G.R. No. 88013 March 19, 1990

SIMEX INTERNATIONAL (MANILA), INCORPORATED,petitioner,vs.THE HONORABLE COURT OF APPEALS and TRADERS ROYAL BANK,respondents.

Don P. Porcuincula for petitioner.

San Juan, Gonzalez, San Agustin & Sinense for private respondent.

CRUZ,J.:We are concerned in this case with the question of damages, specifically moral and exemplary damages. The negligence of the private respondent has already been established. All we have to ascertain is whether the petitioner is entitled to the said damages and, if so, in what amounts.

The parties agree on the basic facts. The petitioner is a private corporation engaged in the exportation of food products. It buys these products from various local suppliers and then sells them abroad, particularly in the United States, Canada and the Middle East. Most of its exports are purchased by the petitioner on credit.

The petitioner was a depositor of the respondent bank and maintained a checking account in its branch at Romulo Avenue, Cubao, Quezon City. On May 25, 1981, the petitioner deposited to its account in the said bank the amount of P100,000.00, thus increasing its balance as of that date to P190,380.74.1Subsequently, the petitioner issued several checks against its deposit but was suprised to learn later that they had been dishonored for insufficient funds.

The dishonored checks are the following:

1. Check No. 215391 dated May 29, 1981, in favor of California Manufacturing Company, Inc. for P16,480.00:

2. Check No. 215426 dated May 28, 1981, in favor of the Bureau of Internal Revenue in the amount of P3,386.73:

3. Check No. 215451 dated June 4, 1981, in favor of Mr. Greg Pedreo in the amount of P7,080.00;

4. Check No. 215441 dated June 5, 1981, in favor of Malabon Longlife Trading Corporation in the amount of P42,906.00:

5. Check No. 215474 dated June 10, 1981, in favor of Malabon Longlife Trading Corporation in the amount of P12,953.00:

6. Check No. 215477 dated June 9, 1981, in favor of Sea-Land Services, Inc. in the amount of P27,024.45:

7. Check No. 215412 dated June 10, 1981, in favor of Baguio Country Club Corporation in the amount of P4,385.02: and

8. Check No. 215480 dated June 9, 1981, in favor of Enriqueta Bayla in the amount of P6,275.00.2As a consequence, the California Manufacturing Corporation sent on June 9, 1981, a letter of demand to the petitioner, threatening prosecution if the dishonored check issued to it was not made good. It also withheld delivery of the order made by the petitioner. Similar letters were sent to the petitioner by the Malabon Long Life Trading, on June 15, 1981, and by the G. and U. Enterprises, on June 10, 1981. Malabon also canceled the petitioner's credit line and demanded that future payments be made by it in cash or certified check. Meantime, action on the pending orders of the petitioner with the other suppliers whose checks were dishonored was also deferred.

The petitioner complained to the respondent bank on June 10, 1981.3Investigation disclosed that the sum of P100,000.00 deposited by the petitioner on May 25, 1981, had not been credited to it. The error was rectified on June 17, 1981, and the dishonored checks were paid after they were re-deposited.4In its letter dated June 20, 1981, the petitioner demanded reparation from the respondent bank for its "gross and wanton negligence." This demand was not met. The petitioner then filed a complaint in the then Court of First Instance of Rizal claiming from the private respondent moral damages in the sum of P1,000,000.00 and exemplary damages in the sum of P500,000.00, plus 25% attorney's fees, and costs.

After trial, Judge Johnico G. Serquinia rendered judgment holding that moral and exemplary damages were not called for under the circumstances. However, observing that the plaintiff's right had been violated, he ordered the defendant to pay nominal damages in the amount of P20,000.00 plus P5,000.00 attorney's fees and costs.5This decision was affirmedin totoby the respondent court.6The respondent court found with the trial court that the private respondent was guilty of negligence but agreed that the petitioner was nevertheless not entitled to moral damages. It said:

The essential ingredient of moral damages is proof of bad faith (De Aparicio vs. Parogurga, 150 SCRA 280). Indeed, there was the omission by the defendant-appellee bank to credit appellant's deposit of P100,000.00 on May 25, 1981. But the bank rectified its records. It credited the said amount in favor of plaintiff-appellant in less than a month. The dishonored checks were eventually paid. These circumstances negate any imputation or insinuation of malicious, fraudulent, wanton and gross bad faith and negligence on the part of the defendant-appellant.

It is this ruling that is faulted in the petition now before us.

This Court has carefully examined the facts of this case and finds that it cannot share some of the conclusions of the lower courts. It seems to us that the negligence of the private respondent had been brushed off rather lightly as if it were a minor infraction requiring no more than a slap on the wrist. We feel it is not enough to say that the private respondent rectified its records and credited the deposit in less than a month as if this were sufficient repentance. The error should not have been committed in the first place. The respondent bank has not even explained why it was committed at all. It is true that the dishonored checks were, as the Court of Appeals put it, "eventually" paid. However, this took almost a month when, properly, the checks should have been paid immediately upon presentment.

As the Court sees it, the initial carelessness of the respondent bank, aggravated by the lack of promptitude in repairing its error, justifies the grant of moral damages. This rather lackadaisical attitude toward the complaining depositor constituted the gross negligence, if not wanton bad faith, that the respondent court said had not been established by the petitioner.

We also note that while stressing the rectification made by the respondent bank, the decision practically ignored the prejudice suffered by the petitioner. This was simply glossed over if not, indeed, disbelieved. The fact is that the petitioner's credit line was canceled and its orders were not acted upon pending receipt of actual payment by the suppliers. Its business declined. Its reputation was tarnished. Its standing was reduced in the business community. All this was due to the fault of the respondent bank which was undeniably remiss in its duty to the petitioner.

Article 2205 of the Civil Code provides that actual or compensatory damages may be received "(2) for injury to the plaintiff s business standing or commercial credit." There is no question that the petitioner did sustain actual injury as a result of the dishonored checks and that the existence of the loss having been established "absolute certainty as to its amount is not required."7Such injury should bolster all the more the demand of the petitioner for moral damages and justifies the examination by this Court of the validity and reasonableness of the said claim.

We agree that moral damages are not awarded to penalize the defendant but to compensate the plaintiff for the injuries he may have suffered.8In the case at bar, the petitioner is seeking such damages for the prejudice sustained by it as a result of the private respondent's fault. The respondent court said that the claimed losses are purely speculative and are not supported by substantial evidence, but if failed to consider that the amount of such losses need not be established with exactitude precisely because of their nature. Moral damages are not susceptible of pecuniary estimation. Article 2216 of the Civil Code specifically provides that "no proof of pecuniary loss is necessary in order that moral, nominal, temperate, liquidated or exemplary damages may be adjudicated." That is why the determination of the amount to be awarded (except liquidated damages) is left to the sound discretion of the court, according to "the circumstances of each case."

From every viewpoint except that of the petitioner's, its claim of moral damages in the amount of P1,000,000.00 is nothing short of preposterous. Its business certainly is not that big, or its name that prestigious, to sustain such an extravagant pretense. Moreover, a corporation is not as a rule entitled to moral damages because, not being a natural person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish and moral shock. The only exception to this rule is where the corporation has a good reputation that is debased, resulting in its social humiliation.9We 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.10It does not appear that, as the private respondent would portray it, the petitioner is an unsavory and disreputable entity that has no good name to protect.

Considering all this, we feel that the award of nominal damages in the sum of P20,000.00 was not the proper relief to which the petitioner was entitled. Under Article 2221 of the Civil Code, "nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him." As we have found that the petitioner has indeed incurred loss through the fault of the private respondent, the proper remedy is the award to it of moral damages, which we impose, in our discretion, in the same amount of P20,000.00.

Now for the exemplary damages.

The pertinent provisions of the Civil Code are the following:

Art. 2229. Exemplary or corrective damages are imposed, by way of example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages.

Art. 2232. In contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.

The banking system is an indispensable institution in the modern world and plays a vital role in the economic life of every civilized nation. Whether as mere passive entities for the safekeeping and saving of money or as active instruments of business and commerce, banks have become an ubiquitous presence among the people, who have come to regard them with respect and even gratitude and, most of all, confidence. Thus, even the humble wage-earner has not hesitated to entrust his life's savings to the bank of his choice, knowing that they will be safe in its custody and will even earn some interest for him. The ordinary person, with equal faith, usually maintains a modest checking account for security and convenience in the settling of his monthly bills and the payment of ordinary expenses. As for business entities like the petitioner, the bank is a trusted and active associate that can help in the running of their affairs, not only in the form of loans when needed but more often in the conduct of their day-to-day transactions like the issuance or encashment of checks.

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

The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. In the case at bar, it is obvious that the respondent bank was remiss in that duty and violated that relationship. What is especially deplorable is that, having been informed of its error in not crediting the deposit in question to the petitioner, the respondent bank did not immediately correct it but did so only one week later or twenty-three days after the deposit was made. It bears repeating that the record does not contain any satisfactory explanation of why the error was made in the first place and why it was not corrected immediately after its discovery. Such ineptness comes under the concept of the wanton manner contemplated in the Civil Code that calls for the imposition of exemplary damages.

After deliberating on this particular matter, the Court, in the exercise of its discretion, hereby imposes upon the respondent bank exemplary damages in the amount of P50,000.00, "by way of example or correction for the public good," in the words of the law. It is expected that this ruling will serve as a warning and deterrent against the repetition of the ineptness and indefference that has been displayed here, lest the confidence of the public in the banking system be further impaired.

ACCORDINGLY, the appealed judgment is hereby MODIFIED and the private respondent is ordered to pay the petitioner, in lieu of nominal damages, moral damages in the amount of P20,000.00, and exemplary damages in the amount of P50,000.00 plus the original award of attorney's fees in the amount of P5,000.00, and costs.

SO ORDERED.

[G.R. No. 152720. February 17, 2005]

SOLIDBANK CORPORATION,petitioner, vs.Spouses TEODULFO and CARMEN ARRIETA,respondents.

D E C I S I O N

PANGANIBAN,J.:

A banks gross negligence in dishonoring a well-funded check, aggravated by its unreasonable delay in repairing the error, calls for an award of moral and exemplary damages. The resulting injury to the check writers reputation and peace of mind needs to be recognized and compensated.

The CaseBefore us is a Petition for Review[1]under Rule 45 of the Rules of Court, seeking to reverse and set aside the March 28, 2001 Decision[2]and the February 5, 2002 Resolution[3]of the Court of Appeals (CA) in CA-GR CV No. 55002. The assailed Decision disposed as follows:

WHEREFORE, the appeal isDISMISSED, with costs against defendant-appellant.[4]The CA denied reconsideration in its February 5, 2002 Resolution.

The FactsThe facts are summarized by the CA as follows:

Carmen Arrieta is a bank depositor of Solidbank Corporation under Checking Account No. 123-1996. On March 1990, Carmen issued SBC Check No. 0293984 (Exh. A) in the amount ofP330.00 in the name of Lopues Department Store in payment of her purchases from said store. When the check was deposited by the store to its account, the same was dishonored due to Account Closed (Exh. B) despite the fact that at the time the check was presented for payment, Carmens checking account was still active and backed up by a deposit ofP1,275.20.

As a consequence of the checks dishonor, Lopues Department Store sent a demand letter to Carmen (Exh. C) threatening her with criminal prosecution unless she redeemed the check within five (5) days. To avoid criminal prosecution, Carmen paidP330.00 in cash to the store, plus a surcharge ofP33.00 for the bouncing check, or a total ofP363.00 (Exh. F).

Thereupon, Carmen filed a complaint against Solidbank Corporation for damages alleging that the bank, by its carelessness and recklessness in certifying that her account was closed despite the fact that it was still very much active and sufficiently funded, had destroyed her good name and reputation and prejudiced not only herself but also her family in the form of mental anguish, sleepless nights, wounded feelings and social humiliation. She prayed that she be awarded moral and exemplary damages as well as attorneys fees.

In its answer, the bank claimed that Carmen, contrary to her undertaking as a depositor, failed to maintain the required balance of at leastP1,000.00 on any day of the month. Moreover, she did not handle her account in a manner satisfactory to the bank. In view of her violations of the general terms and conditions governing the establishment and operation of a current account, Carmens account was recommended for closure. In any event, the bank claimed good faith in declaring her account closed since one of the clerks, who substituted for the regular clerk, committed an honest mistake when he thought that the subject account was already closed when the ledger containing the said account could not be found.

After trial, the lower court rendered its decision holding that Solidbank Corporation was grossly negligent in failing to check whether or not Carmens account was still open and viable at the time the transaction in question was made. Hence, the bank was liable to Carmen for moral and exemplary damages, as well as attorneys fees. It held that the bank was remiss in its duty to treat Carmens account with the highest degree of care, considering the fiduciary nature of their relationship. The dispositive portion of the decision reads:

WHEREFORE, the Court hereby renders judgment in favor of the plaintiff as against the defendant-bank, and defendant-bank is ordered to pay moral damages ofP150,000.00; exemplary damages ofP50,000.00; and attorneys fees ofP20,000.00, plus costs.

SO ORDERED.[5]Ruling of the Court of AppealsThe CA debunked the contention of the bank that the latter was not liable. According to petitioner, the dishonor of the check by reason of Account Closed was an honest mistake of its employee. The appellate court held that the error committed by the bank employee was imputable to the bank. Banks are obliged to treat the accounts of their depositors with meticulous care, regardless of the amount of the deposit. Failing in this duty, petitioner was found grossly negligent. The failure of the bank to immediately notify Respondent Carmen Arrieta of its unilateral closure of her account manifested bad faith, added the CA.

The appellate court likewise affirmed the award of moral damages. It held that the banks wrongful act was the proximate cause of Carmens moral suffering. The CA ruled that the lack of malice and bad faith on the part of petitioner did not suffice to exculpate the latter from liability; the banks gross negligence amounted to a wilful act. The trial courts award of exemplary damages and attorneys fees was sustained in view of respondents entitlement to moral damages.

Hence, this Petition.[6]IssuesPetitioner raises the following issues for our consideration:

I.

Whether or not x x x respondents are entitled to recovery of moral and exemplary damages and attorneys fees.

II.

Whether or not the award of moral and exemplary damages and attorneys fees is excessive, arbitrary and contrary to prevailing jurisprudence.[7]The Courts RulingThe Petition is partly meritorious.

Main Issue:Petitioners Liability for DamagesPetitioner contends that the award of moral damages was erroneous because of the failure of Respondent Carmen to establish that the dishonor of Check No. 0293984 on March 30, 1990 was the direct and only cause of the social humiliation, extreme mental anguish, sleepless nights, and wounded feelings suffered by [her]. It referred to an occasion fifteen days before, on March 15, 1990, during which another check (Check No. 0293983) she had issued had likewise been dishonored.

According to petitioner, highly illogical was her claim that extreme mental anguish and social humiliation resulted from the dishonor of Check No. 0293984, as she claimed none from that of her prior Check No. 0293983, which had allegedly been deposited by mistake by the payees wife. Given the circumstances, petitioner adds that the dishonor of the check -- subject of the present case -- did not really cause respondent mental anguish, sleepless nights and besmirched reputation; and that her institution of this case was clearly motivated by opportunism.

We are not persuaded.

The fact that another check Carmen had issued was previously dishonored does not necessarily imply that the dishonor of a succeeding check can no longer cause moral injury and personal hurt for which the aggrieved party may claim damages. Such prior occurrence does not prove that respondent does not have a good reputation that can be besmirched.[8]The reasons for and the circumstances surrounding the previous issuance and eventual dishonor of Check No. 0293983 are totally separate -- the payee of the prior check was different -- from that of Check No. 0293984, subject of present case. Carmen had issued the earlier check to accommodate a relative,[9]and the succeeding oneto pay for goods purchased from Lopues Department Store. That she might not have suffered damages as a result of the first dishonored check does not necessarily hold true for the second. In the light of sufficient evidence showing that she indeed suffered damages as a result of the dishonor of Check No. 0293984, petitioner may not be exonerated from liability.

Case law[10]lays out the following conditions for the award of moral damages: (1) there is an injury -- whether physical, mental or psychological -- clearly sustained by the claimant; (2) the culpable act or omission is factually established; (3) the wrongful act or omission of the defendant is the proximate cause of the injury sustained by the claimant; and (4) the award of damages is predicated on any of the cases stated in Article 2219[11]of the Civil Code.

In the instant case, all four requisites have been established.First, these were the findings of the appellate court: Carmen Arrieta is a bank depositor of Solidbank Corporation of long standing. She works with the Central Negros Electric Cooperative, Inc. (CENECO), as an executive secretary and later as department secretary. She is a deaconess of the Christian Alliance Church in Bacolod City. These are positions which no doubt elevate her social standing in the community. Understandably -- and as sufficiently proven by her testimony -- she suffered mental anguish, serious anxiety, besmirched reputation, wounded feelings and social humiliation; and she suffered thus when the people she worked with -- her friends, her family and even her daughters classmates -- learned and talked about her bounced check.

Second, it is undisputed that the subject check was adequately funded, but that petitioner wrongfully dishonored it.

Third, Respondent Carmen was able to prove that petitioners wrongful dishonor of her check was the proximate cause of her embarrassment and humiliation in her workplace, in her own home, and in the church where she served as deaconess.

Proximate cause has been defined as any cause which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the result complained of and without which would not have occurred x x x.[12]It is determined from the facts of each case upon combined considerations of logic, common sense, policy and precedent.[13]Clearly, had the bank accepted and honored the check, Carmen would not have had to face the questions of -- and explain her predicament to -- her office mates, her daughters, and the leaders and members of her church.

Furthermore, the CA was in agreement with the trial court in ruling that her injury arose from the gross negligence of petitioner in dishonoring her well-funded check.

Unanimity of the CA and the trial court in their factual ascertainment of this point bars us from supplanting their finding and substituting it with our own. Settled is the doctrine that the factual determinations of the lower courts are conclusive and binding upon this Court.[14]Verily, the review of cases brought before the Supreme Court from the Court of Appeals is limited to errors of law.[15]None of the recognized exceptions to this principle has been shown to exist.

Fourth, treating Carmens account as closed, merely because the ledger could not be found was a reckless act that could not simply be brushed off as an honest mistake. We have repeatedly emphasized that the banking industry is impressed with public interest. Consequently, the highest degree of diligence is expected, and high standards of integrity and performance are even required of it. By the nature of its functions, a bank is under obligation to treat the accounts of its depositors with meticulous care and always to have in mind the fiduciary nature of its relationship with them.[16]Petitioners negligence here was so gross as to amount to a wilful injury to Respondent Carmen. Article 21 of the Civil Code states that any person who wilfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for the damage. Further, Article 2219 provides for the recovery of moral damages for acts referred to in the aforementioned Article 21. Hence, the bank is liable for moral damages to respondent.[17]The foregoing notwithstanding, we find the sum ofP150,000 awarded by the lower courts excessive. Moral damages are not intended to enrich the complainant at the expense of the defendant.[18]Rather, these are awarded only to enable the injured party to obtain means, diversions or amusements that will serve to alleviate the moral suffering that resulted by reason of the defendants culpable action.[19]The purpose of such damages is essentially indemnity or reparation, not punishment or correction.[20]In other words, the award thereof is aimed at a restoration within the limits of the possible, of the spiritualstatus quo ante;[21]therefore, it must always reasonably approximate the extent of injury and be proportional to the wrong committed.[22]Accordingly, the award of moral damages must be reduced toP20,000,[23]an amount commensurate with the alleviation of the suffering caused by the dishonored check that was issued for the amount ofP330.

The law allows the grant of exemplary damages to set an example for the public good.[24]The business of a bank is affected with public interest; thus, it makes a sworn profession of diligence and meticulousness in giving irreproachable service.[25]For this reason, the bank should guard against injury attributable to negligence or bad faith on its part.[26]The banking sector must at all times maintain a high level of meticulousness. The grant of exemplary damages is justified[27]by the initial carelessness of petitioner, aggravated by its lack of promptness in repairing its error. It was only on August 30, 1990, or a period of five months from the erroneous dishonor of the check, when it wrote Lopues Department Store a letter acknowledging the banks mistake.[28]In our view, however, the award ofP50,000 is excessive and should accordingly be reduced toP20,000.[29]The award of attorneys fees in the amount ofP20,000 is proper, for respondents were compelled to litigate to protect their rights.[30]WHEREFORE, the Petition isPARTLY GRANTEDand the assailed DecisionMODIFIED.Petitioners areORDEREDto pay respondentsP20,000 as moral damages,P20,000 as exemplary damages, andP20,000 as attorneys fees.

SO ORDERED.

[G.R. No. 138569.September 11, 2003]

THE CONSOLIDATED BANK and TRUST CORPORATION,petitioner, vs. COURT OF APPEALS and L.C. DIAZ and COMPANY, CPAs,respondents.

D E C I S I O N

CARPIO,J.:

The CaseBefore us is a petition for review of the Decision[1]of the Court of Appeals dated 27 October 1998 and its Resolution dated 11 May 1999.The assailed decision reversed the Decision[2]of the Regional Trial Court of Manila, Branch 8, absolving petitioner Consolidated Bank and Trust Corporation, now known as Solidbank Corporation (Solidbank), of any liability.The questioned resolution of the appellate court denied the motion for reconsideration of Solidbank but modified the decision by deleting the award of exemplary damages, attorneys fees, expenses of litigation and cost of suit.

The FactsSolidbank is a domestic banking corporation organized and existing under Philippine laws.Private respondent L.C. Diaz and Company, CPAs(L.C. Diaz), is a professional partnership engaged in the practice of accounting.

Sometime in March 1976, L.C. Diaz opened a savings account with Solidbank, designated as Savings Account No. S/A 200-16872-6.

On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya (Macaraya), filled up a savings (cash) deposit slip forP990 and a savings (checks) deposit slip forP50.Macaraya instructed the messenger of L.C. Diaz, Ismael Calapre (Calapre), to deposit the money with Solidbank. Macaraya also gave Calapre the Solidbank passbook.

Calapre went to Solidbank and presented to Teller No. 6 the two deposit slips and the passbook.The teller acknowledged receipt of the deposit by returning to Calapre the duplicate copies of the two deposit slips.Teller No. 6 stamped the deposit slips with the words DUPLICATE and SAVING TELLER 6 SOLIDBANK HEAD OFFICE.Since the transaction took time and Calapre had to make another deposit for L.C. Diaz with Allied Bank, he left the passbook with Solidbank.Calapre then went to Allied Bank.When Calapre returned to Solidbank to retrieve the passbook, Teller No. 6 informed him that somebody got the passbook.[3]Calapre went back to L.C. Diaz and reported the incident to Macaraya.

Macaraya immediately prepared a deposit slip in duplicate copies with a check ofP200,000.Macaraya, together with Calapre, went to Solidbank and presented to Teller No. 6 the deposit slip and check.The teller stamped the words DUPLICATE and SAVING TELLER 6 SOLIDBANK HEAD OFFICE on the duplicate copy of the deposit slip. When Macaraya asked for the passbook, Teller No. 6 told Macaraya that someone got the passbook but she could not remember to whom she gave the passbook. When Macaraya asked Teller No. 6 if Calapre got the passbook, Teller No. 6 answered that someone shorter than Calapre got the passbook. Calapre was then standing beside Macaraya.

Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for the deposit of a check forP90,000 drawn on Philippine Banking Corporation (PBC). This PBC check of L.C. Diaz was a check that it had long closed.[4]PBC subsequently dishonored the check because of insufficient funds and because the signature in the check differed from PBCs specimen signature.Failing to get back the passbook, Macaraya went back to her office and reported the matter to the Personnel Manager of L.C. Diaz, Emmanuel Alvarez.

The following day, 15 August 1991, L.C. Diaz through its Chief Executive Officer, Luis C. Diaz (Diaz), called up Solidbank to stop any transaction using the same passbook until L.C. Diaz could open a new account.[5]On the same day, Diaz formally wrote Solidbank to make the same request.It was also on the same day that L.C. Diaz learned of the unauthorized withdrawal the day before, 14 August 1991, ofP300,000 from its savings account.The withdrawal slip for theP300,000 bore the signatures of the authorized signatories of L.C. Diaz, namely Diaz and Rustico L. Murillo. The signatories, however, denied signing the withdrawal slip. A certain Noel Tamayo received theP300,000.

In an Information[6]dated 5 September 1991, L.C. Diaz charged its messenger, Emerano Ilagan (Ilagan) and one Roscon Verdazola with Estafa through Falsification of Commercial Document. The Regional Trial Court of Manila dismissed the criminal case after the City Prosecutor filed a Motion to Dismiss on 4 August 1992.

On 24 August 1992, L.C. Diaz through its counsel demanded from Solidbank the return of its money.Solidbank refused.

On 25 August 1992, L.C. Diaz filed a Complaint[7]for Recovery of a Sum of Money against Solidbank with the Regional Trial Court of Manila, Branch 8.After trial, the trial court rendered on 28 December 1994 a decision absolving Solidbank and dismissing the complaint.

L.C. Diaz then appealed[8]to the Court of Appeals. On 27 October 1998, the Court of Appeals issued its Decision reversing the decision of the trial court.

On 11 May 1999, the Court of Appeals issued its Resolution denying the motion for reconsideration of Solidbank.The appellate court, however, modified its decision by deleting the award of exemplary damages and attorneys fees.

The Ruling of the Trial CourtIn absolving Solidbank, the trial court applied the rules on savings account written on the passbook. The rules state that possession of this book shall raise the presumption of ownership and any payment or payments made by the bank upon the production of the said book and entry therein of the withdrawal shall have the same effect as if made to the depositor personally.[9]At the time of the withdrawal, a certain Noel Tamayo was not only in possession of the passbook, he also presented a withdrawal slip with the signatures of the authorized signatories of L.C. Diaz.The specimen signatures of these persons were in the signature cards.The teller stamped the withdrawal slip with the words Saving Teller No. 5. The teller then passed on the withdrawal slip to Genere Manuel (Manuel) for authentication.Manuel verified the signatures on the withdrawal slip. The withdrawal slip was then given to another officer who compared the signatures on the withdrawal slip with the specimen on the signature cards. The trial court concluded that Solidbank acted with care and observed the rules on savings account when it allowed the withdrawal ofP300,000 from the savings account of L.C. Diaz.

The trial court pointed out that the burden of proof now shifted to L.C. Diaz to prove that the signatures on the withdrawal slip were forged.The trial court admonished L.C. Diaz for not offering in evidence the National Bureau of Investigation (NBI) report on the authenticity of the signatures on the withdrawal slip forP300,000.The trial court believed that L.C. Diaz did not offer this evidence because it is derogatory to its action.

Another provision of the rules on savings account states that the depositor must keep the passbook under lock and key.[10]When another person presents the passbook for withdrawal prior to Solidbanks receipt of the notice of loss of the passbook, that person is considered as the owner of the passbook.The trial court ruled that the passbook presented during the questioned transaction was now out of the lock and key and presumptively ready for a business transaction.[11]Solidbank did not have any participation in the custody and care of the passbook. The trial court believed that Solidbanks act of allowing the withdrawal ofP300,000 was not the direct and proximate cause of the loss. The trial court held that L.C. Diazs negligence caused the unauthorized withdrawal.Three facts establish L.C. Diazs negligence: (1) the possession of the passbook by a person other than the depositor L.C. Diaz; (2) the presentation of a signed withdrawal receipt by an unauthorized person; and (3) the possession by an unauthorized person of a PBC check long closed by L.C. Diaz, which check was deposited on the day of the fraudulent withdrawal.

The trial court debunked L.C. Diazs contention that Solidbank did not follow the precautionary procedures observed by the two parties whenever L.C. Diaz withdrew significant amounts from its account.L.C. Diaz claimed that a letter must accompany withdrawals of more thanP20,000.The letter must request Solidbank to allow the withdrawal and convert the amount to a managers check.The bearer must also have a letter authorizing him to withdraw the same amount.Another person driving a car must accompany the bearer so that he would not walk from Solidbank to the office in making the withdrawal.The trial court pointed out that L.C. Diaz disregarded these precautions in its past withdrawal.On 16 July 1991, L.C. Diaz withdrewP82,554 without any separate letter of authorization or any communication with Solidbank that the money be converted into a managers check.

The trial court further justified the dismissal of the complaint by holding that the case was a last ditch effort of L.C. Diaz to recoverP300,000 after the dismissal of the criminal case against Ilagan.

The dispositive portion of the decision of the trial court reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered DISMISSING the complaint.

The Court further renders judgment in favor of defendant bank pursuant to its counterclaim the amount of Thirty Thousand Pesos (P30,000.00) as attorneys fees.

With costs against plaintiff.

SO ORDERED.[12]The Ruling of the Court of AppealsThe Court of Appeals ruled that Solidbanks negligence was the proximate cause of the unauthorized withdrawal ofP300,000 from the savings account of L.C. Diaz.The appellate court reached this conclusion after applying the provision of the Civil Code on quasi-delict, to wit:

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

The appellate court held that the three elements of a quasi-delict are present in this case, namely: (a) damages suffered by the plaintiff; (b) fault or negligence of the defendant, or some other person for whose acts he must respond; and (c) the connection of cause and effect between the fault or negligence of the defendant and the damage incurred by the plaintiff.

The Court of Appeals pointed out that the teller of Solidbank who received the withdrawal slip forP300,000 allowed the withdrawal without making the necessary inquiry.The appellate court stated that the teller, who was not presented by Solidbank during trial, should have called up the depositor because the money to be withdrawn was a significant amount.Had the teller called up L.C. Diaz, Solidbank would have known that the withdrawal was unauthorized. The teller did not even verify the identity of the impostor who made the withdrawal.Thus, the appellate court found Solidbank liable for its negligence in the selection and supervision of its employees.

The appellate court ruled that while L.C. Diaz was also negligent in entrusting its deposits to its messenger and its messenger in leaving the passbook with the teller,Solidbank could not escape liability because of the doctrine of last clear chance. Solidbank could have averted the injury suffered by L.C. Diaz had it called up L.C. Diaz to verify the withdrawal.

The appellate court ruled that the degree of diligence required from Solidbank is more than that of a good father of a family.The business and functions of banks are affected with public interest. Banks are obligated to treat the accounts of their depositors with meticulous care, always having in mind the fiduciary nature of their relationship with their clients. The Court of Appeals found Solidbank remiss in its duty, violating its fiduciary relationship with L.C. Diaz.

The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, premises considered, the decision appealed from is hereby REVERSED and a new one entered.

1.Ordering defendant-appellee Consolidated Bank and Trust Corporation to pay plaintiff-appellant the sum of Three Hundred Thousand Pesos (P300,000.00), with interest thereon at the rate of 12% per annum from the date of filing of the complaint until paid, the sum ofP20,000.00 as exemplary damages, andP20,000.00 as attorneys fees and expenses of litigation as well as the cost of suit; and

2.Ordering the dismissal of defendant-appellees counterclaim in the amount ofP30,000.00 as attorneys fees.

SO ORDERED.[13]Acting on the motion for reconsideration of Solidbank, the appellate court affirmed its decision but modified the award of damages.The appellate court deleted the award of exemplary damages and attorneys fees. Invoking Article 2231[14]of the Civil Code, the appellate court ruled that exemplary damages could be granted if the defendant acted with gross negligence. Since Solidbank was guilty of simple negligence only, the award of exemplary damages was not justified. Consequently, the award of attorneys fees was also disallowed pursuant to Article 2208 of the Civil Code.The expenses of litigation and cost of suit were also not imposed on Solidbank.

The dispositive portion of the Resolution reads as follows:

WHEREFORE, foregoing considered, our decision dated October 27, 1998 is affirmed with modification by deleting the award of exemplary damages and attorneys fees, expenses of litigation and cost of suit.

SO ORDERED.[15]Hence, this petition.

The IssuesSolidbank seeks the review of the decision and resolution of the Court of Appeals on these grounds:

I.THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER BANK SHOULD SUFFER THE LOSS BECAUSE ITS TELLER SHOULD HAVE FIRST CALLED PRIVATE RESPONDENT BY TELEPHONE BEFORE IT ALLOWED THE WITHDRAWAL OFP300,000.00 TO RESPONDENTS MESSENGER EMERANO ILAGAN, SINCE THERE IS NO AGREEMENT BETWEEN THE PARTIES IN THE OPERATION OF THE SAVINGS ACCOUNT, NOR IS THERE ANY BANKING LAW, WHICH MANDATES THAT A BANK TELLER SHOULD FIRST CALL UP THE DEPOSITOR BEFORE ALLOWING A WITHDRAWAL OF A BIG AMOUNT IN A SAVINGS ACCOUNT.

II.THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF LAST CLEAR CHANCE AND IN HOLDING THAT PETITIONER BANKS TELLER HAD THE LAST OPPORTUNITY TO WITHHOLD THE WITHDRAWAL WHEN IT IS UNDISPUTED THAT THE TWO SIGNATURES OF RESPONDENT ON THE WITHDRAWAL SLIP ARE GENUINE AND PRIVATE RESPONDENTS PASSBOOK WAS DULY PRESENTED, AND CONTRARIWISE RESPONDENT WAS NEGLIGENT IN THE SELECTION AND SUPERVISION OF ITS MESSENGER EMERANO ILAGAN, AND IN THE SAFEKEEPING OF ITS CHECKS AND OTHER FINANCIAL DOCUMENTS.

III.THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE INSTANT CASE IS A LAST DITCH EFFORT OF PRIVATE RESPONDENT TO RECOVER ITSP300,000.00 AFTER FAILING IN ITS EFFORTS TO RECOVER THE SAME FROM ITS EMPLOYEE EMERANO ILAGAN.

IV.THE COURT OF APPEALS ERRED IN NOT MITIGATING THE DAMAGES AWARDED AGAINST PETITIONER UNDER ARTICLE 2197 OF THE CIVIL CODE, NOTWITHSTANDING ITS FINDING THAT PETITIONER BANKS NEGLIGENCE WAS ONLY CONTRIBUTORY.[16]The Ruling of the CourtThe petition is partly meritorious.

Solidbanks Fiduciary Duty under the LawThe rulings of the trial court and the Court of Appeals conflict on the application of the law.The trial court pinned the liability on L.C. Diaz based on the provisions of the rules on savings account, a recognition of the contractual relationship between Solidbank and L.C. Diaz, the latter being a depositor of the former.On the other hand, the Court of Appeals applied the law on quasi-delict to determine who between the two parties was ultimately negligent.The law on quasi-delict orculpa aquilianais generally applicable when there is no pre-existing contractual relationship between the parties.

We hold that Solidbank is liable for breach of contract due to negligence, orculpa contractual.The contract between the bank and its depositor is governed by the provisions of the Civil Code on simple loan.[17]Article 1980 of the Civil Code expressly provides that x x x savings x x x deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan.There is a debtor-creditor relationship between the bank and its depositor.The bank is the debtor and the depositor is the creditor.The depositor lends the bank money and the bank agrees to pay the depositor on demand.The savings deposit agreement between the bank and the depositor is the contract that determines the rights and obligations of the parties.

The law imposes on banks high standards in view of the fiduciary nature of banking.Section 2 of Republic Act No. 8791 (RA 8791),[18]which took effect on 13 June 2000, declares that the State recognizes the fiduciary nature of banking that requires high standards of integrity and performance.[19]This new provision in the general banking law, introduced in 2000, is a statutory affirmation of Supreme Court decisions, starting with the 1990 case ofSimex International v. Court of Appeals,[20]holding that the bank is under obligation to treat the accounts of its depositors withmeticulous care, always having in mind the fiduciary nature of their relationship.[21]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.Article 1172 of the Civil Code states that the degree of diligence required of an obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a good father of a family.[22]Section 2 of RA 8791 prescribes the statutory diligence required from banks that banks must observe high standards of integrity and performance in servicing their depositors.Although RA 8791 took effect almost nine years after the unauthorized withdrawal of theP300,000 from L.C. Diazs savings account, jurisprudence[23]at the time of the withdrawal already imposed on banks the same high standard of diligence required under RA No. 8791.

However, the fiduciary nature of a bank-depositor relationship does not convert the contract between the bank and its depositors from a simple loan to a trust agreement, whether express or implied.Failure by the bank to pay the depositor is failure to pay a simple loan, and not a breach of trust.[24]The law simply imposes on the bank ahigher standardof integrity and performance in complying with its obligations under the contract of simple loan, beyond those required of non-bank debtors under a similar contract of simple loan.

The fiduciary nature of banking does not convert a simple loan into a trust agreement because banks do not accept deposits to enrich depositors but to earn money for themselves.The law allows banks to offer the lowest possible interest rate to depositors while charging the highest possible interest rate on their own borrowers.The interest spread or differential belongs to the bank and not to the depositors who are notcestui que trustof banks.If depositors arecestui que trustof banks, then the interest spread or income belongs to the depositors, a situation that Congress certainly did not intend in enacting Section 2 of RA 8791.

Solidbanks Breach of its Contractual ObligationArticle 1172 of the Civil Code provides that responsibility arising from negligence in the performance of every kind of obligation is demandable. For breach of the savings deposit agreement due to negligence, orculpa contractual, the bank is liable to its depositor.

Calapre left the passbook with Solidbank because the transaction took time and he had to go to Allied Bank for another transaction.The passbook was still in the hands of the employees of Solidbank for the processing of the deposit when Calapre left Solidbank.Solidbanks rules on savings account require that the deposit book should be carefully guarded by the depositor and kept under lock and key, if possible. When the passbook is in the possession of Solidbanks tellers during withdrawals, the law imposes on Solidbank and its tellers an even higher degree of diligence in safeguarding the passbook.

Likewise, Solidbanks tellers must exercise a high degree of diligence in insuring that they return the passbook only to the depositor or his authorized representative. The tellers know, or should know, that the rules on savings account provide that any person in possession of the passbook is presumptively its owner.If the tellers give the passbook to the wrong person, they would be clothing that person presumptive ownership of the passbook, facilitating unauthorized withdrawals by that person.For failing to return the passbook to Calapre, the authorized representative of L.C. Diaz, Solidbank and Teller No. 6 presumptively failed to observe such high degree of diligence in safeguarding the passbook, and in insuring its return to the party authorized to receive the same.

Inculpa contractual, once the plaintiff proves a breach of contract, there is a presumption that the defendant was at fault or negligent.The burden is on the defendant to prove that he was not at fault or negligent.In contrast, inculpa aquilianathe plaintiff has the burden of proving that the defendant was negligent.In the present case, L.C. Diaz has established that Solidbank breached its contractual obligation to return the passbook only to the authorized representative of L.C. Diaz.There is thus a presumption that Solidbank was at fault and its teller was negligent in not returning the passbook to Calapre.The burden was on Solidbank to prove that there was no negligence on its part or its employees.

Solidbank failed to discharge its burden.Solidbank did not present to the trial court Teller No. 6, the teller with whom Calapre left the passbook and who was supposed to return the passbook to him.The record does not indicate that Teller No. 6 verified the identity of the person who retrieved the passbook.Solidbank also failed to adduce in evidence its standard procedure in verifying the identity of the person retrieving the passbook, if there is such a procedure, and that Teller No. 6 implemented this procedure in the present case.

Solidbank is bound by the negligence of its employees under the principle ofrespondeat superioror command responsibility.The defense of exercising the required diligence in the selection and supervision of employees is not a complete defense inculpa contractual, unlike inculpa aquiliana.[25]The bank must not only exercise high standards of integrity and performance, it must also insure that its employees do likewise because this is the only way to insure that the bank will comply with its fiduciary duty.Solidbank failed to present the teller who had the duty to return to Calapre the passbook, and thus failed to prove that this teller exercised the high standards of integrity and performance required of Solidbanks employees.

Proximate Cause of the Unauthorized WithdrawalAnother point of disagreement between the trial and appellate courts is the proximate cause of the unauthorized withdrawal.The trial court believed that L.C. Diazs negligence in not securing its passbook under lock and key was the proximate cause that allowed the impostor to withdraw theP300,000.For the appellate court, the proximate cause was the tellers negligence in processing the withdrawal without first verifying with L.C. Diaz.We do not agree with either court.

Proximate cause 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.[26]Proximate cause is determined by the facts of each case upon mixed considerations of logic, common sense, policy and precedent.[27]L.C. Diaz was not at fault that the passbook landed in the hands of the impostor.Solidbank was in possession of the passbook while it was processing the deposit.After completion of the transaction, Solidbank had the contractual obligation to return the passbook only to Calapre, the authorized representative of L.C. Diaz.Solidbank failed to fulfill its contractual obligation because it gave the passbook to another person.

Solidbanks failure to return the passbook to Calapre made possible the withdrawal of theP300,000 by the impostor who took possession of the passbook.Under Solidbanks rules on savings account, mere possession of the passbook raises the presumption of ownership.It was the negligent act of Solidbanks Teller No. 6 that gave the impostor presumptive ownership of the passbook.Had the passbook not fallen into the hands of the impostor, the loss ofP300,000 would not have happened. Thus, the proximate cause of the unauthorized withdrawal was Solidbanks negligence in not returning the passbook to Calapre.

We do not subscribe to the appellate courts theory that the proximate cause of the unauthorized withdrawal was the tellers failure to call up L.C. Diaz to verify the withdrawal. Solidbank did not have the duty to call up L.C. Diaz to confirm the withdrawal. There is no arrangement between Solidbank and L.C. Diaz to this effect.Even the agreement between Solidbank and L.C. Diaz pertaining to measures that the parties must observe whenever withdrawals of large amounts are made does not direct Solidbank to call up L.C. Diaz.

There is no law mandating banks to call up their clients whenever their representatives withdraw significant amounts from their accounts.L.C. Diaz therefore had the burden to prove that it is the usual practice of Solidbank to call up its clients to verify a withdrawal of a large amount of money.L.C. Diaz failed to do so.

Teller No. 5 who processed the withdrawal could not have been put on guard to verify the withdrawal.Prior to the withdrawal ofP300,000, the impostor deposited with Teller No. 6 theP90,000 PBC check, which later bounced.The impostor apparently deposited a large amount of money to deflect suspicion from the withdrawal of a much bigger amount of money. The appellate court thus erred when it imposed on Solidbank the duty to call up L.C. Diaz to confirm the withdrawal when no law requires this from banks and when the teller had no reason to be suspicious of the transaction.

Solidbank continues to foist the defense that Ilagan made the withdrawal.Solidbank claims that since Ilagan was also a messenger of L.C. Diaz, he was familiar with its teller so that there was no more need for the teller to verify the withdrawal. Solidbank relies on the following statements in the Booking and Information Sheet of Emerano Ilagan:

xxx Ilagan also had with him (before the withdrawal) a forged check of PBC and indicated the amount of P90,000 which he deposited in favor of L.C. Diaz and Company.After successfully withdrawing this large sum of money, accused Ilagan gave alias Rey (Noel Tamayo) his share of the loot.Ilagan then hired a taxicab in the amount of P1,000 to transport him (Ilagan) to his home province at Bauan, Batangas.Ilagan extravagantly and lavishly spent his money but a big part of his loot was wasted in cockfight and horse racing.Ilagan was apprehended and meekly admitted his guilt.[28](Emphasis supplied.)

L.C. Diaz refutes Solidbanks contention by pointing out that the person who withdrew theP300,000 was a certain Noel Tamayo.Both the trial and appellate courts stated that this Noel Tamayo presented the passbook with the withdrawal slip.

We uphold the finding of the trial and appellate courts that a certain Noel Tamayo withdrew theP300,000.The Court is not a trier of facts.We find no justifiable reason to reverse the factual finding of the trial court and the Court of Appeals.The tellers who processed the deposit of theP90,000 check and the withdrawal of theP300,000 were not presented during trial to substantiate Solidbanks claim that Ilagan deposited the check and made the questioned withdrawal.Moreover, the entry quoted by Solidbank does not categorically state that Ilagan presented the withdrawal slip and the passbook.

Doctrine of Last Clear ChanceThe doctrine of last clear chance states that where both parties are negligent but the negligent act of one is appreciably later than that of the other, or where it is impossible to determine whose fault or negligence caused the loss, the one who had the last clear opportunity to avoid the loss but failed to do so, is chargeable with the loss.[29]Stated differently, the antecedent negligence of the plaintiff does not preclude him from recovering damages caused by the supervening negligence of the defendant, who had the last fair chance to prevent the impending harm by the exercise of due diligence.[30]We do not apply the doctrine of last clear chance to the present case.Solidbank is liable for breach of contract due to negligence in the performance of its contractual obligation to L.C. Diaz. This is a case ofculpa contractual, where neither the contributory negligence of the plaintiff nor his last clear chance to avoid the loss, would exonerate the defendant from liability.[31]Such contributory negligence or last clear chance by the plaintiff merely serves to reduce the recovery of damages by the plaintiff but does not exculpate the defendant from his breach of contract.[32]Mitigated DamagesUnder Article 1172, liability (forculpa contractual) may be regulated by the courts, according to the circumstances. This means that if the defendant exercised the proper diligence in the selection and supervision of its employee, or if the plaintiff was guilty of contributory negligence, then the courts may reduce the award of damages.In this case, L.C. Diaz was guilty of contributory negligence in allowing a withdrawal slip signed by its authorized signatories to fall into the hands of an impostor.Thus, the liability of Solidbank should be reduced.

InPhilippine Bank of Commerce v. Court of Appeals,[33]where the Court held the depositor guilty of contributory negligence, we allocated the damages between the depositor and the bank on a 40-60 ratio.Applying the same ruling to this case, we hold that L.C. Diaz must shoulder 40% of the actual damages awarded by the appellate court. Solidbank must pay the other 60% of the actual damages.

WHEREFORE, the decision of the Court of Appeals isAFFIRMEDwithMODIFICATION.Petitioner Solidbank Corporation shall pay private respondent L.C. Diaz and Company, CPAs only 60% of the actual damages awarded by the Court of Appeals.The remaining 40% of the actual damages shall be borne by private respondent L.C. Diaz and Company, CPAs.Proportionate costs.

SO ORDERED.

G.R. No. L-19441 March 27, 1923FUA CUN (aliasTua Cun),Plaintiff-Appellee, vs.RICARDO SUMMERS, in his capacity as Sheriff ex-oficio of the City of Manila, and the CHINA BANKING CORPORATION,Defendants-Appellants.

Araneta and Zaragoza for appellants.Canillas and Cardenas for appellee.OSTRAND,J.:It appears from the evidence that on August 26, 1920, one Chua Soco subscribed for five hundred shares of stock of the defendant Banking Corporation at a par value of P100 per share, paying the sum of P25,000, one-half of the subscription price, in cash, for which a receipt was issued in the following terms:

This is to certify, That Chua Soco, a subscriber for five hundred shares of the capital stock of theChina Banking Corporationat its par value of P100 per share, has paid into the Treasury of the Corporation, on account of said subscription and in accordance with its terms, the sum of twenty-five thousand pesos (P25,000), Philippine currency.chanroblesvirtualawlibrarychanrobles virtual law library

Upon receipt of the balance of said subscription in accordance with the terms of the calls of the Board of Directors, and surrender of this certificate, duly executed certificates for said five hundred shares of stock will be issued to the order of the subscriber.chanroblesvirtualawlibrarychanrobles virtual law library

It is expressly understood that the total number of shares specified in this receipt is subject to sale by theChina Banking Corporationfor the payment of any unpaid subscriptions, should the subscriber fail to pay the whole or any part of the balance of his subscription upon 30 days' notice issued therefor by the Board of Directors.chanroblesvirtualawlibrarychanrobles virtual law library

Witness our official signatures at Manila, P. I., this 25th day of August, 1920.chanroblesvirtualawlibrarychanrobles virtual law library

(Sgd.) MERVIN WEBSTERCashierchanrobles virtual law library

(Sgd.) DEE C. CHUANPresidentOn May 18, 1921, Chua Soco executed a promissory note in favor of the plaintiff Fua Cun for the sum of P25,000 payable in ninety days and drawing interest at the rate of 1 per cent per month, securing the note with a chattel mortgage on the shares of stock subscribed for by Chua Soco, who also endorsed the receipt above mentioned and delivered it to the mortgagee. The plaintiff thereupon took the receipt to the manager of the defendant Bank and informed him of the transaction with Chua Soco, but was told to await action upon the matter by the Board of Directors.chanroblesvirtualawlibrarychanrobles virtual law library

In the meantime Chua Soco appears to have become indebted to the China Banking Corporation in the sum of P37,731.68 for dishonored acceptances of commercial paper and in an action brought against him to recover this amount, Chua Soco's interest in the five hundred shares subscribed for was attached and the receipt seized by the sheriff. The attachment was levied after the defendant bank had received notice of the facts that the receipt had been endorsed over to the plaintiff.chanroblesvirtualawlibrarychanrobles virtual law library

Fua Cun thereupon brought the present action maintaining that by virtue of the payment of the one-half of the subscription price of five hundred shares Chua Soco in effect became the owner of two hundred and fifty shares and praying that his, the plaintiff's, lien on said shares, by virtue of the chattel mortgage, be declared to hold priority over the claim of the defendant Banking Corporation; that the defendants be ordered to deliver the receipt in question to him; and that he be awarded the sum of P5,000 in damages for wrongful attachment.chanroblesvirtualawlibrarychanrobles virtual law library

The trial court rendered judgment in favor of the plaintiff declaring that Chua Soco, through the payment of the P25,000, acquired the right to two hundred and fifty shares fully paid up, upon which shares the plaintiff holds a lien superior to that of the defendant Banking Corporation and ordering that the receipt be returned to said plaintiff. From this judgment the defendants appeal.chanroblesvirtualawlibrarychanrobles virtual law library

Though the court below erred in holding that Chua Soco, by paying one-half of the subscription price of five hundred shares, in effect became the owner of two hundred and fifty shares, the judgment appealed from is in the main correct.chanroblesvirtualawlibrarychanrobles virtual law library

The claim of the defendant Banking Corporation upon which it brought the action in which the writ of attachment was issued, was for the non-payment of drafts accepted by Chua Soco and had no direct connection with the shares of stock in question. At common law a corporation has no lien upon the shares of stockholders for any indebtedness to the corporation (Jones on Liens, 3d ed., sec. 375) and our attention has not been called to any statute creating such lien here. On the contrary, section 120 of the Corporation Act provides that "no bank organized under this Act shall make any loan or discount on the security of the shares of its own capital stock, nor be the purchaser or holder of any such shares, unless such security or purchase shall be necessary to prevent loss upon a debt previously contracted in good faith, and stock so purchased or acquired shall, within six months from the time of its purchase, be sold or disposed of at public or private sale, or, in default thereof, a receiver may be appointed to close up the business of the bank in accordance with law."chanrobles virtual law library

Section 35 of the United States National Banking Act of 1864 contains a similar provision and it has been held in various decisions of the United States Supreme Court that a bank organized under that Act can have no lien on its own stock for the indebtedness of the stockholders even when the by-laws provide that the shares shall be transferable only on the books of the corporation and that no such transfer shall be made if the holder of the shares is indebted to the corporation. (Jones on Liens, 3d ed., sec. 384; First National Bank of South Bendvs.Lanier and Handy, 11 Wall., 369; Bullardvs.National Eagle Bank, 18 Wall., 589; First National Bank of Xeniavs.Stewart and McMillan, 107 U.S., 676.) The reasons for this doctrine are obvious; if banking corporations were given a lien on their own stock for the indebtedness of the stockholders, the prohibition against granting loans or discounts upon the security of the stock would become largely ineffective.chanroblesvirtualawlibrarychanrobles virtual law library

Turning now to the rights of the plaintiff in the stock in question, it is argued that the interest held by Chua Soco was merely an equity which could not be made the subject of a chattel mortgage. Though the courts have uniformly held that chattel mortgages on shares of stock and other choses in action are valid as between the parties, there is still much to be said in favor of the defendants' contention that the chattel mortgage here in question would not prevail over liens of third parties without notice; an equity in shares of stock is of such an intangible character that it is somewhat difficult to see how it can be treated as a chattel and mortgaged in such a manner that the recording of the mortgage will furnish constructive notice to third parties. As said by the court in the case of Spaldingvs.Paine's Adm'r. (81 Ky., 416), in regard to a chattel mortgage of shares of stock:

These certificates of stock are in the pockets of the owner, and go with him where he may happen to locate, as choses in action, or evidence of his right, without any means on the part of those with whom he proposes to deal on the faith of such a security of ascertaining whether or not this stock is in pledge or mortgaged to others. He finds the name of the owner on the books of the company as a subscriber of paid-up stock, amounting to 180 shares, with the certificates in his possession, pays for these certificates their full value, and has the transfer to him made on the books of the company, thereby obtaining a perfect title. What other inquiry is he to make, so as to make his investment certain and secure? Where is he to look, in order to ascertain whether or not this stock has been mortgaged? The chief office of the company may be at one place to-day and at another tomorrow. The owner may have no fixed or permanent abode, and with his notes in one pocket and his certificates of stock in the other - the one evidencing the extent of his interest in the stock of the corporation, the other his right to money owing him by his debtor, we are asked to say that the mortgage is effectual as to the one and inoperative as to the other.

But a determination of this question is not essential in the present case. There can be no doubt that an equity in shares of stock may be assigned and that the assignment is valid as between the parties and as to persons to whom notice is brought home. Such an assignment exists here, though it was made for the purpose of securing a debt. The endorsement to the plaintiff of the receipt above mentioned reads:

For value received, I assign all my rights in these shares in favor of Mr. Tua Cun.chanroblesvirtualawlibrarychanrobles virtual law library

Manila, P. I., May 18, 1921.chanroblesvirtualawlibrarychanrobles virtual law library

(Sgd.) CHUA SOCO

This endorsement was accompanied by the delivery of the receipt to the plaintiff and further strengthened by the execution of the chattel mortgage, which mortgage, at least, operated as a conditional equitable assignment.chanroblesvirtualawlibrarychanrobles virtual law library

As against the rights of the plaintiff the defendant bank had, as we have seen, no lien unless by virtue of the attachment. But the attachment was levied after the bank had received notice of the assignment of Chua Soco's interests to the plaintiff and was therefore subject to the rights of the latter. It follows that as against these rights the defendant bank holds no lien whatever.chanroblesvirtualawlibrarychanrobles virtual law library

As we have already stated, the court erred in holding the plaintiff as the owner of two hundred and fifty shares of stock; "the plaintiff's rights consist in an equity in five hundred shares and upon payment of the unpaid portion of the subscription price he becomes entitled to the issuance of certificate for said five hundred shares in his favor."chanrobles virtual law library

The judgment appealed from is modified accordingly, and in all other respects it is affirmed, with the costs against the appellants Banking Corporation. So ordered.

G.R. No. L-20583 January 23, 1967REPUBLIC OF THE PHILIPPINES,petitioner,vs.SECURITY CREDIT AND ACCEPTANCE CORPORATION, ROSENDO T. RESUELLO, PABLO TANJUTCO, ARTURO SORIANO, RUBEN BELTRAN, BIENVENIDO V. ZAPA, PILAR G. RESUELLO, RICARDO D. BALATBAT, JOSE SEBASTIAN and VITO TANJUTCO JR.,respondents.

Office of the Solicitor General Arturo A. Alafriz and Solicitor E. M. Salva for petitioner.Sycip, Salazar, Luna, Manalo & Feliciano for respondents.Natalio M. Balboa and F. E. Evangelista for the receiver.CONCEPCION,C.J.:This is an originalquo warrantoproceeding, initiated by the Solicitor General, to dissolve the Security and Acceptance Corporation for allegedly engaging in banking operations without the authority required therefor by the General Banking Act (Republic Act No. 337). Named as respondents in the petition are, in addition to said corporation, the following, as alleged members of its Board of Directors and/or Executive Officers, namely:

NAMEPOSITION

Rosendo T. ResuelloPresident & Chairman of the Board

Pablo TanjutcoDirector

Arturo SorianoDirector

Ruben BeltranDirector

Bienvenido V. ZapaDirector & Vice-President

Pilar G. ResuelloDirector & Secretary-Treasurer

Ricardo D. BalatbatDirector & Auditor

Jose R. SebastianDirector & Legal Counsel

Vito Tanjutco Jr.Director & Personnel Manager

The record shows that the Articles of Incorporation of defendant corporation1were registered with the Securities and Exchange Commission on March 27, 1961; that the next day, the Board of Directors of the corporation adopted a set of by-laws,2which were filed with said Commission on April 5, 1961; that on September 19, 1961, the Superintendent of Banks of the Central Bank of the Philippines asked its legal counsel an opinion on whether or not said corporation is a banking institution, within the purview of Republic Act No. 337; that, acting upon this request, on October 11, 1961, said legal counsel rendered an opinion resolving the query in the affirmative; that in a letter, dated January 15, 1962, addressed to said Superintendent of Banks, the corporation through its president, Rosendo T. Resuello, one of defendants herein, sought a reconsideration of the aforementioned opinion, which reconsideration was denied on March 16, 1962; that, prior thereto, or on March 9, 1961, the corporation had applied with the Securities and Exchange Commission for the registration and licensing of its securities under the Securities Act; that, before acting on this application, the Commission referred it to the Central Bank, which, in turn, gave the former a copy of the above-mentioned opinion, in line with which, the Commission advised the corporation on December 5, 1961, to comply with the requirements of the General Banking Act; that, upon application of members of the Manila Police Department and an agent of the Central Bank, on May 18, 1962, the Municipal Court of Manila issued Search Warrant No. A-1019; that, pursuant thereto, members of the intelligence division of the Central Bank and of the Manila Police Department searched the premises of the corporation and seized documents and records thereof relative to its business operations; that, upon the return of said warrant, the seized documents and records were, with the authority of the court, placed under the custody of the Central Bank of the Philippines; that, upon examination and evaluation of said documents and records, the intelligence division of the Central Bank submitted, to the Acting Deputy Governor thereof, a memorandum dated September 10, 1962, finding that the corporation is:

1. Performing banking functions, without requisite certificate of authority from the Monetary Board of the Central Bank, in violation of Secs. 2 and 6 of Republic Act 337, in thatit is soliciting and accepting deposit from the public and lending out the funds so received;

2.Soliciting and accepting savings deposits from the general publicwhen the company's articles of incorporation authorize it only to engage primarily in financing agricultural, commercial and industrial projects, and secondarily, in buying and selling stocks and bonds of any corporation, thereby exceeding the scope of its powers and authority as granted under its charter; consequently such acts areultra-vires:

3.Soliciting subscriptions to the corporate shares of stock and accepting deposits on account thereof, without prior registration and/or licensing of such shares or securing exemption therefor, in violation of the Securities Act; and

4. That being a private credit and financial institution,it should come under the supervision of the Monetary Board of the Central Bank, by virtue of the transfer of the authority, power, duties and functions of the Secretary of Finance, Bank Commissioner and the defunct Bureau of Banking, to the said Board, pursuant to Secs. 139 and 140 of Republic Act 265 and Secs. 88 and 89 of Republic Act 337." (Emphasis Supplied.) that upon examination and evaluation of the same records of the corporation, as well as of other documents and pertinent pipers obtained elsewhere, the Superintendent of Banks, submitted to the Monetary Board of the Central Bank a memorandum dated August 28, 1962, statinginter alia.

11. Pursuant to the request for assistance by the Chief, Intelligence Division, contained in his Memorandum to the Governor dated May 23, 1962 and in accordance with the written instructions of Governor Castillo dated May 31, 1962, an examination of the books and records of the Security Credit and Loans Organizations, Inc. seized by the combined MPD-CB team was conducted by this Department. The examination disclosed the following findings:

a. Considering the extent of its operations, the Security Credit and Acceptance Corporation, Inc.,receives deposits from the public regularly. Such deposits are treated in the Corporation's financial statements as conditional subscription to capital stock. Accumulated deposits of P5,000 of an individual depositor may be converted into stock subscription to the capital stock of the Security Credit and Acceptance Corporation at the option of the depositor. Sale of its shares of stock or subscriptions to its capital stock areoffered to the public as part of its regular operations.

b. That out of the funds obtained from the public through the receipt of deposits and/or the sale of securities,loans are made regularly to any person by the Security Credit and Acceptance Corporation.

A copy of the Memorandum Report dated July 30, 1962 of the examination made by Examiners of this Department of the seized books and records of the Corporation is attached hereto.

12. Section 2 of Republic Act No. 337, otherwise known as the General Banking Act, defines the term, "banking institution" as follows:

Sec. 2. Only duly authorized persons and entities may engage in the lending of funds obtained from the public through the receipts of deposits or the sale of bonds, securities, or obligations of any kind and all entities regularly conducting 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. ...

13. Premises considered, the examination disclosed that the Security Credit and Acceptance Corporation isregularly lending funds obtained from the receipt of deposits and/or the sale of securities. The Corporation therefore is performing 'banking functions' as contemplated in Republic Act No. 337, without having first complied with the provisions of said Act.

Recommendations:In view of all the foregoing, it is recommended that the Monetary Board decide and declare:

1. That the Security Credit and Acceptance Corporation is performing banking functions without having first complied with the provisions of Republic Act No. 337, otherwise known as the General Banking Act, in violation of Sections 2 and 6 thereof; and

2. That this case be referred to the Special Assistant to the Governor (Legal Counsel) for whatever legal actions are warranted, including, if warranted criminal action against the Persons criminally liable and/orquo warrantoproceedings with preliminary injunction against the Corporation for its dissolution. (Emphasis supplied.)

that, acting upon said memorandum of the Superintendent of Banks, on September 14, 1962, the Monetary Board promulgated its Resolution No. 1095, declaring that the corporation is performing banking operations, without having first complied with the provisions of Sections 2 and 6 of Republic Act No. 337;3that on September 25, 1962, the corporation was advised of the aforementioned resolution, but, this notwithstanding, the corporation, as well as the members of its Board of Directors and the officers of the corporation, have been and still are performing the functions and activities which had been declared to constitute illegal banking operations; that during the period from March 27, 1961 to May 18, 1962, the corporation had established 74 branches in principal cities and towns throughout the Philippines; that through a systematic and vigorous campaign undertaken by the corporation, the same had managed to induce the public to open 59,463 savings deposit accounts with an aggregate deposit of P1,689,136.74; that, in consequence of the foregoing deposits with the corporation, its original capital stock of P500,000, divided into 20,000 founders' shares of stock and 80,000 preferred shares of stock, both of which had a par value of P5.00 each, was increased, in less than one (1) year, to P3,000,000 divided into 130,000 founders' shares and 470,000 preferred shares, both with a par value of P5.00 each; and that, according to its statement of assets and liabilities, as of December 31, 1961, the corporation had a capital stock aggregating P1,273,265.98 and suffered, during the year 1961, a loss of P96,685.29. Accordingly, on December 6, 1962, the Solicitor General commenced thisquo warrantoproceedings for the dissolution of the corporation, with a prayer that, meanwhile, a writ of preliminary injunction be issued ex parte, enjoining the corporation and its branches, as well as its officers and agents, from performing the banking operations complained of, and that a receiver be appointed pendente lite.

Upon joint motion of both parties, on August 20, 1963, the Superintendent of Banks of the Central Bank of the Philippines was appointed by this Court receiver pendente lite of defendant corporation, and upon the filing of the requisite bond, said officer assumed his functions as such receiver on September 16, 1963.

In their answer, defendants admitted practically all of the allegations of fact made in the petition. They, however, denied that defendants Tanjutco (Pablo and Vito, Jr.), Soriano, Beltran, Zapa, Balatbat and Sebastian, are directors of the corporation, as well as the validity of the opinion, ruling, evaluation and conclusions, rendered, made and/or reached by the legal counsel and the intelligence division of the Central Bank, the Securities and Exchange Commission, and the Superintendent of Banks of the Philippines, or in Resolution No. 1095 of the Monetary Board, or of Search Warrant No. A-1019 of the Municipal Court of Manila, and of the search and seizure made thereunder. By way of affirmative allegations, defendants averred that, as of July 7, 1961, the Board of Directors of the corporation was composed of defendants Rosendo T. Resuello, Aquilino L. Illera and Pilar G. Resuello; that on July 11, 1962, the corporation had filed with the Superintendent of Banks an application for conversion into a Security Savings and Mortgage Bank, with defendants Zapa, Balatbat, Tanjutco (Pablo and Vito, Jr.), Soriano, Beltran and Sebastian as proposed directors, in addition to the defendants first named above, with defendants Rosendo T. Resullo, Zapa, Pilar G. Resuello, Balatbat and Sebastian as proposed president, vice-president, secretary-treasurer, auditor and legal counsel, respectively; that said additional officers had never assumed their respective offices because of the pendency of the approval of said application for conversion; that defendants Soriano, Beltran, Sebastian, Vito Tanjutco Jr. and Pablo Tanjutco had subsequently withdrawn from the proposed mortgage and savings bank; that on November 29, 1962 or before the commencement of the present proceedings the corporation and defendants Rosendo T. Resuello and Pilar G. Resuello had instituted Civil Case No. 52342 of the Court of First Instance of Manila against Purificacion Santos and other members of the savings plan of the corporation and the City Fiscal for a declaratory relief and an injunction; that on December 3, 1962, Judge Gaudencio Cloribel of said court issued a writ directing the defendants in said case No. 52342 and their representatives or agents to refrain from prosecuting the plaintiff spouses and other officers of the corporation by reason of or in connection with the acceptance by the same of deposits under its savings plan; that acting upon a petition filed by plaintiffs in said case No. 52342, on December 6, 1962, the Court of First Instance of Manila had appointed Jose Ma. Ramirez as receiver of the corporation; that, on December 12, 1962, said Ramirez qualified as such receiver, after filing the requisite bond; that, except as to one of the defendants in said case No. 52342, the issues therein have already been joined; that the failure of the corporation to honor the demands for withdrawal of its depositors or members of its savings plan and its former employees was due, not to mismanagement or misappropriation of corporate funds, but to an abnormal situation created by the mass demand for withdrawal of deposits, by the attachment of property of the corporation by its creditors, by the suspension by debtors of the corporation of the payment of their debts thereto and by an order of the Securities and Exchange Commission dated September 26, 1962, to the corporation to stop soliciting and receiving deposits; and that the withdrawal of deposits of members of the savings plan of the corporation was understood to be subject, as to time and amounts, to the financial condition of the corporation as an investment firm.

In its reply, plaintiff alleged that a photostat copy, attached to said pleading, of the anniversary publication of defendant corporation showed that defendants Pablo Tanjutco, Arturo Soriano, Ruben Beltran, Bienvenido V. Zapa, Ricardo D. Balatbat, Jose R. Sebastian and Vito Tanjutco Jr. are officers and/or directors thereof; that this is confirmed by the minutes of a meeting of stockholders of the corporation, held on September 27, 1962, showing that said defendants had been elected officers thereof; that the views of the legal counsel of the Central Bank, of the Securities and Exchange Commission, the Intelligence Division, the Superintendent of Banks and the Monetary Board above referred to have been expressed in the lawful performance of their respective duties and have not been assailed or impugned in accordance with law; that neither has the validity of Search Warrant No. A-1019 been contested as provided by law; that the only assets of the corporation now consist of accounts receivable amounting approximately to P500,000, and its office equipment and appliances, despite its increased capitalization of P3,000,000 and its deposits amounting to not less than P1,689,136.74; and that the aforementioned petition of the corporation, in Civil Case No. 52342 of the Court of First Instance of Manila, for a declaratory relief is now highly improper, the defendants having already committed infractions and violations of the law justifying the dissolution of the corporation.

Although, admittedly, defendant corporation has not secured the requisite authority to engage in banking, defendants deny that its transactions partake of the nature of banking operations. It is conceded, however, that, in consequence of a propaganda campaign therefor, a total of 59,463 savings account deposits have been made by the public with the corporation and its 74 branches, with an aggregate deposit of P1,689,136.74, which has been lent out to such persons as the corporation deemed suitable therefor. It is clear that these transactions partake of the nature of banking, as the term is used in Section 2 of the General Banking Act. Indeed, a bank has been defined as:

... a moneyed institute [Talmage vs. Pell 7 N.Y. (3 Seld. ) 328, 347, 348] founded to facilitate the borrowing, lending and safe-keeping of money (Smith vs. Kansas City Title & Trust Co., 41 S. Ct. 243, 255 U.S. 180, 210, 65 L. Ed. 577) and to deal, in notes, bills of exchange, and credits (State vs. Cornings Sav. Bank, 115 N.W. 937, 139 Iowa 338). (Banks & Banking, by Zellmann Vol. 1, p. 46).

Moreover, it has been held that:

An investment company which loans out the money of its customers, collects the interest and charges a commission to both lender and borrower, is a bank. (Western Investment Banking Co. vs. Murray, 56 P. 728, 730, 731; 6 Ariz 215.)

... any person engaged in the business carried on by banks of deposit, of discount, or of circulation is doing a banking business, although but one of these functions is exercised. (MacLaren vs. State, 124 N.W. 667, 141 Wis. 577, 135 Am. S.R. 55, 18 Ann. Cas. 826; 9 C.J.S. 30.)

Accordingly, defendant corporation has violated the law by engaging in banking without securing the administrative authority required in Republic Act No. 337.

That the illegal transactions thus undertaken by defendant corporation warrant its dissolution is apparent from the fact that the foregoing misuser of the corporate funds and franchise affects the essence of its business, that it is willful and has been repeated 59,463 times, and that its continuance inflicts injury upon the public, owing to the number of persons affected thereby.

It is urged, however, that this case should be remanded to the Court of First Instance of Manila upon the authority ofVeraguth vs. Isabela Sugar Co. (57 Phil. 266). In this connection, it should be noted that this Court is vested with original jurisdiction, concurrently with courts of first instance, to hear and decidequo warrantocases and, that, consequently, it is discretionary for us to entertain the present case or to require that the issues therein be taken up in said Civil Case No. 52342. The Veraguth case cited by herein defendants, in support of the second alternative, is not in point, because in said case there were issues of fact which required the presentation of evidence, and courts of first instance are, in general, better equipped than appellate courts for the taking of testimony and the determination of questions of fact. In the case at bar, there is, however, no dispute as to the principal facts or acts performed by the corporation in the conduct of its business. The main issue here is one of law, namely, the legal nature of said facts or of the aforementioned acts of the corporation. For this reason, and because public interest demands an early disposition of the case, we have deemed it best to determine the merits thereof.

Wherefore, the writ prayed for should be, as it is hereby granted and defendant corporation is, accordingly, ordered dissolved. The appointment of receiver herein issuedpendente liteis hereby made permanent, and the receiver is, accordingly, directed to administer the properties, deposits, and other assets of defendant corporation and wind up the affairs thereof conformably to Rules 59 and 66 of the Rules of Court. It is so ordered.

SECOND DIVISION

JOSE C. GO,Petitioner,-versus-BANGKO SENTRAL NG PILIPINAS,Respondent.G.R. No.178429

Present:QUISUMBING,J., Chairperson,*CARPIO,CARPIO MORALES,BRION,andABAD,JJ.

Promulgated:October 23, 2009

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