INVESTMENT AND BANKING LAWS

Course Syllabus

By: Atty. Ernesto C. Salao

ecsalao@blogspot.com

A. General Banking Law of 2000 (R.A. 8791)

1. State Policy

Section 2: The State

1. Recognizes
- the vital role of banks in providing an environment conducive to the
sustained development of the national economy; and
- the fiduciary nature of banking that requires high standards of
integrity and performance.

In furtherance thereof, the State shall:

Promote and maintain:

- a stable and efficient banking and financial system
- that is globally competitive, dynamic and responsive to the demands of a
developing economy.

2. Banks, Defined

Banks  are  defined  under  the  GBL  as  entities  engaged  in  the  lending  of  funds  obtained  in  the  form  
of  deposits.  (3.2)  

Cases:

a. Simex International v. Court of Appeals, 183 SCRA 360, 366-367

(1990)

G.R. No. 88013 March 19, 1990

SIMEX INTERNATIONAL (MANILA), INCORPORATED, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and TRADERS ROYAL BANK, respondents.
Don P. Porcuincula for petitioner.
San Juan, Gonzalez, San Agustin & Sinense for private respondent.

CRUZ, J.:
We are concerned in this case with the question of damages, specifically moral and exemplary
damages. The negligence of the private respondent has already been established. All we have to
ascertain is whether the petitioner is entitled to the said damages and, if so, in what amounts.
The parties agree on the basic facts. The petitioner is a private corporation engaged in the
exportation of food products. It buys these products from various local suppliers and then sells
them abroad, particularly in the United States, Canada and the Middle East. Most of its exports
are purchased by the petitioner on credit.
The petitioner was a depositor of the respondent bank and maintained a checking account in its
branch at Romulo Avenue, Cubao, Quezon City. On May 25, 1981, the petitioner deposited to its
account in the said bank the amount of P100,000.00, thus increasing its balance as of that date to
1
P190,380.74. Subsequently, the petitioner issued several checks against its deposit but was
suprised to learn later that they had been dishonored for insufficient funds.
The dishonored checks are the following:
1. Check No. 215391 dated May 29, 1981, in favor of California Manufacturing
Company, Inc. for P16,480.00:
2. Check No. 215426 dated May 28, 1981, in favor of the Bureau of Internal
Revenue in the amount of P3,386.73:
3. Check No. 215451 dated June 4, 1981, in favor of Mr. Greg Pedreño in the
amount of P7,080.00;
4. Check No. 215441 dated June 5, 1981, in favor of Malabon Longlife Trading
Corporation in the amount of P42,906.00:
5. Check No. 215474 dated June 10, 1981, in favor of Malabon Longlife Trading
Corporation in the amount of P12,953.00:
6. Check No. 215477 dated June 9, 1981, in favor of Sea-Land Services, Inc. in
the amount of P27,024.45:
7. Check No. 215412 dated June 10, 1981, in favor of Baguio Country Club
Corporation in the amount of P4,385.02: and
8. Check No. 215480 dated June 9, 1981, in favor of Enriqueta Bayla in the
2
amount of P6,275.00.
As a consequence, the California Manufacturing Corporation sent on June 9, 1981, a letter of
demand to the petitioner, threatening prosecution if the dishonored check issued to it was not
made good. It also withheld delivery of the order made by the petitioner. Similar letters were sent
to the petitioner by the Malabon Long Life Trading, on June 15, 1981, and by the G. and U.
Enterprises, on June 10, 1981. Malabon also canceled the petitioner's credit line and demanded
that future payments be made by it in cash or certified check. Meantime, action on the pending
orders of the petitioner with the other suppliers whose checks were dishonored was also
deferred.
3
The petitioner complained to the respondent bank on June 10, 1981. Investigation disclosed
that the sum of P100,000.00 deposited by the petitioner on May 25, 1981, had not been credited
to it. The error was rectified on June 17, 1981, and the dishonored checks were paid after they
4
were re-deposited.
In its letter dated June 20, 1981, the petitioner demanded reparation from the respondent bank
for its "gross and wanton negligence." This demand was not met. The petitioner then filed a
complaint in the then Court of First Instance of Rizal claiming from the private respondent moral
damages in the sum of P1,000,000.00 and exemplary damages in the sum of P500,000.00, plus
25% attorney's fees, and costs.
After trial, Judge Johnico G. Serquinia rendered judgment holding that moral and exemplary
damages were not called for under the circumstances. However, observing that the plaintiff's right
had been violated, he ordered the defendant to pay nominal damages in the amount of
5
P20,000.00 plus P5,000.00 attorney's fees and costs. This decision was affirmed in toto by the
6
respondent court.
The respondent court found with the trial court that the private respondent was guilty of
negligence but agreed that the petitioner was nevertheless not entitled to moral damages. It said:
The essential ingredient of moral damages is proof of bad faith (De Aparicio vs.
Parogurga, 150 SCRA 280). Indeed, there was the omission by the defendant-
appellee bank to credit appellant's deposit of P100,000.00 on May 25, 1981. But
the bank rectified its records. It credited the said amount in favor of plaintiff-
appellant in less than a month. The dishonored checks were eventually paid.
These circumstances negate any imputation or insinuation of malicious,
fraudulent, wanton and gross bad faith and negligence on the part of the
defendant-appellant.
It is this ruling that is faulted in the petition now before us.
This Court has carefully examined the facts of this case and finds that it cannot share some of the
conclusions of the lower courts. It seems to us that the negligence of the private respondent had
been brushed off rather lightly as if it were a minor infraction requiring no more than a slap on the
wrist. We feel it is not enough to say that the private respondent rectified its records and credited
the deposit in less than a month as if this were sufficient repentance. The error should not have
been committed in the first place. The respondent bank has not even explained why it was
committed at all. It is true that the dishonored checks were, as the Court of Appeals put it,
"eventually" paid. However, this took almost a month when, properly, the checks should have
been paid immediately upon presentment.

As the Court sees it, the initial carelessness of the respondent bank, aggravated by the lack of
promptitude in repairing its error, justifies the grant of moral damages. This rather lackadaisical
attitude toward the complaining depositor constituted the gross negligence, if not wanton bad
faith, that the respondent court said had not been established by the petitioner.
We also note that while stressing the rectification made by the respondent bank, the decision
practically ignored the prejudice suffered by the petitioner. This was simply glossed over if not,
indeed, disbelieved. The fact is that the petitioner's credit line was canceled and its orders were
not acted upon pending receipt of actual payment by the suppliers. Its business declined. Its
reputation was tarnished. Its standing was reduced in the business community. All this was due to
the fault of the respondent bank which was undeniably remiss in its duty to the petitioner.
Article 2205 of the Civil Code provides that actual or compensatory damages may be received
"(2) for injury to the plaintiff s business standing or commercial credit." There is no question that
the petitioner did sustain actual injury as a result of the dishonored checks and that the existence
7
of the loss having been established "absolute certainty as to its amount is not required." Such
injury should bolster all the more the demand of the petitioner for moral damages and justifies the
examination by this Court of the validity and reasonableness of the said claim.
We agree that moral damages are not awarded to penalize the defendant but to compensate the
8
plaintiff for the injuries he may have suffered. In the case at bar, the petitioner is seeking such
damages for the prejudice sustained by it as a result of the private respondent's fault. The
respondent court said that the claimed losses are purely speculative and are not supported by
substantial evidence, but if failed to consider that the amount of such losses need not be
established with exactitude precisely because of their nature. Moral damages are not susceptible
of pecuniary estimation. Article 2216 of the Civil Code specifically provides that "no proof of
pecuniary loss is necessary in order that moral, nominal, temperate, liquidated or exemplary
damages may be adjudicated." That is why the determination of the amount to be awarded
(except liquidated damages) is left to the sound discretion of the court, according to "the
circumstances of each case."
From every viewpoint except that of the petitioner's, its claim of moral damages in the amount of
P1,000,000.00 is nothing short of preposterous. Its business certainly is not that big, or its name
that prestigious, to sustain such an extravagant pretense. Moreover, a corporation is not as a rule
entitled to moral damages because, not being a natural person, it cannot experience physical
suffering or such sentiments as wounded feelings, serious anxiety, mental anguish and moral
shock. The only exception to this rule is where the corporation has a good reputation that is
9
debased, resulting in its social humiliation.
We shall recognize that the petitioner did suffer injury because of the private respondent's
negligence that caused the dishonor of the checks issued by it. The immediate consequence was
that its prestige was impaired because of the bouncing checks and confidence in it as a reliable
debtor was diminished. The private respondent makes much of the one instance when the
petitioner was sued in a collection case, but that did not prove that it did not have a good
10
reputation that could not be marred, more so since that case was ultimately settled. It does not
appear that, as the private respondent would portray it, the petitioner is an unsavory and
disreputable entity that has no good name to protect.
Considering all this, we feel that the award of nominal damages in the sum of P20,000.00 was not
the proper relief to which the petitioner was entitled. Under Article 2221 of the Civil Code,
"nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or
invaded by the defendant, may be vindicated or recognized, and not for the purpose of
indemnifying the plaintiff for any loss suffered by him." As we have found that the petitioner has
indeed incurred loss through the fault of the private respondent, the proper remedy is the award
to it of moral damages, which we impose, in our discretion, in the same amount of P20,000.00.
Now for the exemplary damages.
The pertinent provisions of the Civil Code are the following:
Art. 2229. Exemplary or corrective damages are imposed, by way of example or
correction for the public good, in addition to the moral, temperate, liquidated or
compensatory damages.
Art. 2232. In contracts and quasi-contracts, the court may award exemplary
damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or
malevolent manner.
The banking system is an indispensable institution in the modern world and plays a vital role in
the economic life of every civilized nation. Whether as mere passive entities for the safekeeping
and saving of money or as active instruments of business and commerce, banks have become an
ubiquitous presence among the people, who have come to regard them with respect and even
gratitude and, most of all, confidence. Thus, even the humble wage-earner has not hesitated to
entrust his life's savings to the bank of his choice, knowing that they will be safe in its custody and
will even earn some interest for him. The ordinary person, with equal faith, usually maintains a
modest checking account for security and convenience in the settling of his monthly bills and the
payment of ordinary expenses. As for business entities like the petitioner, the bank is a trusted
and active associate that can help in the running of their affairs, not only in the form of loans
when needed but more often in the conduct of their day-to-day transactions like the issuance or
encashment of checks.
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. A
blunder on the part of the bank, such as the dishonor of a 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. In the case at bar, it is obvious
that the respondent bank was remiss in that duty and violated that relationship. What is especially
deplorable is that, having been informed of its error in not crediting the deposit in question to the
petitioner, the respondent bank did not immediately correct it but did so only one week later or
twenty-three days after the deposit was made. It bears repeating that the record does not contain
any satisfactory explanation of why the error was made in the first place and why it was not
corrected immediately after its discovery. Such ineptness comes under the concept of the wanton
manner contemplated in the Civil Code that calls for the imposition of exemplary damages.
After deliberating on this particular matter, the Court, in the exercise of its discretion, hereby
imposes upon the respondent bank exemplary damages in the amount of P50,000.00, "by way of
example or correction for the public good," in the words of the law. It is expected that this ruling
will serve as a warning and deterrent against the repetition of the ineptness and indefference that
has been displayed here, lest the confidence of the public in the banking system be further
impaired.
ACCORDINGLY, the appealed judgment is hereby MODIFIED and the private respondent is
ordered to pay the petitioner, in lieu of nominal damages, moral damages in the amount of
P20,000.00, and exemplary damages in the amount of P50,000.00 plus the original award of
attorney's fees in the amount of P5,000.00, and costs.
SO ORDERED.

b. Consolidated Bank and Trust Corporation v. Court of Appeals, G.R.

No. 138569, September 11, 2003, 410 SCRA 562, 574-575
CARPIO, J.:
The Case
Before us is a petition for review of the Decision1[1] of the Court of Appeals
dated 27 October 1998 and its Resolution dated 11 May 1999. The assailed
decision reversed the Decision2[2] of the Regional Trial Court of Manila,
Branch 8, absolving petitioner Consolidated Bank and Trust Corporation,
now known as Solidbank Corporation (“Solidbank”), of any liability. The
questioned resolution of the appellate court denied the motion for
reconsideration of Solidbank but modified the decision by deleting the
award of exemplary damages, attorney’s fees, expenses of litigation and cost
of suit.
The Facts
Solidbank is a domestic banking corporation organized and existing under
Philippine laws. Private respondent L.C. Diaz and Company, CPA’s (“L.C.
Diaz”), is a professional partnership engaged in the practice of accounting.
Sometime in March 1976, L.C. Diaz opened a savings account with
Solidbank, designated as Savings Account No. S/A 200-16872-6.
On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya
(“Macaraya”), filled up a savings (cash) deposit slip for P990 and a savings
(checks) deposit slip for P50. Macaraya instructed the messenger of L.C.
Diaz, Ismael Calapre (“Calapre”), to deposit the money with Solidbank.
Macaraya also gave Calapre the Solidbank passbook.
Calapre went to Solidbank and presented to Teller No. 6 the two deposit
slips and the passbook. The teller acknowledged receipt of the deposit by
returning to Calapre the duplicate copies of the two deposit slips. Teller No.
6 stamped the deposit slips with the words “DUPLICATE” and “SAVING
TELLER 6 SOLIDBANK HEAD OFFICE.” Since the transaction took time
and Calapre had to make another deposit for L.C. Diaz with Allied Bank, he
left the passbook with Solidbank. Calapre then went to Allied Bank. When
Calapre returned to Solidbank to retrieve the passbook, Teller No. 6
informed him that “somebody got the passbook.”3[3] Calapre went back to
L.C. Diaz and reported the incident to Macaraya.
Macaraya immediately prepared a deposit slip in duplicate copies with a
check of P200,000. Macaraya, together with Calapre, went to Solidbank and
                                                                                                               
 
 

 
presented to Teller No. 6 the deposit slip and check. The teller stamped the
words “DUPLICATE” and “SAVING TELLER 6 SOLIDBANK HEAD
OFFICE” on the duplicate copy of the deposit slip. When Macaraya asked
for the passbook, Teller No. 6 told Macaraya that someone got the passbook
but she could not remember to whom she gave the passbook. When
Macaraya asked Teller No. 6 if Calapre got the passbook, Teller No. 6
answered that someone shorter than Calapre got the passbook. Calapre was
then standing beside Macaraya.
Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for the
deposit of a check for P90,000 drawn on Philippine Banking Corporation
(“PBC”). This PBC check of L.C. Diaz was a check that it had “long
closed.”4[4] PBC subsequently dishonored the check because of insufficient
funds and because the signature in the check differed from PBC’s specimen
signature. Failing to get back the passbook, Macaraya went back to her
office and reported the matter to the Personnel Manager of L.C. Diaz,
Emmanuel Alvarez.
The following day, 15 August 1991, L.C. Diaz through its Chief Executive
Officer, Luis C. Diaz (“Diaz”), called up Solidbank to stop any transaction
using the same passbook until L.C. Diaz could open a new account.5[5] On
the same day, Diaz formally wrote Solidbank to make the same request. It
was also on the same day that L.C. Diaz learned of the unauthorized
withdrawal the day before, 14 August 1991, of P300,000 from its savings
account. The withdrawal slip for the P300,000 bore the signatures of the
authorized signatories of L.C. Diaz, namely Diaz and Rustico L. Murillo.
The signatories, however, denied signing the withdrawal slip. A certain Noel
Tamayo received the P300,000.
In an Information6[6] dated 5 September 1991, L.C. Diaz charged its
messenger, Emerano Ilagan (“Ilagan”) and one Roscon Verdazola with
Estafa through Falsification of Commercial Document. The Regional Trial
Court of Manila dismissed the criminal case after the City Prosecutor filed a
Motion to Dismiss on 4 August 1992.
On 24 August 1992, L.C. Diaz through its counsel demanded from
Solidbank the return of its money. Solidbank refused.

                                                                                                               
 
 

 
On 25 August 1992, L.C. Diaz filed a Complaint7[7] for Recovery of a Sum
of Money against Solidbank with the Regional Trial Court of Manila,
Branch 8. After trial, the trial court rendered on 28 December 1994 a
decision absolving Solidbank and dismissing the complaint.
L.C. Diaz then appealed8[8] to the Court of Appeals. On 27 October 1998,
the Court of Appeals issued its Decision reversing the decision of the trial
court.
On 11 May 1999, the Court of Appeals issued its Resolution denying the
motion for reconsideration of Solidbank. The appellate court, however,
modified its decision by deleting the award of exemplary damages and
attorney’s fees.
The Ruling of the Trial Court
In absolving Solidbank, the trial court applied the rules on savings account
written on the passbook. The rules state that “possession of this book shall
raise the presumption of ownership and any payment or payments made by
the bank upon the production of the said book and entry therein of the
withdrawal shall have the same effect as if made to the depositor
personally.”9[9]
At the time of the withdrawal, a certain Noel Tamayo was not only in
possession of the passbook, he also presented a withdrawal slip with the
signatures of the authorized signatories of L.C. Diaz. The specimen
signatures of these persons were in the signature cards. The teller stamped
the withdrawal slip with the words “Saving Teller No. 5.” The teller then
passed on the withdrawal slip to Genere Manuel (“Manuel”) for
authentication. Manuel verified the signatures on the withdrawal slip. The
withdrawal slip was then given to another officer who compared the
signatures on the withdrawal slip with the specimen on the signature cards.
The trial court concluded that Solidbank acted with care and observed the
rules on savings account when it allowed the withdrawal of P300,000 from
the savings account of L.C. Diaz.
The trial court pointed out that the burden of proof now shifted to L.C. Diaz
to prove that the signatures on the withdrawal slip were forged. The trial
court admonished L.C. Diaz for not offering in evidence the National Bureau
of Investigation (“NBI”) report on the authenticity of the signatures on the
                                                                                                               
 
 

 
withdrawal slip for P300,000. The trial court believed that L.C. Diaz did not
offer this evidence because it is derogatory to its action.
Another provision of the rules on savings account states that the depositor
must keep the passbook “under lock and key.”10[10] When another person
presents the passbook for withdrawal prior to Solidbank’s receipt of the
notice of loss of the passbook, that person is considered as the owner of the
passbook. The trial court ruled that the passbook presented during the
questioned transaction was “now out of the lock and key and presumptively
ready for a business transaction.”11[11]
Solidbank did not have any participation in the custody and care of the
passbook. The trial court believed that Solidbank’s act of allowing the
withdrawal of P300,000 was not the direct and proximate cause of the loss.
The trial court held that L.C. Diaz’s negligence caused the unauthorized
withdrawal. Three facts establish L.C. Diaz’s negligence: (1) the possession
of the passbook by a person other than the depositor L.C. Diaz; (2) the
presentation of a signed withdrawal receipt by an unauthorized person; and
(3) the possession by an unauthorized person of a PBC check “long closed”
by L.C. Diaz, which check was deposited on the day of the fraudulent
withdrawal.
The trial court debunked L.C. Diaz’s contention that Solidbank did not
follow the precautionary procedures observed by the two parties whenever
L.C. Diaz withdrew significant amounts from its account. L.C. Diaz
claimed that a letter must accompany withdrawals of more than P20,000.
The letter must request Solidbank to allow the withdrawal and convert the
amount to a manager’s check. The bearer must also have a letter authorizing
him to withdraw the same amount. Another person driving a car must
accompany the bearer so that he would not walk from Solidbank to the
office in making the withdrawal. The trial court pointed out that L.C. Diaz
disregarded these precautions in its past withdrawal. On 16 July 1991, L.C.
Diaz withdrew P82,554 without any separate letter of authorization or any
communication with Solidbank that the money be converted into a
manager’s check.
The trial court further justified the dismissal of the complaint by holding that
the case was a last ditch effort of L.C. Diaz to recover P300,000 after the
dismissal of the criminal case against Ilagan.
                                                                                                               
 

 
The dispositive portion of the decision of the trial court reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered
DISMISSING the complaint.
The Court further renders judgment in favor of defendant bank pursuant to
its counterclaim the amount of Thirty Thousand Pesos (P30,000.00) as
attorney’s fees.
With costs against plaintiff.
SO ORDERED.12[12]
The Ruling of the Court of Appeals
The Court of Appeals ruled that Solidbank’s negligence was the proximate
cause of the unauthorized withdrawal of P300,000 from the savings account
of L.C. Diaz. The appellate court reached this conclusion after applying the
provision of the Civil Code on quasi-delict, to wit:
Article 2176. Whoever by act or omission causes damage to another, there
being fault or negligence, is obliged to pay for the damage done. Such fault
or negligence, if there is no pre-existing contractual relation between the
parties, is called a quasi-delict and is governed by the provisions of this
chapter.
The appellate court held that the three elements of a quasi-delict are present
in this case, namely: (a) damages suffered by the plaintiff; (b) fault or
negligence of the defendant, or some other person for whose acts he must
respond; and (c) the connection of cause and effect between the fault or
negligence of the defendant and the damage incurred by the plaintiff.
The Court of Appeals pointed out that the teller of Solidbank who received
the withdrawal slip for P300,000 allowed the withdrawal without making the
necessary inquiry. The appellate court stated that the teller, who was not
presented by Solidbank during trial, should have called up the depositor
because the money to be withdrawn was a significant amount. Had the teller
called up L.C. Diaz, Solidbank would have known that the withdrawal was
unauthorized. The teller did not even verify the identity of the impostor who
made the withdrawal. Thus, the appellate court found Solidbank liable for
its negligence in the selection and supervision of its employees.
The appellate court ruled that while L.C. Diaz was also negligent in
entrusting its deposits to its messenger and its messenger in leaving the
passbook with the teller, Solidbank could not escape liability because of the
doctrine of “last clear chance.” Solidbank could have averted the injury
suffered by L.C. Diaz had it called up L.C. Diaz to verify the withdrawal.
                                                                                                               

 
The appellate court ruled that the degree of diligence required from
Solidbank is more than that of a good father of a family. The business and
functions of banks are affected with public interest. Banks are obligated to
treat the accounts of their depositors with meticulous care, always having in
mind the fiduciary nature of their relationship with their clients. The Court
of Appeals found Solidbank remiss in its duty, violating its fiduciary
relationship with L.C. Diaz.
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, premises considered, the decision appealed from is hereby
REVERSED and a new one entered.
1. Ordering defendant-appellee Consolidated Bank and Trust
Corporation to pay plaintiff-appellant the sum of Three
Hundred Thousand Pesos (P300,000.00), with interest thereon
at the rate of 12% per annum from the date of filing of the
complaint until paid, the sum of P20,000.00 as exemplary
damages, and P20,000.00 as attorney’s fees and expenses of
litigation as well as the cost of suit; and
2. Ordering the dismissal of defendant-appellee’s counterclaim in
the amount of P30,000.00 as attorney’s fees.
SO ORDERED.13[13]
Acting on the motion for reconsideration of Solidbank, the appellate court
affirmed its decision but modified the award of damages. The appellate
court deleted the award of exemplary damages and attorney’s fees. Invoking
Article 223114[14] of the Civil Code, the appellate court ruled that
exemplary damages could be granted if the defendant acted with gross
negligence. Since Solidbank was guilty of simple negligence only, the award
of exemplary damages was not justified. Consequently, the award of
attorney’s fees was also disallowed pursuant to Article 2208 of the Civil
Code. The expenses of litigation and cost of suit were also not imposed on
Solidbank.
The dispositive portion of the Resolution reads as follows:
WHEREFORE, foregoing considered, our decision dated October 27, 1998
is affirmed with modification by deleting the award of exemplary damages
and attorney’s fees, expenses of litigation and cost of suit.

                                                                                                               
 

 
SO ORDERED.15[15]
Hence, this petition.
The Issues
Solidbank seeks the review of the decision and resolution of the Court of
Appeals on these grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONER BANK SHOULD SUFFER THE LOSS
BECAUSE ITS TELLER SHOULD HAVE FIRST CALLED
PRIVATE RESPONDENT BY TELEPHONE BEFORE IT
ALLOWED THE WITHDRAWAL OF P300,000.00 TO
RESPONDENT’S MESSENGER EMERANO ILAGAN,
SINCE THERE IS NO AGREEMENT BETWEEN THE
PARTIES IN THE OPERATION OF THE SAVINGS
ACCOUNT, NOR IS THERE ANY BANKING LAW,
WHICH MANDATES THAT A BANK TELLER SHOULD
FIRST CALL UP THE DEPOSITOR BEFORE ALLOWING
A WITHDRAWAL OF A BIG AMOUNT IN A SAVINGS
ACCOUNT.
II. THE COURT OF APPEALS ERRED IN APPLYING THE
DOCTRINE OF LAST CLEAR CHANCE AND IN
HOLDING THAT PETITIONER BANK’S TELLER HAD
THE LAST OPPORTUNITY TO WITHHOLD THE
WITHDRAWAL WHEN IT IS UNDISPUTED THAT THE
TWO SIGNATURES OF RESPONDENT ON THE
WITHDRAWAL SLIP ARE GENUINE AND PRIVATE
RESPONDENT’S PASSBOOK WAS DULY PRESENTED,
AND CONTRARIWISE RESPONDENT WAS NEGLIGENT
IN THE SELECTION AND SUPERVISION OF ITS
MESSENGER EMERANO ILAGAN, AND IN THE
SAFEKEEPING OF ITS CHECKS AND OTHER
FINANCIAL DOCUMENTS.
III. THE COURT OF APPEALS ERRED IN NOT FINDING
THAT THE INSTANT CASE IS A LAST DITCH EFFORT
OF PRIVATE RESPONDENT TO RECOVER ITS
P300,000.00 AFTER FAILING IN ITS EFFORTS TO
RECOVER THE SAME FROM ITS EMPLOYEE EMERANO
ILAGAN.
                                                                                                               

 
 IV. THE COURT OF APPEALS ERRED IN NOT MITIGATING
THE DAMAGES AWARDED AGAINST PETITIONER
UNDER ARTICLE 2197 OF THE CIVIL CODE,
NOTWITHSTANDING ITS FINDING THAT PETITIONER
BANK’S NEGLIGENCE WAS ONLY
CONTRIBUTORY.16[16]
The Ruling of the Court
The petition is partly meritorious.

Solidbank’s Fiduciary Duty under the Law

The rulings of the trial court and the Court of Appeals conflict on the
application of the law. The trial court pinned the liability on L.C. Diaz
based on the provisions of the rules on savings account, a recognition of the
contractual relationship between Solidbank and L.C. Diaz, the latter being a
depositor of the former. On the other hand, the Court of Appeals applied the
law on quasi-delict to determine who between the two parties was ultimately
negligent. The law on quasi-delict or culpa aquiliana is generally applicable
when there is no pre-existing contractual relationship between the parties.
We hold that Solidbank is liable for breach of contract due to negligence, or
culpa contractual.

The contract between the bank and its depositor is governed by the
provisions of the Civil Code on simple loan.17[17] Article 1980 of the Civil
Code expressly provides that “x x x savings x x x deposits of money in
banks and similar institutions shall be governed by the provisions
concerning simple loan.” There is a debtor-creditor relationship between
the bank and its depositor. The bank is the debtor and the depositor is the
creditor. The depositor lends the bank money and the bank agrees to pay the
depositor on demand. The savings deposit agreement between the bank and
the depositor is the contract that determines the rights and obligations of the
parties.
The law imposes on banks high standards in view of the fiduciary nature of
banking. Section 2 of Republic Act No. 8791 (“RA 8791”),18[18] which
                                                                                                               
 
 

 
took effect on 13 June 2000, declares that the State recognizes the “fiduciary
nature of banking that requires high standards of integrity and
performance.”19[19] This new provision in the general banking law,
introduced in 2000, is a statutory affirmation of Supreme Court decisions,
starting with the 1990 case of Simex International v. Court of
Appeals,20[20] holding that “the bank is under obligation to treat the
accounts of its depositors with meticulous care, always having in mind the
fiduciary nature of their relationship.”21[21]
This fiduciary relationship means that the bank’s obligation to observe “high
standards of integrity and performance” is deemed written into every deposit
agreement between a bank and its depositor. The fiduciary nature of banking
requires banks to assume a degree of diligence higher than that of a good
father of a family. Article 1172 of the Civil Code states that the degree of
diligence required of an obligor is that prescribed by law or contract, and
absent such stipulation then the diligence of a good father of a family.22[22]
Section 2 of RA 8791 prescribes the statutory diligence required from banks
– that banks must observe “high standards of integrity and performance” in
servicing their depositors. Although RA 8791 took effect almost nine years
after the unauthorized withdrawal of the P300,000 from L.C. Diaz’s savings
account, jurisprudence23[23] at the time of the withdrawal already imposed
on banks the same high standard of diligence required under RA No. 8791.
However, the fiduciary nature of a bank-depositor relationship does not
convert the contract between the bank and its depositors from a simple loan
to a trust agreement, whether express or implied. Failure by the bank to pay
the depositor is failure to pay a simple loan, and not a breach of trust.24[24]
The law simply imposes on the bank a higher standard of integrity and
performance in complying with its obligations under the contract of simple
loan, beyond those required of non-bank debtors under a similar contract of
simple loan.
                                                                                                               
 

 
 
 
 

 
The fiduciary nature of banking does not convert a simple loan into a trust
agreement because banks do not accept deposits to enrich depositors but to
earn money for themselves. The law allows banks to offer the lowest
possible interest rate to depositors while charging the highest possible
interest rate on their own borrowers. The interest spread or differential
belongs to the bank and not to the depositors who are not cestui que trust of
banks. If depositors are cestui que trust of banks, then the interest spread or
income belongs to the depositors, a situation that Congress certainly did not
intend in enacting Section 2 of RA 8791.
Solidbank’s Breach of its Contractual Obligation
Article 1172 of the Civil Code provides that “responsibility arising from
negligence in the performance of every kind of obligation is demandable.”
For breach of the savings deposit agreement due to negligence, or culpa
contractual, the bank is liable to its depositor.
Calapre left the passbook with Solidbank because the “transaction took
time” and he had to go to Allied Bank for another transaction. The passbook
was still in the hands of the employees of Solidbank for the processing of the
deposit when Calapre left Solidbank. Solidbank’s rules on savings account
require that the “deposit book should be carefully guarded by the depositor
and kept under lock and key, if possible.” When the passbook is in the
possession of Solidbank’s tellers during withdrawals, the law imposes on
Solidbank and its tellers an even higher degree of diligence in safeguarding
the passbook.
Likewise, Solidbank’s tellers must exercise a high degree of diligence in
insuring that they return the passbook only to the depositor or his authorized
representative. The tellers know, or should know, that the rules on savings
account provide that any person in possession of the passbook is
presumptively its owner. If the tellers give the passbook to the wrong
person, they would be clothing that person presumptive ownership of the
passbook, facilitating unauthorized withdrawals by that person. For failing
to return the passbook to Calapre, the authorized representative of L.C. Diaz,
Solidbank and Teller No. 6 presumptively failed to observe such high degree
of diligence in safeguarding the passbook, and in insuring its return to the
party authorized to receive the same.
In culpa contractual, once the plaintiff proves a breach of contract, there is a
presumption that the defendant was at fault or negligent. The burden is on
the defendant to prove that he was not at fault or negligent. In contrast, in
culpa aquiliana the plaintiff has the burden of proving that the defendant
was negligent. In the present case, L.C. Diaz has established that Solidbank
breached its contractual obligation to return the passbook only to the
authorized representative of L.C. Diaz. There is thus a presumption that
Solidbank was at fault and its teller was negligent in not returning the
passbook to Calapre. The burden was on Solidbank to prove that there was
no negligence on its part or its employees.
Solidbank failed to discharge its burden. Solidbank did not present to the
trial court Teller No. 6, the teller with whom Calapre left the passbook and
who was supposed to return the passbook to him. The record does not
indicate that Teller No. 6 verified the identity of the person who retrieved
the passbook. Solidbank also failed to adduce in evidence its standard
procedure in verifying the identity of the person retrieving the passbook, if
there is such a procedure, and that Teller No. 6 implemented this procedure
in the present case.
Solidbank is bound by the negligence of its employees under the principle of
respondeat superior or command responsibility. The defense of exercising
the required diligence in the selection and supervision of employees is not a
complete defense in culpa contractual, unlike in culpa aquiliana.25[25]
The bank must not only exercise “high standards of integrity and
performance,” it must also insure that its employees do likewise because this
is the only way to insure that the bank will comply with its fiduciary duty.
Solidbank failed to present the teller who had the duty to return to Calapre
the passbook, and thus failed to prove that this teller exercised the “high
standards of integrity and performance” required of Solidbank’s employees.
Proximate Cause of the Unauthorized Withdrawal
Another point of disagreement between the trial and appellate courts is the
proximate cause of the unauthorized withdrawal. The trial court believed
that L.C. Diaz’s negligence in not securing its passbook under lock and key
was the proximate cause that allowed the impostor to withdraw the
P300,000. For the appellate court, the proximate cause was the teller’s
negligence in processing the withdrawal without first verifying with L.C.
Diaz. We do not agree with either court.
Proximate cause is that cause which, in natural and continuous sequence,
unbroken by any efficient intervening cause, produces the injury and without
which the result would not have occurred.26[26] Proximate cause is

                                                                                                               
 

 
determined by the facts of each case upon mixed considerations of logic,
common sense, policy and precedent.27[27]
L.C. Diaz was not at fault that the passbook landed in the hands of the
impostor. Solidbank was in possession of the passbook while it was
processing the deposit. After completion of the transaction, Solidbank had
the contractual obligation to return the passbook only to Calapre, the
authorized representative of L.C. Diaz. Solidbank failed to fulfill its
contractual obligation because it gave the passbook to another person.
Solidbank’s failure to return the passbook to Calapre made possible the
withdrawal of the P300,000 by the impostor who took possession of the
passbook. Under Solidbank’s rules on savings account, mere possession of
the passbook raises the presumption of ownership. It was the negligent act
of Solidbank’s Teller No. 6 that gave the impostor presumptive ownership of
the passbook. Had the passbook not fallen into the hands of the impostor,
the loss of P300,000 would not have happened. Thus, the proximate cause
of the unauthorized withdrawal was Solidbank’s negligence in not
returning the passbook to Calapre.
We do not subscribe to the appellate court’s theory that the proximate cause
of the unauthorized withdrawal was the teller’s failure to call up L.C. Diaz to
verify the withdrawal. Solidbank did not have the duty to call up L.C. Diaz
to confirm the withdrawal. There is no arrangement between Solidbank and
L.C. Diaz to this effect. Even the agreement between Solidbank and L.C.
Diaz pertaining to measures that the parties must observe whenever
withdrawals of large amounts are made does not direct Solidbank to call up
L.C. Diaz.
There is no law mandating banks to call up their clients whenever their
representatives withdraw significant amounts from their accounts. L.C. Diaz
therefore had the burden to prove that it is the usual practice of Solidbank to
call up its clients to verify a withdrawal of a large amount of money. L.C.
Diaz failed to do so.
Teller No. 5 who processed the withdrawal could not have been put on guard
to verify the withdrawal. Prior to the withdrawal of P300,000, the impostor
deposited with Teller No. 6 the P90,000 PBC check, which later bounced.
The impostor apparently deposited a large amount of money to deflect
suspicion from the withdrawal of a much bigger amount of money. The
appellate court thus erred when it imposed on Solidbank the duty to call up

                                                                                                               

 
L.C. Diaz to confirm the withdrawal when no law requires this from banks
and when the teller had no reason to be suspicious of the transaction.
Solidbank continues to foist the defense that Ilagan made the withdrawal.
Solidbank claims that since Ilagan was also a messenger of L.C. Diaz, he
was familiar with its teller so that there was no more need for the teller to
verify the withdrawal. Solidbank relies on the following statements in the
Booking and Information Sheet of Emerano Ilagan:
xxx Ilagan also had with him (before the withdrawal) a forged check of PBC
and indicated the amount of P90,000 which he deposited in favor of L.C.
Diaz and Company. After successfully withdrawing this large sum of
money, accused Ilagan gave alias Rey (Noel Tamayo) his share of the loot.
Ilagan then hired a taxicab in the amount of P1,000 to transport him (Ilagan)
to his home province at Bauan, Batangas. Ilagan extravagantly and lavishly
spent his money but a big part of his loot was wasted in cockfight and horse
racing. Ilagan was apprehended and meekly admitted his guilt.28[28]
(Emphasis supplied.)
L.C. Diaz refutes Solidbank’s contention by pointing out that the person who
withdrew the P300,000 was a certain Noel Tamayo. Both the trial and
appellate courts stated that this Noel Tamayo presented the passbook with
the withdrawal slip.
We uphold the finding of the trial and appellate courts that a certain Noel
Tamayo withdrew the P300,000. The Court is not a trier of facts. We find
no justifiable reason to reverse the factual finding of the trial court and the
Court of Appeals. The tellers who processed the deposit of the P90,000
check and the withdrawal of the P300,000 were not presented during trial to
substantiate Solidbank’s claim that Ilagan deposited the check and made the
questioned withdrawal. Moreover, the entry quoted by Solidbank does not
categorically state that Ilagan presented the withdrawal slip and the
passbook.
Doctrine of Last Clear Chance
The doctrine of last clear chance states that where both parties are negligent
but the negligent act of one is appreciably later than that of the other, or
where it is impossible to determine whose fault or negligence caused the
loss, the one who had the last clear opportunity to avoid the loss but failed to
do so, is chargeable with the loss.29[29] Stated differently, the antecedent
                                                                                                               
 

 
negligence of the plaintiff does not preclude him from recovering damages
caused by the supervening negligence of the defendant, who had the last fair
chance to prevent the impending harm by the exercise of due diligence.30[30]
We do not apply the doctrine of last clear chance to the present case.
Solidbank is liable for breach of contract due to negligence in the
performance of its contractual obligation to L.C. Diaz. This is a case of
culpa contractual, where neither the contributory negligence of the plaintiff
nor his last clear chance to avoid the loss, would exonerate the defendant
from liability.31[31] Such contributory negligence or last clear chance by the
plaintiff merely serves to reduce the recovery of damages by the plaintiff but
does not exculpate the defendant from his breach of contract.32[32]
Mitigated Damages
Under Article 1172, “liability (for culpa contractual) may be regulated by
the courts, according to the circumstances.” This means that if the defendant
exercised the proper diligence in the selection and supervision of its
employee, or if the plaintiff was guilty of contributory negligence, then the
courts may reduce the award of damages. In this case, L.C. Diaz was guilty
of contributory negligence in allowing a withdrawal slip signed by its
authorized signatories to fall into the hands of an impostor. Thus, the
liability of Solidbank should be reduced.
In Philippine Bank of Commerce v. Court of Appeals,33[33] where the
Court held the depositor guilty of contributory negligence, we allocated the
damages between the depositor and the bank on a 40-60 ratio. Applying the
same ruling to this case, we hold that L.C. Diaz must shoulder 40% of the
actual damages awarded by the appellate court. Solidbank must pay the
other 60% of the actual damages.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED with
MODIFICATION. Petitioner Solidbank Corporation shall pay private
respondent L.C. Diaz and Company, CPA’s only 60% of the actual damages
awarded by the Court of Appeals. The remaining 40% of the actual
damages shall be borne by private respondent L.C. Diaz and Company,
CPA’s. Proportionate costs.
                                                                                                               
 
 
 

 
 c. Metropolitan Bank and Trust Company vs. Cabilzo, G.R. No. 154469,
December 6, 2006.

CHICO-NAZARIO, J.:

Before this Court is a Petition for Review on Certiorari, filed by petitioner

Metropolitan Bank and Trust Company (Metrobank) seeking to reverse and
set aside the Decision34[1] of the Court of Appeals dated 8 March 2002 and
its Resolution dated 26 July 2002 affirming the Decision of the Regional
Trial Court (RTC) of Manila, Branch 13 dated 4 September 1998. The
dispositive portion of the Court of Appeals Decision reads:

WHEREFORE, the assailed decision dated September 4, 1998 is AFFIRMED

with modifications (sic) that the awards for exemplary damages and attorney’s fees are
hereby deleted.

Petitioner Metrobank is a banking institution duly organized and

existing as such under Philippine laws.35[2]

Respondent Renato D. Cabilzo (Cabilzo) was one of Metrobank’s

clients who maintained a current account with Metrobank Pasong Tamo
Branch.36[3]

On 12 November 1994, Cabilzo issued a Metrobank Check No.

985988, payable to “CASH” and postdated on 24 November 1994 in the
amount of One Thousand Pesos (P1,000.00). The check was drawn against
Cabilzo’s Account with Metrobank Pasong Tamo Branch under Current
Account No. 618044873-3 and was paid by Cabilzo to a certain Mr.
Marquez, as his sales commission.37[4]
                                                                                                               
 
 
 

 
 Subsequently, the check was presented to Westmont Bank for
payment. Westmont Bank, in turn, indorsed the check to Metrobank for
appropriate clearing. After the entries thereon were examined, including the
availability of funds and the authenticity of the signature of the drawer,
Metrobank cleared the check for encashment in accordance with the
Philippine Clearing House Corporation (PCHC) Rules.

On 16 November 1994, Cabilzo’s representative was at Metrobank

Pasong Tamo Branch to make some transaction when he was asked by a
bank personnel if Cabilzo had issued a check in the amount of P91,000.00 to
which the former replied in the negative. On the afternoon of the same date,
Cabilzo himself called Metrobank to reiterate that he did not issue a check in
the amount of P91,000.00 and requested that the questioned check be
returned to him for verification, to which Metrobank complied.38[5]

Upon receipt of the check, Cabilzo discovered that Metrobank Check

No. 985988 which he issued on 12 November 1994 in the amount of
P1,000.00 was altered to P91,000.00 and the date 24 November 1994 was
changed to 14 November 1994.39[6]

Hence, Cabilzo demanded that Metrobank re-credit the amount of

P91,000.00 to his account. Metrobank, however, refused reasoning that it
has to refer the matter first to its Legal Division for appropriate action.
Repeated verbal demands followed but Metrobank still failed to re-credit the
amount of P91,000.00 to Cabilzo’s account.40[7]

On 30 June 1995, Cabilzo, thru counsel, finally sent a letter-

demand41[8] to Metrobank for the payment of P90,000.00, after deducting

                                                                                                               
 
 
 

 
the original value of the check in the amount of P1,000.00. Such written
demand notwithstanding, Metrobank still failed or refused to comply with its
obligation.

Consequently, Cabilzo instituted a civil action for damages against

Metrobank before the RTC of Manila, Branch 13. In his Complaint
docketed as Civil Case No. 95-75651, Renato D. Cabilzo v. Metropolitan
Bank and Trust Company, Cabilzo prayed that in addition to his claim for
reimbursement, actual and moral damages plus costs of the suit be awarded
in his favor.42[9]

For its part, Metrobank countered that upon the receipt of the said
check through the PCHC on 14 November 1994, it examined the
genuineness and the authenticity of the drawer’s signature appearing thereon
and the technical entries on the check including the amount in figures and in
words to determine if there were alterations, erasures, superimpositions or
intercalations thereon, but none was noted. After verifying the authenticity
and propriety of the aforesaid entries, including the indorsement of the
collecting bank located at the dorsal side of the check which stated that, “all
prior indorsements and lack of indorsement guaranteed,” Metrobank cleared
the check.43[10]

Anent thereto, Metrobank claimed that as a collecting bank and the

last indorser, Westmont Bank should be held liable for the value of the
check. Westmont Bank indorsed the check as the an unqualified indorser,
by virtue of which it assumed the liability of a general indorser, and thus,
among others, warranted that the instrument is genuine and in all respect
what it purports to be.

In addition, Metrobank, in turn, claimed that Cabilzo was partly

responsible in leaving spaces on the check, which, made the fraudulent
insertion of the amount and figures thereon, possible. On account of his
negligence in the preparation and issuance of the check, which according to

                                                                                                               
 

 
Metrobank, was the proximate cause of the loss, Cabilzo cannot thereafter
claim indemnity by virtue of the doctrine of equitable estoppel.

Thus, Metrobank demanded from Cabilzo, for payment in the amount

of P100,000.00 which represents the cost of litigation and attorney’s fees,
for allegedly bringing a frivolous and baseless suit. 44[11]

On 19 April 1996, Metrobank filed a Third-Party Complaint45[12]

against Westmont Bank on account of its unqualified indorsement stamped
at the dorsal side of the check which the former relied upon in clearing what
turned out to be a materially altered check.

Subsequently, a Motion to Dismiss46[13] the Third-Party Complaint

was then filed by Westmont bank because another case involving the same
cause of action was pending before a different court. The said case arose
from an action for reimbursement filed by Metrobank before the Arbitration
Committee of the PCHC against Westmont Bank, and now the subject of a
Petition for Review before the RTC of Manila, Branch 19.

In an Order47[14] dated 4 February 1997, the trial court granted the

Motion to Dismiss the Third-Party Complaint on the ground of litis
pendentia.

On 4 September 1998, the RTC rendered a Decision48[15] in favor of

Cabilzo and thereby ordered Metrobank to pay the sum of P90,000.00, the
amount of the check. In stressing the fiduciary nature of the relationship
between the bank and its clients and the negligence of the drawee bank in
failing to detect an apparent alteration on the check, the trial court ordered

                                                                                                               

 
 
 
 

 
for the payment of exemplary damages, attorney’s fees and cost of litigation.
The dispositive portion of the Decision reads:

WHEREFORE, judgment is rendered ordering defendant Metropolitan Bank

and Trust Company to pay plaintiff Renato Cabilzo the sum of P90,000 with legal
interest of 6 percent per annum from November 16, 1994 until payment is made plus
P20,000 attorney’s fees, exemplary damages of P50,000, and costs of the suit.49[16]

Aggrieved, Metrobank appealed the adverse decision to the Court of

Appeals reiterating its previous argument that as the last indorser, Westmont
Bank shall bear the loss occasioned by the fraudulent alteration of the check.
Elaborating, Metrobank maintained that by reason of its unqualified
indorsement, Westmont Bank warranted that the check in question is
genuine, valid and subsisting and that upon presentment the check shall be
accepted according to its tenor.

Even more, Metrobank argued that in clearing the check, it was not
remiss in the performance of its duty as the drawee bank, but rather, it
exercised the highest degree of diligence in accordance with the generally
accepted banking practice. It further insisted that the entries in the check
were regular and authentic and alteration could not be determined even upon
close examination.

In a Decision50[17] dated 8 March 2002, the Court of Appeals

affirmed with modification the Decision of the court a quo, similarly finding
Metrobank liable for the amount of the check, without prejudice, however,
to the outcome of the case between Metrobank and Westmont Bank which
was pending before another tribunal. The decretal portion of the Decision
reads:

WHEREFORE, the assailed decision dated September 4, 1998 is AFFIRMED

with the modifications (sic) that the awards for exemplary damages and attorney’s fees
are hereby deleted.51[18]

                                                                                                               
 
 

 
 Similarly ill-fated was Metrobank’s Motion for Reconsideration
which was also denied by the appellate court in its Resolution52[19] issued
on 26 July 2002, for lack of merit.

Metrobank now poses before this Court this sole issue:

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN HOLDING

METROBANK, AS DRAWEE BANK, LIABLE FOR THE ALTERATIONS ON THE
SUBJECT CHECK BEARING THE AUTHENTIC SIGNATURE OF THE DRAWER
THEREOF.

We resolve to deny the petition.

An alteration is said to be material if it changes the effect of the instrument. It means that an
unauthorized change in an instrument that purports to modify in any respect the obligation of a party or an
unauthorized addition of words or numbers or other change to an incomplete instrument relating to the
obligation of a party.53[20] In other words, a material alteration is one which changes the items which
are required to be stated under Section 1 of the Negotiable Instruments Law.

Section 1 of the Negotiable Instruments Law provides:

Section 1. Form of negotiable instruments. - An instrument to be negotiable

must conform to the following requirements:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum

certain in money;

(c) Must be payable on demand or at a fixed determinable future

time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be

named or otherwise indicated therein with reasonable
certainty.
                                                                                                               
 

 
 Also pertinent is the following provision in the Negotiable Instrument Law which states:

Section 125. What constitutes material alteration. – Any alteration which

changes:

(a) The date;

(b) The sum payable, either for principal or interest;

(c) The time or place of payment;

(d) The number or the relation of the parties;

(e) The medium or currency in which payment is to be made;

Or which adds a place of payment where no place of payment is specified, or

any other change or addition which alters the effect of the instrument in any respect is a
material alteration.

In the case at bar, the check was altered so that the amount was increased from P1,000.00 to P91,000.00
and the date was changed from 24 November 1994 to 14 November 1994. Apparently, since the entries
altered were among those enumerated under Section 1 and 125, namely, the sum of money payable and the
date of the check, the instant controversy therefore squarely falls within the purview of material alteration.

Now, having laid the premise that the present petition is a case of
material alteration, it is now necessary for us to determine the effect of a
materially altered instrument, as well as the rights and obligations of the
parties thereunder. The following provision of the Negotiable Instrument
Law will shed us some light in threshing out this issue:

Section 124. Alteration of instrument; effect of. – Where a negotiable instrument

is materially altered without the assent of all parties liable thereon, it is avoided, except
as against a party who has himself made, authorized, and assented to the alteration
and subsequent indorsers.

But when the instrument has been materially altered and is in the hands of a
holder in due course not a party to the alteration, he may enforce the payment thereof
according to its original tenor. (Emphasis ours.)

Indubitably, Cabilzo was not the one who made

nor authorized the alteration. Neither did he assent to
the alteration by his express or implied acts. There is
no showing that he failed to exercise such reasonable
degree of diligence required of a prudent man which
could have otherwise prevented the loss. As correctly
ruled by the appellate court, Cabilzo was never remiss
in the preparation and issuance of the check, and there
were no indicia of evidence that would prove otherwise.
Indeed, Cabilzo placed asterisks before and after the
amount in words and figures in order to forewarn the
subsequent holders that nothing follows before and
after the amount indicated other than the one specified
between the asterisks.

The degree of diligence required of a reasonable

man in the exercise of his tasks and the performance of
his duties has been faithfully complied with by Cabilzo.
In fact, he was wary enough that he filled with asterisks
the spaces between and after the amounts, not only
those stated in words, but also those in numerical
figures, in order to prevent any fraudulent insertion,
but unfortunately, the check was still successfully
altered, indorsed by the collecting bank, and cleared by
the drawee bank, and encashed by the perpetrator of
the fraud, to the damage and prejudice of Cabilzo.

Verily, Metrobank cannot lightly impute that Cabilzo was negligent and is therefore prevented
from asserting his rights under the doctrine of equitable estoppel when the facts on record are bare of
evidence to support such conclusion. The doctrine of equitable estoppel states that when one of the two
innocent persons, each guiltless of any intentional or moral wrong, must suffer a loss, it must be borne by
the one whose erroneous conduct, either by omission or commission, was the cause of injury.54[21]
Metrobank’s reliance on this dictum, is misplaced. For one, Metrobank’s representation that it is an
innocent party is flimsy and evidently, misleading. At the same time, Metrobank cannot asseverate that

                                                                                                               

 
Cabilzo was negligent and this negligence was the proximate cause55[22] of the loss in the absence of
even a scintilla proof to buttress such claim. Negligence is not presumed but must be proven by the one
who alleges it.56[23]

Undoubtedly, Cabilzo was an innocent party in this instant

controversy. He was just an ordinary businessman who, in order to facilitate
his business transactions, entrusted his money with a bank, not knowing that
the latter would yield a substantial amount of his deposit to fraud, for which
Cabilzo can never be faulted.

We never fail to stress the remarkable significance of a banking institution to commercial

transactions, in particular, and to the country’s economy in general. The banking system is an
indispensable institution in the modern world and plays a vital role in the economic life of every civilized
nation. Whether as mere passive entities for the safekeeping and saving of money or as active instruments
of business and commerce, banks have become an ubiquitous presence among the people, who have come
to regard them with respect and even gratitude and, most of all, confidence.57[24]

Thus, even the humble wage-earner does not hesitate to entrust his life's savings to the bank of his
choice, knowing that they will be safe in its custody and will even earn some interest for him. The ordinary
person, with equal faith, usually maintains a modest checking account for security and convenience in the
settling of his monthly bills and the payment of ordinary expenses. As for a businessman like the
respondent, the bank is a trusted and active associate that can help in the running of his affairs, not only in
the form of loans when needed but more often in the conduct of their day-to-day transactions like the
issuance or encashment of checks.58[25]

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.59[26]

The point is that as a business affected with public interest and because of the nature of its
functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always

                                                                                                               

 
 
 
 

 
having in mind the fiduciary nature of their relationship. The appropriate degree of diligence required of a

bank must be a high degree of diligence, if not the utmost diligence.60[27]

In the present case, it is obvious that Metrobank was remiss in that duty and violated that
relationship. As observed by the Court of Appeals, there are material alterations on the check that are
visible to the naked eye. Thus:

x x x The number “1” in the date is clearly imposed on a white figure in

the shape of the number “2”. The appellant’s employees who examined
the said check should have likewise been put on guard as to why at the end
of the amount in words, i.e., after the word “ONLY”, there are 4 asterisks,
while at the beginning of the line or before said phrase, there is none, even
as 4 asterisks have been placed before and after the word “CASH” in the
space for payee. In addition, the 4 asterisks before the words “ONE
THOUSAND PESOS ONLY” have noticeably been erased with typing
correction paper, leaving white marks, over which the word “NINETY”
was superimposed. The same can be said of the numeral “9” in the
amount “91,000”, which is superimposed over a whitish mark, obviously
an erasure, in lieu of the asterisk which was deleted to insert the said
figure. The appellant’s employees should have again noticed why only 2
asterisks were placed before the amount in figures, while 3 asterisks were
placed after such amount. The word “NINETY” is also typed differently
and with a lighter ink, when compared with the words “ONE
THOUSAND PESOS ONLY.” The letters of the word “NINETY” are
likewise a little bigger when compared with the letters of the words “ONE
THOUSAND PESOS ONLY”.61[28]

Surprisingly, however, Metrobank failed to detect the above alterations which could not escape the
attention of even an ordinary person. This negligence was exacerbated by the fact that, as found by the
trial court, the check in question was examined by the cash custodian whose functions do not include the
examinations of checks indorsed for payment against drawer’s accounts.62[29] Obviously, the employee
allowed by Metrobank to examine the check was not verse and competent to handle such duty. These
factual findings of the trial court is conclusive upon this court especially when such findings was affirmed
the appellate court.63[30]

                                                                                                               
 
 
 

 
 Apropos thereto, we need to reiterate that by the very nature of their work the degree of
responsibility, care and trustworthiness expected of their employees and officials is far better than those of
ordinary clerks and employees. Banks are expected to exercise the highest degree of diligence in the
selection and supervision of their employees.64[31]

In addition, the bank on which the check is drawn, known as the drawee bank, is under strict
liability to pay to the order of the payee in accordance with the drawer’s instructions as reflected on the
face and by the terms of the check. Payment made under materially altered instrument is not payment done
in accordance with the instruction of the drawer.

When the drawee bank pays a materially altered check, it violates the terms of the check, as well
as its duty to charge its client’s account only for bona fide disbursements he had made. Since the drawee
bank, in the instant case, did not pay according to the original tenor of the instrument, as directed by the
drawer, then it has no right to claim reimbursement from the drawer, much less, the right to deduct the
erroneous payment it made from the drawer’s account which it was expected to treat with utmost fidelity.

Metrobank vigorously asserts that the entries in the check were carefully examined: The date of
the instrument, the amount in words and figures, as well as the drawer’s signature, which after verification,
were found to be proper and authentic and was thus cleared. We are not persuaded. Metrobank’s
negligence consisted in the omission of that degree of diligence required of a bank owing to the fiduciary
nature of its relationship with its client. Article 1173 of the Civil Code provides:

The fault or negligence of the obligor consists in the omission of

that diligence which is required by the nature of the obligation and
corresponds with the circumstances of the persons, of the time and of the
place. x x x.

Beyond question, Metrobank failed to comply with the degree required by the nature of its
business as provided by law and jurisprudence. If indeed it was not remiss in its obligation, then it would
be inconceivable for it not to detect an evident alteration considering its vast knowledge and technical
expertise in the intricacies of the banking business. This Court is not completely unaware of banks’
practices of employing devices and techniques in order to detect forgeries, insertions, intercalations,
superimpositions and alterations in checks and other negotiable instruments so as to safeguard their
authenticity and negotiability. Metrobank cannot now feign ignorance nor claim diligence; neither can it
point its finger at the collecting bank, in order to evade liability.

Metrobank argues that Westmont Bank, as the collecting bank and the last indorser, shall bear the
loss. Without ruling on the matter between the drawee bank and the collecting bank, which is already
under the jurisdiction of another tribunal, we find that Metrobank cannot rely on such indorsement, in
clearing the questioned check. The corollary liability of such indorsement, if any, is separate and
independent from the liability of Metrobank to Cabilzo.

The reliance made by Metrobank on Westmont Bank’s indorsement is clearly inconsistent, if not
totally offensive to the dictum that being impressed with public interest, banks should exercise the highest
degree of diligence, if not utmost diligence in dealing with the accounts of its own clients. It owes the

                                                                                                               

 
highest degree fidelity to its clients and should not therefore lightly rely on the judgment of other banks on
occasions where its clients money were involve, no matter how small or substantial the amount at stake.

Metrobank’s contention that it relied on the strength of collecting bank’s indorsement may be
merely a lame excuse to evade liability, or may be indeed an actual banking practice. In either case, such
act constitutes a deplorable banking practice and could not be allowed by this Court bearing in mind that
the confidence of public in general is of paramount importance in banking business.

What is even more deplorable is that, having been informed of the alteration, Metrobank did not
immediately re-credit the amount that was erroneously debited from Cabilzo’s account but permitted a full
blown litigation to push through, to the prejudice of its client. Anyway, Metrobank is not left with no
recourse for it can still run after the one who made the alteration or with the collecting bank, which it had
already done. It bears repeating that the records are bare of evidence to prove that Cabilzo was negligent.
We find no justifiable reason therefore why Metrobank did not immediately reimburse his account. Such
ineptness comes within the concept of wanton manner contemplated under the Civil Code which warrants
the imposition of exemplary damages, “by way of example or correction for the public good,” in the words
of the law. It is expected that this ruling will serve as a stern warning in order to deter the repetition of
similar acts of negligence, lest the confidence of the public in the banking system be further eroded.
65[32]

WHEREFORE, premises considered, the instant Petition is

DENIED. The Decision dated 8 March 2002 and the Resolution dated 26
July 2002 of the Court of Appeals are AFFIRMED with modification that
exemplary damages in the amount of P50,000.00 be awarded. Costs against
the petitioner.

SO ORDERED.

 
d. Philippine Banking Corporation vs. Court of Appeals, G.R. No.
127469, January 15, 2004.
CARPIO, J.:
The Case
Before us is a petition for review of the Decision66[1] of the Court of Appeals in CA-G.R. CV No. 34382
dated 10 December 1996 modifying the Decision67[2] 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 Damages68[3] against petitioner Philippine Banking Corporation (“BANK”).69[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 P1,428,795.3470[5] has earned accumulated
interest since March 1982 up to the present in the total amount of P1,727,305.45 at the rate of 17% per
annum so his total money with defendant (the BANK) is P3,156,100.79 less the amount of P595,875
representing the 70% balance of the marginal deposit and/or balance of the trust agreements;” and

                                                                                                               
 
 

 
(2) his indebtedness was only P851,250 less the 30% paid as marginal deposit or a balance of
P595,875, which the BANK should have automatically deducted from his time deposits and accumulated
interest, leaving the BANK’s indebtedness to him at P2,560,025.79.
Marcos prayed the trial court to declare Promissory Note No. 20-979-83 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.71[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 P1,428,795.3572[7] as alleged in the complaint. The P764,897.67 included the
P664,897.67 that Marcos deposited on 11 March 1982.
The BANK pointed out that Marcos delivered to the BANK the time deposit certificates by virtue of the
Deed of Assignment dated 2 June 1989. Marcos executed the Deed of Assignment to secure his various
loan obligations. The BANK claimed that these loans are covered by Promissory Note No. 20-756-82
dated 2 June 1982 for P420,000 and Promissory Note No. 20-979-83 dated 24 October 1983 for P500,000.
The BANK stressed that these obligations are separate and distinct from the trust receipt agreements.
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.73[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.74[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.”75[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 P4,867.67.76[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 P4,867.67,77[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 P4,867.6778[13] for a loan worth P595,875 (less 30%
marginal deposit) is not only preposterous, it is also comical. Worse, aside from allowing Marcos to have
unsecured trust receipts, the BANK still claimed to have granted Marcos another loan for P500,000 on 25
October 1983 covered by Promissory Note No. 20-979-83. The BANK is a commercial bank engaged in
the business of lending money. Allowing a loan of more than a million pesos without collateral is in the
words of the trial court, “an impossibility and a gross violation of Central Bank Rules and Regulations,
which no Bank Manager has such authority to grant.”79[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”80[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.81[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 P760,000.00.82[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.83[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?84[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.85[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.86[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.87[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.”88[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.89[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 motions90[25] to this case. The
BANK could have easily re-filed the motion to cross-examine with the requisite notice to Marcos. It did
not do so. The BANK did not make good its threat to elevate the denial to a higher court. The BANK
waited until the trial court rendered a judgment on the merits before questioning the interlocutory order of
denial.
While the right to cross-examine is a vital element of procedural due process, the right does not necessarily
require an actual cross-examination, but merely an opportunity to exercise this right if desired by the party
entitled to it.91[26] Clearly, the BANK’s failure to cross-examine is imputable to the BANK when it lost
this right92[27] as it was in default and failed thereafter to exhaust the remedies to secure the exercise of this
right at the earliest opportunity.
                                                                                                               
 
 

 
 
 
 

 
The two other procedural lapses that the BANK attributes to the appellate and trial courts deserve scant
consideration.
The BANK raises for the very first time the issue of judicial admission on the part of Marcos. The BANK
even has the audacity to fault the Court of Appeals for not ruling on this issue when it never raised this
matter before the appellate court or before the trial court. Obviously, this issue is only an afterthought. An
issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is barred
by estoppel.93[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 times94[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.95[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 Appeals96[31]
requiring banks to “treat the accounts of its depositors with meticulous care, always having in mind the
fiduciary nature of their relationship.”97[32] The Court reiterated this fiduciary duty of banks in subsequent
cases.98[33]

                                                                                                               
 

 
 
 
 

 
Although RA No. 8791 took effect only in the year 2000,99[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. 8791.100[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 Appeals101[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.102[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.103[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.104[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.105[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.106[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.107[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 P764,897.67.108[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.109[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 Manager110[45]
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 interest111[46] without, however, specifying the rate of interest. We, therefore,
impose the legal interest of 12% per annum, the legal interest for the forbearance of money,112[47] on each
of the three trust receipts.
Based on Marcos’ testimony113[48] and the BANK’s letter of demand,114[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.115[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 P101,027.76.116[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 P100,543.04.117[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. 118[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 interest119[54] of P616,318.92 as of 6 March
1987.120[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 P211,622.96.121[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
2212122[57] of the Civil Code.
The BANK’s dismal failure to account for Marcos’ money justifies the award of moral123[58] and
exemplary damages.124[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.125[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.126[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.127[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.128[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.
Costs against petitioner.

e. Serrano vs. Central Bank, G.R. No. L-30511, February 14, 1980, 96
SCRA 96.

MANUEL M. SERRANO, petitioner,

vs.
CENTRAL BANK OF THE PHILIPPINES; OVERSEAS BANK OF MANILA; EMERITO M.
RAMOS, SUSANA B. RAMOS, EMERITO B. RAMOS, JR., JOSEFA RAMOS DELA RAMA,
HORACIO DELA RAMA, ANTONIO B. RAMOS, FILOMENA RAMOS LEDESMA, RODOLFO
LEDESMA, VICTORIA RAMOS TANJUATCO, and TEOFILO TANJUATCO, respondents.
Rene Diokno for petitioner.
F.E. Evangelista & Glecerio T. Orsolino for respondent Central Bank of the Philippines.
Feliciano C. Tumale, Pacifico T. Torres and Antonio B. Periquet for respondent Overseas Bank of
Manila.
Josefina G. Salonga for all other respondents.

CONCEPCION, JR., J.:

Petition for mandamus and prohibition, with preliminary injunction, that seeks the establishment of
joint and solidary liability to the amount of Three Hundred Fifty Thousand Pesos, with interest,
against respondent Central Bank of the Philippines and Overseas Bank of Manila and its
stockholders, on the alleged failure of the Overseas Bank of Manila to return the time deposits
made by petitioner and assigned to him, on the ground that respondent Central Bank failed in its
duty to exercise strict supervision over respondent Overseas Bank of Manila to protect depositors
1
and the general public. Petitioner also prays that both respondent banks be ordered to execute
the proper and necessary documents to constitute all properties fisted in Annex "7" of the Answer
of respondent Central Bank of the Philippines in G.R. No. L-29352, entitled "Emerita M. Ramos,
et al vs. Central Bank of the Philippines," into a trust fund in favor of petitioner and all other
depositors of respondent Overseas Bank of Manila. It is also prayed that the respondents be
prohibited permanently from honoring, implementing, or doing any act predicated upon the
validity or efficacy of the deeds of mortgage, assignment. and/or conveyance or transfer of
whatever nature of the properties listed in Annex "7" of the Answer of respondent Central Bank in
2
G.R. No. 29352.
A sought for ex-parte preliminary injunction against both respondent banks was not given by this
Court.
Undisputed pertinent facts are:
On October 13, 1966 and December 12, 1966, petitioner made a time deposit, for one year with
6% interest, of One Hundred Fifty Thousand Pesos (P150,000.00) with the respondent Overseas
3
Bank of Manila. Concepcion Maneja also made a time deposit, for one year with 6-½% interest,
on March 6, 1967, of Two Hundred Thousand Pesos (P200,000.00) with the same respondent
4
Overseas Bank of Manila.
On August 31, 1968, Concepcion Maneja, married to Felixberto M. Serrano, assigned and
conveyed to petitioner Manuel M. Serrano, her time deposit of P200,000.00 with respondent
5
Overseas Bank of Manila.
Notwithstanding series of demands for encashment of the aforementioned time deposits from the
respondent Overseas Bank of Manila, dating from December 6, 1967 up to March 4, 1968, not a
6
single one of the time deposit certificates was honored by respondent Overseas Bank of Manila.
Respondent Central Bank admits that it is charged with the duty of administering the banking
system of the Republic and it exercises supervision over all doing business in the Philippines, but
denies the petitioner's allegation that the Central Bank has the duty to exercise a most rigid and
stringent supervision of banks, implying that respondent Central Bank has to watch every move
or activity of all banks, including respondent Overseas Bank of Manila. Respondent Central Bank
claims that as of March 12, 1965, the Overseas Bank of Manila, while operating, was only on a
limited degree of banking operations since the Monetary Board decided in its Resolution No. 322,
dated March 12, 1965, to prohibit the Overseas Bank of Manila from making new loans and
investments in view of its chronic reserve deficiencies against its deposit liabilities. This limited
7
operation of respondent Overseas Bank of Manila continued up to 1968.
Respondent Central Bank also denied that it is guarantor of the permanent solvency of any
banking institution as claimed by petitioner. It claims that neither the law nor sound banking
supervision requires respondent Central Bank to advertise or represent to the public any remedial
measures it may impose upon chronic delinquent banks as such action may inevitably result to
panic or bank "runs". In the years 1966-1967, there were no findings to declare the respondent
8
Overseas Bank of Manila as insolvent.
Respondent Central Bank likewise denied that a constructive trust was created in favor of
petitioner and his predecessor in interest Concepcion Maneja when their time deposits were
made in 1966 and 1967 with the respondent Overseas Bank of Manila as during that time the
latter was not an insolvent bank and its operation as a banking institution was being salvaged by
9
the respondent Central Bank.
Respondent Central Bank avers no knowledge of petitioner's claim that the properties given by
respondent Overseas Bank of Manila as additional collaterals to respondent Central Bank of the
Philippines for the former's overdrafts and emergency loans were acquired through the use of
10
depositors' money, including that of the petitioner and Concepcion Maneja.
In G.R. No. L-29362, entitled "Emerita M. Ramos, et al. vs. Central Bank of the Philippines," a
case was filed by the petitioner Ramos, wherein respondent Overseas Bank of Manila sought to
prevent respondent Central Bank from closing, declaring the former insolvent, and liquidating its
assets. Petitioner Manuel Serrano in this case, filed on September 6, 1968, a motion to intervene
in G.R. No. L-29352, on the ground that Serrano had a real and legal interest as depositor of the
Overseas Bank of Manila in the matter in litigation in that case. Respondent Central Bank in G.R.
No. L-29352 opposed petitioner Manuel Serrano's motion to intervene in that case, on the ground
that his claim as depositor of the Overseas Bank of Manila should properly be ventilated in the
Court of First Instance, and if this Court were to allow Serrano to intervene as depositor in G.R.
No. L-29352, thousands of other depositors would follow and thus cause an avalanche of cases
in this Court. In the resolution dated October 4, 1968, this Court denied Serrano's, motion to
intervene. The contents of said motion to intervene are substantially the same as those of the
11
present petition.
This Court rendered decision in G.R. No. L-29352 on October 4, 1971, which became final and
executory on March 3, 1972, favorable to the respondent Overseas Bank of Manila, with the
dispositive portion to wit:
WHEREFORE, the writs prayed for in the petition are hereby granted and
respondent Central Bank's resolution Nos. 1263, 1290 and 1333 (that prohibit the
Overseas Bank of Manila to participate in clearing, direct the suspension of its
operation, and ordering the liquidation of said bank) are hereby annulled and set
aside; and said respondent Central Bank of the Philippines is directed to comply
with its obligations under the Voting Trust Agreement, and to desist from taking
action in violation therefor. Costs against respondent Central Bank of the
12
Philippines.
Because of the above decision, petitioner in this case filed a motion for judgment in this case,
praying for a decision on the merits, adjudging respondent Central Bank jointly and severally
liable with respondent Overseas Bank of Manila to the petitioner for the P350,000 time deposit
made with the latter bank, with all interests due therein; and declaring all assets assigned or
mortgaged by the respondents Overseas Bank of Manila and the Ramos groups in favor of the
13
Central Bank as trust funds for the benefit of petitioner and other depositors.
By the very nature of the claims and causes of action against respondents, they in reality are
recovery of time deposits plus interest from respondent Overseas Bank of Manila, and recovery
of damages against respondent Central Bank for its alleged failure to strictly supervise the acts of
the other respondent Bank and protect the interests of its depositors by virtue of the constructive
trust created when respondent Central Bank required the other respondent to increase its
collaterals for its overdrafts said emergency loans, said collaterals allegedly acquired through the
use of depositors money. These claims shoud be ventilated in the Court of First Instance of
proper jurisdiction as We already pointed out when this Court denied petitioner's motion to
intervene in G.R. No. L-29352. Claims of these nature are not proper in actions for mandamus
and prohibition as there is no shown clear abuse of discretion by the Central Bank in its exercise
of supervision over the other respondent Overseas Bank of Manila, and if there was, petitioner
here is not the proper party to raise that question, but rather the Overseas Bank of Manila, as it
did in G.R. No. L-29352. Neither is there anything to prohibit in this case, since the questioned
acts of the respondent Central Bank (the acts of dissolving and liquidating the Overseas Bank of
Manila), which petitioner here intends to use as his basis for claims of damages against
respondent Central Bank, had been accomplished a long time ago.
Furthermore, both parties overlooked one fundamental principle in the nature of bank deposits
when the petitioner claimed that there should be created a constructive trust in his favor when the
respondent Overseas Bank of Manila increased its collaterals in favor of respondent Central Bank
for the former's overdrafts and emergency loans, since these collaterals were acquired by the use
of depositors' money.
Bank deposits are in the nature of irregular deposits. They are really loans because they earn
interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans
14
and are to be covered by the law on loans. Current and savings deposit are loans to a bank
because it can use the same. The petitioner here in making time deposits that earn interests with
respondent Overseas Bank of Manila was in reality a creditor of the respondent Bank and not a
depositor. The respondent Bank was in turn a debtor of petitioner. Failure of he respondent Bank
to honor the time deposit is failure to pay s obligation as a debtor and not a breach of trust arising
from depositary's failure to return the subject matter of the deposit
WHEREFORE, the petition is dismissed for lack of merit, with costs against petitioner.
SO ORDERED.
Antonio, Abad Santos, JJ., concur.
Barredo (Chairman) J., concur in the judgment on the of the concurring opinion of Justice Aquino.

Separate Opinions
AQUINO, J., concurring:
The petitioner prayed that the Central Bank be ordered to pay his time deposits of P350,000, plus
interests, which he could not recover from the distressed Overseas Bank of Manila, and to
declare all the assets assigned or mortgaged by that bank and the Ramos group to the Central
Bank as trust properties for the benefit of the petitioner and other depositors.
The petitioner has no causes of action agianst the Central Bank to obtain those reliefs. They
cannot be granted in petitioner's instant original actions in this Court for mandamus and
prohibition. It is not the Central Bank's ministerial duty to pay petitioner's time deposits or to hold
the mortgaged properties in trust for the depositors of the Overseas Bank of Manila. The
petitioner has no cause of action for prohibition, a remedy usually available against any tribunal,
board, corporation or person exercising judicial or ministerial functions.
Since the Overseas Bank of Manila was found to be insolvent and the Superintendent of Banks
was ordered to take over its assets preparatory to its liquidation under section 29 of Republic Act
No. 265 (p. 197, Rollo, Manifestation of September 19, 1973), petitioner's remedy is to file his
claim in the liquidating proceeding (Central Bank vs. Morfe, L-38427, March 12, 1975, 63 SCRA
114; Hernandez vs. Rural Bank of Lucena, Inc., L-29791, January 10, 1978, 81 SCRA 75).
Separate Opinions
AQUINO, J., concurring:
The petitioner prayed that the Central Bank be ordered to pay his time deposits of P350,000, plus
interests, which he could not recover from the distressed Overseas Bank of Manila, and to
declare all the assets assigned or mortgaged by that bank and the Ramos group to the Central
Bank as trust properties for the benefit of the petitioner and other depositors.
The petitioner has no causes of action agianst the Central Bank to obtain those reliefs. They
cannot be granted in petitioner's instant original actions in this Court for mandamus and
prohibition. It is not the Central Bank's ministerial duty to pay petitioner's time deposits or to hold
the mortgaged properties in trust for the depositors of the Overseas Bank of Manila. The
petitioner has no cause of action for prohibition, a remedy usually available against any tribunal,
board, corporation or person exercising judicial or ministerial functions.
Since the Overseas Bank of Manila was found to be insolvent and the Superintendent of Banks
was ordered to take over its assets preparatory to its liquidation under section 29 of Republic Act
No. 265 (p. 197, Rollo, Manifestation of September 19, 1973), petitioner's remedy is to file his
claim in the liquidating proceeding (Central Bank vs. Morfe, L-38427, March 12, 1975, 63 SCRA
114; Hernandez vs. Rural Bank of Lucena, Inc., L-29791, January 10, 1978, 81 SCRA 75).

3. Classification of banks

Banks are classified into: (CUT-RICO)

(a) Universal banks;

Universal banks are large commercial banks licensed by the Bangko Sentral
ng Pilipinas (BSP) “to do both commercial and investment banking.’’
A universal bank shall have the authority to exercise:
a. the powers authorized for a commercial bank,
b. the powers of an investment house as provided in existing laws, and
c. the power to invest in non-allied enterprises. (Section 23, GBL)
The operations of universal banks are discussed in Chapter 4.

(b) Commercial banks;

A commercial bank shall have:

a. the general powers incident to corporations,
b. all such powers as may be necessary to carry on the business of commercial
banking, such as:
(i) accepting drafts and issuing letters of credit;
(ii) discounting and negotiating promissory notes, drafts, bills of exchange,
and other evidences of debt;
(iii) accepting or creating demand deposits;
(iv) receiving other types of deposits and deposit substitutes;
(v) buying and selling foreign exchange and gold or silver bullion; acquiring
marketable bonds and other debt securities; and
(vi) extending credit, subject to such rules as the Monetary Board may
promulgate.
➢ These rules may include the determination of bonds and other debt
securities eligible for investment, the maturities and aggregate amount of
such investment. (Section 29, GBL)
(c) Thrift banks, composed of:
(i) Savings and mortgage banks,
(ii) Stock savings and loan associations, and
(iii) Private development banks, as defined in the “Thrift Banks Act” (Republic Act
No. 7906).
 
It is the policy of the State to:
(a)  Recognize  the  indispensable  role  of  the  private  sector,  to  encourage  private  enterprise,  
and  to  provide  incentives  to  needed  investments;  
(b) Promote economic development pursuant to the socio-economic program of the
government, to expand industrial and agricultural growth, to encourage the
establishment of more private thrift banks in order to meet the needs for capital,
personal and investment credit or medium- and long-term loans for Filipino
entrepreneurs;
(c) Encourage and assist the establishment of thrift bank system which will promote
agriculture and industry and at the same time place within easy reach of the people
the medium- and long-term credit facilities at reasonable cost;
(d) Encourage industry, frugality and the accumulation of savings among the public,
and the members and stockholders of thrift banks; and
(e) Regulate and supervise the activities of thrift banks in order to place their
operations on a sound, stable and efficient basis and to curtail or prevent acts or
practices which are prejudicial to the public interest.88
ii. “Thrift banks” include savings and mortgage banks, private development banks,
and stock savings and loans associations organized under existing laws, and any
banking corporation that may be organized for the following purposes:
(1) Accumulating the savings of depositors and investing them, together with capital
loans secured by bonds, mortgages in real estate and insured improvements thereon,
chattel mortgage, bonds and other forms of security or in loans for personal or
household finance, whether secured or unsecured, or in financing for home building
and home development; in readily marketable and debt securities; in commercial
papers and accounts receivables, drafts, bills of exchange, acceptances or notes
arising out of commercial transactions; and in such other investments and loans
which the Monetary Board may de termine as necessary in the furtherance of
national economic objectives;
(2) Providing short-term working capital, medium-and long-term financing, to
businesses engaged in agriculture, services, industry and housing; and
(3) Providing diversified financial and allied services for its chosen market and
constituencies specially for small and medium enterprises and individuals.89
iii. The following are the powers of thrift banks:
(a) Accept savings and time deposits;
(b) Open current or checking accounts: Provided, That the thrift bank has net assets
of at least Twenty million pesos (P20,000,000) subject to such guidelines as may be
established by the Monetary Board; and shall be allowed to directly clear its demand
deposit operations with the Bangko Sentral and the Philippine Clearing House
Corporation;
(c) Act as correspondent for other financial institutions;
(d) Act as collection agent for government entities, including but not limited to, the
Bureau of Internal Revenue, Social Security System, and the Bureau of Customs;
(e) Act as official depository of national agencies and of municipal, city or provincial
funds in the municipality, city or province where the thrift bank is located, subject to
such guidelines as may be established by the Monetary Board;
 (f) Rediscount paper with the Philippine National Bank, the Land Bank of the
Philippines, the Development Bank of the Philippines, and other government-owned
or -controlled corporations. Said institutions shall specify the nature of paper deemed
acceptable for rediscount, as well as rediscounting rate to be charged by any of these
institutions; and  
(g) Issue mortgage and chattel mortgage certificates, buy and sell them for its own
account or for the account of others, or accept and receive them in payment or as
amortization of its loan.
➢ Such mortgage and chattel mortgage certificates shall be issued exclusively in
national currency and exclusively for the financing of equipment loans, mortgage
loans for the acquisition of machinery and other fixed installations, conservation,
enlargement or improvement of productive properties and real estate mortgage loans
for:
(1) the construction, acquisition, expansion or improvement of rural and urban prop-
erties;
(2) the refinancing of similar loans and mortgages; and
(3) such other purposes as may be authorized by the Monetary Board.
➢ A thrift bank shall coordinate the amounts and maturities of its certificates with
those of its loans, so as to ensure adequate cash receipts for the payment of principal
and interest at the time they become due. The bank shall accept its own certificates
at least at the actual price of issue, in any prepayment of loans which mortgage or
chattel mortgage debtors may wish to make: Provided, That the date of maturity of
the certificates is not later than the date on which the payment would otherwise
become due, in the absence of the aforesaid prepayment.
(h) Purchase, hold and convey real estate under the same conditions as those
governing commercial banks;
(i) Engage in quasi-banking and money market operations;
(j)  Open  domestic  letters  of  credit;  
(k) Extend credit facilities to private and government employees: Provided, That in
the case of a borrower who is a permanent employee or wage earner, the treasurer,
cashier or paymaster of the office employing him is authorized, notwithstanding the
provisions of any existing law, rules and regulations to the contrary, to make
deductions from his salary, wage or income pursuant to the terms of his loan, to
remit deductions to the thrift bank concerned, and collect such reasonable fee for his
services;
(l) Extend credit against the security of jewelry, precious stones and articles of
similar nature, subject to such rules and regulations as the Monetary Board may
prescribe; and
(m) Offer other banking services.
Thrift banks may perform the services under (b), (d), (e), (g) and (i) only upon prior
approval of the Monetary Board. It may also perform commercial banking services,
operate under an expanded banking authority, or exercise such other powers incident
to a corporation with prior approval of the Monetary Board.90  
 
 
(d)  Rural  banks,  as  defined  in  the  “Rural  Banks  Act”  (Republic  Act  No.  7353);  

The State recognizes the need to promote comprehensive rural development with the
end in view of attaining acquitable distribution of opportunities, income and wealth;
a sustained increase in the amount of goods and services produced by the nation for
the benefit of the people; and in expanding productivity as a key raising the quality of
life for all, especially the underprivileged.84
Towards these ends, the State encourages and assists in the establishment of rural
 banking system designed to make needed credit available and readily accessible in
the rural areas on reasonable terms.85
Loans or advances extended by rural banks shall be primarily for the purpose of
meeting the normal credit needs of farmers, fishermen or farm families owning or
cultivating land dedicated to agricultural production as well as the normal credit
needs of cooperatives and merchants. In granting of loans, the rural bank shall give
preference to the application of farmers and merchant whose cash requirements are
small.86
In areas where there are no government banks, rural banks may deposit in private
banks more than the amount prescribed by the Single Borrower’s Limit subject to
Monetary Board regulations.

(e) Cooperative banks, as defined in the “Cooperative Code” (Republic Act No. 6938);

A cooperative bank is one organized by, the majority shares of which is

owned and controlled by, cooperatives primarily to provide financial and credit
services to cooperatives. The term “cooperative bank” shall include cooperative rural
banks.91
ii. A cooperative bank may perform the following functions:
(1) To carry on banking and credit services for the cooperatives;
(2) To receive financial aid or loans from the Government and the Central Bank of
the Philippines for and in behalf of the cooperative banks and primary cooperatives
and their federations engaged in business and to supervise the lending and collection
of loans;
(3) To mobilize savings of its members for the benefit of the cooperative movement;
(4) To act as a balancing medium for the surplus funds of cooperatives and their
federations;
(5) To discount bills and promissory notes issued and drawn by cooperatives;
(6) To issue negotiable instruments to facilitate the activities of cooperatives;
(7) To issue debentures subject to the approval of and under conditions and
guarantees to be prescribed by the Government;
(8) To borrow money from banks and other financial institutions within the limit to
be prescribed by the Central Bank; and
(9) To carry out all other functions as may be prescribed by the Cooperative
Development Authority: Provided, That the performance of any banking function
shall be subject to prior approval by the Central Bank of the Philippines.
iii. Membership of a cooperative bank shall include only cooperatives and federations
of cooperatives.

(f) Islamic banks as defined in the “Charter of Al Amanah Islamic Investment Bank of the
Philippines (Republic Act No. 6848);

R.A. 6848 created the Al-Amanah Islamic Investment Bank of the

Philippines, or the Islamic Bank. Its principal domicile and place of business is in
Zamboanga City. It may establish branches, agencies or other offices at such places
in the Philippines or abroad subject to the laws, rules and regulations of the Bangko
Sentral ng Pilipinas.

The primary purpose of the Islamic Bank is to promote and accelerate the socio-
economic development of the Autonomous Region by performing banking, financing and
investment operations and to establish and participate in agricultural, commercial and
industrial ventures based on the Islamic concept of banking.94
iii. All business dealings and activities of the Islamic Bank shall be subject to the basic
principles and rulings of Islamic Shari’a within the purview of the declared policy. Any zakat
or “tithe” paid by the Islamic Bank on behalf of its shareholders and depositors shall be
considered as part of compliance by the Islamic Bank with its obligation to appropriate said
zakat fund and to disburse it in legitimate channels to be ascertained first by the Shari’a
Advisory Council.95
iv. Notwithstanding the provisions of any law to the contrary, the Islamic Bank is authorized
to operate an Investment House pursuant to Presidential Decree No. 129, as amended, and
as a Venture Capital Corporation pursuant to Presidential Decree No. 1688 and, by virtue
thereof, carry on the following types of commercial operations:
(1) The Islamic Bank may have a direct interest as a shareholder, partner, owner or any
other capacity in any commercial, industrial, agricultural, real estate or development project
under mudarabah form of partnership or musharaka joint venture agreement or by
decreasing participation, or otherwise invest under any of the various contemporary Islamic
financing techniques or modes of investment for profit sharing;
(2) The Islamic Bank may carry on commercial operations for the purpose of realizing its
investment banking objectives by establishing enterprises or financing existing enterprises,
or otherwise by participating in any way with other companies, institutions or banks
performing activities similar to its own or which may help accomplish its objectives in the
Philippines or abroad, under any of the contemporary Islamic financing techniques or modes
of investment for profit sharing; and
(3) The Islamic Bank may perform all business ventures and transactions as may be
necessary to carry out the objectives of its charter within the framework of the
Islamic Bank’s financial capabilities and technical considerations prescribed by law
and convention: Provided, That these shall not involve any riba or other activities
prohibited by the Islamic Shari’a principles.

and
 
(g)  Other  classifications  of  banks  as  determined  by  the  Monetary  Board  of  the  Bangko  Sentral  ng  
Pilipinas.  (Section  3,  GBL)  
 
 

4. Distinction of banks from quasi-banks and trust entities

Quasi-banks refer to entities engaged in the borrowing of funds through the issuance,
endorsement or assignment with recourse or acceptance of deposit substitutes for
purposes of relending or purchasing of receivables and other obligations.101
In this connection, deposit substitutes is an alternative form of obtaining funds from the
public, other than deposits, through the issuance, endorsement, or acceptance of debt
instruments for the borrower’s own account, for the purpose of relending or purchasing of
receivables and other obligations. These instruments may include, but need not be
 limited to, bankers acceptances, promissory notes, participations,  certificates  of  assignment  
and  similar  instruments  with  recourse,  and  repurchase  agreements.

5. Diligence required of banks

A. Meticulous Care
By the nature of its functions, a bank is required to take meticulous care of the deposits of its
clients, who have the right to expect high standards of integrity and performance from it.
Among its obligations in furtherance thereof is knowing the signatures of its clients.
Depositors are not estopped from questioning wrongful withdrawals, even if they have failed
to question those errors in the statements sent by the bank to them for verification.48

6. Authority of the Bangko Sentral ng Pilipinas

SECTION 4. Supervisory Powers. — The operations and activities of banks shall be subject to
supervision of the Bangko Sentral. "Supervision" shall include the following:
4.1. The issuance of rules of conduct or the establishment of standards of operation for uniform
application to all institutions or functions covered, taking into consideration the distinctive
character of the operations of institutions and the substantive similarities of specific functions
to which such rules, modes or standards are to be applied;
4.2. The conduct of examination to determine compliance with laws and regulations if the
circumstances so warrant as determined by the Monetary Board;
4.3. Overseeing to ascertain that laws and regulations are complied with;
4.4. Regular investigation which shall not be oftener than once a year from the last date of
examination to determine whether an institution is conducting its business on a safe or
sound basis: Provided, That the deficiencies/irregularities found by or discovered by an audit
shall be immediately addressed;
4.5. Inquiring into the solvency and liquidity of the institution (2-D); or
4.6. Enforcing prompt corrective action. (n)
The Bangko Sentral shall also have supervision over the operations of and exercise regulatory
powers over quasi-banks, trust entities and other financial institutions which under special laws
are
subject to Bangko Sentral supervision. (2-Ca)
For the purposes of this Act, "quasi-banks" shall refer to entities engaged in the borrowing of
funds through the issuance, endorsement or assignment with recourse or acceptance of deposit
substitutes as defined in Section 95 of Republic Act No. 7653 (hereafter the "New Central Bank
Act") for
purposes of relending or purchasing of receivables and other obligations. (2-Da)
SECTION 5. Policy Direction; Ratios, Ceilings and Limitations. — The Bangko Sentral shall
provide policy direction in the areas of money, banking and credit. (n)
For this purpose, the Monetary Board may prescribe ratios, ceilings, limitations, or other forms of
regulation on the different types of accounts and practices of banks and quasi-banks which shall,
to the extent feasible, conform to internationally accepted standards, including those of the Bank
for International Settlements (BIS). The Monetary Board may exempt particular categories of
transactions from such ratios, ceilings and limitations, but not limited to exceptional cases or to
enable a bank or quasi-bank under rehabilitation or during a merger or consolidation to continue
in business with safety to its creditors, depositors and the general public. (2-Ca)

SECTION 6. Authority to Engage in Banking and Quasi-Banking Functions. — No person or

entity shall engage in banking operations or quasi-banking functions without authority from the
Bangko Sentral: Provided, however, That an entity authorized by the Bangko Sentral to perform
universal or commercial banking functions shall likewise have the authority to engage in quasi-
banking functions.
The determination of whether a person or entity is performing banking or quasi-banking functions
without Bangko Sentral authority shall be decided by the Monetary Board. To resolve such issue,
the Monetary Board may, through the appropriate supervising and examining department of the
Bangko
Sentral, examine, inspect or investigate the books and records of such person or entity. Upon
issuance of
this authority, such person or entity may commence to engage in banking operations or quasi-
banking
functions and shall continue to do so unless such authority is sooner surrendered, revoked,
suspended or
annulled by the Bangko Sentral in accordance with this Act or other special laws.
The department head and the examiners of the appropriate supervising and examining
department are hereby authorized to administer oaths to any such person, employee, officer, or
director
of any such entity and to compel the presentation or production of such books, documents,
papers or
records that are reasonably necessary to ascertain the facts relative to the true functions and
operations
of such person or entity. Failure or refusal to comply with the required presentation or production
of such
books, documents, papers or records within a reasonable time shall subject the persons
responsible
therefore to the penal sanctions provided under the New Central Bank Act.
Persons or entities found to be performing banking or quasi-banking functions without authority
from the Bangko Sentral shall be subject to appropriate sanctions under the New Central Bank
Act and
other applicable laws. (4a)
SECTION 7. Examination by the Bangko Sentral. — The Bangko Sentral shall, when
examining a bank, have the authority to examine an enterprise which is wholly or majority-owned
or
controlled by the bank. (21-Ba)

7. Organization, Management and Administration of Banks, Quasi-Banks and

Trust Entities

a) Organization

SECTION 8. Organization. — The Monetary Board may authorize the organization of a bank or
quasi-bank subject to the following conditions:
8.1. That the entity is a stock corporation (7);
8.2. That its funds are obtained from the public, which shall mean twenty (20) or more persons
(2-Da); and
8.3. That the minimum capital requirements prescribed by the Monetary Board for each category
of banks are satisfied. (n)
No new commercial bank shall be established within three (3) years from the effectivity of this
Act. In the
exercise of the authority granted herein, the Monetary Board shall take into consideration their
capability
in terms of their financial resources and technical expertise and integrity. The bank licensing
process shall
incorporate an assessment of the bank's ownership structure, directors and senior management,
its
operating plan and internal controls as well as its projected financial condition
 and capital base.

b) Stockholdings

SECTION 9. Issuance of Stocks. — The Monetary Board may prescribe rules and regulations
on the types of stock a bank may issue, including the terms thereof and rights appurtenant
thereto to
determine compliance with laws and regulations governing capital and equity structure of banks:
Provided, That banks shall issue par value stocks only.
SECTION 10. Treasury Stocks. — No bank shall purchase or acquire shares of its own capital
stock or accept its own shares as a security for a loan, except when authorized by the Monetary
Board:
Provided, That in every case the stock so purchased or acquired shall, within six (6) months from
the time
of its purchase or acquisition, be sold or disposed of at a public or private sale. (24a)
SECTION 11. Foreign Stockholdings. — Foreign individuals and non-bank corporations may
own or control up to forty percent (40%) of the voting stock of a domestic bank. This rule shall
apply to
Filipinos and domestic non-bank corporations. (12a; 12-Aa)
The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship of
the individual stockholders in that bank. The citizenship of the corporation which is a stockholder
in a
bank shall follow the citizenship of the controlling stockholders of the corporation, irrespective of
the place
of incorporation. (n)
SECTION 12. Stockholdings of Family Groups or Related Interests. — Stockholdings of
individuals related to each other within the fourth degree of consanguinity or affinity, legitimate or
common-law, shall be considered family groups or related interests and must be fully disclosed in
all
transactions by such an individual with the bank. (12-Da)
SECTION 13. Corporate Stockholdings. — Two or more corporations owned or controlled by
the same family group or same group of persons shall be considered related interests and must
be fully
disclosed in all transactions by such corporations or related groups of persons
with the bank. (12-Ba)

SECTION 14. Certificate of Authority to Register. — The Securities and Exchange

Commission shall not register the articles of incorporation of any bank, or any amendment
thereto, unless accompanied by a certificate of authority issued by the Monetary Board, under its
seal. Such certificate shall not be issued unless the Monetary Board is satisfied from the evidence
submitted to it:
14.1 That all requirements of existing laws and regulations to engage in the business for which
the applicant is proposed to be incorporated have been complied with;
14.2. That the public interest and economic conditions, both general and local, justify the
authorization; and
14.3. That the amount of capital, the financing, organization, direction and administration, as well
as the integrity and responsibility of the organizers and administrators reasonably assure the
safety of deposits and the public interest. (9)
The Securities and Exchange Commission shall not register the by-laws of any bank, or any
amendment thereto, unless accompanied by a certificate of authority from the Bangko Sentral.
(10)
SECTION 15. Board of Directors. — The provisions of the Corporation Code to the contrary
notwithstanding, there shall be at least five (5), and a maximum of fifteen (15) members of the
board of
directors of bank, two (2) of whom shall be independent directors. An "independent director" shall
mean a person other than an officer or employee of the bank, its subsidiaries or affiliates or
related interests. (n)

Non-Filipino citizens may become members of the board of directors of a bank to the extent of the
foreign participation in the equity of said bank. (Sec. 7, RA 7721)

The meetings of the board of directors may be conducted through modern technologies such as,
but not limited to, teleconferencing and video-conferencing. (n)

c) Fit and proper rule

SECTION 16. Fit and Proper Rule. — To maintain the quality of bank management and afford
better protection to depositors and the public in general, the Monetary Board shall prescribe, pass
upon and review the qualifications and disqualifications of individuals elected or appointed bank
directors or officers and disqualify those found unfit.

After due notice to the board of directors of the bank, the Monetary Board may disqualify,
suspend or remove any bank director or officer who commits or omits an act which render him
unfit for the position.

In determining whether an individual is fit and proper to hold the position of a director or officer of
a bank, regard shall be given to his integrity, experience, education, training, and competence.

d) Limitation on compensation and benefits of directors and officers

SECTION 18. Compensation and Other Benefits of Directors and Officers. — To protect the
funds of depositors and creditors, the Monetary Board may regulate the payment by the bank to
its
directors and officers of compensation, allowance, fees, bonuses, stock options, profit sharing
and fringe
benefits only in exceptional cases and when the circumstances warrant, such as but not limited to
the
following:
18.1. When a bank is under comptrollership or conservatorship; or
18.2. When a bank is found by the Monetary Board to be conducting business in an unsafe or
unsound manner; or
18.3. When a bank is found by the Monetary Board to be in an unsatisfactory
financial condition.

e) Prohibition on public officials

SECTION 19. Prohibition on Public Officials. — Except as otherwise provided in the Rural
Banks Act, no appointive or elective public official, whether full-time or part-time shall at the same
time
serve as officer of any private bank, save in cases where such service is incident to financial
assistance
provided by the government or a government-owned or controlled corporation to the bank or
unless
otherwise provided under existing laws.

f) Branches

SECTION 20. Bank Branches. — Universal or commercial banks may open branches or other
offices within or outside the Philippines upon prior approval of the Bangko Sentral.
Branching by all other banks shall be governed by pertinent laws.
A bank may, subject to prior approval of the Monetary Board, use any or all of its branches as
outlets for the presentation and/or sale of the financial products of its allied undertaking or of its
investment house units.
A bank authorized to establish branches or other offices shall be responsible for all business
conducted in such branches and offices to the same extent and in the same manner as though
such
business had all been conducted in the head office. A bank and its branches and offices shall be
treated
as one unit. (6-B; 27)

g) Banking days

SECTION 21. Banking Days and Hours. — Unless otherwise authorized by the Bangko Sentral
in the interest of the banking public, all banks including their branches and offices shall transact
business
on all working days for at least six (6) hours a day. In addition, banks or any of their branches or
offices
may open for business on Saturdays, Sundays or holidays for at least three (3) hours a day:
Provided,
That banks which opt to open on days other than working days shall report to the Bangko Sentral
the
additional days during which they or their branches or offices shall transact business.
For purposes of this Section, working days shall mean Mondays to Fridays, except if such days
are holidays. (

h) Rule on strikes and lockouts

SECTION 22. Strikes and Lockouts. — The banking industry is hereby declared as
indispensable to the national interest and, not withstanding the provisions of any law to the
contrary, any
strike or lockout involving banks, if unsettled after seven (7) calendar days shall be reported by
the
Bangko Sentral to the Secretary of Labor who may assume jurisdiction over the dispute or decide
it or
certify the same to the National Labor Relations Commission for compulsory arbitration. However,
the
President of the Philippines may at any time intervene and assume jurisdiction over such labor
dispute in
order to settle or terminate the same. (

8. Bank powers and liabilities

a) Operations of Universal Banks

b) Operations of Commercial Banks

ARTICLE I - OPERATIONS OF UNIVERSAL BANKS

SECTION 23. Powers of a Universal Bank. — A universal bank shall have the authority to
exercise, in addition to the powers authorized for a commercial bank in Section 29, the powers of
an
investment house as provided in existing laws and the power to invest in non-allied enterprises as
provided in this Act. (21-B)
SECTION 24. Equity Investments of a Universal Bank. — A universal bank may, subject to
the conditions stated in the succeeding paragraph, invest in the equities of allied and non-allied
enterprises as may be determined by the Monetary Board. Allied enterprises may either be
financial or
non-financial.
Except as the Monetary Board may otherwise prescribe:
24.1. The total investment in equities of allied and non-allied enterprises shall not exceed fifty
percent (50%) of the net worth of the bank; and
24.2. The equity investment in any one enterprise, whether allied or non-allied, shall not exceed
twenty-five percent (25%) of the net worth of the bank.
As used in this Act, "net worth" shall mean the total of the unimpaired paid-in capital including
paid-in surplus, retained earnings and undivided profit, net of valuation reserves and other
adjustments as
may be required by the Bangko Sentral.
The acquisition of such equity or equities is subject to the prior approval of the Monetary Board
which shall promulgate appropriate guidelines to govern such investments. (21-Ba)
SECTION 25. Equity Investments of a Universal Bank in Financial Allied Enterprises. — A
universal bank can own up to one hundred percent (100%) of the equity in a thrift bank, a rural
bank or a
financial allied enterprise.
A publicly-listed universal or commercial bank may own up to one hundred percent (100%) of the
voting stock of only one other universal or commercial bank. (21-B; 21-Ca)
SECTION 26. Equity Investments of a Universal Bank in Non-Financial Allied Enterprises.
— A universal bank may own up to one hundred percent (100%) of the equity in a non-financial
allied
enterprise. (21-Ba)
SECTION 27. Equity Investments of a Universal Bank in Non-Allied Enterprises. — The
equity investment of a universal bank, or of its wholly or majority-owned subsidiaries, in a single
nonallied
enterprise shall not exceed thirty-five percent (35%) of the total equity in that enterprise nor shall
it
exceed thirty-five percent (35%) of the voting stock in that enterprise. (21-B)
SECTION 28. Equity Investments in Quasi-Banks. — To promote competitive conditions in
financial markets, the Monetary Board may further limit to forty percent (40%) equity investments
of
universal banks in quasi-banks. This rule shall also apply in the case of commercial banks. (12-E)
ARTICLE II - OPERATIONS OF COMMERCIAL BANKS
SECTION 29. Powers of a Commercial Bank. — A commercial bank shall have, in addition to
the general powers incident to corporations, all such powers as may be necessary to carry on the
business of commercial banking, such as accepting drafts and issuing letters of credit;
discounting and
negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; accepting or
creating
demand deposits; receiving other types of deposits and deposit substitutes; buying and selling
foreign
exchange and gold or silver bullion; acquiring marketable bonds and other debt securities; and
extending
credit, subject to such rules as the Monetary Board may promulgate. These rules may include the
determination of bonds and other debt securities eligible for investment, the maturities and
aggregate
amount of such investment. (21a)
SECTION 30. Equity Investments of a Commercial Bank. — A commercial bank may, subject
to the conditions stated in the succeeding paragraphs, invest only in the equities of allied
enterprises as
may be determined by the Monetary Board. Allied enterprises may either be financial or non-
financial.
Except as the Monetary Board may otherwise prescribe:
30.1. The total investment in equities of allied enterprises shall not exceed thirty-five percent
(35%) of the net worth of the bank; and
30.2. The equity investment in any one enterprise shall not exceed twenty-five percent (25%) of
the
net worth of the bank.
The acquisition of such equity or equities is subject to the prior approval of the Monetary Board
which shall promulgate appropriate guidelines to govern such investments. (21A-a; 21-Ca)
SECTION 31. Equity Investments of a Commercial Bank in Financial Allied Enterprises. —
A commercial bank may own up to one hundred percent (100%) of the equity of a thrift bank or a
rural
bank.
Where the equity investment of a commercial bank is in other financial allied enterprises,
including another commercial bank, such investment shall remain a minority holding in that
enterprise.
(21-Aa; 21-Ca)
SECTION 32. Equity Investments of a Commercial Bank in Non-Financial Allied
Enterprises. — A commercial bank may own up to one hundred percent (100%) of the equity in
a nonfinancial
allied enterprise. (21-Aa)

9. Nature of bank funds and bank deposits

a) Kinds of Deposit
a.1) Demand deposits

Demand deposits are “all those liabilities of the Bangko Sentral and of other banks which are
denominated in Philippine currency and are subject to payment in legal tender upon demand
by the presentation of (depositor’s) checks.’’
Banks may accept or create demand deposits subject to withdrawal by check. A Universal
Bank and Commercial Bank may accept or create demand deposits subject to withdrawal by
check, without prior authority from the BSP. A Thrift Bank/Rural Bank/Cooperative Bank
may accept or create demand deposits upon prior authority of the BSP. The GBL and NCBA
provide:
A bank other than a universal or commercial bank cannot accept or create demand deposits
except upon prior approval of, and subject to such conditions and rules as may be prescribed
by the Monetary Board. (Section 33, GBL)
Only banks duly authorized to do so may accept funds or create liabilities payable in pesos
upon demand by the presentation of checks, and such operations shall be subject to the control
of the Monetary Board in accordance with the powers granted it with respect thereto under the
NCBA. (Section 58, NCBA)
* Note: Manner of Making the Deposit
In one case, the Supreme Court made the following observations:
See Section 58, Republic Act No. 7653 (The New Central Bank Act).
7879
In  the  ordinary  and  usual  course  of  banking  operations,  current  account  deposits  are  accepted  by  the  bank  
on  the  basis  of  deposit  slips  prepared  and  signed  by  the  depositor,  or  the  latter’s  agent  or  representative,  
who  indicates  therein  the  current  account  number  to  which  the  deposit  is  to  be  credited,  the  name  of  the  
depositor  or  current  account  holder,  the  date  of  the  deposit,  and  the  amount  of  the  deposit  either  in  cash  or  
checks.  The  deposit  slip  has  an  upper  portion  or  stub,  which  is  detached  and  given  to  the  depositor  or  his  
agent;  the  lower  portion  is  retained  by  the  bank.  In  some  instances,  however,  the  deposit  slips  are  prepared  
in  duplicate  by  the  depositor.  The  original  of  the  deposit  slip  is  retained  by  the  bank,  while  the  duplicate  
copy  is  returned  or  given  to  the  depositor.
 - Drawing against uncollected deposits (DAUD)
The following regulations shall govern temporary overdrawings and drawings against
uncollected deposits (DAUDs).
a. Temporary overdrawings. Temporary overdrawings against current account shall not be
allowed, unless caused by normal bank charges and other fees incidental to handling such
accounts. Banks which violate these regulations shall be subject to a fine of one-tenth of one
percent (1/10 of 1%) per day of violation, computed on the basis of the amount of overdrawing
or fines in amounts as may be determined by the Monetary Board, but not to exceed P30,000
a day for each violation, whichever is lower. Technical overdrawings arising from “force post-
ing” in-clearing checks shall be debited by banks under “Returned Checks and Other Cash
Items Not in Process of Collection” which is part of “Other Assets” in the Statement of
Condition. Items to be lodged under this account shall consist only of in-clearing checks
which may result in “technical overdrawn” accounts and shall be immediately reversed the
following day. The checks lodged under “Returned Checks, etc.” shall either be returned or
honored the following day before clearing. The items to be used as cover for the honored
checks should only consist of any of the following:
(1)  Cash;  
(2) Cashier’s, Manager’s or Certified Checks;
(3) Bank Drafts;
(4) Postal Money Orders;
(5) Treasury Warrants;
(6) Duly funded “On us” Checks; and
(7) Fund transfers/credit memos within the same bank representing proceeds of loans
granted under existing regulations.
Peso demand deposit accounts maintained by foreign correspondent banks with commercial
banks shall not be subject to the above-mentioned regulations: Provided, That: (a) The
maintenance of non-resident correspondent bank’s peso checking accounts and overdrawings
therefrom are covered by reciprocal arrangement; (b) Temporary overdrawings are covered
within fifteen (15) days from the date overdrawings are incurred; and (c) Such accounts are
credited only through foreign exchange inward remittance.
b.  Drawings  against  uncollected  deposits.  DAUDs  shall  be  prohibited  except  when  the  drawings  are  
made  against  uncollected  deposits  representing  manager’s/cashier’s/treasurer’s  checks,  treasury  
warrants,  postal  money  orders  and  duly  funded  “on  us”  checks  which  may  be  permitted  at  the  
discretion  of  each  bank.

- Current accounts of bank officers

2. Current Accounts of Bank Officers and Employees
The following officers and employees of banks are prohibited from maintaining demand
deposits or current accounts with the banking office in which they are assigned:
a. All officers;
b. Employees of the bank’s cash department/cash units; and
c. Other employees who have direct and immediate responsibility in the handling of
transactions and/or records pertaining to demand deposits or current accounts.
The  above-­‐mentioned  prohibition  shall  include  the  spouses  and  relatives  within  the  second  degree  of  
consanguinity  and  affinity  of  the  officers  and  employees  covered  by  the  prohibition,  and  the  business  
interests  of  such  officers  and  employees,  their  spouses  and  relatives  within  the  second  degree  of  
consanguinity  and  affinity,  in  single  proprietorships,  or  partnerships  or  corporations  in  which  such  
officers  and  employees,  individually  or  as  a  group,  own  or  control  at  least  a  majority  of  the  capital  of  
the  partnership  or  the  outstanding  subscribed  capital  stock  (voting  and  non-­‐voting)  of  the  
corporation.

3. Checks
A check is a bill of exchange drawn on a bank payable on demand. Thus, a check is a written
order addressed to a bank or persons carrying on the business of banking, by a party having
money in their hands, requesting them to pay on presentment, to a person named therein or
to bearer or order, a named sum of money. Fixed savings and current deposits of money in
banks and similar institutions shall be governed by the provisions concerning simple loan. In
other words, the relationship between the bank and the depositor is that of a debtor and
creditor. By virtue of the contract of deposit between the banker and its depositor, the banker
agrees to pay checks drawn by the depositor provided that said depositor has money in the
hands of the bank.
4. Duty of Banks to Honor Checks
(i) Where the bank possesses funds of a depositor, it is bound to honor his checks to the
extent of the amount of his deposits. The failure of a bank to pay the check of a merchant or a
trader, when the deposit is sufficient, entitles the drawer to substantial damages without
any proof of actual damages. Conversely, a bank is not liable for its refusal to pay a check on
account of insufficient funds, notwithstanding the fact that a deposit may be made later in
the day. Before a bank depositor may maintain a suit to recover a specific amount from his
bank, he must first show that he had on deposit sufficient funds to meet his demand.
(ii) A bank performs its full duty where, upon the receipt of a check drawn against an
account in which there are insufficient funds to pay it in full, it endeavors to induce the
drawer to make good his account so that the check can be paid, and failing in this, it protests
the check on the following morning and notifies its correspondent bank by the telegraph of
the protest. It cannot, therefore, be held liable to the payee and holder of the check for not
protesting it upon the day when it was received.
(iii)  Banks  must  ensure  that  the  amount  of  the  checks  should  be  paid  only  to  its  designated  payee.  
The  fact  that  the  drawee  bank  did  not  discover  the  irregularity  seasonably  constitutes  negligence  in  
carrying  out  the  bank’s  duty  to  its  depositors.    
 
5. Responsibilities of Drawer
A drawer must remember his responsibilities every time he issues a check. He must
personally keep track of his available balance in the bank and not rely on the bank to notify
him of the necessity to fund certain checks he previously issued. A check, as distinguished
from an ordinary bill of exchange, is supposed to be drawn against a previous deposit of
funds for it is ordinarily intended for immediate payment.
6. Duty of Banks to Know Signatures
A bank is bound to know the signatures of its customers; and if it pays a forged check, it
must be considered as making the payment out of its own funds, and cannot ordinarily
charge the amount so paid to the account of the depositor whose name was forged.
7. No Obligation to Make Partial Payment
A  bank  is  under  no  obligation  to  make  part  payment  on  a  check,  up  to  only  the  amount  of  the  
drawer’s  funds,  where  the  check  is  drawn  for  an  amount  larger  than  what  the  drawer  has  on  deposit.  
Such  a  practice  of  paying  checks  in  part  has  never  existed.  Upon  partial  payment,  the  check  holder  
could  not  be  called  upon  to  surrender  the  check,  and  the  bank  would  be  without  a  voucher  affording  
a  certain  means  of  showing  the  payment.  The  rule  is  

based on commercial convenience, and any rule that would work such manifest
inconvenience should not be recognized. A check is intended not only to transfer a right to
the amount named in it, but to serve the further purpose of affording evidence for the bank of
the payment of such amount when the check is taken up.
8. No Duty to Make Up the Deficiency from Other Accounts
Where a depositor has two accounts with a bank, an open account and a savings account, and
draws a check upon the open account for more money than the account contains, the bank
may rightfully refuse to pay the check, and is under no duty to make up the deficiency from
the savings account.10
9. Legal Character of Checks Representing Demand Deposits
Checks representing demand deposits do not have legal tender power and their acceptance in
the payment of debts, both public and private, is at the option of the creditor: Provided,
however, That a check which has been cleared and credited to the account of the creditor
shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount
credited to his account. (Section 60, NCBA)
10. Cross-Check
In State Investment House vs. IAC,11the Supreme Court enumerated the effects of crossing a
check, thus: (1) that the check may not be encashed but only deposited in the bank; (2) that
the check may be negotiated only once — to one who has an account with a bank; and (3) that
the act of crossing the check serves as a warning to the holder that the check has been issued
for a definite purpose so that such holder must inquire if the check has been received
pursuant to that purpose.
11. Cashier’s Check
A cashier’s check is really the bank’s own check and may be treated as a promissory note
with the bank as the maker. The check
becomes the primary obligation of the bank which issues it and constitutes a written promise
to pay upon demand. In New Pacific Timber & Supply Co. Inc. vs. Señeris, the Supreme
Court took judicial notice of the “well-known and accepted practice in the business sector
that a cashier’s check is deemed as cash.” This is because the mere issuance of a cashier’s
check is considered acceptance thereof.12
12. Set-Off
i. A bank may debit the personal account of a depositor for an amount erroneously credited to
the depositor’s sole proprietorship account because the latter being a sole proprietorship has
no separate and distinct personality from the depositor. In Bank of the Philippine Islands vs.
Court of Appeals, G.R. No. 136202, January 25, 2007, the Supreme Court ruled:
Consequently, petitioner, as the collecting bank, had the right to debit Salazar’s account for
the value of the checks it previously credited in her favor. It is of no moment that the account
debited by petitioner was different from the original account to which the proceeds of the check
were credited because both admittedly belonged to Salazar, the former being the account of the
sole proprietorship which had no separate and distinct personality from her, and the latter
being her personal account.
The right of set-off was explained in Associated Bank vs. Tan:13
A bank generally has a right of set-off over the deposits therein for the payment of any
withdrawals on the part of a depositor. The right of a collecting bank to debit a client’s
account for the value of a dishonored check that has previously been credited has fairly been
established by jurisprudence. To begin with, Article 1980 of the Civil Code provides that
“[f]ixed, savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning simple loan.”
Hence, the relationship between banks and depositors has been held to be that of creditor and
debtor. Thus, legal
compensation under Article 1278 of the Civil Code may take place “when all the requisites
mentioned in Article 1279 are present xxx.’’
ii. While, banks have the right of set-off, the issue of whether it acted judiciously is an
entirely different matter.14As businesses affected with public interest, and because of the
nature of their functions, banks are under obligation to treat the accounts of their depositors
with meticulous care, always having in mind the fiduciary nature of their relationship.15
iii. It must be emphasized that the law imposes a duty of diligence on the collecting bank to
scrutinize checks deposited with it, for the purpose of determining their genuineness and
regularity. The collecting bank, being primarily engaged in banking, holds itself out to the
public as the expert on this field, and the law thus holds it to a high standard of conduct.16
The taking and collection of a check without the proper indorsement amount to a conversion
of the check by the bank.17
iv. Crossing of the check with the phrase “Payee’s Account Only,” is a warning that the check
should be deposited only in the account of the payee. Thus, it is the duty of the collecting
bank to ascertain that the check be deposited in payee’s account only. Therefore, it is the
collecting bank which is bound to scrutinize the check and to know its depositors before it
could make the clearing indorsement “all prior indorsements and/or lack of indorsement
guaranteed.” In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking
Corporation, it was ruled:
“Anent petitioner’s liability on said instruments, this court is in full accord with the ruling of
the PCHC’s Board of Directors that:
‘In presenting the checks for clearing and for payment, the defendant made an express
guarantee on the validity of “all prior endorsements.” Thus, stamped at the back of the checks
are the defendant’s clear warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK OF EN-
DORSEMENTS GUARANTEED. Without such warranty, plaintiff would not have paid on
the checks.’
13. Relationship of Payee or Holder and the Bank
It is a well-settled rule that the relationship between the payee or holder of commercial
paper and the bank to which it is sent for collection is, in the absence of an agreement to the
contrary, that of principal and agent.19 A bank which receives such paper for collection is the
agent of the payee or holder.20
Even if diversion of the amount of a check payable to the collecting bank in behalf of the
designated payee may be allowed, still such diversion must be properly authorized by the
payor. Otherwise stated, the diversion can be justified only by proof of authority from the
drawer, or that the drawer has clothed his agent with apparent authority to receive the
proceeds of such check.21
14. Encashment of Checks
Banking business requires that the one who first cashes and negotiates the check must take
some precautions to learn whether or not it is genuine. And if the one cashing the check
through indifference or other circumstance assists the forger in committing the fraud, he
should not be permitted to retain the proceeds of the check from the drawee whose sole fault
was that it did not discover the forgery or the defect in the title of the person negotiating the
instrument before paying the check. For this reason, a bank which cashes a check drawn
upon another bank, without requiring proof as  to  the  identity  of  persons  presenting  it,  or  making  
inquiries  with  regard  to  them,  cannot  hold  the  proceeds  against  the  drawee  when  the  proceeds  of  the  
checks  were  afterwards  diverted  to  the  hands  of  a  third  party.  In  such  cases  the  drawee  bank  has  a  
right  to  believe  that  the  cashing  bank  (or  the  collecting  bank)  had,  by  the  usual  proper  investigation,  
satisfied  itself  of  the  authenticity  of  the  negotiation  of  the  checks.  Thus,  one  who  encashed  a  check  
which  had  been  forged  or  diverted  and  in  turn  received  payment  thereon  from  the  drawee,  is  guilty  
of  negligence  which  proximately  contributed  to  the  success  of  the  fraud  practiced  on  the  drawee  
bank.  The  latter  may  recover  from  the  holder  the  money  paid  on  the  check.  

a.2) Savings deposit

1. Servicing Deposits Outside Bank Premises

Banks may be authorized by the BSP to solicit and accept deposits outside their bank
premises, subject to the following conditions:
a. The financial condition of the bank applying for authority to solicit and collect savings
deposits outside its bank premises is sound and the operations and the quality of the
management thereof could reasonably assure the safety of the funds which may be entrusted
to its deposit collectors and/or solicitors;
b. The proposed area where applicant bank intends to solicit shall be clearly defined;
c. Solicitation of deposits shall only be confined within a locality where there are no other
banks in operation, or where it can be clearly established that the deposit potentials of the
said locality are still untapped; and
d. Applicant bank shall institute and maintain the following minimum safeguards:
(1) All deposit solicitors shall be initially bonded for at least P1,000 subject to the increase
thereof to approximate their daily collections;
(2) Deposit solicitors shall be provided with proper identification cards with photograph and
signature of each respective solicitor, certified to by the appropriate officer of the bank. Said
identification cards shall be worn by each solicitor at all times at the upper breast of his
outer garment when soliciting deposits;
(3) Adequate insurance coverage for funds in transit (representing deposits collected outside
banking premises) shall be secured by applicant bank from insurance companies not
included in the list of companies blacklisted by the Insurance Commissioner;
(4) Deposit slips shall be in booklet form, prenumbered, in triplicate copies and in three (3)
colors — the original to be issued to the depositor, the second copy to be used for posting
reference, and the third copy to be retained in the booklet;
(5) All collections shall be turned over to the cashier at the end of each day accompanied by a
Collection Summary Report to be accomplished in duplicate which shall contain the following
minimum information:
(a) Date of the report,
(b) Names and addresses of the depositors,
(c) Deposit slip numbers,
(d) Amounts of deposit,
(e) Savings account and passbook numbers, and
(f) Name and signature of solicitor rendering the report.
(6) Depositors shall always be required to accomplish a Signature Card when opening an
account, which card shall be used always as reference in checking the
genuineness/authenticity of signatures affixed on withdrawal slips or authorizations for
withdrawal;
(7) Deposits/withdrawals shall be recorded by the bookkeeper or any ledger clerk, except any
bank solicitor, in the depositor’s ledger cards and passbooks on the same day that such
deposits/withdrawals are accepted. Passbooks shall be returned to the depositors not later
than the following business day;89
(8) At the end of each month, depositors shall be advised in writing of the balances of their
deposits with the bank, the advise slips of which shall never be handcarried by the solicitors
themselves; and
(9) Places of assignments of bank solicitors shall be rotated at least quarterly.
2. Individual and Joint Accounts
A deposit may be either individual or joint account. A joint account may be an “and” account
or an “and/or” account. In an “and’’ account, the signature of both co-depositors are required
for withdrawals. On the other hand, in case of an “and/or” either one of the co-depositors may
deposit and withdraw from the account without the knowledge, consent and signature of the
other.22
3. Withdrawals
Banks are prohibited from issuing/accepting withdrawal slips or any other
similar instruments designed to effect withdrawals of savings deposits without
requiring the depositors concerned to present their passbooks and accomplishing the
necessary withdrawal slips, except for banks authorized by the BSP to adopt the no
passbook withdrawal system.

a.3) Negotiable Order of Withdrawal (NOW) Account

Authority to accept Negotiable Order of Withdrawal Accounts

Negotiable Order of Withdrawal (NOW) accounts are interest-bearing deposit accounts that
combine the payable on demand feature of checks and investment feature of savings
accounts. A Universal Bank/Commercial Bank may offer NOW accounts without prior
authority of the Monetary Board. A Thrift Bank/Rural Bank Cooperative Bank may accept
NOW accounts upon prior approval of the Monetary Board.
22 Viray, Handbook on Bank Deposits, 1998 Edition.
CHAPTER 3 — DEPOSIT FUNCTIONS OF BANKSBANKING LAWS & JURISPRUDENCE 90
2. Rules on Servicing NOW Accounts
The following rules shall be observed in servicing NOW accounts:
a. Prior to or simultaneous with the opening of a NOW account, the bank shall inform the
depositor of its terms and conditions.
b. The bank shall be responsible for the proper identification of its depositors; it shall
require, among other things, two (2) specimen signatures and such other pertinent
information.
c. Deposits shall be covered by deposit slips in duplicate duly validated and initialed by the
teller receiving the deposit. A copy of the deposit slip shall be furnished the depositor.
d. NOW accounts shall be kept and maintained separately from the regular savings deposits.
e. Blank NOW forms shall be prenumbered and shall be controlled as in the case of unissued
blank checks.
f. A bank statement shall be sent to each depositor at the end of each month for confirmation
of balances.
g. Banks must use the form prescribed by present rules for NOW accounts.

a.4) Time deposits

Time Deposits
Time deposit is defined as “one the payment of which cannot legally be required within such
a specified number of days.”23
1. Term of Time Deposits
Time deposits shall be issued for a specific period of term.
2. Special Time Deposits
Authority shall be automatically granted to any accredited banking institution which may
participate in the supervised credit program to accept special time deposits from the
Agrarian Reform Fund Commission with interest lower than the rate allowed on time
23 10 Am Jur 2d Sec. 652, citing 12 Cfr Sec. 204.2 (C)(1).91
deposits accepted from the general public. Such deposits shall be exempt from the legal
reserve requirements, as an exception to the existing policies on the matter.
3. Certificates of Time Deposit (CTD)
The following are the rules regarding issuance of CTDs:
a. Negotiable Certificates of Time Deposit (NCTDs)
(i) Universal Banks/Commercial Banks may issue NCTDs without approval of the BSP.
(ii) Thrift Banks/Rural Banks/Cooperative Banks may issue NCTDs upon the prior approval
of the BSP.
b. Non-Negotiable Certificates of Time Deposit
Banks may issue long-term non-negotiable tax-exempt certificates of time deposit without
approval of the BSP.

a.5) Deposit Substitute Operations

E. Deposit Substitute Operations (Quasi-Banking Functions)

The essential elements of quasi-banking are:
a. Borrowing funds for the borrower’s own account;
b. Twenty (20) or more lenders at any one time;
c. Methods of borrowing are issuance, endorsement, or acceptance of debt instruments of any
kind, other than deposits, such as acceptances, promissory notes, participations, certificates
of assignments or similar instruments with recourse, trust certificates, repurchase
agreements, and such other instruments as the Monetary Board may determine; and
d. The purpose of which is (1) relending, or (2) purchasing receivables or other obligations.
* Notes:
(i) Borrowing shall refer to all forms of obtaining or raising funds through any of the
methods and for any of the purposes provided in (d) above whether the borrower’s liability
thereby is treated as real or contingent.
 (ii) For the borrower’s own account shall refer to the assumption of liability in one’s own
capacity and not in representation, or as an agent or trustee, of another.
(iii) Purchasing of receivables or other obligations shall refer to the acquisition of claims
collectible in money, including interbank borrowings or borrowings between financial
institutions, or of acquisition of securities, of any amount and maturity, from domestic or
foreign sources.
(iv) Relending shall refer to the extension of loans by an institution with antecedent
borrowing transactions. Relending shall be presumed, in the absence of express stipulations,
when the institution is regularly engaged in lending.
(v) Regularly engaged in lending shall refer to the practice of extending
loans, advances, discounts or rediscounts as a matter of business, as distinguished
from isolated lending transactions.

a.6) Foreign Currency Deposits

1. Authority to Deposit Foreign Currencies

Any person, natural or juridical, may deposit with such Philippine banks in good standing, as
may, upon application, be designated by the Central Bank for the purpose, foreign currencies
which are acceptable as part of the international reserve, except those which are required by
the Central Bank to be surrendered.24
2. Authority of Banks to accept Foreign Currency Deposits
The banks designated by the Central Bank shall have the authority:
(1) To accept deposits and to accept foreign currencies in trust;
Numbered accounts for recording and servicing of said deposits are allowed.
(2) To issue certificates to evidence such deposits; (3) To discount said certificates;
(4) To accept said deposits as collateral for loans subject to such rules and regulations as may
be promulgated by the Central Bank from time to time; and
(5) To pay interest in foreign currency on such deposits.25
3. Foreign Currency Cover Requirements
Except as the Monetary Board may otherwise prescribe or allow, the depository banks shall:
(i) maintain at all times a one hundred percent foreign currency cover for their liabilities,
(ii) of which cover at least fifteen percent shall be in the form of foreign currency deposit with
the Central Bank,
(iii) and the balance in the form of foreign currency loans or securities, which loan or
securities shall be of short-term maturities and readily marketable,
(iv) Such foreign currency loans may include loans to domestic enterprises which are export-
oriented or registered with the Board of Investments, subject to the limitations to be
prescribed by the Monetary Board on such loans,
(v) Except as the Monetary Board may otherwise prescribe or allow, the foreign currency
cover shall be in the same currency as that of the corresponding foreign currency deposit
liability,
(vi) The Central Bank may pay interest on the foreign currency deposit, and if requested
shall exchange the foreign currency notes and coins into foreign currency instruments drawn
on its depository banks.
Depository banks which, on account of networth, resources, past performance, or other
pertinent criteria, have been qualified by the Monetary Board to function under an expanded
foreign currency deposit system shall be exempt from the requirement of maintaining fifteen
percent (15%) of the cover in the form of foreign currency deposit with the Central Bank.
Subject to prior Central Bank approval when required by Central Bank regulations, said
depository banks may extend foreign currency loans to any domestic enterprise, without the
limitations prescribed regarding maturity and marketability, and such loans shall be eligible
for purposes of the 100% foreign currency cover prescribed.26
4. Withdrawability and Transferability of Foreign Currency Deposits
There is no restriction on the withdrawal by the depositor of his deposit or on
the transferability of the same abroad except those arising from the contract between
the depositor and the bank.27

a.7) Anonymous and Numbered Accounts

Anonymous and Numbered Accounts

Anonymous accounts or accounts under fictitious names should not be kept/allowed. In case
where numbered accounts is allowed (i.e., foreign currency deposits), banks/non-bank
financial institutions should ensure that the client is identified in an official or other
identifying documents.
The following are related laws:
i. Revised Penal Code
“Art. 178. Using fictitious name and concealing true name. — The penalty of arresto mayor and a fine
not to exceed 500 pesos shall be imposed upon any person who shall publicly use a fictitious name for
the purpose of concealing a crime, evading the execution of a judgment or causing damage.
Any person who conceals his true name and other personal circumstances shall be punished by arresto
menor or a fine not to exceed 200 pesos.’’
ii. Civil Code
“Art. 379. The employment of pen names or stage names is permitted, provided it is done in good faith
and there is no injury to third persons. Pen names and stage names cannot be usurped.
Art. 380. Except as provided in the preceding article, no person shall use different names and
surnames.’’
26 Section 4, Republic Act No. 6426 (Foreign Currency Deposit Act of the Philippines).
27 Section 5, Republic Act No. 6426 (Foreign Currency Deposit Act of the Philippines).95
iii. Commonwealth Act No. 142 as amended by Republic Act No. 6085
“Sec. 1. Except as a pseudonym solely for literary, cinema, television, radio or other entertainment
purposes and in athletic events where the use of pseudonym is a normally accepted practice, no person
shall use any name different from the one with which he was registered at birth in the office of the local
civil registry, or with which he was baptized for the first time, or, in case of an alien, with which he was
registered in the Bureau of Immigration upon entry; or such substitute name as may have been
authorized by a competent court: Provided, That persons, whose births have not been registered in any
local civil registry and who have not been baptized, have one year from the approval of this act within
which to register their names in the civil registry of their residence. The name shall comprise the
patronymic name and one or two surnames.
Sec. 2. Any person desiring to use an alias shall apply for authority therefor in proceedings like those
legally provided to obtain judicial authority for a change of name, and no person shall be allowed to
secure such judicial authority for more than one alias. The petition for an alias shall set forth the
person’s baptismal and family name and the name recorded in the civil registry, if different, his
immigrant’s name, if an alien, and his pseudonym, if he has such names other than his original or real
name, specifying the reason or reasons for the use of the desired alias. The judicial authority for the use
of alias the Christian name and the alien immigrant’s name shall be recorded in the proper local civil
registry, and no person shall use any name or names other, than his original or real name unless the
same is or are duly recorded in the proper local civil registry.
Sec. 3. No person having been baptized with a name different from that with which he was registered
at birth in the local civil registry, or in case of an alien, registered in the Bureau of Immigration upon
entry, or any person who obtained judicial authority to use an alias, or who uses a pseudonym, shall
represent himself in any public or private transaction or shall sign or execute any public or private
document without stating or affixing his real or original name and all names or aliases or pseudonym
he is or may have been authorized to use.
Sec. 4. Six months from the approval of this act and subject to the provisions of section
1 hereof, all persons who have used any name and/or names and alias or aliases different from
those authorized in section one of this act and duly recorded in the local civil registry, shall be
prohibited to use such other name or names and/or alias or aliases.’’

Cases:

a. Central Bank of the Philippines vs. Morfe, 63 SCRA 114, 119

G.R. No. L-20119 June 30, 1967

CENTRAL BANK OF THE PHILIPPINES, petitioner,
vs.
THE HONORABLE JUDGE JESUS P. MORFE and FIRST MUTUAL SAVING AND LOAN
ORGANIZATION, INC., respondents.
Natalio M. Balboa, F. E. Evangelista and Mariano Abaya for petitioner.
Halili, Bolinao, Bolinao and Associates for respondents.
CONCEPCION, C.J.:
This is an original action for certiorari, prohibition and injunction, with preliminary injunction, against an
order of the Court of First Instance of Manila, the dispositive part of which reads:
WHEREFORE, upon the petitioner filing an injunction bond in the amount of P3,000.00, let a writ
of preliminary preventive and/or mandatory injunction issue, restraining the respondents, their
agents or representatives, from further searching the premises and properties and from taking
custody of the various documents and papers of the petitioner corporation, whether in its main
office or in any of its branches; and ordering the respondent Central Bank and/or its co-
respondents to return to the petitioner within five (5) days from service on respondents of the writ
of preventive and/or mandatory injunction, all the books, documents, and papers so far seized
from the petitioner pursuant to the aforesaid search warrant.1äwphï1.ñët
Upon the filing of the petition herein and of the requisite bond, we issued, on August 14, 1962, a writ of
preliminary injunction restraining and prohibiting respondents herein from enforcing the order above
quoted.
The main respondent in this case, the First Mutual Savings and Loan Organization, Inc. — hereinafter
referred to as the Organization — is a registered non-stock corporation, the main purpose of which,
according to its Articles of Incorporation, dated February 14, 1961, is "to encourage . . . and implement
savings and thrift among its members, and to extend financial assistance in the form of loans," to them. The
Organization has three (3) classes of "members,"1 namely: (a) founder members — who originally joined
the organization and have signed the pre-incorporation papers — with the exclusive right to vote and be
voted for ; (b) participating members — with "no right to vote or be voted for" — to which category all
other members belong; except (c) honorary members, so made by the board of trustees, — "at the exclusive
discretion" thereof — due to "assistance, honor, prestige or help extended in the propagation" of the
objectives of the Organization — without any pecuniary expenses on the part of said honorary members.
On February 14, 1962, the legal department of the Central Bank of the Philippines — hereinafter referred to
as the Bank — rendered an opinion to the effect that the Organization and others of similar nature are
banking institutions, falling within the purview of the Central Bank Act.2 Hence, on April 1 and 3, 1963,
the Bank caused to be published in the newspapers the following:
ANNOUNCEMENT
To correct any wrong impression which recent newspaper reports on "savings and loan associations" may
have created in the minds of the public and other interested parties, as well as to answer numerous inquiries
from the public, the Central Bank of the Philippines wishes to announce that all "savings and loan
associations" now in operation and other organizations using different corporate names, but engaged in
operations similar in nature to said "associations" HAVE NEVER BEEN AUTHORIZED BY THE
MONETARY BOARD OF THE CENTRAL BANK OF THE PHILIPPINES TO ACCEPT DEPOSIT OF
FUNDS FROM THE PUBLIC NOR TO ENGAGE IN THE BANKING BUSINESS NOR TO PERFORM
ANY BANKING ACTIVITY OR FUNCTION IN THE PHILIPPINES.
Such institutions violate Section. 2 of the General Banking Act, Republic Act No. 337, should they engage
in the "lending of funds obtained from the public through the receipts of deposits or the sale of bonds,
securities or obligations of any kind" without authority from the Monetary Board. Their activities and
operations are not supervised by the Superintendent of Banks and persons dealing with such institutions do
so at their risk.
CENTRAL BANK OF THE PHILIPPINES
Moreover, on April 23, 1962, the Governor of the Bank directed the coordination of "the investigation and
gathering of evidence on the activities of the savings and loan associations which are operating contrary to
law." Soon thereafter, or on May 18, 1962, a member of the intelligence division of the Bank filed with the
Municipal Court of Manila a verified application for a search warrant against the Organization, alleging
that "after close observation and personal investigation, the premises at No. 2745 Rizal Avenue, Manila" —
in which the offices of the Organization were housed — "are being used unlawfully," because said
Organization is illegally engaged in banking activities, "by receiving deposits of money for deposit,
disbursement, safekeeping or otherwise or transacts the business of a savings and mortgage bank and/or
building and loan association . . . without having first complied with the provisions of Republic Act No.
337" and that the articles, papers, or effects enumerated in a list attached to said application, as Annex A
thereof.3 are kept in said premises, and "being used or intended to be used in the commission of a felony, to
wit: violation of Sections 2 and 6 of Republic Act No. 337."4 Said articles, papers or effects are described in
the aforementioned Annex A, as follows:
I. BOOKS OF ORIGINAL ENTRY
(1) General Journal
(2) Columnar Journal or Cash Book
(a) Cash Receipts Journal or Cash Receipt Book
(b) Cash Disbursements Journal or Cash Disbursement Book
II. BOOKS OF FINAL ENTRY
(1) General Ledger
(2) Individual Deposits and Loans Ledgers
(3) Other Subsidiary Ledgers
III. OTHER ACCOUNTING RECORDS
 (1) Application for Membership
(2) Signature Card
(3) Deposit Slip
(4) Passbook Slip
(5) Withdrawal Slip
(6) Tellers Daily Deposit Report
(7) Application for Loan Credit Statement
(8) Credit Report
(9) Solicitor's Report
(10) Promissory Note
(11) I n d o r s e m e n t
(12) Co-makers' Statements
(13) Chattel Mortgage Contracts
(14) Real Estate Mortgage Contracts
(15) Trial Balance
(16) Minutes Book — Board of Directors
IV. FINANCIAL STATEMENTS
(1) Income and Expenses Statements
(2) Balance Sheet or Statement of Assets and Liabilities
V. OTHERS
(1) Articles of Incorporation
(2) By-Laws
(3) Prospectus, Brochures Etc.
(4) And other documents and articles which are being used or intended to be used in unauthorized
banking activities and operations contrary to law.
Upon the filing of said application, on May 18, 1962, Hon. Roman Cancino, as Judge of the said municipal
court, issued the warrant above referred to,5 commanding the search of the aforesaid premises at No. 2745
Rizal Avenue, Manila, and the seizure of the foregoing articles, there being "good and sufficient reasons to
believe" upon examination, under oath, of a detective of the Manila Police Department and said intelligence
officer of the Bank — that the Organization has under its control, in the address given, the aforementioned
articles, which are the subject of the offense adverted to above or intended to be used as means for the
commission of said off offense.
Forthwith, or on the same date, the Organization commenced Civil Case No. 50409 of the Court of First
Instance of Manila, an original action for "certiorari, prohibition, with writ of preliminary injunction and/or
writ of preliminary mandatory injunction," against said municipal court, the Sheriff of Manila, the Manila
Police Department, and the Bank, to annul the aforementioned search warrant, upon the ground that, in
issuing the same, the municipal court had acted "with grave abuse of discretion, without jurisdiction and/or
in excess of jurisdiction" because: (a) "said search warrant is a roving commission general in its terms . . .;"
(b) "the use of the word 'and others' in the search warrant . . . permits the unreasonable search and seizure
of documents which have no relation whatsoever to any specific criminal act . . .;" and (c) "no court in the
Philippines has any jurisdiction to try a criminal case against a corporation . . ."
The Organization, likewise, prayed that, pending hearing of the case on the merits, a writ of preliminary
injunction be issued ex parte restraining the aforementioned search and seizure, or, in the alternative, if the
acts complained of have been partially performed, that a writ of preliminary mandatory injunction be
forthwith issued ex parte, ordering the preservation of the status quo of the parties, as well as the
immediate return to the Organization of the documents and papers so far seized under, the search warrant in
question. After due hearing, on the petition for said injunction, respondent, Hon. Jesus P. Morfe, Judge,
who presided over the branch of the Court of First Instance of Manila to which said Case No. 50409 had
been assigned, issued, on July 2, 1962, the order complained of.
Within the period stated in said order, the Bank moved for a reconsideration thereof, which was denied on
August 7, 1962. Accordingly, the Bank commenced, in the Supreme Court, the present action, against
Judge Morfe and the Organization, alleging that respondent Judge had acted with grave abuse of discretion
and in excess of his jurisdiction in issuing the order in question.
At the outset, it should be noted that the action taken by the Bank, in causing the aforementioned search to
be made and the articles above listed to be seized, was predicated upon the theory that the Organization was
illegally engaged in banking — by receiving money for deposit, disbursement, safekeeping or otherwise, or
transacting the business of a savings and mortgage bank and/or building and loan association, — without
first complying with the provisions of R.A. No. 337, and that the order complained of assumes that the
Organization had violated sections 2 and 6 of said Act.6 Yet respondent Judge found the searches and,
seizures in question to be unreasonable, through the following process of reasoning: the deposition given in
support of the application for a search warrant states that the deponent personally knows that the premises
of the Organization, at No. 2745 Rizal Avenue, Manila,7 were being used unlawfully for banking and
purposes. Respondent judge deduce, from this premise, that the deponent " knows specific banking
transactions of the petitioner with specific persons," and, then concluded that said deponent ". . . could
have, if he really knew of actual violation of the law, applied for a warrant to search and seize only books"
or records:
covering the specific purportedly illegal banking transactions of the petitioner with specific
persons who are the supposed victims of said illegal banking transactions according to his
knowledge. To authorize and seize all the records listed in Annex A to said application for search
warrant, without reference to specific alleged victims of the purported illegal banking transactions,
would be to harass the petitioner, and its officers with a roving commission or fishing expedition
for evidence which could be discovered by normal intelligence operations or inspections (not
seizure) of books and records pursuant to Section 4 of Republic Act No 337 . . ."
The concern thus shown by respondent judge for the civil liberty involved is, certainly, in line with the
function of courts, as ramparts of justice and liberty and deserves the greatest encouragement and warmest
commendation. It lives up to the highest traditions of the Philippine Bench, which underlies the people's
faith in and adherence to the Rule of Law and the democratic principle in this part of the World.
At the same time, it cannot be gainsaid the Constitutional injunction against unreasonable searches and
seizures seeks to forestall, not purely abstract or imaginary evils, but specific and concrete ones. Indeed,
unreasonableness is, in the very nature of things, a condition dependent upon the circumstances
surrounding each case, in much the same way as the question whether or not "probable cause" exists is one
which must be decided in the light of the conditions obtaining in given situations.
Referring particularly to the one at bar, it is not clear from the order complained of whether respondent
Judge opined that the above mentioned statement of the deponent — to the effect that the Organization was
engaged in the transactions mentioned in his deposition — deserved of credence or not. Obviously,
however, a mere disagreement with Judge Cancino, who issued the warrant, on the credibility of said
statement, would not justify the conclusion that said municipal Judge had committed a grave abuse of
discretion, amounting to lack of jurisdiction or excess of jurisdiction. Upon the other hand, the failure of
the witness to mention particular individuals does not necessarily prove that he had no personal knowledge
of specific illegal transactions of the Organization, for the witness might be acquainted with specific
transactions, even if the names of the individuals concerned were unknown to him.
Again, the aforementioned order would seem to assume that an illegal banking transaction, of the kind
contemplated in the contested action of the officers of the Bank, must always connote the existence of a
"victim." If this term is used to denote a party whose interests have been actually injured, then the
assumption is not necessarily justified. The law requiring compliance with certain requirements before
anybody can engage in banking obviously seeks to protect the public against actual, as well as potential,
injury. Similarly, we are not aware of any rule limiting the use of warrants to papers or effects which
cannot be secured otherwise.
The line of reasoning of respondent Judge might, perhaps, be justified if the acts imputed to the
Organization consisted of isolated transactions, distinct and different from the type of business in which it
is generally engaged. In such case, it may be necessary to specify or identify the parties involved in said
isolated transactions, so that the search and seizure be limited to the records pertinent thereto. Such,
however, is not the situation confronting us. The records suggest clearly that the transactions objected to by
the Bank constitute the general pattern of the business of the Organization. Indeed, the main purpose
thereof, according to its By-laws, is "to extend financial assistance, in the form of loans, to its members,"
with funds deposited by them.
It is true, that such funds are referred to — in the Articles of Incorporation and the By-laws — as their
"savings." and that the depositors thereof are designated as "members," but, even a cursory examination of
said documents will readily show that anybody can be a depositor and thus be a "participating member." In
other words, the Organization is, in effect, open to the "public" for deposit accounts, and the funds so raised
may be lent by the Organization. Moreover, the power to so dispose of said funds is placed under the
exclusive authority of the "founder members," and "participating members" are expressly denied the right
to vote or be voted for, their "privileges and benefits," if any, being limited to those which the board of
trustees may, in its discretion, determine from time to time. As a consequence, the "membership" of the
"participating members" is purely nominal in nature. This situation is fraught, precisely, with the very
dangers or evils which Republic Act No. 337 seeks to forestall, by exacting compliance with the
requirements of said Act, before the transactions in question could be undertaken.
It is interesting to note, also, that the Organization does not seriously contest the main facts, upon which the
action of the Bank is based. The principal issue raised by the Organization is predicated upon the theory
that the aforementioned transactions of the Organization do not amount to " banking," as the term is used in
Republic Act No. 337. We are satisfied, however, in the light of the circumstance obtaining in this case,
that the Municipal Judge did not commit a grave abuse of discretion in finding that there was probable
cause that the Organization had violated Sections 2 and 6 of the aforesaid law and in issuing the warrant in
question, and that, accordingly, and in line with Alverez vs. Court of First Instance (64 Phil. 33), the search
and seizure complained of have not been proven to be unreasonable.
Wherefore, the order of respondent Judge dated July 2, 1962, and the writ of preliminary mandatory
injunction issued in compliance therewith are hereby annulled, and the writ of preliminary injunction issued
by this Court on August 14, 1962, accordingly, made permanent, with costs against respondent First Mutual
Savings and Loan Organization, Inc. It is so ordered.
Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur.
Dizon, J., took no part.
Footnotes
1
Pursuant to the by-laws of the Organization, as amended on March 29, 1967.
2
Republic Act No. 338.
3
P. 106, Rollo.
4
Annex 6 to Annex E, p. 105 of the Rollo.
5
P. 107, Rollo.
6
"Section 2. Only duly authorized persons and entities may engage in the lending of funds
obtained from the public through the receipt of deposits or the sale of bonds securities or
obligations of any kind, and all entities regularly conducting such operations shall be considered
as banking institutions and shall be subject to the provisions of this Act, of the Central Bank Act,
and of other pertinent laws. The terms "banking institution" and "bank," as used in this Act, are
synonymous and interchangeable and specifically include banks, banking institutions, commercial
banks, savings banks, mortgage banks, trust companies, building and loan associations, branches
and agencies in the Philippines of foreign banks, hereinafter called Philippine branches, and all
other corporations, companies, partnerships, and associations performing banking functions in the
Philippines.
"Persons and entities which receive deposits only occasionally shall not be considered as
banks, but such persons and entities shall be subject to regulations by the Monetary
Board of the Central Bank; nevertheless, in no case may the Central Bank authorize the
drawing of checks against deposits not maintained in banks, or branches or agencies
thereof.
"The Monetary Board may similarly regulate the activities of persons and entities which
act as agents of banks."
7
"Section 6. No person, association or corporation not conducting the business of a commercial
banking corporation, trust corporation, savings and mortgage bank, or building and loan
association, as defined in this Act, shall advertise or hold itself out as being engaged in the
business of such bank, corporation or association, or use in connection with its business title the
word or words "bank," "banking," "banker," "building and loan association," "trust company," or
other words of similar import, or solicit or receive deposits of money for deposit, disbursement,
safekeeping, or otherwise, or transact in any manner the business of any such bank, corporation or
association, without having first complied with the provisions of this Act in so far as it relates to
commercial banking corporations, trust corporations, savings and mortgage banks, or building and
loan associations, as the case may be. For any violation of the provisions of this section by a
corporation, the officers and directors thereof shall be jointly and severally liable. Any violation of
the provisions of the section shall be punished by a fine of five hundred pesos for each day during
 which such violation is continued or repeated, and in default of the payment thereof, subsidiary
imprisonment as prescribed by law."

b. Bank of the Philippine Islands vs. Court of Appeals, G.R. No.

104612, May 10, 1994

G.R. No. 104612 May 10, 1994

BANK OF THE PHILIPPINE ISLANDS (successor-in- interest of COMMERCIAL AND TRUST
CO.), petitioner,
vs.
HON. COURT OF APPEALS, EASTERN PLYWOOD CORP. and BENIGNO D. LIM,
respondents.
Leonen, Ramirez & Associates for petitioner.
Constante A. Ancheta for private respondents.

DAVIDE, JR., J.:

1
The petitioner urges us to review and set aside the amended Decision of 6 March 1992 of
respondent Court of Appeals in CA- G.R. CV No. 25739 which modified the Decision of 15
November 1990 of Branch 19 of the Regional Trial Court (RTC) of Manila in Civil Case No. 87-
42967, entitled Bank of the Philippine Islands (successor-in-interest of Commercial Bank and
Trust Company) versus Eastern Plywood Corporation and Benigno D. Lim. The Court of Appeals
had affirmed the dismissal of the complaint but had granted the defendants' counterclaim for
P331,261.44 which represents the outstanding balance of their account with the plaintiff.
As culled from the records and the pleadings of the parties, the following facts were duly
established:
Private respondents Eastern Plywood Corporation (Eastern) and
Benigno D. Lim (Lim), an officer and stockholder of Eastern, held at least one joint bank account
("and/or" account) with the Commercial Bank and Trust Co. (CBTC), the predecessor-in-interest
of petitioner Bank of the Philippine Islands (BPI). Sometime in March 1975, a joint checking
account ("and" account) with Lim in the amount of P120,000.00 was opened by Mariano Velasco
with funds withdrawn from the account of Eastern and/or Lim. Various amounts were later
deposited or withdrawn from the joint account of Velasco and Lim. The money therein was placed
in the money market.
Velasco died on 7 April 1977. At the time of his death, the outstanding balance of the account
stood at P662,522.87. On 5 May 1977, by virtue of an Indemnity Undertaking executed by Lim for
2
himself and as President and General Manager of Eastern, one-half of this amount was
3
provisionally released and transferred to one of the bank accounts of Eastern with CBTC.
Thereafter, on 18 August 1978, Eastern obtained a loan of P73,000.00 from CBTC as "Additional
Working Capital," evidenced by the "Disclosure Statement on Loan/Credit Transaction"
(Disclosure Statement) signed by CBTC through its branch manager, Ceferino Jimenez, and
4
Eastern, through Lim, as its President and General Manager. The loan was payable on demand
with interest at 14% per annum.
For this loan, Eastern issued on the same day a negotiable promissory note for P73,000.00
5
payable on demand to the order of CBTC with interest at 14% per annum. The note was signed
by Lim both in his own capacity and as President and General Manager of Eastern. No reference
to any security for the loan appears on the note. In the Disclosure Statement, the box with the
printed word "UNSECURED" was marked with "X" — meaning unsecured, while the line with the
words "this loan is wholly/partly secured by" is followed by the typewritten words "Hold-Out on a
1:1 on C/A No. 2310-001-42," which refers to the joint account of Velasco and Lim with a balance
of P331,261.44.
In addition, Eastern and Lim, and CBTC signed another document entitled "Holdout Agreement,"
6
also dated 18 August 1978, wherein it was stated that "as security for the Loan [Lim and
Eastern] have offered [CBTC] and the latter accepts a holdout on said [Current Account No.
2310-011-42 in the joint names of Lim and Velasco] to the full extent of their alleged interests
therein as these may appear as a result of final and definitive judicial action or a settlement
7
between and among the contesting parties thereto." Paragraph 02 of the Agreement provides as
follows:
Eastply [Eastern] and Mr. Lim hereby confer upon Comtrust [CBTC], when and if
their alleged interests in the Account Balance shall have been established with
finality, ample and sufficient power as shall be necessary to retain said Account
Balance and enable Comtrust to apply the Account Balance for the purpose of
liquidating the Loan in respect of principal and/or accrued interest.
And paragraph 05 thereof reads:
The acceptance of this holdout shall not impair the right of Comtrust to declare
the loan payable on demand at any time, nor shall the existence hereof and the
non-resolution of the dispute between the contending parties in respect of
entitlement to the Account Balance, preclude Comtrust from instituting an action
for recovery against Eastply and/or Mr. Lim in the event the Loan is declared due
and payable and Eastply and/or Mr. Lim shall default in payment of all obligations
and liabilities thereunder.
In the meantime, a case for the settlement of Velasco's estate was filed with Branch 152 of the
RTC of Pasig, entitled "In re Intestate Estate of Mariano Velasco," and docketed as Sp. Proc. No.
8959. In the said case, the whole balance of P331,261.44 in the aforesaid joint account of
Velasco and Lim was being claimed as part of Velasco's estate. On 9 September 1986, the
intestate court granted the urgent motion of the heirs of Velasco to withdraw the deposit under the
joint account of Lim and Velasco and authorized the heirs to divide among themselves the
8
amount withdrawn.
9
Sometime in 1980, CBTC was merged with BPI. On 2 December 1987, BPI filed with the RTC
of Manila a complaint against Lim and Eastern demanding payment of the promissory note for
P73,000.00. The complaint was docketed as Civil Case No. 87- 42967 and was raffled to Branch
19 of the said court, then presided over by Judge Wenceslao M. Polo. Defendants Lim and
Eastern, in turn, filed a counterclaim against BPI for the return of the balance in the disputed
account subject of the Holdout Agreement and the interests thereon after deducting the amount
due on the promissory note.
After due proceedings, the trial court rendered its decision on
15 November 1990 dismissing the complaint because BPI failed to make out its case.
Furthermore, it ruled that "the promissory note in question is subject to the 'hold-out' agreement,"
10
and that based on this agreement, "it was the duty of plaintiff Bank [BPI] to debit the account of
the defendants under the promissory note to set off the loan even though the same has no fixed
11
maturity." As to the defendants' counterclaim, the trial court, recognizing the fact that the entire
amount in question had been withdrawn by Velasco's heirs pursuant to the order of the intestate
court in Sp. Proc. No. 8959, denied it because the "said claim cannot be awarded without
12
disturbing the resolution" of the intestate court.
Both parties appealed from the said decision to the Court of Appeals. Their appeal was docketed
as CA-G.R. CV No. 25739.
On 23 January 1991, the Court of Appeals rendered a decision affirming the decision of the trial
court. It, however, failed to rule on the defendants' (private respondents') partial appeal from the
trial court's denial of their counterclaim. Upon their motion for reconsideration, the Court of
13
Appeals promulgated on 6 March 1992 an Amended Decision wherein it ruled that the
settlement of Velasco's estate had nothing to do with the claim of the defendants for the return of
the balance of their account with CBTC/BPI as they were not privy to that case, and that the
defendants, as depositors of CBTC/BPI, are the latter's creditors; hence, CBTC/BPI should have
protected the defendants' interest in Sp. Proc. No. 8959 when the said account was claimed by
Velasco's estate. It then ordered BPI "to pay defendants the amount of P331,261.44 representing
14
the outstanding balance in the bank account of defendants."
On 22 April 1992, BPI filed the instant petition alleging therein that the Holdout Agreement in
question was subject to a suspensive condition stated therein, viz., that the "P331,261.44 shall
become a security for respondent Lim's promissory note only if respondents' Lim and Eastern
Plywood Corporation's interests to that amount are established as a result of a final and definitive
15
judicial action or a settlement between and among the contesting parties thereto." Hence, BPI
asserts, the Court of Appeals erred in affirming the trial court's decision dismissing the complaint
on the ground that it was the duty of CBTC to debit the account of the defendants to set off the
amount of P73,000.00 covered by the promissory note.
Private respondents Eastern and Lim dispute the "suspensive condition" argument of the
petitioner. They interpret the findings of both the trial and appellate courts that the money
deposited in the joint account of Velasco and Lim came from Eastern and Lim's own account as a
finding that the money deposited in the joint account of Lim and Velasco "rightfully belong[ed] to
Eastern Plywood Corporation and/or Benigno Lim." And because the latter are the rightful owners
of the money in question, the suspensive condition does not find any application in this case and
the bank had the duty to set off this deposit with the loan. They add that the ruling of the lower
court that they own the disputed amount is the final and definitive judicial action required by the
Holdout Agreement; hence, the petitioner can only hold the amount of P73,000.00 representing
16
the security required for the note and must return the rest.
The petitioner filed a Reply to the aforesaid Comment. The private respondents filed a Rejoinder
thereto.
We gave due course to the petition and required the parties to submit simultaneously their
memoranda.
The key issues in this case are whether BPI can demand payment of the loan of P73,000.00
despite the existence of the Holdout Agreement and whether BPI is still liable to the private
respondents on the account subject of the Holdout Agreement after its withdrawal by the heirs of
Velasco.
The collection suit of BPI is based on the promissory note for P73,000.00. On its face, the note is
an unconditional promise to pay the said amount, and as stated by the respondent Court of
17
Appeals, "[t]here is no question that the promissory note is a negotiable instrument." It further
correctly ruled that BPI was not a holder in due course because the note was not indorsed to BPI
by the payee, CBTC. Only a negotiation by indorsement could have operated as a valid transfer
to make BPI a holder in due course. It acquired the note from CBTC by the contract of merger or
sale between the two banks. BPI, therefore, took the note subject to the Holdout Agreement.
We disagree, however, with the Court of Appeals in its interpretation of the Holdout Agreement. It
is clear from paragraph 02 thereof that CBTC, or BPI as its successor-in-interest, had every right
to demand that Eastern and Lim settle their liability under the promissory note. It cannot be
compelled to retain and apply the deposit in Lim and Velasco's joint account to the payment of
the note. What the agreement conferred on CBTC was a power, not a duty. Generally, a bank is
18
under no duty or obligation to make the application. To apply the deposit to the payment of a
19
loan is a privilege, a right of set-off which the bank has the option to exercise.
Also, paragraph 05 of the Holdout Agreement itself states that notwithstanding the agreement,
CBTC was not in any way precluded from demanding payment from Eastern and from instituting
an action to recover payment of the loan. What it provides is an alternative, not an exclusive,
method of enforcing its claim on the note. When it demanded payment of the debt directly from
Eastern and Lim, BPI had opted not to exercise its right to apply part of the deposit subject of the
Holdout Agreement to the payment of the promissory note for P73,000.00. Its suit for the
enforcement of the note was then in order and it was error for the trial court to dismiss it on the
theory that it was set off by an equivalent portion in C/A No. 2310-001-42 which BPI should have
debited. The Court of Appeals also erred in affirming such dismissal.
The "suspensive condition" theory of the petitioner is, therefore, untenable.
The Court of Appeals correctly decided on the counterclaim. The counterclaim of Eastern and Lim
20
for the return of the P331,261.44 was equivalent to a demand that they be allowed to withdraw
their deposit with the bank. Article 1980 of the Civil Code expressly provides that "[f]ixed, savings,
and current deposits of money in banks and similar institutions shall be governed by the
21
provisions concerning simple loan." In Serrano vs. Central Bank of the Philippines, we held that
bank deposits are in the nature of irregular deposits; they are really loans because they earn
interest. The relationship then between a depositor and a bank is one of creditor and debtor. The
deposit under the questioned account was an ordinary bank deposit; hence, it was payable on
22
demand of the depositor.
The account was proved and established to belong to Eastern even if it was deposited in the
names of Lim and Velasco. As the real creditor of the bank, Eastern has the right to withdraw it or
to demand payment thereof. BPI cannot be relieved of its duty to pay Eastern simply because it
already allowed the heirs of Velasco to withdraw the whole balance of the account. The petitioner
should not have allowed such withdrawal because it had admitted in the Holdout Agreement the
questioned ownership of the money deposited in the account. As early as 12 May 1979, CBTC
was notified by the Corporate Secretary of Eastern that the deposit in the joint account of Velasco
and Lim was being claimed by them and that one-half was being claimed by the heirs of Velasco.
23

Moreover, the order of the court in Sp. Proc. No. 8959 merely authorized the heirs of Velasco to
withdraw the account. BPI was not specifically ordered to release the account to the said heirs;
hence, it was under no judicial compulsion to do so. The authorization given to the heirs of
Velasco cannot be construed as a final determination or adjudication that the account belonged to
Velasco. We have ruled that when the ownership of a particular property is disputed, the
determination by a probate court of whether that property is included in the estate of a deceased
24
is merely provisional in character and cannot be the subject of execution.
Because the ownership of the deposit remained undetermined, BPI, as the debtor with respect
thereto, had no right to pay to persons other than those in whose favor the obligation was
constituted or whose right or authority to receive payment is indisputable. The payment of the
money deposited with BPI that will extinguish its obligation to the creditor-depositor is payment to
25
the person of the creditor or to one authorized by him or by the law to receive it. Payment made
by the debtor to the wrong party does not extinguish the obligation as to the creditor who is
without fault or negligence, even if the debtor acted in utmost good faith and by mistake as to the
26
person of the creditor, or through error induced by fraud of a third person. The payment then by
BPI to the heirs of Velasco, even if done in good faith, did not extinguish its obligation to the true
depositor, Eastern.
In the light of the above findings, the dismissal of the petitioner's complaint is reversed and set
aside. The award on the counterclaim is sustained subject to a modification of the interest.
WHEREFORE, the instant petition is partly GRANTED. The challenged amended decision in CA-
G.R. CV No. 25735 is hereby MODIFIED. As modified:
(1) Private respondents are ordered to pay the petitioner the promissory note for
P73,000.00 with interest at:
(a) 14% per annum on the principal, computed from
18 August 1978 until payment;
(b) 12% per annum on the interest which had accrued up to the
date of the filing of the complaint, computed from that date until
payment pursuant to Article 2212 of the Civil Code.
(2) The award of P331,264.44 in favor of the private respondents shall bear
interest at the rate of 12% per annum computed from the filing of the
counterclaim.
No pronouncement as to costs.
SO ORDERED.
Cruz, Bellosillo, Quiason and Kapunan, JJ., concur
#Footnotes

1 Annex "A" of Petition; Rollo, 18-24. Per Associate Justice Jose C. Campos, Jr.,
concurred in by Associate Justices Alicia V. Sempio-Diy and Filemon H.
Mendoza.
2 Annex "2" of Answer; Original Records (OR), 23-26.
3 Exhibits "31" and "32"; Id., 124 and 125, respectively.
4 Exhibit "A-6"; Id., 5.
5 Exhibit "A"; OR, 4.
6 Exhibit "C"; Id., 155-157.
7 Holdout Agreement, 1-2.
8 Annex "A" of Answer to Counterclaim; OR, 31-32.
9 Per testimony of Ceferino Jimenez; TSN, 4 July 1988, 11.
10 OR, 200.
11 Id., 201.
 12 Id., 202.
13 Annex "A" of Petition; Rollo, 19-23.
14 Rollo, 22-23.
15 Id., 13-14.
16 Rollo, 33-35.
17 Id., 20.
18 9 C.J.S. Banks and Banking § 301 (1938). See Bank of California vs. Starrett,
188 P. 410 (Wash. 1920); Bryant vs. Williams, 16 F.2d 159 (D.C.N.C. 1926).
19 Id., § 296. See Lowden vs. Iowa-Des Moines Nat. Bank and Trust Co., 10 F.
Supp. 430 (D.C. Iowa 1935); Meredith vs. First National Bank of Central City, 271
S.W.2d 274 (Ky. Ct. App. 1954).
20 OR, 17.
21 96 SCRA 96 [1980]. See also, Guingona vs. City Fiscal of Manila, 128 SCRA
577 [1984]; People vs. Ong, 204 SCRA 942 [1991].
22 10 Am Jur 2d, Banks, § 356.
23 Annex "1" of Answer; OR, 20-21.
24 Valera vs. Inserto, 149 SCRA 533 [1987].
25 See Article 1240, New Civil Code.
26 IV ARTURO TOLENTINO, CIVIL CODE OF THE PHILIPPINES 285 (1991
ed.)

c. The Consolidated Bank and Trust Corporation vs. Court of Appeals,

G.R. No. 138569, September 11, 2003.

THE CONSOLIDATED BANK and TRUST CORPORATION, petitioner, vs. COURT OF APPEALS and
L.C. DIAZ and COMPANY, CPA’s, respondents.
DECISION
CARPIO, J.:
The Case
Before us is a petition for review of the Decision129[1] of the Court of Appeals dated 27 October 1998 and
its Resolution dated 11 May 1999. The assailed decision reversed the Decision130[2] of the Regional Trial
Court of Manila, Branch 8, absolving petitioner Consolidated Bank and Trust Corporation, now known as
Solidbank Corporation (“Solidbank”), of any liability. The questioned resolution of the appellate court
denied the motion for reconsideration of Solidbank but modified the decision by deleting the award of
exemplary damages, attorney’s fees, expenses of litigation and cost of suit.
The Facts
Solidbank is a domestic banking corporation organized and existing under Philippine laws. Private
respondent L.C. Diaz and Company, CPA’s (“L.C. Diaz”), is a professional partnership engaged in the
practice of accounting.
Sometime in March 1976, L.C. Diaz opened a savings account with Solidbank, designated as Savings
Account No. S/A 200-16872-6.
On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya (“Macaraya”), filled up a savings
(cash) deposit slip for P990 and a savings (checks) deposit slip for P50. Macaraya instructed the messenger
of L.C. Diaz, Ismael Calapre (“Calapre”), to deposit the money with Solidbank. Macaraya also gave
Calapre the Solidbank passbook.

                                                                                                               
 

 
Calapre went to Solidbank and presented to Teller No. 6 the two deposit slips and the passbook. The teller
acknowledged receipt of the deposit by returning to Calapre the duplicate copies of the two deposit slips.
Teller No. 6 stamped the deposit slips with the words “DUPLICATE” and “SAVING TELLER 6
SOLIDBANK HEAD OFFICE.” Since the transaction took time and Calapre had to make another deposit
for L.C. Diaz with Allied Bank, he left the passbook with Solidbank. Calapre then went to Allied Bank.
When Calapre returned to Solidbank to retrieve the passbook, Teller No. 6 informed him that “somebody
got the passbook.”131[3] Calapre went back to L.C. Diaz and reported the incident to Macaraya.
Macaraya immediately prepared a deposit slip in duplicate copies with a check of P200,000. Macaraya,
together with Calapre, went to Solidbank and presented to Teller No. 6 the deposit slip and check. The
teller stamped the words “DUPLICATE” and “SAVING TELLER 6 SOLIDBANK HEAD OFFICE” on
the duplicate copy of the deposit slip. When Macaraya asked for the passbook, Teller No. 6 told Macaraya
that someone got the passbook but she could not remember to whom she gave the passbook. When
Macaraya asked Teller No. 6 if Calapre got the passbook, Teller No. 6 answered that someone shorter than
Calapre got the passbook. Calapre was then standing beside Macaraya.
Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for the deposit of a check for P90,000
drawn on Philippine Banking Corporation (“PBC”). This PBC check of L.C. Diaz was a check that it had
“long closed.”132[4] PBC subsequently dishonored the check because of insufficient funds and because the
signature in the check differed from PBC’s specimen signature. Failing to get back the passbook,
Macaraya went back to her office and reported the matter to the Personnel Manager of L.C. Diaz,
Emmanuel Alvarez.
The following day, 15 August 1991, L.C. Diaz through its Chief Executive Officer, Luis C. Diaz (“Diaz”),
called up Solidbank to stop any transaction using the same passbook until L.C. Diaz could open a new
account.133[5] On the same day, Diaz formally wrote Solidbank to make the same request. It was also on
the same day that L.C. Diaz learned of the unauthorized withdrawal the day before, 14 August 1991, of
P300,000 from its savings account. The withdrawal slip for the P300,000 bore the signatures of the
authorized signatories of L.C. Diaz, namely Diaz and Rustico L. Murillo. The signatories, however, denied
signing the withdrawal slip. A certain Noel Tamayo received the P300,000.
In an Information134[6] dated 5 September 1991, L.C. Diaz charged its messenger, Emerano Ilagan
(“Ilagan”) and one Roscon Verdazola with Estafa through Falsification of Commercial Document. The
Regional Trial Court of Manila dismissed the criminal case after the City Prosecutor filed a Motion to
Dismiss on 4 August 1992.
On 24 August 1992, L.C. Diaz through its counsel demanded from Solidbank the return of its money.
Solidbank refused.
On 25 August 1992, L.C. Diaz filed a Complaint135[7] for Recovery of a Sum of Money against Solidbank
with the Regional Trial Court of Manila, Branch 8. After trial, the trial court rendered on 28 December
1994 a decision absolving Solidbank and dismissing the complaint.
L.C. Diaz then appealed136[8] to the Court of Appeals. On 27 October 1998, the Court of Appeals issued its
Decision reversing the decision of the trial court.
On 11 May 1999, the Court of Appeals issued its Resolution denying the motion for reconsideration of
Solidbank. The appellate court, however, modified its decision by deleting the award of exemplary
damages and attorney’s fees.
                                                                                                               
 

 
 
 
 

 
The Ruling of the Trial Court
In absolving Solidbank, the trial court applied the rules on savings account written on the passbook. The
rules state that “possession of this book shall raise the presumption of ownership and any payment or
payments made by the bank upon the production of the said book and entry therein of the withdrawal shall
have the same effect as if made to the depositor personally.”137[9]
At the time of the withdrawal, a certain Noel Tamayo was not only in possession of the passbook, he also
presented a withdrawal slip with the signatures of the authorized signatories of L.C. Diaz. The specimen
signatures of these persons were in the signature cards. The teller stamped the withdrawal slip with the
words “Saving Teller No. 5.” The teller then passed on the withdrawal slip to Genere Manuel (“Manuel”)
for authentication. Manuel verified the signatures on the withdrawal slip. The withdrawal slip was then
given to another officer who compared the signatures on the withdrawal slip with the specimen on the
signature cards. The trial court concluded that Solidbank acted with care and observed the rules on savings
account when it allowed the withdrawal of P300,000 from the savings account of L.C. Diaz.
The trial court pointed out that the burden of proof now shifted to L.C. Diaz to prove that the signatures on
the withdrawal slip were forged. The trial court admonished L.C. Diaz for not offering in evidence the
National Bureau of Investigation (“NBI”) report on the authenticity of the signatures on the withdrawal slip
for P300,000. The trial court believed that L.C. Diaz did not offer this evidence because it is derogatory to
its action.
Another provision of the rules on savings account states that the depositor must keep the passbook “under
lock and key.”138[10] When another person presents the passbook for withdrawal prior to Solidbank’s
receipt of the notice of loss of the passbook, that person is considered as the owner of the passbook. The
trial court ruled that the passbook presented during the questioned transaction was “now out of the lock and
key and presumptively ready for a business transaction.”139[11]
Solidbank did not have any participation in the custody and care of the passbook. The trial court believed
that Solidbank’s act of allowing the withdrawal of P300,000 was not the direct and proximate cause of the
loss. The trial court held that L.C. Diaz’s negligence caused the unauthorized withdrawal. Three facts
establish L.C. Diaz’s negligence: (1) the possession of the passbook by a person other than the depositor
L.C. Diaz; (2) the presentation of a signed withdrawal receipt by an unauthorized person; and (3) the
possession by an unauthorized person of a PBC check “long closed” by L.C. Diaz, which check was
deposited on the day of the fraudulent withdrawal.
The trial court debunked L.C. Diaz’s contention that Solidbank did not follow the precautionary procedures
observed by the two parties whenever L.C. Diaz withdrew significant amounts from its account. L.C. Diaz
claimed that a letter must accompany withdrawals of more than P20,000. The letter must request
Solidbank to allow the withdrawal and convert the amount to a manager’s check. The bearer must also
have a letter authorizing him to withdraw the same amount. Another person driving a car must accompany
the bearer so that he would not walk from Solidbank to the office in making the withdrawal. The trial court
pointed out that L.C. Diaz disregarded these precautions in its past withdrawal. On 16 July 1991, L.C. Diaz
withdrew P82,554 without any separate letter of authorization or any communication with Solidbank that
the money be converted into a manager’s check.
The trial court further justified the dismissal of the complaint by holding that the case was a last ditch effort
of L.C. Diaz to recover P300,000 after the dismissal of the criminal case against Ilagan.
The dispositive portion of the decision of the trial court reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered DISMISSING the complaint.
The Court further renders judgment in favor of defendant bank pursuant to its counterclaim the amount of
Thirty Thousand Pesos (P30,000.00) as attorney’s fees.
With costs against plaintiff.

                                                                                                               
 
 

 
SO ORDERED.140[12]
The Ruling of the Court of Appeals
The Court of Appeals ruled that Solidbank’s negligence was the proximate cause of the unauthorized
withdrawal of P300,000 from the savings account of L.C. Diaz. The appellate court reached this
conclusion after applying the provision of the Civil Code on quasi-delict, to wit:
Article 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is
obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual
relation between the parties, is called a quasi-delict and is governed by the provisions of this chapter.
The appellate court held that the three elements of a quasi-delict are present in this case, namely: (a)
damages suffered by the plaintiff; (b) fault or negligence of the defendant, or some other person for whose
acts he must respond; and (c) the connection of cause and effect between the fault or negligence of the
defendant and the damage incurred by the plaintiff.
The Court of Appeals pointed out that the teller of Solidbank who received the withdrawal slip for
P300,000 allowed the withdrawal without making the necessary inquiry. The appellate court stated that the
teller, who was not presented by Solidbank during trial, should have called up the depositor because the
money to be withdrawn was a significant amount. Had the teller called up L.C. Diaz, Solidbank would
have known that the withdrawal was unauthorized. The teller did not even verify the identity of the
impostor who made the withdrawal. Thus, the appellate court found Solidbank liable for its negligence in
the selection and supervision of its employees.
The appellate court ruled that while L.C. Diaz was also negligent in entrusting its deposits to its messenger
and its messenger in leaving the passbook with the teller, Solidbank could not escape liability because of
the doctrine of “last clear chance.” Solidbank could have averted the injury suffered by L.C. Diaz had it
called up L.C. Diaz to verify the withdrawal.
The appellate court ruled that the degree of diligence required from Solidbank is more than that of a good
father of a family. The business and functions of banks are affected with public interest. Banks are
obligated to treat the accounts of their depositors with meticulous care, always having in mind the fiduciary
nature of their relationship with their clients. The Court of Appeals found Solidbank remiss in its duty,
violating its fiduciary relationship with L.C. Diaz.
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, premises considered, the decision appealed from is hereby REVERSED and a new one
entered.
1. Ordering defendant-appellee Consolidated Bank and Trust Corporation to pay plaintiff-
appellant the sum of Three Hundred Thousand Pesos (P300,000.00), with interest thereon
at the rate of 12% per annum from the date of filing of the complaint until paid, the sum
of P20,000.00 as exemplary damages, and P20,000.00 as attorney’s fees and expenses of
litigation as well as the cost of suit; and
2. Ordering the dismissal of defendant-appellee’s counterclaim in the amount of P30,000.00
as attorney’s fees.
SO ORDERED.141[13]
Acting on the motion for reconsideration of Solidbank, the appellate court affirmed its decision but
modified the award of damages. The appellate court deleted the award of exemplary damages and
attorney’s fees. Invoking Article 2231142[14] of the Civil Code, the appellate court ruled that exemplary
damages could be granted if the defendant acted with gross negligence. Since Solidbank was guilty of
simple negligence only, the award of exemplary damages was not justified. Consequently, the award of
attorney’s fees was also disallowed pursuant to Article 2208 of the Civil Code. The expenses of litigation
and cost of suit were also not imposed on Solidbank.
The dispositive portion of the Resolution reads as follows:

                                                                                                               
 
 

 
WHEREFORE, foregoing considered, our decision dated October 27, 1998 is affirmed with modification
by deleting the award of exemplary damages and attorney’s fees, expenses of litigation and cost of suit.
SO ORDERED.143[15]
Hence, this petition.
The Issues
Solidbank seeks the review of the decision and resolution of the Court of Appeals on these grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER BANK
SHOULD SUFFER THE LOSS BECAUSE ITS TELLER SHOULD HAVE FIRST
CALLED PRIVATE RESPONDENT BY TELEPHONE BEFORE IT ALLOWED THE
WITHDRAWAL OF P300,000.00 TO RESPONDENT’S MESSENGER EMERANO
ILAGAN, SINCE THERE IS NO AGREEMENT BETWEEN THE PARTIES IN THE
OPERATION OF THE SAVINGS ACCOUNT, NOR IS THERE ANY BANKING
LAW, WHICH MANDATES THAT A BANK TELLER SHOULD FIRST CALL UP
THE DEPOSITOR BEFORE ALLOWING A WITHDRAWAL OF A BIG AMOUNT
IN A SAVINGS ACCOUNT.
II. THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF LAST
CLEAR CHANCE AND IN HOLDING THAT PETITIONER BANK’S TELLER HAD
THE LAST OPPORTUNITY TO WITHHOLD THE WITHDRAWAL WHEN IT IS
UNDISPUTED THAT THE TWO SIGNATURES OF RESPONDENT ON THE
WITHDRAWAL SLIP ARE GENUINE AND PRIVATE RESPONDENT’S
PASSBOOK WAS DULY PRESENTED, AND CONTRARIWISE RESPONDENT
WAS NEGLIGENT IN THE SELECTION AND SUPERVISION OF ITS MESSENGER
EMERANO ILAGAN, AND IN THE SAFEKEEPING OF ITS CHECKS AND OTHER
FINANCIAL DOCUMENTS.
III. THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE INSTANT CASE
IS A LAST DITCH EFFORT OF PRIVATE RESPONDENT TO RECOVER ITS
P300,000.00 AFTER FAILING IN ITS EFFORTS TO RECOVER THE SAME FROM
ITS EMPLOYEE EMERANO ILAGAN.
IV. THE COURT OF APPEALS ERRED IN NOT MITIGATING THE DAMAGES
AWARDED AGAINST PETITIONER UNDER ARTICLE 2197 OF THE CIVIL
CODE, NOTWITHSTANDING ITS FINDING THAT PETITIONER BANK’S
NEGLIGENCE WAS ONLY CONTRIBUTORY.144[16]
The Ruling of the Court
The petition is partly meritorious.
Solidbank’s Fiduciary Duty under the Law
The rulings of the trial court and the Court of Appeals conflict on the application of the law. The trial court
pinned the liability on L.C. Diaz based on the provisions of the rules on savings account, a recognition of
the contractual relationship between Solidbank and L.C. Diaz, the latter being a depositor of the former.
On the other hand, the Court of Appeals applied the law on quasi-delict to determine who between the two
parties was ultimately negligent. The law on quasi-delict or culpa aquiliana is generally applicable when
there is no pre-existing contractual relationship between the parties.
We hold that Solidbank is liable for breach of contract due to negligence, or culpa contractual.
The contract between the bank and its depositor is governed by the provisions of the Civil Code on simple
loan.145[17] Article 1980 of the Civil Code expressly provides that “x x x savings x x x deposits of money
in banks and similar institutions shall be governed by the provisions concerning simple loan.” There is a
debtor-creditor relationship between the bank and its depositor. The bank is the debtor and the depositor is
the creditor. The depositor lends the bank money and the bank agrees to pay the depositor on demand. The

                                                                                                               
 
 

 
savings deposit agreement between the bank and the depositor is the contract that determines the rights and
obligations of the parties.
The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of Republic
Act No. 8791 (“RA 8791”),146[18] which took effect on 13 June 2000, declares that the State recognizes the
“fiduciary nature of banking that requires high standards of integrity and performance.”147[19] This new
provision in the general banking law, introduced in 2000, is a statutory affirmation of Supreme Court
decisions, starting with the 1990 case of Simex International v. Court of Appeals,148[20] holding that “the
bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind
the fiduciary nature of their relationship.”149[21]
This fiduciary relationship means that the bank’s obligation to observe “high standards of integrity and
performance” is deemed written into every deposit agreement between a bank and its depositor. The
fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father
of a family. Article 1172 of the Civil Code states that the degree of diligence required of an obligor is that
prescribed by law or contract, and absent such stipulation then the diligence of a good father of a
family.150[22] Section 2 of RA 8791 prescribes the statutory diligence required from banks – that banks
must observe “high standards of integrity and performance” in servicing their depositors. Although RA
8791 took effect almost nine years after the unauthorized withdrawal of the P300,000 from L.C. Diaz’s
savings account, jurisprudence151[23] at the time of the withdrawal already imposed on banks the same high
standard of diligence required under RA No. 8791.
However, the fiduciary nature of a bank-depositor relationship does not convert the contract between the
bank and its depositors from a simple loan to a trust agreement, whether express or implied. Failure by the
bank to pay the depositor is failure to pay a simple loan, and not a breach of trust.152[24] The law simply
imposes on the bank a higher standard of integrity and performance in complying with its obligations
under the contract of simple loan, beyond those required of non-bank debtors under a similar contract of
simple loan.
The fiduciary nature of banking does not convert a simple loan into a trust agreement because banks do not
accept deposits to enrich depositors but to earn money for themselves. The law allows banks to offer the
lowest possible interest rate to depositors while charging the highest possible interest rate on their own
borrowers. The interest spread or differential belongs to the bank and not to the depositors who are not
cestui que trust of banks. If depositors are cestui que trust of banks, then the interest spread or income
belongs to the depositors, a situation that Congress certainly did not intend in enacting Section 2 of RA
8791.
Solidbank’s Breach of its Contractual Obligation
Article 1172 of the Civil Code provides that “responsibility arising from negligence in the performance of
every kind of obligation is demandable.” For breach of the savings deposit agreement due to negligence, or
culpa contractual, the bank is liable to its depositor.
Calapre left the passbook with Solidbank because the “transaction took time” and he had to go to Allied
Bank for another transaction. The passbook was still in the hands of the employees of Solidbank for the
processing of the deposit when Calapre left Solidbank. Solidbank’s rules on savings account require that
                                                                                                               
 
 

 
 
 
 

 
the “deposit book should be carefully guarded by the depositor and kept under lock and key, if possible.”
When the passbook is in the possession of Solidbank’s tellers during withdrawals, the law imposes on
Solidbank and its tellers an even higher degree of diligence in safeguarding the passbook.
Likewise, Solidbank’s tellers must exercise a high degree of diligence in insuring that they return the
passbook only to the depositor or his authorized representative. The tellers know, or should know, that the
rules on savings account provide that any person in possession of the passbook is presumptively its owner.
If the tellers give the passbook to the wrong person, they would be clothing that person presumptive
ownership of the passbook, facilitating unauthorized withdrawals by that person. For failing to return the
passbook to Calapre, the authorized representative of L.C. Diaz, Solidbank and Teller No. 6 presumptively
failed to observe such high degree of diligence in safeguarding the passbook, and in insuring its return to
the party authorized to receive the same.
In culpa contractual, once the plaintiff proves a breach of contract, there is a presumption that the
defendant was at fault or negligent. The burden is on the defendant to prove that he was not at fault or
negligent. In contrast, in culpa aquiliana the plaintiff has the burden of proving that the defendant was
negligent. In the present case, L.C. Diaz has established that Solidbank breached its contractual obligation
to return the passbook only to the authorized representative of L.C. Diaz. There is thus a presumption that
Solidbank was at fault and its teller was negligent in not returning the passbook to Calapre. The burden
was on Solidbank to prove that there was no negligence on its part or its employees.
Solidbank failed to discharge its burden. Solidbank did not present to the trial court Teller No. 6, the teller
with whom Calapre left the passbook and who was supposed to return the passbook to him. The record
does not indicate that Teller No. 6 verified the identity of the person who retrieved the passbook.
Solidbank also failed to adduce in evidence its standard procedure in verifying the identity of the person
retrieving the passbook, if there is such a procedure, and that Teller No. 6 implemented this procedure in
the present case.
Solidbank is bound by the negligence of its employees under the principle of respondeat superior or
command responsibility. The defense of exercising the required diligence in the selection and supervision
of employees is not a complete defense in culpa contractual, unlike in culpa aquiliana.153[25]
The bank must not only exercise “high standards of integrity and performance,” it must also insure that its
employees do likewise because this is the only way to insure that the bank will comply with its fiduciary
duty. Solidbank failed to present the teller who had the duty to return to Calapre the passbook, and thus
failed to prove that this teller exercised the “high standards of integrity and performance” required of
Solidbank’s employees.
Proximate Cause of the Unauthorized Withdrawal
Another point of disagreement between the trial and appellate courts is the proximate cause of the
unauthorized withdrawal. The trial court believed that L.C. Diaz’s negligence in not securing its passbook
under lock and key was the proximate cause that allowed the impostor to withdraw the P300,000. For the
appellate court, the proximate cause was the teller’s negligence in processing the withdrawal without first
verifying with L.C. Diaz. We do not agree with either court.
Proximate cause is that cause which, in natural and continuous sequence, unbroken by any efficient
intervening cause, produces the injury and without which the result would not have occurred.154[26]
Proximate cause is determined by the facts of each case upon mixed considerations of logic, common
sense, policy and precedent.155[27]
L.C. Diaz was not at fault that the passbook landed in the hands of the impostor. Solidbank was in
possession of the passbook while it was processing the deposit. After completion of the transaction,
Solidbank had the contractual obligation to return the passbook only to Calapre, the authorized
representative of L.C. Diaz. Solidbank failed to fulfill its contractual obligation because it gave the
passbook to another person.

                                                                                                               
 
 

 
Solidbank’s failure to return the passbook to Calapre made possible the withdrawal of the P300,000 by the
impostor who took possession of the passbook. Under Solidbank’s rules on savings account, mere
possession of the passbook raises the presumption of ownership. It was the negligent act of Solidbank’s
Teller No. 6 that gave the impostor presumptive ownership of the passbook. Had the passbook not fallen
into the hands of the impostor, the loss of P300,000 would not have happened. Thus, the proximate cause
of the unauthorized withdrawal was Solidbank’s negligence in not returning the passbook to Calapre.
We do not subscribe to the appellate court’s theory that the proximate cause of the unauthorized withdrawal
was the teller’s failure to call up L.C. Diaz to verify the withdrawal. Solidbank did not have the duty to call
up L.C. Diaz to confirm the withdrawal. There is no arrangement between Solidbank and L.C. Diaz to this
effect. Even the agreement between Solidbank and L.C. Diaz pertaining to measures that the parties must
observe whenever withdrawals of large amounts are made does not direct Solidbank to call up L.C. Diaz.
There is no law mandating banks to call up their clients whenever their representatives withdraw significant
amounts from their accounts. L.C. Diaz therefore had the burden to prove that it is the usual practice of
Solidbank to call up its clients to verify a withdrawal of a large amount of money. L.C. Diaz failed to do
so.
Teller No. 5 who processed the withdrawal could not have been put on guard to verify the withdrawal.
Prior to the withdrawal of P300,000, the impostor deposited with Teller No. 6 the P90,000 PBC check,
which later bounced. The impostor apparently deposited a large amount of money to deflect suspicion
from the withdrawal of a much bigger amount of money. The appellate court thus erred when it imposed on
Solidbank the duty to call up L.C. Diaz to confirm the withdrawal when no law requires this from banks
and when the teller had no reason to be suspicious of the transaction.
Solidbank continues to foist the defense that Ilagan made the withdrawal. Solidbank claims that since
Ilagan was also a messenger of L.C. Diaz, he was familiar with its teller so that there was no more need for
the teller to verify the withdrawal. Solidbank relies on the following statements in the Booking and
Information Sheet of Emerano Ilagan:
xxx Ilagan also had with him (before the withdrawal) a forged check of PBC and indicated the amount of
P90,000 which he deposited in favor of L.C. Diaz and Company. After successfully withdrawing this large
sum of money, accused Ilagan gave alias Rey (Noel Tamayo) his share of the loot. Ilagan then hired a
taxicab in the amount of P1,000 to transport him (Ilagan) to his home province at Bauan, Batangas. Ilagan
extravagantly and lavishly spent his money but a big part of his loot was wasted in cockfight and horse
racing. Ilagan was apprehended and meekly admitted his guilt.156[28] (Emphasis supplied.)
L.C. Diaz refutes Solidbank’s contention by pointing out that the person who withdrew the P300,000 was a
certain Noel Tamayo. Both the trial and appellate courts stated that this Noel Tamayo presented the
passbook with the withdrawal slip.
We uphold the finding of the trial and appellate courts that a certain Noel Tamayo withdrew the P300,000.
The Court is not a trier of facts. We find no justifiable reason to reverse the factual finding of the trial court
and the Court of Appeals. The tellers who processed the deposit of the P90,000 check and the withdrawal
of the P300,000 were not presented during trial to substantiate Solidbank’s claim that Ilagan deposited the
check and made the questioned withdrawal. Moreover, the entry quoted by Solidbank does not
categorically state that Ilagan presented the withdrawal slip and the passbook.
Doctrine of Last Clear Chance
The doctrine of last clear chance states that where both parties are negligent but the negligent act of one is
appreciably later than that of the other, or where it is impossible to determine whose fault or negligence
caused the loss, the one who had the last clear opportunity to avoid the loss but failed to do so, is
chargeable with the loss.157[29] Stated differently, the antecedent negligence of the plaintiff does not
preclude him from recovering damages caused by the supervening negligence of the defendant, who had
the last fair chance to prevent the impending harm by the exercise of due diligence.158[30]

                                                                                                               
 
 

 
We do not apply the doctrine of last clear chance to the present case. Solidbank is liable for breach of
contract due to negligence in the performance of its contractual obligation to L.C. Diaz. This is a case of
culpa contractual, where neither the contributory negligence of the plaintiff nor his last clear chance to
avoid the loss, would exonerate the defendant from liability.159[31] Such contributory negligence or last
clear chance by the plaintiff merely serves to reduce the recovery of damages by the plaintiff but does not
exculpate the defendant from his breach of contract.160[32]
Mitigated Damages
Under Article 1172, “liability (for culpa contractual) may be regulated by the courts, according to the
circumstances.” This means that if the defendant exercised the proper diligence in the selection and
supervision of its employee, or if the plaintiff was guilty of contributory negligence, then the courts may
reduce the award of damages. In this case, L.C. Diaz was guilty of contributory negligence in allowing a
withdrawal slip signed by its authorized signatories to fall into the hands of an impostor. Thus, the liability
of Solidbank should be reduced.
In Philippine Bank of Commerce v. Court of Appeals,161[33] where the Court held the depositor guilty of
contributory negligence, we allocated the damages between the depositor and the bank on a 40-60 ratio.
Applying the same ruling to this case, we hold that L.C. Diaz must shoulder 40% of the actual damages
awarded by the appellate court. Solidbank must pay the other 60% of the actual damages.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED with MODIFICATION. Petitioner
Solidbank Corporation shall pay private respondent L.C. Diaz and Company, CPA’s only 60% of the actual
damages awarded by the Court of Appeals. The remaining 40% of the actual damages shall be borne by
private respondent L.C. Diaz and Company, CPA’s. Proportionate costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Vitug, and Ynares-Santiago, JJ., concur.
Azcuna, J., on official leave.

d. BPI Family Bank vs. Franco G.R. No. 123498, November 23, 2007.

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)  Decision162[1]  in  CA-­‐G.R.  CV  No.  43424  which  affirmed  with  modification  the  judgment163[2]  
of  the  Regional  Trial  Court,  Branch  55,  Manila  (Manila  RTC),  in  Civil  Case  No.  90-­‐53295.  
   
  This   case   has   its   genesis   in   an   ostensible   fraud   perpetrated   on   the   petitioner   BPI   Family  
Bank   (BPI-­‐FB)   allegedly   by   respondent   Amado   Franco   (Franco)   in   conspiracy   with   other  
individuals,164[3]   some   of   whom   opened   and   maintained   separate   accounts   with   BPI-­‐FB,   San  
Francisco  del  Monte  (SFDM)  branch,  in  a  series  of  transactions.  
   
                                                                                                               
 

 
 
 
 

 
   On  August  15,  1989,  Tevesteco  Arrastre-­‐Stevedoring  Co.,  Inc.  (Tevesteco)  opened  a  savings  
and   current   account   with   BPI-­‐FB.   Soon   thereafter,   or   on   August   25,   1989,   First   Metro   Investment  
Corporation   (FMIC)   also   opened   a   time   deposit   account   with   the   same   branch   of   BPI-­‐FB   with   a  
deposit  of  P100,000,000.00,  to  mature  one  year  thence.  
   
  Subsequently,  on  August  31,  1989,  Franco  opened  three  accounts,  namely,  a  current,165[4]  
savings,166[5]   and   time   deposit,167[6]   with   BPI-­‐FB.     The   current   and   savings   accounts   were  
respectively  funded  with  an  initial  deposit  of  P500,000.00  each,  while  the  time  deposit  account  had  
P1,000,000.00  with  a  maturity  date  of  August  31,  1990.  The  total  amount  of  P2,000,000.00  used  to  
open  these  accounts  is  traceable  to  a  check  issued  by  Tevesteco  allegedly  in  consideration  of  Franco’s  
introduction   of   Eladio   Teves,168[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  P2,000,000.00  check  was  part  of  the  P80,000,000.00  debited  by  BPI-­‐FB  from  FMIC’s  
time  deposit  account  and  credited  to  Tevesteco’s  current  account  pursuant  to  an  Authority  to  Debit  
purportedly  signed  by  FMIC’s  officers.  
   
  It   appears,   however,   that   the   signatures   of   FMIC’s   officers   on   the   Authority   to   Debit   were  
forged.169[8]  On  September  4,  1989,  Antonio  Ong,170[9]  upon  being  shown  the  Authority  to  Debit,  
personally   declared   his   signature   therein   to   be   a   forgery.   Unfortunately,   Tevesteco   had   already  
effected   several   withdrawals   from   its   current   account   (to   which   had   been   credited   the  
P80,000,000.00   covered   by   the   forged   Authority   to   Debit)   amounting   to   P37,455,410.54,   including  
the  P2,000,000.00  paid  to  Franco.  
   
On  September  8,  1989,  impelled  by  the  need  to  protect  its  interests  in  light  of  FMIC’s  forgery  
claim,   BPI-­‐FB,   thru   its   Senior   Vice-­‐President,   Severino   Coronacion,   instructed   Jesus  
Arangorin171[10]   to   debit   Franco’s   savings   and   current   accounts   for   the   amounts   remaining  
therein.172[11]   However,   Franco’s   time   deposit   account   could   not   be   debited   due   to   the   capacity  
limitations  of  BPI-­‐FB’s  computer.173[12]  
   
  In   the   meantime,   two   checks174[13]   drawn   by   Franco   against   his   BPI-­‐FB   current   account  
were   dishonored   upon   presentment   for   payment,   and   stamped   with   a   notation   “account   under  
garnishment.”   Apparently,   Franco’s   current   account   was   garnished   by   virtue   of   an   Order   of  

                                                                                                               
 
 

 
 
 

 
 
 
 

 
Attachment   issued   by   the   Regional   Trial   Court   of   Makati   (Makati   RTC)   in   Civil   Case   No.   89-­‐4996  
(Makati   Case),   which   had   been   filed   by   BPI-­‐FB   against   Franco   et   al.,175[14]   to   recover   the  
P37,455,410.54  representing  Tevesteco’s  total  withdrawals  from  its  account.  
   
Notably,   the   dishonored   checks   were   issued   by   Franco   and   presented   for   payment   at   BPI-­‐FB  
prior  to  Franco’s  receipt  of  notice  that  his  accounts  were  under  garnishment.176[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.177[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  P400,000.00  from  his  savings  account  was  temporarily  transferred  
to  Domingo  Quiaoit’s  savings  account,  subject  to  its  immediate  return  upon  issuance  of  a  certificate  of  
deposit  which  Quiaoit  needed  in  connection  with  his  visa  application  at  the  Taiwan  Embassy.  As  part  
of  the  arrangement,  Sebastian  retained  custody  of  Quiaoit’s  savings  account  passbook  to  ensure  that  
no  withdrawal  would  be  effected  therefrom,  and  to  preserve  Franco’s  deposits.  
   
  On   May   17,   1990,   Franco   pre-­‐terminated   his   time   deposit   account.   BPI-­‐FB   deducted   the  
amount  of  P63,189.00   from   the   remaining   balance   of   the   time   deposit   account   representing   advance  
interest  paid  to  him.    
   
  These  transactions  spawned  a  number  of  cases,  some  of  which  we  had  already  resolved.    
   
  FMIC   filed   a   complaint   against   BPI-­‐FB   for   the   recovery   of   the   amount   of   P80,000,000.00  
debited  from  its  account.178[17]  The  case  eventually  reached  this  Court,  and  in  BPI  Family  Savings  
Bank,   Inc.   v.   First   Metro   Investment   Corporation,179[18]   we   upheld   the   finding   of   the   courts   below  
that  BPI-­‐FB  failed  to  exercise  the  degree  of  diligence  required  by  the  nature  of  its  obligation  to  treat  
the  accounts  of  its  depositors  with  meticulous  care.    Thus,  BPI-­‐FB  was  found  liable  to  FMIC  for  the  
debited  amount  in  its  time  deposit.    It  was  ordered  to  pay  P65,332,321.99  plus  interest  at  17%  per  
annum  from  August  29,  1989  until  fully  restored.    In  turn,  the  17%  shall  itself  earn  interest  at  12%  
from  October  4,  1989  until  fully  paid.      
   

                                                                                                               

 
 
 
 

 
 In   a   related   case,   Edgardo   Buenaventura,   Myrna   Lizardo   and  Yolanda  Tica   (Buenaventura,   et  
al.),180[19]   recipients   of   a   P500,000.00   check   proceeding   from   the   P80,000,000.00   mistakenly  
credited   to   Tevesteco,   likewise   filed   suit.   Buenaventura   et   al.,   as   in   the   case   of   Franco,   were   also  
prevented   from   effecting   withdrawals181[20]   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,182[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.183[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.184[23]  
However,   the   civil   case185[24]   remains   under   litigation   and   the   respective   rights   and   liabilities   of  
the  parties  have  yet  to  be  adjudicated.  
   
  Consequently,   in   light   of   BPI-­‐FB’s   refusal   to   heed   Franco’s   demands   to   unfreeze   his   accounts  
and   release   his   deposits   therein,   the   latter   filed   on   June   4,   1990   with   the   Manila   RTC   the   subject   suit.  
In   his   complaint,   Franco   prayed   for   the   following   reliefs:   (1)   the   interest   on   the   remaining  
balance186[25]   of   his   current   account   which   was   eventually   released   to   him   on   October   31,   1991;  
(2)  the  balance187[26]  on  his  savings  account,  plus  interest  thereon;  (3)  the  advance  interest188[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   P2,000,000.00   for   the  
introduction  facilitated  by  Franco  between  George  Daantos  and  Eladio  Teves,  on  the  one  hand,  and  
Jaime  Sebastian,  on  the  other,  spoke  volumes  of  Franco’s  participation  in  the  fraudulent  transaction.  
   
  On   August   4,   1993,   the   Manila   RTC   rendered   judgment,   the   dispositive   portion   of   which  
reads  as  follows:  
   

                                                                                                               
 

 
 
 

 
 
 
 

 
   WHEREFORE,  in  view  of  all  the  foregoing,  judgment  is  hereby  rendered  in  
favor  of  [Franco]  and  against  [BPI-­‐FB],  ordering  the  latter  to  pay  to  the  former  the  
following  sums:  
   
1.   P76,500.00   representing   the   legal   rate   of   interest   on   the   amount   of  
P450,000.00  from  May  18,  1990  to  October  31,  1991;  
   
2.   P498,973.23   representing   the   balance   on   [Franco’s]   savings   account   as   of  
May   18,   1990,   together   with   the   interest   thereon   in   accordance   with   the   bank’s  
guidelines  on  the  payment  therefor;  
   
3.   P30,000.00  by  way  of  attorney’s  fees;  and  
   
4.   P10,000.00  as  nominal  damages.  
   
  The  counterclaim  of  the  defendant  is  DISMISSED  for  lack  of  factual  and  legal  
anchor.  
   
  Costs  against  [BPI-­‐FB].  
   
SO  ORDERED.189[28]  
   
   
  Unsatisfied   with   the   decision,   both   parties   filed   their   respective   appeals   before   the   CA.  
Franco  confined  his  appeal  to  the  Manila  RTC’s  denial  of  his  claim  for  moral  and  exemplary  damages,  
and   the   diminutive   award   of   attorney’s   fees.   In   affirming   with   modification   the   lower   court’s  
decision,  the  appellate  court  decreed,  to  wit:  
   
  WHEREFORE,   foregoing   considered,   the   appealed   decision   is   hereby  
AFFIRMED   with   modification   ordering   [BPI-­‐FB]   to   pay   [Franco]   P63,189.00  
representing   the   interest   deducted   from   the   time   deposit   of   plaintiff-­‐appellant.  
P200,000.00   as   moral   damages   and   P100,000.00   as   exemplary   damages,   deleting  
the   award   of   nominal   damages   (in   view   of   the   award   of   moral   and   exemplary  
damages)   and   increasing   the   award   of   attorney’s   fees   from   P30,000.00   to  
P75,000.00.  
   
  Cost  against  [BPI-­‐FB].  
   
  SO  ORDERED.190[29]  
   
   
  In  this  recourse,  BPI-­‐FB  ascribes  error  to  the  CA  when  it  ruled  that:  (1)  Franco  had  a  better  
right  to  the  deposits  in  the  subject  accounts  which  are  part  of  the  proceeds  of  a  forged  Authority  to  
Debit;   (2)   Franco   is   entitled   to   interest   on   his   current   account;   (3)   Franco   can   recover   the  
P400,000.00  deposit  in  Quiaoit’s  savings  account;  (4)  the  dishonor  of  Franco’s  checks  was  not  legally  
in   order;   (5)   BPI-­‐FB   is   liable   for   interest   on   Franco’s   time   deposit,   and   for   moral   and   exemplary  
damages;  and  (6)  BPI-­‐FB’s  counter-­‐claim  has  no  factual  and  legal  anchor.  
   
  The  petition  is  partly  meritorious.  
                                                                                                               
 

 
    
  We   are   in   full   accord   with   the   common   ruling   of   the   lower   courts   that   BPI-­‐FB   cannot  
unilaterally   freeze   Franco’s   accounts   and   preclude   him   from   withdrawing   his   deposits.     However,  
contrary  to  the  appellate  court’s  ruling,  we  hold  that  Franco  is  not  entitled  to  unearned  interest  on  
the  time  deposit  as  well  as  to  moral  and  exemplary  damages.  
   
  First.   On   the   issue   of   who   has   a   better   right   to   the   deposits   in   Franco’s   accounts,   BPI-­‐FB  
urges  us  that  the  legal  consequence  of  FMIC’s  forgery  claim  is  that  the  money  transferred  by  BPI-­‐FB  
to  Tevesteco  is  its  own,  and  considering  that  it  was  able  to  recover  possession  of  the  same  when  the  
money   was   redeposited   by   Franco,   it   had   the   right   to   set   up   its   ownership   thereon   and   freeze  
Franco’s  accounts.  
   
  BPI-­‐FB   contends   that   its   position   is   not   unlike   that   of   an   owner   of   personal   property   who  
regains  possession  after  it  is  stolen,  and  to  illustrate  this  point,  BPI-­‐FB  gives  the  following  example:  
where  X’s  television  set  is  stolen  by  Y  who  thereafter  sells  it  to  Z,  and  where  Z  unwittingly  entrusts  
possession  of  the  TV  set  to  X,  the  latter  would  have  the  right  to  keep  possession  of  the  property  and  
preclude  Z  from  recovering  possession  thereof.  To  bolster  its  position,  BPI-­‐FB  cites  Article  559  of  the  
Civil  Code,  which  provides:  
   
  Article   559.   The   possession   of   movable   property   acquired   in   good   faith   is  
equivalent   to   a   title.   Nevertheless,   one   who   has   lost   any   movable   or   has   been  
unlawfully   deprived   thereof,   may   recover   it   from   the   person   in   possession   of   the  
same.  
   
  If   the   possessor   of   a   movable   lost   or   of   which   the   owner   has   been  
unlawfully  deprived,  has  acquired  it  in  good  faith  at  a  public  sale,  the  owner  cannot  
obtain  its  return  without  reimbursing  the  price  paid  therefor.  
   
   
  BPI-­‐FB’s   argument   is   unsound.     To   begin   with,   the   movable   property   mentioned   in   Article  
559   of   the   Civil   Code   pertains   to   a   specific   or   determinate   thing.191[30]   A   determinate   or   specific  
thing   is   one   that   is   individualized   and   can   be   identified   or   distinguished   from   others   of   the   same  
kind.192[31]    
   
In  this  case,  the  deposit  in  Franco’s  accounts  consists  of  money  which,  albeit  characterized  as  
a  movable,  is  generic  and  fungible.193[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.194[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,195[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.196[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.197[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.198[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   Appeals199[38]  
continues  to  resonate,  thus:  
   
  The   banking   system   is   an   indispensable   institution   in   the   modern   world  
and   plays   a   vital   role   in   the   economic   life   of   every   civilized   nation.   Whether   as   mere  
passive   entities   for   the   safekeeping   and   saving   of   money   or   as   active   instruments   of  
business   and   commerce,   banks   have   become   an   ubiquitous   presence   among   the  
people,  who  have  come  to  regard  them  with  respect  and  even  gratitude  and,  most  of  
all,  confidence.  Thus,  even  the  humble  wage-­‐earner  has  not  hesitated  to  entrust  his  
life’s  savings  to  the  bank  of  his  choice,  knowing  that  they  will  be  safe  in  its  custody  
and   will   even   earn   some   interest   for   him.   The   ordinary   person,   with   equal   faith,  
usually   maintains   a   modest   checking   account   for   security   and   convenience   in   the  
settling  of  his  monthly  bills  and  the  payment  of  ordinary  expenses.  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   P80,000,000.00   from   FMIC’s   to  
Tevesteco’s   account,   when   FMIC’s   account   was   a   time   deposit   and   it   had   already   paid   advance  
interest   to   FMIC.   Considering   that   there   is   as   yet   no   indubitable   evidence   establishing   Franco’s  
participation   in   the   forgery,   he   remains   an   innocent   party.   As   between   him   and   BPI-­‐FB,   the   latter,  
which  made  possible  the  present  predicament,  must  bear  the  resulting  loss  or  inconvenience.  
   
Second.   With   respect   to   its   liability   for   interest   on   Franco’s   current   account,   BPI-­‐FB   argues  
that   its   non-­‐compliance   with   the   Makati   RTC’s   Order   Lifting   the   Order   of   Attachment   and   the   legal  
consequences  thereof,  is  a  matter  that  ought  to  be  taken  up  in  that  court.    
   
The   argument   is   tenuous.   We   agree   with   the   succinct   holding   of   the   appellate   court   in   this  
respect.   The   Manila   RTC’s   order   to   pay   interests   on   Franco’s   current   account   arose   from   BPI-­‐FB’s  
unjustified   refusal   to   comply   with   its   obligation   to   pay   Franco   pursuant   to   their   contract   of   mutuum.  
In  other  words,  from  the  time  BPI-­‐FB  refused  Franco’s  demand  for  the  release  of  the  deposits  in  his  
current   account,   specifically,   from   May   17,   1990,   interest   at   the   rate   of   12%   began   to   accrue  
thereon.200[39]  
   
Undeniably,  the  Makati  RTC  is  vested  with  the  authority  to  determine  the  legal  consequences  
of   BPI-­‐FB’s   non-­‐compliance   with   the   Order   Lifting   the   Order   of   Attachment.   However,   such   authority  
does  not  preclude  the  Manila  RTC  from  ruling  on  BPI-­‐FB’s  liability  to  Franco  for  payment  of  interest  
based   on   its   continued   and   unjustified   refusal   to   perform   a   contractual   obligation   upon   demand.    
After  all,  this  was  the  core  issue  raised  by  Franco  in  his  complaint  before  the  Manila  RTC.  
   
Third.   As   to   the   award   to   Franco   of   the   deposits   in   Quiaoit’s   account,   we   find   no   reason   to  
depart  from  the  factual  findings  of  both  the  Manila  RTC  and  the  CA.  
   

                                                                                                               

 
 Noteworthy   is   the   fact   that   Quiaoit   himself   testified   that   the   deposits   in   his   account   are  
actually   owned   by   Franco   who   simply   accommodated   Jaime   Sebastian’s   request   to   temporarily  
transfer   P400,000.00   from   Franco’s   savings   account   to   Quiaoit’s   account.201[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.202[41]    
   
BPI-­‐FB  makes  capital  of  Franco’s  belated  allegation  relative  to  this  particular  arrangement.    
It  insists  that  the  transaction  with  Quiaoit  was  not  specifically  alleged  in  Franco’s  complaint  before  
the   Manila   RTC.   However,   it   appears   that   BPI-­‐FB   had   impliedly   consented   to   the   trial   of   this   issue  
given  its  extensive  cross-­‐examination  of  Quiaoit.    
   
Section  5,  Rule  10  of  the  Rules  of  Court  provides:  
   
  Section  5.   Amendment   to   conform   to   or   authorize   presentation   of  
evidence.—  When  issues  not  raised  by  the  pleadings  are  tried  with  the  express  
or  implied  consent  of  the  parties,  they  shall  be  treated  in  all  respects  as  if  they  
had   been   raised   in   the   pleadings.   Such   amendment   of   the   pleadings   as   may   be  
necessary  to  cause  them  to  conform  to  the  evidence  and  to  raise  these  issues  
may  be  made  upon  motion  of  any  party  at  any  time,  even  after  judgment;  but  
failure   to   amend   does   not   affect   the   result   of   the   trial   of   these   issues.   If  
evidence   is   objected   to   at   the   trial   on   the   ground   that   it   is   now   within   the   issues  
made  by  the  pleadings,  the  court  may  allow  the  pleadings  to  be  amended  and  shall  
do  so  with  liberality  if  the  presentation  of  the  merits  of  the  action  and  the  ends  of  
substantial  justice  will  be  subserved  thereby.  The  court  may  grant  a  continuance  to  
enable  the  amendment  to  be  made.  (Emphasis  supplied)  
   
   
  In   all,   BPI-­‐FB’s   argument   that   this   case   is   not   the   right   forum   for   Franco   to   recover   the  
P400,000.00  begs  the  issue.  To  reiterate,  Quiaoit,  testifying  during  the  trial,  unequivocally  disclaimed  
ownership   of   the   funds   in   his   account,   and   pointed   to   Franco   as   the   actual   owner   thereof.   Clearly,  
Franco’s   action   for   the   recovery   of   his   deposits   appropriately   covers   the   deposits   in   Quiaoit’s  
account.  
   
  Fourth.   Notwithstanding   all   the   foregoing,   BPI-­‐FB   continues   to   insist   that   the   dishonor   of  
Franco’s   checks   respectively   dated   September   11   and   18,   1989   was   legally   in   order   in   view   of   the  
Makati   RTC’s   supplemental   writ   of   attachment   issued   on   September   14,   1989.   It   posits   that   as   the  
party  that  applied  for  the  writ  of  attachment  before  the  Makati  RTC,  it  need  not  be  served  with  the  
Notice  of  Garnishment  before  it  could  place  Franco’s  accounts  under  garnishment.  
   
  The   argument   is   specious.     In   this   argument,   we   perceive   BPI-­‐FB’s   clever   but   transparent  
ploy   to   circumvent   Section   4,203[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.204[43]    
Effectively,  therefore,  the  Makati  RTC  had  no  authority  yet  to  bind  the  deposits  of  Franco  through  the  
writ   of   attachment,   and   consequently,   there   was   no   legal   basis   for   BPI-­‐FB   to   dishonor   the   checks  
issued  by  Franco.    
   
  Fifth.  Anent  the  CA’s  finding  that  BPI-­‐FB  was  in  bad  faith  and  as  such  liable  for  the  advance  
interest  it  deducted  from  Franco’s  time  deposit  account,  and  for  moral  as  well  as  exemplary  damages,  
we   find   it   proper   to   reinstate   the   ruling   of   the   trial   court,   and   allow   only   the   recovery   of   nominal  
damages   in   the   amount   of   P10,000.00.   However,   we   retain   the   CA’s   award   of   P75,000.00   as  
attorney’s  fees.  
   
  In   granting   Franco’s   prayer   for   interest   on   his   time   deposit   account   and   for   moral   and  
exemplary  damages,  the  CA  attributed  bad  faith  to  BPI-­‐FB  because  it  (1)  completely  disregarded  its  
obligation   to   Franco;   (2)   misleadingly   claimed   that   Franco’s   deposits   were   under   garnishment;   (3)  
misrepresented   that   Franco’s   current   account   was   not   on   file;   and   (4)   refused   to   return   the  
P400,000.00   despite   the   fact   that   the   ostensible   owner,   Quiaoit,   wanted   the   amount   returned   to  
Franco.  
   
  In  this  regard,  we  are  guided  by  Article  2201  of  the  Civil  Code  which  provides:  
   
  Article  2201.   In   contracts   and   quasi-­‐contracts,   the   damages   for   which  
the  obligor  who  acted  in  good  faith  is  liable  shall  be  those  that  are  the  natural  and  
probable  consequences  of  the  breach  of  the  obligation,  and  which  the  parties  have  
foreseen   or   could   have   reasonable   foreseen   at   the   time   the   obligation   was  
constituted.  
   
  In  case  of  fraud,  bad  faith,  malice  or  wanton  attitude,  the  obligor  shall  
be   responsible   for   all   damages   which   may   be   reasonably   attributed   to   the  
non-­performance  of  the  obligation.  (Emphasis  supplied.)  
   
   
  We  find,  as  the  trial  court  did,  that  BPI-­‐FB  acted  out  of  the  impetus  of  self-­‐protection  and  not  
out   of   malevolence   or   ill   will.     BPI-­‐FB   was   not   in   the   corrupt   state   of   mind   contemplated   in   Article  
2201   and   should   not   be   held   liable   for   all   damages   now   being   imputed   to   it   for   its   breach   of  
obligation.  For  the  same  reason,  it  is  not  liable  for  the  unearned  interest  on  the  time  deposit.  
   
  Bad   faith   does   not   simply   connote   bad   judgment   or   negligence;   it   imports   a   dishonest  
purpose   or   some   moral   obliquity   and   conscious   doing   of   wrong;   it   partakes   of   the   nature   of  
fraud.205[44]  We  have  held  that  it  is  a  breach  of  a  known  duty  through  some  motive  of  interest  or  ill  

                                                                                                               
 

 
will.206[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,207[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,208[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.209[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.210[49]  
   
  Franco   could   not   point   to,   or   identify   any   particular   circumstance   in   Article   2219   of   the   Civil  
Code,211[50]  upon  which  to  base  his  claim  for  moral  damages.      
   
  Thus,   not   having   acted   in   bad   faith,   BPI-­‐FB   cannot   be   held   liable   for   moral   damages   under  
Article  2220  of  the  Civil  Code  for  breach  of  contract.212[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.213[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,214[53]  we,  however,  
find  that  Franco  is  entitled  to  reasonable  attorney’s  fees  for  having  been  compelled  to  go  to  court  in  
order  to  assert  his  right.    Thus,  we  affirm  the  CA’s  grant  of  P75,000.00  as  attorney’s  fees.  
   

                                                                                                               
 

 
 
 

 
 
 
 

 
   Attorney’s  fees  may  be  awarded  when  a  party  is  compelled  to  litigate  or  incur  expenses  to  
protect   his   interest,215[54]   or   when   the   court   deems   it   just   and   equitable.216[55]   In   the   case   at  
bench,  BPI-­‐FB  refused  to  unfreeze  the  deposits  of  Franco  despite  the  Makati  RTC’s  Order  Lifting  the  
Order  of  Attachment  and  Quiaoit’s  unwavering  assertion  that  the  P400,000.00  was  part  of  Franco’s  
savings   account.   This   refusal   constrained   Franco   to   incur   expenses   and   litigate   for   almost   two   (2)  
decades   in   order   to   protect   his   interests   and   recover   his   deposits.   Therefore,   this   Court   deems   it   just  
and  equitable  to  grant  Franco  P75,000.00  as  attorney’s  fees.  The  award  is  reasonable  in  view  of  the  
complexity  of  the  issues  and  the  time  it  has  taken  for  this  case  to  be  resolved.217[56]  
   
  Sixth.  As  for  the  dismissal  of  BPI-­‐FB’s  counter-­‐claim,  we  uphold  the  Manila  RTC’s  ruling,  as  
affirmed  by  the  CA,  that  BPI-­‐FB  is  not  entitled  to  recover  P3,800,000.00  as  actual  damages.  BPI-­‐FB’s  
alleged   loss   of   profit   as   a   result   of   Franco’s   suit   is,   as   already   pointed   out,   of   its   own   making.    
Accordingly,  the  denial  of  its  counter-­‐claim  is  in  order.    
   
  WHEREFORE,   the   petition   is   PARTIALLY   GRANTED.   The   Court   of   Appeals   Decision   dated  
November  29,  1995  is  AFFIRMED  with  the  MODIFICATION  that  the  award  of  unearned  interest  on  
the  time  deposit  and  of  moral  and  exemplary  damages  is  DELETED.  
   
  No  pronouncement  as  to  costs.  

e. Bank of the Philippine Islands vs. Casa Montessori Internationale,

G.R. No. 149454, May 28, 2004.

PANGANIBAN, J.:
By the nature of its functions, a bank is required to take meticulous care of the deposits of its clients, who
have the right to expect high standards of integrity and performance from it. Among its obligations in
furtherance thereof is knowing the signatures of its clients. Depositors are not estopped from questioning
wrongful withdrawals, even if they have failed to question those errors in the statements sent by the bank to
them for verification.
The Case
Before us are two Petitions for Review218[1] under Rule 45 of the Rules of Court, assailing the March 23,
2001 Decision219[2] and the August 17, 2001 Resolution220[3] of the Court of Appeals (CA) in CA-GR CV
No. 63561. The decretal portion of the assailed Decision reads as follows:
“WHEREFORE, upon the premises, the decision appealed from is AFFIRMED with the modification that
defendant bank [Bank of the Philippine Islands (BPI)] is held liable only for one-half of the value of the
forged checks in the amount of P547,115.00 after deductions subject to REIMBURSEMENT from third

                                                                                                               
 

 
 
 
 

 
party defendant Yabut who is likewise ORDERED to pay the other half to plaintiff corporation [Casa
Montessori Internationale (CASA)].”221[4]
The assailed Resolution denied all the parties’ Motions for Reconsideration.
The Facts
The facts of the case are narrated by the CA as follows:
“On November 8, 1982, plaintiff CASA Montessori International222[5] opened Current Account No. 0291-
0081-01 with defendant BPI[,] with CASA’s President Ms. Ma. Carina C. Lebron as one of its authorized
signatories.
“In 1991, after conducting an investigation, plaintiff discovered that nine (9) of its checks had been
encashed by a certain Sonny D. Santos since 1990 in the total amount of P782,000.00, on the following
dates and amounts:
‘Check No. Date Amount
1. 839700 April 24, 1990 P 43,400.00
2. 839459 Nov. 2, 1990 110,500.00
3. 839609 Oct. 17, 1990 47,723.00
4. 839549 April 7, 1990 90,700.00
5. 839569 Sept. 23, 1990 52,277.00
6. 729149 Mar. 22, 1990 148,000.00
7. 729129 Mar. 16, 1990 51,015.00
8. 839684 Dec. 1, 1990 140,000.00
9. 729034 Mar. 2, 1990 98,985.00
Total -- P 782,600.00223[6]
“It turned out that ‘Sonny D. Santos’ with account at BPI’s Greenbelt Branch [was] a fictitious name used
by third party defendant Leonardo T. Yabut who worked as external auditor of CASA. Third party
defendant voluntarily admitted that he forged the signature of Ms. Lebron and encashed the checks.
“The PNP Crime Laboratory conducted an examination of the nine (9) checks and concluded that the
handwritings thereon compared to the standard signature of Ms. Lebron were not written by the latter.
“On March 4, 1991, plaintiff filed the herein Complaint for Collection with Damages against defendant
bank praying that the latter be ordered to reinstate the amount of P782,500.00224[7] in the current and
savings accounts of the plaintiff with interest at 6% per annum.
“On February 16, 1999, the RTC rendered the appealed decision in favor of the plaintiff.”225[8]
Ruling of the Court of Appeals
Modifying the Decision of the Regional Trial Court (RTC), the CA apportioned the loss between BPI and
CASA. The appellate court took into account CASA’s contributory negligence that resulted in the
undetected forgery. It then ordered Leonardo T. Yabut to reimburse BPI half the total amount claimed; and
CASA, the other half. It also disallowed attorney’s fees and moral and exemplary damages.
Hence, these Petitions.226[9]
Issues
In GR No. 149454, Petitioner BPI submits the following issues for our consideration:

                                                                                                               
 

 
 
 
 

 
“I. The Honorable Court of Appeals erred in deciding this case NOT in accord with the applicable
decisions of this Honorable Court to the effect that forgery cannot be presumed; that it must be proved by
clear, positive and convincing evidence; and that the burden of proof lies on the party alleging the forgery.
“II. The Honorable Court of Appeals erred in deciding this case not in accord with applicable laws, in
particular the Negotiable Instruments Law (NIL) which precludes CASA, on account of its own negligence,
from asserting its forgery claim against BPI, specially taking into account the absence of any negligence on
the part of BPI.”227[10]
In GR No. 149507, Petitioner CASA submits the following issues:
“1. The Honorable Court of Appeals erred when it ruled that ‘there is no showing that [BPI], although
negligent, acted in bad faith x x x’ thus denying the prayer for the award of attorney’s fees, moral damages
and exemplary damages to [CASA]. The Honorable Court also erred when it did not order [BPI] to pay
interest on the amounts due to [CASA].
“2. The Honorable Court of Appeals erred when it declared that [CASA] was likewise negligent in the case
at bar, thus warranting its conclusion that the loss in the amount of P547,115.00 be ‘apportioned between
[CASA] and [BPI] x x x.’”228[11]
These issues can be narrowed down to three. First, was there forgery under the Negotiable Instruments
Law (NIL)? Second, were any of the parties negligent and therefore precluded from setting up forgery as a
defense? Third, should moral and exemplary damages, attorney’s fees, and interest be awarded?
The Court’s Ruling
The Petition in GR No. 149454 has no merit, while that in GR No. 149507 is partly meritorious.
First Issue:
Forged Signature Wholly Inoperative
Section 23 of the NIL provides:
“Section 23. Forged signature; effect of. -- When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative, and no right x x x to enforce payment
thereof against any party thereto, can be acquired through or under such signature, unless the party against
whom it is sought to enforce such right is precluded from setting up the forgery or want of
authority.”229[12]
Under this provision, a forged signature is a real230[13] or absolute defense,231[14] and a person whose
signature on a negotiable instrument is forged is deemed to have never become a party thereto and to have
never consented to the contract that allegedly gave rise to it.232[15]
The counterfeiting of any writing, consisting in the signing of another’s name with intent to defraud, is
forgery.233[16]
In the present case, we hold that there was forgery of the drawer’s signature on the check.
First, both the CA234[17] and the RTC235[18] found that Respondent Yabut himself had voluntarily
admitted, through an Affidavit, that he had forged the drawer’s signature and encashed the checks.236[19]
                                                                                                               
 

 
 
 
 

 
 
 

 
He never refuted these findings.237[20] That he had been coerced into admission was not corroborated by
any evidence on record.238[21]
Second, the appellate and the trial courts also ruled that the PNP Crime Laboratory, after its examination of
the said checks,239[22] had concluded that the handwritings thereon -- compared to the standard signature of
the drawer -- were not hers.240[23] This conclusion was the same as that in the Report241[24] that the PNP
Crime Laboratory had earlier issued to BPI -- the drawee bank -- upon the latter’s request.
Indeed, we respect and affirm the RTC’s factual findings, especially when affirmed by the CA, since these
are supported by substantial evidence on record.242[25]
Voluntary Admission Not
Violative of Constitutional Rights
The voluntary admission of Yabut did not violate his constitutional rights (1) on custodial investigation,
and (2) against self-incrimination.
In the first place, he was not under custodial investigation.243[26] His Affidavit was executed in private and
before private individuals.244[27] The mantle of protection under Section 12 of Article III of the 1987
Constitution245[28] covers only the period “from the time a person is taken into custody for investigation of
his possible participation in the commission of a crime or from the time he is singled out as a suspect in the
commission of a crime although not yet in custody.”246[29]
Therefore, to fall within the ambit of Section 12, quoted above, there must be an arrest or a deprivation of
freedom, with “questions propounded on him by the police authorities for the purpose of eliciting
admissions, confessions, or any information.”247[30] The said constitutional provision does “not apply to
spontaneous statements made in a voluntary manner”248[31] whereby an individual orally admits to
authorship of a crime.249[32] “What the Constitution proscribes is the compulsory or coercive disclosure of
incriminating facts.”250[33]
                                                                                                               
 
 
 

 
 
 

 
 
 
 

 
 
 

 
 
Moreover, the right against self-incrimination251[34] under Section 17 of Article III252[35] of the
Constitution, which is ordinarily available only in criminal prosecutions, extends to all other government
proceedings -- including civil actions, legislative investigations,253[36] and administrative proceedings that
possess a criminal or penal aspect254[37] -- but not to private investigations done by private individuals.
Even in such government proceedings, this right may be waived,255[38] provided the waiver is certain;
unequivocal; and intelligently, understandingly and willingly made.256[39]
If in these government proceedings waiver is allowed, all the more is it so in private investigations. It is of
no moment that no criminal case has yet been filed against Yabut. The filing thereof is entirely up to the
appropriate authorities or to the private individuals upon whom damage has been caused. As we shall also
explain later, it is not mandatory for CASA -- the plaintiff below -- to implead Yabut in the civil case
before the lower court.
Under these two constitutional provisions, “[t]he Bill of Rights257[40] does not concern itself with the
relation between a private individual and another individual. It governs the relationship between the
individual and the State.”258[41] Moreover, the Bill of Rights “is a charter of liberties for the individual and
a limitation upon the power of the [S]tate.”259[42] These rights260[43] are guaranteed to preclude the
slightest coercion by the State that may lead the accused “to admit something false, not prevent him from
freely and voluntarily telling the truth.”261[44]
Yabut is not an accused here. Besides, his mere invocation of the aforesaid rights “does not automatically
entitle him to the constitutional protection.”262[45] When he freely and voluntarily executed263[46] his
Affidavit, the State was not even involved. Such Affidavit may therefore be admitted without violating his
constitutional rights while under custodial investigation and against self-incrimination.
Clear, Positive and Convincing
Examination and Evidence
The examination by the PNP, though inconclusive, was nevertheless clear, positive and convincing.

                                                                                                               
 

 
 
 
 

 
 
 

 
 
 
 

 
Forgery “cannot be presumed.”264[47] It must be established by clear, positive and convincing
evidence.265[48] Under the best evidence rule as applied to documentary evidence like the checks in
question, no secondary or substitutionary evidence may inceptively be introduced, as the original writing
itself must be produced in court.266[49] But when, without bad faith on the part of the offeror, the original
checks have already been destroyed or cannot be produced in court, secondary evidence may be
produced.267[50] Without bad faith on its part, CASA proved the loss or destruction of the original checks
through the Affidavit of the one person who knew of that fact268[51] -- Yabut. He clearly admitted to
discarding the paid checks to cover up his misdeed.269[52] In such a situation, secondary evidence like
microfilm copies may be introduced in court.
The drawer’s signatures on the microfilm copies were compared with the standard signature. PNP
Document Examiner II Josefina de la Cruz testified on cross-examination that two different persons had
written them.270[53] Although no conclusive report could be issued in the absence of the original
checks,271[54] she affirmed that her findings were 90 percent conclusive.272[55] According to her, even if
the microfilm copies were the only basis of comparison, the differences were evident.273[56] Besides, the
RTC explained that although the Report was inconclusive, no conclusive report could have been given by
the PNP, anyway, in the absence of the original checks.274[57] This explanation is valid; otherwise, no such
report can ever be relied upon in court.
Even with respect to documentary evidence, the best evidence rule applies only when the contents of a
document -- such as the drawer’s signature on a check -- is the subject of inquiry.275[58] As to whether the
document has been actually executed, this rule does not apply; and testimonial as well as any other
secondary evidence is admissible.276[59] Carina Lebron herself, the drawer’s authorized signatory, testified
many times that she had never signed those checks. Her testimonial evidence is admissible; the checks
have not been actually executed. The genuineness of her handwriting is proved, not only through the
court’s comparison of the questioned handwritings and admittedly genuine specimens thereof,277[60] but
above all by her.
                                                                                                               
 

 
 
 

 
 
 
 

 
 
 

 
 
 
The failure of CASA to produce the original checks neither gives rise to the presumption of suppression of
evidence278[61] nor creates an unfavorable inference against it.279[62] Such failure merely authorizes the
introduction of secondary evidence280[63] in the form of microfilm copies. Of no consequence is the fact
that CASA did not present the signature card containing the signatures with which those on the checks were
compared.281[64] Specimens of standard signatures are not limited to such a card. Considering that it was
not produced in evidence, other documents that bear the drawer’s authentic signature may be resorted
to.282[65] Besides, that card was in the possession of BPI -- the adverse party.
We have held that without the original document containing the allegedly forged signature, one cannot
make a definitive comparison that would establish forgery;283[66] and that a comparison based on a mere
reproduction of the document under controversy cannot produce reliable results.284[67] We have also said,
however, that a judge cannot merely rely on a handwriting expert’s testimony,285[68] but should also
exercise independent judgment in evaluating the authenticity of a signature under scrutiny.286[69] In the
present case, both the RTC and the CA conducted independent examinations of the evidence presented and
arrived at reasonable and similar conclusions. Not only did they admit secondary evidence; they also
appositely considered testimonial and other documentary evidence in the form of the Affidavit.
The best evidence rule admits of exceptions and, as we have discussed earlier, the first of these has been
met.287[70] The result of examining a questioned handwriting, even with the aid of experts and scientific
instruments, may be inconclusive;288[71] but it is a non sequitur to say that such result is not clear, positive
and convincing. The preponderance of evidence required in this case has been satisfied.289[72]
Second Issue:
Negligence Attributable to BPI Alone
Having established the forgery of the drawer’s signature, BPI -- the drawee -- erred in making payments by
virtue thereof. The forged signatures are wholly inoperative, and CASA -- the drawer whose authorized
signatures do not appear on the negotiable instruments -- cannot be held liable thereon. Neither is the latter
precluded from setting up forgery as a real defense.
Clear Negligence
in Allowing Payment
Under a Forged Signature

                                                                                                               

 
 
 
 

 
 
 

 
 
 
 

 
We have repeatedly emphasized that, since the banking business is impressed with public interest, of
paramount importance thereto is the trust and confidence of the public in general. Consequently, the
highest degree of diligence290[73] is expected,291[74] and high standards of integrity and performance are
even required, of it.292[75] By the nature of its functions, a bank is “under obligation to treat the accounts of
its depositors with meticulous care,293[76] always having in mind the fiduciary nature of their
relationship.”294[77]
BPI contends that it has a signature verification procedure, in which checks are honored only when the
signatures therein are verified to be the same with or similar to the specimen signatures on the signature
cards. Nonetheless, it still failed to detect the eight instances of forgery. Its negligence consisted in the
omission of that degree of diligence required295[78] of a bank. It cannot now feign ignorance, for very early
on we have already ruled that a bank is “bound to know the signatures of its customers; and if it pays a
forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily
charge the amount so paid to the account of the depositor whose name was forged.”296[79] In fact, BPI was
the same bank involved when we issued this ruling seventy years ago.
Neither Waiver nor Estoppel
Results from Failure to
Report Error in Bank Statement
The monthly statements issued by BPI to its clients contain a notice worded as follows: “If no error is
reported in ten (10) days, account will be correct.”297[80] Such notice cannot be considered a waiver, even if
CASA failed to report the error. Neither is it estopped from questioning the mistake after the lapse of the
ten-day period.
This notice is a simple confirmation298[81] or “circularization” -- in accounting parlance -- that requests
client-depositors to affirm the accuracy of items recorded by the banks.299[82] Its purpose is to obtain from
the depositors a direct corroboration of the correctness of their account balances with their respective
banks.300[83] Internal or external auditors of a bank use it as a basic audit procedure301[84] -- the results of
which its client-depositors are neither interested in nor privy to -- to test the details of transactions and
balances in the bank’s records.302[85] Evidential matter obtained from independent sources outside a bank
                                                                                                               
 
 

 
 
 

 
 
 
 

 
 
 

 
only serves to provide greater assurance of reliability303[86] than that obtained solely within it for purposes
of an audit of its own financial statements, not those of its client-depositors.
Furthermore, there is always the audit risk that errors would not be detected304[87] for various reasons. One,
materiality is a consideration in audit planning;305[88] and two, the information obtained from such a
substantive test is merely presumptive and cannot be the basis of a valid waiver.306[89] BPI has no right to
impose a condition unilaterally and thereafter consider failure to meet such condition a waiver. Neither
may CASA renounce a right307[90] it has never possessed.308[91]
Every right has subjects -- active and passive. While the active subject is entitled to demand its
enforcement, the passive one is duty-bound to suffer such enforcement.309[92]
On the one hand, BPI could not have been an active subject, because it could not have demanded from
CASA a response to its notice. Besides, the notice was a measly request worded as follows: “Please
examine x x x and report x x x.”310[93] CASA, on the other hand, could not have been a passive subject,
either, because it had no obligation to respond. It could -- as it did -- choose not to respond.
Estoppel precludes individuals from denying or asserting, by their own deed or representation, anything
contrary to that established as the truth, in legal contemplation.311[94] Our rules on evidence even make a
juris et de jure presumption312[95] that whenever one has, by one’s own act or omission, intentionally and
deliberately led another to believe a particular thing to be true and to act upon that belief, one cannot -- in
any litigation arising from such act or omission -- be permitted to falsify that supposed truth.313[96]
In the instant case, CASA never made any deed or representation that misled BPI. The former’s omission,
if any, may only be deemed an innocent mistake oblivious to the procedures and consequences of periodic
audits. Since its conduct was due to such ignorance founded upon an innocent mistake, estoppel will not
arise.314[97] A person who has no knowledge of or consent to a transaction may not be estopped by it.315[98]
“Estoppel cannot be sustained by mere argument or doubtful inference x x x.”316[99] CASA is not barred
from questioning BPI’s error even after the lapse of the period given in the notice.

                                                                                                               
 
 

 
 
 
 

 
 
 

 
 
 
 

 
Loss Borne by
Proximate Source
of Negligence
For allowing payment317[100] on the checks to a wrongful and fictitious payee, BPI -- the drawee bank --
becomes liable to its depositor-drawer. Since the encashing bank is one of its branches,318[101] BPI can
easily go after it and hold it liable for reimbursement.319[102] It “may not debit the drawer’s account320[103]
and is not entitled to indemnification from the drawer.”321[104] In both law and equity, when one of two
innocent persons “must suffer by the wrongful act of a third person, the loss must be borne by the one
whose negligence was the proximate cause of the loss or who put it into the power of the third person to
perpetrate the wrong.”322[105]
Proximate cause is determined by the facts of the case.323[106] “It is that cause which, in natural and
continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which
the result would not have occurred.”324[107]
Pursuant to its prime duty to ascertain well the genuineness of the signatures of its client-depositors on
checks being encashed, BPI is “expected to use reasonable business prudence.”325[108] In the performance
of that obligation, it is bound by its internal banking rules and regulations that form part of the contract it
enters into with its depositors.326[109]
Unfortunately, it failed in that regard. First, Yabut was able to open a bank account in one of its branches
without privity;327[110] that is, without the proper verification of his corresponding identification papers.
Second, BPI was unable to discover early on not only this irregularity, but also the marked differences in
the signatures on the checks and those on the signature card. Third, despite the examination procedures it
conducted, the Central Verification Unit328[111] of the bank even passed off these evidently different
signatures as genuine. Without exercising the required prudence on its part, BPI accepted and encashed the
eight checks presented to it. As a result, it proximately contributed to the fraud and should be held

                                                                                                               
 

 
 
 
 

 
 
 

 
 
 
 
primarily liable329[112] for the “negligence of its officers or agents when acting within the course and scope
of their employment.”330[113] It must bear the loss.
CASA Not Negligent
in Its Financial Affairs
In this jurisdiction, the negligence of the party invoking forgery is recognized as an exception331[114] to the
general rule that a forged signature is wholly inoperative.332[115] Contrary to BPI’s claim, however, we do
not find CASA negligent in handling its financial affairs. CASA, we stress, is not precluded from setting
up forgery as a real defense.
Role of Independent Auditor
The major purpose of an independent audit is to investigate and determine objectively if the financial
statements submitted for audit by a corporation have been prepared in accordance with the appropriate
financial reporting practices333[116] of private entities. The relationship that arises therefrom is both legal
and moral.334[117] It begins with the execution of the engagement letter335[118] that embodies the terms and
conditions of the audit and ends with the fulfilled expectation of the auditor’s ethical336[119] and competent
performance in all aspects of the audit.337[120]
The financial statements are representations of the client; but it is the auditor who has the responsibility for
the accuracy in the recording of data that underlies their preparation, their form of presentation, and the
opinion338[121] expressed therein.339[122] The auditor does not assume the role of employee or of
management in the client’s conduct of operations340[123] and is never under the control or
supervision341[124] of the client.
Yabut was an independent auditor342[125] hired by CASA. He handled its monthly bank reconciliations
and had access to all relevant documents and checkbooks.343[126] In him was reposed the client’s344[127]

                                                                                                               

 
 
 

 
 
 
 

 
 
 

 
 
 
 

 
trust and confidence345[128] that he would perform precisely those functions and apply the appropriate
procedures in accordance with generally accepted auditing standards.346[129] Yet he did not meet these
expectations. Nothing could be more horrible to a client than to discover later on that the person tasked to
detect fraud was the same one who perpetrated it.
Cash Balances
Open to Manipulation
It is a non sequitur to say that the person who receives the monthly bank statements, together with the
cancelled checks and other debit/credit memoranda, shall examine the contents and give notice of any
discrepancies within a reasonable time. Awareness is not equipollent with discernment.
Besides, in the internal accounting control system prudently installed by CASA,347[130] it was Yabut who
should examine those documents in order to prepare the bank reconciliations.348[131] He owned his
working papers,349[132] and his output consisted of his opinion as well as the client’s financial statements
and accompanying notes thereto. CASA had every right to rely solely upon his output -- based on the
terms of the audit engagement -- and could thus be unwittingly duped into believing that everything was in
order. Besides, “[g]ood faith is always presumed and it is the burden of the party claiming otherwise to
adduce clear and convincing evidence to the contrary.”350[133]
Moreover, there was a time gap between the period covered by the bank statement and the date of its actual
receipt. Lebron personally received the December 1990 bank statement only in January 1991351[134] --
when she was also informed of the forgery for the first time, after which she immediately requested a “stop
payment order.” She cannot be faulted for the late detection of the forged December check. After all, the
bank account with BPI was not personal but corporate, and she could not be expected to monitor closely all
its finances. A preschool teacher charged with molding the minds of the youth cannot be burdened with the
intricacies or complexities of corporate existence.
There is also a cutoff period such that checks issued during a given month, but not presented for payment
within that period, will not be reflected therein.352[135] An experienced auditor with intent to defraud can
easily conceal any devious scheme from a client unwary of the accounting processes involved by
manipulating the cash balances on record -- especially when bank transactions are numerous, large and
frequent. CASA could only be blamed, if at all, for its unintelligent choice in the selection and
appointment of an auditor -- a fault that is not tantamount to negligence.
Negligence is not presumed, but proven by whoever alleges it.353[136] Its mere existence “is not sufficient
without proof that it, and no other cause,”354[137] has given rise to damages.355[138] In addition, this fault is
                                                                                                               
 
 
 

 
 
 

 
 
 
 

 
common to, if not prevalent among, small and medium-sized business entities, thus leading the Professional
Regulation Commission (PRC), through the Board of Accountancy (BOA), to require today not only
accreditation for the practice of public accountancy,356[139] but also the registration of firms in the practice
thereof. In fact, among the attachments now required upon registration are the code of good
governance357[140] and a sworn statement on adequate and effective training.358[141]
The missing checks were certainly reported by the bookkeeper359[142] to the accountant360[143] -- her
immediate supervisor -- and by the latter to the auditor. However, both the accountant and the auditor, for
reasons known only to them, assured the bookkeeper that there were no irregularities.
The bookkeeper361[144] who had exclusive custody of the checkbooks362[145] did not have to go directly to
CASA’s president or to BPI. Although she rightfully reported the matter, neither an investigation was
conducted nor a resolution of it was arrived at, precisely because the person at the top of the helm was the
culprit. The vouchers, invoices and check stubs in support of all check disbursements could be concealed
or fabricated -- even in collusion -- and management would still have no way to verify its cash
accountabilities.
Clearly then, Yabut was able to perpetrate the wrongful act through no fault of CASA. If auditors may be
held liable for breach of contract and negligence,363[146] with all the more reason may they be charged with
the perpetration of fraud upon an unsuspecting client. CASA had the discretion to pursue BPI alone under
the NIL, by reason of expediency or munificence or both. Money paid under a mistake may rightfully be
recovered,364[147] and under such terms as the injured party may choose.
Third Issue:
Award of Monetary Claims
Moral Damages Denied
We deny CASA’s claim for moral damages.
In the absence of a wrongful act or omission,365[148] or of fraud or bad faith,366[149] moral damages cannot
be awarded.367[150] 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.368[151] While no proof
of pecuniary loss is necessary therefor -- with the amount to be awarded left to the court’s discretion369[152]
-- the claimant must nonetheless satisfactorily prove the existence of its factual basis370[153] and causal
relation371[154] to the claimant’s act or omission.372[155]
Regrettably, in this case CASA was unable to identify the particular instance -- enumerated in the Civil
Code -- upon which its claim for moral damages is predicated.373[156] Neither bad faith nor negligence so
gross that it amounts to malice374[157] can be imputed to BPI. Bad faith, under the law, “does not simply
connote bad judgment or negligence;375[158] it imports a dishonest purpose or some moral obliquity and
conscious doing of a wrong, a breach of a known duty through some motive or interest or ill will that
partakes of the nature of fraud.”376[159]
As a general rule, a corporation -- being an artificial person without feelings, emotions and senses, and
having existence only in legal contemplation -- is not entitled to moral damages,377[160] because it cannot
experience physical suffering and mental anguish.378[161] However, for breach of the fiduciary duty
required of a bank, a corporate client may claim such damages when its good reputation is besmirched by
such breach, and social humiliation results therefrom.379[162] CASA was unable to prove that BPI had
debased the good reputation of,380[163] and consequently caused incalculable embarrassment to, the former.
CASA’s mere allegation or supposition thereof, without any sufficient evidence on record,381[164] is not
enough.
Exemplary Damages Also Denied
We also deny CASA’s claim for exemplary damages.
Imposed by way of correction382[165] for the public good,383[166] exemplary damages cannot be recovered
as a matter of right.384[167] As we have said earlier, there is no bad faith on the part of BPI for paying the

                                                                                                               

 
 
 

 
 
 
 

 
 
 

 
 
 
 

 
checks of CASA upon forged signatures. Therefore, the former cannot be said to have acted in a wanton,
fraudulent, reckless, oppressive or malevolent manner.385[168] The latter, having no right to moral damages,
cannot demand exemplary damages.386[169]
Attorney’s Fees Granted
Although it is a sound policy not to set a premium on the right to litigate,387[170] we find that CASA is
entitled to reasonable attorney’s fees based on “factual, legal, and equitable justification.”388[171]
When the act or omission of the defendant has compelled the plaintiff to incur expenses to protect the
latter’s interest,389[172] or where the court deems it just and equitable,390[173] attorney’s fees may be
recovered. In the present case, BPI persistently denied the claim of CASA under the NIL to recredit the
latter’s account for the value of the forged checks. This denial constrained CASA to incur expenses and
exert effort for more than ten years in order to protect its corporate interest in its bank account. Besides, we
have already cautioned BPI on a similar act of negligence it had committed seventy years ago, but it has
remained unrelenting. Therefore, the Court deems it just and equitable to grant ten percent (10%)391[174] of
the total value adjudged to CASA as attorney’s fees.
Interest Allowed
For the failure of BPI to pay CASA upon demand and for compelling the latter to resort to the courts to
obtain payment, legal interest may be adjudicated at the discretion of the Court, the same to run from the
filing392[175] of the Complaint.393[176] Since a court judgment is not a loan or a forbearance of recovery,
the legal interest shall be at six percent (6%) per annum.394[177] “If the obligation consists in the payment
of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to
the contrary, shall be the payment of x x x legal interest, which is six percent per annum.”395[178] The

                                                                                                               
 

 
 
 

 
 

 
 

 
 
 

 
 
actual base for its computation shall be “on the amount finally adjudged,”396[179] compounded397[180]
annually to make up for the cost of money398[181] already lost to CASA.
Moreover, the failure of the CA to award interest does not prevent us from granting it upon damages
awarded for breach of contract.399[182] Because BPI evidently breached its contract of deposit with CASA,
we award interest in addition to the total amount adjudged. Under Section 196 of the NIL, any case not
provided for shall be “governed by the provisions of existing legislation or, in default thereof, by the rules
of the law merchant.”400[183] Damages are not provided for in the NIL. Thus, we resort to the Code of
Commerce and the Civil Code. Under Article 2 of the Code of Commerce, acts of commerce shall be
governed by its provisions and, “in their absence, by the usages of commerce generally observed in each
place; and in the absence of both rules, by those of the civil law.”401[184] This law being silent, we look at
Article 18 of the Civil Code, which states: “In matters which are governed by the Code of Commerce and
special laws, their deficiency shall be supplied” by its provisions. A perusal of these three statutes
unmistakably shows that the award of interest under our civil law is justified.
WHEREFORE, the Petition in GR No. 149454 is hereby DENIED, and that in GR No. 149507 PARTLY
GRANTED. The assailed Decision of the Court of Appeals is AFFIRMED with modification: BPI is held
liable for P547,115, the total value of the forged checks less the amount already recovered by CASA from
Leonardo T. Yabut, plus interest at the legal rate of six percent (6%) per annum -- compounded annually,
from the filing of the complaint until paid in full; and attorney’s fees of ten percent (10%) thereof, subject
to reimbursement from Respondent Yabut for the entire amount, excepting attorney’s fees. Let a copy of
this Decision be furnished the Board of Accountancy of the Professional Regulation Commission for such
action as it may deem appropriate against Respondent Yabut. No costs.
SO ORDERED.
Ynares-Santiago, Carpio, and Azcuna, JJ., concur.
Davide, Jr., C.J., (Chairman), on official leave.

f. Bank of the Philippine Islands vs. Court of Appeals, G.R. No.

104612, May 10, 1994.

DAVIDE, JR., J.:

1
The petitioner urges us to review and set aside the amended Decision of 6 March 1992 of
respondent Court of Appeals in CA- G.R. CV No. 25739 which modified the Decision of 15
November 1990 of Branch 19 of the Regional Trial Court (RTC) of Manila in Civil Case No. 87-
42967, entitled Bank of the Philippine Islands (successor-in-interest of Commercial Bank and
Trust Company) versus Eastern Plywood Corporation and Benigno D. Lim. The Court of Appeals
had affirmed the dismissal of the complaint but had granted the defendants' counterclaim for
P331,261.44 which represents the outstanding balance of their account with the plaintiff.
As culled from the records and the pleadings of the parties, the following facts were duly
established:

                                                                                                               
 

 
 
 
 

 
Private respondents Eastern Plywood Corporation (Eastern) and
Benigno D. Lim (Lim), an officer and stockholder of Eastern, held at least one joint bank account
("and/or" account) with the Commercial Bank and Trust Co. (CBTC), the predecessor-in-interest
of petitioner Bank of the Philippine Islands (BPI). Sometime in March 1975, a joint checking
account ("and" account) with Lim in the amount of P120,000.00 was opened by Mariano Velasco
with funds withdrawn from the account of Eastern and/or Lim. Various amounts were later
deposited or withdrawn from the joint account of Velasco and Lim. The money therein was placed
in the money market.
Velasco died on 7 April 1977. At the time of his death, the outstanding balance of the account
stood at P662,522.87. On 5 May 1977, by virtue of an Indemnity Undertaking executed by Lim for
2
himself and as President and General Manager of Eastern, one-half of this amount was
3
provisionally released and transferred to one of the bank accounts of Eastern with CBTC.
Thereafter, on 18 August 1978, Eastern obtained a loan of P73,000.00 from CBTC as "Additional
Working Capital," evidenced by the "Disclosure Statement on Loan/Credit Transaction"
(Disclosure Statement) signed by CBTC through its branch manager, Ceferino Jimenez, and
4
Eastern, through Lim, as its President and General Manager. The loan was payable on demand
with interest at 14% per annum.
For this loan, Eastern issued on the same day a negotiable promissory note for P73,000.00
5
payable on demand to the order of CBTC with interest at 14% per annum. The note was signed
by Lim both in his own capacity and as President and General Manager of Eastern. No reference
to any security for the loan appears on the note. In the Disclosure Statement, the box with the
printed word "UNSECURED" was marked with "X" — meaning unsecured, while the line with the
words "this loan is wholly/partly secured by" is followed by the typewritten words "Hold-Out on a
1:1 on C/A No. 2310-001-42," which refers to the joint account of Velasco and Lim with a balance
of P331,261.44.
In addition, Eastern and Lim, and CBTC signed another document entitled "Holdout Agreement,"
6
also dated 18 August 1978, wherein it was stated that "as security for the Loan [Lim and
Eastern] have offered [CBTC] and the latter accepts a holdout on said [Current Account No.
2310-011-42 in the joint names of Lim and Velasco] to the full extent of their alleged interests
therein as these may appear as a result of final and definitive judicial action or a settlement
7
between and among the contesting parties thereto." Paragraph 02 of the Agreement provides as
follows:
Eastply [Eastern] and Mr. Lim hereby confer upon Comtrust [CBTC], when and if
their alleged interests in the Account Balance shall have been established with
finality, ample and sufficient power as shall be necessary to retain said Account
Balance and enable Comtrust to apply the Account Balance for the purpose of
liquidating the Loan in respect of principal and/or accrued interest.
And paragraph 05 thereof reads:
The acceptance of this holdout shall not impair the right of Comtrust to declare
the loan payable on demand at any time, nor shall the existence hereof and the
non-resolution of the dispute between the contending parties in respect of
entitlement to the Account Balance, preclude Comtrust from instituting an action
for recovery against Eastply and/or Mr. Lim in the event the Loan is declared due
and payable and Eastply and/or Mr. Lim shall default in payment of all obligations
and liabilities thereunder.
In the meantime, a case for the settlement of Velasco's estate was filed with Branch 152 of the
RTC of Pasig, entitled "In re Intestate Estate of Mariano Velasco," and docketed as Sp. Proc. No.
8959. In the said case, the whole balance of P331,261.44 in the aforesaid joint account of
Velasco and Lim was being claimed as part of Velasco's estate. On 9 September 1986, the
intestate court granted the urgent motion of the heirs of Velasco to withdraw the deposit under the
joint account of Lim and Velasco and authorized the heirs to divide among themselves the
8
amount withdrawn.
9
Sometime in 1980, CBTC was merged with BPI. On 2 December 1987, BPI filed with the RTC
of Manila a complaint against Lim and Eastern demanding payment of the promissory note for
P73,000.00. The complaint was docketed as Civil Case No. 87- 42967 and was raffled to Branch
19 of the said court, then presided over by Judge Wenceslao M. Polo. Defendants Lim and
Eastern, in turn, filed a counterclaim against BPI for the return of the balance in the disputed
account subject of the Holdout Agreement and the interests thereon after deducting the amount
due on the promissory note.
After due proceedings, the trial court rendered its decision on
15 November 1990 dismissing the complaint because BPI failed to make out its case.
Furthermore, it ruled that "the promissory note in question is subject to the 'hold-out' agreement,"
10
and that based on this agreement, "it was the duty of plaintiff Bank [BPI] to debit the account of
the defendants under the promissory note to set off the loan even though the same has no fixed
11
maturity." As to the defendants' counterclaim, the trial court, recognizing the fact that the entire
amount in question had been withdrawn by Velasco's heirs pursuant to the order of the intestate
court in Sp. Proc. No. 8959, denied it because the "said claim cannot be awarded without
12
disturbing the resolution" of the intestate court.
Both parties appealed from the said decision to the Court of Appeals. Their appeal was docketed
as CA-G.R. CV No. 25739.
On 23 January 1991, the Court of Appeals rendered a decision affirming the decision of the trial
court. It, however, failed to rule on the defendants' (private respondents') partial appeal from the
trial court's denial of their counterclaim. Upon their motion for reconsideration, the Court of
13
Appeals promulgated on 6 March 1992 an Amended Decision wherein it ruled that the
settlement of Velasco's estate had nothing to do with the claim of the defendants for the return of
the balance of their account with CBTC/BPI as they were not privy to that case, and that the
defendants, as depositors of CBTC/BPI, are the latter's creditors; hence, CBTC/BPI should have
protected the defendants' interest in Sp. Proc. No. 8959 when the said account was claimed by
Velasco's estate. It then ordered BPI "to pay defendants the amount of P331,261.44 representing
14
the outstanding balance in the bank account of defendants."
On 22 April 1992, BPI filed the instant petition alleging therein that the Holdout Agreement in
question was subject to a suspensive condition stated therein, viz., that the "P331,261.44 shall
become a security for respondent Lim's promissory note only if respondents' Lim and Eastern
Plywood Corporation's interests to that amount are established as a result of a final and definitive
15
judicial action or a settlement between and among the contesting parties thereto." Hence, BPI
asserts, the Court of Appeals erred in affirming the trial court's decision dismissing the complaint
on the ground that it was the duty of CBTC to debit the account of the defendants to set off the
amount of P73,000.00 covered by the promissory note.
Private respondents Eastern and Lim dispute the "suspensive condition" argument of the
petitioner. They interpret the findings of both the trial and appellate courts that the money
deposited in the joint account of Velasco and Lim came from Eastern and Lim's own account as a
finding that the money deposited in the joint account of Lim and Velasco "rightfully belong[ed] to
Eastern Plywood Corporation and/or Benigno Lim." And because the latter are the rightful owners
of the money in question, the suspensive condition does not find any application in this case and
the bank had the duty to set off this deposit with the loan. They add that the ruling of the lower
court that they own the disputed amount is the final and definitive judicial action required by the
Holdout Agreement; hence, the petitioner can only hold the amount of P73,000.00 representing
16
the security required for the note and must return the rest.
The petitioner filed a Reply to the aforesaid Comment. The private respondents filed a Rejoinder
thereto.
We gave due course to the petition and required the parties to submit simultaneously their
memoranda.
The key issues in this case are whether BPI can demand payment of the loan of P73,000.00
despite the existence of the Holdout Agreement and whether BPI is still liable to the private
respondents on the account subject of the Holdout Agreement after its withdrawal by the heirs of
Velasco.
The collection suit of BPI is based on the promissory note for P73,000.00. On its face, the note is
an unconditional promise to pay the said amount, and as stated by the respondent Court of
17
Appeals, "[t]here is no question that the promissory note is a negotiable instrument." It further
correctly ruled that BPI was not a holder in due course because the note was not indorsed to BPI
by the payee, CBTC. Only a negotiation by indorsement could have operated as a valid transfer
to make BPI a holder in due course. It acquired the note from CBTC by the contract of merger or
sale between the two banks. BPI, therefore, took the note subject to the Holdout Agreement.
We disagree, however, with the Court of Appeals in its interpretation of the Holdout Agreement. It
is clear from paragraph 02 thereof that CBTC, or BPI as its successor-in-interest, had every right
to demand that Eastern and Lim settle their liability under the promissory note. It cannot be
compelled to retain and apply the deposit in Lim and Velasco's joint account to the payment of
the note. What the agreement conferred on CBTC was a power, not a duty. Generally, a bank is
18
under no duty or obligation to make the application. To apply the deposit to the payment of a
19
loan is a privilege, a right of set-off which the bank has the option to exercise.
Also, paragraph 05 of the Holdout Agreement itself states that notwithstanding the agreement,
CBTC was not in any way precluded from demanding payment from Eastern and from instituting
an action to recover payment of the loan. What it provides is an alternative, not an exclusive,
method of enforcing its claim on the note. When it demanded payment of the debt directly from
Eastern and Lim, BPI had opted not to exercise its right to apply part of the deposit subject of the
Holdout Agreement to the payment of the promissory note for P73,000.00. Its suit for the
enforcement of the note was then in order and it was error for the trial court to dismiss it on the
theory that it was set off by an equivalent portion in C/A No. 2310-001-42 which BPI should have
debited. The Court of Appeals also erred in affirming such dismissal.
The "suspensive condition" theory of the petitioner is, therefore, untenable.
The Court of Appeals correctly decided on the counterclaim. The counterclaim of Eastern and Lim
20
for the return of the P331,261.44 was equivalent to a demand that they be allowed to withdraw
their deposit with the bank. Article 1980 of the Civil Code expressly provides that "[f]ixed, savings,
and current deposits of money in banks and similar institutions shall be governed by the
21
provisions concerning simple loan." In Serrano vs. Central Bank of the Philippines, we held that
bank deposits are in the nature of irregular deposits; they are really loans because they earn
interest. The relationship then between a depositor and a bank is one of creditor and debtor. The
deposit under the questioned account was an ordinary bank deposit; hence, it was payable on
22
demand of the depositor.
The account was proved and established to belong to Eastern even if it was deposited in the
names of Lim and Velasco. As the real creditor of the bank, Eastern has the right to withdraw it or
to demand payment thereof. BPI cannot be relieved of its duty to pay Eastern simply because it
already allowed the heirs of Velasco to withdraw the whole balance of the account. The petitioner
should not have allowed such withdrawal because it had admitted in the Holdout Agreement the
questioned ownership of the money deposited in the account. As early as 12 May 1979, CBTC
was notified by the Corporate Secretary of Eastern that the deposit in the joint account of Velasco
and Lim was being claimed by them and that one-half was being claimed by the heirs of Velasco.
23

Moreover, the order of the court in Sp. Proc. No. 8959 merely authorized the heirs of Velasco to
withdraw the account. BPI was not specifically ordered to release the account to the said heirs;
hence, it was under no judicial compulsion to do so. The authorization given to the heirs of
Velasco cannot be construed as a final determination or adjudication that the account belonged to
Velasco. We have ruled that when the ownership of a particular property is disputed, the
determination by a probate court of whether that property is included in the estate of a deceased
24
is merely provisional in character and cannot be the subject of execution.
Because the ownership of the deposit remained undetermined, BPI, as the debtor with respect
thereto, had no right to pay to persons other than those in whose favor the obligation was
constituted or whose right or authority to receive payment is indisputable. The payment of the
money deposited with BPI that will extinguish its obligation to the creditor-depositor is payment to
25
the person of the creditor or to one authorized by him or by the law to receive it. Payment made
by the debtor to the wrong party does not extinguish the obligation as to the creditor who is
without fault or negligence, even if the debtor acted in utmost good faith and by mistake as to the
26
person of the creditor, or through error induced by fraud of a third person. The payment then by
BPI to the heirs of Velasco, even if done in good faith, did not extinguish its obligation to the true
depositor, Eastern.
In the light of the above findings, the dismissal of the petitioner's complaint is reversed and set
aside. The award on the counterclaim is sustained subject to a modification of the interest.
WHEREFORE, the instant petition is partly GRANTED. The challenged amended decision in CA-
G.R. CV No. 25735 is hereby MODIFIED. As modified:
(1) Private respondents are ordered to pay the petitioner the promissory note for
P73,000.00 with interest at:
(a) 14% per annum on the principal, computed from
18 August 1978 until payment;
(b) 12% per annum on the interest which had accrued up to the
date of the filing of the complaint, computed from that date until
payment pursuant to Article 2212 of the Civil Code.
(2) The award of P331,264.44 in favor of the private respondents shall bear
interest at the rate of 12% per annum computed from the filing of the
counterclaim.
No pronouncement as to costs.
SO ORDERED.
Cruz, Bellosillo, Quiason and Kapunan, JJ., concur
#Footnotes

1 Annex "A" of Petition; Rollo, 18-24. Per Associate Justice Jose C. Campos, Jr.,
concurred in by Associate Justices Alicia V. Sempio-Diy and Filemon H.
Mendoza.
2 Annex "2" of Answer; Original Records (OR), 23-26.
3 Exhibits "31" and "32"; Id., 124 and 125, respectively.
4 Exhibit "A-6"; Id., 5.
5 Exhibit "A"; OR, 4.
6 Exhibit "C"; Id., 155-157.
7 Holdout Agreement, 1-2.
8 Annex "A" of Answer to Counterclaim; OR, 31-32.
9 Per testimony of Ceferino Jimenez; TSN, 4 July 1988, 11.
10 OR, 200.
11 Id., 201.
12 Id., 202.
13 Annex "A" of Petition; Rollo, 19-23.
14 Rollo, 22-23.
15 Id., 13-14.
16 Rollo, 33-35.
17 Id., 20.
18 9 C.J.S. Banks and Banking § 301 (1938). See Bank of California vs. Starrett,
188 P. 410 (Wash. 1920); Bryant vs. Williams, 16 F.2d 159 (D.C.N.C. 1926).
19 Id., § 296. See Lowden vs. Iowa-Des Moines Nat. Bank and Trust Co., 10 F.
Supp. 430 (D.C. Iowa 1935); Meredith vs. First National Bank of Central City, 271
S.W.2d 274 (Ky. Ct. App. 1954).
20 OR, 17.
21 96 SCRA 96 [1980]. See also, Guingona vs. City Fiscal of Manila, 128 SCRA
577 [1984]; People vs. Ong, 204 SCRA 942 [1991].
22 10 Am Jur 2d, Banks, § 356.
23 Annex "1" of Answer; OR, 20-21.
24 Valera vs. Inserto, 149 SCRA 533 [1987].
25 See Article 1240, New Civil Code.
26 IV ARTURO TOLENTINO, CIVIL CODE OF THE PHILIPPINES 285 (1991
ed.)

g. BPI vs. Roxas, G.R. No. 157833, October 15, 2007

 For  our  resolution  is  the  instant  Petition  for  Review  on  Certiorari  assailing  the  Decision402[1]  of  
the  Court  of  Appeals  (Fourth  Division)  dated  February  13,  2003  in  CA-­‐G.R.  CV  No.  67980.    
The  facts  of  the  case,  as  found  by  the  trial  court  and  affirmed  by  the  Court  of  Appeals,  are:  
Gregorio   C.   Roxas,   respondent,   is   a   trader.     Sometime   in   March   1993,   he   delivered   stocks   of  
vegetable   oil   to   spouses   Rodrigo   and   Marissa   Cawili.   As   payment   therefor,   spouses   Cawili   issued   a  
personal  check  in  the  amount  of  P348,805.50.      However,  when  respondent  tried  to  encash  the  check,  it  
was   dishonored   by   the   drawee   bank.       Spouses   Cawili   then   assured   him   that   they   would   replace   the  
bounced  check  with  a  cashier’s  check  from  the  Bank  of  the  Philippine  Islands  (BPI),  petitioner.    
On   March   31,   1993,   respondent   and   Rodrigo   Cawili   went   to   petitioner’s   branch   at   Shaw  
Boulevard,  Mandaluyong  City  where  Elma  Capistrano,  the  branch  manager,  personally  attended  to  them.    
Upon   Elma’s   instructions,   Lita   Sagun,   the   bank   teller,   prepared   BPI   Cashier’s   Check   No.   14428   in   the  
amount   of   P348,805.50,   drawn   against   the   account   of   Marissa   Cawili,   payable   to   respondent.     Rodrigo  
then  handed  the  check  to  respondent  in  the  presence  of  Elma.    
The  following  day,  April  1,  1993,  respondent  returned  to  petitioner’s  branch  at  Shaw  Boulevard  
to   encash   the   cashier’s   check   but   it   was   dishonored.       Elma   informed   him   that   Marissa’s   account   was  
closed  on  that  date.  
Despite   respondent’s   insistence,   the   bank   officers   refused   to   encash   the   check   and   tried   to  
retrieve   it   from   respondent.       He   then   called   his   lawyer   who   advised   him   to   deposit   the   check   in   his  
(respondent’s)  account  at  Citytrust,  Ortigas  Avenue.      However,  the  check  was  dishonored  on  the  ground  
“Account  Closed.”    
On  September  23,  1993,  respondent  filed  with  the  Regional  Trial  Court,  Branch  263,  Pasig  City  a  
complaint   for   sum   of   money   against   petitioner,   docketed   as   Civil   Case   No.   63663.       Respondent   prayed  
that  petitioner  be  ordered  to  pay  the  amount  of  the  check,  damages  and  cost  of  the  suit.  
In   its   answer,   petitioner   specifically   denied   the   allegations   in   the   complaint,   claiming   that   it  
issued   the   check   by   mistake   in   good   faith;   that   its   dishonor   was   due   to   lack   of   consideration;   and   that  
respondent’s  remedy  was  to  sue  Rodrigo  Cawili  who  purchased  the  check.    As  a  counterclaim,  petitioner  
prayed  that  respondent  be  ordered  to  pay  attorney’s  fees  and  expenses  of  litigation.      
Petitioner   filed   a   third-­‐party   complaint   against   spouses   Cawili.     They   were   later   declared   in  
default  for  their  failure  to  file  their  answer.  
After  trial,  the  RTC  rendered  a  Decision,  the  dispositive  portion  of  which  reads:  
  WHEREFORE,   in   view   of   the   foregoing   premises,   this   Court   hereby   renders  
judgment  in  favor  of  herein  plaintiff  and  orders  the  defendant,  Bank  of  the  Philippine  
Islands,  to  pay  Gerardo  C.  Roxas:  
   
1)             The   sum   of   P348,805.50,   the   face   value   of   the   cashier’s   check,   with   legal  
interest  thereon  computed  from  April  1,  1993  until  the  amount  is  fully  paid;  
2)            The  sum  of  P50,000.00  for  moral  damages;  
3)             The   sum   of   P50,000.00   as   exemplary   damages   to   serve   as   an   example   for   the  
public  good;    
4)            The  sum  of  P25,000.00  for  and  as  attorney’s  fees;  and  the  
5)            Costs  of  suit.  
As   to   the   third-­‐party   complaint,   third-­‐party   defendants   Spouses   Rodrigo   and  
Marissa   Cawili   are   hereby   ordered   to   indemnify   defendant   Bank   of   the   Philippine  
Islands  such  amount(s)  adjudged  and  actually  paid  by  it  to  herein  plaintiff  Gregorio  C.  
Roxas,  including  the  costs  of  suit.  
   
SO  ORDERED.  
   
                                                                                                               

 
    
On  appeal,  the  Court  of  Appeals,  in  its  Decision,  affirmed  the  trial  court’s  judgment.  
Hence,  this  petition.  
Petitioner  ascribes  to  the  Court  of  Appeals  the  following  errors:  (1)  in  finding  that  respondent  is  a  
holder  in  due  course;  and  (2)  in  holding  that  it  (petitioner)  is  liable  to  respondent  for  the  amount  of  the  
cashier’s  check.        
Section  52  of  the  Negotiable  Instruments  Law  provides:  
SEC.  52.  What  constitutes  a  holder  in  due  course.  –  A  holder  in  due  course  is  a  
holder  who  has  taken  the  instrument  under  the  following  conditions:  
(a)        That  it  is  complete  and  regular  upon  its  face;  
(b)        That  he  became  the  holder  of  it  before  it  was  overdue  and  without  notice  that  it  
had  been  previously  dishonored,  if  such  was  the  fact;  
(c)        That  he  took  it  in  good  faith  and  for  value;  
(d)         That  at  the  time  it  was  negotiated  to  him,  he  had  no  notice  of  any  infirmity  in  
the  instrument  or  defect  in  the  title  of  person  negotiating  it.    
   
  As  a  general  rule,  under  the  above  provision,  every  holder  is  presumed  prima  facie  to  be  a  holder  
in   due   course.     One   who   claims   otherwise   has   the   onus   probandi   to   prove   that   one   or   more   of   the  
conditions  required  to  constitute  a  holder  in  due  course  are  lacking.      In  this  case,  petitioner  contends  that  
the  element  of  “value”  is  not  present,  therefore,  respondent  could  not  be  a  holder  in  due  course.      
  Petitioner’s  contention  lacks  merit.    Section  25  of  the  same  law    states:  
  SEC.   25.   Value,   what   constitutes.   –   Value   is   any   consideration   sufficient   to  
support  a  simple  contract.    An  antecedent  or  pre-­‐existing  debt  constitutes  value;  and  is  
deemed  as  such  whether  the  instrument  is  payable  on  demand  or  at  a  future  time.  
   
   
   
   
   
  In   Walker   Rubber   Corp.   v.   Nederlandsch   Indische   &   Handelsbank,   N.V.   and   South   Sea   Surety   &  
Insurance  Co.,  Inc.,403[2]  this  Court  ruled  that  value  “in  general  terms  may  be  some  right,  interest,  profit  
or  benefit  to  the  party  who  makes  the  contract  or  some  forbearance,  detriment,  loan,  responsibility,  etc.  
on  the  other  side.”      Here,  there  is  no  dispute  that  respondent  received  Rodrigo  Cawili’s  cashier’s  check  as  
payment  for  the  former’s  vegetable  oil.      The  fact  that  it  was  Rodrigo  who  purchased  the  cashier’s  check  
from  petitioner  will  not  affect  respondent’s  status  as  a  holder  for  value  since  the  check  was  delivered  to  
him   as   payment   for   the   vegetable   oil   he   sold   to   spouses   Cawili.     Verily,   the   Court   of   Appeals   did   not   err   in  
concluding  that  respondent  is  a  holder  in  due  course  of  the  cashier’s  check.  
  Furthermore,   it   bears   emphasis   that   the   disputed   check   is   a   cashier’s   check.       In   International  
Corporate   Bank   v.   Spouses   Gueco,404[3]   this   Court   held   that   a   cashier’s   check   is   really   the   bank’s   own  
check   and   may   be   treated   as   a   promissory   note   with   the   bank   as   the   maker.       The   check   becomes   the  
primary  obligation  of  the  bank  which  issues  it  and  constitutes  a  written  promise  to  pay  upon  demand.        
In  New  Pacific  Timber  &  Supply  Co.  Inc.  v.   Señeris,405[4]  this  Court  took  judicial  notice  of  the  “well-­‐known  
and  accepted  practice  in  the  business  sector  that  a  cashier’s  check  is  deemed  as  cash.”      This  is  because  
the  mere  issuance  of  a  cashier’s  check  is  considered  acceptance  thereof.    

                                                                                                               
 
 

 
 In   view   of   the   above   pronouncements,   petitioner   bank   became   liable   to   respondent   from   the  
moment   it   issued   the   cashier’s   check.       Having   been   accepted   by   respondent,   subject   to   no   condition  
whatsoever,  petitioner  should  have  paid  the  same  upon  presentment  by  the  former.  
  WHEREFORE,   the   petition   is   DENIED.       The   assailed   Decision   of   the   Court   of   Appeals   (Fourth  
Division)  in  CA-­‐G.R.  CV  No.  67980  is  AFFIRMED.        Costs  against  petitioner.  

h. Associated Bank vs. Tan, G.R. No. 156940, December 14, 2004,
446 SCRA 282

PANGANIBAN, J.:
While banks are granted by law the right to debit the value of a dishonored check from a depositor’s
account, they must do so with the highest degree of care, so as not to prejudice the depositor unduly.
The Case
Before us is a Petition for Review406[1] under Rule 45 of the Rules of Court, assailing the January 27, 2003
Decision407[2] of the Court of Appeals (CA) in CA-GR CV No. 56292. The CA disposed as follows:
“WHEREFORE, premises considered, the Decision dated December 3, 1996, of the Regional Trial Court
of Cabanatuan City, Third Judicial Region, Branch 26, in Civil Case No. 892-AF is hereby AFFIRMED.
Costs against the [petitioner].”408[3]
The Facts
The CA narrated the antecedents as follows:
“Vicente Henry Tan (hereafter TAN) is a businessman and a regular depositor-creditor of the Associated
Bank (hereinafter referred to as the BANK). Sometime in September 1990, he deposited a postdated
UCPB check with the said BANK in the amount of P101,000.00 issued to him by a certain Willy Cheng
from Tarlac. The check was duly entered in his bank record thereby making his balance in the amount of
P297,000.00, as of October 1, 1990, from his original deposit of P196,000.00. Allegedly, upon advice and
instruction of the BANK that the P101,000.00 check was already cleared and backed up by sufficient funds,
TAN, on the same date, withdrew the sum of P240,000.00, leaving a balance of P57,793.45. A day after,
TAN deposited the amount of P50,000.00 making his existing balance in the amount of P107,793.45,
because he has issued several checks to his business partners, to wit:
CHECK NUMBERS DATE AMOUNT
a. 138814 Sept. 29, 1990 P9,000.00
b. 138804 Oct. 8, 1990 9,350.00
c. 138787 Sept. 30, 1990 6,360.00
d. 138847 Sept. 29, 1990 21,850.00
e. 167054 Sept. 29, 1990 4,093.40
f. 138792 ` Sept. 29, 1990 3,546.00
g. 138774 Oct. 2, 1990 6,600.00
h. 167072 Oct. 10, 1990 9,908.00
i. 168802 Oct. 10, 1990 3,650.00
“However, his suppliers and business partners went back to him alleging that the checks he issued bounced
for insufficiency of funds. Thereafter, TAN, thru his lawyer, informed the BANK to take positive steps
regarding the matter for he has adequate and sufficient funds to pay the amount of the subject checks.
Nonetheless, the BANK did not bother nor offer any apology regarding the incident. Consequently, TAN,
as plaintiff, filed a Complaint for Damages on December 19, 1990, with the Regional Trial Court of

                                                                                                               
 
 

 
Cabanatuan City, Third Judicial Region, docketed as Civil Case No. 892-AF, against the BANK, as
defendant.
“In his [C]omplaint, [respondent] maintained that he ha[d] sufficient funds to pay the subject checks and
alleged that his suppliers decreased in number for lack of trust. As he has been in the business community
for quite a time and has established a good record of reputation and probity, plaintiff claimed that he
suffered embarrassment, humiliation, besmirched reputation, mental anxieties and sleepless nights because
of the said unfortunate incident. [Respondent] further averred that he continuously lost profits in the
amount of P250,000.00. [Respondent] therefore prayed for exemplary damages and that [petitioner] be
ordered to pay him the sum of P1,000,000.00 by way of moral damages, P250,000.00 as lost profits,
P50,000.00 as attorney’s fees plus 25% of the amount claimed including P1,000.00 per court appearance.
“Meanwhile, [petitioner] filed a Motion to Dismiss on February 7, 1991, but the same was denied for lack
of merit in an Order dated March 7, 1991. Thereafter, [petitioner] BANK on March 20, 1991 filed its
Answer denying, among others, the allegations of [respondent] and alleged that no banking institution
would give an assurance to any of its client/depositor that the check deposited by him had already been
cleared and backed up by sufficient funds but it could only presume that the same has been honored by the
drawee bank in view of the lapse of time that ordinarily takes for a check to be cleared. For its part,
[petitioner] alleged that on October 2, 1990, it gave notice to the [respondent] as to the return of his UCPB
check deposit in the amount of P101,000.00, hence, on even date, [respondent] deposited the amount of
P50,000.00 to cover the returned check.
“By way of affirmative defense, [petitioner] averred that [respondent] had no cause of action against it and
argued that it has all the right to debit the account of the [respondent] by reason of the dishonor of the
check deposited by the [respondent] which was withdrawn by him prior to its clearing. [Petitioner] further
averred that it has no liability with respect to the clearing of deposited checks as the clearing is being
undertaken by the Central Bank and in accepting [the] check deposit, it merely obligates itself as
depositor’s collecting agent subject to actual payment by the drawee bank. [Petitioner] therefore prayed
that [respondent] be ordered to pay it the amount of P1,000,000.00 by way of loss of goodwill, P7,000.00
as acceptance fee plus P500.00 per appearance and by way of attorney’s fees.
“Considering that Westmont Bank has taken over the management of the affairs/properties of the BANK,
[respondent] on October 10, 1996, filed an Amended Complaint reiterating substantially his allegations in
the original complaint, except that the name of the previous defendant ASSOCIATED BANK is now
WESTMONT BANK.
“Trial ensured and thereafter, the court rendered its Decision dated December 3, 1996 in favor of the
[respondent] and against the [petitioner], ordering the latter to pay the [respondent] the sum of P100,000.00
by way of moral damages, P75,000.00 as exemplary damages, P25,000.00 as attorney’s fees, plus the costs
of this suit. In making said ruling, it was shown that [respondent] was not officially informed about the
debiting of the P101,000.00 [from] his existing balance and that the BANK merely allowed the
[respondent] to use the fund prior to clearing merely for accommodation because the BANK considered
him as one of its valued clients. The trial court ruled that the bank manager was negligent in handling the
particular checking account of the [respondent] stating that such lapses caused all the inconveniences to the
[respondent]. The trial court also took into consideration that [respondent’s] mother was originally
maintaining with the x x x BANK [a] current account as well as [a] time deposit, but [o]n one occasion,
although his mother made a deposit, the same was not credited in her favor but in the name of
another.”409[4]
Petitioner appealed to the CA on the issues of whether it was within its rights, as collecting bank, to debit
the account of its client for a dishonored check; and whether it had informed respondent about the dishonor
prior to debiting his account.
Ruling of the Court of Appeals
Affirming the trial court, the CA ruled that the bank should not have authorized the withdrawal of the value
of the deposited check prior to its clearing. Having done so, contrary to its obligation to treat respondent’s
account with meticulous care, the bank violated its own policy. It thereby took upon itself the obligation to

                                                                                                               

 
officially inform respondent of the status of his account before unilaterally debiting the amount of
P101,000. Without such notice, it is estopped from blaming him for failing to fund his account.
The CA opined that, had the P101,000 not been debited, respondent would have had sufficient funds for the
postdated checks he had issued. Thus, the supposed accommodation accorded by petitioner to him is the
proximate cause of his business woes and shame, for which it is liable for damages.
Because of the bank’s negligence, the CA awarded respondent moral damages of P100,000. It also granted
him exemplary damages of P75,000 and attorney’s fees of P25,000.
Hence this Petition.410[5]
Issue
In its Memorandum, petitioner raises the sole issue of “whether or not the petitioner, which is acting as a
collecting bank, has the right to debit the account of its client for a check deposit which was dishonored by
the drawee bank.”411[6]
The Court’s Ruling
The Petition has no merit.
Sole Issue:
Debit of Depositor’s Account
Petitioner-bank contends that its rights and obligations under the present set of facts were misappreciated
by the CA. It insists that its right to debit the amount of the dishonored check from the account of
respondent is clear and unmistakable. Even assuming that it did not give him notice that the check had
been dishonored, such right remains immediately enforceable.
In particular, petitioner argues that the check deposit slip accomplished by respondent on September 17,
1990, expressly stipulated that the bank was obligating itself merely as the depositor’s collecting agent and
-- until such time as actual payment would be made to it -- it was reserving the right to charge against the
depositor’s account any amount previously credited. Respondent was allowed to withdraw the amount of
the check prior to clearing, merely as an act of accommodation, it added.
At the outset, we stress that the trial court’s factual findings that were affirmed by the CA are not subject to
review by this Court.412[7] As petitioner itself takes no issue with those findings, we need only to determine
the legal consequence, based on the established facts.
Right of Setoff
A bank generally has a right of setoff over the deposits therein for the payment of any withdrawals on the
part of a depositor.413[8] The right of a collecting bank to debit a client’s account for the value of a
dishonored check that has previously been credited has fairly been established by jurisprudence. To begin
with, Article 1980 of the Civil Code provides that “[f]ixed, savings, and current deposits of money in banks
and similar institutions shall be governed by the provisions concerning simple loan.”
Hence, the relationship between banks and depositors has been held to be that of creditor and debtor.414[9]
Thus, legal compensation under Article 1278415[10] of the Civil Code may take place “when all the
requisites mentioned in Article 1279 are present,”416[11] as follows:
“(1) That each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;
                                                                                                               
 
 

 
 
 
 

 
 (2) That both debts consist in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.”417[12]
Nonetheless, the real issue here is not so much the right of petitioner to debit respondent’s account but,
rather, the manner in which it exercised such right. The Court has held that even while the right of setoff is
conceded, separate is the question of whether that remedy has properly been exercised.418[13]
The liability of petitioner in this case ultimately revolves around the issue of whether it properly exercised
its right of setoff. The determination thereof hinges, in turn, on the bank’s role and obligations, first, as
respondent’s depositary bank; and second, as collecting agent for the check in question.
Obligation as
Depositary Bank
In BPI v. Casa Montessori,419[14] the Court has emphasized that the banking business is impressed with
public interest. “Consequently, the highest degree of diligence is expected, and high standards of integrity
and performance are even required of it. By the nature of its functions, a bank is under obligation to treat
the accounts of its depositors with meticulous care.”420[15]
Also affirming this long standing doctrine, Philippine Bank of Commerce v. Court of Appeals421[16] has
held that “the degree of diligence required of banks is more than that of a good father of a family where the
fiduciary nature of their relationship with their depositors is concerned.” 422[17] Indeed, the banking
business is vested with the trust and confidence of the public; hence the “appropriate standard of diligence
must be very high, if not the highest, degree of diligence.”423[18] The standard applies, regardless of
whether the account consists of only a few hundred pesos or of millions.424[19]
The fiduciary nature of banking, previously imposed by case law,425[20] is now enshrined in Republic Act
No. 8791 or the General Banking Law of 2000. Section 2 of the law specifically says that the State
recognizes the “fiduciary nature of banking that requires high standards of integrity and performance.”
Did petitioner treat respondent’s account with the highest degree of care? From all indications, it did not.
It is undisputed -- nay, even admitted -- that purportedly as an act of accommodation to a valued client,
petitioner allowed the withdrawal of the face value of the deposited check prior to its clearing. That act
certainly disregarded the clearance requirement of the banking system. Such a practice is unusual, because

                                                                                                               
 
 

 
 
 

 
 
 
 
a check is not legal tender or money;426[21] and its value can properly be transferred to a depositor’s
account only after the check has been cleared by the drawee bank.427[22]
Under ordinary banking practice, after receiving a check deposit, a bank either immediately credit the
amount to a depositor’s account; or infuse value to that account only after the drawee bank shall have paid
such amount.428[23] Before the check shall have been cleared for deposit, the collecting bank can only
“assume” at its own risk -- as herein petitioner did -- that the check would be cleared and paid out.
Reasonable business practice and prudence, moreover, dictated that petitioner should not have authorized
the withdrawal by respondent of P240,000 on October 1, 1990, as this amount was over and above his
outstanding cleared balance of P196,793.45.429[24] Hence, the lower courts correctly appreciated the
evidence in his favor.
Obligation as
Collecting Agent
Indeed, the bank deposit slip expressed this reservation:
“In receiving items on deposit, this Bank obligates itself only as the Depositor’s Collecting agent, assuming
no responsibility beyond carefulness in selecting correspondents, and until such time as actual payments
shall have come to its possession, this Bank reserves the right to charge back to the Depositor’s account any
amounts previously credited whether or not the deposited item is returned. x x x."430[25]
However, this reservation is not enough to insulate the bank from any liability. In the past, we have
expressed doubt about the binding force of such conditions unilaterally imposed by a bank without the
consent of the depositor.431[26] It is indeed arguable that “in signing the deposit slip, the depositor does so
only to identify himself and not to agree to the conditions set forth at the back of the deposit slip.”432[27]
Further, by the express terms of the stipulation, petitioner took upon itself certain obligations as
respondent’s agent, consonant with the well-settled rule that the relationship between the payee or holder of
a commercial paper and the collecting bank is that of principal and agent.433[28] Under Article 1909434[29]
of the Civil Code, such bank could be held liable not only for fraud, but also for negligence.
As a general rule, a bank is liable for the wrongful or tortuous acts and declarations of its officers or agents
within the course and scope of their employment.435[30] Due to the very nature of their business, banks are
expected to exercise the highest degree of diligence in the selection and supervision of their
employees.436[31] Jurisprudence has established that the lack of diligence of a servant is imputed to the

                                                                                                               
 
 
 

 
 
 

 
 
 
 

 
negligence of the employer, when the negligent or wrongful act of the former proximately results in an
injury to a third person;437[32] in this case, the depositor.
The manager of the bank’s Cabanatuan branch, Consorcia Santiago, categorically admitted that she and the
employees under her control had breached bank policies. They admittedly breached those policies when,
without clearance from the drawee bank in Baguio, they allowed respondent to withdraw on October 1,
1990, the amount of the check deposited. Santiago testified that respondent “was not officially informed
about the debiting of the P101,000 from his existing balance of P170,000 on October 2, 1990 x x x.”438[33]
Being the branch manager, Santiago clearly acted within the scope of her authority in authorizing the
withdrawal and the subsequent debiting without notice. Accordingly, what remains to be determined is
whether her actions proximately caused respondent’s injury. Proximate cause is that which -- in a natural
and continuous sequence, unbroken by any efficient intervening cause --produces the injury, and without
which the result would not have occurred.439[34]
Let us go back to the facts as they unfolded. It is undeniable that the bank’s premature authorization of the
withdrawal by respondent on October 1, 1990, triggered -- in rapid succession and in a natural sequence --
the debiting of his account, the fall of his account balance to insufficient levels, and the subsequent
dishonor of his own checks for lack of funds. The CA correctly noted thus:
“x x x [T]he depositor x x x withdrew his money upon the advice by [petitioner] that his money was
already cleared. Without such advice, [respondent] would not have withdrawn the sum of P240,000.00.
Therefore, it cannot be denied that it was [petitioner’s] fault which allowed [respondent] to withdraw a
huge sum which he believed was already his.
“To emphasize, it is beyond cavil that [respondent] had sufficient funds for the check. Had the
P101,000.00 not [been] debited, the subject checks would not have been dishonored. Hence, we can say
that [respondent’s] injury arose from the dishonor of his well-funded checks. x x x.”440[35]
Aggravating matters, petitioner failed to show that it had immediately and duly informed respondent of the
debiting of his account. Nonetheless, it argues that the giving of notice was discernible from his act of
depositing P50,000 on October 2, 1990, to augment his account and allow the debiting. This argument
deserves short shrift.
First, notice was proper and ought to be expected. By the bank manager’s account, respondent was
considered a “valued client” whose checks had always been sufficiently funded from 1987 to 1990,441[36]
until the October imbroglio. Thus, he deserved nothing less than an official notice of the precarious
condition of his account.
Second, under the provisions of the Negotiable Instruments Law regarding the liability of a general
indorser442[37] and the procedure for a notice of dishonor,443[38] it was incumbent on the bank to give
proper notice to respondent. In Gullas v. National Bank,444[39] the Court emphasized:
“x x x [A] general indorser of a negotiable instrument engages that if the instrument – the check in this case
– is dishonored and the necessary proceedings for its dishonor are duly taken, he will pay the amount
thereof to the holder (Sec. 66) It has been held by a long line of authorities that notice of dishonor is
                                                                                                               

 
 
 

 
 
 
 

 
necessary to charge an indorser and that the right of action against him does not accrue until the notice is
given.
“x x x. The fact we believe is undeniable that prior to the mailing of notice of dishonor, and without
waiting for any action by Gullas, the bank made use of the money standing in his account to make good for
the treasury warrant. At this point recall that Gullas was merely an indorser and had issued checks in good
faith. As to a depositor who has funds sufficient to meet payment of a check drawn by him in favor of a
third party, it has been held that he has a right of action against the bank for its refusal to pay such a check
in the absence of notice to him that the bank has applied the funds so deposited in extinguishment of past
due claims held against him. (Callahan vs. Bank of Anderson [1904], 2 Ann. Cas., 203.) However this may
be, as to an indorser the situation is different, and notice should actually have been given him in order that
he might protect his interests.”445[40]
Third, regarding the deposit of P50,000 made by respondent on October 2, 1990, we fully subscribe to the
CA’s observations that it was not unusual for a well-reputed businessman like him, who “ordinarily takes
note of the amount of money he takes and releases,” to immediately deposit money in his current account to
answer for the postdated checks he had issued.446[41]
Damages
Inasmuch as petitioner does not contest the basis for the award of damages and attorney’s fees, we will no
longer address these matters.

i. Banco de Oro Savings and Mortgage Bank vs. Equitable Banking

Corp., G.R. No. L-74917, January 20,1988

G.R. No. 74917 January 20, 1988

BANCO DE ORO SAVINGS AND MORTGAGE BANK, petitioner,
vs.
EQUITABLE BANKING CORPORATION, PHILIPPINE CLEARING HOUSE CORPORATION,
AND REGIONAL TRIAL COURT OF QUEZON CITY, BRANCH XCII (92), respondents.

GANCAYCO, J.:

This is a petition for review on certiorari of a decision of the Regional Trial Court of Quezon City
promulgated on March 24, 1986 in Civil Case No. Q-46517 entitled Banco de Oro Savings and
Mortgage Bank versus Equitable Banking Corporation and the Philippine Clearing House
Corporation after a review of the Decision of the Board of Directors of the Philippine Clearing
House Corporation (PCHC) in the case of Equitable Banking Corporation (EBC) vs. Banco de
Oro Savings and Mortgage (BCO), ARBICOM Case No. 84033.

The undisputed facts are as follows:

It appears that some time in March, April, May and August 1983, plaintiff through its Visa Card
Department, drew six crossed Manager's check (Exhibits "A" to "F", and herein referred to as
Checks) having an aggregate amount of Forty Five Thousand Nine Hundred and Eighty Two &
23/100 (P45,982.23) Pesos and payable to certain member establishments of Visa Card.
Subsequently, the Checks were deposited with the defendant to the credit of its depositor, a
certain Aida Trencio.

                                                                                                               
 

 
Following normal procedures, and after stamping at the back of the Checks the usual
endorsements. All prior and/or lack of endorsement guaranteed the defendant sent the checks for
clearing through the Philippine Clearing House Corporation (PCHC). Accordingly, plaintiff paid the
Checks; its clearing account was debited for the value of the Checks and defendant's clearing
account was credited for the same amount,

Thereafter, plaintiff discovered that the endorsements appearing at the back of the Checks and
purporting to be that of the payees were forged and/or unauthorized or otherwise belong to
persons other than the payees.

Pursuant to the PCHC Clearing Rules and Regulations, plaintiff presented the Checks directly to
the defendant for the purpose of claiming reimbursement from the latter. However, defendant
refused to accept such direct presentation and to reimburse the plaintiff for the value of the
Checks; hence, this case.

In its Complaint, plaintiff prays for judgment to require the defendant to pay the plaintiff the sum of
P45,982.23 with interest at the rate of 12% per annum from the date of the complaint plus
attorney's fees in the amount of P10,000.00 as well as the cost of the suit.

In accordance with Section 38 of the Clearing House Rules and Regulations, the dispute was
presented for Arbitration; and Atty. Ceasar Querubin was designated as the Arbitrator.

After an exhaustive investigation and hearing the Arbiter rendered a decision in favor of the
plaintiff and against the defendant ordering the PCHC to debit the clearing account of the
defendant, and to credit the clearing account of the plaintiff of the amount of P45,982.23 with
interest at the rate of 12% per annum from date of the complaint and Attorney's fee in the amount
of P5,000.00. No pronouncement as to cost was made.

In a motion for reconsideration filed by the petitioner, the Board of Directors of the PCHC affirmed
the decision of the said Arbiter in this wise:
In view of all the foregoing, the decision of the Arbiter is confirmed; and the
Philippine Clearing House Corporation is hereby ordered to debit the clearing
account of the defendant and credit the clearing account of plaintiff the amount of
Forty Five Thousand Nine Hundred Eighty Two & 23/100 (P45,982.23) Pesos
with interest at the rate of 12% per annum from date of the complaint, and the
Attorney's fee in the amount of Five Thousand (P5,000.00) Pesos.

Thus, a petition for review was filed with the Regional Trial Court of Quezon City, Branch XCII,
wherein in due course a decision was rendered affirming in toto the decision of the PCHC.

Hence this petition.

The petition is focused on the following issues:

1. Did the PCHC have any jurisdiction to give due course to and adjudicate Arbicom Case No.
84033?
2. Were the subject checks non-negotiable and if not, does it fall under the ambit of the power of
the PCHC?
3. Is the Negotiable Instrument Law, Act No. 2031 applicable in deciding controversies of this
nature by the PCHC?
4. What law should govern in resolving controversies of this nature?
5. Was the petitioner bank negligent and thus responsible for any undue payment?

Petitioner maintains that the PCHC is not clothed with jurisdiction because the Clearing House
Rules and Regulations of PCHC cover and apply only to checks that are genuinely negotiable.
Emphasis is laid on the primary purpose of the PCHC in the Articles of Incorporation, which
states:
To provide, maintain and render an effective, convenient, efficient, economical and relevant
exchange and facilitate service limited to check processing and sorting by way of assisting
member banks, entities in clearing checks and other clearing items as defined in existing and in
future Central Bank of the Philippines circulars, memoranda, circular letters, rules and regulations
and policies in pursuance to the provisions of Section 107 of R.A. 265. ...
and Section 107 of R.A. 265 which provides:
xxx xxx xxx
The deposit reserves maintained by the banks in the Central Bank, in accordance with the
provisions of Section 1000 shall serve as a basis for the clearing of checks, and the settlement of
interbank balances ...

Petitioner argues that by law and common sense, the term check should be interpreted as one
that fits the articles of incorporation of the PCHC, the Central Bank and the Clearing House Rules
stating that it is a negotiable instrument citing the definition of a "check" as basically a "bill of
exchange" under Section 185 of the NIL and that it should be payable to "order" or to "bearer"
under Section 126 of game law. Petitioner alleges that with the cancellation of the printed words
"or bearer from the face of the check, it becomes non-negotiable so the PCHC has no jurisdiction
over the case.

The Regional Trial Court took exception to this stand and conclusion put forth by the herein
petitioner as it held:
Petitioner's theory cannot be maintained. As will be noted, the PCHC makes no
distinction as to the character or nature of the checks subject of its jurisdiction.
The pertinent provisions quoted in petitioners memorandum simply refer to
check(s). Where the law does not distinguish, we shall not distinguish.
In the case of Reyes vs. Chuanico (CA-G.R. No. 20813 R, Feb. 5, 1962) the
Appellate Court categorically stated that there are four kinds of checks in this
jurisdiction; the regular check; the cashier's check; the traveller's check; and the
crossed check. The Court, further elucidated, that while the Negotiable
Instruments Law does not contain any provision on crossed checks, it is coon
practice in commercial and banking operations to issue checks of this character,
obviously in accordance with Article 541 of the Code of Commerce. Attention is
likewise called to Section 185 of the Negotiable Instruments Law:
Sec. 185. Check defined. — A check is a bill of exchange drawn
on a bank payable on demand. Except as herein otherwise
provided, the provisions of this act applicable to a bill of
exchange payable on demand apply to a check
and the provisions of Section 61 (supra) that the drawer may insert in the
instrument an express stipulation negating or limiting his own liability to the
holder. Consequently, it appears that the use of the term "check" in the Articles of
Incorporation of PCHC is to be perceived as not limited to negotiable checks
only, but to checks as is generally known in use in commercial or business
transactions.
Anent Petitioner's liability on said instruments, this court is in full accord with the
ruling of the PCHC Board of Directors that:
In presenting the Checks for clearing and for payment, the
defendant made an express guarantee on the validity of "all prior
endorsements." Thus, stamped at the back of the checks are the
defendant's clear warranty; ALL PRIOR ENDORSEMENTS
AND/OR LACK OF ENDORSEMENTS GUARANTEED. With.
out such warranty, plaintiff would not have paid on the checks.
No amount of legal jargon can reverse the clear meaning of
defendant's warranty. As the warranty has proven to be false
and inaccurate, the defendant is liable for any damage arising
out of the falsity of its representation.
 The principle of estoppel, effectively prevents the defendant from
denying liability for any damage sustained by the plaintiff which,
relying upon an action or declaration of the defendant, paid on
the Checks. The same principle of estoppel effectively prevents
the defendant from denying the existence of the Checks. (Pp.
1011 Decision; pp. 4344, Rollo)
We agree.

As provided in the aforecited articles of incorporation of PCHC its operation extend to "clearing
checks and other clearing items." No doubt transactions on non-negotiable checks are within the
ambit of its jurisdiction.

In a previous case, this Court had occasion to rule: "Ubi lex non distinguish nec nos distinguere
debemos." It was enunciated in Loc Cham v. Ocampo, 77 Phil. 636 (1946):

The rule, founded on logic is a corollary of the principle that general words and phrases in a
statute should ordinarily be accorded their natural and general significance. In other words, there
should be no distinction in the application of a statute where none is indicated.

There should be no distinction in the application of a statute where none is indicated for courts
are not authorized to distinguish where the law makes no distinction. They should instead
administer the law not as they think it ought to be but as they find it and without regard to
consequences.

The term check as used in the said Articles of Incorporation of PCHC can only connote checks in
general use in commercial and business activities. It cannot be conceived to be limited to
negotiable checks only.

Checks are used between banks and bankers and their customers, and are designed to facilitate
banking operations. It is of the essence to be payable on demand, because the contract between
the banker and the customer is that the money is needed on demand.
The participation of the two banks, petitioner and private respondent, in the clearing operations of
PCHC is a manifestation of their submission to its jurisdiction. Sec. 3 and 36.6 of the PCHC-
CHRR clearing rules and regulations provide:
SEC. 3. AGREEMENT TO THESE RULES. — It is the general agreement and
understanding that any participant in the Philippine Clearing House Corporation,
MICR clearing operations by the mere fact of their participation, thereby
manifests its agreement to these Rules and Regulations and its subsequent
amendments."
Sec 36.6. (ARBITRATION) — The fact that a bank participates in the clearing
operations of the PCHC shall be deemed its written and subscribed consent to
the binding effect of this arbitration agreement as if it had done so in accordance
with section 4 of the Republic Act No. 876, otherwise known as the Arbitration
Law.
Further Section 2 of the Arbitration Law mandates:
Two or more persons or parties may submit to the arbitration of one or more
arbitrators any controversy existing between them at the time of the submission
and which may be the subject of an action, or the parties of any contract may in
such contract agree to settle by arbitration a controversy thereafter arising
between them. Such submission or contract shall be valid and irrevocable, save
upon grounds as exist at law for the revocation of any contract.
Such submission or contract may include question arising out of valuations,
appraisals or other controversies which may be collateral, incidental, precedent
or subsequent to any issue between the parties. ...
Sec. 21 of the same rules, says:
 Items which have been the subject of material alteration or items bearing forged
endorsement when such endorsement is necessary for negotiation shall be
returned by direct presentation or demand to the Presenting Bank and not
through the regular clearing house facilities within the period prescribed by law
for the filing of a legal action by the returning bank/branch, institution or entity
sending the same. (Emphasis supplied)

Viewing these provisions the conclusion is clear that the PCHC Rules and Regulations should not
be interpreted to be applicable only to checks which are negotiable instruments but also to non-
negotiable instruments and that the PCHC has jurisdiction over this case even as the checks
subject of this litigation are admittedly non-negotiable.

Moreover, petitioner is estopped from raising the defense of non-negotiability of the checks in
question. It stamped its guarantee on the back of the checks and subsequently presented these
checks for clearing and it was on the basis of these endorsements by the petitioner that the
proceeds were credited in its clearing account.

The petitioner by its own acts and representation can not now deny liability because it assumed
the liabilities of an endorser by stamping its guarantee at the back of the checks.
The petitioner having stamped its guarantee of "all prior endorsements and/or lack of
endorsements" (Exh. A-2 to F-2) is now estopped from claiming that the checks under
consideration are not negotiable instruments. The checks were accepted for deposit by the
petitioner stamping thereon its guarantee, in order that it can clear the said checks with the
respondent bank. By such deliberate and positive attitude of the petitioner it has for all legal
intents and purposes treated the said cheeks as negotiable instruments and accordingly assumed
the warranty of the endorser when it stamped its guarantee of prior endorsements at the back of
the checks. It led the said respondent to believe that it was acting as endorser of the checks and
on the strength of this guarantee said respondent cleared the checks in question and credited the
account of the petitioner. Petitioner is now barred from taking an opposite posture by claiming
that the disputed checks are not negotiable instrument.

This Court enunciated in Philippine National Bank vs. Court of Appeals a point relevant to the
issue when it stated the doctrine of estoppel is based upon the grounds of public policy, fair
dealing, good faith and justice and its purpose is to forbid one to speak against his own act,
representations or commitments to the injury of one to whom they were directed and who
reasonably relied thereon.

A commercial bank cannot escape the liability of an endorser of a check and which may turn out
to be a forged endorsement. Whenever any bank treats the signature at the back of the checks
as endorsements and thus logically guarantees the same as such there can be no doubt said
bank has considered the checks as negotiable.

Apropos the matter of forgery in endorsements, this Court has succinctly emphasized that the
collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of presenting the check for
payment to the drawee is an assertion that the party making the presentment has done its duty to
ascertain the genuineness of the endorsements. This is laid down in the case of PNB vs. National
City Bank. In another case, this court held that if the drawee-bank discovers that the signature of
the payee was forged after it has paid the amount of the check to the holder thereof, it can
recover the amount paid from the collecting bank.
A truism stated by this Court is that — "The doctrine of estoppel precludes a party from
repudiating an obligation voluntarily assumed after having accepted benefits therefrom. To
countenance such repudiation would be contrary to equity and put premium on fraud or
misrepresentation".
We made clear in Our decision in Philippine National Bank vs. The National City Bank of NY &
Motor Service Co. that:
 Where a check is accepted or certified by the bank on which it is drawn, the bank
is estopped to deny the genuineness of the drawers signature and his capacity to
issue the instrument.
If a drawee bank pays a forged check which was previously accepted or certified
by the said bank, it can not recover from a holder who did not participate in the
forgery and did not have actual notice thereof.
The payment of a check does not include or imply its acceptance in the sense
that this word is used in Section 62 of the Negotiable Instruments Act.
The point that comes uppermost is whether the drawee bank was negligent in failing to discover
the alteration or the forgery. Very akin to the case at bar is one which involves a suit filed by the
drawer of checks against the collecting bank and this came about in Farmers State Bank where it
was held:
A cause of action against the (collecting bank) in favor of the appellee (the
drawer) accrued as a result of the bank breaching its implied warranty of the
genuineness of the indorsements of the name of the payee by bringing about the
presentation of the checks (to the drawee bank) and collecting the amounts
thereof, the right to enforce that cause of action was not destroyed by the
circumstance that another cause of action for the recovery of the amounts paid
on the checks would have accrued in favor of the appellee against another or to
others than the bank if when the checks were paid they have been indorsed by
the payee. (United States vs. National Exchange Bank, 214 US, 302, 29 S
CT665, 53 L. Ed 1006, 16 Am. Cas. 11 84; Onondaga County Savings Bank vs.
United States (E.C.A.) 64 F 703)
Section 66 of the Negotiable Instruments ordains that:
Every indorser who indorsee without qualification, warrants to all subsequent
holders in due course' (a) that the instrument is genuine and in all respects what
it purports to be; (b) that he has good title to it; (c) that all prior parties have
capacity to contract; and (d) that the instrument is at the time of his indorsement
valid and subsisting.
It has been enunciated in an American case particularly in American Exchange National Bank vs.
Yorkville Bank that: "the drawer owes no duty of diligence to the collecting bank (one who had
accepted an altered check and had paid over the proceeds to the depositor) except of seasonably
discovering the alteration by a comparison of its returned checks and check stubs or other
equivalent record, and to inform the drawee thereof." In this case it was further held that:
The real and underlying reasons why negligence of the drawer constitutes no
defense to the collecting bank are that there is no privity between the drawer and
the collecting bank (Corn Exchange Bank vs. Nassau Bank, 204 N.Y.S. 80) and
the drawer owe to that bank no duty of vigilance (New York Produce Exchange
Bank vs. Twelfth Ward Bank, 204 N.Y.S. 54) and no act of the collecting bank is
induced by any act or representation or admission of the drawer (Seaboard
National Bank vs. Bank of America (supra) and it follows that negligence on the
part of the drawer cannot create any liability from it to the collecting bank, and the
drawer thus is neither a necessary nor a proper party to an action by the drawee
bank against such bank. It is quite true that depositors in banks are under the
obligation of examining their passbooks and returned vouchers as a protection
against the payment by the depository bank against forged checks, and
negligence in the performance of that obligation may relieve that bank of liability
for the repayment of amounts paid out on forged checks, which but for such
negligence it would be bound to repay. A leading case on that subject is Morgan
vs. United States Mortgage and Trust Col. 208 N.Y. 218, 101 N.E. 871 Amn.
Cas. 1914D, 462, L.R.A. 1915D, 74.
Thus We hold that while the drawer generally owes no duty of diligence to the collecting bank, the
law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it for
the purpose of determining their genuineness and regularity. The collecting bank being primarily
engaged in banking holds itself out to the public as the expert and the law holds it to a high
standard of conduct.
And although the subject checks are non-negotiable the responsibility of petitioner as indorser
thereof remains.
To countenance a repudiation by the petitioner of its obligation would be contrary to equity and
would deal a negative blow to the whole banking system of this country.
The court reproduces with approval the following disquisition of the PCHC in its decision —
II. Payments To Persons Other
Than The Payees Are Not Valid
And Give Rise To An Obligation
To Return Amounts Received
Nothing is more clear than that neither the defendant's depositor nor the
defendant is entitled to receive payment payable for the Checks. As the checks
are not payable to defendant's depositor, payments to persons other than payees
named therein, their successor-in-interest or any person authorized to receive
payment are not valid. Article 1240, New Civil Code of the Philippines
unequivocably provides that:
"Art. 1240. Payment shall be made to the person in whose favor
the obligation has been constituted, or his successo-in-interest,
or any person authorized to receive it. "
Considering that neither the defendant's depositor nor the defendant is entitled to
receive payments for the Checks, payments to any of them give rise to an
obligation to return the amounts received. Section 2154 of the New Civil Code
mandates that:
Article 2154. If something is received when there is no right to
demand it, and it was unduly delivered through mistake, the
obligation to return it arises.
It is contended that plaintiff should be held responsible for issuing the Checks
notwithstanding that the underlying transactions were fictitious This contention
has no basis in our jurisprudence.
The nullity of the underlying transactions does not diminish, but in fact
strengthens, plaintiffs right to recover from the defendant. Such nullity clearly
emphasizes the obligation of the payees to return the proceeds of the Checks. If
a failure of consideration is sufficient to warrant a finding that a payee is not
entitled to payment or must return payment already made, with more reason the
defendant, who is neither the payee nor the person authorized by the payee,
should be compelled to surrender the proceeds of the Checks received by it.
Defendant does not have any title to the Checks; neither can it claim any
derivative title to them.
III. Having Violated Its Warranty
On Validity Of All Endorsements,
Collecting Bank Cannot Deny
liability To Those Who Relied
On Its Warranty
In presenting the Checks for clearing and for payment, the defendant made an
express guarantee on the validity of "all prior endorsements." Thus, stamped at
the bank of the checks are the defendant's clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED.
Without such warranty, plaintiff would not have paid on the checks.
No amount of legal jargon can reverse the clear meaning of defendant's
warranty. As the warranty has proven to be false and inaccurate, the defendant is
liable for any damage arising out of the falsity of its representation.
The principle of estoppel effectively prevents the defendant from denying liability
for any damages sustained by the plaintiff which, relying upon an action or
declaration of the defendant, paid on the Checks. The same principle of estoppel
effectively prevents the defendant from denying the existence of the Checks.
Whether the Checks have been issued for valuable considerations or not is of no
serious moment to this case. These Checks have been made the subject of
 contracts of endorsement wherein the defendant made expressed warranties to
induce payment by the drawer of the Checks; and the defendant cannot now
refuse liability for breach of warranty as a consequence of such forged
endorsements. The defendant has falsely warranted in favor of plaintiff the
validity of all endorsements and the genuineness of the cheeks in all respects
what they purport to be.
The damage that will result if judgment is not rendered for the plaintiff is
irreparable. The collecting bank has privity with the depositor who is the principal
culprit in this case. The defendant knows the depositor; her address and her
history, Depositor is defendant's client. It has taken a risk on its depositor when it
allowed her to collect on the crossed-checks.
Having accepted the crossed checks from persons other than the payees, the
defendant is guilty of negligence; the risk of wrongful payment has to be
assumed by the defendant.
On the matter of the award of the interest and attorney's fees, the Board of
Directors finds no reason to reverse the decision of the Arbiter. The defendant's
failure to reimburse the plaintiff has constrained the plaintiff to regular the
services of counsel in order to protect its interest notwithstanding that plaintiffs
claim is plainly valid just and demandable. In addition, defendant's clear
obligation is to reimburse plaintiff upon direct presentation of the checks; and it is
undenied that up to this time the defendant has failed to make such
reimbursement.

WHEREFORE, the petition is DISMISSED for lack of merit without pronouncement as to costs.
The decision of the respondent court of 24 March 1986 and its order of 3 June 1986 are hereby
declared to be immediately executory.
SO ORDERED.
Teehankee, C.J., Narvasa, Cruz and Paras, JJ., concur.

j. Bank Of The Philippine Islands Vs. Court Of Appeals, G.R. No.

136202, January 25, 2007

AZCUNA, J.:
This is a petition for review under Rule 45 of the Rules of Court seeking the reversal of the
Decision dated April 3, 1998, and the Resolution dated November 9, 1998, of the Court of Appeals in CA-
G.R. CV No. 42241.

The facts are as follows:

A.A. Salazar Construction and Engineering Services filed an action for a sum of money with
damages against herein petitioner Bank of the Philippine Islands (BPI) on December 5, 1991 before Branch
156 of the Regional Trial Court (RTC) of Pasig City. The complaint was later amended by substituting the
name of Annabelle A. Salazar as the real party in interest in place of A.A. Salazar Construction and
Engineering Services. Private respondent Salazar prayed for the recovery of the amount of Two Hundred
Sixty-Seven Thousand, Seven Hundred Seven Pesos and Seventy Centavos (P267,707.70) debited by
petitioner BPI from her account. She likewise prayed for damages and attorney’s fees.

Petitioner BPI, in its answer, alleged that on August 31, 1991, Julio R. Templonuevo, third-party
defendant and herein also a private respondent, demanded from the former payment of the amount of Two
Hundred Sixty-Seven Thousand, Six Hundred Ninety-Two Pesos and Fifty Centavos (P267,692.50)
representing the aggregate value of three (3) checks, which were allegedly payable to him, but which were
deposited with the petitioner bank to private respondent Salazar’s account (Account No. 0203-1187-67)
without his knowledge and corresponding endorsement.

Accepting that Templonuevo’s claim was a valid one, petitioner BPI froze Account No. 0201-
0588-48 of A.A. Salazar and Construction and Engineering Services, instead of Account No. 0203-1187-67
where the checks were deposited, since this account was already closed by private respondent Salazar or
had an insufficient balance.

Private respondent Salazar was advised to settle the matter with Templonuevo but they did not
arrive at any settlement. As it appeared that private respondent Salazar was not entitled to the funds
represented by the checks which were deposited and accepted for deposit, petitioner BPI decided to debit
the amount of P267,707.70 from her Account No. 0201-0588-48 and the sum of P267,692.50 was paid to
Templonuevo by means of a cashier’s check. The difference between the value of the checks (P267,692.50)
and the amount actually debited from her account (P267,707.70) represented bank charges in connection
with the issuance of a cashier’s check to Templonuevo.

In the answer to the third-party complaint, private respondent Templonuevo admitted the payment
to him of P267,692.50 and argued that said payment was to correct the malicious deposit made by private
respondent Salazar to her private account, and that petitioner bank’s negligence and tolerance regarding the
matter was violative of the primary and ordinary rules of banking. He likewise contended that the debiting
or taking of the reimbursed amount from the account of private respondent Salazar by petitioner BPI was a
matter exclusively between said parties and may be pursuant to banking rules and regulations, but did not in
any way affect him. The debiting from another account of private respondent Salazar, considering that her
other account was effectively closed, was not his concern.

After trial, the RTC rendered a decision, the dispositive portion of which reads thus:

WHEREFORE, premises considered, judgment is hereby rendered

in favor of the plaintiff [private respondent Salazar] and against the
defendant [petitioner BPI] and ordering the latter to pay as follows:

1. The amount of P267,707.70 with 12% interest thereon

from September 16, 1991 until the said amount is fully
paid;
2. The amount of P30,000.00 as and for actual damages;
3. The amount of P50,000.00 as and for moral damages;
4. The amount of P50,000.00 as and for exemplary damages;
5. The amount of P30,000.00 as and for attorney’s fees; and
6. Costs of suit.

The counterclaim is hereby ordered DISMISSED for lack of

factual basis.

The third-party complaint [filed by petitioner] is hereby likewise

ordered DISMISSED for lack of merit.

Third-party defendant’s [i.e., private respondent Templonuevo’s

counterclaim is hereby likewise DISMISSED for lack of factual basis.

SO ORDERED.
 On appeal, the Court of Appeals (CA) affirmed the decision of the RTC and held that respondent
Salazar was entitled to the proceeds of the three (3) checks notwithstanding the lack of endorsement thereon
by the payee. The CA concluded that Salazar and Templonuevo had previously agreed that the checks
payable to JRT Construction and Trading actually belonged to Salazar and would be deposited to her
account, with petitioner acquiescing to the arrangement.

Petitioner therefore filed this petition on these grounds:

I.
The Court of Appeals committed reversible error in misinterpreting
Section 49 of the Negotiable Instruments Law and Section 3 (r and s) of
Rule 131 of the New Rules on Evidence.

II.
The Court of Appeals committed reversible error in NOT applying the
provisions of Articles 22, 1278 and 1290 of the Civil Code in favor of
BPI.

III.
The Court of Appeals committed a reversible error in holding, based on a
misapprehension of facts, that the account from which BPI debited the
amount of P267,707.70 belonged to a corporation with a separate and
distinct personality.

IV.
The Court of Appeals committed a reversible error in holding, based
entirely on speculations, surmises or conjectures, that there was an
agreement between SALAZAR and TEMPLONUEVO that checks
payable to TEMPLONUEVO may be deposited by SALAZAR to her
personal account and that BPI was privy to this agreement.
V.
The Court of Appeals committed reversible error in holding, based
entirely on speculation, surmises or conjectures, that SALAZAR suffered
great damage and prejudice and that her business standing was eroded.

VI.
The Court of Appeals erred in affirming instead of reversing the decision
of the lower court against BPI and dismissing SALAZAR’s complaint.

VII.
The Honorable Court erred in affirming the decision of the lower court
dismissing the third-party complaint of BPI.447[7]

                                                                                                               

 
 The issues center on the propriety of the deductions made by petitioner from private respondent
Salazar’s account. Stated otherwise, does a collecting bank, over the objections of its depositor, have the
authority to withdraw unilaterally from such depositor’s account the amount it had previously paid upon
certain unendorsed order instruments deposited by the depositor to another account that she later closed?

Petitioner argues thus:

1. There is no presumption in law that a check payable to order, when found in the
possession of a person who is neither a payee nor the indorsee thereof, has been lawfully
transferred for value. Hence, the CA should not have presumed that Salazar was a
transferee for value within the contemplation of Section 49 of the Negotiable Instruments
Law, as the latter applies only to a holder defined under Section 191of the same.

2. Salazar failed to adduce sufficient evidence to prove that her possession of the three
checks was lawful despite her allegations that these checks were deposited pursuant to a
prior internal arrangement with Templonuevo and that petitioner was privy to the
arrangement.

3. The CA should have applied the Civil Code provisions on legal compensation because in
deducting the subject amount from Salazar’s account, petitioner was merely rectifying the
undue payment it made upon the checks and exercising its prerogative to alter or modify
an erroneous credit entry in the regular course of its business.

4. The debit of the amount from the account of A.A. Salazar Construction and Engineering
Services was proper even though the value of the checks had been originally credited to
the personal account of Salazar because A.A. Salazar Construction and Engineering
Services, an unincorporated single proprietorship, had no separate and distinct personality
from Salazar.

5. Assuming the deduction from Salazar’s account was improper, the CA should not have
dismissed petitioner’s third-party complaint against Templonuevo because the latter
would have the legal duty to return to petitioner the proceeds of the checks which he
previously received from it.

6. There was no factual basis for the award of damages to Salazar.

The petition is partly meritorious.

First, the issue raised by petitioner requires an inquiry into the factual findings made by the CA.
The CA’s conclusion that the deductions from the bank account of A.A. Salazar Construction and
Engineering Services were improper stemmed from its finding that there was no ineffective payment to
Salazar which would call for the exercise of petitioner’s right to set off against the former’s bank deposits.
This finding, in turn, was drawn from the pleadings of the parties, the evidence adduced during trial and
upon the admissions and stipulations of fact made during the pre-trial, most significantly the following:

(a) That Salazar previously had in her possession the following checks:

(1) Solid Bank Check No. CB766556 dated January 30, 1990 in the
amount of P57,712.50;
(2) Solid Bank Check No. CB898978 dated July 31, 1990 in the
amount of P55,180.00; and,
 (3) Equitable Banking Corporation Check No. 32380638 dated
August 28, 1990 for the amount of P154,800.00;

(b) That these checks which had an aggregate amount of P267,692.50 were payable to the
order of JRT Construction and Trading, the name and style under which Templonuevo does business;

(c) That despite the lack of endorsement of the designated payee upon such checks, Salazar
was able to deposit the checks in her personal savings account with petitioner and encash the same;

(d) That petitioner accepted and paid the checks on three (3) separate occasions over a span
of eight months in 1990; and
(e) That Templonuevo only protested the purportedly unauthorized encashment of the checks
after the lapse of one year from the date of the last check.

Petitioner concedes that when it credited the value of the checks to the account of private
respondent Salazar, it made a mistake because it failed to notice the lack of endorsement thereon by the
designated payee. The CA, however, did not lend credence to this claim and concluded that petitioner’s
actions were deliberate, in view of its admission that the “mistake” was committed three times on three
separate occasions, indicating acquiescence to the internal arrangement between Salazar and Templonuevo.
The CA explained thus:

It was quite apparent that the three checks which appellee Salazar
deposited were not indorsed. Three times she deposited them to her
account and three times the amounts borne by these checks were credited
to the same. And in those separate occasions, the bank did not return the
checks to her so that she could have them indorsed. Neither did the bank
question her as to why she was depositing the checks to her account
considering that she was not the payee thereof, thus allowing us to come to
the conclusion that defendant-appellant BPI was fully aware that the
proceeds of the three checks belong to appellee.

For if the bank was not privy to the agreement between Salazar and
Templonuevo, it is most unlikely that appellant BPI (or any bank for that
matter) would have accepted the checks for deposit on three separate times
nary any question. Banks are most finicky over accepting checks for
deposit without the corresponding indorsement by their payee. In fact, they
hesitate to accept indorsed checks for deposit if the depositor is not one
they know very well.

The CA likewise sustained Salazar’s position that she received the checks from Templonuevo
pursuant to an internal arrangement between them, ratiocinating as follows:

If there was indeed no arrangement between Templonuevo and the

plaintiff over the three questioned checks, it baffles us why it was only on
August 31, 1991 or more than a year after the third and last check was
deposited that he demanded for the refund of the total amount of
P267,692.50.
 A prudent man knowing that payment is due him would have
demanded payment by his debtor from the moment the same became due
and demandable. More so if the sum involved runs in hundreds of thousand
of pesos. By and large, every person, at the very moment he learns that he
was deprived of a thing which rightfully belongs to him, would have
created a big fuss. He would not have waited for a year within which to do
so. It is most inconceivable that Templonuevo did not do this.

Generally, only questions of law may be raised in an appeal by certiorari under Rule 45 of the
Rules of Court. Factual findings of the CA are entitled to great weight and respect, especially when the CA
affirms the factual findings of the trial court. Such questions on whether certain items of evidence should
be accorded probative value or weight, or rejected as feeble or spurious, or whether or not the proofs on one
side or the other are clear and convincing and adequate to establish a proposition in issue, are questions of
fact. The same holds true for questions on whether or not the body of proofs presented by a party, weighed
and analyzed in relation to contrary evidence submitted by the adverse party may be said to be strong, clear
and convincing, or whether or not inconsistencies in the body of proofs of a party are of such gravity as to
justify refusing to give said proofs weight – all these are issues of fact which are not reviewable by the
Court.

This rule, however, is not absolute and admits of certain exceptions, namely: a) when the
conclusion is a finding grounded entirely on speculations, surmises, or conjectures; b) when the inference
made is manifestly mistaken, absurd, or impossible; c) when there is a grave abuse of discretion; d) when
the judgment is based on a misapprehension of facts; e) when the findings of fact are conflicting; f) when
the CA, in making its findings, went beyond the issues of the case and the same are contrary to the
admissions of both appellant and appellee; g) when the findings of the CA are contrary to those of the trial
court; h) when the findings of fact are conclusions without citation of specific evidence on which they are
based; i) when the finding of fact of the CA is premised on the supposed absence of evidence but is
contradicted by the evidence on record; and j) when the CA manifestly overlooked certain relevant facts
not disputed by the parties and which, if properly considered, would justify a different conclusion.448[16]

In the present case, the records do not support the finding made by the CA and the trial court that a
prior arrangement existed between Salazar and Templonuevo regarding the transfer of ownership of the
checks. This fact is crucial as Salazar’s entitlement to the value of the instruments is based on the
assumption that she is a transferee within the contemplation of Section 49 of the Negotiable Instruments
Law.

Section 49 of the Negotiable Instruments Law contemplates a situation whereby the payee or
indorsee delivers a negotiable instrument for value without indorsing it, thus:

Transfer without indorsement; effect of- Where the holder of an

instrument payable to his order transfers it for value without indorsing it,
the transfer vests in the transferee such title as the transferor had therein,
and the transferee acquires in addition, the right to have the indorsement of
the transferor. But for the purpose of determining whether the transferee is
a holder in due course, the negotiation takes effect as of the time when the
indorsement is actually made.

                                                                                                               

 
 It bears stressing that the above transaction is an equitable assignment and the transferee acquires
the instrument subject to defenses and equities available among prior parties. Thus, if the transferor had
legal title, the transferee acquires such title and, in addition, the right to have the indorsement of the
transferor and also the right, as holder of the legal title, to maintain legal action against the maker or
acceptor or other party liable to the transferor. The underlying premise of this provision, however, is that a
valid transfer of ownership of the negotiable instrument in question has taken place.

Transferees in this situation do not enjoy the presumption of ownership in favor of holders since
they are neither payees nor indorsees of such instruments. The weight of authority is that the mere
possession of a negotiable instrument does not in itself conclusively establish either the right of the
possessor to receive payment, or of the right of one who has made payment to be discharged from liability.
Thus, something more than mere possession by persons who are not payees or indorsers of the instrument
is necessary to authorize payment to them in the absence of any other facts from which the authority to
receive payment may be inferred.

The CA and the trial court surmised that the subject checks belonged to private respondent Salazar
based on the pre-trial stipulation that Templonuevo incurred a one-year delay in demanding reimbursement
for the proceeds of the same. To the Court’s mind, however, such period of delay is not of such
unreasonable length as to estop Templonuevo from asserting ownership over the checks especially
considering that it was readily apparent on the face of the instruments that these were crossed checks.

In State Investment House v. IAC, the Court enumerated the effects of crossing a check, thus: (1)
that the check may not be encashed but only deposited in the bank; (2) that the check may be negotiated
only once - to one who has an account with a bank; and (3) that the act of crossing the check serves as a
warning to the holder that the check has been issued for a definite purpose so that such holder must inquire
if the check has been received pursuant to that purpose.

Thus, even if the delay in the demand for reimbursement is taken in conjunction with Salazar’s
possession of the checks, it cannot be said that the presumption of ownership in Templonuevo’s favor as
the designated payee therein was sufficiently overcome. This is consistent with the principle that if
instruments payable to named payees or to their order have not been indorsed in blank, only such payees or
their indorsees can be holders and entitled to receive payment in their own right.449[21]

The presumption under Section 131(s) of the Rules of Court stating that a negotiable instrument
was given for a sufficient consideration will not inure to the benefit of Salazar because the term “given”
does not pertain merely to a transfer of physical possession of the instrument. The phrase “given or
indorsed” in the context of a negotiable instrument refers to the manner in which such instrument may be
negotiated. Negotiable instruments are negotiated by “transfer to one person or another in such a manner as
to constitute the transferee the holder thereof. If payable to bearer it is negotiated by delivery. If payable to
order it is negotiated by the indorsement completed by delivery.”450[22] The present case involves
checks payable to order. Not being a payee or indorsee of the checks, private respondent Salazar could not
be a holder thereof.

It is an exception to the general rule for a payee of an order instrument to transfer the instrument
without indorsement. Precisely because the situation is abnormal, it is but fair to the maker and to prior
holders to require possessors to prove without the aid of an initial presumption in their favor, that they

                                                                                                               
 

 
came into possession by virtue of a legitimate transaction with the last holder.451[23] Salazar failed to
discharge this burden, and the return of the check proceeds to Templonuevo was therefore warranted under
the circumstances despite the fact that Templonuevo may not have clearly demonstrated that he never
authorized Salazar to deposit the checks or to encash the same. Noteworthy also is the fact that petitioner
stamped on the back of the checks the words: "All prior endorsements and/or lack of endorsements
guaranteed," thereby making the assurance that it had ascertained the genuineness of all prior
endorsements. Having assumed the liability of a general indorser, petitioner’s liability to the designated
payee cannot be denied.

Consequently, petitioner, as the collecting bank, had the right to debit Salazar’s account for the
value of the checks it previously credited in her favor. It is of no moment that the account debited by
petitioner was different from the original account to which the proceeds of the check were credited because
both admittedly belonged to Salazar, the former being the account of the sole proprietorship which had no
separate and distinct personality from her, and the latter being her personal account.

The right of set-off was explained in Associated Bank v. Tan:452[24]

A bank generally has a right of set-off over the deposits therein for
the payment of any withdrawals on the part of a depositor. The right of a
collecting bank to debit a client's account for the value of a dishonored
check that has previously been credited has fairly been established by
jurisprudence. To begin with, Article 1980 of the Civil Code provides that
"[f]ixed, savings, and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple loan.”

Hence, the relationship between banks and depositors has been held
to be that of creditor and debtor. Thus, legal compensation under Article
1278 of the Civil Code may take place "when all the requisites mentioned
in Article 1279 are present," as follows:

(1) That each one of the obligors be bound principally,

and that he be at the same time a principal creditor
of the other;
(2) That both debts consist in a sum of money, or if the
things due are consumable, they be of the same
kind, and also of the same quality if the latter has
been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtor.

                                                                                                               
 

 
 While, however, it is conceded that petitioner had the right of set-off over the amount it paid to
Templonuevo against the deposit of Salazar, the issue of whether it acted judiciously is an entirely different
matter.453[25] As businesses affected with public interest, and because of the nature of their functions,
banks are under obligation to treat the accounts of their depositors with meticulous care, always having in
mind the fiduciary nature of their relationship.454[26] In this regard, petitioner was clearly remiss in its
duty to private respondent Salazar as its depositor.

To begin with, the irregularity appeared plainly on the face of the checks. Despite the obvious
lack of indorsement thereon, petitioner permitted the encashment of these checks three times on three
separate occasions. This negates petitioner’s claim that it merely made a mistake in crediting the value of
the checks to Salazar’s account and instead bolsters the conclusion of the CA that petitioner recognized
Salazar’s claim of ownership of checks and acted deliberately in paying the same, contrary to ordinary
banking policy and practice. It must be emphasized that the law imposes a duty of diligence on the
collecting bank to scrutinize checks deposited with it, for the purpose of determining their genuineness and
regularity. The collecting bank, being primarily engaged in banking, holds itself out to the public as the
expert on this field, and the law thus holds it to a high standard of conduct.455[27] The taking and
collection of a check without the proper indorsement amount to a conversion of the check by the
bank.456[28]

More importantly, however, solely upon the prompting of Templonuevo, and with full knowledge
of the brewing dispute between Salazar and Templonuevo, petitioner debited the account held in the name
of the sole proprietorship of Salazar without even serving due notice upon her. This ran contrary to
petitioner’s assurances to private respondent Salazar that the account would remain untouched, pending the
resolution of the controversy between her and Templonuevo.457[29] In this connection, the CA cited the
letter dated September 5, 1991 of Mr. Manuel Ablan, Senior Manager of petitioner bank’s Pasig/Ortigas
branch, to private respondent Salazar informing her that her account had been frozen, thus:

From the tenor of the letter of Manuel Ablan, it is safe to conclude

that Account No. 0201-0588-48 will remain frozen or untouched until
herein [Salazar] has settled matters with Templonuevo. But, in an
unexpected move, in less than two weeks (eleven days to be precise) from
the time that letter was written, [petitioner] bank issued a cashier’s check in
the name of Julio R. Templonuevo of the J.R.T. Construction and Trading
for the sum of P267,692.50 (Exhibit “8”) and debited said amount from
Ms. Arcilla’s account No. 0201-0588-48 which was supposed to be frozen
or controlled. Such a move by BPI is, to Our minds, a clear case of

                                                                                                               

 
 
 
 

 
 negligence, if not a fraudulent, wanton and reckless disregard of the right
of its depositor.
The records further bear out the fact that respondent Salazar had issued several checks drawn
against the account of A.A. Salazar Construction and Engineering Services prior to any notice of deduction
being served. The CA sustained private respondent Salazar’s claim of damages in this regard:

The act of the bank in freezing and later debiting the amount of
P267,692.50 from the account of A.A. Salazar Construction and
Engineering Services caused plaintiff-appellee great damage and prejudice
particularly when she had already issued checks drawn against the said
account. As can be expected, the said checks bounced. To prove this,
plaintiff-appellee presented as exhibits photocopies of checks dated
September 8, 1991, October 28, 1991, and November 14, 1991 (Exhibits
“D”, “E” and “F” respectively)458[30]

These checks, it must be emphasized, were subsequently dishonored, thereby causing private
respondent Salazar undue embarrassment and inflicting damage to her standing in the business community.
Under the circumstances, she was clearly not given the opportunity to protect her interest when petitioner
unilaterally withdrew the above amount from her account without informing her that it had already done so.

For the above reasons, the Court finds no reason to disturb the award of damages granted by the
CA against petitioner. This whole incident would have been avoided had petitioner adhered to the standard
of diligence expected of one engaged in the banking business. A depositor has the right to recover
reasonable moral damages even if the bank’s negligence may not have been attended with malice and bad
faith, if the former suffered mental anguish, serious anxiety, embarrassment and humiliation.459[31]
Moral damages are not meant to enrich a complainant at the expense of defendant. It is only intended to
alleviate the moral suffering she has undergone. The award of exemplary damages is justified, on the other
hand, when the acts of the bank are attended by malice, bad faith or gross negligence. The award of
reasonable attorney’s fees is proper where exemplary damages are awarded. It is proper where depositors
are compelled to litigate to protect their interest.460[32]

WHEREFORE, the petition is partially GRANTED. The assailed Decision dated April 3, 1998
and Resolution dated April 3, 1998 rendered by the Court of Appeals in CA-G.R. CV No. 42241 are
MODIFIED insofar as it ordered petitioner Bank of the Philippine Islands to return the amount of Two
Hundred Sixty-seven Thousand Seven Hundred and Seven and 70/100 Pesos (P267,707.70) to respondent
Annabelle A. Salazar, which portion is REVERSED and SET ASIDE. In all other respects, the same are
AFFIRMED.

No costs.

                                                                                                               
 
 

 
 k. Philippine Commercial International Bank vs. Court of Appeals, G.R.
No. 121413, January 29, 2001

These consolidated petitions involve several fraudulently negotiated checks.

The original actions a quo were instituted by Ford Philippines to recover from the drawee bank,
CITIBANK, N.A. (Citibank) and collecting bank, Philippine Commercial International Bank (PCIBank)
[formerly Insular Bank of Asia and America], the value of several checks payable to the Commissioner of
Internal Revenue, which were embezzled allegedly by an organized syndicate.1âwphi1.nêt
G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995 Decision1 of the Court
of Appeals in CA-G.R. CV No. 25017, entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Insular Bank
of Asia and America (now Philipppine Commercial International Bank), and the August 8, 1995
Resolution,2 ordering the collecting bank, Philippine Commercial International Bank, to pay the amount of
Citibank Check No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996 Decision3 of the Court of
Appeals and its March 5, 1997 Resolution4 in CA-G.R. No. 28430 entitled "Ford Philippines, Inc. vs.
Citibank, N.A. and Philippine Commercial International Bank," affirming in toto the judgment of the trial
court holding the defendant drawee bank, Citibank, N.A., solely liable to pay the amount of P12,163,298.10
as damages for the misapplied proceeds of the plaintiff's Citibanl Check Numbers SN-10597 and 16508.
I. G.R. Nos. 121413 and 121479
The stipulated facts submitted by the parties as accepted by the Court of Appeals are as follows:
"On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No. SN-04867 in the
amount of P4,746,114.41, in favor of the Commissioner of Internal Revenue as payment of
plaintiff;s percentage or manufacturer's sales taxes for the third quarter of 1977.
The aforesaid check was deposited with the degendant IBAA (now PCIBank) and was
subsequently cleared at the Central Bank. Upon presentment with the defendant Citibank, the
proceeds of the check was paid to IBAA as collecting or depository bank.
The proceeds of the same Citibank check of the plaintiff was never paid to or received by the
payee thereof, the Commissioner of Internal Revenue.
As a consequence, upon demand of the Bureau and/or Commissioner of Internal Revenue, the
plaintiff was compelled to make a second payment to the Bureau of Internal Revenue of its
percentage/manufacturers' sales taxes for the third quarter of 1977 and that said second payment of
plaintiff in the amount of P4,746,114.41 was duly received by the Bureau of Internal Revenue.
It is further admitted by defendant Citibank that during the time of the transactions in question,
plaintiff had been maintaining a checking account with defendant Citibank; that Citibank Check
No. SN-04867 which was drawn and issued by the plaintiff in favor of the Commissioner of
Internal Revenue was a crossed check in that, on its face were two parallel lines and written in
between said lines was the phrase "Payee's Account Only"; and that defendant Citibank paid the
full face value of the check in the amount of P4,746,114.41 to the defendant IBAA.
It has been duly established that for the payment of plaintiff's percentage tax for the last quarter of
1977, the Bureau of Internal Revenue issued Revenue Tax Receipt No. 18747002, dated October
20, 1977, designating therein in Muntinlupa, Metro Manila, as the authorized agent bank of
Metrobanl, Alabang branch to receive the tax payment of the plaintiff.
On December 19, 1977, plaintiff's Citibank Check No. SN-04867, together with the Revenue Tax
Receipt No. 18747002, was deposited with defendant IBAA, through its Ermita Branch. The latter
accepted the check and sent it to the Central Clearing House for clearing on the samd day, with the
indorsement at the back "all prior indorsements and/or lack of indorsements guaranteed."
Thereafter, defendant IBAA presented the check for payment to defendant Citibank on same date,
December 19, 1977, and the latter paid the face value of the check in the amount of
P4,746,114.41. Consequently, the amount of P4,746,114.41 was debited in plaintiff's account with
the defendant Citibank and the check was returned to the plaintiff.
Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in the amount of
P4,746,114.41 was not paid to the Commissioner of Internal Revenue. Hence, in separate letters
dated October 26, 1979, addressed to the defendants, the plaintiff notified the latter that in case it
 will be re-assessed by the BIR for the payment of the taxes covered by the said checks, then
plaintiff shall hold the defendants liable for reimbursement of the face value of the same. Both
defendants denied liability and refused to pay.
In a letter dated February 28, 1980 by the Acting Commissioner of Internal Revenue addressed to
the plaintiff - supposed to be Exhibit "D", the latter was officially informed, among others, that its
check in the amount of P4, 746,114.41 was not paid to the government or its authorized agent and
instead encashed by unauthorized persons, hence, plaintiff has to pay the said amount within
fifteen days from receipt of the letter. Upon advice of the plaintiff's lawyers, plaintiff on March 11,
1982, paid to the Bureau of Internal Revenue, the amount of P4,746,114.41, representing payment
of plaintiff's percentage tax for the third quarter of 1977.
As a consequence of defendant's refusal to reimburse plaintiff of the payment it had made for the
second time to the BIR of its percentage taxes, plaintiff filed on January 20, 1983 its original
complaint before this Court.
On December 24, 1985, defendant IBAA was merged with the Philippine Commercial
International Bank (PCI Bank) with the latter as the surviving entity.
Defendant Citibank maintains that; the payment it made of plaintiff's Citibank Check No. SN-
04867 in the amount of P4,746,114.41 "was in due course"; it merely relied on the clearing stamp
of the depository/collecting bank, the defendant IBAA that "all prior indorsements and/or lack of
indorsements guaranteed"; and the proximate cause of plaintiff's injury is the gross negligence of
defendant IBAA in indorsing the plaintiff's Citibank check in question.
It is admitted that on December 19, 1977 when the proceeds of plaintiff's Citibank Check No. SN-
048867 was paid to defendant IBAA as collecting bank, plaintiff was maintaining a checking
account with defendant Citibank."5
Although it was not among the stipulated facts, an investigation by the National Bureau of Investigation
(NBI) revealed that Citibank Check No. SN-04867 was recalled by Godofredo Rivera, the General Ledger
Accountant of Ford. He purportedly needed to hold back the check because there was an error in the
computation of the tax due to the Bureau of Internal Revenue (BIR). With Rivera's instruction, PCIBank
replaced the check with two of its own Manager's Checks (MCs). Alleged members of a syndicate later
deposited the two MCs with the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint before the trial court impleading Pacific Banking
Corporation (PBC) and Godofredo Rivera, as third party defendants. But the court dismissed the complaint
against PBC for lack of cause of action. The course likewise dismissed the third-party complaint against
Godofredo Rivera because he could not be served with summons as the NBI declared him as a "fugitive
from justice".
On June 15, 1989, the trial court rendered its decision, as follows:
"Premises considered, judgment is hereby rendered as follows:
"1. Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and severally, to
pay the plaintiff the amount of P4,746,114.41 representing the face value of plaintiff's
Citibank Check No. SN-04867, with interest thereon at the legal rate starting January 20,
1983, the date when the original complaint was filed until the amount is fully paid, plus
costs;
"2. On defendant Citibank's cross-claim: ordering the cross-defendant IBAA (now PCI
Bank) to reimburse defendant Citibank for whatever amount the latter has paid or may
pay to the plaintiff in accordance with next preceding paragraph;
"3. The counterclaims asserted by the defendants against the plaintiff, as well as that
asserted by the cross-defendant against the cross-claimant are dismissed, for lack of
merits; and
"4. With costs against the defendants.
SO ORDERED."6
Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated their respective
petitions for review on certiorari to the Courts of Appeals. On March 27, 1995, the appellate court issued its
judgment as follows:
"WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision with
modifications.
The court hereby renderes judgment:
 1. Dismissing the complaint in Civil Case No. 49287 insofar as defendant Citibank N.A.
is concerned;
2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff the amount of
P4,746,114.41 representing the face value of plaintiff's Citibank Check No. SN-04867,
with interest thereon at the legal rate starting January 20, 1983, the date when the original
complaint was filed until the amount is fully paid;
3. Dismissing the counterclaims asserted by the defendants against the plaintiff as well as
that asserted by the cross-defendant against the cross-claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED."7
PCI Bank moved to reconsider the above-quoted decision of the Court of Appeals, while Ford filed a
"Motion for Partial Reconsideration." Both motions were denied for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of the Twelfth Division of
the Court of Appeals contending that it merely acted on the instruction of Ford and such casue of action had
already prescribed.
PCIBank sets forth the following issues for consideration:
I. Did the respondent court err when, after finding that the petitioner acted on the check drawn by
respondent Ford on the said respondent's instructions, it nevertheless found the petitioner liable to
the said respondent for the full amount of the said check.
II. Did the respondent court err when it did not find prescription in favor of the petitioner.8
In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning the same decision and
resolution of the Court of Appeals, and praying for the reinstatement in toto of the decision of the trial court
which found both PCIBank and Citibank jointly and severally liable for the loss.
In G.R. No. 121479, appellant Ford presents the following propositions for consideration:
I. Respondent Citibank is liable to petitioner Ford considering that:
1. As drawee bank, respondent Citibank owes to petitioner Ford, as the drawer of the
subject check and a depositor of respondent Citibank, an absolute and contractual duty to
pay the proceeds of the subject check only to the payee thereof, the Commissioner of
Internal Revenue.
2. Respondent Citibank failed to observe its duty as banker with respect to the subject
check, which was crossed and payable to "Payee's Account Only."
3. Respondent Citibank raises an issue for the first time on appeal; thus the same should
not be considered by the Honorable Court.
4. As correctly held by the trial court, there is no evidence of gross negligence on the part
of petitioner Ford.9
II. PCI Bank is liable to petitioner Ford considering that:
1. There were no instructions from petitioner Ford to deliver the proceeds of the subject
check to a person other than the payee named therein, the Commissioner of the Bureau of
Internal Revenue; thus, PCIBank's only obligation is to deliver the proceeds to the
Commissioner of the Bureau of Internal Revenue.10
2. PCIBank which affixed its indorsement on the subject check ("All prior indorsement
and/or lack of indorsement guaranteed"), is liable as collecting bank.11
3. PCIBank is barred from raising issues of fact in the instant proceedings.12
4. Petitioner Ford's cause of action had not prescribed.13
II. G.R. No. 128604
The same sysndicate apparently embezzled the proceeds of checks intended, this time, to settle Ford's
percentage taxes appertaining to the second quarter of 1978 and the first quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of P5,851,706.37 representing the
percentage tax due for the second quarter of 1978 payable to the Commissioner of Internal Revenue. A BIR
Revenue Tax Receipt No. 28645385 was issued for the said purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of P6,311,591.73,
representing the payment of percentage tax for the first quarter of 1979 and payable to the Commissioner of
Internal Revenue. Again a BIR Revenue Tax Receipt No. A-1697160 was issued for the said purpose.
Both checks were "crossed checks" and contain two diagonal lines on its upper corner between, which were
written the words "payable to the payee's account only."
The checks never reached the payee, CIR. Thus, in a letter dated February 28, 1980, the BIR, Region 4-B,
demanded for the said tax payments the corresponding periods above-mentioned.
As far as the BIR is concernced, the said two BIR Revenue Tax Receipts were considered "fake and
spurious". This anomaly was confirmed by the NBI upon the initiative of the BIR. The findings forced Ford
to pay the BIR a new, while an action was filed against Citibank and PCIBank for the recovery of the
amount of Citibank Check Numbers SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tried the case, made its findings on the modus
operandi of the syndicate, as follows:
"A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its General Ledger
Accountant. As such, he prepared the plaintiff's check marked Ex. 'A' [Citibank Check No. Sn-
10597] for payment to the BIR. Instead, however, fo delivering the same of the payee, he passed
on the check to a co-conspirator named Remberto Castro who was a pro-manager of the San
Andres Branch of PCIB.* In connivance with one Winston Dulay, Castro himself subsequently
opened a Checking Account in the name of a fictitious person denominated as 'Reynaldo reyes' in
the Meralco Branch of PCIBank where Dulay works as Assistant Manager.
After an initial deposit of P100.00 to validate the account, Castro deposited a worthless Bank of
America Check in exactly the same amount as the first FORD check (Exh. "A", P5,851,706.37)
while this worthless check was coursed through PCIB's main office enroute to the Central Bank
for clearing, replaced this worthless check with FORD's Exhibit 'A' and accordingly tampered the
accompanying documents to cover the replacement. As a result, Exhibit 'A' was cleared by
defendant CITIBANK, and the fictitious deposit account of 'Reynaldo Reyes' was credited at the
PCIB Meralco Branch with the total amount of the FORD check Exhibit 'A'. The same method
was again utilized by the syndicate in profiting from Exh. 'B' [Citibank Check No. SN-16508]
which was subsequently pilfered by Alexis Marindo, Rivera's Assistant at FORD.
From this 'Reynaldo Reyes' account, Castro drew various checks distributing the sahres of the
other participating conspirators namely (1) CRISANTO BERNABE, the mastermind who
formulated the method for the embezzlement; (2) RODOLFO R. DE LEON a customs broker who
negotiated the initial contact between Bernabe, FORD's Godofredo Rivera and PCIB's Remberto
Castro; (3) JUAN VASTILLO who assisted de Leon in the initial arrangements; (4)
GODOFREDO RIVERA, FORD's accountant who passed on the first check (Exhibit "A") to
Castro; (5) REMERTO CASTRO, PCIB's pro-manager at San Andres who performed the
switching of checks in the clearing process and opened the fictitious Reynaldo Reyes account at
the PCIB Meralco Branch; (6) WINSTON DULAY, PCIB's Assistant Manager at its Meralco
Branch, who assisted Castro in switching the checks in the clearing process and facilitated the
opening of the fictitious Reynaldo Reyes' bank account; (7) ALEXIS MARINDO, Rivera's
Assistant at FORD, who gave the second check (Exh. "B") to Castro; (8) ELEUTERIO JIMENEZ,
BIR Collection Agent who provided the fake and spurious revenue tax receipts to make it appear
that the BIR had received FORD's tax payments.
Several other persons and entities were utilized by the syndicate as conduits in the disbursements
of the proceeds of the two checks, but like the aforementioned participants in the conspiracy, have
not been impleaded in the present case. The manner by which the said funds were distributed
among them are traceable from the record of checks drawn against the original "Reynaldo Reyes"
account and indubitably identify the parties who illegally benefited therefrom and readily indicate
in what amounts they did so."14
On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank, Citibank, liable for
the value of the two checks while adsolving PCIBank from any liability, disposing as follows:
"WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to reimburse
plaintiff FORD the total amount of P12,163,298.10 prayed for in its complaint, with 6% interest
thereon from date of first written demand until full payment, plus P300,000.00 attorney's fees and
expenses litigation, and to pay the defendant, PCIB (on its counterclaim to crossclaim) the sum of
P300,000.00 as attorney's fees and costs of litigation, and pay the costs.
SO ORDERED."15
Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the decision of the trial
court. Hence, this petition.
Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of Appeals decision
and its resolution dated March 5, 1997, with respect to the dismissal of the complaint against PCIBank and
holding Citibank solely responsible for the proceeds of Citibank Check Numbers SN-10597 and 16508 for
P5,851,706.73 and P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing the complaint against defendant PCIBank
considering that:
I. Defendant PCIBank was clearly negligent when it failed to exercise the diligence required to be
exercised by it as a banking insitution.
II. Defendant PCIBank clearly failed to observe the diligence required in the selection and
supervision of its officers and employees.
III. Defendant PCIBank was, due to its negligence, clearly liable for the loss or damage resulting
to the plaintiff Ford as a consequence of the substitution of the check consistent with Section 5 of
Central Bank Circular No. 580 series of 1977.
IV. Assuming arguedo that defedant PCIBank did not accept, endorse or negotiate in due course
the subject checks, it is liable, under Article 2154 of the Civil Code, to return the money which it
admits having received, and which was credited to it its Central bank account.16
The main issue presented for our consideration by these petitions could be simplified as follows: Has
petitioner Ford the right to recover from the collecting bank (PCIBank) and the drawee bank (Citibank) the
value of the checks intended as payment to the Commissioner of Internal Revenue? Or has Ford's cause of
action already prescribed?
Note that in these cases, the checks were drawn against the drawee bank, but the title of the person
negotiating the same was allegedly defective because the instrument was obtained by fraud and unlawful
means, and the proceeds of the checks were not remitted to the payee. It was established that instead of
paying the checks to the CIR, for the settlement of the approprite quarterly percentage taxes of Ford, the
checks were diverted and encashed for the eventual distribution among the mmbers of the syndicate. As to
the unlawful negotiation of the check the applicable law is Section 55 of the Negotiable Instruments Law
(NIL), which provides:
"When title defective -- The title of a person who negotiates an instrument is defective within the
meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or
fore and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in
breach of faith or under such circumstances as amount to a fraud."
Pursuant to this provision, it is vital to show that the negotiation is made by the perpetator in breach of faith
amounting to fraud. The person negotiating the checks must have gone beyond the authority given by his
principal. If the principal could prove that there was no negligence in the performance of his duties, he may
set up the personal defense to escape liability and recover from other parties who. Though their own
negligence, alowed the commission of the crime.
In this case, we note that the direct perpetrators of the offense, namely the embezzlers belonging to a
syndicate, are now fugitives from justice. They have, even if temporarily, escaped liability for the
embezzlement of millions of pesos. We are thus left only with the task of determining who of the present
parties before us must bear the burden of loss of these millions. It all boils down to thequestion of liability
based on the degree of negligence among the parties concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty of the "imputed contributory
negligence" that would defeat its claim for reimbursement, bearing ing mind that its employees, Godofredo
Rivera and Alexis Marindo, were among the members of the syndicate.
Citibank points out that Ford allowed its very own employee, Godofredo Rivera, to negotiate the checks to
his co-conspirators, instead of delivering them to the designated authorized collecting bank (Metrobank-
Alabang) of the payee, CIR. Citibank bewails the fact that Ford was remiss in the supervision and control
of its own employees, inasmuch as it only discovered the syndicate's activities through the information
given by the payee of the checks after an unreasonable period of time.
PCIBank also blames Ford of negligence when it allegedly authorized Godofredo Rivera to divert the
proceeds of Citibank Check No. SN-04867, instead of using it to pay the BIR. As to the subsequent run-
around of unds of Citibank Check Nos. SN-10597 and 16508, PCIBank claims that the proximate cause of
the damge to Ford lies in its own officers and employees who carried out the fradulent schemes and the
transactions. These circumstances were not checked by other officers of the company including its
comptroller or internal auditor. PCIBank contends that the inaction of Ford despite the enormity of the
amount involved was a sheer negligence and stated that, as between two innocent persons, one of whom
must suffer the consequences of a breach of trust, the one who made it possible, by his act of negligence,
must bear the loss.
For its part, Ford denies any negligence in the performance of its duties. It avers that there was no evidence
presented before the trial court showing lack of diligence on the part of Ford. And, citing the case of
Gempesaw vs. Court of Appeals,17 Ford argues that even if there was a finding therein that the drawer was
negligent, the drawee bank was still ordered to pay damages.
Furthermore, Ford contends the Godofredo rivera was not authorized to make any representation in its
behalf, specifically, to divert the proceeds of the checks. It adds that Citibank raised the issue of imputed
negligence against Ford for the first time on appeal. Thus, it should not be considered by this Court.
On this point, jurisprudence regarding the imputed negligence of employer in a master-servant relationship
is instructive. Since a master may be held for his servant's wrongful act, the law imputes to the master the
act of the servant, and if that act is negligent or wrongful and proximately results in injury to a third person,
the negligence or wrongful conduct is the negligence or wrongful conduct of the master, for which he is
liable.18 The general rule is that if the master is injured by the negligence of a third person and by the
concuring contributory negligence of his own servant or agent, the latter's negligence is imputed to his
superior and will defeat the superior's action against the third person, asuming, of course that the
contributory negligence was the proximate cause of the injury of which complaint is made.19
Accordingly, we need to determine whether or not the action of Godofredo Rivera, Ford's General Ledger
Accountant, and/or Alexis Marindo, his assistant, was the proximate cause of the loss or damage. AS
defined, proximate cause is that which, in the natural and continuous sequence, unbroken by any efficient,
intervening cause produces the injury and without the result would not have occurred.20
It appears that although the employees of Ford initiated the transactions attributable to an organized
syndicate, in our view, their actions were not the proximate cause of encashing the checks payable to the
CIR. The degree of Ford's negligence, if any, could not be characterized as the proximate cause of the
injury to the parties.
The Board of Directors of Ford, we note, did not confirm the request of Godofredo Rivera to recall
Citibank Check No. SN-04867. Rivera's instruction to replace the said check with PCIBank's Manager's
Check was not in theordinary course of business which could have prompted PCIBank to validate the same.
As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was established that these checks
were made payable to the CIR. Both were crossed checks. These checks were apparently turned around by
Ford's emploees, who were acting on their own personal capacity.
Given these circumstances, the mere fact that the forgery was committed by a drawer-payor's confidential
employee or agent, who by virtue of his position had unusual facilities for perpertrating the fraud and
imposing the forged paper upon the bank, does notentitle the bank toshift the loss to the drawer-payor, in
the absence of some circumstance raising estoppel against the drawer.21 This rule likewise applies to the
checks fraudulently negotiated or diverted by the confidential employees who hold them in their
possession.
With respect to the negligence of PCIBank in the payment of the three checks involved, separately, the trial
courts found variations between the negotiation of Citibank Check No. SN-04867 and the misapplication of
total proceeds of Checks SN-10597 and 16508. Therefore, we have to scrutinize, separately, PCIBank's
share of negligence when the syndicate achieved its ultimate agenda of stealing the proceeds of these
checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It was coursed
through the ordinary banking transaction, sent to Central Clearing with the indorsement at the back "all
prior indorsements and/or lack of indorsements guaranteed," and was presented to Citibank for payment.
Thereafter PCIBank, instead of remitting the proceeds to the CIR, prepared two of its Manager's checks and
enabled the syndicate to encash the same.
On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The neglect of
PCIBank employees to verify whether his letter requesting for the replacement of the Citibank Check No.
SN-04867 was duly authorized, showed lack of care and prudence required in the circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect the payment of taxpayers in behalf of
the BIR. As an agent of BIR, PCIBank is duty bound to consult its principal regarding the unwarranted
instructions given by the payor or its agent. As aptly stated by the trial court, to wit:
 "xxx. Since the questioned crossed check was deposited with IBAA [now PCIBank], which
claimed to be a depository/collecting bank of BIR, it has the responsibility to make sure that the
check in question is deposited in Payee's account only.
xxx xxx xxx
As agent of the BIR (the payee of the check), defendant IBAA should receive instructions only
from its principal BIR and not from any other person especially so when that person is not known
to the defendant. It is very imprudent on the part of the defendant IBAA to just rely on the alleged
telephone call of the one Godofredo Rivera and in his signature considering that the plaintiff is not
a client of the defendant IBAA."
It is a well-settled rule that the relationship between the payee or holder of commercial paper and the bank
to which it is sent for collection is, in the absence of an argreement to the contrary, that of principal and
agent.22 A bank which receives such paper for collection is the agent of the payee or holder.23
Even considering arguendo, that the diversion of the amount of a check payable to the collecting bank in
behalf of the designated payee may be allowed, still such diversion must be properly authorized by the
payor. Otherwise stated, the diversion can be justified only by proof of authority from the drawer, or that
the drawer has clothed his agent with apparent authority to receive the proceeds of such check.
Citibank further argues that PCI Bank's clearing stamp appearing at the back of the questioned checks
stating that ALL PRIOR INDORSEMENTS AND/OR LACK OF INDORSEMENTS GURANTEED
should render PCIBank liable because it made it pass through the clearing house and therefore Citibank had
no other option but to pay it. Thus, Citibank had no other option but to pay it. Thus, Citibank assets that the
proximate cause of Ford's injury is the gross negligence of PCIBank. Since the questione dcrossed check
was deposited with PCIBank, which claimed to be a depository/collecting bank of the BIR, it had the
responsibility to make sure that the check in questions is deposited in Payee's account only.
Indeed, the crossing of the check with the phrase "Payee's Account Only," is a warning that the check
should be deposited only in the account of the CIR. Thus, it is the duty of the collecting bank PCIBank to
ascertain that the check be deposited in payee's account only. Therefore, it is the collecting bank (PCIBank)
which is bound to scruninize the check and to know its depositors before it could make the clearing
indorsement "all prior indorsements and/or lack of indorsement guaranteed".
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation,24 we ruled:
"Anent petitioner's liability on said instruments, this court is in full accord with the ruling of the
PCHC's Board of Directors that:
'In presenting the checks for clearing and for payment, the defendant made an express guarantee
on the validity of "all prior endorsements." Thus, stamped at the back of the checks are the
defedant's clear warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK OF
ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would not have paid on the
checks.'
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty
has proven to be false and inaccurate, the defendant is liable for any damage arising out of the
falsity of its representation."25
Lastly, banking business requires that the one who first cashes and negotiates the check must take some
percautions to learn whether or not it is genuine. And if the one cashing the check through indifference or
othe circumstance assists the forger in committing the fraud, he should not be permitted to retain the
proceeds of the check from the drawee whose sole fault was that it did not discover the forgery or the
defect in the title of the person negotiating the instrument before paying the check. For this reason, a bank
which cashes a check drawn upon another bank, without requiring proof as to the identity of persons
presenting it, or making inquiries with regard to them, cannot hold the proceeds against the drawee when
the proceeds of the checks were afterwards diverted to the hands of a third party. In such cases the drawee
bank has a right to believe that the cashing bank (or the collecting bank) had, by the usual proper
investigation, satisfied itself of the authenticity of the negotiation of the checks. Thus, one who encashed a
check which had been forged or diverted and in turn received payment thereon from the drawee, is guilty of
negligence which proximately contributed to the success of the fraud practiced on the drawee bank. The
latter may recover from the holder the money paid on the check.26
Having established that the collecting bank's negligence is the proximate cause of the loss, we conclude that
PCIBank is liable in the amount corresponding to the proceeds of Citibank Check No. SN-04867.
G.R. No. 128604
The trial court and the Court of Appeals found that PCIBank had no official act in the ordinary course of
business that would attribute to it the case of the embezzlement of Citibank Check Numbers SN-10597 and
16508, because PCIBank did not actually receive nor hold the two Ford checks at all. The trial court held,
thus:
"Neither is there any proof that defendant PCIBank contributed any official or conscious
participation in the process of the embezzlement. This Court is convinced that the switching
operation (involving the checks while in transit for "clearing") were the clandestine or hidden
actuations performed by the members of the syndicate in their own personl, covert and private
capacity and done without the knowledge of the defendant PCIBank…"27
In this case, there was no evidence presented confirming the conscious particiapation of PCIBank in the
embezzlement. As a general rule, however, a banking corporation is liable for the wrongful or tortuous acts
and declarations of its officers or agents within the course and scope of their employment.28 A bank will be
held liable for the negligence of its officers or agents when acting within the course and scope of their
employment. It may be liable for the tortuous acts of its officers even as regards that species of tort of
which malice is an essential element. In this case, we find a situation where the PCIBank appears also to be
the victim of the scheme hatched by a syndicate in which its own management employees had particiapted.
The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received Citibank Check Numbers
SN-10597 and 16508. He passed the checks to a co-conspirator, an Assistant Manager of PCIBank's
Meralco Branch, who helped Castro open a Checking account of a fictitious person named "Reynaldo
Reyes." Castro deposited a worthless Bank of America Check in exactly the same amount of Ford checks.
The syndicate tampered with the checks and succeeded in replacing the worthless checks and the eventual
encashment of Citibank Check Nos. SN 10597 and 16508. The PCIBank Ptro-manager, Castro, and his co-
conspirator Assistant Manager apparently performed their activities using facilities in their official capacity
or authority but for their personal and private gain or benefit.
A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the
frauds these officers or agents were enabled to perpetrate in the apparent course of their employment; nor
will t be permitted to shirk its responsibility for such frauds, even though no benefit may accrue to the bank
therefrom. For the general rule is that a bank is liable for the fraudulent acts or representations of an officer
or agent acting within the course and apparent scope of his employment or authority.29 And if an officer or
employee of a bank, in his official capacity, receives money to satisfy an evidence of indebetedness lodged
with his bank for collection, the bank is liable for his misappropriation of such sum.30
Moreover, as correctly pointed out by Ford, Section 531 of Central Bank Circular No. 580, Series of 1977
provides that any theft affecting items in transit for clearing, shall be for the account of sending bank,
which in this case is PCIBank.
But in this case, responsibility for negligence does not lie on PCIBank's shoulders alone.
The evidence on record shows that Citibank as drawee bank was likewise negligent in the performance of
its duties. Citibank failed to establish that its payment of Ford's checjs were made in due course and legally
in order. In its defense, Citibank claims the genuineness and due execution of said checks, considering that
Citibank (1) has no knowledge of any informity in the issuance of the checks in question (2) coupled by the
fact that said checks were sufficiently funded and (3) the endorsement of the Payee or lack thereof was
guaranteed by PCI Bank (formerly IBAA), thus, it has the obligation to honor and pay the same.
For its part, Ford contends that Citibank as the drawee bank owes to Ford an absolute and contractual duty
to pay the proceeds of the subject check only to the payee thereof, the CIR. Citing Section 6232 of the
Negotiable Instruments Law, Ford argues that by accepting the instrument, the acceptro which is Citibank
engages that it will pay according to the tenor of its acceptance, and that it will pay only to the payee, (the
CIR), considering the fact that here the check was crossed with annotation "Payees Account Only."
As ruled by the Court of Appeals, Citibank must likewise answer for the damages incurred by Ford on
Citibank Checks Numbers SN 10597 and 16508, because of the contractual relationship existing between
the two. Citibank, as the drawee bank breached its contractual obligation with Ford and such degree of
culpability contributed to the damage caused to the latter. On this score, we agree with the respondent
court's ruling.
Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before paying the amount
of the proceeds thereof to the collecting bank of the BIR. One thing is clear from the record: the clearing
stamps at the back of Citibank Check Nos. SN 10597 and 16508 do not bear any initials. Citibank failed to
notice and verify the absence of the clearing stamps. Had this been duly examined, the switching of the
worthless checks to Citibank Check Nos. 10597 and 16508 would have been discovered in time. For this
reason, Citibank had indeed failed to perform what was incumbent upon it, which is to ensure that the
amount of the checks should be paid only to its designated payee. The fact that the drawee bank did not
discover the irregularity seasonably, in our view, consitutes negligence in carrying out the bank's duty to its
depositors. The point is that as a business affected with public interest and because of the nature of its
functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always
having in mind the fiduciary nature of their relationship.33
Thus, invoking the doctrine of comparative negligence, we are of the view that both PCIBank and Citibank
failed in their respective obligations and both were negligent in the selection and supervision of their
employees resulting in the encashment of Citibank Check Nos. SN 10597 AND 16508. Thus, we are
constrained to hold them equally liable for the loss of the proceeds of said checks issued by Ford in favor of
the CIR.
Time and again, we have stressed that banking business is so impressed with public interest where the trust
and confidence of the public in general is of paramount umportance such that the appropriate standard of
diligence must be very high, if not the highest, degree of diligence.34 A bank's liability as obligor is not
merely vicarious but primary, wherein the defense of exercise of due diligence in the selection and
supervision of its employees is of no moment.35
Banks handle daily transactions involving millions of pesos.36 By the very nature of their work the degree
of responsibility, care and trustworthiness expected of their employees and officials is far greater than those
of ordinary clerks and employees.37 Banks are expected to exercise the highest degree of diligence in the
selection and supervision of their employees.38
On the issue of prescription, PCIBank claims that the action of Ford had prescribed because of its inability
to seek judicial relief seasonably, considering that the alleged negligent act took place prior to December
19, 1977 but the relief was sought only in 1983, or seven years thereafter.
The statute of limitations begins to run when the bank gives the depositor notice of the payment, which is
ordinarily when the check is returned to the alleged drawer as a voucher with a statement of his account,39
and an action upon a check is ordinarily governed by the statutory period applicable to instruments in
writing.40
Our laws on the matter provide that the action upon a written contract must be brought within ten year from
the time the right of action accrues.41 hence, the reckoning time for the prescriptive period begins when the
instrument was issued and the corresponding check was returned by the bank to its depositor (normally a
month thereafter). Applying the same rule, the cause of action for the recovery of the proceeds of Citibank
Check No. SN 04867 would normally be a month after December 19, 1977, when Citibank paid the face
value of the check in the amount of P4,746,114.41. Since the original complaint for the cause of action was
filed on January 20, 1984, barely six years had lapsed. Thus, we conclude that Ford's cause of action to
recover the amount of Citibank Check No. SN 04867 was seasonably filed within the period provided by
law.
Finally, we also find thet Ford is not completely blameless in its failure to detect the fraud. Failure on the
part of the depositor to examine its passbook, statements of account, and cancelled checks and to give
notice within a reasonable time (or as required by statute) of any discrepancy which it may in the exercise
of due care and diligence find therein, serves to mitigate the banks' liability by reducing the award of
interest from twelve percent (12%) to six percent (6%) per annum. As provided in Article 1172 of the Civil
Code of the Philippines, respondibility arising from negligence in the performance of every kind of
obligation is also demandable, but such liability may be regulated by the courts, according to the
circumstances. In quasi-delicts, the contributory negligence of the plaintiff shall reduce the damages that he
may recover.42
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 25017
are AFFIRMED. PCIBank, know formerly as Insular Bank of Asia and America, id declared solely
responsible for the loss of the proceeds of Citibank Check No SN 04867 in the amount P4,746,114.41,
which shall be paid together with six percent (6%) interest thereon to Ford Philippines Inc. from the date
when the original complaint was filed until said amount is fully paid.
However, the Decision and Resolution of the Court of Appeals in CA-G.R. No. 28430 are MODIFIED as
follows: PCIBank and Citibank are adjudged liable for and must share the loss, (concerning the proceeds of
Citibank Check Numbers SN 10597 and 16508 totalling P12,163,298.10) on a fifty-fifty ratio, and each
bank is ORDERED to pay Ford Philippines Inc. P6,081,649.05, with six percent (6%) interest thereon,
from the date the complaint was filed until full payment of said amount.1âwphi1.nêt
Costs against Philippine Commercial International Bank and Citibank N.A.
SO ORDERED.
Bellosillo, Mendoza, Buena, De Leon, Jr., JJ, concur.

b) Minors and Corporations as Depositors

1. Minors
Minors are vested with special capacity and power, in their own right and in their own
names, to make savings or time deposits
CHAPTER 3 — DEPOSIT FUNCTIONS OF BANKSBANKING LAWS & JURISPRUDENCE 98
with and withdraw the same as well as receive interests thereon from banking institutions,
without the assistance of their parents or guardians, provided the following requisites are
met:
1. at least seven years of age,
2. able to read and write,
3. have sufficient discretion, and
4. not otherwise disqualified by any other incapacity.
Parents may nevertheless deposit for their minor children and guardians for their wards.
Deposits in Thrift Banks
Minors in their own rights and in their own names may make deposits and withdraw the
same, and may receive dividends and interest: Provided, however, That, if any guardian shall
give notice in writing to any thrift bank not to make payments of deposits, dividends, or
interest to the minor of whom he is the guardian, then such payment shall be made only to
the guardian.29
2. Corporations
Corporations may open bank accounts as follows:
(i) Incorporation Stage — In case the payment of subscription is in cash, the Securities and
Exchange Commission requires a Bank Certificate of deposit of paid-up capital notarized in
place where signed.
(ii) Post Incorporation — In opening a bank account, the Board of Directors issues a
resolution authorizing the signatories and specifying the depositary bank.
C. Time of Payment of Interest on Time Deposits/Deposit Substitutes
Interest or yield on time deposit/deposit substitute may be paid at maturity or upon
withdrawal or in advance: Provided, however, That interest or yield paid in advance shall not
exceed the interest for one (1) year.

c) Matured Time Deposits

Treatment of Matured Time Deposits/Deposit Substitutes

(i) A time deposit not withdrawn or renewed on its due date shall be treated as a savings
deposit and shall earn interest from maturity to the date of actual withdrawal or renewal at
a rate applicable to savings deposits.
(ii)  A  deposit  substitute  instrument  not  withdrawn  or  renewed  on  its  maturity  date  shall  
from  said  date  become  payable  on  demand  and  shall  earn  an  interest  or  yield  from  maturity  
to  actual  withdrawal  or  renewal  at  a  rate  applicable  to  a  deposit  substitute  with  a  maturity  of  
fifteen  (15)  days.  Banks  performing  quasi-­‐banking  functions  shall  continue  to  consider  
matured  and  unwithdrawn  deposit  substitutes  as  such  and  subject  to  reserves.31

d) Risk-based capital

SECTION 34. Risk-Based Capital. — The Monetary Board shall prescribe the minimum ratio
which the net worth of a bank must bear to its total risk assets which may include contingent
accounts.
For purposes of this Section, the Monetary Board may require that such ratio be determined on
the basis of the net worth and risk assets of a bank and its subsidiaries, financial or otherwise, as
well as
prescribe the composition and the manner of determining the net worth and total risk assets of
banks and
their subsidiaries: Provided, That in the exercise of this authority, the Monetary Board shall, to the
extent
feasible, conform to internationally accepted standards, including those of the Bank for
International
Settlements (BIS), relating to risk-based capital requirements: Provided, further, That it may alter
or
suspend compliance with such ratio whenever necessary for a maximum period of one (1) year:
Provided,
finally, That such ratio shall be applied uniformly to banks of the same category.
In case a bank does not comply with the prescribed minimum ratio, the Monetary Board may limit
or prohibit the distribution of net profits by such bank and may require that part or all of the net
profits be
used to increase the capital accounts of the bank until the minimum requirement has been met.
The
Monetary Board may, furthermore, restrict or prohibit the acquisition of major assets and the
making of
new investments by the bank, with the exception of purchases of readily marketable evidences of
indebtedness of the Republic of the Philippines and of the Bangko Sentral and any other
evidences of
indebtedness or obligations the servicing and repayment of which are fully guaranteed by the
Republic of
the Philippines, until the minimum required capital ratio has been restored.
In case of a bank merger or consolidation, or when a bank is under rehabilitation under a program
approved by the Bangko Sentral, the Monetary Board may temporarily relieve the surviving bank,
consolidated bank, or constituent bank or corporations under rehabilitation from full compliance
with the
required capital ratio under such conditions as it may prescribe.
Before the effectivity of the rules which the Monetary Board is authorized to prescribe under this
provision, Section 22 of the General Banking Act, as amended, Section 9 of the Thrift Banks Act,
and all
pertinent rules issued pursuant thereto, shall continue to be in force.

10. Grant of loans and security requirements

a) Ratio of net worth to total risk assets

SECTION 35. Limit on Loans, Credit Accommodations and Guarantees. —

35.1. Except as the Monetary Board may otherwise prescribe for reasons of national interest, the
total amount of loans, credit accommodations and guarantees as may be defined by the
Monetary Board that may be extended by a bank to any person, partnership, association,
corporation or other entity shall at no time exceed twenty percent (20%) of the net worth of
such bank. The basis for determining compliance with single-borrower limit is the total credit
commitment of the bank to the borrower.
35.2. Unless the Monetary Board prescribes otherwise, the total amount of loans, credit
accommodations and guarantees prescribed in the preceding paragraph may be increased
by an additional ten percent (10%) of the net worth of such bank provided the additional
liabilities of any borrower are adequately secured by trust receipts, shipping documents,
warehouse receipts or other similar documents transferring or securing title covering readily
marketable, non-perishable goods which must be fully covered by insurance.
35.3. The above prescribed ceilings shall include: (a) the direct liability of the maker or acceptor
of
paper discounted with or sold to such bank and the liability of a general indorser, drawer or
guarantor who obtains a loan or other credit accommodation from or discounts paper with or
sells papers to such bank; (b) in the case of an individual who owns or controls a majority
interest in a corporation, partnership, association or any other entity, the liabilities of said
entities to such bank; (c) in the case of a corporation, all liabilities to such bank of all
subsidiaries in which such corporation owns or controls a majority interest; and (d) in the
case of a partnership, association or other entity, the liabilities of the members thereof to
such bank.
35.4. Even if a parent corporation, partnership, association, entity or an individual who owns or
controls a majority interest in such entities has no liability to the bank, the Monetary Board
may prescribe the combination of the liabilities of subsidiary corporations or members of the
partnership, association, entity or such individual under certain circumstances, including but
not limited to any of the following situations: (a) the parent corporation, partnership,
association, entity or individual guarantees the repayment of the liabilities; (b) the liabilities
were incurred for the accommodation of the parent corporation or another subsidiary or of
the partnership or association or entity or such individual; or (c) the subsidiaries though
separate entities operate merely as departments or divisions of a single entity.
35.5. For purposes of this Section, loans, other credit accommodations and guarantees shall
exclude:
(a) loans and other credit accommodations secured by obligations of the Bangko Sentral or
of the Philippine Government; (b) loans and other credit accommodations fully guaranteed by the
government as to the payment of principal and interest; (c) loans and other credit
accommodations
covered by assignment of deposits maintained in the lending bank and held in the Philippines; (d)
loans, credit accommodations and acceptances under letters of credit to the extent covered by
margin deposits; and (e) other loans or credit accommodations which the Monetary Board may
from
time to time, specify as non-risk items.
35.6. Loans and other credit accommodations, deposits maintained with, and usual guarantees
by
a bank to any other bank or non-bank entity, whether locally or abroad, shall be subject to
the limits as herein prescribed.
35.7. Certain types of contingent accounts of borrowers may be included among those subject to
these prescribed limits as may be determined by the Monetary Board. (23a)

b) Single borrower’s limit

c) Restrictions on bank exposure to DOSRI (directors, officers,

stockholders and their related interests)

SECTION 36. Restriction on Bank Exposure to Directors, Officers, Stockholders and Their
Related Interests. — No director or officer of any bank shall, directly or indirectly, for himself or
as the
representative or agent of others, borrow from such bank nor shall he become a guarantor,
indorser or
surety for loans from such bank to others, or in any manner be an obligor or incur any contractual
liability
to the bank except with the written approval of the majority of all the directors of the bank,
excluding the
director concerned: Provided, That such written approval shall not be required for loans, other
credit
accommodations and advances granted to officers under a fringe benefit plan approved by the
Bangko
Sentral. The required approval shall be entered upon the records of the bank and a copy of such
entry
shall be transmitted forthwith to the appropriate supervising and examining department of the
Bangko
Sentral.
Dealings of a bank with any of its directors, officers or stockholders and their related interests
shall be upon terms not less favorable to the bank than those offered to others.
After due notice to the board of directors of the bank, the office of any bank director or officer who
violates the provisions of this Section may be declared vacant and the director or officer shall be
subject
to the penal provisions of the New Central Bank Act.
The Monetary Board may regulate the amount of loans, credit accommodations and guarantees
that may be extended, directly or indirectly, by a bank to its directors, officers, stockholders and
their
related interests, as well as investments of such bank in enterprises owned or controlled by said
directors,
officers, stockholders and their related interests. However, the outstanding loans, credit
accommodations
and guarantees which a bank may extend to each of its stockholders, directors, or officers and
their
related interests, shall be limited to an amount equivalent to their respective unencumbered
deposits and
book value of their paid-in capital contribution in the bank: Provided, however, That loans, credit
accommodations and guarantees secured by assets considered as non-risk by the Monetary
Board shall
be excluded from such limit: Provided, further, That loans, credit accommodations and advances
to
officers in the form of fringe benefits granted in accordance with rules as may be prescribed by
the
Monetary Board shall not be subject to the individual limit.
The Monetary Board shall define the term "related interests."
The limit on loans, credit accommodations and guarantees prescribed herein shall not apply to
loans, credit accommodations and guarantees extended by a cooperative bank to its cooperative
shareholders. (83a)

e) Loans against Real Estate

SECTION 37. Loans and Other Credit Accommodations Against Real Estate. — Except as
the Monetary Board may otherwise prescribe, loans and other credit accommodations against
real estate
shall not exceed seventy-five percent (75%) of the appraised value of the respective real estate
security,
plus sixty percent (60%) of the appraised value of the insured improvements, and such loans may
be
made to the owner of the real estate or to his assignees. (

f) Loans against chattels and other intangible properties

SECTION 38. Loans and Other Credit Accommodations on Security of Chattels and
Intangible Properties. — Except as the Monetary Board may otherwise prescribe, loans and
other credit
accommodations on security of chattels and intangible properties, such as, but not limited to,
patents,
trademarks, trade names, and copyrights shall not exceed seventy-five percent (75%) of the
appraised
value of the security, and such loans and other credit accommodations may be made to the title-
holder of
the chattels and intangible properties or his assignees. (

g) Loan purposes and grant

SECTION 39. Grant and Purpose of Loans and Other Credit Accommodations. — A bank
shall grant loans and other credit accommodations only in amounts and for the periods of time
essential
for the effective completion of the operations to be financed. Such grant of loans and other credit
accommodations shall be consistent with safe and sound banking practices. (75a)
The purpose of all loans and other credit accommodations shall be stated in the application and
in the contract between the bank and the borrower. If the bank finds that the proceeds of the loan
or other
credit accommodation have been employed, without its approval, for purposes other than those
agreed
upon with the bank, it shall have the right to terminate the loan or other credit accommodation
and
demand immediate repayment of the obligation.

h) Unsecured loans

SECTION 40. Requirement for Grant of Loans or Other Credit Accommodations. — Before
granting a loan or other credit accommodation, a bank must ascertain that the debtor is capable
of
fulfilling his commitments to the bank.
Toward this end, a bank may demand from its credit applicants a statement of their assets and
liabilities and of their income and expenditures and such information as may be prescribed by law
or by
rules and regulations of Monetary Board to enable the bank to properly evaluate the credit
application
which includes the corresponding financial statements submitted for taxation purposes to the
Bureau of
Internal Revenue. Should such statements prove to be false or incorrect in any material detail, the
bank
may terminate any loan or other credit accommodation granted on the basis of said statements
and shall
have the right to demand immediate repayment or liquidation of the obligation.
In formulating rules and regulations under this Section, the Monetary Board shall recognize the
peculiar characteristics of microfinancing, such as cash flow-based lending to the basic sectors
that are
not covered by traditional collateral. (76a)
SECTION 41. Unsecured Loans or Other Credit Accommodations. — The Monetary Board is
hereby authorized to issue such regulations as it may deem necessary with respect to unsecured
loans or
other credit accommodations that may be granted by banks.

i) Other security requirements

SECTION 42. Other Security Requirements for Bank Credits. — The Monetary Board may,
by regulation, prescribe further security requirements to which the various types of bank credits
shall be
subject, and, in accordance with the authority granted to it in Section 106 of the New Central
Bank Act,
the Board may by regulation, reduce the maximum ratios established in Sections 36 and 37 of
this Act, or,
 in special cases, increase the maximum ratios established therein.

j) Amortization on loans

SECTION 44. Amortization on Loans and Other Credit Accommodations. — The

amortization schedule of bank loans and other credit accommodations shall be adapted to the
nature of
the operations to be financed.
In case of loans and other credit accommodations with maturities of more than five (5) years,
provisions must be made for periodic amortization payments, but such payments must be made
at least
annually: Provided, however, That when the borrowed funds are to be used for purposes which
do not
initially produce revenues adequate for regular amortization payments therefrom, the bank may
permit the
initial amortization payment to be deferred until such time as said revenues are sufficient for such
purpose, but in no case shall the initial amortization date be later than five (5) years from the date
on
which the loan or other credit accommodation is granted. (79a)
In case of loans and other credit accommodations to microfinance sectors, the schedule of loan
amortization shall take into consideration the projected cash flow of the borrower and adopt this
into the
terms and conditions formulated by banks.

k) Prepayment of loans

SECTION 45. Prepayment of Loans and Other Credit Accommodations. — A borrower may
at any time prior to the agreed maturity date prepay, in whole or in part, the unpaid balance of any
bank
loan and other credit accommodation, subject to such reasonable terms and conditions as may
be agreed
upon between the bank and its borrower

l) Foreclosure of real estate mortgage

SECTION 47. Foreclosure of Real Estate Mortgage. — In the event of foreclosure, whether
judicially or extrajudicially, of any mortgage on real estate which is security for any loan or other
credit
accommodation granted, the mortgagor or debtor whose real property has been sold for the full or
partial
payment of his obligation shall have the right within one year after the sale of the real estate, to
redeem
the property by paying the amount due under the mortgage deed, with interest thereon at the rate
specified in the mortgage, and all the costs and expenses incurred by the bank or institution from
the sale
and custody of said property less the income derived therefrom. However, the purchaser at the
auction
sale concerned whether in a judicial or extrajudicial foreclosure shall have the right to enter upon
and take
possession of such property immediately after the date of the confirmation of the auction sale and
administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct
of
foreclosure proceedings instituted pursuant to this provision shall be given due course only upon
the filing
by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the
damages
which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding.
Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an
extrajudicial foreclosure, shall have the right to redeem the property in accordance with this
provision
until, but not after, the registration of the certificate of foreclosure sale with the applicable Register
of
Deeds which in no case shall be more than three (3) months after foreclosure, whichever is
earlier.
Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall
retain
their redemption rights until their expiration.

m) Renewal or extension of loans and other credit accommodations

SECTION 48. Renewal or Extension of Loans and Other Credit Accommodations. — The
Monetary Board may, by regulation, prescribe the conditions and limitations under which a bank
may
grant extensions or renewals of its loans and other credit accommodations. (81)

n) Provisions for losses and write-offs

SECTION 49. Provisions for Losses and Write-Offs. — All debts due to any bank on which
interest is past due and unpaid for such period as may be determined by the Monetary Board,
unless the
same are well-secured and in the process of collection shall be considered bad debts within the
meaning
of this Section.

Cases:

a. GC Dalton Industries, Inc., v. Equitable PCI Bank, G.R. No. 171169,

August 24, 2009

G.R. No. 171169 August 24, 2009

GC DALTON INDUSTRIES, INC., Petitioner,
vs.
EQUITABLE PCI BANK, Respondent.
DECISION
CORONA, J.:
In 1999, respondent Equitable PCI Bank extended a P30-million credit line to Camden Industries, Inc. (CII)
allowing the latter to avail of several loans (covered by promissory notes) and to purchase trust receipts. To
facilitate collection, CII executed a "hold-out" agreement in favor of respondent authorizing it to deduct
from its savings account any amounts due. To guarantee payment, petitioner GC Dalton Industries, Inc.
executed a third-party mortgage of its real properties in Quezon City1 and Malolos, Bulacan2 as security for
CII’s loans.3
CII did not pay its obligations despite respondent’s demands. By 2003, its outstanding consolidated
promissory notes and unpaid trust receipts had reached a staggering P68,149,132.40.4
Consequently, respondent filed a petition for extrajudicial foreclosure of petitioner’s Bulacan properties in
the Regional Trial Court (RTC) of Bulacan on May 7, 2004.5 On August 3, 2004, the mortgaged properties
were sold at a public auction where respondent was declared the highest bidder. Consequently, a certificate
of sale6 was issued in respondent’s favor on August 3, 2004.
On September 13, 2004, respondent filed the certificate of sale and an affidavit of consolidation of
ownership7 in the Register of Deeds of Bulacan pursuant to Section 47 of the General Banking Law.8
Hence, petitioner’s TCTs covering the Bulacan properties were cancelled and new ones were issued in the
name of respondent.9
In view of the foregoing, respondent filed an ex parte motion for the issuance of a writ of possession10 in
the RTC Bulacan, Branch 10 on January 10, 2005.11
Previously, however, on August 4, 2004, CII had filed an action for specific performance and damages12 in
the RTC of Pasig, Branch 71 (Pasig RTC), asserting that it had allegedly paid its obligation in full to
respondent.13 CII sought to compel respondent to render an accounting in order to prove that the bank
fraudulently foreclosed on petitioner’s mortgaged properties.
Because respondent allegedly failed to appear during the trial, the Pasig RTC rendered a decision on March
30, 200514 based on the evidence presented by CII. It found that, while CII’s past due obligation amounted
only to P14,426,485.66 as of November 30, 2002, respondent had deducted a total of P108,563,388.06
from CII’s savings account. Thus, the Pasig RTC ordered respondent: (1) to return to CII the
"overpayment" with legal interest of 12% per annum amounting to P94,136,902.40; (2) to compensate it for
lost profits amounting to P2,000,000 per month starting August 2004 with legal interest of 12% per annum
until full payment and (3) to return the TCTs covering the mortgaged properties to petitioner. It likewise
awarded CII P2,000,000 and P300,000, respectively, as moral and exemplary damages and P500,000 as
attorney’s fees.
Respondent filed a notice of appeal. CII, on the other hand, moved for the immediate entry and execution
of the abovementioned decision.
In an order dated December 7, 2005,15 the Pasig RTC dismissed respondent’s notice of appeal due to its
failure to pay the appellate docket fees. It likewise found respondent guilty of forum-shopping for filing the
petition for the issuance of a writ of possession in the Bulacan RTC. Thus, the Pasig RTC ordered the
immediate entry of its March 30, 2005 decision.16
Meanwhile, in view of the pending case in the Pasig RTC, petitioner opposed respondent’s ex parte motion
for the issuance of a writ of possession in the Bulacan RTC. It claimed that respondent was guilty of fraud
and forum-shopping, and that it was not informed of the foreclosure. Furthermore, respondent fraudulently
foreclosed on the properties since the Pasig RTC had not yet determined whether CII indeed failed to pay
its obligations.
In an order dated December 10, 2005, the Bulacan RTC granted the motion and a writ of possession was
issued in respondent’s favor on December 19, 2005.
Petitioner immediately assailed the December 10, 2005 order of the Bulacan RTC via a petition for
certiorari in the Court of Appeals (CA). It claimed that the order violated Section 14, Article VIII of the
Constitution17 which requires that every decision must clearly and distinctly state its factual and legal bases.
In a resolution dated January 13, 2006,18 the CA dismissed the petition for lack of merit on the ground that
an order involving the issuance of a writ of possession is not a judgment on the merits, hence, not covered
by the requirement of Section 14, Article VIII of the Constitution.
Petitioner elevated the matter to this Court, assailing the January 13, 2006 resolution of the CA. It insists
that the December 10, 2005 order of the Bulacan RTC was void as it was bereft of factual and legal
bases.1avvphi1
Petitioner likewise cites the conflict between the December 10, 2005 order of the Bulacan RTC and the
December 7, 2005 order of the Pasig RTC. Petitioner claims that, since the Pasig RTC already ordered the
entry of its March 30, 2005 decision (in turn ordering respondent to return TCT No. 351231 and all such
other owner’s documents of title as may have been placed in its possession by virtue of the subject trust
receipt and loan transactions), the same was already final and executory. Thus, inasmuch as CII had
supposedly paid respondent in full, it was erroneous for the Bulacan RTC to order the issuance of a writ of
possession to respondent.
Respondent, on the other hand, asserts that petitioner is raising a question of fact as it essentially assails the
propriety of the issuance of the writ of possession. It likewise points out that petitioner did not truthfully
disclose the status of the March 30, 2005 decision of the Pasig RTC because, in an order dated April 4,
2006, the Pasig RTC partially reconsidered its December 7, 2005 order and gave due course to
respondent’s notice of appeal. (The propriety of the said April 4, 2006 order is still pending review in the
CA.)
We deny the petition.
The issuance of a writ of possession to a purchaser in an extrajudicial foreclosure is summary and
ministerial in nature as such proceeding is merely an incident in the transfer of title.19 The trial court does
not exercise discretion in the issuance thereof.20 For this reason, an order for the issuance of a writ of
possession is not the judgment on the merits contemplated by Section 14, Article VIII of the Constitution.
Hence, the CA correctly upheld the December 10, 2005 order of the Bulacan RTC.
Furthermore, the mortgagor loses all legal interest over the foreclosed property after the expiration of the
redemption period.21 Under Section 47 of the General Banking Law,22 if the mortgagor is a juridical person,
it can exercise the right to redeem the foreclosed property until, but not after, the registration of the
certificate of foreclosure sale within three months after foreclosure, whichever is earlier. Thereafter, such
mortgagor loses its right of redemption.
Respondent filed the certificate of sale and affidavit of consolidation with the Register of Deeds of Bulacan
on September 13, 2004. This terminated the redemption period granted by Section 47 of the General
Banking Law. Because consolidation of title becomes a right upon the expiration of the redemption
period,23 respondent became the owner of the foreclosed properties.24 Therefore, when petitioner opposed
the ex parte motion for the issuance of the writ of possession on January 10, 2005 in the Bulacan RTC, it
no longer had any legal interest in the Bulacan properties.
Nevertheless, even if the ownership of the Bulacan properties had already been consolidated in the name of
respondent, petitioner still had, and could have availed of, the remedy provided in Section 8 of Act 3135.25
It could have filed a petition to annul the August 3, 2004 auction sale and to cancel the December 19, 2005
writ of possession,26 within 30 days after respondent was given possession.27 But it did not. Thus, inasmuch
as the 30-day period to avail of the said remedy had already lapsed, petitioner could no longer assail the
validity of the August 3, 2004 sale.
Any question regarding the validity of the mortgage or its foreclosure cannot be a legal ground for the
refusal to issue a writ of possession. Regardless of whether or not there is a pending suit for the annulment
of the mortgage or the foreclosure itself, the purchaser is entitled to a writ of possession, without prejudice,
of course, to the eventual outcome of the pending annulment case.28
Needless to say, petitioner committed a misstep by completely relying and pinning all its hopes for relief on
its complaint for specific performance and damages in the Pasig RTC,29 instead of resorting to the remedy
of annulment (of the auction sale and writ of possession) under Section 8 of Act 3135 in the Bulacan RTC.
WHEREFORE, the petition is hereby DENIED.
Costs against petitioner.
SO ORDERED.
RENATO C. CORONA
Associate Justice

b. Equitable PCI Bank vs. Ng Sheurig Ngor, G.R. No. 171545,

December 19, 2007

CORONA, J.:
This petition for review on certiorari[1] seeks to set aside the
decision[2] of the Court of Appeals (CA) in CA-G.R. SP No. 83112 and
its resolution[3] denying reconsideration.
On October 7, 2001, respondents Ng Sheung Ngor,[4] Ken Appliance
Division, Inc. and Benjamin E. Go filed an action for annulment and/or
reformation of documents and contracts[5] against petitioner Equitable
PCI Bank (Equitable) and its employees, Aimee Yu and Bejan Lionel
Apas, in the Regional Trial Court (RTC), Branch 16 of Cebu City.[6]
They claimed that Equitable induced them to avail of its peso and
dollar credit facilities by offering low interest rates[7] so they accepted
Equitable's proposal and signed the bank's pre-printed promissory
notes on various dates beginning 1996. They, however, were unaware
that the documents contained identical escalation clauses granting
Equitable authority to increase interest rates without their consent.[8]
Equitable, in its answer, asserted that respondents knowingly accepted
all the terms and conditions contained in the promissory notes.[9] In
fact, they continuously availed of and benefited from Equitable's credit
facilities for five years.[10]
After trial, the RTC upheld the validity of the promissory notes. It
found that, in 2001 alone, Equitable restructured respondents' loans
amounting to US$228,200 and P1,000,000.[11] The trial court,
however, invalidated the escalation clause contained therein because it
violated the principle of mutuality of contracts.[12] Nevertheless, it
took judicial notice of the steep depreciation of the peso during the
intervening period[13] and declared the existence of extraordinary
deflation.[14] Consequently, the RTC ordered the use of the 1996
dollar exchange rate in computing respondents' dollar-denominated
loans.[15] Lastly, because the business reputation of respondents was
(allegedly) severely damaged when Equitable froze their accounts,[16]
the trial court awarded moral and exemplary damages to them.[17]
The dispositive portion of the February 5, 2004 RTC decision[18]
provided:
WHEREFORE, premises considered, judgment is hereby rendered:
A) Ordering [Equitable] to reinstate and return the amount of
[respondents'] deposit placed on hold status;
B) Ordering [Equitable] to pay [respondents] the sum of P12
[m]illion [p]esos as moral damages;
C) Ordering [Equitable] to pay [respondents] the sum of P10
[m]illion [p]esos as exemplary damages;
D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay
[respondents], jointly and severally, the sum of [t]wo [m]illion [p]esos
as moral and exemplary damages;
E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly
and severally, to pay [respondents'] attorney's fees in the sum of
P300,000; litigation expenses in the sum of P50,000 and the cost of
suit;
F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay
[Equitable] the unpaid principal obligation for the peso loan as well as
the unpaid obligation for the dollar denominated loan;
G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay
[Equitable] interest as follows:
1) 12% per annum for the peso loans;
2) 8% per annum for the dollar loans. The basis for the payment of
the dollar obligation is the conversion rate of P26.50 per dollar availed
of at the time of incurring of the obligation in accordance with Article
1250 of the Civil Code of the Philippines;
H) Dismissing [Equitable's] counterclaim except the payment of the
aforestated unpaid principal loan obligations and interest.
SO ORDERED.[19]
Equitable and respondents filed their respective notices of appeal.[20]
In the March 1, 2004 order of the RTC, both notices were denied due
course because Equitable and respondents “failed to submit proof that
they paid their respective appeal fees.”[21]
WHEREFORE, premises considered, the appeal interposed by
defendants from the Decision in the above-entitled case is DENIED
due course. As of February 27, 2004, the Decision dated
February 5, 2004, is considered final and executory in so far as
[Equitable, Aimee Yu and Bejan Lionel Apas] are concerned.[22]
(emphasis supplied)
Equitable moved for the reconsideration of the March 1, 2004 order of
the RTC[23] on the ground that it did in fact pay the appeal fees.
Respondents, on the other hand, prayed for the issuance of a writ of
execution.[24]
On March 24, 2004, the RTC issued an omnibus order denying
Equitable's motion for reconsideration for lack of merit[25] and
ordered the issuance of a writ of execution in favor of
respondents.[26] According to the RTC, because respondents did not
move for the reconsideration of the previous order (denying due
course to the parties’ notices of appeal),[27] the February 5, 2004
decision became final and executory as to both parties and a writ of
execution against Equitable was in order.[28]
A writ of execution was thereafter issued[29] and three real properties
of Equitable were levied upon.[30]
On March 26, 2004, Equitable filed a petition for relief in the RTC from
the March 1, 2004 order.[31] It, however, withdrew that petition on
March 30, 2004[32] and instead filed a petition for certiorari with an
application for an injunction in the CA to enjoin the implementation
and execution of the March 24, 2004 omnibus order.[33]
On June 16, 2004, the CA granted Equitable's application for
injunction. A writ of preliminary injunction was correspondingly
issued.[34]
Notwithstanding the writ of injunction, the properties of Equitable
previously levied upon were sold in a public auction on July 1, 2004.
Respondents were the highest bidders and certificates of sale were
issued to them.[35]
On August 10, 2004, Equitable moved to annul the July 1, 2004
auction sale and to cite the sheriffs who conducted the sale in
contempt for proceeding with the auction despite the injunction order
of the CA.[36]
On October 28, 2005, the CA dismissed the petition for certiorari.[37]
It found Equitable guilty of forum shopping because the bank filed its
petition for certiorari in the CA several hours before withdrawing its
petition for relief in the RTC.[38] Moreover, Equitable failed to
disclose, both in the statement of material dates and certificate of non-
forum shopping (attached to its petition for certiorari in the CA), that it
had a pending petition for relief in the RTC.[39]
Equitable moved for reconsideration[40] but it was denied.[41] Thus,
this petition.
Equitable asserts that it was not guilty of forum shopping because the
petition for relief was withdrawn on the same day the petition for
certiorari was filed.[42] It likewise avers that its petition for certiorari
was meritorious because the RTC committed grave abuse of discretion
in issuing the March 24, 2004 omnibus order which was based on an
erroneous assumption. The March 1, 2004 order denying its notice of
appeal for non payment of appeal fees was erroneous because it had
in fact paid the required fees.[43] Thus, the RTC, by issuing its March
24, 2004 omnibus order, effectively prevented Equitable from
appealing the patently wrong February 5, 2004 decision.[44]
This petition is meritorious.
Equitable Was Not Guilty Of Forum shopping
Forum shopping exists when two or more actions involving the same
transactions, essential facts and circumstances are filed and those
actions raise identical issues, subject matter and causes of
action.[45][46] The test is whether, in two or more pending cases,
there is identity of parties, rights or causes of actions and reliefs.
Equitable's petition for relief in the RTC and its petition for certiorari in
the CA did not have identical causes of action. The petition for relief
from the denial of its notice of appeal was based on the RTC’s
judgment or final order preventing it from taking an appeal by “fraud,
accident, mistake or excusable negligence.”[47][48] On the other
hand, its petition for certiorari in the CA, a special civil action, sought
to correct the grave abuse of discretion amounting to lack of
jurisdiction committed by the RTC.
In a petition for relief, the judgment or final order is rendered by a
court with competent jurisdiction. In a petition for certiorari, the order
is rendered by a court without or in excess of its jurisdiction.
Moreover, Equitable substantially complied with the rule on non-forum
shopping when it moved to withdraw its petition for relief in the RTC
on the same day (in fact just four hours and forty minutes after) it
filed the petition for certiorari in the CA. Even if Equitable failed to
disclose that it had a pending petition for relief in the RTC, it rectified
what was doubtlessly a careless oversight by withdrawing the petition
for relief just a few hours after it filed its petition for certiorari in the
CA ? a clear indication that it had no intention of maintaining the two
actions at the same time.
The Trial Court Committed Grave Abuse of Discretion In Issuing
Its March 1, 2004 and March 24, 2004 Orders
Section 1, Rule 65 of the Rules of Court provides:
Section 1. Petition for Certiorari. When any tribunal, board or
officer exercising judicial or quasi-judicial function has acted
without or in excess of its or his jurisdiction, or with grave
abuse of discretion amounting to lack or excess of jurisdiction,
and there is no appeal, nor any plain, speedy or adequate
remedy in the ordinary course of law, a person aggrieved thereby
may file a verified petition in the proper court, alleging the facts with
certainty and praying that judgment be rendered annulling or
modifying the proceedings of such tribunal, board or officer, and
granting such incidental reliefs as law and justice may require.
The petition shall be accompanied by a certified true copy of the
judgment, order or resolution subject thereof, copies of all pleadings
and documents relevant and pertinent thereto, and a sworn certificate
of non-forum shopping as provided in the third paragraph of Section 3,
Rule 46.
There are two substantial requirements in a petition for certiorari.
These are:
1. that the tribunal, board or officer exercising judicial or quasi-
judicial functions acted without or in excess of his or its jurisdiction or
with grave abuse of discretion amounting to lack or excess of
jurisdiction; and
2. that there is no appeal or any plain, speedy and adequate
remedy in the ordinary course of law.
For a petition for certiorari premised on grave abuse of discretion to
prosper, petitioner must show that the public respondent patently and
grossly abused his discretion and that abuse amounted to an evasion
of positive duty or a virtual refusal to perform a duty enjoined by law
or to act at all in contemplation of law, as where the power was
exercised in an arbitrary and despotic manner by reason of passion or
hostility.[49]
The March 1, 2004 order denied due course to the notices of appeal of
both Equitable and respondents. However, it declared that the
February 5, 2004 decision was final and executory only with
respect to Equitable.[50] As expected, the March 24, 2004 omnibus
order denied Equitable's motion for reconsideration and granted
respondents' motion for the issuance of a writ of execution.[51]
The March 1, 2004 and March 24, 2004 orders of the RTC were
obviously intended to prevent Equitable, et al. from appealing the
February 5, 2004 decision. Not only that. The execution of the decision
was undertaken with indecent haste, effectively obviating or defeating
Equitable's right to avail of possible legal remedies. No matter how we
look at it, the RTC committed grave abuse of discretion in rendering
those orders.
With regard to whether Equitable had a plain, speedy and adequate
remedy in the ordinary course of law, we hold that there was none.
The RTC denied due course to its notice of appeal in the March 1, 2004
order. It affirmed that denial in the March 24, 2004 omnibus order.
Hence, there was no way Equitable could have possibly appealed the
February 5, 2004 decision.[52]
Although Equitable filed a petition for relief from the March 24, 2004
order, that petition was not a plain, speedy and adequate remedy in
the ordinary course of law.[53] A petition for relief under Rule 38 is an
equitable remedy allowed only in exceptional circumstances or where
there is no other available or adequate remedy.[54]
Thus, we grant Equitable's petition for certiorari and consequently give
due course to its appeal.
Equitable Raised Pure Questions of Law in Its Petition
For Review
The jurisdiction of this Court in Rule 45 petitions is limited to questions
of law.[55] There is a question of law “when the doubt or controversy
concerns the correct application of law or jurisprudence to a certain set
of facts; or when the issue does not call for the probative value of the
evidence presented, the truth or falsehood of facts being
admitted.”[56]
Equitable does not assail the factual findings of the trial court. Its
arguments essentially focus on the nullity of the RTC’s February 5,
2004 decision. Equitable points out that that decision was patently
erroneous, specially the exorbitant award of damages, as it was
inconsistent with existing law and jurisprudence.[57]
The Promissory Notes Were Valid
The RTC upheld the validity of the promissory notes despite
respondents’ assertion that those documents were contracts of
adhesion.
A contract of adhesion is a contract whereby almost all of its provisions
are drafted by one party.[58] The participation of the other party is
limited to affixing his signature or his “adhesion” to the contract.[59]
For this reason, contracts of adhesion are strictly construed against
the party who drafted it.[60]
It is erroneous, however, to conclude that contracts of adhesion are
invalid per se. They are, on the contrary, as binding as ordinary
contracts. A party is in reality free to accept or reject it. A contract of
adhesion becomes void only when the dominant party takes advantage
of the weakness of the other party, completely depriving the latter of
the opportunity to bargain on equal footing.[61]
That was not the case here. As the trial court noted, if the terms and
conditions offered by Equitable had been truly prejudicial to
respondents, they would have walked out and negotiated with another
bank at the first available instance. But they did not. Instead, they
continuously availed of Equitable's credit facilities for five long years.
While the RTC categorically found that respondents had outstanding
dollar- and peso-denominated loans with Equitable, it, however, failed
to ascertain the total amount due (principal, interest and penalties, if
any) as of July 9, 2001. The trial court did not explain how it arrived
at the amounts of US$228,200 and P1,000,000.[62] In Metro Manila
Transit Corporation v. D.M. Consunji,[63] we reiterated that this Court
is not a trier of facts and it shall pass upon them only for compelling
reasons which unfortunately are not present in this case.[64] Hence,
we ordered the partial remand of the case for the sole purpose of
determining the amount of actual damages.[65]
Escalation Clause Violated The Principle Of Mutuality Of
Contracts
Escalation clauses are not void per se. However, one “which grants the
creditor an unbridled right to adjust the interest independently and
upwardly, completely depriving the debtor of the right to assent to an
important modification in the agreement” is void. Clauses of that
nature violate the principle of mutuality of contracts.[66] Article
1308[67] of the Civil Code holds that a contract must bind both
contracting parties; its validity or compliance cannot be left to the will
of one of them.[68]
For this reason, we have consistently held that a valid escalation
clause provides:
1. that the rate of interest will only be increased if the
applicable maximum rate of interest is increased by law or by the
Monetary Board; and
2. that the stipulated rate of interest will be reduced if the
applicable maximum rate of interest is reduced by law or by the
Monetary Board (de-escalation clause).[69]
The RTC found that Equitable's promissory notes uniformly stated:
If subject promissory note is extended, the interest for subsequent
extensions shall be at such rate as shall be determined by the
bank.[70]
Equitable dictated the interest rates if the term (or period for
repayment) of the loan was extended. Respondents had no choice but
to accept them. This was a violation of Article 1308 of the Civil Code.
Furthermore, the assailed escalation clause did not contain the
necessary provisions for validity, that is, it neither provided that the
rate of interest would be increased only if allowed by law or the
Monetary Board, nor allowed de-escalation. For these reasons, the
escalation clause was void.
With regard to the proper rate of interest, in New Sampaguita Builders
v. Philippine National Bank[71] we held that, because the escalation
clause was annulled, the principal amount of the loan was subject to
the original or stipulated rate of interest. Upon maturity, the amount
due was subject to legal interest at the rate of 12% per annum.[72]
Consequently, respondents should pay Equitable the interest rates of
12.66% p.a. for their dollar-denominated loans and 20% p.a. for their
peso-denominated loans from January 10, 2001 to July 9, 2001.
Thereafter, Equitable was entitled to legal interest of 12% p.a. on all
amounts due.
There Was No Extraordinary Deflation
Extraordinary inflation exists when there is an unusual decrease in the
purchasing power of currency (that is, beyond the common fluctuation
in the value of currency) and such decrease could not be reasonably
foreseen or was manifestly beyond the contemplation of the parties at
the time of the obligation. Extraordinary deflation, on the other hand,
involves an inverse situation.[73]
Article 1250 of the Civil Code provides:
Article 1250. In case an extraordinary inflation or deflation of the
currency stipulated should intervene, the value of the currency at the
time of the establishment of the obligation shall be the basis of
payment, unless there is an agreement to the contrary.
For extraordinary inflation (or deflation) to affect an obligation, the
following requisites must be proven:
1. that there was an official declaration of extraordinary inflation or
deflation from the Bangko Sentral ng Pilipinas (BSP);[74]
2. that the obligation was contractual in nature;[75] and
3. that the parties expressly agreed to consider the effects of the
extraordinary inflation or deflation.[76]
Despite the devaluation of the peso, the BSP never declared a
situation of extraordinary inflation. Moreover, although the obligation
in this instance arose out of a contract, the parties did not agree to
recognize the effects of extraordinary inflation (or deflation).[77] The
RTC never mentioned that there was a such stipulation either in the
promissory note or loan agreement. Therefore, respondents should
pay their dollar-denominated loans at the exchange rate fixed by the
BSP on the date of maturity.[78]
The Award Of Moral And Exemplary Damages Lacked
Basis
Moral damages are in the category of an award designed to
compensate the claimant for actual injury suffered, not to impose a
penalty to the wrongdoer.[79] To be entitled to moral damages, a
claimant must prove:
1. That he or she suffered besmirched reputation, or physical,
mental or psychological suffering sustained by the claimant;
2. That the defendant committed a wrongful act or omission;
3. That the wrongful act or omission was the proximate cause of
the damages the claimant sustained;
4. The case is predicated on any of the instances expressed or
envisioned by Article 2219[80] and 2220[81]. [82]
In culpa contractual or breach of contract, moral damages are
recoverable only if the defendant acted fraudulently or in bad faith or
in wanton disregard of his contractual obligations.[83] The breach
must be wanton, reckless, malicious or in bad faith, and oppressive or
abusive.[84]
The RTC found that respondents did not pay Equitable the interest due
on February 9, 2001 (or any month thereafter prior to the maturity of
the loan)[85] or the amount due (principal plus interest) due on July
9, 2001.[86] Consequently, Equitable applied respondents' deposits to
their loans upon maturity.
The relationship between a bank and its depositor is that of creditor
and debtor.[87] For this reason, a bank has the right to set-off the
deposits in its hands for the payment of a depositor's
indebtedness.[88]
Respondents indeed defaulted on their obligation. For this reason,
Equitable had the option to exercise its legal right to set-off or
compensation. However, the RTC mistakenly (or, as it now appears,
deliberately) concluded that Equitable acted “fraudulently or in bad
faith or in wanton disregard” of its contractual obligations despite the
absence of proof. The undeniable fact was that, whatever damage
respondents sustained was purely the consequence of their failure
to pay their loans. There was therefore absolutely no basis for the
award of moral damages to them.
Neither was there reason to award exemplary damages. Since
respondents were not entitled to moral damages, neither should they
be awarded exemplary damages.[89] And if respondents were not
entitled to moral and exemplary damages, neither could they be
awarded attorney's fees and litigation expenses.[90]
ACCORDINGLY, the petition is hereby GRANTED.
The October 28, 2005 decision and February 3, 2006 resolution of the
Court of Appeals in CA-G.R. SP No. 83112 are hereby REVERSED and
SET ASIDE.
The March 24, 2004 omnibus order of the Regional Trial Court, Branch
16, Cebu City in Civil Case No. CEB-26983 is hereby ANNULLED for
being rendered with grave abuse of discretion amounting to lack or
excess of jurisdiction. All proceedings undertaken pursuant thereto are
likewise declared null and void.
The March 1, 2004 order of the Regional Trial Court, Branch 16 of
Cebu City in Civil Case No. CEB-26983 is hereby SET ASIDE. The
appeal of petitioners Equitable PCI Bank, Aimee Yu and Bejan Lionel
Apas is therefore given due course.
The February 5, 2004 decision of the Regional Trial Court, Branch 16
of Cebu City in Civil Case No. CEB-26983 is accordingly SET ASIDE.
New judgment is hereby entered:
1. ordering respondents Ng Sheung Ngor, doing business
under the name and style of “Ken Marketing,” Ken Appliance Division,
Inc. and Benjamin E. Go to pay petitioner Equitable PCI Bank the
principal amount of their dollar- and peso-denominated loans;
2. ordering respondents Ng Sheung Ngor, doing business
under the name and style of “Ken Marketing,” Ken Appliance Division,
Inc. and Benjamin E. Go to pay petitioner Equitable PCI Bank interest
at:
a) 12.66% p.a. with respect to their dollar-denominated
loans from January 10, 2001 to July 9, 2001;
b) 20% p.a. with respect to their peso-denominated loans
from January 10, 2001 to July 9, 2001;[91]
c) pursuant to our ruling in Eastern Shipping Lines v. Court
of Appeals,[92] the total amount due on July 9, 2001 shall earn legal
interest at 12% p.a. from the time petitioner Equitable PCI Bank
demanded payment, whether judicially or extra-judicially; and
d) after this Decision becomes final and executory, the
applicable rate shall be 12% p.a. until full satisfaction;
3. all other claims and counterclaims are dismissed.
As a starting point, the Regional Trial Court, Branch 16 of Cebu City
shall compute the exact amounts due on the respective dollar-
denominated and peso-denominated loans, as of July 9, 2001, of
respondents Ng Sheung Ngor, doing business under the name and
style of “Ken Marketing,” Ken Appliance Division and Benjamin E. Go.
SO ORDERED.

c. Floirendo vs. Metropolitan Bank and Trust Co., G.R. No. 148325,
September 3, 2007.

SANDOVAL-GUTIERREZ, J.:
 For our resolution is the instant Petition for Review on Certiorari
under Rule 45 of the 1997 Rules of Civil Procedure, as amended, assailing
the Decision461[1] dated February 22, 2001 and Order462[2] dated May 2,
2001 rendered by the Regional Trial Court (RTC), Branch 39, Cagayan de
Oro City in Civil Case No. 98-476, entitled, “REYNALDO P. FLOIRENDO,
JR., plaintiff, v. METROPOLITAN BANK AND TRUST COMPANY, ET AL.,
defendants.”
Reynaldo P. Floirendo, Jr., petitioner, is the president and chairman of
the Board of Directors of Reymill Realty Corporation, a domestic
corporation engaged in real estate business. On March 20, 1996, he
obtained a loan of P1,000,000.00 from the Metropolitan Bank and Trust
Company, Cagayan de Oro City Branch, respondent, to infuse additional
working capital for his company. As security for the loan, petitioner
executed a real estate mortgage in favor of respondent bank over his four (4)
parcels of land, all situated at Barangay Carmen, Cagayan de Oro City.
The loan was renewed for another year secured by the same real estate
mortgage. Petitioner signed a promissory note dated March 14, 1997 fixing
the rate of interest at “15.446% per annum for the first 30 days, subject to
upward/downward adjustment every 30 days thereafter”; and a penalty
charge of 18% per annum “based on any unpaid principal to be computed
from date of default until payment of the obligation.” The promissory note
likewise provides that:
The rate of interest and/or bank charges herein stipulated, during the term of this
Promissory Note, its extension, renewals or other modifications, may be increased,
decreased, or otherwise changed from time to time by the Bank without advance notice to

                                                                                                               
 

 
 me/us in the event of changes in the interest rate prescribed by law or the Monetary
Board of the Central Bank of the Philippines, in the rediscount rate of member banks with
the Central Bank of the Philippines, in the interest rates on savings and time deposits, in
the interest rates on the bank’s borrowings, in the reserve requirements, or in the overall
costs of funding or money;
I/We hereby expressly consent to any extension and/or renewal hereof in whole
or in part and/or partial payment on account which may be requested by and/or granted to
anyone of us for the payment of this note upon payment of the corresponding renewal or
extension fee.

On July 11, 1997, respondent bank started imposing higher interest

rates on petitioner’s loan which varied through the months, in fact, as high as
30.244% in October 1997. As a result, petitioner could no longer pay the
high interest rates charged by respondent bank. Thus, he negotiated for the
renewal of his loan. Respondent bank agreed provided petitioner would pay
the arrears in interest amounting to the total sum of P163,138.33. Despite
payment by petitioner, respondent bank, instead of renewing the loan, filed
with the Office of the Clerk of Court and Provincial Sheriff, RTC, Cagayan
de Oro City a petition for foreclosure of mortgage which was granted. On
August 17, 1998, the auction sale was set.
Prior thereto or on August 11, 1998, petitioner filed with the RTC,
Branch 39, same city, a complaint for reformation of real estate mortgage
contract and promissory note, docketed as Civil Case No. 98-476.
Referring to the real estate mortgage and the promissory note as “contracts
of adhesion,” petitioner alleged that the increased interest rates unilaterally
imposed by respondent bank are scandalous, immoral, illegal and
unconscionable. He also alleged that the terms and conditions of the real
estate mortgage and the promissory note are such that they could be
interpreted by respondent bank in whatever manner it wants, leaving
petitioner at its mercy. Petitioner thus prayed for reformation of these
documents and the issuance of a temporary restraining order (TRO) and a
writ of preliminary injunction to enjoin the foreclosure and sale at public
auction of his four (4) parcels of land.
On August 14, 1998, the RTC issued a TRO and on September 3,
1998, a writ of preliminary injunction.
In its answer to the complaint, respondent bank asserted that the
interest stipulated by the parties in the promissory note is not per annum but
on a month to month basis. The 15.446% interest appearing therein was
good only for the first 30 days of the loan, subject to upward and downward
adjustment every 30 days thereafter. The terms of the real estate mortgage
and promissory note voluntarily entered into by petitioner are clear and
unequivocal. There is, therefore, no legal and factual basis for an action for
reformation of instruments.

On February 22, 2001, the RTC rendered a Judgment (1) dismissing

the complaint for reformation of instruments, (2) dissolving the writ of
preliminary injunction and (3) directing the sale at public auction of
petitioner’s mortgaged properties. The RTC ruled:
In order that an action for reformation of an instrument may prosper, the
following requisites must occur:
1.) There must have been a meeting of the minds upon the contract;
2.) The instrument or document evidencing the contract does not express
the true agreement between the parties; and
3.) The failure of the instrument to express the agreement must be due to
mistake, fraud, inequitable conduct or accident. (National Irrigation
Administration v. Gamit, G.R. No. 85869, November 5, 1992)
xxx
A perusal further of the complaint and the evidences submitted by the parties
convinced the court that there was certainly a meeting of the minds between the parties.
Plaintiff and defendant bank entered into a contract of loan, the terms and conditions of
which, especially on the rates of interest, are clearly and unequivocally spelled out in the
promissory note. The court believes that there was absolutely no mistake, fraud or
anything that could have prevented a meeting of the minds between the parties.

The RTC upheld the validity of the escalation clause, thus:

 Escalation clauses are valid stipulations in commercial contract to maintain
fiscal stability and to retain the value of money in loan term contracts, (Llorin v. CA, G.R.
No. 103592, February 4, 1993).
xxx xxx xxx
x x x the Court has no other alternative to resolve Issue No. 1 that defendant bank is
allowed to impose the interest rate questioned by plaintiff considering that Exhibit “B”
and “B-1,” which is Exhibit “1” and “1-A” of defendant bank is very clear that the rate of
interest is 15.446% per annum for the first 30 days subject to upward/downward
adjustment every 30 days thereafter.

On the issue of the validity of the foreclosure of the real estate

mortgage, the RTC ruled that:
It is a settled rule that in a real estate mortgage when the obligation is not paid
when due, the mortgagee has the right to foreclose the mortgage and to have the property
seized and sold in view of applying the proceeds to the payment of the obligation (Estate
Investment House v. CA, 215 SCRA 734).

On May 2, 2001, petitioner filed a motion for reconsideration but it

was denied for lack of merit.
Hence, the instant petition.
The fundamental issue for our resolution is whether the mortgage
contract and the promissory note express the true agreement between the
parties herein.
Petitioner contends that the “escalation clause” in the promissory note
imposing 15.446% interest on the loan “for the first 30 days subject to
upward/downward adjustment every 30 days thereafter” is illegal,
excessive and arbitrary. The determination to increase or decrease such
interest rate is primarily left to the discretion of respondent bank.
We agree.
We hold that the increases of interest rate unilaterally imposed by
respondent bank without petitioner’s assent are violative of the principle of
mutuality of contracts ordained in Article 1308 of the Civil Code463[3]
which provides:
Article 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.

The binding effect of any agreement between the parties to a contract

is premised on two settled principles: (1) that obligations arising from
contracts have the force of law between the contracting parties; and (2) that
there must be mutuality between the parties based on their essential equality
to which is repugnant to have one party bound by the contract leaving the
other free therefrom.464[4] Any contract which appears to be heavily
weighed in favor of one of the parties so as to lead to an unconscionable
result is void. Any stipulation regarding the validity or compliance of the
contract which is left solely to the will of one of the parties is likewise
invalid.465[5]
The provision in the promissory note authorizing respondent bank to
increase, decrease or otherwise change from time to time the rate of interest
and/or bank charges “without advance notice” to petitioner, “in the event of
change in the interest rate prescribed by law or the Monetary Board of the
Central Bank of the Philippines,” does not give respondent bank
unrestrained freedom to charge any rate other than that which was agreed
upon. Here, the monthly upward/downward adjustment of interest rate is
left to the will of respondent bank alone. It violates the essence of
mutuality of the contract.

                                                                                                               
 
 

 
 In Philippine National Bank v. Court of Appeals,466[6] and in later
cases,467[7] we held:
In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between the parties based on their essential
equality. A contract containing a condition which makes its fulfillment dependent
exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia v.
Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan
agreement between the PNB and the private respondent gave the PNB a license (although
in fact there was none) to increase the interest rate at will during the term of the loan, that
license would have been null and void for being violative of the principle of mutuality
essential in contracts. It would have invested the loan agreement with the character of a
contract of adhesion, where the parties do not bargain on equal footing, the weaker
party’s (the debtor) participation being reduced to the alternative “to take it or leave it”
(Qua v. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable
trap for the weaker party whom the courts of justice must protect against abuse and
imposition.
In New Sampaguita Builders Construction, Inc. (NSBCI) v. Philippine
National Bank,468[8] we ruled that while it is true that escalation clauses are
valid in maintaining fiscal stability and retaining the value of money on long
term contracts, however, giving respondent an unbridled right to adjust the
interest independently and upwardly would completely take away from
petitioner the right to assent to an important modification in their agreement,
hence, would negate the element of mutuality in their contracts. Such
escalation clause would make the fulfillment of the contracts dependent
exclusively upon the uncontrolled will of respondent bank and is therefore
void. In the present case, the promissory note gives respondent bank
authority to increase the interest rate at will during the term of the loan.
This stipulation violates the principle of mutuality between the parties. It
would be converting the loan agreement into a contract of adhesion where
the parties do not bargain on equal footing, the weaker party’s (petitioner’s)
                                                                                                               
 
 

 
participation being reduced to the alternative “to take it or leave it.469[9]
While the Usury Law ceiling on interest rate was lifted by Central Bank
Circular No. 905, nothing therein could possibly be read as granting
respondent bank carte blanche authority to raise interest rate to levels which
would either enslave its borrower (petitioner herein) or lead to hemorrhaging
of his assets.470[10]
In Philippine National Bank v. Court of Appeals¸471[11] we declared
void the escalation clause in the Credit Agreement between petitioner bank
and private respondents whereby the “Bank reserves the right to increase the
interest rate within the limit allowed by law at any time depending on
whatever policy it may adopt in the future xxx.” We held:
It is basic that there can be no contract in the true sense in the absence of the
element of agreement, or of mutual assent of the parties. If this assent is wanting on the
part of one who contracts, his act has no more efficacy than if it had been done under
duress or by a person of unsound mind.
Similarly, contract changes must be made with the consent of the contracting
parties. The minds of all the parties must meet as to the proposed modification,
especially when it affects an important aspect of the agreement. In the case of loan
contracts, it cannot be gainsaid that the rate of interest is always a vital component, for it
can make or break a capital venture. Thus, any change must be mutually agreed upon,
otherwise, it is bereft of any binding effect.
We cannot countenance petitioner bank’s posturing that that escalation clause at
bench gives it unbridled right to unilaterally upwardly adjust the interest on private
respondents’ loan. That would completely take away from private respondents the right
to assent to an important modification in their agreement, and would negate the element
of mutuality in contracts.

Under Article 1310 of the Civil Code, courts are granted authority to
reduce/increase interest rates equitably, thus:
Article 1310. The determination shall not be obligatory if it is evidently
inequitable. In such case, the courts shall decide what is equitable under the
circumstances.

                                                                                                               
 
 

 
 In the other Philippine National Bank v. Court of Appeals472[12]
case, we disauthorized petitioner bank from unilaterally raising the interest
rate on the loan of private respondent from 18% to 32%, 41% and 48%. In
Almeda v. Court of Appeals,473[13] where the interest rate was increased
from 21% to as high as 68% per annum, we declared arbitrary “the galloping
increases in interest rate imposed by respondent bank on petitioners’ loan,
over the latter’s vehement protests.” In Medel v. Court of Appeals,474[14]
the stipulated interest of 5.5% per month or 66% per annum on a loan
amounting to P500,000.00 was equitably reduced for being iniquitous,
unconscionable and exorbitant. In Solangon v. Salazar,475[15] the
stipulated interest rate of 6% per month or 72% per annum was found to be
“definitely outrageous and inordinate” and was reduced to 12% per annum
which we deemed fair and reasonable. In Imperial v. Jaucian,476[16] we
ruled that the trial court was justified in reducing the stipulated interest rate
from 16% to 1.167% or 14% per annum and the stipulated penalty charge
from 5% to 1.167% per month or 14% per annum.
In this case, respondent bank started to increase the agreed interest
rate of 15.446% per annum to 24.5% on July 11, 1997 and every month
thereafter; 27% on August 11, 1997; 26% on September 10, 1997; 33% on
October 15, 1997; 26.5% on November 27, 1997; 27% on December 1997;
                                                                                                               

 
 
 
 

 
29% on January 13, 1998; 30.244% on February 7, 1998; 24.49% on
March 9, 1998; 22.9% on April 18, 1998; and 18% on May 21, 1998.
Obviously, the rate increases are excessive and arbitrary. It bears reiterating
that respondent bank unilaterally increased the interest rate without
petitioner’s knowledge and consent.
As mentioned earlier, petitioner negotiated for the renewal of his loan.
As required by respondent bank, he paid the interests due. Respondent bank
then could not claim that there was no attempt on his part to comply with his
obligation. Yet, respondent bank hastily filed a petition to foreclose the
mortgage to gain the upperhand in taking petitioner’s four (4) parcels of land
at bargain prices. Obviously, respondent bank acted in bad faith.
In sum, we find that the requisites for reformation of the mortgage
contract and promissory note are present in this case. There has been
meeting of minds of the parties upon these documents. However, these
documents do not express the parties’ true agreement on interest rates. And
the failure of these documents to express their agreement on interest rates
was due to respondent bank’s inequitable conduct.
WHEREFORE, we GRANT the petition. The Judgment dated
February 22, 2001 of the RTC of Cagayan de Oro City, Branch 39 in Civil
Case No. 98-476 is REVERSED. The real estate mortgage contract and the
promissory note agreed upon by the parties are reformed in the sense that
any increase in the interest rate beyond 15.446% per annum should not be
imposed by respondent bank without the consent of petitioner. The interest
he paid in excess of 15.446% should be applied to the payment of the
principal obligation.
SO ORDERED.
 d. Trade & Investment Development Corporation of the Philippines vs.
Roblett Industrial Construction Corporation, G.R. No. 139290, May 19,
2006

TINGA, J.:
Under consideration are the motion for reconsideration1 dated 23 December 2005 and supplemental motion
for reconsideration2 dated 23 January 2006, both filed by respondent Paramount Insurance Corporation
(Paramount) with regard to our Decision3 dated 11 November 2005 which disposed of the case as follows:
WHEREFORE, premises considered, the petition is hereby GRANTED. The Decision of the Court of
Appeals is REVERSED and the judgment of the Regional Trial Court is REINSTATED with the following
modifications:
a) ordering respondents Roblett, the Abieras, and Paramount, jointly and severally, to pay
petitioner Philguarantee the amount of P11,775,611.25, with the following rates of interest and
penalty charge, to wit:
i. for respondent Paramount, eighteen percent (18%) interest per annum from 5 June 1990
until fully paid;
ii. for respondents Roblett and the Abieras, sixteen percent (16%) interest per annum
from 5 June 1990 until fully paid; and penalty charge of sixteen percent (16%) per annum
compounded monthly from 5 June 1990 until fully paid;
b) ordering respondents Roblett and the Abieras, jointly and severally, to pay petitioner
Philguarantee the amount of P18,029,219.78 plus 12% interest thereon from the time of finality of
judgment until fully paid;
c) ordering respondents Roblett and the Abieras, jointly and severally, to pay petitioner
Philguarantee ten percent (10%) of P11,775,611.25, as attorney's fees, plus the costs of suit;
d) ordering respondent Paramount, jointly and severally with respondents Roblett and the Abieras,
to pay petitioner Philguarantee P100,000.00 as reasonable attorney's fees;
e) ordering respondents Roblett and Benlot, jointly and severally, to reimburse respondent
Paramount whatever amount it would pay petitioner Philguarantee including all interests,
attorney's fees and the costs; and
f) ordering all the respondents, jointly and severally, and the third-party defendants, also jointly
and severally, to pay petitioner Philguarantee legal interest of 12% per annum on the judgment
awards respectively against them from the time of finality of judgment until fully paid.
SO ORDERED.4
In support of its motion for reconsideration, Paramount submits the following grounds: (1) Paramount
issued a bidder’s bond and not a performance or guarantee bond so that when respondent Roblett Industrial
Construction Corporation (Roblett) executed the sub-contract agreement, Paramount was released from
liability thereunder; (2) petitioner is guilty of misrepresentation and concealment in securing Paramount’s
continuing commitment to answer for Roblett’s repayment scheme; (3) petitioner and Roblett entered into a
rehabilitation program which novated the principal obligation of the parties resulting in the discharge of
Paramount; (4) the subject surety bond expired without any claim being made against the same; and (5)
Paramount is not liable for attorney’s fees.
The supplemental motion for reconsideration essentially reiterates the allegations and arguments found in
the motion for reconsideration with the additional contention that the interest charge on the principal debt is
unconscionable.
We have perused the instant motions and find no new substantial arguments to warrant the reversal or
modification of our Decision. Respondent’s motion essentially concerns issues that have been passed upon
and fully considered by the Court in the decision sought to be reconsidered. Thus, we find no cogent reason
to depart from the ruling subject of this recourse. The only matter left to be resolved is the validity of the
interest charge against the principal amount involved in this case.
Under the surety bond,5 Paramount bound itself jointly and severally with Roblett to pay petitioner to the
extent of P11,775,611.35 for whatever damages and liabilities the latter may suffer by virtue of its
counterguarantee. Paramount further agreed to pay petitioner interest thereon at the rate of 18% per annum
from the date of receipt of petitioner’s first demand letter up to the date of actual payment.
In our Decision, we found that none of the parties questioned the validity of the stipulated interest rate.
Finding the same legal, we upheld its validity. With the suspension of the Usury Law and the removal of
interest ceiling, the parties are free to stipulate the interest to be imposed on monetary obligations. Absent
any evidence of fraud, undue influence, or any vice of consent exercised by one party against the other, the
interest rate agreed upon is binding upon them.6 Nevertheless, we ruled that Paramount’s liability therefor
should commence from the date of judicial demand, or on 5 June 1990, and not from the date petitioner
made a formal notice of demand to Paramount. This is but fair as the delay in the performance of
Paramount is attributable to the failure of petitioner to inform the former of the developments in the
negotiations with Roblett.
Paramount argues that it is made liable for approximately P48 million, the bulk of which is the interest
charge and not the principal amount. It then submits that the interest is clearly iniquitous, unconscionable
and exorbitant, thus contrary to morals,7 citing our ruling in Medel v. Court of Appeals.8 In the said case,
we held as void the stipulation on interest at the rate of 5.5% per month or 66% per annum, on a
P500,000.00 loan, the same being "excessive, iniquitous, unconscionable and exorbitant, hence, contrary to
morals ("contra bonos mores"), if not against the law."9
It would seem that Paramount’s opposition to the interest awarded herein does not spring from the
invalidity of the stipulated interest rate but rather on the resulting amount of interest charge alone, which if
counted from the date of judicial demand would come to roughly P32 million which is thrice the amount of
the principal debt of P11,775,611.35.
While the Court recognizes the right of the parties to enter into contracts and who are expected to comply
with their terms and obligations, this rule is not absolute. Stipulated interest rates are illegal if they are
unconscionable10 and the Court is allowed to temper interest rates when necessary.11 In exercising this
vested power to determine what is iniquitous and unconscionable, the Court must consider the
circumstances of each case.12 What may be iniquitous and unconscionable in one case, may be just in
another. In a number of cases,13 this Court equitably reduced the interest rate agreed upon by the parties for
being iniquitous, unconscionable, and/or exhorbitant.
Notably in the case of Development Bank of the Philippines v. Court of Appeals14, while this Court held
that respondents were liable for the stipulated interest rate of 18% per annum, we equitably reduced the
same to 10% per annum after finding that the interests and penalty charges alone exceeded the amount of
the principal debt. As such, the interests were found to be excessive. We further held that the additional
penalty charge of 8% per annum would sufficiently cover whatever else damages petitioner may have
incurred such as attorney’s fees and litigation expenses.
In the instant case, the resulting interest charge has turned out to be excessive in the context of its base
computation period, and hence, unwarranted in fact and in operation. We are not unmindful of the length of
time this case has been pending in court for which the amount involved has ballooned to the outrageous
amount of more than P45 million which is four times the principal debt.
While we have sustained the validity of much higher interest rates of 21% per annum in Bautista v. Pilar
Development Corporation15 and 24% per annum in Garcia v. Court of Appeals16 as the factual
circumstances therein warrant, it is well to note that compared to the instant case, the said cases were
litigated for a shorter period of time—12 years and 3 years, respectively. Development Bank of the
Philippines17 was finally decided after only 10 years of litigation. Here, the complaint was filed in the lower
court on 5 June 1990 or sixteen (16) years ago. Consequently, the already huge principal debt swelled to a
considerably disproportionate sum. Thus, we deem an interest rate of 12% per annum is more reasonable
under the circumstances.
WHEREFORE, premises considered, respondent Paramount’s motion for reconsideration and supplemental
motion for reconsideration are GRANTED IN PART and our assailed Decision dated 11 November 2005 is
hereby MODIFIED. The interest rate of 18% per annum as stipulated in the surety bond is equitably
reduced to 12% per annum. The Decision is AFFIRMED WITH FINALITY in all other respects.
SO ORDERED.

e. New Sampaguita Builders Construction vs. Philippine National Bank,

G.R. No. 148753, July 30, 2004
C
ourts have the authority to strike down or to modify provisions in promissory notes that grant
the lenders unrestrained power to increase interest rates, penalties and other charges at the
latter’s sole discretion and without giving prior notice to and securing the consent of the
borrowers. This unilateral
__________________
* On leave.
authority is anathema to the mutuality of contracts and enable lenders to take undue advantage of
borrowers. Although the Usury Law has been effectively repealed, courts may still reduce iniquitous or
unconscionable rates charged for the use of money. Furthermore, excessive interests, penalties and other
charges not revealed in disclosure statements issued by banks, even if stipulated in the promissory notes, cannot
be given effect under the Truth in Lending Act.

The  Case  

   
Before  us  is  a  Petition  for  Review477[1]  under  Rule  45  of  the  Rules  of  Court,  seeking  
to  nullify  the  June  20,  2001  Decision478[2]  of  the  Court  of  Appeals479[3]  (CA)  in  CA-­‐GR  
CV  No.  55231.    The  decretal  portion  of  the  assailed  Decision  reads  as  follows:  
   
“WHEREFORE, the decision of the Regional Trial Court of Dagupan City, Branch 40 dated December 28,
1995 is REVERSED and SET ASIDE. The foreclosure proceedings of the mortgaged properties of
defendants-appellees480[4] and the February 26, 1992 auction sale are declared legal and valid and said
defendants-appellees are ordered to pay plaintiff-appellant PNB,481[5] jointly and severally[,] the amount of
deficiency that will be computed by the trial court based on the original penalty of 6% per annum as
explicitly stated in the loan documents and to pay attorney’s fees in an amount equivalent to x x x 1% of
the total amount due and the costs of suit and expenses of litigation.”482[6]

The  Facts  
   
  The  facts  are  narrated  by  the  CA  as  follows:  
 

“On February 11, 1989, Board Resolution No. 05, Series of

1989 was approved by [Petitioner] NSBCI [1)] authorizing the
company to x x x apply for or secure a commercial loan with
the PNB in an aggregate amount of P8.0M, under such terms
agreed by the Bank and the NSBCI, using or mortgaging the
                                                                                                               

 
 
 
 
 
 
 real estate properties registered in the name of its President
and Chairman of the Board [Petitioner] Eduardo R. Dee as
collateral; [and] 2) authorizing [petitioner-spouses] to secure
the loan and to sign any [and all] documents which may be
required by [Respondent] PNB[,] and that [petitioner-spouses]
shall act as sureties or co-obligors who shall be jointly and
severally liable with [Petitioner] NSBCI for the payment of any
[and all] obligations.  
 

“On August 15, 1989, Resolution No. 77 was approved by

granting the request of [Respondent] PNB thru its Board
NSBCI for an P8 Million loan broken down into a revolving
credit line of P7.7M and an unadvised line of P0.3M for
additional operating and working capital483[7] to mobilize its
various construction projects, namely:  
 
‘1) MWSS Watermain;  
2) NEA-Liberty farm;  
3) Olongapo City Pag-Asa Public Market;  
4) Renovation of COA-NCR Buildings 1, 2 and 9;  
5) Dupels, Inc., Extensive prawn farm
development project;  
6) Banawe Hotel Phase II;  
7) Clark Air Base -- Barracks and Buildings; and  
8) Others: EDSA Lighting, Roxas Blvd. Painting
NEA Sapang Palay and Angeles City.’  

“The loan of [Petitioner] NSBCI was secured by a first

mortgage on the following: a) three (3) parcels of residential
land located at Mangaldan, Pangasinan with total land area of
1,214 square meters[,] including improvements thereon and
registered under TCT Nos. 128449, 126071, and 126072 of

                                                                                                               

 
the Registry of Deeds of Pangasinan; b) six (6) parcels of
residential land situated at San Fabian, Pangasinan with total
area of 1,767 square meters[,] including improvements
thereon and covered by TCT Nos. 144006, 144005, 120458,
120890, 144161[,] and 121127 of the Registry of Deeds of
Pangasinan; and c) a residential lot and improvements
thereon located at Mangaldan, Pangasinan with an area of
4,437 square meters and covered by TCT No. 140378 of the
Registry of Deeds of Pangasinan.  
 

“The loan was further secured by the joint and several

signatures of [Petitioners] Eduardo Dee and Arcelita Marquez
Dee, who signed as accommodation-mortgagors since all the
collaterals were owned by them and registered in their names.  
 

“Moreover [Petitioner] NSBCI executed the following

documents, viz: a) promissory note dated June 29, 1989 in the
amount of P5,000,000.00 with due date on October 27, 1989;
[b)] promissory note dated September 1, 1989 in the amount
of P2,700,000.00 with due date on December 30, 1989; and c)
promissory note dated September 6, 1989 in the amount of
P300,000.00 with maturity date on January 4, 1990.  
 

“In addition, [petitioner] corporation also signed the Credit

Agreement dated August 31, 1989 relating to the ‘revolving
credit line’ of P7.7 Million x x x and the Credit Agreement
dated September 5, 1989 to support the ‘unadvised line’ of
P300,000.00.  
 

“On August 31, 1989, [petitioner-spouses] executed a ‘Joint

and Solidary Agreement’ (JSA) in favor of [Respondent] PNB
‘unconditionally and irrevocably binding themselves to be
jointly and severally liable with the borrower for the payment of
all sums due and payable to the Bank under the Credit
Document.’  
 
 “Later on, [Petitioner] NSBCI failed to comply with its
obligations under the promissory notes.  
 

“On June 18, 1991, [Petitioner] Eduardo R. Dee on behalf of

[Petitioner] NSBCI sent a letter to the Branch Manager of the
PNB Dagupan Branch requesting for a 90-day extension for
the payment of interests and restructuring of its loan for
another term.  
 

“Subsequently, NSBCI tendered payment to [Respondent]

PNB [of] three (3) checks aggregating P1,000,000.00, namely
1) check no. 316004 dated August 8, 1991 in the amount of
P200,000.00; 2) check no. 03499997 dated August 8, 1991 in
the amount of P650,000.00; and 3) check no. 03499998 dated
August 15, 1991 in the amount of P150,000.00.484[8]  
 

“In a meeting held on August 12, 1991, [Respondent] PNB’s

representative[,] Mr. Rolly Cruzabra, was informed by
[Petitioner] Eduardo Dee of his intention to remit to
[Respondent] PNB post-dated checks covering interests,
penalties and part of the loan principals of his due account.  
 

“On August 22, 1991, [Respondent] bank’s Crispin Carcamo

wrote [Petitioner] Eduardo Dee[,] informing him that
[Petitioner] NSBCI’s proposal [was] acceptable[,] provided the
total payment should be P4,128,968.29 that [would] cover the
amount of P1,019,231.33 as principal, P3,056,058.03 as
interests and penalties[,] and P53,678.93 for insurance[,] with
the issuance of post-dated checks to be dated not later than
November 29, 1991.  
 

“On September 6, 1991, [Petitioner] Eduardo Dee wrote the

PNB Branch Manager reiterating his proposals for the

                                                                                                               

 
 settlement of [Petitioner] NSBCI’s past due loan account
amounting to P7,019,231.33.  
 

“[Petitioner] Eduardo Dee later tendered four (4) post-dated

Interbank checks aggregating P1,111,306.67 in favor of
[Respondent] PNB, viz:  
 

‘Check No. Date Amount  

 
03500087 Sept. 29, 1991 P277,826.70  
03500088 Oct. 29, 1991 P277,826.70  
03500089 Nov. 29, 1991 P277,826.70  
03500090 Dec. 20, 1991 P277,826.57’  
 

“Upon presentment[,] however, x x x check nos. 03500087

and 03500088 dated September 29 and October 29, 1991
were dishonored by the drawee bank and returned due [to] a
‘stop payment’ order from [petitioners].  
 

“On November 12, 1991, PNB’s Mr. Carcamo wrote

[Petitioner] Eduardo Dee informing him that unless the
dishonored checks [were] made good, said PNB branch ‘shall
recall its recommendation to the Head Office for the
restructuring of the loan account and refer the matter to its
legal counsel for legal action.[’] [Petitioners] did not heed
[respondent’s] warning and as a result[,] the PNB Dagupan
Branch sent demand letters to [Petitioner] NSBCI at its office
address at 1611 ERDC Building, E. Rodriguez Sr. Avenue,
Quezon City[,] asking it to settle its past due loan account.  
 

“[Petitioners] nevertheless failed to pay their loan obligations

within the [timeframe] given them and as a result,
[Respondent] PNB filed with the Provincial Sheriff of
Pangasinan at Lingayen a Petition for Sale under Act 3135, as
amended[,] and Presidential Decree No. 385 dated January
30, 1992.  
 
“The notice of extra-judicial sale of the mortgaged properties
relating to said PNB’s [P]etition for [S]ale was published in the
February 8, 15 and 22, 1992 issues of the Weekly Guardian,
allegedly a newspaper of general circulation in the Province of
Pangasinan, including the cities of Dagupan and San Carlos.
In addition[,] copies of the notice were posted in three (3)
public places[,] and copies thereof furnished [Petitioner]
NSBCI at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue,
Quezon City, [and at] 555 Shaw Blvd., Mandaluyong[, Metro
Manila;] and [Petitioner] Sps. Eduardo and Arcelita Dee at 213
Wilson St., San Juan, Metro Manila.  
 

“On February 26, 1992, the Provincial Deputy Sheriff

Cresencio F. Ferrer of Lingayen, Pangasinan foreclosed the
real estate mortgage and sold at public auction the mortgaged
properties of [petitioner-spouses,] with [Respondent] PNB
being declared the highest bidder for the amount of
P10,334,000.00.  
 

“On March 2, 1992, copies of the Sheriff’s Certificate of Sale

were sent by registered mail to [petitioner] corporation’s
address at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue,
Quezon City and [petitioner-spouses’] address at 213 Wilson
St., San Juan, Metro Manila.  
 

“On April 6, 1992, the PNB Dagupan Branch Manager sent a

letter to [petitioners] at their address at 1611 [ERDC Building,]
E. Rodriguez Sr. Avenue, Quezon City[,] informing them that
the properties securing their loan account [had] been sold at
public auction, that the Sheriff’s Certificate of Sale had been
registered with the Registry of Deeds of Pangasinan on March
13, 1992[,] and that a period of one (1) year therefrom [was]
granted to them within which to redeem their properties.  
 

“[Petitioners] failed to redeem their properties within the one-

year redemption period[,] and so [Respondent] PNB executed
a [D]eed of [A]bsolute [S]ale consolidating title to the
properties in its name. TCT Nos. 189935 to 189944 were later
issued to [Petitioner] PNB by the Registry of Deeds of
Pangasinan.  
 

“On August 4, 1992, [Respondent] PNB informed [Petitioner]

NSBCI that the proceeds of the sale conducted on February
26, 1992 were not sufficient to cover its total claim amounting
to P12,506,476.43[,] and thus demanded from the latter the
deficiency of P2,172,476.43 plus interest and other charges[,]
until the amount [was] fully paid.  
 

“[Petitioners] refused to pay the above deficiency claim which

compelled [Respondent] PNB to institute the instant
[C]omplaint for the collection of its deficiency claim.  
 

“Finding that the PNB debt relief package automatically

[granted] to [Petitioner] NSBCI the benefits under the program,
the court a quo ruled in favor of [petitioners] in its Decision
dated December 28, 1995, the fallo of which reads:  
 
‘In view of the foregoing, the Court believes and so
holds that the [respondent] has no cause of action
against the [petitioners].  
 
 ‘WHEREFORE, the case is hereby DISMISSED,
without costs.’”485[9]  
 
 

On appeal, respondent assailed the trial court’s Decision dismissing

its deficiency claim on the mortgage debt. It also challenged the

ruling of the lower court that Petitioner NSBCI’s loan account was

bloated, and that the inadequacy of the bid price was sufficient to set

aside the auction sale.

Ruling of the Court of Appeals

   
Reversing  the  trial  court,  the  CA  held  that  Petitioner  NSBCI  did  not  avail  itself  of  
respondent’s  debt  relief  package  (DRP)  or  take  steps  to  comply  with  the  conditions  
for  qualifying  under  the  program.    The  appellate  court  also  ruled  that  entitlement  to  
the  program  was  not  a  matter  of  right,  because  such  entitlement  was  still  subject  to  
the  approval  of  higher  bank  authorities,  based  on  their  assessment  of  the  
borrower’s  repayment  capability  and  satisfaction  of  other  requirements.  
   
As  to  the  misapplication  of  loan  payments,  the  CA  held  that  the  subsidiary  ledgers  of  
NSBCI’s  loan  accounts  with  respondent  reflected  all  the  loan  proceeds  as  well  as  the  
partial  payments  that  had  been  applied  either  to  the  principal  or  to  the  interests,  
penalties  and  other  charges.    Having  been  made  in  the  ordinary  and  usual  course  of  
the  banking  business  of  respondent,  its  entries  were  presumed  accurate,  regular  
and  fair  under  Section  5(q)  of  Rule  131  of  the  Rules  of  Court.    Petitioners  failed  to  
rebut  this  presumption.  
   
The  increases  in  the  interest  rates  on  NSBCI’s  loan  were  also  held  to  be  authorized  
by  law  and  the  Monetary  Board  and  -­‐-­‐  like  the  increases  in  penalty  rates  -­‐-­‐  
voluntarily  and  freely  agreed  upon  by  the  parties  in  the  Credit  Agreements  they  
executed.    Thus,  these  increases  were  binding  upon  petitioners.  
   
                                                                                                               

 
However,  after  considering  that  two  to  three  of  Petitioner  NSBCI’s  projects  covered  
by  the  loan  were  affected  by  the  economic  slowdown  in  the  areas  near  the  military  
bases  in  the  cities  of  Angeles  and  Olongapo,  the  appellate  court  annulled  and  deleted  
the  adjustment  in  penalty  from  6  percent  to  36  percent  per  annum.    Not  only  did  
respondent  fail  to  demonstrate  the  existence  of  market  forces  and  economic  
conditions  that  would  justify  such  increases;  it  could  also  have  treated  petitioners’  
request  for  restructuring  as  a  request  for  availment  of  the  DRP.    Consequently,  the  
original  penalty  rate  of  6  percent  per  annum  was  used  to  compute  the  deficiency  
claim.  
   
The  auction  sale  could  not  be  set  aside  on  the  basis  of  the  inadequacy  of  the  auction  
price,  because  in  sales  made  at  public  auction,  the  owner  is  given  the  right  to  
redeem  the  mortgaged  properties;  the  lower  the  bid  price,  the  easier  it  is  to  effect  
redemption  or  to  sell  such  right.    The  bid  price  of  P10,334,000.00  vis-­‐à-­‐vis  
respondent’s  claim  of  P12,506,476.43  was  found  to  be  neither  shocking  nor  
unconscionable.  
   
The  attorney’s  fees  were  also  reduced  by  the  appellate  court  from  10  percent  to  1  
percent  of  the  total  indebtedness.    First,  there  was  no  extreme  difficulty  in  an  
extrajudicial  foreclosure  of  a  real  estate  mortgage,  as  this  proceeding  was  merely  
administrative  in  nature  and  did  not  involve  a  court  litigation  contesting  the  
proceedings  prior  to  the  auction  sale.    Second,  the  attorney’s  fees  were  exclusive  of  
all  stipulated  costs  and  fees.    Third,  such  fees  were  in  the  nature  of  liquidated  
damages  that  did  not  inure  to  respondent’s  salaried  counsel.  
   
Respondent  was  also  declared  to  have  the  unquestioned  right  to  foreclose  the  Real  
Estate  Mortgage.    It  was  allowed  to  recover  any  deficiency  in  the  mortgage  account  
not  realized  in  the  foreclosure  sale,  since  petitioner-­‐spouses  had  agreed  to  be  
solidarily  liable  for  all  sums  due  and  payable  to  respondent.  
   
Finally,  the  appellate  court  concluded  that  the  extrajudicial  foreclosure  proceedings  
and  auction  sale  were  valid  for  the  following  reasons:  (1)  personal  notice  to  the  
mortgagors,  although  unnecessary,  was  actually  made;  (2)  the  notice  of  extrajudicial  
sale  was  duly  published  and  posted;  (3)  the  extrajudicial  sale  was  conducted  
through  the  deputy  sheriff,  under  the  direction  of  the  clerk  of  court  who  was  
concurrently  the  ex-­‐oficio  provincial  sheriff  and  acting  as  agent  of  respondent;  (4)  
the  sale  was  conducted  within  the  province  where  the  mortgaged  properties  were  
located;  and  (5)  such  sale  was  not  shown  to  have  been  attended  by  fraud.  
   
Hence  this  Petition.486[10]  

                                                                                                               

 
    

Issues  

   
Petitioners  submit  the  following  issues  for  our  consideration:  
“I

Whether or not the Honorable Court of Appeals correctly ruled that petitioners did not avail of PNB’s debt
relief package and were not entitled thereto as a matter of right.

“II

Whether or not petitioners have adduced sufficient and convincing evidence to overthrow the presumption
of regularity and correctness of the PNB entries in the subsidiary ledgers of the loan accounts of petitioners.

“III

Whether or not the Honorable Court of Appeals seriously erred in not holding that the Respondent PNB
bloated the loan account of petitioner corporation by imposing interests, penalties and attorney’s fees
without legal, valid and equitable justification.

“IV

Whether or not the auction price at which the mortgaged properties was sold was disproportionate to their
actual fair mortgage value.

“V

Whether or not Respondent PNB is not entitled to recover the deficiency in the mortgage account not
realized in the foreclosure sale, considering that:

A. Petitioners are merely guarantors of the mortgage debt

of petitioner corporation which has a separate
personality from the [petitioner-spouses].

B. The joint and solidary agreement executed by

[petitioner- spouses] are contracts of adhesion not
binding on them;

C. The NSBCI Board Resolution is not valid and binding

on [petitioner-spouses] because they were compelled to
execute the said Resolution[;] otherwise[,] Respondent
PNB would not grant petitioner corporation the loan;

D. The Respondent PNB had already in its possession the

properties of the [petitioner-spouses] which served as a
 collateral to the loan obligation of petitioner
corporation[,] and to still allow Respondent PNB to
recover the deficiency claim amounting to a very
substantial amount of P2.1 million would constitute
unjust enrichment on the part of Respondent PNB.

“VI

Whether or not the extrajudicial foreclosure proceedings and auction sale, including all subsequent
proceedings[,] are null and void for non-compliance with jurisdictional and other mandatory requirements;
whether or not the petition for extrajudicial foreclosure of mortgage was filed prematurely; and whether or
not the finding of fraud by the trial court is amply supported by the evidence on record.”487[11]

The foregoing may be summed up into two main issues: first,

whether the loan accounts are bloated; and second, whether the

extrajudicial foreclosure and subsequent claim for deficiency are valid

and proper.

The  Court’s  Ruling  

   
The  Petition  is  partly  meritorious.  
   
First  Main  Issue:  
Bloated Loan Accounts

At the outset, it must be stressed that only questions of law488[12] may be raised in a petition for
review on certiorari under Rule 45 of the Rules of Court. As a rule, questions of fact cannot be the subject
of this mode of appeal,489[13] for “[t]he Supreme Court is not a trier of facts.”490[14] As exceptions to this
rule, however, factual findings of the CA may be reviewed on appeal491[15] when, inter alia, the factual

                                                                                                               

 
 
 
 
 
inferences are manifestly mistaken;492[16] the judgment is based on a misapprehension of facts;493[17] or the
CA manifestly overlooked certain relevant and undisputed facts that, if properly considered, would justify a
different legal conclusion.494[18] In the present case, these exceptions exist in various instances, thus
prompting us to take cognizance of factual issues and to decide upon them in the interest of justice and in
the exercise of our sound discretion.495[19]

Indeed, Petitioner NSBCI’s loan accounts with respondent appear to be bloated with some iniquitous
imposition of interests, penalties, other charges and attorney’s fees. To demonstrate this point, the Court
shall take up one by one the promissory notes, the credit agreements and the disclosure statements.

                                                                                                               

 
 
 
 
Increases in Interest Baseless

Promissory Notes. In each drawdown, the Promissory Notes specified the interest rate to be
charged: 19.5 percent in the first, and 21.5 percent in the second and again in the third. However, a
uniform clause therein permitted respondent to increase the rate “within the limits allowed by law at any
time depending on whatever policy it may adopt in the future x x x,”496[20] without even giving prior notice
to petitioners. The Court holds that petitioners’ accessory duty to pay interest497[21] did not give respondent
unrestrained freedom to charge any rate other than that which was agreed upon. No interest shall be due,
unless expressly stipulated in writing.498[22] It would be the zenith of farcicality to specify and agree upon
rates that could be subsequently upgraded at whim by only one party to the agreement.

The “unilateral determination and imposition”499[23] of increased rates is “violative of the principle
of mutuality of contracts ordained in Article 1308500[24] of the Civil Code.”501[25] One-sided impositions do
not have the force of law between the parties, because such impositions are not based on the parties’
essential equality.

Although escalation clauses502[26] are valid in maintaining fiscal stability and retaining the value of money
on long-term contracts,503[27] giving respondent an unbridled right to adjust the interest independently and
upwardly would completely take away from petitioners the “right to assent to an important modification in
their agreement”504[28] and would also negate the element of mutuality in their contracts. The clause cited
earlier made the fulfillment of the contracts “dependent exclusively upon the uncontrolled will”505[29] of
respondent and was therefore void. Besides, the pro forma promissory notes have the character of a
contract d’adhésion,506[30] “where the parties do not bargain on equal footing, the weaker party’s [the
debtor’s] participation being reduced to the alternative ‘to take it or leave it.’”507[31]

“While the Usury Law508[32] ceiling on interest rates was lifted by [Central Bank] Circular No.
509[33]
905, nothing in the said Circular grants lenders carte blanche authority to raise interest rates to levels
which will either enslave their borrowers or lead to a hemorrhaging of their assets.”510[34] In fact, we have
declared nearly ten years ago that neither this Circular nor PD 1684, which further amended the Usury
Law,

                                                                                                               

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
“authorized either party to unilaterally raise the interest rate without the other’s consent.”511[35]

Moreover, a similar case eight years ago pointed out to the same respondent (PNB) that borrowing signified
a capital transfusion from lending institutions to businesses and industries and was done for the purpose of
stimulating their growth; yet respondent’s continued “unilateral and lopsided policy”512[36] of increasing
interest rates “without the prior assent”513[37] of the borrower not only defeats this purpose, but also deviates
from this pronouncement. Although such increases are not usurious, since the “Usury Law is now legally
inexistent”514[38] -- the interest ranging from 26 percent to 35 percent in the statements of account515[39] --
“must be equitably reduced for being iniquitous, unconscionable and exorbitant.”516[40] Rates found to be

                                                                                                               

 
 
 
 
 
 
iniquitous or unconscionable are void, as if it there were no express contract thereon.517[41] Above all, it is
undoubtedly against public policy to charge excessively for the use of money.518[42]

It cannot be argued that assent to the increases can be implied either from the June 18, 1991
request of petitioners for loan restructuring or from their lack of response to the statements of account sent
by respondent. Such request does not indicate any agreement to an interest increase; there can be no
implied waiver of a right when there is no clear, unequivocal and decisive act showing such purpose.519[43]
Besides, the statements were not letters of information sent to secure their conformity; and even if we were
to presume these as an offer, there was no acceptance. No one receiving a proposal to modify a loan
contract, especially interest -- a vital component -- is “obliged to answer the proposal.”520[44]

                                                                                                               

 
 
 
 
 Furthermore, respondent did not follow the stipulation in the Promissory Notes providing for the
automatic conversion of the portion that remained unpaid after 730 days -- or two years from date of
original release -- into a medium-term loan, subject to the applicable interest rate to be applied from the
dates of original release.521[45]

In the first,522[46] second523[47] and third524[48] Promissory Notes, the amount that remained unpaid as
of October 27, 1989, December 1989 and January 4, 1990 -- their respective due dates -- should have been
automatically converted by respondent into medium-term loans on June 30, 1991, September 2, 1991, and
September 7, 1991, respectively. And on this unpaid amount should have been imposed the same interest
rate charged by respondent on other medium-term loans; and the rate applied from June 29, 1989,
September 1, 1989 and September 6, 1989 -- their respective original release -- until paid. But these steps
were not taken. Aside from sending demand letters, respondent did not at all exercise its option to enforce
collection as of these Notes’ due dates. Neither did it renew or extend the account.

In these three Promissory Notes, evidently, no complaint for collection was filed with the courts.
It was not until January 30, 1992 that a Petition for Sale of the mortgaged properties was filed -- with the
provincial sheriff, instead.525[49] Moreover, respondent did not supply the interest rate to be charged on
medium-term loans granted by automatic conversion. Because of this deficiency, we shall use the legal
rate of 12 percent per annum on loans and forbearance of money, as provided for by CB Circular 416.526[50]

Credit Agreements. Aside from the promissory notes, another main document involved in
the principal obligation is the set of credit agreements executed and their annexes.

The first Credit Agreement527[51] dated June 19, 1989 -- although offered and admitted in evidence,
and even referred to in the first Promissory Note -- cannot be given weight.

First, it was not signed by respondent through its branch manager.528[52] Apparently it was
surreptitiously acknowledged before respondent’s counsel, who unflinchingly declared that it had been
signed by the parties on every page, although respondent’s signature does not appear thereon.529[53]

Second, it was objected to by petitioners,530[54] contrary to the trial court’s findings.531[55] However,
it was not the Agreement, but the revolving credit line532[56] of P5,000,000, that expired one year from the
Agreement’s date of implementation.533[57]

Third, there was no attached annex that contained the General Conditions.534[58] Even the
Acknowledgment did not allude to its existence.535[59] Thus, no terms or conditions could be added to the
Agreement other than those already stated therein.

                                                                                                               

 
 
 
 
 
 
 
 
 
 
 
 
 
 Since the first Credit Agreement cannot be given weight, the interest rate on the first availment
pegged at 3 percent over and above respondent’s prime rate536[60] on the date of such availment537[61] has no
bearing at all on the loan. After the first Note’s due date, the rate

                                                                                                               

 
 
 
 
of 19 percent agreed upon should continue to be applied on the availment, until its automatic conversion to
a medium-term loan.

The second Credit Agreement538[62] dated August 31, 1989, provided for interest -- respondent’s
prime rate, plus the applicable spread539[63] in effect as of the date of each availment,540[64] on a revolving
credit line of P7,700,000541[65] -- but did not state any provision on its increase or decrease.542[66]
Consequently, petitioners could not be made to bear interest more than such prime rate plus spread. The
Court gives weight to this second Credit Agreement for the following reasons.

First, this document submitted by respondent was admitted by petitioners.543[67] Again, contrary to their
assertion, it was not the Agreement -- but the credit line -- that expired one year from the Agreement’s date
of implementation.544[68] Thus, the terms and conditions continued to apply, even if drawdowns could no
longer be made.

Second, there was no 7-page annex545[69] offered in evidence that contained the General
Conditions,546[70] notwithstanding the Acknowledgment of its existence by respondent’s counsel. Thus, no
terms or conditions could be appended to the Agreement other than those specified therein.

Third, the 12-page General Conditions547[71] offered and admitted in evidence had no probative
value. There was no reference to it in the Acknowledgment of the Agreement; neither was respondent’s
signature on any of the pages thereof. Thus, the General Conditions’ stipulations on interest
adjustment,548[72] whether on a fixed or a floating scheme, had no effect whatsoever on the Agreement.
Contrary to the trial court’s findings,549[73] the General Condition were correctly objected to by
petitioners.550[74] The rate of 21.5 percent agreed upon in the second Note thus continued to apply to the
second availment, until its automatic conversion into a medium-term loan.

The third Credit Agreement551[75] dated September 5, 1989, provided for the same rate of interest as
that in the second Agreement. This rate was to be applied to availments of an unadvised line of P300,000.
Since there was no mention in the third Agreement, either, of any stipulation on increases or decreases552[76]
in interest, there would be no basis for imposing amounts higher than the prime rate plus spread. Again,
the 21.5 percent rate agreed upon would continue to apply to the third availment indicated in the third Note,
until such amount was automatically converted into a medium-term loan.

                                                                                                               

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 The Court also finds that, first, although this document was admitted by petitioners,553[77] it was the
credit line that expired one year from the implementation of the Agreement.554[78] The terms and conditions
therein continued to apply, even if availments could no longer be drawn after expiry.

Second, there was again no 7-page annex555[79] offered that contained the General Conditions,556[80]
regardless of the Acknowledgment by the same respondent’s counsel affirming its existence. Thus, the
terms and conditions in this Agreement relating to interest cannot be expanded beyond that which was
already laid down by the parties.

Disclosure Statements. In the present case, the Disclosure Statements557[81] furnished by

respondent set forth the same interest rates as those respectively indicated in the Promissory Notes.
Although no method of computation was provided showing how such rates were arrived at, we will
nevertheless take up the Statements seriatim in order

                                                                                                               

 
 
 
 
 
to determine the applicable rates clearly.

As to the first Disclosure Statement on Loan/Credit Transaction558[82] dated June 13, 1989, we hold
that the 19.5 percent effective interest rate per annum559[83] would indeed apply to the first availment or
drawdown evidenced by the first Promissory Note. Not only was this Statement issued prior to the
consummation of such availment or drawdown, but the rate shown therein can also be considered
equivalent to 3 percent over and above respondent’s prime rate in effect. Besides, respondent mentioned
no other rate that it considered to be the prime rate chargeable to petitioners. Even if we disregarded the
related Credit Agreement, we assume that this private transaction between the parties was fair and
regular,560[84] and that the ordinary course of business was followed.561[85]

As to the second Disclosure Statement on Loan/Credit Transaction562[86] dated September 2, 1989,

we hold that the 21.5 percent effective interest rate per annum563[87] would definitely apply to the second
availment or drawdown evidenced by the second Promissory Note. Incidentally, this Statement was issued
only after the consummation of its related availment or drawdown, yet such rate can be deemed equivalent
to the prime rate plus spread, as stipulated in the corresponding Credit Agreement. Again, we presume that
this private transaction was fair and regular, and that the ordinary course of business was followed. That
the related Promissory Note was pre-signed would also bolster petitioners’ claim although, under cross-
examination Efren Pozon -- Assistant Department Manager I564[88] of PNB, Dagupan Branch -- testified that
the Disclosure Statements were the basis for preparing the Notes.565[89]

As to the third Disclosure Statement on Loan/Credit Transaction566[90] dated September 6, 1989, we

hold that the same 21.5 percent effective interest rate per annum567[91] would apply to the third

                                                                                                               

 
 
 
 
 
 
 
 
 
 
availment or drawdown evidenced by the third Promissory Note. This Statement was made available to
petitioner-spouses, only after the related Credit Agreement had been executed, but simultaneously with the
consummation of the Statement’s related availment or drawdown. Nonetheless, the rate herein should still
be regarded as equivalent to the prime rate plus spread, under the similar presumption that this private
transaction was fair and regular and that the ordinary course of business was followed.

In sum, the three disclosure statements, as well as the two credit agreements considered by this
Court, did not provide for any increase in the specified interest rates. Thus, none would now be permitted.
When cross-examined, Julia Ang-Lopez, Finance Account Analyst II of PNB, Dagupan Branch, even
testified that the bases for computing such rates were those sent by the head office from time to time, and
not those indicated in the notes or disclosure statements.568[92]

In addition to the preceding discussion, it is then useless to labor the point that the increase in rates violates
the impairment569[93] clause of the Constitution,570[94] because the sole purpose of this provision is to
safeguard the integrity of valid contractual agreements against unwarranted interference by the State571[95] in
the form of laws. Private individuals’ intrusions on interest rates is governed by statutory enactments like
the Civil Code.

Penalty, or Increases
Thereof, Unjustified

No penalty charges or increases thereof appear either in the Disclosure Statements572[96] or in any
of the clauses in the second and the third Credit Agreements573[97] earlier discussed. While a standard
penalty charge of 6 percent per annum has been imposed on the amounts stated in all three Promissory
Notes still remaining unpaid or unrenewed when they fell due,574[98] there is no stipulation therein that
would justify any increase in that charges. The effect, therefore, when the borrower is not clearly informed
of the Disclosure Statements -- prior to the consummation of the availment or drawdown -- is that the
lender will have no right to collect upon such charge575[99] or increases thereof, even if stipulated in the
Notes. The time is now ripe to give teeth to the often ignored forty-one-year old “Truth in Lending
Act”576[100] and thus transform it from a snivelling paper tiger to a growling financial watchdog of hapless
borrowers.

Besides, we have earlier said that the Notes are contracts of adhesion; although not invalid per se,
any apparent ambiguity in the loan contracts -- taken as a whole -- shall be strictly construed against
respondent who caused it.577[101] Worse, in the statements of account, the penalty rate has again been
unilaterally increased by respondent to 36 percent without petitioners’ consent. As a result of its move,
such

                                                                                                               

 
 
 
 
 
 
 
 
 
 
liquidated damages intended as a penalty shall be equitably reduced by the Court to zilch578[102] for being
iniquitous or unconscionable.579[103]

Although the first Disclosure Statement was furnished Petitioner NSBCI prior to the execution of
the transaction, it is not a contract that can be modified by the related Promissory Note, but a mere
statement in writing that reflects the true and effective cost of loans from respondent. Novation can never
be presumed,580[104] and the animus novandi “must appear by express agreement of the parties, or by their
acts that are too clear and unequivocal to be mistaken.”581[105] To allow novation will surely flout the
“policy of the State to protect

                                                                                                               

 
 
 
 
its citizens from a lack of awareness of the true cost of credit.”582[106]

With greater reason should such penalty charges be indicated in the second and third Disclosure
Statements, yet none can be found therein. While the charges are issued after the respective availment or
drawdown, the disclosure statements are given simultaneously therewith. Obviously, novation still does
not apply.

Other Charges Unwarranted

In like manner, the other charges imposed by respondent are not warranted. No particular values
or rates of service charge are indicated in the Promissory Notes or Credit Agreements, and no total value or
even the breakdown figures of such non-finance charge are specified in the Disclosure Statements.
Moreover, the provision in the Mortgage that requires the payment of insurance and other charges is neither
made part of nor reflected in such Notes, Agreements, or Statements.583[107]

Attorney’s Fees Equitably Reduced

We affirm the equitable reduction in attorney’s fees.584[108] These are not an integral part of the
cost of borrowing, but arise only when collecting upon the Notes becomes necessary. The purpose of these
fees is not to give respondent a larger compensation for the loan than the law already allows, but to protect
it against any future loss or damage by being compelled to retain counsel – in-house or not -- to institute
judicial proceedings for the collection of its credit.585[109] Courts have has the power586[110] to determine their
reasonableness587[111] based on quantum meruit588[112] and to reduce589[113] the amount thereof if
excessive.590[114]

In addition, the disqualification argument in the Affidavit of Publication raised by petitioners no

longer holds water, inasmuch as Act 496591[115] has repealed the Spanish Notarial Law.592[116] In the same
vein, their engagement of their counsel in another capacity concurrent with the practice of law is not
prohibited, so long as the roles being assumed by such counsel is made clear to the client.593[117] The only
reason for this clarification requirement is that certain ethical considerations operative in one profession
may not be so in the other.594[118]

Debt Relief Package

Not Availed Of

We also affirm the CA’s disquisition on the debt relief package (DRP).

                                                                                                               

 
 
 
 
 
 
 
 
 
 
 
 
 
 Respondent’s Circular is not an outright grant of assistance or extension of payment,595[119] but a
mere offer subject to specific terms and conditions.
Petitioner NSBCI failed to establish satisfactorily that it had been seriously and directly affected
by the economic slowdown in the peripheral areas of the then US military bases. Its allegations, devoid of
any verification, cannot lead to a supportable conclusion. In fact, for short-term loans, there is still a need
to conduct a thorough review of the borrower’s repayment possibilities.596[120]

Neither has Petitioner NSBCI shown enough margin of equity,597[121] based on the latest loan value
of hard collaterals,598[122] to be eligible for the package. Additional accommodations on an unsecured basis
may be granted only when regular payment amortizations have been established, or when the merits of the
credit application would so justify.599[123]

The branch manager’s recommendation to restructure or extend a total outstanding loan not exceeding
P8,000,000 is not final, but subject to the approval of respondent’s Branches Department Credit
Committee, chaired by its executive vice-president.600[124] Aside from being further conditioned on other
pertinent policies of respondent,601[125] such approval nevertheless needs to be reported to its Board of
Directors for confirmation.602[126] In fact, under the General Banking Law of 2000,603[127] banks shall grant
loans and other credit accommodations only in amounts and for periods of time essential to the effective
completion of operations to be financed, “consistent with safe and sound banking practices.”604[128] The
Monetary Board -- then and now -- still prescribes, by regulation, the conditions and limitations under
which banks may grant extensions or renewals of their loans and other credit accommodations.605[129]

                                                                                                               

 
 
 
 
 
 
 
 
 
 
 
Entries in Subsidiary Ledgers
Regular and Correct

Contrary to petitioners’ assertions, the subsidiary ledgers of respondent properly reflected all
entries pertaining to Petitioner NSBCI’s loan accounts. In accordance with the Generally Accepted
Accounting Principles (GAAP) for the Banking Industry,606[130] all interests accrued or earned on such
loans, except those that were restructured and non-accruing,607[131] have been periodically taken into
income.608[132] Without a doubt, the subsidiary ledgers in a manual accounting system are mere private
documents609[133] that support and are controlled by the general ledger.610[134] Such ledgers are neither
foolproof nor standard in format, but are periodically subject to audit. Besides, we go by the presumption
that the recording of private transactions has been fair and regular, and that the ordinary course of business
has been followed.

Second Main Issue:

Extrajudicial Foreclosure Valid, But
Deficiency Claims Excessive
   
  Respondent  aptly  exercised  its  option  to  “foreclose  the  mortgage,”611[135]  
after  petitioners  had  failed  to  pay  all  the  Notes  in  full  when  they  fell  due.612[136]    The  
extrajudicial  sale  and  subsequent  proceedings  are  therefore  valid,  but  the  alleged  
deficiency  claim  cannot  be  recovered.  

                                                                                                               

 
 
 
 
 
 
 
Auction  Price  Adequate  
   
  In  the  accessory  contract613[137]  of  real  mortgage,614[138]  in  which  immovable  
property  or  real  rights  thereto  are  used  as  security615[139]  for  the  fulfillment  of  the  
principal  loan  obligation,616[140]  the  bid  price  may  be  lower  than  the  property’s  fair  
market  value.617[141]    In  fact,  the  loan  value  itself  is  only  70  percent  of  the  appraised  
value.618[142]    As  correctly  emphasized  by  the  appellate  court,  a  low  bid  price  will  
make  it  

                                                                                                               

 
 
 
 
 
 
easier619[143]  for  the  owner  to  effect  redemption620[144]  by  subsequently  reacquiring  
the  property  or  by  selling  the  right  to  redeem  and  thus  recover  alleged  losses.    
Besides,  the  public  auction  sale  has  been  regularly  and  fairly  conducted,621[145]  there  
has  been  ample  authority  to  effect  the  sale,622[146]  and  the  Certificates  of  Title  can  be  
relied  upon.    No  personal  notice623[147]  is  even  required,624[148]  because  an  
extrajudicial  foreclosure  is  an  action  in  rem,  requiring  only  notice  by  publication  and  
posting,  in  order  to  bind  parties  interested  in  the  foreclosed  property.625[149]  
   
  As  no  redemption626[150]  was  exercised  within  one  year  after  the  date  of  
registration  of  the  Certificate  of  Sale  with  the  Registry  of  Deeds,627[151]  respondent  -­‐-­‐  
being  the  highest  bidder  -­‐-­‐  has  the  right  to  a  writ  of  possession,  the  final  process  that  
will  consummate  the  extrajudicial  foreclosure.    On  the  other  hand,  petitioner-­‐
spouses,  who  are  mortgagors  herein,  shall  lose  all  their  rights  to  the  property.628[152]  
   
No  Deficiency  Claim  Receivable  
   
  After  the  foreclosure  and  sale  of  the  mortgaged  property,  the  Real  Estate  
Mortgage  is  extinguished.    Although  the  mortgagors,  being  third  persons,  are  not  
liable  for  any  deficiency  in  the  absence  of  a  contrary  stipulation,629[153]  the  action  for  
recovery  of  such  amount  -­‐-­‐  being  clearly  sureties  to  the  principal  obligation  -­‐-­‐  may  
still  be  directed  against  them.630[154]    However,  respondent  may  impose  only  the  
stipulated  interest  rates  of  19.5  percent  and  21.5  percent  on  the  respective  
availments  -­‐-­‐  subject  to  the  12  percent  legal  rate  revision  upon  automatic  
conversion  into  medium-­‐term  loans  -­‐-­‐  plus  1  percent  attorney’s  fees,  without  
additional  charges  on  penalty,  insurance  or  any  increases  thereof.      
   
Accordingly,  the  excessive  interest  rates  in  the  Statements  of  Account  sent  to  
petitioners  are  reduced  to  19.5  percent  and  21.5  percent,  as  stipulated  in  the  
Promissory  Notes;  upon  loan  conversion,  these  rates  are  further  reduced  to  the  legal  
rate  of  12  percent.    Payments  made  by  petitioners  are  pro-­‐rated,  the  charges  on  
penalty  and  insurance  eliminated,  and  the  resulting  total  unpaid  principal  and  
interest  of  P6,582,077.70  as  of  the  date  of  public  auction  is  then  subjected  to  1  
                                                                                                               

 
 
 
 
 
 
 
 
 
 
 
 
percent  attorney’s  fees.    The  total  outstanding  obligation  is  compared  to  the  bid  
price.    On  the  basis  of  these  rates  and  the  comparison  made,  the  deficiency  claim  
receivable  amounting  to  P2,172,476.43  in  fact  vanishes.    Instead,  there  is  an  
overpayment  by  more  than  P3  million,  as  shown  in  the  following  Schedules:  
                                
SCHEDULE 1: PN (1) drawdown amount on 6/29/89              
Less: Interest deducted in advance (per 6/13/89 Disclosure
Statement)              
Net proceeds                      
Principal                      
Add:                          
    Interest at 19.5% p.a.                      
        10/28/89-12/31/89 (5,000,000 x 19.5% x [65/365])          
1/1/90-1/5/90 (5,000,000 x 19.5% x
        [5/365])              
Amount due as of 1/5/90                      
Less: Payment on 1/5/90 (pro-rated upon
interest)                  
Balance                          
Add:                          
    Interest at 19.5% p.a.                      
1/6/90-3/30/90 ([5,000,000-356,821.30] x 19.5% x
        [84/365])              
Amount due as of 3/30/90                      
Less: Payment on 3/30/90 (pro-rated upon
interest)                  
Balance                          
Add:                          
    Interest at 19.5% p.a.                      
3/31/90-5/31/90 ([5,000,000-356,821.30] x 19.5% x
        [62/365])              
Amount due as of 5/31/90                      
Less: Payment on 5/31/90 (pro-rated upon
interest)                  
Balance                          
Add:                          
    Interest at 19.5% p.a.                      
6/1/90-6/29/90 ([5,000,000-(356,821.30+821.33)] x 19.5% x
        [29/365])          
Amount due as of 6/29/90                      
Less: Payment on 6/29/90 (pro-rated upon
interest)                  
Balance                          
    
Add:                          
    Interest at 19.5% p.a.                      
6/30/90-12/31/90 ([5,000,000-(356,821.30+821.33+767,087.92)] x 19.5% x
        [185/365])  
1/1/91-6/29/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x
        19.5% x [180/365])      
Interest at 12% p.a. upon automatic
    conversion                  
6/30/91-8/8/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12%
        x [40/365])      
Amount due as of 8/8/91                      
Less: Payment on 8/8/91 (pro-rated upon
interest)                  
Balance                          
Add:                          
    Interest at 12% p.a.                      
8/9/91-8/15/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12%
        x [7/365])          
Amount due as of 8/15/91                      
Less: Payment on 8/15/91 (pro-rated upon
interest)                  
Balance                          
Add:                          
    Interest at 12% p.a.                      
        8/16/91-11/29/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x [106/365])      
Amount due as of
11/29/91                      
Less: Payment on 11/29/91 (pro-rated upon
interest)                  
Balance                          
Add:                          
    Interest at 12% p.a.                      
        11/30/91-12/20/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x [21/365])      
Amount due as of
12/20/91                      
Less: Payment on 12/20/91 (pro-rated upon
interest)                  
Balance                          
Add:                          
    Interest at 12% p.a.                      
        12/21/91-12/31/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x [11/365])  
1/1/92-2/26/92 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12%
        x [57/365])      
Amount due on PN (1) as of 2/26/92                  
    
                               
SCHEDULE 2: PN (2) drawdown amount on
9/1/89                  
Less: Interest deducted in advance (per 9/1/89 Disclosure
Statement)              
Net proceeds                      
Principal                      
Add:                          
    Interest at 21.5% p.a.                      
12/31/89 (2,700,000 x 21.5% x
        [1/365])              
1/1/90-1/5/90 (2,700,000 x 21.5% x
        [5/365])              
Amount due as of 1/5/90                      
Less: Payment on 1/5/90 (pro-rated upon
interest)                  
Balance                          
Add:                          
    Interest at 21.5% p.a.                      
1/6/90-3/30/90 ([2,700,000-18,209.65] x 21.5% x
        [84/365])              
Amount due as of 3/30/90                      
Less: Payment on 3/30/90 (pro-rated upon
interest)                  
Balance                          
Add:                          
    Interest at 21.5% p.a.                      
3/31/90-5/31/90 ([2,700,000-18,209.65] x 21.5% x
        [62/365])              
Amount due as of 5/31/90                      
Less: Payment on 5/31/90 (pro-rated upon
interest)                  
Balance                          
Add:                          
    Interest at 21.5% p.a.                      
6/1/90-6/29/90 ([2,700,000-(18,209.65+523.04)] x 21.5% x
        [29/365])          
Amount due as of 6/29/90                      
Less: Payment on 6/29/90 (pro-rated upon
interest)                  
Balance                          
    
Add:                          
    Interest at 21.5% p.a.                      
6/30/90-12/31/90 ([2,700,000-(18,209.65+523.04+488,484.22)] x 21.5% x
        [185/365])   2
1/1/91-8/8/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x
        21.5% x [220/365])       2
Amount due as of 8/8/91                      
Less: Payment on 8/8/91 (pro-rated upon
interest)                  
Balance                          
Add:                          
    Interest at 21.5% p.a.                      
8/9/91-8/15/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x
        21.5% x [7/365])          
Amount due as of 8/15/91                      
Less: Payment on 8/15/91 (pro-rated upon
interest)                  
Balance                          
Add:                          
    Interest at 21.5% p.a.                      
8/16/91-9/1/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x
        21.5% x [17/365])      
Interest at 12% p.a. upon automatic
    conversion                  
9/2/91-11/29/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x
        12% x [89/365])      
Amount due as of
11/29/91                    
Less: Payment on 11/29/91 (pro-rated upon
interest)                  
Balance                          
Add:                          
    Interest at 12% p.a.                      
11/30/91-12/20/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x
        12% x [21/365])          
Amount due as of
12/20/91                      
Less: Payment on 12/20/91 (pro-rated upon
interest)                  
Balance                          
Add:                          
    Interest at 12% p.a.                      
12/21/91-12/31/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x
        12% x [11/365])      
 1/1/92-2/26/92 ([2,700,000-(18,209.65+523.04+488,484.22)] x 12%
        x [57/365])      
Amount due on PN (2) as of 2/26/92                  
                               
   
    
                               
SCHEDULE 3: PN (3) drawdown amount on
9/6/89                  
Less: Interest deducted in advance (per 9/6/89 Disclosure
Statement)              
Net proceeds                      
Principal                      
Add:                          
Interest at 21.5%
    p.a.                      
1/5/90 (300,000 x 21.5% x
        [1/365])                  
Amount due as of 1/5/90                      
Less: Payment on 1/5/90 (pro-rated upon
interest)                  
Balance                          
Add:                          
Interest at 21.5%
    p.a.                      
1/6/90-3/30/90 ([300,000-337.22] x 21.5% x
        [84/365])              
Amount due as of 3/30/90                      
Less: Payment on 3/30/90 (pro-rated upon
interest)                  
Balance                          
Add:                          
Interest at 21.5%
    p.a.                      
3/31/90-5/31/90 ([300,000-337.22] x 21.5% x
        [62/365])              
Amount due as of 5/31/90                      
Less: Payment on 5/31/90 (pro-rated upon
interest)                  
Balance                          
Add:                          
Interest at 21.5%
    p.a.                      
6/1/90-6/29/90 ([300,000-(337.22+58.44)] x 21.5% x
        [29/365])              
Amount due as of 6/29/90                      
Less: Payment on 6/29/90 (pro-rated upon
interest)                  
Balance                          
    
Add:                          
Interest at 21.5%
    p.a.                      
6/30/90-12/31/90 ([300,000-(337.22+58.44+54,583.14)] x 21.5% x
        [185/365])      
1/1/91-8/8/91 ([300,000-(337.22+58.44+54,583.14)]] x 21.5% x
        [220/365])      
Amount due as of 8/8/91                      
Less: Payment on 8/8/91 (pro-rated upon
interest)                  
Balance                          
Add:                          
Interest at 21.5%
    p.a.                      
8/9/91-8/15/91 ([300,000-(337.22+58.44+54,583.14)]] x 21.5% x
        [7/365])          
Amount due as of 8/15/91                      
Less: Payment on 8/15/91 (pro-rated upon
interest)                  
Balance                          
Add:                          
Interest at 21.5%
    p.a.                      
8/16/91-9/6/91 ([300,000-(337.22+58.44+54,583.14)]] x 21.5% x
        [22/365])      
Interest at 12% p.a. upon automatic
    conversion                  
9/7/91-11/29/91 ([300,000-(337.22+58.44+54,583.14)]] x 12% x
        [84/365])      
Amount due as of
11/29/91                      
Less: Payment on 11/29/91 (pro-rated upon
interest)                  
Balance                          
Add:                          
    Interest at 12% p.a.                      
11/30/91-12/20/91 ([300,000-(337.22+58.44+54,583.14)]] x 12% x
    [21/365])    
Amount due as of
12/20/91          
Less: Payment on 12/20/91 (pro-rated upon
interest)        
Balance            
Add:            
   Interest at 12% p.a.          
12/21/91-12/31/91 ([300,000-(337.22+58.44+54,583.14)]] x 12% x
    [11/365])  
1/1/92-2/26/92 ([300,000-(337.22+58.44+54,583.14)]] x 12% x
    [57/365])  
Amount due on PN (3) as of 2/26/92        
               
            
SCHEDULE 4: Application of Payments Upon
Interest    
           
           
Date Interest  
    Payable Pro-rated  
           
PN (1)
1/5/90 P 186,986.30 P 543,807.61  
  PN (2) 9,542.47   27,752.12  
  PN (3) 176.71   513.93  
    196,705.48   572,073.65  
           
3/30/90 PN (1) 208,370.59   163,182.85  
  PN (2) 132,693.52   103,917.28  
  PN (3) 14,827.15   11,611.70  
    355,891.26   278,711.83  
           
5/31/90 PN (1) 198,985.09   199,806.42  
  PN (2) 126,716.69   127,239.72  
  PN (3) 14,159.30   14,217.74  
    339,861.08   341,263.89  
           
6/29/90 PN (1) 71,924.74   839,012.66  
  PN (2) 45,801.92   534,286.14  
  PN (3) 5,117.90   59,701.04  
    122,844.56   1,432,999.84  
           
8/8/91 PN (1) 806,639.99   493,906.31  
  PN (2) 523,113.94   320,303.08  
  PN (3) 58,452.66   35,790.61  
    1,388,206.59   850,000.00  
           
8/15/91 PN (1) 321,652.11   86,593.37  
  PN (2) 211,852.33   57,033.69  
  PN (3) 23,672.34   6,372.93  
    557,176.79   150,000.00  
           
11/29/91 PN (1) 370,109.22   161,096.81  
  PN (2) 240,937.94   104,872.65  
  PN (3) 27,241.23   11,857.24  
    638,288.39   277,826.70  
           
 12/20/91 PN (1) 235,767.70   162,115.78  
  PN (2) 151,204.51   103,969.45  
  PN (3) 17,075.64   11,741.35  
  P 404,047.85 P 277,826.57  
           
   
   In  the  preparation  of  the  above-­‐mentioned  schedules,  these  basic  legal  
principles  were  followed:  
   
First,  the  payments  were  applied  to  debts  that  were  already  due.631[155]    Thus,  
when  the  first  payment  was  made  and  applied  on  January  5,  1990,  all  Promissory  
Notes  were  already  due.  
   
Second,  payments  of  the  principal  were  not  made  until  the  interests  had  been  
covered.632[156]    For  instance,  the  first  payment  on  January  15,  1990  had  initially  
been  applied  to  all  interests  due  on  the  notes,  before  deductions  were  made  from  
their  respective  principal  amounts.    The  resulting  decrease  in  interest  balances  
served  as  the  bases  for  subsequent  pro-­‐ratings.  
   
Third,  payments  were  proportionately  applied  to  all  interests  that  were  due  and  
of  the  same  nature  and  burden.633[157]    This  legal  principle  was  the  rationale  for  
the  pro-­‐rated  computations  shown  on  Schedule  4.  
   
Fourth,  since  there  was  no  stipulation  on  capitalization,  no  interests  due  and  
unpaid  were  added  to  the  principal;  hence,  such  interests  did  not  earn  any  
additional  interest.634[158]    The  simple  -­‐-­‐  not  compounded  -­‐-­‐  method  of  interest  
calculation635[159]  was  used  on  all  Notes  until  the  date  of  public  auction.  
   
  In  fine,  under  solutio  indebiti636[160]  or  payment  by  mistake,637[161]  there  is  
no  deficiency  receivable  in  favor  of  PNB,  but  rather  an  excess  claim  or  
surplus638[162]  payable  by  respondent;  this  excess  should  immediately  be  
returned  to  petitioner-­‐spouses  or  their  assigns  -­‐-­‐  not  to  mention  the  buildings  
and  improvements639[163]  on  and  the  fruits  of  the  property  -­‐-­‐  to  the  end  that  no  
one  may  be  unjustly  enriched  or  benefited  at  

                                                                                                               

 
 
 

 
 
 
 

 
 
the  expense  of  another.640[164]    Such  surplus  is  in  the  amount  of  P3,686,101.52,  
computed  as  follows:  
 
Total unpaid principal and interest on the  
promissory notes as of February 26, 1992:  
Drawdown on June 29, 1989  
(Schedule 1) P 4,037,204.10  
Drawdown on September 1, 1989  
(Schedule 2) 2,289,040.38  
Drawdown on September 6, 1989  
(Schedule 3) 255,833.22  
6,582,077.70  
Add: 1% attorney’s fees 65,820.78  
Total outstanding obligation 6,647,898.48  
Less: Bid price 10,334,000.00  
Excess P 3,686,101.52  
   
   
   
  Joint  and  Solidary  Agreement.    Contrary  to  the  contention  of  the  
petitioner-­‐spouses,  their  Joint  and  Solidary  Agreement  (JSA)641[165]  was  
indubitably  a  surety,  not  a  guaranty.642[166]    They  consented  to  be  jointly  and  
severally  liable  with  Petitioner  NSBCI  -­‐-­‐  the  borrower  -­‐-­‐  not  only  for  the  payment  
of  all  sums  due  and  payable  in  favor  of  respondent,  but  also  for  the  faithful  and  
prompt  performance  of  all  the  terms  and  conditions  thereof.643[167]    Additionally,  
the  corporate  secretary  of  Petitioner  NSBCI  certified  as  early  as  February  23,  
1989,  that  the  spouses  should  act  as  such  surety.644[168]    But,  their  solidary  
liability  should  be  carefully  studied,  not  sweepingly  assumed  to  cover  all  
availments  instantly.  
   
  First,  the  JSA  was  executed  on  August  31,  1989.    As  correctly  adverted  to  
by  petitioners,645[169]  it  covered  only  the  Promissory  Notes  of  P2,700,000  and  
P300,000  made  after  that  date.    The  terms  of  a  contract  of  suretyship  undeniably  
determine  the  surety’s  liability646[170]  and  cannot  extend  beyond  what  is  

                                                                                                               
 

 
 
 
 

 
 
stipulated  therein.647[171]    Yet,  the  total  amount  petitioner-­‐spouses  agreed  to  be  
held  liable  for  was  P7,700,000;  by  the  time  the  JSA  was  executed,  the  first  
Promissory  Note  was  still  unpaid  and  was  thus  brought  within  the  JSA’s  
ambit.648[172]  
  Second,  while  the  JSA  included  all  costs,  charges  and  expenses  that  
respondent  might  incur  or  sustain  in  connection  with  the  credit  
documents,649[173]  only  the  interest  was  imposed  under  the  pertinent  Credit  
Agreements.    Moreover,  the  relevant  Promissory  Notes  had  to  be  resorted  to  for  
proper  valuation  of  the  interests  charged.  
   
  Third,  although  the  JSA,  as  a  contract  of  adhesion,  should  be  taken  contra  
proferentum  against  the  party  who  may  have  caused  any  ambiguity  therein,  no  
such  ambiguity  was  found.    Petitioner-­‐spouses,  who  agreed  to  be  
accommodation  mortgagors,650[174]  can  no  longer  be  held  individually  liable  for  
the  entire  onerous  obligation651[175]  because,  as  

                                                                                                               
 
 
 

 
 
it  turned  out,  it  was  respondent  that  still  owed  them.  
   
  To  summarize,  to  give  full  force  to  the  Truth  in  Lending  Act,  only  the  
interest  rates  of  19.5  percent  and  21.5  percent  stipulated  in  the  Promissory  
Notes  may  be  imposed  by  respondent  on  the  respective  availments.    After  730  
days,  the  portions  remaining  unpaid  are  automatically  converted  into  medium-­‐
term  loans  at  the  legal  rate  of  12  percent.    In  all  instances,  the  simple  method  of  
interest  computation  is  followed.    Payments  made  by  petitioners  are  applied  and  
pro-­‐rated  according  to  basic  legal  principles.    Charges  on  penalty  and  insurance  
are  eliminated,  and  1  percent  attorney’s  fees  imposed  upon  the  total  unpaid  
balance  of  the  principal  and  interest  as  of  the  date  of  public  auction.    The  P2  
million  deficiency  claim  therefore  vanishes,  and  a  refund  of  P3,686,101.52  arises.  
   
WHEREFORE,  this  Petition  is  hereby  PARTLY  GRANTED.    The  Decision  of  the  
Court  of  Appeals  is  AFFIRMED,  with  the  MODIFICATION  that  PNB  is  ORDERED  
to  refund  the  sum  of  P3,686,101.52  representing  the  overcollection  computed  
above,  plus  interest  thereon  at  the  legal  rate  of  six  percent  (6%)  per  annum  from  
the  filing  of  the  Complaint  until  the  finality  of  this  Decision.    After  this  Decision  
becomes  final  and  executory,  the  applicable  rate  shall  be  twelve  percent  (12%)  
per  annum  until  its  satisfaction.    No  costs.  
   
SO  ORDERED.  
   

11. Other provisions

a) Major investments

SECTION 50. Major Investments. — For the purpose of enhancing bank supervision, the
Monetary Board shall establish criteria for reviewing major acquisitions or investments by a
bank including
corporate affiliations or structures that may expose the bank to undue risks or in any way
hinder effective
supervision.

b) Ceiling on investments in certain assets

SECTION 51. Ceiling on Investments in Certain Assets. — Any bank may acquire real
estate
as shall be necessary for its own use in the conduct of its business: Provided, however, That
the total
investment in such real estate and improvements thereof, including bank equipment, shall not
exceed fifty
percent (50%) of combined capital accounts: Provided, further, That the equity investment of
a bank in
another corporation engaged primarily in real estate shall be considered as part of the bank's
total
investment in real estate, unless otherwise provided by the Monetary Board.
(25a)

c) Acquisition of real estate

SECTION 52. Acquisition of Real Estate by Way of Satisfaction of Claims. —

Notwithstanding the limitations of the preceding Section, a bank may acquire, hold or convey
real
property under the following circumstances:
52.1. Such as shall be mortgaged to it in good faith by way of security for debts;
52.2. Such as shall be conveyed to it in satisfaction of debts previously contracted in the
course of
its dealings; or
52.3. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds
held
by it and such as it shall purchase to secure debts due it.
Any real property acquired or held under the circumstances enumerated in the above
paragraph
shall be disposed of by the bank within a period of five (5) years or as may be prescribed by
the
Monetary Board: Provided, however, That the bank may, after said period, continue to hold
the property
for its own use, subject to the limitations of the preceding Section.

d) Other banking services

SECTION 53. Other Banking Services. — In addition to the operations specifically

authorized
in this Act, a bank may perform the following services:
53.1. Receive in custody funds, documents and valuable objects;
53.2. Act as financial agent and buy and sell, by order of and for the account of their
customers,
shares, evidences of indebtedness and all types of securities;
53.3. Make collections and payments for the account of others and perform such other
services for
their customers as are not incompatible with banking business;
53.4. Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant
or
administrator of investment management/advisory/consultancy accounts; and
53.5. Rent out safety deposit boxes.
The bank shall perform the services permitted under Subsections 53.1, 53.2, 53.3 and 53.4
as
depositary or as an agent. Accordingly, it shall keep the funds, securities and other effects
which it
receives duly separate from the bank's own assets and liabilities.

The Monetary Board may regulate the operations authorized by this Section in order to
ensure
that such operations do not endanger the interests of the depositors and other creditors of the
bank.
In case a bank or quasi-bank notifies the Bangko Sentral or publicly announces a bank
holiday, or
in any manner suspends the payment of its deposit liabilities continuously for more than thirty
(30) days,
the Monetary Board may summarily and without need for prior hearing close such banking
institution and
place it under receivership of the Philippine Deposit Insurance Corporation.

e) Unsafe or unsound banking practices

SECTION 54. Prohibition to Act as Insurer. — A bank shall not directly engage in
insurance
business as the insurer. (73)
SECTION 55. Prohibited Transactions. —
55.1. No director, officer, employee, or agent of any bank shall —
(a) Make false entries in any bank report or statement or participate in any fraudulent
transaction, thereby affecting the financial interest of, or causing damage to, the bank or
any person;
(b) Without order of a court of competent jurisdiction, disclose to any unauthorized person
any information relative to the funds or properties in the custody of the bank belonging to
private individuals, corporations, or any other entity: Provided, That with respect to bank
deposits, the provisions of existing laws shall prevail;
(c) Accept gifts, fees or commissions or any other form of remuneration in connection with
the approval of a loan or other credit accommodation from said bank;
(d) Overvalue or aid in overvaluing any security for the purpose of influencing in any way the
actions of the bank or any bank; or
(e) Outsource inherent banking functions.
55.2. No borrower of a bank shall —
(a) Fraudulently overvalue property offered as security for a loan or other credit
accommodation from the bank;
(b) Furnish false or make misrepresentation or suppression of material facts for the purpose
of obtaining, renewing, or increasing a loan or other credit accommodation or extending
the period thereof;
(c) Attempt to defraud the said bank in the event of a court action to recover a loan or other
credit accommodation; or
(d) Offer any director, officer, employee or agent of a bank any gift, fee, commission, or any
other form of compensation in order to influence such persons into approving a loan or
other credit accommodation application.
55.3. No examiner, officer or employee of the Bangko Sentral or of any department, bureau,
office,
branch or agency of the Government that is assigned to supervise, examine, assist or render
technical assistance to any bank shall commit any of the acts enumerated in this Section or
aid in the commission of the same. (87-Aa)
The making of false reports or misrepresentation or suppression of material facts by
personnel of
the Bangko Sentral ng Pilipinas shall constitute fraud and shall be subject to the
administrative and
criminal sanctions provided under the New Central Bank Act.
55.4. Consistent with the provisions of Republic Act No. 1405, otherwise known as the Banks
Secrecy Law, no bank shall employ casual or nonregular personnel or too lengthy
probationary personnel in the conduct of its business involving bank deposits.
SECTION 56. Conducting Business in an Unsafe or Unsound Manner. — In determining
whether a particular act or omission, which is not otherwise prohibited by any law, rule or
regulation
affecting banks, quasi-banks or trust entities, may be deemed as conducting business in an
unsafe or
unsound manner for purposes of this Section, the Monetary Board shall consider any of the
following
circumstances:
56.1. The act or omission has resulted or may result in material loss or damage, or abnormal
risk
or danger to the safety, stability, liquidity or solvency of the institution;
56.2. The act or omission has resulted or may result in material loss or damage or abnormal
risk
to the institution's depositors, creditors, investors, stockholders or to the Bangko Sentral or
to the public in general;
56.3. The act or omission has caused any undue injury, or has given any unwarranted
benefits,
advantage or preference to the bank or any party in the discharge by the director or officer of
his duties and responsibilities through manifest partiality, evident bad faith or gross
inexcusable negligence; or
56.4. The act or omission involves entering into any contract or transaction manifestly and
grossly
disadvantageous to the bank, quasi-bank or trust entity, whether or not the director or officer
profited or will profit thereby.
Whenever a bank, quasi-bank or trust entity persists in conducting its business in an unsafe
or
unsound manner, the Monetary Board may, without prejudice to the administrative sanctions
provided in
Section 37 of the New Central Bank Act, take action under Section 30 of the same Act and/or
immediately
exclude the erring bank from clearing, the provisions of law to the contrary notwithstanding.
(n)
SECTION 57. Prohibition on Dividend Declaration. — No bank or quasi-bank shall declare
dividends greater than its accumulated net profits then on hand, deducting therefrom its
losses and bad
debts. Neither shall the bank nor quasi-bank declare dividends, if at the time of declaration:
57.1 Its clearing account with the Bangko Sentral is overdrawn; or
57.2 It is deficient in the required liquidity floor for government deposits for five (5) or more
consecutive days; or
57.3 It does not comply with the liquidity standards/ratios prescribed by the Bangko Sentral
for
purposes of determining funds available for dividend declaration; or
57.4 It has committed a major violation as may be determined by the Bangko
Sentral.

f) Prohibition on dividend declaration

12. Penalties for violations

a) Fine, imprisonment
b) Suspension or removal of director or officer
c) Dissolution of bank

annual  balance  sheet  audit  of  the  bank,  quasi-­‐bank  or  trust  entity  to  review  the  internal  audit  and  
control  
system  of  the  bank,  quasi-­‐bank  or  trust  entity  and  to  submit  a  report  of  such  audit.  (6-­‐Da)  
SECTION  59.  Authority  to  Regulate  Electronic  Transactions.  —  The  Bangko  Sentral  shall  
have  full  authority  to  regulate  the  use  of  electronic  devices,  such  as  computers,  and  processes  for  
recording,  storing  and  transmitting  information  or  data  in  connection  with  the  operations  of  a  
bank,  quasibank  
or  trust  entity,  including  the  delivery  of  services  and  products  to  customers  by  such  entity.  (n)  
SECTION  60.  Financial  Statements.  —  Every  bank,  quasi-­‐bank  or  trust  entity  shall  submit  to  
the  appropriate  supervising  and  examining  department  of  the  Bangko  Sentral  financial  
statements  in  such  
form  and  frequency  as  may  be  prescribed  by  the  Bangko  Sentral.  Such  statements,  which  shall  be  
as  of  a  
specific  date  designated  by  the  Bangko  Sentral,  shall  show  the  actual  financial  condition  of  the  
institution  
submitting  the  statement,  and  of  its  branches,  offices,  subsidiaries  and  affiliates,  including  the  
results  of  
its  operations,  and  shall  contain  such  information  as  may  be  required  in  Bangko  Sentral  
regulations.  (n)  
SECTION  61.  Publication  of  Financial  Statements.  —  Every  bank,  quasi-­‐bank  or  trust  entity,  
shall  publish  a  statement  of  its  financial  condition,  including  those  of  its  subsidiaries  and  
affiliates,  in  such  
terms  understandable  to  the  layman  and  in  such  frequency  as  may  be  prescribed  by  the  Bangko  
Sentral,  
in  English  or  Filipino,  at  least  once  every  quarter  in  a  newspaper  of  general  circulation  in  the  city  
or  
province  where  the  principal  office,  in  the  case  of  a  domestic  institution,  or  the  principal  branch  
or  office  in  
the  case  of  a  foreign  bank,  is  located,  but  if  no  newspaper  is  published  in  the  same  province,  then  
in  a  
newspaper  published  in  Metro  Manila  or  in  the  nearest  city  or  province.  
The  Bangko  Sentral  may  by  regulation  prescribe  the  newspaper  where  the  statements  prescribed  
herein  shall  be  published.  
The  Monetary  Board  may  allow  the  posting  of  the  financial  statements  of  a  bank,  quasi-­‐bank  or  
trust  entity  in  public  places  it  may  determine,  in  lieu  of  the  publication  required  in  the  preceding  
paragraph,  when  warranted  by  the  circumstances.  
Additionally,  banks  shall  make  available  to  the  public  in  such  form  and  manner  as  the  Bangko  
Sentral  may  prescribe  the  complete  set  of  its  audited  financial  statements  as  well  as  such  other  
relevant  
information  including  those  on  enterprises  majority-­‐owned  or  controlled  by  the  bank,  that  will  
inform  the  
public  of  the  true  financial  condition  of  a  bank  as  of  any  given  time.  
In  periods  of  national  and/or  local  emergency  or  of  imminent  panic  which  directly  threaten  
monetary  and  banking  stability,  the  Monetary  Board,  by  a  vote  of  at  least  five  (5)  of  its  members,  
in  
special  cases  and  upon  application  of  the  bank,  quasi-­‐bank  or  trust  entity,  may  allow  such  bank,  
quasibank  
or  trust  entity  to  defer  for  a  stated  period  of  time  the  publication  of  the  statement  of  financial  
condition  required  herein.  (n)  
SECTION  62.  Publication  of  Capital  Stock.  —  A  bank,  quasi-­‐bank  or  trust  entity  incorporated  
under  the  laws  of  the  Philippines  shall  not  publish  the  amount  of  its  authorized  or  subscribed  
capital  stock  
without  indicating  at  the  same  time  and  with  equal  prominence,  the  amount  of  its  capital  actually  
paid  up.  
No  branch  of  any  foreign  bank  doing  business  in  the  Philippines  shall  in  any  way  announce  the  
amount  of  the  capital  and  surplus  of  its  head  office,  or  of  the  bank  in  its  entirety  without  
indicating  at  the  
same  time  and  with  equal  prominence  the  amount  of  the  capital,  if  any,  definitely  assigned  to  
such  
branch.  In  case  no  capital  has  been  definitely  assigned  to  such  branch,  such  fact  shall  be  stated  in,  
and  
shall  form  part  of  the  publication.  (82)  
SECTION  63.  Settlement  of  Disputes.  —  The  provisions  of  any  law  to  the  contrary  
notwithstanding,  the  Bangko  Sentral  shall  be  consulted  by  other  government  agencies  or  
instrumentalities  
in  actions  or  proceedings  initiated  by  or  brought  before  them  involving  controversies  in  banks,  
quasibanks  
or  trust  entities  arising  out  of  and  involving  relations  between  and  among  their  directors,  officers  
or  
stockholders,  as  well  as  disputes  between  any  or  all  of  them  and  the  bank,  quasi-­‐bank  or  trust  
entity  of  
which  they  are  directors,  officers  or  stockholders.  (n)  
SECTION  64.  Unauthorized  Advertisement  or  Business  Representation.  —  No  person,  
association,  or  corporation  unless  duly  authorized  to  engage  in  the  business  of  a  bank,  quasi-­‐
bank,  trust  
entity,  or  savings  and  loan  association  as  defined  in  this  Act,  or  other  banking  laws,  shall  
advertise  or  hold  
itself  out  as  being  engaged  in  the  business  of  such  bank,  quasi-­‐bank,  trust  entity,  or  association,  
or  use  in  
connection  with  its  business  title,  the  word  or  words  "bank",  "banking",  "banker",  "quasi-­‐bank",  
"quasibanking",  
"quasi-­‐banker",  "savings  and  loan  association",  "trust  corporation",  "trust  company"  or  words  of  
similar  import  or  transact  in  any  manner  the  business  of  any  such  bank,  corporation  or  
association.  (6)  
SECTION  65.  Service  Fees.  —  The  Bangko  Sentral  may  charge  equitable  rates,  commissions  
or  fees,  as  may  be  prescribed  by  the  Monetary  Board  for  supervision,  examination  and  other  
services  
which  it  renders  under  this  Act.  (n)  
SECTION  66.  Penalty  for  Violation  of  this  Act.  —  Unless  otherwise  herein  provided,  the  
violation  of  any  of  the  provisions  of  this  Act  shall  be  subject  to  Sections  34,  35,  36  and  37  of  the  
New  
Central  Bank  Act.  If  the  offender  is  a  director  or  officer  of  a  bank,  quasi-­‐bank  or  trust  entity,  the  
Monetary  
Board  may  also  suspend  or  remove  such  director  or  officer.  If  the  violation  is  committed  by  a  
corporation,  
such  corporation  may  be  dissolved  by  quo  warranto  proceedings  instituted  by  the  Solicitor  
General.  (87)  
CHAPTER  V  
PLACEMENT  UNDER  CONSERVATORSHIP  
SECTION  67.  Conservatorship.  —  The  grounds  and  procedures  for  placing  a  bank  under  
conservatorship,  as  well  as,  the  powers  and  duties  of  the  conservator  appointed  for  the  bank  
shall  be  
governed  by  the  provisions  of  Section  29  and  the  last  two  paragraphs  of  Section  30  of  the  New  
Central  
Bank  Act:  Provided,  That  this  Section  shall  also  apply  to  conservatorship  proceedings  of  quasi-­‐
banks.  (n)  
CHAPTER  VI  
CESSATION  OF  BANKING  BUSINESS  
SECTION  68.  Voluntary  Liquidation.  —  In  case  of  the  voluntary  liquidation  of  any  bank  
organized  under  the  laws  of  the  Philippines,  or  of  any  branch  or  office  in  the  Philippines  of  a  
foreign  bank,  
written  notice  of  such  liquidation  shall  be  sent  to  the  Monetary  Board  before  such  liquidation  is  
undertaken,  and  the  Monetary  Board  shall  have  the  right  to  intervene  and  take  such  steps  as  may  
be  
necessary  to  protect  the  interests  of  creditors.  (86)  
SECTION  69.  Receivership  and  Involuntary  Liquidation.  —  The  grounds  and  procedures  for  
placing  a  bank  under  receivership  or  liquidation,  as  well  as  the  powers  and  duties  of  the  receiver  
or  
liquidator  appointed  for  the  bank  shall  be  governed  by  the  provisions  of  Sections  30,  31,  32,  and  
33  of  the  
New  Central  Bank  Act:  Provided,  That  the  petitioner  or  plaintiff  files  with  the  clerk  or  judge  of  the  
court  in  
which  the  action  is  pending  a  bond,  executed  in  favor  of  the  Bangko  Sentral,  in  an  amount  to  be  
fixed  by  
the  court.  This  Section  shall  also  apply  to  the  extent  possible  to  the  receivership  and  liquidation  
proceedings  of  quasi-­‐banks.  (n)  
SECTION  70.  Penalty  for  Transactions  After  a  Bank  Becomes  Insolvent.  —  Any  director  or  
officer  of  any  bank  declared  insolvent  or  placed  under  receivership  by  the  Monetary  Board  who  
refuses  to  
turn  over  the  bank's  records  and  assets  to  the  designated  receivers,  or  who  tampers  with  banks  
records,  
or  who  appropriates  for  himself  or  another  party  or  destroys  or  causes  the  misappropriation  and  
destruction  of  the  bank's  assets,  or  who  receives  or  permits  or  causes  to  be  received  in  said  bank  
any  
deposit,  collection  of  loans  and/or  receivables,  or  who  pays  out  or  permits  or  causes  to  be  paid  
out  any  
funds  of  said  bank,  or  who  transfers  or  permits  or  causes  to  be  transferred  any  securities  or  
property  of  
said  bank  shall  be  subject  to  the  penal  provisions  of  the  New  Central  Bank  Act.  (85a)  
CHAPTER  VII  
LAWS  GOVERNING  OTHER  TYPES  OF  BANKS  
SECTION  71.  Other  Banking  Laws.  —  The  organization,  ownership  and  capital  requirements,  
powers,  supervision  and  general  conduct  of  business  of  thrift  banks,  rural  banks  and  cooperative  
banks  
shall  be  governed  by  the  provisions  of  the  Thrift  Banks  Act,  the  Rural  Banks  Act,  and  the  
Cooperative  
Code,  respectively.  
The  organization,  ownership  and  capital  requirements,  powers,  supervision  and  general  conduct  
of  business  of  Islamic  banks  shall  be  governed  by  special  laws.  
The  provisions  of  this  Act,  however,  insofar  as  they  are  not  in  conflict  with  the  provisions  of  the  
Thrift  Banks  Act,  the  Rural  Banks  Act,  and  the  Cooperative  Code  shall  likewise  apply  to  thrift  
banks,  rural  
banks,  and  cooperative  banks,  respectively.  However,  for  purposes  of  prescribing  the  minimum  
ratio  
which  the  net  worth  of  a  thrift  bank  must  bear  to  its  total  risk  assets,  the  provisions  of  Section  33  
of  this  
Act  shall  govern.  (n)  
CHAPTER  VIII  
FOREIGN  BANKS  
SECTION  72.  Transacting  Business  in  the  Philippines.  —  The  entry  of  foreign  banks  in  the  
Philippines  through  the  establishment  of  branches  shall  be  governed  by  the  provisions  of  the  
Foreign  
Banks  Liberalization  Act.  
The  conduct  of  offshore  banking  business  in  the  Philippines  shall  be  governed  by  the  provisions  
of  the  Presidential  Decree  No.  1034,  otherwise  known  as  the  "Offshore  Banking  System  Decree."  
(14a)  
SECTION  73.  Acquisition  of  Voting  Stock  in  a  Domestic  Bank.  —  Within  seven  (7)  years  
from  the  effectivity  of  this  Act  and  subject  to  guidelines  issued  pursuant  to  the  Foreign  Banks  
Liberalization  Act,  the  Monetary  Board  may  authorize  a  foreign  bank  to  acquire  up  to  one  
hundred  
percent  (100%)  of  the  voting  stock  of  only  one  (1)  bank  organized  under  the  laws  of  the  Republic  
of  the  
Philippines.  
Within  the  same  period,  the  Monetary  Board  may  authorize  any  foreign  bank,  which  prior  to  the  
effectivity  of  this  Act  availed  itself  of  the  privilege  to  acquire  up  to  sixty  percent  (60%)  of  the  
voting  stock  
of  a  bank  under  the  Foreign  Banks  Liberalization  Act  and  the  Thrift  Banks  Act,  to  further  acquire  
voting  
shares  of  such  bank  to  the  extent  necessary  for  it  to  own  one  hundred  percent  (100%)  of  the  
voting  stock  
thereof.  
In  the  exercise  of  this  authority,  the  Monetary  Board  shall  adopt  measures  as  may  be  necessary  
to  ensure  that  at  all  times  the  control  of  seventy  percent  (70%)  of  the  resources  or  assets  of  the  
entire  
banking  system  is  held  by  banks  which  are  at  least  majority-­‐owned  by  Filipinos.  
Any  right,  privilege  or  incentive  granted  to  a  foreign  bank  under  this  Section  shall  be  equally  
enjoyed  by  and  extended  under  the  same  conditions  to  banks  organized  under  the  laws  of  the  
Republic  of  
the  Philippines.  (Secs.  2  and  3,  RA  7721)  
SECTION  74.  Local  Branches  of  Foreign  Banks.  —  In  the  case  of  a  foreign  bank  which  has  
more  than  one  (1)  branch  in  the  Philippines,  all  such  branches  shall  be  treated  as  one  (1)  unit  for  
the  
purpose  of  this  Act,  and  all  references  to  the  Philippine  branches  of  foreign  banks  shall  be  held  to  
refer  to  
such  units.  (68)  
SECTION  75.  Head  Office  Guarantee.  —  In  order  to  provide  effective  protection  of  the  interests  
of  the  depositors  and  other  creditors  of  Philippine  branches  of  a  foreign  bank,  the  head  office  of  
such  
branches  shall  fully  guarantee  the  prompt  payment  of  all  liabilities  of  its  Philippine  branch.  (69)  
Residents  and  citizens  of  the  Philippines  who  are  creditors  of  a  branch  in  the  Philippines  of  a  
foreign  bank  shall  have  preferential  rights  to  the  assets  of  such  branch  in  accordance  with  
existing  laws.  
(19)  
SECTION  76.  Summons  and  Legal  Process.  —  Summons  and  legal  process  served  upon  the  
Philippine  agent  or  head  of  any  foreign  bank  designated  to  accept  service  thereof  shall  give  
jurisdiction  to  
the  courts  over  such  bank,  and  service  of  notices  on  such  agent  or  head  shall  be  as  binding  upon  
the  
bank  which  he  represents  as  if  made  upon  the  bank  itself.  
Should  the  authority  of  such  agent  or  head  to  accept  service  of  summons  and  legal  processes  for  
the  bank  or  notice  to  it  be  revoked,  or  should  such  agent  or  head  become  mentally  incompetent  
or  
otherwise  unable  to  accept  service  while  exercising  such  authority,  it  shall  be  the  duty  of  the  
bank  to  
name  and  designate  promptly  another  agent  or  head  upon  whom  service  of  summons  and  
processes  in  
legal  proceedings  against  the  bank  and  of  notices  affecting  the  bank  may  be  made,  and  to  file  with  
the  
Securities  and  Exchange  Commission  a  duly  authenticated  nomination  of  such  agent.  
In  the  absence  of  the  agent  or  head  or  should  there  be  no  person  authorized  by  the  bank  upon  
whom  service  of  summons,  processes  and  all  legal  notices  may  be  made,  service  of  summons,  
processes  and  legal  notices  may  be  made  upon  the  Bangko  Sentral  Deputy  Governor  In-­‐Charge  of  
the  
supervising  and  examining  departments  and  such  service  shall  be  as  effective  as  if  made  upon  the  
bank  
or  its  duly  authorized  agent  or  head.  
In  case  of  service  for  the  bank  upon  the  Bangko  Sentral  Deputy  Governor  In-­‐Charge  of  the  
supervising  and  examining  departments,  the  said  Deputy  Governor  shall  register  and  transmit  by  
mail  to  
the  president  or  the  secretary  of  the  bank  at  its  head  or  principal  office  a  copy,  duly  certified  by  
him,  of  the  
summons,  process,  or  notice.  The  sending  of  such  copy  of  the  summons,  process,  or  notice  shall  
be  a  
necessary  part  of  the  services  and  shall  complete  the  service.  The  registry  receipt  of  mailing  shall  
be  
prima  facie  evidence  of  the  transmission  of  the  summons,  process  or  notice.  All  costs  necessarily  
incurred  by  the  said  Deputy  Governor  for  the  making  and  mailing  and  sending  of  a  copy  of  the  
summons,  
process,  or  notice  to  the  president  or  the  secretary  of  the  bank  at  its  head  or  principal  office  shall  
be  paid  
in  advance  by  the  party  at  whose  instance  the  service  is  made.  (17)  
SECTION  77.  Laws  Applicable.  —  In  all  matters  not  specifically  covered  by  special  provisions  
applicable  only  to  a  foreign  bank  or  its  branches  and  other  offices  in  the  Philippines,  any  foreign  
bank  
licensed  to  do  business  in  the  Philippines  shall  be  bound  by  the  provisions  of  this  Act,  all  other  
laws,  rules  
and  regulations  applicable  to  banks  organized  under  the  laws  of  the  Philippines  of  the  same  class,  
except  
those  that  provide  for  the  creation,  formation,  organization  or  dissolution  of  corporations  or  for  
the  fixing  of  
the  relations,  liabilities,  responsibilities,  or  duties  of  stockholders,  members,  directors  or  officers  
of  
corporations  to  each  other  or  to  the  corporation.  (18)  
SECTION  78.  Revocation  of  License  of  a  Foreign  Bank.  —  The  Monetary  Board  may  revoke  
the  license  to  transact  business  in  the  Philippines  of  any  foreign  bank,  if  it  finds  that  the  foreign  
bank  is  
insolvent  or  in  imminent  danger  thereof  or  that  its  continuance  in  business  will  involve  probable  
loss  to  
those  transacting  business  with  it.  After  the  revocation  of  its  license,  it  shall  be  unlawful  for  any  
such  
foreign  bank  to  transact  business  in  the  Philippines  unless  its  license  is  renewed  or  reissued.  
After  the  
revocation  of  such  license,  the  Bangko  Sentral  shall  take  the  necessary  action  to  protect  the  
creditors  of  
such  foreign  bank  and  the  public.  The  provisions  of  the  New  Central  Bank  Act  on  sanctions  and  
penalties  
shall  likewise  be  applicable.  (16)  
CHAPTER  IX  
TRUST  OPERATIONS  
SECTION  79.  Authority  to  Engage  in  Trust  Business.  —  Only  a  stock  corporation  or  a  
person  duly  authorized  by  the  Monetary  Board  to  engage  in  trust  business  shall  act  as  a  trustee  
or  
administer  any  trust  or  hold  property  in  trust  or  on  deposit  for  the  use,  benefit,  or  behoof  of  
others.  For  
purposes  of  this  Act,  such  a  corporation  shall  be  referred  to  as  a  trust  entity.  (56a;  57a)  
SECTION  80.  Conduct  of  Trust  Business.  —  A  trust  entity  shall  administer  the  funds  or  
property  under  its  custody  with  the  diligence  that  a  prudent  man  would  exercise  in  the  conduct  
of  an  
enterprise  of  a  like  character  and  with  similar  aims.  
No  trust  entity  shall,  for  the  account  of  the  trustor  or  the  beneficiary  of  the  trust,  purchase  or  
acquire  property  from,  or  sell,  transfer,  assign  or  lend  money  or  property  to,  or  purchase  debt  
instruments  
of,  any  of  the  departments,  directors,  officers,  stockholders,  or  employees  of  the  trust  entity,  
relatives  
within  the  first  degree  of  consanguinity  or  affinity,  or  the  related  interests,  of  such  directors,  
officers  and  
stockholders,  unless  the  transaction  is  specifically  authorized  by  the  trustor  and  the  relationship  
of  the  
trustee  and  the  other  party  involved  in  the  transaction  is  fully  disclosed  to  the  trustor  or  
beneficiary  of  the  
trust  prior  to  the  transaction.  
The  Monetary  Board  shall  promulgate  such  rules  and  regulations  as  may  be  necessary  to  prevent  
circumvention  of  this  prohibition  or  the  evasion  of  the  responsibility  herein  imposed  on  a  trust  
entity.  (56)  
SECTION  81.  Registration  of  Articles  of  Incorporation  and  By-­Laws  of  a  Trust  Entity.  —  
The  Securities  and  Exchange  Commission  shall  not  register  the  articles  of  incorporation  and  by-­‐
laws  or  
any  amendment  thereto,  of  any  trust  entity,  unless  accompanied  by  a  certificate  of  authority  
issued  by  the  
Bangko  Sentral.  (n)  
SECTION  82.  Minimum  Capitalization.  —  A  trust  entity,  before  it  can  engage  in  trust  or  other  
fiduciary  business,  shall  comply  with  the  minimum  paid-­‐in  capital  requirement  which  will  be  
determined  by  
the  Monetary  Board.  (n)  
SECTION  83.  Powers  of  a  Trust  Entity.  —  A  trust  entity,  in  addition  to  the  general  powers  
incident  to  corporations,  shall  have  the  power  to:  
83.1.  Act  as  trustee  on  any  mortgage  or  bond  issued  by  any  municipality,  corporation,  or  any  
body  
politic  and  to  accept  and  execute  any  trust  consistent  with  law;  
83.2.  Act  under  the  order  or  appointment  of  any  court  as  guardian,  receiver,  trustee,  or  
depositary  
of  the  estate  of  any  minor  or  other  incompetent  person,  and  as  receiver  and  depositary  of  
any  moneys  paid  into  court  by  parties  to  any  legal  proceedings  and  of  property  of  any  kind  
which  may  be  brought  under  the  jurisdiction  of  the  court;  
83.3.  Act  as  the  executor  of  any  will  when  it  is  named  the  executor  thereof;  
83.4.  Act  as  administrator  of  the  estate  of  any  deceased  person,  with  the  will  annexed,  or  as  
administrator  of  the  estate  of  any  deceased  person  when  there  is  no  will;  
83.5.  Accept  and  execute  any  trust  for  the  holding,  management,  and  administration  of  any  
estate,  
real  or  personal,  and  the  rents,  issues  and  profits  thereof;  and  
83.6.  Establish  and  manage  common  trust  funds,  subject  to  such  rules  and  regulations  as  may  be  
prescribed  by  the  Monetary  Board.  (58)  
SECTION  84.  Deposit  for  the  Faithful  Performance  of  Trust  Duties.  —  Before  transacting  
trust  business,  every  trust  entity  shall  deposit  with  the  Bangko  Sentral  as  security  for  the  faithful  
performance  of  its  trust  duties,  cash  or  securities  approved  by  the  Monetary  Board  in  an  amount  
equal  to  
not  less  than  Five  hundred  thousand  pesos  (P500,000.00)  or  such  higher  amount  as  may  be  fixed  
by  the  
Monetary  Board:  Provided,  however,  That  the  Monetary  Board  shall  require  every  trust  entity  to  
increase  
the  amount  of  its  cash  or  securities  on  deposit  with  the  Bangko  Sentral  whenever  in  its  judgment  
such  
increase  is  necessary  by  reason  of  the  trust  business  of  such  entity:  Provided,  further,  That  the  
paid-­‐in  
capital  and  surplus  of  such  entity  must  be  at  least  equal  to  the  amount  required  to  be  deposited  
with  the  
Bangko  Sentral  in  accordance  with  the  provisions  of  this  paragraph.  Should  the  capital  and  
surplus  fall  
below  said  amount,  the  Monetary  Board  shall  have  the  same  authority  as  that  granted  to  it  under  
the  
provisions  of  the  fifth  paragraph  of  Section  34  of  this  Act.  
A  trust  entity  so  long  as  it  shall  continue  to  be  solvent  and  comply  with  laws  or  regulations  shall  
have  the  right  to  collect  the  interest  earned  on  such  securities  deposited  with  the  Bangko  Sentral  
and,  
from  time  to  time,  with  the  approval  of  the  Bangko  Sentral,  to  exchange  the  securities  for  others.  
If  the  
trust  entity  fails  to  comply  with  any  law  or  regulation,  the  Bangko  Sentral  shall  retain  such  
interest  on  the  
securities  deposited  with  it  for  the  benefit  of  rightful  claimants.  All  claims  arising  out  of  the  trust  
business  
of  a  trust  entity  shall  have  priority  over  all  other  claims  as  regards  the  cash  or  securities  
deposited  as  
above  provided.  The  Monetary  Board  may  not  permit  the  cash  or  securities  deposited  in  
accordance  with  
the  provisions  of  this  Section  to  be  reduced  below  the  prescribed  minimum  amount  until  the  
depositing  
entity  shall  discontinue  its  trust  business  and  shall  satisfy  the  Monetary  Board  that  it  has  
complied  with  all  
its  obligations  in  connection  with  such  business.  (65a)  
SECTION  85.  Bond  of  Certain  Persons  for  the  Faithful  Performance  of  Duties.  —  Before  
an  executor,  administrator,  guardian,  trustee,  receiver  or  depositary  appointed  by  the  court  
enters  upon  
the  execution  of  his  duties,  he  shall,  upon  order  of  the  court,  file  a  bond  in  such  sum,  as  the  court  
may  
direct.  
Upon  the  application  of  any  executor,  administrator,  guardian,  trustee,  receiver,  depositary  or  
any  
other  person  in  interest,  the  court  may,  after  notice  and  hearing,  order  that  the  subject  matter  of  
the  trust  
or  any  part  thereof  be  deposited  with  a  trust  entity.  Upon  presentation  of  proof  to  the  court  that  
the  subject  
matter  of  the  trust  has  been  deposited  with  a  trust  entity,  the  court  may  order  that  the  bond  
given  by  such  
persons  for  the  faithful  performance  of  their  duties  be  reduced  to  such  sums  as  it  may  deem  
proper:  
Provided,  however,  That  the  reduced  bond  shall  be  sufficient  to  secure  adequately  the  proper  
administration  and  care  of  any  property  remaining  under  the  control  of  such  persons  and  the  
proper  
accounting  for  such  property.  
Property  deposited  with  any  trust  entity  in  conformity  with  this  Section  shall  be  held  by  such  
entity  
under  the  orders  and  direction  of  the  court.  (59)  
SECTION  86.  Exemption  of  Trust  Entity  from  Bond  Requirement.  —  No  bond  or  other  
security  shall  be  required  by  the  court  from  a  trust  entity  for  the  faithful  performance  of  its  
duties  as  courtappointed  
trustee,  executor,  administrator,  guardian,  receiver,  or  depositary.  However,  the  court  may,  
upon  proper  application  with  it  showing  special  cause  therefor,  require  the  trust  entity  to  post  a  
bond  or  
other  security  for  the  protection  of  funds  or  property  confided  to  such  entity.  (59)  
SECTION  87.  Separation  of  Trust  Business  from  General  Business.  —  The  trust  business  
and  all  funds,  properties  or  securities  received  by  any  trust  entity  as  executor,  administrator,  
guardian,  
trustee,  receiver,  or  depositary  shall  be  kept  separate  and  distinct  from  the  general  business  
including  all  
other  funds,  properties,  and  assets  of  such  trust  entity.  The  accounts  of  all  such  funds,  properties,  
or  
securities  shall  likewise  be  kept  separate  and  distinct  from  the  accounts  of  the  general  business  
of  the  
trust  entity.  (61)  
SECTION  88.  Investment  Limitations  of  a  Trust  Entity.  —  Unless  otherwise  directed  by  the  
instrument  creating  the  trust,  the  lending  and  investment  of  funds  and  other  assets  acquired  by  a  
trust  
entity  as  executor,  administrator,  guardian,  trustee,  receiver  or  depositary  of  the  estate  of  any  
minor  or  
other  incompetent  person  shall  be  limited  to  loans  or  investments  as  may  be  prescribed  by  law,  
the  
Monetary  Board  or  any  court  of  competent  jurisdiction.  (63a)  
SECTION  89.  Real  Estate  Acquired  by  a  Trust  Entity.  —  Unless  otherwise  specifically  directed  
by  the  trustor  or  the  nature  of  the  trust,  real  estate  acquired  by  a  trust  entity  in  whatever  manner  
and  for  
whatever  purpose,  shall  likewise  be  governed  by  the  relevant  provisions  of  Section  52  of  this  Act.  
(64a)  
SECTION  90.  Investment  of  Non-­Trust  Funds.  —  The  investment  of  funds  other  than  trust  
funds  of  a  trust  entity  which  is  a  bank,  financing  company  or  an  investment  house  shall  be  
governed  by  
the  relevant  provisions  of  this  Act  and  other  applicable  laws.  (64)  
SECTION  91.  Sanctions  and  Penalties.  —  A  trust  entity  or  any  of  its  officers  and  directors  
found  to  have  willfully  violated  any  pertinent  provisions  of  this  Act,  shall  be  subject  to  the  
sanctions  and  
penalties  provided  under  Section  66  of  this  Act  as  well  as  Sections  36  and  37  of  the  New  Central  
Bank  
Act.  (63)  
SECTION  92.  Exemption  of  Trust  Assets  from  Claims.  —  No  assets  held  by  a  trust  entity  in  
its  capacity  as  trustee  shall  be  subject  to  any  claims  other  than  those  of  the  parties  interested  in  
the  
specific  trusts.  (65)  
SECTION  93.  Establishment  of  Branches  of  a  Trust  Entity.  —  The  ordinary  business  of  a  
trust  entity  shall  be  transacted  at  the  place  of  business  specified  in  its  articles  of  incorporation.  
Such  trust  
entity  may,  with  prior  approval  of  the  Monetary  Board,  establish  branches  in  the  Philippines,  and  
the  said  
entity  shall  be  responsible  for  all  business  conducted  in  such  branches  to  the  same  extent  and  in  
the  
same  manner  as  though  such  business  had  all  been  conducted  in  the  head  office.  
For  the  purpose  of  this  Act,  the  trust  entity  and  its  branches  shall  be  treated  as  one  unit.  (67)

B. The New Central Bank Act (R.A. 7653)

1. State policies
2. Creation of the Bangko Sentral ng Pilipinas (BSP)
3. Responsibility and primary objective
4. Monetary board - powers and functions
5. How the BSP handles banks in distress
a) Conservatorship
b) Closure
b.1 “Close Now, Hear Later”

Case:

1. Rural Bank of San Miguel v. Monetary Board, G.R. No.

150886, February 16, 2007
2. Banco Filipino Savings and Mortgage Bank v. Ybanez,
G.R. No. 148163, December 6, 2004

c) Receivership
d) Liquidation

6. Legal Tender

a) Legal tender power

7. How the BSP handles exchange crisis

a) Domestic monetary instability

b) Abnormal movements in the monetary aggregates, credit or
price level
c) Foreign Exchange
d) Liquidity problems of banks

C. Law on Secrecy of Bank Deposits (R.A. 1405, as amended)

1. Purpose
2. Prohibited acts
3. Deposits covered

Cases:

1. Ejercito v. Sandiganbayan, G.R. Nos. 157294-95, November 30,

2006

4. Exceptions
5. Garnishment of deposits, including foreign deposits
6. Penalties for violation
D. Philippine Deposit Insurance Corporation Act

1. Basic policy
2. Concept of insured deposits
3. Liability to depositors
a) Deposit liabilities required to be insured with PDIC
b) Commencement of liability
c) Deposit accounts not entitled to payment
d) Extent of liability
e) Determination of insured deposits
f) Calculation of liability
(i) Per depositor, per capacity rule
(ii) Joint accounts
(iii) Mode of payment
(iv) Effect of payment of insured deposit
(v) Payments of insured deposits as preferred credit under
Art. 2244, Civil Code
(vi) Failure to settle claim of insured depositor
(vii) Failure of depositor to claim insured deposits
(a) Examination of banks and deposit accounts
(b) Prohibition against splitting of deposits
(c) Prohibition against issuances of TROs, etc.

E. Truth in Lending Act (R.A. 3765)

A. Purpose

B. Obligation of creditors to person to whom credit is extended

C. Covered and excluded transactions

D. Consequences of non-compliance with obligation

Cases:

1. Development Bank of the Philippines v. Felipe Arcilla, G.R. No. 161397,

161426, June 30, 2005
2. United Coconut Planters Bank v. Sps. Beluso, G.R. No. 159912, August
17, 2007