Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-43191 November 13, 1935
PAULINO GULLAS, plaintiff-appellant,
vs.
THE PHILIPPINE NATIONAL BANK, defendant-appellant.
Gullas, Lopez, Tuaño and Leuterio for plaintiff-appellant.
Jose Delgado for defendant-appellant.
MALCOLM, J.:
Both parties to this case appealed from a judgment of the Court of First Instance of Cebu, which
sentenced the defendant to return to the account of the plaintiff the sum of P5098, with legal interest
and costs, the plaintiff to secure damages in the amount of P10,000 more or less, and the defendant to
be absolved totally from the amended complaint. As it is conceded that the plaintiff has already
received the sum represented by the United States treasury, warrant, which is in question, the appeal
will thus determine the amount, if any, which should be paid to the plaintiff by the defendant.
The parties to the case are Paulino Gullas and the Philippine National Bank. The first named is a
member of the Philippine Bar, resident in the City of Cebu. The second named is a banking corporation
with a branch in the same city. Attorney Gullas has had a current account with the bank.

It appears from the record that on August 2, 1933, the Treasurer of the United States for the United
States Veterans Bureau issued a Warrant in the amount of $361, payable to the order of Francisco
Sabectoria Bacos. Paulino Gullas and Pedro Lopez signed as endorsers of this check. Thereupon it was
cashed by the Philippine National Bank. Subsequently the treasury warrant was dishonored by the
Insular Treasurer.

At that time the outstanding balance of Attorney Gullas on the books of the bank was P509. Against
this balance he had issued certain cheeks which could not be paid when the money was sequestered
by the On August 20, 1933, Attorney Gullas left his residence for Manila.
The bank on learning of the dishonor of the treasury warrant sent notices by mail to Mr. Gullas which
could not be delivered to him at that time because he was in Manila. In the bank's letter of August 21,
1933, addressed to Messrs. Paulino Gulla and Pedro Lopez, they were informed that the United States
Treasury warrant No. 20175 in the name of Francisco Sabectoria Bacos for $361 or P722, the payment
for which had been received has been returned by our Manila office with the notation that the
payment of his check has been stopped by the Insular Treasurer. "In view of this therefore we have
applied the outstanding balances of your current accounts with us to the part payment of the
foregoing check", namely, Mr. Paulino Gullas P509. On the return of Attorney Gullas to Cebu on August
31, 1933, notice of dishonor was received and the unpaid balance of the United States Treasury
warrant was immediately paid by him.
As a consequence of these happenings, two occurrences transpired which inconvenienced Attorney
Gullas. In the first place, as above indicated, checks including one for his insurance were not paid
because of the lack of funds standing to his credit in the bank. In the second place, periodicals in the
vicinity gave prominence to the news to the great mortification of Gullas.

A variety of incidental questions have been suggested on the record which it can be taken for granted
as having been adversely disposed of in this opinion. The main issues are two, namely, (1) as to the
right of Philippine National Bank, and to apply a deposit to the debt of depositor to the bank and (2) as
to the amount damages, if any, which should be awarded Gullas.
The Civil Code contains provisions regarding compensation (set off) and deposit. (Articles 1195 et seq.,
1758 et seq. The portions of Philippine law provide that compensation shall take place when two
persons are reciprocally creditor and debtor of each other (Civil Code, article 1195). In his connection,
it has been held that the relation existing between a depositor and a bank is that of creditor and
debtor. (Fulton Iron Works Co. vs. China Banking Corporation [1933], 59 Phil., 59.)

The Negotiable Instruments Law contains provisions establishing the liability of a general indorser and
giving the procedure for a notice of dishonor. The general indorser of negotiable instrument engages
that if he be dishonored and the, necessary proceedings of dishonor be duly taken, he will pay the
amount thereof to the holder. (Negotiable Instruments Law, sec. 66.) In this connection, it has been
held a long line of authorities that notice of dishonor is in order to charge all indorser and that the right
of action against him does not accrue until the notice is given. (Asia Banking Corporation vs. Javier
[1923] 44 Phil., 777; 5 Uniform Laws Annotated.)
As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any
indebtedness to it on the part of a depositor. In Louisiana, however, a civil law jurisdiction, the rule is
denied, and it is held that a bank has no right, without an order from or special assent of the depositor
to retain out of his deposit an amount sufficient to meet his indebtedness. The basis of the Louisiana
doctrine is the theory of confidential contracts arising from irregular deposits, e. g., the deposit of
money with a banker. With freedom of selection and after full preference to the minority rule as more
in harmony with modern banking practice. (1 Morse on Banks and Banking, 5th ed., sec. 324; Garrison
vs. Union Trust Company [1905], 111 A.S.R., 407; Louisiana Civil Code Annotated, arts. 2207 et seq.;
Gordon & Gomila vs. Muchler [1882], 34 L. Ann., 604; 8 Manresa, Comentarios al Codigo Civil Español,
4th ed., 359 et seq., 11 Manresa pp. 694 et seq.)

Starting, therefore, from the premise that the Philippine National Bank had with respect to the deposit
of Gullas a right of set off, we next consider if that remedy was enforced properly. The fact we believe
is undeniable that prior to the mailing of notice of dishonor, and without waiting for any action by
Gullas, the bank made use of the money standing in his account to make good for the treasury
warrant. At this point recall that Gullas was merely an indorser and had issued in good faith.

As to a depositor who has funds sufficient to meet payment of a check drawn by him in favor of a third
party, it has been held that he has a right of action against the bank for its refusal to pay such a check
in the absence of notice to him that the bank has applied the funds so deposited in extinguishment of
past due claims held against him. (Callahan vs. Bank of Anderson [1904], 2 Ann. Cas., 203.) The decision
cited represents the minority doctrine, for on principle it would seem that notice is not necessary to a
maker because the right is based on the doctrine that the relationship is that of creditor and debtor.
However this may be, as to an indorser the situation is different, and notice should actually have been
given him in order that he might protect his interests.
We accordingly are of the opinion that the action of the bank was prejudicial to Gullas. But to follow up
that statement with others proving exact damages is not so easy. For instance, for alleged libelous
articles the bank would not be primarily liable. The same remark could be made relative to the loss of
business which Gullas claims but which could not be traced definitely to this occurrence. Also Gullas
having eventually been reimbursed lost little through the actual levy by the bank on his funds. On the
other hand, it was not agreeable for one to draw checks in all good faith, then, leave for Manila, and on
return find that those checks had not been cashed because of the action taken by the bank. That
caused a disturbance in Gullas' finances, especially with reference to his insurance, which was injurious
to him. All facts and circumstances considered, we are of the opinion that Gullas should be awarded
nominal damages because of the premature action of the bank against which Gullas had no means of
protection, and have finally determined that the amount should be P250.

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

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

THIRD DIVISION

[G.R. NO. 159794 : December 19, 2006]

MACLARING M. LUCMAN, in his capacity as the Manager of the LAND BANK OF THE PHILIPPINES,
Marawi City, Petitioner, v. ALIMATAR MALAWI, ABDUL-KHAYER PANGCOGA, SALIMATAR SARIP,
LOMALA CADAR, ALIRIBA S. MACARAMBON and ABDUL USMAN, Respondents.
DECISION

TINGA, J.:

This is a Petition for Review challenging the decision of the trial court, affirmed by the Court of
Appeals, granting the petition for mandamus filed by herein respondents, Barangay Chairmen (or
Punong Barangay) of several barangays in the province of Lanao del Sur.

The petition for mandamus filed by respondents before the trial court is rooted in their claim that they
were deprived of their Internal Revenue Allotment (IRA) for the 2nd and 3rd quarters of 1997.
Respondents further alleged that these same funds were released by petitioner as Manager of Land
Bank of the Philippines (LBP), the depositary bank, to third persons.

There were originally six (6) petitioners when the Petition for Mandamus with Prayer for Writ of
Preliminary Mandatory Injunction was filed by now respondents before the court of origin. They were
Alimatar Malawi, Abdulkhayr Pangcoga, Salimatar Sarip, Lomala Cadar, Aliriba S. Macarambon and
Abdul Usman who were the incumbent barangay chairmen of Bubong Ngingir (Kabasaran), Ilian,
Linindingan, Mapantao-Ingod, Paigoay and Rangiran, respectively, all from the Municipality of
Pagayawan, Lanao del Sur.1 All of them were the incumbent barangay chairmen of their respective
barangays prior to the 12 May 1997 barangay elections. The elections on 12 May 1997 in the aforesaid
barangays resulted in a failure of elections. Thereafter, the special elections held in these barangays
likewise resulted in a failure of elections.2 Consequently, respondents remained in office in a holdover
capacity pursuant to the provisions of Sec. 1 of

R.A. No. 66793 and Comelec Resolution No. 2888 dated February 5, 1997.4

Beginning with the second quarter of 1997, LBP was selected as the government depository bank for
the IRAs of the abovementioned barangays.5 Being a new government depositary bank for the IRA
funds, the authorized public officials had to open new accounts in behalf of their government units
with the proper LBP branch from which they could withdraw the IRAs.6

After the failed 12 May 1997 elections, respondents attempted to open their respective barangays' IRA
bank accounts but were refused by petitioner because respondents needed to show their individual
certifications showing their right to continue serving as Barangay Chairmen and the requisite Municipal
Accountant's Advice giving respondents the authority to withdraw IRA deposits.7 The requirement for
the Accountant's Advice stemmed from Commission on Audit Circular No. 94-004.8

Respondents were eventually allowed to open accounts for their barangays except for Lomala Cadar
and Abdul Usman of barangays Mapantao-Ingud and Rangiran, respectively, because the accounts for
these barangays were previously opened by two persons who presented themselves as the duly
proclaimed Barangay Chairmen for these same barangays.9

In any event, all respondents were not allowed to withdraw the IRA funds from the opened accounts,
owing to the absence of the requisite Accountant's Advice.10

Then on 4 August 1997, five (5) other persons presented themselves before petitioner as the newly
proclaimed Punong Barangays of the five barangays concerned,11 each of them presenting a
certification of his election as Punong Barangay issued by the provincial director of the DILG-ARMM
and another Certification issued by the Local Government Operations Officer attesting, among others,
to the revocation of the certification previously issued to respondents.12 Without verifying the
authenticity of the certifications presented by these third persons, petitioner proceeded to release the
IRA funds for the 2nd and 3rd quarters of 1997 to them.13

Respondents thus filed on 11 August 1997 a special civil action for Mandamus with Application for
Preliminary Mandatory Injunction docketed as Civil Case No. 11-106, to compel petitioner to allow
them to open and maintain deposit accounts covering the IRAs of their respective barangays and to
withdraw therefrom.14 The case was raffled to the Regional Trial Court (RTC) of Lanao del Sur, Branch
11.15
At the trial respondents Sarip, Cadar, Pangcoga and Usman testified that they were duly elected
chairpersons of their respective barangays and continued as such in a holdover capacity until their re-
election on 30 August 1997. They testified further that despite presenting the corresponding
documents, petitioner refused to allow the withdrawal of the funds.16

Respondent Macarambon testified that he was the incumbent chairperson of Barangay Paigoay prior
to the 12 May 1997 elections and that due to the failure of elections, he continued to occupy his
position in a holdover capacity until he was succeeded by his wife upon the latter's election to the
same post. He testified on petitioner's refusal to release the money to him despite his submission of
the Accountant's Advice.17

For failure to appear at the scheduled hearing on 20 April 1999, petitioner was held as in default and
respondents were allowed to present evidence ex parte. Petitioner's Motion for Reconsideration of the
Order declaring him as in default was granted.18

After failing again to appear on the given time for him to adduce evidence, another Order was issued
wherein petitioner was deemed to have waived his right to present evidence. The Order was lifted on
petitioner's Motion for Reconsideration. Instead of presenting evidence, petitioner filed on 10
November 1999 a Motion to Dispense or Waive Presentation of Evidence wherein he represented that
the prayers in the complaint had already been complied with.19 The RTC granted petitioner's motion
through an Order dated 24 September 1999.20

Thereafter, the RTC rendered a Decision21 dated 8 October 1999 commanding petitioner to pay
respondents, except respondent Alimatar Malawi who failed to testify, the IRAs of their respective
barangays "even without the Accountant's Advice."22 The dispositive portion of the Decision reads, to
wit:

WHEREFORE, premises all considered, the instant petition is hereby granted. Accordingly, Mr.
Maclaring M. Lucman, Manager of the Land Bank of the Philippines, Marawi City branch, is hereby
ordered to pay the following:23

1. Aliriba Macarambon, the 2nd Quarter IRA of Paigoay, Pagayawan in the sum of P48,200.00;

2. Salimatar Sarip of Linindingan the

2nd Quarter IRA - - - P54,220.00

3rd Quarter IRA - - - P54,220.00

3. Lomala S. Cadar of Mapantao the

2nd Quarter IRA - - - P54,320.00

3rd Quarter IRA - - - P54,320.00

4. Abdulkhay Pangcoga of Ilian the

2nd Quarter IRA - - - P53, 361.00

3rd Quarter IRA - - - P53,361.00

5. Abdul Usman of Rangiran the

2nd Quarter IRA - - - P51,185.00

3rd Quarter IRA - - - P51,185.00

even without the Accountant's Advice and the subsequent IRAs until their term of office shall have
expired.

SO ORDERED.24

The RTC gave no credence to petitioner's assertion of payment to the rightful barangay officers, there
having been no testimonial or documentary evidence proferred in substantiation thereof.25 It
considered petitioner's refusal to present evidence as a "silence" that equates to an admission of
respondents' allegations.26 Furthermore, the RTC relied on the testimonies and certifications adduced
by respondents in holding that they were occupying their positions in a holdover capacity27and that by
virtue thereof, they had "the perfect right to continue performing the duties and functions of their
positions including the withdrawal of funds of their respective barangays."28

The Court of Appeals29 affirmed the RTC's Decision in toto. Hence, this petition.

Petitioner argues that respondents have no cause of action against him since they failed to present
valid certifications showing their respective right to continue serving as Punong Barangay as well as the
requisite Municipal Accountant's Advice. Petitioner also asserts that the LBP Marawi Branch had
already released the contested IRAs to the Barangay Treasurers who were acting in conjunction with
the duly recognized Punong Barangays, thereby making the petition for mandamus moot and
academic.30 These are factual issues that are generally beyond the review of this Court.

Petitioner adds that respondents have no legal personality to institute the petition for mandamus in
their own names since the IRAs rightfully belong to the respective barangays and not to them and that
their respective barangays already received the claimed IRAs in this instant case.31

For the proper adjudication of the present petition, two related core issues have to be resolved. First,
what is the cause of action alleged in the initiatory pleading filed by respondents before the trial court?
Second, are there indispensable parties which were not impleaded?cralawlibrary

Although the pleading filed before the lower court was denominated as a Petition for Mandamus With
Prayer For Writ of Preliminary Injunction, the allegations thereof indicate that it is an action for specific
performance, particularly to compel petitioner to allow withdrawal of funds from the accounts of the
barangays headed by respondents with the LBP, Marawi Branch. Thus, the Petition alleged:

"12. Despite the opening of deposit accounts for the barangays mentioned in the preceding paragraph,
respondent, without any valid or lawful cause, failed and refused, and still fails and refuses, to allow
the withdrawal of the funds or IRA of the said barangays as evidenced by the WITHDRAWAL CHECKS
(attached as Annexes "D" to "D-3" hereof) of said barangays which were refused payment when
presented to the Land Bank on August 4, 1997."32

From the records of the case, it appears that the shares of the barangays in the IRA had already been
remitted by the Department of Budget and Management (DBM) to the LBP Marawi Branch where they
were kept in the accounts opened in the names of the barangays.

By virtue of the deposits, there exists between the barangays as depositors and LBP a creditor-debtor
relationship. Fixed, savings, and current deposits of money in banks and similar institutions are
governed by the provisions concerning simple loan.33 In other words, the barangays are the lenders
while the bank is the borrower.

This Court elucidated on the matter in Guingona, Jr., et al. v. The City Fiscal of Manila, et al.,34 citing
Serrano v. Central Bank of the Philippines,35 thus:

Bank deposits are in the nature of irregular deposits. They are really loans because they earn interest.
All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and are to be
covered by the law on loans (Art. 1980, Civil Code; Gullas v. Phil. National Bank, 62 Phil. 519). Current
and savings deposits are loans to a bank because it can use the same. The petitioner here in making
time deposits that earn interest with respondent Overseas Bank of Manila was in reality a creditor of
the respondent Bank and not a depositor. The respondent Bank was in turn a debtor of petitioner.
Failure of the respondent Bank to honor the time deposit is failure to pay its obligation as a debtor and
not a breach of trust arising from a depository's failure to return the subject matter of the deposit.
(Emphasis supplied.)36

The relationship being contractual in nature, mandamus is therefore not an available remedy since
mandamus does not lie to enforce the performance of contractual obligations.37

This brings us to the second core issue.

The IRA funds for which the bank accounts were created belong to the barangays headed by
respondents. The barangays are the only lawful recipients of these funds. Consequently, any
transaction or claim involving these funds can be done only through the proper authorization from the
barangays as juridical entities.

The determination, therefore, of whether or not the IRA funds were unlawfully withheld or improperly
released to third persons can only be determined if the barangays participated as parties to this action.
These questions cannot be resolved with finality without the involvement of the barangays. After all,
these controversies involve funds rightfully belonging to the barangays. Hence, the barangays are
indispensable parties in this case.

An indispensable party is defined as parties-in-interest without whom there can be no final

determination of an action.38 The nature of an indispensable party was thoroughly discussed in
Arcelona v. Court of Appeals,39 to quote:

An indispensable party is a party who has such an interest in the controversy or subject matter that a
final adjudication cannot be made, in his absence, without injuring or affecting that interest, a party
who has not only an interest in the subject matter of the controversy, but also has an interest of such
nature that a final decree cannot be made without affecting his interest or leaving the controversy in
such a condition that its final determination may be wholly inconsistent with equity and good
conscience. It has also been considered that an indispensable party is a person in whose absence there
cannot be a determination between the parties already before the court which is effective, complete,
or equitable. Further, an indispensable party is one who must be included in an action before it may
properly go forward.

A person is not an indispensable party, however, if his interest in the controversy or subject matter is
separable from the interest of the other parties, so that it will not necessarily be directly or injuriously
affected by a decree which does complete justice between them. Also, a person is not an indispensable
party if his presence would merely permit complete relief between him and those already parties to
the action, or if he has no interest in the subject matter of the action. It is not a sufficient reason to
declare a person to be an indispensable party that his presence will avoid multiple litigation.40

In Arcelona, the Court also dwelt on the consequences of failure to include indispensable parties in a
case, categorically stating that the presence of indispensable parties is a condition for the exercise of
juridical power41 and when an indispensable party is not before the court, the action should be
dismissed.42 The absence of an indispensable party renders all subsequent actions of the court null
and void for want of authority to act, not only as to the absent parties but even as to those present.43

The joinder of indispensable parties is mandatory. Without the presence of indispensable parties to the
suit, the judgment of the court cannot attain real finality. Strangers to a case are not bound by the
judgment rendered by the court.44

Clearly, this case was not initiated by the barangays themselves. Neither did the barangay chairmen file
the suit in representation of their respective barangays. Nothing from the records shows otherwise. On
this score alone, the case in the lower court should have been dismissed.
Even if the barangays themselves had filed the case, still it would not prosper. The case involves
government funds and as such, any release therefrom can only be done in accordance with the
prevailing rules and procedures.

The Government Accounting and Auditing Manual (GAAM) provides that the local treasurers shall
maintain the depositary accounts in the name of their respective local government units with banks.45
Under the Local Government Code, the treasurer is given the power, among others, to: (1) keep
custody of barangay funds and properties; and (2) disburse funds in accordance with the financial
procedures provided by the Local Government Code.46 The same manual defines disbursements as
constituting all cash paid out during a given period either in currency or by check.47

Sec. 344 of the Local Government Code further provides for the following requirements in cases of
disbursements, to wit:

Sec. 344. No money shall be disbursed unless the local budget officer certifies to the existence of
appropriation that has been legally made for the purpose, the local accountant has obligated said
appropriation, and the local treasurer certifies to the availability of funds for the purpose. Vouchers
and payrolls shall be certified to and approved by the head of the department or office who has
administrative control of the fund concerned, as to the validity, propriety, and legality of the claim
involved. Except in cases of disbursements involving regularly recurring administrative expenses xxx
approval of the disbursement voucher by the local chief executive himself shall be required whenever
local funds are disbursed.

Thus, as a safeguard against unwarranted disbursements, certifications are required from: (a) the local
budget officer as to the existence and validity of the appropriation; (b) the local accountant as to the
legal obligation incurred by the appropriation; (c) the local treasurer as to the availability of funds; and
(d) the local department head as to the validity, propriety and legality of the claim against the
appropriation.48

Further, the GAAM provides for the basic requirements applicable to all classes of disbursements that
shall be complied with, to wit:

a) Certificate of Availability of Fund. Existence of lawful appropriation, the unexpended balance of

which, free from other obligations, is sufficient to cover the expenditure, certified as available by an
accounting officer or any other official required to accomplish the certificate.

Use of moneys appropriated solely for the specific purpose for which appropriated, and for no other,
except when authorized by law or by a corresponding appropriating body.

b) Approval of claim or expenditure by head of office or his duly authorized representative.

c) Documents to establish validity of claim. - Submission of documents and other evidences to establish
the validity and correctness of the claim for payment.

d) Conformity of the expenditure to existing laws and regulations.

e) Proper accounting treatment.49

This prescribed legal framework governing the release and disbursement of IRA funds to the respective
barangays disabuses from the notion that a barangay chairman, relying solely on his authority as a local
executive, has the right to demand physical possession of the IRA funds allocated by the national
government to the barangay. The right to demand for the funds belongs to the local government itself
through the authorization of their Sanggunian.50

One final note. There is no conclusive proof from the records showing that the IRA funds for the 2nd
and 3rd quarters of the barangays concerned remitted by the DBM had already been
withdrawn from the LBP Marawi Branch. Considering the implications of this action of possibly
depriving several local government units of their IRAs, the Court took the initiative to request the
COMELEC to issue certifications on who were the duly elected chairmen of the barangays concerned.
The COMELEC issued to this Court a list of the elected barangay chairmen which confirmed the re-
election of respondents as barangay chairmen of their respective barangays.51 If withdrawals were
indeed made, whether by the respondents or by impostors, the matter deserves to be investigated
since public funds are involved. Accordingly, we refer the matter to the Department of Interior and
Local Government (DILG) for investigation and appropriate action.

WHEREFORE, premises considered, the petition is GRANTED. The assailed Decisions of the Court of
Appeals and the Regional Trial Court are REVERSED and SET ASIDE. The Petition for Mandamus filed
before the Regional Trial Court is ordered DISMISSED.

The alleged withdrawals of deposits representing the Internal Revenue Allotments for the 2nd and 3rd
Quarters of 1997 of the barangays concerned from the Land Bank of the Philippines, Marawi Branch,
are referred to the DILG for investigation and appropriate action. The DILG is hereby DIRECTED to
INFORM the Court of the result of its investigation within thirty (30) days from the completion thereof.

No pronouncement as to costs.

SO ORDERED.

Quisumbing, J., Chairperson, Carpio, Carpio Morales, and Velasco, Jr., JJ., concur.
F.E.
G.R. No. L-30511 February 14, 1980

MANUEL M. SERRANO, petitioner,

vs.
CENTRAL BANK OF THE PHILIPPINES; OVERSEAS BANK OF MANILA; EMERITO M. RAMOS, SUSANA B.
RAMOS, EMERITO B. RAMOS, JR., JOSEFA RAMOS DELA RAMA, HORACIO DELA RAMA, ANTONIO B.
RAMOS, FILOMENA RAMOS LEDESMA, RODOLFO LEDESMA, VICTORIA RAMOS TANJUATCO, and
TEOFILO TANJUATCO, respondents.
Rene Diokno for petitioner.
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 and the general public.1
Petitioner also prays that both respondent banks be ordered to execute the proper and necessary
documents to constitute all properties 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 G.R. No. 29352.2

A sought for ex-parte preliminary injunction against both respondent banks was not given by this
Court.
Undisputed pertinent facts are:

On October 13, 1966 and December 12, 1966, petitioner made a time deposit, for one year with 6%
interest, of One Hundred Fifty Thousand Pesos (P150,000.00) with the respondent Overseas Bank of
Manila. 3 Concepcion Maneja also made a time deposit, for one year with 6-½% interest, on March 6,
1967, of Two Hundred Thousand Pesos (P200,000.00) with the same respondent Overseas Bank of
Manila.4

On August 31, 1968, Concepcion Maneja, married to Felixberto M. Serrano, assigned and conveyed to
petitioner Manuel M. Serrano, her time deposit of P200,000.00 with respondent Overseas Bank of
Manila. 5

Notwithstanding series of demands for encashment of the aforementioned time deposits from the
respondent Overseas Bank of Manila, dating from December 6, 1967 up to March 4, 1968, not a single
one of the time deposit certificates was honored by respondent Overseas Bank of Manila. 6

Respondent Central Bank admits that it is charged with the duty of administering the banking system
of the Republic and it exercises supervision over all doing business in the Philippines, but denies the
petitioner's allegation that the Central 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 operation of respondent Overseas Bank
of Manila continued up to 1968.7

Respondent Central Bank also denied that it is guarantor of the permanent solvency of any banking
institution as claimed by petitioner. It claims that neither the law nor sound banking supervision
requires respondent Central Bank to advertise or represent to the public any remedial measures it may
impose upon chronic delinquent banks as such action may inevitably result to panic or bank "runs". In
the years 1966-1967, there were no findings to declare the respondent Overseas Bank of Manila as
insolvent. 8

Respondent Central Bank likewise denied that a constructive trust was created in favor of petitioner
and his predecessor in interest Concepcion Maneja when their time deposits were made in 1966 and
1967 with the respondent Overseas Bank of Manila as during that time the latter was not an insolvent
bank and its operation as a banking institution was being salvaged by the respondent Central Bank. 9

Respondent Central Bank avers no knowledge of petitioner's claim that the properties given by
respondent Overseas Bank of Manila as additional collaterals to respondent Central Bank of the
Philippines for the former's overdrafts and emergency loans were acquired through the use of
depositors' money, including that of the petitioner and Concepcion Maneja. 10

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 present petition. 11
This Court rendered decision in G.R. No. L-29352 on October 4, 1971, which became final and
executory on March 3, 1972, favorable to the respondent Overseas Bank of Manila, with the dispositive
portion to wit:

WHEREFORE, the writs prayed for in the petition are hereby granted and respondent Central Bank's
resolution Nos. 1263, 1290 and 1333 (that prohibit the Overseas Bank of Manila to participate in
clearing, direct the suspension of its operation, and ordering the liquidation of said bank) are hereby
annulled and set aside; and said respondent Central Bank of the Philippines is directed to comply with
its obligations under the Voting Trust Agreement, and to desist from taking action in violation therefor.
Costs against respondent Central Bank of the Philippines. 12

Because of the above decision, petitioner in this case filed a motion for judgment in this case, praying
for a decision on the merits, adjudging respondent Central Bank jointly and severally liable with
respondent Overseas Bank of Manila to the petitioner for the P350,000 time deposit made with the
latter bank, with all interests due therein; and declaring all assets assigned or mortgaged by the
respondents Overseas Bank of Manila and the Ramos groups in favor of the Central Bank as trust funds
for the benefit of petitioner and other depositors. 13

By the very nature of the claims and causes of action against respondents, they in reality are recovery
of time deposits plus interest from respondent Overseas Bank of Manila, and recovery of damages
against respondent Central Bank for its alleged failure to strictly supervise the acts of the other
respondent Bank and protect the interests of its depositors by virtue of the constructive trust created
when respondent Central Bank required the other respondent to increase its collaterals for its
overdrafts 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 and are to be
covered by the law on loans. 14 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.
G.R. No. L-60033 April 4, 1984

TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA SANTOS, petitioners,

vs.
THE CITY FISCAL OF MANILA, HON. JOSE B. FLAMINIANO, ASST. CITY FISCAL FELIZARDO N. LOTA and
CLEMENT DAVID, respondents.

MAKASIAR, Actg. C.J.:

This is a petition for prohibition and injunction with a prayer for the immediate issuance of restraining
order and/or writ of preliminary injunction filed by petitioners on March 26, 1982.

On March 31, 1982, by virtue of a court resolution issued by this Court on the same date, a temporary
restraining order was duly issued ordering the respondents, their officers, agents, representatives
and/or person or persons acting upon their (respondents') orders or in their place or stead to refrain
from proceeding with the preliminary investigation in Case No. 8131938 of the Office of the City Fiscal
of Manila (pp. 47-48, rec.). On January 24, 1983, private respondent Clement David filed a motion to
lift restraining order which was denied in the resolution of this Court dated May 18, 1983.

As can be gleaned from the above, the instant petition seeks to prohibit public respondents from
proceeding with the preliminary investigation of I.S. No. 81-31938, in which petitioners were charged
by private respondent Clement David, with estafa and violation of Central Bank Circular No. 364 and
related regulations regarding foreign exchange transactions principally, on the ground of lack of
jurisdiction in that the allegations of the charged, as well as the testimony of private respondent's
principal witness and the evidence through said witness, showed that petitioners' obligation is civil in
nature.

For purposes of brevity, We hereby adopt the antecedent facts narrated by the Solicitor General in its
Comment dated June 28,1982, as follows:têñ.£îhqwâ£

On December 23,1981, private respondent David filed I.S. No. 81-31938 in the Office of the City Fiscal
of Manila, which case was assigned to respondent Lota for preliminary investigation (Petition, p. 8).

In I.S. No. 81-31938, David charged petitioners (together with one Robert Marshall and the following
directors of the Nation Savings and Loan Association, Inc., namely Homero Gonzales, Juan Merino,
Flavio Macasaet, Victor Gomez, Jr., Perfecto Manalac, Jaime V. Paz, Paulino B. Dionisio, and one John
Doe) with estafa and violation of Central Bank Circular No. 364 and related Central Bank regulations on
foreign exchange transactions, allegedly committed as follows (Petition, Annex "A"):têñ.£îhqwâ£

"From March 20, 1979 to March, 1981, David invested with the Nation Savings and Loan Association,
(hereinafter called NSLA) the sum of P1,145,546.20 on nine deposits, P13,531.94 on savings account
deposits (jointly with his sister, Denise Kuhne), US$10,000.00 on time deposit, US$15,000.00 under a
receipt and guarantee of payment and US$50,000.00 under a receipt dated June 8, 1980 (au jointly
with Denise Kuhne), that David was induced into making the aforestated investments by Robert
Marshall an Australian national who was allegedly a close associate of petitioner Guingona Jr., then
NSLA President, petitioner Martin, then NSLA Executive Vice-President of NSLA and petitioner Santos,
then NSLA General Manager; that on March 21, 1981 N LA was placed under receivership by the
Central Bank, so that David filed claims therewith for his investments and those of his sister; that on
July 22, 1981 David received a report from the Central Bank that only P305,821.92 of those
investments were entered in the records of NSLA; that, therefore, the respondents in I.S. No. 81-31938
misappropriated the balance of the investments, at the same time violating Central Bank Circular No.
364 and related Central Bank regulations on foreign exchange transactions; that after demands,
petitioner Guingona Jr. paid only P200,000.00, thereby reducing the amounts misappropriated to
P959,078.14 and US$75,000.00."

Petitioners, Martin and Santos, filed a joint counter-affidavit (Petition, Annex' B') in which they stated
the following.têñ.£îhqwâ£
"That Martin became President of NSLA in March 1978 (after the resignation of Guingona, Jr.) and
served as such until October 30, 1980, while Santos was General Manager up to November 1980; that
because NSLA was urgently in need of funds and at David's insistence, his investments were treated as
special- accounts with interest above the legal rate, an recorded in separate confidential documents
only a portion of which were to be reported because he did not want the Australian government to tax
his total earnings (nor) to know his total investments; that all transactions with David were recorded
except the sum of US$15,000.00 which was a personal loan of Santos; that David's check for
US$50,000.00 was cleared through Guingona, Jr.'s dollar account because NSLA did not have one, that
a draft of US$30,000.00 was placed in the name of one Paz Roces because of a pending transaction
with her; that the Philippine Deposit Insurance Corporation had already reimbursed David within the
legal limits; that majority of the stockholders of NSLA had filed Special Proceedings No. 82-1695 in the
Court of First Instance to contest its (NSLA's) closure; that after NSLA was placed under receivership,
Martin executed a promissory note in David's favor and caused the transfer to him of a nine and on
behalf (9 1/2) carat diamond ring with a net value of P510,000.00; and, that the liabilities of NSLA to
David were civil in nature."

Petitioner, Guingona, Jr., in his counter-affidavit (Petition, Annex' C') stated the following:têñ.£îhqwâ£

"That he had no hand whatsoever in the transactions between David and NSLA since he (Guingona Jr.)
had resigned as NSLA president in March 1978, or prior to those transactions; that he assumed a
portion o; the liabilities of NSLA to David because of the latter's insistence that he placed his
investments with NSLA because of his faith in Guingona, Jr.; that in a Promissory Note dated June 17,
1981 (Petition, Annex "D") he (Guingona, Jr.) bound himself to pay David the sums of P668.307.01 and
US$37,500.00 in stated installments; that he (Guingona, Jr.) secured payment of those amounts with
second mortgages over two (2) parcels of land under a deed of Second Real Estate Mortgage (Petition,
Annex "E") in which it was provided that the mortgage over one (1) parcel shall be cancelled upon
payment of one-half of the obligation to David; that he (Guingona, Jr.) paid P200,000.00 and tendered
another P300,000.00 which David refused to accept, hence, he (Guingona, Jr.) filed Civil Case No. Q-
33865 in the Court of First Instance of Rizal at Quezon City, to effect the release of the mortgage over
one (1) of the two parcels of land conveyed to David under second mortgages."

At the inception of the preliminary investigation before respondent Lota, petitioners moved to dismiss
the charges against them for lack of jurisdiction because David's claims allegedly comprised a purely
civil obligation which was itself novated. Fiscal Lota denied the motion to dismiss (Petition, p. 8).

But, after the presentation of David's principal witness, petitioners filed the instant petition because:
(a) the production of the Promisory Notes, Banker's Acceptance, Certificates of Time Deposits and
Savings Account allegedly showed that the transactions between David and NSLA were simple loans,
i.e., civil obligations on the part of NSLA which were novated when Guingona, Jr. and Martin assumed
them; and (b) David's principal witness allegedly testified that the duplicate originals of the aforesaid
instruments of indebtedness were all on file with NSLA, contrary to David's claim that some of his
investments were not record (Petition, pp. 8-9).

Petitioners alleged that they did not exhaust available administrative remedies because to do so would
be futile (Petition, p. 9) [pp. 153-157, rec.].

As correctly pointed out by the Solicitor General, the sole issue for resolution is whether public
respondents acted without jurisdiction when they investigated the charges (estafa and violation of CB
Circular No. 364 and related regulations regarding foreign exchange transactions) subject matter of I.S.
No. 81-31938.

There is merit in the contention of the petitioners that their liability is civil in nature and therefore,
public respondents have no jurisdiction over the charge of estafa.

A casual perusal of the December 23, 1981 affidavit. complaint filed in the Office of the City Fiscal of
Manila by private respondent David against petitioners Teopisto Guingona, Jr., Antonio I. Martin and
Teresita G. Santos, together with one Robert Marshall and the other directors of the Nation Savings
and Loan Association, will show that from March 20, 1979 to March, 1981, private respondent David,
together with his sister, Denise Kuhne, invested with the Nation Savings and Loan Association the sum
of P1,145,546.20 on time deposits covered by Bankers Acceptances and Certificates of Time Deposits
and the sum of P13,531.94 on savings account deposits covered by passbook nos. 6-632 and 29-742, or
a total of P1,159,078.14 (pp. 15-16, roc.). It appears further that private respondent David, together
with his sister, made investments in the aforesaid bank in the amount of US$75,000.00 (p. 17, rec.).

Moreover, the records reveal that when the aforesaid bank was placed under receivership on March
21, 1981, petitioners Guingona and Martin, upon the request of private respondent David, assumed
the obligation of the bank to private respondent David by executing on June 17, 1981 a joint
promissory note in favor of private respondent acknowledging an indebtedness of Pl,336,614.02 and
US$75,000.00 (p. 80, rec.). This promissory note was based on the statement of account as of June 30,
1981 prepared by the private respondent (p. 81, rec.). The amount of indebtedness assumed appears
to be bigger than the original claim because of the added interest and the inclusion of other deposits of
private respondent's sister in the amount of P116,613.20.

Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to divide the said
indebtedness, and petitioner Guingona executed another promissory note antedated to June 17, 1981
whereby he personally acknowledged an indebtedness of P668,307.01 (1/2 of P1,336,614.02) and
US$37,500.00 (1/2 of US$75,000.00) in favor of private respondent (p. 25, rec.). The aforesaid
promissory notes were executed as a result of deposits made by Clement David and Denise Kuhne with
the Nation Savings and Loan Association.

Furthermore, the various pleadings and documents filed by private respondent David, before this Court
indisputably show that he has indeed invested his money on time and savings deposits with the Nation
Savings and Loan Association.

It must be pointed out that when private respondent David invested his money on nine. and savings
deposits with the aforesaid bank, the contract that was perfected was a contract of simple loan or
mutuum and not a contract of deposit. Thus, Article 1980 of the New Civil Code provides that:têñ.
£îhqwâ£

Article 1980. Fixed, savings, and current deposits of-money in banks and similar institutions shall be
governed by the provisions concerning simple loan.

In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119 [1975], We said:têñ.£îhqwâ£

It should be noted that fixed, savings, and current deposits of money in banks and similar institutions
are hat true deposits. are considered simple loans and, as such, are not preferred credits (Art. 1980
Civil Code; In re Liquidation of Mercantile Batik of China Tan Tiong Tick vs. American Apothecaries Co.,
66 Phil 414; Pacific Coast Biscuit Co. vs. Chinese Grocers Association 65 Phil. 375; Fletcher American
National Bank vs. Ang Chong UM 66 PWL 385; Pacific Commercial Co. vs. American Apothecaries Co.,
65 PhiL 429; Gopoco Grocery vs. Pacific Coast Biscuit CO.,65 Phil. 443)."

This Court also declared in the recent case of Serrano vs. Central Bank of the Philippines (96 SCRA 102
[1980]) that:têñ.£îhqwâ£

Bank deposits are in the nature of irregular deposits. They are really 'loans because they earn interest.
All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and are to be
covered by the law on loans (Art. 1980 Civil Code Gullas vs. Phil. National Bank, 62 Phil. 519). Current
and saving deposits, are loans to a bank because it can use the same. The petitioner here in making
time deposits that earn interests will respondent Overseas Bank of Manila was in reality a creditor of
the respondent Bank and not a depositor. The respondent Bank was in turn a debtor of petitioner.
Failure of the respondent Bank to honor the time deposit is failure to pay its obligation as a debtor and
not a breach of trust arising from a depositary's failure to return the subject matter of the deposit
(Emphasis supplied).

Hence, the relationship between the private respondent and the Nation Savings and Loan Association
is that of creditor and debtor; consequently, the ownership of the amount deposited was transmitted
to the Bank upon the perfection of the contract and it can make use of the amount deposited for its
banking operations, such as to pay interests on deposits and to pay withdrawals. While the Bank has
the obligation to return the amount deposited, it has, however, no obligation to return or deliver the
same money that was deposited. And, the failure of the Bank to return the amount deposited will not
constitute estafa through misappropriation punishable under Article 315, par. l(b) of the Revised Penal
Code, but it will only give rise to civil liability over which the public respondents have no- jurisdiction.

WE have already laid down the rule that:têñ.£îhqwâ£

In order that a person can be convicted under the above-quoted provision, it must be proven that he
has the obligation to deliver or return the some money, goods or personal property that he received
Petitioners had no such obligation to return the same money, i.e., the bills or coins, which they
received from private respondents. This is so because as clearly as stated in criminal complaints, the
related civil complaints and the supporting sworn statements, the sums of money that petitioners
received were loans.

The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code.têñ.£îhqwâ£

"Art. 1933. — By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time- and return it, in which case the
contract is called a commodatum; or money or other consumable thing, upon the condition that the
same amount of the same kind and quality shall he paid in which case the contract is simply called a
loan or mutuum.

"Commodatum is essentially gratuitous.

"Simple loan may be gratuitous or with a stipulation to pay interest.

"In commodatum the bailor retains the ownership of the thing loaned while in simple loan, ownership
passes to the borrower.

"Art. 1953. — A person who receives a loan of money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality."

It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as contrasted
to commodatum the borrower acquires ownership of the money, goods or personal property
borrowed Being the owner, the borrower can dispose of the thing borrowed (Article 248, Civil Code)
and his act will not be considered misappropriation thereof' (Yam vs. Malik, 94 SCRA 30, 34 [1979];
Emphasis supplied).

But even granting that the failure of the bank to pay the time and savings deposits of private
respondent David would constitute a violation of paragraph 1(b) of Article 315 of the Revised Penal
Code, nevertheless any incipient criminal liability was deemed avoided, because when the aforesaid
bank was placed under receivership by the Central Bank, petitioners Guingona and Martin assumed the
obligation of the bank to private respondent David, thereby resulting in the novation of the original
contractual obligation arising from deposit into a contract of loan and converting the original trust
relation between the bank and private respondent David into an ordinary debtor-creditor relation
between the petitioners and private respondent. Consequently, the failure of the bank or petitioners
Guingona and Martin to pay the deposits of private respondent would not constitute a breach of trust
but would merely be a failure to pay the obligation as a debtor.

Moreover, while it is true that novation does not extinguish criminal liability, it may however, prevent
the rise of criminal liability as long as it occurs prior to the filing of the criminal information in court.
Thus, in Gonzales vs. Serrano ( 25 SCRA 64, 69 [1968]) We held that:têñ.£îhqwâ£

As pointed out in People vs. Nery, novation prior to the filing of the criminal information — as in the
case at bar — may convert the relation between the parties into an ordinary creditor-debtor relation,
and place the complainant in estoppel to insist on the original transaction or "cast doubt on the true
nature" thereof.

Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA 578, 580-581 [1983] ), this
Court reiterated the ruling in People vs. Nery ( 10 SCRA 244 [1964] ), declaring that:têñ.£îhqwâ£

The novation theory may perhaps apply prior to the filling of the criminal information in court by the
state prosecutors because up to that time the original trust relation may be converted by the parties
into an ordinary creditor-debtor situation, thereby placing the complainant in estoppel to insist on the
original trust. But after the justice authorities have taken cognizance of the crime and instituted action
in court, the offended party may no longer divest the prosecution of its power to exact the criminal
liability, as distinguished from the civil. The crime being an offense against the state, only the latter can
renounce it (People vs. Gervacio, 54 Off. Gaz. 2898; People vs. Velasco, 42 Phil. 76; U.S. vs. Montanes, 8
Phil. 620).

It may be observed in this regard that novation is not one of the means recognized by the Penal Code
whereby criminal liability can be extinguished; hence, the role of novation may only be to either
prevent the rise of criminal habihty or to cast doubt on the true nature of the original basic transaction,
whether or not it was such that its breach would not give rise to penal responsibility, as when money
loaned is made to appear as a deposit, or other similar disguise is resorted to (cf. Abeto vs. People, 90
Phil. 581; U.S. vs. Villareal, 27 Phil. 481).

In the case at bar, there is no dispute that petitioners Guingona and Martin executed a promissory
note on June 17, 1981 assuming the obligation of the bank to private respondent David; while the
criminal complaint for estafa was filed on December 23, 1981 with the Office of the City Fiscal. Hence,
it is clear that novation occurred long before the filing of the criminal complaint with the Office of the
City Fiscal.

Consequently, as aforestated, any incipient criminal liability would be avoided but there will still be a
civil liability on the part of petitioners Guingona and Martin to pay the assumed obligation.

Petitioners herein were likewise charged with violation of Section 3 of Central Bank Circular No. 364
and other related regulations regarding foreign exchange transactions by accepting foreign currency
deposit in the amount of US$75,000.00 without authority from the Central Bank. They contend
however, that the US dollars intended by respondent David for deposit were all converted into
Philippine currency before acceptance and deposit into Nation Savings and Loan Association.

Petitioners' contention is worthy of behelf for the following reasons:

1. It appears from the records that when respondent David was about to make a deposit of bank
draft issued in his name in the amount of US$50,000.00 with the Nation Savings and Loan Association,
the same had to be cleared first and converted into Philippine currency. Accordingly, the bank draft
was endorsed by respondent David to petitioner Guingona, who in turn deposited it to his dollar
account with the Security Bank and Trust Company. Petitioner Guingona merely accommodated the
request of the Nation Savings and loan Association in order to clear the bank draft through his dollar
account because the bank did not have a dollar account. Immediately after the bank draft was cleared,
petitioner Guingona authorized Nation Savings and Loan Association to withdraw the same in order to
be utilized by the bank for its operations.

2. It is safe to assume that the U.S. dollars were converted first into Philippine pesos before they
were accepted and deposited in Nation Savings and Loan Association, because the bank is presumed to
have followed the ordinary course of the business which is to accept deposits in Philippine currency
only, and that the transaction was regular and fair, in the absence of a clear and convincing evidence to
the contrary (see paragraphs p and q, Sec. 5, Rule 131, Rules of Court).

3. Respondent David has not denied the aforesaid contention of herein petitioners despite the
fact that it was raised. in petitioners' reply filed on May 7, 1982 to private respondent's comment and
in the July 27, 1982 reply to public respondents' comment and reiterated in petitioners' memorandum
filed on October 30, 1982, thereby adding more support to the conclusion that the US$75,000.00 were
really converted into Philippine currency before they were accepted and deposited into Nation Savings
and Loan Association. Considering that this might adversely affect his case, respondent David should
have promptly denied petitioners' allegation.

In conclusion, considering that the liability of the petitioners is purely civil in nature and that there is
no clear showing that they engaged in foreign exchange transactions, We hold that the public
respondents acted without jurisdiction when they investigated the charges against the petitioners.
Consequently, public respondents should be restrained from further proceeding with the criminal case
for to allow the case to continue, even if the petitioners could have appealed to the Ministry of Justice,
would work great injustice to petitioners and would render meaningless the proper administration of
justice.

While as a rule, the prosecution in a criminal offense cannot be the subject of prohibition and
injunction, this court has recognized the resort to the extraordinary writs of prohibition and injunction
in extreme cases, thus:têñ.£îhqwâ£

On the issue of whether a writ of injunction can restrain the proceedings in Criminal Case No. 3140, the
general rule is that "ordinarily, criminal prosecution may not be blocked by court prohibition or
injunction." Exceptions, however, are allowed in the following instances:têñ.£îhqwâ£

"1. for the orderly administration of justice;

"2. to prevent the use of the strong arm of the law in an oppressive and vindictive manner;

"3. to avoid multiplicity of actions;

"4. to afford adequate protection to constitutional rights;

"5. in proper cases, because the statute relied upon is unconstitutional or was held invalid"
( Primicias vs. Municipality of Urdaneta, Pangasinan, 93 SCRA 462, 469-470 [1979]; citing Ramos vs.
Torres, 25 SCRA 557 [1968]; and Hernandez vs. Albano, 19 SCRA 95, 96 [1967]).

Likewise, in Lopez vs. The City Judge, et al. ( 18 SCRA 616, 621-622 [1966]), We held that:têñ.£îhqwâ£

The writs of certiorari and prohibition, as extraordinary legal remedies, are in the ultimate analysis,
intended to annul void proceedings; to prevent the unlawful and oppressive exercise of legal authority
and to provide for a fair and orderly administration of justice. Thus, in Yu Kong Eng vs. Trinidad, 47 Phil.
385, We took cognizance of a petition for certiorari and prohibition although the accused in the case
could have appealed in due time from the order complained of, our action in the premises being based
on the public welfare policy the advancement of public policy. In Dimayuga vs. Fajardo, 43 Phil. 304,
We also admitted a petition to restrain the prosecution of certain chiropractors although, if convicted,
they could have appealed. We gave due course to their petition for the orderly administration of
justice and to avoid possible oppression by the strong arm of the law. And in Arevalo vs. Nepomuceno,
63 Phil. 627, the petition for certiorari challenging the trial court's action admitting an amended
information was sustained despite the availability of appeal at the proper time.

WHEREFORE, THE PETITION IS HEREBY GRANTED; THE TEMPORARY RESTRAINING ORDER PREVIOUSLY
ISSUED IS MADE PERMANENT. COSTS AGAINST THE PRIVATE RESPONDENT.

SO ORDERED.

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

THE CONSOLIDATED BANK and TRUST CORPORATION, Petitioner, v. 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 Decision 1 of the Court of Appeals dated 27 October 1998 and
its Resolution dated 11 May 1999. The assailed decision reversed the Decision 2 of the Regional Trial
Court of Manila, Branch 8, absolving petitioner Consolidated. Bank and Trust Corporation, now known
as Solidbank Corporation ("Solidbank"), of any liability. The questioned resolution of the appellate
court denied the motion for reconsideration of Solidbank but modified the decision by deleting the
award of exemplary damages, attorney’s fees, expenses of litigation and cost of suit.chanrob1es
virtua1 1aw 1ibrary

The Facts

Solidbank is a domestic banking corporation organized and existing under Philippine laws. Private
respondent L.C. Diaz and Company, CPA’s ("L.C. Diaz"), is a professional partnership engaged in the
practice of accounting.

Sometime in March 1976, L.C. Diaz opened a savings account with Solidbank, designated as Savings
Account No. S/A 200-16872-6.

On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya ("Macaraya"), filled up a savings
(cash) deposit slip for P990 and a savings (checks) deposit slip for P50. Macaraya instructed the
messenger of L.C. Diaz, Ismael Calapre ("Calapre"), to deposit the money with Solidbank. Macaraya
also gave Calapre the Solidbank passbook.

Calapre went to Solidbank and presented to Teller No. 6 the two deposit slips and the passbook. The
teller acknowledged receipt of the deposit by returning to Calapre the duplicate copies of the two
deposit slips. Teller No. 6 stamped the deposit slips with the words "DUPLICATE" and "SAVING TELLER
6 SOLIDBANK HEAD OFFICE." Since the transaction took time and Calapre had to make another deposit
for L.C. Diaz with Allied Bank, he left the passbook with Solidbank. Calapre then went to Allied Bank.
When Calapre returned to Solidbank to retrieve the passbook, Teller No. 6 informed him that
"somebody got the passbook. 3 Calapre went back to L.C. Diaz and reported the incident to Macaraya.

Macaraya immediately prepared a deposit slip in duplicate copies with a check of P200,000. Macaraya,
together with Calapre, went to Solidbank and presented to Teller No. 6 the deposit slip and check. The
teller stamped the words "DUPLICATE" and "SAVING TELLER 6 SOLIDBANK HEAD OFFICE" on the
duplicate copy of the deposit slip. When Macaraya asked for the passbook, Teller No. 6 told Macaraya
that someone got the passbook but she could not remember to whom she gave the passbook. When
Macaraya asked Teller No. 6 if Calapre got the passbook, Teller No. 6 answered that someone shorter
than Calapre got the passbook. Calapre was then standing beside Macaraya.

Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for the deposit of a check for
P90,000 drawn on Philippine Banking Corporation ("PBC"). This PBC check of L.C. Diaz was a check that
it had "long closed." 4 PBC subsequently dishonored the check because of insufficient funds and
because the signature in the check differed from PBC’s specimen signature. Failing to get back the
passbook, Macaraya went back to her office and reported the matter to the Personnel Manager of L.C.
Diaz, Emmanuel Alvarez.

The following day, 15 August 1991, L.C. Diaz through its Chief Executive Officer, Luis C. Diaz ("Diaz"),
called up Solidbank to stop any transaction using the same passbook until L.C. Diaz could open a new
account. 5 On the same day, Diaz formally wrote Solidbank to make the same request. It was also on
the same day that L.C. Diaz learned of the unauthorized withdrawal the day before, 14 August 1991, of
P300,000 from its savings account. The withdrawal slip for the P300,000 bore the signatures of the
authorized signatories of L.C. Diaz, namely Diaz and Rustico L. Murillo. The signatories, however,
denied signing the withdrawal slip. A certain Noel Tamayo received the P300,000.cralaw : red
In an Information 6 dated 5 September 1991, L.C. Diaz charged its messenger, Emerano Ilagan
("Ilagan") and one Roscon Verdazola with Estafa through Falsification of Commercial Document. The
Regional Trial Court of Manila dismissed the criminal case after the City Prosecutor filed a Motion to
Dismiss on 4 August 1992.

On 24 August 1992, L.C. Diaz through its counsel demanded from Solidbank the return of its money.
Solidbank refused.

On 25 August 1992, L.C. Diaz filed a Complaint 7 for Recovery of a Sum of Money against Solidbank
with the Regional Trial Court of Manila, Branch 8. After trial, the trial court rendered on 28 December
1994 a decision absolving Solidbank and dismissing the complaint.

L.C. Diaz then appealed 8 to the Court of Appeals. On 27 October 1998, the Court of Appeals issued its
Decision reversing the decision of the trial court.

On 11 May 1999, the Court of Appeals issued its Resolution denying the motion for reconsideration of
Solidbank. The appellate court, however, modified its decision by deleting the award of exemplary
damages and attorney’s fees.

The Ruling of the Trial Court

In absolving Solidbank, the trial court applied the rules on savings account written on the passbook.
The rules state that "possession of this book shall raise the presumption of ownership and any
payment or payments made by the bank upon the production of the said book and entry therein of the
withdrawal shall have the same effect as if made to the depositor personally." 9

At the time of the withdrawal, a certain Noel Tamayo was not only in possession of the passbook, he
also presented a withdrawal slip with the signatures of the authorized signatories of L.C. Diaz. The
specimen signatures of these persons were in the signature cards. The teller stamped the withdrawal
slip with the words "Saving Teller No. 5." The teller then passed on the withdrawal slip to Genere
Manuel ("Manuel") for authentication. Manuel verified the signatures on the withdrawal slip. The
withdrawal slip was then given to another officer who compared the signatures on the withdrawal slip
with the specimen on the signature cards. The trial court concluded that Solidbank acted with care and
observed the rules on savings account when it allowed the withdrawal of P300,000 from the savings
account of L.C. Diaz.

The trial court pointed out that the burden of proof now shifted to L.C. Diaz to prove that the
signatures on the withdrawal slip were forged. The trial court admonished L.C. Diaz for not offering in
evidence the National Bureau of Investigation ("NBI") report on the authenticity of the signatures on
the withdrawal slip for P300,000. The trial court believed that L.C. Diaz did not offer this evidence
because it is derogatory to its action.

Another provision of the rules on savings account states that the depositor must keep the passbook
"under lock and key." 10 When another person presents the passbook for withdrawal prior to
Solidbank’s receipt of the notice of loss of the passbook, that person is considered as the owner of the
passbook. The trial court ruled that the passbook presented during the questioned transaction was
"now out of the lock and key and presumptively ready for a business transaction." 11

Solidbank did not have any participation in the custody and care of the passbook. The trial court
believed that Solidbank’s act of allowing the withdrawal of P300,000 was not the direct and proximate
cause of the loss. The trial court held that L.C. Diaz’s negligence caused the unauthorized withdrawal.
Three facts establish L.C. Diaz’s negligence: (1) the possession of the passbook by a person other than
the depositor L.C. Diaz; (2) the presentation of a signed withdrawal receipt by an unauthorized person;
and (3) the possession by an unauthorized person of a PBC check "long closed" by L.C. Diaz, which
check was deposited on the day of the fraudulent withdrawal.

The trial court debunked L.C. Diaz’s contention that Solidbank did not follow the precautionary
procedures observed by the two parties whenever L.C. Diaz withdrew significant amounts from its
account. L.C. Diaz claimed that a letter must accompany withdrawals of more than P20,000. The letter
must request Solidbank to allow the withdrawal and convert the amount to a manager’s check. The
bearer must also have a letter authorizing him to withdraw the same amount. Another person driving a
car must accompany the bearer so that he would not walk from Solidbank to the office in making the
withdrawal. The trial court pointed out that L.C. Diaz disregarded these precautions in its past
withdrawal. On 16 July 1991, L.C. Diaz withdrew 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:chanrob1es virtual 1aw library

IN VIEW OF THE FOREGOING, judgment is hereby rendered DISMISSING the complaint.

The Court further renders judgment in favor of defendant bank pursuant to its counterclaim the
amount of Thirty Thousand Pesos (P30,000.00) as attorney’s fees.

With costs against plaintiff.

SO ORDERED. 12

The Ruling of the Court of Appeals

The Court of Appeals ruled that Solidbank’s negligence was the proximate cause of the unauthorized
withdrawal of P300,000 from the savings account of L.C. Diaz. The appellate court reached this
conclusion after applying the provision of the Civil Code on quasi-delict, to wit:chanrob1es virtual 1aw
library

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:chanrob1es virtual 1aw library
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

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 2231 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:chanrob1es virtual 1aw library

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.chanrob1es virtua1 1aw 1ibrary

SO ORDERED. 15

Hence, this petition.

The Issues

Solidbank seeks the review of the decision and resolution of the Court of Appeals on these
grounds:chanrob1es virtual 1aw library

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

The Ruling of the Court

The petition is partly meritorious.

Solidbank’s Fiduciary Duty under the Law

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

We hold that Solidbank is liable for breach of contract due to negligence, or culpa contractual.

The contract between the bank and its depositor is governed by the provisions of the Civil Code on
simple loan. 17 Article 1980 of the Civil Code expressly provides that." . . savings . . . deposits of money
in banks and similar institutions shall be governed by the provisions concerning simple loan." There is a
debtor-creditor relationship between the bank and its depositor. The bank is the debtor and the
depositor is the creditor. The depositor lends the bank money and the bank agrees to pay the
depositor on demand. The savings deposit agreement between the bank and the depositor is the
contract that determines the rights and obligations of the parties.

The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of
Republic Act No. 8791 ("RA 8791"), 18 which took effect on 13 June 2000, declares that the State
recognizes the "fiduciary nature of banking that requires high standards of integrity and performance."
19 This new provision in the general banking law, introduced in 2000, is a statutory affirmation of
Supreme Court decisions, starting with the 1990 case of Simex International v. Court of Appeals, 20
holding that "the bank is under obligation to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their relationship. 21

This fiduciary relationship means that the bank’s obligation to observe "high standards of integrity and
performance" is deemed written into every deposit agreement between a bank and its depositor. The
fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good
father of a family. Article 1172 of the Civil Code states that the degree of diligence required of an
obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a good
father of a family. 22 Section 2 of RA 8791 prescribes the statutory diligence required from banks —
that banks must observe "high standards of integrity and performance" in servicing their depositors.
Although RA 8791 took effect almost nine years after the unauthorized withdrawal of the P300,000
from L.C. Diaz’s savings account, jurisprudence 23 at the time of the withdrawal already imposed on
banks the same high standard of diligence required under RA No. 8791.

However, the fiduciary nature of a bank-depositor relationship does not convert the contract between
the bank and its depositors from a simple loan to a trust agreement, whether express or implied.
Failure by the bank to pay the depositor is failure to pay a simple loan, and not a breach of trust. 24
The law simply imposes on the bank a higher standard of integrity and performance in complying with
its obligations under the contract of simple loan, beyond those required of non-bank debtors under a
similar contract of simple loan.

The fiduciary nature of banking does not convert a simple loan into a trust agreement because banks
do not accept deposits to enrich depositors but to earn money for themselves. The law allows banks to
offer the lowest possible interest rate to depositors while charging the highest possible interest rate on
their own borrowers. The interest spread or differential belongs to the bank and not to the depositors
who are not cestui que trust of banks. If depositors are cestui que trust of banks, then the interest
spread or income belongs to the depositors, a situation that Congress certainly did not intend in
enacting Section 2 of RA 8791.

Solidbank’s Breach of its Contractual Obligation

Article 1172 of the Civil Code provides that "responsibility arising from negligence in the performance
of every kind of obligation is demandable." For breach of the savings deposit agreement due to
negligence, or culpa contractual, the bank is liable to its depositor.

Calapre left the passbook with Solidbank because the "transaction took time" and he had to go to
Allied Bank for another transaction. The passbook was still in the hands of the employees of Solidbank
for the processing of the deposit when Calapre left Solidbank. Solidbank’s rules on savings account
require that the "deposit book should be carefully guarded by the depositor and kept under lock and
key, if possible." When the passbook is in the possession of Solidbank’s tellers during withdrawals, the
law imposes on Solidbank and its tellers an even higher degree of diligence in safeguarding the
passbook.

Likewise, Solidbank’s tellers must exercise a high degree of diligence in insuring that they return the
passbook only to the depositor or his authorized representative. The tellers know, or should know, that
the rules on savings account provide that any person in possession of the passbook is presumptively its
owner. If the tellers give the passbook to the wrong person, they would be clothing that person
presumptive ownership of the passbook, facilitating unauthorized withdrawals by that person. For
failing to return the passbook to Calapre, the authorized representative of L.C. Diaz, Solidbank and
Teller No. 6 presumptively failed to observe such high degree of diligence in safeguarding the
passbook, and in insuring its return to the party authorized to receive the same.

In culpa contractual, once the plaintiff proves a breach of contract, there is a presumption that the
defendant was at fault or negligent. The burden is on the defendant to prove that he was not at fault
or negligent. In contrast, in culpa aquiliana the plaintiff has the burden of proving that the defendant
was negligent. In the present case, L.C. Diaz has established that Solidbank breached its contractual
obligation to return the passbook only to the authorized representative of L.C. Diaz. There is thus a
presumption that Solidbank was at fault and its teller was negligent in not returning the passbook to
Calapre. The burden was on Solidbank to prove that there was no negligence on its part or its
employees.

Solidbank failed to discharge its burden. Solidbank did not present to the trial court Teller No. 6, the
teller with whom Calapre left the passbook and who was supposed to return the passbook to him. The
record does not 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.25cralaw:red

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.chanrob1es virtua1 1aw 1ibrary

Proximate Cause of the Unauthorized Withdrawal

Another point of disagreement between the trial and appellate courts is the proximate cause of the
unauthorized withdrawal. The trial court believed that L.C. Diaz’s negligence in not securing its
passbook under lock and key was the proximate cause that allowed the impostor to withdraw the
P300,000. For the appellate court, the proximate cause was the teller’s negligence in processing the
withdrawal without first verifying with L.C. Diaz. We do not agree with either court.

Proximate cause is that cause which, in natural and continuous sequence, unbroken by any efficient
intervening cause, produces the injury and without which the result would not have occurred. 26
Proximate cause is determined by the facts of each case upon mixed considerations of logic, common
sense, policy and precedent. 27

L.C. Diaz was not at fault that the passbook landed in the hands of the impostor. Solidbank was in
possession of the passbook while it was processing the deposit. After completion of the transaction,
Solidbank had the contractual obligation to return the passbook only to Calapre, the authorized
representative of L.C. Diaz. Solidbank failed to fulfill its contractual obligation because it gave the
passbook to another person.

Solidbank’s failure to return the passbook to Calapre made possible the withdrawal of the P300,000 by
the impostor who took possession of the passbook. Under Solidbank’s rules on savings account, mere
possession of the passbook raises the presumption of ownership. It was the negligent act of
Solidbank’s Teller No. 6 that gave the impostor presumptive ownership of the passbook. Had the
passbook not fallen into the hands of the impostor, the loss of P300,000 would not have happened.
Thus, the proximate cause of the unauthorized withdrawal was Solidbank’s negligence in not returning
the passbook to Calapre.

We do not subscribe to the appellate court’s theory that the proximate cause of the unauthorized
withdrawal was the teller’s failure to call up L.C. Diaz to verify the withdrawal. Solidbank did not have
the duty to call up L.C. Diaz to confirm the withdrawal. There is no arrangement between Solidbank
and L.C. Diaz to this effect. Even the agreement between Solidbank and L.C. Diaz pertaining to
measures that the parties must observe whenever withdrawals of large amounts are made does not
direct Solidbank to call up L.C. Diaz.

There is no law mandating banks to call up their clients whenever their representatives withdraw
significant amounts from their accounts. L.C. Diaz therefore had the burden to prove that it is the usual
practice of Solidbank to call up its clients to verify a withdrawal of a large amount of money. L.C. Diaz
failed to do so.

Teller No. 5 who processed the withdrawal could not have been put on guard to verify the withdrawal.
Prior to the withdrawal of P300,000, the impostor deposited with Teller No. 6 the P90,000 PBC check,
which later bounced. The impostor apparently deposited a large amount of money to deflect suspicion
from the withdrawal of a much bigger amount of money. The appellate court thus erred when it
imposed on Solidbank the duty to call up L.C. Diaz to confirm the withdrawal when no law requires this
from banks and when the teller had no reason to be suspicious of the transaction.

Solidbank continues to foist the defense that Ilagan made the withdrawal. Solidbank claims that since
Ilagan was also a messenger of L.C. Diaz, he was familiar with its teller so that there was no more need
for the teller to verify the withdrawal. Solidbank relies on the following statements in the Booking and
Information Sheet of Emerano Ilagan:chanrob1es virtual 1aw library

. . . 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 (Emphasis
supplied.)
L.C. Diaz refutes Solidbank’s contention by pointing out that the person who withdrew the P300,000
was a certain Noel Tamayo. Both the trial and appellate courts stated that this Noel Tamayo presented
the passbook with the withdrawal slip.

We uphold the finding of the trial and appellate courts that a certain Noel Tamayo withdrew the
P300,000. The Court is not a trier of facts. We find no justifiable reason to reverse the factual finding of
the trial court and the Court of Appeals. The tellers who processed the deposit of the P90,000 check
and the withdrawal of the P300,000 were not presented during trial to substantiate Solidbank’s claim
that Ilagan deposited the check and made the questioned withdrawal. Moreover, the entry quoted by
Solidbank does not categorically state that Ilagan presented the withdrawal slip and the passbook.

Doctrine of Last Clear Chance

The doctrine of last clear chance states that where both parties are negligent but the negligent act of
one is appreciably later than that of the other, or where it is impossible to determine whose fault or
negligence caused the loss, the one who had the last clear opportunity to avoid the loss but failed to
do so, is chargeable with the loss. 29 Stated differently, the antecedent negligence of the plaintiff does
not preclude him from recovering damages caused by the supervening negligence of the defendant,
who had the last fair chance to prevent the impending harm by the exercise of due diligence. 30

We do not apply the doctrine of last clear chance to the present case. Solidbank is liable for breach of
contract due to negligence in the performance of its contractual obligation to L.C. Diaz. This is a case of
culpa contractual, where neither the contributory negligence of the plaintiff nor his last clear chance to
avoid the loss, would exonerate the defendant from liability. 31 Such contributory negligence or last
clear chance by the plaintiff merely serves to reduce the recovery of damages by the plaintiff but does
not exculpate the defendant from his breach of contract. 32

Mitigated Damages

Under Article 1172, "liability (for culpa contractual) may be regulated by the courts, according to the
circumstances." This means that if the defendant exercised the proper diligence in the selection and
supervision of its employee, or if the plaintiff was guilty of contributory negligence, then the courts
may reduce the award of damages. In this case, L.C. Diaz was guilty of contributory negligence in
allowing a withdrawal slip signed by its authorized signatories to fall into the hands of an impostor.
Thus, the liability of Solidbank should be reduced.

In Philippine Bank of Commerce v. Court of Appeals, 33 where the Court held the depositor guilty of
contributory negligence, we allocated the damages between the depositor and the bank on a 40-60
ratio. Applying the same ruling to this case, we hold that L.C. Diaz must shoulder 40% of the actual
damages awarded by the appellate court. Solidbank must pay he other 60% of the actual damages.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED with MODIFICATION. Petitioner
Solidbank Corporation shall pay private respondent L.C. Diaz and Company, CPA’s only 60% of the
actual damages awarded by the Court of Appeals. The remaining 40% of the actual damages shall be
borne by private respondent L.C. Diaz and Company, CPA’s. Proportionate costs.chanrob1es virtua1
1aw 1ibrary

SO ORDERED.