1. Philippine Airlines v.
CA Thus, payment must be made to the obligee himself or to an
Doctrine:
As a rule, a payment, in order to be effective to discharge an
obligation, must be made to the proper person.
Moreover, in the absence of an agreement, either express or
implied, payment means the discharge of a debt or obligation in
money and unless the parties so agree, a debtor has no rights,
except at his own peril, to substitute something in lieu of cash as
medium of payment of his debt
Facts
Here, Amelia Tan (respondent), under the name and style of
Able Printing Press commenced a complaint for damages
against PAL.
After trial, the Court of First Instance rendered judgment, in favor
of Tan and against petitioner Philippine Airlines, Inc. (PAL)
Such decision was affirmed by the CA. Subsequently, the
judgment became final and executory and on May 31, 1977,
judgment was correspondingly entered in the case.
Now, Tan filed a motion praying for the issuance of a writ of
execution of the judgment rendered by the Court of Appeals. On
October 11, 1977, the trial court, issued its order of execution
with the corresponding writ in favor of Tan. The writ was duly
referred to Deputy Sheriff Emilio Z. Reyes for enforcement.
Four months later, on February 11, 1978, respondent Amelia
Tan moved for the issuance of an alias writ of execution stating
that the judgment rendered by the lower court, and affirmed with
modification by the Court of Appeals, remained unsatisfied.
Contention
PAL contended that it had already fully paid its obligation to
plaintiff through the deputy sheriff of the respondent court, Emilio
Z. Reyes, as evidenced by cash vouchers properly signed and
receipted by said Emilio Z. Reyes.
Issue
Whether or not the payment made to the absconding sheriff by
check in his name operate to satisfy the judgment debt.
Held
No. The Supreme Court said, under the peculiar circumstances
of this case, the payment to the absconding sheriff by check in
his name did not operate as a satisfaction of the judgment debt.
In general, a payment, in order to be effective to discharge an
obligation, must be made to the proper person. Article 1240 of
the Civil Code provides:
Payment shall be made to the person in whose favor the
obligation has been constituted, or his successor in interest, or
any person authorized to receive it.
agent having authority, express or implied, to receive the
particular payment. Payment made to one having apparent
authority to receive the money will, as a rule, be treated as
though actual authority had been given for its receipt. Likewise,
if payment is made to one who by law is authorized to act for the
creditor, it will work a discharge. The receipt of money due on a
judgment by an officer authorized by law to accept it will,
therefore, satisfy the debt.
The theory is where payment is made to a person authorized
and recognized by the creditor, the payment to such a person
so authorized is deemed payment to the creditor. Under ordinary
circumstances, payment by the judgment debtor in the case at
bar, to the sheriff should be valid payment to extinguish the
judgment debt.
However, there are circumstances in this case, which compel a
different conclusion.
The payment made by the petitioner to the absconding
sheriff was not in cash or legal tender but in checks. The
checks were not payable to Amelia Tan or Able Printing
Press but to the absconding sheriff.
Article 1249 of the Civil Code provides:
The payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then
in the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of
exchange or other mercantile documents shall produce the
effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation
shall be held in abeyance.
Further, the Supreme court said, in the absence of an
agreement, either express or implied, payment means the
discharge of a debt or obligation in money and unless the parties
so agree, a debtor has no rights, except at his own peril, to
substitute something in lieu of cash as medium of payment of
his debt.
Consequently, unless authorized to do so by law or by consent
of the obligee a public officer has no authority to accept anything
other than money in payment of an obligation under a judgment
being executed. Strictly speaking, the acceptance by the sheriff
of the petitioner's checks, in the case at bar, does not, per se,
operate as a discharge of the judgment debt.
Since according to the Court that a negotiable instrument is only
a substitute for money and not money, the delivery of such an
instrument does not, by itself, operate as payment. A check,
whether a manager's check or ordinary cheek, is not legal
tender, and an offer of a check in payment of a debt is not a valid
tender of payment and may be refused receipt by the obligee or
creditor. Mere delivery of checks does not discharge the
obligation under a judgment. The obligation is not extinguished
and remains suspended until the payment by commercial
document is actually realized (Art. 1249, Civil Code, par. 3).
The Court further said that, if bouncing checks had been issued Sheriff to personally encash said checks and misappropriate the
in the name of Amelia Tan and not the Sheriff's, there would proceeds thereof to his exclusive personal benefit. For the
have been no payment. After dishonor of the checks, Ms. Tan prejudice that resulted, the petitioner himself must bear the fault.
could have run after other properties of PAL. The theory is that
she has received no value for what had been awarded her. The judicial guideline which we take note of states as follows:
Because the checks were drawn in the name of Emilio Z. Reyes,
As between two innocent persons, one of whom must suffer the
neither has she received anything. The same rule should apply.
consequence of a breach of trust, the one who made it possible
It is argued that if PAL had paid in cash to Sheriff Reyes, there by his act of confidence must bear the loss.
would have been payment in full legal contemplation. The
Having failed to employ the proper safeguards to protect itself,
reasoning is logical but is it valid and proper? Logic has its limits
the judgment debtor (herein PAL) whose act made possible the
in decision making. We should not follow rulings to their logical
loss had but itself to blame.
extremes if in doing so we arrive at unjust or absurd results.

In the first place, PAL did not pay in cash. It paid in checks.

And second, payment in cash always carries with it certain

cautions. Nobody hands over big amounts of cash in a careless
and inane manner. Mature thought is given to the possibility of
the cash being lost, of the bearer being waylaid or running off
with what he is carrying for another. Payment in checks is
precisely intended to avoid the possibility of the money going to
the wrong party. The situation is entirely different where a Sheriff
seizes a car, a tractor, or a piece of land. Logic often has to give
way to experience and to reality. Having paid with checks, PAL
should have done so properly.

Payment in money or cash to the implementing officer may be

deemed absolute payment of the judgment debt but the Court
has never, in the least bit, suggested that judgment debtors
should settle their obligations by turning over huge amounts of
cash or legal tender to sheriffs and other executing officers.
Payment in cash would result in damage or interminable
litigations each time a sheriff with huge amounts of cash in his
hands decides to abscond.

As a protective measure, therefore, the courts encourage the

practice of payments by check provided adequate controls are
instituted to prevent wrongful payment and illegal withdrawal or
disbursement of funds. If particularly big amounts are involved,
escrow arrangements with a bank and carefully supervised by
the court would be the safer procedure. Actual transfer of funds
takes place within the safety of bank premises. These practices
are perfectly legal. The object is always the safe and incorrupt
execution of the judgment.

It is, indeed, out of the ordinary that checks intended for a

particular payee are made out in the name of another. Making
the checks payable to the judgment creditor would have
prevented the encashment or the taking of undue advantage by
the sheriff, or any person into whose hands the checks may have
fallen, whether wrongfully or in behalf of the creditor. The
issuance of the checks in the name of the sheriff clearly made
possible the misappropriation of the funds that were withdrawn.

As explained and held by the respondent court:

... [K]nowing as it does that the intended payment was for the
private party respondent Amelia Tan, the petitioner corporation,
utilizing the services of its personnel who are or should be
knowledgeable about the accepted procedures and resulting
consequences of the checks drawn, nevertheless, in this
instance, without prudence, departed from what is generally
observed and done, and placed as payee in the checks the
name of the errant Sheriff and not the name of the rightful payee.
Petitioner thereby created a situation which permitted the said
Far East Bank & Trust Company v. Diaz
Doctrine
For a valid tender of payment, it is necessary that there be a
fusion of intent, ability and capability to make good such offer,
which must be absolute and must cover the amount due.
Though a check is not legal tender, and a creditor may validly
refuse to accept it if tendered as payment, one who in fact
accepted a fully' funded check after the debtor's manifestation
that it had been given to settle an obligation is estopped from
later on denouncing the efficacy of such tender of payment.
Facts
Here, petitioner Far East bank purchased respondent's (Diaz
Realty Inc.) account from Pacific Banking Corporation (PaBC) in
December 1986, and that the latter was notified of the
transaction only on March 23, 1988. Thereafter, Antonio Diaz,
president of respondent corporation, inquired from petitioner
bank on the status and the amount of its obligation. He was
informed that the obligation summed up to P1,447,142.03.
On November 14, 1988, petitioner, received from respondent
Interbank Check No. 81399841 dated November 13, 1988,
bearing the amount of P1,450,000, with the notation "Re: Full
Payment of Pacific Bank Account now turn[ed] over to Far East
Bank." The check was subsequently cleared and honored by
Interbank, as shown by the Certification it issued on January 20,
1992.
Now, in the meantime, Diaz wrote the defendant, asking that the
interest rate be reduced from 20% to 12% per annum, but no
reply was ever made; that subsequently, the defendant told him
to change the P1,450,000.00 deposit into a money market
placement, which he did; that the money market placement
expired on April 14, 1989; that when there was still no news from
the defendant whether or not it [would] accept his tender of
payment, he filed this case at the Regional Trial Court of Davao
City.
Lower Courts
The RTC ruled in favor of Diaz.
The CA sustained the trial court's finding that there was a valid
tender of payment in the sum of P1,450,000, made by Diaz
Realty Inc. in favor of Far East Bank and Trust Company. The
appellate court reasoned that petitioner failed to effectively rebut
respondent's evidence that it so tendered the check to liquidate
its indebtedness, and that petitioner had unilaterally treated the
same as a deposit instead.
Contention
Petitioner argues that the CA erred in upholding the validity of
the tender of payment made by Diaz. According to the petitioner
what Diaz had tendered to settle its outstanding obligation, it
points out, was a check which could not be considered legal
tender.
Issue
Whether or not there was a valid tender of payment in this case.
Held
Yes. The Supreme Court said, true, jurisprudence holds that, in
general, a check does not constitute legal tender, and that a
creditor may validly refuse it. It must be emphasized, however,
that this dictum does not prevent a creditor from accepting a
check as payment. In other words, the creditor has
the option and the discretion of refusing or accepting it.
"In the present case, petitioner bank did not refuse respondent's
check. On the contrary, it accepted the check which, it insisted,
was a deposit. As earlier stated, the check proved to be fully
funded and was in fact honored by the drawee bank. Moreover,
petitioner was in possession of the money for several months.
In further contending that there was no valid tender of payment,
petitioner emphasizes our pronouncement in Roman Catholic
Bishop of Malolos, Inc. v. Intermediate Appellate Court, as
follows:
"Tender of payment involves a positive and unconditional act by
the obligor of offering legal tender currency as payment to the
obligee for the former's obligation and demanding that the latter
accept the same.
xxx xxx xxx
"Thus, tender of payment cannot be presumed by a mere
inference from surrounding circumstances. At most, sufficiency
of available funds is only affirmative of the capacity or ability of
the obligor to fulfill his part of the bargain. But whether or not the
obligor avails himself of such funds to settle his outstanding
account remains to be proven by independent and credible
evidence. Tender of payment presupposes not only that the
obligor is able, ready, and willing, but more so, in the act of
performing his obligation. Ab posse ad actu non vale illatio. 'A
proof that an act could have been done is no proof that it was
actually done."'
In other words, tender of payment is the definitive act of offering
the creditor what is due him or her, together with the demand
that the creditor accept the same. More important, there must be
a fusion of intent, ability and capability to make good such offer,
which must be absolute and must cover the amount due.

That respondent intended to settle its obligation with petitioner

is evident from the records of the case. After learning that its
loan balance was P1,447,142.03, it presented to petitioner a
check in the amount of P1,450,000, with the specific notation
that it was for full payment of its Pacific Bank account that had
been purchased by petitioner. The latter accepted the check,
even if it now insists that it considered the same as a mere
deposit. The check was sufficiently funded, as in fact it was
honored by the drawee bank. When petitioner refused to release
the mortgage, respondent instituted the present case to compel
the bank to acknowledge the tender of payment, accept
payment and cancel the mortgage. These acts demonstrate
respondent's intent, ability and capability to fully settle and
extinguish its obligation to petitioner.

That respondent subsequently withdrew the money from

petitioner-bank is of no moment, because such withdrawal
would not affect the efficacy or the legal ramifications of the
tender of payment made on November 14, 1988. As already
discussed, the tender of payment to settle respondent's
obligation as computed by petitioner was accepted, the check
given in payment thereof converted into money, and the money
kept in petitioner's possession for several months.

Finally, petitioner points out that, in any case, tender of

payment extinguishes the obligation only after proper
consignation, which respondent did not do.

The argument does not persuade. For a consignation to be

necessary, the creditor must have refused, without just cause,
to accept the debtor's payment. However, as pointed out earlier,
petitioner accepted respondent's check.

Furthermore, the Court said, to reiterate, the tender was made

by respondent for the purpose of settling its obligation. It was
incumbent upon petitioner to refuse or accept it as payment. The
latter did not have the right or the option to accept and treat it as
a deposit. Thus, by accepting the tendered
check and converting it into money, petitioner is presumed to
have accepted it as payment. To hold otherwise would be
inequitable and unfair to the obligor.
SOLIDBANK VS ARRIETA
FACTS:
Carmen Arrieta is a bank depositor of Solidbank Corporation
under Checking Account No. 123-1996. On March 1990,
Carmen issued SBC Check No. 0293984 in the amount of
P330.00 in the name of Lopues Department Store in payment of
her purchases from said store. When the check was deposited
by the store to its account, the same was dishonored due to
Account Closed despite the fact that at the time the check was
presented for payment, Carmens checking account was still
active and backed up by a deposit of P1,275.20.
As a consequence of the checks dishonor, Lopues Department
Store sent a demand letter to Carmen threatening her with
criminal prosecution unless she redeemed the check within five
(5) days. To avoid criminal prosecution, Carmen paid P330.00
in cash to the store, plus a surcharge of P33.00 for the bouncing
check, or a total of P363.00.
Before these events though, a similar incident occurred days
before, where Arrieta issued a check which subsequently
bounced.
Thereupon, Carmen filed a complaint against Solidbank
Corporation for damages alleging that the bank, by its
carelessness and recklessness in certifying that her account
was closed despite the fact that it was still very much active and
sufficiently funded, had destroyed her good name and reputation
and prejudiced not only herself but also her family in the form of
mental anguish, sleepless nights, wounded feelings and social
humiliation. She prayed that she be awarded moral and
exemplary damages as well as attorneys fees.
In its answer, the bank claimed that Carmen, contrary to her
undertaking as a depositor, failed to maintain the required
balance of at least P1,000.00 on any day of the month.
Moreover, she did not handle her account in a manner
satisfactory to the bank. In view of her violations of the general
terms and conditions governing the establishment and operation
of a current account, Carmen’s account was recommended for
closure. In any event, the bank claimed good faith in
declaring her account closed since one of the clerks, who
substituted for the regular clerk, committed an honest
mistake when he thought that the subject account was
already closed when the ledger containing the said account
could not be found.
After trial, the lower court rendered its decision holding that
Solidbank Corporation was grossly negligent in failing to check
whether or not Carmen’s account was still open and viable at
the time the transaction in question was made. Hence, the bank
was liable to Carmen for moral and exemplary damages, as well
as attorney’s fees. It held that the bank was remiss in its duty to
treat Carmen’s account with the highest degree of care,
considering the fiduciary nature of their relationship.
Solidbank claimshat it was erroneous for Arrieta to attribute the
humiliation to the second bouncing of the check, as she claimed
none when the first check was issued.
ISSUE: WON Arrieta is entitled to moral damages?
RULING: YES, she is entitled to moral damages.
The fact that another check Carmen had issued was previously
dishonored does not necessarily imply that the dishonor of a
succeeding check can no longer cause moral injury and
personal hurt for which the aggrieved party may claim damages.
Such prior occurrence does not prove that respondent does not
have a good reputation that can be besmirched.
The circumstances surrounding the two checks are different.
The first check was to accommodate a relative, and the
succeeding one to pay for goods purchased from the Lopues
Department Store. That she might not have suffered damages
as a result of the first dishonored check does not necessarily
hold true for the second.
The following are the conditions for the award of moral
damages: (1) there is an injury -- whether physical, mental or
psychological -- clearly sustained by the claimant; (2) the
culpable act or omission is factually established; (3) the wrongful
act or omission of the defendant is the proximate cause of the
injury sustained by the claimant; and (4) the award of damages
is predicated on any of the cases stated in Article 2219[11] of
the Civil Code.
In the instant case, all four requisites have been established.
First, these were the findings of the appellate court: Carmen
Arrieta is a bank depositor of Solidbank Corporation of long
standing. She works with the Central Negros Electric
Cooperative, Inc. (CENECO), as an executive secretary and
later as department secretary. She is a deaconess of the
Christian Alliance Church in Bacolod City. These are positions
which no doubt elevate her social standing in the community.
Understandably -- and as sufficiently proven by her testimony --
she suffered mental anguish, serious anxiety, besmirched
reputation, wounded feelings and social humiliation; and she
suffered thus when the people she worked with -- her friends,
her family and even her daughters classmates -- learned and
talked about her bounced check.
Second, it is undisputed that the subject check was adequately
funded, but that petitioner wrongfully dishonored it.
Third, Respondent Carmen was able to prove that petitioners
wrongful dishonor of her check was the proximate cause of her
embarrassment and humiliation in her workplace, in her own
home, and in the church where she served as deaconess.
Proximate cause has been defined as any cause which, in
natural and continuous sequence, unbroken by any efficient
intervening cause, produces the result complained of and
without which would not have occurred x x x.[12] It is determined
from the facts of each case upon combined considerations of
logic, common sense, policy and precedent.[13] Clearly, had the
bank accepted and honored the check, Carmen would not have
had to face the questions of -- and explain her predicament to -
- her office mates, her daughters, and the leaders and members
of her church.
Furthermore, the CA was in agreement with the trial court in
ruling that her injury arose from the gross negligence of
petitioner in dishonoring her well-funded check.
Fourth, treating Carmens account as closed, merely because
the ledger could not be found was a reckless act that could not
simply be brushed off as an honest mistake. We have repeatedly
emphasized that the banking industry 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 and always to have in mind the fiduciary nature of its
relationship with them.

Petitioners negligence here was so gross as to amount to a wilful

injury to Respondent Carmen. Article 21 of the Civil Code states
that any person who wilfully causes loss or injury to another in a
manner that is contrary to morals, good customs or public policy
shall compensate the latter for the damage. Further, Article 2219
provides for the recovery of moral damages for acts referred to
in the aforementioned Article 21. Hence, the bank is liable for
moral damages to respondent.
TAN VS CA and RCBC
DOCTRINE: Bank clients are supposed to rely on the services
extended by the bank, including the assurance that their
deposits will be duly credited them as soon as they are made.
For, any delay in crediting their account can be embarrassing to
them as in the case of plaintiff.
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.
FACTS: Businessman Ramon Tan had maintained an account
with RCBC Binondo since 1976. To avoid carrying cash while
going to Manila, he secured a Cashier’s Check from PCIB in the
amount of P 30K, payable to his order. He deposited the check
to RCBC Binondo.
On the same day, RCBC erroneously sent the same cashier's
check for clearing to the Central Bank which was returned for
having been "missent" or "misrouted." The next day, March 16,
RCBC debited the amount covered by the same cashier's check
from the account of the petitioner. Respondent bank at this time
had not informed the petitioner of its action which the latter
claims he learned of only 42 days after, specifically on March 16,
when he received the bank's debit memo. Relying on the
common knowledge that a cashier's check was as good as
cash, that the usual banking practice that local checks are
cleared within three (3) working days and regional checks
within seven (7) working days, and the fact that the
cashier's check was accepted, petitioner issued two (2)
personal checks both dated March 18. Check No. 040719 in
the name of Go Lac for Five Thousand Five Hundred
(P5,5000.00) Pesos was presented on April 25,3 more than
30 days from petitioner's deposit date of the cashier's
check. CheckNo. 040718 in the name of MS Development
Trading Corporation for Six Thousand Fifty-Three Pesos
and Seventy Centavos (P6,053.70) was returned twice on
March 24, nine (9) days from his deposit date and again on
April 26, twenty-two days after the day the cashier's check
was deposited for insufficiency of funds.
Tan now files a case, contending the following:
1) That there was error on RCBC on not informing him
that there was a mistake in depositing the slip;
2) That RCBC had been remiss in the performance of its
obligation to the petitioner when it "missent" the
cashier's check to the Central Bank knowing, as it
should, that the source of the check, PCIB, Puerto
Princesa Branch, is not included in the areas required
to be cleared by the Central Bank, a fact known to the
banking world and surely to the respondent bank;
3) Third, that RCBC upon knowing of its error in
"missending" the cashier's check to the Central Bank
did not attempt to rectify its "misclearing" error by
clearing it seasonably with PCIB, Puerto Princesa, thru
its own RCBC Puerto Princesa Branch with whom it
had direct radio contact;8
4) Fourth, that as an old client, with twelve (12) years of
good standing then, RCBC should have given him
more consideration by exerting greater diligence in
clearing the check with PCIB, Puerto Princesa, to
protect its client's interest;
5) Fifth, that RCBC failed to inform petitioner promptly that
the check had not been cleared, despite its debiting
without delay the amount covered by the check from
the account of the petitioner and hastily charging the
latter service fees immediately after the return of the
"missent checks";
6) Finally, that the bounced checks resulting from RCBC's
"misclearing" had put in doubt his credibility among his
business peers and sullied his reputation as a
community leader which he had painstakingly
cultivated for years.
RCBC denied negligence and put the blame on Tan for the
"misrouting" on the petitioner for using the wrong check deposit
slip. It insisted that the misuse of a local check deposit slip,
instead of a regional check deposit slip, triggered the
"misrouting" by RCBC of the cashier's check to the Central
Bank and it was petitioner's negligent "misuse" of a local
deposit slip which was the proximate cause of the
"misrouting," thus he should bear the consequence.
RCBC alleged that it complied strictly with accepted banking
practice when it debited the amount of P30,000.00 against
petitioner's account since under Resolution No. 2202 dated
December 21, 1979 of the Monetary Board, it is a matter of
policy to prohibit the drawing against uncollected deposits
(DAUDS) except when the drawings are made against
uncollected deposits representing bank
manager's/cashier's/treasurer's checks, treasury warrants,
postal money orders and duly funded "on us" checks which may
be permitted at the discretion of each bank.
RCBC further asseverated it was merely acting as petitioner's
collecting agent and it assumed no responsibility beyond care in
selecting correspondents under the theory that where a check is
deposited with a collecting bank the relationship created is that
of agency and not creditor-debtor, thus it cannot be liable.
Finally, respondent claimed that serious attempts were made to
contact petitioner through the telephone numbers in the
signature specimen card of petitioner but to no avail.17 The
Assistant Branch Accountant of RCBC Binondo Branch testified
that the first telephone number in the card had been deleted from
the phone company's list and that when RCBC tried to contact
petitioner's daughter Evelyn Tan-Banzon thru a certain
telephone number and when they asked for Evelyn Tan, they
were told there was no such person.
ISSUE: WON the bank was negligent?
RULING: YES, it was negligent.
The Court cited its earlier ruling in the case of City Trust
Corporation v. The Intermediate Appellate Court. In that case,
the depositor failed to put another zero in her account number,
thus the checks she issued were dishonored. The Court said
that even if there was a discrepancy in the number, still the name
of the depositor was correct. The name is controlling in
determining in whose account the deposit is made or should be
posted. This is so because it is not likely to commit an error in
one's name that merely relying on numbers which are difficult to
remember, especially a number with eight (8) digits as the
account numbers of defendant's depositors.
In the first place, the teller should not have accepted plaintiff's
deposit without correcting the account number on the deposit
slip which, obviously, was erroneous because, as pointed out by
defendant, it contained only seven (7) digits instead of eight (8).
Second, the complete name of plaintiff depositor appears in bold
letters on the deposit slip. There could be no mistaking in her
name, and that the deposit was made in her name, Emma E.
Herrero. In fact, defendant's teller should not have fed her
deposit slip to the computer knowing that her account number
written thereon was wrong as it contained only seven (7) digits.
As it happened, according to defendant, plaintiff's deposit had to
be consigned to the suspense accounts pending verification.
This, indeed, could have been avoided at the first instance had
the teller of defendant bank performed her duties efficiently and
well. For then she could have readily detected that the account
number in the name of Emma E. Herrero was erroneous and
would be rejected by the computer. That is, or should be, part of
the training and standard operating procedure of the bank's
employees. On the other hand, the depositors are not concerned
with banking procedure. That is the responsibility of the bank
and its employees. Depositors are only concerned with the
facility of depositing their money, earning interest thereon, if any,
and withdrawing therefrom, particularly businessmen, like
plaintiff, who are supposed to be always on-the-go. Plaintiff's
account is a current account which should immediately be
posted. After all, it does not earn interest. At least, the
forbearance should be commensurated with prompt, efficient
and satisfactory service.
of the check as a currency substitute and create havoc in trade
circles and the banking community. 26
Now, what was presented for deposit in the instant cases was
not just an ordinary check but a cashier's check payable to the
account of the depositor himself. A cashier's check is a primary
obligation of the issuing bank and accepted in advance by its
mere issuance. 27 By its very nature, a cashier's check is the
bank's order to pay drawn upon itself, committing in effect its
total resources, integrity and honor behind the check. A cashier's
check by its peculiar character and general use in the
commercial world is regarded substantially to be as good as the
money which it represents.28 In this case, therefore, PCIB by
issuing the check created an unconditional credit in favor of any
collecting bank.
All these considered, petitioner's reliance on the layman's
perception that a cashier's check is as good as cash is not
entirely misplaced, as it is rooted in practice, tradition, and
principle. We see no reason thus why this so-called
discretion was not exercised in favor of petitioner, specially
since PCIB and RCBC are members of the same clearing
house group relying on each other's solvency. RCBC could
surely rely on the solvency of PCIB when the latter issued
its cashier's check.
We hold that petitioner has the right to recover moral
damages even if the bank's negligence may not have been
attended with malice and bad faith. While bank was not in
bad faith, its negligence caused the Tan to suffer mental
anguish, serious anxiety, embarrassment and humiliation,
for which he is entitled to recover, reasonable moral
damages (Art. 2217, Civil Code).

The bank cannot therefore wash its hands. by claiming that its
depositor "impliedly instructed" the bank to clear his check with
the Central Bank by filling a local check deposit slip. Such
posture is disingenuous, to say the least. First, why would RCBC
follow a patently erroneous act born of ignorance or inattention
or both. Second, bank transactions pass through a succession
of bank personnel whose duty is to check and countercheck
transactions for possible errors. In the instant case, the teller
should not have accepted the local deposit slip with the cashier's
check that on its face was clearly a regional check without calling
the depositor's attention to the mistake at the very moment this
was presented to her. Neither should everyone else down the
line who processed the same check for clearing have allowed
the check to be sent to Central Bank. Depositors do not pretend
to be past master of banking technicalities, much more of
clearing procedures. As soon as their deposits are accepted
by the bank teller, they wholly repose trust in the bank
personnel's mastery of banking, their and the bank's sworn
profession of diligence and meticulousness in giving
irreproachable service.

An ordinary check is not a mere undertaking to pay an amount

of money. There is an element of certainty or assurance that it
will be paid upon presentation that is why it is perceived as a
convenient substitute for currency in commercial and financial
transactions. The basis of the perception being confidence. Any
practice that destroys that confidence will impair the usefulness
G.R. No. 112576 October 26, 1994
(CA-GR CV No. 26571)
METROPOLITAN BANK AND TRUST COMPANY, petitioner,
vs.
THE HON. COURT OF APPEALS, RURAL BANK OF PADRE
GARCIA, INC. and ISABEL R. KATIGBAK, respondents.
Katigbak is the president and director of RBPG, while MBTC is
the rural bank's depository bank, where Katigbak maintains
current accounts.
April 6, 1982, MBTC received from the CB a credit memo dated
April 5, 1982 that its demand deposit account was credited with
P304,000.00 for the account of RBPG, representing loans
granted by the Central Bank to RBPG.
Katigbak issued several checks in the total amount of
P300,000.00, payable to Dr. Felipe and Mrs. Eliza Roque for
P25,000.00 each.
Dr. and Mrs. Roque deposited the checks with PBC, but the
checks were returned by MBTC with the annotations "DAIF —
TNC" (Drawn Against Insufficient Funds — Try Next Clearing)
so they were redeposited on April 14, 1982, which was again
dishonored for the following reason: "DAIF — TNC — NO
ADVICE FROM CB."
The Roques went to Katigbak and the latter paid them in
P50,000 cash.
While Katigbak was on a business-vacation trip, she received
overseas phone calls from Mrs. San Juan informing her that a
certain Mr. Dungo, Assistant Cashier of MBTC insisted on
talking to Mrs. San Juan (Dungo thought she is Isabel Katigbak),
berating her about the checks which bounced, saying "Nag-
issue kayo ng tseke, wala namang pondo."
Mrs. Katigbak asked Mrs. San Juan to request MBTC to check
and verify the records regarding the CB credit memo for
P304,000.00 but Mrs. San Juan received another insulting call
from Mr. Dungo ("Bakit kayo nag-issue ng tseke na wala
namang pondo, Three Hundred Thousand na.") When Mrs. San
Juan explained to him the need to verify the records regarding
the Central Bank memo, he merely brushed it aside, telling her
sarcastically that he was very sure that no such credit memo
existed.
Subsequent events led to hospitalization of Katigbak for 2 days.
MBTC also issued 4 debit memos representing service and
penalty charges for the returned checks.
RBPG and Isabel Katigbak filed an action for damages against
MBTC.
It was established later that the reason why the CM did not
reflect in RBPG’s account was due to the inadvertence and
mishandling of the messenger which resulted to the CM not
being delivered to the department in charge of processing the
same; consequently, when MBTC received from the clearing
department the checks in question, the stated balance in
RBPG's account was only P5,498.58 which excluded the
unprocessed credit advice of P304,000.00 resulting in the
dishonor of the aforementioned checks.
MBTC also contends that the bank and its officers acted with no
deliberate intent on their part to cause injury or damage to
plaintiffs, explaining the circumstances that gave rise to the
bouncing checks situation. Metrobank's negligence arising from
their messenger's misrouting of the credit advice resulting in the
return of the checks in question, despite daily reporting of credit
memos and a corresponding daily radio message confirmation,
and Mr. Dungo's improper handling of clients led to the
messenger's dismissal from service and Mr. Dungo's transfer
from Metro Manila to Mindoro.
RTC: in favour of plaintiff; defendant is ordered to pay
temperate(50k), moral(500k), including attorney's fees, litigation
expenses and the costs of the suit(100k); did not award actual
damages in the amount of P50,000.00 representing the amount
of the two (2) checks payable to Dr. Felipe C. Roque and Mrs.
Elisa Roque.
CA: delete temperate damages, reduce moral(50k-RBPC; 100k-
Katigbak); atty’s fees(50k)
ISSUE: Whether RBPG and Rodriguez are legally entitled to
moral damages and attorney's fees – YES
HELD:
There is no merit in petitioner's argument that it should not be
considered negligent, much less be held liable for damages on
account of the inadvertence of its bank employee as Article 1173
of the Civil Code only requires it to exercise the diligence of a
good pater familias.
As borne out by the records, the dishonoring of the respondent's
checks committed through negligence by the petitioner bank on
April 6, 1982 was rectified only on April 15, 1992 or nine (9) days
after receipt of the credit memo. Clearly, petitioner bank was
remiss in its duty and obligation to treat private respondent's
account with the highest degree of care, considering the
fiduciary nature of their relationship. The 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. It must bear the blame for failing to discover
the mistake of its employee despite the established procedure
requiring bank papers to pass through bank personnel whose
duty it is to check and countercheck them for possible
errors. Responsibility arising from negligence in the
performance of every kind of obligation is demandable. While
the bank's negligence may not have been attended with malice
and bad faith, nevertheless, it caused serious anxiety,
embarrassment and humiliation to private respondents for which
they are entitled to recover reasonable moral damages.

It was established that when Mrs. Katigbak learned that her

checks were not being honored and Mr. Dungo repeatedly made
the insulting phone calls, her wounded feelings and the mental
anguish suffered by her caused her blood pressure to rise
beyond normal limits, necessitating medical attendance for two
(2) days at a hospital.

The damage to private respondents' reputation and social

standing entitles them to moral damages. Moral damages
include physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings, moral shock,
social humiliation and similar injury.

The CA justified its deletion of temperate damages when MBTC

reasoned out that the amount of P50,000.00 is not part of the
relief prayed for in the complaint, aside from the fact that the
amount allegedly suffered by Mrs. Katigbak is susceptible of
proof.

The carelessness of petitioner bank, aggravated by the lack of

promptness in repairing the error and the arrogant attitude of the
bank officer handling the matter, justifies the grant of moral
damages, which are clearly not excessive and unconscionable.

Moreover, considering the nature and extent of the services

rendered by private respondent's counsel, both in the trial and
appellate courts, the Court deems it just and equitable that
attorney's fees in the amount
G.R. No. 116181 April 17, 1996
PHILIPPINE NATIONAL BANK, petitioner,
vs.
COURT OF APPEALS and CARMELO H.
FLORES, respondents.
Flores, business man engaged in real estate, purchased from
PNB 2 manager's checks worth P500,000.00 each, paying a
total of P1,000,040.00, including the service charge. A receipt
for said amount was issued by the petitioner.
On 12 July 1989, Flores presented these checks at the Baguio
Hyatt Casino unit of PNB. However, PNB initially refused to
encash the checks but after a lengthy discussion, it agreed to
encash one 1 of the checks, and deferred the payment of the
other check. Flores tried to encash the chck on several
occasions, to no avail.
Left with no other choice, Flores filed a case with the RTC.
In its Answer, PNB claimed that only P900,000.00 and P40.00
bank charges were actually paid by Flores when he purchased
the 2 manager's checks worth P1,000,000.00. It alleged that due
to Flores' "demanding attitude and temper," petitioner's money
counter, Rowena Montes, who, at that time was still new at her
job, made an error in good faith in issuing the receipt for
P1,000,040.00.
RTC ruled in favour of Flores: 100k-amount dishonoured; 1M-
moral; 1M-exemplary; 50k-attorneys fee; cost of suit.
CA – affirmed RTC decision.
ISSUE:
WHETHER THE CA ERRED IN HOLDING THAT, THE BEST
EVIDENCE TO SHOW WHETHER MR. FLORES PAID THE
PNB CASINO UNIT P900,040 OR P1,000,040 IN
PURCHASING THE TWO MANAGER'S CHECKS EACH
WORTH P500,000 IS THE RECEIPT FOR P1,000,040. – NO
HELD:
A "receipt" is defined as a written and signed acknowledgment
that money has been paid or goods have been delivered. A
receipt is merely presumptive evidence and is not conclusive. A
written acknowledgment that money or a thing of value has been
received. Since a receipt is a mere acknowledgment of
payment, it may be subject to explanation or contradiction. A
receipt may be used as evidence against one just as any other
declaration or admission. A simple receipt not under seal is
presumptive evidence only and may be rebutted or explained by
other evidence of mistake in giving it, or of non-payment or of
the circumstances under which it was given.
Although a receipt is not conclusive evidence, in the case at
bench, an exhaustive review of the records fails to disclose any
other evidence sufficient and strong enough to overturn the
acknowledgment embodied in petitioner's own receipt (as to the
amount of money it actually received).
In Monfort v. Aguinaldo, the receipts of payment, although not
exclusive, were deemed to be the best evidence. The best
evidence for proving payment is by the evidence of receipts
showing the same is also admitted. What respondents claim is
that there is no rule which provides that payment can only be
proved by receipts. While receipts are deemed to be the best
evidence, they are not exclusive. Other evidence may be
presented in lieu thereof if they are not available, as in case of
loss, destruction or disappearance. The fact of payment may be
established not only by documentary evidence, but also by parol
evidence
Here, the evidence presented by PNB (application form) has no
probative value because it did not show proof of payment. The
testimonies were also not given credence because they were
self-serving and were given by bank employees involved in the
fiasco.
ISSUE:
WHETHER THE AWARD FOR MORAL DAMAGES,
EXEMPLARY DAMAGES, AND ATTORNEY'S FEES, AS
COMPARED TO THE ACTUAL CLAIM OF P100,000 IS
DISPROPORTIONATE AND UNCONSCIONABLE. – YES
HELD:
Since there is no doubt as to the fact that the plaintiff purchased
from the defendant bank 2 manager's check worth P500,000.00
each as this was evidenced by an official receipt, then the
existence of the manager's check created a fiduciary
relationship between the defendant bank and the plaintiff and
therefore any breach thereof must be borne by the negligent
party. In this case, the money counter who, among her other
duties, is in charge of counting the money received from a client
purchasing a manager's check did not perform her duty with
diligence and due care. This may be gathered from her
testimony that she did not wait for the counting machine to finish
counting the money for the plaintiff is a VIP client and he was in
a hurry as he was tapping the window. Equally negligent is
Reynaldo Castor for not doing anything when he noticed that
their money counters who entertained the plaintiff were rattled.
From these unfolded facts, the so-called honest mistake
pleaded is therefore misplaced and perforced, defendant must
suffer the consequences of its own negligent acts.
However, we give consideration to petitioner's allegation that the
award of P1,000,000.00 moral damages and P1,000,000.00
exemplary damages in addition to Flores' actual claim of
P100,000.00 is "inordinately disproportionate and
unconscionable."
Under the circumstances obtaining in the case at bench, we rule
that the award of moral and exemplary damages is patently
excessive and should be reduced to a reasonable amount. We
take into consideration the following factors:
First, Flores' contention that he lost the opportunity to purchase
a house and lot in Baguio City due to petitioner's gross
negligence is based solely on his own testimony and a mere
general statement at that. The broker he named during his
cross-examination on 10 July 1990, a Mr. Nick Buendia was not
even presented to confirm the allegation
Second, the award of moral damages in the amount of
P1,000,000.00 is obviously not proportionate to the actual
losses of P100,000.00 sustained by Flores. In RCPI
v. Rodriguez, we ruled that … where the awards of moral and
exemplary damages are far too excessive compared to the
actual losses sustained by the aggrieved party, this Court ruled
that they should be reduced to more reasonable amounts.
In other words, the moral damages awarded must be
commensurate with the loss or injury suffered.
Moral damages though incapable of pecuniary estimations, are
in the category of an award designed to compensate the
claimant for actual injury suffered and not to impose a penalty
on the wrongdoer; It is not intended to enrich a complainant at
the expense of the defendant.

However, the award of P1,000,000.00 exemplary damages is

also far too excessive and should likewise be reduced to an
equitable level.

ISSUE:
WHETHER THE ACT OF ISSUANCE OF RECEIPT PROPER -
NO

HELD:

Finally, we find petitioner's act of issuing the manager's checks

and corresponding receipt before payment thereof was
completely counted reckless and grossly negligent. It is an
appalling breach of bank procedures and must never be
repeated.

In Bautista v. Mangaldan Rural Bank, Inc., we stated that the

banking system has become an indispensable institution in the
modern world and plays a vital role in the economic life of every
civilized society. Whether as mere passive entities for the safe-
keeping and saving of money or as active instruments of
business and commerce, banks have attained an unbiquitous
presence among the people, who have come to regard them
with respect and even gratitude and, most of all, confidence.

G.R. No. 112576 October 26, 1994
(CA-GR CV No. 26571)
METROPOLITAN BANK AND TRUST COMPANY, petitioner,
vs.
THE HON. COURT OF APPEALS, RURAL BANK OF PADRE
GARCIA, INC. and ISABEL R. KATIGBAK, respondents.
Katigbak is the president and director of RBPG, while MBTC is
the rural bank's depository bank, where Katigbak maintains
current accounts.
April 6, 1982, MBTC received from the CB a credit memo dated
April 5, 1982 that its demand deposit account was credited with
P304,000.00 for the account of RBPG, representing loans
granted by the Central Bank to RBPG.
Katigbak issued several checks in the total amount of
P300,000.00, payable to Dr. Felipe and Mrs. Eliza Roque for
P25,000.00 each.
Dr. and Mrs. Roque deposited the checks with PBC, but the
checks were returned by MBTC with the annotations "DAIF —
TNC" (Drawn Against Insufficient Funds — Try Next Clearing)
so they were redeposited on April 14, 1982, which was again
dishonored for the following reason: "DAIF — TNC — NO
ADVICE FROM CB."
The Roques went to Katigbak and the latter paid them in
P50,000 cash.
While Katigbak was on a business-vacation trip, she received
overseas phone calls from Mrs. San Juan informing her that a
certain Mr. Dungo, Assistant Cashier of MBTC insisted on
talking to Mrs. San Juan (Dungo thought she is Isabel Katigbak),
berating her about the checks which bounced, saying "Nag-
issue kayo ng tseke, wala namang pondo."
Mrs. Katigbak asked Mrs. San Juan to request MBTC to check
and verify the records regarding the CB credit memo for
P304,000.00 but Mrs. San Juan received another insulting call
from Mr. Dungo ("Bakit kayo nag-issue ng tseke na wala
namang pondo, Three Hundred Thousand na.") When Mrs. San
Juan explained to him the need to verify the records regarding
the Central Bank memo, he merely brushed it aside, telling her
sarcastically that he was very sure that no such credit memo
existed.
Subsequent events led to hospitalization of Katigbak for 2 days.
MBTC also issued 4 debit memos representing service and
penalty charges for the returned checks.
RBPG and Isabel Katigbak filed an action for damages against
MBTC.
It was established later that the reason why the CM did not
reflect in RBPG’s account was due to the inadvertence and
mishandling of the messenger which resulted to the CM not
being delivered to the department in charge of processing the
same; consequently, when MBTC received from the clearing
department the checks in question, the stated balance in
RBPG's account was only P5,498.58 which excluded the
unprocessed credit advice of P304,000.00 resulting in the
dishonor of the aforementioned checks.
MBTC also contends that the bank and its officers acted with no
deliberate intent on their part to cause injury or damage to
plaintiffs, explaining the circumstances that gave rise to the
bouncing checks situation. Metrobank's negligence arising from
their messenger's misrouting of the credit advice resulting in the
return of the checks in question, despite daily reporting of credit
memos and a corresponding daily radio message confirmation,
and Mr. Dungo's improper handling of clients led to the
messenger's dismissal from service and Mr. Dungo's transfer
from Metro Manila to Mindoro.
RTC: in favour of plaintiff; defendant is ordered to pay
temperate(50k), moral(500k), including attorney's fees, litigation
expenses and the costs of the suit(100k); did not award actual
damages in the amount of P50,000.00 representing the amount
of the two (2) checks payable to Dr. Felipe C. Roque and Mrs.
Elisa Roque.
CA: delete temperate damages, reduce moral(50k-RBPC; 100k-
Katigbak); atty’s fees(50k)
ISSUE: Whether RBPG and Rodriguez are legally entitled to
moral damages and attorney's fees – YES
HELD:
There is no merit in petitioner's argument that it should not be
considered negligent, much less be held liable for damages on
account of the inadvertence of its bank employee as Article 1173
of the Civil Code only requires it to exercise the diligence of a
good pater familias.
As borne out by the records, the dishonoring of the respondent's
checks committed through negligence by the petitioner bank on
April 6, 1982 was rectified only on April 15, 1992 or nine (9) days
after receipt of the credit memo. Clearly, petitioner bank was
remiss in its duty and obligation to treat private respondent's
account with the highest degree of care, considering the
fiduciary nature of their relationship. The 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. It must bear the blame for failing to discover
the mistake of its employee despite the established procedure
requiring bank papers to pass through bank personnel whose
duty it is to check and countercheck them for possible
errors. Responsibility arising from negligence in the
performance of every kind of obligation is demandable. While
the bank's negligence may not have been attended with malice
and bad faith, nevertheless, it caused serious anxiety,
embarrassment and humiliation to private respondents for which
they are entitled to recover reasonable moral damages.

It was established that when Mrs. Katigbak learned that her

checks were not being honored and Mr. Dungo repeatedly made
the insulting phone calls, her wounded feelings and the mental
anguish suffered by her caused her blood pressure to rise
beyond normal limits, necessitating medical attendance for two
(2) days at a hospital.

The damage to private respondents' reputation and social

standing entitles them to moral damages. Moral damages
include physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings, moral shock,
social humiliation and similar injury.

The CA justified its deletion of temperate damages when MBTC

reasoned out that the amount of P50,000.00 is not part of the
relief prayed for in the complaint, aside from the fact that the
amount allegedly suffered by Mrs. Katigbak is susceptible of
proof.

The carelessness of petitioner bank, aggravated by the lack of

promptness in repairing the error and the arrogant attitude of the
bank officer handling the matter, justifies the grant of moral
damages, which are clearly not excessive and unconscionable.

Moreover, considering the nature and extent of the services

rendered by private respondent's counsel, both in the trial and
appellate courts, the Court deems it just and equitable that
attorney's fees in the amount
G.R. No. 116181 April 17, 1996
PHILIPPINE NATIONAL BANK, petitioner,
vs.
COURT OF APPEALS and CARMELO H.
FLORES, respondents.
FACTS:
Flores, business man engaged in real estate, purchased from
PNB 2 manager's checks worth P500,000.00 each, paying a
total of P1,000,040.00, including the service charge. A receipt
for said amount was issued by the petitioner.
On 12 July 1989, Flores presented these checks at the Baguio
Hyatt Casino unit of PNB. However, PNB initially refused to
encash the checks but after a lengthy discussion, it agreed to
encash one 1 of the checks, and deferred the payment of the
other check. Flores tried to encash the chck on several
occasions, to no avail.
Left with no other choice, Flores filed a case with the RTC.
In its Answer, PNB claimed that only P900,000.00 and P40.00
bank charges were actually paid by Flores when he purchased
the 2 manager's checks worth P1,000,000.00. It alleged that due
to Flores' "demanding attitude and temper," petitioner's money
counter, Rowena Montes, who, at that time was still new at her
job, made an error in good faith in issuing the receipt for
P1,000,040.00.
RTC ruled in favour of Flores: 100k-amount dishonoured; 1M-
moral; 1M-exemplary; 50k-attorneys fee; cost of suit.
CA – affirmed RTC decision.
ISSUE:
WHETHER THE CA ERRED IN HOLDING THAT, THE BEST
EVIDENCE TO SHOW WHETHER MR. FLORES PAID THE
PNB CASINO UNIT P900,040 OR P1,000,040 IN
PURCHASING THE TWO MANAGER'S CHECKS EACH
WORTH P500,000 IS THE RECEIPT FOR P1,000,040. – NO
HELD:
A "receipt" is defined as a written and signed acknowledgment
that money has been paid or goods have been delivered. A
receipt is merely presumptive evidence and is not conclusive. A
written acknowledgment that money or a thing of value has been
received. Since a receipt is a mere acknowledgment of
payment, it may be subject to explanation or contradiction. A
receipt may be used as evidence against one just as any other
declaration or admission. A simple receipt not under seal is
presumptive evidence only and may be rebutted or explained by
other evidence of mistake in giving it, or of non-payment or of
the circumstances under which it was given.
Although a receipt is not conclusive evidence, in the case at
bench, an exhaustive review of the records fails to disclose any
other evidence sufficient and strong enough to overturn the
acknowledgment embodied in petitioner's own receipt (as to the
amount of money it actually received).
In Monfort v. Aguinaldo, the receipts of payment, although not
exclusive, were deemed to be the best evidence. The best
evidence for proving payment is by the evidence of receipts
showing the same is also admitted. What respondents claim is
that there is no rule which provides that payment can only be
proved by receipts. While receipts are deemed to be the best
evidence, they are not exclusive. Other evidence may be
presented in lieu thereof if they are not available, as in case of
loss, destruction or disappearance. The fact of payment may be
established not only by documentary evidence, but also by parol
evidence
Here, the evidence presented by PNB (application form) has no
probative value because it did not show proof of payment. The
testimonies were also not given credence because they were
self-serving and were given by bank employees involved in the
fiasco.
ISSUE:
WHETHER THE AWARD FOR MORAL DAMAGES,
EXEMPLARY DAMAGES, AND ATTORNEY'S FEES, AS
COMPARED TO THE ACTUAL CLAIM OF P100,000 IS
DISPROPORTIONATE AND UNCONSCIONABLE. – YES
HELD:
Since there is no doubt as to the fact that the plaintiff purchased
from the defendant bank 2 manager's check worth P500,000.00
each as this was evidenced by an official receipt, then the
existence of the manager's check created a fiduciary
relationship between the defendant bank and the plaintiff and
therefore any breach thereof must be borne by the negligent
party. In this case, the money counter who, among her other
duties, is in charge of counting the money received from a client
purchasing a manager's check did not perform her duty with
diligence and due care. This may be gathered from her
testimony that she did not wait for the counting machine to finish
counting the money for the plaintiff is a VIP client and he was in
a hurry as he was tapping the window. Equally negligent is
Reynaldo Castor for not doing anything when he noticed that
their money counters who entertained the plaintiff were rattled.
From these unfolded facts, the so-called honest mistake
pleaded is therefore misplaced and perforced, defendant must
suffer the consequences of its own negligent acts.
However, we give consideration to petitioner's allegation that the
award of P1,000,000.00 moral damages and P1,000,000.00
exemplary damages in addition to Flores' actual claim of
P100,000.00 is "inordinately disproportionate
unconscionable."
Under the circumstances obtaining in the case at bench, we rule
that the award of moral and exemplary damages is patently
excessive and should be reduced to a reasonable amount. We
take into consideration the following factors:
Finally, we find petitioner's act of issuing the manager's checks
and corresponding receipt before payment thereof was
completely counted reckless and grossly negligent. It is an
appalling breach of bank procedures and must never be
repeated.
and In Bautista v. Mangaldan Rural Bank, Inc., we stated that the
banking system has become an indispensable institution in the
modern world and plays a vital role in the economic life of every
civilized society. Whether as mere passive entities for the safe-
keeping and saving of money or as active instruments of
business and commerce, banks have attained an unbiquitous
presence among the people, who have come to regard them
with respect and even gratitude and, most of all, confidence.

First, Flores' contention that he lost the opportunity to purchase

a house and lot in Baguio City due to petitioner's gross
negligence is based solely on his own testimony and a mere
general statement at that. The broker he named during his
cross-examination on 10 July 1990, a Mr. Nick Buendia was not
even presented to confirm the allegation

Second, the award of moral damages in the amount of

P1,000,000.00 is obviously not proportionate to the actual
losses of P100,000.00 sustained by Flores. In RCPI
v. Rodriguez, we ruled that … where the awards of moral and
exemplary damages are far too excessive compared to the
actual losses sustained by the aggrieved party, this Court ruled
that they should be reduced to more reasonable amounts.

In other words, the moral damages awarded must be

commensurate with the loss or injury suffered.

Moral damages though incapable of pecuniary estimations, are

in the category of an award designed to compensate the
claimant for actual injury suffered and not to impose a penalty
on the wrongdoer; It is not intended to enrich a complainant at
the expense of the defendant.

However, the award of P1,000,000.00 exemplary damages is

also far too excessive and should likewise be reduced to an
equitable level.

ISSUE:

WHETHER THE ACT OF ISSUANCE OF RECEIPT PROPER -

NO

HELD:
HILARIO P. SORIANO, Petitioner. vs. People of the
Philippines, Banko Sentral ng Pilipinas (BSP), Philippine
Deposit Insurance Corporation (PDIC), Public Prosecutor
Antonio C. Buan, and State Prosecutor Arlberto R.
Fonacier, Respondents.
G.R. No. 162336 February 1, 2010
DOCTRINE:
 The prohibition in Section 83 is broad enough to cover
various modes of borrowing. It covers loans by a bank
director or officer which are made either: (1) directly,
(2) indirectly, (3) for himself, (4) or as the
representative or agent of others. It applies even if the
director or officer is a mere guarantor, indorser or
surety for someone else's loan or is in any manner an
obligor for money borrowed from the bank or loaned by
it. The covered transactions are prohibited unless the
approval, reportorial and ceiling requirements under
Section 83 are complied with.
 A direct borrowing is obviously one that is made in the
name of the DOSRI himself or where the DOSRI is a
named party, while an indirect borrowing includes one
that is made by a third party, but the DOSRI has a stake
in the transaction.
FACTS:
Sometime in 2000, the Office of Special Investigation (OSI) of
the Bangko Sentral ng Pilipinas (BSP), through its
officers, transmitted a letter to Jovencito Zuo, Chief State
Prosecutor of the Department of Justice (DOJ). The letter
attached as annexes five affidavits, which would allegedly serve
as bases for filing criminal charges for Estafa thru Falsification
of Commercial Documents, in relation to Presidential Decree
(PD) No. 1689, and for Violation of Section 83 of RA 337, as
amended by PD 1795, against, inter alia, petitioner herein
Hilario P. Soriano. It was stated in the affidavits that spouses
Enrico and Amalia Carlos appeared to have an outstanding loan
of P8 million with the Rural Bank of San Miguel (Bulacan), Inc.
(RBSM), but had never applied for nor received such loan; that
it was petitioner, who was then president of RBSM, who had
ordered, facilitated, and received the proceeds of the loan; and
that the P8 million loan had never been authorized by RBSM's
Board of Directors and no report thereof had ever been
submitted to the Department of Rural Banks, Supervision and
Examination Sector of the BSP.
The letter of the OSI, which was not subscribed under oath,
ended with a request that a preliminary investigation be
conducted and the corresponding criminal charges be filed
against petitioner at his last known address.
State Prosecutor Albert R. Fonacier proceeded with the PI. The
investigating officer issued a Resolution finding probable cause
and correspondingly filed two separate informations against
petitioner before the Regional Trial Court (RTC) of Malolos,
Bulacan.
The first Information docketed as Criminal Case No. 237-M-
2001, was for estafa through falsification of commercial
documents, under Article 315, paragraph 1(b), in relation to
Article 172 of the RPC and PD 1689. It basically alleged that
petitioner and his co-accused, in abuse of the confidence
reposed in them as RBSM officers, caused the falsification of a
number of loan documents, making it appear that one Enrico
Carlos filled up the same, and thereby succeeded in securing a
loan and converting the loan proceeds for their personal gain
and benefit.
The Second Information docketed as Criminal Case No. 238-
M-2001, was for violation of Section 83 of RA 337, as amended
by PD 1795. The said provision refers to the prohibition against
the so-called DOSRI loans. The information alleged that, in his
capacity as President of RBSM, petitioner indirectly secured
an P8 million loan with RBSM, for his personal use and benefit,
without the written consent and approval of the bank's Board of
Directors, without entering the said transaction in the bank's
records, and without transmitting a copy of the transaction to the
supervising department of the bank. His ruse was facilitated by
placing the loan in the name of an unsuspecting RBSM
depositor, one Enrico Carlos.
Petitioner’s Contention:
Petitioner moved to quash] these informations on two grounds:
that the court had no jurisdiction over the offense charged, and
that the facts charged do not constitute an offense.
Petitioner argued that the letter transmitted by the BSP to the
DOJ constituted the complaint and hence was defective for
failure to comply with the mandatory requirements of Section
3(a), Rule 112 of the Rules of Court, such as the statement of
address of petitioner and oath and subscription. Moreover,
petitioner argued that the officers of OSI, who were the
signatories to the letter-complaint, were not authorized by the
BSP Governor, much less by the Monetary Board, to file the
complaint. According to petitioner, this alleged fatal oversight
violated Section 18, pars. (c) and (d) of the New Central Bank
Act (RA 7653).
Petitioner contended that the commission of estafa under RPC
is inherently incompatible with the violation of DOSRI of RA 337,
as amended by PD 1795), hence a person cannot be charged
for both offenses. He argued that a violation of DOSRI law
requires the offender to obtain a loan from his bank, without
complying with procedural, reportorial, or ceiling
requirements. On the other hand, estafa under RPC requires the
offender to misappropriate or convert something that he holds
in trust, or on commission, or for administration, or under
any other obligation involving the duty to return the same.
Petitioner theorized that the characterization of possession is
different in the two offenses. If petitioner acquired the loan as
DOSRI, he owned the loaned money and therefore, cannot
misappropriate or convert it as contemplated in the offense of
estafa. Conversely, if petitioner committed estafa, then he
merely held the money in trust for someone else and therefore,
did not acquire a loan in violation of DOSRI rules.
RTC Ruling:
Ruled in favor of the respondents.
CA RULING:
The CA denied the petition on both issues presented by
petitioner.
Petitioners Motion for Reconsideration was likewise denied for
lack of merit. Hence, this petition.
ISSUE:
1. W/N a loan transaction within the ambit of the DOSRI
law could also be the subject of Estafa under the RPC?
YES
2. W/N the complaint complied with the mandatory
requirements provided under Section 3(a), Rule 112 of
the Rules of Court and Section 18, paragraphs (c) and
(d) ofRepublic Act No. 7653? YES
HELD:
1. W/N a loan transaction within the ambit of the
DOSRI law could also be the subject of Estafa
under the RPC? YES
We have examined the two informations against petitioner and
we find that they contain allegations which, if hypothetically
admitted, would establish the essential elements of the crime of
DOSRI violation and estafa thru falsification of commercial
documents.
Petitioner raises the theory that he could not possibly be held
liable for estafa in concurrence with the charge for DOSRI
violation. According to him, the DOSRI charge presupposes that
he acquired a loan, which would make the loan proceeds
his own money and which he could neither possibly
misappropriate nor convert to the prejudice of another, as
required by the statutory definition of estafa. On the other hand,
if petitioner did not acquire any loan, there can be no DOSRI
violation to speak of. Thus, petitioner posits that the two
offenses cannot co-exist. This theory does not persuade us.
Petitioners theory is based on the false premises that the loan
was extended to him by the bank in his own name, and that he
became the owner of the loan proceeds. Both premises are
wrong.
The bank money (amounting to P8 million) which came to
the possession of petitioner was money held in trust or
administration by him for the bank, in his fiduciary capacity
as the President of said bank. It is not accurate to say that
petitioner became the owner of the P8 million because it
was the proceeds of a loan. That would have been correct if
the bank knowingly extended the loan to petitioner
himself. But that is not the case here. According to the
information for estafa, the loan was supposed to be for
another person, a certain Enrico Carlos; petitioner, through
falsification, made it appear that said Enrico Carlos applied
for the loan when in fact he (Enrico Carlos) did not. Through
such fraudulent device, petitioner obtained the loan
proceeds and converted the same. Under these
circumstances, it cannot be said that petitioner became
the legal owner of the P8 million. Thus, petitioner remained
the banks fiduciary with respect to that money, which
makes it capable of misappropriation or conversion in his
hands.
The next question is whether there can also be, at the same
time, a charge for DOSRI violation in such a situation wherein
the accused bank officer did not secure a loan in his own name,
but was alleged to have used the name of another person in
order to indirectly secure a loan from the bank. We answer this
in the affirmative. Section 83 of RA 337 reads:
Section 83. No director or officer of any banking institution shall,
either directly or indirectly, for himself or as the representative
or agent of others, borrow any of the deposits of funds of such
bank, nor shall he become a guarantor, indorser, or surety for
loans from such bank to others, or in any manner be an obligor
for moneys borrowed from the bank or loaned by it, except with
the written approval of the majority of the directors of the bank,
excluding the director concerned. Any such approval shall be
entered upon the records of the corporation and a copy of such
entry shall be transmitted forthwith to the Superintendent of
Banks. The office of any director or officer of a bank who violates
the provisions of this section shall immediately become vacant
and the director or officer shall be punished by imprisonment of
not less than one year nor more than ten years and by a fine of
not less than one thousand nor more than ten thousand pesos. x
xx
The prohibition in Section 83 is broad enough to cover
various modes of borrowing. It covers loans by a bank
director or officer (like herein petitioner) which are made
either: (1) directly, (2) indirectly, (3) for himself, (4) or as the
representative or agent of others. It applies even if the
director or officer is a mere guarantor, indorser or surety
for someone else's loan or is in any manner an obligor for
money borrowed from the bank or loaned by it. The covered
transactions are prohibited unless the approval, reportorial
and ceiling requirements under Section 83 are complied
with.
The prohibition is intended to protect the public, especially the
depositors from the overborrowing of bank funds by bank
officers, directors, stockholders and related interests, as such
overborrowing may lead to bank failures. It has been said that
banking institutions are not created for the benefit of the
directors [or officers]. While directors have great powers as
directors, they have no special privileges as individuals. They
cannot use the assets of the bank for their own benefit except
as permitted by law. Stringent restrictions are placed about them
so that when acting both for the bank and for one of themselves
at the same time, they must keep within certain prescribed lines
regarded by the legislature as essential to safety in the banking
business.
A direct borrowing is obviously one that is made in the
name of the DOSRI himself or where the DOSRI is a named
party, while an indirect borrowing includes one that is made
by a third party, but the DOSRI has a stake in the
transaction. The latter type indirect borrowing applies here.
The information in Criminal Case 238-M-2001 alleges that
petitioner in his capacity as President of Rural Bank of San
Miguel San Ildefonso branch x x x indirectly borrow[ed] or
secure[d] a loan with [RBSM] x x x knowing fully well that
the same has been done by him without the written consent
and approval of the majority of the board of directors x x x,
and which consent and approval the said accused
deliberately failed to obtain and enter the same upon the
records of said banking institution and to transmit a copy
thereof to the supervising department of the said bank x x
x by using the name of one depositor Enrico Carlos x x x,
the latter having no knowledge of the said loan, and once in
possession of the said amount of eight million pesos (P8
million), [petitioner] converted the same to his own
personal use and benefit.

The foregoing information describes the manner of securing the

loan as indirect; names petitioner as the benefactor of the
indirect loan; and states that the requirements of the law were
not complied with. It contains all the required elements for a
violation of Section 83, even if petitioner did not secure the loan
in his own name.

The broad interpretation of the prohibition in Section 83 is

justified by the fact that it even expressly covers loans to third
parties where the third parties are aware of the transaction (such
as principals represented by the DOSRI), and where the
DOSRIs interest does not appear to be beneficial but even
burdensome (such as in cases when the DOSRI acts as a mere
guarantor or surety). If the law finds it necessary to protect the
bank and the banking system in such situations, it will surely be
illogical for it to exclude a case like this where the DOSRI
acted for his own benefit, using the name of an unsuspecting
person. A contrary interpretation will effectively allow a DOSRI
to use dummies to circumvent the requirements of the law.

2. W/N the complaint complied with the mandatory

requirements provided under Section 3(a), Rule
112 of the Rules of Court and Section 18,
paragraphs (c) and (d) ofRepublic Act No. 7653?
YES

We held in Soriano v. Hon. Casanova, after a close scrutiny of

the letters transmitted by the BSP to the DOJ, that these were
not intended to be the complaint, as envisioned under the
Rules. They did not contain averments of personal knowledge
of the events and transactions constitutive of any offense. The
letters merely transmitted for preliminary investigation the
affidavits of people who had personal knowledge of the acts
of petitioner. We ruled that these affidavits, not the letters
transmitting them, initiated the preliminary
investigation. Since these affidavits were subscribed under
oath by the witnesses who executed them before a notary
public, then there was substantial compliance with Section
3(a), Rule 112 of the Rules of Court.

Anent the contention that there was no authority from the BSP
Governor or the Monetary Board to file a criminal case against
Soriano, we held that the requirements of Section 18,
paragraphs (c) and (d) of RA 7653 did not apply because the
BSP did not institute the complaint but merely transmitted the
affidavits of the complainants to the DOJ.

We further held that since the offenses for which Soriano was
charged were public crimes, authority holds that it can be
initiated by any competent person with personal knowledge of
the acts committed by the offender. Thus, the witnesses who
executed the affidavits clearly fell within the purview of any
competent person who may institute the complaint for a public
crime.
THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on
relation of the Attorney-General), plaintiff, vs. EL HOGAR
FILIPINO, defendant.
G.R. No. L-26649 July 13, 1927
DOCTRINE:
 Section 21 of the Corporation Law expressly gives the
power to the corporation to provide in its by-laws for
the qualifications of directors; and the requirement of
security from them for the proper discharge of the
duties of their office, in the manner prescribed in article
70, is highly prudent and in conformity with good
practice. Article 76, prohibiting directors from making
loans to themselves, is of course designed to prevent
the possibility of the looting of the corporation by
unscrupulous directors. A more discreet provision to
insert in the by-laws of a building and loan association
would be hard to imagine. Clearly, the eighth cause of
action cannot be sustained
FACTS:
This is a quo warranto proceeding, alleging 17 causes of action,
instituted originally in this court by the Philippine Government on
the relation of the Attorney-General against the building and loan
association known as El Hogar Filipino, for the purpose of
depriving it of its corporate franchise, excluding it from all
corporate rights and privileges, and effecting a final dissolution
of said corporation.
The Philippine Commission enacted Act No. 1459, also known
as the Corporation Law, on March 1, 1906. El Hogar Filipino,
organized in 1911 under the laws of the Philippine Islands, was
the first corporation organized under Sec. 171-190 Act No. 1459,
devoted to the subject of building and loan associations, their
organization and administration. In the said law, the capital of
the corporation was not permitted to exceed P3M, but Act No.
2092 amended the statute, permitting capitalization to the
amount of 10M.
El Hogar took advantage of the amendment of Act No. 1459 and
amended its AOI as a result thereof, stating that the amount of
capital must not exceed what has been stated in Act No. 2092.
This resulted to El Hogar having 5,826 shareholders, 125,750
shares with paid-up value of P8.7M. The corporation paid
P7.16M to its withdrawing stockholders.
The Government of the Philippine Islands filed an action against
El Hogar due to the alleged illegal holding title to real property
for a period exceeding five (5) years after the same was bought
in a foreclosure sale. Sec. 13(5) of the Corporation Law states
that corporations must dispose of real estate obtained within 5
years from receiving the title. The Philippine Government also
prays that El Hogar be excluded from all corporate rights and
privileges and effecting a final dissolution of said corporation.
It appears from the records that El Hogar was the holder of a
recorded mortgage on the San Clemente land as security for a
P24K loan to El Hogar. However, shareholders and borrowers
defaulted in payment so El Hogar foreclosed the mortgage and
purchased the land during the auction sale. A deed of
conveyance in favor of El Hogar was executed and sent to the
Register of Deeds of Tralac with a request that the certificate of
title be cancelled and a new one be issued in favor of El Hogar
from the Register of Deeds of Tarlac. However, no reply was
received. El Hogar filed a complaint with the Chief of the General
Land Registration Office. The certificate of title to the San
Clemente land was received by El Hogar and a board resolution
authorizing Benzon to find a buyer was issued. Alcantara, the
buyer of the land, was given extension of time to make payment
but defaulted so the contract treated rescinded. Efforts were
made to find another buyer. Respondent acquired title in
December 1920 until the property was finally sold to Felipa
Alberto in July 1926. The interval exceeded 5 years but the
period did not commence to run until May 7, 1921 when the
register of deeds delivered the new certificate of title. It has been
held that a purchaser of land registered under the Torrens
system cannot acquire the status of an innocent purchaser for
value unless the vendor is able to place the owner’s duplicate in
his hands showing the title to be in the vendor.
During the period before May 1921, El Hogar was not in a
position to pass an indefeasible title to any purchaser.
Therefore, El Hogar cannot be held accountable for this delay
which was not due to its fault. Likewise, the period from March
25, 1926 to April 20, 1926 must not be part of the five-year period
because this was the period where respondent was under the
obligation to sell the property to Alcantara prior to the contract’s
rescission due to Alcantara’s non-payment.
Another circumstance causing the delay is the fact that El Hogar
purchased the property in the full amount of the loan made by
the former owner which is nearly P24K when it was
subsequently found that the property was not salable and later
sold for P6K notwithstanding El Hogar’s efforts to find a
purchaser upon better terms.
ISSUE: Whether the acts of respondent corporation merit its
dissolution or deprivation of its corporate franchise and to
exclude it from all corporate rights and privileges.
HELD: SUSTAINED only as to administering of real property not
owned by it and when permitted by contract.
Causes of action
CAUSE OF ACTION 1: W/N El Hogar is illegally holding title to
real property in excess of 5 years, in violation of the law that
while corporations may loan funds upon real estate security,
they shall dispose of the same within 5 years after receiving title
Held: NO. El Hogar has not offended the law in such a way that
its charter has to be forfeited. The evident purpose behind the
law restricting the rights of corporations with respect to the
tenure of land was to prevent the revival of the entail or
other similar institution by which land could be fettered and
its alienation hampered. In the case, El Hogar had in GF
disposed of the property at the expiration of the period fixed
by law. Under the circumstances the destruction of the
corporation would bring irreparable loss upon thousands of
innocent shareholders of the corporation without any
corresponding benefit to the public.
CAUSE OF ACTION 2: W/N el Hogar is illegally owning and
holding a business lot in excess of the reasonable requirements
and in contravention of the Corpo law that every corporation has
the power to purchase hold lease real property as reasonable
and necessary required for the transaction of the lawful business
Held: NO. The law expressly declares that corporations may
acquire such real estate as is reasonably necessary to enable
them to carry out the purposes for which they were created; and
we are of the opinion that the owning of a business lot upon
which to construct and maintain its offices is reasonably
necessary to a building and loan association such as the
respondent was at the time this property was acquired. A
different ruling on this point would compel important enterprises
to conduct their business exclusively in leased offices — a result
which could serve no useful end but would retard industrial
growth and be inimical to the best interests of society. El Hogar
is entitled to the beneficial use of its property.
CAUSE OF ACTION 3: W/N el Hogar has engaged in activities
foreign to the purposes for which the corporation was created
and not reasonably necessary to its legitimate ends, specifically:
(1) the administration of the offices in the El Hogar building not
used by the respondent itself and the renting of such offices to
the public;
(2) the administration and management of properties belonging
to delinquent shareholders of the association;
(3) the management of some parcels of improved real estate
situated in Manila not under mortgage to it, but owned by
shareholders, and has held itself out by advertisement as
prepared to do so
Held:
(1) NO. The activities clearly fall within the legitimate
powers of the respondent. (SEE CAUSE OF ACTION 2) If the
respondent had the power to acquire the lt, construct the edifice
and hold it beneficially, as there decided, the beneficial
administration by it of such parts of the building as are let to
others must necessarily be lawful.
(2) No, the clause is VALID. The case for the government
supposes that the only remedy which the respondent has in
case of default on the part of its shareholders is to proceed to
enforce collection of the whole loan in the manner contemplated
in section 185 of the Corporation Law. But, according to said
section, the association may treat the whole indebtedness as
due, "at the option of the board of directors," and this remedy is
not made exclusive. The clause giving the association the right
to take over the property which constitutes the security for the
delinquent debt and to manage it with a view to the satisfaction
of the obligations due to the debtor than the immediate
enforcement of the entire obligation, and the clause allowing this
course are VALID.
3) Yes, this practice is unauthorized by law. The
administration of property in the manner described is more
befitting to the business of a real estate agent or trust company
than to the business of a building and loan association. The
practice to which this criticism is directed relates of course solely
to the management and administration of properties which are
not mortgaged to the association. The circumstance that the
owner of the property may have been required to subscribe to
one or more shares of the association with a view to qualifying
him to receive this service is of no significance. It is a general
rule of law that corporations possess only such express
powers. The management and administration of the
property of the shareholders of the corporation is not
expressly authorized by law, and we are unable to see that,
upon any fair construction of the law, these activities are
necessary to the exercise of any of the granted powers.
Here, El Hogar has gone beyond its powers but this does not
mean that it should be dissolved.
CAUSE OF ACTION 7: W/N the royalty paid to the founder of el
Hogar, Antonio Melian, as compensation for his services
rendered by him during the early stages of the organization of
the corporation, is unconscionable, excessive, and thus
necessitates dissolution
HELD: NOT REALLY. If the amount of the compensation now
appears to be a subject of legitimate criticism, this must be due
to the extraordinary development of the association in recent
years. If the Melian contract had been clearly ultra vires — which
is not charged and is certainly untrue — its continued
performance might conceivably be enjoined in such a
proceeding as this; but if the defect from which it suffers is mere
matter for an action because Melian is not a party. It is
rudimentary in law that an action to annul a contract cannot be
maintained without joining both the contracting parties as
defendants. Moreover, the proper party to bring such an action
is either the corporation itself, or some shareholder who has an
interest to protect.
CAUSE OF ACTION 8: W/N articles 70 and 76 of El Hogar’s
constitution by-laws are unlawful? NO
Article 70 of the by-laws in effect requires that persons elected
to the board of directors must be holders of shares of the paid
up value of P5,000 which shall be held as security may be put
up in the behalf of any director by some other holder of shares
in the amount stated. Article 76 of the by-laws declares that
the directors waive their right as shareholders to receive
loans from the association.
It is asserted, under the eight cause of action, that article 70 is
objectionable in that, under the requirement for security, a poor
member, or wage-earner, cannot serve as director, irrespective
of other qualifications and that as a matter of fact only men of
means actually sit on the board. Article 76 is criticized on the
ground that the provision requiring directors to renounce
their right to loans unreasonably limits their rights and
privileges as members. There is nothing of value in either of
theses suggestions. Section 21 of the Corporation Law
expressly gives the power to the corporation to provide in
its by-laws for the qualifications of directors; and the
requirement of security from them for the proper discharge
of the duties of their office, in the manner prescribed in
article 70, is highly prudent and in conformity with good
practice. Article 76, prohibiting directors from making loans
to themselves, is of course designed to prevent the
possibility of the looting of the corporation by
unscrupulous directors. A more discreet provision to insert
in the by-laws of a building and loan association would be
hard to imagine. Clearly, the eighth cause of action cannot
be sustained.
CAUSE OF ACTION 9: W/N el Hogar had abused its franchise
in issuing special shares, which is alleged to be illegal and
inconsistent with the plan and purposes of building and loan
associations, and that these are held by well-to-do people purely
for investment purposes and not by wage-earners for savings
HELD: The ground for supposing the issuance of the "special"
shares to be unlawful is that special shares are not mentioned
in the Corporation Law as one of the forms of security which may
be issued by the association. Upon examination of the nature of
the special shares in the light of American usage, it will be found
that said shares are precisely the same kind of shares that, in
some American jurisdictions, are generally known as advance
payment shares; in if close attention be paid to the language
used in the last sentence of section 178 of the Corporation Law,
it will be found that special shares where evidently created for
the purpose of meeting the condition cause by the prepayment
of dues that is there permitted.
It will escape notice that the provision quoted say that interest
shall not be allowed on the advance payments at a greater rate
than 6% per annum nor for a longer period than one year. The
word "interest " as there used must be taken in its true sense of
compensation for the used of money loaned, and it not must not
be confused with the dues upon which it is contemplated that
the interest may be paid. Now, in the absence of any showing
to the contrary, we infer that no interest is ever paid by the
association in any amount for the advance payments made
on these shares; and the reason is to be found in the fact
that the participation of the special shares in the earnings
of the corporation, in accordance with section 188 of the
Corporation Law, sufficiently compensates the shareholder
for the advance payments made by him; and no other
incentive is necessary to induce inventors to purchase the
stock.
It will be observed that the final 20% of the par value of each
special share is not paid for by the shareholder with funds
out of the pocket. The amount is satisfied by applying a portion
of the shareholder's participation in the annual earnings. But as
the right of every shareholder to such participation in the
earnings is undeniable, the portion thus annually applied is as
much the property of the shareholder as if it were in fact taken
out of his pocket. It follows that the mission of the special shares
does not involve any violation of the principle that the shares
must be sold at par.Thus, here, there is express authority. Also,
in Severino vs. El Hogar Filipino, implied authority to issue such
shares is allowed.
CAUSE OF ACTION 10: W/n El Hogar is pursuing illegally a
policy of depreciating, at an excessive rate at the discretion of
its Board, the value of real properties acquired by it at its sales,
thereby frustrating the right of SHs to participate annually and
equally in the earnings.
HELD: NO. There is an erroneous notion as to what a court
may do in determining the internal policy of a business
corporation. If the criticism contained in the brief of the
Attorney-General upon the practice of the respondent
association with respect to depreciation be well founded, the
Legislature should supply the remedy by defining the extent to
which depreciation may be allowed by building and loan
associations. Certainly this court cannot undertake to
control the discretion of the board of directors of the
association about an administrative matter as to which they
have legitimate power of action.
CAUSE OF ACTIONs 11 AND 12 :W/n el Hogar’s charter
should be revoked because it illegally maintains excessive
reserve funds and because it pursues a policy, allegedly
unlawful, of paying a straight annual dividend of 10% regardless
of losses suffered and profits made by the corporation and in
violation of the requirement s of the corpo code.
HELD: NO. El Hogar has the right to maintain these
reserves. It is true that the corporation law does not expressly
grant this power, but we think it is to be implied. It is a fact of
common observation that all commercial enterprises encounter
periods when earnings fall below the average, and the prudent
manager makes provision for such contingencies. Fluctuations
in the dividend rate are highly detrimental to any fiscal
institutions, while uniformity in the payments of dividends,
continued over long periods, supplies the surest foundations of
public confidence.
Moreover, it is said that the practice of the association in
declaring regularly a 10 per cent dividend is in effect a
guaranty by the association of a fixed dividend which is
contrary to the intention of the statute. The government
insists upon an interpretation of section 188 of the Corporation
Law that is altogether too strict and literal. From the fact that the
statute provides that profits and losses shall be annually
apportioned among the shareholders it is argued that all
earnings should be distributed without carrying anything to the
reserve. But it will be noted that it is provided in the same section
that the profits and losses shall be determined by the board
of directors: and this means that they shall exercise the usual
discretion of good businessmen in allocating a portion of the
annual profits to purposes needful to the welfare of the
association. The law contemplates the distribution of earnings
and losses after other legitimate obligations have been met. Our
conclusion is that the respondent has the power to maintain
the reserves criticized in the eleventh and twelfth counts of
the complaint; and at any rate, if it be supposed that the
reserves referred to have become excessive, the remedy is
in the hands of the Legislature.
CAUSE OF ACTION 13: W/n el Hogar illegally departed from its
charter because it has made loans which were intended to be
used by the borrowers for other purposes than the building of
homes.
HELD: There is no statute here expressly declaring that loans
may be made by these associations solely for the purpose of
building homes. On the contrary, the building of homes is
mentioned in section 171 of the Corporation Law as only one
among several ends which building and loan associations are
designed to promote.) Also, section 181 of the Corporation Law
expressly authorities the Board of directors of the association
from time to time to fix the premium to be charged. The primary
design of building and loan associations should be to help poor
people to procure homes of their own. But in this jurisdiction at
least the lawmaker has taken care not to limit the activities of
building and loan associations in an exclusive manner, and the
exercise of the broader powers must in the end approve itself to
the business community.
CAUSE OF ACTION 16: W/n the el Hogar charter may be
revoked because various loans now outstanding have been
made by the respondent to corporations and partnerships, and
that these entities have in some instances subscribed to shares
in the respondent for the sole purpose of obtaining such loans,
and that some of these juridical entities became shareholders
merely for the purpose of qualifying themselves to take loans
from the association.
HELD: The Corporation Law declares that "any person" may
become a stockholder in building and loan associations. The
word "person" appears to be here used in its general sense, and
there is nothing in the context to indicate that the expression is
used in the restricted sense of both natural and artificial persons,
as indicated in section 2 of the Administrative Code. The word
"person" or persons," is NOT to be taken in this broad sense in
every part of the Corporation Law. For instance, it would seem
reasonable to say that the incorporators of a corporation ought
to be natural persons, although in section 6 it is said that five or
more "persons", although in section 6 it is said that five or more
"persons," not exceeding fifteen, may form a private corporation.
But the context there, as well as the common sense of the
situation, suggests that natural persons are meant.

When it is said, however, in section 173, that "any person" may

become a stockholder in a building and loan association, no
reason is seen why the phrase may not be taken in its proper
broad sense of either a natural or artificial person. At any rate
the question whether these loans and the attendant
subscriptions were properly made involves a consideration of
the power of the subscribing corporations and partnerships to
own the stock and take the loans; and it is not alleged in the
complaint that they were without power in the premises.

CAUSE OF ACTION 17: W/n el Hogar, in disposing of real

estate purchased in the collection of defaulted loans, on credit
at first and then sold and mortgaged to el Hogar to secure
payment of the purchase price, had incurred several outstanding
loans, and that that the persons and entities to which said
properties are sold under the condition charged are not
members or shareholders nor are they made members or
shareholders of the defendant.

HELD: NO. This part of the complaint is based upon a mere

technicality of bookkeeping. The central idea involved in the
discussion is the provision of the Corporation Law requiring
loans to be stockholders only and on the security of real estate
and shares in the corporation, or of shares alone. It seems to be
that, when the respondent sells property acquired at its own
foreclosure sales and takes a mortgage to secure the deferred
payments, the obligation of the purchaser is a true loan, and
hence prohibited.

But in requiring the respondent to sell real estate which it

acquires in connection with the collection of its loans within five
years after receiving title to the same, the law does not prescribe
that the property must be sold for cash or that the purchaser
shall be a shareholder in the corporation. Such sales can of
course be made upon terms and conditions approved by the
parties; and when the association takes a mortgage to secure
the deferred payments, the obligation of the purchaser cannot
be fairly described as arising out of a loan. Nor does the fact that
it is carried as a loan on the books of the respondent make it a
loan on the books of the respondent make it a loan in law. The
contention of the Government under this head is untenable.

Respondent is enjoined in the future from administering real

property not owned by itself, except as may be permitted to
it by contract when a borrowing shareholder defaults in his
obligation. In all other respects, the complaint is DISMISSED.

[G.R. No. 43682. March 31, 1938.]
In re Liquidation of Mercantile Bank of China. TAN TIONG
TICK, claimants-appellant, v. AMERICAN APOTHECARIES
CO., ET AL., Claimants-Appellees.
DOCTRINES:
1. BANKS; CHARACTER OF CURRENT ACCOUNT AND
SAVINGS DEPOSITS, APPLICABLE LAW. — Current account
and savings deposits are not preferred credits in the cases, like
the present, involving the insolvency and liquidation of a bank,
where there are various creditors and it becomes necessary to
ascertain the preference of various credits. These deposits are
essentially mercantile contracts and should, therefore, be
governed by the provisions of the Code of Commerce, pursuant
to its article 2.
2. ID.; ID.; COMMERCIAL LOANS. — In accordance with
article 309 of the Code of Commerce, the so-called current
account and savings deposits have lost the character of deposits
properly so called, and are converted into simple commercial
loans, because the bank disposed of the funds deposited by the
claimant for its ordinary transactions and for the banking
business in which it was engaged. That the bank had the
authority of the claimant to make use of the money deposited on
current and savings accounts is deducible from the fact that the
bank has been paying interest on both deposits, and the
claimant himself asks that he be allowed interest up to the time
when the bank ceased its operations. Moreover, according to
sections 125 of the Corporation Law and 9 of Act No. 3154, said
bank is authorized to make use of the current account, savings,
and fixed deposits provided it retains in its treasury a certain
percentage of the amounts of said deposits.
3. ID.; PREFERENCE OF CREDITS IN CASES OF
INSOLVENCY AND LIQUIDATION OF A BANK. — Even after
the enactment of the Insolvency Law there was no law in this
jurisdiction governing the order or preference of credits in cases
of insolvency and liquidation of a bank. But the Philippine
Legislature subsequently enacted Act No. 3519, amending
various sections of the Revised Administrative Code, which took
effect on February 20, 1929, and section 1641 of this latter
Code, as amended by said Act, provides that "In the case of the
liquidation of a bank or banking institution, after payment of the
costs of the proceedings, including reasonable expenses,
commissions and fees of the Bank Commissioner, to be allowed
by the court, the Bank Commissioner shall pay the debts of the
institution, under decree of the court in the order of their legal
priority."cralaw virtua1aw library
4. ID.; ID.; LEGISLATIVE INTENTION. — From this section
1641 it is inferred that the intention of the Philippine Legislature,
in providing that the Bank Commissioner shall pay the debts of
the company by virtue of an order of the court in the order of
their legal priority, was to enforce the provisions of sections 48,
49 and 50 of the Insolvency Law in the sense that they are made
applicable to cases of insolvency or bankruptcy and liquidation
of banks. No other deduction can be made from the phrase "in
the order of their legal priority" employed by the law, for there
being no law establishing any priority in the order of payment of
credits, the legislature could not reasonably refer to any
legislation upon the subject, unless the interpretation above
stated is accepted.
5. ID.; ID.; SET OFF OF CREDITS. — The Bank Commissioner
set off the claims of the appellant against what the bank had
against him. The court approved this set off over the objection
of the appellant. The appellees contend that the set off does not
lie in this case because otherwise it would prejudice them and
the other creditors in the liquidation. Held: That the court’s ruling
is not error. "It may be stated as a general rule that when a
depositor is indebted to a bank, and the debts are mutual — that
is, between the same parties and in the same right — the bank
may apply the deposit, or such portion thereof as may be
necessary, to the payment of the debt due it by the depositor,
provided there is no express agreement to the contrary and the
deposit is not specifically applicable to some other particular
purpose." (7 Am. Jur., par. 629, p. 455.) The situation referred
to by the appellees is inevitable because section 1639 of the
Revised Administrative Code, as amended by Act No. 3519,
provides that the Bank Commissioner shall reduce the assets of
the bank into cash and this cannot be done without first
liquidating individually the accounts of the debtors of said bank,
and in making this individual liquidation the debtors are entitled
to set off, by way of compensation, their claims against the bank.
6. ID.; ID.; INTEREST. — Under articles 1101 and 1108 of the
Civil Code, interest is allowed by way of indemnity for damages
suffered, in the cases wherein the obligation consists in the
payment of money. In view thereof, Held: That in the absence of
any express law or of any applicable provision of the Code of
Commerce, it is not proper to pay this last kind of interest to the
appellant upon his deposits in the bank, for this would be
anomalous and unjustified in a liquidation or insolvency of a
bank. This rule should be strictly observed in the instant case
because it is understood that the assets should be prorated
among all the creditors as they are insufficient to pay all the
obligations of the bank.
FACTS:
In the proceedings for the liquidation of the Mercantile Bank of
China, the appellant presented a written claim alleging: that
when this bank ceased to operate on September 19, 1931, his
current account in said bank showed a balance of P9,657.50 in
his favor; that on the same date his savings account in the said
bank also showed a balance in his favor of P20,000 plus interest
then due amounting to P194.78; that, on the other hand, he
owed the bank in the amount of P13,262.58, the amount of the
trust receipts which he signed because of his withdrawal from
the bank of certain merchandise consigned to him without
paying the drafts drawn upon him by the remittors thereof; that
the credits thus described should be set off against each other
according to law, and on such set off being made it appeared
that he was still the creditor of the bank in the sum of
P16,589.70.
And he asked that the court order the Bank Commissioner to
pay him the aforesaid balance and that the same be declared as
a preferred credit. The claim was referred to the commissioner
appointed by the court, who at the same time acted as referee,
and this officer recommended that the balance claimed be paid
without interest and as an ordinary credit. The court approved
the recommendation and entered judgment in accordance
therewith. The claimant took an appeal.
In his report the commissioner classified the claims presented
under the following six groups:"
(First) Current accounts, savings and fixed deposits.
(Second) Checks or drafts sold by the Mercantile Bank of China
and not paid by the correspondents or banks against which they
were drawn.
(Third) Checks or drafts issued by the Mercantile Bank of China
in payment or reimbursement of drafts or goods sent to it for
collection by banks and foreign commercial houses against
merchants or commercial entities of Manila.
(Fourth) Drafts for collection received by the Mercantile Bank of
China to be collected from merchants and commercial entities in
Manila, and which were pending collection on the date of the
suspension of payments.
(Fifth) Claims of depositors who are at the same time debtors
of the Mercantile Bank of China.
(Sixth) Various claims."
"RECOMMENDATION OF THE COMMISSIONER”
"Having established the existence of such deposits in the name
of Tan Tiong Tick and the latter having recognized the obligation
in favor of the bank alleged by the Bank Commissioner, for the
security of which he constituted the savings deposit in the
amount of P20,000, it is recommended that from this amount
there be deducted the amount of the obligation of P13,778.90
which the claimant acknowledges in favor of the Mercantile Bank
of China, and that the difference, plus the other current account
deposit of P7,390.11, be considered as ordinary credits subject
to the equal division of the funds of the said bank.
"As to the interest on said deposits also claimed by Mr. Tan
Tiong Tick, the rejection thereof is recommended in view of the
fact that the Bank Commissioner has not credited any interest to
the current and savings accounts of the Mercantile Bank of
China, and it would be unfair that interest, not credited to the
others, be allowed to this claimant."
ISSUES:
1. WHETHER OR NOT THE CURRENT ACCOUNT AND
SAVINGS DEPOSIT ARE NOT PREFERRED CREDITS? YES
2. WHAT IS THE APPLICABLE LAW IN THIS CASE TO
DETERMINE THE PREFERENCE OF THE APPELLANT’S
CREDITS, CONSIDERING THAT THERE HAPPENS TO BE
OTHER CREDITORS? INSOLVENCY LAW
3. WHETHER OR NOT THE SET OFF OF CLAIMS DOES NOT
LIE IN THIS CASE BECAUSE IT WOULD PREJUDICE THE
APPELLEES AND THE OTHER CREDITORS IN THE
LIQUIDATION? NO
4. WHETHER OR NOT THE APPELLANT IS NOT ENTITLED
TO CHARGE INTEREST ON THE AMOUNTS OF HIS
CLAIMS? YES
HELD:
FIRST ISSUE:
1. Revolving the claims under the first group of the report of the
commissioner, the court rejected the recommendation of this
official to the effect that they be declared ordinary credits only,
and approved them as preferred credits. However, in
considering the other claims, among them that of the appellant,
classified under the fifth group, the court approved the
recommendation of the commissioner that they be declared
ordinary credits; in other words, the court considered and
declared the claim of the appellant as an ordinary credit just
because the latter is at the same time a debtor of the bank,
notwithstanding the fact that his claim is of the same kind as
those classified under the first group, inasmuch as they are also
current account and savings deposits.
But we are of the opinion, for the reason presently to be
stated, that current account and savings deposits are not
preferred credits in the cases, like the present, involving the
insolvency and liquidation of a bank, where there are
various creditors and it becomes necessary to ascertain the
preference of various credits.
In our opinion, these deposits are essentially mercantile
contracts and should, therefore, be governed by the provisions
of the Code of Commerce.
The Code of Commerce contains express provisions regulating
deposits of the nature under consideration, and they are articles
303 to 310. The first and the second to the last of the said articles
are as follows:
"ART. 303. In order that a deposit may be considered
commercial, it is necessary —
"1. That the depositary, at least, be a merchant.
"2. That the things deposited be commercial objects.
"3. That the deposit constitute in itself a commercial transaction,
or be made by reason or as a consequence of commercial
transactions."
"ART. 309. Whenever, with the consent of the depositor, the
depositary disposes of the articles on deposit either for himself
or for his business, or for transactions intrusted to him by the
former, the rights and obligations of the depositary and of the
depositor shall cease, and the rules and provisions applicable to
the commercial loans, commission, or contract which took the
place of the deposit shall be observed."
In accordance with article 309, the so-called current
account and savings deposits have lost the character of
deposits properly so-called, and are converted into simple
commercial loans, because the bank disposed of the funds
deposited by the claimant for its ordinary transactions and
for the banking business in which it was engaged. That the
bank had the authority of the claimant to make use of the
money deposited on current and savings accounts is
deducible from the fact that the bank has been paying
interest on both deposits, and the claimant himself asks
that he be allowed interest up to the time when the bank
ceased its operations.
Therefore, the bank, without the necessity of the claimant’s
consent, was by law authorized to dispose of the deposits,
subject to the limitation indicated.
We, therefore, conclude that the law applicable to the
appellant’s claims is the Code of Commerce and that his
current and savings accounts have been converted into
simple commercial loans.
SECOND ISSUE:
The Philippine Legislature subsequently enacted Act No. 1956,
also known as the Insolvency Law, which took effect on May 20,
1909, containing provisions regarding preference of credits; but
its section 52 provides that all the provisions of the law shall not
apply to corporations engaged principally in the banking
business, and among them should be understood included the
Mercantile Bank of China. Said sections provide:
"SEC. 48. Merchandise, effects, and any other kind of property
found among the property of the insolvent, the ownership of
which has not been conveyed to him by a legal and irrevocable
title, shall be considered to be the property of other persons and
shall be placed at the disposal of its lawful owners on order of
the court made at the hearing mentioned in section forty-three
or at any ordinary hearing, is the assignee or any creditor whose
right in the estate of the insolvent has been established shall
petition in writing for such hearing and the court in its discretion
shall to order, the creditors, however, retaining such rights in
said property as belong to the insolvent, and subrogating him
whenever they shall have complied with all obligations
concerning said property.
"SEC. 49. All creditors, except those whose claims are
mentioned in the next following section, whose debts are duly
proved and allowed shall be entitled to share in the property and
estate pro rata, after the property belonging to other persons
referred to in the last preceding section has been deducted
therefrom, without priority or preference whatever: Provided,
That any debt proved by any person liable as bail, surety,
guarantor, or otherwise, for the debtor, shall not be paid to the
person so proving the same until satisfactory evidence shall be
produced of the payment of such debt by such person so liable,
and the share to which such debt would be entitled may be paid
into court, or otherwise held, for the benefit of the party entitled
thereto, as the court may direct.
"SEC. 50. The following are the preferred claims which shall be
paid in the order named:
"(a) Necessary funeral expenses of the debtor, or of his
wife, or children who are under their parental authority and have
no property of their own, when approved by the court;
"(b) Debts due for personal services rendered the insolvent
by employees, laborers, or domestic servants immediately
preceding the commencement of proceedings in insolvency;
"(c) Compensation due the laborers or their dependents
under the provisions of Act Numbered Thirty-four hundred and
twenty-eight, known as the Workmen’s Compensation Act, as
amended by Act Numbered Thirty-eight hundred and twelve,
and under the provisions of Act Numbered Eighteen hundred
and seventy-four, known as the Employers’ Liability Act, and of
other laws providing for payment of indemnity for damages in
cases of labor accidents;
"(d) Legal expenses, and expenses incurred in the
administration of the insolvent’s estate for the common interest
of the creditors, when properly authorized and approved by the
court;
"(e) Debts, taxes, and assessments due the Insular
Government;
"(f) Debts, taxes, and assessments due to any province or
provinces of the Philippine Islands;
"(g) Debts, taxes, and assessments due to any municipally
or municipalities of the Philippine Islands;
"All other creditors shall be paid pro rata." (As amended by Act
No. 3962.)
"ART. 52. . . . The provisions of this Act shall not apply to
corporations engaged principally in the banking business, or to
any other corporation as to which there is any special provision
of law for its liquidation in case of insolvency
It appears that even after the enactment of the Insolvency
Law there was no law in this jurisdiction governing the
order or preference of credits in cases of insolvency and
liquidation of a bank. But the Philippine Legislature
subsequently enacted Act No. 3519, amending various sections
of the Revised Administrative Code, which took effect on
February 20, 1929, and section 1641 of this latter Code, as
amended by said Act, provides:
"SEC. 1641. Distribution of assets. — In the case of the
liquidation of a bank or banking institution, after payment of the
costs of the proceedings, including reasonable expenses,
commissions and fees of the Bank Commissioner, to be allowed
by the court, the Bank Commissioner shall pay the debts of the
institution, under decree of the court in the order of their legal
priority."
From this section 1641 we deduce that the intention of the
Philippine Legislature, in providing that the Bank Commissioner
shall pay the debts of the company by virtue of an order of the
court in the order of their legal priority, was to enforce the
provisions of sections 48, 49 and 50 of the Insolvency Law in the
sense that they are made applicable to cases of insolvency or
bankruptcy and liquidation of banks. No other deduction can
be made from the phrase "in the order of their legal priority"
employed by the law, for there being no law establishing
any priority in the order of payment of credits, the
legislature could not reasonably refer to any legislation
upon the subject, unless the interpretation above stated is
accepted.
Examining now the claims of the appellant, it appears that
none of them falls under any of the cases specified by
sections 48, 49 and 50 of the Insolvency Law; wherefore, we
conclude that the appellant’s claims, consisting of his
current and savings accounts, are not preferred credits.
THIRD ISSUE:
We hold that the court’s ruling is not error. "It may be stated
as a general rule that when a depositor is indebted to a bank,
and the debts are mutual — that is, between the same parties
and in the same right — the bank may apply the deposit, or such
portion thereof as may be necessary, to the payment of the debt
due it by the depositor, provided there is no express agreement
to the contrary and the deposit is not specifically applicable to
some other particular purpose." The situation referred to by
the appellees is inevitable because section 1639 of the
’Revised Administrative Code, as amended by Act No. 3519,
provides that the Bank Commissioner shall reduce the
assets of the bank into cash and this cannot be done
without first liquidating individually the accounts of the
debtors of said bank, and in making this individual
liquidation the debtors are entitled to set off, by way of
compensation, their claims against the bank.
FOURTH ISSUE:
Upon this point a distinction must be made between the interest
which the deposits should earn from their existence until the
bank ceased to operate, and that which they may earn from the
time the bank’s operations were stopped until the date of
payment of the deposits.
As to the first class, we hold that it should be paid because such
interest has been earned in the ordinary course of the bank’s
business and before the latter has been declared in a state of
liquidation. Moreover, the bank being authorized by law to make
use of the deposits, with the limitation stated, to invest the same
in its business and other operations, it may be presumed that
it bound itself to pay interest to the deposits as in fact it
paid interest prior to the dates of the said claims.
As to the interest (second class) which may be charged from
the date the bank ceased to do business because it was
declared in a state of liquidation, we held that the said interest
should not be paid.
Under articles 1101 and 1108 of the Civil Code, interest is
allowed by way of indemnity for damages suffered, in the
cases wherein the obligation consists in the payment of
money. In view of this, we hold that in the absence of any
express law or of any applicable provision of the Code of
Commerce, it is not proper to pay this last kind of interest
to the appellant upon his deposits in the bank, for this
would be anomalous and unjustified in a liquidation or
insolvency of a bank. This rule should be strictly observed
in the instant case because it is understood that the assets
should be prorated among all the creditors as they are
insufficient to pay all the obligations of the bank.
G.R. No. 89252 May 24, 1993 the corporate affairs of the other two (2) were administered and
managed for the benefit of one. There is simply not enough
RAUL SESBREÑO, petitioner, vs. evidence of record to justify disregarding the separate
corporate personalities of delta and Pilipinas and to hold them
HON. COURT OF APPEALS, DELTA MOTORS
CORPORATION AND PILIPINAS BANK, respondents. liable for any assumed or undetermined liability of Philfinance
to petitioner.

Same; Civil Law; For the protection of investors,

depository or custodianship agreements made an integral
part of money market transactions.- We believe and so hold
DOCTRINES: that a contract of deposit was constituted by the act of
Philfinance in designating Pilipinas as custodian or depositary
Commercial Law; Non-negotiable Promissory
bank. The depositor was initially Philfinance; the obligation of
Notes; An instrument though marked non-negotiable, may
the depository was owed, however, to petitioner Sesbreño as
nevertheless be assigned or transferred.- A non-negotiable
beneficiary of the custodianship or depository agreement. We
instrument may, obviously, not be negotiated; but it may be
do not consider that this is a simple case of a stipulation pour
assigned or transferred, absent an express prohibition against
autri. The custodianship or depositary agreement was
assignment or transfer written in the face of the instrument.
established as an integral part of the money market transaction
The words "not negotiable," stamped on the face of the bill of
entered into by petitioner with Philfinance. Petitioner bought a
lading, did not destroy its assignability, but the sole effect was
portion of DMC PN No. 2731; Philfinance as assignor-vendor
to exempt the bill from the statutory provisions relative thereto,
deposited that Note with Pilipinas in order that the thing sold
and a bill, though not negotiable, may be transferred by
would be placed outside the control of the vendor.
assignment; the assignee taking subject to the equities
between the original parties. DMC PN No. 2731, while marked Same; Same; Extinguishment of Obligations;
"non-negotiable," was not at the same time stamped "non- Compensation may defeat assignee’s rights before notice
transferable" or "non-assignable." It contained no stipulation of the assignment is given to the debtor- In other words,
which prohibited Philfinance from assigning or transferring, in petitioner notified Delta of his rights as assignee after
whole or in part, that Note. compensation had taken place by operation of law because
the offsetting instruments had both reached maturity. It is a
Same; Assignment of Credit; Debtor’s consent
firmly settled doctrine that the rights of an assignee are not any
not needed to effectuate assignment.- Apropos Delta's
greater that the rights of the assignor, since the assignee is
complaint that the partial assignment by Philfinance of DMC
merely substituted in the place of the assignor 20 and that the
PN No. 2731 had been effected without the consent of Delta,
assignee acquires his rights subject to the equities — i.e., the
we note that such consent was not necessary for the validity
defenses — which the debtor could have set up against the
and enforceability of the assignment in favor of petitioner.
original assignor before notice of the assignment was given to
Delta's argument that Philfinance's sale or assignment of part
the debtor. At the time that Delta was first put to notice of the
of its rights to DMC PN No. 2731 constituted conventional
assignment in petitioner's favor on 14 July 1981, DMC PN No.
subrogation, which required its (Delta's) consent, is quite
2731 had already been discharged by compensation. Since
mistaken.
the assignor Philfinance could not have then compelled
Same; Same; Agreement prohibiting transfer payment anew by Delta of DMC PN No. 2731, petitioner, as
cannot be invoked against assignee who, without notice assignee of Philfinance, is similarly disabled from collecting
parted with valuable consideration in good faith- We find from Delta the portion of the Note assigned to him.
nothing in his "Letter of Agreement" which can be reasonably Same; Same; Solidary Liability- The solidary
construed as a prohibition upon Philfinance assigning or
liability that petitioner seeks to impute Pilipinas cannot,
transferring all or part of DMC PN No. 2731, before the maturity
however, be lightly inferred. Under article 1207 of the Civil
thereof. It is scarcely necessary to add that, even had this
Code, "there is a solidary liability only when the law or the
"Letter of Agreement" set forth an explicit prohibition of transfer
nature of the obligation requires solidarity," The record here
upon Philfinance, such a prohibition cannot be invoked against
exhibits no express assumption of solidary liability vis-a-vis
an assignee or transferee of the Note who parted with valuable
petitioner, on the part of Pilipinas. Petitioner has not pointed to
consideration in good faith and without notice of such
us to any law which imposed such liability upon Pilipinas nor
prohibition. It is not disputed that petitioner was such an
has petitioner argued that the very nature of the custodianship
assignee or transferee.
assumed by private respondent Pilipinas necessarily implies
Same; Corporations; Grounds for piercing the solidary liability under the securities, custody of which was
veil of corporate fiction- Secondly, it is not disputed that taken by Pilipinas. Accordingly, we are unable to hold Pilipinas
Philfinance and private respondents Delta and Pilipinas have solidarily liable with Philfinance and private respondent Delta
been organized as separate corporate entities. Petitioner asks under DMC PN No. 2731.
us to pierce their separate corporate entities, but has been
able only to cite the presence of a common Director — Mr.
Ricardo Silverio, Sr., sitting on the Board of Directors of all
three (3) companies. Petitioner has neither alleged nor proved
that one or another of the three (3) concededly related
companies used the other two (2) as mere alter egos or that
FACTS:
Petitioner Raul Sesbreño made a money market placement in
the amount of P300,000.00 with the Philippine Underwriters
Finance Corporation ("Philfinance"), Cebu Branch; the
placement, with a term of thirty-two (32) days, would mature
on 13 March 1981.
Petitioner sought to encash the postdated checks issued by
Philfinance. However, the checks were dishonored for having
been drawn against insufficient funds. Thereafter, Philfinance
delivered to petitioner the DCR No. 10805 issued by private
respondent Pilipinas Bank ("Pilipinas").
Petitioner approached Ms. Elizabeth de Villa of private
respondent Pilipinas, Makati Branch, and handed her a
demand letter informing the bank that his placement with
Philfinance in the amount reflected in the DCR No. 10805 had
remained unpaid and outstanding, and that he in effect was
asking for the physical delivery of the underlying promissory
note. Petitioner then examined the original of the DMC PN No.
2731 and found: that the security had been issued on 10 April
1980; that it would mature on 6 April 1981; that it had a face
value of P2,300,833.33, with the Philfinance as "payee" and
private respondent Delta Motors Corporation ("Delta") as
"maker;" and that on face of the promissory note was stamped
"NON NEGOTIABLE." Pilipinas did not deliver the Note, nor
any certificate of participation in respect thereof, to petitioner.
Petitioner later made similar demand letters asking private
respondent Pilipinas for physical delivery of the original of
DMC PN No. 2731. Pilipinas allegedly referred all of
petitioner's demand letters to Philfinance for written
instructions, as has been supposedly agreed upon in
"Securities Custodianship Agreement" between Pilipinas and
Philfinance. Philfinance did not provide the appropriate
instructions; Pilipinas never released DMC PN No. 2731, nor
any other instrument in respect thereof, to petitioner.
Petitioner also made a written demand upon private
respondent Delta for the partial satisfaction of DMC PN No.
2731, explaining that Philfinance, as payee thereof, had
assigned to him said Note to the extent of P307,933.33. Delta,
however, denied any liability to petitioner on the promissory
note, and explained in turn that it had previously agreed with
Philfinance to offset its DMC PN No. 2731 (along with DMC
PN No. 2730) against Philfinance PN No. 143-A issued in favor
of Delta.
In the meantime, Philfinance was placed under the joint
management of the Securities and exchange commission
("SEC") and the Central Bank. Pilipinas delivered to the SEC
DMC PN No. 2731, which to date apparently remains in the
custody of the SEC.
As petitioner had failed to collect his investment and interest
thereon, he filed on 28 September 1982 an action for damages
with the Regional Trial Court ("RTC") of Cebu City, Branch 21,
against private respondents Delta and Pilipinas.
RTC: dismissed the complaint and counterclaims for lack of
merit and for lack of cause of action.
CA: denied the appeal.
Petitioner moved for reconsideration of the above Decision,
without success. Hence, this Petition for Review on Certiorari.
ISSUES:
1. WHETHER OR NOT THE ASSIGNMENT
EFFECTED BY PHILFINANCE IN FAVOR OF
PETITIONER WAS A VALID? YES
2. WHETHER OR NOT COMPENSATION HAD TAKEN
PLACE? YES
3. WHETHER OR NOT PILIPINAS BECAME
SOLIDARILY LIABLE WITH PHILFINANCE AND
DELTA? NO
HELD:
FIRST ISSUE:
Apropos Delta's complaint that the partial assignment by
Philfinance of DMC PN No. 2731 had been effected without
the consent of Delta, we note that such consent was not
necessary for the validity and enforceability of the assignment
in favor of petitioner. Delta's argument that Philfinance's sale
or assignment of part of its rights to DMC PN No. 2731
constituted conventional subrogation, which required its
(Delta's) consent, is quite mistaken. Conventional subrogation,
which in the first place is never lightly inferred, must be clearly
established by the unequivocal terms of the substituting
obligation or by the evident incompatibility of the new and old
obligations on every point. Nothing of the sort is present in the
instant case.
It is in fact difficult to be impressed with Delta's complaint,
since it released its DMC PN No. 2731 to Philfinance, an entity
engaged in the business of buying and selling debt instruments
and other securities, and more generally, in money market
transactions. In Perez v. Court of Appeals, the Court,
speaking through Mme. Justice Herrera, made the following
important statement:
There is another aspect to this case. What is involved here is
a money market transaction.

As defined by Lawrence Smith "the money market is a
market dealing in standardized short-term credit
instruments (involving large amounts) where lenders and
borrowers do not deal directly with each other but through
a middle manor a dealer in the open market." It involves
"commercial papers" which are instruments "evidencing
indebtness of any person or entity. . ., which are issued,
endorsed, sold or transferred or in any manner conveyed
to another person or entity, with or without recourse". The
fundamental function of the money market device in its
operation is to match and bring together in a most
impersonal manner both the "fund users" and the "fund
suppliers." The money market is an "impersonal market",
free from personal considerations. "The market mechanism
is intended to provide quick mobility of money and
securities."
XXXXXXXXXX
As noted, the assignment to petitioner was made on 9
February 1981 or from forty-nine (49) days before the "co-
terminal maturity" date, that is to say, before any compensation
had taken place. Further, the assignment to petitioner would
have prevented compensation had taken place between
Philfinance and Delta, to the extent of P304,533.33, because
upon execution of the assignment in favor of petitioner,
Philfinance and Delta would have ceased to be creditors and
debtors of each other in their own right to the extent of the
amount assigned by Philfinance to petitioner. Thus, we
conclude that the assignment effected by Philfinance in
favor of petitioner was a valid one and that petitioner
accordingly became owner of DMC PN No. 2731 to the
extent of the portion thereof assigned to him.
SECOND ISSUE:
The record shows, however, that petitioner notified Delta of the
fact of the assignment to him only on 14 July 1981, 19 that is,
after the maturity not only of the money market placement
made by petitioner but also of both DMC PN No. 2731 and
Philfinance PN No. 143-A. In other words, petitioner notified
Delta of his rights as assignee after compensation had
taken place by operation of law because the offsetting
instruments had both reached maturity. It is a firmly
settled doctrine that the rights of an assignee are not any
greater that the rights of the assignor, since the assignee
is merely substituted in the place of the assignor and that
the assignee acquires his rights subject to the equities —
i.e., the defenses — which the debtor could have set up
against the original assignor before notice of the
assignment was given to the debtor.
At the time that Delta was first put to notice of the assignment
in petitioner's favor on 14 July 1981, DMC PN No. 2731 had
already been discharged by compensation. Since the assignor
Philfinance could not have then compelled payment anew by
Delta of DMC PN No. 2731, petitioner, as assignee of
Philfinance, is similarly disabled from collecting from Delta the
portion of the Note assigned to him.
It bears some emphasis that petitioner could have notified
Delta of the assignment or sale was effected on 9 February
1981. He could have notified Delta as soon as his money
market placement matured on 13 March 1981 without
payment thereof being made by Philfinance; at that time,
compensation had yet to set in and discharge DMC PN No.
2731. Again petitioner could have notified Delta on 26
March 1981 when petitioner received from Philfinance the
Denominated Custodianship Receipt ("DCR") No. 10805
issued by private respondent Pilipinas in favor of
petitioner. Petitioner could, in fine, have notified Delta at
any time before the maturity date of DMC PN No. 2731.
Because petitioner failed to do so, and because the record
is bare of any indication that Philfinance had itself notified
Delta of the assignment to petitioner, the Court is
compelled to uphold the defense of compensation raised
by private respondent Delta. Of course, Philfinance
remains liable to petitioner under the terms of the
assignment made by Philfinance to petitioner.
THIRD ISSUE:
We find nothing in the DCR that establishes an obligation on
the part of Pilipinas to pay petitioner the amount of
P307,933.33 nor any assumption of liability in solidum with
Philfinance and Delta under DMC PN No. 2731.
We find nothing written in printers ink on the DCR which could
reasonably be read as converting Pilipinas into an obligor
under the terms of DMC PN No. 2731 assigned to petitioner,
either upon maturity thereof or any other time. We note that
both in his complaint and in his testimony before the trial court,
petitioner referred merely to the obligation of private
respondent Pilipinas to effect the physical delivery to him of
DMC PN No. 2731.25 Accordingly, petitioner's theory that
Pilipinas had assumed a solidary obligation to pay the amount
represented by a portion of the Note assigned to him by
Philfinance, appears to be a new theory constructed only after
the trial court had ruled against him. The solidary liability that
petitioner seeks to impute Pilipinas cannot, however, be
lightly inferred. Under article 1207 of the Civil Code, "there is
a solidary liability only when the law or the nature of the
obligation requires solidarity," The record here exhibits no
express assumption of solidary liability vis-a-vis
petitioner, on the part of Pilipinas. Petitioner has not pointed
to us to any law which imposed such liability upon Pilipinas nor
has petitioner argued that the very nature of the custodianship
assumed by private respondent Pilipinas necessarily implies
solidary liability under the securities, custody of which was
taken by Pilipinas. Accordingly, we are unable to hold
Pilipinas solidarily liable with Philfinance and private
respondent Delta under DMC PN No. 2731.
We do not, however, mean to suggest that Pilipinas has no
responsibility and liability in respect of petitioner under the
terms of the DCR. To the contrary, we find, after prolonged In the case at bar, the custodian-depositary bank Pilipinas
analysis and deliberation, that private respondent refused to deliver the security deposited with it when
Pilipinas had breached its undertaking under the DCR to petitioner first demanded physical delivery thereof on 2
petitioner Sesbreño. April 1981. We must again note, in this connection, that on 2
April 1981, DMC PN No. 2731 had not yet matured and
therefore, compensation or offsetting against Philfinance PN
No. 143-A had not yet taken place. Instead of complying with
[CUSTODIANSHIP OR DEPOSITRAY AGREEMENT] the demand of the petitioner, Pilipinas purported to
require and await the instructions of Philfinance, in
We believe and so hold that a contract of deposit was
obvious contravention of its undertaking under the DCR
constituted by the act of Philfinance in designating
to effect physical delivery of the Note upon receipt of
Pilipinas as custodian or depositary bank. The depositor
"written instructions" from petitioner Sesbreño. The
was initially Philfinance; the obligation of the depository was
ostensible term written into the DCR (i.e., "should this [DCR]
owed, however, to petitioner Sesbreño as beneficiary of the
remain outstanding in your favor thirty [30] days after its
custodianship or depository agreement. We do not consider
maturity") was not a defense against petitioner's demand for
that this is a simple case of a stipulation pour autri. The
physical surrender of the Note on at least three grounds:
custodianship or depositary agreement was established
firstly, such term was never brought to the attention of
as an integral part of the money market transaction
petitioner Sesbreño at the time the money market
entered into by petitioner with Philfinance. Petitioner
placement with Philfinance was made; secondly, such
bought a portion of DMC PN No. 2731; Philfinance as
term runs counter to the very purpose of the
assignor-vendor deposited that Note with Pilipinas in order that
custodianship or depositary agreement as an integral part
the thing sold would be placed outside the control of the
of a money market transaction; and thirdly, it is
vendor. Indeed, the constituting of the depositary or
inconsistent with the provisions of Article 1988 of the Civil
custodianship agreement was equivalent to constructive
Code noted above. Indeed, in principle, petitioner became
delivery of the Note (to the extent it had been sold or
entitled to demand physical delivery of the Note held by
assigned to petitioner) to petitioner. It will be seen that
Pilipinas as soon as petitioner's money market placement
custodianship agreements are designed to facilitate
matured on 13 March 1981 without payment from
transactions in the money market by providing a basis for
Philfinance.
confidence on the part of the investors or placers that the
instruments bought by them are effectively taken out of the
pocket, as it were, of the vendors and placed safely beyond
their reach, that those instruments will be there available to the
placers of funds should they have need of them. The
depositary in a contract of deposit is obliged to return the
security or the thing deposited upon demand of the
depositor (or, in the presented case, of the beneficiary) of
the contract, even though a term for such return may have
been established in the said contract. Accordingly, any
stipulation in the contract of deposit or custodianship that runs
counter to the fundamental purpose of that agreement or which
was not brought to the notice of and accepted by the placer-
beneficiary, cannot be enforced as against such beneficiary-
placer.

We believe that the position taken above is supported by

considerations of public policy. If there is any party that
needs the equalizing protection of the law in money market
transactions, it is the members of the general public whom
place their savings in such market for the purpose of
generating interest revenues. The custodian bank, if it is not
related either in terms of equity ownership or management
control to the borrower of the funds, or the commercial paper
dealer, is normally a preferred or traditional banker of such
borrower or dealer (here, Philfinance). The custodian bank
would have every incentive to protect the interest of its client
the borrower or dealer as against the placer of funds. The
providers of such funds must be safeguarded from the impact
of stipulations privately made between the borrowers or
dealers and the custodian banks, and disclosed to fund-
providers only after trouble has erupted.