FIRST DIVISION

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

THE CONSOLIDATED BANK and TRUST CORPORATION, petitioner, vs. COURT OF APPEALS and
L.C. DIAZ and COMPANY, CPA’s, respondents.

DECISION

CARPIO, J.:

The Case

Before us is a petition for review of the 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.

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.

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
withdrewP82,554 without any separate letter of authorization or any communication with
Solidbank that the money be converted into a manager’s check.

The trial court further justified the dismissal of the complaint by holding that the case was a last
ditch effort of L.C. Diaz to recover P300,000 after the dismissal of the criminal case against
Ilagan.

The dispositive portion of the decision of the trial court reads:

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

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

With costs against plaintiff.

SO ORDERED.[12]

The Ruling of the Court of Appeals

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

Article 2176.  Whoever by act or omission causes damage to another, there being fault or
negligence, is obliged to pay for the damage done.  Such fault or negligence, if there is no pre-
existing contractual relation between the parties, is called a quasi-delict and is governed by the
provisions of this chapter.

The appellate court held that the three elements of a quasi-delict are present in this case,
namely: (a) damages suffered by the plaintiff; (b) fault or negligence of the defendant, or some
other person for whose acts he must respond; and (c) the connection of cause and effect
between the fault or negligence of the defendant and the damage incurred by the plaintiff.

The Court of Appeals pointed out that the teller of Solidbank who received the withdrawal slip
for P300,000 allowed the withdrawal without making the necessary inquiry.  The appellate
court stated that the teller, who was not presented by Solidbank during trial, should have called
up the depositor because the money to be withdrawn was a significant amount.  Had the teller
called up L.C. Diaz, Solidbank would have known that the withdrawal was unauthorized. The
teller did not even verify the identity of the impostor who made the withdrawal.  Thus, the
appellate court found Solidbank liable for its negligence in the selection and supervision of its
employees.

The appellate court ruled that while L.C. Diaz was also negligent in entrusting its deposits to its
messenger and its messenger in leaving the passbook with the teller,  Solidbank could not
escape liability because of the doctrine of “last clear chance.” Solidbank could have averted the
injury suffered by L.C. Diaz had it called up L.C. Diaz to verify the withdrawal.

The appellate court ruled that the degree of diligence required from Solidbank is more than
that of a good father of a family.  The business and functions of banks are affected with public
interest. Banks are obligated to treat the accounts of their depositors with meticulous care,
always having in mind the fiduciary nature of their relationship with their clients. The Court of
Appeals found Solidbank remiss in its duty, violating its fiduciary relationship with L.C. Diaz.

The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, premises considered, the decision appealed from is hereby REVERSED and a new
one entered.

1.       Ordering defendant-appellee Consolidated Bank and Trust Corporation to pay plaintiff-

appellant the sum of Three Hundred Thousand Pesos (P300,000.00), with interest thereon at
the rate of 12% per annum from the date of filing of the complaint until paid, the sum
of P20,000.00 as exemplary damages, and P20,000.00 as attorney’s fees and expenses of
litigation as well as the cost of suit; and

2.       Ordering the dismissal of defendant-appellee’s counterclaim in the amount of P30,000.00

as attorney’s fees.

SO ORDERED.[13]

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:

WHEREFORE, foregoing considered, our decision dated October 27, 1998 is affirmed with
modification by deleting the award of exemplary damages and attorney’s fees, expenses of
litigation and cost of suit.

SO ORDERED.[15]

Hence, this petition.

The Issues

Solidbank seeks the review of the decision and resolution of the Court of Appeals on these
grounds:

I.        THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER BANK SHOULD SUFFER THE
LOSS BECAUSE ITS TELLER SHOULD HAVE FIRST CALLED PRIVATE RESPONDENT BY TELEPHONE
BEFORE IT ALLOWED THE WITHDRAWAL OF P300,000.00 TO RESPONDENT’S MESSENGER
EMERANO ILAGAN, SINCE THERE IS NO AGREEMENT BETWEEN THE PARTIES IN THE OPERATION
OF THE SAVINGS ACCOUNT, NOR IS THERE ANY BANKING LAW, WHICH MANDATES THAT A
BANK TELLER SHOULD FIRST CALL UP THE DEPOSITOR BEFORE ALLOWING A WITHDRAWAL OF A
BIG AMOUNT IN A SAVINGS ACCOUNT.

II.       THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF LAST CLEAR CHANCE AND
IN HOLDING THAT PETITIONER BANK’S TELLER HAD THE LAST OPPORTUNITY TO WITHHOLD THE
WITHDRAWAL WHEN IT IS UNDISPUTED THAT THE TWO SIGNATURES OF RESPONDENT ON THE
WITHDRAWAL SLIP ARE GENUINE AND PRIVATE RESPONDENT’S PASSBOOK WAS DULY
PRESENTED, AND CONTRARIWISE RESPONDENT WAS NEGLIGENT IN THE SELECTION AND
SUPERVISION OF ITS MESSENGER EMERANO ILAGAN, AND IN THE SAFEKEEPING OF ITS CHECKS
AND OTHER FINANCIAL DOCUMENTS.

III.      THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE INSTANT CASE IS A LAST DITCH
EFFORT OF PRIVATE RESPONDENT TO RECOVER ITS P300,000.00 AFTER FAILING IN ITS EFFORTS
TO RECOVER THE SAME FROM ITS EMPLOYEE EMERANO ILAGAN.
IV.      THE COURT OF APPEALS ERRED IN NOT MITIGATING THE DAMAGES AWARDED AGAINST
PETITIONER UNDER ARTICLE 2197 OF THE CIVIL CODE, NOTWITHSTANDING ITS FINDING THAT
PETITIONER BANK’S NEGLIGENCE WAS ONLY CONTRIBUTORY.[16]

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

The law imposes on banks high standards in view of the fiduciary nature of banking.  Section 2
of Republic Act No. 8791 (“RA 8791”),[18] 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.[25]

The bank must not only exercise “high standards of integrity and performance,” it must also
insure that its employees do likewise because this is the only way to insure that the bank will
comply with its fiduciary duty.  Solidbank failed to present the teller who had the duty to return
to Calapre the passbook, and thus failed to prove that this teller exercised the “high standards
of integrity and performance” required of Solidbank’s employees.

Proximate Cause of the Unauthorized Withdrawal

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

Proximate cause is that cause which, in natural and continuous sequence, unbroken by any
efficient intervening cause, produces the injury and without which the result would not have
occurred.[26] 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:

xxx Ilagan also had with him (before the withdrawal) a forged check of PBC and indicated the
amount of P90,000 which he deposited in favor of L.C. Diaz and Company.  After successfully
withdrawing this large sum of money, accused Ilagan gave alias Rey (Noel Tamayo) his share of
the loot.  Ilagan then hired a taxicab in the amount of P1,000 to transport him (Ilagan) to his
home province at Bauan, Batangas.  Ilagan extravagantly and lavishly spent his money but a big
part of his loot was wasted in cockfight and horse racing.  Ilagan was apprehended and meekly
admitted his guilt.[28] (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 the
other 60% of the actual damages.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED with MODIFICATION.  Petitioner

Solidbank Corporation shall pay private respondent L.C. Diaz and Company, CPA’s only 60% of
the actual damages awarded by the Court of Appeals.  The remaining 40% of the actual
damages shall be borne by private respondent L.C. Diaz and Company, CPA’s.  Proportionate
costs.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Vitug, and Ynares-Santiago, JJ., concur.

Azcuna, J., on official leave.

Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-30511 February 14, 1980

MANUEL M. SERRANO, petitioner, 
vs.
CENTRAL BANK OF THE PHILIPPINES; OVERSEAS BANK OF MANILA; EMERITO M. RAMOS,
SUSANA B. RAMOS, EMERITO B. RAMOS, JR., JOSEFA RAMOS DELA RAMA, HORACIO DELA
RAMA, ANTONIO B. RAMOS, FILOMENA RAMOS LEDESMA, RODOLFO LEDESMA, VICTORIA
RAMOS TANJUATCO, and TEOFILO TANJUATCO, respondents.

Rene Diokno for petitioner.

F.E. Evangelista & Glecerio T. Orsolino for respondent Central Bank of the Philippines.

Feliciano C. Tumale, Pacifico T. Torres and Antonio B. Periquet for respondent Overseas Bank of
Manila.

Josefina G. Salonga for all other respondents.

CONCEPCION, JR., J.:

Petition for mandamus and prohibition, with preliminary injunction, that seeks the

establishment of joint and solidary liability to the amount of Three Hundred Fifty Thousand
Pesos, with interest, against respondent Central Bank of the Philippines and Overseas Bank of
Manila and its stockholders, on the alleged failure of the Overseas Bank of Manila to return the
time deposits made by petitioner and assigned to him, on the ground that respondent Central
Bank failed in its duty to exercise strict supervision over respondent Overseas Bank of Manila to
protect depositors 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.

Antonio, Abad Santos, JJ., concur.

Barredo (Chairman) J., concur in the judgment on the of the concurring opinion of Justice
Aquino.

Separate Opinions

AQUINO, J., concurring:

The petitioner prayed that the Central Bank be ordered to pay his time deposits of P350,000,
plus interests, which he could not recover from the distressed Overseas Bank of Manila, and to
declare all the assets assigned or mortgaged by that bank and the Ramos group to the Central
Bank as trust properties for the benefit of the petitioner and other depositors.

The petitioner has no causes of action agianst the Central Bank to obtain those reliefs. They
cannot be granted in petitioner's instant original actions in this Court for mandamus and
prohibition. It is not the Central Bank's ministerial duty to pay petitioner's time deposits or to
hold the mortgaged properties in trust for the depositors of the Overseas Bank of Manila. The
petitioner has no cause of action for prohibition, a remedy usually available against any
tribunal, board, corporation or person exercising judicial or ministerial functions.

Since the Overseas Bank of Manila was found to be insolvent and the Superintendent of Banks
was ordered to take over its assets preparatory to its liquidation under section 29 of Republic
Act No. 265 (p. 197, Rollo, Manifestation of September 19, 1973), petitioner's remedy is to file
his claim in the liquidating proceeding (Central Bank vs. Morfe, L-38427, March 12, 1975, 63
SCRA 114; Hernandez vs. Rural Bank of Lucena, Inc., L-29791, January 10, 1978, 81 SCRA 75).

Separate Opinions

AQUINO, J., concurring:

The petitioner prayed that the Central Bank be ordered to pay his time deposits of P350,000,
plus interests, which he could not recover from the distressed Overseas Bank of Manila, and to
declare all the assets assigned or mortgaged by that bank and the Ramos group to the Central
Bank as trust properties for the benefit of the petitioner and other depositors.

The petitioner has no causes of action agianst the Central Bank to obtain those reliefs. They
cannot be granted in petitioner's instant original actions in this Court for mandamus and
prohibition. It is not the Central Bank's ministerial duty to pay petitioner's time deposits or to
hold the mortgaged properties in trust for the depositors of the Overseas Bank of Manila. The
petitioner has no cause of action for prohibition, a remedy usually available against any
tribunal, board, corporation or person exercising judicial or ministerial functions.

Since the Overseas Bank of Manila was found to be insolvent and the Superintendent of Banks
was ordered to take over its assets preparatory to its liquidation under section 29 of Republic
Act No. 265 (p. 197, Rollo, Manifestation of September 19, 1973), petitioner's remedy is to file
his claim in the liquidating proceeding (Central Bank vs. Morfe, L-38427, March 12, 1975, 63
SCRA 114; Hernandez vs. Rural Bank of Lucena, Inc., L-29791, January 10, 1978, 81 SCRA 75).
Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 88013 March 19, 1990

SIMEX INTERNATIONAL (MANILA), INCORPORATED, petitioner, 

vs.
THE HONORABLE COURT OF APPEALS and TRADERS ROYAL BANK, respondents.

Don P. Porcuincula for petitioner.

San Juan, Gonzalez, San Agustin & Sinense for private respondent.

CRUZ, J.:

We are concerned in this case with the question of damages, specifically moral and exemplary
damages. The negligence of the private respondent has already been established. All we have
to ascertain is whether the petitioner is entitled to the said damages and, if so, in what
amounts.

The parties agree on the basic facts. The petitioner is a private corporation engaged in the
exportation of food products. It buys these products from various local suppliers and then sells
them abroad, particularly in the United States, Canada and the Middle East. Most of its exports
are purchased by the petitioner on credit.

The petitioner was a depositor of the respondent bank and maintained a checking account in its
branch at Romulo Avenue, Cubao, Quezon City. On May 25, 1981, the petitioner deposited to
its account in the said bank the amount of P100,000.00, thus increasing its balance as of that
date to P190,380.74. 1 Subsequently, the petitioner issued several checks against its deposit but
was suprised to learn later that they had been dishonored for insufficient funds.

The dishonored checks are the following:

1. Check No. 215391 dated May 29, 1981, in favor of California Manufacturing Company, Inc.
for P16,480.00:

2. Check No. 215426 dated May 28, 1981, in favor of the Bureau of Internal Revenue in the
amount of P3,386.73:
3. Check No. 215451 dated June 4, 1981, in favor of Mr. Greg Pedreño in the amount of
P7,080.00;

4. Check No. 215441 dated June 5, 1981, in favor of Malabon Longlife Trading Corporation in
the amount of P42,906.00:

5. Check No. 215474 dated June 10, 1981, in favor of Malabon Longlife Trading Corporation in
the amount of P12,953.00:

6. Check No. 215477 dated June 9, 1981, in favor of Sea-Land Services, Inc. in the amount of
P27,024.45:

7. Check No. 215412 dated June 10, 1981, in favor of Baguio Country Club Corporation in the
amount of P4,385.02: and

8. Check No. 215480 dated June 9, 1981, in favor of Enriqueta Bayla in the amount of
P6,275.00. 2

As a consequence, the California Manufacturing Corporation sent on June 9, 1981, a letter of

demand to the petitioner, threatening prosecution if the dishonored check issued to it was not
made good. It also withheld delivery of the order made by the petitioner. Similar letters were
sent to the petitioner by the Malabon Long Life Trading, on June 15, 1981, and by the G. and U.
Enterprises, on June 10, 1981. Malabon also canceled the petitioner's credit line and demanded
that future payments be made by it in cash or certified check. Meantime, action on the pending
orders of the petitioner with the other suppliers whose checks were dishonored was also
deferred.

The petitioner complained to the respondent bank on June 10, 1981. 3 Investigation disclosed
that the sum of P100,000.00 deposited by the petitioner on May 25, 1981, had not been
credited to it. The error was rectified on June 17, 1981, and the dishonored checks were paid
after they were re-deposited. 4

In its letter dated June 20, 1981, the petitioner demanded reparation from the respondent bank
for its "gross and wanton negligence." This demand was not met. The petitioner then filed a
complaint in the then Court of First Instance of Rizal claiming from the private respondent
moral damages in the sum of P1,000,000.00 and exemplary damages in the sum of
P500,000.00, plus 25% attorney's fees, and costs.

After trial, Judge Johnico G. Serquinia rendered judgment holding that moral and exemplary
damages were not called for under the circumstances. However, observing that the plaintiff's
right had been violated, he ordered the defendant to pay nominal damages in the amount of
P20,000.00 plus P5,000.00 attorney's fees and costs. 5 This decision was affirmed in toto by the
respondent court. 6

The respondent court found with the trial court that the private respondent was guilty of
negligence but agreed that the petitioner was nevertheless not entitled to moral damages. It
said:

The essential ingredient of moral damages is proof of bad faith (De Aparicio vs. Parogurga, 150
SCRA 280). Indeed, there was the omission by the defendant-appellee bank to credit appellant's
deposit of P100,000.00 on May 25, 1981. But the bank rectified its records. It credited the said
amount in favor of plaintiff-appellant in less than a month. The dishonored checks were
eventually paid. These circumstances negate any imputation or insinuation of malicious,
fraudulent, wanton and gross bad faith and negligence on the part of the defendant-appellant.

It is this ruling that is faulted in the petition now before us.

This Court has carefully examined the facts of this case and finds that it cannot share some of
the conclusions of the lower courts. It seems to us that the negligence of the private
respondent had been brushed off rather lightly as if it were a minor infraction requiring no
more than a slap on the wrist. We feel it is not enough to say that the private respondent
rectified its records and credited the deposit in less than a month as if this were sufficient
repentance. The error should not have been committed in the first place. The respondent bank
has not even explained why it was committed at all. It is true that the dishonored checks were,
as the Court of Appeals put it, "eventually" paid. However, this took almost a month when,
properly, the checks should have been paid immediately upon presentment.

As the Court sees it, the initial carelessness of the respondent bank, aggravated by the lack of
promptitude in repairing its error, justifies the grant of moral damages. This rather lackadaisical
attitude toward the complaining depositor constituted the gross negligence, if not wanton bad
faith, that the respondent court said had not been established by the petitioner.

We also note that while stressing the rectification made by the respondent bank, the decision
practically ignored the prejudice suffered by the petitioner. This was simply glossed over if not,
indeed, disbelieved. The fact is that the petitioner's credit line was canceled and its orders were
not acted upon pending receipt of actual payment by the suppliers. Its business declined. Its
reputation was tarnished. Its standing was reduced in the business community. All this was due
to the fault of the respondent bank which was undeniably remiss in its duty to the petitioner.

Article 2205 of the Civil Code provides that actual or compensatory damages may be received
"(2) for injury to the plaintiff s business standing or commercial credit." There is no question
that the petitioner did sustain actual injury as a result of the dishonored checks and that the
existence of the loss having been established "absolute certainty as to its amount is not
required." 7 Such injury should bolster all the more the demand of the petitioner for moral
damages and justifies the examination by this Court of the validity and reasonableness of the
said claim.

We agree that moral damages are not awarded to penalize the defendant but to compensate
the plaintiff for the injuries he may have suffered. 8 In the case at bar, the petitioner is seeking
such damages for the prejudice sustained by it as a result of the private respondent's fault. The
respondent court said that the claimed losses are purely speculative and are not supported by
substantial evidence, but if failed to consider that the amount of such losses need not be
established with exactitude precisely because of their nature. Moral damages are not
susceptible of pecuniary estimation. Article 2216 of the Civil Code specifically provides that "no
proof of pecuniary loss is necessary in order that moral, nominal, temperate, liquidated or
exemplary damages may be adjudicated." That is why the determination of the amount to be
awarded (except liquidated damages) is left to the sound discretion of the court, according to
"the circumstances of each case."

From every viewpoint except that of the petitioner's, its claim of moral damages in the amount
of P1,000,000.00 is nothing short of preposterous. Its business certainly is not that big, or its
name that prestigious, to sustain such an extravagant pretense. Moreover, a corporation is not
as a rule entitled to moral damages because, not being a natural person, it cannot experience
physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish and
moral shock. The only exception to this rule is where the corporation has a good reputation
that is debased, resulting in its social humiliation. 9

We shall recognize that the petitioner did suffer injury because of the private respondent's
negligence that caused the dishonor of the checks issued by it. The immediate consequence
was that its prestige was impaired because of the bouncing checks and confidence in it as a
reliable debtor was diminished. The private respondent makes much of the one instance when
the petitioner was sued in a collection case, but that did not prove that it did not have a good
reputation that could not be marred, more so since that case was ultimately settled. 10 It does
not appear that, as the private respondent would portray it, the petitioner is an unsavory and
disreputable entity that has no good name to protect.

Considering all this, we feel that the award of nominal damages in the sum of P20,000.00 was
not the proper relief to which the petitioner was entitled. Under Article 2221 of the Civil Code,
"nominal damages are adjudicated in order that a right of the plaintiff, which has been violated
or invaded by the defendant, may be vindicated or recognized, and not for the purpose of
indemnifying the plaintiff for any loss suffered by him." As we have found that the petitioner
has indeed incurred loss through the fault of the private respondent, the proper remedy is the
award to it of moral damages, which we impose, in our discretion, in the same amount of
P20,000.00.

Now for the exemplary damages.

The pertinent provisions of the Civil Code are the following:

Art. 2229. Exemplary or corrective damages are imposed, by way of example or correction for
the public good, in addition to the moral, temperate, liquidated or compensatory damages.

Art. 2232. In contracts and quasi-contracts, the court may award exemplary damages if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.

The banking system is an indispensable institution in the modern world and plays a vital role in
the economic life of every civilized nation. Whether as mere passive entities for the safekeeping
and saving of money or as active instruments of business and commerce, banks have become
an ubiquitous presence among the people, who have come to regard them with respect and
even gratitude and, most of all, confidence. Thus, even the humble wage-earner has not
hesitated to entrust his life's savings to the bank of his choice, knowing that they will be safe in
its custody and will even earn some interest for him. The ordinary person, with equal faith,
usually maintains a modest checking account for security and convenience in the settling of his
monthly bills and the payment of ordinary expenses. As for business entities like the petitioner,
the bank is a trusted and active associate that can help in the running of their affairs, not only in
the form of loans when needed but more often in the conduct of their day-to-day transactions
like the issuance or encashment of checks.

In every case, the depositor expects the bank to treat his account with the utmost fidelity,
whether such account consists only of a few hundred pesos or of millions. The bank must
record every single transaction accurately, down to the last centavo, and as promptly as
possible. This has to be done if the account is to reflect at any given time the amount of money
the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to
whomever he directs. A blunder on the part of the bank, such as the dishonor of a check
without good reason, can cause the depositor not a little embarrassment if not also financial
loss and perhaps even civil and criminal litigation.

The point is that as a business affected with public interest and because of the nature of its
functions, the bank is under obligation to treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of their relationship. In the case at bar, it is
obvious that the respondent bank was remiss in that duty and violated that relationship. What
is especially deplorable is that, having been informed of its error in not crediting the deposit in
question to the petitioner, the respondent bank did not immediately correct it but did so only
one week later or twenty-three days after the deposit was made. It bears repeating that the
record does not contain any satisfactory explanation of why the error was made in the first
place and why it was not corrected immediately after its discovery. Such ineptness comes under
the concept of the wanton manner contemplated in the Civil Code that calls for the imposition
of exemplary damages.

After deliberating on this particular matter, the Court, in the exercise of its discretion, hereby
imposes upon the respondent bank exemplary damages in the amount of P50,000.00, "by way
of example or correction for the public good," in the words of the law. It is expected that this
ruling will serve as a warning and deterrent against the repetition of the ineptness and
indefference that has been displayed here, lest the confidence of the public in the banking
system be further impaired.

ACCORDINGLY, the appealed judgment is hereby MODIFIED and the private respondent is
ordered to pay the petitioner, in lieu of nominal damages, moral damages in the amount of
P20,000.00, and exemplary damages in the amount of P50,000.00 plus the original award of
attorney's fees in the amount of P5,000.00, and costs.

SO ORDERED.

Narvasa, Gancayco, Grino-Aquino and Medialdea, JJ., concur.

Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 161319             January 23, 2007

SPS. EDGAR AND DINAH OMENGAN, Petitioners, 

vs.
PHILIPPPINE NATIONAL BANK, HENRY M. MONTALVO AND MANUEL S.
ACIERTO,* Respondents.

DECISION

CORONA, J.:

This petition for review on certiorari1 seeks a review and reversal of the Court of Appeals (CA)
decision2 and resolution3 in CA-G.R. CV No. 71302.

In October 1996, the Philippine National Bank (PNB) Tabuk (Kalinga) Branch approved
petitioners-spouses’ application for a revolving credit line of P3 million. The loan was secured
by two residential lots in Tabuk, Kalinga-Apayao covered by Transfer Certificate of Title (TCT)
Nos. 12954 and 12112. The certificates of title, issued by the Registry of Deeds of the Province
of Kalinga-Apayao, were in the name of Edgar4 Omengan married to Dinah Omengan.

The first P2.5 million was released by Branch Manager Henry Montalvo on three separate
dates. The release of the final half million was, however, withheld by Montalvo because of a
letter allegedly sent by Edgar’s sisters. It read:

Appas, Tabuk 
Kalinga

7 November 1996

The Manager
Philippine National Bank
Tabuk Branch
Poblacion, Tabuk
Kalinga

Sir:
This refers to the land at Appas, Tabuk in the name of our brother, Edgar Omengan, which was
mortgaged to [the] Bank in the amount of Three Million Pesos (P3,000,000.00), the sum of
[P2.5 Million] had already been released and received by our brother, Edgar.

In this connection, it is requested that the remaining unreleased balance of [half a million
pesos] be held in abeyance pending an understanding by the rest of the brothers and sisters of
Edgar. Please be informed that the property mortgaged, while in the name of Edgar
Omengan, is owned in co-ownership by all the children of the late Roberto and Elnora
Omengan. The lawyer who drafted the document registering the subject property under
Edgar’s name can attest to this fact. We had a prior understanding with Edgar in allowing him
to make use of the property as collateral, but he refuses to comply with such arrangement.
Hence, this letter. (emphasis ours)

Very truly yours,

(Sgd.) Shirley O. Gamon (Sgd.) Imogene O. Bangao

(Sgd.) Caroline O. Salicob (Sgd.) Alice O. Claver5

Montalvo was eventually replaced as branch manager by Manuel Acierto who released the
remaining half million pesos to petitioners on May 2, 1997. Acierto also recommended the
approval of a P2 million increase in their credit line to the Cagayan Valley Business Center
Credit Committee in Santiago City.

The credit committee approved the increase of petitioners’ credit line (from P3 million to P5
million), provided Edgar’s sisters gave their conformity. Acierto informed petitioners of the
conditional approval of their credit line.

But petitioners failed to secure the consent of Edgar’s sisters; hence, PNB put on hold the
release of the additional P2 million.

On October 7, 1998, Edgar Omengan demanded the release of the P2 million. He claimed that
the condition for its release was not part of his credit line agreement with PNB because it was
added without his consent. PNB denied his request.

On March 3, 1999, petitioners filed a complaint for breach of contract and damages against
PNB with the Regional Trial Court (RTC), Branch 25 in Tabuk, Kalinga. After trial, the court
decided in favor of petitioners.

Accordingly, judgment is hereby rendered finding in favor of [petitioners.] [PNB is ordered]:

1) To release without delay in favor of [petitioners] the amount of P2,000,000.00 to complete

theP5,000,000.00 credit line agreement;
2) To pay [petitioners] the amount of P2,760,000.00 representing the losses and/or expected
income of the [petitioners] for three years;

3) To pay lawful interest, until the amount aforementioned on paragraphs 1 and 2 above are
fully paid; and

4) To pay the costs.1awphi1.net

SO ORDERED.6

The CA, however, on June 18, 2003, reversed and set aside the RTC decision dated April 21,
2001.7

Petitioners now contend that the CA erred when it did not sustain the finding of breach of
contract by the RTC. 8

The existence of breach of contract is a factual matter not usually reviewed in a petition filed
under Rule 45. But since the RTC and the CA had contradictory findings, we are constrained to
rule on this issue.

Was there a breach of contract? There was none.

Breach of contract is defined as follows:

[It] is the "failure without legal reason to comply with the terms of a contract." It is also defined
as the "[f]ailure, without legal excuse, to perform any promise which forms the whole or part of
the contract."9

In this case, the parties agreed on a P3 million credit line. This sum was completely released to
petitioners who subsequently applied10 for an increase in their credit line. This was conditionally
approved by PNB’s credit committee. For all intents and purposes, petitioners sought an
additional loan.

The condition attached to the increase in credit line requiring petitioners to acquire the
conformity of Edgar’s sisters was never acknowledged and accepted by petitioners. Thus, as to
the additional loan, no meeting of the minds actually occurred and no breach of contract could
be attributed to PNB. There was no perfected contract over the increase in credit line.

"[T]he business of a bank is one affected with public interest, for which reason the bank should
guard against loss due to negligence or bad faith. In approving the loan of an applicant, the
bank concerns itself with proper [information] regarding its debtors." 11 Any investigation
previously conducted on the property offered by petitioners as collateral did not preclude PNB
from considering new information on the same property as security for a subsequent loan. The
credit and property investigation for the original loan of P3 million did not oblige PNB to grant
and release any additional loan. At the time the original P3 million credit line was approved, the
title to the property appeared to pertain exclusively to petitioners. By the time the application
for an increase was considered, however, PNB already had reason to suspect petitioners’ claim
of exclusive ownership.1avvphi1.net

A mortgagee can rely on what appears on the certificate of title presented by the mortgagor
and an innocent mortgagee is not expected to conduct an exhaustive investigation on the
history of the mortgagor’s title. This rule is strictly applied to banking institutions. xxx

Banks, indeed, should exercise more care and prudence in dealing even with registered lands,
than private individuals, as their business is one affected with public interest. xxx Thus, this
Court clarified that the rule that persons dealing with registered lands can rely solely on the
certificate of title does notapply to banks.12 (emphasis supplied)

Here, PNB had acquired information sufficient to induce a reasonably prudent person to inquire
into the status of the title over the subject property. Instead of defending their position,
petitioners merely insisted that reliance on the face of the certificate of title (in their name) was
sufficient. This principle, as already mentioned, was not applicable to financial institutions like
PNB.

In truth, petitioners had every chance to turn the situation in their favor if, as they said, they
really owned the subject property alone, to the exclusion of any other owner(s). Unfortunately,
all they offered were bare denials of the co-ownership claimed by Edgar’s sisters.

PNB exercised reasonable prudence in requiring the above-mentioned condition for the release
of the additional loan. If the condition proved unacceptable to petitioners, the parties could
have discussed other terms instead of making an obstinate and outright demand for the release
of the additional amount. If the alleged co-ownership in fact had no leg to stand on, petitioners
could have introduced evidence other than a simple denial of its existence.

Since PNB did not breach any contract and since it exercised the degree of diligence expected
of it, it cannot be held liable for damages.

WHEREFORE, the decision and resolution of the Court of Appeals in CA-G.R. CV No. 71302 are
herebyAFFIRMED.

Costs against petitioners.

SO ORDERED.
RENATO C. CORONA
Associate Justice

WE CONCUR:

REYNATO S. PUNO
Chief Justice

ANGELINA SANDOVAL-GUTIERREZ ADOLFO S. AZCUNA

Associate Justice Asscociate Justice
Working Chairperson

CANCIO C. GARCIA
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above
decision had been reached in consultation before the case was assigned to the writer of the
opinion of the Court’s Division.

REYNATO S. PUNO
Chief Justice