BANKING | 05Dec | 1

FIRST DIVISION
[G.R. No. 88013. March 19, 1990.]
SIMEX INTERNATIONAL (MANILA), INCORPORATED, Petitioner, v.
THE HONORABLE COURT OF APPEALS and TRADERS ROYAL
BANK, Respondents.

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."cralaw virtua1aw library
3. ID.; ID.; INJURY TO PLAINTIFFS BUSINESS STANDING OR COMMERCIAL
CREDIT WARRANTS AWARD OF ACTUAL OR COMPENSATORY DAMAGES.
The fact is that the petitioners 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 plaintiffs 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."cralaw
virtua1aw
library
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 respondents
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.; BANKS 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

BANKING | 05Dec | 2

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.

Trading Corporation in the amount of P42,906.00:chanrob1es virtual 1aw

library

DECISION

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

CRUZ, J.:

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

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.chanrobles
law
library
The petitioner was a depositor of the respondent bank and maintained a
checking account in its branch at Romulo Avenue, Cubao, Quezon City. On
May 25, 1981, the petitioner deposited to its account in the said bank the
amount of P100,000.00, thus increasing its balance as of that date to
P190,380.74. 1 Subsequently, the petitioner issued several checks against
its deposit but was suprised to learn later that they had been dishonored for
insufficient
funds.
The dishonored checks are the following:chanrob1es virtual 1aw library
1. Check No. 215391 dated May 29, 1981, in favor of California
Manufacturing Company, Inc. for P16,480.00:chanrob1es virtual 1aw library
2. Check No. 215426 dated May 28, 1981, in favor of the Bureau of Internal
Revenue in the amount of P3,386.73:chanrob1es virtual 1aw library
3. Check No. 215451 dated June 4, 1981, in favor of Mr. Greg Pedreo in
the
amount
of
P7,080.00:chanrob1es
virtual
1aw
library
4. Check No. 215441 dated June 5, 1981, in favor of Malabon Longlife

5. Check No. 215474 dated June 10, 1981, in favor of Malabon Longlife
Trading Corporation in the amount of P12,953.00:chanrob1es virtual 1aw
library
6. Check No. 215477 dated June 9, 1981, in favor of Sea-Land Services,
Inc. in the amount of P27,024.45:chanrob1es virtual 1aw library

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
petitioners 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.chanrobles
virtual
lawlibrary
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%
attorneys
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 attorneys fees and costs. 5 This decision was affirmed in toto by
the
respondent
court.
6

BANKING | 05Dec | 3

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:chanrob1es virtual 1aw library
The essential ingredient of moral damages is proof of bad faith (De Aparicio
v. Parogurga, 150 SCRA 280). Indeed, there was the omission by the
defendant-appellee bank to credit appellants 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.chanrobles
lawlibrary
:
rednad
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 petitioners 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 plaintiffs 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 respondents 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." cralawnad
From every viewpoint except that of the petitioners, 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 respondents 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

BANKING | 05Dec | 4

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.cralawnad
Now

for

the

exemplary

damages.

The pertinent provisions of the Civil Code are the following:chanrob1es

virtual
1aw
library
Art. 2229. Exemplary or corrective damages are imposed, by way of
example or correction for the public good, in addition to the moral,
temperate,
liquidated
or
compensatory
damages.

The 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 twentythree 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.

Art. 2232. In contracts and quasi-contracts, the court may award After deliberating on this particular matter, the Court, in the exercise of its
exemplary damages if the defendant acted in a wanton, fraudulent, discretion, hereby imposes upon the respondent bank exemplary damages
reckless,
oppressive,
or
malevolent
manner. 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
The banking system is an indispensable institution in the modern world and serve as a warning and deterrent against the repetition of the ineptness
plays a vital role in the economic life of every civilized nation. Whether as and indifference that has been displayed here, lest the confidence of the
mere passive entities for the safekeeping and saving of money or as active public in the banking system be further impaired.chanrobles law library :
instruments of business and commerce, banks have become an ubiquitous red
presence among the people, who have come to regard them with respect
and even gratitude and, most of all, confidence. Thus, even the humble ACCORDINGLY, the appealed judgment is hereby MODIFIED and the private
wage-earner has not hesitated to entrust his lifes savings to the bank of his respondent is ordered to pay the petitioner, in lieu of nominal damages,
choice, knowing that they will be safe in its custody and will even earn moral damages in the amount of P20,000.00, and exemplary damages in
some interest for him. The ordinary person, with equal faith, usually the amount of P50,000.00 plus the original award of attorneys fees in the
maintains a modest checking account for security and convenience in the amount
of
P5,000.00,
and
costs.
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 SO ORDERED.
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.chanrobles.com :
virtual
law
library
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.
G.R. No. 127469

January 15, 2004

BANKING | 05Dec | 5

PHILIPPINE BANKING CORPORATION, petitioner,

vs.
COURT OF APPEALS and LEONILO MARCOS, respondents.
DECISION
CARPIO, J.:
The Case
Before us is a petition for review of the Decision1 of the Court of Appeals in
CA-G.R. CV No. 34382 dated 10 December 1996 modifying the Decision2 of
the Regional Trial Court, Fourth Judicial Region, Assisting Court, Bian,
Laguna in Civil Case No. B-3148 entitled "Leonilo Marcos v. Philippine
Banking Corporation."
The Antecedent Facts
On 30 August 1989, Leonilo Marcos ("Marcos") filed with the trial court a
Complaint for Sum of Money with Damages3 against petitioner Philippine
Banking Corporation ("BANK").4
Marcos alleged that sometime in 1982, the BANK through Florencio B.
Pagsaligan ("Pagsaligan"), one of the officials of the BANK and a close
friend of Marcos, persuaded him to deposit money with the BANK. Marcos
yielded to Pagsaligans persuasion and claimed he made a time deposit with
the BANK on two occasions. The first was on 11 March 1982 for
P664,897.67. The BANK issued Receipt No. 635734 for this time deposit.
On 12 March 1982, Marcos claimed he again made a time deposit with the
BANK for P764,897.67. The BANK did not issue an official receipt for this
time deposit but it acknowledged a deposit of this amount through a lettercertification Pagsaligan issued. The time deposits earned interest at 17%
per annum and had a maturity period of 90 days.
Marcos alleged that Pagsaligan kept the various time deposit certificates on
the assurance that the BANK would take care of the certificates, interests
and renewals. Marcos claimed that from the time of the deposit, he had not
received the principal amount or its interest.
Sometime in March 1983, Marcos wanted to withdraw from the BANK his
time deposits and the accumulated interests to buy materials for his
construction business. However, the BANK through Pagsaligan convinced
Marcos to keep his time deposits intact and instead to open several
domestic letters of credit. The BANK required Marcos to give a marginal

deposit of 30% of the total amount of the letters of credit. The time
deposits of Marcos would secure 70% of the letters of credit. Since Marcos
trusted the BANK and Pagsaligan, he signed blank printed forms of the
application for the domestic letters of credit, trust receipt agreements and
promissory notes.
Marcos executed three Trust Receipt Agreements totalling P851,250, broken
down as follows: (1) Trust Receipt No. CD 83.7 dated 8 March 1983 for
P300,000; (2) Trust Receipt No. CD 83.9 dated 15 March 1983 for
P300,000; and (3) Trust Receipt No. CD 83.10 dated 15 March 1983 for
P251,250. Marcos deposited the required 30% marginal deposit for the
trust receipt agreements. Marcos claimed that his obligation to the BANK
was therefore only P595,875 representing 70% of the letters of credit.
Marcos believed that he and the BANK became creditors and debtors of
each other. Marcos expected the BANK to offset automatically a portion of
his time deposits and the accumulated interest with the amount covered by
the three trust receipts totalling P851,250 less the 30% marginal deposit
that he had paid. Marcos argued that if only the BANK applied his time
deposits and the accumulated interest to his remaining obligation, which is
70% of the total amount of the letters of credit, he would have paid
completely his debt. Marcos further pointed out that since he did not apply
for a renewal of the trust receipt agreements, the BANK had no right to
renew the same.
Marcos accused the BANK of unjustly demanding payment for the total
amount of the trust receipt agreements without deducting the 30%
marginal deposit that he had already made. He decried the BANKs unlawful
charging of accumulated interest because he claimed there was no
agreement as to the payment of interest. The interest arose from numerous
alleged extensions and penalties. Marcos reiterated that there was no
agreement to this effect because his time deposits served as the collateral
for his remaining obligation.
Marcos also denied that he obtained another loan from the BANK for
P500,000 with interest at 25% per annum supposedly covered by
Promissory Note No. 20-979-83 dated 24 October 1983. Marcos bewailed
the BANKs belated claim that his time deposits were applied to this void
promissory note on 12 March 1985.
In sum, Marcos claimed that:
(1) his time deposit with the BANK "in the total sum of P1,428,795.345 has
earned accumulated interest since March 1982 up to the present in the total
amount of P1,727,305.45 at the rate of 17% per annum so his total money
with defendant (the BANK) is P3,156,100.79 less the amount of P595,875

BANKING | 05Dec | 6

representing the 70% balance of the marginal deposit and/or balance of the
trust agreements;" and

entrustee, who would undertake to deliver the proceeds of the sale or the
goods themselves to the entrustor within a specified time.

(2) his indebtedness was only P851,250 less the 30% paid as marginal
deposit or a balance of P595,875, which the BANK should have
automatically deducted from his time deposits and accumulated interest,
leaving the BANKs indebtedness to him at P2,560,025.79.

The BANK claimed that Marcos freely entered into the trust receipt
agreements. When Marcos failed to account for the goods delivered or for
the proceeds of the sale, the BANK filed a complaint for violation of
Presidential Decree No. 115 or the Trust Receipts Law. Instead of initiating
negotiations for the settlement of the account, Marcos filed this suit.

Marcos prayed the trial court to declare Promissory Note No. 20-979-83
void and to order the BANK to pay the amount of his time deposits with
interest. He also sought the award of moral and exemplary damages as well
as attorneys fees for P200,000 plus 25% of the amount due.
On 18 September 1989, summons and a copy of the complaint were served
on the BANK.6
On 9 October 1989, the BANK filed its Answer with Counterclaim. The BANK
denied the allegations in the complaint. The BANK believed that the suit
was Marcos desperate attempt to avoid liability under several trust receipt
agreements that were the subject of a criminal complaint.
The BANK alleged that as of 12 March 1982, the total amount of the various
time deposits of Marcos was only P764,897.67 and not P1,428,795.357 as
alleged in the complaint. The P764,897.67 included the P664,897.67 that
Marcos deposited on 11 March 1982.
The BANK pointed out that Marcos delivered to the BANK the time deposit
certificates by virtue of the Deed of Assignment dated 2 June 1989. Marcos
executed the Deed of Assignment to secure his various loan obligations.
The BANK claimed that these loans are covered by Promissory Note No. 20756-82 dated 2 June 1982 for P420,000 and Promissory Note No. 20-97983 dated 24 October 1983 for P500,000. The BANK stressed that these
obligations are separate and distinct from the trust receipt agreements.
When Marcos defaulted in the payment of Promissory Note No. 20-979-83,
the BANK debited his time deposits and applied the same to the obligation
that is now considered fully paid.8 The BANK insisted that the Deed of
Assignment authorized it to apply the time deposits in payment of
Promissory Note No. 20-979-83.
In March 1982, the wife of Marcos, Consolacion Marcos, sought the advice
of Pagsaligan. Consolacion informed Pagsaligan that she and her husband
needed to finance the purchase of construction materials for their business,
L.A. Marcos Construction Company. Pagsaligan suggested the opening of
the letters of credit and the execution of trust receipts, whereby the BANK
would agree to purchase the goods needed by the client through the letters
of credit. The BANK would then entrust the goods to the client, as

The BANK denied falsifying Promissory Note No. 20-979-83. The BANK
claimed that the promissory note is supported by documentary evidence
such as Marcos application for this loan and the microfilm of the cashiers
check issued for the loan. The BANK insisted that Marcos could not deny the
agreement for the payment of interest and penalties under the trust receipt
agreements. The BANK prayed for the dismissal of the complaint, payment
of damages, attorneys fees and cost of suit.
On 15 December 1989, the trial court on motion of Marcos counsel issued
an order declaring the BANK in default for filing its answer five days after
the 15-day period to file the answer had lapsed.9 The trial court also held
that the answer is a mere scrap of paper because a copy was not furnished
to Marcos. In the same order, the trial court allowed Marcos to present his
evidence ex parte on 18 December 1989. On that date, Marcos testified and
presented documentary evidence. The case was then submitted for
decision.
On 19 December 1989, Marcos received a copy of the BANKs Answer with
Compulsory Counterclaim.
On 29 December 1989, the BANK filed an opposition to Marcos motion to
declare the BANK in default. On 9 January 1990, the BANK filed a motion to
lift the order of default claiming that it had only then learned of the order of
default. The BANK explained that its delayed filing of the Answer with
Counterclaim and failure to serve a copy of the answer on Marcos was due
to excusable negligence. The BANK asked the trial court to set aside the
order of default because it had a valid and meritorious defense.
On 7 February 1990, the trial court issued an order setting aside the default
order and admitting the BANKs Answer with Compulsory Counterclaim. The
trial court ordered the BANK to present its evidence on 12 March 1990.
On 5 March 1990, the BANK filed a motion praying to cross-examine Marcos
who had testified during the ex-parte hearing of 18 December 1989. On 12
March 1990, the trial court denied the BANKs motion and directed the
BANK to present its evidence. Trial then ensued.

BANKING | 05Dec | 7

The BANK presented two witnesses, Rodolfo Sales, the Branch Manager of
the BANKs Cubao Branch since 1987, and Pagsaligan, the Branch Manager
of the same branch from 1982 to 1986.
On 24 April 1990, the counsel of Marcos cross-examined Pagsaligan. Due to
lack of material time, the trial court reset the continuation of the crossexamination and presentation of other evidence. The succeeding hearings
were postponed, specifically on 24, 27 and 28 of August 1990, because of
the BANKs failure to produce its witness, Pagsaligan. The BANK on these
scheduled hearings also failed to present other evidence.
On 7 September 1990, the BANK moved to postpone the hearing on the
ground that Pagsaligan could not attend the hearing because of illness. The
trial court denied the motion to postpone and on motion of Marcos counsel
ruled that the BANK had waived its right to present further evidence. The
trial court considered the case submitted for decision. The BANK moved for
reconsideration, which the trial court denied.
On 8 October 1990, the trial court rendered its decision in favor of Marcos.
Aggrieved, the BANK appealed to the Court of Appeals.
On 10 December 1996, the Court of Appeals modified the decision of the
trial court by reducing the amount of actual damages and deleting the
attorneys fees awarded to Marcos.
The Ruling of the Trial Court
The trial court ruled that the total amount of time deposits of Marcos was
P1,429,795.34 and not only P764,897.67 as claimed by the BANK. The trial
court found that Marcos made a time deposit on two occasions. The first
time deposit was made on 11 March 1982 for P664,897.67 as shown by
Receipt No. 635743. On 12 March 1982, Marcos again made a time deposit
for P764,897.67 as acknowledged by Pagsaligan in a letter of certification.
The two time deposits thus amounted to P1,429,795.34.
The trial court pointed out that no receipt was issued for the 12 March 1982
time deposit because the letter of certification was sufficient. The trial court
made a finding that the certification letter did not include the time deposit
made on 11 March 1982. The 12 March 1982 deposit was in cash while the
11 March 1982 deposit was in checks which still had to clear. The checks
were not included in the certification letter since the BANK could not credit
the amounts of the checks prior to clearing. The trial court declared that
even the Deed of Assignment acknowledged that Marcos made several time
deposits as the Deed stated that the assigment was charged against
"various" time deposits.

The trial court recognized the existence of the Deed of Assignment and the
two loans that Marcos supposedly obtained from the BANK on 28 May 1982
for P340,000 and on 2 June 1982 for P420,000. The two loans amounted to
P760,000. On 2 June 1982, the same day that he secured the second loan,
Marcos executed a Deed of Assignment assigning to the BANK P760,000 of
his time deposits. The trial court concluded that obviously the two loans
were immediately paid by virtue of the Deed of Assignment.
The trial court found it strange that Marcos borrowed money from the BANK
at a higher rate of interest instead of just withdrawing his time deposits.
The trial court saw no rhyme or reason why Marcos had to secure the loans
from the BANK. The trial court was convinced that Marcos did not know that
what he had signed were loan applications and a Deed of Assignment in
payment for his loans. Nonetheless, the trial court recognized "the said loan
of P760,000 and its corresponding payment by virtue of the Deed of
Assignment for the equal sum."10
If the BANKs claim is true that the time deposits of Marcos amounted only
to P764,897.67 and he had already assigned P760,000 of this amount, the
trial court pointed out that what would be left as of 3 June 1982 would only
be P4,867.67.11 Yet, after the time deposits had matured, the BANK
allowed Marcos to open letters of credit three times. The three letters of
credit were all secured by the time deposits of Marcos after he had paid the
30% marginal deposit. The trial court opined that if Marcos time deposit
was only P764,897.67, then the letters of credit totalling P595,875 (less
30% marginal deposit) was guaranteed by only P4,867.67,12 the remaining
time deposits after Marcos had executed the Deed of Assignment for
P760,000.
According to the trial court, a security of only P4,867.6713 for a loan worth
P595,875 (less 30% marginal deposit) is not only preposterous, it is also
comical. Worse, aside from allowing Marcos to have unsecured trust
receipts, the BANK still claimed to have granted Marcos another loan for
P500,000 on 25 October 1983 covered by Promissory Note No. 20-979-83.
The BANK is a commercial bank engaged in the business of lending money.
Allowing a loan of more than a million pesos without collateral is in the
words of the trial court, "an impossibility and a gross violation of Central
Bank Rules and Regulations, which no Bank Manager has such authority to
grant."14 Thus, the trial court held that the BANK could not have granted
Marcos the loan covered by Promissory Note No. 20-979-83 because it was
unsecured by any collateral.
The trial court required the BANK to produce the original copies of the loan
application and Promissory Note No. 20-979-83 so that it could determine
who applied for this loan. However, the BANK presented to the trial court
only the "machine copies of the duplicate" of these documents.

BANKING | 05Dec | 8

Based on the "machine copies of the duplicate" of the two documents, the
trial court noticed the following discrepancies: (1) Marcos signature on the
two documents are merely initials unlike in the other documents submitted
by the BANK; (2) it is highly unnatural for the BANK to only have duplicate
copies of the two documents in its custody; (3) the address of Marcos in the
documents is different from the place of residence as stated by Marcos in
the other documents annexed by the BANK in its Answer; (4) Pagsaligan
made it appear that a check for the loan proceeds of P470,588 less bank
charges was issued to Marcos but the checks payee was one ATTY.
LEONILO MARCOS and, as the trial court noted, Marcos is not a lawyer; and
(5) Pagsaligan was not sure what branch of the BANK issued the check for
the loan proceeds. The trial court was convinced that Marcos did not
execute the questionable documents covering the P500,000 loan and
Pagsaligan used these documents as a means to justify his inability to
explain and account for the time deposits of Marcos.
The trial court noted the BANKs "defective" documentation of its
transaction with Marcos. First, the BANK was not in possession of the
original copies of the documents like the loan applications. Second, the
BANK did not have a ledger of the accounts of Marcos or of his various
transactions with the BANK. Last, the BANK did not issue a certificate of
time deposit to Marcos. Again, the trial court attributed the BANKs lapses
to Pagsaligans scheme to defraud Marcos of his time deposits.

the time deposits of P643,240 as of March 1987. However, since the BANK
failed to return the time deposits of Marcos, which again matured in March
1990, the time deposits with interest, less the amount of trust receipts paid
in 1987, amounted to P971,292.49 as of March 1990.
In the alternative, the trial court ruled that even if Marcos had only one
time deposit of P764,897.67 as claimed by the BANK, the time deposit
would have still earned interest at the rate of 17% per annum. The time
deposit of P650,163 would have increased to P1,415,060 in 1987 after
earning interest. Deducting the amount of the three trust receipts, Marcos
time deposits still totalled P1,236,969.30 plus interest.
The dispositive portion of the decision of the trial court reads:
WHEREFORE, under the foregoing circumstances, judgment is hereby
rendered in favor of Plaintiff, directing Defendant Bank as follows:
1) to return to Plaintiff his time deposit in the sum of P971,292.49 with
interest thereon at the legal rate, until fully restituted;
2) to pay attorneys fees of P200,000.00; [and]
3) [to pay the] cost of these proceedings.

The trial court also took note of Pagsaligans demeanor on the witness
stand. Pagsaligan evaded the questions by giving unresponsive or
inconsistent answers compelling the trial court to admonish him. When the
trial court ordered Pagsaligan to produce the documents, he "conveniently
became sick"15 and thus failed to attend the hearings without presenting
proof of his physical condition.

IT IS SO ORDERED.16

The trial court disregarded the BANKs assertion that the time deposits were
converted into a savings account at 14% or 10% per annum upon maturity.
The BANK never informed Marcos that his time deposits had already
matured and these were converted into a savings account. As to the
interest due on the trust receipts, the trial court ruled that there is no basis
for such a charge because the documents do not stipulate any interest.

The appellate court ruled that the trial court committed a reversible error
when it denied the BANKs motion to cross-examine Marcos. The appellate
court ruled that the right to cross-examine is a fundamental right that the
BANK did not waive because the BANK vigorously asserted this right. The
BANKs failure to serve a notice of the motion to Marcos is not a valid
ground to deny the motion to cross-examine. The appellate court held that
the motion to cross-examine is one of those non-litigated motions that do
not require the movant to provide a notice of hearing to the other party.

In computing the amount due to Marcos, the trial court took into account
the marginal deposit that Marcos had already paid which is equivalent to
30% of the total amount of the three trust receipts. The three trust receipts
totalling P851,250 would then have a balance of P595,875. The balance
became due in March 1987 and on the same date, Marcos time deposits of
P669,932.30 had already earned interest from 1983 to 1987 totalling
P569,323.21 at 17% per annum. Thus, the trial court ruled that the time
deposits in 1987 totalled P1,239,115. From this amount, the trial court
deducted P595,875, the amount of the trust receipts, leaving a balance on

The Ruling of the Court of Appeals

The Court of Appeals addressed the procedural and substantive issues that
the BANK raised.

The Court of Appeals pointed out that when the trial court lifted the order of
default, it had the duty to afford the BANK its right to cross-examine
Marcos. This duty assumed greater importance because the only evidence
supporting the complaint is Marcos ex-parte testimony. The trial court
should have tested the veracity of Marcos testimony through the distilling
process of cross-examination. The Court of Appeals, however, believed that
the case should not be remanded to the trial court because Marcos

BANKING | 05Dec | 9

testimony on the time deposits is supported by evidence on record from

which the appellate court could make an intelligent judgment.

However, in its discussion of the assigned errors, the BANK claimed that
Marcos had yet to pay the loan.

On the second procedural issue, the Court of Appeals held that the trial
court did not err when it declared that the BANK had waived its right to
present its evidence and had submitted the case for decision. The appellate
court agreed with the grounds relied upon by the trial court in its Order
dated 7 September 1990.

The appellate court deleted the award of attorneys fees. It noted that the
trial court failed to justify the award of attorneys fees in the text of its
decision. The dispositive portion of the decision of the Court of Appeals
reads:

The Court of Appeals, however, differed with the finding of the trial court as
to the total amount of the time deposits. The appellate court ruled that the
total amount of the time deposits of Marcos is only P764,897.67 and not
P1,429,795.34 as found by the trial court. The certification letter issued by
Pagsaligan showed that Marcos made a time deposit on 12 March 1982 for
P764,897.67. The certification letter shows that the amount mentioned in
the letter was the aggregate or total amount of the time deposits of Marcos
as of that date. Therefore, the P764,897.67 already included the
P664,897.67 time deposit made by Marcos on 11 March 1982.

WHEREFORE, premises considered, the appealed decision is SET ASIDE. A

new judgment is hereby rendered ordering the appellant bank to return to
the appellee his time deposit in the sum of P764,897.67 with 17% interest
within 90 days from March 11, 1982 in accordance with the lettercertification and with legal interest thereafter until fully paid. Costs against
the appellant.
SO ORDERED.18 (Emphasis supplied)
The Issues

The Court of Appeals further explained:

The BANK anchors this petition on the following issues:

Besides, the Official Receipt (Exh. "B", p. 32, Records) dated March 11,
1982 covering the sum of P664,987.67 time deposit did not provide for a
maturity date implying clearly that the amount covered by said receipt
forms part of the total sum shown in the letter-certification which contained
a maturity date. Moreover, it taxes ones credulity to believe that appellee
would make a time deposit on March 12, 1982 in the sum of P764,897.67
which except for the additional sum of P100,000.00 is practically identical
(see underlined figures) to the sum of P664,897.67 deposited the day
before March 11, 1982.

1) WHETHER OR NOT THE PETITIONER [sic] ABLE TO PROVE THE PRIVATE

RESPONDENTS
OUTSTANDING
OBLIGATIONS
SECURED
BY
THE
ASSIGNMENT OF TIME DEPOSITS?

Additionally, We agree with the contention of the appellant that the lower
court wrongly appreciated the testimony of Mr. Pagsaligan. Our finding is
strengthened when we consider the alleged application for loan by the
appellee with the appellant in the sum of P500,000.00 dated October 24,
1983. (Exh. "J", p. 40, Records), wherein it was stated that the loan is for
additional working capital versus the various time deposit amounting to
P760,000.00.17 (Emphasis supplied)

2) WHETHER OR NOT PETITIONER [sic] DEPRIVED OF DUE PROCESS WHEN

THE LOWER COURT HAS [sic] DECLARED PETITIONER TO HAVE WAIVED
PRESENTATION OF FURTHER EVIDENCE AND CONSIDERED THE CASE
SUBMITTED FOR RESOLUTION?19

The Court of Appeals sustained the factual findings of the trial court in
ruling that Promissory Note No. 20-979-83 is void. There is no evidence of
a bank ledger or computation of interest of the loan. The appellate court
blamed the BANK for failing to comply with the orders of the trial court to
produce the documents on the loan. The BANK also made inconsistent
statements. In its Answer to the Complaint, the BANK alleged that the loan
was fully paid when it debited the time deposits of Marcos with the loan.

1.1) COROLLARILY, WHETHER OR NOT THE PROVISIONS OF SECTION 8

RULE 10 OF [sic] THEN REVISED RULES OF COURT BE APPLIED [sic] SO AS
TO CREATE A JUDICIAL ADMISSION ON THE GENUINENESS AND DUE
EXECUTION OF THE ACTIONABLE DOCUMENTS APPENDED TO THE
PETITIONERS ANSWER?

The Ruling of the Court

The petition is without merit.
Procedural Issues
There was no violation of the BANKs right to procedural due process when
the trial court denied the BANKs motion to cross-examine Marcos. Prior to
the denial of the motion, the trial court had properly declared the BANK in
default. Since the BANK was in default, Marcos was able to present his
evidence ex-parte including his own testimony. When the trial court lifted

BANKING | 05Dec | 10

the order of default, the BANK was restored to its standing and rights in the
action. However, as a rule, the proceedings already taken should not be
disturbed.20 Nevertheless, it is within the trial courts discretion to reopen
the evidence submitted by the plaintiff and allow the defendant to challenge
the same, by cross-examining the plaintiffs witnesses or introducing
countervailing evidence.21 The 1964 Rules of Court, the rules then in effect
at the time of the hearing of this case, recognized the trial courts exercise
of this discretion. The 1997 Rules of Court retained this discretion.22
Section 3, Rule 18 of the 1964 Rules of Court reads:
Sec. 3. Relief from order of default. A party declared in default may any
time after discovery thereof and before judgment file a motion under oath
to set aside the order of default upon proper showing that his failure to
answer was due to fraud, accident, mistake or excusable neglect and that
he has a meritorious defense. In such case the order of default may be set
aside on such terms and conditions as the judge may impose in the interest
of justice. (Emphasis supplied)
The records show that the BANK did not ask the trial court to restore its
right to cross-examine Marcos when it sought the lifting of the default order
on 9 January 1990. Thus, the order dated 7 February 1990 setting aside
the order of default did not confer on the BANK the right to cross-examine
Marcos. It was only on 2 March 1990 that the BANK filed the motion to
cross-examine Marcos. During the 12 March 1990 hearing, the trial court
denied the BANKs oral manifestation to grant its motion to cross-examine
Marcos because there was no proof of service on Marcos. The BANKs
counsel pleaded for reconsideration but the trial court denied the plea and
ordered the BANK to present its evidence. Instead of presenting its
evidence, the BANK moved for the resetting of the hearing and when the
trial court denied the same, the BANK informed the trial court that it was
elevating the denial to the "upper court."23
To repeat, the trial court had previously declared the BANK in default. The
trial court therefore had the right to decide whether or not to disturb the
testimony of Marcos that had already been terminated even before the trial
court lifted the order of default.
We do not agree with the appellate courts ruling that a motion to crossexamine is a non-litigated motion and that the trial court gravely abused its
discretion when it denied the motion to cross-examine. A motion to crossexamine is adversarial. The adverse party in this case had the right to resist
the motion to cross-examine because the movant had previously forfeited
its right to cross-examine the witness. The purpose of a notice of a motion
is to avoid surprises on the opposite party and to give him time to study
and meet the arguments.24 In a motion to cross-examine, the adverse
party has the right not only to prepare a meaningful opposition to the
motion but also to be informed that his witness is being recalled for cross-

examination. The proof of service was therefore indispensable and the trial
court was correct in denying the oral manifestation to grant the motion for
cross-examination.
We find no justifiable reason to relax the application of the rule on notice of
motions25 to this case. The BANK could have easily re-filed the motion to
cross-examine with the requisite notice to Marcos. It did not do so. The
BANK did not make good its threat to elevate the denial to a higher court.
The BANK waited until the trial court rendered a judgment on the merits
before questioning the interlocutory order of denial.
While the right to cross-examine is a vital element of procedural due
process, the right does not necessarily require an actual cross-examination,
but merely an opportunity to exercise this right if desired by the party
entitled to it.26 Clearly, the BANKs failure to cross-examine is imputable to
the BANK when it lost this right27 as it was in default and failed thereafter
to exhaust the remedies to secure the exercise of this right at the earliest
opportunity.
The two other procedural lapses that the BANK attributes to the appellate
and trial courts deserve scant consideration.
The BANK raises for the very first time the issue of judicial admission on the
part of Marcos. The BANK even has the audacity to fault the Court of
Appeals for not ruling on this issue when it never raised this matter before
the appellate court or before the trial court. Obviously, this issue is only an
afterthought. An issue raised for the first time on appeal and not raised
timely in the proceedings in the lower court is barred by estoppel.28
The BANK cannot claim that Marcos had admitted the due execution of the
documents attached to its answer because the BANK filed its answer late
and even failed to serve it on Marcos. The BANKs answer, including the
actionable documents it pleaded and attached to its answer, was a mere
scrap of paper. There was nothing that Marcos could specifically deny under
oath. Marcos had already completed the presentation of his evidence when
the trial court lifted the order of default and admitted the BANKs answer.
The provision of the Rules of Court governing admission of actionable
documents was not enacted to reward a party in default. We will not allow a
party to gain an advantage from its disregard of the rules.
As to the issue of its right to present additional evidence, we agree with the
Court of Appeals that the trial court correctly ruled that the BANK had
waived this right. The BANK cannot now claim that it was deprived of its
right to conduct a re-direct examination of Pagsaligan. The BANK postponed
the hearings three times29 because of its inability to secure Pagsaligans
presence during the hearings. The BANK could have presented another

BANKING | 05Dec | 11

witness or its other evidence but it obstinately insisted on the resetting of

the hearing because of Pagsaligans absence allegedly due to illness.
The BANKs propensity for postponements had long delayed the case. Its
motion for postponement based on Pagsaligans illness was not even
supported by documentary evidence such as a medical certificate.
Documentary evidence of the illness is necessary before the trial court
could rule that there is a sufficient basis to grant the postponement.30
The BANKs Fiduciary Duty to its Depositor
The BANK is liable to Marcos for offsetting his time deposits with a fictitious
promissory note. The existence of Promissory Note No. 20-979-83 could
have been easily proven had the BANK presented the original copies of the
promissory note and its supporting evidence. In lieu of the original copies,
the BANK presented the "machine copies of the duplicate" of the
documents. These substitute documents have no evidentiary value. The
BANKs failure to explain the absence of the original documents and to
maintain a record of the offsetting of this loan with the time deposits bring
to fore the BANKs dismal failure to fulfill its fiduciary duty to Marcos.
Section 2 of Republic Act No. 8791 (General Banking Law of 2000)
expressly imposes this fiduciary duty on banks when it declares that the
State recognizes the "fiduciary nature of banking that requires high
standards of integrity and performance." This statutory declaration merely
echoes the earlier pronouncement of the Supreme Court in Simex
International (Manila) Inc. v. Court of Appeals31 requiring banks to "treat
the accounts of its depositors with meticulous care, always having in mind
the fiduciary nature of their relationship."32 The Court reiterated this
fiduciary duty of banks in subsequent cases.33
Although RA No. 8791 took effect only in the year 2000,34 at the time that
the BANK transacted with Marcos, jurisprudence had already imposed on
banks the same high standard of diligence required under RA No. 8791.35
This fiduciary relationship means that the banks obligation to observe "high
standards of integrity and performance" is deemed written into every
deposit agreement between a bank and its depositor.
The fiduciary nature of banking requires banks to assume a degree of
diligence higher than that of a good father of a family. Thus, the BANKs
fiduciary duty imposes upon it a higher level of accountability than that
expected of Marcos, a businessman, who negligently signed blank forms
and entrusted his certificates of time deposits to Pagsaligan without
retaining copies of the certificates.
The business of banking is imbued with public interest. The stability of
banks largely depends on the confidence of the people in the honesty and

efficiency of banks. In Simex International (Manila) Inc. v. Court of

Appeals36 we pointed out the depositors reasonable expectations from a
bank and the banks corresponding duty to its depositor, as follows:
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.
As the BANKs depositor, Marcos had the right to expect that the BANK was
accurately recording his transactions with it. Upon the maturity of his time
deposits, Marcos also had the right to withdraw the amount due him after
the BANK had correctly debited his outstanding obligations from his time
deposits.
By the very nature of its business, the BANK should have had in its
possession the original copies of the disputed promissory note and the
records and ledgers evidencing the offsetting of the loan with the time
deposits of Marcos. The BANK inexplicably failed to produce the original
copies of these documents. Clearly, the BANK failed to treat the account of
Marcos with meticulous care.
The BANK claims that it is a reputable banking institution and that it has no
reason to forge Promissory Note No. 20-979-83. The trial court and
appellate court did not rule that it was the bank that forged the promissory
note. It was Pagsaligan, the BANKs branch manager and a close friend of
Marcos, whom the trial court categorically blamed for the fictitious loan
agreements. The trial court held that Pagsaligan made up the loan
agreement to cover up his inability to account for the time deposits of
Marcos.
Whether it was the BANKs negligence and inefficiency or Pagsaligans
misdeed that deprived Marcos of the amount due him will not excuse the
BANK from its obligation to return to Marcos the correct amount of his time
deposits with interest. The duty to observe "high standards of integrity and
performance" imposes on the BANK that obligation. The BANK cannot also
unjustly enrich itself by keeping Marcos money.
Assuming Pagsaligan was behind the spurious promissory note, the BANK
would still be accountable to Marcos. We have held that a bank is liable for
the wrongful acts of its officers done in the interest of the bank or in their
dealings as bank representatives but not for acts outside the scope of their
authority.37 Thus, we held:

BANKING | 05Dec | 12

A bank holding out its officers and agents as worthy of confidence will not
be permitted to profit by the frauds they may thus be enabled to perpetrate
in the apparent scope 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 (10 Am Jur 2d, p. 114). Accordingly, a banking corporation
is liable to innocent third persons where the representation is made in the
course of its business by an agent acting within the general scope of his
authority even though, in the particular case, the agent is secretly abusing
his authority and attempting to perpetrate a fraud upon his principal or
some other person, for his own ultimate benefit.38
The Existence of Promissory Note No. 20-979-83 was not Proven
The BANK failed to produce the best evidence the original copies of the
loan application and promissory note. The Best Evidence Rule provides that
the court shall not receive any evidence that is merely substitutionary in its
nature, such as photocopies, as long as the original evidence can be had.39
Absent a clear showing that the original writing has been lost, destroyed or
cannot be produced in court, the photocopy must be disregarded, being
unworthy of any probative value and being an inadmissible piece of
evidence.40
What the BANK presented were merely the "machine copies of the
duplicate" of the loan application and promissory note. No explanation was
ever offered by the BANK for its inability to produce the original copies of
the documentary evidence. The BANK also did not comply with the orders
of the trial court to submit the originals.
The purpose of the rule requiring the production of the best evidence is the
prevention of fraud.41 If a party is in possession of evidence and withholds
it, and seeks to substitute inferior evidence in its place, the presumption
naturally arises that the better evidence is withheld for fraudulent purposes,
which its production would expose and defeat.42
The absence of the original of the documentary evidence casts suspicion on
the existence of Promissory Note No. 20-979-83 considering the BANKs
fiduciary duty to keep efficiently a record of its transactions with its
depositors. Moreover, the circumstances enumerated by the trial court
bolster the conclusion that Promissory Note No. 20-979-83 is bogus. The
BANK has only itself to blame for the dearth of competent proof to establish
the existence of Promissory Note No. 20-979-83.
Total Amount Due to Marcos
The BANK and Marcos do not now dispute the ruling of the Court of Appeals
that the total amount of time deposits that Marcos placed with the BANK is
only P764,897.67 and not P1,429,795.34 as found by the trial court. The

BANK has always argued that Marcos time deposits only totalled
P764,897.67.43 What the BANK insists on in this petition is the trial courts
violation of its right to procedural due process and the absence of any
obligation to pay or return anything to Marcos. Marcos, on the other hand,
merely prays for the affirmation of either the trial court or appellate court
decision.44 We uphold the finding of the Court of Appeals as to the amount
of the time deposits as such finding is in accord with the evidence on
record.
Marcos claimed that the certificates of time deposit were with Pagsaligan for
safekeeping. Marcos was only able to present the receipt dated 11 March
1982 and the letter-certification dated 12 March 1982 to prove the total
amount of his time deposits with the BANK. The letter-certification issued
by Pagsaligan reads:
March 12, 1982
Dear Mr. Marcos:
This is to certify that we are taking care in your behalf various Time Deposit
Certificates with an aggregate value of PESOS: SEVEN HUNDRED SIXTY
FOUR THOUSAND EIGHT HUNDRED NINETY SEVEN AND 67/100
(P764,897.67) ONLY, issued today for 90 days at 17% p.a. with the interest
payable at maturity on June 10, 1982.
Thank you.
Sgd. FLORENCIO B. PAGSALIGAN
Branch Manager45
The foregoing certification is clear. The total amount of time deposits of
Marcos as of 12 March 1982 is P764,897.67, inclusive of the sum of
P664,987.67 that Marcos placed on time deposit on 11 March 1982. This is
plainly seen from the use of the word "aggregate."
We are not swayed by Marcos testimony that the certification is actually for
the first time deposit that he placed on 11 March 1982. The lettercertification speaks of "various Time Deposits Certificates with an
aggregate value of P764,897.67." If the amount stated in the lettercertification is for a single time deposit only, and did not include the 11
March 1982 time deposit, then Marcos should have demanded a new letter
of certification from Pagsaligan. Marcos is a businessman. While he already
made an error in judgment in entrusting to Pagsaligan the certificates of
time deposits, Marcos should have known the importance of making the
letter-certification reflect the true nature of the transaction. Marcos is
bound by the letter-certification since he was the one who prodded
Pagsaligan to issue it.

BANKING | 05Dec | 13

We modify the amount that the Court of Appeals ordered the BANK to
return to Marcos. The appellate court did not offset Marcos outstanding
debt with the BANK covered by the three trust receipt agreements even
though Marcos admits his obligation under the three trust receipt
agreements. The total amount of the trust receipts is P851,250 less the
30% marginal deposit of P255,375 that Marcos had already paid the BANK.
This reduced Marcos total debt with the BANK to P595,875 under the trust
receipts.
The trial and appellate courts found that the parties did not agree on the
imposition of interest on the loan covered by the trust receipts and thus no
interest is due on this loan. However, the records show that the three trust
receipt agreements contained stipulations for the payment of interest but
the parties failed to fill up the blank spaces on the rate of interest. Put
differently, the BANK and Marcos expressly agreed in writing on the
payment of interest46 without, however, specifying the rate of interest. We,
therefore, impose the legal interest of 12% per annum, the legal interest
for the forbearance of money,47 on each of the three trust receipts.
Based on Marcos testimony48 and the BANKs letter of demand,49 the
trust receipt agreements became due in March 1987. The records do not
show exactly when in March 1987 the obligation became due. In
accordance with Article 2212 of the Civil Code, in such a case the court
shall fix the period of the duration of the obligation.50 The BANKs letter of
demand is dated 6 March 1989. We hold that the trust receipts became due
on 6 March 1987.
Marcos payment of the marginal deposit of P255,375 for the trust receipts
resulted in the proportionate reduction of the three trust receipts. The
reduced value of the trust receipts and their respective interest as of 6
March 1987 are as follows:
1. Trust Receipt No. CD 83.7 issued on 8 March 1983 originally for
P300,000 was reduced to P210,618.75 with interest of P101,027.76.51
2. Trust Receipt No. CD 83.9 issued on 15 March 1983 originally for
P300,000 was reduced to P210,618.75 with interest of P100,543.04.52
3. Trust Receipt No. CD 83.10 issued on 15 March 1983 originally for
P251,250 was reduced to P174,637.5 with interest of P83,366.68. 53

Upon maturity of the three trust receipts, the BANK should have
automatically deducted, by way of offsetting, Marcos outstanding debt to
the BANK from his time deposits and its accumulated interest. Marcos time
deposits of P764,897.67 had already earned interest54 of P616,318.92 as
of 6 March 1987.55 Thus, Marcos total funds with the BANK amounted to
P1,381,216.59 as of the maturity of the trust receipts. After deducting
P880,812.48, the amount Marcos owed the BANK, from Marcos funds with
the BANK of P1,381,216.59, Marcos remaining time deposits as of 6 March
1987 is only P500,404.11. The accumulated interest on this P500,404.11 as
of 30 August 1989, the date of filing of Marcos complaint with the trial
court, is P211,622.96.56 From 30 August 1989, the interest due on the
accumulated interest of P211,622.96 should earn legal interest at 12% per
annum pursuant to Article 221257 of the Civil Code.
The BANKs dismal failure to account for Marcos money justifies the award
of moral58 and exemplary damages.59 Certainly, the BANK, as employer, is
liable for the negligence or the misdeed of its branch manager which caused
Marcos mental anguish and serious anxiety.60 Moral damages of P100,000
is reasonable and is in accord with our rulings in similar cases involving
banks negligence with regard to the accounts of their depositors.61
We also award P20,000 to Marcos as exemplary damages. The law allows
the grant of exemplary damages by way of example for the public good.62
The public relies on the banks fiduciary duty to observe the highest degree
of diligence. The banking sector is expected to maintain at all times this
high level of meticulousness.63
WHEREFORE, the decision of the Court of Appeals is AFFIRMED with
MODIFICATION. Petitioner Philippine Banking Corporation is ordered to
return to private respondent Leonilo Marcos P500,404.11, the remaining
principal amount of his time deposits, with interest at 17% per annum from
30 August 1989 until full payment. Petitioner Philippine Banking Corporation
is also ordered to pay to private respondent Leonilo Marcos P211,622.96,
the accumulated interest as of 30 August 1989, plus 12% legal interest per
annum from 30 August 1989 until full payment. Petitioner Philippine
Banking Corporation is further ordered to pay P100,000 by way of moral
damages and P20,000 as exemplary damages to private respondent Leonilo
Marcos.
Costs against petitioner.
SO ORDERED.

When the trust receipts became due on 6 March 1987, Marcos owed the
BANK P880,812.48. This amount included P595,875, the principal value of
the three trust receipts after payment of the marginal deposit, and
P284,937.48, the interest then due on the three trust receipts.
G.R. No. 125585

June 8, 2005

BANKING | 05Dec | 14

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 CRUZBAUTISTA, and the REGISTER OF DEEDS of Meycauayan, Bulacan,
Respondents.
DECISION
Tinga, J.:
Before this Court is a Rule 45 petition assailing the D E C I S I O N1 dated
29 September 1994 of the Court of Appeals that reversed the D E C I S I O
N2 dated 30 April 1991 of the Regional Trial Court (RTC) of Bulacan, Branch
6, Malolos. The trial court declared Transfer Certificates of Title (TCTs) No.
T-9326-P(M) and No. T-9327-P(M) as void ab initio and ordered the
restoration of Original Certificate of Title (OCT) No. P-153(M) in the name of
Eduardo Manlapat (Eduardo), petitioners predecessor-in-interest.
The controversy involves Lot No. 2204, a parcel of land with an area of
1,058 square meters, located at Panghulo, Obando, Bulacan. The property
had been originally in the possession of Jose Alvarez, Eduardos
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 Eduardos name3 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 Sale9 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 owners duplicate certificate of OCT No. P153(M) with the bank.
On 31 August 1986, Ricardo died without learning of the prior issuance of
OCT No. P-153(M) in the name of Eduardo.12 His heirs, the Cruzes, were
not immediately aware of the consummated sale between Eduardo and
Ricardo.
Eduardo himself died on 4 April 1987. He was survived by his heirs,
Engracia Aniceto, his spouse; and children, Patricio, Bonifacio, Eduardo,
Corazon, Anselmo, Teresita and Gloria, all surnamed Manlapat.13 Neither
did the heirs of Eduardo (petitioners) inform the Cruzes of the prior sale in
favor of their predecessor-in-interest, Ricardo. Yet subsequently, the Cruzes
came to learn about the sale and the issuance of the OCT in the name of
Eduardo.
Upon learning of their right to the subject lot, the Cruzes immediately tried
to confront petitioners on the mortgage and obtain the surrender of the
OCT. The Cruzes, however, were thwarted in their bid to see the heirs. On
the advice of the Bureau of Lands, NCR Office, they brought the matter to
the barangay captain of Barangay Panghulo, Obando, Bulacan. During the
hearing, petitioners were informed that the Cruzes had a legal right to the
property covered by OCT and needed the OCT for the purpose of securing a
separate title to cover the interest of Ricardo. Petitioners, however, were
unwilling to surrender the OCT.14
Having failed to physically obtain the title from petitioners, in July 1989, the
Cruzes instead went to RBSP which had custody of the owners duplicate
certificate of the OCT, earlier surrendered as a consequence of the
mortgage. Transacting with RBSPs manager, Jose Salazar (Salazar), the
Cruzes sought to borrow the owners 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 owners
duplicate certificate outside the bank premises when the latter showed the
Kasulatan.15 The Cruzes returned the owners 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

BANKING | 05Dec | 15

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.

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,
After securing the approval of the subdivision plan, the Cruzes went back to Rural Bank of San Pascual, Jose Salazar and Jose Flores, in his capacity as
RBSP and again asked for the owners duplicate certificate from Salazar. Deputy Registrar, Meycauayan Branch of the Registry of Deeds of Bulacan;
The Cruzes informed him that the presentation of the owners duplicate
certificate was necessary, per advise of the Register of Deeds, for the (2) Civil Case No. 141-M-90 for damages filed by Jose Salazar against
cancellation of the OCT and the issuance in lieu thereof of two separate Consuelo Cruz, et. [sic] al.; and
titles in the names of Ricardo and Eduardo in accordance with the approved
subdivision plan.19 Before giving the owners duplicate certificate, Salazar (3) Civil Case No. 644-M-89, for declaration of nullity of title with damages
required the Cruzes to see Atty. Renato Santiago (Atty. Santiago), legal filed by Rural Bank of San Pascual, Inc. against the spouses Ricardo Cruz
counsel of RBSP, to secure from the latter a clearance to borrow the title. and Consuelo Cruz, et al.25
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 After trial of the consolidated cases, the RTC of Malolos rendered a decision
hold again of the owners duplicate certificate.
in favor of the heirs of Eduardo, the dispositive portion of which reads:
After the Cruzes presented the owners 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

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

1.Declaring Transfer Certificates of Title Nos. T-9326-P(M) and T-9327P(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. P153(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 attorneys fees; and
d)the costs of the suit.
3.Dismissing the counterclaims.
SO ORDERED."26

BANKING | 05Dec | 16

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

THE FOREGOING CONSIDERED, the appealed decision is hereby reversed

and set aside, with costs against the appellees.

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:

Private respondents (Cruzes) own

the portion titled in their names

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 banks counsel.32 Hence, the imposition of damages
cannot be justified, the Cruzes themselves being the owners of the
Concerning the claims for damages, the trial court found the same to be property. Certainly, Eduardo misled the bank into accepting the entire area
bereft of merit. It ruled that although the act of the Cruzes could be as a collateral since the 603-square meter portion did not anymore belong
deemed fraudulent, still it would not constitute intrinsic fraud. Salazar, to him. The appellate court, however, concluded that there was no
nonetheless, was clearly guilty of negligence in letting the Cruzes borrow conspiracy between the bank and Salazar.33
the owners duplicate certificate of the OCT. Neither the bank nor its
manager had business entrusting to strangers titles mortgaged to it by Hence, this petition for review on certiorari.
other persons for whatever reason. It was a clear violation of the mortgage
and banking laws, the trial court concluded.
Petitioners ascribe errors to the appellate court by asking the following
questions, to wit: (a) can a mortgagor be compelled to receive from the
The trial court also ruled that although Salazar was personally responsible mortgagee a smaller portion of the originally encumbered title partitioned
for allowing the title to be borrowed, the bank could not escape liability for during the subsistence of the mortgage, without the knowledge of, or
it was guilty of contributory negligence. The evidence showed that RBSPs authority derived from, the registered owner; (b) can the mortgagee
legal counsel was sought for advice regarding respondents request. This question the veracity of the registered title of the mortgagor, as noted in
could only mean that RBSP through its lawyer if not through its manager the owners duplicate certificate, and thus, deliver the certificate to such
had known in advance of the Cruzes intention and still it did nothing to third persons, invoking an adverse, prior, and unregistered claim against
prevent the eventuality. Salazar was not even summarily dismissed by the the registered title of the mortgagor; (c) can an adverse prior claim against
bank if he was indeed the sole person to blame. Hence, the banks claim for a registered title be noted, registered and entered without a competent
damages must necessarily fail.28
court order; and (d) can belief of ownership justify the taking of property
without due process of law?34
The trial court granted the prayer for the annulment of the TCTs as a
necessary consequence of its declaration that reconveyance was in order. The kernel of the controversy boils down to the issue of whether the
As to Flores, his work being ministerial as Deputy Register of the Bulacan cancellation of the OCT in the name of the petitioners predecessor-inRegistry of Deeds, the trial court absolved him of any liability with a stern interest and its splitting into two separate titles, one for the petitioners and
warning that he should deal with his future transactions more carefully and the other for the Cruzes, may be accorded legal recognition given the
in the strictest sense as a responsible government official.29
peculiar factual backdrop of the case. We rule in the affirmative.

BANKING | 05Dec | 17

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
Eduardos 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
owners duplicate certificate from the bank, later to be presented to the
Register of Deeds to secure the issuance of two new TCTs in place of the
OCT, is another matter.
Petitioners argue that the 1954 deed of sale was not annotated on the OCT
which was issued in 1976 in favor of Eduardo; thus, the Cruzes claim of
ownership based on the sale would not hold water. The Court is not
persuaded.
Registration is not a requirement for validity of the contract as between the
parties, for the effect of registration serves chiefly to bind third persons.36
The principal purpose of registration is merely to notify other persons not
parties to a contract that a transaction involving the property had been
entered 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;
(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.
Issuance of OCT No. P-153(M), improper

BANKING | 05Dec | 18

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 Eduardos 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 landnot to the
right of ownership thereofwhich 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 owners duplicate upon entry of new certificate.
No voluntary instrument shall be registered by the Register of Deeds,
unless the owners duplicate certificate is presented with such instrument,
except in cases expressly provided for in this Decree or upon order of the
court, for cause shown.
The production of the owners 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 owners
duplicate certificate earlier deposited by Banaag, Eduardos 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
owners 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 owners duplicate certificate. Despite the
apparent irregularity in allowing the Cruzes to get hold of the owners
duplicate certificate, the bank officers consented to the Cruzes plan to
register the deeds of sale and secure two new separate titles, without
notifying the heirs of Eduardo about it.
Further, the law on the matter, specifically P.D. No. 1529, has no explicit
requirement as to the manner of acquiring the owners 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 owners 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.

BANKING | 05Dec | 19

Quite interesting, however, is the contention of the heirs of Eduardo that

the surreptitious lending of the owners 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 banks 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 owners
duplicate certificate, and, thus, he cannot deliver the certificate to such
third persons invoking an adverse, prior, and unregistered claim against the
registered title of the mortgagor. The strength of this argument is diluted by
the peculiar factual milieu of the case.
A mortgagee can rely on what appears on the certificate of title presented
by the mortgagor and an innocent mortgagee is not expected to conduct an
exhaustive investigation on the history of the mortgagors 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
owners 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 banks 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 banks cooperative
stance facilitated the issuance of the TCTs. To make matters worse, the
bank did not even notify the heirs of Eduardo. The conduct of the bank is as
dangerous as it is unthinkably negligent. However, the aspect does not
impair the right of the Cruzes to be recognized as legitimate owners of their
portion of the property.
Undoubtedly, in the absence of the banks 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 owners duplicate are presented to him as there appears on theface
of the instruments no badge of irregularity or nullity.55 If there is someone
to blame for the shortcut resorted to by the Cruzes, it would be the bank
itself whose manager and legal officer helped the Cruzes to facilitate the
issuance of the TCTs.1avvphi1
The bank should not have allowed complete strangers to take possession of
the owners 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

BANKING | 05Dec | 20

indemnifying the plaintiff for any loss suffered by him.57 This award rests
on the mortgagors right to rely on the banks observance of the highest
diligence in the conduct of its business. The act of RBSP of entrusting to
respondents the owners 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
banks mandate to observe the highest degree of diligence in dealing with
its clients. Moreover, a mortgagor has also the right to be afforded due
process before deprivation or diminution of his property is effected as the
OCT was still in the name of Eduardo. Notice and hearing are indispensable
elements of this right which the bank miserably ignored.
Under the circumstances, the Court believes the award of P50,000.00 as
nominal damages is appropriate.
Five-Year Prohibition against alienation
or encumbrance under the Public Land Act
One vital point. Apparently glossed over by the courts below and the parties
is an aspect which is essential, spread as it is all over the record and
intertwined with the crux of the controversy, relating as it does to the
validity of the dispositions of the subject property and the mortgage
thereon. Eduardo was issued a title in 1976 on the basis of his free patent
application. Such application implies the recognition of the public dominion
character of the land and, hence, the five (5)-year prohibition imposed by
the Public Land Act against alienation or encumbrance of the land covered
by a free patent or homestead58 should have been considered.
The deed of sale covering the fifty (50)-square meter right of way executed
by Eduardo on 18 March 1981 is obviously covered by the proscription, the
free patent having been issued on 8 October 1976. However, petitioners
may recover the portion sold since the prohibition was imposed in favor of
the free patent holder. In Philippine National Bank v. De los Reyes,59 this
Court ruled squarely on the point, thus:
While the law bars recovery in a case where the object of the contract is
contrary to law and one or both parties acted in bad faith, we cannot here
apply the doctrine of in pari delicto which admits of an exception, namely,
that when the contract is merely prohibited by law, not illegal per se, and
the prohibition is designed for the protection of the party seeking to
recover, he is entitled to the relief prayed for whenever public policy is
enhanced thereby. Under the Public Land Act, the prohibition to alienate is
predicated on the fundamental policy of the State to preserve and keep in
the family of the homesteader that portion of public land which the State

has gratuitously given to him, and recovery is allowed even where the land
acquired under the Public Land Act was sold and not merely encumbered,
within the prohibited period.60
The sale of the 553 square meter portion is a different story. It was
executed in 1954, twenty-two (22) years before the issuance of the patent
in 1976. Apparently, Eduardo disposed of the portion even before he
thought of applying for a free patent. Where the sale or transfer took place
before the filing of the free patent application, whether by the vendor or the
vendee, the prohibition should not be applied. In such situation, neither the
prohibition nor the rationale therefor which is to keep in the family of the
patentee that portion of the public land which the government has
gratuitously given him, by shielding him from the temptation to dispose of
his landholding, could be relevant. Precisely, he had disposed of his rights
to the lot even before the government could give the title to him.
The mortgage executed in favor of RBSP is also beyond the pale of the
prohibition, as it was forged in December 1981 a few months past the
period of prohibition.
WHEREFORE, the Decision of the Court of Appeals is AFFIRMED, subject to
the modifications herein. Respondent Rural Bank of San Pascual is hereby
ORDERED to PAY petitioners Fifty Thousand Pesos (P50,000.00) by way of
nominal damages. Respondents Consuelo Cruz and Rosalina Cruz-Bautista
are hereby DIVESTED of title to, and respondent Register of Deeds of
Meycauayan, Bulacan is accordingly ORDERED to segregate, the portion of
fifty (50) square meters of the subject Lot No. 2204, as depicted in the
approved plan covering the lot, marked as Exhibit "A", and to issue a new
title covering the said portion in the name of the petitioners at the expense
of the petitioners. No costs.
SO ORDERED.

BANKING | 05Dec | 21

G.R. No. 171460

July 24, 2007

LILLIAN N. MERCADO, CYNTHIA M. FEKARIS, and JULIAN MERCADO,

JR., represented by their Attorney-In-Fact, ALFREDO M. PEREZ,
Petitioners,
vs.
ALLIED BANKING CORPORATION, Respondent.
DECISION
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 of the
Revised Rules of Court, filed by petitioners Lillian N. Mercado, Cynthia M.
Fekaris and Julian Mercado, Jr., represented by their Attorney-In-Fact,
Alfredo M. Perez, seeking to reverse and set aside the Decision1 of the
Court of Appeals dated 12 October 2005, and its Resolution2 dated 15
February 2006 in CA-G.R. CV No. 82636. The Court of Appeals, in its
assailed Decision and Resolution, reversed the Decision3 of the Regional
Trial Court (RTC) of Quezon City, Branch 220 dated 23 September 2003,
declaring the deeds of real estate mortgage constituted on TCT No. RT18206 (106338) null and void. The dispositive portion of the assailed Court
of Appeals Decision thus reads:
WHEREFORE, the appealed decision is REVERSED and SET ASIDE, and a
new judgment is hereby entered dismissing the [petitioners] complaint.4
Petitioners are heirs of Perla N. Mercado (Perla). Perla, during her lifetime,
owned several pieces of real property situated in different provinces of the
Philippines.
Respondent, on the other hand, is a banking institution duly authorized as
such under the Philippine laws.
On 28 May 1992, Perla executed a Special Power of Attorney (SPA) in favor
of her husband, Julian D. Mercado (Julian) over several pieces of real
property registered under her name, authorizing the latter to perform the
following acts:

b) Susana Heights, Muntinlupa covered by Transfer Certificates of Title Nos.

T-108954 600 Square Meters and RT-106338 805 Square Meters of the
Registry of Deeds of Pasig (now Makati);
c) Personal property 1983 Car with Vehicle Registration No. R-16381;
Model 1983; Make Toyota; Engine No. T- 2464
2. To sign for and in my behalf any act of strict dominion or ownership any
sale, disposition, mortgage, lease or any other transactions including quitclaims, waiver and relinquishment of rights in and over the parcels of land
situated in General Trias, Cavite, covered by Transfer Certificates of Title
Nos. T-112254 and T-112255 of the Registry of Deeds of Cavite, in
conjunction with his co-owner and in the person ATTY. AUGUSTO F. DEL
ROSARIO;
3. To exercise any or all acts of strict dominion or ownership over the
above-mentioned properties, rights and interest therein. (Emphasis
supplied.)
On the strength of the aforesaid SPA, Julian, on 12 December 1996,
obtained a loan from the respondent in the amount of P3,000,000.00,
secured by real estate mortgage constituted on TCT No. RT-18206 (106338)
which covers a parcel of land with an area of 805 square meters, registered
with the Registry of Deeds of Quezon City (subject property).5
Still using the subject property as security, Julian obtained an additional
loan from the respondent in the sum of P5,000,000.00, evidenced by a
Promissory Note6 he executed on 5 February 1997 as another real estate
mortgage (REM).
It appears, however, that there was no property identified in the SPA as TCT
No. RT 18206 (106338) and registered with the Registry of Deeds of
Quezon City. What was identified in the SPA instead was the property
covered by TCT No. RT-106338 registered with the Registry of Deeds of
Pasig.

1. To act in my behalf, to sell, alienate, mortgage, lease and deal otherwise

over the different parcels of land described hereinafter, to wit:

Subsequently, Julian defaulted on the payment of his loan obligations. Thus,

respondent initiated extra-judicial foreclosure proceedings over the subject
property which was subsequently sold at public auction wherein the
respondent was declared as the highest bidder as shown in the Sheriffs
Certificate of Sale dated 15 January 1998.7

a) Calapan, Oriental Mindoro Properties covered by Transfer Certificates of

Title Nos. T-53618 - 3,522 Square Meters, T-46810 3,953 Square Meters,
T-53140 177 Square Meters, T-21403 263 square Meters, T- 46807
39 Square Meters of the Registry of Deeds of Oriental Mindoro;

On 23 March 1999, petitioners initiated with the RTC an action for the
annulment of REM constituted over the subject property on the ground that
the same was not covered by the SPA and that the said SPA, at the time
the loan obligations were contracted, no longer had force and effect since it

BANKING | 05Dec | 22

was previously revoked by Perla on 10 March 1993, as evidenced by the

Revocation of SPA signed by the latter.8
Petitioners likewise alleged that together with the copy of the Revocation of
SPA, Perla, in a Letter dated 23 January 1996, notified the Registry of
Deeds of Quezon City that any attempt to mortgage or sell the subject
property must be with her full consent documented in the form of an SPA
duly authenticated before the Philippine Consulate General in New York. 9

2. Declaring the Sheriffs Sale and Certificate of Sale under FRE No. 2217
dated January 15, 1998 over the property covered by TCT No. RT-18206
(106338) of the Registry of Deeds of Quezon City as NULL and VOID;
3. Ordering the defendant Registry of Deeds of Quezon City to cancel the
annotation of Real Estate Mortgages appearing on Entry Nos. PE-4543/RT18206 and 2012/RT-18206 on TCT No. RT-18206 (106338) of the Registry
of Deeds of Quezon City;

In the absence of authority to do so, the REM constituted by Julian over the
subject property was null and void; thus, petitioners likewise prayed that
the subsequent extra-judicial foreclosure proceedings and the auction sale
of the subject property be also nullified.

4. Ordering the [respondent] Bank to deliver/return to the [petitioners]

represented by their attorney-in-fact Alfredo M. Perez, the original Owners
Duplicate Copy of TCT No. RT-18206 (106338) free from the encumbrances
referred to above; and

In its Answer with Compulsory Counterclaim,10 respondent averred that,

contrary to petitioners allegations, the SPA in favor of Julian included the
subject property, covered by one of the titles specified in paragraph 1(b)
thereof, TCT No. RT- 106338 registered with the Registry of Deeds of Pasig
(now Makati). The subject property was purportedly registered previously
under TCT No. T-106338, and was only subsequently reconstituted as TCT
RT-18206 (106338). Moreover, TCT No. T-106338 was actually registered
with the Registry of Deeds of Quezon City and not before the Registry of
Deeds of Pasig (now Makati). Respondent explained that the discrepancy in
the designation of the Registry of Deeds in the SPA was merely an error
that must not prevail over the clear intention of Perla to include the subject
property in the said SPA. In sum, the property referred to in the SPA Perla
executed in favor of Julian as covered by TCT No. 106338 of the Registry of
Deeds of Pasig (now Makati) and the subject property in the case at bar,
covered by RT 18206 (106338) of the Registry of Deeds of Quezon City,
are one and the same.

5. Ordering the [respondent] Bank to pay the [petitioners] the amount of

P100,000.00 as for attorneys fees plus cost of the suit.

On 23 September 2003, the RTC rendered a Decision declaring the REM

constituted over the subject property null and void, for Julian was not
authorized by the terms of the SPA to mortgage the same. The court a quo
likewise ordered that the foreclosure proceedings and the auction sale
conducted pursuant to the void REM, be nullified. The dispositive portion of
the Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of
the [herein petitioners] and against the [herein respondent] Bank:
1. Declaring the Real Estate Mortgages constituted and registered under
Entry Nos. PE-4543/RT-18206 and 2012/RT-18206 annotated on TCT No.
RT-18206 (106338) of the Registry of Deeds of Quezon City as NULL and
VOID;

The other claim for damages and counterclaim are hereby DENIED for lack
of merit.11
Aggrieved, respondent appealed the adverse Decision before the Court of
Appeals.
In a Decision dated 12 October 2005, the Court of Appeals reversed the
RTC Decision and upheld the validity of the REM constituted over the
subject property on the strength of the SPA. The appellate court declared
that Perla intended the subject property to be included in the SPA she
executed in favor of Julian, and that her subsequent revocation of the said
SPA, not being contained in a public instrument, cannot bind third persons.
The Motion for Reconsideration interposed by the petitioners was denied by
the Court of Appeals in its Resolution dated 15 February 2006.
Petitioners are now before us assailing the Decision and Resolution
rendered by the Court of Appeals raising several issues, which are
summarized as follows:
I WHETHER OR NOT THERE WAS A VALID MORTGAGE CONSTITUTED OVER
SUBJECT PROPERTY.
II WHETHER OR NOT THERE WAS A VALID REVOCATION OF THE SPA.
III WHETHER OR NOT THE RESPONDENT WAS A MORTGAGEE-IN- GOOD
FAITH.
For a mortgage to be valid, Article 2085 of the Civil Code enumerates the
following essential requisites:

BANKING | 05Dec | 23

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;
(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.
In the case at bar, it was Julian who obtained the loan obligations from
respondent which he secured with the mortgage of the subject property.
The property mortgaged was owned by his wife, Perla, considered a third
party to the loan obligations between Julian and respondent. It was, thus, a
situation recognized by the last paragraph of Article 2085 of the Civil Code
afore-quoted. However, since it was not Perla who personally mortgaged
her own property to secure Julians loan obligations with respondent, we
proceed to determining if she duly authorized Julian to do so on her behalf.
Under Article 1878 of the Civil Code, a special power of attorney is
necessary in cases where real rights over immovable property are created
or conveyed.12 In the SPA executed by Perla in favor of Julian on 28 May
1992, the latter was conferred with the authority to "sell, alienate,
mortgage, lease and deal otherwise" the different pieces of real and
personal property registered in Perlas name. The SPA likewise authorized
Julian "[t]o exercise any or all acts of strict dominion or ownership" over
the identified properties, and rights and interest therein. The existence and
due execution of this SPA by Perla was not denied or challenged by
petitioners.
There is no question therefore that Julian was vested with the power to
mortgage the pieces of property identified in the SPA. However, as to
whether the subject property was among those identified in the SPA, so as
to render Julians mortgage of the same valid, is a question we still must
resolve.
Petitioners insist that the subject property was not included in the SPA,
considering that it contained an exclusive enumeration of the pieces of
property over which Julian had authority, and these include only: (1) TCT
No. T-53618, with an area of 3,522 square meters, located at Calapan,

Oriental Mindoro, and registered with the Registry of Deeds of Oriental

Mindoro; (2) TCT No. T-46810, with an area of 3,953 square meters,
located at Calapan, Oriental Mindoro, and registered with the Registry of
Deeds of Oriental Mindoro; (3) TCT No. T-53140, with an area of 177
square meters, located at Calapan, Oriental Mindoro, and registered with
the Registry of Deeds of Oriental Mindoro; (4) TCT No. T-21403, with an
area of 263 square meters, located at Calapan, Oriental Mindoro, and
registered with the Registry of Deeds of Oriental Mindoro; (5) TCT No. T46807, with an area of 39 square meters, located at Calapan, Oriental
Mindoro, and registered with the Registry of Deeds of Oriental Mindoro; (6)
TCT No. T-108954, with an area of 690 square meters and located at
Susana Heights, Muntinlupa; (7) RT-106338 805 Square Meters
registered with the Registry of Deeds of Pasig (now Makati); and (8)
Personal Property consisting of a 1983 Car with Vehicle Registration No. R16381, Model 1983, Make Toyota, and Engine No. T- 2464. Nowhere is
it stated in the SPA that Julians authority extends to the subject property
covered by TCT No. RT 18206 (106338) registered with the Registry of
Deeds of Quezon City. Consequently, the act of Julian of constituting a
mortgage over the subject property is unenforceable for having been done
without authority.
Respondent, on the other hand, mainly hinges its argument on the
declarations made by the Court of Appeals that there was no property
covered by TCT No. 106338 registered with the Registry of Deeds of Pasig
(now Makati); but there exists a property, the subject property herein,
covered by TCT No. RT-18206 (106338) registered with the Registry of
Deeds of Quezon City. Further verification would reveal that TCT No. RT18206 is merely a reconstitution of TCT No. 106338, and the property
covered by both certificates of title is actually situated in Quezon City and
not Pasig. From the foregoing circumstances, respondent argues that Perla
intended to include the subject property in the SPA, and the failure of the
instrument to reflect the recent TCT Number or the exact designation of the
Registry of Deeds, should not defeat Perlas clear intention.
After an examination of the literal terms of the SPA, we find that the
subject property was not among those enumerated therein. There is no
obvious reference to the subject property covered by TCT No. RT-18206
(106338) registered with the Registry of Deeds of Quezon City.
There was also nothing in the language of the SPA from which we could
deduce the intention of Perla to include the subject property therein. We
cannot attribute such alleged intention to Perla who executed the SPA when
the language of the instrument is bare of any indication suggestive of such
intention. Contrariwise, to adopt the intent theory advanced by the
respondent, in the absence of clear and convincing evidence to that effect,
would run afoul of the express tenor of the SPA and thus defeat Perlas true
intention.

BANKING | 05Dec | 24

In cases where the terms of the contract are clear as to leave no room for
interpretation, resort to circumstantial evidence to ascertain the true intent
of the parties, is not countenanced. As aptly stated in the case of JMA
House, Incorporated v. Sta. Monica Industrial and Development
Corporation,13 thus:
[T]he law is that if the terms of a contract are clear and leave no doubt
upon the intention of the contracting parties, the literal meaning of its
stipulation shall control. When the language of the contract is explicit,
leaving no doubt as to the intention of the drafters, the courts may not read
into it [in] any other intention that would contradict its main import. The
clear terms of the contract should never be the subject matter of
interpretation. Neither abstract justice nor the rule on liberal interpretation
justifies the creation of a contract for the parties which they did not make
themselves or the imposition upon one party to a contract or obligation not
assumed simply or merely to avoid seeming hardships. The true meaning
must be enforced, as it is to be presumed that the contracting parties know
their scope and effects.14
Equally relevant is the rule that a power of attorney must be strictly
construed and pursued. The instrument will be held to grant only those
powers which are specified therein, and the agent may neither go beyond
nor deviate from the power of attorney.15 Where powers and duties are
specified and defined in an instrument, all such powers and duties are
limited and are confined to those which are specified and defined, and all
other powers and duties are excluded.16 This is but in accord with the
disinclination of courts to enlarge the authority granted beyond the powers
expressly given and those which incidentally flow or derive therefrom as
being usual and reasonably necessary and proper for the performance of
such express powers.17
Even the commentaries of renowned Civilist Manresa18 supports a strict
and limited construction of the terms of a power of attorney:
The law, which must look after the interests of all, cannot permit a man to
express himself in a vague and general way with reference to the right he
confers upon another for the purpose of alienation or hypothecation,
whereby he might be despoiled of all he possessed and be brought to ruin,
such excessive authority must be set down in the most formal and explicit
terms, and when this is not done, the law reasonably presumes that the
principal did not mean to confer it.
In this case, we are not convinced that the property covered by TCT No.
106338 registered with the Registry of Deeds of Pasig (now Makati) is the
same as the subject property covered by TCT No. RT-18206 (106338)
registered with the Registry of Deeds of Quezon City. The records of the

case are stripped of supporting proofs to verify the respondents claim that
the two titles cover the same property. It failed to present any certification
from the Registries of Deeds concerned to support its assertion. Neither did
respondent take the effort of submitting and making part of the records of
this case copies of TCTs No. RT-106338 of the Registry of Deeds of Pasig
(now Makati) and RT-18206 (106338) of the Registry of Deeds of Quezon
City, and closely comparing the technical descriptions of the properties
covered by the said TCTs. The bare and sweeping statement of respondent
that the properties covered by the two certificates of title are one and the
same contains nothing but empty imputation of a fact that could hardly be
given any evidentiary weight by this Court.
Having arrived at the conclusion that Julian was not conferred by Perla with
the authority to mortgage the subject property under the terms of the SPA,
the real estate mortgages Julian executed over the said property are
therefore unenforceable.
Assuming arguendo that the subject property was indeed included in the
SPA executed by Perla in favor of Julian, the said SPA was revoked by virtue
of a public instrument executed by Perla on 10 March 1993. To address
respondents assertion that the said revocation was unenforceable against it
as a third party to the SPA and as one who relied on the same in good faith,
we quote with approval the following ruling of the RTC on this matter:
Moreover, an agency is extinguished, among others, by its revocation
(Article 1999, New Civil Code of the Philippines). The principal may revoke
the agency at will, and compel the agent to return the document evidencing
the agency. Such revocation may be express or implied (Article 1920,
supra).
In this case, the revocation of the agency or Special Power of Attorney is
expressed and by a public document executed on March 10, 1993.
The Register of Deeds of Quezon City was even notified that any attempt to
mortgage or sell the property covered by TCT No. [RT-18206] 106338
located at No. 21 Hillside Drive, Blue Ridge, Quezon City must have the full
consent documented in the form of a special power of attorney duly
authenticated at the Philippine Consulate General, New York City, N.Y.,
U.S.A.
The non-annotation of the revocation of the Special Power of Attorney on
TCT No. RT-18206 is of no consequence as far as the revocations existence
and legal effect is concerned since actual notice is always superior to
constructive notice. The actual notice of the revocation relayed to defendant
Registry of Deeds of Quezon City is not denied by either the Registry of
Deeds of Quezon City or the defendant Bank. In which case, there appears
no reason why Section 52 of the Property Registration Decree (P.D. No.

BANKING | 05Dec | 25

1529) should not apply to the situation. Said Section 52 of P.D. No. 1529
provides:

respondent concluded that Julian was indeed authorized to constitute a

mortgage over the subject property.

"Section 52. Constructive notice upon registration. Every conveyance,

mortgage, lease, lien, attachment, order, judgment, instrument or entry
affecting registered land shall, if registered, filed or entered in the Office of
the Register of Deeds for the province or city where the land to which it
relates lies, be constructive notice to all persons from the time of such
registering, filing or entering. (Pres. Decree No. 1529, Section 53)
(emphasis ours)

We are unconvinced. The property listed in the real estate mortgages Julian
executed in favor of PNB is the one covered by "TCT#RT-18206(106338)."
On the other hand, the Special Power of Attorney referred to TCT No. "RT106338 805 Square Meters of the Registry of Deeds of Pasig now Makati."
The palpable difference between the TCT numbers referred to in the real
estate mortgages and Julians SPA, coupled with the fact that the said TCTs
are registered in the Registries of Deeds of different cities, should have put
respondent on guard. Respondents claim of prudence is debunked by the
fact that it had conveniently or otherwise overlooked the inconsistent
details appearing on the face of the documents, which it was relying on for
its rights as mortgagee, and which significantly affected the identification of
the property being mortgaged. In Arrofo v. Quio,20 we have elucidated
that:

It thus developed that at the time the first loan transaction with defendant
Bank was effected on December 12, 1996, there was on record at the Office
of the Register of Deeds of Quezon City that the special power of attorney
granted Julian, Sr. by Perla had been revoked. That notice, works as
constructive notice to third parties of its being filed, effectively rendering
Julian, Sr. without authority to act for and in behalf of Perla as of the date
the revocation letter was received by the Register of Deeds of Quezon City
on February 7, 1996.19
Given that Perla revoked the SPA as early as 10 March 1993, and that she
informed the Registry of Deeds of Quezon City of such revocation in a letter
dated 23 January 1996 and received by the latter on 7 February 1996, then
third parties to the SPA are constructively notified that the same had been
revoked and Julian no longer had any authority to mortgage the subject
property. Although the revocation may not be annotated on TCT No. RT18206 (106338), as the RTC pointed out, neither the Registry of Deeds of
Quezon City nor respondent denied that Perlas 23 January 1996 letter was
received by and filed with the Registry of Deeds of Quezon City. Respondent
would have undoubtedly come across said letter if it indeed diligently
investigated the subject property and the circumstances surrounding its
mortgage.
The final issue to be threshed out by this Court is whether the respondent is
a mortgagee-in-good faith. Respondent fervently asserts that it exercised
reasonable diligence required of a prudent man in dealing with the subject
property.
Elaborating, respondent claims to have carefully verified Julians authority
over the subject property which was validly contained in the SPA. It
stresses that the SPA was annotated at the back of the TCT of the subject
property. Finally, after conducting an investigation, it found that the
property covered by TCT No. 106338, registered with the Registry of Deeds
of Pasig (now Makati) referred to in the SPA, and the subject property,
covered by TCT No. 18206 (106338) registered with the Registry of Deeds
of Quezon City, are one and the same property. From the foregoing,

[Settled is the rule that] a person dealing with registered lands [is not
required] to inquire further than what the Torrens title on its face indicates.
This rule, however, is not absolute but admits of exceptions. Thus, while its
is true, x x x that a person dealing with registered lands need not go
beyond the certificate of title, it is likewise a well-settled rule that a
purchaser or mortgagee cannot close his eyes to facts which should put a
reasonable man on his guard, and then claim that he acted in good faith
under the belief that there was no defect in the title of the vendor or
mortgagor. His mere refusal to face up the fact that such defect exists, or
his willful closing of his eyes to the possibility of the existence of a defect in
the vendors or mortgagors title, will not make him an innocent purchaser
for value, if it afterwards develops that the title was in fact defective, and it
appears that he had such notice of the defect as would have led to its
discovery had he acted with the measure of precaution which may be
required of a prudent man in a like situation.
By putting blinders on its eyes, and by refusing to see the patent defect in
the scope of Julians authority, easily discernable from the plain terms of
the SPA, respondent cannot now claim to be an innocent mortgagee.
Further, in the case of Abad v. Guimba,21 we laid down the principle that
where the mortgagee does not directly deal with the registered owner of
real property, the law requires that a higher degree of prudence be
exercised by the mortgagee, thus:
While [the] one who buys from the registered owner does not need to look
behind the certificate of title, one who buys from [the] one who is not [the]
registered owner is expected to examine not only the certificate of title but
all factual circumstances necessary for [one] to determine if there are any
flaws in the title of the transferor, or in [the] capacity to transfer the land.

BANKING | 05Dec | 26

Although the instant case does not involve a sale but only a mortgage, the
same rule applies inasmuch as the law itself includes a mortgagee in the
term "purchaser."22
This principle is applied more strenuously when the mortgagee is a bank or
a banking institution. Thus, in the case of Cruz v. Bancom Finance
Corporation,23 we ruled:
Respondent, however, is not an ordinary mortgagee; it is a mortgageebank. As such, unlike private individuals, it is expected to exercise greater
care and prudence in its dealings, including those involving registered
lands. A banking institution is expected to exercise due diligence before
entering into a mortgage contract. The ascertainment of the status or
condition of a property offered to it as security for a loan must be a
standard and indispensable part of its operations.24
Hence, considering that the property being mortgaged by Julian was not
his, and there are additional doubts or suspicions as to the real identity of
the same, the respondent bank should have proceeded with its transactions
with Julian only with utmost caution. As a bank, respondent must subject
all its transactions to the most rigid scrutiny, since its business is impressed
with public interest and its fiduciary character requires high standards of
integrity and performance.25 Where respondent acted in undue haste in
granting the mortgage loans in favor of Julian and disregarding the
apparent defects in the latters authority as agent, it failed to discharge the
degree of diligence required of it as a banking corporation.1awphil
Thus, even granting for the sake of argument that the subject property and
the one identified in the SPA are one and the same, it would not elevate
respondents status to that of an innocent mortgagee. As a banking
institution, jurisprudence stringently requires that respondent should take
more precautions than an ordinary prudent man should, to ascertain the
status and condition of the properties offered as collateral and to verify the
scope of the authority of the agents dealing with these. Had respondent
acted with the required degree of diligence, it could have acquired
knowledge of the letter dated 23 January 1996 sent by Perla to the Registry
of Deeds of Quezon City which recorded the same. The failure of the
respondent to investigate into the circumstances surrounding the mortgage
of the subject property belies its contention of good faith.
On a last note, we find that the real estate mortgages constituted over the
subject property are unenforceable and not null and void, as ruled by the
RTC. It is best to reiterate that the said mortgage was entered into by
Julian on behalf of Perla without the latters authority and consequently,
unenforceable under Article 1403(1) of the Civil Code. Unenforceable
contracts are those which cannot be enforced by a proper action in court,
unless they are ratified, because either they are entered into without or in

excess of authority or they do not comply with the statute of frauds or both
of the contracting parties do not possess the required legal capacity.26 An
unenforceable contract may be ratified, expressly or impliedly, by the
person in whose behalf it has been executed, before it is revoked by the
other contracting party.27 Without Perlas ratification of the same, the real
estate mortgages constituted by Julian over the subject property cannot be
enforced by any action in court against Perla and/or her successors in
interest.
In sum, we rule that the contracts of real estate mortgage constituted over
the subject property covered by TCT No. RT 18206 (106338) registered
with the Registry of Deeds of Quezon City are unenforceable. Consequently,
the foreclosure proceedings and the auction sale of the subject property
conducted in pursuance of these unenforceable contracts are null and void.
This, however, is without prejudice to the right of the respondent to proceed
against Julian, in his personal capacity, for the amount of the loans.
WHEREFORE, IN VIEW OF THE FOREGOING, the instant petition is
GRANTED. The Decision dated 12 October 2005 and its Resolution dated 15
February 2006 rendered by the Court of Appeals in CA-G.R. CV No. 82636,
are hereby REVERSED. The Decision dated 23 September 2003 of the
Regional Trial Court of Quezon City, Branch 220, in Civil Case No. Q-9937145, is hereby REINSTATED and AFFIRMED with modification that the
real estate mortgages constituted over TCT No. RT 18206 (106338) are
not null and void but UNENFORCEABLE. No costs.
SO ORDERED.

G.R. No. 118492

August 15, 2001

BANKING | 05Dec | 27

GREGORIO H. REYES and CONSUELO PUYAT-REYES, petitioners,

vs.
THE HON. COURT OF APPEALS and FAR EAST BANK AND TRUST
COMPANY, respondents.
DE LEON, JR., J.:
Before us is a petition for review of the Decision1 dated July 22, 1994 and
Resolution2 dated December 29, 1994 of the Court of Appeals3 affirming
with modification the Decision4 dated November 12, 1992 of the Regional
Trial Court of Makati, Metro Manila, Branch 64, which dismissed the
complaint for damages of petitioners spouses Gregorio H. Reyes and
Consuelo Puyat-Reyes against respondent Far East Bank and Trust
Company.
The undisputed facts of the case are as follows:
In view of the 20th Asian Racing Conference then scheduled to be held in
September, 1988 in Sydney, Australia, the Philippine Racing Club, Inc.
(PRCI, for brevity) sent four (4) delegates to the said conference. Petitioner
Gregorio H. Reyes, as vice-president for finance, racing manager, treasurer,
and director of PRCI, sent Godofredo Reyes, the club's chief cashier, to the
respondent bank to apply for a foreign exchange demand draft in Australian
dollars.
Godofredo went to respondent bank's Buendia Branch in Makati City to
apply for a demand draft in the amount One Thousand Six Hundred Ten
Australian Dollars (AU$1,610.00) payable to the order of the 20th Asian
Racing Conference Secretariat of Sydney, Australia. He was attended to by
respondent bank's assistant cashier, Mr. Yasis, who at first denied the
application for the reason that respondent bank did not have an Australian
dollar account in any bank in Sydney. Godofredo asked if there could be a
way for respondent bank to accommodate PRCI's urgent need to remit
Australian dollars to Sydney. Yasis of respondent bank then informed
Godofredo of a roundabout way of effecting the requested remittance to
Sydney thus: the respondent bank would draw a demand draft against
Westpac Bank in Sydney, Australia (Westpac-Sydney for brevity) and have
the latter reimburse itself from the U.S. dollar account of the respondent in
Westpac Bank in New York, U.S.A. (Westpac-New York for brevity). This
arrangement has been customarily resorted to since the 1960's and the
procedure has proven to be problem-free. PRCI and the petitioner Gregorio
H. Reyes, acting through Godofredo, agreed to this arrangement or
approach in order 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.1wphi1.nt
On August 10, 1988, upon due presentment of the foreign exchange
demand draft, denominated as FXDD No. 209968, the same was
dishonored, with the notice of dishonor stating the following: "xxx No
account held with Westpac." Meanwhile, on August 16, 1988, Wespac-New
York sent a cable to respondent bank informing the latter that its dollar
account in the sum of One Thousand Six Hundred Ten Australian Dollars
(AU$ 1,610.00) was debited. On August 19, 1988, in response to PRCI's
complaint about the dishonor of the said foreign exchange demand draft,
respondent bank informed Westpac-Sydney of the issuance of the said
demand draft FXDD No. 209968, drawn against the Wespac-Sydney and
informing the latter to be reimbursed from the respondent bank's dollar
account in Westpac-New York. The respondent bank on the same day
likewise informed Wespac-New York requesting the latter to honor the
reimbursement claim of Wespac-Sydney. On September 14, 1988, upon its
second presentment for payment, FXDD No. 209968 was again dishonored
by Westpac-Sydney for the same reason, that is, that the respondent bank
has no deposit dollar account with the drawee Wespac-Sydney.
On September 17, 1988 and September 18, 1988, respectively, petitioners
spouses Gregorio H. Reyes and Consuelo Puyat-Reyes left for Australia to
attend the said racing conference. When petitioner Gregorio H. Reyes
arrived in Sydney in the morning of September 18, 1988, he went directly
to the lobby of Hotel Regent Sydney to register as a conference delegate. At
the registration desk, in the presence of other delegates from various
member of the conference secretariat that he could not register because
the foreign exchange demand draft for his registration fee had been
dishonored for the second time. A discussion ensued in the presence and
within the hearing of many delegates who were also registering. Feeling
terribly embarrassed and humiliated, petitioner Gregorio H. Reyes asked
the lady member of the conference secretariat that he be shown the subject
foreign exchange demand draft that had been dishonored as well as the
covering letter after which he promised that he would pay the registration
fees in cash. In the meantime he demanded that he be given his name
plate and conference kit. The lady member of the conference secretariat
relented and gave him his name plate and conference kit. It was only two
(2) days later, or on September 20, 1988, that he was given the dishonored
demand draft and a covering letter. It was then that he actually paid in cash
the registration fees as he had earlier promised.

BANKING | 05Dec | 28

Meanwhile, on September 19, 1988, petitioner Consuelo Puyat-Reyes

arrived in Sydney. She too was embarassed and humiliated at the
registration desk of the conference secretariat when she was told in the
presence and within the hearing of other delegates that she could not be
registered due to the dishonor of the subject foreign exchange demand
draft. She felt herself trembling and unable to look at the people around
her. Fortunately, she saw her husband, coming toward her. He saved the
situation for her by telling the secretariat member that he had already
arranged for the payment of the registration fee in cash once he was shown
the dishonored demand draft. Only then was petitioner Puyat-Reyes given
her name plate and conference kit.
At the time the incident took place, petitioner Consuelo Puyat-Reyes was a
member of the House of Representatives representing the lone
Congressional District of Makati, Metro Manila. She has been an officer of
the Manila Banking Corporation and was cited by Archbishop Jaime Cardinal
Sin as the top lady banker of the year in connection with her conferment of
the Pro-Ecclesia et Pontifice Award. She has also been awarded a plaque of
appreciation from the Philippine Tuberculosis Society for her extraordinary
service as the Society's campaign chairman for the ninth (9th) consecutive
year.
On November 23, 1988, the petitioners filed in the Regional Trial Court of
Makati, Metro Manila, a complaint for damages, docketed as Civil Case No.
88-2468, against the respondent bank due to the dishonor of the said
foreign exchange demand draft issued by the respondent bank. The
petitioners claim that as a result of the dishonor of the said demand draft,
they were exposed to unnecessary shock, social humiliation, and deep
mental anguish in a foreign country, and in the presence of an international
audience.
On November 12, 1992, the trial court rendered judgment in favor of the
defendant (respondent bank) and against the plaintiffs (herein petitioners),
the dispositive portion of which states:
WHEREFORE, judgment is hereby rendered in favor of the defendant,
dismissing plaintiff's complaint, and ordering plaintiffs to pay to defendant,
on its counterclaim, the amount of P50,000.00, as reasonable attorney's
fees. Costs against the plaintiff.
SO ORDERED.5
The petitioners appealed the decision of the trial court to the Court of
Appeals. On July 22, 1994, the appellate court affirmed the decision of the
trial court but in effect deleted the award of attorney's fees to the
defendant (herein respondent bank) and the pronouncement as to the
costs. The decretal portion of the decision of the appellate court states:

WHEREFORE, the judgment appealed from, insofar as it dismissed plaintiff's

complaint, is hereby AFFIRMED, but is hereby REVERSED and SET ASIDE in
all other respect. No special pronouncement as to costs.
SO ORDERED.6
According to the appellate court, there is no basis to hold the respondent
bank liable for damages for the reason that it exerted every effort for the
subject foreign exchange demand draft to be honored. The appellate court
found and declared that:
xxx

xxx

xxx

Thus, the Bank had every reason to believe that the transaction finally went
through smoothly, considering that its New York account had been debited
and that there was no miscommunication between it and Westpac-New
York. SWIFT is a world wide association used by almost all banks and is
known to be the most reliable mode of communication in the international
banking business. Besides, the above procedure, with the Bank as drawer
and Westpac-Sydney as drawee, and with Westpac-New York as the
reimbursement Bank had been in place since 1960s and there was no
reason for the Bank to suspect that this particular demand draft would not
be honored by Westpac-Sydney.
From the evidence, it appears that the root cause of the
miscommunications of the Bank's SWIFT message is the erroneous
decoding on the part of Westpac-Sydney of the Bank's SWIFT message as
an MT799 format. However, a closer look at the Bank's Exhs. "6" and "7"
would show that despite what appears to be an asterick written over the
figure before "99", the figure can still be distinctly seen as a number "1"
and not number "7", to the effect that Westpac-Sydney was responsible for
the dishonor and not the Bank.
Moreover, it is not said asterisk that caused the misleading on the part of
the Westpac-Sydney of the numbers "1" to "7", since Exhs. "6" and "7" are
just documentary copies of the cable message sent to Wespac-Sydney.
Hence, if there was mistake committed by Westpac-Sydney in decoding the
cable message which caused the Bank's message to be sent to the wrong
department, the mistake was Westpac's, not the Bank's. The Bank had
done what an ordinary prudent person is required to do in the particular
situation, although appellants expect the Bank to have done more. The
Bank having done everything necessary or usual in the ordinary course of
banking transaction, it cannot be held liable for any embarrassment and
corresponding damage that appellants may have incurred.7
xxx

xxx

xxx

BANKING | 05Dec | 29

Hence, this petition, anchored on the following assignment of errors:

I
THE HONORABLE COURT OF APPEALS ERRED IN FINDING PRIVATE
RESPONDENT NOT NEGLIGENT BY ERRONEOUSLY APPLYING THE
STANDARD OF DILIGENCE OF AN "ORDINARY PRUDENT PERSON" WHEN IN
TRUTH A HIGHER DEGREE OF DILIGENCE IS IMPOSED BY LAW UPON THE
BANKS.
II
THE HONORABLE COURT OF APPEALS ERRED IN ABSOLVING PRIVATE
RESPONDENT FROM LIABILITY BY OVERLOOKING THE FACT THAT THE
DISHONOR OF THE DEMAND DRAFT WAS A BREACH OF PRIVATE
RESPONDENT'S WARRANTY AS THE DRAWER THEREOF.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT AS
SHOWN OVERWHELMINGLY BY THE EVIDENCE, THE DISHONOR OF THE
DEMAND DRAFT AS DUE TO PRIVATE RESPONDENT'S NEGLIGENCE AND
NOT THE DRAWEE BANK.8
The petitioners contend that due to the fiduciary nature of the relationship
between the respondent bank and its clients, the respondent should have
exercised a higher degree of diligence than that expected of an ordinary
prudent person in the handling of its affairs as in the case at bar. The
appellate court, according to petitioners, erred in applying the standard of
diligence of an ordinary prudent person only. Petitioners also claim that the
respondent bank violate Section 61 of the Negotiable Instruments Law9
which provides the warranty of a drawer that "xxx on due presentment, the
instrument will be accepted or paid, or both, according to its tenor xxx."
Thus, the petitioners argue that respondent bank should be held liable for
damages for violation of this warranty. The petitioners pray this Court to reexamine 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, representing 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 VicePresident 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, WestpacSydney construed the said cable message as a format for a letter of credit,
and not for a demand draft. The appellate court correct found that "the
figure before '99' can still be distinctly seen as a number '1' and not
number '7'." Indeed, the line of a "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 account12
of respondent bank with the former. As soon as the demand draft was
dishonored, the respondent bank, thinking that the problem was with the
reimbursement and without any idea that it was due to miscommunication,
re-confirmed the authority of Westpac-New York to debit its dollar account
for the purpose of reimbursing Westpac-Sydney.13 Respondent bank also
sent two (2) more cable messages to Westpac-New York inquiring why the
demand draft was not honored.14
With these established facts, we now determine the degree of diligence that
banks are required to exert in their commercial dealings. In Philippine Bank
of Commerce v. Court of Appeals15 upholding a long standing doctrine, we

BANKING | 05Dec | 30

ruled that the degree of diligence required of banks, is more than that of a
good father of a family where the fiduciary nature of their relationship with
their depositors is concerned. In other words banks are duty bound to treat
the deposit accounts of their depositors with the highest degree of care. But
the said ruling applies only to cases where banks act under their fiduciary
capacity, that is, as depositary of the deposits of their depositors. But the
same higher degree of diligence is not expected to be exerted by banks in
commercial transactions that do not involve their fiduciary relationship with
their depositors.
Considering the foregoing, the respondent bank was not required to exert
more than the diligence of a good father of a family in regard to the sale
and issuance of the subject foreign exchange demand draft. The case at bar
does not involve the handling of petitioners' deposit, if any, with the
respondent bank. Instead, the relationship involved was that of a buyer and
seller, that is, between the respondent bank as the seller of the subject
foreign exchange demand draft, and PRCI as the buyer of the same, with
the 20th Asian Racing conference Secretariat in Sydney, Australia as the
payee thereof. As earlier mentioned, the said foreign exchange demand
draft was intended for the payment of the registration fees of the
petitioners as delegates of the PRCI to the 20th Asian Racing Conference in
Sydney.
The evidence shows that the respondent bank did everything within its
power to prevent the dishonor of the subject foreign exchange demand
draft. The erroneous reading of its cable message to Westpac-Sydney by an
employee of the latter could not have been foreseen by the respondent
bank. Being unaware that its 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 WestpacSydney 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
reversable 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.1wphi1.nt

BANKING | 05Dec | 31

G.R. No. 121413

January 29, 2001

I. G.R. Nos. 121413 and 121479

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
COMMERCIAL INTERNATIONAL BANK, respondents.
G.R. No. 128604

PHILIPPINE

January 29, 2001

FORD PHILIPPINES, INC., petitioner,

vs.
CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK
and COURT OF APPEALS, respondents.
QUISUMBING, J.:
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.1wphi1.nt
G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27,
1995 Decision1 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 Philipppine 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
Decision3 of the Court of Appeals and its March 5, 1997 Resolution4 in CAG.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 Citibanl Check Numbers SN-10597 and 16508.

The stipulated facts submitted by the parties as accepted by the Court of

Appeals are 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 degendant 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
Metrobanl, 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 samd day, with the
indorsement at the back "all prior indorsements and/or lack of
indorsements guaranteed." Thereafter, defendant IBAA presented the check

BANKING | 05Dec | 32

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-048867 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 course 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 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 Courts 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.

BANKING | 05Dec | 33

The court hereby renderes 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 crossclaimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED."7
PCI Bank 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 casue 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. PCI Bank 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
proceedings.12

barred

from

raising

issues

of

fact

in

the

instant

4. Petitioner Ford's cause of action had not prescribed.13

II. G.R. No. 128604
The same sysndicate 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

BANKING | 05Dec | 34

of 1978 payable to the Commissioner of Internal Revenue. A BIR Revenue

Tax Receipt No. 28645385 was issued for the said purpose.

[Citibank Check No. SN-16508] which was subsequently pilfered by Alexis

Marindo, Rivera's Assistant at FORD.

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.

From this 'Reynaldo Reyes' account, Castro drew various checks distributing
the sahres 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 VASTILLO 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) REMERTO 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.

Both checks were "crossed checks" and contain two diagonal lines on its
upper 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 concernced, 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 a
new, 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 tried 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, fo delivering the same of 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'

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
adsolving 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 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.

BANKING | 05Dec | 35

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 SN10597 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 insitution.
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 arguedo that defedant 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 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
approprite quarterly percentage taxes of Ford, the checks were diverted
and encashed for the eventual distribution among the mmbers 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 fore 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 perpetator 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. Though their own negligence,
alowed 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 thequestion 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 ing 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 unds
of Citibank Check Nos. SN-10597 and 16508, PCIBank claims that the
proximate cause of the damge to Ford lies in its own officers and employees
who carried out the fradulent 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

BANKING | 05Dec | 36

that the drawer was negligent, the drawee bank was still ordered to pay
damages.
Furthermore, Ford contends the 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 concuring 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, asuming, 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 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 theordinary 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
emploees, 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 perpertrating the fraud and imposing the
forged paper upon the bank, does notentitle the bank toshift 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.
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:
"xxx. Since the questioned crossed check was deposited with IBAA [now
PCIBank], which claimed to be a depository/collecting bank of 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

BANKING | 05Dec | 37

very imprudent on the part of the defendant IBAA to just rely on the
alleged telephone call of the one Godofredo Rivera and in his 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 argreement 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 GURANTEED 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 had no other
option but to pay it. Thus, Citibank assets that the proximate cause of
Ford's injury is the gross negligence of PCIBank. Since the questione
dcrossed 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 questions 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 scruninize 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 defedant'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
Lastly, banking business requires that the one who first cashes and
negotiates the check must take some percautions to learn whether or not it
is genuine. And if the one cashing the check through indifference or othe
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 personl, 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
particiapation of PCIBank in the embezzlement. As a general rule, however,

BANKING | 05Dec | 38

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
particiapted.
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 Ptro-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 t 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 indebetedness 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 531 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 checjs 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 informity 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 PCI Bank (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 6232 of the Negotiable
Instruments Law, Ford argues that by accepting the instrument, the
acceptro 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,
consitutes 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 umportance such that the appropriate standard of diligence

BANKING | 05Dec | 39

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 year 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, 1984, 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 thet 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, respondibility 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
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals
in CA-G.R. CV No. 25017 are AFFIRMED. PCIBank, know formerly as Insular
Bank of Asia and America, id 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 fiftyfifty 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.1wphi1.nt
Costs against Philippine Commercial International Bank and Citibank N.A.
SO ORDERED.

BANKING | 05Dec | 40

G.R. No. L-30511

February 14, 1980

Undisputed pertinent facts are:

MANUEL M. SERRANO, petitioner,

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

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

Rene Diokno for petitioner.

On August 31, 1968, Concepcion Maneja, married to Felixberto M. Serrano,

assigned and conveyed to petitioner Manuel M. Serrano, her time deposit of
P200,000.00 with respondent Overseas Bank of Manila. 5

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

of the Philippines.
Feliciano C. Tumale, Pacifico T. Torres and Antonio B. Periquet for
respondent Overseas Bank of Manila.
Josefina G. Salonga for all other respondents.

CONCEPCION, JR., J.:

Petition for mandamus and prohibition, with preliminary injunction, that
seeks the establishment of joint and solidary liability to the amount of
Three Hundred Fifty Thousand Pesos, with interest, against respondent
Central Bank of the Philippines and Overseas Bank of Manila and its
stockholders, on the alleged failure of the Overseas Bank of Manila to
return the time deposits made by petitioner and assigned to him, on the
ground that respondent Central Bank failed in its duty to exercise strict
supervision over respondent Overseas Bank of Manila to protect depositors
and the general public. 1 Petitioner also prays that both respondent banks
be ordered to execute the proper and necessary documents to constitute all
properties fisted in Annex "7" of the Answer of respondent Central Bank of
the Philippines in G.R. No. L-29352, entitled "Emerita M. Ramos, et al vs.
Central Bank of the Philippines," into a trust fund in favor of petitioner and
all other depositors of respondent Overseas Bank of Manila. It is also
prayed that the respondents be prohibited permanently from honoring,
implementing, or doing any act predicated upon the validity or efficacy of
the deeds of mortgage, assignment. and/or conveyance or transfer of
whatever nature of the properties listed in Annex "7" of the Answer of
respondent Central Bank in G.R. No. 29352. 2
A sought for ex-parte preliminary injunction against both respondent banks
was not given by this Court.

Notwithstanding series of demands for encashment of the aforementioned

time deposits from the respondent Overseas Bank of Manila, dating from
December 6, 1967 up to March 4, 1968, not a single one of the time
deposit certificates was honored by respondent Overseas Bank of Manila. 6
Respondent Central Bank admits that it is charged with the duty of
administering the banking system of the Republic and it exercises
supervision over all doing business in the Philippines, but denies the
petitioner's allegation that the Central Bank has the duty to exercise a most
rigid and stringent supervision of banks, implying that respondent Central
Bank has to watch every move or activity of all banks, including respondent
Overseas Bank of Manila. Respondent Central Bank claims that as of March
12, 1965, the Overseas Bank of Manila, while operating, was only on a
limited degree of banking operations since the Monetary Board decided in
its Resolution No. 322, dated March 12, 1965, to prohibit the Overseas
Bank of Manila from making new loans and investments in view of its
chronic reserve deficiencies against its deposit liabilities. This limited
operation of respondent Overseas Bank of Manila continued up to 1968. 7
Respondent Central Bank also denied that it is guarantor of the permanent
solvency of any banking institution as claimed by petitioner. It claims that
neither the law nor sound banking supervision requires respondent Central
Bank to advertise or represent to the public any remedial measures it may
impose upon chronic delinquent banks as such action may inevitably result
to panic or bank "runs". In the years 1966-1967, there were no findings to
declare the respondent Overseas Bank of Manila as insolvent. 8
Respondent Central Bank likewise denied that a constructive trust was
created in favor of petitioner and his predecessor in interest Concepcion
Maneja when their time deposits were made in 1966 and 1967 with the
respondent Overseas Bank of Manila as during that time the latter was not
an insolvent bank and its operation as a banking institution was being
salvaged by the respondent Central Bank. 9

BANKING | 05Dec | 41

Respondent Central Bank avers no knowledge of petitioner's claim that the

properties given by respondent Overseas Bank of Manila as additional
collaterals to respondent Central Bank of the Philippines for the former's
overdrafts and emergency loans were acquired through the use of
depositors' money, including that of the petitioner and Concepcion Maneja.
10
In G.R. No. L-29362, entitled "Emerita M. Ramos, et al. vs. Central Bank of
the Philippines," a case was filed by the petitioner Ramos, wherein
respondent Overseas Bank of Manila sought to prevent respondent Central
Bank from closing, declaring the former insolvent, and liquidating its assets.
Petitioner Manuel Serrano in this case, filed on September 6, 1968, a
motion to intervene in G.R. No. L-29352, on the ground that Serrano had a
real and legal interest as depositor of the Overseas Bank of Manila in the
matter in litigation in that case. Respondent Central Bank in G.R. No. L29352 opposed petitioner Manuel Serrano's motion to intervene in that
case, on the ground that his claim as depositor of the Overseas Bank of
Manila should properly be ventilated in the Court of First Instance, and if
this Court were to allow Serrano to intervene as depositor in G.R. No. L29352, thousands of other depositors would follow and thus cause an
avalanche of cases in this Court. In the resolution dated October 4, 1968,
this Court denied Serrano's, motion to intervene. The contents of said
motion to intervene are substantially the same as those of the present
petition. 11
This Court rendered decision in G.R. No. L-29352 on October 4, 1971, which
became final and executory on March 3, 1972, favorable to the respondent
Overseas Bank of Manila, with the dispositive portion to wit:
WHEREFORE, the writs prayed for in the petition are hereby granted and
respondent Central Bank's resolution Nos. 1263, 1290 and 1333 (that
prohibit the Overseas Bank of Manila to participate in clearing, direct the
suspension of its operation, and ordering the liquidation of said bank) are
hereby annulled and set aside; and said respondent Central Bank of the
Philippines is directed to comply with its obligations under the Voting Trust
Agreement, and to desist from taking action in violation therefor. Costs
against respondent Central Bank of the Philippines. 12
Because of the above decision, petitioner in this case filed a motion for
judgment in this case, praying for a decision on the merits, adjudging
respondent Central Bank jointly and severally liable with respondent
Overseas Bank of Manila to the petitioner for the P350,000 time deposit
made with the latter bank, with all interests due therein; and declaring all
assets assigned or mortgaged by the respondents Overseas Bank of Manila
and the Ramos groups in favor of the Central Bank as trust funds for the
benefit of petitioner and other depositors. 13

By the very nature of the claims and causes of action against respondents,
they in reality are recovery of time deposits plus interest from respondent
Overseas Bank of Manila, and recovery of damages against respondent
Central Bank for its alleged failure to strictly supervise the acts of the other
respondent Bank and protect the interests of its depositors by virtue of the
constructive trust created when respondent Central Bank required the other
respondent to increase its collaterals for its overdrafts said emergency
loans, said collaterals allegedly acquired through the use of depositors
money. These claims shoud be ventilated in the Court of First Instance of
proper jurisdiction as We already pointed out when this Court denied
petitioner's motion to intervene in G.R. No. L-29352. Claims of these nature
are not proper in actions for mandamus and prohibition as there is no
shown clear abuse of discretion by the Central Bank in its exercise of
supervision over the other respondent Overseas Bank of Manila, and if
there was, petitioner here is not the proper party to raise that question, but
rather the Overseas Bank of Manila, as it did in G.R. No. L-29352. Neither is
there anything to prohibit in this case, since the questioned acts of the
respondent Central Bank (the acts of dissolving and liquidating the
Overseas Bank of Manila), which petitioner here intends to use as his basis
for claims of damages against respondent Central Bank, had been
accomplished a long time ago.
Furthermore, both parties overlooked one fundamental principle in the
nature of bank deposits when the petitioner claimed that there should be
created a constructive trust in his favor when the respondent Overseas
Bank of Manila increased its collaterals in favor of respondent Central Bank
for the former's overdrafts and emergency loans, since these collaterals
were acquired by the use of depositors' money.
Bank deposits are in the nature of irregular deposits. They are really loans
because they earn interest. All kinds of bank deposits, whether fixed,
savings, or current are to be treated as loans and are to be covered by the
law on loans. 14 Current and savings deposit are loans to a bank because it
can use the same. The petitioner here in making time deposits that earn
interests with respondent Overseas Bank of Manila was in reality a creditor
of the respondent Bank and not a depositor. The respondent Bank was in
turn a debtor of petitioner. Failure of he respondent Bank to honor the time
deposit is failure to pay s obligation as a debtor and not a breach of trust
arising from depositary's failure to return the subject matter of the deposit
WHEREFORE, the petition is dismissed for lack of merit, with costs against
petitioner.
SO ORDERED.
Antonio, Abad Santos, JJ., concur.

BANKING | 05Dec | 42

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

opinion of Justice Aquino.

Separate Opinions

AQUINO, J., concurring:

The petitioner prayed that the Central Bank be ordered to pay his time
deposits of P350,000, plus interests, which he could not recover from the
distressed Overseas Bank of Manila, and to declare all the assets assigned
or mortgaged by that bank and the Ramos group to the Central Bank as
trust properties for the benefit of the petitioner and other depositors.
The petitioner has no causes of action agianst the Central Bank to obtain
those reliefs. They cannot be granted in petitioner's instant original actions
in this Court for mandamus and prohibition. It is not the Central Bank's
ministerial duty to pay petitioner's time deposits or to hold the mortgaged
properties in trust for the depositors of the Overseas Bank of Manila. The
petitioner has no cause of action for prohibition, a remedy usually available
against any tribunal, board, corporation or person exercising judicial or
ministerial functions.
Since the Overseas Bank of Manila was found to be insolvent and the
Superintendent of Banks was ordered to take over its assets preparatory to
its liquidation under section 29 of Republic Act No. 265 (p. 197, Rollo,
Manifestation of September 19, 1973), petitioner's remedy is to file his
claim in the liquidating proceeding (Central Bank vs. Morfe, L-38427, March
12, 1975, 63 SCRA 114; Hernandez vs. Rural Bank of Lucena, Inc., L29791, January 10, 1978, 81 SCRA 75).

Separate Opinions
AQUINO, J., concurring:

The petitioner prayed that the Central Bank be ordered to pay his time
deposits of P350,000, plus interests, which he could not recover from the
distressed Overseas Bank of Manila, and to declare all the assets assigned
or mortgaged by that bank and the Ramos group to the Central Bank as
trust properties for the benefit of the petitioner and other depositors.
The petitioner has no causes of action agianst the Central Bank to obtain
those reliefs. They cannot be granted in petitioner's instant original actions
in this Court for mandamus and prohibition. It is not the Central Bank's
ministerial duty to pay petitioner's time deposits or to hold the mortgaged
properties in trust for the depositors of the Overseas Bank of Manila. The
petitioner has no cause of action for prohibition, a remedy usually available
against any tribunal, board, corporation or person exercising judicial or
ministerial functions.
Since the Overseas Bank of Manila was found to be insolvent and the
Superintendent of Banks was ordered to take over its assets preparatory to
its liquidation under section 29 of Republic Act No. 265 (p. 197, Rollo,
Manifestation of September 19, 1973), petitioner's remedy is to file his
claim in the liquidating proceeding (Central Bank vs. Morfe, L-38427, March
12, 1975, 63 SCRA 114; Hernandez vs. Rural Bank of Lucena, Inc., L29791, January 10, 1978, 81 SCRA 75).

BANKING | 05Dec | 43

G.R. No. 128122

March 18, 2005

PREMIERE DEVELOPMENT BANK, Petitioner,

vs.
HON. COURT OF APPEALS, LIBERATO G. YAMBAO,
RODRIGUEZ and JESUS D. MORALES, Respondents.

JESUS

B.

x--------------------x
G.R. No. 128184

March 18, 2005

LILIAN M. TOUNDJIS, Petitioner,

vs.
HON. COURT OF APPEALS, LIBERATO G.YAMBAO, et al., and
JOSELITO GARAYGAY, ET AL., Respondents.
x--------------------x
G.R. No. 128229

March 18, 2005

JOSELITO P. GARAYGAY, CENTURY REALTY and DEVELOPMENT

CORPORATION, Petitioner,
vs.
HON. COURT OF APPEALS, LIBERATO G. YAMBAO, JESUS B.
RODRIGUEZ and JESUS D. MORALES, respondents.
DECISION
GARCIA, J.:
Before the Court are these three (3) separate petitions for review on
certiorari under Rule 45 of the Rules of Court to nullify and set aside the
Decision1 dated November 29, 1995 and Resolution2 dated February 6,
1997 of the Court of Appeals in CA-G.R. CV 42121.
The first assailed issuance affirmed an earlier decision3 dated January 28,
1993 of the Regional Trial Court at Quezon City, Branch 88 in its Civil Case
No. Q-92-8455, declaring, inter alia, herein private respondents, as
plaintiffs therein, Liberato G. Yambao, Jesus B. Rodriquez and Jesus D.
Morales ("Yambao", "Rodriquez" and "Morales", respectively), as rightful
owners of the land subject of this case. The second assailed issuance, on
the other hand, denied reconsideration of the first.
At the core of the controversy is a 2,660-square meter parcel of land,
denominated as Lot 23 of the subdivision plan Fls-2804-D of SWO-17514,
registered under TCT No. 9780 of the Manila Registry, located as it were in

Matandang Balara, which used to be a part of the then district of Caloocan,

City of Manila. The creation of Quezon City which found Lot 23 within its
borders saw the transfer of the corresponding property records to the new
political unit and the generation of new certificates of title to reflect
territorial changes. As thus transferred, TCT No. 9780 was assigned title
number TCT No. 9780 (693).
The evidence on record disclose the following factual antecedents:
Two (2) different persons with exactly the same name, i.e., Vicente T.
Garaygay, each claimed exclusive ownership of Lot 23 by virtue of an
owners duplicate certificate each had possession of during the period
material covering said lot. One held TCT No. 9780, supra, and the other,
TCT No. 9780 (693), supra. The technical description of the land appearing
in one copy corresponds exactly with that in the other. The date "June 14,
1944" appears on the face of both copies as a common date of entry. One,
however, contained certain features, markings, and/or entries not found in
the other and vice versa.
On April 17, 1979, one of the two Vicente T. Garaygays, a resident of Cebu
City (hereinafter referred to as Garaygay of Cebu), executed a deed of
sale4 over the lot described in and covered by his TCT No. 9780 (693) in
favor of his nephew, Joselito P. Garaygay ("Joselito", hereinafter). The sale
notwithstanding, the owners duplicate certificate remained for some time in
the sellers possession.
In another transaction, the other Vicente T. Garaygay, a resident of Rizal
(hereinafter referred to as Garaygay of Rizal), sold to Liberto G. Yambao
and Jesus B. Rodriguez the same property described in TCT 9780. "YCM
Compound, Angono, Rizal" is set out in the February 11, 1986 conveying
deed5 as the sellers residence. Buyers Yambao and Rodriquez would later
sell a portion of their undivided interests on the land to Jesus D. Morales.6
Then came the June 11, 1988 fire that gutted a portion of the Quezon City
hall and destroyed in the process the original copy of TCT No. 9780 (693)
on file with the Registry of Deeds of Quezon City. Barely a month later, a
certain Engr. Hobre filed an application, signed by Garaygay of Cebu, for the
reconstitution of the burned original on the basis of the latters owners
duplicate certificate. One Engr. Felino Cortez of the Land Registration
Authority (LRA) did the follow-up on the application. After due proceedings,
the LRA issued an order of reconstitution,7 by virtue of which Garaygay of
Cebu acquired reconstituted TCT No. RT-1764 (9780) (693).8
Meanwhile, or on May 26, 1989, the deed of sale executed by Garaygay of
Cebu in favor of his nephew Joselito was registered, paving the issuance in
the latters name of TCT No. 12183.9 Thereafter, thru the efforts of same
Engr. Cortez,10 Lot 23 was subdivided into three (3) lots, namely: Lot 23-A,

BANKING | 05Dec | 44

Lot 23-B and Lot 23-C for which TCT Nos. 14414, 14415 and 14416,
respectively,11 were issued. Joselito posthaste sold Lot 23-A to Lilian
Toundjis who, pursuant to a Contract to Sell executed on March 23,
1990,12 undertook to pay Joselito the P.5 Million balance of the P2.5 Million
purchase price once she is placed in possession of a fenced-off property.
And, for shares of stock, Joselito assigned on February 26, 1991, the other
two (2) lots, i.e., Lot 23-B and Lot 23-C to Century Realty and Development
Corporation ("Century Realty") which, after securing TCT Nos. 34390 and
34391 therefor, mortgaged13 the same to Premiere Development Bank,
Inc. ("Premiere Bank") to secure a P2.5 Million loan.
Clashing claims of ownership first came to a head when, sometime in May
1990, Liberato G. Yambao and his agents forcibly prevented Joselitos hired
hands from concrete-fencing the subject property. The police and eventually
the National Bureau of Investigation (NBI) entered into the picture.
In the meantime, Yambao, Rodriquez and Morales as pro indiviso buyers of
Lot No. 23, caused the annotation on December 17, 1990, January 16,
1991 and February 15, 1991 of their respective adverse claims on Joselitos
TCT Nos. 14414, 14415 and 14416. They then filed with the Regional Trial
Court at Quezon City suit against Joselito, Century Realty and Premiere
Bank for quieting of title and annulment of said defendants fake titles with
prayer for damages.
In their amended complaint,14 docketed as Civil Case No. Q-92-8455 and
raffled to Branch 88 of the court, Yambao, Rodriguez and Morales alleged,
inter alia, the following:
1. That Joselito, taking advantage of the 1988 burning of the Quezon City
Hall, and "using an impostor, who pretended to be Vicente Garaygay, by
means of fraud, deceit, and unlawful manipulation succeeded in
administratively reconstituting the aforesaid property (sic) in 1990 on the
basis of an alleged owners copy, which on its face is patently fake and
spurious and fake title bearing [TCT] No. 9780 (693)".
2. That a reconstituted title secured by means of fraud, deceit, or other
machinations is void ab initio under Section 11 of Republic Act (R.A.) 6732;
3. That after causing the reconstitution of the title, Joselito "acted fast to
consummate his scheme of depriving the plaintiffs of their ownership . . . of
the [disputed] land by the following successive acts", referring to Joselitos
act of securing title in his name, subdividing Lot No. 23 and securing titles
to and disposing of the subdivided lots;
4. That they (Yambao, Rodriguez and Morales) filed their separate adverse
claims and caused the same to be annotated at the back of Joselitos TCT
Nos. 14414, 14415 and 14416; that while the adverse claim of Rodriquez

was still valid, Joselito executed on February 26, 1991 a Deed of

Assignment in favor of Century Realty, which thus made the latter a
"transferee in bad faith"; that on March 26, 1991, Century Realty executed
a mortgage contract in favor of Premiere Bank, "a mortgagee in bad faith";
and
5. That at the time the mortgage was executed, the houses of plaintiffs
caretaker and a chapel belonging to them were standing on the two lots in
question.
Answering, principal defendants Joselito and Century Realty denied
plaintiffs material allegations and asserted, by way of affirmative defense,
the validity of (a) the reconstitution of TCT No. 9780 (693); (b) the
assignment of real property in favor of Century Realty; and (c) the
mortgage made by Century Realty in favor of Premiere Bank.
In their separate answers, also with crossclaim and counterclaim, Lilian
Toundjis, who was allowed to intervene to oppose the action thus filed, and
Premiere Bank virtually adopted Joselitos position and pleaded, in addition,
their right as bona fide purchaser or mortgagee for value, as the case may
be, of the subject property.
Issues having been joined, trial ensued with plaintiffs Yambao, Rodriguez
and Morales offering in evidence several documents. Foremost of these was
Exhibit "B"15 which is the owners duplicate copy of TCT No. 9780 of the
Registry of Manila once in the possession of Garaygay of Rizal. On the other
hand, the principal defendants presented no less than 38 pieces of marked
and sub-marked documentary evidence, among which was Exhibit. "1",16
identical to Exhibit "D", which is the duplicate copy of TCT No. 9780 (693)
that pertained to Garaygay of Cebu and used in the reconstitution of the
burned original thereof.
In his testimony, Yambao stated having noticed, when Garaygay of Rizal
offered to sell Lot 23, that the corners and the portion of Exhibit "B"
containing the owners personal circumstances were torn and related the
owners explanation as to how these oddities came about. Yambao related
that owing to the physical appearance of Exhibit "B", the recording of the
Garaygay of Rizal - Yambao/Rodriguez deed of sale (Exh. "A") was refused
since the more crucial document, i.e., the torn owners copy was itself not
registrable unless it is first reconstituted. He also testified that, to assure
himself of the genuineness of the sellers owners duplicate certificate, he
and Garaygay of Rizal repaired to the Quezon City Registry to compare his
(Garaygay of Rizals) copy with the original copy on file with the registry,
and discovered that the only difference was that the owners duplicate
bears the title number "9780", while the original had "9780 (693)"
typewritten on a straight line.17 As told by Yambao, Garaygay of Rizals
explanation for the figure difference is that "693" was not affixed on his

BANKING | 05Dec | 45

(Garaygay of Rizals) title because he never, in first place, presented the

same to the Quezon City Registry for correction or affixture.
Yambao also testified that Garaygay of Rizal, when asked to show proof of
his identity, presented a voters ID with his picture,18 a Commission of
Elections (COMELEC) certification attesting to his being a registered voter in
Precinct No. 21 in Angono, Rizal19 and a certification of residence issued by
the barangay captain of the place.20 Yambao added that before concluding
the sale, he, together with the prospective seller, proceeded to the land site
where the residents and/or caretakers thereat assured him that his
companion, Garaygay of Rizal, was actually the landowner.
For their part, defendants presented Garaygay of Cebu who alleged, among
other things, having acquired Lot 23 from one Macaria Lim vda. Arambulo
sometime in 1944, having paid taxes thereon for the period 1949-199021
and mortgaging in 1949 the titled property with Meralco Employees Savings
& Loan Association, with the mortgage deed and later the discharge of
mortgage being annotated on his title.22 Joselito also took the witness
stand in defense of his ownership of Lot 23 and the transactions he entered
into involving the lot.
Eventually, the trial court rendered judgment finding for the plaintiffs and
against the defendants, declaring Joselitos TCT No. 9780 (693) and all
subsequent titles traceable to it and transactions involving its derivatives as
null and void. To the trial court, plaintiffs evidence preponderated over
those of the defendants whose main witness, Garaygay of Cebu, gave
inconsistent testimony, while Joselito hedged on his answer regarding a
cousin connected with LRA. Going against the defendants cause, the trial
court
further
observed
dubious
circumstances
surrounding
the
reconstitution of TCT 9780 (693), the more disturbing of which is the
admitted participation of LRA personnel in the reconstitution process.
Dated January 28, 1993, the trial courts decision23 dispositively reads:
WHEREFORE, in view of the foregoing, the Court renders the following
judgment to wit:
1. Plaintiffs Liberato G.Yambao, Jesus B. Rodriguez and Jesus D. Morales
are hereby declared the rightful owners and possessors of the land
described in TCT No. 9780 marked as Exh. B;
2. Defendants title, TCT No. 9780 (693), marked as Exh. 1 (p. 349, Rollo,
identical to Exh. D, p. 493 Rollo); the LRA Order of Reconstitution . . .;
defendants reconstituted title No. RT-1764 (9780) (693) marked as Exh.
"4" . . .; the cancelled title TCT No. 12183 and its derivative titles, TCT Nos.
14414, 14415, and 14416, all in the name of defendant Joselito P.
Garaygay and intervenor Lilian M. Toundjis involving TCT 14414; the Deed

of Assignment and Transfer between Joselito P. Garaygay and Century

Realty involving TCT Nos. 14415 and 14416; [the derivative] titles of
defendant Century Realty . . . namely TCT Nos. 34390 . . . and 34391 . . .;
and the Deed of Real Estate Mortgage executed by Century Realty . . . in
favor of defendant Premiere Bank, Inc. are all declared null and void and
without force and effect;
3. The Register of Deeds of Quezon City to strike out the reconstituted title
[but already cancelled] No. 1764 (9780) (693) and TCT No. 12183, . . . ; to
cancel TCT 14414 . . .; to cancel the Deed of Assignment and Transfer
between Joselito P. Garaygay and Century Realty . . . covered by TCT Nos.
14415 and 14416, and necessarily cancel TCT Nos. 34390 and 34391 . . .;
to cancel the Deed of Real Estate Mortgage over TCT Nos. 34390 and 34390
. . .; and thereafter, to enter and register the Deeds of Sale, dated February
11, 1986 (Exh. "A") and July 10, 1988 (Exh. "C") and forthwith issue
corresponding new title/s in the names of the plaintiffs, free from all
encumbrances, except those entered into by them, upon payment of all
taxes and fees prescribed by law;
4. Defendant Joselito P. Garaygay is sentenced to pay each of the [three]
plaintiffs . . ., the sum of P100,000. 00 as moral damages;
5. Defendants Joselito P. Garaygay, Century Realty . . . and Premiere Bank,
Inc. are sentenced to pay jointly and severally each of the two plaintiffs,
namely Liberato Yambao and Jesus Morales, the sum of P25,000.00 as
exemplary damages and to plaintiff Jesus B. Rodriquez the sum of
P25,000.00 as nominal damages The defendants are also sentenced to pay
jointly and severally the sum of P20,000.00 as attorneys fees and the cost
of suit;
6. Defendant Joselito P. Garaygay is further sentenced to reimburse Lilian
M. Toundjis the sum of P2,000,000.00 with interest thereon at 6% per
annum from the date of judgment;
7. With the annulment of the [aforementioned] Deed of Assignment and
Transfer between defendant Joselito P. Garaygay and defendant Century
Realty . . . and the Deed of Real Estate Mortgage . . . between defendant
Century Realty . . . and defendant Premiere Bank, Inc., all aforementioned
defendants who are respective parties to the named deeds are hereby
ordered to make a full return and restitution to each other of all monies,
things and objects they have received thereunder without interest within
fifteen days from finality of this judgment;
8. All other claims are dismissed.
SO ORDERED. [Words in bracket added]

BANKING | 05Dec | 46

In time, herein petitioners appealed to the Court of Appeals whereat their

recourse was docketed as CA- G.R. CV No. 42121.
In its Decision of November 29, 1995,24 the Court of Appeals affirmed in
toto the appealed decision of the trial court, the affirmance being
predicated on the following main justifications:
All in all, the Court agrees with the trial court in giving low rating to both
Vicente Garaygay of Cebu and appellant JOSELITO as witnesses. The court
notes that Vicente T. Garaygay of Cebu has no explanation why the deed of
sale between him and Arambulo was not adduced in evidence x x x
In view of the foregoing questionable actuations of Vicente T. Garaygay of
Cebu and his nephew . . . and their cohorts, the trial court (sic) is
constrained to declare that the defendants mother title TCT No. 9780 (693)
marked as Exhibit 1, which served as the basis of the reconstitution is a
fake and spurious title. x x x Thus, all titles in the name of Vicente T.
Garaygay of Cebu and Joselito Garaygay are null and void. x x x .
On the other hand, the claim of appellees that their certificate of title is a
genuine title is supported with credible and sufficient evidence. The
contention of the appellants that the appellees title should not be accepted
as genuine because it is not authenticated lacks merit. The owners copy of
the title of appellees is a public document (Broce vs. Broce, 4 Phil. 611).
Unlike a private document which must be authenticated before its
admission . . ., there is no need to authenticate a public document to make
it admissible in evidence (Rule 132, Sec 24). The rule that a document
must be authenticated before it is admissible in evidence does not apply to
public documents which are admissible without further proof of their due
execution or genuineness x x x. Public documents are already authenticated
by the official signature and seal which they bear, of which this Court takes
judicial notice (Apostol, Essentials of Evidence, 1991, ed., p. 430)
(Underscoring added).
Their motion for reconsideration having been denied by the appellate court
in its Resolution of February 6, 1997,25 petitioners have separately come to
this Court. That of petitioner Premier Bank was docketed as G.R. No.
128122; that of Toundjis as G.R. No. 128184; and that of Joselito Garaygay
and Century Realty as G.R. No. 128229.
Per this Courts Resolution dated June 18, 1997,26 the three (3) separate
petitions were, upon private respondents motion, ordered consolidated.
The principal issue tendered in the separate petitions, albeit formulated a
bit differently, comes down to the following: whether or not the Court of
Appeals erred in holding Garaygay of Rizal, instead of Garaygay of Cebu, as
the real owner of Lot 23. Behind this issue is the corollary question of

whether or not the same court erred in finding Garaygay of Rizals owners
copy, TCT No. 9780, instead of the Garaygay of Cebus copy, TCT No. 9780
(693), as the authentic title covering Lot 23.
Petitioners urge reversal on the submission that, unlike Garaygay of Cebu
who came forward and took the witness stand, the identity of Garaygay of
Rizal - who they stressed at every turn had not been presented to testify has not been established. Albeit they do not say so, the inference of their
posture is that an impostor has taken the identity of Vicente T. Garaygay.
Corollarily, they also contend that the authenticity of the impostor
Garaygays adverted owners copy of TCT No. 9780 has remained unproven.
The desired reversal cannot be granted.
Both defining documents, Exhibit "1" and Exhibit "B", appear to have been
issued by the appropriate Registry of Deeds and as such would ordinarily
enjoy the guarantees flowing from the legal presumption of regularity of
issuance.27 But how and precisely when the legal aberration occurred
where two (2) owners duplicate certificates ended up in the hands of two
(2) distinct persons, complete strangers to each other, are questions which
the records do not provide clear answer. It may not be idle to speculate,
though, that fraud or other improper manipulations had been employed
along the way, with likely the willing assistance of land registry official/s, to
secure what for the nonce may be tagged as the other title. Consistent with
the presumption of regularity of issuance, however, the authenticity of one
copy has to be recognized. And necessarily, one of the two (2) outstanding
owners copies has to be struck down as wrongly issued, if not plainly
spurious, under the governing Torrens system of land registration. For, a
piece of land cannot plausibly be covered at the same time, under the same
concept of ownership, by two (2) outstanding certificates of title, each
having the same validity, force and effect. One has to be spurious, or at
least one has to prevail over the other.28 Else, the ideal sought to be
achieved by the Torrens system would be illusory. As it were, the Torrens
system of land registration aims to obviate possible conflicts of title by
giving the public the right to rely upon the face of the Torrens certificate
and to dispense, as a rule, with the necessity of inquiring further;29 on the
part of the registered owner, the system gives him complete peace of mind
that he would be secured in his ownership as long as he has not voluntarily
disposed of any right over the covered property.30
The categorical conclusion of the Court of Appeals confirmatory of that of
the trial court is that Exhibit "B" is genuine and that Garaygay of Rizal is a
real person. On the other hand, Exhibit "1" was adjudged spurious. These
factual determinations as a matter of long and sound appellate practice
must be accorded great weight, and, as rule, should not be disturbed on
appeal,31 save for the most compelling and cogent reasons,32 like when

BANKING | 05Dec | 47

such factual findings were drawn from a vacuum, or, in fine, reached
arbitrarily.33
To be sure, arbitrariness cannot contextually be imputed on the appellate
court. Its finding that Garaygay of Rizal is an authentic person, once
residing in and a registered voter of Angono, Rizal has adequate evidentiary
support in his voters ID, the COMELEC and barangay certifications
aforementioned and the testimony of an occupant of Lot 23. And for
whatever it is worth, Garaygay of Cebu no less testified that there are three
(3) Vicente T. Garaygay in the Philippines.34 The reality that the private
respondents failed to put Garaygay of Rizal on the witness box to identify
his copy of the title and defend his erstwhile ownership of Lot 23 may
perhaps support petitioners claim about his being fictitious if his
whereabouts during the trial, if still alive then, was known. But, as found by
the appellate court, "Yambao never heard from or about Garaygay of Rizal"
after they have executed the Deed of Absolute Sale (Exh. "A", supra) on
February 11, 1986.
Petitioners attribution of error on the part of the appellate courts declaring
Garaygay of Rizal as owner of the disputed parcel of land is untenable. It
cannot be overemphasized that the possessor-owner of the authentic copy
of TCT No. 9780 was necessary the real owner of Lot 23. That possessory
distinction happened to belong to Garaygay of Rizal.
Moreover, facts and reasonable inferences drawn therefrom point to Exhibit
"1" as being spurious, necessarily leaving Exhibit "B" as the authentic
duplicate copy. For starters, there is the appearance and physical condition
of the owners copies in question which, if properly evaluated in the light of
attendant circumstances, would help in determining which is genuine and
which is sham.35 For, the condition and physical appearance of a document
would, to borrow from Junquera, reveal, albeit silently, "the naked truth,
hiding nothing, forgetting nothing and exaggerating nothing." As aptly
observed by the appellate court, rationalizing its conclusion adverted to
above, Exhibit "B" has no defect, except for its partly being torn.
Respondents explanation for the defective state of Exhibit "B", as related to
them by Garaygay of Rizal, i.e., it was due to exposure of the document to
the elements, like rain, following his evacuation from Manila to a small nipa
hut in Angono, Rizal during the Japanese occupation,36 merited approval
from the trial court and the Court of Appeals. Both courts, being in a better
position to pass upon the credibility of petitioners witness and appreciate
his testimony respecting the less than usual appearance of Exhibit "B", their
findings command the respect of this Court.
Lest it be overlooked, what might be considered as defects in Garaygay of
Cebus copy are, at bottom, the combined effects thereon of the passage of
time and the elements. Standing alone, these defects do not, in our view,
undermine the integrity of the document.

However, unlike Exhibit "B", Exhibit "1" contained entries and other
uncommon markings or features which could not have existed without
human intervention. Although any one of them may perhaps not be
appreciable in isolation, these features and/or markings, taken together,
indeed put the integrity of Exhibit "1" under heavy cloud and indeed cast
doubt on its genuineness.
The irregularities listed in the appealed decision may be summed up in the
following wise:
1. Two (2) Victory stamps issued after liberation were strangely pasted on
the seal of Garaygay of Cebus title Exhibit "1" - when such stamps were
not yet in existence when such title was entered in the Registry of Deeds of
Manila on June 14, 1944;
2. Exhibit "1" was prepared on "Judicial Form No. 109-D Revised June
1945", which came into circulation after June 14, 1944;
3. Exhibit "1" bears the handwritten figure "9780" in ink above the
typewritten number "693". There is no initial to suggest that the
handwritten number "9780 over the typewritten title number "693" was
officially authorized;
4. The first letter "Y" in the surname "Garaygay" in Exhibit "1" was inserted
in ink. In contrast, there is no such insertion in Exhibit "B"; and
5. Exhibit "1" carries the annotation "subject to further disposition by the
government with respect to real estate transactions consummated during
the Japanese regime, and subject to the provisions of Sec. 4, Rule 74 of the
New Rules of Court".37 Such annotation is supposed to have been
contemporaneously made on the date of the issuance of the title in 1944.
Yet, in what appears to be an anomalous instance, advertence is made to
"transactions consummated during the Japanese regime" and to "Rule 74 of
the Rules of Court", logically implying, as aptly observed by the Court of
Appeals, that the annotation was entered after liberation and also after
1964 when the New Rules of Court came into effect.
Almost as if it were an afterthought, petitioners explained that the Victory
stamps could have been pasted, the 1945 revised judicial form utilized, and
the annotations referred to in item # (5) entered when the TCT of Garaygay
of Cebu was reissued. Anent the number "9780" appearing in ink, the
proffered explanation was that the handwritten "9780" was a mere
provisional marking.
The foregoing explanations are, at best speculative, thus correctly struck
down by the appellate court. And unfortunately, Garaygay of Cebu, the best

BANKING | 05Dec | 48

person to shed light on the foregoing unusual situations and help the
limping case of the petitioners, could not himself offer an explanation.
Petitioners insistence that the inscription on Garaygay of Cebus copy of the
deed of mortgage and the discharge of mortgage he constituted over Lot 23
in favor of Meralco Employees Savings and Loan Association proves the
authenticity of the latters owner duplicate is valid to a point. But, to
suggest that such inscription could not have been possible were his title
spurious is altogether a different matter. We need not cite cases
memorialized in books of jurisprudence where land dealings are annotated
on reconstituted certificates secured thru fraud or otherwise issued
irregularly. Stated a little differently, an annotation of what is otherwise a
bona-fide land transaction is not a peremptory argument against the
spurious character, if that be the case, of the document on which it is
annotated.
In the same token, the payment by Garaygay of Cebu of land taxes on Lot
23 does not also necessary detract from the spurious nature of his title,
Exhibit "1". After all, any one can pay real estate taxes on a given property
without being quizzed by the local treasury whether or not the payor owns
the real property in question. This is not to say of course that tax receipts
are evidence of ownership, since they are not, albeit they are good indicia
of possession in the concept of owner, for no one would ordinarily be paying
taxes for a property not in his actual or at least constructive possession.38
Other than paying taxes from 1949 to 199039 (mistakenly stated by
respondent court as from 1949 to 1960), however, Garaygay of Cebu and
this holds true for his nephew Joselito - did not appear before the current
stand-off to have exercised dominion over Lot 23. For one, it has not been
shown that Garaygay of Cebu was at any time in possession of the property
in question, unlike his namesake from Rizal who managed to place the
property under the care of certain individuals who built semi-permanent
structure-dwelling houses thereon without so much of a protest from
Garaygay of Cebu or his nephew Joselito after the latter purportedly bought
the property. For another, neither Garaygay of Cebu nor his nephew Joselito
ever instituted any action to eject or recover possession from the occupants
of Lot 23. This passivity bespeaks strongly against their claim of ownership.
It has been said that a partys failure to raise a restraining arm or a shout
of dissent to anothers possession for an unreasonably long period is simply
contrary to his claim of ownership.40 Not lost on this Court are
circumstances noted by the trial court which negatively reflect on Garaygay
of Cebus and his nephews claim of ownership. Some excerpts of what the
trial court wrote:
"On its face, Exh. "5" [the original copy of the deed of sale between
Garaygay and his nephew] was notarized by one Armando Pulgado.
However, there are certifications by both the Bureau of National Archives

that no Notarial records of Armando Pulgado exist in Manila. (Exh. "KK") or

in Quezon City (Exh. "LL"), and by the Clerk of Court that Atty. Armando
Pulgado was not appointed as notary public for and in the City of Manila for
the year 1979 (Exh. "MM")
Exh. "5" dated April 17, 1979 was registered only on May 26, 1989, over 10
years from the sale. JOSELITO could not explain how thereafter his own
title (TCT 12183) was issued in his name since it was not he who registered
the Deed of Sale, Exh. "5". In other words, someone else registered it for
him.
Neither JOSELITO nor his uncle . . .followed up the petition for
reconstitution which was prepared, filed and processed by interested
persons in Manila, which scenario prompted plaintiffs counsel to observe
that the reconstitution was among the first of all applicants in Quezon City
to be approved (p. 32, TSN August 17, 1992). Of these interested persons,
the most unthinkable was Engr. Felino Cortez of the LRA who did the followups on the application in Manila. It is remarkable why Cortez, who is neither
a friend nor relative, took special interest in not only following up the
application for reconstitution but in effecting the subdivision of TCT 12183
into [3 lots], for which three derivative titles of TCT 12183 were
issued . . . . Again JOSELITO had no knowledge of this fact of subdivision
until his uncle, . . . telephoned him with the information that the land was
already subdivided.
In short, it appears to the Court that without doing anything, Vicente T.
Garaygay of Cebu has his title (Exh. "1") reconstituted. On the other hand,
without knowing anything, JOSELITO obtained TCT 12183 in his name and
had the land subdivided and sold.
These circumstances demonstrate that neither JOSELITO nor his uncle,
Vicente T. Garaygay of Cebu acted ante litem motam like the true owners
they claim to be in their respective times. xxx
Several questions confound the Courts curiosity. Why were some LRA
officials so interested in the speedy reconstitution and in the subdivision of
the land in excess of their bureaucratic duties? Where did Vicente T.
Garaygay of Cebu get his owners copy, Exh. "1". Did some conniving LRA
officers supply the judicial form and Victory stamps? Why was JOSELITO so
evasive about his cousin in the LRA as shown in his examination?
xxx xxx xxx
As the Court sees it, the Deed of Sale (Exh. "5" was a simulated transaction
because both JOSELITO and his uncle admit this was a joint venture to sell
the property in question. However, the facts suggest that the joint venture
was not limited to the two of them. The persons who prepared and filed the

BANKING | 05Dec | 49

application for reconstitution, and those officers in the LRA who followed it
up and who thereafter subdivided the land into three lots for easier sale,
those at the NBI who tried to persuade Yambao and Morales to settle the
dispute . . . are apparently part of the joint venture or stand to profit from
it"
This brings us to the core of Toundjis and Premiere Banks petitions. The
first asserts the rights of a purchaser and the other, that of a mortgagee, in
good faith and for value of Lot 23, a status respectively denied them by the
appellate court.
The rule that a subsequent declaration of a title as null and void is not a
ground for nullifying the contractual right of a purchaser, rmortgagee or
other transferees in good faith, with the exceptions thereto, is well-settled.
Where the certificate of title is in the name of the seller or mortgagor, the
innocent purchaser or mortgagee for value has the right to rely on what
appears on the certificate without inquiring further.41 In the absence of
anything to excite or arouse suspicion, or except when the party concerned
had actual knowledge of facts or circumstances that should impel a
reasonably cautious person to make such further inquiry, said purchaser or
mortgagee is without obligation to look beyond the certificate and
investigate the title of the seller or mortgagor. Thus, where innocent third
persons, relying on the correctness of the certificate, acquire rights over the
property as buyer or mortgagee, the subsequent declaration of nullity of
title is not a ground for nullifying the right of such buyer or mortgagee.42
Tested by the above norm, may Toundjis be considered, as she has claimed,
an innocent purchaser for value, meaning one who buys or acquires, for
valuable consideration, a piece of land of another without notice that some
other person has a right to, or interest in, such property at the time of
purchase, or before he has notice of the claim or interest of some other
persons in the property.43
The Court of Appeals rejected the claim of Toundjis, and rightly so.
A study of the record shows that TCT 14414 covering Lot. 23-A that
Toundjis contracted to buy from Joselito carried an annotation that it was
administratively reconstituted. Records also indicate that Toundjis knew at
the time of the sale that Joselito did not have possession of the lot
inasmuch as she agreed to pay the balance of the purchase price as soon
as the seller can fence off the property and surrender physical possession
thereof to her.
Even for these two (2) reasons alone, which should have placed Toundjis on
guard respecting Joselitos title, her claim of being a bona fide purchaser for
value must fail. The rejection, therefore, by the Court of Appeals of such
claim is correct. Likewise acceptable is the appellate courts holding, citing

Republic vs. Court of Appeals,44 that a purchaser of a property cannot be in

good faith where the title thereof shows that it was reconstituted. Noted
with approval, too, is the appellate courts observation that the "contract to
sell (Exh. "44") which is unregistered and not annotated at the back of the
title of the property [cannot adversely affect appellees]" for the reason that
under "Sec. 51 of PD 1529 (Property Registration Act), the act of
registration shall be the operative act to convey or affect the land in so far
(sic) as third parties are concerned."45
Premiere Bank cannot also be accorded the status of an innocent
mortgagee for value vis--vis the mortgage of the lots covered by TCT Nos.
34390 and 34391 constituted in its favor by Century Realty. Apart from the
annotations that said titles are only administratively reconstituted,46 the
appellate court provided the ensuing compelling reasons:
"Premiere inspected the property to be mortgaged xxx on March 6, and 11,
1991 as can be seen in its Real Estate Appraisal Report (Exhs. "EE", "EE1"). The adverse claim of Jesus Rodriguez was cancelled on March 26, 1991
xxx Hence, when Premiere inspected the property xxx, it was aware of the
existence of Rodriquez adverse claim. This is admitted by Premieres
witness xxx. The adverse claim of Rodriquez annotated at the back of TCT
No. 14415 and marked as Exhibit I-3 and also at the back of TCT No. 14416
(Exh. J) marked as Exhibit J-3 declares that he is the vendee of the land
described.
There are buildings of strong material on the land in dispute xxx.
Premiere is aware of the existence of these structures as can be seen in its
real estate report (Exh. EE). Said report states that there are shanties
erected in the property in dispute.
But despite the existence of alleged shanties which are in fact and in truth
big structures, two of them being concrete buildings (Exhs. 0 to O-3),
Premiere Bank proceeded in the execution of the mortgage contract. xxx.
If the land mortgaged is in the possession of a person other than the
mortgagor, the mortgagee is required to go beyond the certificate of title
and make inquiries as to the rights of the actual possessors. Failure to do
so would make him a mortgagee in bad faith (Sunshine Finance vs. IAC,
203 SCRA 213; Conspecto vs. Fruto, 31 Phil 144)".
It cannot be overemphasized that Premiere Bank, being in the business of
extending loans secured by real estate mortgage, is familiar with rules on
land registration. As such, it was, as here, expected to exercise more care
and prudence than private individuals in their dealing with registered
lands.47 Accordingly, given inter alia the suspicion-provoking presence of
occupants other than the owner on the land to be mortgaged, it behooved

BANKING | 05Dec | 50

Premiere Bank to conduct a more exhaustive investigation on the history of

the mortgagors title. That Premiere Bank accepted in mortgage the
property in question notwithstanding the existence of structures on the
property and which were in actual, visible and public possession of a person
other than the mortgagor, constitutes gross negligence amounting to bad
faith.48 Premier Bank is thus not entitled to have its lien annotated on the
genuine title.49
A final consideration: Petitioners maintain that the appellate court erred in
annulling the LRA order of reconstitution (Exh. "3"), even if such relief was
not prayed for in private respondents amended complaint and
notwithstanding the fact that the LRA was not impleaded as an
indispensable party in Civil Case No. Q-92-8455.
The contention is far from tenable. An action for quieting of title, as here, is
equivalent to an action for reconveyance of title wrongfully or erroneously
registered in anothers name. The successful outcome of such action would
in most cases necessarily entail the cancellation of existing title wrongly
issued to another, which in turn requires the action of the LRA and/or the
proper Register of Deeds. As in the past, this Court, to obviate multiplicity
of suits, had ordered the LRA or the Register of Deeds, albeit not impleaded
below, to cancel such erroneously issued titles.
Before writing finis to this ponencia, two (2) peripheral matters raised need
to be addressed.
First, petitioner Toundjis has, as an alternative prayer, asked that the
appealed decision ordering Joselito to reimburse her the sum of
P2,000,000.00 be modified, such that the reimbursable amount shall bear
interest of nineteen (19%) percent (down from the 25% she sought in her
answer-in-intervention) instead of six (6%) per annum reckoned from
March 23, 1990, instead of from January 28, 1993, the date of judgment of
the trial court. Absent an explanation with cogent legal support why her
plea for a modificatory ruling should be favorably considered, this Court
denies the same.
Second, petitioners have invited attention to and made much of this Courts
per curiam Decision dated April 7, 199350 in A.M. P-91-593, entitled "Office
of the Court Administrator vs. Atty. Liberato Yambao et al."51 In it, the
Court dismissed herein respondent Yambao from the service as then Clerk
of Court, RTC, Quezon City, Branch 80 for, among other things, having in
his possession a forged deed of sale executed by Vicente T. Garaygay. It
should be stressed in this regard, however, that this Court, in its Resolution
of May 18, 1994,52 resolved to "SUSPEND the implementation of the
effects of the decision of April 7, 1993 pending the judicious review by the
Court of Appeals of the decision of the Regional Trial Court, Branch 80,
Quezon City in Civil Case No. Q-92-8455."

This Court need not belabor the effects on A.M. P-91-593 of the appealed
decision of the Court of Appeals, as hereby affirmed.
WHEREFORE, the instant petitions are DENIED and the impugned Decision
of the Court of Appeals AFFIRMED.
Costs against petitioners.
SO ORDERED.

BANKING | 05Dec | 51

FIRST DIVISION
[G.R. No. L-53194. March 14, 1988.]

car. Santos however removed and stole a check from his check book
without the knowledge and consent of private Respondent. No doubt private
respondent cannot be considered negligent under the circumstances of the
case.

PHILIPPINE NATIONAL BANK, Petitioner, v. HON. ROMULO S.

QUIMPO, Presiding Judge, Court of First Instance of Rizal, Branch
XIV, and FRANCISCO S. GOZON II, Respondents.

DECISION

SYLLABUS

GANCAYCO, J.:

1.
MERCANTILE LAW; NEGOTIABLE INSTRUMENTS; CHECKS; BANKS
PRIME DUTY IS TO ASCERTAIN GENUINENESS OF SIGNATURE OF DRAWER
OR DEPOSITOR. The prime duty of a bank is to ascertain the
genuineness of the signature of the drawer or the depositor on the check
being encashed. It is expected to use reasonable business prudence in
accepting and cashing a check presented to it.

On July 3, 1973, Francisco S. Gozon II, who was a depositor of the

Caloocan City Branch of the Philippine National Bank, went to the bank in
his car accompanied by his friend Ernesto Santos whom he left in the car
while he transacted business in the bank. When Santos saw that Gozon left
his check book he took a check therefrom, filled it up for the amount of
P5,000.00, forged the signature of Gozon, and thereafter he encashed the
check in the bank on the same day. The account of Gozon was debited the
said amount. Upon receipt of the statement of account from the bank,
Gozon asked that the said amount of P5,000.00 should be returned to his
account as his signature on the check was forged but the bank refused.

2.
REMEDIAL LAW; EVIDENCE; FINDINGS OF FACTS OF THE TRIAL
COURT, CONCLUSIVE. In this case the findings of facts of the court a quo
are conclusive. The trial court found that a comparison of the signature on
the forged check and the sample signatures of private respondent show
marked differences as the graceful lines in the sample signature which is
completely different from those of the signature on the forged check.
Indeed the NBI handwriting expert Estelita Santiago Agnes whom the trial
court considered to be an "unbiased scientific expert" indicated the marked
differences between the signature of private respondent on the sample
signatures and the questioned signature. Notwithstanding the testimony of
Col. Fernandez, witness for petitioner, advancing the opinion that the
questioned signature appears to be genuine, the trial court by merely
examining the pictorial report presented by said witness, found a marked
difference in the second "c" in Francisco as written on the questioned
signature as compared to the sample signatures, and the separation
between the "s" and the "c" in the questioned signature while they are
connected in the sample signatures. Obviously, petitioner was negligent in
encashing said forged check without carefully examining the signature
which shows marked variation from the genuine signature of private
Respondent.
3.
MERCANTILE
LAW;
NEGOTIABLE
INSTRUMENTS;
CHECKS;
NEGLIGENCE ON THE PART OF THE DRAWER TO ABSOLVE BANK FROM
LIABILITY ON FORGED CHECK, ABSENT. In reference to the allegation of
the petitioner that it is the negligence of private respondent that is the
cause of the loss which he suffered, the trial court held otherwise. Private
respondent trusted Ernesto Santos as a classmate and a friend. He brought
him along in his car to the bank and he left his personal belongings in the

Upon complaint of private respondent on February 1, 1974 Ernesto Santos

was apprehended by the police authorities and upon investigation he
admitted that he stole the check of Gozon, forged his signature and
encashed the same with the Bank.
Hence Gozon filed the complaint for recovery of the amount of P5,000.00,
plus interest, damages, attorneys fees and costs against the bank in the
Court of First Instance of Rizal. After the issues were joined and the trial on
the merits ensued, a decision was rendered on February 4, 1980, the
dispositive part of which reads as follows:jgc:chanrobles.com.ph
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff. The
defendant is hereby condemned to return to plaintiff the amount of
P5,000.00 which it had unlawfully withheld from the latter, with interest at
the legal rate from September 22, 1972 until the amount is fully delivered.
The defendant is further condemned to pay plaintiff the sum of P2,000.00
as attorneys fees and to pay the costs of this suit."cralaw virtua1aw library
Not satisfied therewith, the bank now filed this petition for review on
certiorari in this Court raising the sole legal issue that
"THE ACT OF RESPONDENT FRANCISCO GOZON, II IN PUTTING HIS
CHECKBOOK CONTAINING THE CHECK IN QUESTION INTO THE HANDS OF
ERNESTO SANTOS WAS INDEED THE PROXIMATE CAUSE OF THE LOSS,

BANKING | 05Dec | 52

THEREBY PRECLUDING HIM FROM SETTING UP THE DEFENSE OF FORGERY

OR WANT OF AUTHORITY UNDER SECTION 23 OF THE NEGOTIABLE
INSTRUMENTS LAW, ACT NO. 3201"
The petition is devoid of merit.
This Court reproduces with approval the disquisition of the court a quo as
follows:jgc:chanrobles.com.ph
"A bank is bound to know the signatures of its customers; and if it pays a
forged check, it must be considered as making the payment out of its own
funds, and cannot ordinarily change the amount so paid to the account of
the depositor whose name was forged (San Carlos Milling Co. v. Bank of
the P.I., 59 Phil. 59).
This rule is absolutely necessary to the circulation of drafts and checks, and
is based upon the presumed negligence of the drawee in failing to meet its
obligation to know the signature of its correspondent. . . . There is nothing
inequitable in such a rule. If the paper comes to the drawee in the regular
course of business, and he, having the opportunity ascertaining its
character, pronounces it to be valid and pays it, it is not only a question of
payment under mistake, but payment in neglect of duty which the
commercial law places upon him, and the result of his negligence must rest
upon him (12 ALR, 1901, citing many cases found in I Agbayani, supra).
Defendant, however, interposed the defense that it exercised diligence in
accordance with the accepted norms of banking practice when it accepted
and paid Exhibit A. It presented evidence that the check had to pass
scrutiny by a signature verifier as well as an officer of the bank.
A comparison of the signature (Exhibit A-1) on the forged check (Exhibit
A) with plaintiffs exemplar signatures (Exhibits 5-A and 5-B)found in the
PNB Form 35-A would immediately show the negligence of the employees of
the defendant bank. Even a not too careful comparison would immediately
arrest ones attention and direct it to the graceful lines of plaintiff s
exemplar signatures found in Exhibits 5-A and 5-B. The formation of the
first letter F in the exemplars, which could be regarded as artistic, is
completely different from the way the same letter is formed in Exhibit A-1.
That alone should have alerted a more careful and prudent signature
verifier."cralaw virtua1aw library
The prime duty of a bank is to ascertain the genuineness of the signature of
the drawer or the depositor on the check being encashed. 1 It is expected
to use reasonable business prudence in accepting and cashing a check
presented to it.

In this case the findings of facts of the court a quo are conclusive. The trial
court found that a comparison of the signature on the forged check and the
sample signatures of private respondent show marked differences as the
graceful lines in the sample signature which is completely different from
those of the signature on the forged check. Indeed the NBI handwriting
expert Estelita Santiago Agnes whom the trial court considered to be an
"unbiased scientific expert" indicated the marked differences between the
signature of private respondent on the sample signatures and the
questioned signature. Notwithstanding the testimony of Col. Fernandez,
witness for petitioner, advancing the opinion that the questioned signature
appears to be genuine, the trial court by merely examining the pictorial
report presented by said witness, found a marked difference in the second
"c" in Francisco as written on the questioned signature as compared to the
sample signatures, and the separation between the "s" and the "c" in the
questioned signature while they are connected in the sample signatures. 2
Obviously, petitioner was negligent in encashing said forged check without
carefully examining the signature which shows marked variation from the
genuine signature of private Respondent.
In reference to the allegation of the petitioner that it is the negligence of
private respondent that is the cause of the loss which he suffered, the trial
court held:jgc:chanrobles.com.ph
"The act of plaintiff in leaving his checkbook in the car while he went out for
a short while can not be considered negligence sufficient to excuse the
defendant bank from its own negligence. It should be borne in mind that
when defendant left his car, Ernesto Santos, a long time classmate and
friend remained in the same. Defendant could not have been expected to
know that the said Ernesto Santos would remove a check from his
checkbook. Defendant had trust in his classmate and friend. He had no
reason to suspect that the latter would breach that trust."cralaw virtua1aw
library
We agree.
Private respondent trustee Ernesto Santos as a classmate and a friend. He
brought him along in his car to the bank and he left his personal belongings
in the car. Santos however removed and stole a check from his check book
without the knowledge and consent of private Respondent. No doubt private
respondent cannot be considered negligent under the circumstances of the
case.
WHEREFORE, the petition is DISMISSED for lack of merit with costs against
petitioner.
SO ORDERED.

BANKING | 05Dec | 53

FIRST DIVISION
[G.R. No. 138569. September 11, 2003.]
THE CONSOLIDATED BANK and TRUST CORPORATION, Petitioner, v.
COURT OF APPEALS and L.C. DIAZ and COMPANY, CPAs,
Respondents.
DECISION
CARPIO, J.:
The Case
Before us is a petition for review of the Decision 1 of the Court of Appeals
dated 27 October 1998 and its Resolution dated 11 May 1999. The assailed
decision reversed the Decision 2 of the Regional Trial Court of Manila,
Branch 8, absolving petitioner Consolidated. Bank and Trust Corporation,
now known as Solidbank Corporation ("Solidbank"), of any liability. The
questioned resolution of the appellate court denied the motion for
reconsideration of Solidbank but modified the decision by deleting the
award of exemplary damages, attorneys fees, expenses of litigation and
cost of suit.chanrob1es virtua1 1aw 1ibrary
The Facts
Solidbank is a domestic banking corporation organized and existing under
Philippine laws. Private respondent L.C. Diaz and Company, CPAs ("L.C.
Diaz"), is a professional partnership engaged in the practice of accounting.
Sometime in March 1976, L.C. Diaz opened a savings account with
Solidbank, designated as Savings Account No. S/A 200-16872-6.
On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya
("Macaraya"), filled up a savings (cash) deposit slip for P990 and a savings
(checks) deposit slip for P50. Macaraya instructed the messenger of L.C.
Diaz, Ismael Calapre ("Calapre"), to deposit the money with Solidbank.
Macaraya also gave Calapre the Solidbank passbook.
Calapre went to Solidbank and presented to Teller No. 6 the two deposit
slips and the passbook. The teller acknowledged receipt of the deposit by
returning to Calapre the duplicate copies of the two deposit slips. Teller No.
6 stamped the deposit slips with the words "DUPLICATE" and "SAVING

TELLER 6 SOLIDBANK HEAD OFFICE." Since the transaction took time and
Calapre had to make another deposit for L.C. Diaz with Allied Bank, he left
the passbook with Solidbank. Calapre then went to Allied Bank. When
Calapre returned to Solidbank to retrieve the passbook, Teller No. 6
informed him that "somebody got the passbook. 3 Calapre went back to
L.C. Diaz and reported the incident to Macaraya.
Macaraya immediately prepared a deposit slip in duplicate copies with a
check of P200,000. Macaraya, together with Calapre, went to Solidbank and
presented to Teller No. 6 the deposit slip and check. The teller stamped the
words "DUPLICATE" and "SAVING TELLER 6 SOLIDBANK HEAD OFFICE" on
the duplicate copy of the deposit slip. When Macaraya asked for the
passbook, Teller No. 6 told Macaraya that someone got the passbook but
she could not remember to whom she gave the passbook. When Macaraya
asked Teller No. 6 if Calapre got the passbook, Teller No. 6 answered that
someone shorter than Calapre got the passbook. Calapre was then standing
beside Macaraya.
Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for the
deposit of a check for P90,000 drawn on Philippine Banking Corporation
("PBC"). This PBC check of L.C. Diaz was a check that it had "long closed."
4 PBC subsequently dishonored the check because of insufficient funds and
because the signature in the check differed from PBCs specimen signature.
Failing to get back the passbook, Macaraya went back to her office and
reported the matter to the Personnel Manager of L.C. Diaz, Emmanuel
Alvarez.
The following day, 15 August 1991, L.C. Diaz through its Chief Executive
Officer, Luis C. Diaz ("Diaz"), called up Solidbank to stop any transaction
using the same passbook until L.C. Diaz could open a new account. 5 On
the same day, Diaz formally wrote Solidbank to make the same request. It
was also on the same day that L.C. Diaz learned of the unauthorized
withdrawal the day before, 14 August 1991, of P300,000 from its savings
account. The withdrawal slip for the P300,000 bore the signatures of the
authorized signatories of L.C. Diaz, namely Diaz and Rustico L. Murillo. The
signatories, however, denied signing the withdrawal slip. A certain Noel
Tamayo received the P300,000.cralaw : red
In an Information 6 dated 5 September 1991, L.C. Diaz charged its
messenger, Emerano Ilagan ("Ilagan") and one Roscon Verdazola with
Estafa through Falsification of Commercial Document. The Regional Trial
Court of Manila dismissed the criminal case after the City Prosecutor filed a
Motion to Dismiss on 4 August 1992.
On 24 August 1992, L.C. Diaz through its counsel demanded from
Solidbank the return of its money. Solidbank refused.

BANKING | 05Dec | 54

On 25 August 1992, L.C. Diaz filed a Complaint 7 for Recovery of a Sum of

Money against Solidbank with the Regional Trial Court of Manila, Branch 8.
After trial, the trial court rendered on 28 December 1994 a decision
absolving Solidbank and dismissing the complaint.

questioned transaction was "now out of the lock and key and presumptively
ready for a business transaction." 11

Solidbank did not have any participation in the custody and care of the
passbook. The trial court believed that Solidbanks act of allowing the
L.C. Diaz then appealed 8 to the Court of Appeals. On 27 October 1998, the withdrawal of P300,000 was not the direct and proximate cause of the loss.
Court of Appeals issued its Decision reversing the decision of the trial court. The trial court held that L.C. Diazs negligence caused the unauthorized
withdrawal. Three facts establish L.C. Diazs negligence: (1) the possession
On 11 May 1999, the Court of Appeals issued its Resolution denying the of the passbook by a person other than the depositor L.C. Diaz; (2) the
motion for reconsideration of Solidbank. The appellate court, however, presentation of a signed withdrawal receipt by an unauthorized person; and
modified its decision by deleting the award of exemplary damages and (3) the possession by an unauthorized person of a PBC check "long closed"
attorneys fees.
by L.C. Diaz, which check was deposited on the day of the fraudulent
withdrawal.
The Ruling of the Trial Court
The trial court debunked L.C. Diazs contention that Solidbank did not follow
In absolving Solidbank, the trial court applied the rules on savings account the precautionary procedures observed by the two parties whenever L.C.
written on the passbook. The rules state that "possession of this book shall Diaz withdrew significant amounts from its account. L.C. Diaz claimed that
raise the presumption of ownership and any payment or payments made by a letter must accompany withdrawals of more than P20,000. The letter
the bank upon the production of the said book and entry therein of the must request Solidbank to allow the withdrawal and convert the amount to
withdrawal shall have the same effect as if made to the depositor a managers check. The bearer must also have a letter authorizing him to
personally." 9
withdraw the same amount. Another person driving a car must accompany
the bearer so that he would not walk from Solidbank to the office in making
At the time of the withdrawal, a certain Noel Tamayo was not only in the withdrawal. The trial court pointed out that L.C. Diaz disregarded these
possession of the passbook, he also presented a withdrawal slip with the precautions in its past withdrawal. On 16 July 1991, L.C. Diaz withdrew
signatures of the authorized signatories of L.C. Diaz. The specimen P82,554 without any separate letter of authorization or any communication
signatures of these persons were in the signature cards. The teller stamped with Solidbank that the money be converted into a managers check.
the withdrawal slip with the words "Saving Teller No. 5." The teller then
passed on the withdrawal slip to Genere Manuel ("Manuel") for The trial court further justified the dismissal of the complaint by holding
authentication. Manuel verified the signatures on the withdrawal slip. The that the case was a last ditch effort of L.C. Diaz to recover P300,000 after
withdrawal slip was then given to another officer who compared the the dismissal of the criminal case against Ilagan.
signatures on the withdrawal slip with the specimen on the signature cards.
The trial court concluded that Solidbank acted with care and observed the The dispositive portion of the decision of the trial court reads:chanrob1es
rules on savings account when it allowed the withdrawal of P300,000 from virtual 1aw library
the savings account of L.C. Diaz.
IN VIEW OF THE FOREGOING, judgment is hereby rendered DISMISSING
The trial court pointed out that the burden of proof now shifted to L.C. Diaz the complaint.
to prove that the signatures on the withdrawal slip were forged. The trial
court admonished L.C. Diaz for not offering in evidence the National Bureau The Court further renders judgment in favor of defendant bank pursuant to
of Investigation ("NBI") report on the authenticity of the signatures on the its counterclaim the amount of Thirty Thousand Pesos (P30,000.00) as
withdrawal slip for P300,000. The trial court believed that L.C. Diaz did not attorneys fees.
offer this evidence because it is derogatory to its action.
With costs against plaintiff.
Another provision of the rules on savings account states that the depositor
must keep the passbook "under lock and key." 10 When another person SO ORDERED. 12
presents the passbook for withdrawal prior to Solidbanks receipt of the
notice of loss of the passbook, that person is considered as the owner of The Ruling of the Court of Appeals
the passbook. The trial court ruled that the passbook presented during the

BANKING | 05Dec | 55

The Court of Appeals ruled that Solidbanks negligence was the proximate
cause of the unauthorized withdrawal of P300,000 from the savings account
of L.C. Diaz. The appellate court reached this conclusion after applying the
provision of the Civil Code on quasi-delict, to wit:chanrob1es virtual 1aw
library
Article 2176.
Whoever by act or
there being fault or negligence, is
Such fault or negligence, if there
between the parties, is called a
provisions of this chapter.

1.
Ordering defendant-appellee Consolidated Bank and Trust
Corporation. to pay plaintiff-appellant the sum of Three Hundred Thousand
Pesos (P300,000.00), with interest thereon at the rate of 12% per annum
from the date of filing of the complaint until paid, the sum of P20,000.00 as
exemplary damages, and P20,000.00 as attorneys fees and expenses of
omission causes damage to another, litigation as well as the cost of suit; and
obliged to pay for the damage done.
is no pre-existing contractual relation 2.
Ordering the dismissal of defendant-appellees counterclaim in the
quasi-delict and is governed by the amount of P30,000.00 as attorneys fees.
SO ORDERED. 13

The appellate court held that the three elements of a quasi-delict are
present in this case, namely: (a) damages suffered by the plaintiff; (b) fault
or negligence of the defendant, or some other person for whose acts he
must respond; and (c) the connection of cause and effect between the fault
or negligence of the defendant and the damage incurred by the plaintiff.
The Court of Appeals pointed out that the teller of Solidbank who received
the withdrawal slip for P300,000 allowed the withdrawal without making the
necessary inquiry. The appellate court stated that the teller, who was not
presented by Solidbank during trial, should have called up the depositor
because the money to be withdrawn was a significant amount. Had the
teller called up L.C. Diaz, Solidbank would have known that the withdrawal
was unauthorized. The teller did not even verify the identity of the impostor
who made the withdrawal. Thus, the appellate court found Solidbank liable
for its negligence in the selection and supervision of its employees.
The appellate court ruled that while L.C. Diaz was also negligent in
entrusting its deposits to its messenger and its messenger in leaving the
passbook with the teller, Solidbank could not escape liability because of the
doctrine of "last clear chance." Solidbank could have averted the injury
suffered by L.C. Diaz had it called up L.C. Diaz to verify the withdrawal.

Acting on the motion for reconsideration of Solidbank, the appellate court

affirmed its decision but modified the award of damages. The appellate
court deleted the award of exemplary damages and attorneys fees.
Invoking Article 2231 14 of the Civil Code, the appellate court ruled that
exemplary damages could be granted if the defendant acted with gross
negligence. Since Solidbank was guilty of simple negligence only, the award
of exemplary damages was not justified. Consequently, the award of
attorneys fees was also disallowed pursuant to Article 2208 of the Civil
Code. The expenses of litigation and cost of suit were also not imposed on
Solidbank.
The dispositive portion of the Resolution reads as follows:chanrob1es virtual
1aw library
WHEREFORE, foregoing considered, our decision dated October 27, 1998 is
affirmed with modification by deleting the award of exemplary damages and
attorneys fees, expenses of litigation and cost of suit.chanrob1es virtua1
1aw 1ibrary
SO ORDERED. 15

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

Hence, this petition.

The dispositive portion of the decision

reads:chanrob1es virtual 1aw library

I.
THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER
BANK SHOULD SUFFER THE LOSS BECAUSE ITS TELLER SHOULD HAVE
FIRST CALLED PRIVATE RESPONDENT BY TELEPHONE BEFORE IT ALLOWED
THE WITHDRAWAL OF P300,000.00 TO RESPONDENTS MESSENGER
EMERANO ILAGAN, SINCE THERE IS NO AGREEMENT BETWEEN THE

of

the

Court

of

Appeals

WHEREFORE, premises considered, the decision appealed from is hereby

REVERSED and a new one entered.

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

BANKING | 05Dec | 56

PARTIES IN THE OPERATION OF THE SAVINGS ACCOUNT, NOR IS THERE

ANY BANKING LAW, WHICH MANDATES THAT A BANK TELLER SHOULD
FIRST CALL UP THE DEPOSITOR BEFORE ALLOWING A WITHDRAWAL OF A
BIG AMOUNT IN A SAVINGS ACCOUNT.
II.
THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF
LAST CLEAR CHANCE AND IN HOLDING THAT PETITIONER BANKS TELLER
HAD THE LAST OPPORTUNITY TO WITHHOLD THE WITHDRAWAL WHEN IT
IS UNDISPUTED THAT THE TWO SIGNATURES OF RESPONDENT ON THE
WITHDRAWAL SLIP ARE GENUINE AND PRIVATE RESPONDENTS PASSBOOK
WAS DULY PRESENTED, AND CONTRARIWISE RESPONDENT WAS
NEGLIGENT IN THE SELECTION AND SUPERVISION OF ITS MESSENGER
EMERANO ILAGAN, AND IN THE SAFEKEEPING OF ITS CHECKS AND OTHER
FINANCIAL DOCUMENTS.
III.
THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE
INSTANT CASE IS A LAST DITCH EFFORT OF PRIVATE RESPONDENT TO
RECOVER ITS P300,000.00 AFTER FAILING IN ITS EFFORTS TO RECOVER
THE SAME FROM ITS EMPLOYEE EMERANO ILAGAN.
IV.
THE COURT OF APPEALS ERRED IN NOT MITIGATING THE
DAMAGES AWARDED AGAINST PETITIONER UNDER ARTICLE 2197 OF THE
CIVIL CODE, NOTWITHSTANDING ITS FINDING THAT PETITIONER BANKS
NEGLIGENCE WAS ONLY CONTRIBUTORY. 16
The Ruling of the Court
The petition is partly meritorious.
Solidbanks Fiduciary Duty under the Law
The rulings of the trial court and the Court of Appeals conflict on the
application of the law. The trial court pinned the liability on L.C. Diaz based
on the provisions of the rules on savings account, a recognition of the
contractual relationship between Solidbank and L.C. Diaz, the latter being a
depositor of the former. On the other hand, the Court of Appeals applied the
law on quasi-delict to determine who between the two parties was
ultimately negligent. The law on quasi-delict or culpa aquiliana is generally
applicable when there is no pre-existing contractual relationship between
the parties.
We hold that Solidbank is liable for breach of contract due to negligence, or
culpa contractual.
The contract between the bank and its depositor is governed by the
provisions of the Civil Code on simple loan. 17 Article 1980 of the Civil Code
expressly provides that." . . savings . . . deposits of money in banks and

similar institutions shall be governed by the provisions concerning simple

loan." There is a debtor-creditor relationship between the bank and its
depositor. The bank is the debtor and the depositor is the creditor. The
depositor lends the bank money and the bank agrees to pay the depositor
on demand. The savings deposit agreement between the bank and the
depositor is the contract that determines the rights and obligations of the
parties.
The law imposes on banks high standards in view of the fiduciary nature of
banking. Section 2 of Republic Act No. 8791 ("RA 8791"), 18 which took
effect on 13 June 2000, declares that the State recognizes the "fiduciary
nature of banking that requires high standards of integrity and
performance." 19 This new provision in the general banking law, introduced
in 2000, is a statutory affirmation of Supreme Court decisions, starting with
the 1990 case of Simex International v. Court of Appeals, 20 holding that
"the bank is under obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their
relationship. 21
This fiduciary relationship means that the banks obligation to observe "high
standards of integrity and performance" is deemed written into every
deposit agreement between a bank and its depositor. The fiduciary nature
of banking requires banks to assume a degree of diligence higher than that
of a good father of a family. Article 1172 of the Civil Code states that the
degree of diligence required of an obligor is that prescribed by law or
contract, and absent such stipulation then the diligence of a good father of
a family. 22 Section 2 of RA 8791 prescribes the statutory diligence
required from banks that banks must observe "high standards of
integrity and performance" in servicing their depositors. Although RA 8791
took effect almost nine years after the unauthorized withdrawal of the
P300,000 from L.C. Diazs savings account, jurisprudence 23 at the time of
the withdrawal already imposed on banks the same high standard of
diligence required under RA No. 8791.
However, the fiduciary nature of a bank-depositor relationship does not
convert the contract between the bank and its depositors from a simple
loan to a trust agreement, whether express or implied. Failure by the bank
to pay the depositor is failure to pay a simple loan, and not a breach of
trust. 24 The law simply imposes on the bank a higher standard of integrity
and performance in complying with its obligations under the contract of
simple loan, beyond those required of non-bank debtors under a similar
contract of simple loan.
The fiduciary nature of banking does not convert a simple loan into a trust
agreement because banks do not accept deposits to enrich depositors but
to earn money for themselves. The law allows banks to offer the lowest
possible interest rate to depositors while charging the highest possible

BANKING | 05Dec | 57

interest rate on their own borrowers. The interest spread or differential

belongs to the bank and not to the depositors who are not cestui que trust
of banks. If depositors are cestui que trust of banks, then the interest
spread or income belongs to the depositors, a situation that Congress
certainly did not intend in enacting Section 2 of RA 8791.
Solidbanks Breach of its Contractual Obligation
Article 1172 of the Civil Code provides that "responsibility arising from
negligence in the performance of every kind of obligation is demandable."
For breach of the savings deposit agreement due to negligence, or culpa
contractual, the bank is liable to its depositor.
Calapre left the passbook with Solidbank because the "transaction took
time" and he had to go to Allied Bank for another transaction. The passbook
was still in the hands of the employees of Solidbank for the processing of
the deposit when Calapre left Solidbank. Solidbanks rules on savings
account require that the "deposit book should be carefully guarded by the
depositor and kept under lock and key, if possible." When the passbook is in
the possession of Solidbanks tellers during withdrawals, the law imposes on
Solidbank and its tellers an even higher degree of diligence in safeguarding
the passbook.
Likewise, Solidbanks tellers must exercise a high degree of diligence in
insuring that they return the passbook only to the depositor or his
authorized representative. The tellers know, or should know, that the rules
on savings account provide that any person in possession of the passbook is
presumptively its owner. If the tellers give the passbook to the wrong
person, they would be clothing that person presumptive ownership of the
passbook, facilitating unauthorized withdrawals by that person. For failing
to return the passbook to Calapre, the authorized representative of L.C.
Diaz, Solidbank and Teller No. 6 presumptively failed to observe such high
degree of diligence in safeguarding the passbook, and in insuring its return
to the party authorized to receive the same.
In culpa contractual, once the plaintiff proves a breach of contract, there is
a presumption that the defendant was at fault or negligent. The burden is
on the defendant to prove that he was not at fault or negligent. In contrast,
in culpa aquiliana the plaintiff has the burden of proving that the defendant
was negligent. In the present case, L.C. Diaz has established that Solidbank
breached its contractual obligation to return the passbook only to the
authorized representative of L.C. Diaz. There is thus a presumption that
Solidbank was at fault and its teller was negligent in not returning the
passbook to Calapre. The burden was on Solidbank to prove that there was
no negligence on its part or its employees.

Solidbank failed to discharge its burden. Solidbank did not present to the
trial court Teller No. 6, the teller with whom Calapre left the passbook and
who was supposed to return the passbook to him. The record does not
indicate that Teller No. 6 verified the identity of the person who retrieved
the passbook. Solidbank also failed to adduce in evidence its standard
procedure in verifying the identity of the person retrieving the passbook, if
there is such a procedure, and that Teller No. 6 implemented this procedure
in the present case.
Solidbank is bound by the negligence of its employees under the principle of
respondeat superior or command responsibility. The defense of exercising
the required diligence in the selection and supervision of employees is not a
complete
defense
in
culpa
contractual,
unlike
in
culpa
aquiliana.25cralaw:red
The bank must not only exercise "high standards of integrity and
performance," it must also insure that its employees do likewise because
this is the only way to insure that the bank will comply with its fiduciary
duty. Solidbank failed to present the teller who had the duty to return to
Calapre the passbook, and thus failed to prove that this teller exercised the
"high standards of integrity and performance" required of Solidbanks
employees.chanrob1es virtua1 1aw 1ibrary
Proximate Cause of the Unauthorized Withdrawal
Another point of disagreement between the trial and appellate courts is the
proximate cause of the unauthorized withdrawal. The trial court believed
that L.C. Diazs negligence in not securing its passbook under lock and key
was the proximate cause that allowed the impostor to withdraw the
P300,000. For the appellate court, the proximate cause was the tellers
negligence in processing the withdrawal without first verifying with L.C.
Diaz. We do not agree with either court.
Proximate cause is that cause which, in natural and continuous sequence,
unbroken by any efficient intervening cause, produces the injury and
without which the result would not have occurred. 26 Proximate cause is
determined by the facts of each case upon mixed considerations of logic,
common sense, policy and precedent. 27
L.C. Diaz was not at fault that the passbook landed in the hands of the
impostor. Solidbank was in possession of the passbook while it was
processing the deposit. After completion of the transaction, Solidbank had
the contractual obligation to return the passbook only to Calapre, the
authorized representative of L.C. Diaz. Solidbank failed to fulfill its
contractual obligation because it gave the passbook to another person.

BANKING | 05Dec | 58

Solidbanks failure to return the passbook to Calapre made possible the

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

his home province at Bauan, Batangas. Ilagan extravagantly and lavishly

spent his money but a big part of his loot was wasted in cockfight and horse
racing. Ilagan was apprehended and meekly admitted his guilt. 28
(Emphasis supplied.)

We do not subscribe to the appellate courts theory that the proximate

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

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

There is no law mandating banks to call up their clients whenever their

representatives withdraw significant amounts from their accounts. L.C. Diaz
therefore had the burden to prove that it is the usual practice of Solidbank
to call up its clients to verify a withdrawal of a large amount of money. L.C.
Diaz failed to do so.
Teller No. 5 who processed the withdrawal could not have been put on
guard to verify the withdrawal. Prior to the withdrawal of P300,000, the
impostor deposited with Teller No. 6 the P90,000 PBC check, which later
bounced. The impostor apparently deposited a large amount of money to
deflect suspicion from the withdrawal of a much bigger amount of money.
The appellate court thus erred when it imposed on Solidbank the duty to
call up L.C. Diaz to confirm the withdrawal when no law requires this from
banks and when the teller had no reason to be suspicious of the
transaction.
Solidbank continues to foist the defense that Ilagan made the withdrawal.
Solidbank claims that since Ilagan was also a messenger of L.C. Diaz, he
was familiar with its teller so that there was no more need for the teller to
verify the withdrawal. Solidbank relies on the following statements in the
Booking and Information Sheet of Emerano Ilagan:chanrob1es virtual 1aw
library
. . . Ilagan also had with him (before the withdrawal) a forged check of PBC
and indicated the amount of P90,000 which he deposited in favor of L.C.
Diaz and Company. After successfully withdrawing this large sum of money,
Accused Ilagan gave alias Rey (Noel Tamayo) his share of the loot. Ilagan
then hired a taxicab in the amount of P1,000 to transport him (Ilagan) to

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

Doctrine of Last Clear Chance

The doctrine of last clear chance states that where both parties are
negligent but the negligent act of one is appreciably later than that of the
other, or where it is impossible to determine whose fault or negligence
caused the loss, the one who had the last clear opportunity to avoid the
loss but failed to do so, is chargeable with the loss. 29 Stated differently,
the antecedent negligence of the plaintiff does not preclude him from
recovering damages caused by the supervening negligence of the
defendant, who had the last fair chance to prevent the impending harm by
the exercise of due diligence. 30
We do not apply the doctrine of last clear chance to the present case.
Solidbank is liable for breach of contract due to negligence in the
performance of its contractual obligation to L.C. Diaz. This is a case of culpa
contractual, where neither the contributory negligence of the plaintiff nor
his last clear chance to avoid the loss, would exonerate the defendant from
liability. 31 Such contributory negligence or last clear chance by the plaintiff
merely serves to reduce the recovery of damages by the plaintiff but does
not exculpate the defendant from his breach of contract. 32
Mitigated Damages
Under Article 1172, "liability (for culpa contractual) may be regulated by the
courts, according to the circumstances." This means that if the defendant
exercised the proper diligence in the selection and supervision of its
employee, or if the plaintiff was guilty of contributory negligence, then the

BANKING | 05Dec | 59

courts may reduce the award of damages. In this case, L.C. Diaz was guilty
of contributory negligence in allowing a withdrawal slip signed by its
authorized signatories to fall into the hands of an impostor. Thus, the
liability of Solidbank should be reduced.
In Philippine Bank of Commerce v. Court of Appeals, 33 where the Court
held the depositor guilty of contributory negligence, we allocated the
damages between the depositor and the bank on a 40-60 ratio. Applying
the same ruling to this case, we hold that L.C. Diaz must shoulder 40% of
the actual damages awarded by the appellate court. Solidbank must pay he
other 60% of the actual damages.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED with
MODIFICATION. Petitioner Solidbank Corporation shall pay private
respondent L.C. Diaz and Company, CPAs only 60% of the actual damages
awarded by the Court of Appeals. The remaining 40% of the actual
damages shall be borne by private respondent L.C. Diaz and Company,
CPAs. Proportionate costs.chanrob1es virtua1 1aw 1ibrary
SO ORDERED.

BANKING | 05Dec | 60

SECOND DIVISION
G.R. No. 208293, December 10, 2014
PHILIPPINE NATIONAL BANK, PETITIONER, VS. CARMELITA S.
SANTOS, REYME L. SANTOS, ANGEL L. SANTOS, NONENG S. DIANCO,
ET AL., RESPONDENTS.
[G.R. No. 208295]
LINA B. AGUILAR, PETITIONER, VS. CARMELITA S. SANTOS, REYME
L. SANTOS, ANGEL L. SANTOS, BUENVENIDO L. SANTOS, ET AL.,
RESPONDENTS.
DECISION
LEONEN, J.:
The standard of diligence required of banks is higher than the degree of
diligence of a good father of a family.
Respondents are children of Angel C. Santos who died on March 21, 1991.
[1]
Sometime in May 1996, respondents discovered that their father
maintained a premium savings account with Philippine National Bank (PNB),
Sta. Elena-Marikina City Branch.[2] As of July 14, 1996, the deposit
amounted to P1,759,082.63.[3] Later, respondents would discover that
their father also had a time deposit of P1,000,000.00 with PNB.[4]
Respondents went to PNB to withdraw their father's deposit.[5]
Lina B. Aguilar, the Branch Manager of PNB-Sta. Elena-Marikina City Branch,
required them to submit the following: "(1) original or certified true copy of
the Death Certificate of Angel C. Santos; (2) certificate of payment of, or
exemption from, estate tax issued by the Bureau of Internal Revenue
(BIR); (3) Deed of Extrajudicial Settlement; (4) Publisher's Affidavit of
publication of the Deed of Extrajudicial Settlement; and (5) Surety bond
effective for two (2) years and in an amount equal to the balance of the
deposit to be withdrawn."[6]
By April 26, 1998, respondents had already obtained the necessary
documents.[7] They tried to withdraw the deposit.[8] However, Aguilar
informed them that the deposit had already "been released to a certain
Bernardito Manimbo (Manimbo) on April 1, 1997."[9] An amount of
PI,882,002.05 was released upon presentation of: (a) an affidavit of selfadjudication purportedly executed by one of the respondents, Reyme L.

Santos; (b) a certificate of time deposit dated December 14, 1989

amounting to P1,000,000.00; and (c) the death certificate of Angel C.
Santos, among others.[10] A special power of attorney was purportedly
executed by Reyme L. Santos in favor of Manimbo and a certain Angel P.
Santos for purposes of withdrawing and receiving the proceeds of the
certificate of time deposit.[11]
On May 20, 1998, respondents filed before the Regional Trial Court of
Marikina City a complaint for sum of money and damages against PNB, Lina
B. Aguilar, and a John Doe.[12] Respondents questioned the release of the
deposit amount to Manimbo who had no authority from them to withdraw
their father's deposit and who failed to present to PNB all the requirements
for such withdrawal.[13] Respondents prayed that they be paid: (a) the
premium deposit amount; (b) the certificate of time deposit amount; and
(c) moral and exemplary damages, attorney's fees, and costs of suit.[14]
PNB and Aguilar denied that Angel C. Santos had two separate accounts
(premium deposit account and time deposit account) with PNB.[15] They
alleged that Angel C. Santos' deposit account was originally a time deposit
account that was subsequently converted into a premium savings account.
[16] They also alleged that Aguilar did not know about Angel C. Santos'
death in 1991 because she only assumed office in 1996.[17] Manimbo was
able to submit an affidavit of self-adjudication and the required surety
bond.[18] He also submitted a certificate of payment of estate tax dated
March 31, 1997.[19] All documents he submitted appeared to be regular.
[20]
PNB and Aguilar filed a third-party complaint against Manimbo, Angel P.
Santos, and Capital Insurance and Surety Co., Inc.[21]
Angel P. Santos denied having anything to do with the special power of
attorney and affidavit of self-adjudication presented by Manimbo.[22] He
also alleged that Manimbo presented the certificate of time deposit without
his knowledge and consent.[23]
Capital Insurance and Surety Co., Inc. alleged that its undertaking was to
pay claims only when persons who were unduly deprived of their lawful
participation in the estate filed an action in court for their claims.[24] It did
not undertake to pay claims resulting from PNB's negligence.[25]
In the decision[26] dated February 22, 2011, the trial court held that PNB
and Aguilar were jointly and severally liable to pay respondents the amount
of P1,882,002.05 with an interest rate of 6% starting May 20, 1998.[27]
PNB and Aguilar were also declared jointly and severally liable for moral and
exemplary damages, attorney's fees, and costs of suit.[28] Manimbo, Angel
P. Santos, and Capital Insurance and Surety Co., Inc. were held jointly and
severally liable to pay PNB P1,877,438.83 pursuant to the heir's bond and

BANKING | 05Dec | 61

P50,000.00 as attorney's fees and the costs of suit.[29] The dispositive

portion of the trial court's decision reads:
WHEREFORE, foregoing premises considered, judgment is hereby rendered
as follows:
ordering the defendants PNB and LIN A B. AGUILAR jointly and severally
liable to pay the plaintiffs the amount of P1,882,002.05, representing the
face value of PNB Manager's Check No. AF-974686B as balance of the total
deposits of decedent Angel C. Santos at the time of its issue, with interest
thereon at the rate of 6% starting on May 20, 1998, the date when the
complaint was filed, until fully paid;
ordering both defendants jointly and severally liable to pay plaintiffs the
amount of Php 100,000.00 as moral damages, another Php 100,000.00 as
exemplary damages and Php 50,000.00 as attorney's fees and the costs of
suit;
On the Third party complaint:
Ordering the third party defendants Bernardito P. Manimbo, Angel P. Santos
and Capital Insurance & Surety Co., Inc., jointly and severally liable to pay
third party plaintiff PNB, the amount of Php 1,877,438.83 pursuant to the
Heir's Bond and the amount of Php 50,000.00 as attorney's fees and the
costs of suit.
SO ORDERED.[30]
The trial court found that Angel C. Santos had only one account with PNB.
[31] The account was originally a time deposit, which was converted into a
premium savings account when it was not renewed on maturity.[32] The
trial court took judicial notice that in 1989, automatic rollover of time
deposit was not yet prevailing.[33]
On the liability of PNB and Aguilar, the trial court held that they were both
negligent in releasing the deposit to Manimbo.[34] The trial court noted
PNB's failure to notify the depositor about the maturity of the time deposit
and the conversion of the time deposit into a premium savings account.[35]
The trial court also noted PNB's failure to cancel the certificate of time
deposit despite conversion.[36] PNB and Aguilar also failed to require the
production of birth certificates to prove claimants' relationship to the
depositor.[37] Further, they relied on the affidavit of self-adjudication when
several persons claiming to be heirs had already approached them
previously.[38]
Aguilar filed a motion for reconsideration[39] of the February 22, 2011
Regional Trial Court decision. This was denied in the June 21, 2011 Regional
Trial Court order.[40]
PNB and Aguilar appealed before the Court of Appeals.[41]

Aguilar contended that she was not negligent and should not have been
made jointly and severally liable with PNB.[42] She merely implemented
PNB's Legal Department's directive to release the deposit to Manimbo.[43]
PNB argued that it was not negligent.[44] The release of the deposit to
Manimbo was pursuant to an existing policy.[45] Moreover, the documents
submitted by Manimbo were more substantial than those submitted by
respondents.[46] Respondents could have avoided the incident "had they
accomplished the required documents immediately."[47]
In the decision[48] promulgated on July 25, 2013, the Court of Appeals
sustained the trial court's finding that there was only one account.[49]
Angel C. Santos could not have possibly opened the premium savings
account in 1994 since he already died in 1991.[50] The Court of Appeals
also held that PNB and Aguilar were negligent in handling the deposit.[51]
The deposit amount was released to Manimbo who did not present all the
requirements, particularly the Bureau of Internal Revenue (BIR)
certification that estate taxes had already been paid.[52] They should also
not have honored the affidavit of self-adjudication.[53]
The Court of Appeals ruled that Aguilar could not escape liability by pointing
her finger at PNB's Legal Department.[54] As the Bank Manager, she should
have given the Legal Department all the necessary information that must
be known in order to protect both the depositors' and the bank's interests.
[55]
The Court of Appeals removed the award of exemplary damages, upon
finding that there was no malice or bad faith.[56]
The Court of Appeals considered the deposit as an ordinary loan by the
bank from Angel C. Santos or his heirs.[57] Therefore, the deposit was a
forbearance which should earn an interest of 12% per annum.[58] The
dispositive portion of the Court of Appeals' decision reads:
WHEREFORE, premises considered, the assailed decision of the court a quo
dated February 22, 2011 is AFFIRMED with the MODIFICATIONS in that the
rate of interest shall be twelve percent (12%) per annum computed from
the filing of the case until fully satisfied. The interest due shall further earn
an interest of 12% per annum to be computed from the date of the filing of
the complaint until fully paid. Meanwhile, the award of exemplary damages
is DELETED.
SO ORDERED.[59]
PNB and Aguilar filed their separate petitions for review of the Court of
Appeals' July 25, 2013 decision.[60]
We resolve the following issues:

BANKING | 05Dec | 62

Whether Philippine National Bank was negligent in releasing the deposit to

Bernardito Manimbo;
Whether Lina B. Aguilar is jointly and severally liable with Philippine
National Bank for the release of the deposit to Bernardito Manimbo; and
Whether respondents were properly awarded damages.
Petitioner Aguilar argued that the Court of Appeals had already found no
malice or bad faith on her part.[61] Moreover, as a mere officer of the
bank, she cannot be made personally liable for acts that she was authorized
to do.[62] These acts were mere directives to her by her superiors.[63]
Hence, she should not be held solidarity liable with PNB.[64]
Petitioner PNB argued that it was the presumptuousness and cavalier
attitude of respondents that gave rise to the controversy and not its
judgment call.[65] Respondents were lacking in sufficient documentation.
[66] Petitioner PNB also argued that respondents failed to show any
justification for the award of moral damages.[67] No bad faith can be
attributed to Aguilar.[68]
In their separate comments to the petitions, respondents argued that the
trial court and the Court of Appeals did not err in finding that petitioners
PNB and Aguilar were negligent in handling their father's deposit.[69] The
acceptance of invalid and incomplete documents to support the deposit's
release to Manimbo was a violation of the bank's fiduciary duty to its
clients.[70] These acts constituted grcss negligence on the part of
petitioners PNB and Aguilar.[71]
However, according to respondents, the Court of Appeals erred in deleting
the award for exemplary damages because the acts in violation of the
bank's fiduciary were done in bad faith.[72]
We rule for the respondents.
The trial court and the Court of Appeals correctly found that petitioners PNB
and Aguilar were negligent in handling the deposit of Angel C. Santos.
The contractual relationship between banks and their depositors is
governed by the Civil Code provisions on simple loan.[73] Once a person
makes a deposit of his or her money to the bank, he or she is considered to
have lent the bank that money.[74] The bank becomes his or her debtor,
and he or she becomes the creditor of the bank, which is obligated to pay
him or her on demand.[75]
The default standard of diligence in the performance of obligations is
"diligence of a good father of a family." Thus, the Civil Code provides:

ART. 1163. Every person obliged to give something is also obliged to take
care of it with the proper diligence of a good father of a family, unless the
law or the stipulation of the parties requires another standard of care.
ART. 1173. The fault or negligence of the obligor consists in the omission of
that diligence which is required by the nature of the obligation and
corresponds with the circumstances of the persons, of the time and of the
place. When negligence shows bad faith, the provisions of articles 1171 and
2201, paragraph 2, shall apply.
If the law or contract does not state the diligence which is to be observed in
the performance, that which is expected of a good father of a family shall
be required. (Emphasis supplied)
"Diligence of a good father of a family" is the standard of diligence expected
of, among others, usufructuaries,[76] passengers of common carriers,[77]
agents,[78] depositaries,[79] pledgees,[80] officious managers,[81] and
persons deemed by law as responsible for the acts of others.[82] "The
diligence of a good father of a family requires only that diligence which an
ordinary prudent man would exercise with regard to his own property."[83]
Other industries, because of their nature, are bound by law to observe
higher standards of diligence. Common carriers, for example, must observe
"extraordinary diligence in the vigilance over the goods and for the safety of
[their] passengers"[84] because it is considered a business affected with
public interest. "Extraordinary diligence" with respect to passenger safety is
further qualified as "carrying the passengers safely as far as human care
and foresight can provide, using the utmost diligence of very cautious
persons, with a due regard for all the circumstances."[85]
Similar to common carriers, banking is a business that is impressed with
public interest. It affects economies and plays a significant role in
businesses and commerce.[86] The public reposes its faith and confidence
upon banks, such that "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."[87] This is
why we have recognized the fiduciary nature of the banks' functions, and
attached a special standard of diligence for the exercise of their functions.
In Simex International (Manila), Inc. v. Court of Appeals,[88] this court
described the nature of banks' functions and the attitude expected of banks
in handling their depositors' accounts, thus:
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 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

BANKING | 05Dec | 63

accounts of its depositors with meticulous care, always having in mind the
fiduciary nature of their relationship.[89] (Emphasis supplied)
The fiduciary nature of banking is affirmed in Republic Act No. 8791 or The
General Banking Law, thus:
SEC. 2. Declaration of Policy. The State recognizes the vital role of banks
in providing an environment conducive to the sustained development of the
national economy and the fiduciary nature of banking that requires high
standards of integrity and performance. In furtherance thereof, the State
shall promote and maintain a stable and efficient banking and financial
system that is globally competitive, dynamic and responsive to the
demands of a developing economy. (Emphasis supplied)
In The Consolidated Bank and Trust Corporation v. Court of Appeals,[90]
this court explained the meaning of fiduciary relationship and the standard
of diligence assumed by banks:
This fiduciary relationship means that the bank's obligation to observe "high
standards of integrity and performance" is deemed written into every
deposit agreement between a bank and its depositor. The fiduciary nature
of banking requires banks to assume a degree of diligence higher than that
of a good father of a family. Article 1172 of the Civil Code states that the
degree of diligence required of an obligor is that prescribed by law or
contract, and absent such stipulation then the diligence of a good father of
a family.[91] (Emphasis supplied, citation omitted)
Petitioners PNB and Aguilar's treatment of Angel C. Santos' account is
inconsistent with the high standard of diligence required of banks. They
accepted Manimbo's representations despite knowledge of the existence of
circumstances that should have raised doubts on such representations. As a
result, Angel C. Santos' deposit was given to a person stranger to him.
Petitioner PNB pointed out that since petitioner Aguilar assumed office as
PNB-Sta. Elena-Marikina City Branch Manager only five (5) years from
Angel C. Santos' death, she was not in the position to know that
respondents were the heirs of Angel C. Santos.[92] She could not have
accepted the unsigned and unnotarized extrajudicial settlement deed that
respondents had first showed her.[93] She was not competent to make a
conclusion whether that deed was genuine.[94] Neither could petitioners
PNB and Aguilar pass judgment on a letter from respondents' lawyer stating
that respondents were the nine heirs of Angel C. Santos.[95]
Petitioners PNB and Aguilar's negligence is not based on their failure to
accept respondents' documents as evidence of their right to claim Angel C.
Santos' deposit. Rather, it is based on their failure to exercise the diligence
required of banks when they accepted the fraudulent representations of
Manimbo.
Petitioners PNB and Aguilar disregarded their own requirements for the
release of the deposit to persons claiming to be heirs of a deceased
depositor. When respondents asked for the release of Angel C. Santos'

deposit, they were required to present the following: "(1) original or

certified true copy of the Death Certificate of Angel C. Santos; (2)
certificate of payment of, or exemption from, estate tax issued by the
Bureau of Internal Revenue (BIR); (3) Deed of Extrajudicial Settlement; (4)
Publisher's Affidavit of publication of the Deed of Extrajudicial Settlement;
and (5) Surety bond effective for two (2) years and in an amount equal to
the balance of the deposit to be withdrawn."[96]
Petitioners PNB and Aguilar, however, accepted Manimbo's representations,
and they released Angel C. Santos' deposit based on only the following
documents:
Death certificate of Angel C. Santos;
Birth certificate of Reyme L. Santos;
Affidavit of self-adjudication of Reyme L. Santos;
Affidavit of publication;
Special power of attorney that Reyme L. Santos executed in favor of
Bernardito Manimbo and Angel P. Santos;
Personal items of Angel C. Santos, such as photocopies or originals of
passport, residence certificate for year 1990, SSS I.D., etc.;
Surety good for two (2) years; and
Certificate of Time Deposit No. 341306.[97]
Based on these enumerations, petitioners PNB and Aguilar either have no
fixed standards for the release of their deceased clients' deposits or they
have standards that they disregard for convenience, favor, or upon exercise
of discretion. Both are inconsistent with the required diligence of banks.
These threaten the safety of the depositors' accounts as they provide
avenues for fraudulent practices by third persons or by bank officers
themselves.
In this case, petitioners PNB and Aguilar released Angel C. Santos' deposit
to Manimbo without having been presented the BIR-issued certificate of
payment of, or exception from, estate tax. This is a legal requirement
before the deposit of a decedent is released. Presidential Decree No. 1158,
[98] the tax code applicable when Angel C. Santos died in 1991, provides:
SEC. 118. Payment of tax antecedent to the transfer of shares, bonds, or
rights. There shall not be transferred to any new owner in the books of
any corporation, sociedad anonima, partnership, business, or industry
organized or established in the Philippines, any shares, obligations, bonds
or rights by way of gift inter vivos or mortis causa, legacy, or inheritance

BANKING | 05Dec | 64

unless a certification from the Commissioner that the taxes fixed in this
Title and due thereon have been paid is shown.
If a bank has knowledge of the death of a person who maintained a hank
deposit account alone, or jointly with another, it shall not allow any
withdrawal from the said deposit account, unless the Commissioner has
certified that the taxes imposed thereon by this Title have been paid;
Provided, however, That the administrator of the estate or any one of the
heirs of the decedent may upon authorization by the Commissioner of
Internal Revenue, withdraw an amount not exceeding P10,000 without the
said certification. For this purpose, all withdrawal slips shall contain a
statement to the effect that all of the joint depositors are still living at the
time of withdrawal by any one of the joint depositors and such statement
shall be under oath by the said depositors.[99] (Emphasis supplied)
This provision was reproduced in Section 97 of the 1997 National Internal
Revenue Code, thus:
SEC. 97. Payment of Tax Antecedent to the Transfer of Shares, Bonds or
Rights. There shall not be transferred to any new owner in the books of
any corporation, sociedad anonima, partnership, business, or industry
organized or established in the Philippines any share, obligation, bond or
right by way of gift inter vivos or mortis causa, legacy or inheritance, unless
a certification from the Commissioner that the taxes fixed in this Title and
due thereon have been paid is shown.

deposits.[102] It appears that Manimbo was not even required to submit

the BIR certificate.[103] He, thus, failed to present such certificate.
Petitioners PNB and Aguilar provided no satisfactory explanation why Angel
C. Santos' deposit was released without it.
Petitioners PNB and Aguilar's negligence is also clear when they accepted as
bases for the release of the deposit to Manimbo: (a) a mere photocopy of
Angel C. Santos' death certificate;[104] (b) the falsified affidavit of selfadjudication and special power of attorney purportedly executed by Reyme
L. Santos;[105] and (c) the certificate of time deposit.[106]
Petitioner Aguilar was aware that there were other claimants to Angel C.
Santos' deposit. Respondents had already communicated with petitioner
Aguilar regarding Angel C. Santos' account before Manimbo appeared.
Petitioner Aguilar even gave respondents the updated passbook of Angel C.
Santos' account.[107] Yet, petitioners PNB and Aguilar did not think twice
before they released the deposit to Manimbo. They did not doubt why no
original death certificate could be submitted. They did not doubt why
Reyme L. Santos would execute an affidavit of self-adjudication when he,
together with others, had previously asked for the release of Angel C.
Santos' deposit. They also relied on the certificate of time deposit and on
Manimbo's representation that the passbook was lost when the passbook
had just been previously presented to Aguilar for updating.[108]

If a bank has knowledge of the death of a person, who maintained a bank

deposit account alone, or jointly with another, it shall not allow any
withdrawal from the said deposit account, unless the Commissioner has
certified that the taxes imposed thereon by this Title have been paid:
Provided, however, That the administrator of the estate or any one (1) of
the heirs of the decedent may, upon authorization by the Commissioner,
withdraw an amount not exceeding Twenty thousand pesos (P20,000)
without the said certification. For this purpose, all withdrawal slips shall
contain a statement to the effect that all of the joint depositors are still
living at the time of withdrawal by any one of the joint depositors and such
statement shall be under oath by the said depositors. (Emphasis supplied)
Taxes are created primarily to generate revenues for the maintenance of
the government. However, this particular tax may also serve as guard
against the release of deposits to persons who have no sufficient and valid
claim over the deposits. Based on the assumption that only those with
sufficient and valid claim to the deposit will pay the taxes for it, requiring
the certificate from the BIR increases the chance that the deposit will be
released only to them.

During the trial, petitioner PNB's counsel only reasoned that the photocopy
of the death certificate was also submitted with other documents, which led
him to no other conclusion than that Angel C. Santos was already dead.
[109] On petitioners PNB and Aguilar's reliance special power of attorney
allegedly executed by Reyme L. Santos, Aguilar admitted that she did not
contact Reyme L. Santos for verification. Her reason was that Reyme L.
Santos was not their client. Therefore, they had no obligation to do so.
[110]

In their compulsory counterclaim,[100] petitioners PNB and Aguilar claimed

that Manimbo presented a certificate of payment of estate tax.[101] During
trial, however, it turned out that this certificate was instead an authority to
accept payment, which is not the certificate required for the release of bank

Petitioner PNB is a bank from which a degree of diligence higher than that
of a good father of a family is expected. Petitioner PNB and its manager,
petitioner Aguilar, failed to meet even the standard of diligence of a good
father of a family. Their actions and inactions constitute gross negligence. It

Given the circumstances, "diligence of a good father of a family" would

have required petitioners PNB and Aguilar to verify. A prudent man would
have inquired why Reyme L. Santos would issue an affidavit of selfadjudication when others had also claimed to be heirs of Angel C. Santos.
Contrary to petitioner Aguilar's reasoning, the fact that Reyme L. Santos
was not petitioner PNB's client should have moved her to take measures to
ensure the veracity of Manimbo's documents and representations. This is
because she had no previous knowledge of Reyme L. Santos his
representatives, and his signature.

BANKING | 05Dec | 65

is for this reason that we sustain the trial court's and the Court of Appeals'
rulings that petitioners PNB and Aguilar are solidarity liable with each other.
[111]
For the same reason, we sustain the award for moral damages. Petitioners
PNB and Aguilar's gross negligence deprived Angel C. Santos' heirs what is
rightfully theirs. Respondents also testified that they experienced anger and
embarrassment when petitioners PNB and Aguilar refused to release Angel
C. Santos' deposit.[112] "The bank's negligence was the result of lack of
due care and caution required of managers and employees of a firm
engaged in so sensitive and demanding business as banking."[113]
Exemplary damages should also be awarded. "The law allows the grant of
exemplary damages by way of example for the public good. The public
relies on the banks' sworn profession of diligence and meticulousness in
giving irreproachable service. The level of meticulousness must be
maintained at all times by the banking sector."[114]
Since exemplary damages are awarded and since respondents were
compelled to litigate to protect their interests,[115] the award of attorney's
fees is also proper.
The Court of Appeals' award of interest should be modified to 12% from
demand on April 26, 1998 until June 30, 2013, and 6% from July 1, 2013
until fully paid. In Nacar v. Gallery Frames:[116]
Thus, from the foregoing, in the absence of an express stipulation as to the
rate of interest that would govern the parties, the rate of legal interest for
loans or forbearance of any money. . . shall no longer be twelve percent
(12%) per annum. . . but will now be six percent (6%) per annum effective
July 1, 2013. It should be noted, nonetheless, that. . . the twelve percent
(12%) per annum legal interest shall apply only until June 30, 2013. Come
July 1, 2013 the new rate of six percent (6%) per annum shall be the
prevailing rate of interest when applicable.
....
When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand. . .
....
When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 6% per annum from such

finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.[117]
WHEREFORE, the Court of Appeals' decision dated July 25, 2013 is
AFFIRMED with the MODIFICATIONS in that petitioners Philippine National
Bank and Lina B. Aguilar are ordered solidarity liable to pay respondents
P100,000.00 as exemplary damages. Further, the interest rate for the
amount of P1,882,002.05, representing the face value of PNB Manager's
Check No. AF-974686B is modified to 12% from April 26, 1998 until June
30, 2013, and 6% from July 1, 2013 until satisfaction. All monetary awards
shall then earn interest at the rate of 6% per annum from finality of the
decision until full satisfaction.
SO ORDERED.

BANKING | 05Dec | 66

G.R. No. 165339

August 23, 2010

EQUITABLE PCI BANK, Petitioner,

vs.
ARCELITO B. TAN, Respondent.
DECISION
PERALTA, J.:
Before this Court is a petition for review on certiorari under Rule 45 of the
Rules of Court seeking to set aside the Decision1 and the Resolution2 of the
Court of Appeals (CA) in CA-G.R. CV No. 41928.
The antecedents are as follows:
Respondent Arcelito B.Tan maintained a current and savings account with
Philippine Commercial International Bank (PCIB), now petitioner Equitable
PCI Bank.3 On May 13, 1992, respondent issued PCIB Check No. 275100
postdated May 30, 19924 in the amount of P34,588.72 in favor of Sulpicio
Lines, Inc. As of May 14, 1992, respondent's balance with petitioner was
P35,147.59. On May 14, 1992, Sulpicio Lines, Inc. deposited the aforesaid
check to its account with Solid Bank, Carbon Branch, Cebu City. After
clearing, the amount of the check was immediately debited by petitioner
from respondent's account thereby leaving him with a balance of only
P558.87.
Meanwhile, respondent issued three checks from May 9 to May 16, 1992,
specifically, PCIB Check No. 275080 dated May 9, 1992, payable to Agusan
del Sur Electric Cooperative Inc. (ASELCO) for the amount of P6,427.68;
PCIB Check No. 275097 dated May 10, 1992 payable to Agusan del Norte
Electric Cooperative Inc., (ANECO) for the amount of P6,472.01; and PCIB
Check No. 314104 dated May 16, 1992 payable in cash for the amount of
P10,000.00. When presented for payment, PCIB Check Nos. 275080,
275097 and 314014 were dishonored for being drawn against insufficient
funds.
As a result of the dishonor of Check Nos. 275080 and 275097 which were
payable to ASELCO and ANECO, respectively, the electric power supply for
the two mini-sawmills owned and operated by respondent, located in
Talacogon, Agusan del Sur; and in Golden Ribbon, Butuan City, was cut off
on June 1, 1992 and May 28, 1992, respectively, and it was restored only
on July 20 and August 24, 1992, respectively.
Due to the foregoing, respondent filed with the Regional Trial Court (RTC) of
Cebu City a complaint against petitioner, praying for payment of losses
consisting of unrealized income in the amount of P1,864,500.00. He also

prayed for payment of moral damages, exemplary damages, attorney's fees

and litigation expenses.
Respondent claimed that Check No. 275100 was a postdated check in
payment of Bills of Lading Nos. 15, 16 and 17, and that his account with
petitioner would have had sufficient funds to cover payment of the three
other checks were it not for the negligence of petitioner in immediately
debiting from his account Check No. 275100, in the amount of P34,588.72,
even as the said check was postdated to May 30, 1992. As a consequence
of petitioner's error, which brought about the dishonor of the two checks
paid to ASELCO and ANECO, the electric supply to his two mini-sawmills
was cut off, the business operations thereof were stopped, and purchase
orders were not duly served causing tremendous losses to him.
In its defense, petitioner denied that the questioned check was postdated
May 30, 1992 and claimed that it was a current check dated May 3, 1992.
It alleged further that the disconnection of the electric supply to
respondent's sawmills was not due to the dishonor of the checks, but for
other reasons not attributable to the bank.
After trial, the RTC, in its Decision5 dated June 21, 1993, ruled in favor of
petitioner and dismissed the complaint.
Aggrieved by the Decision, respondent filed a Notice of Appeal.6 In its
Decision dated May 31, 2004, the Court of Appeals reversed the decision of
the trial court and directed petitioner to pay respondent the sum of
P1,864,500.00 as actual damages, P50,000.00 by way of moral damages,
P50,000.00 as exemplary damages and attorney's fees in the amount of
P30,000.00. Petitioner filed a motion for reconsideration, which the CA
denied in a Resolution dated August 24, 2004.
Hence, the instant petition assigning the following errors:
I
THE FOURTH DIVISION OF THE COURT OF APPEALS DEFIED OFFICE ORDER
NO. 82-04-CG BY HOLDING ON TO THIS CASE AND DECIDING IT INSTEAD
OF UNLOADING IT AND HAVING IT RE-RAFFLED AMONG THE DIVISIONS IN
CEBU CITY.
II
THE COURT OF APPEALS ERRED IN REVERSING THE FINDING OF THE
REGIONAL TRIAL COURT THAT CHECK NO. 275100 WAS DATED MAY 3,
1992.
III

BANKING | 05Dec | 67

THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT'S

WAY OF WRITING THE DATE ON CHECK NO. 275100 WAS THE PROXIMATE
CAUSE OF THE DISHONOR OF HIS THREE OTHER CHECKS.
IV
THE COURT OF APPEALS ERRED IN AWARDING ACTUAL DAMAGES, MORAL
DAMAGES, EXEMPLARY DAMAGES AND ATTORNEY'S FEES.
Anent the first issue, petitioner submits that the CA defied Office Order No.
82-04-CG dated April 5, 2004 issued by then CA Presiding Justice Cancio C.
Garcia when it failed to unload CA-G.R. CV No. 41928 so that it may be reraffled among the Divisions in Cebu City.
Office Order No. 82-04-CG7 provides:
xxxx
In view of the reorganization of the different Divisions due to the
appointment of eighteen (18) new Justices to the additional divisions in the
cities of Cebu and Cagayan de Oro, the raffle of civil, criminal and special
cases submitted for decision and falling within the jurisdiction of the
additional divisions shall commence on April 6, 2004.
The raffle of newly-filed cases and those for completion likewise falling
within the jurisdiction of the additional divisions, shall start on April 12,
2004.
xxxx
Petitioner alleged that since the aforementioned Office Order directed the
raffle of civil, criminal and special cases submitted for decision and falling
within the jurisdiction of the additional divisions on April 6, 2004, CA-G.R.
CV No. 41928 should have been unloaded by the CA's Fourth Division and
re-raffled to the CA's Division in Cebu City instead of deciding the case on
May 31, 2004.
Respondent argued that the CA's Fourth Division correctly acted in taking
cognizance of the case. The CA defended its jurisdiction by ruling that cases
already submitted for decision as of the effectivity of Republic Act (R.A.)
82468 on February 1, 1997 were no longer included for re-raffle to the
newly-created Visayas and Mindanao Divisions of the CA, conformable to
Section 5 of the said statute.
Petitioner's argument is misplaced. Under Section 3 of R.A. 8246, it is
provided that:

Section 3. Section 10 of Batas Pambansa Blg. 129, as amended, is hereby

further amended to read as follows:
Sec. 10. Place of Holding Sessions. The Court of Appeals shall have its
permanent stations as follows: The first seventeen (17) divisions shall be
stationed in the City of Manila for cases coming from the First to the Fifth
Judicial Regions; the Eighteenth, Nineteenth, and Twentieth Divisions shall
be in Cebu City for cases coming from the Sixth, Seventh and Eighth
Judicial Regions; the Twenty-first, Twenty-second and Twenty-third
Divisions shall be in Cagayan de Oro City for cases coming from the Ninth,
Tenth, Eleventh, and Twelfth Judicial Regions. Whenever demanded by
public interest, or whenever justified by an increase in case load, the
Supreme Court, upon its own initiative or upon recommendation of the
Presiding Justice of the Court of Appeals, may authorize any division of the
Court to hold sessions periodically, or for such periods and at such places as
the Supreme Court may determine, for the purpose of hearing and deciding
cases. Trials or hearings in the Court of Appeals must be continuous and
must be completed within three (3) months unless extended by the Chief
Justice of the Supreme Court.
Further, Section 5 of the same Act provides:
Upon the effectivity of this Act, all pending cases, except those which have
been submitted for resolution, shall be referred to the proper division of the
Court of Appeals.9
Although CA-G.R. CV No. 41928 originated from Cebu City and is thus
referable to the CA's Divisions in Cebu City, the said case was already
submitted for decision as of July 25, 1994.10 Hence, CA-G.R. CV No.
41928, which was already submitted for decision as of the effectivity of R.A.
8246, i.e., February 1, 1997, can no longer be referred to the CA's Division
in Cebu City. Thus, the CA's Former Fourth Division correctly ruled that CAG.R. CV No. 41928 pending in its division was not among those cases that
had to be re-raffled to the newly-created CA Divisions in the Visayas
Region.
Further, administrative issuances must not override, supplant or modify the
law, but must remain consistent with the law they intend to carry out.11
Thus, Office Order No. 82-04-CG cannot defeat the provisions of R.A. 8246.
As to the second issue, petitioner maintains that the CA erred in reversing
the finding of the RTC that Check No. 275100 was dated May 3, 1992.
Petitioner argued that in arriving at the conclusion that Check No. 275100
was postdated May 30, 1992, the CA just made a visual examination of the
check, unlike the RTC which verified the truth of respondent's testimony
relative to the issuance of Check No. 275100. Respondent argued that the

BANKING | 05Dec | 68

check was carefully examined by the CA which correctly found that Check
No. 275100 was postdated to May 30, 1992 and not May 3, 1992.
The principle is well established that this Court is not a trier of facts.
Therefore, in an appeal by certiorari under Rule 45 of the Rules of Court,
only questions of law may be raised. The resolution of factual issues is the
function of the lower courts whose findings on these matters are received
with respect and are, as a rule, binding on this Court. However, this rule is
subject to certain exceptions. One of these is when the findings of the
appellate court are contrary to those of the trial court.12 Due to the
divergence of the findings of the CA and the RTC, We shall re-examine the
facts and evidence presented before the lower courts.
The RTC ruled that:
xxxx
The issue to be resolved in this case is whether or not the date of PCIB
Check No. 275100 is May 3, 1992 as contended by the defendant, or May
30, 1992 as claimed by the plaintiff. The date of the check is written as
follows 5/3/0/92. From the manner by which the date of the check is
written, the Court cannot really make a pronouncement as to whether the
true date of the check is May 3 or May 30, 1992, without inquiring into the
background facts leading to the issuance of said check.
According to the plaintiff, the check was issued to Sulpicio Lines in payment
of bill of lading nos. 15, 16 and 17. An examination of bill of lading no. 15,
however, shows that the same was issued, not in favor of plaintiff but in
favor of Coca Cola Bottlers Philippines, Inc. Bill of Lading No. 16 is issued in
favor of Suson Lumber and not to plaintiff. Likewise, Bill of Lading No. 17
shows that it was issued to Jazz Cola and not to plaintiff. Furthermore, the
receipt for the payment of the freight for the shipments reflected in these
three bills of lading shows that the freight was paid by Coca Cola Bottlers
Philippines, Inc. and not by plaintiff.
Moreover, the said receipt shows that it was paid in cash and not by check.
From the foregoing, the evidence on record does not support the claim of
the plaintiff that Check No. 275100 was issued in payment of bills of lading
nos. 15, 16 and 17.
Hence, the conclusion of the Court is that the date of the check was May 3,
1992 and not May 30, 1992.13
xxxx
In fine, the RTC concluded that the check was dated May 3, 1992 and not
May 30, 1992, because the same check was not issued to pay for Bills of

Lading Nos. 15, 16 and 17, as respondent claims. The trial court's
conclusion is preposterous and illogical. The purpose for the issuance of the
check has no logical connection with the date of the check. Besides, the
trial court need not look into the purpose for which the check was issued. A
reading of Check No. 27510014 would readily show that it was dated May
30, 1992. As correctly observed by the CA:
On the first issue, we agree with appellant that appellee Bank apparently
erred in misappreciating the date of Check No. 275100. We have carefully
examined the check in question (Exh. DDDD) and we are convinced that it
was indeed postdated to May 30, 1992 and not May 3, 1992 as urged by
appellee. The date written on the check clearly appears as "5/30/1992"
(Exh. DDDD-4). The first bar (/) which separates the numbers "5" and "30"
and the second bar (/) which further separates the number "30" from the
year 1992 appear to have been done in heavy, well-defined and bold
strokes, clearly indicating the date of the check as "5/30/1992" which
obviously means May 30, 1992. On the other hand, the alleged bar (/)
which appellee points out as allegedly separating the numbers "3" and "0,"
thereby leading it to read the date as May 3, 1992, is not actually a bar or a
slant but appears to be more of an unintentional marking or line done with
a very light stroke. The presence of the figure "0" after the number "3" is
quite significant. In fact, a close examination thereof would unerringly show
that the said number zero or "0" is connected to the preceeding number
"3." In other words, the drawer of the check wrote the figures "30" in one
continuous stroke, thereby contradicting appellees theory that the number
"3" is separated from the figure "0" by a bar. Besides, appellees theory that
the date of the check is May 3, 1992 is clearly untenable considering the
presence of the figure "0" after "3" and another bar before the year 1992.
And if we were to accept appellees theory that what we find to be an
unintentional mark or line between the figures "3" and "0" is a bar
separating the two numbers, the date of the check would then appear as
"5/3/0/1992, which is simply absurd. Hence, we cannot go along with
appellees theory which will lead us to an absurd result. It is therefore our
conclusion that the check was postdated to May 30, 1992 and appellee
Bank or its personnel erred in debiting the amount of the check from
appellants account even before the checks due date. Undoubtedly, had not
appellee bank prematurely debited the amount of the check from
appellants account before its due date, the two other checks (Exhs. LLLL
and GGGG) successively dated May 9, 1992 and May 16, 1992 which were
paid by appellant to ASELCO and ANECO, respectively, would not have been
dishonored and the said payees would not have disconnected their supply of
electric power to appellants sawmills, and the latter would not have
suffered losses.
The law imposes on banks high standards in view of the fiduciary nature of
banking. Section 2 of R.A. 879115 decrees:

BANKING | 05Dec | 69

Declaration of Policy. The State recognizes the vital role of banks in

providing an environment conducive to the sustained development of the
national economy and the fiduciary nature of banking that requires high
standards of integrity and performance. In furtherance thereof, the State
shall promote and maintain a stable and efficient banking and financial
system that is globally competitive, dynamic and responsive to the
demands of a developing economy.
Although R.A. 8791 took effect only in the year 2000, the Court had already
imposed on banks the same high standard of diligence required under R.A.
8791 at the time of the untimely debiting of respondent's account by
petitioner in May 1992. In Simex International (Manila), Inc. v. Court of
Appeals,16 which was decided in 1990, the Court held 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.

drawers instructions as reflected on the face and by the terms of the

check.20 Thus, payment made before the date specified by the drawer is
clearly against the drawee bank's duty to its client.
In its memorandum21 filed before the RTC, petitioner submits that
respondent caused confusion on the true date of the check by writing the
date of the check as 5/3/0/92. If, indeed, petitioner was confused on
whether the check was dated May 3 or May 30 because of the "/" which
allegedly separated the number "3" from the "0," petitioner should have
required respondent drawer to countersign the said "/" in order to ascertain
the true intent of the drawer before honoring the check. As a matter of
practice, bank tellers would not receive nor honor such checks which they
believe to be unclear, without the counter-signature of its drawer. Petitioner
should have exercised the highest degree of diligence required of it by
ascertaining from the respondent the accuracy of the entries therein, in
order to settle the confusion, instead of proceeding to honor and receive
the check.

The diligence required of banks, therefore, is more than that of a good

father of a family.17 In every case, the depositor expects the bank to treat
his account with the utmost fidelity, whether such account consists 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.18 From the
foregoing, it is clear that petitioner bank did not exercise the degree of
diligence that it ought to have exercised in dealing with its client.

Further, petitioner's branch manager, Pedro D. Tradio, in a letter22

addressed to ANECO, explained the circumstances surrounding the dishonor
of PCIB Check No. 275097. Thus:

With respect to the third issue, petitioner submits that respondent's way of
writing the date on Check No. 275100 was the proximate cause of the
dishonor of his three other checks. Contrary to petitioners view, the Court
finds that its negligence is the proximate cause of respondents loss.

This refer (sic) to PCIB Check No. 275097 dated May 16, 1992 in the
amount of P6,472.01 payable to your goodselves issued by Mr. Arcelito B.
Tan (MANWOOD Industries) which was returned by PCIB Mandaue Branch
for insufficiency of funds.

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.19 The proximate cause
of the loss is not respondent's manner of writing the date of the check, as it
was very clear that he intended Check No. 275100 to be dated May 30,
1992 and not May 3, 1992. The proximate cause is petitioners own
negligence in debiting the account of the respondent prior to the date as
appearing in the check, which resulted in the subsequent dishonor of
several checks issued by the respondent and the disconnection by ASELCO
and ANECO of his electric supply.

Please be advised that the return of the aforesaid check was a result of an
earlier negotiation to PCIB-Mandaue Branch through a deposit made on May
14, 1992 with SOLIDBANK Carbon Branch, or through Central Bank clearing
via Philippine Clearing House Corporation facilities, of a postdated check
which ironically and without bad faith passed undetected through several
eyes from the payee of the check down to the depository bank and finally
the drawee bank (PCIB) the aforesaid Check No. 275097 issued to you
would have been honored because it would have been sufficiently funded at
the time it was negotiated. It should be emphasized, however, that Mr.
Arcelito B. Tan was in no way responsible for the dishonor of said PCIB
Check No. 275097.

The bank on which the check is drawn, known as the drawee bank, is under
strict liability to pay to the order of the payee in accordance with the

June 11, 1992

ANECO
Agusan del Norte
Gentlemen:

BANKING | 05Dec | 70

We hope that the foregoing will sufficiently explain the circumstances of the
dishonor of PCIB Check No. 275097 and would clear the name and credit of
Mr. Arcelito Tan from any misimpressions which may have resulted from the
dishonor of said check.
Thank you.
xxxx
Although petitioner failed to specify in the letter the other details of this
"postdated check," which passed undetected from the eyes of the payee
down to the petitioner drawee bank, the Court finds that petitioner was
evidently referring to no other than Check No. 275100 which was deposited
to Solidbank, and was postdated May 30, 1992. As correctly found by the
CA:
In the aforequoted letter of its Manager, appellee Bank expressly
acknowledged that Check No. 275097 (Exh. GGGG) which appellant paid to
ANECO "was sufficiently funded at the time it was negotiated," but it was
dishonored as a "result of an earlier negotiation to PCIB-Mandaue Branch
through a deposit made on May 14, 1992 with SOLIDBANK xxx xxx xxx of a
postdated check which xxx xxx passed undetected." He further admitted
that "Mr. Arcelito B. Tan was in no way responsible for the dishonor of said
PCIB Check No. 275097." Needless to state, since appellee's Manager has
cleared appellant of any fault in the dishonor of the ANECO check, it
[necessarily] follows that responsibility therefor or fault for the dishonor of
the check should fall on appellee bank. Appellee's attempt to extricate itself
from its inadvertence must therefore fail in the face of its Manager's explicit
acknowledgment of responsibility for the inadvertent dishonor of the ANECO
check.23
Evidently, the bank's negligence was the result of lack of due care required
of its managers and employees in handling the accounts of its clients.
Petitioner was negligent in the selection and supervision of its employees.
In Citibank, N.A. v. Cabamongan,24 the Court ruled:
x x x Banks handle daily transactions involving millions of pesos. By the
very nature of their works the degree of responsibility, care and
trustworthiness expected of their employees and officials is far greater than
those of ordinary clerks and employees. Banks are expected to exercise the
highest degree of diligence in the selection and supervision of their
employees.
We now resolve the question on the award of actual, moral and exemplary
damages, as well as attorney's fees by the CA to the respondent.

The CA based the award of actual damages in the amount of P1,864,500.00

on the purchase orders25 submitted by respondent. The CA ruled that:
x x x In the case at bar, appellant [respondent herein] presented adequate
evidence to prove losses consisting of unrealized income that he sustained
as a result of the appellee Bank's gross negligence. Appellant identified
certain Purchase Orders from various customers which were not met by
reason of the disruption of the operation of his sawmills when ANECO and
ASELCO disconnected their supply of electricity thereto. x x x
Actual or compensatory damages are those awarded in order to
compensate a party for an injury or loss he suffered. They arise out of a
sense of natural justice and are aimed at repairing the wrong done. Except
as provided by law or by stipulation, a party is entitled to an adequate
compensation only for such pecuniary loss as he has duly proven.26 To
recover actual damages, not only must the amount of loss be capable of
proof; it must also be actually proven with a reasonable degree of certainty,
premised upon competent proof or the best evidence obtainable.27
Respondent's claim for damages was based on purchase orders from
various customers which were allegedly not met due to the disruption of the
operation of his sawmills. However, aside from the purchase orders and his
testimony, respondent failed to present competent proof on the specific
amount of actual damages he suffered during the entire period his power
was cut off. No other evidence was provided by respondent to show that the
foregoing purchase orders were not met or were canceled by his various
customers. The Court cannot simply rely on speculation, conjecture or
guesswork in determining the amount of damages.28
Moreover, an examination of the purchase orders and job orders reveal that
the orders were due for delivery prior to the period when the power supply
of respondent's two sawmills was cut off on June 1, 1992 to July 20, 1992
and May 28, 1992 to August 24, 1992, respectively. Purchase Order No.
990629 delivery date is May 4, 1992; Purchase Order No. 926930 delivery
date is March 19, 1992; Purchase Order No. 14779631 is due for delivery
on January 31, 1992; Purchase Order No. 7600032 delivery date is
February and March 1992; and Job Order No. 1824,33 dated March 18,
1992, has a 15 days duration of work. Clearly, the disconnection of his
electricity during the period May 28, 1992 to August 24, 1992 could not
possibly affect his sawmill operations and prior orders therefrom.
Given the dearth of respondent's evidence on the matter, the Court resolves
to delete the award of actual damages rendered by the CA in favor of
respondent for his unrealized income.
Nonetheless, in the absence of competent proof on the actual damages
suffered, respondent is entitled to temperate damages. Under Article 2224

BANKING | 05Dec | 71

of the Civil Code of the Philippines, temperate or moderate damages, which

are more than nominal but less than compensatory damages, may be
recovered when the court finds that some pecuniary loss has been suffered
but its amount cannot, from the nature of the case, be proved with
certainty.34 The allowance of temperate damages when actual damages
were not adequately proven is ultimately a rule drawn from equity, the
principle affording relief to those definitely injured who are unable to prove
how definite the injury.35
It is apparent that respondent suffered pecuniary loss. The negligence of
petitioner triggered the disconnection of his electrical supply, which
temporarily halted his business operations and the consequent loss of
business opportunity. However, due to the insufficiency of evidence before
Us, We cannot place its amount with certainty. Article 221636 of the Civil
Code instructs that assessment of damages is left to the discretion of the
court according to the circumstances of each case. Under the
circumstances, the sum of P50,000.00 as temperate damages is
reasonable.
Anent the award of moral damages, it is settled that moral damages are
meant to compensate the claimant for any physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation and similar injuries unjustly caused.37 In
Philippine National Bank v. Court of Appeals,38 the Court held that a bank
is under obligation to treat the accounts of its depositors with meticulous
care whether such account consists only of a few hundred pesos or of
millions of pesos. Responsibility arising from negligence in the performance
of every kind of obligation is demandable. While petitioner's negligence in
that case may not have been attended with malice and bad faith, the banks'
negligence caused respondent to suffer mental anguish, serious anxiety,
embarrassment and humiliation. In said case, We ruled that respondent
therein was entitled to recover reasonable moral damages.1wphi1
In this case, the unexpected cutting off of respondent's electricity, which
resulted in the stoppage of his business operations, had caused him to
suffer humiliation, mental anguish and serious anxiety. The award of
P50,000.00 is reasonable, considering the reputation and social standing of
respondent. As found by the CA, as an accredited supplier, respondent had
been reposed with a certain degree of trust by various reputable and wellestablished corporations.
On the award of exemplary damages, Article 2229 of the Civil Code states:

Art. 2229. Exemplary or corrective damages are imposed, by way of

example or correction for the public good, in addition to the moral,
temperate, liquidated or compensatory damages.
The law allows the grant of exemplary damages to set an example for the
public good. The banking system has become an indispensable institution in
the modern world and plays a vital role in the economic life of every
civilized society. Whether as mere passive entities for the safekeeping and
saving of money or as active instruments of business and commerce, banks
have attained an ubiquitous presence among the people, who have come to
regard them with respect and even gratitude and most of all, confidence.
For this reason, banks should guard against injury attributable to
negligence or bad faith on its part. Without a doubt, it has been repeatedly
emphasized that since the banking business is impressed with public
interest, of paramount importance thereto is the trust and confidence of the
public in general. Consequently, the highest degree of diligence is expected,
and high standards of integrity and performance are even required of it.39
Petitioner, having failed in this respect, the award of exemplary damages in
the amount of P50,000.00 is in order.
As to the award of attorney's fees, Article 220840 of the Civil Code
provides, among others, that attorney's fees may be recovered when
exemplary damages are awarded or when the defendant's act or omission
has compelled the plaintiff to litigate with third persons or to incur expenses
to protect his interest.41 Respondent has been forced to undergo
unnecessary trouble and expense to protect his interest. The Court affirms
the appellate courts award of attorneys fees in the amount of P30,000.00.
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision and
Resolution of the Court of Appeals in CA-G.R. CV No. 41928, dated May 31,
2004 and August 24, 2004, respectively, are AFFIRMED with the following
MODIFICATIONS:
1. The award of One Million Eight Hundred Sixty-Four Thousand and Five
Hundred Pesos (P1,864,500.00) as actual damages, in favor of respondent
Arcelito B. Tan, is DELETED; and
2. Petitioner Equitable PCI Bank is instead directed to pay respondent the
amount of Fifty Thousand Pesos (P50,000.00) as temperate damages.
SO ORDERED.