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REPUBLIC ACT NO. 8791 AN ACT PROVIDING FOR THE REGULATION OF THE ORGANIZATION AND OPERATIONS OF BANKS, QUASI-BANKS, TRUST ENTITIES AND FOR OTHER PURPOSES CHAPTER I TITLE AND CLASSIFICATION OF BANKS SECTION 1. Title. — The short title of this Act shall be "The General Banking Law of 2000." (1a) SECTION 2. Declaration of Policy. — The State recognizes the vital role of banks in providing an environment conducive to the sustained development of the national economy and the fiduciary natureof banking that requires high standards of integrity and performance. In furtherance thereof, the State shall promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy. (n) SECTION 3. Definition and Classification of Banks. — 3.1. "Banks" shall refer to entities engaged in the lending of funds obtained in the form of deposits. (2a) 3.2. Banks shall be classified into: (a) Universal banks; (b) Commercial banks; (c) Thrift banks, composed of: (i) Savings and mortgage banks, (ii) Stock savings and loan associations, and (iii) Private development banks, as defined in Republic Act No. 7906 (hereafter the "Thrift Banks Act"); (d) Rural banks, as defined in Republic Act No. 7353 (hereafter the "Rural Banks Act"); (e) Cooperative banks, as defined in Republic Act No. 6938 (hereafter the "Cooperative Code"); (f) Islamic banks as defined in Republic Act No. 6848, otherwise known as the "Charter of Al Amanah Islamic Investment Bank of the Philippines"; and (g) Other classifications of banks as determined by the Monetary Board of the Bangko Sentral ng Pilipinas. (6-Aa) CHAPTER II AUTHORITY OF THE BANGKO SENTRAL SECTION 4. Supervisory Powers. — The operations and activities of banks shall be subject to supervision of the Bangko Sentral. "Supervision" shall include the following: 4.1. The issuance of rules of conduct or the establishment of standards of operation for uniform application to all institutions or functions covered, taking into consideration the distinctive character of the operations of institutions and the substantive similarities of specific functions to which such rules, modes or standards are to be applied; 4.2. The conduct of examination to determine compliance with laws and regulations if the circumstances so warrant as determined by the Monetary Board; 4.3. Overseeing to ascertain that laws and regulations are complied with; 4.4. Regular investigation which shall not be oftener than once a year from the last date of examination to determine whether an institution is conducting its business on a safe or sound basis: Provided, That the deficiencies/irregularities found by or discovered by an audit shall be immediately addressed; 4.5. Inquiring into the solvency and liquidity of the institution (2-D); or 4.6. Enforcing prompt corrective action. (n) The Bangko Sentral shall also have supervision over the operations of and exercise regulatory powers over quasi-banks, trust entities and other financial institutions which under special laws are subject to Bangko Sentral supervision. (2-Ca) For the purposes of this Act, "quasi-banks" shall refer to entities engaged in the borrowing of
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subject to Bangko Sentral supervision. (2-Ca) For the purposes of this Act, "quasi-banks" shall refer to entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes as defined in Section 95 of Republic Act No. 7653 (hereafter the "New Central Bank Act") for purposes of relending or purchasing of receivables and other obligations. (2-Da) SECTION 5. Policy Direction; Ratios, Ceilings and Limitations. — The Bangko Sentral shall provide policy direction in the areas of money, banking and credit. (n) For this purpose, the Monetary Board may prescribe ratios, ceilings, limitations, or other forms of regulation on the different types of accounts and practices of banks and quasi-banks which shall, to the extent feasible, conform to internationally accepted standards, including those of the Bank for International Settlements (BIS). The Monetary Board may exempt particular categories of transactions from such ratios, ceilings and limitations, but not limited to exceptional cases or to enable a bank or quasi-bank under rehabilitation or during a merger or consolidation to continue in business with safety to its creditors, depositors and the general public. (2-Ca) SECTION 6. Authority to Engage in Banking and Quasi-Banking Functions. — No person or entity shall engage in banking operations or quasi-banking functions without authority from the Bangko Sentral: Provided, however, That an entity authorized by the Bangko Sentral to perform universal or commercial banking functions shall likewise have the authority to engage in quasi-banking functions. The determination of whether a person or entity is performing banking or quasi-banking functions without Bangko Sentral authority shall be decided by the Monetary Board. To resolve such issue, the Monetary Board may, through the appropriate supervising and examining department of the Bangko Sentral, examine, inspect or investigate the books and records of such person or entity. Upon issuance of this authority, such person or entity may commence to engage in banking operations or quasi-banking functions and shall continue to do so unless such authority is sooner surrendered, revoked, suspended or annulled by the Bangko Sentral in accordance with this Act or other special laws. The department head and the examiners of the appropriate supervising and examining department are hereby authorized to administer oaths to any such person, employee, officer, or director of any such entity and to compel the presentation or production of such books, documents, papers or records that are reasonably necessary to ascertain the facts relative to the true functions and operations of such person or entity. Failure or refusal to comply with the required presentation or production of such books, documents, papers or records within a reasonable time shall subject the persons responsible therefore to the penal sanctions provided under the New Central Bank Act. Persons or entities found to be performing banking or quasi-banking functions without authority from the Bangko Sentral shall be subject to appropriate sanctions under the New Central Bank Act and other applicable laws. (4a) SECTION 7. Examination by the Bangko Sentral. — The Bangko Sentral shall, when examining a bank, have the authority to examine an enterprise which is wholly or majority-owned or controlled by the bank. (21-Ba) CHAPTER III ORGANIZATION, MANAGEMENT AND ADMINISTRATION OF BANKS, QUASI-BANKS AND TRUST ENTITIES SECTION 8. Organization. — The Monetary Board may authorize the organization of a bank or quasi-bank subject to the following conditions: 8.1. That the entity is a stock corporation (7); 8.2. That its funds are obtained from the public, which shall mean twenty (20) or more persons (2-Da); and 8.3. That the minimum capital requirements prescribed by the Monetary Board for each category of banks are satisfied. (n) No new commercial bank shall be established within three (3) years from the effectivity of this Act. In the exercise of the authority granted herein, the Monetary Board shall take into consideration their
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the exercise of the authority granted herein, the Monetary Board shall take into consideration their capability in terms of their financial resources and technical expertise and integrity. The bank licensing process shall incorporate an assessment of the bank's ownership structure, directors and senior management, its operating plan and internal controls as well as its projected financial condition and capital base. SECTION 9. Issuance of Stocks. — The Monetary Board may prescribe rules and regulations on the types of stock a bank may issue, including the terms thereof and rights appurtenant thereto to determine compliance with laws and regulations governing capital and equity structure of banks: Provided, That banks shall issue par value stocks only. SECTION 10. Treasury Stocks. — No bank shall purchase or acquire shares of its own capital stock or accept its own shares as a security for a loan, except when authorized by the Monetary Board: Provided, That in every case the stock so purchased or acquired shall, within six (6) months from the time of its purchase or acquisition, be sold or disposed of at a public or private sale. (24a) SECTION 11. Foreign Stockholdings. — Foreign individuals and non-bank corporations may own or control up to forty percent (40%) of the voting stock of a domestic bank. This rule shall apply to Filipinos and domestic non-bank corporations. (12a; 12-Aa) The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship of the individual stockholders in that bank. The citizenship of the corporation which is a stockholder in a bank shall follow the citizenship of the controlling stockholders of the corporation, irrespective of the place of incorporation. (n) SECTION 12. Stockholdings of Family Groups or Related Interests. — Stockholdings of individuals related to each other within the fourth degree of consanguinity or affinity, legitimate or common-law, shall be considered family groups or related interests and must be fully disclosed in all transactions by such an individual with the bank. (12-Da) SECTION 13. Corporate Stockholdings. — Two or more corporations owned or controlled by the same family group or same group of persons shall be considered related interests and must be fully disclosed in all transactions by such corporations or related groups of persons with the bank. (12-Ba) SECTION 14. Certificate of Authority to Register. — The Securities and Exchange Commission shall not register the articles of incorporation of any bank, or any amendment thereto, unless accompanied by a certificate of authority issued by the Monetary Board, under its seal. Such certificate shall not be issued unless the Monetary Board is satisfied from the evidence submitted to it: 14.1 That all requirements of existing laws and regulations to engage in the business for which the applicant is proposed to be incorporated have been complied with; 14.2. That the public interest and economic conditions, both general and local, justify the authorization; and 14.3. That the amount of capital, the financing, organization, direction and administration, as well as the integrity and responsibility of the organizers and administrators reasonably assure the safety of deposits and the public interest. (9) The Securities and Exchange Commission shall not register the by-laws of any bank, or any amendment thereto, unless accompanied by a certificate of authority from the Bangko Sentral. (10) SECTION 15. Board of Directors. — The provisions of the Corporation Code to the contrary notwithstanding, there shall be at least five (5), and a maximum of fifteen (15) members of the board of directors of bank, two (2) of whom shall be independent directors. An "independent director" shall mean a person other than an officer or employee of the bank, its subsidiaries or affiliates or related interests. (n) Non-Filipino citizens may become members of the board of directors of a bank to the extent of the foreign participation in the equity of said bank. (Sec. 7, RA 7721) The meetings of the board of directors may be conducted through modern technologies such as, but not limited to, teleconferencing and video-conferencing. (n) SECTION 16. Fit and Proper Rule. — To maintain the quality of bank management and afford better protection to depositors and the public in general, the Monetary Board shall prescribe, pass upon
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better protection to depositors and the public in general, the Monetary Board shall prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed bank directors or officers and disqualify those found unfit. After due notice to the board of directors of the bank, the Monetary Board may disqualify, suspend or remove any bank director or officer who commits or omits an act which render him unfit for the position. In determining whether an individual is fit and proper to hold the position of a director or officer of a bank, regard shall be given to his integrity, experience, education, training, and competence. (9-Aa) SECTION 17. Directors of Merged or Consolidated Banks. — In the case of a bank merger or consolidation, the number of directors shall not exceed twenty-one (21). (13a) SECTION 18. Compensation and Other Benefits of Directors and Officers. — To protect the funds of depositors and creditors, the Monetary Board may regulate the payment by the bank to its directors and officers of compensation, allowance, fees, bonuses, stock options, profit sharing and fringe benefits only in exceptional cases and when the circumstances warrant, such as but not limited to the following: 18.1. When a bank is under comptrollership or conservatorship; or 18.2. When a bank is found by the Monetary Board to be conducting business in an unsafe or unsound manner; or 18.3. When a bank is found by the Monetary Board to be in an unsatisfactory financial condition. (n) SECTION 19. Prohibition on Public Officials. — Except as otherwise provided in the Rural Banks Act, no appointive or elective public official, whether full-time or part-time shall at the same time serve as officer of any private bank, save in cases where such service is incident to financial assistance provided by the government or a government-owned or controlled corporation to the bank or unless otherwise provided under existing laws. (13) SECTION 20. Bank Branches. — Universal or commercial banks may open branches or other offices within or outside the Philippines upon prior approval of the Bangko Sentral. Branching by all other banks shall be governed by pertinent laws. A bank may, subject to prior approval of the Monetary Board, use any or all of its branches as outlets for the presentation and/or sale of the financial products of its allied undertaking or of its investment house units. A bank authorized to establish branches or other offices shall be responsible for all business conducted in such branches and offices to the same extent and in the same manner as though such business had all been conducted in the head office. A bank and its branches and offices shall be treated as one unit. (6-B; 27) SECTION 21. Banking Days and Hours. — Unless otherwise authorized by the Bangko Sentral in the interest of the banking public, all banks including their branches and offices shall transact business on all working days for at least six (6) hours a day. In addition, banks or any of their branches or offices may open for business on Saturdays, Sundays or holidays for at least three (3) hours a day: Provided, That banks which opt to open on days other than working days shall report to the Bangko Sentral the additional days during which they or their branches or offices shall transact business. For purposes of this Section, working days shall mean Mondays to Fridays, except if such days are holidays. (6-Ca) SECTION 22. Strikes and Lockouts. — The banking industry is hereby declared as indispensable to the national interest and, not withstanding the provisions of any law to the contrary, any strike or lockout involving banks, if unsettled after seven (7) calendar days shall be reported by the Bangko Sentral to the Secretary of Labor who may assume jurisdiction over the dispute or decide it or certify the same to the National Labor Relations Commission for compulsory arbitration. However, the President of the Philippines may at any time intervene and assume jurisdiction over such labor dispute in order to settle or terminate the same. (6-E) CHAPTER IV DEPOSITS, LOANS AND OTHER OPERATIONS
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DEPOSITS, LOANS AND OTHER OPERATIONS ARTICLE I - OPERATIONS OF UNIVERSAL BANKS SECTION 23. Powers of a Universal Bank. — A universal bank shall have the authority to exercise, in addition to the powers authorized for a commercial bank in Section 29, the powers of an investment house as provided in existing laws and the power to invest in non-allied enterprises as provided in this Act. (21-B) SECTION 24. Equity Investments of a Universal Bank. — A universal bank may, subject to the conditions stated in the succeeding paragraph, invest in the equities of allied and non-allied enterprises as may be determined by the Monetary Board. Allied enterprises may either be financial or non-financial. Except as the Monetary Board may otherwise prescribe: 24.1. The total investment in equities of allied and non-allied enterprises shall not exceed fifty percent (50%) of the net worth of the bank; and 24.2. The equity investment in any one enterprise, whether allied or non-allied, shall not exceed twenty-five percent (25%) of the net worth of the bank. As used in this Act, "net worth" shall mean the total of the unimpaired paid-in capital including paid-in surplus, retained earnings and undivided profit, net of valuation reserves and other adjustments as may be required by the Bangko Sentral. The acquisition of such equity or equities is subject to the prior approval of the Monetary Board which shall promulgate appropriate guidelines to govern such investments. (21-Ba) SECTION 25. Equity Investments of a Universal Bank in Financial Allied Enterprises. — A universal bank can own up to one hundred percent (100%) of the equity in a thrift bank, a rural bank or a financial allied enterprise. A publicly-listed universal or commercial bank may own up to one hundred percent (100%) of the voting stock of only one other universal or commercial bank. (21-B; 21-Ca) SECTION 26. Equity Investments of a Universal Bank in Non-Financial Allied Enterprises. — A universal bank may own up to one hundred percent (100%) of the equity in a non-financial allied enterprise. (21-Ba) SECTION 27. Equity Investments of a Universal Bank in Non-Allied Enterprises. — The equity investment of a universal bank, or of its wholly or majority-owned subsidiaries, in a single nonallied enterprise shall not exceed thirty-five percent (35%) of the total equity in that enterprise nor shall it exceed thirty-five percent (35%) of the voting stock in that enterprise. (21-B) SECTION 28. Equity Investments in Quasi-Banks. — To promote competitive conditions in financial markets, the Monetary Board may further limit to forty percent (40%) equity investments of universal banks in quasi-banks. This rule shall also apply in the case of commercial banks. (12-E) ARTICLE II - OPERATIONS OF COMMERCIAL BANKS SECTION 29. Powers of a Commercial Bank. — A commercial bank shall have, in addition to the general powers incident to corporations, all such powers as may be necessary to carry on the business of commercial banking, such as accepting drafts and issuing letters of credit; discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; accepting or creating demand deposits; receiving other types of deposits and deposit substitutes; buying and selling foreign exchange and gold or silver bullion; acquiring marketable bonds and other debt securities; and extending credit, subject to such rules as the Monetary Board may promulgate. These rules may include the determination of bonds and other debt securities eligible for investment, the maturities and aggregate amount of such investment. (21a) SECTION 30. Equity Investments of a Commercial Bank. — A commercial bank may, subject to the conditions stated in the succeeding paragraphs, invest only in the equities of allied enterprises as may be determined by the Monetary Board. Allied enterprises may either be financial or non-financial. Except as the Monetary Board may otherwise prescribe: 30.1. The total investment in equities of allied enterprises shall not exceed thirty-five percent
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30.1. The total investment in equities of allied enterprises shall not exceed thirty-five percent (35%) of the net worth of the bank; and 30.2. The equity investment in any one enterprise shall not exceed twenty-five percent (25%) of the net worth of the bank. The acquisition of such equity or equities is subject to the prior approval of the Monetary Board which shall promulgate appropriate guidelines to govern such investments. (21A-a; 21-Ca) SECTION 31. Equity Investments of a Commercial Bank in Financial Allied Enterprises. — A commercial bank may own up to one hundred percent (100%) of the equity of a thrift bank or a rural bank. Where the equity investment of a commercial bank is in other financial allied enterprises, including another commercial bank, such investment shall remain a minority holding in that enterprise. (21-Aa; 21-Ca) SECTION 32. Equity Investments of a Commercial Bank in Non-Financial Allied Enterprises. — A commercial bank may own up to one hundred percent (100%) of the equity in a nonfinancial allied enterprise. (21-Aa) ARTICLE III - PROVISIONS APPLICABLE TO ALL BANKS, QUASI-BANKS, AND TRUST ENTITIES SECTION 33. Acceptance of Demand Deposits. — A bank other than a universal or commercial bank cannot accept or create demand deposits except upon prior approval of, and subject to such conditions and rules as may be prescribed by the Monetary Board. (72-Aa) SECTION 34. Risk-Based Capital. — The Monetary Board shall prescribe the minimum ratio which the net worth of a bank must bear to its total risk assets which may include contingent accounts. For purposes of this Section, the Monetary Board may require that such ratio be determined on the basis of the net worth and risk assets of a bank and its subsidiaries, financial or otherwise, as well as prescribe the composition and the manner of determining the net worth and total risk assets of banks and their subsidiaries: Provided, That in the exercise of this authority, the Monetary Board shall, to the extent feasible, conform to internationally accepted standards, including those of the Bank for International Settlements (BIS), relating to risk-based capital requirements: Provided, further, That it may alter or suspend compliance with such ratio whenever necessary for a maximum period of one (1) year: Provided, finally, That such ratio shall be applied uniformly to banks of the same category. In case a bank does not comply with the prescribed minimum ratio, the Monetary Board may limit or prohibit the distribution of net profits by such bank and may require that part or all of the net profits be used to increase the capital accounts of the bank until the minimum requirement has been met. The Monetary Board may, furthermore, restrict or prohibit the acquisition of major assets and the making of new investments by the bank, with the exception of purchases of readily marketable evidences of indebtedness of the Republic of the Philippines and of the Bangko Sentral and any other evidences of indebtedness or obligations the servicing and repayment of which are fully guaranteed by the Republic of the Philippines, until the minimum required capital ratio has been restored. In case of a bank merger or consolidation, or when a bank is under rehabilitation under a program approved by the Bangko Sentral, the Monetary Board may temporarily relieve the surviving bank, consolidated bank, or constituent bank or corporations under rehabilitation from full compliance with the required capital ratio under such conditions as it may prescribe. Before the effectivity of the rules which the Monetary Board is authorized to prescribe under this provision, Section 22 of the General Banking Act, as amended, Section 9 of the Thrift Banks Act, and all pertinent rules issued pursuant thereto, shall continue to be in force. (22a) SECTION 35. Limit on Loans, Credit Accommodations and Guarantees. — 35.1. Except as the Monetary Board may otherwise prescribe for reasons of national interest, the
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35.1. Except as the Monetary Board may otherwise prescribe for reasons of national interest, the total amount of loans, credit accommodations and guarantees as may be defined by the Monetary Board that may be extended by a bank to any person, partnership, association, corporation or other entity shall at no time exceed twenty percent (20%) of the net worth of such bank. The basis for determining compliance with single-borrower limit is the total credit commitment of the bank to the borrower. 35.2. Unless the Monetary Board prescribes otherwise, the total amount of loans, credit accommodations and guarantees prescribed in the preceding paragraph may be increased by an additional ten percent (10%) of the net worth of such bank provided the additional liabilities of any borrower are adequately secured by trust receipts, shipping documents, warehouse receipts or other similar documents transferring or securing title covering readily marketable, non-perishable goods which must be fully covered by insurance. 35.3. The above prescribed ceilings shall include: (a) the direct liability of the maker or acceptor of paper discounted with or sold to such bank and the liability of a general indorser, drawer or guarantor who obtains a loan or other credit accommodation from or discounts paper with or sells papers to such bank; (b) in the case of an individual who owns or controls a majority interest in a corporation, partnership, association or any other entity, the liabilities of said entities to such bank; (c) in the case of a corporation, all liabilities to such bank of all subsidiaries in which such corporation owns or controls a majority interest; and (d) in the case of a partnership, association or other entity, the liabilities of the members thereof to such bank. 35.4. Even if a parent corporation, partnership, association, entity or an individual who owns or controls a majority interest in such entities has no liability to the bank, the Monetary Board may prescribe the combination of the liabilities of subsidiary corporations or members of the partnership, association, entity or such individual under certain circumstances, including but not limited to any of the following situations: (a) the parent corporation, partnership, association, entity or individual guarantees the repayment of the liabilities; (b) the liabilities were incurred for the accommodation of the parent corporation or another subsidiary or of the partnership or association or entity or such individual; or (c) the subsidiaries though separate entities operate merely as departments or divisions of a single entity. 35.5. For purposes of this Section, loans, other credit accommodations and guarantees shall exclude: (a) loans and other credit accommodations secured by obligations of the Bangko Sentral or of the Philippine Government; (b) loans and other credit accommodations fully guaranteed by the government as to the payment of principal and interest; (c) loans and other credit accommodations covered by assignment of deposits maintained in the lending bank and held in the Philippines; (d) loans, credit accommodations and acceptances under letters of credit to the extent covered by margin deposits; and (e) other loans or credit accommodations which the Monetary Board may from time to time, specify as non-risk items. 35.6. Loans and other credit accommodations, deposits maintained with, and usual guarantees by a bank to any other bank or non-bank entity, whether locally or abroad, shall be subject to the limits as herein prescribed. 35.7. Certain types of contingent accounts of borrowers may be included among those subject to these prescribed limits as may be determined by the Monetary Board. (23a) SECTION 36. Restriction on Bank Exposure to Directors, Officers, Stockholders and Their Related Interests. — No director or officer of any bank shall, directly or indirectly, for himself or as the representative or agent of others, borrow from such bank nor shall he become a guarantor, indorser or surety for loans from such bank to others, or in any manner be an obligor or incur any contractual liability to the bank except with the written approval of the majority of all the directors of the bank, excluding the director concerned: Provided, That such written approval shall not be required for loans, other credit accommodations and advances granted to officers under a fringe benefit plan approved by the Bangko Sentral. The required approval shall be entered upon the records of the bank and a copy of such entry shall be transmitted forthwith to the appropriate supervising and examining department of the Bangko
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Sentral. The required approval shall be entered upon the records of the bank and a copy of such entry shall be transmitted forthwith to the appropriate supervising and examining department of the Bangko Sentral. Dealings of a bank with any of its directors, officers or stockholders and their related interests shall be upon terms not less favorable to the bank than those offered to others. After due notice to the board of directors of the bank, the office of any bank director or officer who violates the provisions of this Section may be declared vacant and the director or officer shall be subject to the penal provisions of the New Central Bank Act. The Monetary Board may regulate the amount of loans, credit accommodations and guarantees that may be extended, directly or indirectly, by a bank to its directors, officers, stockholders and their related interests, as well as investments of such bank in enterprises owned or controlled by said directors, officers, stockholders and their related interests. However, the outstanding loans, credit accommodations and guarantees which a bank may extend to each of its stockholders, directors, or officers and their related interests, shall be limited to an amount equivalent to their respective unencumbered deposits and book value of their paid-in capital contribution in the bank: Provided, however, That loans, credit accommodations and guarantees secured by assets considered as non-risk by the Monetary Board shall be excluded from such limit: Provided, further, That loans, credit accommodations and advances to officers in the form of fringe benefits granted in accordance with rules as may be prescribed by the Monetary Board shall not be subject to the individual limit. The Monetary Board shall define the term "related interests." The limit on loans, credit accommodations and guarantees prescribed herein shall not apply to loans, credit accommodations and guarantees extended by a cooperative bank to its cooperative shareholders. (83a) SECTION 37. Loans and Other Credit Accommodations Against Real Estate. — Except as the Monetary Board may otherwise prescribe, loans and other credit accommodations against real estate shall not exceed seventy-five percent (75%) of the appraised value of the respective real estate security, plus sixty percent (60%) of the appraised value of the insured improvements, and such loans may be made to the owner of the real estate or to his assignees. (78a) SECTION 38. Loans and Other Credit Accommodations on Security of Chattels and Intangible Properties. — Except as the Monetary Board may otherwise prescribe, loans and other credit accommodations on security of chattels and intangible properties, such as, but not limited to, patents, trademarks, trade names, and copyrights shall not exceed seventy-five percent (75%) of the appraised value of the security, and such loans and other credit accommodations may be made to the title-holder of the chattels and intangible properties or his assignees. (78a) SECTION 39. Grant and Purpose of Loans and Other Credit Accommodations. — A bank shall grant loans and other credit accommodations only in amounts and for the periods of time essential for the effective completion of the operations to be financed. Such grant of loans and other credit accommodations shall be consistent with safe and sound banking practices. (75a) The purpose of all loans and other credit accommodations shall be stated in the application and in the contract between the bank and the borrower. If the bank finds that the proceeds of the loan or other credit accommodation have been employed, without its approval, for purposes other than those agreed upon with the bank, it shall have the right to terminate the loan or other credit accommodation and demand immediate repayment of the obligation. (77) SECTION 40. Requirement for Grant of Loans or Other Credit Accommodations. — Before granting a loan or other credit accommodation, a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank. Toward this end, a bank may demand from its credit applicants a statement of their assets and liabilities and of their income and expenditures and such information as may be prescribed by law or by rules and regulations of Monetary Board to enable the bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation purposes to the Bureau of
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rules and regulations of Monetary Board to enable the bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation purposes to the Bureau of Internal Revenue. Should such statements prove to be false or incorrect in any material detail, the bank may terminate any loan or other credit accommodation granted on the basis of said statements and shall have the right to demand immediate repayment or liquidation of the obligation. In formulating rules and regulations under this Section, the Monetary Board shall recognize the peculiar characteristics of microfinancing, such as cash flow-based lending to the basic sectors that are not covered by traditional collateral. (76a) SECTION 41. Unsecured Loans or Other Credit Accommodations. — The Monetary Board is hereby authorized to issue such regulations as it may deem necessary with respect to unsecured loans or other credit accommodations that may be granted by banks. (n) SECTION 42. Other Security Requirements for Bank Credits. — The Monetary Board may, by regulation, prescribe further security requirements to which the various types of bank credits shall be subject, and, in accordance with the authority granted to it in Section 106 of the New Central Bank Act, the Board may by regulation, reduce the maximum ratios established in Sections 36 and 37 of this Act, or, in special cases, increase the maximum ratios established therein. (78) SECTION 43. Authority to Prescribe Terms and Conditions of Loans and Other Credit Accommodations. — The Monetary Board may, similarly, in accordance with the authority granted to it in Section 106 of the New Central Bank Act, and taking into account the requirements of the economy for the effective utilization of long-term funds, prescribe the maturities, as well as related terms and conditions for various types of bank loans and other credit accommodations. Any change by the Board in the maximum maturities shall apply only to loans and other credit accommodations made after the date of such action. The Monetary Board shall regulate the interest imposed on microfinance borrowers by lending investors and similar lenders, such as, but not limited to, the unconscionable rates of interest collected on salary loans and similar credit accommodations. (78a) SECTION 44. Amortization on Loans and Other Credit Accommodations. — The amortization schedule of bank loans and other credit accommodations shall be adapted to the nature of the operations to be financed. In case of loans and other credit accommodations with maturities of more than five (5) years, provisions must be made for periodic amortization payments, but such payments must be made at least annually: Provided, however, That when the borrowed funds are to be used for purposes which do not initially produce revenues adequate for regular amortization payments therefrom, the bank may permit the initial amortization payment to be deferred until such time as said revenues are sufficient for such purpose, but in no case shall the initial amortization date be later than five (5) years from the date on which the loan or other credit accommodation is granted. (79a) In case of loans and other credit accommodations to microfinance sectors, the schedule of loan amortization shall take into consideration the projected cash flow of the borrower and adopt this into the terms and conditions formulated by banks. (n) SECTION 45. Prepayment of Loans and Other Credit Accommodations. — A borrower may at any time prior to the agreed maturity date prepay, in whole or in part, the unpaid balance of any bank loan and other credit accommodation, subject to such reasonable terms and conditions as may be agreed upon between the bank and its borrower. (80a) SECTION 46. Development Assistance Incentives. — The Bangko Sentral shall provide incentives to banks which, without government guarantee, extend loans to finance educational institutions, cooperatives, hospitals and other medical services, socialized or low-cost housing, local government units and other activities with social content. (n)
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institutions, cooperatives, hospitals and other medical services, socialized or low-cost housing, local government units and other activities with social content. (n) SECTION 47. Foreclosure of Real Estate Mortgage. — In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at the rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. However, the purchaser at the auction sale concerned whether in a judicial or extrajudicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding. Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights until their expiration. (78a) SECTION 48. Renewal or Extension of Loans and Other Credit Accommodations. — The Monetary Board may, by regulation, prescribe the conditions and limitations under which a bank may grant extensions or renewals of its loans and other credit accommodations. (81) SECTION 49. Provisions for Losses and Write-Offs. — All debts due to any bank on which interest is past due and unpaid for such period as may be determined by the Monetary Board, unless the same are well-secured and in the process of collection shall be considered bad debts within the meaning of this Section. The Monetary Board may fix, by regulation or by order in a specific case, the amount of reserves for bad debts or doubtful accounts or other contingencies. Writing off of loans, other credit accommodations, advances and other assets shall be subject to regulations issued by the Monetary Board. (84a) SECTION 50. Major Investments. — For the purpose of enhancing bank supervision, the Monetary Board shall establish criteria for reviewing major acquisitions or investments by a bank including corporate affiliations or structures that may expose the bank to undue risks or in any way hinder effective supervision. SECTION 51. Ceiling on Investments in Certain Assets. — Any bank may acquire real estate as shall be necessary for its own use in the conduct of its business: Provided, however, That the total investment in such real estate and improvements thereof, including bank equipment, shall not exceed fifty percent (50%) of combined capital accounts: Provided, further, That the equity investment of a bank in another corporation engaged primarily in real estate shall be considered as part of the bank's total investment in real estate, unless otherwise provided by the Monetary Board. (25a) SECTION 52. Acquisition of Real Estate by Way of Satisfaction of Claims. — Notwithstanding the limitations of the preceding Section, a bank may acquire, hold or convey real property under the following circumstances: 52.1. Such as shall be mortgaged to it in good faith by way of security for debts; 52.2. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; or 52.3. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held
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its dealings; or 52.3. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due it. Any real property acquired or held under the circumstances enumerated in the above paragraph shall be disposed of by the bank within a period of five (5) years or as may be prescribed by the Monetary Board: Provided, however, That the bank may, after said period, continue to hold the property for its own use, subject to the limitations of the preceding Section. (25a) SECTION 53. Other Banking Services. — In addition to the operations specifically authorized in this Act, a bank may perform the following services: 53.1. Receive in custody funds, documents and valuable objects; 53.2. Act as financial agent and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and all types of securities; 53.3. Make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business; 53.4. Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts; and 53.5. Rent out safety deposit boxes. The bank shall perform the services permitted under Subsections 53.1, 53.2, 53.3 and 53.4 as depositary or as an agent. Accordingly, it shall keep the funds, securities and other effects which it receives duly separate from the bank's own assets and liabilities. The Monetary Board may regulate the operations authorized by this Section in order to ensure that such operations do not endanger the interests of the depositors and other creditors of the bank. In case a bank or quasi-bank notifies the Bangko Sentral or publicly announces a bank holiday, or in any manner suspends the payment of its deposit liabilities continuously for more than thirty (30) days, the Monetary Board may summarily and without need for prior hearing close such banking institution and place it under receivership of the Philippine Deposit Insurance Corporation. (72a) SECTION 54. Prohibition to Act as Insurer. — A bank shall not directly engage in insurance business as the insurer. (73) SECTION 55. Prohibited Transactions. — 55.1. No director, officer, employee, or agent of any bank shall — (a) Make false entries in any bank report or statement or participate in any fraudulent transaction, thereby affecting the financial interest of, or causing damage to, the bank or any person; (b) Without order of a court of competent jurisdiction, disclose to any unauthorized person any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity: Provided, That with respect to bank deposits, the provisions of existing laws shall prevail; (c) Accept gifts, fees or commissions or any other form of remuneration in connection with the approval of a loan or other credit accommodation from said bank; (d) Overvalue or aid in overvaluing any security for the purpose of influencing in any way the actions of the bank or any bank; or (e) Outsource inherent banking functions. 55.2. No borrower of a bank shall — (a) Fraudulently overvalue property offered as security for a loan or other credit accommodation from the bank; (b) Furnish false or make misrepresentation or suppression of material facts for the purpose of obtaining, renewing, or increasing a loan or other credit accommodation or extending the period thereof; (c) Attempt to defraud the said bank in the event of a court action to recover a loan or other credit accommodation; or (d) Offer any director, officer, employee or agent of a bank any gift, fee, commission, or any other form of compensation in order to influence such persons into approving a loan or other credit accommodation application.
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other form of compensation in order to influence such persons into approving a loan or other credit accommodation application. 55.3. No examiner, officer or employee of the Bangko Sentral or of any department, bureau, office, branch or agency of the Government that is assigned to supervise, examine, assist or render technical assistance to any bank shall commit any of the acts enumerated in this Section or aid in the commission of the same. (87-Aa) The making of false reports or misrepresentation or suppression of material facts by personnel of the Bangko Sentral ng Pilipinas shall constitute fraud and shall be subject to the administrative and criminal sanctions provided under the New Central Bank Act. 55.4. Consistent with the provisions of Republic Act No. 1405, otherwise known as the Banks Secrecy Law, no bank shall employ casual or nonregular personnel or too lengthy probationary personnel in the conduct of its business involving bank deposits. SECTION 56. Conducting Business in an Unsafe or Unsound Manner. — In determining whether a particular act or omission, which is not otherwise prohibited by any law, rule or regulation affecting banks, quasi-banks or trust entities, may be deemed as conducting business in an unsafe or unsound manner for purposes of this Section, the Monetary Board shall consider any of the following circumstances: 56.1. The act or omission has resulted or may result in material loss or damage, or abnormal risk or danger to the safety, stability, liquidity or solvency of the institution; 56.2. The act or omission has resulted or may result in material loss or damage or abnormal risk to the institution's depositors, creditors, investors, stockholders or to the Bangko Sentral or to the public in general; 56.3. The act or omission has caused any undue injury, or has given any unwarranted benefits, advantage or preference to the bank or any party in the discharge by the director or officer of his duties and responsibilities through manifest partiality, evident bad faith or gross inexcusable negligence; or 56.4. The act or omission involves entering into any contract or transaction manifestly and grossly disadvantageous to the bank, quasi-bank or trust entity, whether or not the director or officer profited or will profit thereby. Whenever a bank, quasi-bank or trust entity persists in conducting its business in an unsafe or unsound manner, the Monetary Board may, without prejudice to the administrative sanctions provided in Section 37 of the New Central Bank Act, take action under Section 30 of the same Act and/or immediately exclude the erring bank from clearing, the provisions of law to the contrary notwithstanding. (n) SECTION 57. Prohibition on Dividend Declaration. — No bank or quasi-bank shall declare dividends greater than its accumulated net profits then on hand, deducting therefrom its losses and bad debts. Neither shall the bank nor quasi-bank declare dividends, if at the time of declaration: 57.1 Its clearing account with the Bangko Sentral is overdrawn; or 57.2 It is deficient in the required liquidity floor for government deposits for five (5) or more consecutive days; or 57.3 It does not comply with the liquidity standards/ratios prescribed by the Bangko Sentral for purposes of determining funds available for dividend declaration; or 57.4 It has committed a major violation as may be determined by the Bangko Sentral. (84a) SECTION 58. Independent Auditor. — The Monetary Board may require a bank, quasi-bank or trust entity to engage the services of an independent auditor to be chosen by the bank, quasi-bank or trust entity concerned from a list of certified public accountants acceptable to the Monetary Board. The term of the engagement shall be as prescribed by the Monetary Board which may either be on a continuing basis where the auditor shall act as resident examiner, or on the basis of special engagements, but in any case, the independent auditor shall be responsible to the bank's, quasi-bank's or trust entity's board of directors. A copy of the report shall be furnished to the Monetary Board. The Monetary Board may also direct the board of directors of a bank, quasi-bank, trusty entity and/or the individual members thereof, to conduct, either personally or by a committee created by the board, an annual balance sheet audit of the bank, quasi-bank or trust entity to review the internal audit and control
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control system of the bank, quasi-bank or trust entity and to submit a report of such audit. (6-Da) SECTION 59. Authority to Regulate Electronic Transactions. — The Bangko Sentral shall have full authority to regulate the use of electronic devices, such as computers, and processes for recording, storing and transmitting information or data in connection with the operations of a bank, quasibank or trust entity, including the delivery of services and products to customers by such entity. (n) SECTION 60. Financial Statements. — Every bank, quasi-bank or trust entity shall submit to the appropriate supervising and examining department of the Bangko Sentral financial statements in such form and frequency as may be prescribed by the Bangko Sentral. Such statements, which shall be as of a specific date designated by the Bangko Sentral, shall show the actual financial condition of the institution submitting the statement, and of its branches, offices, subsidiaries and affiliates, including the results of its operations, and shall contain such information as may be required in Bangko Sentral regulations. (n) SECTION 61. Publication of Financial Statements. — Every bank, quasi-bank or trust entity, shall publish a statement of its financial condition, including those of its subsidiaries and affiliates, in such terms understandable to the layman and in such frequency as may be prescribed by the Bangko Sentral, in English or Filipino, at least once every quarter in a newspaper of general circulation in the city or province where the principal office, in the case of a domestic institution, or the principal branch or office in the case of a foreign bank, is located, but if no newspaper is published in the same province, then in a newspaper published in Metro Manila or in the nearest city or province. The Bangko Sentral may by regulation prescribe the newspaper where the statements prescribed herein shall be published. The Monetary Board may allow the posting of the financial statements of a bank, quasi-bank or trust entity in public places it may determine, in lieu of the publication required in the preceding paragraph, when warranted by the circumstances. Additionally, banks shall make available to the public in such form and manner as the Bangko Sentral may prescribe the complete set of its audited financial statements as well as such other relevant information including those on enterprises majority-owned or controlled by the bank, that will inform the public of the true financial condition of a bank as of any given time. In periods of national and/or local emergency or of imminent panic which directly threaten monetary and banking stability, the Monetary Board, by a vote of at least five (5) of its members, in special cases and upon application of the bank, quasi-bank or trust entity, may allow such bank, quasibank or trust entity to defer for a stated period of time the publication of the statement of financial condition required herein. (n) SECTION 62. Publication of Capital Stock. — A bank, quasi-bank or trust entity incorporated under the laws of the Philippines shall not publish the amount of its authorized or subscribed capital stock without indicating at the same time and with equal prominence, the amount of its capital actually paid up. No branch of any foreign bank doing business in the Philippines shall in any way announce the amount of the capital and surplus of its head office, or of the bank in its entirety without indicating at the same time and with equal prominence the amount of the capital, if any, definitely assigned to such branch. In case no capital has been definitely assigned to such branch, such fact shall be stated in, and shall form part of the publication. (82) SECTION 63. Settlement of Disputes. — The provisions of any law to the contrary notwithstanding, the Bangko Sentral shall be consulted by other government agencies or instrumentalities in actions or proceedings initiated by or brought before them involving controversies in banks,
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in actions or proceedings initiated by or brought before them involving controversies in banks, quasibanks or trust entities arising out of and involving relations between and among their directors, officers or stockholders, as well as disputes between any or all of them and the bank, quasi-bank or trust entity of which they are directors, officers or stockholders. (n) SECTION 64. Unauthorized Advertisement or Business Representation. — No person, association, or corporation unless duly authorized to engage in the business of a bank, quasi-bank, trust entity, or savings and loan association as defined in this Act, or other banking laws, shall advertise or hold itself out as being engaged in the business of such bank, quasi-bank, trust entity, or association, or use in connection with its business title, the word or words "bank", "banking", "banker", "quasi-bank", "quasibanking", "quasi-banker", "savings and loan association", "trust corporation", "trust company" or words of similar import or transact in any manner the business of any such bank, corporation or association. (6) SECTION 65. Service Fees. — The Bangko Sentral may charge equitable rates, commissions or fees, as may be prescribed by the Monetary Board for supervision, examination and other services which it renders under this Act. (n) SECTION 66. Penalty for Violation of this Act. — Unless otherwise herein provided, the violation of any of the provisions of this Act shall be subject to Sections 34, 35, 36 and 37 of the New Central Bank Act. If the offender is a director or officer of a bank, quasi-bank or trust entity, the Monetary Board may also suspend or remove such director or officer. If the violation is committed by a corporation, such corporation may be dissolved by quo warranto proceedings instituted by the Solicitor General. (87) CHAPTER V PLACEMENT UNDER CONSERVATORSHIP SECTION 67. Conservatorship. — The grounds and procedures for placing a bank under conservatorship, as well as, the powers and duties of the conservator appointed for the bank shall be governed by the provisions of Section 29 and the last two paragraphs of Section 30 of the New Central Bank Act: Provided, That this Section shall also apply to conservatorship proceedings of quasi-banks. (n) CHAPTER VI CESSATION OF BANKING BUSINESS SECTION 68. Voluntary Liquidation. — In case of the voluntary liquidation of any bank organized under the laws of the Philippines, or of any branch or office in the Philippines of a foreign bank, written notice of such liquidation shall be sent to the Monetary Board before such liquidation is undertaken, and the Monetary Board shall have the right to intervene and take such steps as may be necessary to protect the interests of creditors. (86) SECTION 69. Receivership and Involuntary Liquidation. — The grounds and procedures for placing a bank under receivership or liquidation, as well as the powers and duties of the receiver or liquidator appointed for the bank shall be governed by the provisions of Sections 30, 31, 32, and 33 of the New Central Bank Act: Provided, That the petitioner or plaintiff files with the clerk or judge of the court in which the action is pending a bond, executed in favor of the Bangko Sentral, in an amount to be fixed by the court. This Section shall also apply to the extent possible to the receivership and liquidation proceedings of quasi-banks. (n) SECTION 70. Penalty for Transactions After a Bank Becomes Insolvent. — Any director or officer of any bank declared insolvent or placed under receivership by the Monetary Board who refuses to turn over the bank's records and assets to the designated receivers, or who tampers with banks records, or who appropriates for himself or another party or destroys or causes the misappropriation and destruction of the bank's assets, or who receives or permits or causes to be received in said bank any deposit, collection of loans and/or receivables, or who pays out or permits or causes to be paid out any funds of said bank, or who transfers or permits or causes to be transferred any securities or property of
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deposit, collection of loans and/or receivables, or who pays out or permits or causes to be paid out any funds of said bank, or who transfers or permits or causes to be transferred any securities or property of said bank shall be subject to the penal provisions of the New Central Bank Act. (85a) CHAPTER VII LAWS GOVERNING OTHER TYPES OF BANKS SECTION 71. Other Banking Laws. — The organization, ownership and capital requirements, powers, supervision and general conduct of business of thrift banks, rural banks and cooperative banks shall be governed by the provisions of the Thrift Banks Act, the Rural Banks Act, and the Cooperative Code, respectively. The organization, ownership and capital requirements, powers, supervision and general conduct of business of Islamic banks shall be governed by special laws. The provisions of this Act, however, insofar as they are not in conflict with the provisions of the Thrift Banks Act, the Rural Banks Act, and the Cooperative Code shall likewise apply to thrift banks, rural banks, and cooperative banks, respectively. However, for purposes of prescribing the minimum ratio which the net worth of a thrift bank must bear to its total risk assets, the provisions of Section 33 of this Act shall govern. (n) CHAPTER VIII FOREIGN BANKS SECTION 72. Transacting Business in the Philippines. — The entry of foreign banks in the Philippines through the establishment of branches shall be governed by the provisions of the Foreign Banks Liberalization Act. The conduct of offshore banking business in the Philippines shall be governed by the provisions of the Presidential Decree No. 1034, otherwise known as the "Offshore Banking System Decree." (14a) SECTION 73. Acquisition of Voting Stock in a Domestic Bank. — Within seven (7) years from the effectivity of this Act and subject to guidelines issued pursuant to the Foreign Banks Liberalization Act, the Monetary Board may authorize a foreign bank to acquire up to one hundred percent (100%) of the voting stock of only one (1) bank organized under the laws of the Republic of the Philippines. Within the same period, the Monetary Board may authorize any foreign bank, which prior to the effectivity of this Act availed itself of the privilege to acquire up to sixty percent (60%) of the voting stock of a bank under the Foreign Banks Liberalization Act and the Thrift Banks Act, to further acquire voting shares of such bank to the extent necessary for it to own one hundred percent (100%) of the voting stock thereof. In the exercise of this authority, the Monetary Board shall adopt measures as may be necessary to ensure that at all times the control of seventy percent (70%) of the resources or assets of the entire banking system is held by banks which are at least majority-owned by Filipinos. Any right, privilege or incentive granted to a foreign bank under this Section shall be equally enjoyed by and extended under the same conditions to banks organized under the laws of the Republic of the Philippines. (Secs. 2 and 3, RA 7721) SECTION 74. Local Branches of Foreign Banks. — In the case of a foreign bank which has more than one (1) branch in the Philippines, all such branches shall be treated as one (1) unit for the purpose of this Act, and all references to the Philippine branches of foreign banks shall be held to refer to such units. (68) SECTION 75. Head Office Guarantee. — In order to provide effective protection of the interests of the depositors and other creditors of Philippine branches of a foreign bank, the head office of such branches shall fully guarantee the prompt payment of all liabilities of its Philippine branch. (69) Residents and citizens of the Philippines who are creditors of a branch in the Philippines of a foreign bank shall have preferential rights to the assets of such branch in accordance with existing laws. (19) SECTION 76. Summons and Legal Process. — Summons and legal process served upon the Philippine agent or head of any foreign bank designated to accept service thereof shall give jurisdiction to
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to the courts over such bank, and service of notices on such agent or head shall be as binding upon the bank which he represents as if made upon the bank itself. Should the authority of such agent or head to accept service of summons and legal processes for the bank or notice to it be revoked, or should such agent or head become mentally incompetent or otherwise unable to accept service while exercising such authority, it shall be the duty of the bank to name and designate promptly another agent or head upon whom service of summons and processes in legal proceedings against the bank and of notices affecting the bank may be made, and to file with the Securities and Exchange Commission a duly authenticated nomination of such agent. In the absence of the agent or head or should there be no person authorized by the bank upon whom service of summons, processes and all legal notices may be made, service of summons, processes and legal notices may be made upon the Bangko Sentral Deputy Governor In-Charge of the supervising and examining departments and such service shall be as effective as if made upon the bank or its duly authorized agent or head. In case of service for the bank upon the Bangko Sentral Deputy Governor In-Charge of the supervising and examining departments, the said Deputy Governor shall register and transmit by mail to the president or the secretary of the bank at its head or principal office a copy, duly certified by him, of the summons, process, or notice. The sending of such copy of the summons, process, or notice shall be a necessary part of the services and shall complete the service. The registry receipt of mailing shall be prima facie evidence of the transmission of the summons, process or notice. All costs necessarily incurred by the said Deputy Governor for the making and mailing and sending of a copy of the summons, process, or notice to the president or the secretary of the bank at its head or principal office shall be paid in advance by the party at whose instance the service is made. (17) SECTION 77. Laws Applicable. — In all matters not specifically covered by special provisions applicable only to a foreign bank or its branches and other offices in the Philippines, any foreign bank licensed to do business in the Philippines shall be bound by the provisions of this Act, all other laws, rules and regulations applicable to banks organized under the laws of the Philippines of the same class, except those that provide for the creation, formation, organization or dissolution of corporations or for the fixing of the relations, liabilities, responsibilities, or duties of stockholders, members, directors or officers of corporations to each other or to the corporation. (18) SECTION 78. Revocation of License of a Foreign Bank. — The Monetary Board may revoke the license to transact business in the Philippines of any foreign bank, if it finds that the foreign bank is insolvent or in imminent danger thereof or that its continuance in business will involve probable loss to those transacting business with it. After the revocation of its license, it shall be unlawful for any such foreign bank to transact business in the Philippines unless its license is renewed or reissued. After the revocation of such license, the Bangko Sentral shall take the necessary action to protect the creditors of such foreign bank and the public. The provisions of the New Central Bank Act on sanctions and penalties shall likewise be applicable. (16) CHAPTER IX TRUST OPERATIONS SECTION 79. Authority to Engage in Trust Business. — Only a stock corporation or a person duly authorized by the Monetary Board to engage in trust business shall act as a trustee or administer any trust or hold property in trust or on deposit for the use, benefit, or behoof of others. For purposes of this Act, such a corporation shall be referred to as a trust entity. (56a; 57a) SECTION 80. Conduct of Trust Business. — A trust entity shall administer the funds or property under its custody with the diligence that a prudent man would exercise in the conduct of an enterprise of a like character and with similar aims. No trust entity shall, for the account of the trustor or the beneficiary of the trust, purchase or acquire property from, or sell, transfer, assign or lend money or property to, or purchase debt instruments
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instruments of, any of the departments, directors, officers, stockholders, or employees of the trust entity, relatives within the first degree of consanguinity or affinity, or the related interests, of such directors, officers and stockholders, unless the transaction is specifically authorized by the trustor and the relationship of the trustee and the other party involved in the transaction is fully disclosed to the trustor or beneficiary of the trust prior to the transaction. The Monetary Board shall promulgate such rules and regulations as may be necessary to prevent circumvention of this prohibition or the evasion of the responsibility herein imposed on a trust entity. (56) SECTION 81. Registration of Articles of Incorporation and By-Laws of a Trust Entity. — The Securities and Exchange Commission shall not register the articles of incorporation and by-laws or any amendment thereto, of any trust entity, unless accompanied by a certificate of authority issued by the Bangko Sentral. (n) SECTION 82. Minimum Capitalization. — A trust entity, before it can engage in trust or other fiduciary business, shall comply with the minimum paid-in capital requirement which will be determined by the Monetary Board. (n) SECTION 83. Powers of a Trust Entity. — A trust entity, in addition to the general powers incident to corporations, shall have the power to: 83.1. Act as trustee on any mortgage or bond issued by any municipality, corporation, or any body politic and to accept and execute any trust consistent with law; 83.2. Act under the order or appointment of any court as guardian, receiver, trustee, or depositary of the estate of any minor or other incompetent person, and as receiver and depositary of any moneys paid into court by parties to any legal proceedings and of property of any kind which may be brought under the jurisdiction of the court; 83.3. Act as the executor of any will when it is named the executor thereof; 83.4. Act as administrator of the estate of any deceased person, with the will annexed, or as administrator of the estate of any deceased person when there is no will; 83.5. Accept and execute any trust for the holding, management, and administration of any estate, real or personal, and the rents, issues and profits thereof; and 83.6. Establish and manage common trust funds, subject to such rules and regulations as may be prescribed by the Monetary Board. (58) SECTION 84. Deposit for the Faithful Performance of Trust Duties. — Before transacting trust business, every trust entity shall deposit with the Bangko Sentral as security for the faithful performance of its trust duties, cash or securities approved by the Monetary Board in an amount equal to not less than Five hundred thousand pesos (P500,000.00) or such higher amount as may be fixed by the Monetary Board: Provided, however, That the Monetary Board shall require every trust entity to increase the amount of its cash or securities on deposit with the Bangko Sentral whenever in its judgment such increase is necessary by reason of the trust business of such entity: Provided, further, That the paid-in capital and surplus of such entity must be at least equal to the amount required to be deposited with the Bangko Sentral in accordance with the provisions of this paragraph. Should the capital and surplus fall below said amount, the Monetary Board shall have the same authority as that granted to it under the provisions of the fifth paragraph of Section 34 of this Act. A trust entity so long as it shall continue to be solvent and comply with laws or regulations shall have the right to collect the interest earned on such securities deposited with the Bangko Sentral and, from time to time, with the approval of the Bangko Sentral, to exchange the securities for others. If the trust entity fails to comply with any law or regulation, the Bangko Sentral shall retain such interest on the securities deposited with it for the benefit of rightful claimants. All claims arising out of the trust business
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business of a trust entity shall have priority over all other claims as regards the cash or securities deposited as above provided. The Monetary Board may not permit the cash or securities deposited in accordance with the provisions of this Section to be reduced below the prescribed minimum amount until the depositing entity shall discontinue its trust business and shall satisfy the Monetary Board that it has complied with all its obligations in connection with such business. (65a) SECTION 85. Bond of Certain Persons for the Faithful Performance of Duties. — Before an executor, administrator, guardian, trustee, receiver or depositary appointed by the court enters upon the execution of his duties, he shall, upon order of the court, file a bond in such sum, as the court may direct. Upon the application of any executor, administrator, guardian, trustee, receiver, depositary or any other person in interest, the court may, after notice and hearing, order that the subject matter of the trust or any part thereof be deposited with a trust entity. Upon presentation of proof to the court that the subject matter of the trust has been deposited with a trust entity, the court may order that the bond given by such persons for the faithful performance of their duties be reduced to such sums as it may deem proper: Provided, however, That the reduced bond shall be sufficient to secure adequately the proper administration and care of any property remaining under the control of such persons and the proper accounting for such property. Property deposited with any trust entity in conformity with this Section shall be held by such entity under the orders and direction of the court. (59) SECTION 86. Exemption of Trust Entity from Bond Requirement. — No bond or other security shall be required by the court from a trust entity for the faithful performance of its duties as courtappointed trustee, executor, administrator, guardian, receiver, or depositary. However, the court may, upon proper application with it showing special cause therefor, require the trust entity to post a bond or other security for the protection of funds or property confided to such entity. (59) SECTION 87. Separation of Trust Business from General Business. — The trust business and all funds, properties or securities received by any trust entity as executor, administrator, guardian, trustee, receiver, or depositary shall be kept separate and distinct from the general business including all other funds, properties, and assets of such trust entity. The accounts of all such funds, properties, or securities shall likewise be kept separate and distinct from the accounts of the general business of the trust entity. (61) SECTION 88. Investment Limitations of a Trust Entity. — Unless otherwise directed by the instrument creating the trust, the lending and investment of funds and other assets acquired by a trust entity as executor, administrator, guardian, trustee, receiver or depositary of the estate of any minor or other incompetent person shall be limited to loans or investments as may be prescribed by law, the Monetary Board or any court of competent jurisdiction. (63a) SECTION 89. Real Estate Acquired by a Trust Entity. — Unless otherwise specifically directed by the trustor or the nature of the trust, real estate acquired by a trust entity in whatever manner and for whatever purpose, shall likewise be governed by the relevant provisions of Section 52 of this Act. (64a) SECTION 90. Investment of Non-Trust Funds. — The investment of funds other than trust funds of a trust entity which is a bank, financing company or an investment house shall be governed by the relevant provisions of this Act and other applicable laws. (64) SECTION 91. Sanctions and Penalties. — A trust entity or any of its officers and directors found to have willfully violated any pertinent provisions of this Act, shall be subject to the sanctions and penalties provided under Section 66 of this Act as well as Sections 36 and 37 of the New Central Bank Act. (63) SECTION 92. Exemption of Trust Assets from Claims. — No assets held by a trust entity in
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SECTION 92. Exemption of Trust Assets from Claims. — No assets held by a trust entity in its capacity as trustee shall be subject to any claims other than those of the parties interested in the specific trusts. (65) SECTION 93. Establishment of Branches of a Trust Entity. — The ordinary business of a trust entity shall be transacted at the place of business specified in its articles of incorporation. Such trust entity may, with prior approval of the Monetary Board, establish branches in the Philippines, and the said entity shall be responsible for all business conducted in such branches to the same extent and in the same manner as though such business had all been conducted in the head office. For the purpose of this Act, the trust entity and its branches shall be treated as one unit. (67) CHAPTER X FINAL PROVISIONS SECTION 94. Phase Out of Bangko Sentral Powers Over Building and Loan Associations. — Within a period of three (3) years from the effectivity of this Act, the Bangko Sentral shall phase out and transfer its supervising and regulatory powers over building and loan associations to the Home Insurance and Guaranty Corporation which shall assume the same. Until otherwise provided by law, building and loan associations shall continue to be governed by Sections 39 to 55, Chapter VI of the General Banking Act, as amended, including such rules and regulations issued pursuant thereto. Upon assumption by the Home Insurance and Guaranty Corporation of supervising and regulatory powers over building and loan associations, all references in Sections 39 to 55 of the General Banking Act, as amended, to the Bangko Sentral and the Monetary Board shall be deemed to refer to the Home Insurance and Guaranty Corporation and its board of directors, respectively. (n) SECTION 95. Repealing Clause. — Except as may be provided for in Sections 34 and 94 of this Act, the General Banking Act, as amended, and the provisions of any other law, special charters, rule or regulation issued pursuant to said General Banking Act, as amended, or parts thereof, which may be inconsistent with the provisions of this Act are hereby repealed. The provisions of paragraph 8, Section 8, Republic Act No. 3591, as amended by Republic Act No. 7400, are likewise repealed. (90a) SECTION 96. Separability Clause. — If any provision or section of this Act or the application thereof to any person or circumstance is held invalid, the other provisions or sections of this Act, and the application of such provision or section to other persons or circumstances, shall not be affected thereby. (n) SECTION 97. Effectivity Clause. — This Act shall take effect fifteen (15) days following its publication in the Official Gazette or in two (2) national newspapers of general circulation. (91) Approved, MANUEL B. VILLAR JR. FRANKLIN M. DRILON Speaker of the House President of the Senate of Representatives This Act, which is a consolidation of Senate Bill No. 1519 and House Bill No. 6814, was finally passed by the Senate and the House of Representatives on April 12, 2000. ROBERTO P. NAZARENO OSCAR G. YABES Secretary General Secretary of the Senate House of Representatives Approved: JOSEPH EJERCITO ESTRADA Approved: May 23, 2000

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Digest: Simex vs. CA
Saturday, July 11, 2009 1:34 PM

Simex International vs CA Date: March 19, 1990 Petitioner: Simex International Inc Respondents: CA and Traders Royal Bank Ponente: Cruz Facts: Simex is a corporation engaged in the exportation of food products. It buys these products from various local suppliers and then sells them in the US, Canada and the Middle East. Most of its exports are purchased by the petitioner on credit. Simex is a depositor of Traders Royal Bank and maintained a checking account in its branch at Romulo Avenue, Cubao, Quezon City. Simex deposited to its account in the bank the amount of P100,000, thus increasing its balance as of that date to P190,380.74. Subsequently, the petitioner issued several checks against its deposit but was surprised to learn later that they had been dishonored for insufficient funds. As a consequence, the California Manufacturing Corporation sent 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 and by the G. and U. Enterprises. Investigations showed that the sum of P100,000 had not been credited to Simex’ account. The error was rectified and the dishonored checks were paid after they were re -deposited. 4 Simex demanded reparation from the bank for its "gross and wanton negligence." This demand was not met. The petitioner then filed a complaint in the CFI of Rizal claiming from the bank 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. The judge denied moral and exemplary damages (no bad faith bank rectified mistakes) but ordered the bank to pay nominal damages of P20,000.00 plus P5,000.00 attorney's fees and costs. The CA affirmed.
Issue: WON the bank is liable for moral damages Held: Yes

Ratio: 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 bank 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 bank 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 bank has not even explained why it was committed at all. It is true that the dishonored checks were "eventually" paid. However, this took almost a month when, properly, the checks should have been paid immediately upon presentment. The initial carelessness of the 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. Petitioner's credit line was canceled and its orders were not acted upon pending receipt of actual payment by the suppliers. Its business declined. Its reputation was tarnished. Its standing was reduced in the business community. This was due to the fault of the bank which was undeniably remiss in its duty to the petitioner. Article 2205 CC provides that actual or compensatory damages may be received "(2) for injury to the plaintiff's business standing or commercial credit." There is no question that the petitioner did sustain actual injury as a result of the dishonored checks and that the existence of the loss having been established "absolute certainty as to its amount is not required." Such injury should bolster all the more the demand of the petitioner for moral damages and justifies the examination by this Court of the validity and reasonableness of the said claim. Moral damages are not awarded to penalize the defendant but to compensate the plaintiff for the injuries he may have suffered. In the case at bar, the petitioner is seeking such damages for the prejudice sustained by it as a result of the bank's fault. The CA said that the claimed losses are purely speculative and are not supported by substantial evidence, but if failed to consider that the amount of such losses need not be established with exactitude, precisely because of their nature. Moral damages are not susceptible of pecuniary estimation. Article 2216 CC 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 is left to the sound discretion of the court, according to "the circumstances of each case." Petitioner’s claim of moral damages in the amount of P1M is nothing short of preposterous. Its business certainly is not that big, or its name that prestigious, to sustain such an extravagant pretense. Also, 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, etc. The only exception to this rule is where the corporation has a good reputation that is debased, resulting in its social humiliation. We shall recognize that the petitioner did suffer injury because of the bank's negligence the caused the dishonor of the checks issued by it. The immediate consequence was that its prestige was impaired because

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dishonor of the checks issued by it. The immediate consequence was that its prestige was impaired because of the bouncing checks and confidence in it as a reliable debtor was diminished. The bank makes much of the one instance when the petitioner was sued in a collection case, but that did not prove that it did not have a good reputation that could not be marred, more so since that case was ultimately settled. It does not appear that, as the bank would portray it, the petitioner is an unsavory and disreputable entity that has no good name to protect. The award of nominal damages in the sum of P20,000 was not the proper relief to which the petitioner was entitled. Under Article 2221 CC, "nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him." As we have found that the petitioner has indeed incurred loss through the fault of the bank, 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. Issue: WON the bank is liable for exemplary damages Held: Yes Ratio: The banking system is an indispensable institution in the modern world and plays a vital role in the economic life of every civilized nation. Whether as mere passive entities for the safekeeping and saving of money or as active instruments of business and commerce, banks have become an ubiquitous presence among the people, who have come to regard them with respect and even gratitude and, most of all, confidence. Thus, even the humble wage-earner has not hesitated to entrust his life's savings to the bank of his choice, knowing that they will be safe in its custody and will even earn some interest for him. The ordinary person, with equal faith, usually maintains a modest checking account for security and convenience in the settling of his monthly bills and the payment of ordinary expenses. As for business entities like the petitioner, the bank is a trusted and active associate that can help in the running of their affairs, not only in the form of loans when needed but more often in the conduct of their day-to-day transactions like the issuance or encashment of checks. In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a few hundred pesos or of millions. The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he directs. A blunder on the part of the bank, such as the dishonor of a check without good reason, can cause the depositor not a little embarrassment if not also financial loss and perhaps even civil and criminal litigation. The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. In the case at bar, it is obvious that the bank was remiss in that duty and violated that relationship. What is especially deplorable is that, having been informed of its error in not crediting the deposit in question to the petitioner, the respondent bank did not immediately correct it but did so only one week later or twenty-three days after the deposit was made. It bears repeating that the record does not contain any satisfactory explanation of why the error was made in the first place and why it was not corrected immediately after its discovery. Such ineptness comes under the concept of the wanton manner contemplated in the Civil Code that calls for the imposition of exemplary damages. The Court hereby imposes upon the bank exemplary damages in the amount of P50,000, "by way of example or correction for the public good," in the words of the law. It is expected that this ruling will serve as a warning and deterrent against the repetition of the ineptness and indifference that has been displayed here, lest the confidence of the public in the banking system be further impaired.

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DIGEST: BPI v. IAC
Saturday, July 11, 2009 1:39 PM

BPI vs IAC Date: February 21, 1992 Petitioner: BPI Respondents: IAC and spouses Arthur and Viviene Canlas Ponente: Grino-Aquino Facts: Arthur and Vivienne Canlas, opened a joint current account in the QC branch of the Commercial Bank, and Trust Company of the Philippines (CBTC) with an initial deposit of P2,250. Prior thereto, Arthur had an existing separate personal checking account in the same branch. When the 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 Arthur for use as ID and reference. By mistake, she placed the old personal account number of Arthur on the deposit slip for the new joint checking account of the spouses so that the deposit of P2,250 for the joint account was miscredited to Arthur's personal account. The spouses subsequently deposited other amounts in their joint account. However, when Vivienne issued check for P1,639.89 and another check for P1,160, 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. The bank tried to call up the spouses at the telephone number which they had given in their application form, but the bank could not contact them because they actually reside in Porac, Pampanga. The address and number which they gave belonged to Mrs. Canlas' parents. The spouses filed a complaint for damages against the bank before the CFI of Pampanga. An MTD on the ground of improper venue was denied. During the pendency of the case, the BPI and CBTC were merged. BPI took over the defense of any pending actions against CBTC. The RTC then rendered judgment against BPI sentencing it to pay the spouses actual, moral and exemplary damages, attorney’s fees and costs. The IAC deleted the actual damages and reduced the other awards.
Issue: WON the venue was improperly laid in Pampanga in light of the spouses’ earlier declaration that QC is their true residence

Held: No Ratio Personal actions may be instituted in the CFI 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. In this case, there was ample proof that the residence of the plaintiffs is B. Sacan, Porac, Pampanga. The city address of Mrs. Canlas' parents was placed by the spouses 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. Issue: WON the bank was guilty of negligence in handling the spouses’ bank account Held: Yes Ratio: 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 a family. In Simex International vs. CA, 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. [Court quotes Simex on exemplary damages part] 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". 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 recover reasonable moral damages. The award of reasonable attorney's fees is proper for the private respondents were compelled to litigate to protect their interest. However, the absence of malice and bad faith renders the award of exemplary damages improper.

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faith renders the award of exemplary damages improper.

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Digest: BPI vs. CA
Saturday, July 11, 2009 1:43 PM

BPI vs CA Date: February 29, 2000 Petitioner: BPI Respondents: CA and Benjamin Napiza Ponente: Ynares Santiago Facts: Napiza deposited in Foreign Currency Deposit Unit (FCDU) Savings Account No. 028 -187 which he maintained in BPI Buendia Avenue Extension Branch, Continental Bank Manager’s Check payable to "cash" in the amount $2,500.00 and duly endorsed by Napiza on its dorsal side. It appears that the check belonged to a certain Henry Chan who went to the office of Napiza and requested him to deposit the check in his dollar account by way of accommodation and for the purpose of clearing the same. Napiza acceded, and agreed to deliver to Chan a signed blank withdrawal slip, with the understanding that as soon as the check is cleared, both of them would go to the bank to withdraw the amount of the check upon private respondent’s presentation to the bank of his passbook. Using the blank withdrawal slip given by Napiza to Chan, one Ruben Gayon, Jr. was able to withdraw the amount of $2,541.67 from FCDU Savings Account No. 028 -187. Notably, the withdrawal slip shows that the amount was payable to Ramon de Guzman and Agnes de Guzman and was duly initialed by the branch assistant manager, Teresita Lindo. On November 20, 1984, petitioner received communication from the Wells Fargo Bank International of New York that the said check deposited by Napiza was a counterfeit check. BPI then instructed Napiza’s son to inform his father that the check has bounced. The manager also sent a telegram regarding the dishonor of the check. The son undertook to return the amount of $2,500.00 to the bank. On December 18, 1984, Reyes reminded private respondent of his son’s promise and warned that should he fail to return that amount within seven (7) days, the matter would be referred to the bank’s lawyers for appropriate action to protect the bank’s interest. In reply, Napiza wrote BPI’s counsel stating that he deposited the check "for clearing purposes" only to accommodate Chan. BPI field a case against Napiza praying for the return of the amount. Napiza admitted signing the blank withdrawal slip with the understanding that the amount deposited would be withdrawn only after the check has been cleared. However, without his knowledge, the amount of $3541.67 was withdrawn from his dollar account through the collusion with one of BPI’s employees. BPI should have disallowed the withdrawal because his passbook was not presented. The trial court rendered judgment dismissing the complaint as to so hold Napiza 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." Also, BPI should not have authorized the withdrawal from Napiza’s account prior to the receipt of the notice of final payment. The CA affirmed and held that BPI committed gross negligence in allowing Gayon Jr to withdraw the money without even presenting Napiza’s passbook and before the checks were cleared. Issue: WON Napiza, in affixing his signature at the dorsal side of the check, should be liable for the amount stated therein according to Section 66 NIL Held: No Ratio: Ordinarily, Napiza may be held liable as an indorser of the check or even as an accommodation party. However, to hold Napiza liable for the amount of the check he deposited by the strict application of the law and without considering the 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. BPI asserts that by signing the withdrawal slip, Napiza "presented the opportunity for the withdrawal of the amount in question." BPI relied "on the genuine signature on the withdrawal slip, the personality of Napiza’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." 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. Under the rules (appearing in the passbook), to be able to withdraw from the savings account deposit under the Philippine foreign currency deposit system, two requisites must be presented to petitioner bank by the person withdrawing an amount: (a) a duly filled-up withdrawal slip, and (b) the depositor’s passbook. Napiza admits that he signed a blank withdrawal slip ostensibly in violation of Rule No. 6 requiring that the request for withdrawal must name the payee, the amount to be withdrawn and the place where such withdrawal should be made. That the withdrawal slip was in fact a blank one with only Napiza’s two signatures affixed on the proper spaces is buttressed by BPI’s allegation that had Napiza indicated therein the person authorized to receive the money, then Gayon, Jr. could not have withdrawn any amount. BPI contends that "(i)n failing to do so ( i.e., naming his authorized agent), he practically authorized any possessor thereof to write any amount and to collect the same."

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write any amount and to collect the same." Such contention would have been valid if not for the fact that the withdrawal slip itself indicates a special instruction that the amount is payable to "Ramon A. de Guzman &/or Agnes C. de Guzman." Such being the case, BPI’s personnel should have been duly warned that Gayon, who was also employed in BPI’s Buendia Ave. branch, 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 withdrawal. Of course, at the dorsal side of the withdrawal slip is an "authority to withdraw" naming Gayon the person who can withdraw the amount indicated in the check. Napiza does not deny having signed such authority. However, considering BPI’s clear admission that the withdrawal slip was a blank one except for Napiza’s signature, the unavoidable conclusion is that the typewritten name of "Ruben C. Gayon, Jr." was intercalated and thereafter it was signed by Gayon or whoever was allowed by petitioner to withdraw the amount. Under these facts, there could not have been a principal -agent relationship between Napiza and Gayon so as to render the former liable for the amount withdrawn. Moreover, the withdrawal slip contains a boxed warning that states: "This receipt must be signed and presented with the corresponding foreign currency savings passbook by the depositor in person. For withdrawals thru a representative, depositor should accomplish the authority at the back." The requirement of presentation of the passbook when withdrawing an amount cannot be given mere lip service even though the person making the withdrawal is authorized by the depositor to do so. This is clear from Rule No. 6 set out by BPI 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 Napiza’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. In allowing the withdrawal, petitioner likewise overlooked another rule that is printed in the passbook. Thus:
"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 accepted as subject to collection only and credited to the account only upon receipt of the notice of final payment .

In depositing the check in his name, Napiza did not become the outright owner of the amount stated therein. Under the above rule, by depositing the check with BPI, Napiza was, in a way, merely designating BPI as the collecting bank. This is in consonance with the rule that a negotiable instrument, such as a check, whether a manager’s check or ordinary check, is not legal tender. As such, after receiving the deposit, under its own rules, BPI shall credit the amount in Napiza’s account or infuse value thereon only after the drawee bank shall have paid the amount of the check or the check has been cleared for deposit. Again, this is in accordance with ordinary banking practices and with this Court’s pronouncement that "the collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements." The rule finds more meaning in this case where the check involved is drawn on a foreign bank and therefore collection is more difficult than when the drawee bank is a local one even though the check in question is a manager’s check. By the nature of its functions, a bank is under obligation to treat the accounts of its depositors "with meticulous care, always having in mind the fiduciary nature of their relationship." As such, in dealing with its depositors, a bank should exercise its functions not only with the diligence of a good father of a family but it should do so with the highest degree of care. In the case at bar, petitioner, in allowing the withdrawal of private respondent’s deposit, failed to exercise the diligence of a good father of a family. In total disregard of its own rules, petitioner’s personnel negligently handled private respondent’s account to petitioner’s detriment. The seventy-eight (78)-year-old, yet still relevant, case of Picart v. Smith , provides the 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 paterfamilias 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." BPI violated its own rules by allowing the withdrawal of an amount that is definitely over and above the aggregate amount of Napiza’s dollar deposits that had yet to be cleared. The bank’s ledger shows that before he deposited $2,500.00, Napiza had a balance of only $750.00. Upon Napiza’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. 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 of $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. On November 19, 1984 the word "hold" was written beside the balance of $109.92. That must have been the time when Reyes, BPI’s branch manager, was informed unofficially of the fact that the check deposited was a counterfeit, but BPI’s Buendia Ave. Branch received a copy of the communication from Wells Fargo Bank the following day, November 20, 1984. According to Reyes, Wells Fargo Bank International handled the clearing of checks drawn against U.S. banks that were deposited with petitioner. While it is true that Napiza’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 BPI’s personnel was the proximate cause of the loss that BPI 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

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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." The proximate cause of the withdrawal and eventual loss of the amount of $2,500.00 on BPI’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.
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Consolidated Bank and Trust Corporation vs. CA
Wednesday, July 08, 2009 9:14 AM

[2003V862] THE CONSOLIDATED BANK and TRUST CORPORATION, petitioner, vs. COURT OF APPEALS and L.C. DIAZ and COMPANY, CPA’s, respondents.2003 Sep 111st DivisionG.R. No. 138569D E C I S I O N CARPIO, J.:

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

Macaraya immediately prepared a deposit slip in duplicate copies with a check of P200,000. Macaraya, together with Calapre, went to Solidbank and presented to Teller No. 6 the deposit slip and check. The teller stamped the words “DUPLICATE” and “SAVING TELLER 6 SOLIDBANK HEAD OFFICE” on the duplicate copy of the deposit slip. When Macaraya asked for the passbook, Teller No. 6 told Macaraya that someone got the passbook but she could not remember to whom she gave the passbook. When Macaraya asked Teller No. 6 if Calapre got the passbook, Teller No. 6 answered that someone shorter than Calapre got the passbook. Calapre was then standing beside Macaraya.
Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for the deposit of a check for P90,000 drawn on Philippine Banking Corporation (“PBC”). This PBC check of L.C. Diaz was a check that it had “long closed.”*4+ PBC subsequently dishonored the check because of insufficient funds and because the signature in the check differed from PBC’s specimen signature. Failing to get back the passbook, Macaraya went back to her office and reported the matter to the Personnel Manager of L.C. Diaz,
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Macaraya went back to her office and reported the matter to the Personnel Manager of L.C. Diaz, Emmanuel Alvarez. The following day, 15 August 1991, L.C. Diaz through its Chief Executive Officer, Luis C. Diaz (“Diaz”), called up Solidbank to stop any transaction using the same passbook until L.C. Diaz could open a new account.[5] On the same day, Diaz formally wrote Solidbank to make the same request. It was also on the same day that L.C. Diaz learned of the unauthorized withdrawal the day before, 14 August 1991, of P300,000 from its savings account. The withdrawal slip for the P300,000 bore the signatures of the authorized signatories of L.C. Diaz, namely Diaz and Rustico L. Murillo. The signatories, however, denied signing the withdrawal slip. A certain Noel Tamayo received the P300,000. In an Information[6] dated 5 September 1991, L.C. Diaz charged its messenger, Emerano Ilagan (“Ilagan”) and one Roscon Verdazola with Estafa through Falsification of Commercial Document. The Regional Trial Court of Manila dismissed the criminal case after the City Prosecutor filed a Motion to Dismiss on 4 August 1992. On 24 August 1992, L.C. Diaz through its counsel demanded from Solidbank the return of its money. Solidbank refused. On 25 August 1992, L.C. Diaz filed a Complaint[7] for Recovery of a Sum of Money against Solidbank with the Regional Trial Court of Manila, Branch 8. After trial, the trial court rendered on 28 December 1994 a decision absolving Solidbank and dismissing the complaint. L.C. Diaz then appealed[8] to the Court of Appeals. On 27 October 1998, the Court of Appeals issued its Decision reversing the decision of the trial court. On 11 May 1999, the Court of Appeals issued its Resolution denying the motion for reconsideration of Solidbank. The appellate court, however, modified its decision by deleting the award of exemplary damages and attorney’s fees. The Ruling of the Trial Court In absolving Solidbank, the trial court applied the rules on savings account written on the passbook. The rules state that “possession of this book shall raise the presumption of ownership and any payment or payments made by the bank upon the production of the said book and entry therein of the withdrawal shall have the same effect as if made to the depositor personally.”*9+ At the time of the withdrawal, a certain Noel Tamayo was not only in possession of the passbook, he also presented a withdrawal slip with the signatures of the authorized signatories of L.C. Diaz. The specimen signatures of these persons were in the signature cards. The teller stamped the withdrawal slip with the words “Saving Teller No. 5.” The teller then passed on the withdrawal slip to Genere Manuel (“Manuel”) for authentication. Manuel verified the signatures on the withdrawal slip. The withdrawal slip was then given to another officer who compared the signatures on the withdrawal slip with the specimen on the signature cards. The trial court concluded that Solidbank acted with care and observed the rules on savings account when it allowed the withdrawal of P300,000 from the savings account of L.C. Diaz. The trial court pointed out that the burden of proof now shifted to L.C. Diaz to prove that the signatures on the withdrawal slip were forged. The trial court admonished L.C. Diaz for not offering in evidence the National Bureau of Investigation (“NBI”) report on the authenticity of the signatures on the withdrawal slip for P300,000. The trial court believed that L.C. Diaz did not offer this evidence because it is derogatory to its action. Another provision of the rules on savings account states that the depositor must keep the passbook “under lock and key.”*10+ When another person presents the passbook for withdrawal prior to Solidbank’s receipt of the notice of loss of the passbook, that person is considered as the owner of the
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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: IN VIEW OF THE FOREGOING, judgment is hereby rendered DISMISSING the complaint. The Court further renders judgment in favor of defendant bank pursuant to its counterclaim the amount of Thirty Thousand Pesos (P30,000.00) as attorney’s fees. With costs against plaintiff. SO ORDERED.[12] The Ruling of the Court of Appeals The Court of Appeals ruled that Solidbank’s negligence was the proximate cause of the unauthorized withdrawal of P300,000 from the savings account of L.C. Diaz. The appellate court reached this conclusion after applying the provision of the Civil Code on quasi-delict, to wit: Article 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a quasi-delict and is governed by the provisions of this chapter. The appellate court held that the three elements of a quasi-delict are present in this case, namely: (a) damages suffered by the plaintiff; (b) fault or negligence of the defendant, or some other person for whose acts he must respond; and (c) the connection of cause and effect between the fault or negligence of the defendant and the damage incurred by the plaintiff. The Court of Appeals pointed out that the teller of Solidbank who received the withdrawal slip for P300,000 allowed the withdrawal without making the necessary inquiry. The appellate court stated that the teller, who was not presented by Solidbank during trial, should have called up the depositor because the money to be withdrawn was a significant amount. Had the teller called up L.C. Diaz, Solidbank
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the money to be withdrawn was a significant amount. Had the teller called up L.C. Diaz, Solidbank would have known that the withdrawal was unauthorized. The teller did not even verify the identity of the impostor who made the withdrawal. Thus, the appellate court found Solidbank liable for its negligence in the selection and supervision of its employees.

The appellate court ruled that while L.C. Diaz was also negligent in entrusting its deposits to its messenger and its messenger in leaving the passbook with the teller, Solidbank could not escape liability because of the doctrine of “last clear chance.” Solidbank could have averted the injury suffered by L.C. Diaz had it called up L.C. Diaz to verify the withdrawal.
The appellate court ruled that the degree of diligence required from Solidbank is more than that of a good father of a family. The business and functions of banks are affected with public interest. Banks are obligated to treat the accounts of their depositors with meticulous care, always having in mind the fiduciary nature of their relationship with their clients. The Court of Appeals found Solidbank remiss in its duty, violating its fiduciary relationship with L.C. Diaz.

The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, premises considered, the decision appealed from is hereby REVERSED and a new one entered. 1. Ordering defendant-appellee Consolidated Bank and Trust Corporation to pay plaintiff-appellant the sum of Three Hundred Thousand Pesos (P300,000.00), with interest thereon at the rate of 12% per annum from the date of filing of the complaint until paid, the sum of P20,000.00 as exemplary damages, and P20,000.00 as attorney’s fees and expenses of litigation as well as the cost of suit; and

2. Ordering the dismissal of defendant-appellee’s counterclaim in the amount of P30,000.00 as attorney’s fees.
SO ORDERED.[13] Acting on the motion for reconsideration of Solidbank, the appellate court affirmed its decision but modified the award of damages. The appellate court deleted the award of exemplary damages and attorney’s fees. Invoking Article 2231*14+ of the Civil Code, the appellate court ruled that exemplary damages could be granted if the defendant acted with gross negligence. Since Solidbank was guilty of simple negligence only, the award of exemplary damages was not justified. Consequently, the award of attorney’s fees was also disallowed pursuant to Article 2208 of the Civil Code. The expenses of litigation and cost of suit were also not imposed on Solidbank. The dispositive portion of the Resolution reads as follows: WHEREFORE, foregoing considered, our decision dated October 27, 1998 is affirmed with modification by deleting the award of exemplary damages and attorney’s fees, expenses of litigation and cost of suit. SO ORDERED.[15] Hence, this petition. The Issues

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

II. THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF LAST CLEAR CHANCE AND IN HOLDING THAT PETITIONER BANK’S TELLER HAD THE LAST OPPORTUNITY TO WITHHOLD THE WITHDRAWAL WHEN IT IS UNDISPUTED THAT THE TWO SIGNATURES OF RESPONDENT ON THE WITHDRAWAL SLIP ARE GENUINE AND PRIVATE RESPONDENT’S PASSBOOK WAS DULY PRESENTED, AND CONTRARIWISE RESPONDENT WAS NEGLIGENT IN THE SELECTION AND SUPERVISION OF ITS MESSENGER EMERANO ILAGAN, AND IN THE SAFEKEEPING OF ITS CHECKS AND OTHER FINANCIAL DOCUMENTS.
III. THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE INSTANT CASE IS A LAST DITCH EFFORT OF PRIVATE RESPONDENT TO RECOVER ITS P300,000.00 AFTER FAILING IN ITS EFFORTS TO RECOVER THE SAME FROM ITS EMPLOYEE EMERANO ILAGAN. IV. THE COURT OF APPEALS ERRED IN NOT MITIGATING THE DAMAGES AWARDED AGAINST PETITIONER UNDER ARTICLE 2197 OF THE CIVIL CODE, NOTWITHSTANDING ITS FINDING THAT PETITIONER BANK’S NEGLIGENCE WAS ONLY CONTRIBUTORY.*16+ The Ruling of the Court

The petition is partly meritorious.
Solidbank’s Fiduciary Duty under the Law The rulings of the trial court and the Court of Appeals conflict on the application of the law. The trial court pinned the liability on L.C. Diaz based on the provisions of the rules on savings account, a recognition of the contractual relationship between Solidbank and L.C. Diaz, the latter being a depositor of the former. On the other hand, the Court of Appeals applied the law on quasi-delict to determine who between the two parties was ultimately negligent. The law on quasi-delict or culpa aquiliana is generally applicable when there is no pre-existing contractual relationship between the parties. We hold that Solidbank is liable for breach of contract due to negligence, or culpa contractual. The contract between the bank and its depositor is governed by the provisions of the Civil Code on simple loan.*17+ Article 1980 of the Civil Code expressly provides that “x x x savings x x x deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan.” There is a debtor-creditor relationship between the bank and its depositor. The bank is the debtor and the depositor is the creditor. The depositor lends the bank money and the bank agrees to pay the depositor on demand. The savings deposit agreement between the bank and the depositor is the contract that determines the rights and obligations of the parties. The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of Republic Act No. 8791 (“RA 8791”),*18+ which took effect on 13 June 2000, declares that the State recognizes the “fiduciary nature of banking that requires high standards of integrity and performance.” [19] This new provision in the general banking law, introduced in 2000, is a statutory affirmation of Supreme Court decisions, starting with the 1990 case of Simex International v. Court of Appeals,[20] holding that “the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.”*21+ This fiduciary relationship means that the bank’s obligation to observe “high standards of integrity and performance” is deemed written into every deposit agreement between a bank and its depositor. The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good
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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.

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Solidbank failed to discharge its burden. Solidbank did not present to the trial court Teller No. 6, the teller with whom Calapre left the passbook and who was supposed to return the passbook to him. The record does not indicate that Teller No. 6 verified the identity of the person who retrieved the passbook. Solidbank also failed to adduce in evidence its standard procedure in verifying the identity of the person retrieving the passbook, if there is such a procedure, and that Teller No. 6 implemented this procedure in the present case. Solidbank is bound by the negligence of its employees under the principle of respondeat superior or command responsibility. The defense of exercising the required diligence in the selection and supervision of employees is not a complete defense in culpa contractual, unlike in culpa aquiliana.[25]

The bank must not only exercise “high standards of integrity and performance,” it must also insure that its employees do likewise because this is the only way to insure that the bank will comply with its fiduciary duty. Solidbank failed to present the teller who had the duty to return to Calapre the passbook, and thus failed to prove that this teller exercised the “high standards of integrity and performance” required of Solidbank’s employees.
Proximate Cause of the Unauthorized Withdrawal Another point of disagreement between the trial and appellate courts is the proximate cause of the unauthorized withdrawal. The trial court believed that L.C. Diaz’s negligence in not securing its passbook under lock and key was the proximate cause that allowed the impostor to withdraw the P300,000. For the appellate court, the proximate cause was the teller’s negligence in processing the withdrawal without first verifying with L.C. Diaz. We do not agree with either court.

Proximate cause is that cause which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury and without which the result would not have occurred.[26] Proximate cause is determined by the facts of each case upon mixed considerations of logic, common sense, policy and precedent.[27]
L.C. Diaz was not at fault that the passbook landed in the hands of the impostor. Solidbank was in possession of the passbook while it was processing the deposit. After completion of the transaction, Solidbank had the contractual obligation to return the passbook only to Calapre, the authorized representative of L.C. Diaz. Solidbank failed to fulfill its contractual obligation because it gave the passbook to another person. Solidbank’s failure to return the passbook to Calapre made possible the withdrawal of the P300,000 by the impostor who took possession of the passbook. Under Solidbank’s rules on savings account, mere possession of the passbook raises the presumption of ownership. It was the negligent act of Solidbank’s Teller No. 6 that gave the impostor presumptive ownership of the passbook. Had the passbook not fallen into the hands of the impostor, the loss of P300,000 would not have happened. Thus, the proximate cause of the unauthorized withdrawal was Solidbank’s negligence in not returning the passbook to Calapre. We do not subscribe to the appellate court’s theory that the proximate cause of the unauthorized withdrawal was the teller’s failure to call up L.C. Diaz to verify the withdrawal. Solidbank did not have the duty to call up L.C. Diaz to confirm the withdrawal. There is no arrangement between Solidbank and L.C. Diaz to this effect. Even the agreement between Solidbank and L.C. Diaz pertaining to measures that the parties must observe whenever withdrawals of large amounts are made does not direct Solidbank to call up L.C. Diaz. There is no law mandating banks to call up their clients whenever their representatives withdraw significant amounts from their accounts. L.C. Diaz therefore had the burden to prove that it is the usual practice of Solidbank to call up its clients to verify a withdrawal of a large amount of money. L.C. Diaz
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practice of Solidbank to call up its clients to verify a withdrawal of a large amount of money. L.C. Diaz failed to do so.
Teller No. 5 who processed the withdrawal could not have been put on guard to verify the withdrawal. Prior to the withdrawal of P300,000, the impostor deposited with Teller No. 6 the P90,000 PBC check, which later bounced. The impostor apparently deposited a large amount of money to deflect suspicion from the withdrawal of a much bigger amount of money. The appellate court thus erred when it imposed on Solidbank the duty to call up L.C. Diaz to confirm the withdrawal when no law requires this from banks and when the teller had no reason to be suspicious of the transaction. Solidbank continues to foist the defense that Ilagan made the withdrawal. Solidbank claims that since Ilagan was also a messenger of L.C. Diaz, he was familiar with its teller so that there was no more need for the teller to verify the withdrawal. Solidbank relies on the following statements in the Booking and Information Sheet of Emerano Ilagan: xxx Ilagan also had with him (before the withdrawal) a forged check of PBC and indicated the amount of P90,000 which he deposited in favor of L.C. Diaz and Company. After successfully withdrawing this large sum of money, accused Ilagan gave alias Rey (Noel Tamayo) his share of the loot. Ilagan then hired a taxicab in the amount of P1,000 to transport him (Ilagan) to his home province at Bauan, Batangas. Ilagan extravagantly and lavishly spent his money but a big part of his loot was wasted in cockfight and horse racing. Ilagan was apprehended and meekly admitted his guilt.[28] ( mphasis 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
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reduce the award of damages. In this case, L.C. Diaz was guilty of contributory negligence in allowing a withdrawal slip signed by its authorized signatories to fall into the hands of an impostor. Thus, the liability of Solidbank should be reduced. In Philippine Bank of Commerce v. Court of Appeals,[33] where the Court held the depositor guilty of contributory negligence, we allocated the damages between the depositor and the bank on a 40-60 ratio. Applying the same ruling to this case, we hold that L.C. Diaz must shoulder 40% of the actual damages awarded by the appellate court. Solidbank must pay the other 60% of the actual damages.

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

Davide, Jr., C.J., (Chairman), Vitug, and Ynares-Santiago, JJ., concur.
Azcuna, J., on official leave. [1] Penned by Associate Justice Eugenio S. Labitoria with Associate Justices Jesus M. Elbinias, Marina L. Buzon, Godardo A. Jacinto and Candido V. Rivera, concurring, Fourth Division (Special Division of Five Justices). [2] Penned by Judge Felixberto T. Olalia, Jr. [3] Rollo, p. 119. [4] Ibid., p. 229. The account must have been long dormant.

[5] Records, p. 9.
[6] Ibid., p. 34.

[7] Docketed as Civil Case No. 92-62384.
[8] Docketed as CA-G.R. CV No. 49243. [9] Rollo, p. 231. [10] Ibid., p. 233. [11] Ibid., p. 60.

[12] Ibid., p. 66.
[13] Rollo, pp. 49-50.

[14] Art. 2231. In quasi-delicts, exemplary damages may be granted if the defendant acted with gross negligence. [15] Rollo, p. 43.
[16] Ibid., pp. 33-34.

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[16] Ibid., pp. 33-34. *17+ Article 1953 of the Civil Code provides: “A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay the creditor an equal amount of the same kind and quality.”

[18] The General Banking Law of 2000.
[19] In the United States, the prevailing rule, as enunciated by the U.S. Supreme Court in Bank of Marin v. England, 385 U.S. 99 (1966), is that the bank-depositor relationship is governed by contract, and the bankruptcy of the depositor does not alter the relationship unless the bank receives notice of the bankruptcy. However, the Supreme Court of some states, like Arizona, have held that banks have more than a contractual duty to depositors, and that a special relationship may create a fiduciary obligation on banks outside of their contract with depositors. See Stewart v. Phoenix National Bank, 49 Ariz. 34, 64 P. 2d 101 (1937); Klein v. First Edina National Bank, 293 Minn. 418, 196 N.W. 2d 619 (1972). [20] G.R. No. 88013, 19 March 1990, 183 SCRA 360. [21] The ruling in Simex International was followed in the following cases: Bank of the Philippine Islands v. Intermediate Appellate Court, G.R. No. 69162, 21 February 1992, 206 SCRA 408; Citytrust Banking Corporation v. Intermediate Appellate Court, G.R. No. 84281, 27 May 1994, 232 SCRA 559; Tan v. Court of Appeals, G.R. No. 108555, 20 December 1994, 239 SCRA 310; Metropolitan Bank & Trust Co. v. Court of Appeals, G.R. No. 112576, 26 October 1994, 237 SCRA 761; Philippine Bank of Commerce v. Court of Appeals, 336 Phil. 667 (1997); Firestone v. Court of Appeals, G.R. No. 113236, 5 March 2001, 353 SCRA 601. *22+ The second paragraph of Article 1172 of the Civil Code provides: “If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required.” [23] See notes 20 and 21. [24] Serrano v. Central Bank, G.R. L-30511, 14 February 1980, 96 SCRA 96.

[25] Cangco v. Manila Railroad Co., 38 Phil. 769 (1918); De Guia v. Meralco, 40 Phil. 706 (1920).
[26] Philippine Bank of Commerce v. Court of Appeals, supra note 21, citing Vda. de Bataclan v. Medina, 102 Phil. 181 (1957). [27] Ibid. [28] Rollo, p. 35. [29] Philippine Bank of Commerce v. Court of Appeals, supra note 21.

[30] Ibid.
[31] See note 23.

[32] Del Prado v. Manila Electric Co., 52 Phil. 900 (1928-1929).
[33] See note 21. \---!e-library! 6.0 Philippines Copyright © 2000 by Sony Valdez---/ ([2003V862] THE CONSOLIDATED BANK and TRUST CORPORATION, petitioner, vs. COURT OF APPEALS
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([2003V862] THE CONSOLIDATED BANK and TRUST CORPORATION, petitioner, vs. COURT OF APPEALS and L.C. DIAZ and COMPANY, CPA’s, respondents., G.R. No. 138569, 2003 Sep 11, 1st Division)

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Samsung Construction Company Philippines v Far East Bank
Wednesday, July 08, 2009 9:15 AM

[2004V901] SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC., Petitioner, - versus - FAR EAST BANK AND TRUST COMPANY AND COURT OF APPEALS, Respondents.2004 Aug 132nd DivisionG.R. No. 129015D E C I S I O N

Tinga, J.:

Called to fore in the present petition is a classic textbook question - if a bank pays out on a forged check, is it liable to reimburse the drawer from whose account the funds were paid out? The Court of Appeals, in reversing a trial court decision adverse to the bank, invoked tenuous reasoning to acquit the bank of liability. We reverse, applying time-honored principles of law.

The salient facts follow.

Plaintiff Samsung Construction Company Philippines, Inc. (“Samsung Construction”), while based in Biñan, Laguna, maintained a current account with defendant Far East Bank and Trust Company*1+ (“FEBTC”) at the latter’s Bel -Air, Makati branch.*2+ The sole signatory to Samsung Construction’s account was Jong Kyu Lee (“Jong”), its Project Manager,*3+ while the checks remained in the custody of the company’s accountant, Kyu Yong Lee (“Kyu”).*4+

On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC Check No. 432100 to the bank’s branch in Bel -Air, Makati. The check, payable to cash and drawn against Samsung Construction’s current account, was in the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00). The bank teller, Cleofe Justiani, first checked the balance of Samsung Construction’s account. After ascertaining there were enough funds to cover the check,*5+ she compared the signature appearing on the check with the specimen signature of Jong as contained in the specimen signature card with the bank. After comparing the two signatures, Justiani was satisfied as to the authenticity of the signature appearing on the check. She then asked Gonzaga to submit proof of his identity, and the latter presented three (3) identification cards.[6]

At the same time, Justiani forwarded the check to the branch Senior Assistant Cashier Gemma Velez, as it was bank policy that two bank branch officers approve checks exceeding One Hundred Thousand Pesos, for payment or encashment. Velez likewise counterchecked the signature on the check as against that on the signature card. He too concluded that the check was indeed signed by Jong. Velez
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then forwarded the check and signature card to Shirley Syfu, another bank officer, for approval. Syfu then noticed that Jose Sempio III (“Sempio”), the assistant accountant of Samsung Construction, was also in the bank. Sempio was well-known to Syfu and the other bank officers, he being the assistant accountant of Samsung Construction. Syfu showed the check to Sempio, who vouched for the genuineness of Jong’s signature. Confirming the identity of Gonzaga, Sempio said that the check was for the purchase of equipment for Samsung Construction. Satisfied with the genuineness of the signature of Jong, Syfu authorized the bank’s encashment of the check to Gonzaga.

The following day, the accountant of Samsung Construction, Kyu, examined the balance of the bank account and discovered that a check in the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00) had been encashed. Aware that he had not prepared such a check for Jong’s signature, Kyu perused the checkbook and found that the last blank check was missing.*7+ He reported the matter to Jong, who then proceeded to the bank. Jong learned of the encashment of the check, and realized that his signature had been forged. The Bank Manager reputedly told Jong that he would be reimbursed for the amount of the check.[8] Jong proceeded to the police station and consulted with his lawyers.[9] Subsequently, a criminal case for qualified theft was filed against Sempio before the Laguna court.[10]

In a letter dated 6 May 1992, Samsung Construction, through counsel, demanded that FEBTC credit to it the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), with interest.[11] In response, FEBTC said that it was still conducting an investigation on the matter. Unsatisfied, Samsung Construction filed a Complaint on 10 June 1992 for violation of Section 23 of the Negotiable Instruments Law, and prayed for the payment of the amount debited as a result of the questioned check plus interest, and attorney’s fees.*12+ The case was docketed as Civil Case No. 92-61506 before the Regional Trial Court ("RTC") of Manila, Branch 9.[13]

During the trial, both sides presented their respective expert witnesses to testify on the claim that Jong’s signature was forged. Samsung Corporation, which had referred the check for investigation to the NBI, presented Senior NBI Document Examiner Roda B. Flores. She testified that based on her examination, she concluded that Jong’s signature had been forged on the check. On the other hand, FEBTC, which had sought the assistance of the Philippine National Police (PNP),[14] presented Rosario C. Perez, a document examiner from the PNP Crime Laboratory. She testified that her findings showed that Jong’s signature on the check was genuine.*15+

Confronted with conflicting expert testimony, the RTC chose to believe the findings of the NBI expert. In a Decision dated 25 April 1994, the RTC held that Jong’s signature on the check was forged and accordingly directed the bank to pay or credit back to Samsung Construction’s account the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), together with interest tolled from the time the complaint was filed, and attorney’s fees in the amount of Fifteen Thousand Pesos (P15,000.00).

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FEBTC timely appealed to the Court of Appeals. On 28 November 1996, the Special Fourteenth Division of the Court of Appeals rendered a Decision,[16] reversing the RTC Decision and absolving FEBTC from any liability. The Court of Appeals held that the contradictory findings of the NBI and the PNP created doubt as to whether there was forgery.[17] Moreover, the appellate court also held that assuming there was forgery, it occurred due to the negligence of Samsung Construction, imputing blame on the accountant Kyu for lack of care and prudence in keeping the checks, which if observed would have prevented Sempio from gaining access thereto.[18] The Court of Appeals invoked the ruling in PNB v. National City Bank of New York[19] that, if a loss, which must be borne by one or two innocent persons, can be traced to the neglect or fault of either, such loss would be borne by the negligent party, even if innocent of intentional fraud.[20]

Samsung Construction now argues that the Court of Appeals had seriously misapprehended the facts when it overturned the RTC’s finding of forgery. It also contends that the appellate court erred in finding that it had been negligent in safekeeping the check, and in applying the equity principle enunciated in PNB v. National City Bank of New York.

Since the trial court and the Court of Appeals arrived at contrary findings on questions of fact, the Court is obliged to examine the record to draw out the correct conclusions. Upon examination of the record, and based on the applicable laws and jurisprudence, we reverse the Court of Appeals.

Section 23 of the Negotiable Instruments Law states:

When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. mphasis supplied)

The general rule is to the effect that a forged signature is "wholly inoperative," and payment made "through or under such signature” is ineffectual or does not discharge the instrument.*21+ If payment is made, the drawee cannot charge it to the drawer’s account. The traditional justification for the result is that the drawee is in a superior position to detect a forgery because he has the maker’s signature and is expected to know and compare it.[22] The rule has a healthy cautionary effect on banks by encouraging

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care in the comparison of the signatures against those on the signature cards they have on file. Moreover, the very opportunity of the drawee to insure and to distribute the cost among its customers who use checks makes the drawee an ideal party to spread the risk to insurance.[23]

Brady, in his treatise The Law of Forged and Altered Checks, elucidates:

When a person deposits money in a general account in a bank, against which he has the privilege of drawing checks in the ordinary course of business, the relationship between the bank and the depositor is that of debtor and creditor. So far as the legal relationship between the two is concerned, the situation is the same as though the bank had borrowed money from the depositor, agreeing to repay it on demand, or had bought goods from the depositor, agreeing to pay for them on demand. The bank owes the depositor money in the same sense that any debtor owes money to his creditor. Added to this, in the case of bank and depositor, there is, of course, the bank’s obligation to pay checks drawn by the depositor in proper form and presented in due course. When the bank receives the deposit, it impliedly agrees to pay only upon the depositor’s order. When the bank pays a check, on which the depositor’s signature is a forgery, it has failed to comply with its contract in this respect. Therefore, the bank is held liable.

The fact that the forgery is a clever one is immaterial. The forged signature may so closely resemble the genuine as to defy detection by the depositor himself. And yet, if a bank pays the check, it is paying out its own money and not the depositor’s.

The forgery may be committed by a trusted employee or confidential agent. The bank still must bear the loss. Even in a case where the forged check was drawn by the depositor’s partner, the loss was placed upon the bank. The case referred to is Robinson v. Security Bank, Ark., 216 S. W. Rep. 717. In this case, the plaintiff brought suit against the defendant bank for money which had been deposited to the plaintiff’s credit and which the bank had paid out on checks bearing forgeries of the plaintiff’s signature.

xxx

It was held that the bank was liable. It was further held that the fact that the plaintiff waited eight or nine months after discovering the forgery, before notifying the bank, did not, as a matter of law, constitute a ratification of the payment, so as to preclude the plaintiff from holding the bank liable. xxx

This rule of liability can be stated briefly in these words: "A bank is bound to know its depositors’ signature." The rule is variously expressed in the many decisions in which the question has
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depositors’ signature." The rule is variously expressed in the many decisions in which the question has been considered. But they all sum up to the proposition that a bank must know the signatures of those whose general deposits it carries.[24]

By no means is the principle rendered obsolete with the advent of modern commercial transactions. Contemporary texts still affirm this well-entrenched standard. Nickles, in his book Negotiable Instruments and Other Related Commercial Paper wrote, thus:

The deposit contract between a payor bank and its customer determines who can draw against the customer’s account by specifying whose signature is necessary on checks that are chargeable against the customer’s account. Therefore, a check drawn against the account of an individual customer that is signed by someone other than the customer, and without authority from her, is not properly payable and is not chargeable to the customer’s account, inasmuch as any "unauthorized signature on an instrument is ineffective" as the signature of the person whose name is signed.[25]

Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute defense by the party whose signature is forged.*26+ On the premise that Jong’s signature was indeed forged, FEBTC is liable for the loss since it authorized the discharge of the forged check. Such liability attaches even if the bank exerts due diligence and care in preventing such faulty discharge. Forgeries often deceive the eye of the most cautious experts; and when a bank has been so deceived, it is a harsh rule which compels it to suffer although no one has suffered by its being deceived.[27] The forgery may be so near like the genuine as to defy detection by the depositor himself, and yet the bank is liable to the depositor if it pays the check.[28]

Thus, the first matter of inquiry is into whether the check was indeed forged. A document formally presented is presumed to be genuine until it is proved to be fraudulent. In a forgery trial, this presumption must be overcome but this can only be done by convincing testimony and effective illustrations.[29]

In ruling that forgery was not duly proven, the Court of Appeals held:

[There] is ground to doubt the findings of the trial court sustaining the alleged forgery in view of the conflicting conclusions made by handwriting experts from the NBI and the PNP, both agencies of the government.
xxx

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These contradictory findings create doubt on whether there was indeed a forgery. In the case of Tenio-Obsequio v. Court of Appeals, 230 SCRA 550, the Supreme Court held that forgery cannot be presumed; it must be proved by clear, positive and convincing evidence.

This reasoning is pure sophistry. Any litigator worth his or her salt would never allow an opponent’s expert witness to stand uncontradicted, thus the spectacle of competing expert witnesses is not unusual. The trier of fact will have to decide which version to believe, and explain why or why not such version is more credible than the other. Reliance therefore cannot be placed merely on the fact that there are colliding opinions of two experts, both clothed with the presumption of official duty, in order to draw a conclusion, especially one which is extremely crucial. Doing so is tantamount to a jurisprudential cop-out.

Much is expected from the Court of Appeals as it occupies the penultimate tier in the judicial hierarchy. This Court has long deferred to the appellate court as to its findings of fact in the understanding that it has the appropriate skill and competence to plough through the minutiae that scatters the factual field. In failing to thoroughly evaluate the evidence before it, and relying instead on presumptions haphazardly drawn, the Court of Appeals was sadly remiss. Of course, courts, like humans, are fallible, and not every error deserves a stern rebuke. Yet, the appellate court’s error in this case warrants special attention, as it is absurd and even dangerous as a precedent. If this rationale were adopted as a governing standard by every court in the land, barely any actionable claim would prosper, defeated as it would be by the mere invocation of the existence of a contrary "expert" opinion.

On the other hand, the RTC did adjudge the testimony of the NBI expert as more credible than that of the PNP, and explained its reason behind the conclusion:

After subjecting the evidence of both parties to a crucible of analysis, the court arrived at the conclusion that the testimony of the NBI document examiner is more credible because the testimony of the PNP Crime Laboratory Services document

examiner reveals that there are a lot of differences in the questioned signature as compared to the standard specimen signature. Furthermore, as testified to by Ms. Rhoda Flores, NBI expert, the manner of execution of the standard signatures used reveals that it is a free rapid continuous execution or stroke as shown by the tampering terminal stroke of the signatures whereas the questioned signature is a hesitating slow drawn execution stroke. Clearly, the person who executed the questioned signature was hesitant when the signature was made.[30]

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During the testimony of PNP expert Rosario Perez, the RTC bluntly noted that "apparently, there [are] differences on that questioned signature and the standard signatures."[31] This Court, in examining the signatures, makes a similar finding. The PNP expert excused the noted 'differences" by asserting that they were mere "variations," which are normal deviations found in writing.[32] Yet the RTC, which had the opportunity to examine the relevant documents and to personally observe the expert witness, clearly disbelieved the PNP expert. The Court similarly finds the testimony of the PNP expert as unconvincing. During the trial, she was confronted several times with apparent differences between strokes in the questioned signature and the genuine samples. Each time, she would just blandly

assert that these differences were just "variations,"[33] as if the mere conjuration of the word would sufficiently disquiet whatever doubts about the deviations. Such conclusion, standing alone, would be of little or no value unless supported by sufficiently cogent reasons which might amount almost to a demonstration.[34]

The most telling difference between the questioned and genuine signatures examined by the PNP is in the final upward stroke in the signature, or "the point to the short stroke of the terminal in the capital letter ‘L,’" as referred to by the PNP examiner who had marked it in her comparison chart as "point no. 6." To the plain eye, such upward final stroke consists of a vertical line which forms a ninety degree (90º) angle with the previous stroke. Of the twenty one (21) other genuine samples examined by the PNP, at least nine (9) ended with an upward stroke.[35] However, unlike the questioned signature, the upward strokes of eight (8) of these signatures are looped, while the upward stroke of the seventh[36] forms a severe forty-five degree (45º) with the previous stroke. The difference is glaring, and indeed, the PNP examiner was confronted with the inconsistency in point no. 6.

Q: A:

Now, in this questioned document point no. 6, the "s" stroke is directly upwards. Yes, sir.

Q: Now, can you look at all these standard signature (sic) were (sic) point 6 is repeated or the last stroke “s” is pointing directly upwards? A: There is none in the standard signature, sir.[37]

Again, the PNP examiner downplayed the uniqueness of the final stroke in the questioned signature as a mere variation,[38] the same excuse she proffered for the other marked differences noted by the Court and the counsel for petitioner.[39]

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There is no reason to doubt why the RTC gave credence to the testimony of the NBI examiner, and not the PNP expert’s. The NBI expert, Rhoda Flores, clearly qualifies as an expert witness. A document examiner for fifteen years, she had been promoted to the rank of Senior Document Examiner with the NBI, and had held that rank for twelve years prior to her testimony. She had placed among the top five examinees in the Competitive Seminar in Question Document Examination, conducted by the NBI Academy, which qualified her as a document examiner.[40] She had trained with the Royal Hongkong Police Laboratory and is a member of the International Association for Identification.[41] As of the time she testified, she had examined more than fifty to fifty-five thousand questioned documents, on an average of fifteen to twenty documents a day.[42] In comparison, PNP document examiner Perez admitted to having examined only around five hundred documents as of her testimony.[43]

In analyzing the signatures, NBI Examiner Flores utilized the scientific comparative examination method consisting of analysis, recognition, comparison and evaluation of the writing habits with the use of instruments such as a magnifying lense, a stereoscopic microscope, and varied lighting substances. She also prepared enlarged photographs of the signatures in order to facilitate the necessary comparisons.[44] She compared the questioned signature as against ten (10) other sample signatures of Jong. Five of these signatures were executed on checks previously issued by Jong, while the

other five contained in business letters Jong had signed.[45] The NBI found that there were significant differences in the handwriting characteristics existing between the questioned and the sample signatures, as to manner of execution, link/connecting strokes, proportion characteristics, and other identifying details.[46]

The RTC was sufficiently convinced by the NBI examiner’s testimony, and explained her reasons in its Decisions. While the Court of Appeals disagreed and upheld the findings of the PNP, it failed to convincingly demonstrate why such findings were more credible than those of the NBI expert. As a throwaway, the assailed Decision noted that the PNP, not the NBI, had the opportunity to examine the specimen signature card signed by Jong, which was relied upon by the employees of FEBTC in authenticating Jong’s signature. The distinction is irrelevant in establishing forgery. Forgery can be established comparing the contested signatures as against those of any sample signature duly established as that of the persons whose signature was forged.

FEBTC lays undue emphasis on the fact that the PNP examiner did compare the questioned signature against the bank signature cards. The crucial fact in question is whether or not the check was forged, not whether the bank could have detected the forgery. The latter issue becomes relevant only if there is need to weigh the comparative negligence between the bank and the party whose signature was forged.

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At the same time, the Court of Appeals failed to assess the effect of Jong’s testimony that the signature on the check was not his.[47] The assertion may seem self-serving at first blush, yet it cannot be ignored that Jong was in the best position to know whether or not the signature on the check was his. While his claim should not be taken at face value, any averments he would have on the matter, if adjudged as truthful, deserve primacy in consideration. Jong’s testimony is supported by the findings of the NBI examiner. They are also backed by factual circumstances that support the conclusion that the assailed check was indeed forged. Judicial notice can be taken that is highly unusual in practice for a business establishment to draw a check for close to a million pesos and make it payable to cash or bearer, and not to order. Jong immediately reported the forgery upon its discovery. He filed the appropriate criminal charges against Sempio, the putative forger.[48]

Now for determination is whether Samsung Construction was precluded from setting up the defense of forgery under Section 23 of the Negotiable Instruments Law. The Court of Appeals concluded that Samsung Construction was negligent, and invoked the doctrines that"“where a loss must be borne by one of two innocent person, can be traced to the neglect or fault of either, it is reasonable that it would be borne by him, even if innocent of any intentional fraud, through whose means it has succeeded[49] or who put into the power of the third person to perpetuate the wrong."[50] Applying these rules, the Court of Appeals determined that it was the negligence of Samsung Construction that allowed the encashment of the forged check.

In the case at bar, the forgery appears to have been made possible through the acts of one Jose Sempio III, an assistant accountant employed by the plaintiff Samsung [Construction] Co. Philippines, Inc. who supposedly stole the blank check and who presumably is responsible for its encashment through a forged signature of Jong Kyu Lee. Sempio was assistant to the Korean accountant who was in possession of the blank checks and who through negligence, enabled Sempio to have access to the same. Had the Korean accountant been more careful and prudent in keeping the blank checks Sempio would not have had the chance to steal a page thereof and to effect the forgery. Besides, Sempio was an employee who appears to have had dealings with the defendant Bank in behalf of the plaintiff corporation and on the date the check was encashed, he was there to certify that it was a genuine check issued to purchase equipment for the company.[51]

We recognize that Section 23 of the Negotiable Instruments Law bars a party from setting up the defense of forgery if it is guilty of negligence.[52] Yet, we are unable to conclude that Samsung Construction was guilty of negligence in this case. The appellate court failed to explain precisely how the Korean accountant was negligent or how more care and prudence on his part would have prevented the forgery. We cannot sustain this "tar and feathering" resorted to without any basis.

The bare fact that the forgery was committed by an employee of the party whose signature was forged cannot necessarily imply that such party’s negligence was the cause for the forgery. Employers do not possess the preternatural gift of cognition as to the evil that may lurk within the hearts and minds of their employees. The Court’s pronouncement in PCI Bank v. Court of Appeals*53+ applies in this case, to wit:

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case, to wit:

[T]he mere fact that the forgery was committed by a drawer-payor’s confidential employee or agent, who by virtue of his position had unusual facilities for perpetrating the fraud and imposing the forged paper upon the bank, does not entitle the bank to shift the loss to the drawer-payor, in the absence of some circumstance raising estoppel against the drawer.[54]

Admittedly, the record does not clearly establish what measures Samsung Construction employed to safeguard its blank checks. Jong did testify that his accountant, Kyu, kept the checks inside a "safety box,"[55] and no contrary version was presented by FEBTC. However, such testimony cannot prove that the checks were indeed kept in a safety box, as Jong’s testimony on that point is hearsay, since Kyu, and not Jong, would have the personal knowledge as to how the checks were kept.

Still, in the absence of evidence to the contrary, we can conclude that there was no negligence on Samsung Construction’s part. The presumption remains that every person takes ordinary care of his concerns,[56] and that the ordinary course of business has been followed.[57] Negligence is not presumed, but must be proven by him who alleges it.[58] While the complaint was lodged at the instance of Samsung Construction, the matter it had to prove was the claim it had alleged - whether the check was forged. It cannot be required as well to prove that it was not negligent, because the legal presumption remains that ordinary care was employed.

Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact that Samsung Construction was negligent. While the payee, as in this case, may not have the personal knowledge as to the standard procedures observed by the drawer, it well has the means of disputing the presumption of regularity. Proving a negative fact may be "a difficult office,"[59] but necessarily so, as it seeks to overcome a presumption in law. FEBTC was unable to dispute the presumption of ordinary care exercised by Samsung Construction, hence we cannot agree with the Court of Appeals’ finding of negligence.

The assailed Decision replicated the extensive efforts which FEBTC devoted to establish that there was no negligence on the part of the bank in its acceptance and payment of the forged check. However, the degree of diligence exercised by the bank would be irrelevant if the drawer is not precluded from setting up the defense of forgery under Section 23 by his own negligence. The rule of equity enunciated in PNB v. National City Bank of New York, [60] as relied upon by the Court of Appeals, deserves careful examination.

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The point in issue has sometimes been said to be that of negligence. The drawee who has paid upon the forged signature is held to bear the loss, because he has been negligent in failing to recognize that the handwriting is not that of his customer. But it follows obviously that if the payee, holder, or presenter of the forged paper has himself been in default, if he has himself been guilty of a negligence prior to that of the banker, or if by any act of his own he has at all contributed to induce the banker's negligence, then he may lose his right to cast the loss upon the banker.[61] mphasis supplied)

Quite palpably, the general rule remains that the drawee who has paid upon the forged signature bears the loss. The exception to this rule arises only when negligence can be traced on the part of the drawer whose signature was forged, and the need arises to weigh the comparative negligence between the drawer and the drawee to determine who should bear the burden of loss. The Court finds no basis to conclude that Samsung Construction was negligent in the safekeeping of its checks. For one, the settled rule is that the mere fact that the depositor leaves his check book lying around does not constitute such negligence as will free the bank from liability to him, where a clerk of the depositor or other persons, taking advantage of the opportunity, abstract some of the check blanks, forges the depositor’s signature and collect on the checks from the bank.[62] And for another, in point of fact Samsung Construction was not negligent at all since it reported the forgery almost immediately upon discovery.[63]

It is also worth noting that the forged signatures in PNB v. National City Bank of New York were not of the drawer, but of indorsers. The same circumstance attends PNB v. Court of Appeals,[64] which was also cited by the Court of Appeals. It is accepted that a forged signature of the drawer differs in treatment than a forged signature of the indorser.

The justification for the distinction between forgery of the signature of the drawer and forgery of an indorsement is that the drawee is in a position to verify the drawer’s signature by comparison with one in his hands, but has ordinarily no opportunity to verify an indorsement.[65]

Thus, a drawee bank is generally liable to its depositor in paying a check which bears either a forgery of the drawer’s signature or a forged indorsement. But the bank may, as a general rule, recover back the money which it has paid on a check bearing a forged indorsement, whereas it has not this right to the same extent with reference to a check bearing a forgery of the drawer’s signature.*66+

The general rule imputing liability on the drawee who paid out on the forgery holds in this case.

Banking Page 48

Since FEBTC puts into issue the degree of care it exercised before paying out on the forged check, we might as well comment on the bank’s performance of its duty. It might be so that the bank complied with its own internal rules prior to paying out on the questionable check. Yet, there are several troubling circumstances that lead us to believe that the bank itself was remiss in its duty.

The fact that the check was made out in the amount of nearly one million pesos is unusual enough to require a higher degree of caution on the part of the bank. Indeed, FEBTC confirms this through its own internal procedures. Checks below twenty-five thousand pesos require only the approval of the teller; those between twenty-five thousand to one hundred thousand pesos necessitate the approval of one bank officer; and should

the amount exceed one hundred thousand pesos, the concurrence of two bank officers is required.[67]

In this case, not only did the amount in the check nearly total one million pesos, it was also payable to cash. That latter circumstance should have aroused the suspicion of the bank, as it is not ordinary business practice for a check for such large amount to be made payable to cash or to bearer, instead of to the order of a specified person.[68] Moreover, the check was presented for payment by one Roberto Gonzaga, who was not designated as the payee of the check, and who did not carry with him any written proof that he was authorized by Samsung Construction to encash the check. Gonzaga, a stranger to FEBTC, was not even an employee of Samsung Construction.[69] These circumstances are already suspicious if taken independently, much more so if they are evaluated in concurrence. Given the shadiness attending Gonzaga’s presentment of the check, it was not sufficient for FEBTC to have merely complied with its internal procedures, but mandatory that all earnest efforts be undertaken to ensure the validity of the check, and of the authority of Gonzaga to collect payment therefor.

According to FEBTC Senior Assistant Cashier Gemma Velez, the bank tried, but failed, to contact Jong over the phone to verify the check.[70] She added that calling the issuer or drawer of the check to verify the same was not part of the standard procedure of the bank, but an “extra effort.”*71+ Even assuming that such personal verification is tantamount to extraordinary diligence, it cannot be denied that FEBTC still paid out the check despite the absence of any proof of verification from the drawer. Instead, the bank seems to have relied heavily on the say-so of Sempio, who was present at the bank at the time the check was presented.

FEBTC alleges that Sempio was well-known to the bank officers, as he had regularly transacted with the bank in behalf of Samsung Construction. It was even claimed that everytime FEBTC would contact Jong about problems with his account, Jong would hand the phone over to Sempio.[72] However, the only proof of such allegations is the testimony of Gemma Velez, who also testified that she did not know Sempio personally,[73] and had met Sempio for the first time only on the day the check was encashed.[74] In fact, Velez had to inquire with the other officers of the bank as to whether Sempio was actually known to the employees of the bank.[75] Obviously, Velez had no personal knowledge as to the past relationship between FEBTC
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of the bank.[75] Obviously, Velez had no personal knowledge as to the past relationship between FEBTC and Sempio, and any averments of her to that effect should be deemed hearsay evidence. Interestingly, FEBTC did not present as a witness any other employee of their Bel-Air branch, including those who supposedly had transacted with Sempio before.

Even assuming that FEBTC had a standing habit of dealing with Sempio, acting in behalf of Samsung Construction, the irregular circumstances attending the presentment of the forged check should have put the bank on the highest degree of alert. The Court recently emphasized that the highest degree of care and diligence is required of banks.

Banks are engaged in a business impressed with public interest, and it is their duty to protect in return their many clients and depositors who transact business with them. They have the obligation to treat their client’s account meticulously and with the highest degree of care, considering the fiduciary nature of their relationship. The diligence required of banks, therefore, is more than that of a good father of a family.[76]

Given the circumstances, extraordinary diligence dictates that FEBTC should have ascertained from Jong personally that the signature in the questionable check was his.

Still, even if the bank performed with utmost diligence, the drawer whose signature was forged may still recover from the bank as long as he or she is not precluded from setting up the defense of forgery. After all, Section 23 of the Negotiable Instruments Law plainly states that no right to enforce the payment of a check can arise out of a forged signature. Since the drawer, Samsung Construction, is not precluded by negligence from setting up the forgery, the general rule should apply. Consequently, if a bank pays a forged check, it must be considered as paying out of its funds and cannot charge the amount so paid to the account of the depositor.[77] A bank is liable, irrespective of its good faith, in paying a forged check.[78]

WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 28 November 1996 is REVERSED, and the Decision of the Regional Trial Court of Manila, Branch 9, dated 25 April 1994 is REINSTATED. Costs against respondent.

SO ORDERED.

DANTE O. TINGA
Associate Justice

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WE CONCUR:

REYNATO S. PUNO Associate Justice Chairman

MA. ALICIA AUSTRIA-MARTINEZ
Associate Justice

ROMEO J. CALLEJO, SR.
Associate Justice

MINITA V. CHICO-NAZARIO

Associate Justice

ATT ES T AT I O N

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

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REYNATO S. PUNO

Associate Justice
Chairman, Second Division

CE R T I F I C AT I O N

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

HILARIO G. DAVIDE, JR. Chief Justice

--------------------------------------------------------------------------------

[1]Later acquired by or merged with the Bank of the Philippine Islands.

[2]Rollo, p. 35.

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[3]Ibid.

[4]Id. at 28.

[5]Ibid.

[6]Ibid.

[7]Rollo, p. 35.

[8]See TSN dated 25 June 1993, p. 10.

[9]Id. at 9.

[10]See TSN dated 15 June 1993, p. 26.

[11]Ibid.

[12]Act No. 2031.

[13]Presided by Judge E.G. Sandoval, now Justice of the Sandiganbayan.

[14]TSN dated 8 October 1993, p. 8.

[15]Rollo, p. 24.

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[15]Rollo, p. 24.

[16]Penned by Justice S. Montoya, concurred in by Justices G. Jacinto and A. Tuquero.

[17]Rollo, p. 38.

[18]Ibid.

[19]63 Phil 711 (1936).

[20]Rollo, p. 38.

[21]Bank of Philippine Islands v. Court of Appeals, G.R. No. 102383, 26 November 1992, 216 SCRA 51, 65.

[22]Farnsworth, E.A., Negotiable Instruments: Cases and Materials, 2nd ed. (1959), at 173.

[23]Id. at 174.

[24]Brady, J.E., The Law of Forged and Altered Checks (1925), at 6-7. Case citations omitted.

[25]Nickles, S.H., Negotiable Instruments and Other Related Commercial Paper, 2nd ed. (1993), at 415.

[26]Gempesaw v. Court of Appeals, G.R. No. 92244, 9 February 1993, 218 SCRA 682, 689.

[27]Philippine National Bank v. National City Bank of New York, 63 Phil. 711, 743-744 (1936); citing 17 A. L. R., 891; 5 R. C. L., 559.

[28]Brady, H.J., Brady on Bank Checks, 3rd ed. (1962), at 475; citing Hardy v. Chesapeake Bank (1879) 51Md. 562, 34 Am. Rep. 325.
Banking Page 54

51Md. 562, 34 Am. Rep. 325.

[29]Osborn, A., Questioned Document Problems, 2nd ed. (1946), at 181-182.

[30]Rollo, p. 31.

[31]TSN dated 8 October 1993, p. 15.

[32]Id. at 15 and 19.

[33]See TSN dated 8 October 1993, pp. 15, 17, 19, 34, 36 and 38.

[34]Venuto v. Lizzo, 148 App. Div. 164, 132 N.Y. Supp. 1066 (1911), as cited in A. Osborn, supra, note 29.

*35+Defendant’s Exhibits Nos. "S-1," "S-7," "S-8," "S-9," "S-10," "S-12," "S-14," "S-15," and "S-16."

*36+Defendant’s Exhibit No. "S-9."

[37]TSN dated 8 October 1993, p. 35.

[38]Id. at 19 and 36.

[39]Supra, note 26.

[40]TSN dated 27 April 1993, p. 5.

[41]Id. at 7.

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[42]Id. at 7-8.

[43]TSN dated 8 October 1993, p. 4.

[44]TSN dated 27 April 1993, pp. 18-19.

[45]Id. at 14.

[46]Per NBI Questioned Documents Report No. 244-492, Plaintiff’s Exhibit "D."

[47]See TSN dated 25 January 1993, p. 7.

[48]See note 10.

[49]Rollo, p. 38, citing PNB v. National City Bank of New York, 63 Phil. 711, 733 (1936), which in turn cites Gloucester Bank v. Salem Bank, 17 Mass., 33; First Nat. Bank of Danvers vs. First National Bank of Salem, 151 Mass., 280; and B.B. Ford & Co. v. People’s Bank of Orangeburg, 74 S.C., 180.

[50]Ibid., citing PNB v. CA, 134 Phil. 829, 834 (1968), which in turn cites Blondeau v. Nano, 61 Phil. 625, 631, 632.

[51]Rollo, p. 38.

[52]MWSS v. Court of Appeals, G.R. No. L-62943, 14 July 1986, 143 SCRA 20, 31.

[53]G.R. Nos. 121413, 121479 and 128604, 29 January 2001, 350 SCRA 446.

[54]Ibid at 465.

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[55]TSN dated 25 January 1993, pp. 19, 31.

[56]See Section 3(d), Rule 131, Rules of Court.

[57]See Section 3(q), Rule 131, Rules of Court.

[58]Taylor v. Manila Electric Railroad, 16 Phil. 8, 28 (1910), citing Scaevola, Jurisprudencia del Codigo Civil, vol. 6, 551, 552.

[59]US v. Tria, 17 Phil. 303, 307 (1910).

[60]63 Phil. 711 (1936).

[61]Id. at 740; citing 2 Morse on Banks and Banking, 5th ed., secs. 464 and 466, pp. 82-85 and 86, 87.

[62]Brady, J.E., The Law of Forged and Altered Checks, supra, note 24, at 24-27; citing MacIntosh v. Bank, 123 Mass. 393; East St. Louis Cotton Oil Co. v. Bank of Steele, Mo., 205 S.W. Rep. 96.

[63]"For his failure or negligence either to discover or to report promptly the fact of such forgery to the drawee, the drawer loses his right against the drawee who has debited his account under the forged indorsement." Gempesaw v. Court of Appeals, G.R. No. 92244, 9 February 1993, 218 SCRA 682, 690; citing American jurisprudence. "A bank may escape liability where the depositor’s negligence consists of failure to properly examine his bank statements and cancelled checks and failure to notify the bank of forgery within a reasonable time." H. Bailey, supra, note 28, at 477. But see note 24.

[64]G.R. No. L-26001, 29 October 1968, 25 SCRA 693.

[65]Farnsworth, E.A., supra note 22, at 173.

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[66]Brady, J.E., supra, note 24, at 5.

[67]See TSN dated 12 July 1993, p. 8.

[68]"When the instrument is payable to order the payee must be named or otherwise indicated therein with reasonable certainty." Sec. 8, Act No. 2031 (Negotiable Instruments Law). Worthy of note is the fact that a check payable to bearer is more likely to be forged than one that is payable to order. The unofficial essence of bearer check is that anyone who possesses or holds it can indorse or receive payment for it which implies that payment is not limited to a particular person. See Nickles, S.H., Matheson, J.H., and Adams, E.S., Modern Commercial Paper: The New Law of Negotiable Instruments and Related Commercial Paper (1994), at 61.

[69]See TSN dated 26 July 1993, p. 18.

[70]See TSN dated 12 July 1993, p. 11.

[71]Ibid.

[72]Id. at 17.

[73]Id. at 18.

[74]TSN dated 26 July 1993, p. 3.

[75]Id. at 6.

[76]Westmont Bank v. Ong, G.R. No. 132560, 30 January 2002, 375 SCRA 212, 220-221.

[77]Traders Royal Bank v. Radio Philippines Network, Inc., G.R. No. 138510, 10 October 2002, 390 SCRA 608, 614.
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608, 614.

[78]Bailey, H.J., supra, note 28 at 474.

PUNO, J., Chairman, AUSTRIA-MARTINEZ, CALLEJO, SR., TINGA, and CHICO-NAZARIO, JJ. Promulgated: \---!e-library! 6.0 Philippines Copyright © 2000 by Sony Valdez---/ ([2004V901] SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC., Petitioner, - versus - FAR EAST BANK AND TRUST COMPANY AND COURT OF APPEALS, Respondents., G.R. No. 129015, 2004 Aug 13, 2nd Division)

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Heirs of Eduardo Manlapat v CA
Wednesday, July 08, 2009 9:19 AM

[2005V543] HEIRS OF EDUARDO MANLAPAT, represented by GLORIA MANLAPAT -BANAAG and LEON M. BANAAG, JR., Petitioners, versus HON. COURT OF APPEALS, RURAL BANK OF SAN PASCUAL, INC., and JOSE B. SALAZAR, CONSUELO CRUZ and ROSALINA CRUZ-BAUTISTA, and the REGISTER OF DEEDS of Meycauayan, Bulacan, Respondents.2005 Jun 82nd DivisionG.R. No. 125585D E C I S I O N

Tinga, J.: Before this Court is a Rule 45 petition assailing the Decision[1] dated 29 September 1994 of the Court of Appeals that reversed the Decision[2] dated 30 April 1991 of the Regional Trial Court (RTC) of Bulacan, Branch 6, Malolos. The trial court declared Transfer Certificates of Title (TCTs) No. T -9326-P(M) and No. T-9327-P(M) as void ab initio and ordered the restoration of Original Certificate of Title (OCT) No. P-153(M) in the name of Eduardo Manlapat (Eduardo), petitioners’ predecessor -in-interest.

The controversy involves Lot No. 2204, a parcel of land with an area of 1,058 square meters, located at Panghulo, Obando, Bulacan . The property had been originally in the possession of Jose Alvarez, Eduardo’s grandfather, until his demise in 1916. It remained unregistered until 8 October 1976 when OCT No. P-153(M) was issued in the name of Eduardo pursuant to a free patent issued in Eduardo’s name[3] that was entered in the Registry of Deeds of Meycauayan, Bulacan.[4] The subject lot is adjacent to a fishpond owned by one Ricardo Cruz (Ricardo), predecessor -in-interest of respondents Consuelo Cruz and Rosalina Cruz-Bautista (Cruzes).[5]
On 19 December 1954, before the subject lot was titled, Eduardo sold a portion thereof with an area of 553 square meters to Ricardo . The sale is evidenced by a deed of sale entitled “Kasulatan ng Bilihang Tuluyan ng Lupang Walang Titulo (Kasulatan)”*6+ which was signed by Eduardo himself as vendor and his wife Engracia Aniceto with a certain Santiago Enriquez signing as witness. The deed was notarized by Notary Public Manolo Cruz.[7] On 4 April 1963, the Kasulatan was registered with the Register of Deeds of Bulacan.[8]

Eduardo: tagapagmana ni Jose Alvarez na may possession ng lupa Ricardo: may ari ng katabing Fishpond *Eduardo allegedl sold a portion of the land to Ricardo w/ a Kasulatan which was notarized and registered w/ the register of deeds

On 18 March 1981, another Deed of Sale[9] conveying another portion of the subject lot consisting of 50 square meters as right of way was executed by Eduardo in favor of Ricardo in order to reach the portion covered by the first sale executed in 1954 and to have access to his fishpond from the provincial road.[10] The deed was signed by Eduardo himself and his wife Engracia Aniceto, together with Eduardo Manlapat, Jr. and Patricio Manlapat. The same was also duly notarized on 18 July 1981 by Notary Public Arsenio Guevarra.[11]

In December 1981, Leon Banaag, Jr. (Banaag), as attorney -in-fact of his father-in-law Eduardo, executed a mortgage with the Rural Bank of San Pascual, Obando Branch (RBSP), for P100,000.00 with the subject lot as collateral. Banaag deposited the owner’s duplicate certificate of OCT No. P -153(M) with the bank.

On 31 August 1986, Ricardo died without learning of the prior issuance of OCT No. P -153(M) in the name of Eduardo.[12] His heirs, the Cruzes, were not immediately aware of the consummated sale between Eduardo and Ricardo.

Eduardo himself died on 4 April 1987. He was survived by his heirs, Engracia Aniceto, his spouse; and children, Patricio, Bonifacio, Eduardo, Corazon, Anselmo, Teresita and Gloria, all surnamed Manlapat.[13] Neither did the heirs of Eduardo (petitioners) inform the Cruzes of the prior sale in favor of their predecessor-in-interest, Ricardo. Yet subsequently, the Cruzes came to learn about the sale and the issuance of the OCT in the name of Eduardo.

Upon learning of their right to the subject lot, the Cruzes immediately tried to confront petitioners on the mortgage and obtain the surrender of the OCT. The Cruzes, however, were thwarted in their bid to see the heirs. On the advice of the Bureau of Lands, NCR Office, they brought the matter to the barangay captain of Barangay Panghulo, Obando, Bulacan. During the hearing, petitioners were informed that the Cruzes had a legal right to the property covered by OCT and needed the OCT for the purpose of securing a separate title to cover the interest of Ricardo. Petitioners, however, were unwilling to surrender the OCT.[14]

Having failed to physically obtain the title from petitioners, in July 1989, the Cruzes instead went to RBSP which had custody of the owner’s duplicate certificate of the OCT, earlier surrendered as a consequence of the mortgage. Transacting with RBSP’s manager, Jose Salazar (Salazar), the Cruzes sought to borrow the owner’s duplicate certificate for the purpose of photocopying the same and thereafter showing a copy thereof to the Register of Deeds. Salazar allowed the Cruzes to bring the owner’s duplicate certificate outside the bank premises when the latter showed the Kasulatan.*15+ The Cruzes returned the owner’s duplicate certificate on the same day after having copied the same. They then brought the copy of the OCT to Register of Deeds Jose Flores (Flores) of Meycauayan and showed

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then brought the copy of the OCT to Register of Deeds Jose Flores (Flores) of Meycauayan and showed the same to him to secure his legal opinion as to how the Cruzes could legally protect their interest in the property and register the same.[16] Flores suggested the preparation of a subdivision plan to be able to segregate the area purchased by Ricardo from Eduardo and have the same covered by a separate title.[17]

Thereafter, the Cruzes solicited the opinion of Ricardo Arandilla (Arandilla), Land Registration Officer, Director III, Legal Affairs Department, Land Registration Authority at Quezon City, who agreed with the advice given by Flores.[18] Relying on the suggestions of Flores and Arandilla, the Cruzes hired two geodetic engineers to prepare the corresponding subdivision plan. The subdivision plan was presented to the Land Management Bureau, Region III, and there it was approved by a certain Mr. Pambid of said office on 21 July 1989.

After securing the approval of the subdivision plan, the Cruzes went back to RBSP and again asked for the owner’s duplicate certificate from Salazar. The Cruzes informed him that the presentation of the owner’s duplicate certificate was necessary, per advise of the Register of Deeds, for the cancellation of the OCT and the issuance in lieu thereof of two separate titles in the names of Ricardo and Eduardo in accordance with the approved subdivision plan.*19+ Before giving the owner’s duplicate certificate, Salazar required the Cruzes to see Atty. Renato Santiago (Atty. Santiago), legal counsel of RBSP, to secure from the latter a clearance to borrow the title. Atty. Santiago would give the clearance on the condition that only Cruzes put up a substitute collateral, which they did.[20] As a result, the Cruzes got hold again of the owner’s duplicate certificate.

After the Cruzes presented the owner’s duplicate certificate, along with the deeds of sale and the subdivision plan, the Register of Deeds cancelled the OCT and issued in lieu thereof TCT No. T -9326-P(M) covering 603 square meters of Lot No. 2204 in the name of Ricardo and TCT No. T -9327-P(M) covering the remaining 455 square meters in the name of Eduardo.[21]

On 9 August 1989, the Cruzes went back to the bank and surrendered to Salazar TCT No. 9327 -P(M) in the name of Eduardo and retrieved the title they had earlier given as substitute collateral. After securing the new separate titles, the Cruzes furnished petitioners with a copy of TCT No. 9327 -P(M) through the barangay captain and paid the real property tax for 1989.[22]

The Cruzes also sent a formal letter to Guillermo Reyes, Jr., Director, Supervision Sector, Department III of the Central Bank of the Philippines, inquiring whether they committed any violation of existing bank laws under the circumstances. A certain Zosimo Topacio, Jr. of the Supervision Sector sent a reply letter advising the Cruzes, since the matter is between them and the bank, to get in touch with the bank for the final settlement of the case.[23]

In October of 1989, Banaag went to RBSP, intending to tender full payment of the mortgage obligation. It was only then that he learned of the dealings of the Cruzes with the bank which eventually led to the subdivision of the subject lot and the issuance of two separate titles thereon. In exchange for the full payment of the loan, RBSP tried to persuade petitioners to accept TCT No. T -9327-P(M) in the name of Eduardo.[24]

As a result, three (3) cases were lodged, later consolidated, with the trial court, all involving the issuance of the TCTs, to wit:

(1) Civil Case No. 650-M-89, for reconveyance with damages filed by the heirs of Eduardo Manlapat against Consuelo Cruz, Rosalina Cruz-Bautista, Rural Bank of San Pascual, Jose Salazar and Jose Flores, in his capacity as Deputy Registrar, Meycauayan Branch of the Registry of Deeds of Bulacan;

(2) Civil Case No. 141-M-90 for damages filed by Jose Salazar against Consuelo Cruz, et. [sic] al.; and

(3) Civil Case No. 644-M-89, for declaration of nullity of title with damages filed by Rural Bank of San Pascual, Inc. against the spouses Ricardo Cruz and Consuelo Cruz, et al.[25]

After trial of the consolidated cases, the RTC of Malolos rendered a decision in favor of the heirs of Eduardo, the dispositive portion of which reads:

WHEREFORE, premised from the foregoing, judgment is hereby rendered:

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WHEREFORE, premised from the foregoing, judgment is hereby rendered:

1.–Declaring Transfer Certificates of Title Nos. T-9326-P(M) and T-9327-P(M) as void ab initio and ordering the Register of Deeds, Meycauayan Branch to cancel said titles and to restore Original Certificate of Title No. P-153(M) in the name of plaintiffs’ predecessor -in-interest Eduardo Manlapat;

2.-Ordering the defendants Rural Bank of San Pascual, Jose Salazar, Consuelo Cruz and Rosalina Cruz Bautista, to pay the plaintiffs Heirs of Eduardo Manlapat, jointly and severally, the following:

a)P200,000.00 as moral damages; b)P50,000.00 as exemplary damages; c)P20,000.00 as attorney’s fees; and d)the costs of the suit.

3.–Dismissing the counterclaims.

SO ORDERED.”*26+

The trial court found that petitioners were entitled to the reliefs of reconveyance and damages. On this matter, it ruled that petitioners were bona fide mortgagors of an unclouded title bearing no annotation of any lien and/or encumbrance. This fact, according to the trial court, was confirmed by the bank when it accepted the mortgage unconditionally on 25 November 1981. It found that petitioners were complacent and unperturbed, believing that the title to their property, while serving as security for a loan, was safely vaulted in the impermeable confines of RBSP. To their surprise and prejudice, said title was subdivided into two portions, leaving them a portion of 455 square meters from the original total area of 1,058 square meters, all because of the fraudulent and negligent acts of respondents and RBSP. The trial court ratiocinated that even assuming that a portion of the subject lot was sold by Eduardo to Ricardo, petitioners were still not privy to the transaction between the bank and the Cruzes which eventually led to the subdivision of the OCT into TCTs No. T-9326-P(M) and No. T-9327-P(M), clearly to the damage and prejudice of petitioners.[27]

Concerning the claims for damages, the trial court found the same to be bereft of merit. It ruled that although the act of the Cruzes could be deemed fraudulent, still it would not constitute intrinsic fraud. Salazar, nonetheless, was clearly guilty of negligence in letting the Cruzes borrow the owner’s duplicate certificate of the OCT. Neither the bank nor its manager had business entrusting to strangers titles mortgaged to it by other persons for whatever reason. It was a clear violation of the mortgage and banking laws, the trial court concluded.

The trial court also ruled that although Salazar was personally responsible for allowing the title to be borrowed, the bank could not escape liability for it was guilty of contributory negligence. The evidence showed that RBSP’s legal counsel was sought for advice regarding respondents’ request. This could only mean that RBSP through its lawyer if not through its manager had known in advance of the Cruzes’ intention and still it did nothing to prevent the eventuality. Salazar was not even summarily dismissed by the bank if he was indeed the sole person to blame. Hence, the bank’s claim for damages must necessarily fail.[28]

The trial court granted the prayer for the annulment of the TCTs as a necessary consequence of its declaration that reconveyance was in order. As to Flores, his work being ministerial as Deputy Register of the Bulacan Registry of Deeds, the trial court absolved him of any liability with a stern warning that he should deal with his future transactions more carefully and in the strictest sense as a responsible government official.[29]

Aggrieved by the decision of the trial court, RBSP, Salazar and the Cruzes appealed to the Court of Appeals. The appellate court, however, reversed the decision of the RTC. The decretal text of the decision reads:

THE FOREGOING CONSIDERED, the appealed decision is hereby reversed and set aside, with costs against the appellees.

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against the appellees.

SO ORDERED.[30]

The appellate court ruled that petitioners were not bona fide mortgagors since as early as 1954 or before the 1981 mortgage, Eduardo already sold to Ricardo a portion of the subject lot with an area of 553 square meters. This fact, the Court of Appeals noted, is even supported by a document of sale signed by Eduardo Jr. and Engracia Aniceto, the surviving spouse of Eduardo, and registered with the Register of Deeds of Bulacan. The appellate court also found that on 18 March 1981, for the second time, Eduardo sold to Ricardo a separate area containing 50 square meters, as a road right -of-way.[31] Clearly, the OCT was issued only after the first sale. It also noted that the title was given to the Cruzes by RBSP voluntarily, with knowledge even of the bank’s counsel.*32+ Hence, the imposition of damages cannot be justified, the Cruzes themselves being the owners of the property. Certainly, Eduardo misled the bank into accepting the entire area as a collateral since the 603-square meter portion did not anymore belong to him. The appellate court, however, concluded that there was no conspiracy between the bank and Salazar.[33]

Hence, this petition for review on certiorari.

SC Petitioners ascribe errors to the appellate court by asking the following questions, to wit: (a) can a mortgagor be compelled to receive from the mortgagee a smaller portion of the originally encumbered title partitioned during the subsistence of the mortgage, without the knowledge of, or authority derived from, the registered owner; (b) can the mortgagee question the veracity of the registered title of the mortgagor, as noted in the owner’s duplicate certificate, and thus, deliver the certificate to such third persons, invoking an adverse, prior, and unregistered claim against the registered title of the mortgagor; (c) can an adverse prior claim against a registered title be noted, registered and entered without a competent court order; and (d) can belief of ownership justify the taking of property without due process of law?[34]

The kernel of the controversy boils down to the issue of whether the cancellation of the OCT in the name of the petitioners’ predecessor -in-interest and its splitting into two separate titles, one for the petitioners and the other for the Cruzes, may be accorded legal recognition given the peculiar factual backdrop of the case. We rule in the affirmative.

Private respondents (Cruzes) own
the portion titled in their names

Consonant with law and justice, the ultimate denouement of the property dispute lies in the determination of the respective bases of the warring claims. Here, as in other legal disputes, what is written generally deserves credence.

A careful perusal of the evidence on record reveals that the Cruzes have sufficiently proven their claim of ownership over the portion of Lot No. 2204 with an area of 553 square meters. The duly notarized instrument of conveyance was executed in 1954 to which no less than Eduardo was a signatory. The execution of the deed of sale was rendered beyond doubt by Eduardo’s admission in his Sinumpaang Salaysay dated 24 April 1963.[35] These documents make the affirmance of the right of the Cruzes ineluctable. The apparent irregularity, however, in the obtention of the owner’s duplicate certificate from the bank, later to be presented to the Register of Deeds to secure the issuance of two new TCTs in place of the OCT, is another matter.

Petitioners argue that the 1954 deed of sale was not annotated on the OCT which was issued in 1976 in favor of Eduardo; thus, the Cruzes’ claim of ownership based on the sale would not hold water. The Court is not persuaded.

Registration is not a requirement for validity of the contract as between the parties, for the effect of registration serves chiefly to bind third persons.[36] The principal purpose of registration is merely to notify other persons not parties to a contract that a transaction involving the property had been entered

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into. Where the party has knowledge of a prior existing interest which is unregistered at the time he acquired a right to the same land, his knowledge of that prior unregistered interest has the effect of registration as to him.[37]

Further, the heirs of Eduardo cannot be considered third persons for purposes of applying the rule. The conveyance shall not be valid against any person unless registered, except (1) the grantor, (2) his heirs and devisees, and (3) third persons having actual notice or knowledge thereof.[38] Not only are petitioners the heirs of Eduardo, some of them were actually parties to the Kasulatan executed in favor of Ricardo. Thus, the annotation of the adverse claim of the Cruzes on the OCT is no longer required to bind the heirs of Eduardo, petitioners herein.

Petitioners had no right to constitute mortgage over disputed portion

The requirements of a valid mortgage are clearly laid down in Article 2085 of the New Civil Code, viz:

ART. 2085. The following requisites are essential to the contracts of pledge and mortgage:

(1) (2)

That they be constituted to secure the fulfillment of a principal obligation; That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;

(3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose.

Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. mphasis supplied)

For a person to validly constitute a valid mortgage on real estate, he must be the absolute owner thereof as required by Article 2085 of the New Civil Code.[39] The mortgagor must be the owner, otherwise the mortgage is void.[40] In a contract of mortgage, the mortgagor remains to be the owner of the property although the property is subjected to a lien.[41] A mortgage is regarded as nothing more than a mere lien, encumbrance, or security for a debt, and passes no title or estate to the mortgagee and gives him no right or claim to the possession of the property.[42] In this kind of contract, the property mortgaged is merely delivered to the mortgagee to secure the fulfillment of the principal obligation.[43] Such delivery does not empower the mortgagee to convey any portion thereof in favor of another person as the right to dispose is an attribute of ownership.[44] The right to dispose includes the right to donate, to sell, to pledge or mortgage. Thus, the mortgagee, not being the owner of the property, cannot dispose of the whole or part thereof nor cause the impairment of the security in any manner without violating the foregoing rule.[45] The mortgagee only owns the mortgage credit, not the property itself.[46]

Petitioners submit as an issue whether a mortgagor may be compelled to receive from the mortgagee a smaller portion of the lot covered by the originally encumbered title, which lot was partitioned during the subsistence of the mortgage without the knowledge or authority of the mortgagor as registered owner. This formulation is disingenuous, baselessly assuming, as it does, as an admitted fact that the mortgagor is the owner of the mortgaged property in its entirety. Indeed, it has not become a salient issue in this case since the mortgagor was not the owner of the entire mortgaged property in the first place.

Issuance of OCT No. P-153(M), improper

It is a glaring fact that OCT No. P-153(M) covering the property mortgaged was in the name of Eduardo, without any annotation of any prior disposition or encumbrance. However, the property was sufficiently shown to be not entirely owned by Eduardo as evidenced by the Kasulatan. Readily apparent upon perusal of the records is that the OCT was issued in 1976, long after the Kasulatan was executed way back in 1954. Thus, a portion of the property registered in Eduardo’s name arising from the grant of free patent did not actually belong to him. The utilization of the Torrens system to perpetrate fraud cannot be accorded judicial sanction.

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Time and again, this Court has ruled that the principle of indefeasibility of a Torrens title does not apply where fraud attended the issuance of the title, as was conclusively established in this case. The Torrens title does not furnish a shied for fraud.[47] Registration does not vest title. It is not a mode of acquiring ownership but is merely evidence of such title over a particular property. It does not give the holder any better right than what he actually has, especially if the registration was done in bad faith. The effect is that it is as if no registration was made at all.[48] In fact, this Court has ruled that a decree of registration cut off or extinguished a right acquired by a person when such right refers to a lien or encumbrance on the land¾not to the right of ownership thereof¾which was not annotated on the certificate of title issued thereon.[49]

Issuance of TCT Nos. T-9326-P(M) and T-9327-P(M), Valid

The validity of the issuance of two TCTs, one for the portion sold to the predecessor -in-interest of the Cruzes and the other for the portion retained by petitioners, is readily apparent from Section 53 of the Presidential Decree (P.D.) No. 1529 or the Property Registration Decree. It provides:

SEC 53. Presentation of owner’s duplicate upon entry of new certificate. – No voluntary instrument shall be registered by the Register of Deeds, unless the owner’s duplicate certificate is presented with such instrument, except in cases expressly provided for in this Decree or upon order of the court, for cause shown.

The production of the owner’s duplicate certificate, whenever any voluntary instrument is presented for registration, shall be conclusive authority from the registered owner to the Register of Deeds to enter a new certificate or to make a memorandum of registration in accordance with such instrument, and the new certificate or memorandum shall be binding upon the registered owner and upon all persons claiming under him, in favor of every purchaser for value and in good faith.

In all cases of registration procured by fraud, the owner may pursue all his legal and equitable remedies against the parties to such fraud without prejudice, however, to the rights of any innocent holder of the decree of registration on the original petition or application, any subsequent registration procured by the presentation of a forged duplicate certificate of title, or a forged deed or instrument, shall be null and void. mphasis supplied)

Petitioners argue that the issuance of the TCTs violated the third paragraph of Section 53 of P.D. No. 1529. The argument is baseless. It must be noted that the provision speaks of forged duplicate certificate of title and forged deed or instrument. Neither instance obtains in this case. What the Cruzes presented before the Register of Deeds was the very genuine owner’s duplicate certificate earlier deposited by Banaag, Eduardo’s attorney -in-fact, with RBSP. Likewise, the instruments of conveyance are authentic, not forged. Section 53 has never been clearer on the point that as long as the owner’s duplicate certificate is presented to the Register of Deeds together with the instrument of conveyance, such presentation serves as conclusive authority to the Register of Deeds to issue a transfer certificate or make a memorandum of registration in accordance with the instrument.

The records of the case show that despite the efforts made by the Cruzes in persuading the heirs of Eduardo to allow them to secure a separate TCT on the claimed portion, their ownership being amply evidenced by the Kasulatan and Sinumpaang Salaysay where Eduardo himself acknowledged the sales in favor of Ricardo, the heirs adamantly rejected the notion of separate titling. This prompted the Cruzes to approach the bank manager of RBSP for the purpose of protecting their property right. They succeeded in persuading the latter to lend the owner’s duplicate certificate. Despite the apparent irregularity in allowing the Cruzes to get hold of the owner’s duplicate certificate, the bank officers consented to the Cruzes’ plan to register the deeds of sale and secure two new separate titles, without notifying the heirs of Eduardo about it.

Further, the law on the matter, specifically P.D. No. 1529, has no explicit requirement as to the manner of acquiring the owner’s duplicate for purposes of issuing a TCT. This led the Register of Deeds of Meycauayan as well as the Central Bank officer, in rendering an opinion on the legal feasibility of the process resorted to by the Cruzes. Section 53 of P.D. No. 1529 simply requires the production of the owner’s duplicate certificate, whenever any voluntary instrument is presented for registration, and the same shall be conclusive authority from the registered owner to the Register of Deeds to enter a new certificate or to make a memorandum of registration in accordance with such instrument, and the new certificate or memorandum shall be binding upon the registered owner and upon all persons claiming under him, in favor of every purchaser for value and in good faith.

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under him, in favor of every purchaser for value and in good faith.

Quite interesting, however, is the contention of the heirs of Eduardo that the surreptitious lending of the owner’s duplicate certificate constitutes fraud within the ambit of the third paragraph of Section 53 which could nullify the eventual issuance of the TCTs. Yet we cannot subscribe to their position.

Impelled by the inaction of the heirs of Eduardo as to their claim, the Cruzes went to the bank where the property was mortgaged. Through its manager and legal officer, they were assured of recovery of the claimed parcel of land since they are the successors -in-interest of the real owner thereof. Relying on the bank officers’ opinion as to the legality of the means sought to be employed by them and the suggestion of the Central Bank officer that the matter could be best settled between them and the bank, the Cruzes pursued the titling of the claimed portion in the name of Ricardo. The Register of Deeds eventually issued the disputed TCTs.

The Cruzes resorted to such means to protect their interest in the property that rightfully belongs to them only because of the bank officers’ acquiescence thereto. The Cruzes could not have secured a separate TCT in the name of Ricardo without the bank’s approval. Banks, their business being impressed with public interest, are expected to exercise more care and prudence than private individuals in their dealings, even those involving registered lands.[50] The highest degree of diligence is expected, and high standards of integrity and performance are even required of it.[51]

Indeed, petitioners contend that the mortgagee cannot question the veracity of the registered title of the mortgagor as noted in the owner’s duplicate certificate, and, thus, he cannot deliver the certificate to such third persons invoking an adverse, prior, and unregistered claim against the registered title of the mortgagor. The strength of this argument is diluted by the peculiar factual milieu of the case.

A mortgagee can rely on what appears on the certificate of title presented by the mortgagor and an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagor’s title. This rule is strictly applied to banking institutions. A mortgagee -bank must exercise due diligence before entering into said contract. Judicial notice is taken of the standard practice for banks, before approving a loan, to send representatives to the premises of the land offered as collateral and to investigate who the real owners thereof are.[52]

Banks, indeed, should exercise more care and prudence in dealing even with registered lands, than private individuals, as their business is one affected with public interest. Banks keep in trust money belonging to their depositors, which they should guard against loss by not committing any act of negligence that amounts to lack of good faith. Absent good faith, banks would be denied the protective mantle of the land registration statute, Act 496, which extends only to purchasers for value and good faith, as well as to mortgagees of the same character and description.[53] Thus, this Court clarified that the rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks.[54]

Bank Liable for Nominal Damages

Of deep concern to this Court, however, is the fact that the bank lent the owner’s duplicate of the OCT to the Cruzes when the latter presented the instruments of conveyance as basis of their claim of ownership over a portion of land covered by the title. Simple rationalization would dictate that a mortgagee-bank has no right to deliver to any stranger any property entrusted to it other than to those contractually and legally entitled to its possession. Although we cannot dismiss the bank’s acknowledgment of the Cruzes’ claim as legitimized by instruments of conveyance in their possession, we nonetheless cannot sanction how the bank was inveigled to do the bidding of virtual strangers. Undoubtedly, the bank’s cooperative stance facilitated the issuance of the TCTs. To make matters worse, the bank did not even notify the heirs of Eduardo. The conduct of the bank is as dangerous as it is unthinkably negligent. However, the aspect does not impair the right of the Cruzes to be recognized as legitimate owners of their portion of the property.

Undoubtedly, in the absence of the bank’s participation, the Register of Deeds could not have issued the disputed TCTs. We cannot find fault on the part of the Register of Deeds in issuing the TCTs as his authority to issue the same is clearly sanctioned by law. It is thus ministerial on the part of the Register of Deeds to issue TCT if the deed of conveyance and the original owner’s duplicate are presented to him as there appears on theface of the instruments no badge of irregularity or

nullity.[55] If there is someone to blame for the shortcut resorted to by the Cruzes, it would be the bank itself whose manager and legal officer helped the Cruzes to facilitate the issuance of the TCTs.

The bank should not have allowed complete strangers to take possession of the owner’s duplicate certificate even if the purpose is merely for photocopying for a danger of losing the same is more than

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certificate even if the purpose is merely for photocopying for a danger of losing the same is more than imminent. They should be aware of the conclusive presumption in Section 53. Such act constitutes manifest negligence on the part of the bank which would necessarily hold it liable for damages under Article 1170 and other relevant provisions of the Civil Code.[56]

In the absence of evidence, the damages that may be awarded may be in the form of nominal damages. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him.*57+ This award rests on the mortgagor’s right to rely on the bank’s observance of the highest diligence in the conduct of its business. The act of RBSP of entrusting to respondents the owner’s duplicate certificate entrusted to it by the mortgagor without even notifying the mortgagor and absent any prior investigation on the veracity of respondents’ claim and character is a patent failure to foresee the risk created by the act in view of the provisions of Section 53 of P.D. No. 1529. This act runs afoul of every bank’s mandate to observe the highest degree of diligence in dealing with its clients. Moreover, a mortgagor has also the right to be afforded due process before deprivation or diminution of his property is effected as the OCT was still in the name of Eduardo. Notice and hearing are indispensable elements of this right which the bank miserably ignored.

Under the circumstances, the Court believes the award of P50,000.00 as nominal damages is appropriate.

Five-Year Prohibition against alienation or encumbrance under the Public Land Act

One vital point. Apparently glossed over by the courts below and the parties is an aspect which is essential, spread as it is all over the record and intertwined with the crux of the controversy, relating as it does to the validity of the dispositions of the subject property and the mortgage thereon. Eduardo was issued a title in 1976 on the basis of his free patent application. Such application implies the recognition of the public dominion character of the land and, hence, the five (5) -year prohibition imposed by the Public Land Act against alienation or encumbrance of the land covered by a free patent or homestead[58] should have been considered.

The deed of sale covering the fifty (50) -square meter right of way executed by Eduardo on 18 March 1981 is obviously covered by the proscription, the free patent having been issued on 8 October 1976. However, petitioners may recover the portion sold since the prohibition was imposed in favor of the free patent holder. In Philippine National Bank v. De los Reyes,[59] this Court ruled squarely on the point, thus:

While the law bars recovery in a case where the object of the contract is contrary to law and one or both parties acted in bad faith, we cannot here apply the doctrine of in pari delicto which admits of an exception, namely, that when the contract is merely prohibited by law, not illegal per se, and the prohibition is designed for the protection of the party seeking to recover, he is entitled to the relief prayed for whenever public policy is enhanced thereby. Under the Public Land Act, the prohibition to alienate is predicated on the fundamental policy of the State to preserve and keep in the family of the homesteader that portion of public land which the State has gratuitously given to him, and recovery is allowed even where the land acquired under the Public Land Act was sold and not merely encumbered, within the prohibited period.[60]

The sale of the 553 square meter portion is a different story. It was executed in 1954, twenty -two (22) years before the issuance of the patent in 1976. Apparently, Eduardo disposed of the portion even before he thought of applying for a free patent. Where the sale or transfer took place before the filing of the free patent application, whether by the vendor or the vendee, the prohibition should not be applied. In such situation, neither the prohibition nor the rationale therefor which is
to keep in the family of the patentee that portion of the public land which the government has gratuitously given him, by shielding him from the temptation to dispose of his landholding, could be relevant. Precisely, he had disposed of his rights to the lot even before the government could give the title to him.

The mortgage executed in favor of RBSP is also beyond the pale of the prohibition, as it was forged in

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The mortgage executed in favor of RBSP is also beyond the pale of the prohibition, as it was forged in December 1981 a few months past the period of prohibition.

WHEREFORE, the Decision of the Court of Appeals is AFFIRMED, subject to the modifications herein. Respondent Rural Bank of San Pascual is hereby ORDERED to PAY petitioners Fifty Thousand Pesos (P50,000.00) by way of nominal damages. Respondents Consuelo Cruz and Rosalina Cruz -Bautista are hereby DIVESTED of title to, and respondent Register of Deeds of Meycauayan, Bulacan is accordingly ORDERED to segregate, the portion of fifty (50) square meters of the subject Lot No. 2204, as depicted in the approved plan covering the lot, marked as Exhibit “A”, and to issue a new title covering the said portion in the name of the petitioners at the expense of the petitioners. No costs.

SO ORDERED.

DANTE O. TINGA

Associate Justice

WE CONCUR:

(On Official Leave)

REYNATO S. PUNO Associate Justice Chairman

MA. ALICIA AUSTRIA-MARTINEZ ROMEO J. CALLEJO, SR. Associate Justice
Acting Chairman

Associate Justice

MINITA V. CHICO-NAZARIO Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

MA. ALICIA AUSTRIA-MARTINEZ Associate Justice

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Associate Justice Acting Chairman, Second Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairman’s Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

HILARIO G. DAVIDE, JR. Chief Justice

*On Official Leave.

[1]Rollo, pp. 51-65. Decision penned by Associate Justice Bernardo Ll. Salas and concurred in by Justices Jorge S. Imperial and Hector L. Hofileña.

[2]Id. at 42-48. Decision penned by Judge Pablo S. Villanueva.

[3]The Sinumpaang Salaysay signed by Eduardo on 24 April 1963 shows that he is the only heir of his grandfather Jose Alvarez who died in 1916. Eduardo’s mother, daughter of Alvarez, predeceased her father. The sworn statement also shows that the subject lot was in the possession of his grandfather at the time of his death. See also Exhibit 2 - E, p. 4.

[4]The Bureau of Lands issued Free Patent No. 111-6 in the name of Eduardo which became the basis for the issuance of OCT No. P-153(M) by the Register of Deeds dated October 8, 1976.

[5]Rollo. p. 28.

[6]Exhibits, p. 3.

[7]Records, p. 30. See also Rollo, p. 213. The deed was entered in the notarial book of the notary public as Document No. 29, Page 6, Book No. I, Series of 1954.

[8]Rollo, p. 213. The deed was recorded as Inscription No. 16707, Page No. 257, Volume 89, File No.

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[8]Rollo, p. 213. The deed was recorded as Inscription No. 16707, Page No. 257, Volume 89, File No. 21819.

[9]Records, p. 10. Annex A.

[10]Rollo, p. 97.

[11]Records, p. 11. See also Rollo, p. 97. The deed was entered in the notarial book of the notary public as Document No. 261, Page 54, Book XIII, Series of 1981.

[12]Rollo, p. 98.

[13]Records, p. 4.

[14]Rollo, p. 99. See also Exhibit, p. 21. The Sinumpaang Salaysay of Barangay Captain Bonifacio Enriquez of Panghulo, Obando, Bulacan attested to the fact that on July 1989 the Cruzes lodged a complaint with his office regarding a lot with an area of 1,058 square meters, 553 square meters of which was sold to Ricardo on 19 December 1954. This sale was confirmed by Eduardo through a Sinumpaang Salaysay dated 24 April 1963.

[15]Id. at 52 and 100.

[16]Id. at 100.

[17]Ibid.

[18]Id. at 101.

[19]Ibid.

[20]Id. at 102.

[21]Id. at 28-29.

[22]Id. at 103-104.

[23]Exhibit, p. 18.

[24]Rollo, p. 29.

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[25]Supra notes 1 and 2.

[26]Rollo, p. 48.

[27]Id. at 46.

[28]Id. at 47-48.

[29]Id. at 48.

[30]Id. at 65.

[31]Id. at 56.

[32]Id. at 57.

[33]Id. at 65.

[34]Id. at 31-32.

[35]Exhibit No. 4.

[36]Samanilla v. Cajucom, et al., 107 Phil. 432 (1960).

[37]Lagandaon v. Court of Appeals, G.R. Nos. 102526-31, 21 May 1998, 290 SCRA 330.

*38+Peña, Registration of Land Titles and Deeds, 1994 ed., p. 28.

[39]Lagrosa v. Court of Appeals, 371 Phil. 225 (1999).

[40]National Bank v. Palma Gil, 55 Phil. 639 (1930-1931); Contreras v. China Banking Corporation, 76 Phil. 709 (1946).

An agent cannot therefore mortgage in his own name the property of the principal, otherwise the contract is void. But the agent can do so, in the name of the principal, for here the mortgagor is the principal. Hence, if the agent is properly authorized, the contract is valid. See Arenas v. Raymundo, 19

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Phil. 46 (1911).

[41]Ching Sen Ben v. Court of Appeals, 373 Phil. 544 (1999).

[42]Lagrosa v. Court of Appeals, supra note 39, citing Adlawan v. Torres, 233 SCRA 645.

That is why Article 2130 of the New Civil Code provides that a stipulation forbidding the owner from alienating the immovable mortgaged shall be void.

*43+“Ownership is retained by the mortgagor since the latter merely subjects it to a lien. In case of nonpayment of debt secured by a mortgage, the mortgagee has the right to foreclose the mortgaged property and have it sold to satisfy the outstanding indebtedness to enforce his right and consolidation of ownership is not an appropriate remedy. Only upon the lapse of the redemption period and the judgment debtor failed to exercise his right of redemption, ownership will vest or be consolidated in the purchaser.” (Dr. Igmidio Cuevas Lat, LAW ON MORTGAGE, 2001 ed., p. 1)

[44]Article 428 of the Civil Code of the Philippines provides:

ART. 428. The owner has the right to enjoy and dispose of a thing, without other limitations than those established by law.

The owner has also a right of action against the holder and possessor of the thing in order to recover it.

[45]Article 2088 of the Civil Code of the Philippines provides:

ART. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void.

[46]Article 2128 of the Civil Code of the Philippines provides:

ART. 2128. The mortgage credit may be alienated or assigned to a third person, in whole or in part, with the formalities required by law.

[47]Sacdalan v. Court of Appeals, G.R. No. 128967, 20 May 2004, 428 SCRA 586; Republic v. Court of Appeals, G.R. No. 60169, 23 March 1990, 183 SCRA 620; Adille v. Court of Appeals, G.R. No. 44546, 29 January 1988, 157 SCRA 455; Amerol v. Bagumbaran, G.R. No. 33261, 30 September 1987, 154 SCRA 396.

[48]Avila v. Tapucar, G.R. No. 45947, 27 August 1991, 201 SCRA 148; Miranda v. Court of Appeals, G.R. No. 46064, 7 September 1989, 177 SCRA 303, citing De Guzman v. Court of Appeals, 156 SCRA 701.

[49]Development Bank of the Philippines v. Court of Appeals, 387 Phil. 283 (2000).

[50]Development Bank of the Philippines v. Court of Appeals, 387 Phil. 283 (2000), citing Cavite Development Bank v. Lim, G.R. No. 13169, 1 February 2000, 324 SCRA 346, citing Tomas v. Tomas, 98 SCRA 280(1980).

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SCRA 280(1980).

[51]Bank of the Philippine Islands v. Casa Montessori Internationale, et al, G.R. No. 149454 and Casa Montessori Internationale v. Bank of the Philippine Islands, G.R. No. 149507, 28 May 2004, 430 SCRA 261.

[52]Tomas v. Tomas, No. L-36897, 25 June 1980, 98 SCRA 280.

[53]Government Service Insurance System v. Court of Appeals, G.R. No. 128471, 6 March 1998, 287 SCRA 204, 209, citing Tomas v. Tomas, supra note 50.

[54]Id. at 210, citing Rural Bank of Compostela v. Court of Appeals, et al, G.R. No. 122801, 8 April 1997.

*55+See Peña, Registration of Land Titles and Deeds, 1994 ed., p. 519 citing Tinatan v. Serilla, 54 O.G. 23, September 15, 1958, Court of Appeals; Gonzales v. Basa, Jr., 73 Phil. 704 (1942).

[56]The following Civil Code provisions are pertinent:

Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages.

Article 1172. Responsibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances.

Article 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.

Article 20. Every person who, contrary to law, willfully or negligently causes damage to another, shall indemnify the latter for the same.

Article 21. Any person who willfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for the damage.

Article 1973. . . . . The depositary is responsible for the negligence of his employees.

[57]Article 2221 of the Civil Code.

See also my Separate Opinion in the case of Agabon v. NLRC, G.R. No. 158693, November 17, 2004: “Nominal damages are adjudicated in order that a right of a plaintiff which has been violated or invaded by another may be vindicated or recognized without having to indemnify the plaintiff for any loss suffered by him. Nominal damages may likewise be awarded in every obligation arising from law, contracts, quasi-contracts, acts or omissions punished by law and quasi -delicts, or where any property right has been invaded.

. . . [I]t should be recognized that nominal damages are not meant to be compensatory, and should not be computed through a formula based on actual losses. Consequently, nominal damages are usually limited in pecuniary value. This fact should be impressed upon the prospective claimant, especially one who is contemplating seeking actual/compensatory damages.”

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[58]SECTION 118. Except in favor of the Government or any of its branches, units, or institutions, lands acquired under free patent or homestead provisions shall not be subject to encumbrance or alienation from the date of the approval of the application and for a term of five years from and after the date of issuance of the patent or grant, nor shall they become liable to the satisfaction of any debt contracted prior to the expiration of said period, but the improvements or crops on the land may be mortgaged or pledged to qualified persons, associations, or corporations.

No alienation, transfer, or conveyance of any homestead after five years and before twenty -five years after issuance of title shall be valid without the approval of the Secretary of Agriculture and Commerce, which approval shall not be denied except on constitutional and legal grounds.

[59]G.R. Nos. 46898-99, 28 November 1989, 179 SCRA 619.

[60]Id. at 628-629, citing Pascua v. Talens, 80 Phil. 792 (1949); Delos Santos v. Roman Catholic Church of Midsayap, et al., 94 Phil. 405 (1954); Ras v. Sua, et al., 25 SCRA 153 (1968).
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([2005V543] HEIRS OF EDUARDO MANLAPAT, represented by GLORIA MANLAPAT -BANAAG and LEON M. BANAAG, JR., Petitioners, versus HON. COURT OF APPEALS, RURAL BANK OF SAN PASCUAL, INC., and JOSE B. SALAZAR, CONSUELO CRUZ and ROSALINA CRUZ-BAUTISTA, and the REGISTER OF DEEDS of Meycauayan, Bulacan, Respondents., G.R. No. 125585, 2005 Jun 8, 2nd Division)

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Digest: Heirs of Eduardo
Saturday, July 11, 2009 12:05 PM

Heirs of Manlapat vs CA Date: June 8, 2005 Petitioners: Heirs of Eduardo Manlapat, represented by Gloria Manlapat Banaag, et al Respondents: CA, Rural Bank of San Pascual Inc and Jose Salazar, et al Ponente: Tinga Facts: The controversy involves Lot No. 2204 located at Panghulo, Obando, Bulacan. The property had been originally in the possession of Jose Alvarez, Eduardo’s grandfather. It later registered in the name of Eduardo and was entered in the Registry of Deeds of Meycauayan, Bulacan. The lot is adjacent to a fishpond owned by Ricardo Cruz, predecessor-in-interest of respondents Consuelo Cruz and Rosalina Cruz-Bautista. Before the lot was titled, Eduardo sold a portion with an area of 553 sqm to Ricardo. The sale is evidenced by a deed of sale which was signed by Eduardo himself as vendor and his wife Engracia Aniceto with Santiago Enriquez signing as witness. The Kasulatan was registered with the Register of Deeds. Another deed of sale covering 50sqm of the lot was executed by Eduardo in favor of Ricardo. Later, Leon Banaag, Jr, as attorney-in-fact of his father-in-law Eduardo, executed a mortgage with the Rural Bank of San Pascual, Obando Branch (RBSP), for P100,000 with the subject lot as collateral. Banaag deposited the owner’s duplicate certificate of OCT No. P-153(M) with the bank. Ricardo died without learning of the prior issuance of OCT No. P-153(M) in the name of Eduardo. His heirs, the Cruzes, were not immediately aware of the consummated sale between Eduardo and Ricardo. Eduardo himself died and was survived by his heirs, Engracia Aniceto, his spouse; and children, Patricio, Bonifacio, Eduardo, Corazon, Anselmo, Teresita and Gloria, all surnamed Manlapat. Neither did the heirs of Eduardo inform the Cruzes of the prior sale in favor of Ricardo. Yet subsequently, the Cruzes came to learn about the sale and the issuance of the OCT in the name of Eduardo. Upon learning the sale, the Cruzes tried to confront petitioners on the mortgage and obtain the surrender of the OCT. On the advice of the Bureau of Lands, NCR Office, they brought the matter to the barangay captain of Barangay Panghulo, Obando, Bulacan. Petitioners, however, were unwilling to surrender the OCT. Having failed to physically obtain the title from petitioners, in July 1989, the Cruzes instead went to RBSP (bank) which had custody of the owner’s duplicate certificate of the OCT, earlier surrendered as a consequence of the mortgage. Transacting with RBSP’s manager, Jose Salazar, the Cruzes sought to borrow the owner’s duplicate certificate for the purpose of photocopying the same and thereafter showing a copy thereof to the Register of Deeds. Salazar allowed the Cruzes to bring the owner’s duplicate certificate outside the bank premises when the latter showed the Kasulatan. They then brought the copy of the OCT to Register of Deeds Jose Flores of Meycauayan and showed the same to him to secure his legal opinion as to how the Cruzes could legally protect their interest in the property and register the same. Flores suggested the preparation of a subdivision plan to be able to segregate the area purchased by Ricardo from Eduardo and have the same covered by a separate title. After securing the approval of the subdivision plan, the Cruzes went back to RBSP and again asked for the owner’s duplicate certificate from Salazar. The Cruzes informed him that the presentation of the owner’s duplicate certificate was necessary, per advise of the Register of Deeds, for the cancellation of the OCT and the issuance in lieu thereof of two separate titles in the names of Ricardo and Eduardo in accordance with the subdivision plan. The Cruzes got hold again of the owner’s duplicate certificate.
After the Cruzes presented the *owner’s duplicate certificate, along with the *deeds of sale and the *subdivision plan, the Register of Deeds cancelled the OCT and issued in lieu thereof TCT No. T-9326-P(M) covering 603 square meters of Lot No. 2204 in the name of Ricardo and TCT No. T-9327-P(M) covering the remaining 455 square meters in the name of Eduardo.

2 deeds of sale (kasuulatan) were executed by Eduardo in favor of Ricardo
Mortgaged w/o knowledge of the buyers BANAAG executed the mortgage as ATTY-IN-Fact of Eduardo Heirs of Ricardo (buyer) unaware of 2nd sale, nor was Ricardo aware of the mortgage and issuance of OCT in favor of seller Eduardo

SALAZAR: Bank's Manager Borrow OCT from bank, photocopied it, then showed it to Register of Deeds

OCT cancelled; new TCT Issued in the name of Ricardo

Cruz gave the cancelled TCT in the name of Eduardo to the

bank, then furnished new copy of the TCT to barangay The Cruzes went back to the bank and surrendered to Salazar TCT No. 9327-P(M) in the name of Eduardo and retrieved the title they had earlier given as substitute collateral. After securing the new separate titles, captain and paid the real property tax the Cruzes furnished petitioners with a copy of TCT No. 9327-P(M) through the barangay captain and paid the real property tax for 1989.
Banaag went to RBSP, intending to tender full payment of the mortgage obligation. It was only then that he Banaag found out about the actions of Cruzes only when it learned of the dealings of the Cruzes with the bank which eventually led to the subdivision of the subject lot intended to render full payment. Bank wanted to waive full and the issuance of two separate titles thereon. In exchange for the full payment of the loan, RBSP tried to payment in exchange of cancelled TCT in the name of Eduardo persuade petitioners to accept TCT No. T-9327-P(M) in the name of Eduardo. As a result, three (3) cases were lodged, later consolidated, with the trial court, all involving the issuance of the TCTs.

RTC:

After trial of the consolidated cases, the RTC of Malolos rendered a decision in favor of the heirs of Eduardo. The trial court found that petitioners were entitled to the reliefs of reconveyance and damages. On this matter, it ruled that petitioners were bona fide mortgagors of an unclouded title bearing no annotation of any lien and/or encumbrance. It found that petitioners were complacent and unperturbed, believing that the title to their property, while serving as security for a loan, was safely vaulted in the impermeable confines of RBSP. To their surprise and prejudice, said title was subdivided into two portions, leaving them a portion of 455 square meters from the original total area of 1,058 square meters, all because of the fraudulent and negligent acts of respondents and RBSP. It ruled that although the act of the Cruzes could be deemed fraudulent, still it would not constitute intrinsic fraud. Salazar, nonetheless, was clearly guilty of negligence in letting the Cruzes borrow the owner’s duplicate certificate of the OCT. Neither the bank nor its manager had business entrusting to strangers titles mortgaged to it by other persons for whatever reason. It was a clear violation of the mortgage and banking laws, the trial court concluded.
The trial court also ruled that although Salazar was personally responsible for allowing the title to be borrowed, the bank could not escape liability for it was guilty of contributory negligence. The evidence showed that RBSP’s legal counsel was sought for advice regarding respondents’ request. This could only mean that RBSP through its lawyer if not through its manager had known in advance of the Cruzes’ intention and still it did nothing to prevent the eventuality. Salazar was not even summarily dismissed by the bank if he was indeed the sole person to blame. Hence, the bank’s claim for damages must necessarily fail. The CA reversed and ruled that petitioners were not bona fide mortgagors since as early as 1954 or before

RTC: For Manlapats (heirs) -Bank negligent in letting the Cruzes borrow OCT, though Salazar personally responsible for allowing the title to be borrowed -Heirs bona fide mortgagors of an unclouded title

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CA:

The CA reversed and ruled that petitioners were not bona fide mortgagors since as early as 1954 or before the 1981 mortgage, Eduardo already sold to Ricardo a portion of the subject lot with an area of 553 square meters. This fact, the Court of Appeals noted, is even supported by a document of sale signed by Eduardo Jr. and Engracia Aniceto, the surviving spouse of Eduardo, and registered with the Register of Deeds of Bulacan. The appellate court also found that on 18 March 1981, for the second time, Eduardo sold to Ricardo a separate area containing 50 square meters, as a road right-of-way. Clearly, the OCT was issued only after the first sale. It also noted that the title was given to the Cruzes by RBSP voluntarily, with knowledge even of the bank’s counsel. Hence, the imposition of damages cannot be justified, the Cruzes themselves being the owners of the property. Certainly, Eduardo misled the bank into accepting the entire area as a collateral since the 603-square meter portion did not anymore belong to him. The appellate court, however, concluded that there was no conspiracy between the bank and Salazar. Issue: WON the Cruzes own the portion titled in their names Held: Yes Ratio: A careful perusal of the evidence on record reveals that the Cruzes have sufficiently proven their claim of ownership over the portion of Lot No. 2204 with an area of 553 square meters. The duly notarized instrument of conveyance was executed in 1954 to which no less than Eduardo was a signatory. The execution of the deed of sale was rendered beyond doubt by Eduardo’s admission in his Sinumpaang Salaysay dated 24 April 1963. These documents make the affirmance of the right of the Cruzes ineluctable. The apparent irregularity, however, in the obtention of the owner’s duplicate certificate from the bank, later to be presented to the Register of Deeds to secure the issuance of two new TCTs in place of the OCT, is another matter. Petitioners argue that the 1954 deed of sale was not annotated on the OCT which was issued in 1976 in favor of Eduardo; thus, the Cruzes’ claim of ownership based on the sale would not hold water. The Court is not persuaded. Registration is not a requirement for validity of the contract as between the parties, for the effect of registration serves chiefly to bind third persons. The principal purpose of registration is merely to notify other persons not parties to a contract that a transaction involving the property had been entered into. Where the party has knowledge of a prior existing interest which is unregistered at the time he acquired a right to the same land, his knowledge of that prior unregistered interest has the effect of registration as to him. Further, the heirs of Eduardo cannot be considered third persons for purposes of applying the rule. The conveyance shall not be valid against any person unless registered, except (1) the grantor, (2) his heirs and devisees, and (3) third persons having actual notice or knowledge thereof. Not only are petitioners the heirs of Eduardo, some of them were actually parties to the Kasulatan executed in favor of Ricardo. Thus, the annotation of the adverse claim of the Cruzes on the OCT is no longer required to bind the heirs of Eduardo, petitioners herein.
Issue: WON petitioners had a right to constitute mortgage over the disputed portion Held: No Ratio: For a person to validly constitute a valid mortgage on real estate, he must be the absolute owner thereof as required by Article 2085 of the New Civil Code. The mortgagor must be the owner, otherwise the mortgage is void. In a contract of mortgage, the mortgagor remains to be the owner of the property although the property is subjected to a lien. A mortgage is regarded as nothing more than a mere lien, encumbrance, or security for a debt, and passes no title or estate to the mortgagee and gives him no right or claim to the possession of the property. In this kind of contract, the property mortgaged is merely delivered to the mortgagee to secure the fulfillment of the principal obligation. Such delivery does not empower the mortgagee to convey any portion thereof in favor of another person as the right to dispose is an attribute of ownership. The right to dispose includes the right to donate, to sell, to pledge or mortgage. Thus, the mortgagee, not being the owner of the property, cannot dispose of the whole or part thereof nor cause the impairment of the security in any manner without violating the foregoing rule. The mortgagee only owns the mortgage credit, not the property itself. Petitioners submit as an issue whether a mortgagor may be compelled to receive from the mortgagee a smaller portion of the lot covered by the originally encumbered title, which lot was partitioned during the subsistence of the mortgage without the knowledge or authority of the mortgagor as registered owner. This formulation is disingenuous, baselessly assuming, as it does, as an admitted fact that the mortgagor is the owner of the mortgaged property in its entirety. Indeed, it has not become a salient issue in this case since the mortgagor was not the owner of the entire mortgaged property in the first place.

CA: Reversed TC -Manlapats were NOT bona fide mortgagors (mortgaged a land which was already sold to another) -Bank not liable because they only gave the OCT to the true owners of the property

Not a mortgagor because not the owner

Issue: WON the issuance of OCT No. P-153(M) was proper Held: No Ratio: It is a glaring fact that OCT No. P-153(M) covering the property mortgaged was in the name of Eduardo, without any annotation of any prior disposition or encumbrance. However, the property was sufficiently shown to be not entirely owned by Eduardo as evidenced by the Kasulatan. The OCT was issued in 1976, long after the Kasulatan was executed way back in 1954. Thus, a portion of the property registered in Eduardo’s name arising from the grant of free patent did not actually belong to him. The utilization of the Torrens system to perpetrate fraud cannot be accorded judicial sanction. Time and again, this Court has ruled that the principle of indefeasibility of a Torrens title does not apply where fraud attended the issuance of the title, as was conclusively established in this case. The Torrens title does not furnish a shied for fraud. Registration does not vest title. It is not a mode of acquiring ownership but is merely evidence of such title over a particular property. It does not give the holder any better right than what he actually has, especially if the registration was done in bad faith. The effect is that it is as if no registration was made at all. In fact, this Court has ruled that a decree of registration cut off or extinguished a right acquired by a person when such right refers to a lien or encumbrance on the land¾not to the right of ownership thereof which was not annotated on the certificate of title issued thereon. Issue: WON the issuance of TCT Nos. T-9326-P(M) and T-9327-P(M) were valid Held: Yes Ratio: The validity of the issuance of two TCTs, one for the portion sold to the predecessor -in-interest of the Cruzes and the other for the portion retained by petitioners, is readily apparent from Section 53 of the PD No. 1529 or the Property Registration Decree. Petitioners argue that the issuance of the TCTs violated the third paragraph of Section 53 of P.D. No. 1529. The argument is baseless. It must be noted that the provision speaks of forged duplicate certificate of title and forged deed or instrument. Neither instance obtains in this case. What the Cruzes presented before the Register of Deeds was the very genuine owner’s duplicate certificate earlier deposited by Banaag, Eduardo’s attorney -in-fact, with RBSP. Likewise, the instruments of conveyance are authentic, not forged. Section 53 has never been clearer on the point that as long as the owner’s duplicate certificate is presented to the Register of Deeds together with the instrument of conveyance, such presentation serves as conclusive authority to

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Register of Deeds together with the instrument of conveyance, such presentation serves as conclusive authority to the Register of Deeds to issue a transfer certificate or make a memorandum of registration in accordance with the instrument. The records of the case show that despite the efforts made by the Cruzes in persuading the heirs of Eduardo to allow them to secure a separate TCT on the claimed portion, their ownership being amply evidenced by the Kasulatan and Sinumpaang Salaysay where Eduardo himself acknowledged the sales in favor of Ricardo, the heirs adamantly rejected the notion of separate titling. This prompted the Cruzes to approach the bank manager of RBSP for the purpose of protecting their property right. They succeeded in persuading the latter to lend the owner’s duplicate certificate. Despite the apparent irregularity in allowing the Cruzes to get hold of the owner’s duplicate certificate, the bank officers consented to the Cruzes’ plan to register the deeds of sale and secure two new separate titles, without notifying the heirs of Eduardo about it. Further, the law on the matter, specifically P.D. No. 1529, has no explicit requirement as to the manner of acquiring the owner’s duplicate for purposes of issuing a TCT. This led the Register of Deeds of Meycauayan as well as the Central Bank officer, in rendering an opinion on the legal feasibility of the process resorted to by the Cruzes. Section 53 of P.D. No. 1529 simply requires the production of the owner’s duplicate certificate, whenever any voluntary instrument is presented for registration, and the same shall be conclusive authority from the registered owner to the Register of Deeds to enter a new certificate or to make a memorandum of registration in accordance with such instrument, and the new certificate or memorandum shall be binding upon the registered owner and upon all persons claiming under him, in favor of every purchaser for value and in good faith. Quite interesting, however, is the contention of the heirs of Eduardo that the surreptitious lending of the owner’s duplicate certificate constitutes fraud within the ambit of the third paragraph of Section 53 which could nullify the eventual issuance of the TCTs. Yet we cannot subscribe to their position. Indeed, petitioners contend that the mortgagee cannot question the veracity of the registered title of the mortgagor as noted in the owner’s duplicate certificate, and, thus, he cannot deliver the certificate to such third persons invoking an adverse, prior, and unregistered claim against the registered title of the mortgagor. The strength of this argument is diluted by the peculiar factual milieu of the case. A mortgagee can rely on what appears on the certificate of title presented by the mortgagor and an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagor’s title. This rule is strictly applied to banking institutions. A mortgagee-bank must exercise due diligence before entering into said contract. Judicial notice is taken of the standard practice for banks, before approving a loan, to send representatives to the premises of the land offered as collateral and to investigate who the real owners thereof are. Banks, indeed, should exercise more care and prudence in dealing even with registered lands, than private individuals, as their business is one affected with public interest. Banks keep in trust money belonging to their depositors, which they should guard against loss by not committing any act of negligence that amounts to lack of good faith. Absent good faith, banks would be denied the protective mantle of the land registration statute, Act 496, which extends only to purchasers for value and good faith, as well as to mortgagees of the same character and description. Thus, this Court clarified that the rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks.
Issue: WON the bank is liable for nominal damages Held: Yes

Ratio: Of deep concern to this Court, however, is the fact that the bank lent the owner’s duplicate of the OCT to the Cruzes when the latter presented the instruments of conveyance as basis of their claim of ownership over a portion of land covered by the title. Simple rationalization would dictate that a mortgagee-bank has no right to deliver to any stranger any property entrusted to it other than to those contractually and legally entitled to its possession. Although we cannot dismiss the bank’s acknowledgment of the Cruzes’ claim as legitimized by instruments of conveyance in their possession, we nonetheless cannot sanction how the bank was inveigled to do the bidding of virtual strangers. Undoubtedly, the bank’s cooperative stance facilitated the issuance of the TCTs. To make matters worse, the bank did not even notify the heirs of Eduardo. The conduct of the bank is as dangerous as it is unthinkably negligent. However, the aspect does not impair the right of the Cruzes to be recognized as legitimate owners of their portion of the property. Undoubtedly, in the absence of the bank’s participation, the Register of Deeds could not have issued the disputed TCTs. We cannot find fault on the part of the Register of Deeds in issuing the TCTs as his authority to issue the same is clearly sanctioned by law. It is thus ministerial on the part of the Register of Deeds to issue TCT if the deed of conveyance and the original owner’s duplicate are presented to him as there appears on the face of the instruments no badge of irregularity or nullity. If there is someone to blame for the shortcut resorted to by the Cruzes, it would be the bank itself whose manager and legal officer helped the Cruzes to facilitate the issuance of the TCTs. The bank should not have allowed complete strangers to take possession of the owner’s duplicate certificate even if the purpose is merely for photocopying for a danger of losing the same is more than imminent. They should be aware of the conclusive presumption in Section 53. Such act constitutes manifest negligence on the part of the bank which would necessarily hold it liable for damages under Article 1170 and other relevant provisions of the Civil Code. In the absence of evidence, the damages that may be awarded may be in the form of nominal damages. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him. This award rests on the mortgagor’s right to rely on the bank’s observance of the highest diligence in the conduct of its business. The act of RBSP of entrusting to respondents the owner’s duplicate certificate entrusted to it by the mortgagor without even notifying the mortgagor and absent any prior investigation on the veracity of respondents’ claim and character is a patent failure to foresee the risk created by the act in view of the provisions of Section 53 of P.D. No. 1529. This act runs afoul of every bank’s mandate to observe the highest degree of diligence in dealing with its clients. Moreover, a mortgagor has also the right to be afforded due process before deprivation or diminution of his property is effected as the OCT was still in the name of Eduardo. Notice and hearing are indispensable elements of this right which the bank miserably ignored. Under the circumstances, the Court believes the award of P50,000.00 as nominal damages is appropriate. Issue: WON the first sale was valid Held: No Ratio: Eduardo was issued a title in 1976 on the basis of his free patent application. Such application implies the recognition of the public dominion character of the land and, hence, the five (5) -year prohibition imposed by the Public Land Act against alienation or encumbrance of the land covered by a free patent or homestead should have been considered. The deed of sale covering the fifty (50)-square meter right of way executed by Eduardo on 18 March 1981 is obviously covered by the proscription, the free patent having been issued on 8 October 1976. However,

On bank's liability: LIABLE! -bank should not lend documents of its clients to strangers!

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petitioners may recover the portion sold since the prohibition was imposed in favor of the free patent holder. The sale of the 553 square meter portion is a different story. It was executed in 1954, twenty-two (22) years before the issuance of the patent in 1976. Apparently, Eduardo disposed of the portion even before he thought of applying for a free patent. Where the sale or transfer took place before the filing of the free patent application, whether by the vendor or the vendee, the prohibition should not be applied. In such situation, neither the prohibition nor the rationale therefor which is to keep in the family of the patentee that portion of the public land which the government has gratuitously given him, by shielding him from the temptation to dispose of his landholding, could be relevant. Precisely, he had disposed of his rights to the lot even before the government could give the title to him. The mortgage executed in favor of RBSP is also beyond the pale of the prohibition, as it was forged in December 1981 a few months past the period of prohibition.
Pasted from <file:///C:\DOCUME~1\Cha\LOCALS~1\Temp\Rar$DI03.640\Heirs%20of%20Manlapat%20vs%20CA.docx>

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PNB v Pike
Wednesday, July 08, 2009 9:22 AM

[2005V1071] PHILIPPINE NATIONAL BANK, Petitioner, versus NORMAN Y. PIKE, Respondent.2005 Sep 202nd DivisionG.R. No. 157845D E C I S I O N

CHICO-NAZARIO, J.: This petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, seeks to reverse the Decision[1] dated 19 December 2002, and the Resolution[2] dated 02 April 2003, both of the Court of Appeals, in CA-G.R. CV No. 59389, which affirmed with modification the Decision[3] rendered by the Regional Trial Court (RTC), Branch 07 of Manila, dated 10 January 1997, in Civil Case No. 94-68821 in favor of herein respondent Norman Pike (Pike).

The case stemmed from a complaint[4] filed by herein respondent Pike for damages[5] against Philippine National Bank (PNB) on 04 January 1994.
Complainant Pike often traveled to and from Japan as a gay entertainer in said country. Sometime in 1991, he opened U.S. Dollar Savings Account No. 0265-704591-0 with herein petitioner PNB Buendia branch for which he was issued a corresponding passbook. The complaint alleged in substance that before complainant Pike left for Japan on 18 March 1993, he kept the aforementioned passbook inside a cabinet under lock and key, in his home; that on 19 April 1993, a few hours after he arrived from Japan, he discovered that some of his valuables were missing including the passbook; that he immediately reported the incident to the police which led to the arrest and prosecution of a certain Mr. Joy Manuel Davasol; that complainant Pike also discovered that Davasol made two (2) unauthorized withdrawals from his U.S. Dollar Savings Account No. 0265-704591-0, both times at the PNB Buendia branch on the following dates:

DATE
AMOUNT 31 March 1993 $3,500.00 05 April 1993

4,000.00
TOTAL

$7,500.00

that on several occasions, complainant Pike went to defendant PNB’s Buendia branch and verbally protested the unauthorized withdrawals and likewise demanded the return of the total withdrawn amount of U.S. $7,500.00, on the ground that he never authorized anybody to withdraw from his
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amount of U.S. $7,500.00, on the ground that he never authorized anybody to withdraw from his account as the signatures appearing on the subject withdrawal slips were clearly forgeries; that defendant PNB refused to credit said amount back to complainant’s U.S. Dollar Savings Account without justifiable reason, and instead, defendant bank wrote him that it exercised due diligence in the handling of said account; and that on 06 May 1993, complainant Pike wrote defendant PNB simply to request that the hold-account be lifted so that he may withdraw the remaining balance left in his U.S.$ Savings Account and nothing else.

On the other hand, defendant PNB alleged, in its Motion to Dismiss[6] of 18 April 1994, a counterstatement of facts. Its factual allegations read:

. . . On March 15, 1993 at PNB Buendia Branch, Mr. Norman Y. Pike, together with a certain Joy Davasol went to see PNB AVP Mr. Lorenzo T. Val (sic), Jr. purposely to withdraw the amount of $2,000.00. Mr. Pike also informed AVP Val that he is leaving for abroad (Japan) and made verbal instruction to honor all withdrawals to be transmitted by his Talent Manager and Choreographer, Joy Davasol who shall present pre-signed withdrawal slips bearing his (Pike’s) signature. . .

On April 19, 1993, a certain Josephine Balmaceda, who claimed to be plaintiff’s sister executed an affidavit . . . . stating therein that they discovered today (April 19, 1993) the lost (sic) of her brother’s passbook issued by PNB on account of robbery, committed in the residence/office of her brother, promptly reporting the matter to the police authorities and her brother cannot report the matter to the Bank because he was currently in Japan and therefore requesting the Bank to issue a hold-order on her brother’s passbook.

But a copy of an alarm (Police) Report dated April 19, 1993. . . stated that plaintiff (who was the one who reported the matter) after one month in Japan, he (complainant) arrived yesterday. . .

On April 26, 1993, Atty. Nathaniel Ifurung who claims to be plaintiff’s counsel sent a demand letter to VP Violeta T. Suquila (then VP and Manager of PNB Buendia Branch) demanding the bank to credit back the amount of US$7,500.00 which were withdrawn on March 31, 1993 and April 5, 1993, because his client’s signatures were forged and the withdrawal made thereon were unauthorized. . .

On May 5, 1993, Mr. Norman Y. Pike executed an affidavit of loss (sic) Dollar Account Passbook … and requested the PNB to replace the same and allow him to make withdrawals thereon. He stated that his passbook was stolen together with other valuables which he discovered only in the early morning of April 19, 1993. . . On May 6, 1993, plaintiff Norman Y. Pike wrote a letter. . . addressed to the Manager of PNB, Buendia Branch the full contents of said letter hereto quoted as follows: May 6, 1993

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The Manager
Philippine National Bank Buendia Branch Paseo de Roxas cor. Gil Puyat Street Makati, Metro Manila

Sir:

In connection with the request of my sister, Mrs. Josephine P. Balmaceda for the hold-order on my dollar savings passbook No. 265-704591-0, I am now requesting your good office to lift the same so I can withdraw the remaining balance of my passbook which was reported lost sometime in March of this year.

I also promise not to hold responsible the bank and its officers for the withdrawal made on my dollar savings passbook on March 19 and April 5, 1993 respectively as a result of the lost (sic) of my passbook.

Sgd. NORMAN Y. PIKE

Depositor
Philippine Passport No. H918022 Issued at Manila on Sept. 6, 1990

Place of Issuance

On the same day May 6, 1993 Plaintiff Norman Y. Pike was allowed by defendant bank to withdraw the remaining balance from his passbook … .

A letter dated May 18, 1993 was sent to Plaintiff’s counsel … by PNB … stating that the Bank regrets that it cannot accede to such request inasmuch as the Bank exercised due diligence of a good father to his family in the handling of transactions covering the deposit account of Mr. Pike … .
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family in the handling of transactions covering the deposit account of Mr. Pike … .

On July 2, 1993, Plaintiff’s counsel sent a letter to PNB Vice Pres. Suquila denying that his client made any such promise not to hold responsible the bank and its officers for the withdrawal made … .

A letter dated July 29, 1993 … was sent to Plaintiff’s counsel by VP Suquila stating that plaintiff’s withdrawal of the remaining balance of his account with the Bank effectively estops him from claiming on the alleged unauthorized withdrawals.

The trial court, in its decision dated 10 January 1997, made the following findings of fact:

. . . [T]hat the bank is responsible for such unauthorized withdrawals. The court is not impressed with the defense put up by the bank. Its contention that the withdrawals were authorized by the plaintiff because there was an arrangement between the bank represented by its Asst. Vice President Lorenzo Bal, Jr. and the depositor Norman Y. Pike to the effect that pre-signed withdrawal slips, that is, withdrawal slip signed by the depositor in the presence of Mr. Bal whereby it would be made to appear that it was the depositor himself who presented the same to the bank despite the fact that it was another person who presented the same should be honored by the bank cannot be sanctioned by the court. Firstly, the court is not satisfied that there was indeed such an arrangement. . . It is Mr. Bal’s contention that such an arrangement although not ordinarily entered into is still a legal procedure of the bank and is resorted to accommodate the depositors’ specially honored and valued depositor at that.

...

The court compared the signatures in the questioned withdrawal slips with the known signatures of the depositor and is convinced that the signatures in the unauthorized withdrawal slips do not correspond to the true signatures of the depositor.

From the evidence that it received, the court is convinced that the bank was negligent in the performance of its duties such that unauthorized withdrawals were made in the deposit of plaintiff Norman Y. Pike.[7]

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

WHEREFORE and considering the foregoing, judgment is hereby rendered in favor of the plaintiff and against the defendant and ordering the defendant to pay the following:

1. 2.

US$7,500.00 plus interest thereon at the rate of 12% per annum until the full amount is paid; P25,000.00 for and as attorney’s fees;

3.
4.

P50,000.00 as moral damages and P50,000.00 as exemplary damages; and
Plus the costs of suit.[8]

Defendant PNB’s motion for reconsideration was subsequently denied by the court a quo.*9+

On appeal, the Court of Appeals issued the assailed decision dated 19 December 2002, affirming the findings of the RTC that indeed defendant-appellant PNB was negligent in exercising the diligence required of a business imbued with public interest such as that of the banking industry, however, it modified the rate of interest and award for damages, to wit:

WHEREFORE, premises considered, the Decision dated January 10, 1997 issued by the Regional Trial Court of Manila, Branch 7, in Civil Case No. 94-68821, is hereby AFFIRMED with MODIFICATION, as follows:

1. Ordering appellant, the Philippine National Bank, Buendia Branch, to refund appellee the amount of $7,500.00 plus interest of 6% per annum to be computed from the date of the filing of the complaint which interest rate shall become 12% per annum from the time the judgment in this case becomes final and executory until its satisfaction;

2.

The award for moral damages is reduced to P20,000.00; and

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2.

The award for moral damages is reduced to P20,000.00; and

3.

The award for exemplary damages is likewise reduced to P20,000.00.

Costs against appellant.[10]

The appellate court held that:

Appellant claims that appellee personally talked to its officers to allow Joy Manuel Davasol to make withdrawals. Appellee even left pre-signed withdrawal slips before he went to Japan. However, appellant could have told appellee to authorize the withdrawal by a representative by indicating the same at the space provided at the back portion of the withdrawal slip. This operational flaw was observed by the trial court, when it ruled:

The court cannot also understand why the bank did not require the correct, proper and the usual procedure of requiring a depositor who is withdrawing the money through a representative to fill up the back portion of the withdrawal slips, which form was issued by the bank itself.

A perusal of the records discloses that appellee had previously authorized withdrawals by a representative. However, these withdrawals were properly accompanied by a “withdrawal by a representative” form aside from a handwritten request by appellee to allow such withdrawals by his representative, or a typewritten letter-request for withdrawal by a representative. Certainly, appellant lacked the due care and caution required of managers and employees of a firm engaged in so sensitive and demanding business as banking. …

In its desire to be exonerated from liability, appellant advances the argument that, granting negligence on its part, appellee condoned this negligence as shown in his letter dated May 6, 1993, wherein appellee purportedly undertook, not to hold the bank and its officers responsible for the unauthorized withdrawals from his account.

We do not agree. It should be emphasized that while the appellee admitted signing the letter dated May 6, 1993, he, however, denied having undertook (sic) to exonerate the appellant from liability for the unauthorized withdrawals. Appellee questioned the second paragraph of the said letter as being superimposed so that his signature overlapped the text of the second paragraph of said letter. A waiver of right, in order to be valid, should be in a language that clearly manifests his desire to do so. … In the

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instant case, appellee’s filing of the instant action is inconsistent with appellant’s contention that he had waived his right to question appellant’s negligent act of allowing the unauthorized withdrawals from his account.[11]

Defendant-appellant PNB filed a motion for reconsideration. In a Resolution dated 02 April 2003, the Court of Appeals denied said motion.

Hence, this petition.

Petitioner PNB now seeks the review of the aforequoted decision and resolution of the Court of Appeals predicated on the following issues:

I.

WHETHER OR NOT THE PRINCIPLE OF ESTOPPEL WAS NOT PROPERLY APPLIED IN THIS CASE;

II.

WHETHER OR NOT RESPONDENT HAVE SUBSTANTIALLY PROVEN THAT THE SIGNATURES APPEARING ON THE TWO (2) QUESTIONED PRE-SIGNED WITHDRAWAL SLIP FORMS ARE ALL FORGERIES IN ACCORDANCE WITH SECTION 22, RULE 132 OF THE REVISED RULES OF COURT; and

III.

WHETHER OR NOT MORAL AND EXEMPLARY DAMAGES CAN BE AWARDED AGAINST A PARTY IN GOOD FAITH.

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Petitioner PNB contends that due to the verbal instructions[12] of respondent Pike, a valued depositor, it allowed the withdrawal by another person. Plus, the fact that said respondent withdrew the remaining balance in his US Savings Account and executed a waiver releasing petitioner PNB from any liability due to the loss of the funds should rightly negate a finding of negligence on its part. Accordingly, petitioner PNB claims that the appellate court, as well as the trial court erred in holding that the withdrawals in question were unauthorized as the signatures appearing on the subject withdrawal slips were forgeries. Petitioner PNB, therefore, argues that it should not be held liable for the amount withdrawn from the account of respondent Pike in the sum of $7,500.00, as well as for moral and exemplary damages.

A priori, it is quite evident that the petition is anchored on a plea to review or re-examine the factual conclusions reached by the trial court and affirmed by the Court of Appeals, and for this Court to hold otherwise. Whether:

1) respondent Pike’s signatures appearing on the pertinent withdrawal slips used by Joy Manuel Davasol[13] to withdraw the amount of $7,500.00, were forgeries, as found by the trial court and affirmed by the Court of Appeals, or were authentic as claimed by petitioner bank; and

2) respondent Pike in fact executed a waiver absolving petitioner bank from any legal responsibility due to the unauthorized withdrawals, as maintained by petitioner bank, or the paragraph containing said waiver was intercalated by some other person, thus, amounting no waiver at all, as held by the courts a quo.

are questions of fact and not of law. Inexorably, these issues call for an inquiry into the facts and evidence on record. This, as we have so often held, we cannot do.

Elementary is the rule that this Court is not the appropriate venue to consider anew the factual issues as it is not a trier of facts, and, it generally does not weigh anew the evidence already passed upon by the Court of Appeals.[14] When this Court is tasked to go over once more the evidence presented by both parties, and analyze, assess and weigh them to ascertain if the trial court and the appellate court were correct in according superior credit to this or that piece of evidence of one party or the other, the Court cannot and will not do the same.[15] Such task is foreclosed by the rule enunciated under Section 1 of Rule 45[16] of the Rules of Court:

SECTION 1. Filing of petition with Supreme Court. - . . . The petition shall raise only questions of law[17] which must be distinctly set forth.

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We have oft “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,”*18+ and in the absence of any showing that the findings complained of are totally devoid of support in the evidence on record, or that they are so glaringly erroneous as to constitute serious abuse of discretion, such findings must stand. The courts a quo are in a much better position to evaluate properly the evidence.

Finding no other alternative but to affirm their finding that petitioner PNB negligently allowed the unauthorized withdrawals subject of the case at bar, the instant petition for review must necessarily fail.

At this juncture, it bears emphasizing that negligence of banking institutions should never be countenanced. The negligence here lies in the lackadaisical attitude exhibited by employees of petitioner PNB in their treatment of respondent Pike’s US Dollar Savings Account that resulted in the unauthorized withdrawal of $7,500.00. Nevertheless, though its employees may be the ones negligent, a bank’s liability as an obligor is not merely vicarious but primary, as banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees,[19] and having such obligation, this Court cannot ignore the circumstances surrounding the case at bar – how the employees of petitioner PNB turned their heads, nay, closed their eyes to the suspicious circumstances enfolding the two withdrawals subject of the case at bar. It may even be said that they went out of their ways to disregard standard operating procedures formulated to ensure the security of each and every account that they are handling. Petitioner PNB does not deny that the withdrawal slips used were in breach of standard operating procedures of banks in the ordinary and usual course of banking operations as testified to by one of its witnesses, Mr. Lorenzo T. Bal, Assistant Vice President of Petitioner PNB’s Buendia branch, on cross-examination[20] he stated thus:

Q: Mr. Witness, when the original of Exhibit “B”*21+ was presented to you for approval, how many signatures of depositor appears thereon?

A:

Two (2) signatures appears (sic) on the face of the withdrawal slip.

Q:

When it (sic) was (sic) presented to you immediately?

A:

Yes, sir.

Q:

Are you sure of that?
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Q:

Are you sure of that?

A:

Yes, sir. Because it was pre signed withdrawal slip.

Q:

What does the signature appear, the word recipient means?

A:

Received.

Q:

So, what you are saying is that, the depositor here signed this even before receiving the amount?

A: Because before the withdrawal was made, Mr. Pike, the depositor came to the bank when he withdrew the $2,000.00 and instructed me or requested us even the supervisor to honor all withdrawal slip.

Q:

And this is a regular procedure?

A:

Yes, sir.

Q:

Are you sure of that?

A:

Yes, sir.

Q:

Do you have written manual on this particular procedure, Mr. Witness?

A:

Of course, that includes in the Rules and regulations of the bank.

Q:

Are you are (sic) are very sure of that?

A:

And banking is a fast transaction between the depositor and the bank.
Banking Page 88

A:

And banking is a fast transaction between the depositor and the bank.

Q:

And then, is the use of the back portion of the withdrawal slip … with a heading of authorization?

A: Normally, a depositor and the bank agrees on certain terms that if you allow withdrawal from his account, his or her account, its enough that the signature of the depositor appears on both spaces in the front side of the withdrawal slip. Even if you do not have the back portion of the withdrawal slip.

Q:

You are very sure of that?

A:

Yes, sir.

Q: And that has been done with the other withdrawal slip of Norman Pike as stated or as shown in the Statement of Account?

A:

Yes, sir.

Q:

That withdrawal made by representative?

A:

Yes, sir.

From the foregoing, petitioner PNB’s witness was utterly remiss in protecting the bank’s client, as well as the bank itself, when he allowed an account holder to make it appear as if he was the one actually withdrawing from an account and actually receiving the withdrawn amount. Ordinarily, banks allow withdrawal by someone who is not the account holder so long as the account holder authorizes his representative to withdraw and receive from his account by signing on the space provided particularly for such transactions, usually found at the back of withdrawal slips. As fittingly found by the courts a quo, if indeed, respondent Pike signed the withdrawal slips in the presence of Mr. Lorenzo Bal, petitioner PNB’s AVP at its Buendia branch, why did he not call respondent Pike’s attention and refer him to the space provided for authorizing representatives to withdraw from and receive the proceeds of such withdrawal? Or, at the very least, sign or initial the same so that he could identify the pre-signed withdrawal slips made by Mr. Pike?

Banking Page 89

Q:

You are also saying that on March 15, 1993, you likewise met Joy Manuel Dabasol?

A:

Yes, sir.

Q:

And you (sic) also saying on March 15, 1993, you also met Norman Pike, the depositor,

A:

Yes, sir.

Q:

And when did you first met (sic) Norman Pike?

A:

March 15 when he withdrew $2,000.00.

Q:

That was the first time?

A:

First time, yes.

Q: And Mr. Norman Pike was already transacting with you long before that day, is this correct? For how long was he transacting with you?

A:

That was my first time.

Q: That was the first time. What I mean is, that he was transacting with the PNB, Buendia Branch long before you met him?

A:

Maybe.

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Q: And the withdrawal made on April 5, 1993 which you approved, you did not look at Exhibit “C”, the Savings Signature Card Individual?

A:

We do not look at that, that is kept in the vault.

Q:

Yes or no?

A:

No, sir.

Q:

And Mr. witness, Exhibit “C-1”*22+ which is being kept at your vault, also contains a picture?

A:

Yes, sir.

Q:

And the picture of the depositor?

A:

Yes, sir.

Q:

And are you familiar with the identity of the depositor Norman Pike?

A:

What particular identity?

Q:

His appearance?

A:

He is gay looking fellow.

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COURT:

Answer. You are familiar with his physical appearance?

A:

Not so much. Because there are so much depositor (sic) in the bank.[23] [Emphasis ours.]

By his own testimony, the witness negated the very reason for the bank’s bizarre “accommodation” of the alleged verbal request of respondent Pike – that he was a “valued client.” From the aforequoted, it appears that the witness, Lorenzo Bal, was not even reasonably familiar with respondent Pike, yet, he was ready, willing and able to accommodate the verbal request of said depositor. Worse still, the witness still approved the withdrawal transaction without asking for any proof of identification for the reason that: 1) Davasol was in possession of a pre-signed withdrawal slip; and 2) the witness “recognized” the signature of respondent Pike – even after admitting that he did not bother to counter check the signature on the slip with the specimen signature card of respondent Pike and that he met respondent Pike just once so that he cannot seem to recall what the latter looks like. The ensuing quoted testimony of the same witness will justify a finding of negligence amounting to bad faith, to wit:

Q:

And you also met Joy Manuel Dabasol on March 15?

A:

Yes, sir.

Q:

And can you describe Joy Manuel Dabasol?

A: I cannot recall his face but then he is a Talent manager, because there are so many depositors in the bank.

...

Q: Mr. witness, you are saying that Mr. Pike, the depositor gave you verbal authority to honor withdrawal by Joy Manuel Dabasol?

A:

Yes, sir.

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A:

Yes, sir.

Q: Why did you not require then that Mr. Pike instead sign the authorization portion and that the name of Joy Manuel Dabasol appear thereon with his signature?

...

A:

I required Mr. Norman Pike to sign the withdrawal slip on the face of the withdrawal slip.

Q:

But not the authorization portion of the said withdrawal slip?

...

A:

No, because that is sufficient already.

Q:

And is this your normal procedure, Mr. witness? This particular procedure that you conducted?

A:

I don’t think so.

Q: Mr. witness, when – on April 5, 1993, when Joy Dabasol came to the office and according to you, you do not remember him, is that correct?

A:

I cannot recall his face.

...

Q:

And he just showed you a withdrawal slip, is this correct?

A:

Yes, on April 5.

Banking Page 93

Q:

Did you require him to produce any Identification Card, yes or no?

A:

No.

Q:

And how did you know then that it was Joy Dabasol who was making the withdrawal on April 5?

A:

Because the presigned withdrawal slip was presented to me.

Q:

Is that all your basis?

A:

Yes, sir. Because his signature appears.

...

Q: Mr. witness, this alleged authority given to you by Norman Pike to honor withdrawal by Joy Manuel Dabasol, was that in writing?

A:

It was verbally requested.

Q:

And that is SPO (sic) of PNB, Buendia Branch to accept verbal authorities?

A:

Yes.

Q:

Is that Standard Operating Procedure?

A: It is not SPO, but when you knew the client, Your Honor, you have to honor also the trust and confidence. Let us say if you…

Banking Page 94

Q: According to you, you met Norman Pike only on March 15, 1993 and immediately you allowed him to withdraw through pre-signed withdrawal slip?

A: Yes, Your Honor. Because a depositor requested you to honor his signature, you have to do that or else will…and besides the request is for purpose of expediency, Your Honor. Because most often than that, he is out of the country, in Japan. And his Talent Manager is the one managing the recruiting agency. The money will be used in the operating expenses.

...

Q:

You did not even bother to look at the Savings Signature Card Individual, yes or no?

A:

No, sir.[24] [ mphases supplied.]

Having admitted that pre-signed withdrawal slips do not constitute the normal procedure with respect to withdrawals by representatives should have already put petitioner PNB’s employees on guard. Rather than readily validating and permitting said withdrawals, they should have proceeded more cautiously. Clearly, petitioner bank’s employee, Lorenzo T. Bal, an Assistant Vice President at that, was exceedingly careless in his treatment of respondent Pike’s savings account.

From the foregoing, the evidence clearly showed that the petitioner bank did not exercise the degree of diligence that it ought to have exercised in dealing with their clients.

With banks, the degree of diligence required, contrary to the position of petitioner PNB, is more than that of a good father of a family considering that the business of banking is imbued with public interest due to the nature of their functions. The stability of banks largely depends on the confidence of the people in the honesty and efficiency of banks. Thus, 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. Section 2 of Republic Act No. 8791,[25] which took effect on 13 June 2000, makes a categorical declaration that the State recognizes the “fiduciary nature of banking that requires high standards of integrity and performance.”*26+

Though passed long after the unauthorized withdrawals in this case, the aforequoted provision is a statutory affirmation of Supreme Court decisions already in esse at the time of such withdrawals. We
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statutory affirmation of Supreme Court decisions already in esse at the time of such withdrawals. We elucidated in the 1990 case of Simex International, Inc. v. Court of Appeals,*27+ that “the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.”*28+

Likewise, in the case of The Consolidated Bank and Trust Corporation v. Court of Appeals,[29] we clarified that said fiduciary relationship means that the bank’s obligation to observe “highest 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 New Civil Code states that the degree of diligence required of an obligor[30] is that prescribed by law or contract, and absent such stipulation then the diligence of a family. In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such accounts consist only of a few hundred pesos or of millions of pesos.[31]

Anent the issue of the propriety of the award of damages in this case, petitioner PNB asseverates that there was no evidence to prove that respondent Pike “suffered anguish, embarrassment and mental sufferings”*32+ due to its acts in allowing the alleged unauthorized withdrawals. And, having relied on the instructions of a valued depositor, petitioner PNB likewise avers that its actions were made in good faith, for this reason, there is no factual basis for said award.

Petitioner PNB’s assertions fail to impress us.

The award of moral and exemplary damages is left to the sound discretion of the court, and if such discretion is well exercised, as in this case, it will not be disturbed on appeal.[33] In the case of Philippine Telegraph & Telephone Corporation v. Court of Appeals,[34] we had the occasion to reiterate the conditions to be met in order that moral damages may be recovered. In said case we stated:

An award of moral damages would require, firstly, evidence of besmirched reputation, or physical, mental or psychological suffering sustained by the claimant; secondly, a culpable act or omission factually established; thirdly, proof that the wrongful act or omission of the defendant is the proximate cause of the damages sustained by the claimant; and fourthly, that the case is predicated on any of the instances expressed or envisioned by Articles 2219[35] and 2220[36] of the Civil Code.

Specifically, in culpa contractual or breach of contract, as here, moral damages are recoverable only if the defendant has acted fraudulently or in bad faith,[37] or is found guilty of gross negligence amounting to bad faith,[38] or in wanton disregard of his contractual obligations.[39] Verily, the breach must be wanton, reckless, malicious, or in bad faith, oppressive or abusive.[40]

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There is no reason to disturb the trial court’s finding of petitioner bank’s employees’ negligence in their treatment of respondent Pike’s account. In the case on hand, the Court of Appeals sustained, and rightly so, that an award of moral damages is warranted. For, as found by said appellate court, citing the case of Prudential Bank v. Court of Appeals,*41+ “the bank’s negligence is a result of lack of due care and caution required of managers and employees of a firm engaged in so sensitive and demanding business, as banking, hence, the award of P20,000.00 as moral damages, is proper.

The award of exemplary damages is also proper as a warning to petitioner PNB and all concerned not to recklessly disregard their obligation to exercise the highest and strictest diligence in serving their depositors.

Finally, the aforestated grant of exemplary damages entitles respondent Pike the award of attorney's fees in the amount of P20,000.00 and the award of P10,000.00 for litigation expenses.[42]

WHEREFORE, the instant petition is DENIED. The assailed Decision dated 19 December 2002, and the Resolution dated 02 April 2003, both of the Court of Appeals, in CA-G.R. CV No. 59389, which affirmed with modification the Decision rendered by the Regional Trial Court (RTC), Branch 07 of Manila, dated 10 January 1997, in Civil Case No. 94-68821, are hereby AFFIRMED with the modification that petitioner PNB is directed to pay respondent Pike additional 1) P20,000.00 representing attorney’s fees; and 2) P10,000.00 representing expenses of litigation. Costs against petitioner PNB.

SO ORDERED.

MINITA V. CHICO-NAZARIO Associate Justice

WE CONCUR:

REYNATO S. PUNO

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REYNATO S. PUNO Associate Justice Chairman

MA. ALICIA AUSTRIA-MARTINEZ Associate Justice ROMEO J. CALLEJO, SR.

Associate Justice

DANTE O. TINGA
Associate Justice

ATT ES T AT I O N

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO Associate Justice Chairman, Second Division

Banking Page 98

CE R T I F I C AT I O N

Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairman’s Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

HILARIO G. DAVIDE, JR.

Chief Justice

[1] Penned by Associate Justice Juan Q. Enriquez, Jr. with Associate Justices Bernardo P. Abesamis and Edgardo F. Sundiam, concurring; Rollo, p. 8. [2] Rollo, p. 16.

[3] 43.
[4]

Penned by Honorable Enrico A. Lanzanas, presiding judge of RTC-Branch 07, Manila; Rollo, p.

Records, pp. 1-5.

[5] In his complaint filed before the RTC, herein respondent Pike prayed that judgment be rendered ordering defendant PNB (herein petitioner) to pay the following: 1. damages; US$7,500.00 plus 3% interest per month until fully paid representing actual

2.
3.

P25,000.00 for and as attorney’s fees plus P1,000.00 honorarium per court appearance;
P50,000.00 as moral damages;

4.
5.

P50,000.00 as exemplary damages; and
P20,000.00 as cost of suit and litigation expenses.

RTC Records, p. 4. [6] [7] Records, pp. 22-47. Rollo, pp. 52-54.

Banking Page 99

[8] [9] [10] [11]

Rollo, pp. 54-55. [denial of mr by rtc]. Rollo, p. 15. Rollo, pp. 12-13.

*12+ According to petitioner PNB’s AVP Lorenzo T. Bal, respondent Pike gave verbal instructions to allow the latter’s representative, namely “Joy Manuel Davasol,” to be able to withdraw from said US $ Savings Account by presenting a pre-signed withdrawal slip.

[13] The person who, undisputedly, withdrew the amount of $7,500.00 from the US Dollar Savings Account of respondent Pike. [14] Prudential Bank and Trust Company v. Reyes, G.R. No. 141093, 20 February 2001, 352 SCRA 316; and Langkaan Realty Development, Inc. v. United Coconut Planters Bank, G.R. No. 139437, 08 December 2000, 347 SCRA 542. [15] [16] Elayda v. Court of Appeals, G.R. No. 49327, 18 July 1991, 199 SCRA 349. Appeal by Certiorari to the Supreme Court

[17] Question of law has been defined as one that does not call for any examination of the probative value of the evidence presented by the parties. [18] [19] [20] [21] Borromeo v. Sun, G.R. No. 75908, 22 October 1999, 317 SCRA 176. BPI v. Court of Appeals, G.R. No. 102383, 26 November 1992, 216 SCRA 51. TSN, 01 December 1994, pp. 18-20. Withdrawal slip for $4,000.00.

[22]
[23]

Savings Signature Card of Norman Pike.
TSN, 01 December 1994, pp. 22-25.

[24]
[25]

Id., pp. 26-52.
The General Banking Law of 2000.

[26] The Consolidated Bank and Trust Corporation v. Court of Appeals, G.R. No.138569, 11 September 2003, 410 SCRA 562.

[27]

G.R. No. 88013, 19 March 1990, 183 SCRA 360.

[28] Bank of the Philippine Islands v. Intermediate Appellate Court, G.R. No. 69162, 21 February 1992, 206, SCRA 408; Tan v. Court of Appeals, G.R. No. 108555, 20 December 1994, 239 SCRA 310; Metropolitan Bank & Trust Co v. Court of Appeals, G.R. No. 112576, 26 October 1994, 237 SCRA 761; Firestone v. Court of Appeals, G.R. No. 113236, 05 March 2001, 353 SCRA 601.

Banking Page 100

[29]

Supra, note 19.

[30] The provisions of the New Civil Code on simple loan govern the contract between a bank and its depositor. Specifically, Article 1880 categorically provides that “. . . savings . . . deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan.” Thus, the relationship between a bank and its depositor is that of a debtor-creditor, the depositor being the creditor as it lends the bank money; and the bank is the debtor, which agrees to pay the depositor on demand. [31] *32+ [33] Supra, note 11. Petitioner PNB’s Memorandum, p. 43; Rollo, p. 277. Barzaga v. Court of Appeals, G.R. No. 115159, 12 February 1997, 268 SCRA 105, 1997.

[34]
[35]

G.R. No. 139268, 03 September 2002.
Art. 2219. Moral damages may be recovered in the following and analogous cases:

(1)

A criminal offense resulting in physical injuries;

(2)

Quasi-delicts causing physical injuries;

(3)

Seduction, abduction, rape or other lascivious acts;

(4)

Adultery or concubinage;

(5)

Illegal or arbitrary detention or arrest;

(6)

Illegal search;

(7)

Libel, slander or any other form of defamation;

(8)

Malicious prosecution;

(9)

Acts mentioned in article 309;

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(10)

Acts of actions referred to in articles 21, 26, 27, 28, 29¸30, 32, 34, and 35.

The parents of the female seduced, abducted, raped, or abused, referred to in No. 3 of this article, may also recover moral damages.

The spouse, descendants, ascendants, and brothers and sisters may mentioned in No. 9 of this article, in the order named.

bring the action

[36] Art. 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. [37]
[38] [39] [40] [41] [42]

Article 2220 New Civil Code.
Supra. Supra, note 27. Herbosa v. Court of Appeals, G.R. No. 119086, 25 January 2002, 374 SCRA 578. G.R. No. 125536, 16 March 2000, 328 SCRA 264. Art. 2208 (1) of the New Civil Code provides:

Art. 2208. In the absence of stipulation, attorney’s fees and expenses of litigation, other than judicial costs, cannot be recovered, except:
(1) …. When exemplary damages are awarded;

\---!e-library! 6.0 Philippines Copyright © 2000 by Sony Valdez---/
([2005V1071] PHILIPPINE NATIONAL BANK, Petitioner, versus NORMAN Y. PIKE, Respondent., G.R. No. 157845, 2005 Sep 20, 2nd Division)

Banking Page 102

Digest: PNB v. Pike
Saturday, July 11, 2009 12:05 PM

PNB vs Pike Date: September 20, 2005 Petitioner: PNB Respondent: Norman Pike Ponente: Chico Nazario Facts: Norman Pike often traveled to and from Japan as a gay entertainer in said country. Sometime in 1991, he opened U.S. Dollar Savings Account with PNB Buendia branch for which he was issued a passbook. The complaint alleged that before Pike left for Japan on 18 March 1993, he kept the passbook inside a cabinet under lock and key, in his home. A few hours after he arrived from Japan, he discovered that some of his valuables were missing including the passbook; that he immediately reported the incident to the police which led to the arrest and prosecution of a certain Mr. Joy Manuel Davasol. Pike also discovered that Davasol made 2 unauthorized withdrawals from his U.S. Dollar Savings Account. Pike went to PNB’s Buendia branch and verbally protested the unauthorized withdrawals and likewise demanded the return of the total withdrawn amount of U.S. $7,500.00, on the ground that he never authorized anybody to withdraw from his account as the signatures appearing on the subject withdrawal slips were clearly forgeries. PNB refused to credit said amount back to Pike’s U.S. Dollar Savings Account , and instead, the bank wrote him that it exercised due diligence in the handling of said account. Pike filed a case against PNB. PNB, on the other hand, claimed that before Pike went to Japan, he and Davasol went to see PNB AVP Mr. Lorenzo Val and instructed the latter to honor all withdrawals to be made by Davasol. After the loss of Pike’s passbook, he allegedly withdraw the balance from his passbook and executed an affidavit promising not to hold responsible the bank and its officers for the withdrawal made. The trial court ruled that the bank is liable for the unauthorized withdrawals. The bank was negligent in the performance of its duties such that unauthorized withdrawals were made in the deposit of Pike. The CA affirmed the findings of the RTC that indeed defendant-appellant PNB was negligent in exercising the diligence required of a business imbued with public interest such as that of the banking industry, however, it modified the rate of interest and award for damages. Issue: WON PNB is liable for the unauthorized withdrawals Held: Yes Ratio A priori, it is quite evident that the petition is anchored on a plea to review or re-examine the factual conclusions reached by the trial court and affirmed by the CA, and for this Court to hold otherwise. Whether:
1) Pike’s signatures appearing on the pertinent withdrawal slips used by Joy Manuel Davasol to withdraw the amount of $7,500.00, were forgeries, as found by the trial court and affirmed by the Court of Appeals, or were authentic as claimed by petitioner bank; and 2) Pike in fact executed a waiver absolving petitioner bank from any legal responsibility due to the unauthorized withdrawals, as maintained by petitioner bank, or the paragraph containing said waiver was intercalated by some other person, thus, amounting no waiver at all, as held by the courts a quo.

Are questions of fact and not of law. Inexorably, these issues call for an inquiry into the facts and evidence on record. This, as we have so often held, we cannot do. Elementary is the rule that this Court is not the appropriate venue to consider anew the factual issues as it is not a trier of facts, and, it generally does not weigh anew the evidence already passed upon by the Court of Appeals. When this Court is tasked to go over once more the evidence presented by both parties, and analyze, assess and weigh them to ascertain if the trial court and the appellate court were correct in according superior credit to this or that piece of evidence of one party or the other, the Court cannot and will not do the same. Finding no other alternative but to affirm their finding that petitioner PNB negligently allowed the unauthorized withdrawals subject of the case at bar, the instant petition for review must necessarily fail. It bears emphasizing that negligence of banking institutions should never be countenanced. The negligence here lies in the lackadaisical attitude exhibited by employees of PNB in their treatment of respondent Pike’s US Dollar Savings Account that resulted in the unauthorized withdrawal of $7,500. Nevertheless, though its

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US Dollar Savings Account that resulted in the unauthorized withdrawal of $7,500. Nevertheless, though its employees may be the ones negligent, a bank’s liability as an obligor is not merely vicarious but primary, as banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees, and having such obligation, this Court cannot ignore the circumstances surrounding the case at bar – how the employees of PNB turned their heads, nay, closed their eyes to the suspicious circumstances enfolding the two withdrawals subject of the case at bar. It may even be said that they went out of their ways to disregard standard operating procedures formulated to ensure the security of each and every account that they are handling. PNB does not deny that the withdrawal slips used were in breach of standard operating procedures of banks in the ordinary and usual course of banking operations as testified to by one of its witnesses, Mr. Lorenzo T. Bal. PNB’s witness was utterly remiss in protecting the bank’s client, as well as the bank itself, when he allowed an account holder to make it appear as if he was the one actually withdrawing from an account and actually receiving the withdrawn amount. Ordinarily, banks allow withdrawal by someone who is not the account holder so long as the account holder authorizes his representative to withdraw and receive from his account by signing on the space provided particularly for such transactions, usually found at the back of withdrawal slips. As fittingly found by the courts a quo, if indeed, respondent Pike signed the withdrawal slips in the presence of Lorenzo Bal, PNB’s AVP at its Buendia branch, why did he not call Pike’s attention and refer him to the space provided for authorizing representatives to withdraw from and receive the proceeds of such withdrawal? Or, at the very least, sign or initial the same so that he could identify the pre-signed withdrawal slips made by Mr. Pike? By his own testimony, the witness negated the very reason for the bank’s bizarre “accommodation” of the alleged verbal request of Pike – that he was a “valued client.” From the aforequoted, it appears that Lorenzo Bal, was not even reasonably familiar with Pike, yet, he was ready, willing and able to accommodate the verbal request of said depositor. Worse still, the witness still approved the withdrawal transaction without asking for any proof of identification for the reason that: 1) Davasol was in possession of a pre-signed withdrawal slip; and 2) the witness “recognized” the signature of respondent Pike – even after admitting that he did not bother to counter check the signature on the slip with the specimen signature card of Pike and that he met respondent Pike just once so that he cannot seem to recall what the latter looks like. Having admitted that pre-signed withdrawal slips do not constitute the normal procedure with respect to withdrawals by representatives should have already put PNB’s employees on guard. Rather than readily validating and permitting said withdrawals, they should have proceeded more cautiously. Clearly, Lorenzo T. Bal, an Assistant Vice President at that, was exceedingly careless in his treatment of respondent Pike’s savings account. From the foregoing, the evidence clearly showed that the bank did not exercise the degree of diligence that it ought to have exercised in dealing with their clients. With banks, the degree of diligence required, contrary to the position of petitioner PNB, is more than that of a good father of a family considering that the business of banking is imbued with public interest due to the nature of their functions. The stability of banks largely depends on the confidence of the people in the honesty and efficiency of banks. Thus, 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. Section 2 of Republic Act No. 8791,[25] which took effect on 13 June 2000, makes a categorical declaration that the State recognizes the “fiduciary nature of banking that requires high standards of integrity and performance.” Issue: WON the award of damages was proper Held: Yes Ratio: The award of moral and exemplary damages is left to the sound discretion of the court, and if such discretion is well exercised, as in this case, it will not be disturbed on appeal. An award of moral damages would require, firstly, evidence of besmirched reputation, or physical, mental or psychological suffering sustained by the claimant; secondly, a culpable act or omission factually established; thirdly, proof that the wrongful act or omission of the defendant is the proximate cause of the damages sustained by the claimant; and fourthly, that the case is predicated on any of the instances expressed or envisioned by Articles 2219 and 2220 of the Civil Code. Specifically, in culpa contractual or breach of contract, as here, moral damages are recoverable only if the defendant has acted fraudulently or in bad faith, or is found guilty of gross negligence amounting to bad faith,[38] or in wanton disregard of his contractual obligations. Verily, the breach must be wanton, reckless,

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faith,[38] or in wanton disregard of his contractual obligations. Verily, the breach must be wanton, reckless, malicious, or in bad faith, oppressive or abusive. There is no reason to disturb the trial court’s finding of the bank’s employees’ negligence in their treatment of Pike’s account. In the case on hand, the Court of Appeals sustained, and rightly so, that an award of moral damages is warranted. For, as found by said appellate court, citing the case of Prudential Bank v. Court of Appeals, “the bank’s negligence is a result of lack of due care and caution required of managers and employees of a firm engaged in so sensitive and demanding business, as banking, hence, the award of P20,000.00 as moral damages, is proper. The award of exemplary damages is also proper as a warning to petitioner PNB and all concerned not to recklessly disregard their obligation to exercise the highest and strictest diligence in serving their depositors. Finally, the grant of exemplary damages entitles respondent Pike the award of attorney's fees in the amount of P20,000.00 and the award of P10,000.00 for litigation expenses.
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Cadiz v. CA
Wednesday, July 08, 2009 9:22 AM

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[2005V1279] ROMEO C. CADIZ, CARLITO BONGKINGKI and PRISCO GLORIA IV, Petitioners, versus COURT OF APPEALS, and PHILIPPINE COMMERCIAL INTERNATIONAL BANK (Now EQUITABLE PCIBANK), Respondents.2005 Oct 252nd DivisionG.R. No. 153784D E C I S I O N

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/bookkeeperreliever, 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 P12,690.00, 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 secondendorsed 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]
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banking day.[1]

In view of such findings, show-cause memoranda[2] 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 memoranda[4] 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 Decision[6] 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 Decision[7] 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+

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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+

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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 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.

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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.
5. 6.

The signatures of the MOB officers appearing on the said deposit slips were in fact forged.
The posting of said bank transactions bore the initials of petitioners Bongkingki or Gloria. 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
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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.

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. NLRC*18+ 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. . . .

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.

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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 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 banking[22] 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]

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.

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DANTE O. TINGA

Associate Justice

WE CONCUR:

REYNATO S. PUNO Associate Justice

Chairman

MA. ALICIA AUSTRIA-MARTINEZ ROMEO J. CALLEJO, SR. Associate Justice Associate Justice

(On Leave) MINITA V. CHICO-NAZARIO Associate Justice

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ATTESTATION

I attest that the conclusions in the above Decision had been in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO
Associate Justice Chairman, Second Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairman’s Attestation, it is hereby certified that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

HILARIO G. DAVIDE, JR.

Chief Justice

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[1]Rollo, pp. 8-9.

[2]Id. at 68-73.

[3]Id. at 75-79.

[4]Id. at 80-81.

[5]Id. at 115-123.

[6]Id. at 124-140. Penned by Commissioner Rogelio I. Rayala and concurred in by Presiding Commissioner Edna Bonto-Perez. Commissioner Victoriano R. Calaycay did not take part.

[7]Id. at 191-204. Penned by Associate Justice Delilah Vidallon-Magtolis, concurred in by Associate Justices Teodoro P. Regino and Josefina Guevara-Salonga.

[8]Id. at p. 3.

[9]Id. at 25-26.

[10]Id. at 343-425.

[11]Union Motor Corporation v. National Labor Relations Commission, G.R. No. 159738, 9 December 2004, 445 SCRA 683, citing Superlines Transportation Company, Inc. and Manolet Lavides v. ICC Leasing and Financing Corporation, G.R. No. 150673, 28 February 2003, 398 SCRA 508.

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and Financing Corporation, G.R. No. 150673, 28 February 2003, 398 SCRA 508.

[12]Fujitsu Computer Products Corporation v. Court of Appeals, G.R. No. 158232, 31 March 2005, 454 SCRA 737, citing Globe Telecom, Inc. v. Florendo-Flores, G.R. No. 150092, 27 September 2002, 390 SCRA 201; Caingat v. National Labor Relations Commission, G.R. No. 154308, 10 March 2005.

[13]Rollo, p. 120.

[14]Id. at 121.

[15]See Article 277, Labor Code.

[16] ART. 277. Miscellaneous provisions. –
.. .

(b) Subject to the constitutional right of workers to security of tenure and their right to be protected against dismissal except for just and authorized cause and without prejudice to the requirement of notice under Article 283 of this Code, the employer shall furnish the worker whose employment is sought to be terminated a written notice containing a statement of the causes for termination and shall afford the latter ample opportunity to be heard and defend himself with the assistance of his representative if he so desire in accordance with company rules and regulations promulgated pursuant to guidelines set by the Department of Labor and Employment. Any decision taken by the employer shall be without prejudice to the right of the worker to contest the validity or legality of his dismissal by filing a complaint with the regional branch of the National Labor Relations Commission. The burden of proving that the termination was for a valid or authorized cause shall rest on the employer. The Secretary of the Department of Labor and Employment may certify the dispute in the event of a prima facie finding by the appropriate official of the Department of Labor and Employment before whom such dispute pending that the termination may cause a serious labor dispute or is in implementation of a mass lay-off.

[17]Rollo, pp. 458, 461.

[18]G.R. No. 71065, 22 November 1985, 140 SCRA 296.

[19]G.R. No. 148410, 17 January 2005, 448 SCRA 516.
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[19]G.R. No. 148410, 17 January 2005, 448 SCRA 516.

[20]See Section 3, Rule XIV, Book IV, Omnibus Rules Implementing the Labor Code.

[21]Rollo, p. 417.

[22]Solidbank Corporation v. Arrieta, G.R. No. 152720, 17 February 2005, 451 SCRA 711, citing Bank of the Philippine Islands v. Casa Montessori Internationale, G.R. No. 149454, 28 May 2004, 430 SCRA 261.

[23]Associated Bank v. Tan, G.R. No. 156940, 14 December 2004, 446 SCRAR 282.

[24]The Consolidated Bank and Trust Corporation v. Court of Appeals, G.R. No. 138569, 11 September 2003, 410 SCRA 562.

[25]PNCC v. Matias, G.R. No. 156283, 6 May 2005, citing Gonzales v. National Labor Relations Commission, 26 March 2001, 355 SCRA 195; P.J. Lhuillier Inc. v. National Labor Relations Commission, G.R. No. 158758, 29 April 2005, citing Tiu v. National Labor Relations Commission, G.R. No. 83433, 12 November 1992, 215 SCRA 540; Felix v. NLRC, G.R. No. 148256, 17 November 2004, 442 SCRA 465, citing De la Cruz v. NLRC, 268 SCRA 458 (1997).

[26]Supra note 16; Mabeza v. NLRC and Hotel Supreme, 338 Phil. 386 (1997).
\---!e-library! 6.0 Philippines Copyright © 2000 by Sony Valdez---/ ([2005V1279] ROMEO C. CADIZ, CARLITO BONGKINGKI and PRISCO GLORIA IV, Petitioners, versus COURT OF APPEALS, and PHILIPPINE COMMERCIAL INTERNATIONAL BANK (Now EQUITABLE PCIBANK), Respondents., G.R. No. 153784, 2005 Oct 25, 2nd Division)

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Digest: Cadiz v. CA
Saturday, July 11, 2009 12:06 PM

Cadiz vs CA Date: October 25, 2005 Petitioners: Romeo Cadiz, Carlito Bongkiki and Prisco Gloria Respondents: CA and PCIB (now Equitable PCI)

Ponente: Tinga
Facts: Romeo Cadiz, Carlito Bongkingki and Prisco Gloria IV were employed as signature verifier, bookkeeper, and foreign currency denomination clerk/bookkeeper-reliever, respectively, in the main office branch (MOB) of PCIB. The anomalies in question arose when Rosalina Alqueza filed a complaint with PCIB for the alleged non-receipt of a $600 demand draft drawn against it which was purchased by her husband from HSBC. It was uncovered that the demand draft was deposited on 10 June 1988 with FCDU Savings Account No. 1083-4, an account under the name of Sonia 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 US$1,232. 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 P12,690, the peso equivalent of US$600, but insisted that the receipt be issued in Alfiscar’s name instead. A special audit examination was conducted by the bank.The auditors determined that as early as July 1987, Cadiz had reserved the savings account in the name of Alfiscar. The account was opened on 27 November 1987 and closed on 23 June 1988. 25 deposit slips involving the account were posted by Bongkingki while 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. A show cause memoranda were served on petitioners. Not satisfied with the petitioners explanation, the bank dismissed them from employment. Petitioners filed a complaint before the labor arbiter for illegal dismissal. The labor arbiter ruled that petitioners were illegally dismissed as the notices of dismissal were couched in general terms. The NLRC reversed and ruled that petitioners were dismissed for just cause. The CA affirmed. Issue: WON petitioners were dismissed for just cause Held: Yes

Ratio: The general thesis as laid down by the NLRC and CA 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, the labor arbiter’s Decision reveals a different perspective. 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. Far from petitioners’ thrust, the miscoding of deposit slips cannot be downplayed as “mere procedural inadequacies.” 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
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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.” 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. 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. 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. Petitioners were given all avenues to present their side and disprove the allegations of the 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 showcause memoranda to petitioners, asking them to explain their 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. 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
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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. 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. 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 CA in citing UE v. NLRC 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. 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.” 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. 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 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 banking is enshrined in RA 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.” 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. All given, we affirm the conclusion that petitioners were dismissed for just cause. The facts as established, as well as the need to assert the public interest in safeguarding against bank fraud, militate against the present petition.
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Prudential Bank vs. Lim
Wednesday, July 08, 2009 9:25 AM

[2005V1299] PRUDENTIAL BANK, Petitioner, versus CHONNEY LIM, Respondent.2005 Nov 112nd DivisionG.R. No. 136371D E C I S I O N Tinga, J.:

This treats of the petition for review on certiorari of the Decision[1] of the Court of Appeals,[2] dated 31 July 1998, which affirmed with slight modification the Decision[3] of the Regional Trial Court (RTC),[4] granting the action filed by respondent for recovery of sum of money and damages.

Chonney Lim (respondent), the owner of Rikes Boutique located at Session Road, Baguio City, maintained two (2) accounts with Prudential Bank (the bank), namely: Savings Account No. 11264 and Checking Account No. 1262. He availed of the bank’s automatic transfer system wherein the funds from his savings account could be transferred to his checking account in case the balance of the latter account was insufficient to cover the checks he issued.

On 14 March 1988, respondent deposited the amount of P34,000.00 with his savings account. According to respondent, the following day, 15 March 1988, he deposited an equal amount with the same savings account. The matter is the crux of contention between the parties, as the bank has steadfastly denied having received the latter deposit from respondent.

On 24 May 1988, respondent issued a check against his current account in favor of the Paluwagan ng Bayan Savings Bank (Paluwagan) in the sum of P2,830.00 in payment of his loan with the said bank. On 25 May 1988, respondent drew another check against his checking account to the order of Teodulo Crisologo in the amount of P10,000.00 as payment for a business transaction with the latter.

The bank, however, dishonored both checks, claiming that respondent did not have sufficient funds in his account with the bank. Upon learning that the first check paid to Paluwagan had been dishonored, respondent wrote a letter[5] to the bank on 27 May 1988, asking it to recheck its records. On 30 May 1988, the bank’s manager, Tolentino Opiniano (Opiniano), sent a reply letter,*6+ offering, as an excuse for the dishonor of said check, the inadvertent earlier posting to respondent’s account of a postdated check.*7+ While Opiniano apologized for respondent’s inconvenience, he made no commitment to honor this first check.[8]

When the second dishonored check came to respondent’s knowledge, he immediately wrote a letter[9] to the bank, protesting the dishonor of the check. Opiniano sent a reply[10] stating that as per records, a deposit slip dated 15 March 1988 for P34,000.00 was received for deposit to Savings Account No. 11264 on 14 March 1988.

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Respondent denied having made only one deposit, insisting that he made two deposits of P34,000.00 each, one on 14 March and the other on 15 March. As proof, respondent presented the two separate deposit slips covering the transactions, the first bearing the date 14 March 1988 while the second, the date 15 March 1988.

After the bank had conducted a thorough investigation, on 10 June 1988, Opiniano informed respondent that two deposits were made on 14 March 1988, one for P34,000.00 and the other for P1,000.00; and that two other deposits were made on 15 March 1988: P4,900.00 and P2,900.00. He maintained that although the deposit slip bearing the amount of P34,000.00 is dated 15 March 1988, it was actually received the day before or on 14 March 1988. Thus, the bank’s position is that only one deposit of P34,000.00 was made by respondent on 14 and 15 March 1988.[11]

In view of the bank’s adamant refusal to alter its stand, respondent filed a Complaint*12+ before the RTC, Baguio City for the recovery of P34,000.00 representing his actual deposit and P300.00 as penalty charge, plus damages.

On 27 August 1991, the RTC rendered its Decision holding that respondent made two deposits of P34,000.00 apiece. Thus, the RTC ordered the bank to pay the following amounts: P34,000, representing the unposted deposit, with legal interest; P600.00, representing the service charges unjustifiably imposed on respondent, with legal interest; P50,000.00 as moral damages; P25,000.00 as exemplary damages; and P10,000.00 as attorney’s fees, plus costs of suit.

On appeal, the Court of Appeals affirmed the decision of the trial court with modification as to the award of moral damages, reducing it to P10,000.00. The testimony of the bank teller, coupled with the fact that the two deposit slips listed different denominations of money totaling P34,000.00 per deposit slip, led the appellate court to conclude that there were indeed two deposits of P34,000.00 each, one made on 14 March and the other on 15 March 1988.

Before this Court, the bank argues in the main that the award of damages by the appellate court is groundless that consequently, the assailed decision is not in accord with law and jurisprudence.[13]

As a rule, the findings of fact of the trial court when affirmed by the Court of Appeals are final and conclusive on, and cannot be reviewed on appeal by, this Court as long as they are borne out by the record or are based on substantial evidence. The Court is not a trier of facts, its jurisdiction being limited to reviewing only errors of law that may have been committed by the lower courts.[14]

Essentially, as intimated earlier, the issue in the instant case boils down to whether respondent made a deposit of P34,000.00 on 15 March 1988, apart from the deposit of an equal amount the day before, a factual question which was resolved in the affirmative by the RTC, which finding was categorically
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factual question which was resolved in the affirmative by the RTC, which finding was categorically affirmed by the Court of Appeals. The factual issue is beyond the province of this Court to review or disturb. It is not the function of the Court to analyze or weigh all over again the evidence or premises supportive of such factual determination. The Court has consistently held that the findings of the Court of Appeals and other lower courts are, as a rule, accorded great weight, if not binding upon it, save for the most compelling and cogent reasons.[15]

We find no justification to deviate from the factual findings of the trial court and the appellate court. The bank has utterly failed to convince us that the assailed findings are devoid of basis or are not supported by substantial evidence.

As found by the RTC, respondent indeed made two deposits of P34,000.00 on 14 and 15 March 1988, viz:

On the pivotal issue of whether or not the plaintiff made only one (1) or two (2) deposits of P34,000.00— the first on March 14 and the second on March 15, 1988— the Court holds that, from the evidence extant in the record, particularly the admissions of teller Merlita Susan Caasi, the plaintiff has established his claim of having made two (2) deposits of P34,000.00. Thus, Caasi admitted that she impressed her rubber stamp, “Teller 2” and “duplicate” on both the Exhibits “B” and “C” which are plaintiff’s file copies of two separate and different deposit slips for P34,000.00 each. Exhibit “B” is a deposit slip, dated March 14, 1988, for P34,000.00 consisting of 300 pieces of P100 bills and 80 pieces of P50.00 bills; while Exhibit “C” is a deposit slip, dated March 15, 1988, also for P34,000.00, but consisting of 340 pieces of P100 bills. It is only Exhibit “C” that appears to have been recorded by the defendant bank (Exhibit “3”). Since teller Caasi acknowledged to have stamped both deposit slips, logic and reason dictates that she should be presumed to have received the amounts covered by them unless she could satisfactorily demonstrate the contrary which she, however, miserably failed to do. The fact that only one (1) deposit of P34,000.00 is recorded in the teller’s validating machine and blotter, as well as in the ledger, passbook, bookkeeper’s machine tape and blotter, can not help her any for the crux precisely of plaintiff’s complaint is defendant’s negligence in not recording his other deposit of P34,000.00.*16+

The appellate court similarly observed:

On the basis of the evidence adduced by the parties, We are convinced that indeed, appellee deposited P34,000.00 on March 14 and another P34,000.00 on March 15, 1988. These two different transactions are evidenced by two deposit slips marked as Exhibits “B” and “C”. The fact that appellant received the amount represented by each deposit slip can be inferred from the testimony of Merlita Caasi, a bank teller:

ATTY. GAYO:

Q: And by stamping the duplicate copy of a depositor, in the case of Mr. Lim, who is in a practice of
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Q: And by stamping the duplicate copy of a depositor, in the case of Mr. Lim, who is in a practice of always preparing a duplicate copy for his file, your mere stamping of the duplicate would indicate that you received the money deposited? A: Yes, your Honor.”

which must be read in conjunction with her testimony on cross-examination, thus:

ATTY. GAYO:

Q: I am showing you Exhibit “C” and tell the Honorable Court if that is the duplicate of Exhibit “3” which you also stamped with the stamp of the bank? A: I am not sure if that is the real deposit slip made at the same day because they have the practice to get another duplicate if their personal copy was lost, your Honor. This is my stamp but I am not sure if this is the same.

INTERPRETER:

Witness referring to Exhibit “C”.

ATTY. GAYO:

Q: But you are sure that this is your stamp as Teller No. 2 at that time?

A: It appears, it is.

Q: I am showing you now that which we reserved the last time, the original of Exhibit “B”, a copy – an original copy of a deposit slip dated March 14, 1988, stamped with the stamp of the Bank Teller No. 2 and a duplicate. Now, can you now state to the Court that this was your stamp of the bank stamp?

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and a duplicate. Now, can you now state to the Court that this was your stamp of the bank stamp? A: That is my stamp.

Q: Even this word duplicate stamped also in this Exhibit “B”, the original of Exhibit “B”, is your stamp?
A: Yes, it is my stamp.”

Appellee also presented in evidence the reverse side of the deposit slip dated March 14, 1988 he described as follows:

“Q: On the front side of Exhibit “B”, the amount of P34,000.00 cash appears. Is this explained by any denomination of the same exhibit? A: Yes, your Honor.

Q: You are referring to what part of the exhibit? A: I am referring to Exhibit “B-1”, Your Honor.

Q: So that the P34,000.00 you deposited consisted of 300 pieces of P100.00 bills in the total amount of P30,000.00; 80 pieces of P50.00 bills in the total amount of P4,000.00?
A: Yes. Your Honor.”

In the same manner, appellee also presented the other side of the deposit slip dated March 15, 1988, thus:

“Q: On March 15, 1988, do you remember having again deposited another amount of P34,000.00 to your account with the defendant bank? A: Yes. Your Honor.

Q: Do you have a copy? Do you have evidence to show?

A: Yes. Your Honor. I have here my deposit slip on March 15, 1988, for the amount of another P34,000.00.

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Q: Is the denomination of the total deposit of P34,000.00 you made on March 15 shown in this deposit slip? A: Yes, Your Honor. It is shown at the back of the deposit slip.

Q: As what? A: At the back of the deposit slip, your Honor. It shows that the P100.00 bills I deposited is 340 pieces, amounting to P34,000.00.

Q: Do you have a xerox copy of that? A: Yes, Your Honor.

Atty. Gayo:

May we show both the original and the xerox copy. The xerox copy reflects the front page and the reverse side of the deposit slip dated March 15, 1988. May we ask for an observation.

Atty. Munoz:

The xerox copy of the deposit slip dated March 15, 1988 in the sum of P34,000.00, together with the reverse side is a faithful reproduction of the duplicate original presented.

Atty. Gayo:

May we respectfully pray that the front page of that deposit slip be marked as Exhibit “C” and the reverse side as “Exhibit C-1”.*17+

An examination of the deposit slips dated 14 March and 15 March 1988 reveals that while the slips each cover deposits in the amount of P34,000.00, they list down different denominations however. Evidently, the slips were not prepared simultaneously or concurrently. This fact militates against the bank’s claim that one deposit slip is simply the duplicate of the other. To sustain the bank’s hypothesis, we would have to conclude that respondent, with all deliberate design, prepared two deposit slips and
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we would have to conclude that respondent, with all deliberate design, prepared two deposit slips and purposely wrote different denominations in them to mislead the bank that the two deposit slips were separately executed on different occasions. There is no evidence to support such a bizarre conclusion; thus, we are content to uphold the findings of the triers of fact on this point.

The bank insists that the court misappreciated the import of the letter of Opiniano dated 10 June 1988. As we have earlier intimated, appreciation of evidence is the domain of the lower courts. The testimonies of the witnesses presented by the bank deserve scant consideration in the face of the overwhelming documentary evidence of respondent, i.e., the duplicate originals of the deposit slips bearing the amount of P34,000.00 dated 14 and 15 March 1988, respectively. Indeed, the bank failed to rebut the inexorable probative impact of the deposit slips.

Article 1172 of the Civil Code ordains that responsibility arising from negligence in the performance of an obligation is demandable. The failure of the bank’s employees to credit the amount of P34,000.00 to respondent’s savings account, resulting as it did in the dishonor of respondent’s checks, constitutes actionable negligence in law.

From another perspective, the negligence of the bank constitutes a breach of duty to its client. It is worthy of note that the banking industry is impressed with public interest. As such, it must observe a high degree of diligence and observe lofty standards of integrity and performance. By the nature of its functions, a bank is under obligation to treat the accounts of its depositors with meticulous care and always to have in mind the fiduciary nature of its relationship with them.[18]

With the attending factual milieu, the imposition of damages on the errant bank is in order. Presaging this course of action is the ruling in Simex International v. Court of Appeals,[19] where this Court rendered a telling discourse on the fiduciary responsibility of depository banks, thus:

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

In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a few hundred pesos or of millions. The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can dispose of as he sees fit,
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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 action for damages hinges on the resolution of whether respondent has sufficient funds in his account when the checks were dishonored. Both the trial and appellate courts ruled that had the bank credited the P34,000.00 deposit made by respondent on 15 March 1988, the checks would not have been dishonored. Likewise, both courts found that moral damages were in order.

The concept of moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. Although incapable of pecuniary computation, moral damages may be recovered if they are the proximate result of the defendant's wrongful act or omission.[20]

Needless to say, the bank’s wrongful act caused injury to respondent. Credit is very important to businessmen, and its loss or impairment needs to be recognized and compensated.[21] This Court in Leopoldo Araneta v. Bank of America[22] highlights the importance of good credit in the business community:

The financial credit of a businessman is a prized and valuable asset, it being a significant part of the foundation of his business. Any adverse reflection thereon constitutes some material loss to him. As stated in the case Atlanta National Bank vs. Davis, supra, citing 2 Morse Banks, Sec. 458, "it can hardly be possible that a customer's check can be wrongfully refused payment without some impeachment of his credit, which must in fact be an actual injury, though he cannot, from the nature of the case, furnish independent, distinct proof thereof." Under the circumstances of this case, we find that the award of moral damages is proper but the amount must be reverted back to P50,000.00 as ordered by the RTC, said court being in a better position to assess the amount of damages to be imposed on the negligent bank.

Furthermore, we sustain the award of exemplary damages. Such damages are imposed by way of example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages.[23] The business of a bank is affected with public interest; thus, it makes a sworn profession of diligence and meticulousness in giving irreproachable service. For this reason, the bank should guard against injury attributable to negligence or bad faith on its part. The banking sector must at all times maintain a high level of meticulousness.*24+ In view of the bank’s negligence to record the deposit, the grant of exemplary damages is thus justified.

The bank raises another issue, that concerning the postdated check which it had prematurely posted[25] and which it initially assumed, when it first wrote the respondent on 30 May 1988, to be the
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posted[25] and which it initially assumed, when it first wrote the respondent on 30 May 1988, to be the cause of the dishonor of respondent’s check payable to Paluwagan.*26+ The bank argues that the fact it prematurely honored such postdated check did not give rise to damages.[27] This argument is irrelevant. The act or omission of the bank that gives rise to damages in favor of respondent is not the premature posting of the postdated check, but the fact that the bank did not credit respondent’s second deposit of P34,000.00. Besides, this is the first time that said issue was presented. As a rule, no issue may be raised on appeal unless it has been brought before the lower tribunal for its consideration. Higher courts are precluded from entertaining matters neither alleged in the pleadings nor raised during the proceedings below, but ventilated for the first time only in a motion for reconsideration or on appeal.[28]

WHEREFORE, the petition is denied. The Decision of the RTC dated 27 August 1991 in Civil Case No. 1467-R is AFFIRMED IN FULL. Costs against petitioner.

SO ORDERED.

DANTE O. TINGA

Associate Justice

WE CONCUR:

REYNATO S. PUNO
Associate Justice Chairman

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MA. ALICIA AUSTRIA-MARTINEZ L Associate Justice

ROMEO J. CALLEJO, SR. Associate Justice

(On Leave) MINITA V. CHICO-NAZARIO Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO
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REYNATO S. PUNO

Acting Chief Justice

[1]Rollo, pp. 40-51.

[2]Penned by Associate Justice Angelina Sandoval Gutierrez (now Supreme Court Associate Justice) and concurred in by Associate Justices B.A. Adefuin-De la Cruz and Presbitero J. Velasco, Jr.

[3]Rollo, pp. 24-39.

[4]Penned by Judge Salvador J. Valdez, Jr.

[5]Rollo, p. 25.

[6]Id. at 27.

[7]Check No. 275243 dated 29 May 1988 for P3,500.00 in favor of Mrs. Amparo Arre was posted on 11 May 1988.

[8]Supra note 6.

[9]Id. at 28-29.

[10]Id. at 29.

[11]Id. at 31-32.

[12]RTC Records, pp. 1-5.

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[12]RTC Records, pp. 1-5.

[13]Rollo, pp. 12-13.

[14]Swagman Hotels and Travel, Inc. v. Court of Appeals, G.R. No. 161135, 8 April 2005, 455 SCRA 175, citing Amigo v. Teves, 96 Phil. 252 (1954) and Alsua-Betts v. Court of Appeals, Nos. L-46430-31, 30 July 1979, 92 SCRA 332.

[15]Abacus Real Estate Development Center v. Manila Banking Corporation, G.R. No. 162270, 6 April 2005, 455 SCRA 97, citing PT&T v. Court of Appeals, G.R. No. 152057, 29 September 2003, 412 SCRA 263; Ibay v. Court of Appeals, G.R. No. 47158, 5 August 1992, 212 SCRA 160; and Republic v. Court of Appeals, G.R. No. 116372, 18 January 2001, 349 SCRA 451.

[16]Supra note 3 at 37-38.

[17]Supra note 1 at 45-48.

[18]Consolidated Bank and Trust Corporation v. Court of Appeals, G.R. 138569, 11 September 2003, 410 SCRA 562, citing Bank of the Philippine Islands v. Casa Montessori Internationale, G.R. No. 149454, 28 May 2004, 430 SCRA 261.

[19]G.R. No. 88013, 19 March 1990, 183 SCRA 360.

[20]Article 2217, Civil Code.

[21]Samson v. Bank of the Philippine Islands, G.R. No. 150487, 10 July 2003, 405 SCRA 607.

[22]148-B Phil. 124 (1971).

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[23]Article 2229, Civil Code of the Philippines.

[24]Solidbank Corporation v. Arrieta, G.R. No. 152720, 17 February 2005, 451 SCRA 711, citing Simex International v. Court of Appeals, supra note 19.

[25]Supra note 7.

[26]Ibid.

[27]Rollo, p. 18.

[28]Mendoza and Casino v. Bautista, G.R. No. 143666, 18 March 2005, 453 SCRA 691, citing Sesbreno v. Central Board of Assessment Appeals, 337 Phil. 89 (1997); Manila Bay Club Corporation v. Court of Appeals, 319 Phil. 413 (1995), DBP v. West Negros College, Inc., G.R. No. 152359, 21 May 2004; Solid Homes, Inc. v. Court of Appeals, 341 Phil. 261 (1997); People v. Echegaray, 335 Phil. 343 (1997).

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([2005V1299] PRUDENTIAL BANK, Petitioner, versus CHONNEY LIM, Respondent., G.R. No. 136371, 2005 Nov 11, 2nd Division)

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Digest: Prudential Bank
Saturday, July 11, 2009 12:07 PM

Prudential Bank vs Lim Date: November 11, 2005 Petitioner: Prudential Bank Respondent: Chonney Lim Ponente: Tinga Facts: Respondent maintained 2 accounts with Prudential Bank, namely: Savings Account No. 11264 and Checking Account No. 1262. He availed of the bank’s automatic transfer system wherein the funds from his savings account could be transferred to his checking account in case the balance of the latter account was insufficient to cover the checks he issued. On 14 March 1988, respondent deposited P34,000 with his savings account. According to respondent, the following day, he deposited an equal amount with the same savings account. The bank denies this latter deposit. On 24 May 1988, respondent issued a check against his current account in favor of the Paluwagan ng Bayan Savings Bank in the sum of P2,830.00. On 25 May 1988, respondent drew another check against his checking account to the order of Teodulo Crisologo in the amount of P10,000. The bank dishonored both checks due to insufficiency of funds. After the bank had conducted a thorough investigation, Opiniano informed respondent that two deposits were made on 14 March 1988, one for P34,000.00 and the other for P1,000.00; and that two other deposits were made on 15 March 1988: P4,900.00 and P2,900.00. He maintained that although the deposit slip bearing the amount of P34,000 is dated 15 March 1988, it was actually received the day before or on 14 March 1988. Thus, the bank’s position is that only one deposit of P34,000.00 was made by respondent on 14 and 15 March 1988. Respondent filed a complaint before the RTC of Baguio for the recovery of P34,000.00 representing his actual deposit and P300.00 as penalty charge, plus damages. The RTC rendered its Decision holding that respondent made two deposits of P34,000.00 apiece. Thus, the RTC ordered the bank to pay the following amounts: P34,000, representing the unposted deposit, with legal interest; P600.00, representing the service charges unjustifiably imposed on respondent, with legal interest; P50,000.00 as moral damages; P25,000.00 as exemplary damages; and P10,000.00 as attorney’s fees, plus costs of suit. The CA affirmed the decision of the trial court with modification as to the award of moral damages, reducing it to P10,000.00. Issue: WON respondent made two bank deposits Held: Yes Ratio: We find no justification to deviate from the factual findings of the trial court and the CA. The bank has utterly failed to convince us that the assailed findings are devoid of basis or are not supported by substantial evidence. An examination of the deposit slips dated 14 March and 15 March 1988 reveals that while the slips each cover deposits in the amount of P34,000, they list down different denominations however. Evidently, the slips were not prepared simultaneously or concurrently. This fact militates against the bank’s claim that one deposit slip is simply the duplicate of the other. To sustain the bank’s hypothesis, we would have to conclude that respondent, with all deliberate design, prepared two deposit slips and purposely wrote different denominations in them to mislead the bank that the two deposit slips were separately executed on different occasions. There is no evidence to support such a bizarre conclusion; thus, we are content to uphold the findings of the triers of fact on this point. The bank insists that the court misappreciated the import of the letter of Opiniano dated 10 June 1988. As we have earlier intimated, appreciation of evidence is the domain of the lower courts. The testimonies of the witnesses presented by the bank deserve scant consideration in the face of the overwhelming documentary evidence of respondent, i.e., the duplicate originals of the deposit slips bearing the amount of P34,000.00 dated 14 and 15 March 1988, respectively. Indeed, the bank failed to rebut the inexorable probative impact of the deposit slips.

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Issue: WON the bank is guilty of negligence Held: Yes Ratio: Article 1172 of the Civil Code ordains that responsibility arising from negligence in the performance of an obligation is demandable. The failure of the bank’s employees to credit the amount of P34,000.00 to respondent’s savings account, resulting as it did in the dishonor of respondent’s checks, constitutes actionable negligence in law. From another perspective, the negligence of the bank constitutes a breach of duty to its client. It is worthy of note that the banking industry is impressed with public interest. As such, it must observe a high degree of diligence and observe lofty standards of integrity and performance. By the nature of its functions, a bank is under obligation to treat the accounts of its depositors with meticulous care and always to have in mind the fiduciary nature of its relationship with them. With the attending factual milieu, the imposition of damages on the errant bank is in order. Presaging this course of action is the ruling in Simex International v. CA where this Court rendered a telling discourse on the fiduciary responsibility of depository banks, thus:
The banking system is an indispensable institution in the modern world and plays a vital role in the economic life of every c ivilized nation. Whether as mere passive entities for the safekeeping and saving of money or as active instruments of business and com merce, banks have become an ubiquitous presence among the people, who have come to regard them with respect and even gratitude and, most of all, confidence. Thus, even the humble wage-earner has not hesitated to entrust his life's savings to the bank of his choice, knowing that they will be safe in its custody and will even earn some interest for him. The ordinary person, with equal faith , usually maintains a modest checking account for security and convenience in the settling of his monthly bills and the payment of ordi nary expenses. As for business entities like the petitioner, the bank is a trusted and active associate that can help in the runni ng of their affairs, not only in the form of loans when needed but more often in the conduct of their day-to-day transactions like the issuance or encashment of checks. The concept of moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, woun ded feelings, moral shock, social humiliation, and similar injury. Although incapable of pecuniary computation, moral damages may be recovered if they are the proximate result of the defendant's wrongful act or omission.

Needless to say, the bank’s wrongful act caused injury to respondent. Credit is very important to businessmen, and its loss or impairment needs to be recognized and compensated. This Court in Araneta v. Bank of America highlights the importance of good credit in the business community:
The financial credit of a businessman is a prized and valuable asset, it being a significant part of the foundation of his business. Any adverse reflection thereon constitutes some material loss to him. As stated in the case Atlanta National Bank vs. Davis, supr a, citing 2 Morse Banks, Sec. 458, "it can hardly be possible that a customer's check can be wrongfully refused payment without some impeachment of his credit, which must in fact be an actual injury, though he cannot, from the nature of the case, furnish ind ependent, distinct proof thereof."

Issue: WON moral and exemplary damages should be awarded Held: Yes Ratio: Under the circumstances of this case, we find that the award of moral damages is proper but the amount must be reverted back to P50,000.00 as ordered by the RTC, said court being in a better position to assess the amount of damages to be imposed on the negligent bank. We sustain the award of exemplary damages. Such damages are imposed by way of example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages. The business of a bank is affected with public interest; thus, it makes a sworn profession of diligence and meticulousness in giving irreproachable service. For this reason, the bank should guard against injury attributable to negligence or bad faith on its part. The banking sector must at all times maintain a high level of meticulousness. In view of the bank’s negligence to record the deposit, the grant of exemplary damages is thus justified.
EXTRA: The bank raises another issue, that concerning the postdated check which it had prematurely posted and which it initially assumed, when it first wrote the respondent on 30 May 1988, to be the cause of the dishonor of respondent’s check payable to Paluwagan. The bank argues that the fact it prematurely honored such postdated check did not give rise to damages. This argument is irrelevant. The act or omission of the bank that gives rise to damages in favor of respondent is not the premature posting of the postdated check, but the fact that the bank did not credit respondent’s second deposit of P34,000.00. Besides, this is the first time that said issue was presented. As a rule, no issue may be raised on appeal unless it has been brought before the lower tribunal for its consideration. Higher courts are precluded fromentertaining matters neither alleged in the pleadings nor raised during the proceedings below, but ventilated for the first time only in a motion for reconsideration or on appeal.
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Far East Bank and Trust Company & Pacilan
Wednesday, July 08, 2009 9:27 AM

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[2005V855] FAR EAST BANK AND TRUST COMPANY, NOW BANK OF THE PHILIPPINE ISLANDS, Petitioner, versus THEMISTOCLES PACILAN, JR., Respondent.2005 Jul 292nd DivisionG.R. No. 157314D E C I S I O N

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 Decision[1] 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 P100,000.00 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 P680.00 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 P800.00. The said amount was accepted by petitioner bank; hence, increasing the balance of the respondent’s deposit to P1,051.43.

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 P6,000.00; Check No. 2480419 for P50.00; Check No. 2434880 for P680.00 and; Check No. 2434886 for P680.00, or a total amount of P7,410.00. At the time, however, the respondent’s current account with petitioner bank only had a deposit of P6,981.43. 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 P428.57. As a consequence of the overdraft, Check No. 2434886 was dishonored.

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
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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
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the petitioner bank and Villadelgado, jointly and severally, to pay the respondent the amounts of P100,000.00 as moral damages and P50,000.00 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 P10.00 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 P100,000.00 as moral damages;

2. Ordering the defendants, jointly and severally, to pay plaintiff the sum of P50,000.00 as exemplary damages plus costs and expenses of the suit; and

3.

Dismissing *the+ defendants’ counterclaim for lack of merit.
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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 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 P75,000.00 as moral damages and P25,000.00 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
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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 P75,000.00 and the award of exemplary damages reduced to P25,000.00.

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.

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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,
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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 P7,410.00 when the balance of his current account deposit was only P6,981.43. Thus, he incurred an overdraft of P428.57 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
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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.

ROMEO J. CALLEJO, SR. Associate Justice

WE CONCUR:

REYNATO S. PUNO Associate Justice Chairman

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Chairman

MA. ALICIA AUSTRIA-MARTINEZ
Associate Justice

DANTE O. TINGA
Associate Justice

MINITA V. CHICO-NAZARIO

Associate Justice

ATT ES T AT I O N

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO

Associate Justice
Chairman, Second Division

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CE R T I F I C AT I O N

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairman’s Attestation, it is hereby certified that the conclusions in the above decision were reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

HILARIO G. DAVIDE, JR.

Chief Justice
[1] Penned by Associate Justice Oswaldo D. Agcaoili, with Associate Justices Eliezer R. Delos Santos and Danilo B. Pine, concurring. [2] In the Resolution dated July 1, 2004 of the Court of Appeals, the Court was furnished a copy of the Notice of Death of respondent Pacilan, Jr. In compliance with the Court’s Resolution dated September 27, 2004, his counsel averred that the respondent was survived by his children, namely, Jesus Rey, Jesus Rhoel, Jesus Rene and Jesus Ryan, all surnamed Pacilan. *3+ Exhibit “1,” Records, p. 195. (Vol. I) [4] Records, p. 344. (Vol. II)

[5] Rollo, p. 21.
[6] Ibid.

[7] Development Bank of the Philippines v. Court of Appeals, G.R. No. 137916, 8 December 2004, 445 SCRA 500. [8] ABS-CBN Broadcasting Corporation v. Court of Appeals, G.R. No. 128690, 21 January 1999, 301 SCRA 572.
[9] Chua v. Court of Appeals, G.R. No. 112660, 14 March 1995, 242 SCRA 341. [10] Saber v. Court of Appeals, G.R. No. 132981, 31 August 2004, 437 SCRA 259. [11] Id. at 278-279. [12] Id. at 279.

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[12] Id. at 279. *13+ Exhibits “3” up to “3-X,” Records, pp. 197-221. (Vol. I) *14+ Exhibits “4” up to “4-U,” Id. at 222-243. (Vol. I) *15+ Exhibits “5” up to “5-E,” Id. at 244-249. *16+ Exhibits “6” up to “6-C,” Id. at 250-253.

[17] BPI Express Card Corporation v. Court of Appeals, G.R. No. 120639, 25 September 1998, 296 SCRA 260.
\---!e-library! 6.0 Philippines Copyright © 2000 by Sony Valdez---/ ([2005V855] FAR EAST BANK AND TRUST COMPANY, NOW BANK OF THE PHILIPPINE ISLANDS, Petitioner, versus THEMISTOCLES PACILAN, JR., Respondent., G.R. No. 157314, 2005 Jul 29, 2nd Division)

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Digest: FEBTC v. Pacilan
Saturday, July 11, 2009 12:07 PM

Far East Bank vs Pacilan Date: July 29, 2005 Petitioner: Far East Bank and Trust Company, now BPI Respondent: Themistocles Pacilan Jr Ponente: Callejo Sr Facts: Respondent opened a current account with petitioner’s Bacolod Branch. Respondnet since then issued several postdated checks to different payees drawn against the said account. Sometime in March 1988, the respondent issued a check in the amount of P680.00 and the same was presented for payment to petitioner bank on April 4, 1988. Upon presentment, the check was dishonored. The next day, respondent deposited to his current account the amount of P800.00. The said amount was accepted by petitioner bank; hence, increasing the balance of the respondent’s deposit to P1,051.43. Subsequently, when the respondent verified with the bank about the dishonored check, he discovered that his current account was closed on the ground that it was “improperly handled.” The records of the bank disclosed that respondent issued four checks, to wit: Check No. 2480416 for P6,000.00; Check No. 2480419 for P50.00; Check No. 2434880 for P680.00 and; Check No. 2434886 for P680.00, or a total amount of P7,410.00. At the time, however, the respondent’s current account with petitioner bank only had a deposit of P6,981.43. 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, the bank closed respondent’s current account effective the evening of April 4, 1988 as it then had an overdraft of P428.57. As a consequence of the overdraft, Check No. 2434886 was dishonored. Respondent filed with the RTC of Negros Occidental a complaint for damages against the bank and Villadelgado, complaining that the closure of his account 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 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. In their answer, the bank and Villadelgado maintained that the respondent’s current account was subject to the 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.” Also, 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. 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 P100,000.00 as moral damages and P50,000.00 as exemplary damages and costs of suit. The CA affirmed. Issue: WON the bank is liable for damages Held: No Ratio: 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 CC. 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. Malice or bad faith is at the core of the said provision. 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. 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. Bad faith does not simply connote bad judgment or simple negligence,

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unscrupulous advantage of another. 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. 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. Undoubtedly, the 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. 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 P7,410.00 when the balance of his current account deposit was only P6,981.43. Thus, he incurred an overdraft of P428.57 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. In 1987, the said account was overdrawn 117 times for the same reason. Again, in 1988, 26 times. There were also several instances when the respondent issued checks deliberately using a signature different from his specimen signature on file with petitioner bank. 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 the 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.” 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.

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Citibank vs. Cabamongan
Wednesday, July 08, 2009 9:28 AM

/---!e-library! 6.0 Philippines Copyright © 2000 by Sony Valdez---\

[2006V476] Citibank, N.A., Petitioner, versus Spouses Luis and Carmelita Cabamongan and their sons Luis Cabamongan, Jr. and Lito Cabamongan, Respondents.2006 May 21st DivisionG.R. No. 146918D E C I SI O N

AUSTRIA-MARTINEZ, J.:

Before the Court is a petition for review on certiorari of the Decision[1] dated January 26, 2001 and the Resolution[2] dated July 30, 2001 of the Court of Appeals (CA) in CA-G.R. CV No. 59033. The factual background of the case is as follows:
On August 16, 1993, spouses Luis and Carmelita Cabamongan opened a joint “and/or” foreign currency time deposit in trust for their sons Luis, Jr. and Lito at the Citibank, N.A., Makati branch, with Reference No. 60-22214372, in the amount of $55,216.69 for a term of 182 days or until February 14, 1994, at 2.5625 per cent interest per annum.[3] Prior to maturity, or on November 10, 1993, a person claiming to be Carmelita went to the Makati branch and pre-terminated the said foreign currency time deposit by presenting a passport, a Bank of America Versatele Card, an ATM card and a Mabuhay Credit Card.[4] She filled up the necessary forms for pre-termination of deposits with the assistance of Account Officer Yeye San Pedro. While the transaction was being processed, she was casually interviewed by San Pedro about her personal circumstances and investment plans.[5] Since the said person failed to surrender the original Certificate of Deposit, she had to execute a notarized release and waiver document in favor of Citibank, pursuant to Citibank’s internal procedure, before the money was released to her.*6+ The release and waiver document[7] was not notarized on that same day but the money was nonetheless given to the person withdrawing.[8] The transaction lasted for about 40 minutes.[9] After said person left, San Pedro realized that she left behind an identification card.[10] Thus, San Pedro called up Carmelita’s listed address at No. 48 Ranger Street, Moonwalk Village, Las Pinas, Metro Manila on the same day to have the card picked up.*11+ Marites, the wife of Lito, received San Pedro’s call and was stunned by the news that Carmelita preterminated her foreign currency time deposit because Carmelita was in the United States at that time.[12] The Cabamongan spouses work and reside in California. Marites made an overseas call to Carmelita to inform her about what happened.[13] The Cabamongan spouses were shocked at the news. It seems that sometime between June 10 and 16, 1993, an unidentified person broke in at the couple’s residence at No. 3268 Baldwin Park Boulevard, Baldwin Park, California. Initially, they reported that only Carmelita’s jewelry box was missing, but later on, they discovered that other items, such as their passports, bank deposit certificates, including the subject foreign currency deposit, and identification cards were also missing.[14] It was only then that the Cabamongan spouses realized that their passports and bank deposit certificates were lost.[15] Through various overseas calls, the Cabamongan spouses informed Citibank, thru San Pedro, that Carmelita was in the United States and did not preterminate their deposit and that the person who did so was an impostor who could have also been involved in the break-in of their California residence. San Pedro told the spouses to submit the necessary documents to support their claim but Citibank concluded nonetheless that Carmelita indeed preterminated her deposit. In a letter dated September 16, 1994, the Cabamongan spouses, through counsel, made a formal demand upon Citibank for payment of their preterminated deposit in the amount of $55,216.69 with legal interests.[16] In a letter dated November 28, 1994, Citibank, through counsel, refused the Cabamongan spouses’ demand for payment, asserting that the subject deposit was released to Carmelita upon proper identification and verification.[17]
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verification.[17]

On January 27, 1995, the Cabamongan spouses filed a complaint against Citibank before the Regional Trial Court of Makati for Specific Performance with Damages, docketed as Civil Case No 95-163 and raffled to Branch 150 (RTC).[18]
In its Answer dated April 20, 1995, Citibank insists that it was not negligent of its duties since the subject deposit was released to Carmelita only upon proper identification and verification.[19]

At the pre-trial conference the parties failed to arrive at an amicable settlement.[20] Thus, trial on the merits ensued. For the plaintiffs, the Cabamongan spouses themselves and Florenda G. Negre, Documents Examiner II of the Philippine National Police (PNP) Crime Laboratory in Camp Crame, Quezon City, testified. The Cabamongan spouses, in essence, testified that Carmelita could not have preterminated the deposit account since she was in California at the time of the incident.[21] Negre testified that an examination of the questioned signature and the samples of the standard signatures of Carmelita submitted in the RTC showed a significant divergence. She concluded that they were not written by one and the same person.[22]
For the respondent, Citibank presented San Pedro and Cris Cabalatungan, Vice-President and In-Charge of Security and Management Division. Both San Pedro and Cabalatungan testified that proper bank procedure was followed and the deposit was released to Carmelita only upon proper identification and verification.[23] On July 1, 1997, the RTC rendered a decision in favor of the Cabamongan spouses and against Citibank, the dispositive portion of which reads, thus: WHEREFORE, premises considered, defendant Citibank, N.A., is hereby ordered to pay the plaintiffs the following: 1) the principal amount of their Foreign Currency Deposit (Reference No. 6022214372) amounting to $55,216.69 or its Phil. Currency equivalent plus interests from August 16, 1993 until fully paid; 2) Moral damages of P50,000.00; 3) Attorney’s fees of P50,000.00; and 4) Cost of suit.

SO ORDERED.[24]
The RTC reasoned that: xxx Citibank, N.A., committed negligence resulting to the undue suffering of the plaintiffs. The forgery of the signatures of plaintiff Carmelita Cabamongan on the questioned documents has been categorically established by the handwriting expert. xxx Defendant bank was clearly remiss in its duty and obligations to treat plaintiff’s account with the highest degree of care, considering the nature of their relationship. Banks are under the obligation to treat the accounts of their depositors with meticulous care. This is the reason for their established procedure of requiring several specimen signatures and recent picture from potential depositors. For every transaction, the depositor’s signature is passed upon by personnel to check and countercheck possible irregularities and therefore must bear the blame when they fail to detect the forgery or discrepancy.[25]

Despite the favorable decision, the Cabamongan spouses filed on October 1, 1997 a motion to partially
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Despite the favorable decision, the Cabamongan spouses filed on October 1, 1997 a motion to partially reconsider the decision by praying for an increase of the amount of the damages awarded.[26] Citibank opposed the motion.[27] On November 19, 1997, the RTC granted the motion for partial reconsideration and amended the dispositive portion of the decision as follows:

From the foregoing, and considering all the evidence laid down by the parties, the dispositive portion of the court’s decision dated July 1, 1997 is hereby amended and/or modified to read as follows:
WHEREFORE, defendant Citibank, N.A., is hereby ordered to pay the plaintiffs the following: 1) the principal amount of their foreign currency deposit (Reference No. 6022214372) amounting to $55,216.69 or its Philippine currency equivalent (at the time of its actual payment or execution) plus legal interest from Aug. 16, 1993 until fully paid. 2) moral damages in the amount of P200,000.00;

3) exemplary damages in the amount of P100,000.00;
4) attorney’s fees of P100,000.00; 5) litigation expenses of P200,000.00; 6) cost of suit. SO ORDERED.[28]

Dissatisfied, Citibank filed an appeal with the CA, docketed as CA-G.R. CV No. 59033.[29] On January 26, 2001, the CA rendered a decision sustaining the finding of the RTC that Citibank was negligent, ratiocinating in this wise:
In the instant case, it is beyond dispute that the subject foreign currency deposit was pre-terminated on 10 November 1993. But Carmelita Cabamongan, who works as a nursing aid (sic) at the Sierra View Care Center in Baldwin Park, California, had shown through her Certificate of Employment and her Daily Time Record from the [sic] January to December 1993 that she was in the United States at the time of the incident.

Defendant Citibank, N.A., however, insists that Carmelita was the one who pre-terminated the deposit despite claims to the contrary. Its basis for saying so is the fact that the person who made the transaction on the incident mentioned presented a valid passport and three (3) other identification cards. The attending account officer examined these documents and even interviewed said person. She was satisfied that the person presenting the documents was indeed Carmelita Cabamongan. However, such conclusion is belied by these following circumstances. First, the said person did not present the certificate of deposit issued to Carmelita Cabamongan. This would not have been an insurmountable obstacle as the bank, in the absence of such certificate, allows the termination of the deposit for as long as the depositor executes a notarized release and waiver document in favor of the bank. However, this simple procedure was not followed by the bank, as it terminated the deposit and actually delivered the money to the impostor without having the said document notarized on the flimsy excuse that another department of the bank was in charge of notarization. The said procedure was obviously for the protection of the bank but it deliberately ignored such precaution. At the very least, the conduct of the bank amounts to negligence.
Second, in the internal memorandum of Account Officer Yeye San Pedro regarding the incident, she reported that upon comparing the authentic signatures of Carmelita Cabamongan on file with the bank with the signatures made by the person claiming to be Cabamongan on the documents required for the
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with the signatures made by the person claiming to be Cabamongan on the documents required for the termination of the deposit, she noticed that one letter in the latter [sic] signatures was different from that in the standard signatures. She requested said person to sign again and scrutinized the identification cards presented. Presumably, San Pedro was satisfied with the second set of signatures made as she eventually authorized the termination of the deposit. However, upon examination of the signatures made during the incident by the Philippine National Police (PNP) Crime Laboratory, the said signatures turned out to be forgeries. As the qualifications of Document Examiner Florenda Negre were established and she satisfactorily testified on her findings during the trial, we have no reason to doubt the validity of her findings. Again, the bank’s negligence is patent. San Pedro was able to detect discrepancies in the signatures but she did not exercise additional precautions to ascertain the identity of the person she was dealing with. In fact, the entire transaction took only 40 minutes to complete despite the anomalous situation. Undoubtedly, the bank could have done a better job.
Third, as the bank had on file pictures of its depositors, it is inconceivable how bank employees could have been duped by an impostor. San Pedro admitted in her testimony that the woman she dealt with did not resemble the pictures appearing on the identification cards presented but San Pedro still went on with the sensitive transaction. She did not mind such disturbing anomaly because she was convinced of the validity of the passport. She also considered as decisive the fact that the impostor had a mole on her face in the same way that the person in the pictures on the identification cards had a mole. These explanations do not account for the disparity between the pictures and the actual appearance of the impostor. That said person was allowed to withdraw the money anyway is beyond belief. The above circumstances point to the bank’s clear negligence. Bank transactions pass through a successive [sic] of bank personnel, whose duty is to check and countercheck transactions for possible errors. While a bank is not expected to be infallible, it must bear the blame for failing to discover mistakes of its employees despite established bank procedure involving a battery of personnel designed to minimize if not eliminate errors. In the instant case, Yeye San Pedro, the employee who primarily dealt with the impostor, did not follow bank procedure when she did not have the waiver document notarized. She also openly courted disaster by ignoring discrepancies between the actual appearance of the impostor and the pictures she presented, as well as the disparities between the signatures made during the transaction and those on file with the bank. But even if San Pedro was negligent, why must the other employees in the hierarchy of the bank’s work flow allow such thing to pass unnoticed and unrectified?[30] The CA, however, disagreed with the damages awarded by the RTC. It held that, insofar as the date from which legal interest of 12% is to run, it should be counted from September 16, 1994 when extrajudicial demand was made. As to moral damages, the CA reduced it to P100,000.00 and deleted the awards of exemplary damages and litigation expenses. Thus, the dispositive portion of the CA decision reads: WHEREFORE, the decision of the trial court dated 01 July 1997, and its order dated 19 November 1997, are hereby AFFIRMED with the MODIFICATION that the legal interest for actual damages awarded in the amount of $55,216.69 shall run from 16 September 1994; exemplary damages amounting to P100,000.00 and litigation expenses amounting to P200,000.00 are deleted; and moral damages is reduced to P100,000.00. Costs against defendant.

SO ORDERED.[31]
The Cabamongan spouses filed a motion for partial reconsideration on the matter of the award of damages in the decision.[32] On July 30, 2001, the CA granted in part said motion and modified its decision as follows:

1. The actual damages in amount of $55,216.69, representing the amount of appellees’ foreign currency
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1. The actual damages in amount of $55,216.69, representing the amount of appellees’ foreign currency time deposit shall earn an interest of 2.5625% for the period 16 August 1993 to 14 February 1994, as stipulated in the contract; 2. From 16 September 1994 until full payment, the amount of $55,216.69 shall earn interest at the legal rate of 12% per annum, and; 3. The award of moral damages is reduced to P50,000.00.[33]

Dissatisfied, both parties filed separate petitions for review on certiorari with this Court. The Cabamongan spouses’ petition, docketed as G.R. No. 149234, was denied by the Court per its Resolution dated October 17, 2001.*34+ On the other hand, Citibank’s petition was given due course by the Court per Resolution dated December 10, 2001 and the parties were required to submit their respective memoranda.[35]
Citibank poses the following errors for resolution: 1. THE HONORABLE COURT OF APPEALS GRAVELY ERRED AND GRAVELY ABUSED ITS DISCRETION IN UPHOLDING THE LOWER COURT’S DECISION WHICH IS NOT BASED ON CLEAR EVIDENCE BUT ON GRAVE MISAPPREHENSION OF FACTS. 2. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN UPHOLDING THE DECISION OF THE TRIAL COURT AWARDING MORAL DAMAGES WHEN IN FACT THERE IS NO BASIS IN LAW AND FACT FOR SAID AWARD. 3. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE PRINCIPAL AMOUNT OF US$55,216.69 SHOULD EARN INTEREST AT THE RATE OF 12% PER ANNUM FROM 16 SEPTEMBER 1994 UNTIL FULL PAYMENT.[36] Anent the first ground, Citibank contends that the CA erred in affirming the RTC’s finding that it was negligent since the said courts failed to appreciate the extra diligence of a good father of a family exercised by Citibank thru San Pedro.

As to the second ground, Citibank argues that the Cabamongan spouses are not entitled to moral damages since moral damages can be awarded only in cases of breach of contract where the bank has acted willfully, fraudulently or in bad faith. It submits that it has not been shown in this case that Citibank acted willfully, fraudulently or in bad faith and mere negligence, even if the Cabamongan spouses suffered mental anguish or serious anxiety on account thereof, is not a ground for awarding moral damages. On the third ground, Citibank avers that the interest rate should not be 12% but the stipulated rate of 2.5625% per annum. It adds that there is no basis to pay the interest rate of 12% per annum from September 16, 1994 until full payment because as of said date there was no legal ground yet for the Cabamongan spouses to demand payment of the principal and it is only after a final judgment is issued declaring that Citibank is obliged to return the principal amount of US$55,216.69 when the right to demand payment starts and legal interest starts to run. On the other hand, the Cabamongan spouses contend that Citibank’s negligence has been established by evidence. As to the interest rate, they submit that the stipulated interest of 2.5635% should apply for the 182-day contract period from August 16, 1993 to February 14, 1993; thereafter, 12% should apply. They further contend that the RTC’s award of exemplary damages of P100,000.00 should be maintained. They submit that the CA erred in treating the award of litigation expenses as lawyer’s fees since they have shown that they incurred actual expenses in litigating their claim against Citibank. They also contend that the CA erred in reducing the award of moral damages in view of the degree of mental anguish and emotional fears, anxieties and nervousness suffered by them.[37]
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anguish and emotional fears, anxieties and nervousness suffered by them.[37]

Subsequently, Citibank, thru a new counsel, submitted a Supplemental Memorandum,[38] wherein it posits that, assuming that it was negligent, the Cabamongan spouses were guilty of contributory negligence since they failed to notify Citibank that they had migrated to the United States and were residents thereat and after having been victims of a burglary, they should have immediately assessed their loss and informed Citibank of the disappearance of the bank certificate, their passports and other identification cards, then the fraud would not have been perpetuated and the losses avoided. It further argues that since the Cabamongan spouses are guilty of contributory negligence, the doctrine of last clear chance is inapplicable.
Citibank’s assertion that the Cabamongan spouses are guilty of contributory negligence and nonapplication of the doctrine of last clear chance cannot pass muster since these contentions were raised for the first time only in their Supplemental Memorandum. Indeed, the records show that said contention were neither pleaded in the petition for review and the memorandum nor in Citibank’s Answer to the complaint or in its appellant’s brief filed with the CA. To consider the alleged facts and arguments raised belatedly in a supplemental pleading to herein petition for review at this very late stage in the proceedings would amount to trampling on the basic principles of fair play, justice and due process.[39] The Court has 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[40] is expected,[41] and high standards of integrity and performance are even required, of it.*42+ By the nature of its functions, a bank is “under obligation to treat the accounts of its depositors with meticulous care,[43] always having in mind the fiduciary nature of their relationship.”*44+ In this case, it has been sufficiently shown that the signatures of Carmelita in the forms for pretermination of deposits are forgeries. Citibank, with its signature verification procedure, failed to detect the forgery. Its negligence consisted in the omission of that degree of diligence required of banks. The Court has held that a bank is “bound to know the signatures of its customers; and if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily charge the amount so paid to the account of the depositor whose name was forged.”*45+ Such principle equally applies here. Citibank cannot label its negligence as mere mistake or human error. Banks handle daily transactions involving millions of pesos.[46] 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.[47] Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees.[48] The Court agrees with the observation of the CA that Citibank, thru Account Officer San Pedro, openly courted disaster when despite noticing discrepancies in the signature and photograph of the person claiming to be Carmelita and the failure to surrender the original certificate of time deposit, the pretermination of the account was allowed. Even the waiver document was not notarized, a procedure meant to protect the bank. For not observing the degree of diligence required of banking institutions, whose business is impressed with public interest, Citibank is liable for damages. As to the interest rate, Citibank avers that the claim of the Cabamongan spouses does not constitute a loan or forbearance of money and therefore, the interest rate of 6%, not 12%, applies. The Court does not agree. The time deposit subject matter of herein petition is a simple loan. The provisions of the New Civil Code on simple loan govern the contract between a bank and its depositor. Specifically, Article 1980 thereof
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on simple loan govern the contract between a bank and its depositor. Specifically, Article 1980 thereof categorically provides that “. . . savings . . . deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan.” Thus, the relationship between a bank and its depositor is that of a debtor-creditor, the depositor being the creditor as it lends the bank money, and the bank is the debtor which agrees to pay the depositor on demand. The applicable interest rate on the actual damages of $55,216.69, should be in accordance with the guidelines set forth in Eastern Shipping Lines, Inc. v. Court of Appeals[49] to wit:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasidelicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on “Damages” of the Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest, in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.[50] Thus, in a loan or forbearance of money, the interest due should be that stipulated in writing, and in the absence thereof, the rate shall be 12% per annum counted from the time of demand. Accordingly, the stipulated interest rate of 2.562% per annum shall apply for the 182-day contract period from August 16, 1993 to February 14, 1994. For the period from the date of extra-judicial demand, September 16, 1994, until full payment, the rate of 12% shall apply. As for the intervening period between February 15, 1994 to September 15, 1994, the rate of interest then prevailing granted by Citibank shall apply since the time deposit provided for roll over upon maturity of the principal and interest.[51]

As to moral damages, in culpa contractual or breach of contract, as in the case before the Court, moral damages are recoverable only if the defendant has acted fraudulently or in bad faith,[52] or is found guilty of gross negligence amounting to bad faith, or in wanton disregard of his contractual obligations.*53+ The act of Citibank’s employee in allowing the pretermination of Cabamongan spouses’ account despite the noted discrepancies in Carmelita’s signature and photograph, the absence of the original certificate of time deposit and the lack of notarized waiver dormant, constitutes gross negligence amounting to bad faith under Article 2220 of the Civil Code.

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There is no hard-and-fast rule in the determination of what would be a fair amount of moral damages since each case must be governed by its own peculiar facts. The yardstick should be that it is not palpably and scandalously excessive.[54] The amount of P50,000.00 awarded by the CA is reasonable and just. Moreover, said award is deemed final and executory insofar as respondents are concerned considering that their petition for review had been denied by the Court in its final and executory Resolution dated October 17, 2001 in G.R. No. 149234. Finally, Citibank contends that the award of attorney’s fees should be deleted since such award appears only in the dispositive portion of the decision of the RTC and the latter failed to elaborate, explain and justify the same.

Article 2208 of the New Civil Code enumerates the instances where such may be awarded and, in all cases, it must be reasonable, just and equitable if the same were to be granted. Attorney’s fees as part of damages are not meant to enrich the winning party at the expense of the losing litigant. They are not awarded every time a party prevails in a suit because of the policy that no premium should be placed on the right to litigate.*55+ The award of attorney’s fees is the exception rather than the general rule. As such, it is necessary for the court to make findings of facts and law that would bring the case within the exception and justify the grant of such award. The matter of attorney’s fees cannot be mentioned only in the dispositive portion of the decision.[56] They must be clearly explained and justified by the trial court in the body of its decision. Consequently, the award of attorney’s fees should be deleted.
WHEREFORE, the instant petition is PARTIALLY GRANTED. The assailed Decision and Resolution are AFFIRMED with MODIFICATIONS, as follows: 1. The interest shall be computed as follows: a. The actual damages in principal amount of $55,216.69, representing the amount of foreign currency time deposit shall earn interest at the stipulated rate of 2.5625% for the period August 16, 1993 to February 14, 1994; b. From February 15, 1994 to September 15, 1994, the principal amount of $55,216.69 and the interest earned as of February 14, 1994 shall earn interest at the rate then prevailing granted by Citibank; c. From September 16, 1994 until full payment, the principal amount of $55,216.69 and the interest earned as of September 15, 1994, shall earn interest at the legal rate of 12% per annum;

2. The award of attorney’s fees is DELETED.
No pronouncement as to costs. SO ORDERED. MA. ALICIA AUSTRIA-MARTINEZ Associate Justice

WE CONCUR: ARTEMIO V. PANGANIBAN Chief Justice Chairperson CONSUELO YNARES-SANTIAGO Associate Justice
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CONSUELO YNARES-SANTIAGO Associate Justice

ROMEO J. CALLEJO, SR. Associate Justice
(On official leave) MINITA V. CHICO-NAZARIO Associate Justice

CE R T I F I C AT I O N Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division. ARTEMIO V. PANGANIBAN Chief Justice

[1] Penned by Associate Justice Buenaventura J. Guerrero and concurred in by Associate Justices Eriberto U. Rosario, Jr. and Alicia L. Santos (all retired). Rollo, p. 42. [2] Rollo, p. 53.

[3]
[4] [5] [6] [7] [8] [9]

Records, pp. 38, 342.
TSN, Testimony of Yeye San Pedro, July 5, 1996, pp. 4-6. Id. at 7. Id. at 9, 21. Folder of Exhibits, p. 219 TSN, Testimony of Yeye San Pedro, July 5, 1996, pp. 22-24. Id. at 7.

[10]
[11]

Id. at 12, 14.
Id. at 12.

[12] TSN, Testimony of Luis Cabamongan, July 31, 1995, p. 11; TSN, Testimony of Carmelita Cabamongan, September 18, 1995, p. 5. [13]
[14]

Id.
Records, p. 50. TSN, Testimony of Luis Cabamongan, July 31, 1995, p. 26.

[15] TSN, Testimony of Luis Cabamongan, July 31, 1995, pp. 15-16, 26-27; TSN, Testimony of Carmelita Cabamongan, September 18, 1995, p. 12.

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Carmelita Cabamongan, September 18, 1995, p. 12.
[16] [17] [18] [19] Records, p. 84. Id. at 90. Id. at 1. Id. at 97.

[20]

Id. at 129.

[21] TSN, Testimony of Luis Cabamongan, July 31, 1995, p. 13; TSN, Testimony of Carmelita Cabamongan, September 18, 1995, p. 7. [22] TSN, Testimony of Florenda G. Negre, February 5, 1996, pp. 8, 19.

[23] TSN, Testimony of Yeye San Pedro, July 5, 1996; TSN, Testimony of Cris Cabalatungan, September 20, 1990.
[24] [25] Records, p. 512. Id. at 511.

[26]
[27]

Id. at 516.
Id. at 546.

[28]
[29] [30] [31] [32] [33] [34]

Id. at 556.
CA rollo, p. 4. Id. at 99-100. Id. at 103. Id. at 118. Id. at 204. Id. at 222.

[35]
[36]

Rollo, p. 103.
Id. at 151.

[37]
[38]

Id. at 118.
Id. at 170.

[39] Bank of the Philippine Islands v. Leobrera, G.R. Nos. 137147-48, November 18, 2003, 416 SCRA 15, 19; Balitaosan v. Secretary of Education, Culture and Sports, G.R. No. 138238, September 2, 2003, 410 SCRA 233, 235-236. [40] Bank of the Philippine Islands v. Court of Appeals, 383 Phil. 538, 554 (2000); Philippine Bank of Commerce v. Court of Appeals, 336 Phil. 667, 681 (1997).
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of Commerce v. Court of Appeals, 336 Phil. 667, 681 (1997).

[41] Philippine Commercial International Bank v. Court of Appeals, G.R. No. 121413, January 29, 2001, 350 SCRA 446, 472. *42+ §2 of Republic Act No. 8791, otherwise known as “The General Banking Law of 2000.”

[43] Westmont Bank v. Ong, G.R. No. 132560, January 30, 2002, 375 SCRA 212, 221; Citytrust Banking Corp. v. Intermediate Appellate Court, May 27, 1994, 232 SCRA 559, 564. [44] Simex International (Manila), Inc. v. Court of Appeals, March 19, 1990, 183 SCRA 360, 367.

[45]

San Carlos Milling Co., Ltd. v. Bank of the Philippine Islands, 59 Phil. 59, 66 (1933).

[46] Philippine Commercial International Bank v. Court of Appeals, supra; Bank of the Philippine Islands v. Court of Appeals, 216 SCRA 51, 71 (1992). [47] [48] [49] Philippine Commercial International Bank v. Court of Appeals, supra. Id. G.R. No. 97412, July 12, 1994, 234 SCRA 78.

[50]
[51]

Id. at 95-97
Records, pp. 38.

[52]

Article 2220, New Civil Code.

Art. 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. [53] Philippine Telegraph & Telephone Corporation v. Court of Appeals, G.R. No. 139268, September 3, 2002, 388 SCRA 270, 276-277. [54] Prudential Bank v. Court of Appeals, G.R. No. 125536, March 16, 2000, 328 SCRA 264, 271; Philippine National Bank v. Court of Appeals, G.R. No. 126152, September 28, 1999, 315 SCRA 309, 315. [55] Country Bankers Insurance Corporation v. Lianga Bay and Community Multi-purpose Cooperative, Inc. G.R. No. 136914, January 25, 2002, 374 SCRA 653, 666; Ibaan Rural Bank, Inc. v. Court of Appeals, G.R. No. 123817, December 17, 1999, 321 SCRA 88, 95. *56+ Samatra v. Vda. de Pariñas, G.R. No. 142958, April 24, 2002, 381 SCRA 522, 533; Development Bank of the Philippines v. Court of Appeals, G.R. No. 118180, September 20, 1996, 262 SCRA 245,253. \---!e-library! 6.0 Philippines Copyright © 2000 by Sony Valdez---/ ([2006V476] Citibank, N.A., Petitioner, versus Spouses Luis and Carmelita Cabamongan and their sons Luis Cabamongan, Jr. and Lito Cabamongan, Respondents., G.R. No. 146918, 2006 May 2, 1st Division)

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Digest: Citibank vs. Cabamongan
Saturday, July 11, 2009 12:08 PM

Citibank vs Cabamongan Date: May 2, 2006 Petitioner: Citibank Respondents: Spouses Luis and Carmelita Cabamongan and their sons Luis Cabamongan Jr and Lito Cabamongan Ponente: Austria Martinez Facts: Spouses Luis and Carmelita Cabamongan opened a joint "and/or" foreign currency time deposit in trust for their sons Luis, Jr. and Lito at the Citibank, N.A., Makati branch, in the amount of $55,216.69 for a term of 182 days or until February 14, 1994, at 2.5625 % interest pa. Prior to maturity, one Carmelita went to the Makati branch and pre-terminated the said foreign currency time deposit by presenting a passport, a Bank of America Versatele Card, an ATM card and a Mabuhay Credit Card. While the transaction was being processed, she was casually interviewed by San Pedro about her personal circumstances and investment plans. Since the said person failed to surrender the original Certificate of Deposit, she had to execute a notarized release and waiver document in favor of Citibank, pursuant to Citibank's internal procedure, before the money was released to her. The release and waiver document was not notarized on that same day but the money was nonetheless given to the person withdrawing. The transaction lasted for about 40 minutes. After said person left, San Pedro realized that she left behind an ID. San Pedro called up Carmelita's listed. Marites, the wife of Lito, received San Pedro's call and was stunned by the news that Carmelita preterminated her foreign currency time deposit because Carmelita was in the United States at that time. It appeared that an unidentified person broke in at the couple's residence in California and took their passports, bank deposit certificates, including the subject foreign currency deposit, and IDs. The Cabamongan spouses, through counsel, made a formal demand upon Citibank for payment of their preterminated deposit in the amount of $55,216.69 with legal interests. Citibank, through counsel, refused the Cabamongan spouses' demand for payment, asserting that the subject deposit was released to Carmelita upon proper identification and verification. The spouses filed a complaint against Citibank. The RTC rendered a decision in favor of the Cabamongan spouses and against Citibank, reasoning that the forgery was clearly established and Citibank was clearly remiss in its duty to treat plaintiff’s account with the highest degree of care. On appeal, the CA sustained the finding that Citibank was negligent. The CA, however, disagreed with the damages awarded by the RTC. It held that, insofar as the date from which legal interest of 12% is to run, it should be counted from September 16, 1994 when extrajudicial demand was made. As to moral damages, the CA reduced it to P100,000.00 and deleted the awards of exemplary damages and litigation expenses. Issue: WON Citibank was negligent Held: Yes Ratio: Citibank's assertion that the Cabamongan spouses are guilty of contributory negligence and non-application of the doctrine of last clear chance cannot pass muster since these contentions were raised for the first time only in their Supplemental Memorandum. The Court has 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. By the nature of its functions, a 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 this case, it has been sufficiently shown that the signatures of Carmelita in the forms for pretermination of deposits are forgeries. Citibank, with its signature verification procedure, failed to detect the forgery. Its negligence consisted in the omission of that degree of diligence required of banks. The Court has held that a bank is "bound to know the signatures of its customers; and if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily charge the amount so paid to the account of the depositor whose name was forged." Such principle equally applies here. Citibank cannot label its negligence as mere mistake or human error. Banks handle daily transactions involving millions of pesos. By the very nature of their works the degree of responsibility, care and

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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. The Court agrees with the observation of the CA that Citibank, thru Account Officer San Pedro, openly courted disaster when despite noticing discrepancies in the signature and photograph of the person claiming to be Carmelita and the failure to surrender the original certificate of time deposit, the pretermination of the account was allowed. Even the waiver document was not notarized, a procedure meant to protect the bank. For not observing the degree of diligence required of banking institutions, whose business is impressed with public interest, Citibank is liable for damages. Issue: WON the interest rate should be fixed at 6% Held: No Ratio: The time deposit subject matter of herein petition is a simple loan. The provisions of the New Civil Code on simple loan govern the contract between a bank and its depositor. Specifically, Article 1980 thereof categorically provides that ". . . savings . . . deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan." Thus, the relationship between a bank and its depositor is that of a debtorcreditor, the depositor being the creditor as it lends the bank money, and the bank is the debtor which agrees to pay the depositor on demand. The applicable interest rate on the actual damages of $55,216.69, should be in accordance with the guidelines set forth in Eastern Shipping Lines, Inc. v. CA. Thus, in a loan or forbearance of money, the interest due should be that stipulated in writing, and in the absence thereof, the rate shall be 12% per annum counted from the time of demand. Accordingly, the stipulated interest rate of 2.562% per annum shall apply for the 182-day contract period from August 16, 1993 to February 14, 1994. For the period from the date of extra-judicial demand, September 16, 1994, until full payment, the rate of 12% shall apply. As for the intervening period between February 15, 1994 to September 15, 1994, the rate of interest then prevailing granted by Citibank shall apply since the time deposit provided for roll over upon maturity of the principal and interest. Issue: WON the bank is liable for moral damages Held: Yes Ratio: As to moral damages, in culpa contractual or breach of contract, as in the case before the Court, moral damages are recoverable only if the defendant has acted fraudulently or in bad faith, or is found guilty of gross negligence amounting to bad faith, or in wanton disregard of his contractual obligations. The act of Citibank's employee in allowing the pretermination of Cabamongan spouses' account despite the noted discrepancies in Carmelita's signature and photograph, the absence of the original certificate of time deposit and the lack of notarized waiver dormant, constitutes gross negligence amounting to bad faith under Article 2220 of the Civil Code. There is no hard-and-fast rule in the determination of what would be a fair amount of moral damages since each case must be governed by its own peculiar facts. The yardstick should be that it is not palpably and scandalously excessive. The amount of P50,000.00 awarded by the CA is reasonable and just. Moreover, said award is deemed final and executory insofar as respondents are concerned considering that their petition for review had been denied by the Court in its final and executory Resolution dated October 17, 2001 in G.R. No. 149234. Issue: WON the award of attorney’s fees was proper Held: No Ratio: Article 2208 of the New Civil Code enumerates the instances where such may be awarded and, in all cases, it must be reasonable, just and equitable if the same were to be granted. Attorney's fees as part of damages are not meant to enrich the winning party at the expense of the losing litigant. They are not awarded every time a party prevails in a suit because of the policy that no premium should be placed on the right to litigate. The award of attorney's fees is the exception rather than the general rule. As such, it is necessary for the court to make findings of facts and law that would bring the case within the exception and justify the grant of such award. The matter of attorney's fees cannot be mentioned only in the dispositive portion of the decision. They must be clearly explained

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attorney's fees cannot be mentioned only in the dispositive portion of the decision. They must be clearly explained and justified by the trial court in the body of its decision. Consequently, the award of attorney's fees should be deleted.

Pasted from <file:///C:\DOCUME~1\Cha\LOCALS~1\Temp\Rar$DI25.265\Citibank%20vs%20Cabamongan.docx>

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Citibank vs. Sabeniano
Wednesday, July 08, 2009 9:30 AM

*2006V1205+ *1/4+ CITIBANK, N.A. (Formerly First National City Bank) and INVESTORS’ FINANCE CORPORATION, doing business under the name and style of FNCB Finance, Petitioners, versus MODESTA R. SABENIANO, Respondent.2006 Oct 121st DivisionG.R. No. 156132D E C I S I O N

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 Decision[2] 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.

On 8 August 1985, respondent filed a Complaint[5] 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 Complaint*6+ on 9 October 1985 to include additional claims to deposits and money market placements inadvertently left out from her original Complaint.
In their joint Answer[7] 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 (CitibankGeneva). 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
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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 Decision[10] was finally rendered in Civil Case No. 11336 on 24 August 1995 by the fourth Judge[11] 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 P1,069,847.40 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 other.
Costs against the defendant Bank. All the parties appealed the foregoing Decision of the RTC to the Court of Appeals, docketed as CA-G.R. CV No. 51930. Respondent questioned the findings of the RTC that she was still indebted to petitioner Citibank, as well as the failure of the RTC to order petitioners to render an accounting of respondent’s deposits and 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 declaring respondent liable for damages and interest. On 26 March 2002, the Court of Appeals rendered its Decision[12] 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 – 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; 2. As defendant-appellant Citibank failed to establish by competent evidence the alleged indebtedness of plaintiff-appellant, the set-off of P1,069,847.40 in the account of Ms. Sabeniano is hereby declared as without legal and factual basis; 3. As defendants-appellants failed to account the following plaintiff-appellant’s money market placements, savings account and current accounts, the former is hereby ordered to return the same, in accordance with the terms and conditions agreed upon by the contending parties as evidenced by the
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accordance with the terms and conditions agreed upon by the contending parties as evidenced by the certificates of investments, to wit:
(i) Citibank NNPN Serial No. 023356 (Cancels and Supersedes NNPN No. 22526) issued on 17 March 1977, P318,897.34 with 14.50% interest p.a.; (ii) Citibank NNPN Serial No. 23357 (Cancels and Supersedes NNPN No. 22528) issued on 17 March 1977, P203,150.00 with 14.50 interest p.a.;

(iii) FNCB NNPN Serial No. 05757 (Cancels and Supersedes NNPN No. 04952), issued on 02 June 1977, P500,000.00 with 17% interest p.a.; (iv) FNCB NNPN Serial No. 05758 (Cancels and Supersedes NNPN No. 04962), issued on 02 June 1977, P500,000.00 with 17% interest per annum;
(v) The Two Million (P2,000,000.00) money market placements of Ms. 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;

4. Ordering defendants-appellants to jointly and severally pay the plaintiff-appellant the sum of FIVE HUNDRED THOUSAND PESOS (P500,000.00) by way of moral damages, FIVE HUNDRED THOUSAND PESOS (P500,000.00) as exemplary damages, and ONE HUNDRED THOUSAND PESOS (P100,000.00) as attorney’s fees.
Apparently, the parties to the case, namely, the respondent, on one hand, and the petitioners, on the other, made separate attempts to bring the aforementioned Decision of the Court of Appeals, dated 26 March 2002, before this Court for review. G.R. No. 152985 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, then the period for appeal continued to run and still expired on 3 May 2002.[14] Respondent failed to file any Petition for Review within the prescribed period for appeal and, hence, this Court issued a Resolution,[15] dated 13 November 2002, in which it pronounced that – G.R. No. 152985 (Modesta R. Sabeniano vs. Court of Appeals, et al.). – It appearing that petitioner failed to file the intended petition for review on certiorari within the period which expired on May 3, 2002, the Court Resolves to DECLARE THIS CASE TERMINATED and DIRECT the Division Clerk of Court to INFORM the parties that the judgment sought to be reviewed has become final and executory. The said Resolution was duly recorded in the Book of Entries of Judgments on 3 January 2003. G.R. No. 156132

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G.R. No. 156132 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 –

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 hereby ordered DELETED.
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 denied[17] 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 resolved[18] 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 Resolution[20] 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
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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 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. ( mphasis 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
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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

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.
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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 P1,920,000.00 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
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money market placements were applied to partially pay the plaintiff’s past due obligation with the defendant Bank. Thus, the total sum of P1,053,995.80 of the plaintiff’s past due obligation was partially offset by the said money market placement leaving a balance of P1,069,847.40 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 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])

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(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.) P 318,897.34

Money market placement with Citibank, evidenced by PN No. 23357 (which cancels and supersedes PN No. 22528), earning 14.5% interest p.a. P 203,150.00
Money market placement with FNCB Finance, evidenced by PN No. 5757 (which cancels and supersedes PN No. 4952), earning 17% interest p.a. P 500,000.00 Money market placement with FNCB
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Money market placement with FNCB Finance, evidenced by PN No. 5758 (which cancels and supersedes PN No. 2962), earning 17% interest p.a. P 500,000.00 This Court is tasked to determine whether petitioners are indeed liable to return the foregoing amounts, together with the appropriate interests and penalties, to respondent. It shall trace respondent’s transactions with petitioners, from her money market placements with petitioner Citibank and petitioner FNCB Finance, to her savings and current accounts with petitioner Citibank, and to her dollar accounts with Citibank-Geneva. Money market placements with petitioner Citibank The history of respondent’s money market placements with petitioner Citibank began on 6 December 1976, when she made a placement of P500,000.00 as principal amount, which was supposed to earn an interest of 16% p.a. and for which PN No. 20773 was issued. Respondent did not yet claim the proceeds of her placement and, instead, rolled-over or re-invested the principal and proceeds several times in the succeeding years for which new PNs were issued by petitioner Citibank to replace the ones which matured. Petitioner Citibank accounted for respondent’s original placement and the subsequent roll overs thereof, as follows – Date Cancels Maturity Date Amount Interest (mm/dd/yyyy) PN No. PN No. (mm/dd/yyyy) (P) (p.a.) 12/06/1976 01/14/1977 20773 21686 None 01/13/1977 20773 02/08/1977 500,000.00 16% 508,444.44 15%

02/09/1977 22526 21686 03/16/1977 313,952.59 15-3/4% 22528 21686 03/16/1977 200,000.00 15-3/4% 03/17/1977 23356 22526 04/20/1977 318,897.34 14-1/2% 23357 22528 04/20/1977 203,150.00 14-1/2%

Petitioner Citibank alleged that it had already paid to respondent the principal amounts and proceeds of PNs No. 23356 and 23357, upon their maturity. Petitioner Citibank further averred that respondent used the P500,000.00 from the payment of PNs No. 23356 and 23357, plus P600,000.00 sourced from her other funds, to open two time deposit (TD) accounts with petitioner 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 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 an admission – 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 was in words and figures exactly as set out in the pleading of the party relying upon it; that the document was delivered; and that any formal requisites required by law, such as a seal, an acknowledgment, or revenue stamp, which it lacks, are waived by him. Hence, 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 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 Inc., 220; Naftzker vs. Lantz, 137 Mich., 441) or of a
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Greenberg, 127 Cal., 26; Henshaw vs. Root, 60 Inc., 220; Naftzker vs. Lantz, 137 Mich., 441) or of a corporation (Merchant vs. International Banking Corporation, 6 Phil Rep., 314; Wanita vs. Rollins, 75 Miss., 253; Barnes vs. Spencer & Barnes Co., 162 Mich., 509); or that, in the case of the latter, that the corporation was authorized under its charter to sign the instrument (Merchant vs. International Banking Corporation, supra); or that the party charged signed the instrument in some other capacity than that alleged in the pleading setting it 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 admission of its genuineness and due execution. The effect o the admission is such that in the case of a promissory note a prima facie case is made for the plaintiff which dispenses with the necessity of evidence on his part and entitles him to a judgment on the pleadings unless a special defense of new matter, such as payment, is interposed by the defendant (Papa vs. Martinez, 12 Phil. Rep., 613; Chinese Chamber of Commerce vs. Pua To Ching, 14 Phil. Rep., 222; Banco Español -Filipino vs. McKay & Zoeller, 27 Phil. Rep., 183). x x x

Since the genuineness and due execution of PNs No. 23356 and 23357 are uncontested, respondent was able to establish prima facie that petitioner Citibank is liable to her for the amounts stated therein. The assertion of petitioner Citibank of payment of the said PNs is an affirmative allegation of a new matter, the burden of proof as to such resting on petitioner Citibank. Respondent having proved the existence of the obligation, the burden of proof was upon petitioner Citibank to show that it had been discharged.[33] It has already been established by this Court that – As a general rule, one who pleads payment has the burden of proving it. Even where the 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 debtor has the burden of showing with legal certainty that the obligation has been discharged by payment.
When the existence of a debt is fully established by the evidence contained in the record, 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 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] Reviewing the evidence on record, this Court finds that petitioner Citibank failed to satisfactorily 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. 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 time when the questioned transactions took place; and (2) that of Mr. Francisco Tan,[36] the former Assistant VicePresident of Citibank, who directly dealt with respondent with regard to her deposits and loans. The relevant portion*37+ 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: Okey [sic]. Now Mr. Witness, you were asked to testify in this case and this case is [sic] consist [sic] of several documents involving transactions between the plaintiff and the defendant. Now, were you able to make your own memorandum regarding all these transactions? A Yes, based on my recollection of these facts, I did come up of [sic] the outline of the chronological sequence of events.

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sequence of events.
Court: Are you trying to say that you have personal knowledge or participation to these transactions? 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: And this resume or summary that you have prepared is based on purely your recollection or documents? A Based on documents, your Honor.

Court: Are these documents still available now? A Yes, your honor.

Court:

Better present the documents.
Atty. Mabasa:

Yes, your Honor, that is why your Honor.
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”? A Q A Q A Q The transactions which I said earlier were terminated and booked to time deposits. And you are saying time deposits with what bank? With First National Citibank. Is it the same bank as Citibank, N.A.? Yes, sir. And how much was the amount booked as time deposit with defendant Citibank?

A

In the amount of P500,000.00.

Q And outside this P500,000.00 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. A Yes, she also opened another time deposit for P600,000.00.

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A

Yes, she also opened another time deposit for P600,000.00.

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 P500,000.00 which is the proceeds of Exh. “47” and “48” and another P600,000.00, is it not?

A

Yes, sir.

Q And would you know where did the other P600,000 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 P600,000 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, 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
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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 P500,000.00, plus the interest it shoul 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 P500,000.00. 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 P1,100,000.00, 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.
According to petitioners, respondent’s TD Accounts No. 17783 and 17784, in the total amount of P1,100,000.00, 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. 199253*41+ and 199251*42+ for the amounts of P500,000.00 and P600,00.00, 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.” These phrases purportedly established that the MCs were paid from the proceeds of respondent’s 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 Finance booked the amounts received as money market placements, and accordingly issued PNs No. 4952 and 4962, for the amounts of P500,000.00 and P600,000.00, respectively, payable to respondent’s savings account with petitioner Citibank, S/A No. 25-13703-4, upon their maturity on 1 June 1977. Once again, respondent rolled-over several times the
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25-13703-4, upon their maturity on 1 June 1977. Once again, respondent rolled-over several times the principal amounts of her money market placements with petitioner FNCB Finance, as follows – Date Cancels Maturity Date Amount Interest (mm/dd/yyyy) PN No. PN No. (mm/dd/yyyy) (P) (p.a.) 04/29/1977 4952 None 06/01/1977 500,000.00 17% 4962 None 06/01/1977 600,000.00 17%

06/02/1977 5757 4952 08/31/1977 500,000.00 17% 5758 4962 08/31/1977 500,000.00 17%
08/31/1977 8167 5757 08/25/1978 500,000.00 14% 8169 5752 08/25/1978 500,000.00 14% As presented by the petitioner FNCB Finance, respondent rolled-over only the principal amounts of her 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 P600,000.00, matured on 1 June 1977, respondent received a partial payment of the principal which, together with the interest, amounted to P102,633.33;[44] thus, only the amount of P500,000.00 from PN No. 4962 was rolled-over to PN No. 5758. 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. 8167[45] expressly canceled and superseded PN No. 5757, while PN No. 8169[46] also explicitly canceled and superseded PN No. 5758. Thus, it is patently erroneous for the Court of Appeals to still award to respondent the principal amounts and interests covered by PNs No. 5757 and 5758 when these were already canceled and superseded. It is now incumbent upon this Court to determine what subsequently happened to PNs No. 8167 and 8169.

Petitioner FNCB Finance presented four checks as proof of payment of the principal amounts and interests of PNs No. 8167 and 8169 upon their maturity. All the checks were payable to respondent’s savings account with petitioner Citibank, with the following details –
Date of Issuance Check Amount (mm/dd/yyyy) No. (P) Notation

09/01/1978
09/01/1978

76962 12,833.34 Interest payment on PN#08167
76961 12,833.34 Interest payment on PN#08169

09/05/1978

77035 500,000.00 Full payment of principal on PN#08167 which is hereby cancelled 77034 500,000.00 Full payment of principal on PN#08169 which is hereby cancelled

09/05/1978

Then again, Checks No. 77035 and 77034 were later returned to petitioner FNCB Finance together with a memo,[47] dated 6 September 1978, from Mr. Tan of petitioner Citibank, to a Mr. Bobby Mendoza of petitioner FNCB Finance. According to the memo, the two checks, in the total amount of P1,000,000.00, were to be returned to respondent’s account with instructions to book the said amount in money market placements for one more year. Pursuant to the said memo, Checks No. 77035 and 77034 were invested by petitioner FNCB Finance, on behalf of respondent, in money market placements for which it issued PNs No. 20138 and 20139. The PNs each covered P500,000.00, to earn 11% interest per annum, and to mature on 3 September 1979.
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and to mature on 3 September 1979.

On 3 September 1979, petitioner FNCB Finance issued Check No. 100168, pay to the order of “Citibank N.A. A/C Modesta Sabeniano,” in the amount of P1,022,916.66, as full payment of the principal amounts and interests of both PNs No. 20138 and 20139 and, resultantly, canceling the said PNs.[48] Respondent actually admitted the issuance and existence of Check No. 100168, but with the qualification that the proceeds thereof were turned over to petitioner Citibank.[49] Respondent did not clarify the circumstances attending the supposed turn over, but on the basis of the allegations of petitioner Citibank itself, the proceeds of PNs No. 20138 and 20139, amounting to P1,022,916.66, 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 PNs No. 20138 and 20139 shall be dependent on the resolution of the issues raised as to the existence of the loans and the authority of petitioner Citibank to use the proceeds of the said PNs, together with respondent’s other deposits and money market placements, to pay for the same.
Savings and current accounts with petitioner Citibank Respondent presented and submitted before the RTC deposit slips and bank statements to prove deposits made to several of her accounts with petitioner Citibank, particularly, Accounts No. 00484202, 59091, and 472-751, which would have amounted to a total of P3,812,712.32, had there been no withdrawals or debits from the said accounts from the time the said deposits were made. Although the RTC and the Court of Appeals did not make any definitive findings as to the status of respondent’s savings and current accounts with petitioner Citibank, the Decisions of both the trial and appellate courts effectively recognized only the P31,079.14 coming from respondent’s savings account which was used to off-set her alleged outstanding loans with petitioner Citibank.[50] Since both the RTC and the Court of Appeals had consistently recognized only the P31,079.14 of respondent’s savings account with petitioner Citibank, and that respondent failed to move for reconsideration or to appeal this particular finding of fact by the trial and appellate courts, it is already binding upon this 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 P31,079.14 should the off-set thereof by petitioner Citibank against her supposed loans be found invalid. Dollar accounts with Citibank-Geneva

Respondent made an effort of preparing and presenting before the RTC her own computations of her money 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 US$1,336,638.65.[52] However, respondent herself also submitted as part of her formal offer of evidence the computation of her money market placements and dollar accounts with CitibankGeneva as determined by the latter.[53] Citibank-Geneva accounted for respondent’s money market placements and dollar accounts as follows –

MODESTA SABENIANO &/OR
=== == = == = == == = == ==

US$ 30’000.-- Principal Fid. Placement + US$ 339.06 Interest at 3,875% p.a. from 12.07. – 25.10.79 - US$ 95.-Commission (minimum)
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from 12.07. – 25.10.79 - US$ 95.-Commission (minimum) ---------------US$ 30’244.06 Total proceeds on 25.10.1979

US$ 114’000.-- Principal Fid. Placement + US$ 1’358.50 Interest at 4,125% p.a. from 12.07. – 25.10.79 - US$ 41.17 Commission ---------------US$ 115’317.33 Total proceeds on 25.10.1979

US$ 145’561.39 Total proceeds of both placements on 25.10.1979 + US$ 11’381.31 total of both current accounts --------------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) US$ 7’309.71 Balance in current accounts

- US$ 6’998.84 Transfer to Citibank Zuerich – ac no. 121359 on March 13, 1980

US$ 310.87

various charges including closing charges

According to the foregoing computation, by 25 October 1979, respondent had a total of US$156,942.70, from which, US$149,632.99 was transferred by Citibank-Geneva to petitioner Citibank in Manila, and was used by the latter to off-set respondent’s outstanding loans. The balance of respondent’s accounts with 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 US$310.87. Rightly so, both the RTC and the Court of Appeals gave more credence to the computation of 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 off-set thereof by petitioner Citibank against her alleged outstanding loans be found invalid. Respondent 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 accounts with Citibank-Geneva is concerned.

III
Petitioner Citibank was able to establish by preponderance of evidence the existence of respondent’s loans. Petitioners’ version of events In sum, the following amounts were used by petitioner Citibank to liquidate respondent’s purported outstanding loans –

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Description

Amount

Principal and interests of PNs No. 20138 and 20139

(money market placements with petitioner FNCB Finance) P 1,022,916.66 Savings account with petitioner Citibank

31,079.14

Dollar remittance from Citibank-Geneva (peso equivalent Of US$149,632.99)

1,102,944.78

Total P 2,156,940.58

According to petitioner Citibank, respondent incurred her loans under the circumstances narrated below. As early as 9 February 1978, respondent obtained her first loan from petitioner Citibank in the principal amount of P200,000.00, 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 rolledover or renewed. Significant to the Petition at bar are the loans which respondent obtained from July 1978 to January 1979, appropriately covered by PNs (first set).[55] The aggregate principal amount of these loans was P1,920,000.00, which could be broken down as follows – PN No. Date of Issuance (mm/dd/yyyy)
32935 33751 33798 34025 07/20/1978 10/13/1978 10/19/1978 11/15/1978

Date of Maturity Principal Date of Release MC No. (mm/dd/yyyy) Amount (mm/dd/yyyy)
09/18/1978 12/12/1978 11/03/1978 01/15/1979 P 400,000.00 100,000.00 100,000.00 150,000.00 07/20/1978 220701

Unrecovered 10/19/1978 11/16/1978 226285 226439

34079
34192

11/21/1978
12/04/1978

01/19/1979
01/18/1979

250,000.00
100,000.00

11/21/1978
12/05/1978

226467
228057

34402
34534 34609 34740

12/26/1978
01/09/1979 01/17/1979 01/30/1979

02/23/1979
03/09/1979 03/19/1979 03/30/1979

300,000.00
150,000.00 150,000.00 220,000.00

12/26/1978
01/09/1979 01/17/1979 01/30/1979

228203
228270 228357 228400

Total P 1,920,000.00

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Total P 1,920,000.00 When respondent was unable to pay the first set of PNs upon their maturity, these were rolled-over or renewed several times, necessitating the execution by respondent of new PNs in favor of petitioner Citibank. As of 5 April 1979, respondent had the following outstanding PNs (second set),[56] the principal amount of which remained at P1,920,000.00 –

PN No. Date of Issuance Date of Maturity (mm/dd/yyyy) (mm/dd/yyyy) Principal Amount 34510 34509 34534 01/01/1979 01/02/1979 01/09/1979 03/02/1979 03/02/1979 03/09/1979 P 400,000.00 100,000.00 150,000.00

34612
34741

01/19/1979
01/26/1979

03/16/1979
03/12/1979

150,000.00
100,000.00

35689
35694 35695 356946 35697

02/23/1979
03/19/1979 03/19/1979 03/20/1979 03/30/1979

05/29/1979
05/29/1979 05/29/1979 05/29/1979 05/29/1979

300,000.00
150,000.00 100,000.00 250,000.00 220,000.00

Total

P 1,920,000.00

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 Assignment[57] 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 P500,000.00. 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 P500,000.00. 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 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 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 P500,000.00 per Deed.

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 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
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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 officer, bore the date 24 September 1979.[61] When respondent failed to pay the second set of PNs upon their maturity, an exchange of letters ensued between respondent and/or her representatives, on one hand, and the representatives of petitioners, on the other. The first letter[62] was dated 5 April 1979, addressed to respondent and signed by Mr. Tan, as the manager of petitioner Citibank, which stated, in part, that – Despite our repeated requests and follow-up, we regret you have not granted us with any response or payment. We, therefore, have no alternative but to call your loan of P1,920,000.00 plus interests and other charges due and demandable. If you still fail to settle this obligation by 4/27/79, we shall have no other alternative but to refer your account to our lawyers for legal action to protect the interest of the bank. Respondent sent a reply letter[63] dated 26 April 1979, printed on paper bearing the letterhead of respondent’s company, MC Adore International Palace, the body of which reads – This is in reply to your letter dated April 5, 1979 inviting my attention to my loan which has 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. Please accept our Comtrust Check in the amount of P62,683.33. 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 P11-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 letter[64] to petitioner Citibank, on behalf of respondent. The letter was again printed on paper bearing the 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 P1,920,000.00 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 P62,683.33 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
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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 P500,000.00 & PN No. 20139 for P500,000.00 totalling P1 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 letter[67] 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 P2,123,843.20, 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 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) P 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 P 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 P1,069,847.40, 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 P1,920,000.00 loan account supposedly of MC Adore
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MC Adore International Palace, as regards the P1,920,000.00 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 Certification[70] 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 P1,150,000.00, and she had already paid them. She secured from petitioner Citibank two loans of P500,000.00 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 P500,744.00 and P500,000.00, respectively, for “liquidation of loan.” She borrowed another P150,000.00 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 P150,000.00 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
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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 P150,000.00, 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 P400,000.00, covered by PN No. 33935) and No. 226467 (for the loan of P250,000.00, 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 P11=M (sic) loan for MC Adore Palace Hotel is approved by DBP.”*77+ 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 P1,920,000.00 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
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or indorser’s account.*80+ The effect of crossing a check was described by this Court in Philippine Commercial International Bank v. Court of Appeals[81] – *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 P150,000.00, respondent only received P146,312.50, 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
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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 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 P500,000.00 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
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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 checks*95+ 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 P500,000.00 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 P500,000.00; 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 P500,000.00 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 – P145,000.00, P145,000.00 and P242,000.00 – totaled P532,000.00, and was obviously in excess of the P500,000.00 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
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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 P500,744.00 and P500,000.00, respectively. While these provisional receipts did state that Mr. Tan, on 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 P150,000.00.[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
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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 one. It is regrettable, however, that she was unable to substantiate the same. Yet again, 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 herself and were, thus, self-serving. Equally self-serving was respondent’s letter, written on 7 October 1985, or more than six years after the execution of the second set of PNs, in which she demanded return of the simulated or fictitious PNs, together with the letters relating thereto, which Mr. Tan purportedly asked her to execute. Respondent further failed to present any proof of her alleged loan application with the DBP, and of any circumstance or correspondence wherein the simulated or fictitious PNs were indeed used for their supposed purpose.

In contrast, petitioner Citibank, as supported by the testimonies of its officers and available documentation, consistently treated the said PNs as regular loans – accepted, approved, and paid in the ordinary course of its business. The PNs executed by the respondent in favor of petitioner Citibank to cover her loans were duly-filled out and signed, including the disclosure statement found at the back of the said PNs, in adherence to the Central Bank requirement to disclose the full finance charges to a loan granted to borrowers.
Mr. Tan, then an account officer with the Marketing Department of petitioner Citibank, testified that he dealt directly with respondent; he facilitated the loans; and the PNs, at least in the second set, were signed by respondent in his presence.[105] 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+

Ms. Cristina Dondoyano, who worked at petitioner Citibank as a loan processor, was responsible for booking 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 a loan booking checklist, together with the borrowing client’s PNs and other supporting documents, to the loan pre-processor, who will check whether the details in the loan booking checklist are the same as those in the PNs. The documents are then sent to Signature Control for verification of the client’s signature in the PNs, after which, they are returned to the loan pre processor, to be forwarded finally to the loan processor. 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 loans personally, Ms. Dondoyano testified that she saw the original PNs. In 1986, Atty. Fernandez of petitioner Citibank requested her to prepare an accounting of respondent’s loans, which she did, and which was presented as Exhibit “120” for the petitioners. The figures from the said exhibit were culled from the bookings in the General Ledger, a
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petitioners. The figures from the said exhibit were culled from the bookings in the General Ledger, a fact which respondent’s counsel was even willing to stipulate.*107+ Ms. Teresita Glorioso was an Investigation and Reconcilement Clerk at the Control Department of petitioner 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, 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 random comparison of the contents of the microfilms with the original documents; a random review of the contents is done on every role of microfilm.[108] Ms. Renee Rubio worked for petitioner Citibank for 20 years. She rose from the ranks, initially working as a secretary in the Personnel Group; then as a secretary to the Personnel Group Head; a Service Assistant with the Marketing Group, in 1972 to 1974, dealing directly with corporate and individual clients who, among other things, secured loans from petitioner Citibank; the Head of the Collection Group of the Foreign Department in 1974 to 1976; the Head of the Money Transfer Unit in 1976 to 1978; the Head of the Loans and Placements Unit up to the early 1980s; and, thereafter, she established operations training for petitioner 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 marketing person submits a proposal to grant a loan to an individual or corporation. Petitioner Citibank has a worldwide policy that requires a credit committee, composed of a minimum of three people, which would 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 signatures therein against those appearing in the signature cards previously submitted by the client to the bank. The Operations Unit will check and review the documents, including the PNs, if it is a clean loan, and 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 are paid or rolledover, they are returned to the client.[109] Ms. Rubio further explained that she was familiar with respondent’s accounts since, while she was still the Head of the Loan and Placements Unit, she was 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+ 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 money. In consideration of the foregoing discussion, this Court finds that the preponderance of evidence supports the existence of the respondent’s loans, in the principal sum of P1,920,000.00, as of 5 September 1979. While it is well-settled that the term “preponderance of evidence” should not be wholly dependent on the number of witnesses, there are certain instances when the number of witnesses become the determining factor – The preponderance of evidence may be determined, under certain conditions, by the number of witnesses testifying to a particular fact or state of facts. For instance, one or two witnesses may testify to a given state of facts, and six or seven witnesses of equal candor, fairness, intelligence, and
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to a given state of facts, and six or seven witnesses of equal candor, fairness, intelligence, and truthfulness, and equally well corroborated by all the remaining evidence, who have no greater 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. Rep., 761.)[112] Best evidence rule
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:

“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

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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.
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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 Decision[119] 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 P7,000,000.00, secured to the extent of P5,000,000.00 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 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
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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.

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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 offset of respondent’s outstanding loans with her deposit account, amounting to P31,079.14. 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 P1,022,916.66, 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.

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.
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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 documents*125+ 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 rolledover 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:

xxx x
2. In the event the OBLIGATIONS are not paid at maturity or upon demand, as the case may be, the ASSIGNEE is fully authorized and empowered to collect and receive the PLACEMENT (or so much thereof as may be necessary) and apply the same in payment of the OBLIGATIONS. Furthermore, the ASSIGNOR agrees that at any time, and from time to time, upon request by the ASSIGNEE, the ASSIGNOR will promptly execute and deliver any and all such further instruments and documents as may be necessary to effectuate this Assignment. xxx x

This Assignment shall be considered as sufficient authority to FNCB Finance to pay and deliver the
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This Assignment shall be considered as sufficient authority to FNCB Finance to pay and deliver the PLACEMENT or so much thereof as may be necessary to liquidate the OBLIGATIONS, to the ASSIGNEE in accordance with terms and provisions hereof.[130] Petitioner Citibank was only acting upon the authority granted to it under the foregoing Deeds when it finally used the proceeds of PNs No. 20138 and 20139, paid by petitioner FNCB Finance, to partly pay for respondent’s outstanding loans. Strictly speaking, it did not effect a legal compensation or off -set under Article 1278 of the Civil Code, but rather, it partly extinguished respondent’s obligations through the application of the security given by the respondent for her loans. Although the pertinent documents were entitled Deeds of Assignment, they were, in reality, more of a pledge by respondent to petitioner Citibank of her credit due from petitioner FNCB Finance by virtue of her money market placements with the latter. According to Article 2118 of the Civil Code – 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 deliver the surplus, should there be any, to the pledgor. PNs No. 20138 and 20139 matured on 3 September 1979, without them being redeemed by respondent, so that petitioner Citibank collected from petitioner FNCB Finance the proceeds thereof, which included the principal amounts and interests earned by the money market placements, amounting to P1,022,916.66, 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 P1,069,847.40. 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 irregular.

First of all, it escapes this Court why petitioner Citibank took care to have the Deeds of Assignment of the PNs notarized, yet left the Declaration of Pledge unnotarized. This Court would think that petitioner Citibank would take greater cautionary measures with the preparation and execution of the Declaration of Pledge because it involved respondent’s “all present and future fiduciary placements” with a Citibank branch in another country, specifically, in Geneva, Switzerland. While there is no express legal requirement that the Declaration of Pledge had to be notarized to be effective, even so, it could not enjoy the same prima 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. Second, petitioner Citibank was unable to establish the date when the Declaration of Pledge was actually executed. The photocopy of the Declaration of Pledge submitted by petitioner Citibank before the RTC was undated.[132] It presented only a photocopy of the pledge because it already forwarded the original copy 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
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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 her passport and plane tickets to prove that she was out of the country on the said date and could not have signed the pledge. Petitioner Citibank insisted that the pledge was signed before 24 September 1979, but could not provide an explanation as to how and why the said date was written on the pledge. Although Mr. Tan testified that the Declaration of Pledge was signed by respondent personally before him, he could not give the exact date when the said signing took place. It is important to note that the copy of the Declaration of Pledge submitted by the respondent to the RTC was certified by an officer of Citibank-Geneva, which had possession of the original copy of the pledge. It is dated 24 September 1979, and this Court shall abide by 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. Third, the Declaration of Pledge was irregularly filled-out. The pledge was in a standard printed form. It was 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 wit –

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 –
Basic is the rule of evidence that when the subject of inquiry is the contents of a document, no evidence is admissible other than the original document itself except in the instances mentioned in Section 3, Rule 130 of the Revised Rules of Court. Mere photocopies of documents are inadmissible pursuant to the best evidence rule. This is especially true when the issue is that of forgery. As a rule, forgery cannot be presumed and must be proved by clear, positive and convincing evidence and the burden of proof lies on the party alleging forgery. The best evidence of a forged signature in an instrument is the instrument itself reflecting the alleged forged signature. The fact of forgery can only be established by a comparison between the alleged forged signature and the authentic and genuine signature of the person whose signature is theorized upon to have been 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] Respondent made several attempts to have the original copy of the pledge produced before the RTC so as to have it examined by experts. Yet, despite several Orders by the RTC,[136] petitioner Citibank failed to comply 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
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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 respondent, the former had more influence and resources to convince CitibankGeneva 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 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 photocopy of the Declaration of Pledge in lieu of the original, and the photocopy of the pledge presented by petitioner Citibank has nil probative value.[137] In addition, even if this Court cannot make a categorical finding 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] Without the Declaration of Pledge, petitioner Citibank had no authority to demand the remittance of respondent’s dollar accounts with Citibank-Geneva and to apply them to her outstanding loans. It cannot effect legal compensation under Article 1278 of the Civil Code since, petitioner Citibank itself admitted that 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 P1,069,847.40. V The parties shall be liable for interests on their monetary obligations to each other, as determined herein. In summary, petitioner Citibank is ordered by this Court to pay respondent the proceeds of her money market placements, represented by PNs No. 23356 and 23357, amounting to P318,897.34 and P203,150.00, respectively, earning an interest of 14.5% per annum as stipulated in the PNs,[139] beginning 17 March 1977, the date of the placements.
Petitioner Citibank is also ordered to refund to respondent the amount of US$149,632.99, or its equivalent in Philippine currency, which had been remitted from her Citibank-Geneva accounts. These dollar accounts, consisting of two fiduciary placements and current accounts with Citibank-Geneva shall continue earning their respective stipulated interests from 26 October 1979, the date of their remittance by Citibank-Geneva to petitioner Citibank in Manila and applied against respondent’s outstanding loans. As for respondent, she is ordered to pay petitioner Citibank the balance of her outstanding loans, which amounted to P1,069,847.40 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 using respondent’s dollar accounts from Citibank-Geneva is deemed illegal, null and void, and, thus, ineffective. VI Petitioner Citibank shall be liable for damages to respondent. Petitioners protest the award by the Court of Appeals of moral damages, exemplary damages, and
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Petitioners protest the award by the Court of Appeals of moral damages, exemplary damages, and attorney’s fees in favor of respondent. They argued that the RTC did not award any damages, and respondent, in her appeal before the Court of Appeals, did not raise in issue the absence of such. 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 consideration thereof is necessary in arriving at a just decision of the case, and there is a close inter-relation between the omitted assignment of error and those actually assigned and discussed by the 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 testimony[144] 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 A What is the business of that Disto Company Ltd.? 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?
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Q A Q A Q A

How about any political affiliation or government position held if any? I was also a candidate for Mayo last January 30, 1980. Where? In Dagupan City, Pangasinan. What else? 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 A Now, do these things also affect your social and civic activities? 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 P300,000.00, 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 P250,000.00, in accordance with Article 2229[146] and 2234[147] of the Civil Code.
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 P200,000.00 attorney’s fees shall be satisfactory. In contrast, this Court finds no sufficient basis to award damages to petitioners. 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,
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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 (P318,897.34) and Two Hundred Three Thousand One Hundred Fifty Pesos (P203,150.00), 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 (P300,000.00); exemplary damages in the amount of Two Hundred Fifty Thousand Pesos (P250,000.00); and attorney’s fees in the amount of Two Hundred Thousand Pesos (P200,000.00); 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 (P1,069,847.40), 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. MINITA V. CHICO-NAZARIO Associate Justice

WE CONCUR: ARTEMIO V. PANGANIBAN Chief Justice Chairperson

CONSUELO YNARES-SANTIAGO Associate Justice
MA. ALICIA AUSTRIA-MARTINEZ Associate Justice ROMEO J. CALLEJO, SR. Associate Justice

CE R T I F I C AT I O N Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.
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opinion of the Court’s Division. ARTEMIO V. PANGANIBAN Chief Justice

[1]

Rollo, pp. 165-325.

[2] Penned by Associate Justice Andres B. Reyes, Jr. with Associate Justices Conrado M. Vasquez, Jr. and Amelita G. Tolentino, concurring; id. at 327-366. [3] [4] [5] [6] [7] [8] Id. at 368-374. TSN, Deposition of Mr. Francisco Tan, 3 September 1990, pp. 9-10. Records, Vol. I, pp. 1-8. Id. at 148-157. Id. at 40-51. Id. at 208-227.

[9] 346.
[10]

Order, dated 11 December 1985, penned by Judge Ansberto P. Paredes, Records, Vol. I, p.

Penned by Judge Manuel D. Victorio, Records, Vol. III, pp. 1607-1621.

[11] Civil Case No. 11336 was raffled and re-reffled to four different Judges of the Makati RTC before it was finally resolved. It was originally raffled to Makati RTC, Branch 140, presided by Judge Ansberto P. Paredes. On 4 February 1987, before the termination of the re-direct examination of herein respondent (plaintiff before the RTC), the case was transferred to Makati RTC, Branch 57, presided by Judge Francisco X. Velez, for reasons not disclosed in the Records. Judge Velez was able to try and hear the case until the presentation of the evidence by herein petitioners (defendants before the RTC). Respondent again took the stand to present rebuttal evidence, but even before she could finish her testimony, Judge Velez inhibited himself upon petitioners’ motion (Order, dated 10 April 1992, penned by Judge Francisco X. Velez, Records, Vol. 11, p. 1085). The case was transferred to Makati RTC, Branch 141, presided by Judge Marcelino F. Bautista, Jr. For reasons not disclosed in the Records, Judge Manuel D. Victorio took over Makati RTC, Branch 141. After the parties submitted their respective Memoranda, Judge Victorio declared the case submitted for decision (Order, dated 9 December 1994, penned by Judge Manuel D. Victorio, Records, Vol. III, p. 1602). Judge Victorio rendered his Decision in Civil Case No. 11336 on 24 August 1995 (Records, Vol. III, pp. 1607-1621). [12] [13] Rollo, pp. 365-366. Rollo of G.R. No. 152985, pp. 3-4.

[14] The filing of a motion for extension does not automatically suspend the running of the period for appeal, since the purpose of such motion is to merely ask the court to grant an enlargement of the time fixed by law. The movant, therefore, has no right to assume that his motion would be granted, and should check with the court as to the outcome of his motion, so that if the same is denied, he can still perfect his appeal. (Hon. Bello and Ferrer v. Fernando, 114 Phil. 101, 104 [1962].) [15] Rollo of G.R. No. 156132, p. 1227.

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[16] [17]

Rollo, p. 374. Resolution, dated 29 January 2003; rollo, pp. 980-A-B.

[18]

Resolution, dated 23 June 2003; id. at 1311-1312.

[19] Firestone Tire and Rubber Company of the Philippines v. Tempongko, 137 Phil. 239, 244 (1969); Singh v. Liberty Insurance Corp., 118 Phil. 532, 535 (1963). [20] Rollo, pp. 1443-1445.

[21] See the case of Borromeo v. Court of Appeals (162 Phil. 430, 438 [1976]) wherein this Court pronounced that a party’s right to appeal shall not be affected by the perfection of another appeal from the same decision; otherwise, it would lead to the absurd proposition that one party may be deprived of the right to appeal from the portion of a decision against him just because the other party who had been notified of the decision ahead had already perfected his appeal in so far as the said decision adversely affects him. If the perfection of an appeal by one party would not bar the right of the other party to appeal from the same decision, then an unperfected appeal, as in the case at bar, would have far less effect. [22] The Executive Secretary v. Gordon, 359 Phil. 266, 271 (1998).

[23]
[24]

Young v. John Keng Seng, 446 Phil. 823, 833 (2003).
Sps. Sta. Maria v. Court of Appeals, 349 Phil. 275, 282-283 (1998).

*25+ The Court of Appeals modified the trial court’s findings and conclusions, as follows: (1) By declaring the P1,069,847.40 alleged indebtedness of Ms. Sabeniano as non-existing for failure of Citibank to substantiate its allegations; (2) By declaring that there are unpaid money market placements, current accounts and savings account of Ms. Sabeniano; and (3) The awarding of damages in favor of Ms. Sabeniano and against Citibank.

[26]
[27]

Supra note 11.
Records, Vol. III, pp. 1612-1613.

[28] Penned by Associate Justice Andres B. Reyes with Associate Justices Conrado M. Vasquez, Jr. and Amelita G. Tolentino, concurring; rollo, p. 344.
[29] Section 3(m) of Rule 131 of the Revised Rules of Court reads –

SEC. 3. Disputable presumptions. – The following presumptions are satisfactory if uncontradicted, but may be contradicted and overcome by other evidence: xxx x (m) That official duty has been regularly performed. [30] 317 Phil. 495, 501-503 (1995).

[31]
[32]

Records, Vol. I, p. 515.
32 Phil. 476, 478-479.

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[32] [33] [34]

32 Phil. 476, 478-479. Behn, Meyer & Co. v. Rosatzin, 5 Phil. 660, 662 (1906). Jimenez v. National Labor Relations Commission, 326 Phil. 89, 95 (1996).

[35] Mr. Herminio Pujeda, at the time he testified before the RTC in 1990, was already the Vice President of petitioner Citibank.
[36] Mr. Francisco Tan, at the time of his deposition in 1990, was already working as Assistant General Manager for Dai-Chi Kangyo Bank in Hong Kong. [37] [38] [39] *40+ *41+ *42+ TSN, 12 March 1990, pp. 6-10. Lichauco v. Atlantic Gulf & Pacific Co., 84 Phil. 330, 346 (1949). TSN, 6 February 1990, Vol. V, pp. 16-24. Exhibit “37,” defendants’ folder of exhibits, p. 106. Exhibit “37-C,” id. at 107. Exhibit “37-F,” id. at 108.

[43]
*44+

TSN, 12 March 1990, p. 13.
Exhibit “104-C,” defendants’ folder of exhibits, p. 111.

*45+
*46+ *47+ *48+ [49] *50+ *51+

Exhibit “105,” id. at 112.
Exhibit “106,” id. at 114. Exhibit “108,” id. at 118. Exhibits “112” and “119,” id. at 121-A, 124. Records, Vol. III, p. 1367. Exhibit “34-B,” petitioners’ folder of exhibits, p. 102. Exhibit “G,” plaintiff’s folder of exhibits, pp. 4-15.

[52]
*53+

Records, Vol. III, p. 1,562.
Exhibit “J,” plaintiff’s folder of exhibits, p. 49.

*54+
*55+ *56+ *57+ *58+

Exhibit “120-H,” defendants’ folder of exhibits, pp. 131.
Exhibits “1” to “9,” id. at 44-52. Exhibits “18” to “26,” id. at 83-92. Exhibit “13-E,” id. at 65-67. Exhibit “14-G,” id. at 72-74.

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*59+ *60+ *61+ *62+

Exhibit “15” and “Exhibit 17-D,” id. at 77-78, 81-82. Exhibit “38,” id. at 109-110. Exhibit “K-1,” plaintiff’s folder of exhibits, pp. 54-55 Exhibit “27,” defendants’ folder of exhibits, p. 93.

*63+
*64+

Exhibit “28,” id. at 94.
Exhibit “29,” id. at 95.

*65+
*66+ *67+ *68+ *69+

Exhibit “30,” id. at 96.
Exhibit “31,” id. at 97. Exhibit “32,” id. at 98. Exhibits “34-B” and “34-C,” id. at 102-103. Exhibit “34,” id. at 100.

*70+
[71]

Exhibit “121,” id. at 207.
TSN, 14 May 1991, Vol. XI , pp. 12-14.

[72]
*73+ *74+ [75] [76] [77] [78]

TSN, 28 November 1991, Vol. XIII, pp. 5, 15, 23, 28-29.
Exhibit “QQQ,” plaintiff’s folder of exhibits, p. 117. Exhibit “AAAA,” id. at 124. TSN, 28 November 1991, Vol. XIII, pp. 7-8, 23. Id. at 16-23. TSN, 7 May 1986, Vol. II, pp. 42-52; TSN, 19 May 1986, Vol. II, pp. 3-28. Sarmiento v. Court of Appeals, 364 Phil. 613, 621 (1999).

[79] Bank of the Philippine Islands v. Court of Appeals, 383 Phil. 538, 553 (2000), with reference to Tan v. Court of Appeals, 239 Phil. 310, 322 (1994).
[80] [81] Gempesaw v. Court of Appeals, G.R. No. 92244, 9 February 1993, 218 SCRA 682, 695. 403 Phil. 361, 383 (2001).

[82]
[83]

Moran v. Court of Appeals, G.R. No. 105836, 7 March 1994, 230 SCRA 799, 311-312.
Revised Rules of Court, Rule 131, Section 3(p).

[84]
[85]

Id., Rule 131, Section 3(q).
Id., Section 3.
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[85]

Id., Section 3.

*86+
*87+ *88+ [89] [90]

Exhibit “19,” defendants’ folder of exhibits, p. 84.
Exhibits “9-D” and “9-G,” id. at 52. Exhibit “9-F,” id. at 52. TSN, 19 May 1986, Vol. II, p. 10. Associated Bank v. Court of Appeals, G.R. No. 89802, 7 May 1992, 208 SCRA 465, 469-471.

[91] Banco de Oro Savings and Mortgage Bank v Equitable Banking Corporation, G.R. No. 74917, 20 January 1988, 157 SCRA 188, 199. [92] Negotiable Instruments Law, Section 66, in connection with Section 65.

[93] Associated Bank v. Court of Appeals, 322 Phil. 677, 697 (1996); Associated Bank v. Court of Appeals, G.R. No. 89802, 7 May 1992, 208 SCRA 465, 472.

*94+ Plaintiff’s Formal Offer of Documentary Exhibits, records, Vol. I, pp. 504-505; plaintiff’s folder of exhibits, p. 110. *95+
*96+

Exhibits “GGG” and “JJJ,” plaintiff’s folder of exhibits, pp. 109, 113.
Plaintiff’s folder of exhibits, p. 110.

*97+
*98+ [99] [100] *101+ [102] [103]

See the initials on Exhibit “III-1,” plaintiff’s folder of exhibits, p. 112.
Plaintiff’s folder of exhibits, p. 112. TSN, deposition of Mr. Francisco Tan, 3 September 1990, p. 118. G.R. No. 49188, 30 January 1990, 181 SCRA 557, 568. Exhibit “MMM,” plaintiff’s folder of exhibits, p. 115. Records, Vol. I, p. 507. TSN, 28 November 1991, Vol. XIII, pp. 7-8.

[104]
[105]

TSN, deposition of Mr. Francisco Tan, 3 September 1990, p. 96.
TSN, deposition of Mr. Francisco A. Tan, 3 September 1990, pp. 13-16.

[106]
[107] [108] [109] [110]

TSN, 22 May 1990, Vol. V, pp. 31-61.
TSN, 7 March 1991, Vol. IX, pp. 15-19; TSN, 13 March 1991, Vol X, pp. 7-9. TSN, 19 March 1991, Vol. X, pp. 17-21; TSN, 8 April 1991, Vol. X, pp. 31-34. TSN, 18 April 1991, Vol. X, pp. 3-13. Id. at 15-23.

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[110] *111+ [112]

Id. at 15-23. Folder of defendants’ exhibits, pp. 102-103. Municipality of Moncada v. Cajuigan, 21 Phil 184, 190 (1912).

[113]
[114]

J.A.R. Sibal and J.N. Salazar, Jr., Compendium on Evidence 31 (4th ed., 1995).
F.D. Regalado, Remedial Law Compendium, Vol. II, p. 571 (8th ed., 2000).

[115]
[116] [117] [118]

F.D. Regalado, Remedial Law Compendium, Vol. II, 571 (8th ed., 2000).
G.R. Nos. 146710-15, 3 April 2001, 356 SCRA 108, 137-138. TSN, 13 March 1991, Vol X, pp. 7-9. TSN, 22 May 1990, Vol. V, pp. 14-17.

[119] Dr. Ricardo L. Dy and Rosalind O. Dy vs. Citibank, N.A.,CA-G.R. CV No. 15934, 15 January 1990, penned by Associate Justice Nicolas P. Lapeña, Jr. with Associate Justices Santiago M. Kapunan and Emeterio C. Cui, concurring. [120] Revised Rules of Court, Rule 130, Section 34.

[121]
[122]

J.A.R. Sibal and J.N. Salazar, Jr., Compendium on Evidence 199-200 (4th ed., 1995).
Civil Code, Article 1980; Guingona, Jr. v. City Fiscal of Manila, 213 Phil. 516,523-524 (1984).

[123]
[124]

Civil Code, Article 1286.
G.R. No. 57092, 21 January 1993, 217 SCRA 307, 313-314.

[125] Anachuelo v. Intermediate Appellate Court, G.R. No. L-71391, 29 January 1987, 147 SCRA 434, 441-442.

[126]

Antillon v. Barcelon, 37 Phil. 148, 150-151 (1917).

*127+ See Exhibits “13-E, “14-G,” “15- D,”and “17-D,” defendants’ folder of exhibits, pp. 65-67, 72-74, 77-78, 81-82. [128] TSN, 7 March 1991, Vol. IX, pp. 3-6.

[129]

Cuizon v. Court of Appeals, 329 Phil. 456, 482 (1996).

*130+ Exhibits “13-E, “14-G,” “15-D,” and “17-D,” defendants’ folder of exhibits, pp. 65-66, 72-73, 77-78, 81-82. [131] Wildvalley Shipping Co., Ltd. v. Court of Appeals, 396 Phil. 383, 396 (2000).

*132+
*133+

Exhibit “38,” defendants’ folder of exhibits, pp. 109-110.
Exhibit “K-1,” plaintiff’s folder of exhibits, 54-55.

[134]
[135]

Revised Rules of Court, Rule 131, Section 3(u).
Heirs of Severa P. Gregorio v. Court of Appeals, 360 Phil. 753, 763 (1998).
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[135]

Heirs of Severa P. Gregorio v. Court of Appeals, 360 Phil. 753, 763 (1998).

[136] Order, dated 12 November 1985, penned by Judge Ansberto P. Paredes, records, Vol. I, p. 310; Order, dated 2 September 1988, id. at penned by Judge Francisco X. Velez, records, Vol. I, p. 449; Order, dated 24 November 1988, penned by Judge Francisco X. Velez, records, Vol. I, p. 458; Order, dated 25 April 1989, penned by Judge Francisco X. Velez, records, Vol. I, pp. 476-477
[137] Security Bank & Trust Co. v. Triumph Lumber and Construction Corporation, 361 Phil. 463, 477 (1999). [138] Revised Rules of Court, Rule 131, Section 3(e).

[139] The stipulated interest shall apply as indemnity for the damages incurred in the delay of payment as provided in Article 2209 of the Civil Code which reads – ART. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of a stipulation, the legal interest, which is six percent per annum. [Emphasis supplied.] Note, however, that the legal interest has been increased from six percent to twelve percent per annum by virtue of Central Bank Circulars No. 416, dated 29 July 1974, and No. 905, dated 10 December 1982. [140] Radio Communications of the Philippines, Inc. v. National Labor Relations Commission, G.R. Nos. 101181-84, 22 June 1992, 210 SCRA 222, 226-227; Ortigas, Jr. v. Lufthansa German Airlines, G.R. No. L-28773, 30 June 1975, 64 SCRA 610, 633-634; Hernandez v. Andal, 78 Phil. 196, 209-210 (1947). [141] The General Banking Law of 2000, Section 2.

[142]

Philippine National Bank v. Court of Appeals, 373 Phil. 942, 948 (1999).

[143] Simex International (Manila), Inc, vs. Court of Appeals, G.R. No. 88013, 19 March 1990, 183 SCRA 360, 367; Bank of Philippine Islands vs. Intermediate Appellate Court, G.R. No. 69162, 21 February 1992, 206 SCRA 408, 412-413. [144] TSN, 28 January 1986, Vol. I, pp. 5-7.

[145] Tiongco v. Atty. Deguma, 375 Phil. 978, 994-995 (1999); Zenith Insurance Corporation v. Court of Appeals, G.R. No. 85296, 14 May 1990, 185 SCRA 398, 402-403.

[146] 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. [147] While the amount of exemplary damages need not be proved, the plaintiff must show that he is entitled to moral, temperate or compensatory damages before the court may consider the question of whether or not exemplary damages should be awarded. x x x [148]
[149]

Civil Code, Article 2208(1).
Ching Sen Ben vs. Court of Appeals, 373 Phil. 544, 555 (1999).

[150] ABS-CBN Broadcasting Corporation v. Court of Appeals, 361 Phil. 498, 531-532 (1999); Tierra International Construction Corp. v. National Labor Relations Commission, G.R. No. 88912, 3 July 1992, 211 SCRA 73, 81; Saba v. Court of Appeals, G.R. No. 77950, 24 August 1990, 189 SCRA 50, 55.

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Digest: Citibank vs. Sabeniano
Saturday, July 11, 2009 12:09 PM

Citibank vs Sabeniano Date: October 12 2006 Petitioner: Citibank and Investors’ Finance Corporation (under the name and style FNCB Finance) Respondent: Modesta Sabeniano Ponente: Chico Nazario Facts: Modesta Sabeniano was a client of both Citibank and FNCB Finance. Sabeniano filed a complaint against petitioners claiming that she made substantial deposits and money market placements with petitioners. The proceeds were supposedly deposited automatically to Sabeniano’s account with Citibank. However, petitioners refused to return her deposits despite her repeated demands. Hence, this present action. Petitioners, however, claimed that Sabeniano obtained several loans from Citibank. When Sabeniano failed to pay, Citibank exercisted its right to off set Sabeniano’s outstanding loans with her deposits and money market placements pursuant to the Declaration of Pledge and the Deeds of Assignment executed by Sabeniano. The lower court declared the compensation illegal and ordered Citibank to refund the amount of US $149,632.99 to Sabeniano. Sabeniano was also declared indebted to Citibank in the amount of P1,069,847.40. The CA affirmed. Upon MR, the CA deleted the portion where it ordered petitioners to return to Sabeniano the proceeds of her money market placement with AIDC. Issue: As to the money market placements Ratio: This Court is tasked to determine whether petitioners are indeed liable to return the foregoing amounts, together with the appropriate interests and penalties, to respondent. Money market placements with petitioner Citibank The history of respondent's money market placements with petitioner Citibank began on 6 December 1976, when she made a placement of P500,000.00 as principal amount, which was supposed to earn an interest of 16% p.a. and for which PN No. 20773 was issued. Respondent did not yet claim the proceeds of her placement and, instead, rolled-over or re-invested the principal and proceeds several times in the succeeding years for which new PNs were issued by Citibank to replace the ones which matured. 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 genuineness and due execution of the said PNs, but qualified that they were no longer outstanding. Since the genuineness and due execution of PNs No. 23356 and 23357 are uncontested, respondent was able to establish prima facie that Citibank is liable to her for the amounts stated. Reviewing the evidence, the SC found that Citibank failed to satisfactorily 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 Citibank. 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, 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. 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 P1,100,000.00, 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 FNCB Finance According to petitioners, respondent's TD Accounts No. 17783 and 17784, in the total amount of

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According to petitioners, respondent's TD Accounts No. 17783 and 17784, in the total amount of P1,100,000.00, were supposed to mature on 15 March 1978. However, respondent, through a letter, preterminated the said TD accounts and transferred all the proceeds thereof to FNCB Finance for money market placement. Pursuant to her instructions, TD Accounts No. 17783 and 17784 were pre-terminated and Citibank issued Manager's Checks (MC) No. 19925341 and 19925142 for the amounts of P500,000.00 and P600,00.00, respectively. Both MCs were payable to Citifinance, 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." These phrases purportedly established that the MCs were paid from the proceeds of respondent's pre-terminated TD accounts with Citibank. Upon receipt of the MCs, 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 Finance booked the amounts received as money market placements, and accordingly issued PNs No. 4952 and 4962, for the amounts of P500,000.00 and P600,000.00, respectively, payable to respondent's savings account with petitioner Citibank, S/A No. 25-13703-4, upon their maturity on 1 June 1977. Once again, respondent rolled-over several times the principal amounts of her money market placements with petitioner FNCB Finance. As presented by the petitioner FNCB Finance, respondent rolled-over only the principal amounts of her 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 P600,000.00, matured on 1 June 1977, respondent received a partial payment of the principal which, together with the interest, amounted to P102,633.33;44 thus, only the amount of P500,000.00 from PN No. 4962 was rolled -over to PN No. 5758. 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 No. 5757, while PN No. 816946 also explicitly canceled and superseded PN No. 5758. Thus, it is patently erroneous for the Court of Appeals to still award to respondent the principal amounts and interests covered by PNs No. 5757 and 5758 when these were already canceled and superseded. It is now incumbent upon this Court to determine what subsequently happened to PNs No. 8167 and 8169. Petitioner FNCB Finance presented four checks as proof of payment of the principal amounts and interests of PNs No. 8167 and 8169. Then again, Checks No. 77035 and 77034 were later returned to FNCB Finance together with a memo. According to the memo, the two checks, in the total amount of P1,000,000.00, were to be returned to respondent's account with instructions to book the said amount in money market placements for one more year. On 3 September 1979, petitioner FNCB Finance issued Check No. 100168, pay to the order of "Citibank N.A. A/C Modesta Sabeniano," in the amount of P1,022,916.66, as full payment of the principal amounts and interests of both PNs No. 20138 and 20139 and, resultantly, canceling the said PNs. Respondent actually admitted the issuance and existence of Check No. 100168, but with the qualification that the proceeds thereof were turned over to Citibank. Respondent did not clarify the circumstances attending the supposed turn over, but on the basis of the allegations of petitioner Citibank itself, the proceeds of PNs No. 20138 and 20139, amounting to P1,022,916.66, 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 PNs No. 20138 and 20139 shall be dependent on the resolution of the issues raised as to the existence of the loans and the authority of petitioner Citibank to use the proceeds of the said PNs, together with respondent's other deposits and money market placements, to pay for the same. Savings and current accounts with petitioner Citibank Respondent presented and submitted before the RTC deposit slips and bank statements to prove deposits made to several of her accounts with Citibank, particularly, Accounts No. 00484202, 59091, and 472 -751, which would have amounted to a total of P3,812,712.32, had there been no withdrawals or debits from the said accounts from the time the said deposits were made. Since both the RTC and the Court of Appeals had consistently recognized only the P31,079.14 of respondent's savings account with petitioner Citibank, and that respondent failed to move for reconsideration or to appeal this particular finding of fact by the trial and appellate courts, it is already binding upon this 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 P31,079.14 should the off -set thereof by petitioner Citibank against her supposed loans be found invalid. Dollar accounts with Citibank-Geneva Respondent made an effort of preparing and presenting before the RTC her own computations of her money market placements and dollar accounts with Citibank-Geneva, purportedly amounting to a total of

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money market placements and dollar accounts with Citibank-Geneva, purportedly amounting to a total of United States $343,220.98. According to the foregoing computation, by 25 October 1979, respondent had a total of US$156,942.70, from which, US$149,632.99 was transferred by Citibank-Geneva to petitioner Citibank in Manila, and was used by the latter to off-set respondent's outstanding loans. The balance of respondent's accounts with 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 US$310.87. Rightly so, both the RTC and the Court of Appeals gave more credence to the computation of 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 off -set thereof by petitioner Citibank against her alleged outstanding loans be found invalid. Issue: As to the loans procured by respondent Ratio: Citibank was able to establish by preponderance of evidence the existence of respondent's loans. Respondent did indeed have outstanding loans with Citibank at the time it effected the off -set or compensation on 25 July 1979 (using respondent's savings deposit with Citibank), 5 September 1979 (using the proceeds of respondent's money market placements with 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. 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. 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. The crossed MCs are already in the possession of 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, then, the possession by 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. The presumptions are disputable, meaning, they are satisfactory if uncontradicted, but may be contradicted and overcome by other evidence. 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 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. 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. 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, 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. So even if the MCs deposited 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.

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indorsement as against petitioner Citibank, the drawee bank. 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 P500,000.00 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. Because of her Exhibit "HHH," respondent effectively admitted receipt of MC No. 226467, although for reasons other than as proceeds of a loan. 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 checks 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. 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. Respondent has not yet paid the loans she had with Citibank 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 and No. 12723 both of Citibank and signed by Mr. Tan, for the amounts of P500,744.00 and P500,000.00, respectively. While these provisional receipts did state that Mr. Tan, on 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. 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. 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. (recall PAL vs CA) In the case at bar, the issuance of an official receipt by 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,

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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 P150,000.00. 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 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. 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 one. It is regrettable, however, that she was unable to substantiate the same. Yet again, 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 herself and were, thus, self-serving. Equally self-serving was respondent's letter, written on 7 October 1985, or more than six years after the execution of the second set of PNs, in which she demanded return of the simulated or fictitious PNs, together with the letters relating thereto, which Mr. Tan purportedly asked her to execute. Respondent further failed to present any proof of her alleged loan application with the DBP, and of any circumstance or correspondence wherein the simulated or fictitious PNs were indeed used for their supposed purpose. In contrast, Citibank, as supported by the testimonies of its officers and available documentation, consistently treated the said PNs as regular loans – accepted, approved, and paid in the ordinary course of its business. The PNs executed by the respondent in favor of Citibank to cover her loans were duly -filled out and signed, including the disclosure statement found at the back of the said PNs, in adherence to the Central Bank requirement to disclose the full finance charges to a loan granted to borrowers. Lastly, the exchange of letters between Citibank and respondent, as well as the letters sent by other people working for respondent, had consistently recognized that respondent owed petitioner Citibank money. In consideration of the foregoing discussion, this Court finds that the preponderance of evidence supports the existence of the respondent's loans, in the principal sum of P1,920,000.00, as of 5 September 1979. Issue: WON the Court violated the Best Evidence Rule when it accepted photocopies and microfilm copies of the PNs, etc Ratio: 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 (When the original document is unavailable). 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 Citibank – from the account officer in its Marketing Department, to the pre-processor, to the signature verifier, back to the pre-

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account officer in its Marketing Department, to the pre-processor, to the signature verifier, back to the preprocessor, then to the processor for booking. It was only 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. 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 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. Issue: The impact of the Decision of the Court of Appeals in the Dy case Ratio: In the Dy case, Severino Chua Caedo managed to obtain loans from herein petitioner Citibank amounting to P7,000,000.00, secured to the extent of P5,000,000.00 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 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. 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. Issue: WON the compensation was valid Ratio: The liquidation of respondent's outstanding loans were valid in so far as Citibank used respondent's savings account with the bank and her money market placements with FNCB Finance; but illegal and void in so far as Citibank used respondent's dollar accounts with Citibank-Geneva. Savings Account with petitioner Citibank There is little controversy when it comes to the right of Citibank to compensate respondent's outstanding loans with her deposit account. As already found by this Court, Citibank was the creditor of respondent for her outstanding loans. At the same time, respondent was the creditor of 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. 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, therefore, even in the absence of an expressed authority from respondent, 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 P31,079.14. Money market placements with FNCB Finance Respondent's money market placements were with 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 P1,022,916.66, inclusive of the principal amounts and

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proceeds of the said PNs were issued, amounted to P1,022,916.66, 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 CC, 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. What petitioner Citibank actually did was to exercise its rights to the proceeds of respondent's money market placements with FNCB Finance by virtue of the Deeds of Assignment executed by respondent in its favor. The SC gave 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 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. Citibank was only acting upon the authority granted to it under the foregoing Deeds when it finally used the proceeds of PNs No. 20138 and 20139, paid by FNCB Finance, to partly pay for respondent's outstanding loans. Strictly speaking, it did not effect a legal compensation or off-set under Article 1278 of the Civil Code, but rather, it partly extinguished respondent's obligations through the application of the security given by the respondent for her loans. Although the pertinent documents were entitled Deeds of Assignment, they were, in reality, more of a pledge by respondent to Citibank of her credit due from petitioner FNCB Finance by virtue of her money market placements with the latter. PNs No. 20138 and 20139 matured on 3 September 1979, without them being redeemed by respondent, so that Citibank collected from petitioner FNCB Finance the proceeds thereof, which included the principal amounts and interests earned by the money market placements, amounting to P1,022,916.66, 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 P1,069,847.40. 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. Upon closer scrutiny of the Declaration of Pledge, this Court finds the same exceedingly suspicious and irregular. First of all, it escapes this Court why Citibank took care to have the Deeds of Assignment of the PNs notarized, yet left the Declaration of Pledge unnotarized. This Court would think that petitioner Citibank would take greater cautionary measures with the preparation and execution of the Declaration of Pledge because it involved respondent's "all present and future fiduciary placements" with a Citibank branch in another country, specifically, in Geneva, Switzerland. While there is no express legal requirement that the Declaration of Pledge had to be notarized to be effective, even so, it could not enjoy the same prima 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. Second, Citibank was unable to establish the date when the Declaration of Pledge was actually executed. The photocopy of the Declaration of Pledge submitted by petitioner Citibank before the RTC was undated. It presented only a photocopy of the pledge because it already forwarded the original copy 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. Respondent, however, presented her passport and plane tickets to prove that she was out of the country on the said date and could not have signed the pledge. Third, the Declaration of Pledge was irregularly filled-out. The pledge was in a standard printed form. It was 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 Citibank was typewritten. 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

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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 presented only photocopies of the Deed. Without the Declaration of Pledge, petitioner Citibank had no authority to demand the remittance of respondent's dollar accounts with Citibank-Geneva and to apply them to her outstanding loans. It cannot effect legal compensation under Article 1278 of the Civil Code since, petitioner Citibank itself admitted that 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, 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 P1,069,847.40. In summary, Citibank is ordered by this Court to pay respondent the proceeds of her money market placements, represented by PNs No. 23356 and 23357, amounting to P318,897.34 and P203,150.00, respectively, earning an interest of 14.5% per annum as stipulated in the PNs,139 beginning 17 March 1977, the date of the placements. Citibank is also ordered to refund to respondent the amount of US$149,632.99, or its equivalent in Philippine currency, which had been remitted from her Citibank-Geneva accounts. These dollar accounts, consisting of two fiduciary placements and current accounts with Citibank-Geneva shall continue earning their respective stipulated interests from 26 October 1979, the date of their remittance by Citibank-Geneva to petitioner Citibank in Manila and applied against respondent's outstanding loans. As for respondent, she is ordered to pay petitioner Citibank the balance of her outstanding loans, which amounted to P1,069,847.40 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 using respondent's dollar accounts from Citibank-Geneva is deemed illegal, null and void, and, thus, ineffective. Issue: WON Citibank is liable for damages Ratio: 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 CitibankGeneva 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. 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. 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 P300,000.00, for the award of moral damages is meant to compensate for the actual injury suffered by the respondent, not to enrich her. Having failed to exercise more care and prudence than a private individual in its dealings with respondent, Citibank should be liable for exemplary damages, in the amount of P250,000.00, in accordance with Article 2229 and 2234 of the Civil Code. With the award of exemplary damages, then respondent shall also be entitled to an award of attorney's

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2229 and 2234 of the Civil Code. With the award of exemplary damages, then respondent shall also be entitled to an award of attorney's fees. 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 P200,000.00 attorney's fees shall be satisfactory. In contrast, this Court finds no sufficient basis to award damages to petitioners. 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.
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Digest: Fidelity Savings and Mortgage Bank vs. Cenzon
Saturday, July 11, 2009 12:10 PM

Fidelity Savings and Mortgage Bank vs Cenzon Date: April 5, 1990 Petitioner: Fidelity Savings and Mortgage Bank Respondents: Hon Pedro Cenzon and Spouses Timoteo and Olimpia Santiago Ponente: Regalado Facts: 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. The court dismissed the complaint as against Central Bank of the Philippines, Eusebio Lopez, Jr., Arsenio S. Lopez, Jr., Arsenio M. Lopez, Sr. and Bibiana S. Lacuna. The private respondents deposited with the Fidelity Savings Bank the amount of P50,000 (savings account). Also, private respondents deposited another P50,000 under Certificate of Time Deposit No. 0210. The Monetary Board found the bank insolvent and issued Resolution No. 350, (a) forbidding to do business in the Philippines and (b) instructing the Acting Superintendent of Banks to take charge of the assets. The PDIC paid the private respondents P10,000 on the aggregate deposits of P100,000. The MB later issued its Resolution No. 2124 directing the liquidation of the affairs of the bank. The liquidation proceeding is presently pending in the CFI of Manila. Issue: WON an insolvent 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 Held: No Ratio: 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. The Overseas Bank of Manila vs. CA: "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 deposit ceases the moment the operation of the bank is completely suspended by the duly constituted authority, the Central Bank." 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, is in line with the doctrine laid down in the jurisprudence above cited. Issue: WON an insolvent bank may be adjudged to pay moral and exemplary damages, attorney's fees and costs when the insolvency is caused by the anomalous real estate transactions without violating the provisions on preference of credits. Held: No Ratio: 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. The 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, the 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 the bank failed to pay private respondents because it was already insolvent. Further, this case is not one of the specified or analogous cases wherein moral damages may be recovered. 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 the bank actually engaged in anomalous real estate transactions. The same were raised only during the testimony of the bank examiner of the Central Bank, but no documentary evidence was ever presented. Hence, it was error for the lower court to impose exemplary damages upon the bank
Cenzon deposited with Fidelity Savings Bank the total amount of P100k - P50k in its Savings account and another P50 in its Time Deposit Account.
However, Fidelity Savings bank was declared to be insolvent. PDIC paid P10,000 on the aggregate deposits of "100k. MB ordered the liquidationof the affairs of the bank. ISSUE: WON Insolvent bank could be ordered to pay

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Hence, it was error for the lower court to impose exemplary damages upon the bank since, in contracts, such sanction requires that the offending party acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. Neither does this case present the situation where attorney's fees may be awarded. 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. Consequently, we reiterate that under the premises and pursuant to the 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 have 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.
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Digest: Cancio vs. CA
Saturday, July 11, 2009 12:12 PM

Cancio vs CA Date: October 22, 1987 Petitioner: Rosa Cancio Respondents: CA and CTA Ponente: Melencio Herrera Facts: Mrs. Rosa Cancio, while clearing through the Pre-Boarding (AVSECOM) Area of MIA to board PR 306 for Hongkong was apprehended with US$102,900 in cash, US$600 in two travelers checks, and one P500. Mrs. Cancio did not declare her currency had already passed the Customs inspection area. In view of claimant's failure to present the Central Bank Authority, the said currencies were accordingly confiscated and a seizure Receipt No. 013 was issued to her; hence, this seizure proceedings. Cancio presented certified xerox copy of her Bank Book for foreign currency deposit with the PCIB, dollar remittances in telegraphic transfers from abroad for deposits and withdrawal cards, attesting to the fact that Cancio had withdrawn from her FCDU Account a certain amount of United States currency which tended to show that claimant herein was a foreign currency depositor pursuant to the provisions of RA 6426. The money intended principally for such medical purpose and for other miscellaneous and necessary expenses, and, that the subject currencies were concealed and hidden by them inside the two chocolate boxes solely for security reasons. The Commissioner of Customs denied. Cancio appealed to CTA. The CTA affirmed the forfeiture of the US$102,900 in cash, and US$600 in traveller's checks for having been in violation of CB Circulars 265 and 534, in relation to Section 2530(f) of the Tariff and Customs Code. It reversed the forfeiture of P1,500 limit that each traveller is allowed to bring out of the country without a CB permit pursuant to paragraph 4 of CB Circular No. 383. Issue: WON the CTA erred in upholding the forfeiture of the foreign currencies in question. Held: Yes Ratio: It is true that in so far as the exportation or taking out of foreign currency from the country is concerned, Central Bank Circular No. 265 par 3, issued on November 20, 1968,. Similarly, Central Bank Circular No. 534, issued on July 19, 1976. However, peculiar to the present controversy is the fact that, as stated previously, petitioner is a foreign currency depositor. Relevant and applicable to her is the following provision of the "Foreign Currency Deposit Act of the Philippines" (RA 6426): "SEC. 5. Withdrawability and transferability of deposits. There shall be no restriction on the
withdrawal by the depositor of his deposit or on the transferability of the same abroad except those arising from the contract between the depositor and the bank."

Under the provision, the transferability abroad of foreign currency deposits is unrestricted. Only one exception is provided for therein, which is, any restriction "arising from the contract between the depositor and the bank." Neither is a Central Bank authority required for the transferability abroad of foreign currency deposits. Attention is called, however, to the implementing rules and regulations to said Republic Act 6426, as embodied in CB Circular No. 343 issued on April 24, 1972, which provides:
"SEC. 11.b. Subject only to the terms of the contract between the bank and the depositor, the latter shall have a general license to withdraw his deposit, notwithstanding any change in policy or regulations.”

The CA has taken the position that the provision limits the right of the depositor to that of withdrawal and withholds from him the right of transferability abroad. That is not so. Circular -Letter, dated August 3, 1978, issued by the Central Bank reads in explicit terms: "Effective immediately, the banks authorized to accept foreign currency
deposits xxx are hereby instructed to advise their foreign currency depositors who are withdrawing funds for travel purposes to carry with them the certificate of withdrawal that the banks shall issue. The travellers shall present the certifications to the Customs and Central Bank personnel at the MIA, if requested.”

It is a fact that petitioner could not present a certificate of withdrawal at the Manila International Airport when she was about to depart. As she had explained she was unaware of this requirement. And if she had wrapped her dollar currency inside a chocolate box it was for "security reasons." Besides, as instructed in the Circular-Letter, it is the authorized depository bank which should advise its depositors to carry with them the certificate of withdrawal. At any rate, the CA has found that petitioner has presented in evidence her foreign currency bank book and her withdrawal cards. These may be considered as substantial compliance for purposes of this case. Indeed, given the underlying objective of the Foreign Currency Deposit Act, as amended, which is to attract

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compliance for purposes of this case. Indeed, given the underlying objective of the Foreign Currency Deposit Act, as amended, which is to attract and invite the deposit of foreign currencies which are acceptable as part of the international reserve in duly authorized banks in order that they may be put into the stream of the banking system, it would be to defeat the very purpose of the law to place undue restrictions on the transferability of such funds. The countervailing effect would be to discourage prospective foreign currency depositors to the detriment of the banking system. In fine, Central Bank Circulars Nos. 265 and 534 requiring prior Central Bank authority for the taking out of the country of foreign currency should not be made to encompass foreign currency depositors whose rights are expressly defined and guaranteed in a special law, the Foreign Currency Deposit Act (RA 6426). As a foreign currency depositor, therefore, petitioner cannot be adjudged to have violated the Central Bank Circulars. It follows that neither is there room for the application of Section 2530(f) of the Tariff and Customs Code, as amended, which provides for the forfeiture of any article and other objects, the exportation of which is effected or attempted contrary to law.
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Digest: Salvacion vs. CB
Saturday, July 11, 2009 12:12 PM

Salvacion vs CA Date: August 21, 1997 Petitioners: Karen Salvacion, Federico Salvacion Jr and Evelina Salvacion Respondents: Central Bank of the Philippines, China Banking Corporation and Greg Bartelli

Ponente: Torres Jr
Facts: Greg Bartelli, an American tourist, coaxed and lured Karen Salvacion, then 12 years old to go with him to his apartment. Therein, Greg Bartelli detained Karen Salvacion for four days and was able to rape the child. After policemen and people living nearby, rescued Karen, Bartelli was arrested and detained at the Makati Municipal Jail. The policemen recovered from Bartelli the following items: 1.) Dollar Check No. 368, US 3,903.20; 2.) COCOBANK Bank Book No. 104-108758-8 (Peso Acct.); 3.) Dollar Account China Banking Corp., US$/A#54105028-2; 4.) ID-122-30-8877; 5.) Philippine Money (P234.00) cash; 6.) Door Keys 6 pieces; 7.) Stuffed Doll (Teddy Bear) used in seducing the complainant. A criminal case and a civil case were filed before the RTC against Bartelli. Bartelli was able to escape from jail during a scheduled hearing for his petition for bail. The criminal case was archived. Meanwhile, in the civil case, the Judge issued an Order dated February 22, 1989 granting the application of herein petitioners, for the issuance of the writ of preliminary attachment. After petitioners gave Bond No. JCL (4) 1981 by FGU Insurance Corporation in the amount of P100,000 a Writ of Preliminary Attachment was issued by the trial court on February 28, 1989. A notice of Garnishment was issued on China Banking Corporation. The bank invoked RA 1405 andSection 113 of Central Bank Circular No. 960 to the effect that the dollar deposits or defendant Greg Bartelli are exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body, whatsoever. In an inquiry with the Central Bank, the latter said that Section 113, CB Circular No. 960 (1983) is absolute in application. It does not admit of any exception, nor has the same been repealed nor amended. Meanwhile, in the civil case, Bartelli was declared in default. The court ruled in favor of the plaintiffs and ordered Bartelli to pay moral damages, exemplary damages, attorney’s fees, litigation expenses and costs. Issue: WON the Court can entertain the instant petition despite the fact that original jurisdiction in petitions for declaratory relief rests with the lower court

Held: Yes
Ratio: Petitioner deserves to receive the damages awarded to her by the court. But this petition for declaratory relief can only be entertained and treated as a petition for mandamus to require respondents to honor and comply with the writ of execution in Civil Case No. 89-3214. This Court has no original and exclusive jurisdiction over a petition for declaratory relief. 2 However, exceptions to this rule have been recognized. Thus, where the petition has far-reaching implications and raises questions that should be resolved, it may be treated as one for mandamus. Issue: Should Section 113 of CB Circular No. 960 and Section 8 of R.A. 6426, as amended by P.D. 1246, otherwise known as the Foreign Currency Deposit Act be made applicable to a foreign transient? Held: No

Ratio: If Karen's sad fate had happened to anybody's own kin, it would be difficult for him to fathom how the incentive for foreign currency deposit could be more important than his child's rights to said award of damages; in this case, the victim's claim for damages from this alien who had the gall to wrong a child of tender years of a country where he is a mere visitor. This further illustrates the flaw in the
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a child of tender years of a country where he is a mere visitor. This further illustrates the flaw in the questioned provisions. It is worth mentioning that R.A. No. 6426 was enacted in 1983 or at a time when the country's economy was in a shambles; when foreign investments were minimal and presumably, this was the reason why said statute was enacted. But the realities of the present times show that the country has recovered economically; and even if not, the questioned law still denies those entitled to due process of law for being unreasonable and oppressive. The intention of the questioned law may be good when enacted. The law failed to anticipate the iniquitous effects producing outright injustice and inequality such as the case before us. The purpose of PD 1246 in according protection against attachment, garnishment and other court process to foreign currency deposits is stated in its whereases. One of the principal purposes of the protection accorded to foreign currency deposits is "to assure the development and speedy growth of the Foreign Currency Deposit system and the Offshore Banking in the Philippines" (3rd Whereas). It is evident from the [Whereas clauses] that the Offshore Banking System and the Foreign Currency Deposit System were designed to draw deposits from foreign lenders and investors (Vide second Whereas of PD No. 1034; third Whereas of PD No. 1035). It is these deposits that are induced by the two laws and given protection and incentives by them. Obviously, the foreign currency deposit made by a transient or a tourist is not the kind of deposit encouraged by PD Nos. 1034 and 1035 and given incentives and protection by said laws because such depositor stays only for a few days in the country and, therefore, will maintain his deposit in the bank only for a short time. Bartelli, as stated, is just a tourist or a transient. He deposited his dollars with China Banking Corporation only for safekeeping during his temporary stay in the Philippines. For the reasons stated above, the Solicitor General thus submits that the dollar deposit of respondent Greg Bartelli is not entitled to the protection of Section 113 of Central Bank Circular No. 960 and PD No. 1246 against attachment, garnishment or other court processes. In fine, the application of the law depends on the extent of its justice. Eventually, if we rule that the questioned Section 113 of Central Bank Circular No. 960 which exempts from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever, is applicable to a foreign transient, injustice would result especially to a citizen aggrieved by a foreign guest like accused Greg Bartelli. This would negate Article 10 of the New Civil Code which provides that "in case of doubt in the interpretation or application of laws, it is presumed that the lawmaking body intended right and justice to prevail. "Ninguno non deue enriquecerse tortizeramente con dano de otro." Simply stated, when the statute is silent or ambiguous, this is one of those fundamental solutions that would respond to the vehement urge of conscience. It would be unthinkable, that the questioned Section 113 of Central Bank No. 960 would be used as a device by accused Greg Bartelli for wrongdoing, and in so doing, acquitting the guilty at the expense of the innocent. Call it what it may but is there no conflict of legal policy here? Dollar against Peso? Upholding the final and executory judgment of the lower court against the Central Bank Circular protecting the foreign depositor? Shielding or protecting the dollar deposit of a transient alien depositor against injustice to a national and victim of a crime? This situation calls for fairness against legal tyranny. We definitely cannot have both ways and rest in the belief that we have served the ends of justice.
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Agan vs. PIATCO
Wednesday, July 08, 2009 9:36 AM

/---!e-library! 6.0 Philippines Copyright © 2000 by Sony Valdez---\

[2003V454ES] [1/7] DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B. REUNILLA, MANUEL ANTONIO B. BOÑE, MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V. DOMALAON, CONRADO G. DIMAANO, LOLITA R. HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C. HILARIO, MIASCOR WORKERS UNION - NATIONAL LABOR UNION (MWU-NLU), and PHILIPPINE AIRLINES EMPLOYEES ASSOCIATION (PALEA), petitioners, vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS and SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of the Department of Transportation and Communications, respondents, / MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS AVIATION SYSTEMS CORPORATION, MACROASIA-EUREST SERVICES, INC., MACROASIA-MENZIES AIRPORT SERVICES CORPORATION, MIASCOR CATERING SERVICES CORPORATION, MIASCOR AIRCRAFT MAINTENANCE CORPORATION, and MIASCOR LOGISTICS CORPORATION, petitioners-inintervention,2003 May 5En BancG.R. No. 155001D E C I S I O N
PUNO, J.: Petitioners and petitioners-in-intervention filed the instant petitions for prohibition under Rule 65 of the Revised Rules of Court seeking to prohibit the Manila International Airport Authority (MIAA) and the Department of Transportation and Communications (DOTC) and its Secretary from implementing the following agreements executed by the Philippine Government through the DOTC and the MIAA and the Philippine International Air Terminals Co., Inc. (PIATCO): (1) the Concession Agreement signed on July 12, 1997, (2) the Amended and Restated Concession Agreement dated November 26, 1999, (3) the First Supplement to the Amended and Restated Concession Agreement dated August 27, 1999, (4) the Second Supplement to the Amended and Restated Concession Agreement dated September 4, 2000, and (5) the Third Supplement to the Amended and Restated Concession Agreement dated June 22, 2001 (collectively, the PIATCO Contracts). The facts are as follows: In August 1989, the DOTC engaged the services of Aeroport de Paris (ADP) to conduct a comprehensive study of the Ninoy Aquino International Airport (NAIA) and determine whether the present airport can cope with the traffic development up to the year 2010. The study consisted of two parts: first, traffic forecasts, capacity of existing facilities, NAIA future requirements, proposed master plans and development plans; and second, presentation of the preliminary design of the passenger terminal building. The ADP submitted a Draft Final Report to the DOTC in December 1989. Some time in 1993, six business leaders consisting of John Gokongwei, Andrew Gotianun, Henry Sy, Sr., Lucio Tan, George Ty and Alfonso Yuchengco met with then President Fidel V. Ramos to explore the possibility of investing in the construction and operation of a new international airport terminal. To signify their commitment to pursue the project, they formed the Asia’s Emerging Dragon Corp. (AEDC) which was registered with the Securities and Exchange Commission (SEC) on September 15, 1993.

On October 5, 1994, AEDC submitted an unsolicited proposal to the Government through the DOTC/MIAA for the development of NAIA International Passenger Terminal III (NAIA IPT III) under a build-operate-and-transfer arrangement pursuant to RA 6957 as amended by RA 7718 (BOT Law).[1] On December 2, 1994, the DOTC issued Dept. Order No. 94-832 constituting the Prequalification Bids and Awards Committee (PBAC) for the implementation of the NAIA IPT III project.
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and Awards Committee (PBAC) for the implementation of the NAIA IPT III project. On March 27, 1995, then DOTC Secretary Jose Garcia endorsed the proposal of AEDC to the National Economic and Development Authority (NEDA). A revised proposal, however, was forwarded by the DOTC to NEDA on December 13, 1995. On January 5, 1996, the NEDA Investment Coordinating Council (NEDA ICC) - Technical Board favorably endorsed the project to the ICC - Cabinet Committee which approved the same, subject to certain conditions, on January 19, 1996. On February 13, 1996, the NEDA passed Board Resolution No. 2 which approved the NAIA IPT III project. On June 7, 14, and 21, 1996, DOTC/MIAA caused the publication in two daily newspapers of an invitation for competitive or comparative proposals on AEDC’s unsolicited proposal, in accordance with Sec. 4-A of RA 6957, as amended. The alternative bidders were required to submit three (3) sealed envelopes on or before 5:00 p.m. of September 20, 1996. The first envelope should contain the Prequalification Documents, the second envelope the Technical Proposal, and the third envelope the Financial Proposal of the proponent. On June 20, 1996, PBAC Bulletin No. 1 was issued, postponing the availment of the Bid Documents and the submission of the comparative bid proposals. Interested firms were permitted to obtain the Request for Proposal Documents beginning June 28, 1996, upon submission of a written application and payment of a non-refundable fee of P50,000.00 (US$2,000).

The Bid Documents issued by the PBAC provided among others that the proponent must have adequate capability to sustain the financing requirement for the detailed engineering, design, construction, operation, and maintenance phases of the project. The proponent would be evaluated based on its ability to provide a minimum amount of equity to the project, and its capacity to secure external financing for the project.
On July 23, 1996, the PBAC issued PBAC Bulletin No. 2 inviting all bidders to a pre-bid conference on July 29, 1996. On August 16, 1996, the PBAC issued PBAC Bulletin No. 3 amending the Bid Documents. The following amendments were made on the Bid Documents: a. Aside from the fixed Annual Guaranteed Payment, the proponent shall include in its financial proposal an additional percentage of gross revenue share of the Government, as follows: i. First 5 years 5.0%

ii.
iii.

Next 10 years
Next 10 years

7.5%
10.0%

b. The amount of the fixed Annual Guaranteed Payment shall be subject of the price challenge. Proponent may offer an Annual Guaranteed Payment which need not be of equal amount, but payment of which shall start upon site possession. c. The project proponent must have adequate capability to sustain the financing requirement for the detailed engineering, design, construction, and/or operation and maintenance phases of the project as the case may be. For purposes of pre-qualification, this capability shall be measured in terms of: i. Proof of the availability of the project proponent and/or the consortium to provide the minimum amount of equity for the project; and ii. a letter testimonial from reputable banks attesting that the project proponent and/or the members of the consortium are banking with them, that the project proponent and/or the members are of good financial standing, and have adequate resources.
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financial standing, and have adequate resources. d. The basis for the prequalification shall be the proponent’s compliance with the minimum technical and financial requirements provided in the Bid Documents and the IRR of the BOT Law. The minimum amount of equity shall be 30% of the Project Cost.
e. Amendments to the draft Concession Agreement shall be issued from time to time. Said amendments shall only cover items that would not materially affect the preparation of the proponent’s proposal.

On August 29, 1996, the Second Pre-Bid Conference was held where certain clarifications were made. Upon the request of prospective bidder People’s Air Cargo & Warehousing Co., Inc (Paircargo), the PBAC warranted that based on Sec. 11.6, Rule 11 of the Implementing Rules and Regulations of the BOT Law, only the proposed Annual Guaranteed Payment submitted by the challengers would be revealed to AEDC, and that the challengers’ technical and financial proposals would remain confidential. The PBAC also clarified that the list of revenue sources contained in Annex 4.2a of the Bid Documents was merely indicative and that other revenue sources may be included by the proponent, subject to approval by DOTC/MIAA. Furthermore, the PBAC clarified that only those fees and charges denominated as Public Utility Fees would be subject to regulation, and those charges which would be actually deemed Public Utility Fees could still be revised, depending on the outcome of PBAC’s query on the matter with the Department of Justice.
In September 1996, the PBAC issued Bid Bulletin No. 5, entitled "Answers to the Queries of PAIRCARGO as Per Letter Dated September 3 and 10, 1996." Paircargo’s queries and the PBAC’s responses were as follows: 1. It is difficult for Paircargo and Associates to meet the required minimum equity requirement as prescribed in Section 8.3.4 of the Bid Documents considering that the capitalization of each member company is so structured to meet the requirements and needs of their current respective business undertaking/activities. In order to comply with this equity requirement, Paircargo is requesting PBAC to just allow each member of (sic) corporation of the Joint Venture to just execute an agreement that embodies a commitment to infuse the required capital in case the project is awarded to the Joint Venture instead of increasing each corporation’s current authorized capital stock just for prequalification purposes. In prequalification, the agency is interested in one’s financial capability at the time of prequalification, not future or potential capability. A commitment to put up equity once awarded the project is not enough to establish that "present" financial capability. However, total financial capability of all member companies of the Consortium, to be established by submitting the respective companies’ audited financial statements, shall be acceptable. 2. At present, Paircargo is negotiating with banks and other institutions for the extension of a Performance Security to the joint venture in the event that the Concessions Agreement (sic) is awarded to them. However, Paircargo is being required to submit a copy of the draft concession as one of the documentary requirements. Therefore, Paircargo is requesting that they’d (sic) be furnished copy of the approved negotiated agreement between the PBAC and the AEDC at the soonest possible time. A copy of the draft Concession Agreement is included in the Bid Documents. Any material changes would be made known to prospective challengers through bid bulletins. However, a final version will be issued before the award of contract. The PBAC also stated that it would require AEDC to sign Supplement C of the Bid Documents (Acceptance of Criteria and Waiver of Rights to Enjoin Project) and to submit the same with the required Bid Security.
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Bid Security. On September 20, 1996, the consortium composed of People’s Air Cargo and Warehousing Co., Inc. (Paircargo), Phil. Air and Grounds Services, Inc. (PAGS) and Security Bank Corp. (Security Bank) (collectively, Paircargo Consortium) submitted their competitive proposal to the PBAC. On September 23, 1996, the PBAC opened the first envelope containing the prequalification documents of the Paircargo Consortium. On the following day, September 24, 1996, the PBAC prequalified the Paircargo Consortium. On September 26, 1996, AEDC informed the PBAC in writing of its reservations as regards the Paircargo Consortium, which include: a. The lack of corporate approvals and financial capability of PAIRCARGO;
b. The lack of corporate approvals and financial capability of PAGS;

c. The prohibition imposed by RA 337, as amended (the General Banking Act) on the amount that Security Bank could legally invest in the project; d. The inclusion of Siemens as a contractor of the PAIRCARGO Joint Venture, for prequalification purposes; and
e. The appointment of Lufthansa as the facility operator, in view of the Philippine requirement in the operation of a public utility. The PBAC gave its reply on October 2, 1996, informing AEDC that it had considered the issues raised by the latter, and that based on the documents submitted by Paircargo and the established prequalification criteria, the PBAC had found that the challenger, Paircargo, had prequalified to undertake the project. The Secretary of the DOTC approved the finding of the PBAC. The PBAC then proceeded with the opening of the second envelope of the Paircargo Consortium which contained its Technical Proposal.

On October 3, 1996, AEDC reiterated its objections, particularly with respect to Paircargo’s financial capability, in view of the restrictions imposed by Section 21-B of the General Banking Act and Sections 1380 and 1381 of the Manual Regulations for Banks and Other Financial Intermediaries. On October 7, 1996, AEDC again manifested its objections and requested that it be furnished with excerpts of the PBAC meeting and the accompanying technical evaluation report where each of the issues they raised were addressed. On October 16, 1996, the PBAC opened the third envelope submitted by AEDC and the Paircargo Consortium containing their respective financial proposals. Both proponents offered to build the NAIA Passenger Terminal III for at least $350 million at no cost to the government and to pay the government: 5% share in gross revenues for the first five years of operation, 7.5% share in gross revenues for the next ten years of operation, and 10% share in gross revenues for the last ten years of operation, in accordance with the Bid Documents. However, in addition to the foregoing, AEDC offered to pay the government a total of P135 million as guaranteed payment for 27 years while Paircargo Consortium offered to pay the government a total of P17.75 billion for the same period.
Thus, the PBAC formally informed AEDC that it had accepted the price proposal submitted by the Paircargo Consortium, and gave AEDC 30 working days or until November 28, 1996 within which to match the said bid, otherwise, the project would be awarded to Paircargo. As AEDC failed to match the proposal within the 30-day period, then DOTC Secretary Amado Lagdameo, on December 11, 1996, issued a notice to Paircargo Consortium regarding AEDC’s failure to match the
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on December 11, 1996, issued a notice to Paircargo Consortium regarding AEDC’s failure to match the proposal. On February 27, 1997, Paircargo Consortium incorporated into Philippine International Airport Terminals Co., Inc. (PIATCO). AEDC subsequently protested the alleged undue preference given to PIATCO and reiterated its objections as regards the prequalification of PIATCO.

On April 11, 1997, the DOTC submitted the concession agreement for the second-pass approval of the NEDA-ICC. On April 16, 1997, AEDC filed with the Regional Trial Court of Pasig a Petition for Declaration of Nullity of the Proceedings, Mandamus and Injunction against the Secretary of the DOTC, the Chairman of the PBAC, the voting members of the PBAC and Pantaleon D. Alvarez, in his capacity as Chairman of the PBAC Technical Committee.
On April 17, 1997, the NEDA-ICC conducted an ad referendum to facilitate the approval, on a noobjection basis, of the BOT agreement between the DOTC and PIATCO. As the ad referendum gathered only four (4) of the required six (6) signatures, the NEDA merely noted the agreement. On July 9, 1997, the DOTC issued the notice of award for the project to PIATCO.

On July 12, 1997, the Government, through then DOTC Secretary Arturo T. Enrile, and PIATCO, through its President, Henry T. Go, signed the "Concession Agreement for the Build-Operate-and-Transfer Arrangement of the Ninoy Aquino International Airport Passenger Terminal III" (1997 Concession Agreement). The Government granted PIATCO the franchise to operate and maintain the said terminal during the concession period and to collect the fees, rentals and other charges in accordance with the rates or schedules stipulated in the 1997 Concession Agreement. The Agreement provided that the concession period shall be for twenty-five (25) years commencing from the in-service date, and may be renewed at the option of the Government for a period not exceeding twenty-five (25) years. At the end of the concession period, PIATCO shall transfer the development facility to MIAA. On November 26, 1998, the Government and PIATCO signed an Amended and Restated Concession Agreement (ARCA). Among the provisions of the 1997 Concession Agreement that were amended by the ARCA were: Sec. 1.11 pertaining to the definition of "certificate of completion"; Sec. 2.05 pertaining to the Special Obligations of GRP; Sec. 3.02 (a) dealing with the exclusivity of the franchise given to the Concessionaire; Sec. 4.04 concerning the assignment by Concessionaire of its interest in the Development Facility; Sec. 5.08 (c) dealing with the proceeds of Concessionaire’s insurance; Sec. 5.10 with respect to the temporary take-over of operations by GRP; Sec. 5.16 pertaining to the taxes, duties and other imposts that may be levied on the Concessionaire; Sec. 6.03 as regards the periodic adjustment of public utility fees and charges; the entire Article VIII concerning the provisions on the termination of the contract; and Sec. 10.02 providing for the venue of the arbitration proceedings in case a dispute or controversy arises between the parties to the agreement.
Subsequently, the Government and PIATCO signed three Supplements to the ARCA. The First Supplement was signed on August 27, 1999; the Second Supplement on September 4, 2000; and the Third Supplement on June 22, 2001 (collectively, Supplements). The First Supplement to the ARCA amended Sec. 1.36 of the ARCA defining "Revenues" or "Gross Revenues"; Sec. 2.05 (d) of the ARCA referring to the obligation of MIAA to provide sufficient funds for the upkeep, maintenance, repair and/or replacement of all airport facilities and equipment which are owned or operated by MIAA; and further providing additional special obligations on the part of GRP aside from those already enumerated in Sec. 2.05 of the ARCA. The First Supplement also provided a

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stipulation as regards the construction of a surface road to connect NAIA Terminal II and Terminal III in lieu of the proposed access tunnel crossing Runway 13/31; the swapping of obligations between GRP and PIATCO regarding the improvement of Sales Road; and the changes in the timetable. It also amended Sec. 6.01 (c) of the ARCA pertaining to the Disposition of Terminal Fees; Sec. 6.02 of the ARCA by inserting an introductory paragraph; and Sec. 6.02 (a) (iii) of the ARCA referring to the Payments of Percentage Share in Gross Revenues.
The Second Supplement to the ARCA contained provisions concerning the clearing, removal, demolition or disposal of subterranean structures uncovered or discovered at the site of the construction of the terminal by the Concessionaire. It defined the scope of works; it provided for the procedure for the demolition of the said structures and the consideration for the same which the GRP shall pay PIATCO; it provided for time extensions, incremental and consequential costs and losses consequent to the existence of such structures; and it provided for some additional obligations on the part of PIATCO as regards the said structures. Finally, the Third Supplement provided for the obligations of the Concessionaire as regards the construction of the surface road connecting Terminals II and III. Meanwhile, the MIAA which is charged with the maintenance and operation of the NAIA Terminals I and II, had existing concession contracts with various service providers to offer international airline airport services, such as in-flight catering, passenger handling, ramp and ground support, aircraft maintenance and provisions, cargo handling and warehousing, and other services, to several international airlines at the NAIA. Some of these service providers are the Miascor Group, DNATA-Wings Aviation Systems Corp., and the MacroAsia Group. Miascor, DNATA and MacroAsia, together with Philippine Airlines (PAL), are the dominant players in the industry with an aggregate market share of 70%.

On September 17, 2002, the workers of the international airline service providers, claiming that they stand to lose their employment upon the implementation of the questioned agreements, filed before this Court a petition for prohibition to enjoin the enforcement of said agreements.[2]
On October 15, 2002, the service providers, joining the cause of the petitioning workers, filed a motion for intervention and a petition-in-intervention.

On October 24, 2002, Congressmen Salacnib Baterina, Clavel Martinez and Constantino Jaraula filed a similar petition with this Court.[3] On November 6, 2002, several employees of the MIAA likewise filed a petition assailing the legality of the various agreements.[4]
On December 11, 2002. another group of Congressmen, Hon. Jacinto V. Paras, Rafael P. Nantes, Eduardo C. Zialcita, Willie B. Villarama, Prospero C. Nograles, Prospero A. Pichay, Jr., Harlin Cast Abayon and Benasing O. Macaranbon, moved to intervene in the case as Respondents-Intervenors. They filed their Comment-In-Intervention defending the validity of the assailed agreements and praying for the dismissal of the petitions. During the pendency of the case before this Court, President Gloria Macapagal Arroyo, on November 29, 2002, in her speech at the 2002 Golden Shell Export Awards at Malacañang Palace, stated that she will not "honor (PIATCO) contracts which the Executive Branch’s legal offices have concluded (as) null and void."[5]

Respondent PIATCO filed its Comments to the present petitions on November 7 and 27, 2002. The Office of the Solicitor General and the Office of the Government Corporate Counsel filed their respective Comments in behalf of the public respondents. On December 10, 2002, the Court heard the case on oral argument. After the oral argument, the Court
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On December 10, 2002, the Court heard the case on oral argument. After the oral argument, the Court then resolved in open court to require the parties to file simultaneously their respective Memoranda in amplification of the issues heard in the oral arguments within 30 days and to explore the possibility of arbitration or mediation as provided in the challenged contracts.

In their consolidated Memorandum, the Office of the Solicitor General and the Office of the Government Corporate Counsel prayed that the present petitions be given due course and that judgment be rendered declaring the 1997 Concession Agreement, the ARCA and the Supplements thereto void for being contrary to the Constitution, the BOT Law and its Implementing Rules and Regulations.
On March 6, 2003, respondent PIATCO informed the Court that on March 4, 2003 PIATCO commenced arbitration proceedings before the International Chamber of Commerce, International Court of Arbitration (ICC) by filing a Request for Arbitration with the Secretariat of the ICC against the Government of the Republic of the Philippines acting through the DOTC and MIAA.

In the present cases, the Court is again faced with the task of resolving complicated issues made difficult by their intersecting legal and economic implications. The Court is aware of the far reaching fall out effects of the ruling which it makes today. For more than a century and whenever the exigencies of the times demand it, this Court has never shirked from its solemn duty to dispense justice and resolve "actual controversies involving rights which are legally demandable and enforceable, and to determine whether or not there has been grave abuse of discretion amounting to lack or excess of jurisdiction."[6] To be sure, this Court will not begin to do otherwise today.
We shall first dispose of the procedural issues raised by respondent PIATCO which they allege will bar the resolution of the instant controversy. Petitioners’ Legal Standing to File the present Petitions a. G.R. Nos. 155001 and 155661

In G.R. No. 155001 individual petitioners are employees of various service providers[7] having separate concession contracts with MIAA and continuing service agreements with various international airlines to provide in-flight catering, passenger handling, ramp and ground support, aircraft maintenance and provisions, cargo handling and warehousing and other services. Also included as petitioners are labor unions MIASCOR Workers Union-National Labor Union and Philippine Airlines Employees Association. These petitioners filed the instant action for prohibition as taxpayers and as parties whose rights and interests stand to be violated by the implementation of the PIATCO Contracts.
Petitioners-Intervenors in the same case are all corporations organized and existing under Philippine laws engaged in the business of providing in-flight catering, passenger handling, ramp and ground support, aircraft maintenance and provisions, cargo handling and warehousing and other services to several international airlines at the Ninoy Aquino International Airport. Petitioners-Intervenors allege that as tax-paying international airline and airport-related service operators, each one of them stands to be irreparably injured by the implementation of the PIATCO Contracts. Each of the petitionersintervenors have separate and subsisting concession agreements with MIAA and with various international airlines which they allege are being interfered with and violated by respondent PIATCO. In G.R. No. 155661, petitioners constitute employees of MIAA and Samahang Manggagawa sa Paliparan ng Pilipinas - a legitimate labor union and accredited as the sole and exclusive bargaining agent of all the employees in MIAA. Petitioners anchor their petition for prohibition on the nullity of the contracts entered into by the Government and PIATCO regarding the build-operate-and-transfer of the NAIA IPT III. They filed the petition as taxpayers and persons who have a legitimate interest to protect in the
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III. They filed the petition as taxpayers and persons who have a legitimate interest to protect in the implementation of the PIATCO Contracts. Petitioners in both cases raise the argument that the PIATCO Contracts contain stipulations which directly contravene numerous provisions of the Constitution, specific provisions of the BOT Law and its Implementing Rules and Regulations, and public policy. Petitioners contend that the DOTC and the MIAA, by entering into said contracts, have committed grave abuse of discretion amounting to lack or excess of jurisdiction which can be remedied only by a writ of prohibition, there being no plain, speedy or adequate remedy in the ordinary course of law. In particular, petitioners assail the provisions in the 1997 Concession Agreement and the ARCA which grant PIATCO the exclusive right to operate a commercial international passenger terminal within the Island of Luzon, except those international airports already existing at the time of the execution of the agreement. The contracts further provide that upon the commencement of operations at the NAIA IPT III, the Government shall cause the closure of Ninoy Aquino International Airport Passenger Terminals I and II as international passenger terminals. With respect to existing concession agreements between MIAA and international airport service providers regarding certain services or operations, the 1997 Concession Agreement and the ARCA uniformly provide that such services or operations will not be carried over to the NAIA IPT III and PIATCO is under no obligation to permit such carry over except through a separate agreement duly entered into with PIATCO.[8] With respect to the petitioning service providers and their employees, upon the commencement of operations of the NAIA IPT III, they allege that they will be effectively barred from providing international airline airport services at the NAIA Terminals I and II as all international airlines and passengers will be diverted to the NAIA IPT III. The petitioning service providers will thus be compelled to contract with PIATCO alone for such services, with no assurance that subsisting contracts with MIAA and other international airlines will be respected. Petitioning service providers stress that despite the very competitive market, the substantial capital investments required and the high rate of fees, they entered into their respective contracts with the MIAA with the understanding that the said contracts will be in force for the stipulated period, and thereafter, renewed so as to allow each of the petitioning service providers to recoup their investments and obtain a reasonable return thereon. Petitioning employees of various service providers at the NAIA Terminals I and II and of MIAA on the other hand allege that with the closure of the NAIA Terminals I and II as international passenger terminals under the PIATCO Contracts, they stand to lose employment. The question on legal standing is whether such parties have "alleged such a personal stake in the outcome of the controversy as to assure that concrete adverseness which sharpens the presentation of issues upon which the court so largely depends for illumination of difficult constitutional questions."[9] Accordingly, it has been held that the interest of a person assailing the constitutionality of a statute must be direct and personal. He must be able to show, not only that the law or any government act is invalid, but also that he sustained or is in imminent danger of sustaining some direct injury as a result of its enforcement, and not merely that he suffers thereby in some indefinite way. It must appear that the person complaining has been or is about to be denied some right or privilege to which he is lawfully entitled or that he is about to be subjected to some burdens or penalties by reason of the statute or act complained of.[10]

We hold that petitioners have the requisite standing. In the above-mentioned cases, petitioners have a direct and substantial interest to protect by reason of the implementation of the PIATCO Contracts. They stand to lose their source of livelihood, a property right which is zealously protected by the Constitution. Moreover, subsisting concession agreements between MIAA and petitioners-intervenors and service contracts between international airlines and petitioners-intervenors stand to be nullified or terminated by the operation of the NAIA IPT III under the PIATCO Contracts. The financial prejudice brought about by the PIATCO Contracts on petitioners and petitioners-intervenors in these cases are legitimate interests sufficient to confer on them the requisite standing to file the instant petitions.
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interests sufficient to confer on them the requisite standing to file the instant petitions.

b. G.R. No. 155547
In G.R. No. 155547, petitioners filed the petition for prohibition as members of the House of Representatives, citizens and taxpayers. They allege that as members of the House of Representatives, they are especially interested in the PIATCO Contracts, because the contracts compel the Government and/or the House of Representatives to appropriate funds necessary to comply with the provisions therein.[11] They cite provisions of the PIATCO Contracts which require disbursement of unappropriated amounts in compliance with the contractual obligations of the Government. They allege that the Government obligations in the PIATCO Contracts which compel government expenditure without appropriation is a curtailment of their prerogatives as legislators, contrary to the mandate of the Constitution that "[n]o money shall be paid out of the treasury except in pursuance of an appropriation made by law."[12] Standing is a peculiar concept in constitutional law because in some cases, suits are not brought by parties who have been personally injured by the operation of a law or any other government act but by concerned citizens, taxpayers or voters who actually sue in the public interest. Although we are not unmindful of the cases of Imus Electric Co. v. Municipality of Imus[13] and Gonzales v. Raquiza[14] wherein this Court held that appropriation must be made only on amounts immediately demandable, public interest demands that we take a more liberal view in determining whether the petitioners suing as legislators, taxpayers and citizens have locus standi to file the instant petition. In Kilosbayan, Inc. v. Guingona,[15] this Court held "[i]n line with the liberal policy of this Court on locus standi, ordinary taxpayers, members of Congress, and even association of planters, and non-profit civic organizations were allowed to initiate and prosecute actions before this Court to question the constitutionality or validity of laws, acts, decisions, rulings, or orders of various government agencies or instrumentalities."[16] Further, "insofar as taxpayers' suits are concerned . . . (this Court) is not devoid of discretion as to whether or not it should be entertained."[17] As such ". . . even if, strictly speaking, they [the petitioners] are not covered by the definition, it is still within the wide discretion of the Court to waive the requirement and so remove the impediment to its addressing and resolving the serious constitutional questions raised."[18] In view of the serious legal questions involved and their impact on public interest, we resolve to grant standing to the petitioners.

Other Procedural Matters
Respondent PIATCO further alleges that this Court is without jurisdiction to review the instant cases as factual issues are involved which this Court is ill-equipped to resolve. Moreover, PIATCO alleges that submission of this controversy to this Court at the first instance is a violation of the rule on hierarchy of courts. They contend that trial courts have concurrent jurisdiction with this Court with respect to a special civil action for prohibition and hence, following the rule on hierarchy of courts, resort must first be had before the trial courts. After a thorough study and careful evaluation of the issues involved, this Court is of the view that the crux of the instant controversy involves significant legal questions. The facts necessary to resolve these legal questions are well established and, hence, need not be determined by a trial court. The rule on hierarchy of courts will not also prevent this Court from assuming jurisdiction over the cases at bar. The said rule may be relaxed when the redress desired cannot be obtained in the appropriate courts or where exceptional and compelling circumstances justify availment of a remedy within and calling for the exercise of this Court’s primary jurisdiction.*19+

It is easy to discern that exceptional circumstances exist in the cases at bar that call for the relaxation of the rule. Both petitioners and respondents agree that these cases are of transcendental importance as they involve the construction and operation of the country’s premier international airport. Moreover, the crucial issues submitted for resolution are of first impression and they entail the proper legal
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the crucial issues submitted for resolution are of first impression and they entail the proper legal interpretation of key provisions of the Constitution, the BOT Law and its Implementing Rules and Regulations. Thus, considering the nature of the controversy before the Court, procedural bars may be lowered to give way for the speedy disposition of the instant cases.

Legal Effect of the Commencement
of Arbitration Proceedings by

PIATCO
There is one more procedural obstacle which must be overcome. The Court is aware that arbitration proceedings pursuant to Section 10.02 of the ARCA have been filed at the instance of respondent PIATCO. Again, we hold that the arbitration step taken by PIATCO will not oust this Court of its jurisdiction over the cases at bar.

In Del Monte Corporation-USA v. Court of Appeals,[20] even after finding that the arbitration clause in the Distributorship Agreement in question is valid and the dispute between the parties is arbitrable, this Court affirmed the trial court’s decision denying petitioner’s Motion to Suspend Proceedings pursuant to the arbitration clause under the contract. In so ruling, this Court held that as contracts produce legal effect between the parties, their assigns and heirs, only the parties to the Distributorship Agreement are bound by its terms, including the arbitration clause stipulated therein. This Court ruled that arbitration proceedings could be called for but only with respect to the parties to the contract in question. Considering that there are parties to the case who are neither parties to the Distributorship Agreement nor heirs or assigns of the parties thereto, this Court, citing its previous ruling in Salas, Jr. v. Laperal Realty Corporation,[21] held that to tolerate the splitting of proceedings by allowing arbitration as to some of the parties on the one hand and trial for the others on the other hand would, in effect, result in multiplicity of suits, duplicitous procedure and unnecessary delay.[22] Thus, we ruled that the interest of justice would best be served if the trial court hears and adjudicates the case in a single and complete proceeding.
It is established that petitioners in the present cases who have presented legitimate interests in the resolution of the controversy are not parties to the PIATCO Contracts. Accordingly, they cannot be bound by the arbitration clause provided for in the ARCA and hence, cannot be compelled to submit to arbitration proceedings. A speedy and decisive resolution of all the critical issues in the present controversy, including those raised by petitioners, cannot be made before an arbitral tribunal. The object of arbitration is precisely to allow an expeditious determination of a dispute. This objective would not be met if this Court were to allow the parties to settle the cases by arbitration as there are certain issues involving non-parties to the PIATCO Contracts which the arbitral tribunal will not be equipped to resolve. Now, to the merits of the instant controversy. I Is PIATCO a qualified bidder?

Public respondents argue that the Paircargo Consortium, PIATCO’s predecessor, was not a duly prequalified bidder on the unsolicited proposal submitted by AEDC as the Paircargo Consortium failed to meet the financial capability required under the BOT Law and the Bid Documents. They allege that in computing the ability of the Paircargo Consortium to meet the minimum equity requirements for the project, the entire net worth of Security Bank, a member of the consortium, should not be considered.
PIATCO relies, on the other hand, on the strength of the Memorandum dated October 14, 1996 issued by the DOTC Undersecretary Primitivo C. Cal stating that the Paircargo Consortium is found to have a
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by the DOTC Undersecretary Primitivo C. Cal stating that the Paircargo Consortium is found to have a combined net worth of P3,900,000,000.00, sufficient to meet the equity requirements of the project. The said Memorandum was in response to a letter from Mr. Antonio Henson of AEDC to President Fidel V. Ramos questioning the financial capability of the Paircargo Consortium on the ground that it does not have the financial resources to put up the required minimum equity of P2,700,000,000.00. This contention is based on the restriction under R.A. No. 337, as amended or the General Banking Act that a commercial bank cannot invest in any single enterprise in an amount more than 15% of its net worth. In the said Memorandum, Undersecretary Cal opined:

The Bid Documents, as clarified through Bid Bulletin Nos. 3 and 5, require that financial capability will be evaluated based on total financial capability of all the member companies of the [Paircargo] Consortium. In this connection, the Challenger was found to have a combined net worth of P3,926,421,242.00 that could support a project costing approximately P13 Billion.
It is not a requirement that the net worth must be "unrestricted." To impose that as a requirement now will be nothing less than unfair. The financial statement or the net worth is not the sole basis in establishing financial capability. As stated in Bid Bulletin No. 3, financial capability may also be established by testimonial letters issued by reputable banks. The Challenger has complied with this requirement. To recap, net worth reflected in the Financial Statement should not be taken as the amount of the money to be used to answer the required thirty percent (30%) equity of the challenger but rather to be used in establishing if there is enough basis to believe that the challenger can comply with the required 30% equity. In fact, proof of sufficient equity is required as one of the conditions for award of contract (Section 12.1 IRR of the BOT Law) but not for pre-qualification (Section 5.4 of the same document).[23] Under the BOT Law, in case of a build-operate-and-transfer arrangement, the contract shall be awarded to the bidder "who, having satisfied the minimum financial, technical, organizational and legal standards" required by the law, has submitted the lowest bid and most favorable terms of the project.[24] Further, the 1994 Implementing Rules and Regulations of the BOT Law provide: Section 5.4 Pre-qualification Requirements. …. c. Financial Capability: The project proponent must have adequate capability to sustain the financing requirements for the detailed engineering design, construction and/or operation and maintenance phases of the project, as the case may be. For purposes of pre-qualification, this capability shall be measured in terms of (i) proof of the ability of the project proponent and/or the consortium to provide a minimum amount of equity to the project, and (ii) a letter testimonial from reputable banks attesting that the project proponent and/or members of the consortium are banking with them, that they are in good financial standing, and that they have adequate resources. The government agency/LGU concerned shall determine on a project-to-project basis and before pre-qualification, the minimum amount of equity needed. (emphasis supplied) Pursuant to this provision, the PBAC issued PBAC Bulletin No. 3 dated August 16, 1996 amending the financial capability requirements for pre-qualification of the project proponent as follows: 6. Basis of Pre-qualification

The basis for the pre-qualification shall be on the compliance of the proponent to the minimum technical and financial requirements provided in the Bid Documents and in the IRR of the BOT Law, R.A. No. 6957, as amended by R.A. 7718.

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No. 6957, as amended by R.A. 7718. The minimum amount of equity to which the proponent’s financial capability will be based shall be thirty percent (30%) of the project cost instead of the twenty percent (20%) specified in Section 3.6.4 of the Bid Documents. This is to correlate with the required debt-to-equity ratio of 70:30 in Section 2.01a of the draft concession agreement. The debt portion of the project financing should not exceed 70% of the actual project cost. Accordingly, based on the above provisions of law, the Paircargo Consortium or any challenger to the unsolicited proposal of AEDC has to show that it possesses the requisite financial capability to undertake the project in the minimum amount of 30% of the project cost through (i) proof of the ability to provide a minimum amount of equity to the project, and (ii) a letter testimonial from reputable banks attesting that the project proponent or members of the consortium are banking with them, that they are in good financial standing, and that they have adequate resources. As the minimum project cost was estimated to be US$350,000,000.00 or roughly P9,183,650,000.00,[25] the Paircargo Consortium had to show to the satisfaction of the PBAC that it had the ability to provide the minimum equity for the project in the amount of at least P2,755,095,000.00. Paircargo’s Audited Financial Statements as of 1993 and 1994 indicated that it had a net worth of P2,783,592.00 and P3,123,515.00 respectively.*26+ PAGS’ Audited Financial Statements as of 1995 indicate that it has approximately P26,735,700.00 to invest as its equity for the project.[27] Security Bank’s Audited Financial Statements as of 1995 show that it has a net worth equivalent to its capital funds in the amount of P3,523,504,377.00.[28] We agree with public respondents that with respect to Security Bank, the entire amount of its net worth could not be invested in a single undertaking or enterprise, whether allied or non-allied in accordance with the provisions of R.A. No. 337, as amended or the General Banking Act: Sec. 21-B. The provisions in this or in any other Act to the contrary notwithstanding, the Monetary Board, whenever it shall deem appropriate and necessary to further national development objectives or support national priority projects, may authorize a commercial bank, a bank authorized to provide commercial banking services, as well as a government-owned and controlled bank, to operate under an expanded commercial banking authority and by virtue thereof exercise, in addition to powers authorized for commercial banks, the powers of an Investment House as provided in Presidential Decree No. 129, invest in the equity of a non-allied undertaking, or own a majority or all of the equity in a financial intermediary other than a commercial bank or a bank authorized to provide commercial banking services: Provided, That (a) the total investment in equities shall not exceed fifty percent (50%) of the net worth of the bank; (b) the equity investment in any one enterprise whether allied or nonallied shall not exceed fifteen percent (15%) of the net worth of the bank; (c) the equity investment of the bank, or of its wholly or majority-owned subsidiary, in a single non-allied undertaking shall not exceed thirty-five percent (35%) of the total equity in the enterprise nor shall it exceed thirty-five percent (35%) of the voting stock in that enterprise; and (d) the equity investment in other banks shall be deducted from the investing bank's net worth for purposes of computing the prescribed ratio of net worth to risk assets. ,,,.

Further, the 1993 Manual of Regulations for Banks provides:
SECTION X383. Other Limitations and Restrictions. The following limitations and restrictions shall also apply regarding equity investments of banks. a. In any single enterprise. The equity investments of banks in any single enterprise shall not exceed at any time fifteen percent (15%) of the net worth of the investing bank as defined in Sec. X106 and Subsec. X121.5.
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Subsec. X121.5. Thus, the maximum amount that Security Bank could validly invest in the Paircargo Consortium is only P528,525,656.55, representing 15% of its entire net worth. The total net worth therefore of the Paircargo Consortium, after considering the maximum amounts that may be validly invested by each of its members is P558,384,871.55 or only 6.08% of the project cost,[29] an amount substantially less than the prescribed minimum equity investment required for the project in the amount of P2,755,095,000.00 or 30% of the project cost. The purpose of pre-qualification in any public bidding is to determine, at the earliest opportunity, the ability of the bidder to undertake the project. Thus, with respect to the bidder’s financial capacity at the pre-qualification stage, the law requires the government agency to examine and determine the ability of the bidder to fund the entire cost of the project by considering the maximum amounts that each bidder may invest in the project at the time of pre-qualification.
The PBAC has determined that any prospective bidder for the construction, operation and maintenance of the NAIA IPT III project should prove that it has the ability to provide equity in the minimum amount of 30% of the project cost, in accordance with the 70:30 debt-to-equity ratio prescribed in the Bid Documents. Thus, in the case of Paircargo Consortium, the PBAC should determine the maximum amounts that each member of the consortium may commit for the construction, operation and maintenance of the NAIA IPT III project at the time of pre-qualification. With respect to Security Bank, the maximum amount which may be invested by it would only be 15% of its net worth in view of the restrictions imposed by the General Banking Act. Disregarding the investment ceilings provided by applicable law would not result in a proper evaluation of whether or not a bidder is pre-qualified to undertake the project as for all intents and purposes, such ceiling or legal restriction determines the true maximum amount which a bidder may invest in the project. Further, the determination of whether or not a bidder is pre-qualified to undertake the project requires an evaluation of the financial capacity of the said bidder at the time the bid is submitted based on the required documents presented by the bidder. The PBAC should not be allowed to speculate on the future financial ability of the bidder to undertake the project on the basis of documents submitted. This would open doors to abuse and defeat the very purpose of a public bidding. This is especially true in the case at bar which involves the investment of billions of pesos by the project proponent. The relevant government authority is duty-bound to ensure that the awardee of the contract possesses the minimum required financial capability to complete the project. To allow the PBAC to estimate the bidder’s future financial capability would not secure the viability and integrity of the project. A restrictive and conservative application of the rules and procedures of public bidding is necessary not only to protect the impartiality and regularity of the proceedings but also to ensure the financial and technical reliability of the project. It has been held that:

The basic rule in public bidding is that bids should be evaluated based on the required documents submitted before and not after the opening of bids. Otherwise, the foundation of a fair and competitive public bidding would be defeated. Strict observance of the rules, regulations, and guidelines of the bidding process is the only safeguard to a fair, honest and competitive public bidding.[30]
Thus, if the maximum amount of equity that a bidder may invest in the project at the time the bids are submitted falls short of the minimum amounts required to be put up by the bidder, said bidder should be properly disqualified. Considering that at the pre-qualification stage, the maximum amounts which the Paircargo Consortium may invest in the project fell short of the minimum amounts prescribed by the PBAC, we hold that Paircargo Consortium was not a qualified bidder. Thus the award of the contract by the PBAC to the Paircargo Consortium, a disqualified bidder, is null and void. While it would be proper at this juncture to end the resolution of the instant controversy, as the legal effects of the disqualification of respondent PIATCO’s predecessor would come into play and necessarily result in the nullity of all the subsequent contracts entered by it in pursuance of the project, the Court
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result in the nullity of all the subsequent contracts entered by it in pursuance of the project, the Court feels that it is necessary to discuss in full the pressing issues of the present controversy for a complete resolution thereof.
II Is the 1997 Concession Agreement valid? Petitioners and public respondents contend that the 1997 Concession Agreement is invalid as it contains provisions that substantially depart from the draft Concession Agreement included in the Bid Documents. They maintain that a substantial departure from the draft Concession Agreement is a violation of public policy and renders the 1997 Concession Agreement null and void. PIATCO maintains, however, that the Concession Agreement attached to the Bid Documents is intended to be a draft, i.e., subject to change, alteration or modification, and that this intention was clear to all participants, including AEDC, and DOTC/MIAA. It argued further that said intention is expressed in Part C (6) of Bid Bulletin No. 3 issued by the PBAC which states: 6. Amendments to the Draft Concessions Agreement Amendments to the Draft Concessions Agreement shall be issued from time to time. Said amendments shall only cover items that would not materially affect the preparation of the proponent’s proposal.

By its very nature, public bidding aims to protect the public interest by giving the public the best possible advantages through open competition. Thus:
Competition must be legitimate, fair and honest. In the field of government contract law, competition requires, not only `bidding upon a common standard, a common basis, upon the same thing, the same subject matter, the same undertaking,' but also that it be legitimate, fair and honest; and not designed to injure or defraud the government.[31] An essential element of a publicly bidded contract is that all bidders must be on equal footing. Not simply in terms of application of the procedural rules and regulations imposed by the relevant government agency, but more importantly, on the contract bidded upon. Each bidder must be able to bid on the same thing. The rationale is obvious. If the winning bidder is allowed to later include or modify certain provisions in the contract awarded such that the contract is altered in any material respect, then the essence of fair competition in the public bidding is destroyed. A public bidding would indeed be a farce if after the contract is awarded, the winning bidder may modify the contract and include provisions which are favorable to it that were not previously made available to the other bidders. Thus: It is inherent in public biddings that there shall be a fair competition among the bidders. The specifications in such biddings provide the common ground or basis for the bidders. The specifications should, accordingly, operate equally or indiscriminately upon all bidders.[32] The same rule was restated by Chief Justice Stuart of the Supreme Court of Minnesota:

The law is well settled that where, as in this case, municipal authorities can only let a contract for public work to the lowest responsible bidder, the proposals and specifications therefore must be so framed as to permit free and full competition. Nor can they enter into a contract with the best bidder containing substantial provisions beneficial to him, not included or contemplated in the terms and specifications upon which the bids were invited.[33]
In fact, in the PBAC Bid Bulletin No. 3 cited by PIATCO to support its argument that the draft concession agreement is subject to amendment, the pertinent portion of which was quoted above, the PBAC also
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agreement is subject to amendment, the pertinent portion of which was quoted above, the PBAC also clarified that "[s]aid amendments shall only cover items that would not materially affect the preparation of the proponent’s proposal." While we concede that a winning bidder is not precluded from modifying or amending certain provisions of the contract bidded upon, such changes must not constitute substantial or material amendments that would alter the basic parameters of the contract and would constitute a denial to the other bidders of the opportunity to bid on the same terms. Hence, the determination of whether or not a modification or amendment of a contract bidded out constitutes a substantial amendment rests on whether the contract, when taken as a whole, would contain substantially different terms and conditions that would have the effect of altering the technical and/or financial proposals previously submitted by other bidders. The alterations and modifications in the contract executed between the government and the winning bidder must be such as to render such executed contract to be an entirely different contract from the one that was bidded upon. In the case of Caltex (Philippines), Inc. v. Delgado Brothers, Inc.,[34] this Court quoted with approval the ruling of the trial court that an amendment to a contract awarded through public bidding, when such subsequent amendment was made without a new public bidding, is null and void:

The Court agrees with the contention of counsel for the plaintiffs that the due execution of a contract after public bidding is a limitation upon the right of the contracting parties to alter or amend it without another public bidding, for otherwise what would a public bidding be good for if after the execution of a contract after public bidding, the contracting parties may alter or amend the contract, or even cancel it, at their will? Public biddings are held for the protection of the public, and to give the public the best possible advantages by means of open competition between the bidders. He who bids or offers the best terms is awarded the contract subject of the bid, and it is obvious that such protection and best possible advantages to the public will disappear if the parties to a contract executed after public bidding may alter or amend it without another previous public bidding.[35]
Hence, the question that comes to fore is this: is the 1997 Concession Agreement the same agreement that was offered for public bidding, i.e., the draft Concession Agreement attached to the Bid Documents? A close comparison of the draft Concession Agreement attached to the Bid Documents and the 1997 Concession Agreement reveals that the documents differ in at least two material respects: a. Modification on the Public Utility Revenues and Non-Public Utility Revenues that may be

collected by PIATCO
The fees that may be imposed and collected by PIATCO under the draft Concession Agreement and the 1997 Concession Agreement may be classified into three distinct categories: (1) fees which are subject to periodic adjustment of once every two years in accordance with a prescribed parametric formula and adjustments are made effective only upon written approval by MIAA; (2) fees other than those included in the first category which maybe adjusted by PIATCO whenever it deems necessary without need for consent of DOTC/MIAA; and (3) new fees and charges that may be imposed by PIATCO which have not been previously imposed or collected at the Ninoy Aquino International Airport Passenger Terminal I, pursuant to Administrative Order No. 1, Series of 1993, as amended. The glaring distinctions between the draft Concession Agreement and the 1997 Concession Agreement lie in the types of fees included in each category and the extent of the supervision and regulation which MIAA is allowed to exercise in relation thereto.

For fees under the first category, i.e., those which are subject to periodic adjustment in accordance with
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For fees under the first category, i.e., those which are subject to periodic adjustment in accordance with a prescribed parametric formula and effective only upon written approval by MIAA, the draft Concession Agreement includes the following:[36] (1) aircraft parking fees; (2) aircraft tacking fees; (3) groundhandling fees; (4) rentals and airline offices; (5) check-in counter rentals; and (6) porterage fees.

Under the 1997 Concession Agreement, fees which are subject to adjustment and effective upon MIAA approval are classified as "Public Utility Revenues" and include:[37]
(1) aircraft parking fees; (2) aircraft tacking fees;

(3) check-in counter fees; and
(4) Terminal Fees.

The implication of the reduced number of fees that are subject to MIAA approval is best appreciated in relation to fees included in the second category identified above. Under the 1997 Concession Agreement, fees which PIATCO may adjust whenever it deems necessary without need for consent of DOTC/MIAA are "Non-Public Utility Revenues" and is defined as "all other income not classified as Public Utility Revenues derived from operations of the Terminal and the Terminal Complex."[38] Thus, under the 1997 Concession Agreement, groundhandling fees, rentals from airline offices and porterage fees are no longer subject to MIAA regulation.
Further, under Section 6.03 of the draft Concession Agreement, MIAA reserves the right to regulate (1) lobby and vehicular parking fees and (2) other new fees and charges that may be imposed by PIATCO. Such regulation may be made by periodic adjustment and is effective only upon written approval of MIAA. The full text of said provision is quoted below: Section 6.03. Periodic Adjustment in Fees and Charges. Adjustments in the aircraft parking fees, aircraft tacking fees, groundhandling fees, rentals and airline offices, check-in-counter rentals and porterage fees shall be allowed only once every two years and in accordance with the Parametric Formula attached hereto as Annex F. Provided that adjustments shall be made effective only after the written express approval of the MIAA. Provided, further, that such approval of the MIAA, shall be contingent only on the conformity of the adjustments with the above said parametric formula. The first adjustment shall be made prior to the In-Service Date of the Terminal.

The MIAA reserves the right to regulate under the foregoing terms and conditions the lobby and vehicular parking fees and other new fees and charges as contemplated in paragraph 2 of Section 6.01 if in its judgment the users of the airport shall be deprived of a free option for the services they cover.[39]
On the other hand, the equivalent provision under the 1997 Concession Agreement reads: Section 6.03 Periodic Adjustment in Fees and Charges.
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Section 6.03 Periodic Adjustment in Fees and Charges.

….
(c) Concessionaire shall at all times be judicious in fixing fees and charges constituting Non-Public Utility Revenues in order to ensure that End Users are not unreasonably deprived of services. While the vehicular parking fee, porterage fee and greeter/well wisher fee constitute Non-Public Utility Revenues of Concessionaire, GRP may intervene and require Concessionaire to explain and justify the fee it may set from time to time, if in the reasonable opinion of GRP the said fees have become exorbitant resulting in the unreasonable deprivation of End Users of such services.[40] Thus, under the 1997 Concession Agreement, with respect to (1) vehicular parking fee, (2) porterage fee and (3) greeter/well wisher fee, all that MIAA can do is to require PIATCO to explain and justify the fees set by PIATCO. In the draft Concession Agreement, vehicular parking fee is subject to MIAA regulation and approval under the second paragraph of Section 6.03 thereof while porterage fee is covered by the first paragraph of the same provision. There is an obvious relaxation of the extent of control and regulation by MIAA with respect to the particular fees that may be charged by PIATCO. Moreover, with respect to the third category of fees that may be imposed and collected by PIATCO, i.e., new fees and charges that may be imposed by PIATCO which have not been previously imposed or collected at the Ninoy Aquino International Airport Passenger Terminal I, under Section 6.03 of the draft Concession Agreement MIAA has reserved the right to regulate the same under the same conditions that MIAA may regulate fees under the first category, i.e., periodic adjustment of once every two years in accordance with a prescribed parametric formula and effective only upon written approval by MIAA. However, under the 1997 Concession Agreement, adjustment of fees under the third category is not subject to MIAA regulation. With respect to terminal fees that may be charged by PIATCO,[41] as shown earlier, this was included within the category of "Public Utility Revenues" under the 1997 Concession Agreement. This classification is significant because under the 1997 Concession Agreement, "Public Utility Revenues" are subject to an "Interim Adjustment" of fees upon the occurrence of certain extraordinary events specified in the agreement.[42] However, under the draft Concession Agreement, terminal fees are not included in the types of fees that may be subject to "Interim Adjustment."[43] Finally, under the 1997 Concession Agreement, "Public Utility Revenues," except terminal fees, are denominated in US Dollars[44] while payments to the Government are in Philippine Pesos. In the draft Concession Agreement, no such stipulation was included. By stipulating that "Public Utility Revenues" will be paid to PIATCO in US Dollars while payments by PIATCO to the Government are in Philippine currency under the 1997 Concession Agreement, PIATCO is able to enjoy the benefits of depreciations of the Philippine Peso, while being effectively insulated from the detrimental effects of exchange rate fluctuations. When taken as a whole, the changes under the 1997 Concession Agreement with respect to reduction in the types of fees that are subject to MIAA regulation and the relaxation of such regulation with respect to other fees are significant amendments that substantially distinguish the draft Concession Agreement from the 1997 Concession Agreement. The 1997 Concession Agreement, in this respect, clearly gives PIATCO more favorable terms than what was available to other bidders at the time the contract was bidded out. It is not very difficult to see that the changes in the 1997 Concession Agreement translate to direct and concrete financial advantages for PIATCO which were not available at the time the contract was offered for bidding. It cannot be denied that under the 1997 Concession Agreement only "Public Utility Revenues" are subject to MIAA regulation. Adjustments of all other fees imposed and collected by PIATCO are entirely within its control. Moreover, with respect to terminal fees, under the 1997 Concession Agreement, the same is further subject to "Interim Adjustments" not previously stipulated in the draft Concession Agreement. Finally, the change in the currency stipulated for "Public Utility Revenues" under the 1997 Concession Agreement, except terminal fees, gives PIATCO an added benefit
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Revenues" under the 1997 Concession Agreement, except terminal fees, gives PIATCO an added benefit which was not available at the time of bidding.
b. Assumption by the Government of the liabilities of PIATCO in the event of the latter’s

default thereof
Under the draft Concession Agreement, default by PIATCO of any of its obligations to creditors who have provided, loaned or advanced funds for the NAIA IPT III project does not result in the assumption by the Government of these liabilities. In fact, nowhere in the said contract does default of PIATCO’s loans figure in the agreement. Such default does not directly result in any concomitant right or obligation in favor of the Government. However, the 1997 Concession Agreement provides: Section 4.04 …. Assignment.

(b) In the event Concessionaire should default in the payment of an Attendant Liability, and the default has resulted in the acceleration of the payment due date of the Attendant Liability prior to its stated date of maturity, the Unpaid Creditors and Concessionaire shall immediately inform GRP in writing of such default. GRP shall, within one hundred eighty (180) Days from receipt of the joint written notice of the Unpaid Creditors and Concessionaire, either (i) take over the Development Facility and assume the Attendant Liabilities, or (ii) allow the Unpaid Creditors, if qualified, to be substituted as concessionaire and operator of the Development Facility in accordance with the terms and conditions hereof, or designate a qualified operator acceptable to GRP to operate the Development Facility, likewise under the terms and conditions of this Agreement; Provided that if at the end of the 180-day period GRP shall not have served the Unpaid Creditors and Concessionaire written notice of its choice, GRP shall be deemed to have elected to take over the Development Facility with the concomitant assumption of Attendant Liabilities.
(c) If GRP should, by written notice, allow the Unpaid Creditors to be substituted as concessionaire, the latter shall form and organize a concession company qualified to take over the operation of the Development Facility. If the concession company should elect to designate an operator for the Development Facility, the concession company shall in good faith identify and designate a qualified operator acceptable to GRP within one hundred eighty (180) days from receipt of GRP’s written notice. If the concession company, acting in good faith and with due diligence, is unable to designate a qualified operator within the aforesaid period, then GRP shall at the end of the 180-day period take over the Development Facility and assume Attendant Liabilities. The term "Attendant Liabilities" under the 1997 Concession Agreement is defined as: Attendant Liabilities refer to all amounts recorded and from time to time outstanding in the books of the Concessionaire as owing to Unpaid Creditors who have provided, loaned or advanced funds actually used for the Project, including all interests, penalties, associated fees, charges, surcharges, indemnities, reimbursements and other related expenses, and further including amounts owed by Concessionaire to its suppliers, contractors and sub-contractors. Under the above quoted portions of Section 4.04 in relation to the definition of "Attendant Liabilities," default by PIATCO of its loans used to finance the NAIA IPT III project triggers the occurrence of certain
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default by PIATCO of its loans used to finance the NAIA IPT III project triggers the occurrence of certain events that leads to the assumption by the Government of the liability for the loans. Only in one instance may the Government escape the assumption of PIATCO’s liabilities, i.e., when the Government so elects and allows a qualified operator to take over as Concessionaire. However, this circumstance is dependent on the existence and availability of a qualified operator who is willing to take over the rights and obligations of PIATCO under the contract, a circumstance that is not entirely within the control of the Government. Without going into the validity of this provision at this juncture, suffice it to state that Section 4.04 of the 1997 Concession Agreement may be considered a form of security for the loans PIATCO has obtained to finance the project, an option that was not made available in the draft Concession Agreement. Section 4.04 is an important amendment to the 1997 Concession Agreement because it grants PIATCO a financial advantage or benefit which was not previously made available during the bidding process. This financial advantage is a significant modification that translates to better terms and conditions for PIATCO.

PIATCO, however, argues that the parties to the bidding procedure acknowledge that the draft Concession Agreement is subject to amendment because the Bid Documents permit financing or borrowing. They claim that it was the lenders who proposed the amendments to the draft Concession Agreement which resulted in the 1997 Concession Agreement.
We agree that it is not inconsistent with the rationale and purpose of the BOT Law to allow the project proponent or the winning bidder to obtain financing for the project, especially in this case which involves the construction, operation and maintenance of the NAIA IPT III. Expectedly, compliance by the project proponent of its undertakings therein would involve a substantial amount of investment. It is therefore inevitable for the awardee of the contract to seek alternate sources of funds to support the project. Be that as it may, this Court maintains that amendments to the contract bidded upon should always conform to the general policy on public bidding if such procedure is to be faithful to its real nature and purpose. By its very nature and characteristic, competitive public bidding aims to protect the public interest by giving the public the best possible advantages through open competition.[45] It has been held that the three principles in public bidding are (1) the offer to the public; (2) opportunity for competition; and (3) a basis for the exact comparison of bids. A regulation of the matter which excludes any of these factors destroys the distinctive character of the system and thwarts the purpose of its adoption.[46] These are the basic parameters which every awardee of a contract bidded out must conform to, requirements of financing and borrowing notwithstanding. Thus, upon a concrete showing that, as in this case, the contract signed by the government and the contract-awardee is an entirely different contract from the contract bidded, courts should not hesitate to strike down said contract in its entirety for violation of public policy on public bidding. A strict adherence on the principles, rules and regulations on public bidding must be sustained if only to preserve the integrity and the faith of the general public on the procedure. Public bidding is a standard practice for procuring government contracts for public service and for furnishing supplies and other materials. It aims to secure for the government the lowest possible price under the most favorable terms and conditions, to curtail favoritism in the award of government contracts and avoid suspicion of anomalies and it places all bidders in equal footing.[47] Any government action which permits any substantial variance between the conditions under which the bids are invited and the contract executed after the award thereof is a grave abuse of discretion amounting to lack or excess of jurisdiction which warrants proper judicial action. In view of the above discussion, the fact that the foregoing substantial amendments were made on the 1997 Concession Agreement renders the same null and void for being contrary to public policy. These amendments convert the 1997 Concession Agreement to an entirely different agreement from the contract bidded out or the draft Concession Agreement. It is not difficult to see that the amendments on (1) the types of fees or charges that are subject to MIAA regulation or control and the extent thereof

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and (2) the assumption by the Government, under certain conditions, of the liabilities of PIATCO directly translates concrete financial advantages to PIATCO that were previously not available during the bidding process. These amendments cannot be taken as merely supplements to or implementing provisions of those already existing in the draft Concession Agreement. The amendments discussed above present new terms and conditions which provide financial benefit to PIATCO which may have altered the technical and financial parameters of other bidders had they known that such terms were available.
III

Direct Government Guarantee
Article IV, Section 4.04(b) and (c), in relation to Article 1.06, of the 1997 Concession Agreement provides: Section 4.04 Assignment

….
(b) In the event Concessionaire should default in the payment of an Attendant Liability, and the default resulted in the acceleration of the payment due date of the Attendant Liability prior to its stated date of maturity, the Unpaid Creditors and Concessionaire shall immediately inform GRP in writing of such default. GRP shall within one hundred eighty (180) days from receipt of the joint written notice of the Unpaid Creditors and Concessionaire, either (i) take over the Development Facility and assume the Attendant Liabilities, or (ii) allow the Unpaid Creditors, if qualified to be substituted as concessionaire and operator of the Development facility in accordance with the terms and conditions hereof, or designate a qualified operator acceptable to GRP to operate the Development Facility, likewise under the terms and conditions of this Agreement; Provided, that if at the end of the 180-day period GRP shall not have served the Unpaid Creditors and Concessionaire written notice of its choice, GRP shall be deemed to have elected to take over the Development Facility with the concomitant assumption of Attendant Liabilities. (c) If GRP, by written notice, allow the Unpaid Creditors to be substituted as concessionaire, the latter shall form and organize a concession company qualified to takeover the operation of the Development Facility. If the concession company should elect to designate an operator for the Development Facility, the concession company shall in good faith identify and designate a qualified operator acceptable to GRP within one hundred eighty (180) days from receipt of GRP’s written notice. If the concession company, acting in good faith and with due diligence, is unable to designate a qualified operator within the aforesaid period, then GRP shall at the end of the 180-day period take over the Development Facility and assume Attendant Liabilities. …. Section 1.06. Attendant Liabilities

Attendant Liabilities refer to all amounts recorded and from time to time outstanding in the books of the Concessionaire as owing to Unpaid Creditors who have provided, loaned or advanced funds actually used for the Project, including all interests, penalties, associated fees, charges, surcharges, indemnities, reimbursements and other related expenses, and further including amounts owed by Concessionaire to its suppliers, contractors and sub-contractors.[48]
It is clear from the above-quoted provisions that Government, in the event that PIATCO defaults in its loan obligations, is obligated to pay "all amounts recorded and from time to time outstanding from the books" of PIATCO which the latter owes to its creditors.[49] These amounts include "all interests, penalties, associated fees, charges, surcharges, indemnities, reimbursements and other related expenses."*50+ This obligation of the Government to pay PIATCO’s creditors upon PIATCO’s default
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expenses."*50+ This obligation of the Government to pay PIATCO’s creditors upon PIATCO’s default would arise if the Government opts to take over NAIA IPT III. It should be noted, however, that even if the Government chooses the second option, which is to allow PIATCO’s unpaid creditors operate NAIA IPT III, the Government is still at a risk of being liable to PIATCO’s creditors should the latter be unable to designate a qualified operator within the prescribed period.[51] In effect, whatever option the Government chooses to take in the event of PIATCO’s failure to fulfill its loan obligations, the Government is still at a risk of assuming PIATCO’s outstanding loans. This is due to the fact that the Government would only be free from assuming PIATCO’s debts if the unpaid creditors would be able to designate a qualified operator within the period provided for in the contract. Thus, the Government’s assumption of liability is virtually out of its control. The Government under the circumstances provided for in the 1997 Concession Agreement is at the mercy of the existence, availability and willingness of a qualified operator. The above contractual provisions constitute a direct government guarantee which is prohibited by law. One of the main impetus for the enactment of the BOT Law is the lack of government funds to construct the infrastructure and development projects necessary for economic growth and development. This is why private sector resources are being tapped in order to finance these projects. The BOT law allows the private sector to participate, and is in fact encouraged to do so by way of incentives, such as minimizing the unstable flow of returns,[52] provided that the government would not have to unnecessarily expend scarcely available funds for the project itself. As such, direct guarantee, subsidy and equity by the government in these projects are strictly prohibited.[53] This is but logical for if the government would in the end still be at a risk of paying the debts incurred by the private entity in the BOT projects, then the purpose of the law is subverted. Section 2(n) of the BOT Law defines direct guarantee as follows:

(n) Direct government guarantee — An agreement whereby the government or any of its agencies or local government units assume responsibility for the repayment of debt directly incurred by the project proponent in implementing the project in case of a loan default. Clearly by providing that the Government "assumes" the attendant liabilities, which consists of PIATCO’s unpaid debts, the 1997 Concession Agreement provided for a direct government guarantee for the debts incurred by PIATCO in the implementation of the NAIA IPT III project. It is of no moment that the relevant sections are subsumed under the title of "assignment". The provisions providing for direct government guarantee which is prohibited by law is clear from the terms thereof.
The fact thet the ARCA superseded the 1997 Concession Agreement did not cure this fatal defect. Article IV, Section 4.04(c), in relation to Article I, Section 1.06, of the ARCA provides: Section 4.04 Security …. (c) GRP agrees with Concessionaire (PIATCO) that it shall negotiate in good faith and enter into direct agreement with the Senior Lenders, or with an agent of such Senior Lenders (which agreement shall be subject to the approval of the Bangko Sentral ng Pilipinas), in such form as may be reasonably acceptable to both GRP and Senior Lenders, with regard, inter alia, to the following parameters: …. (iv) If the Concessionaire [PIATCO] is in default under a payment obligation owed to the Senior Lenders, and as a result thereof the Senior Lenders have become entitled to accelerate the Senior Loans, the Senior Lenders shall have the right to notify GRP of the same, and without prejudice to any other rights of the Senior Lenders or any Senior Lenders’ agent may have (including without limitation under security interests granted in favor of the Senior Lenders), to either in good faith identify and designate a
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security interests granted in favor of the Senior Lenders), to either in good faith identify and designate a nominee which is qualified under sub-clause (viii)(y) below to operate the Development Facility [NAIA Terminal 3+ or transfer the Concessionaire’s *PIATCO+ rights and obligations under this Agreement to a transferee which is qualified under sub-clause (viii) below;

….
(vi) if the Senior Lenders, acting in good faith and using reasonable efforts, are unable to designate a nominee or effect a transfer in terms and conditions satisfactory to the Senior Lenders within one hundred eighty (180) days after giving GRP notice as referred to respectively in (iv) or (v) above, then GRP and the Senior Lenders shall endeavor in good faith to enter into any other arrangement relating to the Development Facility [NAIA Terminal 3] (other than a turnover of the Development Facility [NAIA Terminal 3] to GRP) within the following one hundred eighty (180) days. If no agreement relating to the Development Facility [NAIA Terminal 3] is arrived at by GRP and the Senior Lenders within the said 180day period, then at the end thereof the Development Facility [NAIA Terminal 3] shall be transferred by the Concessionaire [PIATCO] to GRP or its designee and GRP shall make a termination payment to Concessionaire [PIATCO] equal to the Appraised Value (as hereinafter defined) of the Development Facility [NAIA Terminal 3] or the sum of the Attendant Liabilities, if greater. Notwithstanding Section 8.01(c) hereof, this Agreement shall be deemed terminated upon the transfer of the Development Facility [NAIA Terminal 3] to GRP pursuant hereto; ….

Section 1.06.

Attendant Liabilities

Attendant Liabilities refer to all amounts in each case supported by verifiable evidence from time to time owed or which may become owing by Concessionaire [PIATCO] to Senior Lenders or any other persons or entities who have provided, loaned, or advanced funds or provided financial facilities to Concessionaire [PIATCO] for the Project [NAIA Terminal 3], including, without limitation, all principal, interest, associated fees, charges, reimbursements, and other related expenses (including the fees, charges and expenses of any agents or trustees of such persons or entities), whether payable at maturity, by acceleration or otherwise, and further including amounts owed by Concessionaire [PIATCO] to its professional consultants and advisers, suppliers, contractors and sub-contractors.[54] It is clear from the foregoing contractual provisions that in the event that PIATCO fails to fulfill its loan obligations to its Senior Lenders, the Government is obligated to directly negotiate and enter into an agreement relating to NAIA IPT III with the Senior Lenders, should the latter fail to appoint a qualified nominee or transferee who will take the place of PIATCO. If the Senior Lenders and the Government are unable to enter into an agreement after the prescribed period, the Government must then pay PIATCO, upon transfer of NAIA IPT III to the Government, termination payment equal to the appraised value of the project or the value of the attendant liabilities whichever is greater. Attendant liabilities as defined in the ARCA includes all amounts owed or thereafter may be owed by PIATCO not only to the Senior Lenders with whom PIATCO has defaulted in its loan obligations but to all other persons who may have loaned, advanced funds or provided any other type of financial facilities to PIATCO for NAIA IPT III. The amount of PIATCO’s debt that the Government would have to pay as a result of PIATCO’s default in its loan obligations -- in case no qualified nominee or transferee is appointed by the Senior Lenders and no other agreement relating to NAIA IPT III has been reached between the Government and the Senior Lenders -- includes, but is not limited to, "all principal, interest, associated fees, charges, reimbursements, and other related expenses . . . whether payable at maturity, by acceleration or otherwise."[55]

It is clear from the foregoing that the ARCA provides for a direct guarantee by the government to pay PIATCO’s loans not only to its Senior Lenders but all other entities who provided PIATCO funds or services upon PIATCO’s default in its loan obligation with its Senior Lenders. The fact that the Government’s obligation to pay PIATCO’s lenders for the latter’s obligation would only arise after the
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Government’s obligation to pay PIATCO’s lenders for the latter’s obligation would only arise after the Senior Lenders fail to appoint a qualified nominee or transferee does not detract from the fact that, should the conditions as stated in the contract occur, the ARCA still obligates the Government to pay any and all amounts owed by PIATCO to its lenders in connection with NAIA IPT III. Worse, the conditions that would make the Government liable for PIATCO’s debts is triggered by PIATCO’s own default of its loan obligations to its Senior Lenders to which loan contracts the Government was never a party to. The Government was not even given an option as to what course of action it should take in case PIATCO defaulted in the payment of its senior loans. The Government, upon PIATCO’s default, would be merely notified by the Senior Lenders of the same and it is the Senior Lenders who are authorized to appoint a qualified nominee or transferee. Should the Senior Lenders fail to make such an appointment, the Government is then automatically obligated to "directly deal and negotiate" with the Senior Lenders regarding NAIA IPT III. The only way the Government would not be liable for PIATCO’s debt is for a qualified nominee or transferee to be appointed in place of PIATCO to continue the construction, operation and maintenance of NAIA IPT III. This "pre-condition", however, will not take the contract out of the ambit of a direct guarantee by the government as the existence, availability and willingness of a qualified nominee or transferee is totally out of the government’s control. As such the Government is virtually at the mercy of PIATCO (that it would not default on its loan obligations to its Senior Lenders), the Senior Lenders (that they would appoint a qualified nominee or transferee or agree to some other arrangement with the Government) and the existence of a qualified nominee or transferee who is able and willing to take the place of PIATCO in NAIA IPT III. The proscription against government guarantee in any form is one of the policy considerations behind the BOT Law. Clearly, in the present case, the ARCA obligates the Government to pay for all loans, advances and obligations arising out of financial facilities extended to PIATCO for the implementation of the NAIA IPT III project should PIATCO default in its loan obligations to its Senior Lenders and the latter fails to appoint a qualified nominee or transferee. This in effect would make the Government liable for PIATCO’s loans should the conditions as set forth in the ARCA arise. This is a form of direct government guarantee. The BOT Law and its implementing rules provide that in order for an unsolicited proposal for a BOT project may be accepted, the following conditions must first be met: (1) the project involves a new concept in technology and/or is not part of the list of priority projects, (2) no direct government guarantee, subsidy or equity is required, and (3) the government agency or local government unit has invited by publication other interested parties to a public bidding and conducted the same.[56] The failure to meet any of the above conditions will result in the denial of the proposal. It is further provided that the presence of direct government guarantee, subsidy or equity will "necessarily disqualify a proposal from being treated and accepted as an unsolicited proposal."[57] The BOT Law clearly and strictly prohibits direct government guarantee, subsidy and equity in unsolicited proposals that the mere inclusion of a provision to that effect is fatal and is sufficient to deny the proposal. It stands to reason therefore that if a proposal can be denied by reason of the existence of direct government guarantee, then its inclusion in the contract executed after the said proposal has been accepted is likewise sufficient to invalidate the contract itself. A prohibited provision, the inclusion of which would result in the denial of a proposal cannot, and should not, be allowed to later on be inserted in the contract resulting from the said proposal. The basic rules of justice and fair play alone militate against such an occurrence and must not, therefore, be countenanced particularly in this instance where the government is exposed to the risk of shouldering hundreds of million of dollars in debt.

This Court has long and consistently adhered to the legal maxim that those that cannot be done directly cannot be done indirectly.[58] To declare the PIATCO contracts valid despite the clear statutory prohibition against a direct government guarantee would not only make a mockery of what the BOT Law seeks to prevent -- which is to expose the government to the risk of incurring a monetary obligation resulting from a contract of loan between the project proponent and its lenders and to which the Government is not a party to -- but would also render the BOT Law useless for what it seeks to achieve -to make use of the resources of the private sector in the "financing, operation and maintenance of infrastructure and development projects"[59] which are necessary for national growth and development
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infrastructure and development projects"[59] which are necessary for national growth and development but which the government, unfortunately, could ill-afford to finance at this point in time. IV Temporary takeover of business affected with public interest Article XII, Section 17 of the 1987 Constitution provides:

Section 17. In times of national emergency, when the public interest so requires, the State may, during the emergency and under reasonable terms prescribed by it, temporarily take over or direct the operation of any privately owned public utility or business affected with public interest.
The above provision pertains to the right of the State in times of national emergency, and in the exercise of its police power, to temporarily take over the operation of any business affected with public interest. In the 1986 Constitutional Commission, the term "national emergency" was defined to include threat from external aggression, calamities or national disasters, but not strikes "unless it is of such proportion that would paralyze government service."[60] The duration of the emergency itself is the determining factor as to how long the temporary takeover by the government would last.[61] The temporary takeover by the government extends only to the operation of the business and not to the ownership thereof. As such the government is not required to compensate the private entity-owner of the said business as there is no transfer of ownership, whether permanent or temporary. The private entityowner affected by the temporary takeover cannot, likewise, claim just compensation for the use of the said business and its properties as the temporary takeover by the government is in exercise of its police power and not of its power of eminent domain. Article V, Section 5.10 (c) of the 1997 Concession Agreement provides: Section 5.10 Temporary Take-over of operations by GRP.

….
(c) In the event the development Facility or any part thereof and/or the operations of Concessionaire or any part thereof, become the subject matter of or be included in any notice, notification, or declaration concerning or relating to acquisition, seizure or appropriation by GRP in times of war or national emergency, GRP shall, by written notice to Concessionaire, immediately take over the operations of the Terminal and/or the Terminal Complex. During such take over by GRP, the Concession Period shall be suspended; provided, that upon termination of war, hostilities or national emergency, the operations shall be returned to Concessionaire, at which time, the Concession period shall commence to run again. Concessionaire shall be entitled to reasonable compensation for the duration of the temporary take over by GRP, which compensation shall take into account the reasonable cost for the use of the Terminal and/or Terminal Complex, (which is in the amount at least equal to the debt service requirements of Concessionaire, if the temporary take over should occur at the time when Concessionaire is still servicing debts owed to project lenders), any loss or damage to the Development Facility, and other consequential damages. If the parties cannot agree on the reasonable compensation of Concessionaire, or on the liability of GRP as aforesaid, the matter shall be resolved in accordance with Section 10.01 [Arbitration]. Any amount determined to be payable by GRP to Concessionaire shall be offset from the amount next payable by Concessionaire to GRP.[62] PIATCO cannot, by mere contractual stipulation, contravene the Constitutional provision on temporary government takeover and obligate the government to pay "reasonable cost for the use of the Terminal and/or Terminal Complex."[63] Article XII, section 17 of the 1987 Constitution envisions a situation wherein the exigencies of the times necessitate the government to "temporarily take over or direct the operation of any privately owned public utility or business affected with public interest." It is the

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welfare and interest of the public which is the paramount consideration in determining whether or not to temporarily take over a particular business. Clearly, the State in effecting the temporary takeover is exercising its police power. Police power is the "most essential, insistent, and illimitable of powers."[64] Its exercise therefore must not be unreasonably hampered nor its exercise be a source of obligation by the government in the absence of damage due to arbitrariness of its exercise.[65] Thus, requiring the government to pay reasonable compensation for the reasonable use of the property pursuant to the operation of the business contravenes the Constitution.
V Regulation of Monopolies A monopoly is "a privilege or peculiar advantage vested in one or more persons or companies, consisting in the exclusive right (or power) to carry on a particular business or trade, manufacture a particular article, or control the sale of a particular commodity."[66] The 1987 Constitution strictly regulates monopolies, whether private or public, and even provides for their prohibition if public interest so requires. Article XII, Section 19 of the 1987 Constitution states: Sec. 19. The state shall regulate or prohibit monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed. Clearly, monopolies are not per se prohibited by the Constitution but may be permitted to exist to aid the government in carrying on an enterprise or to aid in the performance of various services and functions in the interest of the public.[67] Nonetheless, a determination must first be made as to whether public interest requires a monopoly. As monopolies are subject to abuses that can inflict severe prejudice to the public, they are subject to a higher level of State regulation than an ordinary business undertaking. In the cases at bar, PIATCO, under the 1997 Concession Agreement and the ARCA, is granted the "exclusive right to operate a commercial international passenger terminal within the Island of Luzon" at the NAIA IPT III.[68] This is with the exception of already existing international airports in Luzon such as those located in the Subic Bay Freeport Special Economic Zone ("SBFSEZ"), Clark Special Economic Zone ("CSEZ") and in Laoag City.*69+ As such, upon commencement of PIATCO’s operation of NAIA IPT III, Terminals 1 and 2 of NAIA would cease to function as international passenger terminals. This, however, does not prevent MIAA to use Terminals 1 and 2 as domestic passenger terminals or in any other manner as it may deem appropriate except those activities that would compete with NAIA IPT III in the latter’s operation as an international passenger terminal.*70+ The right granted to PIATCO to exclusively operate NAIA IPT III would be for a period of twenty-five (25) years from the In-Service Date[71] and renewable for another twenty-five (25) years at the option of the government.[72] Both the 1997 Concession Agreement and the ARCA further provide that, in view of the exclusive right granted to PIATCO, the concession contracts of the service providers currently servicing Terminals 1 and 2 would no longer be renewed and those concession contracts whose expiration are subsequent to the In-Service Date would cease to be effective on the said date.[73]

The operation of an international passenger airport terminal is no doubt an undertaking imbued with public interest. In entering into a Build-Operate-and-Transfer contract for the construction, operation and maintenance of NAIA IPT III, the government has determined that public interest would be served better if private sector resources were used in its construction and an exclusive right to operate be granted to the private entity undertaking the said project, in this case PIATCO. Nonetheless, the privilege given to PIATCO is subject to reasonable regulation and supervision by the Government through the MIAA, which is the government agency authorized to operate the NAIA complex, as well as DOTC, the department to which MIAA is attached.[74]
This is in accord with the Constitutional mandate that a monopoly which is not prohibited must be regulated.[75] While it is the declared policy of the BOT Law to encourage private sector participation
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regulated.[75] While it is the declared policy of the BOT Law to encourage private sector participation by "providing a climate of minimum government regulations,"[76] the same does not mean that Government must completely surrender its sovereign power to protect public interest in the operation of a public utility as a monopoly. The operation of said public utility can not be done in an arbitrary manner to the detriment of the public which it seeks to serve. The right granted to the public utility may be exclusive but the exercise of the right cannot run riot. Thus, while PIATCO may be authorized to exclusively operate NAIA IPT III as an international passenger terminal, the Government, through the MIAA, has the right and the duty to ensure that it is done in accord with public interest. PIATCO’s right to operate NAIA IPT III cannot also violate the rights of third parties. Section 3.01(e) of the 1997 Concession Agreement and the ARCA provide:

3.01 Concession Period
….

(e) GRP confirms that certain concession agreements relative to certain services and operations currently being undertaken at the Ninoy Aquino International Airport passenger Terminal I have a validity period extending beyond the In-Service Date. GRP through DOTC/MIAA, confirms that these services and operations shall not be carried over to the Terminal and the Concessionaire is under no legal obligation to permit such carry-over except through a separate agreement duly entered into with Concessionaire. In the event Concessionaire becomes involved in any litigation initiated by any such concessionaire or operator, GRP undertakes and hereby holds Concessionaire free and harmless on full indemnity basis from and against any loss and/or any liability resulting from any such litigation, including the cost of litigation and the reasonable fees paid or payable to Concessionaire’s counsel of choice, all such amounts shall be fully deductible by way of an offset from any amount which the Concessionaire is bound to pay GRP under this Agreement.
During the oral arguments on December 10, 2002, the counsel for the petitioners-in-intervention for G.R. No. 155001 stated that there are two service providers whose contracts are still existing and whose validity extends beyond the In-Service Date. One contract remains valid until 2008 and the other until 2010.[77]

We hold that while the service providers presently operating at NAIA Terminal 1 do not have an absolute right for the renewal or the extension of their respective contracts, those contracts whose duration extends beyond NAIA IPT III’s In-Service-Date should not be unduly prejudiced. These contracts must be respected not just by the parties thereto but also by third parties. PIATCO cannot, by law and certainly not by contract, render a valid and binding contract nugatory. PIATCO, by the mere expedient of claiming an exclusive right to operate, cannot require the Government to break its contractual obligations to the service providers. In contrast to the arrastre and stevedoring service providers in the case of Anglo-Fil Trading Corporation v. Lazaro[78] whose contracts consist of temporary hold-over permits, the affected service providers in the cases at bar, have a valid and binding contract with the Government, through MIAA, whose period of effectivity, as well as the other terms and conditions thereof, cannot be violated.
In fine, the efficient functioning of NAIA IPT III is imbued with public interest. The provisions of the 1997 Concession Agreement and the ARCA did not strip government, thru the MIAA, of its right to supervise the operation of the whole NAIA complex, including NAIA IPT III. As the primary government agency tasked with the job,*79+ it is MIAA’s responsibility to ensure that whoever by contract is given the right to operate NAIA IPT III will do so within the bounds of the law and with due regard to the rights of third parties and above all, the interest of the public. VI

CONCLUSION
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CONCLUSION

In sum, this Court rules that in view of the absence of the requisite financial capacity of the Paircargo Consortium, predecessor of respondent PIATCO, the award by the PBAC of the contract for the construction, operation and maintenance of the NAIA IPT III is null and void. Further, considering that the 1997 Concession Agreement contains material and substantial amendments, which amendments had the effect of converting the 1997 Concession Agreement into an entirely different agreement from the contract bidded upon, the 1997 Concession Agreement is similarly null and void for being contrary to public policy. The provisions under Sections 4.04(b) and (c) in relation to Section 1.06 of the 1997 Concession Agreement and Section 4.04(c) in relation to Section 1.06 of the ARCA, which constitute a direct government guarantee expressly prohibited by, among others, the BOT Law and its Implementing Rules and Regulations are also null and void. The Supplements, being accessory contracts to the ARCA, are likewise null and void.
WHEREFORE, the 1997 Concession Agreement, the Amended and Restated Concession Agreement and the Supplements thereto are set aside for being null and void. SO ORDERED. Davide, Jr., C.J., Bellosillo, Ynares-Santiago, Sandoval-Gutierrez, Austria-Martinez, Corona, and CarpioMorales, JJ., concur. Vitug, J., see separate (dissenting) opinion. Panganiban, J., please see separate opinion. Quisumbing, J., no jurisdiction, please see separate opinion of J. Vitug in which he concurs. Carpio, J., no part.

Callejo, Sr., J., also concur in the separate opinion of J. Panganiban.
Azcuna, J., joins the separate opinion of J. Vitug.

/---!e-library! 6.0 Philippines Copyright © 2000 by Sony Valdez---\

[2003V454ES] [3/7] DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B. REUNILLA, MANUEL ANTONIO B. BOÑE, MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V. DOMALAON, CONRADO G. DIMAANO, LOLITA R. HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C. HILARIO, MIASCOR WORKERS UNION - NATIONAL LABOR UNION (MWU-NLU), and PHILIPPINE AIRLINES EMPLOYEES ASSOCIATION (PALEA), petitioners, vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS and SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of the Department of Transportation and Communications, respondents, / MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS AVIATION SYSTEMS CORPORATION, MACROASIA-EUREST SERVICES, INC., MACROASIA-MENZIES AIRPORT SERVICES CORPORATION, MIASCOR CATERING SERVICES CORPORATION, MIASCOR AIRCRAFT MAINTENANCE CORPORATION, and MIASCOR LOGISTICS CORPORATION, petitioners-inintervention,2003 May 5En BancG.R. No. 155001SEPARATE OPINION VITUG, J.:
This Court is bereft of jurisdiction to hear the petitions at bar. The Constitution provides that the
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This Court is bereft of jurisdiction to hear the petitions at bar. The Constitution provides that the Supreme Court shall exercise original jurisdiction over, among other actual controversies, petitions for certiorari, prohibition, mandamus, quo warranto, and habeas corpus.[1] The cases in question, although denominated to be petitions for prohibition, actually pray for the nullification of the PIATCO contracts and to restrain respondents from implementing said agreements for being illegal and unconstitutional. Section 2, Rule 65 of the Rules of Court states: "When the proceedings of any tribunal, corporation, board, officer or person, whether exercising judicial, quasi-judicial or ministerial functions, are without or in excess of its or his jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction, and there is no appeal or any other plain, speedy and adequate remedy in the ordinary course of law, a person aggrieved thereby may file a verified petition in the proper court, alleging the facts with certainty and praying that the judgment be rendered commanding the respondent to desist from further proceedings in the action or matter specified therein, or otherwise granting such incidental reliefs as law and justice may require."

The Rule is explicit. A petition for prohibition may be filed against a tribunal, corporation, board, officer or person, exercising judicial, quasi-judicial or ministerial functions. What the petitions seek from respondents do not involve judicial, quasi-judicial or ministerial functions. In prohibition, only legal issues affecting the jurisdiction of the tribunal, board or officer involved may be resolved on the basis of undisputed facts.[2] The parties allege, respectively, contentious evidentiary facts. It would be difficult, if not anomalous, to decide the jurisdictional issue on the basis of the contradictory factual submissions made by the parties.[3] As the Court has so often exhorted, it is not a trier of facts.
The petitions, in effect, are in the nature of actions for declaratory relief under Rule 63 of the Rules of Court. The Rules provide that any person interested under a contract may, before breach or violation thereof, bring an action in the appropriate Regional Trial Court to determine any question of construction or validity arising, and for a declaration of his rights or duties thereunder.[4] The Supreme Court assumes no jurisdiction over petitions for declaratory relief which are cognizable by regional trial courts.[5] As I have so expressed in Tolentino vs. Secretary of Finance[6], reiterated in Santiago vs. Guingona, Jr.[7], the Supreme Court should not be thought of as having been tasked with the awesome responsibility of overseeing the entire bureaucracy. Pervasive and limitless, such as it may seem to be under the 1987 Constitution, judicial power still succumbs to the paramount doctrine of separation of powers. The Court may not at good liberty intrude, inn the guise of sovereign imprimatur, into every affair of government. What significance can still then remain of the time-honored and widely acclaimed principle of separation of powers if, at every turn, the Court allows itself to pass upon at will the disposition of a co-equal, independent and coordinate branch in our system of government. I dread to think of the so varied uncertainties that such an undue interference can lead to. Accordingly, I vote for the dismissal of the petition. [1] Article VIII, Section 5(1), 1987 Constitution. [2] Matuguina Integrated Products, Inc. vs. CA, 263 SCRA 490; Mafinco Trading Corporation vs. Ople, 70 SCRA 139. [3] Mafinco Trading Corporation vs. Ople, supra.

[4] Section 1, Rule 63, Rules of Court.
[5] In re: Bermudez, 145 SCRA 160.

[6] 235 SCRA 630, 720.
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[6] 235 SCRA 630, 720.

[7] 298 SCRA 795.

/---!e-library! 6.0 Philippines Copyright © 2000 by Sony Valdez---\ [2003V454ES] [4/7] DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B. REUNILLA, MANUEL ANTONIO B. BOÑE, MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V. DOMALAON, CONRADO G. DIMAANO, LOLITA R. HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C. HILARIO, MIASCOR WORKERS UNION - NATIONAL LABOR UNION (MWU-NLU), and PHILIPPINE AIRLINES EMPLOYEES ASSOCIATION (PALEA), petitioners, vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS and SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of the Department of Transportation and Communications, respondents, / MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS AVIATION SYSTEMS CORPORATION, MACROASIA-EUREST SERVICES, INC., MACROASIA-MENZIES AIRPORT SERVICES CORPORATION, MIASCOR CATERING SERVICES CORPORATION, MIASCOR AIRCRAFT MAINTENANCE CORPORATION, and MIASCOR LOGISTICS CORPORATION, petitioners-inintervention,2003 May 5En BancG.R. No. 155001[1/3] SEPARATE OPINION

PANGANIBAN, J.: The five contracts for the construction and the operation of Ninoy Aquino International Airport (NAIA) Terminal III, the subject of the consolidated Petitions before the Court, are replete with outright violations of law, public policy and the Constitution. The only proper thing to do is declare them all null and void ab initio and let the chips fall where they may. Fiat iustitia ruat coelum. The facts leading to this controversy are already well presented in the ponencia. I shall not burden the readers with a retelling thereof. Instead, I will cut to the chase and directly address the two sets of gut issues: 1. The first issue is procedural: Does the Supreme Court have original jurisdiction to hear and decide the Petitions? Corollarily, do petitioners have locus standi and should this Court decide the cases without any mandatory referral to arbitration? 2. The second one is substantive in character: Did the subject contracts violate the Constitution, the laws, and public policy to such an extent as to render all of them void and inexistent? My answer to all the above questions is a firm "Yes."

The Procedural Issue:
Jurisdiction, Standing and Arbitration Definitely and surely, the issues involved in these Petitions are clearly of transcendental importance and of national interest. The subject contracts pertain to the construction and the operation of the country’s premiere international airport terminal -- an ultramodern world-class public utility that will play a major role in the country’s economic development and serve to project a positive image of our country abroad. The five build-operate-&-transfer (BOT) contracts, while entailing the investment of billions of pesos in capital and the availment of several hundred millions of dollars in loans, contain provisions that tend to establish a monopoly, require the disbursements of public funds sans
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provisions that tend to establish a monopoly, require the disbursements of public funds sans appropriations, and provide government guarantees in violation of statutory prohibitions, as well as other provisions equally offensive to law, public policy and the Constitution. Public interest will inevitably be affected thereby.

Thus, objections to these Petitions, grounded upon (a) the hierarchy of courts, (b) the need for arbitration prior to court action, and (c) the alleged lack of sufficient personality, standing or interest, being in the main procedural matters, must now be set aside, as they have been in past cases. This Court must be permitted to perform its constitutional duty of determining whether the other agencies of government have acted within the limits of the Constitution and the laws, or if they have gravely abused the discretion entrusted to them.[1] Hierarchy
of Courts

The Court has, in the past, held that questions relating to gargantuan government contracts ought to be settled without delay.[2] This holding applies with greater force to the instant cases. Respondent Piatco is partly correct in averring that petitioners can obtain relief from the regional trial courts via an action to annul the contracts.
Nevertheless, the unavoidable consequence of having to await the rendition and the finality of any such judgment would be a prolonged state of uncertainty that would be prejudicial to the nation, the parties and the general public. And, in light of the feared loss of jobs of the petitioning workers, consequent to the inevitable pretermination of contracts of the petitioning service providers that will follow upon the heels of the impending opening of NAIA Terminal III, the need for relief is patently urgent, and therefore, direct resort to this Court through the special civil action of prohibition is thus justified.[3] Contrary to Piatco’s argument that the resolution of the issues raised in the Petitions will require delving into factual questions,[4] I submit that their disposition ultimately turns on questions of law.[5] Further, many of the significant and relevant factual questions can be easily addressed by an examination of the documents submitted by the parties. In any event, the Petitions raise some novel questions involving the application of the amended BOT Law, which this Court has seen fit to tackle. Arbitration Should the dispute be referred to arbitration prior to judicial recourse? Respondent Piatco claims that Section 10.02 of the Amended and Restated Concession Agreement (ARCA) provides for arbitration under the auspices of the International Chamber of Commerce to settle any dispute or controversy or claim arising in connection with the Concession Agreement, its amendments and supplements. The government disagrees, however, insisting that there can be no arbitration based on Section 10.02 of the ARCA, since all the Piatco contracts are void ab initio. Therefore, all contractual provisions, including Section 10.02 of the ARCA, are likewise void, inexistent and inoperative. To support its stand, the government cites Chavez v. Presidential Commission on Good Government:[6] "The void agreement will not be rendered operative by the parties’ alleged performance (partial or full) of their respective prestations. A contract that violates the Constitution and the law is null and void ab initio and vests no rights and creates no obligations. It produces no legal effect at all." As will be discussed at length later, the Piatco contracts are indeed void in their entirety; thus, a resort to the aforesaid provision on arbitration is unavailing. Besides, petitioners and petitioners-inintervention have pointed out that, even granting arguendo that the arbitration clause remained a valid provision, it still cannot bind them inasmuch as they are not parties to the Piatco contracts. And in the final analysis, it is unarguable that the arbitration process provided for under Section 10.02 of the ARCA, to be undertaken by a panel of three (3) arbitrators appointed in accordance with the Rules of Arbitration of the International Chamber of Commerce, will not be able to address, determine and
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Arbitration of the International Chamber of Commerce, will not be able to address, determine and definitively resolve the constitutional and legal questions that have been raised in the Petitions before us. Locus Standi Given this Court’s previous decisions in cases of similar import, no one will seriously doubt that, being taxpayers and members of the House of Representatives, Petitioners Baterina et al. have locus standi to bring the Petition in GR No. 155547. In Albano v. Reyes,[7] this Court held that the petitioner therein, suing as a citizen, taxpayer and member of the House of Representatives, was sufficiently clothed with standing to bring the suit questioning the validity of the assailed contract. The Court cited the fact that public interest was involved, in view of the important role of the Manila International Container Terminal (MICT) in the country’s economic development and the magnitude of the financial consideration. This, notwithstanding the fact that expenditure of public funds was not required under the assailed contract.

In the cases presently under consideration, petitioners’ personal and substantial interest in the controversy is shown by the fact that certain provisions in the Piatco contracts create obligations on the part of government (through the DOTC and the MIAA) to disburse public funds without prior congressional appropriations.
Petitioners thus correctly assert that the injury to them has a twofold aspect: (1) they are adversely affected as taxpayers on account of the illegal disbursement of public funds; and (2) they are prejudiced qua legislators, since the contractual provisions requiring the government to incur expenditures without appropriations also operate as limitations upon the exclusive power and prerogative of Congress over the public purse. As members of the House of Representatives, they are actually deprived of discretion insofar as the inclusion of those items of expenditure in the budget is concerned. To prevent such encroachment upon the legislative privilege and obviate injury to the institution of which they are members, petitioners-legislators have locus standi to bring suit.

Messrs. Agan et al. and Lopez et al., are likewise taxpayers and thus possessed of standing to challenge the illegal disbursement of public funds. Messrs. Agan et al., in particular, are employees (or representatives of employees) of various service providers that have (1) existing concession agreements with the MIAA to provide airport services necessary to the operation of the NAIA and (2) service agreements to furnish essential support services to the international airlines operating at the NAIA.
On the other hand, Messrs. Lopez et al. are employees of the MIAA. These petitioners (Messrs. Agan et al. and Messrs. Lopez et al.) are confronted with the prospect of being laid off from their jobs and losing their means of livelihood when their employer-companies are forced to shut down or otherwise retrench and cut back on manpower. Such development would result from the imminent implementation of certain provisions in the contracts that tend toward the creation of a monopoly in favor of Piatco, its subsidiaries and related companies.

Petitioners-in-intervention are service providers in the business of furnishing airport-related services to international airlines and passengers in the NAIA and are therefore competitors of Piatco as far as that line of business is concerned. On account of provisions in the Piatco contracts, petitioners-inintervention have to enter into a written contract with Piatco so as not to be shut out of NAIA Terminal III and barred from doing business there. Since there is no provision to ensure or safeguard free and fair competition, they are literally at its mercy. They claim injury on account of their deprivation of property (business) and of the liberty to contract, without due process of law.
And even if petitioners and petitioners-in-intervention were not sufficiently clothed with legal standing, I have at the outset already established that, given its impact on the public and on national interest, this controversy is laden with transcendental importance and constitutional significance. Hence, I do not hesitate to adopt the same position as was enunciated in Kilosbayan v. Guingona Jr.[8] that "in cases of
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hesitate to adopt the same position as was enunciated in Kilosbayan v. Guingona Jr.[8] that "in cases of transcendental importance, the Court may relax the standing requirements and allow a suit to prosper even when there is no direct injury to the party claiming the right of judicial review."[9] The Substantive Issue: Violations of the Constitution and the Laws From the Outset, the Bidding

Process Was Flawed and Tainted
After studying the documents submitted and arguments advanced by the parties, I have no doubt that, right at the outset, Piatco was not qualified to participate in the bidding process for the Terminal III project, but was nevertheless permitted to do so. It even won the bidding and was helped along by what appears to be a series of collusive and corrosive acts.

The build-operate-and-transfer (BOT) project for the NAIA Passenger Terminal III comes under the category of an "unsolicited proposal,"which is the subject of Section 4-A of the BOT Law.[10] The unsolicited proposal was originally submitted by the Asia’s Emerging Dragon Corporation (AEDC) to the Department of Transportation and Communications (DOTC) and the Manila International Airport Authority (MIAA), which reviewed and approved the proposal.
The draft of the concession agreement as negotiated between AEDC and DOTC/MIAA was endorsed to the National Economic Development Authority (NEDA-ICC), which in turn reviewed it on the basis of its scope, economic viability, financial indicators and risks; and thereafter approved it for bidding. The DOTC/MIAA then prepared the Bid Documents, incorporating therein the negotiated Draft Concession Agreement, and published invitations for public bidding, i.e., for the submission of comparative or competitive proposals. Piatco’s predecessor-in-interest, the Paircargo Consortium, was the only company that submitted a competitive bid or price challenge. At this point, I must emphasize that the law requires the award of a BOT project to the bidder that has satisfied the minimum requirements; and met the technical, financial, organizational and legal standards provided in the BOT Law. Section 5 of this statute states: "Sec. 5. Public bidding of projects. - x x x

"In the case of a build-operate-and-transfer arrangement, the contract shall be awarded to the bidder who, having satisfied the minimum financial, technical, organizational and legal standards required by this Act, has submitted the lowest bid and most favorable terms for the project, based on the present value of its proposed tolls, fees, rentals and charges over a fixed term for the facility to be constructed, rehabilitated, operated and maintained according to the prescribed minimum design and performance standards, plans and specifications. x x x." ( mphasis supplied.) The same provision requires that the price challenge via public bidding "must be conducted under a two-envelope/two-stage system: the first envelope to contain the technical proposal and the second envelope to contain the financial proposal." Moreover, the 1994 Implementing Rules and Regulations (IRR) provide that only those bidders that have passed the prequalification stage are permitted to have their two envelopes reviewed.
In other words, prospective bidders must prequalify by submitting their prequalification documents for evaluation; and only the pre-qualified bidders would be entitled to have their bids opened, evaluated
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evaluation; and only the pre-qualified bidders would be entitled to have their bids opened, evaluated and appreciated. On the other hand, disqualified bidders are to be informed of the reason for their disqualification. This procedure was confirmed and reiterated in the Bid Documents, which I quote thus: "Prequalified proponents will be considered eligible to move to second stage technical proposal evaluation. The second and third envelopes of pre-disqualified proponents will be returned."[11] Aside from complying with the legal and technical requirements (track record or experience of the firm and its key personnel), a project proponent desiring to prequalify must also demonstrate its financial capacity to undertake the project. To establish such capability, a proponent must prove that it is able to raise the minimum amount of equity required for the project and to procure the loans or financing needed for it. Section 5.4(c) of the 1994 IRR provides:

"Sec. 5.4. Prequalification Requirements. - To prequalify, a project proponent must comply with the following requirements: xxx xx x xx x

"c. Financial Capability. The project proponent must have adequate capability to sustain the financing requirements for the detailed engineering design, construction, and/or operation and maintenance phases of the project, as the case may be. For purposes of prequalification, this capability shall be measured in terms of: (i) proof of the ability of the project proponent and/or the consortium to provide a minimum amount of equity to the project, and (ii) a letter testimonial from reputable banks attesting that the project proponent and/or members of the consortium are banking with them, that they are in good financial standing, and that they have adequate resources. The government Agency/LGU concerned shall determine on a project-to-project basis, and before pre-qualification, the minimum amount of equity needed. x x x." talics supplied) Since the minimum amount of equity for the project was set at 30 percent[12] of the minimum project cost of US$350 million, the minimum amount of equity required of any proponent stood at US$105 million. Converted to pesos at the exchange rate then of P26.239 to US$1.00 (as quoted by the Bangko Sentral ng Pilipinas), the peso equivalent of the minimum equity was P2,755,095,000. However, the combined equity or net worth of the Paircargo consortium stood at only P558,384,871.55.[13] This amount was only slightly over 6 percent of the minimum project cost and very much short of the required minimum equity, which was equivalent to 30 percent of the project cost. Such deficiency should have immediately caused the disqualification of the Paircargo consortium. This matter was brought to the attention of the Prequalification and Bidding Committee (PBAC). Notwithstanding the glaring deficiency, DOTC Undersecretary Primitivo C. Cal, concurrent chair of the PBAC, declared in a Memorandum dated 14 October 1996 that "the Challenger (Paircargo consortium) was found to have a combined net worth of P3,926,421,242.00 that could support a project costing approximately P13 billion." To justify his conclusion, he asserted: "It is not a requirement that the networth must be ‘unrestricted’. To impose this as a requirement now will be nothing less than unfair." He further opined, "(T)he networth reflected in the Financial Statement should not be taken as the amount of money to be used to answer the required thirty (30%) percent equity of the challenger but rather to be used in establishing if there is enough basis to believe that the challenger can comply with the required 30% equity. In fact, proof of sufficient equity is required as one of the conditions for award of contract (Sec. 12.1 of IRR of the BOT Law) but not for prequalification (Sec. 5.4 of same document)."

On the basis of the foregoing dubious declaration, the Paircargo consortium was deemed prequalified and thus permitted to proceed to the other stages of the bidding process. By virtue of the prequalified status conferred upon the Paircargo, Undersecretary Cal’s findings in effect relieved the consortium of the need to comply with the financial capability requirement imposed by the
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relieved the consortium of the need to comply with the financial capability requirement imposed by the BOT Law and IRR. This position is unmistakably and squarely at odds with the Supreme Court’s consistent doctrine emphasizing the strict application of pertinent rules, regulations and guidelines for the public bidding process, in order to place each bidder -- actual or potential -- on the same footing. Thus, it is unarguably irregular and contrary to the very concept of public bidding to permit a variance between the conditions under which bids are invited and those under which proposals are submitted and approved. Republic v. Capulong[14] teaches that if one bidder is relieved from having to conform to the conditions that impose some duty upon it, that bidder is not contracting in fair competition with those bidders that propose to be bound by all conditions. The essence of public bidding is, after all, an opportunity for fair competition and a basis for the precise comparison of bids.[15] Thus, each bidder must bid under the same conditions; and be subject to the same guidelines, requirements and limitations. The desired result is to be able to determine the best offer or lowest bid, all things being equal. Inasmuch as the Paircargo consortium did not possess the minimum equity equivalent to 30 percent of the minimum project cost, it should not have been prequalified or allowed to participate further in the bidding. The Prequalification and Bidding Committee (PBAC) should therefore not have opened the two envelopes of the consortium containing its technical and financial proposals; required AEDC to match the consortium’s bid;*16+ or awarded the Concession Agreement to the consortium’s successor-ininterest, Piatco. As there was effectively no public bidding to speak of, the entire bidding process having been flawed and tainted from the very outset, therefore, the award of the concession to Paircargo’s successor Piatco was void, and the Concession Agreement executed with the latter was likewise void ab initio. For this reason, Piatco cannot and should not be allowed to benefit from that Agreement.[17] AEDC Was Deprived of the

Right to Match PIATCO‘s
Price Challenge

In DOTC PBAC Bid Bulletin No. 4 (par. 3), Undersecretary Cal declared that, for purposes of matching the price challenge of Piatco, AEDC as originator of the unsolicited proposal would be permitted access only to the schedule of proposed Annual Guaranteed Payments submitted by Piatco, and not to the latter’s financial and technical proposals that constituted the basis for the price challenge in the first place. This was supposedly in keeping with Section 11.6 of the 1994 IRR, which provides that proprietary information is to be respected, protected and treated with utmost confidentiality, and is therefore not to form part of the bidding/tender and related documents.
This pronouncement, I believe, was a grievous misapplication of the mentioned provision. The "proprietary information"referred to in Section 11.6 of the IRR pertains only to the proprietary information of the originator of an unsolicited proposal, and not to those belonging to a challenger. The reason for the protection accorded proprietary information at all is the fact that, according to Section 4A of the BOT Law as amended, a proposal qualifies as an "unsolicited proposal"when it pertains to a project that involves "a new concept or technology", and/or a project that is not on the government’s list of priority projects. To be considered as utilizing a new concept or technology, a project must involve the possession of exclusive rights (worldwide or regional) over a process; or possession of intellectual property rights over a design, methodology or engineering concept.[18] Patently, the intent of the BOT Law is to encourage individuals and groups to come up with creative innovations, fresh ideas and new technology. Hence, the significance and necessity of protecting proprietary information in connection with unsolicited

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proposals. And to make the encouragement real, the law also extends to such individuals and groups what amounts to a "right of first refusal"to undertake the project they conceptualized, involving the use of new technology or concepts, through the mechanism of matching a price challenge.
A competing bid is never just any figure conjured from out of the blue; it is arrived at after studying economic, financial, technical and other factors; it is likewise based on certain assumptions as to the nature of the business, the market potentials, the probable demand for the product or service, the future behavior of cost items, political and other risks, and so on. It is thus self-evident that in order to be able to intelligently match a bid or price challenge, a bidder must be given access to the assumptions and the calculations that went into crafting the competing bid. In this instance, the financial and technical proposals of Piatco would have provided AEDC with the necessary information to enable it to make a reasonably informed matching bid. To put it more simply, a bidder unable to access the competitor’s assumptions will never figure out how the competing bid came about; requiring him to "counter-propose"is like having him shoot at a target in the dark while blindfolded. By withholding from AEDC the challenger’s financial and technical proposals containing the critical information it needed, Undersecretary Cal actually and effectively deprived AEDC of the ability to match the price challenge. One could say that AEDC did not have the benefit of a "level playing field." It seems to me, though, that AEDC was actually shut out of the game altogether. At the end of the day, the bottom line is that the validity and the propriety of the award to Piatco had been irreparably impaired. Delayed Issuance of the Notice of Award Violated the BOT Law and the IRR Section 9.5 of the IRR requires that the Notice of Award must indicate the time frame within which the winner of the bidding (and therefore the prospective awardee) shall submit the prescribed performance security, proof of commitment of equity contributions, and indications of sources of financing (loans); and, in the case of joint ventures, an agreement showing that the members are jointly and severally responsible for the obligations of the project proponent under the contract. The purpose of having a definite and firm timetable for the submission of the aforementioned requirements is not only to prevent delays in the project implementation, but also to expose and weed out unqualified proponents, who might have unceremoniously slipped through the earlier prequalification process, by compelling them to put their money where their mouths are, so to speak. Nevertheless, this provision can be easily circumvented by merely postponing the actual issuance of the Notice of Award, in order to give the favored proponent sufficient time to comply with the requirements. Hence, to avert or minimize the manipulation of the post-bidding process, the IRR not only set out the precise sequence of events occurring between the completion of the evaluation of the technical bids and the issuance of the Notice of Award, but also specified the timetables for each such event. Definite allowable extensions of time were provided for, as were the consequences of a failure to meet a particular deadline. In particular, Section 9.1 of the 1994 IRR prescribed that within 30 calendar days from the time the second-stage evaluation shall have been completed, the Committee must come to a decision whether or not to award the contract and, within 7 days therefrom, the Notice of Award must be approved by the head of agency or local government unit (LGU) concerned, and its issuance must follow within another 7 days thereafter.
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days thereafter.

Section 9.2 of the IRR set the procedure applicable to projects involving substantial government undertakings as follows: Within 7 days after the decision to award is made, the draft contract shall be submitted to the ICC for clearance on a no-objection basis. If the draft contract includes government undertakings already previously approved, then the submission shall be for information only.
However, should there be additional or new provisions different from the original government undertakings, the draft shall have to be reviewed and approved. The ICC has 15 working days to act thereon, and unless otherwise specified, its failure to act on the contract within the specified time frame signifies that the agency or LGU may proceed with the award. The head of agency or LGU shall approve the Notice of Award within seven days of the clearance by the ICC on a no-objection basis, and the Notice itself has to be issued within seven days thereafter. The highly regulated time-frames within which the agents of government were to act evinced the intent to impose upon them the duty to act expeditiously throughout the process, to the end that the project be prosecuted and implemented without delay. This regulated scenario was likewise intended to discourage collusion and substantially reduce the opportunity for agents of government to abuse their discretion in the course of the award process. Despite the clear timetables set out in the IRR, several lengthy and still-unexplained delays occurred in the award process, as can be observed from the presentation made by the counsel for public respondents,[19] quoted hereinbelow: "11 Dec. 1996 - The Paircargo Joint Venture was informed by the PBAC that AEDC failed to match and that negotiations preparatory to Notice of Award should be commenced. This was the decision to award that should have commenced the running of the 7-day period to approve the Notice of Award, as per Section 9.1 of the IRR, or to submit the draft contract to the ICC for approval conformably with Section 9.2. "01 April 1997 - The PBAC resolved that a copy of the final draft of the Concession Agreement be submitted to the NEDA for clearance on a no-objection basis. This resolution came more than 3 months too late as it should have been made on the 20th of December 1996 at the latest. "16 April 1997 - The PBAC resolved that the period of signing the Concession Agreement be extended by 15 days. "18 April 1997 - NEDA approved the Concession Agreement. Again this is more than 3 months too late as the NEDA’s decision should have been released on the 16th of January 1997 or fifteen days after it should have been submitted to it for review. "09 July 1997 - The Notice of Award was issued to PIATCO. Following the provisions of the IRR, the Notice of Award should have been issued fourteen days after NEDA’s approval, or the 28th of January 1997. In any case, even if it were to be assumed that the release of NEDA’s approval on the 18th of April was timely, the Notice of Award should have been issued on the 9th of May 1997. In both cases, therefore, the release of the Notice of Award occurred in a decidedly less than timely fashion."

This chronology of events bespeaks an unmistakable disregard, if not disdain, by the persons in charge of the award process for the time limitations prescribed by the IRR. Their attitude flies in the face of this Court’s solemn pronouncement in Republic v. Capulong*20+ that "strict observance of the rules, regulations and guidelines of the bidding process is the only safeguard to a fair, honest and competitive public bidding."
From the foregoing, the only conclusion that can possibly be drawn is that the BOT law and its IRR were repeatedly violated with unmitigated impunity - and by agents of government, no less! On account of
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repeatedly violated with unmitigated impunity - and by agents of government, no less! On account of such violation, the award of the contract to Piatco, which undoubtedly gained time and benefited from the delays, must be deemed null and void from the beginning. Further Amendments Resulted in a Substantially Different Contract, Awarded Without Public Bidding But the violations and desecrations did not stop there. After the PBAC made its decision on December 11, 1996 to award the contract to Piatco, the latter negotiated changes to the Contract bidded out and ended up with what amounts to a substantially new contract without any public bidding. This Contract was subsequently further amended four more times through negotiation and without any bidding. Thus, the contract actually executed between Piatco and DOTC/MIAA on July 12, 1997 (the Concession Agreement or "CA") differed from the contract bidded out (the draft concession agreement or "DCA") in the following very significant respects: 1. The CA inserted stipulations creating a monopoly in favor of Piatco in the business of providing airport-related services for international airlines and passengers.[21]

2. The CA provided that government is to answer for Piatco’s unpaid loans and debts (lumped under the term Attendant Liabilities) in the event Piatco fails to pay its senior lenders.[22] 3. The CA provided that in case of termination of the contract due to the fault of government, government shall pay all expenses that Piatco incurred for the project plus the appraised value of the Terminal.[23] 4. The CA imposed new and special obligations on government, including delivery of clean possession of the site for the terminal; acquisition of additional land at the government’s expense for construction of road networks required by Piatco’s approved plans and specifications; and assistance to Piatco in securing site utilities, as well as all necessary permits, licenses and authorizations.[24]
5. Where Section 3.02 of the DCA requires government to refrain from competing with the contractor with respect to the operation of NAIA Terminal III, Section 3.02(b) of the CA excludes and prohibits everyone, including government, from directly or indirectly competing with Piatco, with respect to the operation of, as well as operations in, NAIA Terminal III. Operations in is sufficiently broad to encompass all retail and other commercial business enterprises operating within Terminal III, inclusive of the businesses of providing various airport-related services to international airlines, within the scope of the prohibition. 6. Under Section 6.01 of the DCA, the following fees are subject to the written approval of MIAA: lease/rental charges, concession privilege fees for passenger services, food services, transportation utility concessions, groundhandling, catering and miscellaneous concession fees, porterage fees, greeter/well-wisher fees, carpark fees, advertising fees, VIP facilities fees and others. Moreover, adjustments to the groundhandling fees, rentals and porterage fees are permitted only once every two years and in accordance with a parametric formula, per DCA Section 6.03. However, the CA as executed with Piatco provides in Section 6.06 that all the aforesaid fees, rentals and charges may be adjusted without MIAA’s approval or intervention. Neither are the adjustments to these fees and charges subject to or limited by any parametric formula.[25] 7. Section 1.29 of the DCA provides that the terminal fees, aircraft tacking fees, aircraft parking fees, check-in counter fees and other fees are to be quoted and paid in Philippine pesos. But per Section 1.33
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check-in counter fees and other fees are to be quoted and paid in Philippine pesos. But per Section 1.33 of the CA, all the aforesaid fees save the terminal fee are denominated in US Dollars. 8. Under Section 8.07 of the DCA, the term attendant liabilities refers to liabilities pertinent to NAIA Terminal III, such as payment of lease rentals and performance of other obligations under the Land Lease Agreement; the obligations under the Tenant Agreements; and payment of all taxes, fees, charges and assessments of whatever kind that may be imposed on NAIA Terminal III or parts thereof. But in Section 1.06 of the CA, Attendant Liabilities refers to unpaid debts of Piatco: "All amounts recorded and from time to time outstanding in the books of [Piatco] as owing to Unpaid Creditors who have provided, loaned or advanced funds actually used for the Project, including all interests, penalties, associated fees, charges, surcharges, indemnities, reimbursements and other related expenses, and further including amounts owed by [Piatco] to its suppliers, contractors and subcontractors." 9. Per Sections 8.04 and 8.06 of the DCA, government may, on account of the contractor’s breach, rescind the contract and select one of four options: (a) take over the terminal and assume all its attendant liabilities; (b) allow the contractor’s creditors to assign the Project to another entity acceptable to DOTC/MIAA; (c) pay the contractor rent for the facilities and equipment the DOTC may utilize; or (d) purchase the terminal at a price established by independent appraisers. Depending on the option selected, government may take immediate possession and control of the terminal and its operations. Government will be obligated to compensate the contractor for the "equivalent or proportionate contract costs actually disbursed,"but only where government is the one in breach of the contract. But under Section 8.06(a) of the CA, whether on account of Piatco’s breach of contract or its inability to pay its creditors, government is obliged to either (a) take over Terminal III and assume all of Piatco’s debts or (b) permit the qualified unpaid creditors to be substituted in place of Piatco or to designate a new operator. And in the event of government’s breach of contract, Piatco may compel it to purchase the terminal at fair market value, per Section 8.06(b) of the CA. 10. Under the DCA, any delay by Piatco in the payment of the amounts due the government constitutes breach of contract. However, under the CA, such delay does not necessarily constitute breach of contract, since Piatco is permitted to suspend payments to the government in order to first satisfy the claims of its secured creditors, per Section 8.04(d) of the CA. It goes without saying that the amendment of the Contract bidded out (the DCA or draft concession agreement) -- in such substantial manner, without any public bidding, and after the bidding process had been concluded on December 11, 1996 -- is violative of public policy on public biddings, as well as the spirit and intent of the BOT Law. The whole point of going through the public bidding exercise was completely lost. Its very rationale was totally subverted by permitting Piatco to amend the contract for which public bidding had already been concluded. Competitive bidding aims to obtain the best deal possible by fostering transparency and preventing favoritism, collusion and fraud in the awarding of contracts. That is the reason why procedural rules pertaining to public bidding demand strict observance.[26] In a relatively early case, Caltex v. Delgado Brothers,[27] this Court made it clear that substantive amendments to a contract for which a public bidding has already been finished should only be awarded after another public bidding: "The due execution of a contract after public bidding is a limitation upon the right of the contracting parties to alter or amend it without another public bidding, for otherwise what would a public bidding be good for if after the execution of a contract after public bidding, the contracting parties may alter or amend the contract, or even cancel it, at their will? Public biddings are held for the protection of the public, and to give the public the best possible advantages by means of open competition between the bidders. He who bids or offers the best terms is awarded the contract subject of the bid, and it is obvious that such protection and best possible advantages to the public will disappear if the parties to a contract executed after public bidding may alter or amend it without another previous public bidding."[28]
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bidding."[28]

The aforementioned case dealt with the unauthorized amendment of a contract executed after public bidding; in the situation before us, the amendments were made also after the bidding, but prior to execution. Be that as it may, the same rationale underlying Caltex applies to the present situation with equal force. Allowing the winning bidder to renegotiate the contract for which the bidding process has ended is tantamount to permitting it to put in anything it wants. Here, the winning bidder (Piatco) did not even bother to wait until after actual execution of the contract before rushing to amend it. Perhaps it believed that if the changes were made to a contract already won through bidding (DCA) instead of waiting until it is executed, the amendments would not be noticed or discovered by the public.
In a later case, Mata v. San Diego,[29] this Court reiterated its ruling as follows: "It is true that modification of government contracts, after the same had been awarded after a public bidding, is not allowed because such modification serves to nullify the effects of the bidding and whatever advantages the Government had secured thereby and may also result in manifest injustice to the other bidders. This prohibition, however, refers to a change in vital and essential particulars of the agreement which results in a substantially new contract."

Piatco’s counter-argument may be summed up thus: There was nothing in the 1994 IRR that prohibited further negotiations and eventual amendments to the DCA even after the bidding had been concluded. In fact, PBAC Bid Bulletin No. 3 states: "[A]mendments to the Draft Concession Agreement shall be issued from time to time. Said amendments will only cover items that would not materially affect the preparation of the proponent’s proposal."
I submit that accepting such warped argument will result in perverting the policy underlying public bidding. The BOT Law cannot be said to allow the negotiation of contractual stipulations resulting in a substantially new contract after the bidding process and price challenge had been concluded. In fact, the BOT Law, in recognition of the time, money and effort invested in an unsolicited proposal, accords its originator the privilege of matching the challenger’s bid. Section 4-A of the BOT Law specifically refers to a "lower price proposal"by a competing bidder; and to the right of the original proponent "to match the price"of the challenger. Thus, only the price proposals are in play. The terms, conditions and stipulations in the contract for which public bidding has been concluded are understood to remain intact and not be subject to further negotiation. Otherwise, the very essence of public bidding will be destroyed - there will be no basis for an exact comparison between bids. Moreover, Piatco misinterpreted the meaning behind PBAC Bid Bulletin No. 3. The phrase amendments …from time to time refers only to those amendments to the draft concession agreement issued by the PBAC prior to the submission of the price challenge; it certainly does not include or permit amendments negotiated for and introduced after the bidding process has been terminated. Piatco’s Concession Agreement Was Further

Amended, (ARCA) Again
Without Public Bidding

Not satisfied with the Concession Agreement, Piatco -- once more without bothering with public bidding -- negotiated with government for still more substantial changes. The result was the Amended and Restated Concession Agreement (ARCA) executed on November 26, 1998. The following changes were introduced:
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were introduced:

1. The definition of Attendant Liabilities was further amended with the result that the unpaid loans of Piatco, for which government may be required to answer, are no longer limited to only those loans recorded in Piatco’s books or loans whose proceeds were actually used in the Terminal III project.*30+
2. Although the contract may be terminated due to breach by Piatco, it will not be liable to pay the government any Liquidated Damages if a new operator is designated to take over the operation of the terminal.[31] 3. The Liquidated Damages which government becomes liable for in case of its breach of contract were substantially increased.[32] 4. Government’s right to appoint a comptroller for Piatco in case the latter encounters liquidity problems was deleted.[33]

5. Government is made liable for Incremental and Consequential Costs and Losses in case it fails to comply or cause any third party under its direct or indirect control to comply with the special obligations imposed on government.[34]
6. The insurance policies obtained by Piatco covering the terminal are now required to be assigned to the Senior Lenders as security for the loans; previously, their proceeds were to be used to repair and rehabilitate the facility in case of damage.[35] 7. Government bound itself to set the initial rate of the terminal fee, to be charged when Terminal III begins operations, at an amount higher than US$20.[36] 8. Government waived its defense of the illegality of the contract and even agreed to be liable to pay damages to Piatco in the event the contract was declared illegal.[37]

9. Even though government may be entitled to terminate the ARCA on account of breach by Piatco, government is still liable to pay Piatco the appraised value of Terminal III or the Attendant Liabilities, if the termination occurs before the In-Service Date.[38] This condition contravenes the BOT Law provision on termination compensation.
10. Government is obligated to take the administrative action required for Piatco’s imposition, collection and application of all Public Utility Revenues.[39] No such obligation existed previously. 11. Government is now also obligated to perform and cause other persons and entities under its direct or indirect control to perform all acts necessary to perfect the security interests to be created in favor of Piatco’s Senior Lenders.*40+ No such obligation existed previously. 12. DOTC/MIAA’s right of intervention in instances where Piatco’s Non-Public Utility Revenues become exorbitant or excessive has been removed.[41] 13. The illegality and unenforceability of the ARCA or any of its material provisions was made an event of default on the part of government only, thus constituting a ground for Piatco to terminate the ARCA.[42] 14. Amounts due from and payable by government under the contract were made payable on demand -net of taxes, levies, imposts, duties, charges or fees of any kind except as required by law.[43]

15. The Parametric Formula in the contract, which is utilized to compute for adjustments/increases to the public utility revenues (i.e., aircraft parking and tacking fees, check-in counter fee and terminal fee), was revised to permit Piatco to input its more costly short-term borrowing rates instead of the longerterms rates in the computations for adjustments, with the end result that the changes will redound to
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terms rates in the computations for adjustments, with the end result that the changes will redound to its greater financial benefit. 16. The Certificate of Completion simply deleted the successful performance-testing of the terminal facility in accordance with defined performance standards as a pre- condition for government’s acceptance of the terminal facility.[44] In sum, the foregoing revisions and amendments as embodied in the ARCA constitute very material alterations of the terms and conditions of the CA, and give further manifestly undue advantage to Piatco at the expense of government. Piatco claims that the changes to the CA were necessitated by the demands of its foreign lenders. However, no proof whatsoever has been adduced to buttress this claim.

In any event, it is quite patent that the sum total of the aforementioned changes resulted in drastically weakening the position of government to a degree that seems quite excessive, even from the standpoint of a businessperson who regularly transacts with banks and foreign lenders, is familiar with their mind-set, and understands what motivates them. On the other hand, whatever it was that impelled government officials concerned to accede to those grossly disadvantageous changes, I can only hazard a guess. There is no question in my mind that the ARCA was unauthorized and illegal for lack of public bidding and for being patently disadvantageous to government.
/---!e-library! 6.0 Philippines Copyright © 2000 by Sony Valdez---\ [2003V454ES] [5/7] DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B. REUNILLA, MANUEL ANTONIO B. BOÑE, MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V. DOMALAON, CONRADO G. DIMAANO, LOLITA R. HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C. HILARIO, MIASCOR WORKERS UNION - NATIONAL LABOR UNION (MWU-NLU), and PHILIPPINE AIRLINES EMPLOYEES ASSOCIATION (PALEA), petitioners, vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS and SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of the Department of Transportation and Communications, respondents, / MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS AVIATION SYSTEMS CORPORATION, MACROASIA-EUREST SERVICES, INC., MACROASIA-MENZIES AIRPORT SERVICES CORPORATION, MIASCOR CATERING SERVICES CORPORATION, MIASCOR AIRCRAFT MAINTENANCE CORPORATION, and MIASCOR LOGISTICS CORPORATION, petitioners-inintervention,2003 May 5En BancG.R. No. 155001[2/3] SEPARATE OPINION

The Three Supplements Imposed New Obligations on Government, Also Without Prior Public Bidding

After Piatco had managed to breach the protective rampart of public bidding, it recklessly went on a rampage of further assaults on the ARCA.
The First Supplement Is as Void as the ARCA

In the First Supplement ("FS") executed on August 27, 1999, the following changes were made to the
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In the First Supplement ("FS") executed on August 27, 1999, the following changes were made to the ARCA: 1. The amounts payable by Piatco to government were reduced by allowing additional exceptions to the Gross Revenues in which government is supposed to participate.[45] 2. Made part of the properties which government is obliged to construct and/or maintain and keep in good repair are (a) the access road connecting Terminals II and III -- the construction of this access road is the obligation of Piatco, in lieu of its obligation to construct an Access Tunnel connecting Terminals II and III; and (b) the taxilane and taxiway -- these are likewise part of Piatco’s obligations, since they are part and parcel of the project as described in Clause 1.3 of the Bid Documents.[46] 3. The MIAA is obligated to provide funding for the maintenance and repair of the airports and facilities owned or operated by it and by third persons under its control. It will also be liable to Piatco for the latter’s losses, expenses and damages as well as liability to third persons, in case MIAA fails to perform such obligations. In addition, MIAA will also be liable for the incremental and consequential costs of the remedial work done by Piatco on account of the former’s default.*47+ 4. The FS also imposed on government ten (10) "Additional Special Obligations,"including the following: (a) Working for the removal of the general aviation traffic from the NAIA airport complex[48] (b) Providing through MIAA the land required by Piatco for the taxilane and one taxiway at no cost to Piatco[49] (c) Implementing the government’s existing storm drainage master plan*50+

(d) Coordinating with DPWH the financing, the implementation and the completion of the following works before the In-Service Date: three left-turning overpasses (EDSA to Tramo St., Tramo to Andrews Ave., and Manlunas Road to Sales Ave.);[51] and a road upgrade and improvement program involving widening, repair and resurfacing of Sales Road, Andrews Avenue and Manlunas Road; improvement of Nichols Interchange; and removal of squatters along Andrews Avenue.[52]
(e) Dealing directly with BCDA and the Phil. Air Force in acquiring additional land or right of way for the road upgrade and improvement program.[53] 5. Government is required to work for the immediate reversion to MIAA of the Nayong Pilipino National Park.[54] 6. Government’s share in the terminal fees collected was revised from a flat rate of P180 to 36 percent thereof; together with government’s percentage share in the gross revenues of Piatco, the amount will be remitted to government in pesos instead of US dollars.[55] This amendment enables Piatco to benefit from the further erosion of the peso-dollar exchange rate, while preventing government from building up its foreign exchange reserves. 7. All payments from Piatco to government are now to be invoiced to MIAA, and payments are to accrue to the latter’s exclusive benefit.*56+ This move appears to be in support of the funds MIAA advanced to DPWH. I must emphasize that the First Supplement is void in two respects. First, it is merely an amendment to the ARCA, upon which it is wholly dependent; therefore, since the ARCA is void, inexistent and not capable of being ratified or amended, it follows that the FS too is void, inexistent and inoperative. Second, even assuming arguendo that the ARCA is somehow remotely valid, nonetheless the FS, in imposing significant new obligations upon government, altered the fundamental terms and stipulations

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of the ARCA, thus necessitating a public bidding all over again. That the FS was entered into sans public bidding renders it utterly void and inoperative.
The Second Supplement Is

Similarly Void and Inexistent
The Second Supplement ("SS") was executed between the government and Piatco on September 4, 2000. It calls for Piatco, acting not as concessionaire of NAIA Terminal III but as a public works contractor, to undertake -- in the government’s stead -- the clearing, removal, demolition and disposal of improvements, subterranean obstructions and waste materials at the project site.[57]

The scope of the works, the procedures involved, and the obligations of the contractor are provided for in Parts II and III of the SS. Section 4.1 sets out the compensation to be paid, listing specific rates per cubic meter of materials for each phase of the work -- excavation, leveling, removal and disposal, backfilling and dewatering. The amounts collectible by Piatco are to be offset against the Annual Guaranteed Payments it must pay government.
Though denominated as Second Supplement, it was nothing less than an entirely new public works contract. Yet it, too, did not undergo any public bidding, for which reason it is also void and inoperative. Not surprisingly, Piatco had to subcontract the works to a certain Wintrack Builders, a firm reputedly owned by a former high-ranking DOTC official. But that is another story altogether. The Third Supplement Is Likewise Void and Inexistent The Third Supplement ("TS"), executed between the government and Piatco on June 22, 2001, passed on to the government certain obligations of Piatco as Terminal III concessionaire, with respect to the surface road connecting Terminals II and III. By way of background, at the inception of and forming part of the NAIA Terminal III project was the proposed construction of an access tunnel crossing Runway 13/31, which would connect Terminal III to Terminal II. The Bid Documents in Section 4.1.2.3[B][i] declared that the said access tunnel was subject to further negotiation; but for purposes of the bidding, the proponent should submit a bid for it as well. Therefore, the tunnel was supposed to be part and parcel of the Terminal III project. However, in Section 5 of the First Supplement, the parties declared that the access tunnel was not economically viable at that time. In lieu thereof, the parties agreed that a surface access road (now called the T2-T3 Road) was to be constructed by Piatco to connect the two terminals. Since it was plainly in substitution of the tunnel, the surface road construction should likewise be considered part and parcel of the same project, and therefore part of Piatco’s obligation as well. While the access tunnel was estimated to cost about P800 million, the surface road would have a price tag in the vicinity of about P100 million, thus producing significant savings for Piatco. Yet, the Third Supplement, while confirming that Piatco would construct the T2-T3 Road, nevertheless shifted to government some of the obligations pertaining to the former, as follows: 1. Government is now obliged to remove at its own expense all tenants, squatters, improvements and/or waste materials on the site where the T2-T3 road is to be constructed.[58] There was no similar obligation on the part of government insofar as the access tunnel was concerned. 2. Should government fail to carry out its obligation as above described, Piatco may undertake it on government’s behalf, subject to the terms and conditions (including compensation payments) contained
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government’s behalf, subject to the terms and conditions (including compensation payments) contained in the Second Supplement.[59] 3. MIAA will answer for the operation, maintenance and repair of the T2-T3 Road.[60]

The TS depends upon and is intended to supplement the ARCA as well as the First Supplement, both of which are void and inexistent and not capable of being ratified or amended. It follows that the TS is likewise void, inexistent and inoperative. And even if, hypothetically speaking, both ARCA and FS are valid, still, the Third Supplement -- imposing as it does significant new obligations upon government -would in effect alter the terms and stipulations of the ARCA in material respects, thus necessitating another public bidding. Since the TS was not subjected to public bidding, it is consequently utterly void as well. At any rate, the TS created new monetary obligations on the part of government, for which there were no prior appropriations. Hence it follows that the same is void ab initio.
In patiently tracing the progress of the Piatco contracts from their inception up to the present, I noted that the whole process was riddled with significant lapses, if not outright irregularity and wholesale violations of law and public policy. The rationale of beginning at the beginning, so to speak, will become evident when the question of what to do with the five Piatco contracts is discussed later on.

In the meantime, I shall take up specific provisions or changes in the contracts and highlight the more prominent objectionable features.
Government Directly Guarantees Piatco Debts

Certainly the most discussed provision in the parties’ arguments is the one creating an unauthorized, direct government guarantee of Piatco’s obligations in favor of the lenders.
Section 4-A of the BOT Law as amended states that unsolicited proposals, such as the NAIA Terminal III Project, may be accepted by government provided inter alia that no direct government guarantee, subsidy or equity is required. In short, such guarantee is prohibited in unsolicited proposals. Section 2(n) of the same legislation defines direct government guarantee as "an agreement whereby the government or any of its agencies or local government units (will) assume responsibility for the repayment of debt directly incurred by the project proponent in implementing the project in case of a loan default."

Both the CA and the ARCA have provisions that undeniably create such prohibited government guarantee. Section 4.04 (c)(iv) to (vi) of the ARCA, which is similar to Section 4.04 of the CA, provides thus:
"(iv) that if Concessionaire is in default under a payment obligation owed to the Senior Lenders, and as a result thereof the Senior Lenders have become entitled to accelerate the Senior Loans, the Senior Lenders shall have the right to notify GRP of the same x x x; (v) x x x the Senior Lenders may after written notification to GRP, transfer the Concessionaire’s rights and obligations to a transferee x x x; (vi) if the Senior Lenders x x x are unable to x x x effect a transfer x x x, then GRP and the Senior Lenders shall endeavor x x x to enter into any other arrangement relating to the Development Facility x x x. If no agreement relating to the Development Facility is arrived at by GRP and the Senior Lenders within the said 180-day period, then at the end thereof the Development Facility shall be transferred by the Concessionaire to GRP or its designee and GRP shall make a termination payment to Concessionaire equal to the Appraised Value (as hereinafter defined) of the Development Facility or the sum of the Attendant Liabilities, if greater. x x x ."
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Attendant Liabilities, if greater. x x x ."

In turn, the term Attendant Liabilities is defined in Section 1.06 of the ARCA as follows:
"Attendant Liabilities refer to all amounts in each case supported by verifiable evidence from time to time owed or which may become owing by Concessionaire to Senior Lenders or any other persons or entities who have provided, loaned or advanced funds or provided financial facilities to Concessionaire for the Project, including, without limitation, all principal, interest, associated fees, charges, reimbursements, and other related expenses (including the fees, charges and expenses of any agents or trustees of such persons or entities), whether payable at maturity, by acceleration or otherwise, and further including amounts owed by Concessionaire to its professional consultants and advisers, suppliers, contractors and sub-contractors."

Government’s agreement to pay becomes effective in the event of a default by Piatco on any of its loan obligations to the Senior Lenders, and the amount to be paid by government is the greater of either the Appraised Value of Terminal III or the aggregate amount of the moneys owed by Piatco -- whether to the Senior Lenders or to other entities, including its suppliers, contractors and subcontractors. In effect, therefore, this agreement already constitutes the prohibited assumption by government of responsibility for repayment of Piatco’s debts in case of a loan default. In fine, a direct government guarantee.
It matters not that there is a roundabout procedure prescribed by Section 4.04(c)(iv), (v) and (vi) that would require, first, an attempt (albeit unsuccessful) by the Senior Lenders to transfer Piatco’s rights to a transferee of their choice; and, second, an effort (equally unsuccessful) to "enter into any other arrangement"with the government regarding the Terminal III facility, before government is required to make good on its guarantee. What is abundantly clear is the fact that, in the devious labyrinthine process detailed in the aforesaid section, it is entirely within the Senior Lenders’ power, prerogative and control -- exercisable via a mere refusal or inability to agree upon "a transferee"or "any other arrangement"regarding the terminal facility -- to push the process forward to the ultimate contractual cul-de-sac, wherein government will be compelled to abjectly surrender and make good on its guarantee of payment. Piatco also argues that there is no proviso requiring government to pay the Senior Lenders in the event of Piatco’s default. This is literally true, in the sense that Section 4.04(c)(vi) of ARCA speaks of government making the termination payment to Piatco, not to the lenders. However, it is almost a certainty that the Senior Lenders will already have made Piatco sign over to them, ahead of time, its right to receive such payments from government; and/or they may already have had themselves appointed its attorneys-in-fact for the purpose of collecting and receiving such payments. Nevertheless, as petitioners-in-intervention pointed out in their Memorandum,[61] the termination payment is to be made to Piatco, not to the lenders; and there is no provision anywhere in the contract documents to prevent it from diverting the proceeds to its own benefit and/or to ensure that it will necessarily use the same to pay off the Senior Lenders and other creditors, in order to avert the foreclosure of the mortgage and other liens on the terminal facility. Such deficiency puts the interests of government at great risk. Indeed, if the unthinkable were to happen, government would be paying several hundreds of millions of dollars, but the mortgage liens on the facility may still be foreclosed by the Senior Lenders just the same. Consequently, the Piatco contracts are also objectionable for grievously failing to adequately protect government’s interests. More accurately, the contracts would consistently weaken and do away with protection of government interests. As such, they are therefore grossly lopsided in favor of Piatco and/or its Senior Lenders. While on this subject, it is well to recall the earlier discussion regarding a particularly noticeable alteration of the concept of "Attendant Liabilities." In Section 1.06 of the CA defining the term, the
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alteration of the concept of "Attendant Liabilities." In Section 1.06 of the CA defining the term, the Piatco debts to be assumed/paid by government were qualified by the phrases recorded and from time to time outstanding in the books of the Concessionaire and actually used for the project. These phrases were eliminated from the ARCA’s definition of Attendant Liabilities.

Since no explanation has been forthcoming from Piatco as to the possible justification for such a drastic change, the only conclusion possible is that it intends to have all of its debts covered by the guarantee, regardless of whether or not they are disclosed in its books. This has particular reference to those borrowings which were obtained in violation of the loan covenants requiring Piatco to maintain a minimum 70:30 debt-to-equity ratio, and even if the loan proceeds were not actually used for the project itself. This point brings us back to the guarantee itself. In Section 4.04(c)(vi) of ARCA, the amount which government has guaranteed to pay as termination payment is the greater of either (i) the Appraised Value of the terminal facility or (ii) the aggregate of the Attendant Liabilities. Given that the Attendant Liabilities may include practically any Piatco debt under the sun, it is highly conceivable that their sum may greatly exceed the appraised value of the facility, and government may end up paying very much more than the real worth of Terminal III. (So why did government have to bother with public bidding anyway?)
In the final analysis, Section 4.04(c)(iv) to (vi) of the ARCA is diametrically at odds with the spirit and the intent of the BOT Law. The law meant to mobilize private resources (the private sector) to take on the burden and the risks of financing the construction, operation and maintenance of relevant infrastructure and development projects for the simple reason that government is not in a position to do so. By the same token, government guarantee was prohibited, since it would merely defeat the purpose and raison d’être of a build-operate-and-transfer project to be undertaken by the private sector. To the extent that the project proponent is able to obtain loans to fund the project, those risks are shared between the project proponent on the one hand, and its banks and other lenders on the other. But where the proponent or its lenders manage to cajol or coerce the government into extending a guarantee of payment of the loan obligations, the risks assumed by the lenders are passed right back to government. I cannot understand why, in the instant case, government cheerfully assented to reassuming the risks of the project when it gave the prohibited guarantee and thus simply negated the very purpose of the BOT Law and the protection it gives the government. Contract Termination

Provisions in the Piatco
Contracts Are Void The BOT Law as amended provides for contract termination as follows: "Sec. 7. Contract Termination. - In the event that a project is revoked, cancelled or terminated by the government through no fault of the project proponent or by mutual agreement, the Government shall compensate the said project proponent for its actual expenses incurred in the project plus a reasonable rate of return thereon not exceeding that stated in the contract as of the date of such revocation, cancellation or termination: Provided, That the interest of the Government in this instances [sic] shall be duly insured with the Government Service Insurance System or any other insurance entity duly accredited by the Office of the Insurance Commissioner: Provided, finally, That the cost of the insurance coverage shall be included in the terms and conditions of the bidding referred to above. "In the event that the government defaults on certain major obligations in the contract and such failure is not remediable or if remediable shall remain unremedied for an unreasonable length of time, the project proponent/contractor may, by prior notice to the concerned national government agency or
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project proponent/contractor may, by prior notice to the concerned national government agency or local government unit specifying the turn-over date, terminate the contract. The project proponent/contractor shall be reasonably compensated by the Government for equivalent or proportionate contract cost as defined in the contract." The foregoing statutory provision in effect provides for the following limited instances when termination compensation may be allowed:
1. Termination by the government through no fault of the project proponent 2. Termination upon the parties’ mutual agreement 3. Termination by the proponent due to government’s default on certain major contractual obligations To emphasize, the law does not permit compensation for the project proponent when contract termination is due to the proponent’s own fault or breach of contract. This principle was clearly violated in the Piatco Contracts. The ARCA stipulates that government is to pay termination compensation to Piatco even when termination is initiated by government for the following causes: "(i) Failure of Concessionaire to finish the Works in all material respects in accordance with the Tender Design and the Timetable; (ii) Commission by Concessionaire of a material breach of this Agreement x x x; (iii) x x x a change in control of Concessionaire arising from the sale, assignment, transfer or other disposition of capital stock which results in an ownership structure violative of statutory or constitutional limitations;

(iv) A pattern of continuing or repeated non-compliance, willful violation, or non-performance of other terms and conditions hereof which is hereby deemed a material breach of this Agreement x x x."[62]
As if that were not bad enough, the ARCA also inserted into Section 8.01 the phrase "Subject to Section 4.04." The effect of this insertion is that in those instances where government may terminate the contract on account of Piatco’s breach, and it is nevertheless required under the ARCA to make termination compensation to Piatco even though unauthorized by law, such compensation is to be equivalent to the payment amount guaranteed by government -- either a) the Appraised Value of the terminal facility or (b) the aggregate of the Attendant Liabilities, whichever amount is greater! Clearly, this condition is not in line with Section 7 of the BOT Law. That provision permits a project proponent to recover the actual expenses it incurred in the prosecution of the project plus a reasonable rate of return not in excess of that provided in the contract; or to be compensated for the equivalent or proportionate contract cost as defined in the contract, in case the government is in default on certain major contractual obligations. Furthermore, in those instances where such termination compensation is authorized by the BOT Law, it is indispensable that the interest of government be duly insured. Section 5.08 the ARCA mandates insurance coverage for the terminal facility; but all insurance policies are to be assigned, and all proceeds are payable, to the Senior Lenders. In brief, the interest being secured by such coverage is that of the Senior Lenders, not that of government. This can hardly be considered compliance with law. In essence, the ARCA provisions on termination compensation result in another unauthorized government guarantee, this time in favor of Piatco.

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government guarantee, this time in favor of Piatco.
A Prohibited Direct Government Subsidy, Which at the Same Time Is an Assault on the

National Honor
Still another contractual provision offensive to law and public policy is Section 8.01(d) of the ARCA, which is a "bolder and badder"version of Section 8.04(d) of the CA. It will be recalled that Section 4-A of the BOT Law as amended prohibits not only direct government guarantees, but likewise a direct government subsidy for unsolicited proposals. Section 13.2. b. iii. of the 1999 IRR defines a direct government subsidy as encompassing "an agreement whereby the Government x x x will x x x postpone any payments due from the proponent." Despite the statutory ban, Section 8.01(d) of the ARCA provides thus: "(d) The provisions of Section 8.01(a) notwithstanding, and for the purpose of preventing a disruption of the operations in the Terminal and/or Terminal Complex, in the event that at any time Concessionaire is of the reasonable opinion that it shall be unable to meet a payment obligation owed to the Senior Lenders, Concessionaire shall give prompt notice to GRP, through DOTC/MIAA and to the Senior Lenders. In such circumstances, the Senior Lenders (or the Senior Lenders’ Representative) may ensure that after making provision for administrative expenses and depreciation, the cash resources of Concessionaire shall first be used and applied to meet all payment obligations owed to the Senior Lenders. Any excess cash, after meeting such payment obligations, shall be earmarked for the payment of all sums payable by Concessionaire to GRP under this Agreement. If by reason of the foregoing GRP should be unable to collect in full all payments due to GRP under this Agreement, then the unpaid balance shall be payable within a 90-day grace period counted from the relevant due date, with interest per annum at the rate equal to the average 91-day Treasury Bill Rate as of the auction date immediately preceding the relevant due date. If payment is not effected by Concessionaire within the grace period, then a spread of five (5%) percent over the applicable 91-day Treasury Bill Rate shall be added on the unpaid amount commencing on the expiry of the grace period up to the day of full payment. When the temporary illiquidity of Concessionaire shall have been corrected and the cash position of Concessionaire should indicate its ability to meet its maturing obligations, then the provisions set forth under this Section 8.01(d) shall cease to apply. The foregoing remedial measures shall be applicable only while there remains unpaid and outstanding amounts owed to the Senior Lenders." talics supplied) By any manner of interpretation or application, Section 8.01(d) of the ARCA clearly mandates the indefinite postponement of payment of all of Piatco’s obligations to the government, in order to ensure that Piatco’s obligations to the Senior Lenders are paid in full first. That is nothing more or less than the direct government subsidy prohibited by the BOT Law and the IRR. The fact that Piatco will pay interest on the unpaid amounts owed to government does not change the situation or render the prohibited subsidy any less unacceptable. But beyond the clear violations of law, there are larger issues involved in the ARCA. Earlier, I mentioned that Section 8.01(d) of the ARCA completely eliminated the proviso in Section 8.04(d) of the CA which gave government the right to appoint a financial controller to manage the cash position of Piatco during situations of financial distress. Not only has government been deprived of any means of monitoring and managing the situation; worse, as can be seen from Section 8.01(d) above-quoted, the Senior Lenders

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have effectively locked in on the right to exercise financial controllership over Piatco and to allocate its cash resources to the payment of all amounts owed to the Senior Lenders before allowing any payment to be made to government.
In brief, this particular provision of the ARCA has placed in the hands of foreign lenders the power and the authority to determine how much (if at all) and when the Philippine government (as grantor of the franchise) may be allowed to receive from Piatco. In that situation, government will be at the mercy of the foreign lenders. This is a situation completely contrary to the rationale of the BOT Law and to public policy. The aforesaid provision rouses mixed emotions - shame and disgust at the parties’ (especially the government officials’) docile submission and abject servitude and surrender to the imperious and excessive demands of the foreign lenders, on the one hand; and vehement outrage at the affront to the sovereignty of the Republic and to the national honor, on the other. It is indeed time to put an end to such an unbearable, dishonorable situation. The Piatco Contracts Unarguably Violate Constitutional Injunctions I will now discuss the manner in which the Piatco Contracts offended the Constitution. The Exclusive Right Granted to

Piatco to Operate a Public Utility
Is Prohibited by the Constitution

While Section 2.02 of the ARCA spoke of granting to Piatco "a franchise to operate and maintain the Terminal Complex,"Section 3.02(a) of the same ARCA granted to Piatco, for the entire term of the concession agreement, "the exclusive right to operate a commercial international passenger terminal within the Island of Luzon" with the exception of those three terminals already existing[63] at the time of execution of the ARCA.
Section 11 of Article XII of the Constitution prohibits the grant of a "franchise, certificate, or any other form of authorization for the operation of a public utility"that is "exclusive in character." In its Opinion No. 078, Series of 1995, the Department of Justice held that "the NAIA Terminal III which x x x is a ‘terminal for public use’ is a public utility." Consequently, the constitutional prohibition against the exclusivity of a franchise applies to the franchise for the operation of NAIA Terminal III as well. What was granted to Piatco was not merely a franchise, but an "exclusive right"to operate an international passenger terminal within the "Island of Luzon." What this grant effectively means is that the government is now estopped from exercising its inherent power to award any other person another franchise or a right to operate such a public utility, in the event public interest in Luzon requires it. This restriction is highly detrimental to government and to the public interest. Former Secretary of Justice Hernando B. Perez expressed this point well in his Memorandum for the President dated 21 May 2002: "Section 3.02 on ‘Exclusivity’ "This provision gives to PIATCO (the Concessionaire) the exclusive right to operate a commercial international airport within the Island of Luzon with the exception of those already existing at the time of the execution of the Agreement, such as the airports at Subic, Clark and Laoag City. In the case of the
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of the execution of the Agreement, such as the airports at Subic, Clark and Laoag City. In the case of the Clark International Airport, however, the provision restricts its operation beyond its design capacity of 850,000 passengers per annum and the operation of new terminal facilities therein until after the new NAIA Terminal III shall have consistently reached or exceeded its design capacity of ten (10) million passenger capacity per year for three (3) consecutive years during the concession period. "This is an onerous and disadvantageous provision. It effectively grants PIATCO a monopoly in Luzon and ties the hands of government in the matter of developing new airports which may be found expedient and necessary in carrying out any future plan for an inter-modal transportation system in Luzon.
"Additionally, it imposes an unreasonable restriction on the operation of the Clark International Airport which could adversely affect the operation and development of the Clark Special Economic Zone to the economic prejudice of the local constituencies that are being benefited by its operation." talics supplied)

While it cannot be gainsaid that an enterprise that is a public utility may happen to constitute a monopoly on account of the very nature of its business and the absence of competition, such a situation does not however constitute justification to violate the constitutional prohibition and grant an exclusive franchise or exclusive right to operate a public utility.
Piatco’s contention that the Constitution does not actually prohibit monopolies is beside the point. As correctly argued,[64] the existence of a monopoly by a public utility is a situation created by circumstances that do not encourage competition. This situation is different from the grant of a franchise to operate a public utility, a privilege granted by government. Of course, the grant of a franchise may result in a monopoly. But making such franchise exclusive is what is expressly proscribed by the Constitution. Actually, the aforementioned Section 3.02 of the ARCA more than just guaranteed exclusivity; it also guaranteed that the government will not improve or expand the facilities at Clark -- and in fact is required to put a cap on the latter’s operations -- until after Terminal III shall have been operated at or beyond its peak capacity for three consecutive years.[65] As counsel for public respondents pointed out, in the real world where the rate of influx of international passengers can fluctuate substantially from year to year, it may take many years before Terminal III sees three consecutive years’ operations at peak capacity. The Diosdado Macapagal International Airport may thus end up stagnating for a long time. Indeed, in order to ensure greater profits for Piatco, the economic progress of a region has had to be sacrificed. The Piatco Contracts

Violate the Time Limitation
on Franchises

Section 11 of Article XII of the Constitution also provides that "no franchise, certificate or any other form of authorization for the operation of a public utility shall be x x x for a longer period than fifty years." After all, a franchise held for an unreasonably long time would likely give rise to the same evils as a monopoly.
The Piatco Contracts have come up with an innovative way to circumvent the prohibition and obtain an extension. This fact can be gleaned from Section 8.03(b) of the ARCA, which I quote thus: "Sec. 8.03. Termination Procedure and Consequences of Termination. -

a)

x xx

xx x

xx x
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a)

x xx

xx x

xx x

b) In the event the Agreement is terminated pursuant to Section 8.01(b) hereof, Concessionaire shall be entitled to collect the Liquidated Damages specified in Annex ‘G’. The full payment by GRP to Concessionaire of the Liquidated Damages shall be a condition precedent to the transfer by Concessionaire to GRP of the Development Facility. Prior to the full payment of the Liquidated Damages, Concessionaire shall to the extent practicable continue to operate the Terminal and the Terminal Complex and shall be entitled to retain and withhold all payments to GRP for the purpose of offsetting the same against the Liquidated Damages. Upon full payment of the Liquidated Damages, Concessionaire shall immediately transfer the Development Facility to GRP on ‘as-is-where-is’ basis."
The aforesaid easy payment scheme is less beneficial than it first appears. Although it enables government to avoid having to make outright payment of an obligation that will likely run into billions of pesos, this easy payment plan will nevertheless cost government considerable loss of income, which it would earn if it were to operate Terminal III by itself. Inasmuch as payments to the concessionaire (Piatco) will be on "installment basis,"interest charges on the remaining unpaid balance would undoubtedly cause the total outstanding balance to swell. Piatco would thus be entitled to remain in the driver’s seat and keep operating the terminal for an indefinite length of time.

/---!e-library! 6.0 Philippines Copyright © 2000 by Sony Valdez---\
[2003V454ES] [6/7] DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B. REUNILLA, MANUEL ANTONIO B. BOÑE, MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V. DOMALAON, CONRADO G. DIMAANO, LOLITA R. HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C. HILARIO, MIASCOR WORKERS UNION - NATIONAL LABOR UNION (MWU-NLU), and PHILIPPINE AIRLINES EMPLOYEES ASSOCIATION (PALEA), petitioners, vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS and SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of the Department of Transportation and Communications, respondents, / MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS AVIATION SYSTEMS CORPORATION, MACROASIA-EUREST SERVICES, INC., MACROASIA-MENZIES AIRPORT SERVICES CORPORATION, MIASCOR CATERING SERVICES CORPORATION, MIASCOR AIRCRAFT MAINTENANCE CORPORATION, and MIASCOR LOGISTICS CORPORATION, petitioners-inintervention,2003 May 5En BancG.R. No. 155001[3/3] SEPARATE OPINION

The Contracts Create Two Monopolies for Piatco By way of background, two monopolies were actually created by the Piatco contracts. The first and more obvious one refers to the business of operating an international passenger terminal in Luzon, the business end of which involves providing international airlines with parking space for their aircraft, and airline passengers with the use of departure and arrival areas, check-in counters, information systems, conveyor systems, security equipment and paraphernalia, immigrations and customs processing areas; and amenities such as comfort rooms, restaurants and shops.

In furtherance of the first monopoly, the Piatco Contracts stipulate that the NAIA Terminal III will be the only facility to be operated as an international passenger terminal;[66] that NAIA Terminals I and II will no longer be operated as such;[67] and that no one (including the government) will be allowed to compete with Piatco in the operation of an international passenger terminal in the NAIA Complex.[68] Given that, at this time, the government and Piatco are the only ones engaged in the business of operating an international passenger terminal, I am not acutely concerned with this particular monopolistic situation.

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There was however another monopoly within the NAIA created by the subject contracts for Piatco -- in the business of providing international airlines with the following: groundhandling, in-flight catering, cargo handling, and aircraft repair and maintenance services. These are lines of business activity in which are engaged many service providers (including the petitioners-in-intervention), who will be adversely affected upon full implementation of the Piatco Contracts, particularly Sections 3.01(d)[69] and (e)[70] of both the ARCA and the CA. On the one hand, Section 3.02(a) of the ARCA makes Terminal III the only international passenger terminal at the NAIA, and therefore the only place within the NAIA Complex where the business of providing airport-related services to international airlines may be conducted. On the other hand, Section 3.01(d) of the ARCA requires government, through the MIAA, not to allow service providers with expired MIAA contracts to renew or extend their contracts to render airport-related services to airlines. Meanwhile, Section 3.01(e) of the ARCA requires government, through the DOTC and MIAA, not to allow service providers -- those with subsisting concession agreements for services and operations being conducted at Terminal I -- to carry over their concession agreements, services and operations to Terminal III, unless they first enter into a separate agreement with Piatco. The aforementioned provisions vest in Piatco effective and exclusive control over which service provider may and may not operate at Terminal III and render the airport-related services needed by international airlines. It thereby possesses the power to exclude competition. By necessary implication, it also has effective control over the fees and charges that will be imposed and collected by these service providers. This intention is exceedingly clear in the declaration by Piatco that it is "completely within its rights to exclude any party that it has not contracted with from NAIA Terminal III."[71]

Worse, there is nothing whatsoever in the Piatco Contracts that can serve to restrict, control or regulate the concessionaire’s discretion and power to reject any service provider and/or impose any term or condition it may see fit in any contract it enters into with a service provider. In brief, there is no safeguard whatsoever to ensure free and fair competition in the service-provider sector.
In the meantime, and not surprisingly, Piatco is first in line, ready to exploit the unique business opportunity. It announced[72] that it has accredited three groundhandlers for Terminal III. Aside from the Philippine Airlines, the other accredited entities are the Philippine Airport and Ground Services Globeground, Inc. ("PAGSGlobeground") and the Orbit Air Systems, Inc. ("Orbit"). PAGSGlobeground is a wholly-owned subsidiary of the Philippine Airport and Ground Services, Inc. or PAGS,[73] while Orbit is a wholly-owned subsidiary of Friendship Holdings, Inc.,[74] which is in turn owned 80 percent by PAGS.[75] PAGS is a service provider owned 60 percent by the Cheng Family;[76] it is a stockholder of 35 percent of Piatco*77+ and is the latter’s designated contractor-operator for NAIA Terminal III.[78] Such entry into and domination of the airport-related services sector appear to be very much in line with the following provisions contained in the First Addendum to the Piatco Shareholders Agreement,[79] executed on July 6, 1999, which appear to constitute a sort of master plan to create a monopoly and combinations in restraint of trade: "11. a. The Shareholders shall ensure: xx x xx x x x x;

b. That (Phil. Airport and Ground Services, Inc.) PAGS and/or its designated Affiliates shall, at all times during the Concession Period, be exclusively authorized by (PIATCO) to engage in the provision of ground-handling, catering and fueling services within the Terminal Complex. c. That PAIRCARGO and/or its designated Affiliate shall, during the Concession Period, be the only
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c. That PAIRCARGO and/or its designated Affiliate shall, during the Concession Period, be the only entities authorized to construct and operate a warehouse for all cargo handling and related services within the Site." Precisely, proscribed by our Constitution are the monopoly and the restraint of trade being fostered by the Piatco Contracts through the erection of barriers to the entry of other service providers into Terminal III. In Tatad v. Secretary of the Department of Energy,[80] the Court ruled: "x x x *S+ection 19 of Article XII of the Constitution x x x mandates: ‘The State shall regulate or prohibit monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed.’

"A monopoly is a privilege or peculiar advantage vested in one or more persons or companies, consisting in the exclusive right or power to carry on a particular business or trade, manufacture a particular article, or control the sale or the whole supply of a particular commodity. It is a form of market structure in which one or only a few firms dominate the total sales of a product or service. On the other hand, a combination in restraint of trade is an agreement or understanding between two or more persons, in the form of a contract, trust, pool, holding company, or other form of association, for the purpose of unduly restricting competition, monopolizing trade and commerce in a certain commodity, controlling its production, distribution and price, or otherwise interfering with freedom of trade without statutory authority. Combination in restraint of trade refers to the means while monopoly refers to the end. "x x x x xx x xx

"Section 19, Article XII of our Constitution is anti-trust in history and in spirit. It espouses competition. The desirability of competition is the reason for the prohibition against restraint of trade, the reason for the interdiction of unfair competition, and the reason for regulation of unmitigated monopolies. Competition is thus the underlying principle of [S]ection 19, Article XII of our Constitution, x x x."[81]

Gokongwei Jr. v. Securities and Exchange Commission[82] elucidates the criteria to be employed: "A ‘monopoly’ embraces any combination the tendency of which is to prevent competition in the broad and general sense, or to control prices to the detriment of the public. In short, it is the concentration of business in the hands of a few. The material consideration in determining its existence is not that prices are raised and competition actually excluded, but that power exists to raise prices or exclude competition when desired."[83] mphasis supplied) The Contracts Encourage
Monopolistic Pricing, Too Aside from creating a monopoly, the Piatco contracts also give the concessionaire virtually limitless power over the charging of fees, rentals and so forth. What little "oversight function"the government might be able and minded to exercise is less than sufficient to protect the public interest, as can be gleaned from the following provisions: "Sec. 6.06 Adjustment of Non-Public Utility Fees and Charges "For fees, rentals and charges constituting Non-Public Utility Revenues, Concessionaire may make any adjustments it deems appropriate without need for the consent of GRP or any government agency subject to Sec. 6.03(c)." Section 6.03 (c) in turn provides:

"(c) Concessionaire shall at all times be judicious in fixing fees and charges constituting Non-Public Utility
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"(c) Concessionaire shall at all times be judicious in fixing fees and charges constituting Non-Public Utility Revenues in order to ensure that End Users are not unreasonably deprived of services. While the vehicular parking fee, porterage fee and greeter/wellwisher fee constitute Non-Public Utility Revenues of Concessionaire, GRP may require Concessionaire to explain and justify the fee it may set from time to time, if in the reasonable opinion of GRP the said fees have become exorbitant resulting in the unreasonable deprivation of End Users of such services." It will be noted that the above-quoted provision has no teeth, so the concessionaire can defy the government without fear of any sanction. Moreover, Section 6.06 -- taken together with Section 6.03(c) of the ARCA -- falls short of the standard set by the BOT Law as amended, which expressly requires in Section 2(b) that the project proponent is "allowed to charge facility users appropriate tolls, fees, rentals and charges not exceeding those proposed in its bid or as negotiated and incorporated in the contract x x x." The Piatco Contracts Violate Constitutional Prohibitions Against Impairment of Contracts

and Deprivation of Property
Without Due Process

Earlier, I discussed how Section 3.01(e)[84] of both the CA and the ARCA requires government, through DOTC/MIAA, not to permit the carry-over to Terminal III of the services and operations of certain service providers currently operating at Terminal I with subsisting contracts.
By the In-Service Date, Terminal III shall be the only facility to be operated as an international passenger terminal at the NAIA;[85] thus, Terminals I and II shall no longer operate as such,[86] and no one shall be allowed to compete with Piatco in the operation of an international passenger terminal in the NAIA.[87] The bottom line is that, as of the In-Service Date, Terminal III will be the only terminal where the business of providing airport-related services to international airlines and passengers may be conducted at all. Consequently, government through the DOTC/MIAA will be compelled to cease honoring existing contracts with service providers after the In-Service Date, as they cannot be allowed to operate in Terminal III. In short, the CA and the ARCA obligate and constrain government to break its existing contracts with these service providers. Notably, government is not in a position to require Piatco to accommodate the displaced service providers, and it would be unrealistic to think that these service providers can perform their service contracts in some other international airport outside Luzon. Obviously, then, these displaced service providers are -- to borrow a quaint expression -- up the river without a paddle. In plainer terms, they will have lost their businesses entirely, in the blink of an eye. What we have here is a set of contractual provisions that impair the obligation of contracts and contravene the constitutional prohibition against deprivation of property without due process of law.[88] Moreover, since the displaced service providers, being unable to operate, will be forced to close shop, their respective employees - among them Messrs. Agan and Lopez et al. -- have very grave cause for concern, as they will find themselves out of employment and bereft of their means of livelihood. This
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concern, as they will find themselves out of employment and bereft of their means of livelihood. This situation comprises still another violation of the constitution prohibition against deprivation of property without due process. True, doing business at the NAIA may be viewed more as a privilege than as a right. Nonetheless, where that privilege has been availed of by the petitioners-in-intervention service providers for years on end, a situation arises, similar to that in American Inter-fashion v. GTEB.[89] We held therein that a privilege enjoyed for seven years "evolved into some form of property right which should not be removed x x x arbitrarily and without due process."Said pronouncement is particularly relevant and applicable to the situation at bar because the livelihood of the employees of petitioners-intervenors are at stake. The Piatco Contracts Violate Constitutional Prohibition Against Deprivation of Liberty

Without Due Process
The Piatco Contracts by locking out existing service providers from entry into Terminal III and restricting entry of future service providers, thereby infringed upon the freedom -- guaranteed to and heretofore enjoyed by international airlines -- to contract with local service providers of their choice, and vice versa. Both the service providers and their client airlines will be deprived of the right to liberty, which includes the right to enter into all contracts,*90+ and/or the right to make a contract in relation to one’s business.[91] By Creating New Financial Obligations for Government,

Supplements to the ARCA Violate
the Constitutional Ban on

Disbursement of Public Funds
Without Valid Appropriation Clearly prohibited by the Constitution is the disbursement of public funds out of the treasury, except in pursuance of an appropriation made by law.[92] The immediate effect of this constitutional ban is that all the various agencies of government are constrained to limit their expenditures to the amounts appropriated by law for each fiscal year; and to carefully count their cash before taking on contractual commitments. Giving flesh and form to the injunction of the fundamental law, Sections 46 and 47 of Executive Order 292, otherwise known as the Administrative Code of 1987, provide as follows: "Sec. 46. Appropriation Before Entering into Contract. - (1) No contract involving the expenditure of public funds shall be entered into unless there is an appropriation therefor, the unexpended balance of which, free of other obligations, is sufficient to cover the proposed expenditure; and x x x "Sec. 47. Certificate Showing Appropriation to Meet Contract. - Except in the case of a contract for personal service, for supplies for current consumption or to be carried in stock not exceeding the estimated consumption for three (3) months, or banking transactions of government-owned or controlled banks, no contract involving the expenditure of public funds by any government agency shall be entered into or authorized unless the proper accounting official of the agency concerned shall have
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be entered into or authorized unless the proper accounting official of the agency concerned shall have certified to the officer entering into the obligation that funds have been duly appropriated for the purpose and that the amount necessary to cover the proposed contract for the current calendar year is available for expenditure on account thereof, subject to verification by the auditor concerned. The certificate signed by the proper accounting official and the auditor who verified it, shall be attached to and become an integral part of the proposed contract, and the sum so certified shall not thereafter be available for expenditure for any other purpose until the obligation of the government agency concerned under the contract is fully extinguished." Referring to the aforequoted provisions, this Court has held that "(I)t is quite evident from the tenor of the language of the law that the existence of appropriations and the availability of funds are indispensable pre-requisites to or conditions sine qua non for the execution of government contracts. The obvious intent is to impose such conditions as a priori requisites to the validity of the proposed contract."[93] Notwithstanding the constitutional ban, statutory mandates and jurisprudential precedents, the three Supplements to the ARCA, which were not approved by NEDA, imposed on government the additional burden of spending public moneys without prior appropriation. In the First Supplement ("FS") dated August 27, 1999, the following requirements were imposed on the government: · To construct, maintain and keep in good repair and operating condition all airport support services, facilities, equipment and infrastructure owned and/or operated by MIAA, which are not part of the Project or which are located outside the Site, even though constructed by Concessionaire including the access road connecting Terminals II and III and the taxilane, taxiways and runways

· To obligate the MIAA to provide funding for the upkeep, maintenance and repair of the airports and facilities owned or operated by it and by third persons under its control in order to ensure compliance with international standards; and holding MIAA liable to Piatco for the latter’s losses, expenses and damages as well as for the latter’s liability to third persons, in case MIAA fails to perform such obligations; in addition, MIAA will also be liable for the incremental and consequential costs of the remedial work done by Piatco on account of the former’s default.
· Section 4 of the FS imposed on government ten (10) "Additional Special Obligations,"including the following:

Ø Providing thru MIAA the land required by Piatco for the taxilane and one taxiway, at no cost to Piatco
Ø Implementing the government’s existing storm drainage master plan

Ø Coordinating with DPWH the financing, implementation and completion of the following works before the In-Service Date: three left-turning overpasses (Edsa to Tramo St., Tramo to Andrews Ave., and Manlunas Road to Sales Ave.) and a road upgrade and improvement program involving widening, repair and resurfacing of Sales Road, Andrews Avenue and Manlunas Road; improvement of Nichols Interchange; and removal of squatters along Andrews Avenue

Ø Dealing directly with BCDA and the Philippine Air Force in acquiring additional land or right of way for the road upgrade and improvement program Ø Requiring government to work for the immediate reversion to MIAA of the Nayong Pilipino National Park, in order to permit the building of the second west parallel taxiway
· Section 5 of the FS also provides that in lieu of the access tunnel, a surface access road (T2-T3) will
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· Section 5 of the FS also provides that in lieu of the access tunnel, a surface access road (T2-T3) will be constructed. This provision requires government to expend funds to purchase additional land from Nayong Pilipino and to clear the same in order to be able to deliver clean possession of the site to Piatco, as required in Section 5(c) of the FS. On the other hand, the Third Supplement ("TS") obligates the government to deliver, within 120 days from date thereof, clean possession of the land on which the T2-T3 Road is to be constructed. The foregoing contractual stipulations undeniably impose on government the expenditures of public funds not included in any congressional appropriation or authorized by any other statute. Piatco however attempts to take these stipulations out of the ambit of Sections 46 and 47 of the Administrative Code by characterizing them as stipulations for compliance on a "best-efforts basis"only.

To determine whether the additional obligations under the Supplements may really be undertaken on a best-efforts basis only, the nature of each of these obligations must be examined in the context of its relevance and significance to the Terminal III Project, as well as of any adverse impact that may result if such obligation is not performed or undertaken on time. In short, the criteria for determining whether the best-efforts basis will apply is whether the obligations are critical to the success of the Project and, accordingly, whether failure to perform them (or to perform them on time) could result in a material breach of the contract.
Viewed in this light, the "Additional Special Obligations"set out in Section 4 of the FS take on a different aspect. In particular, each of the following may all be deemed to play a major role in the successful and timely prosecution of the Terminal III Project: the obtention of land required by PIATCO for the taxilane and taxiway; the implementation of government’s existing storm drainage master plan; and coordination with DPWH for the completion of the three left-turning overpasses before the In-Service Date, as well as acquisition and delivery of additional land for the construction of the T2-T3 access road. Conversely, failure to deliver on any of these obligations may conceivably result in substantial prejudice to the concessionaire, to such an extent as to constitute a material breach of the Piatco Contracts. Whereupon, the concessionaire may outrightly terminate the Contracts pursuant to Section 8.01(b)(i) and (ii) of the ARCA and seek payment of Liquidated Damages in accordance with Section 8.02(a) of the ARCA; or the concessionaire may instead require government to pay the Incremental and Consequential Losses under Section 1.23 of the ARCA.[94] The logical conclusion then is that the obligations in the Supplements are not to be performed on a best-efforts basis only, but are unarguably mandatory in character.

Regarding MIAA’s obligation to coordinate with the DPWH for the complete implementation of the road upgrading and improvement program for Sales, Andrews and Manlunas Roads (which provide access to the Terminal III site) prior to the In-Service Date, it is essential to take note of the fact that there was a pressing need to complete the program before the opening of Terminal III.[95] For that reason, the MIAA was compelled to enter into a memorandum of agreement with the DPWH in order to ensure the timely completion of the road widening and improvement program. MIAA agreed to advance the total amount of P410.11 million to DPWH for the works, while the latter was committed to do the following:
"2.2.8. Reimburse all advance payments to MIAA including but not limited to interest, fees, plus other costs of money within the periods CY2004 and CY2006 with payment of no less than One Hundred Million Pesos (PhP100M) every year. "2.2.9. Perform all acts necessary to include in its CY2004 to CY2006 budget allocation the repayments for the advances made by MIAA, to ensure that the advances are fully repaid by CY2006. For this purpose, DPWH shall include the amounts to be appropriated for reimbursement to MIAA in the "Not Needing Clearance"column of their Agency Budget Matrix (ABM) submitted to the Department of Budget and Management."

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It can be easily inferred, then, that DPWH did not set aside enough funds to be able to complete the upgrading program for the crucially situated access roads prior to the targeted opening date of Terminal III; and that, had MIAA not agreed to lend the P410 million, DPWH would not have been able to complete the program on time. As a consequence, government would have been in breach of a material obligation. Hence, this particular undertaking of government may likewise not be construed as being for best-efforts compliance only. They also Infringe on the

Legislative Prerogative and
Power Over the Public Purse But the particularly sad thing about this transaction between MIAA and DPWH is the fact that both agencies were maneuvered into (or allowed themselves to be maneuvered into) an agreement that would ensure delivery of upgraded roads for Piatco’s benefit, using funds not allocated for that purpose. The agreement would then be presented to Congress as a done deal. Congress would thus be obliged to uphold the agreement and support it with the necessary allocations and appropriations for three years, in order to enable DPWH to deliver on its committed repayments to MIAA. The net result is an infringement on the legislative power over the public purse and a diminution of Congress’ control over expenditures of public funds -- a development that would not have come about, were it not for the Supplements. Very clever but very illegal!

EPILOGUE
What Do We Do Now? In the final analysis, there remains but one ultimate question, which I raised during the Oral Argument on December 10, 2002: What do we do with the Piatco Contracts and Terminal III?[96] (Feeding directly into the resolution of the decisive question is the other nagging issue: Why should we bother with determining the legality and validity of these contracts, when the Terminal itself has already been built and is practically complete?)

Prescinding from all the foregoing disquisition, I find that all the Piatco contracts, without exception, are void ab initio and therefore inoperative. Even the very process by which the contracts came into being -- the bidding and the award -- has been riddled with irregularities galore and blatant violations of law and public policy, far too many to ignore. There is thus no conceivable way, as proposed by some, of saving one (the original Concession Agreement) while junking all the rest.
Neither is it possible to argue for the retention of the Draft Concession Agreement (referred to in the various pleadings as the Contract Bidded Out) as the contract that should be kept in force and effect to govern the situation, inasmuch as it was never executed by the parties. What Piatco and the government executed was the Concession Agreement which is entirely different from the Draft Concession Agreement. Ultimately, though, it would be tantamount to an outrageous, grievous and unforgivable mutilation of public policy and an insult to ourselves if we opt to keep in place a contract -- any contract -- for to do so would assume that we agree to having Piatco continue as the concessionaire for Terminal III. Despite all the insidious contraventions of the Constitution, law and public policy Piatco perpetrated, keeping Piatco on as concessionaire and even rewarding it by allowing it to operate and profit from Terminal III -- instead of imposing upon it the stiffest sanctions permissible under the laws -- is unconscionable.

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unconscionable. It is no exaggeration to say that Piatco may not really mind which contract we decide to keep in place. For all it may care, we can do just as well without one, if we only let it continue and operate the facility. After all, the real money will come not from building the Terminal, but from actually operating it for fifty or more years and charging whatever it feels like, without any competition at all. This scenario must not be allowed to happen. If the Piatco contracts are junked altogether as I think they should be, should not AEDC automatically be considered the winning bidder and therefore allowed to operate the facility? My answer is a stone-cold ‘No’. AEDC never won the bidding, never signed any contract, and never built any facility. Why should it be allowed to automatically step in and benefit from the greed of another?

Should government pay at all for reasonable expenses incurred in the construction of the Terminal? Indeed it should, otherwise it will be unjustly enriching itself at the expense of Piatco and, in particular, its funders, contractors and investors -- both local and foreign. After all, there is no question that the State needs and will make use of Terminal III, it being part and parcel of the critical infrastructure and transportation-related programs of government.
In Melchor v. Commission on Audit,[97] this Court held that even if the contract therein was void, the principle of payment by quantum meruit was found applicable, and the contractor was allowed to recover the reasonable value of the thing or services rendered (regardless of any agreement as to the supposed value), in order to avoid unjust enrichment on the part of government. The principle of quantum meruit was likewise applied in Eslao v. Commission on Audit,[98] because to deny payment for a building almost completed and already occupied would be to permit government to unjustly enrich itself at the expense of the contractor. The same principle was applied in Republic v. Court of Appeals.[99] One possible practical solution would be for government -- in view of the nullity of the Piatco contracts and of the fact that Terminal III has already been built and is almost finished -- to bid out the operation of the facility under the same or analogous principles as build-operate-and-transfer projects. To be imposed, however, is the condition that the winning bidder must pay the builder of the facility a price fixed by government based on quantum meruit; on the real, reasonable -- not inflated -- value of the built facility. How the payment or series of payments to the builder, funders, investors and contractors will be staggered and scheduled, will have to be built into the bids, along with the annual guaranteed payments to government. In this manner, this whole sordid mess could result in something truly beneficial for all, especially for the Filipino people. WHEREFORE, I vote to grant the Petitions and to declare the subject contracts NULL and VOID. [1] See Kilosbayan, Inc. v. Guingona Jr., 232 SCRA 110, May 5, 1994; and Basco v. Phil. Amusements and Gaming Corporation, 197 SCRA 52, May 14, 1991.

[2] COMELEC v. Quijano-Padilla, GR No. 151992, September 18, 2002.
[3] Vide: ABS-CBN Broadcasting Corp. v. Commission on Elections, 323 SCRA 811, January 28, 2000; likewise, COMELEC v. Quijano-Padilla, supra. *4+ See Respondent PIATCO’s Memorandum, pp. 25-26. *5+ See public respondents’ Memorandum, p. 24. [6] 307 SCRA 394, 399, May 19, 1999, per Panganiban, J.

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[7] 175 SCRA 264, July 11, 1989. [8] Supra, Paras, J. [9] As reiterated in Bayan (Bagong Alyansang Makabayan) v. Zamora, 342 SCRA 449, 480-481, October 10, 2000. [10] RA No. 6957 as amended by RA No. 7718. [11] Par. 3.6.1 on page 8 of the Bid Documents. [12] Initially the minimum equity was set at 20%, per Sec. 3.6.4 of the Bid Documents. However, this was later clarified in Bid Bulletin No. 3(B)(6) to read 30% of Project Cost, to bring the same in line with the draft concession agreement’s Art. II Sec. 2.01(a), which specifically set the project’s debt-to-equity ratio at 70:30, thereby requiring a minimum equity of 30% of project cost. *13+ The consortium was composed of Paircargo, PAGS and Security Bank. Paircargo’s audited financial statements as of 1993 and 1994 showed a net worth of P2,783,592 and P3,123,515 respectively. PAGS’ audited financial statements as of 1995 showed a paid-up capital of P5,000,000 and deposits on future subscriptions of P21,735,700, or an aggregate of P26,735,700 of equity available to invest in the project. Security Bank’s audited statements for 1995 showed a net worth of P3,523,504,377. However, the bank’s entire net worth was not available for investment in the project since Sec. 21-B of the General Banking Act provides inter alia that a commercial bank’s equity investment in any one enterprise, whether allied or non-allied, should not exceed 15% of the net worth of the investing bank. This limitation is reiterated in Sec. 1381.1.a. of the Manual for Banks and Other Financial Intermediaries. Thus, the maximum amount which Security Bank could have legally invested in the project was only P528,525,656.55. And consequently, the maximum amount of equity which the consortium could have put up was only P558,384,871.55.

[14] 199 SCRA 134, July 12, 1991.
[15] Malaga v. Penachos Jr., 213 SCRA 516, September 3, 1992.

[16] Part of the bid process under the BOT Law is the right of the originator of an unsolicited proposal to match a price challenge. Pursuant to Sec. 4-A, "in the event another proponent submits a lower price proposal, the original proponent shall have the right to match that price within thirty (30) working days."
[17] Cf. Malaga v. Penachos, Jr., supra. *18+ §11.2, 1994 IRR. *19+ Public respondents’ Memorandum, pp. 86-87; prepared jointly by the solicitor general, the acting government corporate counsel, and their respective deputies and assistants.

[20] Supra, note 14, per Medialdea, J.
*21+ §§3.01(d), 3.01(e), 3.02(a), 3.02(b) and 5.15 of the CA. *22+ See §1.06 of the CA. *23+ §3.02 of the CA. *24+ §2.05 of the CA.

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[25] The parametric formula referred to in the CA applies only to the following so-called public utility fees: aircraft parking and tacking fees, check-in counter fees and terminal fees. [26] Fernandez, A Treatise on Government Contracts under Philippine Law, 2001 ed., p. 70. [27] 96 Phil. 368, December 29, 1954. [28] Id., p. 375, per Paras, CJ.

[29] 63 SCRA 170, 177-178, March 21, 1975, per Antonio, J.
*30+ Cf. §1.06 of the ARCA vis-à-vis §1.06 of the CA.

*31+ §4.04 and 8.01 of the ARCA vis-à-vis §8.04 of the CA.
[32] As cf. Annex "G"of the ARCA vis-à-vis Annex "G"of the CA. *33+ Cf. §8.04(d) of the ARCA vis-à-vis §9.01(d) of the CA.

*34+ Cf. §2.05 of the ARCA vis-à-vis §2.05 of the CA.
*35+ Cf. §5.08(a) of the ARCA vis-à-vis §5.08(a) of the CA.

*36+ Cf. §6.03(a)(i) of the ARCA vis-à-vis §6.03(a) of the CA.
*37+ Cf. §8.01(b) and §12.09 of the ARCA vis- à-vis §8.04(b) and 12.09 of the CA. *38+ Cf. §8.03(a)(i) of the ARCA vis-à-vis §8.06(a)(i) of the CA. *39+ §2.05(g) of the ARCA. *40+ §4.04(b) of the ARCA. *41+ §6.03(c) of the ARCA vis-à- vis §6.03(c) of the CA. *42+ Cf. §8.01(b) of the ARCA vis-à-vis § 8.04(b) of the CA. *43+ §12.14 of the ARCA. *44+ Cf. §§1.11(b) and 5.06 of the ARCA vis-à-vis §§1.11(b) and 5.06 of the CA.

*45+ §2 of the FS, amending §1.36 of the ARCA.
*46+ §3 of the FS, amending §2.05(d) of the ARCA.

[47] Ibid.
*48+ §4 of the FS, adding §2.05(h) to ARCA. *49+ §4 of the FS, adding §2.05(i) to ARCA.

*50+ §4 of the FS, adding §2.05(p) to ARCA.
*51+ Per §4 of the FS, adding §2.05(n) to ARCA.
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*51+ Per §4 of the FS, adding §2.05(n) to ARCA. *52+ Per §4 of the FS, adding §2.05(o) to ARCA. *53+ Per §4 of the FS, adding §2.05(p) to ARCA. *54+ Per §4 of the FS, adding §2.05(j) to ARCA. *55+ §8 of the FS, amending §6.01(c) of the ARCA. *56+ §9 of the FS, amending §6.02 of the ARCA. *57+ §Sec. 2.1 of the SS. *58+ Per §3.1 of the TS.

*59+ Vide §3.4 of the TS.
*60+ §4.2 of the TS.

[61] Page 37.
*62+ §8.01 (a) of the ARCA. [63] Namely, the airports at the Subic Bay Freeport Special Economic Zone, the Clark Special Economic Zone, and Laoag City.

[64] Memorandum, pp. 5-7, of the petitioners-in-intervention.
*65+ §3.02 a): "x x x. With regard to CSEZ, GRP shall ensure that, until such time as the Development Facility Capacity shall have been consistently reached or exceeded for three (3) consecutive years during the Concession Period, (i) Clark International Airport shall not be operated beyond its design capacity of Eight Hundred Fifty Thousand (850,000) passengers per annum and (ii) no new terminal facilities shall be operated therein. "Development Facility Capacity"refers to the ten million (10,000,000) passenger capacity per year of the Development Facility." *66+ §3.02(a) of the ARCA and §3.02(a) of the CA. *67+ §3.02(b) and (c) of the ARCA, and §3.02(b) of the CA. *68+ §3.02(b) and (c) of the ARCA and §3.02(b) of the CA. Pertinent portions of §3.02(b) of the ARCA are quoted hereinbelow: "(b) On the In-Service Date, GRP shall cause the closure of the Ninoy Aquino International Airport Passenger Terminals I and II as international passenger terminals in order to allow Concessionaire, during the entire Concession Period, to exclusively operate a commercial international passenger terminal within the island of Luzon; provided that the aforesaid exclusive right to operate a commercial international passenger terminal shall be without prejudice to the international passenger terminal operations already existing on the date of this Agreement in SBFSEZ, CSEZ and Laoag City (but subject to the limitation with regard to CSEZ referred to in Section 3.02[a]). Neither shall GRP, DOTC or MIAA use or permit the use of Terminals I and/or II under any arrangement or scheme, for compensation or otherwise, with any party which would directly or indirectly compete with Concessionaire in the latter’s operation of and the operations in the Terminal and Terminal Complex, including without limitation the use of Terminals I and/or II for the handling of international traffic; provided that if Terminals I and/or II are operated as domestic passenger terminals, the conduct of any activity therein which under the
Banking Page 289

are operated as domestic passenger terminals, the conduct of any activity therein which under the ordinary course of operating a domestic passenger terminal is normally undertaken, shall not be considered to be in direct or indirect competition with Concessionaire in its operation of the Development Facility."
[69] Sec. 3.01(d) of the ARCA and the CA reads as follows: "(d) For the purpose of an orderly transition, MIAA shall not renew any expired concession agreement relative to any service or operation currently being undertaken at the Ninoy Aquino International Airport Passenger Terminal I, or extend any concession agreement which may expire subsequent hereto, except to the extent that the continuation of existing services and operations shall lapse on or before the In-Service Date. Nothing herein shall be construed to prohibit MIAA from maintaining arrangements for the uninterrupted provision of essential services at the Ninoy Aquino International Airport Passenger Terminal I until the Terminal shall have commenced operations on the In-Service Date, and thereafter, from making such arrangements as are necessary for the utilization of NAIA Passenger Terminal I as a domestic passenger terminal or as a facility other than an international passenger terminal.

[70] Sec. 3.01(e) of the ARCA and the CA reads as follows:
"(e) GRP confirms that certain concession agreements relative to certain services or operations currently being undertaken at the Ninoy Aquino International Airport Passenger Terminal I have a validity period extending beyond the In-Service Date. GRP, through DOTC/MIAA, confirms that these services and operations shall not be carried over to the Terminal and that Concessionaire is under no legal obligation to permit such carry-over except through a separate agreement duly entered into with Concessionaire. In the event Concessionaire becomes involved in any litigation initiated by any such concessionaire or operator, GRP undertakes and hereby holds Concessionaire free and harmless on a full indemnity basis from and against any loss and/or liability resulting from any such litigation, including the cost of litigation and the reasonable fees paid or payable to Concessionaire’s counsel of choice, all such amounts being fully deductible by way of an offset from any amount which Concessionaire is bound to pay GRP under this Agreement."

[71] PIATCO Comment, par. 9, on p. 6.
[72] PIATCO letter dated October 14, 2002 addressed to the Board of Airline Representatives, copy attached as Annex "OO-Service Providers". [73] Based on the PAGSGlobeground GIS as of July 2000, attached as Annex "LL-Service Providers"to the Memorandum of petitioners-in-intervention. [74] Based on the Orbit GIS as of August 2000, attached as Annex "MM-Service Providers"to the Memorandum of petitioners-in-intervention. [75] Based on the Friendship Holdings, Inc. GIS as of December 2001, attached as Annex "NN-Service Providers"to the Memorandum of petitioners-in-intervention.

[76] Per the Articles of Incorporation of PAGS, attached as Annex "Y-Service Providers"to the petition-inintervention.
[77] Per the GIS of Piatco as of May 2000. *78+ Per §5.15 of both the CA and the ARCA.

[79] Copy of which was presented by Piatco to the Senate Blue Ribbon Committee during committee hearings.

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[80] 281 SCRA 330, November 5, 1997. [81] Id., pp. 355-358, per Puno, J. [82] 89 SCRA 336, April 11, 1979. [83] Id., p. 376, per Antonio, J. [84] Please see footnote 70 supra. *85+ §3.02(a) of the CA and §3.02(a) of the ARCA.

*86+ §3.02(b) of the CA and §3.02(b) and (c) of the ARCA.
[87] Ibid.

*88+ §1, Art. III, Constitution.
[89] 197 SCRA 409, May 23, 1991, per Gutierrez Jr., J. [90] See Rubi v. Provincial Board of Mindoro, 39 Phil. 660, March 7, 1919. *91+ Davao Stevedores Mutual Benefit Association v. Compañia Maritima, 90 Phil. 847, February 29, 1952. *92+ §29(1), Article VI, 1987 Constitution. [93] Commission on Elections v. Quijano-Padilla, GR No. 151992, September 18, 2002, p. 20, per Sandoval-Gutierrez, J.

*94+ §1.23 of the ARCA defines Incremental and Consequential Costs as "additional costs properly documented and reasonably incurred by Concessionaire (including without limitation additional overhead costs, cost of any catch-up program, demobilization, re-mobilization, storage costs, termination penalties, increase in construction costs, additional interest expense, costs, fees and other expenses and increase in the cost of financing) in excess of a budgeted or contracted amount, occasioned by, among other things, delay in the prosecution of Works by reason not attributable to Concessionaire or a deviation from the Tender Design or any suspension or interference with the operation of the Terminal Complex by reason not attributable to Concessionaire. x x x"
[95] Memorandum of Agreement between the Manila International Airport Authority and the Department of Public Works and Highways, p. 2. [96] When I asked this question, Atty. Jose A. Bernas replied that if Piatco is deemed a builder in good faith then it may be entitled to some form of compensation under the principle barring unjust enrichment. But if it is found to be a builder in bad faith then it may not be entitled to compensation. (See TSN, December 10, 2002, pp. 58-71.) Faced with the same question, Solicitor General Alfredo L. Benipayo responded that the facility will not be torn down but taken over by government by virtue of police power or eminent domain. (Id., pp. 94-99.) When asked the same question, Atty. Eduardo delos Angeles explained that under the provision on Step in Rights, the senior lenders can designate a qualified operator to operate the facility. (Id., pp. 225-226.) This solution, however, assumes that this contractual provision is valid. [97] 200 SCRA 704, August 16, 1991.

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[97] 200 SCRA 704, August 16, 1991. [98] 195 SCRA 730, April 8, 1991. [99] 299 SCRA 199, November 25, 1998.

/---!e-library! 6.0 Philippines Copyright © 2000 by Sony Valdez---\ [2003V454ES] [7/7] DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B. REUNILLA, MANUEL ANTONIO B. BOÑE, MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V. DOMALAON, CONRADO G. DIMAANO, LOLITA R. HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C. HILARIO, MIASCOR WORKERS UNION - NATIONAL LABOR UNION (MWU-NLU), and PHILIPPINE AIRLINES EMPLOYEES ASSOCIATION (PALEA), petitioners, vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS and SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of the Department of Transportation and Communications, respondents, / MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS AVIATION SYSTEMS CORPORATION, MACROASIA-EUREST SERVICES, INC., MACROASIA-MENZIES AIRPORT SERVICES CORPORATION, MIASCOR CATERING SERVICES CORPORATION, MIASCOR AIRCRAFT MAINTENANCE CORPORATION, and MIASCOR LOGISTICS CORPORATION, petitioners-inintervention,2003 May 5En BancG.R. No. 155001[1] An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector. [2] G.R. No. 155001. [3] G.R. No. 155547. [4] G.R. No. 155661.

*5+ An international airport is any nation’s gateway to the world, the first contact of foreigners with the Philippine Republic, especially those foreigners who have not been in contact with the wonderful exports of the Philippine economy, those foreigners who have not had the benefit of enjoying Philippine export products. Because for them, when they see your products, that is the face of the Philippines they see. But if they are not exposed to your products, then it’s the airport that’s the first face of the Philippines they see. Therefore, it’s not only a matter of opening yet, but making sure that it is a world class airport that operates without any hitches at all and without the slightest risk to travelers. But it’s also emerging as a test case of my administration’s commitment to fight corruption to rid our state from the hold of any vested interest, the Solicitor General, and the Justice Department have determined that all five agreements covering the NAIA Terminal 3, most of which were contracted in the previous administration, are null and void. I cannot honor contracts which the Executive Branch’s legal offices have concluded (as) null and void.
I am, therefore, ordering the Department of Justice and the Presidential Anti-Graft Commission to investigate any anomalies and prosecute all those found culpable in connection with the NAIA contract. But despite all of the problems involving the PIATCO contracts, I am assuring our people, our travelers, our exporters, my administration will open the terminal even if it requires invoking the whole powers of the Presidency under the Constitution and we will open a safe, secure and smoothly functioning airport, a world class airport, as world class as the exporters we are honoring today. (Speech of President Arroyo, mphasis supplied)

[6] Art. VIII, Sec. 1, Philippine Constitution.
[7] MIASCOR, MACROASIA-EUREST, MACROASIA OGDEN and Philippine Airlines.

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[7] MIASCOR, MACROASIA-EUREST, MACROASIA OGDEN and Philippine Airlines. [8] Sections 3.01 (a) and 3.02, 1997 Concession Agreement; Sections 3.01 (d) and (e) and 3.02, ARCA. [9] Kilosbayan, Inc. v. Morato, G.R. No. 118910, July 17, 1995, 246 SCRA 540, 562-563, citing Baker v. Carr, 369 U.S. 186, 7 L. Ed. 633 (1962). [10] Id.; Bayan v. Zamora, G.R. No. 138570, October 10, 2000; 342 SCRA 449, 478.

[11] Rollo, G.R. No. 155547, p.12.
[12] Article VI, Section 29 (1).

[13] G.R. No. 39842, March 28, 1934, 59 Phil 823.
[14] G.R. No. 29627, December 19, 1989; 180 SCRA 254, 260-261.

[15] G. R. No. 113375, May 5, 1994.
[16] Id. [17] Id. citing Tan vs. Macapagal, 43 SCRA 677, 680 [1972]. [18] Association of Small Landowners in the Philippines, Inc. vs. Secretary of Agrarian Reform, G. R. No. 78742, July 14, 1989; 175 SCRA 343, 364-365 [1989]. [19] Santiago v. Vasquez, G.R. Nos. 99289-90, January 27, 1993; 217 SCRA 633, 652. [20] G.R. No. 136154, February 7, 2001; 351 SCRA 373, 381. [21] G.R. No. 135362, December 13, 1999; 320 SCRA 610. [22] Del Monte Corporation-USA v. Court of Appeals, G.R. No. 136154, February 7, 2001; 351 SCRA 373, 382. [23] Rollo, G.R. No.155001, pp. 2487-2488.

[24] Section 5, R.A. No. 7718.
[25] At the United States Dollar-Philippine Peso exchange rate of US$1:P26.239 quoted by the Bangko Sentral ng Pilipinas at that time. [26] Rollo, G.R. No.155001, pp. 2471-2474.

[27] Id. at 2475-2477. Derived from the figures on the authorized capital stock and the shares of stock that are subscribed and paid-up.
[28] Id. at 2478-2484. [29] Member Maximum Amount of Equity

Security Bank
PAGS

P528,525,656.55
26,735,700.00

Paircargo

3,123,515.00
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Paircargo

3,123,515.00

TOTAL

P558,384,871.55

[30] Republic of the Philippines vs. Hon. Ignacio C. Capulong, G.R. No. 93359, July 12, 1991; 199 SCRA 134, 146-147. mphasis supplied. [31] Danville Maritime, Inc. v. Commission on Audit, G.R. No. 85285, July 28, 1989, 175 SCRA 701, 713. Citations omitted. [32] A. Cobacha & D. Lucenario, Law on Public Bidding and Government Contracts 13 (1960).

[33] Diamond v. City of Mankato, et al., 93 N.W. 912.
[34] G.R. No. L-5439, December 29, 1954; 96 Phil 368.

[35] Id. at 375.
[36] Section 6.03, draft Concession Agreement. [37] Sections 1.33 and 6.03(b), 1997 Concession Agreement. [38] Sections 1.27 and 6.06, 1997 Concession Agreement. [39] mphasis supplied.

[40] mphasis supplied.
[41] Referred to as "Passenger Service Fee" under the draft Concession Agreement. [42] Section 6.05 Interim Adjustment (a) Concessionaire may apply for and, if warranted, may be granted an interim adjustment of the fees and charges constituting Public Utility Revenues upon the occurrence of extraordinary events resulting from any of the following: a depreciation since the last adjustment by at least fifteen percent (15%) of the value of the Philippine Peso relative to the US Dollar using the exchange rates published by the Philippine Dealing System as reference;

an increase since the last adjustment by at least fifteen percent (15%) in the Metro Manila Consumer Price Index based on National Census and Statistics Office publications; an increase since the last adjustment in MERALCO power rates billing by at least fifteen percent (15%);
an increase since the last adjustment in the 180-day Treasury Bill interest rates by at least thirty (30%).

. . ..
[43] Section 6.05, draft Concession Agreement. [44] Section 1.33, 1997 Concession Agreement. [45] Supra note 31.

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[46] Malaga v. Penachos, Jr., G.R No. 86695, September 3, 1992; 213 SCRA 516, 526. [47] A. Cobacha & D. Lucenario, Law on Public Bidding and Government Contracts 6-7 (1960). [48] mphasis supplied. [49] Concession Agreement, Art. 4, Sec. 4.04 (b) and (c), Art. 1, Sec. 1.06, July 12, 1997.

[50] Ibid.
[51] Id. at Art. 4, Sec. 4.04 (c). [52] Record of the Senate Second Regular Session 1993-1994, vol. III, no. 42, p. 362. [53] Republic Act No. 7718, Secs. 2 and 4-A, Implementing Rules and Regulations, Rule 11, Secs. 11.1 and 11.3. [54] Emphasis and caption supplied. [55] Sec. 1.06, ARCA. [56] Republic Act No. 7718, as amended, Sec. 4-A, May 5, 1994; Implementing Rules and Regulations, Rule 10, Sec. 10.1. [57] Implementing Rules and Regulations, Rule 10, Sec. 10.4. [58] North Negros Sugar Co., Inc. v. Hidalgo, G.R. No. 42334, October 31, 1936; Intestate estate of the deceased Florentino San Gil. Josefa R. Oppus v. Bonifacio San Gil, G.R. No. 48115, October 12, 1942; San Diego v. Municipality of Naujan, G.R. No. L- 9920, February 29, 1960; Favis vs. Municipality of Sabañgan, G.R. No. L-26522, 27 February 1969; City of Manila vs. Tarlac Development Corporation, L-24557, L-24469 & L-24481, 31 July 1968; In the matter of the Petition for Declaratory Judgment on Title to Real Property (Quieting of Title) Pechueco Sons Company v. Provincial Board of Antique, G.R. No. L-27038, January 30, 1970; Fornilda v. The Branch 164, Regional Trial Court IVth Judicial Region, Pasig, G.R. No. L-72306, October 5, 1988; Laurel v. Civil Service Commission, G.R. No. 71562, October 28, 1991; Davac v. Court of Appeals, G.R. No. 106105, April 21, 1994. [59] Republic Act No. 7718, Sec. 1. [60] III Record of the Constitutional Commission, pp. 266-267 (1986). [61] Id. [62] Except for providing for the suspension of all payments due to the Government for the duration of the takeover, Article V, Section 5.10(b) of the ARCA contains the same provision. Emphasis and caption supplied.

[63] Id.
[64] Bataan Shipyard and Engineering Co., Inc. v. Presidential Commission on Good Government, G.R. No. 75885, May 27, 1987 citing Freund, The Police Power (Chicago, 1904). [65] Genuino v. Court of Agrarian Relations, G.R. No. L-25035, February 26, 1968. *66+ Black’s Law Dictionary, 4th Ed., p. 1158.
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*66+ Black’s Law Dictionary, 4th Ed., p. 1158.

[67] 36 Am Jur 480 citing Slaughter-House Cases, 16 Wall. (US) 36, 21 L ed 394.
[68] Concession Agreement ("CA") dated July 12, 1997, Art. III, Sec. 3.02(a); Amended and Restated Concession Agreement ("ARCA") dated November 26, 1998, Art. III, Sec. 3.02(a). [69] Ibid.

[70] Id. at CA, Art. III, Sec. 3.02(b); ARCA, Art. III, Sec. 3.02(b).
[71] The day immediately following the day on which the Certificate of Completion is issued or deemed to be issued. [72] Id. at CA, Art. III, Sec. 3.01(a) and (b); ARCA, Art. III, Sec. 3.01 (a) and (b).

[73] Id. at CA, Art. III, Sec. 3.01(d) and (e); ARCA, Art. III, Sec. 3.01(d) and (e).
[74] Executive Order No. 903, as amended, Sec. 4 (b) and (c). [75] Art. XII, Sec. 19, Philippine Constitution. [76] Republic Act No. 7718, Sec. 1. [77] Transcript of Oral Arguments, p. 157, December 10, 2002.

[78] G.R. No. L-54958, September 2, 1983; 09 Phil. 400.
[79] Executive Order No. 903, July 21, 1983, provides:

Section 5. Functions, Powers, and Duties. - The Authority shall have the following functions, powers and duties: .. .
(b) To control, supervise, construct, maintain, operate and provide such facilities or services as shall be necessary for the efficient functioning of the Airport; (c) To promulgate rules and regulations governing the planning, development, maintenance, operation and improvement of the Airport and to control and/or supervise as may be necessary the construction of any structure or the rendition of any service within the Airport;

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Digest: Agan vs. PIATCO
Saturday, July 11, 2009 12:16 PM

Agan vs PIATCO Issue: WON PIATCO is a qualified bidder Held: No Ratio: Public respondents argue that the Paircargo Consortium, PIATCO’s predecessor, was not a duly prequalified bidder on the unsolicited proposal submitted by AEDC as the Paircargo Consortium failed to meet the financial capability required under the BOT Law and the Bid Documents. They allege that in computing the ability of the Paircargo Consortium to meet the minimum equity requirements for the project, the entire net worth of Security Bank, a member of the consortium, should not be considered. PIATCO relies, on the other hand, on the strength of the Memorandum dated October 14, 1996 issued by the DOTC Undersecretary Primitivo C. Cal stating that the Paircargo Consortium is found to have a combined net worth of P3,900,000,000.00, sufficient to meet the equity requirements of the project. The said Memorandum was in response to a letter from Mr. Antonio Henson of AEDC to President Fidel V. Ramos questioning the financial capability of the Paircargo Consortium on the ground that it does not have the financial resources to put up the required minimum equity of P2,700,000,000.00. This contention is based on the restriction under R.A. No. 337, as amended or the General Banking Act that a commercial bank cannot invest in any single enterprise in an amount more than 15% of its net worth. The minimum amount of equity to which the proponent’s financial capability will be based shall be thirty percent (30%) of the project cost instead of the twenty percent (20%) specified in Section 3.6.4 of the Bid Documents. This is to correlate with the required debt-to-equity ratio of 70:30 in Section 2.01a of the draft concession agreement. The debt portion of the project financing should not exceed 70% of the actual project cost. Accordingly, based on the above provisions of law, the Paircargo Consortium or any challenger to the unsolicited proposal of AEDC has to show that it possesses the requisite financial capability to undertake the project in the minimum amount of 30% of the project cost through (i) proof of the ability to provide a minimum amount of equity to the project, and (ii) a letter testimonial from reputable banks attesting that the project proponent or members of the consortium are banking with them, that they are in good financial standing, and that they have adequate resources. As the minimum project cost was estimated to be US$350,000,000.00 or roughly P9,183,650,000, the Paircargo Consortium had to show to the satisfaction of the PBAC that it had the ability to provide the minimum equity for the project in the amount of at least P2,755,095,000.00. Paircargo’s Audited Financial Statements as of 1993 and 1994 indicated that it had a net worth of P2,783,592.00 and P3,123,515.00 respectively. PAGS’ Audited Financial Statements as of 1995 indicate that it has approximately P26,735,700 to invest as its equity for the project. Security Bank’s Audited Financial Statements as of 1995 show that it has a net worth equivalent to its capital funds in the amount of P3,523,504,377. We agree with public respondents that with respect to Security Bank, the entire amount of its net worth could not be invested in a single undertaking or enterprise, whether allied or non -allied in accordance with the provisions of R.A. No. 337, as amended or the General Banking Act:
Sec. 21-B. The provisions in this or in any other Act to the contrary notwithstanding, the Monetary Board, whenever it shall deem appropriate and necessary to further national development objectives or support national priority projects, may authorize a commercial bank, a bank authorized to provide commercial banking services, as well as a government-owned and controlled bank, to operate under an expanded commercial banking authority and by virtue thereof exercise, in addition to powers authorized for commercial banks, the powers of an Investment House as provided in Presidential Decree No. 129, invest in the equity of a non-allied undertaking, or own a majority or all of the equity in a financial intermediary other than a commercial bank or a bank authorized to provide commercial banking services: Provided, That (a) the total investment in equities shall not exceed fifty percent (50%) of the net worth of the bank; (b) the equity investmentin any one enterprise whether allied or non-allied shall not exceed fifteen percent (15%) of the net worth of the bank; (c) the equity investment of the bank, or of its wholly or majority-owned subsidiary, in a single non-allied undertaking shall not exceed thirty-five percent (35%) of the total equity in the enterprise nor shall it exceed thirty-five percent (35%) of the voting stock in that enterprise; and (d) the equity investment in other banks shall be deducted from the investing bank's net worth for purposes of computing the prescribed ratio of net worth to risk assets.

Further, the 1993 Manual of Regulations for Banks provides: SECTION X383. Other Limitations and Restrictions. The following limitations and restrictions shall also apply regarding
equity investments of banks. a. In any single enterprise. The equity investments of banks in any single enterprise shall not exceed at any time fifteen percent (15%) of the net worth of the investing bank as defined in Sec. X106 and Subsec. X121.5.

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worth of the investing bank as defined in Sec. X106 and Subsec. X121.5.

Thus, the maximum amount that Security Bank could validly invest in the Paircargo Consortium is only P528,525,656.55, representing 15% of its entire net worth. The total net worth therefore of the Paircargo Consortium, after considering the maximum amounts that may be validly invested by each of its members is P558,384,871.55 or only 6.08% of the project cost, an amount substantially less than the prescribed minimum equity investment required for the project in the amount of P2,755,095,000.00 or 30% of the project cost. The purpose of pre-qualification in any public bidding is to determine, at the earliest opportunity, the ability of the bidder to undertake the project. Thus, with respect to the bidder’s financial capacity at the pre qualification stage, the law requires the government agency to examine and determine the ability of the bidder to fund the entire cost of the project by considering the maximum amounts that each bidder may invest in the project at the time of pre-qualification. The PBAC has determined that any prospective bidder for the construction, operation and maintenance of the NAIA IPT III project should prove that it has the ability to provide equity in the minimum amount of 30% of the project cost, in accordance with the 70:30 debt-to-equity ratio prescribed in the Bid Documents. Thus, in the case of Paircargo Consortium, the PBAC should determine the maximum amounts that each member of the consortium may commit for the construction, operation and maintenance of the NAIA IPT III project at the time of pre-qualification. With respect to Security Bank, the maximum amount which may be invested by it would only be 15% of its net worth in view of the restrictions imposed by the General Banking Act. Disregarding the investment ceilings provided by applicable law would not result in a proper evaluation of whether or not a bidder is pre-qualified to undertake the project as for all intents and purposes, such ceiling or legal restriction determines the true maximum amount which a bidder may invest in the project. Further, the determination of whether or not a bidder is pre-qualified to undertake the project requires an evaluation of the financial capacity of the said bidder at the time the bid is submitted based on the required documents presented by the bidder. The PBAC should not be allowed to speculate on the future financial ability of the bidder to undertake the project on the basis of documents submitted. This would open doors to abuse and defeat the very purpose of a public bidding. This is especially true in the case at bar which involves the investment of billions of pesos by the project proponent. The relevant government authority is duty-bound to ensure that the awardee of the contract possesses the minimum required financial capability to complete the project. To allow the PBAC to estimate the bidder’s future financial capability would not secure the viability and integrity of the project. A restrictive and conservative application of the rules and procedures of public bidding is necessary not only to protect the impartiality and regularity of the proceedings but also to ensure the financial and technical reliability of the project. It has been held that: The basic rule in public bidding is that bids should be evaluated based on the required documents submitted before and not after the opening of bids. Otherwise, the foundation of a fair and competitive public bidding would be defeated. Strict observance of the rules, regulations, and guidelines of the bidding process is the only safeguard to a fair, honest and competitive public bidding. Thus, if the maximum amount of equity that a bidder may invest in the project at the time the bids are submitted falls short of the minimum amounts required to be put up by the bidder, said bidder should be properly disqualified. Considering that at the pre-qualification stage, the maximum amounts which the Paircargo Consortium may invest in the project fell short of the minimum amounts prescribed by the PBAC, we hold that Paircargo Consortium was not a qualified bidder. Thus the award of the contract by the PBAC to the Paircargo Consortium, a disqualified bidder, is null and void.
Pasted from <file:///C:\DOCUME~1\Cha\LOCALS~1\Temp\Rar$DI72.015\Agan%20vs%20PIATCO.docx>

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Class Notes for Saturday, July 11
Saturday, July 11, 2009 12:59 PM

(the day when we were supposed NOT to have a class!)

Last time: CORE BANKING FUNCTION (wah! I cannot hear nor see the writings on the board!!!) Bank <--------------------------------------> CLIENT (depositor/placer of funds) ' ' ' ' BORROWER DEPOSITS Fixed-time deposits = Time Deposit Checking = Current Deposit Savings = -sometimes there could be an automatic transfer between your checking and savings account. E.g. if your checking account lacks funds, the bank would automatically debit from your savings account to make the check good. *now you could access your account through the internet

*deposit substitutes *the relationship between the bank and client is creditor (BANK) -debtor (CLIENT-DEPOSITOR) Or in the flipside: Creditor: Borrower :: Debtor: Bank
WITHOUT RECOURSE: not a deposit-substitute, not a deposit transaction; most likely it's a savingspurchase transaction -bank gives a certificate of participation WITH RECOURSE: you could run after the bank SECTION 29, GBL: Banking has a goal no longer confined with the core banking function Cf: Section 29 covers different aspects of Banking activities Section 53 of GBL: WON these other resources are restricted to the trust department of the bank: NO because Section 53 applies to the regular banking unit and to the trust department *Bank no longer need authority from SEC: no need to be a securities broker -but there's a MOA that to be a securities broker, bank must register first with SEC (in spite of Section 53.2

53.3. Make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business; -a bank can perform acts as long as it is not incompatible with GBL -general counsel of BSP issued an opinion to the effect that other services not incompatible with banking business must be related to collection and payments… - sir says it is not the correct interpretation!

53.4. Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts; and -bank acting as managing agent… -this function can also be regularly taken by RBU of a bank -in practice, the BSP confines these activities to the trust department -A trust department can act as an investment manager IMA (industrial Management Account) -trust department is an agent acting for a principal (not a trustee) -a trust department, however, is supposed to be a trustee! That is why in other banks, the trust departments are called "asset-management divisions" -3 parties involved in a trust relationship: Trustor Trustee Beneficiary -in this situation, the trustor and beneficiary are the same
53.5. Rent out safety deposit boxes. *good grasp of section 53: bank can offer services to non-residents which are not allowed under normal banking functions (in concept of deposit) *Section 53 is a weird provision because the last paragraph is completely out of place: Gives power to Monetary Board.

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power to Monetary Board. Cf: Section 5, last sentence: Monetary board still given power

-Degree of diligence required on banks -in civil code: if no diligence required, diligence of a good father of a family required GLA of 1949: no language providing for degree of diligence for banks GBL, Section 2: provides degree of diligence: "The State recognizes the vital role of banks in providing an environment conducive to the sustained development of the national economy and the fiduciary nature of banking that requires high standards of integrity and performance. In furtherance thereof, the State shall promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy. " -before GBL, jurisprudence provided the gap for the diligence required. SC has not seemed to know the difference between different levels in comparison. SIMEX International vs. CA F: Simex deposited to its account P100k for payment of checks issued to different companies. The checks were dishonored, thus the companies to which it was issued threatened to sue Simex for the dishonor. Simex complained to the bank, blah blah blah. Mali nga bank! Simex sued for moral damages

H: Bank negligent. So grant moral damages! -utmost fidelity -meticulous care, always having in mind the fiduciary nature of their relationship SIR: SC did not cite A1173, NCC - no proper contextualization of the case!!!
BPI vs. IAC F: teller of petitioner bank miscredited to a different checking account a deposit made by a married couple: mistake led to the dishonor of a check H: Bank liable. Bank not only required to observe A1173 degree of diligence of a good father of a family. Followed SIMEX SIR: SC finally contextualized SIMEX. Bank argued A1173, NCC. SC brushed aside this argument. That is not the case because the bank required to observe "utmost fidelity", citing SIMEX. Beyond bonus pater familias. BPI vs. CA F: Bank allowed the withdrawal of a deposit without requiring the presentation of the depositor's passbook and in disregard of the clearance requirement of the banking system H: Bank negligent -highest degree of care SIR: SC used the phrase "Highest degree of care" In the characterizing degree which is higher than Bonus pater familias. The bank allowed withdrawal of the check without waiting for the clearing of the check! -SC Clarified "utmost care" = highest degree of care

Consolidated Bank and Trust Corporation (Solidbank) vs. CA F: Messanger of company left the passbook of the client at the bank with the teller (who was taking so long to process the deposit). Teller gave the passbook to another person, and there were withdrawals of the funds of the said account which was also allowed by the bank.
H: Bank liable. But liability mitigated by Client's own negligence! SIR: SC finally took notice of existence of Section 2 of GBL -bank only obligated to observe high standards of integrity and performance -Only Justice Carpio interpreted GBL correctly -Justice Carpio explained the difference between culpa contractual and culpa aquiliana -Justice Carpio was Sir's classmate in his 1st three years in College of Law PBC vs. CA F: Time deposit account opened with the bank. Bank failed to issue receipt. When client wanted to withdraw the amount deposited, bank instead convinced him to apply for loans, part of it paid through the time deposit. Bank failed to record the offsetting of the loan with the time deposit account. Also, the court produced merely photocopies of the promissory notes allegedly executed by their client to claim that the client even owes them amounts of money! H: Bank liable! Bank liable for offsetting his time deposit w/ a fictitious PN SIR: Decision consistent with Consolidated Bank decision because the same ponente wrote it!!! Samsung Construction Company Philippines vs. Far East Bank and Trust Company F: forged check presented to the bank. Company only found out about the missing blank check the next day, reported it to the bank immediately. Bank tried to present proof of diligence on its part, by showing that they checked the signature on the check 3x before allowing the check to be encashed. During trial, both parties presented handwriting experts, NBI finding that there was forgery vs. PNP only saying that differences were due to "natural variations" H: Bank liable for the forgery under Section 23 of the NIL. Forgery is a real defense by the drawer

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whose signature is forged. Also used PNB vs. NY to rule that the one who was negligent among those innocent should shoulder the lost.

SIR: Tinga decision. No consultation among the different divisions of SC! GBL not mentioned, but still held that the bank should observe the highest degree of diligence! -Sir met with J. Carpio at Caticlan Airport; If J. Carpio would become CJ, all decisions would be circulated among the divisions so that they would know the decisions of other departments
HEIRS OF EDUARDO MANLAPAT vs. CA F: Sellers mortgaged the land even after they had already sold it to another. The buyers found out about the morgaged, used the tiles with the bank to obtain the cancellation of the title, and did obtain a new title. H: Bank negligent in lending the document of its clients, w/o the consent of its clients, to strangers! This is a dangerous practice!!! SIR: The highest degree of diligence is expected…Court used the words highest in high in one sentence!!!! PNB vs Pike F: Gay performer has a US Dollar account with PNB in Manila. He left his passbook in Manila but when he came back, the passbook was gone and unauthorized withdrawals were already made from his account. PNB argued that Pike did authorize the person who made the withdrawals before he went to Japan. H: PNB negligent when they did not see signature of Pike in the withdrawals made by the alleged agent of Pike. "With banks, the degree of diligence required, contrary to the position of petitioner PNB, is more than that
of a good father of a family considering that the business of banking is imbued with public interest due to the nature of their functions. The stability of banks largely depends on the confidence of the people in the honesty and efficiency of banks. Thus, 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. Section 2 of Republic Act No. 8791,[25] which took effect on 13 June 2000, makes a categorical declaration that the State recognizes the “fiduciary nature of banking that requires high standards of integrity and performance.”

SIR: when the ponente cited J. Carpio, even the mali was copied! Highest and high! CADIZ vs. CA F: H: SIR: "high degree of diligence" J. Tinga already citing GBL? Prudential bank vs. Lim F: 2 accounts. The client availed of the automatic transfer agreement with the bank. He made two deposits on the same day, one with his savings account and one with his checking accounts. Client then issued 2 checks which would be sufficient, if not for the bank's refusal of crediting the deposit made to his other account. Bank claimed that only one deposit was made. TC and CA held that there were 2 deposits made. H: 2 deposits were made!
From another perspective, the negligence of the bank constitutes a breach of duty to its client. It is worthy of note that the banking industry is impressed with public interest. As such, it must observe a high degree of diligence and observe lofty standards of integrity and performance. By the nature of its functions, a bank is under obligation to treat the accounts of its depositors with meticulous care and always to have in mind the fiduciary nature of its relationship with them. With the attending factual milieu, the imposition of damages on the errant bank is in order. Presaging this course of action is the ruling in Simex International v. CA where this Court rendered a telling discourse on the fiduciary responsibility of depository banks, thus:
The banking system is an indispensable institution in the modern world and plays a vital role in the economic life of every c ivilized nation. Whether as mere passive entities for the safekeeping and saving of money or as active instruments of business and com merce, banks have become an ubiquitous presence among the people, who have come to regard them with respect and even gratitude and, most of all, confidence. Thus, even the humble wage-earner has not hesitated to entrust his life's savings to the bank of his choice, knowing that they will be safe in its custody and will even earn some interest for him. The ordinary person, with equal faith , usually maintains a modest checking account for security and convenience in the settling of his monthly bills and the payment of ordi nary expenses. As for business entities like the petitioner, the bank is a trusted and active associate that can help in the runni ng of their affairs, not only in the form of loans when needed but more often in the conduct of their day -to-day transactions like the issuance or encashment of checks. The concept of moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, woun ded feelings, moral shock, social humiliation, and similar injury. Although incapable of pecuniary computation, moral damages may be recovered if they are the proximate result of the defendant's wrongful act or omission.

Needless to say, the bank’s wrongful act caused injury to respondent. Credit is very important to businessmen, and its loss or impairment needs to be recognized and compensated. This Court in Araneta v. Bank of America highlights the importance of good credit in the business community:
The financial credit of a businessman is a prized and valuable asset, it being a significant part of the foundation of his bu siness. Any adverse reflection thereon constitutes some material loss to him. As stated in the case Atlanta National Bank vs. Davis, supr a, citing 2 Morse Banks, Sec. 458, "it can hardly be possible that a customer's check can be wrongfully refused payment without some impeachment of his credit, which must in fact be an actual injury, though he cannot, from the nature of the case, furnish ind ependent, distinct proof thereof."

SIR:
Far East Bank and Trust Company vs. Pacilan Jr. SIR: Customer was negligent. He had insufficient accounts. Only deposited account to make good the check 1 day before check was due.

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Citibank NA vs. Cabamongan
F: A forger, a person who presented herself to be one Carmelita, pre-terminated the account of the Sps Luis and Carmelita Cabamongan
H: The Court has 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. By the nature of its functions, a 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 this case, it has been sufficiently shown that the signatures of Carmelita in the forms for pretermination of deposits are forgeries. Citibank, with its signature verification procedure, failed to detect the forgery. Its negligence consisted in the omission of that degree of diligence required of banks. The Court has held that a bank is "bound to know the signatures of its customers; and if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily charge the amount so paid to the account of the depositor whose name was forged." Such principle equally applies here. Citibank cannot label its negligence as mere mistake or human error. 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. The Court agrees with the observation of the CA that Citibank, thru Account Officer San Pedro, openly courted disaster when despite noticing discrepancies in the signature and photograph of the person claiming to be Carmelita and the failure to surrender the original certificate of time deposit, the pretermination of the account was allowed. Even the waiver document was not notarized, a procedure meant to protect the bank. For not observing the degree of diligence required of banking institutions, whose business is impressed with public interest, Citibank is liable for damages.

SIR: Highest degree of diligence Citibank NA vs. Sabeniano F: Client wanted to withdraw all his money from Citibank. Citibank allegedly unlawfully refused to give him the money he deposited with Citibank! Bank claimed that Sabeniano executed PNs evidencing loans he had with Citibank. Loans became overdue, Sabeniano failed to pay inspite of demands, Citibank offsetted the loans. TC and CA held bank liable for damages, failing to make proper accounting with the moneymarking placements???
H: Citibank and petitioners had right to offset said account BUT citibank liable for failure to account for the said money-market business. Bank has high standard of integrity and performance to meet, which it did not meet in this case. Public interest. Fiduciary relationship. Meticulous in every transaction. SIR: Citibank of Geneva and Citibank of Manila NOT THE SAME! Just 2 branches of the same juridical entity!!!! This is a sweeping statement of the SC, incorrect!!! What the SC is probably trying to say is that Citibank Geneva and Citibank Manila are two different units, not branches!!!? -good source of principles such as the …booo! Read it! -just don't accept the decisions of SC! -in fact, during the moratorium days, CBP prohibited manila branches of foreign banks from paying off deposits. e.g. Citibank manila and Citibank Ny are just units of the same juridical entity. NY liable to pay deposit of Wells Cargo in Manila. Except if stipulation that only assets of Manila branch responsible for the liabilities of Manila branch.

RING-FENCING Provision "the FCDU deposit in Manila is only payable out of the assets of the Manila branch" - w/o this provision, all other branches (even outside RP) would be liable precisely because the separate branches are one and the same entity!!! -the case of Wells Cargo summarized in Sir's book, under section 74? Check sir's book. Or better yet, photocopy it!!!
Fidelity Savings Bank vs. Cenzon F: Fidelity savings bank was declared insolvent and was placed under the supervision of the MB. Santiago, a depositor, who deposited a total of P100k, wanted payment of interest. H: A banking institution which has been declared insolvent and subsequently ordered closed by the Central Bank cannot be held liable to pay interest on bank deposits which accrued during the period when the bank is actually closed and non-operational. Unless a bank engages in transactions, it cannot carry out its role as depository obligated to pay stipulated interest. SIR: Isn't this unfair? Cancio vs. CA F: Mrs. Rosa Cancio, while clearing through the Pre-Boarding (AVSECOM) Area of MIA to board PR 306 for
Hongkong was apprehended with US$102,900 in cash, US$600 in two travelers checks, and one P500. Mrs. Cancio did not declare her currency had already passed the Customs inspection area. In view of claimant's failure to present the Central Bank Authority, the said currencies were accordingly confiscated and a seizure Receipt No. 013 was issued to her; hence, this seizure proceedings. Cancio presented certified xerox copy of her Bank Book for foreign currency deposit with the PCIB, dollar remittances in telegraphic transfers from abroad for deposits and withdrawal cards, attesting to the fact that Cancio had withdrawn from her FCDU Account a certain amount of United States currency which tended to show that claimant herein was a foreign currency depositor pursuant to the provisions of RA 6426. The money intended principally for such medical purpose and for other miscellaneous and necessary expenses, and, that the subject currencies were concealed and hidden by them inside the two chocolate boxes solely for security reasons. The Commissioner of Customs denied. Cancio appealed to CTA. The CTA affirmed the forfeiture of the US$102,900 in cash, and US$600 in traveller's checks for having been in violation of CB Circulars 265 and 534, in relation to Section 2530(f) of the Tariff and Customs Code. It reversed the forfeiture of P1,500 limit that each traveller is allowed to bring

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out of the country without a CB permit pursuant to paragraph 4 of CB Circular No. 383.

H: Carrying of foreign currency allowed if the traveller is a FCDU depositor
It is true that in so far as the exportation or taking out of foreign currency from the country is concerned, Central Bank Circular No. 265 par 3 , issued on November 20, 1968,. Similarly, Central Bank Circular No. 534, issued on July 19, 1976. However, peculiar to the present controversy is the fact that, as stated previously, petitioner is a foreign currency depositor. -At any rate, the CA has found that petitioner has presented in evidence her foreign currency bank book and her withdrawal cards. -Indeed, given the underlying objective of the Foreign Currency Deposit Act, as amended, which is to attract and invite the deposit of foreign currencies which are acceptable as part of the international reserve in duly authorized banks in order that they may be put into the stream of the banking system, it would be to defeat the very purpose of the law to place undue restrictions on the transferability of such funds. The countervailing effect would be to discourage prospective foreign currency depositors to the detriment of the banking system. SIR: No restriction on FCDU depositors. Buy a box of chocolates! Now, if more than $10,00.00, you have to present an authorization! - confirm!!!

Salvacion vs. CB F: Foreigner, a transcient tourist, raped a 12 year old girl. There was a writ of preliminary attachment was issued on his FCD accounts. Bank claimed that the said accounts were exempted from garnishment, invoking Section 113, CBC 960. Final judgment provided for execution of garnishment over the same accounts.

H: This is an exemption of Section 113, CBC 960. -objective of FCD Act is to attract and invite deposit of foreign currencies, foreign investors - not TRANSCIENTS!!! Who are even rapists!!!
SIR: This is a special case. Not a precedent. FCD Accounts still maintain the exemption from garnishment and levies.

*** DOSRI Section 36. Restriction on Bank Exposure to Directors, Officers, Stockholders and their Related Interests SIR: insiders were the cause why banks went under. -insider lending -provides Ceilings -read definition: DOSRI loan: if supported by collateral … -has to waive secrecy of deposits with bank. Without the waiver, bank not supposed to lend DOSRI -read annotation Loan-loss Provision Akin to a reserve requirement; bank is to set aside a percentage. To that extent, what is set aside is restricted. Not declarable as part of dividends. - remember daw!!!

(Shet! I was called. Di naman marinig si Sir!!!)

-section 49 of Annotation -there are supposedly different amounts that have to be set aside for each of those categories…hay boo see the annotation
SPV Act of 2002 already expired -attempt of congress to reduce the non-performing assets of banks. ROPOA: real and other properties Owned or acquired by the banks. Should be disposed of the banks within 5 years -the bank has to sell down the S…in a big discount. Problem: Buyer sells those goods at a higher price. -leigman brothers. Yung pinangbili nila, kiknuha nila. It amounted to millions of pesos? -hay nako, you really have to read on your own, you cannot understand a word sir says!!! -it's a good thing this expired. It was also discarded in US -loan -loss provision is there in the case that bank becomes bankrupt? PDIC insurance -fully protected up to P250k Ratio for less than 100% insurance: Moral hazard. You would not take care of your affairs if you're fully insured. -recently, charter of PDIC was amended. PDIC officers and employees are given immunities from civil liabilities. CAPITAL ADEQUACY (BASE II CAPITAL ACCORD) SECTION 34. Risk-Based Capital. — The Monetary Board shall prescribe the minimum ratio which the net worth of a bank must bear to its total risk assets which may include contingent accounts. For purposes of this Section, the Monetary Board may require that such ratio be determined on the basis of the net worth and risk assets of a bank and its subsidiaries, financial or otherwise, as well as prescribe the composition and the manner of determining the net worth and total risk assets of banks and their subsidiaries: Provided, That in the exercise of this authority, the Monetary Board shall, to the extent feasible, conform to internationally accepted standards, including those of the Bank for International Settlements (BIS), relating to risk-based capital requirements: Provided, further, That it may alter orsuspend compliance with such ratio whenever necessary for a maximum period of one (1) year: Provided, finally, That such ratio shall be applied uniformly to banks of the same category.

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uniformly to banks of the same category. In case a bank does not comply with the prescribed minimum ratio, the Monetary Board may limit or prohibit the distribution of net profits by such bank and may require that part or all of the net profits be used to increase the capital accounts of the bank until the minimum requirement has been met. The Monetary Board may, furthermore, restrict or prohibit the acquisition of major assets and the making of new investments by the bank, with the exception of purchases of readily marketable evidences of indebtedness of the Republic of the Philippines and of the Bangko Sentral and any other evidences of indebtedness or obligations the servicing and repayment of which are fully guaranteed by the Republic of the Philippines, until the minimum required capital ratio has been restored. In case of a bank merger or consolidation, or when a bank is under rehabilitation under a program approved by the Bangko Sentral, the Monetary Board may temporarily relieve the surviving bank, consolidated bank, or constituent bank or corporations under rehabilitation from full compliance with the required capital ratio under such conditions as it may prescribe. Before the effectivity of the rules which the Monetary Board is authorized to prescribe under this provision, Section 22 of the General Banking Act, as amended, Section 9 of the Thrift Banks Act, and all pertinent rules issued pursuant thereto, shall continue to be in force. (22a) Banks have to maintain capital adequacy measure aside from the capital required to set up a bank. The banks have to set aside money corresponding to the risk-weight If an asset is risk- weighted…10% for every 100 units International standard is 8% History of Section 34: Act of 1944: Allied powers were about to be victorious. Meeting at New Hampshire. Planned how to rule the world. So they created 3 institutions: World Bank, International trade Organization (not ratified by Senate of US, so now GATT which provided the rules of trade among nations until WTO charter was passed a few years ago), IMF (supposed to provide countries assistance during times of crisis).

-During that time, exchange rates were changing minute by minute. But under the IMF, currencies were supposed to be pegged with the dollar, Dollar was in turn pegged into gold. In pesos, it was 2 pesos to 1 dollar. Now it is 48 pesos to a dollar. And there's a plan with restoring it to 2 is to 1.
Since Dollars were pegged to the gold, you could exchange at Fort Knox your dollars to gold! US incurred a lot of deficit after that. In 1970s, Nixon announced that US …was closed. US dollar was devalued. Oil contracts with OPEC was denominated in dollars, OPEC incurred losses. Therefore, Oil prices increased to recover the loss. People deposited their dollars with international banks then the international banks would give them dollar in term. Their was excess liquidity. There was a lending streak. The moment the borrowers would get a huge amount of money… In 1983, there was a moratorium in RP, other countries followed suit. International banks found out that they were practically insolvent. Solution: impose the capital adequacy something… Basel… We now have the capital asset…. BASEL I We now have BASEL II…

There is now a credit assessment…Each borrower has a rating that is standard. But rating agencies have conflict of interest. They are paid by the banking companies themselves. The name of the game is how to mitigate your risks. Credit-risk mitigators: *guarantee: to the extent of the guarantee, you don't have to set aside a portion as reserve.
If you have been reading the papers, RP issued warrants…bonds…IOU bonds payable in dollars… 20% risk weighting but coupled with warrant which makes the bond payable in pesos. Obligation becomes peso payable. In the Philippines, we adopted 10% capital adequacy ratio. Illustration: Under Bassel I: If lent to Republic = 0 risk If lent to Province of Cebu = 50% risk weight Under Bassel II: Even if it is the Republic which borrowed, loan is subject to 20% risk weight if denominated in US$. For this purpose, bank capital has been classified under: Tier I: common stock Tier II: subordinating debt (at least 5 years; must not exceed 100% of Tier I)

(vii) Equity Investment Limit: every investment of a bank must be approved by the Monetary Board; it

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may not invest all its net worth in a single transaction, whether allied or non-allied. See Agan case for what are allied and non-allied enterprises. The importance of the difference lies in the fact that only UB may invest in non-allied enterprises. An example of a non-allied enterprise is an airport terminal. ForEx Liberalization 1940s-1950s: period of control 1960s: decontrol 1970s: floating rate of exchange 1980s: moratorium (restructuring of external debts) 1992: end of moratorium; issuance of Brady Bonds to change credit schedules (IOUs and PNs); dollar salting[1] took place 1997: Asian Financial Crisis BSP Circular 1389, as amended Uniform Currency Act was repealed by RA8183. The Act mandated that all obligations be denominated in PhP, otherwise void. Sec. 72, New CB Act[2]: provision answer to exchange crisis.

Equity Investment Limits -banks not allowed to enter allied enterprises
AGAN v. PIATCO WON the PIATCo is an allied undertaking SIR: problem: SC is not very scholarly, cites 1993 manual when in fact, they were already citing the new manual. Numbering begins with X. There are limits to the foreign exchange that a bank can buy There is a limit to real estate it can enter

Foreign Exchange Liberalization -there is actually a new manual replacing BSP Circular No. 1389. But it's