Banking 1

G.R. No.
L-20583
January 23, 1967
REPUBLIC OF THE PHILIPPINES, petitioner,
vs.
SECURITY CREDIT AND ACCEPTANCE CORPORATION,
ROSENDO T. RESUELLO, PABLO TANJUTCO, ARTURO
SORIANO, RUBEN BELTRAN, BIENVENIDO V. ZAPA,
PILAR G. RESUELLO, RICARDO D. BALATBAT, JOSE
SEBASTIAN and VITO TANJUTCO JR., respondents.
Office of the Solicitor General Arturo A. Alafriz and
Solicitor E. M. Salva for petitioner.Sycip, Salazar, Luna,
Manalo & Feliciano for respondents.Natalio M. Balboa
and F. E. Evangelista for the receiver.
mentioned opinion, in line with which, the Commission

advised the corporation on December 5, 1961, to
comply with the requirements of the General Banking
Act; that, upon application of members of the Manila
Police Department and an agent of the Central Bank,
on May 18, 1962, the Municipal Court of Manila issued
Search Warrant No. A-1019; that, pursuant thereto,
members of the intelligence division of the Central
Bank and of the Manila Police Department searched
the premises of the corporation and seized documents
and records thereof relative to its business operations;
that, upon the return of said warrant, the seized
documents and records were, with the authority of the
CONCEPCION, C.J.:
court, placed under the custody of the Central Bank of
This is an original quo warranto proceeding, initiated
the Philippines; that, upon examination and evaluation
by the Solicitor General, to dissolve the Security and
of said documents and records, the intelligence
Acceptance Corporation for allegedly engaging in
division of the Central Bank submitted, to the Acting
banking operations without the authority required
Deputy Governor thereof, a memorandum dated
therefor by the General Banking Act (Republic Act No.
September 10, 1962, finding that the corporation is:
337). Named as respondents in the petition are, in
1. Performing banking functions, without requisite
addition to said corporation, the following, as alleged
certificate of authority from the Monetary Board of the
members of its Board of Directors and/or Executive
Central Bank, in violation of Secs. 2 and 6 of Republic
Officers, namely:
Act 337, in that it is soliciting and accepting deposit
from the public and lending out the funds so received;
NAME
POSITION
2. Soliciting and accepting savings deposits from the
general public when the company's articles of
Rosendo T. Resuello
President & Chairman of the Board
incorporation authorize it only to engage primarily in
Pablo Tanjutco
Director
financing agricultural, commercial and industrial
Arturo Soriano
Director
projects, and secondarily, in buying and selling stocks
Ruben Beltran
Director
and bonds of any corporation, thereby exceeding the
Bienvenido V. Zapa
Director & Vice-President
Pilar G. Resuello
Director & Secretary-Treasurer scope of its powers and authority as granted under its
charter; consequently such acts are ultra-vires:
Ricardo D. Balatbat
Director & Auditor
3. Soliciting subscriptions to the corporate shares of
Jose R. Sebastian
Director & Legal Counsel
Vito Tanjutco Jr.
Director & Personnel Manager stock and accepting deposits on account thereof,
without prior registration and/or licensing of such
The record shows that the Articles of Incorporation of
shares or securing exemption therefor, in violation of
defendant corporation1 were registered with the
the Securities Act; and
Securities and Exchange Commission on March 27,
4. That being a private credit and financial institution,
1961; that the next day, the Board of Directors of the
it should come under the supervision of the Monetary
corporation adopted a set of by-laws,2 which were filed
Board of the Central Bank, by virtue of the transfer of
with said Commission on April 5, 1961; that on
the authority, power, duties and functions of the
September 19, 1961, the Superintendent of Banks of
Secretary of Finance, Bank Commissioner and the
the Central Bank of the Philippines asked its legal
defunct Bureau of Banking, to the said Board, pursuant
counsel an opinion on whether or not said corporation
to Secs. 139 and 140 of Republic Act 265 and Secs. 88
is a banking institution, within the purview of Republic
and 89 of Republic Act 337." (Emphasis Supplied.) that
Act No. 337; that, acting upon this request, on October
upon examination and evaluation of the same records
11, 1961, said legal counsel rendered an opinion
of the corporation, as well as of other documents and
resolving the query in the affirmative; that in a letter,
pertinent
pipers
obtained
elsewhere,
the
dated January 15, 1962, addressed to said
Superintendent of Banks, submitted to the Monetary
Superintendent of Banks, the corporation through its
Board of the Central Bank a memorandum dated
president, Rosendo T. Resuello, one of defendants
August 28, 1962, stating inter alia.
herein,
sought
a
reconsideration
of
the
11. Pursuant to the request for assistance by the
aforementioned opinion, which reconsideration was
Chief, Intelligence Division, contained in his
denied on March 16, 1962; that, prior thereto, or on
Memorandum to the Governor dated May 23, 1962
March 9, 1961, the corporation had applied with the
and in accordance with the written instructions of
Securities and Exchange Commission for the
Governor Castillo dated May 31, 1962, an examination
registration and licensing of its securities under the
of the books and records of the Security Credit and
Securities Act; that, before acting on this application,
Loans Organizations, Inc. seized by the combined
the Commission referred it to the Central Bank, which,
MPD-CB team was conducted by this Department. The
in turn, gave the former a copy of the above-
examination disclosed the following findings:

a. Considering the extent of its operations, the
Security Credit and Acceptance Corporation, Inc.,
receives deposits from the public regularly. Such
deposits are treated in the Corporation's financial
statements as conditional subscription to capital stock.
Accumulated deposits of P5,000 of an individual
depositor may be converted into stock subscription to
the capital stock of the Security Credit and Acceptance
Corporation at the option of the depositor. Sale of its
shares of stock or subscriptions to its capital stock are
offered to the public as part of its regular operations.
b. That out of the funds obtained from the public
through the receipt of deposits and/or the sale of
securities, loans are made regularly to any person by
the Security Credit and Acceptance Corporation.
A copy of the Memorandum Report dated July 30, 1962
of the examination made by Examiners of this
Department of the seized books and records of the
Corporation is attached hereto.
12. Section 2 of Republic Act No. 337, otherwise
known as the General Banking Act, defines the term,
"banking institution" as follows:
Sec. 2. Only duly authorized persons and entities may
engage in the lending of funds obtained from the
public through the receipts of deposits or the sale of
bonds, securities, or obligations of any kind and all
entities regularly conducting operations shall be
considered as banking institutions and shall be subject
to the provisions of this Act, of the Central Bank Act,
and of other pertinent laws. ...
13. Premises considered, the examination disclosed
that the Security Credit and Acceptance Corporation is
regularly lending funds obtained from the receipt of
deposits and/or the sale of securities. The Corporation
therefore is performing 'banking functions' as
contemplated in Republic Act No. 337, without having
first complied with the provisions of said Act.
Recommendations:
In view of all the foregoing, it is recommended that the
Monetary Board decide and declare:
1. That the Security Credit and Acceptance
Corporation is performing banking functions without
having first complied with the provisions of Republic
Act No. 337, otherwise known as the General Banking
Act, in violation of Sections 2 and 6 thereof; and
2. That this case be referred to the Special Assistant to
the Governor (Legal Counsel) for whatever legal
actions are warranted, including, if warranted criminal
action against the Persons criminally liable and/or quo
warranto proceedings with preliminary injunction
against the Corporation for its dissolution. (Emphasis
supplied.)
that, acting upon said memorandum of the
Superintendent of Banks, on September 14, 1962, the
Monetary Board promulgated its Resolution No. 1095,
declaring that the corporation is performing banking
operations, without having first complied with the
provisions of Sections 2 and 6 of Republic Act No.
337;3 that on September 25, 1962, the corporation

was advised of the aforementioned resolution, but,
this notwithstanding, the corporation, as well as the
members of its Board of Directors and the officers of
the corporation, have been and still are performing the
functions and activities which had been declared to
constitute illegal banking operations; that during the
period from March 27, 1961 to May 18, 1962, the
corporation had established 74 branches in principal
cities and towns throughout the Philippines; that
through a systematic and vigorous campaign
undertaken by the corporation, the same had
managed to induce the public to open 59,463 savings
deposit accounts with an aggregate deposit of
P1,689,136.74; that, in consequence of the foregoing
deposits with the corporation, its original capital stock
of P500,000, divided into 20,000 founders' shares of
stock and 80,000 preferred shares of stock, both of
which had a par value of P5.00 each, was increased, in
less than one (1) year, to P3,000,000 divided into
130,000 founders' shares and 470,000 preferred
shares, both with a par value of P5.00 each; and that,
according to its statement of assets and liabilities, as
of December 31, 1961, the corporation had a capital
stock aggregating P1,273,265.98 and suffered, during
the year 1961, a loss of P96,685.29. Accordingly, on
December 6, 1962, the Solicitor General commenced
this quo warranto proceedings for the dissolution of
the corporation, with a prayer that, meanwhile, a writ
of preliminary injunction be issued ex parte, enjoining
the corporation and its branches, as well as its officers
and agents, from performing the banking operations
complained of, and that a receiver be appointed
pendente lite.
Upon joint motion of both parties, on August 20, 1963,
the Superintendent of Banks of the Central Bank of the
Philippines was appointed by this Court receiver
pendente lite of defendant corporation, and upon the
filing of the requisite bond, said officer assumed his
functions as such receiver on September 16, 1963.
In their answer, defendants admitted practically all of
the allegations of fact made in the petition. They,
however, denied that defendants Tanjutco (Pablo and
Vito, Jr.), Soriano, Beltran, Zapa, Balatbat and
Sebastian, are directors of the corporation, as well as
the validity of the opinion, ruling, evaluation and
conclusions, rendered, made and/or reached by the
legal counsel and the intelligence division of the
Central
Bank,
the
Securities
and
Exchange
Commission, and the Superintendent of Banks of the
Philippines, or in Resolution No. 1095 of the Monetary
Board, or of Search Warrant No. A-1019 of the
Municipal Court of Manila, and of the search and
seizure made thereunder. By way of affirmative
allegations, defendants averred that, as of July 7,
1961, the Board of Directors of the corporation was
composed of defendants Rosendo T. Resuello, Aquilino
L. Illera and Pilar G. Resuello; that on July 11, 1962,
the corporation had filed with the Superintendent of
Banks an application for conversion into a Security

Savings and Mortgage Bank, with defendants Zapa,
Balatbat, Tanjutco (Pablo and Vito, Jr.), Soriano, Beltran
and Sebastian as proposed directors, in addition to the
defendants first named above, with defendants
Rosendo T. Resullo, Zapa, Pilar G. Resuello, Balatbat
and Sebastian as proposed president, vice-president,
secretary-treasurer, auditor and legal counsel,
respectively; that said additional officers had never
assumed their respective offices because of the
pendency of the approval of said application for
conversion;
that
defendants
Soriano,
Beltran,
Sebastian, Vito Tanjutco Jr. and Pablo Tanjutco had
subsequently withdrawn from the proposed mortgage
and savings bank; that on November 29, 1962 or
before the commencement of the present proceedings
the corporation and defendants Rosendo T. Resuello
and Pilar G. Resuello had instituted Civil Case No.
52342 of the Court of First Instance of Manila against
Purificacion Santos and other members of the savings
plan of the corporation and the City Fiscal for a
declaratory relief and an injunction; that on December
3, 1962, Judge Gaudencio Cloribel of said court issued
a writ directing the defendants in said case No. 52342
and their representatives or agents to refrain from
prosecuting the plaintiff spouses and other officers of
the corporation by reason of or in connection with the
acceptance by the same of deposits under its savings
plan; that acting upon a petition filed by plaintiffs in
said case No. 52342, on December 6, 1962, the Court
of First Instance of Manila had appointed Jose Ma.
Ramirez as receiver of the corporation; that, on
December 12, 1962, said Ramirez qualified as such
receiver, after filing the requisite bond; that, except as
to one of the defendants in said case No. 52342, the
issues therein have already been joined; that the
failure of the corporation to honor the demands for
withdrawal of its depositors or members of its savings
plan and its former employees was due, not to
mismanagement or misappropriation of corporate
funds, but to an abnormal situation created by the
mass demand for withdrawal of deposits, by the
attachment of property of the corporation by its
creditors, by the suspension by debtors of the
corporation of the payment of their debts thereto and
by an order of the Securities and Exchange
Commission dated September 26, 1962, to the
corporation to stop soliciting and receiving deposits;
and that the withdrawal of deposits of members of the
savings plan of the corporation was understood to be
subject, as to time and amounts, to the financial
condition of the corporation as an investment firm.
In its reply, plaintiff alleged that a photostat copy,
attached to said pleading, of the anniversary
publication of defendant corporation showed that
defendants Pablo Tanjutco, Arturo Soriano, Ruben
Beltran, Bienvenido V. Zapa, Ricardo D. Balatbat, Jose
R. Sebastian and Vito Tanjutco Jr. are officers and/or
directors thereof; that this is confirmed by the minutes
of a meeting of stockholders of the corporation, held

on September 27, 1962, showing that said defendants
had been elected officers thereof; that the views of the
legal counsel of the Central Bank, of the Securities and
Exchange Commission, the Intelligence Division, the
Superintendent of Banks and the Monetary Board
above referred to have been expressed in the lawful
performance of their respective duties and have not
been assailed or impugned in accordance with law;
that neither has the validity of Search Warrant No. A1019 been contested as provided by law; that the only
assets of the corporation now consist of accounts
receivable amounting approximately to P500,000, and
its office equipment and appliances, despite its
increased capitalization of P3,000,000 and its deposits
amounting to not less than P1,689,136.74; and that
the aforementioned petition of the corporation, in Civil
Case No. 52342 of the Court of First Instance of
Manila, for a declaratory relief is now highly improper,
the defendants having already committed infractions
and violations of the law justifying the dissolution of
the corporation.
Although, admittedly, defendant corporation has not
secured the requisite authority to engage in banking,
defendants deny that its transactions partake of the
nature of banking operations. It is conceded, however,
that, in consequence of a propaganda campaign
therefor, a total of 59,463 savings account deposits
have been made by the public with the corporation
and its 74 branches, with an aggregate deposit of
P1,689,136.74, which has been lent out to such
persons as the corporation deemed suitable therefor.
It is clear that these transactions partake of the nature
of banking, as the term is used in Section 2 of the
General Banking Act. Indeed, a bank has been defined
as:
... a moneyed institute [Talmage vs. Pell 7 N.Y. (3
Seld. ) 328, 347, 348] founded to facilitate the
borrowing, lending and safe-keeping of money (Smith
vs. Kansas City Title & Trust Co., 41 S. Ct. 243, 255
U.S. 180, 210, 65 L. Ed. 577) and to deal, in notes, bills
of exchange, and credits (State vs. Cornings Sav.
Bank, 115 N.W. 937, 139 Iowa 338). (Banks & Banking,
by Zellmann Vol. 1, p. 46).
Moreover, it has been held that:
An investment company which loans out the money of
its customers, collects the interest and charges a
commission to both lender and borrower, is a bank.
(Western Investment Banking Co. vs. Murray, 56 P.
728, 730, 731; 6 Ariz 215.)
... any person engaged in the business carried on by
banks of deposit, of discount, or of circulation is doing
a banking business, although but one of these
functions is exercised. (MacLaren vs. State, 124 N.W.
667, 141 Wis. 577, 135 Am. S.R. 55, 18 Ann. Cas. 826;
9 C.J.S. 30.)
Accordingly, defendant corporation has violated the
law by engaging in banking without securing the
administrative authority required in Republic Act No.
337.
That the illegal transactions thus undertaken by
defendant corporation warrant its dissolution is
apparent from the fact that the foregoing misuser of
the corporate funds and franchise affects the essence
of its business, that it is willful and has been repeated
59,463 times, and that its continuance inflicts injury
upon the public, owing to the number of persons
affected thereby.
It is urged, however, that this case should be
remanded to the Court of First Instance of Manila upon
the authority of Veraguth vs. Isabela Sugar Co. (57
Phil. 266). In this connection, it should be noted that
this Court is vested with original jurisdiction,
concurrently with courts of first instance, to hear and
decide quo warranto cases and, that, consequently, it
is discretionary for us to entertain the present case or
to require that the issues therein be taken up in said
Civil Case No. 52342. The Veraguth case cited by
herein defendants, in support of the second
alternative, is not in point, because in said case there
were issues of fact which required the presentation of
evidence, and courts of first instance are, in general,
better equipped than appellate courts for the taking of
testimony and the determination of questions of fact.
In the case at bar, there is, however, no dispute as to
the principal facts or acts performed by the
corporation in the conduct of its business. The main
issue here is one of law, namely, the legal nature of
said facts or of the aforementioned acts of the
corporation. For this reason, and because public
interest demands an early disposition of the case, we
have deemed it best to determine the merits thereof.
Wherefore, the writ prayed for should be, as it is
hereby granted and defendant corporation is,
accordingly, ordered dissolved. The appointment of
receiver herein issued pendente lite is hereby made
permanent, and the receiver is, accordingly, directed
to administer the properties, deposits, and other
assets of defendant corporation and wind up the
affairs thereof conformably to Rules 59 and 66 of the
Rules of Court. It is so ordered.
Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P.,
Zaldivar, Sanchez and Castro, JJ., concur.
Footnotes
1
Which, as amended on May 8, 1961, authorized it:
"1. To extend credit facilities for home building and
agricultural, commercial and industrial projects;
2. To extend credit, give loans, mortgages and
pledges, either as principal, agent, broker or attorneyin-fact, upon every and all kind and classes of
products, materials, goods, merchandise, and other
properties, real or personal of every kind and nature;
3. To draw, accept, endorse, purchase, own, sell,
discount, mortgage, assign or otherwise dispose of,
negotiate or collect accounts or notes receivables,
negotiable instruments, letters of credit and other
evidence of indebtedness;
4. To purchase, acquire, and take over, all or any part
of the rights, assets and business of any person,

partnership, corporation or association, and to
undertake and assume the liabilities and obligations of
such person, partnership, corporation or association
whose rights, assets, business or property may be
purchased, acquired or taken over;
5. To issue bonds, debentures, securities, collaterals
and other obligations or otherwise incur indebtedness
in such manner as may be ascertained by the
corporation; and
6. To undertake the management, promotion,
financing and/or collection services of the operation of
the business, industry or enterprises of any person,
partnership, corporation or association in so far as
may be permitted under the laws of the Philippines."
(Emphasis supplied.).
2
Empowering said Board, inter alia:
"c) To pay for any property or rights acquired by the
corporation or to discharge obligations of the
corporation either wholly or partly in money or in
stock, bonds, debentures or other securities of the
corporation;
"d) To lend or borrow money for the corporation with
or without security and for such purpose to accept or
create, make and issue mortgages, bonds, deeds of
trust and negotiable instruments or securities, secured
by mortgage or pledge of property belonging to the
corporation; provided, that as hereinafter provided,
the proper officers of the corporation shall have these
powers, unless expressly limited by the Board of
Directors: ... (Emphasis supplied).
3
"Sec. 2. Only duly authorized persons and entities
may engage in the lending of funds obtained from the
public through the receipts of deposits or the sale of
bonds, securities, or obligations of any kind, and all
entities regularly conducting such operations shall be
considered as banking institutions and shall be subject
to the provisions of this Act, of the General Bank Act,
and of other pertinent laws. The terms 'banking
institution and 'bank', as used in this Act, are
synonymous and interchangeable and specially
include banks, banking institutions, commercial banks,
savings banks, mortgage banks, trust companies,
building and loan associations, branches and agencies
in the Philippines of foreign banks, hereinafter called
Philippine branches, and all other corporations,
companies, partnerships, and associations performing
banking functions in the Philippines.
"Persons and entities which receive deposits only
occasionally shall not be considered as banks, but
such persons and entities shall be subject to
regulation by the Monetary Board of the Central Bank;
nevertheless in no case may the Central Bank
authorize the drawing of checks against deposits not
maintained in banks, or branches or agencies thereof.
"The Monetary Board may similarly regulate the
activities of persons and entities which act as agents
of banks.
"Sec. 6. No person, association or corporation not
conducting the business of a commercial banking

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

and CENEN DIZON, petitioners, vs. ASIA PACIFIC
FINANCE
CORPORATION
substituted
by
INTERNATIONAL CORPORATE BANK now known as
UNION BANK OF THE PHILIPPINES, respondent.
DECISION
BELLOSILLO, J.:
C. G. DIZON CONSTRUCTION INC. and CENEN DIZON in
this petition for review seek the reversal of the 24 July
1996 Decision of the Court of Appeals dismissing their
appeal for lack of merit and affirming in toto the
decision of the trial court holding them liable to Asia
Pacific Finance Corporation in the amount of
P87,637.50 at 14% interest per annum in addition to
attorney's fees and costs of suit, as well as its 21
March 1997 Resolution denying reconsideration
thereof. On 20 March 1981 Asia Pacific Finance
Corporation (ASIA PACIFIC for short) filed a complaint
for a sum of money with prayer for a writ of replevin
against Teodoro Baas, C. G. Dizon Construction and
Cenen Dizon. Sometime in August 1980 Teodoro Baas
executed a Promissory Note in favor of C. G. Dizon
Construction whereby for value received he promised
to pay to the order of C. G. Dizon Construction the sum
of P390,000.00 in installments of "P32,500.00 every
25th day of the month starting from September 25,
1980 up to August 25, 1981."
Later, C. G. Dizon Construction endorsed with recourse
the Promissory Note to ASIA PACIFIC, and to secure
payment thereof, C. G. Dizon Construction, through its
corporate officers, Cenen Dizon, President, and Juliette
B. Dizon, Vice President and Treasurer, executed a
Deed of Chattel Mortgage covering three (3) heavy
equipment units of Caterpillar Bulldozer Crawler
Tractors with Model Nos. D8-14A, D8-2U and D8H in
favor of ASIA PACIFIC.[ Moreover, Cenen Dizon
executed on 25 August 1980 a Continuing Undertaking
wherein he bound himself to pay the obligation jointly
and severally with C. G. Dizon Construction.
In compliance with the provisions of the Promissory
Note, C. G. Dizon Construction made the following
installment payments to ASIA PACIFIC: P32,500.00 on
25 September 1980, P32,500.00 on 27 October 1980
and P65,000.00 on 27 February 1981, or a total of
P130,000.00. Thereafter, however, C. G. Dizon
Construction defaulted in the payment of the
remaining installments, prompting ASIA PACIFIC to
send a Statement of Account to Cenen Dizon for the
unpaid balance of P267,737.50 inclusive of interests
and charges, and P66,909.38 representing attorney's
fees. As the demand was unheeded, ASIA PACIFIC sued
Teodoro Baas, C. G. Dizon Construction and Cenen
Dizon.
While defendants (herein petitioners) admitted the

genuineness and due execution of the Promissory
Note, the Deed of Chattel Mortgage and the
Continuing Undertaking, they nevertheless maintained
that these documents were never intended by the
parties to be legal, valid and binding but a mere
subterfuge to conceal the loan of P390,000.00 with
usurious interests.
Defendants claimed that since ASIA PACIFIC could not
directly engage in banking business, it proposed to
them a scheme wherein plaintiff ASIA PACIFIC could
extend a loan to them without violating banking laws:
first, Cenen Dizon would secure a promissory note
from Teodoro Baas with a face value of P390,000.00
payable in installments; second, ASIA PACIFIC would
then make it appear that the promissory note was sold
to it by Cenen Dizon with the 14% usurious interest on
the loan or P54,000.00 discounted and collected in
advance by ASIA PACIFIC; and, lastly, Cenen Dizon
would provide sufficient collateral to answer for the
loan in case of default in payment and execute a
continuing guaranty to assure continuous and prompt
payment of the loan. Defendants also alleged that out
of the loan of P390,000.00 defendants actually
received only P329,185.00 after ASIA PACIFIC
deducted the discounted interest, service handling
charges, insurance premium, registration and notarial
fees.
Sometime in October 1980 Cenen Dizon informed ASIA
PACIFIC that he would be delayed in meeting his
monthly amortization on account of business reverses
and promised to pay instead in February 1981. Cenen
Dizon made good his promise and tendered payment
to ASIA PACIFIC in an amount equivalent to two (2)
monthly amortizations. But ASIA PACIFIC attempted to
impose a 3% interest for every month of delay, which
he flatly refused to pay for being usurious.
Afterwards, ASIA PACIFIC allegedly made a verbal
proposal to Cenen Dizon to surrender to it the
ownership of the two (2) bulldozer crawler tractors
and, in turn, the latter would treat the former's
account as closed and the loan fully paid. Cenen Dizon
supposedly agreed and accepted the offer. Defendants
averred that the value of the bulldozer crawler tractors
was more than adequate to cover their obligation to
ASIA PACIFIC.
Meanwhile, on 21 April 1981 the trial court issued a
writ of replevin against defendant C. G. Dizon
Construction for the surrender of the bulldozer crawler
tractors subject of the Deed of Chattel Mortgage. Of
the three (3) bulldozer crawler tractors, only two (2)
were actually turned over by defendants - D8-14A and
D8-2U - which units were subsequently foreclosed by
ASIA PACIFIC to satisfy the obligation. D8-14A was sold
for P120,000.00 and D8-2U for P60,000.00 both to
ASIA PACIFIC as the highest bidder.
During the pendency of the case, defendant Teodoro
Baas passed away, and on motion of the remaining
defendants, the trial court dismissed the case against
him. On the other hand, ASIA PACIFIC was substituted

as party plaintiff by International Corporate Bank after
the disputed Promissory Note was assigned and/or
transferred by ASIA PACIFIC to International Corporate
Bank. Later, International Corporate Bank merged with
Union Bank of the Philippines. As the surviving entity
after the merger, and having succeeded to all the
rights and interests of International Corporate Bank in
this case, Union Bank of the Philippines was
substituted as a party in lieu of International Corporate
BankOn 25 September 1992 the Regional Trial Court
ruled in favor of ASIA PACIFIC holding the defendants
jointly and severally liable for the unpaid balance of
the obligation under the Promissory Note in the
amount of P87,637.50 at 14% interest per annum, and
attorney's fees equivalent to 25% of the monetary
award
On 24 July 1996 the Court of Appeals affirmed in toto
the decision of the trial court thus Defendant-appellants' contention that the instruments
were executed merely as a subterfuge to skirt banking
laws is an untenable defense. If that were so then they
too were parties to the illegal scheme. Why should
they now be allowed to take advantage of their own
knavery to escape the liabilities that their own
chicanery created?
Defendant-appellants also want us to believe their
story that there was an agreement between them and
the plaintiff-appellee that if the former would deliver
their 2 bulldozer crawler tractors to the latter, the
defendant-appellants' obligation would fully be
extinguished. Again, nothing but the word that comes
out between the teeth supports such story. Why did
they not write down such an important agreement? Is
it believable that seasoned businessmen such as the
defendant-appellant Cenen G. Dizon and the other
officers of the appellant corporation would deliver the
bulldozers without a receipt of acquittance from the
plaintiff-appellee x x x x In our book, that is not
credible.
The pivotal issues raised are: (a) Whether the disputed
transaction between petitioners and ASIA PACIFIC
violated banking laws, hence, null and void; and (b)
Whether the surrender of the bulldozer crawler
tractors to respondent resulted in the extinguishment
of petitioners' obligation.
On the first issue, petitioners insist that ASIA PACIFIC
was organized as an investment house which could
not engage in the lending of funds obtained from the
public through receipt of deposits. The disputed
Promissory Note, Deed of Chattel Mortgage and
Continuing Undertaking were not intended to be valid
and binding on the parties as they were merely
devices to conceal their real intention which was to
enter into a contract of loan in violation of banking
laws.
We reject the argument. An investment company
refers to any issuer which is or holds itself out as being
engaged or proposes to engage primarily in the
business of investing, reinvesting or trading in

securities.As defined in Sec. 2, par. (a), of the Revised
Securities Act, securities "shall include x x x x
commercial papers evidencing indebtedness of any
person, financial or non-financial entity, irrespective of
maturity, issued, endorsed, sold, transferred or in any
manner conveyed to another with or without recourse,
such as promissory notes x x x x" Clearly, the
transaction between petitioners and respondent was
one involving not a loan but purchase of receivables at
a discount, well within the purview of "investing,
reinvesting or trading in securities" which an
investment company, like ASIA PACIFIC, is authorized
to perform and does not constitute a violation of the
General Banking Act. Moreover, Sec. 2 of the General
Banking Act provides in part Sec. 2. Only entities duly authorized by the Monetary
Board of the Central Bank may engage in the lending
of funds obtained from the public through the receipt
of deposits of any kind, and all entities regularly
conducting such operations shall be considered as
banking institutions and shall be subject to the
provisions of this Act, of the Central Bank Act, and of
other pertinent laws (underscoring supplied).
Indubitably, what is prohibited by law is for investment
companies to lend funds obtained from the public
through receipts of deposit, which is a function of
banking institutions. But here, the funds supposedly
"lent" to petitioners have not been shown to have
been obtained from the public by way of deposits,
hence, the inapplicability of banking laws.
On petitioners' submission that the true intention of
the parties was to enter into a contract of loan, we
have examined the Promissory Note and failed to
discern anything therein that would support such
theory. On the contrary, we find the terms and
conditions of the instrument clear, free from any
ambiguity, and expressive of the real intent and
agreement of the parties. We quote the pertinent
portions of the Promissory Note FOR VALUE RECEIVED, I/We, hereby promise to pay to
the order of C.G. Dizon Construction, Inc. the sum of
THREE
HUNDRED
NINETY
THOUSAND
ONLY
(P390,000.00), Philippine Currency in the following
manner:
P32,500.00 due every 25th of the month starting from
September 25, 1980 up to August 25, 1981.
I/We agree that if any of the said installments is not
paid as and when it respectively falls due, all the
installments covered hereby and not paid as yet shall
forthwith become due and payable at the option of the
holder of this note with interest at the rate of 14% per
annum on each unpaid installment until fully paid.
If any amount due on this note is not paid at its
maturity and this note is placed in the hands of an
attorney for collection, I/We agree to pay in addition to
the aggregate of the principal amount and interest
due, a sum equivalent to TEN PERCENT (10%) thereof
as Attorney's fees, in case no action is filed, otherwise,
the sum will be equivalent to TWENTY FIVE (25%) of

the said principal amount and interest due x x x x
Makati, Metro Manila, August 25, 1980.
(Sgd) Teodoro Baas
ENDORSED TO ASIA PACIFIC FINANCE CORPORATION
WITH RECOURSE, C.G. DIZON CONSTRUCTION, INC.
By: (Sgd.) Cenen Dizon (Sgd.) Juliette B. Dizon
President VP/Treasurer
Likewise, the Deed of Chattel Mortgage and
Continuing Undertaking were duly acknowledged
before a notary public and, as such, have in their favor
the presumption of regularity. To contradict them there
must be clear, convincing and more than merely
preponderant evidence. In the instant case, the
records do not show even a preponderance of
evidence in favor of petitioners' claim that the Deed of
Chattel Mortgage and Continuing Undertaking were
never intended by the parties to be legal, valid and
binding. Notarial documents are evidence of the facts
in clear and unequivocal manner therein expressed.
Interestingly, petitioners' assertions were based
mainly on the self-serving testimony of Cenen Dizon,
and not on any other independent evidence. His
testimony is not only unconvincing, as found by the
trial court and the Court of Appeals, but also selfdefeating in light of the documents presented by
respondent, i.e., Promissory Note, Deed of Chattel
Mortgage and Continuing Undertaking, the accuracy,
correctness and due execution of which were admitted
by petitioners. Oral evidence certainly cannot prevail
over the written agreements of the parties. The courts
need only rely on the faces of the written contracts to
determine their true intention on the principle that
when the parties have reduced their agreements in
writing, it is presumed that they have made the
writings the only repositories and memorials of their
true agreement.
The second issue deals with a question of fact. We
have ruled often enough that it is not the function of
this Court to analyze and weigh the evidence all over
again, its jurisdiction being limited to reviewing errors
of law that might have been committed by the lower
court.[if !supportFootnotes][12][endif] At any rate, while we are not
a trier of facts, hence, not required as a rule to look
into the factual bases of the assailed decision of the
Court of Appeals, we did so just the same in this case
if only to satisfy petitioners that we have carefully
studied and evaluated the case, all too mindful of the
tenacity and vigor with which the parties, through
their respective counsel, have pursued this case for
nineteen (19) years.
Petitioners contend that the parties already had a
verbal understanding wherein ASIA PACIFIC actually
agreed to consider petitioners' account closed and the
principal obligation fully paid in exchange for the
ownership of the two (2) bulldozer crawler tractors.
We are not persuaded. Again, other than the bare
allegations of petitioners, the records are bereft of any
evidence of the supposed agreement. As correctly
observed by the Court of Appeals, it is unbelievable

that the parties entirely neglected to write down such
an important agreement. Equally incredulous is the
fact that petitioner Cenen Dizon, a seasoned
businessman, readily consented to deliver the
bulldozers to respondent without a corresponding
receipt of acquittance. Indeed, even the testimony of
petitioner Cenen Dizon himself negates the supposed
verbal understanding between the parties Q: You said and is it not a fact that you surrendered
the bulldozers to APCOR by virtue of the seizure order?
A: There was no seizure order. Atty. Carag during that
time said if I surrender the two equipment, we might
finally close a deal if the equipment would come up to
the balance of the loan. So I voluntarily surrendered, I
pulled them from the job site and returned them to
APCOR x x x x
Q: You mentioned a certain Atty. Carag, who is he?
A: He was the former legal counsel of APCOR. They
were handling cases. In fact, I talked with Atty. Carag,
we have a verbal agreement if I surrender the
equipment it might suffice to pay off the debt so I did
just that (underscoring ours).
In other words, there was no binding and perfected
contract
between
petitioners
and
respondent
regarding the settlement of the obligation, but only a
conditional one, a mere conjecture in fact, depending
on whether the value of the tractors to be surrendered
would equal the balance of the loan plus interests. And
since the bulldozer crawler tractors were sold at the
foreclosure sale for only P180,000.00, which was not
enough to cover the unpaid balance of P267,637.50,
petitioners are still liable for the deficiency.
Barring therefore a showing that the findings
complained of are totally devoid of support in the
records, or that they are so glaringly erroneous as to
constitute serious abuse of discretion, we see no valid
reason to discard them. More so in this case where the
findings of both the trial court and the appellate court
coincide with each other on the matter.
With regard to the computation of petitioners' liability,
the records show that petitioners actually paid to
respondent a total sum of P130,000.00 in addition to
the P180,000.00 proceeds realized from the sale of the
bulldozer crawler tractors at public auction. Deducting
these amounts from the principal obligation of
P390,000.00 leaves a balance of P80,000.00, to which
must be added P7,637.50 accrued interests and
charges as of 20 March 1981, or a total unpaid
balance of P87,637.50 for which petitioners are jointly
and severally liable. Furthermore, the unpaid balance
should earn 14% interest per annum as stipulated in
the Promissory Note, computed from 20 March 1981
until fully paid.
On the amount of attorney's fees which under the
Promissory Note is equivalent to 25% of the principal
obligation and interests due, it is not, strictly speaking,
the attorney's fees recoverable as between the
attorney and his client regulated by the Rules of Court.
Rather, the attorney's fees here are in the nature of

liquidated damages and the stipulation therefor is
aptly called a penal clause. It has been said that so
long as such stipulation does not contravene the law,
morals and public order, it is strictly binding upon the
obligor. It is the litigant, not the counsel, who is the
judgment creditor entitled to enforce the judgment by
execution]
Nevertheless, it appears that petitioners' failure to
fully comply with their part of the bargain was not
motivated by ill will or malice, but due to financial
distress occasioned by legitimate business reverses.
Petitioners in fact paid a total of P130,000.00 in three
(3) installments, and even went to the extent of
voluntarily turning over to respondent their heavy
equipment consisting of two (2) bulldozer crawler
tractors, all in a bona fide effort to settle their
indebtedness in full. Article 1229 of the New Civil Code
specifically empowers the judge to equitably reduce
the civil penalty when the principal obligation has
been partly or irregularly complied with. Upon the
foregoing premise, we hold that the reduction of the
attorney's fees from 25% to 15% of the unpaid
principal plus interests is in order.
Finally, while we empathize with petitioners, we
cannot close our eyes to the overriding considerations
of the law on obligations and contracts which must be
upheld and honored at all times. Petitioners have
undoubtedly benefited from the transaction; they
cannot now be allowed to impugn its validity and
legality to escape the fulfillment of a valid and binding
obligation.
WHEREFORE, no reversible error having been
committed by the Court of Appeals, its assailed
Decision of 24 July 1996 and its Resolution of 21 March
1997 are AFFIRMED. Accordingly, petitioners C.G.
Construction Inc. and Cenen Dizon are ordered jointly
and severally to pay respondent Asia Pacific Finance
Corporation, substituted by International Corporate
Bank (now known as Union Bank of the Philippines),
P87,637.50 representing the unpaid balance on the
Promissory Note, with interest at fourteen percent
(14%) per annum computed from 20 March 1981 until
fully paid, and fifteen percent (15%) of the principal
obligation and interests due by way of attorney's fees.
Costs against petitioners.
SO ORDERED.
G.R. No. 88013 March 19, 1990

SIMEX INTERNATIONAL (MANILA), INCORPORATED,
petitioner,
vs.
THE HONORABLE COURT OF APPEALS and TRADERS
ROYAL BANK, respondents.
Don P. Porcuincula for petitioner.
San Juan, Gonzalez, San Agustin & Sinense for private
respondent.
CRUZ, J.:
We are concerned in this case with the question of
damages, specifically moral and exemplary damages.
The negligence of the private respondent has already
been established. All we have to ascertain is whether
the petitioner is entitled to the said damages and, if
so, in what amounts.
The parties agree on the basic facts. The petitioner is
a private corporation engaged in the exportation of
food products. It buys these products from various
local suppliers and then sells them abroad, particularly
in the United States, Canada and the Middle East. Most
of its exports are purchased by the petitioner on
credit.
The petitioner was a depositor of the respondent bank
and maintained a checking account in its branch at
Romulo Avenue, Cubao, Quezon City. On May 25,
1981, the petitioner deposited to its account in the
said bank the amount of P100,000.00, thus increasing
its balance as of that date to P190,380.74. 1
Subsequently, the petitioner issued several checks
against its deposit but was suprised to learn later that
they had been dishonored for insufficient funds.
The dishonored checks are the following:
1. Check No. 215391 dated May 29, 1981, in favor of
California
Manufacturing
Company,
Inc.
for
P16,480.00:
2. Check No. 215426 dated May 28, 1981, in favor of
the Bureau of Internal Revenue in the amount of
P3,386.73:
3. Check No. 215451 dated June 4, 1981, in favor of
Mr. Greg Pedreo in the amount of P7,080.00;
Malabon Longlife Trading Corporation in the amount of
P42,906.00:
Malabon Longlife Trading Corporation in the amount of
P12,953.00:
Sea-Land Services, Inc. in the amount of P27,024.45:
Baguio Country Club Corporation in the amount of
P4,385.02: and
Enriqueta Bayla in the amount of P6,275.00. 2
As a consequence, the California Manufacturing
Corporation sent on June 9, 1981, a letter of demand
to the petitioner, threatening prosecution if the
dishonored check issued to it was not made good. It
also withheld delivery of the order made by the

petitioner. Similar letters were sent to the petitioner by
the Malabon Long Life Trading, on June 15, 1981, and
by the G. and U. Enterprises, on June 10, 1981.
Malabon also canceled the petitioner's credit line and
demanded that future payments be made by it in cash
or certified check. Meantime, action on the pending
orders of the petitioner with the other suppliers whose
checks were dishonored was also deferred.
The petitioner complained to the respondent bank on
June 10, 1981. 3 Investigation disclosed that the sum
of P100,000.00 deposited by the petitioner on May 25,
1981, had not been credited to it. The error was
rectified on June 17, 1981, and the dishonored checks
were paid after they were re-deposited. 4
In its letter dated June 20, 1981, the petitioner
demanded reparation from the respondent bank for its
"gross and wanton negligence." This demand was not
met. The petitioner then filed a complaint in the then
Court of First Instance of Rizal claiming from the
private respondent moral damages in the sum of
P1,000,000.00 and exemplary damages in the sum of
P500,000.00, plus 25% attorney's fees, and costs.
After trial, Judge Johnico G. Serquinia rendered
judgment holding that moral and exemplary damages
were not called for under the circumstances. However,
observing that the plaintiff's right had been violated,
he ordered the defendant to pay nominal damages in
the amount of P20,000.00 plus P5,000.00 attorney's
fees and costs. 5 This decision was affirmed in toto by
the respondent court. 6
The respondent court found with the trial court that
the private respondent was guilty of negligence but
agreed that the petitioner was nevertheless not
entitled to moral damages. It said:
The essential ingredient of moral damages is proof of
bad faith (De Aparicio vs. Parogurga, 150 SCRA 280).
Indeed, there was the omission by the defendantappellee bank to credit appellant's deposit of
P100,000.00 on May 25, 1981. But the bank rectified
its records. It credited the said amount in favor of
plaintiff-appellant in less than a month. The
dishonored checks were eventually paid. These
circumstances negate any imputation or insinuation of
malicious, fraudulent, wanton and gross bad faith and
negligence on the part of the defendant-appellant.
It is this ruling that is faulted in the petition now before
us.
This Court has carefully examined the facts of this
case and finds that it cannot share some of the
conclusions of the lower courts. It seems to us that the
negligence of the private respondent had been
brushed off rather lightly as if it were a minor
infraction requiring no more than a slap on the wrist.
We feel it is not enough to say that the private
respondent rectified its records and credited the
deposit in less than a month as if this were sufficient
repentance. The error should not have been
committed in the first place. The respondent bank has
not even explained why it was committed at all. It is

true that the dishonored checks were, as the Court of
Appeals put it, "eventually" paid. However, this took
almost a month when, properly, the checks should
have been paid immediately upon presentment.
As the Court sees it, the initial carelessness of the
respondent bank, aggravated by the lack of
promptitude in repairing its error, justifies the grant of
moral damages. This rather lackadaisical attitude
toward the complaining depositor constituted the
gross negligence, if not wanton bad faith, that the
respondent court said had not been established by the
petitioner.
We also note that while stressing the rectification
made by the respondent bank, the decision practically
ignored the prejudice suffered by the petitioner. This
was simply glossed over if not, indeed, disbelieved.
The fact is that the petitioner's credit line was
canceled and its orders were not acted upon pending
receipt of actual payment by the suppliers. Its
business declined. Its reputation was tarnished. Its
standing was reduced in the business community. All
this was due to the fault of the respondent bank which
was undeniably remiss in its duty to the petitioner.
Article 2205 of the Civil Code provides that actual or
compensatory damages may be received "(2) for
injury to the plaintiff s business standing or
commercial credit." There is no question that the
petitioner did sustain actual injury as a result of the
dishonored checks and that the existence of the loss
having been established "absolute certainty as to its
amount is not required." 7 Such injury should bolster
all the more the demand of the petitioner for moral
damages and justifies the examination by this Court of
the validity and reasonableness of the said claim.
We agree that moral damages are not awarded to
penalize the defendant but to compensate the plaintiff
for the injuries he may have suffered. 8 In the case at
bar, the petitioner is seeking such damages for the
prejudice sustained by it as a result of the private
respondent's fault. The respondent court said that the
claimed losses are purely speculative and are not
supported by substantial evidence, but if failed to
consider that the amount of such losses need not be
established with exactitude precisely because of their
nature. Moral damages are not susceptible of
pecuniary estimation. Article 2216 of the Civil Code
specifically provides that "no proof of pecuniary loss is
necessary in order that moral, nominal, temperate,
liquidated
or
exemplary
damages
may
be
adjudicated." That is why the determination of the
amount to be awarded (except liquidated damages) is
left to the sound discretion of the court, according to
"the circumstances of each case."
From every viewpoint except that of the petitioner's,
its claim of moral damages in the amount of
P1,000,000.00 is nothing short of preposterous. Its
business certainly is not that big, or its name that
prestigious, to sustain such an extravagant pretense.
Moreover, a corporation is not as a rule entitled to

moral damages because, not being a natural person, it
cannot experience physical suffering or such
sentiments as wounded feelings, serious anxiety,
mental anguish and moral shock. The only exception
to this rule is where the corporation has a good
reputation that is debased, resulting in its social
humiliation. 9
We shall recognize that the petitioner did suffer injury
because of the private respondent's negligence that
caused the dishonor of the checks issued by it. The
immediate consequence was that its prestige was
impaired because of the bouncing checks and
confidence in it as a reliable debtor was diminished.
The private respondent makes much of the one
instance when the petitioner was sued in a collection
case, but that did not prove that it did not have a good
reputation that could not be marred, more so since
that case was ultimately settled. 10 It does not appear
that, as the private respondent would portray it, the
petitioner is an unsavory and disreputable entity that
has no good name to protect.
Considering all this, we feel that the award of nominal
damages in the sum of P20,000.00 was not the proper
relief to which the petitioner was entitled. Under
Article 2221 of the Civil Code, "nominal damages are
adjudicated in order that a right of the plaintiff, which
has been violated or invaded by the defendant, may
be vindicated or recognized, and not for the purpose
of indemnifying the plaintiff for any loss suffered by
him." As we have found that the petitioner has indeed
incurred loss through the fault of the private
respondent, the proper remedy is the award to it of
moral damages, which we impose, in our discretion, in
the same amount of P20,000.00.
Now for the exemplary damages.
The pertinent provisions of the Civil Code are the
following:
Art. 2229. Exemplary or corrective damages are
imposed, by way of example or correction for the
public good, in addition to the moral, temperate,
liquidated or compensatory damages.
Art. 2232. In contracts and quasi-contracts, the court
may award exemplary damages if the defendant acted
in a wanton, fraudulent, reckless, oppressive, or
malevolent manner.
The banking system is an indispensable institution in
the modern world and plays a vital role in the
economic life of every civilized nation. Whether as
mere passive entities for the safekeeping and saving
of money or as active instruments of business and
commerce, banks have become an ubiquitous
presence among the people, who have come to regard
them with respect and even gratitude and, most of all,
confidence. Thus, even the humble wage-earner has
not hesitated to entrust his life's savings to the bank
of his choice, knowing that they will be safe in its
custody and will even earn some interest for him. The
ordinary person, with equal faith, usually maintains a
modest checking account for security and convenience

in the settling of his monthly bills and the payment of
ordinary expenses. As for business entities like the
petitioner, the bank is a trusted and active associate
that can help in the running of their affairs, not only in
the form of loans when needed but more often in the
conduct of their day-to-day transactions like the
issuance or encashment of checks.
In every case, the depositor expects the bank to treat
his account with the utmost fidelity, whether such
account consists only of a few hundred pesos or of
millions. The bank must record every single
transaction accurately, down to the last centavo, and
as promptly as possible. This has to be done if the
account is to reflect at any given time the amount of
money the depositor can dispose of as he sees fit,
confident that the bank will deliver it as and to
whomever he directs. A blunder on the part of the
bank, such as the dishonor of a check without good
reason, can cause the depositor not a little
embarrassment if not also financial loss and perhaps
even civil and criminal litigation.
The point is that as a business affected with public
interest and because of the nature of its functions, the
bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in
mind the fiduciary nature of their relationship. In the
case at bar, it is obvious that the respondent bank was
remiss in that duty and violated that relationship.
What is especially deplorable is that, having been
informed of its error in not crediting the deposit in
question to the petitioner, the respondent bank did not
immediately correct it but did so only one week later
or twenty-three days after the deposit was made. It
bears repeating that the record does not contain any
satisfactory explanation of why the error was made in
the first place and why it was not corrected
immediately after its discovery. Such ineptness comes
under the concept of the wanton manner
contemplated in the Civil Code that calls for the
imposition of exemplary damages.
After deliberating on this particular matter, the Court,
in the exercise of its discretion, hereby imposes upon
the respondent bank exemplary damages in the
amount of P50,000.00, "by way of example or
correction for the public good," in the words of the law.
It is expected that this ruling will serve as a warning
and deterrent against the repetition of the ineptness
and indefference that has been displayed here, lest
the confidence of the public in the banking system be
further impaired.
ACCORDINGLY, the appealed judgment is hereby
MODIFIED and the private respondent is ordered to
pay the petitioner, in lieu of nominal damages, moral
damages in the amount of P20,000.00, and exemplary
damages in the amount of P50,000.00 plus the original
award of attorney's fees in the amount of P5,000.00,
and costs.
SO ORDERED.
G.R. No. 69162 February 21, 1992

BANK OF THE PHILIPPINE ISLANDS, petitioner,
vs.
THE INTERMEDIATE APPELLATE COURT and the
SPOUSES ARTHUR CANLAS and VIVIENE CANLAS,
respondents.
Leonen, Ramirez & Associates for petitioner.
L. Emmanuel B. Canilao for private respondents.
GRIO-AQUINO, J.:
In a decision dated September 3, 1984, the
Intermediate Appellate Court (now Court of Appeals) in
AC-G.R. CV No. 69178 entitled, "Arthur A. Canlas, et
al., Plaintiff-Appellees vs. Commercial Bank and Trust
Company of the Philippines, Defendant-Appellant,"
reduced to P105,000 the P465,000 damage-award of
the trial court to the private respondents for an error
of a bank teller which resulted in the dishonor of two
small checks which the private respondents had

issued against their joint current account. This petition
for review of that decision was filed by the Bank.
The respondent spouses, Arthur and Vivienne Canlas,
opened a joint current account No. 210-520-73 on April
25, 1977 in the Quezon City branch of the Commercial
Bank and Trust Company of the Philippines (CBTC) with
an initial deposit of P2,250. Prior thereto, Arthur
Canlas had an existing separate personal checking
account No. 210-442-41 in the same branch.
When the respondent spouses opened their joint
current account, the "new accounts" teller of the bank
pulled out from the bank's files the old and existing
signature card of respondent Arthur Canlas for Current
Account No. 210-442-41 for use as I D and reference.
By mistake, she placed the old personal account
number of Arthur Canlas on the deposit slip for the
new joint checking account of the spouses so that the
initial deposit of P2,250 for the joint checking account
was miscredited to Arthur's personal account (p. 9,
Rollo). The spouses subsequently deposited other
amounts in their joint account.
However, when respondent Vivienne Canlas issued a
check for Pl,639.89 in April 1977 and another check
for P1,160.00 on June 1, 1977, one of the checks was
dishonored by the bank for insufficient funds and a
penalty of P20 was deducted from the account in both
instances. In view of the overdrawings, the bank tried
to call up the spouses at the telephone number which
they had given in their application form, but the bank
could not contact them because they actually reside in
Porac, Pampanga. The city address and telephone
number which they gave to the bank belonged to Mrs.
Canlas' parents.
On December 15, 1977, the private respondents filed
a complaint for damages against CBTC in the Court of
First Instance of Pampanga (p. 113, Rollo).
On February 27, 1978, the bank filed a motion to
dismiss the complaint for improper venue. The motion
was denied.
During the pendency of the case, the Bank of the
Philippine Islands (BPI) and CBTC were merged. As the
surviving corporation under the merger agreement
and under Section 80 (5) of the Corporation Code of
the Philippines, BPI took over the prosecution and
defense of any pending claims, actions or proceedings
by and against CBTC.
On May 5, 1981, the Regional Trial Court of Pampanga
rendered a decision against BPI, the dispositive portion
of which reads:
WHEREFORE, judgment is hereby rendered sentencing
defendant to pay the plaintiff the following:
1. P 5,000.00 as actual damages;
2. P 150,000.00 for plaintiff Arthur Canlas and
P150,000.00
for
plaintiff
Vivienne
S.
Canlas
representing moral damages;
3. P 150.000.00 as exemplary damages;
4. P 10,000.00 as attorney's fees; and
5. Costs. (p. 36, Rollo).
On appeal, the Intermediate Appellate Court deleted

the actual damages and reduced the other awards.
The dispositive portion of its decision reads:
WHEREFORE, the judgment appealed from is hereby
modified as follows:
1. The award of P50,000.00 in actual damages is
herewith deleted.
2. Moral damages of P50,000.00 is awarded to
plaintiffs-appellees Arthur Canlas and Vivienne S.
Canlas, not P50,000.00 each.
3. Exemplary damages is likewise reduced to the sum
of P50,000.00 and attorney's fees to P5,000.00.
Costs against the defendants appellant. (p. 40, Rollo.)
Petitioner filed this petition for review alleging that the
appellate court erred in holding that:
1. The venue of the case had been properly laid at
Pampanga in the light of private respondents' earlier
declaration that Quezon City is their true residence.
2. The petitioner was guilty of gross negligence in the
handling of private respondents' bank account.
3. Private respondents are entitled to the moral and
exemplary damages and attorney's fees adjudged by
the respondent appellate court.
On the question of venue raised by petitioner, it is
evident that personal actions may be instituted in the
Court of First Instance (now Regional Trial Court) of the
province where the defendant or any of the
defendants resides or may be found, or where the
plaintiff or any of the plaintiffs resides, at the election
of the plaintiff (Section 2[b], Rule 4 of the Rules of
Court). In this case, there was ample proof that the
residence of the plaintiffs is B. Sacan, Porac,
Pampanga (p. 117, Rollo). The city address of Mrs.
Canlas' parents was placed by the private respondents
in their application for a joint checking account, at the
suggestion of the new accounts teller, presumably to
facilitate mailing of the bank statements and
communicating with the private respondents in case
any problems should arise involving the account. No
waiver of their provincial residence for purposes of
determining the venue of an action against the bank
may
be
inferred
from
the
so-called
"misrepresentation" of their true residence.
The appellate court based its award of moral and
exemplary damages, and attorney's fees on its finding
that the mistake committed by the new accounts teller
of the petitioner constituted "serious" negligence (p.
38, Rollo). Said court further stressed that it cannot
absolve the petitioner from liability for damages to the
private respondents, even on the assumption of an
honest mistake on its part, because of the
embarrassment that even an honest mistake can
cause its depositors (p. 31, Rollo).
There is no merit in petitioner's argument that it
should not be considered negligent, much less held
liable for damages on account of the inadvertence of
its bank employee for Article 1173 of the Civil Code
only requires it to exercise the diligence of a good
father of family.
In Simex International (Manila), Inc. vs. Court of

Appeals (183 SCRA 360, 367), this Court stressed the
fiduciary nature of the relationship between a bank
and its depositors and the extent of diligence
expected of it in handling the accounts entrusted to its
care.
whomever he directs. A blunder on the part of the
bank, such as the dishonor of a check without good
reason, can cause the depositor not a little
embarrassment if not also financial loss and perhaps
even civil and criminal litigation.
The point is that as a business affected with public
interest and because of the nature of its functions, the
bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in
mind the fiduciary nature of their relationship. . . .
The bank is not expected to be infallible but, as
correctly observed by respondent Appellate Court, in
this instance, it must bear the blame for not
discovering the mistake of its teller despite the
established procedure requiring the papers and bank
books to pass through a battery of bank personnel
whose duty it is to check and countercheck them for
possible errors. Apparently, the officials and
employees tasked to do that did not perform their
duties with due care, as may be gathered from the
testimony of the bank's lone witness, Antonio Enciso,
who casually declared that "the approving officer does
not have to see the account numbers and all those
things. Those are very petty things for the approving
manager to look into" (p. 78, Record on Appeal).
Unfortunately, it was a "petty thing," like the incorrect
account number that the bank teller wrote on the
initial deposit slip for the newly-opened joint current
account of the Canlas spouses, that sparked this halfa-million-peso damage suit against the bank.
While the bank's negligence may not have been
attended with malice and bad faith, nevertheless, it
caused
serious
anxiety,
embarrassment
and
humiliation to the private respondents for which they
are entitled to recover reasonable moral damages
(American Express International, Inc. vs. IAC, 167
SCRA 209). The award of reasonable attorney's fees is
proper for the private respondents were compelled to
litigate to protect their interest (Art. 2208, Civil Code).
However, the absence of malice and bad faith renders
the award of exemplary damages improper (Globe
Mackay Cable and Radio Corp. vs. Court of Appeals,
176 SCRA 778).
WHEREFORE, the petition for review is granted. The
appealed decision is MODIFIED by deleting the award

of exemplary damages to the private respondents. In
all other respects, the decision of the Intermediate
Appellate Court, now Court of Appeals, is AFFIRMED.
No costs.
SO ORDERED.
[G.R. No. 112392. February 29, 2000]
BANK OF THE PHILIPPINE ISLANDS, petitioner, vs.
COURT OF APPEALS and BENJAMIN C. NAPIZA,
respondents.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review on certiorari of the
Decision of the Court of Appeals in CA-G.R. CV No.
37392 affirming in toto that of the Regional Trial Court
of Makati, Branch 139, which dismissed the complaint
filed by petitioner Bank of the Philippine Islands
against private respondent Benjamin C. Napiza for
sum of money. Sdaad
On September 3, 1987, private respondent deposited
in Foreign Currency Deposit Unit (FCDU) Savings
Account No. 028-187 which he maintained in petitioner
banks Buendia Avenue Extension Branch, Continental
Bank Managers Check No. 00014757 dated August 17,
1984, payable to "cash" in the amount of Two
Thousand Five Hundred Dollars ($2,500.00) and duly
endorsed by private respondent on its dorsal side.It
appears that the check belonged to a certain Henry
Chan who went to the office of private respondent and
requested him to deposit the check in his dollar
account by way of accommodation and for the
purpose of clearing the same. Private respondent
acceded, and agreed to deliver to Chan a signed blank
withdrawal slip, with the understanding that as soon
as the check is cleared, both of them would go to the
bank to withdraw the amount of the check upon
private respondents presentation to the bank of his
passbook.
Using the blank withdrawal slip given by private
respondent to Chan, on October 23, 1984, one Ruben
Gayon, Jr. was able to withdraw the amount of
$2,541.67 from FCDU Savings Account No. 028-187.
Notably, the withdrawal slip shows that the amount
was payable to Ramon A. de Guzman and Agnes C. de
Guzman and was duly initialed by the branch assistant
manager, Teresita Lindo.
On
November 20, 1984, petitioner
received
communication
from
the
Wells
Fargo
Bank
International of New York that the said check
deposited by private respondent was a counterfeit
check because it was "not of the type or style of
checks
issued
by
Continental
Bank
International."Consequently, Mr. Ariel Reyes, the
manager of petitioners Buendia Avenue Extension
Branch, instructed one of its employees, Benjamin D.
Napiza IV, who is private respondents son, to inform
his father that the check bounced.Reyes himself sent a
telegram to private respondent regarding the dishonor

of the check. In turn, private respondents son wrote to
Reyes stating that the check had been assigned "for
encashment" to Ramon A. de Guzman and/or Agnes C.
de Guzman after it shall have been cleared upon
instruction of Chan. He also said that upon learning of
the dishonor of the check, his father immediately tried
to contact Chan but the latter was out of town.[
Private respondents son undertook to return the
amount of $2,500.00 to petitioner bank. On December
18, 1984, Reyes reminded private respondent of his
sons promise and warned that should he fail to return
that amount within seven (7) days, the matter would
be referred to the banks lawyers for appropriate action
to protect the banks interest. [This was followed by a
letter of the banks lawyer dated April 8, 1985
demanding the return of the $2,500.00.
In reply, private respondent wrote petitioners counsel
on April 20, 1985[ stating that he deposited the check
"for clearing purposes" only to accommodate Chan. He
added:
"Further, please take notice that said check was
deposited on September 3, 1984 and withdrawn on
October 23, 1984, or a total period of fifty (50) days
had elapsed at the time of withdrawal. Also, it may not
be amiss to mention here that I merely signed an
authority to withdraw said deposit subject to its
clearing, the reason why the transaction is not
reflected in the passbook of the account. Besides, I did
not receive its proceeds as may be gleaned from the
withdrawal slip under the captioned signature of
recipient.
If at all, my obligation on the transaction is moral in
nature, which (sic) I have been and is (sic) still
exerting utmost and maximum efforts to collect from
Mr. Henry Chan who is directly liable under the
circumstances. Scsdaad
xxx......xxx......xxx."
On August 12, 1986, petitioner filed a complaint
against private respondent, praying for the return of
the amount of $2,500.00 or the prevailing peso
equivalent plus legal interest from date of demand to
date of full payment, a sum equivalent to 20% of the
total amount due as attorney's fees, and litigation
and/or costs of suit.
Private respondent filed his answer, admitting that he
indeed signed a "blank" withdrawal slip with the
understanding that the amount deposited would be
withdrawn only after the check in question has been
cleared. He likewise alleged that he instructed the
party to whom he issued the signed blank withdrawal
slip to return it to him after the bank drafts clearance
so that he could lend that party his passbook for the
purpose of withdrawing the amount of $2,500.00.
However, without his knowledge, said party was able
to withdraw the amount of $2,541.67 from his dollar
savings account through collusion with one of
petitioners employees. Private respondent added that
he had "given the Plaintiff fifty one (51) days with
which to clear the bank draft in question." Petitioner

should have disallowed the withdrawal because his
passbook was not presented. He claimed that
petitioner had no one to blame except itself "for being
grossly negligent;" in fact, it had allegedly admitted
having paid the amount in the check "by mistake" x x
x "if not altogether due to collusion and/or bad faith on
the part of (its) employees." Charging petitioner with
"apparent ignorance of routine bank procedures," by
way of counterclaim, private respondent prayed for
moral damages of P100,000.00, exemplary damages
of P50,000.00 and attorneys fees of 30% of whatever
amount that would be awarded to him plus an
honorarium of P500.00 per appearance in court.
Private respondent also filed a motion for admission of
a third party complaint against Chan. He alleged that
"thru strategem and/or manipulation," Chan was able
to withdraw the amount of $2,500.00 even without
private
respondents
passbook.
Thus,
private
respondent prayed that third party defendant Chan be
made to refund to him the amount withdrawn and to
pay attorneys fees of P5,000.00 plus P300.00
honorarium per appearance.
Petitioner filed a comment on the motion for leave of
court to admit the third party complaint, wherein it
asserted that per paragraph 2 of the Rules and
Regulations governing BPI savings accounts, private
respondent alone was liable "for the value of the credit
given on account of the draft or check deposited." It
contended that private respondent was estopped from
disclaiming liability because he himself authorized the
withdrawal of the amount by signing the withdrawal
slip. Petitioner prayed for the denial of the said motion
so as not to unduly delay the disposition of the main
case asserting that private respondents claim could be
ventilated in another case.
Private respondent replied that for the parties to
obtain complete relief and to avoid multiplicity of
suits, the motion to admit third party complaint should
be granted. Meanwhile, the trial court issued orders on
August 25, 1987 and October 28, 1987 directing
private respondent to actively participate in locating
Chan. After private respondent failed to comply, the
trial court, on May 18, 1988, dismissed the third party
complaint without prejudice.
On November 4, 1991, a decision was rendered
dismissing the complaint. The lower court held that
petitioner could not hold private respondent liable
based on the checks face value alone. To so hold him
liable "would render inutile the requirement of
clearance from the drawee bank before the value of a
particular foreign check or draft can be credited to the
account of a depositor making such deposit." The
lower court further held that "it was incumbent upon
the petitioner to credit the value of the check in
question to the account of the private respondent only
upon receipt of the notice of final payment and should
not have authorized the withdrawal from the latters
account of the value or proceeds of the check." Having
admitted that it committed a "mistake" in not waiting

for the clearance of the check before authorizing the
withdrawal of its value or proceeds, petitioner should
suffer the resultant loss. Supremax
On appeal, the Court of Appeals affirmed the lower
courts decision. The appellate court held that
petitioner committed "clear gross negligence" in
allowing Ruben Gayon, Jr. to withdraw the money
without presenting private respondents passbook and,
before the check was cleared and in crediting the
amount indicated therein in private respondents
account. It stressed that the mere deposit of a check
in private respondents account did not mean that the
check was already private respondents property. The
check still had to be cleared and its proceeds can only
be withdrawn upon presentation of a passbook in
accordance with the banks rules and regulations.
Furthermore, petitioners contention that private
respondent warranted the checks genuineness by
endorsing it is untenable for it would render useless
the clearance requirement. Likewise, the requirement
of presentation of a passbook to ascertain the
propriety of the accounting reflected would be a
meaningless exercise. After all, these requirements are
designed to protect the bank from deception or fraud.
The Court of Appeals cited the case of Roman Catholic
Bishop of Malolos, Inc. v. IAC,where this Court stated
that a personal check is not legal tender or money,
and held that the check deposited in this case must be
cleared before its value could be properly transferred
to private respondent's account.
Without filing a motion for the reconsideration of the
Court of Appeals Decision, petitioner filed this petition
for review on certiorari, raising the following issues:
1.......WHETHER OR NOT RESPONDENT NAPIZA IS
LIABLE UNDER HIS WARRANTIES AS A GENERAL
INDORSER.
2.......WHETHER OR NOT A CONTRACT OF AGENCY WAS
CREATED BETWEEN RESPONDENT NAPIZA AND RUBEN
GAYON.
3.......WHETHER OR NOT PETITIONER WAS GROSSLY
NEGLIGENT IN ALLOWING THE WITHDRAWAL.
Petitioner claims that private respondent, having
affixed his signature at the dorsal side of the check,
should be liable for the amount stated therein in
accordance with the following provision of the
Negotiable Instruments Law (Act No. 2031):
"SEC. 66. Liability of general indorser. Every indorser
who indorses without qualification, warrants to all
subsequent holders in due course
(a)......The matters and things mentioned in
subdivisions (a), (b), and (c) of the next preceding
section; and
(b)......That the instrument is at the time of his
indorsement, valid and subsisting.
And, in addition, he engages that on due presentment,
it shall be accepted or paid, or both, as the case may
be, according to its tenor, and that if it be dishonored,
and the necessary proceedings on dishonor be duly
taken, he will pay the amount thereof to the holder, or

to any subsequent indorser who may be compelled to
pay it."
Section 65, on the other hand, provides for the
following warranties of a person negotiating an
instrument by delivery or by qualified indorsement: (a)
that the instrument is genuine and in all respects what
it purports to be; (b) that he has a good title to it, and
(c) that all prior parties had capacity to contract.In
People v. Maniego, this Court described the liabilities of
an indorser as follows: Juris
"Appellants contention that as mere indorser, she may
not be liable on account of the dishonor of the checks
indorsed by her, is likewise untenable. Under the law,
the holder or last indorsee of a negotiable instrument
has the right to enforce payment of the instrument for
the full amount thereof against all parties liable
thereon. Among the parties liable thereon is an
indorser of the instrument, i.e., a person placing his
signature upon an instrument otherwise than as a
maker, drawer or acceptor * * unless he clearly
indicated by appropriate words his intention to be
bound in some other capacity. Such an indorser who
indorses without qualification, inter alia engages that
on due presentment, * * (the instrument) shall be
accepted or paid, or both, as the case may be,
according to its tenor, and that if it be dishonored, and
the necessary proceedings on dishonor be duly taken,
he will pay the amount thereof to the holder, or any
subsequent indorser who may be compelled to pay it.
Maniego may also be deemed an accommodation
party in the light of the facts, i.e., a person who has
signed the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for the
purpose of lending his name to some other person. As
such, she is under the law liable on the instrument to a
holder for value, notwithstanding such holder at the
time of taking the instrument knew * * (her) to be only
an accommodation party, although she has the right,
after paying the holder, to obtain reimbursement from
the party accommodated, since the relation between
them is in effect that of principal and surety, the
accommodation party being the surety."
It is thus clear that ordinarily private respondent may
be held liable as an indorser of the check or even as
an accommodation party.However, to hold private
respondent liable for the amount of the check he
deposited by the strict application of the law and
without considering the attending circumstances in
the case would result in an injustice and in the erosion
of the public trust in the banking system. The interest
of justice thus demands looking into the events that
led to the encashment of the check.
Petitioner asserts that by signing the withdrawal slip,
private respondent "presented the opportunity for the
withdrawal of the amount in question." Petitioner
relied "on the genuine signature on the withdrawal
slip, the personality of private respondents son and
the lapse of more than fifty (50) days from date of
deposit of the Continental Bank draft, without the

same being returned yet." We hold, however, that the
propriety of the withdrawal should be gauged by
compliance with the rules thereon that both petitioner
bank and its depositors are duty-bound to observe.
In the passbook that petitioner issued to private
respondent, the following rules on withdrawal of
deposits appear:
"4.......Withdrawals must be made by the depositor
personally but in some exceptional circumstances, the
Bank may allow withdrawal by another upon the
depositors written authority duly authenticated; and
neither a deposit nor a withdrawal will be permitted
except upon the presentation of the depositors
savings passbook, in which the amount deposited
withdrawn shall be entered only by the Bank.
5.......Withdrawals may be made by draft, mail or
telegraphic transfer in currency of the account at the
request of the depositor in writing on the withdrawal
slip or by authenticated cable. Such request must
indicate the name of the payee/s, amount and the
place where the funds are to be paid. Any stamp,
transmission and other charges related to such
withdrawals shall be for the account of the depositor
and shall be paid by him/her upon demand.
Withdrawals may also be made in the form of
travellers checks and in pesos. Withdrawals in the
form of notes/bills are allowed subject however, to
their (availability).
6.......Deposits shall not be subject to withdrawal by
check, and may be withdrawn only in the manner
above provided, upon presentation of the depositors
savings passbook and with the withdrawal form
supplied by the Bank at the counter."Scjuris
Under these rules, to be able to withdraw from the
savings account deposit under the Philippine foreign
currency deposit system, two requisites must be
presented to petitioner bank by the person
withdrawing an amount: (a) a duly filled-up withdrawal
slip, and (b) the depositors passbook. Private
respondent admits that he signed a blank withdrawal
slip ostensibly in violation of Rule No. 6 requiring that
the request for withdrawal must name the payee, the
amount to be withdrawn and the place where such
withdrawal should be made. That the withdrawal slip
was in fact a blank one with only private respondents
two signatures affixed on the proper spaces is
buttressed by petitioners allegation in the instant
petition that had private respondent indicated therein
the person authorized to receive the money, then
Ruben Gayon, Jr. could not have withdrawn any
amount. Petitioner contends that "(i)n failing to do so
(i.e., naming his authorized agent), he practically
authorized any possessor thereof to write any amount
and to collect the same."[
Such contention would have been valid if not for the
fact that the withdrawal slip itself indicates a special
instruction that the amount is payable to "Ramon A.
de Guzman &/or Agnes C. de Guzman." Such being the
case, petitioners personnel should have been duly

warned that Gayon, who was also employed in
petitioners Buendia Ave. Extension branch, was not
the proper payee of the proceeds of the check.
Otherwise, either Ramon or Agnes de Guzman should
have issued another authority to Gayon for such
withdrawal. Of course, at the dorsal side of the
withdrawal slip is an "authority to withdraw" naming
Gayon the person who can withdraw the amount
indicated in the check. Private respondent does not
deny having signed such authority. However,
considering petitioners clear admission that the
withdrawal slip was a blank one except for private
respondents signature, the unavoidable conclusion is
that the typewritten name of "Ruben C. Gayon, Jr." was
intercalated and thereafter it was signed by Gayon or
whoever was allowed by petitioner to withdraw the
amount. Under these facts, there could not have been
a principal-agent relationship between private
respondent and Gayon so as to render the former
liable for the amount withdrawn.
Moreover, the withdrawal slip contains a boxed
warning that states: "This receipt must be signed and
presented with the corresponding foreign currency
savings passbook by the depositor in person. For
withdrawals thru a representative, depositor should
accomplish the authority at the back." The
requirement of presentation of the passbook when
withdrawing an amount cannot be given mere lip
service even though the person making the
withdrawal is authorized by the depositor to do so.
This is clear from Rule No. 6 set out by petitioner so
that, for the protection of the banks interest and as a
reminder to the depositor, the withdrawal shall be
entered in the depositors passbook. The fact that
private respondents passbook was not presented
during the withdrawal is evidenced by the entries
therein showing that the last transaction that he made
with the bank was on September 3, 1984, the date he
deposited the controversial check in the amount of
$2,500.00.
In allowing the withdrawal, petitioner likewise
overlooked another rule that is printed in the
passbook. Thus:
"2.......All deposits will be received as current funds
and will be repaid in the same manner; provided,
however, that deposits of drafts, checks, money
orders, etc. will be accepted as subject to collection
only and credited to the account only upon receipt of
the notice of final payment. Collection charges by the
Banks foreign correspondent in effecting such
collection shall be for the account of the depositor. If
the account has sufficient balance, the collection shall
be debited by the Bank against the account. If, for any
reason, the proceeds of the deposited checks, drafts,
money orders, etc., cannot be collected or if the Bank
is required to return such proceeds, the provisional
entry therefor made by the Bank in the savings
passbook and its records shall be deemed
automatically cancelled regardless of the time that has

elapsed, and whether or not the defective items can
be returned to the depositor; and the Bank is hereby
authorized to execute immediately the necessary
corrections, amendments or changes in its record, as
well as on the savings passbook at the first
opportunity to reflect such cancellation." (Italics and
underlining supplied.) Jurissc
As correctly held by the Court of Appeals, in depositing
the check in his name, private respondent did not
become the outright owner of the amount stated
therein. Under the above rule, by depositing the check
with petitioner, private respondent was, in a way,
merely designating petitioner as the collecting bank.
This is in consonance with the rule that a negotiable
instrument, such as a check, whether a managers
check or ordinary check, is not legal tender. [ As such,
after receiving the deposit, under its own rules,
petitioner shall credit the amount in private
respondents account or infuse value thereon only after
the drawee bank shall have paid the amount of the
check or the check has been cleared for deposit.
Again, this is in accordance with ordinary banking
practices and with this Courts pronouncement that
"the collecting bank or last endorser generally suffers
the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering
that the act of presenting the check for payment to
the drawee is an assertion that the party making the
presentment has done its duty to ascertain the
genuineness of the endorsements."The rule finds more
meaning in this case where the check involved is
drawn on a foreign bank and therefore collection is
more difficult than when the drawee bank is a local
one even though the check in question is a managers
check.
In Banco Atlantico v. Auditor General Banco Atlantico,
a commercial bank in Madrid, Spain, paid the amounts
represented in three (3) checks to Virginia Boncan, the
finance officer of the Philippine Embassy in Madrid.
The bank did so without previously clearing the checks
with the drawee bank, the Philippine National Bank in
New York, on account of the "special treatment" that
Boncan received from the personnel of Banco
Atlanticos foreign department. The Court held that the
encashment of the checks without prior clearance is
"contrary to normal or ordinary banking practice
specially so where the drawee bank is a foreign bank
and the amounts involved were large." Accordingly,
the Court approved the Auditor Generals denial of
Banco Atlanticos claim for payment of the value of the
checks that was withdrawn by Boncan.
Said ruling brings to light the fact that the banking
business is affected with public interest. By the nature
of its functions, a bank is under obligation to treat the
accounts of its depositors "with meticulous care,
always having in mind the fiduciary nature of their
relationship."As such, in dealing with its depositors, a
bank should exercise its functions not only with the
diligence of a good father of a family but it should do

so with the highest degree of care.
In the case at bar, petitioner, in allowing the
withdrawal of private respondents deposit, failed to
exercise the diligence of a good father of a family. In
total disregard of its own rules, petitioners personnel
negligently handled private respondents account to
petitioners detriment. As this Court once said on this
matter:
"Negligence is the omission to do something which a
reasonable man, guided by those considerations which
ordinarily regulate the conduct of human affairs, would
do, or the doing of something which a prudent and
reasonable man would do. The seventy-eight (78)year-old, yet still relevant, case of Picart v. Smith,
provides the test by which to determine the existence
of negligence in a particular case which may be stated
as follows: Did the defendant in doing the alleged
negligent act use that reasonable care and caution
which an ordinarily prudent person would have used in
the same situation? If not, then he is guilty of
negligence. The law here in effect adopts the standard
supposed to be supplied by the imaginary conduct of
the discreet pater-familias of the Roman law. The
existence of negligence in a given case is not
determined by reference to the personal judgment of
the actor in the situation before him. The law
considers what would be reckless, blameworthy, or
negligent in the man of ordinary intelligence and
prudence and determines liability by that
Petitioner violated its own rules by allowing the
withdrawal of an amount that is definitely over and
above the aggregate amount of private respondents
dollar deposits that had yet to be cleared. The banks
ledger on private respondents account shows that
before he deposited $2,500.00, private respondent
had a balance of only $750.00. Upon private
respondents deposit of $2,500.00 on September 3,
1984, that amount was credited in his ledger as a
deposit resulting in the corresponding total balance of
$3,250.00.] On September 10, 1984, the amount of
$600.00 and the additional charges of $10.00 were
indicated therein as withdrawn thereby leaving a
balance of $2,640.00. On September 30, 1984, an
interest of $11.59 was reflected in the ledger and on
October 23, 1984, the amount of $2,541.67 was
entered as withdrawn with a balance of $109.92On
November 19, 1984 the word "hold" was written
beside the balance of $109.92.[ That must have been
the time when Reyes, petitioners branch manager,
was informed unofficially of the fact that the check
deposited was a counterfeit, but petitioners Buendia
Ave. Extension Branch received a copy of the
communication thereon from Wells Fargo Bank
International in New York the following day, November
20, 1984] According to Reyes, Wells Fargo Bank
International handled the clearing of checks drawn
against U.S. banks that were deposited with petitioner.
Jjlex
From these facts on record, it is at once apparent that

petitioners personnel allowed the withdrawal of an
amount bigger than the original deposit of $750.00
and the value of the check deposited in the amount of
$2,500.00 although they had not yet received notice
from the clearing bank in the United States on whether
or not the check was funded. Reyes contention that
after the lapse of the 35-day period the amount of a
deposited check could be withdrawn even in the
absence of a clearance thereon, otherwise it could
take a long time before a depositor could make a
withdrawal,is untenable. Said practice amounts to a
disregard of the clearance requirement of the banking
system.
While it is true that private respondents having signed
a blank withdrawal slip set in motion the events that
resulted in the withdrawal and encashment of the
counterfeit check, the negligence of petitioners
personnel was the proximate cause of the loss that
petitioner sustained. Proximate cause, which is
determined by a mixed consideration of logic, common
sense, policy and precedent, is "that cause, which, in
natural and continuous sequence, unbroken by any
efficient intervening cause, produces the injury, and
without which the result would not have occurred. ] The
proximate cause of the withdrawal and eventual loss
of the amount of $2,500.00 on petitioners part was its
personnels negligence in allowing such withdrawal in
disregard of its own rules and the clearing requirement
in the banking system. In so doing, petitioner assumed
the risk of incurring a loss on account of a forged or
counterfeit foreign check and hence, it should suffer
the resulting damage.
WHEREFORE, the petition for review on certiorari is
DENIED. The Decision of the Court of Appeals in CAG.R. CV No. 37392 is AFFIRMED.
SO ORDERED.
[G.R. No. 138569. September 11, 2003]

THE CONSOLIDATED BANK and TRUST CORPORATION,
petitioner, vs. 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 of the
Court of Appeals dated 27 October 1998 and its
Resolution dated 11 May 1999. The assailed decision
reversed the Decision 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.
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 passbookCalapre
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 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 On
the same day, Diaz formally wrote Solidbank to make
the same request. It was also on the same day that
L.C. Diaz learned of the unauthorized withdrawal the
day before, 14 August 1991, of P300,000 from its
savings account. The withdrawal slip for the P300,000
bore the signatures of the authorized signatories of
L.C. Diaz, namely Diaz and Rustico L. Murillo. The
signatories, however, denied signing the withdrawal
slip. A certain Noel Tamayo received the P300,000.

In an Information dated 5 September 1991, L.C. Diaz
charged its messenger, Emerano Ilagan (Ilagan) and
one Roscon Verdazola with Estafa through Falsification
of Commercial Document. The Regional Trial Court of
Manila dismissed the criminal case after the City
Prosecutor filed a Motion to Dismiss on 4 August 1992.
On 24 August 1992, L.C. Diaz through its counsel
demanded from Solidbank the return of its money.
Solidbank refused.
On 25 August 1992, L.C. Diaz filed a Complaint for
Recovery of a Sum of Money against Solidbank with
the Regional Trial Court of Manila, Branch 8. After trial,
the trial court rendered on 28 December 1994 a
decision absolving Solidbank and dismissing the
complaint.
L.C. Diaz then appealed to the Court of Appeals. On 27
October 1998, the Court of Appeals issued its Decision
reversing the decision of the trial court.
On 11 May 1999, the Court of Appeals issued its
Resolution denying the motion for reconsideration of
Solidbank. The appellate court, however, modified its
decision by deleting the award of exemplary damages
and attorneys fees.
The Ruling of the Trial Court
In absolving Solidbank, the trial court applied the rules
on savings account written on the passbook. The rules
state that possession of this book shall raise the
presumption of ownership and any payment or
payments made by the bank upon the production of
the said book and entry therein of the withdrawal shall
have the same effect as if made to the depositor
personally. At the time of the withdrawal, a certain
Noel Tamayo was not only in possession of the
passbook, he also presented a withdrawal slip with the
signatures of the authorized signatories of L.C. Diaz.
The specimen signatures of these persons were in the
signature cards. The teller stamped the withdrawal slip
with the words Saving Teller No. 5. The teller then
passed on the withdrawal slip to Genere Manuel
(Manuel) for authentication. Manuel verified the
signatures on the withdrawal slip. The withdrawal slip
was then given to another officer who compared the
signatures on the withdrawal slip with the specimen on
the signature cards. The trial court concluded that
Solidbank acted with care and observed the rules on
savings account when it allowed the withdrawal of
P300,000 from the savings account of L.C. Diaz.
The trial court pointed out that the burden of proof
now shifted to L.C. Diaz to prove that the signatures
on the withdrawal slip were forged. The trial court
admonished L.C. Diaz for not offering in evidence the
National Bureau of Investigation (NBI) report on the
authenticity of the signatures on the withdrawal slip
for P300,000. The trial court believed that L.C. Diaz did
not offer this evidence because it is derogatory to its
action.
Another provision of the rules on savings account
states that the depositor must keep the passbook
under lock and key.[When another person 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 passbook. The trial
court ruled that the passbook presented during the
questioned transaction was now out of the lock and
key and presumptively ready for a business
transaction.
Solidbank did not have any participation in the
custody and care of the passbook. The trial court
believed that Solidbanks act of allowing the
withdrawal of P300,000 was not the direct and
proximate cause of the loss. The trial court held that
L.C. Diazs negligence caused the unauthorized
withdrawal. Three facts
establish
L.C. Diazs
negligence: (1) the possession of the passbook by a
person other than the depositor L.C. Diaz; (2) the
presentation of a signed withdrawal receipt by an
unauthorized person; and (3) the possession by an
unauthorized person of a PBC check long closed by
L.C. Diaz, which check was deposited on the day of the
fraudulent withdrawal.
The trial court debunked L.C. Diazs contention that
Solidbank did not follow the precautionary procedures
observed by the two parties whenever L.C. Diaz
withdrew significant amounts from its account. L.C.
Diaz claimed that a letter must accompany
withdrawals of more than P20,000. The letter must
request Solidbank to allow the withdrawal and convert
the amount to a managers check. The bearer must
also have a letter authorizing him to withdraw the
same amount. Another person driving a car must
accompany the bearer so that he would not walk from
Solidbank to the office in making the withdrawal. The
trial court pointed out that L.C. Diaz disregarded these
precautions in its past withdrawal. On 16 July 1991,
L.C. Diaz withdrew P82,554 without any separate
letter of authorization or any communication with
Solidbank that the money be converted into a
managers check.
The trial court further justified the dismissal of the
complaint by holding that the case was a last ditch
effort of L.C. Diaz to recover P300,000 after the
dismissal of the criminal case against Ilagan.
The dispositive portion of the decision of the trial court
reads:
IN VIEW OF THE FOREGOING, judgment is hereby
rendered DISMISSING the complaint.
The Court further renders judgment in favor of
defendant bank pursuant to its counterclaim the
amount of Thirty Thousand Pesos (P30,000.00) as
attorneys fees.
With costs against plaintiff.
SO ORDERED.[
The Ruling of the Court of Appeals
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 quasidelict, to wit:

Article 2176. Whoever by act or omission causes
damage to another, there being fault or negligence, is
obliged to pay for the damage done. Such fault or
negligence, if there is no pre-existing contractual
relation between the parties, is called a quasi-delict
and is governed by the provisions of this chapter.
The appellate court held that the three elements of a
quasi-delict are present in this case, namely: (a)
damages suffered by the plaintiff; (b) fault or
negligence of the defendant, or some other person for
whose acts he must respond; and (c) the connection of
cause and effect between the fault or negligence of
the defendant and the damage incurred by the
plaintiff.
The Court of Appeals pointed out that the teller of
Solidbank who received the withdrawal slip for
P300,000 allowed the withdrawal without making the
necessary inquiry. The appellate court stated that the
teller, who was not presented by Solidbank during
trial, should have called up the depositor because the
money to be withdrawn was a significant amount. Had
the teller called up L.C. Diaz, Solidbank would have
known that the withdrawal was unauthorized. The
teller did not even verify the identity of the impostor
who made the withdrawal. Thus, the appellate court
found Solidbank liable for its negligence in the
selection and supervision of its employees.
The appellate court ruled that while L.C. Diaz was also
negligent in entrusting its deposits to its messenger
and its messenger in leaving the passbook with the
teller, Solidbank could not escape liability because of
the doctrine of last clear chance. Solidbank could have
averted the injury suffered by L.C. Diaz had it called
up L.C. Diaz to verify the withdrawal.
The appellate court ruled that the degree of diligence
required from Solidbank is more than that of a good
father of a family. The business and functions of banks
are affected with public interest. Banks are obligated
to treat the accounts of their depositors with
meticulous care, always having in mind the fiduciary
nature of their relationship with their clients. The Court
of Appeals found Solidbank remiss in its duty, violating
its fiduciary relationship with L.C. Diaz.
The dispositive portion of the decision of the Court of
Appeals reads:
WHEREFORE, premises considered, the decision
appealed from is hereby REVERSED and a new one
entered.
1. Ordering defendant-appellee Consolidated Bank and
Trust Corporation to pay plaintiff-appellant the sum of
Three Hundred Thousand Pesos (P300,000.00), with
interest thereon at the rate of 12% per annum from
the date of filing of the complaint until paid, the sum
of P20,000.00 as exemplary damages, and P20,000.00
as attorneys fees and expenses of litigation as well as
the cost of suit; and
2. Ordering the dismissal of defendant-appellees
counterclaim in the amount of P30,000.00 as

attorneys fees.
SO ORDERED.
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 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:
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.
SO ORDERED.
Hence, this petition.
The Issues
Solidbank seeks the review of the decision and
resolution of the Court of Appeals on these grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONER BANK SHOULD SUFFER THE LOSS
BECAUSE ITS TELLER SHOULD HAVE FIRST CALLED
PRIVATE RESPONDENT BY TELEPHONE BEFORE IT
ALLOWED THE WITHDRAWAL OF P300,000.00 TO
RESPONDENTS MESSENGER EMERANO ILAGAN, SINCE
THERE IS NO AGREEMENT BETWEEN THE PARTIES IN
THE OPERATION OF THE SAVINGS ACCOUNT, NOR IS
THERE ANY BANKING LAW, WHICH MANDATES THAT A
BANK TELLER SHOULD FIRST CALL UP THE DEPOSITOR
BEFORE ALLOWING A WITHDRAWAL OF A BIG AMOUNT
IN A SAVINGS ACCOUNT.
II. THE COURT OF APPEALS ERRED IN APPLYING THE
DOCTRINE OF LAST CLEAR CHANCE AND IN HOLDING
THAT PETITIONER 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.
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
loanArticle 1980 of the Civil Code expressly provides
that x x x savings x x x deposits of money in banks
and similar institutions shall be governed by the
provisions concerning simple loan. There is a debtorcreditor 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), 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.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,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.
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. 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 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.[ The law simply
imposes on the bank a higher standard of integrity
and performance in complying with its obligations
under the contract of simple loan, beyond those
required of non-bank debtors under a similar contract
of simple loan.
The fiduciary nature of banking does not convert a
simple loan into a trust agreement because banks do
not accept deposits to enrich depositors but to earn
money for themselves. The law allows banks to offer
the lowest possible interest rate to depositors while
charging the highest possible interest rate on their
own borrowers. The interest spread or differential
belongs to the bank and not to the depositors who are
not cestui que trust of banks. If depositors are cestui
que trust of banks, then the interest spread or income
belongs to the depositors, a situation that Congress
certainly did not intend in enacting Section 2 of RA
8791.
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.
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.
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. Proximate

cause is determined by the facts of each case upon
mixed considerations of logic, common sense, policy
and precedent.
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.
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.
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.
There is no law mandating banks to call up their
clients whenever their representatives withdraw
significant amounts from their accounts. L.C. Diaz
therefore had the burden to prove that it is the usual
practice of Solidbank to call up its clients to verify a
withdrawal of a large amount of money. L.C. Diaz
failed to do so.
Teller No. 5 who processed the withdrawal could not
have been put on guard to verify the withdrawal. Prior
to the withdrawal of P300,000, the impostor deposited
with Teller No. 6 the P90,000 PBC check, which later
bounced. The impostor apparently deposited a large
amount of money to deflect suspicion from the
withdrawal of a much bigger amount of money. The
appellate court thus erred when it imposed on
Solidbank the duty to call up L.C. Diaz to confirm the
withdrawal when no law requires this from banks and
when the teller had no reason to be suspicious of the
transaction.
Solidbank continues to foist the defense that Ilagan
made the withdrawal. Solidbank claims that since
Ilagan was also a messenger of L.C. Diaz, he was
familiar with its teller so that there was no more need
for the teller to verify the withdrawal. Solidbank relies
on the following statements in the Booking and

Information Sheet of Emerano Ilagan:
xxx Ilagan also had with him (before the withdrawal) a
forged check of PBC and indicated the amount of
P90,000 which he deposited in favor of L.C. Diaz and
Company. After successfully withdrawing this large
sum of money, accused Ilagan gave alias Rey (Noel
Tamayo) his share of the loot. Ilagan then hired a
taxicab in the amount of P1,000 to transport him
(Ilagan) to his home province at Bauan, Batangas.
Ilagan extravagantly and lavishly spent his money but
a big part of his loot was wasted in cockfight and
horse racing. Ilagan was apprehended and meekly
admitted his guilt.(Emphasis supplied.)
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.
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.
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. 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.
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.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.
Mitigated Damages
Under Article 1172, liability (for culpa contractual) may
be regulated by the courts, according to the
circumstances. This means that if the defendant
exercised the proper diligence in the selection and

supervision of its employee, or if the plaintiff was
guilty of contributory negligence, then the courts may
reduce the award of damages. In this case, L.C. Diaz
was guilty of contributory negligence in allowing a
withdrawal slip signed by its authorized signatories to
fall into the hands of an impostor. Thus, the liability of
Solidbank should be reduced.
In Philippine Bank of Commerce v. Court of Appeals,
where the Court held the depositor guilty of
contributory negligence, we allocated the damages
between the depositor and the bank on a 40-60 ratio.
Applying the same ruling to this case, we hold that
L.C. Diaz must shoulder 40% of the actual damages
awarded by the appellate court. Solidbank must pay
the other 60% of the actual damages.
WHEREFORE, the decision of the Court of Appeals is
AFFIRMED with MODIFICATION. Petitioner Solidbank
Corporation shall pay private respondent L.C. Diaz and
Company, 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.
SO ORDERED.
[G.R. No. 127469. January 15, 2004]

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 Decisio of the
Court of Appeals in CA-G.R. CV No. 34382 dated 10
December 1996 modifying the Decision 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
Damage
against petitioner
Philippine Banking
Corporation (BANK 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
letter-certification 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
P1,428,795.34 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
representing the 70% balance of the marginal deposit
and/or balance of the trust agreements; and
(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.
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
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 P1,428,795.35 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. 20-756-82 dated 2
June 1982 for P420,000 and Promissory Note No. 20979-83 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. The BANK insisted that the
Deed of Assignment authorized it to apply the time
deposits in payment of Promissory Note No. 20-97983.
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
entrustee, who would undertake to deliver the
proceeds of the sale or the goods themselves to the
entrustor within a specified time.
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.
The BANK denied falsifying Promissory Note No. 20979-83. 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. 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 exparte 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.
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 crossexamined 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.
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 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 the remaining time deposits after
Marcos had executed the Deed of Assignment for
P760,000.
According to the trial court, a security of only
P4,867.67 ] 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. 20-97983. 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 Thus, the trial
court held that the BANK could not have granted
Marcos the loan covered by Promissory Note No. 20979-83 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.
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 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 and thus
failed to attend the hearings without presenting proof
of his physical condition.

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.
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
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.
IT IS SO ORDERED.
The Ruling of the Court of Appeals
The Court of Appeals addressed the procedural and
substantive issues that the BANK raised.
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.
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 testimony
on the time deposits is supported by evidence on
record from which the appellate court could make an
intelligent judgment.
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 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.
The Court of Appeals further explained:
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.
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
The Court of Appeals sustained the factual findings of

the trial court in ruling that Promissory Note No. 20979-83 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. However, in
its discussion of the assigned errors, the BANK claimed
that Marcos had yet to pay the loan.
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:
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 letter-certification and with
legal interest thereafter until fully paid. Costs against
the appellant.
SO ORDERED
The Issues
The BANK anchors this petition on the following issues:
1) WHETHER OR NOT THE PETITIONER [sic] ABLE TO
PROVE THE PRIVATE RESPONDENTS OUTSTANDING
OBLIGATIONS SECURED BY THE ASSIGNMENT OF TIME
DEPOSITS?
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?
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
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 exparte including his own testimony. When the trial court
lifted 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. 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. 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. 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.[
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 cross-examine 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
cross-examine is adversarial. The adverse party in this
case had the right to resist the motion to crossexamine 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. 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 crossexamination. 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 motions 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. Clearly, the BANKs failure to crossexamine is imputable to the BANK when it lost this
right 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
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
times because of its inability to secure Pagsaligans
presence during the hearings. The BANK could have
presented another 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.
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 Appeals requiring banks to treat the
accounts of its depositors with meticulous care, always
having in mind the fiduciary nature of their
relationship. The Court reiterated this fiduciary duty of
banks in subsequent cases.
Although RA No. 8791 took effect only in the year
2000, 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.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 Appeals[ we pointed out the depositors reasonable
expectations
from
a
bank
and
the
banks
corresponding duty to its depositor, as follows:

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. [Thus,
we held:
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.
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. 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.
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.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.
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.[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. 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 Manager
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 letter-certification
speaks of various Time Deposits Certificates with an
aggregate value of P764,897.67. If the amount stated
in the letter-certification 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.
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 interest 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, on each of the three
trust receipts.
Based on Marcos testimony and the BANKs letter of
demand,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. 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.
with interest of P100,543.04.
with interest of P83,366.68. 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.
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
interest of P616,318.92 as of 6 March 1987Thus,
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. 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 2212 of the Civil Code.
The BANKs dismal failure to account for Marcos money
justifies the award of moral and exemplary damages ]
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. 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.
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. 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.
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 ODERED.
[G.R. No. 129015. August 13, 2004]

SAMSUNG CONSTRUCTION COMPANY PHILIPPINES,
INC., petitioner, vs. FAR EAST BANK AND TRUST
COMPANY AND COURT OF APPEALS, respondents.
DECISION
TINGA, J.:
Called to fore in the present petition is a classic
textbook question if a bank pays out on a forged
check, is it liable to reimburse the drawer from whose
account the funds were paid out? The Court of
Appeals, in reversing a trial court decision adverse to
the bank, invoked tenuous reasoning to acquit the
bank of liability. We reverse, applying time-honored
principles of law.
The salient facts follow.
Plaintiff Samsung Construction Company Philippines,
Inc. (Samsung Construction), while based in Bian,
Laguna, maintained a current account with defendant
Far East Bank and Trust Company (FEBTC) at the
latters Bel-Air, Makati branch. The sole signatory to
Samsung Constructions account was Jong Kyu Lee
(Jong), its Project Manager, while the checks remained
in the custody of the companys accountant, Kyu Yong
Lee (Kyu).
On 19 March 1992, a certain Roberto Gonzaga
presented for payment FEBTC Check No. 432100 to
the banks branch in Bel-Air, Makati. The check,
payable to cash and drawn against Samsung
Constructions current account, was in the amount of
Nine Hundred Ninety Nine Thousand Five Hundred
Pesos (P999,500.00). The bank teller, Cleofe Justiani,
first checked the balance of Samsung Constructions
account. After ascertaining there were enough funds
to cover the check,[ she compared the signature
appearing on the check with the specimen signature of
Jong as contained in the specimen signature card with
the bank. After comparing the two signatures, Justiani
was satisfied as to the authenticity of the signature
appearing on the check. She then asked Gonzaga to
submit proof of his identity, and the latter presented
three (3) identification cards.[
At the same time, Justiani forwarded the check to the
branch Senior Assistant Cashier Gemma Velez, as it
was bank policy that two bank branch officers approve

checks exceeding One Hundred Thousand Pesos, for
payment
or
encashment.
Velez
likewise
counterchecked the signature on the check as against
that on the signature card. He too concluded that the
check was indeed signed by Jong. Velez then
forwarded the check and signature card to Shirley
Syfu, another bank officer, for approval. Syfu then
noticed that Jose Sempio III (Sempio), the assistant
accountant of Samsung Construction, was also in the
bank. Sempio was well-known to Syfu and the other
bank officers, he being the assistant accountant of
Samsung Construction. Syfu showed the check to
Sempio, who vouched for the genuineness of Jongs
signature. Confirming the identity of Gonzaga, Sempio
said that the check was for the purchase of equipment
for Samsung Construction. Satisfied with the
genuineness of the signature of Jong, Syfu authorized
the banks encashment of the check to Gonzaga.
The following day, the accountant of Samsung
Construction, Kyu, examined the balance of the bank
account and discovered that a check in the amount of
Nine Hundred Ninety Nine Thousand Five Hundred
Pesos (P999,500.00) had been encashed. Aware that
he had not prepared such a check for Jongs signature,
Kyu perused the checkbook and found that the last
blank check was missing.[if ! He reported the matter to
Jong, who then proceeded to the bank. Jong learned of
the encashment of the check, and realized that his
signature had been forged. The Bank Manager
reputedly told Jong that he would be reimbursed for
the amount of the check Jong proceeded to the police
station and consulted with his lawyers. Subsequently,
a criminal case for qualified theft was filed against
Sempio before the Laguna court. In a letter dated 6
May 1992, Samsung Construction, through counsel,
demanded that FEBTC credit to it the amount of Nine
Hundred Ninety Nine Thousand Five Hundred Pesos
(P999,500.00), with interest.[ In response, FEBTC said
that it was still conducting an investigation on the
matter. Unsatisfied, Samsung Construction filed a
Complaint on 10 June 1992 for violation of Section 23
of the Negotiable Instruments Law, and prayed for the
payment of the amount debited as a result of the
questioned check plus interest, and attorneys fees.The
case was docketed as Civil Case No. 92-61506 before
the Regional Trial Court (RTC) of Manila, Branch 9
During the trial, both sides presented their respective
expert witnesses to testify on the claim that Jongs
signature was forged. Samsung Corporation, which
had referred the check for investigation to the NBI,
presented Senior NBI Document Examiner Roda B.
Flores. She testified that based on her examination,
she concluded that Jongs signature had been forged
on the check. On the other hand, FEBTC, which had
sought the assistance of the Philippine National Police
(PNP), presented Rosario C. Perez, a document
examiner from the PNP Crime Laboratory. She testified
that her findings showed that Jongs signature on the
check was genuine.

Confronted with conflicting expert testimony, the RTC
chose to believe the findings of the NBI expert. In a
Decision dated 25 April 1994, the RTC held that Jongs
signature on the check was forged and accordingly
directed the bank to pay or credit back to Samsung
Constructions account the amount of Nine Hundred
Ninety
Nine
Thousand
Five
Hundred
Pesos
(P999,500.00), together with interest tolled from the
time the complaint was filed, and attorneys fees in the
amount of Fifteen Thousand Pesos (P15,000.00).
FEBTC timely appealed to the Court of Appeals. On 28
November 1996, the Special Fourteenth Division of the
Court of Appeals rendered a Decision, reversing the
RTC Decision and absolving FEBTC from any liability.
The Court of Appeals held that the contradictory
findings of the NBI and the PNP created doubt as to
whether there was forgery. ] Moreover, the appellate
court also held that assuming there was forgery, it
occurred due to the negligence of Samsung
Construction, imputing blame on the accountant Kyu
for lack of care and prudence in keeping the checks,
which if observed would have prevented Sempio from
gaining access thereto. The Court of Appeals invoked
the ruling in PNB v. National City Bank of New York
that, if a loss, which must be borne by one or two
innocent persons, can be traced to the neglect or fault
of either, such loss would be borne by the negligent
party, even if innocent of intentional fraud.
Samsung Construction now argues that the Court of
Appeals had seriously misapprehended the facts when
it overturned the RTCs finding of forgery. It also
contends that the appellate court erred in finding that
it had been negligent in safekeeping the check, and in
applying the equity principle enunciated in PNB v.
National City Bank of New York.
Since the trial court and the Court of Appeals arrived
at contrary findings on questions of fact, the Court is
obliged to examine the record to draw out the correct
conclusions. Upon examination of the record, and
based on the applicable laws and jurisprudence, we
reverse the Court of Appeals.
Section 23 of the Negotiable Instruments Law states:
When a signature is forged or made without the
authority of the person whose signature it purports to
be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to
enforce payment thereof against any party thereto,
can be acquired through or under such signature,
unless the party against whom it is sought to enforce
such right is precluded from setting up the forgery or
want of authority. (Emphasis supplied)
The general rule is to the effect that a forged signature
is wholly inoperative, and payment made through or
under such signature is ineffectual or does not
discharge the instrument. If payment is made, the
drawee cannot charge it to the drawers account. The
traditional justification for the result is that the drawee
is in a superior position to detect a forgery because he
has the makers signature and is expected to know and

compare it. The rule has a healthy cautionary effect on
banks by encouraging care in the comparison of the
signatures against those on the signature cards they
have on file. Moreover, the very opportunity of the
drawee to insure and to distribute the cost among its
customers who use checks makes the drawee an ideal
party to spread the risk to insurance.[
Brady, in his treatise The Law of Forged and Altered
Checks, elucidates:
When a person deposits money in a general account in
a bank, against which he has the privilege of drawing
checks in the ordinary course of business, the
relationship between the bank and the depositor is
that of debtor and creditor. So far as the legal
relationship between the two is concerned, the
situation is the same as though the bank had
borrowed money from the depositor, agreeing to repay
it on demand, or had bought goods from the depositor,
agreeing to pay for them on demand. The bank owes
the depositor money in the same sense that any
debtor owes money to his creditor. Added to this, in
the case of bank and depositor, there is, of course, the
banks obligation to pay checks drawn by the depositor
in proper form and presented in due course. When the
bank receives the deposit, it impliedly agrees to pay
only upon the depositors order. When the bank pays a
check, on which the depositors signature is a forgery,
it has failed to comply with its contract in this respect.
Therefore, the bank is held liable.
The fact that the forgery is a clever one is immaterial.
The forged signature may so closely resemble the
genuine as to defy detection by the depositor himself.
And yet, if a bank pays the check, it is paying out its
own money and not the depositors.
The forgery may be committed by a trusted employee
or confidential agent. The bank still must bear the
loss. Even in a case where the forged check was drawn
by the depositors partner, the loss was placed upon
the bank. The case referred to is Robinson v. Security
Bank, Ark., 216 S. W. Rep. 717. In this case, the
plaintiff brought suit against the defendant bank for
money which had been deposited to the plaintiffs
credit and which the bank had paid out on checks
bearing forgeries of the plaintiffs signature.
xxx
It was held that the bank was liable. It was further held
that the fact that the plaintiff waited eight or nine
months after discovering the forgery, before notifying
the bank, did not, as a matter of law, constitute a
ratification of the payment, so as to preclude the
plaintiff from holding the bank liable. xxx
This rule of liability can be stated briefly in these
words: A bank is bound to know its depositors
signature. The rule is variously expressed in the many
decisions in which the question has been considered.
But they all sum up to the proposition that a bank
must know the signatures of those whose general
deposits it carries.
By no means is the principle rendered obsolete with

the advent of modern commercial transactions.
Contemporary texts still affirm this well-entrenched
standard. Nickles, in his book Negotiable Instruments
and Other Related Commercial Paper wrote, thus:
The deposit contract between a payor bank and its
customer determines who can draw against the
customers account by specifying whose signature is
necessary on checks that are chargeable against the
customers account. Therefore, a check drawn against
the account of an individual customer that is signed by
someone other than the customer, and without
authority from her, is not properly payable and is not
chargeable to the customers account, inasmuch as
any unauthorized signature on an instrument is
ineffective as the signature of the person whose name
is signed.
Under Section 23 of the Negotiable Instruments Law,
forgery is a real or absolute defense by the party
whose signature is forged. On the premise that Jongs
signature was indeed forged, FEBTC is liable for the
loss since it authorized the discharge of the forged
check. Such liability attaches even if the bank exerts
due diligence and care in preventing such faulty
discharge. Forgeries often deceive the eye of the most
cautious experts; and when a bank has been so
deceived, it is a harsh rule which compels it to suffer
although no one has suffered by its being deceived
The forgery may be so near like the genuine as to defy
detection by the depositor himself, and yet the bank is
liable to the depositor if it pays the check.
Thus, the first matter of inquiry is into whether the
check was indeed forged. A document formally
presented is presumed to be genuine until it is proved
to be fraudulent. In a forgery trial, this presumption
must be overcome but this can only be done by
convincing testimony and effective illustrations.
In ruling that forgery was not duly proven, the Court of
Appeals held:
[There] is ground to doubt the findings of the trial
court sustaining the alleged forgery in view of the
conflicting conclusions made by handwriting experts
from the NBI and the PNP, both agencies of the
government.
xxx
These contradictory findings create doubt on whether
there was indeed a forgery. In the case of TenioObsequio v. Court of Appeals, 230 SCRA 550, the
Supreme Court held that forgery cannot be presumed;
it must be proved by clear, positive and convincing
evidence.
This reasoning is pure sophistry. Any litigator worth his
or her salt would never allow an opponents expert
witness to stand uncontradicted, thus the spectacle of
competing expert witnesses is not unusual. The trier of
fact will have to decide which version to believe, and
explain why or why not such version is more credible
than the other. Reliance therefore cannot be placed
merely on the fact that there are colliding opinions of
two experts, both clothed with the presumption of

official duty, in order to draw a conclusion, especially
one which is extremely crucial. Doing so is tantamount
to a jurisprudential cop-out.
Much is expected from the Court of Appeals as it
occupies the penultimate tier in the judicial hierarchy.
This Court has long deferred to the appellate court as
to its findings of fact in the understanding that it has
the appropriate skill and competence to plough
through the minutiae that scatters the factual field. In
failing to thoroughly evaluate the evidence before it,
and relying instead on presumptions haphazardly
drawn, the Court of Appeals was sadly remiss. Of
course, courts, like humans, are fallible, and not every
error deserves a stern rebuke. Yet, the appellate courts
error in this case warrants special attention, as it is
absurd and even dangerous as a precedent. If this
rationale were adopted as a governing standard by
every court in the land, barely any actionable claim
would prosper, defeated as it would be by the mere
invocation of the existence of a contrary expert
opinion.
On the other hand, the RTC did adjudge the testimony
of the NBI expert as more credible than that of the
PNP, and explained its reason behind the conclusion:
After subjecting the evidence of both parties to a
crucible of analysis, the court arrived at the conclusion
that the testimony of the NBI document examiner is
more credible because the testimony of the PNP Crime
Laboratory Services document examiner reveals that
there are a lot of differences in the questioned
signature as compared to the standard specimen
signature. Furthermore, as testified to by Ms. Rhoda
Flores, NBI expert, the manner of execution of the
standard signatures used reveals that it is a free rapid
continuous execution or stroke as shown by the
tampering terminal stroke of the signatures whereas
the questioned signature is a hesitating slow drawn
execution stroke. Clearly, the person who executed the
questioned signature was hesitant when the signature
was made.
During the testimony of PNP expert Rosario Perez, the
RTC bluntly noted that apparently, there [are]
differences on that questioned signature and the
standard signatures. This Court, in examining the
signatures, makes a similar finding. The PNP expert
excused the noted differences by asserting that they
were mere variations, which are normal deviations
found in writing Yet the RTC, which had the opportunity
to examine the relevant documents and to personally
observe the expert witness, clearly disbelieved the
PNP expert. The Court similarly finds the testimony of
the PNP expert as unconvincing. During the trial, she
was confronted several times with apparent
differences between strokes in the questioned
signature and the genuine samples. Each time, she
would just blandly assert that these differences were
just variations as if the mere conjuration of the word
would sufficiently disquiet whatever doubts about the
deviations. Such conclusion, standing alone, would be

of little or no value unless supported by sufficiently
cogent reasons which might amount almost to a
demonstration
The most telling difference between the questioned
and genuine signatures examined by the PNP is in the
final upward stroke in the signature, or the point to the
short stroke of the terminal in the capital letter L, as
referred to by the PNP examiner who had marked it in
her comparison chart as point no. 6. To the plain eye,
such upward final stroke consists of a vertical line
which forms a ninety degree (90) angle with the
previous stroke. Of the twenty one (21) other genuine
samples examined by the PNP, at least nine (9) ended
with an upward stroke. However, unlike the questioned
signature, the upward strokes of eight (8) of these
signatures are looped, while the upward stroke of the
seventh forms a severe forty-five degree (45) with the
previous stroke. The difference is glaring, and indeed,
the PNP examiner was confronted with the
inconsistency in point no. 6.
Q: Now, in this questioned document point no. 6, the s
stroke is directly upwards.
A: Yes, sir.
Q: Now, can you look at all these standard signature
(sic) were (sic) point 6 is repeated or the last stroke s
is pointing directly upwards?
A: There is none in the standard signature, sir.
Again, the PNP examiner downplayed the uniqueness
of the final stroke in the questioned signature as a
mere variation, the same excuse she proffered for the
other marked differences noted by the Court and the
counsel for petitioner.
There is no reason to doubt why the RTC gave
credence to the testimony of the NBI examiner, and
not the PNP experts. The NBI expert, Rhoda Flores,
clearly qualifies as an expert witness. A document
examiner for fifteen years, she had been promoted to
the rank of Senior Document Examiner with the NBI,
and had held that rank for twelve years prior to her
testimony. She had placed among the top five
examinees in the Competitive Seminar in Question
Document Examination, conducted by the NBI
Academy, which qualified her as a document
examiner. She had trained with the Royal Hongkong
Police Laboratory and is a member of the International
Association for Identification. As of the time she
testified, she had examined more than fifty to fifty-five
thousand questioned documents, on an average of
fifteen to twenty documents a day. In comparison, PNP
document examiner Perez admitted to having
examined only around five hundred documents as of
her testimony.
In analyzing the signatures, NBI Examiner Flores
utilized the scientific comparative examination method
consisting of analysis, recognition, comparison and
evaluation of the writing habits with the use of
instruments such as a magnifying lense, a
stereoscopic
microscope,
and
varied
lighting
substances. She also prepared enlarged photographs

of the signatures in order to facilitate the necessary
comparisons. She compared the questioned signature
as against ten (10) other sample signatures of Jong.
Five of these signatures were executed on checks
previously issued by Jong, while the other five
contained in business letters Jong had signed. The NBI
found that there were significant differences in the
handwriting characteristics existing between the
questioned and the sample signatures, as to manner
of execution, link/connecting strokes, proportion
characteristics, and other identifying details.
The RTC was sufficiently convinced by the NBI
examiners testimony, and explained her reasons in its
Decisions. While the Court of Appeals disagreed and
upheld the findings of the PNP, it failed to convincingly
demonstrate why such findings were more credible
than those of the NBI expert. As a throwaway, the
assailed Decision noted that the PNP, not the NBI, had
the opportunity to examine the specimen signature
card signed by Jong, which was relied upon by the
employees of FEBTC in authenticating Jongs signature.
The distinction is irrelevant in establishing forgery.
Forgery can be established comparing the contested
signatures as against those of any sample signature
duly established as that of the persons whose
signature was forged.
FEBTC lays undue emphasis on the fact that the PNP
examiner did compare the questioned signature
against the bank signature cards. The crucial fact in
question is whether or not the check was forged, not
whether the bank could have detected the forgery. The
latter issue becomes relevant only if there is need to
weigh the comparative negligence between the bank
and the party whose signature was forged.
At the same time, the Court of Appeals failed to assess
the effect of Jongs testimony that the signature on the
check was not his. The assertion may seem selfserving at first blush, yet it cannot be ignored that
Jong was in the best position to know whether or not
the signature on the check was his. While his claim
should not be taken at face value, any averments he
would have on the matter, if adjudged as truthful,
deserve primacy in consideration. Jongs testimony is
supported by the findings of the NBI examiner. They
are also backed by factual circumstances that support
the conclusion that the assailed check was indeed
forged. Judicial notice can be taken that is highly
unusual in practice for a business establishment to
draw a check for close to a million pesos and make it
payable to cash or bearer, and not to order. Jong
immediately reported the forgery upon its discovery.
He filed the appropriate criminal charges against
Sempio, the putative forger. Now for determination is
whether Samsung Construction was precluded from
setting up the defense of forgery under Section 23 of
the Negotiable Instruments Law. The Court of Appeals
concluded that Samsung Construction was negligent,
and invoked the doctrines that where a loss must be
borne by one of two innocent person, can be traced to

the neglect or fault of either, it is reasonable that it
would be borne by him, even if innocent of any
intentional fraud, through whose means it has
succeeded or who put into the power of the third
person to perpetuate the wrong. Applying these rules,
the Court of Appeals determined that it was the
negligence of Samsung Construction that allowed the
encashment of the forged check.
In the case at bar, the forgery appears to have been
made possible through the acts of one Jose Sempio III,
an assistant accountant employed by the plaintiff
Samsung [Construction] Co. Philippines, Inc. who
supposedly stole the blank check and who presumably
is responsible for its encashment through a forged
signature of Jong Kyu Lee. Sempio was assistant to the
Korean accountant who was in possession of the blank
checks and who through negligence, enabled Sempio
to have access to the same. Had the Korean
accountant been more careful and prudent in keeping
the blank checks Sempio would not have had the
chance to steal a page thereof and to effect the
forgery. Besides, Sempio was an employee who
appears to have had dealings with the defendant Bank
in behalf of the plaintiff corporation and on the date
the check was encashed, he was there to certify that it
was a genuine check issued to purchase equipment for
the company. We recognize that Section 23 of the
Negotiable Instruments Law bars a party from setting
up the defense of forgery if it is guilty of negligence,
Yet, we are unable to conclude that Samsung
Construction was guilty of negligence in this case. The
appellate court failed to explain precisely how the
Korean accountant was negligent or how more care
and prudence on his part would have prevented the
forgery. We cannot sustain this tar and feathering
resorted to without any basis.
The bare fact that the forgery was committed by an
employee of the party whose signature was forged
cannot necessarily imply that such partys negligence
was the cause for the forgery. Employers do not
possess the preternatural gift of cognition as to the
evil that may lurk within the hearts and minds of their
employees. The Courts pronouncement in PCI Bank v.
Court of Appeals applies in this case, to wit:
[T]he mere fact that the forgery was committed by a
drawer-payors confidential employee or agent, who by
virtue of his position had unusual facilities for
perpetrating the fraud and imposing the forged paper
upon the bank, does not entitle the bank to shift the
loss to the drawer-payor, in the absence of some
circumstance raising estoppel against the drawer.
Admittedly, the record does not clearly establish what
measures Samsung Construction employed to
safeguard its blank checks. Jong did testify that his
accountant, Kyu, kept the checks inside a safety box,
and no contrary version was presented by FEBTC.
However, such testimony cannot prove that the
checks were indeed kept in a safety box, as Jongs
testimony on that point is hearsay, since Kyu, and not

Jong, would have the personal knowledge as to how
the checks were kept.
Still, in the absence of evidence to the contrary, we
can conclude that there was no negligence on
Samsung Constructions part. The presumption remains
that every person takes ordinary care of his
concerns,and that the ordinary course of business has
been followed.Negligence is not presumed, but must
be proven by him who alleges it. While the complaint
was lodged at the instance of Samsung Construction,
the matter it had to prove was the claim it had alleged
- whether the check was forged. It cannot be required
as well to prove that it was not negligent, because the
legal presumption remains that ordinary care was
employed.
Thus, it was incumbent upon FEBTC, in defense, to
prove the negative fact that Samsung Construction
was negligent. While the payee, as in this case, may
not have the personal knowledge as to the standard
procedures observed by the drawer, it well has the
means of disputing the presumption of regularity.
Proving a negative fact may be a difficult office,but
necessarily so, as it seeks to overcome a presumption
in law. FEBTC was unable to dispute the presumption
of ordinary care exercised by Samsung Construction,
hence we cannot agree with the Court of Appeals
finding of negligence.
The assailed Decision replicated the extensive efforts
which FEBTC devoted to establish that there was no
negligence on the part of the bank in its acceptance
and payment of the forged check. However, the
degree of diligence exercised by the bank would be
irrelevant if the drawer is not precluded from setting
up the defense of forgery under Section 23 by his own
negligence. The rule of equity enunciated in PNB v.
National City Bank of New York, as relied upon by the
Court of Appeals, deserves careful examination.
The point in issue has sometimes been said to be that
of negligence. The drawee who has paid upon the
forged signature is held to bear the loss, because he
has been negligent in failing to recognize that the
handwriting is not that of his customer. But it follows
obviously that if the payee, holder, or presenter of the
forged paper has himself been in default, if he has
himself been guilty of a negligence prior to that of the
banker, or if by any act of his own he has at all
contributed to induce the banker's negligence, then he
may lose his right to cast the loss upon the banker.
Quite palpably, the general rule remains that the
drawee who has paid upon the forged signature bears
the loss. The exception to this rule arises only when
negligence can be traced on the part of the drawer
whose signature was forged, and the need arises to
weigh the comparative negligence between the
drawer and the drawee to determine who should bear
the burden of loss. The Court finds no basis to
conclude that Samsung Construction was negligent in
the safekeeping of its checks. For one, the settled rule
is that the mere fact that the depositor leaves his

check book lying around does not constitute such
negligence as will free the bank from liability to him,
where a clerk of the depositor or other persons, taking
advantage of the opportunity, abstract some of the
check blanks, forges the depositors signature and
collect on the checks from the bank. [And for another,
in point of fact Samsung Construction was not
negligent at all since it reported the forgery almost
immediately upon discovery.
It is also worth noting that the forged signatures in
PNB v. National City Bank of New York were not of the
drawer, but of indorsers. The same circumstance
attends PNB v. Court of Appeals, which was also cited
by the Court of Appeals. It is accepted that a forged
signature of the drawer differs in treatment than a
forged signature of the indorser.
The justification for the distinction between forgery of
the signature of the drawer and forgery of an
indorsement is that the drawee is in a position to
verify the drawers signature by comparison with one
in his hands, but has ordinarily no opportunity to verify
an indorsement.[
Thus, a drawee bank is generally liable to its depositor
in paying a check which bears either a forgery of the
drawers signature or a forged indorsement. But the
bank may, as a general rule, recover back the money
which it has paid on a check bearing a forged
indorsement, whereas it has not this right to the same
extent with reference to a check bearing a forgery of
the drawers signature.
The general rule imputing liability on the drawee who
paid out on the forgery holds in this case.
Since FEBTC puts into issue the degree of care it
exercised before paying out on the forged check, we
might as well comment on the banks performance of
its duty. It might be so that the bank complied with its
own internal rules prior to paying out on the
questionable check. Yet, there are several troubling
circumstances that lead us to believe that the bank
itself was remiss in its duty.
The fact that the check was made out in the amount of
nearly one million pesos is unusual enough to require
a higher degree of caution on the part of the bank.
Indeed, FEBTC confirms this through its own internal
procedures. Checks below twenty-five thousand pesos
require only the approval of the teller; those between
twenty-five thousand to one hundred thousand pesos
necessitate the approval of one bank officer; and
should the amount exceed one hundred thousand
pesos, the concurrence of two bank officers is
required.
In this case, not only did the amount in the check
nearly total one million pesos, it was also payable to
cash. That latter circumstance should have aroused
the suspicion of the bank, as it is not ordinary business
practice for a check for such large amount to be made
payable to cash or to bearer, instead of to the order of
a specified person. Moreover, the check was presented
for payment by one Roberto Gonzaga, who was not

designated as the payee of the check, and who did not
carry with him any written proof that he was
authorized by Samsung Construction to encash the
check. Gonzaga, a stranger to FEBTC, was not even an
employee
of
Samsung
Construction.
These
circumstances are already suspicious if taken
independently, much more so if they are evaluated in
concurrence. Given the shadiness attending Gonzagas
presentment of the check, it was not sufficient for
FEBTC to have merely complied with its internal
procedures, but mandatory that all earnest efforts be
undertaken to ensure the validity of the check, and of
the authority of Gonzaga to collect payment therefor.
According to FEBTC Senior Assistant Cashier Gemma
Velez, the bank tried, but failed, to contact Jong over
the phone to verify the check. She added that calling
the issuer or drawer of the check to verify the same
was not part of the standard procedure of the bank,
but an extra effort. Even assuming that such personal
verification is tantamount to extraordinary diligence, it
cannot be denied that FEBTC still paid out the check
despite the absence of any proof of verification from
the drawer. Instead, the bank seems to have relied
heavily on the say-so of Sempio, who was present at
the bank at the time the check was presented.
FEBTC alleges that Sempio was well-known to the
bank officers, as he had regularly transacted with the
bank in behalf of Samsung Construction. It was even
claimed that everytime FEBTC would contact Jong
about problems with his account, Jong would hand the
phone over to Sempio. However, the only proof of such
allegations is the testimony of Gemma Velez, who also
testified that she did not know Sempio personally, and
had met Sempio for the first time only on the day the
check was encashed. In fact, Velez had to inquire with
the other officers of the bank as to whether Sempio
was actually known to the employees of the
bank.Obviously, Velez had no personal knowledge as
to the past relationship between FEBTC and Sempio,
and any averments of her to that effect should be
deemed hearsay evidence. Interestingly, FEBTC did
not present as a witness any other employee of their
Bel-Air branch, including those who supposedly had
transacted with Sempio before.
Even assuming that FEBTC had a standing habit of
dealing with Sempio, acting in behalf of Samsung
Construction, the irregular circumstances attending
the presentment of the forged check should have put
the bank on the highest degree of alert. The Court
recently emphasized that the highest degree of care
and diligence is required of banks.
Banks are engaged in a business impressed with
public interest, and it is their duty to protect in return
their many clients and depositors who transact
business with them. They have the obligation to treat
their clients account meticulously and with the highest
degree of care, considering the fiduciary nature of
their relationship. The diligence required of banks,
therefore, is more than that of a good father of a

family.
Given the circumstances, extraordinary diligence
dictates that FEBTC should have ascertained from Jong
personally that the signature in the questionable
check was his.
Still, even if the bank performed with utmost diligence,
the drawer whose signature was forged may still
recover from the bank as long as he or she is not
precluded from setting up the defense of forgery. After
all, Section 23 of the Negotiable Instruments Law
plainly states that no right to enforce the payment of a
check can arise out of a forged signature. Since the
drawer, Samsung Construction, is not precluded by
negligence from setting up the forgery, the general
rule should apply. Consequently, if a bank pays a
forged check, it must be considered as paying out of
its funds and cannot charge the amount so paid to the
account of the depositor. able, irrespective of its good
faith, in paying a forged check.
WHEREFORE, the Petition is GRANTED. The Decision of
the Court of Appeals dated 28 November 1996 is
REVERSED, and the Decision of the Regional Trial
Court of Manila, Branch 9, dated 25 April 1994 is
REINSTATED. Costs against respondent.
SO ORDERED.
DECISION
TINGA, J.:
Before this Court is a Rule 45 petition assailing the
Decision[1] dated 29 September 1994 of the Court of
Appeals that reversed the Decision[2] dated 30 April
1991 of the Regional Trial Court (RTC) of Bulacan,
Branch 6, Malolos. The trial court declared Transfer
Certificates of Title (TCTs) No. T-9326-P(M) and No. T9327-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. P153(M) was issued in the name of Eduardo pursuant to
a free patent issued in Eduardos name [3] that was
entered in the Registry of Deeds of Meycauayan,
Bulacan.[4] The subject lot is adjacent to a fishpond
owned by one
Ricardo Cruz (Ricardo), predecessor-in-interest of
respondents Consuelo Cruz and Rosalina Cruz-Bautista
(Cruzes).[5]
On 19 December 1954, before the subject lot was
titled, Eduardo sold a portion thereof with an area of
553 square meters to Ricardo. The sale is evidenced
by a deed of sale entitled Kasulatan ng Bilihang
Tuluyan ng Lupang Walang Titulo (Kasulatan) [6] which
was signed by Eduardo himself as vendor and his wife
Engracia Aniceto with a certain Santiago Enriquez
signing as witness. The deed was notarized by Notary
Public Manolo Cruz.[7] On 4 April 1963, the Kasulatan
was registered with the Register of Deeds of Bulacan. [8]
On 18 March 1981, another Deed of Sale[9] conveying
another portion of the subject lot consisting of 50
square meters as right of way was executed by
Eduardo in favor of Ricardo in order to reach the
portion covered by the first sale executed in 1954 and
to have access to his fishpond from the provincial
road.[10] The deed was signed by Eduardo himself and
his wife Engracia Aniceto, together with Eduardo
Manlapat, Jr. and Patricio Manlapat. The same was also
duly notarized on 18 July 1981 by Notary Public
Arsenio Guevarra.[11]
HEIRS OF MANLAPAT VS CA
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. P-153(M) with the
bank.
On 31 August 1986, Ricardo died without learning of
the prior issuance of OCT No. P-153(M) in the name of
Eduardo.[12] His heirs, the Cruzes, were not
immediately aware of the consummated sale between
Eduardo and Ricardo.
Eduardo himself died on 4 April 1987. He was survived
by his heirs, Engracia Aniceto, his spouse; and
children, Patricio, Bonifacio, Eduardo, Corazon,
Anselmo, Teresita and Gloria, all surnamed Manlapat.
[13]
Neither did the heirs of Eduardo (petitioners) inform
the Cruzes of the prior sale in favor of their
predecessor-in-interest, Ricardo. Yet subsequently, the
Cruzes came to learn about the sale and the issuance
of the OCT in the name of Eduardo.
Upon learning of their right to the subject lot, the
Cruzes immediately tried to confront petitioners on the
mortgage and obtain the surrender of the OCT. The
Cruzes, however, were thwarted in their bid to see the
heirs. On the advice of the Bureau of Lands, NCR
Office, they brought the matter to the barangay
captain of Barangay Panghulo, Obando, Bulacan.
During the hearing, petitioners were informed that the
Cruzes had a legal right to the property covered by
OCT and needed the OCT for the purpose of securing a
separate title to cover the interest of Ricardo.
Petitioners, however, were unwilling to surrender the
OCT.[14]
Having failed to physically obtain the title from
petitioners, in July 1989, the Cruzes instead went to
RBSP which had custody of the 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 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.
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]
After securing the approval of the subdivision plan, the

Cruzes went back to RBSP and again asked for the
owners duplicate certificate from Salazar. The Cruzes
informed him that the presentation of the owners
duplicate certificate was necessary, per advise of the
Register of Deeds, for the cancellation of the OCT and
the issuance in lieu thereof of two separate titles in
the names of Ricardo and Eduardo in accordance with
the approved subdivision plan.[19] Before giving the
owners duplicate certificate, Salazar required the
Cruzes to see Atty. Renato Santiago (Atty. Santiago),
legal counsel of RBSP, to secure from the latter a
clearance to borrow the title. Atty. Santiago would give
the clearance on the condition that only Cruzes put up
a substitute collateral, which they did. [20] As a result,
the Cruzes got hold again of the owners duplicate
certificate.
(1) Civil Case No. 650-M-89,

for
reconveyance
with
damages filed by the heirs of
Eduardo
Manlapat
against
Consuelo Cruz, Rosalina CruzBautista, Rural Bank of San
Pascual, Jose Salazar and Jose
Flores, in his capacity as
Deputy Registrar, Meycauayan
Branch of the Registry of
Deeds of Bulacan;
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]
In October of 1989, Banaag went to RBSP, intending to
tender full payment of the mortgage obligation. It was
As a result, three (3) cases were lodged, later

consolidated, with the trial court, all involving the
issuance of the TCTs, to wit:
(2) Civil Case No. 141-M-90 for

damages filed by Jose Salazar
against Consuelo Cruz, et. [sic]
al.; and
(3) Civil Case No. 644-M-89,
for declaration of nullity of title
with damages filed by Rural
Bank of San Pascual, Inc.
against the spouses Ricardo
Cruz and Consuelo Cruz, et al.
[25]
After trial of the consolidated cases, the RTC of Malolos

rendered a decision in favor of the heirs of Eduardo,
the dispositive portion of which reads:
WHEREFORE, premised from
the foregoing, judgment is
hereby rendered:
1.Declaring Transfer Certificates of
Title Nos. T-9326-P(M) and T-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. P-153(M) in the name of
plaintiffs
predecessor-in-interest
Eduardo Manlapat;
2.-Ordering the
defendants Rural Bank of
San Pascual, Jose Salazar,
Consuelo
Cruz
and
Rosalina Cruz-Bautista, to
pay the plaintiffs Heirs of

Eduardo Manlapat, jointly
and
severally,
the
following:
a)P200,000.00 as moral damages;
b)P50,000.00
as
exemplary
damages;
c)P20,000.00 as attorneys fees;
and
d) the costs of the suit.
3.Dismissing the counterclaims.
SO ORDERED.[26]
The trial court found that petitioners were entitled to
the reliefs of reconveyance and damages. On this
matter, it ruled that petitioners were bona fide
mortgagors of an unclouded title bearing no
annotation of any lien and/or encumbrance. This fact,
according to the trial court, was confirmed by the bank
when it accepted the mortgage unconditionally on 25
November 1981. It found that petitioners were
complacent and unperturbed, believing that the title
to their property, while serving as security for a loan,
was safely vaulted in the impermeable confines of
RBSP. To their surprise and prejudice, said title was
subdivided into two portions, leaving them a portion of
455 square meters from the original total area of
1,058 square meters, all because of the fraudulent
and negligent acts of respondents and RBSP. The trial
court ratiocinated that even assuming that a portion of
the subject lot was sold by Eduardo to Ricardo,
petitioners were still not privy to the transaction
between the bank and the Cruzes which eventually led
to the subdivision of the OCT into TCTs No. T-9326-P(M)
and No. T-9327-P(M), clearly to the damage and
prejudice of petitioners.[27]
Concerning the claims for damages, the trial court
found the same to be bereft of merit. It ruled that
although the act of the Cruzes could be deemed
fraudulent, still it would not constitute intrinsic fraud.
Salazar, nonetheless, was clearly guilty of negligence
in letting the Cruzes borrow the owners duplicate
certificate of the OCT. Neither the bank nor its
manager had business entrusting to strangers titles
mortgaged to it by other persons for whatever reason.
It was a clear violation of the mortgage and banking
laws, the trial court concluded.
The trial court also ruled that although Salazar was
personally responsible for allowing the title to be
borrowed, the bank could not escape liability for it was
guilty of contributory negligence. The evidence
showed that RBSPs legal counsel was sought for
advice regarding respondents request. This could only
mean that RBSP through its lawyer if not through its

manager had known in advance of the Cruzes
intention and still it did nothing to prevent the
eventuality. Salazar was not even summarily
dismissed by the bank if he was indeed the sole
person to blame. Hence, the banks claim for damages
must necessarily fail.[28]
The trial court granted the prayer for the annulment of
the TCTs as a necessary consequence of its declaration
that reconveyance was in order. As to Flores, his work
being ministerial as Deputy Register of the Bulacan
Registry of Deeds, the trial court absolved him of any
liability with a stern warning that he should deal with
his future transactions more carefully and in the
strictest sense as a responsible government official.[29]
Aggrieved by the decision of the trial court, RBSP,
Salazar and the Cruzes appealed to the Court of
Appeals. The appellate court, however, reversed the
decision of the RTC. The decretal text of the decision
reads:
THE FOREGOING CONSIDERED,
the appealed
decision
is
hereby reversed and set aside,
with
costs
against
the
appellees.SO ORDERED.[30]
The appellate court ruled that petitioners
were not bona fide mortgagors since as
early as 1954 or before the 1981
mortgage, Eduardo already sold to Ricardo
a portion of the subject lot with an area of
553 square meters. This fact, the Court of
Appeals noted, is even supported by a
document of sale signed by Eduardo Jr.
and Engracia Aniceto, the surviving spouse
of Eduardo, and registered with the
Register of Deeds of Bulacan. The
appellate court also found that on 18
March 1981, for the second time, Eduardo
sold to Ricardo a separate area containing
50 square meters, as a road right-of-way.
[31]
Clearly, the OCT was issued only after
the first sale. It also noted that the title
was given to the Cruzes by RBSP
voluntarily, with knowledge even of the
banks counsel.[32] Hence, the imposition of
damages cannot be justified, the Cruzes
themselves being the owners of the
property. Certainly, Eduardo misled the
bank into accepting the entire area as a
collateral since the 603-square meter
portion did not anymore belong to him.
The appellate court, however, concluded
that there was no conspiracy between the
bank and Salazar.[33]
Hence, this petition for review on certiorari.
Petitioners ascribe errors to the appellate court by

asking the following questions, to wit: (a) can a
mortgagor be compelled to receive from the
mortgagee a smaller portion of the originally
encumbered title partitioned during the subsistence of
the mortgage, without the knowledge of, or authority
derived from, the registered owner; (b) can the
mortgagee question the veracity of the registered title
of the mortgagor, as noted in the owners duplicate
certificate, and thus, deliver the certificate to such
third persons, invoking an adverse, prior, and
unregistered claim against the registered title of the
mortgagor; (c) can an adverse prior claim against a
registered title be noted, registered and entered
without a competent court order; and (d) can belief of
ownership justify the taking of property without due
process of law?[34]
The kernel of the controversy boils down to the issue
of whether the cancellation of the OCT in the name of
the petitioners predecessor-in-interest and its splitting
into two separate titles, one for the petitioners and the
other for the Cruzes, may be accorded legal
recognition given the peculiar factual backdrop of the
case. We rule in the affirmative.
Private respondents (Cruzes) own
the portion titled in their names
Consonant with law and justice, the ultimate
denouement of the property dispute lies in the
determination of the respective bases of the warring
claims. Here, as in other legal disputes, what is written
generally deserves credence.
A careful perusal of the evidence on record reveals
that the Cruzes have sufficiently proven their claim of
ownership over the portion of Lot No. 2204 with an
area of 553 square meters. The duly notarized
instrument of conveyance was executed in 1954 to
which no less than Eduardo was a signatory. The
execution of the deed of sale was rendered beyond
doubt by 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
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.
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 successorsin-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
in
Section 53. Such act constitutes manifest negligence
on the part of the bank which would necessarily hold it
liable for damages under Article 1170 and other
relevant provisions of the Civil Code.[56]
In the absence of evidence, the damages that may be
awarded may be in the form of nominal damages.
Nominal damages are adjudicated in order that a right
of the plaintiff, which has been violated or invaded by
the defendant, may be vindicated or recognized, and
not for the purpose of indemnifying the plaintiff for
any loss suffered by him.[57] This award rests on the
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
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.
One vital point. Apparently glossed over by the courts

below and the parties is an aspect which is essential,
spread as it is all over the record and intertwined with
the crux of the controversy, relating as it does to the
validity of the dispositions of the subject property and
the mortgage thereon. Eduardo was issued a title in
1976 on the basis of his free patent application. Such
application implies the recognition of the public
dominion character of the land and, hence, the five
(5)-year prohibition imposed by the Public Land Act
against alienation or encumbrance of the land covered
by a free patent or homestead [58] should have been
considered.
The 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
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 CruzBautista 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.
CADIZ V CA
DECISION
TINGA, J.:
Employees who abuse their position for fiduciary gain

cannot be shielded from the consequences of their
wrongdoing even on account of the banks operational
laxities that may have provided the gateway for their
shenanigans. Their misconduct provides the bank with
cause for the termination of their employment.
The facts follow.

Petitioners Romeo Cadiz (Cadiz), Carlito Bongkingki
(Bongkingki) and Prisco Gloria IV (Gloria) were
employed as signature verifier, bookkeeper, and
foreign currency denomination clerk/bookkeeperreliever, respectively, in the main office branch (MOB)
of
Philippine
Commercial
International
Bank
(respondent bank).
The anomalies in question arose when Rosalina B.
Alqueza (Alqueza) filed a complaint with PCIB for the
alleged non-receipt of a Six Hundred Dollar ($600.00)
demand draft drawn against it which was purchased
by her husband from Hongkong and Shanghai Banking
Corporation. Upon verification, it was uncovered that
the demand draft was deposited on 10 June 1988 with
FCDU Savings Account (S/A) No. 1083-4, an account
under the name of Sonia Alfiscar (Alfiscar). Further
investigation revealed that the demand draft, together
with four (4) other checks, was made to appear as
only one deposit covered by HSBC Check No. 979120
for One Thousand Two Hundred Thirty-two Dollars
(US$1,232.00).
The Branch Manager, Ismael R. Sandig, then presided
over a series of meetings, wherein Cadiz, Bongkingki
and Gloria allegedly verbally admitted their
participation in a scheme to divert funds intended for
other accounts using the Savings Account of Alfiscar.
Subsequently,
Cadiz
allegedly
paid
Alqueza
P12,690.00, the peso equivalent of US$600, but
insisted that the corresponding receipt be issued in
Alfiscars name instead.
On account of these allegations, a special audit
examination was conducted by the bank. On 31
January 1989, the internal auditors of the bank,
headed by Lizza G. Baylon, submitted their findings in
an official report. The auditors determined that as
early as July 1987, petitioner Cadiz had reserved the
savings account in the name of Sonia Alfiscar. The
account was opened on 27 November 1987 and closed
on 23 June 1988. Twenty-five (25) deposit slips
involving the account were posted by Bongkingki while
sixteen (16) deposit slips were posted by Gloria. A
verification of the deposit slips yielded findings of
miscoded checks, forged signatures, non-validation of
deposit slips by the tellers, wrongful deposit of second-
endorsed checks into foreign currency deposit

accounts, the deposit slips which do not bear the
required approval of bank officers, and withdrawals
made either on the day of deposit or the following
banking day.[1]
In view of such findings, show-cause memoranda [2]
were served on petitioners, requiring them to explain
within seventy-two (72) hours why no disciplinary
action should
be taken against them in connection with the results

of the special audit examination. On 22 March 1989,
petitioners submitted their written explanations. [3] Not
satisfied with their explanations, respondent bank in
memoranda[4] all dated 22 June 1989 dismissed
petitioners from employment for violation of Article III
Section 1 B-2 and Article III Section 1-C of the Code of
Discipline.
Petitioners lodged a complaint before the labor arbiter
for illegal dismissal on 18 September 1989. Labor
Arbiter Ernesto S. Dinopol adjudged that petitioners
were
illegally
dismissed
and
ordered
their
reinstatement and payment of backwages. This
conclusion was based on the notices of dismissal,
which, to the mind of the labor arbiter, was couched in
general terms and without explaining how the rules
were violated. The labor arbiter also attributed
petitioners acts in fraudulently coding several deposit
slips as 1511 (immediately withdrawable) as mere
procedural inadequacies, with the fault attributable to
respondent bank for its laxity.[5]
The labor arbiters Decision was reversed on appeal

before the Second Division of the National Labor
Relations Commission (NLRC), which, in a Decision[6]
dated 30 June 1994, ordered the dismissal of the
petition. In doing so, the NLRC departed from the labor
arbiters finding of facts and concluded that petitioners
were dismissed for just cause. Dismissing petitioners
appeal, the Court of Appeals Ninth Division similarly
determined on the basis of substantial evidence that
petitioners were validly terminated in its own
Decision[7] dated 13 July 2001.
After the appellate court denied petitioners motion for
reconsideration, the matter was brought before this
Court in a Petition for Review on Certiorari.[8]
The issues to be resolved are whether the Court of
Appeals erred in not sustaining the findings of the
labor arbiter and upholding those of the NLRC and
whether the Court of Appeals erred in dismissing the
petition by ignoring petitioners claims that they were

dismissed without just cause and due process.[9]
In its Comment,[10] respondent bank seeks to have the
petition dismissed inasmuch as all the issues raised
herein involve questions of fact. We note that as a
general rule, only questions of law may be brought
upon this Court in a petition for review on certiorari
under Rule 45 of the Rules of Court. This Court is not a
trier of facts, and as such is tasked to calibrate and
assess the probative weight of evidence adduced by
the parties during trial all over again.[11]
However, if there are competing factual findings by
the different triers of fact, such as those made in this
case by the labor arbiter on one hand, and those of
the NLRC and Court of Appeals on the other hand, this
Court is compelled to go over the records of the case,
as well as the submissions of the parties, and resolve
the factual issues.[12] With this in mind, we shall now
proceed to examine the decisions under review.
The general thesis as laid down by the NLRC and Court

of Appeals is that petitioners had surreptitiously
diverted funds deposited by depositors to S/A No.
1083-4 which was under their control and disposition.
On the other hand, a perusal of the labor arbiters
Decision reveals a different perspective from which
the case was approached. While the labor arbiter
conceded that petitioners Bongkingki and Gloria had
miscoded several deposit slips, rendering them
immediately withdrawable, he characterized the errors
as mere procedural inadequacies which were
preventable had management exercised greater
control over its employees.[13]
Far from petitioners thrust, the miscoding of deposit
slips cannot be downplayed as mere procedural
inadequacies. After all, it is such miscoding that
precipitated the fraudulent withdrawals in the first
place. The act operated as the first indispensable step
towards the commission of fraud on the bank.
More disturbing though is the labor arbiters willingness
to acquit petitioners of culpability on account of the
purported negligence of the bank. It is similar to
concluding that the bank guards, and not the burglars,
bear primary culpability for a bank robbery. Whatever
liability or responsibility was expected of the bank
stands as an issue separate from the liability of the
recreant bank employees. Even assuming that the
bank observed less-than-ideal controls over the
security of its operations, such laxity does not serve as
the carte blanche signal for the bank employees to
take advantage of safeguard control lapses and
perpetrate chicanery on their employer.
The labor arbiter also evaluated the banks claim that

Cadiz had reimbursed the amount of $600 to the
aggrieved depositor Alqueza while making it appear
that it was Alfiscar who had actually made the refund.
In disbelieving this claim, the Labor Arbiter concluded
that it is unthinkable for a lowly bank employee to
impose his will upon his high and mighty employer. [14]
This pronouncement is revelatory of absurd logic. The
notion that a lowly employee will never countermand
the will or interests of the employer is sufficiently
rebutted by any labor law casebook, any omnibus of
our labor jurisprudence, and the evolution of the
human experience that disquiets persons from
unhesitatingly acceding to the presumptive good faith
of others. It is an accepted premise of life and
jurisprudence that persons are capable, upon impure
motivations, of taking advantage of others, whether
their social lessers, equals, or betters. The necessity of
punishment arises from this flaw of human nature.
This philosophic stance of the labor arbiter actually
obviates the nature of sin.
Obviously, we are hard-pressed to accord high regard
to the labor arbiters discernment as a trier of facts.
Nonetheless, his claim that there were procedural
flaws attending the dismissal of petitioners warrants
some deliberation.
The labor arbiter ruled that the notices of dismissal
served on petitioners was insufficient as it failed to
specifically delineate how petitioners had violated the
internal rules of the bank. However, the notices do cite
the rules which petitioners had violated and refer to
the fact that such violations occurred relating to S/A
No. 1083-4 account of Sonia Alfiscar and/or Rosalinda
Alqueza.
There is no demand that the notices of dismissal
themselves be couched in the form and language of
judicial or quasi-judicial decisions. What is required is
that the employer conduct a formal investigation
process, with notices duly served on the employees
informing them of the fact of investigation, and
subsequently, if warranted, a separate notice of
dismissal.[15] Through the formal investigatory process,
the employee must be accorded the right to present
his/her side, which must be considered and weighed
by the employer. The employee must be sufficiently
apprised of the nature of the charge against him/her,
so as to be able to intelligently defend against the
charges.
In the instant case, records show that respondent bank
complied with the two-notice rule prescribed in Article
277(b) of the Labor Code.[16] Petitioners were given all
avenues to present their side and disprove the
allegations of respondent bank. An informal meeting

was held between the branch manager of MOB, the
three petitioners and Mr. Gener, the Vice-President of
the PCIB Employees Union. As per report, petitioners
admitted having used Alfiscars account to divert funds
intended for other accounts. A special audit
investigation was conducted to determine the extent
of the fraudulent transactions. Based on the results of
the investigation, respondent bank sent show-cause
memoranda to petitioners, asking them to explain
their lapses, under pain of disciplinary action. The
memoranda, which constitute the first notice,
specified the various questionable acts committed by
petitioners.
Afterwards, petitioners submitted their respective
replies to the memoranda. This very well complies
with the requirement for hearing, by which petitioners
were afforded the opportunity to defend themselves.
The second notice came in the form of the termination
memoranda, informing petitioners of their dismissal
from service. From the foregoing, it is clear that the
required procedural due process for their termination
was strictly complied with.
All told, we hold that the factual appreciation and
conclusions rendered by the labor arbiter are not
worthy of adoption by this Court. In contrast, from the
factual determinations made by the NLRC and the
Court of Appeals, we accept the following facts as
proven:
1.
Petitioner Cadiz reserved
S/A No. 1083-4 in July 1987 as
reflected on respondent banks
new account register.
2.
Foreign
denominated
checks payable to other payees
were diverted into the said
account.
3.
The various deposit slips,
covering the said checks, did not
bear the machine validation of
any of the tellers-in-charge.
4.
The signatures of the MOB
officers appearing on the said
deposit slips were in fact forged.
5.
The posting of said bank
transactions bore the initials of
petitioners Bongkingki or Gloria.
6.
The deposit slips were
coded as 1511 or on-us check.
7.
Petitioner Cadiz agreed to
pay Alqueza the
equivalent
amount of $600.00 but it was
made to appear that Alfiscar paid
the said amount.
8.
In view of these findings,
petitioners were served with
show-cause memoranda asking

them to explain the lapses.
9.
Finding their explanations
unsatisfactory, petitioners were
terminated from employment.
It is from these established facts that we consider the
arguments now presented by petitioners. In light of
these facts, petitioners arguments hardly detract from
the conclusion that their behavior in the course of the
discharge of their duties is clearly malfeasant, and
constitutes ground for their termination on account of
just cause.
First,
petitioners
insist
that
the
show-cause
memoranda served on them did not impute any
fraudulent behavior, but merely lapses. We disagree.
The show-cause memoranda were occasioned by the
confidential report prepared by Sandig, as well as the
findings of the special audit examination. The
confidential report prepared by Sandig addressed to
the Vice-President of respondent bank pertains to the
discovery of fraudulent transactions on S/A No.1083-4
involving three employees of respondent bank. The
report detailed how the events transpired, including
the admissions of petitioners. From there, a special
audit examination was conducted to make a thorough
investigation of the questioned account. The
examination yielded conspicuous findings that
anomalous transactions had taken place involving
petitioners.
Moreover, the show-cause memoranda respectively
served on petitioners clearly indicate that they were
being made to answer questions pertaining to possible
anomalous behavior on their part. For example,
petitioners were asked to explain why they had posted
the questioned deposits on the ledger, although there
were no teller validations or teller stamps, and also on
what basis they considered such transactions to be
valid.[17] On the other hand, the show-cause
memorandum to Cadiz directly asks him to provide the
personal details of Sonia Alfiscar, why he went out of
his way to make a special arrangement for the
mysterious Alfiscar, and other questions pertaining to
the Alfiscar accounts.
We thus cannot give credence to the averments of
petitioners that the memoranda pertain to lapses, and
not fraudulent transactions. The bank could not have
been expected to conclude outright that petitioners
were guilty of fraud, despite all the indicia that they
indeed were. Certainly, the purpose of the show-cause
memoranda was to afford petitioners the opportunity
to acquit themselves of culpable responsibility. It
would have been quite irresponsible for the bank to
have premised the queries therein on irretractable
conclusions that petitioners had been guilty of
anomalous transactions.
Second, petitioners contend that they should be
relieved of any liability considering that respondent
bank did not suffer a pecuniary loss. This claim must
obviously fail.
There is jurisprudential support, as noted by the Court
of Appeals in citing University of the East v. NLRC[18]
that lack of material or pecuniary damages would not
in any way mitigate a persons liability nor obliterate
the loss of trust and confidence. In the case of
Etcuban v. Sulpicio Lines,[19] this Court definitively
ruled that:
. . . Whether or not the
respondent
bank
was
financially
prejudiced
is
immaterial. Also, what matters
is not the amount involved, be
it paltry or gargantuan; rather
the fraudulent scheme in
which the petitioner was
involved, which constitutes a
clear betrayal of trust and
confidence. . . .
Moreover, it cannot be discounted that as bank
employees, the responsibilities of petitioners are
impressed with a high degree of public interest.
Private persons entrust their fortunes to banks, and it
would cause a breakdown of the financial order if the
judicial system were to leave unsanctioned bank
employees who treat depositors accounts as their own
private kitty.
Still, petitioners insist that respondent bank never lost
trust and confidence in them as it did not place them
under preventive suspension, and more tellingly, it
even promoted them after the labor arbiter had
ordered their reinstatement. Preventive suspension,
which is never obligatory on the part of the employer,
may be resorted to only when the continued
employment of the employee poses a serious and
imminent threat to the life or property of the employer
or of his co-workers.[20] The bank points out that the
Alfiscar account, through which the anomalous
transactions were coursed, was no longer active at the
time the fraud was discovered. [21] Clearly, the bank
had reason to conclude that the imminence of the
threat posed by the employees was not as vital as it
would have been had the dubious account still been
open.
As to the alleged promotions, the original employer,
PCIB, admits that petitioners had been reinstated by
reason of the Decision, but such act was by no means
voluntary. PCIB however does not rebut the allegations
that Bongkingki and Cadiz were assigned to sensitive
positions within the bank after their compulsory

reinstatement. This may be so, but the fact that PCIB
lost no time in removing the employees from the
plantilla after the NLRC reversed the labor arbiters
Decision hardly evinces any continuing trust and
confidence on the part of the bank, as maintained by
petitioners.
Moreover,
considering
that
these
reinstated employees were, for the meantime, regular
employees of the bank, it is within the discretion of
PCIB to reassign them as it sees fit, taking into
account the circumstances.
Moreover, it would simply be temerarious for the Court
to sanction the reinstatement of bank employees who
have clearly engaged in anomalous banking practices.
The particular fiduciary responsibilities reposed on
banks and its employees cannot be emphasized
enough. The fiduciary nature of banking [22] is
enshrined in Republic Act No. 8791 or the General
Banking Law of 2000. Section 2 of the law specifically
says that the State recognizes the fiduciary nature of
banking that requires high standards of integrity and
performance.[23] The bank must not only exercise high
standards of integrity and performance, it must also
ensure that its employees do likewise because this is
the only way to ensure that the bank will comply with
its fiduciary duty.[24]
All given, we affirm the conclusion that petitioners
were dismissed for just cause. Loss of trust and
confidence is one of the just causes for termination by
employer under Article 282 of the Labor Code. The
breach of trust must be willful, meaning it must be
done intentionally, knowingly, and purposely, without
justifiable excuse.[25] Ideally, loss of confidence applies
only to cases involving employees occupying positions
of trust and confidence or to those situations where
the employee is routinely charged with the care and
custody of the employers money or property. [26]
Utmost trust and confidence are deemed to have been
reposed on petitioners by virtue of the nature of their
work.
The facts as established, as well as the need to assert
the public interest in safeguarding against bank fraud,
militate against the present petition.
WHEREFORE, the Petition is hereby DENIED and the
assailed Decision of the Court of Appeals AFFIRMED.
Costs against petitioners.
SO ORDERED.
Jr.[2] the total sum of P100,000.00 as moral and

exemplary damages. The assailed decision affirmed
with modification that of the Regional Trial Court (RTC)
of Negros Occidental, Bacolod City, Branch 54, in Civil
Case No. 4908. Likewise sought to be reversed and set
aside is the Resolution dated January 17, 2003 of the
appellate court, denying petitioner banks motion for
reconsideration.
The case stemmed from the following undisputed
facts:
Respondent Pacilan opened a current account with
petitioner banks Bacolod Branch on May 23, 1980. His
account was denominated as Current Account No.
53208 (0052-00407-4). The respondent had since then
issued several postdated checks to different payees
drawn against the said account. Sometime in March
1988, the respondent issued Check No. 2434886 in the
amount of P680.00 and the same was presented for
payment to petitioner bank on April 4, 1988.
Upon its presentment on the said date, Check No.
2434886 was dishonored by petitioner bank. The next
day, or on April 5, 1988, the respondent deposited to
his current account the amount of P800.00. The said
amount was accepted by petitioner bank; hence,
increasing the balance of the respondents deposit to
P1,051.43.
Far East Bank and Trust v. Pacilan Jr

DECISION
CALLEJO, SR., J.:
Before the Court is the petition for review on certiorari
filed by Far East Bank and Trust Company (now Bank
of the Philippines Islands) seeking the reversal of the
Decision[1] dated August 30, 2002 of the Court of
Appeals (CA) in CA-G.R. CV No. 36627 which ordered
it, together with its branch accountant, Roger
Villadelgado, to pay respondent Themistocles Pacilan,
Subsequently, when the respondent verified with

petitioner bank about the dishonor of Check No.
2434866, he discovered that his current account was
closed on the ground that it was improperly handled.
The records of petitioner bank disclosed that between
the period of March 30, 1988 and April 5, 1988, the
respondent issued four checks, to wit: Check No.
2480416 for P6,000.00; Check No. 2480419 for
P50.00; Check No. 2434880 for P680.00 and; Check
No. 2434886 for P680.00, or a total amount of
P7,410.00. At the time, however, the respondents
current account with petitioner bank only had a
deposit of P6,981.43. Thus, the total amount of the
checks presented for payment on April 4, 1988
exceeded the balance of the respondents deposit in
his account. For this reason, petitioner bank, through
its branch accountant, Villadelgado, closed the
respondents current account effective the evening of
April 4, 1988 as it then had an overdraft of P428.57. As
a consequence of the overdraft, Check No. 2434886
was dishonored.
On April 18, 1988, the respondent wrote to petitioner
bank complaining that the closure of his account was
unjustified. When he did not receive a reply from
petitioner bank, the respondent filed with the RTC of
Negros Occidental, Bacolod City, Branch 54, a
complaint for damages against petitioner bank and
Villadelgado. The case was docketed as Civil Case No.
4908. The respondent, as complainant therein, alleged

that the closure of his current account by petitioner
bank was unjustified because on the first banking hour
of April 5, 1988, he already deposited an amount
sufficient to fund his checks. The respondent pointed
out that Check No. 2434886, in particular, was
delivered to petitioner bank at the close of banking
hours on April 4, 1988 and, following normal banking
procedure, it (petitioner bank) had until the last
clearing hour of the following day, or on April 5, 1988,
to honor the check or return it, if not funded. In
disregard of this banking procedure and practice,
however,
petitioner
bank
hastily
closed
the
respondents current account and dishonored his Check
No. 2434886.
The respondent further alleged that prior to the
closure of his current account, he had issued several
other postdated checks. The petitioner banks act of
closing his current account allegedly preempted the
deposits that he intended to make to fund those
checks. Further, the petitioner banks act exposed him
to criminal prosecution for violation of Batas
Pambansa Blg. 22.
According to the respondent, the indecent haste that
attended the closure of his account was patently
malicious and intended to embarrass him. He claimed
that he is a Cashier of Prudential Bank and Trust
Company, whose branch office is located just across
that of petitioner bank, and a prominent and respected
leader both in the civic and banking communities. The
alleged malicious acts of petitioner bank besmirched
the respondents reputation and caused him social
humiliation, wounded feelings, insurmountable worries
and sleepless nights entitling him to an award of
damages.
In their answer, petitioner bank and Villadelgado
maintained that the respondents current account was
subject to petitioner banks Rules and Regulations
Governing the Establishment and Operation of Regular
Demand Deposits which provide that the Bank
reserves the right to close an account if the depositor
frequently draws checks against insufficient funds
and/or uncollected deposits and that the Bank
reserves the right at any time to return checks of the
depositor which are drawn against insufficient funds or
for any reason.[3]
They showed that the respondent had improperly and
irregularly handled his current account. For example,
in 1986, the respondents account was overdrawn 156
times, in 1987, 117 times and in 1988, 26 times. In all
these instances, the account was overdrawn due to
the issuance of checks against insufficient funds. The
respondent had also signed several checks with a
different signature from the specimen on file for
dubious reasons.
When the respondent made the deposit on April 5,

1988, it was obviously to cover for issuances made the
previous day against an insufficiently funded account.
When his Check No. 2434886 was presented for
payment on April 4, 1988, he had already incurred an
overdraft; hence, petitioner bank rightfully dishonored
the same for insufficiency of funds.
After due proceedings, the court a quo rendered
judgment in favor of the respondent as it ordered the
petitioner bank and Villadelgado, jointly and severally,
to pay the respondent the amounts of P100,000.00 as
moral damages and P50,000.00 as exemplary
damages and costs of suit. In so ruling, the court a
quo also cited petitioner banks rules and regulations
which state that a charge of P10.00 shall be levied
against the depositor for any check that is taken up as
a returned item due to insufficiency of funds on the
date of receipt from the clearing office even if said
check is honored and/or covered by sufficient deposit
the following banking day. The same rules and
regulations also provide that a check returned for
insufficiency of funds for any reason of similar import
may be subsequently recleared for one more time
only, subject to the same charges.
According to the court a quo, following these rules and
regulations, the respondent, as depositor, had the
right to put up sufficient funds for a check that was
taken as a returned item for insufficient funds the day
following the receipt of said check from the clearing
office. In fact, the said check could still be recleared
for one more time. In previous instances, petitioner
bank notified the respondent when he incurred an
overdraft and he would then deposit sufficient funds
the following day to cover the overdraft. Petitioner
bank thus acted unjustifiably when it immediately
closed the respondents account on April 4, 1988 and
deprived him of the opportunity to reclear his check or
deposit sufficient funds therefor the following day.
As a result of the closure of his current account,
several of the respondents checks were subsequently
dishonored and because of this, the respondent was
humiliated, embarrassed and lost his credit standing in
the business community. The court a quo further
ratiocinated that even granting arguendo that
petitioner bank had the right to close the respondents
account, the manner which attended the closure
constituted an abuse of the said right. Citing Article 19
of the Civil Code of the Philippines which states that
[e]very person must, in the exercise of his rights and
in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith
and Article 20 thereof which states that [e]very person
who, contrary to law, wilfully or negligently causes
damage to another, shall indemnify the latter for the
same, the court a quo adjudged petitioner bank of
acting in bad faith. It held that, under the foregoing

circumstances, the respondent is entitled to an award
of moral and exemplary damages.
The decretal portion of the court a quos decision
reads:
WHEREFORE, PREMISES CONSIDERED, judgment is
hereby rendered:
1.
Ordering the defendants [petitioner bank and
Villadelgado], jointly and severally, to pay plaintiff [the
respondent] the sum of P100,000.00 as moral
damages;
2.
Ordering the defendants, jointly and severally, to
pay plaintiff the sum of P50,000.00 as exemplary
damages plus costs and expenses of the suit; and
3.
Dismissing [the] defendants counterclaim for
lack of merit.
SO ORDERED.[4]
On appeal, the CA rendered the Decision
dated August 30, 2002, affirming with
modification the decision of the court a
quo.The appellate court substantially
affirmed the factual findings of the court a
quo as it held that petitioner bank
unjustifiably closed
the respondents
account notwithstanding that its own rules
and regulations allow that a check
returned for insufficiency of funds or any
reason of similar import, may be
subsequently recleared for one more time,
subject to standard charges. Like the court
a quo, the appellate court observed that in
several instances in previous years,
petitioner
bank
would
inform
the
respondent when he incurred an overdraft
and allowed him to make a timely deposit
to fund the checks that were initially
dishonored for insufficiency of funds.
However, on April 4, 1988, petitioner bank
immediately closed the respondents
account without even notifying him that he
had incurred an overdraft. Even when they
had already closed his account on April 4,
1988, petitioner bank still accepted the
deposit that the respondent made on April
5, 1988, supposedly to cover his checks.
Echoing the reasoning of the court a quo, the CA
declared that even as it may be conceded that
petitioner bank had reserved the right to close an
account for repeated overdrafts by the respondent,
the exercise of that right must never be despotic or
arbitrary. That petitioner bank chose to close the
account outright and return the check, even after
accepting a deposit sufficient to cover the said check,
is contrary to its duty to handle the respondents

account with utmost fidelity. The exercise of the right
is not absolute and good faith, at least, is required.
The manner by which petitioner bank closed the
account of the respondent runs afoul of Article 19 of
the Civil Code which enjoins every person, in the
exercise of his rights, to give every one his due, and
observe honesty and good faith.
The CA concluded that petitioner banks precipitate
and imprudent closure of the respondents account had
caused him, a respected officer of several civic and
banking associations, serious anxiety and humiliation.
It had, likewise, tainted his credit standing.
Consequently, the award of damages is warranted.
The CA, however, reduced the amount of damages
awarded by the court a quo as it found the same to be
excessive:
We, however, find excessive the amount of damages
awarded by the RTC. In our view the reduced amount
of P75,000.00 as moral damages and P25,000.00 as
exemplary damages are in order. Awards for damages
are not meant to enrich the plaintiff-appellee [the
respondent] at the expense of defendants-appellants
[the petitioners], but to obviate the moral suffering he
has undergone. The award is aimed at the restoration,
within limits possible, of the status quo ante, and
should be proportionate to the suffering inflicted.[5]
The dispositive portion of the assailed CA decision
reads:
WHEREFORE, the decision appealed from is hereby
AFFIRMED, subject to the MODIFICATION that the
award of moral damages is reduced to P75,000.00 and
the award of exemplary damages reduced to
P25,000.00.
SO ORDERED.[6]
Petitioner bank sought the reconsideration of the said
decision but in the assailed Resolution dated January
17, 2003, the appellate court denied its motion.
Hence, the recourse to this Court.
Petitioner bank maintains that, in closing the account
of the respondent in the evening of April 4, 1988, it
acted in good faith and in accordance with the rules
and regulations governing the operation of a regular
demand deposit which reserves to the bank the right
to close an account if the depositor frequently draws
checks against insufficient funds and/or uncollected
deposits. The same rules and regulations also provide
that the depositor is not entitled, as a matter of right,
to overdraw on this deposit and the bank reserves the
right at any time to return checks of the depositor
which are drawn against insufficient funds or for any
reason.
It cites the numerous instances that the respondent

had overdrawn his account and those instances where
he deliberately signed checks using a signature
different from the specimen on file. Based on these
facts, petitioner bank was constrained to close the
respondents account for improper and irregular
handling and returned his Check No. 2434886 which
was presented to the bank for payment on April 4,
1988.
Petitioner bank further posits that there is no law or
rule which gives the respondent a legal right to make
good his check or to deposit the corresponding
amount to cover said check within 24 hours after the
same is dishonored or returned by the bank for having
been drawn against insufficient funds. It vigorously
denies having violated Article 19 of the Civil Code as it
insists that it acted in good faith and in accordance
with the pertinent banking rules and regulations.
The petition is impressed with merit.
A perusal of the respective decisions of the court a
quo and the appellate court show that the award of
damages in the respondents favor was anchored
mainly on Article 19 of the Civil Code which, quoted
anew below, reads:
Art. 19. Every person must, in the exercise of his rights
and in the performance of his duties, act with justice,
give everyone his due, and observe honesty and good
faith.
The elements of abuse of rights are the following: (a)
the existence of a legal right or duty; (b) which is
exercised in bad faith; and (c) for the sole intent of
prejudicing or injuring another.[7] Malice or bad faith is
at the core of the said provision. [8] The law always
presumes good faith and any person who seeks to be
awarded damages due to acts of another has the
burden of proving that the latter acted in bad faith or
with ill-motive.[9] Good faith refers to the state of the
mind which is manifested by the acts of the individual
concerned. It consists of the intention to abstain from
taking an unconscionable and unscrupulous advantage
of another.[10] Bad faith does not simply connote bad
judgment or simple negligence, dishonest purpose or
some moral obliquity and conscious doing of a wrong,
a breach of known duty due to some motives or
interest or ill-will that partakes of the nature of fraud.
[11]
Malice connotes ill-will or spite and speaks not in
response to duty. It implies an intention to do ulterior
and unjustifiable harm. Malice is bad faith or bad
motive.[12]
Undoubtedly, petitioner bank has the right to close the
account of the respondent based on the following
provisions of its Rules and Regulations Governing the
Establishment and Operation of Regular Demand
Deposits:
and conditions.
10)
The Bank reserves the right to close an
account if the depositor frequently draws checks
against insufficient funds and/or uncollected deposits.
12) However, it is clearly understood that
the depositor is not entitled, as a matter of
right, to overdraw on this deposit and the
bank reserves the right at any time to
return checks of the depositor which are
drawn against insufficient funds or for any
other reason.
The facts, as found by the court a quo and
the appellate court, do not establish that,
in the exercise of this right, petitioner bank
committed an abuse thereof. Specifically,
the second and third elements for abuse of
rights are not attendant in the present
case.
The
evidence
presented
by
petitioner bank negates the existence of
bad faith or malice on its part in closing
the respondents account on April 4, 1988
because on the said date the same was
already overdrawn. The respondent issued
four checks, all due on April 4, 1988,
amounting to P7,410.00 when the balance
of his current account deposit was only
P6,981.43. Thus, he incurred an overdraft
of P428.57 which resulted in the dishonor
of his Check No. 2434886. Further,
petitioner bank showed that in 1986, the
current account of the respondent was
overdrawn 156 times due to his issuance
of checks against insufficient funds.[13] In
1987, the said account was overdrawn 117
times for the same reason.[14] Again, in
1988, 26 times.[15] There were also several
instances when the respondent issued
checks deliberately using a signature
different from his specimen signature on
file with petitioner bank.[16] All these
circumstances taken together justified the
petitioner
banks
closure
of
the
respondents account on April 4, 1988 for
improper handling.
It is observed that nowhere under its rules and
regulations is petitioner bank required to notify the
respondent, or any depositor for that matter, of the
closure of the account for frequently drawing checks
against insufficient funds. No malice or bad faith could
be imputed on petitioner bank for so acting since the
records bear out that the respondent had indeed been
improperly and irregularly handling his account not
just a few times but hundreds of times. Under the
circumstances, petitioner bank could not be faulted for
exercising its right in accordance with the express
rules and regulations governing the current accounts
of its depositors. Upon the opening of his account, the
respondent had agreed to be bound by these terms
Neither the fact that petitioner bank accepted the

deposit made by the respondent the day following the
closure of his account constitutes bad faith or malice
on the part of petitioner bank. The same could be
characterized as simple negligence by its personnel.
Said act, by itself, is not constitutive of bad faith.
The respondent had thus failed to discharge his
burden of proving bad faith on the part of petitioner
bank or that it was motivated by ill-will or spite in
closing his account on April 4, 1988 and in
inadvertently accepting his deposit on April 5, 1988.
Further, it has not been shown that these acts were
done by petitioner bank with the sole intention of
prejudicing and injuring the respondent. It is conceded
that the respondent may have suffered damages as a
result of the closure of his current account. However,
there is a material distinction between damages and
injury. The Court had the occasion to explain the
distinction between damages and injury in this wise:
Injury is the illegal invasion of a legal right; damage is
the loss, hurt or harm which results from the injury;
and damages are the recompense or compensation
awarded for the damage suffered. Thus, there can be
damage without injury in those instances in which the
loss or harm was not the result of a violation of a legal
duty. In such cases, the consequences must be borne
by the injured person alone, the law affords no remedy
for damages resulting from an act which does not
amount to a legal injury or wrong. These situations are
often called damnum absque injuria.
In other words, in order that a plaintiff may maintain
an action for the injuries of which he complains, he
must establish that such injuries resulted from a
breach of duty which the defendant owed to the
plaintiff a concurrence of injury to the plaintiff and
legal responsibility by the person causing it. The
underlying basis for the award of tort damages is the
premise that the individual was injured in
contemplation of law. Thus, there must first be a
breach of some duty and the imposition of liability for
that breach before damages may be awarded; and the
breach of such duty should be the proximate cause of
the injury.[17]
Whatever damages the respondent may have suffered
as a consequence, e.g., dishonor of his other
insufficiently funded checks, would have to be borne
by him alone. It was the respondents repeated
improper
and irregular handling of his account which
constrained petitioner bank to close the same in
accordance with the rules and regulations governing
its depositors current accounts. The respondents case
is clearly one of damnum absque injuria.
SO ORDERED.
WHEREFORE, the petition is GRANTED. The Decision

dated August 30, 2002 and Resolution dated January
17, 2003 of the Court of Appeals in CA-G.R. CV No.
36627 are REVERSED AND SET ASIDE.
GREGORIO H. REYES and CONSUELO PUYAT-REYES,

petitioners, vs. THE HON. COURT OF APPEALS and FAR
EAST BANK AND TRUST COMPANY, respondents.
DECISION
DE LEON, JR., J.:
Before us is a petition for review of the Decision dated
July 22, 1994 and ResolutioN dated December 29,
1994 of the Court of Appeals affirming with
modification the Decision[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 clubs chief cashier, to
the respondent bank to apply for a foreign exchange
demand draft in Australian dollars.

Godofredo went to respondent banks 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 20 th
Asian Racing Conference Secretariat of Sydney,
Australia. He was attended to by respondent banks
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 PRCIs 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 1960s and the
procedure has proven to be problem-free. PRCI and the
petitioner Gregorio H. Reyes, acting through
Godofredo, agreed to this arrangement or approach in
order to effect the urgent transfer of Australian dollars
payable to the Secretariat of the 20th Asian Racing
Conference.
On July 28, 1988, the respondent bank approved the
said application of PRCI and issued Foreign Exchange
Demand Draft (FXDD) No. 209968 in the sum applied
for, that is, One Thousand Six Hundred Ten Australian
Dollars (AU$1,610.00), payable to the order of the 20th
Asian Racing Conference Secretariat of Sydney,
Australia, and addressed to Westpac-Sydney as the
drawee bank.
On August 10, 1988, upon due presentment of the
foreign exchange demand draft, denominated as FXDD
No. 209968, the same was dishonored, with the notice
of dishonor stating the following: xxx No account held
with Westpac. Meanwhile, on August 16, 1988,
Westpac-New York sent a cable to respondent bank
informing the latter that its dollar account in the sum
of One Thousand Six Hundred Ten Australian Dollars
(AU$1,610.00) was debited. On August 19, 1988, in
response to PRCIs complaint about the dishonor of the
said foreign exchange demand draft, respondent bank
informed Westpac-Sydney of the issuance of the said
demand draft FXDD No. 209968, drawn against the
Westpac-Sydney and informing the latter to be
reimbursed from the respondent banks dollar account
in Westpac-New York. The respondent bank on the

same day likewise informed Westpac-New York
requesting the latter to honor the reimbursement
claim of Westpac-Sydney. On September 14, 1988,
upon its second presentment for payment, FXDD No.
209968 was again dishonored by Westpac-Sydney for
the same reason, that is, that the respondent bank has
no deposit dollar account with the drawee WestpacSydney.
On September 17, 1988 and September 18, 1988,
respectively, petitioners spouses Gregorio H. Reyes
and Consuelo Puyat-Reyes left for Australia to attend
the said racing conference. When petitioner Gregorio
H. Reyes arrived in Sydney in the morning of
September 18, 1988, he went directly to the lobby of
Hotel Regent Sydney to register as a conference
delegate. At the registration desk, in the presence of
other delegates from various member countries, he
was told by a lady member of the conference
secretariat that he could not register because the
foreign exchange demand draft for his registration fee
had been dishonored for the second time. A discussion
ensued in the presence and within the hearing of
many delegates who were also registering. Feeling
terribly embarrassed and humiliated, petitioner
Gregorio H. Reyes asked the lady member of the
conference secretariat that he be shown the subject
foreign exchange demand draft that had been
dishonored as well as the covering letter after which
he promised that he would pay the registration fees in
cash. In the meantime he demanded that he be given
his name plate and conference kit. The lady member
of the conference secretariat relented and gave him
his name plate and conference kit. It was only two (2)
days later, or on September 20, 1988, that he was
given the dishonored demand draft and a covering
letter. It was then that he actually paid in cash the
registration fees as he had earlier promised.
Meanwhile, on September 19, 1988, petitioner
Consuelo Puyat-Reyes arrived in Sydney. She too was
embarrassed and humiliated at the registration desk
of the conference secretariat when she was told in the
presence and within the hearing of other delegates
that she could not be registered due to the dishonor of
the subject foreign exchange demand draft. She felt
herself trembling and unable to look at the people
around her. Fortunately, she saw her husband coming
toward her. He saved the situation for her by telling
the secretariat member that he had already arranged
for the payment of the registration fees in cash once
he was shown the dishonored demand draft. Only then
was petitioner Puyat-Reyes given her name plate and
conference kit.
At the time the incident took place, petitioner
Consuelo Puyat-Reyes was a member of the House of
Representatives representing the lone Congressional
District of Makati, Metro Manila. She has been an
officer of the Manila Banking Corporation and was
cited by Archbishop Jaime Cardinal Sin as the top lady
banker of the year in connection with her conferment

of the Pro-Ecclesia et Pontifice Award. She has also
been awarded a plaque of appreciation from the
Philippine Tuberculosis Society for her extraordinary
service as the Societys 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. 882468, against the respondent bank due to the
dishonor of the said foreign exchange demand draft
issued by the respondent bank. The petitioners claim
that as a result of the dishonor of the said demand
draft, they were exposed to unnecessary shock, social
humiliation, and deep mental anguish in a foreign
country, and in the presence of an international
audience.
On November 12, 1992, the trial court rendered
judgment in favor of the defendant (respondent bank)
and against the plaintiffs (herein petitioners), the
dispositive portion of which states:
WHEREFORE, judgment is hereby rendered in favor of
the defendant, dismissing plaintiffs complaint, and
ordering plaintiffs to pay to defendant, on its
counterclaim, the amount of P50,000.00, as
reasonable attorneys fees. Costs against the plaintiff.
SO ORDERED.
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 attorneys fees to the
defendant (herein respondent bank) and the
pronouncement as to the costs. The decretal portion of
the decision of the appellate court states:
WHEREFORE, the judgment appealed from, insofar as
it dismisses plaintiffs complaint, is hereby AFFIRMED,
but is hereby REVERSED and SET ASIDE in all other
respect. No special pronouncement as to costs.
SO ORDERED.
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 WestpacSydney.
From the evidence, it appears that the root cause of

the miscommunications of the Banks SWIFT message
is the erroneous decoding on the part of WestpacSydney of the Banks SWIFT message as an MT799
format. However, a closer look at the Banks Exhs. 6
and 7 would show that despite what appears to be an
asterisk written over the figure before 99, the figure
can still be distinctly seen as a number 1 and not
number 7, to the effect that Westpac-Sydney was
responsible for the dishonor and not the Bank.
Moreover, it is not said asterisk that caused the
misleading on the part of the Westpac-Sydney of the
numbers 1 to 7, since Exhs. 6 and 7 are just
documentary copies of the cable message sent to
Westpac-Sydney. Hence, if there was mistake
committed by Westpac-Sydney in decoding the cable
message which caused the Banks message to be sent
to the wrong department, the mistake was Westpacs,
not the Banks. 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.
xxx xxx xxx
Hence, this petition, anchored on the following
assignment of errors:
I
THE HONORABLE COURT OF APPEALS ERRED IN
FINDING PRIVATE RESPONDENT NOT NEGLIGENT BY
ERRONEOUSLY
APPLYING
THE
STANDARD
OF
DILIGENCE OF AN ORDINARY PRUDENT PERSON WHEN
IN TRUTH A HIGHER DEGREE OF DILIGENCE IS
IMPOSED BY LAW UPON THE BANKS.
II
THE HONORABLE COURT OF APPEALS ERRED IN
ABSOLVING PRIVATE RESPONDENT FROM LIABILITY BY
OVERLOOKING THE FACT THAT THE DISHONOR OF THE
DEMAND DRAFT WAS A BREACH OF PRIVATE
RESPONDENTS WARRANTY AS THE DRAWER THEREOF.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT
HOLDING THAT AS SHOWN OVERWHELMINGLY BY THE
EVIDENCE, THE DISHONOR OF THE DEMAND DRAFT
WAS DUE TO PRIVATE RESPONDENTS NEGLIGENCE
AND NOT THE DRAWEE BANK
The petitioners contend that due to the fiduciary
nature of the relationship between the respondent
bank and its clients, the respondent bank should have
exercised a higher degree of diligence than that
expected of an ordinary prudent person in the
handling of its affairs as in the case at bar. The
appellate court, according to petitioners, erred in
applying the standard of diligence of an ordinary
prudent person only. Petitioners also claim that the
respondent bank violated Section 61 of the Negotiable
Instruments Law which provides the warranty of a
drawer that xxx on due presentment, the instrument

will be accepted or paid, or both, according to its tenor
xxx. Thus, the petitioners argue that respondent bank
should be held liable for damages for violation of this
warranty. The petitioners pray this Court to re-examine
the facts to cite certain instances of negligence.
It is our view and we hold that there is no reversible
error in the decision of the appellate court.
Section 1 of Rule 45 of the Revised Rules of Court
provides that (T)he petition (for review) shall raise
only questions of law which must be distinctly set
forth. Thus, we have ruled that factual findings of the
Court of Appeals are conclusive on the parties and not
reviewable by this Court and they carry even more
weight when the Court of Appeals affirms the factual
findings of the trial court.
The courts a quo found that respondent bank did not
misrepresent that it was maintaining a deposit
account with Westpac-Sydney. Respondent banks
assistant cashier explained to Godofredo Reyes,
representating PRCI and petitioner Gregorio H. Reyes,
how the transfer of Australian dollars would be
effected through Westpac-New York where the
respondent bank has a dollar account to WestpacSydney where the subject foreign exchange demand
draft (FXDD No. 209968) could be encashed by the
payee, the 20th Asian Racing Conference Secretatriat.
PRCI and its Vice-President for finance, petitioner
Gregorio H. Reyes, through their said representative,
agreed to that arrangement or procedure. In other
words, the petitioners are estopped from denying the
said arrangement or procedure. Similar arrangements
have been a long standing practice in banking to
facilitate international commercial transactions. In
fact, the SWIFT cable message sent by respondent
bank to the drawee bank, Westpac-Sydney, stated that
it may claim reimbursement from its New York branch,
Westpac-New York where respondent bank has a
deposit dollar account.
The facts as found by the courts a quo show that
respondent bank did not cause an erroneous
transmittal of its SWIFT cable message to WestpacSydney. It was the erroneous decoding of the cable
message on the part of Westpac-Sydney that caused
the dishonor of the subject foreign exchange demand
draft. An employee of Westpac-Sydney in Sydney,
Australia mistakenly read the printed figures in the
SWIFT cable message of respondent bank as MT799
instead of as MT199. As a result, Westpac-Sydney
construed the said cable message as a format for a

letter of credit, and not for a demand draft. The
appellate court correctly found that the figure before
99 can still be distinctly seen as a number 1 and not
number 7. Indeed, the line of a 7 is in a slanting
position while the line of a 1 is in a horizontal position.
Thus, the number 1 in MT199 cannot be construed as
7.
The evidence also shows that the respondent bank
exercised that degree of diligence expected of an
ordinary prudent person under the circumstances
obtaining. Prior to the first dishonor of the subject
foreign exchange demand draft, the respondent bank
advised
Westpac-New
York
to
honor
the
reimbursement claim of Westpac-Sydney and to debit
the dollar account of respondent bank with the former.
As soon as the demand draft was dishonored, the
respondent bank, thinking that the problem was with
the reimbursement and without any idea that it was
due to miscommunication, re-confirmed the authority
of Westpac-New York to debit its dollar account for the
purpose of reimbursing Westpac-Sydney.Respondent
bank also sent two (2) more cable messages to
Westpac-New York inquiring why the demand draft was
not honored.
With these established facts, we now determine the
degree of diligence that banks are required to exert in
their commercial dealings. In Philippine Bank of
Commerce v. Court of Appeals upholding a long
standing doctrine, we ruled that the degree of
diligence required of banks, is more than that of a
good father of a family where the fiduciary nature of
their relationship with their depositors is concerned. In
other words banks are duty bound to treat the deposit
accounts of their depositors with the highest degree of
care. But the said ruling applies only to cases where
banks act under their fiduciary capacity, that is, as
depositary of the deposits of their depositors. But the
same higher degree of diligence is not expected to be
exerted by banks in commercial transactions that do
not involve their fiduciary relationship with their
depositors.
Considering the foregoing, the respondent bank was
not required to exert more than the diligence of a good
father of a family in regard to the sale and issuance of
the subject foreign exchange demand draft. The case
at bar does not involve the handling of petitioners
deposit, if any, with the respondent bank. Instead, the
relationship involved was that of a buyer and seller,
that is, between the respondent bank as the seller of

the subject foreign exchange demand draft, and PRCI
as the buyer of the same, with the 20 th 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 20 th 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 WestpacSydney 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
banks) deposit dollar account with it and to transfer or
credit the corresponding amount to Westpac-Sydney
to cover the amount of the said demand draft.
In view of all the foregoing, and considering that the
dishonor of the subject foreign exchange demand draft
is not attributable to any fault of the respondent bank,
whereas the petitioners appeared to be under estoppel
as earlier mentioned, it is no longer necessary to
discuss the alleged application of Section 61 of the
Negotiable 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.

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G.R. No.

mentioned opinion, in line with which, the Commission

examination disclosed the following findings:

337;3 that on September 25, 1962, the corporation

Banks an application for conversion into a Security

of a meeting of stockholders of the corporation, held

of the rights, assets and business of any person,

conducting the business of a commercial banking

TEODORO BAAS,* C. G. DIZON CONSTRUCTION, INC.,

While defendants (herein petitioners) admitted the

him. On the other hand, ASIA PACIFIC was substituted

business of investing, reinvesting or trading in

the sum will be equivalent to TWENTY FIVE (25%) of

observed by the Court of Appeals, it is unbelievable

Rather, the attorney's fees here are in the nature of

G.R. No. 88013 March 19, 1990

also withheld delivery of the order made by the

not even explained why it was committed at all. It is

Moreover, a corporation is not as a rule entitled to

modest checking account for security and convenience

G.R. No. 69162 February 21, 1992

small checks which the private respondents had

On appeal, the Intermediate Appellate Court deleted

In Simex International (Manila), Inc. vs. Court of

appealed decision is MODIFIED by deleting the award

telegram to private respondent regarding the dishonor

which to clear the bank draft in question." Petitioner

admitted that it committed a "mistake" in not waiting

taken, he will pay the amount thereof to the holder, or

deposit of the Continental Bank draft, without the

case, petitioners personnel should have been duly

automatically cancelled regardless of the time that has

diligence of a good father of a family but it should do

From these facts on record, it is at once apparent that

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

account with Solidbank, designated as Savings

slip. A certain Noel Tamayo received the P300,000.

under lock and key.[When another person presents the

after applying the provision of the Civil Code on quasidelict, to wit:

counterclaim in the amount of P30,000.00 as

ITS FINDING THAT PETITIONER BANKS NEGLIGENCE

effect almost nine years after the unauthorized

representative of L.C. Diaz, Solidbank and Teller No. 6

which the result would not have occurred. Proximate

on the following statements in the Booking and

exercised the proper diligence in the selection and

[G.R. No. 127469. January 15, 2004]

creditors and debtors of each other. Marcos expected

same order, the trial court allowed Marcos to present

P764,897.67 as claimed by the BANK. The trial court

P4,867.67 ] for a loan worth P595,875 (less 30%

of his physical condition.

appellate court held that the motion to cross-examine

The Court of Appeals sustained the factual findings of

plaintiff and allow the defendant to challenge the

the rule on notice of motions to this case. The BANK

before the trial court could rule that there is a

confident that the bank will deliver it as and to

note. The Best Evidence Rule provides that the court

THOUSAND EIGHT HUNDRED NINETY SEVEN AND

due on 6 March 1987.

interest at 17% per annum from 30 August 1989 until

[G.R. No. 129015. August 13, 2004]