Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No.

121413 January 29, 2001

PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK OF ASIA AND AMERICA), vs. COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK, N.A., respondents. G.R. No. 121479 January 29, 2001

FORD PHILIPPINES, INC., petitioner-plaintiff, vs. COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE COMMERCIAL INTERNATIONAL BANK, G.R. No. 128604 January 29, 2001

FORD PHILIPPINES, INC., petitioner, vs. CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK and COURT OF APPEALS, QUISUMBING, J.: These consolidated petitions involve several fraudulently negotiated checks. The original actions a quo were instituted by Ford Philippines to recover from the drawee bank, CITIBANK, N.A. (Citibank) and collecting bank, Philippine Commercial International Bank (PCIBank) [formerly Insular Bank of Asia and America], the value of several checks payable to the Commissioner of Internal Revenue, which were embezzled allegedly by an organized syndicate. G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995 Decision1 of the Court of Appeals in CA-G.R. CV No. 25017, entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Insular Bank of Asia and America (now Philipppine Commercial International Bank), and the August 8, 1995 Resolution,2 ordering the collecting bank, Philippine Commercial International Bank, to pay the amount of Citibank Check No. SN-04867. In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996 Decision3 of the Court of Appeals and its March 5, 1997 Resolution4 in CA-G.R. No. 28430 entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Philippine Commercial International Bank," affirming judgment of the trial court holding the defendant drawee bank, Citibank, N.A., solely liable to pay the amount of P12,163,298.10 as damages for

the misapplied proceeds of the plaintiff's Citibanl Check Numbers SN-10597 and 16508. I. G.R. Nos. 121413 and 121479 The stipulated facts submitted by the parties as accepted by the Court of Appeals are as follows: "On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No. SN-04867 in the amount of P4,746,114.41, in favor of the Commissioner of Internal Revenue as payment of plaintiff;s percentage or manufacturer's sales taxes for the third quarter of 1977. The aforesaid check was deposited with the degendant IBAA (now PCIBank) and was subsequently cleared at the Central Bank. Upon presentment with the defendant Citibank, the proceeds of the check was paid to IBAA as collecting or depository bank. The proceeds of the same Citibank check of the plaintiff was never paid to or received by the payee thereof, the Commissioner of Internal Revenue. As a consequence, upon demand of the Bureau and/or Commissioner of Internal Revenue, the plaintiff was compelled to make a second payment to the Bureau of Internal Revenue of its percentage/manufacturers' sales taxes for the third quarter of 1977 and that said second payment of plaintiff in the amount of P4,746,114.41 was duly received by the Bureau of Internal Revenue. It is further admitted by defendant Citibank that during the time of the transactions in question, plaintiff had been maintaining a checking account with defendant Citibank; that Citibank Check No. SN-04867 which was drawn and issued by the plaintiff in favor of the Commissioner of Internal Revenue was a crossed check in that, on its face were two parallel lines and written in between said lines was the phrase "Payee's Account Only"; and that defendant Citibank paid the full face value of the check in the amount of P4,746,114.41 to the defendant IBAA. It has been duly established that for the payment of plaintiff's percentage tax for the last quarter of 1977, the Bureau of Internal Revenue issued Revenue Tax Receipt No. 18747002, dated October 20, 1977, designating therein in Muntinlupa, Metro Manila, as the authorized agent bank of Metrobanl, Alabang branch to receive the tax payment of the plaintiff. On December 19, 1977, plaintiff's Citibank Check No. SN-04867, together with the Revenue Tax Receipt No. 18747002, was deposited with defendant IBAA, through its Ermita Branch. The latter accepted the check and sent it to the Central Clearing House for clearing on the samd day, with the indorsement at the back "all prior indorsements and/or lack of indorsements guaranteed." Thereafter, defendant IBAA presented the check for payment to defendant Citibank on same date, December 19, 1977, and the latter paid the face value of the check in the amount of P4,746,114.41. Consequently, the amount of P4,746,114.41 was debited in plaintiff's account with the defendant Citibank and the check was returned to the plaintiff. Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in the amount of P4,746,114.41 was not paid to the Commissioner of Internal Revenue. Hence, in separate letters dated October 26, 1979, addressed to the defendants, the plaintiff notified the latter that in case it will be re-assessed by the BIR for the payment of the taxes covered by the said checks, then plaintiff shall hold the defendants liable for reimbursement of the face value of the same. Both defendants denied liability and refused to pay. In a letter dated February 28, 1980 by the Acting Commissioner of Internal Revenue addressed to the plaintiff - supposed to be Exhibit "D", the latter was officially informed, among others, that its check in the amount of P4, 746,114.41 was not paid to the government or its authorized agent and instead encashed by unauthorized persons, hence, plaintiff has to pay the said amount within fifteen days from receipt of the letter. Upon advice of the plaintiff's lawyers, plaintiff on March 11, 1982, paid to the Bureau of Internal Revenue, the amount of P4,746,114.41, representing payment of plaintiff's percentage tax for the third quarter of 1977. As a consequence of defendant's refusal to reimburse plaintiff of the payment it had made for the second time to the BIR of its percentage taxes, plaintiff filed on January 20, 1983 its original complaint before this Court. On December 24, 1985, defendant IBAA was merged with the Philippine Commercial International Bank (PCI Bank) with the latter as the surviving entity. Defendant Citibank maintains that; the payment it made of plaintiff's Citibank Check No. SN-04867 in the amount of P4,746,114.41 "was in due course"; it merely relied on the clearing stamp of the depository/collecting bank, the defendant IBAA that "all prior indorsements and/or lack of indorsements guaranteed"; and the proximate cause of plaintiff's injury is the gross negligence of defendant IBAA in indorsing the plaintiff's Citibank check in question. It is admitted that on December 19, 1977 when the proceeds of plaintiff's Citibank Check No. SN-048867 was paid to defendant IBAA as collecting bank, plaintiff was maintaining a checking account with defendant Citibank."5 Although it was not among the stipulated facts, an investigation by the National Bureau of Investigation (NBI) revealed that Citibank Check No. SN-04867 was recalled by Godofredo Rivera, the General Ledger Accountant of Ford. He purportedly needed to hold back the check because there

was an error in the computation of the tax due to the Bureau of Internal Revenue (BIR). With Rivera's instruction, PCIBank replaced the check with two of its own Manager's Checks (MCs). Alleged members of a syndicate later deposited the two MCs with the Pacific Banking Corporation. Ford, with leave of court, filed a third-party complaint before the trial court impleading Pacific Banking Corporation (PBC) and Godofredo Rivera, as third party defendants. But the court dismissed the complaint against PBC for lack of cause of action. The course likewise dismissed the third-party complaint against Godofredo Rivera because he could not be served with summons as the NBI declared him as a "fugitive from justice". On June 15, 1989, the trial court rendered its decision, as follows: "Premises considered, judgment is hereby rendered as follows: "1. Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and severally, to pay the plaintiff the amount of P4,746,114.41 representing the face value of plaintiff's Citibank Check No. SN-04867, with interest thereon at the legal rate starting January 20, 1983, the date when the original complaint was filed until the amount is fully paid, plus costs; "2. On defendant Citibank's cross-claim: ordering the cross-defendant IBAA (now PCI Bank) to reimburse defendant Citibank for whatever amount the latter has paid or may pay to the plaintiff in accordance with next preceding paragraph; "3. The counterclaims asserted by the defendants against the plaintiff, as well as that asserted by the cross-defendant against the cross-claimant are dismissed, for lack of merits; and "4. With costs against the defendants. SO ORDERED."6 Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated their respective petitions for review on certiorari to the Courts of Appeals. On March 27, 1995, the appellate court issued its judgment as follows: "WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision with modifications. The court hereby renderes judgment: 1. Dismissing the complaint in Civil Case No. 49287 insofar as defendant Citibank N.A. is concerned; 2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff the amount of P4,746,114.41 representing the face value of plaintiff's Citibank Check No. SN-04867, with interest thereon at the legal rate starting January 20, 1983, the date when the original complaint was filed until the amount is fully paid; 3. Dismissing the counterclaims asserted by the defendants against the plaintiff as well as that asserted by the cross-defendant against the crossclaimant, for lack of merits. Costs against the defendant IBAA (now PCI Bank). IT IS SO ORDERED."7 PCI Bank moved to reconsider the above-quoted decision of the Court of Appeals, while Ford filed a "Motion for Partial Reconsideration." Both motions were denied for lack of merit. Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari under Rule 45. In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of the Twelfth Division of the Court of Appeals contending that it merely acted on the instruction of Ford and such casue of action had already prescribed. PCIBank sets forth the following issues for consideration: I. Did the respondent court err when, after finding that the petitioner acted on the check drawn by respondent Ford on the said respondent's instructions, it nevertheless found the petitioner liable to the said respondent for the full amount of the said check.

II. Did the respondent court err when it did not find prescription in favor of the petitioner.8 In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning the same decision and resolution of the Court of Appeals, and praying for the reinstatement in toto of the decision of the trial court which found both PCIBank and Citibank jointly and severally liable for the loss. In G.R. No. 121479, appellant Ford presents the following propositions for consideration: I. Respondent Citibank is liable to petitioner Ford considering that: 1. As drawee bank, respondent Citibank owes to petitioner Ford, as the drawer of the subject check and a depositor of respondent Citibank, an absolute and contractual duty to pay the proceeds of the subject check only to the payee thereof, the Commissioner of Internal Revenue. 2. Respondent Citibank failed to observe its duty as banker with respect to the subject check, which was crossed and payable to "Payee's Account Only." 3. Respondent Citibank raises an issue for the first time on appeal; thus the same should not be considered by the Honorable Court. 4. As correctly held by the trial court, there is no evidence of gross negligence on the part of petitioner Ford.9 II. PCI Bank is liable to petitioner Ford considering that: 1. There were no instructions from petitioner Ford to deliver the proceeds of the subject check to a person other than the payee named therein, the Commissioner of the Bureau of Internal Revenue; thus, PCIBank's only obligation is to deliver the proceeds to the Commissioner of the Bureau of Internal Revenue.10 2. PCIBank which affixed its indorsement on the subject check ("All prior indorsement and/or lack of indorsement guaranteed"), is liable as collecting bank.11 3. PCIBank is barred from raising issues of fact in the instant proceedings.12 4. Petitioner Ford's cause of action had not prescribed.13 II. G.R. No. 128604 The same sysndicate apparently embezzled the proceeds of checks intended, this time, to settle Ford's percentage taxes appertaining to the second quarter of 1978 and the first quarter of 1979. The facts as narrated by the Court of Appeals are as follows: Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of P5,851,706.37 representing the percentage tax due for the second quarter of 1978 payable to the Commissioner of Internal Revenue. A BIR Revenue Tax Receipt No. 28645385 was issued for the said purpose. On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of P6,311,591.73, representing the payment of percentage tax for the first quarter of 1979 and payable to the Commissioner of Internal Revenue. Again a BIR Revenue Tax Receipt No. A-1697160 was issued for the said purpose. Both checks were "crossed checks" and contain two diagonal lines on its upper corner between, which were written the words "payable to the payee's account only." The checks never reached the payee, CIR. Thus, in a letter dated February 28, 1980, the BIR, Region 4-B, demanded for the said tax payments the corresponding periods above-mentioned. As far as the BIR is concernced, the said two BIR Revenue Tax Receipts were considered "fake and spurious". This anomaly was confirmed by the NBI upon the initiative of the BIR. The findings forced Ford to pay the BIR a new, while an action was filed against Citibank and PCIBank for the recovery of the amount of Citibank Check Numbers SN-10597 and 16508. The Regional Trial Court of Makati, Branch 57, which tried the case, made its findings on the modus operandi of the syndicate, as follows:

"A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its General Ledger Accountant. As such, he prepared the plaintiff's check marked Ex. 'A' [Citibank Check No. Sn-10597] for payment to the BIR. Instead, however, fo delivering the same of the payee, he passed on the check to a co-conspirator named Remberto Castro who was a pro-manager of the San Andres Branch of PCIB.* In connivance with one Winston Dulay, Castro himself subsequently opened a Checking Account in the name of a fictitious person denominated as 'Reynaldo reyes' in the Meralco Branch of PCIBank where Dulay works as Assistant Manager. After an initial deposit of P100.00 to validate the account, Castro deposited a worthless Bank of America Check in exactly the same amount as the first FORD check (Exh. "A", P5,851,706.37) while this worthless check was coursed through PCIB's main office enroute to the Central Bank for clearing, replaced this worthless check with FORD's Exhibit 'A' and accordingly tampered the accompanying documents to cover the replacement. As a result, Exhibit 'A' was cleared by defendant CITIBANK, and the fictitious deposit account of 'Reynaldo Reyes' was credited at the PCIB Meralco Branch with the total amount of the FORD check Exhibit 'A'. The same method was again utilized by the syndicate in profiting from Exh. 'B' [Citibank Check No. SN-16508] which was subsequently pilfered by Alexis Marindo, Rivera's Assistant at FORD. From this 'Reynaldo Reyes' account, Castro drew various checks distributing the sahres of the other participating conspirators namely (1) CRISANTO BERNABE, the mastermind who formulated the method for the embezzlement; (2) RODOLFO R. DE LEON a customs broker who negotiated the initial contact between Bernabe, FORD's Godofredo Rivera and PCIB's Remberto Castro; (3) JUAN VASTILLO who assisted de Leon in the initial arrangements; (4) GODOFREDO RIVERA, FORD's accountant who passed on the first check (Exhibit "A") to Castro; (5) REMERTO CASTRO, PCIB's pro-manager at San Andres who performed the switching of checks in the clearing process and opened the fictitious Reynaldo Reyes account at the PCIB Meralco Branch; (6) WINSTON DULAY, PCIB's Assistant Manager at its Meralco Branch, who assisted Castro in switching the checks in the clearing process and facilitated the opening of the fictitious Reynaldo Reyes' bank account; (7) ALEXIS MARINDO, Rivera's Assistant at FORD, who gave the second check (Exh. "B") to Castro; (8) ELEUTERIO JIMENEZ, BIR Collection Agent who provided the fake and spurious revenue tax receipts to make it appear that the BIR had received FORD's tax payments. Several other persons and entities were utilized by the syndicate as conduits in the disbursements of the proceeds of the two checks, but like the aforementioned participants in the conspiracy, have not been impleaded in the present case. The manner by which the said funds were distributed among them are traceable from the record of checks drawn against the original "Reynaldo Reyes" account and indubitably identify the parties who illegally benefited therefrom and readily indicate in what amounts they did so."14 On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank, Citibank, liable for the value of the two checks while adsolving PCIBank from any liability, disposing as follows: "WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to reimburse plaintiff FORD the total amount of P12,163,298.10 prayed for in its complaint, with 6% interest thereon from date of first written demand until full payment, plus P300,000.00 attorney's fees and expenses litigation, and to pay the defendant, PCIB (on its counterclaim to crossclaim) the sum of P300,000.00 as attorney's fees and costs of litigation, and pay the costs. SO ORDERED."15 Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the decision of the trial court. Hence, this petition. Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of Appeals decision and its resolution dated March 5, 1997, with respect to the dismissal of the complaint against PCIBank and holding Citibank solely responsible for the proceeds of Citibank Check Numbers SN-10597 and 16508 for P5,851,706.73 and P6,311,591.73 respectively. Ford avers that the Court of Appeals erred in dismissing the complaint against defendant PCIBank considering that: I. Defendant PCIBank was clearly negligent when it failed to exercise the diligence required to be exercised by it as a banking insitution. II. Defendant PCIBank clearly failed to observe the diligence required in the selection and supervision of its officers and employees. III. Defendant PCIBank was, due to its negligence, clearly liable for the loss or damage resulting to the plaintiff Ford as a consequence of the substitution of the check consistent with Section 5 of Central Bank Circular No. 580 series of 1977. IV. Assuming arguedo that defedant PCIBank did not accept, endorse or negotiate in due course the subject checks, it is liable, under Article 2154 of the Civil Code, to return the money which it admits having received, and which was credited to it its Central bank account.16 The main issue presented for our consideration by these petitions could be simplified as follows: Has petitioner Ford the right to recover from the collecting bank (PCIBank) and the drawee bank (Citibank) the value of the checks intended as payment to the Commissioner of Internal Revenue? Or has Ford's cause of action already prescribed? Note that in these cases, the checks were drawn against the drawee bank, but the title of the person negotiating the same was allegedly defective because the instrument was obtained by fraud and unlawful means, and the proceeds of the checks were not remitted to the payee. It was

established that instead of paying the checks to the CIR, for the settlement of the approprite quarterly percentage taxes of Ford, the checks were diverted and encashed for the eventual distribution among the mmbers of the syndicate. As to the unlawful negotiation of the check the applicable law is Section 55 of the Negotiable Instruments Law (NIL), which provides: "When title defective -- The title of a person who negotiates an instrument is defective within the meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or fore and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith or under such circumstances as amount to a fraud." Pursuant to this provision, it is vital to show that the negotiation is made by the perpetator in breach of faith amounting to fraud. The person negotiating the checks must have gone beyond the authority given by his principal. If the principal could prove that there was no negligence in the performance of his duties, he may set up the personal defense to escape liability and recover from other parties who. Though their own negligence, alowed the commission of the crime. In this case, we note that the direct perpetrators of the offense, namely the embezzlers belonging to a syndicate, are now fugitives from justice. They have, even if temporarily, escaped liability for the embezzlement of millions of pesos. We are thus left only with the task of determining who of the present parties before us must bear the burden of loss of these millions. It all boils down to thequestion of liability based on the degree of negligence among the parties concerned. Foremost, we must resolve whether the injured party, Ford, is guilty of the "imputed contributory negligence" that would defeat its claim for reimbursement, bearing ing mind that its employees, Godofredo Rivera and Alexis Marindo, were among the members of the syndicate. Citibank points out that Ford allowed its very own employee, Godofredo Rivera, to negotiate the checks to his co-conspirators, instead of delivering them to the designated authorized collecting bank (Metrobank-Alabang) of the payee, CIR. Citibank bewails the fact that Ford was remiss in the supervision and control of its own employees, inasmuch as it only discovered the syndicate's activities through the information given by the payee of the checks after an unreasonable period of time. PCIBank also blames Ford of negligence when it allegedly authorized Godofredo Rivera to divert the proceeds of Citibank Check No. SN-04867, instead of using it to pay the BIR. As to the subsequent run-around of unds of Citibank Check Nos. SN-10597 and 16508, PCIBank claims that the proximate cause of the damge to Ford lies in its own officers and employees who carried out the fradulent schemes and the transactions. These circumstances were not checked by other officers of the company including its comptroller or internal auditor. PCIBank contends that the inaction of Ford despite the enormity of the amount involved was a sheer negligence and stated that, as between two innocent persons, one of whom must suffer the consequences of a breach of trust, the one who made it possible, by his act of negligence, must bear the loss. For its part, Ford denies any negligence in the performance of its duties. It avers that there was no evidence presented before the trial court showing lack of diligence on the part of Ford. And, citing the case of Gempesaw vs. Court of Appeals,17 Ford argues that even if there was a finding therein that the drawer was negligent, the drawee bank was still ordered to pay damages. Furthermore, Ford contends the Godofredo rivera was not authorized to make any representation in its behalf, specifically, to divert the proceeds of the checks. It adds that Citibank raised the issue of imputed negligence against Ford for the first time on appeal. Thus, it should not be considered by this Court. On this point, jurisprudence regarding the imputed negligence of employer in a master-servant relationship is instructive. Since a master may be held for his servant's wrongful act, the law imputes to the master the act of the servant, and if that act is negligent or wrongful and proximately results in injury to a third person, the negligence or wrongful conduct is the negligence or wrongful conduct of the master, for which he is liable.18 The general rule is that if the master is injured by the negligence of a third person and by the concuring contributory negligence of his own servant or agent, the latter's negligence is imputed to his superior and will defeat the superior's action against the third person, asuming, of course that the contributory negligence was the proximate cause of the injury of which complaint is made.19 Accordingly, we need to determine whether or not the action of Godofredo Rivera, Ford's General Ledger Accountant, and/or Alexis Marindo, his assistant, was the proximate cause of the loss or damage. AS defined, proximate cause is that which, in the natural and continuous sequence, unbroken by any efficient, intervening cause produces the injury and without the result would not have occurred.20 It appears that although the employees of Ford initiated the transactions attributable to an organized syndicate, in our view, their actions were not the proximate cause of encashing the checks payable to the CIR. The degree of Ford's negligence, if any, could not be characterized as the proximate cause of the injury to the parties. The Board of Directors of Ford, we note, did not confirm the request of Godofredo Rivera to recall Citibank Check No. SN-04867. Rivera's instruction to replace the said check with PCIBank's Manager's Check was not in theordinary course of business which could have prompted PCIBank to validate the same. As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was established that these checks were made payable to the CIR. Both were crossed checks. These checks were apparently turned around by Ford's emploees, who were acting on their own personal capacity.

Given these circumstances, the mere fact that the forgery was committed by a drawer-payor's confidential employee or agent, who by virtue of his position had unusual facilities for perpertrating the fraud and imposing the forged paper upon the bank, does notentitle the bank toshift the loss to the drawer-payor, in the absence of some circumstance raising estoppel against the drawer.21 This rule likewise applies to the checks fraudulently negotiated or diverted by the confidential employees who hold them in their possession. With respect to the negligence of PCIBank in the payment of the three checks involved, separately, the trial courts found variations between the negotiation of Citibank Check No. SN-04867 and the misapplication of total proceeds of Checks SN-10597 and 16508. Therefore, we have to scrutinize, separately, PCIBank's share of negligence when the syndicate achieved its ultimate agenda of stealing the proceeds of these checks. G.R. Nos. 121413 and 121479 Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It was coursed through the ordinary banking transaction, sent to Central Clearing with the indorsement at the back "all prior indorsements and/or lack of indorsements guaranteed," and was presented to Citibank for payment. Thereafter PCIBank, instead of remitting the proceeds to the CIR, prepared two of its Manager's checks and enabled the syndicate to encash the same. On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The neglect of PCIBank employees to verify whether his letter requesting for the replacement of the Citibank Check No. SN-04867 was duly authorized, showed lack of care and prudence required in the circumstances. Furthermore, it was admitted that PCIBank is authorized to collect the payment of taxpayers in behalf of the BIR. As an agent of BIR, PCIBank is duty bound to consult its principal regarding the unwarranted instructions given by the payor or its agent. As aptly stated by the trial court, to wit: "xxx. Since the questioned crossed check was deposited with IBAA [now PCIBank], which claimed to be a depository/collecting bank of BIR, it has the responsibility to make sure that the check in question is deposited in Payee's account only. xxx xxx xxx

As agent of the BIR (the payee of the check), defendant IBAA should receive instructions only from its principal BIR and not from any other person especially so when that person is not known to the defendant. It is very imprudent on the part of the defendant IBAA to just rely on the alleged telephone call of the one Godofredo Rivera and in his signature considering that the plaintiff is not a client of the defendant IBAA." It is a well-settled rule that the relationship between the payee or holder of commercial paper and the bank to which it is sent for collection is, in the absence of an argreement to the contrary, that of principal and agent.22 A bank which receives such paper for collection is the agent of the payee or holder.23 Even considering arguendo, that the diversion of the amount of a check payable to the collecting bank in behalf of the designated payee may be allowed, still such diversion must be properly authorized by the payor. Otherwise stated, the diversion can be justified only by proof of authority from the drawer, or that the drawer has clothed his agent with apparent authority to receive the proceeds of such check. Citibank further argues that PCI Bank's clearing stamp appearing at the back of the questioned checks stating that ALL PRIOR INDORSEMENTS AND/OR LACK OF INDORSEMENTS GURANTEED should render PCIBank liable because it made it pass through the clearing house and therefore Citibank had no other option but to pay it. Thus, Citibank had no other option but to pay it. Thus, Citibank assets that the proximate cause of Ford's injury is the gross negligence of PCIBank. Since the questione dcrossed check was deposited with PCIBank, which claimed to be a depository/collecting bank of the BIR, it had the responsibility to make sure that the check in questions is deposited in Payee's account only. Indeed, the crossing of the check with the phrase "Payee's Account Only," is a warning that the check should be deposited only in the account of the CIR. Thus, it is the duty of the collecting bank PCIBank to ascertain that the check be deposited in payee's account only. Therefore, it is the collecting bank (PCIBank) which is bound to scruninize the check and to know its depositors before it could make the clearing indorsement "all prior indorsements and/or lack of indorsement guaranteed". In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation,24 we ruled: "Anent petitioner's liability on said instruments, this court is in full accord with the ruling of the PCHC's Board of Directors that: 'In presenting the checks for clearing and for payment, the defendant made an express guarantee on the validity of "all prior endorsements." Thus, stamped at the back of the checks are the defedant's clear warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would not have paid on the checks.' No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty has proven to be false and inaccurate, the

defendant is liable for any damage arising out of the falsity of its representation."25 Lastly, banking business requires that the one who first cashes and negotiates the check must take some percautions to learn whether or not it is genuine. And if the one cashing the check through indifference or othe circumstance assists the forger in committing the fraud, he should not be permitted to retain the proceeds of the check from the drawee whose sole fault was that it did not discover the forgery or the defect in the title of the person negotiating the instrument before paying the check. For this reason, a bank which cashes a check drawn upon another bank, without requiring proof as to the identity of persons presenting it, or making inquiries with regard to them, cannot hold the proceeds against the drawee when the proceeds of the checks were afterwards diverted to the hands of a third party. In such cases the drawee bank has a right to believe that the cashing bank (or the collecting bank) had, by the usual proper investigation, satisfied itself of the authenticity of the negotiation of the checks. Thus, one who encashed a check which had been forged or diverted and in turn received payment thereon from the drawee, is guilty of negligence which proximately contributed to the success of the fraud practiced on the drawee bank. The latter may recover from the holder the money paid on the check.26 Having established that the collecting bank's negligence is the proximate cause of the loss, we conclude that PCIBank is liable in the amount corresponding to the proceeds of Citibank Check No. SN-04867. G.R. No. 128604 The trial court and the Court of Appeals found that PCIBank had no official act in the ordinary course of business that would attribute to it the case of the embezzlement of Citibank Check Numbers SN-10597 and 16508, because PCIBank did not actually receive nor hold the two Ford checks at all. The trial court held, thus: "Neither is there any proof that defendant PCIBank contributed any official or conscious participation in the process of the embezzlement. This Court is convinced that the switching operation (involving the checks while in transit for "clearing") were the clandestine or hidden actuations performed by the members of the syndicate in their own personl, covert and private capacity and done without the knowledge of the defendant PCIBank"27 In this case, there was no evidence presented confirming the conscious particiapation of PCIBank in the embezzlement. As a general rule, however, a banking corporation is liable for the wrongful or tortuous acts and declarations of its officers or agents within the course and scope of their employment.28 A bank will be held liable for the negligence of its officers or agents when acting within the course and scope of their employment. It may be liable for the tortuous acts of its officers even as regards that species of tort of which malice is an essential element. In this case, we find a situation where the PCIBank appears also to be the victim of the scheme hatched by a syndicate in which its own management employees had particiapted. The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received Citibank Check Numbers SN-10597 and 16508. He passed the checks to a co-conspirator, an Assistant Manager of PCIBank's Meralco Branch, who helped Castro open a Checking account of a fictitious person named "Reynaldo Reyes." Castro deposited a worthless Bank of America Check in exactly the same amount of Ford checks. The syndicate tampered with the checks and succeeded in replacing the worthless checks and the eventual encashment of Citibank Check Nos. SN 10597 and 16508. The PCIBank Ptro-manager, Castro, and his co-conspirator Assistant Manager apparently performed their activities using facilities in their official capacity or authority but for their personal and private gain or benefit. A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds these officers or agents were enabled to perpetrate in the apparent course of their employment; nor will t be permitted to shirk its responsibility for such frauds, even though no benefit may accrue to the bank therefrom. For the general rule is that a bank is liable for the fraudulent acts or representations of an officer or agent acting within the course and apparent scope of his employment or authority.29 And if an officer or employee of a bank, in his official capacity, receives money to satisfy an evidence of indebetedness lodged with his bank for collection, the bank is liable for his misappropriation of such sum.30 Moreover, as correctly pointed out by Ford, Section 531 of Central Bank Circular No. 580, Series of 1977 provides that any theft affecting items in transit for clearing, shall be for the account of sending bank, which in this case is PCIBank. But in this case, responsibility for negligence does not lie on PCIBank's shoulders alone. The evidence on record shows that Citibank as drawee bank was likewise negligent in the performance of its duties. Citibank failed to establish that its payment of Ford's checjs were made in due course and legally in order. In its defense, Citibank claims the genuineness and due execution of said checks, considering that Citibank (1) has no knowledge of any informity in the issuance of the checks in question (2) coupled by the fact that said checks were sufficiently funded and (3) the endorsement of the Payee or lack thereof was guaranteed by PCI Bank (formerly IBAA), thus, it has the obligation to honor and pay the same. For its part, Ford contends that Citibank as the drawee bank owes to Ford an absolute and contractual duty to pay the proceeds of the subject check only to the payee thereof, the CIR. Citing Section 6232 of the Negotiable Instruments Law, Ford argues that by accepting the instrument, the acceptro which is Citibank engages that it will pay according to the tenor of its acceptance, and that it will pay only to the payee, (the CIR),

considering the fact that here the check was crossed with annotation "Payees Account Only." As ruled by the Court of Appeals, Citibank must likewise answer for the damages incurred by Ford on Citibank Checks Numbers SN 10597 and 16508, because of the contractual relationship existing between the two. Citibank, as the drawee bank breached its contractual obligation with Ford and such degree of culpability contributed to the damage caused to the latter. On this score, we agree with the respondent court's ruling. Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before paying the amount of the proceeds thereof to the collecting bank of the BIR. One thing is clear from the record: the clearing stamps at the back of Citibank Check Nos. SN 10597 and 16508 do not bear any initials. Citibank failed to notice and verify the absence of the clearing stamps. Had this been duly examined, the switching of the worthless checks to Citibank Check Nos. 10597 and 16508 would have been discovered in time. For this reason, Citibank had indeed failed to perform what was incumbent upon it, which is to ensure that the amount of the checks should be paid only to its designated payee. The fact that the drawee bank did not discover the irregularity seasonably, in our view, consitutes negligence in carrying out the bank's duty to its depositors. The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.33 Thus, invoking the doctrine of comparative negligence, we are of the view that both PCIBank and Citibank failed in their respective obligations and both were negligent in the selection and supervision of their employees resulting in the encashment of Citibank Check Nos. SN 10597 AND 16508. Thus, we are constrained to hold them equally liable for the loss of the proceeds of said checks issued by Ford in favor of the CIR. Time and again, we have stressed that banking business is so impressed with public interest where the trust and confidence of the public in general is of paramount umportance such that the appropriate standard of diligence must be very high, if not the highest, degree of diligence.34 A bank's liability as obligor is not merely vicarious but primary, wherein the defense of exercise of due diligence in the selection and supervision of its employees is of no moment.35 Banks handle daily transactions involving millions of pesos.36 By the very nature of their work the degree of responsibility, care and trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees.37 exercise the highest degree of diligence in the selection and supervision of their employees.38 On the issue of prescription, PCIBank claims that the action of Ford had prescribed because of its inability to seek judicial relief seasonably, considering that the alleged negligent act took place prior to December 19, 1977 but the relief was sought only in 1983, or seven years thereafter. The statute of limitations begins to run when the bank gives the depositor notice of the payment, which is ordinarily when the check is returned to the alleged drawer as a voucher with a statement of his account,39 and an action upon a check is ordinarily governed by the statutory period applicable to instruments in writing.40 Our laws on the matter provide that the action upon a written contract must be brought within ten year from the time the right of action accrues.41 hence, the reckoning time for the prescriptive period begins when the instrument was issued and the corresponding check was returned by the bank to its depositor (normally a month thereafter). Applying the same rule, the cause of action for the recovery of the proceeds of Citibank Check No. SN 04867 would normally be a month after December 19, 1977, when Citibank paid the face value of the check in the amount of P4,746,114.41. Since the original complaint for the cause of action was filed on January 20, 1984, barely six years had lapsed. Thus, we conclude that Ford's cause of action to recover the amount of Citibank Check No. SN 04867 was seasonably filed within the period provided by law. Finally, we also find thet Ford is not completely blameless in its failure to detect the fraud. Failure on the part of the depositor to examine its passbook, statements of account, and cancelled checks and to give notice within a reasonable time (or as required by statute) of any discrepancy which it may in the exercise of due care and diligence find therein, serves to mitigate the banks' liability by reducing the award of interest from twelve percent (12%) to six percent (6%) per annum. As provided in Article 1172 of the Civil Code of the Philippines, respondibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances. In quasi-delicts, the contributory negligence of the plaintiff shall reduce the damages that he may recover.42 WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 25017 are AFFIRMED. formerly as Insular Bank of Asia and America, id declared solely responsible for the loss of the proceeds of Citibank Check No SN 04867 in the amount P4,746,114.41, which shall be paid together with six percent (6%) interest thereon to Ford Philippines Inc. from the date when the original complaint was filed until said amount is fully paid. However, the Decision and Resolution of the Court of Appeals in CA-G.R. No. 28430 are MODIFIED as follows: PCIBank and Citibank are adjudged liable for and must share the loss, (concerning the proceeds of Citibank Check Numbers SN 10597 and 16508 totalling P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDERED to pay Ford Philippines Inc. P6,081,649.05, with six percent (6%) interest thereon, from the date the complaint was filed until full payment of said amount.1wphi1.nt Costs against Philippine Commercial International Bank and Citibank N.A. SO ORDERED.

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

G.R. No. 125536 March 16, 2000 PRUDENTIAL BANK, petitioner, vs. COURT OF APPEALS and LETICIA TUPASI-VALENZULA joined by husband Francisco Valenzuela, respondents.

QUISUMBING, J.: This appeal by certiorari under Rule 45 of the Rules of Court seeks to annul and set aside the Decision dated January 31, 1996, and the Resolution dated July 2, 1997, of the Court of Appeals in CA G.R. CV No. 35532, which reversed the judgment of the Regional Trial Court of Valenzuela, Metro Manila, Branch 171, in Civil Case No. 2913-V-88, dismissing the private respondent's complaint for damages. 1 In setting aside the trial court's decision, the Court of Appeals disposed as follows: WHEREFORE, the appealed decision is hereby REVERSED and SET ASIDE and, another rendered ordering the appellee bank to pay appellant the sum of P100,000.00 by way of moral damages; P50,000.00 by way of exemplary damages, P50,000.00 for and as attorney's fees; and to pay the costs. SO ORDERED. 2 The facts of the case on record are as follows: Private respondent Leticia Tupasi-Valenzuela opened Savings Account No. 5744 and Current Account No. 01016-3 in the Valenzuela Branch of petitioner Prudential Bank, with automatic transfer of funds from the savings account to the current account. On June 1, 1988, herein private respondent deposited in her savings account Check No. 666B (104561 of even date) the amount of P35,271.60, drawn against the Philippine Commercial International Bank (PCIB). Taking into account that deposit and a series of withdrawals, private respondent as of June 21, 1988 had a balance of P35,993.48 in her savings account and P776.93 in her current account, or total deposits of P36,770.41, with petitioner. Thereafter, private respondent issued Prudential Bank Check No. 983395 in the amount of P11,500.00 postdated June 20, 1988, in favor of one Belen Legaspi. It was issued to Legaspi as payment for jewelry which private respondent had purchased. Legaspi, who was in jewelry trade, endorsed the check to one Philip Lhuillier, a businessman also in the jewelry business. When Lhuillier deposited the check in his account with the PCIB, Pasay Branch, it was dishonored for being drawn against insufficient funds. Lhuillier's secretary informed the secretary of Legaspi of the dishonor. The latter told the former to redeposit the check, Legaspi's secretary tried to contact private respondent but to no avail. Upon her return from the province, private respondent was surprised to learn of the dishonor of the check. She went to the Valenzuela Branch of Prudential Bank on July 4, 1988, to inquire why her check was dishonored. She approached one Albert Angeles Reyes, the officer in charge of current account, and requested him for the ledger of her current account. Private respondent discovered a debit of P300.00 penalty for the dishonor of her Prudential Check No. 983395. She asked why her check was dishonored when there were sufficient funds in her account as reflected in her passbook. Reyes told her that there was no need to review the passbook because the bank ledger was the best proof that she did not have sufficient funds. Then, he abruptly faced his typewriter and

started typing. Later, it was found out that the check in the amount of P35,271.60 deposited by private respondent on June 1, 1988, was credited in her savings account only on June 24, 1988, or after a period of 23 days. Thus the P11,500.00 check was redeposited by Lhuillier on June 24, 1988, and properly cleared on June 27, 1988. Because of this incident, the bank tried to mollify private respondent by explaining to Legaspi and Lhuillier that the bank was at fault. Since this was not the first incident private respondent had experienced with the bank, private respondent was unmoved by the bank's apologies and she commenced the present suit for damages before the RTC of Valenzuela. After trial, the court rendered a decision on August 30, 1991, dismissing the complaint of private respondent, as well as the counterclaim filed by the defendant, now petitioner. Undeterred, private respondent appealed to the Court of Appeals. On January 31, 1996, respondent appellate court rendered a decision in her favor, setting aside the trial court's decision and ordering herein petitioner to pay private respondent the sum of P100,000.00 by way of moral damages; P50,000.00 exemplary damages; P50,000.00 for and as attorney's fees; and to pay the costs. 3 Petitioner filed a timely motion for reconsideration but it was denied. Hence, this petition, raising the following issues: I. WHETHER OR NOT THE RESPONDENT COURT OF APPEALS ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION IN DEVIATING FROM ESTABLISHED JURISPRUDENCE IN REVERSING THE DISMISSAL JUDGMENT OF THE TRIAL COURT AND INSTEAD AWARDED MORAL DAMAGES, EXEMPLARY DAMAGES AND ATTORNEY'S FEES. II. WHETHER OR NOT THE RESPONDENT COURT OF APPEALS ACTED IN GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION WHERE, EVEN IN THE ABSENCE OF EVIDENCE AS FOUND BY THE TRIAL COURT, AWARDED MORAL DAMAGES IN THE AMOUNT OF P100,000.00. III. WHETHER OR NOT THE RESPONDENT COURT OF APPEALS ACTED IN GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION, WHERE, EVEN IN THE ABSENCE OF EVIDENCE AS FOUND BY THE TRIAL COURT, AWARDED P50,000.00 BY WAY OF EXEMPLARY DAMAGES. IV. WHETHER OR NOT THE RESPONDENT COURT OF APPEALS ACTED WITH GRAVE ABUSE OF DISCRETION WHERE EVEN IN THE ABSENCE OF EVIDENCE, AWARDED ATTORNEY'S FEES. Simply stated, the issue is whether the respondent court erred and gravely abused its discretion in awarding moral and exemplary damages and attorney's fees to be paid by petitioner to private respondent. Petitioner claims that generally the factual findings of the lower courts are final and binding upon this Court. However, there are exceptions to this rule. One is where the trial court and the Court of Appeals had arrived at diverse factual findings. 4 Petitioner faults the respondent court from deviating from the basic rule that finding of facts by the trial court is entitled to great weight, because the trial court had the opportunity to observe the deportment of witness and the evaluation of evidence presented during the trial. Petitioner contends that the appellate court gravely abused its discretion when it awarded damages to the plaintiff, even in the face of lack of evidence to prove such damages, as found by the trial court. Firstly, petitioner questions the award of moral damages. It claims that private respondent did not suffer any damage upon the dishonor of the check. Petitioner avers it acted in good faith. It was an honest mistake on its part, according to petitioner, when misposting of private respondent's deposit on June 1, 1988, happened. Further, petitioner contends that private respondent may not "claim" damages because the petitioner's manager and other employees had profusely apologized to private respondent for the error. They offered to make restitution and apology to the payee of the check, Legaspi, as well as the alleged endorsee, Lhuillier. Regrettably, it was private respondent who declined the offer and allegedly said, that there was nothing more to it, and that the matter had been put to rest. 5 Admittedly, as found by both the respondent appellate court and the trial court, petitioner bank had committed a mistake. It misposted private respondent's check deposit to another account and delayed the posting of the same to the proper account of the private respondent. The mistake resulted to the dishonor of the private respondent's

check. The trial court found "that the misposting of plaintiff's check deposit to another account and the delayed posting of the same to the account of the plaintiff is a clear proof of lack of supervision on the part of the defendant bank." 6 Similarly, the appellate court also found that "while it may be true that the bank's negligence in dishonoring the properly funded check of appellant might not have been attended with malice and bad faith, as appellee [bank] submits, nevertheless, it is the result of lack of due care and caution expected of an employee of a firm engaged in so sensitive and accurately demanding task as banking." 7 In Simex International (Manila), Inc. vs. Court of Appeals, 183 SCRA 360, 367 (1990), and Bank of Philippine Islands vs. IAC, et al., 206 SCRA 408, 412-413 (1992), this Court had occasion to stress the fiduciary nature of the relationship between a bank and its depositors and the extent of diligence expected of the former in handling the accounts entrusted to its care, thus: In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a few hundred pesos or of millions. The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he directs. A blunder on the part of bank, such as the dishonor of a check without good reason, can cause the depositor not a little embarrassment if not also financial loss and perhaps even civil and criminal litigation. The paint is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. . . . In the recent case of Philippine National Bank vs. Court of Appeals, 8 we held that "a bank is under obligation to treat the accounts of its depositors with meticulous care whether such account consists only of a few hundred pesos or of millions of pesos. Responsibility arising from negligence in the performance of every kind of obligation is demandable. While petitioner's negligence in this case may not have been attended with malice and bad faith, nevertheless, it caused serious anxiety, embarrassment and humiliation". Hence we ruled that the offended party in said case was entitled to recover reasonable moral damages. Even if malice or bad faith was not sufficiently proved in the instant case, the fact remains that petitioner has committed a serious mistake. It dishonored the check issued by the private respondent who turned out to have sufficient funds with petitioner. The bank's negligence was the result of lack of due care and caution required of managers and employees of a firm engaged in so sensitive and demanding business as banking. Accordingly, the award of moral damages by the respondent Court of Appeals could not be said to be in error nor in grave abuse of its discretion. There is no hard-and-fast rule in the determination of what would be a fair amount of moral damages since each case must be governed by its own peculiar facts. The yardstick should be that it is not palpably and scandalously excessive. In our view, the award of P100,000.00 is reasonable, considering the reputation and social standing of private respondent Leticia T. Valenzuela. 9 The law allows the grant of exemplary damages by way of example for the public good. 10 The public relies on the banks' sworn profession of diligence and meticulousness in giving irreproachable service. The level of meticulousness must be maintained at all times by the banking sector. Hence, the Court of Appeals did not err in awarding exemplary damages. In our view, however, the reduced amount of P20,000.00 is more appropriate. The award of attorney's fees is also proper when exemplary damages are awarded and since private respondent was compelled to engage the services of a lawyer and incurred expenses to protect her interest. 11 The standards in fixing attorney's fees are: (1) the amount and the character of the services rendered; (2) labor, time and trouble involved; (3) the nature and importance of the litigation and business in which the services were rendered; (4) the responsibility imposed; (5) the amount of money and the value of the property affected by the controversy or involved in the employment; (6) the skill and the experience called for in the performance of the services; (7) the professional character and the social standing of the attorney; (8) the results secured, it being a recognized rule that an attorney may properly charge a much larger fee when it is contingent than when it is not. 12 In this case, all the aforementioned weighed, and considering that the amount involved in the controversy is only P36,770.41, the total deposit of private respondent which was misposted by the bank, we find the award of respondent court of P50,000.00 for attorney's fees, excessive and reduce the same to P30,000.00. WHEREFORE, the assailed DECISION of the Court of Appeals is hereby AFFIRMED, with MODIFICATION. The petitioner is ordered to pay P100,000.00 by way of moral damages in favor of private respondent Leticia T. Valenzuela. It is further ordered to pay her exemplary damages in the amount of

P20,000.00 and P30,000.00, attorney's fees. Costs against petitioner.1wphi1.nt SO ORDERED.

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

CRUZ, J.: We are concerned in this case with the question of damages, specifically moral and exemplary damages. The negligence of the private respondent has already been established. All we have to ascertain is whether the petitioner is entitled to the said damages and, if so, in what amounts. The parties agree on the basic facts. The petitioner is a private corporation engaged in the exportation of food products. It buys these products from various local suppliers and then sells them abroad, particularly in the United States, Canada and the Middle East. Most of its exports are purchased by the petitioner on credit. The petitioner was a depositor of the respondent bank and maintained a checking account in its branch at Romulo Avenue, Cubao, Quezon City. On May 25, 1981, the petitioner deposited to its account in the said bank the amount of P100,000.00, thus increasing its balance as of that date to P190,380.74. 1 Subsequently, the petitioner issued several checks against its deposit but was suprised to learn later that they had been dishonored for insufficient funds. The dishonored checks are the following: 1. Check No. 215391 dated May 29, 1981, in favor of California Manufacturing Company, Inc. for P16,480.00: 2. Check No. 215426 dated May 28, 1981, in favor of the Bureau of Internal Revenue in the amount of P3,386.73: 3. Check No. 215451 dated June 4, 1981, in favor of Mr. Greg Pedreo in the amount of P7,080.00; 4. Check No. 215441 dated June 5, 1981, in favor of Malabon Longlife Trading Corporation in the amount of P42,906.00: 5. Check No. 215474 dated June 10, 1981, in favor of Malabon Longlife Trading Corporation in the amount of

P12,953.00: 6. Check No. 215477 dated June 9, 1981, in favor of Sea-Land Services, Inc. in the amount of P27,024.45: 7. Check No. 215412 dated June 10, 1981, in favor of Baguio Country Club Corporation in the amount of P4,385.02: and 8. Check No. 215480 dated June 9, 1981, in favor of Enriqueta Bayla in the amount of P6,275.00. 2 As a consequence, the California Manufacturing Corporation sent on June 9, 1981, a letter of demand to the petitioner, threatening prosecution if the dishonored check issued to it was not made good. It also withheld delivery of the order made by the petitioner. Similar letters were sent to the petitioner by the Malabon Long Life Trading, on June 15, 1981, and by the G. and U. Enterprises, on June 10, 1981. Malabon also canceled the petitioner's credit line and demanded that future payments be made by it in cash or certified check. Meantime, action on the pending orders of the petitioner with the other suppliers whose checks were dishonored was also deferred. The petitioner complained to the respondent bank on June 10, 1981. 3 Investigation disclosed that the sum of P100,000.00 deposited by the petitioner on May 25, 1981, had not been credited to it. The error was rectified on June 17, 1981, and the dishonored checks were paid after they were re-deposited. 4 In its letter dated June 20, 1981, the petitioner demanded reparation from the respondent bank for its "gross and wanton negligence." This demand was not met. The petitioner then filed a complaint in the then Court of First Instance of Rizal claiming from the private respondent moral damages in the sum of P1,000,000.00 and exemplary damages in the sum of P500,000.00, plus 25% attorney's fees, and costs. After trial, Judge Johnico G. Serquinia rendered judgment holding that moral and exemplary damages were not called for under the circumstances. However, observing that the plaintiff's right had been violated, he ordered the defendant to pay nominal damages in the amount of P20,000.00 plus P5,000.00 attorney's fees and costs. 5 This decision was affirmed in toto by the respondent court. 6 The respondent court found with the trial court that the private respondent was guilty of negligence but agreed that the petitioner was nevertheless not entitled to moral damages. It said: The essential ingredient of moral damages is proof of bad faith (De Aparicio vs. Parogurga, 150 SCRA 280). Indeed, there was the omission by the defendant-appellee bank to credit appellant's deposit of P100,000.00 on May 25, 1981. But the bank rectified its records. It credited the said amount in favor of plaintiff-appellant in less than a month. The dishonored checks were eventually paid. These circumstances negate any imputation or insinuation of malicious, fraudulent, wanton and gross bad faith and negligence on the part of the defendantappellant. It is this ruling that is faulted in the petition now before us. This Court has carefully examined the facts of this case and finds that it cannot share some of the conclusions of the lower courts. It seems to us that the negligence of the private respondent had been brushed off rather lightly as if it were a minor infraction requiring no more than a slap on the wrist. We feel it is not enough to say that the private respondent rectified its records and credited the deposit in less than a month as if this were sufficient repentance. The error should not have been committed in the first place. The respondent bank has not even explained why it was committed at all. It is true that the dishonored checks were, as the Court of Appeals put it, "eventually" paid. However, this took almost a month when, properly, the checks should have been paid immediately upon presentment. As the Court sees it, the initial carelessness of the respondent bank, aggravated by the lack of promptitude in repairing its error, justifies the grant of moral damages. This rather lackadaisical attitude toward the complaining depositor constituted the gross negligence, if not wanton bad faith, that the respondent court said had not been established by the petitioner. We also note that while stressing the rectification made by the respondent bank, the decision practically ignored the prejudice suffered by the petitioner. This was simply glossed over if not, indeed, disbelieved. The fact is that the petitioner's credit line was canceled and its orders were not acted upon pending receipt of actual payment by the suppliers. Its business declined. Its reputation was tarnished. Its standing was reduced in the business community. All this was due to the fault of the respondent bank which was undeniably remiss in its duty to the petitioner.

Article 2205 of the Civil Code provides that actual or compensatory damages may be received "(2) for injury to the plaintiff s business standing or commercial credit." There is no question that the petitioner did sustain actual injury as a result of the dishonored checks and that the existence of the loss having been established "absolute certainty as to its amount is not required." 7 Such injury should bolster all the more the demand of the petitioner for moral damages and justifies the examination by this Court of the validity and reasonableness of the said claim. We agree that moral damages are not awarded to penalize the defendant but to compensate the plaintiff for the injuries he may have suffered. 8 In the case at bar, the petitioner is seeking such damages for the prejudice sustained by it as a result of the private respondent's fault. The respondent court said that the claimed losses are purely speculative and are not supported by substantial evidence, but if failed to consider that the amount of such losses need not be established with exactitude precisely because of their nature. Moral damages are not susceptible of pecuniary estimation. Article 2216 of the Civil Code specifically provides that "no proof of pecuniary loss is necessary in order that moral, nominal, temperate, liquidated or exemplary damages may be adjudicated." That is why the determination of the amount to be awarded (except liquidated damages) is left to the sound discretion of the court, according to "the circumstances of each case." From every viewpoint except that of the petitioner's, its claim of moral damages in the amount of P1,000,000.00 is nothing short of preposterous. Its business certainly is not that big, or its name that prestigious, to sustain such an extravagant pretense. Moreover, a corporation is not as a rule entitled to moral damages because, not being a natural person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish and moral shock. The only exception to this rule is where the corporation has a good reputation that is debased, resulting in its social humiliation. 9 We shall recognize that the petitioner did suffer injury because of the private respondent's negligence that caused the dishonor of the checks issued by it. The immediate consequence was that its prestige was impaired because of the bouncing checks and confidence in it as a reliable debtor was diminished. The private respondent makes much of the one instance when the petitioner was sued in a collection case, but that did not prove that it did not have a good reputation that could not be marred, more so since that case was ultimately settled. 10 It does not appear that, as the private respondent would portray it, the petitioner is an unsavory and disreputable entity that has no good name to protect. Considering all this, we feel that the award of nominal damages in the sum of P20,000.00 was not the proper relief to which the petitioner was entitled. Under Article 2221 of the Civil Code, "nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him." As we have found that the petitioner has indeed incurred loss through the fault of the private respondent, the proper remedy is the award to it of moral damages, which we impose, in our discretion, in the same amount of P20,000.00. Now for the exemplary damages. The pertinent provisions of the Civil Code are the following: Art. 2229. Exemplary or corrective damages are imposed, by way of example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages. Art. 2232. In contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. The banking system is an indispensable institution in the modern world and plays a vital role in the economic life of every civilized nation. Whether as mere passive entities for the safekeeping and saving of money or as active instruments of business and commerce, banks have become an ubiquitous presence among the people, who have come to regard them with respect and even gratitude and, most of all, confidence. Thus, even the humble wage-earner has not hesitated to entrust his life's savings to the bank of his choice, knowing that they will be safe in its custody and will even earn some interest for him. The ordinary person, with equal faith, usually maintains a modest checking account for security and convenience in the settling of his monthly bills and the payment of ordinary expenses. As for business entities like the petitioner, the bank is a trusted and active associate that can help in the running of their affairs, not only in the form of loans when needed but more often in the conduct of their day-to-day transactions like the issuance or encashment of checks. In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a few hundred pesos or of millions. The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given

time the amount of money the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he directs. A blunder on the part of the bank, such as the dishonor of a check without good reason, can cause the depositor not a little embarrassment if not also financial loss and perhaps even civil and criminal litigation. The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. In the case at bar, it is obvious that the respondent bank was remiss in that duty and violated that relationship. What is especially deplorable is that, having been informed of its error in not crediting the deposit in question to the petitioner, the respondent bank did not immediately correct it but did so only one week later or twenty-three days after the deposit was made. It bears repeating that the record does not contain any satisfactory explanation of why the error was made in the first place and why it was not corrected immediately after its discovery. Such ineptness comes under the concept of the wanton manner contemplated in the Civil Code that calls for the imposition of exemplary damages. After deliberating on this particular matter, the Court, in the exercise of its discretion, hereby imposes upon the respondent bank exemplary damages in the amount of P50,000.00, "by way of example or correction for the public good," in the words of the law. It is expected that this ruling will serve as a warning and deterrent against the repetition of the ineptness and indefference that has been displayed here, lest the confidence of the public in the banking system be further impaired. ACCORDINGLY, the appealed judgment is hereby MODIFIED and the private respondent is ordered to pay the petitioner, in lieu of nominal damages, moral damages in the amount of P20,000.00, and exemplary damages in the amount of P50,000.00 plus the original award of attorney's fees in the amount of P5,000.00, and costs. SO ORDERED. Narvasa, Gancayco, Grino-Aquino and Medialdea, JJ., concur.

G.R. No. 118492

August 15, 2001

GREGORIO H. REYES and CONSUELO PUYAT-REYES, petitioners, vs. THE HON. COURT OF APPEALS and FAR EAST BANK AND TRUST COMPANY, respondents. DE LEON, JR., J.: Before us is a petition for review of the Decision1 dated July 22, 1994 and Resolution2 dated December 29, 1994 of the Court of Appeals3 affirming with modification the Decision4 dated November 12, 1992 of the Regional Trial Court of Makati, Metro Manila, Branch 64, which dismissed the complaint for damages of petitioners spouses Gregorio H. Reyes and Consuelo Puyat-Reyes against respondent Far East Bank and Trust Company. The undisputed facts of the case are as follows: In view of the 20th Asian Racing Conference then scheduled to be held in September, 1988 in Sydney, Australia, the Philippine Racing Club, Inc. (PRCI, for brevity) sent four (4) delegates to the said conference. Petitioner Gregorio H. Reyes, as vice-president for finance, racing manager, treasurer, and director of PRCI, sent Godofredo Reyes, the club's chief cashier, to the respondent bank to apply for a foreign exchange demand draft in Australian dollars.

Godofredo went to respondent bank's Buendia Branch in Makati City to apply for a demand draft in the amount One Thousand Six Hundred Ten Australian Dollars (AU$1,610.00) payable to the order of the 20th Asian Racing Conference Secretariat of Sydney, Australia. He was attended to by respondent bank's assistant cashier, Mr. Yasis, who at first denied the application for the reason that respondent bank did not have an Australian dollar account in any bank in Sydney. Godofredo asked if there could be a way for respondent bank to accommodate PRCI's urgent need to remit Australian dollars to Sydney. Yasis of respondent bank then informed Godofredo of a roundabout way of effecting the requested remittance to Sydney thus: the respondent bank would draw a demand draft against Westpac Bank in Sydney, Australia (Westpac-Sydney for brevity) and have the latter reimburse itself from the U.S. dollar account of the respondent in Westpac Bank in New York, U.S.A. (Westpac-New York for brevity). This arrangement has been customarily resorted to since the 1960's and the procedure has proven to be problem-free. PRCI and the petitioner Gregorio H. Reyes, acting through Godofredo, agreed to this arrangement or approach in order to effect the urgent transfer of Australian dollars payable to the Secretariat of the 20th Asian Racing Conference. On July 28, 1988, the respondent bank approved the said application of PRCI and issued Foreign Exchange Demand Draft (FXDD) No. 209968 in the sum applied for, that is, One Thousand Six Hundred Ten Australian Dollars (AU$ 1,610.00), payable to the order of the 20th Asian Racing Conference Secretariat of Sydney, Australia, and addressed to Westpac-Sydney as the drawee bank.1wphi1.nt On August 10, 1988, upon due presentment of the foreign exchange demand draft, denominated as FXDD No. 209968, the same was dishonored, with the notice of dishonor stating the following: "xxx No account held with Westpac." Meanwhile, on August 16, 1988, Wespac-New York sent a cable to respondent bank informing the latter that its dollar account in the sum of One Thousand Six Hundred Ten Australian Dollars (AU$ 1,610.00) was debited. On August 19, 1988, in response to PRCI's complaint about the dishonor of the said foreign exchange demand draft, respondent bank informed Westpac-Sydney of the issuance of the said demand draft FXDD No. 209968, drawn against the Wespac-Sydney and informing the latter to be reimbursed from the respondent bank's dollar account in Westpac-New York. The respondent bank on the same day likewise informed Wespac-New York requesting the latter to honor the reimbursement claim of Wespac-Sydney. On September 14, 1988, upon its second presentment for payment, FXDD No. 209968 was again dishonored by Westpac-Sydney for the same reason, that is, that the respondent bank has no deposit dollar account with the drawee Wespac-Sydney. On September 17, 1988 and September 18, 1988, respectively, petitioners spouses Gregorio H. Reyes and Consuelo Puyat-Reyes left for Australia to attend the said racing conference. When petitioner Gregorio H. Reyes arrived in Sydney in the morning of September 18, 1988, he went directly to the lobby of Hotel Regent Sydney to register as a conference delegate. At the registration desk, in the presence of other delegates from various member of the conference secretariat that he could not register because the foreign exchange demand draft for his registration fee had been dishonored for the second time. A discussion ensued in the presence and within the hearing of many delegates who were also registering. Feeling terribly embarrassed and humiliated, petitioner Gregorio H. Reyes asked the lady member of the conference secretariat that he be shown the subject foreign exchange demand draft that had been dishonored as well as the covering letter after which he promised that he would pay the registration fees in cash. In the meantime he demanded that he be given his name plate and conference kit. The lady member of the conference secretariat relented and gave him his name plate and conference kit. It was only two (2) days later, or on September 20, 1988, that he was given the dishonored demand draft and a covering letter. It was then that he actually paid in cash the registration fees as he had earlier promised. Meanwhile, on September 19, 1988, petitioner Consuelo Puyat-Reyes arrived in Sydney. She too was embarassed and humiliated at the registration desk of the conference secretariat when she was told in the presence and within the hearing of other delegates that she could not be registered due to the dishonor of the subject foreign exchange demand draft. She felt herself trembling and unable to look at the people around her. Fortunately, she saw her husband, coming toward her. He saved the situation for her by telling the secretariat member that he had already arranged for the payment of the registration fee in cash once he was shown the dishonored demand draft. Only then was petitioner Puyat-Reyes given her name plate and conference kit. At the time the incident took place, petitioner Consuelo Puyat-Reyes was a member of the House of Representatives representing the lone Congressional District of Makati, Metro Manila. She has been an officer of the Manila Banking Corporation and was cited by Archbishop Jaime Cardinal Sin as the top lady banker of the year in connection with her conferment of the Pro-Ecclesia et Pontifice Award. She has also been awarded a plaque of appreciation from the Philippine Tuberculosis Society for her extraordinary service as the Society's campaign chairman for the ninth (9th) consecutive year. On November 23, 1988, the petitioners filed in the Regional Trial Court of Makati, Metro Manila, a complaint for damages, docketed as Civil Case No. 88-2468, against the respondent bank due to the dishonor of the said foreign exchange demand draft issued by the respondent bank. The petitioners claim that as a result of the dishonor of the said demand draft, they were exposed to unnecessary shock, social humiliation, and deep mental

anguish in a foreign country, and in the presence of an international audience. On November 12, 1992, the trial court rendered judgment in favor of the defendant (respondent bank) and against the plaintiffs (herein petitioners), the dispositive portion of which states: WHEREFORE, judgment is hereby rendered in favor of the defendant, dismissing plaintiff's complaint, and ordering plaintiffs to pay to defendant, on its counterclaim, the amount of P50,000.00, as reasonable attorney's fees. Costs against the plaintiff. SO ORDERED.5 The petitioners appealed the decision of the trial court to the Court of Appeals. On July 22, 1994, the appellate court affirmed the decision of the trial court but in effect deleted the award of attorney's fees to the defendant (herein respondent bank) and the pronouncement as to the costs. The decretal portion of the decision of the appellate court states: WHEREFORE, the judgment appealed from, insofar as it dismissed plaintiff's complaint, is hereby AFFIRMED, but is hereby REVERSED and SET ASIDE in all other respect. No special pronouncement as to costs. SO ORDERED.6 According to the appellate court, there is no basis to hold the respondent bank liable for damages for the reason that it exerted every effort for the subject foreign exchange demand draft to be honored. The appellate court found and declared that: xxx xxx xxx

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

Hence, this petition, anchored on the following assignment of errors: I THE HONORABLE COURT OF APPEALS ERRED IN FINDING PRIVATE RESPONDENT NOT NEGLIGENT BY ERRONEOUSLY APPLYING THE STANDARD OF DILIGENCE OF AN "ORDINARY PRUDENT PERSON" WHEN IN TRUTH A HIGHER DEGREE OF DILIGENCE IS IMPOSED BY LAW UPON THE BANKS.

II THE HONORABLE COURT OF APPEALS ERRED IN ABSOLVING PRIVATE RESPONDENT FROM LIABILITY BY OVERLOOKING THE FACT THAT THE DISHONOR OF THE DEMAND DRAFT WAS A BREACH OF PRIVATE RESPONDENT'S WARRANTY AS THE DRAWER THEREOF. III THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT AS SHOWN OVERWHELMINGLY BY THE EVIDENCE, THE DISHONOR OF THE DEMAND DRAFT AS DUE TO PRIVATE RESPONDENT'S NEGLIGENCE AND NOT THE DRAWEE BANK.8 The petitioners contend that due to the fiduciary nature of the relationship between the respondent bank and its clients, the respondent should have exercised a higher degree of diligence than that expected of an ordinary prudent person in the handling of its affairs as in the case at bar. The appellate court, according to petitioners, erred in applying the standard of diligence of an ordinary prudent person only. Petitioners also claim that the respondent bank violate Section 61 of the Negotiable Instruments Law9 which provides the warranty of a drawer that "xxx on due presentment, the instrument will be accepted or paid, or both, according to its tenor xxx." Thus, the petitioners argue that respondent bank should be held liable for damages for violation of this warranty. The petitioners pray this Court to re-examine the facts to cite certain instances of negligence. It is our view and we hold that there is no reversible error in the decision of the appellate court. Section 1 of Rule 45 of the Revised Rules of Court provides that "(T)he petition (for review) shall raise only questions of law which must be distinctly set forth." Thus, we have ruled that factual findings of the Court of Appeals are conclusive on the parties and not reviewable by this Court and they carry even more weight when the Court of Appeals affirms the factual findings of the trial court.10 The courts a quo found that respondent bank did not misrepresent that it was maintaining a deposit account with Westpac-Sydney. Respondent bank's assistant cashier explained to Godofredo Reyes, representing PRCI and petitioner Gregorio H. Reyes, how the transfer of Australian dollars would be effected through Westpac-New York where the respondent bank has a dollar account to Westpac-Sydney where the subject foreign exchange demand draft (FXDD No. 209968) could be encashed by the payee, the 20th Asian Racing Conference Secretariat. PRCI and its Vice-President for finance, petitioner Gregorio H. Reyes, through their said representative, agreed to that arrangement or procedure. In other words, the petitioners are estopped from denying the said arrangement or procedure. Similar arrangements have been a long standing practice in banking to facilitate international commercial transactions. In fact, the SWIFT cable message sent by respondent bank to the drawee bank, Westpac-Sydney, stated that it may claim reimbursement from its New York branch, WestpacNew York, where respondent bank has a deposit dollar account. The facts as found by the courts a quo show that respondent bank did not cause an erroneous transmittal of its SWIFT cable message to Westpac-Sydney. It was the erroneous decoding of the cable message on the part of Westpac-Sydney that caused the dishonor of the subject foreign exchange demand draft. An employee of Westpac-Sydney in Sydney, Australia mistakenly read the printed figures in the SWIFT cable message of respondent bank as "MT799" instead of as "MT199". As a result, Westpac-Sydney construed the said cable message as a format for a letter of credit, and not for a demand draft. The appellate court correct found that "the figure before '99' can still be distinctly seen as a number '1' and not number '7'." Indeed, the line of a "7" is in a slanting position while the line of a "1" is in a horizontal position. Thus, the number "1" in "MT199" cannot be construed as "7".11 The evidence also shows that the respondent bank exercised that degree of diligence expected of an ordinary prudent person under the circumstances obtaining. Prior to the first dishonor of the subject foreign exchange demand draft, the respondent bank advised Westpac-New York to honor the reimbursement claim of WestpacSydney and to debit the dollar account12 of respondent bank with the former. As soon as the demand draft was dishonored, the respondent bank, thinking that the problem was with the reimbursement and without any idea that it was due to miscommunication, re-confirmed the authority of Westpac-New York to debit its dollar account for the purpose of reimbursing Westpac-Sydney.13 Respondent bank also sent two (2) more cable messages to Westpac-New York inquiring why the demand draft was not honored.14 With these established facts, we now determine the degree of diligence that banks are required to exert in their commercial dealings. In Philippine Bank of Commerce v. Court of Appeals15 upholding a long standing doctrine, we ruled that the degree of diligence required of banks, is more than that of a good father of a family where the fiduciary nature of their relationship with their depositors is concerned. In other words banks are duty bound to treat the deposit accounts of their depositors with the highest degree of care. But the said ruling applies only to cases where banks act under their fiduciary capacity, that is, as depositary of the deposits of their depositors. But the same higher degree of diligence is not expected to be exerted by banks in commercial transactions that do not involve their fiduciary relationship with their depositors.

Considering the foregoing, the respondent bank was not required to exert more than the diligence of a good father of a family in regard to the sale and issuance of the subject foreign exchange demand draft. The case at bar does not involve the handling of petitioners' deposit, if any, with the respondent bank. Instead, the relationship involved was that of a buyer and seller, that is, between the respondent bank as the seller of the subject foreign exchange demand draft, and PRCI as the buyer of the same, with the 20th Asian Racing conference Secretariat in Sydney, Australia as the payee thereof. As earlier mentioned, the said foreign exchange demand draft was intended for the payment of the registration fees of the petitioners as delegates of the PRCI to the 20th Asian Racing Conference in Sydney. The evidence shows that the respondent bank did everything within its power to prevent the dishonor of the subject foreign exchange demand draft. The erroneous reading of its cable message to Westpac-Sydney by an employee of the latter could not have been foreseen by the respondent bank. Being unaware that its employee erroneously read the said cable message, Westpac-Sydney merely stated that the respondent bank has no deposit account with it to cover for the amount of One Thousand Six Hundred Ten Australian Dollar (AU $1610.00) indicated in the foreign exchange demand draft. Thus, the respondent bank had the impression that WestpacNew York had not yet made available the amount for reimbursement to Westpac-Sydney despite the fact that respondent bank has a sufficient deposit dollar account with Westpac-New York. That was the reason why the respondent bank had to re-confirm and repeatedly notify Westpac-New York to debit its (respondent bank's) deposit dollar account with it and to transfer or credit the corresponding amount to Westpac-Sydney to cover the amount of the said demand draft. In view of all the foregoing, and considering that the dishonor of the subject foreign exchange demand draft is not attributable to any fault of the respondent bank, whereas the petitioners appeared to be under estoppel as earlier mentioned, it is no longer necessary to discuss the alleged application of Section 61 of the Negotiable Instruments Law to the case at bar. In any event, it was established that the respondent bank acted in good faith and that it did not cause the embarrassment of the petitioners in Sydney, Australia. Hence, the Court of Appeals did not commit any reversable error in its challenged decision. WHEREFORE, the petition is hereby DENIED, and the assailed decision of the Court of Appeals is AFFIRMED. Costs against the petitioners. SO ORDERED.1wphi1.nt Bellosillo, Mendoza, Quisumbing, and Buena, JJ., concur.

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

F.E. Evangelista & Glecerio T. Orsolino for respondent Central Bank of the Philippines. Feliciano C. Tumale, Pacifico T. Torres and Antonio B. Periquet for respondent Overseas Bank of Manila. Josefina G. Salonga for all other respondents.

CONCEPCION, JR., J.: Petition for mandamus and prohibition, with preliminary injunction, that seeks the establishment of joint and solidary liability to the amount of Three Hundred Fifty Thousand Pesos, with interest, against respondent Central Bank of the Philippines and Overseas Bank of Manila and its stockholders, on the alleged failure of the Overseas Bank of Manila to return the time deposits made by petitioner and assigned to him, on the ground that respondent Central Bank failed in its duty to exercise strict supervision over respondent Overseas Bank of Manila to protect depositors and the general public. 1 Petitioner also prays that both respondent banks be ordered to execute the proper and necessary documents to constitute all properties fisted in Annex "7" of the Answer of respondent Central Bank of the Philippines in G.R. No. L-29352, entitled "Emerita M. Ramos, et al vs. Central Bank of the Philippines," into a trust fund in favor of petitioner and all other depositors of respondent Overseas Bank of Manila. It is also prayed that the respondents be prohibited permanently from honoring, implementing, or doing any act predicated upon the validity or efficacy of the deeds of mortgage, assignment. and/or conveyance or transfer of whatever nature of the properties listed in Annex "7" of the Answer of respondent Central Bank in G.R. No. 29352. 2 A sought for ex-parte preliminary injunction against both respondent banks was not given by this Court. Undisputed pertinent facts are: On October 13, 1966 and December 12, 1966, petitioner made a time deposit, for one year with 6% interest, of One Hundred Fifty Thousand Pesos (P150,000.00) with the respondent Overseas Bank of Manila. 3 Concepcion Maneja also made a time deposit, for one year with 6-% interest, on March 6, 1967, of Two Hundred Thousand Pesos (P200,000.00) with the same respondent Overseas Bank of Manila. 4 On August 31, 1968, Concepcion Maneja, married to Felixberto M. Serrano, assigned and conveyed to petitioner Manuel M. Serrano, her time deposit of P200,000.00 with respondent Overseas Bank of Manila. 5 Notwithstanding series of demands for encashment of the aforementioned time deposits from the respondent Overseas Bank of Manila, dating from December 6, 1967 up to March 4, 1968, not a single one of the time deposit certificates was honored by respondent Overseas Bank of Manila. 6 Respondent Central Bank admits that it is charged with the duty of administering the banking system of the Republic and it exercises supervision over all doing business in the Philippines, but denies the petitioner's allegation that the Central Bank has the duty to exercise a most rigid and stringent

supervision of banks, implying that respondent Central Bank has to watch every move or activity of all banks, including respondent Overseas Bank of Manila. Respondent Central Bank claims that as of March 12, 1965, the Overseas Bank of Manila, while operating, was only on a limited degree of banking operations since the Monetary Board decided in its Resolution No. 322, dated March 12, 1965, to prohibit the Overseas Bank of Manila from making new loans and investments in view of its chronic reserve deficiencies against its deposit liabilities. This limited operation of respondent Overseas Bank of Manila continued up to 1968. 7 Respondent Central Bank also denied that it is guarantor of the permanent solvency of any banking institution as claimed by petitioner. It claims that neither the law nor sound banking supervision requires respondent Central Bank to advertise or represent to the public any remedial measures it may impose upon chronic delinquent banks as such action may inevitably result to panic or bank "runs". In the years 1966-1967, there were no findings to declare the respondent Overseas Bank of Manila as insolvent. 8 Respondent Central Bank likewise denied that a constructive trust was created in favor of petitioner and his predecessor in interest Concepcion Maneja when their time deposits were made in 1966 and 1967 with the respondent Overseas Bank of Manila as during that time the latter was not an insolvent bank and its operation as a banking institution was being salvaged by the respondent Central Bank. 9 Respondent Central Bank avers no knowledge of petitioner's claim that the properties given by respondent Overseas Bank of Manila as additional collaterals to respondent Central Bank of the Philippines for the former's overdrafts and emergency loans were acquired through the use of depositors' money, including that of the petitioner and Concepcion Maneja. 10 In G.R. No. L-29362, entitled "Emerita M. Ramos, et al. vs. Central Bank of the Philippines," a case was filed by the petitioner Ramos, wherein respondent Overseas Bank of Manila sought to prevent respondent Central Bank from closing, declaring the former insolvent, and liquidating its assets. Petitioner Manuel Serrano in this case, filed on September 6, 1968, a motion to intervene in G.R. No. L-29352, on the ground that Serrano had a real and legal interest as depositor of the Overseas Bank of Manila in the matter in litigation in that case. Respondent Central Bank in G.R. No. L-29352 opposed petitioner Manuel Serrano's motion to intervene in that case, on the ground that his claim as depositor of the Overseas Bank of Manila should properly be ventilated in the Court of First Instance, and if this Court were to allow Serrano to intervene as depositor in G.R. No. L-29352, thousands of other depositors would follow and thus cause an avalanche of cases in this Court. In the resolution dated October 4, 1968, this Court denied Serrano's, motion to intervene. The contents of said motion to intervene are substantially the same as those of the present petition. 11 This Court rendered decision in G.R. No. L-29352 on October 4, 1971, which became final and executory on March 3, 1972, favorable to the respondent Overseas Bank of Manila, with the dispositive portion to wit:
WHEREFORE, the writs prayed for in the petition are hereby granted and respondent Central Bank's resolution Nos. 1263, 1290 and 1333 (that prohibit the Overseas Bank of Manila to participate in clearing, direct the suspension of its operation, and ordering the liquidation of said bank) are hereby annulled and set aside; and said respondent Central Bank of the Philippines is directed to comply with its obligations under the Voting Trust Agreement, and to desist from taking action in violation therefor. Costs against respondent Central Bank of the Philippines. 12

Because of the above decision, petitioner in this case filed a motion for judgment in this case, praying for a decision on the merits, adjudging respondent Central Bank jointly and severally liable with respondent Overseas Bank of Manila to the petitioner for the P350,000 time deposit made with the latter bank, with all interests due therein; and declaring all assets assigned or mortgaged by the respondents Overseas Bank of Manila and the Ramos groups in favor of the Central Bank as trust funds for the benefit of petitioner and other depositors. 13 By the very nature of the claims and causes of action against respondents, they in reality are recovery of time deposits plus interest from respondent Overseas Bank of Manila, and recovery of damages against respondent Central Bank for its alleged failure to strictly supervise the acts of the other respondent Bank and protect the interests of its depositors by virtue of the constructive trust created when respondent Central Bank required the other respondent to increase its collaterals for its overdrafts said emergency loans, said collaterals allegedly acquired through the use of depositors money. These claims shoud be ventilated in the Court of First Instance of proper jurisdiction as We already pointed out when this Court denied petitioner's motion to intervene in G.R. No. L-29352. Claims of these nature are not proper in actions for mandamus and prohibition as there is no shown clear abuse of discretion by the Central Bank in its exercise of supervision over the other respondent Overseas Bank of Manila, and if there was, petitioner here is not the proper party to raise that question, but rather the Overseas Bank of Manila, as it did in G.R. No. L-29352. Neither is there anything to prohibit in this case, since the questioned acts of the respondent Central Bank (the acts of dissolving and liquidating the Overseas Bank of Manila), which petitioner here intends to use as his basis for claims of damages against respondent Central Bank, had been accomplished a long time ago. Furthermore, both parties overlooked one fundamental principle in the nature of bank deposits when the petitioner claimed that there should be created a constructive trust in his favor when the respondent Overseas Bank of Manila increased its collaterals in favor of respondent Central Bank for the former's overdrafts and emergency loans, since these collaterals were acquired by the use of depositors' money. Bank deposits are in the nature of irregular deposits. They are really loans because they earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and are to be covered by the law on loans. 14 Current and savings deposit are loans to a bank because it can use the same. The petitioner here in making time deposits that earn interests with respondent Overseas Bank of Manila was in reality a creditor of the respondent Bank and not a depositor. The respondent Bank was in turn a debtor of petitioner. Failure of he respondent Bank to honor the time deposit is failure to pay s obligation as a debtor and not a breach of trust arising from depositary's failure to return the subject matter of the deposit WHEREFORE, the petition is dismissed for lack of merit, with costs against petitioner. SO ORDERED. Antonio, Abad Santos, JJ., concur. Barredo (Chairman) J., concur in the judgment on the of the concurring opinion of Justice Aquino.

Separate Opinions

AQUINO, J., concurring: The petitioner prayed that the Central Bank be ordered to pay his time deposits of P350,000, plus interests, which he could not recover from the distressed Overseas Bank of Manila, and to declare all the assets assigned or mortgaged by that bank and the Ramos group to the Central Bank as trust properties for the benefit of the petitioner and other depositors. The petitioner has no causes of action agianst the Central Bank to obtain those reliefs. They cannot be granted in petitioner's instant original actions in this Court for mandamus and prohibition. It is not the Central Bank's ministerial duty to pay petitioner's time deposits or to hold the mortgaged properties in trust for the depositors of the Overseas Bank of Manila. The petitioner has no cause of action for prohibition, a remedy usually available against any tribunal, board, corporation or person exercising judicial or ministerial functions. Since the Overseas Bank of Manila was found to be insolvent and the Superintendent of Banks was ordered to take over its assets preparatory to its liquidation under section 29 of Republic Act No. 265 (p. 197, Rollo, Manifestation of September 19, 1973), petitioner's remedy is to file his claim in the liquidating proceeding (Central Bank vs. Morfe, L-38427, March 12, 1975, 63 SCRA 114; Hernandez vs. Rural Bank of Lucena, Inc., L-29791, January 10, 1978, 81 SCRA 75).

Separate Opinions AQUINO, J., concurring: The petitioner prayed that the Central Bank be ordered to pay his time deposits of P350,000, plus interests, which he could not recover from the distressed Overseas Bank of Manila, and to declare all the assets assigned or mortgaged by that bank and the Ramos group to the Central Bank as trust properties for the benefit of the petitioner and other depositors. The petitioner has no causes of action agianst the Central Bank to obtain those reliefs. They cannot be granted in petitioner's instant original actions in this Court for mandamus and prohibition. It is not the Central Bank's ministerial duty to pay petitioner's time deposits or to hold the mortgaged properties in trust for the depositors of the Overseas Bank of Manila. The petitioner has no cause of action for prohibition, a remedy usually available against any tribunal, board, corporation or person exercising

judicial or ministerial functions. Since the Overseas Bank of Manila was found to be insolvent and the Superintendent of Banks was ordered to take over its assets preparatory to its liquidation under section 29 of Republic Act No. 265 (p. 197, Rollo, Manifestation of September 19, 1973), petitioner's remedy is to file his claim in the liquidating proceeding (Central Bank vs. Morfe, L-38427, March 12, 1975, 63 SCRA 114; Hernandez vs. Rural Bank of Lucena, Inc., L-29791, January 10, 1978, 81 SCRA 75). Footnotes
1 pp. 1-10, rollo. 2 p. 10, Id. 3 pp. 12-13, Id. 4 pp. 12-13, Id. 5 p. 14, Id. 6 p. 15, Id. 7 pp- 18-19, Id. 8 pp, 19-20, Id. 9 pp- 22-24, Id. 10 pp. 24-25, Id. 11 pp. 26-27, Id. 12 p. 193, Id. 13 pp. 183-187, Id. 14 Art. 1980, Civil Code, Gullas vs. Phil. National Bank, 62 Phil. 519

CA Agro Industrial Development Corp., vs Court of Appeals GR# 90027 March 3, 193
DAVIDE, JR., J: Facts: Petitioner and the spouses Ramon and Paula Pugao entered into an agreement whereby the former purchased from the latter two (2) parcels of land. Among the terms and conditions of the agreement were that the titles to the lots shall be transferred to the petitioner upon full payment of the purchase price and that the owner's copies of the certificates of titles thereto, and that title shall be deposited shall be deposited in a safety deposit box of any bank. Petitioner and the Pugaos then rented Safety Deposit Box of private respondent Security Bank and Trust Company. Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots. Mrs.

Ramos demanded the execution of a deed of sale which necessarily entailed the production of the certificates of title. In view thereof, Aguirre, accompanied by the Pugaos, then proceeded to the respondent Bank to open the safety deposit box and get the certificates of title. However, when opened in the presence of the Bank's representative, the box yielded no such certificates. Issue: Is the contractual relation between a commercial bank and another party in a contract of rent of a safety deposit box with respect to its contents placed by the latter one of bailor and bailee or one of lessor and lessee? Held: The contract for the rent of the safety deposit box is not an ordinary contract of lease as defined in Article 1643 of the Civil Code. However, We do not fully subscribe to its view that the same is a contract of deposit that is to be strictly governed by the provisions in the Civil Code on deposit; the contract in the case at bar is a special kind of deposit. It cannot be characterized as an ordinary contract of lease under Article 1643 because the full and absolute possession and control of the safety deposit box was not given to the joint renters the petitioner and the Pugaos. The guard key of the box remained with the respondent Bank; without this key, neither of the renters could open the box. On the other hand, the respondent Bank could not likewise open the box without the renter's key. In this case, the said key had a duplicate which was made so that both renters could have access to the box. G.R. No. 90027 March 3, 1993 CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner, vs. THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents. Dolorfino & Dominguez Law Offices for petitioner. Danilo B. Banares for private respondent.

DAVIDE, JR., J.: Is the contractual relation between a commercial bank and another party in a contract of rent of a safety deposit box with respect to its contents placed by the latter one of bailor and bailee or one of lessor and lessee? This is the crux of the present controversy. On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon and Paula Pugao entered into an agreement whereby the former purchased from the latter two (2) parcels of land for a consideration of P350,625.00. Of this amount, P75,725.00 was paid as downpayment while the balance was covered by three (3) postdated checks. Among the terms and conditions of the agreement embodied in a Memorandum of True and Actual Agreement of Sale of Land were that the

titles to the lots shall be transferred to the petitioner upon full payment of the purchase price and that the owner's copies of the certificates of titles thereto, Transfer Certificates of Title (TCT) Nos. 284655 and 292434, shall be deposited in a safety deposit box of any bank. The same could be withdrawn only upon the joint signatures of a representative of the petitioner and the Pugaos upon full payment of the purchase price. Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety Deposit Box No. 1448 of private respondent Security Bank and Trust Company, a domestic banking corporation hereinafter referred to as the respondent Bank. For this purpose, both signed a contract of lease (Exhibit "2") which contains, inter alia, the following conditions:
13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control of the same. 14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it assumes absolutely no liability in connection therewith. 1

After the execution of the contract, two (2) renter's keys were given to the renters one to Aguirre (for the petitioner) and the other to the Pugaos. A guard key remained in the possession of the respondent Bank. The safety deposit box has two (2) keyholes, one for the guard key and the other for the renter's key, and can be opened only with the use of both keys. Petitioner claims that the certificates of title were placed inside the said box. Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at a price of P225.00 per square meter which, as petitioner alleged in its complaint, translates to a profit of P100.00 per square meter or a total of P280,500.00 for the entire property. Mrs. Ramos demanded the execution of a deed of sale which necessarily entailed the production of the certificates of title. In view thereof, Aguirre, accompanied by the Pugaos, then proceeded to the respondent Bank on 4 October 1979 to open the safety deposit box and get the certificates of title. However, when opened in the presence of the Bank's representative, the box yielded no such certificates. Because of the delay in the reconstitution of the title, Mrs. Ramos withdrew her earlier offer to purchase the lots; as a consequence thereof, the petitioner allegedly failed to realize the expected profit of P280,500.00. Hence, the latter filed on 1 September 1980 a complaint 2 for damages against the respondent Bank with the Court of First Instance (now Regional Trial Court) of Pasig, Metro Manila which docketed the same as Civil Case No. 38382. In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no cause of action because of paragraphs 13 and 14 of the contract of lease (Exhibit "2"); corollarily, loss of any of the items or articles contained in the box could not give rise to an action against it. It then interposed a counterclaim for exemplary damages as well as attorney's fees in the amount of P20,000.00. Petitioner subsequently filed an answer to the counterclaim. 4 In due course, the trial court, now designated as Branch 161 of the Regional Trial Court (RTC) of Pasig, Metro Manila, rendered a decision 5 adverse to the petitioner on 8 December 1986, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered dismissing plaintiff's complaint. On defendant's counterclaim, judgment is hereby rendered ordering plaintiff to pay defendant the amount of FIVE THOUSAND (P5,000.00) PESOS as attorney's fees.

With costs against plaintiff. 6

The unfavorable verdict is based on the trial court's conclusion that under paragraphs 13 and 14 of the contract of lease, the Bank has no liability for the loss of the certificates of title. The court declared that the said provisions are binding on the parties. Its motion for reconsideration 7 having been denied, petitioner appealed from the adverse decision to the respondent Court of Appeals which docketed the appeal as CA-G.R. CV No. 15150. Petitioner urged the respondent Court to reverse the challenged decision because the trial court erred in (a) absolving the respondent Bank from liability from the loss, (b) not declaring as null and void, for being contrary to law, public order and public policy, the provisions in the contract for lease of the safety deposit box absolving the Bank from any liability for loss, (c) not concluding that in this jurisdiction, as well as under American jurisprudence, the liability of the Bank is settled and (d) awarding attorney's fees to the Bank and denying the petitioner's prayer for nominal and exemplary damages and attorney's fees. 8 In its Decision promulgated on 4 July 1989, 9 respondent Court affirmed the appealed decision principally on the theory that the contract (Exhibit "2") executed by the petitioner and respondent Bank is in the nature of a contract of lease by virtue of which the petitioner and its co-renter were given control over the safety deposit box and its contents while the Bank retained no right to open the said box because it had neither the possession nor control over it and its contents. As such, the contract is governed by Article 1643 of the Civil Code 10 which provides:
Art. 1643. In the lease of things, one of the parties binds himself to give to another the enjoyment or use of a thing for a price certain, and for a period which may be definite or indefinite. However, no lease for more than ninety-nine years shall be valid.

It invoked Tolentino vs. Gonzales 11 which held that the owner of the property loses his control over the property leased during the period of the contract and Article 1975 of the Civil Code which provides:
Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn interest shall be bound to collect the latter when it becomes due, and to take such steps as may be necessary in order that the securities may preserve their value and the rights corresponding to them according to law. The above provision shall not apply to contracts for the rent of safety deposit boxes.

and then concluded that "[c]learly, the defendant-appellee is not under any duty to maintain the contents of the box. The stipulation absolving the defendant-appellee from liability is in accordance with the nature of the contract of lease and cannot be regarded as contrary to law, public order and public policy." 12 The appellate court was quick to add, however, that under the contract of lease of the safety deposit box, respondent Bank is not completely free from liability as it may still be made answerable in case unauthorized persons enter into the vault area or when the rented box is forced open. Thus, as expressly provided for in stipulation number 8 of the contract in question:
8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented safe and beyond this, the Bank will not be responsible for the contents of any safe rented from it. 13

Its motion for reconsideration 14 having been denied in the respondent Court's Resolution of 28 August 1989, 15 petitioner took this recourse under Rule 45 of the Rules of Court and urges Us to review and set aside the respondent Court's ruling. Petitioner avers that both the respondent Court and the trial court (a) did not properly and legally apply the correct law in this case, (b) acted with grave abuse of discretion or in excess of jurisdiction amounting to lack thereof and (c) set a precedent that is contrary to, or is a departure from precedents adhered to and affirmed by decisions of this Court and precepts in American jurisprudence adopted in the Philippines. It reiterates the arguments it had raised in its motion to reconsider the trial court's decision, the brief submitted to the respondent Court and the motion to reconsider the latter's decision. In a nutshell, petitioner maintains that regardless of nomenclature, the contract for the rent of the safety deposit box (Exhibit "2") is actually a contract of deposit governed by Title XII, Book IV of the Civil Code of the Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss of the certificates of title pursuant to Article 1972 of the said Code which provides:
Art. 1972. The depositary is obliged to keep the thing safely and to return it, when required, to the depositor, or to his heirs and successors, or to the person who may have been designated in the contract. His responsibility, with regard to the safekeeping and the loss of the thing, shall be governed by the provisions of Title I of this Book. If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that the depositary must observe.

Petitioner then quotes a passage from American Jurisprudence expound on the prevailing rule in the United States, to wit:

17

which is supposed to

The prevailing rule appears to be that where a safe-deposit company leases a safe-deposit box or safe and the lessee takes possession of the box or safe and places therein his securities or other valuables, the relation of bailee and bail or is created between the parties to the transaction as to such securities or other valuables; the fact that the safe-deposit company does not know, and that it is not expected that it shall know, the character or description of the property which is deposited in such safe-deposit box or safe does not change that relation. That access to the contents of the safe-deposit box can be had only by the use of a key retained by the lessee ( whether it is the sole key or one to be used in connection with one retained by the lessor) does not operate to alter the foregoing rule. The argument that there is not, in such a case, a delivery of exclusive possession and control to the deposit company, and that therefore the situation is entirely different from that of ordinary bailment, has been generally rejected by the courts, usually on the ground that as possession must be either in the depositor or in the company, it should reasonably be considered as in the latter rather than in the former, since the company is, by the nature of the contract, given absolute control of access to the property, and the depositor cannot gain access thereto without the consent and active participation of the company. . . . (citations omitted).

and a segment from Words and Phrases 18 which states that a contract for the rental of a bank safety deposit box in consideration of a fixed amount at stated periods is a bailment for hire. Petitioner further argues that conditions 13 and 14 of the questioned contract are contrary to law and public policy and should be declared null and void. In support thereof, it cites Article 1306 of the Civil Code which provides that parties to a contract may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy. After the respondent Bank filed its comment, this Court gave due course to the petition and required

the parties to simultaneously submit their respective Memoranda. The petition is partly meritorious. We agree with the petitioner's contention that the contract for the rent of the safety deposit box is not an ordinary contract of lease as defined in Article 1643 of the Civil Code. However, We do not fully subscribe to its view that the same is a contract of deposit that is to be strictly governed by the provisions in the Civil Code on deposit; 19 the contract in the case at bar is a special kind of deposit. It cannot be characterized as an ordinary contract of lease under Article 1643 because the full and absolute possession and control of the safety deposit box was not given to the joint renters the petitioner and the Pugaos. The guard key of the box remained with the respondent Bank; without this key, neither of the renters could open the box. On the other hand, the respondent Bank could not likewise open the box without the renter's key. In this case, the said key had a duplicate which was made so that both renters could have access to the box. Hence, the authorities cited by the respondent Court 20 on this point do not apply. Neither could Article 1975, also relied upon by the respondent Court, be invoked as an argument against the deposit theory. Obviously, the first paragraph of such provision cannot apply to a depositary of certificates, bonds, securities or instruments which earn interest if such documents are kept in a rented safety deposit box. It is clear that the depositary cannot open the box without the renter being present. We observe, however, that the deposit theory itself does not altogether find unanimous support even in American jurisprudence. We agree with the petitioner that under the latter, the prevailing rule is that the relation between a bank renting out safe-deposit boxes and its customer with respect to the contents of the box is that of a bail or and bailee, the bailment being for hire and mutual benefit. 21 This is just the prevailing view because:
There is, however, some support for the view that the relationship in question might be more properly characterized as that of landlord and tenant, or lessor and lessee. It has also been suggested that it should be characterized as that of licensor and licensee. The relation between a bank, safe-deposit company, or storage company, and the renter of a safe-deposit box therein, is often described as contractual, express or implied, oral or written, in whole or in part. But there is apparently no jurisdiction in which any rule other than that applicable to bailments governs questions of the liability and rights of the parties in respect of loss of the contents of safe-deposit boxes. 22 (citations omitted)

In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the General Banking Act 23 pertinently provides:
Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions other than building and loan associations may perform the following services: (a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the safeguarding of such effects. xxx xxx xxx The banks shall perform the services permitted under subsections (a), (b) and (c) of this section as depositories or as agents. . . . 24 (emphasis supplied)

Note that the primary function is still found within the parameters of a contract of deposit, i.e., the receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit boxes is not independent from, but related to or in conjunction with, this principal function. A contract of deposit may be entered into orally or in writing 25 and, pursuant to Article 1306 of the Civil Code, the parties thereto may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy. The depositary's responsibility for the safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement. 26 In the absence of any stipulation prescribing the degree of diligence required, that of a good father of a family is to be observed. 27 Hence, any stipulation exempting the depositary from any liability arising from the loss of the thing deposited on account of fraud, negligence or delay would be void for being contrary to law and public policy. In the instant case, petitioner maintains that conditions 13 and 14 of the questioned contract of lease of the safety deposit box, which read:
13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control of the same. 14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it assumes absolutely no liability in connection therewith. 28

are void as they are contrary to law and public policy. We find Ourselves in agreement with this proposition for indeed, said provisions are inconsistent with the respondent Bank's responsibility as a depositary under Section 72(a) of the General Banking Act. Both exempt the latter from any liability except as contemplated in condition 8 thereof which limits its duty to exercise reasonable diligence only with respect to who shall be admitted to any rented safe, to wit:
8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented safe and beyond this, the Bank will not be responsible for the contents of any safe rented from it. 29

Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It is not correct to assert that the Bank has neither the possession nor control of the contents of the box since in fact, the safety deposit box itself is located in its premises and is under its absolute control; moreover, the respondent Bank keeps the guard key to the said box. As stated earlier, renters cannot open their respective boxes unless the Bank cooperates by presenting and using this guard key. Clearly then, to the extent above stated, the foregoing conditions in the contract in question are void and ineffective. It has been said:
With respect to property deposited in a safe-deposit box by a customer of a safe-deposit company, the parties, since the relation is a contractual one, may by special contract define their respective duties or provide for increasing or limiting the liability of the deposit company, provided such contract is not in violation of law or public policy. It must clearly appear that there actually was such a special contract, however, in order to vary the ordinary obligations implied by law from the relationship of the parties; liability of the deposit company will not be enlarged or restricted by words of doubtful meaning. The company, in renting safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or negligence or that of its agents or servants, and if a provision of the contract may be construed as an attempt to do so, it will be held ineffective for the purpose. Although it has been held that the lessor of a safe-deposit box cannot limit its liability for loss of the contents thereof through its own negligence, the view has been taken that such a lessor may limits its liability to some extent by agreement or stipulation. 30

(citations omitted)

Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the petition should be dismissed, but on grounds quite different from those relied upon by the Court of Appeals. In the instant case, the respondent Bank's exoneration cannot, contrary to the holding of the Court of Appeals, be based on or proceed from a characterization of the impugned contract as a contract of lease, but rather on the fact that no competent proof was presented to show that respondent Bank was aware of the agreement between the petitioner and the Pugaos to the effect that the certificates of title were withdrawable from the safety deposit box only upon both parties' joint signatures, and that no evidence was submitted to reveal that the loss of the certificates of title was due to the fraud or negligence of the respondent Bank. This in turn flows from this Court's determination that the contract involved was one of deposit. Since both the petitioner and the Pugaos agreed that each should have one (1) renter's key, it was obvious that either of them could ask the Bank for access to the safety deposit box and, with the use of such key and the Bank's own guard key, could open the said box, without the other renter being present. Since, however, the petitioner cannot be blamed for the filing of the complaint and no bad faith on its part had been established, the trial court erred in condemning the petitioner to pay the respondent Bank attorney's fees. To this extent, the Decision (dispositive portion) of public respondent Court of Appeals must be modified. WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for attorney's fees from the 4 July 1989 Decision of the respondent Court of Appeals in CA-G.R. CV No. 15150. As modified, and subject to the pronouncement We made above on the nature of the relationship between the parties in a contract of lease of safety deposit boxes, the dispositive portion of the said Decision is hereby AFFIRMED and the instant Petition for Review is otherwise DENIED for lack of merit. No pronouncement as to costs. SO ORDERED. Feliciano, Bidin, Romero and Melo, JJ., concur. Gutierrez, Jr., J., is on leave.

Footnotes
1 Rollo, 102. 2 Annex "A" of Petition; Rollo, 28-32. 3 Annex "B", Id.; Id., 33-35. 4 Annex "C", Id.; Id., 36.

5 Annex "D" of Petition; Rollo, 38-54. Per Judge Cicero C. Jurado. 6 Id., 54. 7 Annex "E", Id.; Id., 55-68. 8 Rollo, 100-101. 9 Per Associate Justice Felipe B. Kalalo, concurred in by Associate Justices Bienvenido C. Ejercito and Luis L. Victor. Annex "I" of Petition; Id., 89-105. 10 Citing PARAS, E.L., Civil Code of the Philippines, vol. 5, 1982 ed., 717. 11 50 Phil. 558 [1927]. 12 Rollo, 103. 13 Id. 14 Annex "J" of Petition; Rollo, 106-113. 15 Annex "K", Id.; Id., 114-115. 16 Articles 1962 to 2009, inclusive. 17 10 Am Jur 2d., 440-441. 18 While the citation is 5 Words and Phrases Permanent Edition, 71-72, We failed to locate this in the said work and volume. 19 Title XII, Book IV, Civil Code. 20 PARAS, E.L., op. cit., and Tolentino vs. Gonzales, supra. 21 10 Am Jur 2d., 441. 22 10 Am Jur 2d., 442-443. 23 R.A. No. 337, as amended. 24 "Agents" refers to paragraphs (b) and (c) while "depositories" refers to paragraph (a). 25 Article 1969, Civil Code. 26 Article 1170, Id.

G.R. No. 112392

February 29, 2000

BANK OF THE PHILIPPINE ISLANDS, petitioner, vs.

COURT OF APPEALS and BENJAMIN C. NAPIZA, respondents. YNARES-SANTIAGO, J.: This is a petition for review on certiorari of the Decision1 of the Court of Appeals in CA-G.R. CV No. 37392 affirming in toto that of the Regional Trial Court of Makati, Branch 139,2 which dismissed the complaint filed by petitioner Bank of the Philippine Islands against private respondent Benjamin C. Napiza for sum of money. On September 3, 1987, private respondent deposited in Foreign Currency Deposit Unit (FCDU) Savings Account No. 028-1873 which he maintained in petitioner bank's Buendia Avenue Extension Branch, Continental Bank Manager's Check No. 000147574 dated August 17, 1984, payable to "cash" in the amount of Two Thousand Five Hundred Dollars ($2,500.00) and duly endorsed by private respondent on its dorsal side.5 It appears that the check belonged to a certain Henry who went to the office of private respondent and requested him to deposit the check in his dollar account by way of accommodation and for the purpose of clearing the same. Private respondent acceded, and agreed to deliver to Chan a signed blank withdrawal slip, with the understanding that as soon as the check is cleared, both of them would go to the bank to withdraw the amount of the check upon private respondent's presentation to the bank of his passbook. Using the blank withdrawal slip given by private respondent to Chan, on October 23, 1984, one Ruben Gayon, Jr. was able to withdraw the amount of $2,541.67 from FCDU Savings Account No. 028-187. Notably, the withdrawal slip shows that the amount was payable to Ramon A. de Guzman and Agnes C. de Guzman and was duly initialed by the branch assistant manager, Teresita Lindo.6 On November 20, 1984, petitioner received communication from the Wells Fargo Bank International of New York that the said check deposited by private respondent was a counterfeit check7 because it was "not of the type or style of checks issued by Continental Bank International."8 Consequently, Mr. Ariel Reyes, the manager of petitioner's Buendia Avenue Extension Branch, instructed one of its employees, Benjamin D. Napiza IV, who is private respondent's son, to inform his father that the check bounced.9 Reyes himself sent a telegram to private respondent regarding the dishonor of the check. In turn, private respondent's son wrote to Reyes stating that the check been assigned "for encashment" to Ramon A. de Guzman and/or Agnes C. de Guzman after it shall have been cleared upon instruction of Chan. He also said that upon learning of the dishonor of the check, his father immediately tried to contact Chan but the latter was out of town.10 Private respondent's son undertook to return the amount of $2,500.00 to petitioner bank. On December 18, 1984, Reyes reminded private respondent of his son's promise and warned that should he fail to return that amount within seven (7) days, the matter would be referred to the bank's lawyers for appropriate action to protect the bank's interest.11 This was followed by a letter of the bank's lawyer dated April 8, 1985 demanding the return of the $2,500.00.12 In reply, private respondent wrote petitioner's counsel on April 20, 198513 stating that he deposited the check "for clearing purposes" only to accommodate Chan. He added: Further, please take notice that said check was deposited on September 3, 1984 and withdrawn on October 23, 1984, or a total period of fifty (50) days had elapsed at the time of withdrawal. Also, it may not be amiss to mention here that I merely signed an authority to withdraw said deposit subject to its clearing, the reason why the transaction is not reflected in the passbook of the account. Besides, I did not

receive its proceeds as may be gleaned from the withdrawal slip under the captioned signature of recipient.1wphi1.nt If at all, my obligation on the transaction is moral in nature, which (sic) I have been and is (sic) still exerting utmost and maximum efforts to collect from Mr. Henry Chan who is directly liable under the circumstances. xxx xxx xxx

On August 12, 1986, petitioner filed a complaint against private respondent, praying for the return of the amount of $2,500.00 or the prevailing peso equivalent plus legal interest from date of demand to date of full payment, a sum equivalent to 20% of the total amount due as attorney's fees, and litigation and/or costs of suit. Private respondent filed his answer, admitting that he indeed signed a "blank" withdrawal slip with the understanding that the amount deposited would be withdrawn only after the check in question has been cleared. He likewise alleged that he instructed the party to whom he issued the signed blank withdrawal slip to return it to him after the bank draft's clearance so that he could lend that party his passbook for the purpose of withdrawing the amount of $2,500.00. However, without his knowledge, said party was able to withdraw the amount of $2,541.67 from his dollar savings account through collusion with one of petitioner's employees. Private respondent added that he had "given the Plaintiff fifty one (51) days with which to clear the bank draft in question." Petitioner should have disallowed the withdrawal because his passbook was not presented. He claimed that petitioner had no one to blame except itself "for being grossly negligent;" in fact, it had allegedly admitted having paid the amount in the check "by mistake" . . . "if not altogether due to collusion and/or bad faith on the part of (its) employees." Charging petitioner with "apparent ignorance of routine bank procedures," by way of counterclaim, private respondent prayed for moral damages of P100,000.00, exemplary damages of P50,000.00 and attorney's fees of 30% of whatever amount that would be awarded to him plus an honorarium of P500.00 per appearance in court. Private respondent also filed a motion for admission of a third party complaint against Chan. He alleged that "thru strategem and/or manipulation," Chan was able to withdraw the amount of $2,500.00 even without private respondent's passbook. Thus, private respondent prayed that third party defendant Chan be made to refund to him the amount withdrawn and to pay attorney's fees of P5,000.00 plus P300.00 honorarium per appearance. Petitioner filed a comment on the motion for leave of court to admit the third party complaint, whenever it asserted that per paragraph 2 of the Rules and Regulations governing BPI savings accounts, private respondent alone was liable "for the value of the credit given on account of the draft or check deposited." It contended that private respondent was estopped from disclaiming liability because he himself authorized the withdrawal of the amount by signing the withdrawal slip. Petitioner prayed for the denial of the said motion so as not to unduly delay the disposition of the main case asserting that private respondent's claim could be ventilated in another case. Private respondent replied that for the parties to obtain complete relief and to avoid multiplicity of suits, the motion to admit third party complaint should be granted. Meanwhile, the trial court issued orders on August 25, 1987 and October 28, 1987 directing private respondent to actively participate in locating Chan. After private respondent failed to comply, the trial court, on May 18, 1988, dismissed the third party complaint without prejudice. On November 4, 1991, a decision was rendered dismissing the complaint. The lower court held that petitioner

could not hold private respondent liable based on the check's face value alone. To so hold him liable "would render inutile the requirement of "clearance" from the drawee bank before the value of a particular foreign check or draft can be credited to the account of a depositor making such deposit." The lower court further held that "it was incumbent upon the petitioner to credit the value of the check in question to the account of the private respondent only upon receipt of the notice of final payment and should not have authorized the withdrawal from the latter's account of the value or proceeds of the check." Having admitted that it committed a "mistake" in not waiting for the clearance of the check before authorizing the withdrawal of its value or proceeds, petitioner should suffer the resultant loss. On appeal, the Court of Appeals affirmed the lower court's decision. The appellate court held that petitioner committed "clears gross negligence" in allowing Ruben Gayon, Jr. to withdraw the money without presenting private respondent's passbook and, before the check was cleared and in crediting the amount indicated therein in private respondent's account. It stressed that the mere deposit of a check in private respondent's account did not mean that the check was already private respondent's property. The check still had to be cleared and its proceeds can only be withdrawn upon presentation of a passbook in accordance with the bank's rules and regulations. Furthermore, petitioner's contention that private respondent warranted the check's genuineness by endorsing it is untenable for it would render useless the clearance requirement. Likewise, the requirement of presentation of a passbook to ascertain the propriety of the accounting reflected would be a meaningless exercise. After all, these requirements are designed to protect the bank from deception or fraud. The Court of Appeals cited the case of Roman Catholic Bishop of Malolos, Inc. v. IAC,14 where this Court stated that a personal check is not legal tender or money, and held that the check deposited in this case must be cleared before its value could be properly transferred to private respondent's account. Without filing a motion for the reconsideration of the Court of Appeals' Decision, petitioner filed this petition for review on certiorari, raising the following issues: 1. WHETHER OR NOT RESPONDENT NAPIZA IS LIABLE UNDER HIS WARRANTIES AS A GENERAL INDORSER. 2. WHETHER OR NOT A CONTRACT OF AGENCY WAS CREATED BETWEEN RESPONDENT NAPIZA AND RUBEN GAYON. 3. WHETHER OR NOT PETITIONER WAS GROSSLY NEGLIGENT IN ALLOWING THE WITHDRAWAL. Petitioner claims that private respondent, having affixed his signature at the dorsal side of the check, should be liable for the amount stated therein in accordance with the following provision of the Negotiable Instruments Law (Act No. 2031): Sec. 66. Liability of general indorser. Every indorser who indorses without qualification, warrants to all subsequent holders in due course (a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and (b) That the instrument is at the time of his indorsement, valid and subsisting. And, in addition, he engages that on due presentment, it shall be accepted or paid, or both, as the case

may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it. Sec. 65, on the other hand, provides for the following warranties of a person negotiating an instrument by delivery or by qualified indorsement: (a) that the instrument is genuine and in all respects what it purports to be; (b) that he has a good title to it, and (c) that all prior parties had capacity to contract.15 In People v. Maniego,16 this Court described the liabilities of an indorser as follows: Appellant's contention that as mere indorser, she may not be liable on account of the dishonor of the checks indorsed by her, is likewise untenable. Under the law, the holder or last indorsee of a negotiable instrument has the right "to enforce payment of the instrument for the full amount thereof against all parties liable thereon. Among the "parties liable thereon." Is an indorser of the instrument, i.e., "a person placing his signature upon an instrument otherwise than as a maker, drawer or acceptor * * unless he clearly indicated by appropriate words his intention to be bound in some other capacity." Such an indorser "who indorses without qualification," inter alia "engages that on due presentment, * * (the instrument) shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or any subsequent indorser who may be compelled to pay it." Maniego may also be deemed an "accommodation party" in the light of the facts, i.e., a person "who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value thereof, and for the purpose of lending his name to some other person." As such, she is under the law "liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew * * (her) to be only an accommodation party," although she has the right, after paying the holder, to obtain reimbursement from the party accommodated, "since the relation between them is in effect that of principal and surety, the accommodation party being the surety. It is thus clear that ordinarily private respondent may be held liable as an indorser of the check or even as an accommodation party.17 However, to hold private respondent liable for the amount of the check he deposited by the strict application of the law and without considering the attending circumstances in the case would result in an injustice and in the erosion of the public trust in the banking system. The interest of justice thus demands looking into the events that led to the encashment of the check. Petitioner asserts that by signing the withdrawal slip, private respondent "presented the opportunity for the withdrawal of the amount in question." Petitioner relied "on the genuine signature on the withdrawal slip, the personality of private respondent's son and the lapse of more than fifty (50) days from date of deposit of the Continental Bank draft, without the same being returned yet." 18 We hold, however, that the propriety of the withdrawal should be gauged by compliance with the rules thereon that both petitioner bank and its depositors are duty-bound to observe. In the passbook that petitioner issued to private respondent, the following rules on withdrawal of deposits appear: 4. Withdrawals must be made by the depositor personally but in some exceptional circumstances, the Bank may allow withdrawal by another upon the depositor's written authority duly authenticated; and neither a deposit nor a withdrawal will be permitted except upon the

presentation of the depositor's savings passbook, in which the amount deposited withdrawn shall be entered only by the Bank. 5. Withdrawals may be made by draft, mail or telegraphic transfer in currency of the account at the request of the depositor in writing on the withdrawal slip or by authenticated cable. Such request must indicate the name of the payee/s, amount and the place where the funds are to be paid. Any stamp, transmission and other charges related to such withdrawals shall be for the account of the depositor and shall be paid by him/her upon demand. Withdrawals may also be made in the form of travellers checks and in pesos. Withdrawals in the form of notes/bills are allowed subject however, to their (availability). 6. Deposits shall not be subject to withdrawal by check, and may be withdrawal only in the manner above provided, upon presentation of the depositor's savings passbook and with the withdrawal form supplied by the Bank at the counter.19 Under these rules, to be able to withdraw from the savings account deposit under the Philippine foreign currency deposit system, two requisites must be presented to petitioner bank by the person withdrawing an amount: (a) a duly filled-up withdrawal slip, and (b) the depositor's passbook. Private respondent admits he signed a blank withdrawal slip ostensibly in violation of Rule No. 6 requiring that the request for withdrawal must name the payee, the amount to be withdrawn and the place where such withdrawal should be made. That the withdrawal slip was in fact a blank one with only private respondent's two signatures affixed on the proper spaces is buttressed by petitioner's allegation in the instant petition that had private respondent indicated therein the person authorized to receive the money, then Ruben Gayon, Jr. could not have withdrawn any amount. Petitioner contends that "(I)n failing to do so (i.e., naming his authorized agent), he practically authorized any possessor thereof to write any amount and to collect the same."20 Such contention would have been valid if not for the fact that the withdrawal slip itself indicates a special instruction that the amount is payable to "Ramon A. de Guzman &/or Agnes C. de Guzman." Such being the case, petitioner's personnel should have been duly warned that Gayon, who was also employed in petitioner's Buendia Ave. Extension branch,21 was not the proper payee of the proceeds of the check. Otherwise, either Ramon or Agnes de Guzman should have issued another authority to Gayon for such withdrawal. Of course, at the dorsal side of the withdrawal slip is an "authority to withdraw" naming Gayon the person who can withdraw the amount indicated in the check. Private respondent does not deny having signed such authority. However, considering petitioner's clear admission that the withdrawal slip was a blank one except for private respondent's signature, the unavoidable conclusion is that the typewritten name of "Ruben C. Gayon, Jr." was intercalated and thereafter it was signed by Gayon or whoever was allowed by petitioner to withdraw the amount. Under these facts, there could not have been a principal-agent relationship between private respondent and Gayon so as to render the former liable for the amount withdrawn. Moreover, the withdrawal slip contains a boxed warning that states: "This receipt must be signed and presented with the corresponding foreign currency savings passbook by the depositor in person. For withdrawals thru a representative, depositor should accomplish the authority at the back." The requirement of presentation of the passbook when withdrawing an amount cannot be given mere lip service even though the person making the withdrawal is authorized by the depositor to do so. This is clear from Rule No. 6 set out by petitioner so that, for the protection of the bank's interest and as a reminder to the depositor, the withdrawal shall be entered in the depositor's passbook. The fact that

private respondent's passbook was not presented during the withdrawal is evidenced by the entries therein showing that the last transaction that he made with the bank was on September 3, 1984, the date he deposited the controversial check in the amount of $2,500.00.22 In allowing the withdrawal, petitioner likewise overlooked another rule that is printed in the passbook. Thus: 2. All deposits will be received as current funds and will be repaid in the same manner; provided, however, that deposits of drafts, checks, money orders, etc. will be accented as subject to collection only and credited to the account only upon receipt of the notice of final payment. Collection charges by the Bank's foreign correspondent in effecting such collection shall be for the account of the depositor. If the account has sufficient balance, the collection shall be debited by the Bank against the account. If, for any reason, the proceeds of the deposited checks, drafts, money orders, etc., cannot be collected or if the Bank is required to return such proceeds, the provisional entry therefor made by the Bank in the savings passbook and its records shall be deemed automatically cancelled regardless of the time that has elapsed, and whether or not the defective items can be returned to the depositor; and the Bank is hereby authorized to execute immediately the necessary corrections, amendments or changes in its record, as well as on the savings passbook at the first opportunity to reflect such cancellation. (Emphasis and underlining supplied.) As correctly held by the Court of Appeals, in depositing the check in his name, private respondent did not become the outright owner of the amount stated therein. Under the above rule, by depositing the check with petitioner, private respondent was, in a way, merely designating petitioner as the collecting bank. This is in consonance with the rule that a negotiable instrument, such as a check, whether a manager's check or ordinary check, is not legal tender. 23 As such, after receiving the deposit, under its own rules, petitioner shall credit the amount in private respondent's account or infuse value thereon only after the drawee bank shall have paid the amount of the check or the check has been cleared for deposit. Again, this is in accordance with ordinary banking practices and with this Court's pronouncement that "the collecting bank or last endorser generally suffers the loss because has the duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements."24 The rule finds more meaning in this case where the check involved is drawn on a foreign bank and therefore collection is more difficult than when the drawee bank is a local one even though the check in question is a manager's check.25 In Banco Atlantico v. Auditor General,26 Banco Atlantico, a commercial bank in Madrid, Spain, paid the amounts represented in three (3) checks to Virginia Boncan, the finance officer of the Philippine Embassy in Madrid. The bank did so without previously clearing the checks with the drawee bank, the Philippine National Bank in New York, on account of the "special treatment" that Boncan received from the personnel of Banco Atlantico's foreign department. The Court held that the encashment of the checks without prior clearance is "contrary to normal or ordinary banking practice specially so where the drawee bank is a foreign bank and the amounts involved were large." Accordingly, the Court approved the Auditor General's denial of Banco Atlantico's claim for payment of the value of the checks that was withdrawn by Boncan. Said ruling brings to light the fact that the banking business is affected with public interest. By the nature of its functions, a bank is under obligation to treat the accounts of its depositors "with

meticulous care, always having in mind the fiduciary nature of their relationship." 27 As such, in dealing with its depositors, a bank should exercise its functions not only with the diligence of a good father of a family but it should do so with the highest degree of care.28 In the case at bar, petitioner, in allowing the withdrawal of private respondent's deposit, failed to exercise the diligence of a good father of a family. In total disregard of its own rules, petitioner's personnel negligently handled private respondent's account to petitioner's detriment. As this Court once said on this matter: Negligence is the omission to do something which a reasonable man, guided by those considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of something which a prudent and reasonable man would do. The seventy-eight (78)-year-old, yet still relevant, case of Picart v. Smith, provides that test by which to determine the existence of negligence in a particular case which may be stated as follows: Did the defendant in doing the alleged negligent act use that reasonable care and caution which an ordinarily prudent person would have used in the same situation? If not, then he is guilty of negligence. The law here in effect adopts the standard supposed to be supplied by the imaginary conduct of the discreet pater-familias of the Roman law. The existence of negligence in a given case is not determined by reference to the personal judgment of the actor in the situation before him. The law considers what would be reckless, blameworthy, or negligent in the man of ordinary intelligence and prudence and determines liability by that.29 Petitioner violated its own rules by allowing the withdrawal of an amount that is definitely over and above the aggregate amount of private respondent's dollar deposits that had yet to be cleared. The bank's ledger on private respondent's account shows that before he deposited $2,500.00, private respondent had a balance of only $750.00.30 Upon private respondent's deposit of $2,500.00 on September 3, 1984, that amount was credited in his ledger as a deposit resulting in the corresponding total balance of $3,250.00.31 On September 10, 1984, the amount of $600.00 and the additional charges of $10.00 were indicated therein as withdrawn thereby leaving a balance $2,640.00. On September 30, 1984, an interest of $11.59 was reflected in the ledger and on October 23, 1984, the amount of $2,541.67 was entered as withdrawn with a balance of $109.92. 32 On November 19, 1984 the word "hold" was written beside the balance of $109.92.33 That must have been the time when Reyes, petitioner's branch manager, was informed unofficially of the fact that the check deposited was a counterfeit, but petitioner's Buendia Ave. Extension Branch received a copy of the communication thereon from Wells Fargo Bank International in New York the following day, November 20, 1984. 34 According to Reyes, Wells Fargo Bank International handled the clearing of checks drawn against U.S. banks that were deposited with petitioner.35 From these facts on record, it is at once apparent that petitioner's personnel allowed the withdrawal of an amount bigger than the original deposit of $750.00 and the value of the check deposited in the amount of $2,500.00 although they had not yet received notice from the clearing bank in the United States on whether or not the check was funded. Reyes' contention that after the lapse of the 35-day period the amount of a deposited check could be withdrawn even in the absence of a clearance thereon, otherwise it could take a long time before a depositor could make a withdrawal, 36 is untenable. Said practice amounts to a disregard of the clearance requirement of the banking system. While it is true that private respondent's having signed a blank withdrawal slip set in motion the events

that resulted in the withdrawal and encashment of the counterfeit check, the negligence of petitioner's personnel was the proximate cause of the loss that petitioner sustained. Proximate cause, which is determined by a mixed consideration of logic, common sense, policy and precedent, is "that cause, which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred." 37 The proximate cause of the withdrawal and eventual loss of the amount of $2,500.00 on petitioner's part was its personnel's negligence in allowing such withdrawal in disregard of its own rules and the clearing requirement in the banking system. In so doing, petitioner assumed the risk of incurring a loss on account of a forged or counterfeit foreign check and hence, it should suffer the resulting damage.1wphi1.nt WHEREFORE, the petition for review on certiorari is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 37392 is AFFIRMED. SO ORDERED. Davide, Jr., C.J., Puno, Kapunan and Pardo, JJ., concur.

Footnotes
1

Penned by Associate Justice Jainal D. Rasul and concurred in by Associate Justices Gloria C. Paras and Ramon Mabutas, Jr.
2

The decision of the RTC was penned by Assisting Judge Jose R. Bautista per Administrative Order No. 109-91 dated October 3, 1991.
3 4 5 6 7 8 9

Exh. B. Exh. C. Exh. C-1. TSN, September 14, 1989, p. 16. Exh. E. Exh. E-1. Exh. F. Ibid. Exh. H.

10 11

12 13 14

Exh. I. Exh. 3. G.R. No. 72110, 191 SCRA 411 (1990

G.R. No. 113236

March 5, 2001 petitioner,

FIRESTONE TIRE & RUBBER COMPANY OF THE PHILIPPINES, vs. COURT OF APPEALS and LUZON DEVELOPMENT BANK, respondents. QUISUMBING, J.:

This petition assails the decision 1 dated December 29, 1993 of the Court of Appeals in CA-G.R. CV No. 29546, which affirmed the judgment 2 of the Regional Trial Court of Pasay City, Branch 113 in Civil Case No. PQ7854-P, dismissing Firestone's complaint for damages. The facts of this case, adopted by the CA and based on findings by the trial court, are as follows: . . . [D]efendant is a banking corporation. It operates under a certificate of authority issued by the Central Bank of the Philippines, and among its activities, accepts savings and time deposits. Said defendant had as one of its client-depositors the Fojas-Arca Enterprises Company ("Fojas-Arca" for brevity). FojasArca maintaining a special savings account with the defendant, the latter authorized and allowed withdrawals of funds therefrom through the medium of special withdrawal slips. These are supplied by the defendant to Fojas-Arca. In January 1978, plaintiff and Fojas-Arca entered into a "Franchised Dealership Agreement" (Exh. B) whereby Fojas-Arca has the privilege to purchase on credit and sell plaintiff's products. On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid Agreement, Fojas-Arca purchased on credit Firestone products from plaintiff with a total amount of P4,896,000.00. In payment of these purchases, Fojas-Arca delivered to plaintiff six (6) special withdrawal slips drawn upon the defendant. In turn, these were deposited by the plaintiff with its current account with the Citibank. All of them were honored and paid by the defendant. This singular circumstance made plaintiff believe [sic] and relied [sic] on the fact that the succeeding special withdrawal slips drawn upon the defendant would be equally sufficiently funded. Relying on such confidence and belief and as a direct consequence thereof, plaintiff extended to Fojas-Arca other purchases on credit of its products. On the following dates Fojas-Arca purchased Firestone products on credit (Exh. M, I, J, K) and delivered to plaintiff the corresponding special withdrawal slips in payment thereof drawn upon the defendant, to wit: DATE June 15, 1978 July 15, 1978 Aug. 15, 1978 Sep. 15, 1978 WITHDRAWAL SLIP NO. 42127 42128 42129 42130 AMOUNT P1,198,092.80 940,190.00 880,000.00 981,500.00

FIRST DIVISION

G.R. No. 118917 December 22, 1997 PHILIPPINE DEPOSIT INSURANCE CORPORATION, petitioner, vs. COURT OF APPEALS, ROSA AQUERO, GERARD YU, ERIC YU, MINA YU, ELIZABETH NGKAION, MERLY CUESCANO, LETICIA TAN, FELY RUMBANA, LORNA ACUB, represented by their Attorney-in-Fact, JOHN FRANCIS COTAOCO, respondents.

KAPUNAN, J.: Petitioner Philippine Deposit Insurance Corporation (PDIC) seeks the reversal of the decision of the Court of Appeals affirming with modification the decision of the Regional Trial Court holding petitioner liable for the value of thirteen (13) certificates of time deposit (CTDs) in the possession of private respondents. The facts, as found by the Court of Appeals, are as follows:
On September 22, 1983, plaintiffs-appellees invested in money market placements with the Premiere Financing Corporation (PFC) in the sum of P10,000.00 each for which they were issued by the PFC corresponding promissory notes and checks. On the same date (September 22, 1983), John Francis Cotaoco, for and in behalf of plaintiffs-appellees, went to the PFC to encash the promissory notes and checks, but the PFC referred him to the Regent Saving Bank (RSB). Instead of paying the promissory notes and checks, the RSB, upon agreement of Cotaoco, issued the subject 13 certificates of time deposit with Nos. 09648 to 09660, inclusive, each stating, among others, that the same certifies that the bearer thereof has deposited with the RSB the sum of P10,000.00; that the certificate shall bear 14% interest per annum; that the certificate is insured up to P15,000.00 with the PDIC; and that the maturity date thereof is on November 3, 1983 (Exhs. "B", "B-1 to "B-12"). On the aforesaid maturity dated (November 3, 1983), Cotaoco went to the RSB to encash the said certificates. Thereat, RSB Executive Vice President Jose M. Damian requested Cotaoco for a deferment or an extension of a few days to enable the RSB to raise the amount to pay for the same (Exh. "D"). Cotaoco agreed. Despite said extension, the RSB still failed to pay the value of the certificates. Instead, RSB advised Cotaoco to file a claim with the PDIC. Meanwhile, on June 15, 1984, the Monetary Board of the Central Bank issued Resolution No. 788 (Exh. "2", Records, p. 159) suspending the operations of the RSB. Eventually, the records of RSB were secured and its deposit liabilities were eventually determined. On December 7, 1984, the Monetary Board issued Resolution No. 1496 (Exh. "1") liquidating the RSB. Subsequently, a masterlist or inventory of the RSB assets and liabilities was prepared. However, the certificates of time deposit of plaintiffs-appellees were not included in the list on the ground that the certificates were not funded by the PFC or duly recorded as liabilities of RSB.

On September 4, 1984, plaintiffs-appellees filed with the PDIC their respective claims for the amount of the certificates (Exhs. "C," "C-1" to "C-12"). Sabina Yu, James Ngkaion, Elaine Ngkaion and Jeffrey Ngkaion, who have similar claims on their certificates of time deposit with the RSB, likewise filed their claims with the PDIC. To their dismay, PDIC refused the aforesaid claims on the ground that the Traders Royal Bank Check No. 299255 dated September 22, 1983 for the amount of P125,846.07 (Exh. "B") issued by PFC for the aforementioned certificates was returned by the drawee bank for having been drawn against insufficient funds; and said check was not replaced by the PFC, resulting in the cancellation of the certificates as indebtedness or liabilities of RSB. 1

Consequently, on March 31, 1987, private respondents filed an action for collection against PDIC, RSB and the Central Bank. On September 14, 1987, the trial court, declared the Central Bank in default for failing to file an answer. On May 29, 1989, the trial court rendered its decision ordering the defendants therein to pay plaintiffs, jointly and severally, the amount corresponding to the latter's certificates of time deposit. Both PDIC and RSB appealed. The Central Bank, on the other hand, filed a petition for certiorari, prohibition and mandamus before the Court of Appeals praying that the writ of execution issued by the trial court against it be set aside. On February 8, 1995, the Court of Appeals rendered its decision granting the Central Bank's petition but dismissing the appeals of PDIC and RSB. Hence, this petition by PDIC assigning the following errors: I THE CA ERRED IN HOLDING THAT THE SUBJECT CTDS ARE NEGOTIABLE INSTRUMENTS II THE CA ERRED IN HOLDING THAT THE CTDS WERE ACQUIRED FOR VALUE AND CONSIDERATION III THE CA ERRED WHEN IT HELD THAT BECAUSE THE CTDS STATE THAT THESE WERE INSURED PETITIONER SHOULD BE HELD LIABLE FOR THE SAME. We deal jointly with petitioner's first and third assigned errors. Relying on this Court's ruling in Caltex (Philippines), Inc. v. Court of Appeals and Security Bank and Trust Company, 2 the Court of Appeals concluded that the

subject CTDs are negotiable. Petitioner, on the other hand, contends that the CTDs are non-negotiable since they do not contain an unconditional promise or order to pay a sum certain in money nor are they made payable to order or bearer, as required by Section 1 of the Negotiable Instruments Law. Whether the CTDs in question are negotiable or not is, however, immaterial in the present case. The Philippine Deposit Insurance Corporation was created by law and, as such, is governed primarily by the provisions of the special law creating it. 3 The liability of the PDIC for insured deposits therefore is statutory and, under Republic Act No. 3591, 4 as amended, such liability rests upon the existence of deposits with the insured bank, not on the negotiability or non-negotiability of the certificates evidencing these deposits. The authority for this conclusion finds support in decisions by American state courts applying their respective bank guaranty laws. Invariably, the plaintiffs in these cases argued that the negotiability of the certificates of deposit in their possession entitled them to be paid out of the bank guaranty fund, a contention that the courts uniformly rejected. Thus, the plaintiffs in Fourth Nat. Bank of Wichita v. Wilson 5 argued that:
. . . the court should hold the certificates to be guaranteed because they are negotiable instruments, and were acquired by the present holders in due course; otherwise it is said certificates of deposit will be deprived of the quality of commercial paper. Certificates of deposit have been regarded as the highest form of collateral. They are of wide currency in the banking and business worlds, and are particularly useful to persons of small means, because they bear interest, and may be readily cashed; therefore to deprive them of the benefit of the guaranty fund would be a calamity. . . .

The Supreme Court of Kansas, however, found the plaintiffs' contention to be without merit, ruling thus:
. . . The argument confuses negotiability of commercial paper with statutory guaranty of deposits. The guaranty is something extrinsic to all forms of evidence of bank obligation; and negotiability of instruments has no dependence on existence or nonexistence of the guaranty. . . . Whatever the status of the plaintiffs may be as holders in due course under the Negotiable Instruments Law, they cannot be assignees of a deposit which was not made, and cannot be entitled to the benefit of a guaranty which did not come into existence. . . .

In arriving at the above decision, the Kansas Supreme Court relied on its earlier ruling in American State Bank v. Foster, 6 which arose from the same facts as the Fourth National Bank case. There, the Court held:
. . . Even if the plaintiff were to be regarded as an innocent purchaser of the certificates as negotiable instruments, its situation would be in no wise bettered so far as relate to a claim against the guaranty fund. The fund protects deposits only. And if no deposit is made, or no deposit within the protection of the guaranty law,

the transfer of a certificate cannot impose a liability on the fund. . . . where a certificate of deposit is given under such circumstances that it is not protected by the guaranty fund, although that fact is not indicated by anything on its face, its indorsement to an innocent holder cannot confer that quality upon it.

In like fashion did the Supreme Court of Nebraska brush aside a similar contention in State v. Farmers' Stale Bank: 7
In this contention we think the appellants fail to distinguish between the liability of the maker of a negotiable instrument, which rests upon the law pertaining to negotiable paper, and the liability of the guaranty fund, which is purely statutory. The circumstances under which the guaranty fund may be liable are entirely apart from the law pertaining to negotiable paper. A holder of a certificate of deposit in a bank who seeks to hold the guaranty fund liable for its payment must show that the transaction leading up to the issuance of the certificate was such that the law holds the guaranty fund liable for its payment. . . .

The Farmers' State Bank ruling was reiterated by the Nebraska Supreme Court in State v. Home State Bank of Dunning 8 and in State v. Kilgore State Bank. 9 The same ruling was adopted by the Supreme Court of South Dakota in Mildenstein v. Hirning. 10 In the case at bar, the Court of Appeals initially found the subject CTDs to be negotiable. Subsequently, however, respondent court deemed the issue immaterial, albeit for entirely different reasons.
. . . Besides, whether the certificates are negotiable or not is of no moment. The fact remains that the certificates categorically state that their bearer [sic] have a deposit in the RSB; that the same will mature on November 3, 1993; and that the certificates are insured by PDIC. 11

We disagree with respondent court's rationale. The fact that the certificates state that the certificates are insured by PDIC does not ipso facto make the latter liable for the same should the contingency insured against arise. As stated earlier, the deposit liability of PDIC is determined by the provisions of R.A. No. 3519, and statements in the certificates that the same are insured by PDIC are not binding upon the latter.
. . . The mere fact that a certificate recites on its face that a certain sum has been deposited, or that officers of the bank may have stated that the deposit is protected by the guaranty law, does not make the guaranty fund liable for payment, if in fact a deposit has not been made . . . . The banks have nothing to do with the guaranty fund as such. It is a fund raised by assessments against all state banks, administered by officers of the state to protect deposits in banks. . . . 12

We come now to petitioner's second assigned error. In order that a claim for deposit insurance with the PDIC may prosper, the law requires that a corresponding deposit be placed in the insured bank. This is implicit from a reading of the following provisions of R.A. 3519:
Sec. 1. There is hereby created a Philippine Deposit Insurance Corporation . . .

which shall insure, as provided, the deposits of all banks which are entitled to the benefits of insurance under this Act . . . . (Emphasis supplied). xxx xxx xxx Sec. 10(a) . . . xxx xxx xxx (c) Whenever an insured bank shall have been closed on account of insolvency, payment of the insured deposits in such bank shall be made by the Corporation as soon as possible . . . .(Emphasis supplied.)

A deposit as defined in Section 3(f) of R.A. No. 3591, may be constituted only if money or the equivalent of money is received by a bank:
Sec. 3. As used in this Act (f) The term "deposit" means the unpaid balance of money or its equivalent received by a bank in the usual course of business and for which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift account or which is evidenced by passbook, check and/or certificate of deposit printed or issued in accordance with Central Bank rules and regulations and other applicable laws, together with such other obligations of a bank which, consistent with banking usage and practices, the Board of Directors shall determine and prescribe by regulations to be deposit liabilities of the Bank . . . . (Emphasis ours.)

Did RSB receive money or its equivalent when it issued the certificates of time deposit? The Court of Appeals, in resolving who between RSB and PFC issued the certificates to private respondents, answered this question in the negative. A perusal of the impugned decision, however, reveals that such finding is grounded entirely on speculation, and thus, cannot bind this Court: 13
Equally unimpressive is the contention of PDIC and RSB that the certificates were issued to PFC which did not acquire the same for value because the check issued by the latter for the certificates bounced for insufficiency of funds. First, granting arguendo that the certificates were originally issued in favor of PFC, such issuance could only give rise to the presumption that the amount stated in the certificates have been deposited to RSB. Had not PFC deposited the amount stated therein, then RSB would have surely refused to issue the certificates certifying to such fact. Second, why did not RSB demand that PFC pay the certificates or file a claim against PFC on the ground that the latter failed to pay for the value of the certificates? It could very well be that the reason why RSB did not run after PFC for payment of the value of the certificates was because the instruments were issued to the latter by RSB for value or were already paid to RSB by plaintiffs-appellees. Third, if it is true that at the time RSB issued the certificates to PFC, the instruments were paid for with checks still to be encashed, then why did not RSB specifically state in the certificates that the validity thereof hinges on the encashment of said check? Fourth, even if it is true that PFC did not deposit with or pay the RSB the amount stated in the certificates, the latter is not be such reason freed from civil liability to plaintiffs-appellees. For, by issuing the certificates, RSB bound itself to pay the amount stated therein to whoever is the bearer upon its presentment for encashment. Truly, there is no reason to depart from the established principle that where a bank issues a certificate of deposit acknowledging a deposit made with a third person or an officer of the bank, or with another bank representing it to be the

certificate of the bank, upon which assurance the depositor accepts it, the bank is liable for the amount of the deposit (Michis, Banks and Banking, Vol. 5A, pp. 48-49, as cited in the Decision on p. 3 thereof). 14

Moreover, such finding totally ignores the evidence presented by defendants. Cardola de Jesus, RSB Deputy Liquidator, testified that RSB received three (3) checks in consideration for the issuance of several CTDs, including the ones in dispute. The first check amounted to P159,153.93, the second, P121,665.95, and the third, P125,846.07 In consideration of the third check, private respondents received thirteen (13) certificates of deposit with Nos. 09648 to 09660, inclusive, with a value of P10,000.00 each or a total of P130,000.00. To conform with the value of the third check, CTD No. 09648 was "chopped," and only the sum of P5,846.07 was credited in favor of private respondents. The first two checks "made good in the clearing" while the third was returned for being "drawn against insufficient funds." The check in question appears on the records as Exhibit "3" (for Regent), 15 and is described in RSB's offer or evidence as "Traders Royal Bank Check No. 292555 dated September 22, 1983 covering the amount or P125,846.07 . . . issued by Premiere Financing Corporation." 16 At the back of said check are the words "Refer to Drawer," 17 indicating that the drawee bank (Traders Royal Bank) refused to pay the value represented by said check. By reason of the check's dishonor, RSB cancelled the corresponding as evidence by an RSB "ticket" dated November 4, 1983. 18 These pieces of evidence convincingly show that the subject CTDs were indeed issued without RSB receiving any money therefor. No deposit, as defined in Section 3 (f) of R.A. No. 3591, therefore came into existence. Accordingly, petitioner PDIC cannot be held liable for value of the certificates of time deposit held by private respondents. ACCORDINGLY, the instant petition is hereby GRANTED and the decision of the Court of Appeals REVERSED. Petitioner is absolved from any liability to private respondents.
SO ORDERED.

THIRD DIVISION G.R. No. 126911 April 30, 2003

PHILIPPINE DEPOSIT INSURANCE CORPORATION, petitioner, vs. THE HONORABLE COURT OF APPEALS and JOSE ABAD, LEONOR ABAD, SABINA ABAD, JOSEPHINE "JOSIE" BEATA ABAD-ORLINA, CECILIA ABAD, PIO ABAD, DOMINIC ABAD, TEODORA ABAD, respondents. CARPIO MORALES, J.: The present petition for review assails the decision of the Court of Appeals affirming that of

the Regional Trial Court of Iloilo City, Branch 30, finding petitioner Philippine Deposit Insurance Corporation (PDIC) liable, as statutory insurer, for the value of 20 Golden Time Deposits belonging to respondents Jose Abad, Leonor Abad, Sabina Abad, Josephine "Josie" Beata Abad-Orlina, Cecilia Abad, Pio Abad, Dominic Abad, and Teodora Abad at the Manila Banking Corporation (MBC), Iloilo Branch. Prior to May 22, 1997, respondents had, individually or jointly with each other, 71 certificates of time deposits denominated as "Golden Time Deposits" (GTD) with an aggregate face value of P1,115,889.96.1 On May 22, 1987, a Friday, the Monetary Board (MB) of the Central Bank of the Philippines, now Bangko Sentral ng Pilipinas, issued Resolution 5052 prohibiting MBC to do business in the Philippines, and placing its assets and affairs under receivership. The Resolution, however, was not served on MBC until Tuesday the following week, or on May 26, 1987, when the designated Receiver took over.3 On May 25, 1987, the next banking day following the issuance of the MB Resolution, respondent Jose Abad was at the MBC at 9:00 a.m. for the purpose of pre-terminating the 71 aforementioned GTDs and re-depositing the fund represented thereby into 28 new GTDs in denominations of P40,000.00 or less under the names of herein respondents individually or jointly with each other.4 Of the 28 new GTDs, Jose Abad pre-terminated 8 and withdrew the value thereof in the total amount of P320,000.00.5 Respondents thereafter filed their claims with the PDIC for the payment of the remaining 20 insured GTDs.6 On February 11, 1988, PDIC paid respondents the value of 3 claims in the total amount of P120,000.00. PDIC, however, withheld payment of the 17 remaining claims after Washington Solidum, Deputy Receiver of MBC-Iloilo, submitted a report to the PDIC7 that there was massive conversion and substitution of trust and deposit accounts on May 25, 1987 at MBC-Iloilo.8 The pertinent portions of the report stated: xxx xxx xxx

On May 25, 1987 (Monday) or a day prior to the official announcement and takeover by CB of the assets and liabilities of The Manila Banking Corporation, the Iloilo Branch was found to have recorded an unusually heavy movements in terms of volume and amount for all types of deposits and trust accounts. It appears that the impending receivership of TMBC was somehow already known to many depositors on account of the massive withdrawals paid on this day which practically wiped out the branch's entire cash position. . . . xxx xxx xxx

. . . The intention was to maximize the availment of PDIC coverage limited to P40,000 by spreading out big accounts to as many certificates under various nominees. . . .9

xxx

xxx

xxx

Because of the report, PDIC entertained serious reservation in recognizing respondents' GTDs as deposit liabilities of MBC-Iloilo. Thus, on August 30, 1991, it filed a petition for declaratory relief against respondents with the Regional Trial Court (RTC) of Iloilo City, for a judicial declaration determination of the insurability of respondents' GTDs at MBCIloilo.10 In their Answer filed on October 24, 1991 and Amended Answer11 filed on January 9, 1992, respondents set up a counterclaim against PDIC whereby they asked for payment of their insured deposits.12 In its Decision of February 22, 1994,13 Branch 30 of the Iloilo RTC declared the 20 GTDs of respondents to be deposit liabilities of MBC, hence, are liabilities of PDIC as statutory insurer. It accordingly disposed as follows: WHEREFORE, premises considered, judgment is hereby rendered: 1. Declaring the 28 GTDs of the Abads which were issued by the TMBC-Iloilo on May 25, 1987 as deposits or deposit liabilities of the bank as the term is defined under Section 3 (f) of R.A. No. 3591, as amended; 2. Declaring PDIC, being the statutory insurer of bank deposits, liable to the Abads for the value of the remaining 20 GTDs, the other 8 having been paid already by TMBC Iloilo on May 25,1987; 3. Ordering PDIC to pay the Abads the value of said 20 GTDs less the value of 3 GTDs it paid on February 11, 1988, and the amounts it may have paid the Abads pursuant to the Order of this Court dated September 8, 1992; 4. Ordering PDIC to pay immediately the Abads the balance of its admitted liability as contained in the aforesaid Order of September 8, 1992, should there be any, subject to liquidation when this case shall have been finally decide; and 5. Ordering PDIC to pay legal interest on the remaining insured deposits of the Abads from February 11, 1988 until they are fully paid. SO ORDERED. On appeal, the Court of Appeals, by the assailed Decision of October 21, 1996,14 affirmed the trial court's decision except as to the award of legal interest which it deleted. Hence, PDIC's present Petition for Review which sets forth this lone assignment of error: THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING THE HOLDING OF THE TRIAL COURT THAT THE AMOUNT REPRESENTED IN THE FACES OF THE SO CALLED "GOLDEN TIME DEPOSITS" WERE INSURED DEPOSITS EVEN AS THEY WERE MERE DERIVATIVES OF RESPONDENTS' PREVIOUS ACCOUNT

BALANCES WHICH WERE PRE-TERMINATED/TERMINATED AT THE TIME THE MANILA BANKING CORPORATION WAS ALREADY IN SERIOUS FINANCIAL DISTRESS. In its supplement to the petition, PDIC adds the following assignment of error: THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING THE HOLDING OF THE TRIAL COURT ORDERING PETITIONER TO PAY RESPONDENTS' CLAIMS FOR PAYMENT OF INSURED DEPOSITS FOR THE REASON THAT AN ACTION FOR DECLARATORY RELIEF DOES NOT ESSENTIALLY ENTAIL AN EXECUTORY PROCESS AS THE ONLY RELIEF THAT SHOULD HAVE BEEN GRANTED BY THE TRIAL COURT IS A DECLARATION OF THE RIGHTS AND DUTIES OF PETITIONER UNDER R.A. 3591, AS AMENDED, PARTICULARLY SECTION 3(F) THEREOF AS CONSIDERED AGAINST THE SURROUNDING CIRCUMSTANCES OF THE MATTER IN ISSUE SOUGHT TO BE CONSTRUED WITHOUT PREJUDICE TO OTHER MATTERS THAT NEED TO BE CONSIDERED BY PETITIONER IN THE PROCESSING OF RESPONDENTS' CLAIMS. Under its charter,15 PDIC (hereafter petitioner) is liable only for deposits received by a bank "in the usual course of business."16 Being of the firm conviction that, as the reported May 25, 1987 bank transactions were so massive, hence, irregular, petitioner essentially seeks a judicial declaration that such transactions were not made "in the usual course of business" and, therefore, it cannot be made liable for deposits subject thereof.17 Petitioner points that as MBC was prohibited from doing further business by MB Resolution 505 as of May 22, 1987, all transactions subsequent to such date were not done "in the usual course of business." Petitioner further posits that there was no consideration for the 20 GTDs subject of respondents' claim. In support of this submission, it states that prior to March 25, 1987, when the 20 GTDs were made, MBC had been experiencing liquidity problems, e.g., at the start of banking operations on March 25, 1987, it had only P2,841,711.90 cash on hand and at the end of the day it was left with P27,805.81 consisting mostly of mutilated bills and coins.18 Hence, even if respondents had wanted to convert the face amounts of the GTDs to cash, MBC could not have complied with it. Petitioner theorizes that after MBC had exhausted its cash and could no longer sustain further withdrawal transactions, it instead issued new GTDs as "payment" for the preterminated GTDs of respondents to make sure that all the newly-issued GTDs have face amounts which are within the statutory coverage of deposit insurance. Petitioner concludes that since no cash was given by respondents and none was received by MBC when the new GTDs were transacted, there was no consideration therefor and, thus, they were not validly transacted "in the usual course of business" and no liability for deposit insurance was created.19 Petitioner's position does not persuade.

While the MB issued Resolution 505 on May 22, 1987, a copy thereof was served on MBC only on May 26, 1987. MBC and its clients could be given the benefit of the doubt that they were not aware that the MB resolution had been passed, given the necessity of confidentiality of placing a banking institution under receivership.20 The evident implication of the law, therefore, is that the appointment of a receiver may be made by the Monetary Board without notice and hearing but its action is subject to judicial inquiry to insure the protection of the banking institution. Stated otherwise, due process does not necessarily require a prior hearing; a hearing or an opportunity to be heard may be subsequent to the closure. One can just imagine the dire consequences of a prior hearing: bank runs would be the order of the day, resulting in panic and hysteria. In the process, fortunes may be wiped out, and disillusionment will run the gamut of the entire banking community. (Emphasis supplied).21 Mere conjectures that MBC had actual knowledge of its impending closure do not suffice. The MB resolution could not thus have nullified respondents' transactions which occurred prior to May 26, 1987. That no actual money in bills and/or coins was handed by respondents to MBC does not mean that the transactions on the new GTDs did not involve money and that there was no consideration therefor. For the outstanding balance of respondents' 71 GTDs in MBC prior to May 26, 198722 in the amount of P1,115,889.15 as earlier mentioned was re-deposited by respondents under 28 new GTDs. Admittedly, MBC had P2,841,711.90 cash on hand more than double the outstanding balance of respondent's 71 GTDs at the start of the banking day on May 25, 1987. Since respondent Jose Abad was at MBC soon after it opened at 9:00 a.m. of that day, petitioner should not presume that MBC had no cash to cover the new GTDs of respondents and conclude that there was no consideration for said GTDs. Petitioner having failed to overcome the presumption that the ordinary course of business was followed,23 this Court finds that the 28 new GTDs were deposited "in the usual course of business" of MBC. In its second assignment of error, petitioner posits that the trial court erred in ordering it to pay the balance of the deposit insurance to respondents, maintaining that the instant petition stemmed from a petition for declaratory relief which does not essentially entail an executory process, and the only relief that should have been granted by the trial court is a declaration of the parties' rights and duties. As such, petitioner continues, no order of payment may arise from the case as this is beyond the office of declaratory relief proceedings.24 Without doubt, a petition for declaratory relief does not essentially entail an executory process. There is nothing in its nature, however, that prohibits a counterclaim from being set-up in the same action.25 Now, there is nothing in the nature of a special civil action for declaratory relief that

proscribes the filing of a counterclaim based on the same transaction, deed or contract subject of the complaint. A special civil action is after all not essentially different from an ordinary civil action, which is generally governed by Rules 1 to 56 of the Rules of Court, except that the former deals with a special subject matter which makes necessary some special regulation. But the identity between their fundamental nature is such that the same rules governing ordinary civil suits may and do apply to special civil actions if not inconsistent with or if they may serve to supplement the provisions of the peculiar rules governing special civil actions.26 Petitioner additionally submits that the issue of determining the amount of deposit insurance due respondents was never tried on the merits since the trial dwelt only on the "determination of the viability or validity of the deposits" and no evidence on record sustains the holding that the amount of deposit due respondents had been finally determined.27 This issue was not raised in the court a quo, however, hence, it cannot be raised for the first time in the petition at bar.28 Finally, petitioner faults respondents for availing of the statutory limits of the PDIC law, presupposing that, based on the conduct of respondent Jose Abad on March 25, 1987, he and his co respondents "somehow knew" of the impending closure of MBC. Petitioner ascribes bad faith to respondent Jose Abad in transacting the questioned deposits, and seeks to disqualify him from availing the benefits under the law. 29 Good faith is presumed. This, petitioner failed to overcome since it offered mere presumptions as evidence of bad faith. WHEREFORE, the assailed decision of the Court of Appeals is hereby AFFIRMED. SO ORDERED. Puno, Panganiban, Sandoval-Gutierrez and Corona, JJ ., concur.

Footnotes
1 2 3 4 5 6

Records at 210211. Id. at 208209. Rollo at 13. Id. at 12. Ibid. Id. at 13.

7 8 9

Records at 214218; Exhibit "D." Rollo at 23. Records at 214215. Rollo at 1314. Records at 2631. Records at 100101. Rollo at 2234. Id. at 3744. RA 3591, as amended.

10 11 12 13 14 15

16 Section 3, R.A. 3591, provides: "(f) The term "deposit" means the unpaid balance of money or its equivalent received by a bank in the usual course of business and for which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift account or which is evidenced by its certificate of deposit, and trust funds held by such bank whether retained or deposited in any department of such bank or deposited in another bank, together with such other obligations of a bank as the Board of Directors shall find and shall prescribe by regulations to be deposit liabilities of the Bank x x x"