G.R. No.
L-43191 November 13, 1935 return of Attorney Gullas to Cebu on August 31, 1933, notice of dishonor was
PAULINO GULLAS, plaintiff-appellant,
vs.
THE PHILIPPINE NATIONAL BANK, defendant-appellant.
Gullas, Lopez, Tuaño and Leuterio for plaintiff-appellant.
Jose Delgado for defendant-appellant.
MALCOLM, J.:
Both parties to this case appealed from a judgment of the Court of First Instance of
Cebu, which sentenced the defendant to return to the account of the plaintiff the sum
of P5098, with legal interest and costs, the plaintiff to secure damages in the amount
of P10,000 more or less, and the defendant to be absolved totally from the amended
complaint. As it is conceded that the plaintiff has already received the sum
represented by the United States treasury, warrant, which is in question, the appeal
will thus determine the amount, if any, which should be paid to the plaintiff by the
defendant.
The parties to the case are Paulino Gullas and the Philippine National Bank. The first
named is a member of the Philippine Bar, resident in the City of Cebu. The second
named is a banking corporation with a branch in the same city. Attorney Gullas has
had a current account with the bank.
It appears from the record that on August 2, 1933, the Treasurer of the United States
for the United States Veterans Bureau issued a Warrant in the amount of $361,
payable to the order of Francisco Sabectoria Bacos. Paulino Gullas and Pedro Lopez
signed as endorsers of this check. Thereupon it was cashed by the Philippine
National Bank. Subsequently the treasury warrant was dishonored by the Insular
Treasurer.
At that time the outstanding balance of Attorney Gullas on the books of the bank was
P509. Against this balance he had issued certain cheeks which could not be paid
when the money was sequestered by the On August 20, 1933, Attorney Gullas left his
residence for Manila.
The bank on learning of the dishonor of the treasury warrant sent notices by mail to
Mr. Gullas which could not be delivered to him at that time because he was in Manila.
In the bank's letter of August 21, 1933, addressed to Messrs. Paulino Gulla and
Pedro Lopez, they were informed that the United States Treasury warrant No. 20175
in the name of Francisco Sabectoria Bacos for $361 or P722, the payment for which
had been received has been returned by our Manila office with the notation that the
payment of his check has been stopped by the Insular Treasurer. "In view of this
therefore we have applied the outstanding balances of your current accounts with us
to the part payment of the foregoing check", namely, Mr. Paulino Gullas P509. On the
received and the unpaid balance of the United States Treasury warrant was
immediately paid by him.
As a consequence of these happenings, two occurrences transpired which
inconvenienced Attorney Gullas. In the first place, as above indicated, checks
including one for his insurance were not paid because of the lack of funds standing to
his credit in the bank. In the second place, periodicals in the vicinity gave prominence
to the news to the great mortification of Gullas.lawphil.net
A variety of incidental questions have been suggested on the record which it can be
taken for granted as having been adversely disposed of in this opinion. The main
issues are two, namely, (1) as to the right of Philippine National Bank, and to apply a
deposit to the debt of depositor to the bank and (2) as to the amount damages, if any,
which should be awarded Gullas.
The Civil Code contains provisions regarding compensation (set off) and deposit.
(Articles 1195 et seq., 1758 et seq. The portions of Philippine law provide that
compensation shall take place when two persons are reciprocally creditor and debtor
of each other (Civil Code, article 1195). In his connection, it has been held that the
relation existing between a depositor and a bank is that of creditor and debtor. (Fulton
Iron Works Co. vs. China Banking Corporation [1933], 59 Phil., 59.)
The Negotiable Instruments Law contains provisions establishing the liability of a
general indorser and giving the procedure for a notice of dishonor. The general
indorser of negotiable instrument engages that if he be dishonored and the,
necessary proceedings of dishonor be duly taken, he will pay the amount thereof to
the holder. (Negotiable Instruments Law, sec. 66.) In this connection, it has been held
a long line of authorities that notice of dishonor is in order to charge all indorser and
that the right of action against him does not accrue until the notice is given. (Asia
Banking Corporation vs. Javier [1923] 44 Phil., 777; 5 Uniform Laws Annotated.)
As a general rule, a bank has a right of set off of the deposits in its hands for the
payment of any indebtedness to it on the part of a depositor. In Louisiana, however, a
civil law jurisdiction, the rule is denied, and it is held that a bank has no right, without
an order from or special assent of the depositor to retain out of his deposit an amount
sufficient to meet his indebtedness. The basis of the Louisiana doctrine is the theory
of confidential contracts arising from irregular deposits, e. g., the deposit of money
with a banker. With freedom of selection and after full preference to the minority rule
as more in harmony with modern banking practice. (1 Morse on Banks and Banking,
5th ed., sec. 324; Garrison vs. Union Trust Company [1905], 111 A.S.R., 407;
Louisiana Civil Code Annotated, arts. 2207 et seq.; Gordon & Gomila vs. Muchler
[1882], 34 L. Ann., 604; 8 Manresa, Comentarios al Codigo Civil Español, 4th ed.,
359 et seq., 11 Manresa pp. 694 et seq.)
Starting, therefore, from the premise that the Philippine National Bank had with
respect to the deposit of Gullas a right of set off, we next consider if that remedy was
enforced properly. 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 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.) The decision cited
represents the minority doctrine, for on principle it would seem that notice is not
necessary to a maker because the right is based on the doctrine that the relationship
is that of creditor and debtor. 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.

We accordingly are of the opinion that the action of the bank was prejudicial to Gullas.
But to follow up that statement with others proving exact damages is not so easy. For
instance, for alleged libelous articles the bank would not be primarily liable. The same
remark could be made relative to the loss of business which Gullas claims but which
could not be traced definitely to this occurrence. Also Gullas having eventually been
reimbursed lost little through the actual levy by the bank on his funds. On the other
hand, it was not agreeable for one to draw checks in all good faith, then, leave for
Manila, and on return find that those checks had not been cashed because of the
action taken by the bank. That caused a disturbance in Gullas' finances, especially
with reference to his insurance, which was injurious to him. All facts and
circumstances considered, we are of the opinion that Gullas should be awarded
nominal damages because of the premature action of the bank against which Gullas
had no means of protection, and have finally determined that the amount should be
P250.

Agreeable to the foregoing, the errors assigned by the parties will in the main be
overruled, with the result that the judgment of the trial court will be modified by
sentencing the defendant to pay the plaintiff the sum of P250, and the costs of both
instances.

Villa-Real, Imperial, Butte, and Goddard, JJ., concur.

G.R. No. 127469 January 15, 2004
PHILIPPINE BANKING CORPORATION, petitioner,
vs.
COURT OF APPEALS and LEONILO MARCOS, respondents.
DECISION
CARPIO, J.:
The Case
Before us is a petition for review of the Decision1 of the Court of Appeals in CA-G.R.
CV No. 34382 dated 10 December 1996 modifying the Decision2 of the Regional Trial
Court, Fourth Judicial Region, Assisting Court, Biñan, 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 Damages3 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 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.
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. 20-979-83
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 P1,428,795.345 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. 20-979-83 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 P1,428,795.357 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.
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.
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
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 assigment 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 P4,867.6713 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.
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 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 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 underlined 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 of this discretion. The 1997 Rules of
Court retained this discretion.22 Section 3, Rule 18 of the 1964 Rules of Court reads:
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
motions25 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 right27 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. 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 Appeals31 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.
In Simex 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.
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.
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. FLORENCIO B. PAGSALIGAN
Branch Manager45
The foregoing certification is clear. The total amount of time deposits of Marcos as of
12 March 1982 is 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 covered by the trust receipts and thus no interest is due 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 interest46 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’ testimony48 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.50 The 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 interest54 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
221257 of the Civil Code.
The BANK’s dismal failure to account for Marcos’ money justifies the award of
moral58 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 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.
G.R. No. 172020 December 6, 2010 against which the packing advances were granted started to expire. Meanwhile, on
December 7, 1979, petitioner, without notifying the respondents, applied to the
TRADERS ROYAL BANK, Petitioner, payment of respondents’ outstanding obligations the sum of $4,220.00 or ₱30,930.49
vs. which was remitted to the respondents thru telegraphic transfer from AMROBANK,
NORBERTO CASTAÑARES and MILAGROS CASTAÑARES, Respondents. Amsterdam by one Richard Wagner. The aforesaid entries in the passbook of
respondents and the $4,220.00 telegraphic transfer were the subject of respondents’
letter-complaint5 dated September 20, 1982 addressed to the Manager of the
DECISION Regional Office of the Central Bank of the Philippines.

VILLARAMA, JR., J.:
Assailed in this petition for review under Rule 45 of the 1997 Rules of Civil Procedure,
as amended, is the Decision1 dated January 11, 2006 of the Court of Appeals (CA) in
CA-G.R. CV No. 67257 which reversed the Joint Decision2 dated August 26, 1998 of
the Regional Trial Court (RTC) of Cebu City, Branch 13 in Civil Case Nos. R-22608
and CEB-112.
The Facts
Respondent-spouses Norberto and Milagros Castañares are engaged in the business
of exporting shell crafts and other handicrafts. Between 1977 and 1978, respondents
obtained from petitioner Traders Royal Bank various loans and credit
accommodations. Respondents executed two real estate mortgages (REMs) dated
April 18, 1977 and January 25, 1978 covering their properties (TCT Nos. T-38346, T-
37536, T-37535, T-37192 and T-37191). As evidenced by Promissory Note No. BD-
77-113 dated May 10, 1977, petitioner released only the amount of ₱35,000.00
although the mortgage deeds indicated the principal amounts as ₱86,000.00 and
₱60,000.00.3
For failure of the respondents to pay their outstanding loans with petitioner, the latter
proceeded with the extrajudicial foreclosure of the real estate mortgages. 6 Thereafter,
a Certificate of Sale7 covering all the mortgaged properties was issued by Deputy
Sheriff Wilfredo P. Borces in favor of petitioner as the lone bidder for ₱117,000.00
during the auction sale conducted on November 24, 1981. Said certificate of sale was
registered with the Office of the Register of Deeds on February 4, 1982.
On November 24, 1982, petitioner instituted Civil Case No. R-22608 for deficiency
judgment, claiming that after applying the proceeds of foreclosure sale to the total
unpaid obligations of respondents (₱200,397.78), respondents were still indebted to
petitioner for the sum of ₱83,397.68.8 Respondents filed their Answer With
Counterclaim on December 27, 1982.9
On February 10, 1983, respondents filed Civil Case No. CEB-112 for the recovery of
the sums of ₱2,584.27 debited from their savings account passbook and the
equivalent amount of $4,220.00 telegraphic transfer, and in addition, $55,258.85
representing the damage suffered by the respondents from letters of credit left un-
negotiated because of petitioner’s refusal to pay the $4,220.00 demanded by the
respondents.10

Respondents were further granted additional funds on various dates under The cases were consolidated before Branch 13, RTC of Cebu City.
promissory notes4 they executed in favor of the petitioner:
Ruling of the RTC
Type of Loan Date Granted Amount
In a Joint Decision11 dated August 26, 1998, the RTC ruled in favor of the petitioner,
Packing Credit May 10, 1977 P19,000.00 as follows:
Packing Credit May 18, 1977 P25,000.00
WHEREFORE, in view of the foregoing, judgment is hereby rendered in Civil Case
Packing Credit June 23, 1977 P12,500.00 No. R-22608 in favor of the plaintiff and against the defendants directing the
defendants jointly and solidarily to pay plaintiff the sum of ₱83,397.68 with legal rate
Packing Credit August 19, 1977 P 2,900.00 of interest to be computed from November 24, 1981 (the date of the auction sale) until
Packing Credit April 4, 1978 P18,000.00 full payment thereof. They are likewise directed to pay plaintiff attorney’s fees in the
sum of ₱10,000.00 plus litigation expenses in the amount of ₱2,500.00.
Packing Credit April 19, 1978 P23,000.00
With cost against defendants.
On June 22, 1977, petitioner transferred the amount of ₱1,150.00 from respondents’
current account to their savings account, which was erroneously posted as ₱1,500.00 In CEB-112, judgment is hereby rendered dismissing the complaint.
but later corrected to reflect the figure ₱1,150.00 in the savings account passbook. By
the second quarter of 1978, the loans began to mature and the letters of credit With cost against the plaintiff.
SO ORDERED.12
The trial court found that despite respondents’ insistence that the REM covered only a
separate loan for ₱86,000.00 which they believed petitioner committed to lend them,
the evidence clearly shows that said REM was constituted as security for all the
promissory notes. No separate demand was made for the amount of ₱86,000.00
stated in the REM, as the demand was limited to the amounts of the promissory
notes. The trial court further noted that respondents never questioned the judgment
for extrajudicial foreclosure, the certificate of sale and the deficiency in that case.13
With respect to the passbook entries, the trial court stated that no objection thereto
was made by the respondents until five years later when in a letter dated August 10,
1982, respondents’ counsel asked petitioner to be enlightened on the matter. Neither
did respondents protest the application of the balance (₱1,150.00) in the passbook to
his account with petitioner. More important, respondent Norberto Castañares in his
testimony admitted that the matter was already clarified to him by petitioner and that
the latter had the right to apply his deposit to his loan accounts. Admittedly, his
complaint has to do more with the lack of consent on his part and the non-issuance of
official receipt. However, he did not follow up his request for official receipt as he did
not want to be going back and forth to the bank.14
CA Ruling
With the trial court’s denial of their motion for reconsideration, respondents appealed
to the CA. Finding merit in respondents’ arguments, the appellate court set aside the
trial court’s judgment under its Decision15 dated January 11, 2006, thus:
WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us
GRANTING the appeal filed in this case and REVERSING AND SETTING ASIDE the
Joint Decision dated August 26, 1998, Regional Trial Court, 7th Judicial Region,
Branch 13, in Civil Case No. R-22608 and Civil Case No. CEB-112. With regard to
Civil Case No. R-22608, the real estate mortgage dated April 18, 1977 is hereby
DECLARED as valid in part as to the amount of P35,000.00 actually released in favor
of appellants, while the real estate mortgage dated January 26, 1978 is hereby
declared as null and void. Furthermore, in Civil Case No. CEB-112, TRB is hereby
ordered to release the amount of US$4,220.90 to the appellants at its current rate of
exchange. No pronouncement as to costs.
SO ORDERED.16
The CA held that the RTC overlooked the fact that there were no adequate evidence
presented to prove that petitioner released in full to the respondents the proceeds of
the REM loan. Citing Filipinas Marble Corporation v. Intermediate Appellate
Court17 and Naguiat v. Court of Appeals,18 the appellate court declared that where
there was failure of the mortgagee bank to deliver the consideration for which the
mortgage was executed, the contract of loan was invalid and consequently the
accessory contract of mortgage is likewise null and void. In this case, only
₱35,000.00 out of the ₱86,000.00 stated in the REM dated April 18, 1977 was
released to respondents, and hence the REM was valid only to that extent. For the
same reason, the second REM was null and void since no actual loan proceeds were
released to the respondents-mortgagors. The REMs are not connected to the
subsequent promissory notes because these were signed by respondents for the sole
purpose of securing packing credits and export advances. Further citing Acme Shoe,
Rubber and Plastic Corp. v. Court of Appeals,19 the CA stated that the rule is that a
pledge, real estate mortgage or antichresis may exceptionally secure after-incurred
obligations only as long as these debts are accurately described therein. In this case,
neither of the two REMs accurately described or even mentioned the securing of
future debts or obligations.20
The CA thus held that petitioner’s remedy would be to file a collection case on the
unpaid promissory notes which were not secured by the REMs.
As to the $4,220.00 telegraphic transfer, the CA ruled that petitioner had no basis for
withholding and applying the said amount to respondents’ loan account. Said
transaction was separate and distinct from the contract of loan between petitioner and
respondents. Petitioner had no authority to convert the said telegraphic transfer into
cash since the participation of respondents was necessary to sign and indorse the
disbursement voucher and check. Moreover, petitioner was not transparent in its
actions as it did not inform the respondents of its intention to apply the proceeds of
the telegraphic transfer to their loan account and worse, it did not even present an
official receipt to prove payment. Section 5 of Republic Act No. 6426, otherwise
known as the Foreign Currency Deposit Act, provides that there shall be no restriction
on the withdrawability by the depositor of his deposit or the transferability of the same
abroad except those arising from contract between the depositor and the bank. 21
The Petition
Petitioner raised the following grounds in the review of the CA decision:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE REAL
ESTATE MORTGAGE DATED 18 APRIL 1977 IS VALID ONLY IN PART
TO THE EXTENT OF PHP35,000.00 WHICH IS ALLEGEDLY THE
AMOUNT PROVED TO HAVE BEEN ACTUALLY RELEASED TO
RESPONDENTS OUT OF THE SUM OF PHP86,000.00.
II. THE COURT OF APPEALS ERRED IN DECLARING AS NULL AND
VOID THE REAL ESTATE MORTGAGE DATED 26 JANUARY 1978 IN
THAT NO ACTUAL LOAN PROCEEDS WERE RELEASED IN FAVOR OF
THE RESPONDENTS.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER
HAD NO BASIS IN WITHHOLDING AND SUBSEQUENTLY APPLYING IN
PAYMENT OF RESPONDENTS’ OVERDUE ACCOUNT IN THE
TELEGRAPHIC TRANSFER IN THE AMOUNT OF U.S.$4,220.00.22
Petitioner contends that the CA overlooked the specific stipulation in the REMs that
the mortgage extends not only to the amounts specified therein but also to loans or
credits subsequently granted, which include the packing credits and export advances
obtained by the respondents. Moreover, the amounts indicated on the REMs need not
exactly be the same amounts that should be released and covered by checks or
credit memos, the same being only the maximum sum or "ceiling" which the REM
secures, as explained by petitioner’s witness, Ms. Blesy Nemeño. Her testimony does
not prove that the proceeds of the loans were not released in full, as no credit memos
in the specific amounts received by the respondents can be presented.
Petitioner argues that the rulings cited by the CA do not at all support its conclusion
that the promissory notes were totally unrelated to the REMs. In the Acme case, the
pronouncement was that the after-incurred obligations must, at the time they are
contracted, only be accurately described in a proper instrument as in the case of a
promissory note. The confusion was brought by the use in the CA decision of the
word "therein" which is not found in the text of the Acme ruling. Besides, it is way too
impossible that future loans can be accurately described, as the CA opined, at the
time that a deed of real estate mortgage is executed. The CA’s reliance on the case
of Filipinas Marble Corporation, is likewise misplaced as it finds no application under
the facts obtaining in the present case. The misappropriation by some individuals of
the loan proceeds secured by petitioner was the consideration which compelled this
Court to rule that there was failure on the part of DBP to deliver the consideration for
which the mortgage was executed. Similarly, the case of Naguiat is inapplicable in
that there was evidence that an agent of the creditor withheld from the debtor the
checks representing the proceeds of the loan pending delivery of additional collateral.
Finally, petitioner reiterates that it had the right by way of set-off the telegraphic
transfer in the sum of $4,220.00 against the unpaid loan account of respondents.
Citing Bank of the Philippine Islands v. Court of Appeals, 23 petitioner asserts that they
are bound principally as both creditors and debtors of each other, the debts consisting
of a sum of money, both due, liquidated and demandable, and are not claimed by a
third person. Hence, the RTC did not err in holding that petitioner validly applied the
amount of ₱30,930.20 (peso equivalent of $4,220.00) to the loan account of the
respondents.
Our Ruling
We rule for the petitioner.
The subject REMs contain the following provision:
That, for and in consideration of certain loans, overdrafts and other credit
accommodations obtained, from the Mortgagee by the Mortgagor and/or SPS.
NORBERTO V. CASTAÑARES & MILAGROS M. CASTAÑARES and to secure the
payment of the same, the principal of all of which is hereby fixed at EIGHTY-SIX
THOUSAND PESOS ONLY – (P86,000.00) Pesos, Philippine Currency, as well as
those that the Mortgagee may hereafter extend to the Mortgagor x x x, including
interest and expenses or any other obligation owing to the Mortgagee, whether direct
or indirect, principal or secondary, as appears in the accounts, books and records of
the Mortgagee x x x.24 (Emphasis supplied.)
The above stipulation is also known as "dragnet clause" or "blanket mortgage clause"
in American jurisprudence that would subsume all debts of past and future origins. It
has been held as a valid and legal undertaking, the amounts specified as
consideration in the contracts do not limit the amount for which the pledge or
mortgage stands as security, if from the four corners of the instrument, the intent to
secure future and other indebtedness can be gathered. A pledge or mortgage given
to secure future advancements is a continuing security and is not discharged by the
repayment of the amount named in the mortgage until the full amount of all
advancements shall have been paid.25
A "dragnet clause" operates as a convenience and accommodation to the borrowers
as it makes available additional funds without their having to execute additional
security documents, thereby saving time, travel, loan closing costs, costs of extra
legal services, recording fees, et cetera.26 While a real estate mortgage may
exceptionally secure future loans or advancements, these future debts must be
sufficiently described in the mortgage contract. An obligation is not secured by a
mortgage unless it comes fairly within the terms of the mortgage contract.27
In holding that the REMs were null and void, the CA opined that the full amount of the
principal loan stated in the deed should have been released in full, sustaining the
position of the respondents that the promissory notes were not secured by the
mortgage and unrelated to it. However, a reading of the afore-quoted provision of the
REMs shows that its terms are broad enough to cover packing credits and export
advances granted by the petitioner to respondents. That the respondents
subsequently availed of letters of credit and export advances in various amounts as
reflected in the promissory notes, buttressed the claim of petitioner that the amounts
of ₱86,000.00 and ₱60,000.00 stated in the REMs merely represent the maximum
total loans which will be secured by the mortgage. This must be so as respondents
confirmed that the mortgage was constituted for the purpose of obtaining additional
capital as dictated by the needs of their export business. Significantly, no complaint
was made by the respondents as to the non-release of ₱86,000.00 and ₱60,000.00,
in full, simultaneous or immediately following the execution of the REMs -- under a
single promissory note each equivalent to the said sums -- and no demand for the
said specific amounts was ever made by the petitioner. Even the letter-complaint sent
by respondents to the Central Bank almost a year after the extrajudicial foreclosure
sale mentioned only the questioned entries in their passbook and the $4,220.00
telegraphic transfer. Considering that respondents deemed it a serious "banking
malpractice" for petitioner not to release in full the loan amount stated in the REMs, it
can only be inferred that respondents themselves understood that the ₱86,000.00
and ₱60,000.00 indicated in the REMs was intended merely to fix a ceiling for the
loan accommodations which will be secured thereby and not the actual principal loan
to be released at one time. Thus, the RTC did not err in upholding the validity of the
REMs and ordering the respondents to pay the deficiency in the foreclosure sale to
satisfy the remaining mortgage indebtedness.
The cases relied upon by the CA are all inapplicable to the present
controversy.lawph!1 In Filipinas Marble Corporation, we held that pending the
outcome of litigation between DBP which together with Bancom officers were alleged
by the petitioner-mortgagor to have misspent and misappropriated the $5 million loan
granted by DBP, the provisions of P.D. No. 385 prohibiting injunctions against
foreclosures by government financial institutions, cannot be automatically applied.
Foreclosure of the mortgaged properties for the whole amount of the loan was only requirements for conventional compensation are (1) that each of the parties can
deemed prejudicial to the petitioner, its employees and their families since the true fully dispose of the credit he seeks to compensate, and (2) that they agree to the
amount of the loan which was applied for the benefit of the petitioner can be extinguishment of their mutual credits.32 Consequently, no error was committed by the
determined only after a trial on the merits.28 No such act of misappropriation by trial court in holding that petitioner validly applied, by way of compensation, the
corporate officers appointed by the mortgagee is involved in this case. Besides, the $4,220.00 telegraphic transfer remitted by respondents’ foreign client through the
respondents never denied receiving the amounts under the promissory notes which petitioner.
were all covered by the REMs and the very obligations subject of the extrajudicial
foreclosure. WHEREFORE, the petition is GRANTED. The Decision dated January 11, 2006 of
the Court of Appeals in CA-G.R. CV No. 67257 is REVERSED and SET ASIDE. The
As to the ruling in Naguiat, we found therein no compelling reason to disturb the lower Joint Decision dated August 26, 1998 of the Regional Trial Court of Cebu City,
courts’ finding that the lender did not remit and the borrower did not receive the Branch 13 in Civil Case Nos. R-22608 and CEB-112 is REINSTATED and UPHELD.
proceeds of the loan. Hence, we held the mortgage contract, being just an accessory
contract, as null and void for absence of consideration. 29 In this case, however, No pronouncement as to costs.
respondents admitted they received all the amounts under the promissory notes
presented by the petitioner. The consideration in the execution of the REMs consist of
those credit accommodations to fund their export transactions. Respondents as an SO ORDERED.
afterthought raised issue on the nature of the amounts of principal loan indicated in
the REMs long after these obligations have matured and the mortgage foreclosed due MARTIN S. VILLARAMA, JR.
to their failure to fully settle their outstanding accounts with petitioner. Having Associate Justice
expressly agreed to the terms of the REMs which are phrased to secure all such
loans and advancements to be obtained from petitioner, although the principal
amount stated therein were not released at one time and under several, not just one,
subsequently issued promissory notes, respondents may not be allowed to complain
later that the amounts they received were unrelated to the REMs.

On the issue of the $4,220.00 telegraphic transfer which was applied by the petitioner
to the loan account of respondents, we hold that the CA erred in holding that
petitioner had no authority to do so by way of compensation or set off. In this case,
the parties stipulated on the manner of such set off in case of non-payment of the
amount due under each promissory note.

The subject promissory notes thus provide:

In case of non-payment of this note or any installments thereof at maturity, I/We

jointly and severally, agree to pay an additional amount equivalent to two per cent
(2%) per annum of the amount due and demandable as penalty and collection
charges, in the form of liquidated damages, until fully paid; and the further sum of ten
per cent (10%) thereof in full, without any deduction, as and for attorney’s fees
whether actually incurred or not, exclusive of costs and judicial/extrajudicial
expenses; moreover, I/We, jointly and severally, further empower and authorize the
TRADERS ROYAL BANK, at its option, and without notice, to set-off or to apply to the
payment of this note any and all funds, which may be in its hands on deposit or
otherwise belonging to anyone or all of us, and to hold as security therefor any real or
personal property, which may be in its possession or control by virtue of any other
contract.30 (Emphasis supplied.)

Agreements for compensation of debts or any obligations when the parties are
mutually creditors and debtors are allowed under Art. 1282 of the Civil Code even
though not all the legal requisites for legal compensation are present. Voluntary or
conventional compensation is not limited to obligations which are not yet due. 31 The
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 32576 November 6, 1930
FULTRON IRON WORKS CO., plaintiff-appellee,
vs.
CHINA BANKING CORPORATION, ET AL., defendants.
CHINA BANKING CORPORATION, appellant.
Feria and La O, and Gibbs and McDonough for appellant.
Claro M. Recto and DeWitt, Perkins and Brady for appellee.
STREET, J.:
This action was instituted on June 23, 1926, in the Court of First Instance of the City
of Manila by the Fulton Iron Works Co., a Delaware corporation having its principal
place of business in St. Louis, Missouri, and duly authorized under the laws of the
Philippine Islands to engage in business in this country. The defendants named in the
complaint are the China Banking Corporation, a domestic corporation having its
principal place of business in the City of Manila, and one S. C. Schwarzkopf. In the
petitory part of the complaint judgment is sought against the two defendants jointly
and severally for the sum of P131,197.10, with interest. As a ground of action against
the two defendants it is asserted in the complaint that the amount claimed by the
plaintiff is part of a larger sum of money (P176, 197.10) belonging to the plaintiff
which had been deposited in the defendant bank by Schwarzkopf during the year
1922, and which had been misappropriated and embezzled by him, with the full
knowledge and consent of the defendant bank. The idea underlying the action, as
against the bank, is that it has been guilty of what may perhaps be styled a civil
complicity in the misappropriation of the money for which recovery is sought.
Upon hearing the cause, upon the separate answers of the two defendants, the trial
court absolved Schwarckopf from the complaint, for the reason that in two prior
criminal proceedings he had been convicted of the offense of estafa, based upon his
misappropriated of the same money, and in said proceedings the obligation to
indemnify the plaintiff had been imposed upon him in the amount of P146,197.40. His
Honor, however, gave judgment in favor of the plaintiff, the Fulton Iron Works Co., to
recover of the defendant bank the sum of P127,200.36, with lawful interest from June
23, 1926, the date of the filing of the complaint, and with costs. From this judgment
the defendant bank appealed.
It appears that in the month of March, 1921, the plaintiff the Fulton Iron Works Co., of
St. Louis, Missouri, sold to the Binalbagan Estate, Inc., a Philippine corporation,
machinery for a sugar mill, for which the purchaser executed three notes amounting
to about $80,000. The first of these notes became due October 1, 1921, and the other
two on April 1, 1922. Neither of the three notes was paid at maturity, owing to the fact
that, before the notes fell due, the Binalbagan Estate, Inc. suspended payments and
passed into the hands of the Philippine National Bank, its principal creditor, for
administration.
The consequently delay in the payments of the notes caused the plaintiff to employ a
firm of lawyers in Manila, of which S. C. Schwarzkopf was then a member, to
represent the plaintiff in an effort to obtain security for the indebtedness, with a view
to its later collection. At the time this retainer was effect, Schwarzkopf was in St.
Louis, on a visit to the United States, and in order that the plaintiff might comply with
the laws of the Philippine Islands in the matter of obtaining a license to transact
business here, the plaintiff executed a formal power of attorney authorizing the
members of Schwarzkopf's firm jointly and severally to accept service in actions and
to do other things necessary to enable the plaintiff to secure the contemplated
license. It is noteworthy that the authority of Schwarzkopf's firm to represent the
plaintiff in the collection of the claims above mentioned did not proceed from this
power, but had its origin in the employment of said firm as attorneys in the matter.
Schwarzkopf returned to Manila in the early part of November, 1921, and the law firm
to which he pertained was dissolved on November 15, 1921. Under the dissolution
agreement the matter of handling this collection devolved upon Schwarzkopf, and he
alone was thereafter concerned in the matter.
On December 13, 1921, Schwarzkopf opened a personal account, as a depositor, in
the China Banking Corporation by making a deposit, on that date, of the sum of P578.
This account was at all times modest in sized, and on January 1, 1922, the credit
balance therein was P543.35. This account has little or no significance in the case,
and it became defunct by September 1, 1922. It may be observed, however, that a
few of the deposits in this account appear to have been taken from account No. 2 to
which reference will presently be made.
In the early part of the year 1922, the financial condition of the Binalbagan Estate, Inc.
began to improve; and on January 13, 1922, D. M. Semple, manager of the Philippine
Sugar Centrals Agency, a department of the Philippine National Bank, drew check
No. 574 for the sum of P10,000, payable to the order of Sydney C. Schwarzkopf, and
delivered the same to him in part payment of the indebtedness owing to the plaintiff
from the Binalbagan Estate, Inc. Upon receiving this check Schwarzkopf signed a
receipt as "attorney-in-fact of Fulton Iron Works Co." The character of attorney-in-fact,
thus assumed by Schwarzkopf, was of course a mere fiction, as the power of attorney
which he really possessed was limited to other matters. The point, however, is really
of no moment.
The check for P10,000 above mentioned was duly indorsed by Schwarzkopf and
deposited by him in a new account with the defendant bank, known as "No. 2
account." This money was thereafter withdrawn from the bank from time to time by
Schwarzkopf, upon his personal checks, and used for his individual purposes. In the
appealed judgment the defendant is held liable for this money, a mere oversight
resulting apparently, from a confusion of this matter with the more important issues
involved in other parts of the case. There is no proof that the defendant bank had any
knowledge, or was chargeable with notice, that the P10,000 thus deposited and
drawn out belonged to any person other than Schwarzkopf himself; and, as depositor,
Schwarzkopf of course had absolute control of the account. A depositor is presumed
to be the owner of funds standing in his name in a bank deposit; and where a bank is
not chargeable with notice that the money deposited in such account is the property
of some other person than the depositor, the bank is justified in paying out the money
to the depositor or upon his order, and cannot be liable to any other person as the
true owner. It is hardly necessary to cite authority upon a proposition so manifestly in
accord with the usage and the common sense of the commercial community. The
proposition stated is implicit in all the cases concerned with the question of the liability
of a bank to its depositors and other persons claiming an interest in the deposits.
Proceeding to the next collection effected by Schwarzkopf upon account of the
plaintiff's claim against the Binalbagan Estate, Inc., we find that on April 11, 1922,
Schwarkopf received, from the manager of the Philippine Sugar Centrals Agency, a
check for the sum of P61,237.50. This check was made payable on its face to "S. C.
Schwarkopf Attorney-in-Fact, Fulton Iron Works Co., or order." After indorsing this
check in the form in which it was drawn, Schwarzkopf opened a new account with the
defendant bank, entitled "S. C. Schwarzkopf, Attorney- in-Fact, Fulton Iron Works
Co.," and deposited said check therein. This account remained undisputed on the
books of the bank for some two months, during which period it had an accretion of
about P130.
Meanwhile, the No. 2 account which had been established back in January, became
depleted, but the manager of the bank, in view, no doubt, of the funds to
Schwarzkopf's credit in the third account conceded to him a credit in No. 2 account of
P25,000. By June 15, 1922, said account became overdrawn to the extend of P22,
144.39, and it was obvious that the limit of the conceded credit would soon be
reached. The manager of the bank then intervened and requested Schwarzkopf to
settle the overdraft. To accomplish this Schwarkopf merely transferred, by check, the
money to his credit in his special account as plaintiff's attorney-in-fact to the No. 2
account. The amount thus transferred was P61,360.81, and the effect of the transfer
was to absorb the overdraft and place a credit balance of nearly P40,000 in No. 2
account. Schwarzkopf then purchased a draft on New York in the amount of $15,000,
and after some delay transmitted the same by mail to the plaintiff. This draft cost
Schwarzkopf the sum of P30,375.02, and it was the only remittance ever made by
him to his client.
The principal question that arises upon the facts above stated is, whether the
defendant bank is liable to the plaintiff for the sum of P22, 144.39 which was thus
applied to the payment of Schwarzkopf's personal indebtedness resulting from his
overdraft in the No. 2 account. Upon this point the first thing to be noted is that the
very form in which the third account was carried on the books of the defendant bank
was sufficient to charge the bank with notice of the fact that the money deposited in
said account belonged to the Fulton Iron Works Co. and not to Schwarzkopf. It is
commonly said, and truly said in a legal sense, that money has no earmarks. But
bank accounts and commercial paper can have earmarks, and these earmarks
consist of the word or words which infallibly convey to the mind notice that the money
or credit represented by the account with which they are associated or the instrument
upon which they are written rightfully belongs to some other person than the one
having control thereof. A bank cannot permit, much less require, a depositor who is in
control of a trust fund to apply any part of the same to his individual indebtedness to
the bank. The decisions to this effect are uniformly accordant and it is believed no
creditable authority to the contrary can be produced from any source. The expression
"trust fund," in this connection, is not a technical term, and is applied in a loose sense
to indicate the situation where a bank account or negotiable securities of any sort are
under the control of a person other than the true owner. The following decisions are
instructive as illustrating different phases of the rule above stated, the selection
having been made with a view to the fact that the cases cited are for the most part
accessible in one or more series of annotated reports; Central Nat. Bank of Baltimore
vs. Conn. Mut. Life Ins. Co., 104 U. S., 54; 26 Law. ed., 693; Union Stock Yards Nat.
Bank vs. Moore, 25 C. C. A., 150; 79 Fed., 705 Sayre vs. Weil, 94 Ala., 466; 15 L. R.
A., 544; Am. Trust & Banking Co. vs. Boone, 102 Ga., 202; 40 L. R. A., 250; 66 Am.
St. Rep., 167; First Denton Nat. Bank vs. Kenney, 116 Md., 24; Ann. Cas. 19193B,
1337; Allen vs. Puritan Trust Co., 211 Mass., 409; L. R. A. 1915C, 518 (and note);
Emerado Farmers' El. Co. vs. Farmers' Bank, 20 N. D., 270; 29 L. R. A. (N. S.), 567;
Baird vs. Lorenz (N. D.), 61 L. R. A., 1385, 1389 (note); Walters Nat. Bank vs.
Bantock, 41 Okla.,, 153; L. R. A. 1915C, 531; Interstate Nat. Bank vs. Claxton 97
Tex., 569; 65 L. R. A., 820; 104 Am. St. Rep., 885; Boyle vs. Northwestern Nat. Bank
of Superior, 125 Wis., 498; 1 L. R. A. (N. S.) 1110 Am. St. Rep., 851; United States
Fidelity & Gy. Co. vs. Adoue, 104 Tex., 379; 37 L. R. A. (N. S.), 409; Ann. Cas.
1914B, 667; Underwood Ltd. vs. Bank of Liverpool (1924), 1 K. B., 755.
Upon the facts before us it is evident that when credit to the extent of P25,000 was
conceded to Schwarzkopf in his personal account No. 2, the eye of the banker was
fixed upon the large amount then upon deposit to Schwarkopf's credit in his account
as attorney-in-fact; but of course, if a bank cannot apply the money in such an
account, or even permit it to be applied, to the personal indebtedness of the fiduciary
depositor, it is not permissible for the bank to extend personal credit to such depositor
upon the faith of the trust account. From any point that the matter be viewed, the
liability of the bank is clear to the extent of P22144.39 this being the amount derived
from Schwarkopf's account as attorney-in-fact which was absorbed by his overdraft in
account No. 2 when the transfer of the balance in the former account to the latter
account was effected, in the manner already stated.
We next proceed to consider the disposition made of the proceeds of the third check
collected by Schwarzkopf upon account of plaintiff's claim against the Binalbagan
Estate, Inc., from the Philippine National Bank. The amount of this collection was
P104, 959.60, and it was paid, on October 11, 1922, by a cashier's check on the
Philippine National Bank, payable "to the order of S. C. Schwarzkopf, attorney-in-fact,
Fulton Iron Works Co." Upon receiving this check, Schwarzkopf indorsed it in proper
form, by writing thereon the words "S. C. Schwarzkopf, attorney-in-fact, Fulton Iron
Works Co.," to which he added another indorsement consisting of his own name
alone, and deposited the check in his personal account No. 2 with the defendant
bank. The check thus delivered to the bank was collected by it from the Philippine
National Bank in ordinary course. Thereafter, in the course of the next few months,
Schwarzkopf withdrew, upon checks written by himself, the entire amount of the
money to his credit in account No. 2, thus misappropriating the money in said account
to his own use.
It will be noted that the money thus squandered comprised not only the proceeds of
the check last mentioned but the residue, consisting of a few thousand pesos, which
had been left in No. 2 account after the overdraft had been paid and Schwarzkopf had
remitted the draft of $15,000 to his principal in the United States. We consider that,
from a legal point of view, the situation with respect to this money is precisely the
same as that presented with respect to the money which came into the account later
by deposit of the check for P104,959.60 above mentioned, because as to both funds,
liability is sought to be fixed upon the bank by reason of its knowledge of the source
from which said funds were derived; and in this connection it should be noted that
there is no proof showing that the defendant bank had any knowledge of the
misappropriation of this money by Schwarzkopf other than such as might have been
derived from an inspection of its own books and the checks by which the money was
paid in and paid out.
The feature of the case now under consideration brings us, it must be admitted, into
debatable territory, but a discriminating analysis of the legal principles involved leads
to the conclusion that the defendant cannot be held liable for money paid out by it in
ordinary course on checks, in regular form, drawn by Schwarzkopf on the No. 2
account.
The specialized function of bank is to serve as a place of deposit for money, to keep it
safely while on deposit, and to pay it out, upon demand to the person who effected
the deposit or upon his order. A bank is not a guardian of trust funds deposited with it
in the sense that it must see to their proper application nor is it its business to pry into
the uses to which moneys on deposit in its vault are being put; and so long as it
serves its function and pays the money out in good faith to the person who deposited
it, or upon his order, without knowledge or notice that it is in fact assisting in the
misappropriation of the fund, the bank will be protected. As is well said by the author
of the monographic article on Banks and Banking in Ruling Case Law, It would
seriously interfere with commercial transactions to charge banks with the duty of
supervising the administration of trust funds, when, in due course of business, they
receive checks and drafts in proper form drawn upon such funds in their custody. The
law imposes no such duty upon them (3 R. C. L., 549; see also cases cited in 7 C. J.,
644, 645, note 25).
There are, it is true, decisions from a few courts, deservedly held in high esteem, to
the effect that a bank makes itself an effective accomplice in the conversion of a trust
fund when, with notice of the character of such fund, it permits the person in control
thereof to deposit it in his personal account. But the decided weight of judicial
authority is to the contrary; and it is generally held that the mere act of a bank in
entering a trust fund to the personal account of the fiduciary, knowing it to be a trust
fund, will not make the bank liable in case of the subsequent misappropriation of the
money by the fiduciary. (United States Fidelity & Gy. Co. vs. First Nat. Bank, 18 Cal.
App., 437: Goodwin vs. Am. Nat. Bank, 48 Conn., 550; Batchelder vs. Cen. Nat. Bank
of Boston, 188 Mass., 25; Allen vs. Puritan Trust Co., 211 Mass., 409; L. R. A.
1915C, 518; Gate City Bldg. & Loan Assoc. vs. National Bank of Commerce, 126 Mo.,
82; 27 L. R. A., 401; 47 Am. St. Rep., 630; Bischoff vs. Yorkville Bank, 218 N. Y., 106;
Havana C. R. Co. vs. Knickerbocker Trust Co., 198 N. Y., 422; L. R. A. 1915B, 720).
The bank has the right to presume that the fiduciary will apply a trust fund to its
proper purpose, and at any rate the bank is not required to send a courier with the
money to see that it reaches a proper destination.
In the case before us an intimate study of the checks which came into the defendant
bank against account No. 2 over a series of months, would have led a discerning
person to the conclusion that the plaintiff's money was being squandered, but such an
inference could not legitimately have been drawn from the first few checks which
were drawn upon the fund, and it would be hard to say just where the bank,
supposing its suspicions to have been aroused, should have intervened. No such a
duty is imposed. Of course, when the bank became a party to the application of part
of the plaintiff's money to the satisfaction of the overdraft in No. 2 account, it was
directly chargeable with knowledge of the misappropriation of the fund to the extent of
the overdraft and that fact, as we have already said, made the bank liable. But this
rule cannot be extented to subsequent acts of malversation and misappropriation
committed by the fiduciary against the real owner of the fund.
Furthermore, it is undeniable that a bank may incur liability by assisting the fiduciary
to accomplish a misappropriation, although the bank does not actually profit by the
misappropriation. A decision illustrating this aspect of the law is found in Washborn
vs. Linscott State Bank (87 Kan., 698), where a bank, to help the treasurer of a lodge
to conceal his defalcations, permitted him to overdraw, and when his account were to
be audited, issued to him a deposit certificate for the shortage, payable to the lodge.
After the audit was made, the certificate was returned and cancelled, and the
shortage reappeared. The court held that a loan had been made to the treasurer
personally, and that the bank became liable to the lodge upon cancelling the deposit
certificate.lawphil.net
Our discussion of this phase of the case should not be concluded without reference to
Bischoff vs. Yorville Bank (218 N. Y., 106), which undoubtedly affords some support
to the contention of the appellee that the defendant bank is liable not only for the
proceeds of the last check collected by Schwarzkopf, but for all of the money which
was transferred to account No. 2 from the account of Schawarzkopf as attorney-in-
fact. This decision comes, it must be admitted, from a court of high repute. But we are
unable to accept the court's conclusions, as applicable to the facts before us. In the
case mentioned it appeared that an executor, named Poggenburg, having money on
deposit in a certain bank to his credit as executor, gradually withdrew about $13,000
from said deposit by checks drawn by him, over a long period of time, in the character
of executor. These checks were indorsed by Poggenburg in his own name simply and
deposited in the defendant Yorkville Bank to his personal credit. At the inception of
this series of transactions Poggenburg was indebted by note to the defendant and
payments were made on this note and other notes thereafter executed in favor of the
bank, out of the funds transferred as above stated. The court held, upon the facts
before, it that the defendant knew at all times that the credits created by the various
deposits through checks of the executor were assets pertaining to the estate of which
Poggenburg was executor; and from this fact, in connection with the misapplication of
part of the money to the payment of the personal notes of Poggenburg, the court held
that the defendant bank was liable to the extent of the whole amount misappropriated
by means of the personal account.
It will be noted that this decision was made in third instance, after a trial in first
instance possibly before a jury and after the judgment against the bank been affirmed
upon appeal in the appellate division of the Supreme Court. The prior history of the
case was therefore such as to entitle the findings of fact of the two prior courts of
great weight, and these courts had found in effect that the defendant bank had acted
in bad faith. If not explicable upon this ground, the decision in the Court of Appeals
must be considered a unique variant from accepted doctrine in this that while
repudiating the idea, favored by a few courts that the act of depositing a trust fund in
the personal accounts of the fiduciary is an effective act of conversion on the part
both of bank and fiduciary, the court nevertheless held that the act of the bank in
permitting the application of part of the money to the personal indebtedness of the
fiduciary afforded a sufficient basis for finding the bank to have been an accomplice in
the subsequent misapplication, by the fiduciary, of other portions of the deposit. We
can accede to the first of these propositions but not to the second. In this connection
we refer to the Annotation appended to Allen vs. Puritan Trust Co. (L. R. A. 1915C,
518, 529), where the pertinent cases are analyzed and the conclusion stated 1 that,
by the weight of authority, the placing of a trust fund in the personal account of the
fiduciary does not make the bank liable for a subsequent misappropriation of the
money by the former. For the rest it is enough to say that there is no proof in this case
that the defendant bank had any guilty connection in fact with the dishonest acts of
Schwarzkopf, in squandering the contents of the No. 2 account after he had made his
remittance of $15,000 to his principal.

In conclusion we ought to add that the legal principles involved in this decision are not
directly deducible from the provisions of the Negotiable Instruments Law, which is in
force in this jurisdiction (Act No. 2031); and there is no provision of the Civil Code or
Code of Commerce directly bearing upon the point under consideration. The liability
of the defendant bank, to the extent recognized in this decision proceeds upon the
fundamental idea that a creditor cannot apply to the obligation of his debtor money
which as he knows belongs to another, without the consent of the latter, — a principle
implicit in all law. We note that the attorneys for the appellant bank have suggested in
their brief that, supposing the bank to have been an accomplice of Schwarzkopf in the
misappropriation of the plaintiff's money, its subsidiary liability was extinguished as a
result of the criminal proceedings against Schwarzkopf. This suggestion is clearly
untenable, with respect to the liability which is fixed upon the bank by this decision.

From what has been said it follows that the appealed judgment must be modified and
the same is hereby modified by reducing the amount of the judgment against the
bank to the sum of P22,144.39 with lawful interest from June 23, 1926 until date of
payment, 2without pronouncement as to costs. So ordered.

Malcolm, Villamor, Ostrand, Johns, Romualdez, and Villa-Real, JJ., concur.

G.R. No. 123498 November 23, 2007
BPI FAMILY BANK, Petitioner,
vs.
AMADO FRANCO and COURT OF APPEALS, Respondents.
DECISION
NACHURA, J.:
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) Decision1 in CA-G.R. CV No. 43424 which affirmed with modification
the judgment2 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 ₱100,000,000.00, 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 ₱500,000.00 each, while the time
deposit account had ₱1,000,000.00 with a maturity date of August 31, 1990. The total
amount of ₱2,000,000.00 used to open these accounts is traceable to a check issued
by Tevesteco allegedly in consideration of Franco’s introduction of Eladio
Teves,7 who 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 ₱2,000,000.00 check was part of the ₱80,000,000.00 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 ₱80,000,000.00 covered by the forged Authority to Debit)
amounting to ₱37,455,410.54, including the ₱2,000,000.00 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 Arangorin10 to debit Franco’s savings and current accounts for the amounts
remaining therein.11 However, Franco’s time deposit account could not be debited
due to the capacity limitations of BPI-FB’s computer.12
In the meantime, two checks13 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 ₱37,455,410.54 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.16 Immediately, 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 ₱400,000.00 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 ₱63,189.00 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
₱80,000,000.00 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 ₱65,332,321.99 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 ₱500,000.00 check proceeding from the
₱80,000,000.00 mistakenly credited to Tevesteco, likewise filed suit. Buenaventura et
al., as in the case of Franco, were also prevented from effecting withdrawals20 from
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 case24 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 balance25 of his current account which was
eventually released to him on October 31, 1991; (2) the balance26 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 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 ₱2,000,000.00 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. ₱76,500.00 representing the legal rate of interest on the amount of
₱450,000.00 from May 18, 1990 to October 31, 1991;
2. ₱498,973.23 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. ₱30,000.00 by way of attorney’s fees; and
4. ₱10,000.00 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] ₱63,189.00 representing the
interest deducted from the time deposit of plaintiff-appellant. ₱200,000.00 as moral
damages and ₱100,000.00 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 ₱30,000.00 to ₱75,000.00.
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 ₱400,000.00 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
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
Appeals38 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. x x x.
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. x x x.
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 ₱80,000,000.00 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 ₱400,000.00 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
₱400,000.00 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.
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 x x x 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 ₱10,000.00.
However, we retain the CA’s award of ₱75,000.00 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 ₱400,000.00 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
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.1âwphi1
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 ₱75,000.00
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 ₱400,000.00 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 ₱75,000.00 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 ₱3,800,000.00 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.
G.R. No. 171845 October 10, 2012
SPOUSES GODFREY and GERARDINA SERFINO, Petitioners,
vs.
FAR EAST BANK AND TRUST COMPANY, INC., now BANK OF THE PHILIPPINE
ISLANDS, Respondent.
DECISION
BRION, J.:
Before the Court is a petition for review on certiorari, 1 filed under Rule 45 of the Rules
of Court, assailing the decision2 dated February 23, 2006 of the Regional Trial
Court (RTC) of Bacolod City, Branch 41, in Civil Case No. 95-9344.
FACTUAL ANTECEDENTS
The present case traces its roots to the compromise judgment dated October 24,
19953 of the RTC of Bacolod City, Branch 47, in Civil Case No. 95-9880. Civil Case
No. 95-9880 was an action for collection of sum of money instituted by the petitioner
spouses Godfrey and Gerardina Serfino (collectively, spouses Serfino) against the
spouses Domingo and Magdalena Cortez (collectively, spouses Cortez). By way of
settlement, the spouses Serfino and the spouses Cortez executed a compromise
agreement on October 20, 1995, in which the spouses Cortez acknowledged their
indebtedness to the spouses Serfino in the amount of ₱ 108,245.71. To satisfy the
debt, Magdalena bound herself "to pay in full the judgment debt out of her
retirement benefits[.]"4 Payment of the debt shall be made one (1) week after
Magdalena has received her retirement benefits from the Government Service
Insurance System (GSIS). In case of default, the debt may be executed against any
of the properties of the spouses Cortez that is subject to execution, upon motion of
the spouses Serfino.5 After finding that the compromise agreement was not contrary
to law, morals, good custom, public order or public policy, the RTC approved the
entirety of the parties’ agreement and issued a compromise judgment based
thereon.6 The debt was later reduced to ₱ 155,000.00 from ₱ 197,000.00 (including
interest), with the promise that the spouses Cortez would pay in full the judgment debt
not later than April 23, 1996.7
No payment was made as promised. Instead, Godfrey discovered that Magdalena
deposited her retirement benefits in the savings account of her daughter-in-law,
Grace Cortez, with the respondent, Far East Bank and Trust Company, Inc. (FEBTC).
As of April 23, 1996, Grace’s savings account with FEBTC amounted to ₱
245,830.37, the entire deposit coming from Magdalena’s retirement benefits. 8 That
same day, the spouses Serfino’s counsel sent two letters to FEBTC informing
the bank that the deposit in Grace’s name was owned by the spouses Serfino
by virtue of an assignment made in their favor by the spouses Cortez. The letter
requested FEBTC to prevent the delivery of the deposit to either Grace or the
spouses Cortez until its actual ownership has been resolved in court.
On April 25, 1996, the spouses Serfino instituted Civil Case No. 95- 9344 against the
spouses Cortez, Grace and her husband, Dante Cortez, and FEBTC for the recovery
of money on deposit and the payment of damages, with a prayer for preliminary
attachment.
On April 26, 1996, Grace withdrew ₱ 150,000.00 from her savings account with
FEBTC. On the same day, the spouses Serfino sent another letter to FEBTC
informing it of the pending action; attached to the letter was a copy of the complaint
filed as Civil Case No. 95-9344.
During the pendency of Civil Case No. 95-9344, the spouses Cortez manifested that
they were turning over the balance of the deposit in FEBTC (amounting to ₱
54,534.00) to the spouses Serfino as partial payment of their obligation under the
compromise judgment. The RTC issued an order dated July 30, 1997, authorizing
FEBTC to turn over the balance of the deposit to the spouses Serfino.
On February 23, 2006, the RTC issued the assailed decision (a) finding the spouses
Cortez, Grace and Dante liable for fraudulently diverting the amount due the spouses
Serfino, but (b) absolving FEBTC from any liability for allowing Grace to
withdraw the deposit. The RTC declared that FEBTC was not a party to the
compromise judgment; FEBTC was thus not chargeable with notice of the parties’
agreement, as there was no valid court order or processes requiring it to withhold
payment of the deposit. Given the nature of bank deposits, FEBTC was primarily
bound by its contract of loan with Grace. There was, therefore, no legal justification
for the bank to refuse payment of the account, notwithstanding the claim of the
spouses Serfino as stated in their three letters.
THE PARTIES’ ARGUMENTS
The spouses Serfino appealed the RTC’s ruling absolving FEBTC from liability
for allowing the withdrawal of the deposit. They allege that the RTC cited no legal
basis for declaring that only a court order or process can justify the withholding of the
deposit in Grace’s name. Since FEBTC was informed of their adverse claim after they
sent three letters, they claim that:
Upon receipt of a notice of adverse claim in proper form, it becomes the duty of the
bank to: 1. Withhold payment of the deposit until there is a reasonable opportunity to
institute legal proceedings to contest ownership; and 2) give prompt notice of the
adverse claim to the depositor. The bank may be held liable to the adverse claimant if
it disregards the notice of adverse claim and pays the depositor.
When the bank has reasonable notice of a bona fide claim that money deposited
with it is the property of another than the depositor, it should withhold payment
until there is reasonable opportunity to institute legal proceedings to contest the
ownership.9 (emphases and underscoring supplied)
Aside from the three letters, FEBTC should be deemed bound by the compromise
judgment, since Article 1625 of the Civil Code states that an assignment of credit
binds third persons if it appears in a public instrument. 10 They conclude that FEBTC,
having been notified of their adverse claim, should not have allowed Grace to
withdraw the deposit.
While they acknowledged that bank deposits are governed by the Civil Code
provisions on loan, the spouses Serfino allege that the provisions on voluntary
deposits should apply by analogy in this case, particularly Article 1988 of the Civil
Code, which states:
Article 1988. The thing deposited must be returned to the depositor upon demand,
even though a specified period or time for such return may have been fixed.
This provision shall not apply when the thing is judicially attached while in the
depositary’s possession, or should he have been notified of the opposition of a
third person to the return or the removal of the thing deposited. In these cases,
the depositary must immediately inform the depositor of the attachment or opposition.
Based on Article 1988 of the Civil Code, the depository is not obliged to return the
thing to the depositor if notified of a third party’s adverse claim.
By allowing Grace to withdraw the deposit that is due them under the compromise
judgment, the spouses Serfino claim that FEBTC committed an actionable
wrong that entitles them to the payment of actual and moral damages.
FEBTC, on the other hand, insists on the correctness of the RTC ruling. It claims that
it is not bound by the compromise judgment, but only by its contract of loan with its
depositor. As a loan, the bank deposit is owned by the bank; hence, the spouses
Serfino’s claim of ownership over it is erroneous.
Based on these arguments, the case essentially involves a determination of the
obligation of banks to a third party who claims rights over a bank deposit
standing in the name of another.
THE COURT’S RULING
We find the petition unmeritorious and see no reason to reverse the RTC’s ruling.
Claim for actual damages not
meritorious because there could be
no pecuniary loss that should be
compensated if there was no
assignment of credit
The spouses Serfino’s claim for damages against FEBTC is premised on their claim
of ownership of the deposit with FEBTC. The deposit consists of Magdalena’s
retirement benefits, which the spouses Serfino claim to have been assigned to them
under the compromise judgment. That the retirement benefits were deposited in
Grace’s savings account with FEBTC supposedly did not divest them of ownership of
the amount, as "the money already belongs to the [spouses Serfino] having been
absolutely assigned to them and constructively delivered by virtue of the x x x public
instrument[.]"11 By virtue of the assignment of credit, the spouses Serfino claim
ownership of the deposit, and they posit that FEBTC was duty bound to protect their
right by preventing the withdrawal of the deposit since the bank had been notified of
the assignment and of their claim.
We find no basis to support the spouses Serfino’s claim of ownership of the
deposit.
"An assignment of credit is an agreement by virtue of which the owner of a credit,
known as the assignor, by a legal cause, such as sale, dation in payment, exchange
or donation, and without the consent of the debtor, transfers his credit and accessory
rights to another, known as the assignee, who acquires the power to enforce it to the
same extent as the assignor could enforce it against the debtor. It may be in the form
of sale, but at times it may constitute a dation in payment, such as when a debtor, in
order to obtain a release from his debt, assigns to his creditor a credit he has
against a third person."12 As a dation in payment, the assignment of credit
operates as a mode of extinguishing the obligation;13 the delivery and
transmission of ownership of a thing (in this case, the credit due from a third person)
by the debtor to the creditor is accepted as the equivalent of the performance of the
obligation.14
The terms of the compromise judgment, however, did not convey an intent to equate
the assignment of Magdalena’s retirement benefits (the credit) as the equivalent of
the payment of the debt due the spouses Serfino (the obligation). There was actually
no assignment of credit; if at all, the compromise judgment merely identified the
fund from which payment for the judgment debt would be sourced:
(c) That before the plaintiffs file a motion for execution of the decision or order based
[on this] Compromise Agreement, the defendant, Magdalena Cortez undertake[s]
and bind[s] herself to pay in full the judgment debt out of her retirement
benefits as Local [T]reasury Operation Officer in the City of Bacolod, Philippines,
upon which full payment, the plaintiffs waive, abandon and relinquish absolutely any
of their claims for attorney’s fees stipulated in the Promissory Note (Annex "A" to the
Complaint).15 [emphasis ours]
Only when Magdalena has received and turned over to the spouses Serfino the
portion of her retirement benefits corresponding to the debt due would the debt be
deemed paid.
In Aquitey v. Tibong,16 the issue raised was whether the obligation to pay the loan
was extinguished by the execution of the deeds of assignment. The Court ruled in the
affirmative, given that, in the deeds involved, the respondent (the debtor) assigned to
the petitioner (the creditor) her credits "to make good" the balance of her obligation;
the parties agreed to relieve the respondent of her obligation to pay the balance of
her account, and for the petitioner to collect the same from the respondent’s
debtors.17 The Court concluded that the respondent’s obligation to pay the balance of
her accounts with the petitioner was extinguished, pro tanto, by the deeds of
assignment of credit executed by the respondent in favor of the petitioner.18
In the present case, the judgment debt was not extinguished by the mere
designation in the compromise judgment of Magdalena’s retirement benefits as the
fund from which payment shall be sourced. That the compromise agreement
authorizes recourse in case of default on other executable properties of the spouses
Cortez, to satisfy the judgment debt, further supports our conclusion that there was no
assignment of Magdalena’s credit with the GSIS that would have extinguished the
obligation.
The compromise judgment in this case also did not give the supposed assignees, the
spouses Serfino, the power to enforce Magdalena’s credit against the GSIS. In fact,
the spouses Serfino are prohibited from enforcing their claim until after the lapse of
one (1) week from Magdalena’s receipt of her retirement benefits:
(d) That the plaintiffs shall refrain from having the judgment based upon this
Compromise Agreement executed until after one (1) week from receipt by the
defendant, Magdalena Cortez of her retirement benefits from the [GSIS] but fails to
pay within the said period the defendants’ judgment debt in this case, in which case
[this] Compromise Agreement [may be] executed upon any property of the
defendants that are subject to execution upon motion by the plaintiffs. 19
An assignment of credit not only entitles the assignee to the credit itself, but also
gives him the power to enforce it as against the debtor of the assignor.
Since no valid assignment of credit took place, the spouses Serfino cannot validly
claim ownership of the retirement benefits that were deposited with FEBTC. Without
ownership rights over the amount, they suffered no pecuniary loss that has to
be compensated by actual damages. The grant of actual damages presupposes
that the claimant suffered a duly proven pecuniary loss. 20
Claim for moral damages not
meritorious because no duty exists
on the part of the bank to protect
interest of third person claiming
deposit in the name of another
Under Article 2219 of the Civil Code, moral damages are recoverable for acts referred
to in Article 21 of the Civil Code.21 Article 21 of the Civil Code, in conjunction with
Article 19 of the Civil Code, is part of the cause of action known in this jurisdiction as
"abuse of rights." The elements of abuse of rights are: (a) there is a legal right or
duty; (b) exercised in bad faith; and (c) for the sole intent of prejudicing or injuring
another.1âwphi1
The spouses Serfino invoke American common law that imposes a duty upon a
bank receiving a notice of adverse claim to the fund in a depositor’s account to
freeze the account for a reasonable length of time, sufficient to allow the
adverse claimant to institute legal proceedings to enforce his right to the
fund.22 In other words, the bank has a duty not to release the deposits unreasonably
early after a third party makes known his adverse claim to the bank deposit.
Acknowledging that no such duty is imposed by law in this jurisdiction, the spouses
Serfino ask the Court to adopt this foreign rule.23
To adopt the foreign rule, however, goes beyond the power of this Court to
promulgate rules governing pleading, practice and procedure in all courts. 24 The rule
reflects a matter of policy that is better addressed by the other branches of
government, particularly, the Bangko Sentral ng Pilipinas, which is the agency that
supervises the operations and activities of banks, and which has the power to issue
"rules of conduct or the establishment of standards of operation for uniform
application to all institutions or functions covered[.]" 25 To adopt this rule will have
significant implications on the banking industry and practices, as the American
experience has shown. Recognizing that the rule imposing duty on banks to freeze
the deposit upon notice of adverse claim adopts a policy adverse to the bank and its
functions, and opens it to liability to both the depositor and the adverse
claimant,26 many American states have since adopted adverse claim statutes that
shifted or, at least, equalized the burden. Essentially, these statutes do not impose a
duty on banks to freeze the deposit upon a mere notice of adverse claim; they first
require either a court order or an indemnity bond.27
In the absence of a law or a rule binding on the Court, it has no option but to uphold
the existing policy that recognizes the fiduciary nature of banking. It likewise rejects
the adoption of a judicially-imposed rule giving third parties with unverified claims
against the deposit of another a better right over the deposit. As current laws provide,
the bank’s contractual relations are with its depositor, not with the third party; 28 "a
bank is under obligation to treat the accounts of its depositors with meticulous care
and always to have in mind the fiduciary nature of its relationship with them." 29 In the
absence of any positive duty of the bank to an adverse claimant, there could be no
breach that entitles the latter to moral damages.
WHEREFORE, in view of the foregoing, the petition for review
on certiorari is DENIED, and the decision dated February 23, 2006 of the Regional
Trial Court of Bacolod City, Branch 41, in Civil Case No. 95-9344
is AFFIRMED. Costs against the petitioners.
SO ORDERED.
ARTURO D. BRION
Associate Justice
G.R. No. 94723 August 21, 1997
KAREN E. SALVACION, minor, thru Federico N. Salvacion, Jr., father and
Natural Guardian, and Spouses FEDERICO N. SALVACION, JR., and EVELINA
E. SALVACION, petitioners,
vs.
CENTRAL BANK OF THE PHILIPPINES, CHINA BANKING CORPORATION and
GREG BARTELLI y NORTHCOTT, respondents.
TORRES, JR., J.:
In our predisposition to discover the "original intent" of a statute, courts become the
unfeeling pillars of the status quo. Ligle do we realize that statutes or even
constitutions are bundles of compromises thrown our way by their framers. Unless we
exercise vigilance, the statute may already be out of tune and irrelevant to our day.
The petition is for declaratory relief. It prays for the following reliefs:
a.) Immediately upon the filing of this petition, an Order be issued
restraining the respondents from applying and enforcing Section
113 of Central Bank Circular No. 960;
b.) After hearing, judgment be rendered:
1.) Declaring the respective rights and duties of petitioners and
respondents;
2.) Adjudging Section 113 of Central Bank Circular No. 960 as
contrary to the provisions of the Constitution, hence void; because
its provision that "Foreign currency deposits shall be exempt from
attachment, garnishment, or any other order or process of any
court, legislative body, government agency or any administrative
body whatsoever
i.) has taken away the right of petitioners to have
the bank deposit of defendant Greg Bartelli y
Northcott garnished to satisfy the judgment
rendered in petitioners' favor in violation of
substantive due process guaranteed by the
Constitution;
ii.) has given foreign currency depositors an
undue favor or a class privilege in violation of the
equal protection clause of the Constitution;
iii.) has provided a safe haven for criminals like
the herein respondent Greg Bartelli y Northcott
since criminals could escape civil liability for their
wrongful acts by merely converting their money
to a foreign currency and depositing it in a foreign
currency deposit account with an authorized
bank.
The antecedent facts:
On February 4, 1989, Greg Bartelli y Northcott, an American tourist, coaxed and lured
petitioner Karen Salvacion, then 12 years old to go with him to his apartment.
Therein, Greg Bartelli detained Karen Salvacion for four days, or up to February 7,
1989 and was able to rape the child once on February 4, and three times each day on
February 5, 6, and 7, 1989. On February 7, 1989, after policemen and people living
nearby, rescued Karen, Greg Bartelli was arrested and detained at the Makati
Municipal Jail. The policemen recovered from Bartelli the following items: 1.) Dollar
Check No. 368, Control No. 021000678-1166111303, US 3,903.20; 2.) COCOBANK
Bank Book No. 104-108758-8 (Peso Acct.); 3.) Dollar Account — China Banking
Corp., US$/A#54105028-2; 4.) ID-122-30-8877; 5.) Philippine Money (P234.00) cash;
6.) Door Keys 6 pieces; 7.) Stuffed Doll (Teddy Bear) used in seducing the
complainant.
On February 16, 1989, Makati Investigating Fiscal Edwin G. Condaya filed against
Greg Bartelli, Criminal Case No. 801 for Serious Illegal Detention and Criminal Cases
Nos. 802, 803, 804, and 805 for four (4) counts of Rape. On the same day, petitioners
filed with the Regional Trial Court of Makati Civil Case No. 89-3214 for damages with
preliminary attachment against Greg Bartelli. On February 24, 1989, the day there
was a scheduled hearing for Bartelli's petition for bail the latter escaped from jail.
On February 28, 1989, the court granted the fiscal's Urgent Ex-Parte Motion for the
Issuance of Warrant of Arrest and Hold Departure Order. Pending the arrest of the
accused Greg Bartelli y Northcott, the criminal cases were archived in an Order dated
February 28, 1989.
Meanwhile, in Civil Case No. 89-3214, the Judge issued an Order dated February 22,
1989 granting the application of herein petitioners, for the issuance of the writ of
preliminary attachment. After petitioners gave Bond No. JCL (4) 1981 by FGU
Insurance Corporation in the amount of P100,000.00, a Writ of Preliminary
Attachment was issued by the trial court on February 28, 1989.
On March 1, 1989, the Deputy Sheriff of Makati served a Notice of Garnishment on
China Banking Corporation. In a letter dated March 13, 1989 to the Deputy Sheriff of
Makati, China Banking Corporation invoked Republic Act No. 1405 as its answer to
the notice of garnishment served on it. On March 15, 1989, Deputy Sheriff of Makati
Armando de Guzman sent his reply to China Banking Corporation saying that the
garnishment did not violate the secrecy of bank deposits since the disclosure is
merely incidental to a garnishment properly and legally made by virtue of a court
order which has placed the subject deposits in custodia legis. In answer to this letter
of the Deputy Sheriff of Makati, China Banking Corporation, in a letter dated March
20, 1989, invoked Section 113 of Central Bank Circular No. 960 to the effect that the
dollar deposits or defendant Greg Bartelli are exempt from attachment, garnishment,
or any other order or process of any court, legislative body, government agency or
any administrative body, whatsoever.
This prompted the counsel for petitioners to make an inquiry with the Central Bank in
a letter dated April 25, 1989 on whether Section 113 of CB Circular No. 960 has any
exception or whether said section has been repealed or amended since said section
has rendered nugatory the substantive right of the plaintiff to have the claim sought to
be enforced by the civil action secured by way of the writ of preliminary attachment as
granted to the plaintiff under Rule 57 of the Revised Rules of Court. The Central Bank
responded as follows:
May 26, 1989
Ms. Erlinda S. Carolino
12 Pres. Osmena Avenue
South Admiral Village
Paranaque, Metro Manila
Dear Ms. Carolino:
This is in reply to your letter dated April 25, 1989 regarding your
inquiry on Section 113, CB Circular No. 960 (1983).
The cited provision is absolute in application. It does not admit of
any exception, nor has the same been repealed nor amended.
The purpose of the law is to encourage dollar accounts within the
country's banking system which would help in the development of
the economy. There is no intention to render futile the basic rights
of a person as was suggested in your subject letter. The law may
be harsh as some perceive it, but it is still the law. Compliance is,
therefore, enjoined.
Very truly yours,
(SGD) AGAPITO S. FAJARDO
Director1
Meanwhile, on April 10, 1989, the trial court granted petitioners' motion for leave to
serve summons by publication in the Civil Case No. 89-3214 entitled "Karen
Salvacion, et al. vs. Greg Bartelli y Northcott." Summons with the complaint was a
published in the Manila Times once a week for three consecutive weeks. Greg Bartelli
failed to file his answer to the complaint and was declared in default on August 7,
1989. After hearing the case ex-parte, the court rendered judgment in favor of
petitioners on March 29, 1990, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiffs
and against defendant, ordering the latter:
1. To pay plaintiff Karen E. Salvacion the amount of P500,000.00
as moral damages;
2. To pay her parents, plaintiffs spouses Federico N. Salvacion, Jr.,
and Evelina E. Salvacion the amount of P150,000.00 each or a
total of P300,000.00 for both of them;
3. To pay plaintiffs exemplary damages of P100,000.00; and
4. To pay attorney's fees in an amount equivalent to 25% of the
total amount of damages herein awarded;
5. To pay litigation expenses of P10,000.00; plus
6. Costs of the suit.
SO ORDERED.
The heinous acts of respondent Greg Bartelli which gave rise to the award were
related in graphic detail by the trial court in its decision as follows:
The defendant in this case was originally detained in the municipal
jail of Makati but was able to escape therefrom on February 24,
1989 as per report of the Jail Warden of Makati to the Presiding
Judge, Honorable Manuel M. Cosico of the Regional Trial Court of
Makati, Branch 136, where he was charged with four counts of
Rape and Serious Illegal Detention (Crim. Cases Nos. 802 to 805).
Accordingly, upon motion of plaintiffs, through counsel, summons
was served upon defendant by publication in the Manila Times, a
newspaper of general circulation as attested by the Advertising
Manager of the Metro Media Times, Inc., the publisher of the said
newspaper. Defendant, however, failed to file his answer to the
complaint despite the lapse of the period of sixty (60) days from the
last publication; hence, upon motion of the plaintiffs, through
counsel, defendant was declared in default and plaintiffs were
authorized to present their evidence ex parte.
In support of the complaint, plaintiffs presented as witnesses the
minor Karen E. Salvacion, her father, Federico N. Salvacion, Jr., a
certain Joseph Aguilar and a certain Liberato Madulio, who gave
the following testimony:
Karen took her first year high school in St. Mary's Academy in
Pasay City but has recently transferred to Arellano University for
her second year.
In the afternoon of February 4, 1989, Karen was at the Plaza Fair
Makati Cinema Square, with her friend Edna Tangile whiling away
her free time. At about 3:30 p.m. while she was finishing her snack
on a concrete bench in front of Plaza Fair, an American
approached her. She was then alone because Edna Tangile had
already left, and she was about to go home. (TSN, Aug. 15, 1989,
pp. 2 to 5)
The American asked her name and introduced himself as Greg
Bartelli. He sat beside her when he talked to her. He said he was a
Math teacher and told her that he has a sister who is a nurse in
New York. His sister allegedly has a daughter who is about Karen's
age and who was with him in his house along Kalayaan Avenue.
(TSN, Aug. 15, 1989, pp. 4-5)
The American asked Karen what was her favorite subject and she
told him it's Pilipino. He then invited her to go with him to his house
where she could teach Pilipino to his niece. He even gave her a
stuffed toy to persuade her to teach his niece. (Id., pp. 5-6)
They walked from Plaza Fair along Pasong Tamo, turning right to
reach the defendant's house along Kalayaan Avenue. (Id., p. 6)
When they reached the apartment house, Karen noticed that
defendant's alleged niece was not outside the house but defendant
told her maybe his niece was inside. When Karen did not see the
alleged niece inside the house, defendant told her maybe his niece
was upstairs, and invited Karen to go upstairs. (Id., p. 7)
Upon entering the bedroom defendant suddenly locked the door.
Karen became nervous because his niece was not there.
Defendant got a piece of cotton cord and tied Karen's hands with it,
and then he undressed her. Karen cried for help but defendant
strangled her. He took a packing tape and he covered her mouth
with it and he circled it around her head. (Id., p. 7)
Then, defendant suddenly pushed Karen towards the bed which
was just near the door. He tied her feet and hands spread apart to
the bed posts. He knelt in front of her and inserted his finger in her
sex organ. She felt severe pain. She tried to shout but no sound
could come out because there were tapes on her mouth. When
defendant withdrew his finger it was full of blood and Karen felt
more pain after the withdrawal of the finger. (Id., p. 8)
He then got a Johnson's Baby Oil and he applied it to his sex organ
as well as to her sex organ. After that he forced his sex organ into
her but he was not able to do so. While he was doing it, Karen
found it difficult to breathe and she perspired a lot while feeling
severe pain. She merely presumed that he was able to insert his
sex organ a little, because she could not see. Karen could not recall
how long the defendant was in that position. (Id. pp. 8-9)
After that, he stood up and went to the bathroom to wash. He also
told Karen to take a shower and he untied her hands. Karen could
only hear the sound of the water while the defendant, she
presumed, was in the bathroom washing his sex organ. When she
took a shower more blood came out from her. In the meantime,
defendant changed the mattress because it was full of blood. After
the shower, Karen was allowed by defendant to sleep. She fell
asleep because she got tired crying. The incident happened at
about 4:00 p.m. Karen had no way of determining the exact time
because defendant removed her watch. Defendant did not care to
give her food before she went to sleep. Karen woke up at about
8:00 o'clock the following morning. (Id., pp. 9-10)
The following day, February 5, 1989, a Sunday, after a breakfast of
biscuit and coke at about 8:30 to 9:00 a.m. defendant raped Karen
while she was still bleeding. For lunch, they also took biscuit and
coke. She was raped for the second time at about 12:00 to 2:00
p.m. In the evening, they had rice for dinner which defendant had
stored downstairs; it was he who cooked the rice that is why it looks
like "lugaw". For the third time, Karen was raped again during the
night. During those three times defendant succeeded in inserting
his sex organ but she could not say whether the organ was inserted
wholly.
Karen did not see any firearm or any bladed weapon. The
defendant did not tie her hands and feet nor put a tape on her
mouth anymore but she did not cry for help for fear that she might
be killed; besides, all the windows and doors were closed. And
even if she shouted for help, nobody would hear her. She was so
afraid that if somebody would hear her and would be able to call the
police, it was still possible that as she was still inside the house,
defendant might kill her. Besides, the defendant did not leave that
Sunday, ruling out her chance to call for help. At nighttime he slept
with her again. (TSN, Aug. 15, 1989, pp. 12-14)
On February 6, 1989, Monday, Karen was raped three times, once
in the morning for thirty minutes after a breakfast of biscuits; again
in the afternoon; and again in the evening. At first, Karen did not
know that there was a window because everything was covered by
a carpet, until defendant opened the window for around fifteen
minutes or less to let some air in, and she found that the window
was covered by styrofoam and plywood. After that, he again closed
the window with a hammer and he put the styrofoam, plywood, and
carpet back. (Id., pp. 14-15)
That Monday evening, Karen had a chance to call for help,
although defendant left but kept the door closed. She went to the
bathroom and saw a small window covered by styrofoam and she
also spotted a small hole. She stepped on the bowl and she cried
for help through the hole. She cried: "Maawa no po kayo so
akin. Tulungan n'yo akong makalabas dito. Kinidnap ako!"
Somebody heard her. It was a woman, probably a neighbor, but
she got angry and said she was "istorbo". Karen pleaded for help
and the woman told her to sleep and she will call the police. She
finally fell asleep but no policeman came. (TSN, Aug. 15, 1989, pp.
15-16)
She woke up at 6:00 o'clock the following morning, and she saw
defendant in bed, this time sleeping. She waited for him to wake up.
When he woke up, he again got some food but he always kept the
door locked. As usual, she was merely fed with biscuit and coke.
On that day, February 7, 1989, she was again raped three times.
The first at about 6:30 to 7:00 a.m., the second at about 8:30 —
9:00, and the third was after lunch at 12:00 noon. After he had
raped her for the second time he left but only for a short while.
Upon his return, he caught her shouting for help but he did not
understand what she was shouting about. After she was raped the
third time, he left the house. (TSN, Aug. 15, 1989, pp. 16-17) She
again went to the bathroom and shouted for help. After shouting for
about five minutes, she heard many voices. The voices were asking
for her name and she gave her name as Karen Salvacion. After a
while, she heard a voice of a woman saying they will just call the
police. They were also telling her to change her clothes. She went
from the bathroom to the room but she did not change her clothes
being afraid that should the neighbors call for the police and the
defendant see her in different clothes, he might kill her. At that time
she was wearing a T-shirt of the American because the latter
washed her dress. (Id., p. 16)
Afterwards, defendant arrived and he opened the door. He asked
her if she had asked for help because there were many policemen
outside and she denied it. He told her to change her clothes, and
she did change to the one she was wearing on Saturday. He
instructed her to tell the police that she left home and willingly; then
he went downstairs but he locked the door. She could hear people
conversing but she could not understand what they were saying.
(Id., p. 19)
When she heard the voices of many people who were conversing
downstairs, she knocked repeatedly at the door as hard as she
could. She heard somebody going upstairs and when the door was
opened, she saw a policeman. The policeman asked her name and
the reason why she was there. She told him she was kidnapped.
Downstairs, he saw about five policemen in uniform and the
defendant was talking to them. "Nakikipag-areglo po sa mga pulis,"
Karen added. "The policeman told him to just explain at the
precinct. (Id., p. 20)
They went out of the house and she saw some of her neighbors in
front of the house. They rode the car of a certain person she called
Kuya Boy together with defendant, the policeman, and two of her
neighbors whom she called Kuya Bong Lacson and one Ate Nita.
They were brought to Sub-Station I and there she was investigated
by a policeman. At about 2:00 a.m., her father arrived, followed by
her mother together with some of their neighbors. Then they were
brought to the second floor of the police headquarters. (Id., p. 21)
At the headquarters, she was asked several questions by the
investigator. The written statement she gave to the police was
marked as Exhibit A. Then they proceeded to the National Bureau
of Investigation together with the investigator and her parents. At
the NBI, a doctor, a medico-legal officer, examined her private
parts. It was already 3:00 in the early morning of the following day
when they reached the NBI. (TSN, Aug. 15, 1989, p. 22) The
findings of the medico-legal officer has been marked as Exhibit B.
She was studying at the St. Mary's Academy in Pasay City at the
time of the incident but she subsequently transferred to Apolinario
Mabini, Arellano University, situated along Taft Avenue, because
she was ashamed to be the subject of conversation in the school.
She first applied for transfer to Jose Abad Santos, Arellano
University along Taft Avenue near the Light Rail Transit Station but
she was denied admission after she told the school the true reason
for her transfer. The reason for their denial was that they might be
implicated in the case. (TSN, Aug. 15, 1989, p. 46)
xxx xxx xxx
After the incident, Karen has changed a lot. She does not play with
her brother and sister anymore, and she is always in a state of
shock; she has been absent-minded and is ashamed even to go
out of the house. (TSN, Sept. 12, 1989, p. 10) She appears to be
restless or sad, (Id., p. 11) The father prays for P500,000.00 moral
damages for Karen for this shocking experience which probably,
she would always recall until she reaches old age, and he is not
sure if she could ever recover from this experience. (TSN, Sept. 24,
1989, pp. 10-11)
Pursuant to an Order granting leave to publish notice of decision, said notice was
published in the Manila Bulletin once a week for three consecutive weeks. After the
lapse of fifteen (15) days from the date of the last publication of the notice of
judgment and the decision of the trial court had become final, petitioners tried to
execute on Bartelli's dollar deposit with China Banking Corporation. Likewise, the
bank invoked Section 113 of Central Bank Circular No. 960.
Thus, petitioners decided to seek relief from this Court.
The issues raised and the arguments articulated by the parties boil down to two:
May this Court entertain the instant petition despite the fact that original jurisdiction in
petitions for declaratory relief rests with the lower court? Should Section 113 of
Central Bank Circular No. 960 and Section 8 of R.A. 6426, as amended by P.D. 1246,
otherwise known as the Foreign Currency Deposit Act be made applicable to a
foreign transient?
Petitioners aver as heretofore stated that Section 113 of Central Bank Circular No.
960 providing that "Foreign currency deposits shall be exempt from attachment,
garnishment, or any other order or process of any court, legislative body, government
agency or any administrative body whatsoever." should be adjudged as
unconstitutional on the grounds that: 1.) it has taken away the right of petitioners to
have the bank deposit of defendant Greg Bartelli y Northcott garnished to satisfy the
judgment rendered in petitioners' favor in violation of substantive due process
guaranteed by the Constitution; 2.) it has given foreign currency depositors an undue
favor or a class privilege in violation of the equal protection clause of the Constitution;
3.) it has provided a safe haven for criminals like the herein respondent Greg Bartelli
y Northcott since criminals could escape civil liability for their wrongful acts by merely
converting their money to a foreign currency and depositing it in a foreign currency
deposit account with an authorized bank; and 4.) The Monetary Board, in issuing
Section 113 of Central Bank Circular No. 960 has exceeded its delegated quasi-
legislative power when it took away: a.) the plaintiffs substantive right to have the
claim sought to be enforced by the civil action secured by way of the writ of
preliminary attachment as granted by Rule 57 of the Revised Rules of Court; b.) the
plaintiffs substantive right to have the judgment credit satisfied by way of the writ of
execution out of the bank deposit of the judgment debtor as granted to the judgment
creditor by Rule 39 of the Revised Rules of Court, which is beyond its power to do so.
On the other hand, respondent Central Bank, in its Comment alleges that the
Monetary Board in issuing Section 113 of CB Circular No. 960 did not exceed its
power or authority because the subject Section is copied verbatim from a portion of
R.A. No. 6426 as amended by P.D. 1246. Hence, it was not the Monetary Board that
grants exemption from attachment or garnishment to foreign currency deposits, but
the law (R.A. 6426 as amended) itself; that it does not violate the substantive due
process guaranteed by the Constitution because a.) it was based on a law; b.) the law
seems to be reasonable; c.) it is enforced according to regular methods of procedure;
and d.) it applies to all members of a class.
Expanding, the Central Bank said; that one reason for exempting the foreign currency
deposits from attachment, garnishment or any other order or process of any court, is
to assure the development and speedy growth of the Foreign Currency Deposit
System and the Offshore Banking System in the Philippines; that another reason is to
encourage the inflow of foreign currency deposits into the banking institutions thereby
placing such institutions more in a position to properly channel the same to loans and
investments in the Philippines, thus directly contributing to the economic development
of the country; that the subject section is being enforced according to the regular
methods of procedure; and that it applies to all foreign currency deposits made by any
person and therefore does not violate the equal protection clause of the Constitution.
Respondent Central Bank further avers that the questioned provision is needed to
promote the public interest and the general welfare; that the State cannot just stand
idly by while a considerable segment of the society suffers from economic distress;
that the State had to take some measures to encourage economic development; and
that in so doing persons and property may be subjected to some kinds of restraints or
burdens to secure the general welfare or public interest. Respondent Central Bank
also alleges that Rule 39 and Rule 57 of the Revised Rules of Court provide that
some properties are exempted from execution/attachment especially provided by law
and R.A. No. 6426 as amended is such a law, in that it specifically provides, among
others, that foreign currency deposits shall be exempted from attachment,
garnishment, or any other order or process of any court, legislative body, government
agency or any administrative body whatsoever.
For its part, respondent China Banking Corporation, aside from giving reasons similar
to that of respondent Central Bank, also stated that respondent China Bank is not
unmindful of the inhuman sufferings experienced by the minor Karen E. Salvacion
from the beastly hands of Greg Bartelli; that it is only too willing to release the dollar
deposit of Bartelli which may perhaps partly mitigate the sufferings petitioner has
undergone; but it is restrained from doing so in view of R.A. No. 6426 and Section
113 of Central Bank Circular No. 960; and that despite the harsh effect of these laws
on petitioners, CBC has no other alternative but to follow the same.
This Court finds the petition to be partly meritorious.
Petitioner deserves to receive the damages awarded to her by the court. But this
petition for declaratory relief can only be entertained and treated as a petition
for mandamus to require respondents to honor and comply with the writ of execution
in Civil Case No. 89-3214.
This Court has no original and exclusive jurisdiction over a petition for declaratory
relief.2 However, exceptions to this rule have been recognized. Thus, where the
petition has far-reaching implications and raises questions that should be resolved, it
may be treated as one for mandamus.3
Here is a child, a 12-year old girl, who in her belief that all Americans are good and in
her gesture of kindness by teaching his alleged niece the Filipino language as
requested by the American, trustingly went with said stranger to his apartment, and
there she was raped by said American tourist Greg Bartelli. Not once, but ten times.
She was detained therein for four (4) days. This American tourist was able to escape
from the jail and avoid punishment. On the other hand, the child, having received a
favorable judgment in the Civil Case for damages in the amount of more than
P1,000,000.00, which amount could alleviate the humiliation, anxiety, and besmirched
reputation she had suffered and may continue to suffer for a long, long time; and
knowing that this person who had wronged her has the money, could not, however
get the award of damages because of this unreasonable law. This questioned law,
therefore makes futile the favorable judgment and award of damages that she and
her parents fully deserve. As stated by the trial court in its decision,
Indeed, after hearing the testimony of Karen, the Court believes
that it was undoubtedly a shocking and traumatic experience she
 had undergone which could haunt her mind for a long, long time,
the mere recall of which could make her feel so humiliated, as in
fact she had been actually humiliated once when she was refused
admission at the Abad Santos High School, Arellano University,
where she sought to transfer from another school, simply because
the school authorities of the said High School learned about what
happened to her and allegedly feared that they might be implicated
in the case.
xxx xxx xxx
The reason for imposing exemplary or corrective damages is due to
the wanton and bestial manner defendant had committed the acts
of rape during a period of serious illegal detention of his hapless
victim, the minor Karen Salvacion whose only fault was in her being
so naive and credulous to believe easily that defendant, an
American national, could not have such a bestial desire on her nor
capable of committing such a heinous crime. Being only 12 years
old when that unfortunate incident happened, she has never heard
of an old Filipino adage that in every forest there is a
snake, . . . .4
If Karen's sad fate had happened to anybody's own kin, it would be difficult for him to
fathom how the incentive for foreign currency deposit could be more important than
his child's rights to said award of damages; in this case, the victim's claim for
damages from this alien who had the gall to wrong a child of tender years of a country
where he is a mere visitor. This further illustrates the flaw in the questioned
provisions.
It is worth mentioning that R.A. No. 6426 was enacted in 1983 or at a time when the
country's economy was in a shambles; when foreign investments were minimal and
presumably, this was the reason why said statute was enacted. But the realities of the
present times show that the country has recovered economically; and even if not, the
questioned law still denies those entitled to due process of law for being
unreasonable and oppressive. The intention of the questioned law may be good when
enacted. The law failed to anticipate the iniquitous effects producing outright injustice
and inequality such as the case before us.
It has thus been said that —
But I also know,5 that laws and institutions must go hand in hand
with the progress of the human mind. As that becomes more
developed, more enlightened, as new discoveries are made, new
truths are disclosed and manners and opinions change with the
change of circumstances, institutions must advance also, and keep
pace with the times. . . We might as well require a man to wear still
the coat which fitted him when a boy, as civilized society to remain
ever under the regimen of their barbarous ancestors.
In his Comment, the Solicitor General correctly opined, thus:
The present petition has far-reaching implications on the right of a
national to obtain redress for a wrong committed by an alien who
takes refuge under a law and regulation promulgated for a purpose
which does not contemplate the application thereof envisaged by
the alien. More specifically, the petition raises the question whether
the protection against attachment, garnishment or other court
process accorded to foreign currency deposits by PD No. 1246 and
CB Circular No. 960 applies when the deposit does not come from
a lender or investor but from a mere transient or tourist who is not
expected to maintain the deposit in the bank for long.
The resolution of this question is important for the protection of
nationals who are victimized in the forum by foreigners who are
merely passing through.
xxx xxx xxx
. . . Respondents China Banking Corporation and Central Bank of
the Philippines refused to honor the writ of execution issued in Civil
Case No. 89-3214 on the strength of the following provision of
Central Bank Circular No. 960:
Sec. 113. Exemption from attachment. — Foreign
currency deposits shall be exempt from
attachment, garnishment, or any other order or
process of any court, legislative body,
government agency or any administrative body
whatsoever.
Central Bank Circular No. 960 was issued pursuant to Section 7 of
Republic Act No. 6426:
Sec. 7. Rules and Regulations. The Monetary
Board of the Central Bank shall promulgate such
rules and regulations as may be necessary to
carry out the provisions of this Act which shall
take effect after the publication of such rules and
regulations in the Official Gazette and in a
newspaper of national circulation for at least once
a week for three consecutive weeks. In case the
Central Bank promulgates new rules and
regulations decreasing the rights of depositors,
the rules and regulations at the time the deposit
was made shall govern.
The aforecited Section 113 was copied from Section 8 of Republic
Act NO. 6426, as amended by P.D. 1246, thus:
 Sec. 8. Secrecy of Foreign Currency Deposits. —
All foreign currency deposits authorized under
this Act, as amended by Presidential Decree No.
1035, as well as foreign currency deposits
authorized under Presidential Decree No. 1034,
are hereby declared as and considered of an
absolutely confidential nature and, except upon
the written permission of the depositor, in no
instance shall such foreign currency deposits be
examined, inquired or looked into by any person,
government official, bureau or office whether
judicial or administrative or legislative or any
other entity whether public or private: Provided,
however, that said foreign currency deposits shall
be exempt from attachment, garnishment, or any
other order or process of any court, legislative
body, government agency or any administrative
body whatsoever.
The purpose of PD 1246 in according protection against
attachment, garnishment and other court process to foreign
currency deposits is stated in its whereases, viz.:
WHEREAS, under Republic Act No. 6426, as
amended by Presidential Decree No. 1035,
certain Philippine banking institutions and
branches of foreign banks are authorized to
accept deposits in foreign currency;
WHEREAS, under the provisions of Presidential
Decree No. 1034 authorizing the establishment of
an offshore banking system in the Philippines,
offshore banking units are also authorized to
receive foreign currency deposits in certain
cases;
WHEREAS, in order to assure the development
and speedy growth of the Foreign Currency
Deposit System and the Offshore Banking
System in the Philippines, certain incentives were
provided for under the two Systems such as
confidentiality of deposits subject to certain
exceptions and tax exemptions on the interest
income of depositors who are nonresidents and
are not engaged in trade or business in the
Philippines;
WHEREAS, making absolute the protective cloak
of confidentiality over such foreign currency
deposits, exempting such deposits from tax, and
guaranteeing the vested rights of depositors
would better encourage the inflow of foreign
currency deposits into the banking institutions
authorized to accept such deposits in the
Philippines thereby placing such institutions more
in a position to properly channel the same to
loans and investments in the Philippines, thus
directly contributing to the economic development
of the country;
Thus, one of the principal purposes of the protection accorded to
foreign currency deposits is "to assure the development and
speedy growth of the Foreign Currency Deposit system and the
Offshore Banking in the Philippines" (3rd Whereas).
The Offshore Banking System was established by PD No. 1034. In
turn, the purposes of PD No. 1034 are as follows:
WHEREAS, conditions conducive to the
establishment of an offshore banking system,
such as political stability, a growing economy and
adequate communication facilities, among others,
exist in the Philippines;
WHEREAS, it is in the interest of developing
countries to have as wide access as possible to
the sources of capital funds for economic
development;
WHEREAS, an offshore banking system based in
the Philippines will be advantageous and
beneficial to the country by increasing our links
with foreign lenders, facilitating the flow of
desired investments into the Philippines, creating
employment opportunities and expertise in
international finance, and contributing to the
national development effort.
WHEREAS, the geographical location, physical
and human resources, and other positive factors
provide the Philippines with the clear potential to
develop as another financial center in Asia;
On the other hand, the Foreign Currency Deposit system was
created by PD. No. 1035. Its purposes are as follows:
WHEREAS, the establishment of an offshore
banking system in the Philippines has been
authorized under a separate decree;
 WHEREAS, a number of local commercial banks,
as depository bank under the Foreign Currency
Deposit Act (RA No. 6426), have the resources
and managerial competence to more actively
engage in foreign exchange transactions and
participate in the grant of foreign currency loans
to resident corporations and firms;
WHEREAS, it is timely to expand the foreign
currency lending authority of the said depository
banks under RA 6426 and apply to their
transactions the same taxes as would be
applicable to transaction of the proposed offshore
banking units;
It is evident from the above [Whereas clauses] that the Offshore
Banking System and the Foreign Currency Deposit System were
designed to draw deposits from foreign lenders and investors (Vide
second Whereas of PD No. 1034; third Whereas of PD No. 1035). It
is these deposits that are induced by the two laws and given
protection and incentives by them.
It would be unthinkable, that the questioned Section 113 of Central Bank No. 960
would be used as a device by accused Greg Bartelli for wrongdoing, and in so doing,
acquitting the guilty at the expense of the innocent.
Call it what it may — but is there no conflict of legal policy here? Dollar against Peso?
Upholding the final and executory judgment of the lower court against the Central
Bank Circular protecting the foreign depositor? Shielding or protecting the dollar
deposit of a transient alien depositor against injustice to a national and victim of a
crime? This situation calls for fairness against legal tyranny.
We definitely cannot have both ways and rest in the belief that we have served the
ends of justice.
IN VIEW WHEREOF, the provisions of Section 113 of CB Circular No. 960 and PD
No. 1246, insofar as it amends Section 8 of R.A. No. 6426 are hereby held to be
INAPPLICABLE to this case because of its peculiar circumstances. Respondents are
hereby REQUIRED to COMPLY with the writ of execution issued in Civil Case No.
89-3214, "Karen Salvacion, et al. vs. Greg Bartelli y Northcott, by Branch CXLIV, RTC
Makati and to RELEASE to petitioners the dollar deposit of respondent Greg Bartelli y
Northcott in such amount as would satisfy the judgment.

Obviously, the foreign currency deposit made by a transient or a

tourist is not the kind of deposit encouraged by PD Nos. 1034 and
1035 and given incentives and protection by said laws because
such depositor stays only for a few days in the country and,
therefore, will maintain his deposit in the bank only for a short time.

Respondent Greg Bartelli, as stated, is just a tourist or a transient.

He deposited his dollars with respondent China Banking
Corporation only for safekeeping during his temporary stay in the
Philippines.

For the reasons stated above, the Solicitor General thus submits
that the dollar deposit of respondent Greg Bartelli is not entitled to
the protection of Section 113 of Central Bank Circular No. 960 and
PD No. 1246 against attachment, garnishment or other court
processes.6

In fine, the application of the law depends on the extent of its justice. Eventually, if we
rule that the questioned Section 113 of Central Bank Circular No. 960 which exempts
from attachment, garnishment, or any other order or process of any court, legislative
body, government agency or any administrative body whatsoever, is applicable to a
foreign transient, injustice would result especially to a citizen aggrieved by a foreign
guest like accused Greg Bartelli. This would negate Article 10 of the New Civil Code
which provides that "in case of doubt in the interpretation or application of laws, it is
presumed that the lawmaking body intended right and justice to prevail. "Ninguno non
deue enriquecerse tortizeramente con dano de otro." Simply stated, when the statute
is silent or ambiguous, this is one of those fundamental solutions that would respond
to the vehement urge of conscience. (Padilla vs. Padilla, 74 Phil. 377).