Cases in Banking

G.R. No.
L-20583
January 23, 1967
REPUBLIC OF THE PHILIPPINES, petitioner,
vs.
SECURITY
CREDIT
AND
ACCEPTANCE
CORPORATION, ROSENDO T. RESUELLO,
PABLO TANJUTCO, ARTURO SORIANO, RUBEN
BELTRAN, BIENVENIDO V. ZAPA, PILAR G.
RESUELLO, RICARDO D. BALATBAT, JOSE
SEBASTIAN and VITO TANJUTCO JR.,
respondents.
Office of the Solicitor General Arturo A. Alafriz and
Solicitor E. M. Salva for petitioner.Sycip, Salazar,
Luna, Manalo & Feliciano for respondents.Natalio
M. Balboa and F. E. Evangelista for the receiver.
on October 11, 1961, said legal counsel rendered an

opinion resolving the query in the affirmative; that in
a letter, dated January 15, 1962, addressed to said
Superintendent of Banks, the corporation through its
president, Rosendo T. Resuello, one of defendants
herein,
sought
a
reconsideration
of
the
aforementioned opinion, which reconsideration was
denied on March 16, 1962; that, prior thereto, or on
March 9, 1961, the corporation had applied with the
Securities and Exchange Commission for the
registration and licensing of its securities under the
Securities Act; that, before acting on this application,
the Commission referred it to the Central Bank,
which, in turn, gave the former a copy of the abovementioned opinion, in line with which, the
CONCEPCION, C.J.:
Commission advised the corporation on December 5,
This is an original quo warranto proceeding, initiated
1961, to comply with the requirements of the General
by the Solicitor General, to dissolve the Security and
Banking Act; that, upon application of members of
Acceptance Corporation for allegedly engaging in
the Manila Police Department and an agent of the
banking operations without the authority required
Central Bank, on May 18, 1962, the Municipal Court
therefor by the General Banking Act (Republic Act
of Manila issued Search Warrant No. A-1019; that,
No. 337). Named as respondents in the petition are, in
pursuant thereto, members of the intelligence division
addition to said corporation, the following, as alleged
of the Central Bank and of the Manila Police
members of its Board of Directors and/or Executive
Department searched the premises of the corporation
Officers, namely:
and seized documents and records thereof relative to
its business operations; that, upon the return of said
NAME
POSITION
warrant, the seized documents and records were, with
Rosendo T. Resuello
President & Chairman of the Board
the authority of the court, placed under the custody of
Pablo Tanjutco
Director
the Central Bank of the Philippines; that, upon
Arturo Soriano
Director
examination and evaluation of said documents and
Ruben Beltran
Director
records, the intelligence division of the Central Bank
Bienvenido V. Zapa
Director & Vice-President
submitted, to the Acting Deputy Governor thereof, a
Pilar G. Resuello
Director & Secretary-Treasurermemorandum dated September 10, 1962, finding that
Ricardo D. Balatbat
Director & Auditor
the corporation is:
Jose R. Sebastian
Director & Legal Counsel
1. Performing banking functions, without requisite
Vito Tanjutco Jr.
Director & Personnel Managercertificate of authority from the Monetary Board of
The record shows that the Articles of Incorporation of
the Central Bank, in violation of Secs. 2 and 6 of
defendant corporation1 were registered with the
Republic Act 337, in that it is soliciting and
Securities and Exchange Commission on March 27,
accepting deposit from the public and lending out the
1961; that the next day, the Board of Directors of the
funds so received;
corporation adopted a set of by-laws, 2 which were
2. Soliciting and accepting savings deposits from the
filed with said Commission on April 5, 1961; that on
general public when the company's articles of
September 19, 1961, the Superintendent of Banks of
incorporation authorize it only to engage primarily in
the Central Bank of the Philippines asked its legal
financing agricultural, commercial and industrial
counsel an opinion on whether or not said corporation
projects, and secondarily, in buying and selling stocks
is a banking institution, within the purview of
and bonds of any corporation, thereby exceeding the
Republic Act No. 337; that, acting upon this request,
scope of its powers and authority as granted under its

charter; consequently such acts are ultra-vires:
3. Soliciting subscriptions to the corporate shares of
stock and accepting deposits on account thereof,
without prior registration and/or licensing of such
shares or securing exemption therefor, in violation of
the Securities Act; and
4. That being a private credit and financial institution,
it should come under the supervision of the Monetary
Board of the Central Bank, by virtue of the transfer of
the authority, power, duties and functions of the
Secretary of Finance, Bank Commissioner and the
defunct Bureau of Banking, to the said Board,
pursuant to Secs. 139 and 140 of Republic Act 265
and Secs. 88 and 89 of Republic Act 337." (Emphasis
Supplied.) that upon examination and evaluation of
the same records of the corporation, as well as of
other documents and pertinent pipers obtained
elsewhere, the Superintendent of Banks, submitted to
the Monetary Board of the Central Bank a
memorandum dated August 28, 1962, stating inter
alia.
11. Pursuant to the request for assistance by the
Chief, Intelligence Division, contained in his
Memorandum to the Governor dated May 23, 1962
and in accordance with the written instructions of
Governor Castillo dated May 31, 1962, an
examination of the books and records of the Security
Credit and Loans Organizations, Inc. seized by the
combined MPD-CB team was conducted by this
Department. The examination disclosed the following
findings:
a. Considering the extent of its operations, the
Security Credit and Acceptance Corporation, Inc.,
receives deposits from the public regularly. Such
deposits are treated in the Corporation's financial
statements as conditional subscription to capital
stock. Accumulated deposits of P5,000 of an
individual depositor may be converted into stock
subscription to the capital stock of the Security Credit
and Acceptance Corporation at the option of the
depositor. Sale of its shares of stock or subscriptions
to its capital stock are offered to the public as part of
its regular operations.
b. That out of the funds obtained from the public
through the receipt of deposits and/or the sale of
securities, loans are made regularly to any person by

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

Act No. 337;3 that on September 25, 1962, the
corporation was advised of the aforementioned
resolution, but, this notwithstanding, the corporation,
as well as the members of its Board of Directors and
the officers of the corporation, have been and still are
performing the functions and activities which had
been declared to constitute illegal banking operations;
that during the period from March 27, 1961 to May
18, 1962, the corporation had established 74 branches
in principal cities and towns throughout the
Philippines; that through a systematic and vigorous
campaign undertaken by the corporation, the same
had managed to induce the public to open 59,463
savings deposit accounts with an aggregate deposit of
P1,689,136.74; that, in consequence of the foregoing
deposits with the corporation, its original capital
stock of P500,000, divided into 20,000 founders'
shares of stock and 80,000 preferred shares of stock,
both of which had a par value of P5.00 each, was
increased, in less than one (1) year, to P3,000,000
divided into 130,000 founders' shares and 470,000
preferred shares, both with a par value of P5.00 each;
and that, according to its statement of assets and
liabilities, as of December 31, 1961, the corporation
had a capital stock aggregating P1,273,265.98 and
suffered, during the year 1961, a loss of P96,685.29.
Accordingly, on December 6, 1962, the Solicitor
General commenced this quo warranto proceedings
for the dissolution of the corporation, with a prayer
that, meanwhile, a writ of preliminary injunction be
issued ex parte, enjoining the corporation and its
branches, as well as its officers and agents, from
performing the banking operations complained of,
and that a receiver be appointed pendente lite.
Upon joint motion of both parties, on August 20,
1963, the Superintendent of Banks of the Central
Bank of the Philippines was appointed by this Court
receiver pendente lite of defendant corporation, and
upon the filing of the requisite bond, said officer
assumed his functions as such receiver on September
16, 1963.
In their answer, defendants admitted practically all of
the allegations of fact made in the petition. They,
however, denied that defendants Tanjutco (Pablo and
Vito, Jr.), Soriano, Beltran, Zapa, Balatbat and
Sebastian, are directors of the corporation, as well as

the validity of the opinion, ruling, evaluation and
conclusions, rendered, made and/or reached by the
legal counsel and the intelligence division of the
Central Bank, the Securities and Exchange
Commission, and the Superintendent of Banks of the
Philippines, or in Resolution No. 1095 of the
Monetary Board, or of Search Warrant No. A-1019 of
the Municipal Court of Manila, and of the search and
seizure made thereunder. By way of affirmative
allegations, defendants averred that, as of July 7,
1961, the Board of Directors of the corporation was
composed of defendants Rosendo T. Resuello,
Aquilino L. Illera and Pilar G. Resuello; that on July
11, 1962, the corporation had filed with the
Superintendent of Banks an application for
conversion into a Security Savings and Mortgage
Bank, with defendants Zapa, Balatbat, Tanjutco
(Pablo and Vito, Jr.), Soriano, Beltran and Sebastian
as proposed directors, in addition to the defendants
first named above, with defendants Rosendo T.
Resullo, Zapa, Pilar G. Resuello, Balatbat and
Sebastian as proposed president, vice-president,
secretary-treasurer, auditor and legal counsel,
respectively; that said additional officers had never
assumed their respective offices because of the
pendency of the approval of said application for
conversion; that defendants Soriano, Beltran,
Sebastian, Vito Tanjutco Jr. and Pablo Tanjutco had
subsequently withdrawn from the proposed mortgage
and savings bank; that on November 29, 1962 or
before the commencement of the present proceedings
the corporation and defendants Rosendo T.
Resuello and Pilar G. Resuello had instituted Civil
Case No. 52342 of the Court of First Instance of
Manila against Purificacion Santos and other
members of the savings plan of the corporation and
the City Fiscal for a declaratory relief and an
injunction; that on December 3, 1962, Judge
Gaudencio Cloribel of said court issued a writ
directing the defendants in said case No. 52342 and
their representatives or agents to refrain from
prosecuting the plaintiff spouses and other officers of
the corporation by reason of or in connection with the
acceptance by the same of deposits under its savings
plan; that acting upon a petition filed by plaintiffs in
said case No. 52342, on December 6, 1962, the Court

of First Instance of Manila had appointed Jose Ma.
Ramirez as receiver of the corporation; that, on
December 12, 1962, said Ramirez qualified as such
receiver, after filing the requisite bond; that, except as
to one of the defendants in said case No. 52342, the
issues therein have already been joined; that the
failure of the corporation to honor the demands for
withdrawal of its depositors or members of its
savings plan and its former employees was due, not
to mismanagement or misappropriation of corporate
funds, but to an abnormal situation created by the
mass demand for withdrawal of deposits, by the
attachment of property of the corporation by its
creditors, by the suspension by debtors of the
corporation of the payment of their debts thereto and
by an order of the Securities and Exchange
Commission dated September 26, 1962, to the
corporation to stop soliciting and receiving deposits;
and that the withdrawal of deposits of members of the
savings plan of the corporation was understood to be
subject, as to time and amounts, to the financial
condition of the corporation as an investment firm.
In its reply, plaintiff alleged that a photostat copy,
attached to said pleading, of the anniversary
publication of defendant corporation showed that
defendants Pablo Tanjutco, Arturo Soriano, Ruben
Beltran, Bienvenido V. Zapa, Ricardo D. Balatbat,
Jose R. Sebastian and Vito Tanjutco Jr. are officers
and/or directors thereof; that this is confirmed by the
minutes of a meeting of stockholders of the
corporation, held on September 27, 1962, showing
that said defendants had been elected officers thereof;
that the views of the legal counsel of the Central
Bank, of the Securities and Exchange Commission,
the Intelligence Division, the Superintendent of
Banks and the Monetary Board above referred to
have been expressed in the lawful performance of
their respective duties and have not been assailed or
impugned in accordance with law; that neither has the
validity of Search Warrant No. A-1019 been
contested as provided by law; that the only assets of
the corporation now consist of accounts receivable
amounting approximately to P500,000, and its office
equipment and appliances, despite its increased
capitalization of P3,000,000 and its deposits
amounting to not less than P1,689,136.74; and that

the aforementioned petition of the corporation, in
Civil Case No. 52342 of the Court of First Instance of
Manila, for a declaratory relief is now highly
improper, the defendants having already committed
infractions and violations of the law justifying the
dissolution of the corporation.
Although, admittedly, defendant corporation has not
secured the requisite authority to engage in banking,
defendants deny that its transactions partake of the
nature of banking operations. It is conceded,
however, that, in consequence of a propaganda
campaign therefor, a total of 59,463 savings account
deposits have been made by the public with the
corporation and its 74 branches, with an aggregate
deposit of P1,689,136.74, which has been lent out to
such persons as the corporation deemed suitable
therefor. It is clear that these transactions partake of
the nature of banking, as the term is used in Section 2
of the General Banking Act. Indeed, a bank has been
defined as:
... a moneyed institute [Talmage vs. Pell 7 N.Y. (3
Seld. ) 328, 347, 348] founded to facilitate the
borrowing, lending and safe-keeping of money
(Smith vs. Kansas City Title & Trust Co., 41 S. Ct.
243, 255 U.S. 180, 210, 65 L. Ed. 577) and to deal, in
notes, bills of exchange, and credits (State vs.
Cornings Sav. Bank, 115 N.W. 937, 139 Iowa 338).
(Banks & Banking, by Zellmann Vol. 1, p. 46).
Moreover, it has been held that:
An investment company which loans out the money
of its customers, collects the interest and charges a
commission to both lender and borrower, is a bank.
(Western Investment Banking Co. vs. Murray, 56 P.
728, 730, 731; 6 Ariz 215.)
... any person engaged in the business carried on by
banks of deposit, of discount, or of circulation is
doing a banking business, although but one of these
functions is exercised. (MacLaren vs. State, 124 N.W.
667, 141 Wis. 577, 135 Am. S.R. 55, 18 Ann. Cas.
826; 9 C.J.S. 30.)
Accordingly, defendant corporation has violated the
law by engaging in banking without securing the
administrative authority required in Republic Act No.
337.
That the illegal transactions thus undertaken by
defendant corporation warrant its dissolution is

apparent from the fact that the foregoing misuser of
the corporate funds and franchise affects the essence
of its business, that it is willful and has been repeated
59,463 times, and that its continuance inflicts injury
upon the public, owing to the number of persons
affected thereby.
It is urged, however, that this case should be
remanded to the Court of First Instance of Manila
upon the authority of Veraguth vs. Isabela Sugar Co.
(57 Phil. 266). In this connection, it should be noted
that this Court is vested with original jurisdiction,
concurrently with courts of first instance, to hear and
decide quo warranto cases and, that, consequently, it
is discretionary for us to entertain the present case or
to require that the issues therein be taken up in said
Civil Case No. 52342. The Veraguth case cited by
herein defendants, in support of the second
alternative, is not in point, because in said case there
were issues of fact which required the presentation of
evidence, and courts of first instance are, in general,
better equipped than appellate courts for the taking of
testimony and the determination of questions of fact.
In the case at bar, there is, however, no dispute as to
the principal facts or acts performed by the
corporation in the conduct of its business. The main
issue here is one of law, namely, the legal nature of
said facts or of the aforementioned acts of the
corporation. For this reason, and because public
interest demands an early disposition of the case, we
have deemed it best to determine the merits thereof.
Wherefore, the writ prayed for should be, as it is
hereby granted and defendant corporation is,
accordingly, ordered dissolved. The appointment of
receiver herein issued pendente lite is hereby made
permanent, and the receiver is, accordingly, directed
to administer the properties, deposits, and other assets
of defendant corporation and wind up the affairs
thereof conformably to Rules 59 and 66 of the Rules
of Court. It is so ordered.
Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon,
J.P., Zaldivar, Sanchez and Castro, JJ., concur.
Footnotes
1
Which, as amended on May 8, 1961, authorized it:
"1. To extend credit facilities for home building and
agricultural, commercial and industrial projects;
2. To extend credit, give loans, mortgages and

pledges, either as principal, agent, broker or attorneyin-fact, upon every and all kind and classes of
products, materials, goods, merchandise, and other
properties, real or personal of every kind and nature;
3. To draw, accept, endorse, purchase, own, sell,
discount, mortgage, assign or otherwise dispose of,
negotiate or collect accounts or notes receivables,
negotiable instruments, letters of credit and other
evidence of indebtedness;
4. To purchase, acquire, and take over, all or any part
of the rights, assets and business of any person,
partnership, corporation or association, and to
undertake and assume the liabilities and obligations
of such person, partnership, corporation or
association whose rights, assets, business or property
may be purchased, acquired or taken over;
5. To issue bonds, debentures, securities, collaterals
and other obligations or otherwise incur indebtedness
in such manner as may be ascertained by the
corporation; and
6. To undertake the management, promotion,
financing and/or collection services of the operation
of the business, industry or enterprises of any person,
partnership, corporation or association in so far as
may be permitted under the laws of the Philippines."
(Emphasis supplied.).
2
Empowering said Board, inter alia:
"c) To pay for any property or rights acquired by the
corporation or to discharge obligations of the
corporation either wholly or partly in money or in
stock, bonds, debentures or other securities of the
corporation;
"d) To lend or borrow money for the corporation with
or without security and for such purpose to accept or
create, make and issue mortgages, bonds, deeds of
trust and negotiable instruments or securities, secured
by mortgage or pledge of property belonging to the
corporation; provided, that as hereinafter provided,
the proper officers of the corporation shall have these
powers, unless expressly limited by the Board of
Directors: ... (Emphasis supplied).
3
"Sec. 2. Only duly authorized persons and entities
may engage in the lending of funds obtained from the
public through the receipts of deposits or the sale of
bonds, securities, or obligations of any kind, and all
entities regularly conducting such operations shall be

considered as banking institutions and shall be
subject to the provisions of this Act, of the General
Bank Act, and of other pertinent laws. The terms
'banking institution and 'bank', as used in this Act, are
synonymous and interchangeable and specially
include banks, banking institutions, commercial
banks, savings banks, mortgage banks, trust
companies, building and loan associations, branches
and agencies in the Philippines of foreign banks,
hereinafter called Philippine branches, and all other
corporations,
companies,
partnerships,
and
associations performing banking functions in the
Philippines.
"Persons and entities which receive deposits only
occasionally shall not be considered as banks, but
such persons and entities shall be subject to
regulation by the Monetary Board of the Central
Bank; nevertheless in no case may the Central Bank
authorize the drawing of checks against deposits not
maintained in banks, or branches or agencies thereof.
"The Monetary Board may similarly regulate the
activities of persons and entities which act as agents
of banks.
"Sec. 6. No person, association or corporation not
conducting the business of a commercial banking
corporation, trust corporation, savings and mortgage
banks, or building and loan association, as defined in
this Act, shall advertise or hold itself out as being
engaged in the business of such bank, corporation or
association, or use in connection with its business
title the word or words, 'bank', 'banking,' 'banker,'
'building and loan association,' 'trust corporation,'
'trust company,' or words of similar import, or solicit
or receive deposits of money for deposit,
disbursement, safekeeping, or otherwise, or transact
in any manner the business of any such bank,
corporation or association without having first
complied with the provisions of this Act in so far as it
relates to commercial banking corporations, trust
corporations, savings and mortgage banks, or
building and loan association as the case may be. For
any violation of the provisions of this section by a
corporation, the officers and directors thereof shall be
jointly and severally liable. Any violation of the
provisions of this section shall be punished by a fine
of five hundred pesos for each day during which such

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

of P130,000.00. Thereafter, however, C. G. Dizon
Construction defaulted in the payment of the
remaining installments, prompting ASIA PACIFIC to
send a Statement of Account to Cenen Dizon for the
unpaid balance of P267,737.50 inclusive of interests
and charges, and P66,909.38 representing attorney's
fees. As the demand was unheeded, ASIA PACIFIC
sued Teodoro Baas, C. G. Dizon Construction and
Cenen Dizon.
While defendants (herein petitioners) admitted the
genuineness and due execution of the Promissory
Note, the Deed of Chattel Mortgage and the
Continuing
Undertaking,
they
nevertheless
maintained that these documents were never intended
by the parties to be legal, valid and binding but a
mere subterfuge to conceal the loan of P390,000.00
with usurious interests.
Defendants claimed that since ASIA PACIFIC could
not directly engage in banking business, it proposed
to them a scheme wherein plaintiff ASIA PACIFIC
could extend a loan to them without violating
banking laws: first, Cenen Dizon would secure a
promissory note from Teodoro Baas with a face value
of P390,000.00 payable in installments; second,
ASIA PACIFIC would then make it appear that the
promissory note was sold to it by Cenen Dizon with
the 14% usurious interest on the loan or P54,000.00
discounted and collected in advance by ASIA
PACIFIC; and, lastly, Cenen Dizon would provide
sufficient collateral to answer for the loan in case of
default in payment and execute a continuing guaranty
to assure continuous and prompt payment of the loan.
Defendants also alleged that out of the loan of
P390,000.00 defendants actually received only
P329,185.00 after ASIA PACIFIC deducted the
discounted interest, service handling charges,
insurance premium, registration and notarial fees.
Sometime in October 1980 Cenen Dizon informed
ASIA PACIFIC that he would be delayed in meeting
his monthly amortization on account of business
reverses and promised to pay instead in February
1981. Cenen Dizon made good his promise and
tendered payment to ASIA PACIFIC in an amount
equivalent to two (2) monthly amortizations. But
ASIA PACIFIC attempted to impose a 3% interest for
every month of delay, which he flatly refused to pay

for being usurious.
Afterwards, ASIA PACIFIC allegedly made a verbal
proposal to Cenen Dizon to surrender to it the
ownership of the two (2) bulldozer crawler tractors
and, in turn, the latter would treat the former's
account as closed and the loan fully paid. Cenen
Dizon supposedly agreed and accepted the offer.
Defendants averred that the value of the bulldozer
crawler tractors was more than adequate to cover
their obligation to ASIA PACIFIC.
Meanwhile, on 21 April 1981 the trial court issued a
writ of replevin against defendant C. G. Dizon
Construction for the surrender of the bulldozer
crawler tractors subject of the Deed of Chattel
Mortgage. Of the three (3) bulldozer crawler tractors,
only two (2) were actually turned over by defendants
- D8-14A and D8-2U - which units were
subsequently foreclosed by ASIA PACIFIC to satisfy
the obligation. D8-14A was sold for P120,000.00 and
D8-2U for P60,000.00 both to ASIA PACIFIC as the
highest bidder.
During the pendency of the case, defendant Teodoro
Baas passed away, and on motion of the remaining
defendants, the trial court dismissed the case against
him. On the other hand, ASIA PACIFIC was
substituted as party plaintiff by International
Corporate Bank after the disputed Promissory Note
was assigned and/or transferred by ASIA PACIFIC to
International Corporate Bank. Later, International
Corporate Bank merged with Union Bank of the
Philippines. As the surviving entity after the merger,
and having succeeded to all the rights and interests of
International Corporate Bank in this case, Union
Bank of the Philippines was substituted as a party in
lieu of International Corporate BankOn 25 September
1992 the Regional Trial Court ruled in favor of ASIA
PACIFIC holding the defendants jointly and severally
liable for the unpaid balance of the obligation under
the Promissory Note in the amount of P87,637.50 at
14% interest per annum, and attorney's fees
equivalent to 25% of the monetary award
On 24 July 1996 the Court of Appeals affirmed in
toto the decision of the trial court thus Defendant-appellants' contention that the instruments
were executed merely as a subterfuge to skirt banking
laws is an untenable defense. If that were so then they

too were parties to the illegal scheme. Why should
they now be allowed to take advantage of their own
knavery to escape the liabilities that their own
chicanery created?
Defendant-appellants also want us to believe their
story that there was an agreement between them and
the plaintiff-appellee that if the former would deliver
their 2 bulldozer crawler tractors to the latter, the
defendant-appellants' obligation would fully be
extinguished. Again, nothing but the word that comes
out between the teeth supports such story. Why did
they not write down such an important agreement? Is
it believable that seasoned businessmen such as the
defendant-appellant Cenen G. Dizon and the other
officers of the appellant corporation would deliver the
bulldozers without a receipt of acquittance from the
plaintiff-appellee x x x x In our book, that is not
credible.
The pivotal issues raised are: (a) Whether the
disputed transaction between petitioners and ASIA
PACIFIC violated banking laws, hence, null and
void; and (b) Whether the surrender of the bulldozer
crawler tractors to respondent resulted in the
extinguishment of petitioners' obligation.
On the first issue, petitioners insist that ASIA
PACIFIC was organized as an investment house
which could not engage in the lending of funds
obtained from the public through receipt of deposits.
The disputed Promissory Note, Deed of Chattel
Mortgage and Continuing Undertaking were not
intended to be valid and binding on the parties as they
were merely devices to conceal their real intention
which was to enter into a contract of loan in violation
of banking laws.
We reject the argument. An investment company
refers to any issuer which is or holds itself out as
being engaged or proposes to engage primarily in the
business of investing, reinvesting or trading in
securities.As defined in Sec. 2, par. (a), of the
Revised Securities Act, securities "shall include x x x
x commercial papers evidencing indebtedness of any
person, financial or non-financial entity, irrespective
of maturity, issued, endorsed, sold, transferred or in
any manner conveyed to another with or without
recourse, such as promissory notes x x x x" Clearly,
the transaction between petitioners and respondent

was one involving not a loan but purchase of
receivables at a discount, well within the purview of
"investing, reinvesting or trading in securities" which
an investment company, like ASIA PACIFIC, is
authorized to perform and does not constitute a
violation of the General Banking Act. Moreover, Sec.
2 of the General Banking Act provides in part Sec. 2. Only entities duly authorized by the Monetary
Board of the Central Bank may engage in the lending
of funds obtained from the public through the receipt
of deposits of any kind, and all entities regularly
conducting such operations shall be considered as
banking institutions and shall be subject to the
provisions of this Act, of the Central Bank Act, and of
other pertinent laws (underscoring supplied).
Indubitably, what is prohibited by law is for
investment companies to lend funds obtained from
the public through receipts of deposit, which is a
function of banking institutions. But here, the funds
supposedly "lent" to petitioners have not been shown
to have been obtained from the public by way of
deposits, hence, the inapplicability of banking laws.
On petitioners' submission that the true intention of
the parties was to enter into a contract of loan, we
have examined the Promissory Note and failed to
discern anything therein that would support such
theory. On the contrary, we find the terms and
conditions of the instrument clear, free from any
ambiguity, and expressive of the real intent and
agreement of the parties. We quote the pertinent
portions of the Promissory Note FOR VALUE RECEIVED, I/We, hereby promise to
pay to the order of C.G. Dizon Construction, Inc. the
sum of THREE HUNDRED NINETY THOUSAND
ONLY (P390,000.00), Philippine Currency in the
following manner:
P32,500.00 due every 25th of the month starting from
September 25, 1980 up to August 25, 1981.
I/We agree that if any of the said installments is not
paid as and when it respectively falls due, all the
installments covered hereby and not paid as yet shall
forthwith become due and payable at the option of the
holder of this note with interest at the rate of 14% per
annum on each unpaid installment until fully paid.
If any amount due on this note is not paid at its
maturity and this note is placed in the hands of an

attorney for collection, I/We agree to pay in addition
to the aggregate of the principal amount and interest
due, a sum equivalent to TEN PERCENT (10%)
thereof as Attorney's fees, in case no action is filed,
otherwise, the sum will be equivalent to TWENTY
FIVE (25%) of the said principal amount and interest
due x x x x
Makati, Metro Manila, August 25, 1980.
(Sgd) Teodoro Baas
ENDORSED TO ASIA PACIFIC FINANCE
CORPORATION WITH RECOURSE, C.G. DIZON
CONSTRUCTION, INC.
By: (Sgd.) Cenen Dizon (Sgd.) Juliette B. Dizon
President VP/Treasurer
Likewise, the Deed of Chattel Mortgage and
Continuing Undertaking were duly acknowledged
before a notary public and, as such, have in their
favor the presumption of regularity. To contradict
them there must be clear, convincing and more than
merely preponderant evidence. In the instant case, the
records do not show even a preponderance of
evidence in favor of petitioners' claim that the Deed
of Chattel Mortgage and Continuing Undertaking
were never intended by the parties to be legal, valid
and binding. Notarial documents are evidence of the
facts in clear and unequivocal manner therein
expressed.
Interestingly, petitioners' assertions were based
mainly on the self-serving testimony of Cenen Dizon,
and not on any other independent evidence. His
testimony is not only unconvincing, as found by the
trial court and the Court of Appeals, but also selfdefeating in light of the documents presented by
respondent, i.e., Promissory Note, Deed of Chattel
Mortgage and Continuing Undertaking, the accuracy,
correctness and due execution of which were
admitted by petitioners. Oral evidence certainly
cannot prevail over the written agreements of the
parties. The courts need only rely on the faces of the
written contracts to determine their true intention on
the principle that when the parties have reduced their
agreements in writing, it is presumed that they have
made the writings the only repositories and
memorials of their true agreement.
The second issue deals with a question of fact. We
have ruled often enough that it is not the function of

this Court to analyze and weigh the evidence all over
again, its jurisdiction being limited to reviewing
errors of law that might have been committed by the
lower court.[if !supportFootnotes][12][endif] At any rate, while we
are not a trier of facts, hence, not required as a rule to
look into the factual bases of the assailed decision of
the Court of Appeals, we did so just the same in this
case if only to satisfy petitioners that we have
carefully studied and evaluated the case, all too
mindful of the tenacity and vigor with which the
parties, through their respective counsel, have
pursued this case for nineteen (19) years.
Petitioners contend that the parties already had a
verbal understanding wherein ASIA PACIFIC
actually agreed to consider petitioners' account closed
and the principal obligation fully paid in exchange for
the ownership of the two (2) bulldozer crawler
tractors.
We are not persuaded. Again, other than the bare
allegations of petitioners, the records are bereft of any
evidence of the supposed agreement. As correctly
observed by the Court of Appeals, it is unbelievable
that the parties entirely neglected to write down such
an important agreement. Equally incredulous is the
fact that petitioner Cenen Dizon, a seasoned
businessman, readily consented to deliver the
bulldozers to respondent without a corresponding
receipt of acquittance. Indeed, even the testimony of
petitioner Cenen Dizon himself negates the supposed
verbal understanding between the parties Q: You said and is it not a fact that you surrendered
the bulldozers to APCOR by virtue of the seizure
order?
A: There was no seizure order. Atty. Carag during
that time said if I surrender the two equipment, we
might finally close a deal if the equipment would
come up to the balance of the loan. So I voluntarily
surrendered, I pulled them from the job site and
returned them to APCOR x x x x
Q: You mentioned a certain Atty. Carag, who is he?
A: He was the former legal counsel of APCOR. They
were handling cases. In fact, I talked with Atty.
Carag, we have a verbal agreement if I surrender the
equipment it might suffice to pay off the debt so I did
just that (underscoring ours).
In other words, there was no binding and perfected

contract between petitioners and respondent
regarding the settlement of the obligation, but only a
conditional one, a mere conjecture in fact, depending
on whether the value of the tractors to be surrendered
would equal the balance of the loan plus interests.
And since the bulldozer crawler tractors were sold at
the foreclosure sale for only P180,000.00, which was
not enough to cover the unpaid balance of
P267,637.50, petitioners are still liable for the
deficiency.
Barring therefore a showing that the findings
complained of are totally devoid of support in the
records, or that they are so glaringly erroneous as to
constitute serious abuse of discretion, we see no valid
reason to discard them. More so in this case where
the findings of both the trial court and the appellate
court coincide with each other on the matter.
With regard to the computation of petitioners'
liability, the records show that petitioners actually
paid to respondent a total sum of P130,000.00 in
addition to the P180,000.00 proceeds realized from
the sale of the bulldozer crawler tractors at public
auction. Deducting these amounts from the principal
obligation of P390,000.00 leaves a balance of
P80,000.00, to which must be added P7,637.50
accrued interests and charges as of 20 March 1981, or
a total unpaid balance of P87,637.50 for which
petitioners are jointly and severally liable.
Furthermore, the unpaid balance should earn 14%
interest per annum as stipulated in the Promissory
Note, computed from 20 March 1981 until fully paid.
On the amount of attorney's fees which under the
Promissory Note is equivalent to 25% of the principal
obligation and interests due, it is not, strictly
speaking, the attorney's fees recoverable as between
the attorney and his client regulated by the Rules of
Court. Rather, the attorney's fees here are in the
nature of liquidated damages and the stipulation
therefor is aptly called a penal clause. It has been said
that so long as such stipulation does not contravene
the law, morals and public order, it is strictly binding
upon the obligor. It is the litigant, not the counsel,
who is the judgment creditor entitled to enforce the
judgment by execution]
Nevertheless, it appears that petitioners' failure to
fully comply with their part of the bargain was not

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

SIMEX
INTERNATIONAL
(MANILA),
INCORPORATED, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and
TRADERS ROYAL BANK, respondents.
Don P. Porcuincula for petitioner.
San Juan, Gonzalez, San Agustin & Sinense for
private respondent.
CRUZ, J.:
We are concerned in this case with the question of
damages, specifically moral and exemplary damages.
The negligence of the private respondent has already
been established. All we have to ascertain is whether
the petitioner is entitled to the said damages and, if
so, in what amounts.
The parties agree on the basic facts. The petitioner is
a private corporation engaged in the exportation of
food products. It buys these products from various
local suppliers and then sells them abroad,
particularly in the United States, Canada and the
Middle East. Most of its exports are purchased by the
petitioner on credit.
The petitioner was a depositor of the respondent bank
and maintained a checking account in its branch at
Romulo Avenue, Cubao, Quezon City. On May 25,
1981, the petitioner deposited to its account in the
said bank the amount of P100,000.00, thus increasing
its balance as of that date to P190,380.74. 1
Subsequently, the petitioner issued several checks
against its deposit but was suprised to learn later that
they had been dishonored for insufficient funds.
The dishonored checks are the following:
1. Check No. 215391 dated May 29, 1981, in favor of
California Manufacturing Company, Inc. for
P16,480.00:
2. Check No. 215426 dated May 28, 1981, in favor of
the Bureau of Internal Revenue in the amount of
P3,386.73:
3. Check No. 215451 dated June 4, 1981, in favor of
Mr. Greg Pedreo in the amount of P7,080.00;
Malabon Longlife Trading Corporation in the amount
of P42,906.00:
Malabon Longlife Trading Corporation in the amount

of P12,953.00:
Sea-Land Services, Inc. in the amount of P27,024.45:
Baguio Country Club Corporation in the amount of
P4,385.02: and
Enriqueta Bayla in the amount of P6,275.00. 2
As a consequence, the California Manufacturing
Corporation sent on June 9, 1981, a letter of demand
to the petitioner, threatening prosecution if the
dishonored check issued to it was not made good. It
also withheld delivery of the order made by the
petitioner. Similar letters were sent to the petitioner
by the Malabon Long Life Trading, on June 15, 1981,
and by the G. and U. Enterprises, on June 10, 1981.
Malabon also canceled the petitioner's credit line and
demanded that future payments be made by it in cash
or certified check. Meantime, action on the pending
orders of the petitioner with the other suppliers whose
checks were dishonored was also deferred.
The petitioner complained to the respondent bank on
June 10, 1981. 3 Investigation disclosed that the sum
of P100,000.00 deposited by the petitioner on May
25, 1981, had not been credited to it. The error was
rectified on June 17, 1981, and the dishonored checks
were paid after they were re-deposited. 4
In its letter dated June 20, 1981, the petitioner
demanded reparation from the respondent bank for its
"gross and wanton negligence." This demand was not
met. The petitioner then filed a complaint in the then
Court of First Instance of Rizal claiming from the
private respondent moral damages in the sum of
P1,000,000.00 and exemplary damages in the sum of
P500,000.00, plus 25% attorney's fees, and costs.
After trial, Judge Johnico G. Serquinia rendered
judgment holding that moral and exemplary damages
were not called for under the circumstances.
However, observing that the plaintiff's right had been
violated, he ordered the defendant to pay nominal
damages in the amount of P20,000.00 plus P5,000.00
attorney's fees and costs. 5 This decision was affirmed
in toto by the respondent court. 6
The respondent court found with the trial court that
the private respondent was guilty of negligence but
agreed that the petitioner was nevertheless not

entitled to moral damages. It said:
The essential ingredient of moral damages is proof of
bad faith (De Aparicio vs. Parogurga, 150 SCRA
280). Indeed, there was the omission by the
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.
G.R. No. 69162 February 21, 1992

BANK OF THE PHILIPPINE ISLANDS, petitioner,
vs.
THE INTERMEDIATE APPELLATE COURT and
the SPOUSES ARTHUR CANLAS and VIVIENE
CANLAS, respondents.
Leonen, Ramirez & Associates for petitioner.
L. Emmanuel B. Canilao for private respondents.
GRIO-AQUINO, J.:
In a decision dated September 3, 1984, the
Intermediate Appellate Court (now Court of Appeals)
in AC-G.R. CV No. 69178 entitled, "Arthur A.
Canlas, et al., Plaintiff-Appellees vs. Commercial
Bank and Trust Company of the Philippines,
Defendant-Appellant," reduced to P105,000 the
P465,000 damage-award of the trial court to the
private respondents for an error of a bank teller which
resulted in the dishonor of two small checks which
the private respondents had issued against their joint
current account. This petition for review of that
decision was filed by the Bank.
The respondent spouses, Arthur and Vivienne Canlas,
opened a joint current account No. 210-520-73 on
April 25, 1977 in the Quezon City branch of the
Commercial Bank and Trust Company of the
Philippines (CBTC) with an initial deposit of P2,250.
Prior thereto, Arthur Canlas had an existing separate
personal checking account No. 210-442-41 in the
same branch.
When the respondent spouses opened their joint
current account, the "new accounts" teller of the bank
pulled out from the bank's files the old and existing
signature card of respondent Arthur Canlas for
Current Account No. 210-442-41 for use as I D and
reference. By mistake, she placed the old personal
account number of Arthur Canlas on the deposit slip
for the new joint checking account of the spouses so
that the initial deposit of P2,250 for the joint
checking account was miscredited to Arthur's
personal account (p. 9, Rollo). The spouses
subsequently deposited other amounts in their joint
account.
However, when respondent Vivienne Canlas issued a
check for Pl,639.89 in April 1977 and another check
for P1,160.00 on June 1, 1977, one of the checks was
dishonored by the bank for insufficient funds and a

penalty of P20 was deducted from the account in both
instances. In view of the overdrawings, the bank tried
to call up the spouses at the telephone number which
they had given in their application form, but the bank
could not contact them because they actually reside in
Porac, Pampanga. The city address and telephone
number which they gave to the bank belonged to Mrs.
Canlas' parents.
On December 15, 1977, the private respondents filed
a complaint for damages against CBTC in the Court
of First Instance of Pampanga (p. 113, Rollo).
On February 27, 1978, the bank filed a motion to
dismiss the complaint for improper venue. The
motion was denied.
During the pendency of the case, the Bank of the
Philippine Islands (BPI) and CBTC were merged. As
the surviving corporation under the merger agreement
and under Section 80 (5) of the Corporation Code of
the Philippines, BPI took over the prosecution and
defense of any pending claims, actions or
proceedings by and against CBTC.
On May 5, 1981, the Regional Trial Court of
Pampanga rendered a decision against BPI, the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered
sentencing defendant to pay the plaintiff the
following:
1. P 5,000.00 as actual damages;
2. P 150,000.00 for plaintiff Arthur Canlas and
P150,000.00 for plaintiff Vivienne S. Canlas
representing moral damages;
3. P 150.000.00 as exemplary damages;
4. P 10,000.00 as attorney's fees; and
5. Costs. (p. 36, Rollo).
On appeal, the Intermediate Appellate Court deleted
the actual damages and reduced the other awards. The
dispositive portion of its decision reads:
WHEREFORE, the judgment appealed from is
hereby modified as follows:
1. The award of P50,000.00 in actual damages is
herewith deleted.
2. Moral damages of P50,000.00 is awarded to
plaintiffs-appellees Arthur Canlas and Vivienne S.
Canlas, not P50,000.00 each.
3. Exemplary damages is likewise reduced to the sum
of P50,000.00 and attorney's fees to P5,000.00.

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

father of family.
In Simex International (Manila), Inc. vs. Court of
Appeals (183 SCRA 360, 367), this Court stressed the
fiduciary nature of the relationship between a bank
and its depositors and the extent of diligence
expected of it in handling the accounts entrusted to its
care.
whomever he directs. A blunder on the part of the
bank, such as the dishonor of a check without good
reason, can cause the depositor not a little
embarrassment if not also financial loss and perhaps
even civil and criminal litigation.
The point is that as a business affected with public
interest and because of the nature of its functions, the
mind the fiduciary nature of their relationship. . . .
The bank is not expected to be infallible but, as
correctly observed by respondent Appellate Court, in
this instance, it must bear the blame for not
discovering the mistake of its teller despite the
established procedure requiring the papers and bank
books to pass through a battery of bank personnel
whose duty it is to check and countercheck them for
possible errors. Apparently, the officials and
employees tasked to do that did not perform their
duties with due care, as may be gathered from the
testimony of the bank's lone witness, Antonio Enciso,
who casually declared that "the approving officer
does not have to see the account numbers and all
those things. Those are very petty things for the
approving manager to look into" (p. 78, Record on
Appeal). Unfortunately, it was a "petty thing," like
the incorrect account number that the bank teller
wrote on the initial deposit slip for the newly-opened
joint current account of the Canlas spouses, that
sparked this half-a-million-peso damage suit against

the bank.
While the bank's negligence may not have been
attended with malice and bad faith, nevertheless, it
caused serious anxiety, embarrassment and
humiliation to the private respondents for which they
are entitled to recover reasonable moral damages
(American Express International, Inc. vs. IAC, 167
SCRA 209). The award of reasonable attorney's fees
is proper for the private respondents were compelled
to litigate to protect their interest (Art. 2208, Civil
Code). However, the absence of malice and bad faith
renders the award of exemplary damages improper
(Globe Mackay Cable and Radio Corp. vs. Court of
Appeals, 176 SCRA 778).
WHEREFORE, the petition for review is granted.
The appealed decision is MODIFIED by deleting the
award of exemplary damages to the private
respondents. In all other respects, the decision of the
Intermediate Appellate Court, now Court of Appeals,
is AFFIRMED. No costs.
SO ORDERED.
[G.R. No. 112392. February 29, 2000]

BANK OF THE PHILIPPINE ISLANDS, petitioner,
vs. COURT OF APPEALS and BENJAMIN C.
NAPIZA, respondents.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review on certiorari of the
Decision of the Court of Appeals in CA-G.R. CV No.
37392 affirming in toto that of the Regional Trial
Court of Makati, Branch 139, which dismissed the
complaint filed by petitioner Bank of the Philippine
Islands against private respondent Benjamin C.
Napiza for sum of money. Sdaad
On September 3, 1987, private respondent deposited
in Foreign Currency Deposit Unit (FCDU) Savings
Account No. 028-187 which he maintained in
petitioner banks Buendia Avenue Extension Branch,
Continental Bank Managers Check No. 00014757
dated August 17, 1984, payable to "cash" in the
amount of Two Thousand Five Hundred Dollars
($2,500.00) and duly endorsed by private respondent
on its dorsal side.It appears that the check belonged
to a certain Henry Chan who went to the office of
private respondent and requested him to deposit the
check in his dollar account by way of accommodation
and for the purpose of clearing the same. Private
respondent acceded, and agreed to deliver to Chan a
signed blank withdrawal slip, with the understanding
that as soon as the check is cleared, both of them
would go to the bank to withdraw the amount of the
check upon private respondents presentation to the
bank of his passbook.
Using the blank withdrawal slip given by private
respondent to Chan, on October 23, 1984, one Ruben
Gayon, Jr. was able to withdraw the amount of
$2,541.67 from FCDU Savings Account No. 028187. Notably, the withdrawal slip shows that the
amount was payable to Ramon A. de Guzman and
Agnes C. de Guzman and was duly initialed by the
branch assistant manager, Teresita Lindo.
On November 20, 1984, petitioner received
communication from the Wells Fargo Bank
International of New York that the said check
deposited by private respondent was a counterfeit
check because it was "not of the type or style of
checks
issued
by
Continental
Bank
International."Consequently, Mr. Ariel Reyes, the

manager of petitioners Buendia Avenue Extension
Branch, instructed one of its employees, Benjamin D.
Napiza IV, who is private respondents son, to inform
his father that the check bounced.Reyes himself sent
a telegram to private respondent regarding the
dishonor of the check. In turn, private respondents
son wrote to Reyes stating that the check had been
assigned "for encashment" to Ramon A. de Guzman
and/or Agnes C. de Guzman after it shall have been
cleared upon instruction of Chan. He also said that
upon learning of the dishonor of the check, his father
immediately tried to contact Chan but the latter was
out of town.[
Private respondents son undertook to return the
amount of $2,500.00 to petitioner bank. On
December 18, 1984, Reyes reminded private
respondent of his sons promise and warned that
should he fail to return that amount within seven (7)
days, the matter would be referred to the banks
lawyers for appropriate action to protect the banks
interest.[This was followed by a letter of the banks
lawyer dated April 8, 1985 demanding the return of
the $2,500.00.
In reply, private respondent wrote petitioners counsel
on April 20, 1985[ stating that he deposited the check
"for clearing purposes" only to accommodate Chan.
He added:
"Further, please take notice that said check was
deposited on September 3, 1984 and withdrawn on
October 23, 1984, or a total period of fifty (50) days
had elapsed at the time of withdrawal. Also, it may
not be amiss to mention here that I merely signed an
authority to withdraw said deposit subject to its
clearing, the reason why the transaction is not
reflected in the passbook of the account. Besides, I
did not receive its proceeds as may be gleaned from
the withdrawal slip under the captioned signature of
recipient.
If at all, my obligation on the transaction is moral in
nature, which (sic) I have been and is (sic) still
exerting utmost and maximum efforts to collect from
Mr. Henry Chan who is directly liable under the
circumstances. Scsdaad
xxx......xxx......xxx."
On August 12, 1986, petitioner filed a complaint
against private respondent, praying for the return of

the amount of $2,500.00 or the prevailing peso
equivalent plus legal interest from date of demand to
date of full payment, a sum equivalent to 20% of the
total amount due as attorney's fees, and litigation
and/or costs of suit.
Private respondent filed his answer, admitting that he
indeed signed a "blank" withdrawal slip with the
understanding that the amount deposited would be
withdrawn only after the check in question has been
cleared. He likewise alleged that he instructed the
party to whom he issued the signed blank withdrawal
slip to return it to him after the bank drafts clearance
so that he could lend that party his passbook for the
purpose of withdrawing the amount of $2,500.00.
However, without his knowledge, said party was able
to withdraw the amount of $2,541.67 from his dollar
savings account through collusion with one of
petitioners employees. Private respondent added that
he had "given the Plaintiff fifty one (51) days with
which to clear the bank draft in question." Petitioner
should have disallowed the withdrawal because his
passbook was not presented. He claimed that
petitioner had no one to blame except itself "for being
grossly negligent;" in fact, it had allegedly admitted
having paid the amount in the check "by mistake" x x
x "if not altogether due to collusion and/or bad faith
on the part of (its) employees." Charging petitioner
with "apparent ignorance of routine bank
procedures," by way of counterclaim, private
respondent prayed for moral damages of
P100,000.00, exemplary damages of P50,000.00 and
attorneys fees of 30% of whatever amount that would
be awarded to him plus an honorarium of P500.00 per
appearance in court.
Private respondent also filed a motion for admission
of a third party complaint against Chan. He alleged
that "thru strategem and/or manipulation," Chan was
able to withdraw the amount of $2,500.00 even
without private respondents passbook. Thus, private
respondent prayed that third party defendant Chan be
made to refund to him the amount withdrawn and to
pay attorneys fees of P5,000.00 plus P300.00
honorarium per appearance.
Petitioner filed a comment on the motion for leave of
court to admit the third party complaint, wherein it
asserted that per paragraph 2 of the Rules and

Regulations governing BPI savings accounts, private
respondent alone was liable "for the value of the
credit given on account of the draft or check
deposited." It contended that private respondent was
estopped from disclaiming liability because he
himself authorized the withdrawal of the amount by
signing the withdrawal slip. Petitioner prayed for the
denial of the said motion so as not to unduly delay the
disposition of the main case asserting that private
respondents claim could be ventilated in another case.
Private respondent replied that for the parties to
obtain complete relief and to avoid multiplicity of
suits, the motion to admit third party complaint
should be granted. Meanwhile, the trial court issued
orders on August 25, 1987 and October 28, 1987
directing private respondent to actively participate in
locating Chan. After private respondent failed to
comply, the trial court, on May 18, 1988, dismissed
the third party complaint without prejudice.
On November 4, 1991, a decision was rendered
dismissing the complaint. The lower court held that
petitioner could not hold private respondent liable
based on the checks face value alone. To so hold him
liable "would render inutile the requirement of
clearance from the drawee bank before the value of a
particular foreign check or draft can be credited to the
account of a depositor making such deposit." The
lower court further held that "it was incumbent upon
the petitioner to credit the value of the check in
question to the account of the private respondent only
upon receipt of the notice of final payment and
should not have authorized the withdrawal from the
latters account of the value or proceeds of the check."
Having admitted that it committed a "mistake" in not
waiting for the clearance of the check before
authorizing the withdrawal of its value or proceeds,
petitioner should suffer the resultant loss. Supremax
On appeal, the Court of Appeals affirmed the lower
courts decision. The appellate court held that
petitioner committed "clear gross negligence" in
allowing Ruben Gayon, Jr. to withdraw the money
without presenting private respondents passbook and,
before the check was cleared and in crediting the
amount indicated therein in private respondents
account. It stressed that the mere deposit of a check in
private respondents account did not mean that the

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

it shall be accepted or paid, or both, as the case may
be, according to its tenor, and that if it be dishonored,
and the necessary proceedings on dishonor be duly
taken, he will pay the amount thereof to the holder, or
to any subsequent indorser who may be compelled to
pay it."
Section 65, on the other hand, provides for the
following warranties of a person negotiating an
instrument by delivery or by qualified indorsement:
(a) that the instrument is genuine and in all respects
what it purports to be; (b) that he has a good title to it,
and (c) that all prior parties had capacity to
contract.In People v. Maniego, this Court described
the liabilities of an indorser as follows: Juris
"Appellants contention that as mere indorser, she may
not be liable on account of the dishonor of the checks
indorsed by her, is likewise untenable. Under the law,
the holder or last indorsee of a negotiable instrument
has the right to enforce payment of the instrument for
the full amount thereof against all parties liable
thereon. Among the parties liable thereon is an
indorser of the instrument, i.e., a person placing his
signature upon an instrument otherwise than as a
maker, drawer or acceptor * * unless he clearly
indicated by appropriate words his intention to be
bound in some other capacity. Such an indorser who
indorses without qualification, inter alia engages that
on due presentment, * * (the instrument) shall be
accepted or paid, or both, as the case may be,
according to its tenor, and that if it be dishonored, and
the necessary proceedings on dishonor be duly taken,
he will pay the amount thereof to the holder, or any
subsequent indorser who may be compelled to pay it.
Maniego may also be deemed an accommodation
party in the light of the facts, i.e., a person who has
signed the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for the
purpose of lending his name to some other person. As
such, she is under the law liable on the instrument to
a holder for value, notwithstanding such holder at the
time of taking the instrument knew * * (her) to be
only an accommodation party, although she has the
right, after paying the holder, to obtain
reimbursement from the party accommodated, since
the relation between them is in effect that of principal
and surety, the accommodation party being the

surety."
It is thus clear that ordinarily private respondent may
be held liable as an indorser of the check or even as
an accommodation party.However, to hold private
respondent liable for the amount of the check he
deposited by the strict application of the law and
without considering the attending circumstances in
the case would result in an injustice and in the
erosion of the public trust in the banking system. The
interest of justice thus demands looking into the
events that led to the encashment of the check.
Petitioner asserts that by signing the withdrawal slip,
private respondent "presented the opportunity for the
withdrawal of the amount in question." Petitioner
relied "on the genuine signature on the withdrawal
slip, the personality of private respondents son and
the lapse of more than fifty (50) days from date of
deposit of the Continental Bank draft, without the
same being returned yet." We hold, however, that the
propriety of the withdrawal should be gauged by
compliance with the rules thereon that both petitioner
bank and its depositors are duty-bound to observe.
In the passbook that petitioner issued to private
respondent, the following rules on withdrawal of
deposits appear:
"4.......Withdrawals must be made by the depositor
personally but in some exceptional circumstances, the
Bank may allow withdrawal by another upon the
depositors written authority duly authenticated; and
neither a deposit nor a withdrawal will be permitted
except upon the presentation of the depositors savings
passbook, in which the amount deposited withdrawn
shall be entered only by the Bank.
5.......Withdrawals may be made by draft, mail or
telegraphic transfer in currency of the account at the
request of the depositor in writing on the withdrawal
slip or by authenticated cable. Such request must
indicate the name of the payee/s, amount and the
place where the funds are to be paid. Any stamp,
transmission and other charges related to such
withdrawals shall be for the account of the depositor
and shall be paid by him/her upon demand.
Withdrawals may also be made in the form of
travellers checks and in pesos. Withdrawals in the
form of notes/bills are allowed subject however, to
their (availability).
6.......Deposits shall not be subject to withdrawal by
check, and may be withdrawn only in the manner
above provided, upon presentation of the depositors
savings passbook and with the withdrawal form
supplied by the Bank at the counter."Scjuris
Under these rules, to be able to withdraw from the
savings account deposit under the Philippine foreign
currency deposit system, two requisites must be
presented to petitioner bank by the person
withdrawing an amount: (a) a duly filled-up
withdrawal slip, and (b) the depositors passbook.
Private respondent admits that he signed a blank
withdrawal slip ostensibly in violation of Rule No. 6
requiring that the request for withdrawal must name
the payee, the amount to be withdrawn and the place
where such withdrawal should be made. That the
withdrawal slip was in fact a blank one with only
private respondents two signatures affixed on the
proper spaces is buttressed by petitioners allegation in
the instant petition that had private respondent
indicated therein the person authorized to receive the
money, then Ruben Gayon, Jr. could not have
withdrawn any amount. Petitioner contends that "(i)n
failing to do so (i.e., naming his authorized agent), he
practically authorized any possessor thereof to write
any amount and to collect the same."[
Such contention would have been valid if not for the
fact that the withdrawal slip itself indicates a special
instruction that the amount is payable to "Ramon A.
de Guzman &/or Agnes C. de Guzman." Such being
the case, petitioners personnel should have been duly
warned that Gayon, who was also employed in
petitioners Buendia Ave. Extension branch, was not
the proper payee of the proceeds of the check.
Otherwise, either Ramon or Agnes de Guzman should
have issued another authority to Gayon for such
withdrawal. Of course, at the dorsal side of the
withdrawal slip is an "authority to withdraw" naming
Gayon the person who can withdraw the amount
indicated in the check. Private respondent does not
deny having signed such authority. However,
considering petitioners clear admission that the
withdrawal slip was a blank one except for private
respondents signature, the unavoidable conclusion is
that the typewritten name of "Ruben C. Gayon, Jr."
was intercalated and thereafter it was signed by

Gayon or whoever was allowed by petitioner to
withdraw the amount. Under these facts, there could
not have been a principal-agent relationship between
private respondent and Gayon so as to render the
former liable for the amount withdrawn.
Moreover, the withdrawal slip contains a boxed
warning that states: "This receipt must be signed and
presented with the corresponding foreign currency
savings passbook by the depositor in person. For
withdrawals thru a representative, depositor should
accomplish the authority at the back." The
requirement of presentation of the passbook when
withdrawing an amount cannot be given mere lip
service even though the person making the
withdrawal is authorized by the depositor to do so.
This is clear from Rule No. 6 set out by petitioner so
that, for the protection of the banks interest and as a
reminder to the depositor, the withdrawal shall be
entered in the depositors passbook. The fact that
private respondents passbook was not presented
during the withdrawal is evidenced by the entries
therein showing that the last transaction that he made
with the bank was on September 3, 1984, the date he
deposited the controversial check in the amount of
$2,500.00.
In allowing the withdrawal, petitioner likewise
overlooked another rule that is printed in the
passbook. Thus:
"2.......All deposits will be received as current funds
and will be repaid in the same manner; provided,
however, that deposits of drafts, checks, money
orders, etc. will be accepted as subject to collection
only and credited to the account only upon receipt of
the notice of final payment. Collection charges by the
Banks foreign correspondent in effecting such
collection shall be for the account of the depositor. If
the account has sufficient balance, the collection shall
be debited by the Bank against the account. If, for
any reason, the proceeds of the deposited checks,
drafts, money orders, etc., cannot be collected or if
the Bank is required to return such proceeds, the
provisional entry therefor made by the Bank in the
savings passbook and its records shall be deemed
automatically cancelled regardless of the time that
has elapsed, and whether or not the defective items
can be returned to the depositor; and the Bank is

hereby authorized to execute immediately the
necessary corrections, amendments or changes in its
record, as well as on the savings passbook at the first
opportunity to reflect such cancellation." (Italics and
underlining supplied.) Jurissc
As correctly held by the Court of Appeals, in
depositing the check in his name, private respondent
did not become the outright owner of the amount
stated therein. Under the above rule, by depositing
the check with petitioner, private respondent was, in a
way, merely designating petitioner as the collecting
bank. This is in consonance with the rule that a
negotiable instrument, such as a check, whether a
managers check or ordinary check, is not legal tender.
[
As such, after receiving the deposit, under its own
rules, petitioner shall credit the amount in private
respondents account or infuse value thereon only
after the drawee bank shall have paid the amount of
the check or the check has been cleared for deposit.
Again, this is in accordance with ordinary banking
practices and with this Courts pronouncement that
"the collecting bank or last endorser generally suffers
the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering
that the act of presenting the check for payment to the
drawee is an assertion that the party making the
presentment has done its duty to ascertain the
genuineness of the endorsements."The rule finds
more meaning in this case where the check involved
is drawn on a foreign bank and therefore collection is
more difficult than when the drawee bank is a local
one even though the check in question is a managers
check.
In Banco Atlantico v. Auditor General Banco
Atlantico, a commercial bank in Madrid, Spain, paid
the amounts represented in three (3) checks to
Virginia Boncan, the finance officer of the Philippine
Embassy in Madrid. The bank did so without
previously clearing the checks with the drawee bank,
the Philippine National Bank in New York, on
account of the "special treatment" that Boncan
received from the personnel of Banco Atlanticos
foreign department. The Court held that the
encashment of the checks without prior clearance is
"contrary to normal or ordinary banking practice
specially so where the drawee bank is a foreign bank

and the amounts involved were large." Accordingly,
the Court approved the Auditor Generals denial of
Banco Atlanticos claim for payment of the value of
the checks that was withdrawn by Boncan.
Said ruling brings to light the fact that the banking
business is affected with public interest. By the nature
of its functions, a bank is under obligation to treat the
accounts of its depositors "with meticulous care,
always having in mind the fiduciary nature of their
relationship."As such, in dealing with its depositors, a
bank should exercise its functions not only with the
diligence of a good father of a family but it should do
so with the highest degree of care.
In the case at bar, petitioner, in allowing the
withdrawal of private respondents deposit, failed to
exercise the diligence of a good father of a family. In
total disregard of its own rules, petitioners personnel
negligently handled private respondents account to
petitioners detriment. As this Court once said on this
matter:
"Negligence is the omission to do something which a
reasonable man, guided by those considerations
which ordinarily regulate the conduct of human
affairs, would do, or the doing of something which a
prudent and reasonable man would do. The seventyeight (78)-year-old, yet still relevant, case of Picart v.
Smith, provides the test by which to determine the
existence of negligence in a particular case which
may be stated as follows: Did the defendant in doing
the alleged negligent act use that reasonable care and
caution which an ordinarily prudent person would
have used in the same situation? If not, then he is
guilty of negligence. The law here in effect adopts the
standard supposed to be supplied by the imaginary
conduct of the discreet pater-familias of the Roman
law. The existence of negligence in a given case is
not determined by reference to the personal judgment
of the actor in the situation before him. The law
considers what would be reckless, blameworthy, or
negligent in the man of ordinary intelligence and
prudence and determines liability by that
Petitioner violated its own rules by allowing the
withdrawal of an amount that is definitely over and
above the aggregate amount of private respondents
dollar deposits that had yet to be cleared. The banks
ledger on private respondents account shows that

before he deposited $2,500.00, private respondent
had a balance of only $750.00. Upon private
respondents deposit of $2,500.00 on September 3,
1984, that amount was credited in his ledger as a
deposit resulting in the corresponding total balance of
$3,250.00.] On September 10, 1984, the amount of
$600.00 and the additional charges of $10.00 were
indicated therein as withdrawn thereby leaving a
balance of $2,640.00. On September 30, 1984, an
interest of $11.59 was reflected in the ledger and on
October 23, 1984, the amount of $2,541.67 was
entered as withdrawn with a balance of $109.92On
November 19, 1984 the word "hold" was written
beside the balance of $109.92.[ That must have been
the time when Reyes, petitioners branch manager,
was informed unofficially of the fact that the check
deposited was a counterfeit, but petitioners Buendia
Ave. Extension Branch received a copy of the
communication thereon from Wells Fargo Bank
International in New York the following day,
November 20, 1984] According to Reyes, Wells Fargo
Bank International handled the clearing of checks
drawn against U.S. banks that were deposited with
petitioner. Jjlex
From these facts on record, it is at once apparent that
petitioners personnel allowed the withdrawal of an
amount bigger than the original deposit of $750.00
and the value of the check deposited in the amount of
$2,500.00 although they had not yet received notice
from the clearing bank in the United States on
whether or not the check was funded. Reyes
contention that after the lapse of the 35-day period
the amount of a deposited check could be withdrawn
even in the absence of a clearance thereon, otherwise
it could take a long time before a depositor could
make a withdrawal,is untenable. Said practice
amounts to a disregard of the clearance requirement
of the banking system.
While it is true that private respondents having signed
a blank withdrawal slip set in motion the events that
resulted in the withdrawal and encashment of the
counterfeit check, the negligence of petitioners
personnel was the proximate cause of the loss that
petitioner sustained. Proximate cause, which is
determined by a mixed consideration of logic,
common sense, policy and precedent, is "that cause,

which, in natural and continuous sequence, unbroken
by any efficient intervening cause, produces the
injury, and without which the result would not have
occurred.] The proximate cause of the withdrawal and
eventual loss of the amount of $2,500.00 on
petitioners part was its personnels negligence in
allowing such withdrawal in disregard of its own
rules and the clearing requirement in the banking
system. In so doing, petitioner assumed the risk of
incurring a loss on account of a forged or counterfeit
foreign check and hence, it should suffer the resulting
damage.
WHEREFORE, the petition for review on certiorari is
DENIED. The Decision of the Court of Appeals in
CA-G.R. CV No. 37392 is AFFIRMED.
SO ORDERED.
[G.R. No. 138569. September 11, 2003]

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

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

after the City Prosecutor filed a Motion to Dismiss on
4 August 1992.
On 24 August 1992, L.C. Diaz through its counsel
demanded from Solidbank the return of its money.
Solidbank refused.
On 25 August 1992, L.C. Diaz filed a Complaint for
Recovery of a Sum of Money against Solidbank with
the Regional Trial Court of Manila, Branch 8. After
trial, the trial court rendered on 28 December 1994 a
decision absolving Solidbank and dismissing the
complaint.
L.C. Diaz then appealed to the Court of Appeals. On
27 October 1998, the Court of Appeals issued its
Decision reversing the decision of the trial court.
On 11 May 1999, the Court of Appeals issued its
Resolution denying the motion for reconsideration of
Solidbank. The appellate court, however, modified its
decision by deleting the award of exemplary damages
and attorneys fees.
The Ruling of the Trial Court
In absolving Solidbank, the trial court applied the
rules on savings account written on the passbook. The
rules state that possession of this book shall raise the
presumption of ownership and any payment or
payments made by the bank upon the production of
the said book and entry therein of the withdrawal
shall have the same effect as if made to the depositor
personally. At the time of the withdrawal, a certain
Noel Tamayo was not only in possession of the
passbook, he also presented a withdrawal slip with
the signatures of the authorized signatories of L.C.
Diaz. The specimen signatures of these persons were
in the signature cards. The teller stamped the
withdrawal slip with the words Saving Teller No. 5.
The teller then passed on the withdrawal slip to
Genere Manuel (Manuel) for authentication. Manuel
verified the signatures on the withdrawal slip. The
withdrawal slip was then given to another officer who
compared the signatures on the withdrawal slip with
the specimen on the signature cards. The trial court
concluded that Solidbank acted with care and
observed the rules on savings account when it
allowed the withdrawal of P300,000 from the savings
account of L.C. Diaz.
The trial court pointed out that the burden of proof
now shifted to L.C. Diaz to prove that the signatures

on the withdrawal slip were forged. The trial court
admonished L.C. Diaz for not offering in evidence
the National Bureau of Investigation (NBI) report on
the authenticity of the signatures on the withdrawal
slip for P300,000. The trial court believed that L.C.
Diaz did not offer this evidence because it is
derogatory to its action.
Another provision of the rules on savings account
states that the depositor must keep the passbook
under lock and key.[When another person presents the
passbook for withdrawal prior to Solidbanks receipt
of the notice of loss of the passbook, that person is
considered as the owner of the passbook. The trial
court ruled that the passbook presented during the
questioned transaction was now out of the lock and
key and presumptively ready for a business
transaction.
Solidbank did not have any participation in the
custody and care of the passbook. The trial court
believed that Solidbanks act of allowing the
withdrawal of P300,000 was not the direct and
proximate cause of the loss. The trial court held that
L.C. Diazs negligence caused the unauthorized
withdrawal. Three facts establish L.C. Diazs
negligence: (1) the possession of the passbook by a
person other than the depositor L.C. Diaz; (2) the
presentation of a signed withdrawal receipt by an
unauthorized person; and (3) the possession by an
unauthorized person of a PBC check long closed by
L.C. Diaz, which check was deposited on the day of
the fraudulent withdrawal.
The trial court debunked L.C. Diazs contention that
Solidbank did not follow the precautionary
procedures observed by the two parties whenever
L.C. Diaz withdrew significant amounts from its
account. L.C. Diaz claimed that a letter must
accompany withdrawals of more than P20,000. The
letter must request Solidbank to allow the withdrawal
and convert the amount to a managers check. The
bearer must also have a letter authorizing him to
withdraw the same amount. Another person driving a
car must accompany the bearer so that he would not
walk from Solidbank to the office in making the
withdrawal. The trial court pointed out that L.C. Diaz
disregarded these precautions in its past withdrawal.
On 16 July 1991, L.C. Diaz withdrew P82,554

without any separate letter of authorization or any
communication with Solidbank that the money be
converted into a managers check.
The trial court further justified the dismissal of the
complaint by holding that the case was a last ditch
effort of L.C. Diaz to recover P300,000 after the
dismissal of the criminal case against Ilagan.
The dispositive portion of the decision of the trial
court reads:
IN VIEW OF THE FOREGOING, judgment is
hereby rendered DISMISSING the complaint.
The Court further renders judgment in favor of
defendant bank pursuant to its counterclaim the
amount of Thirty Thousand Pesos (P30,000.00) as
attorneys fees.
With costs against plaintiff.
SO ORDERED.[
The Ruling of the Court of Appeals
The Court of Appeals ruled that Solidbanks
negligence was the proximate cause of the
unauthorized withdrawal of P300,000 from the
savings account of L.C. Diaz. The appellate court
reached this conclusion after applying the provision
of the Civil Code on 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 plaintiff-appellant the
sum of Three Hundred Thousand Pesos
(P300,000.00), with interest thereon at the rate of
12% per annum from the date of filing of the
complaint until paid, the sum of P20,000.00 as
exemplary damages, and P20,000.00 as attorneys fees
and expenses of litigation as well as the cost of suit;
and
2. Ordering the dismissal of defendant-appellees
counterclaim in the amount of P30,000.00 as
attorneys fees.
SO ORDERED.
Acting on the motion for reconsideration of
Solidbank, the appellate court affirmed its decision
but modified the award of damages. The appellate
court deleted the award of exemplary damages and
attorneys fees. Invoking Article 2231 of the Civil

Code, the appellate court ruled that exemplary
damages could be granted if the defendant acted with
gross negligence. Since Solidbank was guilty of
simple negligence only, the award of exemplary
damages was not justified. Consequently, the award
of attorneys fees was also disallowed pursuant to
Article 2208 of the Civil Code. The expenses of
litigation and cost of suit were also not imposed on
Solidbank.
The dispositive portion of the Resolution reads as
follows:
WHEREFORE, foregoing considered, our decision
dated October 27, 1998 is affirmed with modification
by deleting the award of exemplary damages and
attorneys fees, expenses of litigation and cost of suit.
SO ORDERED.
Hence, this petition.
The Issues
Solidbank seeks the review of the decision and
resolution of the Court of Appeals on these grounds:
I. THE COURT OF APPEALS ERRED IN
HOLDING THAT PETITIONER BANK SHOULD
SUFFER THE LOSS BECAUSE ITS TELLER
SHOULD HAVE FIRST CALLED PRIVATE
RESPONDENT BY TELEPHONE BEFORE IT
ALLOWED THE WITHDRAWAL OF P300,000.00
TO RESPONDENTS MESSENGER EMERANO
ILAGAN, SINCE THERE IS NO AGREEMENT
BETWEEN THE PARTIES IN THE OPERATION
OF THE SAVINGS ACCOUNT, NOR IS THERE
ANY BANKING LAW, WHICH MANDATES
THAT A BANK TELLER SHOULD FIRST CALL
UP THE DEPOSITOR BEFORE ALLOWING A
WITHDRAWAL OF A BIG AMOUNT IN A
SAVINGS ACCOUNT.
II. THE COURT OF APPEALS ERRED IN
APPLYING THE DOCTRINE OF LAST CLEAR
CHANCE AND IN HOLDING THAT PETITIONER
BANKS
TELLER
HAD
THE
LAST
OPPORTUNITY
TO
WITHHOLD
THE
WITHDRAWAL WHEN IT IS UNDISPUTED THAT
THE TWO SIGNATURES OF RESPONDENT ON
THE WITHDRAWAL SLIP ARE GENUINE AND
PRIVATE RESPONDENTS PASSBOOK WAS
DULY PRESENTED, AND CONTRARIWISE
RESPONDENT WAS NEGLIGENT IN THE

SELECTION AND SUPERVISION OF ITS
MESSENGER EMERANO ILAGAN, AND IN THE
SAFEKEEPING OF ITS CHECKS AND OTHER
FINANCIAL DOCUMENTS.
III. THE COURT OF APPEALS ERRED IN NOT
FINDING THAT THE INSTANT CASE IS A LAST
DITCH EFFORT OF PRIVATE RESPONDENT TO
RECOVER ITS P300,000.00 AFTER FAILING IN
ITS EFFORTS TO RECOVER THE SAME FROM
ITS EMPLOYEE EMERANO ILAGAN.
IV. THE COURT OF APPEALS ERRED IN NOT
MITIGATING THE DAMAGES AWARDED
AGAINST PETITIONER UNDER ARTICLE 2197
OF THE CIVIL CODE, NOTWITHSTANDING ITS
FINDING
THAT
PETITIONER
BANKS
NEGLIGENCE WAS ONLY CONTRIBUTORY.
The Ruling of the Court
The petition is partly meritorious.
Solidbanks Fiduciary Duty under the Law
The rulings of the trial court and the Court of Appeals
conflict on the application of the law. The trial court
pinned the liability on L.C. Diaz based on the
provisions of the rules on savings account, a
recognition of the contractual relationship between
Solidbank and L.C. Diaz, the latter being a depositor
of the former. On the other hand, the Court of
Appeals applied the law on quasi-delict to determine
who between the two parties was ultimately
negligent. The law on quasi-delict or culpa aquiliana
is generally applicable when there is no pre-existing
contractual relationship between the parties.
We hold that Solidbank is liable for breach of
contract due to negligence, or culpa contractual.
The contract between the bank and its depositor is
governed by the provisions of the Civil Code on
simple loanArticle 1980 of the Civil Code expressly
provides that x x x savings x x x deposits of money in
banks and similar institutions shall be governed by
the provisions concerning simple loan. There is a
debtor-creditor relationship between the bank and its
depositor. The bank is the debtor and the depositor is
the creditor. The depositor lends the bank money and
the bank agrees to pay the depositor on demand. The
savings deposit agreement between the bank and the
depositor is the contract that determines the rights
and obligations of the parties.

The law imposes on banks high standards in view of
the fiduciary nature of banking. Section 2 of Republic
Act No. 8791 (RA 8791), 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
mind the fiduciary nature of their relationship.
This fiduciary relationship means that the banks
obligation to observe high standards of integrity and
performance is deemed written into every deposit
agreement between a bank and its depositor. The
fiduciary nature of banking requires banks to assume
a degree of diligence higher than that of a good father
of a family. Article 1172 of the Civil Code states that
the degree of diligence required of an obligor is that
prescribed by law or contract, and absent such
stipulation then the diligence of a good father of a
family. Section 2 of RA 8791 prescribes the statutory
diligence required from banks that banks must
observe high standards of integrity and performance
in servicing their depositors. Although RA 8791 took
effect almost nine years after the unauthorized
withdrawal of the P300,000 from L.C. Diazs savings
account, jurisprudence at the time of the withdrawal
already imposed on banks the same high standard of
diligence required under RA No. 8791.
However, the fiduciary nature of a bank-depositor
relationship does not convert the contract between the
bank and its depositors from a simple loan to a trust
agreement, whether express or implied. Failure by the
bank to pay the depositor is failure to pay a simple
loan, and not a breach of trust. [ The law simply
imposes on the bank a higher standard of integrity
and performance in complying with its obligations
under the contract of simple loan, beyond those
required of non-bank debtors under a similar contract
of simple loan.
The fiduciary nature of banking does not convert a
simple loan into a trust agreement because banks do
not accept deposits to enrich depositors but to earn

money for themselves. The law allows banks to offer
the lowest possible interest rate to depositors while
charging the highest possible interest rate on their
own borrowers. The interest spread or differential
belongs to the bank and not to the depositors who are
not cestui que trust of banks. If depositors are cestui
que trust of banks, then the interest spread or income
belongs to the depositors, a situation that Congress
certainly did not intend in enacting Section 2 of RA
8791.
Solidbanks Breach of its Contractual Obligation
Article 1172 of the Civil Code provides that
responsibility arising from negligence in the
performance of every kind of obligation is
demandable. For breach of the savings deposit
agreement due to negligence, or culpa contractual,
the bank is liable to its depositor.
Calapre left the passbook with Solidbank because the
transaction took time and he had to go to Allied Bank
for another transaction. The passbook was still in the
hands of the employees of Solidbank for the
processing of the deposit when Calapre left
Solidbank. Solidbanks rules on savings account
require that the deposit book should be carefully
guarded by the depositor and kept under lock and
key, if possible. When the passbook is in the
possession of Solidbanks tellers during withdrawals,
the law imposes on Solidbank and its tellers an even
higher degree of diligence in safeguarding the
passbook.
Likewise, Solidbanks tellers must exercise a high
degree of diligence in insuring that they return the
passbook only to the depositor or his authorized
representative. The tellers know, or should know, that
the rules on savings account provide that any person
in possession of the passbook is presumptively its
owner. If the tellers give the passbook to the wrong
person, they would be clothing that person
presumptive ownership of the passbook, facilitating
unauthorized withdrawals by that person. For failing
to return the passbook to Calapre, the authorized
representative of L.C. Diaz, Solidbank and Teller No.
6 presumptively failed to observe such high degree of
diligence in safeguarding the passbook, and in
insuring its return to the party authorized to receive
the same.
In culpa contractual, once the plaintiff proves a
breach of contract, there is a presumption that the
defendant was at fault or negligent. The burden is on
the defendant to prove that he was not at fault or
negligent. In contrast, in culpa aquiliana the plaintiff
has the burden of proving that the defendant was
negligent. In the present case, L.C. Diaz has
established that Solidbank breached its contractual
obligation to return the passbook only to the
authorized representative of L.C. Diaz. There is thus
a presumption that Solidbank was at fault and its
teller was negligent in not returning the passbook to
Calapre. The burden was on Solidbank to prove that
there was no negligence on its part or its employees.
Solidbank failed to discharge its burden. Solidbank
did not present to the trial court Teller No. 6, the
teller with whom Calapre left the passbook and who
was supposed to return the passbook to him. The
record does not indicate that Teller No. 6 verified the
identity of the person who retrieved the passbook.
Solidbank also failed to adduce in evidence its
standard procedure in verifying the identity of the
person retrieving the passbook, if there is such a
procedure, and that Teller No. 6 implemented this
procedure in the present case.
Solidbank is bound by the negligence of its
employees under the principle of respondeat superior
or command responsibility. The defense of exercising
the required diligence in the selection and supervision
of employees is not a complete defense in culpa
contractual, unlike in culpa aquiliana.
The bank must not only exercise high standards of
integrity and performance, it must also insure that its
employees do likewise because this is the only way to
insure that the bank will comply with its fiduciary
duty. Solidbank failed to present the teller who had
the duty to return to Calapre the passbook, and thus
failed to prove that this teller exercised the high
standards of integrity and performance required of
Solidbanks employees.
Proximate Cause of the Unauthorized Withdrawal
Another point of disagreement between the trial and
appellate courts is the proximate cause of the
unauthorized withdrawal. The trial court believed that
L.C. Diazs negligence in not securing its passbook
under lock and key was the proximate cause that

allowed the impostor to withdraw the P300,000. For
the appellate court, the proximate cause was the
tellers negligence in processing the withdrawal
without first verifying with L.C. Diaz. We do not
agree with either court.
Proximate cause is that cause which, in natural and
continuous sequence, unbroken by any efficient
intervening cause, produces the injury and without
which the result would not have occurred. Proximate
cause is determined by the facts of each case upon
mixed considerations of logic, common sense, policy
and precedent.
L.C. Diaz was not at fault that the passbook landed in
the hands of the impostor. Solidbank was in
possession of the passbook while it was processing
the deposit. After completion of the transaction,
Solidbank had the contractual obligation to return the
passbook only to Calapre, the authorized
representative of L.C. Diaz. Solidbank failed to fulfill
its contractual obligation because it gave the
passbook to another person.
Solidbanks failure to return the passbook to Calapre
made possible the withdrawal of the P300,000 by the
impostor who took possession of the passbook. Under
Solidbanks rules on savings account, mere possession
of the passbook raises the presumption of ownership.
It was the negligent act of Solidbanks Teller No. 6
that gave the impostor presumptive ownership of the
passbook. Had the passbook not fallen into the hands
of the impostor, the loss of P300,000 would not have
happened. Thus, the proximate cause of the
unauthorized withdrawal was Solidbanks negligence
in not returning the passbook to Calapre.
We do not subscribe to the appellate courts theory
that the proximate cause of the unauthorized
withdrawal was the tellers failure to call up L.C. Diaz
to verify the withdrawal. Solidbank did not have the
duty to call up L.C. Diaz to confirm the withdrawal.
There is no arrangement between Solidbank and L.C.
Diaz to this effect. Even the agreement between
Solidbank and L.C. Diaz pertaining to measures that
the parties must observe whenever withdrawals of
large amounts are made does not direct Solidbank to
call up L.C. Diaz.
There is no law mandating banks to call up their
clients whenever their representatives withdraw

significant amounts from their accounts. L.C. Diaz
therefore had the burden to prove that it is the usual
practice of Solidbank to call up its clients to verify a
withdrawal of a large amount of money. L.C. Diaz
failed to do so.
Teller No. 5 who processed the withdrawal could not
have been put on guard to verify the withdrawal.
Prior to the withdrawal of P300,000, the impostor
deposited with Teller No. 6 the P90,000 PBC check,
which later bounced. The impostor apparently
deposited a large amount of money to deflect
suspicion from the withdrawal of a much bigger
amount of money. The appellate court thus erred
when it imposed on Solidbank the duty to call up
L.C. Diaz to confirm the withdrawal when no law
requires this from banks and when the teller had no
reason to be suspicious of the transaction.
Solidbank continues to foist the defense that Ilagan
made the withdrawal. Solidbank claims that since
Ilagan was also a messenger of L.C. Diaz, he was
familiar with its teller so that there was no more need
for the teller to verify the withdrawal. Solidbank
relies on the following statements in the Booking and
Information Sheet of Emerano Ilagan:
xxx Ilagan also had with him (before the withdrawal)
a forged check of PBC and indicated the amount of
P90,000 which he deposited in favor of L.C. Diaz and
Company. After successfully withdrawing this large
sum of money, accused Ilagan gave alias Rey (Noel
Tamayo) his share of the loot. Ilagan then hired a
taxicab in the amount of P1,000 to transport him
(Ilagan) to his home province at Bauan, Batangas.
Ilagan extravagantly and lavishly spent his money but
a big part of his loot was wasted in cockfight and
horse racing. Ilagan was apprehended and meekly
admitted his guilt.(Emphasis supplied.)
L.C. Diaz refutes Solidbanks contention by pointing
out that the person who withdrew the P300,000 was a
certain Noel Tamayo. Both the trial and appellate
courts stated that this Noel Tamayo presented the
passbook with the withdrawal slip.
We uphold the finding of the trial and appellate courts
that a certain Noel Tamayo withdrew the P300,000.
The Court is not a trier of facts. We find no justifiable
reason to reverse the factual finding of the trial court
and the Court of Appeals. The tellers who processed

the deposit of the P90,000 check and the withdrawal
of the P300,000 were not presented during trial to
substantiate Solidbanks claim that Ilagan deposited
the check and made the questioned withdrawal.
Moreover, the entry quoted by Solidbank does not
categorically state that Ilagan presented the
withdrawal slip and the passbook.
Doctrine of Last Clear Chance
The doctrine of last clear chance states that where
both parties are negligent but the negligent act of one
is appreciably later than that of the other, or where it
is impossible to determine whose fault or negligence
caused the loss, the one who had the last clear
opportunity to avoid the loss but failed to do so, is
chargeable with the loss. Stated differently, the
antecedent negligence of the plaintiff does not
preclude him from recovering damages caused by the
supervening negligence of the defendant, who had the
last fair chance to prevent the impending harm by the
exercise of due diligence.
We do not apply the doctrine of last clear chance to
the present case. Solidbank is liable for breach of
contract due to negligence in the performance of its
contractual obligation to L.C. Diaz. This is a case of
culpa contractual, where neither the contributory
negligence of the plaintiff nor his last clear chance to
avoid the loss, would exonerate the defendant from
liability.Such contributory negligence or last clear
chance by the plaintiff merely serves to reduce the
recovery of damages by the plaintiff but does not
exculpate the defendant from his breach of contract.
Mitigated Damages
Under Article 1172, liability (for culpa contractual)
may be regulated by the courts, according to the
circumstances. This means that if the defendant
exercised the proper diligence in the selection and
supervision of its employee, or if the plaintiff was
guilty of contributory negligence, then the courts may
reduce the award of damages. In this case, L.C. Diaz
was guilty of contributory negligence in allowing a
withdrawal slip signed by its authorized signatories to
fall into the hands of an impostor. Thus, the liability
of Solidbank should be reduced.
In Philippine Bank of Commerce v. Court of Appeals,
where the Court held the depositor guilty of
contributory negligence, we allocated the damages

between the depositor and the bank on a 40-60 ratio.
Applying the same ruling to this case, we hold that
L.C. Diaz must shoulder 40% of the actual damages
awarded by the appellate court. Solidbank must pay
the other 60% of the actual damages.
WHEREFORE, the decision of the Court of Appeals
is AFFIRMED with MODIFICATION. Petitioner
Solidbank Corporation shall pay private respondent
L.C. Diaz and Company, CPAs only 60% of the
actual damages awarded by the Court of Appeals. The
remaining 40% of the actual damages shall be borne
by private respondent L.C. Diaz and Company, CPAs.
Proportionate costs.
SO ORDERED.
[G.R. No. 127469. January 15, 2004]

PHILIPPINE
BANKING
CORPORATION,
petitioner, vs. COURT OF APPEALS and LEONILO
MARCOS, respondents.
DECISION
CARPIO, J.:
The Case
Before us is a petition for review of the Decisio of the
Court of Appeals in CA-G.R. CV No. 34382 dated 10
December 1996 modifying the Decision of the
Regional Trial Court, Fourth Judicial Region,
Assisting Court, Bian, Laguna in Civil Case No. B3148 entitled Leonilo Marcos v. Philippine Banking
Corporation.
The Antecedent Facts
On 30 August 1989, Leonilo Marcos (Marcos) filed
with the trial court a Complaint for Sum of Money
with Damage against petitioner Philippine Banking
Corporation (BANK Marcos alleged that sometime in
1982, the BANK through Florencio B. Pagsaligan
(Pagsaligan), one of the officials of the BANK and a
close friend of Marcos, persuaded him to deposit
money with the BANK. Marcos yielded to
Pagsaligans persuasion and claimed he made a time
deposit with the BANK on two occasions. The first
was on 11 March 1982 for P664,897.67. The BANK
issued Receipt No. 635734 for this time deposit. On
12 March 1982, Marcos claimed he again made a
time deposit with the BANK for P764,897.67. The
BANK did not issue an official receipt for this time
deposit but it acknowledged a deposit of this amount
through a letter-certification Pagsaligan issued. The
time deposits earned interest at 17% per annum and
had a maturity period of 90 days.
Marcos alleged that Pagsaligan kept the various time
deposit certificates on the assurance that the BANK
would take care of the certificates, interests and
renewals. Marcos claimed that from the time of the
deposit, he had not received the principal amount or
its interest.
Sometime in March 1983, Marcos wanted to
withdraw from the BANK his time deposits and the
accumulated interests to buy materials for his
construction business. However, the BANK through
Pagsaligan convinced Marcos to keep his time
deposits intact and instead to open several domestic
letters of credit. The BANK required Marcos to give

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

bewailed the BANKs belated claim that his time
deposits were applied to this void promissory note on
12 March 1985.
In sum, Marcos claimed that:
(1) his time deposit with the BANK in the total sum
of P1,428,795.34 has earned accumulated interest
since March 1982 up to the present in the total
amount of P1,727,305.45 at the rate of 17% per
annum so his total money with defendant (the
BANK) is P3,156,100.79 less the amount of
P595,875 representing the 70% balance of the
marginal deposit and/or balance of the trust
agreements; and
(2) his indebtedness was only P851,250 less the 30%
paid as marginal deposit or a balance of P595,875,
which the BANK should have automatically deducted
from his time deposits and accumulated interest,
leaving the BANKs indebtedness to him at
P2,560,025.79.
Marcos prayed the trial court to declare Promissory
Note No. 20-979-83 void and to order the BANK to
pay the amount of his time deposits with interest. He
also sought the award of moral and exemplary
damages as well as attorneys fees for P200,000 plus
25% of the amount due.
On 18 September 1989, summons and a copy of the
complaint were served on the BANK
On 9 October 1989, the BANK filed its Answer with
Counterclaim. The BANK denied the allegations in
the complaint. The BANK believed that the suit was
Marcos desperate attempt to avoid liability under
several trust receipt agreements that were the subject
of a criminal complaint.
The BANK alleged that as of 12 March 1982, the
total amount of the various time deposits of Marcos
was only P764,897.67 and not P1,428,795.35 as
alleged in the complaint. The P764,897.67 included
the P664,897.67 that Marcos deposited on 11 March
1982.
The BANK pointed out that Marcos delivered to the
BANK the time deposit certificates by virtue of the
Deed of Assignment dated 2 June 1989. Marcos
executed the Deed of Assignment to secure his
various loan obligations. The BANK claimed that
these loans are covered by Promissory Note No. 20-
756-82 dated 2 June 1982 for P420,000 and

Promissory Note No. 20-979-83 dated 24 October
1983 for P500,000. The BANK stressed that these
obligations are separate and distinct from the trust
receipt agreements.
When Marcos defaulted in the payment of
Promissory Note No. 20-979-83, the BANK debited
his time deposits and applied the same to the
obligation that is now considered fully paid. The
BANK insisted that the Deed of Assignment
authorized it to apply the time deposits in payment of
Promissory Note No. 20-979-83.
In March 1982, the wife of Marcos, Consolacion
Marcos, sought the advice of Pagsaligan.
Consolacion informed Pagsaligan that she and her
husband needed to finance the purchase of
construction materials for their business, L.A. Marcos
Construction Company. Pagsaligan suggested the
opening of the letters of credit and the execution of
trust receipts, whereby the BANK would agree to
purchase the goods needed by the client through the
letters of credit. The BANK would then entrust the
goods to the client, as entrustee, who would
undertake to deliver the proceeds of the sale or the
goods themselves to the entrustor within a specified
time.
The BANK claimed that Marcos freely entered into
the trust receipt agreements. When Marcos failed to
account for the goods delivered or for the proceeds of
the sale, the BANK filed a complaint for violation of
Presidential Decree No. 115 or the Trust Receipts
Law. Instead of initiating negotiations for the
settlement of the account, Marcos filed this suit.
The BANK denied falsifying Promissory Note No.
20-979-83. The BANK claimed that the promissory
note is supported by documentary evidence such as
Marcos application for this loan and the microfilm of
the cashiers check issued for the loan. The BANK
insisted that Marcos could not deny the agreement for
the payment of interest and penalties under the trust
receipt agreements. The BANK prayed for the
dismissal of the complaint, payment of damages,
attorneys fees and cost of suit.
On 15 December 1989, the trial court on motion of
Marcos counsel issued an order declaring the BANK
in default for filing its answer five days after the 15-
day period to file the answer had lapsed. The trial

court also held that the answer is a mere scrap of
paper because a copy was not furnished to Marcos. In
the same order, the trial court allowed Marcos to
present his evidence ex parte on 18 December 1989.
On that date, Marcos testified and presented
documentary evidence. The case was then submitted
for decision.
On 19 December 1989, Marcos received a copy of
the BANKs Answer with Compulsory Counterclaim.
On 29 December 1989, the BANK filed an opposition
to Marcos motion to declare the BANK in default. On
9 January 1990, the BANK filed a motion to lift the
order of default claiming that it had only then learned
of the order of default. The BANK explained that its
delayed filing of the Answer with Counterclaim and
failure to serve a copy of the answer on Marcos was
due to excusable negligence. The BANK asked the
trial court to set aside the order of default because it
had a valid and meritorious defense.
On 7 February 1990, the trial court issued an order
setting aside the default order and admitting the
BANKs Answer with Compulsory Counterclaim. The
trial court ordered the BANK to present its evidence
on 12 March 1990.
On 5 March 1990, the BANK filed a motion praying
to cross-examine Marcos who had testified during the
ex-parte hearing of 18 December 1989. On 12 March
1990, the trial court denied the BANKs motion and
directed the BANK to present its evidence. Trial then
ensued.
The BANK presented two witnesses, Rodolfo Sales,
the Branch Manager of the BANKs Cubao Branch
since 1987, and Pagsaligan, the Branch Manager of
the same branch from 1982 to 1986.
On 24 April 1990, the counsel of Marcos crossexamined Pagsaligan. Due to lack of material time,
the trial court reset the continuation of the crossexamination and presentation of other evidence. The
succeeding hearings were postponed, specifically on
24, 27 and 28 of August 1990, because of the BANKs
failure to produce its witness, Pagsaligan. The BANK
on these scheduled hearings also failed to present
other evidence.
On 7 September 1990, the BANK moved to postpone
the hearing on the ground that Pagsaligan could not
attend the hearing because of illness. The trial court

denied the motion to postpone and on motion of
Marcos counsel ruled that the BANK had waived its
right to present further evidence. The trial court
considered the case submitted for decision. The
BANK moved for reconsideration, which the trial
court denied.
On 8 October 1990, the trial court rendered its
decision in favor of Marcos. Aggrieved, the BANK
appealed to the Court of Appeals.
On 10 December 1996, the Court of Appeals
modified the decision of the trial court by reducing
the amount of actual damages and deleting the
attorneys fees awarded to Marcos.
The Ruling of the Trial Court
The trial court ruled that the total amount of time
deposits of Marcos was P1,429,795.34 and not only
P764,897.67 as claimed by the BANK. The trial court
found that Marcos made a time deposit on two
occasions. The first time deposit was made on 11
March 1982 for P664,897.67 as shown by Receipt
No. 635743. On 12 March 1982, Marcos again made
a time deposit for P764,897.67 as acknowledged by
Pagsaligan in a letter of certification. The two time
deposits thus amounted to P1,429,795.34.
The trial court pointed out that no receipt was issued
for the 12 March 1982 time deposit because the letter
of certification was sufficient. The trial court made a
finding that the certification letter did not include the
time deposit made on 11 March 1982. The 12 March
1982 deposit was in cash while the 11 March 1982
deposit was in checks which still had to clear. The
checks were not included in the certification letter
since the BANK could not credit the amounts of the
checks prior to clearing. The trial court declared that
even the Deed of Assignment acknowledged that
Marcos made several time deposits as the Deed stated
that the assigment was charged against various time
deposits.
The trial court recognized the existence of the Deed
of Assignment and the two loans that Marcos
supposedly obtained from the BANK on 28 May
1982 for P340,000 and on 2 June 1982 for P420,000.
The two loans amounted to P760,000. On 2 June
1982, the same day that he secured the second loan,
Marcos executed a Deed of Assignment assigning to
the BANK P760,000 of his time deposits. The trial

court concluded that obviously the two loans were
immediately paid by virtue of the Deed of
Assignment.
The trial court found it strange that Marcos borrowed
money from the BANK at a higher rate of interest
instead of just withdrawing his time deposits. The
trial court saw no rhyme or reason why Marcos had
to secure the loans from the BANK. The trial court
was convinced that Marcos did not know that what he
had signed were loan applications and a Deed of
Assignment in payment for his loans. Nonetheless,
the trial court recognized the said loan of P760,000
and its corresponding payment by virtue of the Deed
of Assignment for the equal sum.
If the BANKs claim is true that the time deposits of
Marcos amounted only to P764,897.67 and he had
already assigned P760,000 of this amount, the trial
court pointed out that what would be left as of 3 June
1982 would only be P4,867.67 Yet, after the time
deposits had matured, the BANK allowed Marcos to
open letters of credit three times. The three letters of
credit were all secured by the time deposits of Marcos
after he had paid the 30% marginal deposit. The trial
court opined that if Marcos time deposit was only
P764,897.67, then the letters of credit totalling
P595,875 (less 30% marginal deposit) was
guaranteed by only P4,867.67 the remaining time
deposits after Marcos had executed the Deed of
Assignment for P760,000.
According to the trial court, a security of only
P4,867.67 ] for a loan worth P595,875 (less 30%
marginal deposit) is not only preposterous, it is also
comical. Worse, aside from allowing Marcos to have
unsecured trust receipts, the BANK still claimed to
have granted Marcos another loan for P500,000 on 25
October 1983 covered by Promissory Note No. 20979-83. The BANK is a commercial bank engaged in
the business of lending money. Allowing a loan of
more than a million pesos without collateral is in the
words of the trial court, an impossibility and a gross
violation of Central Bank Rules and Regulations,
which no Bank Manager has such authority to grant
Thus, the trial court held that the BANK could not
have granted Marcos the loan covered by Promissory
Note No. 20-979-83 because it was unsecured by any
collateral.
The trial court required the BANK to produce the
original copies of the loan application and Promissory
Note No. 20-979-83 so that it could determine who
applied for this loan. However, the BANK presented
to the trial court only the machine copies of the
duplicate of these documents.
Based on the machine copies of the duplicate of the
two documents, the trial court noticed the following
discrepancies: (1) Marcos signature on the two
documents are merely initials unlike in the other
documents submitted by the BANK; (2) it is highly
unnatural for the BANK to only have duplicate
copies of the two documents in its custody; (3) the
address of Marcos in the documents is different from
the place of residence as stated by Marcos in the
other documents annexed by the BANK in its
Answer; (4) Pagsaligan made it appear that a check
for the loan proceeds of P470,588 less bank charges
was issued to Marcos but the checks payee was one
ATTY. LEONILO MARCOS and, as the trial court
noted, Marcos is not a lawyer; and (5) Pagsaligan was
not sure what branch of the BANK issued the check
for the loan proceeds. The trial court was convinced
that Marcos did not execute the questionable
documents covering the P500,000 loan and
Pagsaligan used these documents as a means to
justify his inability to explain and account for the
time deposits of Marcos.
The trial court noted the BANKs defective
documentation of its transaction with Marcos. First,
the BANK was not in possession of the original
copies of the documents like the loan applications.
Second, the BANK did not have a ledger of the
accounts of Marcos or of his various transactions
with the BANK. Last, the BANK did not issue a
certificate of time deposit to Marcos. Again, the trial
court attributed the BANKs lapses to Pagsaligans
scheme to defraud Marcos of his time deposits.
The trial court also took note of Pagsaligans
demeanor on the witness stand. Pagsaligan evaded
the questions by giving unresponsive or inconsistent
answers compelling the trial court to admonish him.
When the trial court ordered Pagsaligan to produce
the documents, he conveniently became sick and thus
failed to attend the hearings without presenting proof
of his physical condition.

The trial court disregarded the BANKs assertion that
the time deposits were converted into a savings
account at 14% or 10% per annum upon maturity.
The BANK never informed Marcos that his time
deposits had already matured and these were
converted into a savings account. As to the interest
due on the trust receipts, the trial court ruled that
there is no basis for such a charge because the
documents do not stipulate any interest.
In computing the amount due to Marcos, the trial
court took into account the marginal deposit that
Marcos had already paid which is equivalent to 30%
of the total amount of the three trust receipts. The
three trust receipts totalling P851,250 would then
have a balance of P595,875. The balance became due
in March 1987 and on the same date, Marcos time
deposits of P669,932.30 had already earned interest
from 1983 to 1987 totalling P569,323.21 at 17% per
annum. Thus, the trial court ruled that the time
deposits in 1987 totalled P1,239,115. From this
amount, the trial court deducted P595,875, the
amount of the trust receipts, leaving a balance on the
time deposits of P643,240 as of March 1987.
However, since the BANK failed to return the time
deposits of Marcos, which again matured in March
1990, the time deposits with interest, less the amount
of trust receipts paid in 1987, amounted to
P971,292.49 as of March 1990.
In the alternative, the trial court ruled that even if
Marcos had only one time deposit of P764,897.67 as
claimed by the BANK, the time deposit would have
still earned interest at the rate of 17% per annum. The
time deposit of P650,163 would have increased to
P1,415,060 in 1987 after earning interest. Deducting
the amount of the three trust receipts, Marcos time
deposits still totalled P1,236,969.30 plus interest.
The dispositive portion of the decision of the trial
court reads:
WHEREFORE, under the foregoing circumstances,
judgment is hereby rendered in favor of Plaintiff,
directing Defendant Bank as follows:
1) to return to Plaintiff his time deposit in the sum of
P971,292.49 with interest thereon at the legal rate,
until fully restituted;
2) to pay attorneys fees of P200,000.00; [and]
3) [to pay the] cost of these proceedings.

IT IS SO ORDERED.
The Ruling of the Court of Appeals
The Court of Appeals addressed the procedural and
substantive issues that the BANK raised.
The appellate court ruled that the trial court
committed a reversible error when it denied the
BANKs motion to cross-examine Marcos. The
appellate court ruled that the right to cross-examine is
a fundamental right that the BANK did not waive
because the BANK vigorously asserted this right. The
BANKs failure to serve a notice of the motion to
Marcos is not a valid ground to deny the motion to
cross-examine. The appellate court held that the
motion to cross-examine is one of those non-litigated
motions that do not require the movant to provide a
notice of hearing to the other party.
The Court of Appeals pointed out that when the trial
court lifted the order of default, it had the duty to
afford the BANK its right to cross-examine Marcos.
This duty assumed greater importance because the
only evidence supporting the complaint is Marcos exparte testimony. The trial court should have tested the
veracity of Marcos testimony through the distilling
process of cross-examination. The Court of Appeals,
however, believed that the case should not be
remanded to the trial court because Marcos testimony
on the time deposits is supported by evidence on
record from which the appellate court could make an
intelligent judgment.
On the second procedural issue, the Court of Appeals
held that the trial court did not err when it declared
that the BANK had waived its right to present its
evidence and had submitted the case for decision. The
appellate court agreed with the grounds relied upon
by the trial court in its Order dated 7 September 1990.
The Court of Appeals, however, differed with the
finding of the trial court as to the total amount of the
time deposits. The appellate court ruled that the total
amount of the time deposits of Marcos is only
P764,897.67 and not P1,429,795.34 as found by the
trial court. The certification letter issued by
Pagsaligan showed that Marcos made a time deposit
on 12 March 1982 for P764,897.67. The certification
letter shows that the amount mentioned in the letter
was the aggregate or total amount of the time deposits
of Marcos as of that date. Therefore, the P764,897.67

already included the P664,897.67 time deposit made
by Marcos on 11 March 1982.
The Court of Appeals further explained:
Besides, the Official Receipt (Exh. B, p. 32, Records)
dated March 11, 1982 covering the sum of
P664,987.67 time deposit did not provide for a
maturity date implying clearly that the amount
covered by said receipt forms part of the total sum
shown in the letter-certification which contained a
maturity date. Moreover, it taxes ones credulity to
believe that appellee would make a time deposit on
March 12, 1982 in the sum of P764,897.67 which
except for the additional sum of P100,000.00 is
practically identical (see underlined figures) to the
sum of P664,897.67 deposited the day before March
11, 1982.
Additionally, We agree with the contention of the
appellant that the lower court wrongly appreciated the
testimony of Mr. Pagsaligan. Our finding is
strengthened when we consider the alleged
application for loan by the appellee with the appellant
in the sum of P500,000.00 dated October 24, 1983.
(Exh. J, p. 40, Records), wherein it was stated that the
loan is for additional working capital versus the
various time deposit amounting to P760,000.00
The Court of Appeals sustained the factual findings
of the trial court in ruling that Promissory Note No.
20-979-83 is void. There is no evidence of a bank
ledger or computation of interest of the loan. The
appellate court blamed the BANK for failing to
comply with the orders of the trial court to produce
the documents on the loan. The BANK also made
inconsistent statements. In its Answer to the
Complaint, the BANK alleged that the loan was fully
paid when it debited the time deposits of Marcos with
the loan. However, in its discussion of the assigned
errors, the BANK claimed that Marcos had yet to pay
the loan.
The appellate court deleted the award of attorneys
fees. It noted that the trial court failed to justify the
award of attorneys fees in the text of its decision. The
dispositive portion of the decision of the Court of
Appeals reads:
WHEREFORE, premises considered, the appealed
decision is SET ASIDE. A new judgment is hereby
rendered ordering the appellant bank to return to the

appellee his time deposit in the sum of P764,897.67
with 17% interest within 90 days from March 11,
1982 in accordance with the letter-certification and
with legal interest thereafter until fully paid. Costs
against the appellant.
SO ORDERED
The Issues
The BANK anchors this petition on the following
issues:
1) WHETHER OR NOT THE PETITIONER [sic]
ABLE TO PROVE THE PRIVATE RESPONDENTS
OUTSTANDING OBLIGATIONS SECURED BY
THE ASSIGNMENT OF TIME DEPOSITS?
1.1) COROLLARILY, WHETHER OR NOT THE
PROVISIONS OF SECTION 8 RULE 10 OF [sic]
THEN REVISED RULES OF COURT BE APPLIED
[sic] SO AS TO CREATE A JUDICIAL
ADMISSION ON THE GENUINENESS AND DUE
EXECUTION
OF
THE
ACTIONABLE
DOCUMENTS
APPENDED
TO
THE
PETITIONERS ANSWER?
2) WHETHER OR NOT PETITIONER [sic]
DEPRIVED OF DUE PROCESS WHEN THE
LOWER COURT HAS [sic] DECLARED
PETITIONER
TO
HAVE
WAIVED
PRESENTATION OF FURTHER EVIDENCE AND
CONSIDERED THE CASE SUBMITTED FOR
RESOLUTION
The Ruling of the Court
The petition is without merit.
Procedural Issues
There was no violation of the BANKs right to
procedural due process when the trial court denied
the BANKs motion to cross-examine Marcos. Prior to
the denial of the motion, the trial court had properly
declared the BANK in default. Since the BANK was
in default, Marcos was able to present his evidence
ex-parte including his own testimony. When the trial
court lifted the order of default, the BANK was
restored to its standing and rights in the action.
However, as a rule, the proceedings already taken
should not be disturbed. Nevertheless, it is within the
trial courts discretion to reopen the evidence
submitted by the plaintiff and allow the defendant to
challenge the same, by cross-examining the plaintiffs
witnesses or introducing countervailing evidence.

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

opposite party and to give him time to study and meet
the arguments. In a motion to cross-examine, the
adverse party has the right not only to prepare a
meaningful opposition to the motion but also to be
informed that his witness is being recalled for crossexamination. The proof of service was therefore
indispensable and the trial court was correct in
denying the oral manifestation to grant the motion for
cross-examination.
We find no justifiable reason to relax the application
of the rule on notice of motions to this case. The
BANK could have easily re-filed the motion to crossexamine with the requisite notice to Marcos. It did
not do so. The BANK did not make good its threat to
elevate the denial to a higher court. The BANK
waited until the trial court rendered a judgment on the
merits before questioning the interlocutory order of
denial.
While the right to cross-examine is a vital element of
procedural due process, the right does not necessarily
require an actual cross-examination, but merely an
opportunity to exercise this right if desired by the
party entitled to it. Clearly, the BANKs failure to
cross-examine is imputable to the BANK when it lost
this right as it was in default and failed thereafter to
exhaust the remedies to secure the exercise of this
right at the earliest opportunity.
The two other procedural lapses that the BANK
attributes to the appellate and trial courts deserve
scant consideration.
The BANK raises for the very first time the issue of
judicial admission on the part of Marcos. The BANK
even has the audacity to fault the Court of Appeals
for not ruling on this issue when it never raised this
matter before the appellate court or before the trial
court. Obviously, this issue is only an afterthought.
An issue raised for the first time on appeal and not
raised timely in the proceedings in the lower court is
barred by estoppel
The BANK cannot claim that Marcos had admitted
the due execution of the documents attached to its
answer because the BANK filed its answer late and
even failed to serve it on Marcos. The BANKs
answer, including the actionable documents it
pleaded and attached to its answer, was a mere scrap
of paper. There was nothing that Marcos could

specifically deny under oath. Marcos had already
completed the presentation of his evidence when the
trial court lifted the order of default and admitted the
BANKs answer. The provision of the Rules of Court
governing admission of actionable documents was
not enacted to reward a party in default. We will not
allow a party to gain an advantage from its disregard
of the rules.
As to the issue of its right to present additional
evidence, we agree with the Court of Appeals that the
trial court correctly ruled that the BANK had waived
this right. The BANK cannot now claim that it was
deprived of its right to conduct a re-direct
examination of Pagsaligan. The BANK postponed the
hearings three times because of its inability to secure
Pagsaligans presence during the hearings. The BANK
could have presented another witness or its other
evidence but it obstinately insisted on the resetting of
the hearing because of Pagsaligans absence allegedly
due to illness.
The BANKs propensity for postponements had long
delayed the case. Its motion for postponement based
on Pagsaligans illness was not even supported by
documentary evidence such as a medical certificate.
Documentary evidence of the illness is necessary
before the trial court could rule that there is a
sufficient basis to grant the postponement.
The BANKs Fiduciary Duty to its Depositor
The BANK is liable to Marcos for offsetting his time
deposits with a fictitious promissory note. The
existence of Promissory Note No. 20-979-83 could
have been easily proven had the BANK presented the
original copies of the promissory note and its
supporting evidence. In lieu of the original copies, the
BANK presented the machine copies of the duplicate
of the documents. These substitute documents have
no evidentiary value. The BANKs failure to explain
the absence of the original documents and to maintain
a record of the offsetting of this loan with the time
deposits bring to fore the BANKs dismal failure to
fulfill its fiduciary duty to Marcos.
Section 2 of Republic Act No. 8791 (General
Banking Law of 2000) expressly imposes this
fiduciary duty on banks when it declares that the
State recognizes the fiduciary nature of banking that
requires high standards of integrity and performance.

This statutory declaration merely echoes the earlier
pronouncement of the Supreme Court in Simex
International (Manila) Inc. v. Court of Appeals
requiring banks to treat the accounts of its depositors
with meticulous care, always having in mind the
fiduciary nature of their relationship. The Court
reiterated this fiduciary duty of banks in subsequent
cases.
Although RA No. 8791 took effect only in the year
2000, at the time that the BANK transacted with
Marcos, jurisprudence had already imposed on banks
the same high standard of diligence required under
RA No. 8791.This fiduciary relationship means that
the banks obligation to observe high standards of
integrity and performance is deemed written into
every deposit agreement between a bank and its
depositor.
The fiduciary nature of banking requires banks to
assume a degree of diligence higher than that of a
good father of a family. Thus, the BANKs fiduciary
duty imposes upon it a higher level of accountability
than that expected of Marcos, a businessman, who
negligently signed blank forms and entrusted his
certificates of time deposits to Pagsaligan without
retaining copies of the certificates.
The business of banking is imbued with public
interest. The stability of banks largely depends on the
confidence of the people in the honesty and
efficiency of banks. In Simex International (Manila)
Inc. v. Court of Appeals[ we pointed out the depositors
reasonable expectations from a bank and the banks
corresponding duty to its depositor, as follows:
whomever he directs.
As the BANKs depositor, Marcos had the right to
expect that the BANK was accurately recording his
transactions with it. Upon the maturity of his time
deposits, Marcos also had the right to withdraw the

amount due him after the BANK had correctly
debited his outstanding obligations from his time
deposits.
By the very nature of its business, the BANK should
have had in its possession the original copies of the
disputed promissory note and the records and ledgers
evidencing the offsetting of the loan with the time
deposits of Marcos. The BANK inexplicably failed to
produce the original copies of these documents.
Clearly, the BANK failed to treat the account of
Marcos with meticulous care.
The BANK claims that it is a reputable banking
institution and that it has no reason to forge
Promissory Note No. 20-979-83. The trial court and
appellate court did not rule that it was the bank that
forged the promissory note. It was Pagsaligan, the
BANKs branch manager and a close friend of
Marcos, whom the trial court categorically blamed
for the fictitious loan agreements. The trial court held
that Pagsaligan made up the loan agreement to cover
up his inability to account for the time deposits of
Marcos.
Whether it was the BANKs negligence and
inefficiency or Pagsaligans misdeed that deprived
Marcos of the amount due him will not excuse the
BANK from its obligation to return to Marcos the
correct amount of his time deposits with interest. The
duty to observe high standards of integrity and
performance imposes on the BANK that obligation.
The BANK cannot also unjustly enrich itself by
keeping Marcos money.
Assuming Pagsaligan was behind the spurious
promissory note, the BANK would still be
accountable to Marcos. We have held that a bank is
liable for the wrongful acts of its officers done in the
interest of the bank or in their dealings as bank
representatives but not for acts outside the scope of
their authority.[Thus, we held:
A bank holding out its officers and agents as worthy
of confidence will not be permitted to profit by the
frauds they may thus be enabled to perpetrate in the
apparent scope of their employment; nor will it be
permitted to shirk its responsibility for such frauds,
even though no benefit may accrue to the bank
therefrom (10 Am Jur 2d, p. 114). Accordingly, a
banking corporation is liable to innocent third persons

where the representation is made in the course of its
business by an agent acting within the general scope
of his authority even though, in the particular case,
the agent is secretly abusing his authority and
attempting to perpetrate a fraud upon his principal or
some other person, for his own ultimate benefit.
The Existence of Promissory Note No. 20-979-83 was
not Proven
The BANK failed to produce the best evidence the
original copies of the loan application and promissory
note. The Best Evidence Rule provides that the court
shall not receive any evidence that is merely
substitutionary in its nature, such as photocopies, as
long as the original evidence can be had. Absent a
clear showing that the original writing has been lost,
destroyed or cannot be produced in court, the
photocopy must be disregarded, being unworthy of
any probative value and being an inadmissible piece
of evidence.
What the BANK presented were merely the machine
copies of the duplicate of the loan application and
promissory note. No explanation was ever offered by
the BANK for its inability to produce the original
copies of the documentary evidence. The BANK also
did not comply with the orders of the trial court to
submit the originals.
The purpose of the rule requiring the production of
the best evidence is the prevention of fraud.If a party
is in possession of evidence and withholds it, and
seeks to substitute inferior evidence in its place, the
presumption naturally arises that the better evidence
is withheld for fraudulent purposes, which its
production would expose and defeat.
The absence of the original of the documentary
evidence casts suspicion on the existence of
Promissory Note No. 20-979-83 considering the
BANKs fiduciary duty to keep efficiently a record of
its transactions with its depositors. Moreover, the
circumstances enumerated by the trial court bolster
the conclusion that Promissory Note No. 20-979-83 is
bogus. The BANK has only itself to blame for the
dearth of competent proof to establish the existence
of Promissory Note No. 20-979-83.
Total Amount Due to Marcos
The BANK and Marcos do not now dispute the ruling
of the Court of Appeals that the total amount of time

deposits that Marcos placed with the BANK is only
P764,897.67 and not P1,429,795.34 as found by the
trial court. The BANK has always argued that Marcos
time deposits only totalled P764,897.67.[What the
BANK insists on in this petition is the trial courts
violation of its right to procedural due process and the
absence of any obligation to pay or return anything to
Marcos. Marcos, on the other hand, merely prays for
the affirmation of either the trial court or appellate
court decision. We uphold the finding of the Court of
Appeals as to the amount of the time deposits as such
finding is in accord with the evidence on record.
Marcos claimed that the certificates of time deposit
were with Pagsaligan for safekeeping. Marcos was
only able to present the receipt dated 11 March 1982
and the letter-certification dated 12 March 1982 to
prove the total amount of his time deposits with the
BANK. The letter-certification issued by Pagsaligan
reads:
March 12, 1982
Dear Mr. Marcos:
This is to certify that we are taking care in your
behalf various Time Deposit Certificates with an
aggregate value of PESOS: SEVEN HUNDRED
SIXTY FOUR THOUSAND EIGHT HUNDRED
NINETY SEVEN AND 67/100 (P764,897.67) ONLY,
issued today for 90 days at 17% p.a. with the interest
payable at maturity on June 10, 1982.
Thank you.
Sgd. FLORENCIO B. PAGSALIGAN
Branch Manager
The foregoing certification is clear. The total amount
of time deposits of Marcos as of 12 March 1982 is
P764,897.67, inclusive of the sum of P664,987.67
that Marcos placed on time deposit on 11 March
1982. This is plainly seen from the use of the word
aggregate.
We are not swayed by Marcos testimony that the
certification is actually for the first time deposit that
he placed on 11 March 1982. The letter-certification
speaks of various Time Deposits Certificates with an
aggregate value of P764,897.67. If the amount stated
in the letter-certification is for a single time deposit
only, and did not include the 11 March 1982 time
deposit, then Marcos should have demanded a new
letter of certification from Pagsaligan. Marcos is a

businessman. While he already made an error in
judgment in entrusting to Pagsaligan the certificates
of time deposits, Marcos should have known the
importance of making the letter-certification reflect
the true nature of the transaction. Marcos is bound by
the letter-certification since he was the one who
prodded Pagsaligan to issue it.
We modify the amount that the Court of Appeals
ordered the BANK to return to Marcos. The appellate
court did not offset Marcos outstanding debt with the
BANK covered by the three trust receipt agreements
even though Marcos admits his obligation under the
three trust receipt agreements. The total amount of
the trust receipts is P851,250 less the 30% marginal
deposit of P255,375 that Marcos had already paid the
BANK. This reduced Marcos total debt with the
BANK to P595,875 under the trust receipts.
The trial and appellate courts found that the parties
did not agree on the imposition of interest on the loan
covered by the trust receipts and thus no interest is
due on this loan. However, the records show that the
three trust receipt agreements contained stipulations
for the payment of interest but the parties failed to fill
up the blank spaces on the rate of interest. Put
differently, the BANK and Marcos expressly agreed
in writing on the payment of interest without,
however, specifying the rate of interest. We,
therefore, impose the legal interest of 12% per
annum, the legal interest for the forbearance of
money, on each of the three trust receipts.
Based on Marcos testimony and the BANKs letter of
demand,the trust receipt agreements became due in
March 1987. The records do not show exactly when
in March 1987 the obligation became due. In
accordance with Article 2212 of the Civil Code, in
such a case the court shall fix the period of the
duration of the obligation. The BANKs letter of
demand is dated 6 March 1989. We hold that the trust
receipts became due on 6 March 1987.
Marcos payment of the marginal deposit of P255,375
for the trust receipts resulted in the proportionate
reduction of the three trust receipts. The reduced
value of the trust receipts and their respective interest
as of 6 March 1987 are as follows:
1. Trust Receipt No. CD 83.7 issued on 8 March 1983
originally for P300,000 was reduced to P210,618.75

with interest of P101,027.76.
2. Trust Receipt No. CD 83.9 issued on 15 March
1983 originally for P300,000 was reduced to
P210,618.75 with interest of P100,543.04.
3. Trust Receipt No. CD 83.10 issued on 15 March
1983 originally for P251,250 was reduced to
P174,637.5 with interest of P83,366.68. When the
trust receipts became due on 6 March 1987, Marcos
owed the BANK P880,812.48. This amount included
P595,875, the principal value of the three trust
receipts after payment of the marginal deposit, and
P284,937.48, the interest then due on the three trust
receipts.
Upon maturity of the three trust receipts, the BANK
should have automatically deducted, by way of
offsetting, Marcos outstanding debt to the BANK
from his time deposits and its accumulated interest.
Marcos time deposits of P764,897.67 had already
earned interest of P616,318.92 as of 6 March
1987Thus, Marcos total funds with the BANK
amounted to P1,381,216.59 as of the maturity of the
trust receipts. After deducting P880,812.48, the
amount Marcos owed the BANK, from Marcos funds
with the BANK of P1,381,216.59, Marcos remaining
time deposits as of 6 March 1987 is only
P500,404.11. The accumulated interest on this
P500,404.11 as of 30 August 1989, the date of filing
of Marcos complaint with the trial court, is
P211,622.96. From 30 August 1989, the interest due
on the accumulated interest of P211,622.96 should
earn legal interest at 12% per annum pursuant to
Article 2212 of the Civil Code.
The BANKs dismal failure to account for Marcos
money justifies the award of moral and exemplary
damages ] Certainly, the BANK, as employer, is liable
for the negligence or the misdeed of its branch
manager which caused Marcos mental anguish and
serious anxiety. Moral damages of P100,000 is
reasonable and is in accord with our rulings in similar
cases involving banks negligence with regard to the
accounts of their depositors.
We also award P20,000 to Marcos as exemplary
damages. The law allows the grant of exemplary
damages by way of example for the public good. The
public relies on the banks fiduciary duty to observe
the highest degree of diligence. The banking sector is

expected to maintain at all times this high level of
meticulousness.
WHEREFORE, the decision of the Court of Appeals
is AFFIRMED with MODIFICATION. Petitioner
Philippine Banking Corporation is ordered to return
to private respondent Leonilo Marcos P500,404.11,
the remaining principal amount of his time deposits,
with interest at 17% per annum from 30 August 1989
until full payment. Petitioner Philippine Banking
Corporation is also ordered to pay to private
respondent Leonilo Marcos P211,622.96, the
accumulated interest as of 30 August 1989, plus 12%
legal interest per annum from 30 August 1989 until
full payment. Petitioner Philippine Banking
Corporation is further ordered to pay P100,000 by
way of moral damages and P20,000 as exemplary
damages to private respondent Leonilo Marcos.
Costs against petitioner.
SO ODERED.
[G.R. No. 129015. August 13, 2004]

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

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

expert witnesses to testify on the claim that Jongs
signature was forged. Samsung Corporation, which
had referred the check for investigation to the NBI,
presented Senior NBI Document Examiner Roda B.
Flores. She testified that based on her examination,
she concluded that Jongs signature had been forged
on the check. On the other hand, FEBTC, which had
sought the assistance of the Philippine National
Police (PNP), presented Rosario C. Perez, a
document examiner from the PNP Crime Laboratory.
She testified that her findings showed that Jongs
signature on the check was genuine.
Confronted with conflicting expert testimony, the
RTC chose to believe the findings of the NBI expert.
In a Decision dated 25 April 1994, the RTC held that
Jongs signature on the check was forged and
accordingly directed the bank to pay or credit back to
Samsung Constructions account the amount of Nine
Hundred Ninety Nine Thousand Five Hundred Pesos
(P999,500.00), together with interest tolled from the
time the complaint was filed, and attorneys fees in the
amount of Fifteen Thousand Pesos (P15,000.00).
FEBTC timely appealed to the Court of Appeals. On
28 November 1996, the Special Fourteenth Division
of the Court of Appeals rendered a Decision,
reversing the RTC Decision and absolving FEBTC
from any liability. The Court of Appeals held that the
contradictory findings of the NBI and the PNP
created doubt as to whether there was forgery.]
Moreover, the appellate court also held that assuming
there was forgery, it occurred due to the negligence of
Samsung Construction, imputing blame on the
accountant Kyu for lack of care and prudence in
keeping the checks, which if observed would have
prevented Sempio from gaining access thereto. The
Court of Appeals invoked the ruling in PNB v.
National City Bank of New York that, if a loss, which
must be borne by one or two innocent persons, can be
traced to the neglect or fault of either, such loss
would be borne by the negligent party, even if
innocent of intentional fraud.
Samsung Construction now argues that the Court of
Appeals had seriously misapprehended the facts
when it overturned the RTCs finding of forgery. It
also contends that the appellate court erred in finding
that it had been negligent in safekeeping the check,

and in applying the equity principle enunciated in
PNB v. National City Bank of New York.
Since the trial court and the Court of Appeals arrived
at contrary findings on questions of fact, the Court is
obliged to examine the record to draw out the correct
conclusions. Upon examination of the record, and
based on the applicable laws and jurisprudence, we
reverse the Court of Appeals.
Section 23 of the Negotiable Instruments Law states:
When a signature is forged or made without the
authority of the person whose signature it purports to
be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to
enforce payment thereof against any party thereto,
can be acquired through or under such signature,
unless the party against whom it is sought to enforce
such right is precluded from setting up the forgery or
want of authority. (Emphasis supplied)
The general rule is to the effect that a forged
signature is wholly inoperative, and payment made
through or under such signature is ineffectual or does
not discharge the instrument. If payment is made, the
drawee cannot charge it to the drawers account. The
traditional justification for the result is that the
drawee is in a superior position to detect a forgery
because he has the makers signature and is expected
to know and compare it. The rule has a healthy
cautionary effect on banks by encouraging care in the
comparison of the signatures against those on the
signature cards they have on file. Moreover, the very
opportunity of the drawee to insure and to distribute
the cost among its customers who use checks makes
the drawee an ideal party to spread the risk to
insurance.[
Brady, in his treatise The Law of Forged and Altered
Checks, elucidates:
When a person deposits money in a general account
in a bank, against which he has the privilege of
drawing checks in the ordinary course of business,
the relationship between the bank and the depositor is
that of debtor and creditor. So far as the legal
relationship between the two is concerned, the
situation is the same as though the bank had
borrowed money from the depositor, agreeing to
repay it on demand, or had bought goods from the
depositor, agreeing to pay for them on demand. The

bank owes the depositor money in the same sense that
any debtor owes money to his creditor. Added to this,
in the case of bank and depositor, there is, of course,
the banks obligation to pay checks drawn by the
depositor in proper form and presented in due course.
When the bank receives the deposit, it impliedly
agrees to pay only upon the depositors order. When
the bank pays a check, on which the depositors
signature is a forgery, it has failed to comply with its
contract in this respect. Therefore, the bank is held
liable.
The fact that the forgery is a clever one is immaterial.
The forged signature may so closely resemble the
genuine as to defy detection by the depositor himself.
And yet, if a bank pays the check, it is paying out its
own money and not the depositors.
The forgery may be committed by a trusted employee
or confidential agent. The bank still must bear the
loss. Even in a case where the forged check was
drawn by the depositors partner, the loss was placed
upon the bank. The case referred to is Robinson v.
Security Bank, Ark., 216 S. W. Rep. 717. In this case,
the plaintiff brought suit against the defendant bank
for money which had been deposited to the plaintiffs
credit and which the bank had paid out on checks
bearing forgeries of the plaintiffs signature.
xxx
It was held that the bank was liable. It was further
held that the fact that the plaintiff waited eight or nine
months after discovering the forgery, before notifying
the bank, did not, as a matter of law, constitute a
ratification of the payment, so as to preclude the
plaintiff from holding the bank liable. xxx
This rule of liability can be stated briefly in these
words: A bank is bound to know its depositors
signature. The rule is variously expressed in the many
decisions in which the question has been considered.
But they all sum up to the proposition that a bank
must know the signatures of those whose general
deposits it carries.
By no means is the principle rendered obsolete with
the advent of modern commercial transactions.
Contemporary texts still affirm this well-entrenched
standard. Nickles, in his book Negotiable Instruments
and Other Related Commercial Paper wrote, thus:
The deposit contract between a payor bank and its

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

witness to stand uncontradicted, thus the spectacle of
competing expert witnesses is not unusual. The trier
of fact will have to decide which version to believe,
and explain why or why not such version is more
credible than the other. Reliance therefore cannot be
placed merely on the fact that there are colliding
opinions of two experts, both clothed with the
presumption of official duty, in order to draw a
conclusion, especially one which is extremely crucial.
Doing so is tantamount to a jurisprudential cop-out.
Much is expected from the Court of Appeals as it
occupies the penultimate tier in the judicial hierarchy.
This Court has long deferred to the appellate court as
to its findings of fact in the understanding that it has
the appropriate skill and competence to plough
through the minutiae that scatters the factual field. In
failing to thoroughly evaluate the evidence before it,
and relying instead on presumptions haphazardly
drawn, the Court of Appeals was sadly remiss. Of
course, courts, like humans, are fallible, and not
every error deserves a stern rebuke. Yet, the appellate
courts error in this case warrants special attention, as
it is absurd and even dangerous as a precedent. If this
rationale were adopted as a governing standard by
every court in the land, barely any actionable claim
would prosper, defeated as it would be by the mere
invocation of the existence of a contrary expert
opinion.
On the other hand, the RTC did adjudge the
testimony of the NBI expert as more credible than
that of the PNP, and explained its reason behind the
conclusion:
After subjecting the evidence of both parties to a
crucible of analysis, the court arrived at the
conclusion that the testimony of the NBI document
examiner is more credible because the testimony of
the PNP Crime Laboratory Services document
examiner reveals that there are a lot of differences in
the questioned signature as compared to the standard
specimen signature. Furthermore, as testified to by
Ms. Rhoda Flores, NBI expert, the manner of
execution of the standard signatures used reveals that
it is a free rapid continuous execution or stroke as
shown by the tampering terminal stroke of the
signatures whereas the questioned signature is a
hesitating slow drawn execution stroke. Clearly, the

person who executed the questioned signature was
hesitant when the signature was made.
During the testimony of PNP expert Rosario Perez,
the RTC bluntly noted that apparently, there [are]
differences on that questioned signature and the
standard signatures. This Court, in examining the
signatures, makes a similar finding. The PNP expert
excused the noted differences by asserting that they
were mere variations, which are normal deviations
found in writing Yet the RTC, which had the
opportunity to examine the relevant documents and to
personally observe the expert witness, clearly
disbelieved the PNP expert. The Court similarly finds
the testimony of the PNP expert as unconvincing.
During the trial, she was confronted several times
with apparent differences between strokes in the
questioned signature and the genuine samples. Each
time, she would just blandly assert that these
differences were just variations as if the mere
conjuration of the word would sufficiently disquiet
whatever doubts about the deviations. Such
conclusion, standing alone, would be of little or no
value unless supported by sufficiently cogent reasons
which might amount almost to a demonstration
The most telling difference between the questioned
and genuine signatures examined by the PNP is in the
final upward stroke in the signature, or the point to
the short stroke of the terminal in the capital letter L,
as referred to by the PNP examiner who had marked
it in her comparison chart as point no. 6. To the plain
eye, such upward final stroke consists of a vertical
line which forms a ninety degree (90) angle with the
previous stroke. Of the twenty one (21) other genuine
samples examined by the PNP, at least nine (9) ended
with an upward stroke. However, unlike the
questioned signature, the upward strokes of eight (8)
of these signatures are looped, while the upward
stroke of the seventh forms a severe forty-five degree
(45) with the previous stroke. The difference is
glaring, and indeed, the PNP examiner was
confronted with the inconsistency in point no. 6.
Q: Now, in this questioned document point no. 6, the
s stroke is directly upwards.
A: Yes, sir.
Q: Now, can you look at all these standard signature
(sic) were (sic) point 6 is repeated or the last stroke s

is pointing directly upwards?
A: There is none in the standard signature, sir.
Again, the PNP examiner downplayed the uniqueness
of the final stroke in the questioned signature as a
mere variation, the same excuse she proffered for the
other marked differences noted by the Court and the
counsel for petitioner.
There is no reason to doubt why the RTC gave
credence to the testimony of the NBI examiner, and
not the PNP experts. The NBI expert, Rhoda Flores,
clearly qualifies as an expert witness. A document
examiner for fifteen years, she had been promoted to
the rank of Senior Document Examiner with the NBI,
and had held that rank for twelve years prior to her
testimony. She had placed among the top five
examinees in the Competitive Seminar in Question
Document Examination, conducted by the NBI
Academy, which qualified her as a document
examiner. She had trained with the Royal Hongkong
Police Laboratory and is a member of the
International Association for Identification. As of the
time she testified, she had examined more than fifty
to fifty-five thousand questioned documents, on an
average of fifteen to twenty documents a day. In
comparison, PNP document examiner Perez admitted
to having examined only around five hundred
documents as of her testimony.
In analyzing the signatures, NBI Examiner Flores
utilized the scientific comparative examination
method consisting of analysis, recognition,
comparison and evaluation of the writing habits with
the use of instruments such as a magnifying lense, a
stereoscopic microscope, and varied lighting
substances. She also prepared enlarged photographs
of the signatures in order to facilitate the necessary
comparisons. She compared the questioned signature
as against ten (10) other sample signatures of Jong.
Five of these signatures were executed on checks
previously issued by Jong, while the other five
contained in business letters Jong had signed. The
NBI found that there were significant differences in
the handwriting characteristics existing between the
questioned and the sample signatures, as to manner of
execution, link/connecting strokes, proportion
characteristics, and other identifying details.
The RTC was sufficiently convinced by the NBI

examiners testimony, and explained her reasons in its
Decisions. While the Court of Appeals disagreed and
upheld the findings of the PNP, it failed to
convincingly demonstrate why such findings were
more credible than those of the NBI expert. As a
throwaway, the assailed Decision noted that the PNP,
not the NBI, had the opportunity to examine the
specimen signature card signed by Jong, which was
relied upon by the employees of FEBTC in
authenticating Jongs signature. The distinction is
irrelevant in establishing forgery. Forgery can be
established comparing the contested signatures as
against those of any sample signature duly
established as that of the persons whose signature
was forged.
FEBTC lays undue emphasis on the fact that the PNP
examiner did compare the questioned signature
against the bank signature cards. The crucial fact in
question is whether or not the check was forged, not
whether the bank could have detected the forgery.
The latter issue becomes relevant only if there is need
to weigh the comparative negligence between the
bank and the party whose signature was forged.
At the same time, the Court of Appeals failed to
assess the effect of Jongs testimony that the signature
on the check was not his. The assertion may seem
self-serving at first blush, yet it cannot be ignored
that Jong was in the best position to know whether or
not the signature on the check was his. While his
claim should not be taken at face value, any
averments he would have on the matter, if adjudged
as truthful, deserve primacy in consideration. Jongs
testimony is supported by the findings of the NBI
examiner. They are also backed by factual
circumstances that support the conclusion that the
assailed check was indeed forged. Judicial notice can
be taken that is highly unusual in practice for a
business establishment to draw a check for close to a
million pesos and make it payable to cash or bearer,
and not to order. Jong immediately reported the
forgery upon its discovery. He filed the appropriate
criminal charges against Sempio, the putative forger.
Now for determination is whether Samsung
Construction was precluded from setting up the
defense of forgery under Section 23 of the Negotiable
Instruments Law. The Court of Appeals concluded

that Samsung Construction was negligent, and
invoked the doctrines that where a loss must be borne
by one of two innocent person, can be traced to the
neglect or fault of either, it is reasonable that it would
be borne by him, even if innocent of any intentional
fraud, through whose means it has succeeded or who
put into the power of the third person to perpetuate
the wrong. Applying these rules, the Court of Appeals
determined that it was the negligence of Samsung
Construction that allowed the encashment of the
forged check.
In the case at bar, the forgery appears to have been
made possible through the acts of one Jose Sempio
III, an assistant accountant employed by the plaintiff
Samsung [Construction] Co. Philippines, Inc. who
supposedly stole the blank check and who
presumably is responsible for its encashment through
a forged signature of Jong Kyu Lee. Sempio was
assistant to the Korean accountant who was in
possession of the blank checks and who through
negligence, enabled Sempio to have access to the
same. Had the Korean accountant been more careful
and prudent in keeping the blank checks Sempio
would not have had the chance to steal a page thereof
and to effect the forgery. Besides, Sempio was an
employee who appears to have had dealings with the
defendant Bank in behalf of the plaintiff corporation
and on the date the check was encashed, he was there
to certify that it was a genuine check issued to
purchase equipment for the company. We recognize
that Section 23 of the Negotiable Instruments Law
bars a party from setting up the defense of forgery if
it is guilty of negligence, Yet, we are unable to
conclude that Samsung Construction was guilty of
negligence in this case. The appellate court failed to
explain precisely how the Korean accountant was
negligent or how more care and prudence on his part
would have prevented the forgery. We cannot sustain
this tar and feathering resorted to without any basis.
The bare fact that the forgery was committed by an
employee of the party whose signature was forged
cannot necessarily imply that such partys negligence
was the cause for the forgery. Employers do not
possess the preternatural gift of cognition as to the
evil that may lurk within the hearts and minds of their
employees. The Courts pronouncement in PCI Bank

v. Court of Appeals applies in this case, to wit:
[T]he mere fact that the forgery was committed by a
drawer-payors confidential employee or agent, who
by virtue of his position had unusual facilities for
perpetrating the fraud and imposing the forged paper
upon the bank, does not entitle the bank to shift the
loss to the drawer-payor, in the absence of some
circumstance raising estoppel against the drawer.
Admittedly, the record does not clearly establish what
measures Samsung Construction employed to
safeguard its blank checks. Jong did testify that his
accountant, Kyu, kept the checks inside a safety box,
and no contrary version was presented by FEBTC.
However, such testimony cannot prove that the
checks were indeed kept in a safety box, as Jongs
testimony on that point is hearsay, since Kyu, and not
Jong, would have the personal knowledge as to how
the checks were kept.
Still, in the absence of evidence to the contrary, we
can conclude that there was no negligence on
Samsung Constructions part. The presumption
remains that every person takes ordinary care of his
concerns,and that the ordinary course of business has
been followed.Negligence is not presumed, but must
be proven by him who alleges it. While the complaint
was lodged at the instance of Samsung Construction,
the matter it had to prove was the claim it had alleged
- whether the check was forged. It cannot be required
as well to prove that it was not negligent, because the
legal presumption remains that ordinary care was
employed.
Thus, it was incumbent upon FEBTC, in defense, to
prove the negative fact that Samsung Construction
was negligent. While the payee, as in this case, may
not have the personal knowledge as to the standard
procedures observed by the drawer, it well has the
means of disputing the presumption of regularity.
Proving a negative fact may be a difficult office,but
necessarily so, as it seeks to overcome a presumption
in law. FEBTC was unable to dispute the presumption
of ordinary care exercised by Samsung Construction,
hence we cannot agree with the Court of Appeals
finding of negligence.
The assailed Decision replicated the extensive efforts
which FEBTC devoted to establish that there was no
negligence on the part of the bank in its acceptance

and payment of the forged check. However, the
degree of diligence exercised by the bank would be
irrelevant if the drawer is not precluded from setting
up the defense of forgery under Section 23 by his
own negligence. The rule of equity enunciated in
PNB v. National City Bank of New York, as relied
upon by the Court of Appeals, deserves careful
examination.
The point in issue has sometimes been said to be that
of negligence. The drawee who has paid upon the
forged signature is held to bear the loss, because he
has been negligent in failing to recognize that the
handwriting is not that of his customer. But it follows
obviously that if the payee, holder, or presenter of the
forged paper has himself been in default, if he has
himself been guilty of a negligence prior to that of the
banker, or if by any act of his own he has at all
contributed to induce the banker's negligence, then he
may lose his right to cast the loss upon the banker.
Quite palpably, the general rule remains that the
drawee who has paid upon the forged signature bears
the loss. The exception to this rule arises only when
negligence can be traced on the part of the drawer
whose signature was forged, and the need arises to
weigh the comparative negligence between the
drawer and the drawee to determine who should bear
the burden of loss. The Court finds no basis to
conclude that Samsung Construction was negligent in
the safekeeping of its checks. For one, the settled rule
is that the mere fact that the depositor leaves his
check book lying around does not constitute such
negligence as will free the bank from liability to him,
where a clerk of the depositor or other persons, taking
advantage of the opportunity, abstract some of the
check blanks, forges the depositors signature and
collect on the checks from the bank. [And for another,
in point of fact Samsung Construction was not
negligent at all since it reported the forgery almost
immediately upon discovery.
It is also worth noting that the forged signatures in
PNB v. National City Bank of New York were not of
the drawer, but of indorsers. The same circumstance
attends PNB v. Court of Appeals, which was also
cited by the Court of Appeals. It is accepted that a
forged signature of the drawer differs in treatment
than a forged signature of the indorser.

The justification for the distinction between forgery
of the signature of the drawer and forgery of an
indorsement is that the drawee is in a position to
verify the drawers signature by comparison with one
in his hands, but has ordinarily no opportunity to
verify an indorsement.[
Thus, a drawee bank is generally liable to its
depositor in paying a check which bears either a
forgery of the drawers signature or a forged
indorsement. But the bank may, as a general rule,
recover back the money which it has paid on a check
bearing a forged indorsement, whereas it has not this
right to the same extent with reference to a check
bearing a forgery of the drawers signature.
The general rule imputing liability on the drawee who
paid out on the forgery holds in this case.
Since FEBTC puts into issue the degree of care it
exercised before paying out on the forged check, we
might as well comment on the banks performance of
its duty. It might be so that the bank complied with its
own internal rules prior to paying out on the
questionable check. Yet, there are several troubling
circumstances that lead us to believe that the bank
itself was remiss in its duty.
The fact that the check was made out in the amount
of nearly one million pesos is unusual enough to
require a higher degree of caution on the part of the
bank. Indeed, FEBTC confirms this through its own
internal procedures. Checks below twenty-five
thousand pesos require only the approval of the teller;
those between twenty-five thousand to one hundred
thousand pesos necessitate the approval of one bank
officer; and should the amount exceed one hundred
thousand pesos, the concurrence of two bank officers
is required.
In this case, not only did the amount in the check
nearly total one million pesos, it was also payable to
cash. That latter circumstance should have aroused
the suspicion of the bank, as it is not ordinary
business practice for a check for such large amount to
be made payable to cash or to bearer, instead of to the
order of a specified person. Moreover, the check was
presented for payment by one Roberto Gonzaga, who
was not designated as the payee of the check, and
who did not carry with him any written proof that he
was authorized by Samsung Construction to encash

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

the presentment of the forged check should have put
the bank on the highest degree of alert. The Court
recently emphasized that the highest degree of care
and diligence is required of banks.
Banks are engaged in a business impressed with
public interest, and it is their duty to protect in return
their many clients and depositors who transact
business with them. They have the obligation to treat
their clients account meticulously and with the
highest degree of care, considering the fiduciary
nature of their relationship. The diligence required of
banks, therefore, is more than that of a good father of
a family.
Given the circumstances, extraordinary diligence
dictates that FEBTC should have ascertained from
Jong personally that the signature in the questionable
check was his.
Still, even if the bank performed with utmost
diligence, the drawer whose signature was forged
may still recover from the bank as long as he or she is
not precluded from setting up the defense of forgery.
After all, Section 23 of the Negotiable Instruments
Law plainly states that no right to enforce the
payment of a check can arise out of a forged
signature. Since the drawer, Samsung Construction, is
not precluded by negligence from setting up the
forgery, the general rule should apply. Consequently,
if a bank pays a forged check, it must be considered
as paying out of its funds and cannot charge the
amount so paid to the account of the depositor. able,
irrespective of its good faith, in paying a forged
check.
WHEREFORE, the Petition is GRANTED. The
Decision of the Court of Appeals dated 28 November
1996 is REVERSED, and the Decision of the
Regional Trial Court of Manila, Branch 9, dated 25
April 1994 is REINSTATED. Costs against
respondent.
SO ORDERED.
HEIRS OF MANLAPAT VS CA
DECISION
TINGA, J.:
Before this Court is a Rule 45 petition assailing the
Decision[1] dated 29 September 1994 of the Court of
Appeals that reversed the Decision[2] dated 30 April
1991 of the Regional Trial Court (RTC) of Bulacan,
Branch 6, Malolos. The trial court declared Transfer
Certificates of Title (TCTs) No. T-9326-P(M) and No.
T-9327-P(M) as void ab initio and ordered the
restoration of Original Certificate of Title (OCT) No.
P-153(M) in the name of Eduardo Manlapat
(Eduardo), petitioners predecessor-in-interest.
The controversy involves Lot No. 2204, a parcel of
land with an area of 1,058 square meters, located at
Panghulo, Obando, Bulacan. The property had been
originally in the possession of Jose Alvarez, Eduardos
grandfather, until his demise in 1916. It remained
unregistered until 8 October 1976 when OCT No. P153(M) was issued in the name of Eduardo pursuant
to a free patent issued in Eduardos name[3] that was
entered in the Registry of Deeds of Meycauayan,
Bulacan.[4] The subject lot is adjacent to a fishpond
owned by one
Ricardo Cruz (Ricardo), predecessor-in-interest of
respondents Consuelo Cruz and Rosalina CruzBautista (Cruzes).[5]
On 19 December 1954, before the subject lot was
titled, Eduardo sold a portion thereof with an area of
553 square meters to Ricardo. The sale is evidenced
by a deed of sale entitled Kasulatan ng Bilihang
Tuluyan ng Lupang Walang Titulo (Kasulatan)[6]
which was signed by Eduardo himself as vendor and
his wife Engracia Aniceto with a certain Santiago
Enriquez signing as witness. The deed was notarized
by Notary Public Manolo Cruz.[7] On 4 April 1963,
the Kasulatan was registered with the Register of
Deeds of Bulacan.[8]
On 18 March 1981, another Deed of Sale[9] conveying
another portion of the subject lot consisting of 50
square meters as right of way was executed by
Eduardo in favor of Ricardo in order to reach the
portion covered by the first sale executed in 1954 and
to have access to his fishpond from the provincial
road.[10] The deed was signed by Eduardo himself and
his wife Engracia Aniceto, together with Eduardo
Manlapat, Jr. and Patricio Manlapat. The same was
also duly notarized on 18 July 1981 by Notary Public
Arsenio Guevarra.[11]
In December 1981, Leon Banaag, Jr. (Banaag), as
attorney-in-fact of his father-in-law Eduardo,
executed a mortgage with the Rural Bank of San
Pascual, Obando Branch (RBSP), for P100,000.00
with the subject lot as collateral. Banaag deposited
the owners duplicate certificate of OCT No. P153(M) with the bank.
On 31 August 1986, Ricardo died without learning of
the prior issuance of OCT No. P-153(M) in the name
of Eduardo.[12] His heirs, the Cruzes, were not
immediately aware of the consummated sale between
Eduardo and Ricardo.
Eduardo himself died on 4 April 1987. He was
survived by his heirs, Engracia Aniceto, his spouse;
and children, Patricio, Bonifacio, Eduardo, Corazon,
Anselmo, Teresita and Gloria, all surnamed
Manlapat.[13] Neither did the heirs of Eduardo
(petitioners) inform the Cruzes of the prior sale in
favor of their predecessor-in-interest, Ricardo. Yet
subsequently, the Cruzes came to learn about the sale
and the issuance of the OCT in the name of Eduardo.
Upon learning of their right to the subject lot, the
Cruzes immediately tried to confront petitioners on
the mortgage and obtain the surrender of the OCT.
The Cruzes, however, were thwarted in their bid to
see the heirs. On the advice of the Bureau of Lands,
NCR Office, they brought the matter to the barangay
captain of Barangay Panghulo, Obando, Bulacan.
During the hearing, petitioners were informed that the
Cruzes had a legal right to the property covered by

OCT and needed the OCT for the purpose of securing
a separate title to cover the interest of Ricardo.
Petitioners, however, were unwilling to surrender the
OCT.[14]
Having failed to physically obtain the title from
petitioners, in July 1989, the Cruzes instead went to
RBSP which had custody of the owners duplicate
certificate of the OCT, earlier surrendered as a
consequence of the mortgage. Transacting with
RBSPs manager, Jose Salazar (Salazar), the Cruzes
sought to borrow the owners duplicate certificate for
the purpose of photocopying the same and thereafter
showing a copy thereof to the Register of Deeds.
Salazar allowed the Cruzes to bring the owners
duplicate certificate outside the bank premises when
the latter showed the Kasulatan.[15] The Cruzes
returned the owners duplicate certificate on the same
day after having copied the same. They then brought
the copy of the OCT to Register of Deeds Jose Flores
(Flores) of Meycauayan and showed the same to him
to secure his legal opinion as to how the Cruzes could
legally protect their interest in the property and
register the same.[16] Flores suggested the preparation
of a subdivision plan to be able to segregate the area
purchased by Ricardo from Eduardo and have the
same covered by a separate title.[17]
Thereafter, the Cruzes solicited the opinion of
Ricardo Arandilla (Arandilla), Land Registration
Officer, Director III, Legal Affairs Department, Land
Registration Authority at Quezon City, who agreed
with the advice given by Flores. [18] Relying on the
suggestions of Flores and Arandilla, the Cruzes hired
two geodetic engineers to prepare the corresponding
subdivision plan. The subdivision plan was presented
to the Land Management Bureau, Region III, and
there it was approved by a certain Mr. Pambid of said
office on 21 July 1989.
After securing the approval of the subdivision plan,
the Cruzes went back to RBSP and again asked for
the owners duplicate certificate from Salazar. The
Cruzes informed him that the presentation of the
owners duplicate certificate was necessary, per advise
of the Register of Deeds, for the cancellation of the

OCT and the issuance in lieu thereof of two separate
titles in the names of Ricardo and Eduardo in
accordance with the approved subdivision plan.[19]
Before giving the owners duplicate certificate,
Salazar required the Cruzes to see Atty. Renato
Santiago (Atty. Santiago), legal counsel of RBSP, to
secure from the latter a clearance to borrow the title.
Atty. Santiago would give the clearance on the
condition that only Cruzes put up a substitute
collateral, which they did.[20] As a result, the Cruzes
got hold again of the owners duplicate certificate.
After the Cruzes presented the owners duplicate
certificate, along with the deeds of sale and the
subdivision plan, the Register of Deeds cancelled the
OCT and issued in lieu thereof TCT No. T-9326-P(M)
covering 603 square meters of Lot No. 2204 in the
name of Ricardo and TCT No. T-9327-P(M) covering
the remaining 455 square meters in the name of
Eduardo.[21]
On 9 August 1989, the Cruzes went back to the bank
and surrendered to Salazar TCT No. 9327-P(M) in
the name of Eduardo and retrieved the title they had
earlier given as substitute collateral. After securing
the new separate titles, the Cruzes furnished
petitioners with a copy of TCT No. 9327-P(M)
through the barangay captain and paid the real
property tax for 1989.[22]
The Cruzes also sent a formal letter to Guillermo
Reyes, Jr., Director, Supervision Sector, Department
III of the Central Bank of the Philippines, inquiring
whether they committed any violation of existing
bank laws under the circumstances. A certain Zosimo
Topacio, Jr. of the Supervision Sector sent a reply
letter advising the Cruzes, since the matter is between
them and the bank, to get in touch with the bank for
the final settlement of the case.[23]
In October of 1989, Banaag went to RBSP, intending
to tender full payment of the mortgage obligation. It
was only then that he learned of the dealings of the
Cruzes with the bank which eventually led to the
subdivision of the subject lot and the issuance of two
separate titles thereon. In exchange for the full

payment of the loan, RBSP tried to persuade
petitioners to accept TCT No. T-9327-P(M) in the
name of Eduardo.[24]
As a result, three (3) cases were lodged, later
consolidated, with the trial court, all involving the
issuance of the TCTs, to wit:
(1) Civil Case No. 650-M-89,
for
reconveyance
with
damages filed by the heirs of
Eduardo Manlapat against
Consuelo Cruz, Rosalina
Cruz-Bautista, Rural Bank of
San Pascual, Jose Salazar and
Jose Flores, in his capacity as
Deputy
Registrar,
Meycauayan Branch of the
Registry of Deeds of
Bulacan;
(2) Civil Case No. 141-M-90
for damages filed by Jose
Salazar against Consuelo
Cruz, et. [sic] al.; and
ordering the Register of Deeds,

Meycauayan Branch to cancel said
titles and to restore Original
Certificate of Title No. P-153(M)
in the name of plaintiffs
predecessor-in-interest Eduardo
Manlapat;
2.-Ordering the
defendants Rural Bank of
San
Pascual,
Jose
Salazar, Consuelo Cruz
and
Rosalina
CruzBautista, to pay the
plaintiffs
Heirs
of
Eduardo
Manlapat,
jointly and severally, the
following:
a)P200,000.00 as moral damages;
b)P50,000.00
as
exemplary
damages;
c)P20,000.00 as attorneys fees;
and
d) the costs of the suit.
3.Dismissing the counterclaims.
(3) Civil Case No. 644-M-89,

for declaration of nullity of
title with damages filed by
Rural Bank of San Pascual,
Inc. against the spouses
Ricardo Cruz and Consuelo
Cruz, et al.[25]
After trial of the consolidated cases, the RTC of
Malolos rendered a decision in favor of the heirs of
Eduardo, the dispositive portion of which reads:
WHEREFORE,
premised
from the foregoing, judgment
is hereby rendered:
1.Declaring Transfer Certificates
of Title Nos. T-9326-P(M) and T9327-P(M) as void ab initio and
SO ORDERED.
[26]
The trial court found that petitioners were entitled to

the reliefs of reconveyance and damages. On this
matter, it ruled that petitioners were bona fide
mortgagors of an unclouded title bearing no
annotation of any lien and/or encumbrance. This fact,
according to the trial court, was confirmed by the
bank when it accepted the mortgage unconditionally
on 25 November 1981. It found that petitioners were
complacent and unperturbed, believing that the title
to their property, while serving as security for a loan,
was safely vaulted in the impermeable confines of
RBSP. To their surprise and prejudice, said title was
subdivided into two portions, leaving them a portion
of 455 square meters from the original total area of
1,058 square meters, all because of the fraudulent and

negligent acts of respondents and RBSP. The trial
court ratiocinated that even assuming that a portion of
the subject lot was sold by Eduardo to Ricardo,
petitioners were still not privy to the transaction
between the bank and the Cruzes which eventually
led to the subdivision of the OCT into TCTs No. T9326-P(M) and No. T-9327-P(M), clearly to the
damage and prejudice of petitioners.[27]
Concerning the claims for damages, the trial court
found the same to be bereft of merit. It ruled that
although the act of the Cruzes could be deemed
fraudulent, still it would not constitute intrinsic fraud.
Salazar, nonetheless, was clearly guilty of negligence
in letting the Cruzes borrow the owners duplicate
certificate of the OCT. Neither the bank nor its
manager had business entrusting to strangers titles
mortgaged to it by other persons for whatever reason.
It was a clear violation of the mortgage and banking
laws, the trial court concluded.
The trial court also ruled that although Salazar was
personally responsible for allowing the title to be
borrowed, the bank could not escape liability for it
was guilty of contributory negligence. The evidence
showed that RBSPs legal counsel was sought for
advice regarding respondents request. This could only
mean that RBSP through its lawyer if not through its
manager had known in advance of the Cruzes
intention and still it did nothing to prevent the
eventuality. Salazar was not even summarily
dismissed by the bank if he was indeed the sole
person to blame. Hence, the banks claim for damages
must necessarily fail.[28]
The trial court granted the prayer for the annulment
of the TCTs as a necessary consequence of its
declaration that reconveyance was in order. As to
Flores, his work being ministerial as Deputy Register
of the Bulacan Registry of Deeds, the trial court
absolved him of any liability with a stern warning
that he should deal with his future transactions more
carefully and in the strictest sense as a responsible
government official.[29]
Aggrieved by the decision of the trial court, RBSP,

Salazar and the Cruzes appealed to the Court of
Appeals. The appellate court, however, reversed the
decision of the RTC. The decretal text of the decision
reads:
THE
FOREGOING
CONSIDERED, the appealed
decision is hereby reversed
and set aside, with costs
against the appellees.SO
ORDERED.[30]
The appellate court ruled that petitioners
were not bona fide mortgagors since as
early as 1954 or before the 1981
mortgage, Eduardo already sold to
Ricardo a portion of the subject lot with
an area of 553 square meters. This fact,
the Court of Appeals noted, is even
supported by a document of sale signed
by Eduardo Jr. and Engracia Aniceto, the
surviving spouse of Eduardo, and
registered with the Register of Deeds of
Bulacan. The appellate court also found
that on 18 March 1981, for the second
time, Eduardo sold to Ricardo a separate
area containing 50 square meters, as a
road right-of-way.[31] Clearly, the OCT
was issued only after the first sale. It also
noted that the title was given to the
Cruzes by RBSP voluntarily, with
knowledge even of the banks counsel. [32]
Hence, the imposition of damages cannot
be justified, the Cruzes themselves being
the owners of the property. Certainly,
Eduardo misled the bank into accepting
the entire area as a collateral since the
603-square meter portion did not
anymore belong to him. The appellate
court, however, concluded that there was
no conspiracy between the bank and
Salazar.[33]
Hence, this petition for review on certiorari.
Petitioners ascribe errors to the appellate court by
asking the following questions, to wit: (a) can a

mortgagor be compelled to receive from the
mortgagee a smaller portion of the originally
encumbered title partitioned during the subsistence of
the mortgage, without the knowledge of, or authority
derived from, the registered owner; (b) can the
mortgagee question the veracity of the registered title
of the mortgagor, as noted in the owners duplicate
certificate, and thus, deliver the certificate to such
third persons, invoking an adverse, prior, and
unregistered claim against the registered title of the
mortgagor; (c) can an adverse prior claim against a
registered title be noted, registered and entered
without a competent court order; and (d) can belief of
ownership justify the taking of property without due
process of law?[34]
The kernel of the controversy boils down to the issue
of whether the cancellation of the OCT in the name
of the petitioners predecessor-in-interest and its
splitting into two separate titles, one for the
petitioners and the other for the Cruzes, may be
accorded legal recognition given the peculiar factual
backdrop of the case. We rule in the affirmative.
Private respondents (Cruzes) own
the portion titled in their names
Consonant with law and justice, the ultimate
denouement of the property dispute lies in the
determination of the respective bases of the warring
claims. Here, as in other legal disputes, what is
written generally deserves credence.
A careful perusal of the evidence on record reveals
that the Cruzes have sufficiently proven their claim of
ownership over the portion of Lot No. 2204 with an
area of 553 square meters. The duly notarized
instrument of conveyance was executed in 1954 to
which no less than Eduardo was a signatory. The
execution of the deed of sale was rendered beyond
doubt by Eduardos admission in his Sinumpaang
Salaysay dated 24 April 1963.[35] These documents
make the affirmance of the right of the Cruzes
ineluctable. The apparent irregularity, however, in the
obtention of the owners duplicate certificate from the

bank, later to be presented to the Register of Deeds to
secure the issuance of two new TCTs in place of the
OCT, is another matter.
Petitioners argue that the 1954 deed of sale was not
annotated on the OCT which was issued in 1976 in
favor of Eduardo; thus, the Cruzes claim of
ownership based on the sale would not hold water.
The Court is not persuaded.
Registration is not a requirement for validity of the
contract as between the parties, for the effect of
registration serves chiefly to bind third persons. [36]
The principal purpose of registration is merely to
notify other persons not parties to a contract that a
transaction involving the property had been entered
into. Where the party has knowledge of a prior
existing interest which is unregistered at the time he
acquired a right to the same land, his knowledge of
that prior unregistered interest has the effect of
registration as to him.[37]
Further, the heirs of Eduardo cannot be considered
third persons for purposes of applying the rule. The
conveyance shall not be valid against any person
unless registered, except (1) the grantor, (2) his heirs
and devisees, and (3) third persons having actual
notice or knowledge thereof.[38] Not only are
petitioners the heirs of Eduardo, some of them were
actually parties to the Kasulatan executed in favor of
Ricardo. Thus, the annotation of the adverse claim of
the Cruzes on the OCT is no longer required to bind
the heirs of Eduardo, petitioners herein.
Petitioners had no right to constitute
mortgage over disputed portion
The requirements of a valid mortgage are clearly laid
down in Article 2085 of the New Civil Code, viz:
ART. 2085. The following
requisites are essential to the
contracts of pledge and mortgage:
(1)
That they be constituted to
secure the fulfillment of a
principal obligation;
(2)
That the pledgor or
mortgagor be the absolute owner
of the thing pledged or mortgaged;
(3)
That
the
persons
constituting the
pledge
or
mortgage have the free disposal of
their property, and in the absence
thereof, that they be legally
authorized for the purpose.
Third persons who are not parties
to the principal obligation may
secure the latter by pledging or
mortgaging their own property.
(emphasis supplied)
For a person to validly constitute a
valid mortgage on real estate, he
must be the absolute owner
thereof as required by Article
2085 of the New Civil Code. [39]
The mortgagor must be the owner,
otherwise the mortgage is void.[40]
In a contract of mortgage, the
mortgagor remains to be the
owner of the property although the
property is subjected to a lien. [41] A
mortgage is regarded as nothing
more than a mere lien,
encumbrance, or security for a
debt, and passes no title or estate
to the mortgagee and gives him no
right or claim to the possession of
the property.[42] In this kind of
contract, the property mortgaged
is merely delivered to the
mortgagee
to
secure
the
fulfillment of the principal
obligation.[43] Such delivery does
not empower the mortgagee to
convey any portion thereof in
favor of another person as the
right to dispose is an attribute of
ownership.[44] The right to dispose
includes the right to donate, to
sell, to pledge or mortgage. Thus,
the mortgagee, not being the
owner of the property, cannot

dispose of the whole or part
thereof nor cause the impairment
of the security in any manner
without violating the foregoing
rule.[45] The mortgagee only owns
the mortgage credit, not the
property itself.[46]
Petitioners submit as an issue whether a mortgagor
may be compelled to receive from the mortgagee a
smaller portion of the lot covered by the originally
encumbered title, which lot was partitioned during
the subsistence of the mortgage without the
knowledge or authority of the mortgagor as registered
owner. This formulation is disingenuous, baselessly
assuming, as it does, as an admitted fact that the
mortgagor is the owner of the mortgaged property in
its entirety. Indeed, it has not become a salient issue
in this case since the mortgagor was not the owner of
the entire mortgaged property in the first place.
Issuance of OCT No. P-153(M), improper
It is a glaring fact that OCT No. P-153(M) covering
the property mortgaged was in the name of Eduardo,
without any annotation of any prior disposition or
encumbrance. However, the property was sufficiently
shown to be not entirely owned by Eduardo as
evidenced by the Kasulatan. Readily apparent upon
perusal of the records is that the OCT was issued in
1976, long after the Kasulatan was executed way
back in 1954. Thus, a portion of the property
registered in Eduardos name arising from the grant of
free patent did not actually belong to him. The
utilization of the Torrens system to perpetrate fraud
cannot be accorded judicial sanction.
Time and again, this Court has ruled that the principle
of indefeasibility of a Torrens title does not apply
where fraud attended the issuance of the title, as was
conclusively established in this case. The Torrens title
does not furnish a shied for fraud. [47] Registration
does not vest title. It is not a mode of acquiring
ownership but is merely evidence of such title over a
particular property. It does not give the holder any
better right than what he actually has, especially if the

registration was done in bad faith. The effect is that it
is as if no registration was made at all. [48] In fact, this
Court has ruled that a decree of registration cut off or
extinguished a right acquired by a person when such
right refers to a lien or encumbrance on the landnot to
the right of ownership thereofwhich was not
annotated on the certificate of title issued thereon.[49]
Issuance of TCT Nos. T-9326-P(M)
and T-9327-P(M), Valid
The validity of the issuance of two TCTs, one for the
portion sold to the predecessor-in-interest of the
Cruzes and the other for the portion retained by
petitioners, is readily apparent from Section 53 of the
Presidential Decree (P.D.) No. 1529 or the Property
Registration Decree. It provides:
SEC 53. Presentation of
owners duplicate upon entry
of new certificate. No
voluntary instrument shall be
registered by the Register of
Deeds, unless the owners
duplicate
certificate
is
presented
with
such
instrument, except in cases
expressly provided for in this
Decree or upon order of the
court, for cause shown.
The production of the owners duplicate certificate,
whenever any voluntary instrument is presented for
registration, shall be conclusive authority from the
registered owner to the Register of Deeds to enter a
new certificate or to make a memorandum of
registration in accordance with such instrument, and
the new certificate or memorandum shall be binding
upon the registered owner and upon all persons
claiming under him, in favor of every purchaser for
value and in good faith.
In all cases of registration
procured by fraud, the owner
may pursue all his legal and

equitable remedies against
the parties to such fraud
without prejudice, however,
to the rights of any innocent
holder of the decree of
registration on the original
petition or application, any
subsequent
registration
procured by the presentation
of
a forged duplicate
certificate of title, or a forged
deed or instrument, shall be
null and void. (emphasis
supplied)
Petitioners argue that the issuance of the TCTs
violated the third paragraph of Section 53 of P.D. No.
1529. The argument is baseless. It must be noted that
the provision speaks of forged duplicate certificate of
title and forged deed or instrument. Neither instance
obtains in this case. What the Cruzes presented before
the Register of Deeds was the very genuine owners
duplicate certificate earlier deposited by Banaag,
Eduardos attorney-in-fact, with RBSP. Likewise, the
instruments of conveyance are authentic, not forged.
Section 53 has never been clearer on the point that as
long as the owners duplicate certificate is presented
to the Register of Deeds together with the instrument
of conveyance, such presentation serves as conclusive
authority to the Register of Deeds to issue a transfer
certificate or make a memorandum of registration in
accordance with the instrument.
The records of the case show that despite the efforts
made by the Cruzes in persuading the heirs of
Eduardo to allow them to secure a separate TCT on
the claimed portion, their ownership being amply
evidenced by the Kasulatan and Sinumpaang
Salaysay where Eduardo himself acknowledged the
sales in favor of Ricardo, the heirs adamantly rejected
the notion of separate titling. This prompted the
Cruzes to approach the bank manager of RBSP for
the purpose of protecting their property right. They
succeeded in persuading the latter to lend the owners
duplicate certificate. Despite the apparent irregularity

in allowing the Cruzes to get hold of the owners
duplicate certificate, the bank officers consented to
the Cruzes plan to register the deeds of sale and
secure two new separate titles, without notifying the
heirs of Eduardo about it.
Further, the law on the matter, specifically P.D. No.
1529, has no explicit requirement as to the manner of
acquiring the owners duplicate for purposes of
issuing a TCT. This led the Register of Deeds of
Meycauayan as well as the Central Bank officer, in
rendering an opinion on the legal feasibility of the
process resorted to by the Cruzes. Section 53 of P.D.
No. 1529 simply requires the production of the
owners duplicate certificate, whenever any voluntary
instrument is presented for registration, and the same
shall be conclusive authority from the registered
owner to the Register of Deeds to enter a new
certificate or to make a memorandum of registration
in accordance with such instrument, and the new
certificate or memorandum shall be binding upon the
registered owner and upon all persons claiming under
him, in favor of every purchaser for value and in
good faith.
Quite interesting, however, is the contention of the
heirs of Eduardo that the surreptitious lending of the
owners duplicate certificate constitutes fraud within
the ambit of the third paragraph of Section 53 which
could nullify the eventual issuance of the TCTs. Yet
we cannot subscribe to their position.
Impelled by the inaction of the heirs of Eduardo as to
their claim, the Cruzes went to the bank where the
property was mortgaged. Through its manager and
legal officer, they were assured of recovery of the
claimed parcel of land since they are the successorsin-interest of the real owner thereof. Relying on the
bank officers opinion as to the legality of the means
sought to be employed by them and the suggestion of
the Central Bank officer that the matter could be best
settled between them and the bank, the Cruzes
pursued the titling of the claimed portion in the name
of Ricardo. The Register of Deeds eventually issued
the disputed TCTs.
The Cruzes resorted to such means to protect their

interest in the property that rightfully belongs to them
only because of the bank officers acquiescence
thereto. The Cruzes could not have secured a separate
TCT in the name of Ricardo without the banks
approval. Banks, their business being impressed with
public interest, are expected to exercise more care
and prudence than private individuals in their
dealings, even those involving registered lands. [50]
The highest degree of diligence is expected, and high
standards of integrity and performance are even
required of it.[51]
Indeed, petitioners contend that the mortgagee cannot
question the veracity of the registered title of the
mortgagor as noted in the owners duplicate
certificate, and, thus, he cannot deliver the certificate
to such third persons invoking an adverse, prior, and
unregistered claim against the registered title of the
mortgagor. The strength of this argument is diluted by
the peculiar factual milieu of the case.
A mortgagee can rely on what appears on the
certificate of title presented by the mortgagor and an
innocent mortgagee is not expected to conduct an
exhaustive investigation on the history of the
mortgagors title. This rule is strictly applied to
banking institutions. A mortgagee-bank must exercise
due diligence before entering into said contract.
Judicial notice is taken of the standard practice for
banks, before approving a loan, to send
representatives to the premises of the land offered as
collateral and to investigate who the real owners
thereof are.[52]
Banks, indeed, should exercise more care and
prudence in dealing even with registered lands, than
private individuals, as their business is one affected
with public interest. Banks keep in trust money
belonging to their depositors, which they should
guard against loss by not committing any act of
negligence that amounts to lack of good faith. Absent
good faith, banks would be denied the protective
mantle of the land registration statute, Act 496, which
extends only to purchasers for value and good faith,
as well as to mortgagees of the same character and
description.[53] Thus, this Court clarified that the rule

that persons dealing with registered lands can rely
solely on the certificate of title does not apply to
banks.[54]
Bank Liable for Nominal Damages
Of deep concern to this Court, however, is the fact
that the bank lent the owners duplicate of the OCT to
the Cruzes when the latter presented the instruments
of conveyance as basis of their claim of ownership
over a portion of land covered by the title. Simple
rationalization would dictate that a mortgagee-bank
has no right to deliver to any stranger any property
entrusted to it other than to those contractually and
legally entitled to its possession. Although we cannot
dismiss the banks acknowledgment of the Cruzes
claim as legitimized by instruments of conveyance in
their possession, we nonetheless cannot sanction how
the bank was inveigled to do the bidding of virtual
strangers. Undoubtedly, the banks cooperative stance
facilitated the issuance of the TCTs. To make matters
worse, the bank did not even notify the heirs of
Eduardo. The conduct of the bank is as dangerous as
it is unthinkably negligent. However, the aspect does
not impair the right of the Cruzes to be recognized as
legitimate owners of their portion of the property.
Undoubtedly, in the absence of the banks
participation, the Register of Deeds could not have
issued the disputed TCTs. We cannot find fault on the
part of the Register of Deeds in issuing the TCTs as
his authority to issue the same is clearly sanctioned
by law. It is thus ministerial on the part of the
Register of Deeds to issue TCT if the deed of
conveyance and the original owners duplicate are
presented to him as there appears on theface of the
instruments no badge of irregularity or
even if the purpose is merely for photocopying for a

danger of losing the same is more than imminent.
They should be aware of the conclusive presumption
in
Section 53. Such act constitutes manifest negligence
on the part of the bank which would necessarily hold
it liable for damages under Article 1170 and other
relevant provisions of the Civil Code.[56]
In the absence of evidence, the damages that may be
awarded may be in the form of nominal damages.
Nominal damages are adjudicated in order that a right
of the plaintiff, which has been violated or invaded
by the defendant, may be vindicated or recognized,
and not for the purpose of indemnifying the plaintiff
for any loss suffered by him. [57] This award rests on
the mortgagors right to rely on the banks observance
of the highest diligence in the conduct of its business.
The act of RBSP of entrusting to respondents the
owners duplicate certificate entrusted to it by the
mortgagor without even notifying the mortgagor and
absent any prior investigation on the veracity of
respondents claim and
character is a patent failure to foresee the risk created
by the act in view of the provisions of Section 53 of
P.D. No. 1529. This act runs afoul of every banks
mandate to observe the highest degree of diligence in
dealing with its clients. Moreover, a mortgagor has
also the right to be afforded due process before
deprivation or diminution of his property is effected
as the OCT was still in the name of Eduardo. Notice
and hearing are indispensable elements of this right
which the bank miserably ignored.
Under the circumstances, the Court believes the
award of P50,000.00 as nominal damages is
appropriate.
nullity.[55] If there is someone to blame for the

shortcut resorted to by the Cruzes, it would be the
bank itself whose manager and legal officer helped
the Cruzes to facilitate the issuance of the TCTs.
Five-Year Prohibition against alienation

or encumbrance under the Public Land Act
The bank should not have allowed complete strangers

to take possession of the owners duplicate certificate
One vital point. Apparently glossed over by the courts

below and the parties is an aspect which is essential,
spread as it is all over the record and intertwined with

the crux of the controversy, relating as it does to the
validity of the dispositions of the subject property and
the mortgage thereon. Eduardo was issued a title in
1976 on the basis of his free patent application. Such
application implies the recognition of the public
dominion character of the land and, hence, the five
(5)-year prohibition imposed by the Public Land Act
against alienation or encumbrance of the land covered
by a free patent or homestead[58] should have been
considered.
The deed of sale covering the fifty (50)-square meter
right of way executed by Eduardo on 18 March 1981
is obviously covered by the proscription, the free
patent having been issued on 8 October 1976.
However, petitioners may recover the portion sold
since the prohibition was imposed in favor of the free
patent holder. In Philippine National Bank v. De los
Reyes,[59] this Court ruled squarely on the point, thus:
While the law bars recovery
in a case where the object of
the contract is contrary to law
and one or both parties acted
in bad faith, we cannot here
apply the doctrine of in pari
delicto which admits of an
exception, namely, that when
the contract is merely
prohibited by law, not illegal
per se, and the prohibition is
designed for the protection of
the party seeking to recover,
he is entitled to the relief
prayed for whenever public
policy is enhanced thereby.
Under the Public Land Act,
the prohibition to alienate is
predicated
on
the
fundamental policy of the
State to preserve and keep in
the family of the homesteader
that portion of public land
which
the
State
has
gratuitously given to him, and
recovery is allowed even

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

Petitioners Romeo Cadiz (Cadiz), Carlito Bongkingki
(Bongkingki) and Prisco Gloria IV (Gloria) were
employed as signature verifier, bookkeeper, and
foreign currency denomination clerk/bookkeeperreliever, respectively, in the main office branch
(MOB) of Philippine Commercial International Bank
(respondent bank).
The anomalies in question arose when Rosalina B.
Alqueza (Alqueza) filed a complaint with PCIB for
the alleged non-receipt of a Six Hundred Dollar
($600.00) demand draft drawn against it which was
purchased by her husband from Hongkong and
Shanghai Banking Corporation. Upon verification, it
was uncovered that the demand draft was deposited
on 10 June 1988 with FCDU Savings Account (S/A)
No. 1083-4, an account under the name of Sonia
Alfiscar (Alfiscar). Further investigation revealed that
the demand draft, together with four (4) other checks,
was made to appear as only one deposit covered by
HSBC Check No. 979120 for One Thousand Two
Hundred Thirty-two Dollars (US$1,232.00).
The Branch Manager, Ismael R. Sandig, then
presided over a series of meetings, wherein Cadiz,
Bongkingki and Gloria allegedly verbally admitted

their participation in a scheme to divert funds
intended for other accounts using the Savings
Account of Alfiscar. Subsequently, Cadiz allegedly
paid Alqueza P12,690.00, the peso equivalent of
US$600, but insisted that the corresponding receipt
be issued in Alfiscars name instead.
On account of these allegations, a special audit
examination was conducted by the bank. On 31
January 1989, the internal auditors of the bank,
headed by Lizza G. Baylon, submitted their findings
in an official report. The auditors determined that as
early as July 1987, petitioner Cadiz had reserved the
savings account in the name of Sonia Alfiscar. The
account was opened on 27 November 1987 and
closed on 23 June 1988. Twenty-five (25) deposit
slips involving the account were posted by
Bongkingki while sixteen (16) deposit slips were
posted by Gloria. A verification of the deposit slips
yielded findings of miscoded checks, forged
signatures, non-validation of deposit slips by the
tellers, wrongful deposit of second-endorsed checks
into foreign currency deposit accounts, the deposit
slips which do not bear the required approval of bank
officers, and withdrawals made either on the day of
deposit or the following banking day.[1]
In view of such findings, show-cause memoranda[2]
were served on petitioners, requiring them to explain
within seventy-two (72) hours why no disciplinary
action should
be taken against them in connection with the results

of the special audit examination. On 22 March 1989,
petitioners submitted their written explanations.[3] Not
satisfied with their explanations, respondent bank in
memoranda[4] all dated 22 June 1989 dismissed
petitioners from employment for violation of Article
III Section 1 B-2 and Article III Section 1-C of the
Code of Discipline.
Petitioners lodged a complaint before the labor arbiter
for illegal dismissal on 18 September 1989. Labor
Arbiter Ernesto S. Dinopol adjudged that petitioners

were illegally dismissed and ordered their
reinstatement and payment of backwages. This
conclusion was based on the notices of dismissal,
which, to the mind of the labor arbiter, was couched
in general terms and without explaining how the rules
were violated. The labor arbiter also attributed
petitioners acts in fraudulently coding several deposit
slips as 1511 (immediately withdrawable) as mere
procedural inadequacies, with the fault attributable to
respondent bank for its laxity.[5]
The labor arbiters Decision was reversed on appeal

before the Second Division of the National Labor
Relations Commission (NLRC), which, in a
Decision[6] dated 30 June 1994, ordered the dismissal
of the petition. In doing so, the NLRC departed from
the labor arbiters finding of facts and concluded that
petitioners were dismissed for just cause. Dismissing
petitioners appeal, the Court of Appeals Ninth
Division similarly determined on the basis of
substantial evidence that petitioners were validly
terminated in its own Decision[7] dated 13 July 2001.
After the appellate court denied petitioners motion for
reconsideration, the matter was brought before this
Court in a Petition for Review on Certiorari.[8]
The issues to be resolved are whether the Court of
Appeals erred in not sustaining the findings of the
labor arbiter and upholding those of the NLRC and
whether the Court of Appeals erred in dismissing the
petition by ignoring petitioners claims that they were
dismissed without just cause and due process.[9]
In its Comment,[10] respondent bank seeks to have the
petition dismissed inasmuch as all the issues raised
herein involve questions of fact. We note that as a
general rule, only questions of law may be brought
upon this Court in a petition for review on certiorari
under Rule 45 of the Rules of Court. This Court is not
a trier of facts, and as such is tasked to calibrate and
assess the probative weight of evidence adduced by

the parties during trial all over again.[11]
However, if there are competing factual findings by
the different triers of fact, such as those made in this
case by the labor arbiter on one hand, and those of the
NLRC and Court of Appeals on the other hand, this
Court is compelled to go over the records of the case,
as well as the submissions of the parties, and resolve
the factual issues.[12] With this in mind, we shall now
proceed to examine the decisions under review.
the bank employees to take advantage of safeguard

control lapses and perpetrate chicanery on their
employer.
The labor arbiter also evaluated the banks claim that
Cadiz had reimbursed the amount of $600 to the
aggrieved depositor Alqueza while making it appear
that it was Alfiscar who had actually made the refund.
In disbelieving this claim, the Labor Arbiter
concluded that it is unthinkable for a lowly bank
employee to impose his will upon his high and
mighty employer.[14]
The general thesis as laid down by the NLRC and

Court of Appeals is that petitioners had
surreptitiously diverted funds deposited by depositors
to S/A No. 1083-4 which was under their control and
disposition. On the other hand, a perusal of the labor
arbiters Decision reveals a different perspective from
which the case was approached. While the labor
arbiter conceded that petitioners Bongkingki and
Gloria had miscoded several deposit slips, rendering
them immediately withdrawable, he characterized the
errors as mere procedural inadequacies which were
preventable had management exercised greater
control over its employees.[13]
This pronouncement is revelatory of absurd logic.

The notion that a lowly employee will never
countermand the will or interests of the employer is
sufficiently rebutted by any labor law casebook, any
omnibus of our labor jurisprudence, and the evolution
of the human experience that disquiets persons from
unhesitatingly acceding to the presumptive good faith
of others. It is an accepted premise of life and
jurisprudence that persons are capable, upon impure
motivations, of taking advantage of others, whether
their social lessers, equals, or betters. The necessity
of punishment arises from this flaw of human nature.
This philosophic stance of the labor arbiter actually
obviates the nature of sin.
Far from petitioners thrust, the miscoding of deposit

slips cannot be downplayed as mere procedural
inadequacies. After all, it is such miscoding that
precipitated the fraudulent withdrawals in the first
place. The act operated as the first indispensable step
towards the commission of fraud on the bank.
Obviously, we are hard-pressed to accord high regard

to the labor arbiters discernment as a trier of facts.
Nonetheless, his claim that there were procedural
flaws attending the dismissal of petitioners warrants
some deliberation.
More disturbing though is the labor arbiters

willingness to acquit petitioners of culpability on
account of the purported negligence of the bank. It is
similar to concluding that the bank guards, and not
the burglars, bear primary culpability for a bank
robbery. Whatever liability or responsibility was
expected of the bank stands as an issue separate from
the liability of the recreant bank employees. Even
assuming that the bank observed less-than-ideal
controls over the security of its operations, such
laxity does not serve as the carte blanche signal for
The labor arbiter ruled that the notices of dismissal

served on petitioners was insufficient as it failed to
specifically delineate how petitioners had violated the
internal rules of the bank. However, the notices do
cite the rules which petitioners had violated and refer
to the fact that such violations occurred relating to
S/A No. 1083-4 account of Sonia Alfiscar and/or
Rosalinda Alqueza.
There is no demand that the notices of dismissal
themselves be couched in the form and language of
judicial or quasi-judicial decisions. What is required

is that the employer conduct a formal investigation
process, with notices duly served on the employees
informing them of the fact of investigation, and
subsequently, if warranted, a separate notice of
dismissal.[15] Through the formal investigatory
process, the employee must be accorded the right to
present his/her side, which must be considered and
weighed by the employer. The employee must be
sufficiently apprised of the nature of the charge
against him/her, so as to be able to intelligently
defend against the charges.
In the instant case, records show that respondent bank
complied with the two-notice rule prescribed in
Article 277(b) of the Labor Code.[16] Petitioners were
given all avenues to present their side and disprove
the allegations of respondent bank. An informal
meeting was held between the branch manager of
MOB, the three petitioners and Mr. Gener, the VicePresident of the PCIB Employees Union. As per
report, petitioners admitted having used Alfiscars
account to divert funds intended for other accounts. A
special audit investigation was conducted to
determine the extent of the fraudulent transactions.
Based on the results of the investigation, respondent
bank sent show-cause memoranda to petitioners,
asking them to explain their lapses, under pain of
disciplinary action. The memoranda, which constitute
the first notice, specified the various questionable
acts committed by petitioners.
Afterwards, petitioners submitted their respective
replies to the memoranda. This very well complies
with the requirement for hearing, by which
petitioners were afforded the opportunity to defend
themselves. The second notice came in the form of
the termination memoranda, informing petitioners of
their dismissal from service. From the foregoing, it is
clear that the required procedural due process for
their termination was strictly complied with.
All told, we hold that the factual appreciation and
conclusions rendered by the labor arbiter are not
worthy of adoption by this Court. In contrast, from
the factual determinations made by the NLRC and the
Court of Appeals, we accept the following facts as

proven:
1.
Petitioner Cadiz reserved
S/A No. 1083-4 in July 1987 as
reflected on respondent banks
new account register.
2.
Foreign denominated
checks payable to other payees
were diverted into the said
account.
3.
The various deposit slips,
covering the said checks, did not
bear the machine validation of
any of the tellers-in-charge.
4.
The signatures of the
MOB officers appearing on the
said deposit slips were in fact
forged.
5.
The posting of said bank
transactions bore the initials of
petitioners
Bongkingki
or
Gloria.
6.
The deposit slips were
coded as 1511 or on-us check.
7.
Petitioner Cadiz agreed
to pay Alqueza the equivalent
amount of $600.00 but it was
made to appear that Alfiscar paid
the said amount.
8.
In view of these findings,
petitioners were served with
show-cause memoranda asking
them to explain the lapses.
9.
Finding
their
explanations
unsatisfactory,
petitioners were terminated from
employment.
It is from these established facts that we consider the
arguments now presented by petitioners. In light of
these facts, petitioners arguments hardly detract from
the conclusion that their behavior in the course of the
discharge of their duties is clearly malfeasant, and
constitutes ground for their termination on account of
just cause.
anomalous transactions.
First, petitioners insist that the show-cause
memoranda served on them did not impute any
fraudulent behavior, but merely lapses. We disagree.
The show-cause memoranda were occasioned by the
confidential report prepared by Sandig, as well as the
findings of the special audit examination. The
confidential report prepared by Sandig addressed to
the Vice-President of respondent bank pertains to the
discovery of fraudulent transactions on S/A No.10834 involving three employees of respondent bank. The
report detailed how the events transpired, including
the admissions of petitioners. From there, a special
audit examination was conducted to make a thorough
investigation of the questioned account. The
examination yielded conspicuous findings that
anomalous transactions had taken place involving
petitioners.
Moreover, the show-cause memoranda respectively
served on petitioners clearly indicate that they were
being made to answer questions pertaining to possible
anomalous behavior on their part. For example,
petitioners were asked to explain why they had
posted the questioned deposits on the ledger, although
there were no teller validations or teller stamps, and
also on what basis they considered such transactions
to be valid.[17] On the other hand, the show-cause
memorandum to Cadiz directly asks him to provide
the personal details of Sonia Alfiscar, why he went
out of his way to make a special arrangement for the
mysterious Alfiscar, and other questions pertaining to
the Alfiscar accounts.
We thus cannot give credence to the averments of
petitioners that the memoranda pertain to lapses, and
not fraudulent transactions. The bank could not have
been expected to conclude outright that petitioners
were guilty of fraud, despite all the indicia that they
indeed were. Certainly, the purpose of the show-cause
memoranda was to afford petitioners the opportunity
to acquit themselves of culpable responsibility. It
would have been quite irresponsible for the bank to
have premised the queries therein on irretractable
conclusions that petitioners had been guilty of
Second, petitioners contend that they should be

relieved of any liability considering that respondent
bank did not suffer a pecuniary loss. This claim must
obviously fail.
There is jurisprudential support, as noted by the Court
of Appeals in citing University of the East v. NLRC [18]
that lack of material or pecuniary damages would not
in any way mitigate a persons liability nor obliterate
the loss of trust and confidence. In the case of
Etcuban v. Sulpicio Lines,[19] this Court definitively
ruled that:
. . . Whether or not the
respondent
bank
was
financially prejudiced is
immaterial.
Also,
what
matters is not the amount
involved, be it paltry or
gargantuan;
rather
the
fraudulent scheme in which
the petitioner was involved,
which constitutes a clear
betrayal
of
trust
and
confidence. . . .
Moreover, it cannot be discounted that as bank
employees, the responsibilities of petitioners are
impressed with a high degree of public interest.
Private persons entrust their fortunes to banks, and it
would cause a breakdown of the financial order if the
judicial system were to leave unsanctioned bank
employees who treat depositors accounts as their own
private kitty.
Still, petitioners insist that respondent bank never lost
trust and confidence in them as it did not place them
under preventive suspension, and more tellingly, it
even promoted them after the labor arbiter had
ordered their reinstatement. Preventive suspension,
which is never obligatory on the part of the employer,
may be resorted to only when the continued
employment of the employee poses a serious and
imminent threat to the life or property of the
employer or of his co-workers. [20] The bank points out

that the Alfiscar account, through which the
anomalous transactions were coursed, was no longer
active at the time the fraud was discovered. [21]
Clearly, the bank had reason to conclude that the
imminence of the threat posed by the employees was
not as vital as it would have been had the dubious
account still been open.
As to the alleged promotions, the original employer,
PCIB, admits that petitioners had been reinstated by
reason of the Decision, but such act was by no means
voluntary. PCIB however does not rebut the
allegations that Bongkingki and Cadiz were assigned
to sensitive positions within the bank after their
compulsory reinstatement. This may be so, but the
fact that PCIB lost no time in removing the
employees from the plantilla after the NLRC
reversed the labor arbiters Decision hardly evinces
any continuing trust and confidence on the part of the
bank, as maintained by petitioners. Moreover,
considering that these reinstated employees were, for
the meantime, regular employees of the bank, it is
within the discretion of PCIB to reassign them as it
sees fit, taking into account the circumstances.
Moreover, it would simply be temerarious for the
Court to sanction the reinstatement of bank
employees who have clearly engaged in anomalous
banking practices. The particular fiduciary
responsibilities reposed on banks and its employees
cannot be emphasized enough. The fiduciary nature
of banking[22] is enshrined in Republic Act No. 8791
or the General Banking Law of 2000. Section 2 of the
law specifically says that the State recognizes the
fiduciary nature of banking that requires high
standards of integrity and performance.[23] The bank
must not only exercise high standards of integrity and
performance, it must also ensure that its employees
do likewise because this is the only way to ensure
that the bank will comply with its fiduciary duty.[24]
All given, we affirm the conclusion that petitioners
were dismissed for just cause. Loss of trust and
confidence is one of the just causes for termination by
employer under Article 282 of the Labor Code. The
breach of trust must be willful, meaning it must be

done intentionally, knowingly, and purposely, without
justifiable excuse.[25] Ideally, loss of confidence
applies only to cases involving employees occupying
positions of trust and confidence or to those situations
where the employee is routinely charged with the
care and custody of the employers money or property.
[26]
Utmost trust and confidence are deemed to have
been reposed on petitioners by virtue of the nature of
their work.
The facts as established, as well as the need to assert
the public interest in safeguarding against bank fraud,
militate against the present petition.
WHEREFORE, the Petition is hereby DENIED and
the assailed Decision of the Court of Appeals
AFFIRMED. Costs against petitioners.
SO ORDERED.
Far East Bank and Trust v. Pacilan Jr

DECISION
CALLEJO, SR., J.:
Before the Court is the petition for review on
certiorari filed by Far East Bank and Trust Company
(now Bank of the Philippines Islands) seeking the
reversal of the Decision[1] dated August 30, 2002 of
the Court of Appeals (CA) in CA-G.R. CV No. 36627
which ordered it, together with its branch accountant,
Roger Villadelgado, to pay respondent Themistocles
Pacilan, Jr.[2] the total sum of P100,000.00 as moral
and exemplary damages. The assailed decision
affirmed with modification that of the Regional Trial
Court (RTC) of Negros Occidental, Bacolod City,
Branch 54, in Civil Case No. 4908. Likewise sought
to be reversed and set aside is the Resolution dated
January 17, 2003 of the appellate court, denying
petitioner banks motion for reconsideration.
The case stemmed from the following undisputed
facts:
Respondent Pacilan opened a current account with
petitioner banks Bacolod Branch on May 23, 1980.
His account was denominated as Current Account
No. 53208 (0052-00407-4). The respondent had since
then issued several postdated checks to different
payees drawn against the said account. Sometime in
March 1988, the respondent issued Check No.
2434886 in the amount of P680.00 and the same was
presented for payment to petitioner bank on April 4,
1988.
Upon its presentment on the said date, Check No.
2434886 was dishonored by petitioner bank. The next
day, or on April 5, 1988, the respondent deposited to
his current account the amount of P800.00. The said
amount was accepted by petitioner bank; hence,
increasing the balance of the respondents deposit to
P1,051.43.
Subsequently, when the respondent verified with
petitioner bank about the dishonor of Check No.

2434866, he discovered that his current account was
closed on the ground that it was improperly handled.
The records of petitioner bank disclosed that between
the period of March 30, 1988 and April 5, 1988, the
respondent issued four checks, to wit: Check No.
2480416 for P6,000.00; Check No. 2480419 for
P50.00; Check No. 2434880 for P680.00 and; Check
No. 2434886 for P680.00, or a total amount of
P7,410.00. At the time, however, the respondents
current account with petitioner bank only had a
deposit of P6,981.43. Thus, the total amount of the
checks presented for payment on April 4, 1988
exceeded the balance of the respondents deposit in
his account. For this reason, petitioner bank, through
its branch accountant, Villadelgado, closed the
respondents current account effective the evening of
April 4, 1988 as it then had an overdraft of P428.57.
As a consequence of the overdraft, Check No.
2434886 was dishonored.
On April 18, 1988, the respondent wrote to petitioner
bank complaining that the closure of his account was
unjustified. When he did not receive a reply from
petitioner bank, the respondent filed with the RTC of
Negros Occidental, Bacolod City, Branch 54, a
complaint for damages against petitioner bank and
Villadelgado. The case was docketed as Civil Case
No. 4908. The respondent, as complainant therein,
alleged that the closure of his current account by
petitioner bank was unjustified because on the first
banking hour of April 5, 1988, he already deposited
an amount sufficient to fund his checks. The
respondent pointed out that Check No. 2434886, in
particular, was delivered to petitioner bank at the
close of banking hours on April 4, 1988 and,
following normal banking procedure, it (petitioner
bank) had until the last clearing hour of the following
day, or on April 5, 1988, to honor the check or return
it, if not funded. In disregard of this banking
procedure and practice, however, petitioner bank
hastily closed the respondents current account and
dishonored his Check No. 2434886.
The respondent further alleged that prior to the
closure of his current account, he had issued several
other postdated checks. The petitioner banks act of

closing his current account allegedly preempted the
deposits that he intended to make to fund those
checks. Further, the petitioner banks act exposed him
to criminal prosecution for violation of Batas
Pambansa Blg. 22.
According to the respondent, the indecent haste that
attended the closure of his account was patently
malicious and intended to embarrass him. He claimed
that he is a Cashier of Prudential Bank and Trust
Company, whose branch office is located just across
that of petitioner bank, and a prominent and respected
leader both in the civic and banking communities.
The alleged malicious acts of petitioner bank
besmirched the respondents reputation and caused
him social humiliation, wounded feelings,
insurmountable worries and sleepless nights entitling
him to an award of damages.
In their answer, petitioner bank and Villadelgado
maintained that the respondents current account was
subject to petitioner banks Rules and Regulations
Governing the Establishment and Operation of
Regular Demand Deposits which provide that the
Bank reserves the right to close an account if the
depositor frequently draws checks against insufficient
funds and/or uncollected deposits and that the Bank
reserves the right at any time to return checks of the
depositor which are drawn against insufficient funds
or for any reason.[3]
They showed that the respondent had improperly and
irregularly handled his current account. For example,
in 1986, the respondents account was overdrawn 156
times, in 1987, 117 times and in 1988, 26 times. In all
these instances, the account was overdrawn due to the
issuance of checks against insufficient funds. The
respondent had also signed several checks with a
different signature from the specimen on file for
dubious reasons.
When the respondent made the deposit on April 5,
1988, it was obviously to cover for issuances made
the previous day against an insufficiently funded
account. When his Check No. 2434886 was presented
for payment on April 4, 1988, he had already incurred

an overdraft; hence, petitioner bank rightfully
dishonored the same for insufficiency of funds.
After due proceedings, the court a quo rendered
judgment in favor of the respondent as it ordered the
petitioner bank and Villadelgado, jointly and
severally, to pay the respondent the amounts of
P100,000.00 as moral damages and P50,000.00 as
exemplary damages and costs of suit. In so ruling, the
court a quo also cited petitioner banks rules and
regulations which state that a charge of P10.00 shall
be levied against the depositor for any check that is
taken up as a returned item due to insufficiency of
funds on the date of receipt from the clearing office
even if said check is honored and/or covered by
sufficient deposit the following banking day. The
same rules and regulations also provide that a check
returned for insufficiency of funds for any reason of
similar import may be subsequently recleared for one
more time only, subject to the same charges.
According to the court a quo, following these rules
and regulations, the respondent, as depositor, had the
right to put up sufficient funds for a check that was
taken as a returned item for insufficient funds the day
following the receipt of said check from the clearing
office. In fact, the said check could still be recleared
for one more time. In previous instances, petitioner
bank notified the respondent when he incurred an
overdraft and he would then deposit sufficient funds
the following day to cover the overdraft. Petitioner
bank thus acted unjustifiably when it immediately
closed the respondents account on April 4, 1988 and
deprived him of the opportunity to reclear his check
or deposit sufficient funds therefor the following day.
As a result of the closure of his current account,
several of the respondents checks were subsequently
dishonored and because of this, the respondent was
humiliated, embarrassed and lost his credit standing
in the business community. The court a quo further
ratiocinated that even granting arguendo that
petitioner bank had the right to close the respondents
account, the manner which attended the closure
constituted an abuse of the said right. Citing Article
19 of the Civil Code of the Philippines which states

that [e]very person must, in the exercise of his rights
and in the performance of his duties, act with justice,
give everyone his due, and observe honesty and good
faith and Article 20 thereof which states that [e]very
person who, contrary to law, wilfully or negligently
causes damage to another, shall indemnify the latter
for the same, the court a quo adjudged petitioner
bank of acting in bad faith. It held that, under the
foregoing circumstances, the respondent is entitled to
an award of moral and exemplary damages.
The decretal portion of the court a quos decision
reads:
WHEREFORE,
PREMISES
judgment is hereby rendered:
CONSIDERED,
1.
Ordering the defendants [petitioner bank and
Villadelgado], jointly and severally, to pay plaintiff
[the respondent] the sum of P100,000.00 as moral
damages;
2.
Ordering the defendants, jointly and severally,
to pay plaintiff the sum of P50,000.00 as exemplary
damages plus costs and expenses of the suit; and
3.
Dismissing [the] defendants counterclaim for
lack of merit.
SO ORDERED.[4]
On appeal, the CA rendered the Decision
dated August 30, 2002, affirming with
modification the decision of the court a
quo.The appellate court substantially
affirmed the factual findings of the court
a quo as it held that petitioner bank
unjustifiably closed the respondents
account notwithstanding that its own
rules and regulations allow that a check
returned for insufficiency of funds or any
reason of similar import, may be
subsequently recleared for one more time,
subject to standard charges. Like the
court a quo, the appellate court observed
that in several instances in previous
years, petitioner bank would inform the

respondent when he incurred an overdraft
and allowed him to make a timely deposit
to fund the checks that were initially
dishonored for insufficiency of funds.
However, on April 4, 1988, petitioner
bank immediately closed the respondents
account without even notifying him that
he had incurred an overdraft. Even when
they had already closed his account on
April 4, 1988, petitioner bank still
accepted the deposit that the respondent
made on April 5, 1988, supposedly to
cover his checks.
Echoing the reasoning of the court a quo, the CA
declared that even as it may be conceded that
petitioner bank had reserved the right to close an
account for repeated overdrafts by the respondent, the
exercise of that right must never be despotic or
arbitrary. That petitioner bank chose to close the
account outright and return the check, even after
accepting a deposit sufficient to cover the said check,
is contrary to its duty to handle the respondents
account with utmost fidelity. The exercise of the right
is not absolute and good faith, at least, is required.
The manner by which petitioner bank closed the
account of the respondent runs afoul of Article 19 of
the Civil Code which enjoins every person, in the
exercise of his rights, to give every one his due, and
observe honesty and good faith.
The CA concluded that petitioner banks precipitate
and imprudent closure of the respondents account had
caused him, a respected officer of several civic and
banking associations, serious anxiety and humiliation.
It had, likewise, tainted his credit standing.
Consequently, the award of damages is warranted.
The CA, however, reduced the amount of damages
awarded by the court a quo as it found the same to be
excessive:
We, however, find excessive the amount of damages
awarded by the RTC. In our view the reduced amount
of P75,000.00 as moral damages and P25,000.00 as
exemplary damages are in order. Awards for damages
are not meant to enrich the plaintiff-appellee [the
respondent] at the expense of defendants-appellants

[the petitioners], but to obviate the moral suffering he
has undergone. The award is aimed at the restoration,
within limits possible, of the status quo ante, and
should be proportionate to the suffering inflicted.[5]
The dispositive portion of the assailed CA decision
reads:
WHEREFORE, the decision appealed from is hereby
AFFIRMED, subject to the MODIFICATION that the
award of moral damages is reduced to P75,000.00
and the award of exemplary damages reduced to
P25,000.00.
SO ORDERED.[6]
Petitioner bank sought the reconsideration of the said
decision but in the assailed Resolution dated January
17, 2003, the appellate court denied its motion.
Hence, the recourse to this Court.
Petitioner bank maintains that, in closing the account
of the respondent in the evening of April 4, 1988, it
acted in good faith and in accordance with the rules
and regulations governing the operation of a regular
demand deposit which reserves to the bank the right
to close an account if the depositor frequently draws
checks against insufficient funds and/or uncollected
deposits. The same rules and regulations also provide
that the depositor is not entitled, as a matter of right,
to overdraw on this deposit and the bank reserves the
right at any time to return checks of the depositor
which are drawn against insufficient funds or for any
reason.
It cites the numerous instances that the respondent
had overdrawn his account and those instances where
he deliberately signed checks using a signature
different from the specimen on file. Based on these
facts, petitioner bank was constrained to close the
respondents account for improper and irregular
handling and returned his Check No. 2434886 which
was presented to the bank for payment on April 4,
1988.
Petitioner bank further posits that there is no law or

rule which gives the respondent a legal right to make
good his check or to deposit the corresponding
amount to cover said check within 24 hours after the
same is dishonored or returned by the bank for having
been drawn against insufficient funds. It vigorously
denies having violated Article 19 of the Civil Code as
it insists that it acted in good faith and in accordance
with the pertinent banking rules and regulations.
The petition is impressed with merit.
A perusal of the respective decisions of the court a
quo and the appellate court show that the award of
damages in the respondents favor was anchored
mainly on Article 19 of the Civil Code which, quoted
anew below, reads:
Art. 19. Every person must, in the exercise of his
rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty
and good faith.
The elements of abuse of rights are the following: (a)
the existence of a legal right or duty; (b) which is
exercised in bad faith; and (c) for the sole intent of
prejudicing or injuring another.[7] Malice or bad faith
is at the core of the said provision. [8] The law always
presumes good faith and any person who seeks to be
awarded damages due to acts of another has the
burden of proving that the latter acted in bad faith or
with ill-motive.[9] Good faith refers to the state of the
mind which is manifested by the acts of the
individual concerned. It consists of the intention to
abstain from taking an unconscionable and
unscrupulous advantage of another.[10] Bad faith does
not simply connote bad judgment or simple
negligence, dishonest purpose or some moral
obliquity and conscious doing of a wrong, a breach of
known duty due to some motives or interest or ill-will
that partakes of the nature of fraud. [11] Malice
connotes ill-will or spite and speaks not in response
to duty. It implies an intention to do ulterior and
unjustifiable harm. Malice is bad faith or bad motive.
[12]
Undoubtedly, petitioner bank has the right to close
the account of the respondent based on the following

provisions of its Rules and Regulations Governing
the Establishment and Operation of Regular Demand
Deposits:
10)
The Bank reserves the right to close an
account if the depositor frequently draws checks
against insufficient funds and/or uncollected deposits.
12) However, it is clearly understood that
the depositor is not entitled, as a matter of
right, to overdraw on this deposit and the
bank reserves the right at any time to
return checks of the depositor which are
drawn against insufficient funds or for
any other reason.
The facts, as found by the court a quo and
the appellate court, do not establish that,
in the exercise of this right, petitioner
bank committed an abuse thereof.
Specifically, the second and third
elements for abuse of rights are not
attendant in the present case. The
evidence presented by petitioner bank
negates the existence of bad faith or
malice on its part in closing the
respondents account on April 4, 1988
because on the said date the same was
already overdrawn. The respondent
issued four checks, all due on April 4,
1988, amounting to P7,410.00 when the
balance of his current account deposit
was only P6,981.43. Thus, he incurred an
overdraft of P428.57 which resulted in
the dishonor of his Check No. 2434886.
Further, petitioner bank showed that in
1986, the current account of the
respondent was overdrawn 156 times due
to his issuance of checks against
insufficient funds.[13] In 1987, the said
account was overdrawn 117 times for the
same reason.[14] Again, in 1988, 26 times.
[15]
There were also several instances
when the respondent issued checks
deliberately using a signature different
from his specimen signature on file with
petitioner
bank.[16]
All
these
circumstances taken together justified the

petitioner banks closure of the
respondents account on April 4, 1988 for
improper handling.
It is observed that nowhere under its rules and
regulations is petitioner bank required to notify the
respondent, or any depositor for that matter, of the
closure of the account for frequently drawing checks
against insufficient funds. No malice or bad faith
could be imputed on petitioner bank for so acting
since the records bear out that the respondent had
indeed been improperly and irregularly handling his
account not just a few times but hundreds of times.
Under the circumstances, petitioner bank could not be
faulted for exercising its right in accordance with the
express rules and regulations governing the current
accounts of its depositors. Upon the opening of his
account, the respondent had agreed to be bound by
these terms and conditions.
Neither the fact that petitioner bank accepted the
deposit made by the respondent the day following the
closure of his account constitutes bad faith or malice
on the part of petitioner bank. The same could be
characterized as simple negligence by its personnel.
Said act, by itself, is not constitutive of bad faith.
The respondent had thus failed to discharge his
burden of proving bad faith on the part of petitioner
bank or that it was motivated by ill-will or spite in
closing his account on April 4, 1988 and in
inadvertently accepting his deposit on April 5, 1988.
Further, it has not been shown that these acts were
done by petitioner bank with the sole intention of
prejudicing and injuring the respondent. It is
conceded that the respondent may have suffered
damages as a result of the closure of his current
account. However, there is a material distinction
between damages and injury. The Court had the
occasion to explain the distinction between damages
and injury in this wise:
Injury is the illegal invasion of a legal right; damage
is the loss, hurt or harm which results from the injury;
and damages are the recompense or compensation
awarded for the damage suffered. Thus, there can be
damage without injury in those instances in which the

loss or harm was not the result of a violation of a
legal duty. In such cases, the consequences must be
borne by the injured person alone, the law affords no
remedy for damages resulting from an act which does
not amount to a legal injury or wrong. These
situations are often called damnum absque injuria.
In other words, in order that a plaintiff may maintain
an action for the injuries of which he complains, he
must establish that such injuries resulted from a
breach of duty which the defendant owed to the
plaintiff a concurrence of injury to the plaintiff and
legal responsibility by the person causing it. The
underlying basis for the award of tort damages is the
premise that the individual was injured in
contemplation of law. Thus, there must first be a
breach of some duty and the imposition of liability
for that breach before damages may be awarded; and
the breach of such duty should be the proximate
cause of the injury.[17]
Whatever damages the respondent may have suffered
as a consequence, e.g., dishonor of his other
insufficiently funded checks, would have to be borne
by him alone. It was the respondents repeated
improper
and irregular handling of his account which
constrained petitioner bank to close the same in
accordance with the rules and regulations governing
its depositors current accounts. The respondents case
is clearly one of damnum absque injuria.
WHEREFORE, the petition is GRANTED. The
Decision dated August 30, 2002 and Resolution dated
January 17, 2003 of the Court of Appeals in CA-G.R.
CV No. 36627 are REVERSED AND SET ASIDE.
SO ORDERED.
GREGORIO H. REYES and CONSUELO PUYATREYES, petitioners, vs. THE HON. COURT OF
APPEALS and FAR EAST BANK AND TRUST
COMPANY, respondents.
DECISION
DE LEON, JR., J.:
Before us is a petition for review of the Decision
dated July 22, 1994 and ResolutioN dated December
29, 1994 of the Court of Appeals affirming with
modification the Decision[dated November 12, 1992
of the Regional Trial Court of Makati, Metro Manila,
Branch 64, which dismissed the complaint for
damages of petitioners spouses Gregorio H. Reyes
and Consuelo Puyat-Reyes against respondent Far
East Bank and Trust Company.
The undisputed facts of the case are as follows:
In view of the 20th Asian Racing Conference then
scheduled to be held in September, 1988 in Sydney,
Australia, the Philippine Racing Club, Inc. (PRCI, for
brevity) sent four (4) delegates to the said conference.
Petitioner Gregorio H. Reyes, as vice-president for
finance, racing manager, treasurer, and director of
PRCI, sent Godofredo Reyes, the clubs chief cashier,
to the respondent bank to apply for a foreign
exchange demand draft in Australian dollars.
Godofredo went to respondent banks Buendia Branch
in Makati City to apply for a demand draft in the
amount One Thousand Six Hundred Ten Australian
Dollars (AU$1,610.00) payable to the order of the
20th Asian Racing Conference Secretariat of Sydney,
Australia. He was attended to by respondent banks
assistant cashier, Mr. Yasis, who at first denied the
application for the reason that respondent bank did
not have an Australian dollar account in any bank in
Sydney. Godofredo asked if there could be a way for
respondent bank to accommodate PRCIs urgent need
to remit Australian dollars to Sydney. Yasis of
respondent bank then informed Godofredo of a
roundabout way of effecting the requested remittance
to Sydney thus: the respondent bank would draw a
demand draft against Westpac Bank in Sydney,
Australia (Westpac-Sydney for brevity) and have the
latter reimburse itself from the U.S. dollar account of
the respondent in Westpac Bank in New York, U.S.A
(Westpac-New York for brevity). This arrangement
has been customarily resorted to since the 1960s and
the procedure has proven to be problem-free. PRCI

and the petitioner Gregorio H. Reyes, acting through
Godofredo, agreed to this arrangement or approach in
order to effect the urgent transfer of Australian dollars
payable to the Secretariat of the 20th Asian Racing
Conference.
On July 28, 1988, the respondent bank approved the
said application of PRCI and issued Foreign
Exchange Demand Draft (FXDD) No. 209968 in the
sum applied for, that is, One Thousand Six Hundred
Ten Australian Dollars (AU$1,610.00), payable to the
order of the 20th Asian Racing Conference Secretariat
of Sydney, Australia, and addressed to WestpacSydney as the drawee bank.
On August 10, 1988, upon due presentment of the
foreign exchange demand draft, denominated as
FXDD No. 209968, the same was dishonored, with
the notice of dishonor stating the following: xxx No
account held with Westpac. Meanwhile, on August
16, 1988, Westpac-New York sent a cable to
respondent bank informing the latter that its dollar
account in the sum of One Thousand Six Hundred
Ten Australian Dollars (AU$1,610.00) was debited.
On August 19, 1988, in response to PRCIs complaint
about the dishonor of the said foreign exchange
demand draft, respondent bank informed WestpacSydney of the issuance of the said demand draft
FXDD No. 209968, drawn against the WestpacSydney and informing the latter to be reimbursed
from the respondent banks dollar account in WestpacNew York. The respondent bank on the same day
likewise informed Westpac-New York requesting the
latter to honor the reimbursement claim of WestpacSydney. On September 14, 1988, upon its second
presentment for payment, FXDD No. 209968 was
again dishonored by Westpac-Sydney for the same
reason, that is, that the respondent bank has no
deposit dollar account with the drawee WestpacSydney.
On September 17, 1988 and September 18, 1988,
respectively, petitioners spouses Gregorio H. Reyes
and Consuelo Puyat-Reyes left for Australia to attend
the said racing conference. When petitioner Gregorio
H. Reyes arrived in Sydney in the morning of
September 18, 1988, he went directly to the lobby of
Hotel Regent Sydney to register as a conference
delegate. At the registration desk, in the presence of

other delegates from various member countries, he
was told by a lady member of the conference
secretariat that he could not register because the
foreign exchange demand draft for his registration fee
had been dishonored for the second time. A
discussion ensued in the presence and within the
hearing of many delegates who were also registering.
Feeling terribly embarrassed and humiliated,
petitioner Gregorio H. Reyes asked the lady member
of the conference secretariat that he be shown the
subject foreign exchange demand draft that had been
dishonored as well as the covering letter after which
he promised that he would pay the registration fees in
cash. In the meantime he demanded that he be given
his name plate and conference kit. The lady member
of the conference secretariat relented and gave him
his name plate and conference kit. It was only two (2)
days later, or on September 20, 1988, that he was
given the dishonored demand draft and a covering
letter. It was then that he actually paid in cash the
registration fees as he had earlier promised.
Meanwhile, on September 19, 1988, petitioner
Consuelo Puyat-Reyes arrived in Sydney. She too
was embarrassed and humiliated at the registration
desk of the conference secretariat when she was told
in the presence and within the hearing of other
delegates that she could not be registered due to the
dishonor of the subject foreign exchange demand
draft. She felt herself trembling and unable to look at
the people around her. Fortunately, she saw her
husband coming toward her. He saved the situation
for her by telling the secretariat member that he had
already arranged for the payment of the registration
fees in cash once he was shown the dishonored
demand draft. Only then was petitioner Puyat-Reyes
given her name plate and conference kit.
At the time the incident took place, petitioner
Consuelo Puyat-Reyes was a member of the House of
Representatives representing the lone Congressional
District of Makati, Metro Manila. She has been an
officer of the Manila Banking Corporation and was
cited by Archbishop Jaime Cardinal Sin as the top
lady banker of the year in connection with her
conferment of the Pro-Ecclesia et Pontifice Award.
She has also been awarded a plaque of appreciation
from the Philippine Tuberculosis Society for her

extraordinary service as the Societys campaign
chairman for the ninth (9th) consecutive year.
On November 23, 1988, the petitioners filed in the
Regional Trial Court of Makati, Metro Manila, a
complaint for damages, docketed as Civil Case No.
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.
The petitioners appealed the decision of the trial court
to the Court of Appeals. On July 22, 1994, the
appellate court affirmed the decision of the trial court
but in effect deleted the award of attorneys fees to the
defendant (herein respondent bank) and the
pronouncement as to the costs. The decretal portion
of the decision of the appellate court states:
WHEREFORE, the judgment appealed from, insofar
as it dismisses plaintiffs complaint, is hereby
AFFIRMED, but is hereby REVERSED and SET
ASIDE in all other respect. No special
pronouncement as to costs.
SO ORDERED.
According to the appellate court, there is no basis to
hold the respondent bank liable for damages for the
reason that it exerted every effort for the subject
foreign exchange demand draft to be honored. The
appellate court found and declared that:
xxx xxx xxx
Thus, the Bank had every reason to believe that the
transaction finally went through smoothly,
considering that its New York account had been
debited and that there was no miscommunication

between it and Westpac-New York. SWIFT is a world
wide association used by almost all banks and is
known to be the most reliable mode of
communication in the international banking business.
Besides, the above procedure, with the Bank as
drawer and Westpac-Sydney as drawee, and with
Westpac-New York as the reimbursement Bank had
been in place since 1960s and there was no reason for
the Bank to suspect that this particular demand draft
would not be honored by 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 Westpac-Sydney was
responsible for the dishonor and not the Bank.
Moreover, it is not said asterisk that caused the
misleading on the part of the Westpac-Sydney of the
numbers 1 to 7, since Exhs. 6 and 7 are just
documentary copies of the cable message sent to
Westpac-Sydney. Hence, if there was mistake
committed by Westpac-Sydney in decoding the cable
message which caused the Banks message to be sent
to the wrong department, the mistake was Westpacs,
not the Banks. The Bank had done what an ordinary
prudent person is required to do in the particular
situation, although appellants expect the Bank to have
done more. The Bank having done everything
necessary or usual in the ordinary course of banking
transaction, it cannot be held liable for any
embarrassment and corresponding damage that
appellants may have incurred.
xxx xxx xxx
Hence, this petition, anchored on the following
assignment of errors:
I
THE HONORABLE COURT OF APPEALS ERRED
IN FINDING PRIVATE RESPONDENT NOT
NEGLIGENT BY ERRONEOUSLY APPLYING
THE STANDARD OF DILIGENCE OF AN
ORDINARY PRUDENT PERSON WHEN IN
TRUTH A HIGHER DEGREE OF DILIGENCE IS

IMPOSED BY LAW UPON THE BANKS.
II
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
IN NOT HOLDING THAT AS SHOWN
OVERWHELMINGLY BY THE EVIDENCE, THE
DISHONOR OF THE DEMAND DRAFT WAS
DUE
TO
PRIVATE
RESPONDENTS
NEGLIGENCE AND NOT THE DRAWEE BANK
The petitioners contend that due to the fiduciary
nature of the relationship between the respondent
bank and its clients, the respondent bank should have
exercised a higher degree of diligence than that
expected of an ordinary prudent person in the
handling of its affairs as in the case at bar. The
appellate court, according to petitioners, erred in
applying the standard of diligence of an ordinary
prudent person only. Petitioners also claim that the
respondent bank violated Section 61 of the
Negotiable Instruments Law which provides the
warranty of a drawer that xxx on due presentment,
the instrument will be accepted or paid, or both,
according to its tenor xxx. Thus, the petitioners argue
that respondent bank should be held liable for
damages for violation of this warranty. The
petitioners pray this Court to re-examine the facts to
cite certain instances of negligence.
It is our view and we hold that there is no reversible
error in the decision of the appellate court.
Section 1 of Rule 45 of the Revised Rules of Court
provides that (T)he petition (for review) shall raise
only questions of law which must be distinctly set
forth. Thus, we have ruled that factual findings of the
Court of Appeals are conclusive on the parties and
not reviewable by this Court and they carry even
more weight when the Court of Appeals affirms the
factual findings of the trial court.
The courts a quo found that respondent bank did not
misrepresent that it was maintaining a deposit

account with Westpac-Sydney. Respondent banks
assistant cashier explained to Godofredo Reyes,
representating PRCI and petitioner Gregorio H.
Reyes, how the transfer of Australian dollars would
be effected through Westpac-New York where the
respondent bank has a dollar account to WestpacSydney where the subject foreign exchange demand
draft (FXDD No. 209968) could be encashed by the
payee, the 20th Asian Racing Conference Secretatriat.
PRCI and its Vice-President for finance, petitioner
Gregorio H. Reyes, through their said representative,
agreed to that arrangement or procedure. In other
words, the petitioners are estopped from denying the
said arrangement or procedure. Similar arrangements
have been a long standing practice in banking to
facilitate international commercial transactions. In
fact, the SWIFT cable message sent by respondent
bank to the drawee bank, Westpac-Sydney, stated that
it may claim reimbursement from its New York
branch, Westpac-New York where respondent bank
has a deposit dollar account.
The facts as found by the courts a quo show that
respondent bank did not cause an erroneous
transmittal of its SWIFT cable message to WestpacSydney. It was the erroneous decoding of the cable
message on the part of Westpac-Sydney that caused
the dishonor of the subject foreign exchange demand
draft. An employee of Westpac-Sydney in Sydney,
Australia mistakenly read the printed figures in the
SWIFT cable message of respondent bank as MT799
instead of as MT199. As a result, Westpac-Sydney
construed the said cable message as a format for a
letter of credit, and not for a demand draft. The
appellate court correctly found that the figure before
99 can still be distinctly seen as a number 1 and not
number 7. Indeed, the line of a 7 is in a slanting
position while the line of a 1 is in a horizontal
position. Thus, the number 1 in MT199 cannot be
construed as 7.
The evidence also shows that the respondent bank
exercised that degree of diligence expected of an
ordinary prudent person under the circumstances
obtaining. Prior to the first dishonor of the subject
foreign exchange demand draft, the respondent bank

advised Westpac-New York to honor the
reimbursement claim of Westpac-Sydney and to debit
the dollar account of respondent bank with the
former. As soon as the demand draft was dishonored,
the respondent bank, thinking that the problem was
with the reimbursement and without any idea that it
was due to miscommunication, re-confirmed the
authority of Westpac-New York to debit its dollar
account for the purpose of reimbursing WestpacSydney.Respondent bank also sent two (2) more
cable messages to Westpac-New York inquiring why
the demand draft was not honored.
With these established facts, we now determine the
degree of diligence that banks are required to exert in
their commercial dealings. In Philippine Bank of
Commerce v. Court of Appeals upholding a long
standing doctrine, we ruled that the degree of
diligence required of banks, is more than that of a
good father of a family where the fiduciary nature of
their relationship with their depositors is concerned.
In other words banks are duty bound to treat the
deposit accounts of their depositors with the highest
degree of care. But the said ruling applies only to
cases where banks act under their fiduciary capacity,
that is, as depositary of the deposits of their
depositors. But the same higher degree of diligence is
not expected to be exerted by banks in commercial
transactions that do not involve their fiduciary
relationship with their depositors.
Considering the foregoing, the respondent bank was
not required to exert more than the diligence of a
good father of a family in regard to the sale and
issuance of the subject foreign exchange demand
draft. The case at bar does not involve the handling of
petitioners deposit, if any, with the respondent bank.
Instead, the relationship involved was that of a buyer
and seller, that is, between the respondent bank as the
seller of the subject foreign exchange demand draft,
and PRCI as the buyer of the same, with the 20 th
Asian Racing Conference Secretariat in Sydney,
Australia as the payee thereof. As earlier mentioned,
the said foreign exchange demand draft was intended
for the payment of the registration fees of the
petitioners as delegates of the PRCI to the 20 th Asian

Racing Conference in Sydney.
The evidence shows that the respondent bank did
everything within its power to prevent the dishonor of
the subject foreign exchange demand draft. The
erroneous reading of its cable message to WestpacSydney by an employee of the latter could not have
been foreseen by the respondent bank. Being unaware
that its employee erroneously read the said cable
message, Westpac-Sydney merely stated that the
respondent bank has no deposit account with it to
cover for the amount of One Thousand Six Hundred
Ten Australian Dollar (AU$1610.00) indicated in the
foreign exchange demand draft. Thus, the respondent
bank had the impression that Westpac-New York had
not yet made available the amount for reimbursement
to Westpac-Sydney despite the fact that respondent
bank has a sufficient deposit dollar account with
Westpac-New York. That was the reason why the
respondent bank had to re-confirm and repeatedly
notify Westpac-New York to debit its (respondent
banks) deposit dollar account with it and to transfer
or credit the corresponding amount to WestpacSydney to cover the amount of the said demand draft.
In view of all the foregoing, and considering that the
dishonor of the subject foreign exchange demand
draft is not attributable to any fault of the respondent
bank, whereas the petitioners appeared to be under
estoppel as earlier mentioned, it is no longer
necessary to discuss the alleged application of
Section 61 of the Negotiable Instruments Law to the
case at bar. In any event, it was established that the
respondent bank acted in good faith and that it did not
cause the embarrassment of the petitioners in Sydney,
Australia. Hence, the Court of Appeals did not
commit any reversable error in its challenged
decision.
WHEREFORE, the petition is hereby DENIED, and
the assailed decision of the Court of Appeals is
AFFIRMED. Costs against the petitioners.
SO ORDERED.

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G.R. No.

on October 11, 1961, said legal counsel rendered an

scope of its powers and authority as granted under its

securities, loans are made regularly to any person by

with the provisions of Sections 2 and 6 of Republic

Sebastian, are directors of the corporation, as well as

said case No. 52342, on December 6, 1962, the Court

amounting to not less than P1,689,136.74; and that

defendant corporation warrant its dissolution is

2. To extend credit, give loans, mortgages and

entities regularly conducting such operations shall be

of five hundred pesos for each day during which such

1980 and P65,000.00 on 27 February 1981, or a total

every month of delay, which he flatly refused to pay

laws is an untenable defense. If that were so then they

the transaction between petitioners and respondent

maturity and this note is placed in the hands of an

have ruled often enough that it is not the function of

In other words, there was no binding and perfected

fully comply with their part of the bargain was not

G.R. No. 88013 March 19, 1990

Malabon Longlife Trading Corporation in the amount

agreed that the petitioner was nevertheless not

business declined. Its reputation was tarnished. Its

them with respect and even gratitude and, most of all,

contemplated in the Civil Code that calls for the

G.R. No. 69162 February 21, 1992

dishonored by the bank for insufficient funds and a

of P50,000.00 and attorney's fees to P5,000.00.

only requires it to exercise the diligence of a good

sparked this half-a-million-peso damage suit against

[G.R. No. 112392. February 29, 2000]

International."Consequently, Mr. Ariel Reyes, the

against private respondent, praying for the return of

asserted that per paragraph 2 of the Rules and

private respondents account did not mean that the

And, in addition, he engages that on due presentment,

and surety, the accommodation party being the

was intercalated and thereafter it was signed by

can be returned to the depositor; and the Bank is

specially so where the drawee bank is a foreign bank

ledger on private respondents account shows that

common sense, policy and precedent, is "that cause,

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

to Allied Bank. When Calapre returned to Solidbank

Trial Court of Manila dismissed the criminal case

now shifted to L.C. Diaz to prove that the signatures

On 16 July 1991, L.C. Diaz withdrew P82,554

Had the teller called up L.C. Diaz, Solidbank would

attorneys fees. Invoking Article 2231 of the Civil

RESPONDENT WAS NEGLIGENT IN THE

and obligations of the parties.

not accept deposits to enrich depositors but to earn

under lock and key was the proximate cause that

clients whenever their representatives withdraw

and the Court of Appeals. The tellers who processed

contributory negligence, we allocated the damages

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

letters of credit. The BANK required Marcos to give

No. 20-979-83 dated 24 October 1983. Marcos

756-82 dated 2 June 1982 for P420,000 and

day period to file the answer had lapsed. The trial

attend the hearing because of illness. The trial court

the BANK P760,000 of his time deposits. The trial