PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK OF ASIA AND

AMERICA), petitioner, vs. COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK,
N.A., respondents.
[G.R. No. 121413. January 29, 2001]
FORD PHILIPPINES, INC., petitioner-plaintif, vs. COURT OF APPEALS and CITIBANK, N.A. and
PHILIPPINE COMMERCIAL INTERNATIONAL BANK,respondents.
[G.R. No. 121479. January 29, 2001]
FORD
PHILIPPINES,
INC., petitioner,
vs. CITIBANK,
N.A.,
INTERNATIONAL BANK and THE COURT OF APPEALS,respondents.

PHILIPPINE

COMMERCIAL

[G.R. No. 128604. January 29, 2001]

FACTS
These consolidated petitions involve several fraudulently negotiated checks. The original actions a
quo were instituted by Ford Philippines to recover from the drawee bank, CITIBANK, N.A. (Citibank) and
collecting bank, Philippine Commercial International Bank (PCIBank) [formerly Insular Bank of Asia and
America], the value of several checks payable to the Commissioner of Internal Revenue, which were
embezzled allegedly by an organized syndicate. G.R. Nos. 121413 and 121479 are twin petitions for review
of the March 27, 1995 Decision [1] of the Court of Appeals in CA-G.R. CV No. 25017, entitled Ford
Philippines, Inc. vs. Citibank, N.A. and Insular Bank of Asia and America (now Philippine Commercial
International Bank), and the August 8, 1995 Resolution, [2] ordering the collecting bank, Philippine
Commercial International Bank, to pay the amount of Citibank Check No. SN-04867. In G.R. No. 128604,
petitioner Ford Philippines assails the October 15, 1996 Decision [3] of the Court of Appeals and its March 5,
1997 Resolution[4] in CA-G.R. No. 28430 entitled Ford Philippines, Inc. vs. Citibank, N.A. and Philippine
Commercial International Bank, affirming in toto the judgment of the trial court holding the defendant
drawee bank, Citibank, N.A., solely liable to pay the amount of P12,163,298.10 as damages for the
misapplied proceeds of the plaintiffs Citibank Check Numbers SN-10597 and 16508.
I. G.R. Nos. 121413 and 121479

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

In a letter dated February 28, 1980 by the Acting Commissioner of Internal Revenue addressed to the
plaintiff - supposed to be Exhibit D, the latter was officially informed, among others, that its check in the
amount of P4,746,114.41 was not paid to the government or its authorized agent and instead encashed by
unauthorized persons, hence, plaintiff has to pay the said amount within fifteen days from receipt of the
letter. Upon advice of the plaintiffs lawyers, plaintiff on March 11, 1982, paid to the Bureau of Internal
Revenue, the amount of P4,746,114.41, representing payment of plaintiffs percentage tax for the third
quarter of 1977. As a consequence of defendants refusal to reimburse plaintiff of the payment it had
made for the second time to the BIR of its percentage taxes, plaintiff filed on January 20, 1983 its original
complaint before this Court.
On December 24, 1985, defendant IBAA was merged with the Philippine Commercial International Bank
(PCI Bank) with the latter as the surviving entity. Defendant Citibank maintains that; the payment it made
of plaintiffs Citibank Check No. SN-04867 in the amount of P4,746,114.41 was in due course; it merely
relied on the clearing stamp of the depository/collecting bank, the defendant IBAA that all prior
indorsements and/or lack of indorsements guaranteed; and the proximate cause of plaintiffs injury is the
gross negligence of defendant IBAA in indorsing the plaintiffs Citibank check in question.
It is admitted that on December 19, 1977 when the proceeds of plaintiffs Citibank Check No. SN-04867
was paid to defendant IBAA as collecting bank, plaintiff was maintaining a checking account with
defendant Citibank.[5]
Although it was not among the stipulated facts, an investigation by the National Bureau of Investigation
(NBI) revealed that Citibank Check No. SN-04867 was recalled by Godofredo Rivera, the General Ledger
Accountant of Ford. He purportedly needed to hold back the check because there was an error in the
computation of the tax due to the Bureau of Internal Revenue (BIR). With Riveras instruction, PCIBank
replaced the check with two of its own Managers Checks (MCs). Alleged members of a syndicate later
deposited the two MCs with the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint before the trial court impleading Pacific Banking
Corporation (PBC) and Godofredo Rivera, as third party defendants. But the court dismissed the complaint
against PBC for lack of cause of action. The court likewise dismissed the third-party complaint against
Godofredo Rivera because he could not be served with summons as the NBI declared him as a fugitive
from justice. On June 15, 1989, the trial court rendered its decision. Not satisfied with the said decision,
both defendants, Citibank and PCIBank, elevated their respective petitions for review on certiorari to the
Court of Appeals. On March 27, 1995, the appellate court issued its judgment. PCIBank moved to
reconsider the above-quoted decision of the Court of Appeals, while Ford filed a Motion for Partial
Reconsideration. Both motions were denied for lack of merit. Separately, PCIBank and Ford filed before
this Court, petitions for review by certiorari under Rule 45. In G.R. No. 121413, PCIBank seeks the reversal
of the decision and resolution of the Twelfth Division of the Court of Appeals contending that it merely
acted on the instruction of Ford and such cause of action had already prescribed.
II. G.R. No. 128604

The same syndicate apparently embezzled the proceeds of checks intended, this time, to settle Fords
percentage taxes appertaining to the second quarter of 1978 and the first quarter of 1979.
The facts as narrated by the Court of Appeals are as follows: Ford drew Citibank Check No. SN-10597 on
July 19, 1978 in the amount of P5,851,706.37 representing the percentage tax due for the second quarter
of 1978 payable to the Commissioner of Internal Revenue. A BIR Revenue Tax Receipt No. 28645385 was
issued for the said purpose. On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the
amount of P6,311,591.73, representing the payment of percentage tax for the first quarter of 1979 and
payable to the Commissioner of Internal Revenue. Again a BIR Revenue Tax Receipt No. A-1697160 was
issued for the said purpose. Both checks were crossed checks and contain two diagonal lines on its upper
left corner between which were written the words payable to the payees account only.
The checks never reached the payee, CIR. Thus, in a letter dated February 28, 1980, the BIR, Region 4-B,
demanded for the said tax payments the corresponding periods above-mentioned. As far as the BIR is
concerned, the said two BIR Revenue Tax Receipts were considered fake and spurious. This anomaly was
confirmed by the NBI upon the initiative of the BIR. The findings forced Ford to pay the BIR anew, while an
action was filed against Citibank and PCIBank for the recovery of the amount of Citibank Check Numbers
SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tried the case, made its findings on the modus
operandi of the syndicate, as follows: A certain Mr. Godofredo Rivera was employed by the plaintiff FORD
as its General Ledger Accountant. As such, he prepared the plaintiffs check marked Ex. A [Citibank
Check No. SN-10597] for payment to the BIR. Instead, however, of delivering the same to the payee, he
passed on the check to a co-conspirator named Remberto Castro who was a pro-manager of the San
Andres Branch of PCIB.* In connivance with one Winston Dulay, Castro himself subsequently opened a
Checking Account in the name of a fictitious person denominated as Reynaldo Reyes in the Meralco
Branch of PCIBank where Dulay works as Assistant Manager.

After an initial deposit of P100.00 to validate the account, Castro deposited a worthless Bank of America
Check in exactly the same amount as the first FORD check (Exh. A, P5,851,706.37) while this worthless
check was coursed through PCIBs main office enroute to the Central Bank for clearing, replaced this
worthless check with FORDs Exhibit A and accordingly tampered the accompanying documents to cover
the replacement. As a result, Exhibit A was cleared by defendant CITIBANK, and the fictitious deposit
account of Reynaldo Reyes was credited at the PCIB Meralco Branch with the total amount of the FORD
check Exhibit A. The same method was again utilized by the syndicate in profiting from Exh. B [Citibank
Check No. SN-16508] which was subsequently pilfered by Alexis Marindo, Riveras Assistant at FORD.
From this Reynaldo Reyes account, Castro drew various checks distributing the shares of the other
participating conspirators namely (1) CRISANTO BERNABE, the mastermind who formulated the method for
the embezzlement; (2) RODOLFO R. DE LEON a customs broker who negotiated the initial contact between
Bernabe, FORDs Godofredo Rivera and PCIBs Remberto Castro; (3) JUAN CASTILLO who assisted de Leon
in the initial arrangements; (4) GODOFREDO RIVERA, FORDs accountant who passed on the first check
(Exhibit A) to Castro; (5) REMBERTO CASTRO, PCIBs pro-manager at San Andres who performed the
switching of checks in the clearing process and opened the fictitious Reynaldo Reyes account at the PCIB
Meralco Branch; (6) WINSTON DULAY, PCIBs Assistant Manager at its Meralco Branch, who assisted Castro
in switching the checks in the clearing process and facilitated the opening of the fictitious Reynaldo Reyes
bank account; (7) ALEXIS MARINDO, Riveras Assistant at FORD, who gave the second check (Exh. B) to
Castro; (8) ELEUTERIO JIMENEZ, BIR Collection Agent who provided the fake and spurious revenue tax
receipts to make it appear that the BIR had received FORDs tax payments.
Several other persons and entities were utilized by the syndicate as conduits in the disbursements of the
proceeds of the two checks, but like the aforementioned participants in the conspiracy, have not been
impleaded in the present case. The manner by which the said funds were distributed among them are
traceable from the record of checks drawn against the original Reynaldo Reyes account and indubitably
identify the parties who illegally benefited therefrom and readily indicate in what amounts they did so. [14]
On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank, Citibank, liable for the
value of the two checks while absolving PCIBank from any liability. Both Ford and Citibank appealed to the
Court of Appeals which affirmed, in toto, the decision of the trial court. Hence, this petition. Petitioner Ford
prays that judgment be rendered setting aside the portion of the Court of Appeals decision and its
resolution dated March 5, 1997, with respect to the dismissal of the complaint against PCIBank and holding
Citibank solely responsible for the proceeds of Citibank Check Numbers SN-10597 and 16508 for
P5,851,706.73 and P6,311,591.73 respectively.
ISSUE
Has petitioner Ford the right to recover from the collecting bank (PCIBank) and the drawee bank (Citibank)
the value of the checks intended as payment to the Commissioner of Internal Revenue? Or has Fords
cause of action already prescribed?
RULING
Note that in these cases, the checks were drawn against the drawee bank, but the title of the person
negotiating the same was allegedly defective because the instrument was obtained by fraud and unlawful
means, and the proceeds of the checks were not remitted to the payee. It was established that instead of
paying the checks to the CIR, for the settlement of the appropriate quarterly percentage taxes of Ford, the
checks were diverted and encashed for the eventual distribution among the members of the syndicate. As
to the unlawful negotiation of the check the applicable law is Section 55 of the Negotiable Instruments Law
(NIL), which provides: When title defective -- The title of a person who negotiates an instrument is
defective within the meaning of this Act when he obtained the instrument, or any signature thereto, by
fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he
negotiates it in breach of faith or under such circumstances as amount to a fraud.
Pursuant to this provision, it is vital to show that the negotiation is made by the perpetrator in breach of
faith amounting to fraud. The person negotiating the checks must have gone beyond the authority given
by his principal. If the principal could prove that there was no negligence in the performance of his duties,
he may set up the personal defense to escape liability and recover from other parties who, through their
own negligence, allowed the commission of the crime.
In this case, we note that the direct perpetrators of the offense, namely the embezzlers belonging to a
syndicate, are now fugitives from justice. They have, even if temporarily, escaped liability for the
embezzlement of millions of pesos. We are thus left only with the task of determining who of the present
parties before us must bear the burden of loss of these millions. It all boils down to the question of liability
based on the degree of negligence among the parties concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty of the imputed contributory
negligence that would defeat its claim for reimbursement, bearing in mind that its employees, Godofredo
Rivera and Alexis Marindo, were among the members of the syndicate.

Citibank points out that Ford allowed its very own employee, Godofredo Rivera, to negotiate the checks to
his co-conspirators, instead of delivering them to the designated authorized collecting bank (MetrobankAlabang) of the payee, CIR. Citibank bewails the fact that Ford was remiss in the supervision and control of
its own employees, inasmuch as it only discovered the syndicates activities through the information given
by the payee of the checks after an unreasonable period of time.
PCIBank also blames Ford of negligence when it allegedly authorized Godofredo Rivera to divert the
proceeds of Citibank Check No. SN-04867, instead of using it to pay the BIR. As to the subsequent runaround of funds of Citibank Check Nos. SN-10597 and 16508, PCIBank claims that the proximate cause of
the damage to Ford lies in its own officers and employees who carried out the fraudulent schemes and the
transactions. These circumstances were not checked by other officers of the company, including its
comptroller or internal auditor. PCIBank contends that the inaction of Ford despite the enormity of the
amount involved was a sheer negligence and stated that, as between two innocent persons, one of whom
must suffer the consequences of a breach of trust, the one who made it possible, by his act of negligence,
must bear the loss.
For its part, Ford denies any negligence in the performance of its duties. It avers that there was no
evidence presented before the trial court showing lack of diligence on the part of Ford. And, citing the
case ofGempesaw vs. Court of Appeals,[17] Ford argues that even if there was a finding therein that the
drawer was negligent, the drawee bank was still ordered to pay damages.
Furthermore, Ford contends that Godofredo Rivera was not authorized to make any representation in its
behalf, specifically, to divert the proceeds of the checks. It adds that Citibank raised the issue of imputed
negligence against Ford for the first time on appeal. Thus, it should not be considered by this Court.
On this point, jurisprudence regarding the imputed negligence of employer in a master-servant relationship
is instructive. Since a master may be held for his servants wrongful act, the law imputes to the master
the act of the servant, and if that act is negligent or wrongful and proximately results in injury to a third
person, the negligence or wrongful conduct is the negligence or wrongful conduct of the master, for which
he is liable.[18] The general rule is that if the master is injured by the negligence of a third person and by
the concurring contributory negligence of his own servant or agent, the latters negligence is imputed to
his superior and will defeat the superiors action against the third person, assuming, of course that the
contributory negligence was the proximate cause of the injury of which complaint is made.[19]
Accordingly, we need to determine whether or not the action of Godofredo Rivera, Fords General Ledger
Accountant, and/or Alexis Marindo, his assistant, was the proximate cause of the loss or damage. As
defined, proximate cause is that which, in the natural and continuous sequence, unbroken by any efficient,
intervening cause produces the injury, and without which the result would not have occurred. [20]
It appears that although the employees of Ford initiated the transactions attributable to an organized
syndicate, in our view, their actions were not the proximate cause of encashing the checks payable to the
CIR. The degree of Fords negligence, if any, could not be characterized as the proximate cause of the
injury to the parties.
The Board of Directors of Ford, we note, did not confirm the request of Godofredo Rivera to recall Citibank
Check No. SN-04867. Riveras instruction to replace the said check with PCIBanks Managers Check was
not in the ordinary course of business which could have prompted PCIBank to validate the same.
As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was established that these checks
were made payable to the CIR. Both were crossed checks. These checks were apparently turned around
by Fords employees, who were acting on their own personal capacity.
Given these circumstances, the mere fact that the forgery was committed by a drawer-payors confidential
employee or agent, who by virtue of his position had unusual facilities for perpetrating the fraud and
imposing the forged paper upon the bank, does not entitle the bank to shift the loss to the drawer-payor, in
the absence of some circumstance raising estoppel against the drawer. [21] This rule likewise applies to the
checks fraudulently negotiated or diverted by the confidential employees who hold them in their
possession.
With respect to the negligence of PCIBank in the payment of the three checks involved, separately, the
trial courts found variations between the negotiation of Citibank Check No. SN-04867 and the
misapplication of total proceeds of Checks SN-10597 and 16508. Therefore, we have to scrutinize,
separately, PCIBanks share of negligence when the syndicate achieved its ultimate agenda of stealing the
proceeds of these checks.
G.R. Nos. 121413 and 121479

Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It was coursed through
the ordinary banking transaction, sent to Central Clearing with the indorsement at the back all prior
indorsements and/or lack of indorsements guaranteed, and was presented to Citibank for
payment. Thereafter PCIBank, instead of remitting the proceeds to the CIR, prepared two of its Managers

checks and enabled the syndicate to encash the same. On record, PCIBank failed to verify the authority of
Mr. Rivera to negotiate the checks. The neglect of PCIBank employees to verify whether his letter
requesting for the replacement of the Citibank Check No. SN-04867 was duly authorized, showed lack of
care and prudence required in the circumstances. Furthermore, it was admitted that PCIBank is authorized
to collect the payment of taxpayers in behalf of the BIR. As an agent of BIR, PCIBank is duty bound to
consult its principal regarding the unwarranted instructions given by the payor or its agent. As aptly
stated by the trial court, to wit: x x x. Since the questioned crossed check was deposited with IBAA [now
PCIBank], which claimed to be a depository/collecting bank of the BIR, it has the responsibility to make
sure that the check in question is deposited in Payees account only. As agent of the BIR (the payee of the
check), defendant IBAA should receive instructions only from its principal BIR and not from any other
person especially so when that person is not known to the defendant. It is very imprudent on the part of
the defendant IBAA to just rely on the alleged telephone call of one Godofredo Rivera and in his signature
to the authenticity of such signature considering that the plaintiff is not a client of the defendant IBAA.
It is a well-settled rule that the relationship between the payee or holder of commercial paper and the
bank to which it is sent for collection is, in the absence of an agreement to the contrary, that of principal
and agent.[22] A bank which receives such paper for collection is the agent of the payee or holder. [23]
Even considering arguendo, that the diversion of the amount of a check payable to the collecting bank in
behalf of the designated payee may be allowed, still such diversion must be properly authorized by the
payor. Otherwise stated, the diversion can be justified only by proof of authority from the drawer, or that
the drawer has clothed his agent with apparent authority to receive the proceeds of such check.
Citibank further argues that PCI Banks clearing stamp appearing at the back of the questioned checks
stating that ALL PRIOR INDORSEMENTS AND/OR LACK OF INDORSEMENTS GUARANTEED should render
PCIBank liable because it made it pass through the clearing house and therefore Citibank had no other
option but to pay it. Thus, Citibank asserts that the proximate cause of Fords injury is the gross
negligence of PCIBank. Since the questioned crossed check was deposited with PCIBank, which claimed to
be a depository/collecting bank of the BIR, it had the responsibility to make sure that the check in question
is deposited in Payees account only.
Indeed, the crossing of the check with the phrase Payees Account Only, is a warning that the check
should be deposited only in the account of the CIR. Thus, it is the duty of the collecting bank PCIBank to
ascertain that the check be deposited in payees account only. Therefore, it is the collecting bank
(PCIBank) which is bound to scrutinize the check and to know its depositors before it could make the
clearing indorsement all prior indorsements and/or lack of indorsement guaranteed.
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation,[24] we ruled: Anent
petitioners liability on said instruments, this court is in full accord with the ruling of the PCHCs Board of
Directors that: In presenting the checks for clearing and for payment, the defendant made an express
guarantee on the validity of all prior endorsements. Thus, stamped at the back of the checks are the
defendants clear warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS
GUARANTEED. Without such warranty, plaintiff would not have paid on the checks. No amount of legal
jargon can reverse the clear meaning of defendants warranty. As the warranty has proven to be false and
inaccurate, the defendant is liable for any damage arising out of the falsity of its representation. [25]
Lastly, banking business requires that the one who first cashes and negotiates the check must take some
precautions to learn whether or not it is genuine. And if the one cashing the check through indifference or
other circumstance assists the forger in committing the fraud, he should not be permitted to retain the
proceeds of the check from the drawee whose sole fault was that it did not discover the forgery or the
defect in the title of the person negotiating the instrument before paying the check. For this reason, a
bank which cashes a check drawn upon another bank, without requiring proof as to the identity of persons
presenting it, or making inquiries with regard to them, cannot hold the proceeds against the drawee when
the proceeds of the checks were afterwards diverted to the hands of a third party. In such cases the
drawee bank has a right to believe that the cashing bank (or the collecting bank) had, by the usual proper
investigation, satisfied itself of the authenticity of the negotiation of the checks. Thus, one who encashed
a check which had been forged or diverted and in turn received payment thereon from the drawee, is
guilty of negligence which proximately contributed to the success of the fraud practiced on the drawee
bank. The latter may recover from the holder the money paid on the check. [26] Having established that the
collecting banks negligence is the proximate cause of the loss, we conclude that PCIBank is liable in the
amount corresponding to the proceeds of Citibank Check No. SN-04867.
G.R. No. 128604

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

In this case, there was no evidence presented confirming the conscious participation of PCIBank in the
embezzlement. As a general rule, however, a banking corporation is liable for the wrongful or tortuous
acts and declarations of its officers or agents within the course and scope of their employment. [28] A bank
will be held liable for the negligence of its officers or agents when acting within the course and scope of
their employment. It may be liable for the tortuous acts of its officers even as regards that species of tort
of which malice is an essential element. In this case, we find a situation where the PCIBank appears also
to be the victim of the scheme hatched by a syndicate in which its own management employees had
participated.
The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received Citibank Check Numbers SN
10597 and 16508. He passed the checks to a co-conspirator, an Assistant Manager of PCIBanks Meralco
Branch, who helped Castro open a Checking account of a fictitious person named Reynaldo Reyes. Castro
deposited a worthless Bank of America Check in exactly the same amount of Ford checks. The syndicate
tampered with the checks and succeeded in replacing the worthless checks and the eventual encashment
of Citibank Check Nos. SN 10597 and 16508. The PCIBank Pro-manager, Castro, and his co-conspirator
Assistant Manager apparently performed their activities using facilities in their official capacity or authority
but for their personal and private gain or benefit.
A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the
frauds these officers or agents were enabled to perpetrate in the apparent course of their employment; nor
will it be permitted to shirk its responsibility for such frauds, even though no benefit may accrue to the
bank therefrom. For the general rule is that a bank is liable for the fraudulent acts or representations of an
officer or agent acting within the course and apparent scope of his employment or authority. [29] And if an
officer or employee of a bank, in his official capacity, receives money to satisfy an evidence of
indebtedness lodged with his bank for collection, the bank is liable for his misappropriation of such sum. [30]
Moreover, as correctly pointed out by Ford, Section 5 [31] of Central Bank Circular No. 580, Series of 1977
provides that any theft affecting items in transit for clearing, shall be for the account of sending bank,
which in this case is PCIBank.
But in this case, responsibility for negligence does not lie on PCIBanks shoulders alone.
The evidence on record shows that Citibank as drawee bank was likewise negligent in the performance of
its duties. Citibank failed to establish that its payment of Fords checks were made in due course and
legally in order. In its defense, Citibank claims the genuineness and due execution of said checks,
considering that Citibank (1) has no knowledge of any infirmity in the issuance of the checks in question
(2) coupled by the fact that said checks were sufficiently funded and (3) the endorsement of the Payee or
lack thereof was guaranteed by PCI Bank (formerly IBAA), thus, it has the obligation to honor and pay the
same.
For its part, Ford contends that Citibank as the drawee bank owes to Ford an absolute and contractual duty
to pay the proceeds of the subject check only to the payee thereof, the CIR. Citing Section 62[32] of the
Negotiable Instruments Law, Ford argues that by accepting the instrument, the acceptor which is Citibank
engages that it will pay according to the tenor of its acceptance, and that it will pay only to the payee, (the
CIR), considering the fact that here the check was crossed with annotation Payees Account Only.
As ruled by the Court of Appeals, Citibank must likewise answer for the damages incurred by Ford on
Citibank Checks Numbers SN 10597 and 16508, because of the contractual relationship existing between
the two. Citibank, as the drawee bank breached its contractual obligation with Ford and such degree of
culpability contributed to the damage caused to the latter. On this score, we agree with the respondent
courts ruling.
Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before paying the amount
of the proceeds thereof to the collecting bank of the BIR. One thing is clear from the record: the clearing
stamps at the back of Citibank Check Nos. SN 10597 and 16508 do not bear any initials. Citibank failed to
notice and verify the absence of the clearing stamps. Had this been duly examined, the switching of the
worthless checks to Citibank Check Nos. 10597 and 16508 would have been discovered in time. For this
reason, Citibank had indeed failed to perform what was incumbent upon it, which is to ensure that the
amount of the checks should be paid only to its designated payee. The fact that the drawee bank did not
discover the irregularity seasonably, in our view, constitutes negligence in carrying out the banks duty to
its depositors. The point is that as a business affected with public interest and because of the nature of its
functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always
having in mind the fiduciary nature of their relationship.[33]
Thus, invoking the doctrine of comparative negligence, we are of the view that both PCIBank and Citibank
failed in their respective obligations and both were negligent in the selection and supervision of their
employees resulting in the encashment of Citibank Check Nos. SN 10597 and 16508. Thus, we are
constrained to hold them equally liable for the loss of the proceeds of said checks issued by Ford in favor
of the CIR.
Time and again, we have stressed that banking business is so impressed with public interest where the
trust and confidence of the public in general is of paramount importance such that the appropriate

standard of diligence must be very high, if not the highest, degree of diligence. [34] A banks liability as
obligor is not merely vicarious but primary, wherein the defense of exercise of due diligence in the
selection and supervision of its employees is of no moment.[35]
Banks handle daily transactions involving millions of pesos. [36] By the very nature of their work the degree
of responsibility, care and trustworthiness expected of their employees and officials is far greater than
those of ordinary clerks and employees.[37] Banks are expected to exercise the highest degree of diligence
in the selection and supervision of their employees.[38]
On the issue of prescription, PCIBank claims that the action of Ford had prescribed because of its inability
to seek judicial relief seasonably, considering that the alleged negligent act took place prior to December
19, 1977 but the relief was sought only in 1983, or seven years thereafter.
The statute of limitations begins to run when the bank gives the depositor notice of the payment, which is
ordinarily when the check is returned to the alleged drawer as a voucher with a statement of his account,
[39]
and an action upon a check is ordinarily governed by the statutory period applicable to instruments in
writing.[40]
Our laws on the matter provide that the action upon a written contract must be brought within ten years
from the time the right of action accrues. [41] Hence, the reckoning time for the prescriptive period begins
when the instrument was issued and the corresponding check was returned by the bank to its depositor
(normally a month thereafter). Applying the same rule, the cause of action for the recovery of the
proceeds of Citibank Check No. SN 04867 would normally be a month after December 19, 1977, when
Citibank paid the face value of the check in the amount of P4,746,114.41. Since the original complaint for
the cause of action was filed on January 20, 1983, barely six years had lapsed. Thus, we conclude that
Fords cause of action to recover the amount of Citibank Check No. SN 04867 was seasonably filed within
the period provided by law.
Finally, we also find that Ford is not completely blameless in its failure to detect the fraud. Failure on the
part of the depositor to examine its passbook, statements of account, and cancelled checks and to give
notice within a reasonable time (or as required by statute) of any discrepancy which it may in the exercise
of due care and diligence find therein, serves to mitigate the banks liability by reducing the award of
interest from twelve percent (12%) to six percent (6%) per annum. As provided in Article 1172 of the Civil
Code of the Philippines, responsibility arising from negligence in the performance of every kind of
obligation is also demandable, but such liability may be regulated by the courts, according to the
circumstances. In quasi-delicts, the contributory negligence of the plaintiff shall reduce the damages that
he may recover.[42]
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 25017, are
AFFIRMED. PCIBank, known formerly as Insular Bank of Asia and America, is declared solely responsible
for the loss of the proceeds of Citibank Check No. SN 04867 in the amount P4,746,114.41, which shall be
paid together with six percent (6%) interest thereon to Ford Philippines Inc. from the date when the original
complaint was filed until said amount is fully paid. However, the Decision and Resolution of the Court of
Appeals in CA-G.R. No. 28430 are MODIFIED as follows: PCIBank and Citibank are adjudged liable for and
must share the loss, (concerning the proceeds of Citibank Check Numbers SN 10597 and 16508 totalling
P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDERED to pay Ford Philippines Inc.
P6,081,649.05, with six percent (6%) interest thereon, from the date the complaint was filed until full
payment of said amount. Costs against Philippine Commercial International Bank and Citibank, N.A. SO
ORDERED.

PRUDENTIAL BANK, petitioner, vs. COURT OF APPEALS and LETICIA TUPASI-VALENZUELA joined
by husband Francisco Valenzuela, respondents. Ed-pm-is
[G.R. No. 125536. March 16, 2000]
FACTS
Private respondent Leticia Tupasi-Valenzuela opened Savings Account No. 5744 and Current Account No.
01016-3 in the Valenzuela Branch of petitioner Prudential Bank, with automatic transfer of funds from the
savings account to the current account.
On June 1, 1988, herein private respondent deposited in her savings account Check No. 666B (104561 of
even date) the amount of P35,271.60, drawn against the Philippine Commercial International Bank (PCIB).
Taking into account that deposit and a series of withdrawals, private respondent as of June 21, 1988 had a
balance of P35,993.48 in her savings account and P776.93 in her current account, or total deposits of
P36,770.41, with petitioner.
Thereafter, private respondent issued Prudential Bank Check No. 983395 in the amount of P11,500.00
post-dated June 20, 1988, in favor of one Belen Legaspi. It was issued to Legaspi as payment for jewelry

which private respondent had purchased. Legaspi, who was in jewelry trade, endorsed the check to one
Philip Lhuillier, a businessman also in the jewelry business. When Lhuillier deposited the check in his
account with the PCIB, Pasay Branch, it was dishonored for being drawn against insufficient funds.
Lhuillier's secretary informed the secretary of Legaspi of the dishonor. The latter told the former to
redeposit the check. Legaspi's secretary tried to contact private respondent but to no avail.
Upon her return from the province, private respondent was surprised to learn of the dishonor of the check.
She went to the Valenzuela Branch of Prudential Bank on July 4, 1988, to inquire why her check was
dishonored. She approached one Albert Angeles Reyes, the officer in charge of current account, and
requested him for the ledger of her current account. Private respondent discovered a debit of P300.00
penalty for the dishonor of her Prudential Check No. 983395. She asked why her check was dishonored
when there were sufficient funds in her account as reflected in her passbook. Reyes told her that there was
no need to review the passbook because the bank ledger was the best proof that she did not have
sufficient funds. Then, he abruptly faced his typewriter and started typing. S-jcj
Later, it was found out that the check in the amount of P35,271.60 deposited by private respondent on
June 1, 1988, was credited in her savings account only on June 24, 1988, or after a period of 23 days. Thus
the P11,500.00 check was redeposited by Lhuillier on June 24, 1988, and properly cleared on June 27,
1988.
Because of this incident, the bank tried to mollify private respondent by explaining to Legaspi and Lhuillier
that the bank was at fault. Since this was not the first incident private respondent had experienced with
the bank, private respondent was unmoved by the bank's apologies and she commenced the present suit
for damages before the RTC of Valenzuela.
After trial, the court rendered a decision on August 30, 1991, dismissing the complaint of private
respondent, as well as the counterclaim filed by the defendant, now petitioner.
Undeterred, private respondent appealed to the Court of Appeals. On January 31, 1996, respondent
appellate court rendered a decision in her favor, setting aside the trial court's decision and ordering herein
petitioner to pay private respondent the sum of P100,000.00 by way of moral damages; P50,000.00
exemplary damages; P50,000.00 for and as attorney's fees; and to pay the costs. [3]
ISSUE
Whether the respondent court erred and gravely abused its discretion in awarding moral and exemplary
damages and attorney's fees to be paid by petitioner to private respondent.
RULING
Petitioner claims that generally the factual findings of the lower courts are final and binding upon this
Court. However, there are exceptions to this rule. One is where the trial court and the Court of Appeals had
arrived at diverse factual findings. [4] Petitioner faults the respondent court from deviating from the basic
rule that finding of facts by the trial court is entitled to great weight, because the trial court had the
opportunity to observe the deportment of witness and the evaluation of evidence presented during the
trial. Petitioner contends that the appellate court gravely abused its discretion when it awarded damages
to the plaintiff, even in the face of lack of evidence to prove such damages, as found by the trial court.
Firstly, petitioner questions the award of moral damages. It claims that private respondent did not suffer
any damage upon the dishonor of the check. Petitioner avers it acted in good faith. It was an honest
mistake on its part, according to petitioner, when misposting of private respondent's deposit on June 1,
1988, happened. Further, petitioner contends that private respondent may not "claim" damages because
the petitioner's manager and other employee had profusely apologized to private respondent for the error.
They offered to make restitution and apology to the payee of the check, Legaspi, as well as the alleged
endorsee, Lhuillier. Regrettably, it was private respondent who declined the offer and allegedly said, that
there was nothing more to it, and that the matter had been put to rest.
Admittedly, as found by both the respondent appellate court and the trial court, petitioner bank had
committed a mistake. It misposted private respondent's check deposit to another account and delayed the
posting of the same to the proper account of the private respondent. The mistake resulted to the dishonor
of the private respondent's check. The trial court found "that the misposting of plaintiffs check deposit to
another account and the delayed posting of the same to the account of the plaintiff is a clear proof of lack
of supervision on the part of the defendant bank." [6]Similarly, the appellate court also found that "while it
may be true that the bank's negligence in dishonoring the properly funded check of appellant might not
have been attended with malice and bad faith, as appellee [bank] submits, nevertheless, it is the result of
lack of due care and caution expected of an employee of a firm engaged in so sensitive and accurately
demanding task as banking."[7]
In Simex International (Manila), Inc, vs. Court of Appeals, 183 SCRA 360, 367 (1990), and Bank of
Philippine Islands vs. IAC, et al., 206 SCRA 408, 412-413 (1992), this Court had occasion to stress the

fiduciary nature of the relationship between a bank and its depositors and the extent of diligence expected
of the former in handling the accounts entrusted to its care, thus: Lex-juris
"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 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 account of its depositors with meticulous care, always having in mind
the fiduciary nature of their relationship. x x x"
In the recent case of Philippine National Bank vs. Court of Appeals,[8] we held that "a bank is under
obligation to treat the accounts of its depositors with meticulous care whether such account consists only
of a few hundred pesos or of millions of pesos. Responsibility arising from negligence in the performance of
every kind of obligation is demandable. While petitioner's negligence in this case may not have been
attended with malice and bad faith, nevertheless, it caused serious anxiety, embarrassment and
humiliation". Hence we ruled that the offended party in said case was entitled to recover reasonable moral
damages.
Even if malice or bad faith was not sufficiently proved in the instant case, the fact remains that petitioner
has committed a serious mistake. It dishonored the check issued by the private respondent who turned out
to have sufficient funds with petitioner. The bank's negligence was the result of lack of due care and
caution required of managers and employees of a firm engaged in so sensitive and demanding business as
banking. Accordingly, the award of moral damages by the respondent Court of Appeals could not be said to
be in error nor in grave abuse of its discretion.
There is no hard-and-fast rule in the determination of what would be a fair amount of moral damages since
each case must be governed by its own peculiar facts. The yardstick should be that it is not palpably and
scandalously excessive. In our view, the award of P100,000.00 is reasonable, considering the reputation
and social standing of private respondent Leticia T. Valenzuela. [9]
The law allows the grant of exemplary damages by way of example for the public good. [10] The public relies
on the banks' sworn profession of diligence and meticulousness in giving irreproachable service. The level
of meticulousness must be maintained at all times by the banking sector. Hence, the Court of Appeals did
not err in awarding exemplary damages. In our view, however, the reduced amount of P20,000.00 is more
appropriate.
The award of attorney's fees is also proper when exemplary damages are awarded and since private
respondent was compelled to engage the services of a lawyer and incurred expenses to protect her
interest.[11] The standards in fixing attorney's fees are: (1) the amount and the character of the services
rendered; (2) labor, time and trouble involved; (3) the nature and importance of the litigation and business
in which the services were rendered; (4) the responsibility imposed; (5) the amount of money and the
value of the property affected by the controversy or involved in the employment; (6) the skill and the
experience called for in the performance of the services; (7) the professional character and the social
standing of the attorney; (8) the results secured, it being a recognized rule that an attorney may properly
charge a much larger fee when it is contingent than when it is not. [12] In this case, all the aforementioned
weighed, and considering that the amount involved in the controversy is only P36,770.41, the total deposit
of private respondent which was misposted by the bank, we find the award of respondent court of
P50,000.00 for attorney's fees, excessive and reduce the same to P30,000.00.
WHEREFORE, the assailed DECISION of the Court of Appeals is hereby AFFIRMED, with MODIFICATION.
The petitioner is ordered to pay P100,000.00 by way of moral damages in favor of private respondent
Leticia T. Valenzuela. It is further ordered to pay her exemplary damages in the amount of P20,000.00 and
P30,000.00, attorney's fees. Jksm
Costs against petitioner.
SO ORDERED.

BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. COURT OF APPEALS and BENJAMIN C.
NAPIZA, respondents.

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

FACTS
On September 3, 1987, private respondent deposited in Foreign Currency Deposit Unit (FCDU) Savings
Account No. 028-187[3] which he maintained in petitioner banks Buendia Avenue Extension Branch,
Continental Bank Managers Check No. 00014757[4] 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.[5] It appears that the check belonged to a certain Henry Chan who went to the office of private
respondent and requested him to deposit the check in his dollar account by way of accommodation and for
the purpose of clearing the same. Private respondent acceded, and agreed to deliver to Chan a signed
blank withdrawal slip, with the understanding that as soon as the check is cleared, both of them would go
to the bank to withdraw the amount of the check upon private respondents presentation to the bank of his
passbook.
Using the blank withdrawal slip given by private respondent to Chan, on October 23, 1984, one Ruben
Gayon, Jr. was able to withdraw the amount of $2,541.67 from FCDU Savings Account No. 028-187.
Notably, the withdrawal slip shows that the amount was payable to Ramon A. de Guzman and Agnes C. de
Guzman and was duly initialed by the branch assistant manager, Teresita Lindo. [6]
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 [7]because it was "not of
the type or style of checks issued by Continental Bank International." [8] 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. [9] 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.[10]
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. [11] This was followed by a letter of the banks lawyer dated April 8,
1985 demanding the return of the $2,500.00.[12]
In reply, private respondent wrote petitioners counsel on April 20, 1985 [13] 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.
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.
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,[14] 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.
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.
RULING
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.
[15]
In People v. Maniego, this Court described the liabilities of an indorser as follows: "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.[17] 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." [18] 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."
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."[20]
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, [21] 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 principalagent 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. [22]
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."
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.[23] 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."[24] 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,[26] 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." [27] 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.[28]
In the case at bar, petitioner, in allowing the withdrawal of private respondents deposit, failed to exercise
the diligence of a good father of a family. In total disregard of its own rules, petitioners personnel
negligently handled private respondents account to petitioners detriment. As this Court once said on this
matter: "Negligence is the omission to do something which a reasonable man, guided by those
considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of something
which a prudent and reasonable man would do. The seventy-eight (78)-year-old, yet still relevant, case
of Picart v. Smith, provides the test by which to determine the existence of negligence in a particular case
which may be stated as follows: Did the defendant in doing the alleged negligent act use that reasonable
care and caution which an ordinarily prudent person would have used in the same situation? If not, then he
is guilty of negligence. The law here in effect adopts the standard supposed to be supplied by the
imaginary conduct of the discreet pater-familias of the Roman law. The existence of negligence in a given
case is not determined by reference to the personal judgment of the actor in the situation before him. The
law considers what would be reckless, blameworthy, or negligent in the man of ordinary intelligence and
prudence and determines liability by that."[29]
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.[30] 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.
[31]
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 $109.92. [32] On November 19, 1984 the word "hold" was written beside the
balance of $109.92.[33] 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. [34] According to Reyes, Wells Fargo Bank International
handled the clearing of checks drawn against U.S. banks that were deposited with petitioner.
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, [36] 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." [37] The proximate cause of the withdrawal and eventual
loss of the amount of $2,500.00 on petitioners part was its personnels negligence in allowing such
withdrawal in disregard of its own rules and the clearing requirement in the banking system. In so doing,
petitioner assumed the risk of incurring a loss on account of a forged or counterfeit foreign check and
hence, it should suffer the resulting damage.
WHEREFORE, the petition for review on certiorari is DENIED. The Decision of the Court of Appeals in CAG.R. CV No. 37392 is AFFIRMED.
SO ORDERED.

SIMEX INTERNATIONAL (MANILA), INCORPORATED, petitioner, vs. THE HONORABLE COURT OF

APPEALS and TRADERS ROYAL BANK, respondents.
G.R. No. 88013 March 19, 1990
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. 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 BIR in the amount of P3,386.73: 3. Check No. 215451 dated June 4, 1981, in favor of Mr. Greg
Pedreo in the amount of P7,080.00; 4. Check No. 215441 dated June 5, 1981, in favor of Malabon Longlife
Trading Corporation in the amount of P42,906.00: 5. Check No. 215474 dated June 10, 1981, in favor of
Malabon Longlife Trading Corporation in the amount of P12,953.00: 6. Check No. 215477 dated June 9,
1981, in favor of Sea-Land Services, Inc. in the amount of P27,024.45: 7. Check No. 215412 dated June 10,
1981, in favor of Baguio Country Club Corporation in the amount of P4,385.02: and 8. Check No. 215480
dated June 9, 1981, in favor of Enriqueta Bayla in the amount of P6,275.00.
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. 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. The respondent court found
with the trial court that the private respondent was guilty of negligence but agreed that the petitioner was
nevertheless not entitled to moral damages. It said: The essential ingredient of moral damages is proof of
bad faith (De Aparicio vs. Parogurga, 150 SCRA 280). Indeed, there was the omission by the defendantappellee bank to credit appellant's deposit of P100,000.00 on May 25, 1981. But the bank rectified its
records. It credited the said amount in favor of plaintiff-appellant in less than a month. The dishonored
checks were eventually paid. These circumstances negate any imputation or insinuation of malicious,
fraudulent, wanton and gross bad faith and negligence on the part of the defendant-appellant.
ISSUE
Whether the petitioner is entitled to the said damages and, if so, in what amounts.
RULING
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.
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.
GREGORIO H. REYES and CONSUELO PUYAT-REYES, petitioners, vs. THE HON. COURT OF APPEALS
and FAR EAST BANK AND TRUST COMPANY, respondents.
G.R. No. 118492

August 15, 2001

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

apply for a demand draft in the amount One Thousand Six Hundred Ten Australian Dollars (AU$1,610.00)
payable to the order of the 20th Asian Racing Conference Secretariat of Sydney, Australia. He was attended
to by respondent bank's assistant cashier, Mr. Yasis, who at first denied the application for the reason that
respondent bank did not have an Australian dollar account in any bank in Sydney. Godofredo asked if there
could be a way for respondent bank to accommodate PRCI's urgent need to remit Australian dollars to
Sydney. Yasis of respondent bank then informed Godofredo of a roundabout way of effecting the requested
remittance to Sydney thus: the respondent bank would draw a demand draft against Westpac Bank in
Sydney, Australia (Westpac-Sydney for brevity) and have the latter reimburse itself from the U.S. dollar
account of the respondent in Westpac Bank in New York, U.S.A. (Westpac-New York for brevity). This
arrangement has been customarily resorted to since the 1960's and the procedure has proven to be
problem-free. PRCI and the petitioner Gregorio H. Reyes, acting through Godofredo, agreed to this
arrangement or approach in order to effect the urgent transfer of Australian dollars payable to the
Secretariat of the 20th Asian Racing Conference. On July 28, 1988, the respondent bank approved the said
application of PRCI and issued Foreign Exchange Demand Draft (FXDD) No. 209968 in the sum applied for,
that is, One Thousand Six Hundred Ten Australian Dollars (AU$ 1,610.00), payable to the order of the
20th Asian Racing Conference Secretariat of Sydney, Australia, and addressed to Westpac-Sydney as the
drawee bank. On August 10, 1988, upon due presentment of the foreign exchange demand draft,
denominated as FXDD No. 209968, the same was dishonored, with the notice of dishonor stating the
following: "xxx No account held with Westpac." Meanwhile, on August 16, 1988, Wespac-New York sent a
cable to respondent bank informing the latter that its dollar account in the sum of One Thousand Six
Hundred Ten Australian Dollars (AU$ 1,610.00) was debited. On August 19, 1988, in response to PRCI's
complaint about the dishonor of the said foreign exchange demand draft, respondent bank informed
Westpac-Sydney of the issuance of the said demand draft FXDD No. 209968, drawn against the WespacSydney and informing the latter to be reimbursed from the respondent bank's dollar account in WestpacNew York. The respondent bank on the same day likewise informed Wespac-New York requesting the latter
to honor the reimbursement claim of Wespac-Sydney. On September 14, 1988, upon its second
presentment for payment, FXDD No. 209968 was again dishonored by Westpac-Sydney for the same
reason, that is, that the respondent bank has no deposit dollar account with the drawee Wespac-Sydney.
On September 17, 1988 and September 18, 1988, respectively, petitioners spouses Gregorio H. Reyes and
Consuelo Puyat-Reyes left for Australia to attend the said racing conference. When petitioner Gregorio H.
Reyes arrived in Sydney in the morning of September 18, 1988, he went directly to the lobby of Hotel
Regent Sydney to register as a conference delegate. At the registration desk, in the presence of other
delegates from various member of the conference secretariat that he could not register because the
foreign exchange demand draft for his registration fee had been dishonored for the second time. A
discussion ensued in the presence and within the hearing of many delegates who were also registering.
Feeling terribly embarrassed and humiliated, petitioner Gregorio H. Reyes asked the lady member of the
conference secretariat that he be shown the subject foreign exchange demand draft that had been
dishonored as well as the covering letter after which he promised that he would pay the registration fees in
cash. In the meantime he demanded that he be given his name plate and conference kit. The lady member
of the conference secretariat relented and gave him his name plate and conference kit. It was only two (2)
days later, or on September 20, 1988, that he was given the dishonored demand draft and a covering
letter. It was then that he actually paid in cash the registration fees as he had earlier promised. Meanwhile,
on September 19, 1988, petitioner Consuelo Puyat-Reyes arrived in Sydney. She too was embarassed and
humiliated at the registration desk of the conference secretariat when she was told in the presence and
within the hearing of other delegates that she could not be registered due to the dishonor of the subject
foreign exchange demand draft. She felt herself trembling and unable to look at the people around her.
Fortunately, she saw her husband, coming toward her. He saved the situation for her by telling the
secretariat member that he had already arranged for the payment of the registration fee in cash once he
was shown the dishonored demand draft. Only then was petitioner Puyat-Reyes given her name plate and
conference kit. At the time the incident took place, petitioner Consuelo Puyat-Reyes was a member of the
House of Representatives representing the lone Congressional District of Makati, Metro Manila. She has
been an officer of the Manila Banking Corporation and was cited by Archbishop Jaime Cardinal Sin as the
top lady banker of the year in connection with her conferment of the Pro-Ecclesia et Pontifice Award. She
has also been awarded a plaque of appreciation from the Philippine Tuberculosis Society for her
extraordinary service as the Society's campaign chairman for the ninth (9 th) 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 petitioners appealed the decision of the trial court to the Court of
Appeals. On July 22, 1994, the appellate court affirmed the decision of the trial court but in effect deleted
the award of attorney's fees to the defendant (herein respondent bank) and the pronouncement as to the
costs. 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.
ISSUES
WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED I. 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 RESPONDENT'S WARRANTY AS THE DRAWER THEREOF; III.
IN NOT HOLDING THAT AS SHOWN OVERWHELMINGLY BY THE EVIDENCE, THE DISHONOR OF THE DEMAND
DRAFT AS DUE TO PRIVATE RESPONDENT'S NEGLIGENCE AND NOT THE DRAWEE BANK.
RULING
The petitioners contend that due to the fiduciary nature of the relationship between the respondent bank
and its clients, the respondent should have exercised a higher degree of diligence than that expected of an
ordinary prudent person in the handling of its affairs as in the case at bar. The appellate court, according to
petitioners, erred in applying the standard of diligence of an ordinary prudent person only. Petitioners also
claim that the respondent bank violate Section 61 of the Negotiable Instruments Law 9 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 bank's assistant cashier explained to Godofredo Reyes,
representing PRCI and petitioner Gregorio H. Reyes, how the transfer of Australian dollars would be
effected through Westpac-New York where the respondent bank has a dollar account to Westpac-Sydney
where the subject foreign exchange demand draft (FXDD No. 209968) could be encashed by the payee, the
20th Asian Racing Conference Secretariat. PRCI and its 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 Westpac-Sydney. It was the erroneous decoding of the
cable message on the part of Westpac-Sydney that caused the dishonor of the subject foreign exchange
demand draft. An employee of Westpac-Sydney in Sydney, Australia mistakenly read the printed figures in
the SWIFT cable message of respondent bank as "MT799" instead of as "MT199". As a result, WestpacSydney construed the said cable message as a format for a letter of credit, and not for a demand draft.
The appellate court correct found that "the figure before '99' can still be distinctly seen as a number '1'
and not number '7'." Indeed, the line of a "7" is in a slanting position while the line of a "1" is in a
horizontal position. Thus, the number "1" in "MT199" cannot be construed as "7". 11
The evidence also shows that the respondent bank exercised that degree of diligence expected of an
ordinary prudent person under the circumstances obtaining. Prior to the first dishonor of the subject
foreign exchange demand draft, the respondent bank advised Westpac-New York to honor the
reimbursement claim of Westpac-Sydney and to debit the dollar account 12 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.13 Respondent bank also sent two (2) more cable messages to Westpac-New York inquiring why the
demand draft was not honored.14
With these established facts, we now determine the degree of diligence that banks are required to exert in
their commercial dealings. In Philippine Bank of Commerce v. Court of Appeals 15 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
20th Asian Racing conference Secretariat in Sydney, Australia as the payee thereof. As earlier mentioned,
the said foreign exchange demand draft was intended for the payment of the registration fees of the
petitioners as delegates of the PRCI to the 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 Westpac-Sydney by an employee
of the latter could not have been foreseen by the respondent bank. Being unaware that its employee

erroneously read the said cable message, Westpac-Sydney merely stated that the respondent bank has no
deposit account with it to cover for the amount of One Thousand Six Hundred Ten Australian Dollar (AU
$1610.00) indicated in the foreign exchange demand draft. Thus, the respondent bank had the impression
that Westpac-New York had not yet made available the amount for reimbursement to Westpac-Sydney
despite the fact that respondent bank has a sufficient deposit dollar account with Westpac-New York. That
was the reason why the respondent bank had to re-confirm and repeatedly notify Westpac-New York to
debit its (respondent bank's) deposit dollar account with it and to transfer or credit the corresponding
amount to Westpac-Sydney to cover the amount of the said demand draft.
WHEREFORE, the petition is hereby DENIED, and the assailed decision of the Court of Appeals
is AFFIRMED. Costs against the petitioners. SO ORDERED.
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS and CARLOS
CAJES, respondents.
[G.R. No. 129471. April 28, 2000]
FACTS
The land in dispute, consisting of 19.4 hectares located in San Miguel, Province of Bohol, was originally
owned by Ulpiano Mumar, whose ownership since 1917 was evidenced by Tax Declaration No. 3840. [3] In
1950,[4] Mumar sold the land to private respondent who was issued Tax Declaration No. R-1475 that same
year.[5] The tax declaration was later superseded by Tax Declaration Nos. R-799 issued in 1961 [6] and D2247 issued in 1974.[7] Private respondent occupied and cultivated the said land, [8] planting cassava and
camote in certain portions of the land. In 1969, unknown to private respondent, Jose Alvarez succeeded in
obtaining the registration of a parcel of land with an area of 1,512,468.00 square meters, [10] in his name for
which he was issued OCT No. 546 on June 16, 1969. [11] The parcel of land included the 19.4 hectares
occupied by private respondent. Alvarez never occupied nor introduced improvements on said land. In
1972, Alvarez sold the land to the spouses Gaudencio and Rosario Beduya to whom TCT No. 10101 was
issued.[13] That same year, the spouses Beduya obtained a loan from petitioner Development Bank of the
Philippines for P526,000.00 and, as security, mortgaged the land covered by TCT No. 10101 to the bank.
[14]
In 1978, the SAAD Investment Corp., and the SAAD Agro-Industries, Inc., represented by Gaudencio
Beduya, and the spouses Beduya personally executed another mortgage over the land in favor of
petitioner to secure a loan of P1,430,000.00. The spouses Beduya later failed to pay their loans, as a result
of which, the mortgage on the property was foreclosed. [16] In the resulting foreclosure sale held on January
31, 1985, petitioner was the highest bidder. [17] As the spouses Beduya failed to redeem the property,
petitioner consolidated its ownership. It appears that private respondent had also applied for a loan from
petitioner in 1978, offering his 19.4 hectare property under Tax Declaration No. D-2247 as security for the
loan. As part of the processing of the application, a representative of petitioner, Patton R. Olano, inspected
the land and appraised its value. Private respondents loan application was later approved by petitioner.
[19]
However after releasing the amount of the loan to private respondent, petitioner found that the land
mortgaged by private respondent was included in the land covered by TCT No. 10101 in the name of the
spouses Beduya. Petitioner, therefore, cancelled the loan and demanded immediate payment of the
amount.[20]Private respondent paid the loan to petitioner for which the former was issued a Cancellation of
Mortgage, dated March 18, 1981, releasing the property in question from encumbrance. Sometime in April
of 1986, more than a year after the foreclosure sale, a re-appraisal of the property covered by TCT No.
10101 was conducted by petitioners representatives. It was then discovered that private respondent was
occupying a portion of said land. Private respondent was informed that petitioner had become the owner of
the land he was occupying, and he was asked to vacate the property. As private respondent refused to do
so,[22] petitioner filed a complaint for recovery of possession with damages against him. The case was
assigned to Branch 1 of the Regional Trial Court, Tagbilaran City, [23] which after trial, rendered a decision,
dated August 22, 1989, declaring petitioner the lawful owner of the entire land covered by TCT No. 10101
on the ground that the decree of registration was binding upon the land. On appeal, the Court of Appeals
reversed and gave judgment for private respondent, declaring him the owner of the 19.4 hectares of land
erroneously included in TCT No. 10101. Petitioner moved for a reconsideration but its motion was denied in
a resolution dated April 23, 1997. Hence this petition.
ISSUES
WHETHER OR NOT I. THE DECISION OF THE RESPONDENT COURT IS NOT IN ACCORD WITH THE APPLICABLE
PROVISIONS OF LAW (Sections 38 and 46 of ACT 496) AND THE APPLICABLE DECISIONS OF THE SUPREME
COURT, PARTICULARLY IN THE CASE OF BENIN VS. TUASON, 57 SCRA 531; II THE RESPONDENT COURT
OVERLOOKED THE ISSUES ABOUT THE DBP BEING AN INNOCENT MORTGAGEE FOR VALUE OF THE LAND IN
QUESTION AND OF HAVING PURCHASED LATER THE SAME DURING A PUBLIC AUCTION SALE; III.THE
RESPONDENT COURTS RULING DECLARING DBP IN ESTOPPEL IS ILLOGICAL. [27]
RULING
First. Petitioner invokes the ruling of this Court in Benin v. Tuason[28] in support of its claim that its
predecessor-in-interest, Jose Alvarez, became the owner of the land by virtue of the decree of registration
issued in his name. In Benin, three sets of plaintiffs filed separate complaints against Mariano Severo
Tuason and J.M. Tuason & Co., Inc., praying for the cancellation of OCT No. 735 covering two parcels of land

called the Sta. Mesa Estate, or Parcel 1, with an area of 8,798,617.00 square meters, and the Diliman
Estate, or Parcel 2, with an area of 15,961,246.00 square meters. They asked that they be declared the
owners and lawful possessors of said lands. Benin is distinguished from this case. In the first
place, Benin involved vast tracts of lands which had already been subdivided and bought by innocent
purchasers for value and in good faith at the time the claimants obtained registration. Secondly, when the
claimants ancestors occupied the lands in question and declared them for tax purposes in 1944, the lands
were already covered by the tax declarations in the name of J. M. Tuason & Co., Inc. In 1914, OCT No. 735
was issued in the name of Tuason so that, from that time on, no possession could defeat the title of the
registered owners of the land. Thirdly, the validity of OCT No. 735 had already been recognized by this
Court in several cases[29] and, as a result thereof, the transfer certificates of title acquired by the innocent
purchasers for value were also declared valid. It was held that neither could the claimants file an action to
annul these titles for not only had these actions prescribed, but the fact was that the claimants were also
barred from doing so by laches, having filed the complaint only in 1955, or 41 years after the issuance of
OCT No. 735 to J.M. Tuason & Co., Inc. Thus, it was not solely the decree of registration which was
considered in resolving the Benin case. What was considered decisive was the valid title or right of
ownership of J. M. Tuason & Co., Inc. and that of the other innocent purchasers for value and in good faith
compared to the failure of the claimants to show their right to own or possess the questioned
properties. Petitioner maintains that the possession by private respondent and his predecessor-in-interest
of the 19.4 hectares of land for more than 30 years cannot overcome the decree of registration issued in
favor of its predecessor-in-interest Jose Alvarez. Petitioner quotes the following statement in
the Benin case: It follows also that the allegation of prescriptive title in favor of plaintiffs does not suffice to
establish a cause of action. If such prescription was completed before the registration of the land in favor
of the Tuasons, the resulting prescriptive title was cut off and extinguished by the decree of registration. If,
on the contrary, the prescription was either begun or completed after the decree of registration, it
conferred no title because, by express provision of law, prescription can not operate against the registered
owner (Act 496).[30] Petitioner would thus insist that, by virtue of the decree of registration, Jose Alvarez
and those claiming title from him (i.e., the spouses Beduya) acquired ownership of the 19.4 hectares of
land, despite the fact that they neither possessed nor occupied these lands.
This view is mistaken. A consideration of the cases shows that a decree of registration cut off or
extinguished a right acquired by a person when such right refers to a lien or encumbrance on the land
not to the right of ownership thereof which was not annotated on the certificate of title issued thereon.
Thus, Act No. 496 provides: Sec. 39. Every person receiving a certificate of title in pursuance of a decree of
registration, and every subsequent purchaser of registered land who takes a certificate of title for value in
good faith shall hold the same free of all encumbrances except those noted on said certificate, and any of
the following encumbrances which may be subsisting, namely: First. Liens, claims, or rights arising or
existing under the laws of Constitution of the United States or of the Philippine Islands which the statutes
of the Philippine Islands cannot require to appear of record in the Registry. Second. Taxes within two years
after the same became due and payable. Third. Any public highway, way, private way established by law,
or any Government irrigation canal or lateral thereof, where the certificate of title does not state that the
boundaries of such highway, way, or irrigation canal or lateral thereof, have been determined.
But if there are easements or other rights appurtenant to a parcel of registered land which for any reason
have failed to be registered, such easements or rights shall remain so appurtenant notwithstanding such
failure, and shall be held to pass with the land until cut off or extinguished by the registration of the
servient estate, or in any other manner. Hence, in Cid v. Javier,[31] it was helds: . . . Consequently, even
conceding arguendo that such an easement has been acquired, it had been cut off and extinguished by the
registration of the servient estate under the Torrens system without the easement being annotated on the
corresponding certificate of title, pursuant to Section 39 of the Land Registration Act. This principle was
reiterated in Purugganan v. Paredes[32] which also involved an easement of light and view that was not
annotated on the certificate of title of the servient estate. But to make this principle applicable to a
situation wherein title acquired by a person through acquisitive prescription would be considered cut off
and extinguished by a decree of registration would run counter to established jurisprudence before and
after the ruling in Benin. Indeed, registration has never been a mode of acquiring ownership over
immovable property. As early as 1911, in the case of City of Manila v. Lack,[33] the Court already ruled on
the purpose of registration of lands, viz.: The Court of Land Registration was created for a single purpose.
The Act is entitled "An Act to provide for the adjudication and registration of titles to lands in the Philippine
Islands." The sole purpose of the Legislature in its creation was to bring the land titles of the Philippine
Islands under one comprehensive and harmonious system, the cardinal features of which are
indefeasibility of title and the intervention of the State as a prerequisite to the creation and transfer of
titles and interest, with the resultant increase in the use of land as a business asset by reason of the
greater certainty and security of title. It does not create a title nor vest one. It simply confirms a
title already created and already vested, rendering it forever indefeasible. . . Again, in the case of Angeles
v. Samia[34] where land was erroneously registered in favor of persons who neither possessed nor occupied
the same, to the prejudice of the actual occupant, the Court held: . . . The purpose of the Land Registration
Act, as this court has had occasion to so state more than once, is not to create or vest title, but to confirm
and register title already created and already vested, and of course, said original certificate of title No.
8995 could not have vested in the defendant more title than what was rightfully due her and her coowners.
It appearing that said certificate granted her much more than she expected, naturally to the prejudice of
another, it is but just that the error, which gave rise to said anomaly, be corrected (City of Manila vs. Lack,
19 Phil., 324). The defendant and her coowners knew or, at least, came to know that it was through error
that the original certificate of title in question was issued by the court which heard cadastral case No. 11 of
Bacolor, not only in or prior to March, 1933, but from the time said certificate was issued in their favor, that

is, from December 15, 1921. This is evidenced by the fact that, ever since, they remained passive without
even attempting to make the least showing of ownership over the land in question until after the lapse of
more than eleven years. The Land Registration Act as well as the Cadastral Act protects only the holders of
a title in good faith and does not permit its provisions to be used as a shield for the commission of fraud, or
that one should enrich himself at the expense of another (Gustilo vs. Maravilla, 48 Phil., 442; Angelo vs.
Director of Lands, 49 Phil., 838). The above-stated Acts do not give anybody, who resorts to the provisions
thereof, a better title than he really and lawfully has. If he happened to obtain it by mistake or to secure, to
the prejudice of his neighbor, more land than he really owns, with or without bad faith on his part, the
certificate of title, which may have been issued to him under the circumstances, may and should be
cancelled or corrected (Legarda and Prieto vs. Saleeby, 31 Phil., 590). This is permitted by section 112 of
Act No. 496, which is applicable to the Cadastral Act because it is so provided expressly by the provisions
of section 11 of the latter Act. It cannot be otherwise because, as stated in the case of Domingo vs. Santos,
Ongsiako, Lim y Cia. (55 Phil., 361), errors in the plans of lands sought to be registered in the registry and
reproduced in the certificate of title issued later, do not annul the decree of registration on the ground that
it is not the plan but the land itself which is registered in the registry. In other words, if the plan of an
applicant for registration or claimant in a cadastral case alleges that the land referred to in said plan is 100
or 1,000 hectares, and the land which he really owns and desires to register in the registry is only 80 ares,
he cannot claim to be the owner of the existing difference if afterwards he is issued a certificate of title
granting him said area of 100 or 1,000 hectares. The principle laid down in this 1938 case remains the
prevailing doctrine, its latest application being in the case of Reyes v. Court of Appeals [36] wherein we ruled
that the fact that a party was able to secure a title in his favor did not operate to vest ownership upon her
of the property. In the present case, private respondent has been in actual, open, peaceful and continuous
possession of the property since 1950. This fact was corroborated by the testimony of Eleuterio
Cambangay who personally knew that Ulpiano Mumar transferred the land covered by Tax Declaration No.
3840[37] in favor of private respondent in 1950. [38] Private respondents claim based on actual occupation of
the land is bolstered by Tax Declaration Nos. R-1475, R-799 and D-2247 [39] which were issued in his name
in 1950, 1961 and 1974, respectively. Together with his actual possession of the land, these tax
declarations constitute strong evidence of ownership of the land occupied by him. As we said in the case
of Republic vs. Court of Appeals: Although tax declarations or realty tax payments of property are not
conclusive evidence of ownership, nevertheless, they are good indicia of possession in the concept of
owner for no one in his right mind would be paying taxes for a property that is not in his actual or at least
constructive possession. They constitute at least proof that the holder has a claim of title over the
property. The voluntary declaration of a piece of property for taxation purposes manifests not only ones
sincere and honest desire to obtain title to the property and announces his adverse claim against the State
and all other interested parties, but also the intention to contribute needed revenues to the Government.
Such an act strengthens ones bona fide claim of acquisition of ownership. More importantly, it was
established that private respondent, having been in possession of the land since 1950, was the owner of
the property when it was registered by Jose Alvarez in 1969, his possession tacked to that of his
predecessor-in-interest, Ulpiano Mumar, which dates back to 1917. [41] Clearly, more than 30 years had
elapsed before a decree of registration was issued in favor of Jose Alvarez. This uninterrupted adverse
possession of the land for more than 30 years could only ripen into ownership of the land through
acquisitive prescription which is a mode of acquiring ownership and other real rights over immovable
property. Prescription requires public, peaceful, uninterrupted and adverse possession of the property in
the concept of an owner for ten (10) years, in case the possession is in good faith and with a just title.
Such prescription is called ordinary prescription, as distinguished from extraordinary prescription which
requires possession for 30 years in case possession is without just title or is not in good faith. In contrast to
private respondent, it has been shown that neither Jose Alvarez nor the spouses Beduya were at any time
in possession of the property in question. In fact, despite knowledge by Gaudencio Beduya that private
respondent occupied this 19.4 hectares included in the area covered by TCT No. 10101, [43] he never
instituted any action to eject or recover possession from the latter. Hence, it can be concluded that neither
Jose Alvarez nor the spouses Beduya ever exercised any right of ownership over the land. The fact of
registration in their favor never vested in them the ownership of the land in dispute. "If a person obtains a
title under the Torrens system, which includes by mistake or oversight land which can no longer be
registered under the system, he does not, by virtue of the said certificate alone, become the owner of the
lands illegally included." Considering the circumstances pertaining in this case, therefore, we hold that
ownership of the 19.4 hectares of land presently occupied by private respondent was already vested in him
and that its inclusion in OCT No. 546 and, subsequently, in TCT No. 10101, was erroneous. Accordingly, the
land in question must be reconveyed in favor of private respondent, the true and actual owner thereof,
reconveyance being clearly the proper remedy in this case. "The true owner may bring an action to have
the ownership or title to the land judicially settled and the Court in the exercise of its equity jurisdiction,
without ordering the cancellation of the Torrens title issued upon the patent, may direct the defendants,
the registered owner to reconvey the parcel of land to the plaintiff who has been found to be the true
owner thereof." (Vital vs. Amore, 90 Phil. 955) "The reconveyance is just and proper in order to terminate
the intolerable anomaly that the patentees should have a torrens title for the land which they and their
predecessors never possessed which has been possessed by Novo in the concept of owner." (Bustarga v.
Novo, 129 SCRA 125)[45]
Second. Generally, an action for reconveyance based on an implied or constructive trust, such as the
instant case, prescribes in 10 years from the date of issuance of decree of registration. [46]However, this rule
does not apply when the plaintiff is in actual possession of the land. Thus, it has been held: . . . [A]n action
for reconveyance of a parcel of land based on implied or constructive trust prescribes in ten years, the
point of reference being the date of registration of the deed or the date of the issuance of the certificate of
title over the property, but this rule applies only when the plaintiff or the person enforcing the trust is not

in possession of the property,since if a person claiming to be the owner thereof is in actual possession of
the property, as the defendants are in the instant case, the right to seek reconveyance, which in effect
seeks to quiet title to the property, does not prescribe. The reason for this is that one who is in actual
possession of a piece of land claiming to be the owner thereof may wait until his possession is disturbed or
his title is attacked before taking steps to vindicate his right, the reason for the rule being, that his
undisturbed possession gives him a continuing right to seek the aid of a court of equity to ascertain and
determine the nature of the adverse claim of a third party and its effect on his own title, which right can be
claimed only by one who is in possession. Having been the sole occupant of the land in question, private
respondent may seek reconveyance of his property despite the lapse of more than 10 years. Nor is there
any obstacle to the determination of the validity of TCT No. 10101. It is true that the indefeasibility of
torrens titles cannot be collaterally attacked. In the instant case, the original complaint is for recovery of
possession filed by petitioner against private respondent, not an original action filed by the latter to
question the validity of TCT No. 10101 on which petitioner bases its right. To rule on the issue of validity in
a case for recovery of possession is tantamount to a collateral attack. However, it should not be
overlooked that private respondent filed a counterclaim against petitioner, claiming ownership over the
land and seeking damages. Hence, we could rule on the question of the validity of TCT No. 10101 for the
counterclaim can be considered a direct attack on the same. "A counterclaim is considered a complaint,
only this time, it is the original defendant who becomes the plaintiff. . . . It stands on the same footing and
is to be tested by the same rules as if it were an independent action." [48] In an analogous case,[49] we ruled
on the validity of a certificate of title despite the fact that the original action instituted before the lower
court was a case for recovery of possession. The Court reasoned that since all the facts of the case are
before it, to direct the party to institute cancellation proceedings would be needlessly circuitous and would
unnecessarily delay the termination of the controversy which has already dragged on for 20 years.
Third. Petitioner nonetheless contends that an action for reconveyance does not lie against it, because it
is an innocent purchaser for value in the foreclosure sale held in 1985. This contention has no merit. Sec.
38 of Act No. 496, the Land Registration Act, provides: If the court after hearing finds that the applicant or
adverse claimant has title as stated in his application or adverse claim and proper for registration, a decree
of confirmation and registration shall be entered. Every decree of registration shall bind the land, and quiet
title thereto, subject only to the exceptions stated in the following section. It shall be conclusive upon and
against all persons, including the Insular Government and all the branches thereof, whether mentioned by
name in the application, notice, or citation, or included in the general description "To all whom it may
concern." Such decree shall not be opened by reason of the absence, infancy, or other disability of any
person affected thereby, nor by any proceeding in any court for reversing judgments or decrees; subject,
however, to the right of any person deprived of land or of any estate or interest therein by decree of
registration obtained by fraud to file in the competent Court of First Instance a petition for review within
one year after entry of the decree, provided no innocent purchaser for value has acquired an interest.
Upon the expiration of said term of one year, every decree or certificate of title issued in accordance with
this section shall be incontrovertible. If there is any such purchaser, the decree of registration shall not be
opened, but shall remain in full force and effect forever, subject only to the right of appeal hereinbefore
provided: Provided, however, That no decree or certificate of title issued to persons not parties to the
appeal shall be cancelled or annulled. But any person aggrieved by such decree in any case may pursue
his remedy by action for damages against the applicant or any other person for fraud in procuring the
decree. Whenever the phrase "innocent purchaser for value" or an equivalent phrase occurs in this Act, it
shall be deemed to include an innocent lessee, mortgagee, or other encumbrancer for value. (As amended
by Sec. 3, Act 3621; and Sec. 1, Act No. 3630.) Succinctly put, 38 provides that a certificate of title is
conclusive and binding upon the whole world. Consequently, a buyer need not look behind the certificate
of title in order to determine who is the actual owner of the land. However, this is subject to the right of a
person deprived of land through fraud to bring an action for reconveyance, provided that it does not
prejudice the rights of an innocent purchaser for value and in good faith. "It is a condition sine qua non for
an action for reconveyance to prosper that the property should not have passed to the hands of an
innocent purchaser for value."[50] The same rule applies to mortgagees, like petitioner. Thus, we held:
Where the certificate of title is in the name of the mortgagor when the land is mortgaged, the innocent
mortgagee for value has the right to rely on what appears on the certificate of title. In the absence of
anything to excite suspicion, said mortgagee is under no obligation to look beyond the certificate and
investigate the title of the mortgagor appearing on the face of said certificate. Although Article 2085 of the
Civil Code provides that absolute ownership of the mortgaged property by the mortgagor is essential, the
subsequent declaration of a title as null and void is not a ground for nullifying the mortgage right of a
mortgagee in good faith. The evidence before us, however, indicates that petitioner is not a mortgagee in
good faith. To be sure, an innocent mortgagee is not expected to conduct an exhaustive investigation on
the history of the mortgagors title. Nonetheless, especially in the case of a banking institution, a
mortgagee must exercise due diligence before entering into said contract. Judicial notice is taken of the
standard practice for banks, before approving a loan, to send representatives to the premises of the land
offered as collateral and to investigate who are the real owners thereof. Banks, their business being
impressed with public interest, are expected to exercise more care and prudence than private individuals
in their dealings, even those involving registered lands. In this case, petitioners representative, Patton R.
Olano, admitted that he came to know of the property for the first time in 1979 when he inspected it to
determine whether the portion occupied by private respondent and mortgaged by the latter to petitioner
was included in TCT No. 10101. This means that when the land was mortgaged by the spouses Beduya in
1972, no investigation had been made by petitioner. It is clear, therefore, that petitioner failed to exercise
due care and diligence in establishing the condition of the land as regards its actual owners and
possessors before it entered into the mortgage contract in 1972 with the Beduyas. Had it done so, it would
not have failed to discover that private respondent was occupying the disputed portion of 19.4 hectares.

For this reason, petitioner cannot be considered an innocent purchaser for value when it bought the land
covered by TCT No. 10101 in 1985 at the foreclosure sale. Indeed, two circumstances negate petitioners
claim that it was an innocent purchaser for value when it bought the land in question, including the portion
occupied by private respondent: (1) petitioner was already informed by Gaudencio Beduya that private
respondent occupied a portion of the property covered by TCT No. 10101; and (2) petitioners
representative conducted an investigation of the property in 1979 to ascertain whether the land
mortgaged by private respondent was included in TCT No. 10101. In other words, petitioner was already
aware that a person other than the registered owner was in actual possession of the land when it bought
the same at the foreclosure sale. A person who deliberately ignores a significant fact which would create
suspicion in an otherwise reasonable man is not an innocent purchaser for value. "It is a well-settled rule
that a purchaser cannot close his eyes to facts which should put a reasonable man upon his guard, and
then claim that he acted in good faith under the belief that there was no defect in the title of the vendor."
Petitioner deliberately disregarded both the fact that private respondent already occupied the property and
that he was claiming ownership over the same. It cannot feign ignorance of private respondents claim to
the land since the latter mortgaged the same land to petitioner as security for the loan he contracted in
1978 on the strength of the tax declarations issued under his name. Instead of inquiring into private
respondents occupation over the land, petitioner simply proceeded with the foreclosure sale, pretending
that no doubts surround the ownership of the land covered by TCT No. 10101. Considering these
circumstances, petitioner cannot be deemed an innocent mortgagee/purchaser for value. As we
ruled: "The failure of appellees to take the ordinary precautions which a prudent man would have taken
under the circumstances, specially in buying a piece of land in the actual, visible and public possession of
another person, other than the vendor, constitutes gross negligence amounting to bad faith. In this
connection, it has been held that where, as in this case, the land sold is in the possession of a person other
than the vendor, the purchaser is required to go beyond the certificates of title and ma[k]e inquiries
concerning the rights of the actual possessor. One who purchases real property which is in the actual
possession of another should, at least, make some inquiry concerning the right of those in possession. The
actual possession by other than the vendor should, at least put the purchaser upon inquiry. He can
scarcely, in the absence of such inquiry, be regarded as a bona fide purchaser as against such
possessors."[54]
Fourth. From the foregoing, we find that the resolution of the issue of estoppel will not affect the outcome
of this case. Petitioner claims that the fact that it approved a loan in favor of private respondent and
executed a mortgage contract covering the 19.4 hectares covered by tax declarations issued under private
respondents name does not mean that it is estopped from questioning the latters title. Petitioner accuses
private respondent of having made misrepresentations which led it to believe in his valid title and
ownership. The claim has no basis. Private respondent made no misrepresentation with regard to the land
occupied by him as he is actually the real owner thereof. Moreover, when private respondent entered into a
mortgage contract with petitioner, his claim of ownership was supported not only by the tax declarations
but also by a certification of the Clerk of Court of the Court of First Instance of Bohol that no civil, land
registration or cadastral case has been filed or instituted before the court affecting the validity of Tax
Declaration No. D-2247 covering the land located in Bugang, San Miguel, Bohol and declared in the name
of Carlos Cajes.[55] These documents were relied upon by private respondent in support of his claim of
ownership. We cannot consider the submission of these documents as misrepresentations by private
respondent as to the actual ownership of the land. Rather, private respondent believed in good faith and
with good reason that he was the owner of the 19.4 hectares occupied by him. As to the question of
estoppel, we do not find petitioner to be estopped from questioning private respondents title. "Estoppel in
pais arises when one, by his acts, representations or admission, or by his own silence when he ought to
speak out, intentionally or through culpable negligence, induces another to believe certain facts to exist
and such other rightfully relies and acts on such belief, so that he will be prejudiced if the former is
permitted to deny the existence of such facts." [56] In the case at bar, upon learning that the land occupied
by private respondent was also covered by TCT No. 10101, petitioner immediately demanded full payment
of the loan and thereafter cancelled the mortgage contract, a fact that is admitted by private respondent
himself.[57] Indeed, nothing in record indicates that petitioner impliedly acquiesced to the validity of private
respondents title when it found out that the latter was occupying a portion of the land covered by TCT No.
10101. However, for reasons aforestated, we uphold private respondents ownership of 19.4 hectares
occupied by him. As a necessary consequence thereof, such portion of land included in TCT No. 10101
must be segregated and reconveyed in his favor.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED in toto. SO ORDERED.

MANUEL M. SERRANO, petitioner, vs. CENTRAL BANK OF THE PHILIPPINES; OVERSEAS BANK OF
MANILA; EMERITO M. RAMOS, SUSANA B. RAMOS, EMERITO B. RAMOS, JR., JOSEFA RAMOS
DELA RAMA, HORACIO DELA RAMA, ANTONIO B. RAMOS, FILOMENA RAMOS LEDESMA,
RODOLFO LEDESMA, VICTORIA RAMOS TANJUATCO, and TEOFILO TANJUATCO, respondents.
G.R. No. L-30511 February 14, 1980
FACTS

On October 13, 1966 and December 12, 1966, petitioner made a time deposit, for one year with 6%
interest, of One Hundred Fifty Thousand Pesos (P150,000.00) with the respondent Overseas Bank of
Manila. 3 Concepcion Maneja also made a time deposit, for one year with 6-% interest, on March 6, 1967,
of Two Hundred Thousand Pesos (P200,000.00) with the same respondent Overseas Bank of Manila. 4
On August 31, 1968, Concepcion Maneja, married to Felixberto M. Serrano, assigned and conveyed to
petitioner Manuel M. Serrano, her time deposit of P200,000.00 with respondent Overseas Bank of Manila. 5
Notwithstanding series of demands for encashment of the aforementioned time deposits from the
respondent Overseas Bank of Manila, dating from December 6, 1967 up to March 4, 1968, not a single one
of the time deposit certificates was honored by respondent Overseas Bank of Manila. 6
Respondent Central Bank admits that it is charged with the duty of administering the banking system of
the Republic and it exercises supervision over all doing business in the Philippines, but denies the
petitioner's allegation that the Central Bank has the duty to exercise a most rigid and stringent supervision
of banks, implying that respondent Central Bank has to watch every move or activity of all banks, including
respondent Overseas Bank of Manila. Respondent Central Bank claims that as of March 12, 1965, the
Overseas Bank of Manila, while operating, was only on a limited degree of banking operations since the
Monetary Board decided in its Resolution No. 322, dated March 12, 1965, to prohibit the Overseas Bank of
Manila from making new loans and investments in view of its chronic reserve deficiencies against its
deposit liabilities. This limited operation of respondent Overseas Bank of Manila continued up to 1968. 7
Respondent Central Bank also denied that it is guarantor of the permanent solvency of any banking
institution as claimed by petitioner. It claims that neither the law nor sound banking supervision requires
respondent Central Bank to advertise or represent to the public any remedial measures it may impose
upon chronic delinquent banks as such action may inevitably result to panic or bank "runs". In the years
1966-1967, there were no findings to declare the respondent Overseas Bank of Manila as insolvent. 8
Respondent Central Bank likewise denied that a constructive trust was created in favor of petitioner and
his predecessor in interest Concepcion Maneja when their time deposits were made in 1966 and 1967 with
the respondent Overseas Bank of Manila as during that time the latter was not an insolvent bank and its
operation as a banking institution was being salvaged by the respondent Central Bank. 9
Respondent Central Bank avers no knowledge of petitioner's claim that the properties given by respondent
Overseas Bank of Manila as additional collaterals to respondent Central Bank of the Philippines for the
former's overdrafts and emergency loans were acquired through the use of depositors' money, including
that of the petitioner and Concepcion Maneja. 10
In G.R. No. L-29362, entitled "Emerita M. Ramos, et al. vs. Central Bank of the Philippines," a case was filed
by the petitioner Ramos, wherein respondent Overseas Bank of Manila sought to prevent respondent
Central Bank from closing, declaring the former insolvent, and liquidating its assets. Petitioner Manuel
Serrano in this case, filed on September 6, 1968, a motion to intervene in G.R. No. L-29352, on the ground
that Serrano had a real and legal interest as depositor of the Overseas Bank of Manila in the matter in
litigation in that case. Respondent Central Bank in G.R. No. L-29352 opposed petitioner Manuel Serrano's
motion to intervene in that case, on the ground that his claim as depositor of the Overseas Bank of Manila
should properly be ventilated in the Court of First Instance, and if this Court were to allow Serrano to
intervene as depositor in G.R. No. L-29352, thousands of other depositors would follow and thus cause an
avalanche of cases in this Court. In the resolution dated October 4, 1968, this Court denied Serrano's,
motion to intervene. The contents of said motion to intervene are substantially the same as those of the
present petition. 11
This Court rendered decision in G.R. No. L-29352 on October 4, 1971, which became final and executory on
March 3, 1972, favorable to the respondent Overseas Bank of Manila, with the dispositive portion to wit:
WHEREFORE, the writs prayed for in the petition are hereby granted and respondent Central Bank's
resolution Nos. 1263, 1290 and 1333 (that prohibit the Overseas Bank of Manila to participate in clearing,
direct the suspension of its operation, and ordering the liquidation of said bank) are hereby annulled and
set aside; and said respondent Central Bank of the Philippines is directed to comply with its obligations
under the Voting Trust Agreement, and to desist from taking action in violation therefor. Costs against
respondent Central Bank of the Philippines. 12
Because of the above decision, petitioner in this case filed a motion for judgment in this case, praying for a
decision on the merits, adjudging respondent Central Bank jointly and severally liable with respondent
Overseas Bank of Manila to the petitioner for the P350,000 time deposit made with the latter bank, with all
interests due therein; and declaring all assets assigned or mortgaged by the respondents Overseas Bank of
Manila and the Ramos groups in favor of the Central Bank as trust funds for the benefit of petitioner and
other depositors. 13
ISSUE
Deposits, loans, and other operations

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

CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner, vs. THE HONORABLE COURT OF APPEALS

and SECURITY BANK AND TRUST COMPANY, respondents.

G.R. No. 90027 March 3, 1993

FACTS
On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon and Paula Pugao
entered into an agreement whereby the former purchased from the latter two (2) parcels of land for a
consideration of P350,625.00. Of this amount, P75,725.00 was paid as downpayment while the balance
was covered by three (3) postdated checks. Among the terms and conditions of the agreement embodied
in a Memorandum of True and Actual Agreement of Sale of Land were that the titles to the lots shall be
transferred to the petitioner upon full payment of the purchase price and that the owner's copies of the
certificates of titles thereto, Transfer Certificates of Title (TCT) Nos. 284655 and 292434, shall be deposited
in a safety deposit box of any bank. The same could be withdrawn only upon the joint signatures of a
representative of the petitioner and the Pugaos upon full payment of the purchase price. Petitioner,
through Sergio Aguirre, and the Pugaos then rented Safety Deposit Box No. 1448 of private respondent
Security Bank and Trust Company, a domestic banking corporation hereinafter referred to as the
respondent Bank. For this purpose, both signed a contract of lease (Exhibit "2") which contains, inter alia,
the following conditions:
13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control of
the same.
14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it
assumes absolutely no liability in connection therewith. 1
After the execution of the contract, two (2) renter's keys were given to the renters one to Aguirre (for
the petitioner) and the other to the Pugaos. A guard key remained in the possession of the respondent
Bank. The safety deposit box has two (2) keyholes, one for the guard key and the other for the renter's
key, and can be opened only with the use of both keys. Petitioner claims that the certificates of title were
placed inside the said box.
Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at a price of
P225.00 per square meter which, as petitioner alleged in its complaint, translates to a profit of P100.00 per
square meter or a total of P280,500.00 for the entire property. Mrs. Ramos demanded the execution of a
deed of sale which necessarily entailed the production of the certificates of title. In view thereof, Aguirre,
accompanied by the Pugaos, then proceeded to the respondent Bank on 4 October 1979 to open the safety
deposit box and get the certificates of title. However, when opened in the presence of the Bank's
representative, the box yielded no such certificates. Because of the delay in the reconstitution of the title,
Mrs. Ramos withdrew her earlier offer to purchase the lots; as a consequence thereof, the petitioner
allegedly failed to realize the expected profit of P280,500.00. Hence, the latter filed on 1 September 1980
a complaint 2 for damages against the respondent Bank with the Court of First Instance (now Regional Trial
Court) of Pasig, Metro Manila which docketed the same as Civil Case No. 38382.
In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no cause of action
because of paragraphs 13 and 14 of the contract of lease (Exhibit "2"); corollarily, loss of any of the items
or articles contained in the box could not give rise to an action against it. It then interposed a counterclaim
for exemplary damages as well as attorney's fees in the amount of P20,000.00. Petitioner subsequently
filed an answer to the counterclaim. 4
In due course, the trial court, now designated as Branch 161 of the Regional Trial Court (RTC) of Pasig,
Metro Manila, rendered a decision 5 adverse to the petitioner on 8 December 1986. The unfavorable verdict
is based on the trial court's conclusion that under paragraphs 13 and 14 of the contract of lease, the Bank
has no liability for the loss of the certificates of title. The court declared that the said provisions are binding
on the parties. Its motion for reconsideration 7 having been denied, petitioner appealed from the adverse
decision to the respondent Court of Appeals which docketed the appeal as CA-G.R. CV No. 15150.
Petitioner urged the respondent Court to reverse the challenged decision because the trial court erred in
(a) absolving the respondent Bank from liability from the loss, (b) not declaring as null and void, for being
contrary to law, public order and public policy, the provisions in the contract for lease of the safety deposit
box absolving the Bank from any liability for loss, (c) not concluding that in this jurisdiction, as well as
under American jurisprudence, the liability of the Bank is settled and (d) awarding attorney's fees to the
Bank and denying the petitioner's prayer for nominal and exemplary damages and attorney's fees. In its
Decision promulgated on 4 July 1989, 9 respondent Court affirmed the appealed decision principally on the
theory that the contract (Exhibit "2") executed by the petitioner and respondent Bank is in the nature of a
contract of lease by virtue of which the petitioner and its co-renter were given control over the safety
deposit box and its contents while the Bank retained no right to open the said box because it had neither
the possession nor control over it and its contents. As such, the contract is governed by Article 1643 of the
Civil Code 10 which provides:
Art. 1643. In the lease of things, one of the parties binds himself to give to another the enjoyment or use of
a thing for a price certain, and for a period which may be definite or indefinite. However, no lease for more
than ninety-nine years shall be valid.

It invoked Tolentino vs. Gonzales 11 which held that the owner of the property loses his control over the
property leased during the period of the contract and Article 1975 of the Civil Code which provides:
Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn interest shall be
bound to collect the latter when it becomes due, and to take such steps as may be necessary in order that
the securities may preserve their value and the rights corresponding to them according to law.
The above provision shall not apply to contracts for the rent of safety deposit boxes.
and then concluded that "[c]learly, the defendant-appellee is not under any duty to maintain the contents
of the box. The stipulation absolving the defendant-appellee from liability is in accordance with the nature
of the contract of lease and cannot be regarded as contrary to law, public order and public policy." 12 The
appellate court was quick to add, however, that under the contract of lease of the safety deposit box,
respondent Bank is not completely free from liability as it may still be made answerable in case
unauthorized persons enter into the vault area or when the rented box is forced open. Thus, as expressly
provided for in stipulation number 8 of the contract in question:
8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented safe and
beyond this, the Bank will not be responsible for the contents of any safe rented from it. 13
Its motion for reconsideration 14 having been denied in the respondent Court's Resolution of 28 August
1989, 15petitioner took this recourse under Rule 45 of the Rules of Court and urges Us to review and set
aside the respondent Court's ruling. Petitioner avers that both the respondent Court and the trial court (a)
did not properly and legally apply the correct law in this case, (b) acted with grave abuse of discretion or in
excess of jurisdiction amounting to lack thereof and (c) set a precedent that is contrary to, or is a
departure from precedents adhered to and affirmed by decisions of this Court and precepts in American
jurisprudence adopted in the Philippines. It reiterates the arguments it had raised in its motion to
reconsider the trial court's decision, the brief submitted to the respondent Court and the motion to
reconsider the latter's decision. In a nutshell, petitioner maintains that regardless of nomenclature, the
contract for the rent of the safety deposit box (Exhibit "2") is actually a contract of deposit governed by
Title XII, Book IV of the Civil Code of the Philippines. 16 Accordingly, it is claimed that the respondent Bank
is liable for the loss of the certificates of title pursuant to Article 1972 of the said Code which provides:
Art. 1972. The depositary is obliged to keep the thing safely and to return it, when required, to the
depositor, or to his heirs and successors, or to the person who may have been designated in the contract.
His responsibility, with regard to the safekeeping and the loss of the thing, shall be governed by the
provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that the
depositary must observe.
Petitioner then quotes a passage from American Jurisprudence
prevailing rule in the United States, to wit:

17

which is supposed to expound on the

The prevailing rule appears to be that where a safe-deposit company leases a safe-deposit box or safe and
the lessee takes possession of the box or safe and places therein his securities or other valuables, the
relation of bailee and bail or is created between the parties to the transaction as to such securities or other
valuables; the fact that the safe-deposit company does not know, and that it is not expected that it shall
know, the character or description of the property which is deposited in such safe-deposit box or safe does
not change that relation. That access to the contents of the safe-deposit box can be had only by the use of
a key retained by the lessee ( whether it is the sole key or one to be used in connection with one retained
by the lessor) does not operate to alter the foregoing rule. The argument that there is not, in such a case,
a delivery of exclusive possession and control to the deposit company, and that therefore the situation is
entirely different from that of ordinary bailment, has been generally rejected by the courts, usually on the
ground that as possession must be either in the depositor or in the company, it should reasonably be
considered as in the latter rather than in the former, since the company is, by the nature of the contract,
given absolute control of access to the property, and the depositor cannot gain access thereto without the
consent and active participation of the company. . . .
and a segment from Words and Phrases 18 which states that a contract for the rental of a bank safety
deposit box in consideration of a fixed amount at stated periods is a bailment for hire.
Petitioner further argues that conditions 13 and 14 of the questioned contract are contrary to law and
public policy and should be declared null and void. In support thereof, it cites Article 1306 of the Civil Code
which provides that parties to a contract may establish such stipulations, clauses, terms and conditions as
they may deem convenient, provided they are not contrary to law, morals, good customs, public order or
public policy.
After the respondent Bank filed its comment, this Court gave due course to the petition and required the
parties to simultaneously submit their respective Memoranda.

ISSUE
Is the contractual relation between a commercial bank and another party in a contract of rent of a safety
deposit box with respect to its contents placed by the latter one of bailor and bailee or one of lessor and
lessee?
RULING
The petition is partly meritorious.
We agree with the petitioner's contention that the contract for the rent of the safety deposit box is not an
ordinary contract of lease as defined in Article 1643 of the Civil Code. However, We do not fully subscribe
to its view that the same is a contract of deposit that is to be strictly governed by the provisions in the Civil
Code on deposit; 19the contract in the case at bar is a special kind of deposit. It cannot be characterized as
an ordinary contract of lease under Article 1643 because the full and absolute possession and control of
the safety deposit box was not given to the joint renters the petitioner and the Pugaos. The guard key of
the box remained with the respondent Bank; without this key, neither of the renters could open the box.
On the other hand, the respondent Bank could not likewise open the box without the renter's key. In this
case, the said key had a duplicate which was made so that both renters could have access to the box.
Hence, the authorities cited by the respondent Court 20 on this point do not apply. Neither could Article
1975, also relied upon by the respondent Court, be invoked as an argument against the deposit theory.
Obviously, the first paragraph of such provision cannot apply to a depositary of certificates, bonds,
securities or instruments which earn interest if such documents are kept in a rented safety deposit box. It
is clear that the depositary cannot open the box without the renter being present.
We observe, however, that the deposit theory itself does not altogether find unanimous support even in
American jurisprudence. We agree with the petitioner that under the latter, the prevailing rule is that the
relation between a bank renting out safe-deposit boxes and its customer with respect to the contents of
the box is that of a bail or and bailee, the bailment being for hire and mutual benefit. 21 This is just the
prevailing view because:
There is, however, some support for the view that the relationship in question might be more properly
characterized as that of landlord and tenant, or lessor and lessee. It has also been suggested that it should
be characterized as that of licensor and licensee. The relation between a bank, safe-deposit company, or
storage company, and the renter of a safe-deposit box therein, is often described as contractual, express
or implied, oral or written, in whole or in part. But there is apparently no jurisdiction in which any rule other
than that applicable to bailments governs questions of the liability and rights of the parties in respect of
loss of the contents of safe-deposit boxes. 22 (citations omitted)
In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear
that in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the
General Banking Act 23pertinently provides:
Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions
other than building and loan associations may perform the following services:
(a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the
safeguarding of such effects.
The banks shall perform the services permitted under subsections (a), (b) and (c) of this section
asdepositories or as agents. . .
Note that the primary function is still found within the parameters of a contract of deposit, i.e., the
receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of the
safety deposit boxes is not independent from, but related to or in conjunction with, this principal function.
A contract of deposit may be entered into orally or in writing 25 and, pursuant to Article 1306 of the Civil
Code, the parties thereto may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order or public policy. The
depositary's responsibility for the safekeeping of the objects deposited in the case at bar is governed by
Title I, Book IV of the Civil Code. Accordingly, the depositary would be liable if, in performing its obligation,
it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement. 26 In the
absence of any stipulation prescribing the degree of diligence required, that of a good father of a family is
to be observed. 27 Hence, any stipulation exempting the depositary from any liability arising from the loss
of the thing deposited on account of fraud, negligence or delay would be void for being contrary to law and
public policy. In the instant case, petitioner maintains that conditions 13 and 14 of the questioned contract
of lease of the safety deposit box, which read:
13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control of
the same.

14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it
assumes absolutely no liability in connection therewith. 28
are void as they are contrary to law and public policy. We find Ourselves in agreement with this proposition
for indeed, said provisions are inconsistent with the respondent Bank's responsibility as a depositary under
Section 72(a) of the General Banking Act. Both exempt the latter from any liability except as contemplated
in condition 8 thereof which limits its duty to exercise reasonable diligence only with respect to who shall
be admitted to any rented safe, to wit:
8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented safe and
beyond this, the Bank will not be responsible for the contents of any safe rented from it. 29
Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It
is not correct to assert that the Bank has neither the possession nor control of the contents of the box
since in fact, the safety deposit box itself is located in its premises and is under its absolute control;
moreover, the respondent Bank keeps the guard key to the said box. As stated earlier, renters cannot open
their respective boxes unless the Bank cooperates by presenting and using this guard key. Clearly then, to
the extent above stated, the foregoing conditions in the contract in question are void and ineffective. It has
been said: With respect to property deposited in a safe-deposit box by a customer of a safe-deposit
company, the parties, since the relation is a contractual one, may by special contract define their
respective duties or provide for increasing or limiting the liability of the deposit company, provided such
contract is not in violation of law or public policy. It must clearly appear that there actually was such a
special contract, however, in order to vary the ordinary obligations implied by law from the relationship of
the parties; liability of the deposit company will not be enlarged or restricted by words of doubtful
meaning.
The
company,
in
renting
safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or
negligence or that of its agents or servants, and if a provision of the contract may be construed as an
attempt to do so, it will be held ineffective for the purpose. Although it has been held that the lessor of a
safe-deposit box cannot limit its liability for loss of the contents thereof through its own negligence, the
view has been taken that such a lessor may limits its liability to some extent by agreement or stipulation.
Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the petition should
be dismissed, but on grounds quite different from those relied upon by the Court of Appeals. In the instant
case, the respondent Bank's exoneration cannot, contrary to the holding of the Court of Appeals, be based
on or proceed from a characterization of the impugned contract as a contract of lease, but rather on the
fact that no competent proof was presented to show that respondent Bank was aware of the agreement
between the petitioner and the Pugaos to the effect that the certificates of title were withdrawable from
the safety deposit box only upon both parties' joint signatures, and that no evidence was submitted to
reveal that the loss of the certificates of title was due to the fraud or negligence of the respondent Bank.
This in turn flows from this Court's determination that the contract involved was one of deposit. Since both
the petitioner and the Pugaos agreed that each should have one (1) renter's key, it was obvious that either
of them could ask the Bank for access to the safety deposit box and, with the use of such key and the
Bank's own guard key, could open the said box, without the other renter being present.
Since, however, the petitioner cannot be blamed for the filing of the complaint and no bad faith on its part
had been established, the trial court erred in condemning the petitioner to pay the respondent Bank
attorney's fees. To this extent, the Decision (dispositive portion) of public respondent Court of Appeals
must be modified.
WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for attorney's fees from
the 4 July 1989 Decision of the respondent Court of Appeals in CA-G.R. CV No. 15150. As modified, and
subject to the pronouncement We made above on the nature of the relationship between the parties in a
contract of lease of safety deposit boxes, the dispositive portion of the said Decision is hereby AFFIRMED
and the instant Petition for Review is otherwise DENIED for lack of merit. No pronouncement as to costs.
SO ORDERED.

FIRESTONE TIRE & RUBBER COMPANY OF THE PHILIPPINES, petitioner, vs., COURT OF APPEALS
and LUZON DEVELOPMENT BANK, respondents.
[G.R. No. 113236. March 5, 2001]
FACTS
[D]efendant is a banking corporation. It operates under a certificate of authority issued by the Central
Bank of the Philippines, and among its activities, accepts savings and time deposits. Said defendant had
as one of its client-depositors the Fojas-Arca Enterprises Company (Fojas-Arca for brevity). Fojas-Arca
maintaining a special savings account with the defendant, the latter authorized and allowed withdrawals of
funds therefrom through the medium of special withdrawal slips. These are supplied by the defendant to
Fojas-Arca.
In January 1978, plaintiff and Fojas-Arca entered into a Franchised Dealership Agreement (Exh. B)
whereby Fojas-Arca has the privilege to purchase on credit and sell plaintiffs products.
On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid Agreement, Fojas-Arca purchased on
credit Firestone products from plaintiff with a total amount of P4,896,000.00. In payment of these
purchases, Fojas-Arca delivered to plaintiff six (6) special withdrawal slips drawn upon the defendant. In
turn, these were deposited by the plaintiff with its current account with the Citibank. All of them were
honored and paid by the defendant. This singular circumstance made plaintiff believe [sic] and relied [sic]
on the fact that the succeeding special withdrawal slips drawn upon the defendant would be equally
sufficiently funded. Relying on such confidence and belief and as a direct consequence thereof, plaintiff
extended to Fojas-Arca other purchases on credit of its products.
On the following dates Fojas-Arca purchased Firestone products on credit (Exh. M, I, J, K) and delivered to
plaintiff the corresponding special withdrawal slips in payment thereof drawn upon the defendant, to wit:
DATE

WITHDRAWAL

AMOUNT

SLIP NO.
June 15, 1978

42127

P1,198,092.80

July 15, 1978

42128

940,190.00

Aug. 15, 1978

42129

880,000.00

Sep. 15, 1978

42130

981,500.00

These were likewise deposited by plaintiff in its current account with Citibank and in turn the Citibank
forwarded it [sic] to the defendant for payment and collection, as it had done in respect of the previous
special withdrawal slips. Out of these four (4) withdrawal slips only withdrawal slip No. 42130 in the
amount of P981,500.00 was honored and paid by the defendant in October 1978. Because of the absence

for a long period coupled with the fact that defendant honored and paid withdrawal slips No. 42128 dated
July 15, 1978, in the amount of P981,500.00 plaintiffs belief was all the more strengthened that the other
withdrawal slips were likewise sufficiently funded, and that it had received full value and payment of FojasArcas credit purchased then outstanding at the time. On this basis, plaintiff was induced to continue
extending to Fojas-Arca further purchase on credit of its products as per agreement (Exh. B).
However, on December 14, 1978, plaintiff was informed by Citibank that special withdrawal slips No.
42127 dated June 15, 1978 for P1,198,092.80 and No. 42129 dated August 15, 1978 for P880,000.00 were
dishonored and not paid for the reason NO ARRANGEMENT. As a consequence, the Citibank debited
plaintiffs account for the total sum of P2,078,092.80 representing the aggregate amount of the above-two
special withdrawal slips. Under such situation, plaintiff averred that the pecuniary losses it suffered is
caused by and directly attributable to defendants gross negligence.
On September 25, 1979, counsel of plaintiff served a written demand upon the defendant for the
satisfaction of the damages suffered by it. And due to defendants refusal to pay plaintiffs claim, plaintiff
has been constrained to file this complaint, thereby compelling plaintiff to incur litigation expenses and
attorneys fees which amount are recoverable from the defendant.
Controverting the foregoing asseverations of plaintiff, defendant asserted, inter alia that the transactions
mentioned by plaintiff are that of plaintiff and Fojas-Arca only, [in] which defendant is not involved;
Vehemently, it was denied by defendant that the special withdrawal slips were honored and treated as if it
were checks, the truth being that when the special withdrawal slips were received by defendant, it only
verified whether or not the signatures therein were authentic, and whether or not the deposit level in the
passbook concurred with the savings ledger, and whether or not the deposit is sufficient to cover the
withdrawal; if plaintiff treated the special withdrawal slips paid by Fojas-Arca as checks then plaintiff has to
blame itself for being grossly negligent in treating the withdrawal slips as check when it is clearly stated
therein that the withdrawal slips are non-negotiable; that defendant is not a privy to any of the
transactions between Fojas-Arca and plaintiff for which reason defendant is not duty bound to notify nor
give notice of anything to plaintiff. If at first defendant had given notice to plaintiff it is merely an
extension of usual bank courtesy to a prospective client; that defendant is only dealing with its depositor
Fojas-Arca and not the plaintiff. In summation, defendant categorically stated that plaintiff has no cause of
action against it (pp. 1-3, Dec.; pp. 368-370, id).[3]
Petitioners complaint[4] for a sum of money and damages with the Regional Trial Court of Pasay City,
Branch 113, docketed as Civil Case No. 29546, was dismissed together with the counterclaim of defendant.
Petitioner appealed the decision to the Court of Appeals. It averred that respondent Luzon Development
Bank was liable for damages under Article 2176 [5] in relation to Articles 19 [6] and 20[7] of the Civil Code. As
noted by the CA, petitioner alleged the following tortious acts on the part of private respondent: 1) the
acceptance and payment of the special withdrawal slips without the presentation of the depositors
passbook thereby giving the impression that the withdrawal slips are instruments payable upon
presentment; 2) giving the special withdrawal slips the general appearance of checks; and 3) the failure of
respondent bank to seasonably warn petitioner that it would not honor two of the four special withdrawal
slips. On December 29, 1993, the Court of Appeals promulgated its assailed decision. It denied the appeal
and affirmed the judgment of the trial court. According to the appellate court, respondent bank notified
the depositor to present the passbook whenever it received a collection note from another bank, belying
petitioners claim that respondent bank was negligent in not requiring a passbook under the subject
transaction. The appellate court also found that the special withdrawal slips in question were not
purposely given the appearance of checks, contrary to petitioners assertions, and thus should not have
been mistaken for checks. Lastly, the appellate court ruled that the respondent bank was under no
obligation to inform petitioner of the dishonor of the special withdrawal slips, for to do so would have been
a violation of the law on the secrecy of bank deposits.
ISSUE
Whether or not respondent bank should be held liable for damages suffered by petitioner, due to its
allegedly belated notice of non-payment of the subject withdrawal slips.
RULING
The initial transaction in this case was between petitioner and Fojas-Arca, whereby the latter purchased
tires from the former with special withdrawal slips drawn upon Fojas-Arcas special savings account with
respondent bank. Petitioner in turn deposited these withdrawal slips with Citibank. The latter credited the
same to petitioners current account, then presented the slips for payment to respondent bank. It was at
this point that the bone of contention arose.
On December 14, 1978, Citibank informed petitioner that special withdrawal slips Nos. 42127 and 42129
dated June 15, 1978 and August 15, 1978, respectively, were refused payment by respondent bank due to
insufficiency of Fojas-Arcas funds on deposit. That information came about six months from the time
Fojas-Arca purchased tires from petitioner using the subject withdrawal slips. Citibank then debited the
amount of these withdrawal slips from petitioners account, causing the alleged pecuniary damage subject
of petitioners cause of action.

At the outset, we note that petitioner admits that the withdrawal slips in question were non-negotiable.
[9]
Hence, the rules governing the giving of immediate notice of dishonor of negotiable instruments do not
apply in this case.[10] Petitioner itself concedes this point. [11] Thus, respondent bank was under no obligation
to give immediate notice that it would not make payment on the subject withdrawal slips. Citibank should
have known that withdrawal slips were not negotiable instruments. It could not expect these slips to be
treated as checks by other entities. Payment or notice of dishonor from respondent bank could not be
expected immediately, in contrast to the situation involving checks.
In the case at bar, it appears that Citibank, with the knowledge that respondent Luzon Development Bank,
had honored and paid the previous withdrawal slips, automatically credited petitioners current account
with the amount of the subject withdrawal slips, then merely waited for the same to be honored and paid
by respondent bank. It presumed that the withdrawal slips were good.
It bears stressing that Citibank could not have missed the non-negotiable nature of the withdrawal
slips. The essence of negotiability which characterizes a negotiable paper as a credit instrument lies in its
freedom to circulate freely as a substitute for money. [12] The withdrawal slips in question lacked this
character.
A bank is under obligation to treat the accounts of its depositors with meticulous care, whether such
account consists only of a few hundred pesos or of millions of pesos. [13] The fact that the other withdrawal
slips were honored and paid by respondent bank was no license for Citibank to presume that subsequent
slips would be honored and paid immediately. By doing so, it failed in its fiduciary duty to treat the
accounts of its clients with the highest degree of care. [14]
In the ordinary and usual course of banking operations, current account deposits are accepted by the bank
on the basis of deposit slips prepared and signed by the depositor, or the latters agent or representative,
who indicates therein the current account number to which the deposit is to be credited, the name of the
depositor or current account holder, the date of the deposit, and the amount of the deposit either in cash
or in check.[15]
The withdrawal slips deposited with petitioners current account with Citibank were not checks, as
petitioner admits. Citibank was not bound to accept the withdrawal slips as a valid mode of deposit. But
having erroneously accepted them as such, Citibank and petitioner as account-holder must bear the
risks attendant to the acceptance of these instruments. Petitioner and Citibank could not now shift the risk
and hold private respondent liable for their admitted mistake.
WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in CA-G.R. CV No. 29546 is
AFFIRMED. Costs against petitioner. SO ORDERED.
PHILIPPINE BANK OF COMMERCE, now absorbed by PHILIPPINE COMMERCIAL INTERNATIONAL
BANK, ROGELIO LACSON, DIGNA DE LEON, MARIA ANGELITA PASCUAL, et al., petitioners, vs.
THE COURT OF APPEALS, ROMMEL'S MARKETING CORP., represented by ROMEO LIPANA, its
President & General Manager, respondents.
G.R. No. 97626 March 14, 1997
FACTS
The case stemmed from a complaint filed by the private respondent Rommel's Marketing Corporation (RMC
for brevity), represented by its President and General Manager Romeo Lipana, to recover from the former
Philippine Bank of Commerce (PBC for brevity), now absorbed by the Philippine Commercial International
Bank, the sum of P304,979.74 representing various deposits it had made in its current account with said
bank but which were not credited to its account, and were instead deposited to the account of one
Bienvenido Cotas, allegedly due to the gross and inexcusable negligence of the petitioner bank.
RMC maintained two (2) separate current accounts, Current Account Nos. 53-01980-3 and 53-01748-7,
with the Pasig Branch of PBC in connection with its business of selling appliances.
In the ordinary and usual course of banking operations, current account deposits are accepted by the bank
on the basis of deposit slips prepared and signed by the depositor, or the latter's agent or representative,
who indicates therein the current account number to which the deposit is to be credited, the name of the
depositor or current account holder, the date of the deposit, and the amount of the deposit either in cash
or checks. The deposit slip has an upper portion or stub, which is detached and given to the depositor or
his agent; the lower portion is retained by the bank. In some instances, however, the deposit slips are
prepared in duplicate by the depositor. The original of the deposit slip is retained by the bank, while the
duplicate copy is returned or given to the depositor.
From May 5, 1975 to July 16, 1976, petitioner Romeo Lipana claims to have entrusted RMC funds in the
form of cash totalling P304,979.74 to his secretary, Irene Yabut, for the purpose of depositing said funds in
the current accounts of RMC with PBC. It turned out, however, that these deposits, on all occasions, were
not credited to RMC's account but were instead deposited to Account No. 53-01734-7 of Yabut's husband,

Bienvenido Cotas who likewise maintains an account with the same bank. During this period, petitioner
bank had, however, been regularly furnishing private respondent with monthly statements showing its
current accounts balances. Unfortunately, it had never been the practice of Romeo Lipana to check these
monthly statements of account reposing complete trust and confidence on petitioner bank.
Irene Yabut's modus operandi is far from complicated. She would accomplish two (2) copies of the deposit
slip, an original and a duplicate. The original showed the name of her husband as depositor and his current
account number. On the duplicate copy was written the account number of her husband but the name of
the account holder was left blank. PBC's teller, Azucena Mabayad, would, however, validate and stamp
both the original and the duplicate of these deposit slips retaining only the original copy despite the lack of
information on the duplicate slip. The second copy was kept by Irene Yabut allegedly for record purposes.
After validation, Yabut would then fill up the name of RMC in the space left blank in the duplicate copy and
change the account number written thereon, which is that of her husband's, and make it appear to be
RMC's account number, i.e., C.A. No. 53-01980-3. With the daily remittance records also prepared by Ms.
Yabut and submitted to private respondent RMC together with the validated duplicate slips with the latter's
name and account number, she made her company believe that all the while the amounts she deposited
were being credited to its account when, in truth and in fact, they were being deposited by her and
credited by the petitioner bank in the account of Cotas. This went on in a span of more than one (1) year
without private respondent's knowledge.
Upon discovery of the loss of its funds, RMC demanded from petitioner bank the return of its money, but as
its demand went unheeded, it filed a collection suit before the Regional Trial Court of Pasig, Branch 160.
The trial court found petitioner bank negligent. On appeal, the appellate court affirmed the foregoing
decision with modifications.
ISSUES
What is the proximate cause of the loss, to the tune of P304,979.74, suffered by the private respondent
RMC petitioner bank's negligence or that of private respondent's?
RULING
The petition has no merit.
Petitioners submit that the proximate cause of the loss is the negligence of respondent RMC and Romeo
Lipana in entrusting cash to a dishonest employee in the person of Ms. Irene Yabut. 5 According to them, it
was impossible for the bank to know that the money deposited by Ms. Irene Yabut belong to RMC; neither
was the bank forewarned by RMC that Yabut will be depositing cash to its account. Thus, it was impossible
for the bank to know the fraudulent design of Yabut considering that her husband, Bienvenido Cotas, also
maintained an account with the bank. For the bank to inquire into the ownership of the cash deposited by
Ms. Irene Yabut would be irregular. Otherwise stated, it was RMC's negligence in entrusting cash to a
dishonest employee which provided Ms. Irene Yabut the opportunity to defraud RMC. 6
Private respondent, on the other hand, maintains that the proximate cause of the loss was the negligent
act of the bank, thru its teller Ms. Azucena Mabayad, in validating the deposit slips, both original and
duplicate, presented by Ms. Yabut to Ms. Mabayad, notwithstanding the fact that one of the deposit slips
was not completely accomplished.
We sustain the private respondent.
Our law on quasi-delicts states:
Art. 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.
There are three elements of a quasi-delict: (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 damages incurred by the plaintiff. 7
In the case at bench, there is no dispute as to the damage suffered by the private respondent (plaintiff in
the trial court) RMC in the amount of P304,979.74. It is in ascribing fault or negligence which caused the
damage where the parties point to each other as the culprit.
Negligence is the omission to do something which a reasonable man, guided by those considerations
which ordinarily regulate the conduct of human affairs, would do, or the doing of something which a
prudent and reasonable man would do. The seventy-eight (78)-year-old, yet still relevant, case of Picart
v. Smith, 8 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 paterfamilias 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.
Applying the above test, it appears that the bank's teller, Ms. Azucena Mabayad, was negligent in
validating, officially stamping and signing all the deposit slips prepared and presented by Ms. Yabut,
despite the glaring fact that the duplicate copy was not completely accomplished contrary to the selfimposed procedure of the bank with respect to the proper validation of deposit slips, original or duplicate,
as testified to by Ms. Mabayad herself, thus:
Q: Now, as teller of PCIB, Pasig Branch, will you please tell us Mrs. Mabayad your important duties and
functions?
A: I accept current and savings deposits from depositors and encashments.
Q: Now in the handling of current account deposits of bank clients, could you tell us the procedure you
follow?
A: The client or depositor or the authorized representative prepares a deposit slip by filling up the deposit
slip with the name, the account number, the date, the cash breakdown, if it is deposited for cash, and the
check number, the amount and then he signs the deposit slip.
Q: Now, how many deposit slips do you normally require in accomplishing current account deposit, Mrs.
Mabayad?
A: The bank requires only one copy of the deposit although some of our clients prepare the deposit slip in
duplicate.
Q: Now in accomplishing current account deposits from your clients, what do you issue to the depositor to
evidence the deposit made?
A: We issue or we give to the clients the depositor's stub as a receipt of the deposit.
Q: And who prepares the deposit slip?
A: The depositor or the authorized representative sir?
Q: Where does the depositor's stub comes (sic) from Mrs. Mabayad, is it with the deposit slip?
A: The depositor's stub is connected with the deposit slip or the bank's copy. In a deposit slip, the upper
portion is the depositor's stub and the lower portion is the bank's copy, and you can detach the bank's
copy from the depositor's stub by tearing it sir.
Q: Now what do you do upon presentment of the deposit slip by the depositor or the depositor's authorized
representative?
A: We see to it that the deposit slip 9 is properly accomplished and then we count the money and then we
tally it with the deposit slip sir.
Q: Now is the depositor's stub which you issued to your clients validated?
A: Yes, sir.

10

[Emphasis ours]

Clearly, Ms. Mabayad failed to observe this very important procedure. The fact that the duplicate slip was
not compulsorily required by the bank in accepting deposits should not relieve the petitioner bank of
responsibility. The odd circumstance alone that such duplicate copy lacked one vital information that of
the name of the account holder should have already put Ms. Mabayad on guard. Rather than readily
validating the incomplete duplicate copy, she should have proceeded more cautiously by being more
probing as to the true reason why the name of the account holder in the duplicate slip was left blank while
that in the original was filled up. She should not have been so naive in accepting hook, line and sinker the
too shallow excuse of Ms. Irene Yabut to the effect that since the duplicate copy was only for her personal
record, she would simply fill up the blank space later on. 11 A "reasonable man of ordinary
prudence" 12would not have given credence to such explanation and would have insisted that the space
left blank be filled up as a condition for validation. Unfortunately, this was not how bank teller Mabayad
proceeded thus resulting in huge losses to the private respondent.
Negligence here lies not only on the part of Ms. Mabayad but also on the part of the bank itself in its
lackadaisical selection and supervision of Ms. Mabayad. This was exemplified in the testimony of Mr.
Romeo Bonifacio, then Manager of the Pasig Branch of the petitioner bank and now its Vice-President, to

the effect that, while he ordered the investigation of the incident, he never came to know that blank
deposit slips were validated in total disregard of the bank's validation procedures, viz:
Q: Did he ever tell you that one of your cashiers affixed the stamp mark of the bank on the deposit slips
and they validated the same with the machine, the fact that those deposit slips were unfilled up, is there
any report similar to that?
A: No, it was not the cashier but the teller.
Q: The teller validated the blank deposit slip?
A: No it was not reported.
Q: You did not know that any one in the bank tellers or cashiers validated the blank deposit slip?
A: I am not aware of that.
Q: It is only now that you are aware of that?
A: Yes, sir.

13

Prescinding from the above, public respondent Court of Appeals aptly observed:
It was in fact only when he testified in this case in February, 1983, or after the lapse of more than seven
(7) years counted from the period when the funds in question were deposited in plaintiff's accounts (May,
1975 to July, 1976) that bank manager Bonifacio admittedly became aware of the practice of his teller
Mabayad of validating blank deposit slips. Undoubtedly, this is gross, wanton, and inexcusable negligence
in the appellant bank's supervision of its employees. 14
It was this negligence of Ms. Azucena Mabayad, coupled by the negligence of the petitioner bank in the
selection and supervision of its bank teller, which was the proximate cause of the loss suffered by the
private respondent, and not the latter's act of entrusting cash to a dishonest employee, as insisted by the
petitioners.
Proximate cause is determined on the facts of each case upon mixed considerations of logic, common
sense, policy and precedent. 15 Vda. de Bataclan v. Medina, 16 reiterated in the case of Bank of the
Phil. Islands v. Court of Appeals, 17 defines proximate cause as "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. . . ." In this case, absent the act of Ms. Mabayad in negligently
validating the incomplete duplicate copy of the deposit slip, Ms. Irene Yabut would not have the facility
with which to perpetrate her fraudulent scheme with impunity. Apropos, once again, is the pronouncement
made by the respondent appellate court, to wit: . . . . Even if Yabut had the fraudulent intention to
misappropriate the funds entrusted to her by plaintiff, she would not have been able to deposit those funds
in her husband's current account, and then make plaintiff believe that it was in the latter's accounts
wherein she had deposited them, had it not been for bank teller Mabayad's aforesaid gross and reckless
negligence. The latter's negligence was thus the proximate, immediate and efficient cause that brought
about the loss claimed by plaintiff in this case, and the failure of plaintiff to discover the same soon enough
by failing to scrutinize the monthly statements of account being sent to it by appellant bank could not
have prevented the fraud and misappropriation which Irene Yabut had already completed when she
deposited plaintiff's money to the account of her husband instead of to the latter's accounts. 18
Furthermore, under the doctrine of "last clear chance" (also referred to, at times as "supervening
negligence" or as "discovered peril"), petitioner bank was indeed the culpable party. This doctrine, in
essence, states that where both parties are negligent, but the negligent act of one is appreciably later in
time than that of the other, or when it is impossible to determine whose fault or negligence should be
attributed to the incident, the one who had the last clear opportunity to avoid the impending harm and
failed to do so is chargeable with the consequences thereof. 19Stated differently, the rule would also mean
that an antecedent negligence of a person does not preclude the recovery of damages for the supervening
negligence of, or bar a defense against liability sought by another, if the latter, who had the last fair
chance, could have avoided the impending harm by the exercise of due diligence. 20Here, assuming that
private respondent RMC was negligent in entrusting cash to a dishonest employee, thus providing the
latter with the opportunity to defraud the company, as advanced by the petitioner, yet it cannot be denied
that the petitioner bank, thru its teller, had the last clear opportunity to avert the injury incurred by its
client, simply by faithfully observing their self-imposed validation procedure.
At this juncture, it is worth to discuss the degree of diligence ought to be exercised by banks in dealing
with their clients.
The New Civil Code provides:

Art. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required
by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of
the place. When negligence shows bad faith, the provisions of articles 1171 and 2201, paragraph 2, shall
apply.
If the law or contract does not state the diligence which is to be observed in the performance, that which is
expected of a good father of a family shall be required. (1104a)
In the case of banks, however, the degree of diligence required is more than that of a good father of a
family. Considering the fiduciary nature of their relationship with their depositors, banks are duty bound to
treat the accounts of their clients with the highest degree of care. 21
As elucidated in Simex International (Manila), Inc. v. Court of Appeals, 22 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 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 failure to duly credit him his deposits
as soon as they are made, can cause the depositor not a little embarrassment if not 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 before us, it is apparent that the petitioner bank was
remiss in that duty and violated that relationship.
Petitioners nevertheless aver that the failure of respondent RMC to cross-check the bank's statements of
account with its own records during the entire period of more than one (1) year is the proximate cause of
the commission of subsequent frauds and misappropriation committed by Ms. Irene Yabut.
We do not agree.
While it is true that had private respondent checked the monthly statements of account sent by the
petitioner bank to RMC, the latter would have discovered the loss early on, such cannot be used by the
petitioners to escape liability. This omission on the part of the private respondent does not change the fact
that were it not for the wanton and reckless negligence of the petitioners' employee in validating the
incomplete duplicate deposit slips presented by Ms. Irene Yabut, the loss would not have occurred.
Considering, however, that the fraud was committed in a span of more than one (1) year covering various
deposits, common human experience dictates that the same would not have been possible without any
form of collusion between Ms. Yabut and bank teller Mabayad. Ms. Mabayad was negligent in the
performance of her duties as bank teller nonetheless. Thus, the petitioners are entitled to claim
reimbursement from her for whatever they shall be ordered to pay in this case.
The foregoing notwithstanding, it cannot be denied that, indeed, private respondent was likewise negligent
in not checking its monthly statements of account. Had it done so, the company would have been alerted
to the series of frauds being committed against RMC by its secretary. The damage would definitely not
have ballooned to such an amount if only RMC, particularly Romeo Lipana, had exercised even a little
vigilance in their financial affairs. This omission by RMC amounts to contributory negligence which shall
mitigate the damages that may be awarded to the private respondent 23 under Article 2179 of the New
Civil Code, to wit:
. . . When the plaintiff's own negligence was the immediate and proximate cause of his injury, he cannot
recover damages. But if his negligence was only contributory, the immediate and proximate cause of the
injury being the defendant's lack of due care, the plaintiff may recover damages, but the courts shall
mitigate the damages to be awarded.
In view of this, we believe that the demands of substantial justice are satisfied by allocating the damage
on a 60-40 ratio. Thus, 40% of the damage awarded by the respondent appellate court, except the award
of P25,000.00 attorney's fees, shall be borne by private respondent RMC; only the balance of 60% needs to
be paid by the petitioners. The award of attorney's fees shall be borne exclusively by the petitioners.
WHEREFORE, the decision of the respondent Court of Appeals is modified by reducing the amount of actual
damages private respondent is entitled to by 40%. Petitioners may recover from Ms. Azucena Mabayad the
amount they would pay the private respondent. Private respondent shall have recourse against Ms. Irene
Yabut. In all other respects, the appellate court's decision is AFFIRMED. Proportionate costs. SO ORDERED.

BANK OF THE PHILIPPINE ISLANDS (successor-in- interest of COMMERCIAL AND TRUST

CO.), petitioner, vs. HON. COURT OF APPEALS, EASTERN PLYWOOD CORP. and BENIGNO D.
LIM, respondents.

G.R. No. 104612 May 10, 1994

FACTS
Private respondents Eastern Plywood Corporation (Eastern) and Benigno D. Lim (Lim), an officer and
stockholder of Eastern, held at least one joint bank account ("and/or" account) with the Commercial Bank
and Trust Co. (CBTC), the predecessor-in-interest of petitioner Bank of the Philippine Islands (BPI).
Sometime in March 1975, a joint checking account ("and" account) with Lim in the amount of P120,000.00
was opened by Mariano Velasco with funds withdrawn from the account of Eastern and/or Lim. Various
amounts were later deposited or withdrawn from the joint account of Velasco and Lim. The money therein
was placed in the money market. Velasco died on 7 April 1977. At the time of his death, the outstanding
balance of the account stood at P662,522.87. On 5 May 1977, by virtue of an Indemnity Undertaking
executed by Lim for himself and as President and General Manager of Eastern, 2 one-half of this amount
was provisionally released and transferred to one of the bank accounts of Eastern with CBTC. 3 Thereafter,
on 18 August 1978, Eastern obtained a loan of P73,000.00 from CBTC as "Additional Working Capital,"
evidenced by the "Disclosure Statement on Loan/Credit Transaction" (Disclosure Statement) signed by
CBTC through its branch manager, Ceferino Jimenez, and Eastern, through Lim, as its President and
General Manager. 4 The loan was payable on demand with interest at 14% per annum. For this loan,
Eastern issued on the same day a negotiable promissory note for P73,000.00 payable on demand to the
order of CBTC with interest at 14% per annum. 5 The note was signed by Lim both in his own capacity and
as President and General Manager of Eastern. No reference to any security for the loan appears on the
note. In the Disclosure Statement, the box with the printed word "UNSECURED" was marked with "X"
meaning unsecured, while the line with the words "this loan is wholly/partly secured by" is followed by the
typewritten words "Hold-Out on a 1:1 on C/A No. 2310-001-42," which refers to the joint account of Velasco
and Lim with a balance of P331,261.44. In addition, Eastern and Lim, and CBTC signed another document
entitled "Holdout Agreement," also dated 18 August 1978, 6 wherein it was stated that "as security for the
Loan [Lim and Eastern] have offered [CBTC] and the latter accepts a holdout on said [Current Account No.
2310-011-42 in the joint names of Lim and Velasco] to the full extent of their alleged interests therein as
these may appear as a result of final and definitive judicial action or a settlement between and among the
contesting parties thereto." 7 Paragraph 02 of the Agreement provides as follows:
Eastply [Eastern] and Mr. Lim hereby confer upon Comtrust [CBTC], when and if their alleged interests in
the Account Balance shall have been established with finality, ample and sufficient power as shall be
necessary to retain said Account Balance and enable Comtrust to apply the Account Balance for the
purpose of liquidating the Loan in respect of principal and/or accrued interest. And paragraph 05 thereof
reads: The acceptance of this holdout shall not impair the right of Comtrust to declare the loan payable on
demand at any time, nor shall the existence hereof and the non-resolution of the dispute between the
contending parties in respect of entitlement to the Account Balance, preclude Comtrust from instituting an
action for recovery against Eastply and/or Mr. Lim in the event the Loan is declared due and payable and
Eastply and/or Mr. Lim shall default in payment of all obligations and liabilities thereunder. In the
meantime, a case for the settlement of Velasco's estate was filed with Branch 152 of the RTC of Pasig,
entitled "In re Intestate Estate of Mariano Velasco," and docketed as Sp. Proc. No. 8959. In the said case,
the whole balance of P331,261.44 in the aforesaid joint account of Velasco and Lim was being claimed as
part of Velasco's estate. On 9 September 1986, the intestate court granted the urgent motion of the heirs
of Velasco to withdraw the deposit under the joint account of Lim and Velasco and authorized the heirs to
divide among themselves the amount withdrawn. 8 Sometime in 1980, CBTC was merged with BPI. 9 On 2
December 1987, BPI filed with the RTC of Manila a complaint against Lim and Eastern demanding payment
of the promissory note for P73,000.00. The complaint was docketed as Civil Case No. 87- 42967 and was
raffled to Branch 19 of the said court, then presided over by Judge Wenceslao M. Polo. Defendants Lim and
Eastern, in turn, filed a counterclaim against BPI for the return of the balance in the disputed account
subject of the Holdout Agreement and the interests thereon after deducting the amount due on the
promissory note.
After due proceedings, the trial court rendered its decision on 15 November 1990 dismissing the complaint
because BPI failed to make out its case. Furthermore, it ruled that "the promissory note in question is
subject to the 'hold-out' agreement," 10 and that based on this agreement, "it was the duty of plaintiff Bank
[BPI] to debit the account of the defendants under the promissory note to set off the loan even though the
same has no fixed maturity." 11 As to the defendants' counterclaim, the trial court, recognizing the fact that
the entire amount in question had been withdrawn by Velasco's heirs pursuant to the order of the intestate
court in Sp. Proc. No. 8959, denied it because the "said claim cannot be awarded without disturbing the
resolution" of the intestate court. Both parties appealed from the said decision to the Court of Appeals.
Their appeal was docketed as CA-G.R. CV No. 25739. On 23 January 1991, the Court of Appeals rendered a
decision affirming the decision of the trial court. It, however, failed to rule on the defendants' (private
respondents') partial appeal from the trial court's denial of their counterclaim. Upon their motion for
reconsideration, the Court of Appeals promulgated on 6 March 1992 an Amended Decision 13 wherein it
ruled that the settlement of Velasco's estate had nothing to do with the claim of the defendants for the
return of the balance of their account with CBTC/BPI as they were not privy to that case, and that the
defendants, as depositors of CBTC/BPI, are the latter's creditors; hence, CBTC/BPI should have protected
the defendants' interest in Sp. Proc. No. 8959 when the said account was claimed by Velasco's estate. It
then ordered BPI "to pay defendants the amount of P331,261.44 representing the outstanding balance in
the bank account of defendants."

On 22 April 1992, BPI filed the instant petition alleging therein that the Holdout Agreement in question was
subject to a suspensive condition stated therein, viz., that the "P331,261.44 shall become a security for
respondent Lim's promissory note only if respondents' Lim and Eastern Plywood Corporation's interests to
that amount are established as a result of a final and definitive judicial action or a settlement between and
among the contesting parties thereto." 15 Hence, BPI asserts, the Court of Appeals erred in affirming the
trial court's decision dismissing the complaint on the ground that it was the duty of CBTC to debit the
account of the defendants to set off the amount of P73,000.00 covered by the promissory note. Private
respondents Eastern and Lim dispute the "suspensive condition" argument of the petitioner. They interpret
the findings of both the trial and appellate courts that the money deposited in the joint account of Velasco
and Lim came from Eastern and Lim's own account as a finding that the money deposited in the joint
account of Lim and Velasco "rightfully belong[ed] to Eastern Plywood Corporation and/or Benigno Lim." And
because the latter are the rightful owners of the money in question, the suspensive condition does not find
any application in this case and the bank had the duty to set off this deposit with the loan. They add that
the ruling of the lower court that they own the disputed amount is the final and definitive judicial action
required by the Holdout Agreement; hence, the petitioner can only hold the amount of P73,000.00
representing the security required for the note and must return the rest. 16
ISSUES
Whether BPI can demand payment of the loan of P73,000.00 despite the existence of the Holdout
Agreement and whether BPI is still liable to the private respondents on the account subject of the Holdout
Agreement after its withdrawal by the heirs of Velasco.
RULING
The collection suit of BPI is based on the promissory note for P73,000.00. On its face, the note is an
unconditional promise to pay the said amount, and as stated by the respondent Court of Appeals, "[t]here
is no question that the promissory note is a negotiable instrument." 17 It further correctly ruled that BPI was
not a holder in due course because the note was not indorsed to BPI by the payee, CBTC. Only a
negotiation by indorsement could have operated as a valid transfer to make BPI a holder in due course. It
acquired the note from CBTC by the contract of merger or sale between the two banks. BPI, therefore, took
the note subject to the Holdout Agreement.
We disagree, however, with the Court of Appeals in its interpretation of the Holdout Agreement. It is clear
from paragraph 02 thereof that CBTC, or BPI as its successor-in-interest, had every right to demand that
Eastern and Lim settle their liability under the promissory note. It cannot be compelled to retain and apply
the deposit in Lim and Velasco's joint account to the payment of the note. What the agreement conferred
on CBTC was a power, not a duty. Generally, a bank is under no duty or obligation to make the
application. 18 To apply the deposit to the payment of a loan is a privilege, a right of set-off which the bank
has the option to exercise. 19 Also, paragraph 05 of the Holdout Agreement itself states that
notwithstanding the agreement, CBTC was not in any way precluded from demanding payment from
Eastern and from instituting an action to recover payment of the loan. What it provides is an alternative,
not an exclusive, method of enforcing its claim on the note. When it demanded payment of the debt
directly from Eastern and Lim, BPI had opted not to exercise its right to apply part of the deposit subject of
the Holdout Agreement to the payment of the promissory note for P73,000.00. Its suit for the enforcement
of the note was then in order and it was error for the trial court to dismiss it on the theory that it was set
off by an equivalent portion in C/A No. 2310-001-42 which BPI should have debited. The Court of Appeals
also erred in affirming such dismissal.
The "suspensive condition" theory of the petitioner is, therefore, untenable. The Court of Appeals correctly
decided on the counterclaim. The counterclaim of Eastern and Lim for the return of the P331,261.44 20 was
equivalent to a demand that they be allowed to withdraw their deposit with the bank. Article 1980 of the
Civil Code expressly provides that "[f]ixed, savings, and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple loan." In Serrano vs. Central Bank of the
Philippines, 21 we held that bank deposits are in the nature of irregular deposits; they are really loans
because they earn interest. The relationship then between a depositor and a bank is one of creditor and
debtor. The deposit under the questioned account was an ordinary bank deposit; hence, it was payable on
demand of the depositor. 22
The account was proved and established to belong to Eastern even if it was deposited in the names of Lim
and Velasco. As the real creditor of the bank, Eastern has the right to withdraw it or to demand payment
thereof. BPI cannot be relieved of its duty to pay Eastern simply because it already allowed the heirs of
Velasco to withdraw the whole balance of the account. The petitioner should not have allowed such
withdrawal because it had admitted in the Holdout Agreement the questioned ownership of the money
deposited in the account. As early as 12 May 1979, CBTC was notified by the Corporate Secretary of
Eastern that the deposit in the joint account of Velasco and Lim was being claimed by them and that onehalf was being claimed by the heirs of Velasco. 23
Moreover, the order of the court in Sp. Proc. No. 8959 merely authorized the heirs of Velasco to withdraw
the account. BPI was not specifically ordered to release the account to the said heirs; hence, it was under
no judicial compulsion to do so. The authorization given to the heirs of Velasco cannot be construed as a
final determination or adjudication that the account belonged to Velasco. We have ruled that when the

ownership of a particular property is disputed, the determination by a probate court of whether that
property is included in the estate of a deceased is merely provisional in character and cannot be the
subject of execution. 24
Because the ownership of the deposit remained undetermined, BPI, as the debtor with respect thereto, had
no right to pay to persons other than those in whose favor the obligation was constituted or whose right or
authority to receive payment is indisputable. The payment of the money deposited with BPI that will
extinguish its obligation to the creditor-depositor is payment to the person of the creditor or to one
authorized by him or by the law to receive it. 25 Payment made by the debtor to the wrong party does not
extinguish the obligation as to the creditor who is without fault or negligence, even if the debtor acted in
utmost good faith and by mistake as to the person of the creditor, or through error induced by fraud of a
third person. 26 The payment then by BPI to the heirs of Velasco, even if done in good faith, did not
extinguish its obligation to the true depositor, Eastern.
WHEREFORE, the instant petition is partly GRANTED. The challenged amended decision in CA-G.R. CV No.
25735 is hereby MODIFIED. As modified: (1) Private respondents are ordered to pay the petitioner the
promissory note for P73,000.00 with interest at: (a) 14% per annum on the principal, computed from 18
August 1978 until payment; (b) 12% per annum on the interest which had accrued up to the date of the
filing of the complaint, computed from that date until payment pursuant to Article 2212 of the Civil Code.
(2) The award of P331,264.44 in favor of the private respondents shall bear interest at the rate of 12% per
annum computed from the filing of the counterclaim. No pronouncement as to costs. SO ORDERED.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK,petitioner, vs. COURT OF APPEALS and RORY
W. LIM,respondents.
[G.R. No. 97785. March 29, 1996]
FACTS
On March 13, 1986, private respondent Rory Lim delivered to his cousin Lim Ong Tian PCIB Check No. JJJ
24212467 in the amount of P200,000.00 for the purpose of obtaining a telegraphic transfer from petitioner
PCIB in the same amount. The money was to be transferred to Equitable Banking Corporation, Cagayan de
Oro Branch, and credited to private respondents account at the said bank. Upon purchase of the
telegraphic transfer, petitioner issued the corresponding receipt dated March 13, 1986 [T/T No. 284][1]
which contained the assailed provision, to wit:
AGREEMENT
In case of fund transfer, the undersigned hereby agrees that such transfer will be made without any
responsibility on the part of the BANK, or its correspondents, for any loss occasioned by errors, or delays in
the transmission of message by telegraph or cable companies or by the correspondents or agencies,
necessarily employed by this BANK in the transfer of this money, all risks for which are assumed by the
undersigned.
Subsequent to the purchase of the telegraphic transfer, petitioner in turn issued and delivered eight (8)
Equitable Bank checks[2] to his suppliers in different amounts as payment for the merchandise that he
obtained from them. When the checks were presented for payment, five of them bounced for insufficiency
of funds,[3] while the remaining three were held overnight for lack of funds upon presentment.[4]
Consequent to the dishonor of these checks, Equitable Bank charged and collected the total amount of P1,
100.00 from private respondent. The dishonor of the checks came to private respondents attention only
on April 2, 1986, when Equitable Bank notified him of the penalty charges and after receiving letters from
his suppliers that his credit was being cut-off due to the dishonor of the checks he issued.
Upon verification by private respondent with the Gingoog Branch Office of petitioner PCIB, it was confirmed
that his telegraphic transfer (T/T No. 284) for the sum of P200,000.00 had not yet been remitted to
Equitable Bank, Cagayan de Oro branch. In fact, petitioner PCIB made the corresponding transfer of funds
only on April 3, 1986, twenty one (21) days after the purchase of the telegraphic transfer on March
13,1986.
Aggrieved, private respondent demanded from petitioner PCIB that he be compensated for the resulting
damage that he suffered due to petitioners failure to make the timely transfer of funds which led to the
dishonor of his checks. In a letter dated April 23, 1986, PCIBs Branch Manager Rodolfo Villarmia
acknowledged their failure to transmit the telegraphic transfer on time as a result of their mistake in using
the control number twice and the petitioner banks failure to request confirmation and act positively on the
disposition of the said telegraphic transfer.[5]
Nevertheless, petitioner refused to heed private respondents demand prompting the latter to file a
complaint for damages with the Regional Trial Court of Gingoog City[6] on January 16, 1987. In his
complaint, private respondent alleged that as a result of petitioners total disregard and gross violation of
its contractual obligation to remit and deliver the sum of Two Hundred Thousand Pesos (P200,000.00)
covered by T/T No. 284 to Equitable Banking Corporation, Cagayan de Oro Branch, private respondents

checks were dishonored for insufficient funds thereby causing his business and credit standing to suffer
considerably for which petitioner should be ordered to pay damages.[7]
Answering the complaint, petitioner denied any liability to private respondent and interposed as special
and affirmative defense the lack of privity between it and private respondent as it was not private
respondent himself who purchased the telegraphic transfer from petitioner. Additionally, petitioner pointed
out that private respondent is nevertheless bound by the stipulation in the telegraphic transfer
application/form receipt[8] which provides: x x x. In case of fund transfer, the undersigned hereby agrees
that such transfer will be made without any responsibility on the part of the BANK, or its correspondents,
for any loss occasioned by errors or delays in the transmission of message by telegraph or cable
companies or by correspondents or agencies, necessarily employed by this BANK in the transfer of this
money, all risks for which are assumed by the undersigned.
According to petitioner, they utilized the services of RCPI-Gingoog City to transmit the message regarding
private respondents telegraphic transfer because their telex machine was out of order at that time. But
as it turned out, it was only on April 3, 1986 that petitioners Cagayan de Oro Branch had received
information about the said telegraphic transfer.[9]
In its decision dated July 27, 1988[10] the Regional Trial Court of Gingoog City held petitioner liable for
breach of contract and struck down the aforecited provision found in petitioners telegraphic transfer
application form/receipt exempting it from any liability and declared the same to be invalid and
unenforceable. As found by the trial court, the provision amounted to a contract of adhesion wherein the
objectionable portion was unilaterally inserted by petitioner in all its application forms without giving any
opportunity to the applicants to question the same and express their conformity thereto.[11]Thus, the trial
court adjudged petitioner liable to private respondent. Upon appeal by petitioner to the Court of Appeals,
respondent court affirmed with modifications the judgment of the trial court. A motion for reconsideration
was filed by petitioner but respondent Court of Appeals denied the same.[14]
ISSUE
Whether or not the assailed provision found in the application form/receipt exempting it from any liability
in case of loss resulting from errors or delays in the transfer of funds is valid.
RULING
Petitioner mainly argues that even assuming that the disputed provision is a contract of adhesion, such
fact alone does not make it invalid because this type of contract is not absolutely prohibited. Moreover,
the terms thereof are expressed clearly, leaving no room for doubt, and both contracting parties
understood and had full knowledge of the same.
Private respondent however contends that the agreement providing non-liability on petitioners part in
case of loss caused by errors or delays despite its recklessness and negligence is void for being contrary to
public policy and interest.[15]
A contract of adhesion is defined as one in which one of the parties imposes a ready-made form of
contract, which the other party may accept or reject, but which the latter cannot modify.[16] One party
prepares the stipulation in the contract, while the other party merely affixes his signature or his adhesion
thereto,[17] giving no room for negotiation and depriving the latter of the opportunity to bargain on equal
footing.[18] Nevertheless, these types of contracts have been declared as binding as ordinary contracts,
the reason being that the party who adheres to the contract is free to reject it entirely.[19] It is equally
important to stress, though, that the Court is not precluded from ruling out blind adherence to their terms
if the attendant facts and circumstances show that they should be ignored for being obviously too onesided.[20]
On previous occasions, it has been declared that a contract of adhesion may be struck down as void and
unenforceable, for being subversive to public policy, only when the weaker party is imposed upon in
dealing with the dominant bargaining party and is reduced to the alternative of taking it or leaving it,
completely deprived of the opportunity to bargain on equal footing.[21] And when it has been shown that
the complainant is knowledgeable enough to have understood the terms and conditions of the contract, or
one whose stature is such that he is expected to be more prudent and cautious with respect to his
transactions, such party cannot later on be heard to complain for being ignorant or having been forced into
merely consenting to the contract.[22]
The factual backdrop of the instant case, however, militates against applying the aforestated
pronouncements. That petitioner failed to discharge its obligation to transmit private respondents
telegraphic transfer on time in accordance with their agreement is already a settled matter as the same is
no longer disputed in this petition. Neither is the finding of respondent Court of Appeals that petitioner
acted fraudulently and in bad faith in the performance of its obligation, being contested by petitioner.
Perforce, we are bound by these factual considerations.

Having established that petitioner acted fraudulently and in bad faith, we find it implausible to absolve
petitioner from its wrongful acts on account of the assailed provision exempting it from any liability. In
Geraldez vs. Court of Appeals,[23] it was unequivocally declared that notwithstanding the enforceability of
a contractual limitation, responsibility arising from a fraudulent act cannot be exculpated because the
same is contrary to public policy. Indeed, Article 21 of the Civil Code is quite explicit in providing that
[a]ny person who willfully causes loss or injury to another in a manner that is contrary to morals, good
customs or public policy shall compensate the latter for the damage. Freedom of contract is subject to the
limitation that the agreement must not be against public policy and any agreement or contract made in
violation of this rule is not binding and will not be enforced.[24]
The prohibition against this type of contractual stipulation is moreover treated by law as void which may
not be ratified or waived by a contracting party. Article 1409 of the Civil Code states:
ART. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public
policy;
These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.
Undoubtedly, the services being offered by a banking institution like petitioner are imbued with public
interest.[25] The use of telegraphic transfers have now become commonplace among businessmen
because it facilitates commercial transactions. Any attempt to completely exempt one of the contracting
parties from any liability in case of loss notwithstanding its bad faith, fault or negligence, as in the instant
case, cannot be sanctioned for being inimical to public interest and therefore contrary to public policy.
Resultingly, there being no dispute that petitioner acted fraudulently and in bad faith, the award of
moral[26] and exemplary damages were proper.
But notwithstanding petitioners liability for the resulting loss and damage to private respondent, we find
the amount of moral damages adjudged by respondent court in the sum of P400,000.00 exorbitant.
Bearing in mind that moral damages are awarded, not to penalize the wrongdoer, but rather to
compensate the claimant for the injuries that he may have suffered,[27] we believe that an award of Two
Hundred Thousand Pesos (P200,000.00) is reasonable under the circumstances.
WHEREFORE, subject to the foregoing modification reducing the amount awarded as moral damages to the
sum of Two Hundred Thousand Pesos (P200,000.00), the appealed decision is hereby AFFIRMED. SO
ORDERED.

CHINA BANKING CORPORATION and TAN KIM LIONG, petitioners-appellants, vs. HON.
WENCESLAO ORTEGA, as Presiding Judge of the Court of First Instance of Manila, Branch VIII,
and VICENTE G. ACABAN, respondents-appellees.
G.R. No. L-34964 January 31, 1973
FACTS
On December 17, 1968 Vicente Acaban filed a complaint in the court a quo against Bautista Logging Co.,
Inc., B & B Forest Development Corporation and Marino Bautista for the collection of a sum of money. Upon
motion of the plaintiff the trial court declared the defendants in default for failure to answer within the
reglementary period, and authorized the Branch Clerk of Court and/or Deputy Clerk to receive the
plaintiff's evidence. On January 20, 1970 judgment by default was rendered against the defendants.
To satisfy the judgment, the plaintiff sought the garnishment of the bank deposit of the defendant B & B
Forest Development Corporation with the China Banking Corporation. Accordingly, a notice of garnishment
was issued by the Deputy Sheriff of the trial court and served on said bank through its cashier, Tan Kim
Liong. In reply, the bank' cashier invited the attention of the Deputy Sheriff to the provisions of Republic
Act No. 1405 which, it was alleged, prohibit the disclosure of any information relative to bank deposits.
Thereupon the plaintiff filed a motion to cite Tan Kim Liong for contempt of court.
In an order dated March 4, 1972 the trial court denied the plaintiff's motion. However, Tan Kim Liong was
ordered "to inform the Court within five days from receipt of this order whether or not there is a deposit in
the China Banking Corporation of defendant B & B Forest Development Corporation, and if there is any
deposit, to hold the same intact and not allow any withdrawal until further order from this Court." Tan Kim
Liong moved to reconsider but was turned down by order of March 27, 1972. In the same order he was
directed "to comply with the order of this Court dated March 4, 1972 within ten (10) days from the receipt
of copy of this order, otherwise his arrest and confinement will be ordered by the Court." Resisting the two
orders, the China Banking Corporation and Tan Kim Liong instituted the instant petition.

ISSUE
Whether or not a banking institution may validly refuse to comply with a court process garnishing the bank
deposit of a judgment debtor, by invoking the provisions of Republic Act No. 1405. *
RULING
The pertinent provisions of Republic Act No. 1405 relied upon by the petitioners reads:
Sec. 2. All deposits of whatever nature with banks or banking institutions in the Philippines including
investments in bonds issued by the Government of the Philippines, its political subdivisions and its
instrumentalities, are hereby considered as of absolutely confidential nature and may not be examined,
inquired or looked into by any person, government official, bureau or office, except upon written
permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of
bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the
subject matter of the litigation.
Sec 3. It shall be unlawful for any official or employee of a banking institution to disclose to any person
other than those mentioned in Section two hereof any information concerning said deposits.
Sec. 5. Any violation of this law will subject offender upon conviction, to an imprisonment of not more than
five years or a fine of not more than twenty thousand pesos or both, in the discretion of the court.
The petitioners argue that the disclosure of the information required by the court does not fall within any of
the four (4) exceptions enumerated in Section 2, and that if the questioned orders are complied with Tan
Kim Liong may be criminally liable under Section 5 and the bank exposed to a possible damage suit by B &
B Forest Development Corporation. Specifically referring to this case, the position of the petitioners is that
the bank deposit of judgment debtor B & B Forest Development Corporation cannot be subject to
garnishment to satisfy a final judgment against it in view of the aforequoted provisions of law.
We do not view the situation in that light. The lower court did not order an examination of or inquiry into
the deposit of B & B Forest Development Corporation, as contemplated in the law. It merely required Tan
Kim Liong to inform the court whether or not the defendant B & B Forest Development Corporation had a
deposit in the China Banking Corporation only for purposes of the garnishment issued by it, so that the
bank would hold the same intact and not allow any withdrawal until further order. It will be noted from the
discussion of the conference committee report on Senate Bill No. 351 and House Bill No. 3977, which later
became Republic Act 1405, that it was not the intention of the lawmakers to place bank deposits beyond
the reach of execution to satisfy a final judgment. Thus:
Mr. MARCOS. Now, for purposes of the record, I should like the Chairman of the Committee on Ways and
Means to clarify this further. Suppose an individual has a tax case. He is being held liable by the Bureau of
Internal Revenue for, say, P1,000.00 worth of tax liability, and because of this the deposit of this individual
is attached by the Bureau of Internal Revenue.
Mr. RAMOS. The attachment will only apply after the court has pronounced sentence declaring the liability
of such person. But where the primary aim is to determine whether he has a bank deposit in order to bring
about a proper assessment by the Bureau of Internal Revenue, such inquiry is not authorized by this
proposed law.
Mr. MARCOS. But under our rules of procedure and under the Civil Code, the attachment or garnishment of
money deposited is allowed. Let us assume, for instance, that there is a preliminary attachment which is
for garnishment or for holding liable all moneys deposited belonging to a certain individual, but such
attachment or garnishment will bring out into the open the value of such deposit. Is that prohibited by this
amendment or by this law?
Mr. RAMOS. It is only prohibited to the extent that the inquiry is limited, or rather, the inquiry is made only
for the purpose of satisfying a tax liability already declared for the protection of the right in favor of the
government; but when the object is merely to inquire whether he has a deposit or not for purposes of
taxation, then this is fully covered by the law.
Mr. MARCOS. And it protects the depositor, does it not?
Mr. RAMOS. Yes, it protects the depositor.
Mr. MARCOS. The law prohibits a mere investigation into the existence and the amount of the deposit.
Mr. RAMOS. Into the very nature of such deposit.
Mr. MARCOS. So I come to my original question. Therefore, preliminary garnishment or attachment of the
deposit is not allowed?

Mr. RAMOS. No, without judicial authorization.

Mr. MARCOS. I am glad that is clarified. So that the established rule of procedure as well as the substantive
law on the matter is amended?
Mr. RAMOS. Yes. That is the effect.
Mr. MARCOS. I see. Suppose there has been a decision, definitely establishing the liability of an individual
for taxation purposes and this judgment is sought to be executed ... in the execution of that judgment,
does this bill, or this proposed law, if approved, allow the investigation or scrutiny of the bank deposit in
order to execute the judgment?
Mr. RAMOS. To satisfy a judgment which has become executory.
Mr. MARCOS. Yes, but, as I said before, suppose the tax liability is P1,000,000 and the deposit is half a
million, will this bill allow scrutiny into the deposit in order that the judgment may be executed?
Mr. RAMOS. Merely to determine the amount of such money to satisfy that obligation to the Government,
but not to determine whether a deposit has been made in evasion of taxes.
Mr. MACAPAGAL. But let us suppose that in an ordinary civil action for the recovery of a sum of money the
plaintiff wishes to attach the properties of the defendant to insure the satisfaction of the judgment. Once
the judgment is rendered, does the gentleman mean that the plaintiff cannot attach the bank deposit of
the defendant?
Mr. RAMOS. That was the question raised by the gentleman from Pangasinan to which I replied that outside
the very purpose of this law it could be reached by attachment.
Mr. MACAPAGAL. Therefore, in such ordinary civil cases it can be attached?
Mr. RAMOS. That is so.
(Vol. II, Congressional Record, House of Representatives, No. 12, pp. 3839-3840, July 27, 1955).
It is sufficiently clear from the foregoing discussion of the conference committee report of the two houses
of Congress that the prohibition against examination of or inquiry into a bank deposit under Republic Act
1405 does not preclude its being garnished to insure satisfaction of a judgment. Indeed there is no real
inquiry in such a case, and if the existence of the deposit is disclosed the disclosure is purely incidental to
the execution process. It is hard to conceive that it was ever within the intention of Congress to enable
debtors to evade payment of their just debts, even if ordered by the Court, through the expedient of
converting their assets into cash and depositing the same in a bank.
WHEREFORE, the orders of the lower court dated March 4 and 27, 1972, respectively, are hereby affirmed,
with costs against the petitioners-appellants.

EMMANUEL C. OATE and ECON HOLDINGS CORPORATION, petitioners, vs. HON. ZEUS C.
ABROGAR, as Presiding Judge of Branch 150 of the Regional Trial Court of Makati, and SUN
LIFE ASSURANCE COMPANY OF CANADA, respondents.
BRUNNER DEVELOPMENT CORPORATION, petitioner, vs. HON. ZEUS C. ABROGAR, as Presiding
Judge of Branch 150 of the Regional Trial Court of Makati, and SUN LIFE ASSURANCE COMPANY
OF CANADA, respondents.
G.R. No. 107303 February 23, 1995
FACTS
These are motions separately filed by petitioners, seeking reconsideration of the decision of the Second
Division holding that although the levy on attachment of petitioners' properties had been made before the
trial court acquired jurisdiction over them, the subsequent service of summons on them cured the
invalidity of the attachment.
The motions were referred to the Court en banc in view of the fact that in another decision rendered by the
Third Division on the same question, it was held that the subsequent acquisition of jurisdiction over the
person of a defendant does not render valid the previous attachment of his property. 1 The Court en
banc accepted the referral and now issues this resolution.

Petitioners maintain that, in accordance with prior decisions of this Court, the attachment of their
properties was void because the trial court had not at that time acquired jurisdiction over them and that
the subsequent service of summons on them did not cure the invalidity of the levy. They further contend
that the examination of the books and ledgers of the Bank of the Philippine Islands (BPI), the Philippine
National Bank (PNB) and the Urban Bank was a "fishing expedition" which the trial court should not have
authorized because petitioner Emmanuel C. Oate, whose accounts were examined, was not a signatory to
any of the documents evidencing the transaction between Sun Life Assurance of Canada (Sun Life) and
Brunner Development Corporation (Brunner).
On the other hand private respondent Sun Life stresses the fact that the trial court eventually acquired
jurisdiction over petitioners and contends that this cured the invalidity of the attachment of petitioners'
properties. With respect to the second contention of petitioners, private respondent argues that the
examination of petitioner Oate's bank account was justified because it was he who signed checks
transferring huge amounts from Brunner's account in the Urban Bank to the PNB and the BPI.
ISSUE
Whether petitioners were guilty of fraud in contracting their obligation
RULING
At the outset, it should be stated that the Court does not in the least doubt the validity of the writ of
attachment issued in these cases. The fact that a criminal complaint for estafa which Sun Life had filed
against petitioner Oate and Noel L. Dio, president of Brunner, was dismissed by the Office of the
Provincial Prosecutor is immaterial to the resolution of the motions for reconsideration. In the first place,
the dismissal, although later affirmed by the Department of Justice, is pending reconsideration. In the
second place, since the issue in the case below is precisely whether petitioners were guilty of fraud in
contracting their obligation, resolution of the question must await the trial of the main case.
However, we find petitioners' contention respecting the validity of the attachment of their properties to be
well taken. We hold that the attachment of petitioners' properties prior to the acquisition of jurisdiction by
the respondent court is void and that the subsequent service of summons on petitioners did not cure the
invalidity of such attachment. The records show that before the summons and the complaint were served
on petitioners Oate and Econ Holdings Corporation (Econ) on January 9, 1992, Deputy Sheriff Arturo C.
Flores had already served on January 3, 1992 notices of garnishment on the PNB Head office 2 and on all its
Metro Manila branches and an A.B capital. 3 In addition he made other levies before the service of
summons on petitioners, to wit: On January 6, 1992, he served notices of garnishment on the Urban
Bank Head Office and all its Metro Manila branches, 4 and on the BPI. 5 On the same day, he levied on
attachment Oate's condominium unit at the Amorsolo Apartments Condominium Project, covered by
Condominium Certificate of Title No. S-1758. 6 On January 7, 1992, he served notice of garnishment on
the Union Bank of the Philippines. 7 On January 8, 1992, he attached Oate's lot, consisting of 1,256
square meters, at the Ayala-Alabang Subdivision, Alabang, Muntinlupa, covered by TCT No. 112673. 8
First. The Deputy Sheriff claims that he had tried to serve the summons with a copy of the complaint on
petitioners on January 3, 1992 but that there was no one in the offices of petitioners on whom he could
make a service. This is denied by petitioners who claim that their office was always open and that Adeliza
M. Jaranilla, Econ's Chief Accountant who eventually received summons on behalf of Oate and Econ, was
present that day. Whatever the truth is, the fact is that no other attempt was made by the sheriff to serve
the summons except on January 9, 1992, in the case of Oate and Econ, and on January 16, 1992, in the
case of Dio. Meantime, he made several levies, which indicates a predisposition to serve the writ of
attachment in anticipation of the eventual acquisition by the court of jurisdiction over petitioners.
Second. Private respondent invokes the ruling in Davao Light & Power Co. v. Court of Appeals in support of
its contention that the subsequent acquisition of jurisdiction by the court cured the defect in the
proceedings for attachment. It cites the following portion of the decision in Davao Light and Power, written
by Justice, now Chief Justice, Narvasa: It goes without saying that whatever be the acts done by the Court
prior to the acquisition of jurisdiction over the person of the defendant, as above indicated issuance of
summons, order of attachment and writ of attachment (and/or appointment of guardian ad litem, or grant
of authority to the plaintiff to prosecute the suit as a pauper litigant, or amendment of the complaint by
the plaintiff as a matter of right without leave of court and however valid and proper they might
otherwise be, these do not and cannot bind and affect the defendant until and unless jurisdiction over his
person iseventually obtained by the court, either by service on him of summons or other coercive process
or his voluntary submission to the court's authority. Hence, when the sheriff or other proper officer
commences implementation of the writ of attachment, it is essential that he serve on the defendant not
only a copy of the applicant's affidavit and attachment bond, and of the order of attachment, as explicitly
required by Section 5 of Rule 57, but also the summons addressed to said defendant as well as a copy of
the complaint and order for appointment of guardian ad litem, if any, as also explicitly directed by Section
3, Rule 14 of the Rules of Court. 10
It is clear from the above excerpt, however, that while the petition for a writ of preliminary attachment
may be granted and the writ itself issued before the defendant is summoned, the writ of attachment
cannot be implemented until jurisdiction over the person of the defendant is obtained. As this Court

explained, "levy on property pursuant to the writ thus issued may not be validly effected unless preceded,
or contemporaneously accompanied, by service on the defendant of summons, a copy of the complaint
(and of the appointment of guardian ad litem, if any), the application for attachment (if not incorporated in
but submitted separately from the complaint), the order of attachment, and the plaintiff's attachment
bond." 11
Further clarification on this point was made in Cuartero v. Court of Appeals, 12 in which it was held: It must
be emphasized that the grant of the provisional remedy of attachment practically involves three stages;
first, the court issues the order granting the application; second, the writ of attachment issues pursuant to
the order granting the writ; and third, the writ is implemented. For the initial two stages, it is not necessary
that jurisdiction over the person of the defendant should first be obtained. However, once the
implementation commences, it is required that the court must have acquired jurisdiction over the
defendant for without such jurisdiction, the court has no power and authority to act in any manner against
the defendant. Any order issuing from the Court will not bind the defendant.
Private respondent argues that the case of Cuartero itself provides for an exception as shown in the
statement that "the court [in issuing the writ of preliminary attachment] cannot bind and affect the
defendant until jurisdiction is eventually obtained" and that since petitioners were subsequently served
with summons, no question can be raised against the validity of the attachment of petitioners' properties
before such service.
The statement in question has been taken out of context. The full statement reads: It is clear from our
pronouncements that a writ of preliminary attachment may issue even before summons is served upon the
defendant. However, we have likewise ruled that the writ cannot bind and affect the defendant until
jurisdiction over his person is eventually obtained. Therefore, it is required that when proper officer
commences implementation of the writ of attachment service of summons should be simultaneously
made. 13
Indeed, as this Court through its First Division has ruled on facts similar to those in these cases, the
attachment of properties before the service of summons on the defendant is invalid, even though the court
later acquires jurisdiction over the defendant. 14 At the very least, then, the writ of attachment must be
served simultaneously with the service of summons before the writ may be enforced. As the properties of
the petitioners were attached by the sheriff before he had served the summons on them, the levies made
must be considered void.
Third. Nor can the attachment of petitioners' properties before the service of summons on them was made
be justified an the ground that unless the writ was then enforced, petitioners would be alerted and might
dispose of their properties before summons could be served on them.
The Rules of Court do not require that issuance of the writ be kept a secret until it can be enforced.
Otherwise in no case may the service of summons on the defendant precede the levy on attachment. To
the contrary, Rule 57, 13 allows the defendant to move to discharge the attachment even before any
attachment is actually levied upon, thus negating any inference that before its enforcement, the issuance
of the writ must be kept secret. Rule 57, 13 provides:
Sec. 13. Discharge of attachment for improper or irregular issuance. The party whose property has been
attached may also, at any time either before or after the release of the attached property, or before any
attachment shall have been actually levied, upon reasonable notice to the attaching creditor, apply to the
judge who granted the order, or to the judge of the court in which the action is pending, for an order to
discharge the attachment on the ground that the same was improperly or irregularly issued. . . . (Emphasis
added).
As this Court pointed out in Davao Light and Power,
even before any property has been levied on."

15

the lifting of an attachment "may be resorted to

It is indeed true that proceedings for the issuance of a writ of attachment are generally ex parte.
InMindanao Savings and Loans Ass'n v. Court of Appeals 16 it was held that no hearing is required for the
issuance of a writ of attachment because this "would defeat the objective of the remedy [because] the
time which such hearing would take could be enough to enable the defendant to abscond or dispose of his
property before a writ of attachment issues." It is not, however, notice to defendant that is sought to be
avoided but the "time which such hearing would take" because of the possibility that defendant may delay
the hearing to be able to dispose of his properties. On the contrary there may in fact be a need for a
hearing before the writ is issued as where the issue of fraudulent disposal of property is raised. 17 It is not
true that there should be no hearing lest a defendant learns of the application for attachment and he
remove's his properties before the writ can be enforced.
On the other hand, to authorize the attachment of property even before jurisdiction over the person of the
defendant is acquired through the service of summons or his voluntary appearance could lead to abuse. It
is entirely possible that the defendant may not know of the filing of a case against him and consequently
may not be able to take steps to protect his interests.

Nor may sheriff's failure to abide by the law be excused on the pretext that after all the court later
acquired jurisdiction over petitioners. More important than the need for insuring success in the
enforcement of the writ is the need for affirming a principle by insisting on that "most fundamental of all
requisites the jurisdiction of the court issuing attachment over the person of the defendant." 18It may be
that the same result would follow from requiring that a new writ be served all over again. The symbolic
significance of such an act, however, is that it would affirm our commitment to the rule of law. 19
II
We likewise find petitioners' second contention to be meritorious. The records show that, on January 21,
1992, respondent judge ordered the examination of the books of accounts and ledgers of Brunner at the
Urban Bank, Legaspi Village branch, and on January 30, 199 the records of account of petitioner Oate at
the BPI, even as he ordered the PNB to produce the records regarding certain checks deposited in it.
First. Sun Life defends these court orders on the ground that the money paid by it to Brunner was
subsequently withdrawn from the Urban Bank after it had been deposited by Brunner and then transferred
to BPI and to the unnamed account in the petitioner Oate's account in the BPI and to the unnamed
account in the PNB.
The issue before the trial court, however, concerns the nature of the transaction between petitioner
Brunner and Sun Life. In its complaint, Sun Life alleges that Oate, in his personal capacity and as
president of Econ, offered to sell to Sun Life P46,990,000.00 worth of treasury bills owned by Econ and
Brunner at the discounted price of P39,526,500.82; that on November 27, 1991, Sun Life paid the price by
means of a check payable to Brunner; that Brunner, through its president Noel L. Dio, issued to it a
receipt with undertaking to deliver the treasury bills to Sun Life; and that on December 4, 1991, Brunner
and Dio delivered instead a promissory note, dated November 27, 1991, in which it was made to appear
that the transaction was a money placement instead of sale of treasury bills.
Thus the issue is whether the money paid to Brunner was the consideration for the sale of treasury bills, as
Sun Life claims, or whether it was money intended for placement, as petitioners allege. Petitioners do not
deny receipt of P39,526,500.82 from Sun Life. Hence, whether the transaction is considered a sale or
money placement does not make the money the "subject matter of litigation" within the meaning of 2 of
Republic Act No. 1405 which prohibits the disclosure or inquiry into bank deposits except "in cases where
the money deposited or invested is the subject matter of litigation." Nor will it matter whether the money
was "swindled" as Sun Life contends.
Second. The examination of bank books and records cannot be justified under Rule 57, 10. This provision
states:
Sec. 10. Examination of party whose property is attached and persons indebted to him or controlling his
property; delivery of property to officer. Any person owing debts to the party whose property is attached
or having in his possession or under his control any credit or other personal property belonging to such
party, may be required to attend before the court in which the action is pending, or before a commissioner
appointed by the court, and be examined on oath respecting the same. The party whose property is
attached may also be required to attend for the purpose of giving information respecting his property, and
may be examined on oath. The court may, after such examination, order personal property capable of
manual delivery belonging to him, in the possession of the person so required to attend before the court,
to be delivered to the clerk of the court, sheriff, or other proper officer on such terms as may be just,
having reference to any lien thereon or claims against the same, to await the judgment in the action.
Since, as already stated, the attachment of petitioners' properties was invalid, the examination ordered in
connection with such attachment must likewise be considered invalid. Under Rule 57, 10, as quoted
above, such examination is only proper where the property of the person examined has been validly
attached.
WHEREFORE, the decision dated February 21, 1994 is RECONSIDERED and SET ASIDE and another one is
rendered GRANTING the petitions for certiorari and SETTING ASIDE the orders dated February 26, 1992 and
September 9, 1992, insofar as they authorize the attachment of petitioners' properties and the
examination of bank books and records pertaining to their accounts, and ORDERING respondent Judge
Zeus C. Abrogar (1) forthwith to issue an alias writ of attachment upon the same bond furnished by
respondent Sun Life Assurance Company of Canada; (2) direct the sheriff to lift the levy under the original
writ of attachment and simultaneously levy on the same properties pursuant to the alias writ so issued;
and (3) take such steps as may be necessary to insure that there will be no intervening period between the
lifting of the original attachment and the subsequent levy under the alias writ. Petitioners may file the
necessary counterbond to prevent subsequent levy or to dissolve the attachment after such levy. SO
ORDERED.

LOURDES T. MARQUEZ, in her capacity as Branch Manager, Union Bank of the

Philippines, petitioners, vs. HON. ANIANO A. DESIERTO, (in his capacity as OMBUDSMAN,
Evaluation and Preliminary Investigation Bureau, Office of the Ombudsman, ANGEL C. MAYORALGO, JR., MARY ANN CORPUZ-MANALAC and JOSE T. DE JESUS, JR., in their capacities as
Chairman and Members of the Panel, respectively, respondents.
[G.R. No. 135882. June 27, 2001]
FACTS
Sometime in May 1998, petitioner Marquez received an Order from the Ombudsman Aniano A. Desierto
dated April 29, 1998, to produce several bank documents for purposes of inspection in camera relative to
various accounts maintained at Union Bank of the Philippines, Julia Vargas Branch, where petitioner is the
branch manager. The accounts to be inspected are Account Nos. 011-37270, 240-020718, 245-30317-3
and 245-30318-1, involved in a case pending with the Ombudsman entitled, Fact-Finding and Intelligence
Bureau (FFIB) v. Amado Lagdameo, et. al. The order further states: It is worth mentioning that the power
of the Ombudsman to investigate and to require the production and inspection of records and documents
is sanctioned by the 1987 Philippine Constitution, Republic Act No. 6770, otherwise known as the
Ombudsman Act of 1989 and under existing jurisprudence on the matter. It must be noted that R. A. 6770
especially Section 15 thereof provides, among others, the following powers, functions and duties of the
Ombudsman, to wit: (8) Administer oaths, issue subpoena and subpoena duces tecum and take testimony
in any investigation or inquiry, including the power to examine and have access to bank accounts and
records; (9) Punish for contempt in accordance with the Rules of Court and under the same procedure and
with the same penalties provided therein. Clearly, the specific provision of R.A. 6770, a later legislation,
modifies the law on the Secrecy of Bank Deposits (R.A. 1405) and places the office of the Ombudsman in
the same footing as the courts of law in this regard.[2]
The basis of the Ombudsman in ordering an in camera inspection of the accounts is a trail of managers
checks purchased by one George Trivinio, a respondent in OMB-0-97-0411, pending with the office of the
Ombudsman. It would appear that Mr. George Trivinio, purchased fifty one (51) Managers Checks (MCs) for
a total amount of P272.1 Million at Traders Royal Bank, United Nations Avenue branch, on May 2 and 3,
1995. Out of the 51 MCs, eleven (11) MCs in the amount of P70.6 million, were deposited and credited to
an account maintained at the Union Bank, Julia Vargas Branch. [3]
On May 26, 1998, the FFIB panel met in conference with petitioner Lourdes T. Marquez and Atty. Fe B.
Macalino at the banks main office, Ayala Avenue, Makati City. The meeting was for the purpose of allowing
petitioner and Atty. Macalino to view the checks furnished by Traders Royal Bank. After convincing
themselves of the veracity of the checks, Atty. Macalino advised Ms. Marquez to comply with the order of
the Ombudsman. Petitioner agreed to an in camerainspection set on June 3, 1998. [4] However, on June 4,
1998, petitioner wrote the Ombudsman explaining to him that the accounts in question cannot readily be
identified and asked for time to respond to the order. The reason forwarded by petitioner was that despite
diligent efforts and from the account numbers presented, we can not identify these accounts since the
checks are issued in cash or bearer. We surmised that these accounts have long been dormant, hence are
not covered by the new account number generated by the Union Bank system. We therefore have to verify

from the Interbank records archives for the whereabouts of these accounts. [5] The Ombudsman,
responding to the request of the petitioner for time to comply with the order, stated: firstly, it must be
emphasized that Union Bank, Julia Vargas Branch was the depositary bank of the subject Traders Royal
Bank Managers Checks (MCs), as shown at its dorsal portion and as cleared by the Philippine Clearing
House, not the International Corporate Bank. Notwithstanding the fact that the checks were payable to
cash or bearer, nonetheless, the name of the depositor(s) could easily be identified since the account
numbers x x x where said checks were deposited are identified in the order. Even assuming that the
accounts xxx were already classified as dormant accounts, the bank is still required to preserve the
records pertaining to the accounts within a certain period of time as required by existing banking rules and
regulations.
And
finally,
the in
camera inspection
was
already
extended
twice
from May 13, 1998 to June 3, 1998, thereby giving the bank enough time within which to sufficiently
comply with the order. Thus, on June 16, 1998, the Ombudsman issued an order directing petitioner to
produce the bank documents relative to the accounts in issue. The order states: Viewed from the
foregoing, your persistent refusal to comply with Ombudsmans order is unjustified, and is merely intended
to delay the investigation of the case. Your act constitutes disobedience of or resistance to a lawful order
issued by this office and is punishable as Indirect Contempt under Section 3(b) of R.A. 6770. The same may
also constitute obstruction in the lawful exercise of the functions of the Ombudsman which is punishable
under Section 36 of R.A. 6770.
On July 10, 1998, petitioner together with Union Bank of the Philippines, filed a petition for declaratory
relief, prohibition and injunction[8] with the Regional Trial Court, Makati City, against the Ombudsman. The
petition was intended to clear the rights and duties of petitioner. Thus, petitioner sought a declaration of
her rights from the court due to the clear conflict between R. A. No. 6770, Section 15 and R. A. No. 1405,
Sections 2 and 3. Petitioner prayed for a temporary restraining order (TRO) because the Ombudsman and
other persons acting under his authority were continuously harassing her to produce the bank documents
relative to the accounts in question. Moreover, on June 16, 1998, the Ombudsman issued another order
stating that unless petitioner appeared before the FFIB with the documents requested, petitioner manager
would be charged with indirect contempt and obstruction of justice. In the meantime, [9] on July 14, 1998,
the lower court denied petitioners prayer for a temporary restraining order and stated thus: After hearing
the arguments of the parties, the court finds the application for a Temporary Restraining Order to be
without merit. Since the application prays for the restraint of the respondent, in the exercise of his
contempt powers under Section 15 (9) in relation to paragraph (8) of R.A. 6770, known as The
Ombudsman Act of 1989, there is no great or irreparable injury from which petitioners may suffer, if
respondent is not so restrained. Respondent should he decide to exercise his contempt powers would still
have to apply with the court. x x x Anyone who, without lawful excuse x x x refuses to produce
documents for inspection, when thereunto lawfully required shall be subject to discipline as in case of
contempt of Court and upon application of the individual or body exercising the power in question shall be
dealt with by the Judge of the First Instance (now RTC) having jurisdiction of the case in a manner provided
by law (section 580 of the Revised Administrative Code). Under the present Constitution only judges may
issue warrants, hence, respondent should apply with the Court for the issuance of the warrant needed for
the enforcement of his contempt orders. It is in these proceedings where petitioners may question the
propriety of respondents exercise of his contempt powers. Petitioners are not therefore left without any
adequate remedy. The questioned orders were issued with the investigation of the case of Fact-Finding
and Intelligence Bureau vs. Amado Lagdameo, et. el., OMB-0-97-0411, for violation of R.A. 3019. Since
petitioner failed to show prima facie evidence that the subject matter of the investigation is outside the
jurisdiction of the Office of the Ombudsman, no writ of injunction may be issued by this Court to delay this
investigation pursuant to Section 14 of the Ombudsman Act of 1989. [10]
On July 20, 1998, petitioner filed a motion for reconsideration. On July 23, 1998, the Ombudsman filed a
motion to dismiss the petition for declaratory relief [12] on the ground that the Regional Trial Court has no
jurisdiction to hear a petition for relief from the findings and orders of the Ombudsman, citing R. A. No.
6770, Sections 14 and 27. On August 7, 1998, the Ombudsman filed an opposition to petitioners motion
for reconsideration dated July 20, 1998. On August 19, 1998, the lower court denied petitioners motion for
reconsideration, and also the Ombudsmans motion to dismiss. On August 21, 1998, petitioner received a
copy of the motion to cite her for contempt, filed with the Office of the Ombudsman by Agapito B. Rosales,
Director, Fact Finding and Intelligence Bureau (FFIB). On August 31, 1998, petitioner filed with the
Ombudsman an opposition to the motion to cite her in contempt on the ground that the filing thereof was
premature due to the petition pending in the lower court. [17] Petitioner likewise reiterated that she had no
intention to disobey the orders of the Ombudsman. However, she wanted to be clarified as to how she
would comply with the orders without her breaking any law, particularly R. A. No. 1405. [18] Respondent
Ombudsman panel set the incident for hearing on September 7, 1998. [19] After hearing, the panel issued an
order dated September 7, 1998, ordering petitioner and counsel to appear for a continuation of the hearing
of the contempt charges against her. [20] On September 10, 1998, petitioner filed with the Ombudsman a
motion for reconsideration of the above order. Her motion was premised on the fact that there was a
pending case with the Regional Trial Court, Makati City, [22] which would determine whether obeying the
orders of the Ombudsman to produce bank documents would not violate any law. The FFIB opposed the
motion,[23] and on October 14, 1998, the Ombudsman denied the motion by order.
ISSUE
Whether petitioner may be cited for indirect contempt for her failure to produce the documents requested
by the Ombudsman. Whether the order of the Ombudsman to have an in camera inspection of the
questioned account is allowed as an exception to the law on secrecy of bank deposits (R. A. No. 1405).

RULING
An examination of the secrecy of bank deposits law (R. A. No. 1405) would reveal the following exceptions:
1.
2.
3.
4.

Where the depositor consents in writing;

Impeachment case;
By court order in bribery or dereliction of duty cases against public officials;
Deposit is subject of litigation;

5. Sec. 8, R. A. No. 3019, in cases of unexplained wealth as held in the case of PNB vs. Gancayco [26]
The order of the Ombudsman to produce for in camera inspection the subject accounts with the Union
Bank of the Philippines, Julia Vargas Branch, is based on a pending investigation at the Office of the
Ombudsman against Amado Lagdameo, et. al. for violation of R. A. No. 3019, Sec. 3 (e) and (g) relative to
the Joint Venture Agreement between the Public Estates Authority and AMARI.
We rule that before an in camera inspection may be allowed, there must be a pending case before a court
of competent jurisdiction. Further, the account must be clearly identified, the inspection limited to the
subject matter of the pending case before the court of competent jurisdiction. The bank personnel and the
account holder must be notified to be present during the inspection, and such inspection may cover only
the account identified in the pending case.
In Union Bank of the Philippines v. Court of Appeals, we held that Section 2 of the Law on Secrecy of Bank
Deposits, as amended, declares bank deposits to be absolutely confidential except:
(1) In an examination made in the course of a special or general examination of a bank that is specifically
authorized by the Monetary Board after being satisfied that there is reasonable ground to believe that a
bank fraud or serious irregularity has been or is being committed and that it is necessary to look into the
deposit to establish such fraud or irregularity,
(2) In an examination made by an independent auditor hired by the bank to conduct its regular audit
provided that the examination is for audit purposes only and the results thereof shall be for the exclusive
use of the bank,
(3) Upon written permission of the depositor,
(4) In cases of impeachment,
(5) Upon order of a competent court in cases of bribery or dereliction of duty of public officials, or
(6) In cases where the money deposited or invested is the subject matter of the litigation [27]
In the case at bar, there is yet no pending litigation before any court of competent authority. What is
existing is an investigation by the office of the Ombudsman. In short, what the Office of the Ombudsman
would wish to do is to fish for additional evidence to formally charge Amado Lagdameo, et. al., with the
Sandiganbayan. Clearly, there was no pending case in court which would warrant the opening of the bank
account for inspection.
Zones of privacy are recognized and protected in our laws. The Civil Code provides that "[e]very person
shall respect the dignity, personality, privacy and peace of mind of his neighbors and other persons" and
punishes as actionable torts several acts for meddling and prying into the privacy of another. It also holds
a public officer or employee or any private individual liable for damages for any violation of the rights and
liberties of another person, and recognizes the privacy of letters and other private communications. The
Revised Penal Code makes a crime of the violation of secrets by an officer, the revelation of trade and
industrial secrets, and trespass to dwelling. Invasion of privacy is an offense in special laws like the AntiWiretapping Law, the Secrecy of Bank Deposits Act, and the Intellectual Property Code.[28]
IN VIEW WHEREOF, we GRANT the petition. We order the Ombudsman to cease and desist from requiring
Union Bank Manager Lourdes T. Marquez, or anyone in her place to comply with the order dated October
14, 1998, and similar orders. No costs. SO ORDERED.
PHILIPPINE NATIONAL BANK and EDUARDO Z. ROMUALDEZ, in his capacity as President of the
Philippine National Bank, plaintiffs-appellants, vs. EMILIO A. GANCAYCO and FLORENTINO
FLOR, Special Prosecutors of the Dept. of Justice, defendants-appellees.
G.R. No. L-18343

September 30, 1965

FACTS
The principal question presented in this case is whether a bank can be compelled to disclose the records of
accounts of a depositor who is under investigation for unexplained wealth.
This question arose when defendants Emilio A. Gancayco and Florentino Flor, as special prosecutors of the
Department of Justice, required the plaintiff Philippine National Bank to produce at a hearing to be held at

10 a.m. on February 20, 1961 the records of the bank deposits of Ernesto T. Jimenez, former administrator
of the Agricultural Credit and Cooperative Administration, who was then under investigation for
unexplained wealth. In declining to reveal its records, the plaintiff bank invoked Republic Act No. 1405
which provides:
SEC. 2. All deposits of whatever nature with banks or banking institutions in the Philippines including
investments in bonds issued by the Government of the Philippines, its political subdivisions and its
instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined,
inquired or looked into by any person, government official, bureau or office, except upon written
permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of
bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the
subject matter of the litigation.
The plaintiff bank also called attention to the penal provision of the law which reads:
SEC. 5. Any violation of this law will subject the offender upon conviction, to an imprisonment of not more
than five years or a fine of not more than twenty thousand pesos or both, in the discretion of the court.
On the other hand, the defendants cited the Anti-Graft and Corrupt Practices Act (Republic Act No. 3019) in
support of their claim of authority and demanded anew that plaintiff Eduardo Z. Romualdez, as bank
president, produce the records or he would be prosecuted for contempt. The law invoked by the defendant
states:
SEC. 8. Dismissal due to unexplained wealth. If in accordance with the provisions of Republic Act
Numbered One thousand three hundred seventy-nine, a public official has been found to have acquired
during his incumbency, whether in his name or in the name of other persons, an amount of property and/or
money manifestly out of proportion to his salary and to his other lawful income, that fact shall be a ground
for dismissal or removal. Properties in the name of the spouse and unmarried children of such public
official may be taken into consideration, when their acquisition through legitimate means cannot be
satisfactorily shown. Bank deposits shall be taken into consideration in the enforcement of this section,
notwithstanding any provision of law to the contrary.
Because of the threat of prosecution, plaintiffs filed an action for declaratory judgment in the Manila Court
of First Instance. After trial, during which Senator Arturo M. Tolentino, author of the Anti-Graft and Corrupt
Practices Act testified, the court rendered judgment, sustaining the power of the defendants to compel the
disclosure of bank accounts of ACCFA Administrator Jimenez. The court said that, by enacting section 8 of,
the Anti-Graft and Corrupt Practices Act, Congress clearly intended to provide an additional ground for the
examination of bank deposits. Without such provision, the court added prosecutors would be hampered if
not altogether frustrated in the prosecution of those charged with having acquired unexplained wealth
while in public office.
From that judgment, plaintiffs appealed to this Court. In brief, plaintiffs' position is that section 8 of the
Anti-Graft Law "simply means that such bank deposits may be included or added to the assets of the
Government official or employee for the purpose of computing his unexplained wealth if and when the
same are discovered or revealed in the manner authorized by Section 2 of Republic Act 1405, which are (1)
Upon written permission of the depositor; (2) In cases of impeachment; (3) Upon order of a competent
court in cases of bribery or dereliction of duty of public officials; and (4) In cases where the money
deposited or invested is the subject matter of the litigation."
ISSUE
Whether a bank can be compelled to disclose the records of accounts of a depositor who is under
investigation for unexplained wealth.
RULING
In support of their position, plaintiffs contend, first, that the Anti-Graft Law (which took effect on August 17,
1960) is a general law which cannot be deemed to have impliedly repealed section 2 of Republic Act No.
1405 (which took effect on Sept. 9, 1955), because of the rule that repeals by implication are not favored.
Second, they argue that to construe section 8 of the Anti-Graft Law as allowing inquiry into bank deposits
would be to negate the policy expressed in section 1 of Republic Act No. 1405 which is "to give
encouragement to the people to deposit their money in banking institutions and to discourage private
hoarding so that the same may be utilized by banks in authorized loans to assist in the economic
development of the country."
Contrary to their claim that their position effects a reconciliation of the provisions of the two laws, plaintiffs
are actually making the provisions of Republic Act No. 1405 prevail over those of the Anti-Graft Law,
because even without the latter law the balance standing to the depositor's credit can be considered
provided its disclosure is made in any of the cases provided in Republic Act No. 1405.

The truth is that these laws are so repugnant to each other than no reconciliation is possible. Thus, while
Republic Act No. 1405 provides that bank deposits are "absolutely confidential ... and [therefore] may not
be examined, inquired or looked into," except in those cases enumerated therein, the Anti-Graft Law
directs in mandatory terms that bank deposits "shall be taken into consideration in the enforcement of this
section, notwithstanding any provision of law to the contrary." The only conclusion possible is that section
8 of the Anti-Graft Law is intended to amend section 2 of Republic Act No. 1405 by providing additional
exception to the rule against the disclosure of bank deposits.
Indeed, it is said that if the new law is inconsistent with or repugnant to the old law, the presumption
against the intent to repeal by implication is overthrown because the inconsistency or repugnancy reveals
an intent to repeal the existing law. And whether a statute, either in its entirety or in part, has been
repealed by implication is ultimately a matter of legislative intent. (Crawford, The Construction of Statutes,
Secs. 309-310. Cf. Iloilo Palay and Corn Planters Ass'n v. Feliciano, G.R. No. L-24022, March 3, 1965).
The recent case of People v. De Venecia, G.R. No. L-20808, July 31, 1965 invites comparison with this case.
There it was held: The result is that although sec. 54 [Rev. Election Code] prohibits a classified civil service
employee from aiding any candidate, sec. 29 [Civil Service Act of 1959] allows such classified employee to
express his views on current political problems or issues, or to mention the name of his candidate for
public office, even if such expression of views or mention of names may result in aiding one particular
candidate. In other words, the last paragraph of sec. 29 is an exception to sec. 54; at most, an amendment
to sec. 54.
With regard to the claim that disclosure would be contrary to the policy making bank deposits confidential,
it is enough to point out that while section 2 of Republic Act 1405 declares bank deposits to be "absolutely
confidential," it nevertheless allows such disclosure in the following instances: (1) Upon written permission
of the depositor; (2) In cases of impeachment; (3) Upon order of a competent court in cases of bribery or
dereliction of duty of public officials; (4) In cases where the money deposited is the subject matter of the
litigation. Cases of unexplained wealth are similar to cases of bribery or dereliction of duty and no reason is
seen why these two classes of cases cannot be excepted from the rule making bank deposits confidential.
The policy as to one cannot be different from the policy as to the other. This policy express the motion that
a public office is a public trust and any person who enters upon its discharge does so with the full
knowledge that his life, so far as relevant to his duty, is open to public scrutiny.
WHEREFORE, the decision appealed from is affirmed, without pronouncement as to costs.

BANCO FILIPINO SAVINGS AND MORTGAGE BANK, petitioner, vs. HON. FIDEL PURISIMA, etc.,
and HON. VICENTE ERICTA and JOSE DEL FIERO, etc., respondents.
G.R. No. L-56429 May 28, 1988
FACTS
The verdict in this special civil action of certiorari turns upon the question of whether or not the "Law on
Secrecy of Bank Deposits" 1 precludes production by subpoena duces tecum of bank records of
transactions by or in the names of the wife, children and friends of a special agent of the Bureau of
Customs, accused before theTanodbayan of having allegedly acquired property manifestly out of
proportion to his salary and other lawful income, in violation of the "Anti-Graft and Corrupt Practices Act." 2
The Customs special agent involved is Manuel Caturla, and the accusation against him was filed by the
Bureau of Internal Revenue. 3 In the course of the preliminary investigation thereof, the Tanodbayan issued
a subpoenaduces tecum to the Banco Filipino Savings & Mortgage Bank, commanding its representative to
appear at a specified time at the Office of the Tanodbayan and furnish the latter with duly certified copies
of the records in all its branches and extension offices, of the loans, savings and time deposits and other
banking transactions, dating back to 1969, appearing in the names of Caturla, his wife, Purita Caturla, their
children Manuel, Jr., Marilyn and Michael and/or Pedro Escuyos. 4
Caturla moved to quash the subpoena duces tecum 5 arguing that compliance therewith would result in a
violation of Sections 2 and 3 of the Law on Secrecy of Bank Deposits. Then Tanodbayan Vicente Ericta not
only denied the motion for lack of merit, and directed compliance with the subpoena, 6 but also expanded
its scope through a second subpoena duces tecum, 7 this time requiring production by Banco Filipino of the
bank records in all its branches and extension offices, of Siargao Agro-Industrial Corporation, Pedro
Escuyos or his wife, Emeterio Escuyos, Purita Caturla, Lucia Escuyos or her husband, Romeo Escuyos,
Emerson Escuyos, Fraterno Caturla, Amparo Montilla, Cesar Caturla, Manuel Caturla or his children, Manuel
Jr., Marilyn and Michael, LTD Pub/Restaurant, and Jose Buo or his wife, Evelyn. Two other subpoena of
substantially the same tenor as the second were released by the Tanodbayan's Office. 8 The last required
obedience under sanction of contempt.
The Banco Filipino Savings & Mortgage Bank, hereafter referred to simply as BF Bank, took over from
Caturla in the effort to nullify the subpoenae. It filed a complaint for declaratory relief with the Court of
First Instance of Manila, 9 which was assigned by raffle to the sala of respondent Judge Fidel Purisima. BF
Bank prayed for a judicial declaration as to whether its compliance with the subpoenae duces tecum would
constitute an infringement of the provisions of Sections 2 and 3 of R.A. No. 1405 in relation to Section 8 of
R.A. No. 3019. It also asked that pending final resolution of the question, the Tanodbayan be provisionally
restrained from exacting compliance with the subpoenae.
Respondent Judge Purisima issued an Order denying for lack of merit the application by BF Bank for a
preliminary injunction and/or restraining order. 10
This Order is now impugned in the instant certiorari action instituted by BF Bank before this Court, as
having been issued with grave abuse of discretion, amounting to lack of jurisdiction. It is the bank's theory
that the order declining to grant that remedy operated as a premature adjudication of the very issue raised
in the declaratory suit, and as judicial sufferance of a transgression of the bank deposits statute, and so
constituted grievous error correctible by certiorari. It further argues that subpoenae in question are in the
nature of "fishing expeditions" or "general warrants" since they authorize indiscriminate inquiry into bank
records; that, assuming that such an inquiry is allowed as regards public officials under investigation for a
violation of the Anti-Graft & Corrupt Practices Act, it is constitutionally impermissible with respect to
private individuals or public officials not under investigation on a charge of violating said Act; and that
while prosecution of offenses should not, as a rule, be enjoined, there are recognized exceptions to the
principle one of which is here present, i.e. to avoid multiplicity of suits, similar subpoenae having been
directed to other banks as well.
It is difficult to see how the refusal by the Court a quo to issue the temporary restraining order applied for
by the petitioner in other words, its disagreement with the petitioner's advocated theory could be
deemed so whimsical, capricious, despotic or oppressive an act as to constitute grave abuse of discretion.
Obviously, the writ of certiorari cannot issue simply on a showing of disagreement between a party and the
court upon some material factual or legal issue. There must be a reasonable demonstration that a party's
contentions are so clearly correct, or the court's ruling thereon so clearly wrong, to justify the issuance of a
writ of certiorari. No such demonstration exists in this case. Indeed, for aught that the record shows, the
Court's refusal to grant the application for a restraining order was, in the premises, licit and proper, or its
validity, fairly debatable, at the very least. Be this as it may, on the merits the petitioner cannot succeed.
Its declared theory is untenable.
ISSUE

DEPOSITS
RULING
The provisions of R.A. No. 1405 subject of BF's declaratory action, read as follows:
Sec. 2. All deposits of whatever nature with banks or banking institutions in the Philippines including
investments in bonds issued by the Government of the Philippines, its political subdivisions and its
instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined,
inquired or looked into by any person, government official, bureau or office, except upon written
permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of
bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the
subject matter of litigation.
Sec. 3. It shall be unlawful for any official or employee of a banking institution to disclose to any person
other than those mentioned in Section two hereof any information concerning said deposits
The other provision involved in the declaratory action is Section 8 of R.A. No. 3019. It reads:
Sec. 8. Dismissal due to unexplained wealth. If in accordance with the provisions of Republic Act
Numbered One thousand three hundred seventy-nine, a public official has been found to have acquired
during his incumbency, whether in his name or in the name of other persons, an amount of property and/or
money manifestly out of proportion to this salary and to his other lawful income, that fact shall be a ground
for dismissal or removal. Properties in the name of the spouse and unmarried children of such public
official may be taken into consideration, when their acquisition through legitimate means cannot be
satisfactorily shown. Bank deposits shall be taken into consideration in the enforcement of this section,
notwithstanding any prohibition of law to the contrary.
In our decision in Philippine National Bank v. Gancayco, rendered on September 30, 1966, 11 we upheld the
judgment of the Trial Court "sustaining the power of the defendants (special prosecutors of the Department
of Justice) to compel the disclosure (by PNB) of bank accounts of ACCFA Administrator Jimenez (then under
investigation for unexplained wealth), .. (it being ruled) that, by enacting section 8 of the Anti-Graft and
Corrupt Practices Act, Congress clearly intended to provide an additional ground for the examination of
bank deposits .. (for) without such provision, the .. prosecutors would be hampered if not altogether
frustrated in the prosection of those charged with having acquired unexplained wealth while in public
office. 12 We ourselves declared in said case that 13
.. while Republic Act No. 1405 provides that bank deposits are "absolutely confidential .. and [therefore]
may not be examined, inquired or looked into," except in those cases enumerated therein, the Anti-Graft
Law directs in mandatory terms that bank deposits "shall be taken into consideration in the enforcement of
this section, notwithstanding any provision of law to the contrary." The only conclusion possible is that
section 8 of the Anti-Graft Law is intended to amend section 2 of Republic Act No. 1405 by providing an
additional exception to the rule against the disclosure of bank desposits.
xxx xxx xxx
... Cases of unexplained wealth 14 are similar to cases of bribery or dereliction of duty 15 and no reason is
seen why these two classes of cases cannot be excepted from the rule making bank deposits confidential.
The policy as to one cannot be different from the policy as to the other. This policy expresses the notion
that a public office is a public trust and any person who enters upon its discharge does so with the full
knowledge that his life, so far as relevant to his duty, is open to public scrutiny.
The inquiry into illegally acquired property or property NOT "legitimately acquired" extends to cases
where such property is concealed by being held by or recorded in the name of other persons. This
proposition is made clear by R.A. No. 3019 which quite categorically states that the term, "legitimately
acquired property of a public officer or employee shall not include .. property unlawfully acquired by the
respondent, but its ownership is concealed by its being recorded in the name of, or held by, respondent's
spouse, ascendants, descendants, relatives or any other persons." 16
To sustain the petitioner's theory, and restrict the inquiry only to property held by or in the name of the
government official or employee, or his spouse and unmarried children is unwarranted in the light of the
provisions of the statutes in question, and would make available to persons in government who illegally
acquire property an easy and fool-proof means of evading investigation and prosecution; all they would
have to do would be to simply place the property in the possession or name of persons other than their
spouse and unmarried children. This is an absurdity that we will not ascribe to the lawmakers.
The power of the Tanodbayan to issue subpoenae ad testificandcum and subpoenae duces tecum at the
time in question is not disputed, and at any rate does not admit of doubt. 17 The subpoenae issued by him,
will be sustained against the petitioner's impugnation.
WHEREFORE, the petition for certiorari is DISMISSED, with costs against petitioner.

DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner, vs.FELIPE P. ARCILLA, JR., Respondent.

G.R. No. 161397

June 30, 2005

FELIPE P. ARCILLA, JR., Petitioner, vs.DEVELOPMENT BANK OF THE PHILIPPINES, Respondent.

G.R. No. 161426

June 30, 2005

FACTS
Atty. Felipe P. Arcilla, Jr. was employed by the Development Bank of the Philippines (DBP) in October 1981.
About five or six months thereafter, he was assigned to the legal department, and thereafter, decided to
avail of a loan under the Individual Housing Project (IHP) of the bank. 1 On September 12, 1983, DBP and
Arcilla executed a Deed of Conditional Sale 2 over a parcel of land, as well as the house to be constructed
thereon, for the price ofP160,000.00. Arcilla borrowed the said amount from DBP for the purchase of the lot
and the construction of a residential building thereon. He obliged himself to pay the loan in 25 years, with
a monthly amortization ofP1,417.91, with 9% interest per annum, to be deducted from his monthly salary. 3
DBP obliged itself to transfer the title of the property upon the payment of the loan, including any
increments thereof. It was also agreed therein that if Arcilla availed of optional retirement, he could elect to
continue paying the loan, provided that the loan/amount would be converted into a regular real estate loan
account with the prevailing interest assigned on real estate loans, payable within the remaining term of
the loan account.4
Arcilla was notified of the periodic release of his loan. 5 During the period of July 1984 to December 31,
1986, the monthly amortizations for the said account were deducted from his monthly salary, for which he
was issued receipts.6
The monthly amortization was increased to P1,468.92 in November 1984, and to P1,691.51 beginning
January 1985. However, Arcilla opted to resign from the bank in December 1986. Conformably with the
Deed of Conditional Sale, the bank informed him, on June 11, 1987, that the balance of his loan account
with the bank had been converted to a regular housing loan, thus:
Amount converted
to PHLoan

Interest Rate

Remaining Term

Monthly
Amortization

P 155,218.79 - 1

9%

22 yrs. & 6 mos<

P1,342.72

6,802.45 - 2

9%

21 yrs. & 10 mos.

59.41

24,342.91 - 3

9%

22 yrs.

212.07

Plus: MRI at PC. 41/thousand

P1,614.20
76.41

P186,364.15

Total

P1,690.617
=========

On July 24, 1987, Arcilla signed three Promissory Notes 8 for the total amount of P186,364.15. He was also
obliged to pay service charge and interests, as follows:
a.1 On the amount advanced or balance thereof that remains unpaid for 30 days* or less:
i.

Interest on advances at 7% p.a. over DBP's borrowing cost:

ii.

No 2% service charge

iii.

No 8% penalty charge

a.2 On the amount advanced or balance thereof that remains unpaid for more than 30 days:
i.

Interest
on
the
advance
over DBP's borrowing cost;

at

7%

p.a. ]
]

ii.

One time 2% service charge

-- To be computed from

iii.

Interest on the service charge

the start of the 30-day

iv.

8%
penalty
charge
on
the
of the advances and service charge.9

balances ]

period

Arcilla also agreed to pay to DBP the following:

*Insurance Premiums - 30-day period to be computed from date of advances
Other Advances - 30-day period to be computed from date of notification
b.

Taxes

b.1

One time service charge

2% of the amount advanced

b.2

Interest and penalty charge

Interest
7%
p.a.
over
borrowing
cost
Penalty
charge

8%
p.a.
if
unpaid
after 30 days from date of advance

i.

Interest of the advance at

7% p.a. over DBP's

borrowing costs;

]--

ii.

One time 2% service charge

iii.

Interest on the service charge

iv.

8%
penalty
charge
on
balances of the advance
service charge.

To be computed from start of 30-day period

the ]
and ]
]

*Insurance Premiums - 30-day period to be computed from date of advances.

Other Advances - 30-day period to be computed from date of notification.
b.

Taxes

b.1

One time service charge

2% of the amount advanced

b.2

Interest and penalty charge

Interest
7%
p.a.
over
borrowing
cost
Penalty
charge

8%
p.a.
if
unpaid
after 30 days from date of advance

However, Arcilla also agreed to the reservation by the DBP of its right to increase (with notice to him) the
"rate of interest on the loan, as well as all other fees and charges on loans and advances pursuant to such
policy as it may adopt from time to time during the period of the loan; Provided, that the rate of interest on
the loan shall be reduced by law or by the Monetary Board; Provided, further, that the adjustment in the
rate of interest shall take effect on or after the effectivity of the increase or decrease in the maximum rate
of interest."10
Upon his request, DBP agreed to grant Arcilla an additional cash advance of P32,000.00. Thereafter, on
May 23, 1984, a Supplement to the Conditional Sale Agreement was executed in which DBP and Arcilla
agreed on the following terms of the loan:
Amount

Interest Rate Per Annum

Terms

P32,000.
00

Nine (9%) per cent MRI for 24

P32,000.00 at P0.40/1,000.00
years

P32,000.

same to be consolidated with (Est.

Amortizati
on
P271.57
12.80

00

the
original
advance
in Amort.) P 284.37
accordance with Condition No. 8
======
hereof.11
===

The additional advance was, thus, consolidated to the outstanding balance of Arcilla's original advance,
payable within the remaining term thereof at 9% per annum. However, he failed to pay his loan account,
advances, penalty charges and interests which, as of October 31, 1990, amounted to P241,940.93.12 DBP
rescinded the Deed of Conditional Sale by notarial act on November 27, 1990. 13 Nevertheless, it wrote
Arcilla, on January 3, 1992, giving him until October 24, 1992, within which to repurchase the property
upon full payment of the current appraisal or updated total, whichever is lesser; in case of failure to do so,
the property would be advertised for bidding.14 DBP reiterated the said offer on October 7, 1992. 15 Arcilla
failed to respond. Consequently, the property was advertised for sale at public bidding on February 14,
1994.16
Arcilla filed a complaint against DBP with the Regional Trial Court (RTC) of Antipolo, Rizal, on February 21,
1994. He alleged that DBP failed to furnish him with the disclosure statement required by Republic Act
(R.A.) No. 3765 and Central Bank (CB) Circular No. 158 prior to the execution of the deed of conditional
sale and the conversion of his loan account with the bank into a regular housing loan account. Despite this,
DBP immediately deducted the account from his salary as early as 1984. Moreover, the bank applied its
own formula and imposed its usurious interests, penalties and charges on his loan account and advances.
He further alleged, thus: 13. That when plaintiff could no longer cope-up with defendant's illegal and
usurious impositions, the DBP unilaterally increased further the rate of interest, without notice to the latter,
and heaped-up usurious interests, penalties and charges; 14. That to further bend the back of the plaintiff,
defendant rescinded the subject deed of conditional sale on 4 December 1990 without giving due notice to
plaintiff; 15. That much later, on 10 October 1993, plaintiff received a letter from defendant dated 19
September 1993, informing plaintiff that the subject deed of conditional sale was already rescinded on 4
December 1990 (xerox copy of the same is hereto attached and made an integral part hereof as Annex
"C";17
In its answer to the complaint, the DBP alleged that it substantially complied with R.A. No. 3765 and CB
Circular No. 158 because the details required in said statements were particularly disclosed in the
promissory notes, deed of conditional sale and the required notices sent to Arcilla. In any event, its failure
to comply strictly with R.A. No. 3765 did not affect the validity and enforceability of the subject contracts
or transactions. DBP interposed a counterclaim for the possession of the property.
On April 27, 2001, the trial court rendered judgment in favor of Arcilla and nullified the notarial rescission
of the deeds executed by the parties. DBP appealed the decision to the Court of Appeals (CA). On May 29,
2003, the CA rendered judgment setting aside and reversing the decision of the RTC. In ordering the
dismissal of the complaint, the appellate court ruled that DBP substantially complied with R.A. No. 3765
and CB Circular No. 158. Arcilla filed a motion for reconsideration of the decision. For its part, DBP filed a
motion for partial reconsideration of the decision, praying that Arcilla be ordered to vacate the property.
However, the appellate court denied both motions.
The parties filed separate petitions for review on certiorari with this Court. The first petition,
entitled Development Bank of the Philippines v. Court of Appeals, was docketed as G.R. No. 161397; the
second petition, entitled Felipe Arcilla, Jr. v. Court of Appeals, was docketed as G.R. No. 161426. The Court
resolved to consolidate the two cases.
ISSUES
a) whether or not petitioner DBP complied with the disclosure requirement of R.A. No. 3765 and CB Circular
No. 158, Series of 1978, in the execution of the deed of conditional sale, the supplemental deed of
conditional sale, as well as the promissory notes; and b) whether or not respondent Felipe Arcilla, Jr. is
mandated to vacate the property and pay rentals for his occupation thereof after the notarial rescission of
the deed of conditional sale was rescinded by notarial act, as well as the supplement executed by DBP.
RULING
On the first issue, Arcilla avers that under R.A. No. 3765 and CB Circular No. 158, the DBP, as the creditor
bank, was mandated to furnish him with the requisite information in such form prescribed by the Central
Bank before the commutation of the loan transaction. He avers that the disclosure of the details of the loan
contained in the deed of conditional sale and the supplement thereto, the promissory notes and release
sheet, do not constitute substantial compliance with the law and the CB Circular. He avers that the
required disclosure did not include the following:
[T]he percentage of Finance Charges to Total Amount Financed (Computed in accordance with Sec. 2(i) of
CB Circular 158; the Additional Charges in case certain stipulations in the contract are not met by the
debtor; Total Non-Finance Charges; Total Finance Charges, Effective Interest Rate, etc. 20
Arcilla further posits that the failure of DBP to comply with its obligation under R.A. No. 3765 and CB
Circular No. 158 forecloses its right to rescind the transaction between them, and to demand compliance of

his obligation arising from said transaction. Moreover, the bank had no right to deduct the monthly
amortizations from his salary without first complying with the mandate of R.A. No. 3765.
DBP, on the other hand, avers that all the information required by R.A. No. 3765 was already contained in
the loan transaction documents. It posits that even if it failed to comply strictly with the disclosure
requirement of R.A. No. 3765, nevertheless, under Section 6(b) of the law, the validity and enforceability of
any action or transaction is not affected. It asserts that Arcilla was estopped from invoking R.A. No. 3765
because he failed to demand compliance with R.A. No. 3765 from the bank before the consummation of
the loan transaction, until the time his complaint was filed with the trial court.
In its petition in G.R. No. 161397, DBP asserts that the RTC erred in not rendering judgment on its
counterclaim for the possession of the subject property, and the liability of Arcilla for rentals while in the
possession of the property after the notarial rescission of the deeds of conditional sale. For his part, Arcilla
(in G.R. No. 161426) insists that the respondent failed to comply with its obligation under R.A. No. 3765;
hence, the notarial rescission of the deed of conditional sale and the supplement thereof was null and void.
Until DBP complies with its obligation, he is not obliged to comply with his.
The petition of Arcilla has no merit.
Section 1 of R.A. No. 3765 provides that prior to the consummation of a loan transaction, the bank, as
creditor, is obliged to furnish a client with a clear statement, in writing, setting forth, to the extent
applicable and in accordance with the rules and regulations prescribed by the Monetary Board of the
Central Bank of the Philippines, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person in connection with the
transaction but which are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charges expressed in terms of pesos and centavos; and
(7) the percentage that the finance charge bears to the total amount to be financed expressed as a simple
annual rate on the outstanding unpaid balance of the obligation.
Under Circular No. 158 of the Central Bank, the information required by R.A. No. 3765 shall be included in
the contract covering the credit transaction or any other document to be acknowledged and signed by the
debtor, thus:
The contract covering the credit transaction, or any other document to be acknowledged and signed by the
debtor, shall indicate the above seven items of information. In addition, the contract or document shall
specify additional charges, if any, which will be collected in case certain stipulations in the contract are not
met by the debtor.
Furthermore, the contract or document shall specify additional charges, if any, which will be collected in
case certain stipulations in the contract are not met by the debtor. 21
If the borrower is not duly informed of the data required by the law prior to the consummation of the
availment or drawdown, the lender will have no right to collect such charge or increases thereof, even if
stipulated in the promissory note.22 However, such failure shall not affect the validity or enforceability of
any contract or transaction.23
In the present case, DBP failed to disclose the requisite information in the disclosure statement form
authorized by the Central Bank, but did so in the loan transaction documents between it and Arcilla. There
is no evidence on record that DBP sought to collect or collected any interest, penalty or other charges,
from Arcilla other than those disclosed in the said deeds/documents.1avvphi1.zw+
The Court is convinced that Arcilla's claim of not having been furnished the data/information required by
R.A. No. 3765 and CB Circular No. 158 was but an afterthought. Despite the notarial rescission of the
conditional sale in 1990, and DBP's subsequent repeated offers to repurchase the property, the latter
maintained his silence. Arcilla filed his complaint only on February 21, 1994, or four years after the said
notarial rescission. The Court finds and so holds that the following findings and ratiocinations of the CA are
correct:
After a careful perusal of the records, We find that the appellee had been sufficiently informed of the terms
and the requisite charges necessarily included in the subject loan. It must be stressed that the Truth in
Lending Act (R.A. No. 3765), was enacted primarily "to protect its citizens from a lack of awareness of the
true cost of credit to the user
by using a full disclosure of such cost with a view of preventing the uninformed use of credit to the
detriment of the national economy" (Emata vs. Intermediate Appellate Court, 174, SCRA 464 [1989]; Sec.

2, R.A. No. 3765).Contrary to appellee's claim that he was not sufficiently informed of the details of the
loan, the records disclose that the required informations were readily available in the three (3) promissory
notes he executed. Precisely, the said promissory notes were executed to apprise appellee of the
remaining balance on his loan when the same was converted into a regular housing loan. And on its face,
the promissory notes signed by no less than the appellee readily shows all the data required by the Truth in
Lending Act (R.A. No. 3765).
Apropos, We agree with the appellant that appellee, a lawyer, would not be so gullible or negligent as to
sign documents without knowing fully well the legal implications and consequences of his actions, and that
appellee was a former employee of appellant. As such employee, he is as well presumed knowledgeable
with matters relating to appellant's business and fully cognizant of the terms of the loan he applied for,
including the charges that had to be paid.
It might have been different if the borrower was, say, an ordinary employee eager to buy his first house
and is easily lured into accepting onerous terms so long as the same is payable on installments. In such
cases, the Court would be disposed to be stricter in the application of the Truth in Lending Act, insisting
that the borrower be fully informed of what he is entering into. But in the case at bar, considering
appellee's education and training, We must hold, in the light of the evidence at hand, that he was duly
informed of the necessary charges and fully understood their implications and effects. Consequently, the
trial court's annulment of the rescission anchored on this ground was unjustified. 24
Anent the prayer of DBP to order Arcilla to vacate the property and pay rentals therefor from 1990, a
review of the records has shown that it failed to adduce evidence on the reasonable amount of rentals for
Arcilla's occupancy of the property. Hence, the Court orders a remand of the case to the court of origin, for
the parties to adduce their respective evidence on the bank's counterclaim.
IN LIGHT OF ALL THE FOREGOING, the petition in G.R. No. 161426 is DENIED for lack of merit. The petition
in
G.R.
No.
161397
is
PARTIALLY GRANTED. The case is hereby REMANDED to the Regional Trial Court of Antipolo, Rizal, Branch
73, for it to resolve the counterclaim of the Development Bank of the Philippines for possession of the
property, and for the reasonable rentals for Felipe P. Arcilla, Jr.'s occupancy thereof after the notarial
rescission of the Deed of Conditional Sale in 1990. Costs against petitioner Felipe P. Arcilla, Jr. SO
ORDERED.

THE CONSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK), petitioner, vs. THE
HONORABLE COURT OF APPEALS, GEORGE AND GEORGE TRADE, INC., GEORGE KING TIM PUA
and PUA KE SENG, respondents.
G.R. No. 91494 July 14, 1995
FACTS
On April 22, 1977, defendant George King Tim Pua, in his personal capacity, applied for, and was granted,
by plaintiff bank a loan for the sum of P500,000.00 for which he executed a promissory note (Exhibit 1) for
the same amount, payable on August 22, 1977. On April 29, 1977, defendant George King Tim Pua, in his
personal capacity applied for, and was granted, by the plaintiff bank a loan for the sum of P400,000.00, for
which he executed a promissory note (Exhibit 1-A) for the same amount, payable on August 29, 1979. On
May 6, 1977, defendant George King Tim Pua, in his personal capacity, gain secured a loan from the
plaintiff for the sum of P400,000.00, for which he executed a promissory note (Exhibit 1-B) for the same
amount, payable on September 5, 1977. On February 21, 1977, defendant George King Tim Pua, in his
personal capacity, applied for, and was granted, by the plaintiff bank three (3) separate loans in the
amounts of P220,000.00, P450,000.00 and P65,000.00, for which he executed three separate promissory
notes (Exhibits 1-C to 1-E), payable on May 23, 1977. On January 23, 1979, defendant George and George
Trade Inc., through defendant George King Tim Pua, obtained a loan of P300,000.00 from the plaintiff, for
which defendant George King Tim Pua executed a promissory note (Exhibit A) on behalf of defendant
corporation, with defendants George King Tim Pua and Pua Ke Seng as co-makers, which loan bears an
interest of 13.23% per annum and is payable on June 22, 1979. On April 19, 1979, defendant George and
George Trade Inc., through defendant George King Tim Pua, applied for, and was granted, another loan of
P200,000.00 from the plaintiff bank, for which defendant George King Tim Pua executed a promissory note
(Exhibit B) on behalf of defendant corporation, with defendants George King Tim Pua and Pua Ke Seng as
co-makers, which loan bears an interest of 14% per annum and is payable on May 21, 1979. On August 2,
1979, defendant George and George Trade Inc., through defendant George King Tim Pua, once more
secured a loan for P150,000.00, for which defendant George King Tim Pua executed a promissory note
(Exhibit C) on behalf of defendant corporation, with defendants George King Tim Pua and Pua Ke Seng as
co-makers, which loan bears an interest of 14% per annum and is payable on September 17, 1979.
The three promissory notes (Exhibits A, B and C) covering loans in the corporate account of defendant
George and George Trade Inc. provides (sic) also that in case of default of payment, the defendants agree
to pay interest at an increased rate of 14% per annum on the amount due, compounded monthly, until
fully paid, as well as an additional sum equivalent to 10% of the total amount due as and for attorney's

fees in addition to expenses and costs of suit, such amount to bear interest at the rate of 1% per month
until paid. Under the two promissory notes (Exhibits B and C), the defendants further bound themselves to
pay a penalty at the rate of 3% per annum on the amount due until fully paid. In order to secure the
payment of defendant George King Tim Pua's obligation with the plaintiff, he assigned unto the latter the
proceeds of a fire insurance policy issued by the Kerr Insurance Company in the amount of P2,908,485.00
The proceeds of the insurance policy were subsequently paid to the plaintiff which applied the same to the
personal account of defendant George King Tim Pua. The personal account of defendant George King Tim
Pua was fully satisfied through the remittances of the fire insurance proceeds (Rollo, pp. 53-55). According
to petitioner bank, after it had deducted from the insurance proceeds the entirety of respondent George
King Tim Pua's personal account, there remained of the insurance proceeds the amount of P383,302.42. It
then proceeded to apply said amount to the unpaid loans of respondent George and George Trade, Inc.
which amounted to P671,772.22 as of September 7, 1979, thus leaving a balance of P288,469.80 of the
loans. Petitioner instituted on April 7, 1980 an action (Civil Case No. 130915) against private respondents
before the then Court of First Instance of Manila for the recovery of the unpaid balances on the three
promissory notes, including attorney's fees equivalent to 10% of the amount recoverable. In their Answer
with Special and Affirmative Defenses and Counterclaim, private respondents claimed that the loans had
been extinguished by way of payment through the assignment by respondent George King Tim Pua of the
fire insurance proceeds and that it was in fact petitioner which owed them by reason of its failure to return
to the latter the balance of said insurance proceeds. No amicable settlement having been reached
between the parties, trial ensued. On November 4, 1982, the trial court rendered judgment, finding for
petitioner. On appeal by private respondents, the Court of Appeals reversed the decision of the trial court.
Failing to secure a reconsideration of said decision, petitioner is now before the Court on a petition for
review oncertiorari.
ISSUE
Whether private respondents are indebted to petitioners in the amount of P288,469.80 as held by the then
Court of First Instance of Manila or whether said private respondents are entitled to reimbursement from
petitioner in the amount of P466,182.39 as decreed by the Court of Appeals?
RULING
In the instant case, the findings of fact of the Court of Appeals are contrary to the findings of the trial
court. Under such circumstance, this Court may review the findings of fact of the Court of Appeals and may
scrutinize the evidence on record. The records show that respondent George King Tim Pua had two sets of
accounts with petitioner bank: his personal account and his account for George and George Trade, Inc. For
his personal account, he obtained from petitioner on different dates six separate loans with different due
dates. All of these loans bore a 14% rate of interest, which was to be compounded monthly, in case of
failure on the part of respondent George King Tim Pua to pay on maturity. In which case, he further
undertook to pay an additional sum equivalent to 10% of the total amount due but in no case less than
P200.00 as attorney's fees. The maturity dates of the loans were extended up to either December 1 or
December 5, 1977 and all interests were paid up to March 5, 1978.
Under the account of George and George Trade, Inc., respondent George King Tim Pua, together with his
co-maker, respondent Pua Ke Seng, obtained the following loans. The first loan bore an annual interest of
13.23%, which was to be increased to 14% in case of failure to pay on due date, compounded monthly,
until fully paid. An additional amount equivalent to 10% of the total amount but not less than P200.00 was
to be imposed in case of failure to pay on due date as attorney's fees. The second and third loans bore an
interest rate of 14% per annum and carried a penalty of 3% per annum on the amount due in case of
failure to pay on the date of maturity. An additional sum equivalent to 10% of the total amount due, but
not less than P200.00, was to be imposed as and for attorney's fees. Interest were paid on the loans up to
their date of maturity.
The records further show that payments were made. Based on the foregoing figures, the accounts of
respondents George King Tim Pua and George and George Trade, Inc. with petitioner Bank should stand as
of September 6, 1979. The 14% interest rate charged by petitioner was within the limits set by Section 3 of
the Usury Law, as amended.
The charging of compounded interest has been held as proper as long as the payment thereof has been
agreed upon by the parties. In Mambulao Lumber Company v. Philippine National Bank, 22 SCRA 359
(1968), we ruled that the parties may, by stipulation, capitalize the interest due and unpaid, which as
added principal shall earn new interest. In the instant case, private respondents agreed to the payment of
14% interest per annum, compounded monthly, should they fail to pay the principal loan on the date of
maturity.
As to handling charges, banks are authorized under Central Bank Circular No. 504 to collect such charges
on loans over P500,000.00 with a maturity of 730 days or less at the rate of 2% per annum, on the
principal or the outstanding balance thereof, whichever is lower; 1.75% on loans over P500,000.00 but not
over P1,000,000.00; 1.50% on loans over P1,000,000.00 but not over 2,000,000.00, etc. Section 7 of the
same Circular, however, provides that all banks and non-bank financial intermediaries authorized to
engage in quasi-banking functions are required to strictly adhere to the provisions of Republic Act No. 3765
otherwise known as the "Truth in Lending Act" and shall make the true and effective cost of borrowing an

integral part of every loan contract. The promissory notes signed by private respondents do not contain
any stipulation on the payment of handling charges. Petitioner bank cannot, therefore, charge private
respondents such handling charges.
The payment of penalty is sanctioned by law, although the penalty may be reduced by the courts if it is
iniquitous or unconscionable (Equitable Banking Corporation v. Liwanag, 32 SCRA 293 [1970]). The
payment of penalty was provided for under the terms and conditions of the promissory notes for Loans B
and C of George and George Trade, Inc. The penalty actually imposed, being only 3% per annum of the
unpaid balance of the principal of said Loan B, is considered reasonable and proper.
The same cannot, however, be said of the payment being insisted upon by petitioner of the attorney's fees
stipulated in all the promissory notes, consisting of 10% of the total amount due and payable. A stipulation
regarding the payment of attorney's fees is neither illegal nor immoral and is enforceable as the law
between the parties as long as such stipulation does not contravene law, good morals, good customs,
public order or public policy (Social Security Commission v. Almeda, 168 SCRA 474 [1988]; Reparations
Commission v. Visayan Packing Corporation, 193 SCRA 531 [1991]). As stated in the promissory notes,
respondent George King Tim Pua agreed to pay attorney's fees only "in addition to expenses and costs of
suit." In other words, petitioner is entitled to collect from respondent George King Tim Pua the attorney's
fees agreed upon only in case it was compelled to litigate with third persons or to incur expenses to
protect its interest (China Airlines, Ltd. v. Intermediate Appellate Court, 169 SCRA 226 [1989]; Songcuan v.
Intermediate Appellate Court, 191 SCRA 28 [1990]). These conditions are not obtaining in the case at
bench. There was no need for petitioner to litigate to protect its interest inasmuch as private respondents
had fully paid their obligations months before it filed the complaint for recovery of sum of money. Neither
has it been shown by competent proof that petitioner had to engage the services of a lawyer or incur
expenses in collecting the fire insurance proceeds from Kerr and Company.
The "Tentative Computation" to which respondent George King Tim Pua allegedly affixed his initials to the
item "Attorney's Fees, 10%" cannot be taken as amending the stipulation contained in the promissory
notes on the payment of attorney's fees. The failure of said Tentative Computation to express the true
intent and agreement of the parties thereto was put in issue in the Amended Answer with Special and
Affirmative Defenses and Counterclaim filed by private respondents before the trial court. The
corresponding testimony of respondent George King Tim Pua that he did not understand the import of this
item in the Tentative Computation remains unrebutted.
The award of attorney's fees lies within the discretion of the court and depends upon the circumstances of
each case. However, the discretion of the court to award attorney's fees under Article 2208 of the Civil
Code of the Philippines demands factual, legal and equitable justification, without which the award is a
conclusion without a premise and improperly left to speculation and conjecture. It becomes a violation of
the proscription against the imposition of a penalty on the right to litigate (Universal Shipping Lines, Inc. v.
Intermediate Appellate Court, 188 SCRA 170 [1990]). The reason for the award must be stated in the text
of the court's decision. If it is stated only in the dispositive portion of the decision, the same shall be
disallowed. As to the award of attorney's fees being an exception rather than the rule, it is necessary for
the court to make findings of fact and law that would bring the case within the exception and justify the
grant of the award (Refractories Corporation of the Philippines v. Intermediate Appellate Court, 176 SCRA
539 [1989]).
In this case, the Court of Appeals strictly followed the above-stated standard set by this Court. The award
of P10,000.00 as attorney's fees to private respondents was reasonable and justified as they were
compelled to litigate and incur expenses to protect their interest.
WHEREFORE, the Decision of the Court of Appeals is AFFIRMED with the MODIFICATION that the amount
which petitioner is ordered to reimburse respondent George King Tim Pua is reduced to THREE THOUSAND
SIX HUNDRED SIXTEEN & 65/100 PESOS (P3,616.65), with legal interest thereon from September 8, 1979
until said amount is fully paid. No pronouncement as to costs. SO ORDERED.

NEW SAMPAGUITA BUILDERS CONSTRUCTION, INC. (NSBCI) and Spouses EDUARDO R. DEE and
ARCELITA M. DEE, Petitioners, - versus PHILIPPINE NATIONAL BANK, Respondent.
G.R. No. 148753

July 30, 2004

FACTS
Courts have the authority to strike down or to modify provisions in promissory notes that grant the lenders
unrestrained power to increase interest rates, penalties and other charges at the latters sole discretion
and without giving prior notice to and securing the consent of the borrowers. This unilateral authority is
anathema to the mutuality of contracts and enable lenders to take undue advantage of
borrowers. Although the Usury Law has been effectively repealed, courts may still reduce iniquitous or
unconscionable rates charged for the use of money. Furthermore, excessive interests, penalties and other
charges not revealed in disclosure statements issued by banks, even if stipulated in the promissory notes,
cannot be given effect under the Truth in Lending Act.

The facts are narrated by the CA as follows:

On February 11, 1989, Board Resolution No. 05, Series of 1989 was approved by [Petitioner] NSBCI [1)]
authorizing the company to x x x apply for or secure a commercial loan with the PNB in an aggregate
amount of P8.0M, under such terms agreed by the Bank and the NSBCI, using or mortgaging the real
estate properties registered in the name of its President and Chairman of the Board [Petitioner] Eduardo R.
Dee as collateral; [and] 2) authorizing [petitioner-spouses] to secure the loan and to sign any [and all]
documents which may be required by [Respondent] PNB[,] and that [petitioner-spouses] shall act as
sureties or co-obligors who shall be jointly and severally liable with [Petitioner] NSBCI for the payment of
any [and all] obligations.
On August 15, 1989, Resolution No. 77 was approved by granting the request of [Respondent] PNB thru its
Board NSBCI for an P8 Million loan broken down into a revolving credit line of P7.7M and an unadvised line
of P0.3M for additional operating and working capital [7] to mobilize its various construction projects,
namely: 1)
MWSS Watermain; 2)
NEA-Liberty farm; 3)
Olongapo City Pag-Asa Public Market;
4)
Renovation of COA-NCR Buildings 1, 2 and 9; 5)
Dupels, Inc., Extensive prawn farm
development project; 6)
Banawe Hotel Phase II; 7)
Clark Air Base -- Barracks and Buildings; and
8)
Others: EDSA Lighting, Roxas Blvd. Painting NEA Sapang Palay and Angeles City.
The loan of [Petitioner] NSBCI was secured by a first mortgage on the following: a) three (3) parcels of
residential land located at Mangaldan, Pangasinan with total land area of 1,214 square meters[,] including
improvements thereon and registered under TCT Nos. 128449, 126071, and 126072 of the Registry of
Deeds of Pangasinan; b) six (6) parcels of residential land situated at San Fabian, Pangasinan with total
area of 1,767 square meters[,] including improvements thereon and covered by TCT Nos. 144006, 144005,
120458, 120890, 144161[,] and 121127 of the Registry of Deeds of Pangasinan; and c) a residential lot and
improvements thereon located at Mangaldan, Pangasinan with an area of 4,437 square meters and
covered by TCT No. 140378 of the Registry of Deeds of Pangasinan.
The loan was further secured by the joint and several signatures of [Petitioners] Eduardo Dee and Arcelita
Marquez Dee, who signed as accommodation-mortgagors since all the collaterals were owned by them and
registered in their names.
Moreover [Petitioner] NSBCI executed the following documents, viz: a) promissory note dated June 29,
1989 in the amount of P5,000,000.00 with due date on October 27, 1989; [b)] promissory note dated
September 1, 1989 in the amount of P2,700,000.00 with due date on December 30, 1989; and c)
promissory note dated September 6, 1989 in the amount ofP300,000.00 with maturity date on January 4,
1990.
In addition, [petitioner] corporation also signed the Credit Agreement dated August 31, 1989 relating to
the revolving credit line of P7.7 Million x x x and the Credit Agreement dated September 5, 1989 to
support the unadvised line of P300,000.00.
On August 31, 1989, [petitioner-spouses] executed a Joint and Solidary Agreement (JSA) in favor of
[Respondent] PNB unconditionally and irrevocably binding themselves to be jointly and severally liable
with the borrower for the payment of all sums due and payable to the Bank under the Credit Document.
Later on, [Petitioner] NSBCI failed to comply with its obligations under the promissory notes.
On June 18, 1991, [Petitioner] Eduardo R. Dee on behalf of [Petitioner] NSBCI sent a letter to the Branch
Manager of the PNB Dagupan Branch requesting for a 90-day extension for the payment of interests and
restructuring of its loan for another term.
Subsequently,
NSBCI
tendered
payment
to
[Respondent]
PNB
[of]
three
(3)
checks
aggregating P1,000,000.00, namely 1) check no. 316004 dated August 8, 1991 in the amount
of P200,000.00; 2) check no. 03499997 dated August 8, 1991 in the amount of P650,000.00; and 3) check
no. 03499998 dated August 15, 1991 in the amount of P150,000.00.[8]
In a meeting held on August 12, 1991, [Respondent] PNBs representative[,] Mr. Rolly Cruzabra, was
informed by [Petitioner] Eduardo Dee of his intention to remit to [Respondent] PNB post-dated checks
covering interests, penalties and part of the loan principals of his due account.
On August 22, 1991, [Respondent] banks Crispin Carcamo wrote [Petitioner] Eduardo Dee[,] informing
him that [Petitioner] NSBCIs proposal [was] acceptable[,] provided the total payment should
be P4,128,968.29 that [would] cover the amount of P1,019,231.33 as principal, P3,056,058.03 as interests
and penalties[,] and P53,678.93 for insurance[,] with the issuance of post-dated checks to be dated not
later than November 29, 1991.
On September 6, 1991, [Petitioner] Eduardo Dee wrote the PNB Branch Manager reiterating his proposals
for the settlement of [Petitioner] NSBCIs past due loan account amounting to P7,019,231.33.
[Petitioner] Eduardo Dee later tendered four (4) post-dated Interbank checks aggregating P1,111,306.67
in favor of [Respondent] PNB, viz:
Check No.

Date

Amount

03500087
03500088
03500089
03500090

Sept. 29, 1991

Oct. 29, 1991
Nov. 29, 1991
Dec. 20, 1991

P277,826.70
P277,826.70
P277,826.70
P277,826.57

Upon presentment[,] however, x x x check nos. 03500087 and 03500088 dated September 29 and
October 29, 1991 were dishonored by the drawee bank and returned due [to] a stop payment order from
[petitioners].
On November 12, 1991, PNBs Mr. Carcamo wrote [Petitioner] Eduardo Dee informing him that unless the
dishonored checks [were] made good, said PNB branch shall recall its recommendation to the Head Office
for the restructuring of the loan account and refer the matter to its legal counsel for legal action.
[] [Petitioners] did not heed [respondents] warning and as a result[,] the PNB Dagupan Branch sent
demand letters to [Petitioner] NSBCI at its office address at 1611 ERDC Building, E. Rodriguez Sr. Avenue,
Quezon City[,] asking it to settle its past due loan account.
[Petitioners] nevertheless failed to pay their loan obligations within the [timeframe] given them and as a
result, [Respondent] PNB filed with the Provincial Sheriff of Pangasinan at Lingayen a Petition for Sale
under Act 3135, as amended[,] and Presidential Decree No. 385 dated January 30, 1992.
The notice of extra-judicial sale of the mortgaged properties relating to said PNBs [P]etition for [S]ale was
published in the February 8, 15 and 22, 1992 issues of the Weekly Guardian, allegedly a newspaper of
general circulation in the Province of Pangasinan, including the cities of Dagupan and San Carlos. In
addition[,] copies of the notice were posted in three (3) public places[,] and copies thereof furnished
[Petitioner] NSBCI at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City, [and at] 555 Shaw Blvd.,
Mandaluyong[, Metro Manila;] and [Petitioner] Sps. Eduardo and Arcelita Dee at 213 Wilson St., San Juan,
Metro Manila.
On February 26, 1992, the Provincial Deputy Sheriff Cresencio F. Ferrer of Lingayen, Pangasinan foreclosed
the real estate mortgage and sold at public auction the mortgaged properties of [petitioner-spouses,] with
[Respondent] PNB being declared the highest bidder for the amount of P10,334,000.00.
On March 2, 1992, copies of the Sheriffs Certificate of Sale were sent by registered mail to [petitioner]
corporations address at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City and [petitionerspouses] address at 213 Wilson St., San Juan, Metro Manila.
On April 6, 1992, the PNB Dagupan Branch Manager sent a letter to [petitioners] at their address at 1611
[ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City[,] informing them that the properties securing their
loan account [had] been sold at public auction, that the Sheriffs Certificate of Sale had been registered
with the Registry of Deeds of Pangasinan on March 13, 1992[,] and that a period of one (1) year therefrom
[was] granted to them within which to redeem their properties.
[Petitioners] failed to redeem their properties within the one-year redemption period[,] and so
[Respondent] PNB executed a [D]eed of [A]bsolute [S]ale consolidating title to the properties in its
name. TCT Nos. 189935 to 189944 were later issued to [Petitioner] PNB by the Registry of Deeds of
Pangasinan.
On August 4, 1992, [Respondent] PNB informed [Petitioner] NSBCI that the proceeds of the sale conducted
on February 26, 1992 were not sufficient to cover its total claim amounting to P12,506,476.43[,] and thus
demanded from the latter the deficiency of P2,172,476.43 plus interest and other charges[,] until the
amount [was] fully paid.
[Petitioners] refused to pay the above deficiency claim which compelled [Respondent] PNB to institute the
instant [C]omplaint for the collection of its deficiency claim.
Finding that the PNB debt relief package automatically [granted] to [Petitioner] NSBCI the benefits under
the program, the court a quo ruled in favor of [petitioners] in its Decision dated December 28, 1995.
Reversing the trial court, the CA held that Petitioner NSBCI did not avail itself of respondents debt relief
package (DRP) or take steps to comply with the conditions for qualifying under the program. The appellate
court also ruled that entitlement to the program was not a matter of right, because such entitlement was
still subject to the approval of higher bank authorities, based on their assessment of the borrowers
repayment capability and satisfaction of other requirements. As to the misapplication of loan payments,
the CA held that the subsidiary ledgers of NSBCIs loan accounts with respondent reflected all the loan
proceeds as well as the partial payments that had been applied either to the principal or to the interests,
penalties and other charges. Having been made in the ordinary and usual course of the banking business
of respondent, its entries were presumed accurate, regular and fair under Section 5(q) of Rule 131 of the
Rules of Court. Petitioners failed to rebut this presumption. The increases in the interest rates on NSBCIs
loan were also held to be authorized by law and the Monetary Board and -- like the increases in penalty
rates -- voluntarily and freely agreed upon by the parties in the Credit Agreements they executed. Thus,
these increases were binding upon petitioners. However, after considering that two to three of Petitioner
NSBCIs projects covered by the loan were affected by the economic slowdown in the areas near the
military bases in the cities of Angeles and Olongapo, the appellate court annulled and deleted the

adjustment in penalty from 6 percent to 36 percent per annum. Not only did respondent fail to
demonstrate the existence of market forces and economic conditions that would justify such increases; it
could also have treated petitioners request for restructuring as a request for availment of the
DRP. Consequently, the original penalty rate of 6 percent per annum was used to compute the deficiency
claim. The auction sale could not be set aside on the basis of the inadequacy of the auction price, because
in sales made at public auction, the owner is given the right to redeem the mortgaged properties; the
lower the bid price, the easier it is to effect redemption or to sell such right. The bid price
of P10,334,000.00 vis--vis respondents claim ofP12,506,476.43 was found to be neither shocking nor
unconscionable. The attorneys fees were also reduced by the appellate court from 10 percent to 1 percent
of the total indebtedness. First, there was no extreme difficulty in an extrajudicial foreclosure of a real
estate mortgage, as this proceeding was merely administrative in nature and did not involve a court
litigation contesting the proceedings prior to the auction sale. Second, the attorneys fees were exclusive
of all stipulated costs and fees. Third, such fees were in the nature of liquidated damages that did not
inure to respondents salaried counsel. Respondent was also declared to have the unquestioned right to
foreclose the Real Estate Mortgage. It was allowed to recover any deficiency in the mortgage account not
realized in the foreclosure sale, since petitioner-spouses had agreed to be solidarily liable for all sums due
and payable to respondent. Finally, the appellate court concluded that the extrajudicial foreclosure
proceedings and auction sale were valid for the following reasons: (1) personal notice to the mortgagors,
although unnecessary, was actually made; (2) the notice of extrajudicial sale was duly published and
posted; (3) the extrajudicial sale was conducted through the deputy sheriff, under the direction of the clerk
of court who was concurrently the ex-oficio provincial sheriff and acting as agent of respondent; (4) the
sale was conducted within the province where the mortgaged properties were located; and (5) such sale
was not shown to have been attended by fraud. Hence this Petition. [10]
ISSUES
Whether the loan accounts are bloated; Whether the extrajudicial foreclosure and subsequent claim for
deficiency are valid and proper.
RULING
The Petition is partly meritorious.
First Main Issue: Bloated Loan Accounts
At the outset, it must be stressed that only questions of law [12] may be raised in a petition for review on
certiorari under Rule 45 of the Rules of Court. As a rule, questions of fact cannot be the subject of this
mode of appeal,[13] for [t]he Supreme Court is not a trier of facts. [14] As exceptions to this rule, however,
factual findings of the CA may be reviewed on appeal [15] when, inter alia, the factual inferences are
manifestly mistaken;[16] the judgment is based on a misapprehension of facts; [17] or the CA manifestly
overlooked certain relevant and undisputed facts that, if properly considered, would justify a different legal
conclusion.[18] In the present case, these exceptions exist in various instances, thus prompting us to take
cognizance of factual issues and to decide upon them in the interest of justice and in the exercise of our
sound discretion.[19]
Indeed, Petitioner NSBCIs loan accounts with respondent appear to be bloated with some iniquitous
imposition of interests, penalties, other charges and attorneys fees. To demonstrate this point, the Court
shall take up one by one the promissory notes, the credit agreements and the disclosure statements.
Increases in Interest Baseless
Promissory Notes. In each drawdown, the Promissory Notes specified the interest rate to be charged: 19.5
percent in the first, and 21.5 percent in the second and again in the third. However, a uniform clause
therein permitted respondent to increase the rate within the limits allowed by law at any time depending
on whatever policy it may adopt in the future x x x, [20] without even giving prior notice to petitioners. The
Court holds that petitioners accessory duty to pay interest [21] did not give respondent unrestrained
freedom to charge any rate other than that which was agreed upon. No interest shall be due, unless
expressly stipulated in writing.[22] It would be the zenith of farcicality to specify and agree upon rates that
could be subsequently upgraded at whim by only one party to the agreement.
The unilateral determination and imposition [23] of increased rates is violative of the principle of mutuality
of contracts ordained in Article 1308[24] of the Civil Code.[25] One-sided impositions do not have the force
of law between the parties, because such impositions are not based on the parties essential equality.
Although escalation clauses[26] are valid in maintaining fiscal stability and retaining the value of money on
long-term contracts,[27] giving respondent an unbridled right to adjust the interest independently and
upwardly would completely take away from petitioners the right to assent to an important modification in
their agreement[28] and would also negate the element of mutuality in their contracts. The clause cited
earlier made the fulfillment of the contracts dependent exclusively upon the uncontrolled will [29] of
respondent and was therefore void. Besides, the pro forma promissory notes have the character of
a contract dadhsion,[30] where the parties do not bargain on equal footing, the weaker partys [the
debtors] participation being reduced to the alternative to take it or leave it. [31]

While the Usury Law[32] ceiling on interest rates was lifted by [Central Bank] Circular No. 905, [33] nothing in
the said Circular grants lenders carte blanche authority to raise interest rates to levels which will either
enslave their borrowers or lead to a hemorrhaging of their assets. [34] In fact, we have declared nearly ten
years ago that neither this Circular nor PD 1684, which further amended the Usury Law, authorized either
party to unilaterally raise the interest rate without the others consent. [35]
Moreover, a similar case eight years ago pointed out to the same respondent (PNB) that borrowing
signified a capital transfusion from lending institutions to businesses and industries and was done for the
purpose of stimulating their growth; yet respondents continued unilateral and lopsided policy [36] of
increasing interest rates without the prior assent [37] of the borrower not only defeats this purpose, but
also deviates from this pronouncement. Although such increases are not usurious, since the Usury Law is
now legally inexistent[38] -- the interest ranging from 26 percent to 35 percent in the statements of
account[39] -- must be equitably reduced for being iniquitous, unconscionable and exorbitant. Rates
found to be iniquitous or unconscionable are void, as if it there were no express contract thereon. Above
all, it is undoubtedly against public policy to charge excessively for the use of money.
It cannot be argued that assent to the increases can be implied either from the June 18, 1991 request of
petitioners for loan restructuring or from their lack of response to the statements of account sent by
respondent. Such request does not indicate any agreement to an interest increase; there can be no
implied waiver of a right when there is no clear, unequivocal and decisive act showing such
purpose. Besides, the statements were not letters of information sent to secure their conformity; and even
if we were to presume these as an offer, there was no acceptance. No one receiving a proposal to modify
a loan contract, especially interest -- a vital component -- is obliged to answer the proposal.
Furthermore, respondent did not follow the stipulation in the Promissory Notes providing for the automatic
conversion of the portion that remained unpaid after 730 days -- or two years from date of original release
-- into a medium-term loan, subject to the applicable interest rate to be applied from the dates of original
release.
In the first, second and third Promissory Notes, the amount that remained unpaid as of October 27, 1989,
December 1989 and January 4, 1990 -- their respective due dates -- should have been automatically
converted by respondent into medium-term loans on June 30, 1991, September 2, 1991, and September 7,
1991, respectively. And on this unpaid amount should have been imposed the same interest rate charged
by respondent on other medium-term loans; and the rate applied from June 29, 1989, September 1, 1989
and September 6, 1989 -- their respective original release -- until paid. But these steps were not
taken. Aside from sending demand letters, respondent did not at all exercise its option to enforce
collection as of these Notes due dates. Neither did it renew or extend the account.
In these three Promissory Notes, evidently, no complaint for collection was filed with the courts. It was not
until January 30, 1992 that a Petition for Sale of the mortgaged properties was filed -- with the provincial
sheriff, instead. Moreover, respondent did not supply the interest rate to be charged on medium-term
loans granted by automatic conversion. Because of this deficiency, we shall use the legal rate of 12
percent per annum on loans and forbearance of money, as provided for by CB Circular 416.
Credit Agreements. Aside from the promissory notes, another main document involved in the principal
obligation is the set of credit agreements executed and their annexes.
The first Credit Agreement dated June 19, 1989 -- although offered and admitted in evidence, and even
referred to in the first Promissory Note -- cannot be given weight.
First, it was not signed by respondent through its branch manager. Apparently it was surreptitiously
acknowledged before respondents counsel, who unflinchingly declared that it had been signed by the
parties on every page, although respondents signature does not appear thereon.
Second, it was objected to by petitioners, contrary to the trial courts findings. However, it was not the
Agreement, but the revolving credit line of P5,000,000, that expired one year from the Agreements date of
implementation.
Third, there was no attached annex that contained the General Conditions. Even the Acknowledgment did
not allude to its existence.[59] Thus, no terms or conditions could be added to the Agreement other than
those already stated therein.
Since the first Credit Agreement cannot be given weight, the interest rate on the first availment pegged at
3 percent over and above respondents prime rate [60] on the date of such availment [61] has no bearing at all
on the loan. After the first Notes due date, the rate of 19 percent agreed upon should continue to be
applied on the availment, until its automatic conversion to a medium-term loan.
The second Credit Agreement[62] dated August 31, 1989, provided for interest -- respondents prime rate,
plus the applicable spread[63] in effect as of the date of each availment, [64] on a revolving credit line
of P7,700,000[65] -- but did not state any provision on its increase or decrease. [66] Consequently, petitioners
could not be made to bear interest more than such prime rate plus spread. The Court gives weight to this
second Credit Agreement for the following reasons.

First, this document submitted by respondent was admitted by petitioners. [67] Again, contrary to their
assertion, it was not the Agreement -- but the credit line -- that expired one year from the Agreements
date of implementation.[68] Thus, the terms and conditions continued to apply, even if drawdowns could no
longer be made.
Second, there was no 7-page annex [69] offered in evidence that contained the General Conditions,
[70]
notwithstanding the Acknowledgment of its existence by respondents counsel. Thus, no terms or
conditions could be appended to the Agreement other than those specified therein.
Third, the 12-page General Conditions [71] offered and admitted in evidence had no probative value. There
was no reference to it in the Acknowledgment of the Agreement; neither was respondents signature on
any of the pages thereof. Thus, the General Conditions stipulations on interest adjustment, [72] whether on
a fixed or a floating scheme, had no effect whatsoever on the Agreement. Contrary to the trial courts
findings,[73] the General Condition were correctly objected to by petitioners. [74] The rate of 21.5 percent
agreed upon in the second Note thus continued to apply to the second availment, until its automatic
conversion into a medium-term loan.
The third Credit Agreement[75] dated September 5, 1989, provided for the same rate of interest as that in
the second Agreement. This rate was to be applied to availments of an unadvised line of P300,000. Since
there was no mention in the third Agreement, either, of any stipulation on increases or decreases [76] in
interest, there would be no basis for imposing amounts higher than the prime rate plus spread. Again, the
21.5 percent rate agreed upon would continue to apply to the third availment indicated in the third Note,
until such amount was automatically converted into a medium-term loan.
The Court also finds that, first, although this document was admitted by petitioners,[77] it was the credit line
that expired one year from the implementation of the Agreement. [78] The terms and conditions therein
continued to apply, even if availments could no longer be drawn after expiry.
Second, there was again no 7-page annex[79] offered that contained the General Conditions, [80] regardless of
the Acknowledgment by the same respondents counsel affirming its existence. Thus, the terms and
conditions in this Agreement relating to interest cannot be expanded beyond that which was already laid
down by the parties.
Disclosure Statements. In the present case, the Disclosure Statements [81] furnished by respondent set
forth the same interest rates as those respectively indicated in the Promissory Notes. Although no method
of computation was provided showing how such rates were arrived at, we will nevertheless take up the
Statements seriatim in order to determine the applicable rates clearly.
As to the first Disclosure Statement on Loan/Credit Transaction [82] dated June 13, 1989, we hold that the
19.5 percent effective interest rate per annum [83] would indeed apply to the first availment or drawdown
evidenced by the first Promissory Note. Not only was this Statement issued prior to the consummation of
such availment or drawdown, but the rate shown therein can also be considered equivalent to 3 percent
over and above respondents prime rate in effect. Besides, respondent mentioned no other rate that it
considered to be the prime rate chargeable to petitioners. Even if we disregarded the related Credit
Agreement, we assume that this private transaction between the parties was fair and regular, [84] and that
the ordinary course of business was followed. [85]
As to the second Disclosure Statement on Loan/Credit Transaction[86] dated September 2, 1989, we hold
that the 21.5 percent effective interest rate per annum [87] would definitely apply to the second availment or
drawdown evidenced by the second Promissory Note. Incidentally, this Statement was issued only after
the consummation of its related availment or drawdown, yet such rate can be deemed equivalent to the
prime rate plus spread, as stipulated in the corresponding Credit Agreement. Again, we presume that this
private transaction was fair and regular, and that the ordinary course of business was followed. That the
related Promissory Note was pre-signed would also bolster petitioners claim although, under crossexamination Efren Pozon -- Assistant Department Manager I [88] of PNB, Dagupan Branch -- testified that the
Disclosure Statements were the basis for preparing the Notes. [89]
As to the third Disclosure Statement on Loan/Credit Transaction [90] dated September 6, 1989, we hold that
the same 21.5 percent effective interest rate per annum [91] would apply to the third availment or drawdown
evidenced by the third Promissory Note. This Statement was made available to petitioner-spouses, only
after the related Credit Agreement had been executed, but simultaneously with the consummation of the
Statements related availment or drawdown. Nonetheless, the rate herein should still be regarded as
equivalent to the prime rate plus spread, under the similar presumption that this private transaction was
fair and regular and that the ordinary course of business was followed.
In sum, the three disclosure statements, as well as the two credit agreements considered by this Court, did
not provide for any increase in the specified interest rates. Thus, none would now be permitted. When
cross-examined, Julia Ang-Lopez, Finance Account Analyst II of PNB, Dagupan Branch, even testified that
the bases for computing such rates were those sent by the head office from time to time, and not those
indicated in the notes or disclosure statements. [92]
In addition to the preceding discussion, it is then useless to labor the point that the increase in rates
violates the impairment[93] clause of the Constitution,[94] because the sole purpose of this provision is to
safeguard the integrity of valid contractual agreements against unwarranted interference by the State [95] in

the form of laws. Private individuals intrusions on interest rates is governed by statutory enactments like
the Civil Code.
Penalty, or IncreasesThereof, Unjustified
No penalty charges or increases thereof appear either in the Disclosure Statements [96] or in any of the
clauses in the second and the third Credit Agreements [97] earlier discussed. While a standard penalty
charge of 6 percent per annum has been imposed on the amounts stated in all three Promissory Notes still
remaining unpaid or unrenewed when they fell due, [98] there is no stipulation therein that would justify any
increase in that charges. The effect, therefore, when the borrower is not clearly informed of the Disclosure
Statements -- prior to the consummation of the availment or drawdown -- is that the lender will have no
right to collect upon such charge [99] or increases thereof, even if stipulated in the Notes. The time is now
ripe to give teeth to the often ignored forty-one-year old Truth in Lending Act [100] and thus transform it
from a snivelling paper tiger to a growling financial watchdog of hapless borrowers.
Besides, we have earlier said that the Notes are contracts of adhesion; although not invalid per se, any
apparent ambiguity in the loan contracts -- taken as a whole -- shall be strictly construed against
respondent who caused it.[101]Worse, in the statements of account, the penalty rate has again been
unilaterally increased by respondent to 36 percent without petitioners consent. As a result of its move,
such liquidated damages intended as a penalty shall be equitably reduced by the Court to zilch [102] for
being iniquitous or unconscionable.[103]
Although the first Disclosure Statement was furnished Petitioner NSBCI prior to the execution of the
transaction, it is not a contract that can be modified by the related Promissory Note, but a mere statement
in writing that reflects the true and effective cost of loans from respondent. Novation can never be
presumed,[104] and the animus novandi must appear by express agreement of the parties, or by their acts
that are too clear and unequivocal to be mistaken. [105] To allow novation will surely flout the policy of the
State to protect its citizens from a lack of awareness of the true cost of credit. [106]
With greater reason should such penalty charges be indicated in the second and third Disclosure
Statements, yet none can be found therein. While the charges are issued after the respective availment or
drawdown, the disclosure statements are given simultaneously therewith. Obviously, novation still does
not apply.
Other Charges Unwarranted
In like manner, the other charges imposed by respondent are not warranted. No particular values or rates
of service charge are indicated in the Promissory Notes or Credit Agreements, and no total value or even
the breakdown figures of such non-finance charge are specified in the Disclosure Statements. Moreover,
the provision in the Mortgage that requires the payment of insurance and other charges is neither made
part of nor reflected in such Notes, Agreements, or Statements.[107]
Attorneys Fees Equitably Reduced
We affirm the equitable reduction in attorneys fees. [108] These are not an integral part of the cost of
borrowing, but arise only when collecting upon the Notes becomes necessary. The purpose of these fees is
not to give respondent a larger compensation for the loan than the law already allows, but to protect it
against any future loss or damage by being compelled to retain counsel in-house or not -- to institute
judicial proceedings for the collection of its credit. [109] Courts have has the power[110] to determine their
reasonableness[111] based on quantum meruit[112] and to reduce[113] the amount thereof if excessive.[114]
In addition, the disqualification argument in the Affidavit of Publication raised by petitioners no longer
holds water, inasmuch as Act 496[115] has repealed the Spanish Notarial Law.[116] In the same vein, their
engagement of their counsel in another capacity concurrent with the practice of law is not prohibited, so
long as the roles being assumed by such counsel is made clear to the client. [117] The only reason for this
clarification requirement is that certain ethical considerations operative in one profession may not be so in
the other.[118]
Debt Relief PackageNot Availed Of
We also affirm the CAs disquisition on the debt relief package (DRP).
Respondents Circular is not an outright grant of assistance or extension of payment, [119] but a mere offer
subject to specific terms and conditions.
Petitioner NSBCI failed to establish satisfactorily that it had been seriously and directly affected by the
economic slowdown in the peripheral areas of the then US military bases. Its allegations, devoid of any
verification, cannot lead to a supportable conclusion. In fact, for short-term loans, there is still a need to
conduct a thorough review of the borrowers repayment possibilities. [120]
Neither has Petitioner NSBCI shown enough margin of equity, [121] based on the latest loan value of hard
collaterals,[122] to be eligible for the package. Additional accommodations on an unsecured basis may be
granted only when regular payment amortizations have been established, or when the merits of the credit
application would so justify.[123]

The branch managers recommendation to restructure or extend a total outstanding loan not
exceedingP8,000,000 is not final, but subject to the approval of respondents Branches Department Credit
Committee, chaired by its executive vice-president. [124] Aside from being further conditioned on other
pertinent policies of respondent,[125]such approval nevertheless needs to be reported to its Board of
Directors for confirmation.[126] In fact, under the General Banking Law of 2000, [127] banks shall grant loans
and other credit accommodations only in amounts and for periods of time essential to the effective
completion of operations to be financed, consistent with safe and sound banking practices. [128] The
Monetary Board -- then and now -- still prescribes, by regulation, the conditions and limitations under
which banks may grant extensions or renewals of their loans and other credit accommodations. [129]
Entries in Subsidiary Ledgers Regular and Correct
Contrary to petitioners assertions, the subsidiary ledgers of respondent properly reflected all entries
pertaining to Petitioner NSBCIs loan accounts. In accordance with the Generally Accepted Accounting
Principles (GAAP) for the Banking Industry, [130] all interests accrued or earned on such loans, except those
that were restructured and non-accruing, [131] have been periodically taken into income. [132] Without a
doubt, the subsidiary ledgers in a manual accounting system are mere private documents [133] that support
and are controlled by the general ledger. [134] Such ledgers are neither foolproof nor standard in format, but
are periodically subject to audit. Besides, we go by the presumption that the recording of private
transactions has been fair and regular, and that the ordinary course of business has been followed.
Second Main Issue: Extrajudicial Foreclosure Valid, But Deficiency Claims Excessive
Respondent aptly exercised its option to foreclose the mortgage, [135] after petitioners had failed to pay all
the Notes in full when they fell due.[136] The extrajudicial sale and subsequent proceedings are therefore
valid, but the alleged deficiency claim cannot be recovered.
Auction Price Adequate
In the accessory contract[137] of real mortgage,[138] in which immovable property or real rights thereto are
used as security[139] for the fulfillment of the principal loan obligation, [140] the bid price may be lower than
the propertys fair market value.[141] In fact, the loan value itself is only 70 percent of the appraised value.
[142]
As correctly emphasized by the appellate court, a low bid price will make it easier [143] for the owner to
effect redemption[144] by subsequently reacquiring the property or by selling the right to redeem and thus
recover alleged losses. Besides, the public auction sale has been regularly and fairly conducted, [145]there
has been ample authority to effect the sale, [146] and the Certificates of Title can be relied upon. No
personal notice[147] is even required,[148] because an extrajudicial foreclosure is an action in rem, requiring
only notice by publication and posting, in order to bind parties interested in the foreclosed property. [149]
As no redemption[150] was exercised within one year after the date of registration of the Certificate of Sale
with the Registry of Deeds,[151] respondent -- being the highest bidder -- has the right to a writ of
possession, the final process that will consummate the extrajudicial foreclosure. On the other hand,
petitioner-spouses, who are mortgagors herein, shall lose all their rights to the property. [152]
No Deficiency Claim Receivable
After the foreclosure and sale of the mortgaged property, the Real Estate Mortgage is
extinguished. Although the mortgagors, being third persons, are not liable for any deficiency in the
absence of a contrary stipulation,[153] the action for recovery of such amount -- being clearly sureties to the
principal obligation -- may still be directed against them. [154] However, respondent may impose only the
stipulated interest rates of 19.5 percent and 21.5 percent on the respective availments -- subject to the 12
percent legal rate revision upon automatic conversion into medium-term loans -- plus 1 percent attorneys
fees, without additional charges on penalty, insurance or any increases thereof.
Accordingly, the excessive interest rates in the Statements of Account sent to petitioners are reduced to
19.5 percent and 21.5 percent, as stipulated in the Promissory Notes; upon loan conversion, these rates
are further reduced to the legal rate of 12 percent. Payments made by petitioners are pro-rated, the
charges on penalty and insurance eliminated, and the resulting total unpaid principal and interest
of P6,582,077.70 as of the date of public auction is then subjected to 1 percent attorneys fees. The total
outstanding obligation is compared to the bid price. On the basis of these rates and the comparison made,
the deficiency claim receivable amounting to P2,172,476.43 in fact vanishes. Instead, there is an
overpayment by more than P3 million, as shown in the following Schedules:
In the preparation of the above-mentioned schedules, these basic legal principles were followed:
First, the payments were applied to debts that were already due. [155] Thus, when the first payment was
made and applied on January 5, 1990, all Promissory Notes were already due.
Second, payments of the principal were not made until the interests had been covered. [156] For instance,
the first payment on January 15, 1990 had initially been applied to all interests due on the notes, before
deductions were made from their respective principal amounts. The resulting decrease in interest
balances served as the bases for subsequent pro-ratings.

Third, payments were proportionately applied to all interests that were due and of the same nature and
burden.[157] This legal principle was the rationale for the pro-rated computations shown on Schedule 4.
Fourth, since there was no stipulation on capitalization, no interests due and unpaid were added to the
principal; hence, such interests did not earn any additional interest. [158] The simple -- not compounded -method of interest calculation[159] was used on all Notes until the date of public auction.
In fine, under solutio indebiti[160] or payment by mistake,[161] there is no deficiency receivable in favor of
PNB, but rather an excess claim or surplus [162] payable by respondent; this excess should immediately be
returned to petitioner-spouses or their assigns -- not to mention the buildings and improvements [163] on and
the fruits of the property -- to the end that no one may be unjustly enriched or benefited at the expense of
another.[164] Such surplus is in the amount of P3,686,101.52, computed as follows:
Joint and Solidary Agreement. Contrary to the contention of the petitioner-spouses, their Joint and Solidary
Agreement (JSA)[165] was indubitably a surety, not a guaranty. [166] They consented to be jointly and
severally liable with Petitioner NSBCI -- the borrower -- not only for the payment of all sums due and
payable in favor of respondent, but also for the faithful and prompt performance of all the terms and
conditions thereof.[167] Additionally, the corporate secretary of Petitioner NSBCI certified as early as
February 23, 1989, that the spouses should act as such surety. [168] But, their solidary liability should be
carefully studied, not sweepingly assumed to cover all availments instantly.
First, the JSA was executed on August 31, 1989. As correctly adverted to by petitioners, [169] it covered only
the Promissory Notes of P2,700,000 and P300,000 made after that date. The terms of a contract of
suretyship undeniably determine the suretys liability [170] and cannot extend beyond what is stipulated
therein.[171] Yet, the total amount petitioner-spouses agreed to be held liable for was P7,700,000; by the
time the JSA was executed, the first Promissory Note was still unpaid and was thus brought within the JSAs
ambit.[172]
Second, while the JSA included all costs, charges and expenses that respondent might incur or sustain in
connection with the credit documents, [173] only the interest was imposed under the pertinent Credit
Agreements. Moreover, the relevant Promissory Notes had to be resorted to for proper valuation of the
interests charged.
Third, although the JSA, as a contract of adhesion, should be taken contra proferentum against the party
who may have caused any ambiguity therein, no such ambiguity was found. Petitioner-spouses, who
agreed to be accommodation mortgagors, [174] can no longer be held individually liable for the entire
onerous obligation[175]because, as it turned out, it was respondent that still owed them.
To summarize, to give full force to the Truth in Lending Act, only the interest rates of 19.5 percent and 21.5
percent stipulated in the Promissory Notes may be imposed by respondent on the respective
availments. After 730 days, the portions remaining unpaid are automatically converted into medium-term
loans at the legal rate of 12 percent. In all instances, the simple method of interest computation is
followed. Payments made by petitioners are applied and pro-rated according to basic legal
principles. Charges on penalty and insurance are eliminated, and 1 percent attorneys fees imposed upon
the total unpaid balance of the principal and interest as of the date of public auction. The P2 million
deficiency claim therefore vanishes, and a refund of P3,686,101.52 arises.
WHEREFORE, this Petition is hereby PARTLY GRANTED. The Decision of the Court of Appeals
isAFFIRMED, with the MODIFICATION that PNB is ORDERED to refund the sum of P3,686,101.52
representing the overcollection computed above, plus interest thereon at the legal rate of six percent (6%)
per annum from the filing of the Complaint until the finality of this Decision. After this Decision becomes
final and executory, the applicable rate shall be twelve percent (12%) per annum until its satisfaction. No
costs. SO ORDERED.