G.R. No.

76118 March 30, 1993

THE CENTRAL BANK OF THE PHILIPPINES and RAMON V. TIAOQUI, petitioners,

vs.
COURT OF APPEALS and TRIUMPH SAVINGS BANK, respondents.

Sycip, Salazar, Hernandez & Gatmaitan for petitioners.

Quisumbing, Torres & Evangelista for Triumph Savings Bank.

BELLOSILLO, J.:

May a Monetary Board resolution placing a private bank under receivership be annulled on the ground
of lack of prior notice and hearing?

This petition seeks review of the decision of the Court of Appeals in CA G.R. S.P. No. 07867 entitled
"The Central Bank of the Philippines and Ramon V. Tiaoqui vs. Hon. Jose C. de Guzman and Triumph
Savings Bank," promulgated 26 September 1986, which affirmed the twin orders of the Regional Trial
Court of Quezon City issued 11 November 19851 denying herein petitioners' motion to dismiss Civil
Case No. Q-45139, and directing petitioner Ramon V. Tiaoqui to restore the private management of
Triumph Savings Bank (TSB) to its elected board of directors and officers, subject to Central Bank
comptrollership.2

The antecedent facts: Based on examination reports submitted by the Supervision and Examination
Sector (SES), Department II, of the Central Bank (CB) "that the financial condition of TSB is one of
insolvency and its continuance in business would involve probable loss to its depositors and
creditors,"3 the Monetary Board (MB) issued on 31 May 1985 Resolution No. 596 ordering the closure
of TSB, forbidding it from doing business in the Philippines, placing it under receivership, and
appointing Ramon V. Tiaoqui as receiver. Tiaoqui assumed office on 3 June 1985.4

On 11 June 1985, TSB filed a complaint with the Regional Trial Court of Quezon City, docketed as
Civil Case No. Q-45139, against Central Bank and Ramon V. Tiaoqui to annul MB Resolution No. 596,
with prayer for injunction, challenging in the process the constitutionality of Sec. 29 of R.A. 269,
otherwise known as "The Central Bank Act," as amended, insofar as it authorizes the Central Bank to
take over a banking institution even if it is not charged with violation of any law or regulation, much
less found guilty thereof.5

On 1 July 1985, the trial court temporarily restrained petitioners from implementing MB Resolution No.
596 "until further orders", thus prompting them to move for the quashal of the restraining order (TRO)
on the ground that it did not comply with said Sec. 29, i.e., that TSB failed to show convincing proof of
arbitrariness and bad faith on the part of petitioners;' and, that TSB failed to post the requisite bond in
favor of Central Bank.

On 19 July 1985, acting on the motion to quash the restraining order, the trial court granted the relief
sought and denied the application of TSB for injunction. Thereafter, Triumph Savings Bank filed with
Us a petition for certiorariunder Rule 65 of the Rules of Court6 dated 25 July 1985 seeking to enjoin
the continued implementation of the questioned MB resolution.

Meanwhile, on 9 August 1985; Central Bank and Ramon Tiaoqui filed a motion to dismiss the
complaint before the RTC for failure to state a cause of action, i.e., it did not allege ultimate facts
showing that the action was plainly arbitrary and made in bad faith, which are the only grounds for the
annulment of Monetary Board resolutions placing a bank under conservatorship, and that TSB was
without legal capacity to sue except through its receiver.7

On 9 September 1985, TSB filed an urgent motion in the RTC to direct receiver Ramon V. Tiaoqui to
restore TSB to its private management. On 11 November 1985, the RTC in separate orders denied
petitioners' motion to dismiss and ordered receiver Tiaoqui to restore the management of TSB to its
elected board of directors and officers, subject to CB comptrollership.

Since the orders of the trial court rendered moot the petition for certiorari then pending before this
Court, Central Bank and Tiaoqui moved on 2 December 1985 for the dismissal of G.R. No. 71465
which We granted on 18 December 1985.8

Instead of proceeding to trial, petitioners elevated the twin orders of the RTC to the Court of Appeals
on a petition for certiorari and prohibition under Rule 65.9 On 26 September 1986, the appellate court,
upheld the orders of the trial court thus —

Petitioners' motion to dismiss was premised on two grounds, namely, that the
complaint failed to state a cause of action and that the Triumph Savings Bank was
without capacity to sue except through its appointed receiver.

Concerning the first ground, petitioners themselves admit that the Monetary Board
resolution placing the Triumph Savings Bank under the receivership of the officials of
the Central Bank was done without prior hearing, that is, without first hearing the side
of the bank. They further admit that said resolution can be the subject of judicial review
and may be set aside should it be found that the same was issued with arbitrariness
and in bad faith.

The charge of lack of due process in the complaint may be taken as constitutive of
allegations of arbitrariness and bad faith. This is not of course to be taken as meaning
that there must be previous hearing before the Monetary Board may exercise its
powers under Section 29 of its Charter. Rather, judicial review of such action not being
foreclosed, it would be best should private respondent be given the chance to show
and prove arbitrariness and bad faith in the issuance of the questioned resolution,
especially so in the light of the statement of private respondent that neither the bank
itself nor its officials were even informed of any charge of violating banking laws.

In regard to lack of capacity to sue on the part of Triumph Savings Bank, we view such
argument as being specious, for if we get the drift of petitioners' argument, they mean
to convey the impression that only the CB appointed receiver himself may question the
CB resolution appointing him as such. This may be asking for the impossible, for it
cannot be expected that the master, the CB, will allow the receiver it has appointed to
question that very appointment. Should the argument of petitioners be given
circulation, then judicial review of actions of the CB would be effectively checked and
foreclosed to the very bank officials who may feel, as in the case at bar, that the CB
action ousting them from the bank deserves to be set aside.

xxx xxx xxx

On the questioned restoration order, this Court must say that it finds nothing whimsical,
despotic, capricious, or arbitrary in its issuance, said action only being in line and
congruent to the action of the Supreme Court in the Banco Filipino Case (G.R. No.
 70054) where management of the bank was restored to its duly elected directors and
officers, but subject to the Central Bank comptrollership.10

On 15 October 1986, Central Bank and its appointed receiver, Ramon V. Tiaoqui, filed this petition
under Rule 45 of the Rules of Court praying that the decision of the Court of Appeals in CA-G.R. SP
No. 07867 be set aside, and that the civil case pending before the RTC of Quezon City, Civil Case No.
Q-45139, be dismissed. Petitioners allege that the Court of Appeals erred —

(1) in affirming that an insolvent bank that had been summarily closed by the Monetary
Board should be restored to its private management supposedly because such
summary closure was "arbitrary and in bad faith" and a denial of "due process";

(2) in holding that the "charge of lack of due process" for "want of prior hearing" in a
complaint to annul a Monetary Board receivership resolution under Sec. 29 of R.A.
265 "may be taken as . . allegations of arbitrariness and bad faith"; and

(3) in holding that the owners and former officers of an insolvent bank may still act or
sue in the name and corporate capacity of such bank, even after it had been ordered
closed and placed under receivership.11

The respondents, on the other hand, allege inter alia that in the Banco Filipino case,12 We held that CB
violated the rule on administrative due process laid down in Ang Tibay vs. CIR (69 Phil. 635)
and Eastern Telecom Corp. vs. Dans, Jr. (137 SCRA 628) which requires that prior notice and hearing
be afforded to all parties in administrative proceedings. Since MB Resolution No. 596 was adopted
without TSB being previously notified and heard, according to respondents, the same is void for want
of due process; consequently, the bank's management should be restored to its board of directors and
officers.13

Petitioners claim that it is the essence of Sec. 29 of R.A. 265 that prior notice and hearing in cases
involving bank closures should not be required since in all probability a hearing would not only cause
unnecessary delay but also provide bank "insiders" and stockholders the opportunity to further
dissipate the bank's resources, create liabilities for the bank up to the insured amount of P40,000.00,
and even destroy evidence of fraud or irregularity in the bank's operations to the prejudice of its
depositors and creditors. 14 Petitioners further argue that the legislative intent of Sec. 29 is to repose
in the Monetary Board exclusive power to determine the existence of statutory grounds for the closure
and liquidation of banks, having the required expertise and specialized competence to do so.

The first issue raised before Us is whether absence of prior notice and hearing may be considered
acts of arbitrariness and bad faith sufficient to annul a Monetary Board resolution enjoining a bank
from doing business and placing it under receivership. Otherwise stated, is absence of prior notice
and hearing constitutive of acts of arbitrariness and bad faith?

Under Sec. 29 of R.A. 265,15 the Central Bank, through the Monetary Board, is vested with exclusive
authority to assess, evaluate and determine the condition of any bank, and finding such condition to
be one of insolvency, or that its continuance in business would involve probable loss to its depositors
or creditors, forbid the bank or non-bank financial institution to do business in the Philippines; and shall
designate an official of the CB or other competent person as receiver to immediately take charge of
its assets and liabilities. The fourth paragraph,16 which was then in effect at the time the action was
commenced, allows the filing of a case to set aside the actions of the Monetary Board which are tainted
with arbitrariness and bad faith.
Contrary to the notion of private respondent, Sec. 29 does not contemplate prior notice and hearing
before a bank may be directed to stop operations and placed under receivership. When par. 4 (now
par. 5, as amended by E.O. 289) provides for the filing of a case within ten (10) days after the receiver
takes charge of the assets of the bank, it is unmistakable that the assailed actions should precede the
filing of the case. Plainly, the legislature could not have intended to authorize "no prior notice and
hearing" in the closure of the bank and at the same time allow a suit to annul it on the basis of absence
thereof.

In the early case of Rural Bank of Lucena, Inc. v. Arca [1965],17 We held that a previous hearing is
nowhere required in Sec. 29 nor does the constitutional requirement of due process demand that the
correctness of the Monetary Board's resolution to stop operation and proceed to liquidation be first
adjudged before making the resolution effective. It is enough that a subsequent judicial review be
provided.

Even in Banco Filipino, 18 We reiterated that Sec. 29 of R.A. 265 does not require a previous hearing
before the Monetary Board can implement its resolution closing a bank, since its action is subject to
judicial scrutiny as provided by law.

It may be emphasized that Sec. 29 does not altogether divest a bank or a non-bank financial institution
placed under receivership of the opportunity to be heard and present evidence on arbitrariness and
bad faith because within ten (10) days from the date the receiver takes charge of the assets of the
bank, resort to judicial review may be had by filing an appropriate pleading with the court. Respondent
TSB did in fact avail of this remedy by filing a complaint with the RTC of Quezon City on the 8th day
following the takeover by the receiver of the bank's assets on 3 June 1985.

This "close now and hear later" scheme is grounded on practical and legal considerations to prevent
unwarranted dissipation of the bank's assets and as a valid exercise of police power to protect the
depositors, creditors, stockholders and the general public.

In Rural Bank of Buhi, Inc. v. Court of Appeals,19 We stated that —

. . . 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.

We stressed in Central Bank of the Philippines v. Court of Appeals20 that —

. . . the banking business is properly subject to reasonable regulation under the police
power of the state because of its nature and relation to the fiscal affairs of the people
and the revenues of the state (9 CJS 32). Banks are affected with public interest
because they receive funds from the general public in the form of deposits. Due to the
nature of their transactions and functions, a fiduciary relationship is created between
the banking institutions and their depositors. Therefore, banks are under the obligation
to treat with meticulous care and utmost fidelity the accounts of those who have
reposed their trust and confidence in them (Simex International [Manila], Inc., v. Court
of Appeals, 183 SCRA 360 [1990]).

It is then the Government's responsibility to see to it that the financial interests of those
who deal with the banks and banking institutions, as depositors or otherwise, are
protected. In this country, that task is delegated to the Central Bank which, pursuant
 to its Charter (R.A. 265, as amended), is authorized to administer the monetary,
banking and credit system of the Philippines. Under both the 1973 and 1987
Constitutions, the Central Bank is tasked with providing policy direction in the areas of
money, banking and credit; corollarily, it shall have supervision over the operations of
banks (Sec. 14, Art. XV, 1973 Constitution, and Sec. 20, Art. XII, 1987 Constitution).
Under its charter, the CB is further authorized to take the necessary steps against any
banking institution if its continued operation would cause prejudice to its depositors,
creditors and the general public as well. This power has been expressly recognized by
this Court. In Philippine Veterans Bank Employees Union-NUBE v. Philippine Veterans
Banks (189 SCRA 14 [1990], this Court held that:

. . . [u]nless adequate and determined efforts are taken by the

government against distressed and mismanaged banks, public faith in
the banking system is certain to deteriorate to the prejudice of the
national economy itself, not to mention the losses suffered by the bank
depositors, creditors, and stockholders, who all deserve the protection
of the government. The government cannot simply cross its arms while
the assets of a bank are being depleted through mismanagement or
irregularities. It is the duty of the Central Bank in such an event to step
in and salvage the remaining resources of the bank so that they may
not continue to be dissipated or plundered by those entrusted with their
management.

Section 29 of R.A. 265 should be viewed in this light; otherwise, We would be subscribing to a situation
where the procedural rights invoked by private respondent would take precedence over the
substantive interests of depositors, creditors and stockholders over the assets of the bank.

Admittedly, the mere filing of a case for receivership by the Central Bank can trigger a bank run and
drain its assets in days or even hours leading to insolvency even if the bank be actually solvent. The
procedure prescribed in Sec. 29 is truly designed to protect the interest of all concerned, i.e., the
depositors, creditors and stockholders, the bank itself, and the general public, and the summary
closure pales in comparison to the protection afforded public interest. At any rate, the bank is given
full opportunity to prove arbitrariness and bad faith in placing the bank under receivership, in which
event, the resolution may be properly nullified and the receivership lifted as the trial court may
determine.

The heavy reliance of respondents on the Banco Filipino case is misplaced in view of factual
circumstances therein which are not attendant in the present case. We ruled in Banco Filipino that the
closure of the bank was arbitrary and attendant with grave abuse of discretion, not because of the
absence of prior notice and hearing, but that the Monetary Board had no sufficient basis to arrive at a
sound conclusion of insolvency to justify the closure. In other words, the arbitrariness, bad faith and
abuse of discretion were determined only after the bank was placed under conservatorship and
evidence thereon was received by the trial court. As this Court found in that case, the Valenzuela,
Aurellano and Tiaoqui Reports contained unfounded assumptions and deductions which did not reflect
the true financial condition of the bank. For instance, the subtraction of an uncertain amount as
valuation reserve from the assets of the bank would merely result in its net worth or the unimpaired
capital and surplus; it did not reflect the total financial condition of Banco Filipino.

Furthermore, the same reports showed that the total assets of Banco Filipino far exceeded its total
liabilities. Consequently, on the basis thereof, the Monetary Board had no valid reason to liquidate the
bank; perhaps it could have merely ordered its reorganization or rehabilitation, if need be. Clearly,
there was in that case a manifest arbitrariness, abuse of discretion and bad faith in the closure
of Banco Filipino by the Monetary Board. But, this is not the case before Us. For here, what is being
raised as arbitrary by private respondent is the denial of prior notice and hearing by the Monetary
Board, a matter long settled in this jurisdiction, and not the arbitrariness which the conclusions of the
Supervision and Examination Sector (SES), Department II, of the Central Bank were reached.

Once again We refer to Rural Bank of Buhi, Inc. v. Court of Appeals,21 and reiterate Our
pronouncement therein that —

. . . the law is explicit as to the conditions prerequisite to the action of the Monetary
Board to forbid the institution to do business in the Philippines and to appoint a receiver
to immediately take charge of the bank's assets and liabilities. They are: (a) an
examination made by the examining department of the Central Bank; (b) report by said
department to the Monetary Board; and (c) prima facie showing that its continuance in
business would involve probable loss to its depositors or creditors.

In sum, appeal to procedural due process cannot just outweigh the evil sought to be prevented; hence,
We rule that Sec. 29 of R.A. 265 is a sound legislation promulgated in accordance with the Constitution
in the exercise of police power of the state. Consequently, the absence of notice and hearing is not a
valid ground to annul a Monetary Board resolution placing a bank under receivership. The absence of
prior notice and hearing cannot be deemed acts of arbitrariness and bad faith. Thus, an MB resolution
placing a bank under receivership, or conservatorship for that matter, may only be annulled after a
determination has been made by the trial court that its issuance was tainted with arbitrariness and bad
faith. Until such determination is made, the status quo shall be maintained, i.e., the bank shall continue
to be under receivership.

As regards the second ground, to rule that only the receiver may bring suit in behalf of the bank is, to
echo the respondent appellate court, "asking for the impossible, for it cannot be expected that the
master, the CB, will allow the receiver it has appointed to question that very appointment."
Consequently, only stockholders of a bank could file an action for annulment of a Monetary Board
resolution placing the bank under receivership and prohibiting it from continuing
operations.22 In Central Bank v. Court of Appeals, 23 We explained the purpose of the law —

. . . in requiring that only the stockholders of record representing the majority of the
capital stock may bring the action to set aside a resolution to place a bank under
conservatorship is to ensure that it be not frustrated or defeated by the incumbent
Board of Directors or officers who may immediately resort to court action to prevent its
implementation or enforcement. It is presumed that such a resolution is directed
principally against acts of said Directors and officers which place the bank in a state of
continuing inability to maintain a condition of liquidity adequate to protect the interest
of depositors and creditors. Indirectly, it is likewise intended to protect and safeguard
the rights and interests of the stockholders. Common sense and public policy dictate
then that the authority to decide on whether to contest the resolution should be lodged
with the stockholders owning a majority of the shares for they are expected to be more
objective in determining whether the resolution is plainly arbitrary and issued in bad
faith.

It is observed that the complaint in this case was filed on 11 June 1985 or two (2) years prior to 25
July 1987 when E.O. 289 was issued, to be effective sixty (60) days after its approval (Sec. 5). The
implication is that before E.O

. 289, any party in interest could institute court proceedings to question a Monetary Board resolution
placing a bank under receivership. Consequently, since the instant complaint was filed by parties
representing themselves to be officers of respondent Bank (Officer-in-Charge and Vice President), the
case before the trial court should now take its natural course. However, after the effectivity of E.O.
289, the procedure stated therein should be followed and observed.

PREMISES considered, the Decision of the Court of Appeals in CA-G.R. SP No. 07867 is AFFIRMED,
except insofar as it upholds the Order of the trial court of 11 November 1985 directing petitioner
RAMON V. TIAOQUI to restore the management of TRIUMPH SAVINGS BANK to its elected Board
of Directors and Officers, which is hereby SET ASIDE.

Let this case be remanded to the Regional Trial Court of Quezon City for further proceedings to
determine whether the issuance of Resolution No. 596 of the Monetary Board was tainted with
arbitrariness and bad faith and to decide the case accordingly.

SO ORDERED.

Narvasa, C.J., Cruz, Padilla, Bidin, Griño-Aquino, Regalado, Davide, Jr., Romero, Nocon, Campos,
Jr. and Quiason, JJ., concur.

Feliciano and Melo, JJ., took no part.

[G.R. No. 125536. March 16, 2000]

PRUDENTIAL BANK, petitioner, vs. COURT OF APPEALS and LETICIA TUPASI-VALENZUELA joined by
husband Francisco Valenzuela, respondents. Ed-pm-is

DECISION

QUISUMBING, J.:

This appeal by certiorari under Rule 45 of the Rules of Court seeks to annul and set aside the Decision
dated January 31, 1996, and the Resolution dated July 2, 1997, of the Court of Appeals in CA G.R. CV No.
35532, which reversed the judgment of the Regional Trial Court of Valenzuela, Metro Manila, Branch 171,
in Civil Case No. 2913-V-88, dismissing the private respondent's complaint for damages.[1]

In setting aside the trial court's decision, the Court of Appeals disposed as follows:
"WHEREFORE, the appealed decision is hereby REVERSED and SET ASIDE and, another rendered ordering
the appellee bank to pay appellant the sum of P100,000.00 by way of moral damages; P50,000.00 by way
of exemplary damages, P50,000.00 for and as attorney's fees; and to pay the costs. Jjs-c

SO ORDERED."[2]

The facts of the case on record are as follows:

Private respondent Leticia Tupasi-Valenzuela opened Savings Account No. 5744 and Current Account No.
01016-3 in the Valenzuela Branch of petitioner Prudential Bank, with automatic transfer of funds from the
savings account to the current account.

On June 1, 1988, herein private respondent deposited in her savings account Check No. 666B (104561 of
even date) the amount of P35,271.60, drawn against the Philippine Commercial International Bank (PCIB).
Taking into account that deposit and a series of withdrawals, private respondent as of June 21, 1988 had
a balance of P35,993.48 in her savings account and P776.93 in her current account, or total deposits of
P36,770.41, with petitioner. Sc-jj

Thereafter, private respondent issued Prudential Bank Check No. 983395 in the amount of P11,500.00
post-dated June 20, 1988, in favor of one Belen Legaspi. It was issued to Legaspi as payment for jewelry
which private respondent had purchased. Legaspi, who was in jewelry trade, endorsed the check to one
Philip Lhuillier, a businessman also in the jewelry business. When Lhuillier deposited the check in his
account with the PCIB, Pasay Branch, it was dishonored for being drawn against insufficient funds.
Lhuillier's secretary informed the secretary of Legaspi of the dishonor. The latter told the former to
redeposit the check. Legaspi's secretary tried to contact private respondent but to no avail.

Upon her return from the province, private respondent was surprised to learn of the dishonor of the
check. She went to the Valenzuela Branch of Prudential Bank on July 4, 1988, to inquire why her check
was dishonored. She approached one Albert Angeles Reyes, the officer in charge of current account, and
requested him for the ledger of her current account. Private respondent discovered a debit of P300.00
penalty for the dishonor of her Prudential Check No. 983395. She asked why her check was dishonored
when there were sufficient funds in her account as reflected in her passbook. Reyes told her that there
was no need to review the passbook because the bank ledger was the best proof that she did not have
sufficient funds. Then, he abruptly faced his typewriter and started typing. S-jcj

Later, it was found out that the check in the amount of P35,271.60 deposited by private respondent on
June 1, 1988, was credited in her savings account only on June 24, 1988, or after a period of 23 days. Thus
the P11,500.00 check was redeposited by Lhuillier on June 24, 1988, and properly cleared on June 27,
1988.

Because of this incident, the bank tried to mollify private respondent by explaining to Legaspi and Lhuillier
that the bank was at fault. Since this was not the first incident private respondent had experienced with
the bank, private respondent was unmoved by the bank's apologies and she commenced the present suit
for damages before the RTC of Valenzuela.

After trial, the court rendered a decision on August 30, 1991, dismissing the complaint of private
respondent, as well as the counterclaim filed by the defendant, now petitioner.

Undeterred, private respondent appealed to the Court of Appeals. On January 31, 1996, respondent
appellate court rendered a decision in her favor, setting aside the trial court's decision and ordering herein
petitioner to pay private respondent the sum of P100,000.00 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. Supr-eme

II. WHETHER OR NOT THE RESPONDENT COURT OF APPEALS ACTED IN GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OF JURISDICTION WHERE, EVEN IN THE ABSENCE OF EVIDENCE AS FOUND BY THE
TRIAL COURT, AWARDED MORAL DAMAGES IN THE AMOUNT OF P100,000.00.

III. WHETHER OR NOT THE RESPONDENT COURT OF APPEALS ACTED IN GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OF JURISDICTION, WHERE, EVEN IN THE ABSENCE OF EVIDENCE AS FOUND BY THE
TRIAL COURT, AWARDED P50,000.00 BY WAY OF EXEMPLARY DAMAGES. Co-urt

IV. WHETHER OR NOT THE RESPONDENT COURT OF APPEALS ACTED WITH GRAVE ABUSE OF DISCRETION
WHERE EVEN IN THE ABSENCE OF EVIDENCE, AWARDED ATTORNEY'S FEES.
Simply stated, the issue is whether the respondent court erred and gravely abused its discretion in
awarding moral and exemplary damages and attorney's fees to be paid by petitioner to private
respondent.

Petitioner claims that generally the factual findings of the lower courts are final and binding upon this
Court. However, there are exceptions to this rule. One is where the trial court and the Court of Appeals
had arrived at diverse factual findings.[4] Petitioner faults the respondent court from deviating from the
basic rule that finding of facts by the trial court is entitled to great weight, because the trial court had the
opportunity to observe the deportment of witness and the evaluation of evidence presented during the
trial. Petitioner contends that the appellate court gravely abused its discretion when it awarded damages
to the plaintiff, even in the face of lack of evidence to prove such damages, as found by the trial court.

Firstly, petitioner questions the award of moral damages. It claims that private respondent did not suffer
any damage upon the dishonor of the check. Petitioner avers it acted in good faith. It was an honest
mistake on its part, according to petitioner, when misposting of private respondent's deposit on June 1,
1988, happened. Further, petitioner contends that private respondent may not "claim" damages because
the petitioner's manager and other employee had profusely apologized to private respondent for the
error. They offered to make restitution and apology to the payee of the check, Legaspi, as well as the
alleged endorsee, Lhuillier. Regrettably, it was private respondent who declined the offer and allegedly
said, that there was nothing more to it, and that the matter had been put to rest.[5]Jle-xj

Admittedly, as found by both the respondent appellate court and the trial court, petitioner bank had
committed a mistake. It misposted private respondent's check deposit to another account and delayed
the posting of the same to the proper account of the private respondent. The mistake resulted to the
dishonor of the private respondent's check. The trial court found "that the misposting of plaintiffs check
deposit to another account and the delayed posting of the same to the account of the plaintiff is a clear
proof of lack of supervision on the part of the defendant bank."[6] Similarly, the appellate court also found
that "while it may be true that the bank's negligence in dishonoring the properly funded check of appellant
might not have been attended with malice and bad faith, as appellee [bank] submits, nevertheless, it is
the result of lack of due care and caution expected of an employee of a firm engaged in so sensitive and
accurately demanding task as banking."[7]

In Simex International (Manila), Inc, vs. Court of Appeals, 183 SCRA 360, 367 (1990), and Bank of Philippine
Islands vs. IAC, et al., 206 SCRA 408, 412-413 (1992), this Court had occasion to stress the fiduciary nature
of the relationship between a bank and its depositors and the extent of diligence expected of the former
in handling the accounts entrusted to its care, thus: Lex-juris

"In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such
account consists only of a few hundred pesos or of millions. The bank must record every single transaction
accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to
reflect at any given time the amount of money the depositor can dispose of as he sees fit, confident that
the bank will deliver it as and to whomever he directs. A blunder on the part of bank, such as the dishonor
of a check without good reason, can cause the depositor not a little embarrassment if not also financial
loss and perhaps even civil and criminal litigation.

The point is that as a business affected with public interest and because of the nature of its functions, the
bank is under obligation to treat the account of its depositors with meticulous care, always having in mind
the fiduciary nature of their relationship. x x x"

In the recent case of Philippine National Bank vs. Court of Appeals,[8] we held that "a bank is under
obligation to treat the accounts of its depositors with meticulous care whether such account consists only
of a few hundred pesos or of millions of pesos. Responsibility arising from negligence in the performance
of every kind of obligation is demandable. While petitioner's negligence in this case may not have been
attended with malice and bad faith, nevertheless, it caused serious anxiety, embarrassment and
humiliation". Hence we ruled that the offended party in said case was entitled to recover reasonable
moral damages.

Even if malice or bad faith was not sufficiently proved in the instant case, the fact remains that petitioner
has committed a serious mistake. It dishonored the check issued by the private respondent who turned
out to have sufficient funds with petitioner. The bank's negligence was the result of lack of due care and
caution required of managers and employees of a firm engaged in so sensitive and demanding business
as banking. Accordingly, the award of moral damages by the respondent Court of Appeals could not be
said to be in error nor in grave abuse of its discretion. Juri-smis

There is no hard-and-fast rule in the determination of what would be a fair amount of moral damages
since each case must be governed by its own peculiar facts. The yardstick should be that it is not palpably
and scandalously excessive. In our view, the award of P100,000.00 is reasonable, considering the
reputation and social standing of private respondent Leticia T. Valenzuela.[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. Jj-juris

The award of attorney's fees is also proper when exemplary damages are awarded and since private
respondent was compelled to engage the services of a lawyer and incurred expenses to protect her
interest.[11] The standards in fixing attorney's fees are: (1) the amount and the character of the services
rendered; (2) labor, time and trouble involved; (3) the nature and importance of the litigation and business
in which the services were rendered; (4) the responsibility imposed; (5) the amount of money and the
value of the property affected by the controversy or involved in the employment; (6) the skill and the
experience called for in the performance of the services; (7) the professional character and the social
standing of the attorney; (8) the results secured, it being a recognized rule that an attorney may properly
charge a much larger fee when it is contingent than when it is not.[12] In this case, all the aforementioned
weighed, and considering that the amount involved in the controversy is only P36,770.41, the total deposit
of private respondent which was misposted by the bank, we find the award of respondent court of
P50,000.00 for attorney's fees, excessive and reduce the same to P30,000.00.

WHEREFORE, the assailed DECISION of the Court of Appeals is hereby AFFIRMED, with MODIFICATION.
The petitioner is ordered to pay P100,000.00 by way of moral damages in favor of private respondent
Leticia T. Valenzuela. It is further ordered to pay her exemplary damages in the amount of P20,000.00 and
P30,000.00, attorney's fees. Jksm

Costs against petitioner.

SO ORDERED.

G.R. No. 105836 March 7, 1994

SPOUSES GEORGE MORAN and LIBRADA P. MORAN, petitioners,

vs.

THE HON. COURT OF APPEALS and CITYTRUST BANKING CORPORATION, respondents.

Gonzales, Batiller, Bilog & Associates for petitioners.

Agcaoli & Associates for private respondent.

REGALADO, J.:
Petitioner spouses George and Librada Moran are the owners of the Wack-Wack Petron gasoline station
located at Shaw Boulevard, corner Old Wack-Wack Road, Mandaluyong, Metro Manila. They regularly
purchased bulk fuel and other related products from Petrophil Corporation on cash on delivery (COD)
basis. Orders for bulk fuel and other related products were made by telephone and payments were
effected by personal checks upon delivery.1

Petitioners maintained three joint accounts, namely one current account (No. 37-00066-7) and two
savings accounts, (Nos. 1037002387 and 1037001372) with the Shaw Boulevard branch of Citytrust
Banking Corporation. As a special privilege to the Morans, whom it considered as valued clients, the bank
allowed them to maintain a zero balance in their current account. Transfers from Saving Account No.
1037002387 to their current account could be made only with their prior authorization, but they gave
written authority to Citytrust to automatically transfer funds from their Savings Account No. 1037001372
to their Current Account No. 37-00066-7 at any time whenever the funds in their current account were
insufficient to meet withdrawals from said current account. Such arrangement for automatic transfer of
funds was called a pre-authorized transfer (PAT) agreement.2

The PAT letter-agreement entered into by the parties on March 19, 1982 contained the following
provisions:

xxx xxx xxx

1. The transfer may be effected on the day following the overdrawing of the current account, but
the check/s would be honored if the savings account has sufficient balance to cover the overdraft.

2. The regular charges on overdraft, and activity fees will be imposed by the Bank.

3. This is merely an accommodation on our part and we have the right, at all times and for any reason
whatsoever, to refuse to effect transfer of funds at our sole and absolute option and discretion, reserving
our right to terminate this arrangement at any time without written notice to you.

4. You hold CITYTRUST free and harmless for any and all omissions or oversight in executing this
automatic transfer of funds; . . .3

xxx xxx xxx

On December 12, 1983, petitioners, through Librada Moran, drew a check (Citytrust No. 041960) for
P50,576.00 payable to Petrophil

Corporation.4 The next day, December 13, 1983, petitioners, again through Librada Moran, issued another
check (Citytrust No. 041962) in the amount of P56,090.00 in favor of the same corporation.5 The total
sum of the two checks was P106,666.00.

On December 14, 1983, Petrophil Corporation deposited the two aforementioned checks to its account
with the Pandacan branch of the Philippine National Bank (PNB), the collecting bank. In turn, PNB,
Pandacan branch presented them for clearing with the Philippine Clearing House Corporation in the
afternoon of the same day. The records show that on December 14, 1983, Current Account No. 37-00066-
7 had a zero balance, while Savings Account No. 1037001372 (covered by the PAT) had an available
balance of

P26,104.306 and Savings Account No. 1037002387 had an available balance of P43,268.39.7

At about ten o'clock in the morning of the following day, December 15, 1983, petitioner George Moran
went to the bank, as was his regular practice, to personally oversee their daily transactions with the bank.
He deposited in their Savings Account No. 1037002387 the amounts of P10,874.58 and P6,754.25,8 and
he likewise deposited in their Savings Account No. 1037001372 the amounts of P5,900.00, P35,100.00
and 30.00.9 The amount of P40,000.00 was then transferred by him from Saving Account No. 1037002387
to their current account by means of a pro forma withdrawal form (a debit memorandum), which was
provided by the bank, authorizing the latter to make the necessary transfer. At the same time, the amount
of P66,666.00 was transferred from Savings Account No. 1037001372 to the same current account
through the pre-authorized transfer (PAT) agreement. 10

Sometime on December 15 or 16, 1983 George Moran was informed by his wife Librada, that Petrophil
refused to deliver their orders on a credit basis because the two checks they had previously issued were
dishonored upon presentment for payment. Apparently, the bank dishonored the checks due to
"insufficiency of funds." 11 The non-delivery of gasoline forced petitioners to temporarily stop business
operations, allegedly causing them to suffer loss of earnings. In addition, Petrophil cancelled their credit
accommodation, forcing them to pay for their purchases in cash. 12 George Moran, furious and upset,
demanded an explanation from Raul Diaz, the branch manager. Failing to get a sufficient explanation, he
talked to a certain Villareal, a bank officer, who allegedly told him that Amy Belen Ragodo, the customer
service officer, had committed a "grave error". 13

On December 16 or 17, 1983, Diaz went to the Moran residence to get the signatures of the petitioners
on an application for a manager's check so that the dishonored checks could be redeemed. Diaz then went
to Petrophil to personally present the checks in payment for the two dishonored checks. 14
In a chance meeting around May or June, 1984, George Moran learned from one Constancio Magno, credit
manager of Petrophil, that the latter received from Citytrust, through Diaz, a letter dated December 16,
1983, notifying them that the two aforementioned checks were "inadvertently dishonored . . . due to
operational error." Said letter was received by Petrophil on January 4, 1984. 15

On July 24, 1984, or a little over six months after the incident, petitioners, through counsel, wrote Citytrust
claiming that the bank's dishonor of the checks caused them besmirched business and personal
reputation, shame and anxiety, hence they were contemplating the filing of the necessary legal actions
unless the bank issued a certification clearing their name and paid them P1,000,000.00 as moral damages.
16

The bank did not act favorably on their demands, hence petitioners filed a complaint for damages on
September 8, 1984, with the Regional Trial Court, Branch 159 at Pasig, Metro Manila, which was docketed
therein as Civil Case No. 51549. In turn, Citytrust filed a counterclaim for damages, alleging that the case
filed against it was unfounded and unjust.

After trial, a decision dated October 9, 1989 was rendered by the trial court dismissing both the complaint
and the counterclaim. 17 On appeal, the Court of Appeals rendered judgment in CA-G.R. CV No. 25009 on
October 9, 1989 affirming the decision of the trial court. 18

We start some basic and accepted rules, statutory and doctrinal. A check is a bill of exchange drawn on a
bank payable on demand. 19 Thus, a check is a written order addressed to a bank or persons carrying on
the business of banking, by a party having money in their hands, requesting them to pay on presentment,
to a person named therein or to bearer or order, a named sum of money. 20

Fixed savings and current deposits of money in banks and similar institutions shall be governed by the
provisions concerning simple loan. 21 In other words, the relationship between the bank and the
depositor is that of a debtor and creditor. 22 By virtue of the contract of deposit between the banker and
its depositor, the banker agrees to pay checks drawn by the depositor provided that said depositor has
money in the hands of the bank. 23

Hence, where the bank possesses funds of a depositor, it is bound to honor his checks to the extent of the
amount of his deposits. The failure of a bank to pay the check of a merchant or a trader, when the deposit
is sufficient, entitles the drawer to substantial damages without any proof of actual

damages. 24
Conversely, a bank is not liable for its refusal to pay a check on account of insufficient funds,
notwithstanding the fact that a deposit may be made later in the day. 25 Before a bank depositor may
maintain a suit to recover a specific amount from his bank, he must first show that he had on deposit
sufficient funds to meet his demand. 26

The present action for damages accordingly hinges on the resolution of the inquiry as to whether or not
petitioners had sufficient funds in their accounts when the bank dishonored the checks in question. In
view of the factual findings of the two lower courts the correctness of which are challenged by what
appear to be plausible, arguments, we feel that the same should properly be resolved by us. This would
necessarily require us to inquire into both the savings and current accounts of petitioners in relation to
the PAT arrangement.

On December 14, 1983, when PNB, Pandacan branch, presented the checks for collection, the available
balance for Savings Account No. 1037001372 was P26,104.30 while Current Account No. 37-00066-7
expectedly had a zero balance. On December 15, 1983, at approximately ten o'clock in the morning,
petitioners, through George Moran, learned that P66,666.00 from Saving Account No. 1037001372 was
transferred to their current account. Another P40,000.00 was transferred from Saving Accounts No.
1037002387 to the current account. Considering that the transfers were by then sufficient to cover the
two checks, it is asserted by petitioners that such fact should have prevented the dishonor of the checks.
It appears, however, that it was not so.

As explained by respondent court in its decision, Gerard E. Rionisto, head of the centralized clearing unit
of Citytrust, detailed on the witness stand the standard clearing procedure adopted by respondent bank
and the Philippine Clearing House Corporation, to wit:.

Q: Let me again re-phase the question. Most of (sic) these two checks issued by Mrs. Librada Moran
under the accounts of the plaintiffs with Citytrust Banking Corporation were drawn dated December 12,
1983 and December 13, 1983(and) these two (2) checks were made payable to Petrophil Corporation. On
record, Petrophil Corporation presented these two (2) checks for clearing with PNB Pandacan Branch on
December 14, 1983. Now in accordance with the bank, what would happen with these checks drawn with
(sic) PNB on December 14, 1983?.

A: So these checks will now be presented by PNB with the Philippine Clearing House on December
14, and then the Philippine Clearing House will process it until midnight of December 14. Citytrust will
send a clearing representative to the Philippine Clearing House at around 2:00 o'clock in the morning of
December 15 and then get the checks. The checks will now be processed at the Citytrust Computer at
around 3:00 o'clock in the morning of December 14 (sic)but it will be processed for balance of Citytrust as
of December 14 because for one, we have not opened on December 15 at 3:00 o'clock. Under the clearing
house rules, we are supposed to process it on the date it was presented for clearing. (tsn, September 9,
1988, pp. 9-10). 27

Considering the clearing process adopted, as explained in the aforequoted testimony, it is clear that the
available balance on December 14, 1983 was used by the bank in determining whether or not there was
sufficient cash deposited to fund the two checks, although what was stamped on the dorsal side of the
two checks in question was "DAIF/12-15-83," since December 15, 1983 was the actual date when the
checks were processed. As earlier stated, when petitioners' checks were dishonored due to insufficiency
of funds, the available balance of Savings Account No. 1037001372, which was the subject of the PAT
agreement, was not enough to cover either of the two checks. On December 14, 1983, when PNB,
Pandacan branch presented the checks for collection, the available balance for Savings Account No.
1037001372, to repeat, was only P26,104.30 while Current Account No. 37-0006-7 had no available
balance. It was only on December 15, 1983 at around ten o'clock in the morning that the necessary funds
were deposited, which unfortunately was too late to prevent the dishonor of the checks.

Petitioners argue that public respondent, by relying heavily on Rionisto's testimony, failed to consider the
fact that the witness himself admitted that he had no personal knowledge surrounding the dishonor of
the two checks in question. Thus, although he knew the standard clearing procedure, it does not
necessarily mean that the same procedure was adopted with regard to the two checks.

We do not agree. Section 3(q), Rule 131 of the Rules of Court provides a disputable presumption in law
that the ordinary course of business has been followed. In the absence of a contrary showing, it is
presumed that the acts in question were in conformity with the usual conduct of business. In the case at
bar, petitioners failed to present countervailing evidence to rebut the presumption that the checks
involved underwent the same regular process for clearing of checks followed by the bank since 1983.

Petitioner had no reason to complain, for they alone were at fault. A drawer must remember his
responsibilities every time he issues a check. He must personally keep track of his available balance in the
bank and not rely on the bank to notify him of the necessity to fund certain check she previously issued.
A check, as distinguished from an ordinary bill of exchange, is supposed to be drawn against a previous
deposit of funds for it is ordinarily intended for immediately payment. 28

Moreover, between the time of the issuance of said checks on December 12 and 13 and the time of their
presentment on December 14, petitioners had, at the very least, twenty-four hours to replenish their
balance in the bank.
As previously noted, it was only during business hours in the morning of December 15, 1983, that
P66,666.00 was automatically transferred from Savings Account No. 1037001372 to Current Account No.
37-00066-7, and another P40,000.00 was transferred from Savings Account No. 1037002387 to the same
current by a debit memorandum. Petitioners argue that if indeed the checks were dishonored in the early
morning of December 15, 1983, the bank would not have automatically transferred P66,666.00 to said
current account. They theorize that the checks having already been dishonored, there was no necessity
to put into effect the pre-authorized transfer agreement.

That theory is incorrect. When the transfer from both savings accounts to the current account were made,
they were done in the hope that the checks may be retrieved, thus preventing their dishonor.
Unfortunately, respondent bank did not succeed in effectuating its good intentions. The transfers were
made to preserve its relations with petitioners whom it knew were valued clients, hence it wanted to
prevent the dishonor of their checks, if the same was at all possible. Although not admitting fault, it tried
its best to make sure that the checks would not bounce.

Under similar circumstances, it was held in Whitman vs. First National Bank 29 that a bank performs its
full duty where, upon the receipt of a check drawn against an account in which there are insufficient funds
to pay it in full, it endeavors to induce the drawer to make good his account so that the check can be paid,
and failing in this, it protests the check on the following morning and notifies its correspondent bank by
the telegraph of the protest. It cannot, therefore, be held liable to the payee and holder of the check for
not protesting it upon the day when it was received. In fact, the court added that the bank did more that
it was required to do by making an effort to induce the drawer to deposit sufficient money to make the
check good, and by notifying its correspondent of the dishonor of the check by telegram.

Petitioners maintain that at the time the checks were dishonored, they had already deposited sufficient
funds to cover said checks. To prove their point, petitioners quoted in their petition the following
testimony of said witness Rionisto, to wit:

Q: Now according to you, you would receive the checks from (being deposited to) the collecting bank
which in this particular example was the Pandacan Branch of PNB which in turn will deliver it to the
Philippine Clearing House and the Philippine Clearing House will deliver it to your office around 12:00
o'clock of December . . . ?

A: Around 2:00 o'clock of December 15. We sent a clearing representative.

Q: And the checks will be processed in accordance with the balance available as of December 14?
A: Yes, sir.

Q: And naturally you will place there "drawn against insufficient funds, December 14, 1983"?

A: Yes, sir.

Q: Are you sure about that?

A: Yes, sir . . . (tsn, September 9, 1988, p. 14) 30

Obviously witness Rionisto was merely confused as to the dates (December 14 and 15) because it did not
jibe with his previous testimony, wherein he categorically stated that "the checks will now be processed
as the Citytrust Computer at around 3:00 in the morning of December 14 (sic) but it will be processed for
balance of Citytrust as of December 14 because for one, we have not opened on December 15 at 3:00
o'clock. Under the clearing house rules, we are supposed to process it on the date it was presented for

clearing." 31 Analyzing the procedure he had previously explained, and analyzing his testimony in its
entirety and not in truncated portions, it would logically and ineluctably appear that he actually meant
December 15, and not December 14.

In the early morning of every business day, prior to banking hours, the various branches of Citytrust would
receive a computer printout called the "rejected transactions" report from the head office. The report
contains, among others, a listing of "checks to be funded." When Citytrust, Shaw Boulevard branch,
received said report in the early morning of December 15, 1983, the two checks involved were included
in the "checks to be funded." That report was used by the bank as its basis in dishonoring the two checks
in question. Petitioner contends that the bank erred when it did so because on previous occasions, the
report was merely used by the bank as a basis for determining whether or not it was necessary to notify
them of the need to deposit certain amounts in their accounts.

Amy Belen Rogado, a bank employee, testified that she would normally copy the details stated in the
report and transfer in on a "pink slip." These pink slips were then given to George Moran. In turn, George
Moran testified that he would deposit the necessary funds stated in the pink slips. As a matter of fact, so
petitioner asseverated, not a single check written on the notices was ever dishonored after he had funded
said checks with the bank. Thus, petitioner argues, the checks were not yet dishonored after the bank
received the report in the early morning of December 15, 1983.
Said argument does not persuade. If ever petitioners on previous occasions were given notices every time
a check was presented for clearing and payment and there were no adequate funds in their accounts,
these were, at most, mere accommodations on the part of respondent bank. It was not a requirement or
a general banking practice, hence non-compliance therewith could not lay the bank open to blame or
rebuke. Legally, the bank had all the right to dishonor the checks because there were no sufficient funds
to speak of in the first place. If the demand is by check, a drawer must have to his credit enough to cover
the demand. If his credit with the bank is less than the amount on the face of the check, the bank may
lawfully refuse payment. 32

Pursuing this matter further, the bank could also not be faulted for not accepting either of the two checks.
The first check issued was in the amount of P50,576.00, while the second one was for P56,090.00. Savings
Account No. 1307001372 then had a balance of only P26,104.30. This being the case, Citytrust could not
be expected to accept for payment either one of the two checks nor partially honor one check.

A bank is under no obligation to make part payment on a check, up to only the amount of the drawer's
funds, where the check is drawn for an amount larger than what the drawer has on deposit. Such a
practice of paying checks in part has never existed. Upon partial payment, the check holder could not be
called upon to surrender the check, and the bank would be without a voucher affording a certain means
of showing the payment. The rule is based on commercial convenience, and any rule that would work
such manifest inconvenience should not be recognized. A check is intended not only to transfer a right to
the amount named in it, but to serve the further purpose of affording evidence for the bank of the
payment of such amount when the check is taken up. 33

On the other hand, assuming arguendo that Savings Account No. 1037002387, which is not covered by a
pre-arranged automatic transfer agreement, had enough amount deposited to cover both checks (which
is not so in this case), the bank still had no obligation to honor said checks as there was then no authority
given to it to make the transfer of funds. Where a depositor has two accounts with a bank, an open
account and a savings account, and draws a check upon the open account for more money than the
account contains, the bank may rightfully refuse to pay the check, and is under no duty to make up the
deficiency from the savings account. 34

We are agree with respondent Court of Appeals in its assessment and interpretation of the nature of the
letter of Citytrust to Petrophil, dated December 16, 1983. As aptly and correctly stated by said court, ". . .
the letter is not an admission of liability as it was written merely to maintain the goodwill and continued
patronage of plaintiff-appellants. (This) cannot be characterized as baseless, considering the totality of
the circumstances surrounding its writing." 35

In the present case, the actions taken by the bank after the incident clearly show that there was neither
malice nor bad faith, but rather a clear intent to mollify an obviously agitated client. Raul Diaz, the branch
manager, even went for this purpose to the Moran residence to facilitate their application for a manager's
check. Later, he went to the Petrophil Corporation to personally redeem the checks. Still later, the letter
was sent by respondent bank to Petrophil explaining that the dishonor of the checks was due to
"operational error." However, we reiterate, it would be a mistake to construe that letter as an admission
of guilt on the part of the bank. It knew that it was confronted with a client who obviously was not willing
to admit any fault on his part, although the facts show otherwise. Thus, respondent bank ran the risk of
losing the business of an important and influential member of the financial community if it did not do
anything to assuage the feelings of petitioners.

It will be recalled that the credit standing of the Morans with Petrophil Corporation was involved, which
fact, more than anything, displeased them, to say the least. On demand of petitioners that their names
be cleared, the bank considered it more prudent to send the letter. It never realized that it would
thereafter be used by petitioners as one of the bases of their legal action. It will be noted that there was
no reason for the bank to send the letter to Petrophil Corporation since the latter was not a client nor was
it demanding any explanation. Clearly, therefore, the letter was merely intended to accommodate the
request of the Morans and was part of the series of damage-control measures taken by the bank to placate
petitioners.

Respondent Court of Appeals perceptively observed that "all these somehow pacified plaintiffs-appellants
(herein petitioners) for they did not thereafter take immediate punitive action against the defendant-
appellee (herein private respondent). As pointed out by the court a quo, it took plaintiffs-appellants about
six (6) months after the dishonor of the checks to demand that defendant-appellee pay them
P1,000,000.00 as damages. At that time, plaintiffs-appellants had discovered the letter of Mr. Diaz
attributing the dishonor of their checks to 'operational error'. The attempt to unduly ride on the letter of
Mr. Diaz speaks for itself." 36

On the above premises which irresistibly commend themselves to our acceptance, we find no cogent and
sufficient to award actual, moral, or exemplary damages to petitioners. Although we take judicial notice
of the fact that there is a fiduciary relationship between a bank and its depositors, as well as the extent of
diligence expected of it in handling the accounts entrusted to its care, 37 the bank may not be held
responsible for such damages in the absence of fraud, bad faith, malice, or wanton attitude. 38

WHEREFORE, finding no reversible error in the judgment appealed from, the same is hereby AFFIRMED,
with costs against petitioners.

SO ORDERED.
G.R. No. 97626 March 14, 1997

PHILIPPINE BANK OF COMMERCE, now absorbed by PHILIPPINE COMMERCIAL INTERNATIONAL BANK,

ROGELIO LACSON, DIGNA DE LEON, MARIA ANGELITA PASCUAL, et al., petitioners,

vs.

THE COURT OF APPEALS, ROMMEL'S MARKETING CORP., represented by ROMEO LIPANA, its President &
General Manager, respondents.

HERMOSISIMA, JR., J.:

Challenged in this petition for review is the Decision dated February 28, 19911 rendered by public
respondent Court of Appeals which affirmed the Decision dated November 15, 1985 of the Regional Trial
Court, National Capital Judicial Region, Branch CLX (160), Pasig City, in Civil Case No. 27288 entitled
"Rommel's Marketing Corporation, etc. v. Philippine Bank of Commerce, now absorbed by Philippine
Commercial and Industrial Bank."

The case stemmed from a complaint filed by the private respondent Rommel's Marketing Corporation
(RMC for brevity), represented by its President and General Manager Romeo Lipana, to recover from the
former Philippine Bank of Commerce (PBC for brevity), now absorbed by the Philippine Commercial
International Bank, the sum of P304,979.74 representing various deposits it had made in its current
account with said bank but which were not credited to its account, and were instead deposited to the
account of one Bienvenido Cotas, allegedly due to the gross and inexcusable negligence of the petitioner
bank.

RMC maintained two (2) separate current accounts, Current Account Nos. 53-01980-3 and 53-01748-7,
with the Pasig Branch of PBC in connection with its business of selling appliances.

In the ordinary and usual course of banking operations, current account deposits are accepted by the bank
on the basis of deposit slips prepared and signed by the depositor, or the latter's agent or representative,
who indicates therein the current account number to which the deposit is to be credited, the name of the
depositor or current account holder, the date of the deposit, and the amount of the deposit either in cash
or checks. The deposit slip has an upper portion or stub, which is detached and given to the depositor or
his agent; the lower portion is retained by the bank. In some instances, however, the deposit slips are
prepared in duplicate by the depositor. The original of the deposit slip is retained by the bank, while the
duplicate copy is returned or given to the depositor.
From May 5, 1975 to July 16, 1976, petitioner Romeo Lipana claims to have entrusted RMC funds in the
form of cash totalling P304,979.74 to his secretary, Irene Yabut, for the purpose of depositing said funds
in the current accounts of RMC with PBC. It turned out, however, that these deposits, on all occasions,
were not credited to RMC's account but were instead deposited to Account No. 53-01734-7 of Yabut's
husband, Bienvenido Cotas who likewise maintains an account with the same bank. During this period,
petitioner bank had, however, been regularly furnishing private respondent with monthly statements
showing its current accounts balances. Unfortunately, it had never been the practice of Romeo Lipana to
check these monthly statements of account reposing complete trust and confidence on petitioner bank.

Irene Yabut's modus operandi is far from complicated. She would accomplish two (2) copies of the deposit
slip, an original and a duplicate. The original showed the name of her husband as depositor and his current
account number. On the duplicate copy was written the account number of her husband but the name of
the account holder was left blank. PBC's teller, Azucena Mabayad, would, however, validate and stamp
both the original and the duplicate of these deposit slips retaining only the original copy despite the lack
of information on the duplicate slip. The second copy was kept by Irene Yabut allegedly for record
purposes. After validation, Yabut would then fill up the name of RMC in the space left blank in the
duplicate copy and change the account number written thereon, which is that of her husband's, and make
it appear to be RMC's account number, i.e., C.A. No. 53-01980-3. With the daily remittance records also
prepared by Ms. Yabut and submitted to private respondent RMC together with the validated duplicate
slips with the latter's name and account number, she made her company believe that all the while the
amounts she deposited were being credited to its account when, in truth and in fact, they were being
deposited by her and credited by the petitioner bank in the account of Cotas. This went on in a span of
more than one (1) year without private respondent's knowledge.

Upon discovery of the loss of its funds, RMC demanded from petitioner bank the return of its money, but
as its demand went unheeded, it filed a collection suit before the Regional Trial Court of Pasig, Branch
160. The trial court found petitioner bank negligent and ruled as follows:

WHEREFORE, judgment is hereby rendered sentencing defendant Philippine Bank of Commerce, now
absorbed by defendant Philippine Commercial & Industrial Bank, and defendant Azucena Mabayad to pay
the plaintiff, jointly and severally, and without prejudice to any criminal action which may be instituted if
found warranted:

1. The sum of P304,979.72, representing plaintiffs lost deposit, plus interest thereon at the legal rate
from the filing of the complaint;

2. A sum equivalent to 14% thereof, as exemplary damages;

3. A sum equivalent to 25% of the total amount due, as and for attorney's fees; and

4. Costs.

Defendants' counterclaim is hereby dismissed for lack of merit.2

On appeal, the appellate court affirmed the foregoing decision with modifications, viz:

WHEREFORE, the decision appealed from herein is MODIFIED in the sense that the awards of exemplary
damages and attorney's fees specified therein are eliminated and instead, appellants are ordered to pay
plaintiff, in addition to the principal sum of P304,979.74 representing plaintiff's lost deposit plus legal
interest thereon from the filing of the complaint, P25,000.00 attorney's fees and costs in the lower court
as well as in this Court.3

Hence, this petition anchored on the following grounds:

1) The proximate cause of the loss is the negligence of respondent Rommel Marketing Corporation
and Romeo Lipana in entrusting cash to a dishonest employee.

2) The failure of respondent Rommel Marketing Corporation to cross-check the bank's statements
of account with its own records during the entire period of more than one (1) year is the proximate cause
of the commission of subsequent frauds and misappropriation committed by Ms. Irene Yabut.

3) The duplicate copies of the deposit slips presented by respondent Rommel Marketing Corporation
are falsified and are not proof that the amounts appearing thereon were deposited to respondent
Rommel Marketing Corporation's account with the bank,

4) The duplicate copies of the deposit slips were used by Ms. Irene Yabut to cover up her fraudulent
acts against respondent Rommel Marketing Corporation, and not as records of deposits she made with
the bank.4

The petition has no merit.

Simply put, the main issue posited before us is: What is the proximate cause of the loss, to the tune of
P304,979.74, suffered by the private respondent RMC — petitioner bank's negligence or that of private
respondent's?

Petitioners submit that the proximate cause of the loss is the negligence of respondent RMC and Romeo
Lipana in entrusting cash to a dishonest employee in the person of Ms. Irene Yabut.5 According to them,
it was impossible for the bank to know that the money deposited by Ms. Irene Yabut belong to RMC;
neither was the bank forewarned by RMC that Yabut will be depositing cash to its account. Thus, it was
impossible for the bank to know the fraudulent design of Yabut considering that her husband, Bienvenido
Cotas, also maintained an account with the bank. For the bank to inquire into the ownership of the cash
deposited by Ms. Irene Yabut would be irregular. Otherwise stated, it was RMC's negligence in entrusting
cash to a dishonest employee which provided Ms. Irene Yabut the opportunity to defraud RMC.6

Private respondent, on the other hand, maintains that the proximate cause of the loss was the negligent
act of the bank, thru its teller Ms. Azucena Mabayad, in validating the deposit slips, both original and
duplicate, presented by Ms. Yabut to Ms. Mabayad, notwithstanding the fact that one of the deposit slips
was not completely accomplished.

We sustain the private respondent.

Our law on quasi-delicts states:

Art. 2176. Whoever by act or omission causes damage to another, there being fault or negligence,
is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual
relation between the parties, is called a quasi-delict and is governed by the provisions of this Chapter.

There are three elements of a quasi-delict: (a) damages suffered by the plaintiff; (b) fault or negligence of
the defendant, or some other person for whose acts he must respond; and (c) the connection of cause
and effect between the fault or negligence of the defendant and the damages incurred by the plaintiff.7

In the case at bench, there is no dispute as to the damage suffered by the private respondent (plaintiff in
the trial court) RMC in the amount of P304,979.74. It is in ascribing fault or negligence which caused the
damage where the parties point to each other as the culprit.
Negligence is the omission to do something which a reasonable man, guided by those considerations
which ordinarily regulate the conduct of human affairs, would do, or the doing of something which a
prudent and reasonable man would do. The seventy-eight (78)-year-old, yet still relevant, case of Picart
v. Smith,8 provides the test by which to determine the existence of negligence in a particular case which
may be stated as follows: Did the defendant in doing the alleged negligent act use that reasonable care
and caution which an ordinarily prudent person would have used in the same situation? If not, then he is
guilty of negligence. The law here in effect adopts the standard supposed to be supplied by the imaginary
conduct of the discreet paterfamilias of the Roman law. The existence of negligence in a given case is not
determined by reference to the personal judgment of the actor in the situation before him. The law
considers what would be reckless, blameworthy, or negligent in the man of ordinary intelligence and
prudence and determines liability by that.

Applying the above test, it appears that the bank's teller, Ms. Azucena Mabayad, was negligent in
validating, officially stamping and signing all the deposit slips prepared and presented by Ms. Yabut,
despite the glaring fact that the duplicate copy was not completely accomplished contrary to the self-
imposed procedure of the bank with respect to the proper validation of deposit slips, original or duplicate,
as testified to by Ms. Mabayad herself, thus:

Q: Now, as teller of PCIB, Pasig Branch, will you please tell us Mrs. Mabayad your important duties
and functions?

A: I accept current and savings deposits from depositors and encashments.

Q: Now in the handling of current account deposits of bank clients, could you tell us the procedure
you follow?

A: The client or depositor or the authorized representative prepares a deposit slip by filling up the
deposit slip with the name, the account number, the date, the cash breakdown, if it is deposited for cash,
and the check number, the amount and then he signs the deposit slip.

Q: Now, how many deposit slips do you normally require in accomplishing current account deposit,
Mrs. Mabayad?

A: The bank requires only one copy of the deposit although some of our clients prepare the deposit
slip in duplicate.
Q: Now in accomplishing current account deposits from your clients, what do you issue to the
depositor to evidence the deposit made?

A: We issue or we give to the clients the depositor's stub as a receipt of the deposit.

Q: And who prepares the deposit slip?

A: The depositor or the authorized representative sir?

Q: Where does the depositor's stub comes (sic) from Mrs. Mabayad, is it with the deposit slip?

A: The depositor's stub is connected with the deposit slip or the bank's copy. In a deposit slip, the
upper portion is the depositor's stub and the lower portion is the bank's copy, and you can detach the
bank's copy from the depositor's stub by tearing it sir.

Q: Now what do you do upon presentment of the deposit slip by the depositor or the depositor's
authorized representative?

A: We see to it that the deposit slip9 is properly accomplished and then we count the money and
then we tally it with the deposit slip sir.

Q: Now is the depositor's stub which you issued to your clients validated?

A: Yes, sir. 10 [Emphasis ours]

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

Negligence here lies not only on the part of Ms. Mabayad but also on the part of the bank itself in its
lackadaisical selection and supervision of Ms. Mabayad. This was exemplified in the testimony of Mr.
Romeo Bonifacio, then Manager of the Pasig Branch of the petitioner bank and now its Vice-President, to
the effect that, while he ordered the investigation of the incident, he never came to know that blank
deposit slips were validated in total disregard of the bank's validation procedures, viz:

Q: Did he ever tell you that one of your cashiers affixed the stamp mark of the bank on the deposit
slips and they validated the same with the machine, the fact that those deposit slips were unfilled up, is
there any report similar to that?

A: No, it was not the cashier but the teller.

Q: The teller validated the blank deposit slip?

A: No it was not reported.

Q: You did not know that any one in the bank tellers or cashiers validated the blank deposit slip?

A: I am not aware of that.

Q: It is only now that you are aware of that?

A: Yes, sir. 13

Prescinding from the above, public respondent Court of Appeals aptly observed:

xxx xxx xxx

It was in fact only when he testified in this case in February, 1983, or after the lapse of more than seven
(7) years counted from the period when the funds in question were deposited in plaintiff's accounts (May,
1975 to July, 1976) that bank manager Bonifacio admittedly became aware of the practice of his teller
Mabayad of validating blank deposit slips. Undoubtedly, this is gross, wanton, and inexcusable negligence
in the appellant bank's supervision of its employees. 14

It was this negligence of Ms. Azucena Mabayad, coupled by the negligence of the petitioner bank in the
selection and supervision of its bank teller, which was the proximate cause of the loss suffered by the
private respondent, and not the latter's act of entrusting cash to a dishonest employee, as insisted by the
petitioners.

Proximate cause is determined on the facts of each case upon mixed considerations of logic, common
sense, policy and precedent. 15 Vda. de Bataclan v. Medina, 16 reiterated in the case of Bank of the Phil.
Islands v. Court of Appeals, 17 defines proximate cause as "that cause, which, in natural and continuous
sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result
would not have occurred. . . ." In this case, absent the act of Ms. Mabayad in negligently validating the
incomplete duplicate copy of the deposit slip, Ms. Irene Yabut would not have the facility with which to
perpetrate her fraudulent scheme with impunity. Apropos, once again, is the pronouncement made by
the respondent appellate court, to wit:

. . . . Even if Yabut had the fraudulent intention to misappropriate the funds entrusted to her by plaintiff,
she would not have been able to deposit those funds in her husband's current account, and then make
plaintiff believe that it was in the latter's accounts wherein she had deposited them, had it not been for
bank teller Mabayad's aforesaid gross and reckless negligence. The latter's negligence was thus the
proximate, immediate and efficient cause that brought about the loss claimed by plaintiff in this case, and
the failure of plaintiff to discover the same soon enough by failing to scrutinize the monthly statements
of account being sent to it by appellant bank could not have prevented the fraud and misappropriation
which Irene Yabut had already completed when she deposited plaintiff's money to the account of her
husband instead of to the latter's accounts. 18

Furthermore, under the doctrine of "last clear chance" (also referred to, at times as "supervening
negligence" or as "discovered peril"), petitioner bank was indeed the culpable party. This doctrine, in
essence, states that where both parties are negligent, but the negligent act of one is appreciably later in
time than that of the other, or when it is impossible to determine whose fault or negligence should be
attributed to the incident, the one who had the last clear opportunity to avoid the impending harm and
failed to do so is chargeable with the consequences thereof. 19 Stated differently, the rule would also
mean that an antecedent negligence of a person does not preclude the recovery of damages for the
supervening negligence of, or bar a defense against liability sought by another, if the latter, who had the
last fair chance, could have avoided the impending harm by the exercise of due diligence. 20 Here,
assuming that private respondent RMC was negligent in entrusting cash to a dishonest employee, thus
providing the latter with the opportunity to defraud the company, as advanced by the petitioner, yet it
cannot be denied that the petitioner bank, thru its teller, had the last clear opportunity to avert the injury
incurred by its client, simply by faithfully observing their self-imposed validation procedure.

At this juncture, it is worth to discuss the degree of diligence ought to be exercised by banks in dealing
with their clients.

The New Civil Code provides:

Art. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is
required by the nature of the obligation and corresponds with the circumstances of the persons, of the
time and of the place. When negligence shows bad faith, the provisions of articles 1171 and 2201,
paragraph 2, shall apply.

If the law or contract does not state the diligence which is to be observed in the performance, that which
is expected of a good father of a family shall be required. (1104a)

In the case of banks, however, the degree of diligence required is more than that of a good father of a
family. Considering the fiduciary nature of their relationship with their depositors, banks are duty bound
to treat the accounts of their clients with the highest degree of care. 21

As elucidated in Simex International (Manila), Inc. v. Court of Appeals, 22 in every case, the depositor
expects the bank to treat his account with the utmost fidelity, whether such account consists only of a
few hundred pesos or of millions. The bank must record every single transaction accurately, down to the
last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time
the amount of money the depositor can dispose as he sees fit, confident that the bank will deliver it as
and to whomever he directs. A blunder on the part of the bank, such as the failure to duly credit him his
deposits as soon as they are made, can cause the depositor not a little embarrassment if not financial loss
and perhaps even civil and criminal litigation.

The point is that as a business affected with public interest and because of the nature of its functions, the
bank is under obligation to treat the accounts of its depositors with meticulous care, always having in
mind the fiduciary nature of their relationship. In the case before us, it is apparent that the petitioner
bank was remiss in that duty and violated that relationship.
Petitioners nevertheless aver that the failure of respondent RMC to cross-check the bank's statements of
account with its own records during the entire period of more than one (1) year is the proximate cause of
the commission of subsequent frauds and misappropriation committed by Ms. Irene Yabut.

We do not agree.

While it is true that had private respondent checked the monthly statements of account sent by the
petitioner bank to RMC, the latter would have discovered the loss early on, such cannot be used by the
petitioners to escape liability. This omission on the part of the private respondent does not change the
fact that were it not for the wanton and reckless negligence of the petitioners' employee in validating the
incomplete duplicate deposit slips presented by Ms. Irene Yabut, the loss would not have occurred.
Considering, however, that the fraud was committed in a span of more than one (1) year covering various
deposits, common human experience dictates that the same would not have been possible without any
form of collusion between Ms. Yabut and bank teller Mabayad. Ms. Mabayad was negligent in the
performance of her duties as bank teller nonetheless. Thus, the petitioners are entitled to claim
reimbursement from her for whatever they shall be ordered to pay in this case.

The foregoing notwithstanding, it cannot be denied that, indeed, private respondent was likewise
negligent in not checking its monthly statements of account. Had it done so, the company would have
been alerted to the series of frauds being committed against RMC by its secretary. The damage would
definitely not have ballooned to such an amount if only RMC, particularly Romeo Lipana, had exercised
even a little vigilance in their financial affairs. This omission by RMC amounts to contributory negligence
which shall mitigate the damages that may be awarded to the private respondent 23 under Article 2179
of the New Civil Code, to wit:

. . . When the plaintiff's own negligence was the immediate and proximate cause of his injury, he cannot
recover damages. But if his negligence was only contributory, the immediate and proximate cause of the
injury being the defendant's lack of due care, the plaintiff may recover damages, but the courts shall
mitigate the damages to be awarded.

In view of this, we believe that the demands of substantial justice are satisfied by allocating the damage
on a 60-40 ratio. Thus, 40% of the damage awarded by the respondent appellate court, except the award
of P25,000.00 attorney's fees, shall be borne by private respondent RMC; only the balance of 60% needs
to be paid by the petitioners. The award of attorney's fees shall be borne exclusively by the petitioners.
WHEREFORE, the decision of the respondent Court of Appeals is modified by reducing the amount of
actual damages private respondent is entitled to by 40%. Petitioners may recover from Ms. Azucena
Mabayad the amount they would pay the private respondent. Private respondent shall have recourse
against Ms. Irene Yabut. In all other respects, the appellate court's decision is AFFIRMED.

Proportionate costs.

SO ORDERED.

Bellosillo, Vitug and Kapunan, JJ., concur.

[G.R. No. 43682. March 31, 1938.]

In re Liquidation of Mercantile Bank of China. TAN TIONG TICK, claimants-appellant, v. AMERICAN

APOTHECARIES CO., ET AL., Claimants-Appellees.

Cirilo Lim and Antonio Gonzalez for Appellant.

Eusebio Orense and Carmelino G. Alvendia for appellees Chinese Grocers Asso. Et. Al.

Marcelo Nubla for appellees Ang Cheng Lian Et. Al.

SYLLABUS

1. BANKS; CHARACTER OF CURRENT ACCOUNT AND SAVINGS DEPOSITS, APPLICABLE LAW. — Current
account and savings deposits are not preferred credits in the cases, like the present, involving the
insolvency and liquidation of a bank, where there are various creditors and it becomes necessary to
ascertain the preference of various credits. These deposits are essentially mercantile contracts and
should, therefore, be governed by the provisions of the Code of Commerce, pursuant to its article 2.
2. ID.; ID.; COMMERCIAL LOANS. — In accordance with article 309 of the Code of Commerce, the so-
called current account and savings deposits have lost the character of deposits properly so called, and
are converted into simple commercial loans, because the bank disposed of the funds deposited by the
claimant for its ordinary transactions and for the banking business in which it was engaged. That the
bank had the authority of the claimant to make use of the money deposited on current and savings
accounts is deducible from the fact that the bank has been paying interest on both deposits, and the
claimant himself asks that he be allowed interest up to the time when the bank ceased its operations.
Moreover, according to sections 125 of the Corporation Law and 9 of Act No. 3154, said bank is
authorized to make use of the current account, savings, and fixed deposits provided it retains in its
treasury a certain percentage of the amounts of said deposits.

3. ID.; PREFERENCE OF CREDITS IN CASES OF INSOLVENCY AND LIQUIDATION OF A BANK. — Even after
the enactment of the Insolvency Law there was no law in this jurisdiction governing the order or
preference of credits in cases of insolvency and liquidation of a bank. But the Philippine Legislature
subsequently enacted Act No. 3519, amending various sections of the Revised Administrative Code,
which took effect on February 20, 1929, and section 1641 of this latter Code, as amended by said Act,
provides that "In the case of the liquidation of a bank or banking institution, after payment of the costs
of the proceedings, including reasonable expenses, commissions and fees of the Bank Commissioner, to
be allowed by the court, the Bank Commissioner shall pay the debts of the institution, under decree of
the court in the order of their legal priority."cralaw virtua1aw library

4. ID.; ID.; LEGISLATIVE INTENTION. — From this section 1641 it is inferred that the intention of the
Philippine Legislature, in providing that the Bank Commissioner shall pay the debts of the company by
virtue of an order of the court in the order of their legal priority, was to enforce the provisions of
sections 48, 49 and 50 of the Insolvency Law in the sense that they are made applicable to cases of
insolvency or bankruptcy and liquidation of banks. No other deduction can be made from the phrase "in
the order of their legal priority" employed by the law, for there being no law establishing any priority in
the order of payment of credits, the legislature could not reasonably refer to any legislation upon the
subject, unless the interpretation above stated is accepted.

5. ID.; ID.; SET OFF OF CREDITS. — The Bank Commissioner set off the claims of the appellant against
what the bank had against him. The court approved this set off over the objection of the appellant. The
appellees contend that the set off does not lie in this case because otherwise it would prejudice them
and the other creditors in the liquidation. Held: That the court’s ruling is not error. "It may be stated as a
general rule that when a depositor is indebted to a bank, and the debts are mutual — that is, between
the same parties and in the same right — the bank may apply the deposit, or such portion thereof as
may be necessary, to the payment of the debt due it by the depositor, provided there is no express
agreement to the contrary and the deposit is not specifically applicable to some other particular
purpose." (7 Am. Jur., par. 629, p. 455.) The situation referred to by the appellees is inevitable because
section 1639 of the Revised Administrative Code, as amended by Act No. 3519, provides that the Bank
Commissioner shall reduce the assets of the bank into cash and this cannot be done without first
liquidating individually the accounts of the debtors of said bank, and in making this individual liquidation
the debtors are entitled to set off, by way of compensation, their claims against the bank.

6. ID.; ID.; INTEREST. — Under articles 1101 and 1108 of the Civil Code, interest is allowed by way of
indemnity for damages suffered, in the cases wherein the obligation consists in the payment of money.
In view thereof, Held: That in the absence of any express law or of any applicable provision of the Code
of Commerce, it is not proper to pay this last kind of interest to the appellant upon his deposits in the
bank, for this would be anomalous and unjustified in a liquidation or insolvency of a bank. This rule
should be strictly observed in the instant case because it is understood that the assets should be
prorated among all the creditors as they are insufficient to pay all the obligations of the bank.

DECISION

IMPERIAL, J.:

In the proceedings for the liquidation of the Mercantile Bank of China, the appellant presented a written
claim alleging: that when this bank ceased to operate on September 19, 1931, his current account in said
bank showed a balance of P9,657.50 in his favor; that on the same date his savings account in the said
bank also showed a balance in his favor of P20,000 plus interest then due amounting to P194.78; that,
on the other hand, he owed the bank in the amount of P13,262.58, the amount of the trust receipts
which he signed because of his withdrawal from the bank of certain merchandise consigned to him
without paying the drafts drawn upon him by the remittors thereof; that the credits thus described
should be set off against each other according to law, and on such set off being made it appeared that
he was still the creditor of the bank in the sum of P16,589.70. And he asked that the court order the
Bank Commissioner to pay him the aforesaid balance and that the same be declared as a preferred
credit. The claim was referred to the commissioner appointed by the court, who at the same time acted
as referee, and this officer recommended that the balance claimed be paid without interest and as an
ordinary credit. The court approved the recommendation and entered judgment in accordance
therewith. The claimant took an appeal.

In his report the commissioner classified the claims presented under the following six groups:" (First)
Current accounts, savings and fixed deposits. (Second) Checks or drafts sold by the Mercantile Bank of
China and not paid by the correspondents or banks against which they were drawn. (Third) Checks or
drafts issued by the Mercantile Bank of China in payment or reimbursement of drafts or goods sent to it
for collection by banks and foreign commercial houses against merchants or commercial entities of
Manila. (Fourth) Drafts for collection received by the Mercantile Bank of China to be collected from
merchants and commercial entities in Manila, and which were pending collection on the date of the
suspension of payments. (Fifth) Claims of depositors who are at the same time debtors of the Mercantile
Bank of China. (Sixth) Various claims." And referring to the claim of the appellant, he
states:jgc:chanrobles.com.ph

"Mr. Tan Tiong Tick claims from the Mercantile Bank of China the amount of P27,597.80, the total
amount of the following sums which he has in his favor in said bank including the corresponding
interests:chanrob1es virtual 1aw library

Balance on current account P7,390.11

Balance of savings account No. 2266 20,000.00

_________

Total 27,890.11.

"Adding to this total the interest also claimed by Mr. Tan Tiong Tick, that is, P194.78 on the savings
account and P12.91 on the current account, the amount claimed makes a total of P27,597.80.

"Notwithstanding the fact that the Bank Commissioner found the claim in accordance with the books of
the Mercantile Bank of China, he declined to issue the corresponding certificate of proof of claim
because the said claimant has pending in the said bank obligations for accepting drafts amounting to a
total of $6,631.29.

"At the hearing of this claim, the claimant admitted such pending obligations, alleging at the same time
that to guarantee the payment of drafts accepted by him, he pledged his bank book No. 2266, which
also answered for the payment of any credit which the said bank may extend to him.

"In Exhibit A presented by the claimant as evidence, consisting of a letter dated November 4, 1931,
addressed by Mr. H. J. Belden to the then Bank Commissioner, Mr. Leo. H. Martin, it appears that the
said savings account was constituted for the sole purpose of securing the payment of drafts against the
claimant, the bill of ladings of which were delivered to him upon trust-receipts, and that, according to
the records of the bank, Mr. Tan Tiong Tick did not obtain any other accommodation from the bank
except the trust-receipts.

"RECOMMENDATION

"Having established the existence of such deposits in the name of Tan Tiong Tick and the latter having
recognized the obligation in favor of the bank alleged by the Bank Commissioner, for the security of
which he constituted the savings deposit in the amount of P20,000, it is recommended that from this
amount there be deducted the amount of the obligation of P13,778.90 which the claimant
acknowledges in favor of the Mercantile Bank of China, and that the difference, plus the other current
account deposit of P7,390.11, be considered as ordinary credits subject to the equal division of the
funds of the said bank.

"As to the interest on said deposits also claimed by Mr. Tan Tiong Tick, the rejection thereof is
recommended in view of the fact that the Bank Commissioner has not credited any interest to the
current and savings accounts of the Mercantile Bank of China, and it would be unfair that interest, not
credited to the others, be allowed to this claimant."cralaw virtua1aw library

It will be noted that in the report of the commissioner the credit of the claimant for the balance of his
deposit on current account has been reduced to P7,390.11, instead of P9,657.50 alleged in his claim, the
total balance recommended in favor of the appellant being P13,611.21, without including interest,
instead of P16,589.70. In his brief the appellant admits the figures appearing in the report, with the
exception of the interest on which we shall presently dwell.

1. Revolving the claims under the first group of the report of the commissioner, the court rejected the
recommendation of this official to the effect that they be declared ordinary credits only, and approved
them as preferred credits. However, in considering the other claims, among them that of the appellant,
classified under the fifth group, the court approved the recommendation of the commissioner that they
be declared ordinary credits; in other words, the court considered and declared the claim of the
appellant as an ordinary credit just because the latter is at the same time a debtor of the bank,
notwithstanding the fact that his claim is of the same kind as those classified under the first group,
inasmuch as they are also current account and savings deposits. To this part of the decision is addressed
the appellant’s first assignment of error.

In truth, if the current account, savings, and fixed deposits are preferred credits for the reasons stated
by the court in its decision, we see no reason why the preference should disappear when the depositors
are at the same time debtors of the bank for amounts less than their credits. If the ground to declare
them preferred credits is sound, the balances resulting after the set off should likewise be preferred,
unless there be a law providing that a set off, when it takes place, produces such an effect, a law which
does not exist as far as we know.

But we are of the opinion, for the reason presently to be stated, that current account and savings
deposits are not preferred credits in the cases, like the present, involving the insolvency and liquidation
of a bank, where there are various creditors and it becomes necessary to ascertain the preference of
various credits.

The court held that these deposits should be governed by the Civil Code, and applying articles 1758 and
1768 of the said Code, ruled that the so-called irregular deposits being still in vogue, as Manresa, the
commentator, maintains, and as held by this court in the case of Rogers v. Smith, Bell & Co. (10 Phil.,
319), the former are preferred credits because partaking of the nature of the irregular deposits.

In our opinion, these deposits are essentially mercantile contracts and should, therefore, be governed
by the provisions of the Code of Commerce, pursuant to its article 2 reading:red:chanrobles.com.ph

"ART. 2. Commercial transactions, be they performed by merchants or not, whether they are specified in
this Code or not, shall be governed by the provisions contained in the same; in the absence of such
provisions, by the commercial customs generally observed in each place; and in the absence of both, by
those of the common law.

"Commercial transactions shall be considered those enumerated in this Code and any others of a similar
character."cralaw virtua1aw library

There is cited in support of the application of the Civil Code to these deposits article 310 of the Code of
Commerce providing:jgc:chanrobles.com.ph

"ART. 310. Notwithstanding the provisions of the foregoing articles, deposits made with banks, with
general warehouses, with loan or any other associations, shall be governed in the first place by the by-
laws of the same, in the second by the provisions of this Code, and finally by the rules of common law,
which are applicable to all deposits."cralaw virtua1aw library

But apparently there was a failure to consider that, according to the order established by the article, the
Civil Code or the common law is mentioned after the Code of Commerce, which means that the
provisions of the latter Code should first be applied before resorting to those of the Civil Code which are
supplementary in character.

The Code of Commerce contains express provisions regulating deposits of the nature under
consideration, and they are articles 303 to 310. The first and the second to the last of the said articles
are as follows:jgc:chanrobles.com.ph

"ART. 303. In order that a deposit may be considered commercial, it is necessary —

"1. That the depositary, at least, be a merchant.

"2. That the things deposited be commercial objects.

"3. That the deposit constitute in itself a commercial transaction, or be made by reason or as a
consequence of commercial transactions."cralaw virtua1aw library

"ART. 309. Whenever, with the consent of the depositor, the depositary disposes of the articles on
deposit either for himself or for his business, or for transactions intrusted to him by the former, the
rights and obligations of the depositary and of the depositor shall cease, and the rules and provisions
applicable to the commercial loans, commission, or contract which took the place of the deposit shall be
observed."cralaw virtua1aw library

In accordance with article 309, the so-called current account and savings deposits have lost the
character of deposits properly so-called, and are converted into simple commercial loans, because the
bank disposed of the funds deposited by the claimant for its ordinary transactions and for the banking
business in which it was engaged. That the bank had the authority of the claimant to make use of the
money deposited on current and savings accounts is deducible from the fact that the bank has been
paying interest on both deposits, and the claimant himself asks that he be allowed interest up to the
time when the bank ceased its operations. Moreover, according to sections 126 of the Corporation Law
and 9 of Act No. 3154, said bank is authorized to make use of the current account, savings, and fixed
deposits provided it retains in its treasury a certain percentage of the amounts of said deposits. Said
sections read:jgc:chanrobles.com.ph

"SEC. 125. Every such commercial banking corporation shall at all times have on hand in lawful money of
the Philippine Islands or of the United State, an amount equal to at least eighteen per centum of the
aggregate amount of its deposits in current accounts which are payable on demand and of its fixed
deposits coming due within thirty days. Such commercial banking corporation shall also at all times
maintain reserve equal in amount to at least five per centum of its total savings deposits. The said
reserve may be maintained in the form of lawful money of the Philippine Islands or of the United States,
or in bonds issued or guaranteed by the Government of the Philippine Islands or of the United States. . .
.

"The percentage of reserve to deposits in the case of the Philippine National Bank and the Bank of the
Philippine Islands is hereby fixed at eighteen per centum of demand deposits and fixed deposits payable
within thirty days and five per centum of savings deposits, in the same manner as is prescribed in this
section for commercial banking corporations in general, which reserve against savings deposits may
consist of Philippine Government or United States Government bonds."cralaw virtua1aw library

"SEC. 9. Every bank organized under this Act shall at all times have on hand, in lawful money of the
Philippine Islands or of the United States, an amount equal to at least twenty per centum of the
aggregate amount of its deposits. The term lawful money of the Philippine Islands’ shall include the
Treasury certificates authorized by Act Numbered Three thousand and fifty-eight, and the term ’lawful
money of the United States shall include gold and silver certificates of the United States and bank notes
issued by the Federal Reserve Banks."cralaw virtua1aw library

Therefore, the bank, without the necessity of the claimant’s consent, was by law authorized to dispose
of the deposits, subject to the limitation indicated.

We, therefore, conclude that the law applicable to the appellant’s claims is the Code of Commerce and
that his current and savings accounts have been converted into simple commercial loans.

2. The next point to decide is the applicable law, if any, to determine the preference of the appellant’s
credits, considering that there happens to be other creditors. Section V of Title I of Book IV of the Code
of Commerce contains provisions relative to the rights of creditors in case of bankruptcy and to their
respective gradation, but these provisions have been repealed by section 524 of the Code of Civil
Procedure reading as follows:jgc:chanrobles.com.ph

"SEC. 524. No new proceedings to be instituted. — No new bankruptcy proceedings shall be instituted
until a new bankruptcy law shall come into force in the Islands. All existing laws and orders relating to
bankruptcy and proceedings therein are hereby repealed: Provided, That nothing in this section shall be
deemed in any manner to affect pending litigation in bankruptcy proceedings."cralaw virtua1aw library
The Philippine Legislature subsequently enacted Act No. 1956, also known as the Insolvency Law, which
took effect on May 20, 1909, containing provisions regarding preference of credits; but its section 52
provides that all the provisions of the law shall not apply to corporations engaged principally in the
banking business, and among them should be understood included the Mercantile Bank of China. Said
sections provide:jgc:chanrobles.com.ph

"SEC. 48. Merchandise, effects, and any other kind of property found among the property of the
insolvent, the ownership of which has not been conveyed to him by a legal and irrevocable title, shall be
considered to be the property of other persons and shall be placed at the disposal of its lawful owners
on order of the court made at the hearing mentioned in section forty-three or at any ordinary hearing, is
the assignee or any creditor whose right in the estate of the insolvent has been established shall petition
in writing for such hearing and the court in its discretion shall to order, the creditors, however, retaining
such rights in said property as belong to the insolvent, and subrogating him whenever they shall have
complied with all obligations concerning said property.

"The following shall be included in this section:jgc:chanrobles.com.ph

"1. Dowry property inestimado and such property estimado which may remain in the possession of the
husband where the receipt thereof is a matter of record in a public instrument registered under the
provisions of sections twenty-one and twenty-seven of the Code of Commerce in force.

"2. Paraphernal property which the wife may have acquired by inheritance, legacy, or donation whether
remaining in the form in which it was received or subrogated or invested in other property, provided
that such investment or subrogation has been registered in the registro mercantile in accordance with
the provisions of the sections of the Code of Commerce mentioned in the next preceding paragraph.

"3. Property and effects deposited with the bankrupt, or administered, leased, rented, or held in
usufruct by him.

"4. Merchandise in the possession of the bankrupt, on commission, for purchase, sale, forwarding, or
delivery.

"5. Bills of exchange or promissory notes without indorsement or other expression transferring
ownership remitted to the insolvent for collection and all others acquired by him for the account of
another person, drawn or indorsed to the remitter direct.
"6. Money remitted to the insolvent, otherwise than on current account, and which is in his possession
for delivery to a definite person in the name and for the account of the remitter or for the settlement of
claims which are to be met at the insolvent’s domicile.

"7. Amounts due the insolvent for sales of merchandise on commission, and bills of exchange and
promissory notes derived therefrom in his possession, even when the same are not made payable to the
owner of the merchandise sold, provided it is proven that the obligation to the insolvent is derived
therefrom and that said bills of exchange and promissory notes were in the possession of the insolvent
for account of the owner of the merchandise to be cashed and remitted, in due time, to the said owner;
all of which shall be a legal presumption when the amount involved in any such sale shall not have been
credited on the books of both the owner of the merchandise and of the insolvent.

"8. Merchandise bought on credit by the insolvent so long as the actual delivery thereof has not been
made to him at his store or at any other place stipulated for such delivery, and merchandise the bills of
lading or shipping receipts of which have been sent him after the same has been loaded by order of the
purchaser and for his account and risk.

"In all cases arising under this paragraph assignees may retain the merchandise so purchased or claim it
for the creditors by paying the price thereof to the vendor.

"9. Goods or chattels wrongfully taken, converted, or withheld by the insolvent if still existing in his
possession or the amount of the value thereof.

"SEC. 49. All creditors, except those whose claims are mentioned in the next following section, whose
debts are duly proved and allowed shall be entitled to share in the property and estate pro rata, after
the property belonging to other persons referred to in the last preceding section has been deducted
therefrom, without priority or preference whatever: Provided, That any debt proved by any person
liable as bail, surety, guarantor, or otherwise, for the debtor, shall not be paid to the person so proving
the same until satisfactory evidence shall be produced of the payment of such debt by such person so
liable, and the share to which such debt would be entitled may be paid into court, or otherwise held, for
the benefit of the party entitled thereto, as the court may direct.

"SEC. 50. The following are the preferred claims which shall be paid in the order
named:jgc:chanrobles.com.ph

"(a) Necessary funeral expenses of the debtor, or of his wife, or children who are under their
parental authority and have no property of their own, when approved by the court;
"(b) Debts due for personal services rendered the insolvent by employees, laborers, or domestic
servants immediately preceding the commencement of proceedings in insolvency;

"(c) Compensation due the laborers or their dependents under the provisions of Act Numbered
Thirty-four hundred and twenty-eight, known as the Workmen’s Compensation Act, as amended by Act
Numbered Thirty-eight hundred and twelve, and under the provisions of Act Numbered Eighteen
hundred and seventy-four, known as the Employers’ Liability Act, and of other laws providing for
payment of indemnity for damages in cases of labor accidents;

"(d) Legal expenses, and expenses incurred in the administration of the insolvent’s estate for the
common interest of the creditors, when properly authorized and approved by the court;

"(e) Debts, taxes, and assessments due the Insular Government;

"(f) Debts, taxes, and assessments due to any province or provinces of the Philippine Islands;

"(g) Debts, taxes, and assessments due to any municipally or municipalities of the Philippine Islands;

"All other creditors shall be paid pro rata." (As amended by Act No. 3962.)

"ART. 52. . . . The provisions of this Act shall not apply to corporations engaged principally in the banking
business, or to any other corporation as to which there is any special provision of law for its liquidation
in case of insolvency."cralaw virtua1aw library

It appears that even after the enactment of the Insolvency Law there was no law in this jurisdiction
governing the order or preference of credits in cases of insolvency and liquidation of a bank. But the
Philippine Legislature subsequently enacted Act No. 3519, amending various sections of the Revised
Administrative Code, which took effect on February 20, 1929, and section 1641 of this latter Code, as
amended by said Act, provides:jgc:chanrobles.com.ph

"SEC. 1641. Distribution of assets. — In the case of the liquidation of a bank or banking institution, after
payment of the costs of the proceedings, including reasonable expenses, commissions and fees of the
Bank Commissioner, to be allowed by the court, the Bank Commissioner shall pay the debts of the
institution, under decree of the court in the order of their legal priority."cralaw virtua1aw library

From this section 1641 we deduce that the intention of the Philippine Legislature, in providing that the
Bank Commissioner shall pay the debts of the company by virtue of an order of the court in the order of
their legal priority, was to enforce the provisions of sections 48, 49 and 50 of the Insolvency Law in the
sense that they are made applicable to cases of insolvency or bankruptcy and liquidation of banks. No
other deduction can be made from the phrase "in the order of their legal priority" employed by the law,
for there being no law establishing any priority in the order of payment of credits, the legislature could
not reasonably refer to any legislation upon the subject, unless the interpretation above stated is
accepted.

Examining now the claims of the appellant, it appears that none of them falls under any of the cases
specified by sections 48, 49 and 50 of the Insolvency Law; wherefore, we conclude that the appellant’s
claims, consisting of his current and savings accounts, are not preferred credits.

3. The commissioner set off the claims of the appellant against what the bank had against him. The court
approved this set off over the objection of the appellant. The appellees contend that the set of does not
lie in this case because otherwise it would prejudice them and the other creditors in the liquidation. We
hold that the court’s ruling is not error. "It may be stated as a general rule that when a depositor is
indebted to a bank, and the debts are mutual — that is, between the same parties and in the same right
— the bank may apply the deposit, or such portion thereof as may be necessary, to the payment of the
debt due it by the depositor, provided there is no express agreement to the contrary and the deposit is
not specifically applicable to some other particular purpose." (7 Am. Jur., par. 629, p. 455; United States
v. Butterworth-Judson Corp., 267 U. S., 387; National Bank v. Morgan, 207 Ala., 65; Bank of Guntersville
v. Crayter, 199 Ala., 599; Tatum v. Commercial Bank & T. Co., 193 Ala., 120; Desha Bank & T. Co. v.
Quilling, 118 Ark., 114; Holloway v. First Nat. Bank, 45 Idaho, 746; Wyman v. Ft. Dearborn Nat. Bank, 181
Ill., 279; Niblack v. Park Nat. Bank, 169 Ill., 517; First Nat. Bank v. Stapf., 165 Ind., 162; Bedford Bank v.
Acoam, 125 Ind., 584.) The situation referred to by the appellees is inevitable because section 1639 of
the ’Revised Administrative Code, as amended by Act No. 3519, provides that the Bank Commissioner
shall reduce the assets of the bank into cash and this cannot be done without first liquidating
individually the accounts of the debtors of said bank, and in making this individual liquidation the
debtors are entitled to set off, by way of compensation, their claims against the bank.

4. The court held that the appellant is not entitled to charge interest on the amounts of his claims, and
this is the object of the second assignment of error. Upon this point a distinction must be made between
the interest which the deposits should earn from their existence until the bank ceased to operate, and
that which they may earn from the time the bank’s operations were stopped until the date of payment
of the deposits. As to the first class, we hold that it should be paid because such interest has been
earned in the ordinary course of the bank’s business and before the latter has been declared in a state
of liquidation. Moreover, the bank being authorized by law to make use of the deposits, with the
limitation stated, to invest the same in its business and other operations, it may be presumed that it
bound itself to pay interest to the deposits as in fact it paid interest prior to the dates of the said claims.
As to the interest which may be charged from the date the bank ceased to do business because it was
declared in a state of liquidation, we held that the said interest should not be paid. Under articles 1101
and 1108 of the Civil Code, interest is allowed by way of indemnity for damages suffered, in the cases
wherein the obligation consists in the payment of money. In view of this, we hold that in the absence of
any express law or of any applicable provision of the Code of Commerce, it is not proper to pay this last
kind of interest to the appellant upon his deposits in the bank, for this would be anomalous and
unjustified in a liquidation or insolvency of a bank. This rule should be strictly observed in the instant
case because it is understood that the assets should be prorated among all the creditors as they are
insufficient to pay all the obligations of the bank.

5. The last assignment of error has to do with the denial by the court of the claimant’s motion for new
trial. No new arguments have been made in its support and it appears that the assigned error was
inserted as a mere corollary of the preceding ones.

In view of all the foregoing considerations, we affirm the part of the appealed decision for the reason
stated herein, and it is ordered that the net claim of the appellant, amounting to P13,611.21, is an
ordinary and not a preferred credit, and that he is entitled to charge interest on the said amount up to
September 19, 1931, without special pronouncement as to the costs. So ordered.

Avanceña, C.J., Villa-Real, Abad Santos, Diaz and Horrilleno, JJ., concur.