[G.R. No. 138569.

September 11, 2003]

THE CONSOLIDATED BANK and TRUST CORPORATION, petitioner, vs. COURT OF

APPEALS and L.C. DIAZ and COMPANY, CPAs, respondents.
DECISION
CARPIO, J.:

The Case
Before us is a petition for review of the Decision of the Court of Appeals dated 27 October 1998 and
its Resolution dated 11 May 1999. The assailed decision reversed the Decision of the Regional Trial
Court of Manila, Branch 8, absolving petitioner Consolidated Bank and Trust Corporation, now known as
Solidbank Corporation (Solidbank), of any liability. The questioned resolution of the appellate court
denied the motion for reconsideration of Solidbank but modified the decision by deleting the award of
exemplary damages, attorneys fees, expenses of litigation and cost of suit.
[1]

[2]

The Facts
Solidbank is a domestic banking corporation organized and existing under Philippine laws. Private
respondent L.C. Diaz and Company, CPAs (L.C. Diaz), is a professional partnership engaged in the
practice of accounting.
Sometime in March 1976, L.C. Diaz opened a savings account with Solidbank, designated as
Savings Account No. S/A 200-16872-6.
On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya (Macaraya), filled up a
savings (cash) deposit slip for P990 and a savings (checks) deposit slip for P50. Macaraya instructed the
messenger of L.C. Diaz, Ismael Calapre (Calapre), to deposit the money with Solidbank. Macaraya also
gave Calapre the Solidbank passbook.
Calapre went to Solidbank and presented to Teller No. 6 the two deposit slips and the
passbook. The teller acknowledged receipt of the deposit by returning to Calapre the duplicate copies of
the two deposit slips. Teller No. 6 stamped the deposit slips with the words DUPLICATE and SAVING
TELLER 6 SOLIDBANK HEAD OFFICE. Since the transaction took time and Calapre had to make
another deposit for L.C. Diaz with Allied Bank, he left the passbook with Solidbank. Calapre then went to
Allied Bank. When Calapre returned to Solidbank to retrieve the passbook, Teller No. 6 informed him that
somebody got the passbook. Calapre went back to L.C. Diaz and reported the incident to Macaraya.
[3]

Macaraya immediately prepared a deposit slip in duplicate copies with a check

of P200,000. Macaraya, together with Calapre, went to Solidbank and presented to Teller No. 6 the
deposit slip and check. The teller stamped the words DUPLICATE and SAVING TELLER 6
SOLIDBANK HEAD OFFICE on the duplicate copy of the deposit slip. When Macaraya asked for the
passbook, Teller No. 6 told Macaraya that someone got the passbook but she could not remember to
whom she gave the passbook. When Macaraya asked Teller No. 6 if Calapre got the passbook, Teller No.

6 answered that someone shorter than Calapre got the passbook. Calapre was then standing beside
Macaraya.
Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for the deposit of a check
for P90,000 drawn on Philippine Banking Corporation (PBC). This PBC check of L.C. Diaz was a check
that it had long closed. PBC subsequently dishonored the check because of insufficient funds and
because the signature in the check differed from PBCs specimen signature. Failing to get back the
passbook, Macaraya went back to her office and reported the matter to the Personnel Manager of L.C.
Diaz, Emmanuel Alvarez.
[4]

The following day, 15 August 1991, L.C. Diaz through its Chief Executive Officer, Luis C. Diaz
(Diaz), called up Solidbank to stop any transaction using the same passbook until L.C. Diaz could open
a new account. On the same day, Diaz formally wrote Solidbank to make the same request. It was also
on the same day that L.C. Diaz learned of the unauthorized withdrawal the day before, 14 August 1991,
of P300,000 from its savings account. The withdrawal slip for the P300,000 bore the signatures of the
authorized signatories of L.C. Diaz, namely Diaz and Rustico L. Murillo. The signatories, however, denied
signing the withdrawal slip. A certain Noel Tamayo received the P300,000.
[5]

In an Information dated 5 September 1991, L.C. Diaz charged its messenger, Emerano Ilagan
(Ilagan) and one Roscon Verdazola with Estafa through Falsification of Commercial Document. The
Regional Trial Court of Manila dismissed the criminal case after the City Prosecutor filed a Motion to
Dismiss on 4 August 1992.
[6]

On 24 August 1992, L.C. Diaz through its counsel demanded from Solidbank the return of its
money. Solidbank refused.
On 25 August 1992, L.C. Diaz filed a Complaint for Recovery of a Sum of Money against Solidbank
with the Regional Trial Court of Manila, Branch 8. After trial, the trial court rendered on 28 December
1994 a decision absolving Solidbank and dismissing the complaint.
[7]

L.C. Diaz then appealed to the Court of Appeals. On 27 October 1998, the Court of Appeals issued
its Decision reversing the decision of the trial court.
[8]

On 11 May 1999, the Court of Appeals issued its Resolution denying the motion for reconsideration
of Solidbank. The appellate court, however, modified its decision by deleting the award of exemplary
damages and attorneys fees.
The Ruling of the Trial Court
In absolving Solidbank, the trial court applied the rules on savings account written on the passbook.
The rules state that possession of this book shall raise the presumption of ownership and any payment
or payments made by the bank upon the production of the said book and entry therein of the withdrawal
shall have the same effect as if made to the depositor personally.
[9]

At the time of the withdrawal, a certain Noel Tamayo was not only in possession of the passbook, he
also presented a withdrawal slip with the signatures of the authorized signatories of L.C. Diaz. The
specimen signatures of these persons were in the signature cards. The teller stamped the withdrawal slip
with the words Saving Teller No. 5. The teller then passed on the withdrawal slip to Genere Manuel

(Manuel) for authentication. Manuel verified the signatures on the withdrawal slip. The withdrawal slip
was then given to another officer who compared the signatures on the withdrawal slip with the specimen
on the signature cards. The trial court concluded that Solidbank acted with care and observed the rules
on savings account when it allowed the withdrawal of P300,000 from the savings account of L.C. Diaz.
The trial court pointed out that the burden of proof now shifted to L.C. Diaz to prove that the
signatures on the withdrawal slip were forged. The trial court admonished L.C. Diaz for not offering in
evidence the National Bureau of Investigation (NBI) report on the authenticity of the signatures on the
withdrawal slip for P300,000. The trial court believed that L.C. Diaz did not offer this evidence because it
is derogatory to its action.
Another provision of the rules on savings account states that the depositor must keep the passbook
under lock and key. When another person presents the passbook for withdrawal prior to Solidbanks
receipt of the notice of loss of the passbook, that person is considered as the owner of the
passbook. The trial court ruled that the passbook presented during the questioned transaction was now
out of the lock and key and presumptively ready for a business transaction.
[10]

[11]

Solidbank did not have any participation in the custody and care of the passbook. The trial court
believed that Solidbanks act of allowing the withdrawal of P300,000 was not the direct and proximate
cause of the loss. The trial court held that L.C. Diazs negligence caused the unauthorized
withdrawal. Three facts establish L.C. Diazs negligence: (1) the possession of the passbook by a person
other than the depositor L.C. Diaz; (2) the presentation of a signed withdrawal receipt by an unauthorized
person; and (3) the possession by an unauthorized person of a PBC check long closed by L.C. Diaz,
which check was deposited on the day of the fraudulent withdrawal.
The trial court debunked L.C. Diazs contention that Solidbank did not follow the precautionary
procedures observed by the two parties whenever L.C. Diaz withdrew significant amounts from its
account. L.C. Diaz claimed that a letter must accompany withdrawals of more than P20,000. The letter
must request Solidbank to allow the withdrawal and convert the amount to a managers check. The
bearer must also have a letter authorizing him to withdraw the same amount. Another person driving a
car must accompany the bearer so that he would not walk from Solidbank to the office in making the
withdrawal. The trial court pointed out that L.C. Diaz disregarded these precautions in its past
withdrawal. On 16 July 1991, L.C. Diaz withdrew P82,554 without any separate letter of authorization or
any communication with Solidbank that the money be converted into a managers check.
The trial court further justified the dismissal of the complaint by holding that the case was a last ditch
effort of L.C. Diaz to recover P300,000 after the dismissal of the criminal case against Ilagan.
The dispositive portion of the decision of the trial court reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered DISMISSING the complaint.

The Court further renders judgment in favor of defendant bank pursuant to its counterclaim the amount of
Thirty Thousand Pesos (P30,000.00) as attorneys fees.
With costs against plaintiff.
SO ORDERED.

[12]

The Ruling of the Court of Appeals

The Court of Appeals ruled that Solidbanks negligence was the proximate cause of the unauthorized
withdrawal of P300,000 from the savings account of L.C. Diaz. The appellate court reached this
conclusion after applying the provision of the Civil Code on quasi-delict, to wit:

Article 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is
obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual
relation between the parties, is called a quasi-delict and is governed by the provisions of this chapter.
The appellate court held that the three elements of a quasi-delict are present in this case, namely: (a)
damages suffered by the plaintiff; (b) fault or negligence of the defendant, or some other person for
whose acts he must respond; and (c) the connection of cause and effect between the fault or negligence
of the defendant and the damage incurred by the plaintiff.
The Court of Appeals pointed out that the teller of Solidbank who received the withdrawal slip
for P300,000 allowed the withdrawal without making the necessary inquiry. The appellate court stated
that the teller, who was not presented by Solidbank during trial, should have called up the depositor
because the money to be withdrawn was a significant amount. Had the teller called up L.C. Diaz,
Solidbank would have known that the withdrawal was unauthorized. The teller did not even verify the
identity of the impostor who made the withdrawal. Thus, the appellate court found Solidbank liable for its
negligence in the selection and supervision of its employees.
The appellate court ruled that while L.C. Diaz was also negligent in entrusting its deposits to its
messenger and its messenger in leaving the passbook with the teller, Solidbank could not escape liability
because of the doctrine of last clear chance. Solidbank could have averted the injury suffered by L.C.
Diaz had it called up L.C. Diaz to verify the withdrawal.
The appellate court ruled that the degree of diligence required from Solidbank is more than that of a
good father of a family. The business and functions of banks are affected with public interest. Banks are
obligated to treat the accounts of their depositors with meticulous care, always having in mind the
fiduciary nature of their relationship with their clients. The Court of Appeals found Solidbank remiss in its
duty, violating its fiduciary relationship with L.C. Diaz.
The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, premises considered, the decision appealed from is hereby REVERSED and a new one
entered.
1.

Ordering defendant-appellee Consolidated Bank and Trust Corporation to pay plaintiffappellant the sum of Three Hundred Thousand Pesos (P300,000.00), with interest thereon
at the rate of 12% per annum from the date of filing of the complaint until paid, the sum
of P20,000.00 as exemplary damages, and P20,000.00 as attorneys fees and expenses of
litigation as well as the cost of suit; and

2.

Ordering the dismissal of defendant-appellees counterclaim in the amount of P30,000.00

as attorneys fees.

SO ORDERED.

[13]

Acting on the motion for reconsideration of Solidbank, the appellate court affirmed its decision but
modified the award of damages. The appellate court deleted the award of exemplary damages and
attorneys fees. Invoking Article 2231 of the Civil Code, the appellate court ruled that exemplary
damages could be granted if the defendant acted with gross negligence. Since Solidbank was guilty of
simple negligence only, the award of exemplary damages was not justified. Consequently, the award of
attorneys fees was also disallowed pursuant to Article 2208 of the Civil Code. The expenses of litigation
and cost of suit were also not imposed on Solidbank.
[14]

The dispositive portion of the Resolution reads as follows:

WHEREFORE, foregoing considered, our decision dated October 27, 1998 is affirmed with modification
by deleting the award of exemplary damages and attorneys fees, expenses of litigation and cost of suit.
SO ORDERED.

[15]

Hence, this petition.

The Issues
Solidbank seeks the review of the decision and resolution of the Court of Appeals on these grounds:

I.

THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER BANK

SHOULD SUFFER THE LOSS BECAUSE ITS TELLER SHOULD HAVE FIRST
CALLED PRIVATE RESPONDENT BY TELEPHONE BEFORE IT ALLOWED THE
WITHDRAWAL OF P300,000.00 TO RESPONDENTS MESSENGER EMERANO
ILAGAN, SINCE THERE IS NO AGREEMENT BETWEEN THE PARTIES IN THE
OPERATION OF THE SAVINGS ACCOUNT, NOR IS THERE ANY BANKING LAW,
WHICH MANDATES THAT A BANK TELLER SHOULD FIRST CALL UP THE
DEPOSITOR BEFORE ALLOWING A WITHDRAWAL OF A BIG AMOUNT IN A
SAVINGS ACCOUNT.

II.

THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF LAST

CLEAR CHANCE AND IN HOLDING THAT PETITIONER BANKS TELLER HAD
THE LAST OPPORTUNITY TO WITHHOLD THE WITHDRAWAL WHEN IT IS
UNDISPUTED THAT THE TWO SIGNATURES OF RESPONDENT ON THE
WITHDRAWAL SLIP ARE GENUINE AND PRIVATE RESPONDENTS PASSBOOK
WAS DULY PRESENTED, AND CONTRARIWISE RESPONDENT WAS
NEGLIGENT IN THE SELECTION AND SUPERVISION OF ITS MESSENGER
EMERANO ILAGAN, AND IN THE SAFEKEEPING OF ITS CHECKS AND OTHER
FINANCIAL DOCUMENTS.

III.

THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE INSTANT CASE
IS A LAST DITCH EFFORT OF PRIVATE RESPONDENT TO RECOVER

ITS P300,000.00 AFTER FAILING IN ITS EFFORTS TO RECOVER THE SAME

FROM ITS EMPLOYEE EMERANO ILAGAN.
IV.

THE COURT OF APPEALS ERRED IN NOT MITIGATING THE DAMAGES

AWARDED AGAINST PETITIONER UNDER ARTICLE 2197 OF THE CIVIL CODE,
NOTWITHSTANDING ITS FINDING THAT PETITIONER BANKS NEGLIGENCE
WAS ONLY CONTRIBUTORY.
[16]

The Ruling of the Court

The petition is partly meritorious.
Solidbanks Fiduciary Duty under the Law
The rulings of the trial court and the Court of Appeals conflict on the application of the law. The trial
court pinned the liability on L.C. Diaz based on the provisions of the rules on savings account, a
recognition of the contractual relationship between Solidbank and L.C. Diaz, the latter being a depositor of
the former. On the other hand, the Court of Appeals applied the law on quasi-delict to determine who
between the two parties was ultimately negligent. The law on quasi-delict or culpa aquiliana is generally
applicable when there is no pre-existing contractual relationship between the parties.
We hold that Solidbank is liable for breach of contract due to negligence, or culpa contractual.
The contract between the bank and its depositor is governed by the provisions of the Civil Code on
simple loan. Article 1980 of the Civil Code expressly provides that x x x savings x x x deposits of money
in banks and similar institutions shall be governed by the provisions concerning simple loan. There is a
debtor-creditor relationship between the bank and its depositor. The bank is the debtor and the depositor
is the creditor. The depositor lends the bank money and the bank agrees to pay the depositor on
demand. The savings deposit agreement between the bank and the depositor is the contract that
determines the rights and obligations of the parties.
[17]

The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of
Republic Act No. 8791 (RA 8791), which took effect on 13 June 2000, declares that the State
recognizes the fiduciary nature of banking that requires high standards of integrity and
performance. This new provision in the general banking law, introduced in 2000, is a statutory
affirmation of Supreme Court decisions, starting with the 1990 case of Simex International v. Court of
Appeals, holding that the bank is under obligation to treat the accounts of its depositors
with meticulous care, always having in mind the fiduciary nature of their relationship.
[18]

[19]

[20]

[21]

This fiduciary relationship means that the banks obligation to observe high standards of integrity
and performance is deemed written into every deposit agreement between a bank and its depositor. The
fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good
father of a family. Article 1172 of the Civil Code states that the degree of diligence required of an obligor
is that prescribed by law or contract, and absent such stipulation then the diligence of a good father of a
family. Section 2 of RA 8791 prescribes the statutory diligence required from banks that banks must
observe high standards of integrity and performance in servicing their depositors. Although RA 8791
took effect almost nine years after the unauthorized withdrawal of the P300,000 from L.C. Diazs savings
[22]

account, jurisprudence at the time of the withdrawal already imposed on banks the same high standard
of diligence required under RA No. 8791.
[23]

However, the fiduciary nature of a bank-depositor relationship does not convert the contract between
the bank and its depositors from a simple loan to a trust agreement, whether express or implied. Failure
by the bank to pay the depositor is failure to pay a simple loan, and not a breach of trust. The law simply
imposes on the bank a higher standard of integrity and performance in complying with its obligations
under the contract of simple loan, beyond those required of non-bank debtors under a similar contract of
simple loan.
[24]

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

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

The bank must not only exercise high standards of integrity and performance, it must also insure
that its employees do likewise because this is the only way to insure that the bank will comply with its
fiduciary duty. Solidbank failed to present the teller who had the duty to return to Calapre the passbook,
and thus failed to prove that this teller exercised the high standards of integrity and performance
required of Solidbanks employees.
Proximate Cause of the Unauthorized Withdrawal
Another point of disagreement between the trial and appellate courts is the proximate cause of the
unauthorized withdrawal. The trial court believed that L.C. Diazs negligence in not securing its passbook
under lock and key was the proximate cause that allowed the impostor to withdraw the P300,000. For the
appellate court, the proximate cause was the tellers negligence in processing the withdrawal without first
verifying with L.C. Diaz. We do not agree with either court.
Proximate cause is that cause which, in natural and continuous sequence, unbroken by any efficient
intervening cause, produces the injury and without which the result would not have occurred. Proximate
cause is determined by the facts of each case upon mixed considerations of logic, common sense, policy
and precedent.
[26]

[27]

L.C. Diaz was not at fault that the passbook landed in the hands of the impostor. Solidbank was in
possession of the passbook while it was processing the deposit. After completion of the transaction,
Solidbank had the contractual obligation to return the passbook only to Calapre, the authorized
representative of L.C. Diaz. Solidbank failed to fulfill its contractual obligation because it gave the
passbook to another person.
Solidbanks failure to return the passbook to Calapre made possible the withdrawal of the P300,000
by the impostor who took possession of the passbook. Under Solidbanks rules on savings account, mere
possession of the passbook raises the presumption of ownership. It was the negligent act of Solidbanks
Teller No. 6 that gave the impostor presumptive ownership of the passbook. Had the passbook not fallen
into the hands of the impostor, the loss of P300,000 would not have happened. Thus, the proximate
cause of the unauthorized withdrawal was Solidbanks negligence in not returning the passbook to
Calapre.
We do not subscribe to the appellate courts theory that the proximate cause of the unauthorized
withdrawal was the tellers failure to call up L.C. Diaz to verify the withdrawal. Solidbank did not have the
duty to call up L.C. Diaz to confirm the withdrawal. There is no arrangement between Solidbank and L.C.
Diaz to this effect. Even the agreement between Solidbank and L.C. Diaz pertaining to measures that the

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

xxx Ilagan also had with him (before the withdrawal) a forged check of PBC and indicated the amount of
P90,000 which he deposited in favor of L.C. Diaz and Company. After successfully withdrawing this
large sum of money, accused Ilagan gave alias Rey (Noel Tamayo) his share of the loot. Ilagan then hired
a taxicab in the amount of P1,000 to transport him (Ilagan) to his home province at Bauan,
Batangas. Ilagan extravagantly and lavishly spent his money but a big part of his loot was wasted in
cockfight and horse racing. Ilagan was apprehended and meekly admitted his guilt. (Emphasis
supplied.)
[28]

L.C. Diaz refutes Solidbanks contention by pointing out that the person who withdrew the P300,000
was a certain Noel Tamayo. Both the trial and appellate courts stated that this Noel Tamayo presented
the passbook with the withdrawal slip.
We uphold the finding of the trial and appellate courts that a certain Noel Tamayo withdrew
the P300,000. The Court is not a trier of facts. We find no justifiable reason to reverse the factual finding
of the trial court and the Court of Appeals. The tellers who processed the deposit of the P90,000 check
and the withdrawal of the P300,000 were not presented during trial to substantiate Solidbanks claim that
Ilagan deposited the check and made the questioned withdrawal. Moreover, the entry quoted by
Solidbank does not categorically state that Ilagan presented the withdrawal slip and the passbook.
Doctrine of Last Clear Chance
The doctrine of last clear chance states that where both parties are negligent but the negligent act of
one is appreciably later than that of the other, or where it is impossible to determine whose fault or
negligence caused the loss, the one who had the last clear opportunity to avoid the loss but failed to do
so, is chargeable with the loss. Stated differently, the antecedent negligence of the plaintiff does not
preclude him from recovering damages caused by the supervening negligence of the defendant, who had
the last fair chance to prevent the impending harm by the exercise of due diligence.
[29]

[30]

We do not apply the doctrine of last clear chance to the present case. Solidbank is liable for breach
of contract due to negligence in the performance of its contractual obligation to L.C. Diaz. This is a case
of culpa contractual, where neither the contributory negligence of the plaintiff nor his last clear chance to
avoid the loss, would exonerate the defendant from liability. Such contributory negligence or last clear
chance by the plaintiff merely serves to reduce the recovery of damages by the plaintiff but does not
exculpate the defendant from his breach of contract.
[31]

[32]

Mitigated Damages
Under Article 1172, liability (for culpa contractual) may be regulated by the courts, according to the
circumstances. This means that if the defendant exercised the proper diligence in the selection and
supervision of its employee, or if the plaintiff was guilty of contributory negligence, then the courts may
reduce the award of damages. In this case, L.C. Diaz was guilty of contributory negligence in allowing a
withdrawal slip signed by its authorized signatories to fall into the hands of an impostor. Thus, the liability
of Solidbank should be reduced.
In Philippine Bank of Commerce v. Court of Appeals, where the Court held the depositor guilty
of contributory negligence, we allocated the damages between the depositor and the bank on a 40-60
ratio. Applying the same ruling to this case, we hold that L.C. Diaz must shoulder 40% of the actual
damages awarded by the appellate court. Solidbank must pay the other 60% of the actual damages.
[33]

WHEREFORE, the decision of the Court of Appeals is AFFIRMED with MODIFICATION. Petitioner
Solidbank Corporation shall pay private respondent L.C. Diaz and Company, CPAs only 60% of the actual
damages awarded by the Court of Appeals. The remaining 40% of the actual damages shall be borne by
private respondent L.C. Diaz and Company, CPAs. Proportionate costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Vitug, and Ynares-Santiago, JJ., concur.
Azcuna, J., on official leave.

G.R. No. 88353 May 8, 1992

CENTRAL BANK OF THE PHILIPPINES and HON. JOSE B. FERNANDEZ, petitioners,
vs.
HON. COURT OF APPEALS, RTC JUDGE TEOFILO GUADIZ, JR., PRODUCERS BANK OF THE PHILIPPINES
and PRODUCERS PROPERTIES, INC., respondents.
G.R. No. 92943 May 8, 1992
ATTY. LEONIDA G. TANSINSIN-ENCARNACION, as the Acting Conservator of Producers Bank of the
Philippines, and PRODUCERS BANK OF THE PHILIPPINES, petitioners,

vs.
PRODUCERS BANK OF THE PHILIPPINES, allegedly represented by HENRY L. CO, HON. COURT OF
APPEALS, HON. TEOFILO GUADIZ, JR., and the "LAW FIRM OF QUISUMBING, TORRES AND EVANGELISTA"
(RAMON J. QUISUMBING, VICENTE TORRES,RAFAEL E. EVANGELISTA, JR. and CHRISTOFER L.
LIM), respondents.
Agapito S. Fajardo, Jerry P. Rebutoc & Antonio M. Tan for petitioners in G.R. No. 88353.
Leonida G.T. Encarnacion for petitioners in G.R. No. 92943.
Quiason, Makalintal, Barot, Torres, Ibarra Law Office for the respondents in G.R. Nos. 88353 & 92943.
DAVIDE, JR., J.:
The common origin of these cases is Civil Case No. 17692 filed before Branch 147 (Makati) of the Regional trail
Court, National Capital Judicial Region and entitled Producers Bank of the Philippines and Producers Properties, Inc.
versus Central Bank of the Philippines, Jose B. Fernandez. Jr. and the Monetary Board. On 21 January 1991, this
Court ordered the consolidation of G.R. No. 92943 with G.R. No. 88353. 1
The first case, G.R. No. 88353, is a petition for review on certiorari of the decision of 6 October 1988 2 and the
resolution of 17 May 1989 3 of the respondent Court of Appeals in C.A.-G.R. No. SP-13624. The impugned decision upheld the 21
September 1987 Order of respondent Judge Teofilo Guadiz, Jr. in Civil Case No. 17692 granting the motion for issuance of a writ of
preliminary injunction enjoining petitioners Central Bank of the Philippines (CB), Mr. Jose B. Fernandez, Jr. and the Monetary
Board, or any of their agencies from implementing Monetary Board (MB) Resolutions No. 649 and No. 751, or from taking the
threatened appropriate alternative action and the 27 October 1987 Order in the same case denying petitioners' motion to dismiss
and vacate said injunction. The challenged resolution, on the other hand, denied petitioners' motion for reconsideration of the 6
October 1988 decision.

The second case, G.R. No. 92943, is a petition for review directed principally against the 17 January 1990 decision of
the respondent Court of Appeals in C.A.-G.R. SP No. 16972. The said decision dismissed the petition therein filed
and sustained the various Orders of the respondent Judge in Civil Case No. 17692, but directed the plaintiffs therein
to amend the amended complaint by stating in its prayer the specific amount of damages which Producers Bank of
the Philippines (PBP) claims to have sustained as a result of losses of operation and the conservator's bank frauds
and abuses; the Clerk of Court was also ordered to determine the amount of filing fees which should be paid by the
plaintiffs within the applicable prescriptive or reglementary period. 4
The records of both cases reveal the following factual and procedural antecedents:
Petitioners claim that on 29 April 1983, during the regular examination of the PBP, CB examiners stumbled upon
some highly questionable loans which had been extended by the PBP management to several entities. Upon further
examination, it was discovered that these loans, totalling approximately P300 million, were "fictitious" as they were
extended, without collateral, to certain interests related to PBP owners themselves. Said loans were deemed to be
anomalous particularly because the total paid-in capital of PBP at that time was only P 140.544 million. This means
that the entire paid-in capital of the bank, together with some P160 million of depositors' money, was utilized by PBP
management to fund these unsecured loans.
Sometime in August of the same year, at the height of the controversy surrounding the discovery of the anomalous
loans, several blind items about a family-owned bank in Binondo which granted fictitious loans to its stockholders
appeared in major newspapers. These news items triggered a bank-run in PBP which resulted in continuous overdrawings on the bank's demand deposit account with the Central Bank; the over-drawings reached P74.109 million
by 29 August 1983. By 17 January 1984, PBP's overdraft with the CB increased to P143.955 million, an indication of
PBP's continuing inability to maintain that condition of solvency and liquidity necessary to protect the interests of its
depositors and creditors. Hence, on 20 January 1984, on the basis of the report submitted by the Supervision and

Examination Sector, Department I of the CB, the Monetary Board (MB), pursuant to its authority under Section 28-A
of R.A. No. 265 and by virtue of MB Board Resolution No. 164, placed PBP under conservatorship. 5
While PBP admits that it had no choice but to submit to the conservatorship, 6 it nonetheless requested that the same be
lifted by the CB. Consequently, the MB issued on 3 February 1984 Resolution No. 169 directing the principal stockholders of PBP to
increase its capital accounts by such an amount that would be necessary for the elimination of PBP's negative net worth of P424
million. On 10 April 1984, CB senior deputy Governor Gabriel Singson informed PBP that pursuant to MB Resolution No. 490 of 30
March 1984, the CB would be willing to lift the conservatorship under the following conditions:

(a) PBP's unsecured overdraft with the Central Bank will be converted into an emergency loan, to
be secured by sufficient collateral, including but not limited to the Following properties offered by
PBP's principal stockholders:
i. 6 floors and other areas of the Producers Bank Bldg., at Paseo de Roxas,
owned by PBP;
ii. 15 floors of the Producers Bank Bldg., at Paseo de Roxas, Makati, owned by
the Producers Properties, Inc.;
iii. Manhattan Bldg. on Nueva Street, Binondo, Manila; and
iv. Producers Bank, Makati Branch Bldg. at Buendia Avenue, Makati;
(b) A comptroller for PBP and any number of bank examiners deemed necessary to oversee PBP's
operations shall be designated by the Central Bank, under terms of reference to be determined by
the Governor;
(c) A letter from the Management of PBP authorizing the Central Bank to automatically return
clearing items that would result in an overdraft in its Central Bank account shall be submitted to the
Central Bank.
On 27 April 1984, the MB adopted Resolution No. 584 approving the consolidation of PBP's other unsecured
obligations to the CB with its overdraft and authorizing the conversion thereof into an emergency loan. The same
resolution authorized the CB Governor to lift the conservatorship and return PBP's management to its principal
stockholders upon completion of the documentation and full collateralization of the emergency loan, but directed PBP
to pay the emergency loan in five (5) equal annual installments, with interest and penalty rates at MRR 180 days plus
48% per annum, and liquidated damages of 5% for delayed payments.
On 4 June 1984, PBP submitted a rehabilitation plan to the CB which proposed the transfer to PBP of three (3)
buildings owned by Producers Properties, Inc. (PPI), its principal stockholder and the subsequent mortgage of said
properties to the CB as collateral for the bank's overdraft obligation. 7 Although said proposal was explored and discussed,
no program acceptable to both the CB and PPI was arrived at because of disagreements on certain matters such as interest rates,
penalties and liquidated damages.

No other rehabilitation program was submitted by PBP for almost three (3) years; as a result thereof, its overdrafts
with the CB continued to accumulate. By the end of June 1987, the figure swelled to a staggering P1.023
billion.Consequently, per Resolution No. 649 dated 3 July 1987, the CB Monetary Board decided to approve in
principle what it considered a viable rehabilitation program for PBP. The program had these principal features:
Al. The Central Bank will assign in favor of the Philippine Deposit Insurance Corporation (PDIC) its
claim over the overdraft of PBP net of net peso differential arising from swap transactions and
interest thereon, up to the amount of the par value of the Producers Properties, Inc. (PPI) shares of
stock in PBP presently pledged to the Central Bank, and PDIC will enter into a contract of dacion

en pago with PBP and PPI whereby PDIC will acquire 4,116,100 preferred shares of stock of PBP
with a par value of P100 per share in consideration for which PDIC will convey its rights over the
overdraft assigned to it by the Central Bank, in favor of PPI;
2. The balance of the overdraft of PBP, after the assignment to PDIC of a portion of such overdraft
referred to in Item I above, will also be assigned to PDIC and converted into preferred shares of
stock of PBP;
3. The interest on the overdraft of PBP will be reduced to 11.75% p.a. retroactively to the date when
the overdraft of PBP was incurred;
4. The accrued interest on the overdraft of PBP, at the reduced rate approved in Item 3 above, as
well as the unbooked penalties on legal reserve deficiencies of PBP will be assigned in favor of
PDIC and such amounts will be allowed to be converted into preferred shares of stock of PBP; and
5. The booking of valuation reserves will be allowed as follows:
3rd year P31 million
4th year 48 million
5th year 67 million
6th year 85 million
7th year 105 million
8th year 124.61 million
subject to the following conditions:
a. Fresh capital of P200.0 million shall be put up, provided that a new group of
stockholders shall hold at least 40% of the total outstanding voting shares of
stock of PBP;
b. PBP shall submit additional collaterals to fully collateralize its overdraft with the
Central Bank;
c. PPI shall convey to PBP the remaining floors of the Producers Bank Centre for
a value of P143.54 million partly in payment of DOSRI loans of P27.6 million,
principal plus interest, and the balance of P115.94 million for shares of stock of
PBP, P15.12 million common and P100.89 million preferred, with features as
presently provided under PBP's Articles of Incorporation and By-Laws;
d. PBP's Articles of Incorporation and By-Laws shall be amended so as to
create a special class of preferred, non-voting, cumulative, non-participating
shares of stock with a dividend rate of 12% which shall be issued (i) in exchange
for the PPI shares that will be conveyed to PDIC under the dacion en pago
mentioned in Item 1 above, (ii) in consideration of the balance of PBP's overdraft
assigned to PDIC under Item 2 above, (iii) in consideration of the accrued
interest on PBP's overdraft assigned to PDIC and the unbooked penalties on
legal reserve deficiencies of PBP also assigned to PDIC. The said preferred
shares of stock shall be convertible into common voting shares of stock upon the
sale of such preferred shares to private parties at the option of such
parties.Proceeds from the sale of these shares of stock shall be used to liquidate
the advances made by the Central Bank to PDIC by virtue of the various
assignments under Items 1, 2, and 4 above. The said shares of stock shall not

share in losses and other capital adjustments representing reduction of capital

accounts as recommended by SES Department I incurred up to the date of the
issuance of such shares of stock;
e. PBP shall execute in favor of a trustee to be approved by the Central Bank of
mortgage trust indenture covering the assets presently mortgaged/pledged to
Central Bank as collateral for the overdraft of PBP as well as additional
collaterals to be submitted to fully collateralize the overdraft of PBP, under which
indenture PDIC as holder of preferred shares of stocks, shall have the first lien
and preference over the assets subject of the indenture in case of insolvency, to
the extent of the overdraft converted into preferred shares of stock, provided that
PBP shall submit an opinion from the Securities and Exchange Commission that
such indenture is legal and valid; and
f. The principal stockholders of both PBP and PPI shall submit in writing their
conformity to the above conditions, with the effect that any previous agreements
to the contrary shall be set aside; and
B. To require PBP to submit to the Monetary Board for approval the identities of the new
stockholdersand the new management which shall not be changed without the prior approval of the
Central Bank, it being understood that final approval of the above rehabilitation plan shall depend
entirely upon the acceptance by the Board of the new stockholders and the new management; and
to give PBP a period of two weeks after such final approval within which to implement the above
rehabilitation plan 8(Emphasis supplied).
There being no response from both PBP and PPI on the proposed rehabilitation plan, the MB issued Resolution No.
751 on 7 August 1987 instructing Central Bank management to advise the bank, through Mr. Henry Co, as follows:
a. The Central Bank conservatorship over PBP may be lifted only after PBP shall have identified
the new group of stockholders who will put in new capital in PBP and after the Monetary Board
shall have considered such new stockholders as acceptable; and
b. The stockholders of PBP have to decide whether or not to accept the terms of the rehabilitation
plan as provided under Resolution
No. 649 dated July 3, 1987 within one week from receipt of notice hereof and if such terms are not
acceptable to them, the Central Bank will take appropriate alternative action on the matter; . . . 9
Additionally, in a letter dated 14 August 1987, the CB called the attention of the PBP directors and officers to Section
107 of R.A. No. 265, as amended by Executive Order No. 289 dated 23 July 1987, which provides, inter alia, that:
. . . any bank which incurs an overdrawing in its deposit account with the Central Bank shall fully
cover said overdraft not later than the next clearing day: Provided, further, That settlement of
clearing balances shall not be effected for any account which continue (sic) to be overdrawn for
five consecutive banking days until such time as the overdrawing is fully covered or otherwise
converted into an emergency loan or advance pursuant to the provisions of Sec. 90 of this
Act. Provided, Finally, That the appropriate clearing office shall be officially notified of banks with
overdrawn balances.Banks with existing overdrafts with the Central Bank as of the effectivity of this
amended section shall within such period as may be prescribed by the Monetary Board, either
convert the overdraft into an emergency loan or advance with a plan of payment, or settle such
overdrafts, and that upon failure to so comply herewith, the Central Bank shall take such action
against the bank as may be warranted under this Act. (Emphasis provided).

A. few days later, or on 27 August 1987, the PBP, without responding to the communications of the CB, filed a
complaint verified by its former board chairman, Henry Co, with the Regional Trial Court of Makati against the CB, the
MB and CB Governor Jose B. Fernandez, Jr. The complaint, docketed as Civil Case No. 17692, 10 devoted several
pages to specific allegations in support of PBP's assertions that the conservatorship was unwarranted, ill-motivated, illegal, utterly
unnecessary and unjustified; that the appointment of the conservator was arbitrary; that herein petitioners acted in bad faith; that the
CB-designated conservators committed bank frauds and abuses; that the CB is guilty of promissory estoppel; and that by reason of
the conservatorship, it suffered losses enumerated in paragraph 27 thereof, the total quantifiable extent of which is
P108,479,771.00, exclusive of loss of profits and loss of
goodwill. 11 It concluded with a prayer for:

. . . judicial review of Monetary Board Resolutions No. 649 dated July 3, 1987 and No. 751 dated
14 August, 1987 and that judgment be rendered nullifying the same and ordering defendant Central
Bank's conservator to restore the viability of PBP as mandated by section 28-A of R.A. 265 and to
fully repair the damages inflicted on PBP consisting of losses of operation and the conservators'
bank frauds and abuses, with costs against defendants. (emphasis supplied).
and for:
. . . the issue of a temporary restraining order/preliminary injunction enjoining defendants' coercion
on PBP to accept the rehabilitation plan within one week or their taking "appropriate alternative
action" including exclusion of PBP from settlement of clearing balances at the Central
Bank clearing house, pending judicial review of Monetary Board Resolutions No. 649 dated July 3,
1987 and No. 751 dated August 14,
1987 defendants not being above the law. 12
Only P102.00 was paid as docket fee.
The case was raffled to Branch 147 of said court which was then presided over by respondent Judge.
On 31 August 1987, respondent Judge issued a temporary restraining order and set the hearing of the application for
preliminary injunction on 9 September 1987. 13 On 11 September 1987, petitioner filed an Opposition to the application for
preliminary injunction. 14

Subsequently, on 21 September 1987, respondent Judge issued an Order granting the writ 15 and enjoining defendantpetitioners or any of their agents from:

. . . implementing Monetary Board Resolutions Nos. 649 and 751 or from taking the threatened
"appropriate alternative action" including exclusion of plaintiff bank from settlement of clearing
balances at the Central Bank clearing house or any other action that will disturb the status quo or
the viability of plaintiff bank during the pendency of this case conditioned upon the posting of a
bond in the amount of P2,000,000.00.
On 25 October 1987, PBP filed the Amended Complaint 16 impleading PPI as an additional plaintiff. No new allegations or
causes of action for said plaintiff were made.

On 5 November 1987, petitioners filed a Motion to Dismiss the Amended Complaint. The motion contained a prayer
to vacate the injunction and raised the following grounds:
1) the amended complaint states no cause of action; MB Resolution Nos. 649 and 751 are merely
advisory, thus, neither effect impairment of plaintiffs' rights nor cause it prejudice, loss or damage;
furthermore, there is no basis for the averments on the legality or illegality of the conservatorship
since the amended complaint does not seek its annulment;

2) the amended complaint is not authorized by the management of PBP; and

3) the lower court did not acquire jurisdiction over the case except to order the amended complaint
expunged from the records because the proper filing fee was not paid. 17
On 27 November 1987, the trial court, through the respondent Judge, handed down an Order denying the motion to
dismiss on the following grounds: (a) the amended complaint alleges ultimate facts showing that plaintiff has a right
and that such a right has been violated by defendant; the questioned MB Resolutions were issued arbitrarily and with
bad faith, "being a part of a scheme to divest plaintiff's present stockholders of their control of PBP and to award the
same to the PDIC or its unknown transferees"; and the averments of legality or illegality of the conservatorship are
relevant to the cause of action since the complaint seeks the lifting of the conservatorship; (b) While it is true that
under Section 28-A of the Central Bank Act the conservator takes over the management of a bank, the Board of
Directors of such bank is not prohibited from filing a suit to lift the conservatorship and from questioning the validity of
both the conservator's fraudulent acts and abuses and its principal's (MB) arbitrary action; besides, PPI is now a
party-plaintiff in the action; and (c) plaintiffs have paid the correct filing fees since "the value of the case cannot be
estimated." 18
G.R. No. 88353
Unable to accept the above Order, herein petitioners CB and Jose B. Fernandez, Jr. filed with respondent Court of
Appeals on 11 January 1988 a petition for certiorari with preliminary injunction 19 to annul the 21 September and 27
November 1987 Orders of the respondent Judge, restrain the implementation of the same and nullify the writ of preliminary
injunction. They contend therein that:

1. The trial court's injunctive order and writ are anomalous and illegal because they are directed
against CB acts and measures which constitute no invasion of plaintiff's rights; and
2. The complaint filed was, on its face, dismissible: (a) for failure to state a cause of action, (b) for
being unauthorized by the party in whose name it purports to have been filed, and (c) for failure of
the purported plaintiff to pay the required filing fees.
Confronted with the "threshold and decisive issue of whether the respondent Judge gravely abused his discretion
when he issued the Writ of Preliminary Injunction to enjoin petitioner from implementing Monetary Board Resolutions
Nos. 649 and 751 for having been issued arbitrarily and with bad faith," the respondent Court promulgated the
challenged decision dismissing the petition for lack of merit. 20 Respondent Court ruled that the CB's sudden and untimely
announcement of the conservatorship over PBP eroded the confidence which the banking public had hitherto reposed on the bank
and resulted in the bank-run; it then concluded that when the CB "peremptorily and illtimely (sic) announced" the conservatorship,
PBP was not given an opportunity to be heard since the CB arbitrarily brushed aside administrative due process notwithstanding
PBP's having sufficiently established its inherent corporate right to autonomously perform its banking activities without undue
governmental interference that would in effect divest its stockholders of their control over the operations of the bank." It further held
that the challenged resolutions of the MB are not just advisory in character "because the same sought to impose upon the
respondent bank petitioners' governmental acts that were specifically designed and executed to devise a scheme that would
irreparably divest from the stockholders of the respondent bank control of the same."

The motion filed by petitioners for the reconsideration of the above decision was denied by the respondent Court in its
Resolution of 17 May
1989. 21 On the issue of the non-payment of the correct docket fees, the said court, in ruling that the correct amount was paid, said
that "the instant case is incapable of pecuniary estimation because the value of the losses incurred by the respondent bank cannot
be calibrated nor pinned down to a specific amount in view of the damage that may be caused by the appointment of a conservator
to its goodwill and standing in the community."

Undaunted by the adverse decision of the Court of Appeals, petitioners filed with this Court on 30 July 1989 the
instant petition for review under Rule 45 of the Rules of Court. 22 It is alleged therein that the respondent Court committed
grave abuse of discretion in:

(1) Ignoring petitioners' contention that since PBP did not pay the correct filing fees, the trial court
did not acquire jurisdiction over the case; hence, pursuant to Manchester Development Corp., et
al. vs.Court of Appeals, et al., G.R. No. 75919, 7 May 1987, 23 the complaint should have been
dismissed for lack of jurisdiction on the part of the court;

(2) . . . ruling on the propriety or impropriety of the conservatorship as a basis for determining the
existence of a cause of action since the amended complaint does not seek the annulment or lifting
of the conservatorship;
(3) . . . not holding that the amended complaint should have been dismissed because it was filed in
the name of PBP without the authority of its conservator; and
(4) . . . not setting aside the Order of the trial court granting the issuance of a writ of preliminary
injunction which unlawfully restrained the CB from exercising its mandated responsibilities and
effectively compelled it to allow the PBP to continue incurring overdrafts with it.
This petition was docketed as G.R. No. 88353.
On 19 July 1989, this Court required the respondents to comment on the petition. 24
In the Comment 25 filed on 9 October 1989, private respondents maintain that: (a) the issue of whether or not they paid the correct
filing fees involves a question of correctness of judgment, not grave abuse of discretion; errors of judgment cannot be the subject of
the present petition for certiorari; (b) the complaint and the amended complaint state sufficient causes of action because they both
contain specific allegations of an illegal, unnecessary, disastrous and repressive conservatorship conducted contrary to its
mandated purpose, and breach of promissory estoppel; furthermore, the trial court committed no grave abuse of discretion when it
found that the questioned MB Resolutions were arbitrarily issued in contravention of the due process clause of the Constitution; (c)
the "Filing of the complaint without authority from the conservator is an issue involving an error of judgment; besides, it would be
ridiculous and absurd to require such prior authorization from the conservator for no one expects him to sanction the filing of a suit
against his principal the CB; moreover, Rule 3 of the Rules of Court requires that every action must be prosecuted and defended
in the name of the real party in interest; besides, no administrative authority, even the CB, can nullify judicial review of administrative
action by requiring that only said administrative authority or its designated conservator can file suit for judicial review of its actuation;
and (d) the writ of preliminary injunction was properly issued.

Petitioners filed a Reply 26 to the Comment on 3 November 1989.

In their Supplemental Comment, private respondents argue that the Manchester rule is not applicable in the case at
bar because what is primarily sought for herein is a writ of injunction and not an award for damages; it is further
alleged that an order denying a motion to dismiss is neither appealable nor be made the proper subject of a petition
for certiorari absent a clear showing of lack of jurisdiction or grave abuse of discretion.
On 15 February 1990, this Court resolved to give due course to the instant petition and require the parties to
simultaneously file their respective Memoranda, 27 which they complied with.
On 1 March 1990, petitioners filed an Urgent Motion 28 informing this Court of the fact that on 6 June 1989, PBP, through
Henry Co, proposed another rehabilitation plan which involved the infusion of fresh capital into PBP by Banque Indosuez (Bangue)
and the AFP-Retirement and Separation Benefits Systems (ARSBS). Under said proposal, all existing law suits of PBP against the
Central Bank and the PBP Conservator, and vice-versa, shall be withdrawn upon approval and implementation of the plan. The plan
was approved by the Monetary Board in its Resolution No. 497 dated 23 June 1989. However, before the mechanics of the
rehabilitation plan could be threshed out among the parties, a "quarrel" developed between Henry and Luis Co, who both have
controlling interests in PBP. Luis accused Henry of "serious manipulations" in PBP and both steadfastly refused to settle their
differences notwithstanding efforts of mediators, including prospective investors. Eventually, the prospective investors, in a letter
dated 20 November 1989, advised the Central Bank that they are withdrawing their offer to infuse capital in PBP and that they have
terminated all discussions with the Co family.

Petitioner further allege that with the withdrawal of Banque Indosuez and RSBS, the rehabilitation plan for PBP is no
longer feasible. Meanwhile, the bank's overdraft with the Central Bank continues to rise. As of 13 February 1990,
PBP's overdraft with the CB increased to P1.233 billion. If the injunction is not lifted, PBP will continually bleed the CB
because of the former's liability to discharge its responsibilities under the law.
G.R. No. 92943
Pursuant to the powers and authority conferred upon her by the Central Bank, Atty. Leonida Tansinsin-Encarnacion,
in her capacity as conservator, instituted reforms aimed at making PBP more viable. With this purpose in mind, she
started reorganizing the bank's personnel and committees.
In order to prevent her from continuing with the reorganization, PBP filed on 24 October 1987, or after it obtained a
writ of preliminary injunction in Civil Case No. 17692, an Omnibus Motion asking the trial court for an order:
(a) reinstating PBP officers to their original positions and restoring the bank's standing committees to their respective
compositions prior to said reorganization; (b) enjoining the lease of any portion of the bank's space in Producers
Bank Centre building to third parties and the relocation of departments/offices of PBP as was contemplated; and (c)
to hold, after an opportunity to be heard is given her, said conservator in contempt of court for disobedience of and
resistance to the writ of injunction. An opposition to the contempt charge was later filed by said petitioner.
Subsequently, upon its inclusion as party-plaintiff via the amended complaint, PPI filed on 4 November 1987 a motion
asking the lower court to order the Central Bank and its agents to restore to PPI the administration of the three (3)
buildings earlier assigned to PBP pending the lifting of the conservatorship. PPI claimed that such transfer was
necessary to prevent the rental income of said buildings being dissipated by the conservator.
On 17 November 1987, both PBP and PPI filed a motion praying:
(1) that the CB Conservator be ordered to publish PBP's financial statement for the last quarter of
1987 and every quarterly statement thereafter during the pendency of this case, with the following
claims of plaintiff PBP against the Central Bank, to wit:
(a) Interest in unconscionable rates of CB overdrawing illegally paid by the CB
conservators to CB now totaling P56,002,000.00,
(b) Penalties on reserve deficiencies illegally paid by the CB conservators to CB
now totaling P20,657,000.00,
(c) Penalties on reserve deficiencies not yet paid but which the conservator has
booked as liabilities now totaling P31,717,000.00,
(d) Losses of operation by the CB conservators from January 31, 1984 to
October 31, 1987 now totaling P461,092,000.00
as "suspense" accounts; and (2) that the CB conservator be ordered to carry those "suspense"
accounts in the books of PBP.
The following day, respondent Judge issued an Order (a) requiring conservator Tansinsin-Encarnacion to reinstate
PBP officers to their original positions prior to the reorganization of the bank's personnel and restore PBP's standing
committees to their original compositions, and (b) restraining her from leasing out to third parties any portion of PBP's
space in the Producers Bank Centre building. However, respondent Judge held in abeyance the contempt
proceedings against the conservator pending her immediate compliance with the Order.

On 22 December 1987, respondent Judge granted PPI's motion for an order transferring to it the administration of the
three (3) buildings assigned to PBP. A motion for reconsideration of this order was filed by petitioners but was
subsequently denied by respondent Judge in the Order of 4 October 1988.
A second Order, issued by respondent Judge on the same day, 22 December 1987, directed conservator TansinsinEncarnacion to publish the financial statement of PBP in the manner prayed for in the aforesaid 17 November 1987
motion. The motion to reconsider this Order was denied by respondent Judge on 3 October 1988.
On several occasions thereafter, conservator Tansinsin-Encarnacion caused the publication of PBP's financial
statement as required by regulations, without, however, carrying the items enumerated by the trial court as "suspense
accounts." Consequently, two (2) contempt charges were filed against her, one for the 3 February 1988 publication in
the Manila Standard of PBP's statement of condition as of 29 December 1987 and the other for the 29 July 1988
publication in the Daily Globe of the bank's statement as of 30 June 1988. Oppositions to both charges of contempt
were filed.
On 9 November 1988, respondent Judge declared said conservator guilty of contempt of court on three (3) counts
and imposed upon her a fine of P1,000.00 for each count of contempt. The latter asked for reconsideration of the
order but the respondent Judge denied the same.
Another contempt charge against her was filed for publishing the statement of condition of PBP (as of 13 September
1988) in the 9 November 1988 issue of the Daily Globe without carrying the alleged "suspense accounts." She was
again found guilty as charged and her motion for reconsideration was denied. Finding no other adequate relief,
Tansinsin-Encarnacion filed with this Court on 11 January 1989 a petition for certiorariagainst respondent Judge,
Henry L. Co and the law firm of Quisumbing, Torres and Evangelista. This case was docketed as G.R. No. 86526.
She prays therein for judgment declaring respondent judge to be without jurisdiction to entertain both the complaint
and amended complaint in Civil Case No. 17692; declaring null and void all his orders, specially the contempt orders;
and finding respondent Judge and respondent lawyers guilty of violating their respective oaths of office. 29
On 8 February 1989, this Court resolved to refer said petition to the Court of Appeals which docketed it as C.A.-G.R.SP No. 16972.
In her Memorandum submitted to the Court of Appeals, Tansinsin-Encarnacion alleged that: (1) respondent Judge
has no jurisdiction over Civil Case No. 17692 because its filing was not authorized by the petitioner or the conservator
in violation of Section 28-A of R.A. No. 265, as amended, it was filed after the ten (10) day period prescribed by
Section 29 of R.A. No. 265, as amended, and the correct docket fees were not paid; (2) respondent Judge illegally
ordered her to return to PPI the administration of the bank's three (3) properties, contrary to his own writ of
preliminary injunction and earlier order to make the bank viable, and to publish the alleged "suspense
accounts" contrary to Section 28-A of R.A. No. 265, as amended, the writ of preliminary injunction and her
constitutional right to silence; (3) respondent Judge erred in declaring her in contempt of court notwithstanding his
lack of jurisdiction over the case and failure to set any date for the hearing and reception of evidence, in violation of
her right to due process of law; and (4) respondents Judge and lawyers are administratively liable for their grossly
illegal actuations and for depriving the Government of at least P13.2 million in filing fees. 30
In its decision dated 17 January 1990, the Court of Appeals (Twelfth Division) 31 dismissed the petition; while finding the
claim of lack of jurisdiction to be without merit, the said court nonetheless gave the following exception:

. . . except that plaintiffs in Civil Case No. 17692, within 15 days from receipt of a copy of this
Decision, shall file the corresponding amendment to their amended complaint in said case, stating
a specific amount "to fully repair the damages inflicted on PBP consisting of losses of operation and
the conservator's bank frauds and abuses", in the prayer of their amended complaint. Thereafter,
the Clerk of Court of the lower court and/or his duly authorized Docket Clerk of Court in charge,
should determine the amount found due, which should be paid by complainants within the

applicable prescriptive or reglementary period, failure of which said claims for damages shall be
dismissed.
In disposing of the issues raised, respondent Court merely adopted with approval the ruling of the respondent Judge
on the question of jurisdiction and cited the decision of the Court of Appeals in C.A.-G.R. SP No. 13624 (subject of
G.R. No. 88353), sustaining the respondent Judge's ruling. As to the filing of the complaint after the lapse of the 10day period provided for in Section 29 of R.A. No. 265, it ruled that the Section does not apply because the complaint
essentially seeks to compel the conservator to perform his duties and refers to circumstances and incidents which
transpired after said 10-day period.
On the issue of lack of jurisdiction for non-payment of correct filing fees, to which an exception was made in
the dispositive portion, the respondent Court found the same to be "partly" meritorious. It agreed with
petitioner that while the other losses and damages sought to be recovered are incapable of pecuniary
estimation, the damages inflicted on PBP due to losses of operation and the conservator's bank frauds and
abuses were in fact pegged at P108,479,771.00 in paragraph 26 of the amended complaint. This specific
amount, however, should have been stated in the prayer of the complaint. It also held that
the Manchestercase "has been legally construed in the subsequent case of Sun Insurance Office Ltd. 32 and
the case ofFilipinas Shell Petroleum Corp. 33 to the effect that applying the doctrine initiated in the case of Manchester,
together with said subsequent thereto (sic), plaintiffs in Civil Case No. 17692 should be given a reasonable time to amend
their complaint, more particularly, to state in their prayer in the amended complaint the specific amount of damages . . ."

On the orders of contempt and the reasons therefor, respondent Court merely stated:
. . . Generally, when the court has jurisdiction over the subject matter and of the person, decisions
upon or questions pertinent to the cause are decisions within its jurisdiction, and however, irregular
or erroneous they may be, they cannot be corrected by certiorari Whether the court's conclusions
was based merely on speculations and conjecture, or on a misapprehension of facts contrary to the
documents and exhibits of the case, is not for us to determine in a petition for certiorari wherein
only issues of jurisdiction may be raised. . . . Thus, the instant petition cannot prosper.
and opined that under the Rules of Court, a judgment of contempt may be questioned on appeal and not
oncertiorari.
Finally, on the administrative liability of the respondent Judge and the lawyers, the respondent Court declared the
claim to be without merit.
Petitioner's motion to reconsider the decision having been denied in the 2 April 1990 Resolution of the respondent
Court, 34 she filed with this Court a petition under Rule 45 of the Rules of Court, which was docketed as G.R. No. 92943. Petitioner
Claims that respondent Court grossly erred in confirming/affirming the allegedly void Orders of respondent Judge which denied the
motion to dismiss the complaint and granted the writ of preliminary injunction, restating in this regard the issues raised by the CB in
G.R.
No. 88353, and in holding her in contempt of court on four occasions. As to the last ground, she asserts that the Orders were issued
in violation of the Rules of Court and infringed her right to due process since there was no hearing on the motions for contempt,
except for the third motion wherein respondent Judge immediately ordered the movant to present evidence.

In their Comment, 35 filed in compliance with Our Resolution 21 May 1990, private respondents practically reiterated the
arguments in their Comment to the petition in G.R. No. 88353; in addition, more specifically on the issue of contempt, they assert
that while the motions for contempt were set for hearing, there is no showing that the scheduled hearings actually took place.
Besides, the remedy to question a contempt order is an appeal; 36 since petitioner did not appeal the questioned orders, the same
became final and executory. 37

After petitioner filed a Reply and private respondents submitted their Rejoinder thereto, this Court gave due course to
the petition.

THE ISSUES
The basic issue in these cases is whether or not the respondent Court committed reversible error in affirming the
challenged Orders of the respondent Judge. This necessarily calls for a determination of whether or not the
respondent Judge committed grave abuse of discretion amounting to lack of jurisdiction:
(1) In not dismissing Civil Case No. 17692 on the following grounds: (a) lack of legal. personality to
bring the action as the same was filed in the name of the PBP without the authority of the
conservator;
(b) failure of the complaint and amended complaint to state a cause of action; and (c) non-payment
of the correct amount of docket fee in violation of the rule enunciated in Manchester
Development Corp.vs. Court of Appeals, et al.;
(2) In granting the writ of preliminary injunction; and
(3) In issuing the assailed Orders in G.R. No. 92943.
DISCUSSION
We shall take up the issues sequentially.
1. PBP has been under conservatorship since 20 January 1984. Pursuant to Section 28-A of the Central Bank Act,38 a
conservator, once appointed, takes over the management of the bank and assumes exclusive powers to oversee every aspect of
the bank's operations and affairs. Petitioners now maintain that this power includes the authority to determine "whether or not to
maintain suit in the bank's name." 39 The trial court overruled this contention stating that the section alluded to "does not prohibit the
Board of Directors of a bank to file suit to lift the conservatorship over it, to question the validity of the conservator's fraudulent acts
and abuses and the arbitrary action of the conservator's principal the Monetary Board of the Central Bank. The conservator
cannot be expected to question his own continued existence and acts. He cannot be expected to file suit to annul the action of his
principal . . . or a suit that would point out the ill-motivation, the disastrous effects of the conservatorship and the conservator's bank
frauds and abuses as alleged in the complaint." 40

Obviously, the trial court was of the impression that what was sought for in Civil Case No. 17692 is the lifting of the
conservatorship because it was arbitrarily and illegally imposed. While it may be true that the PBP devoted the first 38
pages of its 47-page complaint and amended complaint to what it considers an unwarranted, ill-motivated, illegal,
unnecessary, and unjustified conservatorship, it, nevertheless, submitted to the same. There is nothing in the
amended complaint to reflect an unequivocal intention to ask for its lifting. Of course, as subsequent maneuvers
would show, PBP sought to accomplish the lifting thereof through surreptitious means. That such action was not, on
its face, filed to have the conservatorship lifted, is best evidenced by PBP's prayer for a judgment "ordering defendant
Central Bank's conservator to restore the viability of PBP as mandated by Section 28-A of R.A. No.
265 . . ." 41 Unfortunately too, respondent Court was easily misled into believing that the amended complaint sought the lifting of the
conservatorship. Thus, although the matter was not specifically raised in issue and clearly unnecessary for the determination of the
issues squarely raised, the respondent Court opined:

It is Our sober assessment that the respondent bank was not given an opportunity to be heard
when the Central Bank peremptorily and illtimely (sic) announced the appointment of a
conservatorship over the latter (bank) for which reason We believe that administrative due process
was arbitrarily brushed aside to the prejudice of the said bank. . . .
If it were to lift the conservatorship because it was arbitrarily imposed, then the case should have been dismissed on
the grounds of prescription and lack of personality to bring the action. Per the fifth paragraph of Section 29 of the
Central Bank Act, as amended by Executive Order No. 289, the actions of the MB may be assailed in an appropriate
pleading filed by the stockholders of record representing the majority of the capital stock within ten (10) days from

receipt of notice by the said majority stockholders of the order placing the bank under conservatorship. The pertinent
portion of said paragraph reads as follows:
The provisions of any law to the contrary notwithstanding, the actions of the Monetary Board under
this Section, Section 28-A, and the second paragraph of section 34 of this Act shall be final and
executory, and can be set aside by a court only if there is convincing proof, after hearing, that the
action is plainly arbitrary and made in bad faith: Provided, That the same is raised in an appropriate
pleading filed by the stockholders of record representing the majority of the capital stock within ten
(10) days from the date the receiver takes charge of the assets and liabilities of the bank or nonbank financial intermediary performing quasi-banking functions or, in case of conservatorship or
liquidation, within ten (10) days from receipt of notice by the said majority stockholders of said bank
or non-bank financial intermediary of the order of its placement under conservatorship or
liquidation. . . .
The following requisites, therefore, must be present before the order of conservatorship may be set aside by a court:
1. The appropriate pleading must be filed by the stockholders of record representing the majority of
the capital stock of the bank in the proper court;
2. Said pleading must be filed within ten (10) days from receipt of notice by said majority
stockholders of the order placing the bank under conservatorship; and
3. There must be convincing proof, after hearing, that the action is plainly arbitrary and made in bad
faith. 42
In the instant case, PBP was placed under conservatorship on 20 January 1984. The original complaint in Civil Case
No. 17692 was filed only on 27 August 1987, or three (3) years, seven (7) months and seven (7) days later, long after
the expiration of the 10-day period deferred to above. It is also beyond question that the complaint and the amended
complaint were not initiated by the stockholders of record representing the majority of the capital stock. Accordingly,
the order placing PBP under conservatorship had long become final and its validity could no longer be litigated upon
before the trial court. Applying the original provision of the aforesaid Section 29 of the Central Bank Act, this Court,
in Rural Bank of Lucena, Inc. vs. Arca, et al., 43 ruled that:
Nor can the proceedings before Judge Arca be deemed a judicial review of the 1962 resolution No.
122 of the Monetary Board, if only because by law (Section 29, R.A. 265) such review must be
asked within 10 days from notice of the resolution of the Board. Between the adoption of Resolution
No. 122 and the challenged order of Judge Arca, more than one year had elapsed. Hence, the
validity of the Monetary Board's resolution can no longer be litigated before Judge Arca, whose role
under the fourth paragraph of section 29 is confined to assisting and supervising the liquidation of
the Lucena bank.
This rule is still good law notwithstanding the amendment to Section 29 which expands its scope by including the
action of the MB under Section 28-A of the Act on the appointment of a conservator.
It was precisely an awareness of the futility of any action to set aside the conservatorship which prompted PBP to
limit its action to a claim for damages and a prayer for an injunction against the implementation of MB Resolution
Nos. 649 and 751. However, to make it appear that it had a meritorious case and a valid grievance against the
Central Bank, it wandered long into the past and narrated a sad story of persecution, oppression and injustice since
the inception of the conservatorship obviously to gain the sympathy of the court, which it eventually obtained.
The next crucial question that suggests itself for resolution is whether an action for damages arising from the MB's
act of placing the PBP under conservatorship and the acts of the conservator, and to enjoin the MB from

implementing resolutions related or incident to, or in connection with the conservatorship, may be brought only for
and in behalf of the PBP by the stockholders on record representing the majority of the capital stock thereof or simply
upon authority of its Board of Directors, or by its Chairman. We hereby rule that as to the first kind of damages, the
same may be claimed only if the MB's action is plainly arbitrary and made in bad faith, and that the action therefor is
inseparable from an action to set aside the conservatorship. In other words, the same must be filed within ten (10)
days from receipt of notice of the order placing the bank under conservatorship. Otherwise, the provision of the fifth
paragraph of Section 29 of the Central. Bank Act could be rendered meaningless and illusory by the bank's filing,
beyond the prescribed ten-day period, of an action ostensibly claiming damages but in reality questioning the
conservatorship. As to actions for the second kind of damages and for injunction to restrain the enforcement of the
CB's implementing resolutions, said fifth paragraph of Section 29 of the Central Bank Act, as amended, equally
applies because the questioned acts are but incidental to the conservatorship. The purpose of the law in requiring
that only the stockholders of record representing the majority of the capital stock may bring the action to set aside a
resolution to place a bank under conservatorship is to ensure that it be not frustrated or defeated by the incumbent
Board of Directors or officers who may immediately resort to court action to prevent its implementation or
enforcement. It is presumed that such a resolution is directed principally against acts of said Directors and officers
which place the bank in a state of continuing inability to maintain a condition of liquidity adequate to protect the
interest of depositors and creditors. Indirectly, it is likewise intended to protect and safeguard the rights and interests
of the stockholders. Common sense and public policy dictate then that the authority to decide on whether to contest
the resolution should be lodged with the stockholders owning a majority of the shares for they are expected to be
more objective in determining whether the resolution is plainly arbitrary and issued in bad faith.
The original complaint in Civil Case No. 17692 was not initiated by the majority of the stockholders, hence it should
have been dismissed. However, confronted with this fatal flaw, counsel for PBP, through shrewd maneuvering,
attempted to save the day by impleading as co-plaintiff a corporation, the PPI, which was not under conservatorship.
Unfortunately, the maneuver was crudely and imperfectly executed. Except for the inclusion of its name, nothing new
was actually added to the original complaint in terms of causes of action and reliefs for PPI. The amendment then
was an exercise in futility. We cannot, however, subscribe to the petitioner's view that: (a) once a bank is placed
under conservatorship, no action may be filed on behalf of the bank without prior approval of the conservator, and (b)
since in this case such approval was not secured prior to the filing of Civil Case No. 17692, the latter must also be
dismissed on that ground. No such approval is necessary where the action was instituted by the majority of the
bank's stockholders. To contend otherwise would be to defeat the rights of such stockholders under the fifth
paragraph of Section 29 of the Central Bank Act. It must be stressed here that a bank retains its juridical personality
even if placed under conservatorship; 44 it is neither replaced nor substituted by the conservator who, per Section 28-A of the
Central Bank Act, as amended by P.D. No. 1932, shall only:

. . . take charge of the assets, liabilities, and the management of that institution, collect all monies
and debts due said institution and exercise all powers necessary to preserve the assets of the
institution, reorganize the management thereof, and restore its viability. He shall have the power to
overrule, or revoke the actions of the previous management and board of directors . . ., any
provision of law to the contrary notwithstanding, and such other powers as the Monetary Board
shall deem necessary.
Even assuming for the sake of argument that the action was properly brought by an authorized party, the same must
nevertheless be dismissed for failure of the plaintiffs therein to pay the correct docket fees, pursuant toManchester
Development Corp. vs. Court of Appeals, et al.; 45 the said case was decided by this Court on 7 May 1987, exactly three (3)
months and twenty (20) days before the filing of the original complaint and five (5) months and eighteen (18) days before the filing of
the Amended Complaint in Civil Case No. 17692. We ruled therein that:

The Court acquires jurisdiction over any case only upon the payment of the prescribed docket fee.
An amendment of the complaint or similar pleading will not thereby vest jurisdiction in the Court,
much less the payment of the docket fee based on the amounts sought in the amended pleading.
The ruling in the Magaspi case [115 SCRA 193], in so far as it is inconsistent with this
pronouncement is overturned and reversed.

The respondent Judge, in ruling that PBP and PPI had paid the correct docket fee of P102.00, said that "the value of
the case cannot be estimated" since what is sought is an injunction against the enforcement of the challenged
resolutions of the MB; in short, the claim for damages is merely incidental. Upon the other hand, respondent Court, in
its Resolution of 17 May 1989 in C.A.-G.R. SP No. 13624, ruled that the case is "incapable of pecuniary estimation"
because the value of the losses incurred by the PBP "cannot be calibrated nor pinned down to a specific amount in
view of the damage that may be caused by the appointment of a conservator to its goodwill and standing in the
community." 46
Both conclusions are unfounded and are the result of a misapprehension of the allegations and causes of action in
both the complaint and amended complaint.
While PBP cleverly worded its complaint in Civil Case No. 17692 to make it appear as one principally for injunction,
deliberately omitting the claim for damages as a specific cause of action, a careful examination thereof bears that the
same is in reality an action for damages arising out of the alleged "unwarranted, ill-motivated and illegal
conservatorship," or a conservatorship which "was utterly unnecessary and unjustified," and the "arbitrary"
appointment of a conservator. 47 Thus, as stated earlier, it devoted the bulk of its petition to detailed events, occurrences and
transactions in support thereof and patiently enumerated the losses it sustained and suffered. The pertinent portions of paragraph
27 of both the original and amended complaints read as follows:

27. The record of the Central Bank conservatorship of PBP clearly shows that it was responsible
for the losses.
[Then follows an enumeration, from (a) to (u), of particular acts causing or resulting in losses, most
of which are specifically stated]
(v) Total of only the foregoing mentioned and only of those that can be quantified is
P108,479,771.00.
And that excludes loss of profits that PBP could have realized if that disastrous
conservatorship had not been imposed on it and loss of goodwill.
The causes for these abuses of the conservators are course graft and corruption
of the conservators aside from fault in the system which denies private
enterprise. (emphasis supplied)
These are the very damages referred to in the prayer:
. . . to fully repair the damages inflicted on PBP consisting of losses of operation and the
conservators' bank frauds and abuses, . . .
but not specified therein. To this Court's mind, this was done to evade the payment of the corresponding
filing fees which, as computed by petitioner on the basis alone of the specified losses of P108,479,771.00,
would amount to about P 437,000.00. 48 The PBP then clearly acted with manifest bad faith in resorting to the
foregoing clever strategy to avoid paying the correct filing fees. We are thus constrained to reiterate Our pronouncements
in the Manchester case:

The Court cannot close this case without making the observation that it frowns at the practice of
counsel who filed the original complaint in this case of omitting any specification of the amount of
damages in the prayer although the amount of over P78 million is alleged in the body of the
complaint. This is clearly intended for no other purpose than to evade the payment of the correct
filing fees if not to mislead the docket clerk in the assessment of the filing fee. . . .

The respondent Court itself, in its decision of 17 January 1990 in C.A-G.R. SP No. 16972, 49 confronted by the same
issue, but perhaps unaware of its Resolution of 17 May 1989 in C.A.-G.R. SP No. 13624 aforementioned, ruled that PBP and PPI
are liable for the filing fees on the claim for damages. It even directed PBP and PPI to file "the corresponding amendment to their
amended complaint in said case stating a specific amount 'to fully repair the damages inflicted on PBP consisting of losses of
operation and the conservator's bank frauds and abuses' . . .," after which the Clerk of Court of the lower court or his duly authorized
docket clerk should determine the amount found due, which said plaintiffs shall pay "within the applicable prescriptive or
reglementary period,
. . ." 50 The 17 January 1990 ruling, clearly reversing the earlier one, is of doubtful propriety in view of the petition for review of the
decision in C.A.-G.R. SP No. 13624 filed by the petitioner.

In granting PBP and PPI an opportunity to amend their amended complaint to reflect the specific amount of damages
in the prayer of their Amended Complaint, respondent Court took refuge under the rule laid down in Sun Insurance
Office, Ltd., et al. vs. Asuncion, et al. 51 and Filipinas Shell Petroleum Corp. vs. Court of Appeals, et al. 52 Of course, it was
erroneous for respondent Court to apply these last two (2) cases which were decided by this Court three (3) months short of two (2)
years after the promulgation of the Manchester decision on 7 May 1987. Accordingly, since the original complaint in Civil Case No.
17692 was filed on 27 August 1987, the Manchester doctrine was the controlling and applicable law. The lower court had no choice
but to apply it when its attention was called by the petitioner.

Moreover, even granting for the sake of argument that Sun Insurance and Pilipinas Shell 53 may apply in this case, We
should not lose sight of the fact that in the former, this Court categorically stated:

1. It is not simply the filing of the complaint or appropriate initiatory pleading, but the payment of the
prescribed docket fee, that vests a trial court with jurisdiction over the subject-matter or nature of
the action. Where the filling of the initiatory pleading is not accompanied by payment of the docket
fee, the court may allow the payment of the fee within a reasonable time but in no case beyond the
applicable prescriptive or reglementary period.
The prescriptive period therein mentioned refers to the period within which a specific action must be filed. It means
that in every case, the docket fee must be paid before the lapse of the prescriptive period. Chapter 3, Title V, Book III
of the Civil Code is the principal law governing prescription of actions.
There can be no question that in the instant case, PBP's claims for damages arise out of an injury to its rights.
Pursuant to Article 1146 of the Civil Code, the action therefor must be initiated within four (4) years from the time the
cause of action accrued. Since the damages arose out of the alleged unwarranted, ill-motivated, illegal, unnecessary
and unjustified conservatorship, the cause of action, if any, first accrued in 1984 and continued until 27 August 1987,
when the original complaint was filed. Even if We are to assume that the four-year period should start running on 27
August 1987, that period lapsed on 27 August 1991. There is no showing that PBP paid the correct filing fee for the
claim within the prescribed period. Hence, nothing can save Civil Case No. 17692 from being dismissed.
2. And now on the issue of the writ of preliminary injunction.
The challenged Orders of the trial court granting the application for a writ of preliminary injunction and the assailed
decision of the respondent Court in C.A. G.R. No. 13624 clearly betray a prejudgment of the case. In both instances,
not only did said courts declare MB Resolutions Nos. 649 and 751 to be arbitrary, both also declared the
conservatorship to have been issued in violation of PBP's right to administrative due process, which the CB
"arbitrarily brushed aside to the prejudice" of the latter. The said courts further concluded that "the sudden and
untimely announcement by the Central Bank that respondent Producers Bank will be under a conservatorship that will
oversee its operations worked havoc over the confidence that the public had hitherto reposed on respondent bank so
that the majority of its depositors over-reacted and rashly withdrew their accounts from said bank, thus it incurred a
loss of P593.707 million or 59.5% of its deposits."
Thus, save only for the determination of the full extent of PBP's claim for damages, said courts have, at the most,
decided or, at the very least, prejudged the case. Courts, notwithstanding the discretion given to them, should avoid

issuing writs of preliminary injunction which in effect dispose of the main case without a trial.

54

We do not then hesitate

to rule that there was grave abuse of discretion in the issuance of the writ of preliminary injunction.

Besides, there was neither arbitrariness nor bad faith in the issuance of MB Resolutions Nos. 649 and 751. It must be
stressed in this connection that the banking business is properly subject to reasonable regulation under the police
power of the state because of its nature and relation to the fiscal affairs of the people and the revenues of the
state. 55 Banks are affected with public interest because they receive funds from the general public in the form of deposits. Due to
the nature of their transactions and functions, a fiduciary relationship is created between the banking institutions and their
depositors. Therefore, banks are under the obligation to treat with meticulous care and utmost fidelity the accounts of those who
have reposed their trust and confidence in them. 56

It is then Government's responsibility to see to it that the financial interests of those who deal with banks and banking
institutions, as depositors or otherwise, are protected. In this country, that task is delegated to the Central Bank
which, pursuant to its Charter, 57 is authorized to administer the monetary, banking and credit system of the Philippines. Under
both the 1973 and 1987 Constitutions, the Central Bank is tasked with providing policy direction in the areas of money, banking and
credit; corollarily, it shall have supervision over the operations of banks. 58 Under its charter, the CB is further authorized to take the
necessary steps against any banking institution if its continued operation would cause prejudice to its depositors, creditors and the
general public as well. This power has been expressly recognized by this Court. In Philippine Veterans Bank Employees UnionNUBE vs. Philippine Veterans Bank, 59 this Court held that:

. . . Unless adequate and determined efforts are taken by the government against distressed and
mismanaged banks, public faith in the banking system is certain to deteriorate to the prejudice of
the national economy itself, not to mention the losses suffered by the bank depositors, creditors,
and stockholders, who all deserve the protection of the government. The government cannot simply
cross its arms while the assets of a bank are being depleted through mismanagement or
irregularities. It is the duty of the Central Bank in such an event to step in and salvage the
remaining resources of the bank so that they may not continue to be dissipated or plundered by
those entrusted with their management.
One important measure adopted by the government to protect the public against unscrupulous practices of some
bankers is to require banking institutions to set up reserves against their deposit liabilities. These reserves, pegged at
a certain percentage of the volume of deposit liability, is that portion of the deposit received by a banking institution
which it cannot use for loans and investments. The reserve requirement, which ordinarily takes the form of a deposit
with the Central Bank, is one means by which the government ensures the liquidity of banking institutions. 60
These reserve accounts maintained by banking institutions with the Central Bank also serve as a basis for the
clearing of checks and the settlement of interbank balances. 61
The need to maintain these required reserves cannot be over-emphasized. Thus, where over-drawings on deposit
accounts (regardless of amount) are incurred, R.A. No. 265 requires the delinquent bank to:
. . . fully cover said overdraft not later than the next clearing day: Provided, Further, That settlement
of clearing balances shall not be effected for any account which continue to, be overdrawn for five
consecutive banking days until such time as the overdrawing is fully covered or otherwise
converted into an emergency loan or advance pursuant to the provisions of Sec. 90 of this
Act. Provided, Finally, That the appropriate clearing office shall be officially notified of banks with
overdrawn balances. Banks with existing overdrafts with the Central Bank as of the effectivity of
this amended section shall, within such period as may be prescribed by the Monetary Board, either
convert the overdraft into an emergency loan or advance with a plan of payment, or settle such
overdrafts, and that, upon failure to comply herewith, the Central Bank shall take such action
against the bank as may be warranted under this Act. 62 [Emphasis supplied.]

The fact that PBP is grossly overdrawn on its reserve account with the CB (up to P1.233 billion as of 13 February
1990) is not disputed by PBP. This enormous overdraft evidences the patent inability of the bank's management to
keep PBP liquid. This fact alone sufficiently justifies the remedial measures taken by the Monetary Board.
MB Resolutions Nos. 649 and 751 were not promulgated to arbitrarily divest the present stockholders of control over
PBP, as is claimed by the latter. The same contemplates an effective and viable plan to revive and restore PBP. It is
to be noted that before issuing these resolutions, the MB gave the management of PBP ample opportunity (from 30
March 1984 to June of 1987) to submit a viable rehabilitation plan for the bank.
MB Resolution Nos. 751 merely reiterated the requirement set forth in Resolution No. 649 for PBP to identify and
submit the list of new stockholders who will infuse new capital into the bank for CB approval. In this Resolution, the
MB gave PBP's stockholders one (1) week from notice within which to signify their acceptance or rejection of the
proposed rehabilitation plan.
The foregoing resolutions refer to a recommended rehabilitation plan. What was conveyed to PBP was a mere
proposal. There was nothing in the resolutions to indicate that the plan was mandatory. On the contrary, PBP was
given a specific period within which to accept or reject the plan. And, as petitioners correctly pointed out, the plan was
not self-implementing. The warning given by the MB that should said proposal be rejected, the CB "will take
appropriate alternative actions on the matter," does not make the proposed rehabilitation plan compulsory. Whether
or not there is a rehabilitation plan agreed upon between PBP and the MB, the CB is authorized under R.A. No. 265
to take appropriate measures to protect the interest of the bank's depositors as well as of the general public.
Furthermore, the assignment of claims to PDIC and the subsequent dacion en pago (payment of credit through
shares) do not divest the present stockholders of control over PBP. As may be readily observed from the terms of
Resolution No. 645, the shares which shall be issued to PDIC under the dacion are preferred, non-voting and nonparticipating shares. Hence, except for the instances enumerated in the Corporation Code where holders of nonvoting shares are given the right to vote, PDIC shall have no hand in the bank's operation or business. In any event,
these preferred shares will eventually be sold to private parties or new stockholders as soon as they are identified by
PBP and approved by the CB. Prior approval by the CB of the stockholders is necessary screening purposes.
There is nothing objectionable to the actions of the MB. We, therefore, find to be completely without legal or
evidentiary basis the contention that the impugned resolutions are arbitrary, illegal and made in bad faith.
Moreover, respondent Judge acted in complete disregard of Section 107 of R.A. No. 265 when he enjoined the CB
from taking appropriate actions against the bank, "including exclusion of (PBP) from settlement of clearing balances
at the Central Bank clearing house" as warranted by law. By using his own standards, and without scrutinizing the
law, respondent Judge arbitrarily determined when CB may or may not initiate measures against a bank that cannot
maintain its liquidity. He also arbitrarily and capriciously decided who can continually overdraw from the deposit
account with the CB, to the prejudice of other banking institutions, the banking public and the government.
3. As could be gleamed from the pleadings in G.R. No. 92943, the respondent Judge, per his order of 18 November
1987, (a) directed the conservator to restore both the PBP officers to their original positions prior to the reorganization
of the bank's personnel, and the PBP's standing committees to their original compositions, and (b) restrained her
from leasing out to a third party any portion of PBP's space in the Producers Bank Centre; per his Order of 22
December 1987, respondent Judge granted PPI's motion for an order transferring to the latter the administration of
the three (3) buildings; and per the Order of 22 December 1987, he granted the motion directing the conservator to
publish the financial statement of the PBP in the manner prayed for by the latter.
The foregoing Orders were issued without due hearing. Moreover, these reliefs were not prayed for in the Amended
Complaint. They were not even covered by any specific allegations therein. Except for the prohibition to lease, the
rest partook of the nature of a preliminary mandatory injunction which deprived the conservator of her rights and
powers under Section 28-A of R.A. No. 265 and, in effect, set aside the conservatorship with PBP itself had earlier
accepted. It must be remembered that PBP did not ask, in its Amended Complaint, for the setting aside of the

conservatorship. On the contrary, it even prayed that the conservator be ordered to restore the viability of PBP as
mandated by said Section 28-A.
The respondent Judge should not have forgotten the settled doctrine that it is improper to issue a writ of preliminary
mandatory injunction prior to the final hearing, except in cases of extreme urgency, where the right is very clear,
where considerations of relative inconvenience bear strongly in complainant's favor, where there is a willful and
unlawful invasion of plaintiff's right against his protest and remonstrance, the injury being a continuing one, and
where the effect of the mandatory injunction is rather to re-establish and maintain a pre-existing continuing relation
between the parties, recently and arbitrarily interrupted by the defendant, than to establish a new relation. 63
It is plain to this Court that respondent Judge ceased to be an impartial arbitrator; he became the godfather of PBP
and PPI, granting to them practically all that they had asked for in the motions they filed. Upon the issuance of these
Orders, nothing appeared clearer in the judicial horizon than this PBP and PPI had everything in the bag, so to
speak, including the reliefs not even contemplated in their Amended Complaint. The challenged Orders then were
whimsically and arbitrarily issued.
Compounding such detestable conduct is the respondent Judge's issuance, with undue haste and unusual speed, of
the orders of contempt without the proper hearing. If the conservator could, at all, be liable for contempt, it would be
for indirect contempt punished under Section 3, Rule 71 of the Rules of Court, more specifically item (b) of the first
paragraph which reads:
Sec. 3 Indirect contempts to be punished after charge and hearing. After charge in writing has
been filed, and an opportunity given to the accused to be heard by himself or counsel, a person
guilty of any of the following acts may be punished for contempt:
(b) Disobedience of or resistance to a lawful writ, process, order, judgment, or
command of a court, or injunction granted by a court or judge, . . .;
It is clear from the said section that it is necessary that there be a charge and that the party cited for contempt be
given an opportunity to be heard. The reason for this is that contempt partakes of the nature of a criminal offense. In
the instant case, each motion for contempt served as the charge. It is settled that a charge may be filed by a fiscal, a
judge, or even a private person. 64 Petitioner Tansinsin-Encarnacion filed oppositions thereto. Thereafter, it was the duty of the
respondent Judge to hold a hearing on the motions. Respondent Judge deliberately did away with the hearing and this Court finds
no justifiable reason therefor.

There is, moreover, another reason why the contempt orders must be struck down. The orders which were
supposedly disobeyed and from which the motions for contempt arose were, as earlier indicated, null and void for
having been issued with grave abuse of discretion amounting to lack of jurisdiction. Such Orders, therefore, cannot
then be characterized as lawful. Consequently, resistance thereto cannot be punished as contempt 65
PREMISES CONSIDERED, the petitions in G.R. Nos. 88353 and 92943 are GRANTED. The 6 October 1988
decision and 17 May 1989 resolution of the Court of Appeals in C.A.-G.R. SP No. 13624 are REVERSED and SET
ASIDE. Respondent Judge is ordered to dismiss Civil Case No. 17692. All proceedings undertaken and all orders
issued by respondent Judge are hereby SET ASIDE for being null and void. The writ of preliminary injunction issued
by the trial court in its Order dated 21 September 1987 is hereby LIFTED.
IT IS SO ORDERED.
Narvasa, C.J., Melencio-Herrera, Cruz, Paras, Feliciano, Bidin, Grio-Aquino, Regalado, Romero and Nocon, JJ.,
concur.
Padilla and Bellosillo, JJ., took no part.

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS and CARLOS
CAJES, respondents.
DECISION
MENDOZA, J.: Misact
This is a petition for certiorari seeking to reverse the decision and resolution of the Court of Appeals dated August
30, 1996 and April 23, 1997, respectively, declaring private respondent Carlos Cajes the owner of 19.4 hectares of
land embraced in TCT No. 10101 and ordering the segregation and reconveyance of said portion to him.
[1]

[2]

The antecedent facts are as follows:

The land in dispute, consisting of 19.4 hectares located in San Miguel, Province of Bohol, was originally owned by
Ulpiano Mumar, whose ownership since 1917 was evidenced by Tax Declaration No. 3840. In 1950, Mumar sold the
land to private respondent who was issued Tax Declaration No. R-1475 that same year. The tax declaration was later
superseded by Tax Declaration Nos. R-799 issued in 1961 and D-2247 issued in 1974. Private respondent occupied
and cultivated the said land, planting cassava and camote in certain portions of the land.
[3]

[4]

[5]

[6]

[7]

[8]

[9]

In 1969, unknown to private respondent, Jose Alvarez succeeded in obtaining the registration of a parcel of land with
an area of 1,512,468.00 square meters, in his name for which he was issued OCT No. 546 on June 16, 1969. The
parcel of land included the 19.4 hectares occupied by private respondent. Alvarez never occupied nor introduced
improvements on said land.
[10]

[11]

[12]

In 1972, Alvarez sold the land to the spouses Gaudencio and Rosario Beduya to whom TCT No. 10101 was issued.
That same year, the spouses Beduya obtained a loan from petitioner Development Bank of the Philippines for
P526,000.00 and, as security, mortgaged the land covered by TCT No. 10101 to the bank. In 1978, the SAAD
Investment Corp., and the SAAD Agro-Industries, Inc., represented by Gaudencio Beduya, and the spouses Beduya
personally executed another mortgage over the land in favor of petitioner to secure a loan of P1,430,000.00. Sdjad
[13]

[14]

[15]

The spouses Beduya later failed to pay their loans, as a result of which, the mortgage on the property was foreclosed.
In the resulting foreclosure sale held on January 31, 1985, petitioner was the highest bidder. As the spouses
Beduya failed to redeem the property, petitioner consolidated its ownership.
[16]

[17]

[18]

It appears that private respondent had also applied for a loan from petitioner in 1978, offering his 19.4 hectare
property under Tax Declaration No. D-2247 as security for the loan. As part of the processing of the application, a
representative of petitioner, Patton R. Olano, inspected the land and appraised its value.
Private respondents loan application was later approved by petitioner. However after releasing the amount of the
loan to private respondent, petitioner found that the land mortgaged by private respondent was included in the land
covered by TCT No. 10101 in the name of the spouses Beduya. Petitioner, therefore, cancelled the loan and
demanded immediate payment of the amount. Private respondent paid the loan to petitioner for which the former
was issued a Cancellation of Mortgage, dated March 18, 1981, releasing the property in question from encumbrance.
[19]

[20]

[21]

Sometime in April of 1986, more than a year after the foreclosure sale, a re-appraisal of the property covered by TCT
No. 10101 was conducted by petitioners representatives. It was then discovered that private respondent was
occupying a portion of said land. Private respondent was informed that petitioner had become the owner of the land
he was occupying, and he was asked to vacate the property. As private respondent refused to do so, petitioner filed
a complaint for recovery of possession with damages against him. The case was assigned to Branch 1 of the
[22]

Regional Trial Court, Tagbilaran City, which after trial, rendered a decision, dated August 22, 1989, declaring
petitioner the lawful owner of the entire land covered by TCT No. 10101 on the ground that the decree of registration
was binding upon the land. The dispositive portion of the decision reads:
[23]

[24]

WHEREFORE, foregoing considered, the court renders judgment:

1.......Declaring plaintiff bank Development Bank of the Philippines the true and legal owner of the
land in question covered by TCT No. 10101 farm of Gaudencio Beduya;
2.......Dismissing defendants counterclaim; Sppedsc
3.......Ordering defendant to vacate from the land in question; the portion of which he claims to belong
to him for without basis in fact and law;
4.......Ordering defendant, his agents or any person representing him or those who may claim
substantial rights on the land to vacate therefrom, cease and desist from disturbing, molesting and
interfering plaintiffs possession of the land in question, and from committing any such act as would
tend to mitigate, deny or deprive plaintiff of its ownership and possession over said land.
SO ORDERED.
On appeal, the Court of Appeals reversed and gave judgment for private respondent, declaring him the owner of the
19.4 hectares of land erroneously included in TCT No. 10101. The dispositive portion of the appellate courts decision
reads:
WHEREFORE, the appealed decision is hereby REVERSED AND SET ASIDE. A new decision is
hereby rendered:
1. Dismissing the complaint.
2. Declaring the disputed 19.4000 hectares of land embraced in TCT 10101 as exclusively
belonging to defendant-appellant, ordering its segregation from plaintiff-appellees title and its
reconveyance to appellant.
No pronouncement as to costs.
SO ORDERED.

[25]

Petitioner moved for a reconsideration but its motion was denied in a resolution dated April 23, 1997. Hence this
petition.
[26]

Petitioner contends that:

I.......THE DECISION OF THE RESPONDENT COURT IS NOT IN ACCORD WITH THE
APPLICABLE PROVISIONS OF LAW (Sections 38 and 46 of ACT 496) AND THE APPLICABLE
DECISIONS OF THE SUPREME COURT, PARTICULARLY IN THE CASE OF BENIN VS.
TUASON, 57 SCRA 531.
II.......THE RESPONDENT COURT OVERLOOKED THE ISSUES ABOUT THE DBP BEING AN
INNOCENT MORTGAGEE FOR VALUE OF THE LAND IN QUESTION AND OF HAVING
PURCHASED LATER THE SAME DURING A PUBLIC AUCTION SALE. Calrsc

III.THE RESPONDENT COURTS RULING DECLARING DBP IN ESTOPPEL IS ILLOGICAL.

[27]

First. Petitioner invokes the ruling of this Court in Benin v. Tuason in support of its claim that its predecessor-ininterest, Jose Alvarez, became the owner of the land by virtue of the decree of registration issued in his name.
In Benin, three sets of plaintiffs filed separate complaints against Mariano Severo Tuason and J.M. Tuason & Co.,
Inc., praying for the cancellation of OCT No. 735 covering two parcels of land called the Sta. Mesa Estate, or Parcel
1, with an area of 8,798,617.00 square meters, and the Diliman Estate, or Parcel 2, with an area of 15,961,246.00
square meters. They asked that they be declared the owners and lawful possessors of said lands.
[28]

Benin is distinguished from this case. In the first place, Benin involved vast tracts of lands which had already been
subdivided and bought by innocent purchasers for value and in good faith at the time the claimants obtained
registration. Secondly, when the claimants ancestors occupied the lands in question and declared them for tax
purposes in 1944, the lands were already covered by the tax declarations in the name of J. M. Tuason & Co., Inc. In
1914, OCT No. 735 was issued in the name of Tuason so that, from that time on, no possession could defeat the title
of the registered owners of the land. Thirdly, the validity of OCT No. 735 had already been recognized by this Court in
several cases and, as a result thereof, the transfer certificates of title acquired by the innocent purchasers for value
were also declared valid. It was held that neither could the claimants file an action to annul these titles for not only
had these actions prescribed, but the fact was that the claimants were also barred from doing so by laches, having
filed the complaint only in 1955, or 41 years after the issuance of OCT No. 735 to J.M. Tuason & Co., Inc. Thus, it
was not solely the decree of registration which was considered in resolving the Benin case. What was considered
decisive was the valid title or right of ownership of J. M. Tuason & Co., Inc. and that of the other innocent purchasers
for value and in good faith compared to the failure of the claimants to show their right to own or possess the
questioned properties. Sccalr
[29]

Petitioner maintains that the possession by private respondent and his predecessor-in-interest of the 19.4 hectares of
land for more than 30 years cannot overcome the decree of registration issued in favor of its predecessor-in-interest
Jose Alvarez. Petitioner quotes the following statement in the Benin case:
It follows also that the allegation of prescriptive title in favor of plaintiffs does not suffice to establish
a cause of action. If such prescription was completed before the registration of the land in favor of
the Tuasons, the resulting prescriptive title was cut off and extinguished by the decree of
registration. If, on the contrary, the prescription was either begun or completed after the decree of
registration, it conferred no title because, by express provision of law, prescription can not operate
against the registered owner (Act 496).
[30]

Petitioner would thus insist that, by virtue of the decree of registration, Jose Alvarez and those claiming title from him
(i.e., the spouses Beduya) acquired ownership of the 19.4 hectares of land, despite the fact that they neither
possessed nor occupied these lands.
This view is mistaken. A consideration of the cases shows that a decree of registration cut off or extinguished a right
acquired by a person when such right refers to a lien or encumbrance on the land not to the right of ownership
thereof which was not annotated on the certificate of title issued thereon. Thus, Act No. 496 provides:
Sec. 39. Every person receiving a certificate of title in pursuance of a decree of registration, and
every subsequent purchaser of registered land who takes a certificate of title for value in good faith
shall hold the same free of all encumbrances except those noted on said certificate, and any of the
following encumbrances which may be subsisting, namely: Calrspped
First. Liens, claims, or rights arising or existing under the laws of Constitution of the United States
or of the Philippine Islands which the statutes of the Philippine Islands cannot require to appear of
record in the Registry.

Second. Taxes within two years after the same became due and payable.
Third. Any public highway, way, private way established by law, or any Government irrigation canal
or lateral thereof, where the certificate of title does not state that the boundaries of such highway,
way, or irrigation canal or lateral thereof, have been determined.
But if there are easements or other rights appurtenant to a parcel of registered land which for any
reason have failed to be registered, such easements or rights shall remain so appurtenant
notwithstanding such failure, and shall be held to pass with the land until cut off or extinguished by
the registration of the servient estate, or in any other manner.
Hence, in Cid v. Javier, it was helds:
[31]

. . . Consequently, even conceding arguendo that such an easement has been acquired, it had
been cut off and extinguished by the registration of the servient estate under the Torrens system
without the easement being annotated on the corresponding certificate of title, pursuant to Section
39 of the Land Registration Act.
This principle was reiterated in Purugganan v. Paredes which also involved an easement of light and view that was
not annotated on the certificate of title of the servient estate. Scedp
[32]

But to make this principle applicable to a situation wherein title acquired by a person through acquisitive prescription
would be considered cut off and extinguished by a decree of registration would run counter to established
jurisprudence before and after the ruling in Benin. Indeed, registration has never been a mode of acquiring ownership
over immovable property. As early as 1911, in the case of City of Manila v. Lack, the Court already ruled on the
purpose of registration of lands, viz.:
[33]

The Court of Land Registration was created for a single purpose. The Act is entitled "An Act to
provide for the adjudication and registration of titles to lands in the Philippine Islands." The sole
purpose of the Legislature in its creation was to bring the land titles of the Philippine Islands under
one comprehensive and harmonious system, the cardinal features of which are indefeasibility of
title and the intervention of the State as a prerequisite to the creation and transfer of titles and
interest, with the resultant increase in the use of land as a business asset by reason of the greater
certainty and security of title. It does not create a title nor vest one. It simply confirms a title already
created and already vested, rendering it forever indefeasible. . .
Again, in the case of Angeles v. Samia where land was erroneously registered in favor of persons who neither
possessed nor occupied the same, to the prejudice of the actual occupant, the Court held:
[34]

. . . The purpose of the Land Registration Act, as this court has had occasion to so state more than
once, is not to create or vest title, but to confirm and register title already created and already
vested, and of course, said original certificate of title No. 8995 could not have vested in the
defendant more title than what was rightfully due her and her coowners. It appearing that said
certificate granted her much more than she expected, naturally to the prejudice of another, it is but
just that the error, which gave rise to said anomaly, be corrected (City of Manila vs. Lack, 19 Phil.,
324). The defendant and her coowners knew or, at least, came to know that it was through error
that the original certificate of title in question was issued by the court which heard cadastral case
No. 11 of Bacolor, not only in or prior to March, 1933, but from the time said certificate was issued
in their favor, that is, from December 15, 1921. This is evidenced by the fact that, ever since, they
remained passive without even attempting to make the least showing of ownership over the land in
question until after the lapse of more than eleven years. The Land Registration Act as well as the
Cadastral Act protects only the holders of a title in good faith and does not permit its provisions to

be used as a shield for the commission of fraud, or that one should enrich himself at the expense of
another (Gustilo vs. Maravilla, 48 Phil., 442; Angelo vs. Director of Lands, 49 Phil., 838). The
above-stated Acts do not give anybody, who resorts to the provisions thereof, a better title than he
really and lawfully has. If he happened to obtain it by mistake or to secure, to the prejudice of his
neighbor, more land than he really owns, with or without bad faith on his part, the certificate of title,
which may have been issued to him under the circumstances, may and should be cancelled or
corrected (Legarda and Prieto vs. Saleeby, 31 Phil., 590). This is permitted by section 112 of Act
No. 496, which is applicable to the Cadastral Act because it is so provided expressly by the
provisions of section 11 of the latter Act. It cannot be otherwise because, as stated in the case of
Domingo vs. Santos, Ongsiako, Lim y Cia. (55 Phil., 361), errors in the plans of lands sought to be
registered in the registry and reproduced in the certificate of title issued later, do not annul the
decree of registration on the ground that it is not the plan but the land itself which is registered in
the registry. In other words, if the plan of an applicant for registration or claimant in a cadastral case
alleges that the land referred to in said plan is 100 or 1,000 hectares, and the land which he really
owns and desires to register in the registry is only 80 ares, he cannot claim to be the owner of the
existing difference if afterwards he is issued a certificate of title granting him said area of 100 or
1,000 hectares. Edpsc
[35]

The principle laid down in this 1938 case remains the prevailing doctrine, its latest application being in the case of
Reyes v. Court of Appeals wherein we ruled that the fact that a party was able to secure a title in his favor did not
operate to vest ownership upon her of the property.
[36]

In the present case, private respondent has been in actual, open, peaceful and continuous possession of the property
since 1950. This fact was corroborated by the testimony of Eleuterio Cambangay who personally knew that Ulpiano
Mumar transferred the land covered by Tax Declaration No. 3840 in favor of private respondent in 1950. Private
respondents claim based on actual occupation of the land is bolstered by Tax Declaration Nos. R-1475, R-799 and
D-2247 which were issued in his name in 1950, 1961 and 1974, respectively. Together with his actual possession of
the land, these tax declarations constitute strong evidence of ownership of the land occupied by him. As we said in
the case of Republic vs. Court of Appeals:
[37]

[38]

[39]

[40]

Although tax declarations or realty tax payments of property are not conclusive evidence of
ownership, nevertheless, they are good indicia of possession in the concept of owner for no one in
his right mind would be paying taxes for a property that is not in his actual or at least constructive
possession. They constitute at least proof that the holder has a claim of title over the property. The
voluntary declaration of a piece of property for taxation purposes manifests not only ones sincere
and honest desire to obtain title to the property and announces his adverse claim against the State
and all other interested parties, but also the intention to contribute needed revenues to the
Government. Such an act strengthens ones bona fide claim of acquisition of ownership.
More importantly, it was established that private respondent, having been in possession of the land since 1950, was
the owner of the property when it was registered by Jose Alvarez in 1969, his possession tacked to that of his
predecessor-in-interest, Ulpiano Mumar, which dates back to 1917. Clearly, more than 30 years had elapsed before
a decree of registration was issued in favor of Jose Alvarez. This uninterrupted adverse possession of the land for
more than 30 years could only ripen into ownership of the land through acquisitive prescription which is a mode of
acquiring ownership and other real rights over immovable property. Prescription requires public, peaceful,
uninterrupted and adverse possession of the property in the concept of an owner for ten (10) years, in case the
possession is in good faith and with a just title. Such prescription is called ordinary prescription, as distinguished from
extraordinary prescription which requires possession for 30 years in case possession is without just title or is not in
good faith. Edp
[41]

[42]

In contrast to private respondent, it has been shown that neither Jose Alvarez nor the spouses Beduya were at any
time in possession of the property in question. In fact, despite knowledge by Gaudencio Beduya that private
respondent occupied this 19.4 hectares included in the area covered by TCT No. 10101, he never instituted any
[43]

action to eject or recover possession from the latter. Hence, it can be concluded that neither Jose Alvarez nor the
spouses Beduya ever exercised any right of ownership over the land. The fact of registration in their favor never
vested in them the ownership of the land in dispute. "If a person obtains a title under the Torrens system, which
includes by mistake or oversight land which can no longer be registered under the system, he does not, by virtue of
the said certificate alone, become the owner of the lands illegally included."
[44]

Considering the circumstances pertaining in this case, therefore, we hold that ownership of the 19.4 hectares of land
presently occupied by private respondent was already vested in him and that its inclusion in OCT No. 546 and,
subsequently, in TCT No. 10101, was erroneous. Accordingly, the land in question must be reconveyed in favor of
private respondent, the true and actual owner thereof, reconveyance being clearly the proper remedy in this case.
"The true owner may bring an action to have the ownership or title to the land judicially settled and
the Court in the exercise of its equity jurisdiction, without ordering the cancellation of the Torrens
title issued upon the patent, may direct the defendants, the registered owner to reconvey the parcel
of land to the plaintiff who has been found to be the true owner thereof." (Vital vs. Amore, 90 Phil.
955) "The reconveyance is just and proper in order to terminate the intolerable anomaly that the
patentees should have a torrens title for the land which they and their predecessors never
possessed which has been possessed by Novo in the concept of owner." (Bustarga v. Novo, 129
SCRA 125)
[45]

Second. Generally, an action for reconveyance based on an implied or constructive trust, such as the instant case,
prescribes in 10 years from the date of issuance of decree of registration. However, this rule does not apply when
the plaintiff is in actual possession of the land. Thus, it has been held: Misedp
[46]

. . . [A]n action for reconveyance of a parcel of land based on implied or constructive trust
prescribes in ten years, the point of reference being the date of registration of the deed or the date
of the issuance of the certificate of title over the property, but this rule applies only when the plaintiff
or the person enforcing the trust is not in possession of the property, since if a person claiming to
be the owner thereof is in actual possession of the property, as the defendants are in the instant
case, the right to seek reconveyance, which in effect seeks to quiet title to the property, does not
prescribe. The reason for this is that one who is in actual possession of a piece of land claiming to
be the owner thereof may wait until his possession is disturbed or his title is attacked before taking
steps to vindicate his right, the reason for the rule being, that his undisturbed possession gives him
a continuing right to seek the aid of a court of equity to ascertain and determine the nature of the
adverse claim of a third party and its effect on his own title, which right can be claimed only by one
who is in possession.
[47]

Having been the sole occupant of the land in question, private respondent may seek reconveyance of his property
despite the lapse of more than 10 years.
Nor is there any obstacle to the determination of the validity of TCT No. 10101. It is true that the indefeasibility of
torrens titles cannot be collaterally attacked. In the instant case, the original complaint is for recovery of possession
filed by petitioner against private respondent, not an original action filed by the latter to question the validity of TCT
No. 10101 on which petitioner bases its right. To rule on the issue of validity in a case for recovery of possession is
tantamount to a collateral attack. However, it should not be overlooked that private respondent filed a counterclaim
against petitioner, claiming ownership over the land and seeking damages. Hence, we could rule on the question of
the validity of TCT No. 10101 for the counterclaim can be considered a direct attack on the same. "A counterclaim is
considered a complaint, only this time, it is the original defendant who becomes the plaintiff. . . . It stands on the same
footing and is to be tested by the same rules as if it were an independent action." In an analogous case, we ruled
on the validity of a certificate of title despite the fact that the original action instituted before the lower court was a
case for recovery of possession. The Court reasoned that since all the facts of the case are before it, to direct the
party to institute cancellation proceedings would be needlessly circuitous and would unnecessarily delay the
termination of the controversy which has already dragged on for 20 years.
[48]

[49]

Third. Petitioner nonetheless contends that an action for reconveyance does not lie against it, because it is an
innocent purchaser for value in the foreclosure sale held in 1985.
This contention has no merit. Sec. 38 of Act No. 496, the Land Registration Act, provides: Misoedp
If the court after hearing finds that the applicant or adverse claimant has title as stated in his
application or adverse claim and proper for registration, a decree of confirmation and registration
shall be entered. Every decree of registration shall bind the land, and quiet title thereto, subject only
to the exceptions stated in the following section. It shall be conclusive upon and against all
persons, including the Insular Government and all the branches thereof, whether mentioned by
name in the application, notice, or citation, or included in the general description "To all whom it
may concern." Such decree shall not be opened by reason of the absence, infancy, or other
disability of any person affected thereby, nor by any proceeding in any court for reversing
judgments or decrees; subject, however, to the right of any person deprived of land or of any estate
or interest therein by decree of registration obtained by fraud to file in the competent Court of First
Instance a petition for review within one year after entry of the decree, provided no innocent
purchaser for value has acquired an interest. Upon the expiration of said term of one year, every
decree or certificate of title issued in accordance with this section shall be incontrovertible. If there
is any such purchaser, the decree of registration shall not be opened, but shall remain in full force
and effect forever, subject only to the right of appeal hereinbefore provided: Provided,
however, That no decree or certificate of title issued to persons not parties to the appeal shall be
cancelled or annulled. But any person aggrieved by such decree in any case may pursue his
remedy by action for damages against the applicant or any other person for fraud in procuring the
decree. Whenever the phrase "innocent purchaser for value" or an equivalent phrase occurs in this
Act, it shall be deemed to include an innocent lessee, mortgagee, or other encumbrancer for value.
(As amended by Sec. 3, Act 3621; and Sec. 1, Act No. 3630.) Edpmis
Succinctly put, 38 provides that a certificate of title is conclusive and binding upon the whole world. Consequently, a
buyer need not look behind the certificate of title in order to determine who is the actual owner of the land. However,
this is subject to the right of a person deprived of land through fraud to bring an action for reconveyance, provided
that it does not prejudice the rights of an innocent purchaser for value and in good faith. "It is a condition sine qua
non for an action for reconveyance to prosper that the property should not have passed to the hands of an innocent
purchaser for value." The same rule applies to mortgagees, like petitioner. Thus, we held:
[50]

Where the certificate of title is in the name of the mortgagor when the land is mortgaged, the
innocent mortgagee for value has the right to rely on what appears on the certificate of title. In the
absence of anything to excite suspicion, said mortgagee is under no obligation to look beyond the
certificate and investigate the title of the mortgagor appearing on the face of said certificate.
Although Article 2085 of the Civil Code provides that absolute ownership of the mortgaged property
by the mortgagor is essential, the subsequent declaration of a title as null and void is not a ground
for nullifying the mortgage right of a mortgagee in good faith.
[51]

The evidence before us, however, indicates that petitioner is not a mortgagee in good faith. To be sure, an innocent
mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagors title. Nonetheless,
especially in the case of a banking institution, a mortgagee must exercise due diligence before entering into said
contract. Judicial notice is taken of the standard practice for banks, before approving a loan, to send representatives
to the premises of the land offered as collateral and to investigate who are the real owners thereof. Banks, their
business being impressed with public interest, are expected to exercise more care and prudence than private
individuals in their dealings, even those involving registered lands. Jjsc
[52]

In this case, petitioners representative, Patton R. Olano, admitted that he came to know of the property for the first
time in 1979 when he inspected it to determine whether the portion occupied by private respondent and mortgaged
by the latter to petitioner was included in TCT No. 10101. This means that when the land was mortgaged by the

spouses Beduya in 1972, no investigation had been made by petitioner. It is clear, therefore, that petitioner failed to
exercise due care and diligence in establishing the condition of the land as regards its actual owners and possessors
before it entered into the mortgage contract in 1972 with the Beduyas. Had it done so, it would not have failed to
discover that private respondent was occupying the disputed portion of 19.4 hectares. For this reason, petitioner
cannot be considered an innocent purchaser for value when it bought the land covered by TCT No. 10101 in 1985 at
the foreclosure sale.
Indeed, two circumstances negate petitioners claim that it was an innocent purchaser for value when it bought the
land in question, including the portion occupied by private respondent: (1) petitioner was already informed by
Gaudencio Beduya that private respondent occupied a portion of the property covered by TCT No. 10101; and (2)
petitioners representative conducted an investigation of the property in 1979 to ascertain whether the land
mortgaged by private respondent was included in TCT No. 10101. In other words, petitioner was already aware that a
person other than the registered owner was in actual possession of the land when it bought the same at the
foreclosure sale. A person who deliberately ignores a significant fact which would create suspicion in an otherwise
reasonable man is not an innocent purchaser for value. "It is a well-settled rule that a purchaser cannot close his
eyes to facts which should put a reasonable man upon his guard, and then claim that he acted in good faith under the
belief that there was no defect in the title of the vendor."
[53]

Petitioner deliberately disregarded both the fact that private respondent already occupied the property and that he
was claiming ownership over the same. It cannot feign ignorance of private respondents claim to the land since the
latter mortgaged the same land to petitioner as security for the loan he contracted in 1978 on the strength of the tax
declarations issued under his name. Instead of inquiring into private respondents occupation over the land, petitioner
simply proceeded with the foreclosure sale, pretending that no doubts surround the ownership of the land covered by
TCT No. 10101. Considering these circumstances, petitioner cannot be deemed an innocent mortgagee/purchaser
for value. As we ruled: Scjj
"The failure of appellees to take the ordinary precautions which a prudent man would have taken
under the circumstances, specially in buying a piece of land in the actual, visible and public
possession of another person, other than the vendor, constitutes gross negligence amounting to
bad faith.
In this connection, it has been held that where, as in this case, the land sold is in the possession of
a person other than the vendor, the purchaser is required to go beyond the certificates of title and
ma[k]e inquiries concerning the rights of the actual possessor. (Citations omitted.)
One who purchases real property which is in the actual possession of another should, at least,
make some inquiry concerning the right of those in possession. The actual possession by other
than the vendor should, at least put the purchaser upon inquiry. He can scarcely, in the absence of
such inquiry, be regarded as a bona fide purchaser as against such possessors."
[54]

Fourth. From the foregoing, we find that the resolution of the issue of estoppel will not affect the outcome of this
case. Petitioner claims that the fact that it approved a loan in favor of private respondent and executed a mortgage
contract covering the 19.4 hectares covered by tax declarations issued under private respondents name does not
mean that it is estopped from questioning the latters title. Petitioner accuses private respondent of having made
misrepresentations which led it to believe in his valid title and ownership.
The claim has no basis. Private respondent made no misrepresentation with regard to the land occupied by him as he
is actually the real owner thereof. Moreover, when private respondent entered into a mortgage contract with
petitioner, his claim of ownership was supported not only by the tax declarations but also by a certification of the Clerk
of Court of the Court of First Instance of Bohol that no civil, land registration or cadastral case has been filed or
instituted before the court affecting the validity of Tax Declaration No. D-2247 covering the land located in Bugang,
San Miguel, Bohol and declared in the name of Carlos Cajes. These documents were relied upon by private
respondent in support of his claim of ownership. We cannot consider the submission of these documents as
[55]

misrepresentations by private respondent as to the actual ownership of the land. Rather, private respondent believed
in good faith and with good reason that he was the owner of the 19.4 hectares occupied by him. Sjcj
As to the question of estoppel, we do not find petitioner to be estopped from questioning private respondents title.
"Estoppel in pais arises when one, by his acts, representations or admission, or by his own silence when he ought to
speak out, intentionally or through culpable negligence, induces another to believe certain facts to exist and such
other rightfully relies and acts on such belief, so that he will be prejudiced if the former is permitted to deny the
existence of such facts." In the case at bar, upon learning that the land occupied by private respondent was also
covered by TCT No. 10101, petitioner immediately demanded full payment of the loan and thereafter cancelled the
mortgage contract, a fact that is admitted by private respondent himself. Indeed, nothing in record indicates that
petitioner impliedly acquiesced to the validity of private respondents title when it found out that the latter was
occupying a portion of the land covered by TCT No. 10101.
[56]

[57]

However, for reasons aforestated, we uphold private respondents ownership of 19.4 hectares occupied by him. As a
necessary consequence thereof, such portion of land included in TCT No. 10101 must be segregated and
reconveyed in his favor.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED in toto.
SO ORDERED. Supreme
Bellosillo, (Chairman), Quisumbing, Buena, and De Leon, Jr., JJ., concur.

G.R. No. 32576

November 6, 1930

FULTRON IRON WORKS CO., plaintiff-appellee,

vs.
CHINA BANKING CORPORATION, ET AL., defendants.
CHINA BANKING CORPORATION, appellant.
Feria and La O, and Gibbs and McDonough for appellant.
Claro M. Recto and DeWitt, Perkins and Brady for appellee.

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 ofestafa, 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 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.
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, attorneyin-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 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 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.
Malcolm, Villamor, Ostrand, Johns, Romualdez, and Villa-Real, JJ., concur.

SECOND DIVISION
[G.R. No. 155206. October 28, 2003]

GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner, vs. EDUARDO M. SANTIAGO,

substituted by his widow ROSARIO ENRIQUEZ VDA. DE SANTIAGO, respondent.
DECISION
CALLEJO, SR., J.:

Before the Court is the petition for review on certiorari filed by the Government Service Insurance
System (GSIS), seeking to reverse and set aside the Decision dated February 22, 2002 of the Court of
Appeals (CA) in CA-G.R. CV No. 62309 and its Resolution dated September 5, 2002 denying its motion
for reconsideration.
[1]

The antecedent facts of the case, as culled from the assailed CA decision and that of the trial court,
are as follows:

Deceased spouses Jose C. Zulueta and Soledad Ramos obtained various loans from defendant GSIS for
(the) period September, 1956 to October, 1957 in the total amount of P3,117,000.00 secured by real estate
mortgages over parcels of land covered by TCT Nos. 26105, 37177 and 50365. The Zuluetas failed to
pay their loans to defendant GSIS and the latter foreclosed the real estate mortgages dated September 25,
1956, March 6, 1957, April 4, 1957 and October 15, 1957.
On August 14, 1974, the mortgaged properties were sold at public auction by defendant GSIS submitting
a bid price of P5,229,927.84. Not all lots covered by the mortgaged titles, however, were sold. Ninetyone (91) lots were expressly excluded from the auction since the lots were sufficient to pay for all the
mortgage debts. A Certificate of Sale (Annex F, Records, Vol. I, pp. 23-28) was issued by then
Provincial Sheriff Nicanor D. Salaysay.
The Certificate of Sale dated August 14, 1974 had been annotated and inscribed in TCT Nos. 26105,
37177 and 50356, with the following notations: (T)he following lots which form part of this title (TCT

No. 26105) are not covered by the mortgage contract due to sale to third parties and donation to the
government: 50-H-5-C-9-J-65-H-8, 50-H-5-C-9J-M-7; 50-H-5-C-9-J-65-H-5; 1 lots Nos. 1 to 13, Block
No. 1 -6,138 sq.m. 2. Lots Nos. 1 to 11, Block No. 2 4,660 sq.m. 3. Lot No. 15, Block No. 3 487
sq.m. 4. Lot No. 17, Block No. 4 263 sq.m. 5. Lot No. 1, Block No. 7 402 sq.m. 6. Road Lots Nos. 1,
2, 3, & 4 2,747 sq.m.
In another NOTE: The following lots in the Antonio Subdivision were already released by the GSIS and
therefore are not included in this sale, namely: LOT NO. 1, 6, 7, 8, 9, 10, and 13 (Old Plan) Block I; 1, 3,
4, 5, 7, 8 and 10 (Old Plan) Block II; 3, 10, 12 and 13 (New Plan) Block I (Old Plan) Block III; 7, 14 and
20 (New Plan) Block III (Old Plan) Block V; 13 and 20 (New Plan) Block IV (Old Plan) Block VI; 1, 2, 3
and 10 (New Plan) Block V (Old Plan) Block VII; 1, 5, 8, 15, 26 and 27 (New Plan) Block VI (Old Plan)
Block VIII; 7, 12 and 20 (New Plan) Block VII (Old Plan) Block II; 1, 4 and 6 (New Plan) Block VIII
(Old Plan) Block X; 5 (New Plan) Block X (Old Plan) Block ZXII; 6 (New Plan) Block XI (Old Plan)
Block XII; 1, Block 9; 12 Block 1; 11 Block 2; 19 Block 1; 10 Block 6; 23 Block 3.
And the lots on ADDITIONAL EXCLUSION FROM PUBLIC SALE are LOTS NO. 6 Block 4; 2
Block 2; 5 Block 5; 1, 2 and 3 Block 11, 1, 2, 3 and 4 Block 10; 5 Block 11 (New); 1 Block 3; 5 Block 1;
15 Block 7; 11 Block 9; 13 Block 5; 12 Block 5; 3 Block 10; 6.
On November 25, 1975, an Affidavit of Consolidation of Ownership (Annex G, Records, Vol. I, pp. 2931) was executed by defendant GSIS over Zuluetas lots, including the lots, which as earlier stated, were
already excluded from the foreclosure.
On March 6, 1980, defendant GSIS sold the foreclosed properties to Yorkstown Development
Corporation which sale was disapproved by the Office of the President of the Philippines. The sold
properties were returned to defendant GSIS.
The Register of Deeds of Rizal cancelled the land titles issued to Yorkstown Development
Corporation. On July 2, 1980, TCT No. 23552 was issued cancelling TCT No. 21926; TCT No. 23553
cancelled TCT No. 21925; and TCT No. 23554 cancelling TCT No. 21924, all in the name of defendant
GSIS.
After defendant GSIS had re-acquired the properties sold to Yorkstown Development Corporation, it
began disposing the foreclosed lots including the excluded ones.
On April 7, 1990, representative Eduardo Santiago and then plaintiff Antonio Vic Zulueta executed an
agreement whereby Zulueta transferred all his rights and interests over the excluded lots. Plaintiff
Eduardo Santiagos lawyer, Atty. Wenceslao B. Trinidad, wrote a demand letter dated May 11,
1989 (Annex H, Records, Vol. I, pp. 32-33) to defendant GSIS asking for the return of the eighty-one
(81) excluded lots.
[2]

On May 7, 1990, Antonio Vic Zulueta, represented by Eduardo M. Santiago, filed with the Regional
Trial Court (RTC) of Pasig City, Branch 71, a complaint for reconveyance of real estate against the
GSIS. Spouses Alfeo and Nenita Escasa, Manuel III and Sylvia G. Urbano, and Marciana P. Gonzales
and the heirs of Mamerto Gonzales moved to be included as intervenors and filed their respective

answers in intervention. Subsequently, the petitioner, as defendant therein, filed its answer alleging inter
alia that the action was barred by the statute of limitations and/or laches and that the complaint stated no
cause of action. Subsequently, Zulueta was substituted by Santiago as the plaintiff in the complaint a
quo. Upon the death of Santiago on March 6, 1996, he was substituted by his widow, Rosario Enriquez
Vda. de Santiago, as the plaintiff.
After due trial, the RTC rendered judgment against the petitioner ordering it to reconvey to the
respondent, Rosario Enriquez Vda. de Santiago, in substitution of her deceased husband Eduardo, the
seventy-eight lots excluded from the foreclosure sale. The dispositive portion of the RTC decision reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against the defendant:
1.
Ordering defendant to reconvey to plaintiff the seventy-eight (78) lots released and excluded from
the foreclosure sale including the additional exclusion from the public sale, namely:
a.

Lot Nos. 1, 6, 7, 8, 0, 10, 13, Block I (Old Plan).

b.

Lot Nos. 1, 3, 4, 5, 7, 8 and 10, Block II (Old Plan).

c.

Lot Nos. 3, 10, 12, and 13, Block I (New Plan), Block III (Old Plan),

d.

Lot Nos. 7, 14 and 20, Block III (New Plan), Block V (Old Plan).

e.

Lot Nos. 13 and 20, Block IV (New Plan), Block VI (Old Plan).

f.

Lot Nos. 1, 2, 3 and 10, Block V (New Plan), Block VII (Old Plan).

g.

Lot Nos. 1, 5, 8, 15, 26 and 27, Block VI (New Plan), Block VIII (Old
Plan).

h.

Lot Nos. 7 and 12, Block VII (New Plan), Block II (Old Plan).

i.

Lot Nos. 1, 4 and 6, Block VIII (New Plan), Block X (Old Plan).

j.

Lot 5, Block X (New Plan), Block XII (Old Plan).

k.

Lot 6, Block XI (New Plan), Block XII (Old Plan).

l.

Lots 2, 5, 12 and 15, Block I.

m.

Lots 6, 9 and 11, Block 2.

n.

Lots 1, 5, 6, 7, 16 and 23, Block 3.

o.

Lot 6, Block 4.

p.

Lots 5, 12, 13 and 24, Block 5.

q.

Lots 10 and 16, Block 6.

r.

Lots 6 and 15, Block 7.

s.

Lots 13, 24, 28 and 29, Block 8.

t.

Lots 1, 11, 17 and 22, Block 9.

u.

Lots 1, 2, 3 and 4, Block 10.

v.

Lots 1, 2, 3 and 5 (New), Block 11.

2.
Ordering defendant to pay plaintiff, if the seventy-eight (78) excluded lots could not be reconveyed,
the fair market value of each of said lots.
3.
Ordering the Registry of Deeds of Pasig City to cancel the land titles covering the excluded lots in
the name of defendant or any of its successors-in-interest including all derivative titles therefrom and to
issue new land titles in plaintiffs name.
4.
Ordering the Registry of Deeds of Pasig City to cancel the Notices of Lis Pendens inscribed in TCT
No. PT-80342 under Entry No. PT-12267/T-23554; TCT No. 81812 under Entry No. PT-12267/T-23554;
and TCT No. PT-84913 under Entry No. PT-12267/T-23554.
5.

Costs of suit.

[3]

The petitioner elevated the case to the CA which rendered the assailed decision affirming that of the
RTC. The dispositive portion of the assailed decision reads:

WHEREFORE, premises considered, the herein appeal is DISMISSED for lack of merit. The Decision
of December 17, 1997 of Branch 71 of the Regional Trial Court of Pasig City is hereby AFFIRMED.
[4]

The petitioner moved for a reconsideration of the aforesaid decision but the same was denied in the
assailed CA Resolution of September 5, 2002.
The petitioner now comes to this Court alleging that:

THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT A)

PETITIONER WAS GUILTY OF BAD FAITH WHEN IN TRUTH AND IN FACT, THERE WAS NO
SUFFICIENT GROUND TO SUPPORT SUCH CONCLUSION; AND B) THERE WAS NO
PRESCRIPTION IN THIS CASE.
[5]

In its petition, the petitioner maintains that it did not act in bad faith when it erroneously included in its
certificate of sale, and subsequently consolidated the titles in its name over the seventy-eight lots
(subject lots) that were excluded from the foreclosure sale. There was no proof of bad faith nor could

fraud or malice be attributed to the petitioner when it erroneously caused the issuance of certificates of
title over the subject lots despite the fact that these were expressly excluded from the foreclosure sale.
The petitioner asserts that the action for reconveyance instituted by the respondent had already
prescribed after the lapse of ten years from November 25, 1975 when the petitioner consolidated its
ownership over the subject lots. According to the petitioner, an action for reconveyance based on implied
or constructive trust prescribes in ten years from the time of its creation or upon the alleged fraudulent
registration of the property. In this case, when the action was instituted on May 7, 1990, more than
fourteen years had already lapsed. Thus, the petitioner contends that the same was already barred by
prescription as well as laches.
The petitioner likewise takes exception to the holding of the trial court and the CA that it (the
petitioner) failed to apprise or return to the Zuluetas, the respondents predecessors-in-interest, the
seventy-eight lots excluded from the foreclosure sale because the petitioner had no such obligation under
the pertinent loan and mortgage agreement.
The petitioners arguments fail to persuade.
At the outset, it bears emphasis that the jurisdiction of this Court in a petition for review on certiorari
under Rule 45 of the Rules of Court, as amended, is limited to reviewing only errors of law. This Court is
not a trier of facts. Case law has it that the findings of the trial court especially when affirmed by the CA
are binding and conclusive upon this Court. Although there are exceptions to the said rule, we find no
reason to deviate therefrom. By assailing the findings of facts of the trial court as affirmed by the CA, that
it acted in bad faith, the petitioner thereby raised questions of facts in its petition.
[6]

Nonetheless, even if we indulged the petition and delved into the factual issues, we find the petition
barren of merit.
That the petitioner acted in bad faith in consolidating ownership and causing the issuance of titles in
its name over the subject lots, notwithstanding that these were expressly excluded from the foreclosure
sale was the uniform ruling of the trial court and appellate court. As declared by the CA:

The acts of defendant-appellant GSIS in concealing from the Zuluetas [the respondents predecessors-ininterest] the existence of these lots, in failing to notify or apprise the spouses Zulueta about the excluded
lots from the time it consolidated its titles on their foreclosed properties in 1975, in failing to inform them
when it entered into a contract of sale of the foreclosed properties to Yorkstown Development
Corporation in 1980 as well as when the said sale was revoked by then President Ferdinand E. Marcos
during the same year demonstrated a clear effort on its part to defraud the spouses Zulueta and
appropriate for itself the subject properties. Even if titles over the lots had been issued in the name of the
defendant-appellant, still it could not legally claim ownership and absolute dominion over them because
indefeasibility of title under the Torrens system does not attach to titles secured by fraud or
misrepresentation. The fraud committed by defendant-appellant in the form of concealment of the
existence of said lots and failure to return the same to the real owners after their exclusion from the
foreclosure sale made defendant-appellant holders in bad faith. It is well-settled that a holder in bad faith
of a certificate of title is not entitled to the protection of the law for the law cannot be used as a shield for
fraud.
[7]

The Court agrees with the findings and conclusion of the trial court and the CA. The petitioner is not
an ordinary mortgagee. It is a government financial institution and, like banks, is expected to exercise
greater care and prudence in its dealings, including those involving registered lands. The Courts ruling
in Rural Bank of Compostela v. CA is apropos:
[8]

[9]

Banks, indeed, should exercise more care and prudence in dealing even with registered lands, than private
individuals, for their business is one affected with public interest, keeping in trust money belonging to
their depositors, which they should guard against loss by not committing any act of negligence which
amounts to lack of good faith by which they would be denied the protective mantle of land registration
statute, Act [No.] 496, extended only to purchasers for value and in good faith, as well as to mortgagees
of the same character and description.
[10]

Due diligence required of banks extend even to persons, or institutions like the petitioner, regularly
engaged in the business of lending money secured by real estate mortgages.
[11]

In this case, the petitioner executed an affidavit in consolidating its ownership and causing the
issuance of titles in its name over the subject lots despite the fact that these were expressly excluded
from the foreclosure sale. By so doing, the petitioner acted in gross and evident bad faith. It cannot feign
ignorance of the fact that the subject lots were excluded from the sale at public auction. At the least, its
act constituted gross negligence amounting to bad faith. Further, as found by the CA, the petitioners acts
of concealing the existence of these lots, its failure to return them to the Zuluetas and even its attempt to
sell them to a third party is proof of the petitioners intent to defraud the Zuluetas and appropriate for itself
the subject lots.
On the issue of prescription, generally, an action for reconveyance of real property based on fraud
prescribes in four years from the discovery of fraud; such discovery is deemed to have taken place upon
the issuance of the certificate of title over the property. Registration of real property is a constructive
notice to all persons and, thus, the four-year period shall be counted therefrom. On the other hand,
Article 1456 of the Civil Code provides:
[12]

Art. 1456. If property is acquired through mistake or fraud, the person obtaining it is, by force of law,
considered a trustee of an implied trust for the benefit of the person from whom the property comes.
An action for reconveyance based on implied or constructive trust prescribes in ten years from the
alleged fraudulent registration or date of issuance of the certificate of title over the property.
[13]

The petitioners defense of prescription is untenable. As held by the CA, the general rule that the
discovery of fraud is deemed to have taken place upon the registration of real property because it is
considered a constructive notice to all persons does not apply in this case. The CA correctly cited the
cases of Adille v. Court of Appeals and Samonte v. Court of Appeals, where this Court reckoned the
prescriptive period for the filing of the action for reconveyance based on implied trust from
the actual discovery of fraud.
[14]

[15]

In ruling that the action had not yet prescribed despite the fact that more than ten years had lapsed
between the date of registration and the institution of the action for reconveyance, the Court
in Adilleratiocinated:

It is true that registration under the Torrens system is constructive notice of title, but it has likewise been
our holding that the Torrens title does not furnish a shield for fraud. It is therefore no argument to say that
the act of registration is equivalent to notice of repudiation, assuming there was one, notwithstanding the
long-standing rule that registration operates as a universal notice of title.
For the same reason, we cannot dismiss private respondents claims commenced in 1974 over the estate
registered in 1955. While actions to enforce a constructive trust prescribes in ten years, reckoned from
the date of the registration of the property, we, as we said, are not prepared to count the period from such
a date in this case. We note the petitioners sub rosa efforts to get hold of the property exclusively for
himself beginning with his fraudulent misrepresentation in his unilateral affidavit of extrajudicial
settlement that he is the only heir and child of his mother Feliza with the consequence that he was able to
secure title in his name [alone]. Accordingly, we hold that the right of the private respondents
commenced from the time they actually discovered the petitioners act of defraudation. According to the
respondent Court of Appeals, they came to know [of it] apparently only during the progress of the
litigation. Hence, prescription is not a bar.
[16]

The above ruling was reiterated in the more recent case of Samonte. In this case, as established by
the CA, the respondent actually discovered the fraudulent act of the petitioner only in 1989:

... [T]he prescriptive period of the action is to be reckoned from the time plaintiff-appellee (then Eduardo
M. Santiago) had actually discovered the fraudulent act of defendant-appellant which was, as borne out
by the records, only in 1989. Plaintiff-appellee Eduardo M. Santiago categorically testified (TSN of July
11, 1995, pp. 14-15) that he came to know that there were 91 excluded lots in Antonio Village which were
foreclosed by the GSIS and included in its consolidation of ownership in 1975 when, in 1989, he and
Antonio Vic Zulueta discussed it and he was given by Zulueta a special power of attorney to represent
him to recover the subject properties from GSIS. The complaint for reconveyance was filed barely a year
from the discovery of the fraud.
[17]

Following the Courts pronouncements in Adille and Samonte, the institution of the action for
reconveyance in the court a quo in 1990 was thus well within the prescriptive period. Having acted in bad
faith in securing titles over the subject lots, the petitioner is a holder in bad faith of certificates of title over
the subject lots. The petitioner is not entitled to the protection of the law for the law cannot be used as a
shield for frauds.
[18]

Contrary to its claim, the petitioner unarguably had the legal duty to return the subject lots to the
Zuluetas. The petitioners attempts to justify its omission by insisting that it had no such duty under the
mortgage contract is obviously clutching at straw. Article 22 of the Civil Code explicitly provides that
every person who, through an act of performance by another, or any other means, acquires or comes
into possession of something at the expense of the latter without just or legal ground, shall return the
same to him.
WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision dated February 22,
2002 and Resolution dated September 5, 2002 of the Court of Appeals in CA-G.R. CV No. 62309 are
AFFIRMED IN TOTO. Costs against the petitioner.
SO ORDERED.

Bellosillo, (Chairman), Quisumbing, Austria-Martinez, and Tinga, JJ., concur.

EN BANC
[G.R. No. L-60033. July 18, 1985.]
TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA SANTOS, Petitioners, v. THE CITY
FISCAL OF MANILA, HON. JOSE B. FLAMINIANO, ASST. CITY FISCAL FELIZARDO N. LOTA and
CLEMENT DAVID, Respondents.
Lorenzo Taada, Teofisto Guingona and Feliciano C. Tumale, for Petitioners.
Vicente V. Asuncion Jr. for Private Respondent.

DECISION

AQUINO, J.:

Respondent Clement David filed a motion for the reconsideration of this Courts decision dated April 4, 1984,
128 SCRA 577. He contends that this Court failed to consider that the petitioners entered in the records and
books of the Nation Savings and Loan Association only P305,821.92 out of his deposits in the amounts of
P1,145,546.20, P15,531.94 and $75,000 and that they admitted that they did not deliver the difference
when they assumed in their personal capacities the obligation to pay him. He argues that the petitioners
committed estafa through misappropriation.
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On the other hand, the petitioners contend that the decision had already become final because the Solicitor
General did not file any motion for reconsideration; that David cannot adopt a theory which is inconsistent
with his original theory; that his claim is clearly civil, not criminal; that his claim has been novated, and that
prohibition is proper to stop a void proceeding, to prevent the unlawful and oppressive exercise of lawful
authority and to provide a just and orderly administration of justice.
The petitioners filed this prohibition action because their obligation is allegedly civil in character and because
of the adverse publicity supposedly instigated by David.
The factual background may be restated as follows:

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1. Clement David and his sister Denise Kuhne during the period from March 20, 1979 to March, 1981 made
placements with the Nation Savings and Loan Association, Inc. in the total sum of P1,145,546.20 as
evidenced by seven bankers acceptances and five certificates of time deposits.
He and his sister Denise also had savings deposits in the Nation Savings in the sum of P13,531.94 as shown
in Passbooks Nos. 6-632 and 29-740.
They also invested in Nation Savings US$75,000 in 1980 as evidenced by receipts, of which $50,000 was
deposited in the account of Teofisto Guingona, Jr. with the Security Bank and Trust Company.

Aggregate investments of David and Kuhne in Nation Savings: P1,159,078.14 in local currency and 75,000
in U.S. dollars. Nation Savings allegedly paid David from 1979 to the early part of 1981 interests of
P240,000 a year (p. 193, Rollo).
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At the time the deposits were made, Antonio I. Martin was the president of Nation Savings, Teresita G.
Santos was its general manager, and Guingona was a director.
2. On March 21, 1981, Nation Savings was placed under receivership by the Central Bank because of serious
fraud and irregularities committed by its key officers (Annex 12).
3. On June 17, 1981, Guingona and Martin executed a promissory note acknowledging a debt of
P1,336,614.02 and $75,000 to be paid in installments within 180 days from said date with interest at 16%
per annum from July 1, 1981 until fully paid.
4. The promissory note was novated by another note, antedated June 17, 1981, whereby Guingona
acknowledged one-half of the obligation as his debt or the sums of P668,307.01 and $37,500 and secured
the same by second mortgages on his Quezon City properties (Annex D). Guingona paid P200,000 on that
note.
5. Martin assumed the other half of the total debt. He secured it with the pledge of a ring valued according
to him at P560,000 but appraised by a jewel appraiser at P280,000. Martin is also indebted to David in the
sum of P60,000 which David paid to Monte de Piedad to redeem the ring.
6. On July 22, 1981, David received a report from the Central Bank that only P305,821.92 of the placements
made by him and his sister were entered in the NSLA records (Annex 4, p. 218, Rollo). The director of the
CB Department of Rural Banks and Savings and Loan Associations in a report dated June 23, 1981
recommended that the irregularities be brought to the attention of the CB consultant on criminal cases for
appropriate investigation of Nation Savings officials (p. 240, Rollo).
7. In view of the promissory note and the mortgages, David, on July 22, 1981, executed an affidavit wherein
he bound himself to desist from any prosecution of Guingona without prejudice to the balance of his claim
against Nation Savings (Annex M, p. 46, Rollo).
8. On November 19, 1981, Guingona filed against David Civil Case No. Q-33865 in the Quezon City Court of
First Instance. He prayed for damages of P785,000 against David for his failure to accept payment of a
cashiers check for P300,000 (in addition to the P200,000) and to release one of the mortgaged properties
(Annex K, p. 37, Rollo).
9. On December 22, 1981, David filed with the City Fiscals Office, Manila I.S. No. 81-31938, a complaint for
estafa and violation of CB Circular No. 364 and related regulations. He claimed that the difference between
his placements of P1,159,078.14 and $75,000, on one hand, and the sum of P305,821.92, the amount
entered in Nation Savings books, on the other hand, constitutes the defraudation against him.
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10. He filed the complaint against Guingona, as board chairman, director and principal stockholder of Nation
Savings; Martin, as vice-president, director and shareholder, and Santos, as general manager. David dealt
directly with Guingona, Martin and Santos in his transactions with Nation Savings. The three filed a countercharge of perjury against David and his lawyers (p. 59, Rollo).
11. On January 20, 1982, David sought to foreclose extrajudicially the two mortgages (p. 58, Rollo). The
foreclosure was restrained by the Quezon City Court of First Instance.
12. On March 15, 1982, the Solicitor General, in behalf of the Central Bank, filed a petition in the Court of
First Instance of Manila for assistance in the liquidation of Nation Savings as an insolvent firm (Spec. Proc.
No. 82-7552, p. 111, Rollo). The receivership was challenged by Nation Savings stockholders in Special
Proceedings No. 82-1655 (p. 125, Rollo). The Solicitor General answered that petition by alleging that Nation
Savings was plagued with irregularities (p. 225, Rollo).
With the foregoing background, the prohibition petition should be dismissed. The petitioners have no cause
of action for prohibition because the City Fiscal has jurisdiction to conduct the preliminary investigation. It
has not been finished. The filing of this petition is premature. The case does not fall within any of the
exceptions when prohibition lies to stop the preliminary investigation (Hernandez v. Albano, 125 Phil. 513).

"As a general rule, an injunction will not be granted to restrain a criminal prosecution" (People v. Mencias,
124 Phil. 1436, 1441). With more reason will injunction not lie when the case is still at the preliminary
investigation stage. This Court should not usurp the primary function of the City Fiscal to conduct the
preliminary investigation of the estafa charge and of the petitioners countercharge for perjury, which was
consolidated with the estafa charge (p. 59, Rollo).
The City Fiscals office should be allowed to finish its investigation and make its factual findings. This Court
should not conduct the preliminary investigation. It is not a trier of facts. *
The instant case is primarily a litigation between David and the petitioners. The fact that the Solicitor
General, as counsel of the public respondents, did not file a motion for reconsideration does not estop David
from continuing with the prosecution of the petitioners. In the present posture of the case, the City Fiscal
occupies the analogous position of judge. He has to maintain an attitude of neutrality, not that of partiality.
In view of the foregoing considerations, the decision is reconsidered, the petition is dismissed and the City
Fiscal of Manila is directed to finish the preliminary investigation. No costs.
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SO ORDERED.
Escolin, Gutierrez, Jr., De la Fuente and Cuevas, JJ., concur.
Fernando, C.J., took no part.
Abad Santos, J., I vote to deny the motion for reconsideration.
Plana, J., took no part.
Separate Opinions
CONCEPCION, JR., J., Separate Vote and Statement:

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On December 23, 1981, private respondent Clement David, an Australian citizen, filed I.S. No. 81-31938 in
the Office of the City Fiscal of Manila charging petitioners and one, Robert Marshall, together with eight
others who were directors of the Nation Savings and Loan Association, with estafa and violation of Central
Bank Circular No. 364 and related Central Bank circulars and regulations on foreign exchange transactions.
Briefly, David alleges that he delivered to petitioners P1,145,546.20, P15,531.94, and U.S. $75,000 to be
deposited as time deposits or savings account with Nation Savings and Loan Association. Of these amounts
only P305,821.92 were entered in the records and books of the said Association.
At the start of the investigation, petitioners moved to dismiss the case "for lack of jurisdiction because the
claims alleged in the charge compromise a purely civil obligation which has been novated," which motion
was promptly denied.
The first witness of private respondent David was the Deputy Receiver of the Central Bank, Mrs. Yu Donato.
After her testimony, petitioners again moved to dismiss the case on the same ground. This was also denied.
Hence this petition.
The issue before Us is: Can We or should We stop the City Fiscal from completing his preliminary
investigation on the ground that the charges are civil in nature?
I hold We cannot and We should not.
In the complaint before the City Fiscals Office, there are some other respondents aside from petitioners. In
addition to estafa, there are charges of violation of Central Bank circulars. To determine who are liable, if
any, and for what charges requires that the presentation of evidence be completed.
chanroblesvirtualawlibrary

The procedure laid down by law is for the City Fiscal to complete his investigation and thereafter to make a
resolution.
Whatever be the resolution is subject to review by the Ministry of Justice.

In the case before Us, prohibition does not lie to stop the preliminary investigation being conducted by the
City Fiscal.
To hold otherwise, would be to usurp the duties and functions of the City Fiscal and the power to review the
resolution of the City Fiscal by the Ministry of Justice.
The Solicitor General is only a nominal party at most. The People of the Philippines is not a party to the
entire proceedings, and as provided for by law the actuations of the City Fiscal have been defended by
respondent David.
RELOVA, J., concurring:

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I vote to grant the motion for reconsideration and to dismiss the petition for prohibition. To justify the
issuance of the writ the following requisites are necessary, to wit: (1) it must be directed against the
tribunal, corporation, board, or person exercising functions judicial or ministerial; (2) the tribunal,
corporation, board or person has acted without or in excess of its or his jurisdiction, or with grave abuse of
discretion; and, (3) there is no appeal or any other plain, speedy and adequate remedy in the ordinary
course of the law. In the case at bar, it cannot be said that respondent City Fiscal did act without or in
excess of his jurisdiction, or with grave abuse of discretion. On the contrary, he has jurisdiction over the
case and should have been allowed to terminate the preliminary investigation and to render his resolution
thereon. Thereafter, the aggrieved party may appeal to the Minister of Justice.
The contention of petitioner that the resolution of the Court granting the petition for prohibition has become
final because the Solicitor General, representing the City Fiscal, did not file a motion for reconsideration, is
without merit. The rule is clear that when a petition for prohibition is filed, the petitioner shall join as parties
defendant the person or persons interested in sustaining the proceedings in the court; and it should be the
duty of such person or persons to appear and defend, both in his or their own behalf and in behalf of the
court or judge affected by the proceedings in the court. It must be for this reason that the Solicitor General
did not file a motion for reconsideration on the resolution of this Court granting the petition because it was
incumbent upon the private respondent to appear and defend the act of the respondent City Fiscal.
Alampay, J., I share the same view expressed by Justice Relova in this case.
Melencio-Herrera, J., concurring:

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I concur with this Resolution and with the Concurring Opinion of Justice Relova.
TEEHANKEE, J., dissenting:

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I concur with the extended dissenting opinion of Mr. Justice Felix V. Makasiar, whose original ponencia in the
Courts (Second Divisions) original decision of April 4, 1984 1 (with the concurrence of Messrs. Justices
Concepcion, Jr., Guerrero, Abad Santos, de Castro and Escolin, 2 with Mr. Justice Aquino taking no part)
would now be overturned by the Resolution at bar.
The original decision of April 4, 1984 granted the petition for prohibition and injunction and made permanent
the temporary restraining order issued on March 31, 1982 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. 81-31938 of the Office of the City
Fiscal of Manila. Said investigation was being conducted as a result of charges for alleged estafa and
violation of Central Bank Circular No. 364 and related regulations regarding foreign exchange transactions
filed by private respondent Clement David, an Australian national. The Resolution at bar would set aside the
decision on the ground of prematurity of the filing of the petition and directs the respondent city fiscal "to
finish the preliminary investigation."
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Stripped down to essentials, I vote to deny the motion for reconsideration for the following reasons:

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1. The original decision of April 4, 1984 became final and executory upon the expiration on April 21, 1984 of
the 15-day reglementary period from receipt thereof by the Solicitor General on April 6, 1984 without his
having filed a motion for reconsideration, and entry of judgment should therefore have been made on April
23, 1984 (April 22nd being a Sunday). Private respondent Clement David and his sister Denise Kuhne who is
supposed to be co-owner of the money placements but has not even come to the Philippines nor filed any

complaint, have no legal personality nor standing in a criminal case and cannot adopt a stand inconsistent
with or contrary to that of the Solicitor General who has supervision and control over all criminal cases.
Davids filing of a separate motion for reconsideration did not toll the period for finality of the original
judgment nor prevent its having become final and executory on April 23, 1984 as expressly admitted by the
Solicitor General in his manifestation dated August 23, 1984 and filed on August 28, 1984. 3 (Cabral v.
Puno, 70 SCRA 606.)
2. The record and the Resolution at bar itself as well as the original decision of April 4, 1984 of Mr. Justice
Makasiar and his present dissenting opinion show beyond peradventure that any obligation or liability
incurred by petitioners as to Davids and his sisters funds is purely civil in character. Paragraphs 3 to 5 of
the Resolution show the respective civil obligations of the petitioners as per their promissory notes as
subsequently novated, with mortgages and collaterals placed by them. David had been executed an affidavit
of desistance on his own behalf and that of his sister, and therefore they have no standing or personality
whatever to file the criminal charge in the fiscals office. Petitioners good faith and lack of criminal intent are
self-evident in the aforecited pronouncements and acts.
3. It cannot be overemphasized that the issues in this case were joined between petitioners and public and
private respondents, and were resolved in the original decision of April 4, 1984 on the question of whether
there existed any criminal liability on the part of petitioners that would warrant the continuation of the
fiscals preliminary investigation. This issue of lack of criminal liability was fully discussed by all parties at the
hearing and in their extensive memoranda. The Solicitor General accepted the finality on April 23, 1984 of
the Courts negative verdict of April 4, 1984. The city fiscals office remains permanently enjoined by this
Courts final judgment, and such finality which is now res judicata cannot be set aside under the guise of
acting on Davids motion for reconsideration which should be regarded as a mere scrap of paper because of
his lack of legal personality and standing. Any continuation of the fiscals preliminary investigation has been
rendered moot and academic by this Courts judgment of lack of any criminal liability which became final and
executory on April 23, 1984 with the acceptance thereof by public respondents headed by the Solicitor
General. If "the instant case is primarily a litigation between David and the petitioners", as stated in the
Resolution (at page 6), such litigation is purely civil in nature and has to be pursued and settled in the
various pending civil cases of the parties as a private matter between them.
4. The original decision correctly applied here the saving clause to the general rule against enjoining or
aborting criminal prosecution, viz, that the extraordinary and equitable writ of injunction may be resorted to
and issued "for the orderly administration of justice, to prevent the use of the strong arm of the law in an
oppressive and vindictive manner, to avoid multiplicity of actions and to afford adequate protection to
constitutional rights-" The injunction proceedings here which have brought out the pertinent facts, have
served the purpose of a continuation of the preliminary investigation, "to secure the innocent against hasty,
malicious and oppressive prosecution, and to protect him from an open and public accusation of crime, from
the trouble, expense and anxiety of a public trial, and also to protect the state from useless and expensive
trials. (Trocio v. Manta, 118 SCRA 241; citing Hashim v. Boncan, 71 Phil. 216)." 4 With all due deference,
nothing would be gained nor achieved by still directing the fiscal "to finish the preliminary investigation,"
when the issue of criminal liability or not has been submitted to and resolved by this Court. In no way is the
question of jurisdiction of the city fiscal to conduct the preliminary investigation derogated or impaired, as is
the thrust of the Resolution and Mr. Justice Relovas separate opinion particularly, since the majority in
adopting the Resolution made it clear in the deliberations that it was in no way passing judgment upon the
existence or non-existence of criminal liability as resolved and determined negatively in the original
judgment of April 4, 1984 but was only directing the fiscal to continue with and terminate the
investigation on the premise that "the filing of this petition is premature," (at page 5) The only point is that
the said judgment has long become final and executory on April 23, 1984 and the permanent injunction
issued therein against further continuation of the investigation can no longer be set aside.
5. This is in accord with the general policy that the fiscals office should not be used or abused as a collection
agency. We have here the case of a non-resident alien, respondent Clement David, who came here for
special treatment for his "investments" as special accounts "and only a portion of which was to be reported
because he did not want the Australian government to tax his total earnings, nor to know his total
investments." 5 When things went awry, he made sure that he was fully covered with collaterals by
petitioners, who executed them in all good faith and he in turn executed an affidavit of desistance. He
cannot and should not be allowed to misuse our prosecutorial agencies for collection or enforcement of a
purely civil liability.
MAKASIAR, J., dissenting:

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On April 30, 1984, private respondent Clement David, thru counsel Atty. Norberto Quisumbing, filed a
motion dated April 28, 1984 for the reconsideration of the decision promulgated on April 4, 1984 granting
the petition of herein petitioners and making permanent the temporary restraining order previously issued
with costs against private Respondent.
I
The Solicitor General, as counsel for public respondent, did not file within the reglementary period any
motion for reconsideration of the aforesaid decision of April 4, 1984, which the Solicitor General received on
April 6, 1984. Hence, the aforesaid decision, as expressly admitted by the Solicitor General, became final
and executory on April 22, 1984 with respect to public respondents.
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As expressly stated by the Solicitor General in his manifestation dated August 23, 1984 and filed on August
28, 1984,." . . 2. the office of the Solicitor General received the copy of the aforesaid decision on April 6,
1984, and did not file a motion for reconsideration, hence, the Decision became executory as to the public
respondent on April 22, 1984" (p. 418, rec.).
WE ruled in Singh v. Liberty Insurance Corp. (8 SCRA 517, 520 [1963]) that: "as against other parties
adversely affected by the decision who did not appeal the decision must be deemed to have become final
and executory. A contrary view would lead to indefeasible results."
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Since the Solicitor General has supervision and control over a criminal action (in this case, herein petitioners
were charged with estafa and violation of Section 3 of Central Bank Circular No. 364 and Nos. 343 and 865
on foreign exchange; par. 1 of Section 4, Rule 110, Revised Rules of Court of 1964), the aforesaid decision
of April 4, 1984 shall likewise be considered as final and executory with respect to herein private respondent
Clement David who cannot adopt a stand inconsistent with that of the Fiscal.
WE held in Tan Jr. v. Gallardo (73 SCRA 306, 311-314 [1976]):

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"And in any event, whether an offended party intervenes in the prosecution of a criminal action, his
intervention must always be subject to the direction and control of the prosecuting official. As explained in
Herrero v. Diaz, supra, the intervention of the offended party or his attorney is authorized by section 15 of
Rule 106 of the Rules of Court (now section 15, Rule 110), subject to the provisions of section 4 of the same
Rule that all criminal actions either commenced by complaint or by information shall be prosecuted under
the direction and control of the Fiscal.
"Therefore, although the private prosecutors may be permitted to intervene, they are not in control of the
case, and their interests are subordinate to those of the People of the Philippines represented by the fiscal.
The right which the procedural law reserves to the injured party is that of intervening in the prosecution for
the sole purpose of enforcing the civil liability for the criminal action and not of demanding punishment of
the accused. As explained in People v. Orais:
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"The position occupied by the offended party is subordinate to that of the promoter fiscal because as the
promoter fiscal alone is authorized to represent the public prosecution, or the People of the Philippine
Islands, in the prosecution of offenders, and to control the proceeding, and as it is discretionary with him to
institute and prosecute a criminal proceeding, being at liberty to commence it or not to refrain from
prosecuting it or not, depending upon whether or not there is, in his opinion, sufficient evidence to establish
the guilt of the accused beyond a reasonable doubt, except when the case is pending in the Court of First
Instance, the continuation of the offended partys intervention depends upon the continuation of the
proceeding. Consequently, if the promoter fiscal desists from pressing the charge or asks the competent
Court of First Instance in which the case is pending for the dismissal thereof, and said court grants the
petition the intervention of the person injured by the commission of the offense ceases by virtue of the
principle that the accessory follows the principal. Consequently, as the offended party is not entitled to
represent the People of the Philippine Islands in the prosecution of a public offense, or to control the
proceeding once it is commenced, and as his right to intervene therein is subject to the promoter fiscals
right of control, it cannot (sic) be stated that an order of dismissal decreed upon petition of the promoter
fiscal himself deprives the offended party of his right to appeal from an order overruling a complaint or
information, which right belongs exclusively to the promoter fiscal by virtue of the provisions of section 44 of
General Order No. 58. To permit a person injured by the commission of an offense to appeal from an order
dismissing a criminal case issued by a Court of First Instance upon petition of the promoter fiscal, would be

tantamount to giving said offended party of the direction and control of a criminal proceeding in violation of
the provisions of the above-cited section 107 of General Order No. 58.
x

"It is evident, therefore, that since the Solicitor General alone is authorized to represent the State or the
People of the Philippines, the interest of the private prosecutors is subordinate to that of the State and they
cannot be allowed to take a stand inconsistent with that of the Solicitor General, for that would be
tantamount to giving the latter the direction and control of the criminal proceedings, contrary to the
provisions of law and the settled rules on the matter" (pp. 311-314; Italics supplied).
Again, in the case of Cabral v. Puno (70 SCRA 606-610 [1976]), citing several cases, We ruled that: "While it
is true that the offended party, Silvino San Diego, through the private prosecutor, filed a motion for
reconsideration within the reglementary fifteen-day period, such move did not stop the running of the period
for appeal. He did not have the legal personality to appeal or to file a motion for reconsideration on his
behalf. The prosecution in a criminal case through the private prosecutor is under the direction and control
of the Fiscal, and only the motion for reconsideration or appeal filed by the Fiscal could have interrupted a
period for appeal" (Italics supplied).
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This fact alone by itself suffices to warrant the denial of the motion for reconsideration filed by private
respondent Clement David as complainant.
II
And because of the compromise agreement entered into prior to the filing of the criminal information in
court, the said compromise agreement or novation converted the original relationship between the parties
into ordinary creditor-debtor situation. Such novation or compromise prevents the institution of a criminal
prosecution (Ong v. CA, Et Al., 124 SCRA 578, 580-81 [1983] penned by Justice Relova, concurred in by
Justices Melencio-Herrera, Plana, Vasquez and Gutierrez). In said Ong case, Mr. Justice Relova quoted Mr.
Justice J.B.L. Reyes in People v. Nery (10 SCRA 244), thus:
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"The novation theory may perhaps apply to the filing 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 v. Gervacio, 54 Off. Gaz. 2898; People v. Velasco, 42 Phil. 76; U.S. v. Montaes, 8 Phil. 620)" (124
SCRA 578, 580-581).
Also, in the case of Gonzales v. Manila City Fiscal Eulogio Serrano (25 SCRA 64, Sept. 23, 1968), Mr. Chief
Justice Roberto Concepcion, with the concurrence of Associate Justices J.B.L. Reyes, Dizon, Makalintal,
Zaldivar, Sanchez, Castro, Angeles and Fernando, ruled that:
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"As pointed out in People v. 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" (25
SCRA 69).
In the oft-cited case of People v. Nery (10 SCRA 244, Feb. 5, 1964), Mr. Justice J.B.L. Reyes, spoke for the
Court, with the full concurrence of Chief Justice Cesar Bengzon, Justices Padilla, Bautista Angelo, Labrador,
Concepcion, Barrera, Paredes, Dizon, Regala and Makalintal.
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III
Moreover, private respondent cannot now intervene in the prosecution of the criminal offense because he
has waived his right to the civil action when he filed his answer with counterclaim in Civil Case No. Q-33865
in then Court of First Instance, now Regional Trial Court in Quezon City.

It should be recalled that petitioners Teofisto Guingona, Jr., Antonio I. Martin, and Teresita Santos were
respectively Director, President and General Manager of the Nation Savings and Loan Association (NSLA)
from March, 1978 until October or November, 1980. From March 20, 1979 to March, 1981, private
respondent David, an Australian citizen, invested with the NSLA dealing directly with petitioners Martin
and Santos as NSLA President and General Manager the sum of P1,145,546.20 on time deposits,
P13,531.94 on savings account deposits (jointly with his sister Denise Kuhne); US$10,000.00 on time
deposits, US$15,000.00 under receipts and guarantee of payment and US$50,000.00 under a receipt dated
June 8, 1980 (all jointly with Denise Kuhne); that upon private respondent Davids insistence, the aforesaid
investments were treated as special accounts with interest above the legal rate, and recorded in separate
confidential documents; that only a portion of said deposits or investments were to be reported because
respondent David did not want the Australian government to tax his total earnings nor to know his total
investments. All transactions with private respondent David were recorded except the sum of US$15,000.00
which was a personal loan to Santos.
The check of US$50,000.00 was cleared thru Guingonas dollar account with the Security Bank because
NSLA did not have any dollar account.
Thereafter, respondent David, as he himself admitted, received periodic interests on his deposits averaging
P5,000.00 a week (pp. 397-398, rec.).
When the NSLA was placed under receivership on March 21, 1981, petitioners Guingona and Martin, upon
request of private respondent David, assumed the obligation of the Bank to respondent David and executed
on June 17, 1981 a promissory note in favor of David acknowledging indebtedness of P1,336,614.02 and
US$75,000.00 (p. 80, rec.), which amounts were based on the statement of account as of June 30, 1981
prepared by private respondent David himself.
Thereafter, on July 17, 1981, petitioners Guingona and Martin agreed to divide said indebtedness equally,
each one assuming an indebtedness of P668,507.01 and US$37,500.00 in favor of private respondent David
(Annex "D", p. 25, rec.). Guingona executed a new promissory note for his one-half share of the assumed
indebtedness which was secured by second mortgages of two parcels of land (Annex "E", Petition, pp. 2629, rec.) with stipulation that the mortgage of one parcel should be cancelled upon payment of 1/2 of his
one-half share in their obligation to David. The other half of the indebtedness assumed by petitioner Martin
was secured by a 9 1/2 karat diamond ring with a net value of P510,000.00.
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On September 15, 1981, Guingona paid P200,000.00 to David who received the same. When he tendered on
October 15, 1981 and on October 21, 1981 another P300,000.00, respondent David refused to accept,
compelling petitioner Guingona to file Civil Case No. Q-33865 in the CFI of Quezon City on November 19,
1981 (T. Guingona Jr. v. Clement David) for specific performance with damages, praying among others, for
the release of the mortgage over one of the two parcels of land conveyed to private respondent David as
stipulated in the deed of second mortgage.
In said Civil Case No. Q-33865 before the Quezon City RTC, private respondent David filed on December 19,
1981 an answer to the complaint for damages with counter-claim for the remaining balance of petitioner
Guingonas indebtedness in the amount of P638,691.36 and US$49,320.45 plus interests, damages, and
attorneys fees) pp. 104-105, rec.).
Because of the filing by petitioner Guingona of Civil Case No. Q-33865, private respondent David filed his
affidavit-complaint dated December 23, 1981 in the Office of the City Fiscal of Manila against herein
petitioners for estafa and violation of Central Bank Circular No. 364 (Sec. 3) and related regulations on
foreign transaction.
It would appear therefore that private respondent David impliedly waived his right to intervene in this
criminal case because four days before the criminal complaint was filed with the City Fiscal of Manila,
respondent David already filed an answer with counterclaim in Civil Case No. Q-33865 filed in the Quezon
City RTC by petitioner Guingona which is akin to an express reservation of his right to file a separate civil
action.
Thus, it has been ruled that "an offended party loses his right to intervene in the prosecution of a criminal
case not only when he has waived the civil action or expressly reserved his right to institute it, but also
when he has actually instituted the civil action even if he has not made the waiver or reservation adverted
to" (Gorospe and Gorospe v. Gatmaitan, Et Al., 98 Phil. 600, 603 [1956]).

The counterclaim of private respondent David for the remaining balance of the share in the obligation of
petitioner Guingona included in his answer in the aforesaid civil case before the Quezon City RTC is in effect
a civil action for the enforcement of the civil liability of herein petitioner Guingona.
It should be stressed that after receiving the first payment to him of P200,000.00 from petitioner Guingona,
the latter offered him four personal checks covering the amount of P300,000.00 which amount was due on
October 15, 1981 as stipulated; but private respondent David requested that the four personal checks be
changed to managers check and extended the period of payment to October 20, 1981. When petitioner
Guingona complied with the request by delivering the cashiers check covering the amount of P300,000.00
on October 21, 1981, private respondent David refused to accept the same claiming that petitioner
Guingona was already in default and that the entire remaining balance had already become due and payable
(p. 57, rec.).
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Likewise, it should be emphasized that private respondent David executed on July 17, 1981 an affidavit of
desistance wherein he, for himself and in behalf of his sister Denise Kuhne, agreed to desist from any
prosecution of petitioner Guingona (p. 46, rec.).
His affidavit of desistance states:

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"3. That on or about July 17, 1981, Mr. Teofisto Guingona Jr. executed, in my favor, a Promissory Note dated
June 17, 1981 for the amount of P668,307.01 and US$37,500 with interest at 16% per annum from July 1,
1981, of which P50,000.00 has been paid, and two Second Real Estate Mortgages covering two parcels of
land, with buildings and improvements, situated at Quezon City, with Transfer Certificate of Title Nos.
137940 and 137941 of the Registry of Deeds of Quezon City;
"4. That I, therefore, withdraw my claim with the Central Bank only insofar as Mr. Teofisto Guingona Jr. is
concerned to the extent of the Promissory Note and the Mortgages in the amounts indicated in the
Promissory Note, and undertake to desist from any prosecution against him. This is without prejudice to the
balance of my claim against Nation Savings and Loan Association, Inc. and its other officers and employees;
"5. That I execute this affidavit not only for myself but also in behalf of my sister, Denise Kuhne."

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IV
As We stated in the decision sought to be reconsidered, the investments or private respondent David in the
NSLA by way of time deposits and savings deposits are loans under the express provisions of Articles 248,
1933, 1953 and 1980 of the New Civil Code and decisions on the matter.
Thus, in the case of Serrano v. CB (96 SCRA 96, 102 [Feb. 14, 1980]), Mr. Justice Hermogenes Concepcion
Jr., speaking for the Second Division, and concurred in by Justices Barredo, Antonio, Aquino and Abad
Santos, stated:
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"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 v. Phil. National Bank, 62 Phil. 519). Current and savings
deposits are loans to a bank because it can use the same. The petitioner here in making time deposits that
earn interests with respondent Overseas Bank of Manila was in reality a creditor of the respondent Bank and
not a depositor. The respondent Bank was in turn a debtor of petitioner. Failure of 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
depositarys failure to return the subject matter of the deposit" (pp. 102-103).
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Again, in the case of CB v. Morfe (63 SCRA 114) [March 12, 1975]), Justice Ramon C. Aquino, speaking for
the Second Division, with the concurrence of Chief Justice Makalintal and Justices Fernando, Barredo, and
Fernandez, enunciated that:
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"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 v. American Apothecaries Co., 65 Phil.
414; Pacific Coast Biscuit Co. v. Chinese Grocers Association, 65 Phil. 375; Fletcher American National Bank
v. Ang Cheng Lian, 65 Phil. 385; Pacific Commercial Co. v. American Apothecaries Co., 65 Phil. 429; Gopoco
Grocery v. Pacific Coast Biscuit Co., 65 Phil. 443)" [p. 119].

V
In his motion for reconsideration, private respondent contends that the money, amounting to
P1,145,546.20; P13,531.93 and US$75,000.00, to be deposited as time and savings deposit with the Nation
Savings and Loan Association, was delivered to petitioners herein in their personal capacity, who in turn had
the obligation to deliver the same to the bank. Since they did not deliver or deposit the money with the
Nation Savings and Loan Association, they became liable for estafa by misappropriation as the Central Bank
discovered that only P305,821.92 were entered in the records of the bank, and that petitioners assumption
of the obligation of the bank to private respondent was an admission that they did not deliver the money to
the bank.
But as pointed out by petitioners herein, this constitutes a complete change of private respondents original
theory in the City Fiscals Office as shown by his affidavit-complaint on December 23, 1981, wherein he
stated that from March 20, 1979 to March, 1981, he, together with his sister, Denise Kuhne, invested with
the Nation Savings and Loan Association the sum of P1,145,546.20 on time deposits and the sum of
P13,531.94 on savings account deposits or a total of P1,159,078.14 (pp. 15-16, rec.). He likewise made
investments in the aforesaid bank in the amount of US$75,000.00 (p. 17, rec.). He further stated that when
the bank was placed under receivership by the Central Bank, he filed his claim for all of his investments and
later received a report from the Central Bank that only P305,821.92 of his investments with the bank were
entered in its records. So, he filed a complaint for estafa and violation of Section 3 of Central Bank Circular
No. 364 and related Central Bank regulations regarding foreign exchange transactions against the Nation
Savings and Loan Association and the entire board of directors including the petitioners herein.
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Private respondents new theory in his motion for reconsideration has no factual basis. The following facts
and circumstances on record indisputably show that private respondent Clement David invested his money
on time and savings deposits with the Nation Savings and Loan Association directly and not with herein
petitioners as private individuals:
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1. Private respondent himself categorically stated in his affidavit-complaint that he invested with the Nation
Savings and Loan Association the sum of P1,145,546.20 on time deposits and the sum of P13,531.94 on
savings account deposits or a total of P1,159,078.14, as well as the amount of US$75,000.00 (p. 17, rec.).
Mrs. Yu Donato, the Deputy Receiver of the Central Bank, testified under oath before the Assistant City
Fiscal that one of the recognized ways of recording transactions is to keep on file the duplicate original of the
accounting forms used in the transactions (pp. 126, 406, rec.). It appears that the original instruments of
indebtedness were given to private respondent, while the duplicate original of said instruments were on file
in the Nation Savings and Loan Association.
2. The promissory notes executed by petitioners Guingona and Martin wherein they assumed the obligation
of the Nation Savings and Loan Association to private respondent, upon the latters request, stated that the
same were executed as a result of deposits made by Clement David and Denise Kuhne with the Nation
Savings and Loan Association (pp. 25, 80, rec.).
3. Private respondent testified under oath before the Assistant City Fiscal of Manila that he made the
deposits in the principal office of the Nation Savings and Loan Association during office hours, before
authorized officers of the bank, and properly receipted for in bank forms (pp. 397-398, rec.).
4. In his verified answer to the complaint of petitioner Guingona in Civil Case Q-33865 for specific
performance with damages, private respondent admitted that he was a depositor of the Nation Savings and
Loan Association (p. 101, rec.).
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5. Private respondent further admitted under oath that he received periodic interests on his deposits at an
average of P5,000.00 a week (pp. 397-398, rec.). The bank would not have paid him such substantial
interest weekly if he were not a depositor of said NSLA.
6. The report dated June 23, 1981 of Director Consolacion Odra of the Central Bank Department for Rural
Banks and Savings and Loan Associations, stated that private respondent David and Denise Kuhne could be
allowed payment of their recorded deposits up to P15,000.00 each, or a total of P30,000.00 under the
Philippine Deposit Insurance Corporation Law (p. 240, rec.). It is undisputed that private respondent had
already filed and received his claim and that of his sister in the total amount of P30,000.00 from the PDIC.
Under the law, only deposits of distressed banks are entitled to such payment from the PDIC.

7. Private respondents investments were treated as special accounts with special rates upon his insistence
and because Nation Savings and Loan Association was urgently in need of funds. The investments were
recorded in separate confidential documents, and only a portion of which was to be reported because he did
not want the Australian government to tax his total earnings, nor to know his total investments (p. 21, rec.).
8. Private respondents pleadings, particularly his comment dated April 21, 1982 and memorandum dated
December 21, 1982, and documents, such as the statement of account (re: time and savings deposits) as of
June 30, 1981 prepared by private respondent and his affidavit of desistance, filed before this Court show
that he deposited his money with the Nation Savings and Loan Association.
Furthermore, private respondent cannot be permitted, at this stage of the proceedings, to adopt a theory
which is different from that which he sustained in the City Fiscal s Office, especially after We ruled in Our
main decision sought to be reconsidered that bank deposits are in the nature of simple loans, and the failure
of the bank to return the deposits will not constitute estafa through misappropriation, but it will only give
rise to civil liability. It is improper to change theory on appeal and more so in a motion for reconsideration. It
would be unfair and unjust to the other party litigant as it violates petitioners constitutional right to due
process. It could also unduly prolong litigations because a party can always change postures to suit his own
advantage.
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Thus, in People v. Archilla (1 SCRA 698, 701 [1961], citing several cases), this Court said:

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"It is well-settled that parties to a judicial proceeding may not, on appeal, adopt a theory inconsistent with
that which they sustained in the lower court. Consequently, appellee is now estopped from invoking the idea
of double jeopardy upon the theory that she could still be convicted under an information which she branded
to be insufficient in the lower court."
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Again, in the case of Velasco v. Manila Electric Company (42 SCRA 556, 560 [1971]), We held that.
"But as pointed out, this issue was not raised, nor was the inverse condemnation doctrine invoked in the
trial court, so that it would be improper to consider it on appeal, and worse still, on a motion for
reconsideration of the decision on its merits" (Italics supplied).
And, in the recent case of Dosch v. National Labor Relations Commission (123 SCRA 296, 310 [1983]), We
said:
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"Realizing that its `resignation theory was weak and flimsy, Northwest abandoned it and contended for the
first time that petitioner was guilty of insubordination when he refused to comply with the transfer order.
This change of theory on appeal is improper; it is offensive to the basic rules of fair play and justice and
violative of petitioners constitutional right to due process of law. Appellate courts may not entertain
questions of law or fact not raised in the lower courts (Sec. 18, Rule 46, Revised Rules of Court), for that
would constitute a change of theory not permissible on appeal (Toribio v. Decasa, 55 Phil. 461).
"It is undoubtedly the law, that, where a cause has been tried upon the theory that the pleadings are at
issue, or that a particular issue is made by the pleadings, or where an issue is tacitly accepted by all parties
as properly presented for trial and as the only issue, the appellate court will proceed upon the same theory
(Lizarraga Hermanos v. Yap Tico, 24 Phil. Rep. 504; Molina v. Somes, 24 Phil. Rep. 45). It would be unjust
and oppressive for the appellate court to adopt a theory at variance with that on which the case was
presented to and tried by the lower court. It would surprise the parties, to take them unaware and off their
guard, and would in effect, deprive them of their day in court (Limpangco Sons v. Yangco Steamship Co., 34
Phil. 597, 605-609)" [Italics supplied].
VI
To deprive petitioners herein of the foregoing defenses that
(1) failure to file a motion for reconsideration of a decision inevitably renders such decision final and
executory;
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(2) a compromise executed before the institution of the criminal action in court precludes the filing of such
criminal action;

(3) the filing of a civil action, which includes interposing a counterclaim in an answer, before the institution
in court of a criminal action estops or bars the complainant from intervening in the criminal action;
(4) all bank deposits whether savings, current or time deposits are in the nature of loans, under which
the depositor is the creditor of the bank, which thereby becomes the debtor of the depositor, and gives rise
only to a civil obligation; and
(5) the extraordinary writs of injunction are available for the orderly administration of justice, to prevent the
use of the strong arm of the law in an oppressive and vindictive manner, to avoid multiplicity of actions and
to afford adequate protection to constitutional rights
which defenses were already existing long before the filing on December 23, 1981 by respondent David of
his affidavit-complaint before the City Fiscal would be akin to a violation of petitioners right against ex post
facto laws.
As held in the 1970 case of Kay Villegas Kami (35 SCRA 429, 431) citing the case of Mekin v. Wolfe (2 Phil.
74), one of the six kinds of ex post facto law is that which "deprives a person accused of a crime of some
lawful protection to which he has become entitled, such as the protection of a former conviction or acquittal,
or a proclamation of amnesty."
cralaw virtua1aw library

The aforecited defenses were already available to herein petitioners and afford them legal protection already
secured to them prior to the filing of the complaint with the City Fiscal even before any criminal
information has been filed in court.
Additionally, the compromise and affidavit of desistance have the effect of an amnesty complete
absolution from any criminal liability.
Decisions of the Supreme Court are part of the law of the land. Article 8 of the New Civil Code of 1950
directs that "judicial decisions applying or interpreting the laws or the Constitution shall form part of the
legal system of the Philippines" (People v. Licera, 65 SCRA 270 [1975]).
Judicial decisions of the Supreme Court assume the same authority as the statute itself (Caltex v. Palomar,
18 SCRA 247; 124 Phil. 763).
Consequently, any modification or revocation of the previous doctrines aforequoted cannot be given
retroactive effect in the instant criminal prosecution.
chanrobles virtual lawlibrary

Insistence on the criminal prosecution of herein petitioners, who already acquired vested right in the
aforesaid defenses against such prosecution, would therefore be clearly ex post facto.
To continue with the prosecution of herein petitioners, in spite of the foregoing legal constitutional defenses,
would subvert the orderly administration of justice, deny them their constitutional rights, expose the
petitioners to undue and oppressive harassment and aggravate their anguish and expenses, in much the
same way that such unnecessary prosecution exposes the State to useless and expensive trials (Trocio v.
Manta, 118 SCRA 241 [1982]; Hashim v. Boncan, 71 Phil. 216 [1941]; see also Mercado v. Court, etc., 116
SCRA 93 [1982]).
VII
There is no need of prior exhaustion of administrative remedies; because the instant case is an exception to
the principle of exhaustion as only constitutional and legal questions are involved herein (Limoico v. Board,
etc., L-40244, Oct. 31, 1984, per Justice Melencio-Herrera; Del Mar v. PVA, 51 SCRA 340 [1973]; Teoxon v.
Members, etc., 33 SCRA 585 [1970]; Begosa v. Chairman, etc., 32 SCRA 466 [1970]; Gonzales v.
Hechanova, 9 SCRA 230 [1963]; Tapales v. President, etc., Et Al., L-17523, March 30, 1963, 7 SCRA 553;
Pascual v. Provincial Board, etc., L-11959, Oct. 31, 1959, 106 Phil. 466, 470) and because of the urgency of
the relief demanded by petitioners (Guerrero v. Carbonell, L-7180, March 15, 1955, unpublished).
Appealing to the appropriate administrative authorities concerned from the action of the City Fiscal then to
the Regional Trial Court and finally back to this Supreme Tribunal, would render the remedy inadequate and
not speedy enough to save herein petitioners from so much harassment, anguish and expenses or
irreparable damage.

Exhaustion of administrative remedies is not required where the action of the administrative officer is clearly
and obviously devoid of any legality or authority (Mangubat v. Osmea, L-12837, April 30, 1959, 105 Phil.
1308-1309; Palamine v. Zagado, L-6901, March 5, 1954; Manuel v. de la Fuente, 48 Off. Gaz., 4829; F. Jose
v. Lacson, L-10477, May 17, 1957; Festijo v. Mun. Mayor of Nabua, 51 Off. Gaz. 121; Covacha v. Amante, L8358, May 25, 1956; Carmona v. Amante, 52 Off. Gaz. 5109; Senarillos v. Hermosisima, L-10662, December
14, 1956; and Briones v. Osmea, Jr., L-12536, Sept. 24, 1958), or where the challenged action will create
irreparable damage (De Lara, Et. Al. v. Cloribel, Et Al., L-21653, May 31, 1965, 14 SCRA 269, 272-273).
Hence, the motion for reconsideration of private respondent should be denied.

chanroble s virtual lawlibrary

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.:

+.wph!1

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:
t.hqw

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"):
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"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.
t.hqw

"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 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:

t.hqw

"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:
t.hqw

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:

t.hqw

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 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:
t.hqw

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:

t.hqw

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 receivedPetitioners 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.

t.hqw

"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:
t.hqw

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:
t.hqw

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. 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:
t.hqw

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:
t.hqw

"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:

t.hqw

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. 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.

1wph1.t

G.R. No. L-43191

November 13, 1935

PAULINO GULLAS, plaintiff-appellant,

vs.
THE PHILIPPINE NATIONAL BANK, defendant-appellant.
Gullas, Lopez, Tuao and Leuterio for plaintiff-appellant.
Jose Delgado for 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 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 Espaol, 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.
Villa-Real, Imperial, Butte, and Goddard, JJ., concur.

THIRD DIVISION
[G.R. No. 126158. September 23, 1997]
PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs. THE COURT OF APPEALS, HON. PEDRO
T. SANTIAGO, as Judge, RTC of Quezon City Branch 101, FALCON GARMENTS
CORPORATION, QUALITY LABELS, INC., ROBERT SY doing business under the name and
style Jobert Printing Services; EUGENIO POA, MAGIN TABUSO, MAKILITO MAHINAY,
EFREN CACHERO, CESAR M. TORIO and EFREN C. GUMBAC, respondents.
DECISION
MELO, J.:

Assailed and sought to be set aside in the instant petition is the decision of respondent Court of
Appeals promulgated on September 13, 1996 dismissing herein petitioner Philippine Bank of
Communications petition for certiorari impugning an order granting the motion for the issuance of a writ of
execution pending appeal issued by the Regional Trial Court of the National Capital Judicial Region
(Branch 101, Quezon City), in Civil Case No. Q-95-22625, entitled Falcon Garments Corporation, et al.
vs. Philippine Bank of Communications.
The antecedent facts of the case as gathered from the record are as follows:
Sometime in 1989, private respondent Falcon Garments Corporation (Falcon) opened Current
Account No. 25-00640-7 at BMA Quezon City Branch of petitioner Philippine Bank of Communications
(PBCom). Subsequently, on November 27, 1992, private respondent Falcon obtained a loan from
petitioner in the principal sum of Four Million Seven Hundred Thousand Pesos (P4,700,000.00) with
interest at 17% per annum and penalty at 12% per annum in case of default. Falcon failed to pay its loan
on due date and went in default in December, 1993.
On February 9, 1995, Falcon filed a complaint with the Regional Trial Court of Quezon City against
PBCom which was docketed as Civil Case No. Q-95-22625 and raffled to Branch 78, presided over by
Judge Percival Mandap-Lopez. The complaint prayed for the restoration to Falcons current account of
alleged unauthorized withdrawals totalling P12, 729,092.78 which were made from 1990 to 1992, plus
interest, damages, and attorneys fees.
In its answer, PBCom denied liability and interposed a compulsory counterclaim in the sum of
P4,700,000.00, plus the stipulated interest and penalty, damages, and attorneys fees.
On January 2, 1996, the trial court rendered a decision against PBCom the dispositive portion of
which reads:
WHEREFORE, defendant is ordered to restore immediately to plaintiffs Current Account No. 25-006407 the sum
of P12,729,092.78, plus interest at the rate of 12% per annum to commence from the date of the filing of the

complaint until the said amount is fully restored and operate the said account in accordance with the instructions of
plaintiff, acting through its board of directors. And to pay plaintiffs the following sums:
a.

P 500,000.00 as exemplary damages;

b.

P 500,000.00 as attorneys fees; and

c.

P 200,000.00 as litigation expenses.

Plaintiff FALCON is ordered to pay defendant its loan at P 4,700,000.00 plus interest at the rate of 12% per annum
to commence from the date of filing of the complaint. All other claims and counterclaims are dismissed for lack of
merit.
Petitioner PBCom seasonably filed a notice of appeal, while private respondent Falcon filed a Motion
for Execution Pending Appeal dated February 7, 1996. However, before Branch 78 could resolve said
motion, Judge Lopez inhibited himself and the case was re-raffled to Branch 101, presided over Judge
Pedro T. Santiago.
Private respondent Falcon filed an Ex-Parte Manifestation and Motion dated May 7, 1996, claiming
that with its strained relations with PBCom, it was no longer practicable to bank with petitioner, and
prayed that the money judgement be not restored to its current account but instead be directly paid to it
(Rollo, p. 132).
On the very same day of the filing of the motion, Judge Santiago granted the same and authorized
the issuance of a writ of execution pending appeal. The dispositive portion of said order provides:
WHEREFORE, premises considered, finding merit and justification in plaintiffs motion, the Court hereby grants its
motion for execution pending appeal hereby ordering defendant Bank to immediately pay the plaintiff the sum of
P12,729,092.78 with 12% per annum and plaintiffs obligation to defendant Bank be likewise paid by plaintiff in the
amount of P4,700,000.00 with interest also at 12% per annum, as well as the other damages stated in the decision of
Branch 78 dated January 2, 1996, upon a plaintiffs bond of P5,000,000.00 conditioned to answer for whatever
damages which defendants may suffer by virtue of this Order.
The writ was issued on May 14, 1996, and on May 16, 1996, the writ was served upon PBCom which
sought the intercession of the Court of Appeals (CA-G.R. SP No. 40636). On June 4, 1996, a writ of
preliminary injunction was issued by the Court of Appeals restraining its implementation.
On September 13, 1996, the Court of Appeals eventually upheld the validity of the writ of execution
pending appeal and forthwith dissolved the writ of preliminary injunction.
On the same day, private respondent Falcon obtained an alias writ of execution which served upon
petitioner on the same afternoon.
On September 16, 1996, the present petition was filed, with prayer for a temporary restraining order,
preliminary writ of injunction and mandatory injunction alleging that:
THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION IN AFFIRMING
THE ORDER OF JUDGE PEDRO SANTIAGO GRANTING THE ISSUANCE OF A WRIT OF EXECUTION

PENDING APPEAL CONSIDERING THAT GOOD REASONS DO NOT EXIST FOR THE ISSUANCE OF A
WRIT OF EXECUTION PENDING APPEAL UNDER SECTION 2, RULE 39 OF RULES OF COURT.
Petitioner further avers that:
3.01 The privelege respondents in this case ILLEGALLY and UNLAWFULLY implemented a writ of
execution pending appeal on 13 September 1996 using an expired writ, and an Order of the Court
of Appeal subject of this petition which was promulgated only at 10 a.m. of 13 September
1996. On that day, herein petitioner has not receive copy of said decision which is not yet final.
3.02 PBCom and counsel became aware of the questioned Decision of the Court of Appeals when
PBCom Ayala Branch, Makati City, called up and told them that private respondents with about 30
people, brandished the questioned writ and decision enabling private respondents to coerced,
forced and intimidated the personnel of the said petitioners branch resulting in the unlawful
taking of about P1.7 million
3.03 Private respondents have foisted to petitioner and counsel that they (private respondents) will again
go to PBComs other branches to get in full balance of the money judgement which is still on
appeal.
(Rollo, pp. 92-93.)
Upon the above representation of petitioner duly verified by its counsel, Atty. Daniel Y. Laogan, of
Laogan Silva Baeza & Llantino Law Offices, we issued a temporary restraining order at the same time
requiring private respondents to comment.
On November 11, 1996, the Court issued a resolution, which among other things, noticed petitioner
urgent manifestation and motion dated September 17, 1996, praying that (a) counsel for private
respondent be required to explain why they claimed in their ex parte motio for issuance of an alias writ of
execution pending appeal before respondent RTC that the Court of Appeals had already dissolved the
injunction one hour before the promulgation of the Court of Appeals decision in CA-G.R. SP No. 40636;
(b) to require Judge Pedro T. Santiago of RTC Branch 101, Quezon City, to explain why he issued the
order dated September 13, 1993 granting the alias writ of execution pending appeal prior to the courts
receipt of its official copy of said decision dissolving the injunction and even before the finality of the
same.
Judge Santiago submitted his explanation on December 11,1996 which the Court noted on January
17, 1997.
With the filing of the memoranda of the parties, the petition is now ripe for resolution.
The pith of the matter before us is the existence of good reasons which would justify execution
pending appeal. In the absence of such good reasons, it is incumbent upon the reviewing court, such as
the Court of Appeals, to issue the writ of certiorari and failure to do so would constitute grave abuse of
discretion on its part.
It is in this regard that we find that the Court of Appeals committed grave abuse of discretion in
sustaining the trial court.

When Judge Santiago resolved the first ex parte manifestation and motion, the applicable provision
was Section 2, Rule 39 of the former Rules of Court which provided
Sec. 2. Execution pending appeal On motion of the prevailing party with to notice to the adverse party,
the court may, in is discretion, order the execution to issue, even before the expiration of the time to
appeal, upon good reasons to be stated in a special order. If a record on appeal is filed thereafter the
motion and the special order shall be included therein.
The prevailing doctrine an principle then which continues to be the same as provided in Paragraph
2, Section 2, of Rule 39 of the 1997 Rules of Civil Procedure is that discretionary execution is
permissible only when good reasons exist for immediately executing the judgment before finality or
pending appeal or even before the expiration of the time to appeal.
Good reasons consist of compelling circumstances justifying the immediate execution lest judgment
becomes illusory, or the prevailing party may after the lapse of time become unable to enjoy it,
considering the tactics of the adverse party who may apparently have no case except to delay. A long
line of jurisprudence indicates what constitute good reasons as contemplated by the Rules, the following
being merely representative of the same:
1. When in an intestate proceeding which has been pending for almost 29 years, one group of heirs has not yet
received the inheritance due them when the others have already received theirs, or are about to do so (Borja vs.
Encarnacion, 89 Phil. 239 (1951);
2. The advanced age of the prevailing party (Borja vs. Court of Appeals, 196 SCRA 847 [1991]; De Leon vs.
Soriano, supra);
3. When the defeated party is in imminent danger of insolvency (Hacienda Navarro vs. Sabrador, 65 Phil. 536
[1938]; Lao vs. Mencias, 21 SCRA 1021 [1967]; Santos vs. Mojica, 26 SCRA 607 [1969]; City of Manila vs.
Court of Appeals, 72 SCRA 98 [1976]; De los Reyes vs. Capulong, 122 SCRA 631 [1983]; PVTA vs. Lucero,
125 SCRA 337 [1983]);
4. When the appeal is dilatory and the losing party intends to encumber and/or dispose of the property subject
of the case during the pendency of the appeal in order to defraud or deprive the plaintiff of proprietary rights an
defeat the ends of justice (Home Insurance Company vs. Court of Appeals, 184 SCRA 318 [1990]); and
5. Deterioration of commodities subject to litigation (Federation of United Namarco Distributors, Inc. vs.
National Marketing Corp., 4 SCRA 867 [1962]).
The supposed good reasons relied upon by Judge Santiago to justify the discretionary execution
pending appeal are spelled out in the May 7, 1996 Order, reading in relevant part as follows
This Court has given serious thoughts on the restrictive application of Section 2, Rule 39 of the Rules of
Court. Attached to the Reply to the Opposition filed by plaintiffs, are two public documents. As annex
A, the original carbon copies of the summons and complaint in the case entitled Solid Bank
Corporation vs. Falcon Garment Corporation et al., in Civil Case No. 96-76567, a case for collection of
sum of money and replevin (hereafter, referred to as Complaint). And as Annex B, the original copy of a
police blotter of the Center Police District Command, Police Station No. 2, Baler St., Quezon City
(hereafter referred to as police blotter). It is observed the complaint filed by Solidbank against Falcon

supports the material allegations of plaintiffs in the hearing as reproduced above and as also quoted by
defendant in its opposition. The threats of impending criminal and civil cases alleged by plaintiffs are
now proven and established to be real. The complaint shows that Falcon is now being sued for nonpayment of its loan with Solidbank. The checks issued by Falcon to Solidbank, forming part as Annexes
D, E, F, G, H, and I of the complaint, bounced for being drawn against insufficient funds. Annexes J, J-1,
J-2, J-3, and J-4 also for the complaint, are written with demands which carry the threat of criminal action
for violation of Batas Pambansa Blg. 22 against Falcon Garment Corporation and/or its officers by
Solidbank on February 14, 1996, seized the machineries, office and factory equipments of Falcon. The
police blotter even enumerates these machines and office equipments. With the seizure of plaintiffs
instruments in the operation of its business, the filing of collection cases against it, the threat of criminal
prosecution against its officers, the imminent threat to its industrial peace, it is not remote that plaintiffs
survival hangs on the balance. There is truth therefore to plaintiffs claim that its only hope for survival
and arresting threats of civil and criminal cases, is the immediate execution of the judgment. This Court,
also takes into consideration, that plaintiffs ownership over the funds sought to be reinstated to Current
Account No. 25-00640-7, is not in dispute. All the circumstances enumerated by plaintiffs under par. 3 of
its motion combined with the facts established by the complaint of Solidbank against Falcon and the
police blotter, viewed from the above quoted opposition of defendant, to the mind of this Court, constitute
a sufficient evidence of good reason in support of plaintiffs subject motion. Further and significantly
taking into consideration plaintiffs readiness to pay defendants counterclaim of P4,700,000.00 by
deducting the same from the principal account.
The trial court concluded that the foregoing statements presented during the hearing of the motion
for execution pending appeal constitute good reasons for the discretionary execution. The Court of
Appeals agreed, but this Court is of a different persuasion and view.
The reasons relied upon are not compelling and thus can not constitute good reasons.
It is significant to stress that private respondent Falcon is a juridical entity and not a natural
person. Even assuming that it was indeed in financial distress and on the verge of facing civil or even
criminal suits, the immediate execution of a judgment in its favor pending appeal cannot be justified as
Falcons situation may not be likened to a case of a natural person who may be ill or may be of advanced
age. Even the danger of extinction of the corporation will not per se justify a discretionary execution
unless there are showings of other good reasons, such as for instance, impending insolvency of the
adverse party or the appeal being patently dilatory. But even as to the latter reason, it was noted
in Aquino vs. Santiago (161 SCRA 570 [1988]), that it is not for the trial judge to determine the merit of a
decision he rendered as this is the role of the appellate court. Hence, it is not within competence of the
trial court, in resolving a motion for execution pending appeal, to rule that the appeal is patently dilatory
and rely on the same as its bases for finding good reason to grant the motion. Only an appellate court
can appreciate the dilatory intent of an appeal as an additional good reason in upholding an order for
execution pending appeal which may have been issued by the trial court for other good reasons, or in
case where the motion for execution pending appeal is filed with the appellate court in accordance with
Section 2, paragraph (a), Rule 39 of the 1997 Rules of Court.
What is worse, only one case was actually filed against Falcon and this is the complaint for collection
filed by Solidbank. The other case are impending, so it is said. Other than said Solidbank case,
Falcons survival as a body corporate cannot be threatened by anticipated litigation. This
notwithstanding, and even assuming that there was a serious threat to Falcons continued corporate
existence, we hold that it is not tantamount nor even similar to an impending death of a natural

person. The material existence of a juridical person is not on the same plain as that of human life. The
survival of a juridical personality is clearly outweighed by the long standing general policy of enforcing
only final and executory judgments.
In the recent case of David vs. Court of Appeals (G. R. No. 126556, July 28, 1997), we reiterated our
pronouncement in Roxas vs. Court of Appeals (157 SCRA 370 [1988]) that -Execution pending appeal in accordance with Section 2, of Rule 39 is, of course, the exception. Normally, execution
of a judgment should not be had until and unless it has become final and executory -- i.e., the right to appeal has
been renounced or waived, the period for appeal has lapsed without an appeal having been taken, or appeal having
been taken, the appeal has been resolved and the records of the case have been returned to the court of origin -- in
which case, execution shall issue as a matter of right.
On the other hand, when the period of appeal has not expired, execution of the judgment should not be
allowed, save only if there be good reasons therefor, in the courts discretion. As provided in Section 2
Rule 39 of the x x Rules x x, the existence of good reasons is what confers discretionary power on a Court
x x to issue a writ of execution must constitute superior circumstances demanding urgency which will
outweigh the injury or damages should the losing party secure a reversal of the judgment.
Additionally, we cannot help observing that the May 7, 1996 order of execution issued by Judge
Santiago deliberately modified and failed to conform to the dispositive portion of the January 2, 1996
decision rendered by Judge Percival Mandap-Lopez, which is the decision Judge Santiagos order
intended to execute, and that this variance was upon express motion to Falcon
The January 2, 1996 decision ordered petitioner to restore immediately to plaintiffs Current Account
No. 25-00640-7 the sum of P12,729,092.78, plus interest at the rate of 12% per annum to commence
from the date of the filing of the complaint until the said amount is fully restored, and to operate the said
account in accordance with the instructions of plaintiffs, acting through its board of directors. In contrast,
the May 7, 1996 order directed petitioner to immediately pay the sum of P12,729,092.78, plus interest
and other damages.
At first glance the order to restore private respondents current account in the aforementioned
amount and the order to immediately pay the same amount directly to private respondent may seem to be
same, for, after all, upon restoring the said amount, what may prevent the depositor from withdrawing the
entire amount?
However, after more careful and deliberate consideration, one will notice a whale of distinction
between the two aforementioned orders. For one thing, if petitioner PBCom were ordered to credit the
money judgment to Falcons current account with its BMA Quezon City Branch and to operate said
account in accordance with the instructions of the board of directors of Falcon, once credited, release of
any amount from said account may be done only upon proper resolution of private respondent Falcons
board of directors. On the other hand, the order dated May 7, 1996 directed the immediate payment to
Falcon of the corresponding money judgment which may thus be used or misused with or without proper
instructions of Falcons board of directors.
Besides, the harassment complained of by the petitioner bank would not have happened had
respondent trial court issued a writ which faithfully conformed to the judgment sought to be enforced. If
Falcons current account were merely credited in accord with the judgment, a simple and orderly banking

procedure may just have taken place. In fact, it would have been absolutely unnecessary to deputize
anybody, other that the sheriff of the trial court concerned, to enforce the writ ordering petitioner bank to
restore the current account of private respondent.
It is well-settled general principle that a writ of execution must conform substantially to every
essential particular of he judgment promulgated. Execution which is not in harmony with the judgment is
bereft of validity. It must conform particularly to that ordained or decreed in the dispositive portion of the
decision (GSIS vs. Court of Appeals, 218 SCRA 233 [1993]). An order of execution which varies the
tenor of the judgment or exceeds the terms thereof is a nullity (Foremost Farms, Inc. vs. Dept. of Labor
and Employment, 251 SCRA 123 [1995]; Gamboas Inc. vs. Court of Appeals, 72 SCRA 131
[1976];Villoria vs. Piccio, 95 Phil. 802 [1954]).
Falcon has ignored and has remained silent in regard to PBComs charge of harassment and
irregular resort to armed policeman and civilians with acetylene torches in the enforcement of the writ of
execution pending appeal, thus lending credence to PBComs complaint. However, it also appears that
petitioner PBCom does not intend to pursue the administrative aspect of these alleged irregularities, its
prayer in the petition being completely silent on these points. Nevertheless, we find necessary to exhort
both private respondent and its counsel, as well as public respondent sheriffs not to resort to such forms
of harassment by using the strong arms of the law to the prejudice of any party. Barbaric acts such as
those complained of have no place in a civilized society. It is even more abhorrent when such acts are
with the participation or at the very least the acceptance of a member of the bar who, under his oath, has
sworn to uphold the rule of law.
WHEREFORE, premises considered, the instant petition is GRANTED. The decision of the Court of
Appeals dated September 13, 1996 in CA-G.R. SP No. 40636 is hereby ANNULLED and SET
ASIDE. The order of the Regional Trial Court of the National Capital Judicial Region, Branch 101,
stationed at Quezon City, dated May 7, 1996 in Civil Case No. Q-95-22625 is likewise ANNULLED and
SET ASIDE. Accordingly, the trial court is hereby ORDERED to determine the exact amount taken by
private respondent by virtue of the writ or writs of execution issued pursuant to the annulled order dated
May 7, 1996, which amount private respondent is hereby ORDERED to return to petitioner Philippine
Bank of Communications. No special pronouncement is made as to costs.
SO ORDERED.
Narvasa, C.J., (Chairman), Romero, Francisco and Panganiban, JJ., concur.

[G.R. No. 115678. February 23, 2001]

PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs. HON. COURT OF APPEALS

and BERNARDINO VILLANUEVA, respondents.
[G.R. No. 119723. February 23, 2001]
PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs. HON. COURT OF APPEALS and FILIPINAS
TEXTILE MILLS, INC., respondents.

DECISION
YNARES-SANTIAGO, J.:

Before us are consolidated petitions for review both filed by Philippine Bank of Communications; one against
the May 24, 1994 Decision of respondent Court of Appeals in CA-G.R. SP No. 32863 [1] and the other against its
March 31, 1995 Decision in CA-G.R. SP No. 32762. [2] Both Decisions set aside and nullified the August 11, 1993
Order[3] of the Regional Trial Court of Manila, Branch 7, granting the issuance of a writ of preliminary attachment in
Civil Case No. 91-56711.
The case commenced with the filing by petitioner, on April 8, 1991, of a Complaint against private respondent
Bernardino Villanueva, private respondent Filipinas Textile Mills and one Sochi Villanueva (now deceased) before
the Regional Trial Court of Manila. In the said Complaint, petitioner sought the payment of P2,244,926.30
representing the proceeds or value of various textile goods, the purchase of which was covered by irrevocable letters
of credit and trust receipts executed by petitioner with private respondent Filipinas Textile Mills as obligor; which,
in turn, were covered by surety agreements executed by private respondent Bernardino Villanueva and Sochi
Villanueva. In their Answer, private respondents admitted the existence of the surety agreements and trust receipts
but countered that they had already made payments on the amount demanded and that the interest and other charges
imposed by petitioner were onerous.
On May 31, 1993, petitioner filed a Motion for Attachment, [4] contending that violation of the trust receipts law
constitutes estafa, thus providing ground for the issuance of a writ of preliminary attachment; specifically under
paragraphs b and d, Section 1, Rule 57 of the Revised Rules of Court. Petitioner further claimed that
attachment was necessary since private respondents were disposing of their properties to its detriment as a
creditor. Finally, petitioner offered to post a bond for the issuance of such writ of attachment.
The Motion was duly opposed by private respondents and, after the filing of a Reply thereto by petitioner, the
lower court issued its August 11, 1993 Order for the issuance of a writ of preliminary attachment, conditioned upon
the filing of an attachment bond. Following the denial of the Motion for Reconsideration filed by private respondent
Filipinas Textile Mills, both private respondents filed separate petitions for certiorari before respondent Court
assailing the order granting the writ of preliminary attachment.
Both petitions were granted, albeit on different grounds. In CA-G.R. SP No. 32762, respondent Court of
Appeals ruled that the lower court was guilty of grave abuse of discretion in not conducting a hearing on the
application for a writ of preliminary attachment and not requiring petitioner to substantiate its allegations of fraud,
embezzlement or misappropriation. On the other hand, in CA-G.R. SP No. 32863, respondent Court of Appeals
found that the grounds cited by petitioner in its Motion do not provide sufficient basis for the issuance of a writ of
preliminary attachment, they being mere general averments. Respondent Court of Appeals held that neither
embezzlement, misappropriation nor incipient fraud may be presumed; they must be established in order for a writ
of preliminary attachment to issue.
Hence, the instant consolidated[5] petitions charging that respondent Court of Appeals erred in

1. Holding that there was no sufficient basis for the issuance of the writ of preliminary attachment in
spite of the allegations of fraud, embezzlement and misappropriation of the proceeds or goods entrusted
to the private respondents;

2. Disregarding the fact that that the failure of FTMI and Villanueva to remit the proceeds or return the
goods entrusted, in violation of private respondents fiduciary duty as entrustee, constitute embezzlement
or misappropriation which is a valid ground for the issuance of a writ of preliminary attachment. [6]
We find no merit in the instant petitions.
To begin with, we are in accord with respondent Court of Appeals in CA-G.R. SP No. 32863 that the Motion
for Attachment filed by petitioner and its supporting affidavit did not sufficiently establish the grounds relied upon
in applying for the writ of preliminary attachment.
The Motion for Attachment of petitioner states that

1. The instant case is based on the failure of defendants as entrustee to pay or remit the proceeds of the
goods entrusted by plaintiff to defendant as evidenced by the trust receipts (Annexes B, C and D of
the complaint), nor to return the goods entrusted thereto, in violation of their fiduciary duty as agent or
entrustee;
2. Under Section 13 of P.D. 115, as amended, violation of the trust receipt law constitute(s) estafa (fraud
and/or deceit) punishable under Article 315 par. 1[b] of the Revised Penal Code;
3. On account of the foregoing, there exist(s) valid ground for the issuance of a writ of preliminary
attachment under Section 1 of Rule 57 of the Revised Rules of Court particularly under sub-paragraphs
b and d, i.e. for embezzlement or fraudulent misapplication or conversion of money (proceeds) or
property (goods entrusted) by an agent (entrustee) in violation of his fiduciary duty as such, and against a
party who has been guilty of fraud in contracting or incurring the debt or obligation;
4. The issuance of a writ of preliminary attachment is likewise urgently necessary as there exist(s) no
sufficient security for the satisfaction of any judgment that may be rendered against the defendants as the
latter appears to have disposed of their properties to the detriment of the creditors like the herein plaintiff;
5. Herein plaintiff is willing to post a bond in the amount fixed by this Honorable Court as a condition to
the issuance of a writ of preliminary attachment against the properties of the defendants.
Section 1(b) and (d), Rule 57 of the then controlling Revised Rules of Court, provides, to wit

SECTION 1. Grounds upon which attachment may issue. A plaintiff or any proper party may, at the
commencement of the action or at any time thereafter, have the property of the adverse party attached as
security for the satisfaction of any judgment that may be recovered in the following cases:
(b) In an action for money or property embezzled or fraudulently misapplied or converted to his use by a
public officer, or an officer of a corporation, or an attorney, factor, broker, agent or clerk, in the course of
his employment as such, or by any other person in a fiduciary capacity, or for a willful violation of duty;

(d) In an action against a party who has been guilty of fraud in contracting the debt or incurring the
obligation upon which the action is brought, or in concealing or disposing of the property for the taking,
detention or conversion of which the action is brought;
While the Motion refers to the transaction complained of as involving trust receipts, the violation of the terms
of which is qualified by law as constituting estafa, it does not follow that a writ of attachment can and should
automatically issue. Petitioner cannot merely cite Section 1(b) and (d), Rule 57, of the Revised Rules of Court, as
mere reproduction of the rules, without more, cannot serve as good ground for issuing a writ of attachment. An
order of attachment cannot be issued on a general averment, such as one ceremoniously quoting from a pertinent
rule.[7]
The supporting Affidavit is even less instructive. It merely states, as follows --

I, DOMINGO S. AURE, of legal age, married, with address at No. 214-216 Juan Luna Street, Binondo,
Manila, after having been sworn in accordance with law, do hereby depose and say, THAT:
1. I am the Assistant Manager for Central Collection Units Acquired Assets Section of the plaintiff,
Philippine Bank of Communications, and as such I have caused the preparation of the above motion for
issuance of a writ of preliminary attachment;
2. I have read and understood its contents which are true and correct of my own knowledge;
3. There exist(s) sufficient cause of action against the defendants in the instant case;
4. The instant case is one of those mentioned in Section 1 of Rule 57 of the Revised Rules of Court
wherein a writ of preliminary attachment may be issued against the defendants, particularly subparagraphs b and d of said section;
5. There is no other sufficient security for the claim sought to be enforced by the instant case and the
amount due to herein plaintiff or the value of the property sought to be recovered is as much as the sum
for which the order for attachment is granted, above all legal counterclaims.
Again, it lacks particulars upon which the court can discern whether or not a writ of attachment should issue.
Petitioner cannot insist that its allegation that private respondents failed to remit the proceeds of the sale of the
entrusted goods nor to return the same is sufficient for attachment to issue. We note that petitioner anchors its
application upon Section 1(d), Rule 57. This particular provision was adequately explained in Liberty Insurance
Corporation v. Court of Appeals,[8] as follows

To sustain an attachment on this ground, it must be shown that the debtor in contracting the debt or
incurring the obligation intended to defraud the creditor. The fraud must relate to the execution of the
agreement and must have been the reason which induced the other party into giving consent which he
would not have otherwise given. To constitute a ground for attachment in Section 1 (d), Rule 57 of the
Rules of Court, fraud should be committed upon contracting the obligation sued upon. A debt is
fraudulently contracted if at the time of contracting it the debtor has a preconceived plan or
intention not to pay, as it is in this case. Fraud is a state of mind and need not be proved by direct

evidence but may be inferred from the circumstances attendant in each case (Republic v. Gonzales, 13
SCRA 633). (Emphasis ours)
We find an absence of factual allegations as to how the fraud alleged by petitioner was committed. As
correctly held by respondent Court of Appeals, such fraudulent intent not to honor the admitted obligation cannot be
inferred from the debtors inability to pay or to comply with the obligations. [9] On the other hand, as stressed, above,
fraud may be gleaned from a preconceived plan or intention not to pay. This does not appear to be so in the case at
bar. In fact, it is alleged by private respondents that out of the total P419,613.96 covered by the subject trust
receipts, the amount of P400,000.00 had already been paid, leaving only P19,613.96 as balance. Hence, regardless
of the arguments regarding penalty and interest, it can hardly be said that private respondents harbored a
preconceived plan or intention not to pay petitioner.
The Court of Appeals was correct, therefore, in its finding in CA-G.R. SP No. 32863 that neither petitioners
Motion or its supporting Affidavit provides sufficient basis for the issuance of the writ of attachment prayed for.
We also agree with respondent Court of Appeals in CA-G.R. SP No. 32762 that the lower court should have
conducted a hearing and required private petitioner to substantiate its allegations of fraud, embezzlement and
misappropriation.
To reiterate, petitioners Motion for Attachment fails to meet the standard set forth in D.P. Lub Oil Marketing
Center, Inc. v. Nicolas,[10] in applications for attachment. In the said case, this Court cautioned --

The petitioners prayer for a writ of preliminary attachment hinges on the allegations in paragraph 16 of
the complaint and paragraph 4 of the affidavit of Daniel Pe which are couched in general terms devoid of
particulars of time, persons and places to support such a serious assertion that defendants are disposing
of their properties in fraud of creditors. There is thus the necessity of giving to the private respondents an
opportunity to ventilate their side in a hearing, in accordance with due process, in order to determine the
truthfulness of the allegations. But no hearing was afforded to the private respondents the writ having
been issued ex parte. A writ of attachment can only be granted on concrete and specific grounds and not
on general averments merely quoting the words of the rules.
As was frowned upon in D.P. Lub Oil Marketing Center, Inc.,[11] not only was petitioners application defective for
having merely given general averments; what is worse, there was no hearing to afford private respondents an
opportunity to ventilate their side, in accordance with due process, in order to determine the truthfulness of the
allegations of petitioner. As already mentioned, private respondents claimed that substantial payments were made
on the proceeds of the trust receipts sued upon. They also refuted the allegations of fraud, embezzlement and
misappropriation by averring that private respondent Filipinas Textile Mills could not have done these as it had
ceased its operations starting in June of 1984 due to workers strike. These are matters which should have been
addressed in a preliminary hearing to guide the lower court to a judicious exercise of its discretion regarding the
attachment prayed for. On this score, respondent Court of Appeals was correct in setting aside the issued writ of
preliminary attachment.
Time and again, we have held that the rules on the issuance of a writ of attachment must be construed strictly
against the applicants. This stringency is required because the remedy of attachment is harsh, extraordinary and
summary in nature. If all the requisites for the granting of the writ are not present, then the court which issues it acts
in excess of its jurisdiction.[12]

WHEREFORE, for the foregoing reasons, the instant petitions are DENIED. The decision of the Court of
Appeals in CA-G.R. SP No. 32863 and CA-G.R. SP No. 32762 are AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Pardo, JJ., concur.

Negotiable Instruments Law Rights of the Holder 350 SCRA 446 What Constitutes a Holder in Due Course
Negligence of the Collecting Bank and the Drawee Bank
There are three cases consolidated here: G.R. No. 121413 (PCIB vs CA and Ford and Citibank), G.R. No. 121479
(Ford vs CA and Citibank and PCIB), and G.R. No. 128604 (Ford vs Citibank and PCIB and CA).
G.R. No. 121413/G.R. No. 121479
In October 1977, Ford Philippines drew a Citibank check in the amount of P4,746,114.41 in favor of the
Commissioner of the Internal Revenue (CIR). The check represents Fords tax payment for the third quarter of 1977.
On the face of the check was written Payees account only which means that the check cannot be encashed and
can only be deposited with the CIRs savings account (which is with Metrobank). The said check was however
presented to PCIB and PCIB accepted the same. PCIB then indorsed the check for clearing to Citibank. Citibank
cleared the check and paid PCIB P4,746,114.41. CIR later informed Ford that it never received the tax payment.
An investigation ensued and it was discovered that Fords accountant Godofredo Rivera, when the check was
deposited with PCIB, recalled the check since there was allegedly an error in the computation of the tax to be paid.
PCIB, as instructed by Rivera, replaced the check with two of its managers checks.
It was further discovered that Rivera was actually a member of a syndicate and the managers checks were
subsequently deposited with the Pacific Banking Corporation by other members of the syndicate. Thereafter, Rivera
and the other members became fugitives of justice.
G.R. No. 128604
In July 1978 and in April 1979, Ford drew two checks in the amounts of P5,851,706.37 and P6,311,591.73
respectively. Both checks are again for tax payments. Both checks are for Payees account only or for the CIRs
bank savings account only with Metrobank. Again, these checks never reached the CIR.
In an investigation, it was found that these checks were embezzled by the same syndicate to which Rivera was a
member. It was established that an employee of PCIB, also a member of the syndicate, created a PCIB account
under a fictitious name upon which the two checks, through high end manipulation, were deposited. PCIB unwittingly
endorsed the checks to Citibank which the latter cleared. Upon clearing, the amount was withdrawn from the fictitious
account by syndicate members.
ISSUE: What are the liabilities of each party?

HELD: G.R. No. 121413/G.R. No. 121479

PCIB is liable for the amount of the check (P4,746,114.41). PCIB, as a collecting bank has been negligent in verifying
the authority of Rivera to negotiate the check. It failed to ascertain whether or not Rivera can validly recall the check
and have them be replaced with PCIBs managers checks as in fact, Ford has no knowledge and did not authorize
such. A bank (in this case PCIB) which cashes a check drawn upon another bank (in this case Citibank), without
requiring proof as to the identity of persons presenting it, or making inquiries with regard to them, cannot hold the
proceeds against the drawee when the proceeds of the checks were afterwards diverted to the hands of a third party.
Hence, PCIB is liable for the amount of the embezzled check.
G.R. No. 128604
PCIB and Citibank are liable for the amount of the checks on a 50-50 basis.
As a general rule, a bank is liable for the negligent or tortuous act of its employees within the course and apparent
scope of their employment or authority. Hence, PCIB is liable for the fraudulent act of its employee who set up the
savings account under a fictitious name.
Citibank is likewise liable because it was negligent in the performance of its obligations with respect to its agreement
with Ford. The checks which were drawn against Fords account with Citibank clearly states that they are payable to
the CIR only yet Citibank delivered said payments to PCIB. Citibank however argues that the checks were indorsed
by PCIB to Citibank and that the latter has nothing to do but to pay it. The Supreme Court cited Section 62 of the
Negotiable Instruments Law which mandates the Citibank, as an acceptor of the checks, to engage in paying the
checks according to the tenor of the acceptance which is to deliver the payment to the payees account only.
But the Supreme Court ruled that in the consolidated cases, that PCIB and Citibank are not the only negligent parties.
Ford is also negligent for failing to examine its passbook in a timely manner which could have avoided further loss.
But this negligence is not the proximate cause of the loss but is merely contributory. Nevertheless, this mitigates the
liability of PCIB and Citibank hence the rate of interest, with which PCIB and Citibank is to pay Ford, is lowered from
12% to 6% per annum.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 121413

January 29, 2001

PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK

AMERICA), petitioner,
vs.
COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK, N.A., respondents.
G.R. No. 121479

OF

ASIA

AND

January 29, 2001

FORD PHILIPPINES, INC., petitioner-plaintiff,

vs.
COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE COMMERCIAL INTERNATIONAL
BANK, respondents.
G.R. No. 128604

January 29, 2001

FORD PHILIPPINES, INC., petitioner,

vs.
CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK and COURT OF APPEALS, respondents.

DECISION
QUISUMBING, J.:
These consolidated petitions involve several fraudulently negotiated checks.
The original actions a quo were instituted by Ford Philippines to recover from the drawee bank, CITIBANK, N.A.
(Citibank) and collecting bank, Philippine Commercial International Bank (PCIBank) [formerly Insular Bank of Asia
and America], the value of several checks payable to the Commissioner of Internal Revenue, which were embezzled
allegedly by an organized syndicate.
G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995 Decision of the Court of Appeals in
CA-G.R. CV No. 25017, entitled Ford Philippines, Inc. vs. Citibank, N.A. and Insular Bank of Asia and America (now
Philippine Commercial International Bank), and the August 8, 1995 Resolution, ordering the collecting bank,
Philippine Commercial International Bank, to pay the amount of Citibank Check No. SN-04867.
1

In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996 Decision of the Court of Appeals and its
March 5, 1997 Resolution in CA-G.R. No. 28430 entitled Ford Philippines, Inc. vs. Citibank, N.A. and Philippine
Commercial International Bank, affirming in toto the judgment of the trial court holding the defendant drawee bank,
Citibank, N.A., solely liable to pay the amount of P12,163,298.10 as damages for the misapplied proceeds of the
plaintiffs Citibank Check Numbers SN-10597 and 16508.
3

I. G.R. Nos. 121413 and 121479

The stipulated facts submitted by the parties as accepted by the Court of Appeals are as follows:
On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No. SN-04867 in the amount of
P4,746,114.41, in favor of the Commissioner of Internal Revenue as payment of plaintiffs percentage or
manufacturers sales taxes for the third quarter of 1977.
The aforesaid check was deposited with the defendant IBAA (now PCIBank) and was subsequently cleared at the
Central Bank. Upon presentment with the defendant Citibank, the proceeds of the check was paid to IBAA as
collecting or depository bank.
The proceeds of the same Citibank check of the plaintiff was never paid to or received by the payee thereof, the
Commissioner of Internal Revenue.
As a consequence, upon demand of the Bureau and/or Commissioner of Internal Revenue, the plaintiff was
compelled to make a second payment to the Bureau of Internal Revenue of its percentage/manufacturers sales taxes
for the third quarter of 1977 and that said second payment of plaintiff in the amount of P4,746,114.41 was duly
received by the Bureau of Internal Revenue.
It is further admitted by defendant Citibank that during the time of the transactions in question, plaintiff had been
maintaining a checking account with defendant Citibank; that Citibank Check No. SN-04867 which was drawn and
issued by the plaintiff in favor of the Commissioner of Internal Revenue was a crossed check in that, on its face were
two parallel lines and written in between said lines was the phrase Payees Account Only; and that defendant
Citibank paid the full face value of the check in the amount of P4,746,114.41 to the defendant IBAA.
It has been duly established that for the payment of plaintiffs percentage tax for the last quarter of 1977, the Bureau
of Internal Revenue issued Revenue Tax Receipt No. 18747002, dated October 20, 1977, designating therein in
Muntinlupa, Metro Manila, as the authorized agent bank of Metrobank, Alabang branch to receive the tax payment of
the plaintiff.
On December 19, 1977, plaintiffs Citibank Check No. SN-04867, together with the Revenue Tax Receipt No.
18747002, was deposited with defendant IBAA, through its Ermita Branch. The latter accepted the check and sent it
to the Central Clearing House for clearing on the same day, with the indorsement at the back all prior indorsements
and/or lack of indorsements guaranteed. Thereafter, defendant IBAA presented the check for payment to defendant
Citibank on same date, December 19, 1977, and the latter paid the face value of the check in the amount of
P4,746,114.41. Consequently, the amount of P4,746,114.41 was debited in plaintiffs account with the defendant
Citibank and the check was returned to the plaintiff.
Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in the amount of P4,746,114.41 was not
paid to the Commissioner of Internal Revenue. Hence, in separate letters dated October 26, 1979, addressed to the

defendants, the plaintiff notified the latter that in case it will be re-assessed by the BIR for the payment of the taxes
covered by the said checks, then plaintiff shall hold the defendants liable for reimbursement of the face value of the
same. Both defendants denied liability and refused to pay.
In a letter dated February 28, 1980 by the Acting Commissioner of Internal Revenue addressed to the plaintiff
supposed to be Exhibit D, the latter was officially informed, among others, that its check in the amount of P4,
746,114.41 was not paid to the government or its authorized agent and instead encashed by unauthorized persons,
hence, plaintiff has to pay the said amount within fifteen days from receipt of the letter. Upon advice of the plaintiffs
lawyers, plaintiff on March 11, 1982, paid to the Bureau of Internal Revenue, the amount of P4,746,114.41,
representing payment of plaintiffs percentage tax for the third quarter of 1977.
As a consequence of defendants refusal to reimburse plaintiff of the payment it had made for the second time to the
BIR of its percentage taxes, plaintiff filed on January 20, 1983 its original complaint before this Court.
On December 24, 1985, defendant IBAA was merged with the Philippine Commercial International Bank (PCI Bank)
with the latter as the surviving entity.
Defendant Citibank maintains that; the payment it made of plaintiffs Citibank Check No. SN-04867 in the amount of
P4,746,114.41 was in due course; it merely relied on the clearing stamp of the depository/collecting bank, the
defendant IBAA that all prior indorsements and/or lack of indorsements guaranteed; and the proximate cause of
plaintiffs injury is the gross negligence of defendant IBAA in indorsing the plaintiffs Citibank check in question.
It is admitted that on December 19, 1977 when the proceeds of plaintiffs Citibank Check No. SN-048867 was paid to
defendant IBAA as collecting bank, plaintiff was maintaining a checking account with defendant Citibank.
5

Although it was not among the stipulated facts, an investigation by the National Bureau of Investigation (NBI)
revealed that Citibank Check No. SN-04867 was recalled by Godofredo Rivera, the General Ledger Accountant of
Ford. He purportedly needed to hold back the check because there was an error in the computation of the tax due to
the Bureau of Internal Revenue (BIR). With Riveras instruction, PCIBank replaced the check with two of its own
Managers Checks (MCs). Alleged members of a syndicate later deposited the two MCs with the Pacific Banking
Corporation.
Ford, with leave of court, filed a third-party complaint before the trial court impleading Pacific Banking Corporation
(PBC) and Godofredo Rivera, as third party defendants. But the court dismissed the complaint against PBC for lack
of cause of action. The course likewise dismissed the third-party complaint against Godofredo Rivera because he
could not be served with summons as the NBI declared him as a fugitive from justice.
On June 15, 1989, the trial court rendered its decision, as follows:
Premises considered, judgment is hereby rendered as follows:
1. Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and severally, to pay the plaintiff the amount of
P4,746,114.41 representing the face value of plaintiffs Citibank Check No. SN-04867, with interest thereon at the
legal rate starting January 20, 1983, the date when the original complaint was filed until the amount is fully paid, plus
costs;

2. On defendant Citibanks cross-claim: ordering the cross-defendant IBAA (now PCI Bank) to reimburse defendant
Citibank for whatever amount the latter has paid or may pay to the plaintiff in accordance with next preceding
paragraph;
3. The counterclaims asserted by the defendants against the plaintiff, as well as that asserted by the crossdefendant against the cross-claimant are dismissed, for lack of merits; and
4. With costs against the defendants.
SO ORDERED.

Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated their respective petitions for
review on certiorari to the Courts of Appeals. On March 27, 1995, the appellate court issued its judgment as follows:
WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision with modifications.
The court hereby renders judgment:
1. Dismissing the complaint in Civil Case No. 49287 insofar as defendant Citibank N.A. is concerned;
2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff the amount of P4,746,114.41 representing the face
value of plaintiffs Citibank Check No. SN-04867, with interest thereon at the legal rate starting January 20, 1983, the
date when the original complaint was filed until the amount is fully paid;
3. Dismissing the counterclaims asserted by the defendants against the plaintiff as well as that asserted by the crossdefendant against the cross-claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED.

PCI Bank moved to reconsider the above-quoted decision of the Court of Appeals, while Ford filed a Motion for
Partial Reconsideration. Both motions were denied for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of the Twelfth Division of the Court of
Appeals contending that it merely acted on the instruction of Ford and such cause of action had already prescribed.
PCIBank sets forth the following issues for consideration:
I. Did the respondent court err when, after finding that the petitioner acted on the check drawn by respondent Ford on
the said respondents instructions, it nevertheless found the petitioner liable to the said respondent for the full amount
of the said check.
II. Did the respondent court err when it did not find prescription in favor of the petitioner.

In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning the same decision and resolution
of the Court of Appeals, and praying for the reinstatement in toto of the decision of the trial court which found both
PCIBank and Citibank jointly and severally liable for the loss.
In G.R. No. 121479, appellant Ford presents the following propositions for consideration:
I. Respondent Citibank is liable to petitioner Ford considering that:
1. As drawee bank, respondent Citibank owes to petitioner Ford, as the drawer of the subject check and a depositor
of respondent Citibank, an absolute and contractual duty to pay the proceeds of the subject check only to the payee
thereof, the Commissioner of Internal Revenue.
2. Respondent Citibank failed to observe its duty as banker with respect to the subject check, which was crossed and
payable to Payees Account Only.
3. Respondent Citibank raises an issue for the first time on appeal; thus the same should not be considered by the
Honorable Court.
4. As correctly held by the trial court, there is no evidence of gross negligence on the part of petitioner Ford.

II. PCI Bank is liable to petitioner Ford considering that:

1. There were no instructions from petitioner Ford to deliver the proceeds of the subject check to a person other than
the payee named therein, the Commissioner of the Bureau of Internal Revenue; thus, PCIBanks only obligation is to
deliver the proceeds to the Commissioner of the Bureau of Internal Revenue.
10

2. PCIBank which affixed its indorsement on the subject check (All prior indorsement and/or lack of indorsement
guaranteed), is liable as collecting bank.
11

3. PCIBank is barred from raising issues of fact in the instant proceedings.

4. Petitioner Fords cause of action had not prescribed.

12

13

II. G.R. No. 128604

The same syndicate apparently embezzled the proceeds of checks intended, this time, to settle Fords percentage
taxes appertaining to the second quarter of 1978 and the first quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of P5,851,706.37 representing the
percentage tax due for the second quarter of 1978 payable to the Commissioner of Internal Revenue. A BIR Revenue
Tax Receipt No. 28645385 was issued for the said purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of P6,311,591.73, representing
the payment of percentage tax for the first quarter of 1979 and payable to the Commissioner of Internal Revenue.
Again a BIR Revenue Tax Receipt No. A-1697160 was issued for the said purpose.

Both checks were crossed checks and contain two diagonal lines on its upper corner between, which were written
the words payable to the payees account only.
The checks never reached the payee, CIR. Thus, in a letter dated February 28, 1980, the BIR, Region 4-B,
demanded for the said tax payments the corresponding periods above-mentioned.
As far as the BIR is concerned, the said two BIR Revenue Tax Receipts were considered fake and spurious. This
anomaly was confirmed by the NBI upon the initiative of the BIR. The findings forced Ford to pay the BIR a new, while
an action was filed against Citibank and PCIBank for the recovery of the amount of Citibank Check Numbers SN10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tried the case, made its findings on the modus operandi of the
syndicate, as follows:
A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its General Ledger Accountant. As such, he
prepared the plaintiffs check marked Ex. A [Citibank Check No. Sn-10597] for payment to the BIR. Instead,
however, for delivering the same of the payee, he passed on the check to a co-conspirator named Remberto Castro
who was a pro-manager of the San Andres Branch of PCIB.* In connivance with one Winston Dulay, Castro himself
subsequently opened a Checking Account in the name of a fictitious person denominated as Reynaldo Reyes in the
Meralco Branch of PCIBank where Dulay works as Assistant Manager.
After an initial deposit of P100.00 to validate the account, Castro deposited a worthless Bank of America Check in
exactly the same amount as the first FORD check (Exh. A, P5,851,706.37) while this worthless check was coursed
through PCIBs main office en route to the Central Bank for clearing, replaced this worthless check with FORDs
Exhibit A and accordingly tampered the accompanying documents to cover the replacement. As a result, Exhibit A
was cleared by defendant CITIBANK, and the fictitious deposit account of Reynaldo Reyes was credited at the PCIB
Meralco Branch with the total amount of the FORD check Exhibit A. The same method was again utilized by the
syndicate in profiting from Exh. B [Citibank Check No. SN-16508] which was subsequently pilfered by Alexis
Marindo, Riveras Assistant at FORD.
From this Reynaldo Reyes account, Castro drew various checks distributing the shares of the other participating
conspirators namely (1) CRISANTO BERNABE, the mastermind who formulated the method for the embezzlement;
(2) RODOLFO R. DE LEON a customs broker who negotiated the initial contact between Bernabe, FORDs
Godofredo Rivera and PCIBs Remberto Castro; (3) JUAN VASTILLO who assisted de Leon in the initial
arrangements; (4) GODOFREDO RIVERA, FORDs accountant who passed on the first check (Exhibit A) to Castro;
(5) REMERTO CASTRO, PCIBs pro-manager at San Andres who performed the switching of checks in the clearing
process and opened the fictitious Reynaldo Reyes account at the PCIB Meralco Branch; (6) WINSTON DULAY,
PCIBs Assistant Manager at its Meralco Branch, who assisted Castro in switching the checks in the clearing process
and facilitated the opening of the fictitious Reynaldo Reyes bank account; (7) ALEXIS MARINDO, Riveras Assistant
at FORD, who gave the second check (Exh. B) to Castro; (8) ELEUTERIO JIMENEZ, BIR Collection Agent who
provided the fake and spurious revenue tax receipts to make it appear that the BIR had received FORDs tax
payments.
Several other persons and entities were utilized by the syndicate as conduits in the disbursements of the proceeds of
the two checks, but like the aforementioned participants in the conspiracy, have not been impleaded in the present
case. The manner by which the said funds were distributed among them are traceable from the record of checks

drawn against the original Reynaldo Reyes account and indubitably identify the parties who illegally benefited
therefrom and readily indicate in what amounts they did so.
14

On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank, Citibank, liable for the value of
the two checks while absolving PCIBank from any liability, disposing as follows:
WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to reimburse plaintiff FORD the total
amount of P12,163,298.10 prayed for in its complaint, with 6% interest thereon from date of first written demand until
full payment, plus P300,000.00 attorneys fees and expenses litigation, and to pay the defendant, PCIB (on its
counterclaim to crossclaim) the sum of P300,000.00 as attorneys fees and costs of litigation, and pay the costs.
SO ORDERED.

15

Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the decision of the trial court. Hence,
this petition.
Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of Appeals decision and its
resolution dated March 5, 1997, with respect to the dismissal of the complaint against PCIBank and holding Citibank
solely responsible for the proceeds of Citibank Check Numbers SN-10597 and 16508 for P5,851,706.73 and
P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing the complaint against defendant PCIBank considering that:
I. Defendant PCIBank was clearly negligent when it failed to exercise the diligence required to be exercised by it as a
banking institution.
II. Defendant PCIBank clearly failed to observe the diligence required in the selection and supervision of its officers
and employees.
III. Defendant PCIBank was, due to its negligence, clearly liable for the loss or damage resulting to the plaintiff Ford
as a consequence of the substitution of the check consistent with Section 5 of Central Bank Circular No. 580 series of
1977.
IV. Assuming arguendo that defendant PCIBank did not accept, endorse or negotiate in due course the subject
checks, it is liable, under Article 2154 of the Civil Code, to return the money which it admits having received, and
which was credited to it its Central Bank account.
16

The main issue presented for our consideration by these petitions could be simplified as follows: Has petitioner Ford
the right to recover from the collecting bank (PCIBank) and the drawee bank (Citibank) the value of the checks
intended as payment to the Commissioner of Internal Revenue? Or has Fords cause of action already prescribed?
Note that in these cases, the checks were drawn against the drawee bank, but the title of the person negotiating the
same was allegedly defective because the instrument was obtained by fraud and unlawful means, and the proceeds
of the checks were not remitted to the payee. It was established that instead of paying the checks to the CIR, for the
settlement of the appropriate quarterly percentage taxes of Ford, the checks were diverted and encashed for the
eventual distribution among the members of the syndicate. As to the unlawful negotiation of the check the applicable
law is Section 55 of the Negotiable Instruments Law (NIL), which provides:

When title defective The title of a person who negotiates an instrument is defective within the meaning of this Act
when he obtained the instrument, or any signature thereto, by fraud, duress, or fore and fear, or other unlawful
means, or for an illegal consideration, or when he negotiates it in breach of faith or under such circumstances as
amount to a fraud.
Pursuant to this provision, it is vital to show that the negotiation is made by the perpetrator in breach of faith
amounting to fraud. The person negotiating the checks must have gone beyond the authority given by his principal. If
the principal could prove that there was no negligence in the performance of his duties, he may set up the personal
defense to escape liability and recover from other parties who. Though their own negligence, allowed the commission
of the crime.
In this case, we note that the direct perpetrators of the offense, namely the embezzlers belonging to a syndicate, are
now fugitives from justice. They have, even if temporarily, escaped liability for the embezzlement of millions of pesos.
We are thus left only with the task of determining who of the present parties before us must bear the burden of loss of
these millions. It all boils down to the question of liability based on the degree of negligence among the parties
concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty of the imputed contributory negligence that
would defeat its claim for reimbursement, bearing in mind that its employees, Godofredo Rivera and Alexis Marindo,
were among the members of the syndicate.
Citibank points out that Ford allowed its very own employee, Godofredo Rivera, to negotiate the checks to his coconspirators, instead of delivering them to the designated authorized collecting bank (Metrobank-Alabang) of the
payee, CIR. Citibank bewails the fact that Ford was remiss in the supervision and control of its own employees,
inasmuch as it only discovered the syndicates activities through the information given by the payee of the checks
after an unreasonable period of time.
PCIBank also blames Ford of negligence when it allegedly authorized Godofredo Rivera to divert the proceeds of
Citibank Check No. SN-04867, instead of using it to pay the BIR. As to the subsequent run-around of funds of
Citibank Check Nos. SN-10597 and 16508, PCIBank claims that the proximate cause of the damage to Ford lies in its
own officers and employees who carried out the fraudulent schemes and the transactions. These circumstances were
not checked by other officers of the company including its comptroller or internal auditor. PCIBank contends that the
inaction of Ford despite the enormity of the amount involved was a sheer negligence and stated that, as between two
innocent persons, one of whom must suffer the consequences of a breach of trust, the one who made it possible, by
his act of negligence, must bear the loss.
For its part, Ford denies any negligence in the performance of its duties. It avers that there was no evidence
presented before the trial court showing lack of diligence on the part of Ford. And, citing the case of Gempesaw vs.
Court of Appeals, Ford argues that even if there was a finding therein that the drawer was negligent, the drawee
bank was still ordered to pay damages.
17

Furthermore, Ford contends the Godofredo Rivera was not authorized to make any representation in its behalf,
specifically, to divert the proceeds of the checks. It adds that Citibank raised the issue of imputed negligence against
Ford for the first time on appeal. Thus, it should not be considered by this Court.
On this point, jurisprudence regarding the imputed negligence of employer in a master-servant relationship is
instructive. Since a master may be held for his servants wrongful act, the law imputes to the master the act of the

servant, and if that act is negligent or wrongful and proximately results in injury to a third person, the negligence or
wrongful conduct is the negligence or wrongful conduct of the master, for which he is liable. The general rule is that if
the master is injured by the negligence of a third person and by the concurring contributory negligence of his own
servant or agent, the latters negligence is imputed to his superior and will defeat the superiors action against the
third person, assuming, of course that the contributory negligence was the proximate cause of the injury of which
complaint is made.
18

19

Accordingly, we need to determine whether or not the action of Godofredo Rivera, Fords General Ledger Accountant,
and/or Alexis Marindo, his assistant, was the proximate cause of the loss or damage. AS defined, proximate cause is
that which, in the natural and continuous sequence, unbroken by any efficient, intervening cause produces the injury
and without the result would not have occurred.
20

It appears that although the employees of Ford initiated the transactions attributable to an organized syndicate, in our
view, their actions were not the proximate cause of encashing the checks payable to the CIR. The degree of Fords
negligence, if any, could not be characterized as the proximate cause of the injury to the parties.
The Board of Directors of Ford, we note, did not confirm the request of Godofredo Rivera to recall Citibank Check No.
SN-04867. Riveras instruction to replace the said check with PCIBanks Managers Check was not in the ordinary
course of business which could have prompted PCIBank to validate the same.
As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was established that these checks were made
payable to the CIR. Both were crossed checks. These checks were apparently turned around by Fords employees,
who were acting on their own personal capacity.
Given these circumstances, the mere fact that the forgery was committed by a drawer-payors confidential employee
or agent, who by virtue of his position had unusual facilities for perpetrating the fraud and imposing the forged paper
upon the bank, does not entitle the bank to shift the loss to the drawer-payor, in the absence of some circumstance
raising estoppel against the drawer. This rule likewise applies to the checks fraudulently negotiated or diverted by the
confidential employees who hold them in their possession.
21

With respect to the negligence of PCIBank in the payment of the three checks involved, separately, the trial courts
found variations between the negotiation of Citibank Check No. SN-04867 and the misapplication of total proceeds of
Checks SN-10597 and 16508. Therefore, we have to scrutinize, separately, PCIBanks share of negligence when the
syndicate achieved its ultimate agenda of stealing the proceeds of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It was coursed through the
ordinary banking transaction, sent to Central Clearing with the indorsement at the back all prior indorsements and/or
lack of indorsements guaranteed, and was presented to Citibank for payment. Thereafter PCIBank, instead of
remitting the proceeds to the CIR, prepared two of its Managers checks and enabled the syndicate to encash the
same.
On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The neglect of PCIBank
employees to verify whether his letter requesting for the replacement of the Citibank Check No. SN-04867 was duly
authorized, showed lack of care and prudence required in the circumstances.

Furthermore, it was admitted that PCIBank is authorized to collect the payment of taxpayers in behalf of the BIR. As
an agent of BIR, PCIBank is duty bound to consult its principal regarding the unwarranted instructions given by the
payor or its agent. As aptly stated by the trial court, to wit:
xxx. Since the questioned crossed check was deposited with IBAA [now PCIBank], which claimed to be a
depository/collecting bank of BIR, it has the responsibility to make sure that the check in question is deposited in
Payees account only.
xxx

xxx

xxx

As agent of the BIR (the payee of the check), defendant IBAA should receive instructions only from its principal BIR
and not from any other person especially so when that person is not known to the defendant. It is very imprudent on
the part of the defendant IBAA to just rely on the alleged telephone call of the one Godofredo Rivera and in his
signature considering that the plaintiff is not a client of the defendant IBAA.
It is a well-settled rule that the relationship between the payee or holder of commercial paper and the bank to which it
is sent for collection is, in the absence of an agreement to the contrary, that of principal and agent. A bank which
receives such paper for collection is the agent of the payee or holder.
22

23

Even considering arguendo, that the diversion of the amount of a check payable to the collecting bank in behalf of the
designated payee may be allowed, still such diversion must be properly authorized by the payor. Otherwise stated,
the diversion can be justified only by proof of authority from the drawer, or that the drawer has clothed his agent with
apparent authority to receive the proceeds of such check.
Citibank further argues that PCI Banks clearing stamp appearing at the back of the questioned checks stating that
ALL PRIOR INDORSEMENTS AND/OR LACK OF INDORSEMENTS GURANTEED should render PCIBank liable
because it made it pass through the clearing house and therefore Citibank had no other option but to pay it. Thus,
Citibank had no other option but to pay it. Thus, Citibank assets that the proximate cause of Fords injury is the gross
negligence of PCIBank. Since the questioned crossed check was deposited with PCIBank, which claimed to be a
depository/collecting bank of the BIR, it had the responsibility to make sure that the check in questions is deposited in
Payees account only.
Indeed, the crossing of the check with the phrase Payees Account Only, is a warning that the check should be
deposited only in the account of the CIR. Thus, it is the duty of the collecting bank PCIBank to ascertain that the
check be deposited in payees account only. Therefore, it is the collecting bank (PCIBank) which is bound to
scrutinize the check and to know its depositors before it could make the clearing indorsement all prior indorsements
and/or lack of indorsement guaranteed.
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation, we ruled:
24

Anent petitioners liability on said instruments, this court is in full accord with the ruling of the PCHCs Board of
Directors that:
In presenting the checks for clearing and for payment, the defendant made an express guarantee on the validity of
all prior endorsements. Thus, stamped at the back of the checks are the defendants clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would not
have paid on the checks.

No amount of legal jargon can reverse the clear meaning of defendants warranty. As the warranty has proven to be
false and inaccurate, the defendant is liable for any damage arising out of the falsity of its representation.
25

Lastly, banking business requires that the one who first cashes and negotiates the check must take some precautions
to learn whether or not it is genuine. And if the one cashing the check through indifference or other circumstance
assists the forger in committing the fraud, he should not be permitted to retain the proceeds of the check from the
drawee whose sole fault was that it did not discover the forgery or the defect in the title of the person negotiating the
instrument before paying the check. For this reason, a bank which cashes a check drawn upon another bank, without
requiring proof as to the identity of persons presenting it, or making inquiries with regard to them, cannot hold the
proceeds against the drawee when the proceeds of the checks were afterwards diverted to the hands of a third party.
In such cases the drawee bank has a right to believe that the cashing bank (or the collecting bank) had, by the usual
proper investigation, satisfied itself of the authenticity of the negotiation of the checks. Thus, one who encashed a
check which had been forged or diverted and in turn received payment thereon from the drawee, is guilty of
negligence which proximately contributed to the success of the fraud practiced on the drawee bank. The latter may
recover from the holder the money paid on the check.
26

Having established that the collecting banks negligence is the proximate cause of the loss, we conclude that
PCIBank is liable in the amount corresponding to the proceeds of Citibank Check No. SN-04867.
G.R. No. 128604
The trial court and the Court of Appeals found that PCIBank had no official act in the ordinary course of business that
would attribute to it the case of the embezzlement of Citibank Check Numbers SN-10597 and 16508, because
PCIBank did not actually receive nor hold the two Ford checks at all. The trial court held, thus:
Neither is there any proof that defendant PCIBank contributed any official or conscious participation in the process of
the embezzlement. This Court is convinced that the switching operation (involving the checks while in transit for
clearing) were the clandestine or hidden actuations performed by the members of the syndicate in their own
personal, covert and private capacity and done without the knowledge of the defendant PCIBank
27

In this case, there was no evidence presented confirming the conscious participation of PCIBank in the
embezzlement. As a general rule, however, a banking corporation is liable for the wrongful or tortuous acts and
declarations of its officers or agents within the course and scope of their employment. A bank will be held liable for
the negligence of its officers or agents when acting within the course and scope of their employment. It may be liable
for the tortuous acts of its officers even as regards that species of tort of which malice is an essential element. In this
case, we find a situation where the PCIBank appears also to be the victim of the scheme hatched by a syndicate in
which its own management employees had participated.
28

The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received Citibank Check Numbers SN-10597
and 16508. He passed the checks to a co-conspirator, an Assistant Manager of PCIBanks Meralco Branch, who
helped Castro open a Checking account of a fictitious person named Reynaldo Reyes. Castro deposited a
worthless Bank of America Check in exactly the same amount of Ford checks. The syndicate tampered with the
checks and succeeded in replacing the worthless checks and the eventual encashment of Citibank Check Nos. SN
10597 and 16508. The PCIBank Ptro-manager, Castro, and his co-conspirator Assistant Manager apparently
performed their activities using facilities in their official capacity or authority but for their personal and private gain or
benefit.

A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds these
officers or agents were enabled to perpetrate in the apparent course of their employment; nor will t be permitted to
shirk its responsibility for such frauds, even though no benefit may accrue to the bank therefrom. For the general rule
is that a bank is liable for the fraudulent acts or representations of an officer or agent acting within the course and
apparent scope of his employment or authority. And if an officer or employee of a bank, in his official capacity,
receives money to satisfy an evidence of indebtedness lodged with his bank for collection, the bank is liable for his
misappropriation of such sum.
29

30

Moreover, as correctly pointed out by Ford, Section 5 of Central Bank Circular No. 580, Series of 1977 provides that
any theft affecting items in transit for clearing, shall be for the account of sending bank, which in this case is PCIBank.
31

But in this case, responsibility for negligence does not lie on PCIBanks shoulders alone.
The evidence on record shows that Citibank as drawee bank was likewise negligent in the performance of its duties.
Citibank failed to establish that its payment of Fords checks were made in due course and legally in order. In its
defense, Citibank claims the genuineness and due execution of said checks, considering that Citibank (1) has no
knowledge of any informity in the issuance of the checks in question (2) coupled by the fact that said checks were
sufficiently funded and (3) the endorsement of the Payee or lack thereof was guaranteed by PCI Bank (formerly
IBAA), thus, it has the obligation to honor and pay the same.
For its part, Ford contends that Citibank as the drawee bank owes to Ford an absolute and contractual duty to pay
the proceeds of the subject check only to the payee thereof, the CIR. Citing Section 62 of the Negotiable Instruments
Law, Ford argues that by accepting the instrument, the acceptor which is Citibank engages that it will pay according
to the tenor of its acceptance, and that it will pay only to the payee, (the CIR), considering the fact that here the check
was crossed with annotation Payees Account Only.
32

As ruled by the Court of Appeals, Citibank must likewise answer for the damages incurred by Ford on Citibank
Checks Numbers SN 10597 and 16508, because of the contractual relationship existing between the two. Citibank,
as the drawee bank breached its contractual obligation with Ford and such degree of culpability contributed to the
damage caused to the latter. On this score, we agree with the respondent courts ruling.
Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before paying the amount of the
proceeds thereof to the collecting bank of the BIR. One thing is clear from the record: the clearing stamps at the back
of Citibank Check Nos. SN 10597 and 16508 do not bear any initials. Citibank failed to notice and verify the absence
of the clearing stamps. Had this been duly examined, the switching of the worthless checks to Citibank Check Nos.
10597 and 16508 would have been discovered in time. For this reason, Citibank had indeed failed to perform what
was incumbent upon it, which is to ensure that the amount of the checks should be paid only to its designated payee.
The fact that the drawee bank did not discover the irregularity seasonably, in our view, constitutes negligence in
carrying out the banks duty to its depositors. The point is that as a business affected with public interest and because
of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their relationship.
33

Thus, invoking the doctrine of comparative negligence, we are of the view that both PCIBank and Citibank failed in
their respective obligations and both were negligent in the selection and supervision of their employees resulting in
the encashment of Citibank Check Nos. SN 10597 AND 16508. Thus, we are constrained to hold them equally liable
for the loss of the proceeds of said checks issued by Ford in favor of the CIR.

Time and again, we have stressed that banking business is so impressed with public interest where the trust and
confidence of the public in general is of paramount importance such that the appropriate standard of diligence must
be very high, if not the highest, degree of diligence. A banks liability as obligor is not merely vicarious but primary,
wherein the defense of exercise of due diligence in the selection and supervision of its employees is of no moment.
34

35

Banks handle daily transactions involving millions of pesos. By the very nature of their work the degree of
responsibility, care and trustworthiness expected of their employees and officials is far greater than those of ordinary
clerks and employees. Banks are expected to exercise the highest degree of diligence in the selection and
supervision of their employees.
36

37

38

On the issue of prescription, PCIBank claims that the action of Ford had prescribed because of its inability to seek
judicial relief seasonably, considering that the alleged negligent act took place prior to December 19, 1977 but the
relief was sought only in 1983, or seven years thereafter.
The statute of limitations begins to run when the bank gives the depositor notice of the payment, which is ordinarily
when the check is returned to the alleged drawer as a voucher with a statement of his account, and an action upon a
check is ordinarily governed by the statutory period applicable to instruments in writing.
39

40

Our laws on the matter provide that the action upon a written contract must be brought within ten year from the time
the right of action accrues. hence, the reckoning time for the prescriptive period begins when the instrument was
issued and the corresponding check was returned by the bank to its depositor (normally a month thereafter). Applying
the same rule, the cause of action for the recovery of the proceeds of Citibank Check No. SN 04867 would normally
be a month after December 19, 1977, when Citibank paid the face value of the check in the amount of P4,746,114.41.
Since the original complaint for the cause of action was filed on January 20, 1984, barely six years had lapsed. Thus,
we conclude that Fords cause of action to recover the amount of Citibank Check No. SN 04867 was seasonably filed
within the period provided by law.
41

Finally, we also find that Ford is not completely blameless in its failure to detect the fraud. Failure on the part of the
depositor to examine its passbook, statements of account, and cancelled checks and to give notice within a
reasonable time (or as required by statute) of any discrepancy which it may in the exercise of due care and diligence
find therein, serves to mitigate the banks liability by reducing the award of interest from twelve percent (12%) to six
percent (6%) per annum. As provided in Article 1172 of the Civil Code of the Philippines, responsibility arising from
negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by
the courts, according to the circumstances. In quasi-delicts, the contributory negligence of the plaintiff shall reduce
the damages that he may recover.
42

WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 25017
are AFFIRMED. PCIBank, know formerly as Insular Bank of Asia and America, id declared solely responsible for the
loss of the proceeds of Citibank Check No SN 04867 in the amount P4,746,114.41, which shall be paid together with
six percent (6%) interest thereon to Ford Philippines Inc. from the date when the original complaint was filed until said
amount is fully paid.
However, the Decision and Resolution of the Court of Appeals in CA-G.R. No. 28430 are MODIFIED as follows:
PCIBank and Citibank are adjudged liable for and must share the loss, (concerning the proceeds of Citibank Check
Numbers SN 10597 and 16508 totaling P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDERED to pay Ford
Philippines Inc. P6,081,649.05, with six percent (6%) interest thereon, from the date the complaint was filed until full
payment of said amount.

Costs against Philippine Commercial International Bank and Citibank N.A.

SO ORDERED.
Bellosillo, Mendoza, Buena, De Leon, Jr., JJ, concur.

SECOND DIVISION
[G.R. No. 118492. August 15, 2001]

GREGORIO H. REYES and CONSUELO PUYAT-REYES, petitioners, vs. THE HON.

COURT OF APPEALS
and
FAR
EAST BANK AND
TRUST
COMPANY,respondents.
DECISION
DE LEON, JR., J.:

Before us is a petition for review of the Decision dated July 22, 1994 and Resolution dated
December 29, 1994 of the Court of Appeals affirming with modification the Decision dated November
12, 1992 of the Regional Trial Court of Makati, Metro Manila, Branch 64, which dismissed the complaint
for damages of petitioners spouses Gregorio H. Reyes and Consuelo Puyat-Reyes against respondent Far
East Bank and Trust Company.
[1]

[3]

[2]

[4]

The undisputed facts of the case are as follows:

In view of the 20 Asian Racing Conference then scheduled to be held in September, 1988 in Sydney,
Australia, the Philippine Racing Club, Inc. (PRCI, for brevity) sent four (4) delegates to the said
conference. Petitioner Gregorio H. Reyes, as vice-president for finance, racing manager, treasurer, and
director of PRCI, sent Godofredo Reyes, the clubs chief cashier, to the respondent bank to apply for a
foreign exchange demand draft in Australian dollars.
th

Godofredo went to respondent banks Buendia Branch in Makati City to apply for a demand draft in
the amount One Thousand Six Hundred Ten Australian Dollars (AU$1,610.00) payable to the order of the
20 Asian Racing Conference Secretariat of Sydney, Australia. He was attended to by respondent banks
assistant cashier, Mr. Yasis, who at first denied the application for the reason that respondent bank did not
have an Australian dollar account in any bank in Sydney. Godofredo asked if there could be a way for
respondent bank to accommodate PRCIs urgent need to remit Australian dollars to Sydney. Yasis of
respondent bank then informed Godofredo of a roundabout way of effecting the requested remittance to
Sydney thus: the respondent bank would draw a demand draft against Westpac Bank in Sydney, Australia
(Westpac-Sydney for brevity) and have the latter reimburse itself from the U.S. dollar account of the
th

respondent in Westpac Bank in New York, U.S.A (Westpac-New York for brevity). This arrangement has
been customarily resorted to since the 1960s and the procedure has proven to be problem-free. PRCI and
the petitioner Gregorio H. Reyes, acting through Godofredo, agreed to this arrangement or approach in
order to effect the urgent transfer of Australian dollars payable to the Secretariat of the 20 Asian Racing
Conference.
th

On July 28, 1988, the respondent bank approved the said application of PRCI and issued Foreign
Exchange Demand Draft (FXDD) No. 209968 in the sum applied for, that is, One Thousand Six Hundred
Ten Australian Dollars (AU$1,610.00), payable to the order of the 20 Asian Racing Conference
Secretariat of Sydney, Australia, and addressed to Westpac-Sydney as the drawee bank.
th

On August 10, 1988, upon due presentment of the foreign exchange demand draft, denominated as
FXDD No. 209968, the same was dishonored, with the notice of dishonor stating the following: xxx No
account held with Westpac. Meanwhile, on August 16, 1988, Westpac-New York sent a cable to
respondent bank informing the latter that its dollar account in the sum of One Thousand Six Hundred Ten
Australian Dollars (AU$1,610.00) was debited. On August 19, 1988, in response to PRCIs complaint
about the dishonor of the said foreign exchange demand draft, respondent bank informed Westpac-Sydney
of the issuance of the said demand draft FXDD No. 209968, drawn against the Westpac-Sydney and
informing the latter to be reimbursed from the respondent banks dollar account in Westpac-New
York. The respondent bank on the same day likewise informed Westpac-New York requesting the latter to
honor the reimbursement claim of Westpac-Sydney. On September 14, 1988, upon its second
presentment for payment, FXDD No. 209968 was again dishonored by Westpac-Sydney for the same
reason, that is, that the respondent bank has no deposit dollar account with the drawee Westpac-Sydney.
On September 17, 1988 and September 18, 1988, respectively, petitioners spouses Gregorio H.
Reyes and Consuelo Puyat-Reyes left for Australia to attend the said racing conference. When petitioner
Gregorio H. Reyes arrived in Sydney in the morning of September 18, 1988, he went directly to the lobby
of Hotel Regent Sydney to register as a conference delegate. At the registration desk, in the presence of
other delegates from various member countries, he was told by a lady member of the conference
secretariat that he could not register because the foreign exchange demand draft for his registration fee
had been dishonored for the second time. A discussion ensued in the presence and within the hearing of
many delegates who were also registering. Feeling terribly embarrassed and humiliated, petitioner
Gregorio H. Reyes asked the lady member of the conference secretariat that he be shown the subject
foreign exchange demand draft that had been dishonored as well as the covering letter after which he
promised that he would pay the registration fees in cash. In the meantime he demanded that he be given
his name plate and conference kit. The lady member of the conference secretariat relented and gave him
his name plate and conference kit. It was only two (2) days later, or on September 20, 1988, that he was
given the dishonored demand draft and a covering letter. It was then that he actually paid in cash the
registration fees as he had earlier promised.
Meanwhile, on September 19, 1988, petitioner Consuelo Puyat-Reyes arrived in Sydney. She too
was embarrassed and humiliated at the registration desk of the conference secretariat when she was told
in the presence and within the hearing of other delegates that she could not be registered due to the
dishonor of the subject foreign exchange demand draft. She felt herself trembling and unable to look at

the people around her. Fortunately, she saw her husband coming toward her. He saved the situation for
her by telling the secretariat member that he had already arranged for the payment of the registration fees
in cash once he was shown the dishonored demand draft. Only then was petitioner Puyat-Reyes given her
name plate and conference kit.
At the time the incident took place, petitioner Consuelo Puyat-Reyes was a member of the House of
Representatives representing the lone Congressional District of Makati, Metro Manila. She has been an
officer of the Manila Banking Corporation and was cited by Archbishop Jaime Cardinal Sin as the top
lady banker of the year in connection with her conferment of the Pro-Ecclesia et Pontifice Award. She
has also been awarded a plaque of appreciation from the Philippine Tuberculosis Society for her
extraordinary service as the Societys campaign chairman for the ninth (9 ) consecutive year.
th

On November 23, 1988, the petitioners filed in the Regional Trial Court of Makati, Metro Manila, a
complaint for damages, docketed as Civil Case No. 88-2468, against the respondent bank due to the
dishonor of the said foreign exchange demand draft issued by the respondent bank. The petitioners claim
that as a result of the dishonor of the said demand draft, they were exposed to unnecessary shock, social
humiliation, and deep mental anguish in a foreign country, and in the presence of an international
audience.
On November 12, 1992, the trial court rendered judgment in favor of the defendant (respondent
bank) and against the plaintiffs (herein petitioners), the dispositive portion of which states:

WHEREFORE, judgment is hereby rendered in favor of the defendant, dismissing plaintiffs

complaint, and ordering plaintiffs to pay to defendant, on its counterclaim, the amount of
P50,000.00, as reasonable attorneys fees. Costs against the plaintiff.
SO ORDERED.

[5]

The petitioners appealed the decision of the trial court to the Court of Appeals. On July 22, 1994, the
appellate court affirmed the decision of the trial court but in effect deleted the award of attorneys fees to
the defendant (herein respondent bank) and the pronouncement as to the costs. The decretal portion of
the decision of the appellate court states:

WHEREFORE, the judgment appealed from, insofar as it dismisses plaintiffs complaint, is

hereby AFFIRMED, but is hereby REVERSED and SET ASIDE in all other respect. No special
pronouncement as to costs.
SO ORDERED.

[6]

According to the appellate court, there is no basis to hold the respondent bank liable for damages for
the reason that it exerted every effort for the subject foreign exchange demand draft to be honored. The
appellate court found and declared that:
xxx

xxx

xxx

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

xxx

xxx

xxx

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

I

THE HONORABLE COURT OF APPEALS ERRED IN FINDING PRIVATE

RESPONDENT NOT NEGLIGENT BY ERRONEOUSLY APPLYING THE STANDARD
OF DILIGENCE OF AN ORDINARY PRUDENT PERSON WHEN IN TRUTH A
HIGHER DEGREE OF DILIGENCE IS IMPOSED BY LAW UPON THE BANKS.
II

THE HONORABLE COURT OF APPEALS ERRED IN ABSOLVING PRIVATE

RESPONDENT FROM LIABILITY BY OVERLOOKING THE FACT THAT THE

DISHONOR OF THE DEMAND DRAFT WAS A BREACH OF PRIVATE

RESPONDENTS WARRANTY AS THE DRAWER THEREOF.
III

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT AS

SHOWN OVERWHELMINGLY BY THE EVIDENCE, THE DISHONOR OF THE
DEMAND DRAFT WAS DUE TO PRIVATE RESPONDENTS NEGLIGENCE AND
NOT THE DRAWEE BANK.
[8]

The petitioners contend that due to the fiduciary nature of the relationship between the respondent
bank and its clients, the respondent bank should have exercised a higher degree of diligence than that
expected of an ordinary prudent person in the handling of its affairs as in the case at bar. The appellate
court, according to petitioners, erred in applying the standard of diligence of an ordinary prudent person
only. Petitioners also claim that the respondent bank violated Section 61 of the Negotiable Instruments
Law which provides the warranty of a drawer that xxx on due presentment, the instrument will be
accepted or paid, or both, according to its tenor xxx. Thus, the petitioners argue that respondent bank
should be held liable for damages for violation of this warranty. The petitioners pray this Court to reexamine the facts to cite certain instances of negligence.
[9]

It is our view and we hold that there is no reversible error in the decision of the appellate court.
Section 1 of Rule 45 of the Revised Rules of Court provides that (T)he petition (for review) shall
raise only questions of law which must be distinctly set forth. Thus, we have ruled that factual findings
of the Court of Appeals are conclusive on the parties and not reviewable by this Court and they carry
even more weight when the Court of Appeals affirms the factual findings of the trial court.
[10]

The courts a quo found that respondent bank did not misrepresent that it was maintaining a deposit
account with Westpac-Sydney. Respondent banks assistant cashier explained to Godofredo Reyes,
representating PRCI and petitioner Gregorio H. Reyes, how the transfer of Australian dollars would be
effected through Westpac-New York where the respondent bank has a dollar account to Westpac-Sydney
where the subject foreign exchange demand draft (FXDD No. 209968) could be encashed by the payee,
the 20 Asian Racing Conference Secretatriat. PRCI and its Vice-President for finance, petitioner
Gregorio H. Reyes, through their said representative, agreed to that arrangement or procedure. In other
words, the petitioners are estopped from denying the said arrangement or procedure. Similar
arrangements have been a long standing practice in banking to facilitate international commercial
transactions. In fact, the SWIFT cable message sent by respondent bank to the drawee bank, WestpacSydney, stated that it may claim reimbursement from its New York branch, Westpac-New York where
respondent bank has a deposit dollar account.
th

The facts as found by the courts a quo show that respondent bank did not cause an erroneous
transmittal of its SWIFT cable message to Westpac-Sydney. It was the erroneous decoding of the cable
message on the part of Westpac-Sydney that caused the dishonor of the subject foreign exchange demand
draft. An employee of Westpac-Sydney in Sydney, Australia mistakenly read the printed figures in the

SWIFT cable message of respondent bank as MT799 instead of as MT199. As a result, WestpacSydney construed the said cable message as a format for a letter of credit, and not for a demand
draft. The appellate court correctly found that the figure before 99 can still be distinctly seen as a
number 1 and not number 7. Indeed, the line of a 7 is in a slanting position while the line of a 1 is
in a horizontal position. Thus, the number 1 in MT199 cannot be construed as 7.
[11]

The evidence also shows that the respondent bank exercised that degree of diligence expected of an
ordinary prudent person under the circumstances obtaining. Prior to the first dishonor of the subject
foreign exchange demand draft, the respondent bank advised Westpac-New York to honor the
reimbursement claim of Westpac-Sydney and to debit the dollar account of respondent bank with the
former. As soon as the demand draft was dishonored, the respondent bank, thinking that the problem was
with the reimbursement and without any idea that it was due to miscommunication, re-confirmed the
authority of Westpac-New York to debit its dollar account for the purpose of reimbursing WestpacSydney. Respondent bank also sent two (2) more cable messages to Westpac-New York inquiring why
the demand draft was not honored.
[12]

[13]

[14]

With these established facts, we now determine the degree of diligence that banks are required to
exert in their commercial dealings. In Philippine Bank of Commerce v. Court of Appeals upholding a
long standing doctrine, we ruled that the degree of diligence required of banks, is more than that of
a good father of a family where the fiduciary nature of their relationship with their depositors is
concerned. In other words banks are duty bound to treat the deposit accounts of their depositors with
the highest degree of care. But the said ruling applies only to cases where banks act under their fiduciary
capacity, that is, as depositary of the deposits of their depositors. But the same higher degree of diligence
is not expected to be exerted by banks in commercial transactions that do not involve their fiduciary
relationship with their depositors.
[15]

Considering the foregoing, the respondent bank was not required to exert more than the diligence of
a good father of a family in regard to the sale and issuance of the subject foreign exchange demand
draft. The case at bar does not involve the handling of petitioners deposit, if any, with the respondent
bank. Instead, the relationship involved was that of a buyer and seller, that is, between the respondent
bank as the seller of the subject foreign exchange demand draft, and PRCI as the buyer of the same, with
the 20 Asian Racing Conference Secretariat in Sydney, Australia as the payee thereof. As earlier
mentioned, the said foreign exchange demand draft was intended for the payment of the registration fees
of the petitioners as delegates of the PRCI to the 20 Asian Racing Conference in Sydney.
th

th

The evidence shows that the respondent bank did everything within its power to prevent the dishonor
of the subject foreign exchange demand draft. The erroneous reading of its cable message to WestpacSydney by an employee of the latter could not have been foreseen by the respondent bank. Being
unaware that its employee erroneously read the said cable message, Westpac-Sydney merely stated that
the respondent bank has no deposit account with it to cover for the amount of One Thousand Six Hundred
Ten Australian Dollar (AU$1610.00) indicated in the foreign exchange demand draft. Thus, the
respondent bank had the impression that Westpac-New York had not yet made available the amount for
reimbursement to Westpac-Sydney despite the fact that respondent bank has a sufficient deposit dollar
account with Westpac-New York. That was the reason why the respondent bank had to re-confirm and

repeatedly notify Westpac-New York to debit its (respondent banks) deposit dollar account with it and to
transfer or credit the corresponding amount to Westpac-Sydney to cover the amount of the said demand
draft.
In view of all the foregoing, and considering that the dishonor of the subject foreign exchange
demand draft is not attributable to any fault of the respondent bank, whereas the petitioners appeared to
be under estoppel as earlier mentioned, it is no longer necessary to discuss the alleged application of
Section 61 of the Negotiable Instruments Law to the case at bar. In any event, it was established that the
respondent bank acted in good faith and that it did not cause the embarrassment of the petitioners in
Sydney, Australia. Hence, the Court of Appeals did not commit any reversable error in its challenged
decision.
WHEREFORE, the petition is hereby DENIED, and the assailed decision of the Court of Appeals is
AFFIRMED. Costs against the petitioners.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Quisumbing, and Buena, JJ., concur.

G.R. No. L-47757

April 7, 1942

ANA RIVERA, plaintiff-appellant,

vs.
PEOPLES BANK AND TRUST CO., defendant-appellee.
MINNIE STEPHENSON, in her capacity as administratix of the intestate estate of EDGAR
Stephenson,intervenor-appellee.
Cecilio I. Lim, Chief Public Defender, for appellant.
Antonio M. Opisso for intervenor-appellee.
No appearance for appellee Peoples Bank & Trust Co.
OZAETA, J.:
The question raised in this appeal is the validity of the survivorship agreement made by and between
Edgar Stephenson, now deceased, and Ana Rivera, appellant herein, which read as follows:
SURVIVORSHIP AGREEMENT
Know All Men by These Presents:
That we hereby agree with each other and with the PEOPLES BANK AND TRUST COMPANY,
Manila, Philippine Islands (hereinafter called the Bank), that all moneys now or hereafter
deposited by us or either of us with the Bank in our savings account shall be deposited in and
received by the Bank with the understanding and upon the condition that said money be
deposited without consideration of its previous ownership, and that said money and all interest

thereon, if any there be, shall be the property of both of us joint tenants, and shall be payable to
and collectible by either of us during our joint lives, and after the death of one of us shall belong
to and be the sole property of the survivor, and shall be payable to and collectible by such
survivor.
And we further covenant and agree with each other and the Bank, its successors or assigns, that
the receipt or check of either of us during our joint lives, or the receipt or check of the survivor, for
any payment made from this account, and shall be valid and sufficient and discharge to the Bank
for such payment.
The Bank is hereby authorized to accept and deposit to this account all checks made payable to
either or both of us, when endorsed by either or both of us or one for the other.
This is a joint and several agreement and is binding upon each of us, our heirs, executors,
administrators, and assigns.
In witness whereof we have signed our names here to this 17th day of October, 1931.

(Sgd.) EDGAR STEPHENSON

(Sgd.) Ana Rivera
Address: 799 Sta. Mesa, Manila

Witness:
(Sgd.) FRED W. BOHLER
(Sgd.) Y. E. Cox
S. A. #4146
Ana Rivera was employed by Edgar Stephenson as housekeeper from the year 1920 until his death on
June 8, 1939. On December 24, Stephenson opened an account in his name with the defendant Peoples
Bank by depositing therein the sum of P1,000. On October 17, 1931, when there was a balance of P2,072
in said account, the survivorship agreement in question was executed and the said account was
transferred to the name of "Edgar Stephenson and/or Ana Rivera." At the time of Stephenson's death Ana
Rivera held the deposit book, and there was a balance in said account of P701. 43, which Ana Rivera
claimed but which the bank refused to pay to her upon advice of its attorneys who gave the opinion that
the survivorship agreement was of doubtful validity. Thereupon Ana Rivera instituted the present action
against the bank, and Minnie Stephenson, administratix of the estate of the deceased, intervened and
claimed the amount for the estate, alleging that the money deposited in said account was and is the
exclusive property of the deceased.
The trial court held that the agreement in question, viewed from its effect during the lives of the parties,
was a mere power of attorney authorizing Ana Rivera to withdraw the deposit, which power terminated
upon the death of the principal, Edgar Stephenson; but that, viewed from its effect after the death of either
of the parties, the agreement was a donation mortis causa with reference to the balance remaining at the
death of one of them, which, not having been executed with the formalities of a testamentary disposition
as required by article 620 of the Civil Code, was of no legal effect.
The defendant bank did not appear in this Court. Counsel for the intervenor-appellee in his brief contends
that the survivorship agreement was a donation mortis causa from Stephenson to Ana Rivera of the bank
account in question and that, since it was not executed with the formalities of a will, it can have no legal
effect.

We find no basis for the conclusion that the survivorship agreement was a mere power of attorney from
Stephenson to Ana Rivera, or that it is a gift mortis causa of the bank account in question from him to her.
Such conclusion is evidently predicated on the assumption that Stephenson was the exclusive owner of
the funds deposited in the bank, which assumption was in turn based on the facts (1) that the account
was originally opened in the name of Stephenson alone and (2) that Ana Rivera "served only as
housemaid of the deceased." But it not infrequently happens that a person deposits money in the bank in
the name of another; and in the instant case it also appears that Ana Rivera served her master for about
nineteen years without actually receiving her salary from him. The fact that subsequently Stephenson
transferred the account to the name of himself and/or Ana Rivera and executed with the latter the
survivorship agreement in question although there was no relation of kinship between them but only that
of master and servant, nullifies the assumption that Stephenson was the exclusive owner of the bank
account. In the absence, then, of clear proof of the contrary, we must give full faith and credit to the
certificate of deposit, which recites in effect that the funds in question belonged to Edgar Stephenson and
Ana Rivera; that they were joint owners thereof; and that either of them could withdraw any part or the
whole of said account during the lifetime of both, and the balance, if any, upon the death of either,
belonged to the survivor.
Is the survivorship agreement valid? Prima facie, we think it is valid. It is an aleatory contract supported
by law a lawful consideration the mutual agreement of the joint depositors permitting either of them to
withdraw the whole deposit during their lifetime, and transferring the balance to the survivor upon the
death of one of them. The trial court said that the Civil Code "contains no provisions sanctioning such an
agreement" We think it is covered by article 1790 of the Civil Code, which provides as follows:
ART. 1790. By an aleatory contract one of the parties binds himself, or both reciprocally bind
themselves, to give or to do something as an equivalent for that which the other party is to give or
do in case of the occurrence of an event which is uncertain or will happen at an indeterminate
time.
(See also article 1255.)
The case of Macam vs. Gatmaitan (decided March 11, 1937), 36 Off. Gaz., 2175, is in point. Two friends
Juana Gatmaitan and Leonarda Macam, who had lived together for some time, agreed in writing that the
house of strong materials which they bought with the money belonging to Leonarda Macam and the Buick
automobile and certain furniture which belonged to Juana Gatmaitan shall belong to the survivor upon the
death of one of them and that "this agreement shall be equivalent to a transfer of the rights of the one
who dies first and shall be kept by the survivor." After the death of Leonarda Macam, her executrix
assailed that document on the ground that with respect to the house the same constituted a
donation mortis causa by Leonarda Macam in favor of Juana Gatmaitan. In affirming the judgment of the
trial court absolving the defendants from the complaint this Court, speaking through Chief Justice
Avacea, said:
This court is of the opinion that Exhibit C is an aleatory contract whereby, according to article
1790 of the civil Code, one of the parties or both reciprocally bind themselves to give or do
something as an equivalent for that which the other party is to give or do in case of the
occurrence of an event which is uncertain or will happen at an indeterminate time. As already
stated, Leonarda was the owner of the house and Juana of the Buick automobile and most of the
furniture. By virtue of Exhibit C, Juana would become the owner of the house in case Leonarda
died first, and Leonarda would become the owner of the automobile and the furniture if Juana
were to die first. In this manner Leonarda and Juana reciprocally assigned their respective
property to one another conditioned upon who might die first, the time of death determining the
event upon which the acquisition of such right by the one or the other depended. This contract, as
any other contract, is binding upon the parties thereto. Inasmuch as Leonarda had died before
Juana, the latter thereupon acquired the ownership of the house, in the same manner as
Leonarda would have acquired the ownership of the automobile of the furniture if Juana had died
first. (36 Off. Gaz., 2176.)

Furthermore, "it is well established that a bank account may be so created that two persons shall be joint
owners thereof during their mutual lives, and the survivor take the whole on the death of the other. The
right to make such joint deposits has generally been held not to be done with by statutes abolishing joint
tenancy and survivorship generally as they existed at common law." (7 Am. Jur., 299.)
But although the survivorship agreement is per se not contrary to law, its operation or effect may be
violative of the law. For instance, if it be shown in a given case that such agreement is a mere cloak to
hide an inofficious donation, to transfer property in fraud of creditors, or to defeat the legitime of a forced
heir, it may be assailed and annulled upon such grounds. No such vice has been imputed and established
against the agreement involved in the case.
The agreement appealed from is reversed and another judgment will be entered in favor of the plaintiff
ordering the defendant bank to pay to her the sum of P701.43, with legal interest thereon from the date of
the complaint, and the costs in both instances. So ordered.
Yulo, C.J., Moran, Paras, and Bocobo, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 88013 March 19, 1990
SIMEX INTERNATIONAL (MANILA), INCORPORATED, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and TRADERS ROYAL BANK, respondents.
Don P. Porcuincula for petitioner.
San Juan, Gonzalez, San Agustin & Sinense for private respondent.

CRUZ, J.:
We are concerned in this case with the question of damages, specifically moral and exemplary damages.
The negligence of the private respondent has already been established. All we have to ascertain is
whether the petitioner is entitled to the said damages and, if so, in what amounts.
The parties agree on the basic facts. The petitioner is a private corporation engaged in the exportation of
food products. It buys these products from various local suppliers and then sells them abroad, particularly
in the United States, Canada and the Middle East. Most of its exports are purchased by the petitioner on
credit.

The petitioner was a depositor of the respondent bank and maintained a checking account in its branch at
Romulo Avenue, Cubao, Quezon City. On May 25, 1981, the petitioner deposited to its account in the said
bank the amount of P100,000.00, thus increasing its balance as of that date to
P190,380.74. 1 Subsequently, the petitioner issued several checks against its deposit but was suprised to learn later
that they had been dishonored for insufficient funds.

The dishonored checks are the following:

1. Check No. 215391 dated May 29, 1981, in favor of California Manufacturing Company,
Inc. for P16,480.00:
2. Check No. 215426 dated May 28, 1981, in favor of the Bureau of Internal Revenue in
the amount of P3,386.73:
3. Check No. 215451 dated June 4, 1981, in favor of Mr. Greg Pedreo in the amount of
P7,080.00;
4. Check No. 215441 dated June 5, 1981, in favor of Malabon Longlife Trading
Corporation in the amount of P42,906.00:
5. Check No. 215474 dated June 10, 1981, in favor of Malabon Longlife Trading
Corporation in the amount of P12,953.00:
6. Check No. 215477 dated June 9, 1981, in favor of Sea-Land Services, Inc. in the
amount of P27,024.45:
7. Check No. 215412 dated June 10, 1981, in favor of Baguio Country Club Corporation
in the amount of P4,385.02: and
8. Check No. 215480 dated June 9, 1981, in favor of Enriqueta Bayla in the amount of
P6,275.00. 2
As a consequence, the California Manufacturing Corporation sent on June 9, 1981, a letter of demand to
the petitioner, threatening prosecution if the dishonored check issued to it was not made good. It also
withheld delivery of the order made by the petitioner. Similar letters were sent to the petitioner by the
Malabon Long Life Trading, on June 15, 1981, and by the G. and U. Enterprises, on June 10, 1981.
Malabon also canceled the petitioner's credit line and demanded that future payments be made by it in
cash or certified check. Meantime, action on the pending orders of the petitioner with the other suppliers
whose checks were dishonored was also deferred.
The petitioner complained to the respondent bank on June 10, 1981. 3 Investigation disclosed that the sum of
P100,000.00 deposited by the petitioner on May 25, 1981, had not been credited to it. The error was rectified on June
17, 1981, and the dishonored checks were paid after they were re-deposited. 4

In its letter dated June 20, 1981, the petitioner demanded reparation from the respondent bank for its
"gross and wanton negligence." This demand was not met. The petitioner then filed a complaint in the
then Court of First Instance of Rizal claiming from the private respondent moral damages in the sum of
P1,000,000.00 and exemplary damages in the sum of P500,000.00, plus 25% attorney's fees, and costs.

After trial, Judge Johnico G. Serquinia rendered judgment holding that moral and exemplary damages
were not called for under the circumstances. However, observing that the plaintiff's right had been
violated, he ordered the defendant to pay nominal damages in the amount of P20,000.00 plus P5,000.00
attorney's fees and costs. 5 This decision was affirmed in toto by the respondent court. 6
The respondent court found with the trial court that the private respondent was guilty of negligence but
agreed that the petitioner was nevertheless not entitled to moral damages. It said:
The essential ingredient of moral damages is proof of bad faith (De Aparicio vs.
Parogurga, 150 SCRA 280). Indeed, there was the omission by the defendant-appellee
bank to credit appellant's deposit of P100,000.00 on May 25, 1981. But the bank rectified
its records. It credited the said amount in favor of plaintiff-appellant in less than a month.
The dishonored checks were eventually paid. These circumstances negate any
imputation or insinuation of malicious, fraudulent, wanton and gross bad faith and
negligence on the part of the defendant-appellant.
It is this ruling that is faulted in the petition now before us.
This Court has carefully examined the facts of this case and finds that it cannot share some of the
conclusions of the lower courts. It seems to us that the negligence of the private respondent had been
brushed off rather lightly as if it were a minor infraction requiring no more than a slap on the wrist. We feel
it is not enough to say that the private respondent rectified its records and credited the deposit in less
than a month as if this were sufficient repentance. The error should not have been committed in the first
place. The respondent bank has not even explained why it was committed at all. It is true that the
dishonored checks were, as the Court of Appeals put it, "eventually" paid. However, this took almost a
month when, properly, the checks should have been paid immediately upon presentment.
As the Court sees it, the initial carelessness of the respondent bank, aggravated by the lack of
promptitude in repairing its error, justifies the grant of moral damages. This rather lackadaisical attitude
toward the complaining depositor constituted the gross negligence, if not wanton bad faith, that the
respondent court said had not been established by the petitioner.
We also note that while stressing the rectification made by the respondent bank, the decision practically
ignored the prejudice suffered by the petitioner. This was simply glossed over if not, indeed, disbelieved.
The fact is that the petitioner's credit line was canceled and its orders were not acted upon pending
receipt of actual payment by the suppliers. Its business declined. Its reputation was tarnished. Its standing
was reduced in the business community. All this was due to the fault of the respondent bank which was
undeniably remiss in its duty to the petitioner.
Article 2205 of the Civil Code provides that actual or compensatory damages may be received "(2) for
injury to the plaintiff s business standing or commercial credit." There is no question that the petitioner did
sustain actual injury as a result of the dishonored checks and that the existence of the loss having been
established "absolute certainty as to its amount is not required." 7 Such injury should bolster all the more the
demand of the petitioner for moral damages and justifies the examination by this Court of the validity and
reasonableness of the said claim.

We agree that moral damages are not awarded to penalize the defendant but to compensate the plaintiff
for the injuries he may have suffered. 8 In the case at bar, the petitioner is seeking such damages for the
prejudice sustained by it as a result of the private respondent's fault. The respondent court said that the claimed

losses are purely speculative and are not supported by substantial evidence, but if failed to consider that the amount
of such losses need not be established with exactitude precisely because of their nature. Moral damages are not
susceptible of pecuniary estimation. Article 2216 of the Civil Code specifically provides that "no proof of pecuniary
loss is necessary in order that moral, nominal, temperate, liquidated or exemplary damages may be adjudicated."
That is why the determination of the amount to be awarded (except liquidated damages) is left to the sound discretion
of the court, according to "the circumstances of each case."

From every viewpoint except that of the petitioner's, its claim of moral damages in the amount of
P1,000,000.00 is nothing short of preposterous. Its business certainly is not that big, or its name that
prestigious, to sustain such an extravagant pretense. Moreover, a corporation is not as a rule entitled to
moral damages because, not being a natural person, it cannot experience physical suffering or such
sentiments as wounded feelings, serious anxiety, mental anguish and moral shock. The only exception to
this rule is where the corporation has a good reputation that is debased, resulting in its social
humiliation. 9
We shall recognize that the petitioner did suffer injury because of the private respondent's negligence that
caused the dishonor of the checks issued by it. The immediate consequence was that its prestige was
impaired because of the bouncing checks and confidence in it as a reliable debtor was diminished. The
private respondent makes much of the one instance when the petitioner was sued in a collection case,
but that did not prove that it did not have a good reputation that could not be marred, more so since that
case was ultimately settled. 10 It does not appear that, as the private respondent would portray it, the petitioner is
an unsavory and disreputable entity that has no good name to protect.

Considering all this, we feel that the award of nominal damages in the sum of P20,000.00 was not the
proper relief to which the petitioner was entitled. Under Article 2221 of the Civil Code, "nominal damages
are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant,
may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered
by him." As we have found that the petitioner has indeed incurred loss through the fault of the private
respondent, the proper remedy is the award to it of moral damages, which we impose, in our discretion, in
the same amount of P20,000.00.
Now for the exemplary damages.
The pertinent provisions of the Civil Code are the following:
Art. 2229. Exemplary or corrective damages are imposed, by way of example or
correction for the public good, in addition to the moral, temperate, liquidated or
compensatory damages.
Art. 2232. In contracts and quasi-contracts, the court may award exemplary damages if
the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.
The banking system is an indispensable institution in the modern world and plays a vital role in the
economic life of every civilized nation. Whether as mere passive entities for the safekeeping and saving of
money or as active instruments of business and commerce, banks have become an ubiquitous presence
among the people, who have come to regard them with respect and even gratitude and, most of all,
confidence. Thus, even the humble wage-earner has not hesitated to entrust his life's savings to the bank
of his choice, knowing that they will be safe in its custody and will even earn some interest for him. The
ordinary person, with equal faith, usually maintains a modest checking account for security and

convenience in the settling of his monthly bills and the payment of ordinary expenses. As for business
entities like the petitioner, the bank is a trusted and active associate that can help in the running of their
affairs, not only in the form of loans when needed but more often in the conduct of their day-to-day
transactions like the issuance or encashment of checks.
In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such
account consists only of a few hundred pesos or of millions. The bank must record every single
transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the
account is to reflect at any given time the amount of money the depositor can dispose of as he sees fit,
confident that the bank will deliver it as and to whomever he directs. A blunder on the part of the bank,
such as the dishonor of a check without good reason, can cause the depositor not a little embarrassment
if not also financial loss and perhaps even civil and criminal litigation.
The point is that as a business affected with public interest and because of the nature of its functions, the
bank is under obligation to treat the accounts of its depositors with meticulous care, always having in
mind the fiduciary nature of their relationship. In the case at bar, it is obvious that the respondent bank
was remiss in that duty and violated that relationship. What is especially deplorable is that, having been
informed of its error in not crediting the deposit in question to the petitioner, the respondent bank did not
immediately correct it but did so only one week later or twenty-three days after the deposit was made. It
bears repeating that the record does not contain any satisfactory explanation of why the error was made
in the first place and why it was not corrected immediately after its discovery. Such ineptness comes
under the concept of the wanton manner contemplated in the Civil Code that calls for the imposition of
exemplary damages.
After deliberating on this particular matter, the Court, in the exercise of its discretion, hereby imposes
upon the respondent bank exemplary damages in the amount of P50,000.00, "by way of example or
correction for the public good," in the words of the law. It is expected that this ruling will serve as a
warning and deterrent against the repetition of the ineptness and indefference that has been displayed
here, lest the confidence of the public in the banking system be further impaired.
ACCORDINGLY, the appealed judgment is hereby MODIFIED and the private respondent is ordered to
pay the petitioner, in lieu of nominal damages, moral damages in the amount of P20,000.00, and
exemplary damages in the amount of P50,000.00 plus the original award of attorney's fees in the amount
of P5,000.00, and costs.
SO ORDERED.
Narvasa, Gancayco, Grino-Aquino and Medialdea, JJ., concur.

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.

Cirilo Lim and Antonio Gonzalez for appellant.

Eusebio Orense and Carmelino G. Alvendia for appellees Chinese Grocers Asso., et al.
Marcelo Nubla for appellees Ang Cheng Lian, et al.
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 trustreceipts.
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 bylaws 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 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
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 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.
Avancea, C.J., Villa-Real, Abad Santos, Diaz and Horrilleno, JJ., concur.

SECOND DIVISION
[G.R. No. 147800. November 11, 2003]
UNITED COCONUT PLANTERS BANK, petitioner, vs. TEOFILO C. RAMOS, respondent.
DECISION
CALLEJO, SR., J.:

Before us is a petition for review on certiorari of the March 30, 2001 Decision of the Court of
Appeals in CA-G.R. CV No. 56737 which affirmed the Decision of the Regional Trial Court (RTC) of
Makati City, Branch 148, in Civil Case No. 94-1822.
[1]

[2]

The Antecedents
On December 22, 1983, the petitioner United Coconut Planters Bank (UCPB) granted a loan
of P2,800,000 to Zamboanga Development Corporation (ZDC) with Venicio Ramos and the Spouses
Teofilo Ramos, Sr. and Amelita Ramos as sureties. Teofilo Ramos, Sr. was the Executive Officer of
the Iglesia ni Cristo. In March 1984, the petitioner granted an additional loan to ZDC, again with Venicio
Ramos and the Spouses Teofilo Ramos and Amelita Ramos as sureties. However, the ZDC failed to pay
its account to the petitioner despite demands. The latter filed a complaint with the RTC of Makati against
the ZDC, Venicio Ramos and the Spouses Teofilo Ramos, Sr. for the collection of the corporations
account. The case was docketed as Civil Case No. 16453. On February 15, 1989, the RTC of Makati,
Branch 134, rendered judgment in favor of the petitioner and against the defendants. The decretal
portion of the decision reads:
[3]

1.

To pay plaintiff the sum of THREE MILLION ONE HUNDRED FIFTY THOUSAND
PESOS (P3,150,000.00) plus interest, penalties and other charges;

2.

To pay plaintiff the sum of P20,000.00 for attorneys fees; and

3.

To pay the cost of suit.

[4]

The decision became final and executory. On motion of the petitioner, the court issued on December
18, 1990 a writ of execution for the enforcement of its decision ordering Deputy Sheriff Pioquinto P.
Villapaa to levy and attach all the real and personal properties belonging to the aforesaid defendants to
satisfy the judgment. In the writ of execution, the name of one of the defendants was correctly stated as
Teofilo Ramos, Sr.
[5]

To help the Sheriff implement the writ, Atty. Cesar Bordalba, the head of the Litigation and
Enforcement Division (LED) of the petitioner, requested Eduardo C. Reniva, an appraiser of the
petitioners Credit and Appraisal Investigation Department (CAID) on July 17, 1992 to ascertain if the
defendants had any leviable real and personal property. The lawyer furnished Reniva with a copy of Tax
Declaration B-023-07600-R covering a property in Quezon City. In the course of his investigation, Reniva
found that the property was a residential lot, identified as Lot 12, Block 5, Ocampo Avenue, Don Jose
[6]

Subdivision, Quezon City, with an area of 400 square meters, covered by TCT No. 275167 (PR-13108)
under the name of Teofilo C. Ramos, President and Chairman of the Board of Directors of the
Ramdustrial Corporation, married to Rebecca F. Ramos. The property was covered by Tax Declaration
No. B-023-07600-R under the names of the said spouses. Reniva went to the property to inspect it and to
verify the identity of the owner thereof. He saw workers on the property constructing a bungalow.
However, he failed to talk to the owner of the property. Per information gathered from the neighborhood,
Reniva confirmed that the Spouses Teofilo C. Ramos and Rebecca Ramos owned the property.
[7]

[8]

On July 22, 1992, Reniva submitted a report on his appraisal of the property. He stated therein that
the fair market value of the property as of August 1, 1992 was P900,000 and that the owner thereof was
Teofilo C. Ramos, married to Rebecca Ramos. When appraised by the petitioner of the said report, the
Sheriff prepared a notice of levy in Civil Case No. 16453 stating, inter alia, that the defendants were
Teofilo Ramos, Sr. and his wife Amelita Ramos and caused the annotation thereof by the Register of
Deeds on the said title.
[9]

Meanwhile, in August of 1993, Ramdustrial Corporation applied for a loan with the UCPB, a sister
company of the petitioner, using the property covered by TCT No. 275167 (PR-13108) as collateral
therefor. The Ramdustrial Corporation intended to use the proceeds of the loan as additional capital as it
needed to participate in a bidding project of San Miguel Corporation. In a meeting called for by the
UCPB, the respondent was informed that upon verification, a notice of levy was annotated in TCT No.
275167 in favor of the petitioner as plaintiff in Civil Case No. 16453, entitled United Coconut Planters
Bank v. Zamboanga Realty Development Corporation, Venicio A. Ramos and Teofilo Ramos, Sr., because
of which the bank had to hold in abeyance any action on its loan application.
[10]

The respondent was shocked by the information. He was not a party in the said case; neither was
he aware that his property had been levied by the sheriff in the said case. His blood temperature rose so
much that immediately after the meeting, he proceeded to his doctor, Dr. Gatchalian, at the St. Lukes
Medical Center, who gave the respondent the usual treatment and medication for cardio-vascular and
hypertension problems.
[11]

Upon advise from his lawyer, Atty. Carmelito Montano, the respondent executed an affidavit of
denial declaring that he and Teofilo Ramos, Sr., one of the judgment debtors in Civil Case No. 16453,
were not one and the same person. On September 30, 1993, the respondent, through counsel, Atty.
Carmelito A. Montano, wrote Sheriff Villapaa, informing him that a notice of levy was annotated on the
title of the residential lot of the respondent, covered by TCT No. 275167 (PR-13108); and that such
annotation was irregular and unlawful considering that the respondent was not Teofilo Ramos, Sr.
ofIglesia ni Cristo, the defendant in Civil Case No. 16453. He demanded that Sheriff Villapaa cause the
cancellation of the said annotation within five days from notice thereof, otherwise the respondent would
take the appropriate civil, criminal or administrative action against him. Appended thereto was the
respondents affidavit of denial. For his part, Sheriff Villapaa furnished the petitioner with a copy of the
said letter.
[12]

In a conversation over the phone with Atty. Carmelito Montano, Atty. Cesar Bordalba, the head of the
petitioners LED, suggested that the respondent file the appropriate pleading in Civil Case No. 16453 to
prove his claim that Atty. Montanos client, Teofilo C. Ramos, was not defendant Teofilo Ramos, Sr., the
defendant in Civil Case No. 16453.

On October 21, 1993, the respondent was informed by the UCPB that Ramdustrial Corporations
credit line application for P2,000,000 had been approved. Subsequently, on October 22, 1993, the
respondent, in his capacity as President and Chairman of the Board of Directors of Ramdustrial
Corporation, and Rebecca F. Ramos executed a promissory note for the said amount payable to the
UCPB in installments for a period of 180 days. Simultaneously, the respondent and his wife Rebecca F.
Ramos acted as sureties to the loan of Ramdustrial Corporation. However, the respondent was
concerned because when the proceeds of the loan were released, the bidding period for the San Miguel
Corporation project had already elapsed. As business did not go well, Ramdustrial Corporation found it
difficult to pay the loan. It thus applied for an additional loan with the UCPB which was, however,
denied. The corporation then applied for a loan with the Planters Development Bank (PDB), the proceeds
of which would be used to pay its account to the UCPB. The respondent offered to use his property
covered by TCT No. 275167 as collateral for its loan. PDB agreed to pay off the outstanding loan
obligation of Ramdustrial Corporation with UCPB, on the condition that the mortgage with the latter would
be released. UCPB agreed. Pending negotiations with UCPB, the respondent discovered that the notice
of levy annotated on TCT No. 275167 (PR-13108) at the instance of the petitioner had not yet been
cancelled. When apprised thereof, PDB withheld the release of the loan pending the cancellation of the
notice of levy. The account of Ramdustrial Corporation with UCPB thus remained outstanding. The
monthly amortization on its loan from UCPB became due and remained unpaid. When the respondent
went to the petitioner for the cancellation of the notice of levy annotated on his title, the petitioners
counsel suggested to the respondent that he file a motion to cancel the levy on execution to enable the
court to resolve the issue. The petitioner assured the respondent that the motion would not be
opposed. Rather than wait for the petitioner to act, the respondent, through counsel, filed the said motion
on April 8, 1994. As promised, the petitioner did not oppose the motion. The court granted the motion
and issued an order on April 12, 1994 ordering the Register of Deeds to cancel the levy. The Register of
Deeds of Quezon City complied and cancelled the notice of levy.
[13]

[14]

[15]

[16]

[17]

[18]

Despite the cancellation of the notice of levy, the respondent filed, on May 26, 1994, a complaint for
damages against the petitioner and Sheriff Villapaa before the RTC of Makati City, raffled to Branch 148
and docketed as Civil Case No. 94-1822. Therein, the respondent (as plaintiff) alleged that he was the
owner of a parcel of land covered by TCT No. 275167; that Teofilo Ramos, Sr., one of the judgment
debtors of UCPB in Civil Case No. 16453, was only his namesake; that without any legal basis, the
petitioner and Sheriff Villapaa caused the annotation of a notice to levy on the TCT of his aforesaid
property which caused the disapproval of his loan from UCPB and, thus made him lose an opportunity to
participate in the bidding of a considerable project; that by reason of such wrongful annotation of notice of
levy, he suffered sleepless nights, moral shock, mental anguish and almost a heart attack due to high
blood pressure. He thus prayed:
WHEREFORE, premises considered, it is most respectfully prayed of the Honorable Regional Trial Court that after
due hearing, judgment be rendered in his favor by ordering defendants jointly and severally, to pay as follows:
1.

P3,000,000.00 as moral damages;

2.

300,000.00 as exemplary damages;

3.

200,000.00 as actual damages;

4.

200,000.00 as attorneys fees;

5.

Cost of suit.

[19]

In its answer, the petitioner, while admitting that it made a mistake in causing the annotation of notice
of levy on the TCT of the respondent, denied that it was motivated by malice and bad faith. The petitioner
alleged that after ascertaining that it indeed made a mistake, it proposed that the respondent file a motion
to cancel levy with a promise that it would not oppose the said motion. However, the respondent dillydallied and failed to file the said motion; forthwith, if any damages were sustained by the respondent, it
was because it took him quite a long time to file the motion. The petitioner should not thus be made to
suffer for the consequences of the respondents delay.
The petitioner further asserted that it had no knowledge that there were two persons bearing the
same name Teofilo Ramos; it was only when Sheriff Villapaa notified the petitioner that a certain Teofilo
C. Ramos who appeared to be the registered owner of TCT No. 275167 that it learned for the first time
the notice of levy on the respondents property; forthwith, the petitioner held in abeyance the sale of the
levied property at public auction; barred by the failure of the respondent to file a third-party claim in Civil
Case No. 16453, the petitioner could not cause the removal of the levy; in lieu thereof, it suggested to the
respondent the filing of a motion to cancel levy and that the petitioner will not oppose such motion;
surprisingly, it was only on April 12, 1994 that the respondent filed such motion; the petitioner was thus
surprised that the respondent filed an action for damages against it for his failure to secure a timely loan
from the UCPB and PDB. The petitioner thus prayed:
WHEREFORE, in view of the foregoing premises, it is respectfully prayed of this Honorable Court that judgment be
rendered in favor of defendant UCPB, dismissing the complaint in toto and ordering the plaintiff to:
1.

pay moral damages in the amount of PESOS: THREE MILLION P3,000,000.00 and exemplary
damages in the amount of PESOS: FIVE HUNDRED THOUSAND P500,000.00;

2.

pay attorneys fees and litigation expenses in an amount of not less than PESOS: TWO HUNDRED
THOUSAND P200,000.00;

Other reliefs and remedies deemed just and equitable under the premises are also prayed for.

[20]

In the meantime, in 1995, PDB released the proceeds of the loan of Ramdustrial Corporation which
the latter remitted to UCPB.
On March 4, 1997, the RTC rendered a decision in favor of the respondent. The complaint against
Sheriff Villapaa was dismissed on the ground that he was merely performing his duties. The decretal
part of the decision is herein quoted:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the defendant
UCPB, and the latter is hereby ordered to pay the following:
(1)

P800,000.00 as moral damages;

(2)

P100,000.00 as exemplary damages;

(3)

P100,000.00 as attorneys fees;

(4)

Cost of suit.

[21]

The trial court found that contrary to the contention of the petitioner, it acted with caution in looking
for leviable properties of the judgment debtors/defendants in Civil Case No. 16453, it proceeded with
haste as it did not take into consideration that the defendant Teofilo Ramos was married to Amelita
Ramos and had a Sr. in his name, while the respondent was married to Rebecca Ramos and had C for
his middle initial. The investigation conducted by CAID appraiser Eduardo C. Reniva did not conclusively
ascertain if the respondent and Teofilo Ramos, Sr. were one and the same person.
The trial court further stated that while it was Ramdustrial Corporation which applied for a loan with
UCPB and PDB, the respondent, as Chairman of Ramdustrial Corporation, with his wife Rebecca Ramos,
signed in the promissory note and acted as sureties on the said obligations. Moreover, the property which
was levied was the respondents only property where he and his family resided. Thus, the thought of
losing it for reasons not of his own doing gave rise to his entitlement to moral damages.
The trial court further ruled that the mere fact that the petitioner did not file an opposition to the
respondents motion to cancel levy did not negate its negligence and bad faith. However, the court
considered the cancellation of annotation of levy as a mitigating factor on the damages caused to the
respondent. For failure to show that he suffered actual damages, the court a quo dismissed the
respondents claim therefor.
Dissatisfied, the petitioner interposed an appeal to the Court of Appeals (CA). On March 30, 2001,
the CA rendered a decision affirming, in toto, the decision of the trial court, the decretal portion of which is
herein quoted:
WHEREFORE, based on the foregoing premises, the assailed decision is hereby AFFIRMED.

[22]

The CA ruled that the petitioner was negligent in causing the annotation of notice of levy on the title
of the petitioner for its failure to determine with certainty whether the defendant Teofilo Ramos, Sr. in Civil
Case No. 16453 was the registered owner of the property covered by TCT No. 275167, and to inform the
sheriff that the registered owners of the property were the respondent and his wife Rebecca Ramos, and
thereafter request for the cancellation of the motion of levy on the property.
Disappointed, the petitioner filed this instant petition assigning the following errors:
I

IN AFFIRMING THE TRIAL COURTS ORDER, THE COURT OF APPEALS COMMITTED MANIFESTLY
MISTAKEN INFERENCES AND EGREGIOUS MISAPPREHENSION OF FACTS AND GRAVE ERRORS OF
LAW, CONSIDERING THAT:
A.

ON THE EVIDENCE, THE BORROWER OF THE LOAN, WHICH RESPONDENT RAMOS CLAIMED
HE TRIED TO OBTAIN, WAS RAMDUSTRIAL CORPORATION. HENCE, ANY DAMAGE RESULTING
FROM THE ANNOTATION WAS SUFFERED BY THE CORPORATION AND NOT BY RESPONDENT
RAMOS.

B.

THE DELAY IN THE CANCELLATION OF THE ANNOTATION WAS OF RESPONDENT RAMOSS (SIC)
OWN DOING.

C.

THE LOAN APPLICATIONS WITH UNITED COCONUT SAVINGS BANK AND PLANTERS
DEVELOPMENT BANK WERE GRANTED PRIOR TO THE CANCELLATION OF THE ANNOTATION
ON THE TITLE OF THE SUBJECT PROPERTY.
II

THE COURT OF APPEALS DECISION AFFIRMING THE TRIAL COURTS AWARD OF MORAL DAMAGES
TO RESPONDENT RAMOS IN THE AMOUNT OF P800,000 ON A FINDING OF NEGLIGENCE IS
CONTRARY TO LAW AND EVIDENCE.
A.

UCPB WAS NOT NEGLIGENT WHEN IT CAUSED THE LEVY ON THE SUBJECT PROPERTY.

B.

AS A MATTER OF LAW, MORAL DAMAGES CANNOT BE AWARDED ON A FINDING OF MERE

NEGLIGENCE.

C.

IN ANY EVENT, THE AWARD OF MORAL DAMAGES TO RESPONDENT RAMOS WAS

UNREASONABLE AND OPPRESSIVE.
III

THE AWARD OF EXEMPLARY DAMAGES AND ATTORNEYS FEES IS CONTRARY TO LAW SINCE THE
AWARD OF MORAL DAMAGES WAS IMPROPER IN THE FIRST PLACE.
[23]

UCPB prayed that:

WHEREFORE, petitioner UNITED COCONUT PLANTERS BANK respectfully prays that this Honorable Court
render judgment reversing and setting aside the Court of Appeals Decision dated 30 March 2001, and ordering the
dismissal of respondent Ramos Complaint dated 05 May 1994.
[24]

In his comment, the respondent alleged that the CA did not err in affirming, in toto, the decision of the
trial court. He prayed that the petition be denied due course.
The issues posed for our resolution are the following: (a) whether or not the petitioner acted
negligently in causing the annotation of levy on the title of the respondent; (b) if so, whether or not the
respondent was the real party-in-interest as plaintiff to file an action for damages against the petitioner
considering that the loan applicant with UCPB and PDB was RAMDUSTRIAL CORPORATION; (c) if so,
whether or not the respondent is entitled to moral damages, exemplary damages and attorneys fees.
On the first issue, we rule that the petitioner acted negligently when it caused the annotation of the
notice of levy in TCT No. 275167.
It bears stressing that the petitioner is a banking corporation, a financial institution with power to
issue its promissory notes intended to circulate as money (known as bank notes); or to receive the money
of others on general deposit, to form a joint fund that shall be used by the institution for its own benefit, for
one or more of the purposes of making temporary loans and discounts, of dealing in notes, foreign and
domestic bills of exchange, coin bullion, credits, and the remission of money; or with both these powers,
and with the privileges, in addition to these basic powers, of receiving special deposits, and making
collection for the holders of negotiable paper, if the institution sees fit to engage in such business. In
funding these businesses, the bank invests the money that it holds in trust of its depositors. For this
reason, we have held that the business of a bank is one affected with public interest, for which reason the
[25]

bank should guard against loss due to negligence or bad faith. In approving the loan of an applicant, the
bank concerns itself with proper informations regarding its debtors. The petitioner, as a bank and a
financial institution engaged in the grant of loans, is expected to ascertain and verify the identities of the
persons it transacts business with. In this case, the petitioner knew that the sureties to the loan granted
to ZDC and the defendants in Civil Case No. 94-1822 were the Spouses Teofilo Ramos, Sr. and Amelita
Ramos. The names of the Spouses Teofilo Ramos, Sr. and Amelita Ramos were specified in the writ of
execution issued by the trial court.
[26]

[27]

The petitioner, with Atty. Bordalba as the Chief of LED and handling lawyer of Civil Case No. 16453,
in coordination with the sheriff, caused the annotation of notice of levy in the respondents title despite its
knowledge that the property was owned by the respondent and his wife Rebecca Ramos, who were not
privies to the loan availment of ZDC nor parties-defendants in Civil Case No. 16453. Even when the
respondent informed the petitioner, through counsel, that the property levied by the sheriff was owned by
the respondent, the petitioner failed to have the annotation cancelled by the Register of Deeds.
In determining whether or not the petitioner acted negligently, the constant test is: Did the defendant
in doing the negligent act use that reasonable care and caution which an ordinarily prudent person would
have used in the same situation? If not, then he is guilty of negligence. Considering the testimonial and
documentary evidence on record, we are convinced that the petitioner failed to act with the reasonable
care and caution which an ordinarily prudent person would have used in the same situation.
[28]

The petitioner has access to more facilities in confirming the identity of their judgment debtors. It
should have acted more cautiously, especially since some uncertainty had been reported by the appraiser
whom the petitioner had tasked to make verifications. It appears that the petitioner treated the uncertainty
raised by appraiser Eduardo C. Reniva as a flimsy matter. It placed more importance on the information
regarding the marketability and market value of the property, utterly disregarding the identity of the
registered owner thereof.
It should not be amiss to note that the judgment debtors name was Teofilo Ramos, Sr. We note, as
the Supreme Court of Washington in 1909 had, that a legal name consists of one given name and one
surname or family name, and a mistake in a middle name is not regarded as of consequence. However,
since the use of initials, instead of a given name, before a surname, has become a practice, the necessity
that these initials be all given and correctly given in court proceedings has become of importance in every
case, and in many, absolutely essential to a correct designation of the person intended. A middle name is
very important or even decisive in a case in which the issue is as between two persons who have the
same first name and surname, did the act complained of, or is injured or sued or the like.
[29]

[30]

In this case, the name of the judgment debtor in Civil Case No. 16453 was Teofilo Ramos, Sr., as
appearing in the judgment of the court and in the writ of execution issued by the trial court. The name of
the owner of the property covered by TCT No. 275167 was Teofilo C. Ramos. It behooved the petitioner
to ascertain whether the defendant Teofilo Ramos, Sr. in Civil Case No. 16453 was the same person who
appeared as the owner of the property covered by the said title. If the petitioner had done so, it would
have surely discovered that the respondent was not the surety and the judgment debtor in Civil Case No.
16453. The petitioner failed to do so, and merely assumed that the respondent and the judgment debtor
Teofilo Ramos, Sr. were one and the same person.

In sum, we find that the petitioner acted negligently in causing the annotation of notice of levy in the
title of the herein respondent, and that its negligence was the proximate cause of the damages sustained
by the respondent.
On the second issue, the petitioner insists that the respondent is not the real party-in-interest to file
the action for damages, as he was not the one who applied for a loan from UCPB and PDB but
Ramdustrial Corporation, of which he was merely the President and Chairman of the Board of Directors.
We do not agree. The respondent very clearly stated in his complaint that as a result of the unlawful
levy by the petitioner of his property, he suffered sleepless nights, moral shock, and almost a heart attack
due to high blood pressure.
[31]

It must be underscored that the registered owner of the property which was unlawfully levied by the
petitioner is the respondent. As owner of the property, the respondent has the right to enjoy, encumber
and dispose of his property without other limitations than those established by law. The owner also has a
right of action against the holder and possessor of the thing in order to recover it. Necessarily, upon the
annotation of the notice of levy on the TCT, his right to use, encumber and dispose of his property was
diminished, if not negated. He could no longer mortgage the same or use it as collateral for a loan.
[32]

Arising from his right of ownership over the said property is a cause of action against persons or
parties who have disturbed his rights as an owner. As an owner, he is one who would be benefited or
injured by the judgment, or who is entitled to the avails of the suit for an action for damages against one
who disturbed his right of ownership.
[33]

[34]

Hence, regardless of the fact that the respondent was not the loan applicant with the UCPB and
PDB, as the registered owner of the property whose ownership had been unlawfully disturbed and limited
by the unlawful annotation of notice of levy on his TCT, the respondent had the legal standing to file the
said action for damages. In both instances, the respondents property was used as collateral of the loans
applied for by Ramdustrial Corporation. Moreover, the respondent, together with his wife, was a surety of
the aforesaid loans.
While it is true that the loss of business opportunities cannot be used as a reason for an action for
damages arising from loss of business opportunities caused by the negligent act of the petitioner, the
respondent, as a registered owner whose right of ownership had been disturbed and limited, clearly has
the legal personality and cause of action to file an action for damages. Not even the respondents failure
to have the annotation cancelled immediately after he came to know of the said wrongful levy negates his
cause of action.
On the third issue, for the award of moral damages to be granted, the following must exist: (1) there
must be an injury clearly sustained by the claimant, whether physical, mental or psychological; (2) there
must be a culpable act or omission factually established; (3) the wrongful act or omission of the defendant
is the proximate cause of the injury sustained by the claimant; and (4) the award for damages is
predicated on any of the cases stated in Article 2219 of the Civil Code.
[35]

In the case at bar, although the respondent was not the loan applicant and the business
opportunities lost were those of Ramdustrial Corporation, all four requisites were established. First, the
respondent sustained injuries in that his physical health and cardio-vascular ailment were aggravated; his
fear that his one and only property would be foreclosed, hounded him endlessly; and his reputation as

mortgagor had been tarnished. Second, the annotation of notice of levy on the TCT of the private
respondent was wrongful, arising as it did from the petitioners negligent act of allowing the levy without
verifying the identity of its judgment debtor. Third, such wrongful levy was the proximate cause of the
respondents misery. Fourth, the award for damages is predicated on Article 2219 of the Civil Code,
particularly, number 10 thereof.
[36]

Although the respondent was able to establish the petitioners negligence, we cannot, however, allow
the award for exemplary damages, absent the private respondents failure to show that the petitioner
acted with malice and bad faith. It is a requisite in the grant of exemplary damages that the act of the
offender must be accompanied by bad faith or done in a wanton, fraudulent or malevolent manner.
[37]

Attorneys fees may be awarded when a party is compelled to litigate or to incur expenses to protect
his interest by reason of an unjustified act of the other party. In this case, the respondent was compelled
to engage the services of counsel and to incur expenses of litigation in order to protect his interest to the
subject property against the petitioners unlawful levy. The award is reasonable in view of the time it has
taken this case to be resolved.
[38]

In sum, we rule that the petitioner acted negligently in levying the property of the respondent despite
doubts as to the identity of the respondent vis--vis its judgment debtor. By reason of such negligent act,
a wrongful levy was made, causing physical, mental and psychological injuries on the person of the
respondent. Such injuries entitle the respondent to an award of moral damages in the amount
ofP800,000. No exemplary damages can be awarded because the petitioners negligent act was not
tainted with malice and bad faith. By reason of such wrongful levy, the respondent had to hire the
services of counsel to cause the cancellation of the annotation; hence, the award of attorneys fees.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 56737 is AFFIRMED WITH
MODIFICATION. The award for exemplary damages is deleted. No costs.
SO ORDERED.
Bellosillo, (Chairman), Quisumbing, Austria-Martinez, and Tinga, JJ., concur.