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GENERAL BANKING LAW OF 2000 (R.A. No.

performing the functions and activities which had


8791 been declared to constitute illegal banking operations.
In fact, the corporation had established 74 branches in
A. Definition and Classification of Banks principal cities and towns throughout the Philippines;
and that through a systematic and vigorous campaign
REPUBLIC OF THE PHILIPPINES, petitioner, vs. undertaken by the corporation, the same had managed
SECURITY CREDIT AND ACCEPTANCE to induce the public to open 59,463 savings deposit
CORPORATION, ROSENDO T. RESUELLO, PABLO accounts with an aggregate deposit of P1,689,136.74.
TANJUTCO, ARTURO SORIANO, RUBEN
BELTRAN, BIENVENIDO V. ZAPA, PILAR G. Accordingly, on December 6, 1962, the
RESUELLO, RICARDO D. BALATBAT, JOSE Solicitor General commenced this quo warranto
SEBASTIAN and VITO TANJUTCO JR., proceedings for the dissolution of the corporation,
respondents. with a prayer that, meanwhile, a writ of preliminary
G.R. No. L-20583, January 23, 1967, injunction be issued ex parte, enjoining the
CONCEPCION, C.J corporation and its branches, as well as its officers
and agents, from performing the banking operations
Key Doctrine: Indeed, a bank has been defined as a complained of, and that a receiver be appointed
moneyed institute founded to facilitate the borrowing, pendente lite.
lending and safe-keeping of money and to deal, in
notes, bills of exchange, and credits. An investment Defendant corporation admitted that it has not
company which loans out the money of its customers, secured the requisite authority to engage in banking.
collects the interest and charges a commission to both However, defendants deny that its transactions
lender and borrower, is a bank. ... any person engaged partake of the nature of banking operations.
in the business carried on by banks of deposit, of
discount, or of circulation is doing a banking business, ISSUE: Are the transactions made by the
although but one of these functions is exercised. corporation partake of the nature of banking
transactions, thus in violation of the General
FACTS: The Security and Acceptance Corporation is a Banking Act?
corporation registered with the Securities and
Exchange Commission. RULING: YES.
Although, admittedly, defendant corporation
Armed with a search warrant, the intelligence has not secured the requisite authority to engage in
division of the Central Bank and of the Manila Police banking, defendants deny that its transactions partake
Department searched the premises of the corporation of the nature of banking operations. It is conceded,
and seized documents and records thereof relative to however, that, in consequence of a propaganda
its business operations. Upon examination and campaign therefor, a total of 59,463 savings account
evaluation of said documents and records, it was deposits have been made by the public with the
submitted that the corporation is performing banking corporation and its 74 branches, with an aggregate
functions without requisite certificate of authority deposit of P1,689,136.74, which has been lent out to
from the Monetary Board of the Central Bank, in such persons as the corporation deemed suitable
violation of Secs. 2 and 6 of Republic Act 337, therefor.
particularly, soliciting and accepting deposit from the
public and lending out the funds so received. It was It is clear that these transactions partake of
noted that company's articles of incorporation the nature of banking, as the term is used in Section 2
authorize it only to engage primarily in financing of the General Banking Act. Indeed, a bank has been
agricultural, commercial and industrial projects, and defined as a moneyed institute founded to
secondarily, in buying and selling stocks and bonds of facilitate the borrowing, lending and safe-
any corporation, thus the corporation exceeded the keeping of money and to deal, in notes, bills of
scope of its powers and authority as granted under its exchange, and credits.
charter.
Moreover, it has been held that:
The examination disclosed that the Security
Credit and Acceptance Corporation is regularly
An investment company which loans out
lending funds obtained from the receipt of deposits
and/or the sale of securities. The Corporation the money of its customers, collects the
therefore is performing 'banking functions' as interest and charges a commission to both
contemplated in Republic Act No. 337, without having lender and borrower, is a bank.
first complied with the provisions of said Act.
... any person engaged in the business
The Monetary Board promulgated its carried on by banks of deposit, of
Resolution No. 1095, declaring that the corporation is discount, or of circulation is doing a
performing banking operations, without having first banking business, although but one of
complied with the provisions of Sections 2 and 6 of these functions is exercised.
Republic Act No. 337. However, notwithstanding its
notice of the said resolution, the corporation, as well Accordingly, defendant corporation has violated the
as the members of its Board of Directors and the law by engaging in banking without securing the
officers of the corporation, have been and still are

1
administrative authority required in Republic Act No. of Appeals affirmed in toto the decision of the trial
337. court thus.

B. Distinction of Banks from Quasi-Banks and Issue: Did the disputed transaction between
Trust Entities petitioners and ASIA PACIFIC violate banking laws,
hence, null and void?
TEODORO BAAS, C. G. DIZON CONSTRUCTION,
INC., and CENEN DIZON vs. ASIA PACIFIC Held: Petitioners insist that ASIA PACIFIC was
FINANCE CORPORATION organized as an investment house which could not
G.R. No. 128703, October 18, 2000 engage in the lending of funds obtained from the
public through receipt of deposits. We reject the
What is prohibited by law is for investment companies argument. An investment company refers to any issuer
to lend funds obtained from the public through which is or holds itself out as being engaged or
receipts of deposit, which is a function of banking proposes to engage primarily in the business of
institutions. investing, reinvesting or trading in securities. As
defined in Sec. 2, par. (a), of the Revised Securities
In 1981 ASIA PACIFIC filed a complaint for a sum of Act, securities "shall include commercial papers
money with prayer for a writ of replevin against evidencing indebtedness of any person, financial or
Teodoro, C. G. Dizon and Cenen Dizon. Sometime in non-financial entity, irrespective of maturity, issued,
1980, Teodoro executed a Promissory Note in favor of endorsed, sold, transferred or in any manner conveyed
C. G. Dizon whereby he promised to pay to the order to another with or without recourse, such as
of C. G. Dizon the sum of P390,000.00 in installments. promissory notes " Clearly, the transaction between
Later, C. G. Dizon endorsed with recourse the petitioners and respondent was one involving not a
Promissory Note to ASIA PACIFIC, and to secure loan but purchase of receivables at a discount, well
payment thereof, C. G. Dizon, through its officers, within the purview of "investing, reinvesting or
Cenen, President, and Juliette Dizon, VP and trading in securities" which an investment company,
Treasurer, executed a Deed of Chattel Mortgage like ASIA PACIFIC, is authorized to perform and does
covering (3) heavy equipment units of Bulldozer not constitute a violation of the General Banking Act.
Crawler Tractors in favor of ASIA PACIFIC. Moreover,
Cenen executed a Continuing Undertaking wherein he Moreover, Sec. 2 of the General Banking Act provides
bound himself to pay the obligation jointly and in part Sec. 2. Only entities duly authorized by the
severally with C. G. Dizon. Monetary Board of the Central Bank may engage in
the lending of funds obtained from the public through
C. G. Dizon Construction defaulted in the payment of the receipt of deposits of any kind, and all entities
the installments, prompting ASIA PACIFIC to send a regularly conducting such operations shall be
Statement of Account to Cenen. As the demand was considered as banking institutions and shall be subject
unheeded, ASIA PACIFIC sued Teodoro, C. G. Dizon to the provisions of this Act, of the Central Bank Act,
and Cenen. While petitioners admitted the and of other pertinent laws (underscoring supplied).
genuineness of the Promissory Note, the Deed of
Chattel Mortgage and the Continuing Undertaking, Indubitably, what is prohibited by law is for
they nevertheless maintained that these documents investment companies to lend funds obtained from the
were never intended by the parties to be legal, valid public through receipts of deposit, which is a function
and binding but a mere subterfuge to conceal the loan of banking institutions. But here, the funds supposedly
of P390,000.00 with usurious interests. "lent" to petitioners have not been shown to have been
Petitioners claimed that since ASIA PACIFIC could not obtained from the public by way of deposits, hence,
directly engage in banking business, it proposed to the inapplicability of banking laws.
them a scheme wherein ASIA PACIFIC could extend a Petitioners' assertions were based mainly on the self-
loan to them without violating banking laws: first, serving testimony of Cenen, and not on any other
Cenen would secure a promissory note from Teodoro independent evidence. His testimony is not only
Baas with a face value of P390,000.00 payable in unconvincing, but also self-defeating in light of the
installments; second, ASIA PACIFIC would then make documents presented by respondent, i.e., Promissory
it appear that the P/N was sold to it by Cenen with the Note, Deed of Chattel Mortgage and Continuing
14% usurious interest on the loan or P54,000.00 Undertaking, the accuracy, correctness and due
discounted and collected in advance by ASIA PACIFIC; execution of which were admitted by petitioners. Oral
and, lastly, Cenen would provide sufficient collateral evidence certainly cannot prevail over the written
and execute a continuing guaranty. agreements of the parties.

On 21 April 1981 the trial court issued a writ of Finally, while we empathize with petitioners, we
replevin against C. G. Dizon for the surrender of the cannot close our eyes to the overriding considerations
bulldozer crawler tractors. Only two (2) were actually of the law on obligations and contracts which must be
turned over by defendants which units were upheld and honored at all times. Petitioners have
subsequently foreclosed by ASIA PACIFIC to satisfy undoubtedly benefited from the transaction; they
the obligation. On 25 September 1992 the RTC ruled cannot now be allowed to impugn its validity and
in favor of ASIA PACIFIC holding the defendants legality to escape the fulfillment of a valid and binding
jointly and severally liable for the unpaid balance of obligation.
the obligation under the Promissory Note in the
amount of P87,637.50 at 14% interest p.a. The Court

2
FIRST PLANTERS PAWNSHOP, INC., Petitioner, v. That pawnshops are to be treated as non-bank
COMMISSIONER OF INETRNAL REVENUE financial intermediaries is further bolstered by the fact
Respondent. that pawnshops are
G.R. No. 174134, July 30, 2008, AUSTRIA-
MARTINEZ, J. under the regulatory supervision of the Bangko
Sentral ng Pilipinas and covered by its Manual of
Key Doctrine: It need not be elaborated that Regulations for Non-Bank
pawnshops are non-banks/banking institutions.
Financial Institutions. The Manual includes
Moreover, the nature of their business activities
pawnshops in the list of non-bank financial
partakes that of a financial intermediary in that its intermediaries, viz.:
principal function is lending.
4101Q.1 Financial Intermediaries
Facts: First Planters Pawnshop, Inc. (petitioner)
contests the deficiency value-added tax imposed upon xxx
it by the Bureau of Internal Revenue (BIR) for the year
2000. The core of petitioner's argument is that it is not Non-bank financial intermediaries shall
a lending investor within the purview of Section include the following:
108(A) of the National Internal Revenue Code (NIRC),
(1) A person or entity licensed and/or
as amended, and therefore not subject to value-added
tax (VAT). registered with any government
regulatory body as a non-bank
In a Pre-Assessment Notice petitioner was informed financial intermediary, such as
by the BIR that it has an existing tax deficiency on its investment house, investment
VAT liabilities for the year 2000. The deficiency company, financing company,
securities dealer/broker, lending
assessment was at P541,102.79 for VAT Petitioner
investor, pawnshop, money broker x x
protested the assessment for lack of legal and factual
x. (Emphasis supplied)
bases. Petitioner subsequently received a Formal
Assessment Notice directing payment. Coming now to the issue at hand - Since petitioner is a
non-bank financial intermediary, it is subject to 10%
Petitioner sought reconsideration but this was denied VAT for the tax years 1996 to 2002; however, with
by the CTA En Banc. the levy, assessment and collection of VAT from
non-bank financial intermediaries being
Issue: Whether petitioner, engaged in pawnshop
specifically deferred by law, then petitioner is not
business, is liable to pay the deficiency assessment at
P541,102.79 for VAT? liable for VAT during these tax years. And
beginning 2004 up to the present, by virtue of R.A. No.
Ruling: No! 9238, petitioner is no longer liable for VAT but it is
subject to percentage tax on gross receipts from 0% to
Prior to the EVAT Law, pawnshops were treated as 5 %, as the case may be.
lending investors subject to lending investor's tax.
Pawnshops were then treated as VAT-able enterprises C. Bank Powers and Liabilities
under the general classification of sale or exchange of
services under Section 108(A) of the Tax Code of 1997, REGISTER of DEEDS OF MANILA, petitioner-
as amended. On February 16, 2004 R.A. No. 9238 took appellee, vs.
effect. R.A. No. 9238 finally classified pawnshops CHINA BANKING CORPORATION, respondent-
as Other Non-bank Financial Intermediaries.
appellant.
The tax treatment of pawnshops as non-bank financial G.R. No. L-11964, April 28, 1962, DIZON, J., EN
intermediaries is not without basis. BANC

Doctrine
R.A. No. 8791 or the General Banking Law of 2000
provided that banks shall refer to entities engaged in Although Paragraph (c), Section 25 of Republic Act
the lending of funds obtained in the form of deposits. 337 allows a (foreign) commercial bank to purchase
R.A. No. 8791 also included cooperative banks, and hold such real estate as shall be conveyed to it in
Islamic banks and other banks as determined by the
satisfaction of debts previously contracted in the
Monetary Board of the Bangko Sentral ng Pilipinas in
course of its dealings. However, the debts referred
the classification of banks.
to in this provision are only those resulting from
previous loans and other similar transactions made or
It need not be elaborated that pawnshops are non-
banks/banking institutions. Moreover, the nature of entered into by a commercial bank in the ordinary
their business activities partakes that of a financial course of its business as such. Obviously, whatever
intermediary in that its principal function is lending. civil liability arising from the criminal offense of
qualified theft was admitted in favor of appellant bank
by its former employee, Alfonso Pangilinan, was not a
debt resulting from a loan or a similar transaction had

3
between the two parties in the ordinary course of We find that the case before Us does not fall under
banking business. anyone of them.

Facts Paragraph (c), Section 25 of Republic Act 337 allows a


commercial bank to purchase and hold such real
Court of First Instance of Manila (Criminal Case No. estate as shall be conveyed to it in satisfaction of
22908) Alfonso Pangilinan and one Guillermo Chua debts previously contracted in the course of its
were charged with qualified theft, the money involved dealings, We deem it quite clear and free from doubt
amounting to P275,000.00. Pangilinan and his wife, that the "debts" referred to in this provision are only
those resulting from previous loans and other similar
Belen Sta. Ana, executed a public instrument entitled
transactions made or entered into by a commercial
DEED OF TRANSFER whereby, after admitting his bank in the ordinary course of its business as such.
civil liability in favor of his employer, the China Obviously, whatever "civil liability" arising from the
Banking Corporation, in relation to the offense criminal offense of qualified theft was admitted in
aforesaid, he ceded and transferred to the latter, in favor of appellant bank by its former employee,
satisfaction thereof, a parcel of land located in the City Alfonso Pangilinan, was not a debt resulting from a
loan or a similar transaction had between the two
of Manila, registered in the name of "Belen Sta. Ana,
parties in the ordinary course of banking business.
married to Alfonso Pangilinan.

The Deed of Transfer executed by Pangilinan was Neither do the provisions of paragraph (d) of the Same
section apply to the present case because the deed of
presented for registration but the register of deeds,
transfer in question can in no sense be considered as a
after finding that China Banking Corporation, as an sale made by virtue of a judgment, decree, mortgage,
alien-owned corporation, is barred from acquiring or trust deed held by appellant bank. In the same
lands in the Philippines under Sec. 5, Art. XIII of the manner it cannot be said that the real property in
Constitution, submitted the matter to the Land question was purchased by appellant "to secure debts
Registration Commission for resolution which, in turn, due to it", considering that, as stated heretofore, the
term debt employed in the pertinent legal provision
denied the registration.
can logically refer only to such debts as may become
The bank contended that Section 25 of Republic Act payable to appellant bank as a result of a banking
transaction.
337 allows a commercial bank to purchase and hold
real estate to wit: That the constitutional prohibition under
consideration has for its purpose the preservation of
SEC. 25. Any commercial bank may purchase, hold, the patrimony of the nation cannot be denied, but
and convey real estate for the following purposes: appellant and the amici curiae claim that it should be
liberally construed so that the prohibition be limited to
xxxxxxxxx the permanent acquisition of real estate by aliens
whether natural or juridical persons. This, of course,
(c) Such shall be conveyed to it in satisfaction of debts would make legal the ownership acquired by appellant
previously contracted in the course of its dealings; bank by virtue of the deed of transfer mentioned
heretofore, subject to its obligation to dispose of it in
(d) Such as it shall purchase at sales under accordance with law, within 5 years from the date of
judgments, decrees, mortgages, or trust deeds its acquisition. We cannot give assent to this
held by it and such as it shall purchase to contention, in view of the fact that the constitutional
prohibition in question is absolute in terms.
secure debts due to it
BANCO DE ORO-EPCI, INC., Petitioner vs. JAPRL
Issue DEVELOPMENT CORPORATION, RAPID
FORMING CORPORATION and JOSE U.
whether appellant an alien- owned bank can AROLLADO, Respondents.
acquire ownership of the residential lot covered by G.R. No. 179901, April 14, 2008, CORONA, J.
Transfer Certificate of Title No. 32230 by virtue of the
deed of transfer Key Doctrine: Banks have the right to annul any
credit accommodation or loan, and demand the
Ruling immediate payment thereof, from borrowers proven to
be guilty of fraud.
No. Chinabank is prohibited from holding lands by
Sec. 5, Art. XIII of the Constitution. The reason for the Facts:
prohibition is manifestly the desire and purpose of the
Petitioner Banco de Oro-EPCI, Inc. extended
Constitution to place and keep in the hands of the credit facilities to JAPRL Development Corporation
people the ownership over private lands in order not (JAPRL) amounting to P230,000,000 after evaluating
to endanger the integrity of the nation. the latters financial statements for fiscal years 1998,
1999 and 2000. Respondents Rapid Forming
Corporation (RFC) and Jose Arollado acted as JAPRLs

4
sureties. Despite its seemingly strong financial over respondents. Respondents filed a petition for
position, JAPRL defaulted in the payment of four trust certiorari in the CA and asserted that the Makati RTC
receipts soon after the approval of its loan. BDO- EPCI committed grave abuse of discretion as it did not
later learned from MRM Management, JAPRLs acquire jurisdiction over their persons due to defective
financial adviser, that JAPRL had altered and falsified service of summons. Thus, the Makati RTC could not
its financial statements. It allegedly bloated its sales hear the complaint for sum of money.
revenues to post a big income from operations for the
concerned fiscal years to project itself as a viable BDO-EPCI asserts that respondents
investment. The information alarmed petitioner. Citing maliciously evaded the service of summonses to
relevant provisions of the Trust Receipt Agreement, it prevent the Makati RTC from acquiring jurisdiction
demanded immediate payment of JAPRLs outstanding over their persons. Furthermore, they employed bad
obligations amounting to P194,493,388.98. faith to delay proceedings by cunningly exploiting
procedural technicalities to avoid the payment of their
JAPRL (and its subsidiary, RFC) filed a petition obligations. Petitioner moved for reconsideration but it
for rehabilitation in the Regional Trial Court (RTC) of was denied. Hence, this petition.
Quezon City and disclosed that it had been
experiencing a decline in sales for the three preceding
years and a staggering loss in 2002. As the petition Issue:
was sufficient in form and substance, a stay order Whether or not the bank (BPO-EPCI) may
was issued. However, the proposed rehabilitation plan demand the immediate payment of JAPRLs
for JAPRL and RFC was eventually rejected by the outstanding obligations.
Quezon City RTC.
Ruling:
Petitioner BDO-EPCI filed a complaint for sum
of money with an application for the issuance of a writ YES.
of preliminary attachment against respondents in
Makati RTC since JAPRL is ignoring its demand for
When respondents moved for the suspension
payment. BDO-EPCI asserted that JAPRL was guilty of
fraud because it (JAPRL) altered and falsified its of proceedings in Civil Case No. 03-991 before the
financial statements. The Makati RTC subsequently Makati RTC (on the basis of the March 13, 2006 order
denied the application (for the issuance of a writ of of the Calamba RTC), they waived whatever defect
preliminary attachment) for lack of merit as petitioner there was in the service of summons and were deemed
was unable to substantiate its allegations. to have submitted themselves voluntarily to the
Nevertheless, it ordered the service of summons on jurisdiction of the Makati RTC. Under the Interim
respondents. Respondents moved to dismiss the Rules of Procedure on Corporate Rehabilitation, a stay
complaint due to an allegedly invalid service of order defers all actions or claims against the
summons. Because the officers return stated that an corporation seeking rehabilitation from the date of its
administrative assistant had received the summons, issuance until the dismissal of the petition or
JAPRL and RFC argued that Section 11, Rule 14 of the termination of the rehabilitation proceedings. The
Rules of Court contained an exclusive list of persons Makati RTC may proceed to hear Civil Case No. 03-
on whom summons against a corporation must be 991 only against Arollado if there is no ground to go
served. An administrative assistant was not one of after JAPRL and RFC (as will later be discussed). A
them. Arollado, on the other hand, cited Section 6, creditor can demand payment from the surety
Rule 14 thereof which mandated personal service of solidarily liable with the corporation
summons on an individual defendant. Makati RTC seeking rehabilitation.
noted that because corporate officers are often busy,
summonses to corporations are usually received only
Respondents abused procedural technicalities
by administrative assistants or secretaries of
(albeit unsuccessfully) for the sole purpose of
corporate officers in the regular course of business.
preventing, or at least delaying, the collection of their
Hence, it denied the motion for lack of merit.
legitimate obligations. Their reprehensible scheme
impeded the speedy dispensation of justice. More
JAPRL (and its subsidiary, RFC) filed a petition importantly, however, considering the amount
for rehabilitation in the RTC of Calamba, Laguna, involved, respondents utterly disregarded the
Branch 34 (Calamba RTC). Finding JAPRLs petition significance of a stable and efficient banking system to
sufficient in form and in substance, the Calamba RTC the national economy.
issued a stay order. respondents hastily moved to
suspend the proceedings in Civil Case No. 03 -991 Banks are entities engaged in the lending
pending in the Makati RTC. Makati RTC granted the of funds obtained through deposits from the
motion with regard to JAPRL and RFC but ordered public. They borrow the publics excess money
Arollado to file an answer. It ruled that, because he (i.e.,deposits) and lend out the same. Banks
was jointly and solidarily liable with JAPRL and RFC, therefore redistribute wealth in the economy by
the proceedings against him should continue. channeling idle savings to profitable investments.
Respondents moved for reconsideration but it was Banks operate (and earn income) by extending credit
denied. CA granted the petition and held that because facilities financed primarily by deposits from the
the summonses were served on a mere administrative public. They plough back the bulk of said deposits into
the economy in the form of loans. Since banks deal
assistant, the Makati RTC never acquired jurisdiction
with the publics money, their viability depends largely

5
on their ability to return those deposits on demand. Civil Case No. 03-991 against the three which states:
For this reason, banking is undeniably imbued with Section 40. Requirement for Grant
public interest. of Loans or Other Credit
Accommodations. Before granting
Protecting the integrity of the banking system a loan or other credit
has become, by large, the responsibility of banks. The accommodation, a bank must
role of the public, particularly individual borrowers, ascertain that the debtor is
has not been emphasized. Nevertheless, we are not capable of fulfilling his
unaware of the rampant and unscrupulous practice of commitments to the bank.
obtaining loans without intending to pay the same.
Towards this end, a bank may
In this case, petitioner BDO-EPCI alleged that demand from its credit applicants
JAPRL fraudulently altered and falsified its financial a statement of their assets and
statements in order to obtain its credit facilities. liabilities and of their income and
Considering the amount of petitioners exposure in expenditures and such information
JAPRL, justice and fairness dictate that the Makati as may be prescribed by law or by
RTC hear whether or not respondents indeed rules and regulations of the
committed fraud in securing the credit Monetary Board to enable the
accommodation. bank to properly evaluate the
credit application which includes
The protective remedy of rehabilitation the corresponding financial
was never intended to be a refuge of a statements submitted for taxation
debtor guilty of purposes to the Bureau of Internal
fraud. Revenue. Should such
Meanwhile, the Makati RTC should proceed to statements prove to be false or
hear respondents guided by Section 40 of the incorrect in any material detail,
General Banking Law the bank may terminate any
loan or credit accommodation
granted on the basis of said
statements and shall have the
right to demand immediate
repayment or liquidation of the
obligation.

In formulating the rules and


regulations under this Section, the
Monetary Board shall recognize
the peculiar characteristics of
microfinancing, such as cash flow-
based lending to the basic sectors
that are not covered by traditional
collateral. (emphasis supplied)

Under this provision, banks have the right to


annul any credit accommodation or loan, and demand
the immediate payment thereof, from borrowers
proven to be guilty of fraud. Petitioner would then be
entitled to the immediate payment of P194,493,388.98
and other appropriate damages. Finally, considering
that respondents failed to pay the four trust receipts,
the Makati City Prosecutor should investigate whether
or not there is probable cause to indict respondents
for violation of Section 13 of the Trust Receipts Law.

Games and Garments Developers, Inc., petitioner


vs.
Allied Banking Corporation, respondent.
G.R. No. 181426, July 13, 2015, Leonardo-de
Casto, J.:

Key Doctrine: Section 74 of the General


Banking Act, as amended, proscribes banks
from entering into any contract of guaranty
or suretyship without providing definitions of
such contracts.

6
Spouses Bienvenida and Benedicto Pantaleon agreed
to purchase a parcel of land located at Bayanan, In a letter dated November 21, 1996 to Allied Bank,
Muntinlupa, owned by petitioner, Games and thru Mercado, Atty. Lao requested for the immediate
Garments Developers, Inc. (GGDI) for the sums of payment of the balance of the purchase price
P14,000,000.00 payable to GGDI, amounting to P8,360,000.00 considering that the
P4,000,000.00 payable to the Cosay Family, guaranty executed by the bank in favor of GGDI was
and irrevocable and the TCT for the subject property was
P1,000,000.00 as attorneys fees payable to already transferred in Bienvenidas name. There being
GGDI VP-Legal and counsel Atty. Cesar M. no action on his previous letter, Atty. Lao wrote
Lao (Lao). another letter dated December 11, 1996 to Allied
The parties executed a Memorandum of Agreement Bank, thru Mercado, to follow-up on the request for
(MOA) dated August 22, 1996, specifying the terms by payment.
which the payment will be satisfied.
Bienvenida, in a letter dated January 6, 1997, offered
On August 22, 1996, Mercado, Branch Manager of to pay GGDI P1,000,000.00 on or before January 24,
Allied Bank- Pasong Tamo, issued a letter addressed to 1997 and the balance of P7,360,000.00 plus interest
Atty. Lao of GGDI and with Bienvenidas conforme, on March 28, 1997. GGDI received the P1,000,000.00
printed on the letterhead of Allied Bank, which reads: partial payment from Bienvenida via two checks dated
This is with reference to the real January 17, 1997 and January 24, 1997 for the amount
property located at National Road, of P500,000.00 each. Bienvenida then issued two
Bayanan, Muntinlupa City[,] a lot covered Allied Bank postdated checks for March 28, 1997 for
by Transfer Certificate of Title (TCT) No. the amounts of P7,360,000.00 and P442,340.00, to
205965. cover the balance of the purchase price for the subject
Please be advised that Bienvenida property and interest, respectively.
Pantaleon/Sucat Import/Export who is
purchasing the above-mentioned property Mercado executed another letter dated January 27,
has an approved real estate loan with us 1997 addressed to Atty. Lao, similarly worded as his
in the amount of PESOS: ELEVEN letter dated August 22, 1996, except for the
MILLION ONLY (P11,000,000.00), the penultimate paragraph which states that we
portion of the proceeds of which shall be guarantee to pay directly to you the amount of
used to partially liquidate the account PESOS: SEVEN MILLION EIGHT HUNDRED TWO
with you. Succeeding releases which is THOUSAND THREE HUNDRED FORTY
secured by the subject property will be (P7,802,340.00) sixty days from January 27, 1997 or
made payable to Games and Garments on or before March 28, 1997.
Developers, Inc.
After said Transfer Certificate of
When GGDI deposited the two Allied Bank checks
Title (TCT) covering said property is
dated March 28, 1997 issued by Bienvenida, said
already transferred in our clients name,
checks were dishonored for being Drawn Against
our mortgage duly annotated thereon, we
Insufficient Funds.
guarantee to pay directly to you the
amount of PESOS: EIGHT MILLION
THREE HUNDRED SIXTY THOUSAND Atty. Lao sent a letter dated August 15, 1997 to the
ONLY (P8,360,000.00) ninety days from Head Office of Allied Bank in Makati City, copy
August 23, 1996 or on or before furnished Mercado, referring to Mercados letter of
November 21, 1996. guaranty dated January 27, 1997 and making a final
It is understood that this guaranty is request for payment of the sum of P7,802,340.00
irrevocable. within seven days from receipt of the current letter.

On August 23, 1996 GGDI, through its President Hemandas, President of GGDI, sent a fax letter to Aida
Sunder Hemandas, executed a Deed of Sale in favor of T. Yu, Vice President of Allied Bank, also requesting
the Spouses Pantaleon. However, in the Deed the payment based on Mercados letter of guaranty, in
amount of purchase price for the subject property was response the bank said,
reduced to P11,000,000.00. We asked Mr. Mercado about this and
he said that this letter [dated January
27, 1997] was not really intended as a
On the same day the Deed was executed, RD of Makati
[guaranty] for anything but was an
cancelled the TCT in the name of GGDI and issued
accommodation to a request of Atty.
another in the name of Bienvenida, married to
Cesar Lao, the Vice President of Games
Benedicto Pantaleon. The notice of lis pendens
and Garments Developers, Inc. He
(concerning the civil case of the Cosay family against
even emphasized to Atty. Lao that he
GGDI) was also cancelled and a Real Estate Mortgage
was not authorized to issue such
in favor of Allied Bank was annotated to the TCT
issued to Bienvenida. [guaranty] inasmuch as banks are not
allowed to do so under the
General Banking Act.
Despite Mercados letter dated August 22, 1996, and
unbeknownst to GGDI, Allied Bank already released
Thus GGDI filed On April 15, 1998, GGDI filed
the proceeds of the approved loan to the spouses
before the RTC a Complaint for Breach of
Pantaleon on August 23, 1996.
Contract (Rescission) and Damages with

7
prayer for Preliminary Attachment against the who are bound by its stipulations which, when
spouses Pantaleon, Mercado, and Allied Bank. couched in clear and plain language, should be
applied according to their literal tenor.
RTC ruled in favor of GGDI. On Appeal, CA
modified the decision of RTC, absolving Allied We cannot supply material stipulations, read into the
Bank. contract words it does not contain or, for that matter,
read into it any other intention that would contradict
Issue: Whether or not Allied Bank is bound by the its plain import. Neither can we rewrite contracts
letter of Guaranty executed by Mercado. because they operate harshly or inequitably as to one
of the parties, or alter them for the benefit of one
Ruling: Yes. party and to the detriment of the other, or by
construction, relieve one of the parties from the terms
which he voluntarily consented to, or impose on him
The letters executed by Mercado are not
those which he did not.
contracts of guaranty covered by the Other rulings:
prohibition in the General Banking Act, as
1. Based on the doctrine of apparent authority,
amended.
Allied Bank is bound by the undertaking in the
letters dated August 22, 1996 and January 27,
It is undisputed that Mercado wrote two 1997 executed by Mercado as Branch
letters of guaranty dated August 22, 1996 Manager of Allied Bank- Pasong Tamo.
and January 27, 1997. Although Mercados 2. For its failure to comply with its undertaking
letters used the words guarantee and under the letters dated August 22, 1996 and
guaranty, the same do not constitute January 27, 1997, Allied Bank is liable to GGDI
contracts of guaranty covered by the for temperate/moderate, exemplary/corrective
prohibition under Section 74 of the General damages, and attorneys fees.
Banking Act, as amended. Section 74 of the 3. Allied Bank is a mortgagee in bad faith and the
General Banking Act, as amended, proscribes foreclosure on the real estate mortgage and
banks from entering into any contract of public auction sale of the subject property are
guaranty or suretyship without providing null and void.
definitions of such contracts. Consequently, we
D. Banking and Incidental Powers
rely on the general definitions of contracts of
guaranty and suretyship under Article 2047 of
SPOUSES RAUL and AMALIA PANLILIO v.
the Civil Code:
CITIBANK, N.A.
ART. 2047. By guaranty a person, called
G.R. No. 156335 November 28, 2007 AUSTRIA-
the guarantor, binds himself to the
MARTINEZ, J.
creditor to fulfill the obligation of the
principal debtor in case the latter should
fail to do so. Investment management activities may be
If a person binds himself solidarily with exercised by a banking institution. The investment is
the principal debtor, the provisions of not a deposit and is not guaranteed by respondent.
Section 4, Chapter 3, Title I of this Book Absent any fraud or bad faith, the recourse of
shall be observed. In such case the petitioners in the LTCP is solely against the issuer,
contract is called a suretyship. C&P Homes, and only upon maturity.

There was no express undertaking in Mercados Facts:


letters dated August 22, 1996 and January 27, 1997 to Petitioner Amalia Panlilio (Amalia) phoned
pay Bienvenidas debt to GGDI in case Bienvenida Citibank saying she wanted to place an investment, for
failed to do so. In said letters, Mercado merely three million pesos (PhP3 million). She spoke with
acknowledged that Bienvenida and/or her company Jinky Lee, the bank employee, who introduced her to
had an approved real estate loan with Allied Bank and Citibank's various investment offerings. During the
guaranteed that subsequent releases from the loan visit, Amalia instructed Lee on what to do with the
would be made directly to GGDI provided that the PhP3 million. Later, she learned that out of the said
certificate of title over the subject property would be amount, PhP2,134,635.87 was placed by Citibank in a
transferred to Bienvenidas name and the real estate Long-Term Commercial Paper (LTCP), a debt
mortgage constituted on the subject property in favor instrument that paid a high interest, issued by the
of Allied Bank would be annotated on the said corporation Camella and PalmeraHomes (C&P
certificate. Mercado, by the plain language of his Homes). The rest of the money was placed in two
letters, merely committed to the manner by which the PRPN accounts, in trust for each of Amalia's two
proceeds of Bienvenidas approved loan from Allied children.
Bank would be released, but did not obligate Allied
Bank to be answerable with its own money to GGDI Following this investment, respondent claims
should Bienvenida default on the payment of the to have regularly sent confirmations of investment
purchase price for the subject property. (COIs) to petitioners.] Amalia claims to have called Lee
as soon as she received the first COI in December
For this reason, Mercados letters may not be deemed 1997, and demanded that the investment in LTCP be
as contracts of guaranty, although they may be withdrawn and placed in a PRPN. Respondent,
binding as innominate contracts. The rule is settled however, denies this, claiming that Amalia merely
that a contract constitutes the law between the parties

8
called to clarify provisions in the COI and did not securities;
demand a withdrawal (c) Make collections and
payments for the account of others and
Petitioner then met with respondent's other perform such other services for their
employee, Lizza Colet, to preterminate the LTCP and customers as are not incompatible
their other investments. Petitioners were told that as with banking business.
to the LTCP, liquidation could be made only if there is (d) Upon prior approval of the
a willing buyer, a prospect which could be difficult at Monetary Board, act as managing
that time because of the economic crisis. agent, adviser, consultant or
administrator of investment
Amalia, through counsel, sent her first formal, management/ advisory/consultancy
written demand to respondent for a withdrawal of her accounts.
investment as soon as possible. In reply, respondent
wrote a letter stating that despite efforts to sell the The banks shall perform the services
LTCP, no willing buyers were found and that even if a permitted under subsections (a), (b) and
buyer would come later, the price would be lower than
(c) of this section as depositories
Amalia's original investment.
or as agents. Accordingly, they
shall keep the funds, securities and
Thus, petitioners filed with the RTC their other effects which they thus
complaint against respondent for a sum of money and receive duly separated and apart
damages. from the bank's own assets and
liabilities.
The RTC upheld all the allegations of
petitioners and concluded that Amalia never The Monetary Board may regulate the
instructed Citibank to invest the money in an LTCP. operations authorized by this section
Thus, the RTC found Citibank in violation of its in order to insure that said operations
contractual and fiduciary duties and held it liable to do not endanger the interests of the
return the money invested by petitioners plus depositors and other creditors of the
damages. banks. (Emphasis supplied.)

The CA held that with respect to the amount while Section 74 prohibits banks from guaranteeing
of PhP2,134,635.87, the account opened by Amalia obligations of any person, thus:
was an investment management account; as a result,
the money invested was the sole and exclusive Sec. 74. No bank or banking
obligation of C&P Homes, the issuer of the LTCP, and institution shall enter, directly, or
was not guaranteed or insured by herein respondent indirectly into any contract of
Citibank; that Amalia opened such an account as guaranty or suretyship, or shall
evidenced by the documents she executed with
guarantee the interest or principal
Citibank.
of any obligation of any person,
copartnership, association,
ISSUE: corporation or other entity. The
Whether the transaction can be legally exercised by a provisions of this section shall,
Bank? however, not apply to the following: (a)
Whether petitioners are entitled to take back the borrowing of money by banking
money they invested from respondent bank? institution through the rediscounting
of receivables; (b) acceptance of drafts
The transaction is perfectly legal, as investment or bills of exchange (c) certification of
management activities may be exercised by a banking checks; (d) transactions involving the
institution, pursuant to Republic Act No. 337 or the release of documents attached to items
General Banking Act of 1948, as amended, which was received for collection; (e) letters of
the law then in effect. Section 72 of said Act provides: credit transaction, including stand-by
arrangements; (f) repurchase
Sec. 72. In addition to the operations agreements; (g) shipside bonds; (h)
specifically authorized elsewhere in ordinary guarantees or indorsements
this Act, banking institutions other in favor of foreign creditors where the
than building and loan associations principal obligation involves loans and
may perform the following services: credits extended directly by foreign
investment purposes; and (i) other
(a) Receive in custody funds, documents, transactions which the Monetary
and valuable objects, and rent safety Board may, by regulation, define or
deposit boxes for the safeguarding of specify as not covered by the
such effects; prohibition. (Emphasis supplied.)
(b) Act as financial agent and buy and
sell, by order of and for the Nothing also taints the legality of the LTCP bought in
account of their customers, shares, behalf of petitioners. C&P Homes' LTCP was duly
evidences of indebtedness and all registered with the Securities and Exchange
Commission while the issuer was accredited by the
types of
Philippine Trust Committee.

9
June 17, 1981, and the dishonored checks were paid
Petitioners may not seek a return of their investment after they were re-deposited.
directly from respondent at or prior to maturity. As
earlier explained, the investment is not a deposit and SIMEX demanded reparation from TRADERS
is not guaranteed by respondent. Absent any fraud or ROYAL BANK for its "gross and wanton negligence."
bad faith, the recourse of petitioners in the LTCP is This demand was not met. SIMEX then filed a
solely against the issuer, C&P Homes, and only upon
maturity. complaint in the then Court of First Instance of Rizal
claiming from TRADERS ROYAL BANK moral damages
It is clear that since the money is committed to C&P in the sum of P1,000,000.00 and exemplary damages
Homes via LTCP for five years, or until 2003, in the sum of P500,000.00, plus 25% attorney's fees,
petitioners may not seek its recovery from respondent and costs.
prior to the lapse of this period. Petitioners must wait
and meanwhile just be content with receiving their ISSUE: Whether or not TRADERS ROYAL BANK is
interest regularly. If petitioners want the immediate liable for damages
return of their investment before the maturity date,
their only way is to find a willing buyer to purchase RULING: YES.
the LTCP at an agreed price, or to go directly against
the issuer C&P Homes, not against the respondent.
In every case, the depositor expects the bank
to treat his account with the utmost fidelity, whether
E. Diligence Required of Banks
such account consists only of a few hundred pesos or
of millions. The bank must record every single
SIMEX INTERNATIONAL (MANILA),
transaction accurately, down to the last centavo, and
INCORPORATED v. THE HONORABLE COURT
as promptly as possible. This has to be done if the
OF APPEALS and TRADERS ROYAL BANK
account is to reflect at any given time the amount of
G.R. No. 88013, March 19, 1990, CRUZ J. money the depositor can dispose of as he sees fit,
confident that the bank will deliver it as and to
KEY DOCTRINE: In every case, the depositor expects
whomever he directs. A blunder on the part of the
the bank to treat his account with the utmost fidelity,
bank, such as the dishonor of a check without good
whether such account consists only of a few hundred
reason, can cause the depositor not a little
pesos or of millions. The point is that as a business
embarrassment if not also financial loss and perhaps
affected with public interest and because of the nature
even civil and criminal litigation.
of its functions, the bank is under obligation to treat
the accounts of its depositors with meticulous care, The point is that as a business affected with
always having in mind the fiduciary nature of their public interest and because of the nature of its
relationship. In the case at bar, it is obvious that the functions, the bank is under obligation to treat the
respondent bank was remiss in that duty and violated accounts of its depositors with meticulous care,
that relationship.
always having in mind the fiduciary nature of their
relationship. In the case at bar, it is obvious that the
The petitioner SIMEX was a depositor of the
respondent bank was remiss in that duty and violated
respondent bank TRADERS ROYAL BANK and
that relationship. What is especially deplorable is that,
maintained a checking account in its branch at
having been informed of its error in not crediting the
Romulo Avenue, Cubao, Quezon City. SIMEX deposited
deposit in question to the petitioner, the respondent
to its account in the said bank the amount of
bank did not immediately correct it but did so only one
P100,000.00. Subsequently, SIMEX issued several
week later or twenty-three days after the deposit was
checks against its deposit but was suprised to learn
made. It bears repeating that the record does not
later that they had been dishonored for insufficient
contain any satisfactory explanation of why the error
funds.
was made in the first place and why it was not
As a consequence, the California corrected immediately after its discovery. Such
Manufacturing Corporation sent, a letter of demand to ineptness comes under the concept of the wanton
SIMEX, threatening prosecution if the dishonored manner contemplated in the Civil Code that calls for
check issued to it was not made good. It also withheld the imposition of exemplary damages.
delivery of the order made by SIMEX. Similar letters
After deliberating on this particular matter,
were sent to SIMEX by the Malabon Long Life Trading
the Court, in the exercise of its discretion, hereby
and by the G. and U. Enterprises.
imposes upon the respondent bank exemplary
SIMEX complained to TRADERS ROYAL BANK damages in the amount of P50,000.00, "by way of
on June 10, 1981. Investigation disclosed that the sum example or correction for the public good," in the
of P100,000.00 deposited by SIMEX on May 25, 1981, words of the law. It is expected that this ruling will
had not been credited to it. The error was rectified on serve as a warning and deterrent against the
repetition of the ineptness and indefference that has

10
been displayed here, lest the confidence of the public 3. that there was no obligation on its part to
in the banking system be further impaired. notify the plaintiff about the floodwaters that
inundated its premises at Binondo branch
TRADERS ROYAL BANK is ordered to pay which allegedly seeped into the safety deposit
SIMEX, in lieu of nominal damages, moral damages in box leased to the plaintiff.
the amount of P20,000.00, and exemplary damages in The defendant also invokes the following provisions in
the amount of P50,000.00 plus the original award of the Lease Agreement of the safety box:
attorney's fees in the amount of P5,000.00, and costs.
13. The bank is not a depositary of the contents of
Sia vs. Court of Appeals the safe and it has neither the possession nor
G.R. No. 102970, May 13, 1993, DAVIDE, JR., J. control of the same.
14. The bank has no interest whatsoever in said
Contract for the use of safety deposit box is a special contents, except as herein expressly provided,
kind of deposit and the relationship between the and it assumes absolutely no liability in
parties thereto, with respect to the contents of the connection therewith.
box, is that of a bailor and bailee, the bailment being
The trial court ruled in favour of SIA but this was
for hire and mutual benefit.
reversed on appeal to CA.
Conditions in a Lease Agreement covering a safety
Issue:
deposit box which exempt the bank from any liability
for damage, loss or destruction of the contents thereof
arising from its own or its agents fraud, negligence or Whether or not the contract between SIA and SBTC is
delay are considered null and void, for being contrary one of lease which would exculpate SBTC from
liability on account of damage to stamps collection
to law and public policy.
deposited in its safety deposit box.
Although flooding could be considered a fortuitous
Ruling:
event, failure of the bank to give notice to the renter
In the case of CA Agro-Industrial Development Corp.
of such fact makes it liable for damages, its
vs. Court of Appeals, this Court explicitly rejected the
negligence caused to aggravate injury or damage to
contention that a contract for the use of a safety
the renter
deposit box is a contract of lease governed by Title
VII, Book IV of the Civil Code. Nor did we fully
Facts: subscribe to the view that it is a contract of deposit to
be strictly governed by the Civil Code provision on
This is an action for damages arising out of the deposit; it is, as we declared, a special kind of deposit.
destruction or loss of the stamp collection of the
plaintiff LUZAN SIA (petitioner herein) contained in Furthermore, Section 72 of the General Banking Act
Safety Deposit Box No. 54 which had been rented [R.A. 337, as amended] pertinently provides:
from the defendant SECURITY BANK AND TRUST SEC. 72. In addition to the operations
COMPANY (SBTC) pursuant to a contract specifically authorized elsewhere in this Act,
denominated as a Lease Agreement. banking institutions other than building and
loan associations may perform the following
The plaintiff rented the Safety Deposit Box No. 54 of services:
the defendant bank at its Binondo Branch located at (a) Receive in custody funds,
the wherein he placed his collection of stamps. The documents, and valuable objects, and
said safety deposit box leased by the plaintiff was at rent safety deposit boxes for the
the bottom or at the lowest level of the safety deposit safeguarding of such effects.
boxes of the defendant bank at its aforesaid Binondo xxx
Branch. The banks shall perform the services
permitted under subsections (a), (b),
During the floods that took place in 1985 and 1986, and (c) of this section as depositories
floodwater entered into the defendant banks or as agents.
premises, seeped into the safety deposit box leased by
the plaintiff and caused, according to the plaintiff,
Accordingly, the depositary would be liable if, in
damage to his stamps collection. The defendant bank performing its obligation, it is found guilty of fraud,
rejected the plaintiffs claim for compensation for his negligence, delay or contravention of the tenor of the
damaged stamps collection, so, the plaintiff instituted agreement [Art. 1170, id.]. In the absence of any
an action for damages against the defendant bank. stipulation prescribing the degree of diligence
required, that of a good father of a family is to be
The defendant bank also contended observed [Art. 1173, id.]. Hence, any stipulation
exempting the depositary from any liability, arising
1. that its contract with the plaintiff over safety from the loss of the thing deposited on account of
deposit box No. 54 was one of lease and not of fraud, negligence or delay would be void for being
deposit and, therefore, governed by the lease contrary to law and public policy and as such,
agreement which should be the applicable law; provisions #13 and 14 in the lease agreement of
2. that the destruction of the plaintiffs stamps safety deposit box being invoked by SBTC are void.
collection was due to a calamity beyond its Furthermore, said provisions are inconsis tent with
control; and

11
the respondent Banks responsibility as a depositary PRCI and issued Foreign Exchange Demand Draft
under Section 72(a) of the General Banking Act. (FXDD) No. 209968 in the sum applied for, that is, One
Thousand Six Hundred Ten Australian Dollars
As to liability of SBTC, although flooding could be (AU$1,610.00), payable to the order of the 20th
considered a fortuitous event, failure of the bank to Asian Racing Conference Secretariat of Sydney,
give notice to the renter of such fact makes it liable Australia, and addressed to Westpac-Sydney as the
for damages, its negligence caused to aggravate injury drawee bank.
or damage to the renter. SBTC was aware of the floods
of 1985 and 1986; it also knew that the floodwaters Upon due presentment of the foreign exchange
inundated the room where Safe Deposit Box No. 54 demand draft, denominated as FXDD No. 209968, the
was located. In view thereof, it should have lost no same was dishonored, with the notice of dishonour
time in notifying the petitioner in order that the box stating the following: x x x No account held with
could have been opened to retrieve the stamps, thus Westpac. On In response to PRCIs complaint about
saving the same from further deterioration and loss. In the dishonor of the said foreign exchange demand
draft, respondent bank informed Westpac-Sydney of
this respect, it failed to exercise the reasonable care
the issuance of the said demand draft FXDD No.
and prudence expected of a good father of a family,
209968, drawn against the Westpac-Sydney and
thereby becoming a party to the aggravation of the
informing the latter to be reimbursed from the
injury or loss.
respondent banks dollar account in Westpac-New
York. The respondent bank on the same day likewise
REYES VS. COURT OF APPEALS informed Westpac-New York requesting the latter to
G.R. No. 118492. August 15, 2001, DE LEON, JR., honor the reimbursement claim of Westpac-Sydney. On
J.: September 14, 1988, upon its second presentment for
payment, FXDD No. 209968 was again dishonored by
The degree of diligence required of banks is more Westpac-Sydney for the same reason, that is, that the
than that of a good father of a family where the respondent bank has no deposit dollar account with
fiduciary nature of their relationship with their the drawee Westpac- Sydney.
depositors is concerned; The same higher degree of
diligence is not expected to be exerted by banks in Upon arrival of the petitioners in Australia to attend
commercial transactions that do not involve their the racing conference, they were denied registration
fiduciary relationship with their depositors. in front of other delegates because the foreign
exchange demand draft for his registration fee had
been dishonored for the second time.
Facts:
The petitioners filed in the Regional Trial Court of
In view of the 20th Asian Racing Conference then Makati, Metro Manila, a complaint for damages,
scheduled to be held in Sydney, Australia, the docketed as Civil Case No. 88-2468, against the
Philippine Racing Club, Inc. (PRCI, for brevity) sent respondent bank due to the dishonor of the said
four (4) delegates to the said conference. Petitioner foreign exchange demand draft issued by the
Gregorio H. Reyes, as vice-president for finance, respondent bank. The petitioners claim that as a result
racing manager, treasurer, and director of PRCI, sent of the dishonor of the said demand draft, they were
Godofredo Reyes, the clubs chief cashier, to the exposed to unnecessary shock, social humiliation, and
respondent bank FAR EAST BANK AND TRUST deep mental anguish in a foreign country, and in the
COMPANY to apply for a foreign exchange demand presence of an international audience.
draft for One Thousand Six Hundred Ten Australian
Dollars (AU$1,610.00) payable to the order of the 20th Both the trial court and court of appeals dismiss the
Asian Racing Conference Secretariat of Sydney, claim for damages in favour of the respondent bank. In
Australia. so ruling, CA said that the standard of diligence for
the transaction under consideration is that of an
The respondent bankat first denied the application for ordinary prudent person and that there is no basis
the reason that it did not have an Australian dollar to hold the respondent bank liable for damages for the
account in any bank in Sydney. Godofredo asked if reason that it exerted every effort for the subject
there could be a way for respondent bank to foreign exchange effort for the subject foreign
accommodate PRCIs urgent need to remit Australian exchange demand draft to be honored.
dollars to Sydney. Respondent bank then informed
Godofredo of a roundabout way of effecting the Issue:
requested remittance to Sydney thus:
Whether or not respondent bank should be held liable
1. the respondent bank would draw a demand for damages.
draft against Westpac Bank in demand draft
against Westpac Bank in Sydney, Australia Ruling:
(Westpac-Sydney for brevity) and
2. have the latter reimburse itself from the U.S. The facts as found by the courts a quo show that
dollar account of the respondent in Westpac respondent bank did not cause an erroneous
Bank in New York, U.S.A (Westpac- New York transmittal of its SWIFT cable message to Westpac-
for brevity). Sydney. It was the erroneous decoding of the cable
message on the part of Westpac-Sydney that
PRCI and the petitioner Gregorio H. Reyes, acting caused the dishonor of the subject foreign exchange
through Godofredo, agreed to this arrangement. The demand draft. Westpac- Sydney construed the said
respondent bank approved the said application of

12
cable message as a format for a letter of credit, and The General banking Law of 2000 requires of banks
not for a demand draft. the highest standards of integrity and performance.
Needless to say, a bank is under obligation to treat
The evidence also shows that the respondent bank the accounts of its depositors with meticulous care.
exercised that degree of diligence expected of an The fiduciary nature of the relationship between the
ordinary prudent person under the circumstances bank and the depositors must always be of paramount
obtaining. Prior to the first dishonor of the subject concern.
foreign exchange demand draft, the respondent bank
advised Westpac-New York to honor the Facts
reimbursement claim of Westpac-Sydney and to debit Joe Kuan Food Coporation issued in favor of
the dollar account of respondent bank with the former. Chowking five (5) PSBank checks. The total amount of
As soon as the demand draft was dishonored, the the subject checks reached P556,981.86.
respondent bank, thinking that the problem was with
the reimbursement and without any idea that it was Chowkings acting accounting manager, Rino
due to miscommunication, re-confirmed the authority T. Manzano, endorsed and encashed said checks with
of Westpac-New York to debit its dollar account for the the Bustos branch of PSBank. All five checks were
purpose of reimbursing Westpac-Sydney. honored by Santos, the branch head, even with only
the endorsement of Manzano approving them. The
In Philippine Bank of Commerce v. Court of Appeals signatures of the other authorized officers of
upholding a long standing doctrine, we ruled that the Chowking were absent, contrary to usual banking
degree of diligence required of banks, is more than practice. Unexpectedly, Manzano absconded with and
that of a good father of a family where the fiduciary misappropriated the check proceeds.
nature of their relationship with their depositors is
concerned. In other words banks are duty bound to When Chowking found out Manzano scheme, it
treat the deposit accounts of their depositors with the demanded reimbursement from PSBank. When
highest degree of care. But the said ruling applies only PSBank refused to pay, Chowking filed a complaint for
to cases where banks act under their fiduciary a sum of money with damages before RTC.
capacity, that is, as depositary of the deposits of their
depositors. But the same higher degree of diligence is PSBank denied liability for the encashed
not expected to be exerted by banks in commercial checks and maintained that it exercised due diligence
transactions that do not involve their fiduciary in the supervision of all its employees. It even
relationship with their depositors. dismissed Santos after she was found guilty of
negligence in the performance of her duties. It also
Considering the foregoing, the respondent bank was averred that Chowking is stopped from claiming
not required to exert more than the diligence of a reimbursement and damages since it was negligent in
good father of a family in regard to the sale and allowing Manzano to take hold, endorse, and encash
issuance of the subject foreign exchange demand its checks. It pointed out that the proximate cause of
draft. The case at bar does not involve the handling of Chowkings loss was its own negligence.
petitioners deposit, if any, with the respondent bank.
Instead, the relationship involved was that of a buyer RTC rendered judgment in favor of Chowking.
and seller, that is, between the respondent bank as the PSBank then filed a motion for reconsideration and
seller of the subject foreign exchange demand draft, RTC reversed its earlier ruling and held that it was
and PRCI as the buyer of the same, with the 20th Chowkings own negligence that was the proximate
Asian Racing Conference Secretariat in Sydney, cause of the loss.
Australia as the payee thereof.
The CA set aside the order of RTC and held
The evidence shows that the respondent bank did that both PSBank and Santos should bear the
everything within its power to prevent the dishonor of loss.
the subject foreign exchange demand draft. The
erroneous reading of its cable message to Westpac-
Sydney by an employee of the latter could not have Issue
been foreseen by the respondent bank. In any event, it WON PSBank observed the due diligence
was established that the respondent bank acted in required of banks under the law.
good faith and that it did not cause the
embarrassment of the petitioners in Sydney, Australia.
Hence, the Court of Appeals did not commit any Ruling
reversible error. NO. PSBank failed to prove that it has
observed the due diligence required of banks under
PHILIPPINE SAVINGS BANK v. CHOWKING the law.
FOOD CORPORATION
G.R. No. 177526 | JULY 4, 2008 | REYES, R.T., J. | It cannot be over emphasized that the banking
THIRD DIVISION business is impressed with public interest. Of
paramount importance is the trust and confidence of
The banking business is impressed with public the public in general in the banking industry.
Consequently, the diligence required of banks is more
interest. Of paramount importance is the trust and than that of a Roman pater familias or a good father of
confidence of the public in general in the banking a family. The highest degree of diligence is expected.
industry. Consequently, the diligence required of
banks is more than that of a Roman pater familias or a
good father of a family. The highest degree of In its declaration of policy, the General
diligence is expected. Banking Law of 2000 requires of banks the highest

13
standards of integrity and performance. Needless to
say, a bank is under obligation to treat the accounts
of its depositors with meticulous care. The fiduciary It was PEMSLAs policy not to approve
nature of the relationship between the bank and the applications for loans of members with outstanding
depositors must always be of paramount concern. debts. To subvert this policy, some PEMSLA officers
PSBank, through Santos, was clearly negligent devised a scheme to obtain additional loans despite
when it honored Chowkings checks with the lone their outstanding loan accounts. They took out loans in
endorsement of Manzano. The proximate cause of the the names of unknowing members, without the
loss is not Chowkings alleged negligence in allowing knowledge or consent of the latter. The PEMSLA
Manzano to take hold and encash Chowkings checks. checks issued for these loans were then given to the
The proximate cause id PSBanks own negligence in spouses for rediscounting. The officers carried this out
the supervision of its employees when it overlooked by forging the indorsement of the named payees in the
the irregular practice of encashing checks without the checks.
requisite endorsements.
In return, the spouses issued their personal
In BPI v. Casa Montessori Internationale, the checks (Rodriguez checks) in the name of the
Court similarly held: members and delivered the checks to an officer of
PEMSLA. The PEMSLA checks, on the other hand,
pursuant to its prime duty to ascertain well were deposited by the spouses to their account.
the genuineness of the signatures of its client-
depositors on checks being encashed, BPI is
expected to use reasonable business prudence. In Meanwhile, the Rodriguez checks were
the performance of that obligation, it is bound by its deposited directly by PEMSLA to its savings account
internal banking rules and regulation that form part of without any indorsement from the named payees.
the contract it enters into with its depositors. This was an irregular procedure made possible
through the facilitation of Edmundo Palermon, Jr.,
treasurer of PEMSLA and bank teller in the PNB
Unfortunately, it failed in that regard. Without Branch. It appears that this became the usual practice
exercising the required prudence on its part, BPI for the parties.
accepted and encashed the checks presented to it. As
a result, it proximately contributed to the fraud and
should be held primarily liable for the negligence of For the period November 1998 to February
its officers or agents when acting within the course 1999, the spouses issued sixty-nine (69) checks, in the
and scope of their employment. It must bear the loss. total amount of P2,345,804.00. these were payable to
forty-seven (47) individual payees who were all
PHILIPPINE NATIONAL BANK v. ERLANDO members of PEMSLA.
T. RODRIGUEZ and NORMA RODRIGUEZ
G.R. No. 170325 | SEPTEMBER 26, 2008 | PNB eventually found out about these
REYES, R.T., J. | THIRD DIVISION fraudulent acts. To put a stop to this scheme, PNB
closed the current account of PEMSLA. As a result,
the PEMSLA checks deposited by the spouses were
A bank that regularly processes checks that returned or dishonored for reason Account Closed.
are neither payable to the customer nor duly indorsed
by the payee is apparently grossly negligent in its The corresponding Rodriguez checks, however, were
operations. deposited as usual to the PEMSLA savings account.
Thus, because the PEMSLA checks given as payment
In a checking transaction, the drawee bank were returned, spouses Rodriguez incurred losses
has the duty to verify the genuineness of the signature from the rediscounting transactions.
of the drawer and to pay the check strictly in
accordance with the drawers instructions, i.e., to the
named payee in the check. The spouses Rodriguez filed a civil complaint
The trustworthiness of bank employees is for damages against PEMSLA, the Multi-Purpose
indispensable to maintain the stability of the banking Cooperative of Philbankers (MCP), and PNB. They
industry banks are enjoined to be extra vigilant in sought to recover the value of their checks that were
the management and supervision of their employees. deposited to the PEMSLA savings account. The
spouses contended that because PNB credited the
Facts checks to the PEMSLA account even without
indorsements, PNB violated its contractual obligation
Sps. Rodriguez were clients of PNB, Amelia to them as depositors. PNB paid the wrong payees,
Avenue Branch, Cebu City. They maintained savings hence, it should bear the loss.
and demand/checking accounts. The spouses were
engaged in the informal lending business. In line with PNB moved to dismiss the complaint on the
their business, they had a discounting arrangement ground of lack of cause of action. PNB argued that the
with the Philnabank Employees Savings and Loan claim for damages should come from the payees of the
Association (PEMSLA), an association of PNB checks, and not from spouses Rodriguez. Since there
was no demand from the said payees, the obligation
employees. Naturally, PEMSLA was likewise a client of
should be considered as discharged.
PNB Amelia Avenue Branch. The association
maintained current and savings accounts with PNB.
The RTC rendered Judgment in favor of
spouses Rodriguez.
PEMSLA regularly granted loans to its
members. Sps Rodriguez would rediscount the
postdated checks issued to members whenever the The CA reversed and set aside the RTC
association was short of funds. As was customary, the disposition. The CA concluded that the checks were
spouses would replace the postdated checks with their obviously meant by the spouses to be really paid to
own checks issued in the name of the members. PEMSLA. However, upon the motion for
reconsideration of the spouses, the CA reversed itself

14
and ruled that PNB failed to present sufficient proof to face and by the terms of the check. When the drawee
defeat the claim of spouses Rodriguez. Thus, PNB is bank pays a person other than the payee named on
liable for the value of the checks which it paid to the check, it does not comply with the terms of the
PEMSLA without indorsements from the named check and violates its duty to charge the drawers
payees.
account only for properly payable items.
Issue
WON PNB was remiss in its duty as the FACTS: BA-Finance Corporation (BA-Finance) entered
into a transaction with Miller Offset Press,
drawee bank.
Inc. (Miller), through the latters authorized
representatives, i.e., Uy Kiat Chung, Ching Uy Seng,
Ruling and
YES. PNB was remiss in its duty as the drawee Uy Chung Guan Seng.
bank. It does not dispute the fact that its teller or
tellers accepted the 69 checks for deposit to the
PEMSLA account even without any indorsement from BA-Finance granted Miller a credit line facility
the named payees. It bears stressing that order through which the latter could assign or discount its
instruments can only be negotiated with a valid trade receivables with the former.
indorsement.
Uy Kiat Chung, Ching Uy Seng, and Uy Chung Guan
Seng executed a Continuing Suretyship Agreement
A bank that regularly processes checks that
with BA-Finance whereby they jointly and severally
are neither payable to the customer nor duly indorsed
by the payee is apparently grossly negligent in its guaranteed the full and prompt payment of any and all
operations. This Court has recognized the unique indebtedness which Miller may incur with BA-Finance.
public interest possessed by the banking industry and
the need for the people to have full trust and Miller discounted and assigned several trade
confidence in their banks. For this reason, banks are receivables to BA-Finance by executing Deeds of
minded to treat their customers accounts with utmost Assignment in favor of the latter. In consideration of
care, confidence, and honesty. the assignment, BA-Finance issued four checks
(amounting to P 741,227.78) payable to the "Order of
In checking transaction, the drawee bank has Miller Offset Press, Inc." with the notation "For
the duty to verify the genuineness of the signature of Payees Account Only."
the drawer and to pay the check strictly in accordance
with the drawers instructions, i.e., to the named The four checks were deposited by Ching Uy Seng
payee in the check. It should charge to the drawers (a.k.a. Robert Ching), then the corporate secretary of
accounts only the payables authorized by the latter. Miller, in Account No. 989 in Associated Citizens Bank
Otherwise, the drawee will be violating the (Associated Bank). Account No. 989 is a joint bank
instructions of the drawer and it shall be liable for the account under the names of Ching Uy Seng and Uy
amount charged to the drawers account. Chung Guan Seng.

Moreover, PNB was negligent in the selection Associated Bank stamped the checks with the notation
and supervision of its employees. The trustworthiness "all prior endorsements and/or lack of endorsements
of bank employees is indispensable to maintain the guaranteed," and sent them through clearing. Later,
stability of the banking industry. Thus, banks are the drawee bank, Bank of America, honored the
enjoined to be extra vigilant in the management and checks and paid the proceeds to Associated Bank as
supervision of their employees. the collecting bank.
PNBs tellers and officers, in violation of
banking rules of procedure, permitted the invalid Miller failed to deliver to BA-Finance the proceeds of
deposits of checks to the PEMSLA account. Indeed, the assigned trade receivables. Consequently, BA-
when it is the gross negligence of the bank employees Finance filed a Complaint against Miller for collection
that caused the loss, the bank should be held liable. of the amount of P731,329.63 which BA-Finance
allegedly paid in consideration of the assignment, plus
interest at the rate of 16% per annum and penalty
A bank that has been remiss in its duty must charges.
suffer the consequences of its negligence. Being
issued to named payees, PNB was duty-bound by law
and by banking rules and procedure to require that Uy Kiat Chung and Uy Chung Guan Seng denied
the checks be properly indorsed before accepting having signed the Continuing Suretyship Agreement
them for deposit and payment. In fine, PNB should be with BA-Finance. In view thereof, BA-Finance filed an
held liable for the amounts of the checks. Amended Complaint impleading Bank of
America as additional defendant for allegedly
BANK OF AMERICA, NT & SA VS. ASSOCIATED allowing encashment and collection of the
CITIZENS BANK checks by person or persons other than the
G.R. Nos. 141001 & 141018, May 21, 2009, Carpio, J. payee named thereon.

The bank on which a check is drawn, known as the The RTC and CA ruled against Associated Bank.
drawee bank, is under strict liability, based on the
contract between the bank and its customer (drawer), ISSUE: Whether or not Associated Bank is liable to
to pay the check only to the payee or the payees reimburse Bank of America for the amount of the four
order. The drawers instructions are reflected on the checks for being negligent.

15
P35,147.59. On May 14, 1992, Sulpicio Lines, Inc.
RULING: Yes. Associated Bank is liable to reimburse deposited the aforesaid check to its account with Solid
Bank of America for the amount of the four checks for Bank, Carbon Branch, Cebu City. After clearing, the
being negligent. amount of the check was immediately debited by
Equitable PCI Bank from Tan's account thereby
A collecting bank where a check is deposited, and leaving him with a balance of only P558.87.
which endorses the check upon presentment with the
drawee bank, is an endorser. This Court has Meanwhile, Tan issued three checks from May 9 to
repeatedly held that in check transactions, the May 16, 1992, payable to Agusan del Sur Electric
collecting bank or last endorser generally suffers the Cooperative Inc. (ASELCO), to Agusan del Norte
loss because it has the duty to ascertain the Electric Cooperative Inc., (ANECO) and payable in
genuineness of all prior endorsements considering cash for the amount of P10,000.00. When presented
that the act of presenting the check for payment to for payment, the three checks were dishonored
the drawee is an assertion that the party making the for being drawn against insufficient funds.
presentment has done its duty to ascertain the
genuineness of the endorsements. As a result of the dishonor of Check which were
payable to ASELCO and ANECO, respectively, the
When Associated Bank stamped the back of the four electric power supply for the two mini-sawmills owned
checks with the phrase "all prior endorsements and/or and operated by Tan, located in Talacogon, Agusan del
lack of endorsement guaranteed," that bank had for all Sur; and in Golden Ribbon, Butuan City, was cut off on
intents and purposes treated the checks as negotiable June 1, 1992 and May 28, 1992, respectively, and it
instruments and, accordingly, assumed the warranty of was restored only on July 20 and August 24, 1992,
an endorser. Being so, Associated Bank cannot deny respectively.
liability on the checks
Due to the foregoing, Tan filed with RTC of Cebu City
In Banco de Oro Savings and Mortgage Bank v. a complaint against Equitable PCI Bank, praying for
Equitable Banking Corporation, it was held that, the payment of losses consisting of unrealized income in
law imposes a duty of diligence on the collecting the amount of P1,864,500.00. He also prayed for
bank to scrutinize checks deposited with it for payment of moral damages, exemplary damages,
the purpose of determining their genuineness attorney's fees and litigation expenses.
and regularity. The collecting bank being primarily
engaged in banking holds itself out to the public as Tan claimed that Check No. 275100 was a postdated
the expert and the law holds it to a high standard of check in payment of Bills of Lading Nos. 15, 16 and
conduct. 17, and that his account with Equitable PCI Bank
would have had sufficient funds to cover payment of
In presenting the checks for clearing and for payment, the three other checks were it not for the negligence
Associated Bank made an express guarantee on the of Equitable PCI Bank in immediately debiting from
validity of "all prior endorsements". Thus, stamped at his account Check No. 275100, in the amount of
the back of the checks are Associated Banks clear P34,588.72, even as the said check was postdated to
warranty: ALL PRIOR ENDORSEMENTS AND/OR May 30, 1992. As a consequence of Equitable PCI
LACK OF ENDORSEMENTS GUARANTEED. Without Bank 's error, which brought about the dishonor of the
such warranty, Bank of America would not have paid two checks paid to ASELCO and ANECO, the electric
on the checks. supply to his two mini-sawmills was cut off, the
business operations thereof were stopped, and
purchase orders were not duly served causing
As the warranty has proven to be false and inaccurate,
tremendous losses to him.
Associated Bank is liable for any damage arising out of
the falsity of its representation.
In its defense, Equitable PCI Bank denied that the
EQUITABLE PCI BANK VS. TAN questioned check was postdated May 30, 1992 and
G.R. No. 165339. August 23, 2010, J. Peralta, Second claimed that it was a current check dated May 3,
Division 1992. It alleged further that the disconnection of the
electric supply to Tan's sawmills was not due to the
dishonor of the checks, but for other reasons not
As a business affected with public interest and
attributable to the bank.
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 RTC ruled in favor of Equitable PCI Bank but the RTC
fiduciary nature of their relationship. The diligence ruling was reversed by the CA. Hence this petition.
required of banks, therefore, is more than that of a
good father of a family. ISSUE: Whether or not Equitable PCI Bank exercised
the required degree of diligence for banks.
FACTS: Arcelito B.Tan maintained a current and
savings account with Philippine Commercial RULING: No. The law imposes on banks high
International Bank (PCIB), now Equitable PCI Bank. standards in view of the fiduciary nature of banking.
Although R.A. 8791 took effect only in the year 2000,
On May 13, 1992, Tan issued PCIB Check No. 275100 the Court had already imposed on banks the same
postdated May 30, 1992 in the amount of P34,588.72 high standard of diligence required under R.A. 8791 at
in favor of Sulpicio Lines, Inc. As of May 14, 1992, the time of the untimely debiting of respondent's
respondent's balance with Equitable PCI Bank was account by petitioner in May 1992. In Simex

16
International (Manila), Inc. v. Court of Appeals, the transactions because its business is imbued with
Court held that as a business affected with public public interest
interest and because of the nature of its functions, the
bank is under obligation to treat the accounts of its
FACT:
depositors with meticulous care, always having in
mind the fiduciary nature of their relationship.
Spouses Capistrano were the owners of a residential
The proximate cause of the loss is not Tan's manner of lot in Bacoor, Cavite who availed of the Unified Home
writing the date of the check, as it was very clear that Lending Program (UHLP) being implemented by the
he intended Check No. 275100 to be dated May 30, National Home Mortgage Finance Corporation
1992 and not May 3, 1992. The proximate cause is (NHMFC) for the construction of their house. The
Equitable PCI Banks own negligence in debiting the spouses Capistrano then entered into a construction
account of the Tan prior to the date as appearing in contract with GCB Builders which the latter
the check, which resulted in the subsequent dishonor committed to undertake the construction within 75
of several checks issued by Tan and the disconnection days. By virtue of this agreement, GCB submitted its
by ASELCO and ANECO of his electric supply. loan application with Comsavings Bank to finance the
construction costs with understanding that
Comsavings Bank will then reimbursed it from
The bank on which the check is drawn, known as the
NHMFC.
drawee bank, is under strict liability to pay to the
order of the payee in accordance with the drawers
instructions as reflected on the face and by the terms As required prior to the release of the loan,
of the check. Thus, payment made before the date Comsavings Bank asked that Spouses Capistrano to
specified by the drawer is clearly against the drawee sign the necessary documents including the
bank's duty to its client. Certification of House Completion despite the fact that
the construction of the house was in fact not yet
Equitable PCI Bank submits that Tan caused confusion finished. Moreover, it was also required that for
on the true date of the check by writing the date of the NHMFC to reimburse the loan, a photo of the fully
check as 5/3/0/92. If, indeed, Equitable PCI Bank constructed house bearing the signatures of the owner
was confused on whether the check was dated at the dorsal sides must be submitted. The bank did so
May 3 or May 30 because of the / which allegedly but the photo submitted was not the house of the
separated the number 3 from the 0, Equitable Spouses Capistrano but of anothers and no signature,
PCI Bank should have required Tan to as required, was affixed to it.
countersign the said / in order to ascertain the
true intent of the drawer before honoring the Relying on the submitted documents, NHMFC
check. demanded payment of the amortization. However,
Spouses Capistrano protested and raised the defense
As a matter of practice, bank tellers would not receive that the construction was not yet completed and that
nor honor such checks which they believe to be they did not sign the certification of completion.
unclear, without the counter-signature of its drawer.
Equitable PCI Bank should have exercised the highest ISSUE:
degree of diligence required of it by ascertaining from
the respondent the accuracy of the entries therein, in
order to settle the confusion, instead of proceeding to Whether or not Comsavings Bank was negligent for
honor and receive the check. failure to exercise the diligence required of Banks?

The diligence required of banks, therefore, is more RULING:


than that of a good father of a family. In every case,
the depositor expects the bank to treat his account Yes. The court held that the business of bank is
with the utmost fidelity, whether such account consists affected with public interest; thus, it makes a sworn
only of a few hundred pesos or of millions. The bank profession of diligence and meticulousness in giving
must record every single transaction accurately, down irreproachable service. For this reason, the bank
to the last centavo, and as promptly as possible. This should guard against injury attributable to negligence
has to be done if the account is to reflect at any given or bad faith. The banking sector must at all times
time the amount of money the depositor can dispose of maintain a high level of meticulousness.
as he sees fit, confident that the bank will deliver it as
and to whomever he directs. From the foregoing, it is In this case, had the Comsavings Bank complied with
clear that Equitable PCI Bank did not exercise the its duty of observe the highest degree of diligence, it
degree of diligence that it ought to have exercised in would have checked first whether the photos
dealing with its client. represent the actual property of its client and the
same carried their signatures before releasing the
COMSAVINGS BANK VS. SPOUSES DANILO AND loan. Also, the act of the bank of not giving the option
ESTRELLA CAPISTRANO not to pre-sign the Certificate of Completion and
G.R. No. 170942, 28 August 2013, Bersamin asking the client to sign the same despite the fact that
the actual construction of the house is not yet
completed showed negligence and irregularity in the
DOCTRINE: A banking institution is obliged to
exercise of standard operation procedure in banking.
exercise the highest degree of diligence as well as
high standards of integrity and performance in all its

17
With this, Comsavings Bank was held to be negligent the people in the honesty and efficiency of banks. DBP
in exercising the highest degree of diligence required had to act with great care in applying the stipulations
of a bank. of its agreement with Guaria Corporation, lest it
erodes such public confidence.
DEVELOPMENT BANK OF THE PHILIPPINES v.
GUARIA AGRICULTURAL AND REALTY In this case, DBP failed in its duty to exercise the
DEVELOPMENT CORPORATION highest degree of diligence by prematurely foreclosing
G.R. No. 160758, January15, 2015, Bersamin, J. the mortgages and unwarrantedly causing the
foreclosure sale of the mortgaged properties despite
DOCTRINE: Guaria Corporation not being yet in default.
Being a banking institution, it should exercise the Considering that DBP had yet to release the entire
highest degree of diligence, as well as to observe the proceeds of the loan, DBP could not yet make an
high standards of integrity and performance in all its effective demand for Guaria to perform its obligation
transactions because its business is imbued with under the loan.
public interest.The stability of banks largely depends
on the confidence of the people in the honesty and F. Nature of Bank Funds and Bank Deposits
efficiency of banks.
THE CONSOLIDATED BANK and TRUST
CORPORATION vs. COURT OF APPEALS and L.C.
FACTS:
DIAZ and COMPANY, CPAs
G.R. No. 138569 | September 11, 2003 | Carpio, J.
Guaria Corporation applied for a loan from
DBP to finance the development of its resort complex This fiduciary relationship means that the banks
in Iloilo. As required for the approval of the loan obligation to observe high standards of integrity and
application, Guaria executed a promissory note and a performance is deemed written into every deposit
real estate mortgage in favor of DBP. Prior to the agreement between a bank and its depositor. The
release of the loan, DBP required Guaria Corporation fiduciary nature of banking requires banks to assume
to put up a cash equity for the construction of the a degree of diligence higher than that of a good father
buildings and other improvements. Guaria used the of a family as required in Article 1172 of the Civil
proceeds of the loan to defray the cost of additional Code.
improvements in the resort complex. The loan was
approved and it was agreed upon that the release FACTS: L.C. Diaz, an accounting firm has been
shall be in an installment basis. Later on, Guaria maintaining a savings account with Solidbank. On
demanded the release of the balance of the loan, August 14, 1991, L.C. Diaz through its cashier
however, DBP refused and instead paid direcly some (Macaraya), instructed its messenger (Calapre), to
suppliers of Guaria despite its objection. deposit by virtue of two deposit slips the amount of
P990 and P50 with Solidbank. Macaraya gave Calapre
the Solidbank passbook together with the money.
Upon ocular visit, DBP found out that Guaria had not
completed the construction hence demanding to
expedite its completion. However, Guaria did not Calapre went to Solidbank and presented to Teller No.
heed the demand and therefore DBP initiated 6 the two deposit slips and the passbook. The teller
extrajudicial foreclosure proceedings. Guaria filed for acknowledged receipt of the deposit by returning to
specific performance of DBPs obligations under the Calapre the duplicate copies of the two deposit slips.
loan agreement and to stop the foreclosure of the Since the transaction took time and Calapre had to
mortgages. However, DBP moved for the dismissal make another deposit for L.C. Diaz with Allied Bank,
stating that the mortgaged properties were already he left the passbook with Solidbank. When Calapre
returned to Solidbank to retrieve the passbook, Teller
sold. Thus, Guaria sought to nullify the foreclosure
No. 6 informed him that somebody got the passbook.
proceedings and the cancellation of the certificate of
sale.
After learning of the incident, Macaraya went back to
Solidbank together with Calapre and confirmed that
ISSUE:
indeed the passbook was missing and that someone
shorter than Calapre got the passbook. Teller No.6
Whether DBPs foreclosure and sale of the even handed to Macaraya a deposit slip dated 14
mortgaged properties were premature and therefore August 1991 for the deposit of a check for P90,000
violated its duty to maintain highest degree of drawn on PBC. This PBC check of L.C. Diaz was a
diligence of a bank? check that it had long closed. Failing to get back the
passbook, Macaraya went back to her office and
RULING: reported the matter to the Personnel Manager of L.C.
Diaz, Emmanuel Alvarez.
YES. Being a banking institution, DBP owed it to
Guaria Corporation to exercise the highest degree of 15 August 1991, Luis C. Diaz (L.C. Diaz CEO), called
diligence, as well as to observe the high standards of up Solidbank to stop any transaction using the same
integrity and performance in all its transactions passbook until L.C. Diaz could open a new account.
because its business was imbued with public interest. However, on the same day L.C. Diaz was informed of
the unauthorized withdrawal the day before, of
The high standards were also necessary to ensure
P300,000 from its savings account. The withdrawal
public confidence in the banking system, for the
slip for the P300,000 bore the signatures of the
stability of banks largely depends on the confidence of authorized signatories of L.C. Diaz, namely Diaz and

18
Rustico L. Murillo. The signatories, however, denied
signing the withdrawal slip. A certain Noel Tamayo In this case, the failure of Solidbank and Teller No. 6
received the P300,000. to return the passbook to Calapre, the authorized
representative of L.C. Diaz, raises the presumption
that it failed to observe such high degree of diligence
An Information of Estafa through Falsification of in safeguarding the passbook, and in insuring its
Commercial Document against its messengers, Ilagan return to the party authorized to receive the same.
and Verdazola was filed by L.C. Diaz in the RTC of
Manila but it was dismissed for lack of probable cause. Solidbank is bound by the negligence of its employees
under the principle of respondeat superior or
On 24 August 1992, L.C. Diaz through its counsel command responsibility. The defense of exercising the
demanded from Solidbank the return of its money. required diligence in the selection and supervision of
Solidbank refused prompting L.C. Diaz to file a employees is not a complete defense in culpa
complaint for recovery of sum of money against contractual, unlike in culpa aquiliana.
Solidbank with the RTC.
However, the court also found that L.C. Diaz was
guilty of contributory negligence in allowing a
The RTC absolved Solidbank while CA reversed the withdrawal slip signed by its authorized signatories to
decision of the RTC. Hence, this petition. fall into the hands of an impostor. Thus, the liability of
Solidbank should be reduced to 60% of the actual
damages while the other 40% must be shouldered by
ISSUE: Whether or not Solidbank has been negligent
and should be made liable for the loss incurred by L.C. L.C. Diaz.
Diaz on account of the unauthorized withdrawal from
its lost passbook? RUFA C. SUAN vs. ATTY. RICARDO D. GONZALEZ
A.C. NO. 6377 | March 12, 2007 | YNARES-
RULING: Yes, Solidbank is liable for breach of SANTIAGO, J.
contract due to negligence, or culpa contractual. The
contract between the bank and its depositor is The filing of an intracorporate case before the RTC
governed by the provisions of the Civil Code on simple and a complaint with the Bangko Sentral ng Pilipinas,
loan. Art. 1980 of the Civil Code expressly provides invoking BSPs supervisory powers over banking
that x x x savings x x x deposits of money in banks and operations which does not amount to a judicial
similar institutions shall be governed by the provisions proceeding, does not constitute forum shopping.
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. FACTS: Complainant (Suan) is a Director and VP of
The depositor lends the bank money and the bank Rural Green Bank of Caraga, Inc., a rural banking
agrees to pay the depositor on demand. The savings corporation at Montilla Blvd., Butuan City, while
deposit agreement between the bank and the respondent (Gonzales) is one of its stockholders.
depositor is the contract that determines the
rights and obligations of the parties. On February 11, 2004, respondent filed a case for
Mandamus, Computation of Interests, Enforcement of
The law imposes on banks high standards in view of Inspection, Dividend and Appraisal Rights, Damages
the fiduciary nature of banking. Sec. 2 of RA 8791, and Attorney's Fees against the Rural Green Bank of
declares that the State recognizes the fiduciary nature Caraga, Inc. and the members of its Board of Directors
of banking that requires high standards of integrity before the RTC of Butuan City, Br, praying, that a TRO
and performance. This new provision is an affirmation be issued enjoining the conduct of the annual
of the decision in Simex International v. Court of stockholders' meeting and the holding of the election
Appeals, holding that the bank is under obligation to of the Board of Directors.
treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of On February 14, 2004, the trial court issued a TRO
their relationship. conditioned upon respondent's posting of a bond.
Thereafter, respondent submitted a bond issued by
However, the fiduciary nature of a bank-depositor Stronghold Insurance Company, Incorporated (SICI)
relationship does not convert the contract between the together with a Certification issued by then Court
bank and its depositors from a simple loan to a trust Administrator, now Associate Justice, Presbitero J.
agreement, whether express or implied. Failure by the Velasco, Jr. that, according to the Clerk of Court of the
bank to pay the depositor is failure to pay a simple Municipal Trial Court in Cities (MTCC) of Butuan City,
loan, and not a breach of trust. The law simply SICI has no pending obligation and/or liability to the
imposes on the bank a higher standard of integrity government insofar as confiscated bonds in civil and
and performance in complying with its obligations criminal cases are concerned.
under the contract of simple loan, beyond those
required of non-bank debtors under a similar contract Based on the foregoing, Suan filed this complaint
of simple loan. alleging that:
Solidbanks rules on savings account require that the
deposit book should be carefully guarded by the 1.) Respondent engaged in unlawful, dishonest,
depositor and kept under lock and key, if possible. immoral or deceitful conduct when he
When the passbook is in the possession of Solidbanks submitted the certification to the RTC despite
tellers during withdrawals, the law imposes on knowing that the same is applicable only for
Solidbank and its tellers an even higher degree of transactions before the MTCC;
diligence in safeguarding the passbook.

19
2.) The bond was defective because it was the intra-corporate controversies pending before the
released by SICI despite respondent's failure trial court.
to put up the required P100,000.00 collateral.
3.) Respondent committed perjury in the NOTE: The rulings on the first three allegations were
complaint it filed before the BSP against not discussed as they are not related to banking, the
Ismael Andaya and the members of the Board 4th allegation is the closest issue related to banking
of the Rural Green Bank for alleged gross but not under the heading of Nature of Bank Funds
violation of the principles of good corporate and Bank Deposits.
governance, as they represented themselves
G. Stipulation on Interests
as the bank's minority stockholders with a
total holdings amounting to more or less P5 FIDELITY SAVINGS AND MORTGAGE BANK,
million while the controlling stockholders own petitioner, vs.
approximately 80% of the authorized capital HON. PEDRO D. CENZON, in his capacity as
stock. Contrary to the actual figures of 6 Presiding Judge of the CFI Manila and
million for the minority stockholders' stake SPOUSES TIMOTEO AND OLIMPIA
and 70% of the outstanding capital stock SANTIAGO, respondents,
owned by majority stockholders. G.R. No. L-46208, April 5, 1990, REGALADO, J.
4.) Respondent is guilty of forum shopping
because the causes of action of the cases he It is settled jurisprudence that a banking
filed before the RTC and the Bangko Sentral institution which has been declared insolvent and
ng Pilipinas are the same. subsequently ordered closed by the Central Bank of
the Philippines cannot be held liable to pay interest on
The IBP dismissed the case of disbarment against the bank deposits which accrued during the period when
respondent. Hence, this petition. the bank is actually closed and non-operational.

ISSUE: Whether or not respondent should be held FACTS:


guilty of the acts alleged by Suan. In 1968, Spouses Santiago deposited with the
Fidelity Savings and Mortgage Bank (FSMB) an
aggregate amount of P100,000. On February 18, 1969,
RULING: No, Atty. Gonzales is not guilty of any of the
the Monetary Board, after finding that the condition of
acts alleged against him.
FSMB is one of insolvency issued Resolution No. 350
directing its closure and having all its assets be taken
On the 4th allegation: charge by the Monetary Board. Subsequently, PDIC
There is no forum shopping. The essence of forum paid the spouses P10,000 leaving a balance of
shopping is the filing of multiple suits involving the P90,000. Thereafter, the Monetary Board directed the
same parties for the same cause of action, either
liquidation of the bank. Pending liquidation, spouses
simultaneously or successively, for the purpose of
Santiago sent demand letters to the bank demanding
obtaining a favorable judgment.
the immediate payment of the aforementioned deposit
but remained unheeded. This prompted the spouses to
In this case, the filing of the intra-corporate case file an action for a sum of money with damages
before the RTC does not amount to forum-shopping. It against the bank.
is a formal demand of respondent's legal rights in a
court of justice in the manner prescribed by the court
or by the law with respect to the controversy involved. CFI Manila, in its decision ordered the bank to
The relief sought in the case is primarily to compel the pay the following amounts: (a) P90,000 with accrued
interest until fully paid; (b) P30,000 as exemplary
bank to disclose its stockholdings, to allow them the
damages; and (c) P10,000 for attorney's fees, hence
inspection of corporate books and records, and the
the instant petition for review to the Supreme Court.
payment of damages. It was also prayed that a TRO be
issued to enjoin the holding of the annual
stockholder's meeting and the election of the members ISSUES:
of the Board, which, only courts of justice can issue. 1. WON an insolvent bank like the FSMB may be
adjudged to pay interest on unpaid deposits
even after its closure by the Central Bank by
On the other hand, the complaint filed with the reason of insolvency;
Bangko Sentral ng Pilipinas was an invocation of the
2. WON an insolvent bank may be adjudged to
BSP's supervisory powers over banking operations pay moral and exemplary damages, attorney's
which does not amount to a judicial proceeding. It fees and costs;
brought to the attention of the BSP the alleged
questionable actions of the bank's Board of Directors
in violation of the principles of good corporate RULING:
governance. It prayed for the conduct of an 1st issue: NO. It is settled jurisprudence that a
investigation over the alleged unsafe and unsound banking institution which has been declared insolvent
and subsequently ordered closed by the Central Bank
business practices of the bank and to make necessary of the Philippines cannot be held liable to pay interest
corrective measures to prevent the collapse of the on bank deposits which accrued during the period
bank. when the bank is actually closed and non-operational.

As such, the two proceedings are of different nature In The Overseas Bank of Manila vs. CA, the Court held
praying for different relief. Likewise, a ruling by the that:
BSP concerning the soundness of the bank operations
will not adversely or directly affect the resolution of

20
..what enables a bank to pay stipulated The stipulated interest rates of 3% per month and
interest on money deposited with it is the higher is excessive, iniquitous, unconscionable and
other aspects of its operation from which it exorbitant. Such stipulations are void for being
generates funds to cover the payment of such contrary to morals, if not against the law. Since the
interest. Unless a bank can engage in other stipulation is void, it is as if there was no express
banking and financing activities from which it contract thereon. As to penalty charge, the court shall
can derive income, it is inconceivable how it equitably reduce the same when the principal
can carry on as a depository obligated to pay obligation has been partly or irregularly complied with
stipulated interest.Consequently, it should by the debtor or when it is unconscionable.
be deemed read into every contract of deposit
with a bank that the obligation to pay interest FACTS:
on the deposit ceases the moment the
operation of the bank is completely suspended
by the duly constituted authority, the Central Ileana Macalinao was an approved cardholder
Bank. of BPI Mastercard. She made some purchases through
the use of the said credit card and defaulted in paying
for said purchases. Under the Terms and Conditions
From the aforecited authorities, it is manifest Governing the Issuance and Use of the Card, the
that petitioner bank cannot be held liable for interest charges or balance thereof remaining unpaid after the
on deposits which accrued from the time it was due date indicated on the monthly Statement of
prohibited by the Central Bank to Accounts shall bear interest at the rate of 3% per
continue with its banking operations, that is, when month and an additional penalty fee of 3% per month.
Resolution No. 350 to that effect was issued on
February 18, 1969. Thus, the P90,000 deposit of the
spouses should only earn interest up to February 18, Macalinao made partial payments thereon but
1969. failed to settle the full obligation. This prompted BPI
to file with the MeTC a complaint for a sum of money
against her. MeTC ruled in favour of BPI but it
2nd issue: NO. The insolvent bank may not be
adjudged to pay moral, exemplary damages and nevertheless declared as unconscionable the banks
attorney's fees. imposition of total interest rate of 9.25% per month or
111% per annum, hence it reduced the interest and
penalty charges to 2% per month.
There was no fraud or bad faith on the part of
bank in accepting the deposits. The bank could not
even be faulted in not immediately returning the RTC affirmed in toto the decision of the MeTC
amount claimed considering that the demand to pay but CA on appeal modified and increased
was made and the collection suit was filed in the trial the amount of interest rate from 2% to 3% monthly
court several months after its closure where it was no (interest rate at 1.5% and penalty charge at 1.5%)
longer in a position to comply with its obligations to its which according to it is based on the Terms and
creditors, hence moral damages cannot be awarded. Conditions of the card which in turns governs the
transaction between the parties.
The award of exemplary damages which is
supposed to serve as a warning to other banks from ISSUE:
dissipating their assets in anomalous transactions was
likewise without basis. It was not proven that
WON the interest rate and penalty charge of 3% per
petitioner bank actually engaged in anomalous real month is iniquitous as the same translates to 36% per
estate transactions. Hence, it was error for the lower annum or thrice the legal rate of interest and hence
court to impose exemplary damages upon petitioner should be reduced to 2% per month.
bank since, in contracts, such sanction requires that
the offending party acted in a wanton, fraudulent,
reckless, oppressive or malevolent manner. Neither RULING:
does this case present the situation where attorney's
fees may be awarded. YES. The interest rate and penalty charge of
3% per month or 36% per annum although stipulated
Note: SC agreed with the bank that the spouses in the Terms and Conditions Governing the Issuance
claims should have been filed in the pending and Use of the Card is excessive and unconscionable
liquidation proceedings, nevertheless it held that the and should be equitably reduced to 2% per month or
decision rendered in the instant case would not be 24% per annum.
violative of the legal provisions on preference and
concurrence of credits. As the trial court puts it, the The Court in Chua vs. Timan held:
order of payment should not be understood as raising We need not unsettle the principle we
the deposits to the category of preferred credits of the had affirmed in a plethora of cases that
bank but shall be paid in accordance with the Bank stipulated interest rates of 3% per month
Liquidation Rules and Regulations. and higher are excessive, iniquitous,
unconscionable and exorbitant. Such
ILEANA DR. MACALINAO, petitioner, vs. BANK OF stipulations are void for being contrary to
THE PHILIPPINE ISLANDS, respondent. morals, if not against the law. While C.B.
G.R. No. 175490, September 17, 2009, VELASCO, Circular No. 905-82, which took effect on
JR., J. January 1, 1983, effectively removed the
ceiling on interest rates for both secured
and unsecured loans, regardless of

21
maturity, nothing in the said circular could credit accommodations that petitioners subsequently
possibly be read as granting carte blanche obtained from PBC. Due to petitioners' failure to pay
authority to lenders to raise interest rates their loans, PBC foreclosed on the subject property.
to levels which would either enslave their
borrowers or lead to a hemorrhaging of Eugenio D. Trinidad was declared the highest bidder
their assets. during the public auction and was issued a certificate
of sale. Petitioners filed a complaint for annulment of
Since the stipulation on the interest rate is mortgage, extra-judicial foreclosure and certificate of
void, it is as if there was no express contract thereon. sale. RTC dismissed the complaint but granted
Hence, courts may reduce the interest rate as reason petitioners five months and 17 days from the finality of
and equity demand. the decision to exercise their right of redemption over
the foreclosed property.
The same is true with respect to the penalty
charge. Pertinently, Article 1229 of the Civil Code Meanwhile, petitioners assigned their rights
states:
over the contested property to Partas Transporation
Art. 1229. The judge shall equitably
reduce the penalty when the principal Co., Inc. (PTCI). However, respondent heirs of
obligation has been partly or irregularly Trinidad refused to claim the redemption money and
complied with by the debtor. Even if there surrender the certificate of title covering the
has been no performance, the penalty may foreclosed property, claiming the amount tendered
also be reduced by the courts if it is
was inadequate, i.e., the interest of 1% per month was
iniquitous or unconscionable.
computed only for a one-year period. Ultimately, the
RTC upheld the exercise of redemption and directed
In exercising this power to determine what is
iniquitous and unconscionable, courts must consider respondents to surrender the certificate of title.
the circumstances of each case since what may be Respondents' motion for reconsideration was denied.
iniquitous and unconscionable in one may be totally Notice of Appeal was denied. Petitioners moved for
just and equitable in another. In the instant case, the execution which was granted by the RTC. No MR was
records would reveal that Macalinao made partial filed and went directly to the CA. CA set aside the
payments to BPI, as indicated in her Billing
order of RTC. MR was denied.
Statements. This, coupled with the fact that the
stipulated penalty charge of 3% per month or 36% per
annum, in addition to regular interests is indeed ISSUE:
iniquitous and unconscionable justifies the reduction
of such penalty charge. Should the 1% per month interest for one year
be applied as stated in the mortgage contract?
HEIRS OF ESTELITA BURGOS-LIPAT, NAMELY:
ALAN B. LIPAT AND ALFREDO B. LIPAT, JR. v. RULING: NO
HEIRS OF EUGENIO D. TRINIDAD, NAMELY:
ASUNCION R. TRINIDAD, VICTOR R. The one-year redemption period applied by the
TRINIDAD, IMACULADA T. ALFONSO, CA is the rule that generally applies to foreclosure of
CELESTINA T. NAGUIAT, FERNANDO mortgage by a bank. The period of redemption is not
R. TRINIDAD, MICHAEL R. TRINIDAD AND tolled by the filing of a complaint or petition for
JOSEFINA T. NAGUIAT annulment of the mortgage and the foreclosure sale
G.R. NO. 185644. MARCH 2, 2010, CORONA, J.
conducted pursuant to the said mortgage. However,
considering the exceptional circumstances
The rate of interest specified in the mortgage
surrounding this case, we will not apply the rule in
contract shall be applied for the one-year period
this instance pro hac vice.
reckoned from the date of registration of the
certificate of sale in accordance with the General In Lipat, this Court upheld the RTC decision
Banking Act. However, since petitioners effectively giving petitioners five months and 17 days from the
had more than one year to exercise the right of finality of the trial court's decision to redeem their
redemption, justice, fairness and equity require that foreclosed property. Lipat, already final and executory,
they pay 12% p.a. interest beyond the one-year period has therefore become the law of the case between the
up to June 16, 2004 when Partas consigned the parties, including their heirs who are petitioners and
redemption price with the RTC. respondents in this case. In Union Bank of the
Philippines v. ASB Development Corporation, we
FACTS:
explained:
Law of the case has been defined as "the
Estelita Burgos-Lipat and Alfredo Lipat
opinion delivered on a former appeal. More
(spouses Lipat) obtained a P583,854 loan from Pacific
specifically, it means that whatever is already
Banking Corporation (PBC), secured by a real estate
irrevocably established as the controlling legal rule or
mortgage on their Quezon City property. The
decision between the same parties in the same case
mortgage was eventually extended to secure
continues to be the law of the case, whether correct
additional loans, discounting lines, overdrafts and
on general principles or not, so long as the facts on

22
which such decision was predicated continue to be the 0142 secured by a mortgage over his property with no
facts of the case before the court." interest indicated. The second was a consumption
loan evidenced by PN 0143 with an interest of 18%
Consequently, petitioners had five months and per annum. Tuble allegedly obtained a salary loan, his
17 days from the finality of Lipat to exercise their third loan. Later, he resigned and was given the
right of redemption, even though this period was option to return the vehicle without any further
beyond one year from the date of registration of the obligation or retain the unit and pay its remaining
sale. book value. In turn, Asiatrust owed Tuble (1) his pro-
rata share in the DIP; and (2) final salary and 13 th
Thus, the CA erred (and even committed a month pay. Tuble claimed offsetting of loans could
take place which was allowed by the bank. His
grave abuse of discretion) when it insisted on a
liabilities were reduced to P970,691.46 plus the
contrary ruling. The CA had no power to reverse this
unreturned value of the vehicle. The bank filed a
Court's final and executory judgment. The CA
complaint for replevin of the vehicle and was granted.
overstepped its authority when it held that the right of It also filed a Petition for Extra-judicial Foreclosure of
redemption had already expired one year after the real estate mortgage over his property based only on
date of the registration of the certificate of sale. Like his real estate loan amounting to P421,800. Tuble
all other courts in our judicial system, the CA must redeemed the property with the increased price of
take its bearings from the rulings and decisions of this P1,318,401.91 because the bank imposed additional
Court. interest and charges. Tuble questioned how the
foreclosure basis ballooned to P1,318,401.91 in a
Nevertheless, we note that the amount matter of 1 year. The bank explained that it included
tendered by petitioners to redeem their foreclosed the car's book value, the salary loan, car insurance,
property was determined by the sheriff at the rate of 18% annual interest on the bank's redemption
one percent per month for only one year. Section 78 of price of P421,800, penalty and interest charges on
the General Banking Act requires payment of the PN No. 0142, and litigation expenses. Tuble filed for
amount fixed by the court in the order of execution, recovery of a sum of money and damages seeking to
collect the excess charges on the redemption price
with interest thereon at the rate specified in the
and damages which was granted. The RTC ruled that
mortgage contract, and all the costs and other judicial
the 18% annual interest on the bid price of P421,800
expenses incurred by the bank or institution was unlawful. Act 3135 only allows the mortgagee to
concerned by reason of the execution and sale and as charge an interest of 1 % per month if the foreclosed
a result of the custody of said property less the income property is redeemed which was affirmed by the CA.
received from the property. The rate of interest
specified in the mortgage contract shall be ISSUE:
applied for the one-year period reckoned from
Is the bank entitled to include the interest
the date of registration of the certificate of sale
charges on the promissory note of the loans and the
in accordance with the General Banking Act.
18% annual interest on the bid price of P421,800?
However, since petitioners effectively had more
than one year to exercise the right of HELD:
redemption, justice, fairness and equity require
that they pay 12% p.a. interest beyond the one- No. In foreclosures, the mortgaged property is
subjected to the proceedings for the satisfaction of the
year period up to June 16, 2004 when Partas
obligation. As a result, payment is effected by
consigned the redemption price with the RTC.
abnormal means whereby the debtor is forced by a
judicial proceeding to comply with the presentation or
ASIATRUST DEVELOPMENT BANK v. CARMELO to pay indemnity. Once the proceeds from the sale of
TUBLE the property are applied to the payment of the
G.R. No. 183987, July 25, 2012, SECOND obligation, the obligation is already extinguished.
DIVISION (Sereno, J.) Thus, in Spouses Romero v. Court of Appeals, we held
that the mortgage indebtedness was extinguished with
Key Doctrine: Redemption is by force of law, and the foreclosure and sale of the mortgaged property,
the purchaser at public auction is bound to accept it. and that what remained was the right of redemption
Thus, it is the law that provides the terms of the right; granted by law.
the mortgagee cannot dictate them. The terms of this
right are based on Section 47 of the General Banking Consequently, since the Real Estate Mortgage
Law. Contract is already extinguished, petitioner can no
longer rely on it or invoke its provisions, including the
Tuble, vice-president of Asiatrust, availed the dragnet clause stipulated therein. It follows that the
car incentive plan - acquiring a Nissan Vanette - and bank cannot refer to the 18% annual interest charged
loan privileges offered by the bank. He was entitled in Promissory Note No. 0143, an obligation allegedly
to the bank's Senior Managers Deferred Incentive covered by the terms of the Contract.
Plan (DIP). Tuble obtained 3 separate loans. The first,
a real estate loan, evidenced by Promissory Note (PN)

23
The right of redemption of foreclosed retired employee had been cleared by the bank. Thus,
properties was a statutory privilege he enjoyed. Tuble incorrectly invoked legal compensation in
Redemption is by force of law, and the purchaser at addressing this issue of default.
public auction is bound to accept it. Thus, it is the law
that provides the terms of the right; the mortgagee Nevertheless, based on the findings of the RTC
cannot dictate them. The terms of this right, based on and the CA, the obligation of Tuble as evidenced by
Section 47 of the General Banking Law, are as follows: Promissory Note No. 0142, was set to mature on 1
(1) The redemptioner shall have the right within one January 1999. But then, he had already settled his
year after the sale of the real estate, to redeem the liabilities on 17 March 1997 by paying PI,318,401.91
property. (2) The redemptioner shall pay the amount as redemption price. Then, in 1999, the bank issued
due under the mortgage deed, with interest thereon at his Clearance and share in the DIP in view of the full
rate specified in the mortgage, and all the costs and settlement of his obligations. Thus, there being no
expenses incurred by the bank or institution from the substantial delay on his part, the CA did not grievously
sale and custody of said property less the income err in not declaring him to be in default.
derived therefrom. (3) In case of redemptioners who
From all the foregoing, we rule that the
are considered by law as juridical persons, they shall
appellate court correctly deleted the 18% annual
have the right to redeem not after the registration of
interest charges, albeit for different reasons. First, the
the certificate of foreclosure sale with the applicable
interest cannot be imposed, because any reference to
Register of Deeds which in no case shall be more than
three (3) months after foreclosure, whichever is it under the Real Estate Mortgage Contract is
earlier. Consequently, the bank cannot alter that right misplaced, as the contract is already extinguished.
by imposing additional charges and including other Second, the said interest cannot be collected without
loans. Verily, the freedom to stipulate the terms and any basis in terms of Tuble's redemption rights. Third,
conditions of an agreement is limited by law. assuming that the Real Estate Mortgage Contract
subsists, the bank cannot collect the interest because
In any event, assuming that the Real Estate of the contract's ambiguity. Fourth, the dragnet clause
Mortgage Contract subsists, we rule that the dragnet referred to in the contract cannot be presumed to
clause therein does not justify the imposition of an
include the 18% annual interest specified in the
18% annual interest on the redemption price. This
consumption loan. Fifth, with respect to the
Court has recognized that, through a dragnet clause, a
compensatory interest claimed by the bank, we hold
real estate mortgage contract may exceptionally
that neither is the interest due, because Tuble cannot
secure future loans or advancements. But an
obligation is not secured by a mortgage, unless, that be deemed to be in default of his obligations.
mortgage comes fairly within the terms of the
mortgage contract. ADVOCATES FOR TRUTH IN LENDING, INC. and
EDUARDO OLAGUER v. BANGKO SENTRAL
In addition to the 18% annual interest, the MONETARY BOARD, represented by GOVERNOR
bank also claims a 12% interest per annum on the ARMANDO TETANGCO et al. G.R. No. 192986,
consumption loan. Notwithstanding that Promissory 15 January 2013, Reyes, J.
Note No. 0142 contains no stipulation on interest
payments, the bank still claims that Tuble is liable to
The lifting of the ceilings for interest rates does not
pay the legal interest. This interest is currently at 12%
authorize stipulations charging excessive,
per annum, pursuant to Central Bank Circular No. 416
and Article 2209 of the Civil Code, which provides: If unconscionable, and iniquitous interest.
the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the indemnity FACTS.
for damages, there being no stipulation to the
contrary, shall be the payment of the interest R.A. No. 265 which created the Central Bank
agreed upon, and in the absence of stipulation,
of the Philippines empowered the CB-MB to, among
the legal interest, which is six per cent per annum.
others, set the maximum interest rates which banks
Thus, a default must exist before the bank can may charge for all types of loans and other credit
collect the compensatory legal interest of 12% per operations, within limits prescribed by the Usury Law.
annum. In this regard, Tuble denies being in default Later on, the Usury Law was amended by P.D. No.
since, by way of legal compensation, he effectively 1684 giving the CB-MB authority to prescribe different
paid his liabilities on time. This argument is flawed. maximum rates of interest which may be imposed for a
The bank correctly explains in its Petition that in order loan or renewal thereof or the forbearance of any
for legal compensation to take effect, Article 1279 of money, goods, or credits, provided that the changes
the Civil Code requires that the debts be liquidated are effected gradually and announced in advance. In
and demandable. Liquidated debts are those whose its Resolution No. 2224, the CB-MB issued CB Circular
exact amount has already been determined. In this
No. 905, Series of 1982. Section 1 thereof removed
case, the receivable of Tuble, including his DIP share,
the ceilings on interest rates on loans and forbearance
was not yet determined; it was the petitioner's policy
of any money, goods or credits.
to compute and issue the computation only after the

24
different types of borrowings, including deposits
President Fidel V. Ramos then signed into law and deposit substitutes, or loans of financial
R.A. No. 7653 establishing the BSP to replace the CB. intermediaries.
The repealing clause thereof provides that Except as
may be provided for in Sections 46 and 132 of this Act, It is settled that nothing in CB Circular No. 905
R.A. No. 265, as amended, the provisions of any other grants lenders a carte blanche authority to raise
law, special charters, rule or regulation issued interest rates to levels which will either enslave
pursuant to said R.A. No. 265, as amended, or parts their borrowers or lead to a hemorrhaging of
thereof, which may be inconsistent with the provisions their assets. Stipulations authorizing iniquitous
of this Act are hereby repealed. or unconscionable interests have been invariably
struck down for being contrary to morals, if not
Petitioner AFTIL is a nonprofit, non-stock against the law. Indeed, under Article 1409 of the
corporation organized to engage in pro bono concerns Civil Code, these contracts are deemed inexistent and
and activities relating to money lending issues. It filed void ab initio, and therefore cannot be ratified, nor
this petition, joined by its founder and president, may the right to set up their illegality as a defense be
Eduardo B. Olaguer, suing as a taxpayer and a citizen. waived. Nonetheless, the nullity of the stipulation of
Petitioners, claiming that they are raising issues of usurious interest does not affect the lenders right to
transcendental importance to the public, filed directly recover the principal of a loan, nor affect the other
with this Court this Petition for Certiorari under Rule terms thereof. Thus, in a usurious loan with mortgage,
65, seeking to declare that the BSP-MB, replacing the the right to foreclose the mortgage subsists, and this
CB-MB, has no authority to continue enforcing CB right can be exercised by the creditor upon failure by
Circular No. 905, issued by the CB-MB, which the debtor to pay the debt due. The debt due is
suspended the Usury Law. considered as without the stipulated excessive
interest, and a legal interest of 12% per annum will be
ISSUE. added in place of the excessive interest formerly
imposed, following the guidelines laid down in the
1) Did the CB-MB exceeded its authority in landmark case of Eastern Shipping Lines, Inc. v. Court
issuing CB Circular No. 905 which removed all of Appeals.
interest ceilings? NO
2) May the new BSP-MB continue to enforce CB H. Grant of Loans and Security Requirements
Circular No. 905? YES
BANCO DE ORO, PETITIONER-APPELLANT, VS.
JAIME Z. BAYUGA AND ROBERTO P.
HELD. TOLENTINO, RESPONDENTS-APPELLEES, THE
COURT OF APPEALS AND HON. FRANCISCO DE
1) NO. It did not engage in self-legislation when it LA ROSA IN HIS CAPACITY AS JUDGE OF THE
issued the said Circular. The CB-MB merely CFI-RIZAL, BRANCH VII PASAY CITY,
RESPONDENTS
suspended the effectivity of the Usury Law when it
G.R. No. L-49568, October 17, 1979, FIRST
issued CB Circular No. 905, this has long been DIVISION, MELENCIO-HERRERA
recognized and upheld in many cases. As the
Court explained in the landmark case of Medel v. Facts
CA, citing several cases, On 2 November 1976, as security for a loan of
CB Circular No. 905 did not repeal nor in anyway P375K, respondent Bayuga, as attorney-in-fact of
amend the Usury Law but simply suspended the respondent Tolentino, and Zaballero, executed a Real
latters effectivity. A Central Bank Circular cannot Estate Mortgage (REM) in favor of the Acme Savings
repeal a law. Only a law can repeal another law. Bank (now Banco de Oro - Bank) over a parcel of land
2) YES, the BSP-MB has the authority to enforce CB in Calamba, Laguna under the names of Tolentino and
Circular No. 905. A closer perusal shows that Zaballero. The purpose of the loan was for the
Section 109 of R.A. No. 265 covered only loans acquisition of a property located in Tagaytay
(registered in the name of Algue Corporation).
extended by banks, whereas under Section 1-a of
the Usury Law, as amended, the BSP-MB may On 15 November 1976, the Bank made a
prescribe the maximum rate or rates of interest partial release of P200K less charges of P6K, which
for all loans or renewals thereof or the amount was credited to the account of Tolentino. On
forbearance of any money, goods or credits, the same date, out of the balance of P194,000.00,
Tolentino purchased from the BANK a certificate of
including those for loans of low priority such as
time deposit in the amount of P50K. He also withdrew
consumer loans, as well as such loans made by
on the said date P100K and P44K the next day.
pawnshops, finance companies and similar credit Tolentino then purchased from the BANK a Manager's
institutions. It even authorizes the BSP-MB to check in the total amount of P144K, P135K of which
prescribe different maximum rate or rates for he deposited in his savings account, and P9K in his

25
checking account, both with the Far East Bank & judgment, which it is not, rather than as a loan which
Trust Company. Thereafter, claiming that the it is. They want to avail of the full benefits of the loan
borrowers showed no indication of complying with his without assumption of the corresponding obligations,
obligation to pay the amount of the loan to the vendor or very minimally at that. Since receipt of the
(Algue, Inc.) of the Tagaytay City property, which aforestated amount, they have even refused to make
constituted diversion in violation of Sec. 77, Republic
any monthly amortizations even upon demand by the
Act No. 3371, the BANK stopped payment of its
BANK, contending that "no amount of the said loan is
Manager's check at the same time that it refused to
release the balance of the loan. That action was due. It will only be paid ten (10) years after the
necessary, according to the Bank, in order to prevent execution of the mortgage contract as interpreted by
private respondent from perpetrating a fraud against our Courts." Further, there is a gross inadequacy
it. between the value of the loan and the collateral given
by the private respondents.
Thereafter, Tolentino and Bayuga filed an
action for specific performance against the Bank The special reason cited by the trial Court and
before the CFI of Rizal. In ruling in favor of private upheld by the Court of Appeals, i.e., the "substantial
respondents, the CFI reasoned that denying private injustice" wrought on private respondents whose land
respondents relief would have been to deny the had been mortgaged without any centavo paid for the
borrowers relief from the substantial injustice with loan, does not exist in law. As pointed out by the bank,
which they have been burdened considering that their the Calamba property need not have remained subject
land had been mortgaged (the Laguna property) to the mortgage, the mortgage being but an accessory
without the BANK having paid any centavo for the contract to the contrast of loan which is the principal
loan. In affirming the trial court, the CA reasoned that obligation and which has been cancelled. The
it was most persuaded by the fact that the loan is
consideration of the mortgage is the same consi-
intended to buy real estate property, the price of
deration of the principal contract without which it
which varies as days go by.
cannot exist as an independent contract. The
The bank maintains that BANK maintains that "persuasive" factor considered by the Court of Appeals
the issuance of the Writ would patently work violence "that the loan is intended to buy real estate property,
with justice and equity because the property given as
the price of which varies as days go by" was disproved
collateral2 as well as the bonds which have been
posted are inadequate, and petitioner would be made by the fact that Tolentino utilized the amount initially
to violate the Sec. 77 of RA 337. released to purchase a certificate of time deposit and
to open bank accounts (2nd paragraph of the facts) in
Issue
his name rather than pay for the Algue property.
Was the bank correct in unilaterally cancelling
The unfairness and inequity of this posture to
the loan?
the banking business is too evident to require
Ruling elaboration. Funds of a bank are, in a sense held in
Yes. While, prima facie, execution pending trust. There are the interests of depositors to be
appeal3 seemed justified because of the unilateral protected.
cancellation of the release of the loan by the bank
without notice, and the absence of complete
supporting documents to the Petition, disclosures by Decision of TC and CA reversed.
the parties during the hearing and pleadings and
documents subsequently filed uphold a contrary view.
1.
Sec. 77 - The purpose of all loans shall be stated in
the contract between the bank and the borrower. If
In his comment, Tolentino contended that he is the bank finds that the funds have been employed,
not a party to the mortgage which was executed only without its approval, for purposes other than those
agreed upon with the bank, the bank shall have the
between the bank and Bayuga; that he became a party right to terminate the loan and demand immediate
only because he was "injured and damaged by the bad repayment of the obligation. *note this is under the old
law. Sec. 77 is now in the second paragraph of Sec. 39
faith of the bank;" that he is not willing to co-sign a of the Gen. Banking Act of 2000 which is worded:
promissory note in the BANK's favor for the amount of The purpose of all loans and other credit
P389,000.00, alleging that Bayuga had already signed accommodations shall be stated in the application and
a promissory note in November, 1976 in the sum of in the contract between the bank and the borrower. If
P200,000.00; and that neither he nor Bayuga had the bank finds that the proceeds of the loan or other
obligated himself to put up any additional collateral. credit accommodation have been employed, without
its approval, for purposes other than those agreed
Bayuga, for his part, during the hearing, assumed a
upon with the bank, it shall have the right to terminate
very passive role admitting that he was but an the loan or other credit accommodation and demand
employee of Tolentino who was the prime mover in the immediate repayment of the obligation
entire transaction.
2.
The Laguna property was valued at around P157.8k
The lack of good faith and of a sense of fair compared to the loan that was P375K. The property
play on the part of private respondents was all too sought to be acquired was supposed to be added as
collateral but given the allegation that private
evident. They were treating the release of the amount respondents had no intention of using the loan to pay
of P389,000.00 in their favor more as a money

26
the Tagaytay property; the bank stopped paying the officers of banking institutions who acted either as
loan. borrower or as guarantor, but not as both. The RTC
granted Gos motion to quash. The CA reversed it.
3
The issue stated in this case was the propriety of the Hence, this petition for certiorari.
TCs grant of the writ of execution filed by private
respondents but the legal issue as stated in this digest
are essentially the same. Go basically reiterated the argument he raised in his
motion to quash. Additionally, he reiterates his claim
JOSE C. GO vs BANGKO SENTRAL NG PILIPINAS that credit accommodations by banks to their
G.R. No. 178429, October 23, 2009, BRION, J . directors and officers are legal and valid, provided
that these are limited to their outstanding deposits
KEY DOCTRINE: Under Section 83, RA 337, the and book value of the paid-in capital contribution in
following elements must be present to constitute a the bank. The failure to state that he borrowed
violation of its first paragraph: deposits and/or guaranteed loans beyond this limit
1. the offender is a director or officer of any banking rendered the Information defective.
institution;
2. the offender, either directly or indirectly, for himself ISSUE Is Go liable for violation of Sec. 83 of the
or as representative or agent of another, performs General Banking Act?
any of the following acts:
a. he borrows any of the deposits or funds of
such bank; or RULING: YES.
b. he becomes a guarantor, indorser, or surety
for loans from such bank to others, or A simple reading of the above elements easily rejects
c. he becomes in any manner an obligor for Go's contention that the law penalizes a bank director
money borrowed from bank or loaned by it; or officer only either for borrowing the bank's deposits
3. the offender has performed any of such acts without or funds or for guarantying loans by the bank, but not
the written approval of the majority of the directors of for acting in both capacities. The essence of the
the bank, excluding the offender, as the director crime is becoming an obligor of the bank without
concerned. securing the necessary written approval of the
majority of the bank's directors.
An Information for violation of Section 83 (now The second element merely lists down the various
Section 36) of RA 337 or the General Banking Act, as modes of committing the offense. The third mode, by
amended by PD 1795, was filed against Go before the declaring that no director or officer of any banking
RTC. The charge alleged that he, being then the institution shall in any manner be an obligor for
director and the president and chief executive officer money borrowed from the bank or loaned by it," in
of the Orient Bank, taking advantage of his position as fact serves a catch-all phrase that covers any situation
such, unlawfully and knowingly borrow, either directly when a director or officer of the bank becomes its
or indirectly, for himself or as the representative of his obligor.
other related companies, the deposits or funds of the
said banking institution and/or become a guarantor, Section 83 of RA 337, as well as other banking laws
indorser or obligor for loans from the said bank to adopting the same prohibition, was enacted to ensure
others, by then and there using said borrowed that loans by banks and similar financial institutions to
deposits/funds of the said bank in facilitating and their own directors, officers, and stockholders are
granting and/or caused the facilitating and granting of above board. Banks were not created for the benefit of
credit lines/loans and, among others, to the New their directors and officers; they cannot use the assets
Zealand Accounts loans in the total amount of P2.74 of the bank for their own benefit, except as may be
billion, said accused knowing fully well that the same permitted by law.
has been done by him without the written approval
of the majority of the Board of Directors of said Orient Contrary to Go's claims, the second paragraph of
Bank and which approval the said accused Section 83, RA 337 does not provide for an exception
deliberately failed to obtain and enter the same upon to a violation of the first paragraph thereof, nor does it
the records of said banking institution and to transmit constitute as an element of the offense charged.
a copy of which to the supervising department of the Section 83 of RA 337 actually imposes three
said bank, as required by law. restrictions: approval, reportorial, and ceiling
requirements.
Go filed a motion to quash the Information. He insists
that the Information failed to allege the acts or The approval requirement refers to the written
omissions complained of with sufficient particularity to approval of the majority of the bank's board of
enable him to know the offense being charged. Go directors required before bank directors and officers
averred that based on the facts alleged therein, he can in any manner be an obligor for money borrowed
was being prosecuted for borrowing the deposits or from or loaned by the bank. Failure to secure the
funds of the Orient Bank and/or acting as a guarantor, approval renders the bank director or officer
indorser or obligor for the bank's loans to other concerned liable for prosecution and, upon conviction,
persons. The use of the word "and/or" meant that he subjects him to the penalty provided in the third
was charged for being either a borrower or a sentence of first paragraph of Section 83. The
guarantor, or for being both a borrower and guarantor. reportorial requirement, on the other hand, mandates
Go claimed that the charge was not only vague, but that any such approval should be entered upon the
also did not constitute an offense. He posited that records of the corporation, and a copy of the entry be
Section 83 of RA 337 penalized only directors and transmitted to the appropriate supervising

27
department. The reportorial requirement is addressed someone else and therefore, did not acquire a loan in
to the bank itself, which, upon its failure to do so, violation of DOSRI rules.
subjects it to quo warranto proceedings under Section
87 of RA 337. The ceiling requirement under the ISSUE.
second paragraph of Section 83 regulates the amount Is a loan transaction within the ambit of the
of credit accommodations that banks may extend to DOSRI law subject to Estafa under the Revised
their directors or officers by limiting these to an Penal Code? YES.
amount equivalent to the respective outstanding
deposits and book value of the paid-in capital RULING.
contribution in the bank. Again, this is a requirement Petitioners theory is based on the false
directed at the bank. In this light, a prosecution for premises that the loan was extended to him by the
violation of the first paragraph of Section 83, such as bank in his own name, and that he became the owner
the one involved here, does not require an allegation of the loan proceeds. Both premises are wrong. The
that the loan exceeded the legal limit. Even if the loan bank money (amounting toP8 million) which came to
involved is below the legal limit, a written approval by Sorianos possession was money held in trust or
the majority of the bank's directors is still required; administration by him for the bank, in his fiduciary
capacity as the President of said bank. Soriano,
otherwise, the bank director or officer who becomes through falsification, made it appear that said Enrico
an obligor of the bank is liable. Compliance with the Carlos applied for the loan when in fact he did not.
ceiling requirement does not dispense with the Through such fraudulent device, petitioner obtained
approval requirement. the loan proceeds and converted the same. Under
these circumstances, it cannot be said that petitioner
Evidently, the failure to observe the three became the legal owner of the P8 million. Thus,
requirements under Section 83 paves the way for the petitioner remained the banks fiduciary with respect
prosecution of three different offenses, each with its to that money, which makes it capable of
misappropriation or conversion in his hands.
own set of elements. A successful indictment for
The prohibition in Section 83 is broad enough
failing to comply with the approval requirement will
to cover various modes of borrowing. It covers loans
not necessitate proof that the other two were likewise by a bank director or officer which are made either:
not observed. (1) directly, (2) indirectly, (3) for himself, (4) or as the
representative or agent of others. It applies even if the
HILARIO P. SORIANO v. PEOPLE OF THE director or officer is a mere guarantor, indorser or
PHILIPPINES, BSP, PDIC, PUBLIC PROSECUTOR surety for someone else's loanor is in any manner an
ANTONIO BUAN and STATE PROSECUTOR obligor for money borrowed from the bank or loaned
ALBERTO FONACIER by it. Indirect borrowing applies in the instant case,
G.R. No. 162336, 1 February 2010, J. Del Castillo the Information describes the manner of securing the
loan as indirect; names petitioner as the benefactor of
the indirect loan; and states that the requirements of
KEY DOCTRINE. the law were not complied with. It contains all the
A bank officer violates the DOSRI law required elements for a violation of Section 83, even if
when he acquires bank funds for his personal petitioner did not secure the loan in his own name. In
benefit, even if such acquisition was facilitated sum, the informations filed against Soriano do not
by a fraudulent loan application. Directors, negate each other.
officers, stockholders, and their related interests *From DC.
cannot be allowed to interpose the fraudulent
nature of the loan as a defense to escape REPUBLIC OF THE PHILIPPINES v.
culpability for their circumvention of Section 83 SANDIGANBAYAN, et al.
of R.A. No. 337. G.R. Nos. 166859, 169203 and 180702, 12 April
2011, EN BANC (Bersamin, J.)
FACTS.
Affidavits were submitted before the DOCTRINE OF THE CASE
Prosecutors office charging Hilario Soriano with
Estafa through falsification of commercial
The Republic could not outrightly assume that
documents in relation to P.D. No. 1689 and for
violation of Section 83 of R.A. No. 337, whereby it was President Marcos had issued LOI 926 for the purpose
alleged that the spouses Carlos appeared to have an of allowing the loans by the UCPB in favor of
outstanding loan of P8 million with the Rural Bank of Cojuangco. There must be competent evidence to that
San Miguel (Bulacan), Inc., but had never applied for effect. The loans, assuming that they were of a DOSRI
nor received such loan; that it was petitioner, who nature or without the benefit of the required
was then president of the Bank, who had ordered, approvals or in excess of the Single Borrowers Limit,
facilitated, and received the proceeds of the loan. would not be void for that reason. Instead, the bank or
Soriano however contends that the commission the officers responsible for the approval and grant of
of estafa is inherently incompatible with the the DOSRI loan would be subject only to sanctions
violation of the DOSRI law, as petitioner contends. under the law.
Essentially, the petitioner theorized that the
characterization of possession is different in the two
FACTS
offenses. If petitioner acquired the loan as DOSRI, he
owned the loaned money and therefore, cannot
misappropriate or convert it as contemplated in the In 1987, the Republic commenced tbe civil
offense of estafa. Conversely, if petitioner committed case before the Sandiganbayan, impleading as
estafa, then he merely held the money in trust for defendants Eduardo M. Cojuangco, Jr. and 61 other
individuals. More than three years later, the Republic

28
once more amended the complaint apparently to avert stock, informing that a total amount of P
the nullification of the writs of sequestration issued 4,786,107,428.34 had been paid to the UCPB as loan
against properties of Cojuangco. In 1999, the repayment.
Sandiganbayan allowed the subdivision of the
complaint in the civil case into eight complaints, each In its last attempt to pin Cojuanco, the
pertaining to distinct transactions and properties and Republics lack of proof on the source of the funds by
impleading as defendants only the parties alleged to which Cojuangco, et al. had acquired their block of
have participated in the relevant transactions or to SMC shares has made it shift its position, that it now
have owned the specific properties involved. However, suggests that Cojuangco had been enabled to obtain
the writs of sequestration were lifted for violating the loans by the issuance of LOI 926 exempting the
PCGG Rules requiring approval of 2 PCGG UCPB from the DOSRI and the Single Borrowers Limit
commissioners. restrictions.

Allegedly, Cojuangco purchased a block of ISSUES:


33,000,000 shares of SMC stock through the 14 3. Were 9 writs of sequestration (WOS) lifted with
holding companies owned by the CIIF Oil Mills. Also grave abuse of discretion?
impleaded as defendants in the civil case were several 4. Did the Republic adduce sufficient evidence to
corporations alleged to have been under Cojuangcos substantiate its allegations against Cojuanco, et
control and used by him to acquire the block of shares
al., warranting summary judgment?
of San Miguel Corporation (SMC).
5. Did LOI 926, exempting the UCPB from the
DOSRI and the Single Borrowers Limit
The complaint materially averred that restrictions, invalid, which also makes
Cojuangco, as a public officer during the Marcos Cojuancos loan before the UCPB invalid?
administration, acquired assets, funds, and other
property grossly and manifestly disproportionate to
RULING:
his salaries, lawful income and income from
legitimately acquired property and, being the
undisputed coconut king, with unlimited powers to 1. NO. The absence of a prior determination by the
deal with the coconut levy funds; that Cojuangco PCGG of a prima facie basis for the sequestration
enjoyed the privilege of appointing his nominees to the order is, unavoidably, a fatal defect which rendered
SMC Board, to which he appointed key members of the sequestration of respondent corporation and its
the ACCRA Law Firm instead of coconut farmers properties void ab initio.
whose money really funded the sale. Cojuanco, et al.
plotted, devised, schemed, conspired and Plainly enough, the irregularities infirming the
confederated with each other in setting up, through issuance of the several WOS could not be ignored in
the use of coconut levy funds, the financial and favor of the Republic and resolved against the persons
corporate framework and structures that led to the whose properties were subject of the WOS. Where the
establishment of UCPB, UNICOM, COCOLIFE, Rules of the PCGG instituted safeguards under Section
COCOMARK. CIC, and more than 20 other coconut 3, by requiring the concurrent signatures of two
levy-funded corporations. However, ACCRA Law Firm Commissioners to every WOS issued and the existence
was excluded in the case by virtue of an SC decision. of a prima facie case of ill-gotten wealth to support the
issuance, the non-compliance with either of the
After submission of various pleadings, the safeguards nullified the WOS thus issued. It is already
Sandiganbayan, in order to conform with the ruling in settled that sequestration, due to its tendency to
Presidential Commission on Good Government v. impede or limit the exercise of proprietary rights by
Cojuangco, et al., granted COCOFED s Omnibus private citizens, is construed strictly against the State,
Motion (with prayer for preliminary injunction) conformably with the legal maxim that statutes in
relative to who should vote the UCPB shares under derogation of common rights are generally strictly
sequestration. But, when the Republic filed a Motion construed and rigidly confined to the cases clearly
for Judgment on the Pleadings and/or for Partial within their scope and purpose.
Summary Judgment, the Sandiganbayan granted it as
to the CIIF Block of shares. Nor did the Sandiganbayan gravely abuse its
discretion in reducing from four to only two the
During the pendency of the Republics motion conditions imposed for the lifting of the WOS. The
for execution on the CIIF block of shares, Cojuangco, Sandiganbayan thereby acted with the best of
et al. filed a Motion for Authority to Sell San Miguel intentions, being all too aware that the claim of the
Corporation (SMC) shares, praying for leave to allow Republic to the sequestered assets and properties
the sale of SMC shares to proceed. The might be prejudiced or harmed pendente lite unless
Sandiganbayan granted. Cojuangco, et al. manifested the protective conditions were annotated in the
to the Sandiganbayan that the shares would be sold to corporate books of SMC. Moreover, the issue became
the San Miguel Corporation Retirement Plan. The academic following the Sandiganbayans promulgation
Sandiganbayan allowed the sale of the shares of its decision dismissing the Republics Amended
provided that Cojuanco, et al. hold themselves liable Complaint, which thereby removed the stated reason
to their transferees-buyers, especially if they are the Republic continues to hold a claim on the shares
buyers in good faith and for value. Cojuangco, et al. which is yet to be resolved underlying the need for the
later rendered a complete accounting of the proceeds annotation of the conditions (whether four or two).
from the sale of the Cojuangco block of shares of SMC

29
2. NO. The Republic did not discharge its burden as in excess of the Single Borrowers Limit, would
plaintiff to establish by preponderance of evidence not be void for that reason. Instead, the bank or
that the Cojuanco, et al.s SMC shares were illegally the officers responsible for the approval and
acquired with coconut-levy funds. grant of the DOSRI loan would be subject only to
sanctions under the law.
Even assuming that, as the Republic prayed
for, the Court takes judicial notice of the evidence it PHILIPPINE AMANAH BANK (NOW AL-AMANAH
offered with respect to the Cojuangco block of SMC ISLAMIC INVESTMENT BANK OF THE
shares of stock, as contained in the Republics PHILIPPINES, ALSO KNOWN AS ISLAMIC
manifestation of purposes, still its evidence do not BANK), Petitioner, vs. EVANGELISTA
suffice to prove the material allegations in the CONTRERAS, Respondent. [G.R. No. 173168,
complaint that Cojuangco took advantage of his September 29, 2014, BRION, J . ]
positions in UCPB and PCA in order to acquire the
Any private arrangement between Calinico and the
said shares. Besides, the Court found that there are
respondent regarding the proceeds of the loan was
genuine factual issues raised by Cojuanco, et al. that
not the concern of the petitioner bank, as it was not a
need to be threshed out in a full-blown trial, and which
privy to this agreement. If Calinico violated the terms
plaintiff had the burden to substantially prove, such as of his agreement with the respondent on the turn-
sources of funds, determination of whether the funds over of the proceeds of the loan, then the latter's
acquired from alleged various sources can be proper recourse was to file the appropriate criminal
considered coconut levy funds, proof that Cojuangco action in court.
was serving the government at the time the funds
used to purchase the SMC shares were obtained, and Finally, we point out that the petitioner bank is a
the he took advantage of his position and close ties government owned or controlled corporation. While
with then President Marcos. OCT No. P-2034 (issued in favor of Calinico by virtue
of the deed of confirmation of sale) contained a
It was plain, indeed, that Cojuangco, et al. had prohibition against the alienation and encumbrance of
tendered genuine issues through their responsive the subject land within five (5) years from the date of
pleadings and did not admit that the acquisition of the the patent, the CA failed to mention that by the
Cojuangco block of SMC shares had been illegal, or express wordings of the OCT itself, the prohibition
had been made with public funds. As a result, the
does not cover the alienation and encumbrance "in
Republic needed to establish its allegations with
favor of the Government or any of its branches, units
preponderant competent evidence, because, as earlier
or institutions."
stated, the fact that property was ill gotten could not
be presumed but must be substantiated with
competent proof adduced in proper judicial Evangelista Contreras, the respondent, filed a
proceedings. complaint for annulment of real estate mortgage,
cancellation of original certificate of title,
With the Republic nonetheless choosing not to reconveyance, recovery of possession and damages
adduce evidence proving the factual allegations, before the RTC. The respondent alleged that he was
particularly the aforementioned matters, and instead the owner of a 640 square meter cadastral lot located
opting to pursue its claims by Motion for Summary in Cagayan de Oro City. Respondent went to the house
Judgment, the Sandiganbayan became completely of his brother-in-law, Calinico Ilogon, to seek
deprived of the means to know the necessary but assistance in obtaining a loan from the petitioner bank
crucial details of the transactions on the acquisition of since Calinico is a friend of the banks Chief of the
the contested block of shares. The Republics failure Loan Division. Calinico told the respondent that the
to adduce evidence shifted no burden to Cojuanco, et petitioner bank could grant a loan up to P200,000.00 if
al. to establish anything, for it was basic that the party the subject property would be titled.
who asserts, not the party who denies, must prove.
Thus, the Sandiganbayan correctly dismissed the civil Subsequently, respondent and Calinico, upon
case for failure of the Republic to prove its case by the suggestion of the Chief of the petitioner banks
preponderant evidence. Loan Division, entered into a Deed of Confirmation of
Sale under which they transferred the title of the land
to Calinico who, in turn, mortgaged it to the petitioner
3. NO. Firstly, as earlier pointed out, the Republic
bank. Calinico and the respondent then executed an
adduced no evidence on the significant
Agreement stating, among others, that the deed of
particulars of the supposed loan, like the
sale they executed was for the purpose of securing a
amount, the actual borrower, the approving
loan with the petitioner bank.
official, etc. It did not also establish whether or
not the loans were DOSRI or issued in violation
of the Single Borrowers Limit. Secondly, the The respondent wrote a letter and went to the
Republic could not outrightly assume that petitioner bank directing the latters manager not to
President Marcos had issued LOI 926 for the release the loan to Calinico. However, on the next day,
purpose of allowing the loans by the UCPB in he was informed that the loaned amount had already
favor of Cojuangco. There must be competent been given to Calinico earlier that morning
evidence to that effect. And, finally, the loans,
assuming that they were of a DOSRI nature or That petitioner bank subsequently
without the benefit of the required approvals or extrajudicially foreclosed the mortgage due to the
Ilogon spouses failure to pay the loan. The mortgaged

30
property was sold at public auction to the petitioner
bank as the highest bidder. Thereafter, the Certificate In the present case, however, nothing in the
of Sale was issued in favor of the petitioner bank. documents presented by Calinico would arouse the
suspicion of the petitioner bank to prompt a more
The mortgagor failed to redeem the extensive inquiry. When the Ilogon spouses applied for
mortgaged property within the period prescribed by a loan, they presented as collateral a parcel of land
law, thus, the title to the property was consolidated in evidenced by OCT No. P-2034 issued by the Office of
the petitioner bank's name. Consequently, Original the Register of Deeds of Cagayan de Oro, and
Certificate of Title was cancelled and Transfer registered in the name of Calinico. This document did
Certificate of Title was issued in the petitioner bank's not contain any inscription or annotation indicating
name. that the respondent was the owner or that he has any
interest in the subject land. In fact, the respondent
RTC dismissed the complaint for lack of merit. admitted that there was no encumbrance annotated on
It held that the petitioner bank was not aware of the Calinicos title at the time of the latters loan
agreement between the respondent and the Ilogon application. Any private arrangement between
spouses, and that the respondent failed to present any Calinico and the respondent regarding the
evidence as basis to annul the mortgage contract. proceeds of the loan was not the concern of the
petitioner bank, as it was not a privy to this
RTCs decision became final and executory. agreement. If Calinico violated the terms of his
Accordingly, respondent filed a petition for relief. agreement with the respondent on the turn-over
Respondent claimed that the petitioner bank was not a of the proceeds of the loan, then the latter's
lender in good faith since it knew that the mortgaged proper recourse was to file the appropriate
land was not owned by the Ilogon spouses. He added criminal action in court.
that the petitioner bank and the Ilogon spouses
connived with each other to release the loan to The respondent also failed to prove its
Calinico. allegation that the petitioner bank knew, thru a letter
sent by the formers lawyer, Atty. Crisanto Mutya, Jr.,
RTC denied the said petition for relief for that the sale of the subject land between him and
being filed out of time. On appeal, CA set aside RTCs Calinico was made only for loan purposes, and that
decision, declaring the real estate mortgage as null failure of Calinico to turn over the proceeds of the
and void. According to the CA, the petitioner bank loan will invalidate the sale. In his testimony, the
knew that there were conflicting claims over the land, respondent admitted that it was his son who gave the
and that the OCT of this land carried a prohibition of letter to the manager of the petitioner bank.
any encumbrance on the lot for five (5) years. It added Corollarily, the respondents son was never presented
that the petitioner bank failed to exercise diligence in in court. Even assuming, for the sake of argument,
ascertaining the ownership of the land, and ignored that the petitioner bank received a copy of Atty.
the respondents representations that Calinicos title Mutyas letter, it was still well-within its discretion to
was defective and was only for loan purposes. Thus, grant or deny the loan application after evaluating the
this petition for review on certiorari. In the said documents submitted for loan applicant. As earlier
petition, the bank maintained that it is exempted from stated, OCT No. P-2034 issued in Calinicos favor
the 5-year prohibitory period since it is a Government was free from any encumbrances. The petitioner
branch, unit or institution. bank is not anymore privy to whatever
arrangements the owner entered into regarding
ISSUE: Is the real estate mortgage valid? the proceeds of the loan.

RULING: YES. Finally, we point out that the petitioner


bank is a government owned or controlled
corporation. While OCT No. P-2034 (issued in
We are aware of the rule that banks are
favor of Calinico by virtue of the deed of
expected to exercise more care and prudence than
confirmation of sale) contained a prohibition
private individuals in their dealings, even those
against the alienation and encumbrance of the
involving registered lands, since their business is
impressed with public interest. The rule that persons subject land within five (5) years from the date of
dealing with registered lands can rely solely on the the patent, the CA failed to mention that by the
certificate of title does not apply to banks. Simply put, express wordings of the OCT itself, the
the ascertainment of the status or condition of a prohibition does not cover the alienation and
property offered to it as security for a loan must be a encumbrance "in favor of the Government or any
standard and indispensable part of a banks of its branches, units or institutions."
operations.

31

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