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Creditor-Debtor Relationship
G.R. No. L-43682 March 31, 1938
In Re Liquidation of Mercantile Bank of China.
TAN TIONG TICK, claimant-appellant, vs.
AMERICAN APOTHECARIES CO., ET AL., claimants-
appellees.
IMPERIAL, J.:
In the proceedings for the liquidation of the Mercantile Bank of
China, the appellant presented a written claim alleging: that
when this bank ceased to operate on September 19, 1931, his
current account in said bank showed a balance of P9,657.50 in
his favor; that on the same date his savings account in the said
bank also showed a balance in his favor of P20,000 plus interest
then due amounting to P194.78; that on the other hand, he owed
the bank in the amount of P13,262.58, the amount of the trust
receipts which he signed because of his withdrawal from the
bank of certain merchandise consigned to him without paying
the drafts drawn upon him by the remittors thereof; that the
credits thus described should be set off against each other
according to law, and on such set off being made it appeared
that he was still the creditor of the bank in the sum of
P16,589.70. And he asked that the court order the Bank
Commissioner to pay him the aforesaid balance and that the
same be declared as preferred credit. The claim was referred to
the commissioner appointed by the court, who at the same time
acted as referee, and this officer recommended that the balance
claimed be paid without interest and as an ordinary credit. The
court approved the recommendation and entered judgment in
the accordance therewith. The claimant took an appeal.
In his report the commissioner classified the claims presented
under the following six groups: "(First) Current accounts,
savings and fixed deposits. (Second) Checks or drafts sold by
the Mercantile Bank of China and not paid by the
correspondents or banks against which they were drawn. (Third)
Checks or drafts issued by the Mercantile Bank of China in
payment or reimbursement of drafts or goods sent to it for
collection by banks and foreign commercial houses against
merchants or commercial entities of Manila. (Fourth) Drafts for
collection received by the Mercantile Bank of China to be
collected from merchants and commercial entities in Manila and
which were pending collection on the date of the suspension of
payments. (Fifth) Claims of depositors who are at the same time
debtor of the Mercantile Bank of China.(Sixth Various claims."
And referring to the claims of the appellant, he states:
Mr. Tan Tiong Tick claims from the Mercantile Bank of China the
amount of P 27,597.80, the total amount of the following sums
which he has in his favor in said bank including the
corresponding interest:
Balance on the current account . . . . . . . . . . . P7,390.11
Balance of savings account No. 2266 . . . . . 20,000.00
Total . . . . . . . . . . . . . . . . . . 27,390.11
Adding to this total the interest also claimed by Mr. Tan Tiong
Tick, that is, P194.78 on the saving account and P12.91 on the
current account, the amount claimed makes a total of
P27,597.80.
Notwithstanding the fact that the Bank Commissioner found the
claim in accordance with the books of the Mercantile Bank of
China, he declined to issue the corresponding certificate of proof
of claim because the said claimant has pending in the said bank
obligations for accepting draft amounting to a total of $6 631.29.
At the hearing of this claim, the claimant admitted such pending
obligations, alleging at the same time that to guarantee the
payment of drafts accepted by him, he pledged his bank book
No. 2266, which also answered for the payment of any credit
which the said bank may extend to him.
In Exhibit A presented by the claimant as evidence, consisting
of a letter dated November 4, 1931 addressed by Mr. H. J.
Belden to the then Bank Commissioner, Mr. Leo. H. Martin it
appears that the said savings account was constituted for the
sole purpose of securing the payment of drafts against the
claimants, the bill of lading of where delivered to him upon trust-
receipts and that according to the records of that bank Mr. Tan
Tiong Tick did not obtain any other accomodation from the bank
except the trust-receipts.
RECOMMENDATION
Having established the existence of such deposits in the name
of the bank alleged by the Bank Commissioner, for the securities
of which he constituted the savings deposit in the amount of
P20,000, it is recommended that from this amount there be
deducted the amount of the obligation of P13,778.90 which the
claimant acknowledge in favor of the Mercantile Bank of China,
and that the difference, plus the other current account deposit of
P7,390.11, be considered as ordinary credits subject to the
equal division of the funds of the said bank.
As to the interest on said deposits also claimed by Mr. Tan Tiong
Tick, the rejection thereof is recommended in view of the fact
that the Bank Commissioner has not credited any interest to the
current and savings account of the Merchantile Bank of China,
and would be unfair that interest, not credited to the others, be
allowed to this claimant.
It will be noted that in the report of the commissioner the credit
of the claimant for the balance of his deposit on current account
has been reduced to P7,390.11, instead of P9,657.50 alleged in
his claim, the total balance recommended in favor of the
appellant being P13,611.21, without including interest, instead
of P16,589.70. In his brief the appellant admits the figures
appearing in the report, with the exception of the interest on
which we shall presently dwell.
1. Resolving the claims under the first group the
recommendation of this official to the effect that they declared
ordinary credits only, and approved them as preferred credits.
However, in considering the other claims among them that of

that of the appellant, classified under the fifth group, the court
approved the recommendation of the commissioner that they be
declared ordinary credits; in otherwords, the court considered
and declared the claim of the appellant as an ordinary credit just
because the latter is at the same time a debtor of the bank,
notwithstanding the fact that his claim is of the same kind as
those classified under the first group, inasmuch as they are also
current account and savings deposits. To this part of the
decision is addressed the appellant's first assignment of error.
In truth if the current account, savings, and fixed deposits are
preferred credits for the reason states by the court in its decision,
we see no reason why the preference should disappear when
the depositors are at the same time debtors of the bank less than
their credits. If the ground to declare them preferred credits is
sound, the balances resulting after the set should likewise be
preferred, unless there be a law providing that a set off, when it
take place, produces such an effect, a law which does not exist
as far as we know.
But we are of the opinion, for the reason presently to be stated,
that current account and savings deposits are not preferred
credits in the cases, like the present, involving the insolvency
and liquidation of a bank, where there are various creditors and
it becomes necessary to ascertain the preference of various
credits.
The court held that these deposits should be governed by the
Civil Code, and applying articles 1758 and 1868 of the said
Code, ruled that the so-called irregular deposits being still in
vogue, as Manresa, the commentator, maintain and as held by
this court in the case Rogers vs. Smith, Bell & Co. (10 Phil.,
319), the former are preferred credits because partaking of the
nature of the irregular deposits.
In our opinion, these deposits are essentially merchantile
contracts and should, therefore, be governed by the provisions
of the Code of Commerce, pursuant to its article 2 reading:
ART. 2 Commercial transactions, be they performed by
merchants or not, whether they are specified in this Code or not,
shall be governed by the provisions contained in the same; in
the absence of such provisions, by the commercial customs
generally observed in each place; and in the absence of such
provisions, by the commercial customs generally observed in
each place; and in the absence of both, by those of the common
law.
Commercial transactions shall be considered those enumerated
in this Code and any others of a similar character.
There is cited in support of the application of the Civil Code to
these deposits article 310 of the Code of Commerce providing:
ART. 310. Notwithstanding the provisions of the foregoing
articles, deposits made banks, with general warehouse, with
loan or any other associations, shall be governed in the place by
the by-laws of the same in the second by the provisions of this
Code, and finally by the rules of common law, which are
applicable to all deposits.
But apparently there was a failure to consider that, according to
the order established by the article, the Civil Code or the
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common law is mentioned after Code of Commerce, which
means that the provisions of the latter Code should first be
applied before resorting to those of the Civil Code which are
supplementary in character.
The Code of Commerce contains express provisions regulating
deposits of the nature under consideration, and they are articles
303 to 310. The first and the second to the last of the said articles
are as follows:
ART. 303. In order that a deposit may be considered
commercial, it is necessary —
1. That the depositary, at least, be a merchant.
2. That the things deposited be commercial objects.
3. That the deposit constitute in itself a commercial transaction,
or be made by reason or as a consequently of commercial
transaction.
ART. 309. Whatever, with the consent of the depositor, the
depositary disposes of the articles on deposit either for himself
or for his business, or for transactions intrusted to him by the
former, the rights and obligations of the depositary and of the
depositor shall cease, and the rules and provisions applicable to
the commercial loans, commissions, or contract which took the
place of the deposit shall be observed.
In accordance with article 309, the so-called current account and
savings deposits have lost the character of deposits properly so-
called, and are converted into simple commercial loans,
because the bank disposed of the funds deposited by the
claimant for its ordinary transactions and for the banking
business in which it was engaged. That the bank had the
authority of the claimant to make use of the money deposited on
current and savings account is deducible from the fact that the
bank has been paying interest on both deposits, and the
claimant himself asks that he be allowed interest up to the time
when the bank ceased its operations. Moreover, according to
section 125 of the Corporation Law and 9 of Act No. 3154, said
bank is authorized to make use of the current account, savings,
and fixed deposits provided it retains in its treasury a certain
percentage of the amounts of said deposits. Said sections read:
SEC. 125. Every such commercial banking corporation shall at
all times have on hand in lawful money of the Philippines Islands
or of the United States, an amount equal to at least eighteen per
centum of the aggregate amount of its deposits in current which
are payable on demand and of its fixed deposits coming due
within thirty days. Such commercial banking corporations shall
also at all times maintain equal in amount to at least five per
centum of its total savings deposits. The said reserve may be
maintained in the form of lawful money of the Philippines Islands
of the United States, or in bonds issued or guaranteed by the
Government of the Philippines Islands or to the United States. .
..
The percentage of reserve to deposits in the case of the
Philippine National Bank and Bank of the Philippine Islands is
hereby fixed at eighteen per centum of demand deposits and
fixed deposits payable within thirty days and five per centum of
savings deposits, in the same manner as is prescribed in this

section for commercial banking corporations in general, which
reserve against savings deposit may consists of Philippine
Government of United States Government Bonds.
SEC. 9. Every bank organized under this Act shall at all times
have on hand, in lawful money of the Philippine Islands of the
United States, an amount equal to at least twenty per centum of
the aggregate amount of its deposits. The Treasury certificates
authorized by Act Numbered Three thousand and fifty-eight, and
the term lawful money of the United States shall include gold
and silver certificates of the United States and bank notes issued
by the Federal Reserve Bank.
Therefore, the bank, without the necessity of the claimant
consent, was by law authorized to dispose of the deposits,
subject to the limitations indicated.
We, therefore, conclude that the law applicable to the appellant's
claim is the Code of Commerce and that his current and savings
account have converted into simple commercial loans.
2. The next point to decide is the applicable law, if any, to
determine the preference of the appellant's credits, considering
that there happens to be other creditors. Section V of Title I Book
IV of the Code of Commerce contains provisions relative to the
rights of creditors in case of bankruptcy and their respective
gradations, but these provisions have been repealed by section
524 of the Code of Civil Procedure reading as follows:
SEC. 524. No new proceedings to be instituted. — No new
bankrupt proceedings shall be instituted until a new bankruptcy
law shall come into force in the Islands. All existing laws and
other relating to bankruptcy and proceedings therein are hereby
repealed: Provided, That nothing in this section shall be deemed
in any manner to affect pending litigation in bankruptcy
proceedings.
The Philippine Legislature subsequently enacted Act No. 1956,
also known as the Insolvency Law, which took effect on May 20,
1909, containing provisions regarding preference of credits; but
its section 52 provides that all the provisions of the law shall not
apply to corporations engaged principally in the banking
business, and among them should be understood included the
Merchantile Bank of China. Said section provide:
SEC. 48. Merchantile, effect, and any other kind of property
found among the property of the insolvent, the ownership of
which has not been conveyed to him by a legal and irrevocable
title, shall be considered to be the property of other persons shall
be placed at the disposal of its lawful owners on order of the
court made at the hearing in section forty-three or at any ordinary
hearing, if the assignee or any creditor whose right in the estate
of the insolvent has been established shall petition in writing for
such hearing and the court in its discretion shall so order, the
creditors, however, retaining such rights in said property as
belong to the insolvent, and subrogating him whenever they
shall have with all obligations concerning said property.
The following shall be included in this section:
1. Drowy property inestimado and such
property estimado which may remain in the possession of the
husband where the receipt thereof is matter of record in a public
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instrument registered under the provisions of section twenty-one
and twenty-seven of the Code of Commerce in force.
2. Paraphernal property which the wife may have acquired by
inheritance, legacy, or donation whether remaining in the form
in which it was received or subrogated or invested in other
property, provided that such investment or subrogation has been
registered in the registro mercantile in accordance with the
provisions of the sections of the Code of Commerce mentioned
in the next preceding paragraph.
3. Property and effects deposited with the bankrupt, or
administered, least, rented, or held in usufruct by him.
4. Merchandise in the possession of the bankrupt, on
commission, for purchase, sale, forwarding, or delivery.
5. Bills of exchange or promissory notes without indorsement or
other expression transferring ownership remitted to the insolvent
for collection and all other acquired by him for the account of
another person, drawn or indorsed to the remitter direct.
6. Money remitted to the insolvent, otherwise than on current
account, and which is in his possession for delivery to a definite
person in the name and for the account of the remitter or for the
settlement of claims which are to be met at the insolvent
domicile.
7. Amounts due the insolvent for sales of merchandise on
commission, and bills of exchange and promissory notes
delivered therefrom in his possession, even when the same are
not made payable to the owner of the merchandise sold,
provided it is proven that the obligation to the insolvent is derived
therefrom and that said bills of exchange and promissory notes
were in the possession of the insolvent for account of the owner
of the merchandise to be cashed and remitted, in due time, to
the said owners; all of which shall be a legal presumption when
the amount involved in any such shall not been credited on the
book of both the owner of the merchantile and of the insolvent.
8. Merchandise bought on credit by the insolvent so long as the
actual thereof has not been made to him at his store at any other
place stipulated for such delivery, and merchandise the bills of
lading or shipping receipts of which have been sent him after the
same has been loaded by order of the purchaser and for his
account and risk.
In all cases arising under this paragraph assignees may retain
the merchandise so purchased or claim it for the creditors by
paying the price thereof to the vendor.
9. Goods or chattels wrongfully taken, converted, or withheld by
the insolvent if still existing in his possession or the amount of
the value thereof.
SEC. 49. All creditors, except those whose debts are duly
proved and allowed shall be entitled to share in the property and
estate pro rata, after the property belonging to other persons
referred to in the last preceding section has been deducted
therefrom, without priority or preference whatever: Provided,
That any debt proved by any person liable as bail, surety,
guarantor, or otherwise, for the debtor, shall not be paid to the
person so providing the same until satisfactory evidence shall
be produced of the payment of such debt by such person so

liable, and the share to which such debt would be entitled may
be paid into court, or otherwise held, for the benefit of the party
entitled thereto, as the court may direct.
SEC. 50. The following are preferred claims which shall be paid
in the order named:
(a) Necessary funeral expenses of the debtor, or of his wife, or
children who are under their parental authority and have no
property of their own, when approved by the court;
(b) Debts due for personal services rendered the insolvent by
employees, laborers, or domestic servants immediately
preceding the commencement of proceedings in insolvency;
(c) Compensation due the laborers or their dependents under
the provisions of Act Numbered Thirty-four hundred and twenty-
eight, known as the Workmen's Compensation Act, as amended
by Act Numbered Thirty-eight hundred and twelve, and under
the provisions of Act Numbered Eighteen hundred and seventy-
four known as the Employers' Liability Act, and of the other laws
providing for payment of indemnity for damages in cases of labor
accidents;
(d) Legal expenses, and expenses incurred in the administration
of the insolvent estate for the common interest of the creditors,
when properly authorized and approved by the court;
(e) Debts, taxes and assessments due the Insular Government;
(f ) Debts, taxes and assessments due to any province of
provinces of the Philippines Islands;
(g) Debts, taxes and assessment due to any municipality or
municipalities of the Philippine Islands;
All other creditors shall be paid pro rata. (As amended by Act
No. 3962.)
ART. 52 . . . The provisions of this Act shall not apply to
corporations engaged principally in the banking business, or to
any other corporation as to which there is any special provisions
of law for its liquidation in case of insolvency.
It appears that even after the enactment of the Insolvency Law
there was no law in this jurisdiction governing the order or
preference of credits in case of insolvency and liquidation of a
bank. But the Philippine Legislature subsequently enacted Act
No. 3519, amended various sections of the Revised
Administrative Code, which took effect on February 20, 1929,
and section 1641 of this latter Code. as amended by said Act
provides:
SEC. 1641. Distribution of assets. — In the case of the
liquidation of a bank or banking institution, after payment of the
costs of the proceeding, including reasonable expenses,
commissions and fees of the Bank Commissioner, to be allowed
by the court, the Bank Commissioner shall pay the debts of the
institution, under of the court in the order of their legal priority.
From this section 1641 we deduce that the intention of the
Philippine Legislature, in providing that the Bank Commissioner
shall pay the debts of the company by virtue of an order of the
court in the order of their priority, was to enforce the provisions
of section 48, 49 and 50 of the Insolvency Law in the sense that
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they are made applicable to cases of insolvency or bankruptcy
and liquidation of banks. No other deduction can be made from
the phrase "in the order of their legal priority" employed by the
law, for there being no law establishing any priority in the order
of payment of credits, the legislature could not reasonably refer
to any legislation upon the subject, unless the interpretation
above stated is accepted.
Examining now the claims of the appellant, it appears that none
of them falls under any of the cases specified by section 48, 49
and 50 of the Insolvency Law; wherefore, we conclude that the
appellant's claims, consisting of his current and savings
account, are not preferred credits.
3. The commissioner set off the claims of the appellant against
what the bank had against him. The court approved this set off
over the objection of the appellant. The appellees contend that
the set off does not lie in this case because otherwise it would
prejudice them and the other creditors in the liquidation. We hold
that the court's ruling is not error. "It may be stated as a general
rule that when a depositor is indebted to a bank, and the debts
are mutual — that is, between the same parties and in the same
right — the bank may apply the deposit, or such portion thereof
as may be necessary, to the payment of the debt due it by the
depositor, provided there is no express agreement to the
contrary and the deposit is not specially applicable to some other
particular purposes." (7 Am. Jur., par. 629, p.455; United States
vs. Butterworth-Judson Corp., 267 U.S., 387; National Bank vs.
Morgan, 207 Ala.., 65; Bank of Guntersville vs. Crayter, 199 Ala.,
699; Tatum vs. Commercial Bank & T. Co., 193 Ala., 120; Desha
Bank & T. Co. vs. Quilling, 118 Ark., 114; Holloway vs. First Nat.
Bank, 45 Idaho, 746; Wyman vs. Ft. Dearborn Nat Bank, 181 Ill.,
279; Niblack vs. Park Nat. Bank, 169 Ill., 517; First Nat Bank vs.
Stapf., 165 Ind., 162; Bedford Bank vs. Acoam, 125 Ind., 584.)
The situation referred to by the appellees is inevitable because
section 1639 of the Revised Administrative Code, as amended
by Act No. 3519, provides that the Bank Commissioner shall
reduce the assets of the bank into cash and this cannot be done
without first liquidating individually the accounts of the debtors
of said bank, and in making this individual liquidation the debtors
are entitled to set off, by way of compensation, their claims
against the bank.
4. The court held that the appellant is not entitled to charge
interest on the amounts of his claims, and this is the object of
the second assignment of error. Upon this point a distinction
must be made between the interest which the deposits should
ear from their existence until the bank ceased to operate, and
that which they may earn from the time the bank's operations
were stopped until the date of payment of the deposits. As to the
first class, we hold that it should be paid because such interest
has been earned in the ordinary course of the bank's business
and before the latter has been declared in a state or liquidation.
Moreover, the bank being authorized by law to make us of the
deposits, with the limitation stated, to invest the same in its
business and other operations, it may be presumed that it bound
itself to pay interest to the depositors as in fact it paid interest
prior to the date of the said claims. As to the interest which may
be charged from the date the bank ceased to do business
because it was declared in a state of liquidation, we hold that the
said interest should not be paid. Under articles 1101 and 1108
of the Civil Code, interest is allowed by way of indemnity for

damages suffered, in the cases wherein the obligation consists
in the payment of money. In view of this, we hold that in the
absence of any express law or any applicable provision of the
Code of Commerce, it is not proper to pay this last kind of
interest to the appellant upon his deposits in the bank, for this
would be anomalous and unjustified in a liquidation or
insolvency of a bank. This rule should be strictly observed in the
instant case because it is understood that the assets should be
prorated among all the creditors as they are insufficient to pay
all the obligations of the bank.
5. The last assignment of error has to do with the denial by the
court of the claimant's motion for new trial. No new arguments
have been made in its support and it appears that the assigned
error was inserted as a mere corollary of the preceding ones.
In view of all the foregoing considerations, we affirm the part of
the appealed decision for the reasons stated herein, and it is
ordered that the net claim of the appellant, amounting to
P13,611.21, is an ordinary and not a preferred credit, and that
he is entitled to charge interest on said amount up to September
19, 1931, without special pronouncement up to September 19,
1931, without special pronouncement as to the costs. So
ordered.
G.R. No. 32576 November 6, 1930
FULTRON IRON WORKS CO., plaintiff-appellee, vs.
CHINA BANKING CORPORATION, ET AL., defendants.
CHINA BANKING CORPORATION, appellant.
STREET, J.:
This action was instituted on June 23, 1926, in the Court of First
Instance of the City of Manila by the Fulton Iron Works Co., a
Delaware corporation having its principal place of business in St.
Louis, Missouri, and duly authorized under the laws of the
Philippine Islands to engage in business in this country. The
defendants named in the complaint are the China Banking
Corporation, a domestic corporation having its principal place of
business in the City of Manila, and one S. C. Schwarzkopf. In
the petitory part of the complaint judgment is sought against the
two defendants jointly and severally for the sum of P131,197.10,
with interest. As a ground of action against the two defendants
it is asserted in the complaint that the amount claimed by the
plaintiff is part of a larger sum of money (P176, 197.10)
belonging to the plaintiff which had been deposited in the
defendant bank by Schwarzkopf during the year 1922, and
which had been misappropriated and embezzled by him, with
the full knowledge and consent of the defendant bank. The idea
underlying the action, as against the bank, is that it has been
guilty of what may perhaps be styled a civil complicity in the
misappropriation of the money for which recovery is sought.
Upon hearing the cause, upon the separate answers of the two
defendants, the trial court absolved Schwarckopf from the
complaint, for the reason that in two prior criminal proceedings
he had been convicted of the offense of estafa, based upon his
misappropriated of the same money, and in said proceedings
the obligation to indemnify the plaintiff had been imposed upon
him in the amount of P146,197.40. His Honor, however, gave
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judgment in favor of the plaintiff, the Fulton Iron Works Co., to
recover of the defendant bank the sum of P127,200.36, with
lawful interest from June 23, 1926, the date of the filing of the
complaint, and with costs. From this judgment the defendant
bank appealed.
It appears that in the month of March, 1921, the plaintiff the
Fulton Iron Works Co., of St. Louis, Missouri, sold to the
Binalbagan Estate, Inc., a Philippine corporation, machinery for
a sugar mill, for which the purchaser executed three notes
amounting to about $80,000. The first of these notes became
due October 1, 1921, and the other two on April 1, 1922. Neither
of the three notes was paid at maturity, owing to the fact that,
before the notes fell due, the Binalbagan Estate, Inc. suspended
payments and passed into the hands of the Philippine National
Bank, its principal creditor, for administration.
The consequently delay in the payments of the notes caused the
plaintiff to employ a firm of lawyers in Manila, of which S. C.
Schwarzkopf was then a member, to represent the plaintiff in an
effort to obtain security for the indebtedness, with a view to its
later collection. At the time this retainer was effect, Schwarzkopf
was in St. Louis, on a visit to the United States, and in order that
the plaintiff might comply with the laws of the Philippine Islands
in the matter of obtaining a license to transact business here,
the plaintiff executed a formal power of attorney authorizing the
members of Schwarzkopf's firm jointly and severally to accept
service in actions and to do other things necessary to enable the
plaintiff to secure the contemplated license. It is noteworthy that
the authority of Schwarzkopf's firm to represent the plaintiff in
the collection of the claims above mentioned did not proceed
from this power, but had its origin in the employment of said firm
as attorneys in the matter.
Schwarzkopf returned to Manila in the early part of November,
1921, and the law firm to which he pertained was dissolved on
November 15, 1921. Under the dissolution agreement the matter
of handling this collection devolved upon Schwarzkopf, and he
alone was thereafter concerned in the matter.
On December 13, 1921, Schwarzkopf opened a personal
account, as a depositor, in the China Banking Corporation by
making a deposit, on that date, of the sum of P578. This account
was at all times modest in sized, and on January 1, 1922, the
credit balance therein was P543.35. This account has little or no
significance in the case, and it became defunct by September 1,
1922. It may be observed, however, that a few of the deposits in
this account appear to have been taken from account No. 2 to
which reference will presently be made.
In the early part of the year 1922, the financial condition of the
Binalbagan Estate, Inc. began to improve; and on January 13,
1922, D. M. Semple, manager of the Philippine Sugar Centrals
Agency, a department of the Philippine National Bank, drew
check No. 574 for the sum of P10,000, payable to the order of
Sydney C. Schwarzkopf, and delivered the same to him in part
payment of the indebtedness owing to the plaintiff from the
Binalbagan Estate, Inc. Upon receiving this check Schwarzkopf
signed a receipt as "attorney-in-fact of Fulton Iron Works Co."
The character of attorney-in-fact, thus assumed by
Schwarzkopf, was of course a mere fiction, as the power of

attorney which he really possessed was limited to other matters.
The point, however, is really of no moment.
The check for P10,000 above mentioned was duly indorsed by
Schwarzkopf and deposited by him in a new account with the
defendant bank, known as "No. 2 account." This money was
thereafter withdrawn from the bank from time to time by
Schwarzkopf, upon his personal checks, and used for his
individual purposes. In the appealed judgment the defendant is
held liable for this money, a mere oversight resulting apparently,
from a confusion of this matter with the more important issues
involved in other parts of the case. There is no proof that the
defendant bank had any knowledge, or was chargeable with
notice, that the P10,000 thus deposited and drawn out belonged
to any person other than Schwarzkopf himself; and, as
depositor, Schwarzkopf of course had absolute control of the
account. A depositor is presumed to be the owner of funds
standing in his name in a bank deposit; and where a bank is not
chargeable with notice that the money deposited in such
account is the property of some other person than the depositor,
the bank is justified in paying out the money to the depositor or
upon his order, and cannot be liable to any other person as the
true owner. It is hardly necessary to cite authority upon a
proposition so manifestly in accord with the usage and the
common sense of the commercial community. The proposition
stated is implicit in all the cases concerned with the question of
the liability of a bank to its depositors and other persons claiming
an interest in the deposits.
Proceeding to the next collection effected by Schwarzkopf upon
account of the plaintiff's claim against the Binalbagan Estate,
Inc., we find that on April 11, 1922, Schwarkopf received, from
the manager of the Philippine Sugar Centrals Agency, a check
for the sum of P61,237.50. This check was made payable on its
face to "S. C. Schwarkopf Attorney-in-Fact, Fulton Iron Works
Co., or order." After indorsing this check in the form in which it
was drawn, Schwarzkopf opened a new account with the
defendant bank, entitled "S. C. Schwarzkopf, Attorney- in-Fact,
Fulton Iron Works Co.," and deposited said check therein. This
account remained undisputed on the books of the bank for some
two months, during which period it had an accretion of about
P130.
Meanwhile, the No. 2 account which had been established back
in January, became depleted, but the manager of the bank, in
view, no doubt, of the funds to Schwarzkopf's credit in the third
account conceded to him a credit in No. 2 account of P25,000.
By June 15, 1922, said account became overdrawn to the
extend of P22, 144.39, and it was obvious that the limit of the
conceded credit would soon be reached. The manager of the
bank then intervened and requested Schwarzkopf to settle the
overdraft. To accomplish this Schwarkopf merely transferred, by
check, the money to his credit in his special account as plaintiff's
attorney-in-fact to the No. 2 account. The amount thus
transferred was P61,360.81, and the effect of the transfer was
to absorb the overdraft and place a credit balance of nearly
P40,000 in No. 2 account. Schwarzkopf then purchased a draft
on New York in the amount of $15,000, and after some delay
transmitted the same by mail to the plaintiff. This draft cost
Schwarzkopf the sum of P30,375.02, and it was the only
remittance ever made by him to his client.
6
The principal question that arises upon the facts above stated
is, whether the defendant bank is liable to the plaintiff for the sum
of P22, 144.39 which was thus applied to the payment of
Schwarzkopf's personal indebtedness resulting from his
overdraft in the No. 2 account. Upon this point the first thing to
be noted is that the very form in which the third account was
carried on the books of the defendant bank was sufficient to
charge the bank with notice of the fact that the money deposited
in said account belonged to the Fulton Iron Works Co. and not
to Schwarzkopf. It is commonly said, and truly said in a legal
sense, that money has no earmarks. But bank accounts and
commercial paper can have earmarks, and these earmarks
consist of the word or words which infallibly convey to the mind
notice that the money or credit represented by the account with
which they are associated or the instrument upon which they are
written rightfully belongs to some other person than the one
having control thereof. A bank cannot permit, much less require,
a depositor who is in control of a trust fund to apply any part of
the same to his individual indebtedness to the bank. The
decisions to this effect are uniformly accordant and it is believed
no creditable authority to the contrary can be produced from any
source. The expression "trust fund," in this connection, is not a
technical term, and is applied in a loose sense to indicate the
situation where a bank account or negotiable securities of any
sort are under the control of a person other than the true owner.
The following decisions are instructive as illustrating different
phases of the rule above stated, the selection having been made
with a view to the fact that the cases cited are for the most part
accessible in one or more series of annotated reports; Central
Nat. Bank of Baltimore vs. Conn. Mut. Life Ins. Co., 104 U. S.,
54; 26 Law. ed., 693; Union Stock Yards Nat. Bank vs. Moore,
25 C. C. A., 150; 79 Fed., 705 Sayre vs. Weil, 94 Ala., 466; 15
L. R. A., 544; Am. Trust & Banking Co. vs. Boone, 102 Ga., 202;
40 L. R. A., 250; 66 Am. St. Rep., 167; First Denton Nat. Bank
vs. Kenney, 116 Md., 24; Ann. Cas. 19193B, 1337; Allen vs.
Puritan Trust Co., 211 Mass., 409; L. R. A. 1915C, 518 (and
note); Emerado Farmers' El. Co. vs. Farmers' Bank, 20 N. D.,
270; 29 L. R. A. (N. S.), 567; Baird vs. Lorenz (N. D.), 61 L. R.
A., 1385, 1389 (note); Walters Nat. Bank vs. Bantock, 41 Okla.,,
153; L. R. A. 1915C, 531; Interstate Nat. Bank vs. Claxton 97
Tex., 569; 65 L. R. A., 820; 104 Am. St. Rep., 885; Boyle vs.
Northwestern Nat. Bank of Superior, 125 Wis., 498; 1 L. R. A.
(N. S.) 1110 Am. St. Rep., 851; United States Fidelity & Gy. Co.
vs. Adoue, 104 Tex., 379; 37 L. R. A. (N. S.), 409; Ann. Cas.
1914B, 667; Underwood Ltd. vs. Bank of Liverpool (1924), 1 K.
B., 755.
Upon the facts before us it is evident that when credit to the
extent of P25,000 was conceded to Schwarzkopf in his personal
account No. 2, the eye of the banker was fixed upon the large
amount then upon deposit to Schwarkopf's credit in his account
as attorney-in-fact; but of course, if a bank cannot apply the
money in such an account, or even permit it to be applied, to the
personal indebtedness of the fiduciary depositor, it is not
permissible for the bank to extend personal credit to such
depositor upon the faith of the trust account. From any point that
the matter be viewed, the liability of the bank is clear to the
extent of P22144.39 this being the amount derived from
Schwarkopf's account as attorney-in-fact which was absorbed
by his overdraft in account No. 2 when the transfer of the

balance in the former account to the latter account was effected,
in the manner already stated.
We next proceed to consider the disposition made of the
proceeds of the third check collected by Schwarzkopf upon
account of plaintiff's claim against the Binalbagan Estate, Inc.,
from the Philippine National Bank. The amount of this collection
was P104, 959.60, and it was paid, on October 11, 1922, by a
cashier's check on the Philippine National Bank, payable "to the
order of S. C. Schwarzkopf, attorney-in-fact, Fulton Iron Works
Co." Upon receiving this check, Schwarzkopf indorsed it in
proper form, by writing thereon the words "S. C. Schwarzkopf,
attorney-in-fact, Fulton Iron Works Co.," to which he added
another indorsement consisting of his own name alone, and
deposited the check in his personal account No. 2 with the
defendant bank. The check thus delivered to the bank was
collected by it from the Philippine National Bank in ordinary
course. Thereafter, in the course of the next few months,
Schwarzkopf withdrew, upon checks written by himself, the
entire amount of the money to his credit in account No. 2, thus
misappropriating the money in said account to his own use.
It will be noted that the money thus squandered comprised not
only the proceeds of the check last mentioned but the residue,
consisting of a few thousand pesos, which had been left in No.
2 account after the overdraft had been paid and Schwarzkopf
had remitted the draft of $15,000 to his principal in the United
States. We consider that, from a legal point of view, the situation
with respect to this money is precisely the same as that
presented with respect to the money which came into the
account later by deposit of the check for P104,959.60 above
mentioned, because as to both funds, liability is sought to be
fixed upon the bank by reason of its knowledge of the source
from which said funds were derived; and in this connection it
should be noted that there is no proof showing that the
defendant bank had any knowledge of the misappropriation of
this money by Schwarzkopf other than such as might have been
derived from an inspection of its own books and the checks by
which the money was paid in and paid out.
The feature of the case now under consideration brings us, it
must be admitted, into debatable territory, but a discriminating
analysis of the legal principles involved leads to the conclusion
that the defendant cannot be held liable for money paid out by it
in ordinary course on checks, in regular form, drawn by
Schwarzkopf on the No. 2 account.
The specialized function of bank is to serve as a place of deposit
for money, to keep it safely while on deposit, and to pay it out,
upon demand to the person who effected the deposit or upon his
order. A bank is not a guardian of trust funds deposited with it in
the sense that it must see to their proper application nor is it its
business to pry into the uses to which moneys on deposit in its
vault are being put; and so long as it serves its function and pays
the money out in good faith to the person who deposited it, or
upon his order, without knowledge or notice that it is in fact
assisting in the misappropriation of the fund, the bank will be
protected. As is well said by the author of the monographic
article on Banks and Banking in Ruling Case Law, It would
seriously interfere with commercial transactions to charge banks
with the duty of supervising the administration of trust funds,
when, in due course of business, they receive checks and drafts
7
in proper form drawn upon such funds in their custody. The law
imposes no such duty upon them (3 R. C. L.,
549; see also cases cited in 7 C. J., 644, 645, note 25).
There are, it is true, decisions from a few courts, deservedly held
in high esteem, to the effect that a bank makes itself an effective
accomplice in the conversion of a trust fund when, with notice of
the character of such fund, it permits the person in control
thereof to deposit it in his personal account. But the decided
weight of judicial authority is to the contrary; and it is generally
held that the mere act of a bank in entering a trust fund to the
personal account of the fiduciary, knowing it to be a trust fund,
will not make the bank liable in case of the subsequent
misappropriation of the money by the fiduciary. (United States
Fidelity & Gy. Co. vs. First Nat. Bank, 18 Cal. App., 437:
Goodwin vs. Am. Nat. Bank, 48 Conn., 550; Batchelder vs. Cen.
Nat. Bank of Boston, 188 Mass., 25; Allen vs. Puritan Trust Co.,
211 Mass., 409; L. R. A. 1915C, 518; Gate City Bldg. & Loan
Assoc. vs. National Bank of Commerce, 126 Mo., 82; 27 L. R.
A., 401; 47 Am. St. Rep., 630; Bischoff vs. Yorkville Bank, 218
N. Y., 106; Havana C. R. Co. vs. Knickerbocker Trust Co., 198
N. Y., 422; L. R. A. 1915B, 720). The bank has the right to
presume that the fiduciary will apply a trust fund to its proper
purpose, and at any rate the bank is not required to send a
courier with the money to see that it reaches a proper
destination.
In the case before us an intimate study of the checks which
came into the defendant bank against account No. 2 over a
series of months, would have led a discerning person to the
conclusion that the plaintiff's money was being squandered, but
such an inference could not legitimately have been drawn from
the first few checks which were drawn upon the fund, and it
would be hard to say just where the bank, supposing its
suspicions to have been aroused, should have intervened. No
such a duty is imposed. Of course, when the bank became a
party to the application of part of the plaintiff's money to the
satisfaction of the overdraft in No. 2 account, it was directly
chargeable with knowledge of the misappropriation of the fund
to the extent of the overdraft and that fact, as we have already
said, made the bank liable. But this rule cannot be extented to
subsequent acts of malversation and misappropriation
committed by the fiduciary against the real owner of the fund.
Furthermore, it is undeniable that a bank may incur liability by
assisting the fiduciary to accomplish a misappropriation,
although the bank does not actually profit by the
misappropriation. A decision illustrating this aspect of the law is
found in Washborn vs. Linscott State Bank (87 Kan., 698),
where a bank, to help the treasurer of a lodge to conceal his
defalcations, permitted him to overdraw, and when his account
were to be audited, issued to him a deposit certificate for the
shortage, payable to the lodge. After the audit was made, the
certificate was returned and cancelled, and the shortage
reappeared. The court held that a loan had been made to the
treasurer personally, and that the bank became liable to the
lodge upon cancelling the deposit certificate.lawphil.net
Our discussion of this phase of the case should not be
concluded without reference to Bischoff vs. Yorville Bank (218
N. Y., 106), which undoubtedly affords some support to the
contention of the appellee that the defendant bank is liable not

only for the proceeds of the last check collected by Schwarzkopf,
but for all of the money which was transferred to account No. 2
from the account of Schawarzkopf as attorney-in-fact. This
decision comes, it must be admitted, from a court of high repute.
But we are unable to accept the court's conclusions, as
applicable to the facts before us. In the case mentioned it
appeared that an executor, named Poggenburg, having money
on deposit in a certain bank to his credit as executor, gradually
withdrew about $13,000 from said deposit by checks drawn by
him, over a long period of time, in the character of executor.
These checks were indorsed by Poggenburg in his own name
simply and deposited in the defendant Yorkville Bank to his
personal credit. At the inception of this series of transactions
Poggenburg was indebted by note to the defendant and
payments were made on this note and other notes thereafter
executed in favor of the bank, out of the funds transferred as
above stated. The court held, upon the facts before, it that the
defendant knew at all times that the credits created by the
various deposits through checks of the executor were assets
pertaining to the estate of which Poggenburg was executor; and
from this fact, in connection with the misapplication of part of the
money to the payment of the personal notes of Poggenburg, the
court held that the defendant bank was liable to the extent of the
whole amount misappropriated by means of the personal
account.
It will be noted that this decision was made in third instance, after
a trial in first instance possibly before a jury and after the
judgment against the bank been affirmed upon appeal in the
appellate division of the Supreme Court. The prior history of the
case was therefore such as to entitle the findings of fact of the
two prior courts of great weight, and these courts had found in
effect that the defendant bank had acted in bad faith. If not
explicable upon this ground, the decision in the Court of Appeals
must be considered a unique variant from accepted doctrine in
this that while repudiating the idea, favored by a few courts that
the act of depositing a trust fund in the personal accounts of the
fiduciary is an effective act of conversion on the part both of bank
and fiduciary, the court nevertheless held that the act of the bank
in permitting the application of part of the money to the personal
indebtedness of the fiduciary afforded a sufficient basis for
finding the bank to have been an accomplice in the subsequent
misapplication, by the fiduciary, of other portions of the deposit.
We can accede to the first of these propositions but not to the
second. In this connection we refer to the Annotation appended
to Allen vs. Puritan Trust Co. (L. R. A. 1915C, 518, 529), where
the pertinent cases are analyzed and the conclusion
stated 1 that, by the weight of authority, the placing of a trust fund
in the personal account of the fiduciary does not make the bank
liable for a subsequent misappropriation of the money by the
former. For the rest it is enough to say that there is no proof in
this case that the defendant bank had any guilty connection in
fact with the dishonest acts of Schwarzkopf, in squandering the
contents of the No. 2 account after he had made his remittance
of $15,000 to his principal.
In conclusion we ought to add that the legal principles involved
in this decision are not directly deducible from the provisions of
the Negotiable Instruments Law, which is in force in this
jurisdiction (Act No. 2031); and there is no provision of the Civil
Code or Code of Commerce directly bearing upon the point
8
under consideration. The liability of the defendant bank, to the
extent recognized in this decision proceeds upon the
fundamental idea that a creditor cannot apply to the obligation
of his debtor money which as he knows belongs to another,
without the consent of the latter, — a principle implicit in all law.
We note that the attorneys for the appellant bank have
suggested in their brief that, supposing the bank to have been
an accomplice of Schwarzkopf in the misappropriation of the
plaintiff's money, its subsidiary liability was extinguished as a
result of the criminal proceedings against Schwarzkopf. This
suggestion is clearly untenable, with respect to the liability which
is fixed upon the bank by this decision.
From what has been said it follows that the appealed judgment
must be modified and the same is hereby modified by reducing
the amount of the judgment against the bank to the sum of
P22,144.39 with lawful interest from June 23, 1926 until date of
payment, 2without pronouncement as to costs. So ordered.
G.R. No. L-60033 April 4, 1984
TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and
TERESITA SANTOS, petitioners,
vs.
THE CITY FISCAL OF MANILA, HON. JOSE B. FLAMINIANO,
ASST. CITY FISCAL FELIZARDO N. LOTA and CLEMENT
DAVID, respondents.
MAKASIAR, Actg. C.J.:
This is a petition for prohibition and injunction with a prayer for
the immediate issuance of restraining order and/or writ of
preliminary injunction filed by petitioners on March 26, 1982.
On March 31, 1982, by virtue of a court resolution issued by this
Court on the same date, a temporary restraining order was duly
issued ordering the respondents, their officers, agents,
representatives and/or person or persons acting upon their
(respondents') orders or in their place or stead to refrain from
proceeding with the preliminary investigation in Case No.
8131938 of the Office of the City Fiscal of Manila (pp. 47-48,
rec.). On January 24, 1983, private respondent Clement David
filed a motion to lift restraining order which was denied in the
resolution of this Court dated May 18, 1983.
As can be gleaned from the above, the instant petition seeks to
prohibit public respondents from proceeding with the preliminary
investigation of I.S. No. 81-31938, in which petitioners were
charged by private respondent Clement David, with estafa and
violation of Central Bank Circular No. 364 and related
regulations regarding foreign exchange transactions principally,
on the ground of lack of jurisdiction in that the allegations of the
charged, as well as the testimony of private respondent's
principal witness and the evidence through said witness,
showed that petitioners' obligation is civil in nature.
For purposes of brevity, We hereby adopt the antecedent facts
narrated by the Solicitor General in its Comment dated June
28,1982, as follows:
On December 23,1981, private respondent David filed I.S. No.
81-31938 in the Office of the City Fiscal of Manila, which case

was assigned to respondent Lota for preliminary investigation
(Petition, p. 8).
In I.S. No. 81-31938, David charged petitioners (together with
one Robert Marshall and the following directors of the Nation
Savings and Loan Association, Inc., namely Homero Gonzales,
Juan Merino, Flavio Macasaet, Victor Gomez, Jr., Perfecto
Manalac, Jaime V. Paz, Paulino B. Dionisio, and one John Doe)
with estafa and violation of Central Bank Circular No. 364 and
related Central Bank regulations on foreign exchange
transactions, allegedly committed as follows (Petition, Annex
"A"):
"From March 20, 1979 to March, 1981, David invested with the
Nation Savings and Loan Association, (hereinafter called NSLA)
the sum of P1,145,546.20 on nine deposits, P13,531.94 on
savings account deposits (jointly with his sister, Denise Kuhne),
US$10,000.00 on time deposit, US$15,000.00 under a receipt
and guarantee of payment and US$50,000.00 under a receipt
dated June 8, 1980 (au jointly with Denise Kuhne), that David
was induced into making the aforestated investments by Robert
Marshall an Australian national who was allegedly a close
associate of petitioner Guingona Jr., then NSLA President,
petitioner Martin, then NSLA Executive Vice-President of NSLA
and petitioner Santos, then NSLA General Manager; that on
March 21, 1981 N LA was placed under receivership by the
Central Bank, so that David filed claims therewith for his
investments and those of his sister; that on July 22, 1981 David
received a report from the Central Bank that only P305,821.92
of those investments were entered in the records of NSLA; that,
therefore, the respondents in I.S. No. 81-31938 misappropriated
the balance of the investments, at the same time violating
Central Bank Circular No. 364 and related Central Bank
regulations on foreign exchange transactions; that after
demands, petitioner Guingona Jr. paid only P200,000.00,
thereby reducing the amounts misappropriated to P959,078.14
and US$75,000.00."
Petitioners, Martin and Santos, filed a joint counter-affidavit
(Petition, Annex' B') in which they stated the following.
"That Martin became President of NSLA in March 1978 (after
the resignation of Guingona, Jr.) and served as such until
October 30, 1980, while Santos was General Manager up to
November 1980; that because NSLA was urgently in need of
funds and at David's insistence, his investments were treated as
special- accounts with interest above the legal rate, an recorded
in separate confidential documents only a portion of which were
to be reported because he did not want the Australian
government to tax his total earnings (nor) to know his total
investments; that all transactions with David were recorded
except the sum of US$15,000.00 which was a personal loan of
Santos; that David's check for US$50,000.00 was cleared
through Guingona, Jr.'s dollar account because NSLA did not
have one, that a draft of US$30,000.00 was placed in the name
of one Paz Roces because of a pending transaction with her;
that the Philippine Deposit Insurance Corporation had already
reimbursed David within the legal limits; that majority of the
stockholders of NSLA had filed Special Proceedings No. 82-
1695 in the Court of First Instance to contest its (NSLA's)
closure; that after NSLA was placed under receivership, Martin
executed a promissory note in David's favor and caused the
9
transfer to him of a nine and on behalf (9 1/2) carat diamond ring
with a net value of P510,000.00; and, that the liabilities of NSLA
to David were civil in nature."
Petitioner, Guingona, Jr., in his counter-affidavit (Petition,
Annex' C') stated the following:
"That he had no hand whatsoever in the transactions between
David and NSLA since he (Guingona Jr.) had resigned as NSLA
president in March 1978, or prior to those transactions; that he
assumed a portion o; the liabilities of NSLA to David because of
the latter's insistence that he placed his investments with NSLA
because of his faith in Guingona, Jr.; that in a Promissory Note
dated June 17, 1981 (Petition, Annex "D") he (Guingona, Jr.)
bound himself to pay David the sums of P668.307.01 and
US$37,500.00 in stated installments; that he (Guingona, Jr.)
secured payment of those amounts with second mortgages over
two (2) parcels of land under a deed of Second Real Estate
Mortgage (Petition, Annex "E") in which it was provided that the
mortgage over one (1) parcel shall be cancelled upon payment
of one-half of the obligation to David; that he (Guingona, Jr.) paid
P200,000.00 and tendered another P300,000.00 which David
refused to accept, hence, he (Guingona, Jr.) filed Civil Case No.
Q-33865 in the Court of First Instance of Rizal at Quezon City,
to effect the release of the mortgage over one (1) of the two
parcels of land conveyed to David under second mortgages."
At the inception of the preliminary investigation before
respondent Lota, petitioners moved to dismiss the charges
against them for lack of jurisdiction because David's claims
allegedly comprised a purely civil obligation which was itself
novated. Fiscal Lota denied the motion to dismiss (Petition, p.
8).
But, after the presentation of David's principal witness,
petitioners filed the instant petition because: (a) the production
of the Promisory Notes, Banker's Acceptance, Certificates of
Time Deposits and Savings Account allegedly showed that the
transactions between David and NSLA were simple loans, i.e.,
civil obligations on the part of NSLA which were novated when
Guingona, Jr. and Martin assumed them; and (b) David's
principal witness allegedly testified that the duplicate originals of
the aforesaid instruments of indebtedness were all on file with
NSLA, contrary to David's claim that some of his investments
were not record (Petition, pp. 8-9).
Petitioners alleged that they did not exhaust available
administrative remedies because to do so would be futile
(Petition, p. 9) [pp. 153-157, rec.].
As correctly pointed out by the Solicitor General, the sole issue
for resolution is whether public respondents acted without
jurisdiction when they investigated the charges (estafa and
violation of CB Circular No. 364 and related regulations
regarding foreign exchange transactions) subject matter of I.S.
No. 81-31938.
There is merit in the contention of the petitioners that their
liability is civil in nature and therefore, public respondents have
no jurisdiction over the charge of estafa.
A casual perusal of the December 23, 1981 affidavit. complaint
filed in the Office of the City Fiscal of Manila by private

respondent David against petitioners Teopisto Guingona, Jr.,
Antonio I. Martin and Teresita G. Santos, together with one
Robert Marshall and the other directors of the Nation Savings
and Loan Association, will show that from March 20, 1979 to
March, 1981, private respondent David, together with his sister,
Denise Kuhne, invested with the Nation Savings and Loan
Association the sum of P1,145,546.20 on time deposits covered
by Bankers Acceptances and Certificates of Time Deposits and
the sum of P13,531.94 on savings account deposits covered by
passbook nos. 6-632 and 29-742, or a total of P1,159,078.14
(pp. 15-16, roc.). It appears further that private respondent
David, together with his sister, made investments in the
aforesaid bank in the amount of US$75,000.00 (p. 17, rec.).
Moreover, the records reveal that when the aforesaid bank was
placed under receivership on March 21, 1981, petitioners
Guingona and Martin, upon the request of private respondent
David, assumed the obligation of the bank to private respondent
David by executing on June 17, 1981 a joint promissory note in
favor of private respondent acknowledging an indebtedness of
Pl,336,614.02 and US$75,000.00 (p. 80, rec.). This promissory
note was based on the statement of account as of June 30, 1981
prepared by the private respondent (p. 81, rec.). The amount of
indebtedness assumed appears to be bigger than the original
claim because of the added interest and the inclusion of other
deposits of private respondent's sister in the amount of
P116,613.20.
Thereafter, or on July 17, 1981, petitioners Guingona and Martin
agreed to divide the said indebtedness, and petitioner Guingona
executed another promissory note antedated to June 17, 1981
whereby he personally acknowledged an indebtedness of
P668,307.01 (1/2 of P1,336,614.02) and US$37,500.00 (1/2 of
US$75,000.00) in favor of private respondent (p. 25, rec.). The
aforesaid promissory notes were executed as a result of
deposits made by Clement David and Denise Kuhne with the
Nation Savings and Loan Association.
Furthermore, the various pleadings and documents filed by
private respondent David, before this Court indisputably show
that he has indeed invested his money on time and savings
deposits with the Nation Savings and Loan Association.
It must be pointed out that when private respondent David
invested his money on nine. and savings deposits with the
aforesaid bank, the contract that was perfected was a contract
of simple loan or mutuum and not a contract of deposit. Thus,
Article 1980 of the New Civil Code provides that:
Article 1980. Fixed, savings, and current deposits of-money in
banks and similar institutions shall be governed by the
provisions concerning simple loan.
In the case of Central Bank of the Philippines vs. Morfe (63
SCRA 114,119 [1975], We said:
It should be noted that fixed, savings, and current deposits of
money in banks and similar institutions are hat true deposits. are
considered simple loans and, as such, are not preferred credits
(Art. 1980 Civil Code; In re Liquidation of Mercantile Batik of
China Tan Tiong Tick vs. American Apothecaries Co., 66 Phil
414; Pacific Coast Biscuit Co. vs. Chinese Grocers Association
65 Phil. 375; Fletcher American National Bank vs. Ang Chong
10
UM 66 PWL 385; Pacific Commercial Co. vs. American
Apothecaries Co., 65 PhiL 429; Gopoco Grocery vs. Pacific
Coast Biscuit CO.,65 Phil. 443)."
This Court also declared in the recent case of Serrano vs.
Central Bank of the Philippines (96 SCRA 102 [1980]) that:
Bank deposits are in the nature of irregular deposits. They are
really 'loans because they earn interest. All kinds of bank
deposits, whether fixed, savings, or current are to be treated as
loans and are to be covered by the law on loans (Art. 1980 Civil
Code Gullas vs. Phil. National Bank, 62 Phil. 519). Current and
saving deposits, are loans to a bank because it can use
the same. The petitioner here in making time deposits that earn
interests will respondent Overseas Bank of Manila was in reality
a creditor of the respondent Bank and not a depositor. The
respondent Bank was in turn a debtor of petitioner. Failure of the
respondent Bank to honor the time deposit is failure to pay its
obligation as a debtor and not a breach of trust arising from a
depositary's failure to return the subject matter of the
deposit(Emphasis supplied).
Hence, the relationship between the private respondent and the
Nation Savings and Loan Association is that of creditor
and debtor; consequently, the ownership of the amount
deposited was transmitted to the Bank upon the perfection of the
contract and it can make use of the amount deposited for its
banking operations, such as to pay interests on deposits and to
pay withdrawals. While the Bank has the obligation to return
the amount deposited, it has, however, no obligation to return or
deliver the same money that was deposited. And, the failure of
the Bank to return the amount deposited will not constitute
estafa through misappropriation punishable under Article 315,
par. l(b) of the Revised Penal Code, but it will only give rise to
civil liability over which the public respondents have no-
jurisdiction.
WE have already laid down the rule that:
In order that a person can be convicted under the above-quoted
provision, it must be proven that he has the obligation to deliver
or return the some money, goods or personal property that he
received Petitioners had no such obligation to return the same
money, i.e., the bills or coins, which they received from private
respondents. This is so because as clearly as stated in criminal
complaints, the related civil complaints and the supporting sworn
statements, the sums of money that petitioners received were
loans.
The nature of simple loan is defined in Articles 1933 and 1953
of the Civil Code.
"Art. 1933. — By the contract of loan, one of the parties delivers
to another, either something not consumable so that the latter
may use the same for a certain time- and return it, in which case
the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount of
the same kind and quality shall he paid in which case the
contract is simply called a loan or mutuum.
"Commodatum is essentially gratuitous.

"Simple loan may be gratuitous or with a stipulation to pay
interest.
"In commodatum the bailor retains the ownership of the thing
loaned while in simple loan, ownership passes to the borrower.
"Art. 1953. — A person who receives a loan of money or any
other fungible thing acquires the ownership thereof, and is
bound to pay to the creditor an equal amount of the same kind
and quality."
It can be readily noted from the above-quoted provisions that in
simple loan (mutuum), as contrasted to commodatum the
borrower acquires ownership of the money, goods or personal
property borrowed Being the owner, the borrower can dispose
of the thing borrowed (Article 248, Civil Code) and his act will
not be considered misappropriation thereof' (Yam vs. Malik, 94
SCRA 30, 34 [1979]; Emphasis supplied).
But even granting that the failure of the bank to pay the time and
savings deposits of private respondent David would constitute a
violation of paragraph 1(b) of Article 315 of the Revised Penal
Code, nevertheless any incipient criminal liability was deemed
avoided, because when the aforesaid bank was placed under
receivership by the Central Bank, petitioners Guingona and
Martin assumed the obligation of the bank to private respondent
David, thereby resulting in the novation of the original
contractual obligation arising from deposit into a contract of loan
and converting the original trust relation between the bank and
private respondent David into an ordinary debtor-creditor
relation between the petitioners and private respondent.
Consequently, the failure of the bank or petitioners Guingona
and Martin to pay the deposits of private respondent would not
constitute a breach of trust but would merely be a failure to pay
the obligation as a debtor.
Moreover, while it is true that novation does not extinguish
criminal liability, it may however, prevent the rise of criminal
liability as long as it occurs prior to the filing of the criminal
information in court. Thus, in Gonzales vs. Serrano ( 25 SCRA
64, 69 [1968]) We held that:
As pointed out in People vs. Nery, novation prior to the filing of
the criminal information — as in the case at bar — may convert
the relation between the parties into an ordinary creditor-debtor
relation, and place the complainant in estoppel to insist on the
original transaction or "cast doubt on the true nature" thereof.
Again, in the latest case of Ong vs. Court of Appeals (L-58476,
124 SCRA 578, 580-581 [1983] ), this Court reiterated the ruling
in People vs. Nery ( 10 SCRA 244 [1964] ), declaring that:
The novation theory may perhaps apply prior to the filling of the
criminal information in court by the state prosecutors because
up to that time the original trust relation may be converted by the
parties into an ordinary creditor-debtor situation, thereby placing
the complainant in estoppel to insist on the original trust. But
after the justice authorities have taken cognizance of the crime
and instituted action in court, the offended party may no longer
divest the prosecution of its power to exact the criminal liability,
as distinguished from the civil. The crime being an offense
against the state, only the latter can renounce it (People vs.
11
Gervacio, 54 Off. Gaz. 2898; People vs. Velasco, 42 Phil. 76;
U.S. vs. Montanes, 8 Phil. 620).
It may be observed in this regard that novation is not one of the
means recognized by the Penal Code whereby criminal liability
can be extinguished; hence, the role of novation may only be to
either prevent the rise of criminal habihty or to cast doubt on the
true nature of the original basic transaction, whether or not it was
such that its breach would not give rise to penal responsibility,
as when money loaned is made to appear as a deposit, or other
similar disguise is resorted to (cf. Abeto vs. People, 90 Phil. 581;
U.S. vs. Villareal, 27 Phil. 481).
In the case at bar, there is no dispute that petitioners Guingona
and Martin executed a promissory note on June 17, 1981
assuming the obligation of the bank to private respondent David;
while the criminal complaint for estafa was filed on December
23, 1981 with the Office of the City Fiscal. Hence, it is clear that
novation occurred long before the filing of the criminal complaint
with the Office of the City Fiscal.
Consequently, as aforestated, any incipient criminal liability
would be avoided but there will still be a civil liability on the part
of petitioners Guingona and Martin to pay the assumed
obligation.
Petitioners herein were likewise charged with violation of
Section 3 of Central Bank Circular No. 364 and other related
regulations regarding foreign exchange transactions by
accepting foreign currency deposit in the amount of
US$75,000.00 without authority from the Central Bank. They
contend however, that the US dollars intended by respondent
David for deposit were all converted into Philippine currency
before acceptance and deposit into Nation Savings and Loan
Association.
Petitioners' contention is worthy of behelf for the following
reasons:
1. It appears from the records that when respondent David was
about to make a deposit of bank draft issued in his name in the
amount of US$50,000.00 with the Nation Savings and Loan
Association, the same had to be cleared first and converted into
Philippine currency. Accordingly, the bank draft was endorsed
by respondent David to petitioner Guingona, who in turn
deposited it to his dollar account with the Security Bank and
Trust Company. Petitioner Guingona merely accommodated the
request of the Nation Savings and loan Association in order to
clear the bank draft through his dollar account because the bank
did not have a dollar account. Immediately after the bank draft
was cleared, petitioner Guingona authorized Nation Savings and
Loan Association to withdraw the same in order to be utilized by
the bank for its operations.
2. It is safe to assume that the U.S. dollars were converted first
into Philippine pesos before they were accepted and deposited
in Nation Savings and Loan Association, because the bank is
presumed to have followed the ordinary course of the business
which is to accept deposits in Philippine currency only, and that
the transaction was regular and fair, in the absence of a clear
and convincing evidence to the contrary (see
paragraphs p and q, Sec. 5, Rule 131, Rules of Court).

3. Respondent David has not denied the aforesaid contention of
herein petitioners despite the fact that it was raised. in
petitioners' reply filed on May 7, 1982 to private respondent's
comment and in the July 27, 1982 reply to public respondents'
comment and reiterated in petitioners' memorandum filed on
October 30, 1982, thereby adding more support to the
conclusion that the US$75,000.00 were really converted into
Philippine currency before they were accepted and deposited
into Nation Savings and Loan Association. Considering that this
might adversely affect his case, respondent David should have
promptly denied petitioners' allegation.
In conclusion, considering that the liability of the petitioners is
purely civil in nature and that there is no clear showing that they
engaged in foreign exchange transactions, We hold that the
public respondents acted without jurisdiction when they
investigated the charges against the petitioners. Consequently,
public respondents should be restrained from further proceeding
with the criminal case for to allow the case to continue, even if
the petitioners could have appealed to the Ministry of Justice,
would work great injustice to petitioners and would render
meaningless the proper administration of justice.
While as a rule, the prosecution in a criminal offense cannot be
the subject of prohibition and injunction, this court has
recognized the resort to the extraordinary writs of prohibition and
injunction in extreme cases, thus:
On the issue of whether a writ of injunction can restrain the
proceedings in Criminal Case No. 3140, the general rule is that
"ordinarily, criminal prosecution may not be blocked by court
prohibition or injunction." Exceptions, however, are allowed in
the following instances:
"1. for the orderly administration of justice;
"2. to prevent the use of the strong arm of the law in an
oppressive and vindictive manner;
"3. to avoid multiplicity of actions;
"4. to afford adequate protection to constitutional rights;
"5. in proper cases, because the statute relied upon is
unconstitutional or was held invalid" ( Primicias vs. Municipality
of Urdaneta, Pangasinan, 93 SCRA 462, 469-470 [1979]; citing
Ramos vs. Torres, 25 SCRA 557 [1968]; and Hernandez vs.
Albano, 19 SCRA 95, 96 [1967]).
Likewise, in Lopez vs. The City Judge, et al. ( 18 SCRA 616,
621-622 [1966]), We held that:
The writs of certiorari and prohibition, as extraordinary legal
remedies, are in the ultimate analysis, intended to annul void
proceedings; to prevent the unlawful and oppressive exercise of
legal authority and to provide for a fair and orderly administration
of justice. Thus, in Yu Kong Eng vs. Trinidad, 47 Phil. 385, We
took cognizance of a petition for certiorari and prohibition
although the accused in the case could have appealed in due
time from the order complained of, our action in the premises
being based on the public welfare policy the advancement of
public policy. In Dimayuga vs. Fajardo, 43 Phil. 304, We also
admitted a petition to restrain the prosecution of certain
chiropractors although, if convicted, they could have appealed.
12
We gave due course to their petition for the orderly
administration of justice and to avoid possible oppression by the
strong arm of the law. And in Arevalo vs. Nepomuceno, 63 Phil.
627, the petition for certiorari challenging the trial court's action
admitting an amended information was sustained despite the
availability of appeal at the proper time.
WHEREFORE, THE PETITION IS HEREBY GRANTED; THE
TEMPORARY RESTRAINING ORDER PREVIOUSLY ISSUED
IS MADE PERMANENT. COSTS AGAINST THE PRIVATE
RESPONDENT. SO ORDERED.
G.R. No. L-38427 March 12, 1975
CENTRAL BANK OF THE PHILIPPINES as Liquidator of the
FIDELITY SAVINGS BANK, petitioner, vs.
HONORABLE JUDGE JESUS P. MORFE, as Presiding
Judge of Branch XIII, Court of First Instance of Manila,
Spouses AUGUSTO and ADELAIDA PADILLA and Spouses
MARCELA and JOB ELIZES, respondents.
AQUINO, J.:
This case involves the question of whether a final judgment for
the payment of a time deposit in a savings bank which judgment
was obtained after the bank was declared insolvent, is a
preferred claim against the bank. The question arises under the
following facts:
On February 18,1969 the Monetary Board found the Fidelity
Savings Bank to be insolvent. The Board directed the
Superintendent of Banks to take charge of its assets, forbade it
to do business and instructed the Central Bank Legal Counsel
to take legal actions (Resolution No. 350).
On December 9, 1969 the Board involved to seek the court's
assistant and supervision in the liquidation of the ban The
resolution implemented only on January 25, 1972, when his
Central Bank of the Philippines filed the corresponding petition
for assistance and supervision in the Court of First Instance of
Manila (Civil Case No. 86005 assigned to Branch XIII).
Prior to the institution of the liquidation proceeding but after the
declaration of insolvency, or, specifically, sometime in March,
1971, the spouses Job Elizes and Marcela P. Elizes filed a
complaint in the Court of First Instance of Manila against the
Fidelity Savings Bank for the recovery of the sum of P50, 584 as
the balance of their time deposits (Civil Case No. 82520
assigned to Branch I).
In the judgment rendered in that case on December 13, 1972
the Fidelity Savings Bank was ordered to pay the Elizes spouses
the sum of P50,584 plus accumulated interest.
In another case, assigned to Branch XXX of the Court of First
Instance of Manila, the spouses Augusta A. Padilla and Adelaida
Padilla secured on April 14, 1972 a judgment against the Fidelity
Savings Bank for the sums of P80,000 as the balance of their
time deposits, plus interests, P70,000 as moral and exemplary
damages and P9,600 as attorney's fees (Civil Case No. 84200
where the action was filed on September 6, 1971).

In its orders of August 20, 1973 and February 25, 1974, the
lower court (Branch XIII having cognizance of the liquidation
proceeding), upon motions of the Elizes and Padilla spouses
and over the opposition of the Central Bank, directed the latter
as liquidator, to pay their time deposits as preferred judgments,
evidenced by final judgments,within the meaning of article
2244(14)(b) of the Civil Code, if there are enough funds in the
liquidator's custody in excess of the credits more preferred under
section 30 of the Central Bank Law in relation to articles 2244
and 2251 of the Civil Code.
From the said order, the Central Bank appealed to this Court
by certiorari. It contends that the final judgments secured by the
Elizes and Padilla spouses do not enjoy any preference because
(a) they were rendered after the Fidelity Savings Bank was
declared insolvent and (b) under the charter of the Central Bank
and the General Banking Law, no final judgment can be validly
obtained against an insolvent bank.
Republic Act No. 265 provides:
SEC. 29. Proceeding upon insolvency.—Whenever upon
examination by the Superintendent or his examiners or agents
into the condition of any banking institution, it shall be disclosed
that the condition of the same is one of insolvency, or that its
continuance in business would involve probable loss to its
depositors or creditors, it shall be the duty of the Superintendent
forthwith, in writing to inform the Monetary Board of the facts,
and the Board, upon finding the statements of the
Superintendent to be true, shall forthwith forbid the institution to
do business in the Philippines and shall take charge of its assets
and proceeds according to law.
The Monetary Board shall thereupon determine within thirty
days whether the institution may be reorganized or otherwise
placed in such a condition so that it may be permitted to resume
business with safety to its creditors and shall prescribe the
conditions under which such resumption of business shall take
place. In such case the expenses and fees in the administration
of the institution shall be determined by the Board and shall be
paid to the Central Bank out of the assets of such banking
institution.
At any time within ten days after the Monetary Board has taken
charge of the assets of any banking institution, such institution
may apply to the Court of First Instance for an order requiring
the Monetary Board to show cause why it should not be enjoined
from continuing such charge of its assets, and the court may
direct the Board to refrain from further proceedings and to
surrender charge of its assets.
If the Monetary Board shall determine that the banking institution
cannot resume business with safety to its creditors, it shall, by
the Office of the Solicitor General, file a petition in the Court of
First Instance reciting the proceedings which have been taken
and praying the assistance and supervision of the court in the
liquidation of the affairs of the same. The Superintendent shall
thereafter, upon order of the Monetary Board and under the
supervision of the court and with all convenient speed, convert
the assets of the banking institution to money.
SEC. 30. Distribution of assets.—In case of liquidation of a
banking institution, after payment of the costs of the
13
proceedings, including reasonable expenses and fees of the
Central Bank to be allowed by the court, the Central Bank shall
pay the debts of such institution, under the order of the court, in
accordance with their legal priority.
The General Banking Act, Republic Act No. 337, provides:
SEC. 85. Any director or officer of any banking institution who
receives or permits or causes to be received in said bank any
deposit, or who pays out or permits or causes to be paid out any
funds of said bank, or who transfers or permits or causes to be
transferred any securities or property of said bank, after said
bank becomes insolvent, shall be punished by fine of not less
than one thousand nor more than ten thousand pesos and by
imprisonment for not less than two nor more than ten years.
The Civil Code provides:
ART. 2237. Insolvency shall be governed by special laws insofar
as they are not inconsistent with this Code. (n)
ART. 2244. With reference to other property, real and personal,
of the debtor, the following claims or credits shall be preferred in
the order named:
xxx xxx xxx
(14) Credits which, without special privilege, appear in (a) a
public instrument; or (b) in a final judgment, if they have been
the subject of litigation. These credits shall have preference
among themselves in the order of priority of the dates of the
instruments and of the judgments, respectively. (1924a)
ART. 2251. Those credits which do not enjoy any preference
with respect to specific property, and those which enjoy
preference, as to the amount not paid, shall be satisfied
according to the following rules:
(1) In the order established in article 2244;
(2) Common credits referred to in article 2245 shall be paid pro
rata regardless of dates. (1929a)
The trial court or, to be exact, the liquidation court noted that
there is no provision in the charter of the Central Bank in the
General Banking Law (Republic Acts Nos. 265 and 337,
respectively) which suspends or abates civil actions against an
insolvent bank pending in courts other than the liquidation court.
It reasoned out that, because such actions are not suspended,
judgments against insolvent banks could be considered as
preferred credits under article 2244(14)(b) of the Civil Code. It
further noted that, in contrast with the Central Act, section 18 of
the Insolvency Law provides that upon the issuance by the court
of an order declaring a person insolvent "all civil proceedings
against the said insolvent shall be stayed."
The liquidation court directed the Central Bank to honor the writs
of execution issued by Branches I and XXX for the enforcement
of the judgments obtained by the Elizes and Padilla spouses. It
suggested that, after satisfaction of the judgment the Central
Bank, as liquidator, should include said judgments in the list of
preferred credits contained in the "Project of Distribution" "with
the notation "already paid" "

On the other hand, the Central Bank argues that after the
Monetary Board has declared that a bank is insolvent and has
ordered it to cease operations, the Board becomes the trustee
of its assets "for the equal benefit of all the creditors, including
the depositors". The Central Bank cites the ruling that "the
assets of an insolvent banking institution are held in trust for the
equal benefit of all creditors, and after its insolvency, one cannot
obtain an advantage or a preference over another by an
attachment, execution or otherwise" (Rohr vs. Stanton Trust &
Savings Bank, 76 Mont. 248, 245 Pac. 947).
The stand of the Central Bank is that all depositors and creditors
of the insolvent bank should file their actions with the liquidation
court. In support of that view it cites the provision that the
Insolvency Law does not apply to banks (last sentence, sec. 52
of Act No. 1956).
It also invokes the provision penalizing a director officer of a
bank who disburses, or allows disbursement, of the funds of the
bank after it becomes insolvent (Sec. 85, General Banking Act,
Republic Act No. 337). It cites the ruling that "a creditor of an
insolvent state bank in the hands of a liquidator who recovered
a judgment against it is not entitled to a preference for (by) the
mere fact that he is a judgment creditor" (Thomas H. Briggs &
Sons, Inc. vs. Allen, 207 N. Carolina 10, 175 S. E. 838, Braver
Liquidation of Financial Institutions, p. 922).
It should be noted that fixed, savings, and current deposits of
money in banks and similar institutions are not true deposits.
They are considered simple loans and, as such, are not
preferred credits (Art. 1980, Civil Code; In re Liquidation of
Mercantile Bank of China: Tan Tiong Tick vs. American
Apothecaries Co., 65 Phil. 414; Pacific Coast Biscuit Co. vs.
Chinese Grocers Association, 65 Phil. 375; Fletcher American
National Bank vs. Ang Cheng Lian, 65 Phil. 385; Pacific
Commercial Co. vs. American Apothecaries Co., 65 Phil. 429;
Gopoco Grocery vs. Pacific Coast Biscuit Co., 65 Phil. 443).
The aforequoted section 29 of the Central Bank's charter
explicitly provides that when a bank is found to be insolvent, the
Monetary Board shall forbid it to do business and shall take
charge of its assets. The Board in its Resolution No. 350 dated
February 18,1969 banned the Fidelity Savings Bank from doing
business. It took charge of the bank's assets. Evidently, one
purpose in prohibiting the insolvent bank from doing business is
to prevent some depositors from having an undue or fraudulent
preference over other creditors and depositors.
That purpose would be nullified if, as in this case, after the bank
is declared insolvent, suits by some depositors could be
maintained and judgments would be rendered for the payment
of their deposits and then such judgments would be considered
preferred credits under article 2244 (14) (b) of the Civil Code.
We are of the opinion that such judgments cannot be considered
preferred and that article 2244(14)(b) does not apply to
judgments for the payment of the deposits in an insolvent
savings bank which were obtained after the declaration of
insolvency.
A contrary rule or practice would be productive of injustice,
mischief and confusion. To recognize such judgments as
entitled to priority would mean that depositors in insolvent banks,
14
after learning that the bank is insolvent as shown by the fact that
it can no longer pay withdrawals or that it has closed its doors or
has been enjoined by the Monetary Board from doing business,
would rush to the courts to secure judgments for the payment of
their deposits.
In such an eventuality, the courts would be swamped with suits
of that character. Some of the judgments would be default
judgments. Depositors armed with such judgments would pester
the liquidation court with claims for preference on the basis of
article 2244(14)(b). Less alert depositors would be prejudiced.
That inequitable situation could not have been contemplated by
the framers of section 29.
The Rohr case (supra) supplies some illumination on the
disposition of the instant case. It appears in that case that the
Stanton Trust & Savings Bank of Great Falls closed its doors to
business on July 9, 1923. On November 7,1924 the bank (then
already under liquidation) issued to William Rohr a certificate
stating that he was entitled to claim from the bank $1,191.72 and
that he was entitled to dividends thereon. Later, Rohr sued the
bank for the payment of his claim. The bank demurred to the
complaint. The trial court sustained the demurrer. Rohr
appealed. In affirming the order sustaining the demurrer, the
Supreme Court of Montana said:
The general principle of equity that the assets of an insolvent are
to he distributed ratably among general creditors applies with full
force to the distribution of the assets of a bank. A general
depositor of a bank is merely a general creditor, and, as such, is
not entitled to any preference or priority over other general
creditors.
The assets of a bank in process of liquidation are held in trust
for the equal benefit of all creditors, and one cannot be permitted
to obtain an advantage or preference over another by an
attachment, execution or otherwise. A disputed claim of a
creditor may be adjudicated, but those whose claims are
recognized and admitted may not successfully maintain action
thereon. So to permit would defeat the very purpose of the
liquidation of a bank whether being voluntarily accomplished or
through the intervention of a receiver.
xxx xxx xxx
The available assets of such a bank are held in trust, and so
conserved that each depositor or other creditor shall receive
payment or dividend according to the amount of his debt, and
that none of equal class shall receive any advantage or
preference over another.
And with respect to a national bank under voluntary liquidation,
the court noted in the Rohr case that the assets of such a bank
"become a trust fund, to be administered for the benefit of all
creditors pro rata and, while the bank retains its corporate
existence, and may be sued, the effect of a judgment obtained
against it by a creditor is only tofix the amount of debt. He can
acquire no lien which will give him any preference or advantage
over other general creditors. (245 Pac. 249). *
Considering that the deposits in question, in their inception, were
not preferred credits, it does not seem logical and just that they
should be raised to the category of preferred credits simply

because the depositors, taking advantage of the long interval
between the declaration of insolvency and the filing of the
petition for judicial assistance and supervision, were able to
secure judgments for the payment of their time deposits.
The judicial declaration that the said deposits were payable to
the depositors, as indisputably they were due, could not have
given the Elizes and Padilla spouses a priority over the other
depositors whose deposits were likewise indisputably due and
owing from the insolvent bank but who did not want to incur
litigation expenses in securing a judgment for the payment of the
deposits.
The circumstance that the Fidelity Savings Bank, having
stopped operations since February 19, 1969, was forbidden to
do business (and that ban would include the payment of time
deposits) implies that suits for the payment of such deposits
were prohibited. What was directly prohibited should not be
encompassed indirectly. (See Maurello vs. Broadway Bank &
Trust Co. of Paterson 176 Atl. 391, 114 N.J.L. 167).
It is noteworthy that in the trial court's order of October 3, 1972,
which contains the Bank Liquidation Rules and Regulations, it
indicated in step III the procedure for processing the claims
against the insolvent bank. In Step IV, the court directed the
Central Bank, as liquidator, to submit a Project of Distribution
which should include "a list of the preferred credits to be paid in
full in the order of priorities established in Articles 2241, 2242,
2243, 2246 and 2247" of the Civil Code (note that article 2244
was not mentioned). There is no cogent reason why the Elizes
and Padilla spouses should not adhere to the procedure outlined
in the said rules and regulations.
WHEREFORE, the lower court's orders of August 20, 1973 and
February 25, 1974 are reversed and set aside. No costs. SO
ORDERED.
Footnotes
* "It must be borne in mind that the predominant policy of the
insolvent system is intended to secure an equality among
creditors, and to prohibit all preferences except such as are
expressly permitted. When, therefore, doubtful or ambiguous
provisions of the enactments making up the system are to be
construed, that interpretation which best comforts with and gives
effect to the ultimate and controlling purpose of the statute must
be adopted and applied, rather than one which totally, or even
partially, defeat or thwart that design. And this is but another way
of saying that preferences which do not clearly and
unequivocally appear to be authorized ought not to be created
by mere construction, since the tendency of all preferences is to
frustrate, to some extent, equality among creditors, and thus to
disturb the very policy which lies at the root of all the insolvent
laws." (Roberts vs. Edie 85 Md 181, 36 Atl. 820, 822).
"When control of a bank for liquidation purposes is taken by the
superintendent of banks, the question of preference creates in
reality a controversy between the depositor claiming a
preference and the other depositors who are general creditors,
inasmuch as the assets in which all are to participate are
diminished to the extent of whatever preferences are allowed.
The creation of preferences, generally speaking, should
therefore be discouraged except in cases where the right thereto
15
is clearly established. As said in Cavin v. Gleason, 105 N.Y. 256,
at page 262, 11 N.E. 504,506:
"The equitable doctrine that, as between creditors, equality is
equity, admits, so far as we know, of no exception founded on
the greater supposed sacredness of one debt, or that it arose
out of a violation of duty, or that its loss involves greater apparent
hardship in one case than another, unless it appears, in addition,
that there is some specific recognized equity founded on some
agreement, or the relation of the debt to the assigned property,
which entitles the claimant, according to equitable principles, to
preferential payment". (Ramisch vs. Fulton, 41 Ohio App.
443,180 N.E. 735).
"Ordinary deposit becomes bank's money and creates debtor-
creditor relation, precluding preference as against hank's
receive (Annex v. Union Savings Bank & Trust Co. of Davenport,
220 Iowa 712, 263 N.W. 495).
"Where judgment was rendered against bank after bank was in
custody of liquidator, judgment creditor was not entitled to
preference of liquidator, judgment" (Thomas H. Briggs & Sons,
Inc. vs. Allen, 207 N. C. 10, 175 S. E. 838).
Legal Compensation
G.R. No. L-43191 November 13, 1935
PAULINO GULLAS, plaintiff-appellant, vs.
THE PHILIPPINE NATIONAL BANK, defendant-appellant.
MALCOLM, J.:
Both parties to this case appealed from a judgment of the Court
of First Instance of Cebu, which sentenced the defendant to
return to the account of the plaintiff the sum of P5098, with legal
interest and costs, the plaintiff to secure damages in the amount
of P10,000 more or less, and the defendant to be absolved
totally from the amended complaint. As it is conceded that the
plaintiff has already received the sum represented by the United
States treasury, warrant, which is in question, the appeal will
thus determine the amount, if any, which should be paid to the
plaintiff by the defendant.
The parties to the case are Paulino Gullas and the Philippine
National Bank. The first named is a member of the Philippine
Bar, resident in the City of Cebu. The second named is a
banking corporation with a branch in the same city. Attorney
Gullas has had a current account with the bank.
It appears from the record that on August 2, 1933, the Treasurer
of the United States for the United States Veterans Bureau
issued a Warrant in the amount of $361, payable to the order of
Francisco Sabectoria Bacos. Paulino Gullas and Pedro Lopez
signed as endorsers of this check. Thereupon it was cashed by
the Philippine National Bank. Subsequently the treasury warrant
was dishonored by the Insular Treasurer.
At that time the outstanding balance of Attorney Gullas on the
books of the bank was P509. Against this balance he had issued
certain cheeks which could not be paid when the money was

sequestered by the On August 20, 1933, Attorney Gullas left his
residence for Manila.
The bank on learning of the dishonor of the treasury warrant sent
notices by mail to Mr. Gullas which could not be delivered to him
at that time because he was in Manila. In the bank's letter of
August 21, 1933, addressed to Messrs. Paulino Gulla and Pedro
Lopez, they were informed that the United States Treasury
warrant No. 20175 in the name of Francisco Sabectoria Bacos
for $361 or P722, the payment for which had been received has
been returned by our Manila office with the notation that the
payment of his check has been stopped by the Insular
Treasurer. "In view of this therefore we have applied the
outstanding balances of your current accounts with us to the part
payment of the foregoing check", namely, Mr. Paulino Gullas
P509. On the return of Attorney Gullas to Cebu on August 31,
1933, notice of dishonor was received and the unpaid balance
of the United States Treasury warrant was immediately paid by
him.
As a consequence of these happenings, two occurrences
transpired which inconvenienced Attorney Gullas. In the first
place, as above indicated, checks including one for his
insurance were not paid because of the lack of funds standing
to his credit in the bank. In the second place, periodicals in the
vicinity gave prominence to the news to the great mortification
of Gullas.lawphil.net
A variety of incidental questions have been suggested on the
record which it can be taken for granted as having been
adversely disposed of in this opinion. The main issues are two,
namely, (1) as to the right of Philippine National Bank, and to
apply a deposit to the debt of depositor to the bank and (2) as to
the amount damages, if any, which should be awarded Gullas.
The Civil Code contains provisions regarding compensation (set
off) and deposit. (Articles 1195 et seq., 1758 et seq. The
portions of Philippine law provide that compensation shall take
place when two persons are reciprocally creditor and debtor of
each other (Civil Code, article 1195). In his connection, it has
been held that the relation existing between a depositor and a
bank is that of creditor and debtor. (Fulton Iron Works
Co. vs. China Banking Corporation [1933], 59 Phil., 59.)
The Negotiable Instruments Law contains provisions
establishing the liability of a general indorser and giving the
procedure for a notice of dishonor. The general indorser of
negotiable instrument engages that if he be dishonored and the,
necessary proceedings of dishonor be duly taken, he will pay the
amount thereof to the holder. (Negotiable Instruments Law, sec.
66.) In this connection, it has been held a long line of authorities
that notice of dishonor is in order to charge all indorser and that
the right of action against him does not accrue until the notice is
given. (Asia Banking Corporation vs. Javier [1923] 44 Phil., 777;
5 Uniform Laws Annotated.)
As a general rule, a bank has a right of set off of the deposits in
its hands for the payment of any indebtedness to it on the part
of a depositor. In Louisiana, however, a civil law jurisdiction, the
rule is denied, and it is held that a bank has no right, without an
order from or special assent of the depositor to retain out of his
deposit an amount sufficient to meet his indebtedness. The
basis of the Louisiana doctrine is the theory of confidential
16
contracts arising from irregular deposits, e. g., the deposit of
money with a banker. With freedom of selection and after full
preference to the minority rule as more in harmony with modern
banking practice. (1 Morse on Banks and Banking, 5th ed., sec.
324; Garrison vs. Union Trust Company [1905], 111 A.S.R., 407;
Louisiana Civil Code Annotated, arts. 2207 et seq.; Gordon &
Gomila vs. Muchler [1882], 34 L. Ann., 604; 8
Manresa, Comentarios al Codigo Civil Español, 4th ed., 359 et
seq., 11 Manresa pp. 694 et seq.)
Starting, therefore, from the premise that the Philippine National
Bank had with respect to the deposit of Gullas a right of set off,
we next consider if that remedy was enforced properly. The fact
we believe is undeniable that prior to the mailing of notice of
dishonor, and without waiting for any action by Gullas, the bank
made use of the money standing in his account to make good
for the treasury warrant. At this point recall that Gullas was
merely an indorser and had issued in good faith.
As to a depositor who has funds sufficient to meet payment of a
check drawn by him in favor of a third party, it has been held that
he has a right of action against the bank for its refusal to pay
such a check in the absence of notice to him that the bank has
applied the funds so deposited in extinguishment of past due
claims held against him. (Callahan vs. Bank of Anderson [1904],
2 Ann. Cas., 203.) The decision cited represents the minority
doctrine, for on principle it would seem that notice is not
necessary to a maker because the right is based on the doctrine
that the relationship is that of creditor and debtor. However this
may be, as to an indorser the situation is different, and notice
should actually have been given him in order that he might
protect his interests.
We accordingly are of the opinion that the action of the bank was
prejudicial to Gullas. But to follow up that statement with others
proving exact damages is not so easy. For instance, for alleged
libelous articles the bank would not be primarily liable. The same
remark could be made relative to the loss of business which
Gullas claims but which could not be traced definitely to this
occurrence. Also Gullas having eventually been reimbursed lost
little through the actual levy by the bank on his funds. On the
other hand, it was not agreeable for one to draw checks in all
good faith, then, leave for Manila, and on return find that those
checks had not been cashed because of the action taken by the
bank. That caused a disturbance in Gullas' finances, especially
with reference to his insurance, which was injurious to him. All
facts and circumstances considered, we are of the opinion that
Gullas should be awarded nominal damages because of the
premature action of the bank against which Gullas had no
means of protection, and have finally determined that the
amount should be P250.
Agreeable to the foregoing, the errors assigned by the parties
will in the main be overruled, with the result that the judgment of
the trial court will be modified by sentencing the defendant to
pay the plaintiff the sum of P250, and the costs of both
instances.

G.R. No. 136202 January 25, 2007
BANK OF THE PHILIPPINE ISLANDS, Petitioner,
vs.
COURT OF APPEALS, ANNABELLE A. SALAZAR, and
JULIO R. TEMPLONUEVO, Respondents
DECISION
AZCUNA, J.:
This is a petition for review under Rule 45 of the Rules of Court
seeking the reversal of the Decision1 dated April 3, 1998, and
the Resolution2 dated November 9, 1998, of the Court of
Appeals in CA-G.R. CV No. 42241.
The facts3 are as follows:
A.A. Salazar Construction and Engineering Services filed an
action for a sum of money with damages against herein
petitioner Bank of the Philippine Islands (BPI) on December 5,
1991 before Branch 156 of the Regional Trial Court (RTC) of
Pasig City. The complaint was later amended by substituting the
name of Annabelle A. Salazar as the real party in interest in
place of A.A. Salazar Construction and Engineering Services.
Private respondent Salazar prayed for the recovery of the
amount of Two Hundred Sixty-Seven Thousand, Seven
Hundred Seven Pesos and Seventy Centavos (P267,707.70)
debited by petitioner BPI from her account. She likewise prayed
for damages and attorney’s fees.
Petitioner BPI, in its answer, alleged that on August 31, 1991,
Julio R. Templonuevo, third-party defendant and herein also a
private respondent, demanded from the former payment of the
amount of Two Hundred Sixty-Seven Thousand, Six Hundred
Ninety-Two Pesos and Fifty Centavos (P267,692.50)
representing the aggregate value of three (3) checks, which
were allegedly payable to him, but which were deposited with
the petitioner bank to private respondent Salazar’s account
(Account No. 0203-1187-67) without his knowledge and
corresponding endorsement.
Accepting that Templonuevo’s claim was a valid one, petitioner
BPI froze Account No. 0201-0588-48 of A.A. Salazar and
Construction and Engineering Services, instead of Account No.
0203-1187-67 where the checks were deposited, since this
account was already closed by private respondent Salazar or
had an insufficient balance.
Private respondent Salazar was advised to settle the matter with
Templonuevo but they did not arrive at any settlement. As it
appeared that private respondent Salazar was not entitled to the
funds represented by the checks which were deposited and
accepted for deposit, petitioner BPI decided to debit the amount
of P267,707.70 from her Account No. 0201-0588-48 and the
sum of P267,692.50 was paid to Templonuevo by means of a
cashier’s check. The difference between the value of the checks
(P267,692.50) and the amount actually debited from her account
(P267,707.70) represented bank charges in connection with the
issuance of a cashier’s check to Templonuevo.
In the answer to the third-party complaint, private respondent
Templonuevo admitted the payment to him of P267,692.50 and
argued that said payment was to correct the malicious deposit
17
made by private respondent Salazar to her private account, and
that petitioner bank’s negligence and tolerance regarding the
matter was violative of the primary and ordinary rules of banking.
He likewise contended that the debiting or taking of the
reimbursed amount from the account of private respondent
Salazar by petitioner BPI was a matter exclusively between said
parties and may be pursuant to banking rules and regulations,
but did not in any way affect him. The debiting from another
account of private respondent Salazar, considering that her
other account was effectively closed, was not his concern.
After trial, the RTC rendered a decision, the dispositive portion
of which reads thus:
WHEREFORE, premises considered, judgment is hereby
rendered in favor of the plaintiff [private respondent Salazar] and
against the defendant [petitioner BPI] and ordering the latter to
pay as follows:
1. The amount of P267,707.70 with 12% interest thereon from
September 16, 1991 until the said amount is fully paid;
2. The amount of P30,000.00 as and for actual damages;
3. The amount of P50,000.00 as and for moral damages;
4. The amount of P50,000.00 as and for exemplary damages;
5. The amount of P30,000.00 as and for attorney’s fees; and
6. Costs of suit.
The counterclaim is hereby ordered DISMISSED for lack of
factual basis.
The third-party complaint [filed by petitioner] is hereby likewise
ordered DISMISSED for lack of merit.
Third-party defendant’s [i.e., private respondent Templonuevo’s]
counterclaim is hereby likewise DISMISSED for lack of factual
basis.
SO ORDERED.4
On appeal, the Court of Appeals (CA) affirmed the decision of
the RTC and held that respondent Salazar was entitled to the
proceeds of the three (3) checks notwithstanding the lack of
endorsement thereon by the payee. The CA concluded that
Salazar and Templonuevo had previously agreed that the
checks payable to JRT Construction and Trading5 actually
belonged to Salazar and would be deposited to her account, with
petitioner acquiescing to the arrangement.6
Petitioner therefore filed this petition on these grounds:
I.
The Court of Appeals committed reversible error in
misinterpreting Section 49 of the Negotiable Instruments Law
and Section 3 (r and s) of Rule 131 of the New Rules on
Evidence.
II.

The Court of Appeals committed reversible error in NOT
applying the provisions of Articles 22, 1278 and 1290 of the Civil
Code in favor of BPI.
III.
The Court of Appeals committed a reversible error in holding,
based on a misapprehension of facts, that the account from
which BPI debited the amount of P267,707.70 belonged to a
corporation with a separate and distinct personality.
IV.
The Court of Appeals committed a reversible error in holding,
based entirely on speculations, surmises or conjectures, that
there was an agreement between SALAZAR and
TEMPLONUEVO that checks payable to TEMPLONUEVO may
be deposited by SALAZAR to her personal account and that BPI
was privy to this agreement.
V.
The Court of Appeals committed reversible error in holding,
based entirely on speculation, surmises or conjectures, that
SALAZAR suffered great damage and prejudice and that her
business standing was eroded.
VI.
The Court of Appeals erred in affirming instead of reversing the
decision of the lower court against BPI and dismissing
SALAZAR’s complaint.
VII.
The Honorable Court erred in affirming the decision of the lower
court dismissing the third-party complaint of BPI.7
The issues center on the propriety of the deductions made by
petitioner from private respondent Salazar’s account. Stated
otherwise, does a collecting bank, over the objections of its
depositor, have the authority to withdraw unilaterally from such
depositor’s account the amount it had previously paid upon
certain unendorsed order instruments deposited by the
depositor to another account that she later closed?
Petitioner argues thus:
1. There is no presumption in law that a check payable to order,
when found in the possession of a person who is neither a payee
nor the indorsee thereof, has been lawfully transferred for value.
Hence, the CA should not have presumed that Salazar was a
transferee for value within the contemplation of Section 49 of the
Negotiable Instruments Law,8 as the latter applies only to a
holder defined under Section 191of the same.9
2. Salazar failed to adduce sufficient evidence to prove that her
possession of the three checks was lawful despite her
allegations that these checks were deposited pursuant to a prior
internal arrangement with Templonuevo and that petitioner was
privy to the arrangement.
3. The CA should have applied the Civil Code provisions on legal
compensation because in deducting the subject amount from
Salazar’s account, petitioner was merely rectifying the undue
18
payment it made upon the checks and exercising its prerogative
to alter or modify an erroneous credit entry in the regular course
of its business.
4. The debit of the amount from the account of A.A. Salazar
Construction and Engineering Services was proper even though
the value of the checks had been originally credited to the
personal account of Salazar because A.A. Salazar Construction
and Engineering Services, an unincorporated single
proprietorship, had no separate and distinct personality from
Salazar.
5. Assuming the deduction from Salazar’s account was
improper, the CA should not have dismissed petitioner’s third-
party complaint against Templonuevo because the latter would
have the legal duty to return to petitioner the proceeds of the
checks which he previously received from it.
6. There was no factual basis for the award of damages to
Salazar.
The petition is partly meritorious.
First, the issue raised by petitioner requires an inquiry into the
factual findings made by the CA. The CA’s conclusion that the
deductions from the bank account of A.A. Salazar Construction
and Engineering Services were improper stemmed from its
finding that there was no ineffective payment to Salazar which
would call for the exercise of petitioner’s right to set off against
the former’s bank deposits. This finding, in turn, was drawn from
the pleadings of the parties, the evidence adduced during trial
and upon the admissions and stipulations of fact made during
the pre-trial, most significantly the following:
(a) That Salazar previously had in her possession the following
checks:
(1) Solid Bank Check No. CB766556 dated January 30, 1990 in
the amount of P57,712.50;
(2) Solid Bank Check No. CB898978 dated July 31, 1990 in the
amount of P55,180.00; and,
(3) Equitable Banking Corporation Check No. 32380638 dated
August 28, 1990 for the amount of P154,800.00;
(b) That these checks which had an aggregate amount
of P267,692.50 were payable to the order of JRT Construction
and Trading, the name and style under which Templonuevo
does business;
(c) That despite the lack of endorsement of the designated
payee upon such checks, Salazar was able to deposit the
checks in her personal savings account with petitioner and
encash the same;
(d) That petitioner accepted and paid the checks on three (3)
separate occasions over a span of eight months in 1990; and
(e) That Templonuevo only protested the purportedly
unauthorized encashment of the checks after the lapse of one
year from the date of the last check.10
Petitioner concedes that when it credited the value of the checks
to the account of private respondent Salazar, it made a mistake

because it failed to notice the lack of endorsement thereon by
the designated payee. The CA, however, did not lend credence
to this claim and concluded that petitioner’s actions were
deliberate, in view of its admission that the "mistake" was
committed three times on three separate occasions, indicating
acquiescence to the internal arrangement between Salazar and
Templonuevo. The CA explained thus:
It was quite apparent that the three checks which appellee
Salazar deposited were not indorsed. Three times she deposited
them to her account and three times the amounts borne by these
checks were credited to the same. And in those separate
occasions, the bank did not return the checks to her so that she
could have them indorsed. Neither did the bank question her as
to why she was depositing the checks to her account
considering that she was not the payee thereof, thus allowing us
to come to the conclusion that defendant-appellant BPI was fully
aware that the proceeds of the three checks belong to appellee.
For if the bank was not privy to the agreement between Salazar
and Templonuevo, it is most unlikely that appellant BPI (or any
bank for that matter) would have accepted the checks for deposit
on three separate times nary any question. Banks are most
finicky over accepting checks for deposit without the
corresponding indorsement by their payee. In fact, they hesitate
to accept indorsed checks for deposit if the depositor is not one
they know very well.11
The CA likewise sustained Salazar’s position that she received
the checks from Templonuevo pursuant to an internal
arrangement between them, ratiocinating as follows:
If there was indeed no arrangement between Templonuevo and
the plaintiff over the three questioned checks, it baffles us why it
was only on August 31, 1991 or more than a year after the third
and last check was deposited that he demanded for the refund
of the total amount of P267,692.50.
A prudent man knowing that payment is due him would have
demanded payment by his debtor from the moment the same
became due and demandable. More so if the sum involved runs
in hundreds of thousand of pesos. By and large, every person,
at the very moment he learns that he was deprived of a thing
which rightfully belongs to him, would have created a big fuss.
He would not have waited for a year within which to do so. It is
most inconceivable that Templonuevo did not do this. 12
Generally, only questions of law may be raised in an appeal
by certiorari under Rule 45 of the Rules of Court.13Factual
findings of the CA are entitled to great weight and respect,
especially when the CA affirms the factual findings of the trial
court.14 Such questions on whether certain items of evidence
should be accorded probative value or weight, or rejected as
feeble or spurious, or whether or not the proofs on one side or
the other are clear and convincing and adequate to establish a
proposition in issue, are questions of fact. The same holds true
for questions on whether or not the body of proofs presented by
a party, weighed and analyzed in relation to contrary evidence
submitted by the adverse party may be said to be strong, clear
and convincing, or whether or not inconsistencies in the body of
proofs of a party are of such gravity as to justify refusing to give
said proofs weight – all these are issues of fact which are not
reviewable by the Court.15
19
This rule, however, is not absolute and admits of certain
exceptions, namely: a) when the conclusion is a finding
grounded entirely on speculations, surmises, or conjectures; b)
when the inference made is manifestly mistaken, absurd, or
impossible; c) when there is a grave abuse of discretion; d) when
the judgment is based on a misapprehension of facts; e) when
the findings of fact are conflicting; f) when the CA, in making its
findings, went beyond the issues of the case and the same are
contrary to the admissions of both appellant and appellee; g)
when the findings of the CA are contrary to those of the trial
court; h) when the findings of fact are conclusions without
citation of specific evidence on which they are based; i) when
the finding of fact of the CA is premised on the supposed
absence of evidence but is contradicted by the evidence on
record; and j) when the CA manifestly overlooked certain
relevant facts not disputed by the parties and which, if properly
considered, would justify a different conclusion.16
In the present case, the records do not support the finding made
by the CA and the trial court that a prior arrangement existed
between Salazar and Templonuevo regarding the transfer of
ownership of the checks. This fact is crucial as Salazar’s
entitlement to the value of the instruments is based on the
assumption that she is a transferee within the contemplation of
Section 49 of the Negotiable Instruments Law.
Section 49 of the Negotiable Instruments Law contemplates a
situation whereby the payee or indorsee delivers a negotiable
instrument for value without indorsing it, thus:
Transfer without indorsement; effect of- Where the holder of an
instrument payable to his order transfers it for value without
indorsing it, the transfer vests in the transferee such title as the
transferor had therein, and the transferee acquires in addition,
the right to have the indorsement of the transferor. But for the
purpose of determining whether the transferee is a holder in due
course, the negotiation takes effect as of the time when the
indorsement is actually made. 17
It bears stressing that the above transaction is an equitable
assignment and the transferee acquires the instrument subject
to defenses and equities available among prior parties. Thus, if
the transferor had legal title, the transferee acquires such title
and, in addition, the right to have the indorsement of the
transferor and also the right, as holder of the legal title, to
maintain legal action against the maker or acceptor or other
party liable to the transferor. The underlying premise of this
provision, however, is that a valid transfer of ownership of the
negotiable instrument in question has taken place.
Transferees in this situation do not enjoy the presumption of
ownership in favor of holders since they are neither payees nor
indorsees of such instruments. The weight of authority is that the
mere possession of a negotiable instrument does not in itself
conclusively establish either the right of the possessor to receive
payment, or of the right of one who has made payment to be
discharged from liability. Thus, something more than mere
possession by persons who are not payees or indorsers of the
instrument is necessary to authorize payment to them in the
absence of any other facts from which the authority to receive
payment may be inferred.18

The CA and the trial court surmised that the subject checks
belonged to private respondent Salazar based on the pre-trial
stipulation that Templonuevo incurred a one-year delay in
demanding reimbursement for the proceeds of the same. To the
Court’s mind, however, such period of delay is not of such
unreasonable length as to estop Templonuevo from asserting
ownership over the checks especially considering that it was
readily apparent on the face of the instruments 19 that these were
crossed checks.
In State Investment House v. IAC,20 the Court enumerated the
effects of crossing a check, thus: (1) that the check may not be
encashed but only deposited in the bank; (2) that the check may
be negotiated only once - to one who has an account with a
bank; and (3) that the act of crossing the check serves as a
warning to the holder that the check has been issued for a
definite purpose so that such holder must inquire if the check
has been received pursuant to that purpose.
Thus, even if the delay in the demand for reimbursement is taken
in conjunction with Salazar’s possession of the checks, it cannot
be said that the presumption of ownership in Templonuevo’s
favor as the designated payee therein was sufficiently
overcome. This is consistent with the principle that if instruments
payable to named payees or to their order have not been
indorsed in blank, only such payees or their indorsees can be
holders and entitled to receive payment in their own right.21
The presumption under Section 131(s) of the Rules of Court
stating that a negotiable instrument was given for a sufficient
consideration will not inure to the benefit of Salazar because the
term "given" does not pertain merely to a transfer of physical
possession of the instrument. The phrase "given or indorsed" in
the context of a negotiable instrument refers to the manner in
which such instrument may be negotiated. Negotiable
instruments are negotiated by "transfer to one person or another
in such a manner as to constitute the transferee
the holder thereof. If payable to bearer it is negotiated by
delivery. If payable to order it is negotiated by the indorsement
completed by delivery."22The present case involves checks
payable to order. Not being a payee or indorsee of the checks,
private respondent Salazar could not be a holder thereof.
It is an exception to the general rule for a payee of an order
instrument to transfer the instrument without indorsement.
Precisely because the situation is abnormal, it is but fair to the
maker and to prior holders to require possessors to prove
without the aid of an initial presumption in their favor, that they
came into possession by virtue of a legitimate transaction with
the last holder.23 Salazar failed to discharge this burden, and the
return of the check proceeds to Templonuevo was therefore
warranted under the circumstances despite the fact that
Templonuevo may not have clearly demonstrated that he never
authorized Salazar to deposit the checks or to encash the same.
Noteworthy also is the fact that petitioner stamped on the back
of the checks the words: "All prior endorsements and/or lack of
endorsements guaranteed," thereby making the assurance that
it had ascertained the genuineness of all prior endorsements.
Having assumed the liability of a general indorser, petitioner’s
liability to the designated payee cannot be denied.
20
Consequently, petitioner, as the collecting bank, had the right to
debit Salazar’s account for the value of the checks it previously
credited in her favor. It is of no moment that the account debited
by petitioner was different from the original account to which the
proceeds of the check were credited because both admittedly
belonged to Salazar, the former being the account of the sole
proprietorship which had no separate and distinct personality
from her, and the latter being her personal account.
The right of set-off was explained in Associated Bank v. Tan:24
A bank generally has a right of set-off over the deposits therein
for the payment of any withdrawals on the part of a depositor.
The right of a collecting bank to debit a client's account for the
value of a dishonored check that has previously been credited
has fairly been established by jurisprudence. To begin with,
Article 1980 of the Civil Code provides that "[f]ixed, savings, and
current deposits of money in banks and similar institutions shall
be governed by the provisions concerning simple loan."
Hence, the relationship between banks and depositors has been
held to be that of creditor and debtor. Thus, legal compensation
under Article 1278 of the Civil Code may take place "when all
the requisites mentioned in Article 1279 are present," as follows:
(1) That each one of the obligors be bound principally, and that
he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things
due are consumable, they be of the same kind, and also of the
same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and communicated in
due time to the debtor.
While, however, it is conceded that petitioner had the right of
set-off over the amount it paid to Templonuevo against the
deposit of Salazar, the issue of whether it acted judiciously is an
entirely different matter.25 As businesses affected with public
interest, and because of the nature of their functions, banks are
under obligation to treat the accounts of their depositors with
meticulous care, always having in mind the fiduciary nature of
their relationship.26In this regard, petitioner was clearly remiss in
its duty to private respondent Salazar as its depositor.
To begin with, the irregularity appeared plainly on the face of the
checks. Despite the obvious lack of indorsement thereon,
petitioner permitted the encashment of these checks three times
on three separate occasions. This negates petitioner’s claim that
it merely made a mistake in crediting the value of the checks to
Salazar’s account and instead bolsters the conclusion of the CA
that petitioner recognized Salazar’s claim of ownership of
checks and acted deliberately in paying the same, contrary to
ordinary banking policy and practice. It must be emphasized that
the law imposes a duty of diligence on the collecting bank to
scrutinize checks deposited with it, for the purpose of
determining their genuineness and regularity. The collecting
bank, being primarily engaged in banking, holds itself out to the
public as the expert on this field, and the law thus holds it to a

high standard of conduct.27 The taking and collection of a check
without the proper indorsement amount to a conversion of the
check by the bank.28
More importantly, however, solely upon the prompting of
Templonuevo, and with full knowledge of the brewing dispute
between Salazar and Templonuevo, petitioner debited the
account held in the name of the sole proprietorship of Salazar
without even serving due notice upon her. This ran contrary to
petitioner’s assurances to private respondent Salazar that the
account would remain untouched, pending the resolution of the
controversy between her and Templonuevo. 29 In this
connection, the CA cited the letter dated September 5, 1991 of
Mr. Manuel Ablan, Senior Manager of petitioner bank’s
Pasig/Ortigas branch, to private respondent Salazar informing
her that her account had been frozen, thus:
From the tenor of the letter of Manuel Ablan, it is safe to
conclude that Account No. 0201-0588-48 will remain frozen or
untouched until herein [Salazar] has settled matters with
Templonuevo. But, in an unexpected move, in less than two
weeks (eleven days to be precise) from the time that letter was
written, [petitioner] bank issued a cashier’s check in the name of
Julio R. Templonuevo of the J.R.T. Construction and Trading for
the sum of P267,692.50 (Exhibit "8") and debited said amount
from Ms. Arcilla’s account No. 0201-0588-48 which was
supposed to be frozen or controlled. Such a move by BPI is, to
Our minds, a clear case of negligence, if not a fraudulent,
wanton and reckless disregard of the right of its depositor.
The records further bear out the fact that respondent Salazar
had issued several checks drawn against the account of A.A.
Salazar Construction and Engineering Services prior to any
notice of deduction being served. The CA sustained private
respondent Salazar’s claim of damages in this regard:
The act of the bank in freezing and later debiting the amount
of P267,692.50 from the account of A.A. Salazar Construction
and Engineering Services caused plaintiff-appellee great
damage and prejudice particularly when she had already issued
checks drawn against the said account. As can be expected, the
said checks bounced. To prove this, plaintiff-appellee presented
as exhibits photocopies of checks dated September 8, 1991,
October 28, 1991, and November 14, 1991 (Exhibits "D", "E" and
"F" respectively)30
These checks, it must be emphasized, were subsequently
dishonored, thereby causing private respondent Salazar undue
embarrassment and inflicting damage to her standing in the
business community. Under the circumstances, she was clearly
not given the opportunity to protect her interest when petitioner
unilaterally withdrew the above amount from her account without
informing her that it had already done so.
For the above reasons, the Court finds no reason to disturb the
award of damages granted by the CA against petitioner. This
whole incident would have been avoided had petitioner adhered
to the standard of diligence expected of one engaged in the
banking business. A depositor has the right to recover
reasonable moral damages even if the bank’s negligence may
not have been attended with malice and bad faith, if the former
suffered mental anguish, serious anxiety, embarrassment and
humiliation.31 Moral damages are not meant to enrich a
21
complainant at the expense of defendant. It is only intended to
alleviate the moral suffering she has undergone. The award of
exemplary damages is justified, on the other hand, when the
acts of the bank are attended by malice, bad faith or gross
negligence. The award of reasonable attorney’s fees is proper
where exemplary damages are awarded. It is proper where
depositors are compelled to litigate to protect their interest. 32
WHEREFORE, the petition is partially GRANTED. The assailed
Decision dated April 3, 1998 and Resolution dated April 3, 1998
rendered by the Court of Appeals in CA-G.R. CV No. 42241
are MODIFIED insofar as it ordered petitioner Bank of the
Philippine Islands to return the amount of Two Hundred Sixty-
seven Thousand Seven Hundred and Seven and 70/100 Pesos
(P267,707.70) to respondent Annabelle A. Salazar, which
portion is REVERSED and SET ASIDE. In all other respects,
the same are AFFIRMED. No costs. SO ORDERED.
Freezing of Accounts
G.R. No. 123498 November 23, 2007
BPI FAMILY BANK, Petitioner,
vs.
AMADO FRANCO and COURT OF APPEALS, Respondents.
DECISION
NACHURA, J.:
Banks are exhorted to treat the accounts of their depositors with
meticulous care and utmost fidelity. We reiterate this exhortation
in the case at bench.
Before us is a Petition for Review on Certiorari seeking the
reversal of the Court of Appeals (CA) Decision1 in CA-G.R. CV
No. 43424 which affirmed with modification the judgment 2 of the
Regional Trial Court, Branch 55, Manila (Manila RTC), in Civil
Case No. 90-53295.
This case has its genesis in an ostensible fraud perpetrated on
the petitioner BPI Family Bank (BPI-FB) allegedly by respondent
Amado Franco (Franco) in conspiracy with other
individuals,3 some of whom opened and maintained separate
accounts with BPI-FB, San Francisco del Monte (SFDM) branch,
in a series of transactions.
On August 15, 1989, Tevesteco Arrastre-Stevedoring Co., Inc.
(Tevesteco) opened a savings and current account with BPI-FB.
Soon thereafter, or on August 25, 1989, First Metro Investment
Corporation (FMIC) also opened a time deposit account with the
same branch of BPI-FB with a deposit of ₱100,000,000.00, to
mature one year thence.
Subsequently, on August 31, 1989, Franco opened three
accounts, namely, a current,4 savings,5 and time deposit,6with
BPI-FB. The current and savings accounts were respectively
funded with an initial deposit of ₱500,000.00 each, while the
time deposit account had ₱1,000,000.00 with a maturity date of
August 31, 1990. The total amount of ₱2,000,000.00 used to
open these accounts is traceable to a check issued by

Tevesteco allegedly in consideration of Franco’s introduction of
Eladio Teves,7 who was looking for a conduit bank to facilitate
Tevesteco’s business transactions, to Jaime Sebastian, who
was then BPI-FB SFDM’s Branch Manager. In turn, the funding
for the ₱2,000,000.00 check was part of the ₱80,000,000.00
debited by BPI-FB from FMIC’s time deposit account and
credited to Tevesteco’s current account pursuant to an Authority
to Debit purportedly signed by FMIC’s officers.
It appears, however, that the signatures of FMIC’s officers on
the Authority to Debit were forged.8 On September 4, 1989,
Antonio Ong,9 upon being shown the Authority to Debit,
personally declared his signature therein to be a forgery.
Unfortunately, Tevesteco had already effected several
withdrawals from its current account (to which had been credited
the ₱80,000,000.00 covered by the forged Authority to Debit)
amounting to ₱37,455,410.54, including the ₱2,000,000.00 paid
to Franco.
On September 8, 1989, impelled by the need to protect its
interests in light of FMIC’s forgery claim, BPI-FB, thru its Senior
Vice-President, Severino Coronacion, instructed Jesus
Arangorin10 to debit Franco’s savings and current accounts for
the amounts remaining therein.11 However, Franco’s time
deposit account could not be debited due to the capacity
limitations of BPI-FB’s computer.12
In the meantime, two checks13 drawn by Franco against his BPI-
FB current account were dishonored upon presentment for
payment, and stamped with a notation "account under
garnishment." Apparently, Franco’s current account was
garnished by virtue of an Order of Attachment issued by the
Regional Trial Court of Makati (Makati RTC) in Civil Case No.
89-4996 (Makati Case), which had been filed by BPI-FB against
Franco et al.,14 to recover the ₱37,455,410.54 representing
Tevesteco’s total withdrawals from its account.
Notably, the dishonored checks were issued by Franco and
presented for payment at BPI-FB prior to Franco’s receipt of
notice that his accounts were under garnishment. 15 In fact, at the
time the Notice of Garnishment dated September 27, 1989 was
served on BPI-FB, Franco had yet to be impleaded in the Makati
case where the writ of attachment was issued.
It was only on May 15, 1990, through the service of a copy of
the Second Amended Complaint in Civil Case No. 89-4996, that
Franco was impleaded in the Makati case. 16 Immediately, upon
receipt of such copy, Franco filed a Motion to Discharge
Attachment which the Makati RTC granted on May 16, 1990.
The Order Lifting the Order of Attachment was served on BPI-
FB on even date, with Franco demanding the release to him of
the funds in his savings and current accounts. Jesus Arangorin,
BPI-FB’s new manager, could not forthwith comply with the
demand as the funds, as previously stated, had already been
debited because of FMIC’s forgery claim. As such, BPI-FB’s
computer at the SFDM Branch indicated that the current account
record was "not on file."
With respect to Franco’s savings account, it appears that Franco
agreed to an arrangement, as a favor to Sebastian, whereby
₱400,000.00 from his savings account was temporarily
transferred to Domingo Quiaoit’s savings account, subject to its
immediate return upon issuance of a certificate of deposit which
22
Quiaoit needed in connection with his visa application at the
Taiwan Embassy. As part of the arrangement, Sebastian
retained custody of Quiaoit’s savings account passbook to
ensure that no withdrawal would be effected therefrom, and to
preserve Franco’s deposits.
On May 17, 1990, Franco pre-terminated his time deposit
account. BPI-FB deducted the amount of ₱63,189.00 from the
remaining balance of the time deposit account representing
advance interest paid to him.
These transactions spawned a number of cases, some of which
we had already resolved.
FMIC filed a complaint against BPI-FB for the recovery of the
amount of ₱80,000,000.00 debited from its account.17The case
eventually reached this Court, and in BPI Family Savings Bank,
Inc. v. First Metro Investment Corporation,18 we upheld the
finding of the courts below that BPI-FB failed to exercise the
degree of diligence required by the nature of its obligation to
treat the accounts of its depositors with meticulous care. Thus,
BPI-FB was found liable to FMIC for the debited amount in its
time deposit. It was ordered to pay ₱65,332,321.99 plus interest
at 17% per annum from August 29, 1989 until fully restored. In
turn, the 17% shall itself earn interest at 12% from October 4,
1989 until fully paid.
In a related case, Edgardo Buenaventura, Myrna Lizardo and
Yolanda Tica (Buenaventura, et al.),19 recipients of a
₱500,000.00 check proceeding from the ₱80,000,000.00
mistakenly credited to Tevesteco, likewise filed suit.
Buenaventura et al., as in the case of Franco, were also
prevented from effecting withdrawals20 from their current
account with BPI-FB, Bonifacio Market, Edsa, Caloocan City
Branch. Likewise, when the case was elevated to this Court
docketed as BPI Family Bank v. Buenaventura,21 we ruled that
BPI-FB had no right to freeze Buenaventura, et al.’s accounts
and adjudged BPI-FB liable therefor, in addition to damages.
Meanwhile, BPI-FB filed separate civil and criminal cases
against those believed to be the perpetrators of the multi-million
peso scam.22 In the criminal case, Franco, along with the other
accused, except for Manuel Bienvenida who was still at large,
were acquitted of the crime of Estafa as defined and penalized
under Article 351, par. 2(a) of the Revised Penal
Code.23 However, the civil case24 remains under litigation and
the respective rights and liabilities of the parties have yet to be
adjudicated.
Consequently, in light of BPI-FB’s refusal to heed Franco’s
demands to unfreeze his accounts and release his deposits
therein, the latter filed on June 4, 1990 with the Manila RTC the
subject suit. In his complaint, Franco prayed for the following
reliefs: (1) the interest on the remaining balance25 of his current
account which was eventually released to him on October 31,
1991; (2) the balance26 on his savings account, plus interest
thereon; (3) the advance interest27 paid to him which had been
deducted when he pre-terminated his time deposit account; and
(4) the payment of actual, moral and exemplary damages, as
well as attorney’s fees.
BPI-FB traversed this complaint, insisting that it was correct in
freezing the accounts of Franco and refusing to release his

deposits, claiming that it had a better right to the amounts which
consisted of part of the money allegedly fraudulently withdrawn
from it by Tevesteco and ending up in Franco’s accounts. BPI-
FB asseverated that the claimed consideration of ₱2,000,000.00
for the introduction facilitated by Franco between George
Daantos and Eladio Teves, on the one hand, and Jaime
Sebastian, on the other, spoke volumes of Franco’s participation
in the fraudulent transaction.
On August 4, 1993, the Manila RTC rendered judgment, the
dispositive portion of which reads as follows:
WHEREFORE, in view of all the foregoing, judgment is hereby
rendered in favor of [Franco] and against [BPI-FB], ordering the
latter to pay to the former the following sums:
1. ₱76,500.00 representing the legal rate of interest on the
amount of ₱450,000.00 from May 18, 1990 to October 31, 1991;
2. ₱498,973.23 representing the balance on [Franco’s] savings
account as of May 18, 1990, together with the interest thereon
in accordance with the bank’s guidelines on the payment
therefor;
3. ₱30,000.00 by way of attorney’s fees; and
4. ₱10,000.00 as nominal damages.
The counterclaim of the defendant is DISMISSED for lack of
factual and legal anchor.
Costs against [BPI-FB].
SO ORDERED.28
Unsatisfied with the decision, both parties filed their respective
appeals before the CA. Franco confined his appeal to the Manila
RTC’s denial of his claim for moral and exemplary damages, and
the diminutive award of attorney’s fees. In affirming with
modification the lower court’s decision, the appellate court
decreed, to wit:
WHEREFORE, foregoing considered, the appealed decision is
hereby AFFIRMED with modification ordering [BPI-FB] to pay
[Franco] ₱63,189.00 representing the interest deducted from the
time deposit of plaintiff-appellant. ₱200,000.00 as moral
damages and ₱100,000.00 as exemplary damages, deleting the
award of nominal damages (in view of the award of moral and
exemplary damages) and increasing the award of attorney’s
fees from ₱30,000.00 to ₱75,000.00.
Cost against [BPI-FB].
SO ORDERED.29
In this recourse, BPI-FB ascribes error to the CA when it ruled
that: (1) Franco had a better right to the deposits in the subject
accounts which are part of the proceeds of a forged Authority to
Debit; (2) Franco is entitled to interest on his current account;
(3) Franco can recover the ₱400,000.00 deposit in Quiaoit’s
savings account; (4) the dishonor of Franco’s checks was not
legally in order; (5) BPI-FB is liable for interest on Franco’s time
deposit, and for moral and exemplary damages; and (6) BPI-
FB’s counter-claim has no factual and legal anchor.
23
The petition is partly meritorious.
We are in full accord with the common ruling of the lower courts
that BPI-FB cannot unilaterally freeze Franco’s accounts and
preclude him from withdrawing his deposits. However, contrary
to the appellate court’s ruling, we hold that Franco is not entitled
to unearned interest on the time deposit as well as to moral and
exemplary damages.
First. On the issue of who has a better right to the deposits in
Franco’s accounts, BPI-FB urges us that the legal consequence
of FMIC’s forgery claim is that the money transferred by BPI-FB
to Tevesteco is its own, and considering that it was able to
recover possession of the same when the money was
redeposited by Franco, it had the right to set up its ownership
thereon and freeze Franco’s accounts.
BPI-FB contends that its position is not unlike that of an owner
of personal property who regains possession after it is stolen,
and to illustrate this point, BPI-FB gives the following example:
where X’s television set is stolen by Y who thereafter sells it to
Z, and where Z unwittingly entrusts possession of the TV set to
X, the latter would have the right to keep possession of the
property and preclude Z from recovering possession thereof. To
bolster its position, BPI-FB cites Article 559 of the Civil Code,
which provides:
Article 559. The possession of movable property acquired in
good faith is equivalent to a title. Nevertheless, one who has lost
any movable or has been unlawfully deprived thereof, may
recover it from the person in possession of the same.
If the possessor of a movable lost or of which the owner has
been unlawfully deprived, has acquired it in good faith at a public
sale, the owner cannot obtain its return without reimbursing the
price paid therefor.
BPI-FB’s argument is unsound. To begin with, the movable
property mentioned in Article 559 of the Civil Code pertains to a
specific or determinate thing.30 A determinate or specific thing is
one that is individualized and can be identified or distinguished
from others of the same kind.31
In this case, the deposit in Franco’s accounts consists of money
which, albeit characterized as a movable, is generic and
fungible.32 The quality of being fungible depends upon the
possibility of the property, because of its nature or the will of the
parties, being substituted by others of the same kind, not having
a distinct individuality.33
Significantly, while Article 559 permits an owner who has lost or
has been unlawfully deprived of a movable to recover the exact
same thing from the current possessor, BPI-FB simply claims
ownership of the equivalent amount of money, i.e., the value
thereof, which it had mistakenly debited from FMIC’s account
and credited to Tevesteco’s, and subsequently traced to
Franco’s account. In fact, this is what BPI-FB did in filing the
Makati Case against Franco, et al. It staked its claim on the
money itself which passed from one account to another,
commencing with the forged Authority to Debit.
It bears emphasizing that money bears no earmarks of peculiar
ownership,34 and this characteristic is all the more manifest in

the instant case which involves money in a banking transaction
gone awry. Its primary function is to pass from hand to hand as
a medium of exchange, without other evidence of its
title.35 Money, which had passed through various transactions in
the general course of banking business, even if of traceable
origin, is no exception.
Thus, inasmuch as what is involved is not a specific or
determinate personal property, BPI-FB’s illustrative example,
ostensibly based on Article 559, is inapplicable to the instant
case.
There is no doubt that BPI-FB owns the deposited monies in the
accounts of Franco, but not as a legal consequence of its
unauthorized transfer of FMIC’s deposits to Tevesteco’s
account. BPI-FB conveniently forgets that the deposit of money
in banks is governed by the Civil Code provisions on simple loan
or mutuum.36 As there is a debtor-creditor relationship between
a bank and its depositor, BPI-FB ultimately acquired ownership
of Franco’s deposits, but such ownership is coupled with a
corresponding obligation to pay him an equal amount on
demand.37Although BPI-FB owns the deposits in Franco’s
accounts, it cannot prevent him from demanding payment of
BPI-FB’s obligation by drawing checks against his current
account, or asking for the release of the funds in his savings
account. Thus, when Franco issued checks drawn against his
current account, he had every right as creditor to expect that
those checks would be honored by BPI-FB as debtor.
More importantly, BPI-FB does not have a unilateral right to
freeze the accounts of Franco based on its mere suspicion that
the funds therein were proceeds of the multi-million peso scam
Franco was allegedly involved in. To grant BPI-FB, or any bank
for that matter, the right to take whatever action it pleases on
deposits which it supposes are derived from shady transactions,
would open the floodgates of public distrust in the banking
industry.
Our pronouncement in Simex International (Manila), Inc. v.
Court of Appeals38 continues to resonate, thus:
The banking system is an indispensable institution in the modern
world and plays a vital role in the economic life of every civilized
nation. Whether as mere passive entities for the safekeeping
and saving of money or as active instruments of business and
commerce, banks have become an ubiquitous presence among
the people, who have come to regard them with respect and
even gratitude and, most of all, confidence. Thus, even the
humble wage-earner has not hesitated to entrust his life’s
savings to the bank of his choice, knowing that they will be safe
in its custody and will even earn some interest for him. The
ordinary person, with equal faith, usually maintains a modest
checking account for security and convenience in the settling of
his monthly bills and the payment of ordinary expenses. x x x.
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 directs. A blunder on the part of the bank,
24
such as the dishonor of the 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. x x x.
Ineluctably, BPI-FB, as the trustee in the fiduciary relationship,
is duty bound to know the signatures of its customers. Having
failed to detect the forgery in the Authority to Debit and in the
process inadvertently facilitate the FMIC-Tevesteco transfer,
BPI-FB cannot now shift liability thereon to Franco and the other
payees of checks issued by Tevesteco, or prevent withdrawals
from their respective accounts without the appropriate court writ
or a favorable final judgment.
Further, it boggles the mind why BPI-FB, even without delving
into the authenticity of the signature in the Authority to Debit,
effected the transfer of ₱80,000,000.00 from FMIC’s to
Tevesteco’s account, when FMIC’s account was a time deposit
and it had already paid advance interest to FMIC. Considering
that there is as yet no indubitable evidence establishing Franco’s
participation in the forgery, he remains an innocent party. As
between him and BPI-FB, the latter, which made possible the
present predicament, must bear the resulting loss or
inconvenience.
Second. With respect to its liability for interest on Franco’s
current account, BPI-FB argues that its non-compliance with the
Makati RTC’s Order Lifting the Order of Attachment and the
legal consequences thereof, is a matter that ought to be taken
up in that court.
The argument is tenuous. We agree with the succinct holding of
the appellate court in this respect. The Manila RTC’s order to
pay interests on Franco’s current account arose from BPI-FB’s
unjustified refusal to comply with its obligation to pay Franco
pursuant to their contract of mutuum. In other words, from the
time BPI-FB refused Franco’s demand for the release of the
deposits in his current account, specifically, from May 17, 1990,
interest at the rate of 12% began to accrue thereon.39
Undeniably, the Makati RTC is vested with the authority to
determine the legal consequences of BPI-FB’s non-compliance
with the Order Lifting the Order of Attachment. However, such
authority does not preclude the Manila RTC from ruling on BPI-
FB’s liability to Franco for payment of interest based on its
continued and unjustified refusal to perform a contractual
obligation upon demand. After all, this was the core issue raised
by Franco in his complaint before the Manila RTC.
Third. As to the award to Franco of the deposits in Quiaoit’s
account, we find no reason to depart from the factual findings of
both the Manila RTC and the CA.
Noteworthy is the fact that Quiaoit himself testified that the
deposits in his account are actually owned by Franco who simply
accommodated Jaime Sebastian’s request to temporarily
transfer ₱400,000.00 from Franco’s savings account to Quiaoit’s
account.40 His testimony cannot be characterized as hearsay as

the records reveal that he had personal knowledge of the
arrangement made between Franco, Sebastian and himself. 41
BPI-FB makes capital of Franco’s belated allegation relative to
this particular arrangement. It insists that the transaction with
Quiaoit was not specifically alleged in Franco’s complaint before
the Manila RTC. However, it appears that BPI-FB had impliedly
consented to the trial of this issue given its extensive cross-
examination of Quiaoit.
Section 5, Rule 10 of the Rules of Court provides:
Section 5. Amendment to conform to or authorize presentation
of evidence.— When issues not raised by the pleadings are tried
with the express or implied consent of the parties, they shall be
treated in all respects as if they had been raised in the pleadings.
Such amendment of the pleadings as may be necessary to
cause them to conform to the evidence and to raise these issues
may be made upon motion of any party at any time, even after
judgment; but failure to amend does not affect the result of the
trial of these issues. If evidence is objected to at the trial on the
ground that it is now within the issues made by the pleadings,
the court may allow the pleadings to be amended and shall do
so with liberality if the presentation of the merits of the action
and the ends of substantial justice will be subserved thereby.
The court may grant a continuance to enable the amendment to
be made. (Emphasis supplied)
In all, BPI-FB’s argument that this case is not the right forum for
Franco to recover the ₱400,000.00 begs the issue. To reiterate,
Quiaoit, testifying during the trial, unequivocally disclaimed
ownership of the funds in his account, and pointed to Franco as
the actual owner thereof. Clearly, Franco’s action for the
recovery of his deposits appropriately covers the deposits in
Quiaoit’s account.
Fourth. Notwithstanding all the foregoing, BPI-FB continues to
insist that the dishonor of Franco’s checks respectively dated
September 11 and 18, 1989 was legally in order in view of the
Makati RTC’s supplemental writ of attachment issued on
September 14, 1989. It posits that as the party that applied for
the writ of attachment before the Makati RTC, it need not be
served with the Notice of Garnishment before it could place
Franco’s accounts under garnishment.
The argument is specious. In this argument, we perceive BPI-
FB’s clever but transparent ploy to circumvent Section 4,42 Rule
13 of the Rules of Court. It should be noted that the strict
requirement on service of court papers upon the parties affected
is designed to comply with the elementary requisites of due
process. Franco was entitled, as a matter of right, to notice, if
the requirements of due process are to be observed. Yet, he
received a copy of the Notice of Garnishment only on September
27, 1989, several days after the two checks he issued were
dishonored by BPI-FB on September 20 and 21, 1989. Verily, it
was premature for BPI-FB to freeze Franco’s accounts without
even awaiting service of the Makati RTC’s Notice of
Garnishment on Franco.
Additionally, it should be remembered that the enforcement of a
writ of attachment cannot be made without including in the main
suit the owner of the property attached by virtue thereof. Section
5, Rule 13 of the Rules of Court specifically provides that "no
25
levy or attachment pursuant to the writ issued x x x shall be
enforced unless it is preceded, or contemporaneously
accompanied, by service of summons, together with a copy of
the complaint, the application for attachment, on the defendant
within the Philippines."
Franco was impleaded as party-defendant only on May 15,
1990. The Makati RTC had yet to acquire jurisdiction over the
person of Franco when BPI-FB garnished his
accounts.43 Effectively, therefore, the Makati RTC had no
authority yet to bind the deposits of Franco through the writ of
attachment, and consequently, there was no legal basis for BPI-
FB to dishonor the checks issued by Franco.
Fifth. Anent the CA’s finding that BPI-FB was in bad faith and as
such liable for the advance interest it deducted from Franco’s
time deposit account, and for moral as well as exemplary
damages, we find it proper to reinstate the ruling of the trial court,
and allow only the recovery of nominal damages in the amount
of ₱10,000.00. However, we retain the CA’s award of
₱75,000.00 as attorney’s fees.
In granting Franco’s prayer for interest on his time deposit
account and for moral and exemplary damages, the CA
attributed bad faith to BPI-FB because it (1) completely
disregarded its obligation to Franco; (2) misleadingly claimed
that Franco’s deposits were under garnishment; (3)
misrepresented that Franco’s current account was not on file;
and (4) refused to return the ₱400,000.00 despite the fact that
the ostensible owner, Quiaoit, wanted the amount returned to
Franco.
In this regard, we are guided by Article 2201 of the Civil Code
which provides:
Article 2201. In contracts and quasi-contracts, the damages for
which the obligor who acted in good faith is liable shall be those
that are the natural and probable consequences of the breach
of the obligation, and which the parties have foreseen or could
have reasonable foreseen at the time the obligation was
constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor
shall be responsible for all damages which may be reasonably
attributed to the non-performance of the obligation. (Emphasis
supplied.)
We find, as the trial court did, that BPI-FB acted out of the
impetus of self-protection and not out of malevolence or ill will.
BPI-FB was not in the corrupt state of mind contemplated in
Article 2201 and should not be held liable for all damages now
being imputed to it for its breach of obligation. For the same
reason, it is not liable for the unearned interest on the time
deposit.
Bad faith does not simply connote bad judgment or negligence;
it imports a dishonest purpose or some moral obliquity and
conscious doing of wrong; it partakes of the nature of
fraud.44 We have held that it is a breach of a known duty through
some motive of interest or ill will.45 In the instant case, we cannot
attribute to BPI-FB fraud or even a motive of self-enrichment. As
the trial court found, there was no denial whatsoever by BPI-FB
of the existence of the accounts. The computer-generated
 26

document which indicated that the current account was "not on
file" resulted from the prior debit by BPI-FB of the deposits. The
remedy of freezing the account, or the garnishment, or even the
outright refusal to honor any transaction thereon was resorted to
solely for the purpose of holding on to the funds as a security for
its intended court action,46 and with no other goal but to ensure
the integrity of the accounts.
We have had occasion to hold that in the absence of fraud or
bad faith,47 moral damages cannot be awarded; and that the
adverse result of an action does not per se make the action
wrongful, or the party liable for it. One may err, but error alone
is not a ground for granting such damages.48
An award of moral damages contemplates the existence of the
already pointed out, of its own making. Accordingly, the denial
of its counter-claim is in order.
WHEREFORE, the petition is PARTIALLY GRANTED. The
Court of Appeals Decision dated November 29, 1995 is
AFFIRMED with the MODIFICATION that the award of
unearned interest on the time deposit and of moral and
exemplary damages is DELETED. No pronouncement as to
costs. SO ORDERED.
Footnotes
1
Penned by Associate Justice Eugenio S. Labitoria, with Associate Justices
Cancio C. Garcia (retired Associate Justice of the Supreme Court) and Portia Alino
Hormachuelos, concurring; rollo, pp. 40-55.

following requisites: (1) there must be an injury clearly sustained 2

CA rollo, pp. 70-79.
by the claimant, whether physical, mental or psychological; (2) 3
Antonio T. Ong, Manuel Bienvenida, Jr., Milagros Nayve, Jaime Sebastian, Ador
there must be a culpable act or omission factually established; de Asis, and Eladio Teves. Rollo, pp. 160-207. RTC, Quezon City, Branch 85,
(3) the wrongful act or omission of the defendant is the proximate Decision in Crim. Case No. Q91-22386.
cause of the injury sustained by the claimant; and (4) the award 4
Account No. 840-107483-7.
for damages is predicated on any of the cases stated in Article
2219 of the Civil Code.49 5
Account No. 1668238-1.
6
Account No. 08523412.
Franco could not point to, or identify any particular circumstance
in Article 2219 of the Civil Code,50 upon which to base his claim 7
President of Tevesteco.
for moral damages.1âwphi1 8
BPI-FB’s Memorandum, rollo, pp. 104-105.
Thus, not having acted in bad faith, BPI-FB cannot be held liable 9
Executive Vice-President of FMIC.
for moral damages under Article 2220 of the Civil Code for
10
The new BPI-FB SFDM branch manager who replaced Jaime Sebastian.
breach of contract.51
11
BPI-FB’s Memorandum, rollo, p. 105.
We also deny the claim for exemplary damages. Franco should
12
show that he is entitled to moral, temperate, or compensatory Id.
damages before the court may even consider the question of 13
Respectively dated September 11 and 18, 1989. The first check dated August
whether exemplary damages should be awarded to him.52 As 31, 1989 Franco issued in the amount of ₱50,000.00 was honored by BPI-FB.
there is no basis for the award of moral damages, neither can 14
Supra note 3. The names of other defendants in Crim. Case No. Q91-22386.
exemplary damages be granted.
15
Franco received the Notice of Garnishment on September 27, 1989, but the 2
While it is a sound policy not to set a premium on the right to checks he had issued were presented for payment at BPI-FB on September 20 &
21, 1989, respectively.
litigate,53 we, however, find that Franco is entitled to reasonable
attorney’s fees for having been compelled to go to court in order 16
Franco’s Memorandum, rollo, p. 137.
to assert his right. Thus, we affirm the CA’s grant of ₱75,000.00 17
Docketed as Civil Case No. 89-5280 and entitled "First Metro Investment
as attorney’s fees. Corporation v. BPI Family Bank."

Attorney’s fees may be awarded when a party is compelled to 18

G.R. No. 132390, May 21, 2004, 429 SCRA 30.
litigate or incur expenses to protect his interest, 54 or when the 19
Officers of the International Baptist Church and International Baptist Academy in
court deems it just and equitable.55 In the case at bench, BPI- Malabon, Metro Manila.
FB refused to unfreeze the deposits of Franco despite the 20
The checks issued by Buenaventura et al. were dishonored upon presentment
Makati RTC’s Order Lifting the Order of Attachment and for payment.
Quiaoit’s unwavering assertion that the ₱400,000.00 was part of 21
G.R. No. 148196, September 30, 2005, 471 SCRA 431.
Franco’s savings account. This refusal constrained Franco to
incur expenses and litigate for almost two (2) decades in order 22
Supra note 3.
to protect his interests and recover his deposits. Therefore, this 23
Rollo, pp. 160-208.
Court deems it just and equitable to grant Franco ₱75,000.00 as
attorney’s fees. The award is reasonable in view of the 24
The Makati Case for recovery of the ₱37,455,410.54 representing Tevesteco’s
total withdrawals wherein Franco was belatedly impleaded, and a Writ of
complexity of the issues and the time it has taken for this case Garnishment was issued on Franco’s accounts.
to be resolved.56
25
₱450,000.00.
Sixth. As for the dismissal of BPI-FB’s counter-claim, we uphold 26
The reflected amount of ₱98,973.23 plus ₱400,000.00 representing what was
the Manila RTC’s ruling, as affirmed by the CA, that BPI-FB is transferred to Quiaoit’s account under their arrangement
not entitled to recover ₱3,800,000.00 as actual damages. BPI-
27
₱63,189.00.
FB’s alleged loss of profit as a result of Franco’s suit is, as
28
CA rollo, p. 79.
 27

29
Rollo, p. 54. The spouse, descendants, ascendants, and brother and sisters may bring the
action mentioned in No. 9 of this article, in the order named.
30
See Article 1460, paragraph 1 of the Civil Code. A thing is determinate when it
51
is particularly designated or physically segregated from all others of the same Art. 2220. Willful injury to property may be a legal ground for awarding moral
class. damages if the court should find that, under the circumstances, such damages are
justly due. The same rule applies to breaches of contract where the defendant
31
Tolentino, Civil Code of the Philippines Commentaries and Jurisprudence, Vol. acted fraudulently or in bad faith.
IV, 1985, p. 90.
52
Article 2234 of the Civil Code.
32
See Article 418 of the Civil Code, taken from Article 337 of the Old Civil Code
which used the words "fungible or non-fungible." Art. 2234. While the amount of the exemplary damages need not be proved, the
plaintiff must show that he is entitled to moral, temperate or compensatory
33
Tolentino, Civil Code of the Philippines Commentaries and Jurisprudence, Vol. damages before the court may consider the question of whether or not exemplary
II, 1983, p. 26. damages should be awarded. In case liquidated damages have been agreed upon,
although no proof of loss is necessary in order that such liquidated damages may
34
United States v. Sotelo, 28 Phil. 147, 158 (1914). be recovered, nevertheless, before the court may consider the question of granting
exemplary in addition to the liquidated damages, the plaintiff must show that he
35
Id. would be entitled to moral, temperate or compensatory damages were it not for the
stipulation for liquidated damages.
36
Article 1980 of the Civil Code: Fixed, savings, and current deposits of money in
53
banks and similar institutions shall be governed by the provisions concerning loan. Bank of the Philippine Islands v. Casa Montessori Internationale, supra note 48,
See Article 1933 of the Civil Code. at 296.
37 54
Article 1953 of the Civil Code: A person who receives a loan of money or any CIVIL CODE, Art. 2208, par. (2).
other fungible thing acquires the ownership thereof, and is bound to pay the
55
creditor an equal amount of the same kind and quality. CIVIL CODE, Art. 2208, par. (11).
38 56
G.R. No. 88013, March 19, 1990, 183 SCRA 360, 366-367. Ching Sen Ben v. Court of Appeals, 373 Phil. 544, 555 (1999).
39
See Eastern Shipping Lines, Inc. v. Court of Appeals, G.R. No. 97412, July 12,
1994, 234 SCRA 78, 95.
40
TSN, July 30, 1991, p. 5. Closure of Accounts
41
Id. at 5-11. G.R. No. 157314 July 29, 2005
42
SEC. 4. Papers required to be filed and served.— Every judgment, resolution, FAR EAST BANK AND TRUST COMPANY, NOW BANK OF
order, pleading subsequent to the complaint, written motion, notice, appearance,
demand, offer of judgment or similar papers shall be filed with the court, and served THE PHILIPPINE ISLANDS, Petitioners, vs.
upon the parties affected. THEMISTOCLES PACILAN, JR., Respondent.
43
See Sievert v. Court of Appeals, G.R. No. L-84034, December 22, 1988, 168
SCRA 692, 696.
DECISION
44
Board of Liquidators v. Heirs of Maximo Kalaw, et al., 127 Phil. 399, 421 (1967). CALLEJO, SR., J.:
45
Lopez, et al. v. Pan American World Airways, 123 Phil. 256, 264-265 (1966). Before the Court is the petition for review on certiorari filed by Far East
46 Bank and Trust Company (now Bank of the Philippines Islands) seeking
CA rollo, p. 74.
the reversal of the Decision1 dated August 30, 2002 of the Court of
47
Suario v. Bank of the Philippine Islands, G.R. No. 50459, August 25, 1989, 176 Appeals (CA) in CA-G.R. CV No. 36627 which ordered it, together with
SCRA 688, 696; citing Guita v. Court of Appeals, 139 SCRA 576, 580 (1985). its branch accountant, Roger Villadelgado, to pay respondent
48
Themistocles Pacilan, Jr.2 the total sum of ₱100,000.00 as moral and
Bank of the Philippine Islands v. Casa Montessori Internationale, G.R. No.
149454, May 28, 2004, 430 SCRA 261, 293-294. exemplary damages. The assailed decision affirmed with modification
that of the Regional Trial Court (RTC) of Negros Occidental, Bacolod
49
United Coconut Planters Bank v. Ramos, 461 Phil. 277, 298 (2003); citing City, Branch 54, in Civil Case No. 4908. Likewise sought to be reversed
Cathay Pacific Airways, Ltd. v. Spouses Vazquez, 447 Phil. 306 (2003). and set aside is the Resolution dated January 17, 2003 of the appellate
50
Art. 2219. Moral damages may be recovered in the following and analogous court, denying petitioner bank’s motion for reconsideration.
cases:
The case stemmed from the following undisputed facts:
(1) A criminal offense resulting in physical injuries;
Respondent Pacilan opened a current account with petitioner
(2) Quasi-delicts causing physical injuries;
bank’s Bacolod Branch on May 23, 1980. His account was
(3) Seduction, abduction, rape, or other lascivious acts; denominated as Current Account No. 53208 (0052-00407-4).
(4) Adultery or concubinage;
The respondent had since then issued several postdated checks
to different payees drawn against the said account. Sometime in
(5) Illegal or arbitrary detention or arrest; March 1988, the respondent issued Check No. 2434886 in the
(6) Illegal search; amount of ₱680.00 and the same was presented for payment to
petitioner bank on April 4, 1988.
(7) Libel, slander or any other form of defamation;

(8) Malicious prosecution;

(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
The parents of the female seduced, abducted, raped, or abused, referred to in No.
3 of this article, may also recover moral damages.
Upon its presentment on the said date, Check No. 2434886 was
dishonored by petitioner bank. The next day, or on April 5, 1988,
the respondent deposited to his current account the amount of
₱800.00. The said amount was accepted by petitioner bank;
hence, increasing the balance of the respondent’s deposit to
₱1,051.43.

Subsequently, when the respondent verified with petitioner bank
about the dishonor of Check No. 2434866, he discovered that
his current account was closed on the ground that it was
"improperly handled." The records of petitioner bank disclosed
that between the period of March 30,
1988 and April 5, 1988, the respondent issued four checks, to
wit: Check No. 2480416 for ₱6,000.00; Check No. 2480419 for
₱50.00; Check No. 2434880 for ₱680.00 and; Check No.
2434886 for ₱680.00, or a total amount of ₱7,410.00. At the
time, however, the respondent’s current account with petitioner
bank only had a deposit of ₱6,981.43. Thus, the total amount of
the checks presented for payment on April 4, 1988 exceeded the
balance of the respondent’s deposit in his account. For this
reason, petitioner bank, through its branch accountant,
Villadelgado, closed the respondent’s current account effective
the evening of April 4, 1988 as it then had an overdraft of
₱428.57. As a consequence of the overdraft, Check No.
2434886 was dishonored.
On April 18, 1988, the respondent wrote to petitioner bank
complaining that the closure of his account was unjustified.
When he did not receive a reply from petitioner bank, the
respondent filed with the RTC of Negros Occidental, Bacolod
City, Branch 54, a complaint for damages against petitioner
bank and Villadelgado. The case was docketed as Civil Case
No. 4908. The respondent, as complainant therein, alleged that
the closure of his current account by petitioner bank was
unjustified because on the first banking hour of April 5, 1988, he
already deposited an amount sufficient to fund his checks. The
respondent pointed out that Check No. 2434886, in particular,
was delivered to petitioner bank at the close of banking hours on
April 4, 1988 and, following normal banking procedure, it
(petitioner bank) had until the last clearing hour of the following
day, or on April 5, 1988, to honor the check or return it, if not
funded. In disregard of this banking procedure and practice,
however, petitioner bank hastily closed the respondent’s current
account and dishonored his Check No. 2434886.
The respondent further alleged that prior to the closure of his
current account, he had issued several other postdated checks.
The petitioner bank’s act of closing his current account allegedly
preempted the deposits that he intended to make to fund those
checks. Further, the petitioner bank’s act exposed him to
criminal prosecution for violation of Batas Pambansa Blg. 22.
According to the respondent, the indecent haste that attended
the closure of his account was patently malicious and intended
to embarrass him. He claimed that he is a Cashier of Prudential
Bank and Trust Company, whose branch office is located just
across that of petitioner bank, and a prominent and respected
leader both in the civic and banking communities. The alleged
malicious acts of petitioner bank besmirched the respondent’s
reputation and caused him "social humiliation, wounded
feelings, insurmountable worries and sleepless nights" entitling
him to an award of damages.
In their answer, petitioner bank and Villadelgado maintained that
the respondent’s current account was subject to petitioner
bank’s Rules and Regulations Governing the Establishment and
Operation of Regular Demand
Deposits which provide that "the Bank reserves the right to close
an account if the depositor frequently draws checks against
28
insufficient funds and/or uncollected deposits" and that "the
Bank reserves the right at any time to return checks of the
depositor which are drawn against insufficient funds or for any
reason."3
They showed that the respondent had improperly and irregularly
handled his current account. For example, in 1986, the
respondent’s account was overdrawn 156 times, in 1987, 117
times and in 1988, 26 times. In all these instances, the account
was overdrawn due to the issuance of checks against
insufficient funds. The respondent had also signed several
checks with a different signature from the specimen on file for
dubious reasons.
When the respondent made the deposit on April 5, 1988, it was
obviously to cover for issuances made the previous day against
an insufficiently funded account. When his Check No. 2434886
was presented for payment on April 4, 1988, he had already
incurred an overdraft; hence, petitioner bank rightfully
dishonored the same for insufficiency of funds.
After due proceedings, the court a quo rendered judgment in
favor of the respondent as it ordered the petitioner bank and
Villadelgado, jointly and severally, to pay the respondent the
amounts of ₱100,000.00 as moral damages and ₱50,000.00 as
exemplary damages and costs of suit. In so ruling, the court a
quo also cited petitioner bank’s rules and regulations which state
that "a charge of ₱10.00 shall be levied against the depositor for
any check that is taken up as a returned item due to
‘insufficiency of funds’ on the date of receipt from the clearing
office even if said check is honored and/or covered by sufficient
deposit the following banking day." The same rules and
regulations also provide that "a check returned for insufficiency
of funds for any reason of similar import may be subsequently
recleared for one more time only, subject to the same charges."
According to the court a quo, following these rules and
regulations, the respondent, as depositor, had the right to put up
sufficient funds for a check that was taken as a returned item for
insufficient funds the day following the receipt of said check from
the clearing office. In fact, the said check could still be recleared
for one more time. In previous instances, petitioner bank notified
the respondent when he incurred an overdraft and he would then
deposit sufficient funds the following day to cover the overdraft.
Petitioner bank thus acted unjustifiably when it immediately
closed the respondent’s account on April 4, 1988 and deprived
him of the opportunity to reclear his check or deposit sufficient
funds therefor the following day.
As a result of the closure of his current account, several of the
respondent’s checks were subsequently dishonored and
because of this, the respondent was humiliated, embarrassed
and lost his credit standing in the business community. The
court a quo further ratiocinated that even granting arguendo that
petitioner bank had the right to close the respondent’s account,
the manner which attended the closure constituted an abuse of
the
said right. Citing Article 19 of the Civil Code of the Philippines
which states that "[e]very person must, in the exercise of his
rights and in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith" and
Article 20 thereof which states that "[e]very person who, contrary

to law, wilfully or negligently causes damage to another, shall
indemnify the latter for the same," the court a quo adjudged
petitioner bank of acting in bad faith. It held that, under the
foregoing circumstances, the respondent is entitled to an award
of moral and exemplary damages.
The decretal portion of the court a quo’s decision reads:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby
rendered:
1. Ordering the defendants [petitioner bank and Villadelgado],
jointly and severally, to pay plaintiff [the respondent] the sum of
₱100,000.00 as moral damages;
2. Ordering the defendants, jointly and severally, to pay plaintiff
the sum of ₱50,000.00 as exemplary damages plus costs and
expenses of the suit; and
3. Dismissing [the] defendants’ counterclaim for lack of merit.
SO ORDERED.4
On appeal, the CA rendered the Decision dated August 30,
2002, affirming with modification the decision of the court a quo.
The appellate court substantially affirmed the factual findings of
the court a quo as it held that petitioner bank unjustifiably closed
the respondent’s account notwithstanding that its own rules and
regulations
allow that a check returned for insufficiency of funds or any
reason of similar import, may be subsequently recleared for one
more time, subject to standard charges. Like the court a quo, the
appellate court observed that in several instances in previous
years, petitioner bank would inform the respondent when he
incurred an overdraft and allowed him to make a timely deposit
to fund the checks that were initially dishonored for insufficiency
of funds. However, on April 4, 1988, petitioner bank immediately
closed the respondent’s account without even notifying him that
he had incurred an overdraft. Even when they had already
closed his account on April 4, 1988, petitioner bank still accepted
the deposit that the respondent made on April 5, 1988,
supposedly to cover his checks.
Echoing the reasoning of the court a quo, the CA declared that
even as it may be conceded that petitioner bank had reserved
the right to close an account for repeated overdrafts by the
respondent, the exercise of that right must never be despotic or
arbitrary. That petitioner bank chose to close the account
outright and return the check, even after accepting a deposit
sufficient to cover the said check, is contrary to its duty to handle
the respondent’s account with utmost fidelity. The exercise of
the right is not absolute and good faith, at least, is required. The
manner by which petitioner bank closed the account of the
respondent runs afoul of Article 19 of the Civil Code which
enjoins every person, in the exercise of his rights, "to give every
one his due, and observe honesty and good faith."
The CA concluded that petitioner bank’s precipitate and
imprudent closure of the respondent’s account had caused him,
a respected officer of several civic and banking associations,
serious anxiety and humiliation. It had, likewise, tainted his credit
standing. Consequently, the award of damages is warranted.
29
The CA, however, reduced the amount of damages awarded by
the court a quo as it found the same to be excessive:
We, however, find excessive the amount of damages awarded
by the RTC. In our view the reduced amount of ₱75,000.00 as
moral damages and ₱25,000.00 as exemplary damages are in
order. Awards for damages are not meant to enrich the plaintiff-
appellee [the respondent] at the expense of defendants-
appellants [the petitioners], but to obviate the moral suffering he
has undergone. The award is aimed at the restoration, within
limits possible, of the status quo ante, and should be
proportionate to the suffering inflicted.5
The dispositive portion of the assailed CA decision reads:
WHEREFORE, the decision appealed from is hereby
AFFIRMED, subject to the MODIFICATION that the award of
moral damages is reduced to ₱75,000.00 and the award of
exemplary damages reduced to ₱25,000.00.
SO ORDERED.6
Petitioner bank sought the reconsideration of the said decision
but in the assailed Resolution dated January 17, 2003, the
appellate court denied its motion. Hence, the recourse to this
Court.
Petitioner bank maintains that, in closing the account of the
respondent in the evening of April 4, 1988, it acted in good faith
and in accordance with the rules and regulations governing the
operation of a
regular demand deposit which reserves to the bank "the right to
close an account if the depositor frequently draws checks
against insufficient funds and/or uncollected deposits." The
same rules and regulations also provide that "the depositor is
not entitled, as a matter of right, to overdraw on this deposit and
the bank reserves the right at any time to return checks of the
depositor which are drawn against insufficient funds or for any
reason."
It cites the numerous instances that the respondent had
overdrawn his account and those instances where he
deliberately signed checks using a signature different from the
specimen on file. Based on these facts, petitioner bank was
constrained to close the respondent’s account for improper and
irregular handling and returned his Check No. 2434886 which
was presented to the bank for payment on April 4, 1988.
Petitioner bank further posits that there is no law or rule which
gives the respondent a legal right to make good his check or to
deposit the corresponding amount to cover said check within 24
hours after the same is dishonored or returned by the bank for
having been drawn against insufficient funds. It vigorously
denies having violated Article 19 of the Civil Code as it insists
that it acted in good faith and in accordance with the pertinent
banking rules and regulations.
The petition is impressed with merit.
A perusal of the respective decisions of the court a quo and the
appellate court show that the award of damages in the
respondent’s favor was anchored mainly on Article 19 of the Civil
Code which, quoted anew below, reads:

Art. 19. Every person must, in the exercise of his rights and in
the performance of his duties, act with justice, give everyone his
due, and observe honesty and good faith.
The elements of abuse of rights are the following: (a) the existence
of a legal right or duty; (b) which is exercised in bad faith; and (c) for
the sole intent of prejudicing or injuring another.7 Malice or bad faith
is at the core of the said provision.8 The law always presumes good
faith and any person who seeks to be awarded damages due to acts
of another has the burden of proving that the latter acted in bad faith
or with ill-motive.9 Good faith refers to the state of the mind which is
manifested by the acts of the individual concerned. It consists of the
intention to abstain from taking an unconscionable and
unscrupulous advantage of another.10 Bad faith does not simply
connote bad judgment or simple negligence, dishonest purpose or
some moral obliquity and conscious doing of a wrong, a breach of
known duty due to some motives or interest or ill-will that partakes
of the nature of fraud.11 Malice connotes ill-will or spite and speaks
not in response to duty. It implies an intention to do ulterior and
unjustifiable harm. Malice is bad faith or bad motive. 12
Undoubtedly, petitioner bank has the right to close the account
of the respondent based on the following provisions of its Rules
and Regulations Governing the Establishment and Operation of
Regular Demand Deposits:
10) The Bank reserves the right to close an account if the
depositor frequently draws checks against insufficient funds
and/or uncollected deposits.
12) …
However, it is clearly understood that the depositor is not
entitled, as a matter of right, to overdraw on this deposit and the
bank reserves the right at any time to return checks of the
depositor which are drawn against insufficient funds or for any
other reason.
The facts, as found by the court a quo and the appellate court,
do not establish that, in the exercise of this right, petitioner bank
committed an abuse thereof. Specifically, the second and third
elements for abuse of rights are not attendant in the present
case. The evidence presented by petitioner bank negates the
existence of bad faith or malice on its part in closing the
respondent’s account on April 4, 1988 because on the said date
the same was already overdrawn. The respondent issued four
checks, all due on April 4, 1988, amounting to ₱7,410.00 when
the balance of his current account deposit was only ₱6,981.43.
Thus, he incurred an overdraft of ₱428.57 which resulted in the
dishonor of his Check No. 2434886. Further, petitioner bank
showed that in 1986, the current account of the respondent was
overdrawn 156 times due to his issuance of checks against
insufficient funds.13 In 1987, the said account was overdrawn
117 times for the same reason.14 Again, in 1988, 26
times.15 There were also several instances when the respondent
issued checks deliberately using a signature different from his
specimen signature on file with petitioner bank.16 All these
circumstances taken together justified the petitioner bank’s
closure of the respondent’s account on April 4, 1988 for
"improper handling."
It is observed that nowhere under its rules and regulations is
petitioner bank required to notify the respondent, or any
depositor for that matter, of the closure of the account for
30
frequently drawing checks against insufficient funds. No malice
or bad faith could be imputed on petitioner bank for so acting
since the records bear out that the respondent had indeed been
improperly and irregularly handling his account not just a few
times but hundreds of times. Under the circumstances, petitioner
bank could not be faulted for exercising its right in accordance
with the express rules and regulations governing the current
accounts of its depositors. Upon the opening of his account, the
respondent had agreed to be bound by these terms and
conditions.
Neither the fact that petitioner bank accepted the deposit made
by the respondent the day following the closure of his account
constitutes bad faith or malice on the part of petitioner bank. The
same could be characterized as simple negligence by its
personnel. Said act, by itself, is not constitutive of bad faith.
The respondent had thus failed to discharge his burden of
proving bad faith on the part of petitioner bank or that it was
motivated by ill-will or spite in closing his account on April 4,
1988 and in inadvertently accepting his deposit on April 5, 1988.
Further, it has not been shown that these acts were done by
petitioner bank with the sole intention of prejudicing and injuring
the respondent. It is conceded that the respondent may have
suffered damages as a result of the closure of his current
account. However, there is a material distinction between
damages and injury. The Court had the occasion to explain the
distinction between damages and injury in this wise:
… Injury is the illegal invasion of a legal right; damage is the loss,
hurt or harm which results from the injury; and damages are the
recompense or compensation awarded for the damage suffered.
Thus, there can be damage without injury in those instances in
which the loss or harm was not the result of a violation of a legal
duty. In such cases, the consequences must be borne by the injured
person alone, the law affords no remedy for damages resulting from
an act which does not amount to a legal injury or wrong. These
situations are often called damnum absque injuria.
In other words, in order that a plaintiff may maintain an action for
the injuries of which he complains, he must establish that such
injuries resulted from a breach of duty which the defendant owed
to the plaintiff – a concurrence of injury to the plaintiff and legal
responsibility by the person causing it. The underlying basis for
the award of tort damages is the premise that the individual was
injured in contemplation of law. Thus, there must first be a
breach of some duty and the imposition of liability for that breach
before damages may be awarded; and the breach of such duty
should be the proximate cause of the injury.17
Whatever damages the respondent may have suffered as a
consequence, e.g., dishonor of his other insufficiently funded
checks, would have to be borne by him alone. It was the
respondent’s repeated improper and irregular handling of his
account which constrained petitioner bank to close the same in
accordance with the rules and regulations governing its
depositors’ current accounts. The respondent’s case is clearly
one of damnum absque injuria.
WHEREFORE, the petition is GRANTED. The Decision dated August
30, 2002 and Resolution dated January 17, 2003 of the Court of Appeals
in CA-G.R. CV No. 36627 are REVERSED AND SET ASIDE. SO
ORDERED.