G.R. No.

198756, January 13, 2015
BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION, METROPOLITAN BANK &
TRUST COMPANY, PHILIPPINE BANK OF COMMUNICATIONS, PHILIPPINE NATIONAL BANK,
PHILIPPINE VETERANS BANK AND PLANTERS DEVELOPMENT BANK, Petitioners,
RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL CORPORATION, Petitioners,
CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor, v. REPUBLIC OF THE
PHILIPPINES, THE COMMISSIONER OF INTERNAL REVENUE, BUREAU OF INTERNAL REVENUE,
SECRETARY OF FINANCE, DEPARTMENT OF FINANCE, THE NATIONAL TREASURER AND BUREAU
OF TREASURY, Respondents.
DECISION
LEONEN, J.:
The case involves the proper tax treatment of the discount or interest income arising from the P35 billion
worth of 10-year zero-coupon treasury bonds issued by the Bureau of Treasury on October 18, 2001
(denominated as the Poverty Eradication and Alleviation Certificates or the PEACe Bonds by the Caucus of
Development NGO Networks).
special purpose vehicle on behalf of CODE-NGO, repackaged and sold at a premium to investors as the
PEACe Bonds.7 The net proceeds from the sale of the Bonds “will be used to endow a permanent fund
(Hanapbuhay® Fund) to finance meritorious activities and projects of accredited non-government
organizations (NGOs) throughout the country.”8
Prior to and around the time of the proposal of CODE-NGO, other proposals for the issuance of zero-coupon
bonds were also presented by banks and financial institutions, such as First Metro Investment Corporation
(proposal dated March 1, 2001),9 International Exchange Bank (proposal dated July 27, 2000),10 Security
Bank Corporation and SB Capital Investment Corporation (proposal dated July 25, 2001),11 and ATR-Kim Eng
Fixed Income, Inc. (proposal dated August 25, 1999).12 “[B]oth the proposals of First Metro Investment
Corp. and ATR-Kim Eng Fixed Income indicate that the interest income or discount earned on the proposed
zero-coupon bonds would be subject to the prevailing withholding tax.”13
A zero-coupon bond is a bond bought at a price substantially lower than its face value (or at a deep
discount), with the face value repaid at the time of maturity.14 It does not make periodic interest payments,
or have so-called “coupons,” hence the term zero-coupon bond.15 However, the discount to face value
constitutes the return to the bondholder.16
On May 31, 2001, the Bureau of Internal Revenue, in reply to CODE-NGO’s letters dated May 10, 15, and 25,
2001, issued BIR Ruling No. 020-200117 on the tax treatment of the proposed PEACe Bonds. BIR Ruling No.
020-2001, signed by then Commissioner of Internal Revenue René G. Bañez confirmed that the PEACe
Bonds would not be classified as deposit substitutes and would not be subject to the corresponding
withholding tax:

On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No. 370-20111 (2011 BIR
Ruling), declaring that the PEACe Bonds being deposit substitutes are subject to the 20% final withholding
tax. Pursuant to this ruling, the Secretary of Finance directed the Bureau of Treasury to withhold a 20%
final tax from the face value of the PEACe Bonds upon their payment at maturity on October 18, 2011.
This is a petition for certiorari, prohibition and/or mandamus2 filed by petitioners under Rule 65 of the Rules
of Court seeking to:
a. ANNUL Respondent BIR’s Ruling No. 370-2011 dated 7 October 2011 [and] other related rulings issued
by BIR of similar tenor and import, for being unconstitutional and for having been issued without jurisdiction
or with grave abuse of discretion amounting to lack or excess of jurisdiction. . .;
b. PROHIBIT Respondents, particularly the BTr, from withholding or collecting the 20% FWT from the
payment of the face value of the Government Bonds upon their maturity;
c. COMMAND Respondents, particularly the BTr, to pay the full amount of the face value of the Government
Bonds upon maturity. . .; and
d. SECURE a temporary restraining order (TRO), and subsequently a writ of preliminary injunction, enjoining
Respondents, particularly the BIR and the BTr, from withholding or collecting 20% FWT on the Government
Bonds and the respondent BIR from enforcing the assailed 2011 BIR Ruling, as well as other related rulings
issued by the BIR of similar tenor and import, pending the resolution by [the court] of the merits of [the]
Petition.3
Factual background
By letter4 dated March 23, 2001, the Caucus of Development NGO Networks (CODE-NGO) “with the
assistance of its financial advisors, Rizal Commercial Banking Corp. (“RCBC”), RCBC Capital Corp. (“RCBC
Capital”), CAPEX Finance and Investment Corp. (“CAPEX”) and SEED Capital Ventures, Inc.
(SEED),”5 requested an approval from the Department of Finance for the issuance by the Bureau of Treasury
of 10-year zero-coupon Treasury Certificates (T-notes).6 The T-notes would initially be purchased by a
Thus, to be classified as “deposit substitutes”, the borrowing of funds must be obtained from twenty (20) or
more individuals or corporate lenders at any one time. In the light of your representation that the PEACe
Bonds will be issued only to one entity, i.e., Code NGO, the same shall not be considered as “deposit
substitutes” falling within the purview of the above definition. Hence, the withholding tax on deposit
substitutes will not apply.18 (Emphasis supplied)
The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001 was subsequently reiterated in
BIR Ruling No. 035-200119 dated August 16, 2001 and BIR Ruling No. DA-175-0120 dated September 29,
2001 (collectively, the 2001 Rulings). In sum, these rulings pronounced that to be able to determine
whether the financial assets, i.e., debt instruments and securities are deposit substitutes, the “20 or more
individual or corporate lenders” rule must apply. Moreover, the determination of the phrase “at any one
time” for purposes of determining the “20 or more lenders” is to be determined at the time of the original
issuance. Such being the case, the PEACe Bonds were not to be treated as deposit substitutes.
Meanwhile, in the memorandum21 dated July 4, 2001, Former Treasurer Eduardo Sergio G. Edeza (Former
Treasurer Edeza) questioned the propriety of issuing the bonds directly to a special purpose vehicle
considering that the latter was not a Government Securities Eligible Dealer (GSED).22 Former Treasurer
Edeza recommended that the issuance of the Bonds “be done through the ADAPS”23 and that CODE-NGO
“should get a GSED to bid in [sic] its behalf.”24
Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury Bonds25 (Public Offering) dated
October 9, 2001, the Bureau of Treasury announced that “P30.0B worth of 10-year Zero[-] Coupon Bonds
[would] be auctioned on October 16, 2001[.]”26 The notice stated that the Bonds “shall be issued to not
more than 19 buyers/lenders hence, the necessity of a manual auction for this maiden issue.”27 It also
required the GSEDs to submit their bids not later than 12 noon on auction date and to disclose in their bid
submissions the names of the institutions bidding through them to ensure strict compliance with the 19
lender limit.28 Lastly, it stated that “the issue being limited to 19 lenders and while taxable shall not be
subject to the 20% final withholding [tax].”29
On October 12, 2001, the Bureau of Treasury released a memo30 on the “Formula for the Zero-Coupon
Bond.” The memo stated in part that the formula (in determining the purchase price and settlement

1

amount) “is only applicable to the zeroes that are not subject to the 20% final withholding due to the 19
buyer/lender limit.”31
A day before the auction date or on October 15, 2001, the Bureau of Treasury issued the “Auction Guidelines
for the 10-year Zero-Coupon Treasury Bond to be Issued on October 16, 2001” (Auction Guidelines).32 The
Auction Guidelines reiterated that the Bonds to be auctioned are “[n]ot subject to 20% withholding tax as
the issue will be limited to a maximum of 19 lenders in the primary market (pursuant to BIR Revenue
Regulation No. 020 2001).”33 The Auction Guidelines, for the first time, also stated that the Bonds are
“[e]ligible as liquidity reserves (pursuant to MB Resolution No. 1545 dated 27 September 2001)[.]”34
On October 16, 2001, the Bureau of Treasury held an auction for the 10-year zero-coupon bonds.35 Also on
the same date, the Bureau of Treasury issued another memorandum36 quoting excerpts of the ruling issued
by the Bureau of Internal Revenue concerning the Bonds’ exemption from 20% final withholding tax and the
opinion of the Monetary Board on reserve eligibility.37
During the auction, there were 45 bids from 15 GSEDs.38 The bidding range was very wide, from as low as
12.248% to as high as 18.000%.39 Nonetheless, the Bureau of Treasury accepted the auction results.40 The
cut-off was at 12.75%.41
After the auction, RCBC which participated on behalf of CODE-NGO was declared as the winning bidder
having tendered the lowest bids.42 Accordingly, on October 18, 2001, the Bureau of Treasury issued P35
billion worth of Bonds at yield-to-maturity of 12.75% to RCBC for approximately P10.17 billion,43 resulting in
a discount of approximately P24.83 billion.
Also on October 16, 2001, RCBC Capital entered into an underwriting agreement with CODE-NGO, whereby
44
RCBC Capital was appointed as the Issue Manager and Lead Underwriter for the offering of the PEACe
Bonds.45 RCBC Capital agreed to underwrite46 on a firm basis the offering, distribution and sale of the P35
billion Bonds at the price of P11,995,513,716.51.47 In Section 7(r) of the underwriting agreement, CODE-
NGO represented that “[a]ll income derived from the Bonds, inclusive of premium on redemption and gains
on the trading of the same, are exempt from all forms of taxation as confirmed by Bureau of Internal
Revenue (BIR) letter rulings dated 31 May 2001 and 16 August 2001, respectively.”48
RCBC Capital sold the Government Bonds in the secondary market for an issue price of
P11,995,513,716.51. Petitioners purchased the PEACe Bonds on different dates.49
BIR rulings
On October 7, 2011, “the BIR issued the assailed 2011 BIR Ruling imposing a 20% FWT on the Government
Bonds and directing the BIR to withhold said final tax at the maturity thereof, [allegedly without]
consultation with Petitioners as bondholders, and without conducting any hearing.”50
“It appears that the assailed 2011 BIR Ruling was issued in response to a query of the Secretary of Finance
on the proper tax treatment of the discount or interest income derived from the Government Bonds.”51 The
Bureau of Internal Revenue, citing three (3) of its rulings rendered in 2004 and 2005, namely: BIR Ruling
No. 007-0452 dated July 16, 2004; BIR Ruling No. DA-491-0453 dated September 13, 2004; and BIR Ruling
No. 008-0554 dated July 28, 2005, declared the following:
The Php 24.3 billion discount on the issuance of the PEACe Bonds should be subject to 20% Final Tax on
interest income from deposit substitutes. It is now settled that all treasury bonds (including PEACe Bonds),
regardless of the number of purchasers/lenders at the time of origination/issuance are considered deposit
substitutes. In the case of zero-coupon bonds, the discount (i.e. difference between face value and
purchase price/discounted value of the bond) is treated as interest income of the purchaser/holder. Thus,
the Php 24.3 interest income should have been properly subject to the 20% Final Tax as provided in Section
2
2
27(D)(1) of the Tax Code of 1997. . . .
....
However, at the time of the issuance of the PEACe Bonds in 2001, the BTr was not able to collect the final
tax on the discount/interest income realized by RCBC as a result of the 2001 Rulings. Subsequently, the
issuance of BIR Ruling No. 007-04 dated July 16, 2004 effectively modifies and supersedes the 2001 Rulings
by stating that the [1997] Tax Code is clear that the “term public means borrowing from twenty (20) or
more individual or corporate lenders at any one time.” The word “any” plainly indicates that the period
contemplated is the entire term of the bond, and not merely the point of origination or issuance. . . . Thus,
by taking the PEACe bonds out of the ambit of deposits [sic] substitutes and exempting it from the 20%
Final Tax, an exemption in favour of the PEACe Bonds was created when no such exemption is found in the
law.55
On October 11, 2011, a “Memo for Trading Participants No. 58-2011 was issued by the Philippine Dealing
System Holdings Corporation and Subsidiaries (“PDS Group”). The Memo provides that in view of the
pronouncement of the DOF and the BIR on the applicability of the 20% FWT on the Government Bonds, no
transfer of the same shall be allowed to be recorded in the Registry of Scripless Securities (“ROSS”) from 12
October 2011 until the redemption payment date on 18 October 2011. Thus, the bondholders of record
appearing on the ROSS as of 18 October 2011, which include the Petitioners, shall be treated by the BTr as
the beneficial owners of such securities for the relevant [tax] payments to be imposed thereon.”56
On October 17, 2011, replying to an urgent query from the Bureau of Treasury, the Bureau of Internal
Revenue issued BIR Ruling No. DA 378-201157 clarifying that the final withholding tax due on the discount
or interest earned on the PEACe Bonds should “be imposed and withheld not only on RCBC/CODE NGO but
also [on] ‘all subsequent holders of the Bonds.’”58
On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or mandamus (with urgent
application for a temporary restraining order and/or writ of preliminary injunction)59 before this court.
On October 18, 2011, this court issued a temporary restraining order (TRO)60 “enjoining the implementation
of BIR Ruling No. 370-2011 against the [PEACe Bonds,] . . . subject to the condition that the 20% final
withholding tax on interest income therefrom shall be withheld by the petitioner banks and placed in escrow
pending resolution of [the] petition.”61
On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court to intervene and to admit
petition-in-intervention62 dated October 27, 2011, which was granted by this court on November 15, 2011.63
Meanwhile, on November 9, 2011, petitioners filed their “Manifestation with Urgent Ex Parte Motion to Direct
Respondents to Comply with the TRO.”64 They alleged that on the same day that the temporary restraining
order was issued, the Bureau of Treasury paid to petitioners and other bondholders the amounts
representing the face value of the Bonds, net however of the amounts corresponding to the 20% final
withholding tax on interest income, and that the Bureau of Treasury refused to release the amounts
corresponding to the 20% final withholding tax.65
On November 15, 2011, this court directed respondents to: “(1) SHOW CAUSE why they failed to comply
with the October 18, 2011 resolution; and (2) COMPLY with the Court’s resolution in order that petitioners
may place the corresponding funds in escrow pending resolution of the petition.”66
On the same day, CODE-NGO filed a motion for leave to intervene (and to admit attached petition-in-
intervention with comment on the petition-in-intervention of RCBC and RCBC Capital).67 The motion was
granted by this court on November 22, 2011.68
On December 1, 2011, public respondents filed their compliance.69 They explained that: 1) “the
implementation of [BIR Ruling No. 370-2011], which has already been performed on October 18, 2011 with
the withholding of the 20% final withholding tax on the face value of the PEACe bonds, is already fait
accompli . . . when the Resolution and TRO were served to and received by respondents BTr and National
Treasurer [on October 19, 2011]”;70 and 2) the withheld amount has ipso facto become public funds and
cannot be disbursed or released to petitioners without congressional appropriation.71 Respondents further
aver that “[i]nasmuch as the . . . TRO has already become moot . . . the condition attached to it, i.e., ‘that
the 20% final withholding tax on interest income therefrom shall be withheld by the banks and placed in
escrow . . .’ has also been rendered moot[.]”72
On December 6, 2011, this court noted respondents' compliance.73
On February 22, 2012, respondents filed their consolidated comment74 on the petitions-in-intervention filed
by RCBC and RCBC Capital and CODE-NGO.
On November 27, 2012, petitioners filed their “Manifestation with Urgent Reiterative Motion (To Direct
Respondents to Comply with the Temporary Restraining Order).”75
On December 4, 2012, this court: (a) noted petitioners’ manifestation with urgent reiterative motion (to
direct respondents to comply with the temporary restraining order); and (b) required respondents to
comment thereon.76
Respondents’ comment77 was filed on April 15, 2013, and petitioners filed their reply78 on June 5,
2013.cralawred
Issues
The main issues to be resolved are:
I. Whether the PEACe Bonds are “deposit substitutes” and thus subject to 20% final
withholding tax under the 1997 National Internal Revenue Code. Related to this question
is the interpretation of the phrase “borrowing from twenty (20) or more individual or
corporate lenders at any one time” under Section 22(Y) of the 1997 National Internal
Revenue Code, particularly on whether the reckoning of the 20 lenders includes trading of
the bonds in the secondary market; and
II. If the PEACe Bonds are considered “deposit substitutes,” whether the government or the
Bureau of Internal Revenue is estopped from imposing and/or collecting the 20% final
withholding tax from the face value of these Bonds
a. Will the imposition of the 20% final withholding tax violate the non-impairment
clause of the Constitution?
b. Will it constitute a deprivation of property without due process of law?
c. Will it violate Section 245 of the 1997 National Internal Revenue Code on non-
retroactivity of rulings?
Arguments of petitioners, RCBC and RCBC
Capital, and CODE-NGO
3
Petitioners argue that “[a]s the issuer of the Government Bonds acting through the BTr, the Government is
obligated . . . to pay the face value amount of PhP35 Billion upon maturity without any deduction
whatsoever.”79 They add that “the Government cannot impair the efficacy of the [Bonds] by arbitrarily,
oppressively and unreasonably imposing the withholding of 20% FWT upon the [Bonds] a mere eleven (11)
days before maturity and after several, consistent categorical declarations that such bonds are exempt from
the 20% FWT, without violating due process”80 and the constitutional principle on non-impairment of
contracts.81 Petitioners aver that at the time they purchased the Bonds, they had the right to expect that
they would receive the full face value of the Bonds upon maturity, in view of the 2001 BIR Rulings.82
“[R]egardless of whether or not the 2001 BIR Rulings are correct, the fact remains that [they] relied [on]
good faith thereon.”83
At any rate, petitioners insist that the PEACe Bonds are not deposit substitutes as defined under Section
22(Y) of the 1997 National Internal Revenue Code because there was only one lender (RCBC) to whom the
Bureau of Treasury issued the Bonds.84 They allege that the 2004, 2005, and 2011 BIR Rulings “erroneously
interpreted that the number of investors that participate in the ‘secondary market’ is the determining factor
in reckoning the existence or non-existence of twenty (20) or more individual or corporate lenders.”85
Furthermore, they contend that the Bureau of Internal Revenue unduly expanded the definition of deposit
substitutes under Section 22 of the 1997 National Internal Revenue Code in concluding that “the mere
issuance of government debt instruments and securities is deemed as falling within the coverage of ‘deposit
substitutes[.]’”86 Thus, “[t]he 2011 BIR Ruling clearly amount[ed] to an unauthorized act of administrative
legislation[.]”87
Petitioners further argue that their income from the Bonds is a “trading gain,” which is exempt from income
tax.88 They insist that “[t]hey are not lenders whose income is considered as ‘interest income or yield’
subject to the 20% FWT under Section 27 (D)(1) of the [1997 National Internal Revenue Code]”89 because
they “acquired the Government Bonds in the secondary or tertiary market.”90
Even assuming without admitting that the Government Bonds are deposit substitutes, petitioners argue that
the collection of the final tax was barred by prescription.91 They point out that under Section 7 of DOF
Department Order No. 141-95,92 the final withholding tax “should have been withheld at the time of their
issuance[.]”93 Also, under Section 203 of the 1997 National Internal Revenue Code, “internal revenue taxes,
such as the final tax, [should] be assessed within three (3) years after the last day prescribed by law for the
filing of the return.”94
Moreover, petitioners contend that the retroactive application of the 2011 BIR Ruling without prior notice to
them was in violation of their property rights,95 their constitutional right to due process96 as well as Section
246 of the 1997 National Internal Revenue Code on non-retroactivity of rulings.97 Allegedly, it would also
have “an adverse effect of colossal magnitude on the investors, both local and foreign, the Philippine capital
market, and most importantly, the country’s standing in the international commercial community.”98
Petitioners explained that “unless enjoined, the government’s threatened refusal to pay the full value of the
Government Bonds will negatively impact on the image of the country in terms of protection for property
rights (including financial assets), degree of legal protection for lender’s rights, and strength of investor
protection.”99 They cited the country’s ranking in the World Economic Forum: 75th in the world in its 2011–
2012 Global Competitiveness Index, 111th out of 142 countries worldwide and 2nd to the last among ASEAN
countries in terms of Strength of Investor Protection, and 105th worldwide and last among ASEAN countries
in terms of Property Rights Index and Legal Rights Index.100 It would also allegedly “send a reverberating
message to the whole world that there is no certainty, predictability, and stability of financial transactions in
the capital markets[.]”101 “[T]he integrity of Government-issued bonds and notes will be greatly shattered
and the credit of the Philippine Government will suffer”102 if the sudden turnaround of the government will be
allowed,103 and it will reinforce “investors’ perception that the level of regulatory risk for contracts entered
into by the Philippine Government is high,”104 thus resulting in higher interest rate for government-issued
debt instruments and lowered credit rating.105
Petitioners-intervenors RCBC and RCBC Capital contend that respondent Commissioner of Internal Revenue

“gravely and seriously abused her discretion in the exercise of her rule-making power”106 when she issued
the assailed 2011 BIR Ruling which ruled that “all treasury bonds are ‘deposit substitutes’ regardless of the
number of lenders, in clear disregard of the requirement of twenty (20) or more lenders mandated under the
NIRC.”107 They argue that “[b]y her blanket and arbitrary classification of treasury bonds as deposit
substitutes, respondent CIR not only amended and expanded the NIRC, but effectively imposed a new tax on
privately-placed treasury bonds.”108 Petitioners-intervenors RCBC and RCBC Capital further argue that the
2011 BIR Ruling will cause substantial impairment of their vested rights109 under the Bonds since the ruling
imposes new conditions by “subjecting the PEACe Bonds to the twenty percent (20%) final withholding tax
notwithstanding the fact that the terms and conditions thereof as previously represented by the
Government, through respondents BTr and BIR, expressly state that it is not subject to final withholding tax
upon their maturity.”110 They added that “[t]he exemption from the twenty percent (20%) final withholding
tax [was] the primary inducement and principal consideration for [their] participat[ion] in the auction and
underwriting of the PEACe Bonds.”111
Like petitioners, petitioners-intervenors RCBC and RCBC Capital also contend that respondent Commissioner
of Internal Revenue violated their rights to due process when she arbitrarily issued the 2011 BIR Ruling
without prior notice and hearing, and the oppressive timing of such ruling deprived them of the opportunity
to challenge the same.112
Assuming the 20% final withholding tax was due on the PEACe Bonds, petitioners-intervenors RCBC and
RCBC Capital claim that respondents Bureau of Treasury and CODE-NGO should be held liable “as [these]
parties explicitly represented . . . that the said bonds are exempt from the final withholding tax.”113
Finally, petitioners-intervenors RCBC and RCBC Capital argue that “the implementation of the [2011 assailed
BIR Ruling and BIR Ruling No. DA 378-2011] will have pernicious effects on the integrity of existing
securities, which is contrary to the State policies of stabilizing the financial system and of developing capital
markets.”114
For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and BIR Ruling No. DA 378-2011 are “invalid
because they contravene Section 22(Y) of the 1997 [NIRC] when the said rulings disregarded the
applicability of the ‘20 or more lender’ rule to government debt instruments”[;]115 (b) “when [it] sold the
PEACe Bonds in the secondary market instead of holding them until maturity, [it] derived . . . long-term
trading gain[s], not interest income, which [are] exempt . . . under Section 32(B)(7)(g) of the 1997
NIRC”[;]116 (c) “the tax exemption privilege relating to the issuance of the PEACe Bonds . . . partakes of a
contractual commitment granted by the Government in exchange for a valid and material consideration [i.e.,
the issue price paid and savings in borrowing cost derived by the Government,] thus protected by the non-
impairment clause of the 1987 Constitution”[;]117 and (d) the 2004, 2005, and 2011 BIR Rulings “did not
validly revoke the 2001 BIR Rulings since no notice of revocation was issued to [it], RCBC and [RCBC
Capital] and petitioners[-bondholders], nor was there any BIR administrative guidance issued and
published[.]”118 CODE-NGO additionally argues that impleading it in a Rule 65 petition was improper
because: (a) it involves determination of a factual question;119 and (b) it is premature and states no cause of
action as it amounts to an anticipatory third-party claim.120
Arguments of respondents
Respondents argue that petitioners’ direct resort to this court to challenge the 2011 BIR Ruling violates the
doctrines of exhaustion of administrative remedies and hierarchy of courts, resulting in a lack of cause of
action that justifies the dismissal of the petition.121 According to them, “the jurisdiction to review the rulings
of the [Commissioner of Internal Revenue], after the aggrieved party exhausted the administrative
remedies, pertains to the Court of Tax Appeals.”122 They point out that “a case similar to the present Petition
was [in fact] filed with the CTA on October 13, 2011[,] [docketed as] CTA Case No. 8351 [and] entitled,
‘Rizal Commercial Banking Corporation and RCBC Capital Corporation vs. Commissioner of Internal Revenue,
et al.’”123
4
4
Respondents further take issue on the timeliness of the filing of the petition and petitions-in-intervention.124
They argue that under the guise of mainly assailing the 2011 BIR Ruling, petitioners are indirectly attacking
the 2004 and 2005 BIR Rulings, of which the attack is legally prohibited, and the petition insofar as it seeks
to nullify the 2004 and 2005 BIR Rulings was filed way out of time pursuant to Rule 65, Section 4.125
Respondents contend that the discount/interest income derived from the PEACe Bonds is not a trading gain
but interest income subject to income tax.126 They explain that “[w]ith the payment of the PhP35 Billion
proceeds on maturity of the PEACe Bonds, Petitioners receive an amount of money equivalent to about
PhP24.8 Billion as payment for interest. Such interest is clearly an income of the Petitioners considering that
the same is a flow of wealth and not merely a return of capital – the capital initially invested in the Bonds
being approximately PhP10.2 Billion[.]”127
Maintaining that the imposition of the 20% final withholding tax on the PEACe Bonds does not constitute an
impairment of the obligations of contract, respondents aver that: “The BTr has no power to contractually
grant a tax exemption in favour of Petitioners thus the 2001 BIR Rulings cannot be considered a material
term of the Bonds”[;]128 “[t]here has been no change in the laws governing the taxability of interest income
from deposit substitutes and said laws are read into every contract”[;]129 “[t]he assailed BIR Rulings merely
interpret the term “deposit substitute” in accordance with the letter and spirit of the Tax Code”[;]130 “[t]he
withholding of the 20% FWT does not result in a default by the Government as the latter performed its
obligations to the bondholders in full”[;]131 and “[i]f there was a breach of contract or a misrepresentation it
was between RCBC/CODE-NGO/RCBC Cap and the succeeding purchasers of the PEACe Bonds.”132
Similarly, respondents counter that the withholding of “[t]he 20% final withholding tax on the PEACe Bonds
does not amount to a deprivation of property without due process of law.”133 Their imposition of the 20%
final withholding tax is not arbitrary because they were only performing a duty imposed by law;134 “[t]he
2011 BIR Ruling is an interpretative rule which merely interprets the meaning of deposit substitutes [and
upheld] the earlier construction given to the term by the 2004 and 2005 BIR Rulings.”135 Hence,
respondents argue that “there was no need to observe the requirements of notice, hearing, and
publication[.]”136
Nonetheless, respondents add that “there is every reason to believe that Petitioners — all major financial
institutions equipped with both internal and external accounting and compliance departments as well as
access to both internal and external legal counsel; actively involved in industry organizations such as the
Bankers Association of the Philippines and the Capital Market Development Council; all actively taking part in
the regular and special debt issuances of the BTr and indeed regularly proposing products for issue by BTr —
had actual notice of the 2004 and 2005 BIR Rulings.”137 Allegedly, “the sudden and drastic drop — including
virtually zero trading for extended periods of six months to almost a year — in the trading volume of the
PEACe Bonds after the release of BIR Ruling No. 007-04 on July 16, 2004 tend to indicate that market
participants, including the Petitioners herein, were aware of the ruling and its consequences for the PEACe
Bonds.”138
Moreover, they contend that the assailed 2011 BIR Ruling is a valid exercise of the Commissioner of Internal
Revenue’s rule-making power;139 that it and the 2004 and 2005 BIR Rulings did not unduly expand the
definition of deposit substitutes by creating an unwarranted exception to the requirement of having 20 or
more lenders/purchasers;140 and the word “any” in Section 22(Y) of the National Internal Revenue Code
plainly indicates that the period contemplated is the entire term of the bond and not merely the point of
origination or issuance.141
Respondents further argue that a retroactive application of the 2011 BIR Ruling will not unjustifiably
prejudice petitioners.142 “[W]ith or without the 2011 BIR Ruling, Petitioners would be liable to pay a 20%
final withholding tax just the same because the PEACe Bonds in their possession are legally in the nature of
deposit substitutes subject to a 20% final withholding tax under the NIRC.”143 Section 7 of DOF Department
Order No. 141-95 also provides that income derived from Treasury bonds is subject to the 20% final
withholding tax.144 “[W]hile revenue regulations as a general rule have no retroactive effect, if the 1) Respondent Commissioner of Internal Revenue did not act with grave abuse of discretion in issuing the
revocation is due to the fact that the regulation is erroneous or contrary to law, such revocation shall have challenged 2011 BIR Ruling:
retroactive operation as to affect past transactions, because a wrong construction of the law cannot give rise
to a vested right that can be invoked by a taxpayer.”145
a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue of the Commissioner of
Internal Revenue’s power to interpret the provisions of the 1997 National Internal Revenue Code
Finally, respondents submit that “there are a number of variables and factors affecting a capital market.”146
and other tax laws;
“[C]apital market itself is inherently unstable.”147 Thus, “[p]etitioners’ argument that the 20% final
withholding tax . . . will wreak havoc on the financial stability of the country is a mere supposition that is not
a justiciable issue.”148 b. Commissioner of Internal Revenue merely restates and confirms the interpretations contained in
previously issued BIR Ruling Nos. 007-2004, DA-491-04, and 008-05, which have already
On the prayer for the temporary restraining order, respondents argue that this order “could no longer be effectively abandoned or revoked the 2001 BIR Rulings;
implemented [because] the acts sought to be enjoined are already fait accompli.”149 They add that “to
disburse the funds withheld to the Petitioners at this time would violate Section 29[,] Article VI of the c. Commissioner of Internal Revenue is not bound by his or her predecessor’s rulings especially when
Constitution prohibiting ‘money being paid out of the Treasury except in pursuance of an appropriation made the latter’s rulings are not in harmony with the law; and
by law[.]’”150 “The remedy of petitioners is to claim a tax refund under Section 204(c) of the Tax Code
should their position be upheld by the Honorable Court.”151
d. The wrong construction of the law that the 2001 BIR Rulings have perpetrated cannot give rise to a
vested right. Therefore, the 2011 BIR Ruling can be given retroactive effect.
Respondents also argue that “the implementation of the TRO would violate Section 218 of the Tax Code in
relation to Section 11 of Republic Act No. 1125 (as amended by Section 9 of Republic Act No. 9282) which
prohibits courts, except the Court of Tax Appeals, from issuing injunctions to restrain the collection of any
national internal revenue tax imposed by the Tax Code.”152 2) Rule 65 can be resorted to only if there is no appeal or any plain, speedy, and adequate remedy in the
ordinary course of law:
Summary of arguments
a. Petitioners had the basic remedy of filing a claim for refund of the 20% final withholding tax they
In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC Capital, and CODE-NGO argue that: allege to have been wrongfully collected; and
b. Non-observance of the doctrine of exhaustion of administrative remedies and of hierarchy of
1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997 National Internal Revenue courts.
Code when it declared that all government debt instruments are deposit substitutes regardless of
the 20-lender rule; and
Court’s ruling
2. The 2011 BIR Ruling cannot be applied retroactively because:
Procedural Issues
a) It will violate the contract clause;

Non-exhaustion of administrative
o It constitutes a unilateral amendment of a material term (tax exempt status) in the
remedies proper
Bonds, represented by the government as an inducement and important consideration for
the purchase of the Bonds; Under Section 4 of the 1997 National Internal Revenue Code, interpretative rulings are reviewable by the
Secretary of Finance.

b) It constitutes deprivation of property without due process because there was no prior notice to
bondholders and hearing and publication;
c) It violates the rule on non-retroactivity under the 1997 National Internal Revenue Code;
d) It violates the constitutional provision on supporting activities of non-government organizations
and development of the capital market; and
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The power to
interpret the provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction
of the Commissioner, subject to review by the Secretary of Finance. (Emphasis supplied)
Thus, it was held that “[i]f superior administrative officers [can] grant the relief prayed for, [then] special
civil actions are generally not entertained.”153 The remedy within the administrative machinery must be
resorted to first and pursued to its appropriate conclusion before the court’s judicial power can be sought.154

e) The assessment had already prescribed.

Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of administrative remedies:

Respondents counter that:

5

[The doctrine of exhaustion of administrative remedies] is a relative one and its flexibility is called upon by
the peculiarity and uniqueness of the factual and circumstantial settings of a case. Hence, it is disregarded
(1) when there is a violation of due process, (2) when the issue involved is purely a legal question, 155 (3)
when the administrative action is patently illegal amounting to lack or excess of jurisdiction,(4) when there is
estoppel on the part of the administrative agency concerned,(5) when there is irreparable injury, (6) when
the respondent is a department secretary whose acts as an alter ego of the President bears the implied and
assumed approval of the latter, (7) when to require exhaustion of administrative remedies would be
unreasonable, (8) when it would amount to a nullification of a claim, (9) when the subject matter is a private
land in land case proceedings, (10) when the rule does not provide a plain, speedy and adequate remedy,
(11) when there are circumstances indicating the urgency of judicial intervention. 156 (Emphasis supplied,
citations omitted)
The exceptions under (2) and (11) are present in this case. The question involved is purely legal, namely:
(a) the interpretation of the 20-lender rule in the definition of the terms public and deposit substitutes under
the 1997 National Internal Revenue Code; and (b) whether the imposition of the 20% final withholding tax
on the PEACe Bonds upon maturity violates the constitutional provisions on non-impairment of contracts and
due process. Judicial intervention is likewise urgent with the impending maturity of the PEACe Bonds on
October 18, 2011.
The rule on exhaustion of administrative remedies also finds no application when the exhaustion will result in
an exercise in futility.157
In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR Ruling would be a futile
exercise because it was upon the request of the Secretary of Finance that the 2011 BIR Ruling was issued by
the Bureau of Internal Revenue. It appears that the Secretary of Finance adopted the Commissioner of
Internal Revenue’s opinions as his own.158 This position was in fact confirmed in the letter159 dated October
10, 2011 where he ordered the Bureau of Treasury to withhold the amount corresponding to the 20% final
withholding tax on the interest or discounts allegedly due from the bondholders on the strength of the 2011
BIR Ruling.
Doctrine on hierarchy of courts
We agree with respondents that the jurisdiction to review the rulings of the Commissioner of Internal
Revenue pertains to the Court of Tax Appeals. The questioned BIR Ruling Nos. 370-2011 and DA 378-2011
were issued in connection with the implementation of the 1997 National Internal Revenue Code on the
taxability of the interest income from zero-coupon bonds issued by the government.
Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as amended by Republic Act No.
9282,160 such rulings of the Commissioner of Internal Revenue are appealable to that court, thus:
SEC. 7. Jurisdiction. - The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National Internal Revenue or other
laws administered by the Bureau of Internal Revenue;
....
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected by a decision,
6
6
ruling or inaction of the Commissioner of Internal Revenue, the Commissioner of Customs, the Secretary of
Finance, the Secretary of Trade and Industry or the Secretary of Agriculture or the Central Board of
Assessment Appeals or the Regional Trial Courts may file an appeal with the CTA within thirty (30) days
after the receipt of such decision or ruling or after the expiration of the period fixed by law for action as
referred to in Section 7(a)(2) herein.
....
SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving matters arising under
the National Internal Revenue Code, the Tariff and Customs Code or the Local Government Code shall be
maintained, except as herein provided, until and unless an appeal has been previously filed with the CTA and
disposed of in accordance with the provisions of this Act.
In Commissioner of Internal Revenue v. Leal,161 citing Rodriguez v. Blaquera,162 this court emphasized the
jurisdiction of the Court of Tax Appeals over rulings of the Bureau of Internal Revenue, thus:
While the Court of Appeals correctly took cognizance of the petition for certiorari, however, let it be stressed
that the jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains to the Court of
Tax Appeals, not to the RTC.
The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the Commissioner
implementing the Tax Code on the taxability of pawnshops. . . .
....
Such revenue orders were issued pursuant to petitioner's powers under Section 245 of the Tax Code, which
states:
“SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. — The Secretary of
Finance, upon recommendation of the Commissioner, shall promulgate all needful rules and regulations for
the effective enforcement of the provisions of this Code.
The authority of the Secretary of Finance to determine articles similar or analogous to those subject to a rate
of sales tax under certain category enumerated in Section 163 and 165 of this Code shall be without
prejudice to the power of the Commissioner of Internal Revenue to make rulings or opinions in connection
with the implementation of the provisions of internal revenue laws, including ruling on the classification of
articles of sales and similar purposes.” (Emphasis in the original)
....
The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:
“Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal Revenue, but merely
an attempt to nullify General Circular No. V-148, which does not adjudicate or settle any controversy, and
that, accordingly, this case is not within the jurisdiction of the Court of Tax Appeals.
We find no merit in this pretense. General Circular No. V-148 directs the officers charged with the collection
of taxes and license fees to adhere strictly to the interpretation given by the defendant to the statutory
provisions abovementioned, as set forth in the Circular. The same incorporates, therefore, a decision of the
Collector of Internal Revenue (now Commissioner of Internal Revenue) on the manner of enforcement of the
said statute, the administration of which is entrusted by law to the Bureau of Internal Revenue. As such, it
comes within the purview of Republic Act No. 1125, Section 7 of which provides that the Court of Tax
Appeals ‘shall exercise exclusive appellate jurisdiction to review by appeal . . . decisions of the Collector of
Internal Revenue in . . . matters arising under the National Internal Revenue Code or other law or part of the
law administered by the Bureau of Internal Revenue.’”163
In exceptional cases, however, this court entertained direct recourse to it when “dictated by public welfare
and the advancement of public policy, or demanded by the broader interest of justice, or the orders
complained of were found to be patent nullities, or the appeal was considered as clearly an inappropriate
remedy.”164
In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary, Department of
Interior and Local Government,165 this court noted that the petition for prohibition was filed directly before it
“in disregard of the rule on hierarchy of courts. However, [this court] opt[ed] to take primary jurisdiction
over the . . . petition and decide the same on its merits in view of the significant constitutional issues raised
by the parties dealing with the tax treatment of cooperatives under existing laws and in the interest of
speedy justice and prompt disposition of the matter.”166
Here, the nature and importance of the issues raised167 to the investment and banking industry with regard
to a definitive declaration of whether government debt instruments are deposit substitutes under existing
laws, and the novelty thereof, constitute exceptional and compelling circumstances to justify resort to this
court in the first instance.
The tax provision on deposit substitutes affects not only the PEACe Bonds but also any other financial
instrument or product that may be issued and traded in the market. Due to the changing positions of the
Bureau of Internal Revenue on this issue, there is a need for a final ruling from this court to stabilize the
expectations in the financial market.
Finally, non-compliance with the rules on exhaustion of administrative remedies and hierarchy of courts had
been rendered moot by this court’s issuance of the temporary restraining order enjoining the implementation
of the 2011 BIR Ruling. The temporary restraining order effectively recognized the urgency and necessity of
direct resort to this court.
Substantive issues
Tax treatment of deposit substitutes
Under Sections 24(B)(1), 27(D)(1), and 28(A)(7) of the 1997 National Internal Revenue Code, a final
withholding tax at the rate of 20% is imposed on interest on any currency bank deposit and yield or any
other monetary benefit from deposit substitutes and from trust funds and similar arrangements. These
provisions read:
SEC. 24. Income Tax Rates.
....
(B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is
hereby imposed upon the amount of interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar arrangements; . . . Provided,
further, That interest income from long-term deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment management accounts and other investments
evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt
from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-
terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire
income and shall be deducted and withheld by the depository bank from the proceeds of the long-term
deposit or investment certificate based on the remaining maturity thereof:
7
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%. (Emphasis supplied)
SEC. 27. Rates of Income Tax on Domestic Corporations. -
....
(D) Rates of Tax on Certain Passive Incomes. -
(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust
Funds and Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is hereby
imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and
royalties, derived from sources within the Philippines: Provided, however, That interest income derived by a
domestic corporation from a depository bank under the expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income.
(Emphasis supplied)
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
....
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -
(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds
and Similar Arrangements and Royalties. - Interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties
derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty
percent (20%) of such interest: Provided, however, That interest income derived by a resident foreign
corporation from a depository bank under the expanded foreign currency deposit system shall be subject to
a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income. (Emphasis
supplied)
This tax treatment of interest from bank deposits and yield from deposit substitutes was first introduced in
the 1977 National Internal Revenue Code through Presidential Decree No. 1739168 issued in 1980. Later,
Presidential Decree No. 1959, effective on October 15, 1984, formally added the definition of deposit
substitutes, viz:
(y) ‘Deposit substitutes’ shall mean an alternative form of obtaining funds from the public, other than
deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower's own
account, for the purpose of relending or purchasing of receivables and other obligations, or financing their
own needs or the needs of their agent or dealer. These promissory notes, repurchase agreements,
certificates of assignment or participation and similar instrument with recourse as may be authorized by the
Central Bank of the Philippines, for banks and non-bank financial intermediaries or by the Securities and
Exchange Commission of the Philippines for commercial, industrial, finance companies and either non-
financial companies: Provided, however, that only debt instruments issued for inter-bank call loans to cover
deficiency in reserves against deposit liabilities including those between or among banks and quasi-banks
shall not be considered as deposit substitute debt instruments. (Emphasis supplied)
Revenue Regulations No. 17-84, issued to implement Presidential Decree No. 1959, adopted verbatim the
same definition and specifically identified the following borrowings as “deposit substitutes”:

SECTION 2. Definitions of Terms. . . .
(h) “Deposit substitutes” shall mean –
....
(a) All interbank borrowings by or among banks and non-bank financial institutions authorized to engage in
quasi-banking functions evidenced by deposit substitutes instruments, except interbank call loans to cover
deficiency in reserves against deposit liabilities as evidenced by interbank loan advice or repayment transfer
tickets.
(b) All borrowings of the national and local government and its instrumentalities including the Central Bank
of the Philippines, evidenced by debt instruments denoted as treasury bonds, bills, notes, certificates of
indebtedness and similar instruments.
(c) All borrowings of banks, non-bank financial intermediaries, finance companies, investment companies,
trust companies, including the trust department of banks and investment houses, evidenced by deposit
substitutes instruments. (Emphasis supplied)
The definition of deposit substitutes was amended under the 1997 National Internal Revenue Code with the
addition of the qualifying phrase for public – borrowing from 20 or more individual or corporate lenders at
any one time. Under Section 22(Y), deposit substitute is defined thus:
SEC. 22. Definitions - When used in this Title:
....
(Y) The term ‘deposit substitutes’ shall mean an alternative form of obtaining funds from the public (the
term 'public' means borrowing from twenty (20) or more individual or corporate lenders at any
one time) other than deposits, through the issuance, endorsement, or acceptance of debt instruments for
the borrower’s own account, for the purpose of relending or purchasing of receivables and other obligations,
or financing their own needs or the needs of their agent or dealer. These instruments may include, but need
not be limited to, bankers’ acceptances, promissory notes, repurchase agreements, including reverse
repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any
authorized agent bank, certificates of assignment or participation and similar instruments with recourse:
Provided, however, That debt instruments issued for interbank call loans with maturity of not more than five
(5) days to cover deficiency in reserves against deposit liabilities, including those between or among banks
and quasi-banks, shall not be considered as deposit substitute debt instruments. (Emphasis supplied)
Under the 1997 National Internal Revenue Code, Congress specifically defined “public” to mean “twenty (20)
or more individual or corporate lenders at any one time.” Hence, the number of lenders is determinative of
whether a debt instrument should be considered a deposit substitute and consequently subject to the 20%
final withholding tax.
20-lender rule
Petitioners contend that “there [is] only one (1) lender (i.e. RCBC) to whom the BTr issued the Government
Bonds.”169 On the other hand, respondents theorize that the word “any” “indicates that the period
contemplated is the entire term of the bond and not merely the point of origination or issuance[,]”170 such
that if the debt instruments “were subsequently sold in secondary markets and so on, in such a way that
twenty (20) or more buyers eventually own the instruments, then it becomes indubitable that funds would
be obtained from the “public” as defined in Section 22(Y) of the NIRC.”171 Indeed, in the context of the
financial market, the words “at any one time” create an ambiguity.
8
8
Financial markets
Financial markets provide the channel through which funds from the surplus units (households and business
firms that have savings or excess funds) flow to the deficit units (mainly business firms and government that
need funds to finance their operations or growth). They bring suppliers and users of funds together and
provide the means by which the lenders transform their funds into financial assets, and the borrowers
receive these funds now considered as their financial liabilities. The transfer of funds is represented by a
security, such as stocks and bonds. Fund suppliers earn a return on their investment; the return is
necessary to ensure that funds are supplied to the financial markets.172
“The financial markets that facilitate the transfer of debt securities are commonly classified by the maturity
of the securities[,]”173 namely: (1) the money market, which facilitates the flow of short-term funds (with
maturities of one year or less); and (2) the capital market, which facilitates the flow of long-term funds (with
maturities of more than one year).174
Whether referring to money market securities or capital market securities, transactions occur either in
the primary market or in the secondary market.175 “Primary markets facilitate the issuance of new
securities. Secondary markets facilitate the trading of existing securities, which allows for a change in the
ownership of the securities.”176 The transactions in primary markets exist between issuers and investors,
while secondary market transactions exist among investors.177
“Over time, the system of financial markets has evolved from simple to more complex ways of carrying out
financial transactions.”178 Still, all systems perform one basic function: the quick mobilization of money from
the lenders/investors to the borrowers.179
Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect finance; and (3) indirect
finance.180
With direct financing, the “borrower and lender meet each other and exchange funds in return for financial
assets”181 (e.g., purchasing bonds directly from the company issuing them). This method provides certain
limitations such as: (a) “both borrower and lender must desire to exchange the same amount of funds at the
same time”[;]182 and (b) “both lender and borrower must frequently incur substantial information costs
simply to find each other.”183
In semidirect financing, a securities broker or dealer brings surplus and deficit units together, thereby
reducing information costs.184 A broker185 is “an individual or financial institution who provides information
concerning possible purchases and sales of securities. Either a buyer or a seller of securities may contact a
broker, whose job is simply to bring buyers and sellers together.”186 A dealer187 “also serves as a
middleman between buyers and sellers, but the dealer actually acquires the seller’s securities in the hope of
selling them at a later time at a more favorable price.”188 Frequently, “a dealer will split up a large issue of
primary securities into smaller units affordable by . . . buyers . . . and thereby expand the flow of savings
into investment.”189 In semidirect financing, “[t]he ultimate lender still winds up holding the borrower’s
securities, and therefore the lender must be willing to accept the risk, liquidity, and maturity characteristics
of the borrower’s [debt security]. There still must be a fundamental coincidence of wants and needs
between [lenders and borrowers] for semidirect financial transactions to take place.”190
“The limitations of both direct and semidirect finance stimulated the development of indirect financial
transactions, carried out with the help of financial intermediaries”191 or financial institutions, like banks,
investment banks, finance companies, insurance companies, and mutual funds.192 Financial intermediaries
accept funds from surplus units and channel the funds to deficit units.193 “Depository institutions [such as
banks] accept deposits from surplus units and provide credit to deficit units through loans and purchase of
[debt] securities.”194 Nondepository institutions, like mutual funds, issue securities of their own (usually in
smaller and affordable denominations) to surplus units and at the same time purchase debt securities of
deficit units.195 “By pooling the resources of [small savers, a financial intermediary] can service the credit
needs of large firms simultaneously.”196
The financial market, therefore, is an agglomeration of financial transactions in securities performed by
market participants that works to transfer the funds from the surplus units (or investors/lenders) to those
who need them (deficit units or borrowers).
Meaning of “at any one time”
Thus, from the point of view of the financial market, the phrase “at any one time” for purposes of
determining the “20 or more lenders” would mean every transaction executed in the primary or secondary
market in connection with the purchase or sale of securities.
For example, where the financial assets involved are government securities like bonds, the reckoning of “20
or more lenders/investors” is made at any transaction in connection with the purchase or sale of the
Government Bonds, such as:
1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the primary market;
2. Sale and distribution by GSEDs to various lenders/investors in the secondary market;
3. Subsequent sale or trading by a bondholder to another lender/investor in the secondary market
usually through a broker or dealer; or
4. Sale by a financial intermediary-bondholder of its participation interests in the bonds to individual
or corporate lenders in the secondary market.
When, through any of the foregoing transactions, funds are simultaneously obtained from 20 or more
lenders/investors, there is deemed to be a public borrowing and the bonds at that point in time are deemed
deposit substitutes. Consequently, the seller is required to withhold the 20% final withholding tax on the
imputed interest income from the bonds.
For debt instruments that are
not deposit substitutes, regular
income tax applies
It must be emphasized, however, that debt instruments that do not qualify as deposit substitutes under the
1997 National Internal Revenue Code are subject to the regular income tax.
The phrase “all income derived from whatever source” in Chapter VI, Computation of Gross Income, Section
32(A) of the 1997 National Internal Revenue Code discloses a legislative policy to include all income not
expressly exempted as within the class of taxable income under our laws.
“The definition of gross income is broad enough to include all passive incomes subject to specific tax rates or
final taxes.”197 Hence, interest income from deposit substitutes are necessarily part of taxable income.
“However, since these passive incomes are already subject to different rates and taxed finally at source,
they are no longer included in the computation of gross income, which determines taxable income.”198
“Stated otherwise . . . if there were no withholding tax system in place in this country, this 20 percent
portion of the ‘passive’ income of [creditors/lenders] would actually be paid to the [creditors/lenders] and
then remitted by them to the government in payment of their income tax.”199
9
This court, in Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo, 200 explained the rationale
behind the withholding tax system:
The withholding [of tax at source] was devised for three primary reasons: first, to provide the taxpayer a
convenient manner to meet his probable income tax liability; second, to ensure the collection of income tax
which can otherwise be lost or substantially reduced through failure to file the corresponding returns[;] and
third, to improve the government’s cash flow. This results in administrative savings, prompt and efficient
collection of taxes, prevention of delinquencies and reduction of governmental effort to collect taxes through
more complicated means and remedies.201 (Citations omitted)
“The application of the withholdings system to interest on bank deposits or yield from deposit substitutes is
essentially to maximize and expedite the collection of income taxes by requiring its payment at the
source.”202
Hence, when there are 20 or more lenders/investors in a transaction for a specific bond issue, the seller is
required to withhold the 20% final income tax on the imputed interest income from the bonds.
Interest income v. gains from sale or redemption
The interest income earned from bonds is not synonymous with the “gains” contemplated under Section
32(B)(7)(g)203 of the 1997 National Internal Revenue Code, which exempts gains derived from trading,
redemption, or retirement of long-term securities from ordinary income tax.
The term “gain” as used in Section 32(B)(7)(g) does not include interest, which represents forbearance for
the use of money. Gains from sale or exchange or retirement of bonds or other certificate of indebtedness
fall within the general category of “gains derived from dealings in property” under Section 32(A)(3), while
interest from bonds or other certificate of indebtedness falls within the category of “interests” under Section
32(A)(4).204 The use of the term “gains from sale” in Section 32(B)(7)(g) shows the intent of Congress not
to include interest as referred under Sections 24, 25, 27, and 28 in the exemption.205
Hence, the “gains” contemplated in Section 32(B)(7)(g) refers to: (1) gain realized from the trading of the
bonds before their maturity date, which is the difference between the selling price of the bonds in the
secondary market and the price at which the bonds were purchased by the seller; and (2) gain realized by
the last holder of the bonds when the bonds are redeemed at maturity, which is the difference between the
proceeds from the retirement of the bonds and the price at which such last holder acquired the bonds. For
discounted instruments, like the zero-coupon bonds, the trading gain shall be the excess of the selling price
over the book value or accreted value (original issue price plus accumulated discount from the time of
purchase up to the time of sale) of the instruments.206
The Bureau of Internal
Revenue rulings
The Bureau of Internal Revenue’s interpretation as expressed in the three 2001 BIR Rulings is not consistent
with law.207 Its interpretation of “at any one time” to mean at the point of origination alone is unduly
restrictive.
BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on the 2004 and 2005 BIR
Rulings) that “all treasury bonds . . . regardless of the number of purchasers/lenders at the time of
origination/issuance are considered deposit substitutes.”208 Being the subject of this petition, it is, thus,
declared void because it completely disregarded the 20 or more lender rule added by Congress in the 1997
National Internal Revenue Code. It also created a distinction for government debt instruments as against
those issued by private corporations when there was none in the law.
Tax statutes must be reasonably construed as to give effect to the whole act. Their constituent provisions
must be read together, endeavoring to make every part effective, harmonious, and sensible.209 That

construction which will leave every word operative will be favored over one that leaves some word, clause,
or sentence meaningless and insignificant.210
It may be granted that the interpretation of the Commissioner of Internal Revenue in charge of executing
the 1997 National Internal Revenue Code is an authoritative construction of great weight, but the principle is
not absolute and may be overcome by strong reasons to the contrary. If through a misapprehension of law
an officer has issued an erroneous interpretation, the error must be corrected when the true construction is
ascertained.
In Philippine Bank of Communications v. Commissioner of Internal Revenue,211 this court upheld the
nullification of Revenue Memorandum Circular (RMC) No. 7-85 issued by the Acting Commissioner of Internal
Revenue because it was contrary to the express provision of Section 230 of the 1977 National Internal
Revenue Code and, hence, “[cannot] be given weight for to do so would, in effect, amend the statute.”212
Thus:
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of
two years to ten years on claims of excess quarterly income tax payments, such circular created a clear
inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the
law; rather it legislated guidelines contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense
of more specific and less general interpretations of tax laws) which are issued from time to time by the
Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such
interpretation is not conclusive and will be ignored if judicially found to be erroneous. Thus, courts will not
countenance administrative issuances that override, instead of remaining consistent and in harmony with,
the law they seek to apply and implement.213 (Citations omitted)
This court further held that “[a] memorandum-circular of a bureau head could not operate to vest a taxpayer
with a shield against judicial action [because] there are no vested rights to speak of respecting a wrong
construction of the law by the administrative officials and such wrong interpretation could not place the
Government in estoppel to correct or overrule the same.”214
In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc., 215 this court nullified Revenue
Memorandum Order (RMO) No. 15-91 and RMC No. 43-91, which imposed a 5% lending investor's tax on
pawnshops.216 It was held that “the [Commissioner] cannot, in the exercise of [its interpretative] power,
issue administrative rulings or circulars not consistent with the law sought to be applied. Indeed,
administrative issuances must not override, supplant or modify the law, but must remain consistent with the
law they intend to carry out. Only Congress can repeal or amend the law.”217
In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary, 218 this court stated
that the Commissioner of Internal Revenue is not bound by the ruling of his predecessors,219 but, to the
contrary, the overruling of decisions is inherent in the interpretation of laws:
[I]n considering a legislative rule a court is free to make three inquiries: (i) whether the rule is within the
delegated authority of the administrative agency; (ii) whether it is reasonable; and (iii) whether it was
issued pursuant to proper procedure. But the court is not free to substitute its judgment as to the desirability
or wisdom of the rule for the legislative body, by its delegation of administrative judgment, has committed
those questions to administrative judgments and not to judicial judgments. In the case of an interpretative
rule, the inquiry is not into the validity but into the correctness or propriety of the rule. As a matter of power
a court, when confronted with an interpretative rule, is free to (i) give the force of law to the rule; (ii) go to
the opposite extreme and substitute its judgment; or (iii) give some intermediate degree of authoritative
weight to the interpretative rule.
10
10
In the case at bar, we find no reason for holding that respondent Commissioner erred in not considering
copra as an “agricultural food product” within the meaning of § 103(b) of the NIRC. As the Solicitor General
contends, “copra per se is not food, that is, it is not intended for human consumption. Simply stated, nobody
eats copra for food.” That previous Commissioners considered it so, is not reason for holding that the
present interpretation is wrong. The Commissioner of Internal Revenue is not bound by the ruling of his
predecessors. To the contrary, the overruling of decisions is inherent in the interpretation of
laws.220 (Emphasis supplied, citations omitted)
Tax treatment of income derived
from the PEACe Bonds
The transactions executed for the sale of the PEACe Bonds are:
1. The issuance of the P35 billion Bonds by the Bureau of Treasury to RCBC/CODE-NGO at P10.2
billion; and
2. The sale and distribution by RCBC Capital (underwriter) on behalf of CODE-NGO of the PEACe
Bonds to undisclosed investors at P11.996 billion.
It may seem that there was only one lender — RCBC on behalf of CODE-NGO — to whom the PEACe Bonds
were issued at the time of origination. However, a reading of the underwriting agreement221 and RCBC term
sheet222 reveals that the settlement dates for the sale and distribution by RCBC Capital (as underwriter for
CODE-NGO) of the PEACe Bonds to various undisclosed investors at a purchase price of approximately
P11.996 would fall on the same day, October 18, 2001, when the PEACe Bonds were supposedly issued to
CODE-NGO/RCBC. In reality, therefore, the entire P10.2 billion borrowing received by the Bureau of
Treasury in exchange for the P35 billion worth of PEACe Bonds was sourced directly from the undisclosed
number of investors to whom RCBC Capital/CODE-NGO distributed the PEACe Bonds — all at the time of
origination or issuance. At this point, however, we do not know as to how many investors the PEACe Bonds
were sold to by RCBC Capital.
Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACe Bonds are deemed
deposit substitutes within the meaning of Section 22(Y) of the 1997 National Internal Revenue Code and
RCBC Capital/CODE-NGO would have been obliged to pay the 20% final withholding tax on the interest or
discount from the PEACe Bonds. Further, the obligation to withhold the 20% final tax on the corresponding
interest from the PEACe Bonds would likewise be required of any lender/investor had the latter turned
around and sold said PEACe Bonds, whether in whole or part, simultaneously to 20 or more lenders or
investors.
We note, however, that under Section 24223 of the 1997 National Internal Revenue Code, interest income
received by individuals from long-term deposits or investments with a holding period of not less than five (5)
years is exempt from the final tax.
Thus, should the PEACe Bonds be found to be within the coverage of deposit substitutes, the proper
procedure was for the Bureau of Treasury to pay the face value of the PEACe Bonds to the bondholders and
for the Bureau of Internal Revenue to collect the unpaid final withholding tax directly from RCBC
Capital/CODE-NGO, or any lender or investor if such be the case, as the withholding agents.
The collection of tax is not
barred by prescription
The three (3)-year prescriptive period under Section 203 of the 1997 National Internal Revenue Code to
assess and collect internal revenue taxes is extended to 10 years in cases of (1) fraudulent returns; (2) false
returns with intent to evade tax; and (3) failure to file a return, to be computed from the time of discovery
of the falsity, fraud, or omission. Section 203 states:
SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222,
internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the
filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be
begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period
prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes
of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered
as filed on such last day. (Emphasis supplied)
....
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax
may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at
any time within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud
assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in
the civil or criminal action for the collection thereof.
Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe Bonds to 20 or more
lenders/investors, the Bureau of Internal Revenue may still collect the unpaid tax from RCBC Capital/CODE-
NGO within 10 years after the discovery of the omission.
In view of the foregoing, there is no need to pass upon the other issues raised by petitioners and petitioners-
intervenors.
Reiterative motion on the temporary restraining order
Respondents’ withholding of the
20% final withholding tax on
October 18, 2011 was justified
Under the Rules of Court, court orders are required to be “served upon the parties affected.”224 Moreover,
service may be made personally or by mail.225 And, “[p]ersonal service is complete upon actual delivery [of
the order.]”226 This court’s temporary restraining order was received only on October 19, 2011, or a day
after the PEACe Bonds had matured and the 20% final withholding tax on the interest income from the same
was withheld.
Publication of news reports in the print and broadcast media, as well as on the internet, is not a recognized
mode of service of pleadings, court orders, or processes. Moreover, the news reports227 cited by petitioners
were posted minutes before the close of office hours or late in the evening of October 18, 2011, and they did
not give the exact contents of the temporary restraining order.
“[O]ne cannot be punished for violating an injunction or an order for an injunction unless it is shown that
such injunction or order was served on him personally or that he had notice of the issuance or making of
such injunction or order.”228
At any rate, “[i]n case of doubt, a withholding agent may always protect himself or herself by withholding
the tax due”229 and return the amount of the tax withheld should it be finally determined that the income
paid is not subject to withholding.230 Hence, respondent Bureau of Treasury was justified in withholding the
11
amount corresponding to the 20% final withholding tax from the proceeds of the PEACe Bonds, as it received
this court’s temporary restraining order only on October 19, 2011, or the day after this tax had been
withheld.
Respondents’ retention of the
amounts withheld is a defiance of
the temporary restraining order
Nonetheless, respondents’ continued failure to release to petitioners the amount corresponding to the 20%
final withholding tax in order that it may be placed in escrow as directed by this court constitutes a defiance
of this court’s temporary restraining order.231
The temporary restraining order is not moot. The acts sought to be enjoined are not fait accompli. For an
act to be considered fait accompli, the act must have already been fully accomplished and consummated.232
It must be irreversible, e.g., demolition of properties,233 service of the penalty of imprisonment,234 and
hearings on cases.235 When the act sought to be enjoined has not yet been fully satisfied, and/or is still
continuing in nature,236 the defense of fait accompli cannot prosper.
The temporary restraining order enjoins the entire implementation of the 2011 BIR Ruling that constitutes
both the withholding and remittance of the 20% final withholding tax to the Bureau of Internal Revenue.
Even though the Bureau of Treasury had already withheld the 20% final withholding tax237 when it received
the temporary restraining order, it had yet to remit the monies it withheld to the Bureau of Internal
Revenue, a remittance which was due only on November 10, 2011.238 The act enjoined by the temporary
restraining order had not yet been fully satisfied and was still continuing.
Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001 which prescribes to national government
agencies such as the Bureau of Treasury the procedure for the remittance of all taxes it withheld to the
Bureau of Internal Revenue, a national agency shall file before the Bureau of Internal Revenue a Tax
Remittance Advice (TRA) supported by withholding tax returns on or before the 10th day of the following
month after the said taxes had been withheld.240 The Bureau of Internal Revenue shall transmit an original
copy of the TRA to the Bureau of Treasury,241 which shall be the basis for recording the remittance of the tax
collection.242 The Bureau of Internal Revenue will then record the amount of taxes reflected in the TRA as
tax collection in the Journal of Tax Remittance by government agencies based on its copies of the TRA.243
Respondents did not submit any withholding tax return or TRA to prove that the 20% final withholding tax
was indeed remitted by the Bureau of Treasury to the Bureau of Internal Revenue on October 18, 2011.
Respondent Bureau of Treasury’s Journal Entry Voucher No. 11-10-10395244 dated October 18, 2011
submitted to this court shows:
Account Code Debit Amount Credit Amount
Bonds Payable-L/T, Dom-Zero 442-360 35,000,000,000.00
Coupon T/Bonds
(Peace Bonds) – 10 yr
Sinking Fund-Cash (BSF) 198-001 30,033,792,203.59
Due to BIR 412-002 4,966,207,796.41

To record redemption of 10yr
Zero coupon (Peace Bond) net of
the 20% final withholding tax
pursuant to BIR Ruling No. 378-
2011, value date, October 18,
2011 per BTr letter authority and
BSP Bank Statements.
The foregoing journal entry, however, does not prove that the amount of P4,966,207,796.41, representing
the 20% final withholding tax on the PEACe Bonds, was disbursed by it and remitted to the Bureau of
Internal Revenue on October 18, 2011. The entries merely show that the monies corresponding to 20% final
withholding tax was set aside for remittance to the Bureau of Internal Revenue.
We recall the November 15, 2011 resolution issued by this court directing respondents to “show cause why
they failed to comply with the [TRO]; and [to] comply with the [TRO] in order that petitioners may place the
corresponding funds in escrow pending resolution of the petition.”245 The 20% final withholding tax was
effectively placed in custodia legis when this court ordered the deposit of the amount in escrow. The Bureau
of Treasury could still release the money withheld to petitioners for the latter to place in escrow pursuant to
this court’s directive. There was no legal obstacle to the release of the 20% final withholding tax to
petitioners.
Congressional appropriation is not required for the servicing of public debts in view of the automatic
appropriations clause embodied in Presidential Decree Nos. 1177 and 1967.
Section 31 of Presidential Decree No. 1177 provides:
Section 31. Automatic Appropriations. All expenditures for (a) personnel retirement premiums,
government service insurance, and other similar fixed expenditures, (b) principal and interest on public debt,
(c) national government guarantees of obligations which are drawn upon, are automatically appropriated:
provided, that no obligations shall be incurred or payments made from funds thus automatically appropriated
except as issued in the form of regular budgetary allotments.
Section 1 of Presidential Decree No. 1967 states:
Section 1. There is hereby appropriated, out of any funds in the National Treasury not otherwise
appropriated, such amounts as may be necessary to effect payments on foreign or domestic loans, or foreign
or domestic loans whereon creditors make a call on the direct and indirect guarantee of the Republic of the
Philippines, obtained by:
a. the Republic of the Philippines the proceeds of which were relent to government-owned or controlled
corporations and/or government financial institutions;
b. government-owned or controlled corporations and/or government financial institutions the proceeds of
which were relent to public or private institutions;
c. government-owned or controlled corporations and/or financial institutions and guaranteed by the Republic
of the Philippines;
12
12
d. other public or private institutions and guaranteed by government-owned or controlled corporations
and/or government financial institutions.
The amount of P35 billion that includes the monies corresponding to 20% final withholding tax is a lawful
and valid obligation of the Republic under the Government Bonds. Since said obligation represents a public
debt, the release of the monies requires no legislative appropriation.
Section 2 of Republic Act No. 245 likewise provides that the money to be used for the payment of
Government Bonds may be lawfully taken from the continuing appropriation out of any monies in the
National Treasury and is not required to be the subject of another appropriation legislation:
SEC. 2. The Secretary of Finance shall cause to be paid out of any moneys in the National Treasury not
otherwise appropriated, or from any sinking funds provided for the purpose by law, any interest falling due,
or accruing, on any portion of the public debt authorized by law. He shall also cause to be paid out of any
such money, or from any such sinking funds the principal amount of any obligations which have matured, or
which have been called for redemption or for which redemption has been demanded in accordance with
terms prescribed by him prior to date of issue . . . In the case of interest-bearing obligations, he shall pay
not less than their face value; in the case of obligations issued at a discount he shall pay the face value at
maturity; or if redeemed prior to maturity, such portion of the face value as is prescribed by the terms and
conditions under which such obligations were originally issued. There are hereby appropriated as a
continuing appropriation out of any moneys in the National Treasury not otherwise appropriated, such sums
as may be necessary from time to time to carry out the provisions of this section. The Secretary of Finance
shall transmit to Congress during the first month of each regular session a detailed statement of all
expenditures made under this section during the calendar year immediately preceding.
Thus, DOF Department Order No. 141-95, as amended, states that payment for Treasury bills and bonds
shall be made through the National Treasury’s account with the Bangko Sentral ng Pilipinas, to wit:
Section 38. Demand Deposit Account. – The Treasurer of the Philippines maintains a Demand Deposit
Account with the Bangko Sentral ng Pilipinas to which all proceeds from the sale of Treasury Bills and Bonds
under R.A. No. 245, as amended, shall be credited and all payments for redemption of Treasury Bills and
Bonds shall be charged.
Regarding these legislative enactments ordaining an automatic appropriations provision for debt servicing,
this court has held:
Congress . . . deliberates or acts on the budget proposals of the President, and Congress in the exercise of
its own judgment and wisdom formulates an appropriation act precisely following the process established by
the Constitution, which specifies that no money may be paid from the Treasury except in accordance with an
appropriation made by law.
Debt service is not included in the General Appropriation Act, since authorization therefor already exists
under RA Nos. 4860 and 245, as amended, and PD 1967. Precisely in the light of this subsisting
authorization as embodied in said Republic Acts and PD for debt service, Congress does not concern itself
with details for implementation by the Executive, but largely with annual levels and approval thereof upon
due deliberations as part of the whole obligation program for the year. Upon such approval, Congress has
spoken and cannot be said to have delegated its wisdom to the Executive, on whose part lies the
implementation or execution of the legislative wisdom.246 (Citation omitted)
Respondent Bureau of Treasury had the duty to obey the temporary restraining order issued by this court,
which remained in full force and effect, until set aside, vacated, or modified. Its conduct finds no
justification and is reprehensible.247 chanrobleslaw
WHEREFORE, the petition for review and petitions-in-intervention are GRANTED. BIR Ruling Nos. 370-
2011 and DA 378-2011 are NULLIFIED.

Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued retention of the amount
corresponding to the 20% final withholding tax despite this court’s directive in the temporary restraining
order and in the resolution dated November 15, 2011 to deliver the amounts to the banks to be placed in
escrow pending resolution of this case.

Respondent Bureau of Treasury is hereby ORDERED to immediately release and pay to the bondholders the
amount corresponding to the 20% final withholding tax that it withheld on October 18, 2011.

13

Fidelity Savings and Mortgage Bank v. Cenzon, 184 SCRA 141
G.R. No. L-46208 April 5, 1990
FIDELITY SAVINGS AND MORTGAGE BANK, petitioner,
vs.
HON. PEDRO D. CENZON, in his capacity as Presiding Judge of the Court of First Instance of
Manila (Branch XL) and SPOUSES TIMOTEO AND OLIMPIA SANTIAGO, respondents.
REGALADO, J.:
The instant petition seeks the review, on pure questions of law, of the decision rendered by the Court of First
Instance of Manila (now Regional Trial Court), Branch XL, on December 3, 1976 in Civil Case No.
84800,1 ordering herein petitioner to pay private respondents the following amounts:
(a) P90,000.00 with accrued interest in accordance with Exhibits A and B until fully paid;
(b) P30,000,00 as exemplary damages; and
(c) P10,000.00 as and for attorney's fees.
The payment by the defendant Fidelity Savings and Mortgage Bank of the aforementioned sums of money
shall be subject to the Bank Liquidation Rules and Regulations embodied in the Order of the Court of First
Instance of Manila, Branch XIII, dated October 3, 1972, Civil Case No. 86005, entitled, "IN RE: Liquidation of
the Fidelity Savings Bank versus Central Bank of the Philippines, Liquidator."
With costs against the defendant Fidelity Savings and Mortgage Bank.
SO ORDERED.
Private respondents instituted this present action for a sum of money with damages against Fidelity Savings
and Mortgage Bank, Central Bank of the Philippines, Eusebio Lopez, Jr., Arsenio M. Lopez, Sr., Arsenio S.
Lopez, Jr., Bibiana E. Lacuna, Jose C. Morales, Leon P. Cusi, Pilar Y. Pobre-Cusi and Ernani A. Pacana. On
motion of herein private respondents, as plaintiffs, the amended complaint was dismissed without prejudice
against defendants Jose C. Morales, Leon P. Cusi, Pilar Y. Pobre-Cusi and Ernani A. Pacana. 2 In its aforesaid
decision of December 3, 1976, the court a quo dismissed the complaint as against defendants Central Bank
of the Philippines, Eusebio Lopez, Jr., Arsenio S. Lopez, Jr., Arsenio M. Lopez, Sr. and Bibiana S. Lacuna.
Back on August 10, 1973, the plaintiffs (herein private respondents) and the defendants Fidelity Savings and
Mortgage Bank (petitioner herein), Central Bank of the Philippines and Bibiana E. Lacuna had filed in said
case in the lower court a partial stipulation of facts, as follows:
COME NOW herein plaintiffs, SPOUSES TIMOTEO M. SANTIAGO and OLIMPIA R. SANTIAGO, herein
defendants FIDELITY SAVINGS AND MORTGAGE BANK and the CENTRAL BANK OF THE
14
14
PHILIPPINES, and herein defendant BIBIANA E. LACUNA, through their respective undersigned
counsel, and before this Honorable Court most respectfully submit the following Partial Stipulation
of Facts:
1. That herein plaintiffs are husband and wife, both of legal age, and presently residing at No. 480
C. de la Paz Street, Sta. Elena, Marikina, Rizal;
2. That herein defendant Fidelity Savings and Mortgage Bank is a corporation duly organized and
existing under and by virtue of the laws of the Philippines; that defendant Central Bank of the
Philippines is a corporation duly organized and existing under and by virtue of the laws of the
Philippines;
3. That herein defendant Bibiana E. Lacuna is of legal age and a resident of No. 42 East Lawin
Street, Philamlife Homes, Quezon City, said defendant was an assistant Vice-President of the
defendant fidelity Savings and Mortgage Bank,
4. That sometime on May 16, 1968, here in plaintiffs deposited with the defendant Fidelity Savings
Bank the amount of FIFTY THOUSAND PESOS (P50,000.00) under Savings Account No. 16-0536;
that likewise, sometime on July 6, 1968, herein plaintiff,- deposited with the defendant Fidelity
Savings and Mortgage Bank the amount of FIFTY THOUSAND PESOS (P50,000.00) under Certificate
of Time Deposit No. 0210; that the aggregate amount of deposits of the plaintiffs with the
defendant Fidelity Savings and Mortgage Bank is ONE HUNDRED THOUSAND PESOS
(P100,000.00);
5. That on February 18, 1969, the Monetary Board, after finding the report of the Superintendent
of Banks, that the condition of the defendant Fidelity Savings and Mortgage Bank is one of
insolvency, to be true, issued Resolution No. 350 deciding, among others, as follows:
1) To forbid the Fidelity Savings Bank to do business in the Philippines;
2) To instruct the Acting Superintendent of Banks to take charge, in the name of the
Monetary Board, of the Bank's assets
6. That pursuant to the above-cited instructions of the Monetary Board, the Superintendent of
Banks took charge in the name of the Monetary Board, of the assets of defendant Fidelity Savings
Bank on February 19, 1969; and that since that date up to this date, the Superintendent of Banks
(now designated as Director, Department of Commercial and Savings Banks) has been taking
charge of the assets of defendant Fidelity Savings and Mortgage Bank;
7. That sometime on October 10, 1969 the Philippine Deposit Insurance Corporation paid the
plaintiffs the amount of TEN THOUSAND PESOS (P10,000.00) on the aggregate deposits of
P100,000.00 pursuant to Republic Act No. 5517, thereby leaving a deposit balance of P90,000.00;
8. That on December 9, 1969, the Monetary Board issued its Resolution No. 2124 directing the
liquidation of the affairs of defendant Fidelity Savings Bank;
 9. That on January 25, 1972, the Solicitor General of the Philippines filed a "Petition for Assistance
and Supervision in Liquidation" of the affairs of the defendant Fidelity Savings and Mortgage Bank
with the Court of First Instance of Manila, assigned to Branch XIII and docketed as Civil Case No.
86005;
10. That on October 3, 1972, the Liquidation Court promulgated the Bank Rules and Regulations to
govern the liquidation of the affairs of defendant Fidelity Savings and Mortgage Bank, prescribing
the rules on the conversion of the Bank's assets into money, processing of claims against it and the
manner and time of distributing the proceeds from the assets of the Bank;
11. That the liquidation proceedings has not been terminated and is still pending up to the present;
12. That herein plaintiffs, through their counsel, sent demand letters to herein defendants,
demanding the immediate payment of the aforementioned savings and time deposits.
WHEREFORE, it is respectfully prayed that the foregoing Partial Stipulation of Facts be approved by
this Honorable Court, without prejudice to the presentation of additional documentary or
testimonial evidence by herein parties.
Manila, Philippines, August 10, 1973. 3
Assigning error in the judgment of the lower court quoted ab antecedents, petitioner raises two questions of
law, to wit:
1. Whether or not an insolvent bank like the Fidelity Savings and Mortgage Bank may be adjudged to pay
interest on unpaid deposits even after its closure by the Central Bank by reason of insolvency without
violating the provisions of the Civil Code on preference of credits; and
2. Whether or not an insolvent bank like the Fidelity Savings and Mortgage Bank may be adjudged to pay
moral and exemplary damages, attorney's fees and costs when the insolvency is caused b the anomalous
real estate transactions without violating the provisions of the Civil Code on preference of credits.
There is merit in the petition.
It is settled jurisprudence that a banking institution which has been declared insolvent and subsequently
ordered closed by the Central Bank of the Philippines cannot be held liable to pay interest on bank deposits
which accrued during the period when the bank is actually closed and non-operational.
In The Overseas Bank of Manila vs. Court of Appeals and Tony D. Tapia, 4
we held that:
It is a matter of common knowledge, which We take judicial notice of, that what enables a bank to
pay stipulated interest on money deposited with it is that thru the other aspects of its operation it
is able to generate funds to cover the payment of such interest. Unless a bank can lend money,
engage in international transactions, acquire foreclosed mortgaged properties or their proceeds and
generally engage in other banking and financing activities from which it can derive income, it is
inconceivable how it can carry on as a depository obligated to pay stipulated interest. Conventional
wisdom dictates this inexorable fair and just conclusion. And it can be said that all who deposit
money in banks are aware of such a simple economic proposition. Consequently, it should be
deemed read into every contract of deposit with a bank that the obligation to pay interest on the
15
deposit ceases the moment the operation of the bank is completely suspended by the duly
constituted authority, the Central Bank.
This was reiterated in the subsequent case of The Overseas Bank of Manila vs. The Hon. Court of Appeals
and Julian R. Cordero. 5 and in the recent cases of Integrated Realty Corporation, et al. vs. Philippine
National Bank, et al. and the Overseas Bank of Manila vs. Court of appeals, et al. 6
From the aforecited authorities, it is manifest that petitioner cannot be held liable for interest on bank
deposits which accrued from the time it was prohibited by the Central Bank to continue with its banking
operations, that is, when Resolution No. 350 to that effect was issued on February 18, 1969.
The order, therefore, of the Central Bank as receiver/liquidator of petitioner bank allowing the claims of
depositors and creditors to earn interest up to the date of its closure on February 18, 1969, 7 in line with the
doctrine laid down in the jurisprudence above cited.
Although petitioner's formulation of the second issue that it poses is slightly inaccurate and defective, we
likewise find the awards of moral and exemplary damages and attorney's fees to be erroneous.
The trial court found, and it is not disputed, that there was no fraud or bad faith on the part of petitioner
bank and the other defendants in accepting the deposits of private respondents. Petitioner bank could not
even be faulted in not immediately returning the amount claimed by private respondents considering that
the demand to pay was made and Civil Case No. 84800 was filed in the trial court several months after the
Central Bank had ordered petitioner's closure. By that time, petitioner bank was no longer in a position to
comply with its obligations to its creditors, including herein private respondents. Even the trial court had to
admit that petitioner bank failed to pay private respondents because it was already insolvent. 8 Further, this
case is not one of the specified or analogous cases wherein moral damages may be recovered. 9
There is no valid basis for the award of exemplary damages which is supposed to serve as a warning to other
banks from dissipating their assets in anomalous transactions. It was not proven by private respondents,
and neither was there a categorical finding made by the trial court, that petitioner bank actually engaged in
anomalous real estate transactions. The same were raised only during the testimony of the bank examiner of
the Central Bank, 10 but no documentary evidence was ever presented in support thereof. Hence, it was error
for the lower court to impose exemplary damages upon petitioner bank since, in contracts, such sanction
requires that the offending party acted in a wanton, fraudulent, reckless, oppressive or malevolent
manner. 11 Neither does this case present the situation where attorney's fees may be awarded. 12
In the absence of fraud, bad faith, malice or wanton attitude, petitioner bank may, therefore, not be held
responsible for damages which may be reasonably attributed to the non-performance of the
obligation. 13 Consequently, we reiterate that under the premises and pursuant to the aforementioned
provisions of law, it is apparent that private respondents are not justifiably entitled to the payment of moral
and exemplary damages and attorney's fees.
While we tend to agree with petitioner bank that private respondents' claims should he been filed in the
liquidation proceedings in Civil Case No. 86005, entitled "In Re: Liquidation of the Fidelity Savings and
Mortgage Bank," pending before Branch XIII of the then Court of First Instance of Manila, we do not believe
that the decision rendered in the instant case would be violative of the legal provisions on preference and
concurrence of credits. As the trial court puts it:
. . . But this order of payment should not be understood as raising these deposits to the category
of preferred credits of the defendant Fidelity Savings and Mortgage Bank but shall be paid in

accordance with the Bank Liquidation Rules and Regulations embodied in the Order of the. Court of
First Instance of Manila, Branch XIII dated October 3, 1972 (Exh. 3). . . . 14
WHEREFORE, the judgment appealed from is hereby MODIFIED. Petitioner Fidelity Savings and Mortgage
Bank is hereby declared liable to pay private respondents Timoteo and Olimpia Santiago the sum of
P90,000.00, with accrued interest in accordance with the terms of Savings Account Deposit No. 16-0536
(Exhibit A) and Certificate of Time Deposit No. 0210 (Exhibit B) until February 18, 1969. The awards for
moral and exemplary damages, and attorney's fees are hereby DELETED. No costs.
SO ORDERED.
[G.R. No. 128703. October 18, 2000.]
TEODORO BAÑAS, * C. G. DIZON CONSTRUCTION, INC., and CENEN DIZON, Petitioners, v. ASIA
PACIFIC FINANCE CORPORATION, 1 substituted by INTERNATIONAL CORPORATE BANK now
known as UNION BANK OF THE PHILIPPINES, Respondent.
DECISION
BELLOSILLO, J.:
C. G. DIZON CONSTRUCTION INC. and CENEN DIZON in this petition for review seek the reversal of the 24
July 1996 Decision of the Court of Appeals dismissing their appeal for lack of merit and affirming in toto the
decision of the trial court holding them liable to Asia Pacific Finance Corporation in the amount of P87,637.50
at 14% interest per annum in addition to attorney’s fees and costs of suit, as well as its 21 March 1997
Resolution denying reconsideration thereof. 2
On 20 March 1981 Asia Pacific Finance Corporation (ASIA PACIFIC for short) filed a complaint for a sum of
money with prayer for a writ of replevin against Teodoro Bañas, C. G. Dizon Construction and Cenen Dizon.
Sometime in August 1980 Teodoro Bañas executed a Promissory Note in favor of C. G. Dizon Construction
whereby for value received he promised to pay to the order of C. G. Dizon Construction the sum of
P390,000.00 in installments of "P32,500.00 every 25th day of the month starting from September 25, 1980
up to August 25, 1981." 3
Later, C. G. Dizon Construction endorsed with recourse the Promissory Note to ASIA PACIFIC, and to secure
payment thereof, C. G. Dizon Construction, through its corporate officers, Cenen Dizon, President, and
Juliette B. Dizon, Vice President and Treasurer, executed a Deed of Chattel Mortgage covering three (3)
heavy equipment units of Caterpillar Bulldozer Crawler Tractors with Model Nos. D8-14A, D8-2U and D8H in
favor of ASIA PACIFIC. 4 Moreover, Cenen Dizon executed on 25 August 1980 a Continuing Undertaking
wherein he bound himself to pay the obligation jointly and severally with C. G. Dizon Construction. 5
In compliance with the provisions of the Promissory Note, C. G. Dizon Construction made the following
installment payments to ASIA PACIFIC: P32,500.00 on 25 September 1980, P32,500.00 on 27 October 1980
and P65,000.00 on 27 February 1981, or a total of P130,000.00. Thereafter, however, C. G. Dizon
Construction defaulted in the payment of the remaining installments, prompting ASIA PACIFIC to send a
Statement of Account to Cenen Dizon for the unpaid balance of P267,737.50 inclusive of interests and
charges, and P66,909.38 representing attorney’s fees. As the demand was unheeded, ASIA PACIFIC sued
Teodoro Bañas, C. G. Dizon Construction and Cenen Dizon. s virtua1 1aw 1ibrary
16
16
While defendants (herein petitioners) admitted the genuineness and due execution of the Promissory Note,
the Deed of Chattel Mortgage and the Continuing Undertaking, they nevertheless maintained that these
documents were never intended by the parties to be legal, valid and binding but a mere subterfuge to
conceal the loan of P390,000.00 with usurious interests.
Defendants claimed that since ASIA PACIFIC could not directly engage in banking business, it proposed to
them a scheme wherein plaintiff ASIA PACIFIC could extend a loan to them without violating banking laws:
first, Cenen Dizon would secure a promissory note from Teodoro Bañas with a face value of P390,000.00
payable in installments; second, ASIA PACIFIC would then make it appear that the promissory note was sold
to it by Cenen Dizon with the 14% usurious interest on the loan or P54,000.00 discounted and collected in
advance by ASIA PACIFIC; and, lastly, Cenen Dizon would provide sufficient collateral to answer for the loan
in case of default in payment and execute a continuing guaranty to assure continuous and prompt payment
of the loan. Defendants also alleged that out of the loan of P390,000.00 defendants actually received only
P329,185.00 after ASIA PACIFIC deducted the discounted interest, service handling charges, insurance
premium, registration and notarial fees.
Sometime in October 1980 Cenen Dizon informed ASIA PACIFIC that he would be delayed in meeting his
monthly amortization on account of business reverses and promised to pay instead in February 1981. Cenen
Dizon made good his promise and tendered payment to ASIA PACIFIC in an amount equivalent to two (2)
monthly amortizations. But ASIA PACIFIC attempted to impose a 3% interest for every month of delay,
which he flatly refused to pay for being usurious. s virtua1 1aw 1ibrary
Afterwards, ASIA PACIFIC allegedly made a verbal proposal to Cenen Dizon to surrender to it the ownership
of the two (2) bulldozer crawler tractors and, in turn, the latter would treat the former’s account as closed
and the loan fully paid. Cenen Dizon supposedly agreed and accepted the offer. Defendants averred that the
value of the bulldozer crawler tractors was more than adequate to cover their obligation to ASIA PACIFIC.
Meanwhile, on 21 April 1981 the trial court issued a writ of replevin against defendant C. G. Dizon
Construction for the surrender of the bulldozer crawler tractors subject of the Deed of Chattel Mortgage. Of
the three (3) bulldozer crawler tractors, only two (2) were actually turned over by defendants — D8-14A and
D8-2U — which units were subsequently foreclosed by ASIA PACIFIC to satisfy the obligation. D8-14A was
sold for P120,000.00 and D8-2U for P60,000.00 both to ASIA PACIFIC as the highest bidder.
During the pendency of the case, defendant Teodoro Bañas passed away, and on motion of the remaining
defendants, the trial court dismissed the case against him. On the other hand, ASIA PACIFIC was substituted
as party plaintiff by International Corporate Bank after the disputed Promissory Note was assigned and/or
transferred by ASIA PACIFIC to International Corporate Bank. Later, International Corporate Bank merged
with Union Bank of the Philippines. As the surviving entity after the merger, and having succeeded to all the
rights and interests of International Corporate Bank in this case, Union Bank of the Philippines was
substituted as a party in lieu of International Corporate Bank. 6
On 25 September 1992 the Regional Trial Court ruled in favor of ASIA PACIFIC holding the defendants jointly
and severally liable for the unpaid balance of the obligation under the Promissory Note in the amount of
P87,637.50 at 14% interest per annum, and attorney’s fees equivalent to 25% of the monetary award. 7
On 24 July 1996 the Court of Appeals affirmed in toto the decision of the trial court thus —
Defendant-appellants’ contention that the instruments were executed merely as a subterfuge to skirt
banking laws is an untenable defense. If that were so then they too were parties to the illegal scheme. Why
should they now be allowed to take advantage of their own knavery to escape the liabilities that their own
chicanery created?
Defendant-appellants also want us to believe their story that there was an agreement between them and the
plaintiff-appellee that if the former would deliver their 2 bulldozer crawler tractors to the latter, the
defendant-appellants’ obligation would fully be extinguished. Again, nothing but the word that comes out
between the teeth supports such story. Why did they not write down such an important agreement? Is it
believable that seasoned businessmen such as the defendant-appellant Cenen G. Dizon and the other
officers of the appellant corporation would deliver the bulldozers without a receipt of acquittance from the
plaintiff-appellee . . . In our book, that is not credible. s virtua1 1aw 1ibrary
The pivotal issues raised are: (a) Whether the disputed transaction between petitioners and ASIA PACIFIC
violated banking laws, hence, null and void; and (b) Whether the surrender of the bulldozer crawler tractors
to respondent resulted in the extinguishment of petitioners’ obligation.
On the first issue, petitioners insist that ASIA PACIFIC was organized as an investment house which could
not engage in the lending of funds obtained from the public through receipt of deposits. The disputed
Promissory Note, Deed of Chattel Mortgage and Continuing Undertaking were not intended to be valid and
binding on the parties as they were merely devices to conceal their real intention which was to enter into a
contract of loan in violation of banking laws.
We reject the argument. An investment company refers to any issuer which is or holds itself out as being
engaged or proposes to engage primarily in the business of investing, reinvesting or trading in securities. 8
As defined in Sec. 2, par. (a), of the Revised Securities Act, 9 securities "shall include . . . commercial papers
evidencing indebtedness of any person, financial or non-financial entity, irrespective of maturity, issued,
endorsed, sold, transferred or in any manner conveyed to another with or without recourse, such as
promissory notes . . ." Clearly, the transaction between petitioners and respondent was one involving not a
loan but purchase of receivables at a discount, well within the purview of "investing, reinvesting or trading in
securities" which an investment company, like ASIA PACIFIC, is authorized to perform and does not
constitute a violation of the General Banking Act. 10 Moreover, Sec. 2 of the General Banking Act provides in
part —
SECTION 2. Only entities duly authorized by the Monetary Board of the Central Bank may engage in the
lending of funds obtained from the public through the receipt of deposits of any kind, and all entities
regularly conducting such operations shall be considered as banking institutions and shall be subject to the
provisions of this Act, of the Central Bank Act, and of other pertinent laws (Emphasis supplied).
Indubitably, what is prohibited by law is for investment companies to lend funds obtained from the public
through receipts of deposit, which is a function of banking institutions. But here, the funds supposedly "lent"
to petitioners have not been shown to have been obtained from the public by way of deposits, hence, the
inapplicability of banking laws.
On petitioners’ submission that the true intention of the parties was to enter into a contract of loan, we have
examined the Promissory Note and failed to discern anything therein that would support such theory. On the
contrary, we find the terms and conditions of the instrument clear, free from any ambiguity, and expressive
of the real intent and agreement of the parties. We quote the pertinent portions of the Promissory Note —
FOR VALUE RECEIVED, I/We, hereby promise to pay to the order of C.G. Dizon Construction, Inc. the sum of
THREE HUNDRED NINETY THOUSAND ONLY (P390,000.00), Philippine Currency in the following manner: s
virtual 1aw library
P32,500.00 due every 25th of the month starting from September 25, 1980 up to August 25, 1981.
I/We agree that if any of the said installments is not paid as and when it respectively falls due, all the
installments covered hereby and not paid as yet shall forthwith become due and payable at the option of the
holder of this note with interest at the rate of 14% per annum on each unpaid installment until fully paid.
If any amount due on this note is not paid at its maturity and this note is placed in the hands of an attorney
17
for collection, I/We agree to pay in addition to the aggregate of the principal amount and interest due, a sum
equivalent to TEN PERCENT (10%) thereof as Attorney’s fees, in case no action is filed, otherwise, the sum
will be equivalent to TWENTY FIVE (25%) of the said principal amount and interest due . . .
Makati, Metro Manila, August 25, 1980.
(Sgd.) Teodoro Bañas
ENDORSED TO ASIA PACIFIC FINANCE CORPORATION WITH RECOURSE, C.G. DIZON CONSTRUCTION, INC.
By: (Sgd.) Cenen Dizon (Sgd.) Juliette B. Dizon
President VP/Treasurer
Likewise, the Deed of Chattel Mortgage and Continuing Undertaking were duly acknowledged before a notary
public and, as such, have in their favor the presumption of regularity. To contradict them there must be
clear, convincing and more than merely preponderant evidence. In the instant case, the records do not show
even a preponderance of evidence in favor of petitioners’ claim that the Deed of Chattel Mortgage and
Continuing Undertaking were never intended by the parties to be legal, valid and binding. Notarial
documents are evidence of the facts in clear and unequivocal manner therein expressed. 11
Interestingly, petitioners’ assertions were based mainly on the self-serving testimony of Cenen Dizon, and
not on any other independent evidence. His testimony is not only unconvincing, as found by the trial court
and the Court of Appeals, but also self-defeating in light of the documents presented by respondent, i.e.,
Promissory Note, Deed of Chattel Mortgage and Continuing Undertaking, the accuracy, correctness and due
execution of which were admitted by petitioners. Oral evidence certainly cannot prevail over the written
agreements of the parties. The courts need only rely on the faces of the written contracts to determine their
true intention on the principle that when the parties have reduced their agreements in writing, it is presumed
that they have made the writings the only repositories and memorials of their true agreement. s virtua1
1aw 1ibrary
The second issue deals with a question of fact. We have ruled often enough that it is not the function of this
Court to analyze and weigh the evidence all over again, its jurisdiction being limited to reviewing errors of
law that might have been committed by the lower court. 12 At any rate, while we are not a trier of facts,
hence, not required as a rule to look into the factual bases of the assailed decision of the Court of Appeals,
we did so just the same in this case if only to satisfy petitioners that we have carefully studied and evaluated
the case, all too mindful of the tenacity and vigor with which the parties, through their respective counsel,
have pursued this case for nineteen (19) years.
Petitioners contend that the parties already had a verbal understanding wherein ASIA PACIFIC actually
agreed to consider petitioners’ account closed and the principal obligation fully paid in exchange for the
ownership of the two (2) bulldozer crawler tractors.
We are not persuaded. Again, other than the bare allegations of petitioners, the records are bereft of any
evidence of the supposed agreement. As correctly observed by the Court of Appeals, it is unbelievable that
the parties entirely neglected to write down such an important agreement. Equally incredulous is the fact
that petitioner Cenen Dizon, a seasoned businessman, readily consented to deliver the bulldozers to
respondent without a corresponding receipt of acquittance. Indeed, even the testimony of petitioner Cenen
Dizon himself negates the supposed verbal understanding between the parties —
Q: You said and is it not a fact that you surrendered the bulldozers to APCOR by virtue of the seizure order?
A: There was no seizure order. Atty. Carag during that time said if I surrender the two equipment, we might
finally close a deal if the equipment should come up to the balance of the loan. So I voluntarily surrendered,
I pulled them from the job site and returned them to APCOR . . .
 18

representing the unpaid balance on the Promissory Note, with interest at fourteen percent (14%) per annum
Q: You mentioned a certain Atty. Carag, who is he? computed from 20 March 1981 until fully paid, and fifteen percent (15%) of the principal obligation and
interests due by way of attorney’s fees. Costs against petitioners.
A: He was the former legal counsel of APCOR. They were handling cases. In fact, I talked with Atty. Carag,
we have a verbal agreement if I surrender the equipment it might suffice to pay off the debt so I did just
that (Emphasis ours). 13

In other words, there was no binding and perfected contract between petitioners and respondent regarding
the settlement of the obligation, but only a conditional one, a mere conjecture in fact, depending on whether
the value of the tractors to be surrendered would equal the balance of the loan plus interests. And since the
bulldozer crawler tractors were sold at the foreclosure sale for only P180,000.00, 14 which was not enough
to cover the unpaid balance of P267,637.50, petitioners are still liable for the deficiency.

Barring therefore a showing that the findings complained of are totally devoid of support in the records, or
that they are so glaringly erroneous as to constitute serious abuse of discretion, we see no valid reason to
discard them. More so in this case where the findings of both the trial court and the appellate court coincide
with each other on the matter.

With regard to the computation of petitioners’ liability, the records show that petitioners actually paid to
respondent a total sum of P130,000.00 in addition to the P180,000.00 proceeds realized from the sale of the
bulldozer crawler tractors at public auction. Deducting these amounts from the principal obligation of
P390,000.00 leaves a balance of P80,000.00, to which must be added P7,637.50 accrued interests and
charges as of 20 March 1981, or a total unpaid balance of P87,637.50 for which petitioners are jointly and
severally liable. Furthermore, the unpaid balance should earn 14% interest per annum as stipulated in the
Promissory Note, computed from 20 March 1981 until fully paid. s virtua1 1aw 1ibrary

On the amount of attorney’s fees which under the Promissory Note is equivalent to 25% of the principal
obligation and interests due, it is not, strictly speaking, the attorney’s fees recoverable as between the
attorney and his client regulated by the Rules of Court. Rather, the attorney’s fees here are in the nature of
liquidated damages and the stipulation therefor is aptly called a penal clause. s virtua1 1aw 1ibrary

It has been said that so long as such stipulation does not contravene the law, morals and public order, it is
strictly binding upon the obligor. It is the litigant, not the counsel, who is the judgment creditor entitled to
enforce the judgment by execution. 15

Nevertheless, it appears that petitioners’ failure to fully comply with their part of the bargain was not
motivated by ill will or malice, but due to financial distress occasioned by legitimate business reverses.
Petitioners in fact paid a total of P130,000.00 in three (3) installments, and even went to the extent of
voluntarily turning over to respondent their heavy equipment consisting of two (2) bulldozer crawler tractors,
all in a bona fide effort to settle their indebtedness in full. Article 1229 of the New Civil Code specifically
empowers the judge to equitably reduce the civil penalty when the principal obligation has been partly or
irregularly complied with. Upon the foregoing premise, we hold that the reduction of the attorney’s fees from
25% to 15% of the unpaid principal plus interests is in order.

Finally, while we empathize with petitioners, we cannot close our eyes to the overriding considerations of the
law on obligations and contracts which must be upheld and honored at all times. Petitioners have
undoubtedly benefited from the transaction; they cannot now be allowed to impugn its validity and legality
to escape the fulfillment of a valid and binding obligation.

WHEREFORE, no reversible error having been committed by the Court of Appeals, its assailed Decision of 24
July 1996 and its Resolution of 21 March 1997 are AFFIRMED. Accordingly, petitioners C.G. Construction Inc.
and Cenen Dizon are ordered jointly and severally to pay respondent Asia Pacific Finance Corporation,
substituted by International Corporate Bank (now known as Union Bank of the Philippines), P87,637.50

18
Central Bank of the Philippines v. CA, G.R. No. 88353, May 8, 1992
G.R. No. 88353 May 8, 1992
CENTRAL BANK OF THE PHILIPPINES and HON. JOSE B. FERNANDEZ, petitioners,
vs.
HON. COURT OF APPEALS, RTC JUDGE TEOFILO GUADIZ, JR., PRODUCERS BANK OF THE
PHILIPPINES and PRODUCERS PROPERTIES, INC., respondents.
DAVIDE, JR., J.:
The common origin of these cases is Civil Case No. 17692 filed before Branch 147 (Makati) of the Regional
trail Court, National Capital Judicial Region and entitled Producers Bank of the Philippines and Producers
Properties, Inc. versus Central Bank of the Philippines, Jose B. Fernandez. Jr. and the Monetary Board. On
21 January 1991, this Court ordered the consolidation of G.R. No. 92943 with G.R. No. 88353. 1
The first case, G.R. No. 88353, is a petition for review on certiorari of the decision of 6 October 19882 and
the resolution of 17 May 19893 of the respondent Court of Appeals in C.A.-G.R. No. SP-13624. The impugned
decision upheld the 21 September 1987 Order of respondent Judge Teofilo Guadiz, Jr. in Civil Case No.
17692 granting the motion for issuance of a writ of preliminary injunction –– enjoining petitioners Central
Bank of the Philippines (CB), Mr. Jose B. Fernandez, Jr. and the Monetary Board, or any of their agencies
from implementing Monetary Board (MB) Resolutions No. 649 and No. 751, or from taking the threatened
appropriate alternative action –– and the 27 October 1987 Order in the same case denying petitioners'
motion to dismiss and vacate said injunction. The challenged resolution, on the other hand, denied
petitioners' motion for reconsideration of the 6 October 1988 decision.
The second case, G.R. No. 92943, is a petition for review directed principally against the 17 January 1990
decision of the respondent Court of Appeals in C.A.-G.R. SP No. 16972. The said decision dismissed the
petition therein filed and sustained the various Orders of the respondent Judge in Civil Case No. 17692, but
directed the plaintiffs therein to amend the amended complaint by stating in its prayer the specific amount of
damages which Producers Bank of the Philippines (PBP) claims to have sustained as a result of losses of
operation and the conservator's bank frauds and abuses; the Clerk of Court was also ordered to determine
the amount of filing fees which should be paid by the plaintiffs within the applicable prescriptive or
reglementary period. 4
The records of both cases reveal the following factual and procedural antecedents:
Petitioners claim that on 29 April 1983, during the regular examination of the PBP, CB examiners stumbled
upon some highly questionable loans which had been extended by the PBP management to several entities.
Upon further examination, it was discovered that these loans, totalling approximately P300 million, were
"fictitious" as they were extended, without collateral, to certain interests related to PBP owners themselves.
Said loans were deemed to be anomalous particularly because the total paid-in capital of PBP at that time
was only P 140.544 million. This means that the entire paid-in capital of the bank, together with some P160
million of depositors' money, was utilized by PBP management to fund these unsecured loans.
19
Sometime in August of the same year, at the height of the controversy surrounding the discovery of the
anomalous loans, several blind items about a family-owned bank in Binondo which granted fictitious loans to
its stockholders appeared in major newspapers. These news items triggered a bank-run in PBP which
resulted in continuous over-drawings on the bank's demand deposit account with the Central Bank; the over-
drawings reached P74.109 million by 29 August 1983. By 17 January 1984, PBP's overdraft with the CB
increased to P143.955 million, an indication of PBP's continuing inability to maintain that condition of
solvency and liquidity necessary to protect the interests of its depositors and creditors. Hence, on 20 January
1984, on the basis of the report submitted by the Supervision and Examination Sector, Department I of the
CB, the Monetary Board (MB), pursuant to its authority under Section 28-A of R.A. No. 265 and by virtue of
MB Board Resolution No. 164, placed PBP under conservatorship. 5
While PBP admits that it had no choice but to submit to the conservatorship, 6 it nonetheless requested that
the same be lifted by the CB. Consequently, the MB issued on 3 February 1984 Resolution No. 169 directing
the principal stockholders of PBP to increase its capital accounts by such an amount that would be necessary
for the elimination of PBP's negative net worth of P424 million. On 10 April 1984, CB senior deputy Governor
Gabriel Singson informed PBP that pursuant to MB Resolution No. 490 of 30 March 1984, the CB would be
willing to lift the conservatorship under the following conditions:
(a) PBP's unsecured overdraft with the Central Bank will be converted into an emergency
loan, to be secured by sufficient collateral, including but not limited to the Following
properties offered by PBP's principal stockholders:
i. 6 floors and other areas of the Producers Bank Bldg., at Paseo de
Roxas, owned by PBP;
ii. 15 floors of the Producers Bank Bldg., at Paseo de Roxas, Makati,
owned by the Producers Properties, Inc.;
iii. Manhattan Bldg. on Nueva Street, Binondo, Manila; and
iv. Producers Bank, Makati Branch Bldg. at Buendia Avenue, Makati;
(b) A comptroller for PBP and any number of bank examiners deemed necessary to
oversee PBP's operations shall be designated by the Central Bank, under terms of
reference to be determined by the Governor;
(c) A letter from the Management of PBP authorizing the Central Bank to automatically
return clearing items that would result in an overdraft in its Central Bank account shall be
submitted to the Central Bank.
On 27 April 1984, the MB adopted Resolution No. 584 approving the consolidation of PBP's other unsecured
obligations to the CB with its overdraft and authorizing the conversion thereof into an emergency loan. The
same resolution authorized the CB Governor to lift the conservatorship and return PBP's management to its
principal stockholders upon completion of the documentation and full collateralization of the emergency loan,
but directed PBP to pay the emergency loan in five (5) equal annual installments, with interest and penalty
rates at MRR 180 days plus 48% per annum, and liquidated damages of 5% for delayed payments.
 20

On 4 June 1984, PBP submitted a rehabilitation plan to the CB which proposed the transfer to PBP of three
(3) buildings owned by Producers Properties, Inc. (PPI), its principal stockholder and the subsequent
mortgage of said properties to the CB as collateral for the bank's overdraft obligation. 7 Although said
proposal was explored and discussed, no program acceptable to both the CB and PPI was arrived at because
of disagreements on certain matters such as interest rates, penalties and liquidated damages.
No other rehabilitation program was submitted by PBP for almost three (3) years; as a result thereof, its
overdrafts with the CB continued to accumulate. By the end of June 1987, the figure swelled to a
staggering P1.023 billion. Consequently, per Resolution No. 649 dated 3 July 1987, the CB Monetary Board
decided to approve in principle what it considered a viable rehabilitation program for PBP. The program had
these principal features:
Al. The Central Bank will assign in favor of the Philippine Deposit Insurance Corporation
(PDIC) its claim over the overdraft of PBP net of net peso differential arising from swap
transactions and interest thereon, up to the amount of the par value of the Producers
Properties, Inc. (PPI) shares of stock in PBP presently pledged to the Central Bank, and
PDIC will enter into a contract of dacion en pago with PBP and PPI whereby PDIC will
acquire 4,116,100 preferred shares of stock of PBP with a par value of P100 per share in
consideration for which PDIC will convey its rights over the overdraft assigned to it by the
Central Bank, in favor of PPI;
2. The balance of the overdraft of PBP, after the assignment to PDIC of a portion of such
overdraft referred to in Item I above, will also be assigned to PDIC and converted into
preferred shares of stock of PBP;
3. The interest on the overdraft of PBP will be reduced to 11.75% p.a. retroactively to the
date when the overdraft of PBP was incurred;
b. PBP shall submit additional collaterals to fully collateralize its
overdraft with the Central Bank;
c. PPI shall convey to PBP the remaining floors of the Producers Bank
Centre for a value of P143.54 million partly in payment of DOSRI loans
of P27.6 million, principal plus interest, and the balance of P115.94
million for shares of stock of PBP, P15.12 million common and P100.89
million preferred, with features as presently provided under PBP's
Articles of Incorporation and By-Laws;
d. PBP's Articles of Incorporation and By-Laws shall be amended so as
to create a special class of preferred, non-voting, cumulative, non-
participating shares of stock with a dividend rate of 12% which shall
be issued (i) in exchange for the PPI shares that will be conveyed to
PDIC under the dacion en pago mentioned in Item 1 above, (ii) in
consideration of the balance of PBP's overdraft assigned to PDIC under
Item 2 above, (iii) in consideration of the accrued interest on PBP's
overdraft assigned to PDIC and the unbooked penalties on legal
reserve deficiencies of PBP also assigned to PDIC. The said preferred
shares of stock shall be convertible into common voting shares of
stock upon the sale of such preferred shares to private parties at the
option of such parties. Proceeds from the sale of these shares of stock
shall be used to liquidate the advances made by the Central Bank to
PDIC by virtue of the various assignments under Items 1, 2, and 4
above. The said shares of stock shall not share in losses and other
capital adjustments representing reduction of capital accounts as
recommended by SES Department I incurred up to the date of the
issuance of such shares of stock;

4. The accrued interest on the overdraft of PBP, at the reduced rate approved in Item 3 e. PBP shall execute in favor of a trustee to be approved by the Central
above, as well as the unbooked penalties on legal reserve deficiencies of PBP will be Bank of mortgage trust indenture covering the assets presently
assigned in favor of PDIC and such amounts will be allowed to be converted into preferred mortgaged/pledged to Central Bank as collateral for the overdraft of
shares of stock of PBP; and PBP as well as additional collaterals to be submitted to fully
collateralize the overdraft of PBP, under which indenture PDIC as
holder of preferred shares of stocks, shall have the first lien and
5. The booking of valuation reserves will be allowed as follows: preference over the assets subject of the indenture in case of
insolvency, to the extent of the overdraft converted into preferred
3rd year — P31 million shares of stock, provided that PBP shall submit an opinion from the
4th year — 48 million Securities and Exchange Commission that such indenture is legal and
5th year — 67 million valid; and
6th year — 85 million
7th year — 105 million f. The principal stockholders of both PBP and PPI shall submit in writing
8th year — 124.61 million their conformity to the above conditions, with the effect that any
previous agreements to the contrary shall be set aside; and
subject to the following conditions:
B. To require PBP to submit to the Monetary Board for approval the identities of the new
a. Fresh capital of P200.0 million shall be put up, provided that a new stockholders and the new management which shall not be changed without the prior
group of stockholders shall hold at least 40% of the total outstanding approval of the Central Bank, it being understood that final approval of the above
voting shares of stock of PBP; rehabilitation plan shall depend entirely upon the acceptance by the Board of the new
stockholders and the new management; and to give PBP a period of two weeks after such

20
 final approval within which to implement the above rehabilitation plan 8 (Emphasis
supplied).
There being no response from both PBP and PPI on the proposed rehabilitation plan, the MB issued
Resolution No. 751 on 7 August 1987 instructing Central Bank management to advise the bank, through Mr.
Henry Co, as follows:
a. The Central Bank conservatorship over PBP may be lifted only after PBP shall have
identified the new group of stockholders who will put in new capital in PBP and after the
Monetary Board shall have considered such new stockholders as acceptable; and
b. The stockholders of PBP have to decide whether or not to accept the terms of the
rehabilitation plan as provided under Resolution
No. 649 dated July 3, 1987 within one week from receipt of notice hereof and if such
terms are not acceptable to them, the Central Bank will take appropriate alternative
action on the matter; . . .9
Additionally, in a letter dated 14 August 1987, the CB called the attention of the PBP directors and officers to
Section 107 of R.A. No. 265, as amended by Executive Order No. 289 dated 23 July 1987, which
provides, inter alia, that:
. . . any bank which incurs an overdrawing in its deposit account with the Central Bank
shall fully cover said overdraft not later than the next clearing day: Provided, further,
That settlement of clearing balances shall not be effected for any account which continue
(sic) to be overdrawn for five consecutive banking days until such time as the
overdrawing is fully covered or otherwise converted into an emergency loan or
advance pursuant to the provisions of Sec. 90 of this Act. Provided, Finally, That the
appropriate clearing office shall be officially notified of banks with overdrawn
balances. Banks with existing overdrafts with the Central Bank as of the effectivity of this
amended section shall within such period as may be prescribed by the Monetary Board,
either convert the overdraft into an emergency loan or advance with a plan of payment,
or settle such overdrafts, and that upon failure to so comply herewith, the Central Bank
shall take such action against the bank as may be warranted under this Act. (Emphasis
provided).
A. few days later, or on 27 August 1987, the PBP, without responding to the communications of the CB, filed
a complaint verified by its former board chairman, Henry Co, with the Regional Trial Court of Makati against
the CB, the MB and CB Governor Jose B. Fernandez, Jr. The complaint, docketed as Civil Case No.
17692, 10 devoted several pages to specific allegations in support of PBP's assertions that the
conservatorship was unwarranted, ill-motivated, illegal, utterly unnecessary and unjustified; that the
appointment of the conservator was arbitrary; that herein petitioners acted in bad faith; that the CB-
designated conservators committed bank frauds and abuses; that the CB is guilty of promissory estoppel;
and that by reason of the conservatorship, it suffered losses enumerated in paragraph 27 thereof, the total
quantifiable extent of which is P108,479,771.00, exclusive of loss of profits and loss of
goodwill. 11 It concluded with a prayer for:
. . . judicial review of Monetary Board Resolutions No. 649 dated July 3, 1987 and No.
751 dated 14 August, 1987 and that judgment be rendered nullifying the same and
ordering defendant Central Bank's conservator to restore the viability of PBP as mandated
by section 28-A of R.A. 265 and to fully repair the damages inflicted on PBP consisting of
21
losses of operation and the conservators' bank frauds and abuses, with costs against
defendants. (emphasis supplied).
and for:
. . . the issue of a temporary restraining order/preliminary injunction enjoining
defendants' coercion on PBP to accept the rehabilitation plan within one week or their
taking "appropriate alternative action" including exclusion of PBP from settlement of
clearing balances at the Central
Bank clearing house, pending judicial review of Monetary Board Resolutions No. 649
dated July 3, 1987 and No. 751 dated August 14,
1987 –– defendants not being above the law. 12
Only P102.00 was paid as docket fee.
The case was raffled to Branch 147 of said court which was then presided over by respondent Judge.
On 31 August 1987, respondent Judge issued a temporary restraining order and set the hearing of the
application for preliminary injunction on 9 September 1987. 13 On 11 September 1987, petitioner filed an
Opposition to the application for preliminary injunction. 14
Subsequently, on 21 September 1987, respondent Judge issued an Order granting the writ 15
and enjoining
defendant-petitioners or any of their agents from:
. . . implementing Monetary Board Resolutions Nos. 649 and 751 or from taking the
threatened "appropriate alternative action" including exclusion of plaintiff bank from
settlement of clearing balances at the Central Bank clearing house or any other action
that will disturb the status quo or the viability of plaintiff bank during the pendency of this
case conditioned upon the posting of a bond in the amount of P2,000,000.00.
On 25 October 1987, PBP filed the Amended Complaint 16 impleading PPI as an additional plaintiff. No new
allegations or causes of action for said plaintiff were made.
On 5 November 1987, petitioners filed a Motion to Dismiss the Amended Complaint. The motion contained a
prayer to vacate the injunction and raised the following grounds:
1) the amended complaint states no cause of action; MB Resolution Nos. 649 and 751 are
merely advisory, thus, neither effect impairment of plaintiffs' rights nor cause it prejudice,
loss or damage; furthermore, there is no basis for the averments on the legality or
illegality of the conservatorship since the amended complaint does not seek its
annulment;
2) the amended complaint is not authorized by the management of PBP; and
3) the lower court did not acquire jurisdiction over the case except to order the amended
complaint expunged from the records because the proper filing fee was not paid. 17

On 27 November 1987, the trial court, through the respondent Judge, handed down an Order denying the
motion to dismiss on the following grounds: (a) the amended complaint alleges ultimate facts showing that
plaintiff has a right and that such a right has been violated by defendant; the questioned MB Resolutions
were issued arbitrarily and with bad faith, "being a part of a scheme to divest plaintiff's present stockholders
of their control of PBP and to award the same to the PDIC or its unknown transferees"; and the averments of
legality or illegality of the conservatorship are relevant to the cause of action since the complaint seeks the
lifting of the conservatorship; (b) While it is true that under Section 28-A of the Central Bank Act the
conservator takes over the management of a bank, the Board of Directors of such bank is not prohibited
from filing a suit to lift the conservatorship and from questioning the validity of both the conservator's
fraudulent acts and abuses and its principal's (MB) arbitrary action; besides, PPI is now a party-plaintiff in
the action; and (c) plaintiffs have paid the correct filing fees since "the value of the case cannot be
estimated." 18
G.R. No. 88353
Unable to accept the above Order, herein petitioners CB and Jose B. Fernandez, Jr. filed with respondent
Court of Appeals on 11 January 1988 a petition for certiorari with preliminary injunction 19 to annul the 21
September and 27 November 1987 Orders of the respondent Judge, restrain the implementation of the same
and nullify the writ of preliminary injunction. They contend therein that:
1. The trial court's injunctive order and writ are anomalous and illegal because they are
directed against CB acts and measures which constitute no invasion of plaintiff's rights;
and
2. The complaint filed was, on its face, dismissible: (a) for failure to state a cause of
action, (b) for being unauthorized by the party in whose name it purports to have been
filed, and (c) for failure of the purported plaintiff to pay the required filing fees.
Confronted with the "threshold and decisive issue of whether the respondent Judge gravely abused his
discretion when he issued the Writ of Preliminary Injunction to enjoin petitioner from implementing Monetary
Board Resolutions Nos. 649 and 751 for having been issued arbitrarily and with bad faith," the respondent
Court promulgated the challenged decision dismissing the petition for lack of merit. 20 Respondent Court
ruled that the CB's sudden and untimely announcement of the conservatorship over PBP eroded the
confidence which the banking public had hitherto reposed on the bank and resulted in the bank-run; it then
concluded that when the CB "peremptorily and illtimely (sic) announced" the conservatorship, PBP was not
given an opportunity to be heard since the CB arbitrarily brushed aside administrative due process
notwithstanding PBP's having sufficiently established its inherent corporate right to autonomously perform its
banking activities without undue governmental interference that would in effect divest its stockholders of
their control over the operations of the bank." It further held that the challenged resolutions of the MB are
not just advisory in character "because the same sought to impose upon the respondent bank petitioners'
governmental acts that were specifically designed and executed to devise a scheme that would irreparably
divest from the stockholders of the respondent bank control of the same."
The motion filed by petitioners for the reconsideration of the above decision was denied by the respondent
Court in its Resolution of 17 May
1989. 21 On the issue of the non-payment of the correct docket fees, the said court, in ruling that the correct
amount was paid, said that "the instant case is incapable of pecuniary estimation because the value of the
losses incurred by the respondent bank cannot be calibrated nor pinned down to a specific amount in view of
the damage that may be caused by the appointment of a conservator to its goodwill and standing in the
community."
22
22
Undaunted by the adverse decision of the Court of Appeals, petitioners filed with this Court on 30 July 1989
the instant petition for review under Rule 45 of the Rules of Court. 22 It is alleged therein that the respondent
Court committed grave abuse of discretion in:
(1) Ignoring petitioners' contention that since PBP did not pay the correct filing fees, the
trial court did not acquire jurisdiction over the case; hence, pursuant to Manchester
Development Corp., et al. vs. Court of Appeals, et al., G.R. No. 75919, 7 May 1987, 23 the
complaint should have been dismissed for lack of jurisdiction on the part of the court;
(2) . . . ruling on the propriety or impropriety of the conservatorship as a basis for
determining the existence of a cause of action since the amended complaint does not
seek the annulment or lifting of the conservatorship;
(3) . . . not holding that the amended complaint should have been dismissed because it
was filed in the name of PBP without the authority of its conservator; and
(4) . . . not setting aside the Order of the trial court granting the issuance of a writ of
preliminary injunction which unlawfully restrained the CB from exercising its mandated
responsibilities and effectively compelled it to allow the PBP to continue incurring
overdrafts with it.
This petition was docketed as G.R. No. 88353.
On 19 July 1989, this Court required the respondents to comment on the petition. 24
In the Comment 25 filed on 9 October 1989, private respondents maintain that: (a) the issue of whether or
not they paid the correct filing fees involves a question of correctness of judgment, not grave abuse of
discretion; errors of judgment cannot be the subject of the present petition for certiorari; (b) the complaint
and the amended complaint state sufficient causes of action because they both contain specific allegations of
an illegal, unnecessary, disastrous and repressive conservatorship conducted contrary to its mandated
purpose, and breach of promissory estoppel; furthermore, the trial court committed no grave abuse of
discretion when it found that the questioned MB Resolutions were arbitrarily issued in contravention of the
due process clause of the Constitution; (c) the "Filing of the complaint without authority from the
conservator is an issue involving an error of judgment; besides, it would be ridiculous and absurd to require
such prior authorization from the conservator for no one expects him to sanction the filing of a suit against
his principal –– the CB; moreover, Rule 3 of the Rules of Court requires that every action must be
prosecuted and defended in the name of the real party in interest; besides, no administrative authority, even
the CB, can nullify judicial review of administrative action by requiring that only said administrative authority
or its designated conservator can file suit for judicial review of its actuation; and (d) the writ of preliminary
injunction was properly issued.
Petitioners filed a Reply 26
to the Comment on 3 November 1989.
In their Supplemental Comment, private respondents argue that the Manchester rule is not applicable in the
case at bar because what is primarily sought for herein is a writ of injunction and not an award for damages;
it is further alleged that an order denying a motion to dismiss is neither appealable nor be made the proper
subject of a petition for certiorari absent a clear showing of lack of jurisdiction or grave abuse of discretion.
On 15 February 1990, this Court resolved to give due course to the instant petition and require the parties to
simultaneously file their respective Memoranda, 27 which they complied with.
On 1 March 1990, petitioners filed an Urgent Motion 28 informing this Court of the fact that on 6 June 1989,
PBP, through Henry Co, proposed another rehabilitation plan which involved the infusion of fresh capital into
PBP by Banque Indosuez (Bangue) and the AFP-Retirement and Separation Benefits Systems (ARSBS).
Under said proposal, all existing law suits of PBP against the Central Bank and the PBP Conservator,
and vice-versa, shall be withdrawn upon approval and implementation of the plan. The plan was approved by
the Monetary Board in its Resolution No. 497 dated 23 June 1989. However, before the mechanics of the
rehabilitation plan could be threshed out among the parties, a "quarrel" developed between Henry and Luis
Co, who both have controlling interests in PBP. Luis accused Henry of "serious manipulations" in PBP and
both steadfastly refused to settle their differences notwithstanding efforts of mediators, including prospective
investors. Eventually, the prospective investors, in a letter dated 20 November 1989, advised the Central
Bank that they are withdrawing their offer to infuse capital in PBP and that they have terminated all
discussions with the Co family.
Petitioner further allege that with the withdrawal of Banque Indosuez and RSBS, the rehabilitation plan for
PBP is no longer feasible. Meanwhile, the bank's overdraft with the Central Bank continues to rise. As of 13
February 1990, PBP's overdraft with the CB increased to P1.233 billion. If the injunction is not lifted, PBP will
continually bleed the CB because of the former's liability to discharge its responsibilities under the law.
G.R. No. 92943
Pursuant to the powers and authority conferred upon her by the Central Bank, Atty. Leonida Tansinsin-
Encarnacion, in her capacity as conservator, instituted reforms aimed at making PBP more viable. With this
purpose in mind, she started reorganizing the bank's personnel and committees.
In order to prevent her from continuing with the reorganization, PBP filed on 24 October 1987, or after it
obtained a writ of preliminary injunction in Civil Case No. 17692, an Omnibus Motion asking the trial court
for an order:
(a) reinstating PBP officers to their original positions and restoring the bank's standing committees to their
respective compositions prior to said reorganization; (b) enjoining the lease of any portion of the bank's
space in Producers Bank Centre building to third parties and the relocation of departments/offices of PBP as
was contemplated; and (c) to hold, after an opportunity to be heard is given her, said conservator in
contempt of court for disobedience of and resistance to the writ of injunction. An opposition to the contempt
charge was later filed by said petitioner.
Subsequently, upon its inclusion as party-plaintiff via the amended complaint, PPI filed on 4 November 1987
a motion asking the lower court to order the Central Bank and its agents to restore to PPI the administration
of the three (3) buildings earlier assigned to PBP pending the lifting of the conservatorship. PPI claimed that
such transfer was necessary to prevent the rental income of said buildings being dissipated by the
conservator.
On 17 November 1987, both PBP and PPI filed a motion praying:
(1) that the CB Conservator be ordered to publish PBP's financial statement for the last
quarter of 1987 and every quarterly statement thereafter during the pendency of this
case, with the following claims of plaintiff PBP against the Central Bank, to wit:
23
(a) Interest in unconscionable rates of CB overdrawing illegally paid by
the CB conservators to CB –– now totaling P56,002,000.00,
(b) Penalties on reserve deficiencies illegally paid by the CB
conservators to CB –– now totaling P20,657,000.00,
(c) Penalties on reserve deficiencies not yet paid but which the
conservator has booked as liabilities –– now totaling P31,717,000.00,
(d) Losses of operation by the CB conservators from January 31, 1984
to October 31, 1987 –– now totaling P461,092,000.00
as "suspense" accounts; and (2) that the CB conservator be ordered to carry those
"suspense" accounts in the books of PBP.
The following day, respondent Judge issued an Order (a) requiring conservator Tansinsin-Encarnacion to
reinstate PBP officers to their original positions prior to the reorganization of the bank's personnel and
restore PBP's standing committees to their original compositions, and (b) restraining her from leasing out to
third parties any portion of PBP's space in the Producers Bank Centre building. However, respondent Judge
held in abeyance the contempt proceedings against the conservator pending her immediate compliance with
the Order.
On 22 December 1987, respondent Judge granted PPI's motion for an order transferring to it the
administration of the three (3) buildings assigned to PBP. A motion for reconsideration of this order was filed
by petitioners but was subsequently denied by respondent Judge in the Order of 4 October 1988.
A second Order, issued by respondent Judge on the same day, 22 December 1987, directed conservator
Tansinsin-Encarnacion to publish the financial statement of PBP in the manner prayed for in the aforesaid 17
November 1987 motion. The motion to reconsider this Order was denied by respondent Judge on 3 October
1988.
On several occasions thereafter, conservator Tansinsin-Encarnacion caused the publication of PBP's financial
statement as required by regulations, without, however, carrying the items enumerated by the trial court as
"suspense accounts." Consequently, two (2) contempt charges were filed against her, one for the 3 February
1988 publication in the Manila Standard of PBP's statement of condition as of 29 December 1987 and the
other for the 29 July 1988 publication in the Daily Globe of the bank's statement as of 30 June 1988.
Oppositions to both charges of contempt were filed.
On 9 November 1988, respondent Judge declared said conservator guilty of contempt of court on three (3)
counts and imposed upon her a fine of P1,000.00 for each count of contempt. The latter asked for
reconsideration of the order but the respondent Judge denied the same.
Another contempt charge against her was filed for publishing the statement of condition of PBP (as of 13
September 1988) in the 9 November 1988 issue of the Daily Globe without carrying the alleged "suspense
accounts." She was again found guilty as charged and her motion for reconsideration was denied. Finding no
other adequate relief, Tansinsin-Encarnacion filed with this Court on 11 January 1989 a petition
for certiorari against respondent Judge, Henry L. Co and the law firm of Quisumbing, Torres and Evangelista.
This case was docketed as G.R. No. 86526. She prays therein for judgment declaring respondent judge to be
without jurisdiction to entertain both the complaint and amended complaint in Civil Case No. 17692;

declaring null and void all his orders, specially the contempt orders; and finding respondent Judge and
respondent lawyers guilty of violating their respective oaths of office. 29
On 8 February 1989, this Court resolved to refer said petition to the Court of Appeals which docketed it as
C.A.-G.R.-SP No. 16972.
In her Memorandum submitted to the Court of Appeals, Tansinsin-Encarnacion alleged that: (1) respondent
Judge has no jurisdiction over Civil Case No. 17692 because its filing was not authorized by the petitioner or
the conservator in violation of Section 28-A of R.A. No. 265, as amended, it was filed after the ten (10) day
period prescribed by Section 29 of R.A. No. 265, as amended, and the correct docket fees were not paid;
(2) respondent Judge illegally ordered her to return to PPI the administration of the bank's three (3)
properties, contrary to his own writ of preliminary injunction and earlier order to make the bank viable, and
to publish the alleged "suspense accounts" contrary to Section 28-A of R.A. No. 265, as amended, the writ of
preliminary injunction and her constitutional right to silence; (3) respondent Judge erred in declaring her in
contempt of court notwithstanding his lack of jurisdiction over the case and failure to set any date for the
hearing and reception of evidence, in violation of her right to due process of law; and (4) respondents Judge
and lawyers are administratively liable for their grossly illegal actuations and for depriving the Government
of at least P13.2 million in filing fees. 30
In its decision dated 17 January 1990, the Court of Appeals (Twelfth Division) 31 dismissed the petition; while
finding the claim of lack of jurisdiction to be without merit, the said court nonetheless gave the following
exception:
. . . except that plaintiffs in Civil Case No. 17692, within 15 days from receipt of a copy of
this Decision, shall file the corresponding amendment to their amended complaint in said
case, stating a specific amount "to fully repair the damages inflicted on PBP consisting of
losses of operation and the conservator's bank frauds and abuses", in the prayer of their
amended complaint. Thereafter, the Clerk of Court of the lower court and/or his duly
authorized Docket Clerk of Court in charge, should determine the amount found due,
which should be paid by complainants within the applicable prescriptive or reglementary
period, failure of which said claims for damages shall be dismissed.
In disposing of the issues raised, respondent Court merely adopted with approval the ruling of the
respondent Judge on the question of jurisdiction and cited the decision of the Court of Appeals in C.A.-G.R.
SP No. 13624 (subject of G.R. No. 88353), sustaining the respondent Judge's ruling. As to the filing of the
complaint after the lapse of the 10-day period provided for in Section 29 of R.A. No. 265, it ruled that the
Section does not apply because the complaint essentially seeks to compel the conservator to perform his
duties and refers to circumstances and incidents which transpired after said 10-day period.
On the issue of lack of jurisdiction for non-payment of correct filing fees, to which an exception was
made in the dispositive portion, the respondent Court found the same to be "partly" meritorious. It
agreed with petitioner that while the other losses and damages sought to be recovered are
incapable of pecuniary estimation, the damages inflicted on PBP due to losses of operation and the
conservator's bank frauds and abuses were in fact pegged at P108,479,771.00 in paragraph 26 of
the amended complaint. This specific amount, however, should have been stated in the prayer of
the complaint. It also held that the Manchester case "has been legally construed in the subsequent
case of Sun Insurance Office Ltd. 32 and the case of Filipinas Shell Petroleum Corp. 33 to the effect
that applying the doctrine initiated in the case of Manchester, together with said subsequent
thereto (sic), plaintiffs in Civil Case No. 17692 should be given a reasonable time to amend their
24
24
complaint, more particularly, to state in their prayer in the amended complaint the specific amount
of damages . . ."
On the orders of contempt and the reasons therefor, respondent Court merely stated:
. . . Generally, when the court has jurisdiction over the subject matter and of the person,
decisions upon or questions pertinent to the cause are decisions within its jurisdiction,
and however, irregular or erroneous they may be, they cannot be corrected by certiorari
Whether the court's conclusions was based merely on speculations and conjecture, or on
a misapprehension of facts contrary to the documents and exhibits of the case, is not for
us to determine in a petition for certiorari wherein only issues of jurisdiction may be
raised. . . . Thus, the instant petition cannot prosper.
and opined that under the Rules of Court, a judgment of contempt may be questioned on appeal
and not on certiorari.
Finally, on the administrative liability of the respondent Judge and the lawyers, the respondent Court
declared the claim to be without merit.
Petitioner's motion to reconsider the decision having been denied in the 2 April 1990 Resolution of the
respondent Court, 34 she filed with this Court a petition under Rule 45 of the Rules of Court, which was
docketed as G.R. No. 92943. Petitioner Claims that respondent Court grossly erred in confirming/affirming
the allegedly void Orders of respondent Judge which denied the motion to dismiss the complaint and granted
the writ of preliminary injunction, restating in this regard the issues raised by the CB in G.R.
No. 88353, and in holding her in contempt of court on four occasions. As to the last ground, she asserts that
the Orders were issued in violation of the Rules of Court and infringed her right to due process since there
was no hearing on the motions for contempt, except for the third motion wherein respondent Judge
immediately ordered the movant to present evidence.
In their Comment, 35 filed in compliance with Our Resolution 21 May 1990, private respondents practically
reiterated the arguments in their Comment to the petition in G.R. No. 88353; in addition, more specifically
on the issue of contempt, they assert that while the motions for contempt were set for hearing, there is no
showing that the scheduled hearings actually took place. Besides, the remedy to question a contempt order
is an appeal; 36 since petitioner did not appeal the questioned orders, the same became final and
executory. 37
After petitioner filed a Reply and private respondents submitted their Rejoinder thereto, this Court gave due
course to the petition.
THE ISSUES
The basic issue in these cases is whether or not the respondent Court committed reversible error in affirming
the challenged Orders of the respondent Judge. This necessarily calls for a determination of whether or not
the respondent Judge committed grave abuse of discretion amounting to lack of jurisdiction:
(1) In not dismissing Civil Case No. 17692 on the following grounds: (a) lack of legal.
personality to bring the action as the same was filed in the name of the PBP without the
authority of the conservator;
 (b) failure of the complaint and amended complaint to state a cause of action; and (c)
non-payment of the correct amount of docket fee in violation of the rule enunciated
in Manchester Development Corp. vs. Court of Appeals, et al.;
(2) In granting the writ of preliminary injunction; and
(3) In issuing the assailed Orders in G.R. No. 92943.
DISCUSSION
We shall take up the issues sequentially.
1. PBP has been under conservatorship since 20 January 1984. Pursuant to Section 28-A of the Central Bank
Act, 38 a conservator, once appointed, takes over the management of the bank and assumes exclusive
powers to oversee every aspect of the bank's operations and affairs. Petitioners now maintain that this
power includes the authority to determine "whether or not to maintain suit in the bank's name." 39 The trial
court overruled this contention stating that the section alluded to "does not prohibit the Board of Directors of
a bank to file suit to lift the conservatorship over it, to question the validity of the conservator's fraudulent
acts and abuses and the arbitrary action of the conservator's principal –– the Monetary Board of the Central
Bank. The conservator cannot be expected to question his own continued existence and acts. He cannot be
expected to file suit to annul the action of his principal . . . or a suit that would point out the ill-motivation,
the disastrous effects of the conservatorship and the conservator's bank frauds and abuses as alleged in the
complaint." 40
Obviously, the trial court was of the impression that what was sought for in Civil Case No. 17692 is the lifting
of the conservatorship because it was arbitrarily and illegally imposed. While it may be true that the PBP
devoted the first 38 pages of its 47-page complaint and amended complaint to what it considers an
unwarranted, ill-motivated, illegal, unnecessary, and unjustified conservatorship, it, nevertheless, submitted
to the same. There is nothing in the amended complaint to reflect an unequivocal intention to ask for its
lifting. Of course, as subsequent maneuvers would show, PBP sought to accomplish the lifting thereof
through surreptitious means. That such action was not, on its face, filed to have the conservatorship lifted, is
best evidenced by PBP's prayer for a judgment "ordering defendant Central Bank's conservator to restore the
viability of PBP as mandated by Section 28-A of R.A. No. 265 . . ." 41 Unfortunately too, respondent Court
was easily misled into believing that the amended complaint sought the lifting of the conservatorship. Thus,
although the matter was not specifically raised in issue and clearly unnecessary for the determination of the
issues squarely raised, the respondent Court opined:
It is Our sober assessment that the respondent bank was not given an opportunity to be
heard when the Central Bank peremptorily and illtimely (sic) announced the appointment
of a conservatorship over the latter (bank) for which reason We believe that
administrative due process was arbitrarily brushed aside to the prejudice of the said bank.
...
If it were to lift the conservatorship because it was arbitrarily imposed, then the case should have been
dismissed on the grounds of prescription and lack of personality to bring the action. Per the fifth paragraph
of Section 29 of the Central Bank Act, as amended by Executive Order No. 289, the actions of the MB may
be assailed in an appropriate pleading filed by the stockholders of record representing the majority of the
capital stock within ten (10) days from receipt of notice by the said majority stockholders of the order
placing the bank under conservatorship. The pertinent portion of said paragraph reads as follows:
25
The provisions of any law to the contrary notwithstanding, the actions of the Monetary
Board under this Section, Section 28-A, and the second paragraph of section 34 of this
Act shall be final and executory, and can be set aside by a court only if there is convincing
proof, after hearing, that the action is plainly arbitrary and made in bad faith: Provided,
That the same is raised in an appropriate pleading filed by the stockholders of record
representing the majority of the capital stock within ten (10) days from the date the
receiver takes charge of the assets and liabilities of the bank or non-bank financial
intermediary performing quasi-banking functions or, in case of conservatorship or
liquidation, within ten (10) days from receipt of notice by the said majority stockholders
of said bank or non-bank financial intermediary of the order of its placement under
conservatorship or liquidation. . . .
The following requisites, therefore, must be present before the order of conservatorship may be set aside by
a court:
1. The appropriate pleading must be filed by the stockholders of record representing the
majority of the capital stock of the bank in the proper court;
2. Said pleading must be filed within ten (10) days from receipt of notice by said majority
stockholders of the order placing the bank under conservatorship; and
3. There must be convincing proof, after hearing, that the action is plainly arbitrary and
made in bad faith. 42
In the instant case, PBP was placed under conservatorship on 20 January 1984. The original complaint in
Civil Case No. 17692 was filed only on 27 August 1987, or three (3) years, seven (7) months and seven (7)
days later, long after the expiration of the 10-day period deferred to above. It is also beyond question that
the complaint and the amended complaint were not initiated by the stockholders of record representing the
majority of the capital stock. Accordingly, the order placing PBP under conservatorship had long become final
and its validity could no longer be litigated upon before the trial court. Applying the original provision of the
aforesaid Section 29 of the Central Bank Act, this Court, in Rural Bank of Lucena, Inc. vs. Arca, et
al., 43 ruled that:
Nor can the proceedings before Judge Arca be deemed a judicial review of the 1962
resolution No. 122 of the Monetary Board, if only because by law (Section 29, R.A. 265)
such review must be asked within 10 days from notice of the resolution of the Board.
Between the adoption of Resolution No. 122 and the challenged order of Judge Arca,
more than one year had elapsed. Hence, the validity of the Monetary Board's resolution
can no longer be litigated before Judge Arca, whose role under the fourth paragraph of
section 29 is confined to assisting and supervising the liquidation of the Lucena bank.
This rule is still good law notwithstanding the amendment to Section 29 which expands its scope by including
the action of the MB under Section 28-A of the Act on the appointment of a conservator.
It was precisely an awareness of the futility of any action to set aside the conservatorship which prompted
PBP to limit its action to a claim for damages and a prayer for an injunction against the implementation of
MB Resolution Nos. 649 and 751. However, to make it appear that it had a meritorious case and a valid
grievance against the Central Bank, it wandered long into the past and narrated a sad story of persecution,
oppression and injustice since the inception of the conservatorship –– obviously to gain the sympathy of the
court, which it eventually obtained.

The next crucial question that suggests itself for resolution is whether an action for damages arising from the
MB's act of placing the PBP under conservatorship and the acts of the conservator, and to enjoin the MB
from implementing resolutions related or incident to, or in connection with the conservatorship, may be
brought only for and in behalf of the PBP by the stockholders on record representing the majority of the
capital stock thereof or simply upon authority of its Board of Directors, or by its Chairman. We hereby rule
that as to the first kind of damages, the same may be claimed only if the MB's action is plainly arbitrary and
made in bad faith, and that the action therefor is inseparable from an action to set aside the
conservatorship. In other words, the same must be filed within ten (10) days from receipt of notice of the
order placing the bank under conservatorship. Otherwise, the provision of the fifth paragraph of Section 29
of the Central. Bank Act could be rendered meaningless and illusory by the bank's filing, beyond the
prescribed ten-day period, of an action ostensibly claiming damages but in reality questioning the
conservatorship. As to actions for the second kind of damages and for injunction to restrain the enforcement
of the CB's implementing resolutions, said fifth paragraph of Section 29 of the Central Bank Act, as
amended, equally applies because the questioned acts are but incidental to the conservatorship. The purpose
of the law in requiring that only the stockholders of record representing the majority of the capital stock may
bring the action to set aside a resolution to place a bank under conservatorship is to ensure that it be not
frustrated or defeated by the incumbent Board of Directors or officers who may immediately resort to court
action to prevent its implementation or enforcement. It is presumed that such a resolution is directed
principally against acts of said Directors and officers which place the bank in a state of continuing inability to
maintain a condition of liquidity adequate to protect the interest of depositors and creditors. Indirectly, it is
likewise intended to protect and safeguard the rights and interests of the stockholders. Common sense and
public policy dictate then that the authority to decide on whether to contest the resolution should be lodged
with the stockholders owning a majority of the shares for they are expected to be more objective in
determining whether the resolution is plainly arbitrary and issued in bad faith.
The original complaint in Civil Case No. 17692 was not initiated by the majority of the stockholders, hence it
should have been dismissed. However, confronted with this fatal flaw, counsel for PBP, through shrewd
maneuvering, attempted to save the day by impleading as co-plaintiff a corporation, the PPI, which was not
under conservatorship. Unfortunately, the maneuver was crudely and imperfectly executed. Except for the
inclusion of its name, nothing new was actually added to the original complaint in terms of causes of action
and reliefs for PPI. The amendment then was an exercise in futility. We cannot, however, subscribe to the
petitioner's view that: (a) once a bank is placed under conservatorship, no action may be filed on behalf of
the bank without prior approval of the conservator, and (b) since in this case such approval was not secured
prior to the filing of Civil Case No. 17692, the latter must also be dismissed on that ground. No such
approval is necessary where the action was instituted by the majority of the bank's stockholders. To contend
otherwise would be to defeat the rights of such stockholders under the fifth paragraph of Section 29 of the
Central Bank Act. It must be stressed here that a bank retains its juridical personality even if placed under
conservatorship; 44 it is neither replaced nor substituted by the conservator who, per Section 28-A of the
Central Bank Act, as amended by P.D. No. 1932, shall only:
. . . take charge of the assets, liabilities, and the management of that institution, collect
all monies and debts due said institution and exercise all powers necessary to preserve
the assets of the institution, reorganize the management thereof, and restore its viability.
He shall have the power to overrule, or revoke the actions of the previous management
and board of directors . . ., any provision of law to the contrary notwithstanding, and such
other powers as the Monetary Board shall deem necessary.
Even assuming for the sake of argument that the action was properly brought by an authorized party, the
same must nevertheless be dismissed for failure of the plaintiffs therein to pay the correct docket fees,
pursuant to Manchester Development Corp. vs. Court of Appeals, et al.; 45 the said case was decided by this
Court on 7 May 1987, exactly three (3) months and twenty (20) days before the filing of the original
26
26
complaint and five (5) months and eighteen (18) days before the filing of the Amended Complaint in Civil
Case No. 17692. We ruled therein that:
The Court acquires jurisdiction over any case only upon the payment of the prescribed
docket fee. An amendment of the complaint or similar pleading will not thereby vest
jurisdiction in the Court, much less the payment of the docket fee based on the amounts
sought in the amended pleading. The ruling in the Magaspi case [115 SCRA 193], in so
far as it is inconsistent with this pronouncement is overturned and reversed.
The respondent Judge, in ruling that PBP and PPI had paid the correct docket fee of P102.00, said that "the
value of the case cannot be estimated" since what is sought is an injunction against the enforcement of the
challenged resolutions of the MB; in short, the claim for damages is merely incidental. Upon the other hand,
respondent Court, in its Resolution of 17 May 1989 in C.A.-G.R. SP No. 13624, ruled that the case is
"incapable of pecuniary estimation" because the value of the losses incurred by the PBP "cannot be
calibrated nor pinned down to a specific amount in view of the damage that may be caused by the
appointment of a conservator to its goodwill and standing in the community." 46
Both conclusions are unfounded and are the result of a misapprehension of the allegations and causes of
action in both the complaint and amended complaint.
While PBP cleverly worded its complaint in Civil Case No. 17692 to make it appear as one principally for
injunction, deliberately omitting the claim for damages as a specific cause of action, a careful examination
thereof bears that the same is in reality an action for damages arising out of the alleged "unwarranted, ill-
motivated and illegal conservatorship," or a conservatorship which "was utterly unnecessary and
unjustified," and the "arbitrary" appointment of a conservator. 47 Thus, as stated earlier, it devoted the bulk
of its petition to detailed events, occurrences and transactions in support thereof and patiently enumerated
the losses it sustained and suffered. The pertinent portions of paragraph 27 of both the original and
amended complaints read as follows:
27. The record of the Central Bank –– conservatorship of PBP clearly shows that it was
responsible for the losses.
xxx xxx xxx
[Then follows an enumeration, from (a) to (u), of particular acts causing or resulting in
losses, most of which are specifically stated]
xxx xxx xxx
(v) Total of only the foregoing mentioned and only of those that can be quantified is
P108,479,771.00.
And that excludes loss of profits that PBP could have realized if that
disastrous conservatorship had not been imposed on it and loss of
goodwill.
 The causes for these abuses of the conservators are course graft and
corruption of the conservators aside from fault in the system which
denies private enterprise. (emphasis supplied)
xxx xxx xxx
These are the very damages referred to in the prayer:
. . . to fully repair the damages inflicted on PBP consisting of losses of operation and the
conservators' bank frauds and abuses, . . .
but not specified therein. To this Court's mind, this was done to evade the payment of the
corresponding filing fees which, as computed by petitioner on the basis alone of the specified losses
of P108,479,771.00, would amount to about P 437,000.00. 48 The PBP then clearly acted with
manifest bad faith in resorting to the foregoing clever strategy to avoid paying the correct filing
fees. We are thus constrained to reiterate Our pronouncements in the Manchester case:
The Court cannot close this case without making the observation that it frowns at the
practice of counsel who filed the original complaint in this case of omitting any
specification of the amount of damages in the prayer although the amount of over P78
million is alleged in the body of the complaint. This is clearly intended for no other
purpose than to evade the payment of the correct filing fees if not to mislead the docket
clerk in the assessment of the filing fee. . . .
The respondent Court itself, in its decision of 17 January 1990 in C.A-G.R. SP No. 16972, 49 confronted by
the same issue, but perhaps unaware of its Resolution of 17 May 1989 in C.A.-G.R. SP No. 13624
aforementioned, ruled that PBP and PPI are liable for the filing fees on the claim for damages. It even
directed PBP and PPI to file "the corresponding amendment to their amended complaint in said case stating a
specific amount 'to fully repair the damages inflicted on PBP consisting of losses of operation and the
conservator's bank frauds and abuses' . . .," after which the Clerk of Court of the lower court or his duly
authorized docket clerk should determine the amount found due, which said plaintiffs shall pay "within the
applicable prescriptive or reglementary period,
. . ." 50 The 17 January 1990 ruling, clearly reversing the earlier one, is of doubtful propriety in view of the
petition for review of the decision in C.A.-G.R. SP No. 13624 filed by the petitioner.
In granting PBP and PPI an opportunity to amend their amended complaint to reflect the specific amount of
damages in the prayer of their Amended Complaint, respondent Court took refuge under the rule laid down
in Sun Insurance Office, Ltd., et al. vs. Asuncion, et al. 51 and Filipinas Shell Petroleum Corp. vs. Court of
Appeals, et al. 52 Of course, it was erroneous for respondent Court to apply these last two (2) cases which
were decided by this Court three (3) months short of two (2) years after the promulgation of
the Manchester decision on 7 May 1987. Accordingly, since the original complaint in Civil Case No. 17692
was filed on 27 August 1987, the Manchester doctrine was the controlling and applicable law. The lower
court had no choice but to apply it when its attention was called by the petitioner.
Moreover, even granting for the sake of argument that Sun Insurance and Pilipinas Shell 53 may apply in this
case, We should not lose sight of the fact that in the former, this Court categorically stated:
1. It is not simply the filing of the complaint or appropriate initiatory pleading, but the
payment of the prescribed docket fee, that vests a trial court with jurisdiction over the
subject-matter or nature of the action. Where the filling of the initiatory pleading is not
27
accompanied by payment of the docket fee, the court may allow the payment of the fee
within a reasonable time but in no case beyond the applicable prescriptive or
reglementary period.
The prescriptive period therein mentioned refers to the period within which a specific action must be filed. It
means that in every case, the docket fee must be paid before the lapse of the prescriptive period. Chapter 3,
Title V, Book III of the Civil Code is the principal law governing prescription of actions.
There can be no question that in the instant case, PBP's claims for damages arise out of an injury to its
rights. Pursuant to Article 1146 of the Civil Code, the action therefor must be initiated within four (4) years
from the time the cause of action accrued. Since the damages arose out of the alleged unwarranted, ill-
motivated, illegal, unnecessary and unjustified conservatorship, the cause of action, if any, first accrued in
1984 and continued until 27 August 1987, when the original complaint was filed. Even if We are to assume
that the four-year period should start running on 27 August 1987, that period lapsed on 27 August 1991.
There is no showing that PBP paid the correct filing fee for the claim within the prescribed period. Hence,
nothing can save Civil Case No. 17692 from being dismissed.
2. And now on the issue of the writ of preliminary injunction.
The challenged Orders of the trial court granting the application for a writ of preliminary injunction and the
assailed decision of the respondent Court in C.A. G.R. No. 13624 clearly betray a prejudgment of the case.
In both instances, not only did said courts declare MB Resolutions Nos. 649 and 751 to be arbitrary, both
also declared the conservatorship to have been issued in violation of PBP's right to administrative due
process, which the CB "arbitrarily brushed aside to the prejudice" of the latter. The said courts further
concluded that "the sudden and untimely announcement by the Central Bank that respondent Producers
Bank will be under a conservatorship that will oversee its operations worked havoc over the confidence that
the public had hitherto reposed on respondent bank so that the majority of its depositors over-reacted and
rashly withdrew their accounts from said bank, thus it incurred a loss of P593.707 million or 59.5% of its
deposits."
Thus, save only for the determination of the full extent of PBP's claim for damages, said courts have, at the
most, decided or, at the very least, prejudged the case. Courts, notwithstanding the discretion given to
them, should avoid issuing writs of preliminary injunction which in effect dispose of the main case without a
trial. 54 We do not then hesitate to rule that there was grave abuse of discretion in the issuance of the writ of
preliminary injunction.
Besides, there was neither arbitrariness nor bad faith in the issuance of MB Resolutions Nos. 649 and 751. It
must be stressed in this connection that the banking business is properly subject to reasonable regulation
under the police power of the state because of its nature and relation to the fiscal affairs of the people and
the revenues of the state. 55 Banks are affected with public interest because they receive funds from the
general public in the form of deposits. Due to the nature of their transactions and functions, a fiduciary
relationship is created between the banking institutions and their depositors. Therefore, banks are under the
obligation to treat with meticulous care and utmost fidelity the accounts of those who have reposed their
trust and confidence in them. 56
It is then Government's responsibility to see to it that the financial interests of those who deal with banks
and banking institutions, as depositors or otherwise, are protected. In this country, that task is delegated to
the Central Bank which, pursuant to its Charter, 57 is authorized to administer the monetary, banking and
credit system of the Philippines. Under both the 1973 and 1987 Constitutions, the Central Bank is tasked
with providing policy direction in the areas of money, banking and credit; corollarily, it shall have supervision
over the operations of banks. 58 Under its charter, the CB is further authorized to take the necessary steps

against any banking institution if its continued operation would cause prejudice to its depositors, creditors
and the general public as well. This power has been expressly recognized by this Court. In Philippine
Veterans Bank Employees Union-NUBE vs. Philippine Veterans Bank, 59 this Court held that:
. . . Unless adequate and determined efforts are taken by the government against
distressed and mismanaged banks, public faith in the banking system is certain to
deteriorate to the prejudice of the national economy itself, not to mention the losses
suffered by the bank depositors, creditors, and stockholders, who all deserve the
protection of the government. The government cannot simply cross its arms while the
assets of a bank are being depleted through mismanagement or irregularities. It is the
duty of the Central Bank in such an event to step in and salvage the remaining resources
of the bank so that they may not continue to be dissipated or plundered by those
entrusted with their management.
One important measure adopted by the government to protect the public against unscrupulous practices of
some bankers is to require banking institutions to set up reserves against their deposit liabilities. These
reserves, pegged at a certain percentage of the volume of deposit liability, is that portion of the deposit
received by a banking institution which it cannot use for loans and investments. The reserve requirement,
which ordinarily takes the form of a deposit with the Central Bank, is one means by which the government
ensures the liquidity of banking institutions. 60
These reserve accounts maintained by banking institutions with the Central Bank also serve as a basis for
the clearing of checks and the settlement of interbank balances. 61
The need to maintain these required reserves cannot be over-emphasized. Thus, where over-drawings on
deposit accounts (regardless of amount) are incurred, R.A. No. 265 requires the delinquent bank to:
. . . fully cover said overdraft not later than the next clearing day: Provided, Further, That
settlement of clearing balances shall not be effected for any account which continue to, be
overdrawn for five consecutive banking days until such time as the overdrawing is fully
covered or otherwise converted into an emergency loan or advance pursuant to the
provisions of Sec. 90 of this Act. Provided, Finally, That the appropriate clearing office
shall be officially notified of banks with overdrawn balances. Banks with existing
overdrafts with the Central Bank as of the effectivity of this amended section shall, within
such period as may be prescribed by the Monetary Board, either convert the overdraft
into an emergency loan or advance with a plan of payment, or settle such overdrafts, and
that, upon failure to comply herewith, the Central Bank shall take such action against the
bank as may be warranted under this Act. 62 [Emphasis supplied.]
The fact that PBP is grossly overdrawn on its reserve account with the CB (up to P1.233 billion as of 13
February 1990) is not disputed by PBP. This enormous overdraft evidences the patent inability of the bank's
management to keep PBP liquid. This fact alone sufficiently justifies the remedial measures taken by the
Monetary Board.
MB Resolutions Nos. 649 and 751 were not promulgated to arbitrarily divest the present stockholders of
control over PBP, as is claimed by the latter. The same contemplates an effective and viable plan to revive
and restore PBP. It is to be noted that before issuing these resolutions, the MB gave the management of PBP
ample opportunity (from 30 March 1984 to June of 1987) to submit a viable rehabilitation plan for the bank.
28
28
MB Resolution Nos. 751 merely reiterated the requirement set forth in Resolution No. 649 for PBP to identify
and submit the list of new stockholders who will infuse new capital into the bank for CB approval. In this
Resolution, the MB gave PBP's stockholders one (1) week from notice within which to signify their
acceptance or rejection of the proposed rehabilitation plan.
The foregoing resolutions refer to a recommended rehabilitation plan. What was conveyed to PBP was a
mere proposal. There was nothing in the resolutions to indicate that the plan was mandatory. On the
contrary, PBP was given a specific period within which to accept or reject the plan. And, as petitioners
correctly pointed out, the plan was not self-implementing. The warning given by the MB that should said
proposal be rejected, the CB "will take appropriate alternative actions on the matter," does not make the
proposed rehabilitation plan compulsory. Whether or not there is a rehabilitation plan agreed upon between
PBP and the MB, the CB is authorized under R.A. No. 265 to take appropriate measures to protect the
interest of the bank's depositors as well as of the general public.
Furthermore, the assignment of claims to PDIC and the subsequent dacion en pago (payment of credit
through shares) do not divest the present stockholders of control over PBP. As may be readily observed from
the terms of Resolution No. 645, the shares which shall be issued to PDIC under the dacion are preferred,
non-voting and non-participating shares. Hence, except for the instances enumerated in the Corporation
Code where holders of non-voting shares are given the right to vote, PDIC shall have no hand in the bank's
operation or business. In any event, these preferred shares will eventually be sold to private parties or new
stockholders as soon as they are identified by PBP and approved by the CB. Prior approval by the CB of the
stockholders is necessary screening purposes.
There is nothing objectionable to the actions of the MB. We, therefore, find to be completely without legal or
evidentiary basis the contention that the impugned resolutions are arbitrary, illegal and made in bad faith.
Moreover, respondent Judge acted in complete disregard of Section 107 of R.A. No. 265 when he enjoined
the CB from taking appropriate actions against the bank, "including exclusion of (PBP) from settlement of
clearing balances at the Central Bank clearing house" as warranted by law. By using his own standards, and
without scrutinizing the law, respondent Judge arbitrarily determined when CB may or may not initiate
measures against a bank that cannot maintain its liquidity. He also arbitrarily and capriciously decided who
can continually overdraw from the deposit account with the CB, to the prejudice of other banking
institutions, the banking public and the government.
3. As could be gleamed from the pleadings in G.R. No. 92943, the respondent Judge, per his order of 18
November 1987, (a) directed the conservator to restore both the PBP officers to their original positions prior
to the reorganization of the bank's personnel, and the PBP's standing committees to their original
compositions, and (b) restrained her from leasing out to a third party any portion of PBP's space in the
Producers Bank Centre; per his Order of 22 December 1987, respondent Judge granted PPI's motion for an
order transferring to the latter the administration of the three (3) buildings; and per the Order of 22
December 1987, he granted the motion directing the conservator to publish the financial statement of the
PBP in the manner prayed for by the latter.
The foregoing Orders were issued without due hearing. Moreover, these reliefs were not prayed for in the
Amended Complaint. They were not even covered by any specific allegations therein. Except for the
prohibition to lease, the rest partook of the nature of a preliminary mandatory injunction which deprived the
conservator of her rights and powers under Section 28-A of R.A. No. 265 and, in effect, set aside the
conservatorship with PBP itself had earlier accepted. It must be remembered that PBP did not ask, in its
Amended Complaint, for the setting aside of the conservatorship. On the contrary, it even prayed that the
conservator be ordered to restore the viability of PBP as mandated by said Section 28-A.
The respondent Judge should not have forgotten the settled doctrine that it is improper to issue a writ of Separate Opinions
preliminary mandatory injunction prior to the final hearing, except in cases of extreme urgency, where the
right is very clear, where considerations of relative inconvenience bear strongly in complainant's favor,
GUTIERREZ, JR., J., concurring:
where there is a willful and unlawful invasion of plaintiff's right against his protest and remonstrance, the
injury being a continuing one, and where the effect of the mandatory injunction is rather to re-establish and
maintain a pre-existing continuing relation between the parties, recently and arbitrarily interrupted by the While I concur in the Court's decision, I would like to express certain reservations about the arbitrary grant
defendant, than to establish a new relation. 63 of power under the law to Central Bank (CB) authorities.

It is plain to this Court that respondent Judge ceased to be an impartial arbitrator; he became the godfather
of PBP and PPI, granting to them practically all that they had asked for in the motions they filed. Upon the
issuance of these Orders, nothing appeared clearer in the judicial horizon than this –– PBP and PPI had
everything in the bag, so to speak, including the reliefs not even contemplated in their Amended Complaint.
The challenged Orders then were whimsically and arbitrarily issued.
Compounding such detestable conduct is the respondent Judge's issuance, with undue haste and unusual
speed, of the orders of contempt without the proper hearing. If the conservator could, at all, be liable for
contempt, it would be for indirect contempt punished under Section 3, Rule 71 of the Rules of Court, more
specifically item (b) of the first paragraph which reads:
Sec. 3 Indirect contempts to be punished after charge and hearing. –– After charge in
writing has been filed, and an opportunity given to the accused to be heard by himself or
counsel, a person guilty of any of the following acts may be punished for contempt:
Any displeasure of CB officials against a private bank expressed through official pronouncements or through
rumors, real or imagined, in media, as in this case, will lead to a bank run by depositors. And if the CB,
which alone can stem the disaster, does not sincerely do all it can to help the bank, the inevitable result is
the bank's collapse and closure. Subsequent judicial action is illusory. I realize that the possibility of abuse is
no reason to invalidate a law but here it is not a mere "possibility." It is a certainty whenever CB officials
decide or will to do so. The absolute power and discretion over a bank's life or death and the total reliance
on the officials' good faith is contrary to principles of fairness and substantive due process embodied in our
Constitution.
The principal function of a CB conservator is to preserve the assets of the private bank and restore its
viability. I, however, note from this petition and earlier cases of the same nature that a conservator usually
forgets that he is supposed to be a friend of the bank under conservatorship and not its adversary. The
distinction between a conservator and a liquidator is overlooked. The conservator starts with a prejudiced
attitude. There should be a more objective and evenhanded way of restoring distressed banks to viability.

xxx xxx xxx

(b) Disobedience of or resistance to a lawful writ, process, order,

judgment, or command of a court, or injunction granted by a court or
judge, . . .;

It is clear from the said section that it is necessary that there be a charge and that the party cited for
contempt be given an opportunity to be heard. The reason for this is that contempt partakes of the nature of
a criminal offense. In the instant case, each motion for contempt served as the charge. It is settled that a
charge may be filed by a fiscal, a judge, or even a private person. 64 Petitioner Tansinsin-Encarnacion filed
oppositions thereto. Thereafter, it was the duty of the respondent Judge to hold a hearing on the motions.
Respondent Judge deliberately did away with the hearing and this Court finds no justifiable reason therefor.

There is, moreover, another reason why the contempt orders must be struck down. The orders which were
supposedly disobeyed and from which the motions for contempt arose were, as earlier indicated, null and
void for having been issued with grave abuse of discretion amounting to lack of jurisdiction. Such Orders,
therefore, cannot then be characterized as lawful. Consequently, resistance thereto cannot be punished as
contempt 65

PREMISES CONSIDERED, the petitions in G.R. Nos. 88353 and 92943 are GRANTED. The 6 October 1988
decision and 17 May 1989 resolution of the Court of Appeals in C.A.-G.R. SP No. 13624 are REVERSED and
SET ASIDE. Respondent Judge is ordered to dismiss Civil Case No. 17692. All proceedings undertaken and all
orders issued by respondent Judge are hereby SET ASIDE for being null and void. The writ of preliminary
injunction issued by the trial court in its Order dated 21 September 1987 is hereby LIFTED.

IT IS SO ORDERED.

29

G.R. No. 158261 December 18, 2006
IN RE: PETITION FOR ASSISTANCE IN THE LIQUIDATION OF THE RURAL BANK OF BOKOD
(BENGUET), INC., PHILIPPINE DEPOSIT INSURANCE CORPORATION, petitioner,
vs.
BUREAU OF INTERNAL REVENUE, respondent.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari1 under Rule 45 of the revised Rules of Court, praying that this
Court set aside the Orders, dated 17 January 20032 and 13 May 2003,3 of the Regional Trial Court (RTC) of
La Trinidad, Benguet, sitting as the Liquidation Court of the closed Rural Bank of Bokod (Benguet), Inc.
(RBBI), in Spec. Proc. No. 91-SP-0060.
There is no dispute as to the antecedent facts of the case, recounted as follows:
In 1986, a special examination of RBBI was conducted by the Supervision and Examination Sector (SES)
Department III of what is now the Bangko Sentral ng Pilipinas (BSP),4 wherein various loan irregularities
were uncovered. In a letter, dated 20 May 1986, the SES Department III required the RBBI management to
infuse fresh capital into the bank, within 30 days from date of the advice, and to correct all the exceptions
noted. However, up to the termination of the subsequent general examination conducted by the SES
Department III, no concrete action was taken by the RBBI management. In view of the irregularities noted
and the insolvent condition of RBBI, the members of the RBBI Board of Directors were called for a
conference at the BSP on 4 August 1986. Only one RBBI Director, a certain Mr. Wakit, attended the
conference, and the examination findings and related recommendations were discussed with him. In a letter,
dated 4 August 1986, receipt of which was acknowledged by Mr. Wakit, the SES Department III warned the
RBBI Board of Directors that, unless substantial remedial measures are taken to rehabilitate the bank, it will
recommend that the bank be placed under receivership. In a subsequent letter, dated 17 November 1986, a
copy of which was sent to every member of the RBBI Board of Directors via registered mail, the SES
Department III reiterated its warning that it would recommend the closure of the bank, unless the needed
fresh capital was immediately infused. Despite these notices, the SES Department III received no word from
RBBI or from any of its Directors as of 28 November 1986.5
In a meeting held on 9 January 1987, the Monetary Board of the BSP decided to take the following action –
Rural Bank of Bokod (Benguet), Inc. – Report on its examination as of June 16, 1986, its
placement under receivership
ACTION TAKEN
Finding to be true the statements of the Special Assistant to the Governor and Head, Supervision
and Examination Sector (SES) Department III, in her memorandum dated 28 November 1986
submitting a report on the general examination of the Rural Bank of Bokod (Benguet), Inc. as of 16
June 1986, that the financial condition of the rural bank is one of insolvency and its continuance in
business would involve further losses to its depositors and creditors, x x x
30
30
xxxx
[T]he Board decided as follows:
a. To forbid the bank to do business in the Philippines and place its assets and affairs
under receivership in accordance with Section 29 of R.A. No. 265, as amended.
b. To designate the Special Assistant to the Governor and Head, SES Department III, as
Receiver of the bank;
c. To refer the cases of irregularities/frauds to the Office of Special Investigation for
further investigation and possible filing of appropriate charges against the following
present/former officers and employees of the bank:
xxxx
d. To include the names of the above-mentioned present and former officers and
employees of the bank in the list of persons barred from employment in any financial
institution under the supervision of the Central Bank without prior clearance from the
Central Bank.6
A memorandum and report, dated 28 August 1990, were submitted by the Director of the SES Department
III concluding that the RBBI remained in insolvent financial condition and it can no longer safely resume
business with the depositors, creditors, and the general public. On 7 September 1990, the Monetary Board,
after determining and confirming the said memorandum and report, ordered the liquidation of the bank and
designated the Director of the SES Department III as liquidator.7
On 10 April 1991, the designated BSP liquidator of RBBI caused the filing with the RTC of a Petition for
Assistance in the Liquidation of RBBI, docketed as Spec. Proc. No. 91-SP-0060.8 Subsequently, on 2 June
1992, the Monetary Board transferred to herein petitioner Philippine Deposit Insurance Corporation (PDIC)
the receivership/liquidation of RBBI.9
PDIC then filed, on 11 September 2002, a Motion for Approval of Project of Distribution10 of the assets of
RBBI, in accordance with Section 31, in relation to Section 30, of Republic Act No. 7653, otherwise known as
the New Central Bank Act. During the hearing held on 17 January 2003, the respondent Bureau of Internal
Revenue (BIR), through Atty. Justo Reginaldo, manifested that PDIC should secure a tax clearance certificate
from the appropriate BIR Regional Office, pursuant to Section 52(C) of Republic Act No. 8424, or the Tax
Code of 1997, before it could proceed with the dissolution of RBBI. On even date, the RTC issued one of the
assailed Orders,11 directing PDIC to comply with Section 52(C) of the Tax Code of 1997 within 30 days from
receipt of a copy of the said order. Pending compliance therewith, the RTC held in abeyance the Motion for
Approval of Project of Distribution. On 13 May 2003, the second assailed Order12 was issued, in which the
RTC, in resolving the Motion for Reconsideration filed by PDIC, ruled as follows –
ORDER
Submitted for resolution is petitioner’s motion for reconsideration of the order of this court dated
January 17, 2003 holding in abeyance the motion for approval of the project of distribution pending
their compliance with a tax clearance from the Bureau of Internal Revenue.
 Petitioner in their motion state that Section 52-C of Republic Act 8424 does not cover closed placed under receivership by the Monetary Board of the BSP still needs to secure a tax clearance certificate
banking institutions like the Rural Bank of Bokod as the law that covers liquidation of closed banks from the BIR before the liquidation court approves the project of distribution of the assets of the bank.
is Section 30 of Republic Act No. 7653 otherwise known as the new Central Bank Law.
I
Commenting on the motion for reconsideration the Bureau of Internal Revenue states that the only
logic why the Bureau is requesting for a tax clearance is to determine how much taxes, if there be
This Court shall first proceed with the procedural issue on the appropriateness of the remedy taken by PDIC
any, is due the government.
from the assailed RTC Orders.

The court believes and so holds that petitioner should still secure the necessary tax clearance in
The differences between an appeal by certiorari under Rule 4515 of the revised Rules of Court and an original
order for it to be cleared of all its tax liabilities as regardless of what law covers the liquidation of
action for certiorari under Rule 6516 of the same Rules have been laid down by this Court in the case of
closed banks, still these banks are subject to payment of taxes mandated by law. Also in its motion
Atty. Paa v. Court of Appeals,17 to wit –
for approval of the project of distribution, paragraph 2, item 2.2 states that there are unremitted
withholding taxes in the amount of P8,767.32.
a. In appeal by certiorari, the petition is based on questions of law which the appellant desires the
appellate court to resolve. In certiorari as an original action, the petition raises the issue as to
This shows that indeed there are still taxes to be paid. In order therefore that all taxes due the
whether the lower court acted without or in excess of jurisdiction or with grave abuse of discretion.
government should be paid, petitioner should secure a tax clearance from the Bureau of Internal
Revenue.
b. Certiorari, as a mode of appeal, involves the review of the judgment, award or final order on the
merits. The original action for certiorari may be directed against an interlocutory order of the court
Wherefore, based on the foregoing premises, the motion for reconsideration filed by petitioner is
prior to appeal from the judgment or where there is no appeal or any other plain, speedy or
hereby DENIED for lack of merit.13
adequate remedy.

Hence, PDIC filed the present Petition for Review on Certiorari, under Rule 45 of the revised Rules of Court,
c. Appeal by certiorari must be made within the reglementary period for appeal. An original action
raising pure questions of law. It made a lone assignment of error, alleging that –
for certiorari may be filed not later than sixty (60) days from notice of the judgment, order or
resolution sought to be assailed.
THE COURT A QUO ERRED IN APPLYING THE PROVISION OF SECTION 52-C OF REPUBLIC ACT NO.
8424 DIRECTING THE SUBMISSION OF TAX CLEARANCE FOR CORPORATIONS CONTEMPLATING
d. Appeal by certiorari stays the judgment, award or order appealed from. An original action
DISSOLUTION ON A BANK ORDERED CLOSED AND PLACED UNDER RECEIVERSHIP AND,
for certiorari, unless a writ of preliminary injunction or a temporary restraining order shall have
THEREAFTER, UNDER LIQUIDATION, BY THE MONETARY BOARD PURSUANT TO SECTION 30 OF
been issued, does not stay the challenged proceeding.
REPUBLIC ACT NO. 7653.14

e. In appeal by certiorari, the petitioner and respondent are the original parties to the action, and
PDIC argues that the closure of banks under Section 30 of the New Central Bank Act is summary in nature
the lower court or quasi-judicial agency is not to be impleaded. In certiorari as an original action,
and procurement of tax clearance as required under Section 52(C) of the Tax Code of 1997 is not a condition
the parties are the aggrieved party against the lower court or quasi-judicial agency and the
precedent thereto; that under Section 30, in relation to Section 31, of the New Central Bank Act, asset
prevailing parties, who thereby respectively become the petitioner and respondents.
distribution of a closed bank requires only the approval of the liquidation court; and that the BIR is not
without recourse since, subject to the applicable provisions of the Tax Code of 1997, it may therefore assess
the closed RBBI for tax liabilities, if any. f. In certiorari for purposes of appeal, the prior filing of a motion for reconsideration is not required
(Sec. 1, Rule 45); while in certiorari as an original action, a motion for reconsideration is a
condition precedent (Villa-Rey Transit vs. Bello, L-18957, April 23, 1963), subject to certain
In its Comment, the BIR countered with the following arguments: that the present Petition for Review
exceptions.
on Certiorari under Rule 45 of the revised Rules of Court is not the proper remedy to question the Order,
dated 17 January 2003, of the RTC because said order is interlocutory and cannot be the subject of an
appeal; that Section 52(C) of the Tax Code of 1997 applies to all corporations, including banks ordered g. In appeal by certiorari, the appellate court is in the exercise of its appellate jurisdiction and
closed by the Monetary Board pursuant to Section 30 of the New Central Bank Act; that the RTC may order power of review, while in certiorari as an original action, the higher court exercises original
the PDIC to obtain a tax clearance before proceeding to rule on the Motion for Approval of Project of jurisdiction under its power of control and supervision over the proccedings of lower courts.
Distribution of the assets of RBBI; and that the present controversy should not have been elevated to this
Court since the parties are both government agencies who should have administratively settled the dispute.
Guided by the foregoing distinctions, this Court, in perusing the assailed RTC Orders, dated 17 January 2003
and 13 May 2003, reaches the conclusion that these are merely interlocutory in nature and are not the
This Court finds that there are only two primary issues for the resolution of the Petition at bar, one being proper subjects of an appeal by certiorari under Rule 45 of the revised Rules of Court.
procedural, and the other substantive. The procedural issue involves the question of whether the Petition for
Review on Certiorari under Rule 45 of the revised Rules of Court is the proper remedy from the assailed
Orders of the RTC. The substantive issue deals with the determination of whether a bank ordered closed and This Court has repeatedly and uniformly held that a judgment or order may be appealed only when it is final,
meaning that it completely disposes of the case and definitively adjudicates the respective rights of the
31
 32

parties, leaving thereafter no substantial proceeding to be had in connection with the case except the proper The BIR anchors its position that a tax clearance is necessary on Section 52(C) of the Tax Code of 1997,
execution of the judgment or order. Conversely, an interlocutory order or judgment is not appealable for it which provides –
does not decide the action with finality and leaves substantial proceedings still to be had.18
SEC. 52. Corporation Returns. –
The RTC Orders presently questioned before this Court has not disposed of the case nor has it adjudicated
definitively the rights of the parties in Spec. Proc. No. 91-SP-0060. They only held in abeyance the approval
xxxx
of the Project of Distribution of the assets of RBBI until PDIC, as liquidator, acquires a tax clearance from the
BIR. Indubitably, there are still substantial proceedings to be had after PDIC presents the required tax
clearance to the trial court, since the Project of Distribution of assets still has to be finalized and approved. (C) Return of Corporation Contemplating Dissolution or Reorganization. – Every corporation shall,
within thirty days (30) after the adoption by the corporation of a resolution or plan for its
dissolution, or for the liquidation of the whole or any part of its capital stock, including a
PDIC avers that the RTC Orders of 17 January 2003 and 13 May 2003 are final because, as this Court
corporation which has been notified of possible involuntary dissolution by the Securities and
pronounced in the case of Pacific Banking Corporation Employees’ Organization (PaBCEO) v. Court of
Exchange Commission, or for its reorganization, render a correct return to the Commissioner,
Appeals,19 an order of the liquidation court allowing or disallowing a claim is a final order and may be the
verified under oath, setting forth the terms of such resolution or plan and such other information as
subject of an appeal. It further asserts that the legal issue of whether RBBI should secure a tax clearance is
the Secretary of Finance, upon recommendation of the Commissioner, shall, by rules and
a "disputed claim," which was already allowed by the RTC in its assailed Orders, thus, making the latter final.
regulations, prescribe.

This Court is unconvinced. The foregoing arguments of PDIC result from a strained interpretation of law and
jurisprudence, and are raised in an apparent attempt to justify a very obvious faux pas on its part. While it is
true that in liquidation proceedings, the settlement of disputed or contentious claims may require a full-dress
hearing and the resolution of legal issues,20 it does not follow that all legal issues resolved in the course of
the liquidation proceedings would automatically be tantamount to an allowance or disallowance of a disputed
or contentious claim. In Spec. Proc. No. 91-SP-0060 pending before the RTC, there can be no doubt that the
claim of the BIR against RBBI consists of the unpaid tax liabilities of the latter. The BIR contends that it
could only determine the existence and correct amount of the tax liabilities of RBBI if PDIC, as liquidator of
the bank, secures a tax clearance from the appropriate BIR Regional Office. The acquirement of a tax
clearance is not the claim of the BIR against RBBI, it is only the means by which to ascertain such claim.
Whatever tax liabilities the BIR may claim against RBBI can still be disputed before the RTC by the PDIC, as
liquidator of the bank, whether as to the existence or computation of the said tax liabilities, and it is the
ruling of the RTC on such matters that may constitute a final order which definitively settles the claim of the
BIR. The mere grant by the RTC of the motion requiring PDIC, as liquidator of RBBI, to secure a tax
clearance, does not yet constitute an adjudication of the claim of the BIR. Hence, the assailed RTC Orders,
dated 17 January 2003 and 13 May 2003, are clearly interlocutory in nature.
As a general rule, an interlocutory order is not appealable until after the rendition of the judgment on the
merits, given that a contrary rule would delay the administration of justice and unduly burden the courts.
This Court, however, has also held that an original action for certiorari under Rule 65 of the revised Rules of
Court is an appropriate remedy to assail an interlocutory order when (1) the tribunal issued such order
without or in excess of jurisdiction or with grave abuse of discretion, and (2) the assailed interlocutory order
is patently erroneous and the remedy of appeal would not afford adequate and expeditious relief.21 Thus,
despite this Court’s finding that PDIC, as the liquidator of RBBI, availed itself of the wrong remedy by filing
an appeal by certiorari under Rule 45 of the revised Rules of Court, We shall adopt a positive and pragmatic
approach, and, instead of dismissing the instant Petition outright, it shall treat the same as an original action
for certiorari under Rule 65 of the same Rules, in consideration of the crucial issues and substantial
arguments already presented by the concerned parties before this Court.22
II
The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange
Commission of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure a certificate of
tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the Securities and
Exchange Commission.
To implement the foregoing provision, the BIR still relies on the regulations it jointly issued with the
Securities and Exchange Commission (SEC) in 1985, when the Tax Code of 1977 was still in effect and a
similar provision could be found in Section 46(C) thereof. The full text of the regulations is reproduced below
–
BIR-SEC REGULATIONS NO. 1
SUBJECT: Regulations to Implement the Provisions of Executive Order No. 1026, Amending Section
46(c) of the National Internal Revenue Code of 1977, as amended, Requiring Dissolving
Corporations to File Information Returns and Secure Tax Clearance from the Commissioner of
Internal Revenue, and Providing Adequate Penalties for Violations Thereof.
TO: All Internal Revenue Officers and Others Concerned.
Pursuant to the provisions of Section 277, in relation to Section 4 of the National Revenue Code of
1977, as amended, the following regulations are hereby promulgated.
Section 1. Scope. – These regulations shall govern the procedure for the issuance of tax clearance
certificates to dissolving corporations. This shall include corporations intending to dissolve or
liquidate the whole or any part of its capital stocks, as well as, corporations which have been
notified of possible involuntary dissolution by the Securities and Exchange Commission.

Having disposed of the procedural issue, this Court now addresses the substantive issue of whether RBBI, as Section 2. Requirements in case of dissolution. – a) Every Corporation shall, within thirty (30) days
represented by its liquidator, PDIC, still needs to secure a tax clearance from the BIR before the RTC could after
approve the Project of Distribution of the assets of RBBI.

32
 - the adoption by the corporation of a resolution or plan for the dissolution of the corporation, or
for the liquidation of the whole or any part of its capital stock, or
- the receipt of an order of suspension by the Securities and Exchange Commission in case of
involuntary dissolution,
file their income tax returns covering the income earned by them from the beginning of the taxable
year up to date of such dissolution.
In addition thereto, they shall submit within the same period and verified under oath, the following
documents:
1. a copy of the articles of incorporation and by-laws;
corporation by order of the SEC. They make no reference at all to a situation similar to the one at bar in
which a banking corporation is ordered closed and placed under receivership by the BSP and its assets
judicially liquidated. Now, the determining question is, whether Section 52(C) of the Tax Code of 1997 and
BIR-SEC Regulations No. 1 could be made to apply to the present case.
This Court rules in the negative.
First, Section 52(C) of the Tax Code of 1997 and the BIR-SEC Regulations No. 1 regulate the relations only
as between the SEC and the BIR, making a certificate of tax clearance a prior requirement before the SEC
could approve the dissolution of a corporation. In Spec. Proc. No. 91-SP-0060 pending before the RTC, RBBI
was placed under receivership and ordered liquidated by the BSP, not the SEC; and the SEC is not even a
party in the said case, although the BIR is. This Court cannot find any basis to extend the SEC requirements
for dissolution of a corporation to the liquidation proceedings of RBBI before the RTC when the SEC is not
even involved therein.

2. a copy of the resolution authorizing dissolution; and It is conceded that the SEC has the authority to order the dissolution of a corporation pursuant to Section
121 of Batas Pambansa Blg. 68, otherwise known as the Corporation Code of the Philippines, which reads –
3. balance sheet as of the date of dissolution and a profit and loss statement covering the
period from the beginning of the taxable year to the date of dissolution. Sec. 121. Involuntary dissolution. – A corporation may be dissolved by the Securities and Exchange
Commission upon filing of a verified complaint and after proper notice and hearing on the grounds
provided by existing laws, rules and regulations.
b) The Securities and Exchange Commission whenever it issues an order of involuntary dissolution
or suspension of the primary franchise or certificate of registration of a corporation, shall at the
same time furnish the Commissioner of Internal Revenue a copy of such order. The Corporation Code, however, is a general law applying to all types of corporations, while the New Central
Bank Act regulates specifically banks and other financial institutions, including the dissolution and liquidation
thereof. As between a general and special law, the latter shall prevail – generalia specialibus non derogant.23
Section 3. Tax clearance certificate. – a) Within thirty (30) days from receipt of the documents
mentioned in the preceding Section, the Commissioner of Internal Revenue, or his duly authorized
representative, shall issue the corresponding tax clearance certificate (BIR Form No. 17.61) for the The liquidation of RBBI is undertaken according to Sections 30 of the New Central Bank Act, viz –
corporation which will be dissolved.
Sec. 30. Proceedings in Receivership and Liquidation. - Whenever, upon report of the head of the
b) The Securities and Exchange Commission shall issue the final order of dissolution only after a supervising or examining department, the Monetary Board finds that a bank or quasi-bank:
certificate of tax clearance has been submitted by the dissolving corporation: Provided, that in case
of involuntary dissolution, the Securities and Exchange Commission may nevertheless proceed with
(a) is unable to pay its liabilities as they become due in the ordinary course of business: Provided,
the dissolution if thirty (30) days after receipt of the suspension order no tax clearance has yet
That this shall not include inability to pay caused by extraordinary demands induced by financial
been issued.
panic in the banking community;

Section 4. Penalty. – Failure to render the return and secure the certificate of tax clearance as
(b) has insufficient realizable assets, as determined by the Bangko Sentral, to meet its liabilities; or
above-mentioned shall subject the officer(s) of the corporation required by law to file the return
under Section 46(a) of the National Internal Revenue Code of 1977, as amended, to a fine of not
less than P5,000.00 or imprisonment of not less than two (2) years, and shall make them liable for (c) cannot continue in business without involving probable losses to its depositors or creditors; or
all outstanding or unpaid tax liabilities of the dissolving corporation.
(d) has wilfully violated a cease and desist order under Section 37 that has become final, involving
Section 5. Effectivity. – These regulations shall apply to all corporate dissolution taking place on or acts or transactions which amount to fraud or a dissipation of the assets of the institution; in which
after May 14, 1985. cases, the Monetary Board may summarily and without need for prior hearing forbid the institution
from doing business in the Philippines and designate the Philippine Deposit Insurance Corporation
as receiver of the banking institution.
Section 6. Repealing Clause. – All revenue regulations, orders and circulars which are inconsistent
herewith are hereby modified accordingly.
For a quasi-bank, any person of recognized competence in banking or finance may be designated
as receiver.
The afore-quoted Tax Code provision and regulations refer to a voluntary dissolution and/or liquidation of a
corporation through its adoption of a resolution or plan to that effect, or an involuntary dissolution of a

33

The receiver shall immediately gather and take charge of all the assets and liabilities of the
institution, administer the same for the benefit of its creditors, and exercise the general powers of
a receiver under the Revised Rules of Court but shall not, with the exception of administrative
expenditures, pay or commit any act that will involve the transfer or disposition of any asset of the
institution: Provided, That the receiver may deposit or place the funds of the institution in non-
speculative investments. The receiver shall determine as soon as possible, but not later than ninety
(90) days from take over, whether the institution may be rehabilitated or otherwise placed in such
a condition that it may be permitted to resume business with safety to its depositors and creditors
and the general public: Provided, That any determination for the resumption of business of the
institution shall be subject to prior approval of the Monetary Board.
If the receiver determines that the institution cannot be rehabilitated or permitted to resume
business in accordance with the next preceding paragraph, the Monetary Board shall notify in
writing the board of directors of its findings and direct the receiver to proceed with the liquidation
of the institution. The receiver shall:
(1) file ex parte with the proper regional trial court, and without requirement of prior notice or any
other action, a petition for assistance in the liquidation of the institution pursuant to a liquidation
plan adopted by the Philippine Deposit Insurance Corporation for general application to all closed
banks. In case of quasi-banks, the liquidation plan shall be adopted by the Monetary Board. Upon
acquiring jurisdiction, the court shall, upon motion by the receiver after due notice, adjudicate
disputed claims against the institution, assist the enforcement of individual liabilities of the
stockholders, directors and officers, and decide on other issues as may be material to implement
the liquidation plan adopted. The receiver shall pay the cost of the proceedings from the assets of
the institution.
(2) convert the assets of the institution to money, dispose of the same to creditors and other
parties, for the purpose of paying the debts of such institution in accordance with the rules on
concurrence and preference of credit under the Civil Code of the Philippines and he may, in the
name of the institution, and with the assistance of counsel as he may retain, institute such actions
as may be necessary to collect and recover accounts and assets of, or defend any action against,
the institution. The assets of an institution under receivership or liquidation shall be deemed in
custodia legis in the hands of the receiver and shall, from the moment the institution was placed
under such receivership or liquidation, be exempt from any order of garnishment, levy,
attachment, or execution.
The actions of the Monetary Board taken under this section or under Section 29 of this Act shall be
final and executory, and may not be restrained or set aside by the court except on petition for
certiorari on the ground that the action taken was in excess of jurisdiction or with such grave abuse
of discretion as to amount to lack or excess of jurisdiction. The petition for certiorari may only be
filed by the stockholders of record representing the majority of the capital stock within ten (10)
days from receipt by the board of directors of the institution of the order directing receivership,
liquidation or conservatorship.
The designation of a conservator under Section 29 of this Act or the appointment of a receiver
under this section shall be vested exclusively with the Monetary Board. Furthermore, the
designation of a conservator is not a precondition to the designation of a receiver.
Section 30 of the New Central Bank Act lays down the proceedings for receivership and liquidation of a bank.
The said provision is silent as regards the securing of a tax clearance from the BIR. The omission,
34
34
nonetheless, cannot compel this Court to apply by analogy the tax clearance requirement of the SEC, as
stated in Section 52(C) of the Tax Code of 1997 and BIR-SEC Regulations No. 1, since, again, the dissolution
of a corporation by the SEC is a totally different proceeding from the receivership and liquidation of a bank
by the BSP. This Court cannot simply replace any reference by Section 52(C) of the Tax Code of 1997 and
the provisions of the BIR-SEC Regulations No. 1 to the "SEC" with the "BSP." To do so would be to read into
the law and the regulations something that is simply not there, and would be tantamount to judicial
legislation.
It should be noted that there are substantial differences in the procedure for involuntary dissolution and
liquidation of a corporation under the Corporation Code, and that of a banking corporation under the New
Central Bank Act, so that the requirements in one cannot simply be imposed in the other.
Under the Corporation Code, the SEC may dissolve a corporation, upon the filing of a verified complaint and
after proper notice and hearing, on grounds provided by existing laws, rules, and regulations.24 Upon receipt
by the corporation of the order of suspension from the SEC, it is required to notify and submit a copy of the
said order, together with its final tax return, to the BIR. The SEC is also required to furnish the BIR a copy of
its order of suspension. The BIR is supposed to issue a tax clearance to the corporation within 30 days from
receipt of the foregoing documentary requirements. The SEC shall issue the final order of dissolution only
after the corporation has submitted its tax clearance; or in case of involuntary dissolution, the SEC may
proceed with the dissolution after 30 days from receipt by the BIR of the documentary requirements without
a tax clearance having been issued.25 The corporation is allowed to continue as a body corporate for three
years after its dissolution, for the purpose of prosecuting and defending suits by or against it, to settle and
close its affairs, and to dispose of and convey its property and distribute its assets, but not for the purpose
of continuing its business. The corporation may undertake its own liquidation, or at any time during the said
three years, it may convey all of its property to trustees for the benefit of its stockholders, members,
creditors, and other persons in interest.26
In contrast, the Monetary Board may summarily and without need for prior hearing, forbid the banking
corporation from doing business in the Philippines, for causes enumerated in Section 30 of the New Central
Bank Act; and appoint the PDIC as receiver of the bank. PDIC shall immediately gather and take charge of
all the assets and liabilities of the closed bank and administer the same for the benefit of its creditors. The
summary nature of the procedure for the involuntary closure of a bank is especially stressed in Section 30 of
the New Central Bank Act, which explicitly states that the actions of the Monetary Board under the said
Section or Section 29 shall be final and executory, and may not be restrained or set aside by the court
except on a Petition for Certiorari filed by the stockholders of record of the bank representing a majority of
the capital stock. PDIC, as the appointed receiver, shall file ex parte with the proper RTC, and without
requirement of prior notice or any other action, a petition for assistance in the liquidation of the bank. The
bank is not given the option to undertake its own liquidation.
Second, the alleged purpose of the BIR in requiring the liquidator PDIC to secure a tax clearance is to enable
it to determine the tax liabilities of the closed bank. It raised the point that since the PDIC, as receiver and
liquidator, failed to file the final return of RBBI for the year its operations were stopped, the BIR had no way
of determining whether the bank still had outstanding tax liabilities.
To our mind, what the BIR should have requested from the RTC, and what was within the discretion of the
RTC to grant, is not an order for PDIC, as liquidator of RBBI, to secure a tax clearance; but, rather, for it to
submit the final return of RBBI. The first paragraph of Section 30(C) of the Tax Code of 1997, read in
conjunction with Section 54 of the same Code, clearly imposes upon PDIC, as the receiver and liquidator of
RBBI, the duty to file such a return. The pertinent provisions are reproduced below for reference –
 SEC. 52. Corporation Returns. – Government, other than those in Articles 2241(1) and 2242(1) of the Civil Code, will come only in ninth
place in the order of preference.27
xxxx
Thus, the recourse of the BIR, after assessing the final return and examining all other pertinent documents
of RBBI, and making a determination of the latter’s outstanding tax liabilities, is to present its claim, on
(C) Return of Corporation Contemplating Dissolution or Reorganization. – Every corporation shall,
behalf of the National Government, before the RTC during the liquidation proceedings. The BIR is expected
within thirty days (30) after the adoption by the corporation of a resolution or plan for its
to prove and substantiate its claim, in the same manner as the other creditors. It is only after the RTC allows
dissolution, or for the liquidation of the whole or any part of its capital stock, including a
the claim of the BIR, together with the claims of the other creditors, can a Project for Distribution of the
corporation which has been notified of possible involuntary dissolution by the Securities and
assets of RBBI be finalized and approved. PDIC, then, as liquidator, may proceed with the disposition of the
Exchange Commission, or for its reorganization, render a correct return to the Commissioner,
assets of RBBI and pay the latter’s financial obligations, including its outstanding tax liabilities. And, finally,
verified under oath, setting forth the terms of such resolution or plan and such other information as
only after such payment, can the BIR issue a certificate of tax clearance in the name of RBBI.
the Secretary of Finance, upon recommendation of the Commissioner, shall, by rules and
regulations, prescribe.
Third, the evident void in current statutes and regulations as to the relations among the BIR, as tax collector
of the National Government; the BSP, as regulator of the banks; and the PDIC, as the receiver and liquidator
xxxx
of banks ordered closed by the BSP, is not for this Court to fill in. It is up to the legislature to address the
matter through appropriate legislation, and to the executive to provide the regulations for its
SEC. 54. Returns of receivers, Trustees in Bankruptcy or Assignees. – In cases wherein receivers, implementation.
trustees in bankruptcy or assignees are operating the property or business of a corporation, subject
to the tax imposed by this Title, such receivers, trustees or assignees shall make returns of net
It is for these reasons that the RTC committed grave abuse of discretion, and committed patent error, in
income as and for such corporation, in the same manner and form as such an organization is
ordering the PDIC, as the liquidator of RBBI, to first secure a tax clearance from the appropriate BIR
hereinbefore required to make returns, and any tax due on the income as returned by receivers,
Regional Office, and holding in abeyance the approval of the Project of Distribution of the assets of the RBBI
trustees or assignees shall be assessed and collected in the same manner as if assessed directly
by virtue thereof.
against the organizations of whose businesses or properties they have custody or control.

Although this Court rules in favor of PDIC, in the sense that a tax clearance is not a prerequisite to the
Section 54 of the Tax Code of 1997 imposes a general duty on all receivers, trustees in bankruptcy, and
approval of the Project of Distribution of the assets of RBBI, it cannot uphold its argument that the Spec.
assignees, who operate and preserve the assets of a corporation, regardless of the circumstances or the law
Proc. No. 91-SP-0060 is summary in nature.
by which they came to hold their positions, to file the necessary returns on behalf of the corporation under
their care.
Section 30(d) of the New Central Bank Act gives the Monetary Board of the BSP the power to, summarily
and without need for prior hearing, forbid a bank or quasi-bank from doing business in the Philippines and
The filing by PDIC of a final tax return, on behalf of RBBI, should already address the supposed concern of
designating the PDIC as receiver of the banking institution. It bears to emphasize that: (1) the power is
the BIR and would already enable the latter to determine if RBBI still had outstanding tax liabilities.
granted to the Monetary Board of the BSP; and (2) what is summary in nature is the power of the Monetary
Board of the BSP to forbid or stop a bank or quasi-bank from doing further business.
The unreasonableness and impossibility of requiring a tax clearance before the approval by the RTC of the
Project of Distribution of the assets of the RBBI becomes apparent when the timeline of the proceedings is
Once liquidation proceedings are instituted before the appropriate trial court, and the trial court assumes
considered.
jurisdiction over the Petition, then the proceedings take a different character. Spec. Proc. No. 91-SP-0600 is
the liquidation proceedings initiated by the PDIC before the RTC. Liquidation proceedings have been
The BIR can only issue a certificate of tax clearance when the taxpayer had completely paid off his tax described in detail in the case of Pacific Banking Corporation Employees’ Organization (PaBCEO) v. Court of
liabilities. The certificate of tax clearance attests that the taxpayer no longer has any outstanding tax Appeals,28 to wit –
obligations to the Government.
[A] liquidation proceeding resembles the proceeding for the settlement of estate of deceased
Should the BIR find that RBBI still had outstanding tax liabilities, PDIC will not be able to pay the same persons under Rules 73 to 91 of the Rules of Court. The two have a common purpose: the
because the Project of Distribution of the assets of RBBI remains unapproved by the RTC; and, if RBBI still determination of all the assets and the payment of all the debts and liabilities of the insolvent
had outstanding tax liabilities, the BIR will not issue a tax clearance; but, without the tax clearance, the corporation or the estate. The Liquidator and the administrator or executor are both charged with
Project of Distribution of assets, which allocates the payment for the tax liabilities, will not be approved by the assets for the benefit of the claimants. In both instances, the liability of the corporation and the
the RTC. It will be a chicken-and-egg dilemma. estate is not disputed. The court's concern is with the declaration of creditors and their
rights and the determination of their order of payment
The Government, in this case, cannot generally claim preference of credit, and receive payment ahead of the
other creditors of RBBI. Duties, taxes, and fees due the Government enjoy priority only when they are with xxxx
reference to a specific movable property, under Article 2241(1) of the Civil Code, or immovable property,
under Article 2242(1) of the same Code. However, with reference to the other real and personal property of
the debtor, sometimes referred to as "free property," the taxes and assessments due the National
35
 36

A liquidation proceeding is a single proceeding which consists of a number of cases properly

classified as "claims." It is basically a two-phased proceeding. The first phase is concerned with
the approval and disapproval of claims. Upon the approval of the petition seeking the assistance of
the proper court in the liquidation of a closed entity, all money claims against the bank are required
to be filed with the liquidation court. This phase may end with the declaration by the liquidation
court that the claim is not proper or without basis. On the other hand, it may also end with the
liquidation court allowing the claim. In the latter case, the claim shall be classified whether it is
ordinary or preferred, and thereafter included Liquidator. In either case, the order allowing or
disallowing a particular claim is final order, and may be appealed by the party aggrieved thereby.

The second phase involves the approval by the Court of the distribution plan prepared by the duly
appointed liquidator. The distribution plan specifies in detail the total amount available for
distribution to creditors whose claim were earlier allowed. The Order finally disposes of the issue of
how much property is available for disposal. Moreover, it ushers in the final phase of the liquidation
proceeding - payment of all allowed claims in accordance with the order of legal priority and the
approved distribution plan.

xxxx

A liquidation proceeding is commenced by the filing of a single petition by the Solicitor General with
a court of competent jurisdiction entitled, "Petition for Assistance in the Liquidation of e.g., Pacific
Banking Corporation." All claims against the insolvent are required to be filed with the liquidation
court. Although the claims are litigated in the same proceeding, the treatment is individual. Each
claim is heard separately. And the Order issued relative to a particular claim applies only to said
claim, leaving the other claims unaffected, as each claim is considered separate and distinct from
the others. x x x [Emphases supplied.]

Irrefragably, liquidation proceedings cannot be summary in nature. It requires the holding of hearings and
presentation of evidence of the parties concerned, i.e., creditors who must prove and substantiate their
claims, and the liquidator disputing the same. It also allows for multiple appeals, so that each creditor may
appeal a final order rendered against its claim. Hence, liquidation proceedings may very well be highly-
contested and drawn-out, because, at the end of it all, all claims against the corporation undergoing
litigation must be settled definitively and its assets properly disposed off.

WHEREFORE, in view of the foregoing, this Court rules as follows –

(a) The instant Petition is GRANTED and the Orders, dated 17 January 2003 and 13 May 2003, of the RTC,
sitting as the Liquidation Court of the closed RBBI, in Spec. Proc. No. 91-SP-0060, are NULLIFIED and SET
ASIDE for having been rendered with grave abuse of discretion;

(b) The PDIC, as liquidator, is ORDERED to submit to the BIR the final tax return of RBBI, in accordance
with the first paragraph of Section 52(C), in connection with Section 54, of the Tax Code of 1997; and

(c) The RTC is ORDERED to resume the liquidation proceedings in Spec. Proc. No. 91-SP-0060 in order to
determine all the claims of the creditors, including that of the National Government, as determined and
presented by the BIR; and, pursuant to such determination, and guided accordingly by the provisions of the
Civil Code on preference of credit, to review and approve the Project of Distribution of the assets of RBBI.

SO ORDERED.
36
G.R. No. L-20583 January 23, 1967 and seized documents and records thereof relative to its business operations; that, upon the return of said
warrant, the seized documents and records were, with the authority of the court, placed under the custody
of the Central Bank of the Philippines; that, upon examination and evaluation of said documents and
REPUBLIC OF THE PHILIPPINES, petitioner,
records, the intelligence division of the Central Bank submitted, to the Acting Deputy Governor thereof, a
vs.
memorandum dated September 10, 1962, finding that the corporation is:
SECURITY CREDIT AND ACCEPTANCE CORPORATION, ROSENDO T. RESUELLO, PABLO TANJUTCO,
ARTURO SORIANO, RUBEN BELTRAN, BIENVENIDO V. ZAPA, PILAR G. RESUELLO, RICARDO D.
BALATBAT, JOSE SEBASTIAN and VITO TANJUTCO JR., respondents. 1. Performing banking functions, without requisite certificate of authority from the Monetary Board
of the Central Bank, in violation of Secs. 2 and 6 of Republic Act 337, in that it is soliciting and
accepting deposit from the public and lending out the funds so received;
CONCEPCION, C.J.:

2. Soliciting and accepting savings deposits from the general public when the company's articles of
This is an original quo warranto proceeding, initiated by the Solicitor General, to dissolve the Security and
incorporation authorize it only to engage primarily in financing agricultural, commercial and
Acceptance Corporation for allegedly engaging in banking operations without the authority required therefor
industrial projects, and secondarily, in buying and selling stocks and bonds of any corporation,
by the General Banking Act (Republic Act No. 337). Named as respondents in the petition are, in addition to
thereby exceeding the scope of its powers and authority as granted under its charter; consequently
said corporation, the following, as alleged members of its Board of Directors and/or Executive Officers,
such acts are ultra-vires:
namely:

3. Soliciting subscriptions to the corporate shares of stock and accepting deposits on account
NAME POSITION thereof, without prior registration and/or licensing of such shares or securing exemption therefor,
in violation of the Securities Act; and
Rosendo T. Resuello President & Chairman of the Board

Pablo Tanjutco Director 4. That being a private credit and financial institution, it should come under the supervision of the
Arturo Soriano Director Monetary Board of the Central Bank, by virtue of the transfer of the authority, power, duties and
functions of the Secretary of Finance, Bank Commissioner and the defunct Bureau of Banking, to
Ruben Beltran Director the said Board, pursuant to Secs. 139 and 140 of Republic Act 265 and Secs. 88 and 89 of Republic
Act 337." (Emphasis Supplied.) that upon examination and evaluation of the same records of the
Bienvenido V. Zapa Director & Vice-President corporation, as well as of other documents and pertinent pipers obtained elsewhere, the
Pilar G. Resuello Director & Secretary-Treasurer Superintendent of Banks, submitted to the Monetary Board of the Central Bank a memorandum
dated August 28, 1962, stating inter alia.
Ricardo D. Balatbat Director & Auditor

Jose R. Sebastian Director & Legal Counsel
Vito Tanjutco Jr. Director & Personnel Manager
The record shows that the Articles of Incorporation of defendant corporation1 were registered with the
Securities and Exchange Commission on March 27, 1961; that the next day, the Board of Directors of the
corporation adopted a set of by-laws,2 which were filed with said Commission on April 5, 1961; that on
September 19, 1961, the Superintendent of Banks of the Central Bank of the Philippines asked its legal
counsel an opinion on whether or not said corporation is a banking institution, within the purview of Republic
Act No. 337; that, acting upon this request, on October 11, 1961, said legal counsel rendered an opinion
resolving the query in the affirmative; that in a letter, dated January 15, 1962, addressed to said
Superintendent of Banks, the corporation through its president, Rosendo T. Resuello, one of defendants
herein, sought a reconsideration of the aforementioned opinion, which reconsideration was denied on March
16, 1962; that, prior thereto, or on March 9, 1961, the corporation had applied with the Securities and
Exchange Commission for the registration and licensing of its securities under the Securities Act; that, before
acting on this application, the Commission referred it to the Central Bank, which, in turn, gave the former a
copy of the above-mentioned opinion, in line with which, the Commission advised the corporation on
December 5, 1961, to comply with the requirements of the General Banking Act; that, upon application of
members of the Manila Police Department and an agent of the Central Bank, on May 18, 1962, the Municipal
Court of Manila issued Search Warrant No. A-1019; that, pursuant thereto, members of the intelligence
division of the Central Bank and of the Manila Police Department searched the premises of the corporation
11. Pursuant to the request for assistance by the Chief, Intelligence Division, contained in his
Memorandum to the Governor dated May 23, 1962 and in accordance with the written instructions
of Governor Castillo dated May 31, 1962, an examination of the books and records of the Security
Credit and Loans Organizations, Inc. seized by the combined MPD-CB team was conducted by this
Department. The examination disclosed the following findings:
a. Considering the extent of its operations, the Security Credit and Acceptance
Corporation, Inc., receives deposits from the public regularly. Such deposits are treated
in the Corporation's financial statements as conditional subscription to capital stock.
Accumulated deposits of P5,000 of an individual depositor may be converted into stock
subscription to the capital stock of the Security Credit and Acceptance Corporation at the
option of the depositor. Sale of its shares of stock or subscriptions to its capital stock
are offered to the public as part of its regular operations.
b. That out of the funds obtained from the public through the receipt of deposits and/or
the sale of securities, loans are made regularly to any person by the Security Credit and
Acceptance Corporation.
A copy of the Memorandum Report dated July 30, 1962 of the examination made by Examiners of
this Department of the seized books and records of the Corporation is attached hereto.

37

12. Section 2 of Republic Act No. 337, otherwise known as the General Banking Act, defines the
term, "banking institution" as follows:
Sec. 2. Only duly authorized persons and entities may engage in the lending of funds
obtained from the public through the receipts of deposits or the sale of bonds, securities,
or obligations of any kind and all entities regularly conducting operations shall be
considered as banking institutions and shall be subject to the provisions of this Act, of the
Central Bank Act, and of other pertinent laws. ...
13. Premises considered, the examination disclosed that the Security Credit and Acceptance
Corporation is regularly lending funds obtained from the receipt of deposits and/or the sale of
securities. The Corporation therefore is performing 'banking functions' as contemplated in Republic
Act No. 337, without having first complied with the provisions of said Act.
Recommendations:
In view of all the foregoing, it is recommended that the Monetary Board decide and declare:
1. That the Security Credit and Acceptance Corporation is performing banking functions without
having first complied with the provisions of Republic Act No. 337, otherwise known as the General
Banking Act, in violation of Sections 2 and 6 thereof; and
2. That this case be referred to the Special Assistant to the Governor (Legal Counsel) for whatever
legal actions are warranted, including, if warranted criminal action against the Persons criminally
liable and/or quo warranto proceedings with preliminary injunction against the Corporation for its
dissolution. (Emphasis supplied.)
that, acting upon said memorandum of the Superintendent of Banks, on September 14, 1962, the
Monetary Board promulgated its Resolution No. 1095, declaring that the corporation is performing
banking operations, without having first complied with the provisions of Sections 2 and 6 of
Republic Act No. 337;3 that on September 25, 1962, the corporation was advised of the
aforementioned resolution, but, this notwithstanding, the corporation, as well as the members of
its Board of Directors and the officers of the corporation, have been and still are performing the
functions and activities which had been declared to constitute illegal banking operations; that
during the period from March 27, 1961 to May 18, 1962, the corporation had established 74
branches in principal cities and towns throughout the Philippines; that through a systematic and
vigorous campaign undertaken by the corporation, the same had managed to induce the public to
open 59,463 savings deposit accounts with an aggregate deposit of P1,689,136.74; that, in
consequence of the foregoing deposits with the corporation, its original capital stock of P500,000,
divided into 20,000 founders' shares of stock and 80,000 preferred shares of stock, both of which
had a par value of P5.00 each, was increased, in less than one (1) year, to P3,000,000 divided into
130,000 founders' shares and 470,000 preferred shares, both with a par value of P5.00 each; and
that, according to its statement of assets and liabilities, as of December 31, 1961, the corporation
had a capital stock aggregating P1,273,265.98 and suffered, during the year 1961, a loss of
P96,685.29. Accordingly, on December 6, 1962, the Solicitor General commenced this quo
warranto proceedings for the dissolution of the corporation, with a prayer that, meanwhile, a writ
of preliminary injunction be issued ex parte, enjoining the corporation and its branches, as well as
its officers and agents, from performing the banking operations complained of, and that a receiver
be appointed pendente lite.
38
38
Upon joint motion of both parties, on August 20, 1963, the Superintendent of Banks of the Central Bank of
the Philippines was appointed by this Court receiver pendente lite of defendant corporation, and upon the
filing of the requisite bond, said officer assumed his functions as such receiver on September 16, 1963.
In their answer, defendants admitted practically all of the allegations of fact made in the petition. They,
however, denied that defendants Tanjutco (Pablo and Vito, Jr.), Soriano, Beltran, Zapa, Balatbat and
Sebastian, are directors of the corporation, as well as the validity of the opinion, ruling, evaluation and
conclusions, rendered, made and/or reached by the legal counsel and the intelligence division of the Central
Bank, the Securities and Exchange Commission, and the Superintendent of Banks of the Philippines, or in
Resolution No. 1095 of the Monetary Board, or of Search Warrant No. A-1019 of the Municipal Court of
Manila, and of the search and seizure made thereunder. By way of affirmative allegations, defendants
averred that, as of July 7, 1961, the Board of Directors of the corporation was composed of defendants
Rosendo T. Resuello, Aquilino L. Illera and Pilar G. Resuello; that on July 11, 1962, the corporation had filed
with the Superintendent of Banks an application for conversion into a Security Savings and Mortgage Bank,
with defendants Zapa, Balatbat, Tanjutco (Pablo and Vito, Jr.), Soriano, Beltran and Sebastian as proposed
directors, in addition to the defendants first named above, with defendants Rosendo T. Resullo, Zapa, Pilar
G. Resuello, Balatbat and Sebastian as proposed president, vice-president, secretary-treasurer, auditor and
legal counsel, respectively; that said additional officers had never assumed their respective offices because
of the pendency of the approval of said application for conversion; that defendants Soriano, Beltran,
Sebastian, Vito Tanjutco Jr. and Pablo Tanjutco had subsequently withdrawn from the proposed mortgage
and savings bank; that on November 29, 1962 — or before the commencement of the present proceedings
— the corporation and defendants Rosendo T. Resuello and Pilar G. Resuello had instituted Civil Case No.
52342 of the Court of First Instance of Manila against Purificacion Santos and other members of the savings
plan of the corporation and the City Fiscal for a declaratory relief and an injunction; that on December 3,
1962, Judge Gaudencio Cloribel of said court issued a writ directing the defendants in said case No. 52342
and their representatives or agents to refrain from prosecuting the plaintiff spouses and other officers of the
corporation by reason of or in connection with the acceptance by the same of deposits under its savings
plan; that acting upon a petition filed by plaintiffs in said case No. 52342, on December 6, 1962, the Court of
First Instance of Manila had appointed Jose Ma. Ramirez as receiver of the corporation; that, on December
12, 1962, said Ramirez qualified as such receiver, after filing the requisite bond; that, except as to one of
the defendants in said case No. 52342, the issues therein have already been joined; that the failure of the
corporation to honor the demands for withdrawal of its depositors or members of its savings plan and its
former employees was due, not to mismanagement or misappropriation of corporate funds, but to an
abnormal situation created by the mass demand for withdrawal of deposits, by the attachment of property of
the corporation by its creditors, by the suspension by debtors of the corporation of the payment of their
debts thereto and by an order of the Securities and Exchange Commission dated September 26, 1962, to the
corporation to stop soliciting and receiving deposits; and that the withdrawal of deposits of members of the
savings plan of the corporation was understood to be subject, as to time and amounts, to the financial
condition of the corporation as an investment firm.
In its reply, plaintiff alleged that a photostat copy, attached to said pleading, of the anniversary publication
of defendant corporation showed that defendants Pablo Tanjutco, Arturo Soriano, Ruben Beltran, Bienvenido
V. Zapa, Ricardo D. Balatbat, Jose R. Sebastian and Vito Tanjutco Jr. are officers and/or directors thereof;
that this is confirmed by the minutes of a meeting of stockholders of the corporation, held on September 27,
1962, showing that said defendants had been elected officers thereof; that the views of the legal counsel of
the Central Bank, of the Securities and Exchange Commission, the Intelligence Division, the Superintendent
of Banks and the Monetary Board above referred to have been expressed in the lawful performance of their
respective duties and have not been assailed or impugned in accordance with law; that neither has the
validity of Search Warrant No. A-1019 been contested as provided by law; that the only assets of the
corporation now consist of accounts receivable amounting approximately to P500,000, and its office
equipment and appliances, despite its increased capitalization of P3,000,000 and its deposits amounting to
not less than P1,689,136.74; and that the aforementioned petition of the corporation, in Civil Case No.
52342 of the Court of First Instance of Manila, for a declaratory relief is now highly improper, the defendants
having already committed infractions and violations of the law justifying the dissolution of the corporation.
Although, admittedly, defendant corporation has not secured the requisite authority to engage in banking,
defendants deny that its transactions partake of the nature of banking operations. It is conceded, however,
that, in consequence of a propaganda campaign therefor, a total of 59,463 savings account deposits have
been made by the public with the corporation and its 74 branches, with an aggregate deposit of
P1,689,136.74, which has been lent out to such persons as the corporation deemed suitable therefor. It is
clear that these transactions partake of the nature of banking, as the term is used in Section 2 of the
General Banking Act. Indeed, a bank has been defined as:
... a moneyed institute [Talmage vs. Pell 7 N.Y. (3 Seld. ) 328, 347, 348] founded to facilitate the
borrowing, lending and safe-keeping of money (Smith vs. Kansas City Title & Trust Co., 41 S. Ct.
243, 255 U.S. 180, 210, 65 L. Ed. 577) and to deal, in notes, bills of exchange, and credits (State
vs. Cornings Sav. Bank, 115 N.W. 937, 139 Iowa 338). (Banks & Banking, by Zellmann Vol. 1, p.
46).
Moreover, it has been held that:
An investment company which loans out the money of its customers, collects the interest and
charges a commission to both lender and borrower, is a bank. (Western Investment Banking Co.
vs. Murray, 56 P. 728, 730, 731; 6 Ariz 215.)
... any person engaged in the business carried on by banks of deposit, of discount, or of circulation
is doing a banking business, although but one of these functions is exercised. (MacLaren vs. State,
124 N.W. 667, 141 Wis. 577, 135 Am. S.R. 55, 18 Ann. Cas. 826; 9 C.J.S. 30.)
Accordingly, defendant corporation has violated the law by engaging in banking without securing
the administrative authority required in Republic Act No. 337.
That the illegal transactions thus undertaken by defendant corporation warrant its dissolution is apparent
from the fact that the foregoing misuser of the corporate funds and franchise affects the essence of its
business, that it is willful and has been repeated 59,463 times, and that its continuance inflicts injury upon
the public, owing to the number of persons affected thereby.
It is urged, however, that this case should be remanded to the Court of First Instance of Manila upon the
authority of Veraguth vs. Isabela Sugar Co. (57 Phil. 266). In this connection, it should be noted that this
Court is vested with original jurisdiction, concurrently with courts of first instance, to hear and decide quo
warranto cases and, that, consequently, it is discretionary for us to entertain the present case or to require
that the issues therein be taken up in said Civil Case No. 52342. The Veraguth case cited by herein
defendants, in support of the second alternative, is not in point, because in said case there were issues of
fact which required the presentation of evidence, and courts of first instance are, in general, better equipped
than appellate courts for the taking of testimony and the determination of questions of fact. In the case at
bar, there is, however, no dispute as to the principal facts or acts performed by the corporation in the
conduct of its business. The main issue here is one of law, namely, the legal nature of said facts or of the
aforementioned acts of the corporation. For this reason, and because public interest demands an early
disposition of the case, we have deemed it best to determine the merits thereof.
Wherefore, the writ prayed for should be, as it is hereby granted and defendant corporation is, accordingly,
ordered dissolved. The appointment of receiver herein issued pendente lite is hereby made permanent, and
39
the receiver is, accordingly, directed to administer the properties, deposits, and other assets of defendant
corporation and wind up the affairs thereof conformably to Rules 59 and 66 of the Rules of Court. It is so
ordered.
Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur.
Footnotes
1
Which, as amended on May 8, 1961, authorized it:
"1. To extend credit facilities for home building and agricultural, commercial and industrial
projects;
2. To extend credit, give loans, mortgages and pledges, either as principal, agent, broker
or attorney-in-fact, upon every and all kind and classes of products, materials, goods,
merchandise, and other properties, real or personal of every kind and nature;
3. To draw, accept, endorse, purchase, own, sell, discount, mortgage, assign or otherwise
dispose of, negotiate or collect accounts or notes receivables, negotiable instruments,
letters of credit and other evidence of indebtedness;
4. To purchase, acquire, and take over, all or any part of the rights, assets and business
of any person, partnership, corporation or association, and to undertake and assume the
liabilities and obligations of such person, partnership, corporation or association whose
rights, assets, business or property may be purchased, acquired or taken over;
5. To issue bonds, debentures, securities, collaterals and other obligations or otherwise
incur indebtedness in such manner as may be ascertained by the corporation; and
6. To undertake the management, promotion, financing and/or collection services of the
operation of the business, industry or enterprises of any person, partnership, corporation
or association in so far as may be permitted under the laws of the Philippines." (Emphasis
supplied.).
2
Empowering said Board, inter alia:
"c) To pay for any property or rights acquired by the corporation or to discharge
obligations of the corporation either wholly or partly in money or in stock, bonds,
debentures or other securities of the corporation;
"d) To lend or borrow money for the corporation with or without security and for such
purpose to accept or create, make and issue mortgages, bonds, deeds of trust and
negotiable instruments or securities, secured by mortgage or pledge of property
belonging to the corporation; provided, that as hereinafter provided, the proper officers of
the corporation shall have these powers, unless expressly limited by the Board of
Directors: ... (Emphasis supplied).
 40
3
"Sec. 2. Only duly authorized persons and entities may engage in the lending of funds obtained
from the public through the receipts of deposits or the sale of bonds, securities, or obligations of
any kind, and all entities regularly conducting such operations shall be considered as banking
institutions and shall be subject to the provisions of this Act, of the General Bank Act, and of other
pertinent laws. The terms 'banking institution and 'bank', as used in this Act, are synonymous and
interchangeable and specially include banks, banking institutions, commercial banks, savings
banks, mortgage banks, trust companies, building and loan associations, branches and agencies in
the Philippines of foreign banks, hereinafter called Philippine branches, and all other corporations,
companies, partnerships, and associations performing banking functions in the Philippines.

"Persons and entities which receive deposits only occasionally shall not be considered as
banks, but such persons and entities shall be subject to regulation by the Monetary Board
of the Central Bank; nevertheless in no case may the Central Bank authorize the drawing
of checks against deposits not maintained in banks, or branches or agencies thereof.

"The Monetary Board may similarly regulate the activities of persons and entities which
act as agents of banks.

"Sec. 6. No person, association or corporation not conducting the business of a

commercial banking corporation, trust corporation, savings and mortgage banks, or
building and loan association, as defined in this Act, shall advertise or hold itself out as
being engaged in the business of such bank, corporation or association, or use in
connection with its business title the word or words, 'bank', 'banking,' 'banker,' 'building
and loan association,' 'trust corporation,' 'trust company,' or words of similar import, or
solicit or receive deposits of money for deposit, disbursement, safekeeping, or otherwise,
or transact in any manner the business of any such bank, corporation or association
without having first complied with the provisions of this Act in so far as it relates to
commercial banking corporations, trust corporations, savings and mortgage banks, or
building and loan association as the case may be. For any violation of the provisions of
this section by a corporation, the officers and directors thereof shall be jointly and
severally liable. Any violation of the provisions of this section shall be punished by a fine
of five hundred pesos for each day during which such violation is continued or repeated,
and, in default of the payment thereof, subsidiary imprisonment as prescribed by law."

40
G.R. No. 160260 October 24, 2012 613307 (Exh. E) 1008-08734-3 June 14, 1988 200,000.00

613306 (Exh. D) 1008-08734-3 July 4, 1988 290,595.00

WESTMONT BANK, formerly ASSOCIATED BANK now UNITED OVERSEAS BANK
PHILIPPINES, Petitioner,
vs.
MYRNA DELA ROSA-RAMOS, DOMINGO TAN and WILLIAM CO, Respondents.
According to Dela Rosa-Ramos, Check No. 467322 for P200,000.00 was a "stale" guarantee check. The
DECISION check was originally dated August 28, 1987 but was altered to make it appear that it was dated May 8,
1988. Tan then deposited the check in the account of the other respondent, William Co (Co), despite the
obvious superimposed date. As a result, the amount of P200,00.00 or the value indicated in the check was
MENDOZA, J.:
eventually charged against her checking account.9

This is a Petition for Review under Rule 45 of the 1997 Rules of Court procedure seeking a partial review of
Check No. 510290 for P232,500.00, dated June 10, 1988, was issued in payment of cigarettes that Dela
the February 14, 2003 Decision1 and the October 2, 2003 Resolution2 of the Court of Appeals (CA), in CA-
Rosa-Ramos bought from Co. This check allegedly "bounced" so she replaced it with her "good customer’s
G.R. CV No. 63983, which modified the September 16, 1998 Decision of the Regional Trial Court, Branch 7,
check and cash" and gave it to Tan. The latter, however, did not return the bounced check to her. Instead,
Manila (RTC) in Civil Case No. 89-17926 entitled, Myrna Dela Rosa-Ramos v. Westmont Bank, formerly
he "redeposited" it in Co’s account.10
Associated Bank, Domingo Tan, and William Co.

Check No. 613307 for P200,000.00, was another guarantee check that was also "undated." Dela Rosa-
The petition was filed on November 24, 2003 and received by this Court on December 15, 2003. The case
Ramos claimed that it was Tan who placed the date "June 14, 1988." For this check, an order to stop
was given due course on February 6, 2008.
payment was issued because of insufficient funds. Expectedly, the words

The Facts
From 1986, respondent Myrna Dela Rosa-Ramos (Dela Rosa-Ramos) maintained a checking/current account
with the United Overseas Bank Philippines3 (Bank) at the latter’s Sto. Cristo Branch, Binondo, Manila. In her
several transactions with the Bank, Dela Rosa-Ramos got acquainted with its Signature Verifier, respondent
Domingo Tan (Tan).4
In the course of their acquaintance, Tan offered Dela Rosa-Ramos a "special arrangement"5 wherein he
would finance or place sufficient funds in her checking/current account whenever there would be an
overdraft or when the amount of said checks would exceed the balance of her current account. It was their
arrangement to make sure that the checks she would issue would not be dishonored. Tan offered the service
for a fee of P50.00 a day for every P40,000.00 he would finance. This financier-debtor relationship started in
1987 and lasted until1998.6
In order to guarantee payment for such funding, Dela Rosa-Ramos issued postdated checks covering the
principal amount plus interest as computed by Tan on specified date. There were also times when she just
paid in cash.7 Relative to their said agreement, Dela Rosa-Ramos issued and delivered to Tan the following
Associated Bank checks8 drawn against her current account and payable to "cash," to wit:
1âwphi1
"PAYMENT STOPPED" were stamped on both sides of the check. This check was not returned to her either
and, instead, it was "redeposited" in Co’s account.11
Check Nos. 510290 and 613307 were both dishonored for insufficient funds.1âwphi1 When Dela Rosa-Ramos
got the opportunity to confront Co regarding their deposit of the two checks, the latter disclosed that her two
checks were deposited in his account to cover for his P432,500.00 cash which was taken by Tan. Then, with
a threat to expose her relationship with a married man, Tan and Co were able to coerce her to replace the
two above-mentioned checks with Check No. 59864812 in the amount of P432,500.00 which was equivalent
to the total amount of the two dishonored checks.13
Check No. 613306 for P290,595.00, was also undated when delivered to Tan who later placed the date, July
4, 1988. Dela Rosa-Ramos pointed out that as of July 5, 1988, her checking account had P121,989.66 which
was insufficient to answer for the value of said check. A check of a certain Lee See Bin in the amount of
P170,000.00 was, however, deposited in her checking account. As a result, Tan was able to encash Check
No. 613306 and withdrew her P121,989.66 balance. Later, Dela Rosa-Ramos found out that the Lee See Bin
Check was not funded because the Bank’s bookkeeper demanded from her the return of the deficiency.14
Claiming that the four checks mentioned were deposited by Tan without her consent, Dela Rosa-Ramos
instituted a complaint15 against Tan and the Bank before the RTC seeking, among other things, to recover
from the Bank the sum of ₱754,689.66 representing the total amount charged or withdrawn from her current
account. Dela Rosa-Ramos subsequently amended her complaint to include Co.16

CHECK NO. CURRENT ACCT. DATE AMOUNT During the trial, Tan’s partial direct testimony was ordered stricken off the records because he failed to
complete it and make himself available for cross-examination. Later, it was found out that he had passed
467322 (Exh. A) 1008-08341-0 May 8, 1988 PhP200,000.00 away.17
510290 (Exh. C) 1008-08734-3 June 10, 1988 232,500.00
On September 16, 1998, the RTC resolved the case in this wise:

41

WHEREFORE, judgment is hereby rendered, sentencing defendant Associated Bank now the Westmont Bank
and defendants – DOMINGO TAN and WILLIAM CO, to pay the plaintiff, jointly and severally:
1. The sum of P754,689.66, representing plaintiff’s lost deposit, plus interest thereon at the legal
rate of 12% per annum from the filing of the complaint, until fully paid;
2. The sum of P1,000,000.00, as moral damages;
3. The sum equivalent to 10% thereof, as exemplary damages;
4. The sum equivalent to 25% of the total amount due, as and for attorney’s fees; and
5. Costs.
Defendant’s counterclaims are hereby dismissed for lack of merit.
SO ORDERED.18
Co and the Bank appealed their cases to the CA. As Co failed to file a brief within the period prescribed, his
appeal was dismissed.19 The CA then proceeded to resolve the appeal of the Bank. On February 14, 2003, the
CA rendered its appealed decision, the dispositive portion of which reads:
WHEREFORE, premises considered, Decision dated September 16, 1998 of the Regional Trial Court of Manila,
National Capital Region, Branch 7, in Civil Case No. 89-17926, is hereby AFFIRMED with the MODIFICATION
that: (a) the defendants are liable only for the amount of ₱521,989.00 covering Check Nos. 467322, 613307
and ₱121,989.66 covered by Check No. 613306 and (b) deleting the award for moral damages and
attorney’s fees.
SO ORDERED.20
Still not satisfied, the Bank moved for partial reconsideration. On October 2, 2003, the CA denied it for lack
of merit. In the case of Co, he never appealed the CA decision. Thus, only the Bank is now before this Court
raising the following issues:
I.
WITHOUT DELINEATING THE SOURCE OF THE RESPECTIVE OBLIGATIONS OF PETITIONER BANK,
RESPONDENT TAN AND RESPONDENT CO IN RELATION TO RESPONDENT DELA ROSA-RAMOS, THE
HONORABLE COURT OF APPEALS UTTERLY AND GRAVELY ERRED WHEN IT SWEEPINGLY AFFIRMED
THE JUDGMENT OF THE HONORABLE TRIAL COURT MAKING THEM JOINTLY AND SEVERALLY
LIABLE FOR THE JUDGMENT AWARD IN FAVOR OF RESPONDENT DELA ROSA-RAMOS.
II.
42
42
THE JUDGMENT AWARD AGAINST PETITIONER BANK UNDER CHECK NO. 467322 (EXH. ‘A’) IS
TOTALLY WITHOUT LEGAL BASIS AS THE SAME WAS MERELY BASED ON SPECULATIVE
ASSUMPTION OR PURE SPECULATION.
III.
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN FINDING THAT THE ACCOUNT OF
RESPONDENT DELA ROSA-RAMOS WAS DEBITED WITH THE FACE AMOUNT OF CHECK NO. 613307
(EXH. ‘E’) AS SUCH FINDING IS CONTRARY TO THE FINDING OF THE HONORABLE TRIAL COURT
THAT THE SAID CHECK WAS DISHONORED TOGETHER WITH CHECK NO. 510290 (EXH. ‘C’) FOR
THE REASON THAT BOTH CHECKS WERE DRAWN AGAINST INSUFFICIENT FUNDS.
IV.
NOTWITHSTANDING AND CLEARLY CONTRADICTING ITS VERY FINDING THAT "AS TO CHECK NO.
613306 (EXH.’D’), THIS COURT OPINES THAT NO MANIFEST IRREGULARITY EXISTS," THE
HONORABLE COURT OF APPEALS GROSSLY ERRED WHEN IT ERRONEOUSLY FOUND PETITIONER
BANK LIABLE IN THE AMOUNT OF P121,989.96 COVERED BY SAID CHECK.
V.
ASSUMING ARGUENDO THAT PETITIONER BANK IS LIABLE TO ANSWER FOR THE ALLEGED
DAMAGES SUFFERED BY RESPONDENT DELA ROSA-RAMOS, THE HONORABLE COURT OF APPEALS
GROSSLY ERRED WHEN IT FAILED TO PASS UPON PETITIONER BANK’S CROSS-CLAIM AGAINST
RESPONDENT TAN.21
It must be remembered that public interest is intimately carved into the banking industry because the
primordial concern here is the trust and confidence of the public. This fiduciary nature of every bank’s
relationship with its clients/depositors impels it to exercise the highest degree of care, definitely more than
that of a reasonable man or a good father of a family.22 It is, therefore, required to treat the accounts and
deposits of these individuals with meticulous care.23 The rationale behind this is well-expressed in Sandejas
v. Ignacio,24
The banking system has become an indispensable institution in the modern world and plays a vital role in
the economic life of every civilized society – banks have attained a ubiquitous presence among the people,
who have come to regard them with respect and even gratitude and most of all, confidence, and it is for this
reason, banks should guard against injury attributable to negligence or bad faith on its part.
Considering that banks can only act through their officers and employees, the fiduciary obligation laid down
for these institutions necessarily extends to their employees. Thus, banks must ensure that their employees
observe the same high level of integrity and performance for it is only through this that banks may meet and
comply with their own fiduciary duty.25 It has been repeatedly held that "a bank’s liability as an obligor is not
merely vicarious, but primary"26 since they are expected to observe an equally high degree of diligence, not
only in the selection, but also in the supervision of its employees. Thus, even if it is their employees who are
negligent, the bank’s responsibility to its client remains paramount making its liability to the same to be a
direct one.
Guided by the following standard, the Bank, given the fiduciary nature of its relationship with Dela Rosa- Lastly, with respect to Check No. 613306, the Court agrees with the CA when it found:
Ramos, should have exerted every effort to safeguard and protect her money which was deposited and
entrusted with it. As found by both the RTC and the CA, Ramos was defrauded and she lost her money
x x x that no manifest irregularity exists as shown from the Statement of Accounts for the month of July
because of the negligence attributable to the Bank and its employees. Indeed, it was the employees who
1988 that as of July 4, 1988, the plaintiff-appellee had an outstanding deposit of P121,989.66. It was also
directly dealt with Dela Rosa-Ramos, but the Bank cannot distance itself from them. That they were the ones
cleared therein that, on July 5, 1988, P170,000.00, through the check of Lee See Bin with the same UNITED
who gained at the expense of Dela Rosa-Ramos will not excuse it of its fundamental responsibility to her. As
OVERSEAS BANK-Sto. Cristo Branch, was deposited on the account of the plaintiff-appellee and on the very
stated by the RTC,
same day Check No. 613306 in the amount of P290,595.00 was approved and processed and its equivalent
was debited from the account of the plaintiff-appellee since the check is an ‘on-us’ check which is deposited
The factual circumstances attending the repeated irregular entries and transactions involving the current to an account of another with the same branch as that of the drawer of the said check, and is considered as
account of the plaintiff-appellee is evidently due to, if not connivance, gross negligence of other bank officers good as cash if funded, hence, may be withdrawn on the very same day it was deposited.30
since the repeated assailed transactions could not possibly be committed by defendant Tan alone considering
the fact that the processing of the questioned checks would pass the hands of various bank officers who
The Court has reviewed the findings of the RTC on the matter and agrees with the CA that there was no
positively identified their initials therein. Having a number of employees commit mistake or gross negligence
irregularity. The burden of proof was on Dela Rosa-Ramos to establish that Lee See Bin was fictitious and
at the same situation is so puzzling and obviates the appellant bank’s laxity in hiring and supervising its
that the money which purportedly came from him was merely simulated. She unfortunately failed to
employees. Hence, this Court is of the opinion that the appellant bank should be held liable for the damages
discharge this burden.
suffered by the plaintiff-appellee in the case at bench.27

That matter being settled, the next matter to be determined is the amount of liability of the Bank.
As regards Check No. 467322, the Bank avers that Dela Rosa- Ramos’ acquiesced to the change of the date
in the said check. It argues that her continued acts of dealing and transacting with the Bank like
subsequently issuing checks despite her experience with this check only shows her acquiescence which is
tantamount to giving her consent. Obviously, the Bank has not taken to heart its fiduciary responsibility to
its clients. Rather than ask and wonder why there were indeed subsequent transactions, the more
paramount issue is why the Bank through its several competent employees and officers, did not stop, double
check and ascertain the genuineness of the date of the check which displayed an obvious alteration. This
failure on the part of the Bank makes it liable for that loss. As the RTC held:
Withal, the Bank should only be made to answer the value of Check No. 467322 in the amount of
P200,000.00 plus the legal rate of interest. This must be further tempered down for there is no denying that
it was Dela Rosa-Ramos who exposed herself to risk when she entered into that "special arrangement" with
Tan. While the Bank reneged on its responsibility to Dela Rosa-Ramos, she is nevertheless equally guilty of
contributory negligence. It has been held that where the bank and a depositor are equally negligent, they
should equally suffer the loss. The two must both bear the consequences of their mistakes.31 Thus, the Bank
should only pay 50% of the actual damages awarded while Dela Rosa-Ramos should have to shoulder the
remaining 50%.
Considering that Tan was primarily responsible for the damages caused to Dela Rosa-Ramos, the Bank can
seek compensation from his estate, subject to the applicable laws and rules.

x x x defendant-bank is not faultless in the irregularities of its signature-verifier. In the first place, it should
The reinstatement of deleted damages sought by Dela Rosa-Ramosin her comment may not be entertained
have readily rejected the obviously altered plaintiff’s P200,000.00-check, thus, avoid its unwarranted deposit
for she did not appeal the CA decision.
in defendant-Co’s account and its corollary loss from plaintiff’s deposit, had its other employees, even
excepting TAN, performed their duties efficiently and well. x x x28
WHEREFORE, the petition for review is PARTIALLY GRANTED. The February 14, 2003 Decision and the
October 2, 2003 Resolution of the Court of Appeals in CA-G.R. CV No. 63983 are MODIFIED. Petitioner
The glaring error did not escape the observation of the CA either. On the matter, it hastened to add:
United Overseas Bank Philippines (formerly Westmont Bank) is hereby ordered to pay respondent Myrna
Dela Rosa-Ramos the amount of P100,000.00, representing 50% of the actual damages awarded plus legal
A careful scrutiny of the evidence shows that indeed the date of Check No. 467322 had been materially interest.
altered from August 1987 to May 8, 1988 in accordance with Section 125 of the Negotiable Instruments Law.
It is worthy to take note of the fact that such alteration was not countersigned by the drawer to make it a
SO ORDERED.
valid correction of its date as consented by its drawer as the standard operating procedure of the appellant
bank in such situation as admitted by its Sto. Cristo Branch manager, Mabini Z. Millan. x x x.29

On Check No. 613307, the Bank argues that the CA erred in considering that the said check was debited
against the account of Dela Rosa-Ramos when the fact was that it was dishonored for having been drawn
against insufficient funds. This means that the check was not charged against her account.

In this regard, the Court agrees with the Bank. Indeed, the admission made by Dela Rosa-Ramos that she
had to issue a replacement check for Check No. 613307 as well as for Check No. 510290 only proves that
these checks were never paid and charged or debited against her account. The replacement check is, of
course, a totally different matter and is not covered as an issue in this case.

43
 44

G.R. No. 183774 November 14, 2012 consideration therefor as the latter even withdrew their adverse claim and never demanded for the payment
of any unpaid balance.
PHILIPPINE BANKING CORPORATION, Petitioner,
vs. On the other hand, Philbank filed its Answer8 asserting that it is an innocent mortgagee for value without
ARTURO DY, BERNARDO DY, JOSE DELGADO AND CIPRIANA DELGADO, Respondents. notice of the defect in the title of the Dys. It filed a cross-claim against Sps. Delgado and the Dys for all the
damages that may be adjudged against it in the event they are declared seller and purchaser in bad faith,
respectively.
DECISION

In answer to the cross-claim, Sps. Delgado insisted that Philbank was not a mortgagee in good faith for
PERLAS-BERNABE, J.:
having granted the loan and accepted the mortgage despite knowledge of the simulation of the sale to the
Dys and for failure to verify the nature of the buyer’s physical possession of a portion of Lot No. 6966. They
This Petition for Review on Certiorari assails the January 30, 2008 Decision1 of the Court of Appeals (CA) in thereby prayed for the cancellation of the mortgage in Philbank's favor.
CA-G.R. CV No. 51672, which set aside the October 5, 1994 Decision2 of the Regional Trial Court of Cebu
City, Branch 22 (RTC) and directed the Register of Deeds of Cebu City to cancel Transfer Certificate of Title
Subsequently, Sps. Delgado amended their cross-claim against the Dys to include a prayer for the
(TCT) Nos. 517683 and 519014 in the names of respondents Arturo Dy and Bernardo Dy (Dys) and to issue
nullification of the deeds of absolute sale in the latter's favor and the corresponding certificates of title, and
the corresponding TCTs in the name of respondent Cipriana Delgado (Cipriana).
for the consequent reinstatement of Cipriana’s title.9

The Factual Antecedents

The complaints against the Dys and Philbank were subsequently withdrawn. On the other hand, both the
buyer and Sps. Delgado never presented any evidence in support of their respective claims. Hence, the RTC
Cipriana was the registered owner of a 58,129-square meter (sq.m.) lot, denominated as Lot No. 6966, limited itself to the resolution of the claims of Sps. Delgado, Philbank and the Dys against one another.
situated in Barrio Tongkil, Minglanilla, Cebu, covered by TCT No. 18568. She and her husband, respondent
Jose Delgado (Jose), entered into an agreement with a certain Cecilia Tan (buyer) for the sale of the said
The RTC Ruling
property for a consideration of P10.00/sq.m. It was agreed that the buyer shall make partial payments from
time to time and pay the balance when Cipriana and Jose (Sps. Delgado) are ready to execute the deed of
sale and transfer the title to her. In the Decision10 dated October 5, 1994, the RTC dismissed the cross-claims of Sps. Delgado against the
Dys and Philbank. It noted that other than Sps. Delgado's bare allegation of the Dys' supposed non-payment
of the full consideration for Lot Nos. 6966 and 4100-A, they failed to adduce competent evidence to support
At the time of sale, the buyer was already occupying a portion of the property where she operates a noodle
their claim. On the other hand, the Dys presented a cash voucher11 dated April 6, 1983 duly signed by Sps.
(bihon) factory while the rest was occupied by tenants which Sps. Delgado undertook to clear prior to full
Delgado acknowledging receipt of the total consideration for the two lots.
payment. After paying the total sum of P147,000.00 and being then ready to pay the balance, the buyer
demanded the execution of the deed, which was refused. Eventually, the buyer learned of the sale of the
property to the Dys and its subsequent mortgage to petitioner Philippine Banking Corporation (Philbank), The RTC also observed that Sps. Delgado notified Philbank of the purported simulation of the sale to the Dys
prompting the filing of the Complaint5 for annulment of certificate of title, specific performance and/or only after the execution of the loan and mortgage documents and the release of the loan proceeds to the
reconveyance with damages against Sps. Delgado, the Dys and Philbank. latter, negating their claim of bad faith. Moreover, they subsequently notified the bank of the Dys' full
payment for the two lots mortgaged to it.
In their Answer, Sps. Delgado, while admitting receipt of the partial payments made by the buyer, claimed
that there was no perfected sale because the latter was not willing to pay their asking price of P17.00/sq.m. The CA Ruling
They also interposed a cross-claim against the Dys averring that the deeds of absolute sale in their favor
dated June 28, 19826 and June 30, 19827 covering Lot No. 6966 and the adjoining Lot No. 4100-A (on
However, on appeal, the CA set aside12 the RTC's decision and ordered the cancellation of the Dys'
which Sps. Delgado's house stands), were fictitious and merely intended to enable them (the Dys) to use the
certificates of title and the reinstatement of Cipriana's title. It ruled that there were no perfected contracts of
said properties as collateral for their loan application with Philbank and thereafter, pay the true consideration
sale between Sps. Delgado and the Dys in view of the latter's admission that the deeds of sale were
of P17.00/sq.m. for Lot No. 6966. However, after receiving the loan proceeds, the Dys reneged on their
purposely executed to facilitate the latter's loan application with Philbank and that the prices indicated
agreement, prompting Sps. Delgado to cause the annotation of an adverse claim on the Dys' titles and to
therein were not the true consideration. Being merely simulated, the contracts of sale were, thus, null and
inform Philbank of the simulation of the sale. Sps. Delgado, thus, prayed for the dismissal of the complaint,
void, rendering the subsequent mortgage of the lots likewise void.
with a counterclaim for damages and a cross-claim against the Dys for the payment of the balance of the
purchase price plus damages.
The CA also declared Philbank not to be a mortgagee in good faith for its failure to ascertain how the Dys
acquired the properties and to exercise greater care when it conducted an ocular inspection thereof. It
For their part, the Dys denied knowledge of the alleged transaction between cross-claimants Sps. Delgado
thereby canceled the mortgage over the two lots.
and buyer. They claimed to have validly acquired the subject property from Sps. Delgado and paid the full

44
The Petition
In the present petition, Philbank insists that it is a mortgagee in good faith. It further contends that Sps.
Delgado are estopped from denying the validity of the mortgage constituted over the two lots since they
participated in inducing Philbank to grant a loan to the Dys.
On the other hand, Sps. Delgado maintain that Philbank was not an innocent mortgagee for value for failure
to exercise due diligence in transacting with the Dys and may not invoke the equitable doctrine of estoppel
to conceal its own lack of diligence.
For his part, Arturo Dy filed a Petition-in-Intervention13 arguing that while the deeds of absolute sale over
the two properties were admittedly simulated, the simulation was only a relative one involving a false
statement of the price. Hence, the parties are still bound by their true agreement. The same was
opposed/objected to by both Philbank14 and Sps. Delgado15 as improper, considering that the CA judgment
had long become final and executory as to the Dys who neither moved for reconsideration nor appealed the
CA Decision.
In this case, while Philbank failed to exercise greater care in conducting the ocular inspection of the
properties offered for mortgage,24 its omission did not prejudice any innocent third parties. In particular,
the buyer did not pursue her cause and abandoned her claim on the property. On the other hand, Sps.
Delgado were parties to the simulated sale in favor of the Dys which was intended to mislead Philbank into
granting the loan application. Thus, no amount of diligence in the conduct of the ocular inspection could have
led to the discovery of the complicity between the ostensible mortgagors (the Dys) and the true owners
(Sps. Delgado).1âwphi1 In fine, Philbank can hardly be deemed negligent under the premises since the
ultimate cause of the mortgagors' (the Dys') defective title was the simulated sale to which Sps. Delgado
were privies.
Indeed, a finding of negligence must always be contextualized in line with the attendant circumstances of a
particular case. As aptly held in Philippine National Bank v. Heirs of Estanislao Militar,25 "the diligence with
which the law requires the individual or a corporation at all times to govern a particular conduct varies with
the nature of the situation in which one is placed, and the importance of the act which is to be
performed."26 Thus, without diminishing the time-honored principle that nothing short of extraordinary
diligence is required of banks whose business is impressed with public interest, Philbank's inconsequential
oversight should not and cannot serve as a bastion for fraud and deceit.

The Ruling of the Court
The petition is meritorious.
At the outset, the Court takes note of the fact that the CA Decision nullifying the questioned contracts of sale
between Sps. Delgado and the Dys had become final and executory. Accordingly, the Petition-in-Intervention
filed by Arturo Dy, which seeks to maintain the subject contracts' validity, can no longer be entertained. The
cancellation of the Dys' certificates of title over the disputed properties and the issuance of new TCTs in
favor of Cipriana must therefore be upheld.
However, Philbank's mortgage rights over the subject properties shall be maintained. While it is settled that
a simulated deed of sale is null and void and therefore, does not convey any right that could ripen into a
valid title,16 it has been equally ruled that, for reasons of public policy,17 the subsequent nullification of title
to a property is not a ground to annul the contractual right which may have been derived by a purchaser,
mortgagee or other transferee who acted in good faith.18
To be sure, fraud comprises "anything calculated to deceive, including all acts, omissions, and concealment
involving a breach of legal duty or equitable duty, trust, or confidence justly reposed, resulting in damage to
another, or by which an undue and unconscientious advantage is taken of another."27 In this light, the Dys'
and Sps. Delgado's deliberate simulation of the sale intended to obtain loan proceeds from and to prejudice
Philbank clearly constitutes fraudulent conduct. As such, Sps. Delgado cannot now be allowed to deny the
validity of the mortgage executed by the Dys in favor of Philbank as to hold otherwise would effectively
sanction their blatant bad faith to Philbank's detriment.
Accordingly, in the interest of public policy, fair dealing, good faith and justice, the Court accords Philbank
the rights of a mortgagee in good faith whose lien to the securities posted must be respected and protected.
In this regard, Philbank is entitled to have its mortgage carried over or annotated on the titles of Cipriana
Delgado over the said properties.
WHERFORE, the assailed January 30, 2008 Decision of the Court of Appeals in CA-G.R. CV No. 51672 is
hereby AFFIRMED with MODIFICATION upholding the mortgage rights of petitioner Philippine Banking
Corporation over the subject properties.

The ascertainment of good faith or lack of it, and the determination of whether due diligence and prudence SO ORDERED.
were exercised or not, are questions of fact19 which are generally improper in a petition for review on
certiorari under Rule 45 of the Rules of Court (Rules) where only questions of law may be raised. A
recognized exception to the rule is when there are conflicting findings of fact by the CA and the RTC,20 as in
this case.

Primarily, it bears noting that the doctrine of "mortgagee in good faith" is based on the rule that all persons
dealing with property covered by a Torrens Certificate of Title are not required to go beyond what appears
on the face of the title. This is in deference to the public interest in upholding the indefeasibility of a
certificate of title as evidence of lawful ownership of the land or of any encumbrance thereon.21 In the case
of banks and other financial institutions, however, greater care and due diligence are required since they are
imbued with public interest, failing which renders the mortgagees in bad faith. Thus, before approving a loan
application, it is a standard operating practice for these institutions to conduct an ocular inspection of the
property offered for mortgage and to verify the genuineness of the title to determine the real owner(s)
thereof.22 The apparent purpose of an ocular inspection is to protect the "true owner" of the property as
well as innocent third parties with a right, interest or claim thereon from a usurper who may have acquired a
fraudulent certificate of title thereto.23

45

G.R. No. 158143 September 21, 2011
PHILIPPINE COMMERCIAL INTERNATIONAL BANK, Petitioner,
vs.
ANTONIO B. BALMACEDA and ROLANDO N. RAMOS, Respondents.
DECISION
BRION, J.:
Before us is a petition for review on certiorari,1 filed by the Philippine Commercial International Bank2 (Bank
or PCIB), to reverse and set aside the decision3 dated April 29, 2003 of the Court of Appeals (CA) in CA-G.R.
CV No. 69955. The CA overturned the September 22, 2000 decision of the Regional Trial Court (RTC) of
Makati City, Branch 148, in Civil Case No. 93-3181, which held respondent Rolando Ramos liable to PCIB for
the amount of ₱895,000.00.
FACTUAL ANTECEDENTS
On September 10, 1993, PCIB filed an action for recovery of sum of money with damages before the RTC
against Antonio Balmaceda, the Branch Manager of its Sta. Cruz, Manila branch. In its complaint, PCIB
alleged that between 1991 and 1993, Balmaceda, by taking advantage of his position as branch manager,
fraudulently obtained and encashed 31 Manager’s checks in the total amount of Ten Million Seven Hundred
Eighty Two Thousand One Hundred Fifty Pesos (₱10,782,150.00).
On February 28, 1994, PCIB moved to be allowed to file an amended complaint to implead Rolando Ramos
as one of the recipients of a portion of the proceeds from Balmaceda’s alleged fraud. PCIB also increased the
number of fraudulently obtained and encashed Manager’s checks to 34, in the total amount of Eleven Million
Nine Hundred Thirty Seven Thousand One Hundred Fifty Pesos (₱11,937,150.00). The RTC granted this
motion.
Since Balmaceda did not file an Answer, he was declared in default. On the other hand, Ramos filed an
Answer denying any knowledge of Balmaceda’s scheme. According to Ramos, he is a reputable businessman
engaged in the business of buying and selling fighting cocks, and Balmaceda was one of his clients. Ramos
admitted receiving money from Balmaceda as payment for the fighting cocks that he sold to Balmaceda, but
maintained that he had no knowledge of the source of Balmaceda’s money.
THE RTC DECISION
On September 22, 2000, the RTC issued a decision in favor of PCIB, with the following dispositive portion:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the
defendants as follows:
46
46
1. Ordering defendant Antonio Balmaceda to pay the amount of ₱11,042,150.00 with interest
thereon at the legal rate from [the] date of his misappropriation of the said amount until full
restitution shall have been made[.]
2. Ordering defendant Rolando Ramos to pay the amount of ₱895,000.00 with interest at the legal
rate from the date of misappropriation of the said amount until full restitution shall have been
made[.]
3. Ordering the defendants to pay plaintiff moral damages in the sum of ₱500,000.00 and
attorney’s fees in the amount of ten (10%) percent of the total misappropriated amounts sought to
be recovered.
4. Plus costs of suit.
SO ORDERED.4
From the evidence presented, the RTC found that Balmaceda, by taking undue advantage of his position and
authority as branch manager of the Sta. Cruz, Manila branch of PCIB, successfully obtained and
misappropriated the bank’s funds by falsifying several commercial documents. He accomplished this by
claiming that he had been instructed by one of the Bank’s corporate clients to purchase Manager’s checks on
its behalf, with the value of the checks to be debited from the client’s corporate bank account. First, he
would instruct the Bank staff to prepare the application forms for the purchase of Manager’s checks, payable
to several persons. Then, he would forge the signature of the client’s authorized representative on these
forms and sign the forms as PCIB’s approving officer. Finally, he would have an authorized officer of PCIB
issue the Manager’s checks. Balmaceda would subsequently ask his subordinates to release the Manager’s
checks to him, claiming that the client had requested that he deliver the checks.5 After receiving the
Manager’s checks, he encashed them by forging the signatures of the payees on the checks.
In ruling that Ramos acted in collusion with Balmaceda, the RTC noted that although the Manager’s checks
payable to Ramos were crossed checks, Balmaceda was still able to encash the checks.6 After Balmaceda
encashed three of these Manager’s checks, he deposited most of the money into Ramos’ account.7 The RTC
concluded that from the ₱11,937,150.00 that Balmaceda misappropriated from PCIB, ₱895,000.00 actually
went to Ramos. Since the RTC disbelieved Ramos’ allegation that the sum of money deposited into his
Savings Account (PCIB, Pasig branch) were proceeds from the sale of fighting cocks, it held Ramos liable to
pay PCIB the amount of ₱895,000.00.
THE COURT OF APPEALS DECISION
On appeal, the CA dismissed the complaint against Ramos, holding that no sufficient evidence existed to
prove that Ramos colluded with Balmaceda in the latter’s fraudulent manipulations.8
According to the CA, the mere fact that Balmaceda made Ramos the payee in some of the Manager’s checks
does not suffice to prove that Ramos was complicit in Balmaceda’s fraudulent scheme. It observed that other
persons were also named as payees in the checks that Balmaceda acquired and encashed, and PCIB only
chose to go after Ramos. With PCIB’s failure to prove Ramos’ actual participation in Balmaceda’s fraud, no
legal and factual basis exists to hold him liable.
The CA also found that PCIB acted illegally in freezing and debiting ₱251,910.96 from Ramos’ bank account.
The CA thus decreed:
WHEREFORE, the appeal is granted. The Decision of the trial court rendered on September 22, 2000[,]
insofar as appellant Ramos is concerned, is SET ASIDE, and the complaint below against him is DISMISSED.
Appellee is hereby ordered to release the amount of ₱251,910.96 to appellant Ramos plus interest at [the]
legal rate computed from September 30, 1993 until appellee shall have fully complied therewith.
Appellee is likewise ordered to pay appellant Ramos the following:
a) ₱50,000.00 as moral damages
b) ₱50,000.00 as exemplary damages, and
c) ₱20,000.00 as attorney’s fees.
No costs.
SO ORDERED.9
THE PETITION
In the present petition, PCIB avers that:
I In civil cases, the party carrying the burden of proof must establish his case by a preponderance of evidence,
THE APPELLATE COURT ERRED IN HOLDING THAT THERE IS NO EVIDENCE TO HOLD THAT
RESPONDENT RAMOS ACTED IN COMPLICITY WITH RESPONDENT BALMACEDA
II
THE APPELLATE COURT ERRED IN ORDERING THE PETITIONER TO RELEASE THE AMOUNT OF
₱251,910.96 TO RESPONDENT RAMOS AND TO PAY THE LATTER MORAL AND EXEMPLARY
DAMAGES AND ATTORNEY’S FEES10
PCIB contends that the circumstantial evidence shows that Ramos had knowledge of, and acted in complicity
with Balmaceda in, the perpetuation of the fraud. Ramos’ explanation that he is a businessman and that he
received the Manager’s checks as payment for the fighting cocks he sold to Balmaceda is unconvincing,
given the large sum of money involved. While Ramos presented evidence that he is a reputable
businessman, this evidence does not explain why the Manager’s checks were made payable to him in the
first place.
PCIB maintains that it had the right to freeze and debit the amount of ₱251,910.96 from Ramos’ bank
account, even without his consent, since legal compensation had taken place between them by operation of
law. PCIB debited Ramos’ bank account, believing in good faith that Ramos was not entitled to the proceeds
47
of the Manager’s checks and was actually privy to the fraud perpetrated by Balmaceda. PCIB cannot thus be
held liable for moral and exemplary damages.
OUR RULING
We partly grant the petition.
At the outset, we observe that the petition raises mainly questions of fact whose resolution requires the re-
examination of the evidence on record. As a general rule, petitions for review on certiorari only involve
questions of law.11 By way of exception, however, we can delve into evidence and the factual circumstance
of the case when the findings of fact in the tribunals below (in this case between those of the CA and of the
RTC) are conflicting. When the exception applies, we are given latitude to review the evidence on record to
decide the case with finality.12
Ramos’ participation in Balmaceda’s scheme not proven
From the testimonial and documentary evidence presented, we find it beyond question that Balmaceda, by
taking advantage of his position as branch manager of PCIB’s Sta. Cruz, Manila branch, was able to apply for
and obtain Manager’s checks drawn against the bank account of one of PCIB’s clients. The unsettled question
is whether Ramos, who received a portion of the money that Balmaceda took from PCIB, should also be held
liable for the return of this money to the Bank.
PCIB insists that it presented sufficient evidence to establish that Ramos colluded with Balmaceda in the
scheme to fraudulently secure Manager’s checks and to misappropriate their proceeds. Since Ramos’ defense
– anchored on mere denial of any participation in Balmaceda’s wrongdoing – is an intrinsically weak defense,
it was error for the CA to exonerate Ramos from any liability.
or evidence which, to the court, is more worthy of belief than the evidence offered in opposition.13 This
Court, in Encinas v. National Bookstore, Inc.,14 defined "preponderance of evidence" in the following
manner:
"Preponderance of evidence" is the weight, credit, and value of the aggregate evidence on either side and is
usually considered to be synonymous with the term "greater weight of the evidence" or "greater weight of
the credible evidence." Preponderance of evidence is a phrase which, in the last analysis, means probability
of the truth. It is evidence which is more convincing to the court as worthy of belief than that which is
offered in opposition thereto.
The party, whether the plaintiff or the defendant, who asserts the affirmative of an issue has the onus to
prove his assertion in order to obtain a favorable judgment, subject to the overriding rule that the burden to
prove his cause of action never leaves the plaintiff. For the defendant, an affirmative defense is one that is
not merely a denial of an essential ingredient in the plaintiff's cause of action, but one which, if established,
will constitute an "avoidance" of the claim.15
Thus, PCIB, as plaintiff, had to prove, by preponderance of evidence, its positive assertion that Ramos
conspired with Balmaceda in perpetrating the latter’s scheme to defraud the Bank. In PCIB’s estimation, it
successfully accomplished this through the submission of the following evidence:
 48

[1] Exhibits "A," "D," "PPPP," "QQQQ," and "RRRR" and their submarkings, the application forms for
MCs, show that [these MCs were applied for in favor of Ramos;]
[2] Exhibits "K," "N," "SSSS," "TTTT," and "UUUU" and their submarkings prove that the MCs were
issued in favor of x x x Ramos[; and]
Q: Showing to you several applications for Manager’s Check previously attached as Annexes "A, B, C, D and
E["] of the complaint. Could you please tell us where is that particular alleged signature of a client applying
for the Manager’s check which you claimed to have been forged by Mr. Balmaceda?
A: Here sir.x x x x

[3] [T]estimonies of the witness for [PCIB].16 Q: After the accomplishment of this application form as you stated Mrs. witness, do you know what
happened to the application form?
We cannot accept these submitted pieces of evidence as sufficient to satisfy the burden of proof that PCIB
carries as plaintiff. A: Before that application form is processed it goes to several stages. Here for example this was signed
supposed to be by the client and his signature representing that, he certified the signature based on their
records to be authentic.
On its face, all that PCIB’s evidence proves is that Balmaceda used Ramos’ name as a payee when he filled
up the application forms for the Manager’s checks. But, as the CA correctly observed, the mere fact that
Balmaceda made Ramos the payee on some of the Manager’s checks is not enough basis to conclude that Q: When you said he to whom are you referring to?
Ramos was complicit in Balmaceda’s fraud; a number of other people were made payees on the other
Manager’s checks yet PCIB never alleged them to be liable, nor did the Bank adduce any other evidence
A: Mr. Balmaceda. And at the same time he approved the transaction.
pointing to Ramos’ participation that would justify his separate treatment from the others. Also, while Ramos
is Balmaceda’s brother-in-law, their relationship is not sufficient, by itself, to render Ramos liable, absent
concrete proof of his actual participation in the fraudulent scheme. xxxx

Moreover, the evidence on record clearly shows that Balmaceda acted on his own when he applied for the Q: Do you know if the corresponding checks applied for in the application forms were issued?
Manager’s checks against the bank account of one of PCIB’s clients, as well as when he encashed the
fraudulently acquired Manager’s checks.
A: Yes sir.

Mrs. Elizabeth Costes, the Area Manager of PCIB at the time of the relevant events, testified that Balmaceda
committed all the acts necessary to obtain the unauthorized Manager’s checks – from filling up the
application form by forging the signature of the client’s representative, to forging the signatures of the
payees in order to encash the checks. As Mrs. Costes stated in her testimony:
Q: I am going into [these] particular instances where you said that Mr. Balmaceda [has] been making
unauthorized withdrawals from particular account of a client or a client of yours at Sta. Cruz branch. Would
you tell us how he effected his unauthorized withdrawals?
Q: Could you please show us where these checks are now, the one applied for in Exhibit "A" which is in the
amount of ₱150,000.00, where is the corresponding check?
A: Rolando Ramos dated December 26, 1991 and one of the signatories with higher authority, this is Mr.
Balmaceda’s signature.
Q: In other words he is likewise approving signatory to the Manager’s check?

A: He prevailed upon the domestic remittance clerk to prepare the application of a Manager’s check which A: Yes sir. This is an authority that the check [has] been encashed.
[has] been debited to a client’s account. This particular Manager’s check will be payable to a certain
individual thru his account as the instruction of the client.
Q: In other words this check issued to Rolando Ramos dated December 26, 1991 is a cross check but
nonetheless he allowed to encash by granting it.
Q: What was your findings in so far as the particular alleged instruction of a client is concerned?

Could you please show us?

A: We found out that he forged the signature of the client.

ATTY. PACES: Witness pointing to an initial of the defendant Antonio Balmaceda, the notation cross check.
Q: On that particular application?

A: And this is his signature.

A: Yes sir.

xxxx

48
Q: How about the check corresponding to Exhibit E-2 which is an application for ₱125,000.00 for a certain Q: In other words it would be possible that Mr. Balmaceda himself gotten the proceeds of the checks by
Rolando Ramos. Do you have the check? forging the payees signature?

A: Yes sir. A: Yes sir.18 (emphases ours)

ATTY. PACES: Witness producing a check dated December 19, 1991 the amount of ₱125,000.00 payable to
certain Rolando Ramos.
Q: Can you tell us whether the same modus operandi was ad[o]pted by Mr. Balmaceda in so far as he is
concerned?
Mrs. Nilda Laforteza, the Commercial Account Officer of PCIB’s Sta. Cruz, Manila branch at the time the
events of this case occurred, confirmed Mrs. Costes’ testimony by stating that it was Balmaceda who forged
Ramos’ signature on the Manager’s checks where Ramos was the payee, so as to encash the amounts
indicated on the checks.19 Mrs. Laforteza also testified that Ramos never went to the PCIB, Sta. Cruz,
Manila branch to encash the checks since Balmaceda was the one who deposited the checks into Ramos’
bank account. As revealed during Mrs. Laforteza’s cross-examination:

A: Yes sir he is also the right signer and he authorized the cancellation of the cross check.17 (emphasis
Q: Mrs. Laforteza, these checks that were applied for by Mr. Balmaceda, did you ever see my client go to the
ours)
bank to encash these checks?

xxxx
A: No it is Balmaceda who is depositing in his behalf.

Q: These particular checks [Mrs.] witness in your findings, do you know if Mr. Balmaceda [has] again any
Q: Did my client ever call up the bank concerning this amount?
participation in these checks?

A: Yes he is not going to call PCIBank Sta. Cruz branch because his account is maintained at Pasig.
A: He is also the right signer and approved officer and he was authorized to debit on file.

Q: So Mr. Balmaceda was the one who just remitted or transmitted the amount that you claimed [was sent]
xxxx
to the account of my client?

Q: And do you know if these particular checks marked as Exhibit G-2 to triple FFF were subsequently
A: Yes.20 (emphases ours)
encashed?

Even Mrs. Rodelia Nario, presented by PCIB as its rebuttal witness to prove that Ramos encashed a
A: Yes sir.
Manager’s check for ₱480,000.00, could only testify that the money was deposited into Ramos’ PCIB bank
account. She could not attest that Ramos himself presented the Manager’s check for deposit in his bank
Q: Were you able to find out who encashed? account.21 These testimonies clearly dispute PCIB’s theory that Ramos was instrumental in the encashment
of the Manager’s checks.
A: Mr. Balmaceda himself and besides he approved the encashment because of the signature that he allowed
the encashment of the check. We also find no reason to doubt Ramos’ claim that Balmaceda deposited these large sums of money into his
bank account as payment for the fighting cocks that Balmaceda purchased from him. Ramos presented two
witnesses – Vicente Cosculluela and Crispin Gadapan – who testified that Ramos previously engaged in the
xxxx business of buying and selling fighting cocks, and that Balmaceda was one of Ramos’ biggest clients.

Q: Do you know if this particular person having in fact withdraw of received the proceeds of [these] Quoting from the RTC decision, PCIB stresses that Ramos’ own witness and business partner, Cosculluela,
particular checks, the payee? testified that the biggest net profit he and Ramos earned from a single transaction with Balmaceda
amounted to no more than ₱100,000.00, for the sale of approximately 45 fighting cocks.22 In PCIB’s view,
A: No sir. this testimony directly contradicts Ramos’ assertion that he received approximately ₱400,000.00 from his
biggest transaction with Balmaceda. To PCIB, the testimony also renders questionable Ramos’ assertion that
Balmaceda deposited large amounts of money into his bank account as payment for the fighting cocks.
Q: It was all Mr. Balmaceda dealing with you?

On this point, we find that PCIB misunderstood Cosculluela’s testimony. A review of the testimony shows
A: Yes sir. that Cosculluela specifically referred to the net profit that they earned from the sale of the fighting
cocks;23 PCIB apparently did not take into account the capital, transportation and other expenses that are
components of these transactions. Obviously, in sales transactions, the buyer has to pay not only for the
value of the thing sold, but also for the shipping costs and other incidental costs that accompany the
49
 50

acquisition of the thing sold. Thus, while the biggest net profit that Ramos and Cosculluela earned in a single
transaction amounted to no more than ₱100,000.00,24 the inclusion of the actual acquisition costs of the
fighting cocks, the transportation expenses (i.e., airplane tickets from Bacolod or Zamboanga to Manila) and
other attendant expenses could account for the ₱400,000.00 that Balmaceda deposited into Ramos’ bank
account.
Given that PCIB failed to establish Ramos’ participation in Balmaceda’s scheme, it was not even necessary
for Ramos to provide an explanation for the money he received from Balmaceda. Even if the evidence
adduced by the plaintiff appears stronger than that presented by the defendant, a judgment cannot be
entered in the plaintiff’s favor if his evidence still does not suffice to sustain his cause of action;25 to
reiterate, a preponderance of evidence as defined must be established to achieve this result.
PCIB itself at fault as employer
While we appreciate that Balmaceda took advantage of his authority and position as the branch manager to
commit these acts, this circumstance cannot be used to excuse the manner the Bank – through its
employees –handled its clients’ bank accounts and thereby ignored established bank procedures at the
branch manager’s mere order. This lapse is made all the more glaring by Balmaceda’s repetition of his
modus operandi 33 more times in a period of over one year by the Bank’s own estimation. With this kind of
record, blame must be imputed on the Bank itself and its systems, not solely on the weakness or lapses of
individual employees.
Principle of unjust enrichment not applicable
PCIB maintains that even if Ramos did not collude with Balmaceda, it still has the right to recover the
amounts unjustly received by Ramos pursuant to the principle of unjust enrichment. This principle is
embodied in Article 22 of the Civil Code which provides:

In considering this case, one point that cannot be disregarded is the significant role that PCIB played which Article 22. Every person who through an act of performance by another, or any other means, acquires or
contributed to the perpetration of the fraud. We cannot ignore that Balmaceda managed to carry out his comes into possession of something at the expense of the latter without just or legal ground, shall return the
fraudulent scheme primarily because other PCIB employees failed to carry out their assigned tasks – flaws same to him.
imputable to PCIB itself as the employer.
To have a cause of action based on unjust enrichment, we explained in University of the Philippines v. Philab
Ms. Analiza Vega, an accounting clerk, teller and domestic remittance clerk working at the PCIB, Sta. Cruz, Industries, Inc.34 that:
Manila branch at the time of the incident, testified that Balmaceda broke the Bank’s protocol when he
ordered the Bank’s employees to fill up the application forms for the Manager’s checks, to be debited from
Unjust enrichment claims do not lie simply because one party benefits from the efforts or obligations of
the bank account of one of the bank’s clients, without providing the necessary Authority to Debit from the
others, but instead it must be shown that a party was unjustly enriched in the sense that the term unjustly
client.26 PCIB also admitted that these Manager’s checks were subsequently released to Balmaceda, and not
could mean illegally or unlawfully.
to the client’s representative, based solely on Balmaceda’s word that the client had tasked him to deliver
these checks.27
Moreover, to substantiate a claim for unjust enrichment, the claimant must unequivocally prove that
another party knowingly received something of value to which he was not entitled and that
Despite Balmaceda’s gross violations of bank procedures – mainly in the processing of the applications for
the state of affairs are such that it would be unjust for the person to keep the benefit. Unjust
Manager’s checks and in the releasing of the Manager’s checks – Balmaceda’s co-employees not only turned
enrichment is a term used to depict result or effect of failure to make remuneration of or for property or
a blind eye to his actions, but actually complied with his instructions. In this way, PCIB’s own employees
benefits received under circumstances that give rise to legal or equitable obligation to account for them; to
were unwitting accomplices in Balmaceda’s fraud.
be entitled to remuneration, one must confer benefit by mistake, fraud, coercion, or request. Unjust
enrichment is not itself a theory of reconvey. Rather, it is a prerequisite for the enforcement of the doctrine
Another telling indicator of PCIB’s negligence is the fact that it allowed Balmaceda to encash the Manager’s of restitution.35 (emphasis ours)
checks that were plainly crossed checks. A crossed check is one where two parallel lines are drawn across its
face or across its corner.28 Based on jurisprudence, the crossing of a check has the following effects: (a) the
Ramos cannot be held liable to PCIB on account of unjust enrichment simply because he received payments
check may not be encashed but only deposited in the bank; (b) the check may be negotiated only once — to
out of money secured by fraud from PCIB. To hold Ramos accountable, it is necessary to prove that he
the one who has an account with the bank; and (c) the act of crossing the check serves as a warning to the
received the money from Balmaceda, knowing that he (Ramos) was not entitled to it. PCIB must also prove
holder that the check has been issued for a definite purpose and he must inquire if he received the check
that Ramos, at the time that he received the money from Balmaceda, knew that the money was acquired
pursuant to this purpose; otherwise, he is not a holder in due course.29 In other words, the crossing of a
through fraud. Knowledge of the fraud is the link between Ramos and PCIB that would obligate Ramos to
check is a warning that the check should be deposited only in the account of the payee. When a check is
return the money based on the principle of unjust enrichment.
crossed, it is the duty of the collecting bank to ascertain that the check is only deposited to the payee’s
account.30 In complete disregard of this duty, PCIB’s systems allowed Balmaceda to encash 26 Manager’s
checks which were all crossed checks, or checks payable to the "payee’s account only." However, as the evidence on record indicates, Ramos accepted the deposits that Balmaceda made directly
into his bank account, believing that these deposits were payments for the fighting cocks that Balmaceda
had purchased. Significantly, PCIB has not presented any evidence proving that Ramos participated in, or
The General Banking Law of 200031 requires of banks the highest standards of integrity and performance.
that he even knew of, the fraudulent sources of Balmaceda’s funds.
The banking business is impressed with public interest. Of paramount importance is the trust and confidence
of the public in general in the banking industry. Consequently, the diligence required of banks is more than
that of a Roman pater familias or a good father of a family.32 The highest degree of diligence is expected.33 PCIB illegally froze and debited Ramos’ assets

50
We also find that PCIB acted illegally in freezing and debiting Ramos’ bank account. In BPI Family Bank v. SO ORDERED.
Franco,36 we cautioned against the unilateral freezing of bank accounts by banks, noting that:

More importantly, [BPI Family Bank] does not have a unilateral right to freeze the accounts of Franco based
on its mere suspicion that the funds therein were proceeds of the multi-million peso scam Franco was
allegedly involved in. To grant [BPI Family Bank], or any bank for that matter, the right to take whatever
action it pleases on deposits which it supposes are derived from shady transactions, would open the
floodgates of public distrust in the banking industry.37

We see no legal merit in PCIB’s claim that legal compensation took place between it and Ramos, thereby
warranting the automatic deduction from Ramos’ bank account. For legal compensation to take place, two
persons, in their own right, must first be creditors and debtors of each other.38 While PCIB, as the
depositary bank, is Ramos’ debtor in the amount of his deposits, Ramos is not PCIB’s debtor under the
evidence the PCIB adduced. PCIB thus had no basis, in fact or in law, to automatically debit from Ramos’
bank account.

On the award of damages

Although PCIB’s act of freezing and debiting Ramos’ account is unlawful, we cannot hold PCIB liable for
moral and exemplary damages. Since a contractual relationship existed between Ramos and PCIB as the
depositor and the depositary bank, respectively, the award of moral damages depends on the applicability of
Article 2220 of the Civil Code, which provides:

Article 2220. Willful injury to property may be a legal ground for awarding moral damages if the court should
find that, under the circumstances, such damages are justly due. The same rule applies to breaches of
contract where the defendant acted fraudulently or in bad faith. [emphasis ours]

Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some
moral obliquity and conscious commission of a wrong; it partakes of the nature of fraud.39

As the facts of this case bear out, PCIB did not act out of malice or bad faith when it froze Ramos’ bank
account and subsequently debited the amount of ₱251,910.96 therefrom. While PCIB may have acted hastily
and without regard to its primary duty to treat the accounts of its depositors with meticulous care and
utmost fidelity,40 we find that its actions were propelled more by the need to protect itself, and not out of
malevolence or ill will. One may err, but error alone is not a ground for granting moral damages.41

We also disallow the award of exemplary damages. Article 2234 of the Civil Code requires a party to first
prove that he is entitled to moral, temperate or compensatory damages before he can be awarded
exemplary damages.1âwphi1 Since no reason exists to award moral damages, so too can there be no reason
to award exemplary damages.

We deem it just and equitable, however, to uphold the award of attorney’s fees in Ramos’ favor. Taking into
consideration the time and efforts involved that went into this case, we increase the award of attorney’s fees
from ₱20,000.00 to ₱75,000.00.

WHEREFORE, the petition is PARTIALLY GRANTED. We AFFIRM the decision of the Court of Appeals
dated April 29, 2003 in CA-G.R. CV No. 69955 with the MODIFICATION that the award of moral and
exemplary damages in favor of Rolando N. Ramos is DELETED, while the award of attorney’s fees
is INCREASED to ₱75,000.00. Costs against the Philippine Commercial International Bank.

51
 52

G.R. No. 180257 February 23, 2011 In the meantime, Gonzales issued a check dated September 30, 1998 in favor of Rene Unson (Unson) for
PhP 250,000 drawn against the credit line (COHLA). However, on October 13, 1998, upon presentment for
payment by Unson of said check, it was dishonored by PCIB due to the termination by PCIB of the credit line
EUSEBIO GONZALES, Petitioner,
under COHLA on October 7, 1998 for the unpaid periodic interest dues from the loans of Gonzales and the
vs.
spouses Panlilio. PCIB likewise froze the FCD account of Gonzales.
PHILIPPINE COMMERCIAL AND INTERNATIONAL BANK, EDNA OCAMPO, and ROBERTO
NOCEDA, Respondents.
Consequently, Gonzales had a falling out with Unson due to the dishonor of the check. They had a heated
argument in the premises of the Philippine Columbian Association (PCA) where they are both members,
DECISION
which caused great embarrassment and humiliation to Gonzales. Thereafter, on November 5, 1998, Unson
sent a demand letter5 to Gonzales for the PhP 250,000. And on December 3, 1998, the counsel of Unson
VELASCO, JR., J.: sent a second demand letter6 to Gonzales with the threat of legal action. With his FCD account that PCIB
froze, Gonzales was forced to source out and pay the PhP 250,000 he owed to Unson in cash.
The Case
On January 28, 1999, Gonzales, through counsel, wrote PCIB insisting that the check he issued had been
fully funded, and demanded the return of the proceeds of his FCD as well as damages for the unjust
This is an appeal via a Petition for Review on Certiorari under Rule 45 from the Decision1 dated October 22, dishonor of the check.7 PCIB replied on March 22, 1999 and stood its ground in freezing Gonzales’ accounts
2007 of the Court of Appeals (CA) in CA-G.R. CV No. 74466, which denied petitioner’s appeal from the due to the outstanding dues of the loans.8 On May 26, 1999, Gonzales reiterated his demand, reminding
December 10, 2001 Decision2 in Civil Case No. 99-1324 of the Regional Trial Court (RTC), Branch 138 in PCIB that it knew well that the actual borrowers were the spouses Panlilio and he never benefited from the
Makati City. The RTC found justification for respondents’ dishonor of petitioner’s check and found petitioner proceeds of the loans, which were serviced by the PCIB account of the spouses Panlilio.9
solidarily liable with the spouses Jose and Jocelyn Panlilio (spouses Panlilio) for the three promissory notes
they executed in favor of respondent Philippine Commercial and International Bank (PCIB).
PCIB’s refusal to heed his demands compelled Gonzales to file the instant case for damages with the RTC, on
account of the alleged unjust dishonor of the check issued in favor of Unson.
The Facts

The Ruling of the RTC

Petitioner Eusebio Gonzales (Gonzales) was a client of PCIB for a good 15 years before he filed the instant
case. His account with PCIB was handled by respondent Edna Ocampo (Ocampo) until she was replaced by
respondent Roberto Noceda (Noceda). After due trial, on December 10, 2001, the RTC rendered a Decision in favor of PCIB. The decretal portion
reads:
In October 1992, PCIB granted a credit line to Gonzales through the execution of a Credit-On-Hand Loan
Agreement3 (COHLA), in which the aggregate amount of the accounts of Gonzales with PCIB served as WHEREFORE, judgment is rendered as follows –
collateral for and his availment limit under the credit line. Gonzales drew from said credit line through the
issuance of check. At the institution of the instant case, Gonzales had a Foreign Currency Deposit (FCD) of
(a) on the first issue, plaintiff is liable to pay defendant Bank as principal under the promissory
USD 8,715.72 with PCIB.
notes, Exhibits A, B and C;

On October 30, 1995, Gonzales and his wife obtained a loan for PhP 500,000. Subsequently, on December
(b) on the second issue, the Court finds that there is justification on part of the defendant Bank to
26, 1995 and January 3, 1999, the spouses Panlilio and Gonzales obtained two additional loans from PCIB in
dishonor the check, Exhibit H;
the amounts of PhP 1,000,000 and PhP 300,000, respectively. These three loans amounting to PhP
1,800,000 were covered by three promissory notes.4 To secure the loans, a real estate mortgage (REM)
over a parcel of land covered by Transfer Certificate of Title (TCT) No. 38012 was executed by Gonzales and (c) on the third issue, plaintiff and defendants are not entitled to damages from each other.
the spouses Panlilio. Notably, the promissory notes specified, among others, the solidary liability of Gonzales
and the spouses Panlilio for the payment of the loans. However, it was the spouses Panlilio who received the
No pronouncement as to costs.
loan proceeds of PhP 1,800,000.

The monthly interest dues of the loans were paid by the spouses Panlilio through the automatic debiting of
their account with PCIB. But the spouses Panlilio, from the month of July 1998, defaulted in the payment of
the periodic interest dues from their PCIB account which apparently was not maintained with enough
deposits. PCIB allegedly called the attention of Gonzales regarding the July 1998 defaults and the
subsequent accumulating periodic interest dues which were left still left unpaid.
SO ORDERED.10
The RTC found Gonzales solidarily liable with the spouses Panlilio on the three promissory notes relative to
the outstanding REM loan. The trial court found no fault in the termination by PCIB of the COHLA with
Gonzales and in freezing the latter’s accounts to answer for the past due PhP 1,800,000 loan. The trial court

52
ruled that the dishonor of the check issued by Gonzales in favor of Unson was proper considering that the covered by TCT No. 38012 was constituted as security; and second, whether PCIB properly dishonored the
credit line under the COHLA had already been terminated or revoked before the presentment of the check. check of Gonzales drawn against the COHLA he had with the bank.

Aggrieved, Gonzales appealed the RTC Decision before the CA. The petition is partly meritorious.

The Ruling of the CA First Issue: Solidarily Liability on Promissory Notes

On September 26, 2007, the appellate court rendered its Decision dismissing Gonzales’ appeal and A close perusal of the records shows that the courts a quo correctly found Gonzales solidarily liable with the
affirming in toto the RTC Decision. The fallo reads: spouses Panlilio for the three promissory notes.

WHEREFORE, in view of the foregoing, the decision, dated December 10, 2001, in Civil Case No. 99-1324 is The promissory notes covering the PhP 1,800,000 loan show the following:
hereby AFFIRMED in toto.
(1) Promissory Note BD-090-1766-95,13 dated October 30, 1995, for PhP 500,000 was signed by
SO ORDERED.11 Gonzales and his wife, Jessica Gonzales;

In dismissing Gonzales’ appeal, the CA, first, confirmed the RTC’s findings that Gonzales was indeed (2) Promissory Note BD-090-2122-95,14 dated December 26, 1995, for PhP 1,000,000 was signed
solidarily liable with the spouses Panlilio for the three promissory notes executed for the REM loan; second, it by Gonzales and the spouses Panlilio; and
likewise found neither fault nor negligence on the part of PCIB in dishonoring the check issued by Gonzales
in favor of Unson, ratiocinating that PCIB was merely exercising its rights under the contractual stipulations
(3) Promissory Note BD-090-011-96,15 dated January 3, 1996, for PhP 300,000 was signed by
in the COHLA brought about by the outstanding past dues of the REM loan and interests for which Gonzales
Gonzales and the spouses Panlilio.
was solidarily liable with the spouses Panlilio to pay under the promissory notes.

Clearly, Gonzales is liable for the loans covered by the above promissory notes. First, Gonzales admitted that
Thus, we have this petition.
he is an accommodation party which PCIB did not dispute. In his testimony, Gonzales admitted that he
merely accommodated the spouses Panlilio at the suggestion of Ocampo, who was then handling his
The Issues accounts, in order to facilitate the fast release of the loan. Gonzales testified:

Gonzales, as before the CA, raises again the following assignment of errors: ATTY. DE JESUS:

I - IN NOT CONSIDERING THAT THE LIABILITY ARISING FROM PROMISSORY NOTES (EXHIBITS Now in this case you filed against the bank you mentioned there was a loan also applied for by the Panlilio’s
"A", "B" AND "C", PETITIONER; EXHIBITS "1", "2" AND "3", RESPONDENT) PERTAINED TO in the sum of P1.8 Million Pesos. Will you please tell this Court how this came about?
BORROWER JOSE MA. PANLILIO AND NOT TO APPELLANT AS RECOGNIZED AND
ACKNOWLEDGE[D] BY RESPONDENT PHILIPPINE COMMERCIAL & INDUSTRIAL BANK
GONZALES:
(RESPONDENT BANK).

Mr. Panlilio requested his account officer . . . . at that time it is a P42.0 Million loan and if he secures another
II - IN FINDING THAT THE RESPONDENTS WERE NOT AT FAULT NOR GUILTY OF GROSS
P1.8 Million loan the release will be longer because it has to pass to XO.
NEGLIGENCE IN DISHONORING PETITIONER’S CHECK DATED 30 SEPTEMBER 1998 IN THE
AMOUNT OF P250,000.00 FOR THE REASON "ACCOUNT CLOSED", INSTEAD OF MERELY "REFER TO
DRAWER" GIVEN THE FACT THAT EVEN AFTER DISHONOR, RESPONDENT SIGNED A Q: After that what happened?
CERTIFICATION DATED 7 DECEMBER 1998 THAT CREDIT ON HAND (COH) LOAN AGREEMENT WAS
STILL VALID WITH A COLLATERAL OF FOREIGN CURRENCY DEPOSIT (FCD) OF [USD] 48,715.72.
A: So as per suggestion since Mr. Panlilio is a good friend of mine and we co-owned the property I agreed
initially to use my name so that the loan can be utilized immediately by Mr. Panlilio.
III - IN NOT AWARDING DAMAGES AGAINST RESPONDENTS DESPITE PRESENTATION OF CLEAR
PROOF TO SUPPORT ACTION FOR DAMAGES.12
Q: Who is actually the borrower of this P1.8 Million Pesos?

The Court’s Ruling

A: Well, in paper me and Mr. Panlilio.

The core issues can be summarized, as follows: first, whether Gonzales is liable for the three promissory
notes covering the PhP 1,800,000 loan he made with the spouses Panlilio where a REM over a parcel of land Q: Who received the proceeds of said loan?

53

A: Mr. Panlilio.
Q: Do you have any proof that it was Mr. Panlilio who actually received the proceeds of this P1.8 Million
Pesos loan?
A: A check was deposited in the account of Mr. Panlilio.16
xxxx
Q: By the way upon whose suggestion was the loan of Mr. Panlilio also placed under your name initially?
A: Well it was actually suggested by the account officer at that time Edna Ocampo.
Q: How about this Mr. Rodolfo Noceda?
A: As you look at the authorization aspect of the loan Mr. Noceda is the boss of Edna so he has been familiar
with my account ever since its inception.
Q: So these two officers Ocampo and Noceda knew that this was actually the account of Mr. Panlilio and not
your account?
A: Yes, sir. In fact even if there is a change of account officer they are always informing me that the account
will be debited to Mr. Panlilio’s account.17
Moreover, the first note for PhP 500,000 was signed by Gonzales and his wife as borrowers, while the two
subsequent notes showed the spouses Panlilio sign as borrowers with Gonzales. It is, thus, evident that
Gonzales signed, as borrower, the promissory notes covering the PhP 1,800,000 loan despite not receiving
any of the proceeds.
Second, the records of PCIB indeed bear out, and was admitted by Noceda, that the PhP 1,800,000 loan
proceeds went to the spouses Panlilio, thus:
ATTY. DE JESUS: [on Cross-Examination]
Is it not a fact that as far as the records of the bank [are] concerned the proceeds of the 1.8 million loan was
received by Mr. Panlilio?
NOCEDA:
Yes sir.18
The fact that the loans were undertaken by Gonzales when he signed as borrower or co-borrower for the
benefit of the spouses Panlilio—as shown by the fact that the proceeds went to the spouses Panlilio who
were servicing or paying the monthly dues—is beside the point. For signing as borrower and co-borrower on
54
54
the promissory notes with the proceeds of the loans going to the spouses Panlilio, Gonzales has extended an
accommodation to said spouses.
Third, as an accommodation party, Gonzales is solidarily liable with the spouses Panlilio for the loans. In Ang
v. Associated Bank,19 quoting the definition of an accommodation party under Section 29 of the Negotiable
Instruments Law, the Court cited that an accommodation party is a person "who has signed the instrument
as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his
name to some other person."20 The Court further explained:
[A]n accommodation party is one who meets all the three requisites, viz: (1) he must be a party to the
instrument, signing as maker, drawer, acceptor, or indorser; (2) he must not receive value therefor; and (3)
he must sign for the purpose of lending his name or credit to some other person. An accommodation party
lends his name to enable the accommodated party to obtain credit or to raise money; he receives no part of
the consideration for the instrument but assumes liability to the other party/ies thereto. The accommodation
party is liable on the instrument to a holder for value even though the holder, at the time of taking the
instrument, knew him or her to be merely an accommodation party, as if the contract was not for
accommodation.
As petitioner acknowledged it to be, the relation between an accommodation party and the accommodated
party is one of principal and surety—the accommodation party being the surety. As such, he is deemed an
original promisor and debtor from the beginning; he is considered in law as the same party as the debtor in
relation to whatever is adjudged touching the obligation of the latter since their liabilities are interwoven as
to be inseparable. Although a contract of suretyship is in essence accessory or collateral to a valid principal
obligation, the surety’s liability to the creditor is immediate, primary and absolute; he
is directly and equally bound with the principal. As an equivalent of a regular party to the undertaking, a
surety becomes liable to the debt and duty of the principal obligor even without possessing a direct or
personal interest in the obligations nor does he receive any benefit therefrom.21
Thus, the knowledge, acquiescence, or even demand by Ocampo for an accommodation by Gonzales in order
to extend the credit or loan of PhP 1,800,000 to the spouses Panlilio does not exonerate Gonzales from
liability on the three promissory notes.
Fourth, the solidary liability of Gonzales is clearly stipulated in the promissory notes which uniformly begin,
"For value received, the undersigned (the "BORROWER") jointly and severally promise to pay x x x."
Solidary liability cannot be presumed but must be established by law or contract.22 Article 1207 of the Civil
Code pertinently states that "there is solidary liability only when the obligation expressly so states, or when
the obligation requires solidarity." This is true in the instant case where Gonzales, as accommodation party,
is immediately, equally, and absolutely bound with the spouses Panlilio on the promissory notes which
indubitably stipulated solidary liability for all the borrowers. Moreover, the three promissory notes serve as
the contract between the parties. Contracts have the force of law between the parties and must be complied
with in good faith.23
Second Issue: Improper Dishonor of Check
Having ruled that Gonzales is solidarily liable for the three promissory notes, We shall now touch upon the
question of whether it was proper for PCIB to dishonor the check issued by Gonzales against the credit line
under the COHLA.
We answer in the negative.
As a rule, an appeal by certiorari under Rule 45 of the Rules of Court is limited to review of errors of
law.24 The factual findings of the trial court, especially when affirmed by the appellate court, are generally
binding on us unless there was a misapprehension of facts or when the inference drawn from the facts was
manifestly mistaken.25 The instant case falls within the exception.
The courts a quo found and held that there was a proper dishonor of the PhP 250,000 check issued by
Gonzales against the credit line, because the credit line was already closed prior to the presentment of the
check by Unson; and the closing of the credit line was likewise proper pursuant to the stipulations in the
promissory notes on the bank’s right to set off or apply all moneys of the debtor in PCIB’s hand and the
stipulations in the COHLA on the PCIB’s right to terminate the credit line on grounds of default by Gonzales.
Gonzales argues otherwise, pointing out that he was not informed about the default of the spouses Panlilio
and that the September 21, 1998 account statement of the credit line shows a balance of PhP 270,000 which
was likewise borne out by the December 7, 1998 PCIB’s certification that he has USD 8,715.72 in his FCD
account which is more than sufficient collateral to guarantee the PhP 250,000 check, dated September 30,
1998, he issued against the credit line.
A careful scrutiny of the records shows that the courts a quo committed reversible error in not finding
negligence by PCIB in the dishonor of the PhP 250,000 check.
First. There was no proper notice to Gonzales of the default and delinquency of the PhP 1,800,000 loan. It
must be borne in mind that while solidarily liable with the spouses Panlilio on the PhP 1,800,000 loan
covered by the three promissory notes, Gonzales is only an accommodation party and as such only lent his
name and credit to the spouses Panlilio. While not exonerating his solidary liability, Gonzales has a right to
be properly apprised of the default or delinquency of the loan precisely because he is a co-signatory of the
promissory notes and of his solidary liability.
We note that it is indeed understandable for Gonzales to push the spouses Panlilio to pay the outstanding
dues of the PhP 1,800,000 loan, since he was only an accommodation party and was not personally
interested in the loan. Thus, a meeting was set by Gonzales with the spouses Panlilio and the PCIB officers,
Noceda and Ocampo, in the spouses Panlilio’s jewelry shop in SM Megamall on October 5, 1998.
Unfortunately, the meeting did not push through due to the heavy traffic Noceda and Ocampo encountered.
Such knowledge of the default by Gonzales was, however, not enough to properly apprise Gonzales about
the default and the outstanding dues. Verily, it is not enough to be merely informed to pay over a hundred
thousand without being formally apprised of the exact aggregate amount and the corresponding dues
pertaining to specific loans and the dates they became due.
Gonzales testified that he was not duly notified about the outstanding interest dues of the loan:
ATTY. DE JESUS:
Now when Mr. Panlilio’s was encountering problems with the bank did the defendant bank [advise] you of
any problem with the same account?
GONZALES:
They never [advised] me in writing.
55
Q: How did you come to know that there was a problem?
A: When my check bounced sir.26
On the other hand, the PCIB contends otherwise, as Corazon Nepomuceno testified:
ATTY. PADILLA:
Can you tell this Honorable Court what is it that you told Mr. Gonzales when you spoke to him at the
celphone?
NEPOMUCENO:
I just told him to update the interest so that we would not have to cancel the COH Line and he could
withdraw the money that was in the deposit because technically, if an account is past due we are not allowed
to let the client withdraw funds because they are allowed to offset funds so, just to help him get his money,
just to update the interest so that we could allow him to withdraw.
Q: Withdraw what?
A: His money on the COH, whatever deposit he has with us.
Q: Did you inform him that if he did not update the interest he would not be able to withdraw his money?
A: Yes sir, we will be forced to hold on to any assets that he has with us so that’s why we suggested just to
update the interest because at the end of everything, he would be able to withdraw more funds than the
interest that the money he would be needed to update the interest.27
From the foregoing testimonies, between the denial of Gonzales and the assertion by PCIB that Gonzales
was properly apprised, we find for Gonzales. We find the testimonies of the former PCIB employees to be
self-serving and tenuous at best, for there was no proper written notice given by the bank. The record is
bereft of any document showing that, indeed, Gonzales was formally informed by PCIB about the past due
periodic interests.
PCIB is well aware and did not dispute the fact that Gonzales is an accommodation party. It also acted in
accordance with such fact by releasing the proceeds of the loan to the spouses Panlilio and likewise only
informed the spouses Panlilio of the interest dues. The spouses Panlilio, through their account28 with PCIB,
were paying the periodic interest dues and were the ones periodically informed by the bank of the debiting of
the amounts for the periodic interest payments. Gonzales never paid any of the periodic interest dues.
PCIB’s Noceda admitted as much in his cross-examination:
ATTY. DE JESUS: [on Cross-Examination]
And there was no instance that Mr. Gonzales ever made even interest for this loan, is it not, it’s always Mr.
Panlilio who was paying the interest for this loan?
NOCEDA:
 56

Yes sir.29 The COHLA, in its effectivity clause, clearly provides:

Indeed, no evidence was presented tending to show that Gonzales was periodically sent notices or notified of
the various periodic interest dues covering the three promissory notes. Neither do the records show that
Gonzales was aware of amounts for the periodic interests and the payment for them. Such were serviced by
the spouses Panlilio.
Thus, PCIB ought to have notified Gonzales about the status of the default or delinquency of the interest
dues that were not paid starting July 1998. And such notification must be formal or in written form
considering that the outstanding periodic interests became due at various dates, i.e., on July 8, 17, and 28,
1998, and the various amounts have to be certain so that Gonzales is not only properly apprised but is given
the opportunity to pay them being solidarily liable for the loans covered by the promissory notes.
4. EFFECTIVITY — The COH shall be effective for a period of one (1) year commencing from the receipt by
the CLIENT of the COH checkbook issued by the BANK, subject to automatic renewals for same periods
unless terminated by the BANK upon prior notice served on CLIENT.31 (Emphasis ours.)
It is undisputed that the bank unilaterally revoked, suspended, and terminated the COHLA without giving
Gonzales prior notice as required by the above stipulation in the COHLA. Noceda testified on cross-
examination on the Offering Ticket32 recommending the termination of the credit line, thus:
ATTY. DE JESUS: [on Cross-Examination]

This Exhibit 8, you have not furnished at anytime a copy to the plaintiff Mr. Gonzales is it not?
It is the bank which computes these periodic interests and such dues must be put into writing and formally
served to Gonzales if he were asked to pay them, more so when the payments by the spouses Panlilio were
charged through the account of the spouses Panlilio where the interest dues were simply debited. Such NOCEDA:
arrangement did not cover Gonzales’ bank account with PCIB, since he is only an accommodation party who
has no personal interest in the PhP 1,800,000 loan. Without a clear and determinate demand through a
formal written notice for the exact periodic interest dues for the loans, Gonzales cannot be expected to pay No sir but verbally it was relayed to him.
for them.
Q: But you have no proof that Mr. Gonzales came to know about this Exhibit 8?
In business, more so for banks, the amounts demanded from the debtor or borrower have to be definite,
clear, and without ambiguity. It is not sufficient simply to be informed that one must pay over a hundred A: It was relayed to him verbally.
thousand aggregate outstanding interest dues without clear and certain figures. Thus, We find PCIB
negligent in not properly informing Gonzales, who is an accommodation party, about the default and the
exact outstanding periodic interest dues. Without being properly apprised, Gonzales was not given the Q: But there is no written proof?
opportunity to properly act on them.
A: No sir.
It was only through a letter30 sent by PCIB dated October 2, 1998 but incongruously showing the
delinquencies of the PhP 1,800,000 loan at a much later date, i.e., as of October 31, 1998, when Gonzales Q: And it is only now that you claim that it was verbally relayed to him, it’s only now when you testified in
was formally apprised by PCIB. In it, the interest due was PhP 106,1616.71 and penalties for the unpaid Court?
interest due of PhP 64,766.66, or a total aggregate due of PhP 171,383.37. But it is not certain and the
records do not show when the letter was sent and when Gonzales received it. What is clear is that such letter
was belatedly sent by PCIB and received by Gonzales after the fact that the latter’s FCD was already frozen, A: Before . . .
his credit line under the COHLA was terminated or suspended, and his PhP 250,000 check in favor of Unson
was dishonored. Q: To whom did you relay this information?

And way much later, or on May 4, 1999, was a demand letter from the counsel of PCIB sent to Gonzales
demanding payment of the PhP 1,800,000 loan. Obviously, these formal written notices sent to Gonzales
were too late in the day for Gonzales to act properly on the delinquency and he already suffered the
humiliation and embarrassment from the dishonor of his check drawn against the credit line.
A: It was during the time that we were going to Megamall, it was relayed by Liza that he has to pay his
obligations or else it will adversely affect the status of the account.33
On the other hand, the testimony of Corazon Nepomuceno shows:

To reiterate, a written notice on the default and deficiency of the PhP 1,800,000 loan covered by the three
promissory notes was required to apprise Gonzales, an accommodation party. PCIB is obliged to formally
inform and apprise Gonzales of the defaults and the outstanding obligations, more so when PCIB was
invoking the solidary liability of Gonzales. This PCIB failed to do.
Second. PCIB was grossly negligent in not giving prior notice to Gonzales about its course of action to
suspend, terminate, or revoke the credit line, thereby violating the clear stipulation in the COHLA.
ATTY. DE JESUS: [on Cross-Examination]
Now we go to the other credit facility which is the credit on hand extended solely of course to Mr. Eusebio
Gonzales who is the plaintiff here, Mr. Panlilio is not included in this credit on hand facility. Did I gather from
you as per your Exhibit 7 as of October 2, 1998 you were the one who recommended the cancellation of this
credit on hand facility?

56
NEPOMUCENO:
It was recommended by the account officer and I supported it.
Q: And you approved it?
A: Yes sir.
Q: Did you inform Mr. Gonzales that you have already cancelled his credit on hand facility?
A: As far as I know, it is the account officer who will inform him.
Q: But you have no record that he was informed?
A: I don’t recall and we have to look at the folder to determine if they were informed.
Q: If you will notice, this letter . . . what do you call this letter of yours?
A: That is our letter advising them or reminding them of their unpaid interest and that if he is able to update
his interest he can extend the promissory note or restructure the outstanding.
Q: Now, I call your attention madam witness, there is nothing in this letter to the clients advising them or
Mr. Gonzales that his credit on hand facility was already cancelled?
A: I don’t know if there are other letters aside from this.
Q: So in this letter there is nothing to inform or to make Mr. Eusebio aware that his credit on hand facility
was already cancelled?
A: No actually he can understand it from the last sentence. "If you will be able to update your outstanding
interest, we can apply the extention of your promissory note" so in other words we are saying that if you
don’t, you cannot extend the promissory note.
Q: You will notice that the subject matter of this October 2, 1998 letter is only the loan of 1.8 million is it
not, as you can see from the letter? Okay?
A: Ah . . .
Q: Okay. There is nothing there that will show that that also refers to the credit on hand facility which was
being utilized by Mr. Gonzales is it not?
A: But I don’t know if there are other letters that are not presented to me now.34
The foregoing testimonies of PCIB officers clearly show that not only did PCIB fail to give prior notice to
Gonzales about the Offering Ticket for the process of termination, suspension, or revocation of the credit line
57
under the COHLA, but PCIB likewise failed to inform Gonzales of the fact that his credit line has been
terminated. Thus, we find PCIB grossly negligent in the termination, revocation, or suspension of the credit
line under the COHLA. While PCIB invokes its right on the so-called "cross default provisions," it may not
with impunity ignore the rights of Gonzales under the COHLA.
Indeed, the business of banking is impressed with public interest and great reliance is made on the bank’s
sworn profession of diligence and meticulousness in giving irreproachable service. Like a common carrier
whose business is imbued with public interest, a bank should exercise extraordinary diligence to negate its
liability to the depositors.35 In this instance, PCIB is sorely remiss in the diligence required in treating with
its client, Gonzales. It may not wantonly exercise its rights without respecting and honoring the rights of its
clients.
Art. 19 of the New Civil Code clearly provides that "[e]very person must, in the exercise of his rights and in
the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith."
This is the basis of the principle of abuse of right which, in turn, is based upon the maxim suum jus summa
injuria (the abuse of right is the greatest possible wrong).36
In order for Art. 19 to be actionable, the following elements must be present: "(1) the existence of a legal
right or duty, (2) which is exercised in bad faith, and (3) for the sole intent of prejudicing or injuring
another."37 We find that such elements are present in the instant case. The effectivity clause of the COHLA
is crystal clear that termination of the COH should be done only upon prior notice served on the CLIENT.
This is the legal duty of PCIB––to inform Gonzales of the termination. However, as shown by the above
testimonies, PCIB failed to give prior notice to Gonzales.
Malice or bad faith is at the core of Art. 19. Malice or bad faith "implies a conscious and intentional design to
do a wrongful act for a dishonest purpose or moral obliquity."38 In the instant case, PCIB was able to send a
letter advising Gonzales of the unpaid interest on the loans39 but failed to mention anything about the
termination of the COHLA. More significantly, no letter was ever sent to him about the termination of the
COHLA. The failure to give prior notice on the part of PCIB is already prima facie evidence of bad
faith.40 Therefore, it is abundantly clear that this case falls squarely within the purview of the principle of
abuse of rights as embodied in Art. 19.
Third. There is no dispute on the right of PCIB to suspend, terminate, or revoke the COHLA under the "cross
default provisions" of both the promissory notes and the COHLA. However, these cross default provisions do
not confer absolute unilateral right to PCIB, as they are qualified by the other stipulations in the contracts or
specific circumstances, like in the instant case of an accommodation party.
The promissory notes uniformly provide:
The lender is hereby authorized, at its option and without notice, to set off or apply to the
payment of this Note any and all moneys which may be in its hands on deposit or otherwise
belonging to the Borrower. The Borrower irrevocably appoint/s the Lender, effective upon the
nonpayment of this Note on demand/at maturity or upon the happening of any of the events of default, but
without any obligation on the Lender’s part should it choose not to perform this mandate, as the attorney-in-
fact of the Borrower, to sell and dispose of any property of the Borrower, which may be in the Lender’s
possession by public or private sale, and to apply the proceeds thereof to the payment of this Note; the
Borrower, however, shall remain liable for any deficiency.41 (Emphasis ours.)
The above provisos are indeed qualified with the specific circumstance of an accommodation party who, as
such, has not been servicing the payment of the dues of the loans, and must first be properly apprised in
writing of the outstanding dues in order to answer for his solidary obligation.
 58

The same is true for the COHLA, which in its default clause provides: Third Issue: Award of Damages

16. DEFAULT — The CLIENT shall be considered in default under the COH if any of the following events shall The banking system has become an indispensable institution in the modern world and plays a vital role in
occur: the economic life of every civilized society—banks have attained a ubiquitous presence among the people,
who have come to regard them with respect and even gratitude and most of all, confidence, and it is for this
reason, banks should guard against injury attributable to negligence or bad faith on its part.45
1. x x x

In the instant case, Gonzales suffered from the negligence and bad faith of PCIB. From the testimonies of
2. Violation of the terms and conditions of this Agreement or any contract of the CLIENT with the
Gonzales’ witnesses, particularly those of Dominador Santos46 and Freddy Gomez,47 the embarrassment
BANK or any bank, persons, corporations or entities for the payment of borrowed money, or any
and humiliation Gonzales has to endure not only before his former close friend Unson but more from the
other event of default in such contracts.42
members and families of his friends and associates in the PCA, which he continues to experience considering
the confrontation he had with Unson and the consequent loss of standing and credibility among them from
The above pertinent default clause must be read in conjunction with the effectivity clause (No. 4 of the the fact of the apparent bouncing check he issued. Credit is very important to businessmen and its loss or
COHLA, quoted above), which expressly provides for the right of client to prior notice. The rationale is impairment needs to be recognized and compensated.48
simple: in cases where the bank has the right to terminate, revoke, or suspend the credit line, the client
must be notified of such intent in order for the latter to act accordingly—whether to correct any ground
The termination of the COHLA by PCIB without prior notice and the subsequent dishonor of the check issued
giving rise to the right of the bank to terminate the credit line and to dishonor any check issued or to act in
by Gonzales constitute acts of contra bonus mores. Art. 21 of the Civil Code refers to such acts when it says,
accord with such termination, i.e., not to issue any check drawn from the credit line or to replace any checks
"Any person who willfully causes loss or injury to another in a manner that is contrary to morals, good
that had been issued. This, the bank—with gross negligence—failed to accord Gonzales, a valued client for
customs or public policy shall compensate the latter for damage."
more than 15 years.

Accordingly, this Court finds that such acts warrant the payment of indemnity in the form of nominal
Fourth. We find the testimony43 of Ocampo incredible on the point that the principal borrower of the PhP
damages.1avvphi1 Nominal damages "are recoverable where a legal right is technically violated and must be
1,800,000 loan covered by the three promissory notes is Gonzales for which the bank officers had special
vindicated against an invasion that has produced no actual present loss of any kind x x x."49 We further
instructions to grant and that it was through the instructions of Gonzales that the payment of the periodic
explained the nature of nominal damages in Almeda v. Cariño:
interest dues were debited from the account of the spouses Panlilio.

For one, while the first promissory note dated October 30, 1995 indeed shows Gonzales as the principal
borrower, the other promissory notes dated December 26, 1995 and January 3, 1996 evidently show that it
was Jose Panlilio who was the principal borrower with Gonzales as co-borrower. For another, Ocampo cannot
feign ignorance on the arrangement of the payments by the spouses Panlilio through the debiting of their
bank account. It is incredulous that the payment arrangement is merely at the behest of Gonzales and at a
mere verbal directive to do so. The fact that the spouses Panlilio not only received the proceeds of the loan
but were servicing the periodic interest dues reinforces the fact that Gonzales was only an accommodation
party.
Thus, due to PCIB’s negligence in not giving Gonzales—an accommodation party—proper notice relative to
the delinquencies in the PhP 1,800,000 loan covered by the three promissory notes, the unjust termination,
revocation, or suspension of the credit line under the COHLA from PCIB’s gross negligence in not honoring its
obligation to give prior notice to Gonzales about such termination and in not informing Gonzales of the fact
of such termination, treating Gonzales’ account as closed and dishonoring his PhP 250,000 check, was
certainly a reckless act by PCIB. This resulted in the actual injury of PhP 250,000 to Gonzales whose FCD
account was frozen and had to look elsewhere for money to pay Unson.
With banks, the degree of diligence required is more than that of a good father of the family considering that
the business of banking is imbued with public interest due to the nature of their function. The law imposes
on banks a high degree of obligation to treat the accounts of its depositors with meticulous care, always
having in mind the fiduciary nature of banking.44 Had Gonzales been properly notified of the delinquencies
of the PhP 1,800,000 loan and the process of terminating his credit line under the COHLA, he could have
acted accordingly and the dishonor of the check would have been avoided.
x x x Its award is thus not for the purpose of indemnification for a loss but for the recognition and
vindication of a right. Indeed, nominal damages are damages in name only and not in fact. When granted by
the courts, they are not treated as an equivalent of a wrong inflicted but simply a recognition of the
existence of a technical injury. A violation of the plaintiff’s right, even if only technical, is sufficient to
support an award of nominal damages. Conversely, so long as there is a showing of a violation of the right of
the plaintiff, an award of nominal damages is proper.50 (Emphasis Ours.)
In the present case, Gonzales had the right to be informed of the accrued interest and most especially, for
the suspension of his COHLA. For failure to do so, the bank is liable to pay nominal damages. The amount of
such damages is addressed to the sound discretion of the court, taking into account the relevant
circumstances.51 In this case, the Court finds that the grant of PhP 50,000 as nominal damages is proper.
Moreover, as We held in MERALCO v. CA,52 failure to give prior notice when required, such as in the instant
case, constitutes a breach of contract and is a clear violation of Art. 21 of the Code. In cases such as this,
Art. 2219 of the Code provides that moral damages may be recovered in acts referred to in its Art. 21.
Further, Art. 2220 of the Code provides that "[w]illful injury to property may be a legal ground for awarding
moral damages if the court should find that, under the circumstances, such damages are justly due. The
same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith." Similarly,
"every person who, contrary to law, willfully or negligently causes damage to another, shall indemnify the
latter for the same."53 Evidently, Gonzales is entitled to recover moral damages.
Even in the absence of malice or bad faith, a depositor still has the right to recover reasonable moral
damages, if the depositor suffered mental anguish, serious anxiety, embarrassment, and
humiliation.54 Although incapable of pecuniary estimation, moral damages are certainly recoverable if they

58
are the proximate result of the defendant’s wrongful act or omission. The factual antecedents bolstered by
undisputed testimonies likewise show the mental anguish and anxiety Gonzales had to endure with the
threat of Unson to file a suit. Gonzales had to pay Unson PhP 250,000, while his FCD account in PCIB was
frozen, prompting Gonzales to demand from PCIB and to file the instant suit.
The award of moral damages is aimed at a restoration within the limits of the possible, of the spiritual status
quo ante—it must always reasonably approximate the extent of injury and be proportional to the wrong
committed.55 Thus, an award of PhP 50,000 is reasonable moral damages for the unjust dishonor of the PhP
250,000 which was the proximate cause of the consequent humiliation, embarrassment, anxiety, and mental
anguish suffered by Gonzales from his loss of credibility among his friends, colleagues and peers.
Furthermore, the initial carelessness of the bank’s omission in not properly informing Gonzales of the
outstanding interest dues––aggravated by its gross neglect in omitting to give prior notice as stipulated
under the COHLA and in not giving actual notice of the termination of the credit line––justifies the grant of
exemplary damages of PhP 10,000. Such an award is imposed by way of example or correction for the public
good. Finally, an award for attorney’s fees is likewise called for from PCIB’s negligence which compelled
Gonzales to litigate to protect his interest. In accordance with Art. 2208(1) of the Code, attorney’s fees may
be recovered when exemplary damages are awarded. We find that the amount of PhP 50,000 as attorney’s
fees is reasonable. WHEREFORE, this petition is PARTLY GRANTED. Accordingly, the CA Decision dated
October 22, 2007 in CA-G.R. CV No. 74466 is hereby REVERSED and SET ASIDE. The Philippine
Commercial and International Bank (now Banco De Oro) is ORDERED to pay Eusebio Gonzales PhP 50,000 as
nominal damages, PhP 50,000 as moral damages, PhP 10,000 as exemplary damages, and PhP 50,000 as
attorney’s fees. No pronouncement as to costs. SO ORDERED.
Equitable PCI Bank v. Tan, G.R. No. 165339, August 23, 2010
G.R. No. 165339 August 23, 2010
EQUITABLE PCI BANK, Petitioner,
vs.
ARCELITO B. TAN, Respondent.
DECISION
PERALTA, J.:
Before this Court is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set
aside the Decision1 and the Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 41928.
The antecedents are as follows:
Respondent Arcelito B.Tan maintained a current and savings account with Philippine Commercial
International Bank (PCIB), now petitioner Equitable PCI Bank.3 On May 13, 1992, respondent issued PCIB
Check No. 275100 postdated May 30, 19924 in the amount of ₱34,588.72 in favor of Sulpicio Lines, Inc. As
of May 14, 1992, respondent's balance with petitioner was ₱35,147.59. On May 14, 1992, Sulpicio Lines, Inc.
deposited the aforesaid check to its account with Solid Bank, Carbon Branch, Cebu City. After clearing, the
amount of the check was immediately debited by petitioner from respondent's account thereby leaving him
with a balance of only ₱558.87.
59
Meanwhile, respondent issued three checks from May 9 to May 16, 1992, specifically, PCIB Check No.
275080 dated May 9, 1992, payable to Agusan del Sur Electric Cooperative Inc. (ASELCO) for the amount of
₱6,427.68; PCIB Check No. 275097 dated May 10, 1992 payable to Agusan del Norte Electric Cooperative
Inc., (ANECO) for the amount of ₱6,472.01; and PCIB Check No. 314104 dated May 16, 1992 payable in
cash for the amount of ₱10,000.00. When presented for payment, PCIB Check Nos. 275080, 275097 and
314014 were dishonored for being drawn against insufficient funds.
As a result of the dishonor of Check Nos. 275080 and 275097 which were payable to ASELCO and ANECO,
respectively, the electric power supply for the two mini-sawmills owned and operated by respondent, located
in Talacogon, Agusan del Sur; and in Golden Ribbon, Butuan City, was cut off on June 1, 1992 and May 28,
1992, respectively, and it was restored only on July 20 and August 24, 1992, respectively.
Due to the foregoing, respondent filed with the Regional Trial Court (RTC) of Cebu City a complaint against
petitioner, praying for payment of losses consisting of unrealized income in the amount of ₱1,864,500.00. He
also prayed for payment of moral damages, exemplary damages, attorney's fees and litigation expenses.
Respondent claimed that Check No. 275100 was a postdated check in payment of Bills of Lading Nos. 15, 16
and 17, and that his account with petitioner would have had sufficient funds to cover payment of the three
other checks were it not for the negligence of petitioner in immediately debiting from his account Check No.
275100, in the amount of ₱34,588.72, even as the said check was postdated to May 30, 1992. As a
consequence of petitioner's error, which brought about the dishonor of the two checks paid to ASELCO and
ANECO, the electric supply to his two mini-sawmills was cut off, the business operations thereof were
stopped, and purchase orders were not duly served causing tremendous losses to him.
In its defense, petitioner denied that the questioned check was postdated May 30, 1992 and claimed that it
was a current check dated May 3, 1992. It alleged further that the disconnection of the electric supply to
respondent's sawmills was not due to the dishonor of the checks, but for other reasons not attributable to
the bank.
After trial, the RTC, in its Decision5 dated June 21, 1993, ruled in favor of petitioner and dismissed the
complaint.
Aggrieved by the Decision, respondent filed a Notice of Appeal.6 In its Decision dated May 31, 2004, the
Court of Appeals reversed the decision of the trial court and directed petitioner to pay respondent the sum of
₱1,864,500.00 as actual damages, ₱50,000.00 by way of moral damages, ₱50,000.00 as exemplary
damages and attorney's fees in the amount of ₱30,000.00. Petitioner filed a motion for reconsideration,
which the CA denied in a Resolution dated August 24, 2004.
Hence, the instant petition assigning the following errors:
I
THE FOURTH DIVISION OF THE COURT OF APPEALS DEFIED OFFICE ORDER NO. 82-04-CG BY
HOLDING ON TO THIS CASE AND DECIDING IT INSTEAD OF UNLOADING IT AND HAVING IT RE-
RAFFLED AMONG THE DIVISIONS IN CEBU CITY.
II

THE COURT OF APPEALS ERRED IN REVERSING THE FINDING OF THE REGIONAL TRIAL COURT
THAT CHECK NO. 275100 WAS DATED MAY 3, 1992.
III
THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT'S WAY OF WRITING THE
DATE ON CHECK NO. 275100 WAS THE PROXIMATE CAUSE OF THE DISHONOR OF HIS THREE
OTHER CHECKS.
IV
THE COURT OF APPEALS ERRED IN AWARDING ACTUAL DAMAGES, MORAL DAMAGES, EXEMPLARY
DAMAGES AND ATTORNEY'S FEES.
Anent the first issue, petitioner submits that the CA defied Office Order No. 82-04-CG dated April 5, 2004
issued by then CA Presiding Justice Cancio C. Garcia when it failed to unload CA-G.R. CV No. 41928 so that it
may be re-raffled among the Divisions in Cebu City.
Office Order No. 82-04-CG7 provides:
xxxx
In view of the reorganization of the different Divisions due to the appointment of eighteen (18) new Justices
to the additional divisions in the cities of Cebu and Cagayan de Oro, the raffle of civil, criminal and special
cases submitted for decision and falling within the jurisdiction of the additional divisions shall commence on
April 6, 2004.
The raffle of newly-filed cases and those for completion likewise falling within the jurisdiction of the
additional divisions, shall start on April 12, 2004.
xxxx
Petitioner alleged that since the aforementioned Office Order directed the raffle of civil, criminal and special
cases submitted for decision and falling within the jurisdiction of the additional divisions on April 6, 2004,
CA-G.R. CV No. 41928 should have been unloaded by the CA's Fourth Division and re-raffled to the CA's
Division in Cebu City instead of deciding the case on May 31, 2004.
Respondent argued that the CA's Fourth Division correctly acted in taking cognizance of the case. The CA
defended its jurisdiction by ruling that cases already submitted for decision as of the effectivity of Republic
Act (R.A.) 82468 on February 1, 1997 were no longer included for re-raffle to the newly-created Visayas and
Mindanao Divisions of the CA, conformable to Section 5 of the said statute.
Petitioner's argument is misplaced. Under Section 3 of R.A. 8246, it is provided that:
Section 3. Section 10 of Batas Pambansa Blg. 129, as amended, is hereby further amended to read as
follows:
60
60
Sec. 10. Place of Holding Sessions. — The Court of Appeals shall have its permanent stations as follows: The
first seventeen (17) divisions shall be stationed in the City of Manila for cases coming from the First to the
Fifth Judicial Regions; the Eighteenth, Nineteenth, and Twentieth Divisions shall be in Cebu City for cases
coming from the Sixth, Seventh and Eighth Judicial Regions; the Twenty-first, Twenty-second and Twenty-
third Divisions shall be in Cagayan de Oro City for cases coming from the Ninth, Tenth, Eleventh, and Twelfth
Judicial Regions. Whenever demanded by public interest, or whenever justified by an increase in case load,
the Supreme Court, upon its own initiative or upon recommendation of the Presiding Justice of the Court of
Appeals, may authorize any division of the Court to hold sessions periodically, or for such periods and at
such places as the Supreme Court may determine, for the purpose of hearing and deciding cases. Trials or
hearings in the Court of Appeals must be continuous and must be completed within three (3) months unless
extended by the Chief Justice of the Supreme Court.
Further, Section 5 of the same Act provides:
Upon the effectivity of this Act, all pending cases, except those which have been submitted for
resolution, shall be referred to the proper division of the Court of Appeals.9
Although CA-G.R. CV No. 41928 originated from Cebu City and is thus referable to the CA's Divisions in Cebu
City, the said case was already submitted for decision as of July 25, 1994.10 Hence, CA-G.R. CV No. 41928,
which was already submitted for decision as of the effectivity of R.A. 8246, i.e., February 1, 1997, can no
longer be referred to the CA's Division in Cebu City. Thus, the CA's Former Fourth Division correctly ruled
that CA-G.R. CV No. 41928 pending in its division was not among those cases that had to be re-raffled to the
newly-created CA Divisions in the Visayas Region.
Further, administrative issuances must not override, supplant or modify the law, but must remain consistent
with the law they intend to carry out.11 Thus, Office Order No. 82-04-CG cannot defeat the provisions of
R.A. 8246.
As to the second issue, petitioner maintains that the CA erred in reversing the finding of the RTC that Check
No. 275100 was dated May 3, 1992. Petitioner argued that in arriving at the conclusion that Check No.
275100 was postdated May 30, 1992, the CA just made a visual examination of the check, unlike the RTC
which verified the truth of respondent's testimony relative to the issuance of Check No. 275100. Respondent
argued that the check was carefully examined by the CA which correctly found that Check No. 275100 was
postdated to May 30, 1992 and not May 3, 1992.
The principle is well established that this Court is not a trier of facts. Therefore, in an appeal by certiorari
under Rule 45 of the Rules of Court, only questions of law may be raised. The resolution of factual issues is
the function of the lower courts whose findings on these matters are received with respect and are, as a
rule, binding on this Court. However, this rule is subject to certain exceptions. One of these is when the
findings of the appellate court are contrary to those of the trial court.12 Due to the divergence of the
findings of the CA and the RTC, We shall re-examine the facts and evidence presented before the lower
courts.
The RTC ruled that:
xxxx
The issue to be resolved in this case is whether or not the date of PCIB Check No. 275100 is May 3, 1992 as
contended by the defendant, or May 30, 1992 as claimed by the plaintiff. The date of the check is written as
follows – 5/3/0/92. From the manner by which the date of the check is written, the Court cannot really make The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of R.A.
a pronouncement as to whether the true date of the check is May 3 or May 30, 1992, without inquiring into 879115 decrees:
the background facts leading to the issuance of said check.
Declaration of Policy. – The State recognizes the vital role of banks in providing an environment conducive to
According to the plaintiff, the check was issued to Sulpicio Lines in payment of bill of lading nos. 15, 16 and the sustained development of the national economy and the fiduciary nature of banking that requires high
17. An examination of bill of lading no. 15, however, shows that the same was issued, not in favor of plaintiff standards of integrity and performance. In furtherance thereof, the State shall promote and maintain a
but in favor of Coca Cola Bottlers Philippines, Inc. Bill of Lading No. 16 is issued in favor of Suson Lumber stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the
and not to plaintiff. Likewise, Bill of Lading No. 17 shows that it was issued to Jazz Cola and not to plaintiff. demands of a developing economy.
Furthermore, the receipt for the payment of the freight for the shipments reflected in these three bills of
lading shows that the freight was paid by Coca Cola Bottlers Philippines, Inc. and not by plaintiff.
Although R.A. 8791 took effect only in the year 2000, the Court had already imposed on banks the same
high standard of diligence required under R.A. 8791 at the time of the untimely debiting of respondent's
Moreover, the said receipt shows that it was paid in cash and not by check. From the foregoing, the evidence account by petitioner in May 1992. In Simex International (Manila), Inc. v. Court of Appeals,16 which was
on record does not support the claim of the plaintiff that Check No. 275100 was issued in payment of bills of decided in 1990, the Court held that as a business affected with public interest and because of the nature of
lading nos. 15, 16 and 17. 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.
Hence, the conclusion of the Court is that the date of the check was May 3, 1992 and not May 30, 1992.13
The diligence required of banks, therefore, is more than that of a good father of a family.17 In every case,
the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists
xxxx
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
In fine, the RTC concluded that the check was dated May 3, 1992 and not May 30, 1992, because the same time the amount of money the depositor can dispose of as he sees fit, confident that the bank will deliver it
check was not issued to pay for Bills of Lading Nos. 15, 16 and 17, as respondent claims. The trial court's as and to whomever he directs.18 From the foregoing, it is clear that petitioner bank did not exercise the
conclusion is preposterous and illogical. The purpose for the issuance of the check has no logical connection degree of diligence that it ought to have exercised in dealing with its client.
with the date of the check. Besides, the trial court need not look into the purpose for which the check was
issued. A reading of Check No. 27510014 would readily show that it was dated May 30, 1992. As correctly
With respect to the third issue, petitioner submits that respondent's way of writing the date on Check No.
observed by the CA:
275100 was the proximate cause of the dishonor of his three other checks. Contrary to petitioner’s view, the
Court finds that its negligence is the proximate cause of respondent’s loss.
On the first issue, we agree with appellant that appellee Bank apparently erred in misappreciating the date
of Check No. 275100. We have carefully examined the check in question (Exh. DDDD) and we are convinced
Proximate cause is that cause which, in a natural and continuous sequence, unbroken by any efficient
that it was indeed postdated to May 30, 1992 and not May 3, 1992 as urged by appellee. The date written
intervening cause, produces the injury, and without which the result would not have occurred.19 The
on the check clearly appears as "5/30/1992" (Exh. DDDD-4). The first bar (/) which separates the numbers
proximate cause of the loss is not respondent's manner of writing the date of the check, as it was very clear
"5" and "30" and the second bar (/) which further separates the number "30" from the year 1992 appear to
that he intended Check No. 275100 to be dated May 30, 1992 and not May 3, 1992. The proximate cause is
have been done in heavy, well-defined and bold strokes, clearly indicating the date of the check as
petitioner’s own negligence in debiting the account of the respondent prior to the date as appearing in the
"5/30/1992" which obviously means May 30, 1992. On the other hand, the alleged bar (/) which appellee
check, which resulted in the subsequent dishonor of several checks issued by the respondent and the
points out as allegedly separating the numbers "3" and "0," thereby leading it to read the date as May 3,
disconnection by ASELCO and ANECO of his electric supply.
1992, is not actually a bar or a slant but appears to be more of an unintentional marking or line done with a
very light stroke. The presence of the figure "0" after the number "3" is quite significant. In fact, a close
examination thereof would unerringly show that the said number zero or "0" is connected to the preceeding The bank on which the check is drawn, known as the drawee bank, is under strict liability to pay to the order
number "3." In other words, the drawer of the check wrote the figures "30" in one continuous stroke, of the payee in accordance with the drawer’s instructions as reflected on the face and by the terms of the
thereby contradicting appellee’s theory that the number "3" is separated from the figure "0" by a bar. check.20 Thus, payment made before the date specified by the drawer is clearly against the drawee bank's
Besides, appellee’s theory that the date of the check is May 3, 1992 is clearly untenable considering the duty to its client.
presence of the figure "0" after "3" and another bar before the year 1992. And if we were to accept
appellee’s theory that what we find to be an unintentional mark or line between the figures "3" and "0" is a
In its memorandum21 filed before the RTC, petitioner submits that respondent caused confusion on the true
bar separating the two numbers, the date of the check would then appear as "5/3/0/1992, which is simply
date of the check by writing the date of the check as 5/3/0/92. If, indeed, petitioner was confused on
absurd. Hence, we cannot go along with appellee’s theory which will lead us to an absurd result. It is
whether the check was dated May 3 or May 30 because of the "/" which allegedly separated the number "3"
therefore our conclusion that the check was postdated to May 30, 1992 and appellee Bank or its personnel
from the "0," petitioner should have required respondent drawer to countersign the said "/" in order to
erred in debiting the amount of the check from appellant’s account even before the check’s due date.
ascertain the true intent of the drawer before honoring the check. As a matter of practice, bank tellers would
Undoubtedly, had not appellee bank prematurely debited the amount of the check from appellant’s account
not receive nor honor such checks which they believe to be unclear, without the counter-signature of its
before its due date, the two other checks (Exhs. LLLL and GGGG) successively dated May 9, 1992 and May
drawer. Petitioner should have exercised the highest degree of diligence required of it by ascertaining from
16, 1992 which were paid by appellant to ASELCO and ANECO, respectively, would not have been
the respondent the accuracy of the entries therein, in order to settle the confusion, instead of proceeding to
dishonored and the said payees would not have disconnected their supply of electric power to appellant’s
honor and receive the check.
sawmills, and the latter would not have suffered losses.

61

Further, petitioner's branch manager, Pedro D. Tradio, in a letter22 addressed to ANECO, explained the
circumstances surrounding the dishonor of PCIB Check No. 275097. Thus:
June 11, 1992
ANECO
Agusan del Norte
Gentlemen:
This refer (sic) to PCIB Check No. 275097 dated May 16, 1992 in the amount of ₱6,472.01 payable to your
goodselves issued by Mr. Arcelito B. Tan (MANWOOD Industries) which was returned by PCIB Mandaue
Branch for insufficiency of funds.
Please be advised that the return of the aforesaid check was a result of an earlier negotiation to PCIB-
Mandaue Branch through a deposit made on May 14, 1992 with SOLIDBANK Carbon Branch, or through
Central Bank clearing via Philippine Clearing House Corporation facilities, of a postdated check which
ironically and without bad faith passed undetected through several eyes from the payee of the check down to
the depository bank and finally the drawee bank (PCIB) the aforesaid Check No. 275097 issued to you would
have been honored because it would have been sufficiently funded at the time it was negotiated. It should
be emphasized, however, that Mr. Arcelito B. Tan was in no way responsible for the dishonor of said PCIB
Check No. 275097.
We hope that the foregoing will sufficiently explain the circumstances of the dishonor of PCIB Check No.
275097 and would clear the name and credit of Mr. Arcelito Tan from any misimpressions which may have
resulted from the dishonor of said check.
Thank you.
xxxx
Although petitioner failed to specify in the letter the other details of this "postdated check," which passed
undetected from the eyes of the payee down to the petitioner drawee bank, the Court finds that petitioner
was evidently referring to no other than Check No. 275100 which was deposited to Solidbank, and was
postdated May 30, 1992. As correctly found by the CA:
In the aforequoted letter of its Manager, appellee Bank expressly acknowledged that Check No. 275097
(Exh. GGGG) which appellant paid to ANECO "was sufficiently funded at the time it was negotiated," but it
was dishonored as a "result of an earlier negotiation to PCIB-Mandaue Branch through a deposit made on
May 14, 1992 with SOLIDBANK xxx xxx xxx of a postdated check which xxx xxx passed undetected." He
further admitted that "Mr. Arcelito B. Tan was in no way responsible for the dishonor of said PCIB Check No.
275097." Needless to state, since appellee's Manager has cleared appellant of any fault in the dishonor of
the ANECO check, it [necessarily] follows that responsibility therefor or fault for the dishonor of the check
should fall on appellee bank. Appellee's attempt to extricate itself from its inadvertence must therefore fail in
the face of its Manager's explicit acknowledgment of responsibility for the inadvertent dishonor of the ANECO
check.23
62
62
Evidently, the bank's negligence was the result of lack of due care required of its managers and employees
in handling the accounts of its clients. Petitioner was negligent in the selection and supervision of its
employees. In Citibank, N.A. v. Cabamongan,24 the Court ruled:
x x x Banks handle daily transactions involving millions of pesos. By the very nature of their works the
degree of responsibility, care and trustworthiness expected of their employees and officials is far greater
than those of ordinary clerks and employees. Banks are expected to exercise the highest degree of diligence
in the selection and supervision of their employees.
We now resolve the question on the award of actual, moral and exemplary damages, as well as attorney's
fees by the CA to the respondent.
The CA based the award of actual damages in the amount of ₱1,864,500.00 on the purchase
orders25 submitted by respondent. The CA ruled that:
x x x In the case at bar, appellant [respondent herein] presented adequate evidence to prove losses
consisting of unrealized income that he sustained as a result of the appellee Bank's gross negligence.
Appellant identified certain Purchase Orders from various customers which were not met by reason of the
disruption of the operation of his sawmills when ANECO and ASELCO disconnected their supply of electricity
thereto. x x x
Actual or compensatory damages are those awarded in order to compensate a party for an injury or loss he
suffered. They arise out of a sense of natural justice and are aimed at repairing the wrong done. Except as
provided by law or by stipulation, a party is entitled to an adequate compensation only for such pecuniary
loss as he has duly proven.26 To recover actual damages, not only must the amount of loss be capable of
proof; it must also be actually proven with a reasonable degree of certainty, premised upon competent proof
or the best evidence obtainable.27
Respondent's claim for damages was based on purchase orders from various customers which were allegedly
not met due to the disruption of the operation of his sawmills. However, aside from the purchase orders and
his testimony, respondent failed to present competent proof on the specific amount of actual damages he
suffered during the entire period his power was cut off. No other evidence was provided by respondent to
show that the foregoing purchase orders were not met or were canceled by his various customers. The Court
cannot simply rely on speculation, conjecture or guesswork in determining the amount of damages.28
Moreover, an examination of the purchase orders and job orders reveal that the orders were due for delivery
prior to the period when the power supply of respondent's two sawmills was cut off on June 1, 1992 to July
20, 1992 and May 28, 1992 to August 24, 1992, respectively. Purchase Order No. 990629 delivery date is
May 4, 1992; Purchase Order No. 926930 delivery date is March 19, 1992; Purchase Order No. 14779631 is
due for delivery on January 31, 1992; Purchase Order No. 7600032 delivery date is February and March
1992; and Job Order No. 1824,33 dated March 18, 1992, has a 15 days duration of work. Clearly, the
disconnection of his electricity during the period May 28, 1992 to August 24, 1992 could not possibly affect
his sawmill operations and prior orders therefrom.
Given the dearth of respondent's evidence on the matter, the Court resolves to delete the award of actual
damages rendered by the CA in favor of respondent for his unrealized income.
Nonetheless, in the absence of competent proof on the actual damages suffered, respondent is entitled to
temperate damages. Under Article 2224 of the Civil Code of the Philippines, temperate or moderate
damages, which are more than nominal but less than compensatory damages, may be recovered when the WHEREFORE, the petition is PARTIALLY GRANTED. The Decision and Resolution of the Court of Appeals in
court finds that some pecuniary loss has been suffered but its amount cannot, from the nature of the case, CA-G.R. CV No. 41928, dated May 31, 2004 and August 24, 2004, respectively, are AFFIRMED with the
be proved with certainty.34 The allowance of temperate damages when actual damages were not adequately following MODIFICATIONS:
proven is ultimately a rule drawn from equity, the principle affording relief to those definitely injured who are
unable to prove how definite the injury.35
1. The award of One Million Eight Hundred Sixty-Four Thousand and Five Hundred Pesos
(₱1,864,500.00) as actual damages, in favor of respondent Arcelito B. Tan, is DELETED; and
It is apparent that respondent suffered pecuniary loss. The negligence of petitioner triggered the
disconnection of his electrical supply, which temporarily halted his business operations and the consequent
2. Petitioner Equitable PCI Bank is instead directed to pay respondent the amount of Fifty Thousand
loss of business opportunity. However, due to the insufficiency of evidence before Us, We cannot place its
Pesos (₱50,000.00) as temperate damages.
amount with certainty. Article 221636 of the Civil Code instructs that assessment of damages is left to the
discretion of the court according to the circumstances of each case. Under the circumstances, the sum of
₱50,000.00 as temperate damages is reasonable. SO ORDERED.

Anent the award of moral damages, it is settled that moral damages are meant to compensate the claimant
for any physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation and similar injuries unjustly caused.37 In Philippine National Bank v. Court of
Appeals,38 the Court held that a bank is under obligation to treat the accounts of its depositors with
meticulous care whether such account consists only of a few hundred pesos or of millions of pesos.
Responsibility arising from negligence in the performance of every kind of obligation is demandable. While
petitioner's negligence in that case may not have been attended with malice and bad faith, the banks'
negligence caused respondent to suffer mental anguish, serious anxiety, embarrassment and humiliation. In
said case, We ruled that respondent therein was entitled to recover reasonable moral damages.1âwphi1

In this case, the unexpected cutting off of respondent's electricity, which resulted in the stoppage of his
business operations, had caused him to suffer humiliation, mental anguish and serious anxiety. The award of
₱50,000.00 is reasonable, considering the reputation and social standing of respondent. As found by the CA,
as an accredited supplier, respondent had been reposed with a certain degree of trust by various reputable
and well- established corporations.

On the award of exemplary damages, Article 2229 of the Civil Code states:

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.

The law allows the grant of exemplary damages to set an example for the public good. The banking system
has become an indispensable institution in the modern world and plays a vital role in the economic life of
every civilized society. Whether as mere passive entities for the safekeeping and saving of money or as
active instruments of business and commerce, banks have attained an ubiquitous presence among the
people, who have come to regard them with respect and even gratitude and most of all, confidence. For this
reason, banks should guard against injury attributable to negligence or bad faith on its part. Without a
doubt, it has been repeatedly emphasized that since the banking business is impressed with public interest,
of paramount importance thereto is the trust and confidence of the public in general. Consequently, the
highest degree of diligence is expected, and high standards of integrity and performance are even required
of it.39 Petitioner, having failed in this respect, the award of exemplary damages in the amount of
₱50,000.00 is in order.

As to the award of attorney's fees, Article 220840 of the Civil Code provides, among others, that attorney's
fees may be recovered when exemplary damages are awarded or when the defendant's act or omission has
compelled the plaintiff to litigate with third persons or to incur expenses to protect his
interest.41 Respondent has been forced to undergo unnecessary trouble and expense to protect his interest.
The Court affirms the appellate court’s award of attorney’s fees in the amount of ₱30,000.00.

63

Simex International v. CA, 183 SCRA 361 (1990)
G.R. No. 88013 March 19, 1990
SIMEX INTERNATIONAL (MANILA), INCORPORATED, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and TRADERS ROYAL BANK, respondents.
.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:
64
64
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, be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by
the checks should have been paid immediately upon presentment. 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.
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 Now for the exemplary damages.
said had not been established by the petitioner.
The pertinent provisions of the Civil Code are the following:
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
Art. 2229. Exemplary or corrective damages are imposed, by way of example or
fact is that the petitioner's credit line was canceled and its orders were not acted upon pending receipt of
correction for the public good, in addition to the moral, temperate, liquidated or
actual payment by the suppliers. Its business declined. Its reputation was tarnished. Its standing was
compensatory damages.
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.
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.
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 The banking system is an indispensable institution in the modern world and plays a vital role in the economic
"absolute certainty as to its amount is not required." 7 Such injury should bolster all the more the demand of life of every civilized nation. Whether as mere passive entities for the safekeeping and saving of money or as
the petitioner for moral damages and justifies the examination by this Court of the validity and active instruments of business and commerce, banks have become an ubiquitous presence among the
reasonableness of the said claim. 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,
We agree that moral damages are not awarded to penalize the defendant but to compensate the plaintiff for
with equal faith, usually maintains a modest checking account for security and convenience in the settling of
the injuries he may have suffered. 8 In the case at bar, the petitioner is seeking such damages for the
his monthly bills and the payment of ordinary expenses. As for business entities like the petitioner, the bank
prejudice sustained by it as a result of the private respondent's fault. The respondent court said that the
is a trusted and active associate that can help in the running of their affairs, not only in the form of loans
claimed losses are purely speculative and are not supported by substantial evidence, but if failed to consider
when needed but more often in the conduct of their day-to-day transactions like the issuance or encashment
that the amount of such losses need not be established with exactitude precisely because of their nature.
of checks.
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 In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such
(except liquidated damages) is left to the sound discretion of the court, according to "the circumstances of account consists only of a few hundred pesos or of millions. The bank must record every single transaction
each case." 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
From every viewpoint except that of the petitioner's, its claim of moral damages in the amount of
a check without good reason, can cause the depositor not a little embarrassment if not also financial loss and
P1,000,000.00 is nothing short of preposterous. Its business certainly is not that big, or its name that
perhaps even civil and criminal litigation.
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 The point is that as a business affected with public interest and because of the nature of its functions, the
this rule is where the corporation has a good reputation that is debased, resulting in its social humiliation. 9
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
We shall recognize that the petitioner did suffer injury because of the private respondent's negligence that
of its error in not crediting the deposit in question to the petitioner, the respondent bank did not immediately
caused the dishonor of the checks issued by it. The immediate consequence was that its prestige was
correct it but did so only one week later or twenty-three days after the deposit was made. It bears repeating
impaired because of the bouncing checks and confidence in it as a reliable debtor was diminished. The
that the record does not contain any satisfactory explanation of why the error was made in the first place
private respondent makes much of the one instance when the petitioner was sued in a collection case, but
and why it was not corrected immediately after its discovery. Such ineptness comes under the concept of the
that did not prove that it did not have a good reputation that could not be marred, more so since that case
wanton manner contemplated in the Civil Code that calls for the imposition of exemplary damages.
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.
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
Considering all this, we feel that the award of nominal damages in the sum of P20,000.00 was not the
the public good," in the words of the law. It is expected that this ruling will serve as a warning and deterrent
proper relief to which the petitioner was entitled. Under Article 2221 of the Civil Code, "nominal damages are
against the repetition of the ineptness and indefference that has been displayed here, lest the confidence of
adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may
the public in the banking system be further impaired.

65

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.
Reyes v. CA, G.R. No. 118492, August 15, 2001
G.R. No. 118492 August 15, 2001
GREGORIO H. REYES and CONSUELO PUYAT-REYES, petitioners,
vs.
THE HON. COURT OF APPEALS and FAR EAST BANK AND TRUST COMPANY, respondents.
DE LEON, JR., J.:
Before us is a petition for review of the Decision1 dated July 22, 1994 and Resolution2 dated December 29,
1994 of the Court of Appeals3 affirming with modification the Decision4 dated November 12, 1992 of the
Regional Trial Court of Makati, Metro Manila, Branch 64, which dismissed the complaint for damages of
petitioners spouses Gregorio H. Reyes and Consuelo Puyat-Reyes against respondent Far East Bank and
Trust Company.
The undisputed facts of the case are as follows:
In view of the 20th Asian Racing Conference then scheduled to be held in September, 1988 in Sydney,
Australia, the Philippine Racing Club, Inc. (PRCI, for brevity) sent four (4) delegates to the said conference.
Petitioner Gregorio H. Reyes, as vice-president for finance, racing manager, treasurer, and director of PRCI,
sent Godofredo Reyes, the club's chief cashier, to the respondent bank to apply for a foreign exchange
demand draft in Australian dollars.
Godofredo went to respondent bank's Buendia Branch in Makati City to apply for a demand draft in the
amount One Thousand Six Hundred Ten Australian Dollars (AU$1,610.00) payable to the order of the
20th Asian Racing Conference Secretariat of Sydney, Australia. He was attended to by respondent bank's
assistant cashier, Mr. Yasis, who at first denied the application for the reason that respondent bank did not
have an Australian dollar account in any bank in Sydney. Godofredo asked if there could be a way for
respondent bank to accommodate PRCI's urgent need to remit Australian dollars to Sydney. Yasis of
respondent bank then informed Godofredo of a roundabout way of effecting the requested remittance to
Sydney thus: the respondent bank would draw a demand draft against Westpac Bank in Sydney, Australia
(Westpac-Sydney for brevity) and have the latter reimburse itself from the U.S. dollar account of the
respondent in Westpac Bank in New York, U.S.A. (Westpac-New York for brevity). This arrangement has
been customarily resorted to since the 1960's and the procedure has proven to be problem-free. PRCI and
the petitioner Gregorio H. Reyes, acting through Godofredo, agreed to this arrangement or approach in order
66
66
to effect the urgent transfer of Australian dollars payable to the Secretariat of the 20th Asian Racing
Conference.
On July 28, 1988, the respondent bank approved the said application of PRCI and issued Foreign Exchange
Demand Draft (FXDD) No. 209968 in the sum applied for, that is, One Thousand Six Hundred Ten Australian
Dollars (AU$ 1,610.00), payable to the order of the 20th Asian Racing Conference Secretariat of Sydney,
Australia, and addressed to Westpac-Sydney as the drawee bank.1âwphi1.nêt
On August 10, 1988, upon due presentment of the foreign exchange demand draft, denominated as FXDD
No. 209968, the same was dishonored, with the notice of dishonor stating the following: "xxx No account
held with Westpac." Meanwhile, on August 16, 1988, Wespac-New York sent a cable to respondent bank
informing the latter that its dollar account in the sum of One Thousand Six Hundred Ten Australian Dollars
(AU$ 1,610.00) was debited. On August 19, 1988, in response to PRCI's complaint about the dishonor of the
said foreign exchange demand draft, respondent bank informed Westpac-Sydney of the issuance of the said
demand draft FXDD No. 209968, drawn against the Wespac-Sydney and informing the latter to be
reimbursed from the respondent bank's dollar account in Westpac-New York. The respondent bank on the
same day likewise informed Wespac-New York requesting the latter to honor the reimbursement claim of
Wespac-Sydney. On September 14, 1988, upon its second presentment for payment, FXDD No. 209968 was
again dishonored by Westpac-Sydney for the same reason, that is, that the respondent bank has no deposit
dollar account with the drawee Wespac-Sydney.
On September 17, 1988 and September 18, 1988, respectively, petitioners spouses Gregorio H. Reyes and
Consuelo Puyat-Reyes left for Australia to attend the said racing conference. When petitioner Gregorio H.
Reyes arrived in Sydney in the morning of September 18, 1988, he went directly to the lobby of Hotel
Regent Sydney to register as a conference delegate. At the registration desk, in the presence of other
delegates from various member of the conference secretariat that he could not register because the foreign
exchange demand draft for his registration fee had been dishonored for the second time. A discussion
ensued in the presence and within the hearing of many delegates who were also registering. Feeling terribly
embarrassed and humiliated, petitioner Gregorio H. Reyes asked the lady member of the conference
secretariat that he be shown the subject foreign exchange demand draft that had been dishonored as well as
the covering letter after which he promised that he would pay the registration fees in cash. In the meantime
he demanded that he be given his name plate and conference kit. The lady member of the conference
secretariat relented and gave him his name plate and conference kit. It was only two (2) days later, or on
September 20, 1988, that he was given the dishonored demand draft and a covering letter. It was then that
he actually paid in cash the registration fees as he had earlier promised.
Meanwhile, on September 19, 1988, petitioner Consuelo Puyat-Reyes arrived in Sydney. She too was
embarassed and humiliated at the registration desk of the conference secretariat when she was told in the
presence and within the hearing of other delegates that she could not be registered due to the dishonor of
the subject foreign exchange demand draft. She felt herself trembling and unable to look at the people
around her. Fortunately, she saw her husband, coming toward her. He saved the situation for her by telling
the secretariat member that he had already arranged for the payment of the registration fee in cash once he
was shown the dishonored demand draft. Only then was petitioner Puyat-Reyes given her name plate and
conference kit.
At the time the incident took place, petitioner Consuelo Puyat-Reyes was a member of the House of
Representatives representing the lone Congressional District of Makati, Metro Manila. She has been an officer
of the Manila Banking Corporation and was cited by Archbishop Jaime Cardinal Sin as the top lady banker of
the year in connection with her conferment of the Pro-Ecclesia et Pontifice Award. She has also been
awarded a plaque of appreciation from the Philippine Tuberculosis Society for her extraordinary service as
the Society's campaign chairman for the ninth (9th) consecutive year.
On November 23, 1988, the petitioners filed in the Regional Trial Court of Makati, Metro Manila, a complaint
for damages, docketed as Civil Case No. 88-2468, against the respondent bank due to the dishonor of the
said foreign exchange demand draft issued by the respondent bank. The petitioners claim that as a result of
the dishonor of the said demand draft, they were exposed to unnecessary shock, social humiliation, and
deep mental anguish in a foreign country, and in the presence of an international audience.
On November 12, 1992, the trial court rendered judgment in favor of the defendant (respondent bank) and
against the plaintiffs (herein petitioners), the dispositive portion of which states:
WHEREFORE, judgment is hereby rendered in favor of the defendant, dismissing plaintiff's
complaint, and ordering plaintiffs to pay to defendant, on its counterclaim, the amount of
P50,000.00, as reasonable attorney's fees. Costs against the plaintiff.
SO ORDERED.5
The petitioners appealed the decision of the trial court to the Court of Appeals. On July 22, 1994, the
appellate court affirmed the decision of the trial court but in effect deleted the award of attorney's fees to
the defendant (herein respondent bank) and the pronouncement as to the costs. The decretal portion of the
decision of the appellate court states:
WHEREFORE, the judgment appealed from, insofar as it dismissed plaintiff's complaint, is hereby
AFFIRMED, but is hereby REVERSED and SET ASIDE in all other respect. No special pronouncement
as to costs.
SO ORDERED.6
According to the appellate court, there is no basis to hold the respondent bank liable for damages for the
reason that it exerted every effort for the subject foreign exchange demand draft to be honored. The
appellate court found and declared that:
xxx xxx xxx
Thus, the Bank had every reason to believe that the transaction finally went through smoothly,
considering that its New York account had been debited and that there was no miscommunication
between it and Westpac-New York. SWIFT is a world wide association used by almost all banks and
is known to be the most reliable mode of communication in the international banking business.
Besides, the above procedure, with the Bank as drawer and Westpac-Sydney as drawee, and with
Westpac-New York as the reimbursement Bank had been in place since 1960s and there was no
reason for the Bank to suspect that this particular demand draft would not be honored by Westpac-
Sydney.
From the evidence, it appears that the root cause of the miscommunications of the Bank's SWIFT
message is the erroneous decoding on the part of Westpac-Sydney of the Bank's SWIFT message
as an MT799 format. However, a closer look at the Bank's Exhs. "6" and "7" would show that
despite what appears to be an asterick written over the figure before "99", the figure can still be
distinctly seen as a number "1" and not number "7", to the effect that Westpac-Sydney was
responsible for the dishonor and not the Bank.
67
Moreover, it is not said asterisk that caused the misleading on the part of the Westpac-Sydney of
the numbers "1" to "7", since Exhs. "6" and "7" are just documentary copies of the cable message
sent to Wespac-Sydney. Hence, if there was mistake committed by Westpac-Sydney in decoding
the cable message which caused the Bank's message to be sent to the wrong department, the
mistake was Westpac's, not the Bank's. The Bank had done what an ordinary prudent person is
required to do in the particular situation, although appellants expect the Bank to have done more.
The Bank having done everything necessary or usual in the ordinary course of banking transaction,
it cannot be held liable for any embarrassment and corresponding damage that appellants may
have incurred.7
xxx xxx xxx
Hence, this petition, anchored on the following assignment of errors:
I
THE HONORABLE COURT OF APPEALS ERRED IN FINDING PRIVATE RESPONDENT NOT NEGLIGENT
BY ERRONEOUSLY APPLYING THE STANDARD OF DILIGENCE OF AN "ORDINARY PRUDENT
PERSON" WHEN IN TRUTH A HIGHER DEGREE OF DILIGENCE IS IMPOSED BY LAW UPON THE
BANKS.
II
THE HONORABLE COURT OF APPEALS ERRED IN ABSOLVING PRIVATE RESPONDENT FROM
LIABILITY BY OVERLOOKING THE FACT THAT THE DISHONOR OF THE DEMAND DRAFT WAS A
BREACH OF PRIVATE RESPONDENT'S WARRANTY AS THE DRAWER THEREOF.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT AS SHOWN
OVERWHELMINGLY BY THE EVIDENCE, THE DISHONOR OF THE DEMAND DRAFT AS DUE TO
PRIVATE RESPONDENT'S NEGLIGENCE AND NOT THE DRAWEE BANK.8
The petitioners contend that due to the fiduciary nature of the relationship between the respondent bank and
its clients, the respondent should have exercised a higher degree of diligence than that expected of an
ordinary prudent person in the handling of its affairs as in the case at bar. The appellate court, according to
petitioners, erred in applying the standard of diligence of an ordinary prudent person only. Petitioners also
claim that the respondent bank violate Section 61 of the Negotiable Instruments Law9 which provides the
warranty of a drawer that "xxx on due presentment, the instrument will be accepted or paid, or both,
according to its tenor xxx." Thus, the petitioners argue that respondent bank should be held liable for
damages for violation of this warranty. The petitioners pray this Court to re-examine the facts to cite certain
instances of negligence.
It is our view and we hold that there is no reversible error in the decision of the appellate court.
Section 1 of Rule 45 of the Revised Rules of Court provides that "(T)he petition (for review) shall raise only
questions of law which must be distinctly set forth." Thus, we have ruled that factual findings of the Court of
Appeals are conclusive on the parties and not reviewable by this Court – and they carry even more weight
when the Court of Appeals affirms the factual findings of the trial court.10
 68

The courts a quo found that respondent bank did not misrepresent that it was maintaining a deposit account employee erroneously read the said cable message, Westpac-Sydney merely stated that the respondent
with Westpac-Sydney. Respondent bank's assistant cashier explained to Godofredo Reyes, representing PRCI bank has no deposit account with it to cover for the amount of One Thousand Six Hundred Ten Australian
and petitioner Gregorio H. Reyes, how the transfer of Australian dollars would be effected through Westpac- Dollar (AU $1610.00) indicated in the foreign exchange demand draft. Thus, the respondent bank had the
New York where the respondent bank has a dollar account to Westpac-Sydney where the subject foreign impression that Westpac-New York had not yet made available the amount for reimbursement to Westpac-
exchange demand draft (FXDD No. 209968) could be encashed by the payee, the 20th Asian Racing Sydney despite the fact that respondent bank has a sufficient deposit dollar account with Westpac-New York.
Conference Secretariat. PRCI and its Vice-President for finance, petitioner Gregorio H. Reyes, through their That was the reason why the respondent bank had to re-confirm and repeatedly notify Westpac-New York to
said representative, agreed to that arrangement or procedure. In other words, the petitioners are estopped debit its (respondent bank's) deposit dollar account with it and to transfer or credit the corresponding
from denying the said arrangement or procedure. Similar arrangements have been a long standing practice amount to Westpac-Sydney to cover the amount of the said demand draft.
in banking to facilitate international commercial transactions. In fact, the SWIFT cable message sent by
respondent bank to the drawee bank, Westpac-Sydney, stated that it may claim reimbursement from its
In view of all the foregoing, and considering that the dishonor of the subject foreign exchange demand draft
New York branch, Westpac-New York, where respondent bank has a deposit dollar account. The facts as
is not attributable to any fault of the respondent bank, whereas the petitioners appeared to be under
found by the courts a quo show that respondent bank did not cause an erroneous transmittal of its SWIFT
estoppel as earlier mentioned, it is no longer necessary to discuss the alleged application of Section 61 of the
cable message to Westpac-Sydney. It was the erroneous decoding of the cable message on the part of
Negotiable Instruments Law to the case at bar. In any event, it was established that the respondent bank
Westpac-Sydney that caused the dishonor of the subject foreign exchange demand draft. An employee of
acted in good faith and that it did not cause the embarrassment of the petitioners in Sydney, Australia.
Westpac-Sydney in Sydney, Australia mistakenly read the printed figures in the SWIFT cable message of
Hence, the Court of Appeals did not commit any reversable error in its challenged decision.
respondent bank as "MT799" instead of as "MT199". As a result, Westpac-Sydney construed the said cable
message as a format for a letter of credit, and not for a demand draft. The appellate court correct found that
"the figure before '99' can still be distinctly seen as a number '1' and not number '7'." Indeed, the line of a WHEREFORE, the petition is hereby DENIED, and the assailed decision of the Court of Appeals
"7" is in a slanting position while the line of a "1" is in a horizontal position. Thus, the number "1" in "MT199" is AFFIRMED. Costs against the petitioners.
cannot be construed as "7".11
SO ORDERED
The evidence also shows that the respondent bank exercised that degree of diligence expected of an
ordinary prudent person under the circumstances obtaining. Prior to the first dishonor of the subject foreign
exchange demand draft, the respondent bank advised Westpac-New York to honor the reimbursement claim
of Westpac-Sydney and to debit the dollar account12 of respondent bank with the former. As soon as the
demand draft was dishonored, the respondent bank, thinking that the problem was with the reimbursement
and without any idea that it was due to miscommunication, re-confirmed the authority of Westpac-New York
to debit its dollar account for the purpose of reimbursing Westpac-Sydney.13 Respondent bank also sent two
(2) more cable messages to Westpac-New York inquiring why the demand draft was not honored.14

With these established facts, we now determine the degree of diligence that banks are required to exert in
their commercial dealings. In Philippine Bank of Commerce v. Court of Appeals15 upholding a long standing
doctrine, we ruled that the degree of diligence required of banks, is more than that of a good father of a
family where the fiduciary nature of their relationship with their depositors is concerned. In other words
banks are duty bound to treat the deposit accounts of their depositors with the highest degree of care. But
the said ruling applies only to cases where banks act under their fiduciary capacity, that is, as depositary of
the deposits of their depositors. But the same higher degree of diligence is not expected to be exerted by
banks in commercial transactions that do not involve their fiduciary relationship with their depositors.

Considering the foregoing, the respondent bank was not required to exert more than the diligence of a good
father of a family in regard to the sale and issuance of the subject foreign exchange demand draft. The case
at bar does not involve the handling of petitioners' deposit, if any, with the respondent bank. Instead, the
relationship involved was that of a buyer and seller, that is, between the respondent bank as the seller of the
subject foreign exchange demand draft, and PRCI as the buyer of the same, with the 20th Asian Racing
conference Secretariat in Sydney, Australia as the payee thereof. As earlier mentioned, the said foreign
exchange demand draft was intended for the payment of the registration fees of the petitioners as delegates
of the PRCI to the 20th Asian Racing Conference in Sydney.

The evidence shows that the respondent bank did everything within its power to prevent the dishonor of the
subject foreign exchange demand draft. The erroneous reading of its cable message to Westpac-Sydney by
an employee of the latter could not have been foreseen by the respondent bank. Being unaware that its

68
 China Banking Corp. v. Court of Appeals, 511 SCRA 110 (2006)
G.R. No. 140687 December 18, 2006
CHINA BANKING CORPORATION, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and JOSE "JOSEPH" GOTIANUY as substituted by
ELIZABETH GOTIANUY LO, respondents.
DECISION
CHICO-NAZARIO, J.:
A Complaint for recovery of sums of money and annulment of sales of real properties and shares of stock
docketed as CEB-21445 was filed by Jose "Joseph" Gotianuy against his son-in-law, George Dee, and his
daughter, Mary Margaret Dee, before the Regional Trial Court (RTC) of Cebu City, Branch 58.
Jose Gotianuy accused his daughter Mary Margaret Dee of stealing, among his other properties, US dollar
deposits with Citibank N.A. amounting to not less than P35,000,000.00 and US$864,000.00. Mary Margaret
Dee received these amounts from Citibank N.A. through checks which she allegedly deposited at China
Banking Corporation (China Bank). He likewise accused his son-in-law, George Dee, husband of his
daughter, Mary Margaret, of transferring his real properties and shares of stock in George Dee's name
without any consideration. Jose Gotianuy, died during the pendency of the case before the trial court.1 He
was substituted by his daughter, Elizabeth Gotianuy Lo. The latter presented the US Dollar checks withdrawn
by Mary Margaret Dee from his US dollar placement with Citibank. The details of the said checks are:
1) CITIBANK CHECK NO. 69003194405412 dated September 29 1997 in the amount of
US$5,937.52 payable to GOTIANUY: JOSE AND/OR DEE: MARY MARGARET;
2) CITIBANK CHECK NO. 69003194405296 dated September 29 1997 in the amount of
US$7,197.59 payable to GOTIANUY: JOSE AND/OR DEE: MARY MARGARET;
3) CITIBANK CHECK NO. 69003194405414 dated September 29 1997 in the amount of
US$1,198.94 payable to GOTIANUY: JOSE AND/OR DEE: MARY MARGARET;
4) CITIBANK CHECK NO. 69003194405413 dated September 29 1997 in the amount of US$989.04
payable to GOTIANUY: JOSE AND/OR DEE: MARY MARGARET;
5) CITIBANK CHECK NO. 69003194405297 dated October 01 1997 in the amount of
US$766,011.97 payable to GOTIANUY: JOSE AND/OR DEE: MARY MARGARET; and
6) CITIBANK CHECK NO. 69003194405339 dated October 09 1997 in the amount of US$83,053.10
payable to GOTIANUY: JOSE AND/OR DEE: MARY MARGARET.2
Upon motion of Elizabeth Gotianuy Lo, the trial court3 issued a subpoena to Cristota Labios and Isabel Yap,
employees of China Bank, to testify on the case. The Order of the trial court dated 23 February 1999, states:
69
Issue a subpoena ad testificandum requiring MS. ISABEL YAP and CRISTOTA LABIOS of China
Banking Corporation, Cebu Main Branch, corner Magallanes and D. Jakosalem Sts., Cebu City, to
appear in person and to testify in the hearing of the above entitled case on March 1, 1999 at 8:30
in the morning, with regards to Citibank Checks (Exhs. "AAA" to "AAA-5") and other matters
material and relevant to the issues of this case.4
China Bank moved for a reconsideration. Resolving the motion, the trial court issued an Order dated 16 April
1999 and held:
The Court is of the view that as the foreign currency fund (Exhs. "AAA" to "AAA-5") is deposited
with the movant China Banking Corporation, Cebu Main Branch, Cebu City, the disclosure only as
to the name or in whose name the said fund is deposited is not violative of the law. Justice will be
better served if the name or names of the depositor of said fund shall be disclosed because such a
disclosure is material and important to the issues between the parties in the case at bar.
Premises considered, the motion for reconsideration is denied partly and granted partly, in the
sense that Isabel Yap and/or Cristuta Labios are directed to appear before this Court and to testify
at the trial of this case on April 20, 1999, May 6 & 7, 1999 at 10:00 o'clock in the morning and only
for the purpose of disclosing in whose name or names is the foreign currency fund (Exhs. "AAA" to
"AAA-5") deposited with the movant Bank and not to other matters material and relevant to the
issues in the case at bar.5
From this Order, China Bank filed a Petition for Certiorari6 with the Court of Appeals. In a Decision7 dated 29
October 1999, the Court of Appeals denied the petition of China Bank and affirmed the Order of the RTC.
In justifying its conclusion, the Court of Appeals ratiocinated:
From the foregoing, it is pristinely clear the law specifically encompasses only the money or funds
in foreign currency deposited in a bank. Thus, the coverage of the law extends only to the foreign
currency deposit in the CBC account where Mary Margaret Dee deposited the Citibank checks in
question and nothing more.
It has to be pointed out that the April 16, 1999 Order of the court of origin modified its previous
February 23, 1999 Order such that the CBC representatives are directed solely to divulge "in whose
name or names is the foreign currency fund (Exhs. "AAA" to "AAA-5") deposited with the movant
bank." It precluded inquiry on "other materials and relevant to the issues in the case at bar." We
find that the directive of the court below does not contravene the plain language of RA 6426 as
amended by P.D. No. 1246.
The contention of petitioner that the [prescription] on absolute confidentiality under the law in
question covers even the name of the depositor and is beyond the compulsive process of the courts
is palpably untenable as the law protects only the deposits itself but not the name of the depositor.
To uphold the theory of petitioner CBC is reading into the statute "something that is not within the
manifest intention of the legislature as gathered from the statute itself, for to depart from the
meaning expressed by the words, is to alter the statute, to legislate and not to interpret, and
judicial legislation should be avoided. Maledicta expositio quae corrumpit textum – It is a
dangerous construction which is against the words. Expressing the same principle is the
maxim: Ubi lex non distinguit nec nos distinguere debemos, which simply means that where the

law does not distinguish, we should not make any distinction." (Gonzaga, Statutes and their
Construction, p. 75.)8
From the Decision of the Court of Appeals, China Bank elevated the case to this Court based on the following
issues:
I
THE HONORABLE COURT OF APPEALS HAS INTERPRETED THE PROVISION OF SECTION 8 OF R.A.
6426, AS AMENDED, OTHERWISE KNOWN AS THE FOREIGN CURRENCY DEPOSIT ACT, IN A
MANNER CONTRARY TO THE LEGISLATIVE PURPOSE, THAT IS, TO PROVIDE ABSOLUTE
CONFIDENTIALITY OF WHATEVER INFORMATION RELATIVE TO THE FOREIGN CURRENCY DEPOSIT.
II
PRIVATE RESPONDENT IS NOT THE OWNER OF THE QUESTIONED FOREIGN CURRENCY DEPOSIT.
THUS, HE CANNOT INVOKE THE AID OF THE COURT IN COMPELLING THE DISCLOSURE OF
SOMEONE ELSE'S FOREIGN CURRENCY DEPOSIT ON THE FLIMSY PRETEXT THAT THE CHECKS (IN
FOREIGN CURRENCY) HE HAD ISSUED MAY HAVE ENDED UP THEREIN.
III
PETITIONER CAN RIGHTLY INVOKE THE PROVISION OF SEC. 8, R.A. 6426, IN BEHALF OF THE
FOREIGN CURRENCY DEPOSITOR, OWING TO ITS SOLEMN OBLIGATION TO ITS CLIENT TO
EXERCISE EXTRAORDINARY DILIGENCE IN THE HANDLING OF THE ACCOUNT.9
As amended by Presidential Decree No. 1246, the law reads:
SEC. 8. Secrecy of Foreign Currency Deposits. – All foreign currency deposits authorized under this
Act, as amended by Presidential Decree No. 1035, as well as foreign currency deposits authorized
under Presidential Decree No. 1034, are hereby declared as and considered of an absolutely
confidential nature and, except upon the written permission of the depositor, in no instance
shall such foreign currency deposits be examined, inquired or looked into by any person,
government official, bureau or office whether judicial or administrative or legislative or any other
entity whether public or private: Provided, however, that said foreign currency deposits shall be
exempt from attachment, garnishment, or any other order or process of any court, legislative body,
government agency or any administrative body whatsoever. (As amended by PD No. 1035, and
further amended by PD No. 1246, prom. Nov. 21, 1977) (Emphasis supplied.)
Under the above provision, the law provides that all foreign currency deposits authorized under Republic Act
No. 6426, as amended by Sec. 8, Presidential Decree No. 1246, Presidential Decree No. 1035, as well as
foreign currency deposits authorized under Presidential Decree No. 1034 are considered absolutely
confidential in nature and may not be inquired into. There is only one exception to the secrecy of foreign
currency deposits, that is, disclosure is allowed upon the written permission of the depositor.
This much was pronounced in the case of Intengan v. Court of Appeals,10 where it was held that the only
exception to the secrecy of foreign currency deposits is in the case of a written permission of the depositor.
70
70
It must be remembered that under the whereas clause of Presidential Decree No. 1246 which amended Sec.
8 of Republic Act No. 6426, the Foreign Currency Deposit System including the Offshore Banking System
under Presidential Decree 1034 were intended to draw deposits from foreign lenders and investors, and we
quote:
Whereas, in order to assure the development and speedy growth of the Foreign Currency Deposit
System and the Offshore Banking System in the Philippines, certain incentives were provided for
under the two Systems such as confidentiality of deposits subject to certain exceptions and tax
exemptions on the interest income of depositors who are nonresidents and are not engaged in
trade or business in the Philippines;
Whereas, making absolute the protective cloak of confidentiality over such foreign currency
deposits, exempting such deposits from tax, and guaranteeing the vested rights of depositors
would better encourage the inflow of foreign currency deposits into the banking institutions
authorized to accept such deposits in the Philippines thereby placing such institutions more in a
position to properly channel the same to loans and investments in the Philippines, thus directly
contributing to the economic development of the country.
As to the deposit in foreign currencies entitled to be protected under the confidentiality rule, Presidential
Decree No. 1034,11 defines deposits to mean funds in foreign currencies which are accepted and held by an
offshore banking unit in the regular course of business, with the obligation to return an equivalent amount to
the owner thereof, with or without interest.12
It is in this light that the court in the case of Salvacion v. Central Bank of the Philippines,13 allowed the
inquiry of the foreign currency deposit in question mainly due to the peculiar circumstances of the case such
that a strict interpretation of the letter of the law would result to rank injustice. Therein, Greg Bartelli y
Northcott, an American tourist, was charged with criminal cases for serious illegal detention and rape
committed against then 12 year-old Karen Salvacion. A separate civil case for damages with preliminary
attachment was filed against Greg Bartelli. The trial court issued an Order granting the Salvacions'
application for the issuance of a writ of preliminary attachment. A notice of garnishment was then served on
China Bank where Bartelli held a dollar account. China Bank refused, invoking the secrecy of bank deposits.
The Supreme Court ruled: "In fine, the application of the law depends on the extent of its justice x x x It
would be unthinkable, that the questioned law exempting foreign currency deposits from attachment,
garnishment, or any other order or process of any court, legislative body, government agency or any
administrative body whatsoever would be used as a device by an accused x x x for wrongdoing, and in so
doing, acquitting the guilty at the expense of the innocent.14
With the foregoing, we are now tasked to determine the single material issue of whether or not petitioner
China Bank is correct in its submission that the Citibank dollar checks with both Jose Gotianuy and/or Mary
Margaret Dee as payees, deposited with China Bank, may not be looked into under the law on secrecy of
foreign currency deposits. As a corollary issue, sought to be resolved is whether Jose Gotianuy may be
considered a depositor who is entitled to seek an inquiry over the said deposits.
The Court of Appeals, in allowing the inquiry, considered Jose Gotianuy, a co-depositor of Mary Margaret
Dee. It reasoned that since Jose Gotianuy is the named co-payee of the latter in the subject checks, which
checks were deposited in China Bank, then, Jose Gotianuy is likewise a depositor thereof. On that basis, no
written consent from Mary Margaret Dee is necessitated.
We agree in the conclusion arrived at by the Court of Appeals.
The following facts are established: (1) Jose Gotianuy and Mary Margaret Dee are co-payees of various SO ORDERED.
Citibank checks;15 (2) Mary Margaret Dee withdrew these checks from Citibank;16 (3) Mary Margaret Dee
admitted in her Answer to the Request for Admissions by the Adverse Party sent to her by Jose
Gotianuy17 that she withdrew the funds from Citibank upon the instruction of her father Jose Gotianuy and
that the funds belonged exclusively to the latter; (4) these checks were endorsed by Mary Margaret Dee at
the dorsal portion; and (5) Jose Gotianuy discovered that these checks were deposited with China Bank as
shown by the stamp of China Bank at the dorsal side of the checks.

Thus, with this, there is no issue as to the source of the funds. Mary Margaret Dee declared the source to be
Jose Gotianuy. There is likewise no dispute that these funds in the form of Citibank US dollar Checks are now
deposited with China Bank.

As the owner of the funds unlawfully taken and which are undisputably now deposited with China Bank, Jose
Gotianuy has the right to inquire into the said deposits.

A depositor, in cases of bank deposits, is one who pays money into the bank in the usual course of business,
to be placed to his credit and subject to his check or the beneficiary of the funds held by the bank as
trustee.18

On this score, the observations of the Court of Appeals are worth reiterating:

Furthermore, it is indubitable that the Citibank checks were drawn against the foreign currency
account with Citibank, NA. The monies subject of said checks originally came from the late Jose
Gotianuy, the owner of the account. Thus, he also has legal rights and interests in the CBC account
where said monies were deposited. More importantly, the Citibank checks (Exhibits "AAA" to "AAA-
5") readily demonstrate (sic) that the late Jose Gotianuy is one of the payees of said checks. Being
a co-payee thereof, then he or his estate can be considered as a co-depositor of said checks. Ergo,
since the late Jose Gotianuy is a co-depositor of the CBC account, then his request for the assailed
subpoena is tantamount to an express permission of a depositor for the disclosure of the name of
the account holder. The April 16, 1999 Order perforce must be sustained.19 (Emphasis supplied.)

One more point. It must be remembered that in the complaint of Jose Gotianuy, he alleged that his US dollar
deposits with Citibank were illegally taken from him. On the other hand, China Bank employee Cristuta
Labios testified that Mary Margaret Dee came to China Bank and deposited the money of Jose Gotianuy in
Citibank US dollar checks to the dollar account of her sister Adrienne Chu.20 This fortifies our conclusion that
an inquiry into the said deposit at China Bank is justified. At the very least, Jose Gotianuy as the owner of
these funds is entitled to a hearing on the whereabouts of these funds.

All things considered and in view of the distinctive circumstances attendant to the present case, we are
constrained to render a limited pro hac vice ruling.21 Clearly it was not the intent of the legislature when it
enacted the law on secrecy on foreign currency deposits to perpetuate injustice. This Court is of the view
that the allowance of the inquiry would be in accord with the rudiments of fair play,22 the upholding of
fairness in our judicial system and would be an avoidance of delay and time-wasteful and circuitous way of
administering justice.23

WHEREFORE, premises considered, the Petition is DENIED. The Decision of the Court of Appeals dated 29
October 1999 affirming the Order of the RTC, Branch 58, Cebu City dated 16 April 1999 is AFFIRMED and
this case is ordered REMANDED to the trial court for continuation of hearing with utmost dispatch consistent
with the above disquisition. No costs.

71
 72

BPI v. IAC, G.R. No. 69162, February 21, 1992 On May 5, 1981, the Regional Trial Court of Pampanga rendered a decision against BPI, the dispositive
portion of which reads:
G.R. No. 69162 February 21, 1992
WHEREFORE, judgment is hereby rendered sentencing defendant to pay the plaintiff the
following:
BANK OF THE PHILIPPINE ISLANDS, petitioner,
vs.
THE INTERMEDIATE APPELLATE COURT and the SPOUSES ARTHUR CANLAS and VIVIENE 1. P 5,000.00 as actual damages;
CANLAS, respondents.
2. P 150,000.00 for plaintiff Arthur Canlas and P150,000.00 for plaintiff Vivienne S.
GRIÑO-AQUINO, J.: Canlas representing moral damages;

In a decision dated September 3, 1984, the Intermediate Appellate Court (now Court of Appeals) in AC-G.R. 3. P 150.000.00 as exemplary damages;
CV No. 69178 entitled, "Arthur A. Canlas, et al., Plaintiff-Appellees vs. Commercial Bank and Trust Company
of the Philippines, Defendant-Appellant," reduced to P105,000 the P465,000 damage-award of the trial court
4. P 10,000.00 as attorney's fees; and
to the private respondents for an error of a bank teller which resulted in the dishonor of two small checks
which the private respondents had issued against their joint current account. This petition for review of that
decision was filed by the Bank. 5. Costs. (p. 36, Rollo).

The respondent spouses, Arthur and Vivienne Canlas, opened a joint current account No. 210-520-73 on
April 25, 1977 in the Quezon City branch of the Commercial Bank and Trust Company of the Philippines
(CBTC) with an initial deposit of P2,250. Prior thereto, Arthur Canlas had an existing separate personal
checking account No. 210-442-41 in the same branch.
On appeal, the Intermediate Appellate Court deleted the actual damages and reduced the other awards. The
dispositive portion of its decision reads:
WHEREFORE, the judgment appealed from is hereby modified as follows:

When the respondent spouses opened their joint current account, the "new accounts" teller of the bank
pulled out from the bank's files the old and existing signature card of respondent Arthur Canlas for Current 1. The award of P50,000.00 in actual damages is herewith deleted.
Account No. 210-442-41 for use as I D and reference. By mistake, she placed the old personal account
number of Arthur Canlas on the deposit slip for the new joint checking account of the spouses so that the 2. Moral damages of P50,000.00 is awarded to plaintiffs-appellees Arthur Canlas and
initial deposit of P2,250 for the joint checking account was miscredited to Arthur's personal account (p. Vivienne S. Canlas, not P50,000.00 each.
9, Rollo). The spouses subsequently deposited other amounts in their joint account.

3. Exemplary damages is likewise reduced to the sum of P50,000.00 and attorney's fees
However, when respondent Vivienne Canlas issued a check for Pl,639.89 in April 1977 and another check for to P5,000.00.
P1,160.00 on June 1, 1977, one of the checks was dishonored by the bank for insufficient funds and a
penalty of P20 was deducted from the account in both instances. In view of the overdrawings, the bank tried
to call up the spouses at the telephone number which they had given in their application form, but the bank Costs against the defendants appellant. (p. 40, Rollo.)
could not contact them because they actually reside in Porac, Pampanga. The city address and telephone
number which they gave to the bank belonged to Mrs. Canlas' parents. Petitioner filed this petition for review alleging that the appellate court erred in holding that:

On December 15, 1977, the private respondents filed a complaint for damages against CBTC in the Court of 1. The venue of the case had been properly laid at Pampanga in the light of private
First Instance of Pampanga (p. 113, Rollo). respondents' earlier declaration that Quezon City is their true residence.

On February 27, 1978, the bank filed a motion to dismiss the complaint for improper venue. The motion was 2. The petitioner was guilty of gross negligence in the handling of private respondents'
denied. bank account.

During the pendency of the case, the Bank of the Philippine Islands (BPI) and CBTC were merged. As the 3. Private respondents are entitled to the moral and exemplary damages and attorney's
surviving corporation under the merger agreement and under Section 80 (5) of the Corporation Code of the fees adjudged by the respondent appellate court.
Philippines, BPI took over the prosecution and defense of any pending claims, actions or proceedings by and
against CBTC.

72
On the question of venue raised by petitioner, it is evident that personal actions may be instituted in the
Court of First Instance (now Regional Trial Court) of the province where the defendant or any of the
defendants resides or may be found, or where the plaintiff or any of the plaintiffs resides, at the election of
the plaintiff (Section 2[b], Rule 4 of the Rules of Court). In this case, there was ample proof that the
residence of the plaintiffs is B. Sacan, Porac, Pampanga (p. 117, Rollo). The city address of Mrs. Canlas'
parents was placed by the private respondents in their application for a joint checking account, at the
suggestion of the new accounts teller, presumably to facilitate mailing of the bank statements and
communicating with the private respondents in case any problems should arise involving the account. No
waiver of their provincial residence for purposes of determining the venue of an action against the bank may
be inferred from the so-called "misrepresentation" of their true residence.
recover reasonable moral damages (American Express International, Inc. vs. IAC, 167 SCRA 209). The
award of reasonable attorney's fees is proper for the private respondents were compelled to litigate to
protect their interest (Art. 2208, Civil Code). However, the absence of malice and bad faith renders the
award of exemplary damages improper (Globe Mackay Cable and Radio Corp. vs. Court of Appeals, 176
SCRA 778).
WHEREFORE, the petition for review is granted. The appealed decision is MODIFIED by deleting the award of
exemplary damages to the private respondents. In all other respects, the decision of the Intermediate
Appellate Court, now Court of Appeals, is AFFIRMED. No costs.

SO ORDERED.
The appellate court based its award of moral and exemplary damages, and attorney's fees on its finding that
the mistake committed by the new accounts teller of the petitioner constituted "serious" negligence (p.
38, Rollo). Said court further stressed that it cannot absolve the petitioner from liability for damages to the
private respondents, even on the assumption of an honest mistake on its part, because of the
embarrassment that even an honest mistake can cause its depositors (p. 31, Rollo).

There is no merit in petitioner's argument that it should not be considered negligent, much less held liable
for damages on account of the inadvertence of its bank employee for Article 1173 of the Civil Code only
requires it to exercise the diligence of a good father of family.

In Simex International (Manila), Inc. vs. Court of Appeals (183 SCRA 360, 367), this Court stressed the
fiduciary nature of the relationship between a bank and its depositors and the extent of diligence expected of
it in handling the accounts entrusted to its care.

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. . . .

The bank is not expected to be infallible but, as correctly observed by respondent Appellate Court, in this
instance, it must bear the blame for not discovering the mistake of its teller despite the established
procedure requiring the papers and bank books to pass through a battery of bank personnel whose duty it is
to check and countercheck them for possible errors. Apparently, the officials and employees tasked to do
that did not perform their duties with due care, as may be gathered from the testimony of the bank's lone
witness, Antonio Enciso, who casually declared that "the approving officer does not have to see the account
numbers and all those things. Those are very petty things for the approving manager to look into" (p. 78,
Record on Appeal). Unfortunately, it was a "petty thing," like the incorrect account number that the bank
teller wrote on the initial deposit slip for the newly-opened joint current account of the Canlas spouses, that
sparked this half-a-million-peso damage suit against the bank.

While the bank's negligence may not have been attended with malice and bad faith, nevertheless, it caused
serious anxiety, embarrassment and humiliation to the private respondents for which they are entitled to

73
 74

BPI v. Court of Appeals, 326 SCRA 641 (2000) In reply, private respondent wrote petitioner's counsel on April 20, 198513 stating that he deposited the
check "for clearing purposes" only to accommodate Chan. He added:
G.R. No. 112392 February 29, 2000
Further, please take notice that said check was deposited on September 3, 1984 and withdrawn on
October 23, 1984, or a total period of fifty (50) days had elapsed at the time of withdrawal. Also, it
BANK OF THE PHILIPPINE ISLANDS, petitioner,
may not be amiss to mention here that I merely signed an authority to withdraw said deposit
vs.
subject to its clearing, the reason why the transaction is not reflected in the passbook of the
COURT OF APPEALS and BENJAMIN C. NAPIZA, respondents.
account. Besides, I did not receive its proceeds as may be gleaned from the withdrawal slip under
the captioned signature of recipient.1âwphi1.nêt
YNARES-SANTIAGO, J.:
If at all, my obligation on the transaction is moral in nature, which (sic) I have been and is (sic)
This is a petition for review on certiorari of the Decision1 of the Court of Appeals in CA-G.R. CV No. 37392 still exerting utmost and maximum efforts to collect from Mr. Henry Chan who is directly liable
affirming in toto that of the Regional Trial Court of Makati, Branch 139,2 which dismissed the complaint filed under the circumstances.
by petitioner Bank of the Philippine Islands against private respondent Benjamin C. Napiza for sum of
money.
xxx xxx xxx

On September 3, 1987, private respondent deposited in Foreign Currency Deposit Unit (FCDU) Savings
On August 12, 1986, petitioner filed a complaint against private respondent, praying for the return of the
Account No. 028-1873 which he maintained in petitioner bank's Buendia Avenue Extension Branch,
amount of $2,500.00 or the prevailing peso equivalent plus legal interest from date of demand to date of full
Continental Bank Manager's Check No. 000147574 dated August 17, 1984, payable to "cash" in the amount
payment, a sum equivalent to 20% of the total amount due as attorney's fees, and litigation and/or costs of
of Two Thousand Five Hundred Dollars ($2,500.00) and duly endorsed by private respondent on its dorsal
suit.
side.5 It appears that the check belonged to a certain Henry who went to the office of private respondent and
requested him to deposit the check in his dollar account by way of accommodation and for the purpose of
clearing the same. Private respondent acceded, and agreed to deliver to Chan a signed blank withdrawal slip, Private respondent filed his answer, admitting that he indeed signed a "blank" withdrawal slip with the
with the understanding that as soon as the check is cleared, both of them would go to the bank to withdraw understanding that the amount deposited would be withdrawn only after the check in question has been
the amount of the check upon private respondent's presentation to the bank of his passbook. cleared. He likewise alleged that he instructed the party to whom he issued the signed blank withdrawal slip
to return it to him after the bank draft's clearance so that he could lend that party his passbook for the
purpose of withdrawing the amount of $2,500.00. However, without his knowledge, said party was able to
Using the blank withdrawal slip given by private respondent to Chan, on October 23, 1984, one Ruben
withdraw the amount of $2,541.67 from his dollar savings account through collusion with one of petitioner's
Gayon, Jr. was able to withdraw the amount of $2,541.67 from FCDU Savings Account No. 028-187.
employees. Private respondent added that he had "given the Plaintiff fifty one (51) days with which to clear
Notably, the withdrawal slip shows that the amount was payable to Ramon A. de Guzman and Agnes C. de
the bank draft in question." Petitioner should have disallowed the withdrawal because his passbook was not
Guzman and was duly initialed by the branch assistant manager, Teresita Lindo.6
presented. He claimed that petitioner had no one to blame except itself "for being grossly negligent;" in fact,
it had allegedly admitted having paid the amount in the check "by mistake" . . . "if not altogether due to
On November 20, 1984, petitioner received communication from the Wells Fargo Bank International of New collusion and/or bad faith on the part of (its) employees." Charging petitioner with "apparent ignorance of
York that the said check deposited by private respondent was a counterfeit check7 because it was "not of the routine bank procedures," by way of counterclaim, private respondent prayed for moral damages of
type or style of checks issued by Continental Bank International."8 Consequently, Mr. Ariel Reyes, the P100,000.00, exemplary damages of P50,000.00 and attorney's fees of 30% of whatever amount that would
manager of petitioner's Buendia Avenue Extension Branch, instructed one of its employees, Benjamin D. be awarded to him plus an honorarium of P500.00 per appearance in court.
Napiza IV, who is private respondent's son, to inform his father that the check bounced.9 Reyes himself sent
a telegram to private respondent regarding the dishonor of the check. In turn, private respondent's son
Private respondent also filed a motion for admission of a third party complaint against Chan. He alleged that
wrote to Reyes stating that the check been assigned "for encashment" to Ramon A. de Guzman and/or
"thru strategem and/or manipulation," Chan was able to withdraw the amount of $2,500.00 even without
Agnes C. de Guzman after it shall have been cleared upon instruction of Chan. He also said that upon
private respondent's passbook. Thus, private respondent prayed that third party defendant Chan be made to
learning of the dishonor of the check, his father immediately tried to contact Chan but the latter was out of
refund to him the amount withdrawn and to pay attorney's fees of P5,000.00 plus P300.00 honorarium per
town.10
appearance.

Private respondent's son undertook to return the amount of $2,500.00 to petitioner bank. On December 18,
Petitioner filed a comment on the motion for leave of court to admit the third party complaint, whenever it
1984, Reyes reminded private respondent of his son's promise and warned that should he fail to return that
asserted that per paragraph 2 of the Rules and Regulations governing BPI savings accounts, private
amount within seven (7) days, the matter would be referred to the bank's lawyers for appropriate action to
respondent alone was liable "for the value of the credit given on account of the draft or check deposited." It
protect the bank's interest.11 This was followed by a letter of the bank's lawyer dated April 8, 1985
contended that private respondent was estopped from disclaiming liability because he himself authorized the
demanding the return of the $2,500.00.12
withdrawal of the amount by signing the withdrawal slip. Petitioner prayed for the denial of the said motion

74
so as not to unduly delay the disposition of the main case asserting that private respondent's claim could be
ventilated in another case.
Private respondent replied that for the parties to obtain complete relief and to avoid multiplicity of suits, the
motion to admit third party complaint should be granted. Meanwhile, the trial court issued orders on August
25, 1987 and October 28, 1987 directing private respondent to actively participate in locating Chan. After
private respondent failed to comply, the trial court, on May 18, 1988, dismissed the third party complaint
without prejudice.
On November 4, 1991, a decision was rendered dismissing the complaint. The lower court held that
petitioner could not hold private respondent liable based on the check's face value alone. To so hold him
liable "would render inutile the requirement of "clearance" from the drawee bank before the value of a
particular foreign check or draft can be credited to the account of a depositor making such deposit." The
lower court further held that "it was incumbent upon the petitioner to credit the value of the check in
question to the account of the private respondent only upon receipt of the notice of final payment and should
not have authorized the withdrawal from the latter's account of the value or proceeds of the check." Having
admitted that it committed a "mistake" in not waiting for the clearance of the check before authorizing the
withdrawal of its value or proceeds, petitioner should suffer the resultant loss.
On appeal, the Court of Appeals affirmed the lower court's decision. The appellate court held that petitioner
committed "clears gross negligence" in allowing Ruben Gayon, Jr. to withdraw the money without presenting
private respondent's passbook and, before the check was cleared and in crediting the amount indicated
therein in private respondent's account. It stressed that the mere deposit of a check in private respondent's
account did not mean that the check was already private respondent's property. The check still had to be
cleared and its proceeds can only be withdrawn upon presentation of a passbook in accordance with the
bank's rules and regulations. Furthermore, petitioner's contention that private respondent warranted the
check's genuineness by endorsing it is untenable for it would render useless the clearance requirement.
Likewise, the requirement of presentation of a passbook to ascertain the propriety of the accounting
reflected would be a meaningless exercise. After all, these requirements are designed to protect the bank
from deception or fraud.
The Court of Appeals cited the case of Roman Catholic Bishop of Malolos, Inc. v. IAC,14 where this Court
stated that a personal check is not legal tender or money, and held that the check deposited in this case
must be cleared before its value could be properly transferred to private respondent's account.
Without filing a motion for the reconsideration of the Court of Appeals' Decision, petitioner filed this petition
for review on certiorari, raising the following issues:
1. WHETHER OR NOT RESPONDENT NAPIZA IS LIABLE UNDER HIS WARRANTIES AS A GENERAL
INDORSER.
2. WHETHER OR NOT A CONTRACT OF AGENCY WAS CREATED BETWEEN RESPONDENT NAPIZA
AND RUBEN GAYON.
3. WHETHER OR NOT PETITIONER WAS GROSSLY NEGLIGENT IN ALLOWING THE WITHDRAWAL.
Petitioner claims that private respondent, having affixed his signature at the dorsal side of the check, should
be liable for the amount stated therein in accordance with the following provision of the Negotiable
Instruments Law (Act No. 2031):
75
Sec. 66. Liability of general indorser. — Every indorser who indorses without qualification, warrants
to all subsequent holders in due course —
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding
section; and
(b) That the instrument is at the time of his indorsement, valid and subsisting.
And, in addition, he engages that on due presentment, it shall be accepted or paid, or both, as the
case may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on
dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent
indorser who may be compelled to pay it.
Sec. 65, on the other hand, provides for the following warranties of a person negotiating an instrument by
delivery or by qualified indorsement: (a) that the instrument is genuine and in all respects what it purports
to be; (b) that he has a good title to it, and (c) that all prior parties had capacity to contract.15 In People v.
Maniego,16 this Court described the liabilities of an indorser as follows:
Appellant's contention that as mere indorser, she may not be liable on account of the dishonor of
the checks indorsed by her, is likewise untenable. Under the law, the holder or last indorsee of a
negotiable instrument has the right "to enforce payment of the instrument for the full amount
thereof against all parties liable thereon. Among the "parties liable thereon." Is an indorser of the
instrument, i.e., "a person placing his signature upon an instrument otherwise than as a maker,
drawer or acceptor * * unless he clearly indicated by appropriate words his intention to be bound
in some other capacity." Such an indorser "who indorses without qualification," inter alia "engages
that on due presentment, * * (the instrument) shall be accepted or paid, or both, as the case may
be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor
be duly taken, he will pay the amount thereof to the holder, or any subsequent indorser who may
be compelled to pay it." Maniego may also be deemed an "accommodation party" in the light of the
facts, i.e., a person "who has signed the instrument as maker, drawer, acceptor, or indorser,
without receiving value thereof, and for the purpose of lending his name to some other person." As
such, she is under the law "liable on the instrument to a holder for value, notwithstanding such
holder at the time of taking the instrument knew * * (her) to be only an accommodation party,"
although she has the right, after paying the holder, to obtain reimbursement from the party
accommodated, "since the relation between them is in effect that of principal and surety, the
accommodation party being the surety.
It is thus clear that ordinarily private respondent may be held liable as an indorser of the check or even as
an accommodation party.17 However, to hold private respondent liable for the amount of the check he
deposited by the strict application of the law and without considering the attending circumstances in the case
would result in an injustice and in the erosion of the public trust in the banking system. The interest of
justice thus demands looking into the events that led to the encashment of the check.
Petitioner asserts that by signing the withdrawal slip, private respondent "presented the opportunity for the
withdrawal of the amount in question." Petitioner relied "on the genuine signature on the withdrawal slip, the
personality of private respondent's son and the lapse of more than fifty (50) days from date of deposit of the
Continental Bank draft, without the same being returned yet."18 We hold, however, that the propriety of the
withdrawal should be gauged by compliance with the rules thereon that both petitioner bank and its
depositors are duty-bound to observe.
 76

In the passbook that petitioner issued to private respondent, the following rules on withdrawal of deposits
appear:
4. Withdrawals must be made by the depositor personally but in some exceptional circumstances,
the Bank may allow withdrawal by another upon the depositor's written authority duly
authenticated; and neither a deposit nor a withdrawal will be permitted except upon the
presentation of the depositor's savings passbook, in which the amount deposited withdrawn shall
be entered only by the Bank.
the person making the withdrawal is authorized by the depositor to do so. This is clear from Rule No. 6 set
out by petitioner so that, for the protection of the bank's interest and as a reminder to the depositor, the
withdrawal shall be entered in the depositor's passbook. The fact that private respondent's passbook was not
presented during the withdrawal is evidenced by the entries therein showing that the last transaction that he
made with the bank was on September 3, 1984, the date he deposited the controversial check in the amount
of $2,500.00.22
In allowing the withdrawal, petitioner likewise overlooked another rule that is printed in the passbook. Thus:

5. Withdrawals may be made by draft, mail or telegraphic transfer in currency of the account at the
request of the depositor in writing on the withdrawal slip or by authenticated cable. Such request
must indicate the name of the payee/s, amount and the place where the funds are to be paid. Any
stamp, transmission and other charges related to such withdrawals shall be for the account of the
depositor and shall be paid by him/her upon demand. Withdrawals may also be made in the form
of travellers checks and in pesos. Withdrawals in the form of notes/bills are allowed subject
however, to their (availability).
6. Deposits shall not be subject to withdrawal by check, and may be withdrawal only in the manner
above provided, upon presentation of the depositor's savings passbook and with the withdrawal
form supplied by the Bank at the counter.19
2. All deposits will be received as current funds and will be repaid in the same manner; provided,
however, that deposits of drafts, checks, money orders, etc. will be accented as subject to
collection only and credited to the account only upon receipt of the notice of final payment.
Collection charges by the Bank's foreign correspondent in effecting such collection shall be for the
account of the depositor. If the account has sufficient balance, the collection shall be debited by the
Bank against the account. If, for any reason, the proceeds of the deposited checks, drafts, money
orders, etc., cannot be collected or if the Bank is required to return such proceeds, the provisional
entry therefor made by the Bank in the savings passbook and its records shall be deemed
automatically cancelled regardless of the time that has elapsed, and whether or not the defective
items can be returned to the depositor; and the Bank is hereby authorized to execute immediately
the necessary corrections, amendments or changes in its record, as well as on the savings
passbook at the first opportunity to reflect such cancellation. (Emphasis and underlining supplied.)

Under these rules, to be able to withdraw from the savings account deposit under the Philippine foreign
As correctly held by the Court of Appeals, in depositing the check in his name, private respondent did not
currency deposit system, two requisites must be presented to petitioner bank by the person withdrawing an
become the outright owner of the amount stated therein. Under the above rule, by depositing the check with
amount: (a) a duly filled-up withdrawal slip, and (b) the depositor's passbook. Private respondent admits he
petitioner, private respondent was, in a way, merely designating petitioner as the collecting bank. This is in
signed a blank withdrawal slip ostensibly in violation of Rule No. 6 requiring that the request for withdrawal
consonance with the rule that a negotiable instrument, such as a check, whether a manager's check or
must name the payee, the amount to be withdrawn and the place where such withdrawal should be made.
ordinary check, is not legal tender.23 As such, after receiving the deposit, under its own rules, petitioner shall
That the withdrawal slip was in fact a blank one with only private respondent's two signatures affixed on the
credit the amount in private respondent's account or infuse value thereon only after the drawee bank shall
proper spaces is buttressed by petitioner's allegation in the instant petition that had private respondent
have paid the amount of the check or the check has been cleared for deposit. Again, this is in accordance
indicated therein the person authorized to receive the money, then Ruben Gayon, Jr. could not have
with ordinary banking practices and with this Court's pronouncement that "the collecting bank or last
withdrawn any amount. Petitioner contends that "(I)n failing to do so (i.e., naming his authorized agent), he
endorser generally suffers the loss because has the duty to ascertain the genuineness of all prior
practically authorized any possessor thereof to write any amount and to collect the same."20
endorsements considering that the act of presenting the check for payment to the drawee is an assertion
that the party making the presentment has done its duty to ascertain the genuineness of the
Such contention would have been valid if not for the fact that the withdrawal slip itself indicates a special endorsements."24 The rule finds more meaning in this case where the check involved is drawn on a foreign
instruction that the amount is payable to "Ramon A. de Guzman &/or Agnes C. de Guzman." Such being the bank and therefore collection is more difficult than when the drawee bank is a local one even though the
case, petitioner's personnel should have been duly warned that Gayon, who was also employed in check in question is a manager's check.25
petitioner's Buendia Ave. Extension branch,21 was not the proper payee of the proceeds of the check.
Otherwise, either Ramon or Agnes de Guzman should have issued another authority to Gayon for such
In Banco Atlantico v. Auditor General,26 Banco Atlantico, a commercial bank in Madrid, Spain, paid the
withdrawal. Of course, at the dorsal side of the withdrawal slip is an "authority to withdraw" naming Gayon
amounts represented in three (3) checks to Virginia Boncan, the finance officer of the Philippine Embassy in
the person who can withdraw the amount indicated in the check. Private respondent does not deny having
Madrid. The bank did so without previously clearing the checks with the drawee bank, the Philippine National
signed such authority. However, considering petitioner's clear admission that the withdrawal slip was a blank
Bank in New York, on account of the "special treatment" that Boncan received from the personnel of Banco
one except for private respondent's signature, the unavoidable conclusion is that the typewritten name of
Atlantico's foreign department. The Court held that the encashment of the checks without prior clearance is
"Ruben C. Gayon, Jr." was intercalated and thereafter it was signed by Gayon or whoever was allowed by
"contrary to normal or ordinary banking practice specially so where the drawee bank is a foreign bank and
petitioner to withdraw the amount. Under these facts, there could not have been a principal-agent
the amounts involved were large." Accordingly, the Court approved the Auditor General's denial of Banco
relationship between private respondent and Gayon so as to render the former liable for the amount
Atlantico's claim for payment of the value of the checks that was withdrawn by Boncan.
withdrawn.

Said ruling brings to light the fact that the banking business is affected with public interest. By the nature of
Moreover, the withdrawal slip contains a boxed warning that states: "This receipt must be signed and
its functions, a bank is under obligation to treat the accounts of its depositors "with meticulous care, always
presented with the corresponding foreign currency savings passbook by the depositor in person. For
having in mind the fiduciary nature of their relationship."27 As such, in dealing with its depositors, a bank
withdrawals thru a representative, depositor should accomplish the authority at the back." The requirement
should exercise its functions not only with the diligence of a good father of a family but it should do so with
of presentation of the passbook when withdrawing an amount cannot be given mere lip service even though
the highest degree of care.28

76
In the case at bar, petitioner, in allowing the withdrawal of private respondent's deposit, failed to exercise WHEREFORE, the petition for review on certiorari is DENIED. The Decision of the Court of Appeals in CA-G.R.
the diligence of a good father of a family. In total disregard of its own rules, petitioner's personnel CV No. 37392 is AFFIRMED.
negligently handled private respondent's account to petitioner's detriment. As this Court once said on this
matter:
SO ORDERED.

Negligence is the omission to do something which a reasonable man, guided by those

considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of
something which a prudent and reasonable man would do. The seventy-eight (78)-year-old, yet
still relevant, case of Picart v. Smith, provides that test by which to determine the existence of
negligence in a particular case which may be stated as follows: Did the defendant in doing the
alleged negligent act use that reasonable care and caution which an ordinarily prudent person
would have used in the same situation? If not, then he is guilty of negligence. The law here in
effect adopts the standard supposed to be supplied by the imaginary conduct of the discreet pater-
familias of the Roman law. The existence of negligence in a given case is not determined by
reference to the personal judgment of the actor in the situation before him. The law considers what
would be reckless, blameworthy, or negligent in the man of ordinary intelligence and prudence and
determines liability by that.29

Petitioner violated its own rules by allowing the withdrawal of an amount that is definitely over and above
the aggregate amount of private respondent's dollar deposits that had yet to be cleared. The bank's ledger
on private respondent's account shows that before he deposited $2,500.00, private respondent had a
balance of only $750.00.30 Upon private respondent's deposit of $2,500.00 on September 3, 1984, that
amount was credited in his ledger as a deposit resulting in the corresponding total balance of
$3,250.00.31 On September 10, 1984, the amount of $600.00 and the additional charges of $10.00 were
indicated therein as withdrawn thereby leaving a balance $2,640.00. On September 30, 1984, an interest of
$11.59 was reflected in the ledger and on October 23, 1984, the amount of $2,541.67 was entered as
withdrawn with a balance of $109.92.32 On November 19, 1984 the word "hold" was written beside the
balance of $109.92.33 That must have been the time when Reyes, petitioner's branch manager, was informed
unofficially of the fact that the check deposited was a counterfeit, but petitioner's Buendia Ave. Extension
Branch received a copy of the communication thereon from Wells Fargo Bank International in New York the
following day, November 20, 1984.34 According to Reyes, Wells Fargo Bank International handled the
clearing of checks drawn against U.S. banks that were deposited with petitioner.35

From these facts on record, it is at once apparent that petitioner's personnel allowed the withdrawal of an
amount bigger than the original deposit of $750.00 and the value of the check deposited in the amount of
$2,500.00 although they had not yet received notice from the clearing bank in the United States on whether
or not the check was funded. Reyes' contention that after the lapse of the 35-day period the amount of a
deposited check could be withdrawn even in the absence of a clearance thereon, otherwise it could take a
long time before a depositor could make a withdrawal,36 is untenable. Said practice amounts to a disregard
of the clearance requirement of the banking system.

While it is true that private respondent's having signed a blank withdrawal slip set in motion the events that
resulted in the withdrawal and encashment of the counterfeit check, the negligence of petitioner's personnel
was the proximate cause of the loss that petitioner sustained. Proximate cause, which is determined by a
mixed consideration of logic, common sense, policy and precedent, 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."37 The proximate cause of the withdrawal and eventual loss of the
amount of $2,500.00 on petitioner's part was its personnel's negligence in allowing such withdrawal in
disregard of its own rules and the clearing requirement in the banking system. In so doing, petitioner
assumed the risk of incurring a loss on account of a forged or counterfeit foreign check and hence, it should
suffer the resulting damage.1âwphi1.nêt

77

Consolidated Bank and Trust Corporation v. Court of Appeals, 410 SCRA 562 (2003)
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. s 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.
78
78
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: s 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: s 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
79
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: s 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: s 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. s
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: s is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the
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
80
80
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
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. s 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.
81
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: s 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. s virtua1 1aw 1ibrary
SO ORDERED.
.R. No. 156132 October 12, 2006
CITIBANK, N.A. (Formerly First National City Bank) and INVESTORS' FINANCE CORPORATION,
doing business under the name and style of FNCB Finance, petitioners,
vs.
MODESTA R. SABENIANO, respondent.
DECISION
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari,1 under Rule 45 of the Revised Rules of Court, of the
Decision2 of the Court of Appeals in CA-G.R. CV No. 51930, dated 26 March 2002, and the Resolution,3 dated
20 November 2002, of the same court which, although modifying its earlier Decision, still denied for the
most part the Motion for Reconsideration of herein petitioners.
Petitioner Citibank, N.A. (formerly known as the First National City Bank) is a banking corporation duly
authorized and existing under the laws of the United States of America and licensed to do commercial
banking activities and perform trust functions in the Philippines.
Petitioner Investor's Finance Corporation, which did business under the name and style of FNCB Finance,
was an affiliate company of petitioner Citibank, specifically handling money market placements for its clients.
It is now, by virtue of a merger, doing business as part of its successor-in-interest, BPI Card Finance
Corporation. However, so as to consistently establish its identity in the Petition at bar, the said petitioner
shall still be referred to herein as FNCB Finance.4
Respondent Modesta R. Sabeniano was a client of both petitioners Citibank and FNCB Finance. Regrettably,
the business relations among the parties subsequently went awry.
82
82
On 8 August 1985, respondent filed a Complaint5 against petitioners, docketed as Civil Case No. 11336,
before the Regional Trial Court (RTC) of Makati City. Respondent claimed to have substantial deposits and
money market placements with the petitioners, as well as money market placements with the Ayala
Investment and Development Corporation (AIDC), the proceeds of which were supposedly deposited
automatically and directly to respondent's accounts with petitioner Citibank. Respondent alleged that
petitioners refused to return her deposits and the proceeds of her money market placements despite her
repeated demands, thus, compelling respondent to file Civil Case No. 11336 against petitioners for
"Accounting, Sum of Money and Damages." Respondent eventually filed an Amended Complaint6 on 9
October 1985 to include additional claims to deposits and money market placements inadvertently left out
from her original Complaint.
In their joint Answer7 and Answer to Amended Complaint,8 filed on 12 September 1985 and 6 November
1985, respectively, petitioners admitted that respondent had deposits and money market placements with
them, including dollar accounts in the Citibank branch in Geneva, Switzerland (Citibank-Geneva). Petitioners
further alleged that the respondent later obtained several loans from petitioner Citibank, for which she
executed Promissory Notes (PNs), and secured by (a) a Declaration of Pledge of her dollar accounts in
Citibank-Geneva, and (b) Deeds of Assignment of her money market placements with petitioner FNCB
Finance. When respondent failed to pay her loans despite repeated demands by petitioner Citibank, the
latter exercised its right to off-set or compensate respondent's outstanding loans with her deposits and
money market placements, pursuant to the Declaration of Pledge and the Deeds of Assignment executed by
respondent in its favor. Petitioner Citibank supposedly informed respondent Sabeniano of the foregoing
compensation through letters, dated 28 September 1979 and 31 October 1979. Petitioners were therefore
surprised when six years later, in 1985, respondent and her counsel made repeated requests for the
withdrawal of respondent's deposits and money market placements with petitioner Citibank, including her
dollar accounts with Citibank-Geneva and her money market placements with petitioner FNCB Finance. Thus,
petitioners prayed for the dismissal of the Complaint and for the award of actual, moral, and exemplary
damages, and attorney's fees.
When the parties failed to reach a compromise during the pre-trial hearing,9 trial proper ensued and the
parties proceeded with the presentation of their respective evidence. Ten years after the filing of the
Complaint on 8 August 1985, a Decision10 was finally rendered in Civil Case No. 11336 on 24 August 1995 by
the fourth Judge11 who handled the said case, Judge Manuel D. Victorio, the dispositive portion of which
reads –
WHEREFORE, in view of all the foregoing, decision is hereby rendered as follows:
(1) Declaring as illegal, null and void the setoff effected by the defendant Bank [petitioner
Citibank] of plaintiff's [respondent Sabeniano] dollar deposit with Citibank, Switzerland, in
the amount of US$149,632.99, and ordering the said defendant [petitioner Citibank] to
refund the said amount to the plaintiff with legal interest at the rate of twelve percent
(12%) per annum, compounded yearly, from 31 October 1979 until fully paid, or its peso
equivalent at the time of payment;
(2) Declaring the plaintiff [respondent Sabeniano] indebted to the defendant Bank
[petitioner Citibank] in the amount of ₱1,069,847.40 as of 5 September 1979 and
ordering the plaintiff [respondent Sabeniano] to pay said amount, however, there shall be
no interest and penalty charges from the time the illegal setoff was effected on 31
October 1979;
 (3) Dismissing all other claims and counterclaims interposed by the parties against each (v) The Two Million (₱2,000,000.00) money market placements of Ms.
other. Sabeniano with the Ayala Investment & Development Corporation
(AIDC) with legal interest at the rate of twelve percent (12%) per
annum compounded yearly, from 30 September 1976 until fully paid;
Costs against the defendant Bank.

4. Ordering defendants-appellants to jointly and severally pay the plaintiff-appellant the

All the parties appealed the foregoing Decision of the RTC to the Court of Appeals, docketed as CA-G.R. CV
sum of FIVE HUNDRED THOUSAND PESOS (₱500,000.00) by way of moral damages, FIVE
No. 51930. Respondent questioned the findings of the RTC that she was still indebted to petitioner Citibank,
HUNDRED THOUSAND PESOS (₱500,000.00) as exemplary damages, and ONE HUNDRED
as well as the failure of the RTC to order petitioners to render an accounting of respondent's deposits and
THOUSAND PESOS (₱100,000.00) as attorney's fees.
money market placements with them. On the other hand, petitioners argued that petitioner Citibank validly
compensated respondent's outstanding loans with her dollar accounts with Citibank-Geneva, in accordance
with the Declaration of Pledge she executed in its favor. Petitioners also alleged that the RTC erred in not Apparently, the parties to the case, namely, the respondent, on one hand, and the petitioners, on the other,
declaring respondent liable for damages and interest. made separate attempts to bring the aforementioned Decision of the Court of Appeals, dated 26 March 2002,
before this Court for review.
On 26 March 2002, the Court of Appeals rendered its Decision12 affirming with modification the RTC Decision
in Civil Case No. 11336, dated 24 August 1995, and ruling entirely in favor of respondent in this wise – G.R. No. 152985

Wherefore, premises considered, the assailed 24 August 1995 Decision of the court a quo is
hereby AFFIRMED with MODIFICATION, as follows:
1. Declaring as illegal, null and void the set-off effected by the defendant-appellant Bank
of the plaintiff-appellant's dollar deposit with Citibank, Switzerland, in the amount of
US$149,632.99, and ordering defendant-appellant Citibank to refund the said amount to
the plaintiff-appellant with legal interest at the rate of twelve percent (12%) per annum,
compounded yearly, from 31 October 1979 until fully paid, or its peso equivalent at the
time of payment;
Respondent no longer sought a reconsideration of the Decision of the Court of Appeals in CA-G.R. CV No.
51930, dated 26 March 2002, and instead, filed immediately with this Court on 3 May 2002 a Motion for
Extension of Time to File a Petition for Review,13 which, after payment of the docket and other lawful fees,
was assigned the docket number G.R. No. 152985. In the said Motion, respondent alleged that she received
a copy of the assailed Court of Appeals Decision on 18 April 2002 and, thus, had 15 days therefrom or until 3
May 2002 within which to file her Petition for Review. Since she informed her counsel of her desire to pursue
an appeal of the Court of Appeals Decision only on 29 April 2002, her counsel neither had enough time to file
a motion for reconsideration of the said Decision with the Court of Appeals, nor a Petition for Certiorari with
this Court. Yet, the Motion failed to state the exact extension period respondent was requesting for.

Since this Court did not act upon respondent's Motion for Extension of Time to file her Petition for Review,
2. As defendant-appellant Citibank failed to establish by competent evidence the alleged
then the period for appeal continued to run and still expired on 3 May 2002.14 Respondent failed to file any
indebtedness of plaintiff-appellant, the set-off of ₱1,069,847.40 in the account of Ms.
Petition for Review within the prescribed period for appeal and, hence, this Court issued a Resolution,15 dated
Sabeniano is hereby declared as without legal and factual basis;
13 November 2002, in which it pronounced that –

3. As defendants-appellants failed to account the following plaintiff-appellant's money

G.R. No. 152985 (Modesta R. Sabeniano vs. Court of Appeals, et al.). – It appearing that
market placements, savings account and current accounts, the former is hereby ordered
petitioner failed to file the intended petition for review on certiorari within the period which expired
to return the same, in accordance with the terms and conditions agreed upon by the
on May 3, 2002, the Court Resolves to DECLARE THIS CASE TERMINATED and DIRECT the
contending parties as evidenced by the certificates of investments, to wit:
Division Clerk of Court to INFORM the parties that the judgment sought to be reviewed has
become final and executory.
(i) Citibank NNPN Serial No. 023356 (Cancels and Supersedes NNPN
No. 22526) issued on 17 March 1977, ₱318,897.34 with 14.50%
The said Resolution was duly recorded in the Book of Entries of Judgments on 3 January 2003.
interest p.a.;

G.R. No. 156132

(ii) Citibank NNPN Serial No. 23357 (Cancels and Supersedes NNPN
No. 22528) issued on 17 March 1977, ₱203,150.00 with 14.50 interest
p.a.; Meanwhile, petitioners filed with the Court of Appeals a Motion for Reconsideration of its Decision in CA-G.R.
CV No. 51930, dated 26 March 2002. Acting upon the said Motion, the Court of Appeals issued the
Resolution,16 dated 20 November 2002, modifying its Decision of 26 March 2002, as follows –
(iii) FNCB NNPN Serial No. 05757 (Cancels and Supersedes NNPN No.
04952), issued on 02 June 1977, ₱500,000.00 with 17% interest p.a.;
WHEREFORE, premises considered, the instant Motion for Reconsideration is PARTIALLY
GRANTED as Sub-paragraph (V) paragraph 3 of the assailed Decision's dispositive portion is
(iv) FNCB NNPN Serial No. 05758 (Cancels and Supersedes NNPN No.
hereby ordered DELETED.
04962), issued on 02 June 1977, ₱500,000.00 with 17% interest per
annum;

83

The challenged 26 March 2002 Decision of the Court is AFFIRMED with MODIFICATION.
Assailing the Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 51930, dated 26 March 2002
and 20 November 2002, respectively, petitioners filed the present Petition, docketed as G.R. No. 156132.
The Petition was initially denied17 by this Court for failure of the petitioners to attach thereto a Certification
against Forum Shopping. However, upon petitioners' Motion and compliance with the requirements, this
Court resolved18 to reinstate the Petition.
The Petition presented fourteen (14) assignments of errors allegedly committed by the Court of Appeals in
its Decision, dated 26 March 2002, involving both questions of fact and questions of law which this Court, for
the sake of expediency, discusses jointly, whenever possible, in the succeeding paragraphs.
I
The Resolution of this Court, dated 13 November 2002, in G.R. No. 152985, declaring the Decision
of the Court of Appeals, dated 26 March 2002, final and executory, pertains to respondent
Sabeniano alone.
Before proceeding to a discussion of the merits of the instant Petition, this Court wishes to address first the
argument, persistently advanced by respondent in her pleadings on record, as well as her numerous
personal and unofficial letters to this Court which were no longer made part of the record, that the Decision
of the Court of Appeals in CA-G.R. CV No. 51930, dated 26 March 2002, had already become final and
executory by virtue of the Resolution of this Court in G.R. No. 152985, dated 13 November 2002.
G.R. No. 152985 was the docket number assigned by this Court to respondent's Motion for Extension of Time
to File a Petition for Review. Respondent, though, did not file her supposed Petition. Thus, after the lapse of
the prescribed period for the filing of the Petition, this Court issued the Resolution, dated 13 November
2002, declaring the Decision of the Court of Appeals, dated 26 March 2002, final and executory. It should be
pointed out, however, that the Resolution, dated 13 November 2002, referred only to G.R. No. 152985,
respondent's appeal, which she failed to perfect through the filing of a Petition for Review within the
prescribed period. The declaration of this Court in the same Resolution would bind respondent solely, and
not petitioners which filed their own separate appeal before this Court, docketed as G.R. No. 156132, the
Petition at bar. This would mean that respondent, on her part, should be bound by the findings of fact and
law of the Court of Appeals, including the monetary amounts consequently awarded to her by the appellate
court in its Decision, dated 26 March 2002; and she can no longer refute or assail any part thereof. 19
This Court already explained the matter to respondent when it issued a Resolution20 in G.R. No. 156132,
dated 2 February 2004, which addressed her Urgent Motion for the Release of the Decision with the
Implementation of the Entry of Judgment in the following manner –
[A]cting on Citibank's and FNCB Finance's Motion for Reconsideration, we resolved to grant the
motion, reinstate the petition and require Sabeniano to file a comment thereto in our Resolution of
June 23, 2003. Sabeniano filed a Comment dated July 17, 2003 to which Citibank and FNCB
Finance filed a Reply dated August 20, 2003.
From the foregoing, it is clear that Sabeniano had knowledge of, and in fact participated in, the
proceedings in G.R. No. 156132. She cannot feign ignorance of the proceedings therein and claim
that the Decision of the Court of Appeals has become final and executory. More precisely,
the Decision became final and executory only with regard to Sabeniano in view of her failure to
84
84
file a petition for review within the extended period granted by the Court, and not to Citibank and
FNCB Finance whose Petition for Review was duly reinstated and is now submitted for decision.
Accordingly, the instant Urgent Motion is hereby DENIED. (Emphasis supplied.)
To sustain the argument of respondent would result in an unjust and incongruous situation wherein one
party may frustrate the efforts of the opposing party to appeal the case by merely filing with this Court a
Motion for Extension of Time to File a Petition for Review, ahead of the opposing party, then not actually
filing the intended Petition.21 The party who fails to file its intended Petition within the reglementary or
extended period should solely bear the consequences of such failure.
Respondent Sabeniano did not commit forum shopping.
Another issue that does not directly involve the merits of the present Petition, but raised by petitioners, is
whether respondent should be held liable for forum shopping.
Petitioners contend that respondent committed forum shopping on the basis of the following facts:
While petitioners' Motion for Reconsideration of the Decision in CA-G.R. CV No. 51930, dated 26 March 2002,
was still pending before the Court of Appeals, respondent already filed with this Court on 3 May 2002 her
Motion for Extension of Time to File a Petition for Review of the same Court of Appeals Decision, docketed as
G.R. No. 152985. Thereafter, respondent continued to participate in the proceedings before the Court of
Appeals in CA-G.R. CV No. 51930 by filing her Comment, dated 17 July 2002, to petitioners' Motion for
Reconsideration; and a Rejoinder, dated 23 September 2002, to petitioners' Reply. Thus, petitioners argue
that by seeking relief concurrently from this Court and the Court of Appeals, respondent is undeniably guilty
of forum shopping, if not indirect contempt.
This Court, however, finds no sufficient basis to hold respondent liable for forum shopping.
Forum shopping has been defined as the filing of two or more suits involving the same parties for the same
cause of action, either simultaneously or successively, for the purpose of obtaining a favorable
judgment.22 The test for determining forum shopping is whether in the two (or more) cases pending, there is
an identity of parties, rights or causes of action, and relief sought.23 To guard against this deplorable
practice, Rule 7, Section 5 of the revised Rules of Court imposes the following requirement –
SEC. 5. Certification against forum shopping. – The plaintiff or principal party shall certify under
oath in the complaint or other initiatory pleading asserting a claim for relief, or in a sworn
certification annexed thereto and simultaneously filed therewith: (a) that he has not theretofore
commenced any action or filed any claim involving the same issues in any court, tribunal or quasi-
judicial agency and, to the best of his knowledge, no such other action or claim is pending therein;
(b) if there is such other pending action or claim, a complete statement of the present status
thereof; and (c) if he should thereafter learn that the same or similar action or claim has been filed
or is pending, he shall report that fact within five (5) days therefrom to the court wherein his
aforesaid complaint or initiatory pleading has been filed.
Failure to comply with the foregoing requirements shall not be curable by mere amendment of the
complaint or other initiatory pleading but shall be cause for the dismissal of the case without
prejudice, unless otherwise provided, upon motion and after hearing. The submission of a false
 certification or non-compliance with any of the undertakings therein shall constitute indirect
contempt of court, without prejudice to the corresponding administrative and criminal actions. If
the acts of the party or his counsel clearly constitute willful and deliberate forum shopping, the
same shall be ground for summary dismissal with prejudice and shall constitute direct contempt, as
well as cause for administrative sanctions.
Although it may seem at first glance that respondent was simultaneously seeking recourse from the Court of
Appeals and this Court, a careful and closer scrutiny of the details of the case at bar would reveal otherwise.
It should be recalled that respondent did nothing more in G.R. No. 152985 than to file with this Court a
Motion for Extension of Time within which to file her Petition for Review. For unexplained reasons,
respondent failed to submit to this Court her intended Petition within the reglementary period. Consequently,
this Court was prompted to issue a Resolution, dated 13 November 2002, declaring G.R. No. 152985
terminated, and the therein assailed Court of Appeals Decision final and executory. G.R. No. 152985,
therefore, did not progress and respondent's appeal was unperfected.
The Petition for Review would constitute the initiatory pleading before this Court, upon the timely filing of
which, the case before this Court commences; much in the same way a case is initiated by the filing of a
Complaint before the trial court. The Petition for Review establishes the identity of parties, rights or causes
of action, and relief sought from this Court, and without such a Petition, there is technically no case before
this Court. The Motion filed by respondent seeking extension of time within which to file her Petition for
Review does not serve the same purpose as the Petition for Review itself. Such a Motion merely presents the
important dates and the justification for the additional time requested for, but it does not go into the details
of the appealed case.
Without any particular idea as to the assignments of error or the relief respondent intended to seek from this
Court, in light of her failure to file her Petition for Review, there is actually no second case involving the
same parties, rights or causes of action, and relief sought, as that in CA-G.R. CV No. 51930.
It should also be noted that the Certification against Forum Shopping is required to be attached to the
initiatory pleading, which, in G.R. No. 152985, should have been respondent's Petition for Review. It is in
that Certification wherein respondent certifies, under oath, that: (a) she has not commenced any action or
filed any claim involving the same issues in any court, tribunal or quasi-judicial agency and, to the best of
her knowledge, no such other action or claim is pending therein; (b) if there is such other pending action or
claim, that she is presenting a complete statement of the present status thereof; and (c) if she should
thereafter learn that the same or similar action or claim has been filed or is pending, she shall report that
fact within five days therefrom to this Court. Without her Petition for Review, respondent had no obligation
to execute and submit the foregoing Certification against Forum Shopping. Thus, respondent did not violate
Rule 7, Section 5 of the Revised Rules of Court; neither did she mislead this Court as to the pendency of
another similar case.
Lastly, the fact alone that the Decision of the Court of Appeals, dated 26 March 2002, essentially ruled in
favor of respondent, does not necessarily preclude her from appealing the same. Granted that such a move
is ostensibly irrational, nonetheless, it does not amount to malice, bad faith or abuse of the court processes
in the absence of further proof. Again, it should be noted that the respondent did not file her intended
Petition for Review. The Petition for Review would have presented before this Court the grounds for
respondent's appeal and her arguments in support thereof. Without said Petition, any reason attributed to
the respondent for appealing the 26 March 2002 Decision would be grounded on mere speculations, to which
this Court cannot give credence.
II
85
As an exception to the general rule, this Court takes cognizance of questions of fact raised in the
Petition at bar.
It is already a well-settled rule that the jurisdiction of this Court in cases brought before it from the Court of
Appeals by virtue of Rule 45 of the Revised Rules of Court is limited to reviewing errors of law. Findings of
fact of the Court of Appeals are conclusive upon this Court. There are, however, recognized exceptions to the
foregoing rule, namely: (1) when the findings are grounded entirely on speculation, surmises, or
conjectures; (2) when the interference made is manifestly mistaken, absurd, or impossible; (3) when there
is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the
findings of fact are conflicting; (6) when in making its findings, the Court of Appeals went beyond the issues
of the case, or its findings are contrary to the admissions of both the appellant and the appellee; (7) when
the findings are contrary to those of the trial court; (8) when the findings are conclusions without citation of
specific evidence on which they are based; (9) when the facts set forth in the petition as well as in the
petitioner's main and reply briefs are not disputed by the respondent; and (10) when the findings of fact are
premised on the supposed absence of evidence and contradicted by the evidence on record.24
Several of the enumerated exceptions pertain to the Petition at bar.
It is indubitable that the Court of Appeals made factual findings that are contrary to those of the RTC,25 thus,
resulting in its substantial modification of the trial court's Decision, and a ruling entirely in favor of the
respondent. In addition, petitioners invoked in the instant Petition for Review several exceptions that would
justify this Court's review of the factual findings of the Court of Appeals, i.e., the Court of Appeals made
conflicting findings of fact; findings of fact which went beyond the issues raised on appeal before it; as well
as findings of fact premised on the supposed absence of evidence and contradicted by the evidence on
record.
On the basis of the foregoing, this Court shall proceed to reviewing and re-evaluating the evidence on record
in order to settle questions of fact raised in the Petition at bar.
The fact that the trial judge who rendered the RTC Decision in Civil Case No. 11336, dated 24
August 1995, was not the same judge who heard and tried the case, does not, by itself, render
the said Decision erroneous.
The Decision in Civil Case No. 11336 was rendered more than 10 years from the institution of the said case.
In the course of its trial, the case was presided over by four (4) different RTC judges.26 It was Judge Victorio,
the fourth judge assigned to the case, who wrote the RTC Decision, dated 24 August 1995. In his
Decision,27 Judge Victorio made the following findings –
After carefully evaluating the mass of evidence adduced by the parties, this Court is not inclined to
believe the plaintiff's assertion that the promissory notes as well as the deeds of assignments of
her FNCB Finance money market placements were simulated. The evidence is overwhelming that
the plaintiff received the proceeds of the loans evidenced by the various promissory notes she had
signed. What is more, there was not an iota of proof save the plaintiff's bare testimony that she
had indeed applied for loan with the Development Bank of the Philippines.
More importantly, the two deeds of assignment were notarized, hence they partake the nature of a
public document. It makes more than preponderant proof to overturn the effect of a notarial
attestation. Copies of the deeds of assignments were actually filed with the Records Management
and Archives Office.

Finally, there were sufficient evidence wherein the plaintiff had admitted the existence of her loans
with the defendant Bank in the total amount of ₱1,920,000.00 exclusive of interests and penalty
charges (Exhibits "28", "31", "32", and "33").
In fine, this Court hereby finds that the defendants had established the genuineness and due
execution of the various promissory notes heretofore identified as well as the two deeds of
assignments of the plaintiff's money market placements with defendant FNCB Finance, on the
strength of which the said money market placements were applied to partially pay the plaintiff's
past due obligation with the defendant Bank. Thus, the total sum of ₱1,053,995.80 of the plaintiff's
past due obligation was partially offset by the said money market placement leaving a balance of
₱1,069,847.40 as of 5 September 1979 (Exhibit "34").
Disagreeing in the foregoing findings, the Court of Appeals stressed, in its Decision in CA-G.R. CV No. 51930,
dated 26 March 2002, "that the ponente of the herein assailed Decision is not the Presiding Judge who heard
and tried the case."28 This brings us to the question of whether the fact alone that the RTC Decision was
rendered by a judge other than the judge who actually heard and tried the case is sufficient justification for
the appellate court to disregard or set aside the findings in the Decision of the court a quo?
This Court rules in the negative.
What deserves stressing is that, in this jurisdiction, there exists a disputable presumption that the RTC
Decision was rendered by the judge in the regular performance of his official duties. While the said
presumption is only disputable, it is satisfactory unless contradicted or overcame by other
evidence.29 Encompassed in this presumption of regularity is the presumption that the RTC judge, in
resolving the case and drafting his Decision, reviewed, evaluated, and weighed all the evidence on record.
That the said RTC judge is not the same judge who heard the case and received the evidence is of little
consequence when the records and transcripts of stenographic notes (TSNs) are complete and available for
consideration by the former.
In People v. Gazmen,30 this Court already elucidated its position on such an issue –
Accused-appellant makes an issue of the fact that the judge who penned the decision was not the
judge who heard and tried the case and concludes therefrom that the findings of the former are
erroneous. Accused-appellant's argument does not merit a lengthy discussion. It is well-settled that
the decision of a judge who did not try the case is not by that reason alone erroneous.
It is true that the judge who ultimately decided the case had not heard the controversy at all, the
trial having been conducted by then Judge Emilio L. Polig, who was indefinitely suspended by this
Court. Nonetheless, the transcripts of stenographic notes taken during the trial were complete and
were presumably examined and studied by Judge Baguilat before he rendered his decision. It is not
unusual for a judge who did not try a case to decide it on the basis of the record. The fact that he
did not have the opportunity to observe the demeanor of the witnesses during the trial but merely
relied on the transcript of their testimonies does not for that reason alone render the judgment
erroneous.
(People vs. Jaymalin, 214 SCRA 685, 692 [1992])
Although it is true that the judge who heard the witnesses testify is in a better position to observe
the witnesses on the stand and determine by their demeanor whether they are telling the truth or
86
86
mouthing falsehood, it does not necessarily follow that a judge who was not present during the trial
cannot render a valid decision since he can rely on the transcript of stenographic notes taken
during the trial as basis of his decision.
Accused-appellant's contention that the trial judge did not have the opportunity to observe the
conduct and demeanor of the witnesses since he was not the same judge who conducted the
hearing is also untenable. While it is true that the trial judge who conducted the hearing would be
in a better position to ascertain the truth and falsity of the testimonies of the witnesses, it does not
necessarily follow that a judge who was not present during the trial cannot render a valid and just
decision since the latter can also rely on the transcribed stenographic notes taken during the trial
as the basis of his decision.
(People vs. De Paz, 212 SCRA 56, 63 [1992])
At any rate, the test to determine the value of the testimony of the witness is whether or not such
is in conformity with knowledge and consistent with the experience of mankind (People vs. Morre,
217 SCRA 219 [1993]). Further, the credibility of witnesses can also be assessed on the basis of
the substance of their testimony and the surrounding circumstances (People v. Gonzales, 210 SCRA
44 [1992]). A critical evaluation of the testimony of the prosecution witnesses reveals that their
testimony accords with the aforementioned tests, and carries with it the ring of truth end perforce,
must be given full weight and credit.
Irrefragably, by reason alone that the judge who penned the RTC Decision was not the same judge who
heard the case and received the evidence therein would not render the findings in the said Decision
erroneous and unreliable. While the conduct and demeanor of witnesses may sway a trial court judge in
deciding a case, it is not, and should not be, his only consideration. Even more vital for the trial court judge's
decision are the contents and substance of the witnesses' testimonies, as borne out by the TSNs, as well as
the object and documentary evidence submitted and made part of the records of the case.
This Court proceeds to making its own findings of fact.
Since the Decision of the Court of Appeals in CA-G.R. CV No. 51930, dated 26 March 2002, has become final
and executory as to the respondent, due to her failure to interpose an appeal therefrom within the
reglementary period, she is already bound by the factual findings in the said Decision. Likewise, respondent's
failure to file, within the reglementary period, a Motion for Reconsideration or an appeal of the Resolution of
the Court of Appeals in the same case, dated 20 November 2002, which modified its earlier Decision by
deleting paragraph 3(v) of its dispositive portion, ordering petitioners to return to respondent the proceeds
of her money market placement with AIDC, shall already bar her from questioning such modification before
this Court. Thus, what is for review before this Court is the Decision of the Court of Appeals, dated 26 March
2002, as modified by the Resolution of the same court, dated 20 November 2002.
Respondent alleged that she had several deposits and money market placements with petitioners. These
deposits and money market placements, as determined by the Court of Appeals in its Decision, dated 26
March 2002, and as modified by its Resolution, dated 20 November 2002, are as follows –
Deposit/Placement Amount
Dollar deposit with Citibank-Geneva $
149,632.99
 Money market placement with Citibank, evidenced by Promissory Note (PN) No.
23356 (which cancels and supersedes PN No. 22526), earning 14.5% interest
per annum (p.a.)
Money market placement with Citibank, evidenced by PN No. 23357 (which
cancels and supersedes PN No. 22528), earning 14.5% interest p.a.
Money market placement with FNCB Finance, evidenced by PN No. 5757 (which
cancels and supersedes PN No. 4952), earning 17% interest p.a.
₱ ₱600,000.00 sourced from her other funds, to open two time deposit (TD) accounts with petitioner
318,897.34 Citibank, namely, TD Accounts No. 17783 and 17784.
Petitioner Citibank did not deny the existence nor questioned the authenticity of PNs No. 23356 and
₱
23357 it issued in favor of respondent for her money market placements. In fact, it admitted the
203,150.00
genuineness and due execution of the said PNs, but qualified that they were no longer
₱ outstanding.31 In Hibberd v. Rohde and McMillian,32 this Court delineated the consequences of such
500,000.00 an admission –

Money market placement with FNCB Finance, evidenced by PN No. 5758 (which ₱
cancels and supersedes PN No. 2962), earning 17% interest p.a. 500,000.00 By the admission of the genuineness and due execution of an instrument, as provided in
this section, is meant that the party whose signature it bears admits that he signed it or
that it was signed by another for him with his authority; that at the time it was signed it
This Court is tasked to determine whether petitioners are indeed liable to return the foregoing amounts, was in words and figures exactly as set out in the pleading of the party relying upon it;
together with the appropriate interests and penalties, to respondent. It shall trace respondent's transactions that the document was delivered; and that any formal requisites required by law, such as
with petitioners, from her money market placements with petitioner Citibank and petitioner FNCB Finance, to a seal, an acknowledgment, or revenue stamp, which it lacks, are waived by him. Hence,
her savings and current accounts with petitioner Citibank, and to her dollar accounts with Citibank-Geneva. such defenses as that the signature is a forgery (Puritan Mfg. Co. vs. Toti & Gradi, 14 N.
M., 425; Cox vs. Northwestern Stage Co., 1 Idaho, 376; Woollen vs. Whitacre, 73 Ind.,
198; Smith vs. Ehnert, 47 Wis., 479; Faelnar vs. Escaño, 11 Phil. Rep., 92); or that it
Money market placements with petitioner Citibank was unauthorized, as in the case of an agent signing for his principal, or one signing in
behalf of a partnership (Country Bank vs. Greenberg, 127 Cal., 26; Henshaw vs. Root, 60
The history of respondent's money market placements with petitioner Citibank began on 6 December 1976, Inc., 220; Naftzker vs. Lantz, 137 Mich., 441) or of a corporation
when she made a placement of ₱500,000.00 as principal amount, which was supposed to earn an interest of (Merchant vs. International Banking Corporation, 6 Phil Rep., 314; Wanita vs. Rollins, 75
16% p.a. and for which PN No. 20773 was issued. Respondent did not yet claim the proceeds of her Miss., 253; Barnes vs. Spencer & Barnes Co., 162 Mich., 509); or that, in the case of the
placement and, instead, rolled-over or re-invested the principal and proceeds several times in the latter, that the corporation was authorized under its charter to sign the instrument
succeeding years for which new PNs were issued by petitioner Citibank to replace the ones which matured. (Merchant vs. International Banking Corporation, supra); or that the party charged
Petitioner Citibank accounted for respondent's original placement and the subsequent roll-overs thereof, as signed the instrument in some other capacity than that alleged in the pleading setting it
follows – out (Payne vs. National Bank, 16 Kan., 147); or that it was never delivered
(Hunt vs. Weir, 29 Ill., 83; Elbring vs. Mullen, 4 Idaho, 199; Thorp vs. Keokuk Coal Co.,
48 N.Y., 253; Fire Association of Philadelphia vs. Ruby, 60 Neb., 216) are cut off by the
Date Cancel Maturity Date Interes admission of its genuineness and due execution.
PN Amount
(mm/dd/yyy s PN (mm/dd/yyy t
No. (P)
y) No. y) (p.a.) The effect of the admission is such that in the case of a promissory note a prima facie
2077 500,000.0 case is made for the plaintiff which dispenses with the necessity of evidence on his part
12/06/1976 None 01/13/1977 16% and entitles him to a judgment on the pleadings unless a special defense of new matter,
3 0
such as payment, is interposed by the defendant (Papa vs. Martinez, 12 Phil. Rep., 613;
2168 508,444.4 Chinese Chamber of Commerce vs. Pua To Ching, 14 Phil. Rep., 222; Banco Español-
01/14/1977 20773 02/08/1977 15%
6 4 Filipino vs. McKay & Zoeller, 27 Phil. Rep., 183). x x x
2252 313,952.5 15-
21686 03/16/1977
6 9 3/4% Since the genuineness and due execution of PNs No. 23356 and 23357 are uncontested,
02/09/1977 respondent was able to establish prima facie that petitioner Citibank is liable to her for the amounts
2252 200,000.0 15- stated therein. The assertion of petitioner Citibank of payment of the said PNs is an affirmative
21686 03/16/1977
8 0 3/4% allegation of a new matter, the burden of proof as to such resting on petitioner Citibank.
2335 318,897.3 14- Respondent having proved the existence of the obligation, the burden of proof was upon petitioner
22526 04/20/1977 Citibank to show that it had been discharged.33 It has already been established by this Court that –
6 4 1/2%
03/17/1977
2335 203,150.0 14-
22528 04/20/1977 As a general rule, one who pleads payment has the burden of proving it. Even where the
7 0 1/2%
plaintiff must allege non-payment, the general rule is that the burden rests on the
defendant to prove payment, rather than on the plaintiff to prove non-payment. The
Petitioner Citibank alleged that it had already paid to respondent the principal amounts and debtor has the burden of showing with legal certainty that the obligation has been
proceeds of PNs No. 23356 and 23357, upon their maturity. Petitioner Citibank further averred that discharged by payment.
respondent used the ₱500,000.00 from the payment of PNs No. 23356 and 23357, plus

87
 88

When the existence of a debt is fully established by the evidence contained in the record, Are these documents still available now?
the burden of proving that it has been extinguished by payment devolves upon the debtor
who offers such defense to the claim of the creditor. Where the debtor introduces some
A Yes, your honor.
evidence of payment, the burden of going forward with the evidence – as distinct from
the general burden of proof – shifts to the creditor, who is then under the duty of
producing some evidence of non-payment.34 Court:

Reviewing the evidence on record, this Court finds that petitioner Citibank failed to satisfactorily Better present the documents.
prove that PNs No. 23356 and 23357 had already been paid, and that the amount so paid was
actually used to open one of respondent's TD accounts with petitioner Citibank.
Atty. Mabasa:

Petitioner Citibank presented the testimonies of two witnesses to support its contention of
payment: (1) That of Mr. Herminio Pujeda,35 the officer-in-charge of loans and placements at the Yes, your Honor, that is why your Honor.
time when the questioned transactions took place; and (2) that of Mr. Francisco Tan,36 the former
Assistant Vice-President of Citibank, who directly dealt with respondent with regard to her deposits Atty. Mabasa:
and loans.

The relevant portion37 of Mr. Pujeda's testimony as to PNs No. 23356 and 23357 (referred to
therein as Exhibits No. "47" and "48," respectively) is reproduced below –
Atty. Mabasa:
Q Now, basing on the notes that you prepared, Mr. Witness, and according to you basing
also on your personal recollection about all the transactions involved between Modesta
Sabeniano and defendant City Bank [sic] in this case. Now, would you tell us what
happened to the money market placements of Modesta Sabeniano that you have earlier
identified in Exhs. "47" and "48"?

Okey [sic]. Now Mr. Witness, you were asked to testify in this case and this case A The transactions which I said earlier were terminated and booked to time deposits.
is [sic] consist [sic] of several documents involving transactions between the
plaintiff and the defendant. Now, were you able to make your own Q And you are saying time deposits with what bank?
memorandum regarding all these transactions?

A With First National Citibank.

A Yes, based on my recollection of these facts, I did come up of [sic] the outline of the
chronological sequence of events.
Q Is it the same bank as Citibank, N.A.?

Court:
A Yes, sir.

Are you trying to say that you have personal knowledge or participation to these
transactions? Q And how much was the amount booked as time deposit with defendant Citibank?

A Yes, your Honor, I was the officer-in charge of the unit that was processing these
transactions. Some of the documents bear my signature.
Court:
A In the amount of ₱500,000.00.
Q And outside this ₱500,000.00 which you said was booked out of the proceeds of Exhs.
"47" and "48", were there other time deposits opened by Mrs. Modesta Sabeniano at that
time.

And this resume or summary that you have prepared is based on purely your
recollection or documents? A Yes, she also opened another time deposit for ₱600,000.00.

A Based on documents, your Honor. Q So all in all Mr. Witness, sometime in April of 1978 Mrs. Modesta Sabeneano [sic] had
time deposit placements with Citibank in the amount of ₱500,000.00 which is the
proceeds of Exh. "47" and "48" and another ₱600,000.00, is it not?
Court:

88
 A Yes, sir.
Q And would you know where did the other ₱600,000 placed by Mrs. Sabeneano [sic] in a
time deposit with Citibank, N.A. came [sic] from?
A She funded it directly.
Q What are you saying Mr. Witness is that the ₱600,000 is a [sic] fresh money coming
from Mrs. Modesta Sabeneano [sic]?
A That is right.
In his deposition in Hong Kong, Mr. Tan recounted what happened to PNs No. 23356 and 23357
(referred to therein as Exhibits "E" and "F," respectively), as follows –
Atty. Mabasa : Now from the Exhibits that you have identified Mr. Tan from Exhibits "A"
to "F", which are Exhibits of the plaintiff. Now, do I understand from you that the original
amount is Five Hundred Thousand and thereafter renewed in the succeeding exhibits?
Mr. Tan : Yes, Sir.
Atty. Mabasa : Alright, after these Exhibits "E" and "F" matured, what happened
thereafter?
Mr. Tan : Split into two time deposits.
Atty. Mabasa : Exhibits "E" and "F"?
Before anything else, it should be noted that when Mr. Pujeda's testimony before the RTC was
made on 12 March 1990 and Mr. Tan's deposition in Hong Kong was conducted on 3 September
1990, more than a decade had passed from the time the transactions they were testifying on took
place. This Court had previously recognized the frailty and unreliability of human memory with
regards to figures after the lapse of five years.38 Taking into consideration the substantial length of
time between the transactions and the witnesses' testimonies, as well as the undeniable fact that
bank officers deal with multiple clients and process numerous transactions during their tenure, this
Court is reluctant to give much weight to the testimonies of Mr. Pujeda and Mr. Tan regarding the
payment of PNs No. 23356 and 23357 and the use by respondent of the proceeds thereof for
opening TD accounts. This Court finds it implausible that they should remember, after all these
years, this particular transaction with respondent involving her PNs No. 23356 and 23357 and TD
accounts. Both witnesses did not give any reason as to why, from among all the clients they had
dealt with and all the transactions they had processed as officers of petitioner Citibank, they
specially remembered respondent and her PNs No. 23356 and 23357. Their testimonies likewise
lacked details on the circumstances surrounding the payment of the two PNs and the opening of
the time deposit accounts by respondent, such as the date of payment of the two PNs, mode of
payment, and the manner and context by which respondent relayed her instructions to the officers
of petitioner Citibank to use the proceeds of her two PNs in opening the TD accounts.
Moreover, while there are documentary evidences to support and trace respondent's money market
placements with petitioner Citibank, from the original PN No. 20773, rolled-over several times to,
89
finally, PNs No. 23356 and 23357, there is an evident absence of any documentary evidence on the
payment of these last two PNs and the use of the proceeds thereof by respondent for opening TD
accounts. The paper trail seems to have ended with the copies of PNs No. 23356 and 23357.
Although both Mr. Pujeda and Mr. Tan said that they based their testimonies, not just on their
memories but also on the documents on file, the supposed documents on which they based those
portions of their testimony on the payment of PNs No. 23356 and 23357 and the opening of the TD
accounts from the proceeds thereof, were never presented before the courts nor made part
of the records of the case. Respondent's money market placements were of substantial amounts
– consisting of the principal amount of ₱500,000.00, plus the interest it should have earned during
the years of placement – and it is difficult for this Court to believe that petitioner Citibank would
not have had documented the payment thereof.
When Mr. Pujeda testified before the RTC on 6 February 1990,39 petitioners' counsel attempted to
present in evidence a document that would supposedly support the claim of petitioner Citibank that
the proceeds of PNs No. 23356 and 23357 were used by respondent to open one of her two TD
accounts in the amount of ₱500,000.00. Respondent's counsel objected to the presentation of the
document since it was a mere "xerox" copy, and was blurred and hardly readable. Petitioners'
counsel then asked for a continuance of the hearing so that they can have time to produce a better
document, which was granted by the court. However, during the next hearing and continuance of
Mr. Pujeda's testimony on 12 March 1990, petitioners' counsel no longer referred to the said
document.
As respondent had established a prima facie case that petitioner Citibank is obligated to her for the
amounts stated in PNs No. 23356 and 23357, and as petitioner Citibank failed to present sufficient
proof of payment of the said PNs and the use by the respondent of the proceeds thereof to open
her TD accounts, this Court finds that PNs No. 23356 and 23357 are still outstanding and
petitioner Citibank is still liable to respondent for the amounts stated therein.
The significance of this Court's declaration that PNs No. 23356 and 23357 are still outstanding
becomes apparent in the light of petitioners' next contentions – that respondent used the proceeds
of PNs No. 23356 and 23357, together with additional money, to open TD Accounts No. 17783 and
17784 with petitioner Citibank; and, subsequently, respondent pre-terminated these TD accounts
and transferred the proceeds thereof, amounting to ₱1,100,000.00, to petitioner FNCB Finance for
money market placements. While respondent's money market placements with petitioner FNCB
Finance may be traced back with definiteness to TD Accounts No. 17783 and 17784, there is only
flimsy and unsubstantiated connection between the said TD accounts and the supposed proceeds
paid from PNs No. 23356 and 23357. With PNs No. 23356 and 23357 still unpaid, then they
represent an obligation of petitioner Citibank separate and distinct from the obligation of petitioner
FNCB Finance arising from respondent's money market placements with the latter.
Money market placements with petitioner FNCB Finance
According to petitioners, respondent's TD Accounts No. 17783 and 17784, in the total amount of
₱1,100,000.00, were supposed to mature on 15 March 1978. However, respondent, through a
letter dated 28 April 1977,40 pre-terminated the said TD accounts and transferred all the proceeds
thereof to petitioner FNCB Finance for money market placement. Pursuant to her instructions, TD
Accounts No. 17783 and 17784 were pre-terminated and petitioner Citibank (then still named First
National City Bank) issued Manager's Checks (MC) No. 19925341 and 19925142 for the amounts of
₱500,000.00 and ₱600,00.00, respectively. Both MCs were payable to Citifinance (which, according
to Mr. Pujeda,43 was one with and the same as petitioner FNCB Finance), with the additional
notation that "A/C MODESTA R. SABENIANO." Typewritten on MC No. 199253 is the phrase "Ref.
Proceeds of TD 17783," and on MC No. 199251 is a similar phrase, "Ref. Proceeds of TD 17784."
 90

These phrases purportedly established that the MCs were paid from the proceeds of respondent's 09/05/ 1978 77034 500,000.00 Full payment of principal on PN#08169 which is hereby cancelled
pre-terminated TD accounts with petitioner Citibank. Upon receipt of the MCs, petitioner FNCB
Finance deposited the same to its account with Feati Bank and Trust Co., as evidenced by the
rubber stamp mark of the latter found at the back of both MCs. In exchange, petitioner FNCB Then again, Checks No. 77035 and 77034 were later returned to petitioner FNCB Finance together with a
Finance booked the amounts received as money market placements, and accordingly issued PNs memo,47 dated 6 September 1978, from Mr. Tan of petitioner Citibank, to a Mr. Bobby Mendoza of petitioner
No. 4952 and 4962, for the amounts of ₱500,000.00 and ₱600,000.00, respectively, payable to FNCB Finance. According to the memo, the two checks, in the total amount of ₱1,000,000.00, were to be
respondent's savings account with petitioner Citibank, S/A No. 25-13703-4, upon their maturity on returned to respondent's account with instructions to book the said amount in money market placements for
1 June 1977. Once again, respondent rolled-over several times the principal amounts of her money one more year. Pursuant to the said memo, Checks No. 77035 and 77034 were invested by petitioner FNCB
market placements with petitioner FNCB Finance, as follows – Finance, on behalf of respondent, in money market placements for which it issued PNs No. 20138 and
20139. The PNs each covered ₱500,000.00, to earn 11% interest per annum, and to mature on 3 September
1979.
Date Maturity Date Amount Interest
PN No. Cancels PN No.
(mm/dd/yyyy) (mm/dd/yyyy) (₱) (p.a.)
On 3 September 1979, petitioner FNCB Finance issued Check No. 100168, pay to the order of "Citibank N.A.
4952 None 06/01/1977 500,000.00 17% A/C Modesta Sabeniano," in the amount of ₱1,022,916.66, as full payment of the principal amounts and
04/29/1977 interests of both PNs No. 20138 and 20139 and, resultantly, canceling the said PNs.48 Respondent actually
4962 None 06/01/1977 600,000.00 17% admitted the issuance and existence of Check No. 100168, but with the qualification that the proceeds
5757 4952 08/31/1977 500,000.00 17% thereof were turned over to petitioner Citibank.49 Respondent did not clarify the circumstances attending the
06/02/1977 supposed turn over, but on the basis of the allegations of petitioner Citibank itself, the proceeds of PNs No.
5758 4962 08/31/1977 500,000.00 17% 20138 and 20139, amounting to ₱1,022,916.66, was used by it to liquidate respondent's outstanding loans.
Therefore, the determination of whether or not respondent is still entitled to the return of the proceeds of
8167 5757 08/25/1978 500,000.00 14% PNs No. 20138 and 20139 shall be dependent on the resolution of the issues raised as to the existence of the
08/31/1977 loans and the authority of petitioner Citibank to use the proceeds of the said PNs, together with respondent's
8169 5752 08/25/1978 500,000.00 14% other deposits and money market placements, to pay for the same.

As presented by the petitioner FNCB Finance, respondent rolled-over only the principal amounts of her Savings and current accounts with petitioner Citibank
money market placements as she chose to receive the interest income therefrom. Petitioner FNCB Finance
also pointed out that when PN No. 4962, with principal amount of ₱600,000.00, matured on 1 June 1977,
Respondent presented and submitted before the RTC deposit slips and bank statements to prove deposits
respondent received a partial payment of the principal which, together with the interest, amounted to
made to several of her accounts with petitioner Citibank, particularly, Accounts No. 00484202, 59091, and
₱102,633.33;44 thus, only the amount of ₱500,000.00 from PN No. 4962 was rolled-over to PN No. 5758.
472-751, which would have amounted to a total of ₱3,812,712.32, had there been no withdrawals or debits
from the said accounts from the time the said deposits were made.
Based on the foregoing records, the principal amounts of PNs No. 5757 and 5758, upon their maturity, were
rolled over to PNs No. 8167 and 8169, respectively. PN No. 816745 expressly canceled and superseded PN
Although the RTC and the Court of Appeals did not make any definitive findings as to the status of
No. 5757, while PN No. 816946 also explicitly canceled and superseded PN No. 5758. Thus, it is patently
respondent's savings and current accounts with petitioner Citibank, the Decisions of both the trial and
erroneous for the Court of Appeals to still award to respondent the principal amounts and interests covered
appellate courts effectively recognized only the ₱31,079.14 coming from respondent's savings account which
by PNs No. 5757 and 5758 when these were already canceled and superseded. It is now incumbent upon
was used to off-set her alleged outstanding loans with petitioner Citibank.50
this Court to determine what subsequently happened to PNs No. 8167 and 8169.

Since both the RTC and the Court of Appeals had consistently recognized only the ₱31,079.14 of
Petitioner FNCB Finance presented four checks as proof of payment of the principal amounts and interests of
respondent's savings account with petitioner Citibank, and that respondent failed to move for reconsideration
PNs No. 8167 and 8169 upon their maturity. All the checks were payable to respondent's savings account
or to appeal this particular finding of fact by the trial and appellate courts, it is already binding upon this
with petitioner Citibank, with the following details –
Court. Respondent is already precluded from claiming any greater amount in her savings and current
accounts with petitioner Citibank. Thus, this Court shall limit itself to determining whether or not respondent
is entitled to the return of the amount of ₱31,079.14 should the off-set thereof by petitioner Citibank against
Date of Check Amount Notation
her supposed loans be found invalid.
Issuance No. (₱)
(mm/dd/yyyy)
Dollar accounts with Citibank-Geneva
09/01/1978 76962 12,833.34 Interest payment on PN#08167

09/01/1978 76961 12,833.34 Interest payment on PN#08169 Respondent made an effort of preparing and presenting before the RTC her own computations of her money
09/05/1978 77035 500,000.00 Full payment of principal on PN#08167 which is hereby cancelled market placements and dollar accounts with Citibank-Geneva, purportedly amounting to a total of United
States (US) $343,220.98, as of 23 June 1985.51 In her Memorandum filed with the RTC, she claimed a much
bigger amount of deposits and money market placements with Citibank-Geneva, totaling
90
US$1,336,638.65.52 However, respondent herself also submitted as part of her formal offer of evidence the Petitioner Citibank was able to establish by preponderance of evidence the existence of
computation of her money market placements and dollar accounts with Citibank-Geneva as determined by respondent's loans.
the latter.53 Citibank-Geneva accounted for respondent's money market placements and dollar accounts as
follows –
Petitioners' version of events

MODESTA SABENIANO &/OR In sum, the following amounts were used by petitioner Citibank to liquidate respondent's purported
================== outstanding loans –
US$ 30'000.-- Principal Fid. Placement

+ US$ 339.06 Interest at 3,875% p.a. from 12.07. – 25.10.79 Description Amount
- US$ 95.-- Commission (minimum)

US$ 30'244.06 Total proceeds on 25.10.1979 Principal and interests of PNs

No. 20138 and 20139
US$ 114'000.-- Principal Fid. Placement (money market placements
with petitioner FNCB
+ US$ 1'358.50 Interest at 4,125% p.a. from 12.07. – 25.10.79
Finance) ₱ 1,022,916.66
- US$ 41.17 Commission
Savings account with
US$ 115'317.33 Total proceeds on 25.10.1979 petitioner Citibank 31,079.14

US$ 145'561.39 Total proceeds of both placements on Dollar remittance from

25.10.1979 Citibank-Geneva (peso
equivalent of
+ US$ 11'381.31 total of both current accounts US$149,632.99) 1,102,944.78
US$ 156'942.70 Total funds available

- US$ 149'632.99 Transfer to Citibank Manila on 26.10.1979

(counter value of Pesos 1'102'944.78) Total ₱ 2,156,940.58
US$ 7'309.71 Balance in current accounts

- US$ 6'998.84 Transfer to Citibank Zuerich – ac no. 121359 on According to petitioner Citibank, respondent incurred her loans under the circumstances narrated below.
March 13, 1980

US$ 310.87 various charges including closing charges As early as 9 February 1978, respondent obtained her first loan from petitioner Citibank in the principal
amount of ₱200,000.00, for which she executed PN No. 31504.54 Petitioner Citibank extended to her several
other loans in the succeeding months. Some of these loans were paid, while others were rolled-over or
According to the foregoing computation, by 25 October 1979, respondent had a total of US$156,942.70, renewed. Significant to the Petition at bar are the loans which respondent obtained from July 1978 to
from which, US$149,632.99 was transferred by Citibank-Geneva to petitioner Citibank in Manila, and was January 1979, appropriately covered by PNs (first set).55 The aggregate principal amount of these loans was
used by the latter to off-set respondent's outstanding loans. The balance of respondent's accounts with ₱1,920,000.00, which could be broken down as follows –
Citibank-Geneva, after the remittance to petitioner Citibank in Manila, amounted to US$7,309.71, which was
subsequently expended by a transfer to another account with Citibank-Zuerich, in the amount of
US$6,998.84, and by payment of various bank charges, including closing charges, in the amount of PN Date of Issuance Date of Maturity Principal Date of Release
US$310.87. Rightly so, both the RTC and the Court of Appeals gave more credence to the computation of MC No.
No. (mm/dd/yyyy) (mm/dd/yyyy) Amount (mm/dd/yyyy)
Citibank-Geneva as to the status of respondent's accounts with the said bank, rather than the one prepared
by respondent herself, which was evidently self-serving. Once again, this Court shall limit itself to
determining whether or not respondent is entitled to the return of the amount of US$149,632.99 should the 32935 07/20/1978 09/18/1978 ₱ 400,000.00 07/20/1978 220701
off-set thereof by petitioner Citibank against her alleged outstanding loans be found invalid. Respondent 33751 10/13/1978 12/12/1978 100,000.00 Unrecovered
cannot claim any greater amount since she did not perfect an appeal of the Decision of the Court of Appeals,
dated 26 March 2002, which found that she is entitled only to the return of the said amount, as far as her 33798 10/19/1978 11/03/1978 100,000.00 10/19/1978 226285
accounts with Citibank-Geneva is concerned.
34025 11/15/1978 01/15/1979 150,000.00 11/16/1978 226439

III 34079 11/21/1978 01/19/1979 250,000.00 11/21/1978 226467

91
 92

34192 12/04/1978 01/18/1979 100,000.00 12/05/1978 228057 new Deeds of Assignment,59 in favor of petitioner Citibank, on 25 August 1978. According to the more recent
Deeds, respondent assigned PNs No. 20138 and 20139, representing her rolled-over money market
34402 12/26/1978 02/23/1979 300,000.00 12/26/1978 228203 placements with petitioner FNCB Finance, to petitioner Citibank as security for the banking and credit
facilities it extended to her, in the aggregate principal amount of ₱500,000.00 per Deed.
34534 01/09/1979 03/09/1979 150,000.00 01/09/1979 228270

34609 01/17/1979 03/19/1979 150,000.00 01/17/1979 228357 In addition to the Deeds of Assignment of her money market placements with petitioner FNCB Finance,
respondent also executed a Declaration of Pledge,60 in which she supposedly pledged "[a]ll present and
34740 01/30/1979 03/30/1979 220,000.00 01/30/1979 228400
future fiduciary placements held in my personal and/or joint name with Citibank, Switzerland," to secure all
claims the petitioner Citibank may have or, in the future, acquire against respondent. The petitioners' copy
of the Declaration of Pledge is undated, while that of the respondent, a copy certified by a Citibank-Geneva
Total ₱ 1,920,000.00 officer, bore the date 24 September 1979.61

When respondent was unable to pay the first set of PNs upon their maturity, these were rolled-over or When respondent failed to pay the second set of PNs upon their maturity, an exchange of letters ensued
renewed several times, necessitating the execution by respondent of new PNs in favor of petitioner Citibank. between respondent and/or her representatives, on one hand, and the representatives of petitioners, on the
As of 5 April 1979, respondent had the following outstanding PNs (second set),56 the principal amount of other.
which remained at ₱1,920,000.00 –
The first letter62 was dated 5 April 1979, addressed to respondent and signed by Mr. Tan, as the manager of
Date of Issuance Date of Maturity petitioner Citibank, which stated, in part, that –
PN No. Principal Amount
(mm/dd/yyyy) (mm/dd/yyyy)
Despite our repeated requests and follow-up, we regret you have not granted us with any response
34510 01/01/1979 03/02/1979 P 400,000.00
or payment.
34509 01/02/1979 03/02/1979 100,000.00

34534 01/09/1979 03/09/1979 150,000.00 We, therefore, have no alternative but to call your loan of ₱1,920,000.00 plus interests and other
charges due and demandable. If you still fail to settle this obligation by 4/27/79, we shall have no
34612 01/19/1979 03/16/1979 150,000.00 other alternative but to refer your account to our lawyers for legal action to protect the interest of
the bank.
34741 01/26/1979 03/12/1979 100,000.00

35689 02/23/1979 05/29/1979 300,000.00 Respondent sent a reply letter63 dated 26 April 1979, printed on paper bearing the letterhead of respondent's
35694 03/19/1979 05/29/1979 150,000.00 company, MC Adore International Palace, the body of which reads –

35695 03/19/1979 05/29/1979 100,000.00

This is in reply to your letter dated April 5, 1979 inviting my attention to my loan which has
356946 03/20/1979 05/29/1979 250,000.00 become due. Pursuant to our representation with you over the telephone through Mr. F. A. Tan,
you allow us to pay the interests due for the meantime.
35697 03/30/1979 05/29/1979 220,000.00

Total ₱ 1,920,000.00 Please accept our Comtrust Check in the amount of ₱62,683.33.

All the PNs stated that the purpose of the loans covered thereby is "To liquidate existing obligation," except
for PN No. 34534, which stated for its purpose "personal investment."
Respondent secured her foregoing loans with petitioner Citibank by executing Deeds of Assignment of her
money market placements with petitioner FNCB Finance. On 2 March 1978, respondent executed in favor of
petitioner Citibank a Deed of Assignment57 of PN No. 8169, which was issued by petitioner FNCB Finance, to
secure payment of the credit and banking facilities extended to her by petitioner Citibank, in the aggregate
principal amount of ₱500,000.00. On 9 March 1978, respondent executed in favor of petitioner Citibank
another Deed of Assignment,58 this time, of PN No. 8167, also issued by petitioner FNCB Finance, to secure
payment of the credit and banking facilities extended to her by petitioner Citibank, in the aggregate amount
of ₱500,000.00. When PNs No. 8167 and 8169, representing respondent's money market placements with
petitioner FNCB Finance, matured and were rolled-over to PNs No. 20138 and 20139, respondent executed
Please bear with us for a little while, at most ninety days. As you know, we have a pending loan
with the Development Bank of the Philippines in the amount of ₱11-M. This loan has already been
recommended for approval and would be submitted to the Board of Governors. In fact, to further
facilitate the early release of this loan, we have presented and furnished Gov. J. Tengco a xerox
copy of your letter.
You will be doing our corporation a very viable service, should you grant us our request for a little
more time.
A week later or on 3 May 1979, a certain C. N. Pugeda, designated as "Executive Secretary," sent a
letter64 to petitioner Citibank, on behalf of respondent. The letter was again printed on paper bearing the

92
letterhead of MC Adore International Palace. The pertinent paragraphs of the said letter are reproduced
below –
Per instructions of Mrs. Modesta R. Sabeniano, we would like to request for a re-computation of the
interest and penalty charges on her loan in the aggregate amount of ₱1,920,000.00 with maturity
date of all promissory notes at June 30, 1979. As she has personally discussed with you yesterday,
this date will more or less assure you of early settlement.
In this regard, please entrust to bearer, our Comtrust check for ₱62,683.33 to be replaced by
another check with amount resulting from the new computation. Also, to facilitate the processing of
the same, may we request for another set of promissory notes for the signature of Mrs. Sabeniano
and to cancel the previous ones she has signed and forwarded to you.
This was followed by a telegram,65 dated 5 June 1979, and received by petitioner Citibank the following day.
The telegram was sent by a Dewey G. Soriano, Legal Counsel. The telegram acknowledged receipt of the
telegram sent by petitioner Citibank regarding the "re-past due obligation" of McAdore International Palace.
However, it reported that respondent, the President and Chairman of MC Adore International Palace, was
presently abroad negotiating for a big loan. Thus, he was requesting for an extension of the due date of the
obligation until respondent's arrival on or before 31 July 1979.
The next letter,66 dated 21 June 1979, was signed by respondent herself and addressed to Mr. Bobby
Mendoza, a Manager of petitioner FNCB Finance. Respondent wrote therein –
Re: PN No. 20138 for ₱500,000.00 & PN No. 20139 for ₱500,000.00 totalling ₱1 Million,
both PNs will mature on 9/3/1979.
This is to authorize you to release the accrued quarterly interests payment from my captioned
placements and forward directly to Citibank, Manila Attention: Mr. F. A. Tan, Manager, to apply to
my interest payable on my outstanding loan with Citibank.
Please note that the captioned two placements are continuously pledged/hypothecated to Citibank,
Manila to support my personal outstanding loan. Therefore, please do not release the captioned
placements upon maturity until you have received the instruction from Citibank, Manila.
On even date, respondent sent another letter67 to Mr. Tan of petitioner Citibank, stating that –
Re: S/A No. 25-225928
and C/A No. 484-946
This letter serves as an authority to debit whatever the outstanding balance from my captioned
accounts and credit the amount to my loan outstanding account with you.
Unlike respondent's earlier letters, both letters, dated 21 June 1979, are printed on plain paper, without the
letterhead of her company, MC Adore International Palace.
By 5 September 1979, respondent's outstanding and past due obligations to petitioner Citibank totaled
₱2,123,843.20, representing the principal amounts plus interests. Relying on respondent's Deeds of
Assignment, petitioner Citibank applied the proceeds of respondent's money market placements with
93
petitioner FNCB Finance, as well as her deposit account with petitioner Citibank, to partly liquidate
respondent's outstanding loan balance,68 as follows –
Respondent's outstanding obligation (principal and interest) ₱ 2,123,843.20
Less: Proceeds from respondent's money market placements
with petitioner FNCB Finance (principal and interest) (1,022,916.66)
Deposits in respondent's bank accounts with petitioner
Citibank (31,079.14)
Balance of respondent's obligation ₱ 1,069,847.40
Mr. Tan of petitioner Citibank subsequently sent a letter,69 dated 28 September 1979, notifying respondent
of the status of her loans and the foregoing compensation which petitioner Citibank effected. In the letter,
Mr. Tan informed respondent that she still had a remaining past-due obligation in the amount of
₱1,069,847.40, as of 5 September 1979, and should respondent fail to pay the amount by 15 October 1979,
then petitioner Citibank shall proceed to off-set the unpaid amount with respondent's other collateral,
particularly, a money market placement in Citibank-Hongkong.
On 5 October 1979, respondent wrote Mr. Tan of petitioner Citibank, on paper bearing the letterhead of MC
Adore International Palace, as regards the ₱1,920,000.00 loan account supposedly of MC Adore Finance &
Investment, Inc., and requested for a statement of account covering the principal and interest of the loan as
of 31 October 1979. She stated therein that the loan obligation shall be paid within 60 days from receipt of
the statement of account.
Almost three weeks later, or on 25 October 1979, a certain Atty. Moises Tolentino dropped by the office of
petitioner Citibank, with a letter, dated 9 October 1979, and printed on paper with the letterhead of MC
Adore International Palace, which authorized the bearer thereof to represent the respondent in settling the
overdue account, this time, purportedly, of MC Adore International Palace Hotel. The letter was signed by
respondent as the President and Chairman of the Board.
Eventually, Atty. Antonio Agcaoili of Agcaoili & Associates, as counsel of petitioner Citibank, sent a letter to
respondent, dated 31 October 1979, informing her that petitioner Citibank had effected an off-set using her
account with Citibank-Geneva, in the amount of US$149,632.99, against her "outstanding, overdue,
demandable and unpaid obligation" to petitioner Citibank. Atty. Agcaoili claimed therein that the
compensation or off-set was made pursuant to and in accordance with the provisions of Articles 1278
through 1290 of the Civil Code. He further declared that respondent's obligation to petitioner Citibank was
now fully paid and liquidated.
Unfortunately, on 7 October 1987, a fire gutted the 7th floor of petitioner Citibank's building at Paseo de
Roxas St., Makati, Metro Manila. Petitioners submitted a Certification70 to this effect, dated 17 January 1991,
issued by the Chief of the Arson Investigation Section, Fire District III, Makati Fire Station, Metropolitan
Police Force. The 7th floor of petitioner Citibank's building housed its Control Division, which was in charge of
keeping the necessary documents for cases in which it was involved. After compiling the documentary
evidence for the present case, Atty. Renato J. Fernandez, internal legal counsel of petitioner Citibank,
forwarded them to the Control Division. The original copies of the MCs, which supposedly represent the
proceeds of the first set of PNs, as well as that of other documentary evidence related to the case, were
among those burned in the said fire.71

Respondent's version of events
Respondent disputed petitioners' narration of the circumstances surrounding her loans with petitioner
Citibank and the alleged authority she gave for the off-set or compensation of her money market placements
and deposit accounts with petitioners against her loan obligation.
Respondent denied outright executing the first set of PNs, except for one (PN No. 34534 in particular).
Although she admitted that she obtained several loans from petitioner Citibank, these only amounted to
₱1,150,000.00, and she had already paid them. She secured from petitioner Citibank two loans of
₱500,000.00 each. She executed in favor of petitioner Citibank the corresponding PNs for the loans and the
Deeds of Assignment of her money market placements with petitioner FNCB Finance as security.72 To prove
payment of these loans, respondent presented two provisional receipts of petitioner Citibank – No.
19471,73 dated 11 August 1978, and No. 12723,74 dated 10 November 1978 – both signed by Mr. Tan, and
acknowledging receipt from respondent of several checks in the total amount of ₱500,744.00 and
₱500,000.00, respectively, for "liquidation of loan."
She borrowed another ₱150,000.00 from petitioner Citibank for personal investment, and for which she
executed PN No. 34534, on 9 January 1979. Thus, she admitted to receiving the proceeds of this loan via MC
No. 228270. She invested the loan amount in another money market placement with petitioner FNCB
Finance. In turn, she used the very same money market placement with petitioner FNCB Finance as security
for her ₱150,000.00 loan from petitioner Citibank. When she failed to pay the loan when it became due,
petitioner Citibank allegedly forfeited her money market placement with petitioner FNCB Finance and, thus,
the loan was already paid.75
Respondent likewise questioned the MCs presented by petitioners, except for one (MC No. 228270 in
particular), as proof that she received the proceeds of the loans covered by the first set of PNs. As recounted
in the preceding paragraph, respondent admitted to obtaining a loan of ₱150,000.00, covered by PN No.
34534, and receiving MC No. 228270 representing the proceeds thereof, but claimed that she already paid
the same. She denied ever receiving MCs No. 220701 (for the loan of ₱400,000.00, covered by PN No.
33935) and No. 226467 (for the loan of ₱250,000.00, covered by PN No. 34079), and pointed out that the
checks did not bear her indorsements. She did not deny receiving all other checks but she interposed that
she received these checks, not as proceeds of loans, but as payment of the principal amounts and/or
interests from her money market placements with petitioner Citibank. She also raised doubts as to the
notation on each of the checks that reads "RE: Proceeds of PN#[corresponding PN No.]," saying that such
notation did not appear on the MCs when she originally received them and that the notation appears to have
been written by a typewriter different from that used in writing all other information on the checks (i.e.,
date, payee, and amount).76 She even testified that MCs were not supposed to bear notations indicating the
purpose for which they were issued.
As to the second set of PNs, respondent acknowledged having signed them all. However, she asserted that
she only executed these PNs as part of the simulated loans she and Mr. Tan of petitioner Citibank concocted.
Respondent explained that she had a pending loan application for a big amount with the Development Bank
of the Philippines (DBP), and when Mr. Tan found out about this, he suggested that they could make it
appear that the respondent had outstanding loans with petitioner Citibank and the latter was already
demanding payment thereof; this might persuade DBP to approve respondent's loan application. Mr. Tan
made the respondent sign the second set of PNs, so that he may have something to show the DBP
investigator who might inquire with petitioner Citibank as to respondent's loans with the latter. On her own
copies of the said PNs, respondent wrote by hand the notation, "This isa (sic) simulated non-negotiable note,
signed copy given to Mr. Tan., (sic) per agreement to be shown to DBP representative. itwill (sic) be
returned to me if the ₱11=M (sic) loan for MC Adore Palace Hotel is approved by DBP."77
94
94
Findings of this Court as to the existence of the loans
After going through the testimonial and documentary evidence presented by both sides to this case, it is this
Court's assessment that respondent did indeed have outstanding loans with petitioner Citibank at the time it
effected the off-set or compensation on 25 July 1979 (using respondent's savings deposit with petitioner
Citibank), 5 September 1979 (using the proceeds of respondent's money market placements with petitioner
FNCB Finance) and 26 October 1979 (using respondent's dollar accounts remitted from Citibank-Geneva).
The totality of petitioners' evidence as to the existence of the said loans preponderates over respondent's.
Preponderant evidence means that, as a whole, the evidence adduced by one side outweighs that of the
adverse party.78
Respondent's outstanding obligation for ₱1,920,000.00 had been sufficiently documented by petitioner
Citibank.
The second set of PNs is a mere renewal of the prior loans originally covered by the first set of PNs, except
for PN No. 34534. The first set of PNs is supported, in turn, by the existence of the MCs that represent the
proceeds thereof received by the respondent.
It bears to emphasize that the proceeds of the loans were paid to respondent in MCs, with the respondent
specifically named as payee. MCs checks are drawn by the bank's manager upon the bank itself and
regarded to be as good as the money it represents.79 Moreover, the MCs were crossed checks, with the
words "Payee's Account Only."
In general, a crossed check cannot be presented to the drawee bank for payment in cash. Instead, the check
can only be deposited with the payee's bank which, in turn, must present it for payment against the drawee
bank in the course of normal banking hours. The crossed check cannot be presented for payment, but it can
only be deposited and the drawee bank may only pay to another bank in the payee's or indorser's
account.80 The effect of crossing a check was described by this Court in Philippine Commercial International
Bank v. Court of Appeals81 –
[T]he crossing of a check with the phrase "Payee's Account Only" is a warning that the check
should be deposited in the account of the payee. Thus, it is the duty of the collecting bank PCI
Bank to ascertain that the check be deposited in payee's account only. It is bound to scrutinize the
check and to know its depositors before it can make the clearing indorsement "all prior
indorsements and/or lack of indorsement guaranteed."
The crossed MCs presented by petitioner Bank were indeed deposited in several different bank accounts and
cleared by the Clearing Office of the Central Bank of the Philippines, as evidenced by the stamp marks and
notations on the said checks. The crossed MCs are already in the possession of petitioner Citibank, the
drawee bank, which was ultimately responsible for the payment of the amount stated in the checks. Given
that a check is more than just an instrument of credit used in commercial transactions for it also serves as a
receipt or evidence for the drawee bank of the cancellation of the said check due to payment,82 then, the
possession by petitioner Citibank of the said MCs, duly stamped "Paid" gives rise to the presumption that the
said MCs were already paid out to the intended payee, who was in this case, the respondent.
This Court finds applicable herein the presumptions that private transactions have been fair and
regular,83 and that the ordinary course of business has been followed.84 There is no question that the loan
transaction between petitioner Citibank and the respondent is a private transaction. The transactions
revolving around the crossed MCs – from their issuance by petitioner Citibank to respondent as payment of
the proceeds of her loans; to its deposit in respondent's accounts with several different banks; to the
clearing of the MCs by an independent clearing house; and finally, to the payment of the MCs by petitioner
Citibank as the drawee bank of the said checks – are all private transactions which shall be presumed to
have been fair and regular to all the parties concerned. In addition, the banks involved in the foregoing
transactions are also presumed to have followed the ordinary course of business in the acceptance of the
crossed MCs for deposit in respondent's accounts, submitting them for clearing, and their eventual payment
and cancellation.
The afore-stated presumptions are disputable, meaning, they are satisfactory if uncontradicted, but may be
contradicted and overcome by other evidence.85 Respondent, however, was unable to present sufficient and
credible evidence to dispute these presumptions.
It should be recalled that out of the nine MCs presented by petitioner Citibank, respondent admitted to
receiving one as proceeds of a loan (MC No. 228270), denied receiving two (MCs No. 220701 and 226467),
and admitted to receiving all the rest, but not as proceeds of her loans, but as return on the principal
amounts and interests from her money market placements.
Respondent admitted receiving MC No. 228270 representing the proceeds of her loan covered by PN No.
34534. Although the principal amount of the loan is ₱150,000.00, respondent only received ₱146,312.50,
because the interest and handling fee on the loan transaction were already deducted therefrom.86 Stamps
and notations at the back of MC No. 228270 reveal that it was deposited at the Bank of the Philippine Islands
(BPI), Cubao Branch, in Account No. 0123-0572-28.87 The check also bore the signature of respondent at the
back.88 And, although respondent would later admit that she did sign PN No. 34534 and received MC No.
228270 as proceeds of the loan extended to her by petitioner Citibank, she contradicted herself when, in an
earlier testimony, she claimed that PN No. 34534 was among the PNs she executed as simulated loans with
petitioner Citibank.89
Respondent denied ever receiving MCs No. 220701 and 226467. However, considering that the said checks
were crossed for payee's account only, and that they were actually deposited, cleared, and paid, then the
presumption would be that the said checks were properly deposited to the account of respondent, who was
clearly named the payee in the checks. Respondent's bare allegations that she did not receive the two
checks fail to convince this Court, for to sustain her, would be for this Court to conclude that an irregularity
had occurred somewhere from the time of the issuance of the said checks, to their deposit, clearance, and
payment, and which would have involved not only petitioner Citibank, but also BPI, which accepted the
checks for deposit, and the Central Bank of the Philippines, which cleared the checks. It falls upon the
respondent to overcome or dispute the presumption that the crossed checks were issued, accepted for
deposit, cleared, and paid for by the banks involved following the ordinary course of their business.
The mere fact that MCs No. 220701 and 226467 do not bear respondent's signature at the back does not
negate deposit thereof in her account. The liability for the lack of indorsement on the MCs no longer fall on
petitioner Citibank, but on the bank who received the same for deposit, in this case, BPI Cubao Branch. Once
again, it must be noted that the MCs were crossed, for payee's account only, and the payee named in both
checks was none other than respondent. The crossing of the MCs was already a warning to BPI to receive
said checks for deposit only in respondent's account. It was up to BPI to verify whether it was receiving the
crossed MCs in accordance with the instructions on the face thereof. If, indeed, the MCs were deposited in
accounts other than respondent's, then the respondent would have a cause of action against BPI.90
BPI further stamped its guarantee on the back of the checks to the effect that, "All prior endorsement and/or
Lack of endorsement guaranteed." Thus, BPI became the indorser of the MCs, and assumed all the
warranties of an indorser,91 specifically, that the checks were genuine and in all respects what they
purported to be; that it had a good title to the checks; that all prior parties had capacity to contract; and
that the checks were, at the time of their indorsement, valid and subsisting.92 So even if the MCs deposited
95
by BPI's client, whether it be by respondent herself or some other person, lacked the necessary
indorsement, BPI, as the collecting bank, is bound by its warranties as an indorser and cannot set up the
defense of lack of indorsement as against petitioner Citibank, the drawee bank.93
Furthermore, respondent's bare and unsubstantiated denial of receipt of the MCs in question and their
deposit in her account is rendered suspect when MC No. 220701 was actually deposited in Account No.
0123-0572-28 of BPI Cubao Branch, the very same account in which MC No. 228270 (which respondent
admitted to receiving as proceeds of her loan from petitioner Citibank), and MCs No. 228203, 228357, and
228400 (which respondent admitted to receiving as proceeds from her money market placements) were
deposited. Likewise, MC No. 226467 was deposited in Account No. 0121-002-43 of BPI Cubao Branch, to
which MCs No. 226285 and 226439 (which respondent admitted to receiving as proceeds from her money
market placements) were deposited. It is an apparent contradiction for respondent to claim having received
the proceeds of checks deposited in an account, and then deny receiving the proceeds of another check
deposited in the very same account.
Another inconsistency in respondent's denial of receipt of MC No. 226467 and her deposit of the same in her
account, is her presentation of Exhibit "HHH," a provisional receipt which was supposed to prove that
respondent turned over ₱500,000.00 to Mr. Tan of petitioner Citibank, that the said amount was split into
three money market placements, and that MC No. 226467 represented the return on her investment from
one of these placements.94 Because of her Exhibit "HHH," respondent effectively admitted receipt of MC No.
226467, although for reasons other than as proceeds of a loan.
Neither can this Court give credence to respondent's contention that the notations on the MCs, stating that
they were the proceeds of particular PNs, were not there when she received the checks and that the
notations appeared to be written by a typewriter different from that used to write the other information on
the checks. Once more, respondent's allegations were uncorroborated by any other evidence. Her and her
counsel's observation that the notations on the MCs appear to be written by a typewriter different from that
used to write the other information on the checks hardly convinces this Court considering that it constitutes
a mere opinion on the appearance of the notation by a witness who does not possess the necessary
expertise on the matter. In addition, the notations on the MCs were written using both capital and small
letters, while the other information on the checks were written using capital letters only, such difference
could easily confuse an untrained eye and lead to a hasty conclusion that they were written by different
typewriters.
Respondent's testimony, that based on her experience transacting with banks, the MCs were not supposed
to include notations on the purpose for which the checks were issued, also deserves scant consideration.
While respondent may have extensive experience dealing with banks, it still does not qualify her as a
competent witness on banking procedures and practices. Her testimony on this matter is even belied by the
fact that the other MCs issued by petitioner Citibank (when it was still named First National City Bank) and
by petitioner FNCB Finance, the existence and validity of which were not disputed by respondent, also bear
similar notations that state the reason for which they were issued.
Respondent presented several more pieces of evidence to substantiate her claim that she received MCs No.
226285, 226439, 226467, 226057, 228357, and 228400, not as proceeds of her loans from petitioner
Citibank, but as the return of the principal amounts and payment of interests from her money market
placements with petitioners. Part of respondent's exhibits were personal checks95 drawn by respondent on
her account with Feati Bank & Trust Co., which she allegedly invested in separate money market placements
with both petitioners, the returns from which were paid to her via MCs No. 226285 and 228400. Yet, to this
Court, the personal checks only managed to establish respondent's issuance thereof, but there was nothing
on the face of the checks that would reveal the purpose for which they were issued and that they were
actually invested in money market placements as respondent claimed.

Respondent further submitted handwritten notes that purportedly computed and presented the returns on
her money market placements, corresponding to the amount stated in the MCs she received from petitioner
Citibank. Exhibit "HHH-1"96 was a handwritten note, which respondent attributed to Mr. Tan of petitioner
Citibank, showing the breakdown of her BPI Check for ₱500,000.00 into three different money market
placements with petitioner Citibank. This Court, however, noticed several factors which render the note
highly suspect. One, it was written on the reversed side of Provisional Receipt No. 12724 of petitioner
Citibank which bore the initials of Mr. Tan acknowledging receipt of respondent's BPI Check No. 120989 for
₱500,000.00; but the initials on the handwritten note appeared to be that of Mr. Bobby Mendoza of
petitioner FNCB Finance.97 Second, according to Provisional Receipt No. 12724, BPI Check No. 120989 for
₱500,000.00 was supposed to be invested in three money market placements with petitioner Citibank for the
period of 60 days. Since all these money market placements were made through one check deposited on the
same day, 10 November 1978, it made no sense that the handwritten note at the back of Provisional Receipt
No. 12724 provided for different dates of maturity for each of the money market placements (i.e., 16
November 1978, 17 January 1979, and 21 November 1978), and such dates did not correspond to the 60
day placement period stated on the face of the provisional receipt. And third, the principal amounts of the
money market placements as stated in the handwritten note – ₱145,000.00, ₱145,000.00 and ₱242,000.00
– totaled ₱532,000.00, and was obviously in excess of the ₱500,000.00 acknowledged on the face of
Provisional Receipt No. 12724.
Exhibits "III" and "III-1," the front and bank pages of a handwritten note of Mr. Bobby Mendoza of petitioner
FNCB Finance,98 also did not deserve much evidentiary weight, and this Court cannot rely on the truth and
accuracy of the computations presented therein. Mr. Mendoza was not presented as a witness during the
trial before the RTC, so that the document was not properly authenticated nor its contents sufficiently
explained. No one was able to competently identify whether the initials as appearing on the note were
actually Mr. Mendoza's.
Also, going by the information on the front page of the note, this Court observes that payment of
respondent's alleged money market placements with petitioner FNCB Finance were made using Citytrust
Checks; the MCs in question, including MC No. 228057, were issued by petitioner Citibank. Although
Citytrust (formerly Feati Bank & Trust Co.), petitioner FNCB Finance, and petitioner Citibank may be affiliates
of one another, they each remained separate and distinct corporations, each having its own financial system
and records. Thus, this Court cannot simply assume that one corporation, such as petitioner Citibank or
Citytrust, can issue a check to discharge an obligation of petitioner FNCB Finance. It should be recalled that
when petitioner FNCB Finance paid for respondent's money market placements, covered by its PNs No. 8167
and 8169, as well as PNs No. 20138 and 20139, petitioner FNCB Finance issued its own checks.
As a last point on this matter, if respondent truly had money market placements with petitioners, then these
would have been evidenced by PNs issued by either petitioner Citibank or petitioner FNCB Finance,
acknowledging the principal amounts of the investments, and stating the applicable interest rates, as well as
the dates of their of issuance and maturity. After respondent had so meticulously reconstructed her other
money market placements with petitioners and consolidated the documentary evidence thereon, she came
surprisingly short of offering similar details and substantiation for these particular money market
placements.
Since this Court is satisfied that respondent indeed received the proceeds of the first set of PNs, then it
proceeds to analyze her evidence of payment thereof.
In support of respondent's assertion that she had already paid whatever loans she may have had with
petitioner Citibank, she presented as evidence Provisional Receipts No. 19471, dated 11 August 1978, and
No. 12723, dated 10 November 1978, both of petitioner Citibank and signed by Mr. Tan, for the amounts of
₱500,744.00 and ₱500,000.00, respectively. While these provisional receipts did state that Mr. Tan, on
96
96
behalf of petitioner Citibank, received respondent's checks as payment for her loans, they failed to
specifically identify which loans were actually paid. Petitioner Citibank was able to present evidence that
respondent had executed several PNs in the years 1978 and 1979 to cover the loans she secured from the
said bank. Petitioner Citibank did admit that respondent was able to pay for some of these PNs, and what it
identified as the first and second sets of PNs were only those which remained unpaid. It thus became
incumbent upon respondent to prove that the checks received by Mr. Tan were actually applied to the PNs in
either the first or second set; a fact that, unfortunately, cannot be determined from the provisional receipts
submitted by respondent since they only generally stated that the checks received by Mr. Tan were payment
for respondent's loans.
Mr. Tan, in his deposition, further explained that provisional receipts were issued when payment to the bank
was made using checks, since the checks would still be subject to clearing. The purpose for the provisional
receipts was merely to acknowledge the delivery of the checks to the possession of the bank, but not yet of
payment.99 This bank practice finds legitimacy in the pronouncement of this Court that a check, whether an
MC or an ordinary check, is not legal tender and, therefore, cannot constitute valid tender of payment.
In Philippine Airlines, Inc. v. Court of Appeals, 100 this Court elucidated that:
Since a negotiable instrument is only a substitute for money and not money, the delivery of such
an instrument does not, by itself, operate as payment (Sec. 189, Act 2031 on Negs. Insts.; Art.
1249, Civil Code; Bryan Landon Co. v. American Bank, 7 Phil. 255; Tan Sunco, v. Santos, 9 Phil.
44; 21 R.C.L. 60, 61). A check, whether a manager's check or ordinary check, is not legal tender,
and an offer of a check in payment of a debt is not a valid tender of payment and may be refused
receipt by the obligee or creditor. Mere delivery of checks does not discharge the obligation under a
judgment. The obligation is not extinguished and remains suspended until the payment by
commercial document is actually realized (Art. 1249, Civil Code, par. 3).
In the case at bar, the issuance of an official receipt by petitioner Citibank would have been dependent on
whether the checks delivered by respondent were actually cleared and paid for by the drawee banks.
As for PN No. 34534, respondent asserted payment thereof at two separate instances by two different
means. In her formal offer of exhibits, respondent submitted a deposit slip of petitioner Citibank, dated 11
August 1978, evidencing the deposit of BPI Check No. 5785 for ₱150,000.00.101 In her Formal Offer of
Documentary Exhibits, dated 7 July 1989, respondent stated that the purpose for the presentation of the
said deposit slip was to prove that she already paid her loan covered by PN No. 34534.102 In her testimony
before the RTC three years later, on 28 November 1991, she changed her story. This time she narrated that
the loan covered by PN No. 34534 was secured by her money market placement with petitioner FNCB
Finance, and when she failed to pay the said PN when it became due, the security was applied to the loan,
therefore, the loan was considered paid.103 Given the foregoing, respondent's assertion of payment of PN No.
34534 is extremely dubious.
According to petitioner Citibank, the PNs in the second set, except for PN No. 34534, were mere renewals of
the unpaid PNs in the first set, which was why the PNs stated that they were for the purpose of liquidating
existing obligations. PN No. 34534, however, which was part of the first set, was still valid and subsisting
and so it was included in the second set without need for its renewal, and it still being the original PN for
that particular loan, its stated purpose was for personal investment.104 Respondent essentially admitted
executing the second set of PNs, but they were only meant to cover simulated loans. Mr. Tan supposedly
convinced her that her pending loan application with DBP would have a greater chance of being approved if
they made it appear that respondent urgently needed the money because petitioner Citibank was already
demanding payment for her simulated loans.
Respondent's defense of simulated loans to escape liability for the second set of PNs is truly a novel random comparison of the contents of the microfilms with the original documents; a random review of the
one.1âwphi1 It is regrettable, however, that she was unable to substantiate the same. Yet again, contents is done on every role of microfilm.108
respondent's version of events is totally based on her own uncorroborated testimony. The notations on the
second set of PNs, that they were non-negotiable simulated notes, were admittedly made by respondent
Ms. Renee Rubio worked for petitioner Citibank for 20 years. She rose from the ranks, initially working as a
herself and were, thus, self-serving. Equally self-serving was respondent's letter, written on 7 October 1985,
secretary in the Personnel Group; then as a secretary to the Personnel Group Head; a Service Assistant with
or more than six years after the execution of the second set of PNs, in which she demanded return of the
the Marketing Group, in 1972 to 1974, dealing directly with corporate and individual clients who, among
simulated or fictitious PNs, together with the letters relating thereto, which Mr. Tan purportedly asked her to
other things, secured loans from petitioner Citibank; the Head of the Collection Group of the Foreign
execute. Respondent further failed to present any proof of her alleged loan application with the DBP, and of
Department in 1974 to 1976; the Head of the Money Transfer Unit in 1976 to 1978; the Head of the Loans
any circumstance or correspondence wherein the simulated or fictitious PNs were indeed used for their
and Placements Unit up to the early 1980s; and, thereafter, she established operations training for petitioner
supposed purpose.
Citibank in the Asia-Pacific Region responsible for the training of the officers of the bank. She testified on the
standard loan application process at petitioner Citibank. According to Ms. Rubio, the account officer or
In contrast, petitioner Citibank, as supported by the testimonies of its officers and available documentation, marketing person submits a proposal to grant a loan to an individual or corporation. Petitioner Citibank has a
consistently treated the said PNs as regular loans – accepted, approved, and paid in the ordinary course of worldwide policy that requires a credit committee, composed of a minimum of three people, which would
its business. approve the loan and amount thereof. There can be no instance when only one officer has the power to
approve the loan application. When the loan is approved, the account officer in charge will obtain the
corresponding PNs from the client. The PNs are sent to the signature verifier who would validate the
The PNs executed by the respondent in favor of petitioner Citibank to cover her loans were duly-filled out
signatures therein against those appearing in the signature cards previously submitted by the client to the
and signed, including the disclosure statement found at the back of the said PNs, in adherence to the Central
bank. The Operations Unit will check and review the documents, including the PNs, if it is a clean loan, and
Bank requirement to disclose the full finance charges to a loan granted to borrowers.
securities and deposits, if it is collateralized. The loan is then recorded in the General Ledger. The Loans and
Placements Department will not book the loans without the PNs. When the PNs are liquidated, whether they
Mr. Tan, then an account officer with the Marketing Department of petitioner Citibank, testified that he dealt are paid or rolled-over, they are returned to the client.109 Ms. Rubio further explained that she was familiar
directly with respondent; he facilitated the loans; and the PNs, at least in the second set, were signed by with respondent's accounts since, while she was still the Head of the Loan and Placements Unit, she was
respondent in his presence.105 asked by Mr. Tan to prepare a list of respondent's outstanding obligations.110 She thus calculated
respondent's outstanding loans, which was sent as an attachment to Mr. Tan's letter to respondent, dated 28
September 1979, and presented before the RTC as Exhibits "34-B" and "34-C."111
Mr. Pujeda, the officer who was previously in charge of loans and placements, confirmed that the signatures
on the PNs were verified against respondent's specimen signature with the bank.106
Lastly, the exchange of letters between petitioner Citibank and respondent, as well as the letters sent by
other people working for respondent, had consistently recognized that respondent owed petitioner Citibank
Ms. Cristina Dondoyano, who worked at petitioner Citibank as a loan processor, was responsible for booking money.
respondent's loans. Booking the loans means recording it in the General Ledger. She explained the
procedure for booking loans, as follows: The account officer, in the Marketing Department, deals directly
with the clients who wish to borrow money from petitioner Citibank. The Marketing Department will forward In consideration of the foregoing discussion, this Court finds that the preponderance of evidence supports
a loan booking checklist, together with the borrowing client's PNs and other supporting documents, to the the existence of the respondent's loans, in the principal sum of ₱1,920,000.00, as of 5 September 1979.
loan pre-processor, who will check whether the details in the loan booking checklist are the same as those in While it is well-settled that the term "preponderance of evidence" should not be wholly dependent on the
the PNs. The documents are then sent to Signature Control for verification of the client's signature in the number of witnesses, there are certain instances when the number of witnesses become the determining
PNs, after which, they are returned to the loan pre-processor, to be forwarded finally to the loan processor. factor –
The loan processor shall book the loan in the General Ledger, indicating therein the client name, loan
amount, interest rate, maturity date, and the corresponding PN number. Since she booked respondent's
The preponderance of evidence may be determined, under certain conditions, by the number of
loans personally, Ms. Dondoyano testified that she saw the original PNs. In 1986, Atty. Fernandez of
witnesses testifying to a particular fact or state of facts. For instance, one or two witnesses may
petitioner Citibank requested her to prepare an accounting of respondent's loans, which she did, and which
testify to a given state of facts, and six or seven witnesses of equal candor, fairness, intelligence,
was presented as Exhibit "120" for the petitioners. The figures from the said exhibit were culled from the
and truthfulness, and equally well corroborated by all the remaining evidence, who have no greater
bookings in the General Ledger, a fact which respondent's counsel was even willing to stipulate.107
interest in the result of the suit, testify against such state of facts. Then the preponderance of
evidence is determined by the number of witnesses. (Wilcox vs. Hines, 100 Tenn. 524, 66 Am. St.
Ms. Teresita Glorioso was an Investigation and Reconcilement Clerk at the Control Department of petitioner Rep., 761.)112
Citibank. She was presented by petitioner Citibank to expound on the microfilming procedure at the bank,
since most of the copies of the PNs were retrieved from microfilm. Microfilming of the documents are actually
done by people at the Operations Department. At the end of the day or during the day, the original copies of
all bank documents, not just those pertaining to loans, are microfilmed. She refuted the possibility that
insertions could be made in the microfilm because the microfilm is inserted in a cassette; the cassette is
placed in the microfilm machine for use; at the end of the day, the cassette is taken out of the microfilm
machine and put in a safe vault; and the cassette is returned to the machine only the following day for use,
Best evidence rule
until the spool is full. This is the microfilming procedure followed everyday. When the microfilm spool is
already full, the microfilm is developed, then sent to the Control Department, which double checks the
contents of the microfilms against the entries in the General Ledger. The Control Department also conducts a

97

This Court disagrees in the pronouncement made by the Court of Appeals summarily dismissing the
documentary evidence submitted by petitioners based on its broad and indiscriminate application of the best
evidence rule.
In general, the best evidence rule requires that the highest available degree of proof must be produced.
Accordingly, for documentary evidence, the contents of a document are best proved by the production of the
document itself,113 to the exclusion of any secondary or substitutionary evidence.114
The best evidence rule has been made part of the revised Rules of Court, Rule 130, Section 3, which reads –
SEC. 3. Original document must be produced; exceptions. – When the subject of inquiry is the
contents of a document, no evidence shall be admissible other than the original document itself,
except in the following cases:
(a) When the original has been lost or destroyed, or cannot be produced in court, without
bad faith on the part of the offeror;
(b) When the original is in the custody or under the control of the party against whom the
evidence is offered, and the latter fails to produce it after reasonable notice;
(c) When the original consists of numerous accounts or other documents which cannot be
examined in court without great loss of time and the fact sought to be established from
them is only the general result of the whole; and
(d) When the original is a public record in the custody of a public officer or is recorded in
a public office.
As the afore-quoted provision states, the best evidence rule applies only when the subject of the inquiry is
the contents of the document. The scope of the rule is more extensively explained thus –
But even with respect to documentary evidence, the best evidence rule applies only when
the content of such document is the subject of the inquiry. Where the issue is only as to whether
such document was actually executed, or exists, or on the circumstances relevant to or
surrounding its execution, the best evidence rule does not apply and testimonial evidence is
admissible (5 Moran, op. cit., pp. 76-66; 4 Martin, op. cit., p. 78). Any other substitutionary
evidence is likewise admissible without need for accounting for the original.
Thus, when a document is presented to prove its existence or condition it is offered not as
documentary, but as real, evidence. Parol evidence of the fact of execution of the documents is
allowed (Hernaez, et al. vs. McGrath, etc., et al., 91 Phil 565). x x x 115
In Estrada v. Desierto,116 this Court had occasion to rule that –
It is true that the Court relied not upon the original but only copy of the Angara Diary as published
in the Philippine Daily Inquirer on February 4-6, 2001. In doing so, the Court, did not, however,
violate the best evidence rule. Wigmore, in his book on evidence, states that:
98
98
"Production of the original may be dispensed with, in the trial court's discretion, whenever in the
case in hand the opponent does not bona fide dispute the contents of the document and no other
useful purpose will be served by requiring production.24
"x x x x
"In several Canadian provinces, the principle of unavailability has been abandoned, for certain
documents in which ordinarily no real dispute arised. This measure is a sensible and progressive
one and deserves universal adoption (post, sec. 1233). Its essential feature is that a copy may be
used unconditionally, if the opponent has been given an opportunity to inspect it." (Emphasis
supplied.)
This Court did not violate the best evidence rule when it considered and weighed in evidence the photocopies
and microfilm copies of the PNs, MCs, and letters submitted by the petitioners to establish the existence of
respondent's loans. The terms or contents of these documents were never the point of contention in the
Petition at bar. It was respondent's position that the PNs in the first set (with the exception of PN No. 34534)
never existed, while the PNs in the second set (again, excluding PN No. 34534) were merely executed to
cover simulated loan transactions. As for the MCs representing the proceeds of the loans, the respondent
either denied receipt of certain MCs or admitted receipt of the other MCs but for another purpose.
Respondent further admitted the letters she wrote personally or through her representatives to Mr. Tan of
petitioner Citibank acknowledging the loans, except that she claimed that these letters were just meant to
keep up the ruse of the simulated loans. Thus, respondent questioned the documents as to their existence or
execution, or when the former is admitted, as to the purpose for which the documents were executed,
matters which are, undoubtedly, external to the documents, and which had nothing to do with the contents
thereof.
Alternatively, even if it is granted that the best evidence rule should apply to the evidence presented by
petitioners regarding the existence of respondent's loans, it should be borne in mind that the rule admits of
the following exceptions under Rule 130, Section 5 of the revised Rules of Court –
SEC. 5. When the original document is unavailable. – When the original document has been lost or
destroyed, or cannot be produced in court, the offeror, upon proof of its execution or existence and
the cause of its unavailability without bad faith on his part, may prove its contents by a copy, or by
a recital of its contents in some authentic document, or by the testimony of witnesses in the order
stated.
The execution or existence of the original copies of the documents was established through the testimonies
of witnesses, such as Mr. Tan, before whom most of the documents were personally executed by
respondent. The original PNs also went through the whole loan booking system of petitioner Citibank – from
the account officer in its Marketing Department, to the pre-processor, to the signature verifier, back to the
pre-processor, then to the processor for booking.117 The original PNs were seen by Ms. Dondoyano, the
processor, who recorded them in the General Ledger. Mr. Pujeda personally saw the original MCs, proving
respondent's receipt of the proceeds of her loans from petitioner Citibank, when he helped Attys. Cleofe and
Fernandez, the bank's legal counsels, to reconstruct the records of respondent's loans. The original MCs were
presented to Atty. Cleofe who used the same during the preliminary investigation of the case, sometime in
years 1986-1987. The original MCs were subsequently turned over to the Control and Investigation Division
of petitioner Citibank.118
It was only petitioner FNCB Finance who claimed that they lost the original copies of the PNs when it moved
to a new office. Citibank did not make a similar contention; instead, it explained that the original copies of
the PNs were returned to the borrower upon liquidation of the loan, either through payment or roll-over.
Petitioner Citibank proffered the excuse that they were still looking for the documents in their storage or
warehouse to explain the delay and difficulty in the retrieval thereof, but not their absence or loss. The
original documents in this case, such as the MCs and letters, were destroyed and, thus, unavailable for
presentation before the RTC only on 7 October 1987, when a fire broke out on the 7th floor of the office
building of petitioner Citibank. There is no showing that the fire was intentionally set. The fire destroyed
relevant documents, not just of the present case, but also of other cases, since the 7th floor housed the
Control and Investigation Division, in charge of keeping the necessary documents for cases in which
petitioner Citibank was involved.
The foregoing would have been sufficient to allow the presentation of photocopies or microfilm copies of the
PNs, MCs, and letters by the petitioners as secondary evidence to establish the existence of respondent's
loans, as an exception to the best evidence rule.
The impact of the Decision of the Court of Appeals in the Dy case
In its assailed Decision, the Court of Appeals made the following pronouncement –
Besides, We find the declaration and conclusions of this Court in CA-G.R. CV No.
15934 entitled Sps. Dr. Ricardo L. Dy and Rosalind O. Dy vs. City Bank, N.A., et al, promulgated
on 15 January 1990, as disturbing taking into consideration the similarities of the fraud,
machinations, and deceits employed by the defendant-appellant Citibank and its Account Manager
Francisco Tan.
Worthy of note is the fact that Our declarations and conclusions against Citibank and the person of
Francisco Tan in CA-G.R. CV No. 15934 were affirmed in toto by the Highest Magistrate in
a Minute Resolution dated 22 August 1990 entitled Citibank, N.A., vs. Court of Appeals, G.R.
93350.
As the factual milieu of the present appeal created reasonable doubts as to whether the nine (9)
Promissory Notes were indeed executed with considerations, the doubts, coupled by the findings
and conclusions of this Court in CA-G.R. CV No. 15934 and the Supreme Court in G.R. No.
93350. should be construed against herein defendants-appellants Citibank and FNCB Finance.
What this Court truly finds disturbing is the significance given by the Court of Appeals in its assailed Decision
to the Decision119 of its Third Division in CA-G.R. CV No. 15934 (or the Dy case), when there is an absolute
lack of legal basis for doing such.
Although petitioner Citibank and its officer, Mr. Tan, were also involved in the Dy case, that is about the only
connection between the Dy case and the one at bar. Not only did the Dy case tackle transactions between
parties other than the parties presently before this Court, but the transactions are absolutely independent
and unrelated to those in the instant Petition.
In the Dy case, Severino Chua Caedo managed to obtain loans from herein petitioner Citibank amounting to
₱7,000,000.00, secured to the extent of ₱5,000,000.00 by a Third Party Real Estate Mortgage of the
properties of Caedo's aunt, Rosalind Dy. It turned out that Rosalind Dy and her husband were unaware of
the said loans and the mortgage of their properties. The transactions were carried out exclusively between
Caedo and Mr. Tan of petitioner Citibank. The RTC found Mr. Tan guilty of fraud for his participation in the
questionable transactions, essentially because he allowed Caedo to take out the signature cards, when these
should have been signed by the Dy spouses personally before him. Although the Dy spouses' signatures in
99
the PNs and Third Party Real Estate Mortgage were forged, they were approved by the signature verifier
since the signature cards against which they were compared to were also forged. Neither the RTC nor the
Court of Appeals, however, categorically declared Mr. Tan personally responsible for the forgeries, which, in
the narration of the facts, were more likely committed by Caedo.
In the Petition at bar, respondent dealt with Mr. Tan directly, there was no third party involved who could
have perpetrated any fraud or forgery in her loan transactions. Although respondent attempted to raise
suspicion as to the authenticity of her signatures on certain documents, these were nothing more than naked
allegations with no corroborating evidence; worse, even her own allegations were replete with
inconsistencies. She could not even establish in what manner or under what circumstances the fraud or
forgery was committed, or how Mr. Tan could have been directly responsible for the same.
While the Court of Appeals can take judicial notice of the Decision of its Third Division in the Dy case, it
should not have given the said case much weight when it rendered the assailed Decision, since the former
does not constitute a precedent. The Court of Appeals, in the challenged Decision, did not apply any legal
argument or principle established in the Dy case but, rather, adopted the findings therein of wrongdoing or
misconduct on the part of herein petitioner Citibank and Mr. Tan. Any finding of wrongdoing or misconduct
as against herein petitioners should be made based on the factual background and pieces of evidence
submitted in this case, not those in another case.
It is apparent that the Court of Appeals took judicial notice of the Dy case not as a legal precedent for the
present case, but rather as evidence of similar acts committed by petitioner Citibank and Mr. Tan. A basic
rule of evidence, however, states that, "Evidence that one did or did not do a certain thing at one time is not
admissible to prove that he did or did not do the same or similar thing at another time; but it may be
received to prove a specific intent or knowledge, identity, plan, system, scheme, habit, custom or usage, and
the like."120 The rationale for the rule is explained thus –
The rule is founded upon reason, public policy, justice and judicial convenience. The fact that a
person has committed the same or similar acts at some prior time affords, as a general rule, no
logical guaranty that he committed the act in question. This is so because, subjectively, a man's
mind and even his modes of life may change; and, objectively, the conditions under which he may
find himself at a given time may likewise change and thus induce him to act in a different way.
Besides, if evidence of similar acts are to be invariably admitted, they will give rise to a multiplicity
of collateral issues and will subject the defendant to surprise as well as confuse the court and
prolong the trial.121
The factual backgrounds of the two cases are so different and unrelated that the Dy case cannot be used to
prove specific intent, knowledge, identity, plan, system, scheme, habit, custom or usage on the part of
petitioner Citibank or its officer, Mr. Tan, to defraud respondent in the present case.
IV
The liquidation of respondent's outstanding loans were valid in so far as petitioner Citibank used
respondent's savings account with the bank and her money market placements with petitioner
FNCB Finance; but illegal and void in so far as petitioner Citibank used respondent's dollar
accounts with Citibank-Geneva.
Savings Account with petitioner Citibank

Compensation is a recognized mode of extinguishing obligations. Relevant provisions of the Civil Code
provides –
Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and
debtors of each other.
Art. 1279. In order that compensation may be proper, it is necessary;
(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they
be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
There is little controversy when it comes to the right of petitioner Citibank to compensate respondent's
outstanding loans with her deposit account. As already found by this Court, petitioner Citibank was the
creditor of respondent for her outstanding loans. At the same time, respondent was the creditor of petitioner
Citibank, as far as her deposit account was concerned, since bank deposits, whether fixed, savings, or
current, should be considered as simple loan or mutuum by the depositor to the banking institution.122 Both
debts consist in sums of money. By June 1979, all of respondent's PNs in the second set had matured and
became demandable, while respondent's savings account was demandable anytime. Neither was there any
retention or controversy over the PNs and the deposit account commenced by a third person and
communicated in due time to the debtor concerned. Compensation takes place by operation of
law,123 therefore, even in the absence of an expressed authority from respondent, petitioner Citibank had the
right to effect, on 25 June 1979, the partial compensation or off-set of respondent's outstanding loans with
her deposit account, amounting to ₱31,079.14.
Money market placements with FNCB Finance
Things though are not as simple and as straightforward as regards to the money market placements and
bank account used by petitioner Citibank to complete the compensation or off-set of respondent's
outstanding loans, which came from persons other than petitioner Citibank.
Respondent's money market placements were with petitioner FNCB Finance, and after several roll-overs,
they were ultimately covered by PNs No. 20138 and 20139, which, by 3 September 1979, the date the check
for the proceeds of the said PNs were issued, amounted to ₱1,022,916.66, inclusive of the principal amounts
and interests. As to these money market placements, respondent was the creditor and petitioner FNCB
Finance the debtor; while, as to the outstanding loans, petitioner Citibank was the creditor and respondent
the debtor. Consequently, legal compensation, under Article 1278 of the Civil Code, would not apply since
the first requirement for a valid compensation, that each one of the obligors be bound principally, and that
he be at the same time a principal creditor of the other, was not met.
100
100
What petitioner Citibank actually did was to exercise its rights to the proceeds of respondent's money market
placements with petitioner FNCB Finance by virtue of the Deeds of Assignment executed by respondent in its
favor.
The Court of Appeals did not consider these Deeds of Assignment because of petitioners' failure to produce
the original copies thereof in violation of the best evidence rule. This Court again finds itself in disagreement
in the application of the best evidence rule by the appellate court.
To recall, the best evidence rule, in so far as documentary evidence is concerned, requires the presentation
of the original copy of the document only when the context thereof is the subject of inquiry in the case.
Respondent does not question the contents of the Deeds of Assignment. While she admitted the existence
and execution of the Deeds of Assignment, dated 2 March 1978 and 9 March 1978, covering PNs No. 8169
and 8167 issued by petitioner FNCB Finance, she claimed, as defense, that the loans for which the said
Deeds were executed as security, were already paid. She denied ever executing both Deeds of Assignment,
dated 25 August 1978, covering PNs No. 20138 and 20139. These are again issues collateral to the contents
of the documents involved, which could be proven by evidence other than the original copies of the said
documents.
Moreover, the Deeds of Assignment of the money market placements with petitioner FNCB Finance were
notarized documents, thus, admissible in evidence. Rule 132, Section 30 of the Rules of Court provides that
–
SEC. 30. Proof of notarial documents. – Every instrument duly acknowledged or proved and
certified as provided by law, may be presented in evidence without further proof, the certificate of
acknowledgement being prima facie evidence of the execution of the instrument or document
involved.
Significant herein is this Court's elucidation in De Jesus v. Court of Appeals,124 which reads –
On the evidentiary value of these documents, it should be recalled that the notarization of a private
document converts it into a public one and renders it admissible in court without further proof of its
authenticity (Joson vs. Baltazar, 194 SCRA 114 [1991]). This is so because a public document duly
executed and entered in the proper registry is presumed to be valid and genuine until the contrary
is shown by clear and convincing proof (Asido vs. Guzman, 57 Phil. 652 [1918]; U.S. vs. Enriquez,
1 Phil 241 [1902]; Favor vs. Court of Appeals, 194 SCRA 308 [1991]). As such, the party
challenging the recital of the document must prove his claim with clear and convincing evidence
(Diaz vs. Court of Appeals, 145 SCRA 346 [1986]).
The rule on the evidentiary weight that must be accorded a notarized document is clear and unambiguous.
The certificate of acknowledgement in the notarized Deeds of Assignment constituted prima facie evidence of
the execution thereof. Thus, the burden of refuting this presumption fell on respondent. She could have
presented evidence of any defect or irregularity in the execution of the said documents125 or raised questions
as to the verity of the notary public's acknowledgment and certificate in the Deeds.126 But again, respondent
admitted executing the Deeds of Assignment, dated 2 March 1978 and 9 March 1978, although claiming that
the loans for which they were executed as security were already paid. And, she assailed the Deeds of
Assignment, dated 25 August 1978, with nothing more than her bare denial of execution thereof, hardly the
clear and convincing evidence required to trounce the presumption of due execution of a notarized
document.
Petitioners not only presented the notarized Deeds of Assignment, but even secured certified literal copies
thereof from the National Archives.127 Mr. Renato Medua, an archivist, working at the Records Management
and Archives Office of the National Library, testified that the copies of the Deeds presented before the RTC
were certified literal copies of those contained in the Notarial Registries of the notary publics concerned,
which were already in the possession of the National Archives. He also explained that he could not bring to
the RTC the Notarial Registries containing the original copies of the Deeds of Assignment, because the
Department of Justice (DOJ) Circular No. 97, dated 8 November 1968, prohibits the bringing of original
documents to the courts to prevent the loss of irreplaceable and priceless documents.128
Accordingly, this Court gives the Deeds of Assignment grave importance in establishing the authority given
by the respondent to petitioner Citibank to use as security for her loans her money her market placements
with petitioner FNCB Finance, represented by PNs No. 8167 and 8169, later to be rolled-over as PNs No.
20138 and 20139. These Deeds of Assignment constitute the law between the parties, and the obligations
arising therefrom shall have the force of law between the parties and should be complied with in good
faith.129 Standard clauses in all of the Deeds provide that –
The ASSIGNOR and the ASSIGNEE hereby further agree as follows:
principal amounts and interests earned by the money market placements, amounting to ₱1,022,916.66, and
applied the same against respondent's outstanding loans, leaving no surplus to be delivered to respondent.
Dollar accounts with Citibank-Geneva
Despite the legal compensation of respondent's savings account and the total application of the proceeds of
PNs No. 20138 and 20139 to respondent's outstanding loans, there still remained a balance of
₱1,069,847.40. Petitioner Citibank then proceeded to applying respondent's dollar accounts with Citibank-
Geneva against her remaining loan balance, pursuant to a Declaration of Pledge supposedly executed by
respondent in its favor.
Certain principles of private international law should be considered herein because the property pledged was
in the possession of an entity in a foreign country, namely, Citibank-Geneva. In the absence of any
allegation and evidence presented by petitioners of the specific rules and laws governing the constitution of a
pledge in Geneva, Switzerland, they will be presumed to be the same as Philippine local or domestic laws;
this is known as processual presumption.131

Upon closer scrutiny of the Declaration of Pledge, this Court finds the same exceedingly suspicious and
xxxx
irregular.

2. In the event the OBLIGATIONS are not paid at maturity or upon demand, as the case
First of all, it escapes this Court why petitioner Citibank took care to have the Deeds of Assignment of the
may be, the ASSIGNEE is fully authorized and empowered to collect and receive the
PNs notarized, yet left the Declaration of Pledge unnotarized. This Court would think that petitioner Citibank
PLACEMENT (or so much thereof as may be necessary) and apply the same in payment of
would take greater cautionary measures with the preparation and execution of the Declaration of Pledge
the OBLIGATIONS. Furthermore, the ASSIGNOR agrees that at any time, and from time
because it involved respondent's "all present and future fiduciary placements" with a Citibank branch in
to time, upon request by the ASSIGNEE, the ASSIGNOR will promptly execute and deliver
another country, specifically, in Geneva, Switzerland. While there is no express legal requirement that the
any and all such further instruments and documents as may be necessary to effectuate
Declaration of Pledge had to be notarized to be effective, even so, it could not enjoy the same prima
this Assignment.
facie presumption of due execution that is extended to notarized documents, and petitioner Citibank must
discharge the burden of proving due execution and authenticity of the Declaration of Pledge.
xxxx
Second, petitioner Citibank was unable to establish the date when the Declaration of Pledge was actually
5. This Assignment shall be considered as sufficient authority to FNCB Finance to pay and executed. The photocopy of the Declaration of Pledge submitted by petitioner Citibank before the RTC was
deliver the PLACEMENT or so much thereof as may be necessary to liquidate the undated.132 It presented only a photocopy of the pledge because it already forwarded the original copy
OBLIGATIONS, to the ASSIGNEE in accordance with terms and provisions hereof.130 thereof to Citibank-Geneva when it requested for the remittance of respondent's dollar accounts pursuant
thereto. Respondent, on the other hand, was able to secure a copy of the Declaration of Pledge, certified by
an officer of Citibank-Geneva, which bore the date 24 September 1979.133 Respondent, however, presented
Petitioner Citibank was only acting upon the authority granted to it under the foregoing Deeds when it finally
her passport and plane tickets to prove that she was out of the country on the said date and could not have
used the proceeds of PNs No. 20138 and 20139, paid by petitioner FNCB Finance, to partly pay for
signed the pledge. Petitioner Citibank insisted that the pledge was signed before 24 September 1979, but
respondent's outstanding loans. Strictly speaking, it did not effect a legal compensation or off-set under
could not provide an explanation as to how and why the said date was written on the pledge. Although Mr.
Article 1278 of the Civil Code, but rather, it partly extinguished respondent's obligations through the
Tan testified that the Declaration of Pledge was signed by respondent personally before him, he could not
application of the security given by the respondent for her loans. Although the pertinent documents were
give the exact date when the said signing took place. It is important to note that the copy of the Declaration
entitled Deeds of Assignment, they were, in reality, more of a pledge by respondent to petitioner Citibank of
of Pledge submitted by the respondent to the RTC was certified by an officer of Citibank-Geneva, which had
her credit due from petitioner FNCB Finance by virtue of her money market placements with the latter.
possession of the original copy of the pledge. It is dated 24 September 1979, and this Court shall abide by
According to Article 2118 of the Civil Code –
the presumption that the written document is truly dated.134 Since it is undeniable that respondent was out
of the country on 24 September 1979, then she could not have executed the pledge on the said date.
ART. 2118. If a credit has been pledged becomes due before it is redeemed, the pledgee may
collect and receive the amount due. He shall apply the same to the payment of his claim, and
Third, the Declaration of Pledge was irregularly filled-out. The pledge was in a standard printed form. It was
deliver the surplus, should there be any, to the pledgor.
constituted in favor of Citibank, N.A., otherwise referred to therein as the Bank. It should be noted, however,
that in the space which should have named the pledgor, the name of petitioner Citibank was typewritten, to
PNs No. 20138 and 20139 matured on 3 September 1979, without them being redeemed by respondent, so wit –
that petitioner Citibank collected from petitioner FNCB Finance the proceeds thereof, which included the

101
 102

The pledge right herewith constituted shall secure all claims which the Bank now has or in the
future acquires against Citibank, N.A., Manila (full name and address of the Debtor), regardless of
the legal cause or the transaction (for example current account, securities transactions, collections,
credits, payments, documentary credits and collections) which gives rise thereto, and including
principal, all contractual and penalty interest, commissions, charges, and costs.
The pledge, therefore, made no sense, the pledgor and pledgee being the same entity. Was a mistake made
by whoever filled-out the form? Yes, it could be a possibility. Nonetheless, considering the value of such a
document, the mistake as to a significant detail in the pledge could only be committed with gross
carelessness on the part of petitioner Citibank, and raised serious doubts as to the authenticity and due
execution of the same. The Declaration of Pledge had passed through the hands of several bank officers in
the country and abroad, yet, surprisingly and implausibly, no one noticed such a glaring mistake.
Lastly, respondent denied that it was her signature on the Declaration of Pledge. She claimed that the
signature was a forgery. When a document is assailed on the basis of forgery, the best evidence rule applies
–
Citibank-Geneva is a distinct and separate entity. As for the dollar accounts, respondent was the creditor and
Citibank-Geneva is the debtor; and as for the outstanding loans, petitioner Citibank was the creditor and
respondent was the debtor. The parties in these transactions were evidently not the principal creditor of each
other.
Therefore, this Court declares that the remittance of respondent's dollar accounts from Citibank-Geneva and
the application thereof to her outstanding loans with petitioner Citibank was illegal, and null and void.
Resultantly, petitioner Citibank is obligated to return to respondent the amount of US$149,632,99 from her
Citibank-Geneva accounts, or its present equivalent value in Philippine currency; and, at the same time,
respondent continues to be obligated to petitioner Citibank for the balance of her outstanding loans which,
as of 5 September 1979, amounted to ₱1,069,847.40.
V
The parties shall be liable for interests on their monetary obligations to each other, as
determined herein.

Basic is the rule of evidence that when the subject of inquiry is the contents of a document, no
In summary, petitioner Citibank is ordered by this Court to pay respondent the proceeds of her money
evidence is admissible other than the original document itself except in the instances mentioned in
market placements, represented by PNs No. 23356 and 23357, amounting to ₱318,897.34 and ₱203,150.00,
Section 3, Rule 130 of the Revised Rules of Court. Mere photocopies of documents are inadmissible
respectively, earning an interest of 14.5% per annum as stipulated in the PNs,139 beginning 17 March 1977,
pursuant to the best evidence rule. This is especially true when the issue is that of forgery.
the date of the placements.

As a rule, forgery cannot be presumed and must be proved by clear, positive and convincing
Petitioner Citibank is also ordered to refund to respondent the amount of US$149,632.99, or its equivalent in
evidence and the burden of proof lies on the party alleging forgery. The best evidence of a forged
Philippine currency, which had been remitted from her Citibank-Geneva accounts. These dollar accounts,
signature in an instrument is the instrument itself reflecting the alleged forged signature. The fact
consisting of two fiduciary placements and current accounts with Citibank-Geneva shall continue earning
of forgery can only be established by a comparison between the alleged forged signature and the
their respective stipulated interests from 26 October 1979, the date of their remittance by Citibank-Geneva
authentic and genuine signature of the person whose signature is theorized upon to have been
to petitioner Citibank in Manila and applied against respondent's outstanding loans.
forged. Without the original document containing the alleged forged signature, one cannot make a
definitive comparison which would establish forgery. A comparison based on a mere xerox copy or
reproduction of the document under controversy cannot produce reliable results.135 As for respondent, she is ordered to pay petitioner Citibank the balance of her outstanding loans, which
amounted to ₱1,069,847.40 as of 5 September 1979. These loans continue to earn interest, as stipulated in
the corresponding PNs, from the time of their respective maturity dates, since the supposed payment thereof
Respondent made several attempts to have the original copy of the pledge produced before the RTC so as to
using respondent's dollar accounts from Citibank-Geneva is deemed illegal, null and void, and, thus,
have it examined by experts. Yet, despite several Orders by the RTC,136 petitioner Citibank failed to comply
ineffective.
with the production of the original Declaration of Pledge. It is admitted that Citibank-Geneva had possession
of the original copy of the pledge. While petitioner Citibank in Manila and its branch in Geneva may be
separate and distinct entities, they are still incontestably related, and between petitioner Citibank and VI
respondent, the former had more influence and resources to convince Citibank-Geneva to return, albeit
temporarily, the original Declaration of Pledge. Petitioner Citibank did not present any evidence to convince
this Court that it had exerted diligent efforts to secure the original copy of the pledge, nor did it proffer the Petitioner Citibank shall be liable for damages to respondent.
reason why Citibank-Geneva obstinately refused to give it back, when such document would have been very
vital to the case of petitioner Citibank. There is thus no justification to allow the presentation of a mere Petitioners protest the award by the Court of Appeals of moral damages, exemplary damages, and attorney's
photocopy of the Declaration of Pledge in lieu of the original, and the photocopy of the pledge presented by fees in favor of respondent. They argued that the RTC did not award any damages, and respondent, in her
petitioner Citibank has nil probative value.137 In addition, even if this Court cannot make a categorical finding appeal before the Court of Appeals, did not raise in issue the absence of such.
that respondent's signature on the original copy of the pledge was forged, it is persuaded that petitioner
Citibank willfully suppressed the presentation of the original document, and takes into consideration the
presumption that the evidence willfully suppressed would be adverse to petitioner Citibank if produced.138 While it is true that the general rule is that only errors which have been stated in the assignment of errors
and properly argued in the brief shall be considered, this Court has also recognized exceptions to the general
rule, wherein it authorized the review of matters, even those not assigned as errors in the appeal, if the
Without the Declaration of Pledge, petitioner Citibank had no authority to demand the remittance of consideration thereof is necessary in arriving at a just decision of the case, and there is a close inter-relation
respondent's dollar accounts with Citibank-Geneva and to apply them to her outstanding loans. It cannot between the omitted assignment of error and those actually assigned and discussed by the
effect legal compensation under Article 1278 of the Civil Code since, petitioner Citibank itself admitted that

102
appellant.140 Thus, the Court of Appeals did not err in awarding the damages when it already made findings
that would justify and support the said award.
Although this Court appreciates the right of petitioner Citibank to effect legal compensation of respondent's
local deposits, as well as its right to the proceeds of PNs No. 20138 and 20139 by virtue of the notarized
Deeds of Assignment, to partly extinguish respondent's outstanding loans, it finds that petitioner Citibank did
commit wrong when it failed to pay and properly account for the proceeds of respondent's money market
placements, evidenced by PNs No. 23356 and 23357, and when it sought the remittance of respondent's
dollar accounts from Citibank-Geneva by virtue of a highly-suspect Declaration of Pledge to be applied to the
remaining balance of respondent's outstanding loans. It bears to emphasize that banking is impressed with
public interest and its fiduciary character requires high standards of integrity and performance.141 A bank is
under the obligation to treat the accounts of its depositors with meticulous care whether such accounts
consist only of a few hundred pesos or of millions of pesos.142 The bank must record every single transaction
accurately, down to the last centavo, and as promptly as possible.143 Petitioner Citibank evidently failed to
exercise the required degree of care and transparency in its transactions with respondent, thus, resulting in
the wrongful deprivation of her property.
Respondent had been deprived of substantial amounts of her investments and deposits for more than two
decades. During this span of years, respondent had found herself in desperate need of the amounts
wrongfully withheld from her. In her testimony144 before the RTC, respondent narrated –
Q By the way Mrs. Witness will you kindly tell us again, you said before that you are a
businesswoman, will you tell us again what are the businesses you are engaged into [sic]?
A I am engaged in real estate. I am the owner of the Modesta Village 1 and 2 in San Mateo, Rizal. I
am also the President and Chairman of the Board of Macador [sic] Co. and Business Inc. which
operates the Macador [sic] International Palace Hotel. I am also the President of the Macador [sic]
International Palace Hotel, and also the Treasures Home Industries, Inc. which I am the Chairman
and president of the Board and also operating affiliated company in the name of Treasures Motor
Sales engaged in car dealers [sic] like Delta Motors, we are the dealers of the whole Northern
Luzon and I am the president of the Disto Company, Ltd., based in Hongkong licensed in Honkong
[sic] and now operating in Los Angeles, California.
Q What is the business of that Disto Company Ltd.?
A Disto Company, Ltd., is engaged in real estate and construction.
Q Aside from those businesses are you a member of any national or community organization for
social and civil activities?
A Yes sir.
Q What are those?
A I am the Vice-President of thes [sic] Subdivision Association of the Philippines in 1976, I am also
an officer of the … Chamber of Real Estate Business Association; I am also an officer of the
Chatholic [sic] Women's League and I am also a member of the CMLI, I forgot the definition.
Q How about any political affiliation or government position held if any?
103
A I was also a candidate for Mayo last January 30, 1980.
Q Where?
A In Dagupan City, Pangasinan.
Q What else?
A I also ran as an Assemblywoman last May, 1984, Independent party in Regional I, Pangasinan.
Q What happened to your businesses you mentioned as a result of your failure to recover you [sic]
investments and bank deposits from the defendants?
A They are not all operating, in short, I was hampered to push through the businesses that I have.
A [sic] Of all the businesses and enterprises that you mentioned what are those that are paralyzed
and what remain inactive?
A Of all the company [sic] that I have, only the Disto Company that is now operating in California.
Q How about your candidacy as Mayor of Dagupan, [sic] City, and later as Assemblywoman of
Region I, what happened to this?
A I won by voting but when election comes on [sic] the counting I lost and I protested this, it is still
pending and because I don't have financial resources I was not able to push through the case. I
just have it pending in the Comelec.
Q Now, do these things also affect your social and civic activities?
A Yes sir, definitely.
Q How?
A I was embarrassed because being a businesswoman I would like to inform the Honorable Court
that I was awarded as the most outstanding businesswoman of the year in 1976 but when this
money was not given back to me I was not able to comply with the commitments that I have
promised to these associations that I am engaged into [sic], sir.
For the mental anguish, serious anxiety, besmirched reputation, moral shock and social humiliation suffered
by the respondent, the award of moral damages is but proper. However, this Court reduces the amount
thereof to ₱300,000.00, for the award of moral damages is meant to compensate for the actual injury
suffered by the respondent, not to enrich her.145
Having failed to exercise more care and prudence than a private individual in its dealings with respondent,
petitioner Citibank should be liable for exemplary damages, in the amount of ₱250,000.00, in accordance
with Article 2229146 and 2234147 of the Civil Code.
 104

With the award of exemplary damages, then respondent shall also be entitled to an award of attorney's
fees.148 Additionally, attorney's fees may be awarded when a party is compelled to litigate or to incur
expenses to protect his interest by reason of an unjustified act of the other party.149 In this case, an award of
₱200,000.00 attorney's fees shall be satisfactory.

In contrast, this Court finds no sufficient basis to award damages to petitioners.1âwphi1 Respondent was
compelled to institute the present case in the exercise of her rights and in the protection of her interests. In
fact, although her Complaint before the RTC was not sustained in its entirety, it did raise meritorious points
and on which this Court rules in her favor. Any injury resulting from the exercise of one's rights is damnum
absque injuria.150

IN VIEW OF THE FOREGOING, the instant Petition is PARTLY GRANTED. The assailed Decision of the
Court of Appeals in CA-G.R. No. 51930, dated 26 March 2002, as already modified by its Resolution, dated
20 November 2002, is hereby AFFIRMED WITH MODIFICATION, as follows –

1. PNs No. 23356 and 23357 are DECLARED subsisting and outstanding. Petitioner Citibank
is ORDERED to return to respondent the principal amounts of the said PNs, amounting to Three
Hundred Eighteen Thousand Eight Hundred Ninety-Seven Pesos and Thirty-Four Centavos
(₱318,897.34) and Two Hundred Three Thousand One Hundred Fifty Pesos (₱203,150.00),
respectively, plus the stipulated interest of Fourteen and a half percent (14.5%) per annum,
beginning 17 March 1977;

2. The remittance of One Hundred Forty-Nine Thousand Six Hundred Thirty Two US Dollars and
Ninety-Nine Cents (US$149,632.99) from respondent's Citibank-Geneva accounts to petitioner
Citibank in Manila, and the application of the same against respondent's outstanding loans with the
latter, is DECLARED illegal, null and void. Petitioner Citibank is ORDERED to refund to respondent
the said amount, or its equivalent in Philippine currency using the exchange rate at the time of
payment, plus the stipulated interest for each of the fiduciary placements and current accounts
involved, beginning 26 October 1979;

3. Petitioner Citibank is ORDERED to pay respondent moral damages in the amount of Three
Hundred Thousand Pesos (₱300,000.00); exemplary damages in the amount of Two Hundred Fifty
Thousand Pesos (₱250,000.00); and attorney's fees in the amount of Two Hundred Thousand Pesos
(₱200,000.00); and

4. Respondent is ORDERED to pay petitioner Citibank the balance of her outstanding loans, which,
from the respective dates of their maturity to 5 September 1979, was computed to be in the sum
of One Million Sixty-Nine Thousand Eight Hundred Forty-Seven Pesos and Forty Centavos
(₱1,069,847.40), inclusive of interest. These outstanding loans shall continue to earn interest, at
the rates stipulated in the corresponding PNs, from 5 September 1979 until payment thereof.

SO ORDERED.

104
Cadiz v. Court of Appeals, 474 SCRA 232 (2005)
G.R. No. 153784 October 25, 2005
ROMEO C. CADIZ, CARLITO BONGKINGKI and PRISCO GLORIA IV, Petitioners,
vs.
COURT OF APPEALS, and PHILIPPINE COMMERCIAL INTERNATIONAL BANK (Now EQUITABLE
PCIBANK), Respondents.
DECISION
Tinga, J.:
Employees who abuse their position for fiduciary gain cannot be shielded from the consequences of their
wrongdoing even on account of the bank’s operational laxities that may have provided the gateway for their
shenanigans. Their misconduct provides the bank with cause for the termination of their employment.
The facts follow.
Petitioners Romeo Cadiz ("Cadiz"), Carlito Bongkingki ("Bongkingki") and Prisco Gloria IV ("Gloria") were
employed as signature verifier, bookkeeper, and foreign currency denomination clerk/bookkeeper-reliever,
respectively, in the main office branch (MOB) of Philippine Commercial International Bank (respondent
bank).
The anomalies in question arose when Rosalina B. Alqueza (Alqueza) filed a complaint with PCIB for the
alleged non-receipt of a Six Hundred Dollar ($600.00) demand draft drawn against it which was purchased
by her husband from Hongkong and Shanghai Banking Corporation. Upon verification, it was uncovered that
the demand draft was deposited on 10 June 1988 with FCDU Savings Account (S/A) No. 1083-4, an account
under the name of Sonia Alfiscar (Alfiscar). Further investigation revealed that the demand draft, together
with four (4) other checks, was made to appear as only one deposit covered by HSBC Check No. 979120 for
One Thousand Two Hundred Thirty-two Dollars (US$1,232.00).
The Branch Manager, Ismael R. Sandig, then presided over a series of meetings, wherein Cadiz, Bongkingki
and Gloria allegedly verbally admitted their participation in a scheme to divert funds intended for other
accounts using the Savings Account of Alfiscar. Subsequently, Cadiz allegedly paid Alqueza ₱12,690.00, the
peso equivalent of US$600, but insisted that the corresponding receipt be issued in Alfiscar’s name instead.
On account of these allegations, a special audit examination was conducted by the bank. On 31 January
1989, the internal auditors of the bank, headed by Lizza G. Baylon, submitted their findings in an official
report. The auditors determined that as early as July 1987, petitioner Cadiz had reserved the savings
account in the name of Sonia Alfiscar. The account was opened on 27 November 1987 and closed on 23 June
1988. Twenty-five (25) deposit slips involving the account were posted by Bongkingki while sixteen (16)
deposit slips were posted by Gloria. A verification of the deposit slips yielded findings of miscoded checks,
forged signatures, non-validation of deposit slips by the tellers, wrongful deposit of second-endorsed checks
into foreign currency deposit accounts, the deposit slips which do not bear the required approval of bank
officers, and withdrawals made either on the day of deposit or the following banking day.1
105
In view of such findings, show-cause memoranda2 were served on petitioners, requiring them to explain
within seventy-two (72) hours why no disciplinary action should
be taken against them in connection with the results of the special audit examination. On 22 March 1989,
petitioners submitted their written explanations.3 Not satisfied with their explanations, respondent bank in
memoranda4 all dated 22 June 1989 dismissed petitioners from employment for violation of Article III
Section 1 B-2 and Article III Section 1-C of the Code of Discipline.
Petitioners lodged a complaint before the labor arbiter for illegal dismissal on 18 September 1989. Labor
Arbiter Ernesto S. Dinopol adjudged that petitioners were illegally dismissed and ordered their reinstatement
and payment of backwages. This conclusion was based on the notices of dismissal, which, to the mind of the
labor arbiter, was couched in general terms and without explaining how the rules were violated. The labor
arbiter also attributed petitioners’ acts in fraudulently coding several deposit slips as "1511" (immediately
withdrawable) as mere procedural inadequacies, with the fault attributable to respondent bank for its laxity.5
The labor arbiter’s Decision was reversed on appeal before the Second Division of the National Labor
Relations Commission (NLRC), which, in a Decision6 dated 30 June 1994, ordered the dismissal of the
petition. In doing so, the NLRC departed from the labor arbiter’s finding of facts and concluded that
petitioners were dismissed for just cause. Dismissing petitioners’ appeal, the Court of Appeals Ninth Division
similarly determined on the basis of substantial evidence that petitioners were validly terminated in its
own Decision7 dated 13 July 2001.
After the appellate court denied petitioner’s motion for reconsideration, the matter was brought before this
Court in a Petition for Review on Certiorari.8
The issues to be resolved are whether the Court of Appeals erred in not sustaining the findings of the labor
arbiter and upholding those of the NLRC and whether the Court of Appeals erred in dismissing the petition by
ignoring petitioners’ claims that they were dismissed without just cause and due process.9
In its Comment,10 respondent bank seeks to have the petition dismissed inasmuch as all the issues raised
herein involve questions of fact. We note that as a general rule, only questions of law may be brought upon
this Court in a petition for review on certiorari under Rule 45 of the Rules of Court. This Court is not a trier of
facts, and as such is tasked to calibrate and assess the probative weight of evidence adduced by the parties
during trial all over again.11
However, if there are competing factual findings by the different triers of fact, such as those made in this
case by the labor arbiter on one hand, and those of the NLRC and Court of Appeals on the other hand, this
Court is compelled to go over the records of the case, as well as the submissions of the parties, and resolve
the factual issues.12 With this in mind, we shall now proceed to examine the decisions under review.
The general thesis as laid down by the NLRC and Court of Appeals is that petitioners had surreptitiously
diverted funds deposited by depositors to S/A No. 1083-4 which was under their control and disposition. On
the other hand, a perusal of the labor arbiter’s Decision reveals a different perspective from which the case
was approached. While the labor arbiter conceded that petitioners Bongkingki and Gloria had miscoded
several deposit slips, rendering them immediately withdrawable, he characterized the errors as "mere
procedural inadequacies" which were preventable had management exercised greater control over its
employees.13

Far from petitioners’ thrust, the miscoding of deposit slips cannot be downplayed as "mere procedural
inadequacies." After all, it is such miscoding that precipitated the fraudulent withdrawals in the first place.
The act operated as the first indispensable step towards the commission of fraud on the bank.
More disturbing though is the labor arbiter’s willingness to acquit petitioners of culpability on account of the
purported negligence of the bank. It is similar to concluding that the bank guards, and not the burglars, bear
primary culpability for a bank robbery. Whatever liability or responsibility was expected of the bank stands
as an issue separate from the liability of the recreant bank employees. Even assuming that the bank
observed less-than-ideal controls over the security of its operations, such laxity does not serve as the carte
blanche signal for the bank employees to take advantage of safeguard control lapses and perpetrate
chicanery on their employer.
The labor arbiter also evaluated the bank’s claim that Cadiz had reimbursed the amount of $600 to the
aggrieved depositor Alqueza while making it appear that it was Alfiscar who had actually made the refund. In
disbelieving this claim, the Labor Arbiter concluded that "it is unthinkable for a lowly bank employee to
impose his will upon his high and mighty employer."14
This pronouncement is revelatory of absurd logic. The notion that a lowly employee will never countermand
the will or interests of the employer is sufficiently rebutted by any labor law casebook, any omnibus of our
labor jurisprudence, and the evolution of the human experience that disquiets persons from unhesitatingly
acceding to the presumptive good faith of others. It is an accepted premise of life and jurisprudence that
persons are capable, upon impure motivations, of taking advantage of others, whether their social lessers,
equals, or betters. The necessity of punishment arises from this flaw of human nature. This philosophic
stance of the labor arbiter actually obviates the nature of sin.
Obviously, we are hard-pressed to accord high regard to the labor arbiter’s discernment as a trier of facts.
Nonetheless, his claim that there were procedural flaws attending the dismissal of petitioners warrants some
deliberation.
The labor arbiter ruled that the notices of dismissal served on petitioners was insufficient as it failed to
specifically delineate how petitioners had violated the internal rules of the bank. However, the notices do cite
the rules which petitioners had violated and refer to the fact that such violations occurred relating to S/A No.
1083-4 account of Sonia Alfiscar and/or Rosalinda Alqueza.
There is no demand that the notices of dismissal themselves be couched in the form and language of judicial
or quasi-judicial decisions. What is required is that the employer conduct a formal investigation process, with
notices duly served on the employees informing them of the fact of investigation, and subsequently, if
warranted, a separate notice of dismissal.15 Through the formal investigatory process, the employee must
be accorded the right to present his/her side, which must be considered and weighed by the employer. The
employee must be sufficiently apprised of the nature of the charge against him/her, so as to be able to
intelligently defend against the charges.
In the instant case, records show that respondent bank complied with the two-notice rule prescribed in
Article 277(b) of the Labor Code.16 Petitioners were given all avenues to present their side and disprove the
allegations of respondent bank. An informal meeting was held between the branch manager of MOB, the
three petitioners and Mr. Gener, the Vice-President of the PCIB Employees Union. As per report, petitioners
admitted having used Alfiscar’s account to divert funds intended for other accounts. A special audit
investigation was conducted to determine the extent of the fraudulent transactions. Based on the results of
the investigation, respondent bank sent show-cause memoranda to petitioners, asking them to explain their
106
106
lapses, under pain of disciplinary action. The memoranda, which constitute the first notice, specified the
various questionable acts committed by petitioners.
Afterwards, petitioners submitted their respective replies to the memoranda. This very well complies with the
requirement for hearing, by which petitioners were afforded the opportunity to defend themselves. The
second notice came in the form of the termination memoranda, informing petitioners of their dismissal from
service. From the foregoing, it is clear that the required procedural due process for their termination was
strictly complied with.
All told, we hold that the factual appreciation and conclusions rendered by the labor arbiter are not worthy of
adoption by this Court. In contrast, from the factual determinations made by the NLRC and the Court of
Appeals, we accept the following facts as proven:
1. Petitioner Cadiz reserved S/A No. 1083-4 in July 1987 as reflected on respondent bank’s "new account
register."
2. Foreign denominated checks payable to other payees were diverted into the said account.
3. The various deposit slips, covering the said checks, did not bear the machine validation of any of the
tellers-in-charge.
4. The signatures of the MOB officers appearing on the said deposit slips were in fact forged.
5. The posting of said bank transactions bore the initials of petitioners Bongkingki or Gloria.
6. The deposit slips were coded as "1511" or "on-us check."
7. Petitioner Cadiz agreed to pay Alqueza the equivalent amount of $600.00 but it was made to appear that
Alfiscar paid the said amount.
8. In view of these findings, petitioners were served with show-cause memoranda asking them to explain the
lapses.
9. Finding their explanations unsatisfactory, petitioners were terminated from employment.
It is from these established facts that we consider the arguments now presented by petitioners. In light of
these facts, petitioners’ arguments hardly detract from the conclusion that their behavior in the course of the
discharge of their duties is clearly malfeasant, and constitutes ground for their termination on account of just
cause.
First, petitioners insist that the show-cause memoranda served on them did not impute any fraudulent
behavior, but merely lapses. We disagree.
The show-cause memoranda were occasioned by the confidential report prepared by Sandig, as well as the
findings of the special audit examination. The confidential report prepared by Sandig addressed to the Vice-
President of respondent bank pertains to the discovery of fraudulent transactions on S/A No.1083-4
involving three employees of respondent bank. The report detailed how the events transpired, including the
admissions of petitioners. From there, a special audit examination was conducted to make a thorough
investigation of the questioned account. The examination yielded conspicuous findings that anomalous
transactions had taken place involving petitioners.
Moreover, the show-cause memoranda respectively served on petitioners clearly indicate that they were
being made to answer questions pertaining to possible anomalous behavior on their part. For example,
petitioners were asked to explain why they had posted the questioned deposits on the ledger, although there
were no teller validations or teller stamps, and also on what basis they considered such transactions to be
valid.17 On the other hand, the show-cause memorandum to Cadiz directly asks him to provide the personal
details of Sonia Alfiscar, why he went out of his way to make a special arrangement for the mysterious
Alfiscar, and other questions pertaining to the Alfiscar accounts.
and confidence on the part of the bank, as maintained by petitioners. Moreover, considering that these
reinstated employees were, for the meantime, regular employees of the bank, it is within the discretion of
PCIB to reassign them as it sees fit, taking into account the circumstances.
Moreover, it would simply be temerarious for the Court to sanction the reinstatement of bank employees
who have clearly engaged in anomalous banking practices. The particular fiduciary responsibilities reposed
on banks and its employees cannot be emphasized enough. The fiduciary nature of banking22 is enshrined in
Republic Act No. 8791 or the General Banking Law of 2000. Section 2 of the law specifically says that the
State recognizes the "fiduciary nature of banking that requires high standards of integrity and
performance."23 The bank must not only exercise "high standards of integrity and performance," it must
also ensure that its employees do likewise because this is the only way to ensure that the bank will comply
with its fiduciary duty.24

We thus cannot give credence to the averments of petitioners that the memoranda pertain to "lapses", and
not fraudulent transactions. The bank could not have been expected to conclude outright that petitioners
were guilty of fraud, despite all the indicia that they indeed were. Certainly, the purpose of the show-cause
memoranda was to afford petitioners the opportunity to acquit themselves of culpable responsibility. It
would have been quite irresponsible for the bank to have premised the queries therein on irretractable
conclusions that petitioners had been guilty of anomalous transactions.
Second, petitioners contend that they should be relieved of any liability considering that respondent bank did
not suffer a pecuniary loss. This claim must obviously fail.
There is jurisprudential support, as noted by the Court of Appeals in citing University of the East v.
NLRC18 that lack of material or pecuniary damages would not in any way mitigate a person’s liability nor
obliterate the loss of trust and confidence. In the case of Etcuban v. Sulpicio Lines,19 this Court definitively
ruled that:
. . . Whether or not the respondent bank was financially prejudiced is immaterial. Also, what matters is not
the amount involved, be it paltry or gargantuan; rather the fraudulent scheme in which the petitioner was
involved, which constitutes a clear betrayal of trust and confidence. . . .
All given, we affirm the conclusion that petitioners were dismissed for just cause. Loss of trust and
confidence is one of the just causes for termination by employer under Article 282 of the Labor Code. The
breach of trust must be willful, meaning it must be done intentionally, knowingly, and purposely, without
justifiable excuse.25 Ideally, loss of confidence applies only to cases involving employees occupying
positions of trust and confidence or to those situations where the employee is routinely charged with the
care and custody of the employer’s money or property.26 Utmost trust and confidence are deemed to have
been reposed on petitioners by virtue of the nature of their work.
The facts as established, as well as the need to assert the public interest in safeguarding against bank fraud,
militate against the present petition.
WHEREFORE, the Petition is hereby DENIED and the assailed Decision of the Court of Appeals AFFIRMED.
Costs against petitioners.
SO ORDERED.

Moreover, it cannot be discounted that as bank employees, the responsibilities of petitioners are impressed
with a high degree of public interest. Private persons entrust their fortunes to banks, and it would cause a
breakdown of the financial order if the judicial system were to leave unsanctioned bank employees who treat
depositor’s accounts as their own private kitty.

Still, petitioners insist that respondent bank never lost trust and confidence in them as it did not place them
under preventive suspension, and more tellingly, it even promoted them after the labor arbiter had ordered
their reinstatement. Preventive suspension, which is never obligatory on the part of the employer, may be
resorted to only when the continued employment of the employee poses "a serious and imminent threat to
the life or property of the employer or of his co-workers."20 The bank points out that the Alfiscar account,
through which the anomalous transactions were coursed, was no longer active at the time the fraud was
discovered.21 Clearly, the bank had reason to conclude that the imminence of the threat posed by the
employees was not as vital as it would have been had the dubious account still been open.

As to the alleged promotions, the original employer, PCIB, admits that petitioners had been reinstated by
reason of the Decision, but such act was by no means voluntary. PCIB however does not rebut the
allegations that Bongkingki and Cadiz were assigned to sensitive positions within the bank after their
compulsory reinstatement. This may be so, but the fact that PCIB lost no time in removing the employees
from the plantilla after the NLRC reversed the labor arbiter’s Decision hardly evinces any continuing trust

107

Far East Bank v. Pacilan, 465 SCRA 372 (2005)
G.R. No. 157314 July 29, 2005
FAR EAST BANK AND TRUST COMPANY, NOW BANK OF THE PHILIPPINE ISLANDS, Petitioners,
vs.
THEMISTOCLES PACILAN, JR., Respondent.
DECISION
CALLEJO, SR., J.:
Before the Court is the petition for review on certiorari filed by Far East Bank and Trust Company (now Bank
of the Philippines Islands) seeking the reversal of the Decision1 dated August 30, 2002 of the Court of
Appeals (CA) in CA-G.R. CV No. 36627 which ordered it, together with its branch accountant, Roger
Villadelgado, to pay respondent Themistocles Pacilan, Jr.2 the total sum of ₱100,000.00 as moral and
exemplary damages. The assailed decision affirmed with modification that of the Regional Trial Court (RTC)
of Negros Occidental, Bacolod City, Branch 54, in Civil Case No. 4908. Likewise sought to be reversed and
set aside is the Resolution dated January 17, 2003 of the appellate court, denying petitioner bank’s motion
for reconsideration.
The case stemmed from the following undisputed facts:
Respondent Pacilan opened a current account with petitioner bank’s Bacolod Branch on May 23, 1980. His
account was denominated as Current Account No. 53208 (0052-00407-4). The respondent had since then
issued several postdated checks to different payees drawn against the said account. Sometime in March
1988, the respondent issued Check No. 2434886 in the amount of ₱680.00 and the same was presented for
payment to petitioner bank on April 4, 1988.
Upon its presentment on the said date, Check No. 2434886 was dishonored by petitioner bank. The next
day, or on April 5, 1988, the respondent deposited to his current account the amount of ₱800.00. The said
amount was accepted by petitioner bank; hence, increasing the balance of the respondent’s deposit to
₱1,051.43.
Subsequently, when the respondent verified with petitioner bank about the dishonor of Check No. 2434866,
he discovered that his current account was closed on the ground that it was "improperly handled." The
records of petitioner bank disclosed that between the period of March 30,
1988 and April 5, 1988, the respondent issued four checks, to wit: Check No. 2480416 for ₱6,000.00; Check
No. 2480419 for ₱50.00; Check No. 2434880 for ₱680.00 and; Check No. 2434886 for ₱680.00, or a total
amount of ₱7,410.00. At the time, however, the respondent’s current account with petitioner bank only had
a deposit of ₱6,981.43. Thus, the total amount of the checks presented for payment on April 4, 1988
exceeded the balance of the respondent’s deposit in his account. For this reason, petitioner bank, through its
branch accountant, Villadelgado, closed the respondent’s current account effective the evening of April 4,
1988 as it then had an overdraft of ₱428.57. As a consequence of the overdraft, Check No. 2434886 was
dishonored.
108
108
On April 18, 1988, the respondent wrote to petitioner bank complaining that the closure of his account was
unjustified. When he did not receive a reply from petitioner bank, the respondent filed with the RTC of
Negros Occidental, Bacolod City, Branch 54, a complaint for damages against petitioner bank and
Villadelgado. The case was docketed as Civil Case No. 4908. The respondent, as complainant therein, alleged
that the closure of his current account by petitioner bank was unjustified because on the first banking hour
of April 5, 1988, he already deposited an amount sufficient to fund his checks. The respondent pointed out
that Check No. 2434886, in particular, was delivered to petitioner bank at the close of banking hours on April
4, 1988 and, following normal banking procedure, it
(petitioner bank) had until the last clearing hour of the following day, or on April 5, 1988, to honor the check
or return it, if not funded. In disregard of this banking procedure and practice, however, petitioner bank
hastily closed the respondent’s current account and dishonored his Check No. 2434886.
The respondent further alleged that prior to the closure of his current account, he had issued several other
postdated checks. The petitioner bank’s act of closing his current account allegedly preempted the deposits
that he intended to make to fund those checks. Further, the petitioner bank’s act exposed him to criminal
prosecution for violation of Batas Pambansa Blg. 22.
According to the respondent, the indecent haste that attended the closure of his account was patently
malicious and intended to embarrass him. He claimed that he is a Cashier of Prudential Bank and Trust
Company, whose branch office is located just across that of petitioner bank, and a prominent and respected
leader both in the civic and banking communities. The alleged malicious acts of petitioner bank besmirched
the respondent’s reputation and caused him "social humiliation, wounded feelings, insurmountable worries
and sleepless nights" entitling him to an award of damages.
In their answer, petitioner bank and Villadelgado maintained that the respondent’s current account was
subject to petitioner bank’s Rules and Regulations Governing the Establishment and Operation of Regular
Demand
Deposits which provide that "the Bank reserves the right to close an account if the depositor frequently
draws checks against insufficient funds and/or uncollected deposits" and that "the Bank reserves the right at
any time to return checks of the depositor which are drawn against insufficient funds or for any reason."3
They showed that the respondent had improperly and irregularly handled his current account. For example,
in 1986, the respondent’s account was overdrawn 156 times, in 1987, 117 times and in 1988, 26 times. In
all these instances, the account was overdrawn due to the issuance of checks against insufficient funds. The
respondent had also signed several checks with a different signature from the specimen on file for dubious
reasons.
When the respondent made the deposit on April 5, 1988, it was obviously to cover for issuances made the
previous day against an insufficiently funded account. When his Check No. 2434886 was presented for
payment on April 4, 1988, he had already incurred an overdraft; hence, petitioner bank rightfully dishonored
the same for insufficiency of funds.
After due proceedings, the court a quo rendered judgment in favor of the respondent as it ordered the
petitioner bank and Villadelgado, jointly and severally, to pay the respondent the amounts of ₱100,000.00 as
moral damages and ₱50,000.00 as exemplary damages and costs of suit. In so ruling, the court a quo also
cited petitioner bank’s rules and regulations which state that "a charge of ₱10.00 shall be levied against the
depositor for any check that is taken up as a returned item due to ‘insufficiency of funds’ on the date of
receipt from the clearing office even if said check is honored and/or covered by sufficient deposit the
following banking day." The same rules and regulations also provide that "a check returned for insufficiency
of funds for any reason of similar import may be subsequently recleared for one more time only, subject to
the same charges."
According to the court a quo, following these rules and regulations, the respondent, as depositor, had the
right to put up sufficient funds for a check that was taken as a returned item for insufficient funds the day
following the receipt of said check from the clearing office. In fact, the said check could still be recleared for
one more time. In previous instances, petitioner bank notified the respondent when he incurred an overdraft
and he would then deposit sufficient funds the following day to cover the overdraft. Petitioner bank thus
acted unjustifiably when it immediately closed the respondent’s account on April 4, 1988 and deprived him
of the opportunity to reclear his check or deposit sufficient funds therefor the following day.
As a result of the closure of his current account, several of the respondent’s checks were subsequently
dishonored and because of this, the respondent was humiliated, embarrassed and lost his credit standing in
the business community. The court a quo further ratiocinated that even granting arguendo that petitioner
bank had the right to close the respondent’s account, the manner which attended the closure constituted an
abuse of the
said right. Citing Article 19 of the Civil Code of the Philippines which states that "[e]very person must, in the
exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith" and Article 20 thereof which states that "[e]very person who, contrary to
law, wilfully or negligently causes damage to another, shall indemnify the latter for the same," the court a
quo adjudged petitioner bank of acting in bad faith. It held that, under the foregoing circumstances, the
respondent is entitled to an award of moral and exemplary damages.
The decretal portion of the court a quo’s decision reads:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
1. Ordering the defendants [petitioner bank and Villadelgado], jointly and severally, to pay plaintiff [the
respondent] the sum of ₱100,000.00 as moral damages;
2. Ordering the defendants, jointly and severally, to pay plaintiff the sum of ₱50,000.00 as exemplary
damages plus costs and expenses of the suit; and
3. Dismissing [the] defendants’ counterclaim for lack of merit.
SO ORDERED.4
On appeal, the CA rendered the Decision dated August 30, 2002, affirming with modification the decision of
the court a quo.
The appellate court substantially affirmed the factual findings of the court a quo as it held that petitioner
bank unjustifiably closed the respondent’s account notwithstanding that its own rules and regulations
allow that a check returned for insufficiency of funds or any reason of similar import, may be subsequently
recleared for one more time, subject to standard charges. Like the court a quo, the appellate court observed
that in several instances in previous years, petitioner bank would inform the respondent when he incurred an
overdraft and allowed him to make a timely deposit to fund the checks that were initially dishonored for
insufficiency of funds. However, on April 4, 1988, petitioner bank immediately closed the respondent’s
account without even notifying him that he had incurred an overdraft. Even when they had already closed
109
his account on April 4, 1988, petitioner bank still accepted the deposit that the respondent made on April 5,
1988, supposedly to cover his checks.
Echoing the reasoning of the court a quo, the CA declared that even as it may be conceded that petitioner
bank had reserved the right to close an account for repeated overdrafts by the respondent, the exercise of
that right must never be despotic or arbitrary. That petitioner bank chose to close the account outright and
return the check, even after accepting a deposit sufficient to cover the said check, is contrary to its duty to
handle the respondent’s account with utmost fidelity. The exercise of the right is not absolute and good faith,
at least, is required. The manner by which petitioner bank closed the account of the respondent runs afoul of
Article 19 of the Civil Code which enjoins every person, in the exercise of his rights, "to give every one his
due, and observe honesty and good faith."
The CA concluded that petitioner bank’s precipitate and imprudent closure of the respondent’s account had
caused him, a respected officer of several civic and banking associations, serious anxiety and humiliation. It
had, likewise, tainted his credit standing. Consequently, the award of damages is warranted. The CA,
however, reduced the amount of damages awarded by the court a quo as it found the same to be excessive:
We, however, find excessive the amount of damages awarded by the RTC. In our view the reduced amount
of ₱75,000.00 as moral damages and ₱25,000.00 as exemplary damages are in order. Awards for damages
are not meant to enrich the plaintiff-appellee [the respondent] at the expense of defendants-appellants [the
petitioners], but to obviate the moral suffering he has undergone. The award is aimed at the restoration,
within limits possible, of the status quo ante, and should be proportionate to the suffering inflicted.5
The dispositive portion of the assailed CA decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the MODIFICATION that the award
of moral damages is reduced to ₱75,000.00 and the award of exemplary damages reduced to ₱25,000.00.
SO ORDERED.6
Petitioner bank sought the reconsideration of the said decision but in the assailed Resolution dated January
17, 2003, the appellate court denied its motion. Hence, the recourse to this Court.
Petitioner bank maintains that, in closing the account of the respondent in the evening of April 4, 1988, it
acted in good faith and in accordance with the rules and regulations governing the operation of a
regular demand deposit which reserves to the bank "the right to close an account if the depositor frequently
draws checks against insufficient funds and/or uncollected deposits." The same rules and regulations also
provide that "the depositor is not entitled, as a matter of right, to overdraw on this deposit and the bank
reserves the right at any time to return checks of the depositor which are drawn against insufficient funds or
for any reason."
It cites the numerous instances that the respondent had overdrawn his account and those instances where
he deliberately signed checks using a signature different from the specimen on file. Based on these facts,
petitioner bank was constrained to close the respondent’s account for improper and irregular handling and
returned his Check No. 2434886 which was presented to the bank for payment on April 4, 1988.

Petitioner bank further posits that there is no law or rule which gives the respondent a legal right to make
good his check or to deposit the corresponding amount to cover said check within 24 hours after the same is
dishonored or returned by the bank for having been drawn against insufficient funds. It vigorously denies
having violated Article 19 of the Civil Code as it insists that it acted in good faith and in accordance with the
pertinent banking rules and regulations.
The petition is impressed with merit.
A perusal of the respective decisions of the court a quo and the appellate court show that the award of
damages in the respondent’s favor was anchored mainly on Article 19 of the Civil Code which, quoted anew
below, reads:
Art. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith.
The elements of abuse of rights are the following: (a) the existence of a legal right or duty; (b) which is
exercised in bad faith; and (c) for the sole intent of prejudicing or injuring another.7 Malice or bad faith is at
the core of the said provision.8 The law always presumes good faith and any person who seeks to be
awarded damages due to acts of another has the burden of proving that the latter acted in bad faith or with
ill-motive.9 Good faith refers to the state of the mind which is manifested by the acts of the individual
concerned. It consists of the intention to abstain from taking an unconscionable and unscrupulous advantage
of another.10 Bad faith does not simply connote bad judgment or simple negligence, dishonest purpose or
some moral obliquity and conscious doing of a wrong, a breach of known duty due to some motives or
interest or ill-will that partakes of the nature of fraud.11 Malice connotes ill-will or spite and speaks not in
response to duty. It implies an intention to do ulterior and unjustifiable harm. Malice is bad faith or bad
motive.12
Undoubtedly, petitioner bank has the right to close the account of the respondent based on the following
provisions of its Rules and Regulations Governing the Establishment and Operation of Regular Demand
Deposits:
10) The Bank reserves the right to close an account if the depositor frequently draws checks against
insufficient funds and/or uncollected deposits.
…
12) …
However, it is clearly understood that the depositor is not entitled, as a matter of right, to overdraw on this
deposit and the bank reserves the right at any time to return checks of the depositor which are drawn
against insufficient funds or for any other reason.
The facts, as found by the court a quo and the appellate court, do not establish that, in the exercise of this
right, petitioner bank committed an abuse thereof. Specifically, the second and third elements for abuse of
rights are not attendant in the present case. The evidence presented by petitioner bank negates the
existence of bad faith or malice on its part in closing the respondent’s account on April 4, 1988 because on
the said date the same was already overdrawn. The respondent issued four checks, all due on April 4, 1988,
amounting to ₱7,410.00 when the balance of his current account deposit was only ₱6,981.43. Thus, he
110
110
incurred an overdraft of ₱428.57 which resulted in the dishonor of his Check No. 2434886. Further,
petitioner bank showed that in 1986, the current account of the respondent was overdrawn 156 times due to
his issuance of checks against insufficient funds.13 In 1987, the said account was overdrawn 117 times for
the same
reason.14 Again, in 1988, 26 times.15 There were also several instances when the respondent issued checks
deliberately using a signature different from his specimen signature on file with petitioner bank.16 All these
circumstances taken together justified the petitioner bank’s closure of the respondent’s account on April 4,
1988 for "improper handling."
It is observed that nowhere under its rules and regulations is petitioner bank required to notify the
respondent, or any depositor for that matter, of the closure of the account for frequently drawing checks
against insufficient funds. No malice or bad faith could be imputed on petitioner bank for so acting since the
records bear out that the respondent had indeed been improperly and irregularly handling his account not
just a few times but hundreds of times. Under the circumstances, petitioner bank could not be faulted for
exercising its right in accordance with the express rules and regulations governing the current accounts of its
depositors. Upon the opening of his account, the respondent had agreed to be bound by these terms and
conditions.
Neither the fact that petitioner bank accepted the deposit made by the respondent the day following the
closure of his account constitutes bad faith or malice on the part of petitioner bank. The same could be
characterized as simple negligence by its personnel. Said act, by itself, is not constitutive of bad faith.
The respondent had thus failed to discharge his burden of proving bad faith on the part of petitioner bank or
that it was motivated by ill-will or spite in closing his account on April 4, 1988 and in inadvertently accepting
his deposit on April 5, 1988.
Further, it has not been shown that these acts were done by petitioner bank with the sole intention of
prejudicing and injuring the respondent. It is conceded that the respondent may have suffered damages as a
result of the closure of his current account. However, there is a material distinction between damages and
injury. The Court had the occasion to explain the distinction between damages and injury in this wise:
… Injury is the illegal invasion of a legal right; damage is the loss, hurt or harm which results from the
injury; and damages are the recompense or compensation awarded for the damage suffered. Thus, there
can be damage without injury in those instances in which the loss or harm was not the result of a violation of
a legal duty. In such cases, the consequences must be borne by the injured person alone, the law affords no
remedy for damages resulting from an act which does not amount to a legal injury or wrong. These
situations are often called damnum absque injuria.
In other words, in order that a plaintiff may maintain an action for the injuries of which he complains, he
must establish that such injuries resulted from a breach of duty which the defendant owed to the plaintiff – a
concurrence of injury to the plaintiff and legal responsibility by the person causing it. The underlying basis
for the award of tort damages is the premise that the individual was injured in contemplation of law. Thus,
there must first be a breach of some duty and the imposition of liability for that breach before damages may
be awarded; and the breach of such duty should be the proximate cause of the injury.17
Whatever damages the respondent may have suffered as a consequence, e.g., dishonor of his other
insufficiently funded checks, would have to be borne by him alone. It was the respondent’s repeated
improper
and irregular handling of his account which constrained petitioner bank to close the same in accordance with
the rules and regulations governing its depositors’ current accounts. The respondent’s case is clearly one
of damnum absque injuria.

WHEREFORE, the petition is GRANTED. The Decision dated August 30, 2002 and Resolution dated January
17, 2003 of the Court of Appeals in CA-G.R. CV No. 36627 are REVERSED AND SET ASIDE.

SO ORDERED.

111