SECOND DIVISION

[G.R. No. 176434. June 25, 2008.]

BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. LIFETIME MARKETING CORPORATION, respondent.
D E C I S I O N
TINGA, J p:
The Bank of the Philippine Islands (BPI) seeks the reversal of the Decision 1 of the Court of Appeals
dated 31 July 2006 in CA-G.R. CV No. 62769 which ordered it to pay Lifetime Marketing Corporation
(LMC) actual damages in the amount of P2,075,695.50 on account of its gross negligence in handling
LMC's account. aHCSTD
The following facts, quoted from the decision of the Court of Appeals, are undisputed:
On October 22, 1981, Lifetime Marketing Corporation (LMC, for brevity), opened a current account with
the Bank of the Philippine Islands (BPI, for brevity), Greenhills-Edsa branch, denominated as Account No.
3101-0680-63. In this account, the "sales agents" of LMC would have to deposit their collections or
payments to the latter. As a result, LMC and BPI, made a special arrangement that the former's agents
will accomplish three (3) copies of the deposit slips, the third copy to be retained and held by the teller
until LMC's authorized representatives, Mrs. Virginia Mongon and Mrs. Violeta Ancajas, shall retrieve
them on the following banking day.
Sometime in 1986, LMC availed of the BPI's inter-branch banking network services in Metro Manila,
whereby the former's agents could make [a] deposit to any BPI branch in Metro Manila under the same
account. Under this system, BPI's bank tellers were no longer obliged to retain the extra copy of the
deposit slips instead, they will rely on the machine-validated deposit slip, to be submitted by LMC's
agents. For its part, BPI would send to LMC a monthly bank statement relating to the subject account.
This practice was observed and complied with by the parties. AHCcET
As a business practice, the registered sales agents or the Lifetime Educational Consultants of LMC, can
get the books from the latter on consignment basis, then they would go directly to their clients to sell.
These agents or Lifetime Educational Consultants would then pay to LMC, seven (7) days after they pick
up all the books to be sold. Since LMC have several agents around the Philippines, it required to remit
their payments through BPI, where LMC maintained its current account. It has been LMC's practice to
require its agents to present a validated deposit slip and, on that basis, LMC would issue to the latter an
acknowledgement receipt.
Alice Laurel, is one of LMC's "Educational Consultants" or agents. On various dates covering the period
from May, [sic] 1991 up to August, 1992, Alice Laurel deposited checks to LMC's subject account at
different branches of BPI, specifically: at the Harrison/Buendia branch-8 checks; at Arrangue branch-4
checks; at Araneta branch-1 check; at Binondo branch-3 checks; at Ermita branch-5 checks; at Cubao
Shopping branch-1 check; at Escolta branch-4 checks; at the Malate branch-2 checks; at Taft Avenue
branch-2 checks; at Paseo de Roxas branch-1 check; at J. Ruiz, San Juan branch, at West Avenue and
Commonwealth Quezon City branch-2 checks; and at Vito Cruz branch-2 checks. cHECAS
Each check thus deposited were retrieved by Alice Laurel after the deposit slips were machine-validated,
except the following thirteen (13) checks, which bore no machine validation, to wit: CBC Check No.
484004, RCBC Check No. 419818, CBC Check No. 484042, FEBTC Check No. 171857, RCBC Check No.
419847, CBC Check No. 484053, MBTC Check No. 080726, CBC Check No. 484062, PBC Check No.
158076, CBC Check No. 484027, CBC Check No. 484017, CBC Check No. 484023 and CBC Check No.
218190.
A verification with BPI by LMC showed that Alice Laurel made check deposits with the named BPI
branches and, after the check deposit slips were machine-validated, requested the teller to reverse the
transactions. Based on general banking practices, however, the cancellation of deposit or payment
transactions upon request by any depositor or payor, requires that all copies of the deposit slips must be
retrieved or surrendered to the bank. This practice, in effect, cancels the deposit or payment
transaction, thus, it leaves no evidence for any subsequent claim or misrepresentation made by any
innocent third person. Notwithstanding this, the verbal requests of Alice Laurel and her husband to
reverse the deposits even after the deposit slips were already received and consummated were
accommodated by BPI tellers. IAETDc
Alice Laurel presented the machine-validated deposit slips to LMC which, on the strength thereof,
considered her account paid. LMC even granted her certain privileges or prizes based on the deposits
she made.
The total aggregate amount covered by Alice Laurel's deposit slips was Two Million Seven Hundred Sixty
Seven Thousand, Five Hundred Ninety Four Pesos (P2,767,594.00) and, for which, LMC paid Laurel the
total sum of Five Hundred Sixty Thousand Seven Hundred Twenty Six Pesos (P560,726.00) by way of
"sales discount and promo prizes."
The above fraudulent transactions of Alice Laurel and her husband was made possible through BPI
teller's failure to retrieve the duplicate original copies of the deposit slips from the former, every time
they ask for cancellation or reversal of the deposit or payment transaction.
Upon discovery of this fraud in early August 1992, LMC made queries from the BPI branches involved. In
reply to said queries, BPI branch managers formally admitted that they cancelled, without the
permission of or due notice to LMC, the deposit transactions made by Alice and her husband, and based
only upon the latter's verbal request or representation. ScHAIT
Thereafter, LMC immediately instituted a criminal action for Estafa against Alice Laurel and her husband
Thomas Limoanco, before the Regional Trial Court of Makati, Branch 65, docketed as Criminal Case No.
93-7970 to 71, entitled People of the Philippines v. Thomas Limoanco and Alice Laurel. This case for
estafa, however, was archived because summons could not be served upon the spouses as they have
absconded. Thus, the BPI's apparent reluctance to admit liability and settle LMC's claim for damages,
and a hopeless case of recovery from Alice Laurel and her husband, has left LMC, with no option but to
recover damages from BPI.
On July 24, 1995, LMC, through its representative, Miss Consolacion C. Rogacion, the President of the
company, filed a Complaint for Damages against BPI, docketed as Civil Case No. 95-1106, and was raffled
to Regional Trial Court of Makati City, Branch 141.
After trial on the merits, the court a quo rendered a Decision in favor of LMC. The dispositive portion of
which reads, as follows: IEHaSc
WHEREFORE, decision is hereby rendered ordering defendant bank to pay plaintiff actual damages
equitably reduced to one (1) million pesos plus attorney's fees of P100,000.00.
No pronouncement as to costs.
SO ORDERED. 2
Only BPI filed an appeal. The Court of Appeals affirmed the decision of the trial court but increased the
award of actual damages to P2,075,695.50 and deleted the award of P100,000.00 as attorney's fees. 3
Citing public interest, the appellate court denied reconsideration in a Resolution 4 dated 30 January
2007.
In this Petition for Review 5 dated 19 March 2007, BPI insists that LMC should have presented evidence
to prove not only the amount of the checks that were deposited and subsequently reversed, but also
the actual delivery of the books and the payment of "sales and promo prizes" to Alice Laurel. Failing this,
there was allegedly no basis for the award of actual damages. Moreover, the actual damages should not
have been increased because the decision of the trial court became conclusive as regards LMC when it
did not appeal the said decision. TcDHSI
BPI further avers that LMC's negligence in considering the machine-validated check deposit slips as
evidence of Alice Laurel's payment was the proximate cause of its own loss. Allegedly, by allowing its
agents to make deposits with other BPI branches, LMC violated its own special arrangement with BPI's
Greenhills-EDSA branch for the latter to hold on to an extra copy of the deposit slip for pick up by LMC's
authorized representatives. BPI points out that the deposits were in check and not in cash. As such, LMC
should have borne in mind that the machine validation in the deposit slips is still subject to the
sufficiency of the funds in the drawers' account. Furthermore, LMC allegedly ignored the express notice
indicated in its monthly bank statements and consequently failed to check the accuracy of the
transactions reflected therein.
In its Manifestation of Compliance by Respondent on the Order Dated 20 June 2007 Received on 29 July
2007 to Submit Comment, 6 dated 9 August 2007, LMC insists that it is indeed entitled to the actual
damages awarded to it by the appellate court.
BPI filed a Reply 7 dated 15 January 2008, in reiteration of its submissions. DACIHc
We have repeatedly emphasized that the banking industry is impressed with public interest. Of
paramount importance thereto is the trust and confidence of the public in general. Accordingly, the
highest degree of diligence is expected, and high standards of integrity and performance are 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 its relationship with them. 8 The fiduciary
nature of banking, previously imposed by case law, is now enshrined in Republic Act No. 8791 or the
General Banking Law of 2000. Section 2 thereof specifically says that the state recognizes the fiduciary
nature of banking that requires high standards of integrity and performance. 9
Whether BPI observed the highest degree of care in handling LMC's account is the subject of the inquiry
in this case.
LMC sought recovery from BPI on a cause of action based on tort. Article 2176 of the Civil Code
provides, "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."
There are three elements of quasi-delict: (a) fault or negligence of the defendant, or some other person
for whose acts he must respond; (b) damages suffered by the plaintiff; and (c) the connection of cause
and effect between the fault or negligence of the defendant and the damages incurred by the plaintiff.
10 cISAHT
In this case, both the trial court and the Court of Appeals found that the reversal of the transactions in
question was unilaterally undertaken by BPI's tellers without following normal banking procedure which
requires them to ensure that all copies of the deposit slips are surrendered by the depositor. The
machine-validated deposit slips do not show that the transactions have been cancelled, leading LMC to
rely on these slips and to consider Alice Laurel's account as already paid.
Negligence is the omission to do something which a reasonable man, guided by those considerations
which ordinarily regulate the conduct of human affairs, would do, or the doing of something which a
prudent and reasonable man would not do. 11 Negligence in this case lies in the tellers' disregard of the
validation procedures in place and BPI's utter failure to supervise its employees. Notably, BPI's managers
admitted in several correspondences with LMC that the deposit transactions were cancelled without
LMC's knowledge and consent and based only upon the request of Alice Laurel and her husband. 12
DIEAHc
It is well to reiterate that the degree of diligence required of banks is more than that of a reasonable
man or a good father of a family. In view of the fiduciary nature of their relationship with their
depositors, banks are duty-bound to treat the accounts of their clients with the highest degree of care.
13
BPI cannot escape liability because of LMC's failure to scrutinize the monthly statements sent to it by the
bank. This omission does not change the fact that were it not for the wanton and reckless negligence of
BPI's tellers in failing to require the surrender of the machine-validated deposit slips before reversing
the deposit transactions, the loss would not have occurred. BPI's negligence is undoubtedly the
proximate cause of the loss. Proximate cause is that cause which, in a natural and continuous sequence,
unbroken by any efficient intervening cause, produces the injury, and without which the result would
not have occurred. 14
It is also true, however, that LMC should have been more vigilant in managing and overseeing its own
financial affairs. The damages awarded to it were correctly reduced on account of its own contributory
negligence in accordance with Article 1172 of the Civil Code. 15 THADEI
Parenthetically, we find no merit in BPI's allegation that LMC should have presented evidence of delivery
of the books and payment of sales and promo prizes to Alice Laurel. The evidence presented by LMC in
the form of BPI's own admission that the deposit transactions were reversed at the instance of Alice
Laurel and her husband, coupled with the machine-validated deposit slips 16 which were supposed to
have been deposited to LMC's account but were cancelled without its knowledge and consent,
sufficiently form the bases for the actual damages claimed because they are the very same documents
relied upon by LMC in considering Alice Laurel's account paid and in granting her monetary privileges
and prizes.
Be that as it may, we find the appellate court's decision increasing the award of actual damages in favor
of LMC improper since the latter did not appeal from the decision of the trial court. It is well-settled that
a party who does not appeal from the decision may not obtain any affirmative relief from the appellate
court other than what he has obtained from the lower court whose decision is brought up on appeal.
The exceptions to this rule, such as where there are (1) errors affecting the lower court's jurisdiction
over the subject matter, (2) plain errors not specified, and (3) clerical errors, do not apply in this case. 17
CADHcI
WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 62769 dated 31 July 2006 and its
Resolution dated January 30, 2007 are AFFIRMED with the MODIFICATION that the Bank of the
Philippine Islands is ordered to pay actual damages to Lifetime Marketing Corporation in the amount of
One Million Pesos (P1,000,000.00). No pronouncement as to costs.
SO ORDERED.
Quisumbing, Carpio-Morales, Velasco, Jr. and Brion, JJ., concur.
SECOND DIVISION
[G.R. No. 153784. October 25, 2005.]
ROMEO C. CADIZ, CARLITO BONGKINGKI and PRISCO GLORIA IV, petitioners, vs. COURT OF APPEALS, and
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (Now EQUITABLE PCIBANK), respondents.
D E C I S I O N
TINGA, J p:
Employees who abuse their position for fiduciary gain cannot be shielded from the consequences of
their wrongdoing even on account of the bank's operational laxities that may have provided the gateway
for their shenanigans. Their misconduct provides the bank with cause for the termination of their
employment.
The facts follow.
Petitioners Romeo Cadiz ("Cadiz"), Carlito Bongkingki ("Bongkingki") and Prisco Gloria IV ("Gloria") were
employed as signature verifier, bookkeeper, and foreign currency denomination clerk/bookkeeper-
reliever, respectively, in the main office branch (MOB) of Philippine Commercial International Bank
(respondent bank).
The anomalies in question arose when Rosalina B. Alqueza (Alqueza) filed a complaint with PCIB for the
alleged non-receipt of a Six Hundred Dollar ($600.00) demand draft drawn against it which was
purchased by her husband from Hongkong and Shanghai Banking Corporation. Upon verification, it was
uncovered that the demand draft was deposited on 10 June 1988 with FCDU Savings Account (S/A) No.
1083-4, an account under the name of Sonia Alfiscar (Alfiscar). Further investigation revealed that the
demand draft, together with four (4) other checks, was made to appear as only one deposit covered by
HSBC Check No. 979120 for One Thousand Two Hundred Thirty-two Dollars (US$1,232.00). TAcSaC
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 second-
endorsed checks into foreign currency deposit accounts, the deposit slips which do not bear the
required approval of bank officers, and withdrawals made either on the day of deposit or the following
banking day. 1
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. aASDTE
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
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.
HEAcDC
More disturbing though is the labor arbiter's willingness to acquit petitioners of culpability on account of
the purported negligence of the bank. It is similar to concluding that the bank guards, and not the
burglars, bear primary culpability for a bank robbery. Whatever liability or responsibility was expected of
the bank stands as an issue separate from the liability of the recreant bank employees. Even assuming
that the bank observed less-than-ideal controls over the security of its operations, such laxity does not
serve as the carte blanche signal for the bank employees to take advantage of safeguard control lapses
and perpetrate chicanery on their employer.
The labor arbiter also evaluated the bank's claim that Cadiz had reimbursed the amount of $600 to the
aggrieved depositor Alqueza while making it appear that it was Alfiscar who had actually made the
refund. In disbelieving this claim, the Labor Arbiter concluded that "it is unthinkable for a lowly bank
employee to impose his will upon his high and mighty employer." 14
This pronouncement is revelatory of absurd logic. The notion that a lowly employee will never
countermand the will or interests of the employer is sufficiently rebutted by any labor law casebook, any
omnibus of our labor jurisprudence, and the evolution of the human experience that disquiets persons
from unhesitatingly acceding to the presumptive good faith of others. It is an accepted premise of life
and jurisprudence that persons are capable, upon impure motivations, of taking advantage of others,
whether their social lessers, equals, or betters. The necessity of punishment arises from this flaw of
human nature. This philosophic stance of the labor arbiter actually obviates the nature of sin.
Obviously, we are hard-pressed to accord high regard to the labor arbiter's discernment as a trier of
facts. Nonetheless, his claim that there were procedural flaws attending the dismissal of petitioners
warrants some deliberation.
The labor arbiter ruled that the notices of dismissal served on petitioners was insufficient as it failed to
specifically delineate how petitioners had violated the internal rules of the bank. However, the notices
do cite the rules which petitioners had violated and refer to the fact that such violations occurred
relating to S/A No. 1083-4 account of Sonia Alfiscar and/or Rosalinda Alqueza. EcaDCI
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. acHDTE
All told, we hold that the factual appreciation and conclusions rendered by the labor arbiter are not
worthy of adoption by this Court. In contrast, from the factual determinations made by the NLRC and
the Court of Appeals, we accept the following facts as proven:
1. Petitioner Cadiz reserved S/A No. 1083-4 in July 1987 as reflected on respondent bank's "new
account register."
2. Foreign denominated checks payable to other payees were diverted into the said account.
3. The various deposit slips, covering the said checks, did not bear the machine validation of any of
the tellers-in-charge.
4. The signatures of the MOB officers appearing on the said deposit slips were in fact forged.
5. The posting of said bank transactions bore the initials of petitioners Bongkingki or Gloria.
6. The deposit slips were coded as "1511" or "on-us check."
7. Petitioner Cadiz agreed to pay Alqueza the equivalent amount of $600.00 but it was made to
appear that Alfiscar paid the said amount.
8. In view of these findings, petitioners were served with show-cause memoranda asking them to
explain the lapses.
9. Finding their explanations unsatisfactory, petitioners were terminated from employment.
It is from these established facts that we consider the arguments now presented by petitioners. In light
of these facts, petitioners' arguments hardly detract from the conclusion that their behavior in the
course of the discharge of their duties is clearly malfeasant, and constitutes ground for their termination
on account of just cause. HCaIDS
First, petitioners insist that the show-cause memoranda served on them did not impute any fraudulent
behavior, but merely lapses. We disagree.
The show-cause memoranda were occasioned by the confidential report prepared by Sandig, as well as
the findings of the special audit examination. The confidential report prepared by Sandig addressed to
the Vice-President of respondent bank pertains to the discovery of fraudulent transactions on S/A No.
1083-4 involving three employees of respondent bank. The report detailed how the events transpired,
including the admissions of petitioners. From there, a special audit examination was conducted to make
a thorough investigation of the questioned account. The examination yielded conspicuous findings that
anomalous transactions had taken place involving petitioners.
Moreover, the show-cause memoranda respectively served on petitioners clearly indicate that they
were being made to answer questions pertaining to possible anomalous behavior on their part. For
example, petitioners were asked to explain why they had posted the questioned deposits on the ledger,
although there were no teller validations or teller stamps, and also on what basis they considered such
transactions to be valid. 17 On the other hand, the show-cause memorandum to Cadiz directly asks him
to provide the personal details of Sonia Alfiscar, why he went out of his way to make a special
arrangement for the mysterious Alfiscar, and other questions pertaining to the Alfiscar accounts.
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. ASTDCH
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. SHTcDE
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.
cSaATC
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.
Puno, Austria-Martinez and Callejo, Sr., JJ., concur.
Chico-Nazario, J., is on leave.
SECOND DIVISION
[G.R. No. 125585. June 8, 2005.]
HEIRS OF EDUARDO MANLAPAT, represented by GLORIA MANLAPAT-BANAAG and LEON M. BANAAG,
JR., petitioners, vs. 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.
Vicente D. Cario for petitioners.
Ulpiano P. Sarmiento III and Arturo Sioson for private respondents.
SYLLABUS
1. CIVIL LAW; CONTRACTS; REGISTRATION OF CONTRACT; PURPOSE. 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.
2. ID.; ID.; MORTGAGE; MORTGAGOR MUST BE THE OWNER OF THE MORTGAGED PROPERTY;
RATIONALE. The requirements of a valid mortgage are clearly laid down in Article 2085 of the New
Civil Code. For a person to 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. SCEDAI
3. ID.; LAND REGISTRATION; TORRENS TITLE; PRINCIPLE OF INDEFEASIBILITY THEREOF DOES NOT
APPLY WHERE FRAUD ATTENDED THE ISSUANCE OF TITLE. 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 shield 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 land not to the right of ownership
thereof which was not annotated on the certificate of title issued thereon.
4. ID.; ID.; TRANSFER CERTIFICATE OF TITLE; ISSUANCE THEREOF REQUIRES ONLY THE
PRESENTATION OF OWNER'S DUPLICATE CERTIFICATE TOGETHER WITH THE INSTRUMENT OF
CONVEYANCE; APPLICATION IN CASE AT BAR. 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 of P.D. No. 1529 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. . . . 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. SHEIDC
5. MERCANTILE LAW; BANKING INSTITUTIONS; MORTGAGEE BANKS ARE REQUIRED TO EXERCISE
DUE DILIGENCE BEFORE ENTERING INTO CONTRACTS. 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. The highest degree of diligence is expected, and high
standards of integrity and performance are even required of it. 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 the rule
that persons dealing with registered lands can rely solely on the certificate of title does not apply to
banks.
6. CIVIL LAW; DAMAGES; NOMINAL DAMAGES; PROPER IN ORDER TO VINDICATE RIGHTS WHICH
HAD BEEN VIOLATED OR INVADED; EXEMPLIFIED IN CASE AT BAR. 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 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. cTSDAH
D E C I S I O N
TINGA, J p:
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. AacCIT
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
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.
ADCSEa
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
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. aACEID
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; SHcDAI
(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:
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. DacTEH
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.
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. cISDHE
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. THacES
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
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) That they be constituted to secure the fulfillment of a principal obligation; aIcTCS
(2) 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. (emphasis 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. CaEATI
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.
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 land not to the right of ownership thereof which 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. IDCcEa
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. (emphasis 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. cHESAD
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.
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.
HcSaTI
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. cEaCAH
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. 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
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. IcESDA
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. DcITaC
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. IcDCaS
SO ORDERED.
Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ., concur.
Puno, J., is on official leave.
SECOND DIVISION
[G.R. No. 121413. January 29, 2001.]
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK OF ASIA AND AMERICA),
petitioner, vs. COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK, N.A., respondents.
[G.R. No. 121479. January 29, 2001.]
FORD PHILIPPINES, INC., petitioner-plaintiff, vs. COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE
COMMERCIAL INTERNATIONAL BANK, respondents.
[G.R. No. 128604. January 29, 2001.]
FORD PHILIPPINES, INC., petitioner, vs. CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK
and THE COURT OF APPEALS, respondents.
Romulo, Mabanta, Buenaventura, Sayoc & Delos Angeles for Ford Philippines, Inc.
Agabin, Verzola, Hermoso, Layaoen & De Castro for private respondent PCIB.
Angara, Abello, Concepcion, Regala & Cruz for respondent Citibank.
SYNOPSIS
Ford Philippines drew and issued Citibank Check. No. SN 04867 on October 19, 1977, Citibank Check No.
SN 10597 on July 19, 1978 and Citibank Check No. SN-16508 on April 20, 1979, all in favor of the
Commissioner of Internal Revenue (CIR) for payment of its percentage taxes. The checks were crossed
and deposited with the IBAA, now PCIB, BIR's authorized collecting bank. The first check was cleared
containing an indorsement that "all prior indorsements and/or lack of indorsements guaranteed." The
same, however, was replaced with two (2) IBAA's managers' checks based on a call and letter request
made by Godofredo Rivera, Ford's General Ledger Accountant, on an alleged error in the computation of
the tax due without IBAA verifying the authority of Rivera. These manager's checks were later deposited
in another bank and misappropriated by the syndicate. The last two checks were cleared by the Citibank
but failed to discover that the clearing stamps do not bear any initials. The proceeds of the checks were
also illegally diverted or switched by officers of PCIB members of the syndicate, who eventually
encashed them. Ford, which was compelled to pay anew the percentage taxes, sued in two actions for
collection against the two banks on January 20, 1983, barely six years from the date the first check was
returned to the drawer. The direct perpetrators of the crime are now fugitives from justice.
In the first case, the trial court held that Citibank and IBAA were jointly and severally liable for the
checks, but on review by certiorari, the Court of Appeals held only IBAA (PCIB) solely liable for the
amount of the first check. In the second case involving the last two checks, the trial court absolved PCIB
from liability and held that only the Citibank is liable for the checks issued by Ford. However, on appeal,
the Court of Appeals held both banks liable for negligence in the selection and supervision of their
employees resulting in the erroneous encashment of the checks. These two rulings became the subject
of the present recourse.
The relationship between a holder of a commercial paper and the bank to which it is sent for collection
is that of a principal and an agent and the diversion of the amount of the check is justified only by proof
of authority from the drawer; that in crossed checks, the collecting bank is bound to scrutinize the check
and know its depositors before clearing indorsement; that as a general rule, banks are liable for
wrongful or tortuous acts of its agents within the scope and in the course of their employment; that
failure of the drawee bank to seasonably discover irregularity in the checks constitutes negligence and
renders the bank liable for loss of proceeds of the checks; that an action upon a check prescribes in ten
(10) years; and that the contributory negligence of the drawer shall reduce the damages he may recover
against the collecting bank.
SYLLABUS
1. CIVIL LAW; TORTS AND DAMAGES; LIABILITY OF MASTER FOR NEGLIGENCE OF HIS OWN
SERVANT OR AGENT. On this point, jurisprudence regarding the imputed negligence of employer in a
master-servant relationship is instructive. Since a master may be held for his servant's wrongful act, the
law imputes to the master the act of the servant, and if that act is negligent or wrongful and proximately
results in injury to a third person, the negligence or wrongful conduct is the negligence or wrongful
conduct of the master, for which he is liable. The general rule is that if the master is injured by the
negligence of a third person and by the concurring contributory negligence of his own servant or agent,
the latter's negligence is imputed to his superior and will defeat the superior's action against the third
person, assuming, of course that the contributory negligence was the proximate cause of the injury of
which complaint is made.
2. ID.; ID.; PROXIMATE CAUSE, DEFINED. As defined, proximate cause is that which, in the
natural and continuous sequence, unbroken by any efficient, intervening cause produces the injury, and
without which the result would not have occurred.
3. ID.; ID.; LIABILITY OF MASTER FOR NEGLIGENCE OF HIS OWN SERVANT OR AGENT; ESTOPPEL,
REQUIRED. Given these circumstances, the mere fact that the forgery was committed by a drawer-
payor's confidential employee or agent, who by virtue of his position had unusual facilities for
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.
This rule likewise applies to the checks fraudulently negotiated or diverted by the confidential
employees who hold them in their possession.
4. MERCANTILE LAW; NEGOTIABLE INSTRUMENTS; CHECKS; RELATIONSHIP BETWEEN HOLDER OF
COMMERCIAL PAPER AND BANK TO WHICH IT IS SENT FOR COLLECTION IS THAT OF PRINCIPAL AND
AGENT; DIVERSION OF AMOUNT OF CHECK, JUSTIFIED ONLY BY PROOF OF AUTHORITY FROM DRAWER.
It is a well-settled rule that the relationship between the payee or holder of commercial paper and
the bank to which it is sent for collection is, in the absence of an agreement to the contrary, that of
principal and agent. A bank which receives such paper for collection is the agent of the payee or holder.
Even considering arguendo, that the diversion of the amount of a check payable to the collecting bank in
behalf of the designated payee may be allowed, still such diversion must be properly authorized by the
payor. Otherwise stated, the diversion can be justified only by proof of authority from the drawer, or
that the drawer has clothed his agent with apparent authority to receive the proceeds of such check.
5. ID.; ID.; ID.; CROSSED CHECKS; COLLECTING BANK BOUND TO SCRUTINIZE CHECK AND KNOW ITS
DEPOSITORS BEFORE CLEARING INDORSEMENT; CASE AT BAR. Indeed, the crossing of the check with
the phrase "Payee's Account Only," is a warning that the check should be deposited only in the account
of the CIR. Thus, it is the duty of the collecting bank PCIBank to ascertain that the check be deposited in
payee's account only. Therefore, it is the collecting bank (PCIBank) which is bound to scrutinize the
check and to know its depositors before it could make the clearing indorsement "all prior indorsements
and/or lack of indorsement guaranteed." Lastly, banking business requires that the one who first cashes
and negotiates the check must take some precautions to learn whether or not it is genuine. And if the
one cashing the check through indifference or other circumstance assists the forger in committing the
fraud, he should not be permitted to retain the proceeds of the check from the drawee whose sole fault
was that it did not discover the forgery or the defect in the title of the person negotiating the
instrument before paying the check. For this reason, a bank which cashes a check drawn upon another
bank, without requiring proof as to the identity of persons presenting it, or making inquiries with regard
to them, cannot hold the proceeds against the drawee when the proceeds of the checks were
afterwards diverted to the hands of a third party. In such cases the drawee bank has a right to believe
that the cashing bank (or the collecting bank) had, by the usual proper investigation, satisfied itself of
the authenticity of the negotiation of the checks. Thus, one who encashed a check which had been
forged or diverted and in turn received payment thereon from the drawee, is guilty of negligence which
proximately contributed to the success of the fraud practiced on the drawee bank. The latter may
recover from the holder the money paid on the check. Having established that the collecting bank's
negligence is the proximate cause of the loss, we conclude that PCIBank is liable in the amount
corresponding to the proceeds of Citibank Check No. SN-04867.
6. CIVIL LAW; TORTS AND DAMAGES; AS A GENERAL RULE, BANKS ARE LIABLE FOR WRONGFUL OR
TORTUOUS ACT OF ITS OFFICERS OR AGENTS ACTING WITHIN SCOPE AND COURSE OF EMPLOYMENT.
As a general rule, however, a banking corporation is liable for the wrongful or tortuous acts and
declarations of its officers or agents within the course and scope of their employment. A bank will be
held liable for the negligence of its officers or agents when acting within the course and scope of their
employment. It may be liable for the tortuous acts of its officers even as regards that species of tort of
which malice is an essential element. A bank holding out its officers and agents as worthy of confidence
will not be permitted to profit by the frauds these officers or agents were enabled to perpetrate in the
apparent course of their employment; nor will it be permitted to shirk its responsibility for such frauds,
even though no benefit may accrue to the bank therefrom. For the general rule is that a bank is liable for
the fraudulent acts or representations of an officer or agent acting within the course and apparent
scope of his employment or authority. And if an officer or employee of a bank, in his official capacity,
receives money to satisfy an evidence of indebtedness lodged with his bank for collection, the bank is
liable for his misappropriation of such sum.
7. ID.; ID.; ID.; FAILURE OF DRAWEE BANK TO DISCOVER ABSENCE OF INITIALS ON CLEARING
STAMPS CONSTITUTES NEGLIGENCE. Citibank should have scrutinized Citibank Check Numbers SN
10597 and 16508 before paying the amount of the proceeds thereof to the collecting bank of the BIR.
One thing is clear from the record: the clearing stamps at the back of Citibank Check Nos. SN 10597 and
16508 do not bear any initials. Citibank failed to notice and verify the absence of the clearing stamps.
Had this been duly examined, the switching of the worthless checks to Citibank Check Nos. 10597 and
16508 would have been discovered in time. For this reason, Citibank had indeed failed to perform what
was incumbent upon it, which is to ensure that the amount of the checks should be paid only to its
designated payee. The fact that the drawee bank did not discover the irregularity seasonably, in our
view, constitutes negligence in carrying out the bank's duty to its depositors. The point is that as a
business affected with public interest and because of the nature of its functions, the bank is under
obligation to treat the accounts of its depositors with meticulous care, always having in mind the
fiduciary nature of their relationship.
8. ID.; ID.; ID.; DOCTRINE OF COMPARATIVE NEGLIGENCE RENDERS BANKS LIABLE FOR LOSS OF
PROCEEDS OF CHECKS; RATIONALE. Thus, invoking the doctrine of comparative negligence, we are of
the view that both PCIBank and Citibank failed in their respective obligations and both were negligent in
the selection and supervision of their employees resulting in the encashment of Citibank Check Nos. SN
10597 and 16508. Thus, we are constrained to hold them equally liable for the loss of the proceeds of
said checks issued by Ford in favor of the CIR. Time and again, we have stressed that banking business is
so impressed with public interest where the trust and confidence of the public in general is of
paramount importance such that the appropriate standard of diligence must be very high, if not the
highest, degree of diligence. A bank's liability as obligor is not merely vicarious but primary, wherein the
defense of exercise of due diligence in the selection and supervision of its employees is of no moment.
Banks handle daily transactions involving millions of pesos. By the very nature of their work the degree
of responsibility, care and trustworthiness expected of their employees and officials is far greater than
those of ordinary clerks and employees. Banks are expected to exercise the highest degree of diligence
in the selection and supervision of their employees.
9. ID.; PRESCRIPTION OF ACTIONS; ACTION UPON A CHECK PRESCRIBES IN TEN YEARS. The
statute of limitations begins to run when the bank gives the depositor notice of the payment, which is
ordinarily when the check is returned to the alleged drawer as a voucher with a statement of his
account, and an action upon a check is ordinarily governed by the statutory period applicable to
instruments in writing. Our laws on the matter provide that the action upon a written contract must be
brought within ten years from the time the right of action accrues. Hence, the reckoning time for the
prescriptive period begins when the instrument was issued and the corresponding check was returned
by the bank to its depositor (normally a month thereafter).
10. ID.; ID.; ID.; CASE AT BAR. Applying the same rule, the cause of action for the recovery of the
proceeds of Citibank Check No. SN 04867 would normally be a month after December 19, 1977, when
Citibank paid the face value of the check in the amount of P4,746,114.41. Since the original complaint
for the cause of action was filed on January 20, 1983, barely six years had lapsed. Thus, we conclude that
Ford's cause of action to recover the amount of Citibank Check No. SN 04867 was seasonably filed
within the period provided by law.
11. ID.; DAMAGES; CONTRIBUTORY NEGLIGENCE OF PLAINTIFF SHALL REDUCE DAMAGES HE MAY
RECOVER. Finally, we also find that Ford is not completely blameless in its failure to detect the fraud.
Failure on the part of the depositor to examine its passbook, statements of account, and cancelled
checks and to give notice within a reasonable time (or as required by statute) of any discrepancy which
it may in the exercise of due care and diligence find therein, serves to mitigate the banks' liability by
reducing the award of interest from twelve percent (12%) to six percent (6%) per annum. As provided in
Article 1172 of the Civil Code of the Philippines, 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. In quasi-delicts, the contributory negligence of the plaintiff shall
reduce the damages that he may recover.
D E C I S I O N
QUISUMBING, J p:
These consolidated petitions involve several fraudulently negotiated checks.
The original actions a quo were instituted by Ford Philippines to recover from the drawee bank
CITIBANK, N.A. (Citibank) and collecting bank, Philippine Commercial International Bank (PCIBank)
[formerly Insular Bank of Asia and America], the value of several checks payable to the Commissioner of
Internal Revenue, which were embezzled allegedly by an organized syndicate. ASHECD
G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995 Decision 1 of the
Court of Appeals in CA-G.R CV No. 25017, entitled "Ford Philippines, Inc. vs. Citibank N.A. and Insular
Bank of Asia and America (now Philippine Commercial International Bank), and the August 8, 1995
Resolution, 2 ordering the collecting bank Philippine Commercial International Bank to pay the amount
of Citibank Check No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996 Decision 3 of the Court of
Appeals and its March 5, 1997 Resolution 4 in CA-G.R. No. 28430 entitled "Ford Philippines, Inc. vs.
Citibank N.A. and Philippine Commercial International Bank," affirming in toto the judgment of the trial
court holding the defendant drawee bank Citibank N.A., solely liable to pay the amount of
P12,163,298.10 as damages for the misapplied proceeds of the plaintiff's Citibank Check Numbers SN-
10597 and 16508.
I. GR Nos. 121413 and 121479
The stipulated facts submitted by the parties as accepted by the Court of Appeals as follows:
"On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No. SN-04867 in the amount
of P4,746,114.41, in favor of the Commissioner of Internal Revenue as payment of plaintiff's percentage
or manufacturer's sales taxes for the third quarter of 1977.
The aforesaid check was deposited with the defendant IBAA (now PCIBank) and was subsequently
cleared at the Central Bank. Upon presentment with the defendant Citibank, the proceeds of the check
was paid to IBAA as collecting or depository bank.
The proceeds of the same Citibank check of the plaintiff was never paid to or received by the payee
thereof, the Commissioner of Internal Revenue.
As a consequence, upon demand of the Bureau and/or Commissioner of Internal Revenue, the plaintiff
was compelled to make a second payment to the Bureau of Internal Revenue of its
percentage/manufacturers' sales taxes for the third quarter of 1977 and that said second payment of
plaintiff in the amount of P4,746,114.41 was duly received by the Bureau of Internal Revenue.
It is further admitted by defendant Citibank that during the time of the transactions in question, plaintiff
had been maintaining a checking account with defendant Citibank; that Citibank Check No. SN-04867
which was drawn and issued by the plaintiff in favor of the Commissioner of Internal Revenue was a
crossed check in that, on its face were two parallel lines and written in between said lines was the
phrase "Payee's Account Only"; and that defendant Citibank paid the full face value of the check in the
amount of P4,746,114.41 to the defendant IBAA.
It has been duly established that for the payment of plaintiff's percentage tax for the last quarter of
1977, the Bureau of Internal Revenue issued Revenue Tax Receipt No. 18747002, dated October 20,
1977, designating therein in Muntinlupa, Metro Manila, as the authorized agent bank of Metrobank,
Alabang Branch to receive the tax payment of the plaintiff.
On December 19, 1977, plaintiff's Citibank Check No. SN-04867, together with the Revenue Tax Receipt
No. 18747002, was deposited with defendant IBAA, through its Ermita Branch. The latter accepted the
check and sent it to the Central Clearing House for clearing on the same day, with the indorsement at
the back "all prior indorsements and/or lack of indorsements guaranteed." Thereafter, defendant IBAA
presented the check for payment to defendant Citibank on same date, December 19, 1977, and the
latter paid the face value of the check in the amount of P4,746,114.41. Consequently, the amount of
P4,746,114.41 was debited in plaintiff's account with the defendant Citibank and the check was
returned to the plaintiff.
Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in the amount of
P4,746,114.41 was not paid to the Commissioner of Internal Revenue. Hence, in separate letters dated
October 26, 1979, addressed to the defendants, the plaintiff notified the latter that in case it will be re-
assessed by the BIR for the payment of the taxes covered by the said checks, then plaintiff shall hold the
defendants liable for reimbursement of the face value of the same. Both defendants denied liability and
refused to pay.
In a letter dated February 28, 1980 by the Acting Commissioner of Internal Revenue addressed to the
plaintiff supposed to be Exhibit "D", the latter was officially informed, among others, that its check in
the amount of P4,746,114.41 was not paid to the government or its authorized agent and instead
encashed by unauthorized persons, hence, plaintiff has to pay the said amount within fifteen days from
receipt of the letter. Upon advice of the plaintiff's lawyers, plaintiff on March 11, 1982, paid to the
Bureau of Internal Revenue, the amount of P4,746,114.41, representing payment of plaintiff's
percentage tax for the third quarter of 1977.
As a consequence of defendant's refusal to reimburse plaintiff of the payment it had made for the
second time to the BIR of its percentage taxes, plaintiff filed on January 20, 1983 its original complaint
before this Court.
On December 24, 1985, defendant IBAA was merged with the Philippine Commercial International Bank
(PCI Bank) with the latter as the surviving entity.
Defendant Citibank maintains that; the payment it made of plaintiff's Citibank Check No. SN-04867 in
the amount of P4,746,114.41 "was in due course"; it merely relied on the clearing stamp of the
depository/collecting bank, the defendant IBAA that "all prior indorsements and/or lack of indorsements
guaranteed"; and the proximate cause of plaintiff's injury is the gross negligence of defendant IBAA in
indorsing the plaintiff's Citibank check in question.
It is admitted that on December 19, 1977 when the proceeds of plaintiff's Citibank Check No. SN-04867
was paid to defendant IBAA as collecting bank, plaintiff was maintaining a checking account with
defendant Citibank." 5
Although it was not among the stipulated facts, an investigation by the National Bureau of Investigation
(NBI) revealed that Citibank Check No. SN-04867 was recalled by Godofredo Rivera, the General Ledger
Accountant of Ford. He purportedly needed to hold back the check because there was an error in the
computation of the tax due to the Bureau of Internal Revenue (BIR). With Rivera's instruction, PCIBank
replaced the check with two of its own Manager's Checks (MCs). Alleged members of a syndicate later
deposited the two MCs with the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint before the trial court impleading Pacific Banking
Corporation (PBC) and Godofredo Rivera, as third party defendants. But the court dismissed the
complaint against PBC for lack of cause of action. The court likewise dismissed the third-party complaint
against Godofredo Rivera because he could not be served with summons as the NBI declared him as a
"fugitive from justice".
On June 15, 1989, the trial court rendered its decision, as follows:
"Premises considered, judgment is hereby rendered as follows:
1. Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and severally, to pay the
plaintiff the amount of P4,746,114.41 representing the face value of plaintiff's Citibank Check No. SN-
04867, with interest thereon at the legal rate starting January 20, 1983, the date when the original
complaint was filed until the amount is fully paid, plus costs;
2. On defendant Citibank's cross-claim: ordering the cross-defendant IBAA (now PCI BANK) to
reimburse defendant Citibank for whatever amount the latter has paid or may pay to the plaintiff in
accordance with the next preceding paragraph;
3. The counterclaims asserted by the defendants against the plaintiff, as well as that asserted by
the cross-defendant against the cross-claimant are dismissed, for lack of merits; and
4. With costs against the defendants.
SO ORDERED." 6
Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated their respective
petitions for review on certiorari to the Court of Appeals. On March 27, 1995, the appellate court issued
its judgment as follows:
"WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision with modifications.
The court hereby renders judgment:
1. Dismissing the complaint in Civil Case No. 49287 insofar as defendant Citibank N.A. is concerned;
2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff the amount of P4,746,114.41
representing the face value of plaintiff's Citibank Check No. SN-04867, with interest thereon at the legal
rate starting January 20, 1983. the date when the original complaint was filed until the amount is fully
paid;
3. Dismissing the counterclaims asserted by the defendants against the plaintiff as well as that
asserted by the cross-defendant against the cross-claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED." 7
PCIBank moved to reconsider the above-quoted decision of the Court of Appeals, while Ford filed a
"Motion for Partial Reconsideration." Both motions were denied for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of the Twelfth Division of
the Court of Appeals contending that it merely acted on the instruction of Ford and such cause of action
had already prescribed.
PCIBank sets forth the following issues for consideration:
I. Did the respondent court err when, after finding that the petitioner acted on the check drawn
by respondent Ford on the said respondent's instructions, it nevertheless found the petitioner liable to
the said respondent for the full amount of the said check.
II. Did the respondent court err when it did not find prescription in favor of the petitioner. 8
In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning the same decision
and resolution of the Court of Appeals, and praying for the reinstatement in toto of the decision of the
trial court which found both PCIBank and Citibank jointly and severally liable for the loss.
In G.R. No. 121479, appellant Ford presents the following propositions for consideration:
I. Respondent Citibank is liable to petitioner Ford considering that:
1. As drawee bank, respondent Citibank owes to petitioner Ford, as the drawer of the subject
check and a depositor of respondent Citibank, an absolute and contractual duty to pay the proceeds of
the subject check only to the payee thereof, the Commissioner of Internal Revenue.
2. Respondent Citibank failed to observe its duty as banker with respect to the subject check,
which was crossed and payable to "Payee's Account Only."
3. Respondent Citibank raises an issue for the first time on appeal; thus the same should not be
considered by the Honorable Court.
4. As correctly held by the trial court, there is no evidence of gross negligence on the part of
petitioner Ford. 9
II. PCIBank is liable to petitioner Ford considering that:
1. There were no instructions from petitioner Ford to deliver the proceeds of the subject check to
a person other than the payee named therein, the Commissioner of the Bureau of Internal Revenue;
thus, PCIBank's only obligation is to deliver the proceeds to the Commissioner of the Bureau of Internal
Revenue. 10
2. PCIBank which affixed its indorsement on the subject check ("All prior indorsement and/or lack
of indorsement guaranteed"), is liable as collecting bank. 11
3. PCIBank is barred from raising issues of fact in the instant proceedings. 12
4. Petitioner Ford's cause of action had not prescribed. 13
II. G.R. No. 128604
The same syndicate apparently embezzled the proceeds of checks intended, this time, to settle Ford's
percentage taxes appertaining to the second quarter of 1978 and the first quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of P5,851,706.37 representing
the percentage tax due for the second quarter of 1978 payable to the Commissioner of Internal
Revenue. A BIR Revenue Tax Receipt No. 28645385 was issued for the said purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of P6,311,591.73,
representing the payment of percentage tax for the first quarter of 1979 and payable to the
Commissioner of Internal Revenue. Again a BIR Revenue Tax Receipt No. A-1697160 was issued for the
said purpose. DcSEHT
Both checks were "crossed checks" and contain two diagonal lines on its upper left corner between
which were written the words "payable to the payee's account only."
The checks never reached the payee, CIR. Thus, in a letter dated February 28, 1980, the BIR, Region 4-B,
demanded for the said tax payments the corresponding periods above-mentioned.
As far as the BIR is concerned, the said two BIR Revenue Tax Receipts were considered "fake and
spurious". This anomaly was confirmed by the NBI upon the initiative of the BIR. The findings forced
Ford to pay the BIR anew, while an action was filed against Citibank and PCIBank for the recovery of the
amount of Citibank Check Numbers SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tied the case, made its findings on the modus
operandi of the syndicate, as follows:
"A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its General Ledger Accountant.
As such, he prepared the plaintiff's check marked Ex. 'A' [Citibank Check No. SN-10597] for payment to
the BIR. Instead, however, of delivering the same to the payee, he passed on the check to a co-
conspirator named Remberto Castro who was a pro-manager of the San Andres Branch of PCIB. * In
connivance with one Winston Dulay, Castro himself subsequently opened a Checking Account in the
name of a fictitious person denominated as 'Reynaldo Reyes' in the Meralco Branch of PCIBank where
Dulay works as Assistant Manager.
After an initial deposit of P100.00 to validate the account, Castro deposited a worthless Bank of America
Check in exactly the same amount as the first FORD check (Exh. "A", P5,851,706.37) while this worthless
check was coursed through PCIB's main office enroute to the Central Bank for clearing, replaced this
worthless check with FORD's Exhibit 'A' and accordingly tampered the accompanying documents to
cover the replacement. As a result, Exhibit 'A' was cleared by defendant CITIBANK, and the fictitious
deposit account of 'Reynaldo Reyes' was credited at the PCIB Meralco Branch with the total amount of
the FORD check Exhibit 'A'. The same method was again utilized by the syndicate in profiting from Exh.
'B' [Citibank Check No. SN-16508] which was subsequently pilfered by Alexis Marindo, Rivera's Assistant
at FORD.
From this 'Reynaldo Reyes' account, Castro drew various checks distributing the shares of the other
participating conspirators namely (1) CRISANTO BERNABE, the mastermind who formulated the method
for the embezzlement; (2) RODOLFO R. DE LEON a customs broker who negotiated the initial contact
between Bernabe, FORD's Godofredo Rivera and PCIB's Remberto Castro; (3) JUAN CASTILLO who
assisted de Leon in the initial arrangements; (4) GODOFREDO RIVERA, FORD's accountant who passed on
the first check (Exhibit "A") to Castro; (5) REMBERTO CASTRO, PCIB's pro-manager at San Andres who
performed the switching of checks in the clearing process and opened the fictitious Reynaldo Reyes
account at the PCIB Meralco Branch; (6) WINSTON DULAY, PCIB's Assistant Manager at its Meralco
Branch, who assisted Castro in switching the checks in the clearing process and facilitated the opening of
the fictitious Reynaldo Reyes' bank account; (7) ALEXIS MARINDO, Rivera's Assistant at FORD, who gave
the second check (Exh. "B") to Castro; (8) ELEUTERIO JIMENEZ, BIR Collection Agent who provided the
fake and spurious revenue tax receipts to make it appear that the BIR had received FORD's tax
payments.
Several other persons and entities were utilized by the syndicate as conduits in the disbursements of the
proceeds of the two checks, but like the aforementioned participants in the conspiracy, have not been
impleaded in the present case. The manner by which the said funds were distributed among them are
traceable from the record of checks drawn against the original "Reynaldo Reyes" account and
indubitably identify the parties who illegally benefited therefrom and readily indicate in what amounts
they did so." 14
On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank, Citibank, liable for
the value of the two checks while absolving PCIBank from any liability, disposing as follows:
"WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to reimburse plaintiff FORD
the total amount of P12,163,298.10 prayed for in its complaint, with 6% interest thereon from date of
first written demand until full payment, plus P300,000.00 attorney's fees and expenses of litigation, and
to pay the defendant, PCIB (on its counterclaim to crossclaim) the sum of P300,000.00 as attorney's fees
and costs of litigation, and pay the costs.
SO ORDERED." 15
Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the decision of the trial
court. Hence, this petition.
Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of Appeals
decision and its resolution dated March 5, 1997, with respect to the dismissal of the complaint against
PCIBank and holding Citibank solely responsible for the proceeds of Citibank Check Numbers SN-10597
and 16508 for P5,851,706.73 and P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing the complaint against defendant PCIBank
considering that:
I. Defendant PCIBank was clearly negligent when it failed to exercise the diligence required to be
exercised by it as a banking institution.
II. Defendant PCIBank clearly failed to observe the diligence required in the selection and
supervision of its officers and employees.
III. Defendant PCIBank was, due to its negligence, clearly liable for the loss or damage resulting to
the plaintiff Ford as a consequence of the substitution of the check consistent with Section 5 of Central
Bank Circular No. 580 series of 1977.
IV. Assuming arguendo that defendant PCIBank did not accept, endorse or negotiate in due course
the subject checks, it is liable, under Article 2154 of the Civil Code, to return the money which it admits
having received, and which was credited to it in its Central Bank account. 16
The main issue presented for our consideration by these petitions could be simplified as follows: Has
petitioner Ford the right to recover from the collecting bank (PCIBank) and the drawee bank (Citibank)
the value of the checks intended as payment to the Commissioner of Internal Revenue? Or has Ford's
cause of action already prescribed?
Note that in these cases, the checks were drawn against the drawee bank, but the title of the person
negotiating the same was allegedly defective because the instrument was obtained by fraud and
unlawful means, and the proceeds of the checks were not remitted to the payee. It was established that
instead of paying the checks to the CIR, for the settlement of the appropriate quarterly percentage taxes
of Ford, the checks were diverted and encashed for the eventual distribution among the members of the
syndicate. As to the unlawful negotiation of the check the applicable law is Section 55 of the Negotiable
Instruments Law (NIL), which provides:
"When title defective The title of a person who negotiates an instrument is defective within the
meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or
force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in
breach of faith or under such circumstances as amount to a fraud."
Pursuant to this provision, it is vital to show that the negotiation is made by the perpetrator in breach of
faith amounting to fraud. The person negotiating the checks must have gone beyond the authority given
by his principal. If the principal could prove that there was no negligence in the performance of his
duties, he may set up the personal defense to escape liability and recover from other parties who,
through their own negligence, allowed the commission of the crime.
In this case, we note that the direct perpetrators of the offense, namely the embezzlers belonging to a
syndicate, are now fugitives from justice. They have, even if temporarily, escaped liability for the
embezzlement of millions of pesos. We are thus left only with the task of determining who of the
present parties before us must bear the burden of loss of these millions. It all boils down to the question
of liability based on the degree of negligence among the parties concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty of the "imputed contributory
negligence" that would defeat its claim for reimbursement, bearing in mind that its employees,
Godofredo Rivera and Alexis Marindo, were among the members of the syndicate.
Citibank points out that Ford allowed its very own employee, Godofredo Rivera, to negotiate the checks
to his co-conspirators, instead of delivering them to the designated authorized collecting bank
(Metrobank-Alabang) of the payee, CIR. Citibank bewails the fact that Ford was remiss in the supervision
and control of its own employees, inasmuch as it only discovered the syndicate's activities through the
information given by the payee of the checks after an unreasonable period of time.
PCIBank also blames Ford of negligence when it allegedly authorized Godofredo Rivera to divert the
proceeds of Citibank Check No. SN-04867, instead of using it to pay the BIR. As to the subsequent run-
around of funds of Citibank Check Nos. SN-10597 and 16508, PCIBank claims that the proximate cause of
the damage to Ford lies in its own officers and employees who carried out the fraudulent schemes and
the transactions. These circumstances were not checked by other officers of the company, including its
comptroller or internal auditor. PCIBank contends that the inaction of Ford despite the enormity of the
amount involved was a sheer negligence and stated that, as between two innocent persons, one of
whom must suffer the consequences of a breach of trust, the one who made it possible, by his act of
negligence, must bear the loss.
For its part, Ford denies any negligence in the performance of its duties. It avers that there was no
evidence presented before the trial court showing lack of diligence on the part of Ford. And, citing the
case of Gempesaw vs. Court of Appeals, 17 Ford argues that even if there was a finding therein that the
drawer was negligent, the drawee bank was still ordered to pay damages.
Furthermore, Ford contends that Godofredo Rivera was not authorized to make any representation in
its behalf, specifically, to divert the proceeds of the checks. It adds that Citibank raised the issue of
imputed negligence against Ford for the first time on appeal. Thus, it should not be considered by this
Court.
On this point, jurisprudence regarding the imputed negligence of employer in a master-servant
relationship is instructive. Since a master may be held for his servant's wrongful act, the law imputes to
the master the act of the servant, and if that act is negligent or wrongful and proximately results in
injury to a third person, the negligence or wrongful conduct is the negligence or wrongful conduct of the
master, for which he is liable. 18 The general rule is that if the master is injured by the negligence of a
third person and by the concurring contributory negligence of his own servant or agent, the latter's
negligence is imputed to his superior and will defeat the superior's action against the third person,
assuming, of course that the contributory negligence was the proximate cause of the injury of which
complaint is made. 19
Accordingly, we need to determine whether or not the action of Godofredo Rivera, Ford's General
Ledger Accountant, and/or Alexis Marindo, his assistant, was the proximate cause of the loss or damage.
As defined, proximate cause is that which, in the natural and continuous sequence, unbroken by any
efficient, intervening cause produces the injury, and without which the result would not have occurred.
20
It appears that although the employees of Ford initiated the transactions attributable to an organized
syndicate, in our view, their actions were not the proximate cause of encashing the checks payable to
the CIR. The degree of Ford's negligence, if any, could not be characterized as the proximate cause of
the injury to the parties.
The Board of Directors of Ford, we note, did not confirm the request of Godofredo Rivera to recall
Citibank Check No. SN-04867. Rivera's instruction to replace the said check with PCIBank's Manager's
Check was not in the ordinary course of business which could have prompted PCIBank to validate the
same.
As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was established that these checks
were made payable to the CIR. Both were crossed checks. These checks were apparently turned around
by Ford's employees, who were acting on their own personal capacity.
Given these circumstances, the mere fact that the forgery was committed by a drawer-payor's
confidential employee or agent, who by virtue of his position had unusual facilities for 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. 21 This rule
likewise applies to the checks fraudulently negotiated or diverted by the confidential employees who
hold them in their possession.
With respect to the negligence of PCIBank in the payment of the three checks involved, separately, the
trial courts found variations between the negotiation of Citibank Check No. SN-04867 and the
misapplication of total proceeds of Checks SN-10597 and 16508. Therefore, we have to scrutinize,
separately, PCIBank's share of negligence when the syndicate achieved its ultimate agenda of stealing
the proceeds of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It was coursed
through the ordinary banking transaction, sent to Central Clearing with the indorsement at the back "all
prior indorsements and/or lack of indorsements guaranteed," and was presented to Citibank for
payment. Thereafter PCIBank, instead of remitting the proceeds to the CIR, prepared two of its
Manager's checks and enabled the syndicate to encash the same. cDCEHa
On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The neglect of
PCIBank employees to verify whether his letter requesting for the replacement of the Citibank Check No.
SN-04867 was duly authorized, showed lack of care and prudence required in the circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect the payment of taxpayers in behalf of
the BIR. As an agent of BIR, PCIBank is duty bound to consult its principal regarding the unwarranted
instructions given by the payor or its agent. As aptly stated by the trial court, to wit:
". . . Since the questioned crossed check was deposited with IBAA [now PCIBank], which claimed to be a
depository/collecting bank of the BIR, it has the responsibility to make sure that the check in question is
deposited in Payee's account only.
xxx xxx xxx
As agent of the BIR (the payee of the check), defendant IBAA should receive instructions only from its
principal BIR and not from any other person especially so when that person is not known to the
defendant. It is very imprudent on the part of the defendant IBAA to just rely on the alleged telephone
call of one (Godofredo Rivera and in his signature to the authenticity of such signature considering that
the plaintiff is not a client of the defendant IBAA."
It is a well-settled rule that the relationship between the payee or holder of commercial paper and the
bank to which it is sent for collection is, in the absence of an agreement to the contrary, that of principal
and agent. 22 A bank which receives such paper for collection is the agent of the payee or holder. 23
Even considering arguendo, that the diversion of the amount of a check payable to the collecting bank in
behalf of the designated payee may be allowed, still such diversion must be properly authorized by the
payor. Otherwise stated, the diversion can be justified only by proof of authority from the drawer, or
that the drawer has clothed his agent with apparent authority to receive the proceeds of such check.
Citibank further argues that PCI Bank's clearing stamp appearing at the back of the questioned checks
stating that ALL PRIOR INDORSEMENTS AND/OR LACK OF INDORSEMENTS GUARANTEED should render
PCIBank liable because it made it pass through the clearing house and therefore Citibank had no other
option but to pay it. Thus, Citibank asserts that the proximate cause of Ford's injury is the gross
negligence of PCIBank. Since the questioned crossed check was deposited with PCIBank, which claimed
to be a depository/collecting bank of the BIR, it had the responsibility to make sure that the check in
question is deposited in Payee's account only.
Indeed, the crossing of the check with the phrase "Payee's Account Only," is a warning that the check
should be deposited only in the account of the CIR. Thus, it is the duty of the collecting bank PCIBank to
ascertain that the check be deposited in payee's account only. Therefore, it is the collecting bank
(PCIBank) which is bound to scrutinize the check and to know its depositors before it could make the
clearing indorsement "all prior indorsements and/or lack of indorsement guaranteed".
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation, 24 we ruled:
"Anent petitioner's liability on said instruments, this court is in full accord with the ruling of the PCHC's
Board of Directors that:
'In presenting the checks for clearing and for payment, the defendant made an express guarantee on the
validity of "all prior endorsements." Thus, stamped at the back of the checks are the defendant's clear
warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without such
warranty, plaintiff would not have paid on the checks.'
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty has
proven to be false and inaccurate, the defendant is liable for any damage arising out of the falsity of its
representation." 25 AcaEDC
Lastly, banking business requires that the one who first cashes and negotiates the check must take some
precautions to learn whether or not it is genuine. And if the one cashing the check through indifference
or other circumstance assists the forger in committing the fraud, he should not be permitted to retain
the proceeds of the check from the drawee whose sole fault was that it did not discover the forgery or
the defect in the title of the person negotiating the instrument before paying the check. For this reason,
a bank which cashes a check drawn upon another bank, without requiring proof as to the identity of
persons presenting it, or making inquiries with regard to them, cannot hold the proceeds against the
drawee when the proceeds of the checks were afterwards diverted to the hands of a third party. In such
cases the drawee bank has a right to believe that the cashing bank (or the collecting bank) had, by the
usual proper investigation, satisfied itself of the authenticity of the negotiation of the checks. Thus, one
who encashed a check which had been forged or diverted and in turn received payment thereon from
the drawee, is guilty of negligence which proximately contributed to the success of the fraud practiced
on the drawee bank. The latter may recover from the holder the money paid on the check. 26
Having established that the collecting bank's negligence is the proximate cause of the loss, we conclude
that PCIBank is liable in the amount corresponding to the proceeds of Citibank Check No. SN-04867.
G.R. No. 128604
The trial court and the Court of Appeals found that PCIBank had no official act in the ordinary course of
business that would attribute to it the case of the embezzlement of Citibank Check Numbers SN-10597
and 16508, because PCIBank did not actually receive nor hold the two Ford checks at all. The trial court
held, thus:
"Neither is there any proof that defendant PCIBank contributed any official or conscious participation in
the process of the embezzlement. This Court is convinced that the switching operation (involving the
checks while in transit for "clearing") were the clandestine or hidden actuations performed by the
members of the syndicate in their own personal, covert and private capacity and done without the
knowledge of the defendant PCIBank. . . ." 27
In this case, there was no evidence presented confirming the conscious participation of PCIBank in the
embezzlement. As a general rule, however, a banking corporation is liable for the wrongful or tortuous
acts and declarations of its officers or agents within the course and scope of their employment. 28 A
bank will be held liable for the negligence of its officers or agents when acting within the course and
scope of their employment. It may be liable for the tortuous acts of its officers even as regards that
species of tort of which malice is an essential element. In this case, we find a situation where the
PCIBank appears also to be the victim of the scheme hatched by a syndicate in which its own
management employees had participated:
The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received Citibank Check Numbers
SN 10597 and 16508. He passed the checks to a co-conspirator, an Assistant Manager of PCIBank's
Meralco Branch, who helped Castro open a Checking account of a fictitious person named "Reynaldo
Reyes." Castro deposited a worthless Bank of America Check in exactly the same amount of Ford checks.
The syndicate tampered with the checks and succeeded in replacing the worthless checks and the
eventual encashment of Citibank Check Nos. SN 10597 and 16508. The PCIBank Pro-manager, Castro,
and his co-conspirator Assistant Manager apparently performed their activities using facilities in their
official capacity or authority but for their personal and private gain or benefit.
A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the
frauds these officers or agents were enabled to perpetrate in the apparent course of their employment;
nor will it be permitted to shirk its responsibility for such frauds, even though no benefit may accrue to
the bank therefrom. For the general rule is that a bank is liable for the fraudulent acts or
representations of an officer or agent acting within the course and apparent scope of his employment or
authority. 29 And if an officer or employee of a bank, in his official capacity, receives money to satisfy an
evidence of indebtedness lodged with his bank for collection, the bank is liable for his misappropriation
of such sum. 30
Moreover, as correctly pointed out by Ford, Section 5 31 of Central Bank Circular No. 580, Series of 1977
provides that any theft affecting items in transit for clearing, shall be for the account of sending bank,
which in this case is PCIBank.
But in this case, responsibility for negligence does not lie on PCIBank's shoulders alone.
The evidence on record shows that Citibank as drawee bank was likewise negligent in the performance
of its duties. Citibank failed to establish that its payment of Ford's checks were made in due course and
legally in order. In its defense, Citibank claims the genuineness and due execution of said checks,
considering that Citibank (1) has no knowledge of any infirmity in the issuance of the checks in question
(2) coupled by the fact that said checks were sufficiently funded and (3) the endorsement of the Payee
or lack thereof was guaranteed by PCIBank (formerly IBAA), thus, it has the obligation to honor and pay
the same.
For its part, Ford contends that Citibank as the drawee bank owes to Ford an absolute and contractual
duty to pay the proceeds of the subject check only to the payee thereof, the CIR. Citing Section 62 32 of
the Negotiable Instruments Law, Ford argues that by accepting the instrument, the acceptor which is
Citibank engages that it will pay according to the tenor of its acceptance, and that it will pay only to the
payee, (the CIR), considering the fact that here the check was crossed with annotation "Payees Account
Only."
As ruled by the Court of Appeals, Citibank must likewise answer for the damages incurred by Ford on
Citibank Checks Numbers SN 10597 and 16508, because of the contractual relationship existing between
the two. Citibank, as the drawee bank breached its contractual obligation with Ford and such degree of
culpability contributed to the damage caused to the latter. On this score, we agree with the respondent
court's ruling.
Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before paying the
amount of the proceeds thereof to the collecting bank of the BIR. One thing is clear from the record: the
clearing stamps at the back of Citibank Check Nos. SN 10597 and 16508 do not bear any initials. Citibank
failed to notice and verify the absence of the clearing stamps. Had this been duly examined, the
switching of the worthless checks to Citibank Check Nos. 10597 and 16508 would have been discovered
in time. For this reason, Citibank had indeed failed to perform what was incumbent upon it, which is to
ensure that the amount of the checks should be paid only to its designated payee. The fact that the
drawee bank did not discover the irregularity seasonably, in our view, constitutes negligence in carrying
out the bank's duty to its depositors. The point is that as a business affected with public interest and
because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors
with meticulous care, always having in mind the fiduciary nature of their relationship. 33
Thus, invoking the doctrine of comparative negligence, we are of the view that both PCIBank and
Citibank failed in their respective obligations and both were negligent in the selection and supervision of
their employees resulting in the encashment of Citibank Check Nos. SN 10597 and 16508. Thus, we are
constrained to hold them equally liable for the loss of the proceeds of said checks issued by Ford in favor
of the CIR.
Time and again, we have stressed that banking business is so impressed with public interest where the
trust and confidence of the public in general is of paramount importance such that the appropriate
standard of diligence must be very high, if not the highest, degree of diligence. 34 A bank's liability as
obligor is not merely vicarious but primary, wherein the defense of exercise of due diligence in the
selection and supervision of its employees is of no moment. 35
Banks handle daily transactions involving millions of pesos. 36 By the very nature of their work the
degree of responsibility, care and trustworthiness expected of their employees and officials is far greater
than those of ordinary clerks and employees. 37 Banks are expected to exercise the highest degree of
diligence in the selection and supervision of their employees. 38
On the issue of prescription, PCIBank claims that the action of Ford had prescribed because of its
inability to seek judicial relief seasonably, considering that the alleged negligent act took place prior to
December 19, 1977 but the relief was sought only in 1983, or seven years thereafter.
The statute of limitations begins to run when the bank gives the depositor notice of the payment, which
is ordinarily when the check is returned to the alleged drawer as a voucher with a statement of his
account, 39 and an action upon a check is ordinarily governed by the statutory period applicable to
instruments in writing. 40
Our laws on the matter provide that the action upon a written contract must be brought within ten
years from the time the right of action accrues. 41 Hence, the reckoning time for the prescriptive period
begins when the instrument was issued and the corresponding check was returned by the bank to its
depositor (normally a month thereafter). Applying the same rule, the cause of action for the recovery of
the proceeds of Citibank Check No. SN 04867 would normally be a month after December 19, 1977,
when Citibank paid the face value of the check in the amount of P4,746,114.41. Since the original
complaint for the cause of action was filed on January 20, 1983, barely six years had lapsed. Thus, we
conclude that Ford's cause of action to recover the amount of Citibank Check No. SN 04867 was
seasonably filed within the period provided by law.
Finally, we also find that Ford is not completely blameless in its failure to detect the fraud. Failure on the
part of the depositor to examine its passbook, statements of account, and cancelled checks and to give
notice within a reasonable time (or as required by statute) of any discrepancy which it may in the
exercise of due care and diligence find therein, serves to mitigate the banks' liability by reducing the
award of interest from twelve percent (12%) to six percent (6%) per annum. As provided in Article 1172
of the Civil Code of the Philippines, 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. In quasi-delicts, the contributory negligence of the plaintiff shall reduce the damages
that he may recover. 42 ScAIaT
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 25017 are
AFFIRMED. PCIBank, known formerly as Insular Bank of Asia and America, is declared solely responsible
for the loss of the proceeds of Citibank Check No. SN 04867 in the amount P4,746,114.41, which shall be
paid together with six percent (6%) interest thereon to Ford Philippines Inc. from the date when the
original complaint was filed until said amount is fully paid.
However, the Decision and Resolution of the Court of Appeals in CA-G.R. No. 28430 are MODIFIED as
follows: PCIBank and Citibank are adjudged liable for and must share the loss, (concerning the proceeds
of Citibank Check Numbers SN 10597 and 16508 totalling P12,163,298.10) on a fifty-fifty ratio, and each
bank is ORDERED to pay Ford Philippines Inc. P6,081,649.05, with six percent (6%) interest thereon,
from the date the complaint was filed until full payment of said amount.
Costs against Philippine Commercial International Bank and Citibank, N.A.
SO ORDERED.
Bellosillo, Mendoza, Buena and De Leon, Jr., JJ., concur.
FIRST DIVISION
[G.R. No. 88013. March 19, 1990.]
SIMEX INTERNATIONAL (MANILA), INCORPORATED, petitioner, vs. THE HONORABLE COURT OF APPEALS
and TRADERS ROYAL BANK, respondents.
Don P. Porciuncula for petitioner.
San Juan, Gonzalez, San Agustin & Sinense for private respondent.
SYLLABUS
1. CIVIL LAW; DAMAGES; CARELESSNESS AMOUNTING TO GROSS NEGLIGENCE WARRANTS AWARD
OF MORAL DAMAGES. The negligence of the private respondent had been brushed off rather lightly
as if it were a minor infraction requiring no more than a slap on the wrist. We feel it is not enough to say
that the private respondent rectified its records and credited the deposit in less than a month as if this
were sufficient repentance. The error should not have been committed in the first place. The
respondent bank has not even explained why it was committed at all. It is true that the dishonored
checks were, as the Court of Appeals put it, "eventually" paid. However, this took almost a month when,
properly, the checks should have been paid immediately upon presentment. As the Court sees it, the
initial carelessness of the respondent bank, aggravated by the lack of promptitude in repairing its error,
justifies the grant of moral damages. This rather lackadaisical attitude toward the complaining depositor
constituted the gross negligence, if not wanton bad faith.
2. ID.; ID.; DETERMINATION AS TO THE AMOUNT OF MORAL DAMAGES LEFT TO THE SOUND
DISCRETION OF THE COURT. Moral damages are not susceptible of pecuniary estimation. Article 2216
of the Civil Code specifically provides that "no proof of pecuniary loss is necessary in order that moral,
nominal, temperate, liquidated or exemplary damages may be adjudicated." That is why the
determination of the amount to be awarded (except liquidated damages) is left to the sound discretion
of the court, according to "the circumstances of each case."
3. ID.; ID.; INJURY TO PLAINTIFF'S BUSINESS STANDING OR COMMERCIAL CREDIT WARRANTS
AWARD OF ACTUAL OR COMPENSATORY DAMAGES. The fact is that the petitioner's credit line was
canceled and its orders were not acted upon pending receipt of actual payment by the suppliers. Its
business declined. Its reputation was tarnished. Its standing was reduced in the business community. All
this was due to the fault of the respondent bank which was undeniably remiss in its duty to the
petitioner. Article 2205 of the Civil Code provides that actual or compensatory damages may be received
"(2) for injury to the plaintiff's business standing or commercial credit." There is no question that the
petitioner did sustain actual injury as a result of the dishonored checks and that the existence of the loss
having been established "absolute certainty as to its amount is not required."
4. ID.; ID.; CORPORATION NOT ENTITLED TO MORAL DAMAGES AS A RULE; EXCEPTION. A
corporation is not as a rule entitled to moral damages because, not being a natural person, it cannot
experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish
and moral shock. The only exception to this rule is where the corporation has a good reputation that is
debased, resulting in its social humiliation.
5. ID.; ID.; AWARD OF NOMINAL DAMAGES NOT WARRANTED IN CASE AT BAR. The petitioner
did suffer injury because of the private respondent's negligence the caused the dishonor of the checks
issued by it. The immediate consequence was that its prestige was impaired because of the bouncing
checks and confidence in it as a reliable debtor was diminished. The private respondent makes much of
the one instance when the petitioner was sued in a collection case, but that did not prove that it did not
have a good reputation that could not be marred, more so since that case was ultimately settled. It does
not appear that, as the private respondent would portray it, the petitioner is an unsavory and
disreputable entity that has no good name to protect. Considering all this, we feel that the award of
nominal damages in the sum of P20,000.00 was not the proper relief to which the petitioner was
entitled. Under Article 2221 of the Civil Code, "nominal damages are adjudicated in order that a right of
the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and
not for the purpose of indemnifying the plaintiff for any loss suffered by him." As we have found that
the petitioner has indeed incurred loss through the fault of the private respondent, the proper remedy
is the award to it of moral damages, which we impose, in our discretion, in the same amount of
P20,000.00.
6. ID.; ID.; BANK'S NEGLIGENCE IN THEIR DUTIES TOWARDS THEIR CLIENTS WARRANTS AWARD OF
EXEMPLARY DAMAGES; REASON THEREOF. As a business affected with public interest and because of
the nature of its functions, the bank is under obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their relationship. In the case at bar, it is
obvious that the respondent bank was remiss in that duty and violated that relationship. What is
especially deplorable is that, having been informed of its error in not crediting the deposit in question to
the petitioner, the respondent bank did not immediately correct it but did so only one week later or
twenty-three days after the deposit was made. It bears repeating that the record does not contain any
satisfactory explanation of why the error was made in the first place and why it was not corrected
immediately after its discovery. Such ineptness comes under the concept of the wanton manner
contemplated in the Civil Code that calls for the imposition of exemplary damages. After deliberating on
this particular matter, the Court, in the exercise of its discretion, hereby imposes upon the respondent
bank exemplary damages in the amount of P50,000.00, "by way of example or correction for the public
good," in the words of the law. It is expected that this ruling will serve as a warning and deterrent
against the repetition of the ineptness and indifference that has been displayed here, lest the
confidence of the public in the banking system be further impaired.
D E C I S I O N
CRUZ, J p:
We are concerned in this case with the question of damages, specifically moral and exemplary damages.
The negligence of the private respondent has already been established. All we have to ascertain is
whether the petitioner is entitled to the said damages and, if so, in what amounts.
The parties agree on the basic facts. The petitioner is a private corporation engaged in the exportation
of food products. It buys these products from various local suppliers and then sells them abroad,
particularly in the United States, Canada and the Middle East. Most of its exports are purchased by the
petitioner on credit. LLphil
The petitioner was a depositor of the respondent bank and maintained a checking account in its branch
at Romulo Avenue, Cubao, Quezon City. On May 25, 1981, the petitioner deposited to its account in the
said bank the amount of P100,000.00, thus increasing its balance as of that date to P190,380.74. 1
Subsequently, the petitioner issued several checks against its deposit but was surprised to learn later
that they had been dishonored for insufficient funds.
The dishonored checks are the following:
1. Check No. 215391 dated May 29, 1981, in favor of California Manufacturing Company, Inc. for
P16,480.00:
2. Check No. 215426 dated May 28, 1981, in favor of the Bureau of Internal Revenue in the
amount of P3,386.73:
3. Check No. 215451 dated June 4, 1981, in favor of Mr. Greg Pedreo in the amount of P7,080.00:
4. Check No. 215441 dated June 5, 1981, in favor of Malabon Longlife Trading Corporation in the
amount of P42,906.00:
5. Check No. 215474 dated June 10, 1981, in favor of Malabon Longlife Trading Corporation in the
amount of P12,953.00:
6. Check No. 215477 dated June 9, 1981, in favor of Sea-Land Services, Inc. in the amount of
P27,024.45:
7. Check No. 215412 dated June 10, 1981, in favor of Baguio Country Club Corporation in the
amount of P4,385.02: and
8. Check No. 215480 dated June 9, 1981, in favor of Enriqueta Bayla in the amount of P6,275.00. 2
As a consequence, the California Manufacturing Corporation sent on June 9, 1981, a letter of demand to
the petitioner, threatening prosecution if the dishonored check issued to it was not made good. It also
withheld delivery of the order made by the petitioner. Similar letters were sent to the petitioner by the
Malabon Long Life Trading, on June 15, 1981, and by the G. and U. Enterprises, on June 10, 1981.
Malabon also canceled the petitioner's credit line and demanded that future payments be made by it in
cash or certified check. Meantime, action on the pending orders of the petitioner with the other
suppliers whose checks were dishonored was also deferred. cdrep
The petitioner complained to the respondent bank on June 10, 1981. 3 Investigation disclosed that the
sum of P100,000.00 deposited by the petitioner on May 25, 1981, had not been credited to it. The error
was rectified on June 17, 1981, and the dishonored checks were paid after they were re-deposited. 4
In its letter dated June 20, 1981, the petitioner demanded reparation from the respondent bank for its
"gross and wanton negligence." This demand was not met. The petitioner then filed a complaint in the
then Court of First Instance of Rizal claiming from the private respondent moral damages in the sum of
P1,000,000.00 and exemplary damages in the sum of P500,000.00, plus 25% attorney's fees, and costs.
After trial, Judge Johnico G. Serquia rendered judgment holding that moral and exemplary damages
were not called for under the circumstances. However, observing that the plaintiffs right had been
violated, he ordered the defendant to pay nominal damages in the amount of P20,000.00 plus P5,000.00
attorney's fees and costs. 5 This decision was affirmed in toto by the respondent court. 6
The respondent court found with the trial court that the private respondent was guilty of negligence but
agreed that the petitioner was nevertheless not entitled to moral damages. It said:
The essential ingredient of moral damages is proof of bad faith (De Aparicio vs. Parogurga, 150 SCRA
280). Indeed, there was the omission by the defendant-appellee bank to credit appellant's deposit of
P100,000.00 on May 25, 1981. But the bank rectified its records. It credited the said amount in favor of
plaintiff-appellant in less than a month. The dishonored checks were eventually paid. These
circumstances negate any imputation or insinuation of malicious, fraudulent, wanton and gross bad faith
and negligence on the part of the defendant-appellant.
It is this ruling that is faulted in the petition now before us.
This Court has carefully examined the facts of this case and finds that it cannot share some of the
conclusions of the lower courts. It seems to us that the negligence of the private respondent had been
brushed off rather lightly as if it were a minor infraction requiring no more than a slap on the wrist. We
feel it is not enough to say that the private respondent rectified its records and credited the deposit in
less than a month as if this were sufficient repentance. The error should not have been committed in the
first place. The respondent bank has not even explained why it was committed at all. It is true that the
dishonored checks were, as the Court of Appeals put it, "eventually" paid. However, this took almost a
month when, properly, the checks should have been paid immediately upon presentment. llcd
As the Court sees it, the initial carelessness of the respondent bank, aggravated by the lack of
promptitude in repairing its error, justifies the grant of moral damages. This rather lackadaisical attitude
toward the complaining depositor constituted the gross negligence, if not wanton bad faith, that the
respondent court said had not been established by the petitioner.
We also note that while stressing the rectification made by the respondent bank, the decision practically
ignored the prejudice suffered by the petitioner. This was simply glossed over if not, indeed, disbelieved.
The fact is that the petitioner's credit line was canceled and its orders were not acted upon pending
receipt of actual payment by the suppliers. Its business declined. Its reputation was tarnished. Its
standing was reduced in the business community. All this was due to the fault of the respondent bank
which was undeniably remiss in its duty to the petitioner.
Article 2205 of the Civil Code provides that actual or compensatory damages may be received "(2) for
injury to the plaintiff's business standing or commercial credit." There is no question that the petitioner
did sustain actual injury as a result of the dishonored checks and that the existence of the loss having
been established "absolute certainty as to its amount is not required." 7 Such injury should bolster all
the more the demand of the petitioner for moral damages and justifies the examination by this Court of
the validity and reasonableness of the said claim.
We agree that moral damages are not awarded to penalize the defendant but to compensate the
plaintiff for the injuries he may have suffered. 8 In the case at bar, the petitioner is seeking such
damages for the prejudice sustained by it as a result of the private respondent's fault. The respondent
court said that the claimed losses are purely speculative and are not supported by substantial evidence,
but if failed to consider that the amount of such losses need not be established with exactitude,
precisely because of their nature. Moral damages are not susceptible of pecuniary estimation. Article
2216 of the Civil Code specifically provides that "no proof of pecuniary loss is necessary in order that
moral, nominal, temperate, liquidated or exemplary damages may be adjudicated." That is why the
determination of the amount to be awarded (except liquidated damages) is left to the sound discretion
of the court, according to "the circumstances of each case." LexLib
From every viewpoint except that of the petitioner's, its claim of moral damages in the amount of
P1,000,000.00 is nothing short of preposterous. Its business certainly is not that big, or its name that
prestigious, to sustain such an extravagant pretense. Moreover, a corporation is not as a rule entitled to
moral damages because, not being a natural person, it cannot experience physical suffering or such
sentiments as wounded feelings, serious anxiety, mental anguish and moral shock. The only exception to
this rule is where the corporation has a good reputation that is debased, resulting in its social
humiliation. 9
We shall recognize that the petitioner did suffer injury because of the private respondent's negligence
the caused the dishonor of the checks issued by it. The immediate consequence was that its prestige
was impaired because of the bouncing checks and confidence in it as a reliable debtor was diminished.
The private respondent makes much of the one instance when the petitioner was sued in a collection
case, but that did not prove that it did not have a good reputation that could not be marred, more so
since that case was ultimately settled. 10 It does not appear that, as the private respondent would
portray it, the petitioner is an unsavory and disreputable entity that has no good name to protect.
Considering all this, we feel that the award of nominal damages in the sum of P20,000.00 was not the
proper relief to which the petitioner was entitled. Under Article 2221 of the Civil Code, "nominal
damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the
defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for
any loss suffered by him." As we have found that the petitioner has indeed incurred loss through the
fault of the private respondent, the proper remedy is the award to it of moral damages, which we
impose, in our discretion, in the same amount of P20,000.00. LexLib
Now for the exemplary damages.
The pertinent provisions of the Civil Code are the following:
Art. 2229. Exemplary or corrective damages are imposed, by way of example or correction for the
public good, in addition to the moral, temperate, liquidated or compensatory damages.
Art. 2232. In contracts and quasi-contracts, the court may award exemplary damages if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.
The banking system is an indispensable institution in the modern world and plays a vital role in the
economic life of every civilized nation. Whether as mere passive entities for the safekeeping and saving
of money or as active instruments of business and commerce, banks have become an ubiquitous
presence among the people, who have come to regard them with respect and even gratitude and, most
of all, confidence. Thus, even the humble wage-earner has not hesitated to entrust his life's savings to
the bank of his choice, knowing that they will be safe in its custody and will even earn some interest for
him. The ordinary person, with equal faith, usually maintains a modest checking account for security and
convenience in the settling of his monthly bills and the payment of ordinary expenses. As for business
entities like the petitioner, the bank is a trusted and active associate that can help in the running of their
affairs, not only in the form of loans when needed but more often in the conduct of their day-to-day
transactions like the issuance or encashment of checks. prcd
In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such
account consists only of a few hundred pesos or of millions. The bank must record every single
transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the
account is to reflect at any given time the amount of money the depositor can dispose of as he sees fit,
confident that the bank will deliver it as and to whomever he directs. A blunder on the part of the bank,
such as the dishonor of a check without good reason, can cause the depositor not a little
embarrassment if not also financial loss and perhaps even civil and criminal litigation.
The point is that as a business affected with public interest and because of the nature of its functions,
the bank is under obligation to treat the accounts of its depositors with meticulous care, always having
in mind the fiduciary nature of their relationship. In the case at bar, it is obvious that the respondent
bank was remiss in that duty and violated that relationship. What is especially deplorable is that, having
been informed of its error in not crediting the deposit in question to the petitioner, the respondent bank
did not immediately correct it but did so only one week later or twenty-three days after the deposit was
made. It bears repeating that the record does not contain any satisfactory explanation of why the error
was made in the first place and why it was not corrected immediately after its discovery. Such ineptness
comes under the concept of the wanton manner contemplated in the Civil Code that calls for the
imposition of exemplary damages.
After deliberating on this particular matter, the Court, in the exercise of its discretion, hereby imposes
upon the respondent bank exemplary damages in the amount of P50,000.00, "by way of example or
correction for the public good," in the words of the law. It is expected that this ruling will serve as a
warning and deterrent against the repetition of the ineptness and indifference that has been displayed
here, lest the confidence of the public in the banking system be further impaired. LLpr
ACCORDINGLY, the appealed judgment is hereby MODIFIED and the private respondent is ordered to
pay the petitioner, in lieu of nominal damages, moral damages in the amount of P20,000.00, and
exemplary damages in the amount of P50,000.00 plus the original award of attorney's fees in the
amount of P5,000.00, and costs.
SO ORDERED.
Narvasa, Gancayco, Grio-Aquino and Medialdea, JJ., concur.
SECOND DIVISION
[G.R. No. 118492. August 15, 2001.]
GREGORIO H. REYES and CONSUELO PUYAT-REYES, petitioners, vs. THE HON. COURT OF APPEALS and
FAR EAST BANK AND TRUST COMPANY, respondents.
Benitez Parlade Africa Herrera Parlade & Panga Law Offices for petitioners.
Antonio R. Bautista & Partners for private respondent.
SYNOPSIS
The petitioners filed in the Regional Trial Court of Makati, Metro Manila, a complaint for damages,
against the respondent bank due to the dishonor of the foreign exchange demand draft which was
intended for the payment of the registration fees of the petitioners as delegates of the Philippine Racing
Club, Inc. (PRCI) to the 20th Asian Racing Conference in Sydney, Australia. The petitioners claimed that
as a result of the dishonor of the said demand draft, they were exposed to unnecessary shock, social
humiliation, and deep mental anguish in a foreign country, and in the presence of an international
audience.
After trial, the court rendered judgment in favor of the respondent bank and against the petitioners. On
appeal, the Court of Appeals affirmed the decision of the trial court, but deleted the award of attorney's
fees and the pronouncement as to the costs. According to the appellate court, there was no basis to
hold the respondent bank liable for damages for the reason that it exerted every effort for the subject
foreign exchange demand draft to be honored. The Appellate court found that the Westpac-New York,
the drawee bank, was responsible for the dishonor, and not the respondent bank.
Petitioners elevated the matter before the Supreme Court. CTAIDE
Among others, petitioners contended that due to the fiduciary nature of the relationship between the
respondent bank and its clients, the respondent bank should have exercised a higher degree of diligence
than that expected of an ordinary prudent person in the handling of its affairs as in the case at bar. The
appellate court, according to petitioners, erred in applying the standard of diligence of an ordinary
prudent person only.
In denying the petition, the Supreme Court held that the respondent bank was not required to exert
more than the diligence of a good father of a family in regard to the sale and issuance of the subject
foreign exchange demand draft. The case at bar did not involve the handling of petitioners' deposit, if
any, with the respondent bank. Instead, the relationship involved was that of a buyer and seller, that is,
between the respondent bank as the seller of the subject foreign exchange demand draft, and PRCI as
the buyer of the same, with the 20th Asian Racing Conference Secretariat in Sydney, Australia as the
payee thereof.
The Court found that the respondent bank did everything within its power to prevent the dishonor of
the subject foreign exchange demand draft. It was established that the respondent bank acted in good
faith and that it did not cause the embarrassment of the petitioners in Sydney, Australia. Hence, the
Court held that the Court of Appeals did not commit any reversible error in its challenged decision.
SYLLABUS
1. REMEDIAL LAW; EVIDENCE; FACTUAL FINDINGS OF THE COURT OF APPEALS ARE CONCLUSIVE
ON THE PARTIES AND NOT REVIEWABLE BY THE SUPREME COURT. Section 1 of Rule 45 of the Revised
Rules of Court provides that "(T)he petition (for review) shall raise only questions of law which must be
distinctly set forth." Thus, we have ruled that factual findings of the Court of Appeals are conclusive on
the parties and not reviewable by this Court and they carry even more weight when the Court of
Appeals affirms the factual findings of the trial court.
2. COMMERCIAL LAW; BANKING; RESPONDENT BANK EXERCISED THE DEGREE OF DILIGENCE
EXPECTED OF AN ORDINARY PRUDENT PERSON IN CASE AT BAR. The evidence also shows that the
respondent bank exercised that degree of diligence expected of an ordinary prudent person under the
circumstances obtaining. Prior to the first dishonor of the subject foreign exchange demand draft, the
respondent bank advised Westpac-New York to honor the reimbursement claim of Westpac-Sydney and
to debit the dollar account of respondent bank with the former. As soon as the demand draft was
dishonored, the respondent bank, thinking that the problem was with the reimbursement and without
any idea that it was due to miscommunications, re-confirmed the authority of Westpac-New York to
debit its dollar account for the purpose of reimbursing Westpac-Sydney. Respondent bank also sent two
(2) more cable messages to Westpac-New York inquiring why the demand draft was not honored.
HCaIDS
3. ID.; ID.; BANKS ACTING UNDER FIDUCIARY CAPACITY OF A FAMILY MUST EXERT MORE THAN
THE DILIGENCE OF A GOOD FATHER; HIGHER DEGREE OF DILIGENCE NOT REQUIRED IN COMMERCIAL
TRANSACTIONS; CASE AT BAR. In Philippine Bank of Commerce v. Court of Appeals upholding a long
standing doctrine, we ruled that the degree of diligence required of banks, is more than that of a good
father of a family where the fiduciary nature of their relationship with their depositors is concerned. In
other words banks are duty bound to treat the deposit accounts of their depositors with the highest
degree of care. But the said ruling applies only to cases where banks act under their fiduciary capacity,
that is, as depositary of the deposits of their depositors. But the same higher degree of diligence is not
expected by banks in commercial transactions that do not involve their fiduciary relationship with their
depositors. Considering the foregoing, the respondent bank was not required to exert more than the
diligence of a good father of a family in regard to the sale and issuance of the subject foreign exchange
demand draft. The case at bar does not involve the handling of petitioners' deposit, if any, with the
respondent bank. Instead, the relationship involved was that of a buyer and seller, that is, between the
respondent bank as the seller of the subject foreign exchange demand draft, and PRCI as the buyer of
the same, with the 20th Asian Racing Conference in Sydney.
4. ID.; ID.; RESPONDENT BANK ACTED IN GOOD FAITH IN CASE AT BAR. The evidence shows that
the respondent bank did everything within its power to prevent the dishonor of the subject foreign
exchange demand draft. The erroneous reading of its cable message to Westpac-Sydney by an employee
of the latter could not have been foreseen by the respondent bank. Being unaware that its employee
erroneously read the said cable message, Westpac-Sydney merely stated that the respondent bank has
no deposit account with it to cover for the amount of One Thousand Six Hundred Ten Australian Dollar;
(AU$1610.00) indicated in the foreign demand draft. Thus, the respondent bank had the impression that
Westpac-New York had not made available the amount for reimbursement to Westpac-Sydney despite
the fact that respondent bank has a sufficient deposit dollar with it and to transfer or credit the
corresponding amount to Westpac-Sydney to cover the amount of the said demand draft. In view of all
the foregoing, and considering that the dishonor of the subject foreign exchange demand draft is not
attributable to any fault of the respondent bank, whereas the petitioners appeared to be under estoppel
as earlier mentioned, it is no longer necessary to discuss the alleged application of Section 61 of the
Negotiable Instruments Law to the case at bar. In any event, it was established that the respondent bank
acted in good faith and that it did not cause the embarrassment of the petitioners in Sydney, Australia.
Hence, the Court of Appeals did not commit any reversible error in its challenged decision. cDHAaT
D E C I S I O N
DE LEON, JR., J p:
Before us is a petition for review of the Decision 1 dated July 22, 1994 and Resolution 2 dated December
29, 1994 of the Court of Appeals 3 affirming with modification the Decision 4 dated November 12, 1992
of the Regional Trial Court of Makati, Metro Manila, Branch 64, which dismissed the complaint for
damages of petitioners spouses Gregorio H. Reyes and Consuelo Puyat-Reyes against respondent Far
East Bank and Trust Company.
The undisputed facts of the case are as follows:
In view of the 20th Asian Racing Conference then scheduled to be held in September, 1988 in Sydney,
Australia, the Philippine Racing Club, Inc. (PRCI, for brevity) sent four (4) delegates to the said
conference. Petitioner Gregorio H. Reyes, as vice-president for finance, racing manager, treasurer, and
director of PRCI, sent Godofredo Reyes, the club's chief cashier, to the respondent bank to apply for a
foreign exchange demand draft in Australian dollars. cTADCH
Godofredo went to respondent bank's Buendia Branch in Makati City to apply for a demand draft in the
amount One Thousand Six Hundred Ten Australian Dollars (AU$1,610.00) payable to the order of the
20th Asian Racing Conference Secretariat of Sydney, Australia. He was attended to by respondent bank's
assistant cashier, Mr. Yasis, who at first denied the application for the reason that respondent bank did
not have an Australian dollar account in any bank in Sydney. Godofredo asked if there could be a way for
respondent bank to accommodate PRCI's urgent need to remit Australian dollars to Sydney. Yasis of
respondent bank then informed Godofredo of a roundabout way of effecting the requested remittance
to Sydney thus: the respondent bank would draw a demand draft against Westpac Bank in Sydney,
Australia (Westpac-Sydney for brevity) and have the latter reimburse itself from the U.S. dollar account
of the respondent in Westpac Bank in New York, U.S.A. (Westpac-New York for brevity). This
arrangement has been customarily resorted to since the 1960's and the procedure has proven to be
problem-free. PRCI and the petitioner Gregorio H. Reyes, acting through Godofredo, agreed to this
arrangement or approach in order to effect the urgent transfer of Australian dollars payable to the
Secretariat of the 20th Asian Racing Conference.
On July 28, 1988, the respondent bank approved the said application of PRCI and issued Foreign
Exchange Demand Draft (FXDD) No. 209968 in the sum applied for, that is, One Thousand Six Hundred
Ten Australian Dollars (AU$1,610.00), payable to the order of the 20th Asian Racing Conference
Secretariat of Sydney, Australia, and addressed to Westpac-Sydney as the drawee bank.
On August 10, 1988, upon due presentment of the foreign exchange demand draft, denominated as
FXDD No. 209968, the same was dishonored, with the notice of dishonor stating the following: ". . . No
account held with Westpac." Meanwhile, on August 16, 1988, Westpac-New York sent a cable to
respondent bank informing the latter that its dollar account in the sum of One Thousand Six Hundred
Ten Australian Dollars (AU$1,610.00) was debited. On August 19, 1988, in response to PRCI's complaint
about the dishonor of the said foreign exchange demand draft, respondent bank informed Westpac-
Sydney of the issuance of the said demand draft FXDD No. 209968, drawn against the Westpac-Sydney
and informing the latter to be reimbursed from the respondent bank's dollar account in Westpac-New
York. The respondent bank on the same day likewise informed Westpac-New York requesting the latter
to honor the reimbursement claim of Westpac-Sydney. On September 14, 1988, upon its second
presentment for payment, FXDD No. 209968 was again dishonored by Westpac-Sydney for the same
reason, that is, that the respondent bank has no deposit dollar account with the drawee Westpac-
Sydney.
On September 17, 1988 and September 18, 1988, respectively, petitioners spouses Gregorio H. Reyes
and Consuelo Puyat-Reyes left for Australia to attend the said racing conference. When petitioner
Gregorio H. Reyes arrived in Sydney in the morning of September 18, 1988, he went directly to the lobby
of Hotel Regent Sydney to register as a conference delegate. At the registration desk, in the presence of
other delegates from various member countries, he was told by a lady member of the conference
secretariat that he could not register because the foreign exchange demand draft for his registration fee
had been dishonored for the second time. A discussion ensued in the presence and within the hearing of
many delegates who were also registering. Feeling terribly embarrassed and humiliated, petitioner
Gregorio H. Reyes asked the lady member of the conference secretariat that he be shown the subject
foreign exchange demand draft that had been dishonored as well as the covering letter after which he
promised that he would pay the registration fees in cash. In the meantime he demanded that he be
given his name plate and conference kit. The lady member of the conference secretariat relented and
gave him his name plate and conference kit. It was only two (2) days later, or on September 20, 1988,
that he was given the dishonored demand draft and a covering letter. It was then that he actually paid in
cash the registration fees as he had earlier promised.
Meanwhile, on September 19, 1988, petitioner Consuelo Puyat-Reyes arrived in Sydney. She too was
embarrassed and humiliated at the registration desk of the conference secretariat when she was told in
the presence and within the hearing of other delegates that she could not be registered due to the
dishonor of the subject foreign exchange demand draft. She felt herself trembling and unable to look at
the people around her. Fortunately, she saw her husband coming toward her. He saved the situation for
her by telling the secretariat member that he had already arranged for the payment of the registration
fees in cash once he was shown the dishonored demand draft. Only then was petitioner Puyat-Reyes
given her name plate and conference kit.
At the time the incident took place, petitioner Consuelo Puyat-Reyes was a member of the House of
Representatives representing the lone Congressional District of Makati, Metro Manila. She has been an
officer of the Manila Banking Corporation and was cited by Archbishop Jaime Cardinal Sin as the top lady
banker of the year in connection with her conferment of the Pro-Ecclesia et Pontifice Award. She has
also been awarded a plaque of appreciation from the Philippine Tuberculosis Society for her
extraordinary service as the Society's campaign chairman for the ninth (9th) consecutive year.
On November 23, 1988, the petitioners filed in the Regional Trial Court of Makati, Metro Manila, a
complaint for damages, docketed as Civil Case No. 88-2468, against the respondent bank due to the
dishonor of the said foreign exchange demand draft issued by the respondent bank. The petitioners
claim that as a result of the dishonor of the said demand draft, they were exposed to unnecessary shock,
social humiliation, and deep mental anguish in a foreign country, and in the presence of an international
audience.
On November 12, 1992, the trial court rendered judgment in favor of the defendant (respondent bank)
and against the plaintiffs (herein petitioners), the dispositive portion of which states:
WHEREFORE, judgment is hereby rendered in favor of the defendant, dismissing plaintiffs' complaint,
and ordering plaintiffs to pay to defendant, on its counterclaim, the amount of P50,000.00, as
reasonable attorney's fees. Costs against the plaintiff.
SO ORDERED. 5
The petitioners appealed the decision of the trial court to the Court of Appeals. On July 22, 1994, the
appellate court affirmed the decision of the trial court but in effect deleted the award of attorney's fees
to the defendant (herein respondent bank) and the pronouncement as to the costs. The decretal portion
of the decision of the appellate court states:
WHEREFORE, the judgment appealed from, insofar as it dismisses plaintiffs' complaint, is hereby
AFFIRMED, but is hereby REVERSED and SET ASIDE in all other respect. No special pronouncement as to
costs.
SO ORDERED. 6
According to the appellate court, there is no basis to hold the respondent bank liable for damages for
the reason that it exerted every effort for the subject foreign exchange demand draft to be honored.
The appellate court found and declared that:
xxx xxx xxx
Thus, the Bank had every reason to believe that the transaction finally went through smoothly,
considering that its New York account had been debited and that there was no miscommunication
between it and Westpac-New York. SWIFT is a world wide association used by almost all banks and is
known to be the most reliable mode of communication in the international banking business. Besides,
the above procedure, with the Bank as drawer and Westpac-Sydney as drawee, and with Westpac-New
York as the reimbursement Bank had been in place since 1960s and there was no reason for the Bank to
suspect that this particular demand draft would not be honored by Westpac-Sydney.
From the evidence, it appears that the root cause of the miscommunications of the Bank's SWIFT
message is the erroneous decoding on the part of Westpac-Sydney of the Bank's SWIFT message as an
MT799 format. However, a closer look at the Bank's Exhs. "6" and "7" would show that despite what
appears to be an asterisk written over the figure before "99", the figure can still be distinctly seen as a
number "1" and not number "7", to the effect that Westpac-Sydney was responsible for the dishonor
and not the Bank.
Moreover, it is not said asterisk that caused the misleading on the part of the Westpac-Sydney of the
numbers "1" to "7", since Exhs. "6" and "7" are just documentary copies of the cable message sent to
Westpac-Sydney. Hence, if there was mistake committed by Westpac-Sydney in decoding the cable
message which caused the Bank's message to be sent to the wrong department, the mistake was
Westpac's, not the Bank's. The Bank had done what an ordinary prudent person is required to do in the
particular situation, although appellants expect the Bank to have done more. The Bank having done
everything necessary or usual in the ordinary course of banking transaction, it cannot be held liable for
any embarrassment and corresponding damage that appellants may have incurred. 7
xxx xxx xxx
Hence, this petition, anchored on the following assignment of errors:
I
THE HONORABLE COURT OF APPEALS ERRED IN FINDING PRIVATE RESPONDENT NOT NEGLIGENT BY
ERRONEOUSLY APPLYING THE STANDARD OF DILIGENCE OF AN "ORDINARY PRUDENT PERSON" WHEN
IN TRUTH A HIGHER DEGREE OF DILIGENCE IS IMPOSED BY LAW UPON THE BANKS.
II
THE HONORABLE COURT OF APPEALS ERRED IN ABSOLVING PRIVATE RESPONDENT FROM LIABILITY BY
OVERLOOKING THE FACT THAT THE DISHONOR OF THE DEMAND DRAFT WAS A BREACH OF PRIVATE
RESPONDENT'S WARRANTY AS THE DRAWER THEREOF.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT AS SHOWN OVERWHELMINGLY BY
THE EVIDENCE, THE DISHONOR OF THE DEMAND DRAFT WAS DUE TO PRIVATE RESPONDENT'S
NEGLIGENCE AND NOT THE DRAWEE BANK. 8
The petitioners contend that due to the fiduciary nature of the relationship between the respondent
bank and its clients, the respondent bank should have exercised a higher degree of diligence than that
expected of an ordinary prudent person in the handling of its affairs as in the case at bar. The appellate
court, according to petitioners, erred in applying the standard of diligence of an ordinary prudent person
only. Petitioners also claim that the respondent bank violated Section 61 of the Negotiable Instruments
Law 9 which provides the warranty of a drawer that ". . . on due presentment, the instrument will be
accepted or paid, or both, according to its tenor . . . ." Thus, the petitioners argue that respondent bank
should be held liable for damages for violation of this warranty. The petitioners pray this Court to re-
examine the facts to cite certain instances of negligence.
It is our view and we hold that there is no reversible error in the decision of the appellate court.
Section 1 of Rule 45 of the Revised Rules of Court provides that "(T)he petition (for review) shall raise
only questions of law which must be distinctly set forth." Thus, we have ruled that factual findings of the
Court of Appeals are conclusive on the parties and not reviewable by this Court and they carry even
more weight when the Court of Appeals affirms the factual findings of the trial court. 10
The courts a quo found that respondent bank did not misrepresent that it was maintaining a deposit
account with Westpac-Sydney. Respondent bank's assistant cashier explained to Godofredo Reyes,
representating PRCI and petitioner Gregorio H. Reyes, how the transfer of Australian dollars would be
effected through Westpac-New York where the respondent bank has a dollar account to Westpac-
Sydney where the subject foreign exchange demand draft (FXDD No. 209968) could be encashed by the
payee, the 20th Asian Racing Conference Secretariat. PRCI and its Vice-President for finance, petitioner
Gregorio H. Reyes, through their said representative, agreed to that arrangement or procedure. In other
words, the petitioners are estopped from denying the said arrangement or procedure. Similar
arrangements have been a long standing practice in banking to facilitate international commercial
transactions. In fact, the SWIFT cable message sent by respondent bank to the drawee bank, Westpac-
Sydney, stated that it may claim reimbursement from its New York branch, Westpac-New York, where
respondent bank has a deposit dollar account.
The facts as found by the courts a quo show that respondent bank did not cause an erroneous
transmittal of its SWIFT cable message to Westpac-Sydney. It was the erroneous decoding of the cable
message on the part of Westpac-Sydney that caused the dishonor of the subject foreign exchange
demand draft. An employee of Westpac-Sydney in Sydney, Australia mistakenly read the printed figures
in the SWIFT cable message of respondent bank as "MT799" instead of as "MT199". As a result,
Westpac-Sydney construed the said cable message as a format for a letter of credit, and not for a
demand draft. The appellate court correctly found that "the figure before '99' can still be distinctly seen
as a number '1' and not number '7'." Indeed, the line of a "7" is in a slanting position while the line of a
"1" is in a horizontal position. Thus, the number "1" in "MT199" cannot be construed as "7". 11
The evidence also shows that the respondent bank exercised that degree of diligence expected of an
ordinary prudent person under the circumstances obtaining. Prior to the first dishonor of the subject
foreign exchange demand draft, the respondent bank advised Westpac-New York to honor the
reimbursement claim of Westpac-Sydney and to debit the dollar account 12 of respondent bank with
the former. As soon as the demand draft was dishonored, the respondent bank, thinking that the
problem was with the reimbursement and without any idea that it was due to miscommunication, re-
confirmed the authority of Westpac-New York to debit its dollar account for the purpose of reimbursing
Westpac-Sydney. 13 Respondent bank also sent two (2) more cable messages to Westpac-New York
inquiring why the demand draft was not honored. 14
With these established facts, we now determine the degree of diligence that banks are required to exert
in their commercial dealings. In Philippine Bank of Commerce v. Court of Appeals 15 upholding a long
standing doctrine, we ruled that the degree of diligence required of banks, is more than that of a good
father of a family where the fiduciary nature of their relationship with their depositors is concerned. In
other words banks are duty bound to treat the deposit accounts of their depositors with the highest
degree of care. But the said ruling applies only to cases where banks act under their fiduciary capacity,
that is, as depositary of the deposits of their depositors. But the same higher degree of diligence is not
expected to be exerted by banks in commercial transactions that do not involve their fiduciary
relationship with their depositors. CHcTIA
Considering the foregoing, the respondent bank was not required to exert more than the diligence of a
good father of a family in regard to the sale and issuance of the subject foreign exchange demand draft.
The case at bar does not involve the handling of petitioners' deposit, if any, with the respondent bank.
Instead, the relationship involved was that of a buyer and seller, that is, between the respondent bank
as the seller of the subject foreign exchange demand draft, and PRCI as the buyer of the same, with the
20th Asian Racing Conference Secretariat in Sydney, Australia as the payee thereof. As earlier
mentioned, the said foreign exchange demand draft was intended for the payment of the registration
fees of the petitioners as delegates of the PRCI to the 20th Asian Racing Conference in Sydney.
The evidence shows that the respondent bank did everything within its power to prevent the dishonor
of the subject foreign exchange demand draft. The erroneous reading of its cable message to Westpac-
Sydney by an employee of the latter could not have been foreseen by the respondent bank. Being
unaware that its employee erroneously read the said cable message, Westpac-Sydney merely stated
that the respondent bank has no deposit account with it to cover for the amount of One thousand Six
Hundred Ten Australian Dollar (AU$1610.00) indicated in the foreign exchange demand draft. Thus, the
respondent bank had the impression that Westpac-New York had not yet made available the amount for
reimbursement to Westpac-Sydney despite the fact that respondent bank has a sufficient deposit dollar
account with Westpac-New York. That was the reason why the respondent bank had to re-confirm and
repeatedly notify Westpac-New York to debit its (respondent bank's) deposit dollar account with it and
to transfer or credit the corresponding amount to Westpac-Sydney to cover the amount of the said
demand draft.
In view of all the foregoing, and considering that the dishonor of the subject foreign exchange demand
draft is not attributable to any fault of the respondent bank, whereas the petitioners appeared to be
under estoppel as earlier mentioned, it is no longer necessary to discuss the alleged application of
Section 61 of the Negotiable Instrument Law to the case at bar. In any event, it was established that the
respondent bank acted in good faith and that it did not cause the embarrassment of the petitioners in
Sydney, Australia. Hence, the Court of Appeals did not commit any reversible error in its challenged
decision.
WHEREFORE, the petition is hereby DENIED, and the assailed decision of the Court of Appeals is
AFFIRMED. Costs against the petitioners.
SO ORDERED.
Bellosillo, Mendoza, Quisumbing and Buena, JJ., concur.