Bañas vs. Asia Pacific Corp.

, 343 SCRA 527 October 18, 2000 TEODORO BAÑAS,*

C. G. DIZON CONSTRUCTION, INC., and CENEN DIZON, petitioners, versus ASIA
PACIFICFINANCE CORPORATION substituted by INTERNATIONAL CORPORATE BANK now known as
UNIONBANK OF THE PHILIPPINES, respondent. Facts: Asia Pacific filed a complaint for a sum of money
with prayer for a writ of replevin against Teodoro Bañas,C.G. Dizon Construction Inc. and Cenen Dizon. Bañas
executed a promissory note in favor of C.G. Dizon Construction. Later C. G. Dizon Construction endorsed with
recourse the promissory note to Asia Pacific and to secure payment thereof, C.G. Dizon through its corporate
officers executed a Deed of Chattel Mortgage covering three heavy equipment units of Caterpillar Bulldozer
Crawler Tractors in favor of Asia Pacific. Moreover Cenen Dizon executed a Continuing Undertaking wherein
he bound himself to pay the obligation jointly and severally with C.G. Dizon Construction. In compliance with
the provision of the promissory note, C.G. Dizon construction made payments by way of Installments to Asia
Pacific, However C.G. Dizon Construction defaulted in the payment of the remaining installments, prompting
Asia Pacific to send a statement of account to Cenen Dizon for the unpaid balance. As the demand was unheeded,
Asia Pacific sued Teodoro Bañas, C.G. DizonConstruction Inc. and Cenen DizonTeodoro Bañas, C.G. Dizon
Construction Inc. and Cenen Dizon admitted the genuineness and due execution of the Promissory Note, Deed of
Chattel Mortgage and the Continuing Undertaking, they nevertheless maintained that these legal documents we
never intended to be legal valid and binding but a mere subterfuge to conceal the loan with usurious interest.
Defendants claimed that since Asia Pacific could not directly engage in banking business, it propose to them a
scheme wherein Asia Pacific could extend a loan to them without violating banking laws : first, Cenen Dizon
would secure a promissory note from Teodoro Bañas with a face value of P390,000.00 payable in installments;
second, ASIA PACIFIC would then make it appear that the promissory note was sold to it by Cenen Dizon with
the 14% usurious interest on the loan or P54,000.00 discounted and collected in advance by ASIA PACIFIC; and,
lastly, Cenen Dizon would provide sufficient collateral to answer for the loan in case of default in payment and
execute a continuing guaranty to assure continuous and prompt payment of the loan. Sometime in October 1980
Cenen Dizon informed ASIAPACIFIC that he would be delayed in meeting his monthly amortization on account
of business reverses and promised to pay instead in February 1981. Cenen

Dizon made good his promise and tendered payment to ASIA PACIFIC in an amount equivalent to two (2)
monthly amortizations. But ASIA PACIFIC attempted to impose a 3% interest for every month of delay, which
he flatly refused to pay for being usurious. Afterwards, ASIA PACIFIC allegedly made a verbal proposal to Cenen
Dizon to surrender to it the ownership of the two (2) bulldozer crawler tractors and, in turn, the latter would treat
the former’s account as closed and the loan fully paid. Cenen Dizon supposedly agreed and accepted the offer.
Defendants averred that the value of the bulldozer crawler tractors was more than adequate to cover their
obligation to ASIA PACIFIC. Meanwhile, on 21 April 1981 the trial court issued a writ of replevin against
defendant C. G. Dizon Construction for the surrender of the bulldozer crawler tractors subject of the Deed of
Chattel Mortgage. Of the three (3) bulldozer crawler tractors, only two (2) were actually turned over by defendants
which units were subsequently foreclosed by ASIA PACIFIC to satisfy the obligation. On 25 September 1992
the Regional Trial Court ruled in favor of ASIA PACIFIC holding the defendants jointly and severally liable for
the unpaid balance of the obligation under the Promissory Note. The Court of Appeals affirmed in toto the
decision of the trial court. Issue: Whether the disputed transaction between petitioners and Asia Pacific violated
banking laws, hence null and void. Held: The Supreme Court ruled and said that an investment company refers
to any insurer which is or holds itself out as being engaged or proposes to engage primarily in the business of
investing, reinvesting or trading in securities. As defined in Section 2 paragraph (a) of the Revised Securities Act
, securities shall include commercial papers evidencing indebtedness of any person, financial or non financial
entity, irrespective of maturity, issued , endorsed, sold , transferred or in any manner conveyed to another with or
without recourse such as promissory notes. Clearly the transaction between petitioners and respondent was one
involving not a loan but a purchase of receivables at a discount well within the purview of investing, reinvesting
or trading in securities which an investment company like the Asia Pacific is authorized to perform and does not
constitute a violation of the General Banking Act. Moreover Section 2 of the General Banking Act
provides:―Only entities duly authorized by the Monetary Board of the Central Bank may engage in the lending
of funds obtained from the public through the receipt of deposits of any kind and all entities regularly conducting
such operations shall be considered as banking institutions and shall be subject to the provisions of this Act, of
the Central Bank Act and of other pertinent laws. ―Indubitably, what is prohibited by law is for investment
companies to lend funds obtained from the public through receipts of deposits which is a function of banking
institutions. But in the case at bar the funds supposedly ―lent‖ to petitioners have not been shown to have been
obtained from the public by way of deposits hence the applicability of banking laws.

FIRST PLANTERS PAWNSHOP v.CIR

July 30, 2008 Austria-Martinez

SUMMARY:
First Planters Pawnshop was assessed deficiency VATand DST. It argued that it is not a lending investor within
the purviewof Section 108(A) of the NIRC and therefore not subject to VAT. TheSC ruled that it is not liable
for VAT.
DOCTRINE:
Since First Planters is a non-bank financial intermediary,it is subject to 10% VAT for the tax years 1996 to
2002; however, withthe levy, assessment and collection of VAT from non-bank financialintermediaries being
specifically deferred by law, then First Plantersis not liable for VAT during these tax years. But with the
fullimplementation of the VAT system on non-bank financialintermediaries starting January 1, 2003, First
Planters is liable for10% VAT for said tax year. And beginning 2004 up to the present, byvirtue of R.A. No.
9238, First Planters is no longer liable for VAT but itis subject to percentage tax on gross receipts from 0% to 5
%, as thecase may be.
FACTS:
Petitioner First Planters Pawnshop received a Formal AssessmentNotice directing payment of VAT deficiency
and documentary stamp tax(DST) deficiency, inclusive of surcharge and interest for the year 2000.
ARGUMENT OF FIRST PLANTERS:
(1) it is not a lending investor within the purview of Section 108(A) ofthe NIRC and therefore not subject to
VAT(2) a pawn ticket is not subject to DST because it is not proof of thepledge transaction, and even assuming
that it is so, it is not subject totax since a documentary stamp tax is levied on the document issuedand not on the
transaction.
ISSUES:
1. W/N liable for VAT
2. W/N liable for documentary stamp tax - YES
RULING:
Yes, the contactor’s tax on Gotamco constitutes an indirect tax on WHO and is covered by the exemption
enjoyed by WHO.

RATIO:
 Liability for VAT: First Planters is NOT liable for VAT
The determination of tax liability depends on the tax treatment of apawnshop business. Pawnshops should have
been treated as non-bankfinancial intermediaries from the very beginning, subject to theappropriate taxes
provided by law.At the time of the disputed assessment (around 2000), pawnshops were not subject to 10%
VAT under the general provision on “sale orexchange of services” as defined under Section 108(A). Instead,
due to the specific nature of its business, pawnshops were then subject to 10%VAT under the category of non-
bank financial intermediaries, asprovided in the same Section 108(A), which reads:
SEC. 108. Value-added Tax on Sale of Services and Use or Leaseof Properties. –
A) xx
The phrase “sale or exchange of services” means the performanceof all kinds or services in the
Philippines for others for a fee,remuneration or consideration, including x x x services of banks,non-
bank financial intermediaries and finance companies; andnon-life insurance companies (except their
crop insurances),including surety, fidelity, indemnity and bonding companies..xx
Since First Planters is a non-bank financial intermediary, it is subject to10% VAT for the tax years 1996 to
2002; however, with the levy,assessment and collection of VAT from non-bank financialintermediaries being
specifically deferred by law, then First Planters is not liable for VAT during these tax years. But with the
fullimplementation of the VAT system on non-bank financialintermediaries starting January 1, 2003, First
Planters is liable for 10%VAT for said tax year. And beginning 2004 up to the present, by virtueof R.A. No.
9238, First Planters is no longer liable for VAT but it issubject to percentage tax on gross receipts from 0% to 5
%, as the casemay be.

Liability for DST: First Planters is liable for DST

Applying jurisprudence, the subject of DST is not limited to thedocument alone. Pledge, which is an exercise of
a privilege to transferobligations, rights or properties incident thereto, is also subject to DST,thus
–

xx.. the subject of a DST is not limited to the documentembodying the enumerated transactions. A DST
is an excise taxon the exercise of a right or privilege to transfer obligations, rights or properties incident
thereto… xx

Pledge is among the privileges, the exercise of which is subject to DST.A pledge may be defined as an
accessory, real and unilateral contract byvirtue of which the debtor or a third person delivers to the creditor orto
a third person movable property as security for the performance ofthe principal obligation, upon the fulfillment
of which the thingpledged, with all its accessions and accessories, shall be returned to thedebtor or to the
third person.True, the law does not consider said ticket as an evidence of security orindebtedness. However, for
purposes of taxation, the same pawn ticketis proof of an exercise of a taxable privilege of concluding a contract
of pledge. At any rate, it is not said ticket that creates the pawnshop’s obligation to pay DST but the exercise of
the privilege to enter into acontract of pledge. There is therefore no basis in petitioner’s assertion that a DST is
literally a tax on a document and that no tax may beimposed on a pawn ticket.Also, Section 195 of the NIRC
unqualifiedly subjects all pledges to DST.
It states that “[o]n every xxx pledge xxx there shall be collected adocumentary stamp tax xxx.” It is clear,
categorical, and needs no further interpretation or construction.In the instant case, there is no law specifically
and expressly exemptingpledges entered into by pawnshops from the payment of DST. Section199 of the NIRC
enumerated certain documents which are not subjectto stamp tax; but a pawnshop ticket is not one of them.
Hence,petitioner’s nebulous claim that it is not subject to DST is without merit.
DISPOSITIVE:
First Planters is liable not liable for VAT but liable forDST.

Sec. 8.2, GBL

The Monetary Board may authorize the organization of a bank or quasi-bank subject to the following conditions:
8.1. That the entity is a stock corporation (7);
8.2. That its funds are obtained from the public, which shall mean twenty (20) or more persons (2-Da);

8.3. That the minimum capital requirements prescribed by the Monetary Board for each category of banks
are satisfied.

Section 95, NCBA

SEC. 95. Definition of Deposit Substitutes. _ The term "deposit substitutes" is defined as an alternative form of
obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt
instruments for the borrower's own account, for the purpose of relending or purchasing of receivables and other
obligations. These instruments may include, but need not be limited to, bankers acceptances, promissory notes,
participations, certificates of assignment and similar instruments with recourse, and repurchase agreements. The
Monetary Board shall determine what specific instruments shall be considered as deposit substitutes for the
purposes of Section 94 of this Act: Provided, however, That deposit substitutes of commercial, industrial and
other nonfinancial companies issued for the limited purpose of financing their own needs or the needs of their
agents or dealers shall not be covered by the provisions of Section 94 of this Act.

SECTION 6 PART 1 & 2

No person or entity shall engage in banking operations or quasi-banking functions without authority from the
Bangko Sentral: .Provided, however, that an entity authorized by the Bangko Sentral to perform universal or
commercial banking functions shall likewise have the authority to engage in quasi-banking functions.

The determination of whether a person or entity is performing banking or quasi-banking functions without Bangko
Sentral authority shall be decided by the Monetary Board. To resolve such issue, the Monetary Board may;
through the appropriate supervising and examining department of the Bangko Sentral, examine, inspect or
investigate the books and records of such person or entity. Upon issuance of this authority, such person or entity
may commence to engage in banking operations or quasi-banking function and shall continue to do so unless such
authority is sooner surrendered, revoked, suspended or annulled by the Bangko Sentral in accordance with this
Act or other special laws.

SECTION 2. Declaration Of Policy

The State recognizes the vital role of banks providing an environment conducive to the sustained development of
the national economy and the fiduciary nature of banking that requires high standards of integrity and
performance. In furtherance thereof, the State shall promote and maintain a stable and efficient banking and
financial system that is globally competitive, dynamic and responsive to the demands of a developing economy.

Simex International (Manila), Inc. vs. CA, 183 SCRA 360 G.R. No. 88013 March 19, 1990
SIMEX INTERNATIONAL vs. THE HONORABLE COURT BANK, respondents.

(MANILA), OF APPEALS INCORPORATED, petitioner, and TRADERS ROYAL

Facts: The petitioner was a depositor of the respondent bank and maintained a checking account in its branch at
Romulo Avenue, Cubao, Quezon City. On May 25, 1981, the petitioner deposited to its account in the said bank
the amount of P100,000.00, thus increasing its balance as of that date to P190,380.74. 1 Subsequently, the
petitioner issued several checks against its deposit but was suprised to learn later that they had been dishonored
for insufficient funds. As a consequence, the California Manufacturing Corporation sent on June 9, 1981, a letter
of demand to the petitioner, threatening prosecution if the dishonored check issued to it was not made good. It
also withheld delivery of the order made by the petitioner. The petitioner complained to the respondent bank on
June 10, 1981. 3 Investigation disclosed that the sum of P100,000.00 deposited by the petitioner on May 25, 1981,
had not been credited to it. The error was rectified on June 17, 1981, and the dishonored checks were paid after
they were redeposited. In its letter dated June 20, 1981, the petitioner demanded reparation from the respondent
bank for its "gross and wanton negligence." This demand was not met. The petitioner then filed a complaint in
the then Court of First Instance of Rizal claiming from the private respondent moral damages in the sum of
P1,000,000.00 and exemplary damages in the sum of P500,000.00, plus 25% attorney's fees, and costs. After trial,
Judge Johnico G. Serquinia rendered judgment holding that moral and exemplary damages were not called for
under the circumstances. However, observing that the plaintiff's right had been violated, he ordered the defendant
to pay nominal damages This decision was affirmed in toto by the respondent court. Issue: Whether or not that
the private respondent was guilty of negligence.

Held: This Court has carefully examined the facts of this case and finds that it cannot share some of the
conclusions of the lower courts. It seems to us that the negligence of the private respondent had been brushed off
rather lightly as if it were a minor infraction requiring no more than a slap on the wrist The respondent bank has
not even explained why it was committed at all. It is true that the dishonored checks were, as the Court of Appeals
put it, "eventually" paid. However, this took almost a month when, properly, the checks should have been paid
immediately upon presentment. As the Court sees it, the initial carelessness of the respondent bank, aggravated
by the lack of promptitude in repairing its error, justifies the grant of moral damages. We shall recognize that the
petitioner did suffer injury because of the private respondent's negligence that caused the dishonor of the checks
issued by it. The immediate consequence was that its prestige was impaired because of the bouncing checks and
confidence in it as a reliable debtor was diminished. The private respondent makes much of the one instance when
the petitioner was sued in a collection case, but that did not prove that it did not have a good reputation that could
not be marred, more so since that case was ultimately settled. After deliberating on this particular matter, the
Court, in the exercise of its discretion, hereby imposes upon the respondent bank exemplary damages in the
amount of P50,000.00, "by way of example or correction for the public good," in the words of the law. It is
expected that this ruling will serve as a warning and deterrent against the repetition of the ineptness and
indefference that has been displayed here, lest the confidence of the public in the banking system be further
impaired. ACCORDINGLY, the appealed judgment is hereby MODIFIED and the private respondent is ordered
to pay the petitioner, in lieu of nominal damages, moral damages in the amount of P20,000.00, and exemplary
damages in the amount of P50,000.00 plus the original award of attorney's fees in the amount of P5,000.00, and
costs.

CENTRAL BANK VS COURT OF APPEALS

G.R. No. L-45710 October 3, 1985

CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF
THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory receiver
of Island Savings Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.

I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.

Antonio R. Tupaz for private respondent.

MAKASIAR, CJ.:

This is a petition for review on certiorari to set aside as null and void the decision of the Court of Appeals, in
C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the decision dated February 15, 1972 of the Court
of First Instance of Agusan, which dismissed the petition of respondent Sulpicio M. Tolentino for injunction,
specific performance or rescission, and damages with preliminary injunction.

On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department, approved the
loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan, executed on the same
day a real estate mortgage over his 100-hectare land located in Cubo, Las Nieves, Agusan, and covered by TCT
No. T-305, and which mortgage was annotated on the said title the next day. The approved loan application called
for a lump sum P80,000.00 loan, repayable in semi-annual installments for a period of 3 years, with 12% annual
interest. It was required that Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to
develop his other property into a subdivision.

On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank; and Sulpicio
M. Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at 12% annual interest,
payable within 3 years from the date of execution of the contract at semi-annual installments of P3,459.00 (p. 64,
rec.). An advance interest for the P80,000.00 loan covering a 6-month period amounting to P4,800.00 was
deducted from the partial release of P17,000.00. But this pre-deducted interest was refunded to Sulpicio M.
Tolentino on July 23, 1965, after being informed by the Bank that there was no fund yet available for the release
of the P63,000.00 balance (p. 47, rec.). The Bank, thru its vice-president and treasurer, promised repeatedly the
release of the P63,000.00 balance (p. 113, rec.).

On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was suffering
liquidity problems, issued Resolution No. 1049, which provides:
 In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit liabilities,
the Board, by unanimous vote, decided as follows:

1) To prohibit the bank from making new loans and investments [except investments in
government securities] excluding extensions or renewals of already approved loans, provided that
such extensions or renewals shall be subject to review by the Superintendent of Banks, who may
impose such limitations as may be necessary to insure correction of the bank's deficiency as soon
as possible;

xxx xxx xxx

(p. 46, rec.).

On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up the required capital
to restore its solvency, issued Resolution No. 967 which prohibited Island Savings Bank from doing business in
the Philippines and instructed the Acting Superintendent of Banks to take charge of the assets of Island Savings
Bank (pp. 48-49, rec).

On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the promissory
note, filed an application for the extra-judicial foreclosure of the real estate mortgage covering the 100-hectare
land of Sulpicio M. Tolentino; and the sheriff scheduled the auction for January 22, 1969.

On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan for
injunction, specific performance or rescission and damages with preliminary injunction, alleging that since Island
Savings Bank failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is entitled to specific
performance by ordering Island Savings Bank to deliver the P63,000.00 with interest of 12% per annum from
April 28, 1965, and if said balance cannot be delivered, to rescind the real estate mortgage (pp. 32-43, rec.).

On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary restraining
order enjoining the Island Savings Bank from continuing with the foreclosure of the mortgage (pp. 86-87, rec.).

On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of the petition
of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the Central Bank and by the Acting
Superintendent of Banks (pp. 65-76, rec.).

On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding unmeritorious the
petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the amount of PI 7 000.00 plus legal
interest and legal charges due thereon, and lifting the restraining order so that the sheriff may proceed with the
foreclosure (pp. 135-136. rec.

On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court of First
Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for specific performance, but it
ruled that Island Savings Bank can neither foreclose the real estate mortgage nor collect the P17,000.00 loan pp.
30-:31. rec.).

Hence, this instant petition by the central Bank.

The issues are:

1. Can the action of Sulpicio M. Tolentino for specific performance prosper?

2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory note?

3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate mortgage
be foreclosed to satisfy said amount?

When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April 28,
1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or promise of each party is
the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs, Pelarca 29
SCRA 1 [1969]); and when one party has performed or is ready and willing to perform his part of the contract,
the other party who has not performed or is not ready and willing to perform incurs in delay (Art. 1169 of the
Civil Code). The promise of Sulpicio M. Tolentino to pay was the consideration for the obligation of Island
Savings Bank to furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on
April 28, 1965, he signified his willingness to pay the P80,000.00 loan. From such date, the obligation of Island
Savings Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan started
on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the Central Bank issued
Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank from doing further business. Such
prohibition made it legally impossible for Island Savings Bank to furnish the P63,000.00 balance of the
P80,000.00 loan. The power of the Monetary Board to take over insolvent banks for the protection of the public
is recognized by Section 29 of R.A. No. 265, which took effect on June 15, 1948, the validity of which is not in
question.

The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island Savings Bank in
complying with its obligation of releasing the P63,000.00 balance because said resolution merely prohibited the
Bank from making new loans and investments, and nowhere did it prohibit island Savings Bank from releasing
the balance of loan agreements previously contracted. Besides, the mere pecuniary inability to fulfill an
engagement does not discharge the obligation of the contract, nor does it constitute any defense to a decree of
specific performance (Gutierrez Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of
insolvency of a debtor is never an excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach
of the contract by him (vol. 17A, 1974 ed., CJS p. 650)

The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest amounting to
P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be taken as a waiver of his right
to collect the P63,000.00 balance. The act of Island Savings Bank, in asking the advance interest for 6 months on
the supposed P80,000.00 loan, was improper considering that only P17,000.00 out of the P80,000.00 loan was
released. A person cannot be legally charged interest for a non-existing debt. Thus, the receipt by Sulpicio M.
'Tolentino of the pre-deducted interest was an exercise of his right to it, which right exist independently of his
right to demand the completion of the P80,000.00 loan. The exercise of one right does not affect, much less
neutralize, the exercise of the other.

The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot exempt it from
complying with its reciprocal obligation to furnish the entire P80,000.00 loan. 'This Court previously ruled that
bank officials and employees are expected to exercise caution and prudence in the discharge of their functions
(Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]). It is the obligation of the bank's officials and
employees that before they approve the loan application of their customers, they must investigate the existence
and evaluation of the properties being offered as a loan security. The recent rush of events where collaterals for
bank loans turn out to be non-existent or grossly over-valued underscore the importance of this responsibility.
The mere reliance by bank officials and employees on their customer's representation regarding the loan collateral
being offered as loan security is a patent non-performance of this responsibility. If ever bank officials and
employees totally reIy on the representation of their customers as to the valuation of the loan collateral, the bank
shall bear the risk in case the collateral turn out to be over-valued. The representation made by the customer is
immaterial to the bank's responsibility to conduct its own investigation. Furthermore, the lower court, on
objections of' Sulpicio M. Tolentino, had enjoined petitioners from presenting proof on the alleged over-valuation
because of their failure to raise the same in their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971). The lower court's
action is sanctioned by the Rules of Court, Section 2, Rule 9, which states that "defenses and objections not
pleaded either in a motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise the same
issue before the Supreme Court.

Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan agreement, Sulpicio
M. Tolentino, under Article 1191 of the Civil Code, may choose between specific performance or rescission with
damages in either case. But since Island Savings Bank is now prohibited from doing further business by Monetary
Board Resolution No. 967, WE cannot grant specific performance in favor of Sulpicio M, Tolentino.

Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the P63,000.00 balance
of the P80,000.00 loan, because the bank is in default only insofar as such amount is concerned, as there is no
doubt that the bank failed to give the P63,000.00. As far as the partial release of P17,000.00, which Sulpicio M.
Tolentino accepted and executed a promissory note to cover it, the bank was deemed to have complied with its
reciprocal obligation to furnish a P17,000.00 loan. The promissory note gave rise to Sulpicio M. Tolentino's
reciprocal obligation to pay the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations
under the promissory note made him a party in default, hence not entitled to rescission (Article 1191 of the Civil
Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved party, that is, Island
Savings Bank. If Tolentino had not signed a promissory note setting the date for payment of P17,000.00 within 3
years, he would be entitled to ask for rescission of the entire loan because he cannot possibly be in default as there
was no date for him to perform his reciprocal obligation to pay.

Since both parties were in default in the performance of their respective reciprocal obligations, that is, Island
Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M. Tolentino failed to
comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated, they are both liable for
damages.

Article 1192 of the Civil Code provides that in case both parties have committed a breach of their reciprocal
obligations, the liability of the first infractor shall be equitably tempered by the courts. WE rule that the liability
of Island Savings Bank for damages in not furnishing the entire loan is offset by the liability of Sulpicio M.
Tolentino for damages, in the form of penalties and surcharges, for not paying his overdue P17,000.00 debt. The
liability of Sulpicio M. Tolentino for interest on his PI 7,000.00 debt shall not be included in offsetting the
liabilities of both parties. Since Sulpicio M. Tolentino derived some benefit for his use of the P17,000.00, it is
just that he should account for the interest thereon.
WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely foreclosed to satisfy
his P 17,000.00 debt.

The consideration of the accessory contract of real estate mortgage is the same as that of the principal contract
(Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the consideration of his obligation to pay is the
existence of a debt. Thus, in the accessory contract of real estate mortgage, the consideration of the debtor in
furnishing the mortgage is the existence of a valid, voidable, or unenforceable debt (Art. 2086, in relation to Art,
2052, of the Civil Code).

The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was then in
existence, as there was no debt yet because Island Savings Bank had not made any release on the loan, does not
make the real estate mortgage void for lack of consideration. It is not necessary that any consideration should pass
at the time of the execution of the contract of real mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may
either be a prior or subsequent matter. But when the consideration is subsequent to the mortgage, the mortgage
can take effect only when the debt secured by it is created as a binding contract to pay (Parks vs, Sherman, Vol.
176 N.W. p. 583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of
consideration, the mortgage becomes unenforceable to the extent of such failure (Dow. et al. vs. Poore, Vol. 172
N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p. 138). Where the indebtedness actually owing to the holder of the
mortgage is less than the sum named in the mortgage, the mortgage cannot be enforced for more than the actual
sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in 5th ed., Wiltsie on Mortgage, Vol.
1, P. 180).

Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real estate
mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00,
hence the real estate mortgage covering 100 hectares is unenforceable to the extent of 78.75 hectares. The
mortgage covering the remainder of 21.25 hectares subsists as a security for the P17,000.00 debt. 21.25 hectares
is more than sufficient to secure a P17,000.00 debt.

The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is inapplicable
to the facts of this case.

Article 2089 provides:

A pledge or mortgage is indivisible even though the debt may be divided among the successors in
interest of the debtor or creditor.

Therefore, the debtor's heirs who has paid a part of the debt can not ask for the proportionate
extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.

Neither can the creditor's heir who have received his share of the debt return the pledge or cancel
the mortgage, to the prejudice of other heirs who have not been paid.

The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several heirs of
the debtor or creditor which does not obtain in this case. Hence, the rule of indivisibility of a mortgage cannot
apply
WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS HEREBY
MODIFIED, AND

1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN PETITIONERS

THE SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST PER ANNUM COVERING
THE PERIOD FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12% INTEREST ON THE TOTAL
AMOUNT COUNTED FROM AUGUST 22, 1985 UNTIL PAID;

2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE COVERING
21.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL INDEBTEDNESS; AND

3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED UNEN
FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M. TOLENTINO.

NO COSTS. SO ORDERED.

Concepcion, Jr., Escolin, Cuevas and Alampay, JJ., concur.

Aquino (Chairman) and Abad Santos, JJ., took no part.

SECTION 22. Strikes and Lockouts.

The banking industry is hereby declared as indispensable to the national interest and, notwithstanding the
provisions of any law to the contrary, any strike or lockout involving banks, if unsettled after seven (7) calendar
days shall be reported by the Bangko Sentral to the secretary of Labor who may assume jurisdiction over the
dispute or decide it or certify the sane to the National Labor Relations Commission for compulsory arbitration.
However, the President of the Philippines may at any time intervene and assume jurisdiction over such labor
dispute in order to settle or terminate the same. (6-E)

BANK OF THE PHIL ISLANDS VS INTERMEDIATE APPELLATE COURT

G.R. No. 69162 February 21, 1992

BANK OF THE PHILIPPINE ISLANDS, petitioner,

vs.
THE INTERMEDIATE APPELLATE COURT and the SPOUSES ARTHUR CANLAS and VIVIENE
CANLAS,respondents.

Leonen, Ramirez & Associates for petitioner.

L. Emmanuel B. Canilao for private respondents.

GRIÑO-AQUINO, J.:

In a decision dated September 3, 1984, the Intermediate Appellate Court (now Court of Appeals) in AC-G.R.
CV No. 69178 entitled, "Arthur A. Canlas, et al., Plaintiff-Appellees vs. Commercial Bank and Trust Company
of the Philippines, Defendant-Appellant," reduced to P105,000 the P465,000 damage-award of the trial court to
the private respondents for an error of a bank teller which resulted in the dishonor of two small checks which
the private respondents had issued against their joint current account. This petition for review of that decision
was filed by the Bank.

The respondent spouses, Arthur and Vivienne Canlas, opened a joint current account No. 210-520-73 on April
25, 1977 in the Quezon City branch of the Commercial Bank and Trust Company of the Philippines (CBTC)
with an initial deposit of P2,250. Prior thereto, Arthur Canlas had an existing separate personal checking
account No. 210-442-41 in the same branch.

When the respondent spouses opened their joint current account, the "new accounts" teller of the bank pulled
out from the bank's files the old and existing signature card of respondent Arthur Canlas for Current Account
No. 210-442-41 for use as I D and reference. By mistake, she placed the old personal account number of Arthur
Canlas on the deposit slip for the new joint checking account of the spouses so that the initial deposit of P2,250
for the joint checking account was miscredited to Arthur's personal account (p. 9, Rollo). The spouses
subsequently deposited other amounts in their joint account.

However, when respondent Vivienne Canlas issued a check for Pl,639.89 in April 1977 and another check for
P1,160.00 on June 1, 1977, one of the checks was dishonored by the bank for insufficient funds and a penalty of
P20 was deducted from the account in both instances. In view of the overdrawings, the bank tried to call up the
spouses at the telephone number which they had given in their application form, but the bank could not contact
them because they actually reside in Porac, Pampanga. The city address and telephone number which they gave
to the bank belonged to Mrs. Canlas' parents.

On December 15, 1977, the private respondents filed a complaint for damages against CBTC in the Court of
First Instance of Pampanga (p. 113, Rollo).

On February 27, 1978, the bank filed a motion to dismiss the complaint for improper venue. The motion was
denied.

During the pendency of the case, the Bank of the Philippine Islands (BPI) and CBTC were merged. As the
surviving corporation under the merger agreement and under Section 80 (5) of the Corporation Code of the
Philippines, BPI took over the prosecution and defense of any pending claims, actions or proceedings by and
against CBTC.

On May 5, 1981, the Regional Trial Court of Pampanga rendered a decision against BPI, the dispositive portion
of which reads:

WHEREFORE, judgment is hereby rendered sentencing defendant to pay the plaintiff the
following:

1. P 5,000.00 as actual damages;

 2. P 150,000.00 for plaintiff Arthur Canlas and P150,000.00 for plaintiff Vivienne S. Canlas
representing moral damages;

3. P 150.000.00 as exemplary damages;

4. P 10,000.00 as attorney's fees; and

5. Costs. (p. 36, Rollo).

On appeal, the Intermediate Appellate Court deleted the actual damages and reduced the other awards. The
dispositive portion of its decision reads:

WHEREFORE, the judgment appealed from is hereby modified as follows:

1. The award of P50,000.00 in actual damages is herewith deleted.

2. Moral damages of P50,000.00 is awarded to plaintiffs-appellees Arthur Canlas and Vivienne

S. Canlas, not P50,000.00 each.

3. Exemplary damages is likewise reduced to the sum of P50,000.00 and attorney's fees to
P5,000.00.

Costs against the defendants appellant. (p. 40, Rollo.)

Petitioner filed this petition for review alleging that the appellate court erred in holding that:

1. The venue of the case had been properly laid at Pampanga in the light of private respondents'
earlier declaration that Quezon City is their true residence.

2. The petitioner was guilty of gross negligence in the handling of private respondents' bank
account.

3. Private respondents are entitled to the moral and exemplary damages and attorney's fees
adjudged by the respondent appellate court.

On the question of venue raised by petitioner, it is evident that personal actions may be instituted in the Court of
First Instance (now Regional Trial Court) of the province where the defendant or any of the defendants resides
or may be found, or where the plaintiff or any of the plaintiffs resides, at the election of the plaintiff (Section
2[b], Rule 4 of the Rules of Court). In this case, there was ample proof that the residence of the plaintiffs is B.
Sacan, Porac, Pampanga (p. 117, Rollo). The city address of Mrs. Canlas' parents was placed by the private
respondents in their application for a joint checking account, at the suggestion of the new accounts teller,
presumably to facilitate mailing of the bank statements and communicating with the private respondents in case
any problems should arise involving the account. No waiver of their provincial residence for purposes of
determining the venue of an action against the bank may be inferred from the so-called "misrepresentation" of
their true residence.
The appellate court based its award of moral and exemplary damages, and attorney's fees on its finding that the
mistake committed by the new accounts teller of the petitioner constituted "serious" negligence (p. 38, Rollo).
Said court further stressed that it cannot absolve the petitioner from liability for damages to the private
respondents, even on the assumption of an honest mistake on its part, because of the embarrassment that even
an honest mistake can cause its depositors (p. 31, Rollo).

There is no merit in petitioner's argument that it should not be considered negligent, much less held liable for
damages on account of the inadvertence of its bank employee for Article 1173 of the Civil Code only requires it
to exercise the diligence of a good father of family.

In Simex International (Manila), Inc. vs. Court of Appeals (183 SCRA 360, 367), this Court stressed the
fiduciary nature of the relationship between a bank and its depositors and the extent of diligence expected of it
in handling the accounts entrusted to its care.

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

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

The bank is not expected to be infallible but, as correctly observed by respondent Appellate Court, in this
instance, it must bear the blame for not discovering the mistake of its teller despite the established procedure
requiring the papers and bank books to pass through a battery of bank personnel whose duty it is to check and
countercheck them for possible errors. Apparently, the officials and employees tasked to do that did not perform
their duties with due care, as may be gathered from the testimony of the bank's lone witness, Antonio Enciso,
who casually declared that "the approving officer does not have to see the account numbers and all those
things.Those are very petty things for the approving manager to look into" (p. 78, Record on Appeal).
Unfortunately, it was a "petty thing," like the incorrect account number that the bank teller wrote on the initial
deposit slip for the newly-opened joint current account of the Canlas spouses, that sparked this half-a-million-
peso damage suit against the bank.

While the bank's negligence may not have been attended with malice and bad faith, nevertheless, it caused
serious anxiety, embarrassment and humiliation to the private respondents for which they are entitled to recover
reasonable moral damages (American Express International, Inc. vs. IAC, 167 SCRA 209). The award of
reasonable attorney's fees is proper for the private respondents were compelled to litigate to protect their interest
(Art. 2208, Civil Code). However, the absence of malice and bad faith renders the award of exemplary damages
improper (Globe Mackay Cable and Radio Corp. vs. Court of Appeals, 176 SCRA 778).
WHEREFORE, the petition for review is granted. The appealed decision is MODIFIED by deleting the award
of exemplary damages to the private respondents. In all other respects, the decision of the Intermediate
Appellate Court, now Court of Appeals, is AFFIRMED. No costs.

SO ORDERED.

Narvasa, C.J., Cruz and Medialdea, JJ., concur.

PHILIPPINE BANKING CORPORATION VS COURT OF APPEALS

[G.R. No. 127469. January 15, 2004]
PHILIPPINE BANKING CORPORATION, petitioner, vs. COURT OF APPEALS and LEONILO
MARCOS, respondents.

DECISION
CARPIO, J.:

The Case

Before us is a petition for review of the Decision[1] of the Court of Appeals in CA-G.R. CV No. 34382 dated
10 December 1996 modifying the Decision[2] of the Regional Trial Court, Fourth Judicial Region, Assisting
Court, Bian, Laguna in Civil Case No. B-3148 entitled Leonilo Marcos v. Philippine Banking Corporation.

The Antecedent Facts

On 30 August 1989, Leonilo Marcos (Marcos) filed with the trial court a Complaint for Sum of Money with
Damages[3] against petitioner Philippine Banking Corporation (BANK).[4]
Marcos alleged that sometime in 1982, the BANK through Florencio B. Pagsaligan (Pagsaligan), one of the
officials of the BANK and a close friend of Marcos, persuaded him to deposit money with the BANK. Marcos
yielded to Pagsaligans persuasion and claimed he made a time deposit with the BANK on two occasions. The
first was on 11 March 1982 for P664,897.67. The BANK issued Receipt No. 635734 for this time deposit. On 12
March 1982, Marcos claimed he again made a time deposit with the BANK for P764,897.67. The BANK did not
issue an official receipt for this time deposit but it acknowledged a deposit of this amount through a letter-
certification Pagsaligan issued. The time deposits earned interest at 17% per annum and had a maturity period of
90 days.
Marcos alleged that Pagsaligan kept the various time deposit certificates on the assurance that the BANK
would take care of the certificates, interests and renewals. Marcos claimed that from the time of the deposit, he
had not received the principal amount or its interest.
 Sometime in March 1983, Marcos wanted to withdraw from the BANK his time deposits and the accumulated
interests to buy materials for his construction business. However, the BANK through Pagsaligan convinced
Marcos to keep his time deposits intact and instead to open several domestic letters of credit. The BANK required
Marcos to give a marginal deposit of 30% of the total amount of the letters of credit. The time deposits of Marcos
would secure 70% of the letters of credit. Since Marcos trusted the BANK and Pagsaligan, he signed blank printed
forms of the application for the domestic letters of credit, trust receipt agreements and promissory notes.
Marcos executed three Trust Receipt Agreements totalling P851,250, broken down as follows: (1) Trust
Receipt No. CD 83.7 dated 8 March 1983 for P300,000; (2) Trust Receipt No. CD 83.9 dated 15 March 1983
for P300,000; and (3) Trust Receipt No. CD 83.10 dated 15 March 1983 for P251,250. Marcos deposited the
required 30% marginal deposit for the trust receipt agreements. Marcos claimed that his obligation to the BANK
was therefore only P595,875 representing 70% of the letters of credit.
Marcos believed that he and the BANK became creditors and debtors of each other. Marcos expected the
BANK to offset automatically a portion of his time deposits and the accumulated interest with the amount covered
by the three trust receipts totalling P851,250 less the 30% marginal deposit that he had paid. Marcos argued that
if only the BANK applied his time deposits and the accumulated interest to his remaining obligation, which is
70% of the total amount of the letters of credit, he would have paid completely his debt. Marcos further pointed
out that since he did not apply for a renewal of the trust receipt agreements, the BANK had no right to renew the
same.
Marcos accused the BANK of unjustly demanding payment for the total amount of the trust receipt
agreements without deducting the 30% marginal deposit that he had already made.He decried the BANKs
unlawful charging of accumulated interest because he claimed there was no agreement as to the payment of
interest. The interest arose from numerous alleged extensions and penalties. Marcos reiterated that there was no
agreement to this effect because his time deposits served as the collateral for his remaining obligation.
Marcos also denied that he obtained another loan from the BANK for P500,000 with interest at 25% per
annum supposedly covered by Promissory Note No. 20-979-83 dated 24 October 1983. Marcos bewailed the
BANKs belated claim that his time deposits were applied to this void promissory note on 12 March 1985.
In sum, Marcos claimed that:
(1) his time deposit with the BANK in the total sum of P1,428,795.34[5] has earned accumulated interest since
March 1982 up to the present in the total amount of P1,727,305.45 at the rate of 17% per annum so his total
money with defendant (the BANK) is P3,156,100.79 less the amount of P595,875 representing the 70% balance
of the marginal deposit and/or balance of the trust agreements; and
(2) his indebtedness was only P851,250 less the 30% paid as marginal deposit or a balance of P595,875,
which the BANK should have automatically deducted from his time deposits and accumulated interest, leaving
the BANKs indebtedness to him at P2,560,025.79.
Marcos prayed the trial court to declare Promissory Note No. 20-979-83 void and to order the BANK to pay
the amount of his time deposits with interest. He also sought the award of moral and exemplary damages as well
as attorneys fees for P200,000 plus 25% of the amount due.
On 18 September 1989, summons and a copy of the complaint were served on the BANK.[6]
 On 9 October 1989, the BANK filed its Answer with Counterclaim. The BANK denied the allegations in the
complaint. The BANK believed that the suit was Marcos desperate attempt to avoid liability under several trust
receipt agreements that were the subject of a criminal complaint.
The BANK alleged that as of 12 March 1982, the total amount of the various time deposits of Marcos was
only P764,897.67 and not P1,428,795.35[7] as alleged in the complaint. TheP764,897.67 included
the P664,897.67 that Marcos deposited on 11 March 1982.
The BANK pointed out that Marcos delivered to the BANK the time deposit certificates by virtue of the Deed
of Assignment dated 2 June 1989. Marcos executed the Deed of Assignment to secure his various loan
obligations. The BANK claimed that these loans are covered by Promissory Note No. 20-756-82 dated 2 June
1982 for P420,000 and Promissory Note No. 20-979-83 dated 24 October 1983 for P500,000. The BANK stressed
that these obligations are separate and distinct from the trust receipt agreements.
When Marcos defaulted in the payment of Promissory Note No. 20-979-83, the BANK debited his time
deposits and applied the same to the obligation that is now considered fully paid.[8] The BANK insisted that the
Deed of Assignment authorized it to apply the time deposits in payment of Promissory Note No. 20-979-83.
In March 1982, the wife of Marcos, Consolacion Marcos, sought the advice of Pagsaligan. Consolacion
informed Pagsaligan that she and her husband needed to finance the purchase of construction materials for their
business, L.A. Marcos Construction Company. Pagsaligan suggested the opening of the letters of credit and the
execution of trust receipts, whereby the BANK would agree to purchase the goods needed by the client through
the letters of credit. The BANK would then entrust the goods to the client, as entrustee, who would undertake to
deliver the proceeds of the sale or the goods themselves to the entrustor within a specified time.
The BANK claimed that Marcos freely entered into the trust receipt agreements. When Marcos failed to
account for the goods delivered or for the proceeds of the sale, the BANK filed a complaint for violation of
Presidential Decree No. 115 or the Trust Receipts Law. Instead of initiating negotiations for the settlement of the
account, Marcos filed this suit.
The BANK denied falsifying Promissory Note No. 20-979-83. The BANK claimed that the promissory note
is supported by documentary evidence such as Marcos application for this loan and the microfilm of the cashiers
check issued for the loan. The BANK insisted that Marcos could not deny the agreement for the payment of
interest and penalties under the trust receipt agreements. The BANK prayed for the dismissal of the complaint,
payment of damages, attorneys fees and cost of suit.
On 15 December 1989, the trial court on motion of Marcos counsel issued an order declaring the BANK in
default for filing its answer five days after the 15-day period to file the answer had lapsed.[9] The trial court also
held that the answer is a mere scrap of paper because a copy was not furnished to Marcos. In the same order, the
trial court allowed Marcos to present his evidence ex parte on 18 December 1989. On that date, Marcos testified
and presented documentary evidence. The case was then submitted for decision.
On 19 December 1989, Marcos received a copy of the BANKs Answer with Compulsory Counterclaim.
On 29 December 1989, the BANK filed an opposition to Marcos motion to declare the BANK in default. On
9 January 1990, the BANK filed a motion to lift the order of default claiming that it had only then learned of the
order of default. The BANK explained that its delayed filing of the Answer with Counterclaim and failure to serve
a copy of the answer on Marcos was due to excusable negligence. The BANK asked the trial court to set aside
the order of default because it had a valid and meritorious defense.
 On 7 February 1990, the trial court issued an order setting aside the default order and admitting the BANKs
Answer with Compulsory Counterclaim. The trial court ordered the BANK to present its evidence on 12 March
1990.
On 5 March 1990, the BANK filed a motion praying to cross-examine Marcos who had testified during
the ex-parte hearing of 18 December 1989. On 12 March 1990, the trial court denied the BANKs motion and
directed the BANK to present its evidence. Trial then ensued.
The BANK presented two witnesses, Rodolfo Sales, the Branch Manager of the BANKs Cubao Branch since
1987, and Pagsaligan, the Branch Manager of the same branch from 1982 to 1986.
On 24 April 1990, the counsel of Marcos cross-examined Pagsaligan. Due to lack of material time, the trial
court reset the continuation of the cross-examination and presentation of other evidence. The succeeding hearings
were postponed, specifically on 24, 27 and 28 of August 1990, because of the BANKs failure to produce its
witness, Pagsaligan. The BANK on these scheduled hearings also failed to present other evidence.
On 7 September 1990, the BANK moved to postpone the hearing on the ground that Pagsaligan could not
attend the hearing because of illness. The trial court denied the motion to postpone and on motion of Marcos
counsel ruled that the BANK had waived its right to present further evidence. The trial court considered the case
submitted for decision. The BANK moved for reconsideration, which the trial court denied.
On 8 October 1990, the trial court rendered its decision in favor of Marcos. Aggrieved, the BANK appealed
to the Court of Appeals.
On 10 December 1996, the Court of Appeals modified the decision of the trial court by reducing the amount
of actual damages and deleting the attorneys fees awarded to Marcos.

The Ruling of the Trial Court

The trial court ruled that the total amount of time deposits of Marcos was P1,429,795.34 and not
only P764,897.67 as claimed by the BANK. The trial court found that Marcos made a time deposit on two
occasions. The first time deposit was made on 11 March 1982 for P664,897.67 as shown by Receipt No.
635743. On 12 March 1982, Marcos again made a time deposit for P764,897.67 as acknowledged by Pagsaligan
in a letter of certification. The two time deposits thus amounted to P1,429,795.34.
The trial court pointed out that no receipt was issued for the 12 March 1982 time deposit because the letter
of certification was sufficient. The trial court made a finding that the certification letter did not include the time
deposit made on 11 March 1982. The 12 March 1982 deposit was in cash while the 11 March 1982 deposit was
in checks which still had to clear.The checks were not included in the certification letter since the BANK could
not credit the amounts of the checks prior to clearing. The trial court declared that even the Deed of Assignment
acknowledged that Marcos made several time deposits as the Deed stated that the assigment was charged against
various time deposits.
The trial court recognized the existence of the Deed of Assignment and the two loans that Marcos supposedly
obtained from the BANK on 28 May 1982 for P340,000 and on 2 June 1982 for P420,000. The two loans
amounted to P760,000. On 2 June 1982, the same day that he secured the second loan, Marcos executed a Deed
of Assignment assigning to the BANKP760,000 of his time deposits. The trial court concluded that obviously the
two loans were immediately paid by virtue of the Deed of Assignment.
 The trial court found it strange that Marcos borrowed money from the BANK at a higher rate of interest
instead of just withdrawing his time deposits. The trial court saw no rhyme or reason why Marcos had to secure
the loans from the BANK. The trial court was convinced that Marcos did not know that what he had signed were
loan applications and a Deed of Assignment in payment for his loans. Nonetheless, the trial court recognized the
said loan of P760,000 and its corresponding payment by virtue of the Deed of Assignment for the equal sum.[10]
If the BANKs claim is true that the time deposits of Marcos amounted only to P764,897.67 and he had already
assigned P760,000 of this amount, the trial court pointed out that what would be left as of 3 June 1982 would only
be P4,867.67.[11] Yet, after the time deposits had matured, the BANK allowed Marcos to open letters of credit
three times. The three letters of credit were all secured by the time deposits of Marcos after he had paid the 30%
marginal deposit. The trial court opined that if Marcos time deposit was only P764,897.67, then the letters of
credit totalling P595,875 (less 30% marginal deposit) was guaranteed by only P4,867.67,[12] the remaining time
deposits after Marcos had executed the Deed of Assignment forP760,000.
According to the trial court, a security of only P4,867.67[13] for a loan worth P595,875 (less 30% marginal
deposit) is not only preposterous, it is also comical. Worse, aside from allowing Marcos to have unsecured trust
receipts, the BANK still claimed to have granted Marcos another loan for P500,000 on 25 October 1983 covered
by Promissory Note No. 20-979-83. The BANK is a commercial bank engaged in the business of lending
money. Allowing a loan of more than a million pesos without collateral is in the words of the trial court, an
impossibility and a gross violation of Central Bank Rules and Regulations, which no Bank Manager has such
authority to grant.[14] Thus, the trial court held that the BANK could not have granted Marcos the loan covered
by Promissory Note No. 20-979-83 because it was unsecured by any collateral.
The trial court required the BANK to produce the original copies of the loan application and Promissory Note
No. 20-979-83 so that it could determine who applied for this loan. However, the BANK presented to the trial
court only the machine copies of the duplicate of these documents.
Based on the machine copies of the duplicate of the two documents, the trial court noticed the following
discrepancies: (1) Marcos signature on the two documents are merely initials unlike in the other documents
submitted by the BANK; (2) it is highly unnatural for the BANK to only have duplicate copies of the two
documents in its custody; (3) the address of Marcos in the documents is different from the place of residence as
stated by Marcos in the other documents annexed by the BANK in its Answer; (4) Pagsaligan made it appear that
a check for the loan proceeds of P470,588 less bank charges was issued to Marcos but the checks payee was one
ATTY. LEONILO MARCOS and, as the trial court noted, Marcos is not a lawyer; and (5) Pagsaligan was not
sure what branch of the BANK issued the check for the loan proceeds. The trial court was convinced that Marcos
did not execute the questionable documents covering the P500,000 loan and Pagsaligan used these documents as
a means to justify his inability to explain and account for the time deposits of Marcos.
The trial court noted the BANKs defective documentation of its transaction with Marcos. First, the BANK
was not in possession of the original copies of the documents like the loan applications. Second, the BANK did
not have a ledger of the accounts of Marcos or of his various transactions with the BANK. Last, the BANK did
not issue a certificate of time deposit to Marcos. Again, the trial court attributed the BANKs lapses to Pagsaligans
scheme to defraud Marcos of his time deposits.
The trial court also took note of Pagsaligans demeanor on the witness stand. Pagsaligan evaded the questions
by giving unresponsive or inconsistent answers compelling the trial court to admonish him. When the trial court
ordered Pagsaligan to produce the documents, he conveniently became sick[15] and thus failed to attend the
hearings without presenting proof of his physical condition.
 The trial court disregarded the BANKs assertion that the time deposits were converted into a savings account
at 14% or 10% per annum upon maturity. The BANK never informed Marcos that his time deposits had already
matured and these were converted into a savings account. As to the interest due on the trust receipts, the trial court
ruled that there is no basis for such a charge because the documents do not stipulate any interest.
In computing the amount due to Marcos, the trial court took into account the marginal deposit that Marcos
had already paid which is equivalent to 30% of the total amount of the three trust receipts. The three trust receipts
totalling P851,250 would then have a balance of P595,875. The balance became due in March 1987 and on the
same date, Marcos time deposits ofP669,932.30 had already earned interest from 1983 to 1987
totalling P569,323.21 at 17% per annum. Thus, the trial court ruled that the time deposits in 1987
totalled P1,239,115. From this amount, the trial court deducted P595,875, the amount of the trust receipts, leaving
a balance on the time deposits of P643,240 as of March 1987. However, since the BANK failed to return the time
deposits of Marcos, which again matured in March 1990, the time deposits with interest, less the amount of trust
receipts paid in 1987, amounted to P971,292.49 as of March 1990.
In the alternative, the trial court ruled that even if Marcos had only one time deposit of P764,897.67 as
claimed by the BANK, the time deposit would have still earned interest at the rate of 17% per annum. The time
deposit of P650,163 would have increased to P1,415,060 in 1987 after earning interest. Deducting the amount of
the three trust receipts, Marcos time deposits still totalled P1,236,969.30 plus interest.
The dispositive portion of the decision of the trial court reads:

WHEREFORE, under the foregoing circumstances, judgment is hereby rendered in favor of Plaintiff, directing
Defendant Bank as follows:

1) to return to Plaintiff his time deposit in the sum of P971,292.49 with interest thereon at the legal
rate, until fully restituted;
2) to pay attorneys fees of P200,000.00; [and]
3) [to pay the] cost of these proceedings.

IT IS SO ORDERED.[16]

The Ruling of the Court of Appeals

The Court of Appeals addressed the procedural and substantive issues that the BANK raised.
The appellate court ruled that the trial court committed a reversible error when it denied the BANKs motion
to cross-examine Marcos. The appellate court ruled that the right to cross-examine is a fundamental right that the
BANK did not waive because the BANK vigorously asserted this right. The BANKs failure to serve a notice of
the motion to Marcos is not a valid ground to deny the motion to cross-examine. The appellate court held that the
motion to cross-examine is one of those non-litigated motions that do not require the movant to provide a notice
of hearing to the other party.
The Court of Appeals pointed out that when the trial court lifted the order of default, it had the duty to afford
the BANK its right to cross-examine Marcos. This duty assumed greater importance because the only evidence
supporting the complaint is Marcos ex-parte testimony. The trial court should have tested the veracity of Marcos
testimony through the distilling process of cross-examination. The Court of Appeals, however, believed that the
case should not be remanded to the trial court because Marcos testimony on the time deposits is supported by
evidence on record from which the appellate court could make an intelligent judgment.
On the second procedural issue, the Court of Appeals held that the trial court did not err when it declared that
the BANK had waived its right to present its evidence and had submitted the case for decision. The appellate
court agreed with the grounds relied upon by the trial court in its Order dated 7 September 1990.
The Court of Appeals, however, differed with the finding of the trial court as to the total amount of the time
deposits. The appellate court ruled that the total amount of the time deposits of Marcos is only P764,897.67 and
not P1,429,795.34 as found by the trial court. The certification letter issued by Pagsaligan showed that Marcos
made a time deposit on 12 March 1982 for P764,897.67. The certification letter shows that the amount mentioned
in the letter was the aggregate or total amount of the time deposits of Marcos as of that date. Therefore,
theP764,897.67 already included the P664,897.67 time deposit made by Marcos on 11 March 1982.
The Court of Appeals further explained:

Besides, the Official Receipt (Exh. B, p. 32, Records) dated March 11, 1982 covering the sum of P664,987.67
time deposit did not provide for a maturity date implying clearly that the amount covered by said receipt forms
part of the total sum shown in the letter-certification which contained a maturity date. Moreover, it taxes ones
credulity to believe that appellee would make a time deposit on March 12, 1982 in the sum
of P764,897.67 which except for the additional sum of P100,000.00 is practically identical (see underlined
figures) to the sum of P664,897.67 deposited the day before March 11, 1982.

Additionally, We agree with the contention of the appellant that the lower court wrongly appreciated the
testimony of Mr. Pagsaligan. Our finding is strengthened when we consider the alleged application for loan by
the appellee with the appellant in the sum of P500,000.00 dated October 24, 1983. (Exh. J, p. 40, Records),
wherein it was stated that the loan is for additional working capital versus the various time deposit amounting
to P760,000.00.[17] (Emphasis supplied)

The Court of Appeals sustained the factual findings of the trial court in ruling that Promissory Note No. 20-
979-83 is void. There is no evidence of a bank ledger or computation of interest of the loan. The appellate court
blamed the BANK for failing to comply with the orders of the trial court to produce the documents on the
loan. The BANK also made inconsistent statements. In its Answer to the Complaint, the BANK alleged that the
loan was fully paid when it debited the time deposits of Marcos with the loan. However, in its discussion of the
assigned errors, the BANK claimed that Marcos had yet to pay the loan.
The appellate court deleted the award of attorneys fees. It noted that the trial court failed to justify the award
of attorneys fees in the text of its decision. The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, premises considered, the appealed decision is SET ASIDE. A new judgment is hereby
rendered ordering the appellant bank to return to the appellee his time deposit in the sum ofP764,897.67
with 17% interest within 90 days from March 11, 1982 in accordance with the letter-certification and
with legal interest thereafter until fully paid. Costs against the appellant.

SO ORDERED.[18] (Emphasis supplied)

The Issues
 The BANK anchors this petition on the following issues:

1) WHETHER OR NOT THE PETITIONER [sic] ABLE TO PROVE THE PRIVATE RESPONDENTS
OUTSTANDING OBLIGATIONS SECURED BY THE ASSIGNMENT OF TIME DEPOSITS?

1.1) COROLLARILY, WHETHER OR NOT THE PROVISIONS OF SECTION 8 RULE 10 OF [sic] THEN
REVISED RULES OF COURT BE APPLIED [sic] SO AS TO CREATE A JUDICIAL ADMISSION ON THE
GENUINENESS AND DUE EXECUTION OF THE ACTIONABLE DOCUMENTS APPENDED TO THE
PETITIONERS ANSWER?

2) WHETHER OR NOT PETITIONER [sic] DEPRIVED OF DUE PROCESS WHEN THE LOWER COURT
HAS [sic] DECLARED PETITIONER TO HAVE WAIVED PRESENTATION OF FURTHER EVIDENCE
AND CONSIDERED THE CASE SUBMITTED FOR RESOLUTION?[19]

The Ruling of the Court

The petition is without merit.

Procedural Issues

There was no violation of the BANKs right to procedural due process when the trial court denied the BANKs
motion to cross-examine Marcos. Prior to the denial of the motion, the trial court had properly declared the BANK
in default. Since the BANK was in default, Marcos was able to present his evidence ex-parte including his own
testimony. When the trial court lifted the order of default, the BANK was restored to its standing and rights in the
action. However, as a rule, the proceedings already taken should not be disturbed.[20] Nevertheless, it is within the
trial courts discretion to reopen the evidence submitted by the plaintiff and allow the defendant to challenge the
same, by cross-examining the plaintiffs witnesses or introducing countervailing evidence.[21] The 1964 Rules of
Court, the rules then in effect at the time of the hearing of this case, recognized the trial courts exercise of this
discretion. The 1997 Rules of Court retained this discretion.[22] Section 3, Rule 18 of the 1964 Rules of Court
reads:

Sec. 3. Relief from order of default. A party declared in default may any time after discovery thereof and before
judgment file a motion under oath to set aside the order of default upon proper showing that his failure to
answer was due to fraud, accident, mistake or excusable neglect and that he has a meritorious defense. In such
case the order of default may be set aside on such terms and conditions as the judge may impose in the interest
of justice. (Emphasis supplied)

The records show that the BANK did not ask the trial court to restore its right to cross-examine Marcos when
it sought the lifting of the default order on 9 January 1990. Thus, the order dated 7 February 1990 setting aside
the order of default did not confer on the BANK the right to cross-examine Marcos. It was only on 2 March 1990
that the BANK filed the motion to cross-examine Marcos. During the 12 March 1990 hearing, the trial court
denied the BANKs oral manifestation to grant its motion to cross-examine Marcos because there was no proof of
service on Marcos. The BANKs counsel pleaded for reconsideration but the trial court denied the plea and ordered
the BANK to present its evidence. Instead of presenting its evidence, the BANK moved for the resetting of the
hearing and when the trial court denied the same, the BANK informed the trial court that it was elevating the
denial to the upper court.[23]
To repeat, the trial court had previously declared the BANK in default. The trial court therefore had the right
to decide whether or not to disturb the testimony of Marcos that had already been terminated even before the trial
court lifted the order of default.
We do not agree with the appellate courts ruling that a motion to cross-examine is a non-litigated motion and
that the trial court gravely abused its discretion when it denied the motion to cross-examine. A motion to cross-
examine is adversarial. The adverse party in this case had the right to resist the motion to cross-examine because
the movant had previously forfeited its right to cross-examine the witness. The purpose of a notice of a motion is
to avoid surprises on the opposite party and to give him time to study and meet the arguments. [24] In a motion to
cross-examine, the adverse party has the right not only to prepare a meaningful opposition to the motion but also
to be informed that his witness is being recalled for cross-examination. The proof of service was therefore
indispensable and the trial court was correct in denying the oral manifestation to grant the motion for cross-
examination.
We find no justifiable reason to relax the application of the rule on notice of motions[25] to this case. The
BANK could have easily re-filed the motion to cross-examine with the requisite notice to Marcos. It did not do
so. The BANK did not make good its threat to elevate the denial to a higher court. The BANK waited until the
trial court rendered a judgment on the merits before questioning the interlocutory order of denial.
While the right to cross-examine is a vital element of procedural due process, the right does not necessarily
require an actual cross-examination, but merely an opportunity to exercise this right if desired by the party entitled
to it.[26] Clearly, the BANKs failure to cross-examine is imputable to the BANK when it lost this right[27] as it was
in default and failed thereafter to exhaust the remedies to secure the exercise of this right at the earliest
opportunity.
The two other procedural lapses that the BANK attributes to the appellate and trial courts deserve scant
consideration.
The BANK raises for the very first time the issue of judicial admission on the part of Marcos. The BANK
even has the audacity to fault the Court of Appeals for not ruling on this issue when it never raised this matter
before the appellate court or before the trial court. Obviously, this issue is only an afterthought. An issue raised
for the first time on appeal and not raised timely in the proceedings in the lower court is barred by estoppel.[28]
The BANK cannot claim that Marcos had admitted the due execution of the documents attached to its answer
because the BANK filed its answer late and even failed to serve it on Marcos. The BANKs answer, including the
actionable documents it pleaded and attached to its answer, was a mere scrap of paper. There was nothing that
Marcos could specifically deny under oath. Marcos had already completed the presentation of his evidence when
the trial court lifted the order of default and admitted the BANKs answer. The provision of the Rules of Court
governing admission of actionable documents was not enacted to reward a party in default. We will not allow a
party to gain an advantage from its disregard of the rules.
As to the issue of its right to present additional evidence, we agree with the Court of Appeals that the trial
court correctly ruled that the BANK had waived this right. The BANK cannot now claim that it was deprived of
its right to conduct a re-direct examination of Pagsaligan. The BANK postponed the hearings three
times[29] because of its inability to secure Pagsaligans presence during the hearings. The BANK could have
presented another witness or its other evidence but it obstinately insisted on the resetting of the hearing because
of Pagsaligans absence allegedly due to illness.
The BANKs propensity for postponements had long delayed the case. Its motion for postponement based on
Pagsaligans illness was not even supported by documentary evidence such as a medical certificate. Documentary
evidence of the illness is necessary before the trial court could rule that there is a sufficient basis to grant the
postponement.[30]

The BANKs Fiduciary Duty to its Depositor

The BANK is liable to Marcos for offsetting his time deposits with a fictitious promissory note. The existence
of Promissory Note No. 20-979-83 could have been easily proven had the BANK presented the original copies
of the promissory note and its supporting evidence. In lieu of the original copies, the BANK presented the machine
copies of the duplicate of the documents. These substitute documents have no evidentiary value. The BANKs
failure to explain the absence of the original documents and to maintain a record of the offsetting of this loan with
the time deposits bring to fore the BANKs dismal failure to fulfill its fiduciary duty to Marcos.
Section 2 of Republic Act No. 8791 (General Banking Law of 2000) expressly imposes this fiduciary duty
on banks when it declares that the State recognizes the fiduciary nature of banking that requires high standards of
integrity and performance. This statutory declaration merely echoes the earlier pronouncement of the Supreme
Court in Simex International (Manila) Inc. v. Court of Appeals[31] requiring banks to treat the accounts of its
depositors with meticulous care, always having in mind the fiduciary nature of their relationship. [32] The Court
reiterated this fiduciary duty of banks in subsequent cases.[33]
Although RA No. 8791 took effect only in the year 2000,[34] at the time that the BANK transacted with
Marcos, jurisprudence had already imposed on banks the same high standard of diligence required under RA No.
8791.[35] This fiduciary relationship means that the banks obligation to observe high standards of integrity and
performance is deemed written into every deposit agreement between a bank and its depositor.
The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good
father of a family. Thus, the BANKs fiduciary duty imposes upon it a higher level of accountability than that
expected of Marcos, a businessman, who negligently signed blank forms and entrusted his certificates of time
deposits to Pagsaligan without retaining copies of the certificates.
The business of banking is imbued with public interest. The stability of banks largely depends on the
confidence of the people in the honesty and efficiency of banks. In Simex International (Manila) Inc. v. Court of
Appeals[36] we pointed out the depositors reasonable expectations from a bank and the banks corresponding duty
to its depositor, as follows:

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.
 As the BANKs depositor, Marcos had the right to expect that the BANK was accurately recording his
transactions with it. Upon the maturity of his time deposits, Marcos also had the right to withdraw the amount
due him after the BANK had correctly debited his outstanding obligations from his time deposits.
By the very nature of its business, the BANK should have had in its possession the original copies of the
disputed promissory note and the records and ledgers evidencing the offsetting of the loan with the time deposits
of Marcos. The BANK inexplicably failed to produce the original copies of these documents. Clearly, the BANK
failed to treat the account of Marcos with meticulous care.
The BANK claims that it is a reputable banking institution and that it has no reason to forge Promissory Note
No. 20-979-83. The trial court and appellate court did not rule that it was the bank that forged the promissory
note. It was Pagsaligan, the BANKs branch manager and a close friend of Marcos, whom the trial court
categorically blamed for the fictitious loan agreements. The trial court held that Pagsaligan made up the loan
agreement to cover up his inability to account for the time deposits of Marcos.
Whether it was the BANKs negligence and inefficiency or Pagsaligans misdeed that deprived Marcos of the
amount due him will not excuse the BANK from its obligation to return to Marcos the correct amount of his time
deposits with interest. The duty to observe high standards of integrity and performance imposes on the BANK
that obligation. The BANK cannot also unjustly enrich itself by keeping Marcos money.
Assuming Pagsaligan was behind the spurious promissory note, the BANK would still be accountable to
Marcos. We have held that a bank is liable for the wrongful acts of its officers done in the interest of the bank or
in their dealings as bank representatives but not for acts outside the scope of their authority.[37] Thus, we held:

A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds
they may thus be enabled to perpetrate in the apparent scope of their employment; nor will it be permitted to
shirk its responsibility for such frauds, even though no benefit may accrue to the bank therefrom (10 Am Jur 2d,
p. 114). Accordingly, a banking corporation is liable to innocent third persons where the representation is made
in the course of its business by an agent acting within the general scope of his authority even though, in the
particular case, the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his principal
or some other person, for his own ultimate benefit.[38]

The Existence of Promissory Note No. 20-979-83 was not Proven

The BANK failed to produce the best evidence the original copies of the loan application and promissory
note. The Best Evidence Rule provides that the court shall not receive any evidence that is merely substitutionary
in its nature, such as photocopies, as long as the original evidence can be had.[39] Absent a clear showing that the
original writing has been lost, destroyed or cannot be produced in court, the photocopy must be disregarded, being
unworthy of any probative value and being an inadmissible piece of evidence.[40]
What the BANK presented were merely the machine copies of the duplicate of the loan application and
promissory note. No explanation was ever offered by the BANK for its inability to produce the original copies of
the documentary evidence. The BANK also did not comply with the orders of the trial court to submit the
originals.
The purpose of the rule requiring the production of the best evidence is the prevention of fraud.[41] If a party
is in possession of evidence and withholds it, and seeks to substitute inferior evidence in its place, the presumption
naturally arises that the better evidence is withheld for fraudulent purposes, which its production would expose
and defeat.[42]
The absence of the original of the documentary evidence casts suspicion on the existence of Promissory Note
No. 20-979-83 considering the BANKs fiduciary duty to keep efficiently a record of its transactions with its
depositors. Moreover, the circumstances enumerated by the trial court bolster the conclusion that Promissory Note
No. 20-979-83 is bogus. The BANK has only itself to blame for the dearth of competent proof to establish the
existence of Promissory Note No. 20-979-83.

Total Amount Due to Marcos

The BANK and Marcos do not now dispute the ruling of the Court of Appeals that the total amount of time
deposits that Marcos placed with the BANK is only P764,897.67 and notP1,429,795.34 as found by the trial court.
The BANK has always argued that Marcos time deposits only totalled P764,897.67.[43] What the BANK insists
on in this petition is the trial courts violation of its right to procedural due process and the absence of any
obligation to pay or return anything to Marcos. Marcos, on the other hand, merely prays for the affirmation of
either the trial court or appellate court decision.[44] We uphold the finding of the Court of Appeals as to the amount
of the time deposits as such finding is in accord with the evidence on record.
Marcos claimed that the certificates of time deposit were with Pagsaligan for safekeeping. Marcos was only
able to present the receipt dated 11 March 1982 and the letter-certification dated 12 March 1982 to prove the total
amount of his time deposits with the BANK. The letter-certification issued by Pagsaligan reads:

March 12, 1982

Dear Mr. Marcos:

This is to certify that we are taking care in your behalf various Time Deposit Certificates with an aggregate
value of PESOS: SEVEN HUNDRED SIXTY FOUR THOUSAND EIGHT HUNDRED NINETY SEVEN
AND 67/100 (P764,897.67) ONLY, issued today for 90 days at 17% p.a. with the interest payable at maturity
on June 10, 1982.

Thank you.

Sgd. FLORENCIO B. PAGSALIGAN

Branch Manager[45]

The foregoing certification is clear. The total amount of time deposits of Marcos as of 12 March 1982
is P764,897.67, inclusive of the sum of P664,987.67 that Marcos placed on time deposit on 11 March 1982. This
is plainly seen from the use of the word aggregate.
We are not swayed by Marcos testimony that the certification is actually for the first time deposit that he
placed on 11 March 1982. The letter-certification speaks of various Time Deposits Certificates with an aggregate
value of P764,897.67. If the amount stated in the letter-certification is for a single time deposit only, and did not
include the 11 March 1982 time deposit, then Marcos should have demanded a new letter of certification from
Pagsaligan. Marcos is a businessman. While he already made an error in judgment in entrusting to Pagsaligan the
certificates of time deposits, Marcos should have known the importance of making the letter-certification reflect
the true nature of the transaction. Marcos is bound by the letter-certification since he was the one who prodded
Pagsaligan to issue it.
We modify the amount that the Court of Appeals ordered the BANK to return to Marcos. The appellate court
did not offset Marcos outstanding debt with the BANK covered by the three trust receipt agreements even though
Marcos admits his obligation under the three trust receipt agreements. The total amount of the trust receipts
is P851,250 less the 30% marginal deposit of P255,375 that Marcos had already paid the BANK. This reduced
Marcos total debt with the BANK to P595,875 under the trust receipts.
The trial and appellate courts found that the parties did not agree on the imposition of interest on the loan
covered by the trust receipts and thus no interest is due on this loan. However, the records show that the three
trust receipt agreements contained stipulations for the payment of interest but the parties failed to fill up the blank
spaces on the rate of interest. Put differently, the BANK and Marcos expressly agreed in writing on the payment
of interest[46] without, however, specifying the rate of interest. We, therefore, impose the legal interest of 12%per
annum, the legal interest for the forbearance of money,[47] on each of the three trust receipts.
Based on Marcos testimony[48] and the BANKs letter of demand,[49] the trust receipt agreements became due
in March 1987. The records do not show exactly when in March 1987 the obligation became due. In accordance
with Article 2212 of the Civil Code, in such a case the court shall fix the period of the duration of the
obligation.[50] The BANKs letter of demand is dated 6 March 1989. We hold that the trust receipts became due
on 6 March 1987.
Marcos payment of the marginal deposit of P255,375 for the trust receipts resulted in the proportionate
reduction of the three trust receipts. The reduced value of the trust receipts and their respective interest as of 6
March 1987 are as follows:

1. Trust Receipt No. CD 83.7 issued on 8 March 1983 originally for P300,000 was reduced
to P210,618.75 with interest of P101,027.76.[51]

2. Trust Receipt No. CD 83.9 issued on 15 March 1983 originally for P300,000 was reduced
to P210,618.75 with interest of P100,543.04.[52]

3. Trust Receipt No. CD 83.10 issued on 15 March 1983 originally for P251,250 was reduced
to P174,637.5 with interest of P83,366.68. [53]

When the trust receipts became due on 6 March 1987, Marcos owed the BANK P880,812.48. This amount
included P595,875, the principal value of the three trust receipts after payment of the marginal deposit,
and P284,937.48, the interest then due on the three trust receipts.
Upon maturity of the three trust receipts, the BANK should have automatically deducted, by way of
offsetting, Marcos outstanding debt to the BANK from his time deposits and its accumulated interest. Marcos
time deposits of P764,897.67 had already earned interest[54] of P616,318.92 as of 6 March 1987.[55] Thus, Marcos
total funds with the BANK amounted toP1,381,216.59 as of the maturity of the trust receipts. After
deducting P880,812.48, the amount Marcos owed the BANK, from Marcos funds with the BANK
of P1,381,216.59, Marcos remaining time deposits as of 6 March 1987 is only P500,404.11. The accumulated
interest on this P500,404.11 as of 30 August 1989, the date of filing of Marcos complaint with the trial court,
is P211,622.96.[56] From 30 August 1989, the interest due on the accumulated interest of P211,622.96 should earn
legal interest at 12% per annum pursuant to Article 2212[57] of the Civil Code.
The BANKs dismal failure to account for Marcos money justifies the award of moral [58] and exemplary
damages.[59] Certainly, the BANK, as employer, is liable for the negligence or the misdeed of its branch manager
which caused Marcos mental anguish and serious anxiety.[60] Moral damages of P100,000 is reasonable and is in
accord with our rulings in similar cases involving banks negligence with regard to the accounts of their
depositors.[61]
We also award P20,000 to Marcos as exemplary damages. The law allows the grant of exemplary damages
by way of example for the public good.[62] The public relies on the banks fiduciary duty to observe the highest
degree of diligence. The banking sector is expected to maintain at all times this high level of meticulousness.[63]
WHEREFORE, the decision of the Court of Appeals is AFFIRMED with MODIFICATION. Petitioner
Philippine Banking Corporation is ordered to return to private respondent Leonilo Marcos P500,404.11, the
remaining principal amount of his time deposits, with interest at 17% per annum from 30 August 1989 until full
payment. Petitioner Philippine Banking Corporation is also ordered to pay to private respondent Leonilo
Marcos P211,622.96, the accumulated interest as of 30 August 1989, plus 12% legal interest per annum from 30
August 1989 until full payment. Petitioner Philippine Banking Corporation is further ordered to pay P100,000 by
way of moral damages and P20,000 as exemplary damages to private respondent Leonilo Marcos.
Costs against petitioner.
SO ODERED.
Davide, Jr., C.J., (Chairman), Panganiban, Ynares-Santiago, and Azcuna, JJ., Concur.

BANK OF THE PHILIPPINE ISLANDS BS CASA MONTESSORI INTERNATIONALE

BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. CASA MONTESSORI INTERNATIONALE and
LEONARDO T. YABUT, respondents.

[G.R. No. 149507. May 28, 2004]

CASA MONTESSORI INTERNATIONALE, petitioner, vs. BANK OF THE PHILIPPINE

ISLANDS, respondent.

DECISION
PANGANIBAN, J.:

By the nature of its functions, a bank is required to take meticulous care of the deposits of its clients, who
have the right to expect high standards of integrity and performance from it.Among its obligations in furtherance
thereof is knowing the signatures of its clients. Depositors are not estopped from questioning wrongful
withdrawals, even if they have failed to question those errors in the statements sent by the bank to them for
verification.

The Case

Before us are two Petitions for Review[1] under Rule 45 of the Rules of Court, assailing the March 23,
2001 Decision[2] and the August 17, 2001 Resolution[3] of the Court of Appeals (CA) in CA-GR CV No.
63561. The decretal portion of the assailed Decision reads as follows:

WHEREFORE, upon the premises, the decision appealed from is AFFIRMED with the modification that
defendant bank [Bank of the Philippine Islands (BPI)] is held liable only for one-half of the value of the forged
checks in the amount of P547,115.00 after deductions subject to REIMBURSEMENT from third party
defendant Yabut who is likewise ORDERED to pay the other half to plaintiff corporation [Casa Montessori
Internationale (CASA)].[4]

The assailed Resolution denied all the parties Motions for Reconsideration.

The Facts

The facts of the case are narrated by the CA as follows:

On November 8, 1982, plaintiff CASA Montessori International[5] opened Current Account No. 0291-0081-01
with defendant BPI[,] with CASAs President Ms. Ma. Carina C. Lebron as one of its authorized signatories.

In 1991, after conducting an investigation, plaintiff discovered that nine (9) of its checks had been encashed by
a certain Sonny D. Santos since 1990 in the total amount of P782,000.00, on the following dates and amounts:

Check No. Date Amount

1. 839700 April 24, 1990 P 43,400.00

2. 839459 Nov. 2, 1990 110,500.00

3. 839609 Oct. 17, 1990 47,723.00

4. 839549 April 7, 1990 90,700.00

5. 839569 Sept. 23, 1990 52,277.00

6. 729149 Mar. 22, 1990 148,000.00

7. 729129 Mar. 16, 1990 51,015.00

8. 839684 Dec. 1, 1990 140,000.00

 9. 729034 Mar. 2, 1990 98,985.00

Total -- P 782,600.00[6]

It turned out that Sonny D. Santos with account at BPIs Greenbelt Branch [was] a fictitious name used by third
party defendant Leonardo T. Yabut who worked as external auditor of CASA.Third party defendant voluntarily
admitted that he forged the signature of Ms. Lebron and encashed the checks.
The PNP Crime Laboratory conducted an examination of the nine (9) checks and concluded that the
handwritings thereon compared to the standard signature of Ms. Lebron were not written by the latter.
On March 4, 1991, plaintiff filed the herein Complaint for Collection with Damages against defendant bank
praying that the latter be ordered to reinstate the amount of P782,500.00[7] in the current and savings accounts of
the plaintiff with interest at 6% per annum.
On February 16, 1999, the RTC rendered the appealed decision in favor of the plaintiff.[8]

Ruling of the Court of Appeals

Modifying the Decision of the Regional Trial Court (RTC), the CA apportioned the loss between BPI and
CASA. The appellate court took into account CASAs contributory negligence that resulted in the undetected
forgery. It then ordered Leonardo T. Yabut to reimburse BPI half the total amount claimed; and CASA, the other
half. It also disallowed attorneys fees and moral and exemplary damages.
Hence, these Petitions.[9]

Issues

In GR No. 149454, Petitioner BPI submits the following issues for our consideration:

I. The Honorable Court of Appeals erred in deciding this case NOT in accord with the applicable decisions of
this Honorable Court to the effect that forgery cannot be presumed; that it must be proved by clear, positive
and convincing evidence; and that the burden of proof lies on the party alleging the forgery.

II. The Honorable Court of Appeals erred in deciding this case not in accord with applicable laws, in
particular the Negotiable Instruments Law (NIL) which precludes CASA, on account of its own negligence,
from asserting its forgery claim against BPI, specially taking into account the absence of any negligence on the
part of BPI.[10]

In GR No. 149507, Petitioner CASA submits the following issues:

1. The Honorable Court of Appeals erred when it ruled that there is no showing that [BPI], although negligent,
acted in bad faith x x x thus denying the prayer for the award of attorneys fees, moral damages and exemplary
damages to [CASA]. The Honorable Court also erred when it did not order [BPI] to pay interest on the amounts
due to [CASA].
2. The Honorable Court of Appeals erred when it declared that [CASA] was likewise negligent in the case at
bar, thus warranting its conclusion that the loss in the amount of P547,115.00 be apportioned between [CASA]
and [BPI] x x x.[11]

These issues can be narrowed down to three. First, was there forgery under the Negotiable Instruments Law
(NIL)? Second, were any of the parties negligent and therefore precluded from setting up forgery as a
defense? Third, should moral and exemplary damages, attorneys fees, and interest be awarded?

The Courts Ruling

The Petition in GR No. 149454 has no merit, while that in GR No. 149507 is partly meritorious.

First Issue:
Forged Signature Wholly Inoperative

Section 23 of the NIL provides:

Section 23. Forged signature; effect of. -- When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative, and no right x x x to enforce payment thereof
against any party thereto, can be acquired through or under such signature, unless the party against whom it is
sought to enforce such right is precluded from setting up the forgery or want of authority.[12]

Under this provision, a forged signature is a real[13] or absolute defense,[14] and a person whose signature on
a negotiable instrument is forged is deemed to have never become a party thereto and to have never consented to
the contract that allegedly gave rise to it.[15]
The counterfeiting of any writing, consisting in the signing of anothers name with intent to defraud, is
forgery.[16]
In the present case, we hold that there was forgery of the drawers signature on the check.
First, both the CA[17] and the RTC[18] found that Respondent Yabut himself had voluntarily admitted, through
an Affidavit, that he had forged the drawers signature and encashed the checks. [19] He never refuted these
findings.[20] That he had been coerced into admission was not corroborated by any evidence on record.[21]
Second, the appellate and the trial courts also ruled that the PNP Crime Laboratory, after its examination of
the said checks,[22] had concluded that the handwritings thereon -- compared to the standard signature of the
drawer -- were not hers.[23] This conclusion was the same as that in the Report[24] that the PNP Crime Laboratory
had earlier issued to BPI -- the drawee bank -- upon the latters request.
Indeed, we respect and affirm the RTCs factual findings, especially when affirmed by the CA, since these
are supported by substantial evidence on record.[25]

Voluntary Admission Not

Violative of Constitutional Rights
 The voluntary admission of Yabut did not violate his constitutional rights (1) on custodial investigation, and
(2) against self-incrimination.
In the first place, he was not under custodial investigation.[26] His Affidavit was executed in private and
before private individuals.[27] The mantle of protection under Section 12 of Article III of the 1987
Constitution[28] covers only the period from the time a person is taken into custody for investigation of his possible
participation in the commission of a crime or from the time he is singled out as a suspect in the commission of a
crime although not yet in custody.[29]
Therefore, to fall within the ambit of Section 12, quoted above, there must be an arrest or a deprivation of
freedom, with questions propounded on him by the police authorities for the purpose of eliciting admissions,
confessions, or any information.[30] The said constitutional provision does not apply to spontaneous statements
made in a voluntary manner[31] whereby an individual orally admits to authorship of a crime.[32] What the
Constitution proscribes is the compulsory or coercive disclosure of incriminating facts.[33]
Moreover, the right against self-incrimination[34] under Section 17 of Article III[35] of the Constitution, which
is ordinarily available only in criminal prosecutions, extends to all other government proceedings -- including
civil actions, legislative investigations,[36] and administrative proceedings that possess a criminal or penal
aspect[37] -- but not to private investigations done by private individuals. Even in such government proceedings,
this right may be waived,[38] provided the waiver is certain; unequivocal; and intelligently, understandingly and
willingly made.[39]
If in these government proceedings waiver is allowed, all the more is it so in private investigations. It is of
no moment that no criminal case has yet been filed against Yabut. The filing thereof is entirely up to the
appropriate authorities or to the private individuals upon whom damage has been caused. As we shall also explain
later, it is not mandatory for CASA -- the plaintiff below -- to implead Yabut in the civil case before the lower
court.
Under these two constitutional provisions, [t]he Bill of Rights[40] does not concern itself with the relation
between a private individual and another individual. It governs the relationship between the individual and the
State.[41] Moreover, the Bill of Rights is a charter of liberties for the individual and a limitation upon the power
of the [S]tate.[42] These rights[43] are guaranteed to preclude the slightest coercion by the State that may lead the
accused to admit something false, not prevent him from freely and voluntarily telling the truth.[44]
Yabut is not an accused here. Besides, his mere invocation of the aforesaid rights does not automatically
entitle him to the constitutional protection.[45] When he freely and voluntarily executed[46] his Affidavit, the State
was not even involved. Such Affidavit may therefore be admitted without violating his constitutional rights while
under custodial investigation and against self-incrimination.

Clear, Positive and Convincing

Examination and Evidence

The examination by the PNP, though inconclusive, was nevertheless clear, positive and convincing.
Forgery cannot be presumed.[47] It must be established by clear, positive and convincing evidence.[48] Under
the best evidence rule as applied to documentary evidence like the checks in question, no secondary or
substitutionary evidence may inceptively be introduced, as the original writing itself must be produced in
court.[49] But when, without bad faith on the part of the offeror, the original checks have already been destroyed
or cannot be produced in court, secondary evidence may be produced.[50] Without bad faith on its part, CASA
proved the loss or destruction of the original checks through the Affidavit of the one person who knew of that
fact[51] -- Yabut. He clearly admitted to discarding the paid checks to cover up his misdeed.[52] In such a situation,
secondary evidence like microfilm copies may be introduced in court.
The drawers signatures on the microfilm copies were compared with the standard signature. PNP Document
Examiner II Josefina de la Cruz testified on cross-examination that two different persons had written
them.[53] Although no conclusive report could be issued in the absence of the original checks,[54] she affirmed that
her findings were 90 percent conclusive.[55]According to her, even if the microfilm copies were the only basis of
comparison, the differences were evident.[56] Besides, the RTC explained that although the Report was
inconclusive, no conclusive report could have been given by the PNP, anyway, in the absence of the original
checks.[57] This explanation is valid; otherwise, no such report can ever be relied upon in court.
Even with respect to documentary evidence, the best evidence rule applies only when the contents of a
document -- such as the drawers signature on a check -- is the subject of inquiry.[58] As to whether the document
has been actually executed, this rule does not apply; and testimonial as well as any other secondary evidence is
admissible.[59] Carina Lebron herself, the drawers authorized signatory, testified many times that she had never
signed those checks. Her testimonial evidence is admissible; the checks have not been actually executed.The
genuineness of her handwriting is proved, not only through the courts comparison of the questioned handwritings
and admittedly genuine specimens thereof,[60] but above all by her.
The failure of CASA to produce the original checks neither gives rise to the presumption of suppression of
evidence[61] nor creates an unfavorable inference against it.[62] Such failure merely authorizes the introduction of
secondary evidence[63] in the form of microfilm copies. Of no consequence is the fact that CASA did not present
the signature card containing the signatures with which those on the checks were compared.[64] Specimens of
standard signatures are not limited to such a card. Considering that it was not produced in evidence, other
documents that bear the drawers authentic signature may be resorted to.[65] Besides, that card was in the possession
of BPI -- the adverse party.
We have held that without the original document containing the allegedly forged signature, one cannot make
a definitive comparison that would establish forgery;[66] and that a comparison based on a mere reproduction of
the document under controversy cannot produce reliable results.[67] We have also said, however, that a judge
cannot merely rely on a handwriting experts testimony,[68] but should also exercise independent judgment in
evaluating the authenticity of a signature under scrutiny.[69] In the present case, both the RTC and the CA
conducted independent examinations of the evidence presented and arrived at reasonable and similar
conclusions. Not only did they admit secondary evidence; they also appositely considered testimonial and other
documentary evidence in the form of the Affidavit.
The best evidence rule admits of exceptions and, as we have discussed earlier, the first of these has been
[70]
met. The result of examining a questioned handwriting, even with the aid of experts and scientific instruments,
may be inconclusive;[71] but it is a non sequitur to say that such result is not clear, positive and convincing. The
preponderance of evidence required in this case has been satisfied.[72]

Second Issue:
Negligence Attributable to BPI Alone
 Having established the forgery of the drawers signature, BPI -- the drawee -- erred in making payments by virtue
thereof. The forged signatures are wholly inoperative, and CASA -- the drawer whose authorized signatures do
not appear on the negotiable instruments -- cannot be held liable thereon. Neither is the latter precluded from
setting up forgery as a real defense.

Clear Negligence
in Allowing Payment
Under a Forged Signature

We have repeatedly emphasized that, since the banking business is impressed with public interest, of
paramount importance thereto is the trust and confidence of the public in general.Consequently, the highest degree
of diligence[73] is expected,[74] and high standards of integrity and performance are even required, of it.[75] By the
nature of its functions, a bank is under obligation to treat the accounts of its depositors with meticulous
care,[76] always having in mind the fiduciary nature of their relationship.[77]
BPI contends that it has a signature verification procedure, in which checks are honored only when the
signatures therein are verified to be the same with or similar to the specimen signatures on the signature
cards. Nonetheless, it still failed to detect the eight instances of forgery. Its negligence consisted in the omission
of that degree of diligence required[78] of a bank.It cannot now feign ignorance, for very early on we have already
ruled that a bank is bound to know the signatures of its customers; and if it pays a forged check, it must be
considered as making the payment out of its own funds, and cannot ordinarily charge the amount so paid to the
account of the depositor whose name was forged.[79] In fact, BPI was the same bank involved when we issued this
ruling seventy years ago.

Neither Waiver nor Estoppel

Results from Failure to
Report Error in Bank Statement

The monthly statements issued by BPI to its clients contain a notice worded as follows: If no error is reported
in ten (10) days, account will be correct.[80] Such notice cannot be considered a waiver, even if CASA failed to
report the error. Neither is it estopped from questioning the mistake after the lapse of the ten-day period.
This notice is a simple confirmation[81] or circularization -- in accounting parlance -- that requests client-
depositors to affirm the accuracy of items recorded by the banks.[82] Its purpose is to obtain from the depositors a
direct corroboration of the correctness of their account balances with their respective banks.[83] Internal or external
auditors of a bank use it as a basic audit procedure[84] -- the results of which its client-depositors are neither
interested in nor privy to -- to test the details of transactions and balances in the banks records.[85] Evidential
matter obtained from independent sources outside a bank only serves to provide greater assurance of
reliability[86] than that obtained solely within it for purposes of an audit of its own financial statements, not those
of its client-depositors.
Furthermore, there is always the audit risk that errors would not be detected[87] for various reasons. One,
materiality is a consideration in audit planning;[88] and two, the information obtained from such a substantive test
is merely presumptive and cannot be the basis of a valid waiver.[89] BPI has no right to impose a condition
unilaterally and thereafter consider failure to meet such condition a waiver. Neither may CASA renounce a
right[90] it has never possessed.[91]
Every right has subjects -- active and passive. While the active subject is entitled to demand its enforcement,
the passive one is duty-bound to suffer such enforcement.[92]
On the one hand, BPI could not have been an active subject, because it could not have demanded from CASA
a response to its notice. Besides, the notice was a measly request worded as follows: Please examine x x x and
report x x x.[93] CASA, on the other hand, could not have been a passive subject, either, because it had no
obligation to respond. It could -- as it did -- choose not to respond.
Estoppel precludes individuals from denying or asserting, by their own deed or representation, anything
contrary to that established as the truth, in legal contemplation.[94] Our rules on evidence even make a juris et de
jure presumption[95] that whenever one has, by ones own act or omission, intentionally and deliberately led
another to believe a particular thing to be true and to act upon that belief, one cannot -- in any litigation arising
from such act or omission -- be permitted to falsify that supposed truth.[96]
In the instant case, CASA never made any deed or representation that misled BPI. The formers omission, if
any, may only be deemed an innocent mistake oblivious to the procedures and consequences of periodic
audits. Since its conduct was due to such ignorance founded upon an innocent mistake, estoppel will not
arise.[97] A person who has no knowledge of or consent to a transaction may not be estopped by it.[98] Estoppel
cannot be sustained by mere argument or doubtful inference x x x.[99] CASA is not barred from questioning BPIs
error even after the lapse of the period given in the notice.

Loss Borne by
Proximate Source
of Negligence

For allowing payment[100] on the checks to a wrongful and fictitious payee, BPI -- the drawee bank -- becomes
liable to its depositor-drawer. Since the encashing bank is one of its branches,[101] BPI can easily go after it and
hold it liable for reimbursement.[102] It may not debit the drawers account[103] and is not entitled to indemnification
from the drawer.[104] In both law and equity, when one of two innocent persons must suffer by the wrongful act
of a third person, the loss must be borne by the one whose negligence was the proximate cause of the loss or who
put it into the power of the third person to perpetrate the wrong.[105]
Proximate cause is determined by the facts of the case.[106] It is that cause which, in natural and continuous
sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would
not have occurred.[107]
Pursuant to its prime duty to ascertain well the genuineness of the signatures of its client-depositors on checks
being encashed, BPI is expected to use reasonable business prudence.[108] In the performance of that obligation,
it is bound by its internal banking rules and regulations that form part of the contract it enters into with its
depositors.[109]
Unfortunately, it failed in that regard. First, Yabut was able to open a bank account in one of its branches
without privity;[110] that is, without the proper verification of his corresponding identification papers. Second, BPI
was unable to discover early on not only this irregularity, but also the marked differences in the signatures on the
checks and those on the signature card.Third, despite the examination procedures it conducted, the Central
Verification Unit[111] of the bank even passed off these evidently different signatures as genuine. Without
exercising the required prudence on its part, BPI accepted and encashed the eight checks presented to it. As a
result, it proximately contributed to the fraud and should be held primarily liable[112] for the negligence of its
officers or agents when acting within the course and scope of their employment.[113] It must bear the loss.

CASA Not Negligent

in Its Financial Affairs

In this jurisdiction, the negligence of the party invoking forgery is recognized as an exception [114] to the
general rule that a forged signature is wholly inoperative.[115] Contrary to BPIs claim, however, we do not find
CASA negligent in handling its financial affairs. CASA, we stress, is not precluded from setting up forgery as a
real defense.

Role of Independent Auditor

The major purpose of an independent audit is to investigate and determine objectively if the financial
statements submitted for audit by a corporation have been prepared in accordance with the appropriate financial
reporting practices[116] of private entities. The relationship that arises therefrom is both legal and moral.[117] It
begins with the execution of the engagement letter[118] that embodies the terms and conditions of the audit and
ends with the fulfilled expectation of the auditors ethical[119] and competent performance in all aspects of the
audit.[120]
The financial statements are representations of the client; but it is the auditor who has the responsibility for
the accuracy in the recording of data that underlies their preparation, their form of presentation, and the
opinion[121] expressed therein.[122] The auditor does not assume the role of employee or of management in the
clients conduct of operations[123] and is never under the control or supervision[124] of the client.
Yabut was an independent auditor[125] hired by CASA. He handled its monthly bank reconciliations and had
access to all relevant documents and checkbooks.[126] In him was reposed the clients[127] trust and
confidence[128] that he would perform precisely those functions and apply the appropriate procedures in
accordance with generally accepted auditing standards.[129]Yet he did not meet these expectations. Nothing could
be more horrible to a client than to discover later on that the person tasked to detect fraud was the same one who
perpetrated it.

Cash Balances
Open to Manipulation

It is a non sequitur to say that the person who receives the monthly bank statements, together with the
cancelled checks and other debit/credit memoranda, shall examine the contents and give notice of any
discrepancies within a reasonable time. Awareness is not equipollent with discernment.
Besides, in the internal accounting control system prudently installed by CASA,[130] it was Yabut who should
examine those documents in order to prepare the bank reconciliations.[131]He owned his working papers,[132] and
his output consisted of his opinion as well as the clients financial statements and accompanying notes
thereto. CASA had every right to rely solely upon his output -- based on the terms of the audit engagement -- and
could thus be unwittingly duped into believing that everything was in order. Besides, [g]ood faith is always
presumed and it is the burden of the party claiming otherwise to adduce clear and convincing evidence to the
contrary.[133]
Moreover, there was a time gap between the period covered by the bank statement and the date of its actual
receipt. Lebron personally received the December 1990 bank statement only in January 1991[134] -- when she was
also informed of the forgery for the first time, after which she immediately requested a stop payment order. She
cannot be faulted for the late detection of the forged December check. After all, the bank account with BPI was
not personal but corporate, and she could not be expected to monitor closely all its finances. A preschool teacher
charged with molding the minds of the youth cannot be burdened with the intricacies or complexities of corporate
existence.
There is also a cutoff period such that checks issued during a given month, but not presented for payment
within that period, will not be reflected therein.[135] An experienced auditor with intent to defraud can easily
conceal any devious scheme from a client unwary of the accounting processes involved by manipulating the cash
balances on record -- especially when bank transactions are numerous, large and frequent. CASA could only be
blamed, if at all, for its unintelligent choice in the selection and appointment of an auditor -- a fault that is not
tantamount to negligence.
Negligence is not presumed, but proven by whoever alleges it.[136] Its mere existence is not sufficient without
proof that it, and no other cause,[137] has given rise to damages.[138] In addition, this fault is common to, if not
prevalent among, small and medium-sized business entities, thus leading the Professional Regulation Commission
(PRC), through the Board of Accountancy (BOA), to require today not only accreditation for the practice of public
accountancy,[139] but also the registration of firms in the practice thereof. In fact, among the attachments now
required upon registration are the code of good governance[140] and a sworn statement on adequate and effective
training.[141]
The missing checks were certainly reported by the bookkeeper[142] to the accountant[143] -- her immediate
supervisor -- and by the latter to the auditor. However, both the accountant and the auditor, for reasons known
only to them, assured the bookkeeper that there were no irregularities.
The bookkeeper[144] who had exclusive custody of the checkbooks[145] did not have to go directly to CASAs
president or to BPI. Although she rightfully reported the matter, neither an investigation was conducted nor a
resolution of it was arrived at, precisely because the person at the top of the helm was the culprit. The vouchers,
invoices and check stubs in support of all check disbursements could be concealed or fabricated -- even in
collusion -- and management would still have no way to verify its cash accountabilities.
Clearly then, Yabut was able to perpetrate the wrongful act through no fault of CASA. If auditors may be
held liable for breach of contract and negligence,[146] with all the more reason may they be charged with the
perpetration of fraud upon an unsuspecting client. CASA had the discretion to pursue BPI alone under the NIL,
by reason of expediency or munificence or both. Money paid under a mistake may rightfully be recovered,[147] and
under such terms as the injured party may choose.

Third Issue:
Award of Monetary Claims
Moral Damages Denied

We deny CASAs claim for moral damages.

In the absence of a wrongful act or omission,[148] or of fraud or bad faith,[149] moral damages cannot be
awarded.[150] The adverse result of an action does not per se make the action wrongful, or the party liable for
it. One may err, but error alone is not a ground for granting such damages.[151] While no proof of pecuniary loss
is necessary therefor -- with the amount to be awarded left to the courts discretion[152] -- the claimant must
nonetheless satisfactorily prove the existence of its factual basis[153] and causal relation[154] to the claimants act or
omission.[155]
Regrettably, in this case CASA was unable to identify the particular instance -- enumerated in the Civil Code
-- upon which its claim for moral damages is predicated.[156] Neither bad faith nor negligence so gross that it
amounts to malice[157] can be imputed to BPI. Bad faith, under the law, does not simply connote bad judgment or
negligence;[158] it imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach
of a known duty through some motive or interest or ill will that partakes of the nature of fraud.[159]
As a general rule, a corporation -- being an artificial person without feelings, emotions and senses, and having
existence only in legal contemplation -- is not entitled to moral damages,[160] because it cannot experience physical
suffering and mental anguish.[161] However, for breach of the fiduciary duty required of a bank, a corporate client
may claim such damages when its good reputation is besmirched by such breach, and social humiliation results
therefrom.[162] CASA was unable to prove that BPI had debased the good reputation of,[163] and consequently
caused incalculable embarrassment to, the former. CASAs mere allegation or supposition thereof, without any
sufficient evidence on record,[164] is not enough.

Exemplary Damages Also Denied

We also deny CASAs claim for exemplary damages.

Imposed by way of correction[165] for the public good,[166] exemplary damages cannot be recovered as a
matter of right.[167] As we have said earlier, there is no bad faith on the part of BPI for paying the checks of CASA
upon forged signatures. Therefore, the former cannot be said to have acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner.[168] The latter, having no right to moral damages, cannot demand exemplary
damages.[169]

Attorneys Fees Granted

Although it is a sound policy not to set a premium on the right to litigate,[170] we find that CASA is entitled
to reasonable attorneys fees based on factual, legal, and equitable justification.[171]
When the act or omission of the defendant has compelled the plaintiff to incur expenses to protect the latters
interest,[172] or where the court deems it just and equitable,[173] attorneys fees may be recovered. In the present
case, BPI persistently denied the claim of CASA under the NIL to recredit the latters account for the value of the
forged checks. This denial constrained CASA to incur expenses and exert effort for more than ten years in order
to protect its corporate interest in its bank account. Besides, we have already cautioned BPI on a similar act of
negligence it had committed seventy years ago, but it has remained unrelenting. Therefore, the Court deems it
just and equitable to grant ten percent (10%)[174] of the total value adjudged to CASA as attorneys fees.

Interest Allowed

For the failure of BPI to pay CASA upon demand and for compelling the latter to resort to the courts to obtain
payment, legal interest may be adjudicated at the discretion of the Court, the same to run from the filing[175] of
the Complaint.[176] Since a court judgment is not a loan or a forbearance of recovery, the legal interest shall be at
six percent (6%) per annum.[177] If the obligation consists in the payment of a sum of money, and the debtor incurs
in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of x x x legal
interest, which is six percent per annum.[178] The actual base for its computation shall be on the amount finally
adjudged,[179] compounded[180] annually to make up for the cost of money[181] already lost to CASA.
Moreover, the failure of the CA to award interest does not prevent us from granting it upon damages awarded
for breach of contract.[182] Because BPI evidently breached its contract of deposit with CASA, we award interest
in addition to the total amount adjudged. Under Section 196 of the NIL, any case not provided for shall be
governed by the provisions of existing legislation or, in default thereof, by the rules of the law
merchant.[183] Damages are not provided for in the NIL. Thus, we resort to the Code of Commerce and the Civil
Code. Under Article 2 of the Code of Commerce, acts of commerce shall be governed by its provisions and, in
their absence, by the usages of commerce generally observed in each place; and in the absence of both rules, by
those of the civil law.[184] This law being silent, we look at Article 18 of the Civil Code, which states: In matters
which are governed by the Code of Commerce and special laws, their deficiency shall be supplied by its
provisions. A perusal of these three statutes unmistakably shows that the award of interest under our civil law is
justified.
WHEREFORE, the Petition in GR No. 149454 is hereby DENIED, and that in GR No. 149507 PARTLY
GRANTED. The assailed Decision of the Court of Appeals is AFFIRMED with modification: BPI is held liable
for P547,115, the total value of the forged checks less the amount already recovered by CASA from Leonardo T.
Yabut, plus interest at the legal rate of six percent (6%) per annum -- compounded annually, from the filing of
the complaint until paid in full; and attorneys fees of ten percent (10%) thereof, subject to reimbursement from
Respondent Yabut for the entire amount, excepting attorneys fees. Let a copy of this Decision be furnished the
Board of Accountancy of the Professional Regulation Commission for such action as it may deem appropriate
against Respondent Yabut. No costs.
SO ORDERED.
Ynares-Santiago, Carpio, and Azcuna, JJ., concur.
Davide, Jr., C.J., (Chairman), on official leave.