BANKING LAW OF 2000)
ABROGATING THE RIGHT TO ONE YEAR
REDEMPTION PERIOD OF CORPORATE
MORTGAGORS IS UNCONSTITUTIONAL.
III
ASSUMING THAT THE NEW LAW IS
CONSTITUTIONAL, IT SHOULD BE
GIVEN PROSPECTIVE APPLICATION.
IV
THE BID PRICE OF ONLY P162,354,329.46
FOR THE FOUNDRY PROJECT WITH A
FAIR MARKET VALUE OF P444,184,000.00,
SOUND VALUE OF P493,732,000.00 COST
OF REPRODUCTION OF P989,605,000.00 IS
SO GROSSLY INADEQUATE AS TO
RENDER THE SALE NULL AND VOID IN
LAW AND IN EQUITY.
THE AUCTION SALE CONDUCTED IN
SAN PABLO CITY IS NULL AND VOID
FOR BEING IN VIOLATION OF SECTION 2
OF ACT 3135, AS AMENDED AND THE
EXPRESS PROVISION OF THE
MORTGAGE TRUST INDENTURE THAT:
IN ANY EXTRA-JUDICIAL
FORECLOSURE UNDER ACT 3135, AS
AMENDED . . . THE AUCTION SALE
SHALL TAKE PLACE IN THE CITY OR
 CAPITAL OF THE PROVINCE WHERE
THE COLLATERAL IS SITUATED.
VI
THE REQUIREMENTS OF SECTION 3
OF ACT 3135, AS AMENDED, FOR POSTING
OF NOTICES WERE NOT COMPLIED
WITH IN THE FORECLOSURE
PROCEEDINGS IN QUESTION.
VII
THE INTEREST BASED ON THE
FLOATING RATE STIPULATED IN THE
PROMISSORY NOTES IS NULL AND VOID
FOR BEING POTESTATIVE IN
CHARACTER AND FOR BEING
VIOLATIVE OF THE PRINCIPLE OF
MUTUALITY OF CONTRACT, HENCE THE
FORECLOSURE MAY PROCEED ONLY
ONCE THE CORRECT LEGAL AMOUNT
OF THE LOAN IS DETERMINED AND
ONLY IF THE MORTGAGOR CANNOT
PAY FOLLOWING THAT
DETERMINATION. 23
On June 26, 2002, a status quo order was issued
enjoining the cancellation of titles over the mortgaged
properties in the name of BMC as well as the issuance
of new titles and the consolidation thereof in the name
of private respondent banks 24
We deem it proper to resolve the issue of forum
shopping raised by private respondents.
Under the Procedure on Extra-Judicial Foreclosure of
Mortgage (A.M. No. 99-10-05-0), 25 the applicant in an
extra-judicial foreclosure covering properties located in
different provinces is required to pay only one filing fee
regardless of the number of properties to be foreclosed
so long as the application covers only one transaction or
indebtedness. The venue, however, of the extra-judicial
foreclosure proceedings is the place where each of the
mortgaged property is located. Pertinent portion thereof
states
Where the application concerns the extra-
judicial foreclosure of mortgages, of real
estates and/or chattels in different locations
covering one indebtedness, only one filing fee
corresponding to such indebtedness shall be
collected. The collecting Clerk of Court shall,
apart from the official receipt of the fees, issue
a certificate of payment indicating the amount
of indebtedness, the filing fees collected, the
mortgages sought to be foreclosed, the real
estates and/or chattels mortgaged and their
respective locations, which certificate shall
serve the purpose of having the application
docketed with the Clerks of Court of the places
where the other properties are located and of
allowing the extra-judicial foreclosures to
proceed thereat.
In Spouses Caviles v. Court of Appeals, 26 we recognized the
predicament that confronts a mortgagor seeking to
restrain the extra judicial foreclosure of mortgages
arising from a single transaction but concerning
properties found in different provinces. Thus
. . . [W]e find it necessary to dwell on the issue
of whether or not the act of petitioners in filing
three civil actions one with the RTC of
Makati, another with the RTC of Bian,
Laguna (Branch 24) and the third one, with the
Bian Assisting Court, constitutes forum
shopping.
171
The problem of petitioners is an off-shoot of
the express provisions of B.P. Blg. 129, to wit:
"Sec. 21. Original jurisdiction in other
cases. Regional Trial Courts shall
exercise original jurisdiction:
"(1) In the issuance of writs
of certiorari, prohibition, mandamus,
quo warranto, habeas
corpus and injunction which may be
enforced in any part of their respective
regions; (Emphasis, supplied) CSIcTa
and Section 3, Rule 2 of the Rules of Court
which provides that a party may not institute
more than one suit for a single cause of action.
(Emphasis supplied)
In the said case, the mortgagors filed separate actions for
breach of mortgage contract with injunction to restrain
the extra-judicial foreclosure proceedings commenced
by the mortgagee in Makati and Bian, Laguna where
the properties were situated. The Court did not find the
mortgagors guilty of forum shopping insofar as the cases
filed with the Makati and Bian, Laguna (Branch 24)
courts were concerned. The obvious reason is that since
injunction is enforceable only within the territorial limits
of the trial court, the mortgagor is left without remedy as
to the properties located outside the jurisdiction of the
issuing court, unless an application for injunction is
made with another court which has jurisdiction over the
latter properties.
In the case at bar, BMC is not guilty of forum shopping
precisely because the remedy available to them under
the law was the filing of separate injunction suits. It is
mandated to file only one case for a single cause of
action, e.g., breach of mortgage contract, yet, it cannot
enforce any injunctive writ issued by the court to protect
its properties situated outside the jurisdiction of said
court. Besides, BMC was honest enough to inform the
Zambales court in the certification 27 of its complaint
that it has a pending request not to give due course to
the foreclosure proceedings with the San Pablo court, in
the same manner that its petition for certiorari with the
Court of Appeals notified the appellate court of the
pendency of its complaint with the Zambales court. 28 It
would therefore be unfair to dismiss the cases filed by
BMC on the ground of forum shopping where under the
circumstances the law gives it no other remedy.
The issues involved in the instant petition
for certiorari are not only limited to the propriety of the
Court of Appeals' denial of BMC's prayer to enjoin the
consolidation of title of the foreclosed properties in the
name of private respondents. There are likewise raised
factual issues, i.e., the validity of the foreclosure and the
sale at public auction of its properties, which are yet to
be resolved by the Court of Appeals. Since this Court is
not a trier of facts, the remand of this case to the
appellate court is necessary.
Anent the constitutional issue raised by BMC, we have
repeatedly held that the constitutionality of a law may be
passed upon by the Court, where there is an actual case
and that the resolution of the constitutional question
must be necessary in deciding the controversy. 29 In this
case, the resolution of the constitutionality of Section 47
of the General Banking Act (Republic Act No. 8791) which
reduced the period of redemption of extra-judicially
foreclosed properties of juridical persons is not the
verylis mota of the controversy. BMC is not asserting a
legal right for which it is entitled to a judicial
determination at this time inasmuch as it may not even
be entitled to redeem the foreclosed properties. Until an
actual controversy is brought to test the constitutionality
of Republic Act No. 8791, the presumption of validity, which
inheres in every statute, must be accorded to it. cASTED
WHEREFORE, in view of all the foregoing, the petition
is PARTLY GRANTED. The Resolutions of the Court of
Appeals dated April 5, 2002 and May 28, 2002, in CA-
G.R. SP No. 69503, insofar as they denied BMC's
application for temporary restraining order, are
REVERSED and SET ASIDE. The status quo order
issued by the Court on June 26, 2002 shall stand until
further order of the Court, and the instant case is
REMANDED to the Court of Appeals for determination
of the case on its merits. Petitioner BMC is ordered to
inform the appellate court of the present status of Civil
Case No. RTC-1852-1, then pending with the Regional
Trial Court of Iba, Zambales, Branch 70, and if it had
been decided and the decision is on appeal in the Court
of Appeals, the latter may consider its consolidation
with CA-G.R. SP No. 69503 if warranted.
No pronouncement as to costs.
SO ORDERED.
THIRD DIVISION
[G.R. No. 168088. April 4, 2007.]
SAN FERNANDO RURAL BANK,
INC., petitioner, vs. PAMPANGA OMNIBUS
DEVELOPMENT CORPORATION and
DOMINIC G. AQUINO, respondents.
172
Before the Court is a Petition for Review under Rule 45
of the Rules of Court, assailing the Decision 1 of the
Court of Appeals (CA) in CA-G.R. SP No. 75787 as
well as the Resolution 2 which denied the motion for
reconsideration thereof. The appellate court set aside the
Order 3 of the Regional Trial Court (RTC), San
Fernando, Pampanga, Branch 44, in LRC No. 890,
which in turn had granted the petition of San Fernando
Rural Bank, Inc. (petitioner) for the issuance of a writ of
possession.
The Antecedents
Pampanga Omnibus Development Corporation
(respondent PODC) was the registered owner of a parcel
of land in San Fernando, Pampanga (now San Fernando
City). The 61,579-square-meter lot was covered by
Transfer Certificate of Title (TCT) No. 275745-R.
Respondent PODC secured two loans from petitioner
and Masantol Rural Bank, Inc. (MRBI) at an annual
interest of 24%: P750,000.00 on April 20, 1989, to
mature on April 15, 1990; 4 and another P750,000.00 on
May 3, 1989, payable on April 28, 1990. 5 The loans
were evidenced by separate promissory notes executed
by Federico R. Mendoza and Anastacio E. de Vera. To
secure payment of the loans, respondent PODC executed
a real estate mortgage over the subject lot in favor of the
creditor banks. 6 The contract provided that in case of
failure or refusal of the mortgagor to pay the obligation
secured thereby, the real estate mortgage may be
extrajudicially foreclosed in accordance with Act No. 3135,
as amended. 7 EHCcIT
Eliza M. Garbes (PODC President and daughter of
Federico Mendoza), together with her husband Aristedes
Garbes, secured a P950,000.00 loan from petitioner on
March 27, 1992. The loan was to mature after 180 days
or on September 23, 1992. 8 Mendoza signed as co-
borrower in the promissory note executed by the
spouses. The spouses also executed a chattel mortgage
over their personal property as security for the payment
of their loan account. 9
Upon respondent PODC's failure to pay its loan to
petitioner, the latter filed a petition for extrajudicial
foreclosure of real estate mortgage and at the auction on
April 23, 2001, petitioner emerged as the winning bidder
for P1,245,982.05. The Ex-Officio Sheriff executed a
Certificate of Sale 10 on May 9, 2001 which stated that
"the period of redemption of the property shall expire
one (1) year after registration in the Register of Deeds."
The certificate was annotated at the dorsal portion of
TCT No. 275745-R on June 7, 2001. Petitioner did not
file a petition for a writ of possession during the
redemption period. TcDAHS
On May 11, 2002, petitioner, through Eliza Garbes (with
the authority of petitioner's board of
directors), 11 executed a notarized deed of
assignment 12 in favor of respondent Dominic G.
Aquino over its right to redeem the property. On May
29, 2002, respondent Aquino offered to redeem the
property for P1,588,094.28, but petitioner rejected the
offer and demanded the payment of P16,805,414.71
(including the loan of the spouses Garbes) 13 as
redemption money. Respondent Aquino rejected the
demand of petitioner.
On May 30, 2002, respondent Aquino remitted Cashier's
Check No. 0000202756 14 for P1,588,094.28 to the Ex-
Officio Sheriff as redemption money for the property for
which he was issued Receipt No. 15582906 dated May
31, 2002. 15
In a letter 16 dated June 4, 2002, the Ex-Officio Sheriff
informed petitioner that the property had been redeemed
by respondent Aquino for P1,588,094.28. She requested
petitioner for the computation of the correct redemption On the same day, petitioner's representative Elvin Reyes
price before the lapse of the reglementary period to went to the office of the Ex-Officio Sheriff and inquired
redeem the property. Petitioner then submitted a how the amount of P5,194,742.50 was arrived at.
statement of account indicating that the redemption TheEx-Officio Sheriff explained to him that she had
price was P9,052,309.23, and including the loan of the accepted the redemption price in accordance with the
spouses Garbes (P7,753,105.48), a total of provisions of R.A. Nos. 8791 and 7353. She further
P16,805,414.71. 17Thereafter, theEx-Officio Sheriff explained that she had furnished petitioner with a copy
computed the redemption price (based on the General of the Certificate of Redemption she had earlier
Banking Act [R.A. No. 8791], and The Rural Bank Act of executed; however, Reyes refused to receive a copy of
1992 R.A. No. 7353) to be P5,194,742.50. 18 When the Certificate of Redemption. 21
respondent Aquino was apprised of this, he remitted on
On June 10, 2002, petitioner, through its president
June 7, 2002 a cashier's check for P3,606,648.52,
Rogelio D. Reyes, executed an Affidavit of
representing the difference between the redemption
Consolidation 22 over the property. It was alleged
price computed by the Ex-Officio Sheriff
therein that respondent PODC or any other person/entity
(P5,194,742.50) and the amount he had earlier paid
with the right of redemption did not exercise their right
(P1,588,094.28). The Ex-Officio Sheriff issued Official
to repurchase within one year from June 7, 2001. The
Receipt No. 15582907 to respondent Aquino, and on
affidavit was filed with the Office of the Register of
June 7, 2002, a Certificate of Redemption. 19 The
Deeds on the same day. The penultimate paragraph
certificate reads in part:
reads: SaAcHE
WHEREAS, before the expiration of the one
That the aforesaid Mortgagors nor any other
(1) year period to redeem, by virtue of the
persons or entity entitled with the right of
Deed of Assignment executed by the President
redemption did not exercise their right of
of the Pampanga Omnibus Dev't. Corp., Mr.
repurchase and a period of more than one (1)
DOMINIC G. AQUINO redeemed the said
year from June 7, 2001 has already elapsed and
property in the total amount of FIVE
by reason thereof, the San Fernando Rural
MILLION ONE HUNDRED NINETY-FOUR
Bank, Inc. do hereby request the Registry of
THOUSAND SEVEN HUNDRED FORTY-
Deeds of the province of Pampanga, after the
TWO and 50/100 (P5,194,742.50) paid under
payment of the lawful fees of this office to
Official Receipts Nos. 15582906 and
cancel Transfer Certificate of Title No.
15582907 dated May 31, 2002 and June 7,
275745-R and to issue a new Certificate of
2002, respectively, and have issued this
Title in favor of the San Fernando Rural Bank,
CERTIFICATE OF REDEMPTION under the
Inc. 23
guarantees prescribed by law. DISHEA
The affidavit was entered in the Registry Book in the
City of San Fernando (P), June 7, 2002. 20
Office of the Register of Deeds as Entry No. 784.
However, no new title was issued in favor of petitioner.
173
In a letter 24 dated June 10, 2002, the Ex-Officio Sheriff
informed petitioner that respondent Aquino had
redeemed the property and requested petitioner, through
its president, to turn over the owner's duplicate of TCT
No. 275745-R before the redemption price of
P5,194,742.50 would be remitted. She appended to the
letter a copy of the Certificate of Redemption she had
executed in favor of respondent Aquino. However,
petitioner refused to do so.
Meanwhile, the Ex-Officio Sheriff fell ill and failed to
report for work up to June 14, 2002. She then wrote
petitioner, reiterating her request for the delivery of TCT
No. 275745-R. She, however, failed to file the
Certificate of Redemption with the Register of
Deeds. 25
When respondent Aquino learned that petitioner had
filed an Affidavit of Consolidation, he sent a
letter 26 dated June 14, 2002 to the Register of Deeds,
informing the latter that he was the assignee under the
Deed of Assignment executed by respondent PODC, and
that as shown by the appended Certificate of
Redemption he had redeemed the property on June 7,
2002. He also insisted that he had redeemed the property
within the period therefor, and requested the Register of
Deeds not to register the Affidavit of Consolidation and
to cancel TCT No. 275745-R. 27
On June 17, 2002, respondent Aquino filed the
Certificate of Redemption executed by the Ex-
Officio Sheriff with the Office of the Register of Deeds.
The Register of Deeds entered the Certificate of
Redemption in the Primary Entry Book of Entries under
Entry No. 1205. 28 On even date, the Register of Deeds
entered the deed of assignment executed by respondent
PODC in favor of Aquino in the Primary Book of
Entries as Entry No. 1208.
Meanwhile, the Registrar of Deeds was in a quandary;
he was not certain whether it was proper for him to issue
a new title to petitioner. In a letter 29 dated June 18,
2002, he requested the Administrator of the Land
Registration Authority (LRA), by way of consulta, to
issue an opinion on whether a new title should be issued
to petitioner, or the Certificate of Redemption in favor
of respondent Aquino should be annotated at the dorsal
portion of TCT No. 275745-R. EaScHT
On October 15, 2002, petitioner filed a Petition for a
Writ of Possession in the RTC of Pampanga. Petitioner
alleged that it had purchased the property at public
auction as evidenced by the Certificate of Sale appended
thereto; the Certificate of Sale was annotated at the
dorsal portion of TCT No. 275745-R on June 7, 2001; as
far as he was concerned, the right of respondent PODC
to redeem the property had already expired; and
under Act No. 3135, as amended, it is entitled to the
possession of the property during or even after the
redemption period. It prayed that the corresponding writ
of possession over the property be issued in its favor
upon the filing of the requisite bond in an amount
equivalent to the market value of the property or in an
amount as the court may direct. 30 Petitioner appended
to its petition a certified true copy of the Certificate of
Sale executed by the Ex-Officio Sheriff in its favor over
the property. The case was docketed as LRC No. 890.
The court set the hearing of the petition at 8:30 a.m. on
November 28, 2002 and sent the corresponding notices
to respondent PODC. 31
During the hearing, respondent PODC opposed the
petition on the following grounds: petitioner deliberately
concealed the fact that the property had been redeemed
on June 7, 2002; respondent Aquino had paid
174
P5,194,742.00 as redemption money based on the
computation of petitioner; the Ex-Officio Sheriff had
executed a Certificate of Redemption in favor of
respondent Aquino on June 7, 2002, a copy of which
petitioner refused to receive; respondent Aquino, as
assignee, had offered to redeem the property on May 29,
2002 and tendered the amount of P1,588,094.28, but
petitioner insisted that the redemption price was
P16,805,414.71, including the loan account of the
spouses Garbes; that since respondent Aquino had
redeemed the property from the Ex-Officio Sheriff on
June 7, 2002 within the one-year period after paying the
total amount of P5,194,742.50, it was respondent
Aquino, and not petitioner, who is entitled to a writ of
possession; 32 and that besides, he was already in
possession of the property. 33 It insisted that petitioner
filed its petition to preempt the resolution of the LRA on
the consulta of the Register of Deeds. The oppositor
prayed that the petition be denied and that it be granted
such other relief and remedies just and equitable under
the premises. HTCSDE
In its Reply, petitioner averred that since respondent
Aquino had offered an amount short of the redemption
price of P16,805,414.71, under Section 47 of R.A. No.
8791there was no valid redemption of the property. The
loan of the spouses Garbes was intended for respondent
PODC as borrower. Petitioner alleged that it would have
been foolhardy for it to grant a P950,000.00 loan to the
spouses without any security. Hence, unless the entire
loan account of respondent PODC and the spouses
Garbes (P16,805,414.71) was paid, the mortgage
persisted. 34 It further posited that, since respondent
PODC had already assigned its right to redeem the
property, the oppositor had no more right or interest over
the property; it was thus not the proper party as
oppositor. AEIHCS
By way of rejoinder, respondent PODC averred that the
Certificate of Redemption executed by theEx-
Officio Sheriff is presumed valid and legal; the RTC,
acting as a Land Registration Court, had no jurisdiction
to pass upon the validity of the Certificate of
Redemption; 35 upon the execution of the Deed of
Assignment in favor of respondent Aquino and the
payment of redemption money, the latter had taken
actual possession of the property; based on the
Certificate of Redemption, he had developed the
property and introduced a lot of improvements; and
since a third party was in possession of the property,
possession could no longer be given to petitioner via a
writ of possession. Respondent PODC maintained that
petitioner was not entitled to a writ of possession until
the title was consolidated in its name.
On December 12, 2002, the LRA resolved
the consulta of the Register of Deeds as follows:
While it is clear from the records that an agent
of the assignee tried to redeem the property
within the one (1) year period of redemption
and, in fact, the Certificate of Redemption was
executed by the Clerk of Court and Ex-
Officio Sheriff of the Regional Trial Court of
San Fernando City, Pampanga on the last day
of the redemption period, the same was not
registered before the Registry of Deeds within
the one (1) year period of redemption. Borne
by the records is the receipt before the registry
of the Certificate of Redemption and other
related documents on June 17, 2002 for
annotation. Hence, the same was not registered
within the aforesaid one (1) year redemption
period.
Considering that the document first presented
and entered in the Primary Entry Book of the
registry is the Affidavit of Consolidation in
favor of the creditors, the mortgagee bank and
not the Certificate of Redemption in favor of
the assignee of the debtor-mortgagor, although
admittedly, the latter instrument was executed
on the last day of the redemption period but
not, in fact, registered within the same period,
under the premises, the consolidating
mortgagee is possessed with a superior right
than the redemptioner. Under the law, the first
in registration is the first in law. 36
The dispositive portion of the Resolution of the LRA
Administrator reads:
WHEREFORE, premises considered, this
Authority is of the opinion and so holds that
the Affidavit of Consolidation is superior over
the Certificate of Redemption, hence,
registrable on TCT No. 275745-R. IEHSDA
SO ORDERED. 37
Respondents filed a motion for reconsideration of the
Resolution of the LRA Administrator.
On December 20, 2002, the court in LRC No. 890
issued an Order granting the petition and ordered the
issuance of a writ of possession, on a bond equivalent to
the market value of the property. It ruled that petitioner,
as purchaser at the foreclosure sale, was entitled to a
writ of possession. The question of the validity of the
redemption made by respondent Aquino, to whom
respondent PODC had assigned its right to redeem the
property, as well as the registrability of the Affidavit of
Consolidation executed by petitioner, through its
president, and the validity of the Certificate of
175
Redemption executed by the clerk of court and Ex-
Officio Sheriff of the RTC cannot be raised as a
justification for opposing the petition. It declared that
the proceedings for the issuance of a writ of possession
were ex-parte and it was the court's ministerial duty to
issue the writ. jurcda
Furthermore, the court held that petitioner's right to the
possession of the foreclosed property is bolstered by the
fact that no third party was actually holding the property
adverse to respondent PODC. Respondent Aquino, as
assignee of respondent PODC's right to redeem could
not be considered a party holding the property adversely
to respondent PODC. Neither was there any pending
civil case involving the rights of third parties.
Consequently, it was the ministerial duty of the RTC to
issue a writ of possession in favor of petitioner, as the
winning bidder in the public auction.
The court declared that the purpose of the law in
requiring the filing of a bond is to answer for the
reasonable rental for a period of twelve months for the
use of the property during the period of redemption.
Since the period of redemption had already expired, a
bond was no longer necessary. Nevertheless, the court
granted petitioner's prayer to put up a bond in the
amount equivalent to the market value of the property.
The court ruled that petitioner was entitled to the
possession of the property, together with improvements
existing thereon, as a mere incident of its right of
ownership. 38
Respondents filed a motion for reconsideration of the
order, contending that petitioner was entitled to a writ of
possession after the lapse of the period for redemption
only if a Torrens title had been issued in its favor. Since
the one-year redemption period had lapsed without
petitioner having been issued any Torrens title, the court
erred when it granted the petition for a writ of
possession. It also pointed out that petitioner had failed
to present any title under its name. CDcaSA
For its part, petitioner stated in its Opposition to
respondents' motion for reconsideration, that it was not
necessary that a buyer in a public auction be issued a
title in its name before it could be entitled to a writ of
possession upon the expiration of the redemption period.
The title is merely an evidence of ownership; it is the
Certificate of Sale that vests ownership in the buyer over
the property sold. It insisted that the purchaser was
entitled to the possession of the property even after the
lapse of the redemption period. 39
On February 18, 2003, the court issued an Order
denying the motion for reconsideration of respondents.
The court ruled that petitioner, as purchaser at public
auction, acquired the right to possess the property, and
the right of the mortgagor from the time it purchased the
property and not from the issuance of the title over the
property in its name. 40
On March 6, 2003, respondents filed a Petition
for Certiorari with the CA, assailing the orders of the
RTC as follows:
I. Public respondent committed grave abuse of
discretion amounting to lack or excess
of jurisdiction when it granted private
respondent's prayer for an issuance of
writ of possession in its favor when
serious issues affecting private
respondent's right to possess the subject
lot is still pending determination by the
Land Registration Authority. aIcDCH
II. Public respondent committed grave abuse of
discretion amounting to lack or excess
of jurisdiction when it allowed private
respondent to post a redemption bond
beyond the redemption period. 41
They averred that the RTC should have denied the
petition for a writ of possession pending the resolution
of the consulta by the LRA. They asserted that the
issues before the RTC were substantial, namely: (a)
whether respondent Aquino, as the assignee of the right
of respondent PODC to redeem the property, had the
right to do so; (b) whether he had redeemed the property
as evidenced by the Certificate of Redemption executed
by the Ex-Officio Sheriff; and (c) the redemption price.
They insisted that the obligation of the RTC to issue the
writ of possession ceased to be ministerial.
Respondents maintained that they had the right to
redeem the property. Since there were grave doubts
about the parties' contentions as to who had the right to
possess the property, the RTC should have dismissed the
petition for a writ of possession pending determination
of the substantial issues by the LRA. The trial court
should have relied on the rulings of this Court in Rivero
de Ortega v. Natividad, 42 Barican v. Intermediate Appellate
Court, 43 and Sulit v. Court of Appeals. 44Respondents asserted
that petitioner was not entitled to a writ of possession
because contrary to Section 7 of Act No. 3135, it posted a
bond beyond the period for redemption. The case was
docketed as CA-G.R. SP No. 75787. ScCEIA
In its Comment on the petition, petitioner insisted on its
right to a writ of possession and that the trial court acted
in accordance with law and the facts of the case.
Moreover, it averred that the RTC, sitting as a land
registration court, had jurisdiction over the petition for a
writ of possession; thus, the remedy of respondents was
176
to appeal the assailed order and not to file a petition
for certiorari in the CA.
The CA failed to resolve the plea of respondents for a
temporary restraining order. Petitioner filed a motion for
execution of the December 20, 2002 Order of the trial
court in LRC No. 890. The RTC granted the motion and
issued a writ of possession on May 14, 2003. 45 The
Sheriff implemented the writ and placed petitioner in
possession of the property. HASDcC
On September 4, 2003, petitioner filed a
Complaint 46 against respondents and the Ex-
Officio Sheriff in the RTC of Pampanga, for the
nullification of the Deed of Assignment executed by
PODC in favor of Aquino and of the Certificate of
Redemption executed by the Ex-Officio Sheriff, and for
damages with a plea for injunctive relief. Petitioner filed
an Amended/Supplemental Complaint and prayed that
judgment be rendered in its favor, thus:
WHEREFORE, it is prayed that a judgment be
rendered in favor of the plaintiff and against
the defendants:
a) Annulling the Deed of Assignment dated
May 11, 2002 executed by and between
defendants PODC and AQUINO.
b) Declaring the Certificate of Redemption
dated June 7, 2001 issued by the defendant
Clerk of Court and Ex-Officio Sheriff as null
and void ab initio.
c) Ordering the defendants, jointly and
severally, to pay the plaintiff the amount of:
A. P100,000.00 as and for moral
damages. HAECID
 B. P100,000.00 as and for exemplary
damages.
C. P50,000.00 as and for attorney's fees
plus the costs of suit.
OTHER RELIEF and remedies just equitable
are also prayed for. 47
The case was docketed as Civil Case No. 12785.
Meanwhile, the LRA Administrator issued a Resolution
recalling the Resolution dated December 12, 2002 and
declared that the Certificate of Redemption executed by
the Ex-Officio Sheriff was superior to the Affidavit of
Consolidation filed by petitioner. Based on the June 14,
2002 letter of the Ex-Officio Sheriff and the Certificate
of Redemption, respondent Aquino, who was the
assignee of respondent PODC, had redeemed the
property on June 7, 2002. Petitioner was already aware
as early as June 7, 2002 of the redemption of the
property by respondent Aquino; hence, the date of
registration of the Certificate of Redemption on June 17,
2002 was of no legal consequence.
Accordingly, on September 10, 2003, respondents filed
(in LRC No. 890) a Joint Motion to quash the writ of
possession issued by the trial court and for the issuance
of a new TCT. They averred that the LRA Administrator
finally resolved that the Certificate of Redemption
issued by the Ex-Officio Sheriff was superior to the
Affidavit of Consolidation of petitioner. On the basis of
the LRA Order, the Register of Deeds issued TCT No.
544978-A over the property in the name of respondent
Aquino as the registered owner.
The court denied the joint motion on November 10,
2003, holding that respondent Aquino, as the registered
owner of the subject property, should initiate the
appropriate action in the proper court in order to exclude
petitioner or any other person from the physical
possession of his property. 48 The court ruled that after
placing petitioner in possession of the property, the court
had lost jurisdiction over the case. DaTEIc
On November 27, 2003, respondents filed before the CA
their Joint Notice of Appeal 49 from the November 10,
2003 Order of the RTC in LRC No. 890. The appeal was
docketed as CA-G.R. CV No. 81607.
On November 28, 2003, petitioner filed a
Manifestation, 50 stating that under Section 47 of R.A. No.
8791, the period to exercise the right to redeem shall be
until but not after the registration of the Certificate of
Foreclosure Sale with the Register of Deeds which is in
no case shall be more than three (3) months after the
foreclosure, whichever is earlier. 51 The Certificate of
Foreclosure Sale was registered on June 7, 2001 and
since respondent PODC had assigned/transferred the
right to redeem the property to respondent Aquino only
on May 11, 2002, the redemption period had already
lapsed.
On December 18, 2003, the CA rendered judgment in
CA-G.R. SP No. 75787 granting the petition of
respondents and setting aside the assailed orders of the
trial court. The fallo of the decision reads:
WHEREFORE, the petition is GRANTED and
the orders dated December 20, 200[2] and
February 18, 2003 of respondent judge are
VACATED and SET ASIDE. aDTSHc
SO ORDERED. 52
The appellate court ruled that the December 20, 2002
Order of the RTC granting the petition for a writ of
possession was interlocutory and not final; hence, it may
be questioned only via petition for certiorari under Rule
177
65 of the Rules of Court, not by appeal. The CA cited
the ruling of this Court in City of Manila v. Serrano. 53
The CA further held that the RTC committed grave
abuse of discretion amounting to excess or lack of
jurisdiction when it granted the application of petitioner
for a writ of possession. Respondent Aquino, as
successor-in-interest of respondent PODC, had
redeemed the property on June 7, 2002 in accordance
with Section 6 of Act No. 3135, as amended, and in relation
to Section 27(a), Rule 39 of the Rules of Court. Thus,
although the Certificate of Redemption was not
registered before the Register of Deeds, he was entitled
to the possession thereof; the registration of the
Certificate of Redemption in the Office of the Register
of Deeds is merely required to bind third persons.
According to the CA, petitioner may not refuse the
redemption by respondent Aquino because the right of
petitioner over the property was merely inchoate until
after the redemption period had lapsed without the right
being exercised by those allowed by law. HaTAEc
Petitioner moved for the reconsideration of its decision
on the ground that, under Section 47 of R.A. No. 8791,
respondent PODC had only up to the registration of the
Certificate of Foreclosure Sale (June 7, 2001) but not
more than three (3) months from the public auction,
whichever is earlier, within which to redeem the
property; respondent PODC, on the other hand, assigned
its right to redeem the property on May 11, 2002, long
after the redemption period had expired; hence,
respondent PODC had no more right to assign it to
respondent Aquino. Consequently, the latter had no right
to redeem the property, and the Certificate of
Redemption executed by the Ex-Officio Sheriff was null
and void. Moreover, respondent Aquino failed to pay the
correct amount of the redemption price. Petitioner
claimed that it acted in good faith when it had its
Affidavit of Consolidation registered in the Register of
Deeds. In sum, petitioner ascribes error on the part of
the CA in nullifying the order of the RTC. CDaTAI
However, the CA denied the motion of petitioner on the
ground that by invoking Section 47 of R.A. No. 8791, it
thereby changed its theory on appeal which, as held by
this Court in Dalumpines v. Court of Appeals, 54 is
prohibited. 55
Petitioner SFRBI then filed a petition for review
on certiorari with this Court for the reversal of the
Decision and Resolution of the CA, and raised the
following issues:
I not to file a special civil action for certiorari. In fact,
Whether or not the Court of Appeals seriously
erred when it sanctioned the Respondents'
resort to Certiorari under Rule 65 of the
Revised Rules of Court, questioning a final
order and not an interlocutory order of the
RTC. DHTCaI
II
Whether or not the respondents are guilty of
forum shopping by taking both the remedy of
appeal and certiorari on the same issues and
substantially the same set of facts.
III
Whether or not the Court of Appeals
committed serious error when it ruled on a
matter that was not and could not have been
submitted for its adjudication.
IV
Whether or not the Honorable Court is
precluded from reviewing the factual findings
of the Court of Appeals.
V
Whether or not the petitioner SAFER Bank, as
well as the Honorable Court, is precluded from
applying the governing law, under which the
redemption period had clearly expired. 56
On the first issue, petitioner avers that the December 20,
2002 Order of the RTC granting the writ of possession
in its favor was final; hence, the remedy of respondents
herein, as oppositors below, was to appeal to the CA and
petitioner asserts, the writ of possession issued by the
RTC had already been implemented when respondents
filed their petition in the CA on December 10, 2003.
Petitioner also claims that the assailed order of the RTC
was in accordance with the law and the Rules of Court;
even if it is merely an error of judgment and not a
jurisdictional error, resort to a petition for certiorari was
inappropriate. Respondents were, thus, proscribed from
filing a petition for certiorari in the CA since the appeal
was an adequate and speedy remedy in the ordinary
course of law and, indeed, they appealed the November
10, 2003 Order of the RTC in LRC No. 890 to the CA in
CA-G.R. CV No. 81607. It had also posted a bond in the
RTC to answer for any damages. The ruling of this
Court in City of Manila v. Serrano 57 is, therefore, not
applicable. IEaCDH
Petitioner further avers that the CA erred in applying Act
No. 3135, as amended, instead of Section 47 of R.A. No. 8791,
the General Banking Act of 2000. Respondent PODC
had the right to redeem the property not later than June
7, 2001. Undisputably, respondent PODC failed to
178
redeem the property before the registration of the
Certificate of Sale; hence, when respondent PODC
executed the deed of assignment on May 11, 2002 in
favor of respondent Aquino, it had no more right to
redeem the property. Thus, it could not have assigned
the right to redeem the property to respondent Aquino.
The latter redeemed the property only on June 7, 2002,
long after the Certificate of Sale was registered on June
7, 2001. Since there was no valid redemption of the
property by respondent Aquino, petitioner claimed that it
was entitled to the writ of possession of the property. It
further insisted that the RTC, acting as a Land
Registration Court, had limited jurisdiction; it had no
jurisdiction to resolve the issues on the validity of the
deed of assignment and the legality of respondent
Aquino's redemption of the property, as well as its
ownership. Only the RTC in the exercise of its general
jurisdiction in Civil Case No. 12765 (where petitioner
assailed the deed of assignment and the Certificate of
Redemption executed by the Ex-Officio Sheriff) was
vested with jurisdiction to resolve these issues. In
resolving these issues, the CA thereby preempted the
RTC in Civil Case No. 12765 and deprived it of due
process. In any event, according to petitioner, the
pronouncement of the CA on the validity of the Deed of
Assignment and Certificate of Redemption was merely
an obiter dictum.
Petitioner posits that the CA's reliance on the rulings of
this Court in Rivero and Barican was erroneous because
the right of third parties holding the property adverse to
respondent PODC was not involved. Neither was the
pendency of the consulta of the Register of Deeds in the
LRA a bar to the issuance of a writ of possession in its
favor by the RTC acting as a land registration court. It
was the ministerial duty of the RTC to issue a writ of
possession over the property to petitioner as purchaser at
the foreclosure sale during and after the redemption
period. ECDaTI
Petitioner further maintains that respondents filed their
petition for certiorari in the CA and delineated the
issues to be resolved. It did not change its theory in the
CA when it filed its motion for reconsideration of the
CA decision. Citing the ruling in Rivera v. Court of
Appeals, 58 petitioner avers that a theory of the case is
that which refers to the facts on which the cause of
action is based. The facts are those alleged in the
complaint and satisfactorily proven at the trial. It insists
that it did not change the set of facts that it submitted
and presented to the CA. It was not estopped from citing
Section 47 of R.A. No. 8791. It had posited in the RTC that
respondents failed to redeem the property before the
expiration of the redemption period. Besides, as held by
this Court in Lianga Lumber Company v. Lianga Timber
Co., Inc., 59 a party may change his theory on appeal
when the factual basis thereof would not require
presentation of any further evidence by the adverse
party to enable it to properly meet the issue raised in the
new theory. The failure of a party to invoke an
applicable law in a given case does not create a vested
right, and an erroneous interpretation does not give rise
to estoppel. Even if petitioner did not invoke R.A. No. 8791,
it behooved the CA to apply the law before it,
prescinding from the theory advocated by the parties.
Neither may respondents invoke estoppel. They were
aware of the provisions of the law as well as the facts
and circumstances warranting the application thereof.
Petitioner also imputes forum shopping to respondents
because the latter raised the issue of possession in both
CA-G.R. SP No. 75787 and CA-G.R. CV No. 81607.
Petitioner also accuses respondents of using the decision
in CA-G.R. SP No. 75787 to support their contention in
CA-G.R. CV No. 81607. It further contends that the writ
of possession issued by the RTC was void.
For their part, respondents aver that the RTC committed
grave abuse of its discretion in issuing the December 20,
2002 and February 18, 2003 Orders. Hence, the decision
of the CA was in accord with the law and the Rules of
Court. They assert that given the circumstances
obtaining in this case, their petition for certiorari was
proper. Although they had the right to appeal the orders
of the RTC, the same was not a speedy and adequate
remedy. They insist that they were not guilty of forum
shopping because the only issue in CA-G.R. CV No.
81607 was the validity of the Order of the RTC dated
November 10, 2003, which denied their motion to quash
the writ of possession. On the other hand, challenged in
CA-G.R. SP No. 75787 was the Order of the RTC
granting the petition for a writ of possession. Since
the Ex-Officio Sheriff declared in the Certificate of
Redemption that respondent Aquino redeemed the
property within the one-year period, petitioner was
estopped from relying on Section 47 of R.A. No. 8791.
Respondents point out that in the RTC and the CA,
petitioner had insisted that respondent Aquino had one
(1) year from June 7, 2001 within which to redeem the
property as provided in Act No. 3135, as amended; thus,
petitioner was proscribed from changing the theory it
pursued in the RTC and the CA. Moreover, under
Section 71 of R.A. No. 8791, redemption by entities of
property mortgaged is governed by R.A. No. 7353, under
which the period of redemption is one year from the
registration of the Certificate of Sale. HcTIDC
The Ruling of the Court
The petition is meritorious.
The CA erred in holding that the Order of the RTC
granting the petition for a writ of possession was merely
179
interlocutory. Interlocutory orders are those that
determine incidental matters and which do not touch on
the merits of the case or put an end to the proceedings. A
petition for certiorari under Rule 65 of the Rules of
Court is the proper remedy to question an improvident
interlocutory order. 60 On the other hand, a final order is
one that disposes of the whole matter or terminates the
particular proceedings or action leaving nothing to be
done but to enforce by execution what has been
determined. It is one that finally disposes of the pending
action so that nothing more can be done with it in the
lower court. 61 The remedy to question a final order is
appeal under Rule 41 of the Rules of Court. ASTcaE
We agree with petitioner's contention that the December
20, 2002 Order of the RTC granting the petition for a
writ of possession is final. The remedy of respondents
was to appeal to the CA by filing their notice of appeal
within the period therefor. 62 Indeed, when the RTC
denied on November 10, 2003 the motion of
respondents to quash the writ the court had earlier
issued, respondents appealed to the CA under Rule 41 of
the Rules of Court. The appeal was docketed as CA-
G.R. CV No. 81607. Respondents did not file a
supplemental petition in CA-G.R. SP No. 75787.
The reliance of the CA in City of Manila v. Serrano 63 is
misplaced. In that case, the trial court issued the writ of
possession in connection with a complaint for
expropriation under Rule 67 of the Rules of Court. Such
a writ is interlocutory in nature. 64 On the other hand, an
order granting a writ of possession under Act No. 3135, as
amended, is of a different species. The latter order is
final, hence, appealable. 65 Even if the trial court erred
in granting a petition for a writ of possession, such an
error is merely an error of judgment correctible by
ordinary appeal and not by a petition for a writ
of certiorari. 66 Such writ cannot be legally used for
any other purpose. ATDHSC
Certiorari is a remedy narrow in its scope and inflexible
in character. It is not a general utility tool in the legal
workshop. 67 Certiorari will issue only to correct errors
of jurisdiction and not to correct errors of judgment. An
error of judgment is one which the court may commit in
the exercise of its jurisdiction, and which error is
reviewable only by an appeal. Error of jurisdiction is
one where the act complained of was issued by the court
without or in excess of jurisdiction and which error is
correctible only by the extraordinary writ of certiorari.
As long as the court acts within its jurisdiction, any
alleged errors committed in the exercise of its discretion
will amount to nothing more than mere errors of
judgment, correctible by an appeal if the aggrieved party
raised factual and legal issues; or a petition for review
under Rule 45 of the Rules of Court if only questions of
law are involved. 68
A cert writ may be issued if the court or quasi-judicial
body issues an order with grave abuse of discretion
amounting to excess or lack of jurisdiction. Grave abuse
of discretion implies such capricious and whimsical
exercise of judgment as is equivalent to lack of
jurisdiction or, in other words, where the power is
exercised in an arbitrary manner by reason of passion,
prejudice, or personal hostility, and it must be so patent
or gross as to amount to an evasion of a positive duty or
to a virtual refusal to perform the duty enjoined or to act
at all in contemplation of law. 69 Mere abuse of
discretion is not enough. Moreover, a party is entitled to
a writ of certiorarionly if there is no appeal nor any
plain, speedy or adequate relief in the ordinary course of
law.
The raison d'etre for the rule is that when a court
exercises its jurisdiction, an error committed while so
engaged does not deprive it of the jurisdiction being
exercised when the error was committed. If it did, every
error committed by a court would deprive it of its
jurisdiction and every erroneous judgment would be a
void judgment. In such a situation, the administration of
justice would not survive. Hence, where the issue or
question involved affects the wisdom or legal soundness
of the decision not the jurisdiction of the court to
render said decision the same is beyond the province
of a special civil action for certiorari.
Under Section 8, Act No. 3135, as amended, the debtor-
mortgagor may file a motion to set aside a writ of
execution:
Section 8. Setting aside of sale and writ of
possession. The debtor may, in the
proceedings in which possession was
requested, but not later than thirty days after
the purchaser was given possession, petition
that the sale be set aside and the writ of
possession cancelled, specifying the damages
suffered by him, because the mortgage was not
violated or the sale was not made in
accordance with the provisions hereof, and the
court shall take cognizance of this petition in
accordance with the summary procedure
provided for in section one hundred and twelve
of Act Numbered Four hundred and ninety-six;
and if it finds the complaint of the debtor
justified, it shall dispose in his favor of all or
part of the bond furnished by the person who
obtained possession. Either of the parties may
appeal from the order of the judge in
accordance with section fourteen of Act
Numbered Four hundred and ninety-six; but
180
the order of possession shall continue in effect
during the pendency of the appeal. acIASE
The purchaser may appeal the order to the CA if his
petition is denied by the RTC. However, during the
pendency of the appeal, the purchaser must be placed in
possession of the property, such possession being
predicated on the right of ownership. 70
The threshold issue between petitioner and respondents
in the RTC was the correct amount of redemption money
under Section 47 of R.A. No. 8791. Respondent Aquino had
the right to file an action against petitioner in the RTC in
the exercise of its general jurisdiction to enforce
redemption within the redemption period to preserve its
right to redeem the foreclosed property. 71 It bears
stressing that the controversy between the parties relates
to the precise amount of redemption: petitioner
contended that, under the real estate mortgage executed
by respondent PODC in its favor, the loan account of the
spouses Garbes was secured by the property covered by
said deed; on the other hand, respondents averred that
only the loan account of respondent PODC was secured
by the mortgage of its property. Indeed, the parties could
have raised the issue of the redemption period under the
second paragraph of Section 47 of R.A. No. 8791. The
provision reads:
Notwithstanding Act 3135, juridical persons
whose property is being sold pursuant to an
extrajudicial foreclosure, shall have the right to
redeem the property in accordance with this
provision until, but not after, the registration of
the certificate of foreclosure sale with the
applicable Register of Deeds which in no case
shall be more than three (3) months after
foreclosure, whichever is earlier. Owners of
 property that has been sold in a foreclosure
sale prior to the effectivity of this Act shall
retain their redemption rights until their
expiration. ATDHSC
The ministerial duty of the RTC to issue a writ of
possession does not become discretionary simply
because the Register of Deeds had elevated
in consulta to the LRA the question of whether the
Torrens title should be issued in favor of petitioner
whose Affidavit of Consolidation was registered in the
Office of the Register of Deeds, or in favor of
respondent Aquino who claimed to have redeemed the
property on June 7, 2002 as gleaned from the Certificate
of Redemption of the Ex-Officio Sheriff but registered
only on June 17, 2002. Respondent Aquino claimed to
have redeemed the property with the correct redemption
price and within the one year period of redemption. The
LRA himself admitted that the issue of whether
respondent Aquino had remitted the correct redemption
price is a matter that should be resolved by the regular
courts. 72 The LRA was vested with jurisdiction to
resolve only the registrability of the Affidavit of
Consolidation executed by petitioner and the Certificate
of Redemption executed by the Ex-Officio Sheriff.
We need not rule on the issue of whether respondent
Aquino had lawfully redeemed the property as provided
in Section 47 of R.A. No. 8791. This issue shall be passed
upon by the RTC in Civil Case No. 12785 after the
parties present their testimonial and documentary
evidence.
IN LIGHT OF ALL THE FOREGOING, the petition is
GRANTED. The Decision of the Court of Appeals is
SET ASIDE AND REVERSED.
SO ORDERED.

181