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On August 10, 1988, upon due presentment of the foreign exchange demand draft,

SECOND DIVISION denominated as FXDD No. 209968, the same was dishonored, with the notice of dishonor
[G.R. No. 118492. August 15, 2001] stating the following: xxx No account held with Westpac. Meanwhile, on August 16, 1988,
Westpac-New York sent a cable to respondent bank informing the latter that its dollar account
GREGORIO H. REYES and CONSUELO PUYAT-REYES, petitioners, vs. THE HON. in the sum of One Thousand Six Hundred Ten Australian Dollars (AU$1,610.00) was
COURT OF APPEALS and FAR EAST BANK AND TRUST debited. On August 19, 1988, in response to PRCIs complaint about the dishonor of the said
COMPANY, respondents. foreign exchange demand draft, respondent bank informed Westpac-Sydney of the issuance
of the said demand draft FXDD No. 209968, drawn against the Westpac-Sydney and
informing the latter to be reimbursed from the respondent banks dollar account in Westpac-
DECISION
New York. The respondent bank on the same day likewise informed Westpac-New York
DE LEON, JR., J.: requesting the latter to honor the reimbursement claim of Westpac-Sydney. On September
14, 1988, upon its second presentment for payment, FXDD No. 209968 was again dishonored
by Westpac-Sydney for the same reason, that is, that the respondent bank has no deposit
Before us is a petition for review of the Decision[1] dated July 22, 1994 and dollar account with the drawee Westpac-Sydney.
Resolution[2] dated December 29, 1994 of the Court of Appeals [3] affirming with modification
the Decision[4] dated November 12, 1992 of the Regional Trial Court of Makati, Metro Manila, On September 17, 1988 and September 18, 1988, respectively, petitioners spouses
Branch 64, which dismissed the complaint for damages of petitioners spouses Gregorio H. Gregorio H. Reyes and Consuelo Puyat-Reyes left for Australia to attend the said racing
Reyes and Consuelo Puyat-Reyes against respondent Far East Bank and Trust Company. conference. When petitioner Gregorio H. Reyes arrived in Sydney in the morning of
September 18, 1988, he went directly to the lobby of Hotel Regent Sydney to register as a
The undisputed facts of the case are as follows: conference delegate. At the registration desk, in the presence of other delegates from various
In view of the 20th Asian Racing Conference then scheduled to be held in September, member countries, he was told by a lady member of the conference secretariat that he could
1988 in Sydney, Australia, the Philippine Racing Club, Inc. (PRCI, for brevity) sent four (4) not register because the foreign exchange demand draft for his registration fee had been
delegates to the said conference. Petitioner Gregorio H. Reyes, as vice-president for finance, dishonored for the second time. A discussion ensued in the presence and within the hearing
racing manager, treasurer, and director of PRCI, sent Godofredo Reyes, the clubs chief of many delegates who were also registering. Feeling terribly embarrassed and humiliated,
cashier, to the respondent bank to apply for a foreign exchange demand draft in Australian petitioner Gregorio H. Reyes asked the lady member of the conference secretariat that he be
dollars. shown the subject foreign exchange demand draft that had been dishonored as well as the
covering letter after which he promised that he would pay the registration fees in cash. In the
Godofredo went to respondent banks Buendia Branch in Makati City to apply for a meantime he demanded that he be given his name plate and conference kit.The lady member
demand draft in the amount One Thousand Six Hundred Ten Australian Dollars of the conference secretariat relented and gave him his name plate and conference kit. It was
(AU$1,610.00) payable to the order of the 20th Asian Racing Conference Secretariat of only two (2) days later, or on September 20, 1988, that he was given the dishonored demand
Sydney, Australia. He was attended to by respondent banks assistant cashier, Mr. Yasis, who draft and a covering letter. It was then that he actually paid in cash the registration fees as he
at first denied the application for the reason that respondent bank did not have an Australian had earlier promised.
dollar account in any bank in Sydney. Godofredo asked if there could be a way for respondent
bank to accommodate PRCIs urgent need to remit Australian dollars to Sydney. Yasis of Meanwhile, on September 19, 1988, petitioner Consuelo Puyat-Reyes arrived in
respondent bank then informed Godofredo of a roundabout way of effecting the requested Sydney. She too was embarrassed and humiliated at the registration desk of the conference
remittance to Sydney thus: the respondent bank would draw a demand draft against Westpac secretariat when she was told in the presence and within the hearing of other delegates that
Bank in Sydney, Australia (Westpac-Sydney for brevity) and have the latter reimburse itself she could not be registered due to the dishonor of the subject foreign exchange demand
from the U.S. dollar account of the respondent in Westpac Bank in New York, U.S.A draft. She felt herself trembling and unable to look at the people around her. Fortunately, she
(Westpac-New York for brevity). This arrangement has been customarily resorted to since the saw her husband coming toward her. He saved the situation for her by telling the secretariat
1960s and the procedure has proven to be problem-free. PRCI and the petitioner Gregorio H. member that he had already arranged for the payment of the registration fees in cash once
Reyes, acting through Godofredo, agreed to this arrangement or approach in order to effect he was shown the dishonored demand draft. Only then was petitioner Puyat-Reyes given her
the urgent transfer of Australian dollars payable to the Secretariat of the 20 th Asian Racing name plate and conference kit.
Conference.
At the time the incident took place, petitioner Consuelo Puyat-Reyes was a member of
On July 28, 1988, the respondent bank approved the said application of PRCI and the House of Representatives representing the lone Congressional District of Makati, Metro
issued Foreign Exchange Demand Draft (FXDD) No. 209968 in the sum applied for, that is, Manila. She has been an officer of the Manila Banking Corporation and was cited by
One Thousand Six Hundred Ten Australian Dollars (AU$1,610.00), payable to the order of Archbishop Jaime Cardinal Sin as the top lady banker of the year in connection with her
the 20th Asian Racing Conference Secretariat of Sydney, Australia, and addressed to conferment of the Pro-Ecclesia et Pontifice Award. She has also been awarded a plaque of
Westpac-Sydney as the drawee bank. appreciation from the Philippine Tuberculosis Society for her extraordinary service as the
Societys campaign chairman for the ninth (9th) consecutive year.

1
On November 23, 1988, the petitioners filed in the Regional Trial Court of Makati, Metro the figure can still be distinctly seen as a number 1 and not number 7, to the effect that
Manila, a complaint for damages, docketed as Civil Case No. 88-2468, against the respondent Westpac-Sydney was responsible for the dishonor and not the Bank.
bank due to the dishonor of the said foreign exchange demand draft issued by the respondent
bank. The petitioners claim that as a result of the dishonor of the said demand draft, they were Moreover, it is not said asterisk that caused the misleading on the part of the Westpac-
exposed to unnecessary shock, social humiliation, and deep mental anguish in a foreign Sydney of the numbers 1 to 7, since Exhs. 6 and 7 are just documentary copies of the cable
country, and in the presence of an international audience. message sent to Westpac-Sydney. Hence, if there was mistake committed by Westpac-
On November 12, 1992, the trial court rendered judgment in favor of the defendant Sydney in decoding the cable message which caused the Banks message to be sent to the
(respondent bank) and against the plaintiffs (herein petitioners), the dispositive portion of wrong department, the mistake was Westpacs, not the Banks. The Bank had done what an
which states: ordinary prudent person is required to do in the particular situation, although appellants
expect the Bank to have done more. The Bank having done everything necessary or usual
in the ordinary course of banking transaction, it cannot be held liable for any embarrassment
WHEREFORE, judgment is hereby rendered in favor of the defendant, dismissing plaintiffs and corresponding damage that appellants may have incurred. [7]
complaint, and ordering plaintiffs to pay to defendant, on its counterclaim, the amount of
P50,000.00, as reasonable attorneys fees. Costs against the plaintiff.
xxx xxx xxx
SO ORDERED.[5] Hence, this petition, anchored on the following assignment of errors:
I
The petitioners appealed the decision of the trial court to the Court of Appeals. On July
22, 1994, the appellate court affirmed the decision of the trial court but in effect deleted the
award of attorneys fees to the defendant (herein respondent bank) and the pronouncement THE HONORABLE COURT OF APPEALS ERRED IN FINDING PRIVATE
as to the costs. The decretal portion of the decision of the appellate court states: RESPONDENT NOT NEGLIGENT BY ERRONEOUSLY APPLYING THE STANDARD
OF DILIGENCE OF AN ORDINARY PRUDENT PERSON WHEN IN TRUTH A
HIGHER DEGREE OF DILIGENCE IS IMPOSED BY LAW UPON THE BANKS.
WHEREFORE, the judgment appealed from, insofar as it dismisses plaintiffs complaint, is
hereby AFFIRMED, but is hereby REVERSED and SET ASIDE in all other respect. No
special pronouncement as to costs. II

SO ORDERED.[6] THE HONORABLE COURT OF APPEALS ERRED IN ABSOLVING PRIVATE


RESPONDENT FROM LIABILITY BY OVERLOOKING THE FACT THAT THE
DISHONOR OF THE DEMAND DRAFT WAS A BREACH OF PRIVATE
According to the appellate court, there is no basis to hold the respondent bank liable for RESPONDENTS WARRANTY AS THE DRAWER THEREOF.
damages for the reason that it exerted every effort for the subject foreign exchange demand
draft to be honored. The appellate court found and declared that:
III
xxx xxx xxx
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT AS
Thus, the Bank had every reason to believe that the transaction finally went through SHOWN OVERWHELMINGLY BY THE EVIDENCE, THE DISHONOR OF THE
smoothly, considering that its New York account had been debited and that there was no DEMAND DRAFT WAS DUE TO PRIVATE RESPONDENTS NEGLIGENCE AND
miscommunication between it and Westpac-New York. SWIFT is a world wide NOT THE DRAWEE BANK.[8]
association used by almost all banks and is known to be the most reliable mode of
communication in the international banking business. Besides, the above procedure, with The petitioners contend that due to the fiduciary nature of the relationship between
the Bank as drawer and Westpac-Sydney as drawee, and with Westpac-New York as the the respondent bank and its clients, the respondent bank should have exercised a higher
reimbursement Bank had been in place since 1960s and there was no reason for the Bank degree of diligence than that expected of an ordinary prudent person in the handling of its
to suspect that this particular demand draft would not be honored by Westpac-Sydney. affairs as in the case at bar.The appellate court, according to petitioners, erred in applying the
standard of diligence of an ordinary prudent person only. Petitioners also claim that the
From the evidence, it appears that the root cause of the miscommunications of the Banks respondent bank violated Section 61 of the Negotiable Instruments Law[9] which provides the
SWIFT message is the erroneous decoding on the part of Westpac-Sydney of the Banks warranty of a drawer that xxx on due presentment, the instrument will be accepted or paid, or
SWIFT message as an MT799 format. However, a closer look at the Banks Exhs. 6 and 7 both, according to its tenor xxx. Thus, the petitioners argue that respondent bank should be
would show that despite what appears to be an asterisk written over the figure before 99, held liable for damages for violation of this warranty. The petitioners pray this Court to re-
examine the facts to cite certain instances of negligence.

2
It is our view and we hold that there is no reversible error in the decision of the appellate the deposits of their depositors. But the same higher degree of diligence is not expected to
court. be exerted by banks in commercial transactions that do not involve their fiduciary relationship
with their depositors.
Section 1 of Rule 45 of the Revised Rules of Court provides that (T)he petition (for
review) shall raise only questions of law which must be distinctly set forth. Thus, we have Considering the foregoing, the respondent bank was not required to exert more than the
ruled that factual findings of the Court of Appeals are conclusive on the parties and not diligence of a good father of a family in regard to the sale and issuance of the subject foreign
reviewable by this Court and they carry even more weight when the Court of Appeals affirms exchange demand draft. The case at bar does not involve the handling of petitioners deposit,
the factual findings of the trial court.[10] if any, with the respondent bank. Instead, the relationship involved was that of a buyer and
seller, that is, between the respondent bank as the seller of the subject foreign exchange
The courts a quo found that respondent bank did not misrepresent that it was demand draft, and PRCI as the buyer of the same, with the 20th Asian Racing Conference
maintaining a deposit account with Westpac-Sydney. Respondent banks assistant cashier Secretariat in Sydney, Australia as the payee thereof. As earlier mentioned, the said foreign
explained to Godofredo Reyes, representating PRCI and petitioner Gregorio H. Reyes, how exchange demand draft was intended for the payment of the registration fees of the petitioners
the transfer of Australian dollars would be effected through Westpac-New York where the as delegates of the PRCI to the 20th Asian Racing Conference in Sydney.
respondent bank has a dollar account to Westpac-Sydney where the subject foreign
exchange demand draft (FXDD No. 209968) could be encashed by the payee, the 20 th Asian The evidence shows that the respondent bank did everything within its power to prevent
Racing Conference Secretatriat. PRCI and its Vice-President for finance, petitioner Gregorio the dishonor of the subject foreign exchange demand draft. The erroneous reading of its cable
H. Reyes, through their said representative, agreed to that arrangement or procedure. In other message to Westpac-Sydney by an employee of the latter could not have been foreseen by
words, the petitioners are estopped from denying the said arrangement or procedure. Similar the respondent bank. Being unaware that its employee erroneously read the said cable
arrangements have been a long standing practice in banking to facilitate international message, Westpac-Sydney merely stated that the respondent bank has no deposit account
commercial transactions. In fact, the SWIFT cable message sent by respondent bank to the with it to cover for the amount of One Thousand Six Hundred Ten Australian Dollar
drawee bank, Westpac-Sydney, stated that it may claim reimbursement from its New York (AU$1610.00) indicated in the foreign exchange demand draft. Thus, the respondent bank
branch, Westpac-New York where respondent bank has a deposit dollar account. had the impression that Westpac-New York had not yet made available the amount for
reimbursement to Westpac-Sydney despite the fact that respondent bank has a sufficient
The facts as found by the courts a quo show that respondent bank did not cause an deposit dollar account with Westpac-New York. That was the reason why the respondent
erroneous transmittal of its SWIFT cable message to Westpac-Sydney. It was the erroneous bank had to re-confirm and repeatedly notify Westpac-New York to debit its (respondent
decoding of the cable message on the part of Westpac-Sydney that caused the dishonor of banks) deposit dollar account with it and to transfer or credit the corresponding amount to
the subject foreign exchange demand draft. An employee of Westpac-Sydney in Sydney, Westpac-Sydney to cover the amount of the said demand draft.
Australia mistakenly read the printed figures in the SWIFT cable message of respondent bank
as MT799 instead of as MT199. As a result, Westpac-Sydney construed the said cable In view of all the foregoing, and considering that the dishonor of the subject foreign
message as a format for a letter of credit, and not for a demand draft. The appellate court exchange demand draft is not attributable to any fault of the respondent bank, whereas the
correctly found that the figure before 99 can still be distinctly seen as a number 1 and not petitioners appeared to be under estoppel as earlier mentioned, it is no longer necessary to
number 7. Indeed, the line of a 7 is in a slanting position while the line of a 1 is in a horizontal discuss the alleged application of Section 61 of the Negotiable Instruments Law to the case
position. Thus, the number 1 in MT199 cannot be construed as 7. [11] at bar. In any event, it was established that the respondent bank acted in good faith and that
it did not cause the embarrassment of the petitioners in Sydney, Australia. Hence, the Court
The evidence also shows that the respondent bank exercised that degree of of Appeals did not commit any reversable error in its challenged decision.
diligence expected of an ordinary prudent person under the circumstances obtaining. Prior to
the first dishonor of the subject foreign exchange demand draft, the respondent bank advised WHEREFORE, the petition is hereby DENIED, and the assailed decision of the Court of
Westpac-New York to honor the reimbursement claim of Westpac-Sydney and to debit the Appeals is AFFIRMED. Costs against the petitioners.
dollar account[12] of respondent bank with the former. As soon as the demand draft was
dishonored, the respondent bank, thinking that the problem was with the reimbursement and SO ORDERED.
without any idea that it was due to miscommunication, re-confirmed the authority of Westpac-
New York to debit its dollar account for the purpose of reimbursing Westpac-
Sydney.[13] Respondent bank also sent two (2) more cable messages to Westpac-New York
inquiring why the demand draft was not honored.[14]
With these established facts, we now determine the degree of diligence that banks are
required to exert in their commercial dealings. In Philippine Bank of Commerce v. Court of
Appeals[15] upholding a long standing doctrine, we ruled that the degree of diligence required
of banks, is more than that of a good father of a family where the fiduciary nature of their
relationship with their depositors is concerned. In other words banks are duty bound to treat
the deposit accounts of their depositors with the highest degree of care. But the said ruling
applies only to cases where banks act under their fiduciary capacity, that is, as depositary of

3
G.R. No. 170942 August 28, 2013 certificate of occupancy permit and certification of completion, and submission of house
pictures signed by the borrower at the back.
COMSAVINGS BANK (NOW GSIS FAMILY BANK), PETITIONER,
vs. On August 10, 1992, Comsavings Bank informed respondents of the approval of an interim
SPOUSES DANILO AND ESTRELLA CAPISTRANO, RESPONDENTS. financing loan of ₱260,000.00 payable within 180 days, which amount was to be paid out of
the proceeds of the loan from NHMFC. By October 9, 1992, GCB Builders received from
DECISION Comsavings Bank the total sum of ₱265,000.00 as construction cost in four releases, to wit:
BERSAMIN, J.: August 7, 1992
A banking institution serving as an originating bank for the Unified Home Lending Program - ₱39,210.00
(UHLP) of the Government owes a duty to observe the highest degree of diligence and a
high standard of integrity and performance in all its transactions with its clients because its August 19, 1992
business is imbued with public interest.
- ₱112,181.00
The Case
September 3, 1992
Comsavings Bank (now GSIS Family Bank) seeks the review and reversal of the decision
promulgated on November 30, 2005,1 whereby the Court of Appeals (CA) affirmed with - ₱53,565.00
modifications the decision rendered on April 25, 2003 by the Regional Trial Court (RTC),
October 9, 1992
Branch 135, in Makati City finding it liable for damages to respondents. 2
- ₱24,779.253
Antecedents
In late September 1992, after Comsavings Bank had released the total of ₱265,000.00 to
Respondents were the owners of a residential lot with an area of 200 square meters known
GCB Builders as construction cost, respondents inquired from GCB Builder when their
as Lot 8 of Block 4 of the Infant Jesus Subdivision situated in Bacoor, Cavite, and covered
house would be completed considering that their contract stipulated a completion period of
by Transfer Certificate of Title (TCT) No. 316885 of the Register of Deeds of Cavite.
75 days. Cruz-Bay gave various excuses for the delay, such as the rainy season, but
Desirous of building their own house on the lot, they availed themselves of the UHLP
promised to finish the construction as soon as possible. The year 1992 ended with the
implemented by the National Home Mortgage Finance Corporation (NHMFC). On May 28,
construction of the house unfinished.4
1992, they executed a construction contract with Carmencita Cruz-Bay, the proprietor of
GCB Builders, for the total contract price of ₱265,000.00 with the latter undertaking to In February 1993, respondents demanded the completion of the house. In reply, Cruz-Bay
complete the construction within 75 days. To finance the construction, GCB Builders told them to give the further amount of ₱25,000.00 to finish the construction. They
facilitated their loan application with Comsavings Bank, an NHFMC-accredited originator. As requested a breakdown of the amounts already spent in the construction considering that
proof of their qualifications to avail themselves of a loan under the UHLP and to comply with the ₱303,450.00 that Comsavings Bank had been paid by NHMFC on their loan had been
the conditions prescribed for the approval of their application, they submitted their record of more than the contract price of the contract. Instead of furnishing them the requested
employment, the amount of their income, and a clearance from the Social Security System breakdown, GCB Builders’ counsel sent a demand letter for an additional construction cost
(SSS) to the effect that they had no existing loans, among others. On May 28, 1992, they of ₱52,511.59.
executed in favor of GCB Builders a deed of assignment of the amount of the ₱300,000.00
proceeds of the loan from Comsavings Bank. On May 30, 1993, respondents received a letter from NHMFC advising that they should
already start paying their monthly amortizations of ₱4,278.00 because their loan had been
On July 2, 1992, Comsavings Bank informed respondent Estrella Capistrano that she would released on April 20, 1993 directly to Comsavings Bank. On June 1, 1993, Estrella
have to sign various documents as part of the requirements for the release of the loan. Capistrano went to the construction site and found to her dismay that the house was still
Among the documents was a certificate of house completion and acceptance. On the same unfinished. She noted that there were no doorknobs; that the toilet bath floor was not even
date, Comsavings Bank handed Estrella a letter addressed to GCB Builders informing the constructed yet because the portion of the house was still soil; that there were no toilet and
latter that respondents had complied with the preliminary requirements of the UHLP, and bathroom fixtures; that the toilet and bath wall tiles had no end-capping; that there were
were qualified to avail themselves of the loan amounting to ₱303,450.00 payable within 25 cracks on the wall plastering; that the kitchen sink had no plumbing fixtures; and that the
years at 16% per annum, subject to the following terms and conditions, namely: the signing main door installed was a flush-type instead of the sliding door specified in the approved
of mortgage documents, 100% completion of the construction of the housing unit, original plans.

4
On July 5, 1993, respondents wrote to NHMFC protesting the demand for amortization it submitted the certificate of house acceptance/completion to NHMFC after the completion
payments considering that they had not signed any certification of completion and of the house on April 20, 1993 because such representations were normal and regular
acceptance, and that even if there was such a certification of completion and acceptance, it requirements in loan processing of the conduit banks of NHMFC. Lastly, NHMFC alleged
would have been forged. that it administered the UHLP of the Government by granting financing to qualified home
borrowers through loan originators, like Comsavings Bank in this case; and that
On July 14, 1993, respondents again wrote to NHMFC requesting an ocular inspection of respondents had applied and had been granted a housing loan, and, as security, they had
the construction site. executed a loan and mortgage agreement and promissory note for ₱303,450.00 dated July
2, 1992.
On November 11, 1993, Atty. Ruben C. Corona, the Manager of the Collateral Verification &
External Examination Department of NHMFC, informed the counsel of respondents that the Decision of the RTC
inspection of the construction site conducted on August 4, 1993 showed the following:
On April 25, 2003, after trial, the RTC rendered a decision in favor of
1) That the subject unit is being occupied by tenant, a certain Mr. Mark Inanil; respondents.9 Specifically, it found that although the proceeds of the loan had been
completely released, the construction of the house of respondents remained not completed;
2) That the toilet/bath and kitchen counter are not installed with Plumbing fixtures;
that the house had remained in the possession of GCB Builders, which had meanwhile
3) That there are no door knobs on bedroom and no handles on Kitchen cabinet; leased it to another person; that GCB Builders did not comply with the terms and conditions
of the construction contract; and that NHMFC approved the loan in the gross amount of
4) That the toilet bath has no concrete flooring and the tiles has no end/corner cappings; ₱303,450.00, and released ₱289,000.00 of that amount to Comsavings Bank on April 20,
and 1993. It concluded that respondents were entitled to recover from all defendants actual
damages of ₱25,000.00; moral damages for their mental anguish and sleepless night in the
5) That there are hairline cracks on flooring.5
amount of ₱200,000.00; exemplary damages of ₱100,000.00; and ₱30,000.00 as attorney’s
On July 12, 1993, respondents sued GCB Builders and Comsavings Bank for breach of fees. It ruled, however, that only GCB Builders was liable for the monthly rental of ₱4,500.00
contract and damages,6praying that defendants be ordered jointly and severally liable: (1) to because GCB Builders was alone in renting out the house; and that NHMFC was equally
finish the construction of the house according to the plans and specifications agreed upon at liable with the other defendants by reason of its having released the loan proceeds to
the price stipulated in the construction contract; and (2) to pay them ₱38,450.00 as the Comsavings Bank without verifying whether the construction had already been completed,
equivalent of the mortgage value in excess of the contract price; ₱25,000.00 as actual thereby indicating that NHMFC had connived and confederated with its co-defendants in the
damages for the expenses incurred by reason of the breach of contract; ₱200,000.00 as irregular release of the loan proceeds to Comsavings Bank.
moral damages; ₱30,000.00 as attorney’s fees; and ₱50,000.00 as exemplary damages.
The RTC disposed thusly:
Respondents amended their complaint to implead NHMFC as ab additional defendant. WHEREFORE, judgment is hereby rendered ordering:
Aside from adopting the reliefs under the original complaint, they prayed that NHMFC be
directed to hold in abeyance its demand for amortization payment until the case had been Defendants GCB Builder, COMSAVINGS BANK, and NATIONAL HOUSING FINANCE
finally adjudged; that NHMFC, GCB Builders and Comsavings Bank be ordered to pay MORTGAGE CORPORATION (sic) jointly and severally:
moral and exemplary damages, and attorney’s fees; and that GCB Builders and
Comsavings be directed to pay ₱4,500.00 as monthly rental from the filing of the complaint 1.1 To complete the construction of the house of plaintiff Spouses DANILO and ESTRELLA
until the house was turned-over and accepted by them.7 CAPISTRANO within thirty 30 days;

In their respective answers,8 GCB Builders, Comsavings Bank and NHMFC asserted that 1.2 To pay said plaintiffs:
the complaint as amended stated no cause of action against them. On its part, GCB
1.2.1 ₱25,000.00 in actual damages;
Builders claimed that the construction of the house had been completed a long time ago;
that respondent had failed, despite demand, to occupy the house and to pay a balance of 1.2.2 ₱200,000.00 in moral damages;
₱46,849.94 as of August 23, 1993; and that it had received only ₱239,355.30 out of the
₱303,000.00 loan, inasmuch as the balance went to interim interest, originator fee, service 1.2.3 ₱100,000.00 in exemplary damages;
charge and other bank charges. Comsavings Bank averred that respondents were estopped
from assailing their signing of the certificate of house acceptance/completion on July 2, 1.2.4 ₱30,000.00 as attorney’s fees.
1992 considering that they had the option not to pre-sign the certificate; and that it did not
make any representation as to the conditions and facilitation of the loan with NHMFC when

5
Defendant GCB Builder to pay the plaintiffs the amount of ₱4,500.00, as rentals from the II
date of the filing of the Complaint until the construction of the house is completed, turned
over to and accepted by the plaintiffs; THE TRIAL COURT ERRED IN HOLDING THAT DEFENDANT-APPELLANT NATIONAL
HOME MORTGAGE FINANCE CORPORATION SHOULD HOLD IN ABEYANCE THE
Defendants NHMFC to hold in abeyance the collection of the amortizations until 30 days COLLECTION OF AMORTIZATION UNTIL 30 DAYS FROM THE COMPLETION AND
from the completion and acceptance by the plaintiffs of the house in question. ACCEPTANCE BY THE PLAINTIFFS OF THE HOUSE IN QUESTION.13

SO ORDERED.10 On November 30, 2005, the CA promulgated the appealed decision, 14 affirming the RTC
subject to the modification that NHMFC was absolved of liability, and that the moral and
GCB Builders, Comsavings Bank and NHMFC appealed to the CA. exemplary damages were reduced, viz:
Decision of the CA xxxx
GCB Builders assigned the following errors to the RTC, namely: The Court a quo held appellant Comsavings Bank jointly and severally liable with appellant
GCB Builders since it likewise committed misrepresentations in obtaining the mortgage loan
IN FINDING THAT THE HOUSE IN QUESTION WAS NOT COMPLETED.
from the NHMFC in the name of the appellees. We concur. The records show that it was
IN FINDING THAT GCB BUILDERS DID NOT COMPLY WITH THE TERM AND appellant Comsavings Bank which called up the appellee Estrella Capistrano and had her
CONDITIONS OF THE CONSTRUCTION. sign various documents as part of the documentary requirements for the release of the
construction loan. One of these documents, was the Certificate of House Completion and
IN NOT FINDING THAT THE PLAINTIFFS ARE LIABLE TO PAY DEFENDANT GCB THE Acceptance, which, upon appellant Bank’s representation was signed by the appellees even
AMOUNT OF ₱45,000.00. if the construction of the house had not yet started. On July 2, 1992, Comsavings Bank
informed appellant GCB Builders that appellees had provisionally complied with the
IN RENDERING WITHOUT LEGAL AND FACTUAL BASIS THE DECISION, THE
preliminary requirements under the Unified Home Lending Program of appellant NHMFC
DISPOSTIVE PORTION OF WHICH READS, AS FOLLOWS:
and qualified for a loan in the amount of ₱303,450.00 payable in twenty-five (25) years at an
xxxx interest of 16% per annum. One condition for the approval of the loan was "100%
completion of the construction of the housing unit located on the property described plus:
IN NOT GRANTING THE RELIEFS PRAYED FOR IN THE COUNTERCLAIM; Original Certificate of Occupancy Permit and Certification of Completion and Submission of
House pictures signed at the back by the borrower. However, the loan documents which
IN NOT DISMISSING THE COMPLAINT.11 appellant Bank submitted to appellant NHMFC were false. Appellant Comsavings Bank in
order to show that the construction of the subject house had been completed, submitted a
Comsavings Bank phrased its assignment of error thuswise:
photograph of a toilet/bath with plumbing and fixtures installed when in the truth, as admitted
I by appellant GCB Builders, the plumbing fixtures had not (been) installed as the appellees
were still indebted to GCB. Comsavings Bank also submitted photographs of wall tiles of the
THE TRIAL COURT ERRED IN HOLDING THAT DEFENDANT-APPELLANT toilet/bath showing them to be brown or mustard, but the color of the wall tiles actually
COMSAVINGS BANK IS JOINTLY AND SEVERALLY LIABLE WITH THE OTHER installed was white per testimony of appellee Estrella Capistrano and corroborated by
DEFENDANTS-APPELLANTS GCB BUILDERS AND NATIONAL HOME MORTGAGE appellant GCB Builders’ witness Leopoldo Arnaiz. The appellees complained to appellant
FINANCE CORPORATION TO PAY PLAINTIFFS-APPELLEES ACTUAL, MORAL AND NHMFC that the house which they bought was unfinished on the basis of which NHMFC
EXEMPLARY DAMAGES AS WELL AS ATTORNEY’S FEES.12 conducted an inspection of the housing unit and found the complaint to be true.
NHMFC ascribes to the RTC the following errors, to wit: By submitting false or forged documents to the NHMFC, appellant Comsavings Bank
violated the warranties contained in the purchase of the loan agreement with appellant
I
NHMFC. On the strength of such warranties, NHMFC issued Check No. 425824 in the
THE TRIAL COURT ERRED IN HOLDING THAT DEFENDANT-APPELLANT NATIONAL amount of ₱1,382,806.63 that include the mortgage loan of the appellees. It must be
HOME MORTGAGE FINANCE CORPORATION IS JOINTLY AND SEVERALLY LIABLE recalled that the agreement provided among others that "the housing loan extended to the
WITH THE OTHER DEFENDANT-APPELLANTS GCB BUILDERS AND COMSAVINGS appellees would be released to and received by Comsavings Bank, and the latter warrants
BANK TO PAY PLAINTIFFS-APPELLEES ACTUAL, MORAL AND EXEMPLARY the genuineness of all loan documents it submitted to NHMFC. Incidentally, Carmencita B.
DAMAGES AS WELL AS ATTORNEY’S FEES. Cruz, owner and proprietor of appellant GCB Builders admitted that she is even not an
accredited builder of housing units under the Unified Home Lending Program (UHLP) of the

6
NHMFC in the area. Appellant Comsavings Bank in allowing appellant GCB Builders to from Comsavings Bank’s breach of warranties under its purchase of loan agreement with
participate in the UHLP program undermined and defeated its real purpose, to help low NHMFC. Under the purchase of loan agreement, it undertook, for value received, to sell,
income families build their own homes, to the damage and prejudice of the appellees. 15 transfer and deliver to NHMFC the loan agreements, promissory notes and other supporting
documents that it had entered into and executed with respondents, and warranted the
xxxx genuineness of the loan documents and the "construction of the residential units." 19 Having
made the warranties in favor of NHMFC, it would be liable in case of breach of the
WHEREFORE, in view of all the foregoing, the decision appealed from is AFFIRMED with
warranties to NHMFC, not respondents, eliminating breach of such warranties as a source
MODIFICATIONS. The dispositive portion finding the NHMFC jointly and severally liable
of its liability towards respondents.
with the other appellants for the payment of actual, moral and exemplary damages, is
hereby deleted; the awards of moral and exemplary damages are reduced to ₱100,000.00 Instead, the liability of Comsavings Bank towards respondents was based on Article 20 and
and ₱50,000.00, respectively, and the amount of rentals to be paid by GCB Builders is to be Article 1170 of the Civil Code, viz:
reckoned from August 4, 1993.
Article 20. Every person who, contrary to law, willfully or negligently causes damage to
SO ORDERED.16 another, shall indemnify the latter for the same.
Hence, this further appeal by Comsavings Bank. Article 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof, are liable
Issue
for damages.
Comsavings Bank submits the lone issue of:
Based on the provisions, a banking institution like Comsavings Bank is obliged to exercise
WHETHER OR NOT THE COURT OF APPEALS ERRED IN FINDING PETITIONER BANK the highest degree of diligence as well as high standards of integrity and performance in all
JOINTLY AND SEVERALLY LIABLE WITH GCB BUILDERS TO PAY RESPONDENT its transactions because its business is imbued with public interest. 20 As aptly declared in
ACTUAL, MORAL AND EXEMPLARY DAMAGES, AS WELL AS ATTORNEY’S FEES.17 Philippine National Bank v. Pike:21 "The stability of banks largely depends on the confidence
of the people in the honesty and efficiency of banks."
Comsavings Bank insists on its non-liability, contending that it committed no
misrepresentation when it made respondents sign the certificate of house Gross negligence connotes want of care in the performance of one’s duties; 22 it is a
acceptance/completion notwithstanding that the construction of the house had not yet negligence characterized by the want of even slight care, acting or omitting to act in a
started; that they agreed to pre-sign the certificate, although they had the option not to; that situation where there is duty to act, not inadvertently but willfully and intentionally, with a
it made them sign the certificate to enable them to avoid the inconvenience of returning conscious indifference to consequences insofar as other persons may be affected. 23It
back and forth just to sign the certificate; that it made clear to them during the pre-signing evinces a thoughtless disregard of consequences without exerting any effort to avoid
that the certificate would be submitted to NHMFC only after the completion of the house; them.24
that it submitted the certificate to NHMFC after the completion of the construction of the
There is no question that Comsavings Bank was grossly negligent in its dealings with
house on April 23, 2003; that they had thus been informed beforehand of the conditions in
respondents because it did not comply with its legal obligation to exercise the required
pre-signing the certificate; that choosing to pre-sign the certificate estopped them from
diligence and integrity. As a banking institution serving as an originator under the UHLP and
questioning the procedural aspect of the documentation; and that the practice of pre-signing
being the maker of the certificate of acceptance/completion,25 it was fully aware that the
documents was not expressly prohibited considering that they were not induced to pre-sign
purpose of the signed certificate was to affirm that the house had been completely
the certificate.18
constructed according to the approved plans and specifications, and that respondents had
Ruling thereby accepted the delivery of the complete house. Given the purpose of the certificate, it
should have desisted from presenting the certificate to respondents for their signature
The appeal has no merit. without such conditions having been fulfilled. Yet, it made respondents sign the certificate
(through Estrella Capistrano, both in her personal capacity and as the attorney-in-fact of her
1.
husband Danilo Capistrano) despite the construction of the house not yet even starting. Its
Comsaving Bank’s liability was not based on its purchase of loan agreement with NHMFC act was irregular per se because it contravened the purpose of the certificate. Worse, the
but on Article 20 and Article 1170 of the Civil Code pre-signing of the certificate was fraudulent because it was thereby enabled to gain in the
process the amount of ₱17,306.83 in the form of several deductions from the proceeds of
The CA rightfully declared Comsavings Bank solidarily liable with GCB Builders for the the loan on top of other benefits as an originator bank.26 On the other hand, respondents
damages sustained by respondents. However, we point out that such liability did not arise were prejudiced, considering that the construction of the house was then still incomplete

7
and was ultimately defective. Compounding their plight was that NHMFC demanded the claimant for any physical suffering, mental anguish, fright, serious anxiety, besmirched
payment of their monthly amortizations despite the non-completion of the house. Had reputation, wounded feelings, moral shock, social humiliation and similar injuries unjustly
Comsavings Bank been fair towards them as its clients, it should not have made them pre- caused.31
sign the certificate until it had confirmed that the construction of the house had been
completed. In their amended complaint, respondents claimed that the acts of GCB Builders and
Comsavings Bank had caused them to suffer sleepless nights, worries and anxieties. The
Comsavings Bank asserts that it submitted the certificate to NHMFC after the construction claim was well founded. Danilo worked in Saudi Arabia in order to pay the loan used for the
of the house had been completed on April 23, 2003. The assertion could not be true, construction of their family home. His anxiety and anguish over the incomplete and defective
however, because Atty. Corona of NHMFC testified that he had inspected the house on construction of their house, as well as the inconvenience he and his wife experienced
August 4, 1993 and had found the construction to be incomplete and defective.27 because of this suit were not easily probable. On her part, Estrella was a mere housewife,
but was the attorney-in-fact of Danilo in matters concerning the loan transaction. With Danilo
Contrary to the claim of Comsavings Bank, the records contain no showing that respondents working abroad, she was alone in overseeing the house construction and the progress of
had been given the option not to pre-sign the certificate of acceptance/completion; that the present case. Given her situation, she definitely experienced worries and sleepless
Comsavings Bank had made respondents sign the certificate so that they would not be nights. The award of moral damages of ₱100,000.00 awarded by the CA as exemplary
inconvenienced in going back and forth just to sign the certificate; and that it made clear to damages is proper.1âwphi1
them during the pre-signing that the certificate would be submitted to NHMFC only after the
completion of the house. Felicisima M. Miranda, the loan officer of Comsavings Bank and its With respect to exemplary damages, the amount of ₱50,000.00 awarded by the CA as
sole witness during trial, did not attest to such option not to pre-sign. Also, Estrella exemplary damages is sustained. Relevantly, we have held that:
Capistrano (Estrella) mentioned nothing about it during the trial, testifying only that after
signing several documents, including the certificate, she was told by Comsavings Bank’s The law allows the grant of exemplary damages to set an example for the public good. The
personnel that the documents would be needed for the processing of the loan. 28 Clearly, the business of a bank is affected with public interest; thus, it makes a sworn profession of
supposed option was Comsavings Bank’s lame justification for the pre-signing of the diligence and meticulousness in giving irreproachable service. For this reason, the bank
certificate. should guard against injury attributable to negligence or bad faith on its part. The banking
sector must at all times maintain a high level of meticulousness. The grant of exemplary
The submission of pictures of the fully-constructed house bearing the signatures of damages is justified by the initial carelessness of petitioner, aggravated by its lack of
respondents on the dorsal sides was a requirement for the release of the loan by promptness in repairing its error.32
Comsavings Bank to GCB Builders, and for the Comsavings Bank’s reimbursement of the
loan from NHMFC.29 The signatures were ostensibly for authentication of the pictures. In its However, the award of actual damages amounting to ₱25,000.00 is not warranted. To justify
compliance, GCB Builders submitted pictures of a different house sans the signatures of an award for actual damages, there must be competent proof of the actual amount of loss.
respondents on the dorsal sides.30 Ignoring the glaring irregularity, Comsavings Bank Credence can be given only to claims duly supported by receipts.33 Respondents did not
accepted the unsigned (hence, unauthenticated) pictures, released the loan to GCB submit any documentary proof, like receipts, to support their claim for actual damages.
Builders, and turned over the pictures to NHMFC for the reimbursement of the loan. Had
Nonetheless, it cannot be denied that they had suffered substantial losses. Article 2224 of
Comsavings Bank complied with its duty of observing the highest degree of diligence, it
the Civil Code allows the recovery of temperate damages when the court finds that some
would have checked first whether the pictures carried the signatures of respondents on their
pecuniary loss was suffered but its amount cannot be proved with certainty. In lieu of actual
dorsal sides, and whether the house depicted on the pictures was really the house of
damages, therefore, temperate damages of ₱25,000.00 are awarded. Such amount, in our
respondents, before releasing the proceeds of the loan to GCB Builders and before
view, is reasonable under the circumstances.
submitting the pictures to NHMFC for the reimbursement. Again, this is an indication of
Comsavings Bank’s gross negligence. Article 2208 of the Civil Code allows recovery of attorney’s fees when exemplary damages
are awarded or where the plaintiff has incurred expenses to protect his interest by reason of
2.
defendant’s act or omission. Considering that exemplary damages were properly awarded
Comsavings Bank is liable for damages here, and that respondents hired a private lawyer to litigate its cause, we agree with the
RTC and CA that the ₱30,000.00 allowed as attorney’s fees were appropriate and
As to the damages that should be awarded to respondents, moral and exemplary damages reasonable.
were warranted.
A defendant who did not appeal may be benefitted by the judgment in favor of the other
Under Article 2219 of the Civil Code, moral damages may be recovered for the acts or defendant who appealed.34Thus, the foregoing modifications as to the nature and amount of
actions referred to in Article 20 of the Civil Code. Moral damages are meant to compensate

8
damages inures to the benefit of GCB Builders although it did not appeal the ruling of the 3. That if the VENDEE shall fail or in default to pay six (6) monthly installments to the
CA. VENDOR the herein agreement is deemed cancelled, terminated and/or rescinded and in
such event, the VENDEE (sic) binds to refund to the VENDOR (sic) the deposit
WHEREFORE, we AFFIRM the decision promulgated by the Court of Appeals on November of P50,000.00 and with the latters (sic) obligation to pay the former (sic) as a corresponding
30, 2005, subject to the MODIFICATIONS that Comsavings Bank and GCB Builders are refund for cost of improvements made in the premises by VENDEE;
further ordered to pay, jointly and severally, to the Spouses Danilo and Estrella Capistrano
the following amounts: (1) ₱25,000.00 as temperate damages; (2) ₱30,000.00 as attorney’s 4. That on the date of receipt of the downpayment of P50,000.00 by the VENDOR, it is
fees; (3) interest of 6% per annum on all the amounts of damages reckoned from the finality mutually agreed for VENDEE to occupy and take physical possession of the premises as
of this decision; and (4) the costs of suit. well as for the latter (VENDEE) to keep and hold in possession the corresponding transfer
certificate of title No. ______ of the land in question which is the subject of this agreement;
SO ORDERED.
5. That on the date of final payment by the VENDEE to the VENDOR, the latter shall
G.R. No. 142411 execute at her expense the corresponding document of DEED OF ABSOLUTE SALE for the
former as well as the payment of realty clearances, BIR Capital Gain Tax, sales tax or
WINIFREDA URSAL, transfer fees and attorneys fees; that, for the issuance of title in VENDEEs name shall be
- versus - the exclusive account of said VENDEE.[4]

COURT OF APPEALS, THE RURAL BANK OF LARENA (SIQUIJOR), INC. and Petitioner paid the down payment and took possession of the property. She immediately
SPOUSES JESUS MONESET and CRISTITA MONESET, built a concrete perimeter fence and an artesian well, and planted fruit bearing trees and
flowering plants thereon which all amounted to P50,000.00. After paying six monthly
Promulgated: October 14, 2005 installments, petitioner stopped paying due to the Monesets failure to deliver to her the
transfer certificate of title of the property as per their agreement; and because of the failure
of the Monesets to turn over said title, petitioner failed to have the contract of sale annotated
thereon.[5]
DECISION
Unknown to petitioner, the Monesets executed on November 5, 1985 an absolute deed of
AUSTRIA-MARTINEZ, J.:
sale in favor of Dr. Rafael Canora, Jr. over the said property for P14,000.00.[6] On
Before us is a petition for review on certiorari under Rule 45 of the Rules of Court seeking September 15, 1986, the Monesets executed another sale, this time with pacto de retro with
the reversal of the Decision[1] of the Court of Appeals (CA) dated June 28, 1999 and the Restituto Bundalo.[7] On the same day, Bundalo, as attorney-in-fact of the Monesets,
Resolution dated January 31, 2000 denying petitioners motion for reconsideration. [2] executed a real estate mortgage over said property with Rural Bank of Larena (hereafter
Bank) located in Siquijor for the amount of P100,000.00.[8] The special power of attorney
These are the facts: made by the Monesets in favor of Bundalo as well as the real estate mortgage was then
annotated on the title on September 16, 1986.[9] For the failure of the Monesets to pay the
The spouses Jesus and Cristita Moneset (Monesets) are the registered owners of a 333- loan, the Bank served a notice of extrajudicial foreclosure dated January 27, 1988 on
square meter land together with a house thereon situated at Sitio Laguna, Basak, Cebu City Bundalo.[10]
covered by Transfer Certificate of Title No. 78374.[3] On January 9, 1985, they executed a
Contract to Sell Lot & House in favor of petitioner Winifreda Ursal (Ursal), with the following On September 30, 1989, Ursal filed an action for declaration of non-effectivity of mortgage
terms and conditions: and damages against the Monesets, Bundalo and the Bank. She claimed that the
defendants committed fraud and/or bad faith in mortgaging the property she earlier bought
That the VENDOR (Cristita R. Moneset) offers to SELL and the VENDEE accepts to BUY at from the Monesets with a bank located in another island, Siquijor; and the Bank acted in bad
the agreed lump sum price of P130,000.00 payable on the installment basis as follows: faith since it granted the real estate mortgage in spite of its knowledge that the property was
1. That on the date of the signing of this agreement, the VENDEE will tender an earnest in the possession of petitioner.[11]
money or downpayment of P50,000.00 to the VENDOR, and by these presents, the latter The Monesets answered that it was Ursal who stopped paying the agreed monthly
hereby acknowledges receipt of said amount from the former; installments in breach of their agreement.[12] The Bank, on the other hand, averred that the
2. That the balance of the selling price of P80,000.00 shall be paid by the VENDEE to title of the property was in the name of Cristita Radaza Moneset married to Jesus Moneset
the VENDOR in equal monthly installments of P3,000.00 starting the month of February, and did not show any legal infirmity.[13]
1985, until said balance of the selling price shall be fully paid;

9
Bundalo, meanwhile, was not served summons because he could no longer be found at his investigated further when he learned that the owner is not the actual occupant. He was
given address.[14] however told by Moneset that the actual occupant was only a lessee. Banking on this
information that the actual occupant was only a lessee with no other right over and above
Trial on the merits proceeded. Thereafter, the Regional Trial Court of Cebu City, Branch 24, such, the bank approved a loan of P100,000.00 in favor of Moneset through Bundalo their
rendered its decision finding that Ursal is more credible than the Monesets and that the attorney-in-fact.
Monesets are liable for damages for fraud and breach of the contract to sell:
Likewise the Rural Bank of Larena had the right to rely on what appeared on the certificate
The evidence of [Ursal] show that she was the first to acquire a substantial interest over the of title of the Monesets and it was under no obligation to look beyond the certificate and
lot and house by virtue of the execution of the Contract to Sell (Exh. A). After the execution investigate the title of the mortgagor appearing on the face of the certificate.
of Exh. A plaintiff took possession of the questioned lot and houseafter she made a
downpayment of P50,000.00. [S]he paid the installments for six (6) months without fail. The approval of the P100,000.00 loan from the Rural Bank of Larena was made possible
[However] plaintiff (stopped) paying the installment because defendant spouses failed to through the deception and bad faith of defendant spouses Moneset and Bundalo but the
give her the Transfer Certificate of Title over the lot and house despite repeated demands. It pertinent documents were per se in order. The court is of the honest belief that the case
is evident then that the first to violate the conditions of Exh. A were the defendants Spouses against the defendant bank be dismissed for lack of merit. The court however believes that
Moneset. This is the reason why plaintiff was not able to annotate Exh. A on the TCT. The for reasons of equity the bank should give the plaintiff Ursal the preferential right to redeem
evidence of plaintiff show that there was no intention on her part to discontinue paying the the subject house and lot.[16]
installments. In a reciprocal obligation, one cannot be compelled to do if the other party fails
to do his part (Art. 1169, New Civil Code).

The acts of defendant Spouses Moneset in selling again the lot and house in question to Dr. The trial court then disposed of the case as follows:
Canora by executing a Deed of Absolute Sale; in selling the same on pacto de retro to
Wherefore premises considered, judgment is hereby rendered in favor of the defendant
defendant Bundalo; and in mortgaging the same to defendant Rural Bank of Larena are
Rural Bank of Larena dismissing the complaint against it for lack of merit and against the
plainly and clearly fraudulent because they were done while Exh. A was still existing and the
defendant spouses Moneset ordering them to:
transaction was done without notice to the plaintiff. As provided in Art. 1170 of the New Civil
Code, those who are guilty of fraud in the performance of their obligation --- and those who 1. reimburse to plaintiff Ursal the following:
in any manner contravene the tenor thereof, are liable for damages.
a.) downpayment of P50,000.00
Another ground for liability under this article is when there is fraud/deceit. In the instant
case, there was fraud/deceit on the part of the defendant spouses Moneset when they b.) monthly installments for six months at P3,000.00 per month --- P18,000.00
executed the Deed of Sale to Dr. Canora; the Deed of Sale with Pacto de Retro to Bundalo
c.) expenses improvements P61, 676.52
and the Special Power of Attorney for Bundalo to execute for and in their behalf the Real
Estate Mortgage with the Rural Bank of Larena knowing fully well that the Contract to Sell
house and lot, Exh. A was still existing notwithstanding their violation to the provisions
thereto. It is therefore crystal clear that defendant spouses Moneset are liable for 2. pay to plaintiff the following:
damages.[15]
a.) moral damages ----------------- P30,000.00
As to the real estate mortgage, the trial court held that the same was valid and the Bank
was not under any obligation to look beyond the title, although the present controversy could b.) exemplary damages ----------- P20,000.00
have been avoided had the Bank been more astute in ascertaining the nature of petitioners
c.) litigation expenses------------- P 5,000.00
possession of the property, thus:
d.) attorneys fees ----------------- P10,000.00
The Real Estate Mortgage and the Foreclosure Proceedings cannot be considered null and
void in the sense that per se the formalities required by law were complied with except for e.) costs
the fact that behind their execution there was fraud, deceit and bad faith on the part of
defendant spouses Moneset and Bundalo. 3. order the defendant Rural Bank of Larena to give the plaintiff the preferential right to
redeem the subject house and lot.
The defendant Rural Bank of Larena for its part could have avoided this situation if the bank
appraiser who made the ocular inspection of the subject house and lot went deeper and

10
SO ORDERED.[17] since it involves the purchase of real property; Ursal was purportedly only a lessee of the
property, thus as mortgagor who is not entitled to possess the mortgaged property, they no
Both Ursal and the Monesets appealed the decision to the CA. Ursal alleged that the Bank longer considered the lease in the processing and approval of the loan; Sec. 50 of Act No.
was guilty of bad faith for not investigating the 496 is also inapplicable since the alleged prior existing interest was only that of a lessee; in
any case, it was the Monesets who lied to the Bank anent the real nature of the
presence of Ursal on the property in question, while the Monesets claimed that the trial court
encumbrance, thus, it is the Monesets who are guilty of fraud and not the Bank. [25]
erred in giving preferential right to Ursal to redeem the property and in ordering them to pay
damages.[18] In her Rejoinder,[26] petitioner argued that: under the law on mortgage, the mortgagor must
be the owner of the property he offers as security of his loan; the mortgagee like herein
The CA affirmed in toto the decision of the trial court. It held that the Bank did not have prior
Bank which neglects to verify the ownership of the property offered as security of the loan
knowledge of the contract to sell the house and lot and the Monesets acted fraudulently thus
runs the risk of his folly; the Banks negligence is not excusable because an adverse claim
they cannot be given preferential right to redeem the property and were therefore correctly
and notice of lis pendens were already annotated on the certificate of title when the
ordered to pay damages.[19]
mortgage was constituted or when the deed of real estate mortgage was annotated; it would
The Monesets filed a motion for reconsideration which was denied outright for having been be unfair to put the blame on petitioner who was innocent of the transaction; the trial court
filed out of time.[20] Ursals motion for reconsideration was denied by the CA on January 31, found that the Bank even provided its appraiser the amount of P15,000.00 to redeem
2000 for lack of merit.[21] the pacto de retro sale allegedly executed in favor of Dr. Canora; this should have aroused
the Banks suspicion and prompted it to investigate further the property; the trial court
Hence, the present petition raising the sole error: recognized the bad faith committed by the Monesets and ordered them to pay the sum
of P126,676.52 in damages but exonerated the Bank who is equally guilty of bad faith; the
That with grave abuse of discretion amounting to excess of jurisdiction, the
Monesets cannot pay the damages as they have no money and property thus if the decision
Honorable Court of Appeals erred in rendering a decision and Resolution NOT in
of the trial court as affirmed by the CA is to be enforced, they will only be holding an empty
accordance with law and the applicable rulings of the Supreme Court.[22]
bag while the Bank which is equally guilty will go free; what would be fair is to let the

two respondents bear jointly and severally the consequences of their transaction and let the
Petitioner claims that: the Bank was duly informed through its appraiser that the house and innocent petitioner ultimately own the house and lot in question.[27]
lot to be mortgaged by Monesets were in the possession of a lessee; the Bank should have
The petitioner, in her Memorandum dated July 31, 2005, raised the issues of: (1) Whether or
taken this as a cue to investigate further the Monesets right over the same; the case
not the document captioned: Contract to Sell Lot and House (Exh. A) is valid and binding so
of Embrado vs. Court of Appeals (233 SCRA 335) held that where a purchaser neglects to
much so that the herein Petitioner who is the Vendee is the lawful and true owner of the lot
make the necessary inquiry and closes his eyes to facts which should put a reasonable man
and house in question; (2) Whether or not the herein respondents spouses Jesus Moneset
on his guard to the possibility of the existence of a defect in his vendors title, he cannot
and Cristita Moneset who were the vendors and/or mortgagors together with respondent
claim that he is a purchaser in good faith; Sec. 50 of Act 496 provides that where a party
Restituto Bundalo were conniving and acting in bad faith; and (3) Whether or not respondent
has knowledge of a prior existing interest which is unregistered at the time he acquired the
Rural Bank of Larena measured up to the strict requirement of making a thorough
land, his knowledge of that prior unregistered interest has the effect of registration as to him
investigation of the property offered as collateral before granting a loan and be considered
and the Torrens system cannot be used as a shield against fraud; following Art. 2176 of the
as innocent mortgagee and entitled to the protection of the law. [28] Petitioner reiterated her
Civil Code, respondent Bank is obliged to pay for the damage done. [23]
arguments in support of the first and third issues raised in the Memorandum while she
merely adopted the CA findings in support of the second issue, i.e., when the Monesets
encumbered the Transfer Certificate of Title (TCT) to Dr. Canora and thereafter to Bundalo,
Petitioner then prayed that the Deed of Real Estate Mortgage be declared as non-effective they committed bad faith or fraud since the contract to sell with Ursal was still valid and
and non-enforceable as far as petitioner is concerned; that she be declared as the absolute subsisting.[29]
owner of the house and lot in question; that the Monesets be ordered to execute a deed of
absolute sale covering the subject property; and that the Bank be ordered to direct the Respondent Bank, in its Memorandum dated July 20, 2005, reiterated the arguments it
collection or payment of the loan of P100,000.00 plus interest from the Monesets for they made in its Comment that: the case cited by petitioner requiring extra ordinary diligence is
were the ones who received and enjoyed the said loan. [24] inapplicable in this case since what is involved here is mortgage and not sale; as
mortgagee, its interest is limited only to determining whether the mortgagor is the registered
On the other hand, respondent Bank in its Comment argues that: its interest in the property owner of the property whose certificate of title showed that there were no existing
was only that of mortgagee and not a purchaser thus its interest is limited only to encumbrances thereon; and even with unregistered encumbrances, the Bank has priority by
ascertaining that the mortgagor is the registered owner; the case cited is inapplicable at bar the registration of the loan documents.[30]

11
It is different from contracts of sale, since ownership in contracts to sell is reserved by the
vendor and is not to pass to the vendee until full payment of the purchase price, while
No memorandum is filed by respondent Monesets. in contracts of sale, title to the property passess to the vendee upon the delivery of the thing
sold. In contracts of sale the vendor loses ownership over the property and cannot recover it
The crux of petitioners contention is that the Bank failed to look beyond the transfer
unless and until the contract is resolved or rescinded, while in contracts to sell, title is
certificate of title of the property for which it must be held liable.
retained by the vendor until full payment of the price. [38] In contracts to sell, full payment is a
We agree. Banks cannot merely rely on certificates of title in ascertaining the status of positive suspensive condition while in contracts of sale, non-payment is a negative
mortgaged properties; as their business is impressed with public interest, they are expected resolutory condition.[39]
to exercise more care and prudence in their dealings than private individuals. [31] Indeed, the
A contract to sell may further be distinguished from a conditional contract of sale, in that,
rule that persons dealing with registered lands can rely solely on the certificate of title does
the fulfillment of the suspensive condition, which is the full payment of the purchase price,
not apply to banks.[32]
will not automatically transfer ownership to the buyer although the property may have been
As enunciated in Cruz vs. Bancom:[33] previously delivered to him. The prospective vendor still has to convey title to the

Respondent is not an ordinary mortgagee; it is a mortgagee-bank. As such, unlike private prospective buyer by entering into a contract of absolute sale. While in a conditional contract
individuals, it is expected to exercise greater care and prudence in its dealings, including of sale, the fulfillment of the suspensive condition renders the sale absolute and affects the
those involving registered lands. A banking institution is expected to exercise due diligence sellers title thereto such that if there was previous delivery of the property, the sellers
before entering into a mortgage contract. The ascertainment of the status or condition of a ownership or title to the property is automatically transferred to the buyer. [40]
property offered to it as security for a loan must be a standard and indispensable part of its
Indeed, in contracts to sell the obligation of the seller to sell becomes demandable only
operations.[34]
upon the happening of the suspensive condition, that is, the full payment of the purchase
Our agreement with petitioner on this point of law, notwithstanding, we are constrained to price by the buyer. It is only upon the existence of the contract of sale that the seller
refrain from granting the prayers of her petition, to wit: that the Deed of Real Estate becomes obligated to transfer the ownership of the thing sold to the buyer. Prior to the
Mortgage be declared as non-effective and non-enforceable as far as petitioner is existence of the contract of sale, the seller is not obligated to transfer the ownership to the
concerned; that she be declared as the absolute owner of the house and lot in question; that buyer, even if there is a contract to sell between them.[41]
the Monesets be ordered to execute a deed of absolute sale covering the subject property;
In this case, the parties not only titled their contract as Contract to Sell Lot and House but
and that the Bank be ordered to direct the collection or payment of the loan of P100,000.00
specified in their agreement that the vendor shall only execute a deed of absolute sale on
plus interest from the Monesets for they were the ones who received and enjoyed the said
the date of the final payment by vendee.[42] Such provision signifies that the parties truly
loan.[35]
intended their contract to be that of contract to sell.[43]
The reason is that, the contract between petitioner and the Monesets being one of Contract
Since the contract in this case is a contract to sell, the ownership of the property remained
to Sell Lot and House, petitioner, under the circumstances, never acquired ownership over
with the Monesets even after petitioner has paid the down payment and took possession of
the property and her rights were limited to demand for specific performance from the
the property. In Flancia vs. Court of Appeals,[44] where the vendee in the contract to sell also
Monesets, which at this juncture however is no longer feasible as the property had already
took possession of the property, this Court held that the subsequent mortgage constituted
been sold to other persons.
by the owner over said property in favor of another person was valid since the vendee
A contract to sell is a bilateral contract whereby the prospective seller, while expressly retained absolute ownership over the property.[45] At most, the vendee in the contract to sell
reserving the ownership of the subject property despite delivery thereof to the prospective was entitled only to damages.[46]
buyer, binds himself to sell the said property exclusively to the prospective buyer upon
Petitioner attributes her decision to stop paying installments to the failure of the Monesets to
fulfillment of the condition agreed upon, that is, full payment of the purchase price.[36]
comply with their agreement to deliver the transfer certificate of title after the down payment
In such contract, the prospective seller expressly reserves the transfer of title to the of P50,000.00. On this point, the trial court was correct in holding that for such failure, the
prospective buyer, until the happening of an event, which in this case is the full payment of Monesets are liable to pay damages pursuant to Art. 1169 of the Civil Code on reciprocal
the purchase price. What the seller agrees or obligates himself to do is to fulfill his promise obligations.[47]
to sell the subject property when the entire amount of the purchase price is delivered to him.
Stated differently, the full payment of the purchase price partakes of a suspensive condition,
the non-fulfillment of which prevents the obligation to sell from arising and thus, ownership is
retained by the prospective seller without further remedies by the prospective buyer. [37]

12
The vendors breach of the contract, notwithstanding, ownership still remained with the buyer after registration because there is no defect in the owner-sellers title per se, but the
Monesets and petitioner cannot justify her failure to complete the payment. latter, of course, may be sued for damages by the intending buyer.[53] (Emphasis supplied)

In Pangilinan vs. Court of Appeals,[48] the vendees contended that their failure to pay the In this case, the lower courts found that the property was sold to Dr. Canora and then to
balance of the total contract price was because the vendor reneged on its obligation to Bundalo who in turn acted as attorney-in-fact for the Monesets in mortgaging the property to
improve the subdivision and its facilities. In said case, the Court held that the vendees were respondent Bank. The trial court and the CA erred in giving petitioner the preferential right to
barred by laches from asking for specific performance eight years from the date of last redeem the property as such would prejudice the rights of the subsequent buyers who were
installment. The Court held that: not parties in the proceedings below. While the matter of giving petitioner preferential right
to redeem the property was not put in issue before us, in the exercise of our discretionary
(the vendees) instead of being vigilant and diligent in asserting their rights over the subject power to correct manifest and palpable error, we deem it proper to delete said portion of the
property had failed to assert their rights when the law requires them to act. Laches or stale decision for being erroneous.[54]
demands is based upon grounds of public policy which requires, for the peace of society,
the discouragement of stale claims and unlike the statute of limitations, is not a mere Petitioners rights were limited to asking for specific performance and damages from the
question of time but is principally a question of the inequity or unfairness of permitting a right Monesets. Specific performance, however, is no longer feasible at this point as explained
or claim to be enforced or asserted. above. This being the case, it follows that petitioner never had any cause of action against
respondent Bank. Having no cause of action against the bank and not being an owner of the
The legal adage finds application in the case at bar. Tempus enim modus tollendi subject property, petitioner is not entitled to redeem the subject property.
obligations et actiones, quia tempus currit contra desides et sui juris contemptoresFor time
is a means of dissipating obligations and actions, because time runs against the slothful and Petitioner had lost her right to demand specific performance when the Monesets executed a
careless of their own rights.[49] Deed of Absolute Sale in favor of Dr. Canora. Contrary to what she claims, petitioner had no
vested right over the property.
In this case, petitioner instituted an action for Declaration of Non-Effectivity of Mortgage with
Damages four years from the date of her last installment and only as a reaction to the Indeed, it is the Monesets who first breached their obligation towards petitioner and are
foreclosure proceedings instituted by respondent Bank. After the Monesets failed to deliver guilty of fraud against her. It cannot be denied however that petitioner is also not without
the TCT, petitioner merely stopped paying installments and did not institute an action for fault. She sat on her rights and never consigned the full amount of the property. She
specific performance, neither did she consign payment of the remaining balance as proof of therefore cannot ask to be declared the owner of the property, this late, especially since the
her willingness and readiness to comply with her part of the obligation. As we held in San same has already passed hands several times, neither can she question the mortgage
Lorenzo Development Corp. vs. Court of Appeals,[50] the perfected contract to sell imposed constituted on the property years after title has already passed to another person by virtue
on the vendee the obligation to pay the balance of the purchase price. There being an of a deed of absolute sale.
obligation to pay the price, the vendee should have made the proper tender of payment and
consignation of the price in court as required by law. Consignation of the amounts due in At this point, let it be stated that the courts below and even this Court have no jurisdiction to
court is essential in order to extinguish the vendees obligation to pay the balance of the resolve the issue whether there was bad faith among the Monesets, Canora and Bundalo.
purchase price.[51] Since there is no indication in the records that petitioner even attempted Canora was never impleaded. Bundalo has not been served with summons.
to make the proper consignation of the amounts due, the obligation on the part of the
WHEREFORE, the petition is DENIED. The decision of the Regional Trial Court of Cebu
Monesets to transfer ownership never acquired obligatory force.
City, Branch 24, promulgated on February 5, 1993 and the decision of the Court of Appeals
In other words, petitioner did not acquire ownership over the subject property as she did not dated June 28, 1999 are hereby AFFIRMED. However, in the higher interest of substantial
pay in full the equal price of the contract to sell. Further, the Monesets breach did not entitle justice, the Court MODIFIES the same to the effect that the portion ordering the Rural Bank
petitioner to any preferential treatment over the property especially when such property has of Larena (Siquijor), Inc. to give petitioner the preferential right to redeem the house and lot
been sold to other persons. covered by Transfer Certificate of Title No. 78374 is DELETED for lack of legal basis.

As explained in Coronel vs. Court of Appeals:[52] No costs.

In a contract to sell, there being no previous sale of the property, a third person SO ORDERED.
buying such property despite the fulfillment of the suspensive condition such as the
full payment of the purchase price, for instance, cannot be deemed a buyer in bad
faith and the prospective buyer cannot seek the relief of reconveyance of the
property. There is no double sale in such case. Title to the property will transfer to the

13
G.R. No. 180945 On June 29, 1998 the RTC rendered a decision granting respondent Corpuzs prayers. This
PHILIPPINE NATIONAL BANK, AS THE ATTORNEY-IN-FACT OF OPAL PORTFOLIO prompted petitioner PNB to appeal to the Court of Appeals (CA). On July 31, 2007 the CA
INVESTMENTS (SPV-AMC), INC., affirmed the decision of the RTC and denied the motion for its reconsideration, prompting
- versus - PNB to take recourse to this Court.
MERCEDES CORPUZ, REPRESENTED BY HER ATTORNEY-IN-FACT VALENTINA
CORPUZ, The Issue Presented
Promulgated: February 12, 2010
The sole issue presented in this case is whether or not petitioner PNB is a mortgagee in
ABAD, J.: good faith, entitling it to its lien on the title to the property in dispute.
This case is about the need for a mortgagee-bank, faced with suspicious layers of transfers The Ruling of the Court
involving a property presented for mortgage, to exercise proper diligence in ascertaining
the bona fide status of those transfers. Petitioner PNB points out that, since it did a credit investigation, inspected the property, and
verified the clean status of the title before giving out the loan to the Songcuans, it should be
The Facts and the Case regarded as a mortgagee in good faith. PNB claims that the precautions it took constitute
sufficient compliance with the due diligence required of banks when dealing with registered
On October 4, 1974 respondent Mercedes Corpuz delivered her owners duplicate copy of
lands.
Transfer Certificate of Title (TCT) 32815 to Dagupan City Rural Bank as security against
any liability she might incur as its cashier. She later left her job and went to the United As a rule, the Court would not expect a mortgagee to conduct an exhaustive investigation of
States. the history of the mortgagors title before he extends a loan.[1] But petitioner PNB is not an
ordinary mortgagee; it is a bank.[2] Banks are expected to be more cautious than ordinary
On October 24, 1994 the rural bank where she worked cancelled its lien on Corpuzs title,
individuals in dealing with lands, even registered ones, since the business of banks is
she having incurred no liability to her employer. Without Corpuzs knowledge and consent,
imbued with public interest.[3] It is of judicial notice that the standard practice for banks
however, Natividad Alano, the rural banks manager, turned over Corpuzs title to Julita
before approving a loan is to send a staff to the property offered as collateral and verify the
Camacho and Amparo Callejo.
genuineness of the title to determine the real owner or owners. [4]
Conniving with someone from the assessors office, Alano, Camacho, and Callejo prepared
One of the CAs findings in this case is that in the course of its verification, petitioner PNB
a falsified deed of sale, making it appear that on February 23, 1995 Corpuz sold her land to
was informed of the previous TCTs covering the subject property. [5] And the PNB has not
one Mary Bondoc for P50,000.00. They caused the registration of the deed of sale, resulting
categorically contested this finding. It is evident from the faces of those titles that the
in the cancellation of TCT 32815 and the issuance of TCT 63262 in Bondocs name. About a
ownership of the land changed from Corpuz to Bondoc, from Bondoc to the Palaganases,
month later or on March 27, 1995 the trio executed another fictitious deed of sale with Mary
and from the Palaganases to the Songcuans in less than three months and mortgaged to
Bondoc selling the property to the spouses Rufo and Teresa Palaganas for
PNB within four months of the last transfer.
only P15,000.00. This sale resulted in the issuance of TCT 63466 in favor of the
Palaganases. The above information in turn should have driven the PNB to look at the deeds of sale
involved. It would have then discovered that the property was sold for ridiculously low
Nine days later or on April 5, 1995 the Palaganases executed a deed of sale in favor of
prices: Corpuz supposedly sold it to Bondoc for just P50,000.00; Bondoc to the
spouses Virgilio and Elena Songcuan for P50,000.00, resulting in the issuance of TCT
Palaganases for just P15,000.00; and the Palaganases to the Songcuans also for
63528. Finally, four months later or on August 10, 1995 the Songcuans took out a loan
just P50,000.00. Yet the PNB gave the property an appraised value
of P1.1 million from petitioner Philippine National Bank (PNB) and, to secure payment, they
of P781,760.00. Anyone who deliberately ignores a significant fact that would
executed a real estate mortgage on their title. Before granting the loan, the PNB had the title
create suspicion in an otherwise reasonable person cannot be considered as an innocent
verified and the property inspected.
mortgagee for value.[6]
On November 20, 1995 respondent Corpuz filed, through an attorney-in-fact, a complaint
The Court finds no reason to reverse the CA decision.
before the Dagupan Regional Trial Court (RTC) against Mary Bondoc, the Palaganases, the
Songcuans, and petitioner PNB, asking for the annulment of the layers of deeds of sale WHEREFORE, the Court DENIES the petition and AFFIRMS the decision of the Court of
covering the land, the cancellation of TCTs 63262, 63466, and 63528, and the Appeals dated July 31, 2007 and its resolution dated December 17, 2007 in CA-G.R. CV
reinstatement of TCT 32815 in her name. 60616.

SO ORDERED.

14
amounted to ₱2,734,207.36. Anna Marie, her mother, and the PNB executed a Deed of
Waiver and Quitclaim dated May 23, 200310 to settle all questions regarding the
G.R. No. 202514 consolidation of the savings accounts. After withdrawals, the balance of her consolidated
savings account was ₱250,741.82.
ANNA MARIE L. GUMABON, Petitioner
vs. On July 30, 2003, the PNB sent letters to Anna Marie to inform her that the PNB refused to
PHILIPPINE NATIONAL BANK, Respondent honor its obligation under FXCTD Nos. 993902 and 993992, 11 and that the PNB withheld
DECISION the release of the balance of ₱250,741.82 in the consolidated savings account.12 According
to the PNB, Anna Marie pre-terminated, withdrew and/or debited sums against her deposits.
BRION, J.:
Thus, Anna Marie filed before the RTC a complaint for sum of money and damages against
Before us is a petition for review on certiorari1under Rule 45 of the Rules of Court filed by the PNB and Fernandez.13
Anna Marie Gumabon (Anna Marie) assailing the December 16, 2011 decision2 and June
As to the two FXCTDs, Anna Marie contended that the PNB’s refusal to pay her time
26, 2012 resolution3 of the Court of Appeals (CA) in CA-G.R. CV. No. 96289. The CA
deposits is contrary to law.1âwphi1The PNB cannot claim that the bank deposits have been
reversed the Regional Trial Court (RTC)'s ruling4 in Civil Case No. Q-04-53432 favoring
paid since the certificates of the time deposits are still with Anna Marie. 14
Anna Marie.
As to the consolidated savings account, Anna Marie stated that the PNB had already
The Facts
acknowledged the account’s balance in the Deed of Waiver and Quitclaim amounting to
On August 12, 2004, Anna Marie filed a complaint for recovery of sum of money and ₱2,734,207.36. As of January 26, 2004, the remaining balance was ₱250,741.82. PNB
damages before the RTC against the Philippine National Bank (PNB) and the PNB Delta presented no concrete proof that this amount had been withdrawn.
branch manager Silverio Fernandez (Fernandez). The case stemmed from the PNB’s
Anna Marie prayed that the PNB and Fernandez be held solidarily liable for actual, moral,
refusal to release Anna Marie’s money in a consolidated savings account and in two foreign
and exemplary damages, as well as attorney’s fees, costs of suit, and legal interests
exchange time deposits, evidenced by Foreign Exchange Certificates of Time
because of the PNB’s refusal to honor its obligations.
Deposit (FXCTD).
In its answer,15 the PNB argued that: (1) Anna Marie is not entitled to the balance of the
In 2001, Anna Marie, together with her mother Angeles and her siblings Anna Elena and
consolidated savings account based on solutio indebiti; (2) the PNB already paid the
Santiago, (the Gumabons) deposited with the PNB Delta Branch $10,945.28 and
$10,058.01 covered by FXCTD No. 993902; (3) the PNB is liable to pay only $10,718.87 of
$16,830.91, for which they were issued FXCTD Nos. A-9939025 and A-
993992,6 respectively. FXCTD No. 993992, instead of the full amount of $17,235.41; and (4) Anna Marie is guilty of
contributory negligence. The PNB’s arguments are discussed below.
The Gumabons also maintained eight (8) savings accounts 7 in the same bank. Anna Marie
First, Anna Marie is not entitled to the alleged balance of ₱250,741.82. The PNB’s
decided to consolidate the eight (8) savings accounts and to withdraw ₱2,727,235.85 from
investigation showed that Anna Marie withdrew a total of ₱251,246.8116 from two of the
the consolidated savings account to help her sister’s financial needs.
eight savings accounts and she used this amount to purchase manager’s check No.
Anna Marie called the PNB employee handling her accounts, Reino Antonio Salvoro 0000760633.17 Hence, ₱251,246.81 should be deducted from the sum agreed upon in
(Salvoro), to facilitate the consolidation of the savings accounts and the withdrawal. When the Deed of Waiver and Quitclaim. The PNB offered photocopies of the
she went to the bank on April 14, 2003, she was informed that she could not withdraw from PNB’s miscellaneous ticket18 and the manager’s check as evidence to prove the
the savings accounts since her bank records were missing and Salvoro could not be withdrawals. The PNB argued that unjust enrichment would result if Anna Marie would be
contacted. allowed to collect ₱250,741.82 from the consolidated savings account without deducting her
previous withdrawal of ₱251,246.81.
On April 15, 2003, Anna Marie presented her two FXCTDs, but was also unable to withdraw
against them. Fernandez informed her that the bank would still verify and investigate before Second, Anna Marie is not entitled to receive $10,058.01 covered by FXCTD No. 993902.
allowing the withdrawal since Salvoro had not reported for work. Based on the PNB’s records, Anna Marie pre-terminated FXCTD No. 993902 on March 11,
2002, and used the deposit, together with another deposit covered by FXCTD No. 993914
Thus, Anna Marie sent two demand letters8 dated April 23 and April 25, 2003 to the PNB. (for $8,111.35), to purchase a foreign demand draft (FX Demand Draft No. 4699831)
payable to Anna Rose/Angeles Gumabon. The PNB presented a facsimile copy of Anna
After a month, the PNB finally consolidated the savings accounts and issued a passbook Rose’s Statement of Account (SOA)19 from the PNB Bank to prove that the amount
for Savings Account (SA) No. 6121200.9 The PNB also confirmed that the total deposits
covered by FXCTD No. 993902 was already paid.

15
Third, Anna Marie is only entitled to receive $10,718.87 instead of the full amount of (a) $10,058.01, as the outstanding balance of FXCTD No. 993902;
$17,235.41 covered by FXCTD No. 993992 because: (a) the amount of $1,950.00 was part
of the money used by Anna Marie to purchase the manager’s check; (2) the amount of (b) $20,244.42, as the outstanding balance of FXCTD No. 993992;and
$2,566.54 was credited to Current Account No. 227-810961-8 owned by Anna Marie’s aunt,
(c) ₱250,741.82, as the outstanding balance of SA No. 6121200;
Lolita Lim; and (3) the amount of $2,000.00 was credited to Current Account No.
2108107498 of Anna Marie and Savings Account No. 212-5057333 of Anna Marie/or (2) ₱100,000.00 as moral damages;
Angeles or Santiago/or Elena (all surnamed Gumabon). Hence, these amounts should be
deducted from the amount payable to Anna Marie. (3) ₱50,000.00 as exemplary damages;

Finally, the PNB alleged that Anna Marie was guilty of contributory negligence in her bank (4) ₱150,000.00 as attorney’s fees; and
dealings.
(5) Costs of suit.
In herreply,20 Anna Marie argued that the best evidence of her withdrawals is the
From this ruling, the PNB appealed before the CA.
withdrawal slips duly signed by her and the passbooks pertaining to the accounts. PNB,
however, failed to show any of the withdrawal slips and/or passbooks, and also failed to The CA Ruling
present sufficient evidence that she used her accounts’ funds.
The CA reversed the RTC’s ruling.24
The RTC Ruling
The CA held that the PNB had paid the actual amounts claimed by Anna Marie in her
The RTC ruled in Anna Marie’s favour.21 complaint. The CA noted Anna Marie’s suspicious and exclusive dealings with Salvoro and
the Gumabons’ instruction to Salvoro to make unauthorized and unrecorded withdrawals.
The RTC held that the PNB had not yet paid the remaining balance of $10,058.01 under
Hence, there are no entries of withdrawals reflected in Anna Marie’s passbook.
FXCTD No. 993902. Anna Marie’s SOA,22 which the PNB relied upon, is a mere photocopy
and does not satisfy the best evidence rule. Moreover, there is no indication on the stated The CA also considered Anna Rose’s SOA as proof that the PNB had paid the remaining
amounts in the SOA that the funds have come from FXCTD No. 993902.23 The PNB failed balance of $10,058.01 on FXCTD No. 993902. The CA held that the PNB verified the SOA
to obtain the deposition of a PNC Bank officer or present any other evidence to show that and it was corroborated by the affidavit25 of the PNB Branch Operations Officer in New
the amounts stated in the SOA came from FXCTD No. 993902. The RTC also held that the York. The CA stated that the RTC should have allowed the taking of the deposition of the
alleged pre-termination of FXCTD No. 993902 on March 11, 2002, is hard to believe since PNB bank officer.
the certificate shows that the last entry was made on March 24, 2003, with a reflected
balance of $10,058.01. The CA also relied on the PNB’s investigation and concluded that the PNB had already paid
the amounts claimed by Anna Marie under FXCTD Nos. 993902 and 993992.
On FXCTD No. 993992, the RTC held that the PNB failed to prove Anna Marie’s alleged
withdrawals. These alleged withdrawals are not reflected at the back of the certificate. Anna As to Anna Marie’s consolidated savings account, the CA gave credence to the
Marie’s ledger was also not presented as evidence to show that several withdrawals had miscellaneous ticket and the manager’s check presented by the PNB to prove that it had
been made against FXCTD No. 993992. already paid the balance.

On the consolidated savings account, the RTC held that the PNB failed to prove that Anna Marie moved but failed to obtain reconsideration of the CA’s decision; hence, the
Anna Marie withdrew the balance of ₱250,741.82. The RTC excluded PNB’s evidence, i.e., present petition.26
photocopies of the miscellaneous ticket and manager’s check, to prove the alleged
withdrawals, since these documents were just photocopies and thus failed to satisfy the best The Petition
evidence rule.
Anna Marie filed the present petition for review to question the CA’s decision and resolution
The RTC awarded damages to Anna Marie due to the PNB’s mishandling of her account which reversed the RTC’s ruling.
through its employee, Salvoro. The RTC also held that the PNB failed to establish Anna
Anna Marie argues that: first, the CA should not have disregarded the RTC’s conclusive
Marie’s contributory negligence.
findings; second, the CA erred in considering the PNB New York bank officer’s affidavit
In conclusion, the RTC ordered the PNB to pay Anna Marie these amounts: because it was not formally offered as evidence; third, the CA erroneously relied on a
foreign demand draft27 to prove the PNB’s payment of the amount due under FXCTD No.
(1) Actual damages of: 993902; fourth, the CA erroneously considered the miscellaneous ticket and the manager’s

16
check because these documents are mere photocopies and inadmissible under the best We note that the CA considered pieces of evidence which are inadmissible under the Rules
evidence rule; and fifth, the CA’s conclusion about a purported "connivance" between Anna of Court, particularly the manager’s check and the corresponding miscellaneous ticket, Anna
Marie and Salvoro has no evidentiary basis. Rose’s SOA, and the affidavit of the PNB New York’s bank officer. The inadmissibility of
these documents is explained more fully in the following discussion.
In its comment, the PNB counters that: first, the CA can rectify the RTC’s factual findings
since the RTC committed errors in its appreciation of the evidence; second, the RTC PNB failed to establish the fact of
completely ignored the PNB’s several evidence proving its payment of Anna Marie’s payment to Anna Marie in FXCTD
FXCTDs; third, Anna Marie did not refute the PNB’s allegations of payment; fourth, the CA Nos. 993902 and 993992, and SA No. 6121200.
has the right to review even those exhibits which were excluded by the RTC; and fifth, the
CA correctly ruled that the PNB should not be faulted about the unrecorded transactions, It is a settled rule in evidence that the one who alleges payment has the burden of proving
and that the PNB had done its duty to its depositors when it conducted investigations and an it.30 The burden of proving that the debt had been discharged by payment rests upon the
internal audit of Anna Marie’s accounts. debtor once the debt’s existence has been fully established by the evidence on record.
When the debtor introduces some evidence of payment, the burden of going forward with
The Issues the evidence – as distinct from the burden of proof – shifts to the creditor. Consequently, the
creditor has a duty to produce evidence to show non-payment.31
The issue before this Court is whether Anna Marie is entitled to the payment of the following
amounts: In the present case, both the CA and the RTC declared that the PNB has the burden of
proving payment. The lower courts, however, differed in resolving the question of whether
(a) $10,058.01 or the outstanding balance under FXCTD No. 993902; the PNB presented sufficient evidence of payment to shift the burden of evidence to Anna
Marie. The RTC ruled that the PNB failed to do so, after excluding PNB’s evidence, i.e.,
(b) $20,244.42 for FXCTD No. 993992;
miscellaneous ticket, manager’s check, and the affidavit of the PNB New York’s bank
(c) ₱250,741.82 for SA No. 6121200; and officer, based on the rules of evidence. The CA, on the other hand, considered the excluded
evidence and found that the PNB presented sufficient proof of payment.
(3) Damages.
i. The PNB’s alleged payment of
Our Ruling the amount covered by SA No.
6121200
We grant the petition and reverse the CA’s ruling.
The PNB alleged that it had already paid the balance of the consolidated savings account
The core issue raised in the present petition is a question of fact. As a general rule, a
(SA No. 6121200) amounting to P250,741.82. It presented the manager’s check to prove
petition for review under Rule 45 of the Rules of Court covers only questions of law.
that Anna Marie purchased the check using the amounts covered by the Gumabon’s two
Questions of fact are not reviewable and cannot be passed upon by the Court in the
savings accounts which were later part of Anna Marie’s consolidated savings account. The
exercise of its power to review under Rule 45.28
PNB also presented the miscellaneous ticket to prove Anna Marie’s withdrawal from the
There are, however, exceptions to the general rule. Questions of fact may be raised before savings accounts.
this Court in any of these instances: (1) when the findings are grounded entirely on
The RTC denied the admission of the manager’s check and the miscellaneous ticket since
speculations, surmises, or conjectures; (2) when the inference made is manifestly mistaken,
the original copies were never presented.32 The PNB moved to tender the excluded
absurd, or impossible; (3) when there is a grave abuse of discretion; (4) when the judgment
evidence and argued that even without the presentation of the original copies, the
is based on misappreciation of facts; (5) when the findings of fact are conflicting; (6) when in
photocopies are admissible because they have been identified by Fernandez. 33
making its findings, the same are contrary to the admissions of both appellant and appellee;
(7) when the findings are contrary to those of the trial court; (8) when the findings are Evidence, to be admissible, must comply with two qualifications: (a) relevance and (b)
conclusions without citation of specific evidence on which they are based; (9) when the facts competence. Evidence is relevant if it has a relation to the fact in issue as to induce a belief
set forth in the petition as well as in the petitioners main and reply briefs are not disputed by in its existence or nonexistence.34 On the other hand, evidence is competent if it is not
the respondent; and (10) when the findings of fact are premised on the supposed absence excluded by the law or by the Rules of Court.35
of evidence and contradicted by the evidence on record.29
One of the grounds under the Rules of Court that determines the competence of evidence is
The present case falls under two of the exceptions, particularly that the CA’s findings are the best evidence rule. Section 3, Rule 130 of the Rules of Court provides that the original
contrary to the RTC’s findings, and that the CA’s findings of fact are premised on absent copy of the document must be presented whenever the content of the document is under
evidence and contradicted by the evidence on record. inquiry.36

17
However, there are instances when the Court may allow the presentation of secondary uncontested transactions, the remaining balance of Anna Marie’s deposit
evidence in the absence of the original document. Section 3, Rule 130 of the Rules of Court became ₱250,741.82. The inevitable conclusion is that PNB’s obligation to pay ₱250,741.82
enumerates these exceptions: under SA No. 6121200 subsists.

(a) when the original has been lost, or destroyed, or cannot be produced in court, without ii. The PNB’s alleged payment of
bad faith on the part of the offeror; the amount covered by FXCTD No. 993902

(b) when the original is in the custody or under the control of the party against whom the The PNB claimed that it had already paid the amount of $10,058.01 covered by FXCTD No.
evidence is offered, and the latter fails to produce it after reasonable notice; 993902. It presented the foreign demand draft dated March 11, 2002 which Anna Marie
allegedly purchased with the funds of FXCTD No. 993902. In addition, the PNB also
(c) when the original consists of numerous accounts or other documents which cannot be presented Anna Rose’s SOA to show that there was a fund transfer involving the contested
examined in court without great loss of time and the fact sought to be established from them amount. To further support its claim, the PNB annexed the affidavit of the PNB New York’s
is only the general result of the whole; and branch officer about the fund transfer. The PNB, however, failed to formally offer the
affidavit as evidence.
(d) when the original is a public record in the custody of a public officer or is recorded in a
public office. Anna Marie moved for the exclusion of the photocopy of Anna Rose’s SOA for failing to
conform to the best evidence rule. The RTC granted her motion and denied its admission.
While the RTC cannot consider the excluded evidence to resolve the issues, such evidence
When the case reached the CA, the CA stated that the RTC should have considered the
may still be admitted on appeal provided there has been tender of the excluded evidence
evidence in the light of the PNB’s identification of the SOA as an exact copy of the original
under Section 40 of Rule 132 of the Rules of Court.37
and the claim that it is corroborated by the affidavit of the PNB New York’s bank officer.
The PNB cannot simply substitute the mere photocopies of the subject documents for the
The PNB explained that its failure to present the original copy of Anna Rose’s SOA was
original copies without showing the court that any of the exceptions under Section 3 of Rule
because the original was not in the PNB’s possession.
130 of the Rules of Court applies. The PNB’s failure to give a justifiable reason for the
absence of the original documents and to maintain a record of Anna Marie’s transactions We rule that the SOA is inadmissible because it fails to qualify as relevant evidence. As
only shows the PNB’s dismal failure to fulfill its fiduciary duty to Anna Marie.38 The Court the RTC correctly stated, the SOA "does not show which of the amount stated therein came
expects the PNB to "treat the accounts of its depositors with meticulous care, always having from the funds of Certificate of Time Deposit No. A-993902."41
in mind the fiduciary nature of their relationship."39 The Court explained in Philippine
Banking Corporation v. CA,40 the fiduciary nature of the bank’s relationship with its The affidavit of the PNB New York’s bank officer is also inadmissible in the light of the
depositors, to wit: following self-explanatory provision of the Rules of Court:

The business of banking is imbued with public interest. The stability of banks largely "Sec. 34. Offer of evidence. – The court shall consider no evidence which has not been
depends on the confidence of the people in the honesty and efficiency of banks. In Simex formally offered. x x x."42
International (Manila) Inc. v. Court of Appeals we pointed out the depositor’s reasonable
expectations from a bank and the bank’s corresponding duty to its depositor, as Formal offer means that the offeror shall inform the court of the purpose of introducing its
follows: exhibits into evidence. Without a formal offer of evidence, courts cannot take notice of this
evidence even if this has been previously marked and identified.43
In every case, the depositor expects the bank to treat his account with the utmost fidelity,
whether such account consists only of a few hundred pesos or of millions. The bank must In Heirs of Pedro Pasag v. Parocha,44 we reiterated the importance of a formal offer of
record every single transaction accurately, down to the last centavo, and as promptly evidence. Courts are mandated to rest their factual findings and their judgment only and
as possible. This has to be done if the account is to reflect at any given time the amount of strictly upon the evidence offered by the parties at the trial. The formal offer enables the
money the depositor can dispose of as he sees fit, confident that the bank will deliver it as judge to know the purpose or purposes for which the proponent is presenting the evidence.
and to whomever he directs. (emphasis and underscoring supplied) It also affords the opposing parties the chance to examine the evidence and to object to its
admissibility. Moreover, it facilitates review as the appellate court will not be required to
Consequently, the CA should not have admitted the subject documents even if the PNB review documents not previously scrutinized by the trial court.
tendered the excluded evidence.
In People v. Napat-a,45 People v. Mate,46 and Heirs of Romana Saves, et al. v. Escolastico
Notably, the PNB clearly admitted in the executed Deed of Waiver and Quitclaim that it Saves, et al.,47 we recognized the exceptions from the requirement of a formal offer of
owed Anna Marie ₱2,734,207.36 under the consolidated savings account. After a number of

18
evidence, namely: (a) the evidence must have been duly identified by testimony duly Section 2 of Republic Act No. 8791,52 declares the State’s recognition of the "fiduciary
recorded; and (b) the evidence must have been incorporated in the records of the case. nature of banking that requires high standards of integrity and performance." It cannot be
overemphasized that the banking business is impressed with public interest. The trust and
It is unmistakable that the PNB did not include the affidavit of the PNB New York’s bank confidence of the public to the industry is given utmost importance. 53Thus, the bank is under
officer in its formal offer of evidence to corroborate Anna Rose’s SOA. Although the affidavit obligation to treat its depositor’s accounts with meticulous care, having in mind the nature of
was included in the records and identified by Fernandez, it remains inadmissible for their relationship.54 The bank is required to assume a degree of diligence higher than that of
being hearsay. Jurisprudence dictates that an affidavit is merely hearsay evidence when its a good father of a family.55
affiant or maker did not take the witness stand.48
As earlier settled, the PNB was negligent for its failure to update and properly handle Anna
In the present case, Fernandez is not the proper party to identify the affidavit executed by Marie’s accounts. This is patent from the PNB’s letter to Anna Marie, admitting the error and
the PNB New York’s bank officer since he is not the affiant. Therefore, the affidavit is unauthorized withdrawals from her account. Moreover, Anna Marie was led to believe that
inadmissible. the amounts she has in her accounts would remain because of the Deed of Waiver and
Quitclaim executed by her, her mother, and PNB. Assuming arguendo that Anna Marie
Thus, the PNB failed to present sufficient and admissible evidence to prove payment of the
made the contested withdrawals, due diligence requires the PNB to record the transactions
$10,058.01.This failure leads us to conclude that the PNB is still liable to pay the amount
in her passbooks.
covered by FXCTD No. 993902.
The Court has established in a number of cases the standard of care required from banks,
iii. The PNB’s alleged payment of
and the bank’s liability for the damages sustained by the depositor. The bank is not
the amount covered by FXCTD No. 993992
absolved from liability by the fact that it was the bank’s employee who committed the wrong
The PNB alleged that Anna Marie’s claim over FXCTD No. 993992 should only be limited to and caused damage to the depositor.56 Article 2180 of the New Civil Code provides that the
$5,857.79. It presented the manager’s check, which admissibility we have heretofore owners and managers of an establishment are responsible for damages caused by their
discussed and settled, and the miscellaneous tickets. employees while performing their functions.57

We cannot absolve the PNB from liability based on these miscellaneous tickets alone. As In addition, we held in PNB v. Pike,58 that although the bank’s employees are the ones
the RTC correctly stated, the transactions allegedly evidenced by these tickets were neither negligent, a bank is primarily liable for the employees’ acts because banks are expected to
posted at the back of Anna Marie’s certificate, nor recorded on her ledger to show that exercise the highest degree of diligence in the selection and supervision of their employees.
several withdrawals had been made on the account.
Indeed, a great possibility exists that Salvoro was involved in the unauthorized withdrawals.
At this point, we remind the PNB of the negotiability of a certificate of deposit as it is a Anna Marie entrusted her accounts to and made her banking transactions only through him.
written acknowledgment by the bank of the receipt of a sum of money on deposit which the Salvaro’s unexplained disappearance further confirms this Court’s suspicions. The Court is
bank promises to pay to the depositor, to the latter’s order, or to some other person or the alarmed that he was able to repeatedly do these unrecorded transactions without the bank
latter’s order.49 To discharge a debt, the bank must pay to someone authorized to receive noticing it. This only shows that the PNB has been negligent in the supervision of its
the payment.50 A bank acts at its peril when it pays deposits evidenced by a certificate of employees.
deposit, without its production and surrender after proper indorsement. 51
As to contributory negligence, the Court agrees with the RTC that the PNB failed to
Again, as the RTC had correctly stated, the PNB should not have allowed the withdrawals, if substantiate its allegation that Anna Marie was guilty of contributory negligence.
there were indeed any, without the presentation of the covering foreign certificates of time
Contributory negligence is conduct on the part of the injured party, contributing as a legal
deposit. There are no irregularities on Anna Marie’s certificates to justify the PNB’s refusal
cause to the harm he has suffered, which falls below the standard to which he is required to
to pay the stated amounts in the certificates when it was presented for payment.
conform for his own protection.59 Whether contributory negligence transpired is a factual
Therefore, the PNB is liable for Anna Marie’s claims since it failed to prove that it had matter that must be proven.
already been discharged from its obligation.
In the present case, Anna Marie cannot be held responsible for entrusting her account with
PNB is liable to Anna Marie for actual, moral, and Salvoro. As shown in the records, Salvoro was the bank’s time deposit specialist. Anna
exemplary damages as well as attorney’s fees for its Marie cannot thus be faulted if she engaged the bank’s services through Salvoro for
negligent acts as a banking institution. transactions related to her time deposits.

Since the PNB is clearly liable to Anna Marie for her deposits, the Court now determines
PNB’s liability for damages under existing laws and jurisprudence.

19
The Court also cannot accept the CA’s conclusion that there was connivance between Anna decision of the Regional Trial Court is REINSTATED with MODIFICATIONS. Thus, the
Marie and Salvoro. This conclusion is simply not supported by the records and is therefore Philippine National Bank is ORDERED to pay Anna Marie Gumabon the following:
baseless.
(1) Actual damages of:
In these lights, we hold that Anna Marie is entitled to moral damages of ₱100,000.00. In
cases of breach of contract, moral damages are recoverable only if the defendant acted (a) $10,058.01, as the outstanding balance of FXCTD No. 993902;
fraudulently or in bad faith, or is guilty of gross negligence amounting to bad faith, or in clear
(b) $ 20,244.42, as the outstanding balance of FXCTD No. 993992; and
disregard of his contractual obligations.60 Anna Marie was able to establish the mental
anguish and serious anxiety that she suffered because of the PNB’s refusal to honor its (c) ₱250,741.82, as the outstanding balance of SA No. 6121200;
obligations.
(2) Legal interest of twelve percent (12%) per annum of the total actual damages from
Anna Marie is likewise entitled to exemplary damages of ₱50,000.00. Article 2229 of the August 12, 2004 to June 30, 2013, and six percent (6o/o) per annum from July 1, 2013 until
New Civil Code imposes exemplary damages by way of example or correction for the public full satisfaction;
good. To repeat, banks must treat the accounts of its depositors with meticulous care and
always have in mind the fiduciary nature of its relationship with them. 61Having failed to (3) ₱l00,000.00 as moral damages;
observe these, the award of exemplary damages is justified.
(4) ₱50,000.00 as exemplary damages;
As exemplary damages are awarded herein62and as Anna Marie was compelled to litigate
(5) ₱l50,000.00 as attorney's fees; and
to protect her interests,63the award of attorney’s fees and expenses of litigation of
₱150,000.00 is proper. (7) Costs of suit.
Finally, we impose legal interest pursuant to the guidelines in Nacar v. Gallery Let a copy of this Decision be furnished the Financial Consumers Protection Department of
Frames.64 We held in that case that for interest awarded on actual and compensatory the Bangko Sentral ng Pilipinas, for information and possible action in accordance with the
damages, the interest rate is imposed as follows: Bangko Sentral ng Pilipinas' mandate to protect the banking public.
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a SO ORDERED.
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be
12% per annum [changed to 6% per annumstarting July 1, 2013] to be computed from
default, i.e., from extrajudicial demand under and subject to the provisions of Article 1169 of
the Civil Code.

xxxx

3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest x x x shall be 6% per annum from such finality until its satisfaction. x
xx

We note that pursuant to the Bangko Sentral ng Pilipinas-Monetary Board Circular No. 799,
the legal interest rate is 6% per annum effective July 1, 2013. The new rate is applicable
prospectively; thus, the 12% per annum shall still apply until June 30, 2013.

In the present case, Anna Marie filed her complaint on August 12, 2004. PNB is therefore
liable for legal interest of 12% per annum from Augus t 12, 2004 until June 30, 2013, and
6% per annum from July 1, 2013, until its full satisfaction.

WHEREFORE, the petition is GRANTED. The assailed December 16, 2011 decision and
June 26, 2012 resolution of the Court of Appeals is hereby reversed. The October 26, 2010

20
Finance for the issuance by the Bureau of Treasury of 10-year zero-coupon Treasury
Certificates (T-notes).[6] The T-notes would initially be purchased by a special purpose
EN BANC vehicle on behalf of CODE-NGO, repackaged and sold at a premium to investors as the
PEACe Bonds.[7] The net proceeds from the sale of the Bonds "will be used to endow a
[ GR No. 198756, Jan 13, 2015 ] permanent fund (Hanapbuhay® Fund) to finance meritorious activities and projects of
accredited non-government organizations (NGOs) throughout the country." [8]
BANCO DE ORO v. REPUBLIC +

DECISION Prior to and around the time of the proposal of CODE-NGO, other proposals for the
issuance of zero-coupon bonds were also presented by banks and financial institutions,
LEONEN, J.: such as First Metro Investment Corporation (proposal dated March 1, 2001),[9] International
Exchange Bank (proposal dated July 27, 2000),[10] Security Bank Corporation and SB
The case involves the proper tax treatment of the discount or interest income arising from
Capital Investment Corporation (proposal dated July 25, 2001), [11] and ATR-Kim Eng Fixed
the P35 billion worth of 10-year zero-coupon treasury bonds issued by the Bureau of
Income, Inc. (proposal dated August 25, 1999).[12] "[B]oth the proposals of First Metro
Treasury on October 18, 2001 (denominated as the Poverty Eradication and Alleviation
Investment Corp. and ATR-Kim Eng Fixed Income indicate that the interest income or
Certificates or the PEACe Bonds by the Caucus of Development NGO Networks).
discount earned on the proposed zero-coupon bonds would be subject to the prevailing
withholding tax."[13]
On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No. 370-
2011[1] (2011 BIR Ruling), declaring that the PEACe Bonds being deposit substitutes are
A zero-coupon bond is a bond bought at a price substantially lower than its face value (or
subject to the 20% final withholding tax. Pursuant to this ruling, the Secretary of Finance
at a deep discount), with the face value repaid at the time of maturity. [14] It does not make
directed the Bureau of Treasury to withhold a 20% final tax from the face value of the
periodic interest payments, or have so-called "coupons," hence the term zero-coupon
PEACe Bonds upon their payment at maturity on October 18, 2011.
bond.[15] However, the discount to face value constitutes the return to the bondholder. [16]
This is a petition for certiorari, prohibition and/or mandamus [2] filed by petitioners under Rule
On May 31, 2001, the Bureau of Internal Revenue, in reply to CODE-NGO's letters dated
65 of the Rules of Court seeking to:
May 10, 15, and 25, 2001, issued BIR Ruling No. 020-2001[17] on the tax treatment of the
a. ANNUL Respondent BIR's Ruling No. 370-2011 dated 7 October 2011 [and] other proposed PEACe Bonds. BIR Ruling No. 020-2001, signed by then Commissioner of
related rulings issued by BIR of similar tenor and import, for being unconstitutional and for Internal Revenue René G. Bañez confirmed that the PEACe Bonds would not be classified
having been issued without jurisdiction or with grave abuse of discretion amounting to lack as deposit substitutes and would not be subject to the corresponding withholding tax:
or excess of jurisdiction. . .;

b. PROHIBIT Respondents, particularly the BTr, from withholding or collecting the 20% FWT
Thus, to be classified as "deposit substitutes", the borrowing of funds must be obtained from
from the payment of the face value of the Government Bonds upon their maturity;
twenty (20) or more individuals or corporate lenders at any one time. In the light of your
representation that the PEACe Bonds will be issued only to one entity, i.e., Code NGO, the
c. COMMAND Respondents, particularly the BTr, to pay the full amount of the face value of
same shall not be considered as "deposit substitutes" falling within the purview of the above
the Government Bonds upon maturity. . .; and
definition. Hence, the withholding tax on deposit substitutes will not apply.[18] (Emphasis
supplied)
d. SECURE a temporary restraining order (TRO), and subsequently a writ of preliminary
injunction, enjoining Respondents, particularly the BIR and the BTr, from withholding or
collecting 20% FWT on the Government Bonds and the respondent BIR from enforcing the The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001 was
assailed 2011 BIR Ruling, as well as other related rulings issued by the BIR of similar tenor subsequently reiterated in BIR Ruling No. 035-2001[19]dated August 16, 2001 and BIR
and import, pending the resolution by [the court] of the merits of [the] Petition. [3] Ruling No. DA-175-01[20] dated September 29, 2001 (collectively, the 2001 Rulings). In
sum, these rulings pronounced that to be able to determine whether the financial assets,
Factual background
i.e., debt instruments and securities are deposit substitutes, the "20 or more individual or
By letter[4] dated March 23, 2001, the Caucus of Development NGO Networks (CODE-NGO)
corporate lenders" rule must apply. Moreover, the determination of the phrase "at any one
"with the assistance of its financial advisors, Rizal Commercial Banking Corp. ("RCBC"),
time" for purposes of determining the "20 or more lenders" is to be determined at the time of
RCBC Capital Corp. ("RCBC Capital"), CAPEX Finance and Investment Corp. ("CAPEX")
the original issuance. Such being the case, the PEACe Bonds were not to be treated as
and SEED Capital Ventures, Inc. (SEED),"[5] requested an approval from the Department of
deposit substitutes.

21
billion.
Meanwhile, in the memorandum[21] dated July 4, 2001, Former Treasurer Eduardo Sergio G.
Edeza (Former Treasurer Edeza) questioned the propriety of issuing the bonds directly to a Also on October 16, 2001, RCBC Capital entered into an underwriting agreement[44] with
special purpose vehicle considering that the latter was not a Government Securities Eligible CODE-NGO, whereby RCBC Capital was appointed as the Issue Manager and Lead
Dealer (GSED).[22] Former Treasurer Edeza recommended that the issuance of the Bonds Underwriter for the offering of the PEACe Bonds.[45] RCBC Capital agreed to
"be done through the ADAPS"[23] and that CODE-NGO "should get a GSED to bid in [sic] its underwrite[46]on a firm basis the offering, distribution and sale of the P35 billion Bonds at the
behalf."[24] price of P11,995,513,716.51.[47] In Section 7(r) of the underwriting agreement, CODE-NGO
represented that "[a]ll income derived from the Bonds, inclusive of premium on redemption
Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury and gains on the trading of the same, are exempt from all forms of taxation as confirmed by
Bonds[25] (Public Offering) dated October 9, 2001, the Bureau of Treasury announced that Bureau of Internal Revenue (BIR) letter rulings dated 31 May 2001 and 16 August 2001,
"P30.0B worth of 10-year Zero[-] Coupon Bonds [would] be auctioned on October 16, respectively."[48]
2001[.]"[26] The notice stated that the Bonds "shall be issued to not more than 19
buyers/lenders hence, the necessity of a manual auction for this maiden issue." [27] It also RCBC Capital sold the Government Bonds in the secondary market for an issue price of
required the GSEDs to submit their bids not later than 12 noon on auction date and to P11,995,513,716.51. Petitioners purchased the PEACe Bonds on different dates.[49]
disclose in their bid submissions the names of the institutions bidding through them to
ensure strict compliance with the 19 lender limit.[28] Lastly, it stated that "the issue being BIR rulings
limited to 19 lenders and while taxable shall not be subject to the 20% final withholding
[tax]."[29]
On October 7, 2011, "the BIR issued the assailed 2011 BIR Ruling imposing a 20% FWT on
the Government Bonds and directing the BIR to withhold said final tax at the maturity
On October 12, 2001, the Bureau of Treasury released a memo [30] on the "Formula for the
thereof, [allegedly without] consultation with Petitioners as bondholders, and without
Zero-Coupon Bond." The memo stated in part that the formula (in determining the purchase
conducting any hearing."[50]
price and settlement amount) "is only applicable to the zeroes that are not subject to the
20% final withholding due to the 19 buyer/lender limit."[31]
"It appears that the assailed 2011 BIR Ruling was issued in response to a query of the
Secretary of Finance on the proper tax treatment of the discount or interest income derived
A day before the auction date or on October 15, 2001, the Bureau of Treasury issued the
from the Government Bonds."[51] The Bureau of Internal Revenue, citing three (3) of its
"Auction Guidelines for the 10-year Zero-Coupon Treasury Bond to be Issued on October
rulings rendered in 2004 and 2005, namely: BIR Ruling No. 007-04[52] dated July 16, 2004;
16, 2001" (Auction Guidelines).[32] The Auction Guidelines reiterated that the Bonds to be
BIR Ruling No. DA-491-04[53] dated September 13, 2004; and BIR Ruling No. 008-
auctioned are "[n]ot subject to 20% withholding tax as the issue will be limited to a maximum
05[54] dated July 28, 2005, declared the following:
of 19 lenders in the primary market (pursuant to BIR Revenue Regulation No. 020
2001)."[33] The Auction Guidelines, for the first time, also stated that the Bonds are "[e]ligible
as liquidity reserves (pursuant to MB Resolution No. 1545 dated 27 September 2001)[.]" [34]
The Php 24.3 billion discount on the issuance of the PEACe Bonds should be subject to
On October 16, 2001, the Bureau of Treasury held an auction for the 10-year zero-coupon 20% Final Tax on interest income from deposit substitutes. It is now settled that all treasury
bonds.[35] Also on the same date, the Bureau of Treasury issued another bonds (including PEACe Bonds), regardless of the number of purchasers/lenders at the time
memorandum[36] quoting excerpts of the ruling issued by the Bureau of Internal Revenue of origination/issuance are considered deposit substitutes. In the case of zero-coupon
concerning the Bonds' exemption from 20% final withholding tax and the opinion of the bonds, the discount (i.e. difference between face value and purchase price/discounted value
Monetary Board on reserve eligibility.[37] of the bond) is treated as interest income of the purchaser/holder. Thus, the Php 24.3
interest income should have been properly subject to the 20% Final Tax as provided in
During the auction, there were 45 bids from 15 GSEDs.[38] The bidding range was very Section 27(D)(1) of the Tax Code of 1997. . . .
wide, from as low as 12.248% to as high as 18.000%.[39] Nonetheless, the Bureau of
Treasury accepted the auction results.[40] The cut-off was at 12.75%.[41] ....

After the auction, RCBC which participated on behalf of CODE-NGO was declared as the However, at the time of the issuance of the PEACe Bonds in 2001, the BTr was not able to
winning bidder having tendered the lowest bids.[42] Accordingly, on October 18, 2001, the collect the final tax on the discount/interest income realized by RCBC as a result of the 2001
Bureau of Treasury issued P35 billion worth of Bonds at yield-to-maturity of 12.75% to Rulings. Subsequently, the issuance of BIR Ruling No. 007-04 dated July 16, 2004
RCBC for approximately P10.17 billion,[43] resulting in a discount of approximately P24.83 effectively modifies and supersedes the 2001 Rulings by stating that the [1997] Tax Code is

22
clear that the "term public means borrowing from twenty (20) or more individual or corporate resolution in order that petitioners may place the corresponding funds in escrow pending
lenders at any one time." The word "any" plainly indicates that the period contemplated is resolution of the petition."[66]
the entire term of the bond, and not merely the point of origination or issuance. . . . Thus, by
taking the PEACe bonds out of the ambit of deposits [sic] substitutes and exempting it from On the same day, CODE-NGO filed a motion for leave to intervene (and to admit attached
the 20% Final Tax, an exemption in favour of the PEACe Bonds was created when no such petition-in-intervention with comment on the petition-in-intervention of RCBC and RCBC
exemption is found in the law.[55] Capital).[67] The motion was granted by this court on November 22, 2011. [68]

On December 1, 2011, public respondents filed their compliance. [69] They explained that: 1)
On October 11, 2011, a "Memo for Trading Participants No. 58-2011 was issued by the "the implementation of [BIR Ruling No. 370-2011], which has already been performed on
Philippine Dealing System Holdings Corporation and Subsidiaries ("PDS Group"). The October 18, 2011 with the withholding of the 20% final withholding tax on the face value of
Memo provides that in view of the pronouncement of the DOF and the BIR on the the PEACe bonds, is already fait accompli . . . when the Resolution and TRO were served to
applicability of the 20% FWT on the Government Bonds, no transfer of the same shall be and received by respondents BTr and National Treasurer [on October 19, 2011]"; [70] and 2)
allowed to be recorded in the Registry of Scripless Securities ("ROSS") from 12 October the withheld amount has ipso facto become public funds and cannot be disbursed or
2011 until the redemption payment date on 18 October 2011. Thus, the bondholders of released to petitioners without congressional appropriation. [71] Respondents further aver
record appearing on the ROSS as of 18 October 2011, which include the Petitioners, shall that "[i]nasmuch as the . . . TRO has already become moot . . . the condition attached to it,
be treated by the BTr as the beneficial owners of such securities for the relevant [tax] i.e., 'that the 20% final withholding tax on interest income therefrom shall be withheld by the
payments to be imposed thereon."[56] banks and placed in escrow . . .' has also been rendered moot[.]"[72]

On October 17, 2011, replying to an urgent query from the Bureau of Treasury, the Bureau On December 6, 2011, this court noted respondents' compliance. [73]
of Internal Revenue issued BIR Ruling No. DA 378-2011[57] clarifying that the final
withholding tax due on the discount or interest earned on the PEACe Bonds should "be On February 22, 2012, respondents filed their consolidated comment [74] on the petitions-in-
imposed and withheld not only on RCBC/CODE NGO but also [on] 'all subsequent holders intervention filed by RCBC and RCBC Capital and CODE-NGO.
of the Bonds.'"[58]
On November 27, 2012, petitioners filed their "Manifestation with Urgent Reiterative Motion
On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or mandamus (To Direct Respondents to Comply with the Temporary Restraining Order)." [75]
(with urgent application for a temporary restraining order and/or writ of preliminary
injunction)[59] before this court. On December 4, 2012, this court: (a) noted petitioners' manifestation with urgent reiterative
motion (to direct respondents to comply with the temporary restraining order); and (b)
On October 18, 2011, this court issued a temporary restraining order (TRO) [60] "enjoining the required respondents to comment thereon.[76]
implementation of BIR Ruling No. 370-2011 against the [PEACe Bonds,] . . . subject to the
condition that the 20% final withholding tax on interest income therefrom shall be withheld Respondents' comment[77] was filed on April 15, 2013, and petitioners filed their reply[78] on
by the petitioner banks and placed in escrow pending resolution of [the] petition." [61] June 5, 2013.

On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court to intervene Issues
and to admit petition-in-intervention[62]dated October 27, 2011, which was granted by this
court on November 15, 2011.[63]
The main issues to be resolved are:
Meanwhile, on November 9, 2011, petitioners filed their "Manifestation with Urgent Ex Parte
Motion to Direct Respondents to Comply with the TRO." [64] They alleged that on the same
I. Whether the PEACe Bonds are "deposit substitutes" and thus subject to 20% final
day that the temporary restraining order was issued, the Bureau of Treasury paid to
withholding tax under the 1997 National Internal Revenue Code. Related to this
petitioners and other bondholders the amounts representing the face value of the Bonds,
question is the interpretation of the phrase "borrowing from twenty (20) or more
net however of the amounts corresponding to the 20% final withholding tax on interest
individual or corporate lenders at any one time" under Section 22(Y) of the 1997
income, and that the Bureau of Treasury refused to release the amounts corresponding to
National Internal Revenue Code, particularly on whether the reckoning of the 20
the 20% final withholding tax.[65]
lenders includes trading of the bonds in the secondary market; and
On November 15, 2011, this court directed respondents to: "(1) SHOW CAUSE why they
failed to comply with the October 18, 2011 resolution; and (2) COMPLY with the Court's

23
II. If the PEACe Bonds are considered "deposit substitutes," whether the government out that under Section 7 of DOF Department Order No. 141-95,[92] the final withholding tax
or the Bureau of Internal Revenue is estopped from imposing and/or collecting the "should have been withheld at the time of their issuance[.]" [93] Also, under Section 203 of
20% final withholding tax from the face value of these Bonds the 1997 National Internal Revenue Code, "internal revenue taxes, such as the final tax,
[should] be assessed within three (3) years after the last day prescribed by law for the filing
a. Will the imposition of the 20% final withholding tax violate the non- of the return."[94]
impairment clause of the Constitution?
Moreover, petitioners contend that the retroactive application of the 2011 BIR Ruling without
b. Will it constitute a deprivation of property without due process of law?
prior notice to them was in violation of their property rights,[95] their constitutional right to due
c. Will it violate Section 245 of the 1997 National Internal Revenue Code on process[96] as well as Section 246 of the 1997 National Internal Revenue Code on non-
non-retroactivity of rulings? retroactivity of rulings.[97] Allegedly, it would also have "an adverse effect of colossal
magnitude on the investors, both local and foreign, the Philippine capital market, and most
Arguments of petitioners, RCBC and RCBC importantly, the country's standing in the international commercial
Capital, and CODE-NGO community."[98] Petitioners explained that "unless enjoined, the government's threatened
refusal to pay the full value of the Government Bonds will negatively impact on the image of
the country in terms of protection for property rights (including financial assets), degree of
Petitioners argue that "[a]s the issuer of the Government Bonds acting through the BTr, the
legal protection for lender's rights, and strength of investor protection."[99] They cited the
Government is obligated . . . to pay the face value amount of PhP35 Billion upon maturity
country's ranking in the World Economic Forum: 75 th in the world in its 2011 2012 Global
without any deduction whatsoever."[79] They add that "the Government cannot impair the
Competitiveness Index, 111th out of 142 countries worldwide and 2nd to the last among
efficacy of the [Bonds] by arbitrarily, oppressively and unreasonably imposing the
ASEAN countries in terms of Strength of Investor Protection, and 105th worldwide and last
withholding of 20% FWT upon the [Bonds] a mere eleven (11) days before maturity and
among ASEAN countries in terms of Property Rights Index and Legal Rights Index. [100] It
after several, consistent categorical declarations that such bonds are exempt from the 20%
would also allegedly "send a reverberating message to the whole world that there is no
FWT, without violating due process"[80] and the constitutional principle on non-impairment of
certainty, predictability, and stability of financial transactions in the capital
contracts.[81] Petitioners aver that at the time they purchased the Bonds, they had the right
markets[.]"[101] "[T]he integrity of Government-issued bonds and notes will be greatly
to expect that they would receive the full face value of the Bonds upon maturity, in view of
shattered and the credit of the Philippine Government will suffer" [102] if the sudden
the 2001 BIR Rulings.[82] "[R]egardless of whether or not the 2001 BIR Rulings are correct,
turnaround of the government will be allowed,[103] and it will reinforce "investors' perception
the fact remains that [they] relied [on] good faith thereon." [83]
that the level of regulatory risk for contracts entered into by the Philippine Government is
high,"[104] thus resulting in higher interest rate for government-issued debt instruments and
At any rate, petitioners insist that the PEACe Bonds are not deposit substitutes as defined
lowered credit rating.[105]
under Section 22(Y) of the 1997 National Internal Revenue Code because there was only
one lender (RCBC) to whom the Bureau of Treasury issued the Bonds. [84] They allege that
Petitioners-intervenors RCBC and RCBC Capital contend that respondent Commissioner of
the 2004, 2005, and 2011 BIR Rulings "erroneously interpreted that the number of investors
Internal Revenue "gravely and seriously abused her discretion in the exercise of her rule-
that participate in the 'secondary market' is the determining factor in reckoning the existence
making power"[106] when she issued the assailed 2011 BIR Ruling which ruled that "all
or non-existence of twenty (20) or more individual or corporate lenders."[85] Furthermore,
treasury bonds are 'deposit substitutes' regardless of the number of lenders, in clear
they contend that the Bureau of Internal Revenue unduly expanded the definition of deposit
disregard of the requirement of twenty (20) or more lenders mandated under the
substitutes under Section 22 of the 1997 National Internal Revenue Code in concluding that
NIRC."[107] They argue that "[b]y her blanket and arbitrary classification of treasury bonds as
"the mere issuance of government debt instruments and securities is deemed as falling
deposit substitutes, respondent CIR not only amended and expanded the NIRC, but
within the coverage of 'deposit substitutes[.]'"[86] Thus, "[t]he 2011 BIR Ruling clearly
effectively imposed a new tax on privately-placed treasury bonds."[108] Petitioners-
amount[ed] to an unauthorized act of administrative legislation[.]" [87]
intervenors RCBC and RCBC Capital further argue that the 2011 BIR Ruling will cause
substantial impairment of their vested rights[109] under the Bonds since the ruling imposes
Petitioners further argue that their income from the Bonds is a "trading gain," which is
new conditions by "subjecting the PEACe Bonds to the twenty percent (20%) final
exempt from income tax.[88] They insist that "[t]hey are not lenders whose income is
withholding tax notwithstanding the fact that the terms and conditions thereof as previously
considered as 'interest income or yield' subject to the 20% FWT under Section 27 (D)(1) of
represented by the Government, through respondents BTr and BIR, expressly state that it is
the [1997 National Internal Revenue Code]"[89] because they "acquired the Government
not subject to final withholding tax upon their maturity."[110] They added that "[t]he
Bonds in the secondary or tertiary market."[90]
exemption from the twenty percent (20%) final withholding tax [was] the primary inducement
and principal consideration for [their] participat[ion] in the auction and underwriting of the
Even assuming without admitting that the Government Bonds are deposit substitutes,
PEACe Bonds."[111]
petitioners argue that the collection of the final tax was barred by prescription. [91] They point

24
Like petitioners, petitioners-intervenors RCBC and RCBC Capital also contend that Respondents further take issue on the timeliness of the filing of the petition and petitions-in-
respondent Commissioner of Internal Revenue violated their rights to due process when she intervention.[124] They argue that under the guise of mainly assailing the 2011 BIR Ruling,
arbitrarily issued the 2011 BIR Ruling without prior notice and hearing, and the oppressive petitioners are indirectly attacking the 2004 and 2005 BIR Rulings, of which the attack is
timing of such ruling deprived them of the opportunity to challenge the same. [112] legally prohibited, and the petition insofar as it seeks to nullify the 2004 and 2005 BIR
Rulings was filed way out of time pursuant to Rule 65, Section 4. [125]
Assuming the 20% final withholding tax was due on the PEACe Bonds, petitioners-
intervenors RCBC and RCBC Capital claim that respondents Bureau of Treasury and Respondents contend that the discount/interest income derived from the PEACe Bonds is
CODE-NGO should be held liable "as [these] parties explicitly represented . . . that the said not a trading gain but interest income subject to income tax. [126] They explain that "[w]ith the
bonds are exempt from the final withholding tax."[113] payment of the PhP35 Billion proceeds on maturity of the PEACe Bonds, Petitioners receive
an amount of money equivalent to about PhP24.8 Billion as payment for interest. Such
Finally, petitioners-intervenors RCBC and RCBC Capital argue that "the implementation of interest is clearly an income of the Petitioners considering that the same is a flow of wealth
the [2011 assailed BIR Ruling and BIR Ruling No. DA 378-2011] will have pernicious effects and not merely a return of capital the capital initially invested in the Bonds being
on the integrity of existing securities, which is contrary to the State policies of stabilizing the approximately PhP10.2 Billion[.]"[127]
financial system and of developing capital markets."[114]
Maintaining that the imposition of the 20% final withholding tax on the PEACe Bonds does
For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and BIR Ruling No. DA 378- not constitute an impairment of the obligations of contract, respondents aver that: "The BTr
2011 are "invalid because they contravene Section 22(Y) of the 1997 [NIRC] when the said has no power to contractually grant a tax exemption in favour of Petitioners thus the 2001
rulings disregarded the applicability of the '20 or more lender' rule to government debt BIR Rulings cannot be considered a material term of the Bonds"[;] [128] "[t]here has been no
instruments"[;][115] (b) "when [it] sold the PEACe Bonds in the secondary market instead of change in the laws governing the taxability of interest income from deposit substitutes and
holding them until maturity, [it] derived . . . long-term trading gain[s], not interest income, said laws are read into every contract"[;][129] "[t]he assailed BIR Rulings merely interpret the
which [are] exempt . . . under Section 32(B)(7)(g) of the 1997 NIRC"[;] [116] (c) "the tax term "deposit substitute" in accordance with the letter and spirit of the Tax Code"[;] [130] "[t]he
exemption privilege relating to the issuance of the PEACe Bonds . . . partakes of a withholding of the 20% FWT does not result in a default by the Government as the latter
contractual commitment granted by the Government in exchange for a valid and material performed its obligations to the bondholders in full"[;] [131] and "[i]f there was a breach of
consideration [i.e., the issue price paid and savings in borrowing cost derived by the contract or a misrepresentation it was between RCBC/CODE-NGO/RCBC Cap and the
Government,] thus protected by the non-impairment clause of the 1987 succeeding purchasers of the PEACe Bonds."[132]
Constitution"[;][117] and (d) the 2004, 2005, and 2011 BIR Rulings "did not validly revoke the
2001 BIR Rulings since no notice of revocation was issued to [it], RCBC and [RCBC Capital] Similarly, respondents counter that the withholding of "[t]he 20% final withholding tax on the
and petitioners[-bondholders], nor was there any BIR administrative guidance issued and PEACe Bonds does not amount to a deprivation of property without due process of
published[.]"[118] CODE-NGO additionally argues that impleading it in a Rule 65 petition was law."[133] Their imposition of the 20% final withholding tax is not arbitrary because they were
improper because: (a) it involves determination of a factual question; [119] and (b) it is only performing a duty imposed by law;[134] "[t]he 2011 BIR Ruling is an interpretative rule
premature and states no cause of action as it amounts to an anticipatory third-party which merely interprets the meaning of deposit substitutes [and upheld] the earlier
claim.[120] construction given to the term by the 2004 and 2005 BIR Rulings." [135] Hence, respondents
argue that "there was no need to observe the requirements of notice, hearing, and
Arguments of respondents publication[.]"[136]

Nonetheless, respondents add that "there is every reason to believe that Petitioners all
major financial institutions equipped with both internal and external accounting and
Respondents argue that petitioners' direct resort to this court to challenge the 2011 BIR
compliance departments as well as access to both internal and external legal counsel;
Ruling violates the doctrines of exhaustion of administrative remedies and hierarchy of
actively involved in industry organizations such as the Bankers Association of the
courts, resulting in a lack of cause of action that justifies the dismissal of the
Philippines and the Capital Market Development Council; all actively taking part in the
petition.[121] According to them, "the jurisdiction to review the rulings of the [Commissioner
regular and special debt issuances of the BTr and indeed regularly proposing products for
of Internal Revenue], after the aggrieved party exhausted the administrative remedies,
issue by BTr had actual notice of the 2004 and 2005 BIR Rulings." [137] Allegedly, "the
pertains to the Court of Tax Appeals."[122] They point out that "a case similar to the present
sudden and drastic drop including virtually zero trading for extended periods of six months
Petition was [in fact] filed with the CTA on October 13, 2011[,] [docketed as] CTA Case No.
to almost a year in the trading volume of the PEACe Bonds after the release of BIR Ruling
8351 [and] entitled, 'Rizal Commercial Banking Corporation and RCBC Capital Corporation
No. 007-04 on July 16, 2004 tend to indicate that market participants, including the
vs. Commissioner of Internal Revenue, et al.'"[123]

25
Petitioners herein, were aware of the ruling and its consequences for the PEACe
Bonds."[138] In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC Capital, and CODE-
NGO argue that:
Moreover, they contend that the assailed 2011 BIR Ruling is a valid exercise of the
Commissioner of Internal Revenue's rule-making power;[139] that it and the 2004 and 2005 1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997 National
BIR Rulings did not unduly expand the definition of deposit substitutes by creating an Internal Revenue Code when it declared that all government debt instruments are
unwarranted exception to the requirement of having 20 or more lenders/purchasers; [140] and deposit substitutes regardless of the 20-lender rule; and
the word "any" in Section 22(Y) of the National Internal Revenue Code plainly indicates that
2. The 2011 BIR Ruling cannot be applied retroactively because:
the period contemplated is the entire term of the bond and not merely the point of origination
or issuance.[141]
a) It will violate the contract clause;
Respondents further argue that a retroactive application of the 2011 BIR Ruling will not o It constitutes a unilateral amendment of a material term (tax exempt
unjustifiably prejudice petitioners.[142] "[W]ith or without the 2011 BIR Ruling, Petitioners status) in the Bonds, represented by the government as an inducement
would be liable to pay a 20% final withholding tax just the same because the PEACe Bonds and important consideration for the purchase of the Bonds;
in their possession are legally in the nature of deposit substitutes subject to a 20% final
withholding tax under the NIRC."[143] Section 7 of DOF Department Order No. 141-95 also
provides that income derived from Treasury bonds is subject to the 20% final withholding b) It constitutes deprivation of property without due process because there was no prior
tax.[144] "[W]hile revenue regulations as a general rule have no retroactive effect, if the notice to bondholders and hearing and publication;
revocation is due to the fact that the regulation is erroneous or contrary to law, such
revocation shall have retroactive operation as to affect past transactions, because a wrong c) It violates the rule on non-retroactivity under the 1997 National Internal Revenue Code;
construction of the law cannot give rise to a vested right that can be invoked by a
taxpayer."[145] d) It violates the constitutional provision on supporting activities of non-government
organizations and development of the capital market; and
Finally, respondents submit that "there are a number of variables and factors affecting a
capital market."[146] "[C]apital market itself is inherently unstable."[147] Thus, "[p]etitioners' e) The assessment had already prescribed.
argument that the 20% final withholding tax . . . will wreak havoc on the financial stability of
the country is a mere supposition that is not a justiciable issue." [148]
Respondents counter that:
On the prayer for the temporary restraining order, respondents argue that this order "could
1) Respondent Commissioner of Internal Revenue did not act with grave abuse of discretion
no longer be implemented [because] the acts sought to be enjoined are already fait
in issuing the challenged 2011 BIR Ruling:
accompli."[149] They add that "to disburse the funds withheld to the Petitioners at this time
would violate Section 29[,] Article VI of the Constitution prohibiting 'money being paid out of
the Treasury except in pursuance of an appropriation made by law[.]'"[150] "The remedy of
petitioners is to claim a tax refund under Section 204(c) of the Tax Code should their a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue of the
position be upheld by the Honorable Court."[151] Commissioner of Internal Revenue's power to interpret the provisions of the 1997
National Internal Revenue Code and other tax laws;
Respondents also argue that "the implementation of the TRO would violate Section 218 of
the Tax Code in relation to Section 11 of Republic Act No. 1125 (as amended by Section 9
of Republic Act No. 9282) which prohibits courts, except the Court of Tax Appeals, from b. Commissioner of Internal Revenue merely restates and confirms the interpretations
issuing injunctions to restrain the collection of any national internal revenue tax imposed by contained in previously issued BIR Ruling Nos. 007-2004, DA-491-04, and 008-05,
the Tax Code."[152] which have already effectively abandoned or revoked the 2001 BIR Rulings;

Summary of arguments c. Commissioner of Internal Revenue is not bound by his or her predecessor's rulings
especially when the latter's rulings are not in harmony with the law; and

26
d. The wrong construction of the law that the 2001 BIR Rulings have perpetrated implied and assumed approval of the latter, (7) when to require exhaustion of administrative
cannot give rise to a vested right. Therefore, the 2011 BIR Ruling can be given remedies would be unreasonable, (8) when it would amount to a nullification of a claim, (9)
retroactive effect. when the subject matter is a private land in land case proceedings, (10) when the rule does
not provide a plain, speedy and adequate remedy, (11) when there are circumstances
indicating the urgency of judicial intervention. [156] (Emphasis supplied, citations omitted)
2) Rule 65 can be resorted to only if there is no appeal or any plain, speedy, and adequate
remedy in the ordinary course of law:
The exceptions under (2) and (11) are present in this case. The question involved is purely
legal, namely: (a) the interpretation of the 20-lender rule in the definition of the
a. Petitioners had the basic remedy of filing a claim for refund of the 20% final terms public and deposit substitutes under the 1997 National Internal Revenue Code; and
withholding tax they allege to have been wrongfully collected; and (b) whether the imposition of the 20% final withholding tax on the PEACe Bonds upon
maturity violates the constitutional provisions on non-impairment of contracts and due
b. Non-observance of the doctrine of exhaustion of administrative remedies and of
process. Judicial intervention is likewise urgent with the impending maturity of the PEACe
hierarchy of courts.
Bonds on October 18, 2011.

Court's ruling The rule on exhaustion of administrative remedies also finds no application when the
exhaustion will result in an exercise in futility.[157]
Procedural Issues
In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR Ruling
would be a futile exercise because it was upon the request of the Secretary of Finance that
Non-exhaustion of administrative the 2011 BIR Ruling was issued by the Bureau of Internal Revenue. It appears that the
remedies proper Secretary of Finance adopted the Commissioner of Internal Revenue's opinions as his
own.[158] This position was in fact confirmed in the letter[159] dated October 10, 2011 where
Under Section 4 of the 1997 National Internal Revenue Code, interpretative rulings are he ordered the Bureau of Treasury to withhold the amount corresponding to the 20% final
reviewable by the Secretary of Finance. withholding tax on the interest or discounts allegedly due from the bondholders on the
strength of the 2011 BIR Ruling.
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. -
- The power to interpret the provisions of this Code and other tax laws shall be under the Doctrine on hierarchy of courts
exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of
Finance. (Emphasis supplied) We agree with respondents that the jurisdiction to review the rulings of the Commissioner of
Internal Revenue pertains to the Court of Tax Appeals. The questioned BIR Ruling Nos.
370-2011 and DA 378-2011 were issued in connection with the implementation of the 1997
Thus, it was held that "[i]f superior administrative officers [can] grant the relief prayed for,
National Internal Revenue Code on the taxability of the interest income from zero-coupon
[then] special civil actions are generally not entertained." [153] The remedy within the
bonds issued by the government.
administrative machinery must be resorted to first and pursued to its appropriate conclusion
before the court's judicial power can be sought.[154]
Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as amended by
Republic Act No. 9282,[160] such rulings of the Commissioner of Internal Revenue are
Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of
appealable to that court, thus:
administrative remedies:
SEC. 7. Jurisdiction. - The CTA shall exercise:
[The doctrine of exhaustion of administrative remedies] is a relative one and its flexibility is
called upon by the peculiarity and uniqueness of the factual and circumstantial settings of a a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
case. Hence, it is disregarded (1) when there is a violation of due process, (2) when the
issue involved is purely a legal question,[155] (3) when the administrative action is patently 1. Decisions of the Commissioner of Internal Revenue in cases involving disputed
illegal amounting to lack or excess of jurisdiction,(4) when there is estoppel on the part of assessments, refunds of internal revenue taxes, fees or other charges, penalties in
the administrative agency concerned,(5) when there is irreparable injury, (6) when the relation thereto, or other matters arising under the National Internal Revenue or
respondent is a department secretary whose acts as an alter ego of the President bears the other laws administered by the Bureau of Internal Revenue;

27
....
The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely
affected by a decision, ruling or inaction of the Commissioner of Internal Revenue, the "Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal
Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry or Revenue, but merely an attempt to nullify General Circular No. V-148, which does not
the Secretary of Agriculture or the Central Board of Assessment Appeals or the Regional adjudicate or settle any controversy, and that, accordingly, this case is not within the
Trial Courts may file an appeal with the CTA within thirty (30) days after the receipt of such jurisdiction of the Court of Tax Appeals.
decision or ruling or after the expiration of the period fixed by law for action as referred to in
Section 7(a)(2) herein. We find no merit in this pretense. General Circular No. V-148 directs the officers charged
.... with the collection of taxes and license fees to adhere strictly to the interpretation given by
the defendant to the statutory provisions abovementioned, as set forth in the Circular. The
SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving same incorporates, therefore, a decision of the Collector of Internal Revenue (now
matters arising under the National Internal Revenue Code, the Tariff and Customs Code or Commissioner of Internal Revenue) on the manner of enforcement of the said statute, the
the Local Government Code shall be maintained, except as herein provided, until and administration of which is entrusted by law to the Bureau of Internal Revenue. As such, it
unless an appeal has been previously filed with the CTA and disposed of in accordance with comes within the purview of Republic Act No. 1125, Section 7 of which provides that the
the provisions of this Act. Court of Tax Appeals 'shall exercise exclusive appellate jurisdiction to review by appeal . . .
decisions of the Collector of Internal Revenue in . . . matters arising under the National
Internal Revenue Code or other law or part of the law administered by the Bureau of Internal
In Commissioner of Internal Revenue v. Leal,[161] citing Rodriguez v. Blaquera,[162] this court Revenue.'"[163]
emphasized the jurisdiction of the Court of Tax Appeals over rulings of the Bureau of
Internal Revenue, thus:
In exceptional cases, however, this court entertained direct recourse to it when "dictated by
public welfare and the advancement of public policy, or demanded by the broader interest of
While the Court of Appeals correctly took cognizance of the petition for certiorari, justice, or the orders complained of were found to be patent nullities, or the appeal was
however, let it be stressed that the jurisdiction to review the rulings of the Commissioner of considered as clearly an inappropriate remedy."[164]
Internal Revenue pertains to the Court of Tax Appeals, not to the RTC.
In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary,
The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the Department of Interior and Local Government,[165] this court noted that the petition for
Commissioner implementing the Tax Code on the taxability of pawnshops. . . . prohibition was filed directly before it "in disregard of the rule on hierarchy of
.... courts. However, [this court] opt[ed] to take primary jurisdiction over the . . . petition and
decide the same on its merits in view of the significant constitutional issues raised by the
Such revenue orders were issued pursuant to petitioner's powers under Section 245 of the parties dealing with the tax treatment of cooperatives under existing laws and in the interest
Tax Code, which states: of speedy justice and prompt disposition of the matter." [166]

"SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. The Here, the nature and importance of the issues raised [167] to the investment and banking
Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all industry with regard to a definitive declaration of whether government debt instruments are
needful rules and regulations for the effective enforcement of the provisions of this Code. deposit substitutes under existing laws, and the novelty thereof, constitute exceptional and
compelling circumstances to justify resort to this court in the first instance.
The authority of the Secretary of Finance to determine articles similar or analogous to those
subject to a rate of sales tax under certain category enumerated in Section 163 and 165 of The tax provision on deposit substitutes affects not only the PEACe Bonds but also any
this Code shall be without prejudice to the power of the Commissioner of Internal Revenue other financial instrument or product that may be issued and traded in the market. Due to
to make rulings or opinions in connection with the implementation of the provisions of the changing positions of the Bureau of Internal Revenue on this issue, there is a need for a
internal revenue laws, including ruling on the classification of articles of sales and similar final ruling from this court to stabilize the expectations in the financial market.
purposes." (Emphasis in the original)
Finally, non-compliance with the rules on exhaustion of administrative remedies and
.... hierarchy of courts had been rendered moot by this court's issuance of the temporary
restraining order enjoining the implementation of the 2011 BIR Ruling. The temporary

28
restraining order effectively recognized the urgency and necessity of direct resort to this domestic corporation from a depository bank under the expanded foreign currency deposit
court. system shall be subject to a final income tax at the rate of seven and one-half percent (7
1/2%) of such interest income. (Emphasis supplied)
Substantive issues

SEC. 28. Rates of Income Tax on Foreign Corporations. -


Tax treatment of deposit substitutes
(A) Tax on Resident Foreign Corporations. -
Under Sections 24(B)(1), 27(D)(1), and 28(A)(7) of the 1997 National Internal Revenue
Code, a final withholding tax at the rate of 20% is imposed on interest on any currency bank ....
deposit and yield or any other monetary benefit from deposit substitutes and from trust
funds and similar arrangements. These provisions read: (7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -

SEC. 24. Income Tax Rates.


.... (a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes,
Trust Funds and Similar Arrangements and Royalties. - Interest from any currency bank
(B) Rate of Tax on Certain Passive Income. deposit and yield or any other monetary benefit from deposit substitutes and from trust
funds and similar arrangements and royalties derived from sources within the Philippines
shall be subject to a final income tax at the rate of twenty percent (20%) of such
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty interest: Provided, however, That interest income derived by a resident foreign corporation
percent (20%) is hereby imposed upon the amount of interest from any currency bank from a depository bank under the expanded foreign currency deposit system shall be
deposit and yield or any other monetary benefit from deposit substitutes and from trust subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such
funds and similar arrangements; . . . Provided, further, That interest income from long-term interest income. (Emphasis supplied)
deposit or investment in the form of savings, common or individual trust funds, deposit
substitutes, investment management accounts and other investments evidenced by
certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be This tax treatment of interest from bank deposits and yield from deposit substitutes was first
exempt from the tax imposed under this Subsection: Provided, finally, That should the introduced in the 1977 National Internal Revenue Code through Presidential Decree No.
holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a 1739[168] issued in 1980. Later, Presidential Decree No. 1959, effective on October 15,
final tax shall be imposed on the entire income and shall be deducted and withheld by the 1984, formally added the definition of deposit substitutes, viz:
depository bank from the proceeds of the long-term deposit or investment certificate based
on the remaining maturity thereof: (y) 'Deposit substitutes' shall mean an alternative form of obtaining funds from the public,
other than deposits, through the issuance, endorsement, or acceptance of debt instruments
Four (4) years to less than five (5) years - 5%; for the borrower's own account, for the purpose of relending or purchasing of receivables
Three (3) years to less than four (4) years - 12%; and and other obligations, or financing their own needs or the needs of their agent or dealer.
Less than three (3) years - 20%. (Emphasis supplied) These promissory notes, repurchase agreements, certificates of assignment or participation
and similar instrument with recourse as may be authorized by the Central Bank of the
SEC. 27. Rates of Income Tax on Domestic Corporations. - Philippines, for banks and non-bank financial intermediaries or by the Securities and
.... Exchange Commission of the Philippines for commercial, industrial, finance companies and
either non-financial companies: Provided, however, that only debt instruments issued for
(D) Rates of Tax on Certain Passive Incomes. - inter-bank call loans to cover deficiency in reserves against deposit liabilities including those
between or among banks and quasi-banks shall not be considered as deposit substitute
debt instruments. (Emphasis supplied)
(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes
and from Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of
twenty percent (20%) is hereby imposed upon the amount of interest on currency bank Revenue Regulations No. 17-84, issued to implement Presidential Decree No. 1959,
deposit and yield or any other monetary benefit from deposit substitutes and from trust adopted verbatim the same definition and specifically identified the following borrowings as
funds and similar arrangements received by domestic corporations, and royalties, derived "deposit substitutes":
from sources within the Philippines: Provided, however, That interest income derived by a

29
SECTION 2. Definitions of Terms. . . .
20-lender rule
(h) "Deposit substitutes" shall mean
Petitioners contend that "there [is] only one (1) lender (i.e. RCBC) to whom the BTr issued
.... the Government Bonds."[169] On the other hand, respondents theorize that the word "any"
"indicates that the period contemplated is the entire term of the bond and not merely the
(a) All interbank borrowings by or among banks and non-bank financial institutions point of origination or issuance[,]"[170] such that if the debt instruments "were subsequently
authorized to engage in quasi-banking functions evidenced by deposit substitutes sold in secondary markets and so on, in such a way that twenty (20) or more buyers
instruments, except interbank call loans to cover deficiency in reserves against deposit eventually own the instruments, then it becomes indubitable that funds would be obtained
liabilities as evidenced by interbank loan advice or repayment transfer tickets. from the "public" as defined in Section 22(Y) of the NIRC."[171] Indeed, in the context of the
financial market, the words "at any one time" create an ambiguity.
(b) All borrowings of the national and local government and its instrumentalities including the
Central Bank of the Philippines, evidenced by debt instruments denoted as treasury bonds, Financial markets
bills, notes, certificates of indebtedness and similar instruments.
Financial markets provide the channel through which funds from the surplus units
(c) All borrowings of banks, non-bank financial intermediaries, finance companies, (households and business firms that have savings or excess funds) flow to the deficit units
investment companies, trust companies, including the trust department of banks and (mainly business firms and government that need funds to finance their operations or
investment houses, evidenced by deposit substitutes instruments. (Emphasis supplied) growth). They bring suppliers and users of funds together and provide the means by which
the lenders transform their funds into financial assets, and the borrowers receive these
funds now considered as their financial liabilities. The transfer of funds is represented by a
The definition of deposit substitutes was amended under the 1997 National Internal security, such as stocks and bonds. Fund suppliers earn a return on their investment; the
Revenue Code with the addition of the qualifying phrase for public borrowing from 20 or return is necessary to ensure that funds are supplied to the financial markets. [172]
more individual or corporate lenders at any one time. Under Section 22(Y), deposit
substitute is defined thus: "The financial markets that facilitate the transfer of debt securities are commonly classified
by the maturity of the securities[,]"[173]namely: (1) the money market, which facilitates the
SEC. 22. Definitions - When used in this Title:
flow of short-term funds (with maturities of one year or less); and (2) the capital market,
....
which facilitates the flow of long-term funds (with maturities of more than one year).[174]
(Y) The term 'deposit substitutes' shall mean an alternative form of obtaining funds from
Whether referring to money market securities or capital market securities, transactions
the public (the term 'public' means borrowing from twenty (20) or more individual or
occur either in the primary market or in the secondary market.[175] "Primary
corporate lenders at any one time) other than deposits, through the issuance,
markets facilitate the issuance of new securities. Secondary markets facilitate the trading
endorsement, or acceptance of debt instruments for the borrower's own account, for the
of existing securities, which allows for a change in the ownership of the securities." [176] The
purpose of relending or purchasing of receivables and other obligations, or financing their
transactions in primary markets exist between issuers and investors, while secondary
own needs or the needs of their agent or dealer. These instruments may include, but need
market transactions exist among investors.[177]
not be limited to, bankers' acceptances, promissory notes, repurchase agreements,
including reverse repurchase agreements entered into by and between the Bangko Sentral
"Over time, the system of financial markets has evolved from simple to more complex ways
ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or participation
of carrying out financial transactions."[178] Still, all systems perform one basic function: the
and similar instruments with recourse: Provided, however, That debt instruments issued for
quick mobilization of money from the lenders/investors to the borrowers.[179]
interbank call loans with maturity of not more than five (5) days to cover deficiency in
reserves against deposit liabilities, including those between or among banks and quasi-
Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect finance;
banks, shall not be considered as deposit substitute debt instruments. (Emphasis supplied)
and (3) indirect finance.[180]

Under the 1997 National Internal Revenue Code, Congress specifically defined "public" to With direct financing, the "borrower and lender meet each other and exchange funds in
mean "twenty (20) or more individual or corporate lenders at any one time." Hence, the return for financial assets"[181] (e.g., purchasing bonds directly from the company issuing
number of lenders is determinative of whether a debt instrument should be considered a them). This method provides certain limitations such as: (a) "both borrower and lender must
deposit substitute and consequently subject to the 20% final withholding tax. desire to exchange the same amount of funds at the same time"[;] [182] and (b) "both lender

30
and borrower must frequently incur substantial information costs simply to find each 3. Subsequent sale or trading by a bondholder to another lender/investor in the
other."[183] secondary market usually through a broker or dealer; or

In semidirect financing, a securities broker or dealer brings surplus and deficit units 4. Sale by a financial intermediary-bondholder of its participation interests in the
together, thereby reducing information costs.[184] A broker[185] is "an individual or financial bonds to individual or corporate lenders in the secondary market.
institution who provides information concerning possible purchases and sales of
securities. Either a buyer or a seller of securities may contact a broker, whose job is simply
When, through any of the foregoing transactions, funds are simultaneously obtained from 20
to bring buyers and sellers together."[186] A dealer[187] "also serves as a middleman
or more lenders/investors, there is deemed to be a public borrowing and the bonds at that
between buyers and sellers, but the dealer actually acquires the seller's securities in the
point in time are deemed deposit substitutes. Consequently, the seller is required to
hope of selling them at a later time at a more favorable price." [188] Frequently, "a dealer will
withhold the 20% final withholding tax on the imputed interest income from the bonds.
split up a large issue of primary securities into smaller units affordable by . . . buyers . . . and
thereby expand the flow of savings into investment." [189] In semidirect financing, "[t]he
For debt instruments that are
ultimate lender still winds up holding the borrower's securities, and therefore the lender must
not deposit substitutes, regular
be willing to accept the risk, liquidity, and maturity characteristics of the borrower's [debt
income tax applies
security]. There still must be a fundamental coincidence of wants and needs between
[lenders and borrowers] for semidirect financial transactions to take place." [190]
It must be emphasized, however, that debt instruments that do not qualify as deposit
substitutes under the 1997 National Internal Revenue Code are subject to the regular
"The limitations of both direct and semidirect finance stimulated the development of indirect
income tax.
financial transactions, carried out with the help of financial intermediaries" [191] or financial
institutions, like banks, investment banks, finance companies, insurance companies, and
The phrase "all income derived from whatever source" in Chapter VI, Computation of Gross
mutual funds.[192] Financial intermediaries accept funds from surplus units and channel the
Income, Section 32(A) of the 1997 National Internal Revenue Code discloses a legislative
funds to deficit units.[193] "Depository institutions [such as banks] accept deposits from
policy to include all income not expressly exempted as within the class of taxable income
surplus units and provide credit to deficit units through loans and purchase of [debt]
under our laws.
securities."[194] Nondepository institutions, like mutual funds, issue securities of their own
(usually in smaller and affordable denominations) to surplus units and at the same time
"The definition of gross income is broad enough to include all passive incomes subject to
purchase debt securities of deficit units.[195] "By pooling the resources of [small savers, a
specific tax rates or final taxes."[197] Hence, interest income from deposit substitutes are
financial intermediary] can service the credit needs of large firms simultaneously." [196]
necessarily part of taxable income. "However, since these passive incomes are already
subject to different rates and taxed finally at source, they are no longer included in the
The financial market, therefore, is an agglomeration of financial transactions in securities
computation of gross income, which determines taxable income." [198] "Stated otherwise . . .
performed by market participants that works to transfer the funds from the surplus units (or
if there were no withholding tax system in place in this country, this 20 percent portion of the
investors/lenders) to those who need them (deficit units or borrowers).
'passive' income of [creditors/lenders] would actually be paid to the [creditors/lenders] and
then remitted by them to the government in payment of their income tax." [199]
Meaning of "at any one time"
This court, in Chamber of Real Estate and Builders' Associations, Inc. v.
Thus, from the point of view of the financial market, the phrase "at any one time" for
Romulo,[200] explained the rationale behind the withholding tax system:
purposes of determining the "20 or more lenders" would mean every transaction executed in
the primary or secondary market in connection with the purchase or sale of securities. The withholding [of tax at source] was devised for three primary reasons: first, to provide the
taxpayer a convenient manner to meet his probable income tax liability; second, to ensure
For example, where the financial assets involved are government securities like bonds, the the collection of income tax which can otherwise be lost or substantially reduced through
reckoning of "20 or more lenders/investors" is made at any transaction in connection with failure to file the corresponding returns[;] and third, to improve the government's cash flow.
the purchase or sale of the Government Bonds, such as: This results in administrative savings, prompt and efficient collection of taxes, prevention of
delinquencies and reduction of governmental effort to collect taxes through more
1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the primary market;
complicated means and remedies.[201] (Citations omitted)
2. Sale and distribution by GSEDs to various lenders/investors in the secondary
market;
"The application of the withholdings system to interest on bank deposits or yield from
deposit substitutes is essentially to maximize and expedite the collection of income taxes by

31
requiring its payment at the source."[202]
Tax statutes must be reasonably construed as to give effect to the whole act. Their
Hence, when there are 20 or more lenders/investors in a transaction for a specific bond constituent provisions must be read together, endeavoring to make every part effective,
issue, the seller is required to withhold the 20% final income tax on the imputed interest harmonious, and sensible.[209] That construction which will leave every word operative will
income from the bonds. be favored over one that leaves some word, clause, or sentence meaningless and
insignificant.[210]
Interest income v. gains from sale or redemption
It may be granted that the interpretation of the Commissioner of Internal Revenue in charge
The interest income earned from bonds is not synonymous with the "gains" contemplated of executing the 1997 National Internal Revenue Code is an authoritative construction of
under Section 32(B)(7)(g)[203] of the 1997 National Internal Revenue Code, which exempts great weight, but the principle is not absolute and may be overcome by strong reasons to
gains derived from trading, redemption, or retirement of long-term securities from ordinary the contrary. If through a misapprehension of law an officer has issued an erroneous
income tax. interpretation, the error must be corrected when the true construction is ascertained.

The term "gain" as used in Section 32(B)(7)(g) does not include interest, which represents In Philippine Bank of Communications v. Commissioner of Internal Revenue,[211] this court
forbearance for the use of money. Gains from sale or exchange or retirement of bonds or upheld the nullification of Revenue Memorandum Circular (RMC) No. 7-85 issued by the
other certificate of indebtedness fall within the general category of "gains derived from Acting Commissioner of Internal Revenue because it was contrary to the express provision
dealings in property" under Section 32(A)(3), while interest from bonds or other certificate of of Section 230 of the 1977 National Internal Revenue Code and, hence, "[cannot] be given
indebtedness falls within the category of "interests" under Section 32(A)(4). [204] The use of weight for to do so would, in effect, amend the statute." [212] Thus:
the term "gains from sale" in Section 32(B)(7)(g) shows the intent of Congress not to include
interest as referred under Sections 24, 25, 27, and 28 in the exemption.[205]

Hence, the "gains" contemplated in Section 32(B)(7)(g) refers to: (1) gain realized from the When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the
trading of the bonds before their maturity date, which is the difference between the selling prescriptive period of two years to ten years on claims of excess quarterly income tax
price of the bonds in the secondary market and the price at which the bonds were payments, such circular created a clear inconsistency with the provision of Sec. 230 of 1977
purchased by the seller; and (2) gain realized by the last holder of the bonds when the NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines
bonds are redeemed at maturity, which is the difference between the proceeds from the contrary to the statute passed by Congress.
retirement of the bonds and the price at which such last holder acquired the bonds. For
discounted instruments, like the zero-coupon bonds, the trading gain shall be the excess of It bears repeating that Revenue memorandum-circulars are considered administrative
the selling price over the book value or accreted value (original issue price plus rulings (in the sense of more specific and less general interpretations of tax laws) which are
accumulated discount from the time of purchase up to the time of sale) of the issued from time to time by the Commissioner of Internal Revenue. It is widely accepted
instruments.[206] that the interpretation placed upon a statute by the executive officers, whose duty is to
enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is not
The Bureau of Internal conclusive and will be ignored if judicially found to be erroneous. Thus, courts will not
Revenue rulings countenance administrative issuances that override, instead of remaining consistent and in
harmony with, the law they seek to apply and implement. [213] (Citations omitted)
The Bureau of Internal Revenue's interpretation as expressed in the three 2001 BIR Rulings
is not consistent with law.[207] Its interpretation of "at any one time" to mean at the point of
This court further held that "[a] memorandum-circular of a bureau head could not operate to
origination alone is unduly restrictive.
vest a taxpayer with a shield against judicial action [because] there are no vested rights to
speak of respecting a wrong construction of the law by the administrative officials and such
BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on the 2004 and
wrong interpretation could not place the Government in estoppel to correct or overrule the
2005 BIR Rulings) that "all treasury bonds . . . regardless of the number of
same."[214]
purchasers/lenders at the time of origination/issuance are considered deposit
substitutes."[208] Being the subject of this petition, it is, thus, declared void because it
In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc., [215] this court
completely disregarded the 20 or more lender rule added by Congress in the 1997 National
nullified Revenue Memorandum Order (RMO) No. 15-91 and RMC No. 43-91, which
Internal Revenue Code. It also created a distinction for government debt instruments as
imposed a 5% lending investor's tax on pawnshops.[216] It was held that "the
against those issued by private corporations when there was none in the law.
[Commissioner] cannot, in the exercise of [its interpretative] power, issue administrative

32
rulings or circulars not consistent with the law sought to be applied. Indeed, administrative CODE-NGO/RCBC. In reality, therefore, the entire P10.2 billion borrowing received by the
issuances must not override, supplant or modify the law, but must remain consistent with Bureau of Treasury in exchange for the P35 billion worth of PEACe Bonds was sourced
the law they intend to carry out. Only Congress can repeal or amend the law."[217] directly from the undisclosed number of investors to whom RCBC Capital/CODE-NGO
distributed the PEACe Bonds all at the time of origination or issuance. At this point,
In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance however, we do not know as to how many investors the PEACe Bonds were sold to by
Secretary,[218] this court stated that the Commissioner of Internal Revenue is not bound by RCBC Capital.
the ruling of his predecessors,[219] but, to the contrary, the overruling of decisions is inherent
in the interpretation of laws: Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACe
Bonds are deemed deposit substitutes within the meaning of Section 22(Y) of the 1997
[I]n considering a legislative rule a court is free to make three inquiries: (i) whether the rule National Internal Revenue Code and RCBC Capital/CODE-NGO would have been obliged
is within the delegated authority of the administrative agency; (ii) whether it is reasonable; to pay the 20% final withholding tax on the interest or discount from the PEACe
and (iii) whether it was issued pursuant to proper procedure. But the court is not free to Bonds. Further, the obligation to withhold the 20% final tax on the corresponding interest
substitute its judgment as to the desirability or wisdom of the rule for the legislative body, by from the PEACe Bonds would likewise be required of any lender/investor had the latter
its delegation of administrative judgment, has committed those questions to administrative turned around and sold said PEACe Bonds, whether in whole or part, simultaneously to 20
judgments and not to judicial judgments. In the case of an interpretative rule, the inquiry is or more lenders or investors.
not into the validity but into the correctness or propriety of the rule. As a matter of power a
court, when confronted with an interpretative rule, is free to (i) give the force of law to the We note, however, that under Section 24[223] of the 1997 National Internal Revenue Code,
rule; (ii) go to the opposite extreme and substitute its judgment; or (iii) give some interest income received by individuals from long-term deposits or investments with a
intermediate degree of authoritative weight to the interpretative rule. holding period of not less than five (5) years is exempt from the final tax.

In the case at bar, we find no reason for holding that respondent Commissioner erred in not Thus, should the PEACe Bonds be found to be within the coverage of deposit substitutes,
considering copra as an "agricultural food product" within the meaning of § 103(b) of the the proper procedure was for the Bureau of Treasury to pay the face value of the PEACe
NIRC. As the Solicitor General contends, "copra per se is not food, that is, it is not intended Bonds to the bondholders and for the Bureau of Internal Revenue to collect the unpaid final
for human consumption. Simply stated, nobody eats copra for food." That previous withholding tax directly from RCBC Capital/CODE-NGO, or any lender or investor if such be
Commissioners considered it so, is not reason for holding that the present interpretation is the case, as the withholding agents.
wrong. The Commissioner of Internal Revenue is not bound by the ruling of his
predecessors. To the contrary, the overruling of decisions is inherent in the interpretation of The collection of tax is not
laws.[220] (Emphasis supplied, citations omitted) barred by prescription

The three (3)-year prescriptive period under Section 203 of the 1997 National Internal
Tax treatment of income derived
Revenue Code to assess and collect internal revenue taxes is extended to 10 years in
from the PEACe Bonds
cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file
a return, to be computed from the time of discovery of the falsity, fraud,
The transactions executed for the sale of the PEACe Bonds are:
or omission. Section 203 states:
1. The issuance of the P35 billion Bonds by the Bureau of Treasury to RCBC/CODE-
SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided
NGO at P10.2 billion; and
in Section 222, internal revenue taxes shall be assessed within three (3) years after the last
2. The sale and distribution by RCBC Capital (underwriter) on behalf of CODE-NGO day prescribed by law for the filing of the return, and no proceeding in court without
of the PEACe Bonds to undisclosed investors at P11.996 billion. assessment for the collection of such taxes shall be begun after the expiration of such
period: Provided, That in a case where a return is filed beyond the period prescribed by law,
the three (3)-year period shall be counted from the day the return was filed. For purposes of
It may seem that there was only one lender RCBC on behalf of CODE-NGO to whom the this Section, a return filed before the last day prescribed by law for the filing thereof shall be
PEACe Bonds were issued at the time of origination. However, a reading of the considered as filed on such last day. (Emphasis supplied) . . . .
underwriting agreement[221] and RCBC term sheet[222] reveals that the settlement dates for
the sale and distribution by RCBC Capital (as underwriter for CODE-NGO) of the PEACe SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of
Bonds to various undisclosed investors at a purchase price of approximately P11.996 would Taxes.
fall on the same day, October 18, 2001, when the PEACe Bonds were supposedly issued to

33
(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a Respondents' retention of the
return, the tax may be assessed, or a proceeding in court for the collection of such tax may amounts withheld is a defiance of
be filed without assessment, at any time within ten (10) years after the discovery of the the temporary restraining order
falsity, fraud or omission: Provided, That in a fraud assessment which has become final and
executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal Nonetheless, respondents' continued failure to release to petitioners the amount
action for the collection thereof. corresponding to the 20% final withholding tax in order that it may be placed in escrow as
directed by this court constitutes a defiance of this court's temporary restraining order. [231]

Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe Bonds to 20 or The temporary restraining order is not moot. The acts sought to be enjoined are not fait
more lenders/investors, the Bureau of Internal Revenue may still collect the unpaid tax from accompli. For an act to be considered fait accompli, the act must have already been fully
RCBC Capital/CODE-NGO within 10 years after the discovery of the omission. accomplished and consummated.[232] It must be irreversible, e.g., demolition of
properties,[233] service of the penalty of imprisonment,[234] and hearings on cases.[235] When
In view of the foregoing, there is no need to pass upon the other issues raised by petitioners the act sought to be enjoined has not yet been fully satisfied, and/or is still continuing in
and petitioners-intervenors. nature,[236] the defense of fait accompli cannot prosper.
Reiterative motion on the temporary restraining order
The temporary restraining order enjoins the entire implementation of the 2011 BIR Ruling
that constitutes both the withholding and remittance of the 20% final withholding tax to the
Respondents' withholding of the Bureau of Internal Revenue. Even though the Bureau of Treasury had already withheld the
20% final withholding tax on 20% final withholding tax[237] when it received the temporary restraining order, it had yet to
October 18, 2011 was justified remit the monies it withheld to the Bureau of Internal Revenue, a remittance which was due
only on November 10, 2011.[238] The act enjoined by the temporary restraining order had
Under the Rules of Court, court orders are required to be "served upon the parties not yet been fully satisfied and was still continuing.
affected."[224] Moreover, service may be made personally or by mail. [225] And, "[p]ersonal
service is complete upon actual delivery [of the order.]" [226] This court's temporary Under DOF-DBM Joint Circular No. 1-2000A[239] dated July 31, 2001 which prescribes to
restraining order was received only on October 19, 2011, or a day after the PEACe Bonds national government agencies such as the Bureau of Treasury the procedure for the
had matured and the 20% final withholding tax on the interest income from the same was remittance of all taxes it withheld to the Bureau of Internal Revenue, a national agency shall
withheld. file before the Bureau of Internal Revenue a Tax Remittance Advice (TRA) supported by
withholding tax returns on or before the 10th day of the following month after the said taxes
Publication of news reports in the print and broadcast media, as well as on the internet, is had been withheld.[240] The Bureau of Internal Revenue shall transmit an original copy of
not a recognized mode of service of pleadings, court orders, or processes. Moreover, the the TRA to the Bureau of Treasury,[241] which shall be the basis for recording the remittance
news reports[227] cited by petitioners were posted minutes before the close of office hours or of the tax collection.[242] The Bureau of Internal Revenue will then record the amount of
late in the evening of October 18, 2011, and they did not give the exact contents of the taxes reflected in the TRA as tax collection in the Journal of Tax Remittance by government
temporary restraining order. agencies based on its copies of the TRA.[243] Respondents did not submit any withholding
tax return or TRA to prove that the 20% final withholding tax was indeed remitted by the
"[O]ne cannot be punished for violating an injunction or an order for an injunction unless it is Bureau of Treasury to the Bureau of Internal Revenue on October 18, 2011.
shown that such injunction or order was served on him personally or that he had notice of
the issuance or making of such injunction or order."[228] Respondent Bureau of Treasury's Journal Entry Voucher No. 11-10-10395[244] dated
October 18, 2011 submitted to this court shows:
At any rate, "[i]n case of doubt, a withholding agent may always protect himself or herself by
Account Code Debit Amount Credit Amount
withholding the tax due"[229] and return the amount of the tax withheld should it be finally
determined that the income paid is not subject to withholding.[230] Hence, respondent Bonds Payable-L/T, Dom-Zero 442-360 35,000,000,000.00
Bureau of Treasury was justified in withholding the amount corresponding to the 20% final
withholding tax from the proceeds of the PEACe Bonds, as it received this court's temporary Coupon T/Bonds
restraining order only on October 19, 2011, or the day after this tax had been withheld.
(Peace Bonds) 10 yr

34
Sinking Fund-Cash (BSF) 198-001 30,033,792,203.59 a. the Republic of the Philippines the proceeds of which were relent to government-owned
or controlled corporations and/or government financial institutions;
Due to BIR 412-002 4,966,207,796.41
b. government-owned or controlled corporations and/or government financial institutions the
To record redemption of 10yr
proceeds of which were relent to public or private institutions;
Zero coupon (Peace Bond) net
of the 20% final withholding tax
c. government-owned or controlled corporations and/or financial institutions and guaranteed
pursuant to BIR Ruling No. 378-
by the Republic of the Philippines;
2011, value date, October 18,
2011 per BTr letter authority and
d. other public or private institutions and guaranteed by government-owned or controlled
BSP Bank Statements.
corporations and/or government financial institutions.

The foregoing journal entry, however, does not prove that the amount of P4,966,207,796.41,
The amount of P35 billion that includes the monies corresponding to 20% final withholding
representing the 20% final withholding tax on the PEACe Bonds, was disbursed by it and
tax is a lawful and valid obligation of the Republic under the Government Bonds. Since said
remitted to the Bureau of Internal Revenue on October 18, 2011. The entries merely show
obligation represents a public debt, the release of the monies requires no legislative
that the monies corresponding to 20% final withholding tax was set aside for remittance to
appropriation.
the Bureau of Internal Revenue.
Section 2 of Republic Act No. 245 likewise provides that the money to be used for the
We recall the November 15, 2011 resolution issued by this court directing respondents to
payment of Government Bonds may be lawfully taken from the continuing appropriation out
"show cause why they failed to comply with the [TRO]; and [to] comply with the [TRO] in
of any monies in the National Treasury and is not required to be the subject of another
order that petitioners may place the corresponding funds in escrow pending resolution of the
appropriation legislation:
petition."[245] The 20% final withholding tax was effectively placed in custodia legis when this
court ordered the deposit of the amount in escrow. The Bureau of Treasury could still
release the money withheld to petitioners for the latter to place in escrow pursuant to this SEC. 2. The Secretary of Finance shall cause to be paid out of any moneys in the National
court's directive. There was no legal obstacle to the release of the 20% final withholding tax Treasury not otherwise appropriated, or from any sinking funds provided for the purpose by
to petitioners. law, any interest falling due, or accruing, on any portion of the public debt authorized by law.
He shall also cause to be paid out of any such money, or from any such sinking funds the
Congressional appropriation is not required for the servicing of public debts in view of the principal amount of any obligations which have matured, or which have been called for
automatic appropriations clause embodied in Presidential Decree Nos. 1177 and 1967. redemption or for which redemption has been demanded in accordance with terms
prescribed by him prior to date of issue . . . In the case of interest-bearing obligations, he
Section 31 of Presidential Decree No. 1177 provides: shall pay not less than their face value; in the case of obligations issued at a discount he
shall pay the face value at maturity; or if redeemed prior to maturity, such portion of the face
Section 31. Automatic Appropriations. All expenditures for (a) personnel retirement
value as is prescribed by the terms and conditions under which such obligations were
premiums, government service insurance, and other similar fixed expenditures, (b) principal
originally issued. There are hereby appropriated as a continuing appropriation out of any
and interest on public debt, (c) national government guarantees of obligations which are
moneys in the National Treasury not otherwise appropriated, such sums as may be
drawn upon, are automatically appropriated: provided, that no obligations shall be incurred
necessary from time to time to carry out the provisions of this section. The Secretary of
or payments made from funds thus automatically appropriated except as issued in the form
Finance shall transmit to Congress during the first month of each regular session a detailed
of regular budgetary allotments.
statement of all expenditures made under this section during the calendar year immediately
preceding.
Section 1 of Presidential Decree No. 1967 states:

Section 1. There is hereby appropriated, out of any funds in the National Treasury not Thus, DOF Department Order No. 141-95, as amended, states that payment for Treasury
otherwise appropriated, such amounts as may be necessary to effect payments on foreign bills and bonds shall be made through the National Treasury's account with the Bangko
or domestic loans, or foreign or domestic loans whereon creditors make a call on the direct Sentral ng Pilipinas, to wit:
and indirect guarantee of the Republic of the Philippines, obtained by:

35
Section 38. Demand Deposit Account. The Treasurer of the Philippines maintains a
Demand Deposit Account with the Bangko Sentral ng Pilipinas to which all proceeds from
the sale of Treasury Bills and Bonds under R.A. No. 245, as amended, shall be credited and
all payments for redemption of Treasury Bills and Bonds shall be charged.

Regarding these legislative enactments ordaining an automatic appropriations provision for


debt servicing, this court has held:

Congress . . . deliberates or acts on the budget proposals of the President, and Congress in
the exercise of its own judgment and wisdom formulates an appropriation act precisely
following the process established by the Constitution, which specifies that no money may be
paid from the Treasury except in accordance with an appropriation made by law.

Debt service is not included in the General Appropriation Act, since authorization therefor
already exists under RA Nos. 4860 and 245, as amended, and PD 1967. Precisely in the
light of this subsisting authorization as embodied in said Republic Acts and PD for debt
service, Congress does not concern itself with details for implementation by the Executive,
but largely with annual levels and approval thereof upon due deliberations as part of the
whole obligation program for the year. Upon such approval, Congress has spoken and
cannot be said to have delegated its wisdom to the Executive, on whose part lies the
implementation or execution of the legislative wisdom.[246] (Citation omitted)

Respondent Bureau of Treasury had the duty to obey the temporary restraining order issued
by this court, which remained in full force and effect, until set aside, vacated, or
modified. Its conduct finds no justification and is reprehensible.[247]

WHEREFORE, the petition for review and petitions-in-intervention are GRANTED. BIR
Ruling Nos. 370-2011 and DA 378-2011 are NULLIFIED.

Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued retention


of the amount corresponding to the 20% final withholding tax despite this court's directive in
the temporary restraining order and in the resolution dated November 15, 2011 to deliver
the amounts to the banks to be placed in escrow pending resolution of this case.

Respondent Bureau of Treasury is hereby ORDERED to immediately release and pay to the
bondholders the amount corresponding to the 20% final withholding tax that it withheld on
October 18, 2011.

36

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