Republic of the Philippines
81-31938, David charged petitioners (together with one Robert Marshall and
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-60033 April 4, 1984
TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA SANTOS,
petitioners,
vs.
THE CITY FISCAL OF MANILA, HON. JOSE B. FLAMINIANO, ASST. CITY FISCAL
FELIZARDO N. LOTA and CLEMENT DAVID, respondents.
MAKASIAR, Actg. C.J.:ñé+.£ªwph!1
This is a petition for prohibition and injunction with a prayer for the immediate issuance of
restraining order and/or writ of preliminary injunction filed by petitioners on March 26,
1982.
On March 31, 1982, by virtue of a court resolution issued by this Court on the same date,
a temporary restraining order was duly issued ordering the respondents, their officers,
agents, representatives and/or person or persons acting upon their (respondents') orders
or in their place or stead to refrain from proceeding with the preliminary investigation in
Case No. 8131938 of the Office of the City Fiscal of Manila (pp. 47-48, rec.). On January 24,
1983, private respondent Clement David filed a motion to lift restraining order which was
denied in the resolution of this Court dated May 18, 1983.
As can be gleaned from the above, the instant petition seeks to prohibit public
respondents from proceeding with the preliminary investigation of I.S. No. 81-31938, in
which petitioners were charged by private respondent Clement David, with estafa and
violation of Central Bank Circular No. 364 and related regulations regarding foreign
exchange transactions principally, on the ground of lack of jurisdiction in that the
allegations of the charged, as well as the testimony of private respondent's principal
witness and the evidence through said witness, showed that petitioners' obligation is civil
in nature.
For purposes of brevity, We hereby adopt the antecedent facts narrated by the Solicitor
General in its Comment dated June 28,1982, as follows:têñ.£îhqwâ£
On December 23,1981, private respondent David filed I.S. No. 81-31938 in the Office of
the City Fiscal of Manila, which case was assigned to respondent Lota for preliminary
investigation (Petition, p. 8).
In I.S. No.
the following directors of the Nation Savings and Loan Association, Inc., namely Homero
Gonzales, Juan Merino, Flavio Macasaet, Victor Gomez, Jr., Perfecto Manalac, Jaime V. Paz,
Paulino B. Dionisio, and one John Doe) with estafa and violation of Central Bank Circular
No. 364 and related Central Bank regulations on foreign exchange transactions, allegedly
committed as follows (Petition, Annex "A"):têñ.£îhqwâ£
"From March 20, 1979 to March, 1981, David invested with the Nation Savings and Loan
Association, (hereinafter called NSLA) the sum of P1,145,546.20 on nine deposits,
P13,531.94 on savings account deposits (jointly with his sister, Denise Kuhne),
US$10,000.00 on time deposit, US$15,000.00 under a receipt and guarantee of payment
and US$50,000.00 under a receipt dated June 8, 1980 (au jointly with Denise Kuhne), that
David was induced into making the aforestated investments by Robert Marshall an
Australian national who was allegedly a close associate of petitioner Guingona Jr., then
NSLA President, petitioner Martin, then NSLA Executive Vice-President of NSLA and
petitioner Santos, then NSLA General Manager; that on March 21, 1981 N LA was placed
under receivership by the Central Bank, so that David filed claims therewith for his
investments and those of his sister; that on July 22, 1981 David received a report from the
Central Bank that only P305,821.92 of those investments were entered in the records of
NSLA; that, therefore, the respondents in I.S. No. 81-31938 misappropriated the balance
of the investments, at the same time violating Central Bank Circular No. 364 and related
Central Bank regulations on foreign exchange transactions; that after demands, petitioner
Guingona Jr. paid only P200,000.00, thereby reducing the amounts misappropriated to
P959,078.14 and US$75,000.00."
Petitioners, Martin and Santos, filed a joint counter-affidavit (Petition, Annex' B') in which
they stated the following.têñ.£îhqwâ£
"That Martin became President of NSLA in March 1978 (after the resignation of Guingona,
Jr.) and served as such until October 30, 1980, while Santos was General Manager up to
November 1980; that because NSLA was urgently in need of funds and at David's
insistence, his investments were treated as special- accounts with interest above the legal
rate, an recorded in separate confidential documents only a portion of which were to be
reported because he did not want the Australian government to tax his total earnings (nor)
to know his total investments; that all transactions with David were recorded except the
sum of US$15,000.00 which was a personal loan of Santos; that David's check for
US$50,000.00 was cleared through Guingona, Jr.'s dollar account because NSLA did not
have one, that a draft of US$30,000.00 was placed in the name of one Paz Roces because
of a pending transaction with her; that the Philippine Deposit Insurance Corporation had
already reimbursed David within the legal limits; that majority of the stockholders of NSLA
had filed Special Proceedings No. 82-1695 in the Court of First Instance to contest its
(NSLA's) closure; that after NSLA was placed under receivership, Martin executed a
promissory note in David's favor and caused the transfer to him of a nine and on behalf (9
1/2) carat diamond ring with a net value of P510,000.00; and, that the liabilities of NSLA to
David were civil in nature."
1
Petitioner, Guingona, Jr., in his counter-affidavit (Petition, Annex' C') stated the
following:têñ.£îhqwâ£
"That he had no hand whatsoever in the transactions between David and NSLA since he
(Guingona Jr.) had resigned as NSLA president in March 1978, or prior to those
transactions; that he assumed a portion o; the liabilities of NSLA to David because of the
latter's insistence that he placed his investments with NSLA because of his faith in
Guingona, Jr.; that in a Promissory Note dated June 17, 1981 (Petition, Annex "D") he
(Guingona, Jr.) bound himself to pay David the sums of P668.307.01 and US$37,500.00 in
stated installments; that he (Guingona, Jr.) secured payment of those amounts with
second mortgages over two (2) parcels of land under a deed of Second Real Estate
Mortgage (Petition, Annex "E") in which it was provided that the mortgage over one (1)
parcel shall be cancelled upon payment of one-half of the obligation to David; that he
(Guingona, Jr.) paid P200,000.00 and tendered another P300,000.00 which David refused
to accept, hence, he (Guingona, Jr.) filed Civil Case No. Q-33865 in the Court of First
Instance of Rizal at Quezon City, to effect the release of the mortgage over one (1) of the
two parcels of land conveyed to David under second mortgages."
At the inception of the preliminary investigation before respondent Lota, petitioners
moved to dismiss the charges against them for lack of jurisdiction because David's claims
allegedly comprised a purely civil obligation which was itself novated. Fiscal Lota denied
the motion to dismiss (Petition, p. 8).
But, after the presentation of David's principal witness, petitioners filed the instant petition
because: (a) the production of the Promisory Notes, Banker's Acceptance, Certificates of
Time Deposits and Savings Account allegedly showed that the transactions between David
and NSLA were simple loans, i.e., civil obligations on the part of NSLA which were novated
when Guingona, Jr. and Martin assumed them; and (b) David's principal witness allegedly
testified that the duplicate originals of the aforesaid instruments of indebtedness were all
on file with NSLA, contrary to David's claim that some of his investments were not record
(Petition, pp. 8-9).
Petitioners alleged that they did not exhaust available administrative remedies because to
do so would be futile (Petition, p. 9) [pp. 153-157, rec.].
As correctly pointed out by the Solicitor General, the sole issue for resolution is whether
public respondents acted without jurisdiction when they investigated the charges (estafa
and violation of CB Circular No. 364 and related regulations regarding foreign exchange
transactions) subject matter of I.S. No. 81-31938.
There is merit in the contention of the petitioners that their liability is civil in nature and
therefore, public respondents have no jurisdiction over the charge of estafa.
A casual perusal of the December 23, 1981 affidavit. complaint filed in the Office of the
City Fiscal of Manila by private respondent David against petitioners Teopisto Guingona,
Jr., Antonio I. Martin and Teresita G. Santos, together with one Robert Marshall and the
other directors of the Nation Savings and Loan Association, will show that from March 20,
1979 to March, 1981, private respondent David, together with his sister, Denise Kuhne,
invested with the Nation Savings and Loan Association the sum of P1,145,546.20 on time
deposits covered by Bankers Acceptances and Certificates of Time Deposits and the sum
of P13,531.94 on savings account deposits covered by passbook nos. 6-632 and 29-742,
or a total of P1,159,078.14 (pp. 15-16, roc.). It appears further that private respondent
David, together with his sister, made investments in the aforesaid bank in the amount of
US$75,000.00 (p. 17, rec.).
Moreover, the records reveal that when the aforesaid bank was placed under receivership
on March 21, 1981, petitioners Guingona and Martin, upon the request of private
respondent David, assumed the obligation of the bank to private respondent David by
executing on June 17, 1981 a joint promissory note in favor of private respondent
acknowledging an indebtedness of Pl,336,614.02 and US$75,000.00 (p. 80, rec.). This
promissory note was based on the statement of account as of June 30, 1981 prepared by
the private respondent (p. 81, rec.). The amount of indebtedness assumed appears to be
bigger than the original claim because of the added interest and the inclusion of other
deposits of private respondent's sister in the amount of P116,613.20.
Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to divide the said
indebtedness, and petitioner Guingona executed another promissory note antedated to
June 17, 1981 whereby he personally acknowledged an indebtedness of P668,307.01 (1/2
of P1,336,614.02) and US$37,500.00 (1/2 of US$75,000.00) in favor of private respondent
(p. 25, rec.). The aforesaid promissory notes were executed as a result of deposits made
by Clement David and Denise Kuhne with the Nation Savings and Loan Association.
Furthermore, the various pleadings and documents filed by private respondent David,
before this Court indisputably show that he has indeed invested his money on time and
savings deposits with the Nation Savings and Loan Association.
It must be pointed out that when private respondent David invested his money on nine.
and savings deposits with the aforesaid bank, the contract that was perfected was a
contract of simple loan or mutuum and not a contract of deposit. Thus, Article 1980 of the
New Civil Code provides that:têñ.£îhqwâ£
Article 1980. Fixed, savings, and current deposits of-money in banks and similar
institutions shall be governed by the provisions concerning simple loan.
In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119 [1975], We
said:têñ.£îhqwâ£
It should be noted that fixed, savings, and current deposits of money in banks and similar
institutions are hat true deposits. are considered simple loans and, as such, are not
preferred credits (Art. 1980 Civil Code; In re Liquidation of Mercantile Batik of China Tan
Tiong Tick vs. American Apothecaries Co., 66 Phil 414; Pacific Coast Biscuit Co. vs. Chinese
Grocers Association 65 Phil. 375; Fletcher American National Bank vs. Ang Chong UM 66
2
PWL 385; Pacific Commercial Co. vs. American Apothecaries Co., 65 PhiL 429; Gopoco "Commodatum is essentially gratuitous.
Grocery vs. Pacific Coast Biscuit CO.,65 Phil. 443)."
"Simple loan may be gratuitous or with a stipulation to pay interest.
This Court also declared in the recent case of Serrano vs. Central Bank of the Philippines
(96 SCRA 102 [1980]) that:têñ.£îhqw⣠"In commodatum the bailor retains the ownership of the thing loaned while in simple loan,
ownership passes to the borrower.
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 "Art. 1953. — A person who receives a loan of money or any other fungible thing acquires
treated as loans and are to be covered by the law on loans (Art. 1980 Civil Code Gullas vs. the ownership thereof, and is bound to pay to the creditor an equal amount of the same
Phil. National Bank, 62 Phil. 519). Current and saving deposits, are loans to a bank kind and quality."
because it can use the same. The petitioner here in making time deposits that earn
interests will respondent Overseas Bank of Manila was in reality a creditor of the
respondent Bank and not a depositor. The respondent Bank was in turn a debtor of
It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as
petitioner. Failure of the respondent Bank to honor the time deposit is failure to pay its
contrasted to commodatum the borrower acquires ownership of the money, goods or
obligation as a debtor and not a breach of trust arising from a depositary's failure to return personal property borrowed Being the owner, the borrower can dispose of the thing
the subject matter of the deposit (Emphasis supplied). borrowed (Article 248, Civil Code) and his act will not be considered misappropriation
thereof' (Yam vs. Malik, 94 SCRA 30, 34 [1979]; Emphasis supplied).
Hence, the relationship between the private respondent and the Nation Savings and Loan
But even granting that the failure of the bank to pay the time and savings deposits of
Association is that of creditor and debtor; consequently, the ownership of the amount
private respondent David would constitute a violation of paragraph 1(b) of Article 315 of
deposited was transmitted to the Bank upon the perfection of the contract and it can make
the Revised Penal Code, nevertheless any incipient criminal liability was deemed avoided,
use of the amount deposited for its banking operations, such as to pay interests on
because when the aforesaid bank was placed under receivership by the Central Bank,
deposits and to pay withdrawals. While the Bank has the obligation to return the amount
petitioners Guingona and Martin assumed the obligation of the bank to private respondent
deposited, it has, however, no obligation to return or deliver the same money that was
David, thereby resulting in the novation of the original contractual obligation arising from
deposited. And, the failure of the Bank to return the amount deposited will not constitute
deposit into a contract of loan and converting the original trust relation between the bank
estafa through misappropriation punishable under Article 315, par. l(b) of the Revised
and private respondent David into an ordinary debtor-creditor relation between the
Penal Code, but it will only give rise to civil liability over which the public respondents have
petitioners and private respondent. Consequently, the failure of the bank or petitioners
no- jurisdiction.
Guingona and Martin to pay the deposits of private respondent would not constitute a
breach of trust but would merely be a failure to pay the obligation as a debtor.
WE have already laid down the rule that:têñ.£îhqwâ£
Moreover, while it is true that novation does not extinguish criminal liability, it may
In order that a person can be convicted under the above-quoted provision, it must be however, prevent the rise of criminal liability as long as it occurs prior to the filing of the
proven that he has the obligation to deliver or return the some money, goods or personal criminal information in court. Thus, in Gonzales vs. Serrano ( 25 SCRA 64, 69 [1968]) We
property that he received Petitioners had no such obligation to return the same money, held that:têñ.£îhqwâ£
i.e., the bills or coins, which they received from private respondents. This is so because as
clearly as stated in criminal complaints, the related civil complaints and the supporting
As pointed out in People vs. Nery, novation prior to the filing of the criminal information —
sworn statements, the sums of money that petitioners received were loans.
as in the case at bar — may convert the relation between the parties into an ordinary
creditor-debtor relation, and place the complainant in estoppel to insist on the original
The nature of simple loan is defined in Articles 1933 and 1953 of the Civil transaction or "cast doubt on the true nature" thereof.
Code.têñ.£îhqwâ£
Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA 578, 580-581
"Art. 1933. — By the contract of loan, one of the parties delivers to another, either [1983] ), this Court reiterated the ruling in People vs. Nery ( 10 SCRA 244 [1964] ),
something not consumable so that the latter may use the same for a certain time- and declaring that:têñ.£îhqwâ£
return it, in which case the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount of the same kind and quality
The novation theory may perhaps apply prior to the filling of the criminal information in
shall he paid in which case the contract is simply called a loan or mutuum.
court by the state prosecutors because up to that time the original trust relation may be
3
converted by the parties into an ordinary creditor-debtor situation, thereby placing the
complainant in estoppel to insist on the original trust. But after the justice authorities have
taken cognizance of the crime and instituted action in court, the offended party may no
longer divest the prosecution of its power to exact the criminal liability, as distinguished
from the civil. The crime being an offense against the state, only the latter can renounce it
(People vs. Gervacio, 54 Off. Gaz. 2898; People vs. Velasco, 42 Phil. 76; U.S. vs. Montanes,
8 Phil. 620).
It may be observed in this regard that novation is not one of the means recognized by the
Penal Code whereby criminal liability can be extinguished; hence, the role of novation may
only be to either prevent the rise of criminal habihty or to cast doubt on the true nature of
the original basic transaction, whether or not it was such that its breach would not give
rise to penal responsibility, as when money loaned is made to appear as a deposit, or other
similar disguise is resorted to (cf. Abeto vs. People, 90 Phil. 581; U.S. vs. Villareal, 27 Phil.
481).
In the case at bar, there is no dispute that petitioners Guingona and Martin executed a
promissory note on June 17, 1981 assuming the obligation of the bank to private
respondent David; while the criminal complaint for estafa was filed on December 23, 1981
with the Office of the City Fiscal. Hence, it is clear that novation occurred long before the
filing of the criminal complaint with the Office of the City Fiscal.
Consequently, as aforestated, any incipient criminal liability would be avoided but there
will still be a civil liability on the part of petitioners Guingona and Martin to pay the
assumed obligation.
Petitioners herein were likewise charged with violation of Section 3 of Central Bank
Circular No. 364 and other related regulations regarding foreign exchange transactions by
accepting foreign currency deposit in the amount of US$75,000.00 without authority from
the Central Bank. They contend however, that the US dollars intended by respondent
David for deposit were all converted into Philippine currency before acceptance and
deposit into Nation Savings and Loan Association.
Petitioners' contention is worthy of behelf for the following reasons:
1. It appears from the records that when respondent David was about to make a deposit
of bank draft issued in his name in the amount of US$50,000.00 with the Nation Savings
and Loan Association, the same had to be cleared first and converted into Philippine
currency. Accordingly, the bank draft was endorsed by respondent David to petitioner
Guingona, who in turn deposited it to his dollar account with the Security Bank and Trust
Company. Petitioner Guingona merely accommodated the request of the Nation Savings
and loan Association in order to clear the bank draft through his dollar account because
the bank did not have a dollar account. Immediately after the bank draft was cleared,
petitioner Guingona authorized Nation Savings and Loan Association to withdraw the same
in order to be utilized by the bank for its operations.
2. It is safe to assume that the U.S. dollars were converted first into Philippine pesos
before they were accepted and deposited in Nation Savings and Loan Association, because
the bank is presumed to have followed the ordinary course of the business which is to
accept deposits in Philippine currency only, and that the transaction was regular and fair,
in the absence of a clear and convincing evidence to the contrary (see paragraphs p and q,
Sec. 5, Rule 131, Rules of Court).
3. Respondent David has not denied the aforesaid contention of herein petitioners despite
the fact that it was raised. in petitioners' reply filed on May 7, 1982 to private respondent's
comment and in the July 27, 1982 reply to public respondents' comment and reiterated in
petitioners' memorandum filed on October 30, 1982, thereby adding more support to the
conclusion that the US$75,000.00 were really converted into Philippine currency before
they were accepted and deposited into Nation Savings and Loan Association. Considering
that this might adversely affect his case, respondent David should have promptly denied
petitioners' allegation.
In conclusion, considering that the liability of the petitioners is purely civil in nature and
that there is no clear showing that they engaged in foreign exchange transactions, We
hold that the public respondents acted without jurisdiction when they investigated the
charges against the petitioners. Consequently, public respondents should be restrained
from further proceeding with the criminal case for to allow the case to continue, even if
the petitioners could have appealed to the Ministry of Justice, would work great injustice
to petitioners and would render meaningless the proper administration of justice.
While as a rule, the prosecution in a criminal offense cannot be the subject of prohibition
and injunction, this court has recognized the resort to the extraordinary writs of
prohibition and injunction in extreme cases, thus:têñ.£îhqwâ£
On the issue of whether a writ of injunction can restrain the proceedings in Criminal Case
No. 3140, the general rule is that "ordinarily, criminal prosecution may not be blocked by
court prohibition or injunction." Exceptions, however, are allowed in the following
instances:têñ.£îhqwâ£
"1. for the orderly administration of justice;
"2. to prevent the use of the strong arm of the law in an oppressive and vindictive manner;
"3. to avoid multiplicity of actions;
"4. to afford adequate protection to constitutional rights;
"5. in proper cases, because the statute relied upon is unconstitutional or was held invalid"
( Primicias vs. Municipality of Urdaneta, Pangasinan, 93 SCRA 462, 469-470 [1979]; citing
Ramos vs. Torres, 25 SCRA 557 [1968]; and Hernandez vs. Albano, 19 SCRA 95, 96
[1967]).
4
Likewise, in Lopez vs. The City Judge, et al. ( 18 SCRA 616, 621-622 [1966]), We held
that:têñ.£îhqwâ£

The writs of certiorari and prohibition, as extraordinary legal remedies, are in the ultimate
analysis, intended to annul void proceedings; to prevent the unlawful and oppressive
exercise of legal authority and to provide for a fair and orderly administration of justice.
Thus, in Yu Kong Eng vs. Trinidad, 47 Phil. 385, We took cognizance of a petition for
certiorari and prohibition although the accused in the case could have appealed in due
time from the order complained of, our action in the premises being based on the public
welfare policy the advancement of public policy. In Dimayuga vs. Fajardo, 43 Phil. 304, We
also admitted a petition to restrain the prosecution of certain chiropractors although, if
convicted, they could have appealed. We gave due course to their petition for the orderly
administration of justice and to avoid possible oppression by the strong arm of the law.
And in Arevalo vs. Nepomuceno, 63 Phil. 627, the petition for certiorari challenging the
trial court's action admitting an amended information was sustained despite the
availability of appeal at the proper time.

WHEREFORE, THE PETITION IS HEREBY GRANTED; THE TEMPORARY RESTRAINING

ORDER PREVIOUSLY ISSUED IS MADE PERMANENT. COSTS AGAINST THE PRIVATE
RESPONDENT.

SO ORDERED.1äwphï1.ñët

5
THIRD DIVISION issued to him by a certain Willy Cheng from Tarlac. The check was duly entered in his bank
record thereby making his balance in the amount of P297,000.00, as of October 1, 1990,
[G.R. No. 156940. December 14, 2004] from his original deposit of P196,000.00. Allegedly, upon advice and instruction of the
BANK that the P101,000.00 check was already cleared and backed up by sufficient funds,
TAN, on the same date, withdrew the sum of P240,000.00, leaving a balance of
ASSOCIATED BANK (Now WESTMONT BANK), petitioner, vs. VICENTE HENRY
P57,793.45. A day after, TAN deposited the amount of P50,000.00 making his existing
TAN, respondent.
balance in the amount of P107,793.45, because he has issued several checks to his
business partners, to wit:
DECISION
CHECK NUMBERS DATE AMOUNT
PANGANIBAN, J.:
a. 138814 Sept. 29, 1990 P9,000.00
While banks are granted by law the right to debit the value of a dishonored check from a b. 138804 Oct. 8, 1990 9,350.00
depositors account, they must do so with the highest degree of care, so as not to prejudice c. 138787 Sept. 30, 1990 6,360.00
the depositor unduly. d. 138847 Sept. 29, 1990 21,850.00
e. 167054 Sept. 29, 1990 4,093.40
The Case f. 138792 ` Sept. 29, 1990 3,546.00
g. 138774 Oct. 2, 1990 6,600.00
h. 167072 Oct. 10, 1990 9,908.00
Before us is a Petition for Review1[1] under Rule 45 of the Rules of Court, assailing the
i. 168802 Oct. 10, 1990 3,650.00
January 27, 2003 Decision2[2] of the Court of Appeals (CA) in CA-GR CV No. 56292. The
CA disposed as follows:
However, his suppliers and business partners went back to him alleging that the checks he
issued bounced for insufficiency of funds. Thereafter, TAN, thru his lawyer, informed the
WHEREFORE, premises considered, the Decision dated December 3, 1996, of the
BANK to take positive steps regarding the matter for he has adequate and sufficient funds
Regional Trial Court of Cabanatuan City, Third Judicial Region, Branch 26, in Civil Case No.
to pay the amount of the subject checks. Nonetheless, the BANK did not bother nor offer
892-AF is hereby AFFIRMED. Costs against the [petitioner].3[3]
any apology regarding the incident. Consequently, TAN, as plaintiff, filed a Complaint for
Damages on December 19, 1990, with the Regional Trial Court of Cabanatuan City, Third
The Facts Judicial Region, docketed as Civil Case No. 892-AF, against the BANK, as defendant.

The CA narrated the antecedents as follows:
Vicente Henry Tan (hereafter TAN) is a businessman and a regular depositor-creditor of
the Associated Bank (hereinafter referred to as the BANK). Sometime in September 1990,
he deposited a postdated UCPB check with the said BANK in the amount of P101,000.00
In his [C]omplaint, [respondent] maintained that he ha[d] sufficient funds to pay the
subject checks and alleged that his suppliers decreased in number for lack of trust. As he
has been in the business community for quite a time and has established a good record of
reputation and probity, plaintiff claimed that he suffered embarrassment, humiliation,
besmirched reputation, mental anxieties and sleepless nights because of the said
unfortunate incident. [Respondent] further averred that he continuously lost profits in the
amount of P250,000.00. [Respondent] therefore prayed for exemplary damages and that
[petitioner] be ordered to pay him the sum of P1,000,000.00 by way of moral damages,
P250,000.00 as lost profits, P50,000.00 as attorneys fees plus 25% of the amount claimed
including P1,000.00 per court appearance.

Meanwhile, [petitioner] filed a Motion to Dismiss on February 7, 1991, but the same was
denied for lack of merit in an Order dated March 7, 1991. Thereafter, [petitioner] BANK on
March 20, 1991 filed its Answer denying, among others, the allegations of [respondent]
and alleged that no banking institution would give an assurance to any of its
client/depositor that the check deposited by him had already been cleared and backed up
by sufficient funds but it could only presume that the same has been honored by the

6
drawee bank in view of the lapse of time that ordinarily takes for a check to be cleared. For
its part, [petitioner] alleged that on October 2, 1990, it gave notice to the [respondent] as
to the return of his UCPB check deposit in the amount of P101,000.00, hence, on even
date, [respondent] deposited the amount of P50,000.00 to cover the returned check.
By way of affirmative defense, [petitioner] averred that [respondent] had no cause of
action against it and argued that it has all the right to debit the account of the [respondent]
by reason of the dishonor of the check deposited by the [respondent] which was
withdrawn by him prior to its clearing. [Petitioner] further averred that it has no liability
with respect to the clearing of deposited checks as the clearing is being undertaken by the
Central Bank and in accepting [the] check deposit, it merely obligates itself as depositors
collecting agent subject to actual payment by the drawee bank. [Petitioner] therefore
prayed that [respondent] be ordered to pay it the amount of P1,000,000.00 by way of loss
of goodwill, P7,000.00 as acceptance fee plus P500.00 per appearance and by way of
attorneys fees.
Affirming the trial court, the CA ruled that the bank should not have authorized the
withdrawal of the value of the deposited check prior to its clearing. Having done so,
contrary to its obligation to treat respondents account with meticulous care, the bank
violated its own policy. It thereby took upon itself the obligation to officially inform
respondent of the status of his account before unilaterally debiting the amount of
P101,000. Without such notice, it is estopped from blaming him for failing to fund his
account.
The CA opined that, had the P101,000 not been debited, respondent would have had
sufficient funds for the postdated checks he had issued. Thus, the supposed
accommodation accorded by petitioner to him is the proximate cause of his business woes
and shame, for which it is liable for damages.
Because of the banks negligence, the CA awarded respondent moral damages of P100,000.
It also granted him exemplary damages of P75,000 and attorneys fees of P25,000.

Considering that Westmont Bank has taken over the management of the affairs/properties Hence this Petition.5[5]
of the BANK, [respondent] on October 10, 1996, filed an Amended Complaint reiterating
substantially his allegations in the original complaint, except that the name of the previous
Issue
defendant ASSOCIATED BANK is now WESTMONT BANK.

In its Memorandum, petitioner raises the sole issue of whether or not the petitioner, which
Trial ensured and thereafter, the court rendered its Decision dated December 3, 1996 in
is acting as a collecting bank, has the right to debit the account of its client for a check
favor of the [respondent] and against the [petitioner], ordering the latter to pay the
deposit which was dishonored by the drawee bank.6[6]
[respondent] the sum of P100,000.00 by way of moral damages, P75,000.00 as exemplary
damages, P25,000.00 as attorneys fees, plus the costs of this suit. In making said ruling, it
was shown that [respondent] was not officially informed about the debiting of the The Courts Ruling
P101,000.00 [from] his existing balance and that the BANK merely allowed the
[respondent] to use the fund prior to clearing merely for accommodation because the The Petition has no merit.
BANK considered him as one of its valued clients. The trial court ruled that the bank
manager was negligent in handling the particular checking account of the [respondent]
Sole Issue:
stating that such lapses caused all the inconveniences to the [respondent]. The trial court
Debit of Depositors Account
also took into consideration that [respondents] mother was originally maintaining with the
x x x BANK [a] current account as well as [a] time deposit, but [o]n one occasion, although
his mother made a deposit, the same was not credited in her favor but in the name of Petitioner-bank contends that its rights and obligations under the present set of facts were
another.4[4] misappreciated by the CA. It insists that its right to debit the amount of the dishonored
check from the account of respondent is clear and unmistakable. Even assuming that it did
not give him notice that the check had been dishonored, such right remains immediately
Petitioner appealed to the CA on the issues of whether it was within its rights, as collecting
enforceable.
bank, to debit the account of its client for a dishonored check; and whether it had
informed respondent about the dishonor prior to debiting his account.

Ruling of the Court of Appeals

7
In particular, petitioner argues that the check deposit slip accomplished by respondent on
September 17, 1990, expressly stipulated that the bank was obligating itself merely as the
depositors collecting agent and -- until such time as actual payment would be made to it --
it was reserving the right to charge against the depositors account any amount previously
credited. Respondent was allowed to withdraw the amount of the check prior to clearing,
merely as an act of accommodation, it added.
At the outset, we stress that the trial courts factual findings that were affirmed by the CA
are not subject to review by this Court.7[7] As petitioner itself takes no issue with those
findings, we need only to determine the legal consequence, based on the established
facts.
Right of Setoff
A bank generally has a right of setoff over the deposits therein for the payment of any
withdrawals on the part of a depositor.8[8] The right of a collecting bank to debit a clients
account for the value of a dishonored check that has previously been credited has fairly
been established by jurisprudence. To begin with, Article 1980 of the Civil Code provides
that [f]ixed, savings, and current deposits of money in banks and similar institutions shall
be governed by the provisions concerning simple loan.
Hence, the relationship between banks and depositors has been held to be that of creditor
and debtor.9[9] Thus, legal compensation under Article 127810[10] of the Civil Code may
take place when all the requisites mentioned in Article 1279 are present,11[11] as follows:
(1) That each one of the obligors be bound principally, and that he be at the same time
a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the latter
has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor.12[12]
Nonetheless, the real issue here is not so much the right of petitioner to debit respondents
account but, rather, the manner in which it exercised such right. The Court has held that
even while the right of setoff is conceded, separate is the question of whether that remedy
has properly been exercised.13[13]
The liability of petitioner in this case ultimately revolves around the issue of whether it
properly exercised its right of setoff. The determination thereof hinges, in turn, on the
banks role and obligations, first, as respondents depositary bank; and second, as
collecting agent for the check in question.
Obligation as
Depositary Bank
In BPI v. Casa Montessori,14[14] the Court has emphasized that the banking business is
impressed with public interest. Consequently, the highest degree of diligence is expected,
and high standards of integrity and performance are even required of it. By the nature of
its functions, a bank is under obligation to treat the accounts of its depositors with
meticulous care.15[15]
8
Also affirming this long standing doctrine, Philippine Bank of Commerce v. Court of
Appeals16[16] has held 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.17[17] Indeed, the banking business is vested with the trust and
confidence of the public; hence the appropriate standard of diligence must be very high, if
not the highest, degree of diligence.18[18] The standard applies, regardless of whether
the account consists of only a few hundred pesos or of millions.19[19]
The fiduciary nature of banking, previously imposed by case law,20[20] is now enshrined
in Republic Act No. 8791 or the General Banking Law of 2000. Section 2 of the law
specifically says that the State recognizes the fiduciary nature of banking that requires
high standards of integrity and performance.
Did petitioner treat respondents account with the highest degree of care? From all
indications, it did not.
It is undisputed -- nay, even admitted -- that purportedly as an act of accommodation to a
valued client, petitioner allowed the withdrawal of the face value of the deposited check
prior to its clearing. That act certainly disregarded the clearance requirement of the
banking system. Such a practice is unusual, because a check is not legal tender or
money;21[21] and its value can properly be transferred to a depositors account only after
the check has been cleared by the drawee bank.22[22]
Under ordinary banking practice, after receiving a check deposit, a bank either
immediately credit the amount to a depositors account; or infuse value to that account
only after the drawee bank shall have paid such amount.23[23] Before the check shall
have been cleared for deposit, the collecting bank can only assume at its own risk -- as
herein petitioner did -- that the check would be cleared and paid out.
Reasonable business practice and prudence, moreover, dictated that petitioner should not
have authorized the withdrawal by respondent of P240,000 on October 1, 1990, as this
amount was over and above his outstanding cleared balance of P196,793.45.24[24]
Hence, the lower courts correctly appreciated the evidence in his favor.
Obligation as
Collecting Agent
Indeed, the bank deposit slip expressed this reservation:
In receiving items on deposit, this Bank obligates itself only as the Depositors Collecting
agent, assuming no responsibility beyond carefulness in selecting correspondents, and
until such time as actual payments shall have come to its possession, this Bank reserves
the right to charge back to the Depositors account any amounts previously credited
whether or not the deposited item is returned. x x x."25[25]
9
However, this reservation is not enough to insulate the bank from any liability. In the past,
we have expressed doubt about the binding force of such conditions unilaterally imposed
by a bank without the consent of the depositor.26[26] It is indeed arguable that in signing
the deposit slip, the depositor does so only to identify himself and not to agree to the
conditions set forth at the back of the deposit slip.27[27]
Further, by the express terms of the stipulation, petitioner took upon itself certain
obligations as respondents agent, consonant with the well-settled rule that the
relationship between the payee or holder of a commercial paper and the collecting bank is
that of principal and agent.28[28] Under Article 190929[29] of the Civil Code, such bank
could be held liable not only for fraud, but also for negligence.
As a general rule, a bank is liable for the wrongful or tortuous acts and declarations of its
officers or agents within the course and scope of their employment.30[30] Due to the very
nature of their business, banks are expected to exercise the highest degree of diligence in
the selection and supervision of their employees.31[31] Jurisprudence has established
that the lack of diligence of a servant is imputed to the negligence of the employer, when
the negligent or wrongful act of the former proximately results in an injury to a third
person;32[32] in this case, the depositor.
The manager of the banks Cabanatuan branch, Consorcia Santiago, categorically admitted
that she and the employees under her control had breached bank policies. They
admittedly breached those policies when, without clearance from the drawee bank in
Baguio, they allowed respondent to withdraw on October 1, 1990, the amount of the
check deposited. Santiago testified that respondent was not officially informed about the
debiting of the P101,000 from his existing balance of P170,000 on October 2, 1990 x x
x.33[33]
Being the branch manager, Santiago clearly acted within the scope of her authority in
authorizing the withdrawal and the subsequent debiting without notice. Accordingly, what
remains to be determined is whether her actions proximately caused respondents injury.
Proximate cause is that which -- in a natural and continuous sequence, unbroken by any
efficient intervening cause --produces the injury, and without which the result would not
have occurred.34[34]
Let us go back to the facts as they unfolded. It is undeniable that the banks premature
authorization of the withdrawal by respondent on October 1, 1990, triggered -- in rapid
succession and in a natural sequence -- the debiting of his account, the fall of his account
balance to insufficient levels, and the subsequent dishonor of his own checks for lack of
funds. The CA correctly noted thus:
x x x [T]he depositor x x x withdrew his money upon the advice by [petitioner] that his
money was already cleared. Without such advice, [respondent] would not have withdrawn
the sum of P240,000.00. Therefore, it cannot be denied that it was [petitioners] fault
which allowed [respondent] to withdraw a huge sum which he believed was already his.
To emphasize, it is beyond cavil that [respondent] had sufficient funds for the check. Had
the P101,000.00 not [been] debited, the subject checks would not have been dishonored.
Hence, we can say that [respondents] injury arose from the dishonor of his well-funded
checks. x x x.35[35]
10
Aggravating matters, petitioner failed to show that it had immediately and duly informed However this may be, as to an indorser the situation is different, and notice should actually
respondent of the debiting of his account. Nonetheless, it argues that the giving of notice have been given him in order that he might protect his interests.40[40]
was discernible from his act of depositing P50,000 on October 2, 1990, to augment his
account and allow the debiting. This argument deserves short shrift. Third, regarding the deposit of P50,000 made by respondent on October 2, 1990, we fully
subscribe to the CAs observations that it was not unusual for a well-reputed businessman
First, notice was proper and ought to be expected. By the bank managers account, like him, who ordinarily takes note of the amount of money he takes and releases, to
respondent was considered a valued client whose checks had always been sufficiently immediately deposit money in his current account to answer for the postdated checks he
funded from 1987 to 1990,36[36] until the October imbroglio. Thus, he deserved nothing had issued.41[41]
less than an official notice of the precarious condition of his account.
Damages
Second, under the provisions of the Negotiable Instruments Law regarding the liability of a
general indorser 37 [37] and the procedure for a notice of dishonor, 38 [38] it was Inasmuch as petitioner does not contest the basis for the award of damages and attorneys
incumbent on the bank to give proper notice to respondent. In Gullas v. National fees, we will no longer address these matters.
Bank,39[39] the Court emphasized:
聽
x x x [A] general indorser of a negotiable instrument engages that if the instrument the
check in this case is dishonored and the necessary proceedings for its dishonor are duly
taken, he will pay the amount thereof to the holder (Sec. 66) It has been held by a long WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against
line of authorities that notice of dishonor is necessary to charge an indorser and that the petitioner.
right of action against him does not accrue until the notice is given.
SO ORDERED.
x x x. The fact we believe is undeniable that prior to the mailing of notice of dishonor, and
without waiting for any action by Gullas, the bank made use of the money standing in his Sandoval-Gutierrez, Carpio-Morales, and Garcia, JJ., concur.
account to make good for the treasury warrant. At this point recall that Gullas was merely
an indorser and had issued checks in good faith. As to a depositor who has funds sufficient Corona, J., on leave.
to meet payment of a check drawn by him in favor of a third party, it has been held that he
has a right of action against the bank for its refusal to pay such a check in the absence of
notice to him that the bank has applied the funds so deposited in extinguishment of past
due claims held against him. (Callahan vs. Bank of Anderson [1904], 2 Ann. Cas., 203.)

11
 Respondents. December 19, 2007

FIRST DIVISION x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - x

EQUITABLE PCI BANK,* G.R. No. 171545 DECISION

AIMEE YU and BEJAN

LIONEL APAS, CORONA, J.:

Petitioners, Present: This petition for review on certiorari42[1] seeks to set aside the decision43[2] of the
Court of Appeals (CA) in CA-G.R. SP No. 83112 and its resolution 44 [3] denying
reconsideration.

PUNO, C.J., Chairperson, On October 7, 2001, respondents Ng Sheung Ngor,45[4] Ken Appliance Division,
Inc. and Benjamin E. Go filed an action for annulment and/or reformation of documents
and contracts46[5] against petitioner Equitable PCI Bank (Equitable) and its employees,
-versus- SANDOVAL-GUTIERREZ,
Aimee Yu and Bejan Lionel Apas, in the Regional Trial Court (RTC), Branch 16 of Cebu
City.47[6] They claimed that Equitable induced them to avail of its peso and dollar credit
CORONA, facilities by offering low interest rates48[7] so they accepted Equitable's proposal and

AZCUNA and

LEONARDO-DE CASTRO, JJ.

NG SHEUNG NGOR** doing

business under the name

and style KEN MARKETING, Promulgated:

KEN APPLIANCE DIVISION,

INC. and BENJAMIN E. GO,

12
signed the bank's pre-printed promissory notes on various dates beginning 1996. They, was (allegedly) severely damaged when Equitable froze their accounts,57[16] the trial
however, were unaware that the documents contained identical escalation clauses court awarded moral and exemplary damages to them.58[17]
granting Equitable authority to increase interest rates without their consent.49[8]

Equitable, in its answer, asserted that respondents knowingly accepted all the terms
and conditions contained in the promissory notes.50[9] In fact, they continuously availed The dispositive portion of the February 5, 2004 RTC decision59[18] provided:
of and benefited from Equitable's credit facilities for five years.51[10]
WHEREFORE, premises considered, judgment is hereby rendered:
After trial, the RTC upheld the validity of the promissory notes. It found that, in 2001
alone, Equitable restructured respondents' loans amounting to US$228,200 and A) Ordering [Equitable] to reinstate and return the amount of
P1,000,000.52[11] The trial court, however, invalidated the escalation clause contained [respondents'] deposit placed on hold status;
therein because it violated the principle of mutuality of contracts.53[12] Nevertheless, it
took judicial notice of the steep depreciation of the peso during the intervening B) Ordering [Equitable] to pay [respondents] the sum of P12
period54[13] and declared the existence of extraordinary deflation.55[14] Consequently, [m]illion [p]esos as moral damages;
the RTC ordered the use of the 1996 dollar exchange rate in computing respondents'
dollar-denominated loans.56[15] Lastly, because the business reputation of respondents C) Ordering [Equitable] to pay [respondents] the sum of P10
[m]illion [p]esos as exemplary damages;

D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to

pay [respondents], jointly and severally, the sum of [t]wo
[m]illion [p]esos as moral and exemplary damages;

E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly

and severally, to pay [respondents'] attorney's fees in the sum
of P300,000; litigation expenses in the sum of P50,000 and the
cost of suit;

F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay

[Equitable] the unpaid principal obligation for the peso loan as
well as the unpaid obligation for the dollar denominated loan;
G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay
[Equitable] interest as follows:

13

1) 12% per annum for the peso loans;
2) 8% per annum for the dollar loans. The basis for the
payment of the dollar obligation is the conversion rate of
P26.50 per dollar availed of at the time of incurring of the
obligation in accordance with Article 1250 of the Civil
Code of the Philippines;
H) Dismissing [Equitable's] counterclaim except the payment of
the aforestated unpaid principal loan obligations and interest.
SO ORDERED.60[19]
Equitable moved for the reconsideration of the March 1, 2004 order of the RTC64[23]
on the ground that it did in fact pay the appeal fees. Respondents, on the other hand,
prayed for the issuance of a writ of execution.65[24]
On March 24, 2004, the RTC issued an omnibus order denying Equitable's motion for
reconsideration for lack of merit66[25] and ordered the issuance of a writ of execution in
favor of respondents.67[26] According to the RTC, because respondents did not move for
the reconsideration of the previous order (denying due course to the parties notices of
appeal),68[27] the February 5, 2004 decision became final and executory as to both
parties and a writ of execution against Equitable was in order.69[28]
A writ of execution was thereafter issued 70 [29] and three real properties of
Equitable were levied upon.71[30]

Equitable and respondents filed their respective notices of appeal.61[20]

In the March 1, 2004 order of the RTC, both notices were denied due course because
Equitable and respondents failed to submit proof that they paid their respective appeal
fees.62[21]

WHEREFORE, premises considered, the appeal interposed by

defendants from the Decision in the above-entitled case is DENIED due
course. As of February 27, 2004, the Decision dated February 5,
2004, is considered final and executory in so far as [Equitable,
Aimee Yu and Bejan Lionel Apas] are concerned. 63 [22]
(emphasis supplied)

14
 On March 26, 2004, Equitable filed a petition for relief in the RTC from the March 1,
2004 order.72[31] It, however, withdrew that petition on March 30, 200473[32] and
instead filed a petition for certiorari with an application for an injunction in the CA to enjoin
the implementation and execution of the March 24, 2004 omnibus order.74[33]
On June 16, 2004, the CA granted Equitable's application for injunction. A writ of
preliminary injunction was correspondingly issued.75[34]
Notwithstanding the writ of injunction, the properties of Equitable previously levied
upon were sold in a public auction on July 1, 2004. Respondents were the highest bidders
and certificates of sale were issued to them.76[35]
On August 10, 2004, Equitable moved to annul the July 1, 2004 auction sale and to
cite the sheriffs who conducted the sale in contempt for proceeding with the auction
despite the injunction order of the CA.77[36]
On October 28, 2005, the CA dismissed the petition for certiorari.78[37] It found
Equitable guilty of forum shopping because the bank filed its petition for certiorari in the
CA several hours before withdrawing its petition for relief in the RTC.79[38] Moreover,
Equitable failed to disclose, both in the statement of material dates and certificate of
non-forum shopping (attached to its petition for certiorari in the CA), that it had a pending
petition for relief in the RTC.80[39]
Equitable moved for reconsideration81[40] but it was denied.82[41] Thus, this
petition.
Equitable asserts that it was not guilty of forum shopping because the petition for
relief was withdrawn on the same day the petition for certiorari was filed.83[42] It likewise
avers that its petition for certiorari was meritorious because the RTC committed grave
abuse of discretion in issuing the March 24, 2004 omnibus order which was based on an
erroneous assumption. The March 1, 2004 order denying its notice of appeal for non
payment of appeal fees was erroneous because it had in fact paid the required fees.84[43]
15
Thus, the RTC, by issuing its March 24, 2004 omnibus order, effectively prevented In a petition for relief, the judgment or final order is rendered by a court with
Equitable from appealing the patently wrong February 5, 2004 decision.85[44] competent jurisdiction. In a petition for certiorari, the order is rendered by a court without
or in excess of its jurisdiction.
This petition is meritorious.
Moreover, Equitable substantially complied with the rule on non-forum shopping
EQUITABLE WAS when it moved to withdraw its petition for relief in the RTC on the same day (in fact just
NOT GUILTY OF four hours and forty minutes after) it filed the petition for certiorari in the CA. Even if
FORUM Equitable failed to disclose that it had a pending petition for relief in the RTC, it rectified
SHOPPING what was doubtlessly a careless oversight by withdrawing the petition for relief just a few
hours after it filed its petition for certiorari in the CA ― a clear indication that it had no
intention of maintaining the two actions at the same time.
Forum shopping exists when two or more actions involving the same transactions,
essential facts and circumstances are filed and those actions raise identical issues, subject
matter and causes of action.86[45] The test is whether, in two or more pending cases, THE TRIAL COURT
there is identity of parties, rights or causes of actions and reliefs.87[46] COMMITTED
GRAVE ABUSE OF
DISCRETION IN
Equitable's petition for relief in the RTC and its petition for certiorari in the CA did not
ISSUING ITS
have identical causes of action. The petition for relief from the denial of its notice of appeal
MARCH 1, 2004
was based on the RTCs judgment or final order preventing it from taking an appeal by
AND MARCH 24,
fraud, accident, mistake or excusable negligence.88[47] On the other hand, its petition for
2004 ORDERS
certiorari in the CA, a special civil action, sought to correct the grave abuse of discretion
amounting to lack of jurisdiction committed by the RTC.89[48]
Section 1, Rule 65 of the Rules of Court provides:

Section 1. Petition for Certiorari. When any tribunal, board or officer

exercising judicial or quasi-judicial function has acted without
or in excess of its or his jurisdiction, or with grave abuse of
discretion amounting to lack or excess of jurisdiction, and
there is no appeal, nor any plain, speedy or adequate remedy
in the ordinary course of law, a person aggrieved thereby may file a
verified petition in the proper court, alleging the facts with certainty and
praying that judgment be rendered annulling or modifying the
proceedings of such tribunal, board or officer, and granting such
incidental reliefs as law and justice may require.

The petition shall be accompanied by a certified true copy of the

judgment, order or resolution subject thereof, copies of all pleadings
and documents relevant and pertinent thereto, and a sworn certificate
of non-forum shopping as provided in the third paragraph of Section 3,
Rule 46.

There are two substantial requirements in a petition for certiorari. These are:

16
 1. that the tribunal, board or officer exercising judicial or
quasi-judicial functions acted without or in excess of his or its
jurisdiction or with grave abuse of discretion amounting to
lack or excess of jurisdiction; and
2. that there is no appeal or any plain, speedy and adequate
remedy in the ordinary course of law.
omnibus order. Hence, there was no way Equitable could have possibly appealed the
February 5, 2004 decision.93[52]
Although Equitable filed a petition for relief from the March 24, 2004 order, that
petition was not a plain, speedy and adequate remedy in the ordinary course of law.94[53]
A petition for relief under Rule 38 is an equitable remedy allowed only in exceptional
circumstances or where there is no other available or adequate remedy.95[54]

Thus, we grant Equitable's petition for certiorari and consequently give due course to
For a petition for certiorari premised on grave abuse of discretion to prosper, its appeal.
petitioner must show that the public respondent patently and grossly abused his discretion
and that abuse amounted to an evasion of positive duty or a virtual refusal to perform a
EQUITABLE
duty enjoined by law or to act at all in contemplation of law, as where the power was
RAISED PURE
exercised in an arbitrary and despotic manner by reason of passion or hostility.90[49]
QUESTIONS OF
LAW IN ITS
The March 1, 2004 order denied due course to the notices of appeal of both Equitable PETITION FOR
and respondents. However, it declared that the February 5, 2004 decision was final and REVIEW
executory only with respect to Equitable.91[50] As expected, the March 24, 2004
omnibus order denied Equitable's motion for reconsideration and granted respondents'
The jurisdiction of this Court in Rule 45 petitions is limited to questions of law.96[55]
motion for the issuance of a writ of execution.92[51]
There is a question of law when the doubt or controversy concerns the correct application
of law or jurisprudence to a certain set of facts; or when the issue does not call for the
The March 1, 2004 and March 24, 2004 orders of the RTC were obviously probative value of the evidence presented, the truth or falsehood of facts being
intended to prevent Equitable, et al. from appealing the February 5, 2004 decision. Not admitted.97[56]
only that. The execution of the decision was undertaken with indecent haste, effectively
obviating or defeating Equitable's right to avail of possible legal remedies. No matter how
Equitable does not assail the factual findings of the trial court. Its arguments
we look at it, the RTC committed grave abuse of discretion in rendering those orders.
essentially focus on the nullity of the RTCs February 5, 2004 decision. Equitable points out

With regard to whether Equitable had a plain, speedy and adequate remedy in the
ordinary course of law, we hold that there was none. The RTC denied due course to its
notice of appeal in the March 1, 2004 order. It affirmed that denial in the March 24, 2004

17
that that decision was patently erroneous, specially the exorbitant award of
damages, as it was inconsistent with existing law and jurisprudence.98[57]
THE PROMISSORY
NOTES WERE
VALID
The RTC upheld the validity of the promissory notes despite respondents
assertion that those documents were contracts of adhesion.
A contract of adhesion is a contract whereby almost all of its provisions are drafted
by one party.99[58] The participation of the other party is limited to affixing his signature
or his adhesion to the contract.100[59] For this reason, contracts of adhesion are strictly
construed against the party who drafted it.101[60]
It is erroneous, however, to conclude that contracts of adhesion are invalid per se.
They are, on the contrary, as binding as ordinary contracts. A party is in reality free to
accept or reject it. A contract of adhesion becomes void only when the dominant party
takes advantage of the weakness of the other party, completely depriving the latter of the
opportunity to bargain on equal footing.102[61]
That was not the case here. As the trial court noted, if the terms and conditions
offered by Equitable had been truly prejudicial to respondents, they would have walked
out and negotiated with another bank at the first available instance. But they did not.
Instead, they continuously availed of Equitable's credit facilities for five long years.
While the RTC categorically found that respondents had outstanding dollar- and
peso-denominated loans with Equitable, it, however, failed to ascertain the total amount
due (principal, interest and penalties, if any) as of July 9, 2001. The trial court did not
explain how it arrived at the amounts of US$228,200 and P1,000,000.103[62] In Metro
Manila Transit Corporation v. D.M. Consunji,104[63] we reiterated that this Court is not a
trier of facts and it shall pass upon them only for compelling reasons which unfortunately
are not present in this case.105[64] Hence, we ordered the partial remand of the case for
the sole purpose of determining the amount of actual damages.106[65]
ESCALATION CLAUSE VIOLATED THE
PRINCIPLE OF MUTUALITY OF
CONTRACTS
Escalation clauses are not void per se. However, one which grants the creditor an
unbridled right to adjust the interest independently and upwardly, completely depriving
the debtor of the right to assent to an important modification in the agreement is void.
Clauses of that nature violate the principle of mutuality of contracts.107[66] Article
18
1308108[67] of the Civil Code holds that a contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them.109[68]
For this reason, we have consistently held that a valid escalation clause provides:
1. that the rate of interest will only be increased if the
applicable maximum rate of interest is increased by law or by
the Monetary Board; and
2. that the stipulated rate of interest will be reduced if the
applicable maximum rate of interest is reduced by law or by
the Monetary Board (de-escalation clause).110[69]
The RTC found that Equitable's promissory notes uniformly stated:
If subject promissory note is extended, the interest for subsequent
extensions shall be at such rate as shall be determined by the
bank.111[70]
Equitable dictated the interest rates if the term (or period for repayment) of the
loan was extended. Respondents had no choice but to accept them. This was a violation of
Article 1308 of the Civil Code. Furthermore, the assailed escalation clause did not contain
the necessary provisions for validity, that is, it neither provided that the rate of interest
would be increased only if allowed by law or the Monetary Board, nor allowed
de-escalation. For these reasons, the escalation clause was void.
With regard to the proper rate of interest, in New Sampaguita Builders v. Philippine
National Bank112[71] we held that, because the escalation clause was annulled, the
principal amount of the loan was subject to the original or stipulated rate of interest. Upon
maturity, the amount due was subject to legal interest at the rate of 12% per
annum.113[72]
Consequently, respondents should pay Equitable the interest rates of 12.66% p.a.
for their dollar-denominated loans and 20% p.a. for their peso-denominated loans from
January 10, 2001 to July 9, 2001. Thereafter, Equitable was entitled to legal interest of
12% p.a. on all amounts due.
THERE WAS NO
EXTRAORDINARY
DEFLATION
Extraordinary inflation exists when there is an unusual decrease in the purchasing
power of currency (that is, beyond the common fluctuation in the value of currency) and
such decrease could not be reasonably foreseen or was manifestly beyond the
contemplation of the parties at the time of the obligation. Extraordinary deflation, on the
other hand, involves an inverse situation.114[73]
Article 1250 of the Civil Code provides:
Article 1250. In case an extraordinary inflation or deflation of the
currency stipulated should intervene, the value of the currency at the
time of the establishment of the obligation shall be the basis of
payment, unless there is an agreement to the contrary.
For extraordinary inflation (or deflation) to affect an obligation, the following
requisites must be proven:
1. that there was an official declaration of extraordinary
inflation or deflation from the Bangko Sentral ng Pilipinas
(BSP);115[74]
19
 2. that the obligation was contractual in nature;116[75] and
1.
3. that the parties expressly agreed to consider the effects of
the extraordinary inflation or deflation.117[76]
2.
Despite the devaluation of the peso, the BSP never declared a situation of
extraordinary inflation. Moreover, although the obligation in this instance arose out of a 3.
contract, the parties did not agree to recognize the effects of extraordinary inflation (or
deflation).118[77] The RTC never mentioned that there was a such stipulation either in
the promissory note or loan agreement. Therefore, respondents should pay their 4.
dollar-denominated loans at the exchange rate fixed by the BSP on the date of
maturity.119[78]
That he or she suffered besmirched reputation, or physical,
mental or psychological suffering sustained by the claimant;
That the defendant committed a wrongful act or omission;
That the wrongful act or omission was the proximate cause
of the damages the claimant sustained;
The case is predicated on any of the instances expressed or
envisioned by Article 2219 121 [80] and 2220 122 [81].
123[82]

THE AWARD OF In culpa contractual or breach of contract, moral damages are recoverable only if
MORAL AND the defendant acted fraudulently or in bad faith or in wanton disregard of his contractual
EXEMPLARY obligations.124[83] The breach must be wanton, reckless, malicious or in bad faith, and
DAMAGES LACKED oppressive or abusive.125[84]
BASIS
The RTC found that respondents did not pay Equitable the interest due on February 9,
Moral damages are in the category of an award designed to compensate the claimant 2001 (or any month thereafter prior to the maturity of the loan)126[85] or the amount due
for actual injury suffered, not to impose a penalty to the wrongdoer.120[79] To be entitled
to moral damages, a claimant must prove:

20
(principal plus interest) due on July 9, 2001.127[86] Consequently, Equitable applied
respondents' deposits to their loans upon maturity.
The relationship between a bank and its depositor is that of creditor and
debtor.128[87] For this reason, a bank has the right to set-off the deposits in its hands for
the payment of a depositor's indebtedness.129[88]
Respondents indeed defaulted on their obligation. For this reason, Equitable had the
option to exercise its legal right to set-off or compensation. However, the RTC mistakenly
(or, as it now appears, deliberately) concluded that Equitable acted fraudulently or in bad
faith or in wanton disregard of its contractual obligations despite the absence of proof. The
undeniable fact was that, whatever damage respondents sustained was purely the
consequence of their failure to pay their loans. There was therefore absolutely no
basis for the award of moral damages to them.
Neither was there reason to award exemplary damages. Since respondents were not
entitled to moral damages, neither should they be awarded exemplary damages.130[89]
And if respondents were not entitled to moral and exemplary damages, neither could they
be awarded attorney's fees and litigation expenses.131[90]
ACCORDINGLY, the petition is hereby GRANTED.
The October 28, 2005 decision and February 3, 2006 resolution of the Court of
Appeals in CA-G.R. SP No. 83112 are hereby REVERSED and SET ASIDE.
The March 24, 2004 omnibus order of the Regional Trial Court, Branch 16, Cebu City
in Civil Case No. CEB-26983 is hereby ANNULLED for being rendered with grave abuse of
discretion amounting to lack or excess of jurisdiction. All proceedings undertaken pursuant
thereto are likewise declared null and void.
The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu City in Civil
Case No. CEB-26983 is hereby SET ASIDE. The appeal of petitioners Equitable PCI Bank,
Aimee Yu and Bejan Lionel Apas is therefore given due course.
The February 5, 2004 decision of the Regional Trial Court, Branch 16 of Cebu City in
Civil Case No. CEB-26983 is accordingly SET ASIDE. New judgment is hereby entered:
1. ordering respondents Ng Sheung Ngor, doing business under the
name and style of Ken Marketing, Ken Appliance Division, Inc. and
Benjamin E. Go to pay petitioner Equitable PCI Bank the principal
amount of their dollar- and peso-denominated loans;
2. ordering respondents Ng Sheung Ngor, doing business under the
name and style of Ken Marketing, Ken Appliance Division, Inc. and
Benjamin E. Go to pay petitioner Equitable PCI Bank interest at:
a) 12.66% p.a. with respect to their dollar-denominated
loans from January 10, 2001 to July 9, 2001;
b) 20% p.a. with respect to their peso-denominated loans
from January 10, 2001 to July 9, 2001;132[91]
c) pursuant to our ruling in Eastern Shipping Lines v. Court
of Appeals,133[92] the total amount due on July 9, 2001 shall
earn legal interest at 12% p.a. from the time petitioner
Equitable PCI Bank demanded payment, whether judicially or
extra-judicially; and
d) after this Decision becomes final and executory, the
applicable rate shall be 12% p.a. until full satisfaction;
21
 3. all other claims and counterclaims are dismissed.

As a starting point, the Regional Trial Court, Branch 16 of Cebu City shall compute
the exact amounts due on the respective dollar-denominated and peso-denominated loans,
as of July 9, 2001, of respondents Ng Sheung Ngor, doing business under the name and
style of Ken Marketing, Ken Appliance Division and Benjamin E. Go.

SO ORDERED.

22
FIRST DIVISION
[G.R. No. 112392. February 29, 2000]
BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. COURT OF APPEALS and
BENJAMIN C. NAPIZA, respondents.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review on certiorari of the Decision134[1] of the Court of Appeals in
CA-G.R. CV No. 37392 affirming in toto that of the Regional Trial Court of Makati, Branch
139,135[2] which dismissed the complaint filed by petitioner Bank of the Philippine Islands
against private respondent Benjamin C. Napiza for sum of money. Sdaad
On September 3, 1987, private respondent deposited in Foreign Currency Deposit Unit
(FCDU) Savings Account No. 028-187136[3] which he maintained in petitioner banks
Buendia Avenue Extension Branch, Continental Bank Managers Check No. 00014757137[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.138[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.139[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 check140[7] because it was "not of the type or style of checks issued by
Continental Bank International."141[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.142[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.143[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
23
interest.144[11] This was followed by a letter of the banks lawyer dated April 8, 1985
demanding the return of the $2,500.00.145[12]
In reply, private respondent wrote petitioners counsel on April 20, 1985146[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. Scsdaad
xxx......xxx......xxx."
On August 12, 1986, petitioner filed a complaint against private respondent, praying for
the return of the amount of $2,500.00 or the prevailing peso equivalent plus legal interest
from date of demand to date of full payment, a sum equivalent to 20% of the total amount
due as attorney's fees, and litigation and/or costs of suit.
Private respondent filed his answer, admitting that he indeed signed a "blank" withdrawal
slip with the understanding that the amount deposited would be withdrawn only after the
check in question has been cleared. He likewise alleged that he instructed the party to
whom he issued the signed blank withdrawal slip to return it to him after the bank drafts
clearance so that he could lend that party his passbook for the purpose of withdrawing the
amount of $2,500.00. However, without his knowledge, said party was able to withdraw
the amount of $2,541.67 from his dollar savings account through collusion with one of
petitioners employees. Private respondent added that he had "given the Plaintiff fifty one
(51) days with which to clear the bank draft in question." Petitioner should have
disallowed the withdrawal because his passbook was not presented. He claimed that
petitioner had no one to blame except itself "for being grossly negligent;" in fact, it had
allegedly admitted having paid the amount in the check "by mistake" x x x "if not
altogether due to collusion and/or bad faith on the part of (its) employees." Charging
petitioner with "apparent ignorance of routine bank procedures," by way of counterclaim,
private respondent prayed for moral damages of P100,000.00, exemplary damages of
P50,000.00 and attorneys fees of 30% of whatever amount that would be awarded to him
plus an honorarium of P500.00 per appearance in court.
Private respondent also filed a motion for admission of a third party complaint against
Chan. He alleged that "thru strategem and/or manipulation," Chan was able to withdraw
the amount of $2,500.00 even without private respondents passbook. Thus, private
respondent prayed that third party defendant Chan be made to refund to him the amount
withdrawn and to pay attorneys fees of P5,000.00 plus P300.00 honorarium per
appearance.
Petitioner filed a comment on the motion for leave of court to admit the third party
complaint, wherein it asserted that per paragraph 2 of the Rules and Regulations
governing BPI savings accounts, private respondent alone was liable "for the value of the
credit given on account of the draft or check deposited." It contended that private
respondent was estopped from disclaiming liability because he himself authorized the
withdrawal of the amount by signing the withdrawal slip. Petitioner prayed for the denial
of the said motion so as not to unduly delay the disposition of the main case asserting that
private respondents claim could be ventilated in another case.
Private respondent replied that for the parties to obtain complete relief and to avoid
multiplicity of suits, the motion to admit third party complaint should be granted.
Meanwhile, the trial court issued orders on August 25, 1987 and October 28, 1987
directing private respondent to actively participate in locating Chan. After private
respondent failed to comply, the trial court, on May 18, 1988, dismissed the third party
complaint without prejudice.
On November 4, 1991, a decision was rendered dismissing the complaint. The lower court
held that petitioner could not hold private respondent liable based on the checks face
value alone. To so hold him liable "would render inutile the requirement of clearance from
the drawee bank before the value of a particular foreign check or draft can be credited to
the account of a depositor making such deposit." The lower court further held that "it was
incumbent upon the petitioner to credit the value of the check in question to the account
of the private respondent only upon receipt of the notice of final payment and should not
have authorized the withdrawal from the latters account of the value or proceeds of the
check." Having admitted that it committed a "mistake" in not waiting for the clearance of
the check before authorizing the withdrawal of its value or proceeds, petitioner should
suffer the resultant loss. Supremax
24
On appeal, the Court of Appeals affirmed the lower courts decision. The appellate court (b)......That the instrument is at the time of his indorsement, valid and
held that petitioner committed "clear gross negligence" in allowing Ruben Gayon, Jr. to subsisting.
withdraw the money without presenting private respondents passbook and, before the
check was cleared and in crediting the amount indicated therein in private respondents And, in addition, he engages that on due presentment, it shall be
account. It stressed that the mere deposit of a check in private respondents account did accepted or paid, or both, as the case may be, according to its tenor,
not mean that the check was already private respondents property. The check still had to and that if it be dishonored, and the necessary proceedings on dishonor
be cleared and its proceeds can only be withdrawn upon presentation of a passbook in be duly taken, he will pay the amount thereof to the holder, or to any
accordance with the banks rules and regulations. Furthermore, petitioners contention that subsequent indorser who may be compelled to pay it."
private respondent warranted the checks genuineness by endorsing it is untenable for it
would render useless the clearance requirement. Likewise, the requirement of
Section 65, on the other hand, provides for the following warranties of a person
presentation of a passbook to ascertain the propriety of the accounting reflected would be
negotiating an instrument by delivery or by qualified indorsement: (a) that the instrument
a meaningless exercise. After all, these requirements are designed to protect the bank
is genuine and in all respects what it purports to be; (b) that he has a good title to it, and
from deception or fraud.
(c) that all prior parties had capacity to contract.148[15] In People v. Maniego,149[16]
this Court described the liabilities of an indorser as follows: Juris
The Court of Appeals cited the case of Roman Catholic Bishop of Malolos, Inc. v.
IAC,147[14] where this Court stated that a personal check is not legal tender or money,
"Appellants contention that as mere indorser, she may not be liable on
and held that the check deposited in this case must be cleared before its value could be
account of the dishonor of the checks indorsed by her, is likewise
properly transferred to private respondent's account.
untenable. Under the law, the holder or last indorsee of a negotiable
instrument has the right to enforce payment of the instrument for the
Without filing a motion for the reconsideration of the Court of Appeals Decision, petitioner full amount thereof against all parties liable thereon. Among the parties
filed this petition for review on certiorari, raising the following issues: 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
1.......WHETHER OR NOT RESPONDENT NAPIZA IS LIABLE UNDER HIS acceptor * * unless he clearly indicated by appropriate words his
WARRANTIES AS A GENERAL INDORSER. intention to be bound in some other capacity. Such an indorser who
indorses without qualification, inter alia engages that on due
2.......WHETHER OR NOT A CONTRACT OF AGENCY WAS CREATED presentment, * * (the instrument) shall be accepted or paid, or both, as
BETWEEN RESPONDENT NAPIZA AND RUBEN GAYON. 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
3.......WHETHER OR NOT PETITIONER WAS GROSSLY NEGLIGENT IN
compelled to pay it. Maniego may also be deemed an accommodation
ALLOWING THE WITHDRAWAL.
party in the light of the facts, i.e., a person who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving
Petitioner claims that private respondent, having affixed his signature at the dorsal side of value therefor, and for the purpose of lending his name to some other
the check, should be liable for the amount stated therein in accordance with the following person. As such, she is under the law liable on the instrument to a
provision of the Negotiable Instruments Law (Act No. 2031): holder for value, notwithstanding such holder at the time of taking the
instrument knew * * (her) to be only an accommodation party,
"SEC. 66. Liability of general indorser. Every indorser who indorses although she has the right, after paying the holder, to obtain
without qualification, warrants to all subsequent holders in due course reimbursement from the party accommodated, since the relation

(a)......The matters and things mentioned in subdivisions (a), (b), and

(c) of the next preceding section; and

25
 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.150[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."151[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."152[19] Scjuris
Under these rules, to be able to withdraw from the savings account deposit under the
Philippine foreign currency deposit system, two requisites must be presented to petitioner
bank by the person withdrawing an amount: (a) a duly filled-up withdrawal slip, and (b)
the depositors passbook. Private respondent admits that he signed a blank withdrawal slip
ostensibly in violation of Rule No. 6 requiring that the request for withdrawal must name
the payee, the amount to be withdrawn and the place where such withdrawal should be
made. That the withdrawal slip was in fact a blank one with only private respondents two
signatures affixed on the proper spaces is buttressed by petitioners allegation in the
instant petition that had private respondent indicated therein the person authorized to
receive the money, then Ruben Gayon, Jr. could not have withdrawn any amount.
Petitioner contends that "(i)n failing to do so (i.e., naming his authorized agent), he
practically authorized any possessor thereof to write any amount and to collect the
same."153[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,154[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 principal-agent relationship between private respondent and Gayon so as to render
the former liable for the amount withdrawn.
26
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
$2,500.00.155[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." (Italics and underlining supplied.) Jurissc
As correctly held by the Court of Appeals, in depositing the check in his name, private
respondent did not become the outright owner of the amount stated therein. Under the
above rule, by depositing the check with petitioner, private respondent was, in a way,
merely designating petitioner as the collecting bank. This is in consonance with the rule
that a negotiable instrument, such as a check, whether a managers check or ordinary
check, is not legal tender.156[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."157[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.158[25] Misjuris
In Banco Atlantico v. Auditor General,159[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."160[27] As such, in dealing with its depositors, a bank should exercise its
27
functions not only with the diligence of a good father of a family but it should do so with
the highest degree of care.161[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."162[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 $750.00.163[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
$3,250.00.164[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 $109.92.165[32] On November 19, 1984 the word "hold" was written beside the
balance of $109.92.166[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, 1984.167[34] According to Reyes, Wells Fargo Bank International
handled the clearing of checks drawn against U.S. banks that were deposited with
petitioner.168[35] Jjlex
From these facts on record, it is at once apparent that petitioners personnel allowed the
withdrawal of an amount bigger than the original deposit of $750.00 and the value of the
check deposited in the amount of $2,500.00 although they had not yet received notice
from the clearing bank in the United States on whether or not the check was funded.
Reyes contention that after the lapse of the 35-day period the amount of a deposited
check could be withdrawn even in the absence of a clearance thereon, otherwise it could
take a long time before a depositor could make a withdrawal,169[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
28
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."170[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 CA-G.R. CV No. 37392 is AFFIRMED.SO ORDERED.

29
Republic of the Philippines Santos, to reimburse respondent Chowking Food Corporation (Chowking) the amount
corresponding to five (5) illegally encashed checks.
Supreme Court
The Facts
Manila
Between March 15, 1989 and August 10, 1989, Joe Kuan Food Corporation issued in
THIRD DIVISION favor of Chowking five (5) PSBank checks with the following numbers, dates and
denominations:
PHILIPPINE SAVINGS BANK, G.R. No. 177526
Petitioner, Check No. Amount Date
Present:
017069 P 44,120.00 15 March 1989
YNARES-SANTIAGO, J.,
Chairperson, 053528 P135,052.87 09 May 1989

- versus - AUSTRIA-MARTINEZ, 074602 P160,138.12 08 August 1989

CHICO-NAZARIO, 074631 P159,634.13 08 August 1989

NACHURA, and
REYES, JJ.
017096 P 60,036.74 10 August 1989172[2]
CHOWKING FOOD Promulgated:
CORPORATION, The total amount of the subject checks reached P556,981.86.
Respondent. July 4, 2008
On the respective due dates of each check, Chowkings acting accounting manager,
x--------------------------------------------------x Rino T. Manzano, endorsed and encashed said checks with the Bustos branch of
respondent PSBank.173[3]
DECISION
All the five checks were honored by defendant Santos, even with only the
endorsement of Manzano approving them. The signatures of the other authorized officers
REYES, R.T., J.:
of respondent corporation were absent in the five (5) checks, contrary to usual banking
practice.174[4] Unexpectedly, Manzano absconded with and misappropriated the check
IT is the peculiar quality of a fool to perceive the fault of others and to forget his own. proceeds.175[5]
Ang isang kakatuwang katangian ng isang hangal ay punahin ang kamalian ng
iba at kalimutan naman ang sa kanya.

This is a petition for review on certiorari of the Decision171[1] of the Court of Appeals
(CA) reinstating the Decision of the Regional Trial Court (RTC), Manila, Branch 5. The RTC
ordered petitioner Philippine Savings Bank (PSBank) and its Bustos Branch Head, Erlinda O.

30
 When Chowking found out Manzanos scheme, it demanded reimbursement from
PSBank.176[6] When PSBank refused to pay, Chowking filed a complaint177[7] for a sum
of money with damages before the RTC. Likewise impleaded were PSBanks president,
Antonio S. Abacan, and Bustos branch head, Santos.178[8]
Both PSBank and Santos filed cross claims and third party complaints against
Manzano.179[9] Despite all diligent efforts, summonses were not served upon third party
defendant Manzano. Santos did not take any further action and her third party complaint
was archived.180[10]
Meanwhile, petitioner caused the service of its summons on the cross-claim and third
party complaints through publication. On its subsequent motion, Manzano was declared in
default for failure to file a responsive pleading.181[11]
Respondent filed a motion for summary judgment. Petitioner opposed the motion.
On February 1, 1995, the trial court denied the motion via an order of even date.182[12]
In its Answer, petitioner did not controvert the foregoing facts, but denied liability to
respondent for the encashed checks.183[13] Petitioner bank maintained it exercised due
diligence in the supervision of all its employees. It even dismissed defendant Santos after
she was found guilty of negligence in the performance of her duties.184[14]
Defendant Santos, on the other hand, denied that she had been negligent in her job.
She averred that she merely followed the banks practice of honoring respondents checks
even if accompanied only by Manzanos endorsement.185[15]
Defendant Abacan likewise denied any liability to respondent. He alleged that, as
president and officer of petitioner bank, he played no role in the transactions complained
of.186[16] Thus, respondent has no cause of action against him.
Petitioner, Santos and Abacan were unanimous in asserting that respondent is
estopped from claiming reimbursement and damages since it was negligent in allowing
Manzano to take hold, endorse, and encash its checks. Petitioner pointed out that the
proximate cause of respondents loss was its own negligence.187[17]
RTC Disposition
On August 24, 1998, the RTC rendered judgment in favor of respondent, the
dispositive portion of which reads:
31
 WHEREFORE, premises considered, judgment is hereby rendered in 2. Ordering the third party defendant, Regino or
favor of plaintiff and as against defendant Philippine Savings Bank and Rino T. Manzano to pay the plaintiff Chowking
Erlinda O. Santos ordering the said defendants to pay plaintiff, jointly Food Corporation, the following:
and severally:
a. To reimburse the plaintiff the
1. The amount of P556,981.86 plus interest at the amount of P556,981.86 plus interest
rate of 12% per annum from August 15, 1989 at the rate of 12% per annum from
until said amount shall have been paid; August 15, 1989, until said amount
2. 20% of the total amount due plaintiff as has been fully satisfied;
attorneys fees;
3. The sum of P100,000.00 as exemplary b. To pay an attorneys fee equivalent
damages; to 20% of the total amount due the
4. The sum of P1,000,000.00 for plaintiffs plaintiff;
unrealized profits.
c. To pay an amount of P100,000.00
The complaint with respect to defendant Antonio Abacan, Jr. the plaintiff for actual and
as well as his counterclaim and cross claim are hereby DISMISSED. compensatory damages, plus the
costs of this suit.
With respect to the cross claim of defendant PSBank against
Erlinda Santos and its third-party complaint against Rino T. Manzano, SO ORDERED.189[19]
both Santos and Manzano are hereby ordered to jointly and severally,
reimburse defendant PSBank whatever amount the latter shall be Dissatisfied with the modified ruling of the RTC, respondent appealed to the CA.
constrained to pay plaintiff in connection with this case.
CA Disposition
SO ORDERED.188[18]

In its appeal, respondent Chowking contended, inter alia, that the RTC erred in
Aggrieved, petitioner filed a motion for reconsideration. Through an Order dated
ruling that the proximate cause of the loss was its own negligence; and that its claim was
January 11, 1999, the RTC reversed its earlier ruling and held that it was respondents own
barred by estoppel.
negligence that was the proximate cause of the loss. The fallo of the amended RTC
decision now reads:
On January 31, 2007, the CA granted the appeal, disposing as follows:
In light of the foregoing grounds and observations, the
Decision of August 24, 1998, by this Court is accordingly modified as WHEREFORE, the instant appeal is GRANTED. The order
follows: appealed from is hereby SET ASIDE and the 24 August 1998 decision is
consequently REINSTATED with modification that the awards of
1. Ordering the dismissal of the complaint by the attorneys fees, exemplary damages, and alleged P1,000,000.00
plaintiff Chowking Food Corporation against the unrealized profits of the appellant are DELETED.
defendants, Philippine Savings Bank (PSBank)
and Erlinda Santos for lack of basis in fact and IT IS SO ORDERED.190[20]
law;

32
 The CA held that both petitioner PSBank and Santos should bear the loss. Said
the appellate court:
It is admitted that PSB cashed, over the counter, the checks of
the appellant indorsed by Manzano alone. Since there is no more
dispute on the negligent act of Santos in honoring the appellants checks,
over the counter, despite the proper indorsements, the categorical
finding of negligence against her, remaining unrebutted, is deemed
established. This in effect warrants a finding that Santos is liable for
damages to the appellant. The lower court therefore erred in dismissing
the complaint against her.191[21]
Further, the CA held that:
Contrary to PSBs contention that it should not be held liable
because it neither consented to nor had knowledge of Santos ( sic)
violations, such liability of Santos is solidary with PSB pursuant to Article
2176 in relation to Article 2180 of the Civil Code which 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....
Art. 2180. The obligation imposed by Art. 2176 is
demandable not only for one's own acts or omissions
but also for those of persons for whom one is
responsible.
xxxx
Employers shall be liable for the damage caused by
their employees and household helpers acting within
the scope of their assigned tasks even though the
former are not engaged in any business or activity.
xxxx
The responsibility treated of in this article shall cease
when the persons herein mentioned prove that they
observed all the diligence of a good father of a family
to prevent damage.
x x x However, with banks like PSB, the degree of diligence required is
more than that of a good father of a family considering that the
business of banking is imbued with public interest due to the nature of
its functions. Highest degree of diligence is needed which PSB, in this
case, failed to observe.
x x x Its argument that it should no be held responsible for the
negligent acts of Santos because those were independent acts x x x
perpetrated without its knowledge and consent is without basis in fact
and in law. Assuming that PSB did not err in hiring Santos for her
position, its lack of supervision over her made it solidarily liable for the
unauthorized encashment of the checks involved. In the supervision of
employees, the employer must formulate standard operating
procedures, monitor their implementation and impose disciplinary
measures for the breach thereof. The appellee, in this case, presented
no evidence that it formulated rules/guidelines for the proper
performance of functions of its employees and that it strictly
implemented and monitored compliance therewith. x x x192[22]
The CA also disagreed with petitioners contention that respondents own negligence
was the proximate cause of its loss. The CA opined that even assuming that respondent
was also negligent in allowing Manzano to encash its checks, petitioner had the last clear
chance to avert injury and loss to respondent. This could have been done if petitioner,
through Santos, faithfully and carefully observed its encashment rules and procedures.
The CA ratiocinated:
x x x Had Santos not been remiss in verifying the indorsements of the
checks involved, she would not have cashed the same because
Manzano, whose only signature appears therein, is apparently not an
authorized signatory of the appellant x x x had every means to
determine the validity of those indorsements but for one reason or
another she was neglectful of her duty x x x as admitted by PSB, such
over the counter encashments are not even sanctioned by its policies
but Santos simply ignored the same. It appears clear that Santos let the
opportunity slip by when an exercise of ordinary prudence expected of
bank employees would have sufficed to prevent the loss.193[23]
Issues
33
 Petitioner has resorted to the present recourse and assigns to the CA the
following errors:
I concealment of material facts or at least calculated to convey the
THE HONORABLE COURT OF APPEALS ERRED IN NOT RULING THAT
RESPONDENT WAS ESTOPPED FROM ASSERTING ITS CLAIM AGAINST
PETITIONER.
II
THE HONORABLE COURT OF APPEALS ERRED WHEN IT DID NOT RULE
THAT RESPONDENT'S NEGLIGENCE WAS THE PROXIMATE CAUSE OF
ITS OWN LOSS. (Underscoring supplied)
Our Ruling
The doctrine of equitable estoppel or estoppel in pais finds no application
in the present case. The equitable doctrine of estoppel was explained by this Court in
Caltex (Philippines), Inc. v. Court of Appeals:194[24]
Under the doctrine of estoppel, an admission or representation
is rendered conclusive upon the person making it, and cannot be denied
or disproved as against the person relying thereon. A party may not go
back on his own acts and representations to the prejudice of the other
party who relied upon them. In the law of evidence, whenever a party
has, by his own declaration, act, or omission, intentionally and
deliberately led another to believe a particular thing true, to act upon
such belief, he cannot, in any litigation arising out of such declaration,
act, or omission, be permitted to falsify it.195[25]
The principle received further elaboration in Maneclang v. Baun:196[26]
In estoppel by pais, as related to the party sought to be
estopped, it is necessary that there be a concurrence of the following
requisites: (a) conduct amounting to false representation or
impression that the facts are otherwise than, and inconsistent with,
those which the party subsequently attempts to assert; (b) intent, or at
least expectation that this conduct shall be acted upon, or at least
influenced by the other party; and (c) knowledge, actual or constructive
of the actual facts.197[27]
Estoppel may vary somewhat in definition, but all authorities agree that a party
invoking the doctrine must have been misled to ones prejudice. That is the final and, in
reality, most important of the elements of equitable estoppel.198[28] It is this element
that is lacking here.
We agree with the CA that Chowking did not make any false representation or
concealment of material facts in relation to the encashments of the previous checks. As
adverted to earlier, respondent may have allowed Manzano to previously encash its checks,
but it has always been accompanied with the endorsements of the other authorized
signatories. Respondent did not allow petitioner to have its checks encashed without the
signature of all of its authorized signatories.
The CA pointed out:
We find at the back of those checks, whereon indorsement
usually appears, the signature of Manzano together with other
signature/signatures though mostly are illegible. It appears then that,
assuming the appellant impliedly tolerated the act of Manzano in
indorsing the checks, it did not allow Manzano alone to indorse its
checks as what actually happened in this case because his previous
indorsements were coupled with other indorsements of the
appellants signatories. There is, therefore, no sufficient evidence to
sustain PSBs submission. On this score alone, the defense of estoppel
must fail.199[29] (Underscoring and emphasis supplied)
34
 Neither can estoppel be appreciated in relation to petitioner itself. In Kalalo v.
Luz,200[30] the Court enumerated the elements of estoppel in this wise:
x x x As related to the party claiming the estoppel, the
essential elements are (1) lack of knowledge and of the means of
knowledge of the truth as the facts in question; (2) reliance, in good
faith, upon the conduct and statements of the party to be estopped; (3)
action or inaction based thereon of such character as to change the
position or status of the party claiming the estoppel, to his injury,
detriment or prejudice.201[31]
Here, the first two elements are wanting. Petitioner has knowledge of the truth and
the means to it as to the proper endorsements necessary in encashing respondents
checks. Respondent has an account with petitioner bank and, as such, is privy to the
proper signatories to endorse respondents checks.
Neither can petitioner claim good faith.
It is elementary that estoppel cannot be sustained in doubtful inference. Absent the
conclusive proof that its essential elements are present, estoppel must fail. Because
estoppel, when misapplied, becomes a most effective weapon to accomplish an injustice,
inasmuch as it shuts a mans mouth from speaking the truth.202[32]
Petitioner failed to prove that it has observed the due diligence required
of banks under the law. Contrary to petitioners view, its negligence is the proximate
cause of respondents loss.
It cannot be over emphasized that the banking business is impressed with public
interest. Of paramount importance is the trust and confidence of the public in general in
the banking industry. Consequently, the diligence required of banks is more than that of a
Roman pater familias or a good father of a family.203[33] The highest degree of diligence
is expected.204[34]
In its declaration of policy, the General Banking Law of 2000205[35] requires of
banks the highest standards of integrity and performance. Needless to say, a bank is
under obligation to treat the accounts of its depositors with meticulous care.206[36] The
fiduciary nature of the relationship between the bank and the depositors must always be
of paramount concern.207[37]
Petitioner, through Santos, was clearly negligent when it honored respondents
checks with the lone endorsement of Manzano. In the similar case of Philippine Bank of
Commerce v. Court of Appeals,208[38] an employee of Rommels Marketing Corporation
(RMC) was able to illegally deposit in a different account the checks of the corporation.
This Court found that it was the bank tellers failure to exercise extraordinary diligence to
validate the deposit slips that caused the crime to be perpetrated.
The Court held thus:
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
35
 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.
xxxx
It was this negligence x x x 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 private respondent, and
not the latters act of entrusting cash to a dishonest employee, as
insisted by the petitioners.209[39]
Proximate cause is determined by the facts of the case. It 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.210[40]
Measured by the foregoing yardstick, the proximate cause of the loss is not
respondents alleged negligence in allowing Manzano to take hold and encash respondents
checks. The proximate cause is petitioners own negligence in the supervision of its
employees when it overlooked the irregular practice of encashing checks even without the
requisite endorsements.
In Bank of the Philippine Islands v. Casa Montessori Internationale,211[41] this
Court similarly held:
For allowing payment on the checks to a wrongful and
fictitious payee, BPI the drawee bank becomes liable to its
depositor-drawer. Since the encashing bank is one of its branches, BPI
can easily go after it and hold it liable for reimbursement. x x x In both
law and equity, when one of two innocent persons must suffer by the
wrongful act of a third person, the loss must be borne by the one whose
negligence was the proximate cause of the loss or who put it into the
power of the third person to perpetrate the wrong.212[42]
Further, the Court ruled:
Pursuant to its prime duty to ascertain well the genuineness of
the signatures of its client-depositors on checks being encashed, BPI is
expected to use reasonable business prudence. In the performance of
that obligation, it is bound by its internal banking rules and regulations
that form part of the contract it enters into with its depositors.
Unfortunately, it failed in that regard. x x x Without exercising
the required prudence on its part, BPI accepted and encashed the eight
checks presented to it. As a result, it proximately contributed to
the fraud and should be held primarily liable for the negligence
of its officers or agents when acting within the course and
scope of their employment. It must bear the loss.213[43]
WHEREFORE, the petition is DENIED for lack of merit.
SO ORDERED.
36
FIRST DIVISION deductions subject to REIMBURSEMENT from third party defendant Yabut who is likewise
ORDERED to pay the other half to plaintiff corporation [Casa Montessori Internationale
[G.R. No. 149454. May 28, 2004] (CASA)].217[4]

BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. CASA MONTESSORI The assailed Resolution denied all the parties Motions for Reconsideration.
INTERNATIONALE and LEONARDO T. YABUT, respondents.
The Facts
[G.R. No. 149507. May 28, 2004]
The facts of the case are narrated by the CA as follows:
CASA MONTESSORI INTERNATIONALE, petitioner, vs. BANK OF THE
PHILIPPINE ISLANDS, respondent. On November 8, 1982, plaintiff CASA Montessori International218[5] opened Current
Account No. 0291-0081-01 with defendant BPI[,] with CASAs President Ms. Ma. Carina C.
DECISION Lebron as one of its authorized signatories.

PANGANIBAN, J.: In 1991, after conducting an investigation, plaintiff discovered that nine (9) of its checks
had been encashed by a certain Sonny D. Santos since 1990 in the total amount of
P782,000.00, on the following dates and amounts:
By the nature of its functions, a bank is required to take meticulous care of the deposits of
its clients, who have the right to expect high standards of integrity and performance from
it. Among its obligations in furtherance thereof is knowing the signatures of its clients. Check No. Date Amount
Depositors are not estopped from questioning wrongful withdrawals, even if they have
failed to question those errors in the statements sent by the bank to them for verification. 1. 839700 April 24, 1990 P 43,400.00

The Case 2. 839459 Nov. 2, 1990 110,500.00

Before us are two Petitions for Review214[1] under Rule 45 of the Rules of Court, assailing 3. 839609 Oct. 17, 1990 47,723.00
the March 23, 2001 Decision215[2] and the August 17, 2001 Resolution216[3] of the
Court of Appeals (CA) in CA-GR CV No. 63561. The decretal portion of the assailed 4. 839549 April 7, 1990 90,700.00
Decision reads as follows:
5. 839569 Sept. 23, 1990 52,277.00
WHEREFORE, upon the premises, the decision appealed from is AFFIRMED with the
modification that defendant bank [Bank of the Philippine Islands (BPI)] is held liable only
6. 729149 Mar. 22, 1990 148,000.00
for one-half of the value of the forged checks in the amount of P547,115.00 after

7. 729129 Mar. 16, 1990 51,015.00

8. 839684 Dec. 1, 1990 140,000.00

37
 9. 729034 Mar. 2, 1990 98,985.00
Total -- P 782,600.00219[6]
It turned out that Sonny D. Santos with account at BPIs Greenbelt Branch [was] a fictitious
name used by third party defendant Leonardo T. Yabut who worked as external auditor of
CASA. Third party defendant voluntarily admitted that he forged the signature of Ms.
Lebron and encashed the checks.
The PNP Crime Laboratory conducted an examination of the nine (9) checks and
concluded that the handwritings thereon compared to the standard signature of Ms.
Lebron were not written by the latter.
On March 4, 1991, plaintiff filed the herein Complaint for Collection with Damages against
defendant bank praying that the latter be ordered to reinstate the amount of
P782,500.00220[7] in the current and savings accounts of the plaintiff with interest at 6%
per annum.
On February 16, 1999, the RTC rendered the appealed decision in favor of the
plaintiff.221[8]
Ruling of the Court of Appeals
Modifying the Decision of the Regional Trial Court (RTC), the CA apportioned the loss
between BPI and CASA. The appellate court took into account CASAs contributory
negligence that resulted in the undetected forgery. It then ordered Leonardo T. Yabut to
reimburse BPI half the total amount claimed; and CASA, the other half. It also disallowed
attorneys fees and moral and exemplary damages.
Hence, these Petitions.222[9]
Issues
In GR No. 149454, Petitioner BPI submits the following issues for our consideration:
I. The Honorable Court of Appeals erred in deciding this case NOT in accord with the
applicable decisions of this Honorable Court to the effect that forgery cannot be
presumed; that it must be proved by clear, positive and convincing evidence; and that the
burden of proof lies on the party alleging the forgery.
II. The Honorable Court of Appeals erred in deciding this case not in accord with
applicable laws, in particular the Negotiable Instruments Law (NIL) which precludes
CASA, on account of its own negligence, from asserting its forgery claim against BPI,
specially taking into account the absence of any negligence on the part of BPI.223[10]
In GR No. 149507, Petitioner CASA submits the following issues:
1. The Honorable Court of Appeals erred when it ruled that there is no showing that [BPI],
although negligent, acted in bad faith x x x thus denying the prayer for the award of
attorneys fees, moral damages and exemplary damages to [CASA]. The Honorable Court
also erred when it did not order [BPI] to pay interest on the amounts due to [CASA].
2. The Honorable Court of Appeals erred when it declared that [CASA] was likewise
negligent in the case at bar, thus warranting its conclusion that the loss in the amount of
P547,115.00 be apportioned between [CASA] and [BPI] x x x.224[11]
These issues can be narrowed down to three. First, was there forgery under the
Negotiable Instruments Law (NIL)? Second, were any of the parties negligent and
therefore precluded from setting up forgery as a defense? Third, should moral and
exemplary damages, attorneys fees, and interest be awarded?
The Courts Ruling
The Petition in GR No. 149454 has no merit, while that in GR No. 149507 is partly
meritorious.
38
First Issue: encashed the checks.232[19] He never refuted these findings.233[20] That he had been
Forged Signature Wholly Inoperative coerced into admission was not corroborated by any evidence on record.234[21]

Section 23 of the NIL provides:
Section 23. Forged signature; effect of. -- When a signature is forged or made without the
authority of the person whose signature it purports to be, it is wholly inoperative, and no
right x x x to enforce payment thereof against any party thereto, can be acquired through
or under such signature, unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority.225[12]
Under this provision, a forged signature is a real226[13] or absolute defense,227[14] and
a person whose signature on a negotiable instrument is forged is deemed to have never
become a party thereto and to have never consented to the contract that allegedly gave
rise to it.228[15]
Second, the appellate and the trial courts also ruled that the PNP Crime Laboratory, after
its examination of the said checks,235[22] had concluded that the handwritings thereon --
compared to the standard signature of the drawer -- were not hers. 236 [23] This
conclusion was the same as that in the Report237[24] that the PNP Crime Laboratory had
earlier issued to BPI -- the drawee bank -- upon the latters request.
Indeed, we respect and affirm the RTCs factual findings, especially when affirmed by the
CA, since these are supported by substantial evidence on record.238[25]
Voluntary Admission Not

The counterfeiting of any writing, consisting in the signing of anothers name with intent to
defraud, is forgery.229[16]

In the present case, we hold that there was forgery of the drawers signature on the check.

First, both the CA230[17] and the RTC231[18] found that Respondent Yabut himself had
voluntarily admitted, through an Affidavit, that he had forged the drawers signature and

39
Violative of Constitutional Rights
The voluntary admission of Yabut did not violate his constitutional rights (1) on custodial
investigation, and (2) against self-incrimination.
In the first place, he was not under custodial investigation.239[26] His Affidavit was
executed in private and before private individuals.240[27] The mantle of protection under
Section 12 of Article III of the 1987 Constitution241[28] covers only the period from the
time a person is taken into custody for investigation of his possible participation in the
commission of a crime or from the time he is singled out as a suspect in the commission of
a crime although not yet in custody.242[29]
Therefore, to fall within the ambit of Section 12, quoted above, there must be an arrest or
a deprivation of freedom, with questions propounded on him by the police authorities for
the purpose of eliciting admissions, confessions, or any information.243[30] The said
constitutional provision does not apply to spontaneous statements made in a voluntary
manner244[31] whereby an individual orally admits to authorship of a crime.245[32]
What the Constitution proscribes is the compulsory or coercive disclosure of incriminating
facts.246[33]
Moreover, the right against self-incrimination 247 [34] under Section 17 of Article
III248[35] of the Constitution, which is ordinarily available only in criminal prosecutions,
extends to all other government proceedings -- including civil actions, legislative
investigations,249[36] and administrative proceedings that possess a criminal or penal
aspect250[37] -- but not to private investigations done by private individuals. Even in such
government proceedings, this right may be waived,251[38] provided the waiver is certain;
unequivocal; and intelligently, understandingly and willingly made.252[39]
If in these government proceedings waiver is allowed, all the more is it so in private
investigations. It is of no moment that no criminal case has yet been filed against Yabut.
The filing thereof is entirely up to the appropriate authorities or to the private individuals
upon whom damage has been caused. As we shall also explain later, it is not mandatory
for CASA -- the plaintiff below -- to implead Yabut in the civil case before the lower court.
40
Under these two constitutional provisions, [t]he Bill of Rights253[40] does not concern
itself with the relation between a private individual and another individual. It governs the
relationship between the individual and the State.254[41] Moreover, the Bill of Rights is a
charter of liberties for the individual and a limitation upon the power of the
[S]tate.255[42] These rights256[43] are guaranteed to preclude the slightest coercion by
the State that may lead the accused to admit something false, not prevent him from freely
and voluntarily telling the truth.257[44]
Yabut is not an accused here. Besides, his mere invocation of the aforesaid rights does not
automatically entitle him to the constitutional protection.258[45] When he freely and
voluntarily executed259[46] his Affidavit, the State was not even involved. Such Affidavit
may therefore be admitted without violating his constitutional rights while under custodial
investigation and against self-incrimination.
Clear, Positive and Convincing
Examination and Evidence
The examination by the PNP, though inconclusive, was nevertheless clear, positive and
convincing.
Forgery cannot be presumed.260[47] It must be established by clear, positive and
convincing evidence.261[48] Under the best evidence rule as applied to documentary
evidence like the checks in question, no secondary or substitutionary evidence may
inceptively be introduced, as the original writing itself must be produced in court.262[49]
But when, without bad faith on the part of the offeror, the original checks have already
been destroyed or cannot be produced in court, secondary evidence may be
produced.263[50] Without bad faith on its part, CASA proved the loss or destruction of the
original checks through the Affidavit of the one person who knew of that fact264[51] --
Yabut. He clearly admitted to discarding the paid checks to cover up his misdeed.265[52]
In such a situation, secondary evidence like microfilm copies may be introduced in court.
The drawers signatures on the microfilm copies were compared with the standard
signature. PNP Document Examiner II Josefina de la Cruz testified on cross-examination
that two different persons had written them.266[53] Although no conclusive report could
41
be issued in the absence of the original checks,267[54] she affirmed that her findings
were 90 percent conclusive.268[55] According to her, even if the microfilm copies were
the only basis of comparison, the differences were evident.269[56] Besides, the RTC
explained that although the Report was inconclusive, no conclusive report could have
been given by the PNP, anyway, in the absence of the original checks.270[57] This
explanation is valid; otherwise, no such report can ever be relied upon in court.
Even with respect to documentary evidence, the best evidence rule applies only when the
contents of a document -- such as the drawers signature on a check -- is the subject of
inquiry.271[58] As to whether the document has been actually executed, this rule does
not apply; and testimonial as well as any other secondary evidence is admissible.272[59]
Carina Lebron herself, the drawers authorized signatory, testified many times that she had
never signed those checks. Her testimonial evidence is admissible; the checks have not
been actually executed. The genuineness of her handwriting is proved, not only through
the courts comparison of the questioned handwritings and admittedly genuine specimens
thereof,273[60] but above all by her.
The failure of CASA to produce the original checks neither gives rise to the presumption of
suppression of evidence274[61] nor creates an unfavorable inference against it.275[62]
Such failure merely authorizes the introduction of secondary evidence276[63] in the form
of microfilm copies. Of no consequence is the fact that CASA did not present the signature
card containing the signatures with which those on the checks were compared.277[64]
Specimens of standard signatures are not limited to such a card. Considering that it was
not produced in evidence, other documents that bear the drawers authentic signature may
be resorted to.278[65] Besides, that card was in the possession of BPI -- the adverse
party.
We have held that without the original document containing the allegedly forged signature,
one cannot make a definitive comparison that would establish forgery;279[66] and that a
comparison based on a mere reproduction of the document under controversy cannot
produce reliable results.280[67] We have also said, however, that a judge cannot merely
rely on a handwriting experts testimony,281[68] but should also exercise independent
42
judgment in evaluating the authenticity of a signature under scrutiny.282[69] In the
present case, both the RTC and the CA conducted independent examinations of the
evidence presented and arrived at reasonable and similar conclusions. Not only did they
admit secondary evidence; they also appositely considered testimonial and other
documentary evidence in the form of the Affidavit.
The best evidence rule admits of exceptions and, as we have discussed earlier, the first of
these has been met.283[70] The result of examining a questioned handwriting, even with
the aid of experts and scientific instruments, may be inconclusive;284[71] but it is a non
sequitur to say that such result is not clear, positive and convincing. The preponderance of
evidence required in this case has been satisfied.285[72]
Second Issue:
Negligence Attributable to BPI Alone
Having established the forgery of the drawers signature, BPI -- the drawee -- erred in making
payments by virtue thereof. The forged signatures are wholly inoperative, and CASA -- the
drawer whose authorized signatures do not appear on the negotiable instruments --
cannot be held liable thereon. Neither is the latter precluded from setting up forgery as a
real defense.
Clear Negligence
in Allowing Payment
Under a Forged Signature
We have repeatedly emphasized that, since the banking business is impressed with public
interest, of paramount importance thereto is the trust and confidence of the public in
general. Consequently, the highest degree of diligence286[73] is expected,287[74] and
high standards of integrity and performance are even required, of it.288[75] By the nature
of its functions, a bank is under obligation to treat the accounts of its depositors with
meticulous care, 289 [76] always having in mind the fiduciary nature of their
relationship.290[77]
BPI contends that it has a signature verification procedure, in which checks are honored
only when the signatures therein are verified to be the same with or similar to the
specimen signatures on the signature cards. Nonetheless, it still failed to detect the eight
instances of forgery. Its negligence consisted in the omission of that degree of diligence
required291[78] of a bank. It cannot now feign ignorance, for very early on we have
already ruled that a bank is bound to know the signatures of its customers; and if it pays a
forged check, it must be considered as making the payment out of its own funds, and
cannot ordinarily charge the amount so paid to the account of the depositor whose name
was forged.292[79] In fact, BPI was the same bank involved when we issued this ruling
seventy years ago.
Neither Waiver nor Estoppel
Results from Failure to
Report Error in Bank Statement
43
The monthly statements issued by BPI to its clients contain a notice worded as follows: If
no error is reported in ten (10) days, account will be correct.293[80] Such notice cannot
be considered a waiver, even if CASA failed to report the error. Neither is it estopped from
questioning the mistake after the lapse of the ten-day period.
This notice is a simple confirmation294[81] or circularization -- in accounting parlance --
that requests client-depositors to affirm the accuracy of items recorded by the
banks.295[82] Its purpose is to obtain from the depositors a direct corroboration of the
correctness of their account balances with their respective banks.296[83] Internal or
external auditors of a bank use it as a basic audit procedure297[84] -- the results of which
its client-depositors are neither interested in nor privy to -- to test the details of
transactions and balances in the banks records.298[85] Evidential matter obtained from
independent sources outside a bank only serves to provide greater assurance of
reliability299[86] than that obtained solely within it for purposes of an audit of its own
financial statements, not those of its client-depositors.
Furthermore, there is always the audit risk that errors would not be detected300[87] for
various reasons. One, materiality is a consideration in audit planning;301[88] and two, the
information obtained from such a substantive test is merely presumptive and cannot be
the basis of a valid waiver.302[89] BPI has no right to impose a condition unilaterally and
thereafter consider failure to meet such condition a waiver. Neither may CASA renounce a
right303[90] it has never possessed.304[91]
Every right has subjects -- active and passive. While the active subject is entitled to
demand its enforcement, the passive one is duty-bound to suffer such
enforcement.305[92]
On the one hand, BPI could not have been an active subject, because it could not have
demanded from CASA a response to its notice. Besides, the notice was a measly request
worded as follows: Please examine x x x and report x x x.306[93] CASA, on the other hand,
could not have been a passive subject, either, because it had no obligation to respond. It
could -- as it did -- choose not to respond.
44
Estoppel precludes individuals from denying or asserting, by their own deed or
representation, anything contrary to that established as the truth, in legal
contemplation. 307 [94] Our rules on evidence even make a juris et de jure
presumption308[95] that whenever one has, by ones own act or omission, intentionally
and deliberately led another to believe a particular thing to be true and to act upon that
belief, one cannot -- in any litigation arising from such act or omission -- be permitted to
falsify that supposed truth.309[96]
In the instant case, CASA never made any deed or representation that misled BPI. The
formers omission, if any, may only be deemed an innocent mistake oblivious to the
procedures and consequences of periodic audits. Since its conduct was due to such
ignorance founded upon an innocent mistake, estoppel will not arise.310[97] A person
who has no knowledge of or consent to a transaction may not be estopped by it.311[98]
Estoppel cannot be sustained by mere argument or doubtful inference x x x.312[99] CASA
is not barred from questioning BPIs error even after the lapse of the period given in the
notice.
Loss Borne by
Proximate Source
of Negligence
For allowing payment313[100] on the checks to a wrongful and fictitious payee, BPI -- the
drawee bank -- becomes liable to its depositor-drawer. Since the encashing bank is one of
its branches, 314 [101] BPI can easily go after it and hold it liable for
reimbursement.315[102] It may not debit the drawers account316[103] and is not
entitled to indemnification from the drawer.317[104] In both law and equity, when one of
two innocent persons must suffer by the wrongful act of a third person, the loss must be
borne by the one whose negligence was the proximate cause of the loss or who put it into
the power of the third person to perpetrate the wrong.318[105]
Proximate cause is determined by the facts of the case.319[106] It 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.320[107]
Pursuant to its prime duty to ascertain well the genuineness of the signatures of its
client-depositors on checks being encashed, BPI is expected to use reasonable business
45
prudence.321[108] In the performance of that obligation, it is bound by its internal
banking rules and regulations that form part of the contract it enters into with its
depositors.322[109]
Unfortunately, it failed in that regard. First, Yabut was able to open a bank account in one
of its branches without privity;323[110] that is, without the proper verification of his
corresponding identification papers. Second, BPI was unable to discover early on not only
this irregularity, but also the marked differences in the signatures on the checks and those
on the signature card. Third, despite the examination procedures it conducted, the Central
Verification Unit324[111] of the bank even passed off these evidently different signatures
as genuine. Without exercising the required prudence on its part, BPI accepted and
encashed the eight checks presented to it. As a result, it proximately contributed to the
fraud and should be held primarily liable325[112] for the negligence of its officers or
agents when acting within the course and scope of their employment.326[113] It must
bear the loss.
CASA Not Negligent
in Its Financial Affairs
In this jurisdiction, the negligence of the party invoking forgery is recognized as an
exception 327 [114] to the general rule that a forged signature is wholly
inoperative.328[115] Contrary to BPIs claim, however, we do not find CASA negligent in
handling its financial affairs. CASA, we stress, is not precluded from setting up forgery as a
real defense.
Role of Independent Auditor
The major purpose of an independent audit is to investigate and determine objectively if
the financial statements submitted for audit by a corporation have been prepared in
accordance with the appropriate financial reporting practices329[116] of private entities.
The relationship that arises therefrom is both legal and moral.330[117] It begins with the
execution of the engagement letter331[118] that embodies the terms and conditions of
the audit and ends with the fulfilled expectation of the auditors ethical332[119] and
competent performance in all aspects of the audit.333[120]
The financial statements are representations of the client; but it is the auditor who has the
responsibility for the accuracy in the recording of data that underlies their preparation,
their form of presentation, and the opinion334[121] expressed therein.335[122] The
46
auditor does not assume the role of employee or of management in the clients conduct of
operations336[123] and is never under the control or supervision337[124] of the client.
Yabut was an independent auditor338[125] hired by CASA. He handled its monthly bank
reconciliations and had access to all relevant documents and checkbooks.339[126] In him
was reposed the clients340[127] trust and confidence341[128] that he would perform
precisely those functions and apply the appropriate procedures in accordance with
generally accepted auditing standards.342[129] Yet he did not meet these expectations.
Nothing could be more horrible to a client than to discover later on that the person tasked
to detect fraud was the same one who perpetrated it.
Cash Balances
Open to Manipulation
It is a non sequitur to say that the person who receives the monthly bank statements,
together with the cancelled checks and other debit/credit memoranda, shall examine the
contents and give notice of any discrepancies within a reasonable time. Awareness is not
equipollent with discernment.
Besides, in the internal accounting control system prudently installed by CASA,343[130] it
was Yabut who should examine those documents in order to prepare the bank
reconciliations.344[131] He owned his working papers,345[132] and his output consisted
of his opinion as well as the clients financial statements and accompanying notes thereto.
CASA had every right to rely solely upon his output -- based on the terms of the audit
engagement -- and could thus be unwittingly duped into believing that everything was in
order. Besides, [g]ood faith is always presumed and it is the burden of the party claiming
otherwise to adduce clear and convincing evidence to the contrary.346[133]
Moreover, there was a time gap between the period covered by the bank statement and
the date of its actual receipt. Lebron personally received the December 1990 bank
statement only in January 1991347[134] -- when she was also informed of the forgery for
the first time, after which she immediately requested a stop payment order. She cannot be
faulted for the late detection of the forged December check. After all, the bank account
with BPI was not personal but corporate, and she could not be expected to monitor closely
all its finances. A preschool teacher charged with molding the minds of the youth cannot
be burdened with the intricacies or complexities of corporate existence.
There is also a cutoff period such that checks issued during a given month, but not
presented for payment within that period, will not be reflected therein.348[135] An
47
experienced auditor with intent to defraud can easily conceal any devious scheme from a
client unwary of the accounting processes involved by manipulating the cash balances on
record -- especially when bank transactions are numerous, large and frequent. CASA could
only be blamed, if at all, for its unintelligent choice in the selection and appointment of an
auditor -- a fault that is not tantamount to negligence.
Negligence is not presumed, but proven by whoever alleges it.349[136] Its mere existence
is not sufficient without proof that it, and no other cause,350[137] has given rise to
damages.351[138] In addition, this fault is common to, if not prevalent among, small and
medium-sized business entities, thus leading the Professional Regulation Commission
(PRC), through the Board of Accountancy (BOA), to require today not only accreditation
for the practice of public accountancy,352[139] but also the registration of firms in the
practice thereof. In fact, among the attachments now required upon registration are the
code of good governance353[140] and a sworn statement on adequate and effective
training.354[141]
The missing checks were certainly reported by the bookkeeper 355 [142] to the
accountant356[143] -- her immediate supervisor -- and by the latter to the auditor.
However, both the accountant and the auditor, for reasons known only to them, assured
the bookkeeper that there were no irregularities.
The bookkeeper357[144] who had exclusive custody of the checkbooks358[145] did not
have to go directly to CASAs president or to BPI. Although she rightfully reported the
matter, neither an investigation was conducted nor a resolution of it was arrived at,
precisely because the person at the top of the helm was the culprit. The vouchers, invoices
and check stubs in support of all check disbursements could be concealed or fabricated --
even in collusion -- and management would still have no way to verify its cash
accountabilities.
Clearly then, Yabut was able to perpetrate the wrongful act through no fault of CASA. If
auditors may be held liable for breach of contract and negligence,359[146] with all the
more reason may they be charged with the perpetration of fraud upon an unsuspecting
client. CASA had the discretion to pursue BPI alone under the NIL, by reason of
expediency or munificence or both. Money paid under a mistake may rightfully be
recovered,360[147] and under such terms as the injured party may choose.
Third Issue:
Award of Monetary Claims
48
Moral Damages Denied
We deny CASAs claim for moral damages.
In the absence of a wrongful act or omission,361[148] or of fraud or bad faith,362[149]
moral damages cannot be awarded.363[150] The adverse result of an action does not per
se make the action wrongful, or the party liable for it. One may err, but error alone is not
a ground for granting such damages. 364[151] While no proof of pecuniary loss is
necessary therefor -- with the amount to be awarded left to the courts discretion365[152]
-- the claimant must nonetheless satisfactorily prove the existence of its factual
basis366[153] and causal relation367[154] to the claimants act or omission.368[155]
Regrettably, in this case CASA was unable to identify the particular instance -- enumerated
in the Civil Code -- upon which its claim for moral damages is predicated.369[156] Neither
bad faith nor negligence so gross that it amounts to malice370[157] can be imputed to BPI.
Bad faith, under the law, does not simply connote bad judgment or negligence;371[158] it
imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a
breach of a known duty through some motive or interest or ill will that partakes of the
nature of fraud.372[159]
As a general rule, a corporation -- being an artificial person without feelings, emotions and
senses, and having existence only in legal contemplation -- is not entitled to moral
damages, 373 [160] because it cannot experience physical suffering and mental
anguish.374[161] However, for breach of the fiduciary duty required of a bank, a
corporate client may claim such damages when its good reputation is besmirched by such
breach, and social humiliation results therefrom.375[162] CASA was unable to prove that
BPI had debased the good reputation of,376[163] and consequently caused incalculable
49
embarrassment to, the former. CASAs mere allegation or supposition thereof, without any
sufficient evidence on record,377[164] is not enough.
Exemplary Damages Also Denied
We also deny CASAs claim for exemplary damages.
Imposed by way of correction378[165] for the public good,379[166] exemplary damages
cannot be recovered as a matter of right.380[167] As we have said earlier, there is no bad
faith on the part of BPI for paying the checks of CASA upon forged signatures. Therefore,
the former cannot be said to have acted in a wanton, fraudulent, reckless, oppressive or
malevolent manner.381[168] The latter, having no right to moral damages, cannot
demand exemplary damages.382[169]
Attorneys Fees Granted
Although it is a sound policy not to set a premium on the right to litigate,383[170] we find
that CASA is entitled to reasonable attorneys fees based on factual, legal, and equitable
justification.384[171]
When the act or omission of the defendant has compelled the plaintiff to incur expenses to
protect the latters interest, 385 [172] or where the court deems it just and
equitable,386[173] attorneys fees may be recovered. In the present case, BPI persistently
denied the claim of CASA under the NIL to recredit the latters account for the value of the
forged checks. This denial constrained CASA to incur expenses and exert effort for more
than ten years in order to protect its corporate interest in its bank account. Besides, we
have already cautioned BPI on a similar act of negligence it had committed seventy years
ago, but it has remained unrelenting. Therefore, the Court deems it just and equitable to
grant ten percent (10%)387[174] of the total value adjudged to CASA as attorneys fees.
Interest Allowed
For the failure of BPI to pay CASA upon demand and for compelling the latter to resort to
the courts to obtain payment, legal interest may be adjudicated at the discretion of the
Court, the same to run from the filing388[175] of the Complaint.389[176] Since a court
judgment is not a loan or a forbearance of recovery, the legal interest shall be at six
percent (6%) per annum.390[177] If the obligation consists in the payment of a sum of
50
money, and the debtor incurs in delay, the indemnity for damages, there being no WHEREFORE, the Petition in GR No. 149454 is hereby DENIED, and that in GR No.
stipulation to the contrary, shall be the payment of x x x legal interest, which is six percent 149507 PARTLY GRANTED. The assailed Decision of the Court of Appeals is AFFIRMED
per annum.391[178] The actual base for its computation shall be on the amount finally with modification: BPI is held liable for P547,115, the total value of the forged checks less
adjudged, 392 [179] compounded 393 [180] annually to make up for the cost of the amount already recovered by CASA from Leonardo T. Yabut, plus interest at the legal
money394[181] already lost to CASA. rate of six percent (6%) per annum -- compounded annually, from the filing of the
complaint until paid in full; and attorneys fees of ten percent (10%) thereof, subject to
Moreover, the failure of the CA to award interest does not prevent us from granting it upon reimbursement from Respondent Yabut for the entire amount, excepting attorneys fees.
damages awarded for breach of contract.395[182] Because BPI evidently breached its Let a copy of this Decision be furnished the Board of Accountancy of the Professional
contract of deposit with CASA, we award interest in addition to the total amount adjudged. Regulation Commission for such action as it may deem appropriate against Respondent
Under Section 196 of the NIL, any case not provided for shall be governed by the Yabut. No costs.SO ORDERED.
provisions of existing legislation or, in default thereof, by the rules of the law
merchant.396[183] Damages are not provided for in the NIL. Thus, we resort to the Code
of Commerce and the Civil Code. Under Article 2 of the Code of Commerce, acts of
commerce shall be governed by its provisions and, in their absence, by the usages of
commerce generally observed in each place; and in the absence of both rules, by those of
the civil law.397[184] This law being silent, we look at Article 18 of the Civil Code, which
states: In matters which are governed by the Code of Commerce and special laws, their
deficiency shall be supplied by its provisions. A perusal of these three statutes
unmistakably shows that the award of interest under our civil law is justified.

51
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 171845 October 10, 2012
SPOUSES GODFREY and GERARDINA SERFINO, Petitioners,
vs.
FAR EAST BANK AND TRUST COMPANY, INC., now BANK OF THE PHILIPPINE
ISLANDS, Respondent.
DECISION
BRION, J.:
Before the Court is a petition for review on certiorari, 1 filed under Rule 45 of the Rules of
Court, assailing the decision2 dated February 23, 2006 of the Regional Trial Court (RTC) of
Bacolod City, Branch 41, in Civil Case No. 95-9344.
FACTUAL ANTECEDENTS
The present case traces its roots to the compromise judgment dated October 24,
19953 of the RTC of Bacolod City, Branch 47, in Civil Case No. 95-9880. Civil Case No.
95-9880 was an action for collection of sum of money instituted by the petitioner spouses
Godfrey and Gerardina Serfino (collectively, spouses Serfino) against the spouses
Domingo and Magdalena Cortez (collectively, spouses Cortez). By way of settlement, the
spouses Serfino and the spouses Cortez executed a compromise agreement on October 20,
1995, in which the spouses Cortez acknowledged their indebtedness to the spouses
Serfino in the amount of ₱ 108,245.71. To satisfy the debt, Magdalena bound herself "to
pay in full the judgment debt out of her retirement benefits[.]"4 Payment of the
debt shall be made one (1) week after Magdalena has received her retirement benefits
from the Government Service Insurance System (GSIS). In case of default, the debt may
be executed against any of the properties of the spouses Cortez that is subject to
execution, upon motion of the spouses Serfino.5 After finding that the compromise
agreement was not contrary to law, morals, good custom, public order or public policy, the
RTC approved the entirety of the parties’ agreement and issued a compromise judgment
based thereon.6 The debt was later reduced to ₱ 155,000.00 from ₱ 197,000.00 (including
interest), with the promise that the spouses Cortez would pay in full the judgment debt
not later than April 23, 1996.7
No payment was made as promised. Instead, Godfrey discovered that Magdalena
deposited her retirement benefits in the savings account of her daughter-in-law, Grace
Cortez, with the respondent, Far East Bank and Trust Company, Inc. (FEBTC). As of April
23, 1996, Grace’s savings account with FEBTC amounted to ₱ 245,830.37, the entire
deposit coming from Magdalena’s retirement benefits.8 That same day, the spouses
Serfino’s counsel sent two letters to FEBTC informing the bank that the deposit
in Grace’s name was owned by the spouses Serfino by virtue of an assignment
made in their favor by the spouses Cortez. The letter requested FEBTC to prevent
the delivery of the deposit to either Grace or the spouses Cortez until its actual ownership
has been resolved in court.
On April 25, 1996, the spouses Serfino instituted Civil Case No. 95- 9344 against the
spouses Cortez, Grace and her husband, Dante Cortez, and FEBTC for the recovery of
money on deposit and the payment of damages, with a prayer for preliminary
attachment.
On April 26, 1996, Grace withdrew ₱ 150,000.00 from her savings account with
FEBTC. On the same day, the spouses Serfino sent another letter to FEBTC informing it of
the pending action; attached to the letter was a copy of the complaint filed as Civil Case
No. 95-9344.
During the pendency of Civil Case No. 95-9344, the spouses Cortez manifested that they
were turning over the balance of the deposit in FEBTC (amounting to ₱ 54,534.00) to the
spouses Serfino as partial payment of their obligation under the compromise judgment.
The RTC issued an order dated July 30, 1997, authorizing FEBTC to turn over the balance
of the deposit to the spouses Serfino.
On February 23, 2006, the RTC issued the assailed decision (a) finding the spouses Cortez,
Grace and Dante liable for fraudulently diverting the amount due the spouses Serfino, but
(b) absolving FEBTC from any liability for allowing Grace to withdraw the
deposit. The RTC declared that FEBTC was not a party to the compromise judgment;
FEBTC was thus not chargeable with notice of the parties’ agreement, as there was no
valid court order or processes requiring it to withhold payment of the deposit. Given the
nature of bank deposits, FEBTC was primarily bound by its contract of loan with Grace.
There was, therefore, no legal justification for the bank to refuse payment of the account,
notwithstanding the claim of the spouses Serfino as stated in their three letters.
THE PARTIES’ ARGUMENTS
The spouses Serfino appealed the RTC’s ruling absolving FEBTC from liability
for allowing the withdrawal of the deposit. They allege that the RTC cited no legal
basis for declaring that only a court order or process can justify the withholding of the
deposit in Grace’s name. Since FEBTC was informed of their adverse claim after they sent
three letters, they claim that:
Upon receipt of a notice of adverse claim in proper form, it becomes
the duty of the bank to: 1. Withhold payment of the deposit until
there is a reasonable opportunity to institute legal proceedings to
contest ownership; and 2) give prompt notice of the adverse claim to
52
 the depositor. The bank may be held liable to the adverse claimant if it
disregards the notice of adverse claim and pays the depositor.
When the bank has reasonable notice of a bona
fide claim that money deposited with it is the
property of another than the depositor, it
should withhold payment until there is reasonable
opportunity to institute legal proceedings to contest
the ownership.9 (emphases and underscoring
supplied)
Aside from the three letters, FEBTC should be deemed bound by the compromise
judgment, since Article 1625 of the Civil Code states that an assignment of credit binds
third persons if it appears in a public instrument.10 They conclude that FEBTC, having
been notified of their adverse claim, should not have allowed Grace to withdraw the
deposit.
While they acknowledged that bank deposits are governed by the Civil Code provisions on
loan, the spouses Serfino allege that the provisions on voluntary deposits should apply by
analogy in this case, particularly Article 1988 of the Civil Code, which states:
Article 1988. The thing deposited must be returned to the depositor
upon demand, even though a specified period or time for such return
may have been fixed.
This provision shall not apply when the thing is judicially attached
while in the depositary’s possession, or should he have been
notified of the opposition of a third person to the return or the
removal of the thing deposited. In these cases, the depositary must
immediately inform the depositor of the attachment or opposition.
Based on Article 1988 of the Civil Code, the depository is not obliged to return the thing to
the depositor if notified of a third party’s adverse claim.
By allowing Grace to withdraw the deposit that is due them under the compromise
judgment, the spouses Serfino claim that FEBTC committed an actionable wrong
that entitles them to the payment of actual and moral damages.
FEBTC, on the other hand, insists on the correctness of the RTC ruling. It claims that it is
not bound by the compromise judgment, but only by its contract of loan with its depositor.
As a loan, the bank deposit is owned by the bank; hence, the spouses Serfino’s claim of
ownership over it is erroneous.
Based on these arguments, the case essentially involves a determination of the
obligation of banks to a third party who claims rights over a bank deposit
standing in the name of another.
THE COURT’S RULING
We find the petition unmeritorious and see no reason to reverse the RTC’s ruling.
Claim for actual damages not
meritorious because there could be
no pecuniary loss that should be
compensated if there was no
assignment of credit
The spouses Serfino’s claim for damages against FEBTC is premised on their claim of
ownership of the deposit with FEBTC. The deposit consists of Magdalena’s retirement
benefits, which the spouses Serfino claim to have been assigned to them under the
compromise judgment. That the retirement benefits were deposited in Grace’s savings
account with FEBTC supposedly did not divest them of ownership of the amount, as "the
money already belongs to the [spouses Serfino] having been absolutely assigned to them
and constructively delivered by virtue of the x x x public instrument[.]"11 By virtue of the
assignment of credit, the spouses Serfino claim ownership of the deposit, and they
posit that FEBTC was duty bound to protect their right by preventing the withdrawal of the
deposit since the bank had been notified of the assignment and of their claim.
We find no basis to support the spouses Serfino’s claim of ownership of the
deposit.
"An assignment of credit is an agreement by virtue of which the owner of a credit, known
as the assignor, by a legal cause, such as sale, dation in payment, exchange or donation,
and without the consent of the debtor, transfers his credit and accessory rights to another,
known as the assignee, who acquires the power to enforce it to the same extent as the
assignor could enforce it against the debtor. It may be in the form of sale, but at times it
may constitute a dation in payment, such as when a debtor, in order to obtain a
release from his debt, assigns to his creditor a credit he has against a third
person."12 As a dation in payment, the assignment of credit operates as a mode of
extinguishing the obligation;13 the delivery and transmission of ownership of a thing
(in this case, the credit due from a third person) by the debtor to the creditor is accepted
as the equivalent of the performance of the obligation.14
The terms of the compromise judgment, however, did not convey an intent to equate the
assignment of Magdalena’s retirement benefits (the credit) as the equivalent of the
payment of the debt due the spouses Serfino (the obligation). There was actually no
assignment of credit; if at all, the compromise judgment merely identified the fund
from which payment for the judgment debt would be sourced:
53
 (c) That before the plaintiffs file a motion for execution of the decision
or order based [on this] Compromise Agreement, the defendant,
Magdalena Cortez undertake[s] and bind[s] herself to pay in
full the judgment debt out of her retirement benefits as Local
[T]reasury Operation Officer in the City of Bacolod, Philippines, upon
which full payment, the plaintiffs waive, abandon and relinquish
absolutely any of their claims for attorney’s fees stipulated in the
Promissory Note (Annex "A" to the Complaint).15 [emphasis ours]
Only when Magdalena has received and turned over to the spouses Serfino the portion of
her retirement benefits corresponding to the debt due would the debt be deemed paid.
In Aquitey v. Tibong,16 the issue raised was whether the obligation to pay the loan was
extinguished by the execution of the deeds of assignment. The Court ruled in the
affirmative, given that, in the deeds involved, the respondent (the debtor) assigned to the
petitioner (the creditor) her credits "to make good" the balance of her obligation; the
parties agreed to relieve the respondent of her obligation to pay the balance of her
account, and for the petitioner to collect the same from the respondent’s debtors.17 The
Court concluded that the respondent’s obligation to pay the balance of her accounts with
the petitioner was extinguished, pro tanto, by the deeds of assignment of credit executed
by the respondent in favor of the petitioner.18
In the present case, the judgment debt was not extinguished by the mere designation
in the compromise judgment of Magdalena’s retirement benefits as the fund from which
payment shall be sourced. That the compromise agreement authorizes recourse in case of
default on other executable properties of the spouses Cortez, to satisfy the judgment debt,
further supports our conclusion that there was no assignment of Magdalena’s credit with
the GSIS that would have extinguished the obligation.
The compromise judgment in this case also did not give the supposed assignees, the
spouses Serfino, the power to enforce Magdalena’s credit against the GSIS. In fact, the
spouses Serfino are prohibited from enforcing their claim until after the lapse of one (1)
week from Magdalena’s receipt of her retirement benefits:
(d) That the plaintiffs shall refrain from having the judgment based
upon this Compromise Agreement executed until after one (1) week
from receipt by the defendant, Magdalena Cortez of her retirement
benefits from the [GSIS] but fails to pay within the said period the
defendants’ judgment debt in this case, in which case [this]
Compromise Agreement [may be] executed upon any property of the
defendants that are subject to execution upon motion by the
plaintiffs.19
An assignment of credit not only entitles the assignee to the credit itself, but also gives
him the power to enforce it as against the debtor of the assignor.
Since no valid assignment of credit took place, the spouses Serfino cannot validly claim
ownership of the retirement benefits that were deposited with FEBTC. Without
ownership rights over the amount, they suffered no pecuniary loss that has to
be compensated by actual damages. The grant of actual damages presupposes that
the claimant suffered a duly proven pecuniary loss.20
Claim for moral damages not
meritorious because no duty exists
on the part of the bank to protect
interest of third person claiming
deposit in the name of another
Under Article 2219 of the Civil Code, moral damages are recoverable for acts referred to in
Article 21 of the Civil Code.21 Article 21 of the Civil Code, in conjunction with Article 19 of
the Civil Code, is part of the cause of action known in this jurisdiction as "abuse of rights."
The elements of abuse of rights are: (a) there is a legal right or duty; (b) exercised in
bad faith; and (c) for the sole intent of prejudicing or injuring another.1âwphi1
The spouses Serfino invoke American common law that imposes a duty upon a bank
receiving a notice of adverse claim to the fund in a depositor’s account to
freeze the account for a reasonable length of time, sufficient to allow the
adverse claimant to institute legal proceedings to enforce his right to the
fund.22 In other words, the bank has a duty not to release the deposits unreasonably
early after a third party makes known his adverse claim to the bank deposit.
Acknowledging that no such duty is imposed by law in this jurisdiction, the spouses Serfino
ask the Court to adopt this foreign rule.23
To adopt the foreign rule, however, goes beyond the power of this Court to promulgate
rules governing pleading, practice and procedure in all courts.24 The rule reflects a
matter of policy that is better addressed by the other branches of government,
particularly, the Bangko Sentral ng Pilipinas, which is the agency that supervises the
operations and activities of banks, and which has the power to issue "rules of conduct or
the establishment of standards of operation for uniform application to all institutions or
functions covered[.]"25 To adopt this rule will have significant implications on the banking
industry and practices, as the American experience has shown. Recognizing that the rule
imposing duty on banks to freeze the deposit upon notice of adverse claim adopts a policy
adverse to the bank and its functions, and opens it to liability to both the depositor and the
adverse claimant,26 many American states have since adopted adverse claim statutes that
shifted or, at least, equalized the burden. Essentially, these statutes do not impose a duty
on banks to freeze the deposit upon a mere notice of adverse claim; they first require
either a court order or an indemnity bond.27
In the absence of a law or a rule binding on the Court, it has no option but to uphold the
existing policy that recognizes the fiduciary nature of banking. It likewise rejects the
adoption of a judicially-imposed rule giving third parties with unverified claims against the
deposit of another a better right over the deposit. As current laws provide, the bank’s
54
contractual relations are with its depositor, not with the third party;28 "a bank is under
obligation to treat the accounts of its depositors with meticulous care and always to have
in mind the fiduciary nature of its relationship with them."29 In the absence of any positive
duty of the bank to an adverse claimant, there could be no breach that entitles the latter to
moral damages.

WHEREFORE, in view of the foregoing, the petition for review on certiorari is DENIED,
and the decision dated February 23, 2006 of the Regional Trial Court of Bacolod City,
Branch 41, in Civil Case No. 95-9344 is AFFIRMED. Costs against the petitioners.

SO ORDERED.

55
SECOND DIVISION
[G.R. No. 121413. January 29, 2001]
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. 121479. January 29, 2001]
FORD PHILIPPINES, INC., petitioner-plaintiff, vs. COURT OF APPEALS and
CITIBANK, N.A. and PHILIPPINE COMMERCIAL INTERNATIONAL BANK,
respondents.
[G.R. No. 128604. January 29, 2001]
FORD PHILIPPINES, INC., petitioner, vs. CITIBANK, N.A., PHILIPPINE
COMMERCIAL INTERNATIONAL BANK and THE COURT OF APPEALS,
respondents.
DECISION
QUISUMBING, J.:
These consolidated petitions involve several fraudulently negotiated checks.
The original actions a quo were instituted by Ford Philippines to recover from the drawee
bank, CITIBANK, N.A. (Citibank) and collecting bank, Philippine Commercial International
Bank (PCIBank) [formerly Insular Bank of Asia and America], the value of several checks
payable to the Commissioner of Internal Revenue, which were embezzled allegedly by an
organized syndicate.
G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995
Decisioni[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,ii[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 Decisioniii[3]
of the Court of Appeals and its March 5, 1997 Resolutioniv[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
The stipulated facts submitted by the parties as accepted by the Court of Appeals are as
follows:
On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No. SN-04867
in the amount of P4,746,114.41, in favor of the Commissioner of Internal Revenue as
payment of plaintiffs percentage or manufacturers sales taxes for the third quarter of
1977.
The aforesaid check was deposited with the defendant IBAA (now PCIBank) and was
subsequently cleared at the Central Bank. Upon presentment with the defendant Citibank,
the proceeds of the check was paid to IBAA as collecting or depository bank.
The proceeds of the same Citibank check of the plaintiff was never paid to or received by
the payee thereof, the Commissioner of Internal Revenue.
As a consequence, upon demand of the Bureau and/or Commissioner of Internal Revenue,
the plaintiff was compelled to make a second payment to the Bureau of Internal Revenue
of its percentage/manufacturers sales taxes for the third quarter of 1977 and that said
second payment of plaintiff in the amount of P4,746,114.41 was duly received by the
Bureau of Internal Revenue.
It is further admitted by defendant Citibank that during the time of the transactions in
question, plaintiff had been maintaining a checking account with defendant Citibank; that
Citibank Check No. SN-04867 which was drawn and issued by the plaintiff in favor of the
Commissioner of Internal Revenue was a crossed check in that, on its face were two
parallel lines and written in between said lines was the phrase Payees Account Only; and
that defendant Citibank paid the full face value of the check in the amount of
P4,746,114.41 to the defendant IBAA.
It has been duly established that for the payment of plaintiffs percentage tax for the last
quarter of 1977, the Bureau of Internal Revenue issued Revenue Tax Receipt No.
18747002, dated October 20, 1977, designating therein in Muntinlupa, Metro Manila, as
the authorized agent bank of Metrobank, Alabang Branch to receive the tax payment of
the plaintiff.
On December 19, 1977, plaintiffs Citibank Check No. SN-04867, together with the
Revenue Tax Receipt No. 18747002, was deposited with defendant IBAA, through its
Ermita Branch. The latter accepted the check and sent it to the Central Clearing House for
clearing on the same day, with the indorsement at the back all prior indorsements and/or
lack of indorsements guaranteed. Thereafter, defendant IBAA presented the check for
56
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.
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, as follows:
Premises considered, judgment is hereby rendered as follows:

In a letter dated February 28, 1980 by the Acting Commissioner of Internal Revenue
1. Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and severally, to
addressed to the plaintiff - supposed to be Exhibit D, the latter was officially informed,
pay the plaintiff the amount of P4,746,114.41 representing the face value of plaintiffs
among others, that its check in the amount of P4,746,114.41 was not paid to the
Citibank Check No. SN-04867, with interest thereon at the legal rate starting January 20,
government or its authorized agent and instead encashed by unauthorized persons, hence,
1983, the date when the original complaint was filed until the amount is fully paid, plus
plaintiff has to pay the said amount within fifteen days from receipt of the letter. Upon
costs;
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. 2. On defendant Citibanks cross-claim: ordering the cross-defendant IBAA (now PCI
BANK) to reimburse defendant Citibank for whatever amount the latter has paid or may
pay to the plaintiff in accordance with the next preceding paragraph;
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. 3. The counterclaims asserted by the defendants against the plaintiff, as well as that
asserted by the cross-defendant against the cross-claimant are dismissed, for lack of
merits; and
On December 24, 1985, defendant IBAA was merged with the Philippine Commercial
International Bank (PCI Bank) with the latter as the surviving entity.
4. With costs against the defendants.
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 SO ORDERED.vi[6]
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 Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated their
plaintiffs injury is the gross negligence of defendant IBAA in indorsing the plaintiffs respective petitions for review on certiorari to the Court of Appeals. On March 27, 1995,
Citibank check in question. the appellate court issued its judgment as follows:

It is admitted that on December 19, 1977 when the proceeds of plaintiffs Citibank Check WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision with
No. SN-04867 was paid to defendant IBAA as collecting bank, plaintiff was maintaining a modifications.
checking account with defendant Citibank.v[5]
The court hereby renders judgment:
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
1. Dismissing the complaint in Civil Case No. 49287 insofar as defendant Citibank N.A.
Rivera, the General Ledger Accountant of Ford. He purportedly needed to hold back the
is concerned;
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

57
2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff the amount of
P4,746,114.41 representing the face value of plaintiffs Citibank Check No. SN-04867, with
interest thereon at the legal rate starting January 20, 1983. the date when the original
complaint was filed until the amount is fully paid;
3. Dismissing the counterclaims asserted by the defendants against the plaintiff as well
as that asserted by the cross-defendant against the cross-claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED.vii[7]
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.
PCIBank sets forth the following issues for consideration:
I. Did the respondent court err when, after finding that the petitioner acted on the
check drawn by respondent Ford on the said respondents instructions, it nevertheless
found the petitioner liable to the said respondent for the full amount of the said check.
II. Did the respondent court err when it did not find prescription in favor of the
petitioner.viii[8]
In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning the
same decision and resolution of the Court of Appeals, and praying for the reinstatement in
toto of the decision of the trial court which found both PCIBank and Citibank jointly and
severally liable for the loss.
In G.R. No. 121479, appellant Ford presents the following propositions for consideration:
I. Respondent Citibank is liable to petitioner Ford considering that:
1. As drawee bank, respondent Citibank owes to petitioner Ford, as the drawer of the
subject check and a depositor of respondent Citibank, an absolute and contractual duty to
pay the proceeds of the subject check only to the payee thereof, the Commissioner of
Internal Revenue.
2. Respondent Citibank failed to observe its duty as banker with respect to the subject
check, which was crossed and payable to Payees Account Only.
3. Respondent Citibank raises an issue for the first time on appeal; thus the same
should not be considered by the Honorable Court.
4. As correctly held by the trial court, there is no evidence of gross negligence on the
part of petitioner Ford.ix[9]
II. PCIBank is liable to petitioner Ford considering that:
1. There were no instructions from petitioner Ford to deliver the proceeds of the subject
check to a person other than the payee named therein, the Commissioner of the Bureau of
Internal Revenue; thus, PCIBanks only obligation is to deliver the proceeds to the
Commissioner of the Bureau of Internal Revenue.x[10]
2. PCIBank which affixed its indorsement on the subject check (All prior indorsement
and/or lack of indorsement guaranteed), is liable as collecting bank.xi[11]
3. PCIBank is barred from raising issues of fact in the instant proceedings.xii[12]
4. Petitioner Fords cause of action had not prescribed.xiii[13]
II. G.R. No. 128604
The same syndicate apparently embezzled the proceeds of checks intended, this time, to
settle Fords percentage taxes appertaining to the second quarter of 1978 and the first
quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of P5,851,706.37
representing the percentage tax due for the second quarter of 1978 payable to the
Commissioner of Internal Revenue. A BIR Revenue Tax Receipt No. 28645385 was issued
for the said purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of
P6,311,591.73, representing the payment of percentage tax for the first quarter of 1979
and payable to the Commissioner of Internal Revenue. Again a BIR Revenue Tax Receipt
No. A-1697160 was issued for the said purpose.
Both checks were crossed checks and contain two diagonal lines on its upper left corner
between which were written the words payable to the payees account only.
58
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.xiv[14]
On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank,
Citibank, liable for the value of the two checks while absolving PCIBank from any liability,
disposing as follows:
WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to reimburse
plaintiff FORD the total amount of P12,163,298.10 prayed for in its complaint, with 6%
interest thereon from date of first written demand until full payment, plus P300,000.00
attorneys fees and expenses of litigation, and to pay the defendant, PCIB (on its
counterclaim to crossclaim) the sum of P300,000.00 as attorneys fees and costs of
litigation, and pay the costs.
SO ORDERED.xv[15]
Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the
decision of the trial court. Hence, this petition.
Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of
Appeals decision and its resolution dated March 5, 1997, with respect to the dismissal of
the complaint against PCIBank and holding Citibank solely responsible for the proceeds of
Citibank Check Numbers SN-10597 and 16508 for P5,851,706.73 and P6,311,591.73
respectively.
Ford avers that the Court of Appeals erred in dismissing the complaint against defendant
PCIBank considering that:
I. Defendant PCIBank was clearly negligent when it failed to exercise the diligence
required to be exercised by it as a banking institution.
II. Defendant PCIBank clearly failed to observe the diligence required in the selection
and supervision of its officers and employees.
59
III. Defendant PCIBank was, due to its negligence, clearly liable for the loss or damage
resulting to the plaintiff Ford as a consequence of the substitution of the check consistent
with Section 5 of Central Bank Circular No. 580 series of 1977.
IV. Assuming arguendo that defendant PCIBank did not accept, endorse or negotiate in
due course the subject checks, it is liable, under Article 2154 of the Civil Code, to return
the money which it admits having received, and which was credited to it in its Central Bank
account.xvi[16]
The main issue presented for our consideration by these petitions could be simplified as
follows: Has petitioner Ford the right to recover from the collecting bank (PCIBank) and
the drawee bank (Citibank) the value of the checks intended as payment to the
Commissioner of Internal Revenue? Or has Fords cause of action already prescribed?
Note that in these cases, the checks were drawn against the drawee bank, but the title of
the person negotiating the same was allegedly defective because the instrument was
obtained by fraud and unlawful means, and the proceeds of the checks were not remitted
to the payee. It was established that instead of paying the checks to the CIR, for the
settlement of the appropriate quarterly percentage taxes of Ford, the checks were
diverted and encashed for the eventual distribution among the members of the syndicate.
As to the unlawful negotiation of the check the applicable law is Section 55 of the
Negotiable Instruments Law (NIL), which provides:
When title defective -- The title of a person who negotiates an instrument is defective
within the meaning of this Act when he obtained the instrument, or any signature thereto,
by fraud, duress, or 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 (Metrobank-Alabang) of the payee, CIR. Citibank bewails the
fact that Ford was remiss in the supervision and control of its own employees, inasmuch as
it only discovered the syndicates activities through the information given by the payee of
the checks after an unreasonable period of time.
PCIBank also blames Ford of negligence when it allegedly authorized Godofredo Rivera to
divert the proceeds of Citibank Check No. SN-04867, instead of using it to pay the BIR. As
to the subsequent run-around of funds of Citibank Check Nos. SN-10597 and 16508,
PCIBank claims that the proximate cause of the damage to Ford lies in its own officers and
employees who carried out the fraudulent schemes and the transactions. These
circumstances were not checked by other officers of the company, including its
comptroller or internal auditor. PCIBank contends that the inaction of Ford despite the
enormity of the amount involved was a sheer negligence and stated that, as between two
innocent persons, one of whom must suffer the consequences of a breach of trust, the one
who made it possible, by his act of negligence, must bear the loss.
For its part, Ford denies any negligence in the performance of its duties. It avers that there
was no evidence presented before the trial court showing lack of diligence on the part of
Ford. And, citing the case of Gempesaw vs. Court of Appeals,xvii[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.xviii[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.xix[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
60
continuous sequence, unbroken by any efficient, intervening cause produces the injury,
and without which the result would not have occurred.xx[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. xxi[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.
xxx xxxxxx
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.xxii[22] A bank which receives such paper for
collection is the agent of the payee or holder.xxiii[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.
61
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation ,xxiv[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.xxv[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.xxvi[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.xxvii[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.xxviii[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.xxix[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.xxx[30]
Moreover, as correctly pointed out by Ford, Section 5xxxi[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
62
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 62xxxii[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.xxxiii[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.xxxiv[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.xxxv[35]
Banks handle daily transactions involving millions of pesos.xxxvi[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.xxxvii[37] Banks are expected to exercise the highest degree of diligence in the
selection and supervision of their employees.xxxviii[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,xxxix[39] and an action upon a check is ordinarily
governed by the statutory period applicable to instruments in writing.xl[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.xli[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.xlii[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.
63
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.

64
SECOND DIVISION
[G.R. No. 125536. March 16, 2000]
PRUDENTIAL BANK, petitioner, vs. COURT OF APPEALS and LETICIA
TUPASI-VALENZUELA joined by husband Francisco Valenzuela, respondents.
Ed-pm-is
DECISION
QUISUMBING, J.:
This appeal by certiorari under Rule 45 of the Rules of Court seeks to annul and set aside
the Decision dated January 31, 1996, and the Resolution dated July 2, 1997, of the Court
of Appeals in CA G.R. CV No. 35532, which reversed the judgment of the Regional Trial
Court of Valenzuela, Metro Manila, Branch 171, in Civil Case No. 2913-V-88, dismissing the
private respondent's complaint for damages.398[1]
In setting aside the trial court's decision, the Court of Appeals disposed as follows:
"WHEREFORE, the appealed decision is hereby REVERSED and SET
ASIDE and, another rendered ordering the appellee bank to pay
appellant the sum of P100,000.00 by way of moral damages;
P50,000.00 by way of exemplary damages, P50,000.00 for and as
attorney's fees; and to pay the costs. Jjs-c
SO ORDERED."399[2]
The facts of the case on record are as follows:
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. Sc-jj
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
65
by way of moral damages; P50,000.00 exemplary damages; P50,000.00 for and as
attorney's fees; and to pay the costs.400[3]
Petitioner filed a timely motion for reconsideration but it was denied. Hence, this petition,
raising the following issues:
I. WHETHER OR NOT THE RESPONDENT COURT OF APPEALS ACTED
WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF
JURISDICTION IN DEVIATING FROM ESTABLISHED JURISPRUDENCE
IN REVERSING THE DISMISSAL JUDGMENT OF THE TRIAL COURT AND
INSTEAD AWARDED MORAL DAMAGES, EXEMPLARY DAMAGES AND
ATTORNEY'S FEES. Supr-eme
II. WHETHER OR NOT THE RESPONDENT COURT OF APPEALS ACTED
IN GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF
JURISDICTION WHERE, EVEN IN THE ABSENCE OF EVIDENCE AS
FOUND BY THE TRIAL COURT, AWARDED MORAL DAMAGES IN THE
AMOUNT OF P100,000.00.
III. WHETHER OR NOT THE RESPONDENT COURT OF APPEALS ACTED
IN GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF
JURISDICTION, WHERE, EVEN IN THE ABSENCE OF EVIDENCE AS
FOUND BY THE TRIAL COURT, AWARDED P50,000.00 BY WAY OF
EXEMPLARY DAMAGES. Co-urt
IV. WHETHER OR NOT THE RESPONDENT COURT OF APPEALS ACTED
WITH GRAVE ABUSE OF DISCRETION WHERE EVEN IN THE ABSENCE
OF EVIDENCE, AWARDED ATTORNEY'S FEES.
Simply stated, the issue is 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.
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.401[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.402[5]Jle-xj
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."403[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."404[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
66
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,405[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. Juri-smis
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.406[9]
The law allows the grant of exemplary damages by way of example for the public
good. 407 [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. Jj-juris
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.408[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.409[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
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Costs against petitioner.

SO ORDERED.

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